Category: Stock Updates (Blogs)

Atomera Update

Posted on by io-fund

Last week, Atomera announced its first joint development agreement. In this blog update, we revisit the company that was first covered in March of 2020 in this PDF.

Atomera offers Mears Silicon Technology (MST). The team at Atomera has been developing this technology since 2001. The technology works on an atomic level to insert thin layers of non-semiconductor material to increase the “concentration of dopants.”

Atomera has developed MST wafers with the goal of replacing current specialty wafers by keeping the cost the same but delivering an increase in performance. In more simple terms, the goal of MST is to reduce the effects of Moore’s Law by reducing chip size, delivering higher electron-mobility and increasing the performance of the transistor. According to third-party PMIC and per Atomera’s website, MST can result in 16-21% reduced chip size.

The Joint Development Agreement (JDA) is with a “leading semiconductor provider” and includes “a manufacturing license allowing the customer to fabricate semiconductor wafers incorporating MST for use in their products.” Ideally, we would have been provided a name. In absence of this, I mused on the forum earlier today that perhaps it’s 5G related due to the CEO having quite a bit of mobile on his resume with VP and GM positions in the mobile division of Broadcom and also from Altera. However, until the company announces this, we won’t have any way of knowing.

Theoretically, if one company uses MST then others will follow because MST provides a competitive advantage by reducing chip size and enhancing transistor capabilities. MST also helps memory/DRAM designers by reducing the size of the chip without moving to a new technology node. In the previous report that I published, I outlined that using MST/Atomera would cost around $40 to $60 million total while a foundry for a new node can cost billions of dollars – so MST saves quite a bit here.

In the past, I’ve called Atomera a Hail Mary play. I’d say we are now on the 1-yard line.

Atomera has always been an all-or-nothing proposition as the company is essentially pre-revenue. This is a company where we saw there could be an important need for the product/invention as the semis race heats up. You’re seeing major evidence of the semi race right now and even the smallest advantage can make an impact between competitors.

We attempted a position around March but did not remain in our position because we wanted to allocate our money elsewhere until the first licensing agreement was announced. We like where the company is at now as far as risk/reward.

Atomera is pre-revenue. The company reported only $62,000 in the first nine month of 2020 compared to $395,00 for the same period last year. 

The company loses roughly $12 million per year so it’s not surprising the company raised cash recently with a $25 million offering on January 5th, 2021. The company also sold shares of 845,730 for net proceeds of $8.6 million.

Net cash used in operating activities for the nine months ending September 30th was $9.1 million. In the most recent quarter, the net loss was $3.6 million or EPS of ($0.19).

There is only one analyst covering the company with estimates of EPS ($0.62) for 2021 and revenue of $130,000 for 2020 compared to estimates of $3.5 million for 2021.

Revenue is generated from integrated licensing agreements. Customers pay a licensing fee to use MST technology in the manufacturing of silicon wafers. Royalties are paid for each silicon wafer or device that incorporates the MST technology.

When we say an all-or-nothing proposition, what we mean is that Atomera can become profitable off the royalties from one wafer fab company and there are 370 wafer fabs worldwide. The annual revenue at 50% ramp from an average sized fabrication company would be $6.7 million in revenue. The annual revenue at 50% ramp from a larger foundry would be $29 million in revenue at a 2% royalty rate.

Please note, as discussed in an investor’s call in December, the royalty ranges from 1-3% depending on the size of the fab. The larger the fab, the lower the royalty fee. According to one analyst who covers the stock closely, once adopted, the technology will be used for a minimum of 7 years.

The company provided the following in the recent Investors Presentation last month:

If the company is truly “working with 50% of the world’s top semiconductor makers” and the first licensing agreement was announced, then perhaps the rest will line-up nicely (and quickly for our sake).

Target customers (i.e., not current customers but more like addressable market) include Samsung, Micron, Intel, Texas Instruments, NXP, SK Hynix, Qualcomm, Marvell, Broadcom, Skyworks, Qorvo, Taiwan Semiconductors, Applied Materials and more. You can view the full list here on page 3.

The total addressable market outlined here on pages 9-10 is between $6 to $7 billion in royalty fees primarily driven by FinFET and Advanced Nodes ($6 billion), RF SOI ($50 million) and 5V Analog ($660 million).

In a previous Investors Presentation, the company discussed having licenses with STMicroelectronics and Ahashi.

Prior to the announcement, the CEO was cautious to say when a manufacturing license would be issued. From what I’ve seen from Atomera, they’ve always been very diligent to distinguish between the various phases and potential setbacks that testing and integration can cause. The ultimate goal, whether in conversations such as the one below, or in the Investor Presentations, is the licensing as this is what creates revenue.

This is from a conference in September:

“When do we believe it will happen? We have not typically predicted when we will get to commercial production. One of the reasons is when customers work with us, it takes 9 months for us to do a single evaluation run with them. Maybe even longer. Um, and in the past, we’ve experienced a lot of times we have a good evaluation run with a customer, they get a good result and they want to do another one to try to make the result even better. And so that’s how these types of technologies are brought to market. So if we believe that we’re gonna reach the end in 3 months, we may find out that at the end of that we have another 9 months in front of it. We avoid predicting that but we are in the late stages of evaluation and integration with many different companies, and we’re hopeful that we’ll reach a manufacturing license with them relatively quickly.”We avoid predicting that but we are in the late stages of evaluation and integration with many different companies, and we’re hopeful that we’ll reach a manufacturing license with them relatively quickly.”

The CEO grew a $1 billion-plus division at Broadcom and also worked as an SVP and GM at Altera – which was a competitor to Xilinx before being bought out by Intel. He comes specifically from a mobile background. The CTO has been inventing and working on patents for broadband networks for 30 years and is who MST is named after. As I said last March, I don’t see any flags here and I think management has been very transparent leading up to this point.

I look forward to hearing what company the manufacturing licensing agreement is with and how soon the royalty fees will affect the top line.

Please note, we are very early to Atomera and there will always be time to consider the stock later down the line when it carries less risk. That is the beauty of small caps and tracking them early. Anytime there are debates about companies that are higher risk, the answer is almost always “revisit later” for anyone who is not comfortable with the risk profile.

We like the JDA and licensing announcement and we are following a plan we set in May for this company – however, Knox is critical here (more so, than say, a position in Microsoft). Knox is very good at stops and tracking technicals so we are combining a few of Knox’s techniques right now.

Part 2: Portfolio Review Summary

Posted on by io-fund

Hope everyone is having a good week.

We held a webinar on Tuesday reviewing our long-term buy and hold positions. You can access the webinar here. We recommend listening as it’s more of an annual review and includes information on how to best use our site.

Below, I follow up on the remaining ten or so positions in our portfolio. Our blog on the first half was published last week and can be accessed here.

When creating the presentation, I overlooked our long position on Docusign! We are long Docusign and I’ve included the notes below. This blog covers: DOCU, ROKU, ZM, SNAP, UNITY, FUBO, MGNI, BAND, SHOP, TDOC, AMWL and TWLO.

DocuSign:

The reason we don’t think Docusign is a temporary covid stock is that it’s hard to go back to paper for the real estate, legal and finance industries at this point. Not only are e-signatures easier but they create a digital file. These particular industries have been slow to convert to digital tools. (Anyone who has closed a house at a title company can tell you it’s long overdue). 

We like DocuSign as we also don’t believe these industries will shop an endless number of competitors or creative solutions. Universal acceptance is key here. Real estate is a great example – once the lenders, the title company and the real estate professionals use DocuSign (which many of them do now), each of them benefits from having a seamless experience and won’t want to break course unless necessary. In this way, the fact these industries are not the most innovative in terms of technology helps DocuSign in its quest to become the universal standard.

We will keep you updated if the competitive landscape changes or if these industries revert back to paper in droves J

Roku, Magnite and FuboTV:

We are always scanning for areas of tech that the market is underestimating. Last year around this time it was cloud. This year, we think one of the trends underestimated is connected TV and OTT. We covered where we are in the hype cycle from Gartner with 2021-2024 being the years when this trend takes off. We believe Gartner is perfectly on target with ad dollars migrating as we speak.

Notably, we had mentioned that Roku would likely have a strong second half of the year as Pay TV ad budgets are re-negotiated in the Fall.  If you’re long Roku or interested in hearing more, then I  recommend reading this blog update on Roku from June where I note Roku mgmt talking about increased financial commitments in the fall.

In the blog post, I said the years between 2022-2023 but am bumping that up now for a few reasons (Gartner’s hype cycle has always stated 2021-2024 but I see more confirmation that Gartner is right about the real start date for the bigger years)

Here are some updated thoughts on why we are leaning heavily into this trend and taking some key risks:

  1. The hype cycle is a powerful thing and we are fully aware that we are not in the cord-cutting trend – we are in the ad budget migration trend
  2. The signs we are seeing are not only in the fundamentals of companies like Roku and TTD’s CTV ads but also Disney’s very big moves this year. We think Disney going all-in on CTV ads and OTT live streaming is being under-reported.
  3. Disney is the world’s most influential media corporation. By Disney giving this trend the green light, we think bigger yet more traditional brand dollars will follow.
  4. Remember, we didn’t see as many ad dollars migrate to mobile, Google and Facebook, as you would think. Even with all of their data scientists and behavioral targeting for higher ROI – they only could get 50% of the budgets to migrate after a decade of dominance. It’s now around 60%. That leaves 40% for CTV ads and potentially back to 50% with the data CTV ads offer.
  5. Hopefully, you caught the importance of my last bullet point — there is roughly $10 billion being spent on CTV ads right now and about $70 billion on Pay TV ads.We believe cable may not exist by 2025. Therefore, this is minimum 7X growth if this occurs. However, there will also be some share taken from mobile because CTV first-party publishers have data that competes with mobile on behavioral targeting. So, let’s say minimum 9X growth in front of us when/if cable no longer exists. That’s 7X today but I’m asserting a larger market share than Pay TV today as CTV ads compete with mobile on data.

