The Gilmo Report

April 11, 2018

April 11, 2018

I generally find follow-through days to be somewhat useless when it comes to determining the future direction of the general market. In a market like this, where news instability can create sharp and sudden swings in either direction, it’s difficult to tell whether a follow-through is real or just a function of a volatility twitch. Ultimately, the action of individual stocks tells the full story, and as I noted in last night’s special video report there wasn’t a large number of stocks setting up on the long side.

In addition, the index action wasn’t all that powerful, despite qualifying as a follow-through day across the board.

However, there were some favored names hanging along support, which at least created some possible lower-risk entries. Some of these, as we’ll see, had a decent day today. But with the trade war of words simmering down, a new flow of news took up the slack. This came in the form of an impending strike against Syria as punishment for again using chemical weapons against its own people. Overnight, futures markets were rattled and we were treated to yet another morning gap move, this time to the downside.

Buyers appeared to shy away from the market as the indexes all declined on lighter volume vs. yesterday’s levels. The NASDAQ Composite Index lost momentum at its 20-dema and reversed. Note how yesterday’s follow-through looks rather meager relative to the thrust shown on prior up days in the chart. This is what makes me skeptical as to the longer-term viability of this follow-through day, but we can simply focus on the action of individual stocks as a concrete way of handling this uncertainty.

 

GR041118-$COMPQ

 

The S&P 500 Index ran into resistance at its 20-dema as well on tepid volume. It has very little upside thrust showing on the follow-through day. Note how the action is stalling slightly, as it is on the NASDAQ’s chart, with the close about 2/3rds of the way up the daily price range. In a sense, it looks a bit like a stalling follow-through day. Whether this is significant or not will soon be proven out.

 

GR041118-$SPX

 

The big story dominating the financial news yesterday and today was Facebook (FB) CEO Mark Zuckerberg’s testimony before Congress regarding the misuse and abuse of user data. Donning a suit for perhaps one of the very few times in his life, the young CEO more or less “passed” the testimony, but some questions remained. FB is, in my view, more reactive that proactive when it comes to plugging holes in their business. This is, however, understandable given the fact that social-networking is a relatively new business with the usual growing pains.

This took the stock up into and above the 20-dema on a strong-volume move yesterday, and it again moved higher today. Both days would qualify as five-day pocket pivots at the 20-dema, but notice that the stock is also running into resistance at the prior 167.18 low where it stalled today on heavy volume. In order to determine whether this has a shot at forming a low here, I’d want to see the stock hold tight along the 20-dema as volume dries up, as I’m not willing to chase it up here.

 

GR041118-FB

 

In terms of actionable long ideas, big-stock NASDAQ names don’t really catch my fancy. Yes, they will likely rally IF the general market follow-through ends up working, but the only one that looked buyable to me in last night’s video was Netflix (NFLX). This was based on the simple fact that it is one of the very few big-stock NASDAQ names looking somewhat robust along its 50-dma.

And NFLX did gap up this morning in the face of a market gap-down at the open, but stalled as it attempted to approach its prior highs. The trick here is that you had to buy it along the 50-dma yesterday, and now it’s a matter of seeing whether it can hold the 20-dema, not too far below today’s intraday lows.

 

GR041118-NFLX

 

Tesla (TSLA) may be set to eat up the shorts again after a big-volume rally off the lows of last week. As I noted over the weekend, it has traded right up into the underside of a five-month consolidation, where we would expect to see at least some temporary overhead resistance. Thus, if it can hold tight along the 20-dema here as volume continues to dry up, then it may have a reasonable shot at heading for the 50-dma if the general market is able to move higher.

 

GR041118-TSLA

 

I continue to view the cyber-security area as one to focus on, and in last night’s special video I discussed two additional names as variations on the theme, Okta (OKTA) and Sailpoint Technologies (SAIL). Both are recent IPOs in the space, and have been building bases during the recent market correction. OKTA came popping out of a low-base formation today, just missing a pocket pivot by one day.

I like OKTA on any small pullback down toward the 10-dma and 20-dema. However, if you saw last night’s video, you knew to attempt the entry right at the moving averages, with a nicely profitable move coming rather quickly in the day. Instant gratification!

 

GR041118-OKTA

 

While OKTA offers authentication services as part of its product mix, Sailpoint Technologies (SAIL) provides identity management. It was sitting along the 10-dma last night as volume was drying up sharply to -51% below-average, well below minimum “voodoo” volume levels. That was therefore buyable along the line this morning, and the stock immediately responded with a strong 8.74% gain on big volume. It’s extended now, but another set-up that provided instant upside gratification on a day when the market indexes were quite soft.

