The Gilmo Report

April 30, 2017

April 30, 2017

Huge upside momentum at the start of the week tapered off into a slow stall as the indexes suffered from a bit of the old syndrome.of too far, too fast. The NASDAQ Composite Index came in Monday with a big breakaway gap to all-time highs, and the momentum from that move carried it up through the milestone 6,000 level on Tuesday (I did not, however, see anyone wearing NASDAQ 6000 baseball caps to commemorate the occasion).

The upside mo-mo continued into Friday morning as the index gapped up again to an all-time high. Running into heavy volume selling that may have been at least partly due to month-end activity the NASDAQ gave up a strong opening gain to close in the red for the day.

 

GR043017-$COMPQ

 

The small-cap Russell 2000 Index was hit the hardest on Friday’s reversal off the highs, closing down -1.18% on the day. The daily chart of the Russell’s proxy, the iShares Russell 2000 ETF (IWM), broke back below Tuesday’s breakout point on higher volume. As I wrote on Wednesday, the Russell’s action could only be interpreted bearishly if we saw the breakout failure. We saw that on Friday. Therefore, near-term the action among small-caps is bearish, and may imply a further pullback from here.

 

GR043017-IWM

 

The S&P 500 Index, like the other NYSE-centric indexes, is running into resistance at its prior March high. On Wednesday, I pointed out that the action that day had the appearance of churning on higher volume, and hence was bearish. Friday’s reversal off the peak on higher volume builds on the bearishness.

Whether this means the market is heading lower next week, or whether the bearish index action simply means Ugly Duckling is about to pay a visit is open to interpretation. I think it probably boils down to what individual stocks are doing, and there have been playable set-ups both long and short in recent days.

 

GR043017-$SPX

 

Case in point would be Amazon.com (AMZN), which gapped up on Friday morning on an allegedly strong earnings report the night before. The stock printed 948.83 at the opening bell, and then steadily descended from there. By the close it was trading right at the intraday lows, giving up all but 0.72% of its big gap-up move. Interestingly, AMZN’s gap-up turned out to be not a buyable one (a BGU), but a shortable one (an SGU!). So how does one determine whether a gap-up like this is buyable or shortable? That’s a very good question.

 

GR043017-AMZN

 

The answer is “620.” I tweeted near the open that AMZN had posted a 620 sell signal in the pre-open “around 951,” and was short the stock on that basis. I show the five-minute 620 chart for Friday below. In this case I was simply acting on the 620 sell signal, and if AMZN turned around and posted a 620 buy signal, I would simply click on the “Reverse” button on my ThinkorSwim® trading platform and flip from short to long.

But AMZN just kept trundling lower. From the opening bell to the closing bell, the stock never poked above the blue 20-period exponential moving average (equivalent to a 20 x 5 minutes = 60 minutes =1 hour e.m.a.). Talk about consistency!

While there was much talk among the punditry about AMZN moving through the millennial mark at $1,000 a share, the stock didn’t seem to be in a big hurry to do so. It could be possible that the stock is topping here and will now spend some time building another base, but the only true confirmation of this would likely have to be an all-out bust of the 50-day moving average down at 872.08.

 

GR043017-AMZN Intraday

 

In the meantime, AMZN was a nice 620 short-scalp on Friday for anyone who was alert to the set-up and ready to play it as it showed up in real-time. Despite the short scalp on Friday, I would not rush to judgment and instead remain open to the stock potentially stabilizing and holding up as a BGU, should that be the case.

GrubHub (GRUB) was another big earnings gapper this past week, but it came a day before AMZN. The company reported earnings Thursday morning, and gapped up monstrously. The stock had closed at 35.02 on Wednesday, and opened up on Thursday at 40.55.

This is a good example of why I refrain from playing earnings roulette with stocks, long or short. As of the last reported date, GRUB had 16.47 million shares of its stock sold short, and those shorts were run through the juicer on Thursday. The stock kept running all day long and closed near the highs of the day at 42.98. On Friday, however, the situation shifted, and GRUB went from a bottom-fishing buyable gap-up (a BFBGU) to an intraday short-sale set-up into the upside extension. Again, how do we know which side of the stock to be on and when?