While I’m on this point, let me reiterate why I like Magnite. Google and Facebook became mobile powerhouses because they leveraged their first-party data. This is exactly what Disney is doing with Magnite and Roku is doing with DataXu.

Feel free to choose whichever CTV first-party ad company positions you’d like to choose. In the past, I have pointed out trends that I’m bullish on and provided our picks (cloud last year was an example of a trend we were bullish on despite extreme red days). However, our readers made excellent gains in other picks, as well – with many cloud stocks to choose from. We have a limited portfolio and we can’t own every company in a space. Therefore, please remember that I am highlighting a strong trend where there will be many winners.

We are also comfortable taking on more risk with MGNI and FUBO as these two companies have messy financials coming out of the ad industry issues during covid (FB, GOOGL and TWTR had their worst quarter on record). We understand (and fully comprehend) this affected smaller companies and are forward-looking. Fubo was especially hard hit with the pause to live sports in Q2.

However, a case can be made for TTD which is perhaps safer. Feel free to chat about that on the forum as many of our subscribers own this stock and can lay out why they are bullish. On that note, feel free to bring up any stocks you think fit this trend for the mutual benefit of the group.

One reason I have been tracking the deprecation of the IDFA closely is that any weakness to mobile/Facebook/Google will be a tailwind to our positions with first-party data in CTV ads. Roku – and even Magnite with Disney data – could be the winners here as this change on mobile rolls out. I cover the IDFA here and also here. Please note, both Roku and Magnite run omnichannel ads but leverage CTV data for this.

For Roku, we will be watching for international expansion. If you’ve been with me for any length of time, I’ve never doubted Anthony Wood despite the many ups/downs this stock has taken (we’ve even held through two 60% drops!!).

For Magnite, we will be watching for this company to quietly move onto the market’s radar. I say quietly because if Magnite does what it’s proposing, then we haven’t seen anything yet in terms of stock price. We feel good about our supply-side thesis – all earnings calls with MGNI and ROKU agreed with our thesis – and we remain bullish. Please always follow Knox for sentiment-driven price movements.

For Fubo, we look to audience growth first and foremost. They must deliver here on a year-over-year basis. We think the story of watching live sports and socially betting is investable and we see a path here to follow in Sky Media’s footsteps but to be potentially much larger on a global basis. We also see limited downside now as the shorts have shown the world all of Fubo’s weaknesses (i.e. fully priced in) and the company went through 6X liquidity. Essentially, we understand Fubo has hurdles to clear but we remain long and will update you if this changes.

Bottom line, we are heavily weighted in this trend! There are many opportunities and we have laid out the ones we have in our portfolio. We look forward to more discussion on any other opportunities our readers have dug up or any opportunities David or myself discover.

Roku PDF here from 2019

Roku Update here

Magnite Report here

Fubo Report here

TTD Report here

Most Likely to Be FAANGs — Shopify and Zoom:

When do you sell a stock that has performed well? The question of when to exit is equally as important as when to enter. These two could be tempting to sell because the story is so well known. However, I consider these two stocks to be opportunities that are hiding in plain sight.

We remain long Zoom Video for its historical product-market fit. We’ve never seen anything like this in tech – not with Apple, Google, Amazon, Facebook or Netflix. I understand the argument is that covid created unusual circumstances. Keep in mind, video conferencing was not without competitors. It’s a very crowded space – so, the question here is why Zoom Video instead of the various other apps? Citrix GoToMeeting, BlueJeans, Skype, MS Teams, Google Meets, etc.

Access the 2019 Zoom Report here.

This is what we mean by product-market fit – a product that overcomes all odds and sees breakthrough growth has met the demands of the market. You could say that perhaps every company with top-line growth has achieved this to some extent. However, when we see this kind of breakthrough it usually means there is something unique going on here at the product level.

We believe Zoom is preparing to do to cloud voice what it did to cloud video – and now email too. We are buckled in tight to see what arguably the best product design team of the decade can do to disrupt bigger markets in the productivity space.

However, please be aware that the market is unsure of how to price Zoom Video going forward. We’ve seen this in the nearly 40% pullback. As we navigate the uncertainty, we are willing to remain in the position even if there’s some kind of earnings issue (we don’t think there will be but want to clarify we are not fair-weathered as all tech companies eventually take a breather).

Shopify has a mission that makes perfect sense. We detailed why we were bullish on the merchant-side value proposition last year in our PDF. We are also bullish on the fulfillment center. I know it’s getting noisy with shiny-new IPOs and SPACs but we also don’t want to lose sight of what is tried and true.

I mentioned on the webinar that we think e-commerce could have a big Q4 with earnings because of the unprecedented amount of shopping that occurred. We’ve always liked SHOP and will remain long when the economy opens back up. About two weeks ago, we added BIGC to our momentum portfolio to see if Q4 comes in strong.

We also agree with Pinterest bulls (we’ve been a PINS investor in the past and written analysis since its IPO). We also agree with Square bulls (the one that got away from me last year!) – who doesn’t love Square’s SMS code for faster checkout? Many of our readers own these stocks and know them well so we look forward to hearing the community talk about these and others.

Unity and Snap:

We covered these two recently. Augmented reality and virtual reality are trends that we think will catch people off guard because AR/VR is seen as a hobbyist or gamer technology. What we find interesting here is not only the growth of the trend but how few beneficiaries there seems to be at the moment as to who can capitalize on the trend.

Unity’s lock-up period expires on March 17— look to Knox around this time. If we happen to trim, then we will add at a lower entry. Also, Unity has exposure to the IDFA … however, there’s a chance they overcome this as they have a concentrated group of gaming apps and this allows for category-level targeting for user acquisition, etcetera. We aren’t trading Unity based on IDFA weakness at this time but the risk is there. Management says it will not materially affect them and I’m hoping they also have a way to create publisher segments DSPs.

Teladoc and Amwell:

 

We haven’t budged on our telehealth thesis despite the market taking a breather. There’s only one way forward for health care — and AI should help accelerate both of these products. You can view the original thesis here on Telehealth. We continue to look for new opportunities in telehealth. Amwell is a choice of ours primarily based on Google and the synergy between Amwell and the AI data Google has.

Twilio:

I had covered Twilio at length recently in the Motley Fool podcast – we like the acquisition spree and pivot towards omnichannel marketing. This management team is super fun to watch because they are so visionary and developer-centric. They’re out to win! We think it’ll be the edge device market that catapults them, but in the near-term as the edge is being built out, the pivot towards being an omnichannel marketing/data company provides plenty of tailwinds. 

My most recent Twilio PDF can be found here or the one from 2019 here.

Two Stocks to Play a Biotech Bottom

Posted on by io-fund

Biotech Sector (XBI)

XBI is the ETF that tracks the S&P Biotechnology Select Index. This ETF is equal weighted and distributed amongst small, medium and large cap companies. It’s one that I use as a proxy for the biotech industry.

Relatively speaking, this sector performed poorly over the last 3 weeks.

That being said, any attempt to buy biotech right now would be a countertrend move, which comes with risks. Stocks in motion tend to stay in motion; however, there is evidence that we could be approaching a bottom, which could provide an opportunity.

Note how XBI is finding support at the $139-$141 price region. This is a heavy confluence of important prices. Furthermore, the RSI, CCI, and Accumulation/Distribution lines are all diverging, suggesting that the selling pressure is fading.

The Accumulation/Distribution line implies that smart money is beginning to buy at these levels. This is further backed by the volume patterns declining into the correction, implying that the sellers are drying up. Also, note the two large green volume spikes. These are signs you look for when looking for a potential bottom.

Two Biotech Stocks we like

Please note, we have looked at these stocks fundamentally but will lean heavier on technicals for Biotech as the space is complicated and requires domain knowledge to trade purely on fundamentals.

Sarepta Therapeutics (SRPT)

SRPT is setting up for a nice breakout above the $180-$185 region. The targets on this move will be the $425-$570 region if confirmed. Also, there are several levels in play which need to be monitored.

The $167-$176 region signals a breakout for the large base formed since it topped in June of 2018. Also, note the ascending inverse head and shoulder pattern that is also at play (in green). Price failed to breakout from the neckline around $180-$182. Since then, we are seeing a retest of the $167 region.

I’d look for a buy at the lower trend channel on any weakness, which is implying support between $128 – $135, depending on how fast it gets tested on any weakness. If we do not see this caliber of correction, we will be looking for a breakout buy on this position.

Sangamo Therapeutics (SGMO)

SGMO is setting for a multi-year breakout. The chart appears to be tracking a leading diagonal pattern, which is overlapping, with sharp moves, yet trending up since 2003.

I believe that we are in the final 5th wave of this leading diagonal pattern, which can take us well into 2021, if confirmed and held. We will be playing the $19.25 breakout on this move.

Kingsoft Cloud (KC)

Posted on by io-fund

On Friday, we initiated in Kingsoft Cloud. Please keep in mind, KC carries risk as the company has disclosed its earnings statements are not audited. As stated on the forum by our readers, the United States House is set to consider a measure this week to force U.S. listed Chinese companies to comply with audit terms. We cover additional risks below and Knox goes into the levels he is watching and how he plans to manage risk for this particular position.

We want to give a few bullet points here as to why we initiated despite the fact KC.

Overview:

We like Cloud IaaS in China and this is the basis for our Alibaba position. I mentioned this on the forum here. The United States cloud IaaS market is about $45 to $50 billion while China recently surpassed $5 billion – which reveals an important gap for this massive population.

According to some numbers, Kingsoft Cloud is the #3 cloud provider second to Alibaba and Tencent. According to others, Kingsoft Cloud is a close tie with Baidu in the #4 spot. Here is the quote from the S-1 filing: “We are the third largest internet cloud service provider in China with a market share of 5.4% in terms of revenue from Infrastructure as a Service, or IaaS, and Platform as a Service, or PaaS, public cloud services in 2019, according to Frost & Sullivan.”

