ACOM....Add On Opportunity

Back on September 14th I profiled Ancestry.com coming out of a beautiful cup and handle base. It really was the first safe buying opportunity since the IPO last December. This stock is setting up its first add on buy point on a Three Weeks Tight (3WT) base pattern. A 3WT base is simple when a stock closes tight, +/- 1%, on a weekly chart for three consecutive weeks. Its is a sign that institutions are supporting the stocks and sellers are scarce. The 3WT pattern usually occurs after a stock has seen nice price appreciation. Since ACOM is now up 24% from my purchase, I am looking for an opportunity to add to this position. The pivot point or add on opportunity is 10 cents higher than the previous three weeks high or at $28.46. What is very encouraging is this 3WT is after two weeks where ACOM announced secondary offerings which usually can destroy a stock and its chart. Additionally, the general market was weak last week with the Nasdaq down close to 3%. Yet, ACOM again closed the week tight. This is very bullish and constructive behavior for a young stock. However, one of the most important factors in buying or adding on to a position is VOLUME. Volume is the key and I am looking for a 50+% increase over its 20 day volume average to confirm. Without the proper volume signature on a breakout, I will simply sell the add on shares at days end.

ACOM announced their quarterly earnings recently where their earnings were up +167% and sales grew +39%. Additionally, they confirmed and raised guidance for the entire year. Equally important, ACOM is see increased sponsorship of its stocks by the institutional community.

I like to use weekly charts as it provides the best opportunity to evaluate where a stock has been and may go. The weekly chart is impressive as you will notice all the big volume up weeks verses the low volume down weeks. Also, ACOM has a 15% short increased which may be some gas to the fire if it can break out to new highs.

Please do your own due diligence when making stock decisions and always use stops when a position goes against you.

VMWARE, INC (VMW)

Many of the early leading stocks are now extended past safe buy points. If the market continues to digest the past couple weeks gains, there may be some add on buy opportunities. VMW has provided an additional buy opportunity in the form of a Three Weeks Tight (3WT) base. The 3WT is when a stock closes on the week within 1% of the previous weeks closing price for three consecutive weeks. This is a sign that institutions are holding their shares and the stock is digestion before continuing it's price progression.

The buy point would be ten cents higher than the high price of the 3WT or $87.26. It also then will only be 6% past the original break out in early September. Volume ideally will be 50%+ higher on the breakout day.

VMW is in one of the top industry groups. It has pre-tax margins of 24%, quarterly EPS growth of 70%, quarterly sales growth of 48% and a ROE of 17%. VMW reports earnings again in mid October.

ANCESTRY.COM (ACOM)

ACOM is setting up a potential 20 week Cup & Handle offering a buy point at $21.45

I love the fact it's an IPO and potentially under owned. Last quarter ACOM announced 50% EPS growth and 36% sales growth. It is in the Internet content group.

**One thing to keep in mind is ACOM has a fairly low float (24MM shares) which can make it somewhat "whippy". ACOM is relatively thin trading 200K+/- a day. You typically want stocks that trade 500K minimum. Therefore, ACOM positioning size may need to be smaller than normal.**

Technically, what I particularly like in it's Cup & Handle base is the handle held above the 50 Day Moving Average during the recent market correction. Also, its relative strength line is near new highs at 91. Monday provided an early entry as volume was higher than any day for the past several weeks. It probably is the clue that institutions are jump starting the actual pivot point.

MAKEMYTRIP.COM (MMYT)

I tend to follow the philosophy of putting the majority of capital in a handful of names that are the true leaders. As I got well positioned in CMG, NFLX and ARUN on the 9/1/10 Follow Through Day, I had some funds available to invest in perhaps a more speculative name.


The Indian stock market is near new highs (see India ETF=INP) and several Indian stocks are attractive. Some that are especially strong are TTM, INFY, IGTE and CTSH.


However, I tend to gravitate to IPO stocks as many of the biggest moves come from newer offerings. One that caught my eye with a beautiful high tight flag (HTF) set up was Makemytrip.com (MMYT). First, I should point out that MMYT is a thinner stock so caution is needed. MMYT is in the #1 Industry Group right now in the "Leisure-Travel". It is a group mate of PCLN which is obviously one of the strongest stocks in this new uptrend.


