The Recent Pullback
Despite coronavirus fears that many were forecasting could lead to a crash, the market remained fairly stable. While the market was overextended in valuations we rarely see, it took the fear of a global pandemic to knock the indexes down just 3%.
The market hit the top end of our target at 3220, as mentioned in last week’s market update. Regarding the correction, 2.5% is what we got in the NASDAQ before the market caught a strong bid that pushed the index to new highs. The SPX soon followed.
A few things I’ve noticed this week:
- Some extremes we’re seeing in the current Put-Call Ratio.
- All-time high in the U.S. PEG ratio,
- NASDAQ is reaching new highs while more than half the index is still at least 20% off their 52-week highs.
In short, a handful of stocks in the index are accounting for most of the returns. So, this is not a broad market uptrend. Therefore, I am not sure the correction is entirely over. We will monitor this as we go along. While the main indexes are reaching all new highs, it’s doing so without the transport index and small cap index doing the same.
The small caps represent the health of the domestic economy. Considering the vast majority of their revenue is domestically centered, they provide a better gauge for the domestic economy. The transport sector also reflects economic health simply because when businesses are booming, they need to transport more goods for sales. Until these indexes join in the broad market with new highs, the current uptrend should be closely monitored.
The market climbs a wall of worry, and the current environment is no exception. You will always be able to find reasons to not invest until it is too late. I have a stop in place with every trade so I don’t have to worry about a crash.
My goal is to try to buy stocks near key supports with tight stops, or when they are breaking out. As stated on the forum, as well as the last market update, we bought the recent dip, and will continue to until the broad market breaks key supports.
In the meantime, I’m holding some cash for new opportunities, have stops on all my tech positions, am hedged with a few choice gold/silver plays as well as some cheap, long-dated puts on indebted companies. And, most importantly, I’m staying with the general trend, which is up. The key level to watch today in regards to the recent correction is SPX 3290. If this support breaks, we will likely see a retest of last week’s lows, and the levels I outlined in the last market update will be back on the table.
Telaria (TLRA)
Last year, small caps started to break out. We did published report on this opportunity early-on, showing that small caps are trending towards recessionary levels while large caps continued to make new highs. The thesis was that if we are not heading into a recession in 2020, then small caps have a large gap to fill in order to catch up. Even though small caps have not made new highs, they began to breakout of their range, trending towards new highs. It was based on this thesis that we added to our two small cap positions with Telaria being one of them, and since then we are up about 40%.
The structure of Telaria is a complex one, which can be analyzed from various angles. It is because of this that I focused exclusively on the 5-wave uptrend we are currently in. Since TLRA was acquired, the 55-day EMA has been strong support for the price (the red line).
If TLRA breaks the 55-day EMA, the levels to watch are the $8.50, $7.90, $7.15, $6.20. These areas are derived from the ratios on the right of the chart, which are price clusters that are taken from various Fibonacci ratios applied to the structure of TLRA. There are very tight clusters that will define the important levels to watch if TLRA breaks the 55-day EMA.
As of today, I am raising my stop to either $8.25 or the 200-day SMA, which ever gives first. This will give the first support region some room to breathe. If this stop is triggered, it will lock in about a 20% gain from our initial position, and we will look to re-enter down the road.
However, if Telaria can break out to new highs at $11.82, we could see it trade in the $13 before any sizable pullback. If this happens, our stops will be raised to compensate.
The Trade Desk (TTD)
We are long The Trade Desk, and have been since their last earnings report. The recent breakout to new highs, suggests that the current 3rd wave that we are in is not over, and the next level I’m targeting is around the $350-$375 area before we see a pullback. However, it’s worth noting that we haven’t fully cleared the $296 region, and until we do, the risk is that the 3rd wave is topping at current levels is still present.
The internal momentum is fading while price is going up, which is not preferable as a price breaks out to new highs. However, we like TTD for 2020, so on any pullback, we will be adding to our current position.
Zoom (ZM)
We have been covering Zoom weekly, mostly because the bullish setup offered a great low risk/high reward opportunity. Going long in the mid-low $60s with a stop just under the all-time low at $59.95 was the setup we were offered our premium readers twice.