Kingsoft could see multi-cloud as a tailwind due to being the largest independent cloud provider. Also, companies like Bytedance and iQIYI use KC to avoid using Tencent (direct competitor). The concentration of Bytedance and others is a risk.

Although market is undecided about Xiaomi’s involvement due to large customer concentration, we see this particular customer/backer as a positive. We like the Xiaomi has done well in China and we also like the focus on 5G, video content and health care/medical IoT to help KC find an edge against Alibaba, Tencent and Baidu. Xiaomi is the number two smartphone in China ahead of Apple and we think this resilience is a positive. In fact, we would not have invested without a strong backer in either AI or 5G so Xiaomi as an early investor, co-chairman and 14% of revenue is primary to our interest.

Kingsoft is focused on verticals, such as video streaming, gaming and health care. We like this approach as it shows an understanding of competitive positioning and clear differentiation from the larger competitors.

Kingsoft Cloud is scheduled be added to the MSCI China All Shares Index on November 30th at market close.

Net dollar retention rate is 155% in FY 2019

Revenue increased 72.6% year-over-year. This represents 48.1% growth from public cloud services and 257.3% growth from enterprise cloud services. Some of this was a rebound in enterprise from a covid deceleration. The company is expected to grow revenue 62% next year to $1.62 billion. To compare, Tencent Cloud is in the $3 billion range.

Adjusted gross profit was $16.9 million and adjusted EBITDA of -$3.9 million.

 

Risks

There are currently over 200 Chinese companies that are listed on U.S. exchanges. However, unlike U.S. companies that must comply with strict regulatory requirements, China-based audit firms are not in compliance with the U.S. Public Company Accounting Oversight Board (PCAOB) inspections required under the Sarbanes-Oxley Act of 2002 (SOX Act), which is supposed to apply to all U.S. listed publicly traded companies.  

The NASDAQ is requiring additional listing requirements for Chinese firms, while the U.S. Senate passed S. 945, the Holding Foreign Companies Accountable Act. This Act requires foreign companies to prove that they are not owned by governments, as well as requiring them to disclose to the SEC information that allows the PCAOB to perform inspections.

This change in U.S. regulations was soon followed by the Luckin Coffee fraud. The Chinese competitor to Starbucks admitted to falsifying their sales by roughly $2.2 billion yuan. This not only led to a sharp selloff in the stock, but also caused the NASDAQ to delist the stock.

The above reasons led to valuations in Chinese tech companies that are hard to come by in today’s markets. Because of the above risks, we will still invest in ideas we like, but with risk controls in place. Our two Chinese positions are Alibaba (BABA) and Kingsoft (KC), both of which now have stops in place. This will allow us to participate in the growth stories, while at the same time minimize our exposure to the macro and regulatory risks going on within China today.

The national debt to GDP ratio of the U.S. economy is estimated to be around 98% of GDP by the end of 2020, with the largest increase in government debt. In a similar response to the GFC, the Chinese government also attempted to stimulate their economy through debt, and is currently looking an unsustainable debt to GDP ratio of 317%, with the largest focus in corporate debt.

Basic Technical Analysis

From a basic Technical Analysis perspective, we have a nice base that has formed, which provides a clear breakout zone.

Note the large volume spike accompanied by a long green candle. This suggests that the sellers have dried up, leading to a rush of buyers. Seeing Friday close above $39.25 is promising. The next level of resistance will be $43.

Elliott Wave Analysis

If we dived deeper into the price structure, we can get further support of a potential breakout on the horizon.

The above chart outlines my structural analysis of the current price action in KC. First off, from its all-time low, we have a clear 5 wave move to the ended just below the $43 level. Each wave within this structure (in green on the left), moved along standard extensions, further supporting a wave 1 within a larger uptrend (in blue).

We then saw a symmetrical retrace to the 50% retrace level of the first wave. Once again, we typically see 2nd waves terminate around the 50% retrace level. The structure of this retrace also was symmetrical.  In other words, the length of the c wave in red was around the same length of the a wave in red.

This retrace was then followed by another 5 wave move up, and smaller retrace, suggesting that we are in the early stages of the larger degree 3rd wave in blue. The move on Friday further supported this thesis when we saw a high volume breakout above the $39.25 resistance. If we see a further breakout above the $43 level the above targets will be in effect.

We will use a wider stop than normal in this starter position. We always start small, and if we analyze a trend accurately, which is confirmed by an increase in price, we tend to build on that position along the uptrend. We will have a stop at $31.90 based on the closing price.

Market Report: October 18th, 2020

Posted on by io-fund

In this report we analyze: Fiverr, CrowdStrike, Shopify, DocuSign, Zoom, Nvidia

Please note the glossary of terms and techniques here and herehere and here

You can access our portfolio here. You can also track in real time our Buyshere. You can also track in real time our Buys/SellsSells/Portfolio Activity in the forum.Portfolio Activity in the forum.

If you want to track us in real time, we recommend that you set up alerts to these 3 topics “Portfolio Activity”, “Buys,” and “Sells” which can be done by clicking on their icon/image, or search for their name in the search bar. Then, click the follow button and it will turn red like the image below.

Positions we Closed Last Week

Fiverr (FVRR)

Summary

  • We logged a 17% gain in FVRR last week, after buying the move off the prior breakout around $125.
  • FVRR has a completed 5 wave pattern, and is finding resistance in a very concentrated zone of resistance around $176-$181.
  • We also got 3 sell signals at this area, causing us to log the gain and step out of the way for now.
  • We will look to re-enter when the risk in FVRR subsides.

Last week we closed our position in FVRR, logging a 17% gain in less than 2 weeks. Fiverr had a solid breakout in the $125 region, which continued into the mid $140s region, where we initiated our position. The price gave us no indication of weakness until it approached the $176-$181 region.

As a momentum position, we are looking to sell into strength, while at the same time protecting our hard earned gains. Fiverr’s inability to break through the heavy concentration of important price clusters (shown in the chart) was one reason that we looked to take gains at this price. This was further confirmed by 3 sell signals (also listed on the chart), all of which are signaling buying exhaustion and weakening momentum.

If FVRR does correct at this region, we don’t expect a deep correction due to its positioning in the new COVID economy, as well as its relative strength. The areas we will look to potentially re-enter, assuming we get a buy signal, will be at $162 or $151. If we get a clear break below $151, it’s a signal that a deeper correction could be unfolding.

On the other hand, if FVRR can break above the $181 level on elevated volume, we will consider that a breakout, and look to re-enter this position.

 

CrowdStrike (CRWD)

Summary

  • CrowdStrike is forming a classic technical pattern known as a double top (In Elliott Wave this is simply an extended B wave).
  • The price structure of this rally supports the double top scenario, as of now.
  • A break below $141 will confirm this scenario, which will put us in the final leg of this correction.
  • A break above $154-$155 will support the correction being over, and we will likely take that position in our momentum portfolio.

Due to the number of warnings we were seeing in various positions we cover (some of which are outlined below), we decided to raise our stop to the breakeven price in CRWD in an attempt to protect our portfolio from incurring a loss.

Internally, I highlighted on the right of the chart the 161.8% extension of the 1st wave. More times than not, this is the spot where the 3rd wave in a standard 5 wave pattern will end, leading to the 4th wave drawdown. This is exactly where CRWD’s recent drawdown began, putting us in the 4th wave correction.

One reason I am not convinced the 4th wave is over is based on how shallow and quick the 2nd wave was (in blue). If the 2nd wave is quick and shallow, we tend to see the 4th wave be complex and long. In short, the 4th wave, so far, is too simple and sharp to likely be complete.

The second reason I am cautious is the structure of the recent uptrend from the $115 low.

It is hard to count this structure as anything but a corrective B wave within an ongoing correction. For the reasons above, we decided to step aside, and wait for the risks developing to work themselves out.

We are agnostic, and hold no opinion on what should happen. We simply analyze price action to give us increased probabilities to profit and manage risk. So, if CRWD does breakout to new highs, we will not hesitate to re-load our position for the next leg up.

To keep things simple, if the price breaks below the $141 region, it will help confirm that the final leg in the 4th wave is active, and the most common 4th wave targets, for CRWD, are either the $120 region or the $102 region. 

However, if CRWD can break above the $154 region, it will signal that the 4th wave is likely over, at which point we will re-assess getting back into this stock.

Potential Setups Going Forward

Shopify (SHOP)

Summary

  • Shopify is struggling to breakout of the $1100-$1110 price region.
  • Like CrowdStrike, there is a potential that the uptrend from the recent low is a B wave, forming what appears to be a triple top pattern.
  • If price breaks below $950, it will help confirm this scenario, at which point we will track the downtrend, looking for a reasonable place to add to our position.
  • However, if SHOP break above the $1110 region with force, it will be a nice setup for a continuation of this rally.

Shopify has been chopping around in a relatively tight range for about 4 months. Three times the price has attempt to breakout of the $1110 region – twice, so far, it has failed. We are at the same resistance today, and the internal indicators, along with the price structure are suggesting another potential fail at this crucial region.

The CCI is showing a significant divergence as it is decreasing while price is increasing. Also, the MACD is trending down and just crossed over, suggesting a momentum trend change is likely, at least in the short-term.

As long as the $950 region holds, this could be just a brief dip before we get a clean breakout above $1110. However, below $950 will help confirm that, at minimum, a retest of the recent low will be likely.

Docusign (DOCU)

Summary

  • After an extended rally, DocuSign corrected ~35%.
  • We grabbed shares of DocuSign at the $188 region, which was about 2% short of our target at $185.
  • The $185 region was the shallow target for the 4th wave decline we outlined; however, the bounce off this low appears to be corrective, making the probability of a new low a scenario that we are now taking into account.
  • As long as DOCU holds above the $218 support, this scenario will be unlikely. Below $218, and the probability of a new low increases.

