The Gilmo Report

April 28, 2018

April 28, 2018

The market looked primed for a big upside romp Friday morning after big-stock NASDAQ names Amazon.com (AMZN), Intel (INTC), and Microsoft (MSFT) all reported strong earnings and gapped up sharply in after-hours trading on Thursday. As the pundits on cable financial TV lauded the exploits of these three big-stock index names, the NASDAQ Composite Index moved up toward its 50-dma, looking as if a breakout through this key moving average was all but inevitable.

But that all dissipated rapidly shortly after the opening bell, and was accompanied by bearish reversals in all three big-stock gappers, AMZN, INTC, and MSFT. This sent the NASDAQ Composite careening off the underbelly of its 50-dma and streaking back to the downside. Volume was light, more indicative of a lack of buying interest rather than huge selling interest.

 

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The S&P 500 Index was also unable to capitalize on the morning earnings ebullience and just churned around on light, indecisive volume. Where it goes from here is difficult to determine, but as I noted in Thursday night’s video report, I would not be surprised to see the S&P 500 eventually breach the 200-dma.

That said, for now, we simply remain in this big choppy range extending back to late January as stocks fly back and forth with little to nothing in the way of big money trends developing. In my view, this remains a swing-trading environment for nimble, active traders. It is not an investor’s market, period.

 

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Amazon.com (AMZN) broke out on Friday at the open as expected. However, as I warned in my Thursday evening video report, members should keep an eye out for a possible breakout failure. It didn’t take long for the stock to fail after it reached a peak of 1664.81 in pre-open trading and then began declining even before the opening bell. At the bell it printed an opening price of 1634.01.

From there it was straight down as it quickly plummeted back through the 1617.54 pivot point. By the close it was trading near the lows of the day, printing 1574.24 at the bell. Technically, one could still assume this is a buyable gap-up type of move, but the stock would need to stabilize first. This might entail a test of the moving average confluence down below, where the 10-dma at 1508.63 is the highest moving average of the bunch.

A clean breach of the moving averages, however, would confirm AMZN as a late-stage failed-base (LSFB) short-sale set-up. Nevertheless, the first sign of an LSFB is always either a move below the original breakout point or the 20-dema, and in this case AMZN became a short once it dropped below 1617.54. However, alert traders might have started shorting it earlier in the day based on the five-minute 620 intraday chart.

 

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I pointed out in my Thursday video that AMZN reminded me a little bit of Netflix (NFLX), which also broke out after earnings. The difference here is that NFLX actually held up on the initial breakout and buyable gap-up, but never generated any significant upside from there. It then just stalled around and eventually failed, breaking below the 10-dma and 20-dema a week later.

It’s never constructive to see big-stock leaders breaking out and then failing. But it does present viable short-sale targets for those who are oriented toward the short side and can recognize the proper entry points. In NFLX’s case, the first sign of failure was the breach of the 323.77 BGU low on Monday combined with news of a $1.5 billion bond offering. That sent the stock down for three straight days before it found support around the 50-dma on Wednesday.

From here, I still consider moves up into the 10-dma, which appears to serve as solid resistance, as your lower-risk short-side entry opportunities. In my Wednesday report, I surmised that the stock would likely push up through the 20-dema, where it might then encounter resistance at the 10-dma. The 10-dma also coincides with the lows of the gap-up “rising window.”

 

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Nvidia (NVDA) reversed at its 10-dma and 20-dema on Friday, where it was shortable after a logical undercut & rally move. Buying interest wasn’t strong enough to propel the stock as far as the 50-dma, so for now the 10-dma/20-dema moving-average confluence is working as a short-sale entry point. As I wrote on Wednesday, “Volume picked up on the day, so rallies up into the 10-dma/20-dema moving-average confluence remain your short-sale entry opportunities for now.”

There is still an outside possibility of NVDA pushing up higher into the 50-dma depending on what the general market does from here, so maintain your initial stops at the 10-dma/20-dema moving-average confluence. And remember that shorting the stock here means one is anticipating a decent downside move ahead of earnings, which are expected on May 10th.

 

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Facebook (FB) had an impressive gap-up move following earnings, but what is notable here is that it wasn’t strong enough to take the stock anywhere back near its prior highs. In fact, the stock has barely cleared its 200-dma, which is the highest moving average in its pattern. You might also notice that the 50-dma has crossed below the 200-dma, creating a bearish black cross.

While the black cross may or may not be telling, what is evident here right now is that FB is running into resistance along the 200-dma and the bottom of a prior area of price congestion. I discussed this in my Thursday night video report, and after FB tried to rally higher on Friday morning it reversed to close down and back below the 200-dma.

I now view this as a short, using the 200-dma as a guide for a tight upside stop. One thing I find interesting currently is that many pundits and analysts cite FB as a valuation play given its “low” P/E ratio. Currently, the stock sells at about 19 times 2019 estimates. But it is often quite common for a big leading stock to begin showing a “low” P/E just when it is ready to begin a big correction.

