6b4ae414-df00-4cd5-9374-8f23dd501538_Lam-Research-Premium-Analysis.pdf

Lam Research: Premium Analysis

Lam Research

Introduction:

Lam Research is cash efficient with forward guidance that shows earnings will grow at a rate that is rare to see in the semiconductor space. There is a 1.5% dividend, an exceptional buyback schedule and adjusted forward earnings per share of $20.34 for FY 2021, up from $16.05 for FY 2020. The $4 EPS increase in adjusted forward earnings in 2021 alone is more than Nvidia, Qualcomm, Taiwan Semiconductor, AMD or Qorvo’s respective EPS. 

Lam Research’s forward EPS is nearly double Broadcom, in second place.

Lam Research has best-of-class etch processing equipment. The majority of its revenue comes from supplying NAND and DRAM memory manufacturing. The company provides micro-processors, memory devices, various processing solutions and fabrication equipment for semiconductor companies. 

Front-end wafer processing solutions from Lam Research help to create chips and applications for edge devices. Wafer processing create transistors, capacitors and wiring for semiconductors. 

Lam Research’s customers span across Micron, Samsung and Intel. Analysts covering Lam Research like to point out that the company is protected from supply and demand as memory manufacturers will continue to buy from Lam Research even during a low point in the cycle. This was proven during 2015 when Lam Research did not feel the effects of the memory trough.

With that said, Lam Research is not entirely immune to supply chain issues as fiscal 2018 to fiscal 2019 reported a 13% decline.

Financials:

The company released its Q2 fiscal year 2020 results on January 29, 2020. Revenues grew 2.41% to $2.58 billion with trailing twelve-month revenue at $9.55 billion. This is slightly lower than FY 2019 revenue reported in the quarter ending in June with Lam Research’s fiscal year beginning July 1st. 

Net income fell 11% year-over-year to $514.5 million in Q2. Earnings per share were $3.43 compared to $3.09 for the previous quarter and $3.51 for the same period last year. Adjusted earnings per share came in at $4.01 compared to $3.18 in the previous quarter. 

Historically, revenue grew 18% from fiscal 2016 to fiscal 2019 although declined in 2018 due to trade war issues.  

Gross margins are at 45.7% compared to 45.3% in the 1Q FY 2020, which is average for a semiconductor company. The company has cash and cash equivalents of $3.03 billion at the end of the Q2 compared to $4.6 billion at the end of the Q1. The company reported cash and cash equivalents and investments of $4.9 billion compared to $5.8 billion at the end of Q1. 

This was due due to $1.0 billion of share repurchases, dividend payment of $166.7 million and capital expenditure of $62.1 million. These outflows were partially offset by $307.9 million of cash generated from operating activities. 

The company has long-term debt of $4.4 billion with current debt of $667 million. The operating cash flows were $307.9 million in fiscal Q2 2020 compared to $464 million in Q1 2020 and $642.4 million in Q4 2019.

Forward Guidance

The median revenue forecast for fiscal 2020 was $10.23 billion for an increase of 5.7% and $11.87 billion for fiscal 2021 beginning in July. However, the company recently withdrew financial guidance for Q3 2020 due to the company being located in California where non-essential companies have “shelter in place” restrictions.  

According to the recent investors day presentation, the company expects revenue to reach $14.5 billion to $15.5 billion for 2023/2024. This assumes a water fab equipment market assumption of $60 billion up from a market of $46 to $47 billion in the current year. If the market is more bullish by this time frame, the addressable market estimate for WFE is $70 billion with Lam Research’s revenue at $17 billion and EPS of $36.

The company also announced that it will return 75% to 100% of Lam Research’s free cash to investors, up from a previous target of 50%, and will also boost its dividend each year. Please note, this was stated at the start of the coronavirus disruption and prior to California’s closure of nonessential businesses. 

According to the earnings call, NAND demand is expected to be strong in calendar year 2020. The company expects to see growth in water fab equipment of $8 billion to $10 billion this year due to strong spending in foundry/logic (over memory). The company stated early signs of improvement in NAND spending with DRAM more in the longterm.

Services growth will be important to watch in the next quarter and into the future. According to management on the earnings call, services grew 30% year-over-year with multi-year contracts that provide recurring revenue to the company. The expectation is that services will outgrow the installed base with growth of 10-11% year-overyear. 

The company’s decision to buy Novellus Systems for $3.3 billion in 2011 helped the company to gain a leading position in the deposition segment. More recently in the earnings call it’s mentioned that the atomic layer deposition (ALD) is another area of growth. The company is gaining market share because of best-in-class film properties along with hyperactivity and low defects.

Valuation:

Lam Research has a more attractive valuation a month ago as the price is down 25% from the Febuary peak. However, it’s important to note this was more of a reversion to the mean rather than a deep discount as Lam Research is now trading at its 5-year average across nearly all valuation metrics.

Click here to view spreadsheet.

What I like about Lam Research is its cash flow and also the company’s cash on hand relative to annual revenue.  

Applied Materials reported $14.6 billion in revenue last year yet similar cash reserves of $3 billion as Lam Research with $9.6 billion revenue. The 5-year free cash flow growth rate for Lam Research is 38.12% compared to Applied Materials at 12.47%. 

The 5-year free cash flow growth rate for KLA is 7.52%. This is a significant spread on free cash flow and the comparables. 

Notably, Lam Research has higher forward revenue estimates of 17% compared to AMAT at 13.45% and KLA at 10.59%. When averaged over the next two years, Lam Research has similar revenue to both comparables. 

Earnings are similar across Lam Research and Applied Materials, although when you add in shares outstanding, Lam Research is set apart with 160 million shares compared to Applied Material at 945 million shares, which results in a much higher EPS for Lam Research. 

This, in turn, will allow Lam Research to do more buybacks and pay a dividend, which will attract a wide range of investors (value investors for the free cash flow, dividend investors for income, and growth investors for the memory market, stability from equipment sales and few competitors on etch).

It’s anyone’s guess as to what exactly the market has priced in with the Coronavirus as the company has not issued a revised guidance at this time other than to withdraw its current guidance (see below). 

Due to global economic conditions, the headquarters being shut down, and uncertainty in demand for NAND, some discount from the five-year average would be ideal. 

During the trade war, Lam Research traded at a PE ratio of around 10 and during the Q4 2018 selloff, the stock traded around PE ratio of 9. We have yet to see Lam Research trade at these levels during the Coronavirus/March bear market as it’s remained at a PE ratio of 13 or above. With that said, a forward PE ratio at 9 would be reasonable when comparing the last two sell-offs in tech and semiconductors. 

When looking at EV/EBIT, Lam has also remained above its Q4 2018 selloff and China trade war valuations. 

Some of the hardiness we are seeing in semiconductors during the March lows reflects the fact that a pricing surge was expected this year, yet as noted below, analysts and manufacturers are mixed on whether this will occur now due to a lack in demand (not supply).  

The majority believe the pricing surge will be much softer than previously estimated to flat while Gartner is calling for 10-15% increases in pricing (see below).

COVID-19 Impact

Multiple San Francisco bay area counties issued shelter-in-place order. The company needs to temporarily stop on-site work at its Fremont and Livermore locations for three weeks effective March 17, 2020. As a result of these implications the company’s manufacturing activities in the two California facilities will be disrupted and parts from key suppliers will be impacted. The company has withdrawn the March quarter 2020 financial guidance.

The company also has supply chain activities in Malaysia, and on March 16, 2020, the Malaysian government issued orders to close certain business activities from March 18 to March 31, 2020. 

Lam Research saw a 43% drawdown from its February peak and is currently trading down 24%. Meanwhile, analysts are mixed on the semiconductor market recovery following COVID-19 shutdowns. 

On March 20th, Mizuho analyst Vijay Rakesh upgraded the stock from neutral to buy. Rakesh expects a rebound in the second half of 2020 and into 2021 based on the expectation for growth in NAND, DRAM, and etchequipment spending. The analyst mentions valuation is cheap compared to the historical average. 

