Week 20 Breakout Forecast: Short-Term Picks To Give You An Edge

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Includes: CARA, CBAY, CFMS, CMRX, CYRX, ERII, MCD, MRNS, PETX, PPDF, QD, STKL, TRV, TTGT, TZOO, VERI, YETI, ZS
by: JD Henning
Summary

Two sample Breakout Stocks for Week 20 with better than 10% short-term upside potential.

Analysis this week is on breakdown conditions in the Momentum Gauge indicator to the worst recorded values since October 2018.

S&P 500 down -2.19% from first Momentum Gauge breakdown signal on May 1.  Negative signals have continued six of the last eight trading days.

The streak continues now with 86 out of 104 trading weeks (82.7%), with at least one stock move 10% or greater in four or five trading days.

Two Best of the Dow 30 for mega-cap selections this week with strong breakout conditions are McDonald's and The Travelers Companies.

Introduction

The Weekly Breakout Forecast continues my doctoral research analysis on MDA breakout selections over more than five years. This subset of the different portfolios I regularly analyze has now reached 104 weeks of public selections as part of this ongoing live forward-testing.

In 2017 the sample size began with 12 stocks, then eight stocks in 2018, and now at members' request for 2019, I generate four selections each week. Remarkably, the frequency streak of 10% gainers within a four- or five-day trading week remains at highly statistically significant levels of 86 out of 104 weeks (82.7%). More than 150 stocks have gained over 10% in a five-day trading week since this MDA testing began in 2017.

Starting at the beginning of May, we have seen the most negative signals on the Momentum Gauge since October 2018. These daily breakdown signals also corresponded to the midweek declining performance of the Week 19 stocks. Members have been alerted since the first signal on May 1st that we have now had six out of eight trading days with negative momentum higher than positive momentum levels. This is the most negative momentum condition since Week 39 last year, approximately eight months ago.

Momentum Breakout Stock Portfolio 2019 results YTD

All-time total return is now +77.08%

Risk Range Graph Skews Highly Positive

Cumulative Weekly Max Gain YTD: +139.47% (Best case)

Fixed Holding Period With No Reaction to News/Events: -11.53% (Worst case)

The evidence is strong that you can outperform the worst-case fixed one-week, equal weighted minimum return measurement shown above in the 1 Week Close (blue line). The best results are now coming from longer-term holding periods beyond one week. This is showing a return to prior patterns in 2017 and 2018 where a fixed three- and four-week holding pattern became the optimal period as more data was acquired.

As I always tell traders, don't fixate on holding periods or arbitrary price targets offered by analysts with no clear time horizon. The best gains are made by monitoring the conditions of the indicators that signaled a strong buy in the first place and hold as long as these buy conditions remain intact.

Year to date through May 10th, the largest gains of the week for the S&P 500 are occurring on Friday. In fact fully 70% of the S&P 500 gains are occurring on the last day of the week, and in many cases like last week, the most substantial gains were in the last four hours of Friday.

2019 YTD S&P 500 average daily returns

(Source: Value & Momentum Breakouts)

Momentum conditions are highly negative this week; however, momentum remains strongest among these prior breakout stocks YTD: TechTarget (TTGT) +52.83%, Marinus Pharmaceuticals (MRNS) +32.09%, CymaBay Therapeutics (CBAY) +37.57%, Cara Therapeutics (CARA) +11.43%, PPDAI Group (PPDF) +38.99%, Qudian (QD) +27.76%, Veritone (VERI) 11.91%, YETI Holdings (YETI) +21.49%, Travelzoo (TZOO) +40.58%, Energy Recovery (ERII) +14.18%, Aratana Therapeutics (PETX) +26.22%, Cryoport (CYRX) +16.18%, Conformis (CFMS) +38.72%, SunOpta (STKL) +22.41% and the current set of Week 20 Breakout stocks.

In week 18 of the prior week, the Momentum Gauge chart had the first negative cross in 31 weeks with negative momentum line above the positive momentum line for two days. Since then, we have seen four more days through week 19 of additional negative signals. The total comprises six negative momentum days out of eight days for the first time since the major decline in October 2018. Several warning signals in addition to the Momentum Gauge decline have been triggered. These conditions may be macro-event driven and could be resolved quickly with sudden trade deals or changes in Fed policy. A look back at the signals of decline in October 2018 may be helpful:

8 Warning Signals Of Deteriorating Market Conditions

Contributing factors could also be a delayed impact from the $30 billion quantitative tightening event in Week 18. The China-US trade deterioration in the talks with increased uncertainty and a new hike of $250 billion in tariffs against China on Friday. Escalating conditions with Iran and North Korea could also be contributing additional macroeconomic pressures. The positive spike on May 6th between the two elevated negative momentum values corresponded with the surprise increase in April job numbers, 38% above forecasted expectations. Nevertheless the trend has turned distinctly negative and caution is highly warranted.

