Stock Chart Reviews – Snapshots of Digital Lows and Material Highs

Stock Market Commentary

My bullishness waned with last week’s manic trading action. I called the resulting patterns choppiness toppiness to reflect a biding sense that the market is churning out some kind of lasting top. Still, under the surface of the churn is a fresh divergence. The stock market is full of digital lows and material highs. Stocks representing the expensive growth prospects of the digital world continue to suffer from selling pressure. An unfriendly Federal Reserve is forcing investors to lower risk tolerance and their willingness to pay for little to no profits. The resulting valuation compression is particularly cratering price/sales ratios. Stocks in companies working in the material world are enjoying significant buying strength. In some cases these material highs are generating all-time highs. I expect this divergence to continue at least as long as the prospects for the (real) economy continue to look healthy.

Stock Chart Reviews – Below the 50-day moving average (DMA)

Global X Cloud Computing ETF (CLOU)

The Global X Cloud Computing ETF (CLOU) summarizes the theme of digital lows. This ETF full of cloud software companies is already down 10.1% for the year and down 25.9% from its all-time high set just two months ago. Of course, CLOU was a source of strength given its ability to beat out the February peak that still stands as the top for so many expensive growth stocks. CLOU is liberally sprinkled with higher quality, less speculative components. Still, a 14-month low says plenty about the rapid reversal in investor sentiment. Valuation compression is creating digital lows.

Twilio Inc (TWLO)

Twilio Inc (TWLO) currently holds a 3.9% allocation in CLOU. TWLO weighs heavily on CLOU with a new 18-month digital low. The near relentless downtrend since mid-summer was interrupted briefly by an October breakout above resistance at the 50-day moving average (DMA) (the red line below) and the 200DMA (the blue line). I still do not see an attractive point of entry for TWLO. TWLO reamins a very expensive 18x sales.

MongoDB, Inc (MDB)

CLOU does not include database provider MongoDB, Inc (MDB). However, MDB is a cloud player in the First Trust ISE Cloud Computing Index Fund. MDB provided fresh confirmation of the weakening digital investment space as it sliced through 200DMA support with a 9.6% loss. The breakdown now awaits a confirmation before MDB goes deeper into bearish mode. MDB looks like it confirmed a double-top from November to December. With no earnings and a price/sales ratio at a nosebleed 41x sales, MDB could suffer a lot more from the on-going valuation compression of the digital lows.

Rapid7, Inc (RPD)

Cyber security software company Rapid7, Inc (RPD) sank deeper into bearish territory. RPD rallied right into 200DMA resistance and sold off three straight days. RPD closed the week at an 8-month low. I do not see a good entry point for RPD. I am in no rush to enter RPD given the company has no earnings and sells at 12x sales.

Splunk Inc (SPLK)

Splunk (SPLK) is bottoming with a relatively reasonable valuation of 7x sales. However, I decided to take profits on my small position. I used looming 50DMA resistance as my excuse. In a bullish environment for tech stocks, I would have more patience to “wait and see” more signs that SPLK departed from the digital lows.

Cloudflare, Inc (NET)

Cloud platform cybersecurity company Cloudflare, Inc (NET) suffered a rejection at 200DMA resistance. With NET in bearish territory, no earnings, and a valuation at 73x sales, negative investor sentiment for expensive growth stocks could drag NET much lower from here.

Oracle (ORCL)

Old school software company Oracle (ORCL) briefly stood well above the pack. ORCL enjoyed a 15.6% post-earnings pop last month. Sellers have dominated the trading action ever since. The post-earnings gains evaporated in 2 weeks. Now ORCL is struggling to hold on to 200DMA support as it trades in line with the consolidation ahead of last September’s earnings. I am watching ORCL closely because the Bollinger Bands (BB) are clamping down on the price action. This Bollinger Band squeeze could provide the catalyst for resolving the current stalemate to the upside or downside.

Adobe Inc (ADBE)

Adobe Inc (ADBE) is down 24% from its all-time high set just two months ago. ADBE went through a confirmed 200DMA breakdown following December earnings and soon confirmed 200DMA resistance. A wicked 7.1% follow-through drop looked like a setup for further declines. Instead, ADBE is actually looking like it is carving out a bottom from the digital lows.

The chart below points to a bullish engulfing pattern. It is a classic candlestick pattern that signifies high odds of an end to a downtrend. The low of the day starts below the previous (down) day and the close of the day exceeds the (intraday) high of the previous day. ADBE is a buy here with a stop below the bottoming patter. The first profit target sits at converging 50/200DMA resistance.

Block, Inc (SQ)

I am still watching Block, Inc (SQ) for an investment opportunity. However this relentless selling has me worried I am missing something important. SQ is now down to a very attractive 6x sales. The forward P/E is a nosebleed 85, but at least Block has profits. For now, I just bide time and keep watching for some kind of stabilization. SQ trades at a 16-month low. SQ peaked at $87 ahead of the pandemic.

Draft Kings (DKNG)

While SQ will probably retain some portion of its pandemic-driven gains, Draft Kings (DKNG) looks like it will not be so lucky. The competition in betting is growing fast and marketing spend must be soaring. Draft Kings is still not turning profit, but it now trades for 11x sales. DKNG started 2021 around 35x sales, so just a little more valuation compression will take DKNG back to its pre-pandemic peak.

