Weekly Update, PepTalk - 12/26/2015

Happy Holidays, Pep Talk for 2016

Happy Holidays Everyone!  For those of you that celebrate Christmas, I hope you had a great one.  At next writing it will be 2016.  I wish everyone a very happy new year.

2015 was a tough trading year for a lot of traders.  If you are in this camp, stay positive and look forward.  There is not a trader in history that hasn't had a drawdown.  The market has gone nowhere for 12-24 months (depending on what market you are looking at).  There were a few great leaders in 2015 like AMZN and the bank sector.  If you were talented, experienced and on your game, there was opportunity to have a nice year.  There is no doubt about that.  But it was an easy year to have a drawdown or to finish down for the year.  It happens to every trader noviced or experienced.  Learn from it, and then look forward positively.  There were traders that got chopped up in 98 and most of 99 and then went up 400-500% in 3-6 months.  We very well could be setting up for this type of environment again.  So stay positive, get your work in and if you see A trades going forward, believe and go for it.

It was an interesting market week.  After "losing" the follow through day, the market had a nice 3 day rally.  When the market doesn't do what you think it should do (fall apart after failed follow through day), pay attention.  That is a trading rule for many experienced and able traders.

Most of the signs I look at point to my scenario A in my market mosaic; i.e., we are in an intermediate correction, leaders are setting up and we should be looking for a follow through day soon that could be very powerful.

Just to hammer home the potential coiled spring/the market has gone nowhere for a long time theme, here is a chart of the Russell 2000.  Nowhere since 1/1/14 (2 years ago!).  The IWM also completed the Billy O (the nickname traders had for William O'Neil)) 5 waves down a few months ago.  See my previous charts on S&P 500.  As Bill O says, stay positive, he has never met a successful pessimist.  There might be opportunity here.

Watch list

Here are the updates to my watch list:

VIAV - Completed its 7 week in its double bottom base, started to climb up the right side and has built some RS.  The week was too short to show accumulation, but if we had a full week we probably would have gotten one.  I am giving you the daily view here.  I drew this as part of an ascending wedge, but it doesn't have to be going forward.

N - Continued to hold its RS after a nice rinse and high volume weekly recovery/accumulation the week prior.  If you have a Billy O "How to Make Money in Stocks" book, look at Pic N' Save 1979 chart (the base was actually in 81/82).  That double bottom base (a double double bottom!) was very similar and had a very similar rinse and high volume recovery at the bottom of the base on the weekly.   My stock charts don't go back to 1979 or I would show you.  The trendline pivots for N have fallen to 91-94 depending on how aggressive you draw them.  50 day is just above for you pocket pivot watchers.

LITE - had a nice tight 1%  week in a potential handle.  The handle probably needs more work as previously discussed with QIHU examples.  See last week.  So far we have a nice cup base, with pocket pivots before it launched up the right side.

I put the positive Wall Street comments for LITE through my twitter feed this week.  I caught this news late.  But it gives you a summary of some of the fundamental positives that are creeping into this story.


LNKD - had another tight weekly close (1.4%) in an 8 week base within a base.  I'd love more tight action or a nice rinse and recovery.  Don't fall sleep on this or any other A set ups due to internal worry or macro headlines.  QCOM broke out on Jan 6 1999.  See past posts or twitter feed for chart. Don't fall asleep here on this or anything that is setting up!  Here is updated daily on LNKD.

Happy holidays and new year everyone!  Let's get our minds and prep right ahead of this last week of 2015 and the 2016 that lies ahead.

Market and Leaders Update - 12/19/15

Market Health - Market in correction.  We still have distribution in the market and no follow through day yet.  I continue to build a mosaic in an effort to determine if we are in a intermediate, mild correction or a more severe bear market.  My thesis continues to be that we are in an intermediate correction and we should be looking for the best investments/long setups for when this ends.  But here are some of the market data points I am examining.

Mosaic for mild, intermediate correction - significant fear in the market over rising interest rates/commodities/many hedge funds failing, the market hasn't gone anywhere in a year and has chopped people up, oscillator is building again, I am seeing some emerging leaders set up.  When people are giving up on the market, trend analysis, and active management, I get excited.  This is exactly the type of backdrop that gives way to a follow through day and a market and leaders that finally trend.