 

GR043017-GRUB

 

The answer again was “620.” Below I show the five-minute 620 chart of GRUB, and we can see that on Thursday the stock streaked higher and never looked back. All day long it remained above the 20-period line without flashing a clean 620 sell signal. I was watching the stock at this point, and was even looking at shorting the stock as it started to look like a 620 sell signal might materialize. At 11:20 a.m. PST my time, I blogged that GRUB didn’t feel like it was going to roll over and that it was probably going higher.

By the close on Thursday, GRUB logged another point to the upside. By Friday’s open, the stock picked up where it left off and kept pushing higher, hitting an intraday peak of 45.09 before reversing. It then flashed a 620 sell signal around 9:00 a.m. PST and kept moving lower for the rest of the day. The action here on the 620 is fairly clean, and easy to interpret. Sometimes this is not the case, but we can see how the 620 chart works when it works best in these two examples, AMZN and GRUB.

The short early in the day provided a nice downside scalp for the day. However, based on the way I like to play these I will cover the position into the close and then see where things are at on Monday morning if I want to re-enter the short at that time. There is always the possibility that GRUB will stabilize and then turn higher, so I want to keep things “fresh.”

 

GR043017-GRUB Intraday

 

Netflix (NFLX) continues to hold Tuesday’s high-volume base breakout, but looks to be wedging slightly along the lows. Note how it is holding up near its highs with volume declining, whereas you’d prefer to see it drifting to the downside with volume declining.

Not that this is a huge problem, since the stock is within buyable range of the 148.29 breakout buy point. So, buying anywhere around the 150 price level is a maximum of 2-3% above the buy point. If it fails, it fails, but risk can be kept to a minimum by using either the 148.29 price level or one of the lower moving averages, such as the 10-day or 20-dema lines.

 

GR043017-NFLX

 

Alphabet (GOOGL) reported earnings along with AMZN on Thursday after the close, and it too gapped up on the open. The stock printed 929 at the opening bell, rallied to a high of 935.90, and then slid lower all day long before closing at 924.52 and right near the intraday lows. GOOGL was less clear on its 620 chart early in the day, first flashing a sell signal, then a buy signal, and then a final sell signal as the stock kept moving lower. In this case one might have to come after the stock a couple of times before getting any traction on the short side.

 

GR043017-GOOGL

 

This week we will see Apple (AAPL), Facebook (FB), and Tesla (TSLA), report earnings, and I have no intention of playing earnings roulette with any of them. Priceline Group (PCLN), not shown, has continued to move higher since breaking out on Monday, and is extended as its May 9th earnings report approaches.

Nvidia (NVDA), also not shown, is holding along its 50-day moving average with volume drying up, but whether it is going to have a significant move in either direction before it is expected to report on May 9th is unknown.

We also have Alibaba (BABA) expected to report on Thursday of this coming week, and the stock is currently extended and not in any lower-risk entry position. JD.com (JD) is the same story as it sits in an extended position with earnings expected on May 9th before the open. Momo (MOMO), also not shown here on a chart, is still holding up near its highs and along the 10-day moving average with volume drying up on Friday. Earnings are expected on May 16th.

Weibo (WB) is showing some spunk here, and looks like it is revving to go higher following last week’s roundabout pocket pivot at the 50-day moving average. The only roadblock might be the fact that it is expected to report earnings on May 10th.

Over the past several days since the pocket pivot, WB has been making a run at its prior breakout highs of mid-February, and held up buoyantly on Friday as sellers didn’t seem intent on hitting the stock into month-end. Believe it or not, if you look at WB’s weekly chart, not shown here, you will note that the stock in fact made an all-time weekly closing high.

This is constructive action, but anyone who bought the stock on the basis of last week’s pocket pivot along the 50-day line might consider if they want to take some swing-trading profits ahead of earnings. The good news is that one has a week-and-a-half to figure this out.

 

GR043017-WB

 

Netease (NTES), not shown, is expected to report earnings on May 10th, and for now I think the stock is played out. After reversing hard on Wednesday, it has now retested its lows of the prior week around 260. For now, I’m only focusing on stocks that have already reported earnings as this takes the whole earnings roulette thing out of the equation.