Celsius Holdings, Inc (CELH)

I gave up on beverage company Celsius Holdings, Inc (CELH) last July in order to preserve remaining profits. I ended up selling right at the bottom of a subsequent rebound and rally. Although CELH is trading lower than my point of sale, I am not interested in buying back anytime soon. CELH still carries a 21x sales valuation. Accordingly, the stock is subject to the valuation compression descending upon a whole host of expensive growth stocks. From a technical perspective, CELH is deep in bearish territory with an 8-month low and relentless selling since the last 200DMA breakdown.

Boston Beer Company, Inc (SAM)

Speaking of giving up on beverage companies, The Boston Beer Company, Inc (SAM) threw me for a loop after issuing poor earnings guidance. Sellers took SAM down 8.1%. Technically, I could have stopped out when SAM closed below its 50DMA ahead of the bad news. However, I decided to wait for confirmation of the breakdown. Now, I am waiting to see whether support will hold from the November/December lows. This is my second trip in SAM. If this trip fails, I will remove SAM from my radar.

GoDaddy Inc (GDDY)

GoDaddy Inc (GDDY) soared 8.4% on news of a potential and large investment from Starboard Ventures. I jumped aboard the speculation train with a covered call position. I thought the position would get called away. Instead, the short call expired worthless. I am now watching to see whether sellers close GDDY below the bottom of the gap from the Starboard news. Support at an uptrending 50DMA is also critical. As a stock of the digital world, GDDY is likely losing (short-term) fans. Fortunately, GoDaddy makes profits and already sells at a reasonable valuation of 3x sales.

Netflix, Inc (NFLX)

Netflix, Inc (NFLX) caused excitement with investors and groans from subscribers with news of another price hike. After the dust settled, NFLX settled into a mere 1.3% gain. NFLX peaked in November and quickly lost altitude from there as it joined the digital lows crowd. The stock trades right back in line with the consolidation and trading range that constrained price action from June, 2020 to August, 2021. The late year breakout was a complete fakeout. NFLX trades 24.0% off its all-time high.

Alphabet Inc (GOOG)

When I described how the NASDAQ (COMPQX) survived an important breach, I did not include some similarly interesting patterns. In particular, Alphabet (GOOG) pulled off a picture-perfect test of 200DMA support. I tried to jump on the trade with a call spread. Unfortunately, GOOG options have wide spreads and are this challenging to acquire at good prices. I missed the entire rebound to 20DMA resistance. Sellers took the baton from there.

Intuitive Surgical, Inc (ISRG)

I was closely watching Intuitive Surgical, Inc (ISRG) for a defense of 200DMA support. Buyers only put up a half-hearted defense. ISRG closed the week in the bearish position of a confirmed 200DMA breakdown and breach of support from the December lows. Note the triple top that adds to the appearance of a lasting end to price appreciation for now.

iShares MSCI Brazil ETF (EWZ)

My buy rule on a 20% correction in iShares MSCI Brazil ETF (EWZ) worked like a charm back in March, 2021. The second round came in September. The selling has yet to abate. However, given the strength of commodities and the rebound in iron ore prices, I added more EWZ in the middle of last week’s buying. Brazil’s economy is heavily dependent on commodities. EWZ gained 6.8% for the week and is even working on a fresh 50DMA breakout. My upside target is now at overhead 200DMA resistance.

Stock Chart Reviews – Above the 50DMA

BHP Group Limited (BHP)

The material highs are working well for commodities companies like BHP Group Limited (BHP). The rally in BHP gave me the first idea to buy EWZ off the bottom. While I already took profits on BHP, I am considering jumping back in after a confirmed 200DMA breakout (above $68).

Rio Tinto Plc (RIO)

Commodities producer (largely iron ore) Rio Tinto Plc (RIO) is rallying just like BHP. However, RIO is still working on a 200DMA breakout as it chews on resistance from the August price consolidation. Unlike BHP, I bought a RIO position too early… I am just on the edge of salvaging some value on a call spread expiring this week.

Caterpillar (CAT)

Construction and industrial equipment manufacturer Caterpillar (CAT) is benefiting from the return to the value of the material world. When I noted the confirmed 200DMA breakout, I primed myself to buy the dips. The dip to $217 was too quick for me to catch. Buyers resumed their work from there. I am once again primed to buy the next dip.

Applied Materials (AMAT)

Semiconductors support the digital world, but they are firmly planted in the material world. Semiconductor equipment maker Applied Materials (AMAT) broke out in December to a new all-time high but swooned from there. AMAT traded back to the bottom of the previous trading range. That trading range itself is a major breakout from a trading range that dominated much of 2021. Strong earnings news from Taiwan Semiconductor Company (TSMC) pushed AMAT to a new all-time high before faders took AMAT to a 1.5% loss on the day. Remembering the rotation to the material world, buyers jumped back into AMAT for a 6.3% gain and an all-time high. I have been riding the churn of the last month or so with a $165/$180 call spread that expires this week. I am hoping this latest breakout is finally the charm that sustains profits…

Intel Corporation (INTC)

This week is my last opportunity to play call options in Intel Corporation (INTC) before earnings (my INTC between the earnings call options trade). I bought a fresh tranche as INTC traded down to 200DMA support. Friday’s 1.4% gain is a good start, but I need strong follow-through now…

Be careful out there!

Footnotes

Source for charts unless otherwise noted: TradingView.com

Full disclosure: long SAM, long GDDY, long EWZ, long RIO call spread, long AMAT call spread, long INTC calls

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*Charting notes: Stock prices are not adjusted for dividends. Candlestick charts use hollow bodies: open candles indicate a close higher than the open, filled candles indicate an open higher than the close.

Grammar checked by Grammar Coach from Thesaurus.com