The Gilmo Report

April 19, 2017

April 19, 2017

All the major market indexes, apart from the NASDAQ Composite Index and its close relative, the NASDAQ 100, have been living like homeless indexes underneath the “freeway overpass” of their 50-day moving averages. The NASDAQ, which has been able to find support along its 50-day line earlier this week, didn’t show much in the way of sustainable strength today, however.

After an initial upside romp, earlier in the day, the NASDAQ reversed to close near its lows for the day on higher trading volume. This has the look of churning and stalling on higher volume. In my view this is simply another form of distribution.

 

GR041917-$COMPQ

 

The S&P 500 Index has made several runs at its 50-day moving average over the past week, but to no avail. Today the index again ran up to its 50-day line before reversing to close in the red and near the intraday lows. Volume was higher in a clear distribution day.

 

GR041917-$SPX

 

Even though the indexes are weak, the intraday action has remained volatile, as the choppy action of the S&P 500, above, over the past four days shows. In terms of what individual stocks are doing, I reiterate what I’ve been saying for the past 3-4 reports. I see no reason for anyone to take any significant long positions right here. Buying stocks right now with the idea of riding some intermediate trend strikes me as a risky proposition. As far as the long side goes, as I see it, this is one of those times where the less you do, the better.

Meanwhile, for those trying to hold onto long positions that continue to hold up, simply sticking to your trailing and absolute stops should be sufficient to keep one out of trouble. There is also the idea of taking profits into strong upside trends that have formed over the past few months. This is the more pro-active, swing-trading approach that I have advocated for some time now.

The financial sector saw another one of its own go bust after spinning the wrong “earnings roulette” number. Goldman Sachs (GS) gapped down hard yesterday on a move that could have been played as a shortable gap-down for alert, experienced short-sellers. The stock was already on the casualty list after its late March breakdown, and yesterday’s gap-down only added insult to injury.

I first noted GS’ base-failure type of short-sale set-up back in my March 22nd report, and the stock has continued lower since then before yesterday’s blow-up. At this stage, GS merely confirms the general malaise plaguing the financials, a major area of leadership in this market rally that began right after the November election.

This can be treated as a shortable gap-down using yesterday’s high at 219.89 as a guide for an upside stop. Keep in mind, however, that the stock is quite extended at this point since the mid-March base-breakout failure. In a case like this, the breakdown can’t be viewed as a late-stage failed-base (LSFB) since it isn’t late-stage. Rather it is just a base-breakout failure, which is a close cousin to the LSFB as a valid short-sale set-up.

 

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More actionable this morning was Citigroup (C), which had rallied into the confluence of its 10-day and 20-day moving averages in sympathy to Morgan Stanley’s (MS) earnings report. I blogged early in the day when the stock was trading near the 59 price level that it was in position to short at that point.

We can see that C is a breakout/base-failure type of short-sale set-up that is not a late-stage failed-base for the basic reason that this recent base wasn’t late-stage. If you look at the weekly chart of C, not shown, you will notice that this last base formed a handle to a big POD-with-handle type of formation. It can, however, just be treated as a base-failure type of short-sale set-up, using any rallies up into the 10-day, 20-day, or even 50-day moving averages as a guide for a tight upside stop.

 

GR041917-C

 

Among big-stock NASDAQ names, Netflix (NFLX) became an earnings roulette casualty yesterday after reporting earnings on Monday after the close. Despite trading at all-time highs in pre-market trade yesterday morning, the stock reversed and closed just below its 50-day moving average on heavy selling volume.

This morning a brief upside blip carried up through the 50-day line before running into resistance at the 20-day moving average. As I’ve written in recent reports, a bust of the 50-day line would be a trigger for a NFLX short-sale, and this morning’s move up to the 20-dema was a perfect short-sale entry opportunity for those alert to it.

From here, I would watch for any rallies up into the 50-day moving average as potential short-sale entry points, but for now the time to short this thing was this morning at the 20-dema. NFLX now goes into the broken-leader pile and onto the short-sale watch list.