Regarding COVID-19 Rakesh states, “While (first half of 2020) wafer-equipment spending will likely be impacted from COVID-19, we see a better (second half 2020) by the need to add capacity to tight memory supply, and foundry/logic WFE spending given strong seasonal 5G handset demand, a strong data center outlook and 7nanometer/5-nanometer ramps.”

Evercore names Nvidia, Lam Research, and ASML as top ideas for long-term investors amid the “incredibly uncertain” demand picture. Meanwhile, B.Riley analyst Craig Ellis downgraded the 10 chips companies, writing that he “underestimated potential for a risk” from outbreak of COVID-19.

Morgan Stanley analyst says that the company’s analyst day featured “several incremental positives,” including a strong earnings target and a higher FCF return plan. The firm sees Lam Research as a core holding, but “can see more upside elsewhere around the theme of memory improvement.” (Note: is likely this analyst is referring to Micron as Morgan Stanley is bullish on Micron).

Addressable Market and Valuation

According to Gartner the worldwide wafer fab equipment market is expected to reach $53.6 billion in 2020, down 1% from 2019. According to the March Investors presentation, Lam Research has outperformed water fab equipment (WFE) growth 2:1. Lam Research’s revenue grew at a CAGR of 16% from 2013 to 2019 and WFE grew at a CAGR of 8% in the same period.

Lam Research’s customer list includes Micron Technology, Samsung Electronics, SK Hynix, Toshiba, TSMC, among others. In 2019, Lam Research was also named a preferred supplier for Intel. 

Geographically, Lam Research is weighted towards China at 29% and Taiwan at 26%. The United States makes up 9% of Lam Research’s revenue.  

NAND is primarily driven by smartphones, including SSD and memory cards. The global 3D NAND flash memory drive market size was $9 billion in 2017 and is projected to reach $99 billion by 2025, growing at a CAGR of 35.3%. Asia-Pacific will be a strong contributor to global share at nearly half of the market at $48 billion. Key players for

NAND include Samsung Electronics Co., Ltd., Toshiba Corporation, SK Hynix Semiconductor, Inc., Micron Technology, Inc., Intel Corporation, Apple Inc., Lenovo Group Ltd., Advanced Micro Devices, STMicroelectronics, and SanDisk Corporation.

Statista places the size of the dynamic random-access memory market worldwide at $63.5 billion in the current year, growing to $83.4 billion by 2024. DRAM memory is used in smartphones and tablets and the increasing demand for online operability and internet connectivity. 

Low-power consumption and high-density memory technologies, such as DRAM, are also used in data center infrastructure due to cloud services requiring cooling, high speed data transmission and back-up facilities. 

According to IC Insights, NAND Flash sales declined 27% in 2019 and will rebound at 19% in 2020. DRAM sales declined 37% in 2019 and will rebound 12% in 2020. 

Source: IC Insights

However, COVID-19 shutdowns may soften the pricing surge that was beginning to form due to demand. The weakened forecast comes from an uncertainty in consumer spending on mobile phones and devices that use chips. If major hyperscalers curb their spending in the second half, as discussed by TechTarget, then flash and SSDs will be impacted. Others agree that there’s unlikely to be shortage this year in memory and that NAND flash, SSDs and DRAM should remain at a reasonable price. In contrast, Gartner continues to believe NAND flash will see a 10-15% increase in pricing with SSD prices likely higher. 

Product Overview

Lam Research manufactures equipment for semiconductor companies. The company serves the etch, deposition and clean markets with a specialty in 3D NAND flash and advanced DRAM. 

As the market leader in etch, Lam Research supplies a critical process in chipmaking where excess material is removed. Lam Research also produces deposition equipment, which applies thin-film layers to surfaces. 

This month, the company announced the Sense.i platform, which has a space-saving architecture and will help customers meet wafer output targets “by producing more than 50% improvement in etch output density.” The company describes the platform as self-aware due to autonomous calibration that helps reduce downtime and labor costs while the tool self-adapts to maximize wafer output. The platform also has a small footprint, which helps as manufacturers increase the complexity of their processes. 

The majority of its revenue comes from supplying NAND and DRAM memory manufacturing. The company provides micro-processors, memory devices, various processing solutions and fabrication equipment for semiconductor companies. 

NAND memory saves data even when the power is removed, like when a cell phone is turned off. DRAM only saves memory when a device has power but is much faster than NAND and lasts longer. Beyond mobile devices, NAND is found in traffic lights, digital advertising panels/displays, and anything with artificial intelligence that needs to store data. NAND has been around since the 1980s but got a much-needed boost from 3D NAND, which stacks vertical memory chips. I’ll cover 3D NAND in more detail in the upcoming Micron research report.

Catalysts for Lam Research include FinFET and planar for 3D NAND with multiple patterning and vertical layers. 3D NAND spans single-level cell (SLC), multi-level cell (MLC) and triple-level cell (TLC). As chipmakers must battle each other for more power per chip while often in pricing wars, equipment providers like Lam Research can provide an advantage through superior tools. There are more layer-counts in 3D NAND and foundry/logic transitions to the process node that require greater multiple patterning steps. Upgrades from the planar to 3D NAND have been strong drivers for Lam Research’s double-digit revenue growth although these upgrades may level off in the future. 

For Lam Research’s customers, Moore’s Law states that the number of transistors on a microchip doubles every two years although the cost of computers is halved. Superior equipment providers (like Lam Research) can help stave off the effects of Moore’s Law for their customers by helping to deliver high-volume manufacturing. 

The competitive advantage for Lam Research is the lead it has from service contracts and customer collaboration for high-volume manufacturing. It would be challenging for new competitors to compete with the scale and resources that Lam Research has. Lam Research has an installed base of 61,000 chambers as of the end of December 2019, up from 40,000 units in 2015. The company is also driving more revenue per chamber. New technologies like “Sense.i” deliver significant productivity and throughput improvements. The tool will be delivered to all major customers to increase manufacturing rates. 

Lam Research merged with Novellus in a $3.3 billion stock deal in 2012 to become a market leader in deposition materials. In 2016, an attempt to merge with KLA-Tencor was shot down.  

Lam Research is also releasing an advanced atomic layer deposition (ALD) tool as well as a plan to introduce dry photoresists for EUV patterning in lieu of the current wet photoresists. The ALD-tool will target companies such as ADM International and Applied Materials for physical/chemical vapor deposition. 

TSMC has mentioned that the 5G and HPC are the growth drivers in the long-term. This should also help the company to diversify from any slowdown in memory chip clients. 

Technical Analysis

By Knox Ridley 

Elliott Wave/Fibonacci Price Zones (Weekly Chart)

The above chart is my Elliott Wave count for LRCV going looking back to 2009. All Elliott Wave charts are meant to be analyzed on the logarithmic charts, which is why the trend looks more balanced. It’s measuring the percentage change in a stock. 

I have LRCV ending a large degree third wave, in blue, and currently in the 4th wave down. Fourth waves typically retrace to the 23.6% to 38.6% retracement level of the entire 3rd wave. On rare occasions we see it retrace to the 50% retracement level. These levels are outlined in black to the right of the green target box.

The red, blue and black prices on the right of the chart correlate to the larger degree counts. What we want to see are confluences of price clusters. When we see this intersection, it usually marks an important region for support/resistance. These typically act as magnets to the price above and can usually be counted as great areas to either layer in or look for a bottom.

Basic Technical Analysis (Hourly Chart)

If we zoom into the hourly chart we can get a better idea of where this correction may bottom. Corrections typically unfold in 3 legs that are symmetrical (in Elliott Wave it’s marked as A,B,C). In other words, more times than not, the length of the first leg is usually the length of the last leg down.

In the chart above, this symmetrical leg down is shown by the 100% extension in black, which is to the left of the target box. This area also coincides with a number of Fibonacci price clusters, which is shown on the right of the target box. 

The areas where we will focus is the yellow and green bands.  The yellow band consists of the $174 – $161 region, which coincides with two Fibonacci price clusters as well as the 1/2 Gann Fan. The green band consists of $135 region which is the 100% extension of the first leg down as well as some major price clusters

Also, the B wave that we are in shows many divergences, which suggests this rally is running on fumes. We have multiple negative reversal patterns, where the RSI and MACD are making higher highs while the price is making a lower low. This is saying that a larger amount of buying pressure is needed to push the stock up to a lower price than before. The volume is also suggesting that this rally isn’t widely being bought either.  