We patiently waited to enter DocuSign while it was in its extended 3rd wave rally. Once we saw key supports break, we targeted the $185 region as an area of interest. We ended up buying at $204 and again at $188.

Since then, DOCU seems to be in a new uptrend, and destined for all new highs. However, like many other stocks we have tracked, this uptrend appears to be corrective, and could simply just be a B wave within an A,B,C correction, where the C wave will have us, at minimum, retest the $188 low.

If price breaks below $218, this scenario will become a higher probability, at which point we will open up our targets for more shares at a lower price. On the other hand, if price holds this level and breaks above the $265 region, it will support that the bottom is likely in, and new highs will be in our near future.

Zoom (ZM)

Summary

  • Zoom’s large degree 3rd wave (in blue), has extended to regions that is rare to see.
  • Of course, we can see further extensions, but the upside before we see a 4th wave drawdown is limited.
  • Furthermore, the internal indicators are suggesting that the recent breakout to new highs is not being supported by either smart money, or strong momentum at the moment.

Last Friday on the forum, we warned our readers that Zoom below the $502 resistance was risky. After Ark Investment Management announced their first entry into Zoom, which was followed by a rush of buyers to push prices to all new highs.

Why we are skeptical of this breakout is for a few reasons: For one, in my history of studying price structures amongst various asset classes, I can’t remember the last time I saw a stock’s 3rd wave extend as far as Zoom’s current has. For example, the internal structure of Zoom’s 3rd wave is in red on the chart, and the 5th wave is currently at the 1000% extension of the first wave. Keep in mind, that we typically see the 5th wave terminate at the 200% extension.

Furthermore, for the first time in Zoom’s epic uptrend, we are seeing smart money not supporting a new high. This is evidenced by the Accumulation/Distribution line, which implies smart money flow within a stock. More times than not, this indicator will lead price, and the fact that it is not making new highs with the price is a warning.

Furthermore, the momentum indicators are showing signs of a slowdown under the hood. The MACD is not making a new high with price, which is a very common pattern we see towards the end of a move. Also, the RSI is clearly diverging, as well, suggesting that this move up is not being supported with an increase in buying momentum.

I would never bet against Zoom. In fact, it is our largest holding for a reason. At some point, momentum shifts even in the best stocks and allows for a healthy correction. We think this could be the case in the coming weeks and we will look to add to our position.

Nvidia (NVDA)

Summary

  • The weekly chart that we have discussed for several months is continuing to deteriorate.
  • Nvidia appears to be forming a double top, like several other stocks we are tracking.
  • If it can break to new highs and hold, we can likely see a continued extension of the uptrend.
  • We placed a stop on our most recent tranche ONLY – $541.5 with a stop at $537.9 (closing price).
  • Based on the fundamental story with AI, we are comfortable withstanding any volatility with the remainder of our position.

We believe the long-term outlook of Nvidia is bright. However, the intermediate to short term outlook could have some bumps, which is healthy and normal.

The price action and signals I’m seeing warrant caution. That being said, Nvidia has broken out of two bases lately, which is usually bullish, and we took one of them around $540. We will be placing a stop on that tranche ONLY. The stop will be a close below the 20-day EMA ($537.90), which has held it up in this rally predominantly.

The chart attached is showing the weekly trend. I’ve been tracking the divergences with the MFI and CCI for months, which is present in my past market reports. These weekly divergences can last for months to even a year-plus before we see a correction, which is why I continued to play the breakouts with Nvidia.

Also, the bigger the time frame, the more significant the pattern is. This is why I always start my analysis with the weekly chart. The long-term trend in Nvidia is up, but the warnings are also getting stronger as well. They warrant caution and should be watched, but until you start seeing multiple timeframes lining up (monthly, weekly, daily, hourly), I find it better to stay in the trend even with the warnings.

Furthermore, I’m starting to see exhaustion in Nvidia on the daily chart, as well. The same overbought conditions and divergences are finally starting to develop. Because of this, I’m being cautious until Nvidia can break out to new highs.

As long as we can hold $520, I believe we can see new highs soon. However, below $520, and it opens the door to the pullback scenario outlined in the above chart. This is where we complete the final leg of the large degree 4th wave correction, which as of now, has standard targets between $415-$395. This will set us up for the final move in the decade-long 5-wave pattern, which should be a fun a ride and also line up well with the AI trend.

Market Report: October 11th, 2020

Posted on by io-fund

In this report we analyze: Twilio, Chainlink, Roku, Qualcomm, Slack

Please note the glossary of terms and techniques here and herehere and here

You can access our portfolio here. You can also track in real time our Buyshere. You can also track in real time our Buys/SellsSells/Portfolio Activity in the forum.Portfolio Activity in the forum.

If you want to track us in real time, we recommend that you set up alerts to these 3 topics “Portfolio Activity”, “Buys,” and “Sells” which can be done by clicking on their icon/image, or search for their name in the search bar. Then, click the follow button and it will turn red like the image below.

Stocks we Bought Last Week

Twilio (TWLO)Twilio (TWLO)

Summary

  • Our decision to focus on Twilio was a fundamental decision based on recent announcements. It has now become a high conviction play.
  • Twilio bottomed at the upper region that we outlined in prior Market Updates, around $212, completing a symmetrical correction as well as its 4th wave drawdown.
  • It then opened the trading day up 6%, and closed the day at new highs, signaling that the correction in Twilio is likely over.
  • This puts us in the 5th wave, which we added to in the breakout. However, because it’s the 5th wave, we will be patient in adding new positions for now.

So far, our analysis in Twilio has held up quite well, which you can view here. Twilio went on to make a new high after we published this outlook, which pushed the 4th wave targets up about 5%. Twilio then went on to tag the upper target range we most commonly see in 4th waves, for Twilio that was the $212 price region. This was further confirmed by volume spikes as well as the CMF implying that smart money is starting to buy again.

Also, what this means is that we are likely in the 5th wave of this uptrend. Fifth waves can extend, which is why we decided to buy with a portion of our targeted allocation. However, because of where we are in the count, we will be patient in adding the remaining positions.

Chainlink (LINK)Chainlink (LINK)

Summary

  • Link has shown signs of bottoming in the $7.3 region.
  • We bought on the retest at $8.5.
  • However, there are signs that the correction may not be over. A decisive break above $11 will be strong evidence that the bottom is in, at which price we will look to add.
  • A break below $8.5 is evidence that we will likely be retesting the $7.3 low.

After a 65% drawdown, Chainlink still has not tested the 200-day SMA (in black on the chart). It’s rare to see a drawdown so deep to not at least test the 200-day. Prior to the recent move down, LINK has seen, in less than three years, 21 drawdowns greater than 30%. Of those 21, eight are greater than 45%, five have been greater than 70%, and one was an 89% drawdown.

Interestingly, the correction, so far, has unfolded in a complex, yet 3 wave, symmetrical pattern. This is what we look for in corrections when creating targets – symmetry as well as a confluence of important prices coming together to create support. For example, the length of Wave C (red), which bottomed at $7.3, is exactly twice the length of wave A (red). This area also lined up perfectly with the trend channel that Link has been tracking for years (in gray).

If that was the bottom, then grabbing shares at the $8.5 region was the retest and hold of the lows. However, I’m not convinced that the correction is over for the following reasons:

  • Note the importance of the 55-day EMA (in red). It has been resistance for every attempt Link has made to bottom and breakout. This is exactly where Link is right now – being held down by the 55-day EMA.
  • The volume is not increasing that much with the price’s recent attempt to bottom and start a new uptrend.
  • There is a noticeable RSI reversal pattern present. This is when the RSI makes a higher high while price makes a lower high, signaling that the buying pressure is getting exhausted before breaking out. We usually see this in downtrends and it has a good track record of signaling more downside ahead.
  • Regardless, if price can make a sustained break above $11, we will look to add to our position.

Regardless, if Link breaks above the $11 region with force, it will help support that the $7.3 region is the end of this correction. This will be my signal to add more. Also, the fact that LINK broke out of the trend channel, and simply bounced off of it in this drawdown is quite bullish, which should be factored in. Right now, we are in between $8.50 – $11. How price moves through one of these levels will help us better game plan for what’s coming next.

Stocks that we are Targeting/Updating

Roku (ROKU)

Summary

  • Roku recently broke out of the $168-$170 region, which has kept price bottled up for over a year.
  • The long-term price structure has recently become quite clear and helped us better understand where Roku is heading. We have raised our price targets for Roku based on the information we have.
  • A break back below the $168 region will be a warning to the uptrend. If this happens, we will re-evaluate our current targets. However, Roku’s relative performance over the last 3 weeks has given me no indication that this is a high probability outcome.

Anyone that has been with us for a while should be aware of the larger trend in Roku, which can be seen in the weekly charts. Also, the price action over the last couple weeks has set us on a course that makes mapping Roku much easier to manage, which we will dive into.

But first, some background about the pattern that Roku is on. The above chart is looking at the weekly trend in Roku since its IPO. The first thing that should jump out at you is how perfectly Roku has respected the trend channel in gray. I circled 3 instances where the price either bottomed or topped at the exact border of the channel. Knowing the importance of this trend channel is valuable information to have so that we can maximize our gains with Roku in the intermediate term.

Furthermore, the long-term price structure resembles a leading diagonal pattern. In other words, this is a series of 5 waves (in blue), and the internal makeup of these 5 waves usually unfolds in a 3 wave pattern. For the sake of neatness, I only outlined these internal patterns in the most recent 4th wave (A,B,C in red), which completed at the March lows. I also outlined what I believe to be this pattern in the current 5th wave (A,B,C in green)

This would put us in the middle of the C wave, which are powerful trends, driven by emotion and always move in a 5 wave pattern. This simplifies Roku’s path going forward. Based on the information we have, the current projections for Roku put it between the $325 – $395 region, which is the ideal targets as well as the upper region of the trend channel. Of course, anything can change, and if it does we will update you.