(Source: Value & Momentum Breakouts)

Using the signals of the Momentum Gauge may significantly improve your returns in 2019 and protect your investments. Two conditional signals that are very important to watch:

  • Avoid/Minimize trading when the Negative score is higher than the Positive momentum score.
  • Avoid/Minimize trading when the Negative score is above 70 on the gauge.

The Week 20 - 2019 Breakout Stocks for Next Week Are:

The four Breakout Stocks for Week 20 were released earlier than usual on Friday for members to take advantage of the increasingly strong Friday market gain anomaly. The portfolio is already up +2.25% from midday Friday. The Week 20 stocks consist of one technology stock and three healthcare sector stocks:

  1. Chimerix (CMRX) - Healthcare/Biotechnology
  2. Zscaler (ZS) - Technology/Security Software & Services

Chimerix - Healthcare / Biotechnology Price Target: 4.00

(Source: FinViz)

May-09-19 02:08PM Edited Transcript of CMRX earnings conference call or presentation 9-May-19 12:30pm GMT - Thomson Reuters StreetEvents
May-09-19 09:25AM Chimerix Reports Q1 Loss, Tops Revenue Estimates - Zacks
May-09-19 08:25AM Chimerix: 1Q Earnings Snapshot Associated Press

Chimerix, Inc., a biopharmaceutical company, discovers, develops, and commercializes medicines that address unmet medical needs in the United States. The company's lead product candidate is brincidofovir, an investigational nucleoside analog for the prevention of viral infections in hematopoietic or stem cell transplant recipients, as well as for the treatment of adenovirus infection and disease, smallpox, and BK virus infection in kidney and HCT transplant recipients.

Zscaler - Technology / Security Software & Services Price Target: 85.00

(Source: FinViz)

May-10-19 04:33PM Hot IPO Stock Zscaler Surges Into Buy Zone After Strong Breakout - Investor's Business Daily
May-10-19 01:04PM Uber IPO: See Lessons From Facebook, Alibaba, Snap, Lyft Before Investing - Investor's Business Daily
May-08-19 05:50PM Zscaler (Gains As Market Dips: What You Should Know - Zacks

Zscaler, Inc. operates as a cloud security company worldwide. The company's flagship services include Zscaler Internet Access solution that connects users to externally managed applications, including software-as-a-service applications and Internet destinations; and Zscaler Private Access solution, which is designed to provide access to internally managed applications, either hosted internally in data centers, and private or public clouds.

Top 2 Dow 30 Stocks to Watch for Week 20

Applying the same breakout model parameters without regard to market cap or the below-average volatility of mega-cap stocks may produce strong breakout results relative to other Dow 30 stocks.

While I don't expect Dow stocks to outperform typical breakout stocks over the measured five-day breakout period, it can provide some strong additional basis for investors to judge future momentum performance for mega-cap stocks in the short- to medium-term.

The top two stocks based on the same published breakout parameters for this week are also prior picks:

McDonald's Corporation (MCD)

Selected in previous weeks, MCD continues in strong technical breakout momentum conditions at new highs. Indicators are all strongly positive with breakout conditions accelerating. The stock looks poised to break well above the 200/share price level on strong positive technicals and fundamentals.

The Travelers Companies (TRV)

A first time selection this year, Travelers shows strong positive momentum conditions and good technicals for a breakout well above the 145/share resistance level.

Conclusion

These stocks continue the live forward-testing of the breakout selection algorithms from my doctoral research with continuous enhancements over prior years. These Weekly Breakout picks consist of the shortest duration picks of seven quantitative models I publish from top financial research that include one-year buy/hold value stocks.

The Momentum Gauge index has not been more negative since October 2018 and strong caution is warranted.

All the very best to you and have a great week of trading!

JD Henning, PhD, MBA, CFE, CAMS

Disclosure: I am/we are long UWT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Caution: These stocks are not necessarily recommended for long-term buy/hold unless you are comfortable with very large price swings. These are the most volatile selections I offer from among all the different Value & Momentum portfolios. Entry price points are highlighted in yellow as a general point of entry as market conditions allow in the next trading session. Members of my service receive these selections prior to the close every Friday.