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Feb. 16, 2012, 12:01 a.m. EST
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Kevin Marder is a guest columnist and a co-founder of MarketWatch. He is principal of Marder Investment Advisors Corp. and a contributor to The Gilmo Report. Previously, he served as chief market strategist for Ladenburg Thalmann Co. and developed institutional fixed-income risk management software for Capital Management Sciences.
By Kevin Marder
The price/volume behavior of this cycle's leading index, the Nasdaq Composite /quotes/zigman/123127 COMP -0.55% , showed signs of stalling action Tuesday and Wednesday.
Specifically, Tuesday showed price unable to make further progress amid an increase in volume, known as churning.
Then on Wednesday, price put in an "outside day," in which a higher high and lower low were printed. The pattern also happens to be a bearish engulfing candlestick pattern. Outside days and engulfing patterns tend to correlate with trend reversals.
Taken together, the action of Tuesday and Wednesday appears to favor an easing of prices over the next day or two.
Also auguring for some near-term weakness was the distribution seen Wednesday in some leading stocks, including Apple /quotes/zigman/68270/quotes/nls/aapl AAPL -2.31% , Chipotle Mexican Grill /quotes/zigman/395806/quotes/nls/cmg CMG -0.85% , Lululemon Athletica /quotes/zigman/39660/quotes/nls/lulu LULU -0.72% , Petsmart /quotes/zigman/54520/quotes/nls/petm PETM -1.77% , Equinix /quotes/zigman/89870/quotes/nls/eqix EQIX -1.18% , Buffalo Wild Wings /quotes/zigman/91104/quotes/nls/bwld BWLD -1.29% , Monster Beverage /quotes/zigman/8035590/quotes/nls/mnst MNST -3.41% , Jazz Pharmaceuticals /quotes/zigman/8123438/quotes/nls/jazz JAZZ -0.72% , United Rentals /quotes/zigman/208360/quotes/nls/uri URI -1.89% , Under Armour /quotes/zigman/388552/quotes/nls/ua UA -0.83% , Tractor Supply /quotes/zigman/56321/quotes/nls/tsco TSCO -1.03% , Netsuite /quotes/zigman/493264/quotes/nls/n N -1.99% , and Pricesmart /quotes/zigman/63839/quotes/nls/psmt PSMT -4.01% .
Among the names, Mercadolibre /quotes/zigman/106413/quotes/nls/meli MELI +4.21% , noted here Tuesday (" An aggressive speculator could use the Feb. 6 high of 98.75 as a potential entry point... "), broke out Wednesday on volume 107% above its average daily volume.
Judging by some softness seen in the market on Tuesday and Wednesday, it is quite possible that MELI will dip below its breakout point, known as the "pivot," before it attempts a follow-through higher.
All positions discussed in this column should have an initial protective stop-loss to mitigate the risk of an entry moving in the wrong direction.
Also, this provider of online marketplace services in Latin America releases quarterly earnings later this month. The stock is not yet extended (5% or more) above the top of its base, and could therefore still be entered, along with a protective sell-stop. Given the proximity of the earnings report, a junior position makes sense here, especially with MELI having a generous valuation, and therefore a higher risk level.
Netsuite /quotes/zigman/493264/quotes/nls/n N -1.99% has been spoken about here a number of times. The stock is one of the few glamours with earnings estimates north of 40% for both '12 and '13 (40% and 62%, respectively). These are the titles that accord close attention here, as they have historically been among the market's biggest-winning stocks. N's rich valuation may scare a value player, but this is another accoutrement, along with a high earnings growth estimate, that goes along with the largest winners over the decades.
The risk with high-multiple stocks is certainly higher, and thus issues like MELI and N may not appeal to some participants. But the highly-valued share is the bread-and-butter of the aggressive speculator and this column.
Technically, N is forming a classic, cup-with-handle base, the pattern popularized by Bill O'Neil in his classic, How to Make Money in Stocks. Wednesday's high-volume reversal was obviously a negative, yet the pattern is still intact. A break above the high of the handle area at 48.82 can be used as a potential entry point for the aggressive speculator.
Golar LNG /quotes/zigman/85962/quotes/nls/glng GLNG -0.41% is not technically considered a growth stock, as its business is not recession resistant. Yet the shipper of liquefied natural gas has been a market leader and is due to put up big earnings growth this year (an increase of 111%, according to most analysts). Earnings have not been released, so there is an added risk in taking a position near-term.
Technically, the stock offers the aggressive speculator a potential entry above the Jan. 10 high at 47.82.
Elsewhere, Zillow /quotes/zigman/5930210/quotes/nls/z Z +0.27% is viewed as among the top two recent IPOs, and has been watched here closely at it comes up to its November high. Earnings were released after Wednesday's close. The stock does not offer attractive entry at present but should be monitored, as it has the raw fundamentals to potentially be a big winner.
In summation, the market remains overdue for a correction. The stalling action in the Nasdaq on Tuesday and Wednesday, combined with Wednesday's distribution in a number of the speculative glamours, augurs for dampness over the immediate-term. Such action would be viewed as healthy and necessary in order to set the table for another intermediate-term upleg. The risk is more geopolitical than domestic, centering on an Iranian-Israeli war.
In that case, all bets would be off.
Charts created using TradeStation . ©TradeStation Technologies, 2001-2012. All rights reserved. All mutual fund ownership and earnings estimate data provided by Thomson Reuters.
At the time of this writing, of the stocks mentioned in this report, Kevin Marder or an affiliate thereof held no positions, though positions are subject to change at any time and without notice. The information contained herein may have been previously disseminated.
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