This also lined up with the 1-2, i-ii bullish setup we talked about in the last few market updates. If this was valid, we targeted the $87 region for a wave-3 top, which is exactly what we got the day of the breakout. The following day we extended to the $92 region before correcting.
The volume spikes are encouraging, as well. We saw an influx of buyers at key resistance step in. The RSI is showing positive divergence, suggesting the current pullback will likely be shallow before completing its 5th wave push. The MACD is also well above the trendline. All of these internal signs are suggesting a healthy uptrend.
As long as Zoom holds the $75.75 region, the larger degree 3rd wave uptrend is in place. That would put us in internal 4th wave of the larger degree 3rd wave. If valid, this will likely test new highs before we get the larger degree wave 4th wave pullback.
Boingo (WIFI)
Boingo is one of my favorite setups today. We have, like with Zoom, a 1-2,I-ii setup in place. This also is showing up as a standard cup and handle pattern. If WIFI can break above $13.40-$13.50 region with heavy volume, we will likely see strong uptrend, much like we witnessed with Zoom. If this is valid, I’m targeting the $20-$21 region.
Further proof comes from the structure of the handles in the above chart. Notice the 3-wave move, where the final wave ended exactly at the 127.2% extension of the first wave. This is textbook Fibonacci trading, which lends the current bullish setup being valid. In summary, as long as $9.55 holds, which is a wide stop, I’m long WIFI at current prices.
Slack (WORK)
We recently sold out position in Slack around the $23.50 area this time around. It appears that Slack, yet again, is topping out within its very tight range, and will retest the $20-$19.50 region. After climbing nearly 20%, which falls in line with the symmetry we pointed out in the last 2 attempts to breakout, we can see negative divergence between the RSI and price.
Also, the MACD is rolling over at higher highs. All of these signs are suggesting that a breakout may not happen this attempt. We will look to go long again if Slack can clear the $24.30 region, or if it finds another bottom around $20. Eventually Slack will break down or break out, and based on how range bound it has been, this move should be a strong one.
Datadog (DDOG)
Datadog is another stock with limited price action that is providing a complicated and ambiguous structure. Right now, I am giving the uptrend the benefit of the doubt and will keep this count as my primary one unless DDOG breaks through the $39.60 region. Below this region, which is my current stop, and DDOG will likely retrace in a more bearish count.
So far, the internals are lining up with the price in a healthy uptrend. Also, the yellow region on the chart highlights a very tight cluster of important Fibonacci prices, which should act as strong support.
Roku (ROKU)
Roku has been trading within a descending wedge pattern since December of last year. These patterns more often than not, resolve themselves in the direction they are pointing. The MACD confirms this with the direction it is pointing in, as well.
The blue and red regions on the chart highlight recent drawdowns, and they coincide with the colored ratios on the right of the chart. Symmetry is a strong force in technical analysis, and we can usually target the length of prior drawdowns for important inflection points.
The red area region highlights a, roughly, 21% drawdown. If we measure the length of this drawdown from the top that followed it, that will take us to $120.83 (or the 100% extension).
We have been layering in at this level, which also coincides with the 200-day SMA. If we break through this level, the next support region will be between $112-$115. Below that, and we will reach the 100% extension of the drawdown highlighted in blue, which will take us sub-$100.
I’m expecting us to at least hit the $112-$115 region, which I will use to layer in more longs. Roku sub-$100 would be a gift, based on our future calculations on where this we see this company going within the connected TV ad space.
Pinterest (PINS)
After reporting stellar earnings, Pinterest is set to open tomorrow with heavy volume, through the above resistance cluster between $24.75-$25. There is a heavy confluence of important prices, coupled with the 38.6% retrace level, which also happens to coincide with PINS closing the gap.
Breaking through an important price resistance with force is exactly what we want to see. What we want to see next is – can PINS hold the $24.75-$25 region as support now that it has broken through? We will likely see a retest of this area, and that is where I will look to add to my current position.
Quick update from Beth: the 5G spreadsheet is coming out this upcoming week. We got a little delayed as we have twice as many companies we are tracking as we do for cloud. Should be out Mon-Wed of next week.