The Gilmo Report

April 13, 2016

April 13, 2016

The market continues to follow the pattern that I’ve discussed several times in recent reports. Each time it starts to weaken, leading stocks begin to pull back in earnest, reaching points of logical support. However, in the process, the action looks somewhat questionable and perhaps a bit dangerous. This makes its difficult from a psychological standpoint to step in and buy stocks right at what end up being their most optimal and opportunistic entry points.

By yesterday’s open, the NASDAQ Composite Index had already closed three days in a row underneath its 200-day moving average. The prior two days, last Friday and this past Monday, it actually opened up before reversing back below the line. Yesterday morning another gap-up open was immediately sold into as the indexes reversed, with the S&P 500 and the NASDAQ pushing into the red.

As the morning progressed, the Dow Jones Industrials Index was on the verge of joining its index brethren in negative territory. At that point, news of a deal between Saudi Arabia and Russia to freeze oil production in an attempt at supporting lagging oil prices sent the indexes rocketing in the other direction, back to the upside.

Before the news, I was actually salivating over the prospect of another index reversal that might be more decisive to the downside. Once everything started jacking to the upside, however, I also noticed that a large number of stocks on my buy watch list were bouncing off of their 20-day exponential moving averages, and some, like Facebook (FB), were coming up off of their 5-day moving averages. This sent me flipping out of my shorts and back to the long side.

Thus within the context of where stocks on my long watch list were trading, the market bounce was logical. And the logic was also consistent with the way the market has acted over the past few weeks. When it looks ugly, and leading stocks are pulling into logical areas of support, that’s the point where one has the best chance of getting away with shrewd opportunism by stepping in and buying shares. Of course, at the time, that is not such an easy thing to do.

And so the market becomes a difficult beast to deal with as it remains in an extended position after a strong rally off of the February lows. One has to maintain total awareness of where stocks on both their long and short watch lists are trading and be able to put the puzzle’s pieces together quickly in order to react fast enough.

Today the market built on yesterday’s reversal as all the major indexes pushed to higher highs, as the daily chart of the NASDAQ Composite Index shows below. Volume came in higher as the index gapped up and pushed to its highest high since the February lows. This can only be viewed as bullish action.

 

GR041316-$COMPQ

 

The S&P 500 Index also gapped up this morning and broke out from its three-week price range on increased volume. As with the NASDAQ Composite, this is bullish action, plain and simple.

 

GR041316-$SPX

 

As I wrote over the weekend and in my Wednesday mid-week report of last week, I was looking for either bullish or bearish confirmation from the broad NYSE Composite Index. Specifically, as I wrote over the weekend, “A breakout through the 200-day line would be a bullish development. In contrast, a movement that sees the index “peel away” from the 200-day line on the downside on heavy volume would be a bearish development.”

Yesterday the NYSE Composite was able to break out through the 200-day line on the upside as volume picked up. Today it followed through on that positive development with a move to higher highs on even higher volume. With the broad market in the form of the NYSE Composite Index clearing its 200-day moving average, this is confirming, bullish action.

 

GR041316-$NYA

 

As the small-cap Russell 2000 Index also shows bullish action on a breakout to higher highs today, further confirmation in the form of a breakout up through the 200-day moving average can be watched for. My guess is that it will be coming soon enough based on the action in the rest of the market.

 

GR041316-$RUT

 

Gold took a break today after the SPDR Gold Shares ETF (GLD) pushed up to the 120 level around the highs of its current price range yesterday and Monday. Today the GLD backed down slightly to its 20-day moving average on light volume.

Objectively, gold remains in a clear price range that it began to form in mid-February.  This could be setting the yellow metal up for a breakout, which I consider a distinct possibility at some point down the line. For now, those interested in owning the GLD or any other gold-related ETF should continue to take an opportunistic approach by looking to buy pullbacks within the range.

 

GR041316-GLD

 

Facebook (FB) was a big story again today as it busted its 50-day moving average on huge selling volume. The move was attributed to fears of slowing ad sales for the big-stock social-networking leader. From a pure trading perspective, however, I was watching it for a short-sale signal as it approached the 10-day moving average this morning. From my perspective the stock became a short right around the 112 price level on a 620 sell signal.

We can see on the infamous 5-minute “620” intraday chart below that FB started the day off on a big gap-up rally along with the rest of the market. It rallied as high as 112.65 before it ran out of gas and began drifting back to the downside. At around 7:35 a.m. Pacific Daylight Time and the 112.12 price level we got a MACD cross.

