This manufacturer of solid state drives is in perhaps the market’s most voracious uptrend. Is there a spot where you can climb on board for significant further gains in lieu of a price correction? In a continuing market uptrend, yes.
A weekly chart shows that STEC has formed a pattern O’Neil refers to as a High Tight Flag. That means price at least doubled over a course of 4 to 8 weeks and then corrected for at least 3 weeks no more than 20%. The buy signal is on a volume move to new highs.
Today might be the day. STEC trades a 50 day average of 2MM shares per day. Little more than halfway through today’s session the stock has traded almost 1.7MM shares, meaning it should well surpass the average.
STEC has today broken through the brief downtrend line formed by connecting the July highs. An hourly chart shows 3 peaks representing these highs. Price has passed the first at $24.88 and needs to pass the others on volume at $25.43 and $26 to confirm the break out. Would consider entry here with a stop under $24.50, allowing for a small correction back to the trend line.
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STEC has been our best performing stock, up better than 40% to its recent highs.
ReplyDeleteThe company reports earnings after the bell and the temptation is strong to "lock in" gains, especially when one considers that that by one measure this stock is due for a breather. O’Neil’s studies of the best performing stocks tell us that the very best performers climb on average not more than 189% above their 200 MA’s before succumbing to profit taking. This morning STEC was about 230% above the line.
But STEC has broken out of a powerful pattern and is flat out the best performing stock in the market. It has not violated the uptrend line connecting its May through June highs and last week closed tightly with the week prior on reduced volume, a sign of accumulation even at these extended levels.
We were dubious when the stock failed at new highs last Thursday. That always signals an imminent reaction in the opposite direction. And, indeed, on Friday STEC traded lower, only to bounce back smartly into the close.
Our assessment? The technicals tell us the immediate upside is likely limited. But the stock could as well continue to trade tightly than retrace significantly. If you are overweight this stock you should lighten your load. Otherwise we believe this is not the time to sell this powerful stock if you purchased it correctly.
STEC is down sharply after hours, about 11%.
ReplyDeleteThey beat and raised. So what happened?
In part it could be that they didn’t raise revenue targets for next quarter. Given the extended nature of the stock bears are likely to point to that as evidence of slowing momentum. But if you bought this right we wouldn’t be concerned about that. STEC has been conservative in their forecasts and the rest of the report was simply stellar, including margins well beyond The Street’s expectations.
What we think really hit the stock was the company’s filing to sell 7.5MM shares. But the company isn’t selling new shares, diluting current stakeholders. Rather this is a secondary offering in which insiders are looking to cash in some of their winnings. Management owns 39% of the company and even after this sale will still own about 25%. Sales by insiders during the run of a winning stock are common as they look to diversify their holdings, many of whom often have their entire net worth tied up in one entrepreneurial enterprise.
We believe the knee jerk reaction could well be an opportunity to add small shares to your holding around the 20 MA during tomorrow’s trading. But the market will declare the ultimate verdict. We’ll be watching.
The market has clearly put STEC in the penalty box.
ReplyDeleteAfter they reported earnings we advised that there were concerns about slowing growth and insiders offering a large number of shares in a secondary sale. We expected the stock to take a hit but to bounce back.
While this occurred in the days after earnings the secondary priced today and there are problems with the way the stock is trading. Accordingly we need to be prepared to take profits.
The first problem is the lack of confidence the market has expressed in the stock. Price closed yesterday at $33.59 but the underwriters could only find a sufficient bid from subscribers for the offering at $31. Worse, the underwriters insisted on selling the maximum number of shares increasing the offering from 7.5 to 9MM.
Next we have on our hands today a real distribution day. On our sister blog last night we posted that yesterday’s bout of distribution was not meaningful. With less than an hour in today’s session it seems that today’s is. Especially on the NASDAQ, which is leading the major indices lower. This has only added to the selling pressure on a big winner like STEC. Early on the underwriters were unable to support the stock at the $31 offering price and it has twice made lower intraday lows after the initial round of selling.
What is our approach? The final low of the day barely undercut the prior low. This set up a rally past an intraday resistance point before price pulled back. Shares are again rallying but remain well off their highs. We want to see price close above the afternoon highs, or at least take them out and close in the vicinity. This kind of technical action would likely preclude another devastating gap down in the stock price tomorrow, something we don’t believe we can afford. That would let us gauge the behavior of the stock during tomorrow’s session after the emotion of today’s selling has subsided.
The afternoon high is at $30.55. We feel strongly that unless price takes out this level into the close you should lighten your position in the stock.
The markets remain incredibly resilient and might avoid true distribution days.
ReplyDeleteVolume has exceeded yesterday’s totals on the NYSE, but both the Dow and S&P 500 are down lightly enough that they could close within the 0.2% down threshold needed to avoid a distribution tag. In any case with these indices well off their lows this could be the kind of mild distribution we dismissed yesterday.
The NASDAQ, while off its lows, will still close lower for the day but might escape a distribution day because volume is slowing as the session progresses.
This leaves us ever so slightly more open to STEC, but still needing to be defensive. As we head into the close STEC has set up a lower afternoon pivot, above which we would consider holding shares pending tomorrow’s action. That price is $30.10. We still recommend lightening up if that level is not achieved.
Let’s be clear what’s transpired this week. After earnings on Monday the stock gapped down on Tuesday due to fears of slowing growth and insiders’ plans to sell shares. But the damage was limited and by Wednesday price began to recover. From all appearances there was a contented shareholder base.
ReplyDeleteBut there was difficulty in pricing the offering which led to a new round of selling in the stock yesterday. The urgency of that selling seems to have dissipated in today’s trading. Price traded to a new daily low but did not make significant progress. It is basing comfortably above the lows as we post.
Over the last two days about 19MM shares of stock have changed hands, sufficient to accommodate subscribers to the offering who opted to quickly flip the stock. At this point the new shares seem to be fully digested.
We’d buy back at the market the shares we sold yesterday on a move over $29.50 with the idea that price should close at or above that level for us to hold. This level represents important afternoon resistance and will also create a “hammer” like candle representing today’s trading action on the chart, signaling a likely change in the direction of price during Monday’s session and lessening the likelihood of shares trading lower during this pullback.
We like today's price action in STEC and are reentering at the market just above $30. The stop for this reentry will be today's low.
ReplyDelete