 

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Tesla (TSLA) has been holding up admirably in the midst of the current index turmoil. Yesterday it closed in a very tight range right at the $300 price level with volume drying up to -30% below average. Not what you would call “voodoo” levels, but for a big-cap name like TSLA it was good enough for a trade to the upside today.

TSLA is expected to announce earnings on May 3rd, which may mean that you won’t see much movement beyond 2-3% above the $300 Century Mark until then. For now, I see low-volume pullbacks to the 300 price level, like yesterday’s, as perhaps good entries for a quick upside scalp.

 

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Notes on other big-stock NASDAQ names:

Alphabet (GOOGL) has rallied up to its prior April highs around the 860 price level. This might serve as near-term resistance, and so the stock could be considered to be in short-sale range using the 860 price level as your guide for an upside stop. Keep in mind that earnings are expected on April 27th, so you’d be looking for a tradeable move to materialize before then.

Apple (AAPL) pulled an outside reversal to the downside today at its 20-dema with volume picking up slightly. In my view, the breach of the 20-dema is a near-term sell signal, although the 50-day line could be used as a lower selling guide given that the stock is only 1% above the line.

Amazon.com (AMZN) found support near its 20-dema and gapped up slightly on Monday, retaking its 10-day moving average. Not much to do here ahead of earnings next week. AMZN is expected to report earnings on April 27th.

Facebook (FB) rallied back up to its highs today on about average volume after announcing that it has designed 360-degree cameras at its developer conference. The stock stalled off the intraday highs to close mid-range. With earnings expected on May 3rd, there isn’t much to do here before then.

Priceline Group (PCLN) is hovering along its 20-dema after regaining the line on Monday. Breaches of the 20-dema would be trigger points for short-sale entries in the stock, but so far the stock is mostly showing a tendency to chop sideways. Earnings aren’t expected until May 9th, so it’s not clear if a more decisive move will develop before then.

All these big-stock NASDAQ names I’ve been following for some time now will be announcing earnings within the next couple of weeks. For this reason, there isn’t much to do with these names before they report, and I’m certainly not going to buy or short any of these into earnings with the idea of playing earnings roulette. However, I would be alert to any opportunities that develop after earnings are announced such as occurred with NFLX yesterday.

Over the weekend I wrote that Nvidia (NVDA) looked in position for a rally attempt after undercutting its late February low and testing its early March low. That produced a logical undercut & rally move right up into its 20-dema that gave short-sellers a more optimal entry opportunity this morning before reversing.

This remains within shortable range using the 20-dema as a guide for an upside stop. NVDA is expected to report earnings on May 9th.

 

GR041917-NVDA

 

Netease (NTES) was last shortable near the 50-day moving average nearly two weeks ago, after which it broke down to fill the prior gap from mid-February. I noted this in my report of last Wednesday, and the stock rallied for one single day on putrid volume before rolling over to lower lows.

Today NTES appeared to find support off the deep, intraday lows and then rallying to close up near the highs of the daily trading range. I have to think this thing is ready for some sort of reflex bounce. Therefore, I would be on the lookout for weak rallies up into the 10-day, 20-day, or 50-day moving averages as potential short-sale points.

NTES is expected to report earnings on May 10th.

 

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Weibo (WB), not shown, remains in a short-sale position right here along its 20-dema while using the 50-day moving average at 51.32 as a guide for a tight upside stop. WB is expected to report earnings on May 11th.

The 20-day exponential moving averages on Alibaba (BABA). JD.com (JD), and Momo (MOMO) remain your nearest selling guides for these Chinese stock leaders. All three have held up well during the market’s decline over the past month or so, and if one owns any of these names then using the 20-dema as a selling guide is a reasonable risk-management approach here. All three will report earnings in May, so that is not a factor, at least not near-term.

Snap (SNAP) made a couple of attempts at an undercut & rally move after moving below the prior 20.03 low in the pattern last week. Yesterday it finally met with success as the stock jacked up off the lows on higher volume that was not sufficient for a pocket pivot.