This was then confirmed by a moving average cross at 8:15 a.m. PDT just below the 112 price level, and the stock plummeted from there. As it streaked for the 108 price level we can see that it reached a “MACD stretch” where the MACD lines become stretched to the downside. That could have been considered a short-term intraday cover point.

 

GR041316-FB Intraday

 

FB then rallied right up into the 20-period line on an intraday basis where it ran into resistance right around 10:00 a.m. PDT. This provided an intraday short re-entry opportunity. The stock obeyed the line quite nicely as it reversed and broke to lower lows. Once it undercut the prior lows, however, notice that the MACD starts to diverge to the upside. This is a second cover point, and the stock then turns back to the upside and issues a 620 BUY signal right at 12:00 noon PDT. This precedes the ensuing price spike at around 12:30 by six price bars.

This is a fantastic example of how a 620 chart can help you handle a short-sale opportunity as well as how to cover, take profits, and even flip long the stock. After being short the stock most of the day, I ended the day long FB.

All the madness on the five-minute 620 intraday chart distills down to what you see on the daily chart of Facebook (FB), below. Later in the day, news crossed the wires that the previous report of declining ad sales for FB were incorrect, and the stock launched to the upside. The nice thing here is that the stock had issued a 620 BUY signal well before that price spike occurred.

By the end of the day FB picked up some strong buying interest and closed well above its 50-day line on huge volume. The action also shows up as big-volume supporting action at the 50-day line on the daily as well as the 10-week line on the weekly, and can be viewed as a supporting pocket pivot at the 50-day line.

 

GR041316-FB

 

Most of the stocks we’ve been following in recent reports found support at the 20-day moving averages. While FB found support at its 50-day line both yesterday and then again today, others found support at their 20-day or 10-day moving averages. Here are a number of examples:

Workday (WDAY) found support yesterday at its 20-day and 200-day moving averages. I’ve talked about the 200-day line as being the most opportunistic entry point for WDAY, and there it was, right when the market looked like it was in the most trouble yesterday morning!

 

GR041316-WDAY

 

Salesforce.com (CRM) bounced off of its 20-day moving average as sellers never really hit the stock yesterday. It also held well above its 200-day moving average in the process.

 

GR041316-CRM

 

Splunk (SPLK) wasn’t looking all that appetizing yesterday when it traded down to its 20-day moving average and stayed there despite the general market reversal to the upside. However, selling volume yesterday was quite light, and today the stock was able to advance to its highest closing high since rallying off of its February lows.

 

GR041316-SPLK

 

Ambarella (AMBA) won today’s Ugly Duckling Award with a big-volume reversal back to the upside that also qualified as a roundabout pocket pivot or RAPP as it came up through both the 20-day and 10-day moving averages.

I give it the Ugly Duckling Award for its strong 6.96% move today coming on the heels of yesterday’s ugly breakdown to the 50-day moving average with selling volume increasing. In that position the stock looks like it wants to bust the 50-day moving average, but instead it turns and jacks higher today on strong volume. From here I’d probably try and buy a pullback to the 10-day moving average, although yesterday’s pullback was without question the maximum and most shrewdly opportunistic entry point!

 

GR041316-AMBA

 

Vantiv (VNTV) is another one that bounced off of its 20-day moving average yesterday. Not much to say here other than the fact that the 20-day line has served as steady support for the stock since the February lows. Pullbacks to the line have to be looked at as buying opportunities until proven otherwise.

 

GR041316-VNTV

 

I raised the possibility of Netflix’ (NFLX) pullback last week into the 10-day line as a buyable pullback, although there was a bearish case to consider IF the stock were to bust the 20-day moving average. However, like every other stock I’ve been looking at on the long side recently, NFLX simply bounced off of its 20-day moving average yesterday as volume picked up. Today’s action, while a gap-up through the 200-day moving average did not qualify as a buyable gap-up since the initial gap-up move was not of great enough magnitude.

That, however, is not a problem since the action did qualify as a roundabout pocket pivot (RAPP) coming up through the 200-day moving average. Surprise! NFLX is expected to announce earnings next week, so it’s not clear to me that this is buyable. But if one was alert to buying it off of the 20-day line yesterday, then you at least have a profitable trade on your hands. Whether you wish to play earnings roulette with the stock is another matter altogether.

 

GR041316-NFLX

 

Continuing with the parade of stocks that found support at their 20-day moving averages yesterday, we can look at big-stock semiconductor names Broadcom (AVGO) and Nvidia (NVDA). Both stocks bounced from a point at or near their 20-day moving averages and then cleared to higher highs today.

