Markets gapped up and closed strong on Friday, albeit on a below-average volume summer session. Price is acting constructively and there are more stocks starting to set up nicely every day, but the indexes in general have a lot more to go by way of proving strength and a long-term bottom formation. I’m still skeptical of this rally’s strength: volume has been light, we’re still below declining key moving averages, and there’s a lot of resistance close overhead. Stay on your toes in case of a downside reversal.

Several stocks are setting up entry points, and there are two ways that I like to buy stocks coming out of a correction; Buy 1-2 (or more) stocks with smaller position sizes, or buy one stock with a normal position. In either case, I’ll wait until the position(s) show me a decent profit to prove the market is working before adding more exposure. This allows me to manage risk and portfolio downside while getting a feel for how trades are working in the market environment.

Tonight I’ll cover the stocks I’m watching closely early this week for potential entries. Let’s get into it!

Index Update

The Nasdaq is back above a roughly flat 21EMA as of Friday’s close, while net highs/lows are still net negative, though just barely. This signals caution on long positions until net highs/lows can flip positive for the first time since April 4th. The market has returned -18% since then.

Volume has still not come in on the growth index, though price back above the 21EMA is a positive sign. Still, there is a lot of potential supply just overhead with the 50-MA and prior areas of significance that should prove as resistance. Higher volume will likely be needed to overcome these price areas.

The S&P-500 closed just above the 21EMA but on relatively light volume. Watch for the 21EMA to hold as support tomorrow, and for higher volume to come in to push price above the 50MA.

Stock Updates

Halozyme Therapeutics (HALO) came back in to test the breakout point and 21EMA, and it held both convincingly, proving its strength in the process. I noted to take some profit around +9% and move stops up to even on the rest, so you may have been stopped out on the swing-low. In hindsight, it would have been better to keep the original stops while it tested these areas.

Merck (MRK) is a slower-moving drug manufacturer, but it has a solid chart pattern with relative strength and dry-up in volume through the base. The buy point is a breakout through $95 on much higher volume with stops at $93.

Sierra Wireless (SWIR) broke out of a shallow cup base on high volume, but hasn’t yet followed through. I noted that it could be bought on a test and hold of the $25 area, which occurred on Friday. Now I’m watching for a powerful move above $26.40.

Best Setups

The setups below are ideas, not outright buys; placing a trade is discretionary and depends on both the price action and volume. To succeed, you’ll need to make the trade your own based on your rules for entering and taking profits, and always use a stop-loss!

Li Auto (LI) is a China-based electric vehicle company with stellar earnings and revenue growth. It’s up over 100% from the lows it set in May and now price has tightened up over the past few weeks. The first buy point is a move through $39 and the second is through $40 with power volume. Stops at $37.50.

Chewy (CHWY) is looking less and less like a short-covering rally after a large move up from the lows kicked off by the highest volume since IPO day. Now price has tightened up just under the 200-day, signaling a lack of sellers even after big gains. It has printed two inside-days in a row, so the buy point is a move up through Friday’s high at $43.40 with stops at $41.30.

Celsius Holdings (CELH) is getting busy working up the right side of a potential cup-with-handle formation on the weekly chart below. I don’t see a great entry on the daily chart here, but it’s one to watch over the next few weeks both as a potential leader and as a signal for what growth stocks might do next.

That’s all for tonight! See you back here on Wednesday night for an update on our stocks.

Cheers,

Danny Deals