The Gilmo Report

April 2, 2017

April 1, 2017

The first quarter of 2017 came to an end on Friday with a whimper, at least from an index point of view. The S&P 500 remains in a short-term downtrend defined by lower highs and lower lows formed throughout March. It is still, however, holding above its 50-day moving average. Friday’s action showed some churning action on higher, quarter-end volume.

 

GR040217-$SPX

 

Basically, for the market, March came in like a lion and went out like a lamb, as the old Welsh proverb goes. As the chart above shows, the S&P 500 spent the entire month consolidating the gains of January and February. Given that prior uptrend, spending the past four weeks or so backing-and-filling in what is so far a normal-looking consolidative process may not be such a bad thing.

The NASDAQ Composite Index also churned around on Friday on higher quarter-end volume, but was down only -0.04% vs. the S&P’s -0.23%. In addition, the NASDAQ is in a position where it is pulling down slightly from a new all-time closing high posted on Thursday. Whether the higher volume on Friday, likely attributable to quarter-end institutional portfolio re-shuffling, is a sign of distribution and an impending downturn remains to be seen.

But if leading stocks continue to act well, I would simply continue to take my cue from them rather than fixating on what the indexes may or may not be doing. The market may simply be consolidating in preparation for another leg to the upside.

 

GR040217-$COMPQ

 

As far as individual stocks go, I remain a fan of Snap (SNAP) as long as it continues to hold above its 10-day moving average. The stock pushed up through the 10-day line earlier in the week on a nice pocket pivot move. That was briefly preceded by a nice undercut & rally move up through the 20.64 prior low in the pattern on the same day. As I blogged Thursday night, SNAP pulled right into its 10-day line that day as volume declined to -65% below average. This created a textbook voodoo pullback into the line and put the stock in a lower-risk entry position.

The stock closed on Friday 29 cents above the 10-day line, less than 2%, which keeps it in a lower-risk entry position using the 10-day line as a tight stop. Volume dried up on Friday to -68.9% below average as sellers are nowhere to be seen, despite another round of negative analyst comments about the stock on Wednesday.

 

GR040217-SNAP

 

I blogged Friday morning on Fortinet (FTNT), pointing out the big-volume gap-up on Wednesday followed by an orderly, low-volume pullback of -57% below average at that time. By the close on Friday volume had “increased” to a rate of -37.8% below average as sellers dried up.

Wednesday’s gap-up move was not of large enough volume to be a true buyable gap-up, but it was a strong-volume trendline breakout. FTNT did a great job of frustrating buyers after its early February buyable gap-up to nowhere. Just as everyone including myself has given up on the stock, it finds support at the 50-day moving average and then gaps up and out of its seven-week base.

 

GR040217-FTNT

 

Both big-stock cyber-security names that I’ve discussed in recent reports, Checkpoint Software (CHKP) and Symantec (SYMC), have been acting well as they remain in uptrends. If any smaller name in the group has a chance at joining them, right now FTNT looks like the ticket.

As far as CHKP and SYMC go, CHKP, not shown, is best bought on low-volume pullbacks to the 20-day moving average at 101.86. SYMC, also not shown, is holding squeaky tight in a three-weeks-tight (3WT) formation. It is buyable here along the 10-day moving average while using the 20-dema as a selling guide.

If you’re jonesing to buy Applied Optoelectronics (AAOI), I would suggest forgetting about the whole high, tight flag myth and instead focusing on the precise price/volume action as it lies presently. I’m quite willing to concede that Monday’s action was a reasonable flag breakout. Unfortunately, that exact breakout level didn’t hold on Thursday.

But when that happens, and in this market, it happens often enough, we know that the next reference point for support can often present a less obvious entry point This is particularly so when the pullback takes the stock just below the prior breakout buy point.

In this position, we can see that AAOI found some volume support off the 10-day line on Friday. For those who want to own the stock (after it nearly tripled in price from where I first discussed it) here, then this would be your lower-risk entry point, using the 10-day line at 54.57 as your selling guide. In this manner we focus on the precise price/volume action. This is a much more concrete approach vs. trying to label or qualify a chart pattern as something like a high, tight flag from which any predictive value can be derived.

 

GR040217-AAOI

 

Tesla (TSLA) hasn’t budged since gapping up to its prior February highs on Tuesday of this past week. While the magnitude of the price move on that upside gap wasn’t enough for a buyable gap-up, it is still possible to treat this as a BGU, using the 275 intraday low as a selling guide.