Putting it Together

The above chart combines the Fibonacci price clusters in black, on the right of the chart, and the Gann Fan angles. One thing becomes evident, the $174 region is an intersection between the Gann Angle 1/2, and the Fibonacci price cluster. 

I’d look for the $174 area to act as support in the coming days/weeks. It would also be a good level to start layering in, for anyone with a long-term time frame in mind. 

If the price can close above $288 and sustain above that level, then I consider that a cautious bullish scenario. I’ll consider entering with very tight stops. 

I will update you when we approach one of these two scenarios.

Last week, we stated that our primary count suggests that we have completed or are about to complete a 3rd wave down within a 5-wave structure, known as a C-wave. This week, the count has not changed; it is still valid and still in play.

As part of the 5-wave structure, we stated, “this will give way to a 4th wave corrective bounce,” which I believe we are in right now.

The below chart outlines this plan in blue. Regarding the corrective bounce, went on to say that “the structure of the upcoming bounce will be crucial for providing further clues as to the on-going direction of the market. If the correction is overlapping and symmetrical, it will support the 4th wave thesis.

 I’m expecting this to find resistance around the 2500-2600 before topping out. However, if we see heavy volume and a structure that is impulsive – i.e., 5-wave patterns – then it will support the thesis of a potential bottom. I want to see the 2750 level taken back before I will believe the bulls are in control.” 

So far, the market has met resistance and appears to be topping out exactly where we suggested it would – between 2500 – 2600.

As of now, my plan has not changed. I expect us the retest the lows and to slightly make newer lows. In the coming days/weeks, I will look for entries in this bear market between the 2250 – 2060 region.

Why I’m Cautious

That being said, I do want discuss why I’m hesitant to dive into equities this last week. One reason is that the 1800 range in SPX is still in play. It is represented by the red box, and would be an extended 5th wave drawdown. If the market breaks the 2065/2050 region with force, it becomes probable that we see this target.

If this count comes into play, the idea of a quick recession, which can see us at new highs by the year end becomes unlikely. Instead, the signals would indicate the potential for a more prolonged recession. As an investor, with this potential on the table, I am remaining cautious with my excess cash, until proven otherwise.

On the other hand, if we do bottom within the blue target range, which I am still expecting, I believe we could see the final 5th wave off the 2009 lows, which I have been talking about in many prior market updates. The target for this will be a multi-year bull market could take us beyond the initial 4000 target before we encounter a prolonged bear market. This is based on Elliott Wave theory, which I use to remove emotions from major market moves and to set up game plans.

On a fundamental level, if we see the economy open back up sooner rather than later and a potential vaccine or antiviral helps reduce spread, then we will likely see a sharp reversal in equities. Also, it can’t be overstated the record levels of liquidity dumped into the market by the Fed, which with improved sentiment and economic numbers, could create the environment for this renewed bull scenario to play out. This is also why I am hesitant to speculate on a bottom. If this plays out, the multi-year bull market, fueled by excess liquidity will more than make up for being late rather than early.

Further evidence we are in a 4th wave:

 Fourth waves are notorious for complex and confusing structures. The structure of what the 4th wave is presenting us is not different. It can be counted as a 5-waves up pattern off the low, which is typically bullish. However, at a closer look, it appears to be a more symmetrical, complex A,B,C pattern. Because of this ambiguity, I tend to turn towards other clues that can help verify our thesis.

Negative RSI Reversal

The negative RSI reversal pattern is when the price is making a lower high, as represented by the red arrow on the chart, and the RSI (and/or MACD) is making a higher high, as represented by the green arrows on the chart.

We clearly have this pattern playing on the daily chart. It suggests that the momentum under the price is fading. In other words, it is taking more buying pressure to make lower highs. This is not a good sign, and suggests a reversal is soon to occur.

Volume Patterns

Price can rise on weak volume, but in a true bottom and reversal, it is usually met with massive buying pressure, which shows up in very large volume spikes.

This volume, typical increases its trend as the uptrend returns. This is not what we are seeing today. In fact, the volume trend is decreasing and the only daily volume spikes are red.

 

Volatility

The above chart compares the S&P 500, in blue, to the rolling 20-day realized volatility, in yellow, and the VIX, in orange. The VIX measures the implied or expected volatility in the S&P 500 over the next 30 days. When it is high, it means that based on the options market, there is an expectation for elevated levels of movement (up or down) over the next 30 days.

Realized Volatility is a topic in and of itself; however, in essence, it’s the actual measurement of historical volatility over a given time period. I used the 20-day measurement to provide us with a visible trend.

You’ll notice that the realized volatility peaks after the market bottoms whenever volatility hits. It then rolls into a recovery. Now, look at where we are. We have yet to suggest a peak, let alone a roll. Nearly every time, when the market has bottomed, we’d see this measurement already rolling.

The VIX is also at an extremely high reading. Anything above 30 has historically been considered high, and a warning to investors. Above 50 is typically considered extreme, and suggests speculation for anyone trying to initiate long term buy and hold positions.

Today we are above 60, and in an uncanny fashion, have stayed above 50 for one of the longest periods on record. This is not normal, and until the VIX can begin to settle at lower levels, it is unlikely that we find a meaningful bottom.

Bear Market Rallies

On Tuesday, the Dow gained 11.5% in a single day from extremely oversold conditions. This move was followed by two additional days of gains, inciting the FOMO crowd to think the bottom was in. The financial news media fanned this feeling by announcing that this was the fourth largest single day percentage gain in the Dow’s history.

What they failed to mention was the context in which the greatest single percentages occur:

The chart shows the greatest single day moves going back to the 20s. The one thing they all have in common is they occurred within major downtrends in a bear market. A week prior, Marketwatch put out an article that outlined the number of > 5% rallies and > 10% rallies within the past bear markets, like in 1973 and 2008, as well as deep corrections, like 2012 and 2016.

The results are shocking. Large swings are common when both realized and implied volatility are high. However, until the market breaks its bear market downtrend, coupled with additional indicators, these moves should be treated like small gains in a larger downward trend.

Our Goal

We believe that the best gains come from holding great companies involved in significant tech trends for an extended period. One of the benefits of deep and thorough knowledge about these trends and companies is that the analysis allows you to hold these companies for the long-term with conviction.

This conviction is the key ingredient, and one of the greatest values we believe this service offers. Most tech stocks are volatile, and can have multiple +50% drawdowns on the long road to becoming multi-baggers. We use technical analysis to simply manage this risk and seek out favorable entries.

Please keep in mind that with the right price, our plan is to hold without stops, hedge and add in weakness, and only sell when the story changes. We are excited about the prices we are starting to see, and are looking to make long-term allocations in this market when one of two things occurs:

(1) Prices get so low that we are OK with any remaining downside in the bear market. The targets that I outlined focus on these prices. In bear markets, we get a flush of sentiment and a rejection of hope that stocks will ever recover again.

Anyone who invested during the 2002 and 2009 bottom knows the feeling. This simply has not happened, which means that either this bear market is an anomaly, and new highs are in our near future, or that we have more of volatility in our future that will ultimately flush out the remaining sentiment.

(2) The economy corrects, providing encouraging data that a real expansion can occur. In this case, the bull market will be in its infancy and prices will be higher than they are at the bottom; however, there will be an element of safety with higher probabilities that the market will continue to grow with a new expansion of the business cycle.

It can’t be stated enough that bull markets create wealth, not bear markets. The primary focus of most legendary money managers is to conserve assets. It is much more difficult to rebuild than it is to preserve and deploy into safety. In other words, losses work geometrically against you. For example, and asset that goes down 50% will require a 100% gain to break even. If an asset goes down 80%, it requires a 400% gain to break even. We posted about this on the forum in regards to Boeing.

The advantage of protecting gains is why we spoke regularly about how our focus was to ride the remaining momentum of the bull market with reasonable stops to protect us from the downside. If you followed our stops and entries that we outlined in real time on the forum, as well as on the market updates, you should be sitting on nice gains and minimal losses.

