Market Lab Report - Weekly Review of Pocket Pivots and BGUs for the Week of April 12-16, 2016
Mellanox Technologies (MLNX)
GM - MLNX has been in an uptrend for some time now, and strikes me as being in an extended position overall in its pattern. There is a pocket pivot on February 22nd that looks more opportunistic. At this stage, with earnings expected this coming week on Wednesday, I don't think its worth taking a shot here as there is no profit cushion in the stock. I would wait to see what, if anything, develops after earnings - there is no reason to play "earnings roulette" with this one.
Dr. K - MLNX got support at its 20dma on Friday closing midbar. If you own this, MLNX could be sold on any break below its 20dma, or slightly below its Friday low.
New Oriental Education & Technology Group (EDU)
GM - EDU is expected to announce earnings this coming Tuesday, and as with MLNX I see no reason to try and play "earnings roulette" with this ahead of earnings. In the past, pocket pivots that occur just prior to earnings were reasonable clues of a positive earnings reports, but that correlation has not held up as well in the current environment. These days I prefer to have a profit cushion in any name if I'm going to hold it through earnings.
Dr. K - A pocket pivot that is not extended can sometimes move higher over the next few days. EDU has not so in keeping risk to a minimum, selling before it reports earnings is probably prudent. The last two earnings reports pushed the stock higher, but the report before those two gapped the stock slightly lower. Keeping risk to a minimum is essential in this environment.
Vulcan Materials (VMC)
GM - VMC is in a reasonable buy position here using the 20-day moving average as a nearby selling guide. The stock is just starting to emerge from a cup-with-handle formation. We can see that an attempt at higher highs five trading days ago on the chart was soundly rejected, but VMC could make another run for new highs before it is expected to announce earnings on May 5th.
Dr K - VMC has managed to outperform the S&P 500 with its healthy group rank and strongly accelerating earnings. When the S&P 500 falters, VMC tends to find shallow floors. When the S&P 500 goes on a mild uptrend, VMC tends to trade in a fairly tight uptrend as it did in late 2014 and twice in 2015.
Below is a summary spreadsheet for pocket pivots and buyable gap-ups for which we've sent out reports since March 1, 2016:
This summary spreadsheet demonstrates that taking profits when you have them is critical in this market. An active approach would help to lock in gains since all of these pocket pivots and BGUs have gone higher after we've reported on them. However, several have also come apart, and in some cases, as with SWHC, a big breakdown came after a nice 12.52% price gain at its peak price following the initial pocket pivot. That breakdown took SWHC down -18.78% from its original pocket pivot on March 4th. SMCI argues in favor of tight risk control, and demonstrates why junky, smaller stocks tend to carry more risk. After scoring a 4.37% gain after we reported on it, the stock has since dropped -19.36% from its original March 1st pocket pivot. Overall a mixed bag, but if one plays the right names and is willing to take profits when they have them, material upside progress can be made while avoiding some of the breakdowns we've seen in names like SWHC and SMCI.
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