Tech breakout

Say “tech” and many people probably think “FAANG,” but tech is a big tent, and there’s a whole lot of action in the sector away from the marquee names.

Consider EPAM Systems (EPAM), a “small” global tech company (market cap $6.6 billion) that provides high-end computer engineering and consulting services in dozens of countries, and whose stock broke out to a record high on Friday.

It’s no secret that tech has led the market’s current rebound; over the most recent five trading days the Nasdaq 100 index (NDX) rallied around 3.5%. Meanwhile, though, EPAM galloped ahead at a nearly 7% pace. And that’s been the case for at least a few months. The chart below shows the stock’s relative strength vs. the Nasdaq 100 index (NDX) since last October, a period when EPAM more than doubled the tech index’s percentage return.

EPAM Systems (EPAM) and Nasdaq 100 (NDX), 9/26/17–3/12/18

Source: OptionsHouse

Although EPAM has been around since the 1990s, its stock has been publicly traded only since February 2012. And aside from a contraction in 2016, it’s mostly been on a fast track higher. In addition to making Forbes’ list of Best Small Companies in 2014, EPAM came in at No. 12 on its “Fast Tech 25” list of the fastest-growing tech companies last year, boasting 28% three-year average sales growth.1 Its shares surged on February 16 after the company released Q4 numbers that beat both earnings and revenue estimates; the stock also received at least one raised price target (to $130).2

Zooming in on the recent price action shows that after the stock joined the NDX in breaking out to record highs on Friday, it followed up with another big day yesterday, gaining more than 2% and topping $125. The higher March low formed what chart analysts would identify as an ascending triangle, a “consolidation” pattern that is typically interpreted as a pause in price action that implies a continuation of the trend that preceded the triangle—in this case, up.  The breakout has occurred, so the question is whether the stock can extend the move.

EPAM Systems (EPAM), 11/30/17–3/12/18

Source: OptionsHouse

While past performance does not guarantee future results, to get a handle on what EPAM could do in the near future, it may help to look at what has happened after the stock has made similar moves. There have been 80 upside breakouts where EPAM made at least a 30-day new high and gained at least 1% on the breakout day (in this case, Friday). The results after these breakouts are bullish, but also support the idea that prices tend to cool a bit immediately after a high-momentum move: The stock was higher after one day (i.e., Monday), but then sometimes drifted sideways to lower for a day or two before getting back in gear. Ten days after the breakout, though, the stock’s median gain was 1.47%.

When a stock breaks through a well-defined resistance level like the one EPAM just did—especially on strong momentum—it often will return to test that breakout level before moving higher. EPAM could pull back anywhere from the breakout level (around $119.20) to the trendline defined by the February and March lows and still keep its longer-term uptrend intact.

Hot markets can be enticing, but they require cool heads to trade them successfully.


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1 Forbes. Fast Tech 25 2017.

2 EPAM Systems (EPAM) PT Raised to $130 at Needham & Company; Strong Revenue Momentum to Continue. 2/16/18.