We take our subscribers and your readership very seriously, and lean towards being conservative instead of reckless. Hence, the S&P 500 levels we are watching tend to be in the middle rather than within an extreme on either side.

Amazon, Facebook, and Google experienced multiple large drawdowns and required both conviction and risk management. This is what we hope to impart through our own strategies of using stops and proper position sizing. We do believe that we are in an environment that has the potential to offer us fantastic values for leaders in the next tech cycle.

Stock Updates

 

Nvidia (NVDA)

Nvidia, unlike many of the tech names we cover, does not appear to be in a fourth wave correction. It appears to be in a larger degree A,B,C structure. This is supported by the structure of the decline as well as the symmetry.

On the B-wave, noted in pink, the (a) wave is the same length as the (c) wave. While price is struggling to break out at this key level, the internals are weakening, suggesting another leg down.

The yellow band is the primary support in play. Below this level, and we could see a rather large suck out. With that said, I’ve raised my target to the lower end of the yellow band at $173.

 

Roku (ROKU)

Stepping back from Roku, it is clearly trading as a large degree ending diagonal – five sets of 3-wave patterns within a trend channel. When Roku hit its low, it tagged the lower end of the channel, which is enough to meet the 3-wave move down. This makes up the 4th wave in this pattern.

This means that we will either get a spill over on the next retest, of we are setting up for a 5-wave impulse into the final 5th wave pattern. The internals and volume are weak, which supports a retest. Regardless, I’ve raised my target to $70, which will account for both scenarios. We will likely add in increments in case Roku breaks down out of this pattern prematurely.

 

Shopify (SHOP)

I’ve also raised my target for Shopify to $285. Shopify, like Nvidia, is trading in a larger degree A,B,C pattern, which will put us in the early C-wave down.

These moves are typically symmetrical, which would target the $245 region. However, I can’t rule out that the retest of the lows may hold, which would set us up for a 5-wave move to new highs. For this reason, I’ve raised the upper range of the price target to $285. Like with Roku, we will likely layer slowly into a new position at these levels

 

Slack (WORK)

Slack is also in a corrective pattern. I believe it’s in an A,B,C pattern and not its final 4th wave down. This means, like with Nvidia and Shopify, we should see a C-wave down into the green target box. The volume and internals are suggesting the same. We’ve raised our target to the $17 range, and will look to add to our position around these levels.

 

Uber (UBER)

We closed our short on Uber for a nice gain last week, as stated. It has rallied on weak volume and weak internal momentum, which is suggesting another bout of price fatigue.

There are two scenarios at play: (1) we are in a fourth wave, which will take us back to the lows; (2) we are in an A,B,C pattern. In which case, we completed the A wave, and are in the process of topping out in the B-wave. If this is correct, the C-wave is projected to take us beyond the recent lows.

Above $35 should be a stop for anyone who wants to speculate another round of weakness for Uber. We announced on the forum that we purchased puts in both Uber and Lyft on this strength, which are dated through May.

This week, Twitter and Facebook lowered guidance stating weakening demand from advertisers. This is important for Pinterest, The Trade Desk, Telaria and/or Rubicon and Roku.

I had stated on the forum to a few readers that Twitter’s lowered guidance doesn’t sit well with me. I was waiting to see if another company would come forward and Facebook did the next day to say the same; ad revenue is weakening. 

Facebook is a bellwether for advertising. Although I don’t like their tracking methods, they have a global reach with 2 billion users, so they have a good read on advertiser demand. 

I’m estimating Twitter could lose about 10-15% of revenue from previous guidance despite monetizable daily active users (mDAU) being up 23% Guidance was around $825 to $885 million and the company stated they would be slightly down YoY with the year-ago quarter at $786 million. We know Twitter had strong growth in Q4 at 21% YoY mDAU which correlated to 11% increase in revenue. 

Facebook was less transparent about revenue numbers yet did state their usage is incredibly high while they’ve  “seen a weakening in our ads business in countries taking aggressive actions to reduce the spread of COVID-19.”

This means demand in advertising is not correlating to eyeballs and mobile usage. This will the first time that has happened since the iPhone was launched. However, this did happen to Google search during the 2008 financial crisis – although growth was not negative, the worst of it was 2% revenue growth in Q2 2009. 

Keep in mind, this happened quickly as January and most of February were stable months. The other thing that doesn’t sit well with me is the usage in this situation is hitting record highs due to quarantines. In Italy, Facebook’s app usage is up 70%. This disconnect between usage and revenue was not the case in 2008/2009. 

We don’t cover Twitter and Facebook specifically on our premium site but we do cover many other ad-tech names.

I think they are all at risk right now of lowered ad demand. If we take at face value what is being communicated, these smaller companies could take a hit on both sides; their operations could be maxed from more usage while ad demand is also down. 

Knox is working on new stops for Pinterest, Roku, The Trade Desk and Telaria for anyone still in these positions. He will cover RUBI for anyone in this stock, as well. 

We can’t tell you exactly how the market will respond or what will happen to ad-tech revenue. But we do want to keep you apprised of any information we come across and the support levels to watch. 

Best case scenario: these stocks follow the movements of the broader market

Worst case scenario: these stocks see more volatility than the broader market as Wall Street is still unsure about many of these names

Regardless, I can’t stress enough using risk management and being patient. This is not an easy situation to navigate.

To be completely transparent, I was very surprised to see the lowered guidance as I thought the increased usage would keep ad-tech insulated for at least a quarter or so. 

Although we don’t have information from these other companies as to the impact, I have to take at face value what’s being communicated about advertiser demand. You’re also all well aware these companies are more volatile than Facebook or Twitter.  

One thing about the machine trading we are seeing in the market right now is that machines aren’t able to correlate a news headline on Facebook or Twitter through NLP and connect this to the stocks mentioned above. So, that gives any of our readers in these positions time to regroup.

We are trying to be active on the forum as things progress across the board. Here is the update I posted yesterday after Twitter lowered guidance but before Facebook lowered guidance. It sums up my thoughts on this. 

“I was a bit surprised by Twitter’s lowered guidance today and to see an ad-tech company already say they will miss Q1. That means ad demand fell off fairly quickly and/or drove bids down quickly as we were halfway through Q1 before this happened. Mobile usage and OTT usage is up but Twitter is the first to cast doubts on where ad spend is right now. SF and NYC have only been quarantined about a week, so I didn’t expect to see an ad company to lower guidance that quickly. If any others come out to lower guidance, then we know this will be a more complicated situation than usage and eyeballs correlating to higher ad spend. 

On a similar note, I know some people got FOMO today with Roku, but now we are hearing ads could be shaky. There is no way to really gauge the impact right now of businesses being shut down, to be honest.

Anyone who is super confident on exactly how the coronavirus will impact the tech industry is not taking into account the many variables (that) fuel growth. That may be hard to believe with the green we saw today on the NASDAQ compared to the DOW and S&P500. I think Zoom Video and Twitter are trying to be cautious and realistic in the face of potential “buy the dip” and FOMO buying.

Post-coronavirus, I have strong convictions on our stock list. We may adjust for any consumer 5G and I will add AMD to the list. I’m looking over Docusign right now, as well. But very few changes. 

This is a long post to say that I am relying quite a bit on TA at the moment as the recovery in tech and the recovery in the economy is anyone’s guess right now. I’m favoring patience across the board.”

Over the week, we moved away from providing broad market analysis and focused more on providing updated target entries for our shopping list of stocks. Please reference the Top Stocks List under the spreadsheet section of the site, as well as the forum for updated charts.

If you are new to the site, a few places to start in regards to the information below:

Blog Update on Target Entries

S&P 500 Levels We Are Targeting

Fundamental Analysis and Convictions

So far, we have updated entries for 16 names and plan to provide the remainder in the week ahead.

As of today, we are still holding onto our long-term positions in Microsoft, Alibaba, Nvidia and Roku. We are also holding our position in Zoom, which we are now holding without a stop, and just began building a small position in Slack when it traded in the $16 range (updated on the forum).