Financials have remained under pressure, but for the most part are just flopping around in their patterns as they track sideways. We see this in Citigroup (C) which was good for a scalp on the short side earlier in the week as it was hanging above its 50-day moving average. However, now we can see that the stock has pulled into the confluence of its 10-day simple and 20-day exponential moving averages with volume drying up to -33% below average, which is “voodoo” territory for a big-cap name like this.

The health of financials is dependent on this idea of continuous interest rate increases in 2017, which is something of an open question given Friday’s oh-so-tepid 0.7% GDP growth number. Technically, however, C is looking like it’s good for a trade back up to the upside and within this current price range.

 

GR043017-C

 

Financials tend to look alike, and the daily chart of J.P. Morgan (JPM) in comparison to C’s chart is testament to this. Its pattern is a little weaker as it found resistance at its 50-day moving average on Tuesday of this past week before dipping back down to its 20-day exponential moving average.

That was good for a couple of points of downside for a nice short scalp. The ensuing pullback to the 20-dema, however, occurred with volume drying up to -34% below average, also in voodoo territory. This would imply that JPM might be good for a trade back up to the 50-day line from here.

 

GR043017-JPM

 

Goldman Sachs (GS) is in its own little world after coming completely unglued during the months of March and April. Last week it gapped down to lower lows, but after already becoming extended to the downside, this acted more like an exhaustion gap as the stock undercut the prior late March low.

This led to a typical undercut and rally move back to the upside, and the stock is now flopping around its 20-day exponential moving average. Selling volume picked up slightly on Friday, but still came in -25% below average, which is NOT in voodoo territory.

Perhaps GS is set to retest last week’s low, and one way to test that theory is to short the stock here and use the 20-dema as a very tight upside stop. Overall, however, I think the fate of financials depends a great deal on the future direction of interest rates, which makes the entire sector somewhat news-sensitive.

 

GR043017-GS

 

By my reckoning, Snap (SNAP) had about 37.83 million of its shares sold short as of the last report date in mid-April. With nobody intent on selling the stock, the vise has slowly tightened on the shorts all week long with the stock up five days in a row.

The final four days of the week all showed five-day pocket volume signatures, although only those occurring at the 10-day and 20-dema lines were actionable. Now SNAP is just a bit extended on the upside, but looks like it could continue higher as its expected May 10th earnings reports looms ever closer.

 

GR043017-SNAP

 

Even though Applied Optoelectronics (AAOI) is expected to report earnings this Wednesday, it has already let the earnings cat out of the bag so to speak. Two weeks ago, the company reported “preliminary” earnings and raised guidance, causing the stock to gap-up sharply. That gap-up turned out to be shortable, which I tweeted before the open when the stock was trading around 51 that day. The stock then reversed and held along its 65-day exponential moving average, the lowest moving average you see on the chart below.

It then posted a pocket pivot coming off the magenta 10-day moving average, and the next day a roundabout pocket pivot coming up through the 50-day moving average. It has since been holding tight along the 50-day line, and on Friday volume dried up to -40% below average, which is well within voodoo territory.

Unless there are some surprises in store when the company reports on Wednesday, this looks buyable right here at the 50-day line, using the line as a tight selling guide. I should also point out that AAOI has been the subject of M&A speculation, also known as buyout rumors, which has perhaps contributed to its current buoyancy.

 

GR043017-AAOI

 

At least when it comes to ServiceNow (NOW) we needn’t worry about playing earnings roulette, as the stock already reported Wednesday after the close, as I noted in my report of that day. On Thursday, the stock posted a buyable gap-up (BGU) and set an intraday low of 93.30 before closing at 94.33, a little over 1% higher.

On Friday NOW dipped just a hair below the 93.30 price level before finding its feet and pushing back to the upside side. It then closed at 94.48, which keeps it within buying range of Thursday’s BGU. While one could try and mess around with other clouds set to report earnings later in May like Splunk (SPLK) and Workday (WDAY), both of which act well, NOW is showing a concrete long set-up here and now and without the added excitement of having to play earnings roulette.

 

GR043017-NOW

 

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.

Notes on long ideas discussed in recent reports with expected earnings report dates:

Activision Blizzard (ATVI) is expected to report on Wednesday, May 4th.

Arista Networks (ANET) is expected to report on Tuesday, March 2nd.

Bioverative (BIVV) is expected to report on Thursday, May 3rd.

Electronic Arts (EA) is expected to report on May 9th, but can also be expected to react in sympathy to ATVI’s earnings reports on Wednesday.