MMYT provided several positives in my eye. First, it has strong fundamentals with a 3 year sale's growth of 42% and last quarter sales growth of 45%. Second, the RS line is at a new high at 97. Third, it is a recent IPO and experiencing strong early accumulation. Fourth, it is in the market strongest industry group. Lastly, it provided an entry opportunity with a HTF set up.


I had a buy stop in at $36.29 in the event I wasn't able to see the breakout. Fortunately, MMYT was trading up in premarket on good volume and sort of "showed it's hand" which gave me the chance to hit it early around $35.80 at the open on 9/9/10. Typically, on the breakout you'd like to see 100+% volume. Prior to breaking out, volume had fizzled to 200K shares a day or less. On the breakout day it traded over 1.2MM shares which showed that hopefully institutional investors were snapping up shares. MMYT began trading on 8/12/10 with an IPO price of $14.00. It ran to $36.19 in 5 trading days (+157%). There was a brief 20% correction phase on much lower volume. Ideally, the breakout will produce a new phase with much higher prices. However.....only time will tell if this can make one of those monster stock type runs.

NEW UPTREND

After nearly four months of chop and slop, the market confirmed a new uptrend on September 1st. As with many new uptrends, leading stocks will begin breaking out near the follow through day (FTD). The September 1st FTD was no disappointment as I began to make initial purchases. Leading stocks are showing decent price progression and many are extended above even their 10 day moving averages.

First, I want to identify some of the leading stocks of the market since the FTD. Also, we can see some trends as the Cloud Computing industry is providing many of the leaders.

FFIV
ARUN (Purchased 9/1/10 at $19.00)
AKAM
CRM
VMW
RVBD
NFLX (Purchased 9/1/10 at $130.30)
PCLN
CMG (Purchased 9/1/10 @ $154.53)
MELI

We are now at a point where what appears to be the leaders have shown their faces. These stocks now have some cushion so there is little to do but watch our positions as volume will surely make its way back into the market post Labor Day Holiday week. So far, the Nasdaq has only experienced one distribution day. Although, we have a market of stocks and not a stock market, it would be ideal to see some nice days of accumulation on the indexes.

The indexes have retaken their 50 day moving averages (unfortunately in lower volume) and now the next test will be their 200 day moving averages. Ideally, we can power through this moving average in bigger volume.

So while we have identified the early leading stocks, if this FTD is the real deal there should be another wave of movers to jump on which is the good news if you missed the early breakouts. There should be some safer opportunities to add to these leaders down the road as well. History has proven (i.e. Aug-Nov 2007) that the stocks in the top industry groups near the FTD will perform the best.

The top performing industry groups are as follows:

#1 Leisure/Travel (PCLN, CTRP, MMYT)
#2 Software (VMW, CTXS, CIS)
#3 Data Storage (ISLN, NZ, PAR)
#4 Leisure/Movies (NFLX)
#5 Computer Enterpise (CRM, QLIK)

Note that the Retail/Restaurant group has moved up considerable with stocks like CMG, PNRA, MCD, BWLD, YUM, DPZ, and BJRI

TRADING RULES

I was preparing some documents which required me to articulate my trading philosophy in just a few paragraphs which is not easy. Without posting every rule I follow, here (in short) is what I attempt to practice in trend following:


Buy the leading stocks of the current uptrend as they move up through a proper pivot point or new high. Using the CANSLIM formula we identify strong fundamental companies that also possess the correct technical "look". Stocks are only purchased as they break out of a proper sound base. The only time to be invested is in an uptrend. Cash is also a position and many times throughout the year 100% cash is a desirable position. Protecting capital is the #1 priority.

When/if fully invested the portfolio may consist of 4-6 positions. There may be cases where 3-4 is desired to maximize our return with the true leaders. Starting position is 60% of the desired total position and we only add as the first purchase shows us a profit. Typically, we'd look to add another 20-30% as we have a 3% gain and pyramid from there. We don't want to add past a 5% gain as this raises our original basis and increases the chances of being shaken out of our position. Keeping in mind nearly 3 of 4 stocks will reset the pivot.

Profits will start to be taken in the 20% area and taken incrementally. It is normal to take profits as the stocks is still advancing. The exception being if a stock advances 20+% in less than 3 weeks, in which we hold for a minimum of 8 weeks. However, we never let a 20% gainer turn into a losing position.

