The Gilmo Report

April 17, 2016

April 17, 2016

After two strong upside days the indexes did the logical thing by holding tight as they consolidated on Thursday and Friday. For the most part the indexes barely budged as they held in a tight range for two days in a row, as the daily chart of the NASDAQ Composite Index shows below. Volume was up slightly on Friday due to options expiration. Aside from that, the action was for the most part uneventful.

 

GR041716-$COMPQ

 

The S&P 500 Index doesn’t look much different from the NASDAQ as it also held tight and in a narrow price range on Thursday and Friday. Generally, it is a bullish sign when an index holds tight and the daily price range tightens up. So in the absence of any materially bearish price/volume evidence, the market remains in a bull trend.

 

GR041716-$SPX

 

While the broad NYSE Composite Index, not shown, also pulled back with the S&P 500 and NASDAQ Composite Indexes, the small-cap Russell 2000 Index diverged slightly by closing up on the day. The index nudged up against the underside of its 200-day moving average on slightly higher options expiration volume. As was the case with the NYSE Composite Index earlier in the week when it cleared its 200-day moving average, a similar move from the Russell would certainly help to throw more fuel on the bull’s campfire. For now the general market uptrend remains intact.

 

GR041716-$RUT

 

Despite its daily volatility, gold remains in what is now a six-week base that it has formed as it consolidates its prior sharp gains off of the December 2015 lows. The SPDR Gold Shares ETF (GLD) has again flopped back into its 50-day moving average. The GLD held the line on Friday as volume declined. Technically, this puts the yellow metal in a lower-risk buy position along the 50-day moving average. However, only a breakout to higher highs would confirm the bullish case for gold as it continues to consolidate.

 

GR041716-GLD

 

As long as the yellow metal remains in a sideways consolidation the potential for a breakout still remains a distinct possibility. If we’re looking for clues as to how this consolidation might eventually resolve, we might consider that the action in the white metal, silver, offers a significant one. The daily chart of the iShares Silver Trust (SLV) shows a breakout through the top of its own eight-week base/consolidation and off to higher highs.

I would venture to speculate that as long as the SLV holds this breakout, the GLD can’t be too far behind. While the two metals can diverge on a short-term basis, the longer-term correlation between the two has historically been a strong one. Therefore, the odds would argue for higher highs in gold if silver continues to make higher highs as well.

 

GR041716-SLV

 

When you spend some time studying Facebook (FB) on a daily or weekly chart, the action has a distinctly “Ugly Duckling” look to it. In February a failed breakout attempt sends the stock plummeting from its highs and then busting through its 50-day moving average on heavy selling volume. From there it engages in a choppy, low-volume rally back up to the 110 price area and its prior base breakout point, and then rolls over slightly as it falls through the lows of the short uptrend channel (1).

After holding at a point just above the 50-day moving average it then begins another uptrend channel (2) of similar duration that shows a tightening up of its daily price ranges, but volume is sorely lacking all the way up. This leads to an all-time closing high in late March, but this turns into a short-term double-top as the stock turns back to the downside.

The previously orderly uptrend channel deteriorates into a widening, choppy downtrend channel (3) of two weeks duration so far. Overall, the action is starting to look rather sloppy, but the stock is able to hold its 50-day moving average three trading days ago on heavy volume that appears to be of a supporting nature.

 

GR041716-FB

 

On Friday FB came back down towards its 50-day line in a Wyckoffian Retest type of move as volume dried up to -35.5$ below average. Technically this brings the stock into a buyable position. However, I would note that the area defined by the top of the pyramid formed by trend channels 2 and 3 on the chart has the look of a fractal head and shoulders formation. Therefore, it is still possible that FB will breach the 50-day line at some point. Whether this happens before or after earnings are announced at the end of April remains to be seen.

The tight action in the indexes over the past two trading days has been accompanied by similar action in a number of leading stocks. Adobe Systems (ADBE), for example, held tight along its 10-day moving average on Thursday as volume dried up sharply. A small increase in buying interest on Friday sent the stock back up toward the highs of its current four-week price range since its mid-March buyable gap-up move. Earnings are not expected until June 21st, so this is still quite playable from here using the 20-day line at 92.93 as a selling guide.

 

GR041716-ADBE

 

Workday (WDAY) has now found support at its 20-day moving average twice in the same week. After successfully testing and rebounding off the line on Tuesday the stock gave buyers a second chance on Friday as it pushed right into the line.