 

GR041118-SAIL

 

Other names in the space that I’ve discussed in recent reports have also sprung to life this week, such as FireEye (FEYE). The stock, pulled into its 10-dma yesterday, but as I noted in my video last night, posted a pocket pivot at the line, despite the stall-out and close in the lower end of the daily price range. That was an opportunistic entry point, and buyers had another opportunity this morning as the stock opened down slightly.

FEYE then launched higher to post a strong pocket pivot on the day in the face of a weak market. This coincided with a nice trendline breakout, such that pullbacks to the trendline might provide lower-risk entry opportunities from here.  But, obviously, the spot to buy it was at the 10-dma this morning per my video comments last night.

 

GR041118-FEYE

 

Fortinet (FTNT) broke out yesterday but on below-average volume. This morning Morgan Stanley downgraded the stock to “equal-weight,” sending it back to the downside, but it found support at the 10-dma, which brought it into buyable range. Volume was heavy, which is not surprising given the downgrade, so I’d want to see how this is able to stabilize and hold along the 10-dma and 20-dema while volume dries up in the coming days.

 

GR041118-FTNT

 

Palo Alto Networks (PANW) announced that they are in an agreement to buy an Israeli cyber-security firm, which sent the stock back to the downside. But it was already extended as I noted in previous reports, thanks to the big pocket pivot breakout last Thursday. So, this pullback has served to bring the stock back into its 20-dema, where it offers a lower-risk entry point. The stock held the line again today as volume declined to about average, keeping it in buy range with the idea of using yesterday’s low or the 20-dema as a selling guide.

 

GR041118-PANW

 

CyberArk Software (CYBR) also acts well as it holds tight along the 10-dma with volume drying up to -66% below-average today. It is the thinnest of the cyber-security names I have discussed in this report, but is in a very buyable position with the idea of using the 10-dma or 20-dema as your selling guides. In my view, cyber-security names remain poised to assume a leadership role IF (and they may be a big “if”) we see a sustainable market rally from here.

 

GR041118-CYBR

 

If I was looking for shorts I might go after if this current follow-through ends up failing, Square (SQ) is a potential candidate. However, I must admit that I view this as a two-sided situation. It is still holding above the prior cup-with-handle breakout point and its 50-dma, despite running into resistance at the 20-dema today on weak volume.

So, the question is whether this is a possible L-formation en route to a “LUie” type of recovery, or whether it is in fact a late-stage, failed-base, short-sale set-up in progress. I suppose that will depend on where the general market goes from here, but it was possible to scalp it on the short side today when it rallied into the 20-dema. For now, we’ll just have to see how this plays out within the context of whether this current market rally attempt flies or fails.

 

GR041118-SQ

 

Lumentum Holdings (LITE) looked buyable along its 50-dma per my discussion in last night’s video special, and sure enough, the stock popped off the 50-dma nicely today. Volume was light, but the move was still impressive in the face of a weak general market. The stock is likely working on the lows of a new base, so I’d keep an eye out for any low-volume or otherwise successful retest of the 50-dma from here as a lower-risk entry opportunity.

 

GR041118-LITE

 

Applied Materials (AMAT) is still in effect as a late-stage, failed-base, short-sale set-up, but it has been a bit erratic on an intraday basis. The stock looked like it was in trouble on Monday as it reversed to the downside to close near its intraday lows. It then rallied yesterday, and today completed a three-day wedging rally up into the 20-dema and 50-dma where it promptly reversed.

For now, I think I’d be willing to test this on the short side on any further rallies up into the 50-dma, which has served as clear near-term resistance over the past two weeks. Thus, this is a “go to” name on the short side based on the LSFB set-up. If it can convincingly clear the 50-dma and near-term resistance, then it’s just a quick stop-out.

 

GR041118-AMAT

 

Weight Watchers International (WTW) is looking like a head and shoulders top in progress, but so far hasn’t broken down to its current neckline. Right now, the stock is living below its 50-dma, 20-dema, and 10-dma, but volume remains indecisive. I could see this resolving in either direction from here, frankly, and this could include another rally and test of the 50-dma.

