Just when we thought the craziness had finally come to an end, Tuesday’s CPI numbers showed that inflation was still rising, despite the market’s belief that it had in fact peaked.
The result was a bloodbath like we haven’t seen in years.
The Nasdaq fell 5.5% in a day. And the Dow lost 1276 points.
Even our trade in MCK is rolling over. Luckily, we sold half near the highs and raised our stop to breakeven on the rest (see why risk management is so crucial?).
Monthly Chart of McKesson Corporation (MCK) – Source: TradingView
This week, all the major indexes fell back to a crucial support level shown below in white on the QQQ.
Monthly Chart of Invesco QQQ Trust (QQQ) – Source: TradingView
This has been a battleground for stocks since June, so it’s not surprising that this is where the selling finally stopped.
But make no mistake… This is where the rubber meets the road.
As of Friday afternoon, sellers were winning the battle and support was not holding.
Disclosure: I took a short position in QQQ on Thursday with a tight stop above Wednesday’s high.
The Put/Call Ratio has also surged to 1.18.
I expect to see it hit at least 1.40 before this market finds a bottom, so I’m expecting things to get worse before they get better.
Remember that things can change quickly and that works in both directions.
In June, only 13% above stocks were above their respective 50-day moving average.
By August that number was up to 80%… and it’s now back down to 36%.
The only standout this week has been solar…
If there was ever any doubt that solar was leading the market, Tuesday put that to rest.
Top solar names like EnphaseEnergy (ENPH), First Solar (FSLR) and Sunrun (RUN) all went UP on Tuesday!
And in case you haven’t been paying attention, here’s how those stocks have performed since the June lows:
So, it shouldn’t surprise you the two stocks on my watchlist this week are solar names.
Here are the details…
Invesco Solar ETF (TAN)
I’ve been making my case on solar for months, so I won’t waste my breath explaining why I like the sector.
TAN broke out from a textbook breakout pattern in July and climbed 22% in just two weeks – a huge move for a basket of roughly 40 stocks.
It is now forming another base with resistance near $89.
If TAN can get above there, I am expecting another quick move higher.
Altus Power (AMPS)
AMPS is somewhat of an under-the-radar solar stock.
Unlike most solar companies which make panels, chips, or mounting systems for customer-owned solar energy systems, Altus is an electric utility company whose power comes exclusively from solar generation.
It owns and operates a network of solar farms and sells the power to end users.
I haven’t dug into all the details yet, but I imagine large companies are buying power from them just for the energy credits and whatever tax incentives are currently up for grabs.
With a market capitalization of just under $2 billion, it is a small-cap stock.
AMP is coming out of a cup with handle pattern that began late last year, and the 200-day moving average is finally starting to rise.
This looks like the early stages of a new Stage 2 uptrend which is exactly where I like to buy.
The major indexes held their ground this week. As of Friday morning, the S&P and Nasdaq were both trading near the same level they closed the week before.
Markets avoided any major selling days, and volume is picking up slightly as we approach the end of summer, which has historically seen lighter action.
Stocks posted net new highs each day, and the percentage of names above their 50- and 200-day moving averages continues to rise.
Percentage of Stocks above 50-day (left) and 200-day (right) Moving Average – Source: TradingView
The solar energy and biotech sectors are currently leading as the top performers.
Solar, in particular, made a big move over the last few weeks…
Enphase Energy, Inc. (ENPH) is now up 37% from the $220 pivot point I identified on July 22.
Daily Chart of Enphase Energy, Inc. (ENPH) – Source: TradingView
Two other Watchlist stocks from last week, Ionis Pharmaceuticals, Inc. (IONS) and Otter Tail Corporation (OTTR), also made nice moves from their breakout points…
Daily Charts of Ionis Pharmaceuticals, Inc. (IONS) and Otter Tail Corporation (OTTR) – Source: TradingView
But with solar getting a bit extended, I will be focusing on the biotech sector this week.
Portfolio Review
I also want to review our open trade in McKesson Corporation (MCK).
I issued a buy recommendation for MCKon July 27, and we recorded an official entry price of $336.73 in our portfolio.
After initially moving higher, shares pulled back a bit after earnings.
Daily Chart of McKesson Corporation (MCK) – Source: TradingView
What’s important, however, is how a stock responds to bad news…
In this case, shares quickly recovered and made new highs the following day.
This is a good sign of strength.
Our stop remains at $315.70. If you are risk-averse and want to tighten that up, you could move your stop loss up to $326.10 – just beneath the low of the earnings dip.
This would cut your risk from 6% down to 3% on the trade.
Still, I am going to leave our official stop in place at $315.70 in order to give the trade room to breathe.
Stealth Trades Watchlist
Going forward, your Weekly Updates will look a lot more like this one…
They’ll include more information on our current stock recommendations and put less of a focus on our weekly Watchlist.