Volume picked up sharply, but was still below average, as the stock closed in the upper half of its daily trading range. This gives it the look of supporting action at the 20-day line. Keep in mind that Friday was options expiration so the small spin-out to the 20-day line and the increase in volume could be attributable to that. In the meantime pullbacks to the 20-day line continue to offer your best entry opportunities.

 

GR041716-WDAY

 

WDAY’s cousin, Salesforce.com (CRM), not shown here on a chart, is holding up well after Tuesday’s bounce off of its 20-day moving average. The stock edged to its highest closing high since the February lows but is not in a buyable position. Pullbacks to the 10-day line at 75.29 would be your nearest entry opportunities, while a pullback to the 20-day line, now at 74.12, would be your most opportunistic entry point as turned out to be the case on Friday with WDAY.  

Splunk (SPLK) is holding squeaky tight along its 10-day moving average, successfully testing and rebounding off of the 20-day moving average on Tuesday. Notice that Thursday’s action showed volume drying up in the extreme in classic “voodoo” fashion as the stock held tight along the 10-day line.

In any normal market I would say that SPLK is simply revving up for a sharp move to the upside, but of course this is not necessarily your typical market environment. Nevertheless, I would continue to view pullbacks into the 20-day moving average at 48.30 as your best low-risk entry opportunities.

 

GR041716-SPLK

 

With most of these Ugly Duckling type names I like on the long side, the 20-day moving average represents key support in my mind. A breach of the 20-day line can easily cause these stocks to morph back into short-sale targets. This needs to be kept in mind with names like CRM, WDAY, and SPLK. Sometimes the initial breach can turn out to be a fake-out as well, as we can see in the example of Ambarella (AMBA). The stock blew through its 20-day moving average (the green line) on Tuesday as selling volume picked up and sent the stock down to its 50-day moving average.

However, AMBA was able to reverse course the very next day with a big-volume pocket pivot move and regain the 20-day and 10-day moving averages. On Friday the stock pulled into the 10-day line with volume declining. This puts it in a lower-risk buy position using the 20-day line at 43.29 as a reasonable selling guide.

 

GR041716-AMBA

 

I’ve discussed in recent reports that I prefer to lay back and let Square (SQ) come into its 20-day moving average before looking to scoop up shares again. As I pointed out, the stock had a more than 30% move from its original 12.05 buy point, more than generous in this market environment. Giving it some time to settle down made perfect sense as we now see the stock starting to move down towards the 20-day line. The stock closed Friday at 14.33, a mere 21 cents above the 20-day line at 14.12. Volume picked up slightly but still came in -8.8% below average.

While this could ping right off the 20-day line, the other possibility given that it is a smaller, more volatile recent IPO name would be an undercut of the 20-day line that also undercuts the 13.74 low of April 4th. That would represent my most shrewdly opportunistic entry point on a pullback. Therefore we want to keep a close eye on SQ this coming week to see how this plays out.

 

GR041716-SQ

 

The semiconductor names that I’ve discussed in the report since early March have started to shows signs of slowing. For example, MA-Com Technology Solutions (MTSI), not shown here on a chart, has come all the way back down to its 50-day moving average and its prior breakout point from early March.

All that work and nothing to show for it! Meanwhile, Maxlinear (MXL), also not shown here on a chart, has gone nowhere since its March 16th breakout. It is currently sitting beneath its 20-day moving average after reversing back below the line on Friday on increased volume.

With earnings coming up in the next couple of weeks it’s not clear to me that these are names I want to be trafficking in currently. MTSI might be considered buyable here as volume dries up on this pullback to the 50-day line, but MXL has failed to show any consistent, coherent price/volume action to keep me interested in the stock. As I wrote in my Wednesday mid-week report, neither stock has looked all that attractive to me, and that has remained the case over the past two trading days.

Among smaller semiconductors, however, Silicon Motion (SIMO) has been the name to own. However, the ride has not been all that safe and sane as the stock has shown a tendency to swing 10% or more quickly. However, a general approach of selling into strength and then buying back at the 20-day moving average would have worked well with the stock so far.

At this point I would consider the stock to be in a three-week range as it is about 15% extended from its March 11th base breakout point which I first mentioned in my report of that same day. In this position the only logical entry point would be on a pullback to the 20-day line, and this already occurred on Thursday.

Earnings are expected out on April 27th, so it’s not clear that significant further upside is possible before then. Also, notice that the stock’s daily price ranges have widened considerably over the past 2-3 weeks, in contrast to the tighter action seen before and just after its March 11th base breakout.