I can remember back in 2012, Apple (AAPL) was selling at about 12-13 times earnings, but that didn’t prevent the stock from an ensuing -45% decline from its 2012 highs. In my view, P/E’s are not measures of absolute value, but rather the value that the market places on the company’s future earnings stream. Thus, a low P/E may be telling you something is wrong, and this may certainly be the case with FB, so it is important not to get caught in the valuation trap – let the chart tell its story.

 

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I wrote in my Wednesday report that Twitter (TWTR) was gapping up in the after-hours that day in sympathy to FB, which was gapping higher on a strong earnings report. As I said, “In the after-hours as I write, the stock is trading up above 30 in sympathy to FB, which may set up another shorting opportunity tomorrow.”

That turned out to be the case as TWTR rallies right up into the 50-dma and then dutifully reversed, logging a lower closing low on Friday on above-average volume. From here, now that the stock is down a ways from its 50-dma, weak rallies up into the 20-dema might present potential short entries.

 

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Cree (CREE) turned out to be the short-sale gift that keeps on giving after I first discussed it as a short into an earnings gap-up in my Tuesday night video report. That short-sale recommendation turned out to be prophetic as the stock reversed hard on the day for a big short-side gain.

However, as they say on those cable TV infomercials, “But wait, there’s more!” On Thursday, CREE rallied back up into its 50-dma and then sat there again on Friday morning, presenting short-sellers with a big, fat target right at the line. I discussed looking to short weak rallies back up into the 50-dma in my Wednesday report, and shorting it there on Friday yielded immediate results, as the stock then broke to lower lows. It is now extended to the downside.

 

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Inphi (IPHI) was another stock I discussed shorting into on an earnings gap-up in my Tuesday video report, and it busted hard on a big outside reversal on Wednesday. Now the stock is drifting back up toward the 50-dma on weak volume. I would look for this wedging rally to perhaps push a little close to the 50-dma as a potential short-sale entry opportunity from here.

 

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In my view, this remains a bifurcated market, with opportunities showing up on the long or short side. Lately I’m finding more things that are shortable than buyable, but some leaders continue to act okay. CSX Corp. (CSX) is one of those. I discussed in my Wednesday report that the stock had posted an undercut & rally move coming back up through the prior 59.19 intraday low of the prior week’s buyable gap-up (BGU) move.

That was not the cleanest of U&R moves since the stock retested the 10-dma on Thursday. It did, however, hold support at the 10-dma, which was less than 1% below the 59.19 BGU low. On Friday, despite the funky general market action, CSX rallied off the 10-dma as volume dried up sharply. This keeps the stock in a buyable position using the 10-dma at 59.43, or the prior 59.19 BGU low as selling guides.

 

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Because CSX has broken out and is “in the clear,” I prefer it to Norfolk Southern (NSC). However, NSC continues to hold up well following Wednesday’s big pocket pivot gap move back up through the 50-dma. The problem for me is that it is still way down in its base and extended from the 50-dma or any other useful moving average. I might look for a retest of the 50-dma as a lower-risk entry, assuming you can get it.

Boeing (BA) is holding tight here along its 50-dma following Wednesday’s post-earnings pocket pivot move back up through the 50-dma. This puts it in a lower-risk entry position using the 50-dma or the 10-dma/20-dema confluence, just below, as your tight selling guide. Keep in mind that this coming week, Treasury Secretary Steven Mnuchin will head to China to engage in trade discussion, so this could serve as a catalyst for the stock one way or the other.

 

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Intuitive Surgical (ISRG) has rallied off its 20-dema, as I surmised it might in my Wednesday report. The rally has now carried back above the 10-dma, but volume has been light. I would look for any low-volume retest of the 20-dema as a lower-risk entry possibility from here.

 

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Nutanix’s (NTNX) got hit Friday on a report that the company was delaying its cloud launch due to an “engineering problem.” This takes the stock completely out of play for now, pending its expected earnings report this Thursday. I will be watching the stock closely on the report, however, in case anything interestingly opportunistic arises.

 

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Square (SQ) is also expected to report this week on Wednesday, after the close. I noted in my Wednesday’s report that the stock was undercutting a prior low in the pattern, hence might be susceptible to an undercut & rally move back to the upside. That’s precisely what we saw over the next two days as a light-volume rally carried the stock right up into its 10-dma, 20-dema, and 50-dma.

It ran out of gas as it approached the 50-dma on Friday morning, stalling a bit to close in the lower part of its daily trading range. While that was good for a short scalp, I would leave the stock alone going into Wednesday’s expected earnings report.

 

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This will be a big week for cyber-security earnings, as FireEye (FEYE), Fortinet (FTNT), and CyberArk Software are all expected to report this week. FEYE is expected on May 1st, while FTNT and CYBR are expected on May 3rd. Thus, these all remain on earnings watch for now, and nothing more.