Now, if you’ve ever wondered how I developed a proven track record of trading along the insiders like corporate CEOs, CFOs, executives and board members…
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Corporate insiders are always buying or selling shares in the companies they operate. These folks have a footing of knowledge that Main Street investors simply do not.
I’m elated to announce that my wife gave birth to our daughter this past Sunday.
So far, she seems to be the good luck charm this market desperately needed.
This week, the S&P 500 saw two 90% up volume days, a valid follow-through day and a bullish break of the recent swing high.
It also reclaimed its 50-day moving average.
Daily Chart of S&P 500 Index – Source: TradingView
There were also more stocks making new highs than new lows every day last week.
This was the first time we have seen that since the rally in late March.
Daily Chart of Nasdaq Composite Index – Source: TradingView
None of these factors equate to a guarantee that stocks will go up from here…
But when all of my internal indicators fire to the long side in the same week, I start buying.
So, I have increased exposure in my personal accounts.
Based on how those trades work out, I will either bump my size up again if the trades make money on the whole or go back down to quarter size if they don’t.
Join Me on Monday
Before we get to this week’s Watchlist, I want to remind you to join me on Monday afternoon for our Stealth Trades Live Class at 3:00 p.m. ET…
I’m going to outline our plans for trading during this rally, and we’ll take a look at our Watchlist stocks and other potential ideas in more detail.
In the meantime, here are the three top trades I’m watching this week…
Enphase Energy, Inc. (Long Idea)
I have been talking about the strength in solar stocks for several weeks now, and Enphase Energy, Inc. (ENPH) is one of my favorites.
Daily Chart of Enphase Energy, Inc. (ENPH) – Source: TradingView
Surge score: 98/100
% Above 52-wk low: 93%
Sales growth: +46%
Return on Equity: 74%
Triple momentum: yes
The stock is completing a textbook breakout pattern, with volatility compressing as pullbacks have shallowed from left to right.
The pivot area is around $220.
A move above that level has a high probability of leading to a strong move to the upside.
McKesson Corporation (Long Idea)
Despite a hideous bear market in the first half of 2022, McKesson Corporation (MCK) stock has been surging.
Daily Chart of McKesson Corporation (MCK) – Source: TradingView
Surge score: 97/100
% Above 52-wk low: 79%
Sales growth: +12%
Return on Equity: N/A
Triple momentum: yes
Shares are up 34% year-to-date, and most of that move occurred in just the first quarter.
After making new all-time highs, the medical supply company began consolidating in April and now looks ready to break out for another leg higher.
There are definite signs of accumulation in the base, and volume is drying up as price is tightening at the end… Exactly what we want to see.
Consider buying on a move above $336 with a sell stop at $315. This equates to a 6% risk on the trade.
Consolidated Water Co. Ltd. (Long Idea)
Consolidated Water Co. Ltd. (CWCO) is a small-cap company focused on treating and supplying water products to customers in the Cayman Islands, Bahamas and British Virgin Islands.
Daily Chart of Consolidated Water Co. Ltd. (CWCO) – Source: TradingView
Surge score: 97/100
% Above 52-wk low: 61%
Sales growth: +14%
Return on Equity: 2%
Triple momentum: yes
The stock made a powerful move higher in May, advancing 40% in just one month. Shares then pulled back and consolidated in the $14 area.
A look at the volume candles below the chart shows clear signs of accumulation (large buying) and very little selling.
This is a good sign that may point to institutions building large positions in the stock.
Consider buying CWCO on a move above $15.00.
This is a smaller stock with lighter trading volume, so I want to see a large volume spike on the breakout for confirmation.
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In our live Alpha Stocks session this past Monday, I pointed out that stocks were severely oversold and I was looking for a short-term bounce.
Stocks rose as expected during the following week, but as I write this on Friday morning, the rally seems fairly unimpressive.
The S&P 500 is up roughly 4% from last week’s close, but we have not seen aggressive buying volume.
Daily Chart of S&P 500 Index with Volume Indicators – Source: TradingView
We managed to avoid any new 90% down volume days, but we did not see a 90% up volume day either…
That’s a sign I am waiting for to signal that buyers might be returning.
The number of stocks making new lows continues to outpace the ones making new highs as well.
Daily Chart of Nasdaq Composite with Market Breadth Indicator – Source: TradingView
While it was good to see the ratio shrinking last week, a healthy market will have stocks breaking out to new highs and fewer names undercutting prior lows.
Unfortunately for the bulls, it has been over two weeks since we have seen a day with net new highs.
Showing Promise
That being said, a few groups of stocks are starting to show promise.
It is vitally important to watch which stocks are making highs when the market is making lows.
This is usually the next group of market leaders that can advance several hundred percent once the next bull market begins.
