In a corrective environment many that wisely raise cash to protect their capital then make the unfortunate mistake of tuning the market out, becoming complacent and allowing their watchlists to fall into disarray. This can be a fatal mistake in some instances, as when the time comes to get back to work on the long side they are often caught flat-footed. This is why you shouldn’t ever really take your eye off the market; you don’t need to be invested, of course, but you should be at least tracking its progress.
Right now, for example, there are a number of growth stocks looking like they are on the way to building cup-shaped bases, some of which we list below. How these bases progress will go a long way to portending the market’s future direction. Obviously, if they round out, tighten up and begin to form the right sides of their cups ahead of the market (showing a high relative strength) it could be a signal that the correction is close to over; however, if these bases begin to fall apart, get wide and loose or form improperly it could signal that a more severe downside move is in the offing, or that, at the very least, the market needs to do more work before a worthwhile rally can occur.
No one can say what the market will do, but we can certainly make educated decisions based on historical precedent. And history shows that the odds are in your favor when you wait for the market to confirm your thesis. To anticipate is to gamble, as Jesse Livermore used to say.
So while we wait on the market to signal its next move, here’s just a few of the more constructive bases we see being built so far, as well as the stocks that are holding up the best in this quasi-correction (with a chart or two thrown in for good measure):
RVBD
CTSH
CAGC
MEND
EVVV
CPTS
PCLN
EZPW
RUE
SIRO
CATM
OTEX
DSW
CML
ASPS
VRX
ARUN
IPCM
SBGI
SCSS
VASC
SDXC
DRWI
RHB
REV
PRX
CEU
CREE
ISRG
BIDU
SXCI
GMCR
CGA
FIRE
ARST
NFLX
EW
HGSI
SFSF
TRIT
ZSTN
SWI
AMZN
VPRT
We’re also monitoring a few stocks as they approach or hit their 200 day/40 week moving averages to see what happens, a bounce or breach:
FSYS
TLEO
CISG
PWRD
GFA
VIT
LFT
MELI
HMIN
HRBN
Bounces off the 200 day/40 week moving averages should be measured by volume signatures and price action alone. One should also bear in mind that such bounces could end up failing right at a down-trending 50 day/10 week moving average and end up merely being prime shorting opportunities. So if one were to trade these bounces, he should be prepared to reverse course on a dime.
Finally, it should be noted that many of the bases that we see need weeks more of work in order to have the symmetrical attributes of what we would deem a “proper” base. In other words, a cup-shaped base where the left side formed over three to four weeks shouldn’t have a right side just two weeks long, especially if the upside volume pales in comparison to the downside volume. Just food for thought.
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