Buying the Turn

After the Selloff

The Nasdaq Composite fell 2.9% Friday and another 1.1% Monday. Twilio took a bigger hit. Its shares fell 15.2% Friday after the company reported 20% revenue growth and raised its full-year free cash flow outlook.

When a business is growing through a selloff, we look for the point when buyers start to come back. A stock making fresh lows can keep falling. By the time it has rallied 50%, the price that made it interesting may be gone.

How We Look for an Early Recovery

Our Fundamental Early Recovery screen starts with stocks on our watchlist that are at least 20% below their highest close over the most recent 63 trading sessions. We look for a close above each of the preceding five closes. We also want 14-day RSI, a measure of price momentum, to be at least 35 and higher than it was five sessions earlier.

Then we revisit the business. Has management held or raised its outlook? Are the operating numbers we based our investment case on still holding up? A stock can clear the price screen and still come off our list if the reason we followed the company has changed.

What We’re Watching Next

Twilio bounced 1.2% Monday and still closed below several of the preceding five closes. We’ll watch for a close above that rolling range. The next business checkpoint is whether Twilio delivers on the higher cash flow outlook that made the selloff worth a look in the first place.