Another approach would be to take the opportunistic route and just wait to see if the stock fills the gap down to the 270.57 price level. But with volume drying up as TSLA holds squeaky tight over the past four days, it doesn’t seem like there are enough sellers around who are intent on knocking the stock back to the downside.

 

GR040217-TSLA

 

As two of my other bio-tech favorites in 2017, Clovis Oncology (CLVS) and Incyte Pharmaceuticals (INCY) are testing their 50-day moving averages, Bioverative (BIVV) is picking up the slack with a new-high breakout. I first discussed the stock when it was sitting at its 20-day moving average last weekend, and so far it has done well.

On Friday, it pulled down into the confluence of its 10-day and 20-dema lines where it found support and turned back to the upside on a five-day pocket pivot breakout move. As I discussed in my weekend report, a pullback to the lines would present a lower-risk entry point, so one had to be alert to that Friday morning.

That was the point to take shares, as I would be a little wary of jumping all over the stock after it posts a strong move off of the moving average confluence. Better to have bought the stock on the pullback, as is my preferred method of approaching things on the buy side of this market.

 

GR040217-BIVV

 

Clovis Oncology (CLVS) may be an example of an Ugly Duckling sort of pullback right down to its 50-day moving average. This has the look of ugliness based on the fact that it has fallen below the prior base breakout point. But in this market, we already know that base breakouts aren’t your best entry signals.

In this case, the pullback below the prior breakout point perhaps creates disinterest among would-be buyers, hence making the situation ripe for an appearance by the Ugly Duckling. Volume is drying up as the stock tests the 50-day line, so for those who like to take an opportunistic approach, this could be considered buyable using the 50-day line as a tight stop or selling guide.

 

GR040217-CLVS

 

Meanwhile, Glaukos (GKOS), not shown, is extended and out of position for any kind of lower-risk entry but should be watched for any pullbacks into its 10-day simple or 20-day exponential moving averages.

Incyte Pharmaceuticals (INCY), also not shown, which was on fire earlier in March, is dive-bombing its 50-day moving average on light volume. I would watch to see how it acts once it meets up with the 50-day line.

Amazon.com (AMZN) followed through on Wednesday’s breakout to new highs by pushing higher again on Friday as volume came in well above average. The stock is a little over 3% past the breakout buy point of 860.86, so for base breakout buyers this remains within buying range.

Note the extremely tight weekly closes and price ranges presaging this week’s breakout from a cup-with-handle base. We can also see that the breakout was preceded by a quick shakeout down to the 10-week moving average where the stock found ready support before launching higher.

 

GR040217-AMZN

 

Nvidia (NVDA) continues to confound all the short-sellers that have piled into the stock over recent weeks since it broke down off the peak in mid-February. This is trading squeaky tight along its 50-day moving average, not too differently from what it was doing when I last discussed the stock in my Wednesday mid-week report.

Now the 10-day and 20-day moving averages have had a chance to catch up to the stock price as three moving average now converge just below the current closing price. This remains in a buyable position using any of the three nearby moving averages as selling guides.

 

GR040217-NVDA

 

Notes on other big-stock NASDAQ names, all of which are tracking at or near all-time highs with no signs of breaking down yet:

Apple (AAPL) remains extended short-term awaiting a pullback that might make the stock more buyable.

Netflix (NFLX) is extended on the upside as it pushes to all-time highs.

Facebook (FB) is extended as it continues to trek higher. Looking for pullbacks as possible entry points is your best approach here.

Priceline Group (PCLN) is holding tight after posting a pocket pivot at its 10-day moving average on Tuesday. This is still within buying range of the pocket pivot using the 10-day line as a selling guide.

The Ugly Duckling may yet shine upon Netease (NTES), which has started to look at least a little bit ugly on its daily chart, not shown, as it drops below its 20-dema. But the weekly chart, below, reveals the stock’s first pullback to the 10-week moving average following its prior buyable gap-up base breakout in mid-February.

Note that weekly volume dried up, so this could be considered a pullback entry point using the 10-week or 50-day moving averages as reasonably tight selling guides. In addition, NTES has been able to remain above the 278.80 intraday low of the February 16th BGU, which is certainly one strike in its favor.