Our shorts, Uber and Lyft, traded above the 8-day EMA on Friday. they both closed the day below the 8-day EMA, so it was an intra-day move. However, as a discipline, I always, without question, follow my exit plan when I set it. Since the exit plan was to sell when the 8-day EMA was breached, I will buy to cover these positions on Monday for 2 really nice gains. As of the close on Friday, we are sitting on a 38% gain in Lyft and a 29% gain in Uber, which have acted as fantastic hedges for our long positions.

I believe the extreme gains we saw in these two positions over the last 2 days were simply short covering. Both these positions have very high short interest, which can make for violent corrective moves up when the shorts cover. We believe there is more downside to be had in both these positions, so we will look to add in any further corrective moves.

With shorts especially, we always follow exit plans as any gain in a short can turn into a loss very quickly.

With a long-term-time frame in mind, we have a very positive outlook. This is the type of market that you build lifetime positions with cost basis we will may not see again. However, our personal opinion and preference is to wait for our target entries and target SP 500 levels because we believe there is more downside in our future. The evidence for this opinion and belief is laid out below. We also discuss the “what if we are wrong” scenario.

 

Broad Market Valuations

Price-to-Sales (P/S) ratio is a metric we’ve talked about before when referring to market valuations. Using Price-to-Earnings (P/E) ratios to gauge the value of the market, especially in the era of large buy-back programs, is not as accurate as using a metric like sales. Top line revenue, like free cash flow, cannot be distorted. The problem with using free cash flow to gauge the market is that not all promising companies are positive free cash flow, yet the common denominator is they all make sales. 

That being said, the Price-to-Sales Ratio (P/S) of the S&P 500 was at an all-time-high in December 2019 at 2.32. For reference, anything over 1.55 has historically been considered expensive while anything below has been considered a value. Last December’s P/S ratio exceeded both the dot.com peak and the 1929 peak when ratios were just above 2.2.

The market is currently 30% from this all-time peak; however, the current P/S ratio is still hovering around 1.66, notably above the 1.55 historical mean. So, even after a 30% drawdown, we are still relatively expensive.

It’s hard to grasp just how overvalued equities were at their recent peak. Looking at the below image by Crescat Capital puts this into perspective.

The U.S. Market Cap/GDP ratio is one of Warren Buffet’s favorite metrics for gauging value in the market. It is calculated by dividing the total stock market by the gross domestic product. 

After a 33% drawdown, when we briefly breached the 2018 December low, the market traded around the valuations we saw at the 2007 peak. Today, after a slight corrective bounce, we are trading above this level.

Historically, in bear markets, stock valuations move from overvalued to undervalued. So far, according to two important measurements for market valuations, we have gone from very overvalued to slightly overvalued.

 

Intermarket Analysis

A few weeks ago, we analyzed the more economically sensitive sectors of the economy to see what they were telling us about the potential severity of the drawdown. At the time, these sectors were completely in a bear market or almost in a bear market, while the S&P 500 was still in correction territory. They were leading the market down a few weeks ago and I believe they continue to lead the markets down today. In other words, these sectors suggest more downside.

Every one of these sectors closed below the 2015 high around 2133. They are above the 2016 low, which is around 1800. These sectors, especially the regional banks and financial sectors, are suggesting an unwinding that has been long overdue.

Prior to the 2020 peak, the global debt was at a record high of $250 Trillion, which is over 3x the level of Global GDP. Like in most cycles, as they age, the quality of the debt deteriorates. The U.S. financial sector’s exposure to this debt is still in question and this why the sector continues to lead the market down.

 

Technical Damage

The amount of technical damage done to the market is extensive. This chart will be a regular update as we progress in either direction. The chart below also outlines what will need to happen in order to squash this bear market from a technical perspective.

So far, the market has failed to retest 1 of the 2 bear market trend lines in red. There are important moving averages, Fibonacci retrace levels, numerous open gaps, and prior peaks, all of which will act as strong resistance. Until we make a higher high and lower low and begin to take back some of these levels, I will be suspicious of any rally.

The below chart outlines the two scenarios that I am tracking for a likely path.

Scenario 1:

Scenario 1 is outlined in blue. The blue count is the count I am leaning towards as most probable. It suggests that the 3rd wave (within the C-wave) has bottomed or is close to bottoming. This will give way to a corrective 4th wave bounce, and then a final 5th wave down to the 2100 region.

Scenario 2:

Scenario 2 is outlined in red. The red count suggests that the 3rd wave will further extend into the 2200 region. If the economically sensitive sectors we are tracking break through the 2016 level, and this 3rd wave keeps extending, then we could see this market trade down to the 1800 level support level.

 

Regarding a bottom:

In order for the bulls to convince me that they taking back control of this market, I will want to see them take back the 2750 level on the S&P 500.  For me, below this level, and the pressure is down, which puts the above scenarios in play.

 

Some Good News – Positive Divergences

Beth is covering the speed of the bear market for MarketWatch this week. Since February 20th, the market has gone straight down with minor interruptions. In fact, March of 2020 holds the record for how quickest bear market in history at only 16 days starting on February 19th. The second fastest bear market to occur was the notorious 1929 followed by the escalator drop of 1987.

When calculating how quickly the 2020 market dropped 30%, the juxtaposition of our current situation is even more severe. The bear market of March of 2020 took 19 days to drop 30%, followed by 1987 and 1929, tied for second at 55 days to reach 30% drawdown. The other notorious black swans, the dot-com bust and the 2008 crisis, took almost a full year to retreat 30%.

The good news is that the market structure suggests that we are due for a large degree wave-4 bounce, and the MACD as well as the VIX are supporting this.

Note the MACD in the prior chart regarding the 2 potential scenarios we’re tracking. As the market is making lower lows, the MACD is coiling upwards. This is the type of positive divergence we see when we are approaching a bottom of sorts. This plays into the larger degree wave-4 that I am anticipating.

The VIX refers to the ticker symbol for the CBOE Volatility Index, and has become a popular measure of the stock market’s expectation of volatility based on S&P 500 index options. In other words, it measures the amount of implied or expected volatility in the market.

So, as the market makes new lows, the VIX would typically make new highs because lower prices bring about more fear.

If you look at the above chart, in the final hour of trading, the market began to trend down and closed just above the all-time low for this bear market. However, the VIX also trended down. This is saying that the VIX is seeing a reduction of future volatility, while price is going down. This is a divergence we usually see towards a bottom or the bottom of a bear market.

It’s worth noting, that during the 2008 bear market, the VIX oscillated between the 70 to 50 range four times between October and November of 2008, before finally beginning to slowly trend back down. Basically, the VIX is still in a very elevated state and until it begins to settle down to much lower levels, we will likely not find a meaningful bottom.

 

What if we are Wrong?

As we stated on the forum to a few readers, this market presents two equal risks to every investor:

-Invest too early and see losses as the market attempts to price in a recession

-Invest too late and miss exceptional pricing (we are already at prices that nobody would have dreamed of a month ago).

Which risk are you most comfortable with? Only you can answer that. We are simply telling you what our plan is based on technical analysis that helps guide the positions we chose from deep-drive research.

I’d like to point out, we are not perma-bears or perma-bulls. We don’t comment a lot on the coronavirus because we are not doctors or health experts. We are sometimes on Twitter but are often too busy with research to tweet frequently.

We believe balanced research is an important strength. We have no desire to be right about calling a market. You won’t hear us pumping our positions during a historic selloff because we feel that it’s irresponsible to say “buy now” when our cost basis is low and we are not buying ourselves.

Instead, once the market broke key support, we worked overtime to find the S&P 500 levels we thought were most probable (and our personal target). We also published technical stops to help protect our readers’ gains. This was based on well over 100 hours of research (closer to 200 hours of research) over the past month on various technical charts and identifying stops and new entries for all of our positions. Our goal is to make money for our readers and to build the best portfolio possible in today’s market.  

Where the market decides to bottom is really anyone’s educated guess. Our targets take into account the potential for the blue and red counts I outlined above. These will be the levels that we will begin to build long-term positions. We plan to continue to hedge these long positions in case we are early.

