How’s Business, Bart?
Looking at the sideways action in the
Nasdaq Composite over the past 10 weeks reminds me of a man I used to know.
Many years ago, my friends and I used
to frequent a local pub. You know, the kind where just about everyone knew
everyone else.
Although most of the frequent patrons
were in their 20s, there was one old, heavy-set man that was forever a
bar-stool fixture. Bart, a funeral director, was always sitting at the far
corner of the bar apparently drowning in his loneliness, but friendly
nonetheless.
“Hey Bart,” one of us used
to call over, “How’s business?”
“Deadddddd,” he’d reply, in
his hoarse smoker’s voice. We got
a rise out of it every time
And so goes the action in the market’s
aggressive-growth arena — flatter
than a week-old opened bottle of beer.
But right now, the word
“patience” should have a smiling face next to it in the trader’s
dictionary. Right now, patience is our friend.
Nonetheless, the intermediate-term
trader should always be ready for something to change. This trading range won’t
last forever. In fact, despite several distribution days in the Nasdaq Composite
over the past two weeks, it still hasn’t completely broken down. Moreover, the
intermediate-term trader should notice that the Naz has three more days to come
through with a valid O’Neil follow-through day.
The Composite’s most recent close
occurred on Aug. 2 at 3658.46 — seven trading sessions ago. Although the most
potent FTDs occur within four to seven days from a closing low, a valid FTD can
occur up to the tenth day.
But if an FTD does come through,
there’s nary a stock set up properly with a low-risk entry point that meet’s our
strict buy criteria. Most stocks even coming close are at best half-baked.
Sapient Corp
(
SAPE |
Quote |
Chart |
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PowerRating) is probably closest in my book.
Although Sapient attempted to emerge
from a very loose setup on the right side of its saucer patter a week ago, it
did pull back and may tighten up into a handle at this point. The stock sports
an O’Neil EPS rating of 99 and RS ranking of 95. These numbers certainly fit our
buy criteria.
Bear in mind, however, the stock’s
group ranking in the O’Neil database of 197 industry sub-groupings is a lowly
158 — the lowest ranking in seven weeks for the Internet- Network
Security/Solutions sub-group. Moreover, despite the big, upside volume on the
day the company reported better-than expected earnings results for its June
quarter (see graph below), the stock’s O’Neil Accumulation/Distribution is still
a B. This is okay, but it’s A/D number rating (the O’Neil numbering system used
to derive the letter rating) finished last week at +18 (a move below +5 takes it
to a “C” rating) — the lowest number rating in eight weeks.
It does bear watching, however. The
development of a tight, low-volume, well-constructed handle, followed by a big,
upside volume breakout, would certainly improve the stock’s A/D rating
immensely.
If the market instead breaks down from
here, the trader’s odds of latching onto a breakout winner drop considerably.
Remember, the majority of stocks will go with the price flow of the overall
market. Timing the market is the most important component to our rule-based
trading discipline.
Getting back to the Naz, there’s a
bunch a overhead to cut through on the upside in order to get a follow through
from here.
For one, what was price support a
month ago around the 3900 level is now price resistance (see graph below). Also,
the Naz’s 200-day moving average currently resides around the 3900, with the
Composite trading below it for the past two weeks. On the other hand, if the Naz
can break above this dual-leveled price resistance in the next four days on a
heavy-volume FTD it may say something important about the direction of the next
intermediate-term advance.
As discussed last week, sentiment is
moving in the right direction toward higher levels of pessimism than has been
seen in many weeks. That’s a start. But an O’Neil FTD is only as good as the
stocks you can buy with all of the right characteristics.
For now, we’re just watching and
waiting for the market to speak.