 

GR041716-SIMO

 

The bigger semiconductors we’ve been following lately have shown more coherent and steady upside action. On Friday, Broadcom (AVGO) pulled into its 20-day moving average on below-average volume, bringing it into a better buy position using the 20-day line as a selling guide.

Most of these semiconductor names have been trending higher for some time. Given the rotational nature of this market, I begin to question how much higher they can go. AVGO might be one to consider in this regard, and it may be that the trend is broken when the company announces earnings towards the end of April.

 

GR041716-AVGO

 

AVGO’s pullback on Friday coincided with pullbacks in its semiconductor cousins NXP Semiconductor (NXPI) and Skyworks Solutions (SWKS). Given that all three of these names are suppliers to Apple (AAPL), they were likely influenced by AAPL’s reversal back down through its 200-day moving average.

The selling in all of these names came on reports that AAPL will continue to reduce production of iPhones in the April-June period due to sluggish sales. Allegedly, slow sales of the iPhone 6s and iPhone 6s Plus forced AAPL to lower inventories for the January-March quarter by 30%. AAPL was looking pretty “cherry” (pun intended!) three days ago as it pocket pivoted above its 200-day moving average. However, that strength was quickly reversed on Friday as the stock broke back below the 200-day line on heavy selling volume.

This brings AAPL back into play as a short-sale target using the 200-day line at 110.57 as a guide for a tight upside stop. AAPL is expected to announce earnings after the close on April 25th.  And after a long rally off of the February lows it is not surprising to see the stock morph back into a short-sale candidate. This also offers a good example of how these Ugly Duckling uptrends off the February lows can change and bring some of these names back into play on the short side.

 

GR041716-AAPL

 

As a semiconductor that doesn’t supply to AAPL, Nvidia (NVDA) simply kept moving higher on Friday with volume picking up to 16% above average. The stock is now over 10% extended from its original cup-with-handle breakout point of March 16th. The last buying opportunity in NVDA came this past Tuesday as the stock tested the 20-day moving average, after which it has continued to move to all-time highs. Pullbacks to the 20-day line, now at 35.33, remain your best entry opportunities. Earnings are not expected until April 5th.

 

GR041716-NVDA

 

Alibaba Group (BABA) is hanging tight along its 10-day moving average following Wednesday’s pocket pivot move above the line. Volume has declined over the past two days, putting this in a buyable position using either the 10-day line at 78.39 or the 20-day line at 77.35 as nearby selling guides.

BABA’s technical action has improved as we’ve seen its Chinese internet retailer cousin JD.com (JD) also shoot higher in recent days. And while you’re at it you should also take a look at the daily chart of big-stock Chinese internet leader Baidu (BIDU) which flashed a gap-up pocket pivot off of its 10-day moving average this past Wednesday. BABA and BIDU both look playable here, and as big-stock Chinese internet-related names, the group strength is encouraging for both names. Both stocks are expected to announce earnings in the first week of May.

 

GR041716-BABA

 

Tesla Motors (TSLA) is consolidating the sharp move it had a couple of weeks ago after posting two pocket pivots along its 200-day moving average. As I wrote four reports ago, that move was in excess of 10% and at the point the stock was likely in need of a pullback.

As well, whenever TSLA starts rallying, the more sober analysts come out of the woodwork to recite all the fundamental reasons why TSLA should be trading at $25 instead of $250. In the process, short interest in the stock has remained at just above 32 million shares for the past month, based on the most recent March 31st report date.

Technically, what we see here is a nice pullback into the 10-day moving average as volume dried up to -40.8% below average on Friday. With no selling pressure, TSLA was able to drift back into positive territory by the close. And if this remains the case with respect to a lack of selling pressure, all those shorts are going to need some help from earnings, which are expected to be announced on May 4th.

In the meantime, TSLA may just decide to run the shorts through the blender one more time before earnings. As long as the stock is able to hold tight along the 10-day line, or even above the 20-day line down at 241.05, this remains a clear possibility.

 

GR041716-TSLA

 

J.P. Morgan (JPM) turned out to be a decent trade if one jumped on Wednesday’s buyable gap-up move. The stock ran right into the 200-day moving average on Friday and reversed on average, but lighter, volume. What has plagued financials has been primarily plummeting oil prices and the industry’s exposure to high-yield debt in the oil sector. With talk of a production freeze hitting the market on Tuesday, JPM’s not-as-bad-as-expected earnings report on Wednesday morning helped to alleviate the pressure on financials in general.