 

GR041316-AVGO

 

GR041316-NVDA

 

While AVGO and NVDA continue to act well while the other smaller semiconductor names I’ve discussed in recent reports flounder a bit, consider AVGO and NVDA are “big-stock” semiconductor names. Names like Maxlinear (MXL), MA-Com Technology Solutions (MTSI), and Silicon Motion (SIMO) (all not shown here on charts) are smaller names and hence subject to greater volatility. MXL and MTSI look somewhat unattractive here, while SIMO has had a nice price move up to the $40 price level and is now pulling back to its 20-day moving average.

For those of you who watch the Gilmo blog, you might have noticed that Alibaba Group (BABA) was on a list of stocks I showed in a blog post dated March 8th. At that point I was showing the screen output for low-volume or “voodoo” pullbacks in Ugly Duckling type names. BABA was on that screen, and we can see that the stock has since moved a fair bit higher. Yesterday it also bounced off of its 20-day moving average and then continued higher today on a pocket pivot move coming up through its 10-day moving average.

BABA isn’t expected to announce earnings until early May, so it may have a shot at building on today’s pocket pivot before then. I would optimally look to buy any pullback coming back into the 10-day line at 78.31 if possible.

 

GR041316-BABA

 

As I wrote in my Wednesday mid-week report last week, Tesla Motors (TSLA) was getting a bit extended at that time and in need of a bit of a pullback. That pullback has come over the past five trading days as the stock dipped back into its 10-day moving average on declining selling volume.

Yesterday’s volume came in at below average as the stock held at the 10-day line, and today volume picked up slightly as the stock pushed up and off of the 10-day line. I’m willing to take a shot on the long side with TSLA off of the 10-day line, but keep in mind that the company is expected to announce earnings on May 4th.

 

GR041316-TSLA

 

Amazon.com (AMZN) was another big-stock NASDAQ leader that I’ve been discussing in recent reports that found support at its 10-day moving average yesterday. This led to a range breakout to higher highs on a pocket pivot volume signature. AMZN is expected to announce earnings on April 28th, so it does have some time to build on this move. However, my preference remains to look to buy any pullback to the 10-day line, now at 597.35. Another big-stock NASDAQ leader that keeps pushing higher.

 

GR041316-AMZN

 

Mobileye (MBLY) has been making some strong-volume moves to higher highs over the past three days, pausing only briefly yesterday before pushing higher again today. The stock stalled slightly at the highs today after Citron Research came out with a reiteration of their negative view of the company.

 

GR041316-MBLY

 

Delta Air Lines (DAL) is expected to announce earnings tomorrow before the open, and I would watch this for some sort of actionable move, one way or the other. While I would certainly not look to hold a short or long position in the stock going into tomorrow’s earnings announcement, it is possible that an actionable reaction to the report might occur.

Anyone trying to short the stock before the report with the idea of making some quick profits and then getting out of the way in order to avoid having to play earnings roulette would have been quickly stopped out today. Not a problem – just wait to see what happens tomorrow.

 

GR041316-DAL

 

Watching a stock for its reaction following an earnings reports can be fruitful. Of course, you must be open to it being either shortable or buyable, depending on its precise nature. For example, I wasn’t going to try and short J.P. Morgan (JPM) into earnings this morning before the open, although I was watching for some sort of actionable move after the report.

As always, I like to remain open to whatever the action tells me, and therefore avoid coming in with a rigid bullish or bearish view. As I wrote over the weekend, earnings roulette season can bring with it some nice trading opportunities. In this case, JPM didn’t announce earnings that were as bad as expected, so the stock gapped to the upside on huge volume.

Objectively, this was initially playable as a buyable gap-up this morning. One could try and short it, I suppose, but that is in fact fighting the tide and moving against the line of least resistance. At the very least, one would not try and short a gap-up move like this unless you see a 620 sell signal. If it gaps and runs, I want to be long the stock. In this manner, a stock I was initially looking at as a possible short-sale target becomes a long position as I move in the direction of the line of least resistance.

 

GR041316-JPM

 

I should also mention that Goldman Sachs (GS) had a bottom-fishing pocket pivot (BFPP) as well today as it gapped up through its 10-day and 20-day moving averages. GS is expected to announce earnings next Tuesday. Over the weekend it was also looking to me like the airlines were starting to weaken, but as DAL illustrates, this theory went out the window fast. For example, Southwest Airlines (LUV), which was looking a bit sloppy last week, roared back to life today with a pocket pivot on a small gap-up off of its 10-day moving average.