Selling rules are the most important. If a position is taken and the stock begins to move against us we sell 40% when down 3%, another 40% down 5% and remaining when down 7%. Most important factor is cutting loses quickly and letting winners run. With this formula, we can have 4 or 5 losers with only 1 winner and remain profitable.

This trading method uses rules and not opinions or emotions. We are rigid with our rules but flexible with our expectations. In most cases, the less you do the better. Sitting tight when right and quickly cutting losers is the key.

LOGM

LogMeIn, Inc (LOGM) is setting up to breakout as early as Friday into new all time highs.

The daily chart looks cup and handle-ish but technically the base is an IPO base with the pivot coming on new highs $23.60

An aggressive trader (i.e. me) could have bought today through the $22 area as volume poured in. In fact, LOGM traded nearly 600% more than it average 50 day volume. It was it's largest single day up volume since its IPO in July 2009.

You might ask, what is LOGM and what do they do?

LOGM has a technology that allows you to log onto your desktop via iPad and perform any tasks that your desktop runs.

LOGM recently reported earnings growth of 23% and sales growth of 24%. They sport an impressive ROE of 38%. The largest shareholder is Fidelity (FMR). And if you are a William O'Neil follower you know FMR always has the goods.

Good luck and do your due diligence!

EARNINGS

Earnings season is certainly one to remember. Of S&P stocks reporting so far, a record 83% have beat expectations. The past average as been 61% beating expectations. Companies are beating on both the top and bottom line. Estimates are being raised and forward guidance is generally strong. All of this bodes well for the current rally.


After starting to sell stocks over a week ago, Wednesday it appeared the market was going to split open with the opening gap down. By the lunch the market had recovered and it dawned on me that the right side was the long side.

I repurchased positions in CREE, PCLN, and GMCR. All three bounced well. However, GMCR reports on Monday. If GMCR can get back above the 50 day moving average by close Monday then I will hold for earnings. If not, I will close out the position on Monday.

The market continues to shake off news stories and issues like Greece and Goldman Sachs only to make new highs. It is quite simple that the market is not done going higher. Many new stocks are making new highs and really starting to stretch their legs out. I will not be surprised to see some climax moves in the likes of BIDU, CREE, AAPL, NFLX, CMG, DECK, etc.

This week there are several opportunities setting up:

WCRX $28.49
ASIA $30.00
AIXG $39.00
APKT $21.00
FIRE $27.65
OSTK $21.87
PXP $34.80
SWI $25.00

RAISING CASH

I started to raise cash on Friday. Not that I think the absolute top is in on this latest move but I want to lock in profits. I have been 200% long since late February and Friday we racked up another Distribution Day. Now, one might say it was Options Expiration and a ton of volume came on GOOG earnings and GS fruad news. However, heavy selling even with logical reasons needs to be paid attention to regardless. We have 5 days of distribution on the S&P and NYSE and 3 for the leading index, the Nasdaq.

Therefore, I will be off margin at this point. I have been watching the 2470 to 2550 area on the Nasdaq for potential retracement level. Well, we got to 2517. A pullback would appear to be in order. Everybody and their brother is looking for the pullback which might just be the reason for the market to grind higher. There is still tons of cash on the sidelines by funds and the mom and pop retail investor appears to still be on the sidelines. Maybe we need to get everyone back in before the market really can rest.

None the less, I am taking some profits in stocks like CREE, CMG, GMCR, PCLN, and SNDK. These stocks are up big in 2010 after gigantic moves in 2009. I will still have some exposure but would rather be disappointed that I left a little on the table than wished I would have sold. I want to have cash on hand to buy these same names back on potential pullbacks to their 50 Day Moving Averages.

The other thing I noticed last week is that some of the breakouts are not working as well. Let's face it, this market has been way too easy. Every breakout has come worry free and with quick profits. I am having a hard time thinking of any breakouts that even came back to their pivot points. Ok, CTRP did. But, that is about it. VMW and ULTA broke out nice but really didn't give the follow through you'd like to see. I took just so-so profits and moved on. I also jumped on SWI and APKT only to see the breakouts reverse. This leads me to believe that while the end is not necessarily here, it is closer. I think once we get through earnings season the market will be due for a rest. This may be one of those years when it truly is "Sell in May & Go Away".