We are not financial advisors. We use technical analysis to help create emotionless game plans, guide potential entries and manage risk. But, ultimately, you are the main arbiter of your investment decisions.

If your time frame is 5+ years and you can weather a potential 20% drawdown from current levels, then you will likely be glad that you bought at current prices.

There are numerous examples of roughly 30% drawdowns in past pandemic scares that showed a quick V-shape recovery. The level of fear in the market is palpable, and we are starting to see divergences amongst the MACD and the VIX, suggesting a bottom of sorts could be forming.  

Also, there is not much reference for the amount of liquidity being flooded into the market. On the flip side, this could act as a back stop to further economic deterioration.

However, if you believe this indicates THE bottom, it’s worth comparing today to the 2008 recession. During 2007-2009, we saw a 55% drawdown in stocks. However, during that time frame only the financial sector needed a bailout, now the list of sectors that needs a bailout is growing by the week. Also, airplanes were flying, Vegas was open, small business weren’t forced to close, there was no mandatory stay indoors policy and pro sports were still active as well as schools. No one knows the extent of the economic damage this pandemic will cause to the economy because we have never seen such a widespread halting of economic activity in an economy infused with record levels of debt.

Investors have been trained to buy the dip for 11 years. This strategy paid off handsomely for over a decade, and after 2018’s V-shaped recovery, there’s still a belief that we will see another such recovery. This scenario is possible, but I do not believe it is probable.

The structure of the upcoming bounce will be crucial for providing further clues on the on-going direction of the market. If the correction is overlapping and symmetrical, it will support the 4th wave thesis. I’m expecting this to find resistance around the 2500-2600 before topping out. However, if we see heavy volume and a structure that is impulsive – i.e., 5-wave patterns – then it will support the thesis of a potential bottom.

I want to see the 2750 level taken back before I will believe the bulls are in control. We need resistance to be taken back and an uptrend to form before I’m willing to support the idea that a bottom is in place.  

 

Position Updates

Please reference the Top Stocks List under the spreadsheet section of the site for updates on target entries. Please also reference the forum and the chat rooms for charts. Chat rooms are organized by stock ticker.

We’ve laid out our broader market thesis over the past few weeks and are now turning our attention to individual target entries. Identifying broader market levels first was an important step as the market is reacting to these levels. We noticed that Goldman Sachs published something similar today.

If the market breaks 2340, we will likely see the market trade down in the 2100 region. This is the primary target that we diligently identified over the past few weeks. 

We mentioned that Knox follows an analyst who uses the same discipline and is calling for 1800. However, at some point, we have to be satisfied and not time the bottom. This is a personal choice.

Our positions will be 70% built in the target entries we are publishing this week. We will keep 30% on hand to either allocate at another leg lower or when we see a renewed uptrend.

Please note: We do expect there to be corrective bounce(s), which is the fourth of five waves in this C-wave down. The momentum indicators are at unusually low levels. They will need to reset for the next leg lower. What this means is some investors might get bullish too early from seeing some green on the indexes. Until the VIX settles below 20 and we see normal days (i.e. 100 bps to 500 bps), it’s unlikely that a bottom is in place. 

Target Entries:

The market is moving fast and we want to get information out to you as quickly as possible. We will be updating target entries for (3) stocks per day from our Top Stocks list in column J of the spreadsheet.

You can access the Top Stocks List here.You can access the Top Stocks List here.

Please check the Top Stocks list for daily updates on our target entries. Today we updated target entries (column J) for Roku, The Trade Desk and Slack. 

Here are some bullet points about these target entries:

• Column J will not change as it’s based on the broader market thesis that we have worked diligently towards building over 2-3 weeks.
• Our game plan is outlined in Column K to help provide additional information into the technicals we are monitoring for entry.
• Knox will be posting charts and additional TA on the forum for anyone who has questions or wants more TA information.
• We will do a summary of the target entries this weekend.
• We don’t want to overwhelm your inbox with blog updates while also getting the information out asap – therefore, please check for daily updates on the spreadsheet. 

Top Stocks List:

We will be updating this monthly around the first of the month. Our convictions on the fundamentals have not changed. The only stock we foresee adding right now is AMD. We are evaluating other semiconductors and will update you accordingly. Docusign (on our watch list) is also a potential. Notably, Beth is not ready to initiate on Micron as the memory market is looking sluggish this year. Those earnings are coming up soon. If this changes after earnings, we will let you know.

You’ll get the AMD PDF report tomorrow. 

We do understand that there was a bigger seller in Roku today. This does not change our conviction. 

Thank you for your readership!

Throughout last week, we laid out ranges in the S&P 500 where we will be potential buyers again. The update on March 10th discussed the sudden move and why we are viewing any bounce as an opportunity to build hedges and raise cash in positions where we seek a lower cost basis.

There were two scenarios provided given the sudden market drop last week:

(1) we’d have a deep correction or shallow bear market that would find a bottom between 2645 – 2520 with a potential spillover to 2500.

(2) or, we’re in for a bigger bear market that can find a bottom between 2340 – 2100.

I want to note that the market cut through the 2600 region with little hesitation and closed sub-2500 last Thursday. The overnight action in the futures market found a bottom in the 2400s before a much-needed corrective bounce that happened on Friday.

With realized volatility approaching record highs, many back-to-back ~9% days, and price unable to find support at key levels, this helps put into focus the scope of the bear market we are likely in. Within three weeks, the has market erased the gains that it took us 1.3 years to build. In short, we haven’t seen drops and rebounds of this magnitude since 2008.

With that said, this will be our last market update until next week as we now turn towards updating our conviction list with target entries. We followed our stops on many positions and are now working towards re-entry using the broader market as our guide. The story did not change on the stocks we’ve covered on the Top Stocks list. The conviction levels have also not changed, with the exception of Zoom – we are raising conviction from 8 to 9, even in light of its current valuation.

How I designed my risk management strategy

I personally got licensed in late 2007 and began my carrier in finance just in time for the great recession. In late 2008, I took over the Bay Area territory for my company and began developing relationships with countless financial advisors, RIAs and various CIOs regarding portfolio analysis as well as the implementation of passive ETF strategies within a portfolio.

Back then, ETFs were new and passive investing was not well utilized in portfolio management. This helped me get in front of many professional investment portfolios and strategies. Buy and hold is the ultimate goal. However, in rare cases where there are +50% drawdowns, like in 2008, I have found risk management to be crucial for the portfolios I personally handled during those years. 

With this came my use of creating plans based on the broader market, back up plans, using stops, hedges and position sizing and other tools. I’ve regularly and openly discussed these to navigate volatility while investing with a long-term time frame.

As we have been doing from the day we launched, we will also cover targets for stocks where we have a low-cost basis already. We believe we are one of the only sites that continually covers pricing. We do not simply publish “buy recommendations” or a buy list. We hope this extra effort is worth its weight during this bear market. 

Daily Chart

For any readers who are interested in how I came up with the 2100-2340 scenario, I’ve included some charts below. They use a combination of Elliott Wave counts going back nearly a century, with Fibonacci ratios and standard technical analysis.

I believe we are in a C-wave down. The C-wave is a 5-wave pattern pointing down. It is characterized as a powerful move that shifts sentiment to an extreme, which is exactly what we are seeing. Towards the end of a C-wave, sentiment typically hits a hopeless state, and without a game plan, investors tend to make the wrong decision at the worst time. Investors collectively feel panic in unison, watching the same situation unfold, and it leads to moments of capitulation, usually right before the market reverses. We want to do the opposite and use technical analysis to remove the emotion. If you followed our stops and hedges, you should be sitting on a nice pile of cash as well as having some long volatility plays to counter the losses on the long side.

From what we know about 5-wave structures, I estimate that we are in the final stages of the 3rd wave, and are likely in the corrective move of the 4th wave, which means we have the final 5th wave down to go.

One of the technical analysts who I respect and uses similar tools thinks we could see a termination as low as 1800 over the next few months. My count is calling for 2100 as the deeper bear market bottom. I’m not sure I will push it this far for target re-entries. Either way, we will spell out our targets for each stock around this time next week.