Because of the recent breakout as well as the strong relative strength in light of market weakness, I believe Roku will continue to be a market leader. We recently bought on the breakout and retest at $178; however, we will look for new entries as well going forward. This move to our new target will not be in a straight line, and there is a chance we could be wrong. If Roku breaks back below the $170-$168 region, it will be a warning to this thesis. But for now, Roku is becoming a clear market leader (again).

Qualcomm (QCOM)

Summary

  • After breaking out of a 20 year base, Qualcomm’s response has been lackluster, which is concerning.
  • Its price structure appears to be at the end of a sloppy and complex 5 wave uptrend that began in 2016.
  • The internal signals are flashing a warning as QCOM is at major resistance between $122-$123.
  • We are putting a stop on QCOM to protect our gains.
  • If we break below $108 on heavy volume, the first downside target will come into play and are listed in yellow ($100-$93).

Qulacomm’s price history, like every semiconductor company that has been trading for at least 20 years, is a complex and overlapping structure. I believe QCOM’s began a new long-term uptrend in 2016. Unfortunately, this uptrend has been very overlapping. There is a clear 5 waves (highlighted in red), and like Roku, I believe this structure can be defined only as a leading diagonal pattern.

What concerns me is that QCOM is close to completing this 5 wave pattern, which usually gives way to a correction. Also, the red region on the chart is a cluster of really important prices, which historically acts as strong resistance. Qulacomm is struggling here and its internal indicators aren’t suggesting a breakout.

If we look at the internals, smart money is not confirming a move higher to new highs. Also, one of my proprietary overbought/oversold signals in flashing overbought conditions while the CCI has given us 3 consecutive divergences (lower highs while price makes higher highs), which has always been one of my warning signals.

With all the evidence piling up, caution is warranted. If this count is correct, the first target in this 2nd wave pullback is outlined on the chart. The yellow region will be a shallow 2nd wave ($100-$93).

I want to be very clear. What follows the 2nd wave drawdown is the 3rd wave, which is the most powerful trend within the 5 wave pattern. The first wave, so far, has taken about 4 years to complete and went up ~200%. This 3rd wave thesis lines up with the fundamental thesis we are seeing within 5G. We may be early, which also lines up with the warnings we are seeing, but if we stop out, QCOM will be high on our list to get back into when the uptrend begins again.

Also, I want to be clear, we are not selling. Instead we are putting a stop on the price, just in case the above analysis is correct. If price does break through the $122-$123 region, this will be a bullish scenario that we will happily be a part of. In other words, 5th waves can extend so far that it makes the 2nd drawdown wave a non-issue if the cost basis is low enough and time horizon is long enough.

Slack (WORK)Slack (WORK)

Summary

  • Sentiment is at a rock bottom with Slack and most investors will want to likely skip any analysis on Slack.
  • However, there are very encouraging signs that we have made a low in Slack, which is confirmed by smart money buying into this stock at depressed levels.
  • A break above $35 will signal that the bottom is in, and we will likely see all new highs soon after.

Since its IPO, Slack has not fully participated in the cloud rally we’ve been enjoying for over 2 years. With great product-market fit, stellar growth metrics as well as a net retention rate that tops most cloud products, its price movement has been frustrating to investors. Furthermore, they recently lowered their guidance, further beating down sentiment.

The interesting thing about sentiment is when it feels the worst to buy a stock, that is usually the time in which the sellers have dried up, leaving only one direction for the stock to go. You don’t have to look far to see Slack naysayers on social media and on various sites. However, when I start seeing an overwhelming amount of negative sentiment in a stock that we believe will one day begin an uptrend worthy of being called a cloud play, I start to look for entries.

Interestingly, the Accumulation/Distribution (A/D) line is suggesting that smart money is doing the same. Notice how it is making new highs before price. This is a solid leading indicator, and a great way top track smart money.

Furthermore, the correction that started at the June high, has completed a symmetrical move. In other words, the length of the a wave is the exact length of the c wave, which also lines up with the 50% retrace of the first wave off the March lows – i.e., the most common spot that a 2nd wave hits bottom. This is solid evidence that we have likely bottomed.

Many investors in Slack will be skeptical of this analysis, and I can’t blame them. So, to keep it simple, a break above $35 will help confirm that we are about to see all new highs. The first target in this new uptrend will be between $50-$62.

September Portfolio Overview

Posted on by io-fund

Every month, we will release a portfolio review and macro-conditions outlook with any data we are using to guide our positioning. Now that the site has been live for over a year, we feel we are at the stage where a monthly portfolio review may be valuable to our readers. In this report, we address the growth vs. value theme that is playing out in this market, and why the divergence between the two can grow even wider. We also discuss why comparing this market to 1999 is not an accurate comparison. Finally, we take a look at our up to date portfolio allocation.

Macro Outlook:

Since the market bottomed on March 23rd, the tech driven rally that followed has more than recovered the loss we saw in the bear market from the February highs. So far, the recovery rally in the NASDAQ100 has returned over 83% from the lows and has provided no reasonable entries for cautious investors.

So far, the tech heavy NASDAQ100 (NDX) hasn’t provided a pullback greater than 7.3% since the rally began. Furthermore, each dip lasted between 2-4 days before buyers stepped in to continue the uptrend.

Furthermore, if we look at the RSI, which is a momentum indicator that helps gauge the health of a trend, on April 6th, the tech heavy NASDAQ100 (NDX) crossed above 50, and stayed above this important line until Sept. 8th. When the RSI is above the 50 line (in blue), it’s indicating that momentum is tilting up as the gains are outpacing the losses over a 14-day period.

Notice how strong this rally was based on the RSI. Each time the RSI tested the 50 line, it held. It wasn’t until September 8th that we saw the 50-line break to the downside, producing a tech led sell-off that had the NDX correct over 14%, so far.

Today, the NASDAQ100 has taken back this crucial line, and held the retest on Friday’s selloff. This is encouraging; however, we will want to see this trend continue beyond 60 on the RSI to further confirm that this is not just a corrective bounce.

Growth vs. Value

The fear for tech investors is that there will be an inevitable rotation out of richly valued tech stocks and into beaten down value stocks. I have no doubt that one day value will have a real rotation and demonstrate outperformance. However, the evidence supports any

There are usually cues in the relative price action of sectors/indexes that signal the makeup of the trend we are in. For example, the below chart compares the NASDAQ100, which is comprised predominantly of tech, to the S&P 500, which is a broad sample of the best stocks in all sectors of the market.

There is a common pattern in the broad market that seems to be playing out right now. Notice when NDX bottoms compared to the S&P 500 this year. The tech driven NASDAQ100 bottomed on March 16th, and then retested the lows on March 23rd, while the S&P 500 bottomed on March 23rd. In June, the exact same pattern played out – the NASDAQ100 first, followed by the S&P500. Today, this pattern seems to be playing out again.

If we dig deeper, an even more interesting pattern unfolds. Three times this year, the phrase “value rotation” has been used to explain the sharp sell-offs in tech and sudden increase in beaten down value names.

The above graph compares the NASDAQ100 (red) to the Russell 1000 Value index (blue). The below indicator is a relative strength indicator. When the blue graph dips below 0, it is showing times in which value is outperforming tech.

What’s interesting to note is the spread between value and tech leading into each new “rotation.” The first rotation into value saw a 19% spread between the two indexes. Then, leading into the second rotation, the spread was 26%. Recently, leading into the current value rotation out of tech, the spread was 31%.

This trend is suggesting that each attempt for the market to rotate into the beaten down value names has failed with tech continuing to lead the market higher. Until Tech starts to truly underperform and show significant and consistent misses in earnings reports.

A Deeper Dive into the Problem with Value

It would be hard to lump all value names into one category. Sectors like Transportation and Industrials, classic value sectors, have performed really well, both of which are just a few percentage points away from all-time highs. This is a further encouraging sign for the recovery underway because both sectors are highly sensitive to global economic activity.

However, in bull markets, we typically see all sectors participate in an uptrend, and when we do not see this, it is something that warrants caution. If we look at both Financials and Energy, a completely different story unfolds.

Energy

 

Energy is in a clear downtrend. Furthermore, this sector is disliked more today than at the March 23rd lows. All of the alpha that it produced in the initial recovery has been given back, as its downtrend progresses.

Financials

The same trend is present in Financials today, as well.

Financials appear to be in a downtrend, diverging from the rest of the market. Furthermore, and somewhat shocking, the below indicator compares the relative performance of this sector to the broad market. When it is above the green 0 line, it’s signaling that financials are performing better than the S&P500, while being below the 0 line means they are performing worse. You have to go back to 2008/2009 to find a time when financials are disliked as much as they are today.

Collectively, these two sectors account for roughly 12% of our economy in terms of market cap. However, they account for roughly 21% of total revenue in the U.S. economy. This is a large weight around the neck of the recovery that we will want to see corrected.

It’s also worth mentioning that the last time we saw financials diverge into a downtrend while tech/growth continued its uptrend was in 1999.

This is something we will continue to monitor, and we believe it will eventually correct. The rest of the market is quite strong, and proved that it is able to carry the laggards until we find a bottom and reverse. However, we want to be very clear that we do not believe tech today is like the tech market of 1999; rather we are seeing some divergences that have not happened in nearly two decades and this is something to point out.

The Problem with Comparing this Market to 1999

You don’t have to look far to see charts comparing P/S ratios between now and 1999. Many factors are at play in this beyond simple bubble talks. For one, Microsoft, currently has an annual Revenue of $143 Billion, with 13.6% YoY revenue growth. Furthermore, it accomplished this growth with 37% operating margin.