SNAP closed just below its 10-day line yesterday, and today tried to rally further into the 20-day exponential moving average before stalling out on weak buying demand. While I discussed this U&R set-up over the weekend, and it did produce some nice results over the past two days, I would look to take the long scalp and bag the trade here. With the stock stalling at the 20-dema, the potential for this to move back to the low remains in force.

If one can borrow the stock, then it may be possible to treat this as a short-sale here using the 20-dema at 21.12 as a guide for an upside stop. That said, if SNAP were to rally up through the 20-dema on a pocket pivot type of move it would then become playable on the long side.

Obviously, I have a two-sided view of the stock currently, and I am willing to play it in either direction “as it lies” and depending on the specific set-up at hand.

 

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Applied Optoelectronics (AAOI) remains a former leader that is now helping to populate my short-sale watch list. Members will recall that I tweeted before the open that the stock was likely a short on the gap-up move above 50 in pre-open trade. This move occurred after the company pre-released earnings, but the gap was sold into on heavy volume.

On Monday AAOI briefly moved above its 50-day moving average before reversing to close lower. With the stock holding along its 10-day moving average with volume drying up, I would look for a weak rally back up toward the 50-day moving average or the 20-dema as potential short-sale entry opportunities.

Of course, alert short-sellers had to be aware of the big short opportunity in short AAOI that occurred on Friday before the open! Those looking for a new opportunity after the fact may not be rewarded as quickly, but the stock remains a short-sale set-up for now as it works on what looks to be the right shoulder of a nascent head and shoulders formation.

 

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Over the weekend I discussed the weak action among the video-gaming names, otherwise known as the “lipstick stocks.” At the time, I theorized that they should all be watched for a potential downside break that would make them all potential short-sale targets. Instead, all three have rallied so far this week, but in the process, could be setting up as shorts ahead of earnings in May.

For example, here we can see that Electronic Arts (EA) rallied up into the highs of its current low-base price range right around the 90 price level. In this case, we can use the highs of the range as a reference for potential resistance, and shorting the stock along those highs today would have produced some small near-term results. EA stalled to close about mid-range on higher volume. In my view 90 remains solid resistance, so I would not be surprised to see the stock breach the 10-day and 20-day moving averages on the downside. This would trigger a short-sale at that point.

 

GR041917-EA

 

Activision Blizzard (ATVI) also moved up to the highs of its current price range, but stalled off the peak on very weak volume. This is similar to EA in that a move back below the 10-day or 20-day moving averages would trigger a short-sale entry at that point.

 

GR041917-ATVI

 

EA and ATVI were moving in sympathy today to a base breakout in Take-Two Interactive (TTWO). The breakout occurred on volume that was 4% above-average and which also qualified as a pocket pivot volume signature. So, what we have here is a pocket pivot breakout to new highs on the part of TTWO.

Now, I understand fully that none of these three stocks has shown any substantial signs of breaking down. All three have and continue to act like leading names. However, in the interest of giving some insight into how I watch for situations to develop on the short side, let’s just say that I’m very interested in seeing how this TTWO breakout plays out.

The breakout, while occurring on a pocket pivot, did come on a light volume increase, and we know how this market tends to treat obvious breakouts. Therefore, what I’m watching for is any kind of breakout failure here in TTWO. If that occurs, then I would watch for a coincident breakdown in EA and ATVI below their 20-demas. At that point, a failed TTWO breakout would help to confirm the group weakness, and I would go after the two weaker names in the group as short-sale targets.

Obviously, this is something that is “in progress,” but something I’m watching for as a way of staying ahead of possible short-sale opportunities. That’s what I did with AAOI last Friday, and NFLX yesterday, because what looks strong today can flip to the downside in a hurry in this market, especially if we see more weakness in the indexes from here.

 

GR041917-TTWO

 

Splunk (SPLK) bounced off its 200-day moving average on Monday after becoming shortable at the 50-day moving average last week. This meet-up with the 200-day line coincided with an undercut of the prior lows in the pattern, triggering a logical undercut & rally move.