Square (SQ) is expected to report earnings on Wednesday, May 3rd. to do with the stock before then.

Take-Two Interactive (TTWO) can also be expected to react to ATVI’s earnings report on Wednesday, but is not itself expected to report earnings on May 16th.

Veeva Systems (VEEV) is expected to report on May 25th but is currently way-extended from any kind of lower-risk entry point.

As you can see from my notes as well as my discussions of other big-stock NASDAQ names in this report, we’re going to see a lot of earnings reports this coming week. And, as is often the case, long or short opportunities can easily materialize once earnings are reported.

Sometimes the opportunities go first in one direction and then the other, as NFLX was when it was shortable right after earnings and then buyable again once it regained its 50-day line on Monday in an MAU&R move. Both plays were profitable on a short-term basis. Such is the nature of this market.

If you watch pundits on financial cable TV or read their commentary on the internet, you find a lot of talk about the “foundations” of this rally being in question. Most commentators believe that the rally since the November elections has been a “Trump Rally” predicated on the passage of his sweeping legislative agenda.

The fact that little of that agenda has yet to come to fruition is often cited as the market’s Achilles Heel. That may or may not be true, as the market could simply chop around as it awaits something more concrete in the way of tax reform or healthcare legislation. Or it could fool the crowd and just go higher.

Meanwhile, the bigger issue from my perspective is finding fresh situations that have strong upside potential outside of the names I’ve been following that keep trending higher, such as AAPL, AMZN, FB, BABA, PCLN, GOOGL, MOMO, SQ, etc.

Some of these will be reporting earnings this week, so there could be some significant action that develops as a result, but we won’t know until we get there. Until then, I must satisfy myself with a handful of actionable names that have already reported earnings.

In addition, there are buyable gap-up moves in industrials like Caterpillar (CAT) and CSX Corp. (CSX), both not shown, over the past week or so, but these haven’t led to huge upside since their BGU’s. This past week I saw interesting post-earnings gap-up moves in Edwards Lifesciences (EW), not shown, and iRobot (IRBT), the maker of the Roomba robotic vacuum.

Both stocks, however, can technically be considered buyable as BGUs using EW’s BGU intraday low 106.74 and IRBT’s BGU intraday low of 74 as selling guides. The most optimal approach would be to look for pullbacks closer to the BGU low, similar to what you saw in NOW on Friday when it just barely undercut its own 93.30 BGU intraday low.

One of these Roomba gizmos lives in my home, and I can often hear it roaming the rooms and hallways during the day as goes about its business of sucking up unwanted matter from our floors and carpets. I understand that they also make a mopping robot known as the “Braava,” and I wouldn’t be surprised if one of these shows up in my house soon.

I suppose if I had to choose between EW and IRBT, I’d go with the latter based on the 108% earnings increase they reported on Tuesday after the close vs. EW’s “slower” 32% earnings growth. One could also keep things tighter with IRBT by using the 78.11 low of Thursday rather than the 74 intraday low of Wednesday’s BGU as a selling guide.

 

GR043017-IRBT

 

Then there’s Vertex Pharmaceuticals (VRTX), which gapped up in late March after reporting that tests showed their experimental cystic fibrosis drug improved lung function. This led to a big-volume buyable gap-up at that time, and the stock has baby-stepped its way higher along its 10-day moving average since then.

VRTX reported strong 356% earnings growth on Thursday after the close and posted a stalling continuation pocket pivot at its 10-day line on Friday. This would be technically buyable here using the 10-day line. Keep in mind that VRTX is a developmental bio-tech with several new drugs in the pipeline, hence can be subject to news-risk as is the case with bio-techs in general.

 

GR043017-VRTX

 

Perhaps we’ll see the market pull back this week as market participants mindlessly heed the old market bromide of “Sell in May and go away.” But I’m guessing that the big earnings reports this week in names like AAPL, FB, and TSLA, among others, will figure into all of this.

So, it still remains a matter of just watching the stocks. While there are a few fresher situations coming through my screens, the fact that there aren’t a large number may indicate that this isn’t the time for taking big, new positions. That does not preclude, however, the idea of testing a couple of these new ideas out while maintaining the usual tight risk-management approach that I advocate. 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. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.