High revenue with healthy growth and high operating margins is a trend we see all throughout tech and other mega cap companies. Due to the efficiency of innovation, globalization, and the advancement of on-going microtrends, tech, like many stocks, commands (and has earned) a higher P/S ratio.

Also, regarding key differences between now and 1999, which are conveniently left out of the conversation, and are large distinguishing factors. For one,

  • We are regularly seeing companies we track provides high double-digit, and in some cases, triple digit YoY revenue growth. If you are unfamiliar with microtrends, you miss the key differentiator between now and 1999. There was no microtrend driving prices. Tech was a convenience back then and lacked the strong fundamentals to drive price increases.
  • 1999, the FED began raising rates. They continued to raise rates into 2000, even into the beginning of the 2000 bear market, in an attempt to quell inflation and slow down an overheated market. This, in turn, cut off loan growth, and eventually halted the growth of risk-on assets. Today, the FED is at 0 and recently announced they will stay at 0 through 2023. This is an attempt to fight deflation and encourage loan growth.
  • In 1999 the yield curve was sharply inverted in the late 90s, which has been a solid indicator of a recession on the horizon. This is simply not true today. We saw the yield curve invert in early 2018-2019, which signaled the recession we are in now; however, though rates are very low, the yield curve has recovered to a healthy slope.

In conclusion, without a clear understanding of the nature of the microtrends in play, it would be easy to continually wait for a tech crash that simply hasn’t arrived. The economic environment is much more favorable for risk assets today than in 1999, which we believe will be a boon to continued tech outperformance.

However, please note that sentiment suggests that we can see another leg lower, which in fact, would be healthy for the long-term trend. However, the positioning of non-commercial traders and the AAII bullish % suggests any additional dip should be shallow and short lived.

Active Portfolio

 

During the current correction, we have initiated a number of buys due to our stocks hitting the targets that we outlined in past weekly market reports. Broad market analysis is important as a backdrop, but we tend to focus heavier on individual names primarily.

The reason why we focus on individual stocks over the broad market is that strong leaders within a bull market tend to bottom first and begin a new uptrend well before the broad market, which is what we are seeing so far in many of the names we track.

Additions to Current Positions

Regarding Zoom, Nvidia and Shopify – 3 of our favorite stocks – we announced on Monday, September 21st, that we were indiscriminately buying these names. In doing so, we were able to add to our positions close to their bottoms.

We have a large position in Zoom and are not as focused here due to its position size. However, we still want to add to Nvidia and Shopify. Nvidia, specifically, due to relative performance with Zoom over the last 4 weeks has pushed it down from our top position last month to our 2nd largest position. Nvidia is a high conviction idea, and we will continue to add to this stock in weakness and strength when the setups are present.

We also added to Roku and Marvell last week based on breakouts and relative strength. We love both names and will continue to guide entries based on ongoing analysis.

Finally, we added to AMD just 5% above our target region due to buy signals we received at those levels.

Closed Positions

We closed our position in Inseego. Our draw to this small cap company was its positioning with last mile connectivity on 5G. However, its recent price action coupled with the high level of short interest in the stock, had us lean towards reducing risk and focusing on our higher conviction ideas. For now, Marvell will slowly get this allocation.

We also stepped away from BigCommerce, as well, but don’t be surprised if you see us initiate here. We are watching this one very closely.

New Positions

We laid out very detailed setups for a number of stocks that we would like to own or add to. Here is a list of these setups with links:

Inphi
AMD
Teladoc
Docusign
Marvell
Bandwidth
Microsoft
Datadog
Shopify
Twilio
Nvidia
Fiverr

We were able to execute on a number of the above setups. For example, Teladoc, Docusign and the majority of our position in Inphi, aswell as a new tranche of AMD, were all executed within a few % points of our downside targets. We were able to add shares of NVDA, ZM and SHOP close to their lows, as well.

However, some of the setups have not manifested – BAND, NFLX, MSFT, DDOG. We will be updating these targets as the market progresses. As long as the S&P 500 is below 3400-3420, the downside setups indicated above are still active. Above this level and we will shift our game plan to our traditional base and breakout setups.

We further added to AMWL on its IPO date, and will look to add to this stock as it continues its uptrend. For reference, the last IPO Beth was adamant about was Zoom, and so far, this little talked about IPO is performing better than all the hot IPOs that garnered press.

Market Report: September 27th, 2020

Posted on by io-fund

In this report we analyze: Roku, Bandwidth, Marvell, Nvidia

Please note the glossary of terms and techniques here and herehere and here

You can access our portfolio here. You can also track in real time our Buyshere. You can also track in real time our Buys/SellsSells/Portfolio Activity in the forum.Portfolio Activity in the forum.

If you want to track us in real time, we recommend that you set up alerts to these 3 topics “Portfolio Activity”, “Buys,” and “Sells” which can be done by clicking on their icon/image, or search for their name in the search bar. Then, click the follow button and it will turn red like the image below.

Please note that we have provided a number of setups in stocks we are targeting in this correction. All of these setups are still active and they include: Netflix, AMD and Teladoc, which you can access here. The setups in Microsoft and Docusign are also active, which you can access here. The setups in Inphi, Shopify, Datadog, Twilio and Okta can be found here.Please note that we have provided a number of setups in stocks we are targeting in this correction. All of these setups are still active and they include: Netflix, AMD and Teladoc, which you can access here. The setups in Microsoft and Docusign are also active, which you can access here. The setups in Inphi, Shopify, Datadog, Twilio and Okta can be found here.here. The setups in Microsoft and Docusign are also active, which you can access here. The setups in Inphi, Shopify, Datadog, Twilio and Okta can be found here.

 

Roku (ROKU)

Summary

  • On heavy volume, Roku has broken out to new highs. Roku has been kept under the $176-$178 resistance zone for just over a year.
  • After receiving a buy signal, we bought a new tranche of Roku as it retested and held the breakout price. 
  • Roku’s relative strength compared to its peers has been very strong during the correction and especially the bounce last week. Signs like this are typically positive for stocks when the correction ends.

Since September of 2019, Roku has been in a relative downtrend, making a series of lower highs and lower lows. After bottoming in March of 2020, the price has steadily been climbing to retest the $176-$178 region, in an attempt to breakout to new highs.

After several failed attempts, not only did Roku’s price breakout to new highs this prior week, but it closed the week above this breakout zone on elevated volume. This is a promising sign that the trend in Roku is shifting.

The above chart shows the weekly candles for Roku. The long-term trend has been tracking a trend channel (in gray) almost perfectly. I have been expecting Roku to eventually make an attempt at the upper region of this channel. However, it needed to breakout of its base first. This recently happened, which triggered a new buy signal in our portfolio.

When a stock makes a noticeable breakout, like Roku just did, out of a large base, I will usually wait for the price to retest the breakout zone. This is exactly what happened on Roku, as shown by the hourly chart below.

After the breakout, the $176-$178 region became support. What made me believe this is not another false breakout in Roku was the movement in the momentum indicator as the price tested the breakout zone.

As price was bouncing along this region, notice how the CCI started trending up, while price kept trending down towards the support region. It was making higher lows as price was making lower lows. This kind of positive divergence is an excellent signal that the selling pressure is giving way to buying pressure.

As a result, we executed a buy at $178.4. We are holding without stops, for now, and believe Roku will be a leader out of this correction.

Bandwidth (BAND)

Summary

  • Bandwidth made new highs while the rest of the market is struggling to breakout of a downtrend.
  • However, the internal indicators are showing more weakness than price is leading on, which I believe can lead to one more retest of the 55-day EMA around $145-$155.
  • This area is also the price that we spotted an institution make a big position in BAND, which should further support a floor at this region.
  • If we do get a retest of this region, we will consider that a buy signal.

In technical analysis, there is a saying that is a basic principle – “price is king.” If you ignore price because the momentum indicators are saying something different, you could miss out on a great run. This saying couldn’t be truer than with Bandwidth right now. The price is undeniably resilient and strong with BAND, while the rest of the market is struggling. Like Roku, it was going down less than the broad market on down days and up more on rebound days.

However, if we look at the internal indicators, they tell a different story.

Internal Indicators

For one, the Accumulation/Distribution (A/D) lines signals what smart money/institutions are usually doing. More times than not, it acts as a leading indicator to price, so divergences are something to pay close attention to here.

Notice how the A/D line has been making lower highs while price continued to make higher highs. The A/D line has been in a downtrend for months while price is still moving up, which is not what we want to see.

We are starting to see a small change in trend with the A/D line last week. For the first time in a while, the A/D line is starting to make a higher high. It’s too soon to tell, if this indicator starts leading price to new highs, it’s a great sign that more smart money is starting to see what we have seen for some time.

Regardless, the price trend is up, and anyone who invested with us when Beth first announced this relatively unknown stock, is up over 40%. We believe that even though the internal signals are weaker than we’d like to see, that BAND’s performance during this correction will attract new buyers, which should propel it higher when this correction ends.

Marvell (MRVL)

Summary

  • Marvell has followed our count almost perfectly so far, allowing us to grab shares last month at $33.
  • However, price is stuck in a symmetrical triangle pattern that can break either way.
  • If it breaks out to the upside (above $39.20), that would be a buy signal. If it breaks to the downside (below $37), we will need to track the following downtrend before issuing a new buy signal.

Marvell is one of our 5G plays. It’s current performance is nothing special, but its positioning for the coming hype cycle in 5G should create alpha in the coming years. So far, it has tracked the count we laid out months ago almost perfectly.

We were expecting a correction around the $36 region, which was supported by a decreasing RSI. We then targeted the $33 range, which we grabbed just a few pennies away from the bottom. If you followed us into this entry, you should be up about 17%. The fact that we were able to grab shares so close to an expected bottom, helps confirm that the count we are tracking is likely correct.

What concerns me is the symmetrical triangle pattern (bull pennant) in blue on the chart. This pattern can go either way. However, the count we used to get shares at $33, is suggesting that it should break to the upside. If this happens, we will consider that a buy signal. If price breaks to the downside, it could suggest a retest of the $33-$32 region, which we would consider a buy signal, as well.