 

GR040217-NTES Weekly

 

Weibo (WB) has tucked back into the top of its prior late February to late March low-base price range following Wednesday’s pocket pivot range breakout. Volume dried up to -55% below average, putting the stock in a lower-risk buy position using the 50-day moving average, about 2.7% lower, as a tight selling guide.

 

GR040217-WB

 

JD.com (JD) is starting to get sloppy when it should be tightening up constructively in order to offset the big price break it had two weeks ago on above-average volume. That price break did turn out to be buyable on the ensuing undercut & rally (U&R) move, and made for a nice, quick swing-trade. But the stock hasn’t made further progress beyond its recent highs. What I don’t like is Friday’s drop below the 10-day moving average with volume picking up. This looks a little bit sloppier than the preferred tighter price action I’d like to see around the 10-day line.

Now we’re back down to the 20-dema, and my inclination here would be to lay back and see whether JD doesn’t come in further to test the 50-day moving average as a more opportunistic entry point, assuming it does so constructively.

 

GR040217-JD

 

Alibaba (BABA) and Momo (MOMO), both not shown here on charts, are pulling back within strong prior uptrends. BABA pulled into its 10-day moving average on Friday on about average volume, but I prefer to look at buying the stock on pullbacks to the 20-dema, which has served as a reliable line of support for the stock over the past two months.

MOMO may be problematic here as it reversed Thursday’s strong-volume continuation pocket pivot off the 10-day moving average by breaking down to the 20-dema on heavy selling volume on Friday. MOMO may need some time to settle down and set up properly, so I’d give it some time to do so. The stock has had a strong price move so far in 2017 since I first discussed it near the $20 price level.

Splunk (SPLK) looks to be pulling in on light volume in normal fashion after posting a pocket pivot on Wednesday. The closer this gets to the confluence of the 10-day and 20-day moving averages with volume continuing to dry up the better. But how one defines “close enough” is somewhat subjective.

On Friday SPLK closed at 62.29 about 1% above its 20-day moving average, now at 61.62, with volume drying up to -48% below average, In my view, this is close enough to be in position for a lower-risk entry right here while using the 20-dema as a tight selling guide or the 50-day moving average as a wider selling guide. From a fundamental standpoint, SPLK has posted triple-digit earnings growth over the past two quarters with sales up 40% and 39%, sequentially. 2018 and 2019 estimates call for annual earnings growth of 44% and 51%.

 

GR040217-SPLK

 

Take-Two Interactive (TTWO) has now posted two consecutive five-day pocket pivots along the confluence of its 10-day, 20-day, and 50-day moving averages. It was already buyable per my discussion of the stock in Wednesday’s report based on the tight action along the moving average confluence.

As you know, I like to see clusters of five-day pocket pivots in lieu of a single ten-day pocket pivot as signs of strength. In my view, these two five-day pocket pivots potentially bode well for TTWO, and I continue to view it as buyable here using the moving average confluence as a tight selling guide.

 

GR040217-TTWO

 

The other two video-gaming names on my watch list and which I’ve discussed in recent reports (also known as the “lipstick stocks”), Activision (ATVI) and Electronic Arts (EA), both continue to act constructively as well. This is a good sign for the group. ATVI, not shown, posted a pocket pivot on Tuesday of this past week and has pulled down closer to its 10-day moving average. The closer to the 10-day line one can buy the stock the better, but it can be considered to be in a buyable position here using the 10-day line as a selling guide.

EA is sitting right at its 20-dema as volume dried up to -32% below average on Friday. The stock looks a little bit scary due to the heavy volume selling off the peak two weeks ago. But I have noted before that the stock experienced similar selling back in early February and merely tested the 20-dema before moving higher.

Thus, we can consider this as buyable here using the 20-dema as a tight selling guide. If I had to choose between ATVI, EA, and TTWO, I tend to like TTWO’s action the best. However, we have to remember that in this market sometimes it’s the Ugly Duckling in the flock that fools everyone and performs the best!

The action in Square (SQ) has been constructive following Monday’s shakeout and pocket pivot move back up through the 10-day and 20-day moving averages. On Friday volume dried up to -64% below average as sellers are nowhere to be found. This is in a buyable position right here using the 10-day line as a tight selling guide.

 

GR040217-SQ

 

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.  