I certainly have no idea what the market will do and it's crazy to try and predict. I am simply observing what I see happening and try to make the best decisions for my P&L. So far the charts of leading growth stocks are holding up well. But, it is time to be on high alert.

Keep your stops in place and trade what you see and not what you think........

GRINDING HIGHER

All the averages added one more Distribution Day this past Wednesday. However, the leading index (Nasdaq) was only down .20% which barely qualifies. But, we must be respectful regardless. More importantly, the Nasdaq grinded higher for the week up 2%.

Last week, I had profiled CREE and CMG as two potential 3 Week Tight breakout opportunities. Both exploded out of their bases on Monday morning. CREE ended the week up 12% and CMG closed 7% for the week. My other pick SWI triggered but closed basically flat.

I still like SWI and think it will be a big mover. I am somewhat torn whether it blast out on the third try or if it now puts in a handle for potential Cup with Handle base breakout. The $23.77 area needs to be watched. SWI trades a somewhat light 500MM shares. However, there is only a little over 5MM shares in the float. SWI can really fly (in both directions) if it starts to move.

This week there are several potential set ups and I will discuss three.

Vmware (VMW) is in the computer software-enterprise business. It begins its 6th week in a flat base with potential pivot point at the $55 area. VMW doesn't have the type of quarterly earnings growth I love to see yet but quarterly sales were up 18% last quarter. The ROE is a solid 17%. I do like the fact it has solid liquidity and has institutional following and support. VMW also announced in March it would be repurchasing up to $400 MM of its stock back.

Ulta Salon (ULTA) is a retail salon supply store. Obviously, all the retail stocks have been on fire. I have been following ULTA and it has now set up a Square Box base with potential pivot point at $23.45. It is in it's 5th week of the base so it could now breakout. ULTA has quarterly earnings growth of 62% and quarterly sales growth of 16%. It's ROE is 15% which is so-so.

Acme Packet (APKT) is in the telecom equipment business. A trading friend has pointed out APKT to me and it has set up a very powerful High Tight Flag (HTF) base. The HTF can produce one of the most explosive and successful breakouts; potentially doubling again. The HTF is created when you have a stock up over 100% in less than 8 weeks and then you get digestion for a few week but less than 15% correction. APKT has a text book HTF set up and pivot over the $20.56 area.

SWI

I especially like IPO breakouts. Solarwinds Inc (SWI) has tried to breakout twice since it's IPO in 2009. The third time may be the charm.



It has a cup shaped base here. It is possible that it puts in a handle or just breaks out from cup without handle base.


SWI has quarterly earnings growth of 73% and sales growth of 32% (both accelerating). Also, a very impressive ROE of 208%. It appears that institutional sponsorship is growing. However, it only trades 450,000 shares a day so it is a tad on the thin side to be considered institutional quality.

The proper pivot point would be $23.77. Keep in mind it reports earnings on 4/28/10.

DIGESTION...............

Market continues to digest gains as index leader Nasdaq is up five weeks in a row. The past week closed tight in Holiday shorten (light volume) week. We experienced one distribution day on Wednesday but there has been zero damage to our leaders.

Next week there are two nice set ups for potential add on buys to existing holdings.

CREE.....3 Week Tight set up for what has been one of the leading stocks since early 2009. CREE had quarterly earnings growth of +90% and quarterly sales growth of +35%. CREE has a new buy point at $72.50 (10 cents higher than previous 3 week high). Keep in mind CREE reports earnings on approximately April 21st.

CMG......3 Week Tight set up as well. All of the restaurant stocks have had nice moves (CAKE, DIN & PNRA). My opinion, CMG is the leader in the group with quarterly earnings growth of 90% and quarterly sales growth of 12%. It also has a ROE of 19%. CMG has a new buy point of $117.21. CMG also has upcoming earnings around April 22nd.

Lastly, previous gigantic mover CAGC has fallen back into its base after earnings news on Wednesday. This one needs some time but did undercut previous low to set up a potential Double Bottom base down the road. Will need to monitor to see if it receives support at the 50 day moving average (which I suspect it will).