Also, it’s worth pointing out that the daily RSI has not broken 50 the entire correction. This is a strong statement that helps support an upside break, and it’s also rare to see this right now. It’s worth mentioning that any stock in September that has held the 50 line on their daily RSI is worth serious consideration.

Nvidia (NVDA)

Summary

  • Nvidia is consolidating between $530 and $475.
  • The weekly chart as well as the daily chart suggest Nvidia has at least one more leg lower to travel before this correction is over.
  • However, the daily RSI never decisively broke below 50, suggesting unusual strength in light of broad market weakness.
  • If price instead breaks above $530, we will consider that a breakout and signal that its correction/pullback is likely over.

The above image is the weekly chart of Nvidia, which includes over 20 years of weekly price information. Interestingly, the price has been tracking a multi-decade trend channel (in gray). We have seen several significant bottoms and tops at the very edges of this channel, which tells me that it is an important piece to Nvidia’s price movements.

So, seeing price break out of this channel recently is a bullish move. Nvidia is our highest conviction idea. We’ve guided numerous entries in this gem, and recently added at $479. We believe that a new entry should happen soon.

Note the Money Flow Index below the weekly chart. It is quite rare to ever seen then MFI hit 90, and when it does, it signals an extreme overbought condition. Historically, the indicator doesn’t stay in this position long, and has led to a variety of corrections. I believe the likely correction we see in Nvidia is a retest of the trend channel breakout, which is around the $435-$405 level.

This region is further confirmed by a number of signals that are visible in the daily chart below.

For one, the symmetrical, 3-leg correction, would suggest that price tags the $425 region, which coincides with the edge of the trend channel we just discussed. This region also houses many other important price clusters between $435-$405. If price hits this level, we consider it a buy.

Nvidia’s price is currently consolidating between the $530 and $475 region. A break of either of these levels will signal Nvidia’s next move. The weekly and daily chat are suggesting a break below $475; however, just because the downside setup is there, doesn’t mean it will manifest. So, if price breaks back above $530, we would consider that a breakout.

It’s also worth noting how well NVDA has held the 50 line in the RSI. Once again, any stock that has held this level during September in the daily RSI is worth consideration in this market. The strength in this stock is strong, and we only expect it to increase as AI unfolds.

Momentum List: September 2020

Posted on by io-fund

By David Marlin

This is the inaugural momentum list report written by David Marlin. We will release this report on a monthly basis.

Process Overview:

Identifying stocks that have superior momentum is a proven way to outperform the market. The key is evaluating which stocks show the fundamental and technical trends to sustain the type of momentum that will outperform the broader market.

In this report, I use a combination of fundamental, technical, and industry analysis to determine the top momentum stocks in the tech space. Please note, we’ve included one featured stock in this report: Sea Limited.

For evaluating the strength of a stock’s performance, I use a few time frames: YTD performance, performance from key market lows (in our case, the March lows), and short-term momentum.

For short term, I often look at stocks on a quarterly basis as it is very common to see a stock post big gains after earnings and continue that momentum for the rest of the quarter.  With the current sell off in the market, I am also closely looking at how stocks have performed during the market decline as technical strength is best revealed during pullbacks. 

On a technical basis, I like to use a few moving averages to help determine trends – the 8ema & 21ema for short terms trends, the 50 MA for medium term, and the 200 MA for long term.  In the current market environment, many previous leaders are now trading under their 50-day moving averages.  This is a key indicator that there has been a momentum change in these stocks and their previous uptrend has slowed considerably. Many stock trading legends, including William O’Neil, recommend avoiding stocks trading under their 50-day MA’s all together.         

The strongest stocks tend to be in the strongest industries. Identifying growing and evolving industries is a key to finding big gainers.  Companies with large addressable markets that are ideally positioned to capitalize on emerging trends are the focus of this list.  

High growth stocks obviously trade at a premium valuation, so this is not the most important factor in the creation of this list.  However, valuation cannot not be ignored, even for high growth stocks.  For this list, I analyzed historical valuations and valuation in comparison to peers.     

The criteria in the creation and maintenance of this portfolio moving forward is outlined below. Note that I only focus on stocks in the tech space with large addressable markets and market caps exceeding $3B. 

Momentum List Criteria:

  1. Financial Performance & Momentum
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  2. Technical Strength & Momentum
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  3. Industry Analysis
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  4. Valuation
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David’s Top Stocks List:

The top momentum stocks list is listed in order of highest to lowest revenue growth last quarter:

1. Sea Limited (SE)

Rev Growth: 102%
YTD Return: 271%
Proj 1yr Fwd Rev Growth: 39%
EV/Fwd Rev: 13.9x

Summary: Sea Limited is one of the top growth stocks to own based off its strong growth and leadership position in a rapidly growing market that remains underpenetrated.  See the attached PDF for the full report on Sea Limited.    

2. CrowdStrike Inc (CRWD)

Rev Growth: 84%
YTD Return: 158%
Proj 1yr Fwd Rev Growth: 36%
EV/Fwd Rev: 33.7x

Summary: CrowdStrike continues to prove it is a secular winner in the cybersecurity industry, displacing the existing participants and gaining significant market share.  The fundamental performance in Q2 confirms this company is a best-in-class business worth owning as security software continues to be the top priority for organizations around the world.        

3. Fiverr International (FVRR)

Rev Growth: 82%
YTD Return: 426%
Proj 1yr Fwd Rev Growth: 37%
EV/Fwd Rev: 23.8x

Summary: Fiverr has seen a surge in consumer demand related to COVID, and the company has now seen 4 consecutive quarter of accelerating YoY revenue growth.  I believe Fiverr is ideally positioned to become a sustained beneficiary of the digital transformation long after the economy reopens and see a tremendous runway for growth ahead of them.  At a roughly $4B valuation, Fiverr is in the early innings of its lifecycle, as management estimates that its TAM is north of $100B. 

4. Square Inc (SQ)

Rev Growth: 64%
YTD Return: 133%
Proj 1yr Fwd Rev Growth: 22%
EV/Fwd Rev: 8.7x

Summary: Square has built a platform around digital payments and commerce, positioning itself to benefit from the transition to a cashless society.  Square is ideally situated for sustained growth with the ongoing shift towards digital payments, both on the B2C and P2P side with its Seller and Cash App ecosystems.     

5. Fastly Inc (FSLY)

Rev Growth: 62%
YTD Return: 311%
Proj 1yr Fwd Rev Growth: 33%
EV/Fwd Rev: 28.0x

Summary: Fastly has proven itself as a disruptive and innovative company focused on creating cutting-edge technology for developers and DevOps teams.  Fastly is one of the main beneficiaries of the digital transformation, as the subsequent increased internet usage in its clientele has led to accelerating revenue growth and net retention rates for the company. 

6. MercadoLibre Inc (MELI)

Rev Growth: 61%
YTD Return: 71%
Proj 1yr Fwd Rev Growth: 32%
EV/Fwd Rev: 13.6x

Summary: MercadoLibre is the leader in the Latin American e-commerce market, and is poised to continue to benefit from the increasing shift to online shopping in those underdeveloped nations.  The company received a massive boost from COVID across all its businesses, including tremendous growth in MercadoPago, the company’s digital payments segment.  MercadoLibre has a long runway for growth ahead of it as the top e-commerce and fintech company in a developing region.

7. Pinterest Inc (PINS)

Rev Growth: 4%
YTD Return: 96%
Proj 1yr Fwd Rev Growth: 33%
EV/Fwd Rev: 13.9x

Summary: Pinterest stock soared after its Q2 earnings report, as management predicted a return to +30% YoY growth levels.  Pinterest has a golden opportunity to accelerate its growth by increasing monetization per-user, particularly internationally.  As advertisers around the globe gradually ramp up their spending again, Pinterest is positioned to be one of the main beneficiaries.

8. Tesla Inc (TSLA)

Rev Growth: -5%
YTD Return: 406%
Proj 1yr Fwd Rev Growth: 42%
EV/Fwd Rev: 13.4x

Summary: A list of the top momentum stocks would not be complete without Tesla.  Tesla is a company with massive potential for growth ahead of it as it attempts to revolutionize the future of the transportation industry.  The top auto companies in the world are all chasing Tesla to catch up to its EV leadership status and the company continues to widen its lead with its proprietary innovation.       

9. Penn National Gaming Inc (PENN)

Rev Growth: -77%
YTD Return: 186%
Proj 1yr Fwd Rev Growth: 39%
EV/Fwd Rev: 3.3x

Summary: Penn Gaming has a tremendous opportunity to become a dominant player in the rapidly growing sports betting industry.  Newly acquired Barstool Sports will be the main driver of this growth, as the company’s social media following allows Penn to digitally reach millions of potential customers.  In its launch last Friday (9/18), the Barstool Sportsbook app was the most downloaded sports app in the US, even as the app is only available for use in 1 state (PA).  I expect Penn will continue to leverage the Barstool brand to acquire a dominant position in the industry, making it significantly undervalued in comparison to its peers.      

Outside Looking In: ETSY, NET, ZS, SNAP

We are starting out with 9 stocks to include in this portfolio, a number that may change based off conviction and new opportunities.  There will be a new tab for monitoring the Momentum Portfolio next to the Active Portfolio moving forward.       

I will be covering the list of the top momentum stocks in depth and releasing an updated report each month.  Businesses and industries are always changing and new opportunities emerge — my goal is to identify them and bring these to your attention.

The portfolio may change at any time due to a change in fundamentals, technical strength, new opportunities for inclusion on the list, etc.  In the coming weeks, I will be releasing in depth reports on each stock included in the momentum portfolio. 

Knox and I will also be working together to provide entries/exits in the names included. Please find me on the forum for any questions or comments on this report.