Chemical, shipping and energy stocks were the clear leaders in 2022. But their reign quickly came to an end.
Over the last two weeks, the Energy Select Sector SPDR Fund (XLE) is down 23%.
Shipping stocks like ZIM Integrated Shipping Services Ltd. (ZIM), Star Bulk Carriers Corp. (SBLK), Genco Shipping & Trading Limited (GNK) and Grindrod Shipping Holdings Ltd. (GRIN) have fallen 25%-30% each.
And Dow Inc. (DOW) has wiped out all of its 2022 gains in just three weeks.
So… who are the new leaders?
Bullish Biotechs
So far, the new leaders all seem to be biotechnology companies. The SPDR S&P Biotech ETF (XBI) rose over 12% last week.
And stocks like Meridian Bioscience, Inc. (VIVO), Chinook Therapeutics, Inc. (KDNY), Immunocore Holdings plc (IMCR), Allogene Therapeutics, Inc. (ALLO) and Vertex Pharmaceuticals Incorporated (VRTX) are all showing a lot of strength on increasing volume.
Meridian Bioscience, Inc. (VIVO) with Volume Indicator – Source: TradingView
The increase in volume is a crucial distinction that is often overlooked by amateur traders.
We want to see heavy buying from large institutions as they are building up positions. And volume is the secret footprint that reveals this activity.
I am also seeing strength in several solar energy stocks. Daqo New Energy Corp. (DQ), Enphase Energy, Inc. (ENPH), SolarEdge Technologies, Inc. (SEDG), JinkoSolar Holding Co., Ltd. (JKS) and a few others are beginning to set up as potential buys.
The general market, however, is still in no-man’s land. It has not yet shown enough strength to start heavily buying.
The indexes are also too far extended to safely enter a good short position.
Therefore, risk-averse traders might consider sitting out for the week until the market shows where it wants to go.
The Nasdaq index, represented below by the Invesco QQQ Trust (QQQ), is beginning to tighten up and coil before making its next move.
Daily Chart of Invesco QQQ Trust (QQQ) – Source: TradingView
Which direction the market moves next remains to be seen, but I have enough confidence in this week’s Watchlist ideas to bring them to you today.
You’ll find two new long ideas and one new short idea addedto the Watchlist below…
Chinook Therapeutics, Inc. (Long Idea)
Chinook Therapeutics, Inc. (KDNY) is a biotech stock coming out of a two-year base pattern.
Here’s how the chart is setting up…
Weekly Chart of Chinook Therapeutics, Inc. (KDNY) – Source: TradingView
And here’s how the stock is setting up with my Stealth System…
Surge score: 97/100
% Above 52-wk low: 79%
Sales growth: +671%
Return on Equity: N/A
Triple momentum: yes
The company has three drugs in its development pipeline, one of which is in Stage 3 clinical trials.
Good news from that trial could deliver a big surge in the share price.
KDNY has seen several weeks of big volume on its move to the highs. Consider buying the breakout with an 8% stop.
Immunocore Holdings plc (Long Idea)
Immunocore Holdings plc (IMCR) is another biotechnology stock showing a lot of strength.
Here’s how the chart is setting up…
Daily Chart of Immunocore Holdings plc (IMCR) – Source: TradingView
And here’s how the stock is setting up with my Stealth System…
Surge score: 96/100
% Above 52-wk low: 102%
Sales growth: +159%
Return on Equity: N/A
Triple momentum: yes
IMCR just completed a beautiful base pattern with volatility compressing as pullbacks shallowed from left to right – exactly the kind of price action we like to see.
Consider buying this stock here around the $37 mark with an 8% stop loss.
And here’s how the stock is setting up with my Stealth System…
Surge score: 90/100
% Above 52-wk low: 96%
Sales growth: +113%
Return on Equity: 191%
Triple momentum: no
The stock was a market leader in 2022 as marine shipping companies have been able to charge insane rates due to slowdowns in the supply chain.
Earnings surged roughly 10-fold after the pandemic and the stock has done the same.
But President Biden basically declared war on ZIM and the other handful of companies that control the bulk of cargo shipments from overseas thanks to what the White House believes is “price gouging.”
After an 803% move higher in 2021 and early 2022, ZIM has finally started rolling over.
Shares have seen heavy selling volume over the last few weeks, and the stock is now resting on its 200-day moving average for the first time ever.
I would consider selling ZIM short with a buy stop at $52 for protection.
Did You Miss the Big Reveal?
Were you able to join my colleague and expert trader Anthony Speciale for the unveiling of Project 6×6 and his brand-new trading service, Part Time Profits?
P.S. Were you able to join my colleague and expert trader Anthony Speciale for the unveiling of Project 6×6 and his brand-new trading service, Part Time Profits?