However, LUV is expected to announce earnings on April 21st, so it’s not clear that one would want to buy this and then look to play earnings roulette. It does illustrate the resurgent strength in airlines. Among the other airline names I’ve discussed in recent reports, Alaska Airlines (ALK) stopped out any short position at the 20-day line today while Hawaiian Holdings (HA) finally followed through on its continuation pocket pivot of eight trading days ago and cleared to all-time highs today on below-average volume.

 

GR041316-LUV

 

GoDaddy (GDDY) turned out to be a decent short at the 20-day moving average last week as it dove below its 50-day moving average on Monday and yesterday. As it approached the 200-day line and reversed, it could have been covered for about a 7% profit. Now the stock has pulled a voodoo rally back up to the 20-day moving average which theoretically brings it back into shortable position. Thus, for those who might want to have a short-sale target, this is actionable here using a very tight 2-3% upside stop.

My general take with something like this is to test a small short in the stock as a possible hedge against my current long positions. However, there is no guarantee that it will work out that way. I have experienced times when a short “hedge” position goes up while my longs go down, rendering such a hedge fairly useless.

 

GR041316-GDDY

 

Over the weekend Panera Bread (PNRA) looked like it was in a reasonably low-risk buy position as it was holding along its 20-day moving average with volume drying up. That turned out to NOT be the case as the stock broke down through the 20-day line on Monday before successfully finding support at the 50-day moving average yesterday. Thus PNRA became a long idea that found support at its 50-day moving average instead of the 20-day line as so many other long ideas I’ve discussed in recent reports did yesterday. C’est la vie.

The 50-day line is still less than 2% away from the 20-day line, so the stock was within reasonable buy range at either moving average. It remains so using the 50-day line at 205.46 as a selling guide.

 

GR041316-PNRA

 

I wrote over the weekend that if one has a hankering to own shares of Fabrinet (FN) then you had your golden opportunity on Monday when the stock was right at the 20-day moving average. It then pushed up and off of the line on a five-day pocket pivot volume signature, held briefly at its 10-day line yesterday, and then moved higher today. As I wrote last Wednesday, the most opportunistic place to buy this was on a pullback to the 20-day line and the top of its prior base breakout point. There it was, and there it goes!

 

GR041316-FN

 

Below are my current Trading Journal notes on other names I’ve discussed in recent reports:

Acuity Brands (AYI) has held within buyable range of last week’s buyable gap-up move, but today closed at a higher-high, putting it out of optimal buying range. Interestingly, AYI didn’t budge much over the past five trading days following the BGU, which is probably a sign of strength Pullbacks close to the rising 10-day moving average, now at 239.45, would offer your next potential entry points.

Apple (AAPL) had a pocket pivot coming up through its 200-day moving average today. Pullbacks into the 10-day line at 110.71 might be considered buyable, but earnings are expected on April 25th. Along with pocket pivots seen in AMZN and NFLX, this is bullish action not only for AAPL, but probably for the market at large.

D.R. Horton (DHI) pulled into its 10-day moving average yesterday where it was buyable and then today pushed to a higher high on increased but below-average volume.

Square (SQ) pulled into its 10-day moving average today on about average volume. As discussed in the past two reports, I prefer to look for a pullback to the 20-day line at 14.03 as the most opportunistically optimal buy opportunity. Keep a close eye on this, as it is our only leader among “fresh merchandise” recent IPO names.

Yesterday I blogged during the trading day that we were seeing another one of these instances where the market starts to look somewhat questionable, but our favored long ideas were pulling into areas of logical support. I have advocated looking at such Ugly Duckling pullbacks as the most opportunistic entry points on the long side.

Of course, as we already know, things don’t look all that appetizing when such opportunities arise. But in this market I think one can take a couple of shots here and there since risk can be controlled tightly by using the same support level to which the stock is pulling back as your selling guide. Meanwhile, my attempts to maintain an even hand by looking at potential short-sale set-ups are being dashed left and right. JPM, DAL, ALK, etc. are not cooperating, and in the case of JPM the stock has morphed into a buyable bottom-fishing gap-up/pocket pivot move.

The trick is to know what you are looking at when you see it and then taking action in the right direction. Remember: Follow the line of least resistance! Right now that would appear to be to the upside.

 

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 a position in FB, GDDY, and JPM, though positions are subject to change at any time and without notice.

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