Also, I often will give the price at which a moving average is currently moving through, but the reality is that moving averages change every day. In the future, I plan to quote the exact price less often since members should watch the moving averages themselves as they move up and down (which is why they are called “moving” averages and not “static” averages!) rather than fixating on the exact price a moving average was at the prior day. 

Notes on other long ideas discussed in recent reports:

Arista Networks (ANET) has pulled into its 10-day moving average, which puts it in a lower-risk entry position using the 10-day line as a selling guide. This also puts it in position for a possible continuation pocket pivot, which is something to watch for.

Carnival Cruise Lines (CCL) is slightly extended, and is buyable on pullbacks to the 10-day or 20-dema lines.

Lumentum Holdings (LITE) has pulled back to its 10-day moving average which puts it in a lower-risk entry positon using the 10-day line as a tight selling guide or the 20-dema as a wider selling guide.

Oclaro (OCLR) pulled into its 20-dema on Friday and held, closing just below mid-range on the day. This puts it in a lower-risk entry position using the 20-dema as a selling guide.

Royal Caribbean Cruise Lines (RCL) failed to hold its 10-day moving average and dropped below the line on Friday as selling volume picked up but remained about average on the day. This does put it in a lower-risk entry position using the 20-dema as a tight selling guide.

Veeva Systems (VEEV) has been a monster over the past three weeks but remains extended as the 10-day and 20-day moving averages catch up to the stock. For now, pending a better long entry set-up, watch for any pullbacks down to the 20-dema, now at 48.68 as potentially opportunistic entries should they occur.

On the short side, the only real love I’ve been getting has been coming from Alaska Air Group (ALK). After reversing at the 50-day moving average on Wednesday the stock has continued to post lower lows on heavy selling volume. That brings the 89 low of eight trading days ago into play as a downside target and near-term cover point for anyone working this on the short side.

 

GR040217-ALK

 

U.S. Steel (X) is holding tight along its 10-day moving average where some might interpret this to be a short-sale entry point at a potential line of resistance. But I would keep an open mind here since the stock could simply be rounding out the lows of another base. X tends to become most buyable when it takes on an Ugly Duckling look, and most shortable when it starts to look strong on the upside. X is undercutting and testing the prior base lows from late January, so there is definitely the possibility of an Ugly Duckling set-up developing here on the long side.

 

GR040217-X

 

Diamondback Energy (FANG), not shown here on a chart, may be trying to round out the lows of a new base as oil names in general are starting to take on an Ugly Duckling look. For example, check out the daily chart of Parsley Energy (PE), a prior oil-sector short-sale target discussed in recent reports, below. PE has been beaten to a pulp throughout 2017, but more recently has started to shows signs of life. In fact, the stock a roundabout pocket pivot on Friday at its 50-day moving average. Thus, it is starting to morph into an Ugly Duckling long set-up!

In this market, I frequently find that some of the best Ugly Duckling set-ups rounding out the lows of potential new bases come right off of my short-sale watch list. PE and X show how this can work, and so one must keep an open mind with respect to these types of set-ups, because often the best price moves occur here, not on a base breakout that the whole world sees.

With oil names having been beaten up badly over recent months, it would make sense to me given this highly rotational market environment that we could begin to see Ugly Duckling set-ups start to pop up within the sector. PE is certainly one such candidate.

After all, the company is expected to post annual earnings growth of 392% and 117% in 2018 and 2017, which is nothing to sneeze at. Among the oil names that I follow, it has the best earnings growth, so would be my top candidate in an oil sector turnaround.

 

GR040217-PE

 

GrubHub (GRUB), not shown here on a chart, broke out to a lower closing low on Friday but selling volume was rather light. If one is looking to short this, then waiting for rallies up into the 10-day or 20-dema lines is your best bet for a lower-risk short-sale entry opportunity. On an individual stock basis, there is a lot of interesting stuff going on underneath the surface of the market. That is why I tend to lean to the long side right here, at least until I start seeing something more concrete on the short side.

When even your prior short-sale targets are starting to show classic Ugly Duckling clues of a turnaround, that is likely telling you something about the underlying market tone. Long live the Ugly Duckling!

On that note, allow me to close this report with the same words of advice I used in Wednesday’s report: Think like an algo, keep the Ugly Duckling close to your heart, and watch your stocks!

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 FTNT, SNAP, and SQ, 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.