Featured Stock: Sea Limited

By Knox Ridley and David Marlin

This week, we initiated a position in Sea Limited at $150.10. We believe Sea is positioned for significant future growth because of its leadership status in e-commerce and gaming in Southeast Asia. This region is among the fastest growing in terms of internet usage in the world. With Sea establishing itself as the region’s dominant internet company and extending its lead over competition, we have been looking for a proper entry in the stock. 

Since the March 23rd lows, SE has been a leader among tech stocks. After climbing over 350% over the last trailing 1-year period, SE is currently down just 10% from its 52-week high, while the NASDAQ is down about 13%. Also, it’s worth noting that SE has, so far, bottomed on Sept. 8, making a series of higher highs and higher lows since. This is compared to the NASDAQ, which found its lowest level of Sept. 22, and is still in a downtrend posture. This is notable strength that we look for during pullbacks.

With a deeper look into the chart, we can see that SE appears to be setting up for a move higher. Note the base that the stock has built, which is outlined in blue, with the breakout spot being around $50.50 – $51. This is accompanied by decreasing volume, with more green bars than red. This is signaling that the sellers appear to be drying up.

Usually I wait for confirmation of a breakout before I move; however, the internals had me anticipate one instead. For one, we are seeing the 50-line hold in the RSI during this selloff, meaning that the momentum is still positive to flat, while the NASDAQ is clearly losing momentum. Recently, the RSI is starting to trend up.

This is coupled with positive divergence in the CCI and the MACD in a classic coiling pattern. Furthermore, the Accumulation/Distribution line is indicating that smart money is buying into this dip. When this indicator makes a new high before price, it’s a good sign that price will soon follow.

There is additional risk within the broad market right now; however, we like the setup forming in SE. We placed a stop about 10% below our entry, which is just below the base SE built. If this stop is hit, we will exit and regroup for the next move up. With momentum, the key is to have hard stops and exit when the momentum is still up.

Market Report: September 13th, 2020

Posted on by io-fund

In this report we analyze: Roku, Microsoft, Docusign and BigCommerce

Please note the glossary of terms and techniques here and herehere and here

You can access our portfolio here. You can also track in real time our Buyshere. You can also track in real time our Buys/SellsSells/Portfolio Activity in the Portfolio Activity in the forum.

If you want to track us in real time, we recommend that you set up alerts to these 3 topics “Portfolio Activity”, “Buys,”  and “Sells” which can be done by clicking on their icon/image, or search for their name in the search bar. Then, click the follow button and it will turn red like the image below.

The setups we outlined in Netflix, AMD and Teladoc last week are still active. You can access them here.here.

Roku (ROKU)

SummarySummary

  • Even though Roku is 16% off its high, the force behind the drawdown is not strong. Volume is light, and smart money is not selling.
  • If $150 breaks, we will target the $144-$140 region.
  • We will also look for the 37 mark on the RSI for a bottom, as well.

After breaking out at the $175-$176 region, Roku fell back below this major resistance, confirming a false breakout. We stopped out of our recent tranche in an attempt to play this breakout, and currently setting up our next plan to buy more shares for our long-term position.

Roku is currently down 16% from its highs and found support at the $151-$150 price range. Also, note the blue trendlines. These are Anchored Volume Weighted Average Prices (AVWAP)that are tied to the major swing lows within the recent uptrend. This tool helps determine the health of a trend and also determines key supports for when that trend changes.

Roku found support at the June 29th AVWAP and is currently holding this price. Even with a 16% correction, these AVWAPs show we are still in a healthy uptrend.

Further signs of strength can be found in the volume. Notice how the volume trend has been decreasing with the selling. This is telling me that the drawdown is not backed by excessive selling, but more of a lack of buyers.

The Accumulation/Distribution line supports this. Note the lower lows while ROKU’s price makes higher highs. This is not what you want to see prior to a breakout; however, note how that lows in the A/D are moving higher. This is confirming that even though “smart money” is not buying, they are also not selling.

For the sake of simplicity, if Roku breaks the $150 support, it will confirm a downtrend is in place. If this happens, my targets are from $144 – $140. The question will be – how low does price have to go before the smart money steps back in? It’s not at $150, so we will likely look lower for a bottom.

The RSI will also be key for finding a buying spot. With no positive divergences showing up on the daily chart (or hourly), we will look to the 37 mark for a bottom. This has been major support in the RSI throughout Roku’s history. If the RSI finds this support while price is also on a key support, that will be a buy for us.

The long-term chart lines up with the fundamental thesis here. We are long-term bulls, and will use this period to further accumulate shares in one of our favorite stocks.

Microsoft (MSFT)

SummarySummary

  • After crossing the $220 resistance, Microsoft invalidated the possibility for a large degree downtrend that we have been tracking for several weeks.
  • This is great news for the long-term outlook for MSFT and the market. However, the chart suggests we are now in the 2nd wave, which could be rough in the short-term.
  • We will be buyer in the $192-$185 region.

We’ve been tracking Microsoft extensively this year. I suggest you look at my deep dive into the long-term chart to get an idea of the trends at play. You can access that here. We’ve held off on buying MSFT into this rally because of the risks we outlined below the $218-$220 price. Below here the slight possibility for a larger than normal downside setup was on the table.

As of now, there is good news and bad news with Microsoft from a technical perspective. The good news is that this large downside setup has been invalidated once MSFT crossed the $220 mark. For the long-term prospects of Microsoft (and the market), we are expecting higher levels once this correction plays out.

Furthermore, the 5 wave move off the March low is arguably the most classic example of a standard 5 wave pattern that I’ve ever seen. For example, the most common extension for the 3rd wave to end is the 161.8% extension, which for MSFT was around $213. We then look for the 4th wave to end around the 23.6% or 38.2% retrace of the 3rd wave. Microsoft’s 4th wave ended at the 23.6% retrace exactly. We then look for the 5th wave to end at the 200% extension with the MACD showing negative divergence. For Microsoft, the 200% extension was $232 with the MACD diverging. If I was going to teach someone how Elliott Wave mapping works, I’d start with this 5 wave pattern because of how text book it is.

Now for the bad news – what follows the 1st wave is the 2nd wave drawdown, which we have been planning for. If you look at the downtrend in MSFT, we have a clear A wave with a B wave that followed. It then gave way to price just briefly making a lower low, which is key. If the downtrend was over, we would’ve looked for a retest of the recent low and a hold above it, setting up for a move up. Once Microsoft breaks the $201 region, the C wave will be in play.

I’ll target the $192-$185 region for entry. This is a heavy confluence of important prices as well as the symmetrical move for this correction, which we’ve used successfully to get shares of many stocks in corrections close to their lows. There is also an open gap at $192, which should lead to a bounce.

Also, the Anchored Volume Weighted Average, which I anchored to the low in March, will be in this region this week. This is the best gauge for testing the health of an uptrend, and even with this pullback, the bulls are still in control according to this indicator. Expect heavy buying in this region, which we will participate in.

Docusign (DOCU)

SummarySummary

  • DocuSign is down 35% from its all-time high, and just broke another key support at $205.
  • The largest volume spike in its history happened at all-time highs, setting off a wave of selling.
  • The structure suggests that the large degree 3rd wave is over, which puts the 4th wave targets at $185 – $140.

We outlined our plan for buying DocuSign in the forum last week, which you can access in the DOCU topic. Since the March low DocuSign has been in a clear 3rd wave. Third waves are powerful trends, which anyone invested in DocuSign since March is aware of. It has returned nearly 350% since the March low before hitting a top $6 below our target price at $298.50.

Confirmation that the 3rd wave is over and that we are now in the large degree 4th wave (in red) comes from a few signals:

  • Notice the massive volume spike. This is the largest move in volume in DocuSign’s history, and it’s predominantly selling. This means a large number of buyers have sold in unison, reducing the demand for shares. We will need buyers to step back in to stop the correction, which hasn’t happened even after a 35% drawdown.
  • Price has closed below the 55-day EMA
  • The RSI is clearly below 50 and holding, indicating that momentum has shifted to the downside.
  • Price closed below the key support of $205.

For DocuSign, the most common targets for 4th wave supports are at the $185 for a shallow 4th wave and $140 on the deep side. The AVWAP, tied to the March low in blue, appears to be moving into the $185 region while the 200-day SMA is moving into the $140 region. The momentum indicators will be crucial for determining supports. They have their own support regions that I will be following, as well. We’ll be looking for signs of a bottom while both are hovering around key supports.

We started buying at $205 of Friday, and will be heavy buyers at the $185 region if we get there.

BigCommerce (BIGC)

SummarySummary

  • BIGC is in a deep drawdown.
  • It broke the $80.60 support, and thus means there is likely more downside ahead.
  • Until price gets into the mid-$70s, the valuations are just too rich compared to other fast-growing stocks we own.
  • The structure is unfortunately setting up for two extreme scenarios – either we are in a deep 2nd wave, which will give way to a strong 3rd wave to new highs. Or, we break to all new lows (below $64), at which point the price structure could be setting up for an even deeper drawdown.

We’ve been tracking BigCommerce since it topped a few weeks back. So far, it has been in a complex series of symmetrical corrections. My chart above outlines this path, and it assumes that BIGC is in a 2nd wave correction. This implies that the recent uptrend was it wave 1, which actually lines up well.

The problem with BIGC is that there is no indication that the correction is done. The second wave can go as low as the all-time low and still be valid, but this is an additional 25% from current prices. Furthermore, until it gets into the mid $70s, from a P/S standpoint in the E-commerce space, it’s not worth the risk.

Also, note the AVWAP, which I tied to important swing highs in the downtrend. Until BIGC stops making new lower highs, and starts taking back some of these AVWAPs in blue, the trend will remain down.

If BIGC can continue into the $70s and show some sign of bottoming, then we may take another shot at BIGC with stop just below the all-time low. If the price breaks to new lows, we will step away.