Mosaic for severe bear market to come - some big leaders like AMZN look tired and extended, market has been narrow this year, not a lot of great setups.  IBD called Wed a follow through day this week, and it failed quickly and violently.

Watchlist Update:

I listed these in order of how constructive their action was this week from best to worst (even though they were all "constructive").

VIAV - great RS the last 2 days.  6 weeks into a handle, a cup or a double bottom base.  Cups need 6 weeks, double bottoms 7 weeks.  We had our 2nd week of volume accumulation (marked with A) in the base with no weeks of distribution.

N - Actually started to build some RS.  We had a big week of accumulation (marked with an A) at the bottom of this base!  In this year long base, weekly accumulation and distribution is roughly even.  Hasn't had a pocket pivot or trendline break yet.  I liked the CIO survey calling for increased spending in SaaS in 2016 this week.  As I mentioned in a tweet, the overall group has a lack of setups (main technical risk to assess).

LNKD - We are now 6 weeks into a base (a cup) within a base (a cup and handle or double bottom with handle).  We had a weekly close within 2% of the week before (not bad for a "beta" stock).  A few weeks ago, we had 2 weekly closes within 1% of each other.  So far on the weekly, we only have one week of distribution in this 6 week base (the first week), and volume has been very dry in the remainder of the base.   We didn't even get above average volume on options day and the 50 day break yesterday.

Using 8% stops, one hasn't been stopped out if they started a position in front of the the 50 day.   One hasn't been stopped out if they bought the low of the gap up day, but the stops are close on that entry.   Swing traders can look for a gap fill around 219.  IBDers who like to cheat from here will look for pocket pivots back up through the 50 day.  The non cheater pivot point remains 258.  I have included LNKD's current chart plus another similar base within a base - QCOM in late 98 before the run of a lifetime.  Both had several years of chop, wedges, subsequent double bottoms and bases within bases/handles.  QCOM's bottom of its handle or base within base was just under 50 day.

LITE - great RS this week but "handle building" process might continue.  We did have a short 5 day handle, the stock kept riding the 20 day and then "broke out".  But my sense is this handle making process might continue.  We need a real handle in terms of severity or time (over a week).  This might be an unorthodox handle that makes a higher high, then a lower low to key support levels like QIHU several times in 2012/2013.  Overall we have a big cup base with no official breakout, lots of weekly accumulation on right side of base (marked with As).

New stock for watch list:

RUN - very early, much work to do.  But I loved that this stock was up +100% in a correction.  We need to wait for a potential high tight flag formation over next 3-5 weeks.  This name is a beneficiary of last week's solar legislation.  This is a flakier name.  But so was TASR in 2003.

 

Optical Update - CIEN, FNSR, LITE

Last week was a heavy week of optical news; CIEN (the equipment company) and FNSR (the component company, competitor to LITE) both reported.  I am most interested in these EPS calls/reactions for a potential LITE mosaic.

CIEN looks like it continues to be base building.  As I mentioned on twitter feed, CIEN expectations were ahead of themselves, and similar to LNKD earlier in 15, CIEN set the bar low for the fiscal year to come.  I will be looking to see if CIEN makes any base bottoming formations.  So far, I don't see a clear one.  The more a trader can look for the cleanest and best set ups, the better.

FNSR beat low expectations.  People have worried about share loss, their unexpected CEO transition,  and increased competition in the data space where they have more exposure.  The stock had a great EPS reaction.  Sentiment was poor.  FNSR is still the laggard in component space.  They could benefit from consolidation in this space.  Hopes were high for industry consolidation in last year.  It seems like consensus has fallen on that front even though FNSR is in a CEO search and LITE has been separated from VIAV for 3 months.

Overall, I heard nothing on the CIEN/FNSR EPS calls to deter me from a group thesis that there is a 16/17 cycle coming for this group and the best positioned companies.  LITE has the potential to be one of those.  I am doing more work on LITE.  I have tweeted out what I know on fundamentals so far.  Its IBD composite rating has increased to 75 with its EPS and RS ratings both increasing.  I hope to post in the next week or 2 on the next round of work I am doing on LITE as it looks to be building a handle and it has some promise.