The question with JPM, however, is whether Wednesday’s buyable gap-up/bottom-fishing pocket pivot will lead to substantially further upside. Obviously, in its current position, the only lower-risk buy opportunity would be on a test of the 60.38 intraday low of Wednesday’s price range. In the meantime, the next confirming signal would occur on a move up through the 200-day moving average, preferably on a pocket pivot volume signature or better.

 

GR041716-JPM

 

Alaska Airlines (ALK) has drifted back up towards its prior highs on light volume as it awaits earnings, which are expected to be announced this coming Thursday. ALK stock has so far not followed through on my prior assessment of the stock as a possible Punchbowl of Death or POD topping situation as the airline stocks have been resurgent as of late.

Any short positions in ALK were summarily stopped out on Wednesday, and as I wrote a week ago, keeping a tight stop at the 20-day line was necessary since it was not entirely clear that the set-up would pan out as a bona fide POD top. Thursday will be a big day for a number of airline stocks that are expected to announce that same day, such as HA and LUV. These names have all had strong, Ugly Duckling types of moves off of their extreme February lows, and earnings may figure heavily in terms of their ability to sustain their current uptrends.

 

GR041716-ALK

 

Delta Air Lines (DAL) has already announced earnings on Thursday morning, but this did produce a trading opportunity for alert investors. While the stock did gap up at the open, it ran out of steam at the prior range highs at around the 50 price level and reversed to close at the lows of its daily trading range.

The failure at the prior highs did set up a short-sale opportunity, as I blogged on Thursday morning. On Friday the stock continued lower on above-average selling volume but held right at the 50-day moving average. The stock closed just below the 20-day moving average, so it sits in no-man’s land here between that and the 50-day line.

 

GR041716-DAL

 

DAL’s five-minute intraday “620” chart (for an explanation of the 620, click here) is an interesting example of a less-than-perfect 620 sell signal that developed in the stock following the post-earnings gap-up move. Given that the stock had traded up to the 50 level and right around its prior highs, one had to be alert for any signs of a reversal at that level.

This contrasts with JPM’s gap-up move on Wednesday, which had no discernible areas of resistance that were nearby on that particular day. It was not until Thursday that it finally ran up into the 200-day line, which then became a viable line of resistance for the stock.

DAL, on the other hand, did have a viable line of resistance at the prior highs around the 50 price level, so the initial MACD cross right after the open could have been used as an early sell signal. This was later confirmed by a bearish moving average cross, with the orange 6-period line crossing below the blue 20-period line. This started to work, but the stock pushed back above the 20-period line, and this was followed by a bullish moving average cross about 30 minutes later. Since I was using the 50 price level as a guide for my upside stop, I let this play out.

DAL then reversed back below the 20-period line and issued a 620 sell signal on the bearish moving average cross just before 10:00 a.m. Pacific Time. From there it just slowly trundled lower as the 6-period line tracked just below the 20-period line for the rest of the day.

 

GR041716-DAL Intraday

 

Given the action on the 620 chart for the second half of the day and the close near the intraday lows, I decided to hold a short position in DAL overnight. The next day the stock broke down to the 50-day line which was my initial short-term downside price target.

With DAL sitting right at its 50-day moving average, only a breach of the 50-day line would confirm a potential resumption of the stock’s downward trajectory from the Thursday morning peak. Otherwise I am interested to see whether earnings from ALK, HA, and LUV on Thursday help to set up another shortable move in the stock.

GoDaddy (GDDY) has been a consistent short every time it has rallied up to its 20-day moving average over the past two weeks since announcing its 16.5 million share secondary offering. That offering was priced eight trading days ago at 30.25, roughly around the 50-day moving average, and the stock has been able to hold the line, more or less, on each pullback since then.

On Friday the stock was showing very low volume levels in the middle of the day, as I noted in a blog post at that time. By the close, and likely due to options expiration on Friday, volume picked up as the stock churned around its 50-day moving average.

If one wanted to test the stock on the long side based on the idea that so far it has shown an ability to digest its large secondary offering reasonably well, then the 50-day line at 30.38 would serve as a guide for a tight stop. Otherwise, another failure at the 20-day line or a high-volume breach of the 50-day line would keep this in play as an LSFB short-sale set-up. GDDY is expected to announce earnings on May 5th.