Last week, WTW failed near the 50-dma and reversed from there. Plumbing lower lows on Monday. The stock has turned with the market as it runs up into the lower 10-dma, which might make it a short right here. But the stock sells at about 18 times next year’s earnings, so I think it there is also a chance that it is currently just working on the lows and right side of a potential new base.

Does that mean it will undercut and test the March 6th low at 57.57, perhaps bouncing off the theoretical neckline, or does it work its way back up to the 50-dma from here? This is one to watch closely as it evolves within the current general market context. If the follow-through fails, then it may test that prior low. If the FTD works, then it may be headed higher from here.

 

GR041118-WTW

 

Atlassian (TEAM) moved higher today, thanks to the fact that the general market did in fact perk up, as I wrote it had to over the weekend. It’s now extended, but pullbacks into the 20-dema as 56.17 would offer lower-risk entries from here. I still tend to think, however, that the stock needs to do more work on its base. But then, I felt that way over the weekend, and the stock just thumbed its nose at me and moved higher.

Nutanix (NTNX) is another name that I felt needed more work, and it of course has made a liar of me by rallying back above its 20-dema and 10-dema. Volume has been below average as it pushes up near its prior highs, so I’d look for some sort of set-up on a pullback to the 10-dma/20-dema confluence on light volume as a lower-risk entry or re-entry.

Otherwise, there is also the possibility that this peak yesterday turns out to be the mid-point of a possible double-bottom that forms after a retest of the prior March 28th low when the stock retraced 50% of its prior breakout move. The question is whether more sellers show up again as they did in late March off the peak when the stock sold off hard.

 

GR041118-NTNX

 

Carbonite (CARB) remains unresolved within an L-formation as it holds excruciatingly tight along its 10-dma and 20-dema. Volume remains dry as a bone here, coming in today at -61% below-average today. While CARB is in the data storage group, I also see it as a cyber-security play. That’s because it allows one to automatically back up their files, providing a measure of protection against ransomware since one can just reload their files from CARB’s cloud storage facility.

So, while we haven’t seen any instant gratification on this one like we did with OKTA and SAIL, it could still be setting up for a possible “LUie” move where the L-formation evolves in a U-formation. Again, if this market rally and follow-through holds up, then eventually CARB is likely to make the LUie a reality.

 

GR041118-CARB

 

For newer members: Please note that when I use the term “20-day moving average,” “20-day line,” or “20-dema” I am referring to the 20-day exponential moving average. I use four primary moving averages on my daily charts: a 10-day simple (the magenta line), 20-day exponential (the green line), 50-day simple (the blue line) and 200-day simple moving average (the red line). On rare occasions, I will also employ a 65-day exponential moving average (thin black line). In all cases I will mostly use the shorthand version of “10-dma,” “50-dma,” etc.

With the potential for a U.S. missile strike against Syria occurring overnight at any unknown time, the market rightly seems a bit jittery here. But, despite the weak general market action, there were some good trades to be had today based on my short video special posted last night in the Gilmo Live Blog section of the website.

A missile strike could turn out to be a clean, no-mess affair that, once out of the way, eliminates the current uncertainty and sets things back on their upside path. Or it could lead to complications that only add to the uncertainty, and perhaps unnerve the market more significantly, leading to an outright follow-through day failure. That’s the new wild card in this market, at least for the short-term.

So, the only way to approach it is concretely, by focusing on the individual stock set-ups. Today’s action did not kill the follow-through day, so that, for what it’s worth, it still is in force pending further evidence to the contrary. Therefore, I continue to look for set-ups on either side of the market, with the idea of acting depending on how things play out on this latest bit of news-based uncertainty.

This is still a tough market, as evidenced by today’s lack of follow-through to yesterday’s follow-through. As well, long set-ups may only turn out to be short-term trades, so one must remain opportunistic and alert, seeking to take advantage of the volatility that the current news flow creates. That is all.

Gil Morales

CEO and Principal, Gil Morales & Company, LLC
Managing Director and Principal, MoKa Investors, LLC
Managing Director and Principal, Virtue of Selfish Investing, LLC

At the time of this writing, of the stocks mentioned in this report, Gil Morales, MoKa Investors, LLC, Virtue of Selfish Investing, LLC, and/or Gil Morales & Company, LLC held no positions, though positions are subject to change at any time and without notice.

Gil Morales & Company, LLC (“GMC”), 8033 Sunset Boulevard, Suite 830, Los Angeles, California, 90046. GMC is a Registered Investment Adviser. This information is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to GMC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Gil Morales & Company, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.