Hourly Chart

The above chart is meant to show 2 basic things: (1) how the downtrend, so far, is following the expected 5-wave pattern down; (2) the amount of resistance overhead, which makes a standard V-shape recovery unlikely.

If you feel like you have missed out on the bottom, please note the level of resistance above the current price. There are numerous unfilled gaps, two bear market trend lines, multiple simple moving averages and the 3140 peak – all while facing unchartered territory of a virus pandemic.

Where We Go from Here

The major risk to the coronavirus, as it pertains to the markets, is a lack of consumer spending. Will the extreme measures of canceled schools, postponed professional sports, Disneyland closures, etcetera last for three weeks or eight weeks or something completely unpredictable. The spiral effect of consumer spending matters here.

The second risk is quantifying the exposure the financial sector has right now to the buildup of risky debts in the system, which is why the financial sector ETF (XLF) is leading the charge down at 25%, and the regional bank ETF (KRE) is down around 37%. If and when this scenario plays out is anyone’s guess.

To put a stop to this bear market, we will need to see the market close first above 2950 and then 3150 to note a new uptrend in place. However, the bear market cannot fully be squashed until we make new highs at 3400. I find this less likely than my bigger bear thesis, at this time.  

 

Position Updates

If you look at the Top Stocks List we published about ten days ago, you’ll see a column with stops. We followed those stops and logged gains on Chainlink at +44%, Shopify at +35%, Trade Desk at +32%, Telaria at +26%, BOINGO +9%, ALTERYX +9%, ELASTIC +5%, WORK +2%. We took losses on DATADOG -2%, BITCOIN -4%, Dynatrace at -9%, Inseego at -16% and a second position on Roku at -23%.

We do have some longer-term buy and hold positions that are unshakeable no matter how deep a selloff. These are Nvidia, Alibaba, Roku and Microsoft (we also provided stops for anyone looking to establish positions in these stocks within the last 6 months. We have been building positions for years in these positions, which is why we are willing to weather the drawdown with them). Subsequently, these are the stocks that Beth first covered prior to launching the site on Seeking Alpha. We were able to get a low-cost basis because of the Q4 2018 pullback.

Also, we are still holding Zoom (ZM). With the widespread use of Zoom into the global community through this outbreak, we have decided to both: 1) raise our conviction level on Zoom from 8 to 9, and hold our current position without stops. We are prepared to weather any drawdown that may come from panic selling due to our hedges, and will add to this position on any potential weakness. If you are uncomfortable holding without stops, please continue to use our recommended stops on the spreadsheet.

Zoom now joins a few other stocks that we hold without stops and have high conviction on: Nvidia, Roku, Microsoft and Alibaba. We fully expect many stocks on our list to join the “no stops, buy and hold” club in our portfolio after this bear market offers stellar long-term valuations.

We view this bear market/steep correction as a gift and will be re-entering any positions we stopped out of. As I mentioned above, our task over the next week is to evaluate each stock and publish a target re-entry for our readers. We expect that the broader market analysis we’ve diligently worked and laid out for you during this tumultuous market to be a good base for creating re-entry points. Without having done this work, re-entry would be complete guesswork rather than based on probabilities.

 

Lyft (LYFT)

So far, we are around 30% up on our Lyft short since discussing the hedge. We discussed waiting for a bounce to add. On that bounce, we initiated a short around $34 and so far, it’s been a remarkable hedge. We added more on Friday’s corrective bounce, which we disclosed on the form under Hedges, and we expect a bounce in the coming days/weeks as the price works off oversold conditions.

If Lyft crosses the 8-EMA, we will exit the short. We will look for re-entry when the market tops out, or breaks back below the 8-day EMA, which is currently sitting around the $30.

For all hedges we have a predefined exit such as using an EMA crossover, 25% trailing stop, a notable candlestick pattern, etc.

For these hedges, we will use the 8-day EMA as our stop going forward or a 25% trailing stop, whichever comes first.

 

Uber (UBER)

Our Uber short is up about 24% since our entry. We added more in the Friday rally, and will look to add more as the market tops out. You’ve heard me talk about symmetry on corrections. The symmetry on Uber is remarkable so far. The length of the first wave down (A), so far, is the exact length of the 3rd wave down (C).

Notice how the price closes right at the 100% extension of the A wave for 2 days in a row. If this level breaks, expect the 1.272 extension to come into play around $19-$19.50. We will use the 8-day EMA as our stop going forward or a 25% trailing stop, whichever comes first.

 

Slack (WORK)

We stopped out of Slack when it broke the $24.25 stop out price. We logged a fractional gain and are looking for re-entry. Considering that the structure now suggests that we are in an A,B,C  corrective pattern, the C-wave should target around $14. This is the 100% extension of the A wave.

The strong hammer pattern coupled with the fact that smart money is buying and the RSI is oversold, suggests a retest of the $24-$25 region. For any longs on today’s low, I’d watch for these levels. A fail there would suggest a potential retest of Friday’s low, at which point, I will look to re-enter.

The $16 price target will be the area I will look to build a new position.

 

Roku (ROKU)

Roku is a buy and hold position that we own with a cost basis of $29.88. This portion of our portfolio is being held without any stops.

However, we are always looking to add more in weakness. We like Roku and we like that it gets beaten up because it provides for new entries. Beth strongly believes once this company turns profitable, it will enter a new stage from volatile/speculative (market’s opinion) to a market darling. She’s laid out why she likes Roku in great detail across PDFs, blogs, etc – mainly hinging on Roku’s ownership of the operating system, device and ad exchange plus the mega trend of Connected TV ads.

The above chart outlines our recent plan for adding to Roku. This new position we held with a stop around $86. We layered in at $125, $115, and again at $100 with a stop just under $86. The stop was triggered and we sold this new position on Roku for a loss.

We are looking for re-entries, and suspect that we will be range bound in the coming week. Notice the shooting star pattern as well as the hammer pattern. This suggests strong volume at $86 and $74. I wouldn’t be shocked if Roku struggles to break out of this range.

Next week will be telling. One thing is certain, on the daily chart, the MACD is making new lows and the histogram has not moved up. Buying Roku in the $70 range is a phenomenal value; the broader market is likely not done yet with its sell-off per our TA above, hence we are back on the sidelines for our new position.

 

Datadog (DDOG)

Datadog blew through our stop at $39.60 on a large gap at the open of the market. We sold just under the stop due to the heavy volume, and ended up logging a 2% loss. The reason we chose this stop is because it was the absolute lowest level DDOG could drop while still maintain an impulsive 5-wave structure. Below this level and it sets up an entirely new structure, which we believe puts us in a C-wave down.

It’s worth noting that DDOG is very oversold and the MACD, at new lows, is straying to turn up. For anyone attempting to speculate on a bottom, this would be a good level to try. We are believers in this company and will look for a re-entry.

In fact, when the market broke down into the 2500 region, we announced that we are putting money to work. This is one of the positions we bought around $32. This was a speculative play to attempt to catch the shallow bear scenario we outlined. We will look to add more and will update you on target entry next week.

 

Pinterest (PINS)

We recently attempted to buy Pinterest above its all-time lows, with a stop just below that level. We stopped out with a 2% loss, once PINS made an all-time low below $17.39, and missed out on a large amount of the current downside. The question is – how much lower can PINS go?

The RSI is confirming a bear market, and is also suggesting a continued bounce for now. However, the Accumulation/Distribution indicator does not show that the Smart Money is buying PINS at this level. If Pins breaks below $13, then we can expect the selling to resume. However, if PINS can break back above the $19 region, it will invalidate my current expectation, and be strong evidence that the bottom is in.

 

Bitcoin (BTC)

 The above chart shows the long-term path we are tracking in Bitcoin. When looked at from a logarithmic scale, and not a price scale, it really puts into perspective the pattern as well as the bubble that caught the popular attention. The long-term trend is something we want to catch, and though the weekly risk management may be frustrating, it’s necessary when dealing with such a new and volatile asset like Bitcoin.