 

GR041716-GDDY

 

Fabrinet (FN) was last buyable at the 20-day moving average last week on the pullback right to the top of the prior base. On Friday the stock pulled into the 10-day line as volume declined. My preference would be to look for a pullback into the 20-day moving average at 30.89 as the most opportunistic entry given the stock’s volatile nature. FN is expected to announce earnings on May 2nd. If one bought the stock at the 20-day line two Fridays ago or on Monday morning, one can certainly look for further upside to develop between now and earnings.

 

GR041716-FN

 

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

Acuity Brands (AYI) remains extended from its recent buyable gap-up.

Amazon.com (AMZN) remains extended from its pocket pivot range breakout of this past Wednesday. Earnings are expected out at the end of the month.

D.R. Horton (DHI) is holding tight after pushing to a higher high on Wednesday. Pullbacks into the 10-day line at 30.63 would be your nearest potential entry opportunities. Keep in mind the company is expected to announce earnings next Thursday.

Hawaiian Holdings (HA) bounced off of the 10-day moving average on Friday and pushed back up to its all-time closing highs. Pullbacks into the 10-day line remain your best entry opportunities, but keep in mind that HA is expected to announce earnings this coming Thursday, along with ALK.

Mobileye (MBLY) is extended to the upside and only a pullback into the 10-day moving average at 38.29 would offer a lower-risk entry opportunity from here.

Netflix (NFLX) is currently extended from its 200-day moving average after pocket pivoting off of the line this past Wednesday. If one had been enterprising and shrewdly opportunistic enough to pick up shares on the pullback to the 20-day moving average last Tuesday, then one might consider taking profits before earnings come out as expected Monday after the close. Otherwise, one can play earnings roulette if they so desire and feel that the stock’s movement from the 20-day line provides a sufficient cushion.

Panera Bread (PNRA) continues to hold along the 50-day moving average but does not appear to want to move much higher as earnings are expected to come out on April 26th.

Southwest Airlines (LUV) is extended from Wednesday’s pocket pivot range breakout. Earnings are expected out this Thursday along with ALK and HA.

Vantiv (VNTV) holds up well at the top of its current price range following its pullback into the 20-day line this past Tuesday. Pullbacks into the 20-day line remain your most opportunistic entry points. Earnings are expected on April 26th.

The market action on Thursday and Friday struck me as nothing special, and for that reason the uptrend remains intact. However, there have been some very short-term tactical short-sale opportunities in the mix, at least from an active trader’s perspective.

Those seeking a more intermediate-term approach on the long side should simply set their stops at points that enable such an approach to be taken without exposing oneself to excessive risk. And this, of course, means only buying stocks on weakness as they pull into logical areas of support. Chasing strength is not advisable in most cases, currently.

In an uncertain and at times volatile environment maintaining adequate risk-control should be task #1, regardless of whether one seeks to take a short-term or intermediate-term approach. I tend to think that buying breakouts and then setting 7-8% downside stops exposes one to too much risk. If one is going to buy breakouts, then setting a much tighter stop is necessary.

One way to do this can be seen on the chart of SIMO, much further above. If you look at the base breakout of March 11th, you will notice that the 10-day line was not too far below the stock at that point. It then pulled back for two days following the breakout and tested the 10-day line on lighter volume. This made it quite buyable using the 10-day line as your selling guide rather than a strict 7-8% downside stop.

In this manner one can use nearby moving averages or other areas of significant support as a selling guide after buying a standard base breakout. This offers a practical method for tightening up your risk parameters in a difficult environment. As the market remains in an uptrend, the long side will remain the line of least resistance. However, when relevant, I will identify tactical short-sale opportunities when I see them in real-time on the Gilmo blog, as I did with DAL, Nike (NKE) and Under Armour (UA) on Thursday and Friday.

As we continue to move through the heart of earnings season, opportunities will likely arise on both sides of the market, and this should remain one aspect of our current market focus.

In any environment, it is useful to maintain an awareness of where short-sale set-ups might be developing. In the past, such as we saw last August, we’ve seen the emergence of an increasing number of short-sale set-ups serve as a sign of potential market weakness. If we begin to see more stocks begin to act like AAPL did on Friday, then we will have a reasonable indication that the market rally is vulnerable to a more serious sell-off.

So far that evidence has not presented itself, and we simply carry on as we have until it does. 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 a position in AMBA, BABA, FB, and TSLA, though positions are subject to change at any time and without notice.

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