This week in Our Outstanding Service We offered an investor training program. Quite simply, this is a weekly webinar that amounts to the analyst training you would receive at Big Money, LLC, if said Master of the Universe store were more pessimistic than what is normally permitted in Corporatesville, USA. We’ll cover fundamental and technical analysis – with more than a little help from our friends at TrendSpider, whose CEO stopped delivering the platform’s capabilities to our members last week – and so much more. How do you explain earnings calls, that kind of thing. (Clue: Ignore virtually all spoken words – listen instead for spaces between words and unspoken words.)
We started the series with a topic that everyone wants to know, which is how to spot a buying opportunity. Next week we have how to spot a selling opportunity, which is probably more important but for some reason less exciting to people, many of whom have read a lot of buffs to think about taking a profit.
Let us guide you to an example of a purchase opportunity we used, which was DataDog(). This is a software company that sells nerdy stuff to geeks who work deep in the guts of the enterprise. The company sells a kind of Stasi app that spends all of its time watching other parts of the organization’s IT suite. It does not have a great deal of competition, and its customers have to purchase said app from one of the few vendors. Therefore, it has pricing power, long-term contracts, and large cash flow margins. Before we get to the interesting part – the graph – let’s deal with the number bits. We have more core analytics experience in our store than that of healthy humans, so consider that’s a good shape, except for the low growth rate in the order book that the company needs to get and fix in the next couple of quarters.
(Sources: SEC company filings, Cestrian analysis)
OK, so the numbers are good with one grumble. Fine. The valuation is what you would expect from a banzai software company that is growing at 79% annually – the market is asking you to pay just 23 times TTM revenue for this pup. But enough reality, let’s get to the real workplace, and that’s the stock chart.
Let’s look at the arrow in two different ways. First, here’s the weekly since the IPO. (You can open a full page version of this graph here).
If the candles look weird by the way – that’s because they aren’t candles. It’s raindrops. This is a proprietary TrendSpider tool that includes a volume-weighted average price during each measured period – and better yet, it shows you the first and second half of the individually measured period. This is a much richer way to view price action than a simple candle alone. We are using these raindrop charts more and more in our work – you can read more about them here.
return to . For recent IPOs, we find that the graph from the theoretical zero price can be useful in identifying subsequent levels. Here we show a 5-wave move up from that theoretical zero to the 2021 high at shy of $200/share. Come on the correction to developing stocks in the fourth quarter of last year, and then put the name in the ABC textbook A three-wave move down, with the C leg being a bit longer than the A leg (an indication of confidence that selling may have stalled). To add to the notion that we may have bottomed out in this cycle, the end of that C leg occurred near the 0.618 Fibonacci retracement level of the entire five wave bullish movement. This is the characteristic level for such a corrective movement to find support. Finally, look at the volume of stocks trading in the price zone between the retracement level of 0.618 (call it $75 a share) and the bottom of the 1st segment (call it $110/share) – these are the faint blue bars on the right side of the chart above. This is a large number of shares traded. It’s an area of high-volume nodes that tells you that it’s very likely that this is an institutional backlog.
Let’s now look at the daily stocks. Full page version, here.
Here we can see the hash rate of trading activity at the bottom of the chart. When looking for evidence to confirm or reject the idea of institutional backlog, we set the starting point for volume in price after the recent spike in retail activity in February. And we see a bunch of oversized knots after the retail spike – in the $85-$110 or so range. Which appears to us as additional evidence to support the idea that this stock is accumulating, in preparation for a possible rally.
Now let’s zoom out to monthly. Full page version, here.
Here we plot the first wave of greater degree (from theoretical zero to the peak of Q4 2021) and wave 2 down (graded in this textbook 0.618 of the higher wave 1 retracement) and show a possible combination of waves 3, 4 and 5. A typical target of wave 3 is to extend by 100% for wave 1 – same as saying, take the stock price movement made in wave 1 and add that to the stock price at the bottom of wave 2 and that makes us a target of $292, almost 3 times the money from here. This may sound crazy, but this is a very high growth company that may currently be under institutional backlog. If the arrow makes it to the coding part of the next cycle, that’s not an overly ambitious target. Then we draw a typical shallow wave 4 and a modest wave 5.
So there you have it. Could things go wrong tomorrow, of course, but based on today’s evidence? You have a recent low to place a stop loss order; You have potential institutional buildup in the current price zone, and you have a really achievable long-term price target. And that, to our tired—nay, wary old eyes—sounds like a disguised buy.
Disclosure: The personal accounts of Cestrian Capital Research, Inc employees hold long positions at .
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Cisterian Capital Research, Inc – August 24, 2022
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