The micro chart is where this will play out for now. In short, we have 5-waves up, which is now building another 5-waves up on a slightly larger scale. Remember, when 5-waves builds into larger 5-wave patterns, the more bullish the structure becomes. If the price can break back above $5800 and hold, then break back above $6100, this will support the green count. If we break back down below $4300, it supports the red count.

The problem with these counts is that they both stretch the rules of Elliott Wave theory. They are both valid, but also both rare structures. Trading this 4th wave has been frustrating, to say the least. However, once we get a confirmed bottom and a renewed uptrend, any losses incurred can give way to gains. Until the price makes a decision, I will stay on then sidelines. Please keep in mind that below $4300 puts $1600 in play.

 

Chainlink (LINKUSD)

Please note: Chainlink is a crypto not listed on the public markets.

LINK broke through our stop and also the floor underneath the impulse we have been tracking. In breaking below the peak of wave-1, it broke a fundamental rule in Elliot Wave and completely invalidates 5-wave structure we have been tracking since the last bottom around $1.65.

This changes the structure into a likely leading diagonal, which suggests that Link has farther to go in order to complete the 4th pattern. We will look for a re-entry when the pattern gets close to completion.

Chainlink requires strict risk management, so opening and closing positions with strict adherence to stops. If you’re not comfortable with this, it’s not the right choice. We have opened and closed our position about four times since August with reasonable gains between 30-50% gains. I am active on the forum with this but it does require more active management.

From peak to trough, last week saw a correction that traced 15.86% while at the same time breaking the pivot support at 3000 level.

As of now, the 2880-2600 region is crucial, and will be the area in which this correction bottoms or turns into something bigger. Whether we are in the early stages of a bear market or we have struck some kind of bottom, we can expect an attempt a reflexive bounce in the coming days/weeks.

The market needs to work-off levels of oversold conditions, and it will be in this bounce that I will look to increase my hedges and potentially raise more cash.

Obviously, we are not market prognosticators, rather we try to prepare for all scenarios. In fact, as I wrote this today the futures were down 1.3% and are now up 0.5%.

Here’s a glimpse of what COVID-19 has done to China, so far:

One of the major global supply chains has been disrupted. Adding more liquidity in the system via rate cuts will not fully address a supply chain problem. The February/March data will not help the markets, as the global economy slows due to the uncertainty around pandemic fears. So, any attempt at adding to long positions should be done with caution.

On the other hand, I want to point out the number of buyers we found in the NASDAQ at the 200-day SMA.

The above chart shows the Nasdaq. Look at the level of buying that stepped with a spike of green volume at the 200-day MA (noted by the black line). This is a great sign for bulls and should signal, at minimum, a temporary bottom, while we work off overbought conditions.

So, I’d like to offer some perspective on our positions, which have held up quite well considering the blood in the streets. We want to offer you some scenarios that offer good risk/reward trades with an exit strategy that protects your capital.

We aren’t financial advisors. Instead, we are actively seeking the best tech stocks at the best prices.

Elastic (ESTC)

We spotted the same setup in Elastic as we saw in Zoom when it was below $70. In Elliott Wave, it’s known as a 1-2, i-ii setup, which we see just before a powerful wave 3 takes over. On the forum, we pointed this setup out, and put a stop just under $63.50 on the closing price. The stock closed at $63.80, then earnings propelled ESTC 18% in a market that was down around 3-4%.

The bad news is that the probability of this setup holding is not favorable, per my count. We saw negative divergences within the RSI, MACD and MACD Histogram, suggesting the momentum is just not behind the move. Also, the Accumulation/Deceleration line, which measures if the price move is supported with volume and if that volume is “smart money,” also diverged.

I am holding a stop just under $69.25 to protect the gains we got for this move.

Roku (ROKU)

Roku has provided us with clear support levels. The first was at $125, which held for some time. Now, we are trading within the $115-$112 region, which Roku is now struggling to maintain. The recent buying pressure to push it back into the range was weak, and the “smart money,” which typically positions in the final hours of a day, is not buying right now.

The MACD failed at the 0 line, and is now in a clear decline below the range that held price within the tight descending wedge pattern for many months.

My stop for Roku is just under $86, and I’ll move my stops up if we get a bounce here.

It’s also worth pointing out the valuation of Roku at these levels compared to its runway. We believe, even in a a global recession, Roku’s business model is primed for growth. However, the stock market can have moments of being extremely mispriced, especially with misunderstood tech. It is for this reason that I have a stop in place for any new positions.

Nvidia (NVDA)

Nvidia found heavy buying at the $244 support region I pointed out in the last market update, which also coincides with the 55-day EMA. This also coincides with the middle of the target box we were watching. For us to have a bottom in place, the $244 region will be the battle ground going forward.

Even in light of the drawdown we saw in the market last week, where the vast majority of stocks in the market are trading at or below their 200-day moving average, Nvidia held the 55-day EMA with the MACD staying above the 0 line.

For anyone looking for a reasonable risk/reward entry for Nvidia, one scenario is to consider is entering at current prices, with a stop just under $241. This is a good setup to play any upside, while protecting from any further downside that may play out. Like with other positions, move your stops up as price increases.

Qualcomm (QCOM)

Qualcomm’s internals, as shown by the MACD, are showing that the selling halted and began to turn up well below the 0 line, with the histogram confirming this. The 38.2% retrace level, which is highlighted in blue on the chart around $73-$72 found buyers to step in and halt the decline.

However, it’s worth pointing out that QCOM stalled just below the 200-day MA, which is the psychological barrier that separates a downtrend from an uptrend. I would want to see it take back this region, which I expect it will, based on how over sold it is now, as a sign that, at minimum, a relief rally is underway. For anyone looking to go long, I’d hold a stop just under this level. A good stop would be $72.50.

Alibaba (BABA)

Alibaba is showing a lot of strength at the $200 region. For anyone who has been following us since we first covered BABA on our premium site, when it was trading around $180, you’ll remember that the $200 region was a tough hurdle for BABA to break above. Now that the price cleared this zone on the way up, that region is acting as strong support.

The internals are showing an easing of the selling momentum at this region. The MACD histogram is showing positive divergence, as the price is beginning to turn up below the 0 line. The Accumulation/Deceleration index is actually going up as the price is going down, which means that the “smart money” is buying into this decline.

For anyone looking to go long BABA, current levels with a stop at $197 would be a reasonable risk/reward setup. We believe in the long-term business model of BABA. If the coronavirus beats the stock down, we think that will be a gift.

This is a company to own for the long haul; however, the stop will protect us from another leg down in the correction if we get it before a bounce.

Zoom (ZM)

Zoom has been a fantastic position to hold during the sell off. In fact, while the market is down about 13%, Zoom is up about 3%. However, notice the very large Bearish Engulfing Candle that engulfed most of the move since the correction began. This is not a good sign for Zoom. This specific candlestick pattern usually precedes a change in trend, whether this change is the beginning of a failed impulse, which we’ve been tracking since wave-1, or it’s the wave-4 pullback we have been waiting for, only time will tell.

I have provided 2 stops: (1) the tight stop would be just under $94; (2) the wide stop would be just under the AVWAP, which is just under $84.

The Trade Desk (TTD)

It’s worth pointing out just how strong the Trade Desk has performed during this correction. As of now, it is only down about 10%. It found a swarm of buyers at the 200-day MA. After earnings, it quickly took back it’s 55-day EMA, and also the 10-day EMA.

The MACD is still under the 0 line with the histogram beginning to turn up, which is signaling bottom of sorts. Also, the Accumulation/Distribution line is making new highs before the price. There is a good chance that TTD makes new highs in any relief rally we get.

For any longs, I would watch the 55-day EMA as support and even as a stop, which is around the $275-$270 region as I write.

Dynatrace (DT)

Dynatrace has retraced to the upper region of our target box and found strong support around the $30 region, which is highlighted in blue on the chart. This also overlaps with the 55-day EMA in blue on the chart. The Internals are suggesting that at current levels we have not seen an exhaustion of selling.

For any longs at this region, I’d suggest a tight stop around $29.40 just in case we break this support. We have raised our stop to this point to protect our gains. Below here and we will likely see the $27.50 region come into play pretty quickly.