From peak to trough, last week saw a correction that traced 15.86% while at the same time breaking the pivot support at 3000 level.
As of now, the 2880-2600 region is crucial, and will be the area in which this correction bottoms or turns into something bigger. Whether we are in the early stages of a bear market or we have struck some kind of bottom, we can expect an attempt a reflexive bounce in the coming days/weeks.
The market needs to work-off levels of oversold conditions, and it will be in this bounce that I will look to increase my hedges and potentially raise more cash.
Obviously, we are not market prognosticators, rather we try to prepare for all scenarios. In fact, as I wrote this today the futures were down 1.3% and are now up 0.5%.
Here’s a glimpse of what COVID-19 has done to China, so far:
One of the major global supply chains has been disrupted. Adding more liquidity in the system via rate cuts will not fully address a supply chain problem. The February/March data will not help the markets, as the global economy slows due to the uncertainty around pandemic fears. So, any attempt at adding to long positions should be done with caution.
On the other hand, I want to point out the number of buyers we found in the NASDAQ at the 200-day SMA.
The above chart shows the Nasdaq. Look at the level of buying that stepped with a spike of green volume at the 200-day MA (noted by the black line). This is a great sign for bulls and should signal, at minimum, a temporary bottom, while we work off overbought conditions.
So, I’d like to offer some perspective on our positions, which have held up quite well considering the blood in the streets. We want to offer you some scenarios that offer good risk/reward trades with an exit strategy that protects your capital.
We aren’t financial advisors. Instead, we are actively seeking the best tech stocks at the best prices.
Elastic (ESTC)
We spotted the same setup in Elastic as we saw in Zoom when it was below $70. In Elliott Wave, it’s known as a 1-2, i-ii setup, which we see just before a powerful wave 3 takes over. On the forum, we pointed this setup out, and put a stop just under $63.50 on the closing price. The stock closed at $63.80, then earnings propelled ESTC 18% in a market that was down around 3-4%.
The bad news is that the probability of this setup holding is not favorable, per my count. We saw negative divergences within the RSI, MACD and MACD Histogram, suggesting the momentum is just not behind the move. Also, the Accumulation/Deceleration line, which measures if the price move is supported with volume and if that volume is “smart money,” also diverged.
I am holding a stop just under $69.25 to protect the gains we got for this move.
Roku (ROKU)
Roku has provided us with clear support levels. The first was at $125, which held for some time. Now, we are trading within the $115-$112 region, which Roku is now struggling to maintain. The recent buying pressure to push it back into the range was weak, and the “smart money,” which typically positions in the final hours of a day, is not buying right now.
The MACD failed at the 0 line, and is now in a clear decline below the range that held price within the tight descending wedge pattern for many months.
My stop for Roku is just under $86, and I’ll move my stops up if we get a bounce here.
It’s also worth pointing out the valuation of Roku at these levels compared to its runway. We believe, even in a a global recession, Roku’s business model is primed for growth. However, the stock market can have moments of being extremely mispriced, especially with misunderstood tech. It is for this reason that I have a stop in place for any new positions.
Nvidia (NVDA)
Nvidia found heavy buying at the $244 support region I pointed out in the last market update, which also coincides with the 55-day EMA. This also coincides with the middle of the target box we were watching. For us to have a bottom in place, the $244 region will be the battle ground going forward.
Even in light of the drawdown we saw in the market last week, where the vast majority of stocks in the market are trading at or below their 200-day moving average, Nvidia held the 55-day EMA with the MACD staying above the 0 line.
For anyone looking for a reasonable risk/reward entry for Nvidia, one scenario is to consider is entering at current prices, with a stop just under $241. This is a good setup to play any upside, while protecting from any further downside that may play out. Like with other positions, move your stops up as price increases.
Qualcomm (QCOM)
Qualcomm’s internals, as shown by the MACD, are showing that the selling halted and began to turn up well below the 0 line, with the histogram confirming this. The 38.2% retrace level, which is highlighted in blue on the chart around $73-$72 found buyers to step in and halt the decline.
However, it’s worth pointing out that QCOM stalled just below the 200-day MA, which is the psychological barrier that separates a downtrend from an uptrend. I would want to see it take back this region, which I expect it will, based on how over sold it is now, as a sign that, at minimum, a relief rally is underway. For anyone looking to go long, I’d hold a stop just under this level. A good stop would be $72.50.
Alibaba (BABA)
Alibaba is showing a lot of strength at the $200 region. For anyone who has been following us since we first covered BABA on our premium site, when it was trading around $180, you’ll remember that the $200 region was a tough hurdle for BABA to break above. Now that the price cleared this zone on the way up, that region is acting as strong support.
The internals are showing an easing of the selling momentum at this region. The MACD histogram is showing positive divergence, as the price is beginning to turn up below the 0 line. The Accumulation/Deceleration index is actually going up as the price is going down, which means that the “smart money” is buying into this decline.
For anyone looking to go long BABA, current levels with a stop at $197 would be a reasonable risk/reward setup. We believe in the long-term business model of BABA. If the coronavirus beats the stock down, we think that will be a gift.
This is a company to own for the long haul; however, the stop will protect us from another leg down in the correction if we get it before a bounce.
Zoom (ZM)
Zoom has been a fantastic position to hold during the sell off. In fact, while the market is down about 13%, Zoom is up about 3%. However, notice the very large Bearish Engulfing Candle that engulfed most of the move since the correction began. This is not a good sign for Zoom. This specific candlestick pattern usually precedes a change in trend, whether this change is the beginning of a failed impulse, which we’ve been tracking since wave-1, or it’s the wave-4 pullback we have been waiting for, only time will tell.
I have provided 2 stops: (1) the tight stop would be just under $94; (2) the wide stop would be just under the AVWAP, which is just under $84.
The Trade Desk (TTD)
It’s worth pointing out just how strong the Trade Desk has performed during this correction. As of now, it is only down about 10%. It found a swarm of buyers at the 200-day MA. After earnings, it quickly took back it’s 55-day EMA, and also the 10-day EMA.
The MACD is still under the 0 line with the histogram beginning to turn up, which is signaling bottom of sorts. Also, the Accumulation/Distribution line is making new highs before the price. There is a good chance that TTD makes new highs in any relief rally we get.
For any longs, I would watch the 55-day EMA as support and even as a stop, which is around the $275-$270 region as I write.
Dynatrace (DT)
Dynatrace has retraced to the upper region of our target box and found strong support around the $30 region, which is highlighted in blue on the chart. This also overlaps with the 55-day EMA in blue on the chart. The Internals are suggesting that at current levels we have not seen an exhaustion of selling.
For any longs at this region, I’d suggest a tight stop around $29.40 just in case we break this support. We have raised our stop to this point to protect our gains. Below here and we will likely see the $27.50 region come into play pretty quickly.