Sailpoint Technologies (SAIL) and Okta (OKTA) are beginning to waver a bit as their respective, expected earnings reports approach on May 9th. While both stocks are holding above recent pocket pivots, upside progress has been muted, and unless I see significant upside progress ahead of their earnings reports I am not interested in playing earnings roulette with either stock.

Palo Alto Networks (PANW) continues to go nowhere as it tracks tight sideways along its 10-dma and 20-dema. Volume has remained light, and I continue to view pullbacks to the 20-dema as your best, lower-risk entry opportunities. However, the stock hasn’t shown any willingness to move significantly higher ahead of its expected May 31st earnings report. But it still has plenty of time to make a move if it wants to, so remains a viable long idea for now.

 

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First Solar (FSLR) was buyable along the 20-dema as I discussed in my Wednesday report, although I neglected to mention that the company was expected to report earnings on Thursday. Doh! Well, anyone who bought the stock ahead of earnings would have made out well, however, since the stock took off on a sharp upside move on Friday. Proof that sometimes it pays to be more lucky than good!

FSLR ended up stalling however, and closing in the lower half of its daily trading range on very heavy volume. I would be interested to see how this handles any further pullback to the 10-dma, since a contraction in volume on a successful retest of the 10-dma, maybe even the 20-dema, might present a lower-risk entry.

 

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Notes on other long ideas:

Carbonite (CARB) is expected to report earnings this Thursday, May 3rd so there is nothing to do with the stock until then.

Planet Fitness (PLNT) is expected to report earnings this Tuesday, May 1st so there isn’t much to do here until then.

Applied Materials (AMAT) kept rallying on Thursday and then again Friday morning on low volume, which was the weak rally I was looking for as a short-sale entry per my comments in Wednesday’s report. The stock, however, didn’t quite make it as far as the 200-dma before turning tail on a low-volume outside reversal.

For those watching the five-minute 620 intraday chart, a clean sell signal was generated about 10-15 minutes after the opening bell up around 50.90, and the stock then headed south to close at 49.40, about 5% lower. Not bad for a day’s work, if you can get it. The stock is now out of shorting range. Earnings are not expected until May 17th.

I should point out that the trick here, as with any potential short-sale target as it is rallying up toward a moving average, is to watch a five-minute 620 chart carefully as AMAT approached the 200-dma. Not all weak rallies will get as far as a key moving average, while some will push just past a key moving average. One must be flexible while using the 620 chart to determine potential entries, since one can never know for sure just where a rallying short-sale target will stop and reverse.

 

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

This remains a choppy environment, but this is nothing new as I’ve been saying this for quite some time now. It is interesting to note that some of the best trading opportunities this past week came on the short side, and generally from shorting into post-earnings rallies and gap-ups. Perhaps this is a clue as to the flavor of this market where good news gets sold into.

This week we will have a Fed meeting, trade discussions in China as Treasury Secretary heads to Beijing, and Apple (AAPL) earnings. All this should conspire to produce the usual wild and wooly action we’re becoming accustomed to. Nevertheless, I think this is a ripe environment for nimble traders who understand how to employ methods that go beyond the somewhat simplistic and currently relatively ineffective CAN SLIM™ discipline.

Perhaps it is a sign of the times that now even Investor’s Business Daily is promoting a “Wyckoff Trading Course” webinar. I first noted the importance of Richard D. Wyckoff’s methods and philosophy as it related to the philosophy and methods of my mentor and former boss, William J. O’Neil in the book, Trade Like an O’Neil Disciple (John Wiley & Sons, August 2010).

And, as I noted in my latest book, Short-Selling with the O’Neil Disciples (John Wiley & Sons, April 2015), these days I consider myself an “OWL” (O’Neil, Wyckoff, & Livermore) disciple more than an O’Neil disciple.

And that’s not to dismiss what I learned from Bill O’Neil since that is still a very important component in my overall trading philosophy. But it does recognize that today’s markets are a bit different from the steadily trending post-World War 2 secular bull market, and that utilizing what are really old methods (Wyckoff and Livermore began trading in the early 1900’s) can be productive in a market that tends to express itself in swing-type moves as much or even more than trending moves.

So, again, to beat a dead horse, this is a market where one should avoid taking a rigid bullish or bearish stance, and simply seek to go with the available “OWL” set-ups as they appear in real-time, long or short. At times we have seen the market lean toward the short side, and then shift back to the long side, all while showing little in the way of sustainable breakouts or breakdowns.

This is an environment for swing-trading, period. In recognition of this, I have instituted a pilot program of more frequent Gilmo Video Reports, which I believe have been very timely in terms of presenting actionable ideas in a format that is more in sync with the rapidly changing, day-to-day swings we see in this market. When these videos are posted, a link will appear on my Twitter page, and we will also send an email to all members notifying them of same. 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 no positions, though positions are subject to change at any time and without notice.

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