Disclosure: I do have a position in LITE.

Market Update 12/13/2015

Using the strict O'Neil definition of market health, we are in a correction.  We have over 5 distribution days in all of the major indices.

Having said that, we always need to look for signs to determine if this is a (1) mild, short term correction or (2) something that can be more severe.  In investment analysis (fundamental or technical), we often build a mosaic to make our best guess.  Tonight, my best guess is we are in #1 and #1 can end when we make modest new short term lows (vs November).  I say that based on 1.19 put call volume ratio, the market oscillator which is very oversold (over -50), and some similarities I see with bull markets of the past.  I see some similarities between October 99 and January 00 in the market charts of last month. 

http://www.stockcharts.com/h-sc/ui?s=%24COMPQ&p=D&st=1999-07-02&en=2000-05-27&id=p99710526914

We are probably building fear about the Fed and will soon have buy the news.

I am trying to keep my watch list tight.  Here are updates on 2 of the names I find interesting:

LNKD - Fundamentally, the company has new revenue streams in (1) sales navigation and (2) training.  We have one Q of earnings acceleration.  The company's sentiment had been poor at the bottom of the current cup and handle base following its poor earnings guidance earlier in the year.  

Technically, I think the stock is currently building a handle or base within a base.  I like that the volume is drying up around the 50 day.  I wouldn't rule out a shakeout through the 50 day.  I am not as strong at wave analysis, but it possible the stock is in the final stages of a zigzag (5-3-5).

http://www.stockcharts.com/h-sc/ui?s=LNKD&p=D&yr=1&mn=0&dy=0&id=p50460028271

VIAV - Fundamental comments - I have previously pointed out the recent acceleration in earnings.  Tonight, I wanted to talk about the initial conditions that can make for a big stock: valuation, sentiment, catalysts.   And how these might apply for VIAV.   Starting out, whether it is AAPL in 03 or AMZN in 09 (or even in 14/15), a big stock will have a cheap valuation vs its earnings potential, sentiment which is poor or unknown, and multiple catalysts and product cycles that will take it from cheap and unknown or cheap and hated to something much better.  

Regarding VIAV sentiment, we have a hated company (for the people that know it) which just threw out its CEO.  This company missed almost every Q the last 3 years.  We have 3 buys and 9 holds.

Regarding VIAV valuation, I won't recreate the wheel, I'd point you in the direction of the Sandell activist letter to the VIAV board in September.

http://www.businesswire.com/news/home/20150901005950/en/Sandell-Sends-Letter-Viavi-Solutions

The only thing I would add is that this was a company that was aiming for 16-20% EBIT margins (before the executive transition) according to prior targets laid out at company analyst days.  If they did that, they would probably earn $.80-$1.00 some day.

Regarding VIAV catalysts, in a turnaround, sometimes you have to dream what could go right and why it could go right.  With VIAV, we are getting a new CEO.  A potential restructuring.  They have a great balance sheet and a significant NOL balance to make accretive acquisitions with.  Maybe it's a target.  Maybe its SDN/NFV portfolio takes off (I prefer a product turnaround to a cost cut in tech).  It has a new go to market strategy which just helped it hit its first Q in a long time.  

The main fundamental risk to pay attention to is the decline of some of their legacy test businesses.  But that decline and a horrible industry environment has hit them hard the last year.  What if the decline of legacy slows and their growth products kick in?

On the VIAV technical front, there are 2 possibilities.  I suppose the stock could make a lower low vs August.  The more probable scenario is the last flat completed in August was the stock's last correction (post its final EPS blowup and firing its CEO) and this stock has now begun a bull run and is now 5 weeks into its first base or handle.  If you are an O'Neil trader, you are rooting for a quiet week or 2, and then a breakout from $6.48 (if this turns into a 7 week double bottom), or $6.56 if it is a shorter handle.  A retake of the 50 day or a trend line breakout would be the cheater buy points.  

http://www.stockcharts.com/h-sc/ui?s=VIAV&p=W&yr=5&mn=0&dy=0&id=p46142809704

Disclosure:  I do have positions in VIAV and LNKD.