Anyone short the stock from the 50-day moving average earlier last week should have covered at the 200-day line. Now we see SPLK rallying back up to its 50-day moving average on wedging volume. This puts the stock right in short-sale position here at the 50-day line while using it as a guide for an upside stop.

 

GR041917-SPLK

 

Workday (WDAY) also remains in short-sale range here as it stalls along the 50-day moving average. Volume picked up slightly today but still came in well below-average. Notice how the upside volume spikes over the past five days have steadily declined as buying interest is starting to diminish.

This looks to be in a shortable position here using today’s intraday high at 84.93 as a guide for a tight upside stop.

 

GR041917-WDAY

 

Neither SPLK or WDAY report earnings until late May, but their cloud cohort ServiceNow (NOW) is expected to report next week on April 26th. In the meantime, the stock has also rallied up into its 50-day moving average on below-average volume in a four-day move off the lows of last week.

In my view, this rally brings NOW into an optimal short-sale position using today’s intraday high at 88.40 as your upside stop. Shorting it here implies that one is looking for a move back to the downside before earnings, which is what I would be playing for as a quick swing-trade/short scalp. I would not recommend shorting the stock here and attempting to play earnings roulette.

With SPLK, WDAY, and NOW all rallying up into their 50-day lines, this could set up a possible group failure. This is something to watch for as confirmation if looking to short any of these three stocks.

 

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GrubHub (GRUB), not shown, was last shortable at its 50-day moving average last week, and the stock has moved down to its 10-day moving average before bouncing today. With earnings expected next week on April 27th, I would leave the stock alone for now and wait to see what opportunities, if any, show up after earnings.

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, 20-day exponential, 50-day simple and 200-day simple moving average.

As I discussed earlier in this report as well as in other recent reports. I don’t see much that I find compelling on the long side currently. This market seems to show new cracks every day, and risk to the downside is growing. At the same time, the preponderance of short-sale set-ups is naturally moving me more to the short side.

I have only a small handful of names remaining on my long watch list, and here are my notes on those that have been discussed in recent reports. Some have already started to break down:

Arista Networks (ANET) has regained its 10-day moving average. The 20-dema remains your reference for a tight selling guide. ANET is not expected to report earnings until May 2nd.

Bioverative (BIVV) is still holding above its recent base breakout point. I would continue to use the 20-dema as a maximum selling guide. However, given the way former bio-tech leaders that I first discussed in January have acted recently, CLVS, GKOS, and INCY, one could always consider taking profits here on any position bought close to the 50-51 price level per my discussion of the stock at that time.

Checkpoint Software (CHKP) followed up last Thursday’s outside reversal to the downside with another one yesterday on very heavy selling volume. This one has been removed from my buy watch list based on this action ahead of earnings, which are expected on April 27th

Incyte Pharmaceuticals (INCY) gapped down on negative product news, highlighting the news risk that is always part of the equation when long these names. INCY had a very nice move since I first discussed it in January of this year, and taking profits into that move would have been consistent with the swing-trading approach that I advocate in this market.

Square (SQ) popped up and off the confluence of its 10-day and 20-day moving averages today, but stalled to close just barely in the lower half of its daily trading range. Earnings are expected on May 3rd, and I’m not inclined to try and do anything with the stock ahead of or into earnings.

Veeva Systems (VEEV) remains near its recent highs, and the 20-dema remains a nearby selling guide.

I wrote over the weekend that the “alibi” for the end-of-the-week selling was found in the potential for negative news amidst all the current geo-political tension. As I theorized at the time, if we got through the long Easter holiday without any noteworthy and negative news, Monday might see stocks open to the upside.

That was precisely what happened, and the action has remained somewhat choppy so far this week. However, bounces in several short-sale targets are bringing them back into lower-risk short-sale positions, such as was the case with NVDA today.

For now, investors should stay alert and ready to act decisively if and when trailing or absolute stops are hit on any current long positions. Meanwhile, if I’m seeing short-sale set-ups that are working, that represents “daylight” that I will be more than happy to run toward! Take it from there.

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 positions in C and SNAP, 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. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.