The Gilmo Report

April 9, 2017

April 9, 2017

Friday’s Bureau of Labor Statistics jobs number came in lighter than expected, with a mere 98,000 non-farm payrolls reported vs. expectations of 180,000. Meanwhile the now-mythical unemployment rate came in at 4.5% vs. expectations of 4.7%. By now, most market watchers understand the sleight-of-hand statistical machinations that produce such a disparity between weak jobs growth and a declining unemployment rate.

On the heels of Wednesday’s strong ADP jobs number, the weak BLS jobs report was perhaps a bit of a negative surprise, and futures did initially sell off in response. Throw in the overnight bombing of a Syrian airbase by U.S. cruise missiles and a terrorist attack in Stockholm, Sweden, and it seemed like the perfect storm for sending the market sharply to the downside.

But what seems obvious in the market often turns out to be quite the opposite. As I tweeted on Wednesday, a day when the market was reversing sharply to the downside in an extremely bearish move for which I was positioned on the short side, one always feels a need to be constantly looking back over one’s shoulder, expecting the unexpected.

This market has a way of making one suffer from what I like to call “profit paranoia.” When something is going my way and I’m profiting nicely, fear rather than greed seems to take over. That is the fear of seeing your profitable long or short position change direction in an instant, and in the process vaporizing a nice chunk of your profits.

There are more than a few examples of this in this market. Just ask anyone who bought Applied Optoelectronics (AAOI) on the high, tight flag breakout a couple of weeks ago. You can also add names like Alphabet (GOOGL) and Weibo (WB), both big leaders in this market that had sudden breakdowns off their peaks over the past several weeks.

It’s no different for the short side. I like the example of U.S. Steel (X) as a name that exhibits this sort of “now you see me, now you don’t” type of behavior in both directions, and on a regular basis. It does not matter how good you think you are as a trader or investor, the action can easily fool you.

After X had been clipped on heavy selling volume three times on the way down after peaking in February, I theorized last weekend that X could be attempting to round out a new base. By Wednesday, however, that didn’t look likely as the stock pulled an outside reversal to the downside on higher selling volume.

But in this market, the news flow has been a meaningful force for infrastructure-related stocks. Wednesday night the N.Y. Times reported that President Trump had a renewed plan for infrastructure legislation, and this sent the related stocks rallying on Wednesday. For X, that created a five-day pocket pivot, and this was followed by a higher-volume ten-day pocket pivot on Friday as the stock pushed above the 10-day moving average.

Technically, X is now a potential long based on Friday’s bottom-fishing pocket pivot (BFPP), using the 10-day line as a tight selling guide. Note that on the way down since peaking in February, the stock has had a few short rallies, and these were mostly created by a short-term positive news flow regarding the Administration’s infrastructure push.

It’s this sort of thing that makes this market challenging at times, if not downright difficult. It is also why one must keep an open mind with respect to the real-time action, because in the market what you conclude one day can change quickly over the next two.

 

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To some extent, this has applied to the general market as well. When it looked like the market might be ready to split wide open after Wednesday’s brutal downside reversal, there wasn’t even so much as a hairline crack over the following two days. But the index action still remains open to resolution in either direction.

Objectively the S&P 500 Index remains in a five-week downtrend extending back to the beginning of March. Wednesday’s ugly reversal constituted a failed trendline breakout attempt, and the index is now attempting to hold support just above the 50-day moving average as volume declines. If it holds and turns back to the upside, then we will have a bullish resolution. On the other hand, a breach of the 50-day moving average could send the index on a test of the March low.

 

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The NASDAQ Composite Index has also been holding tight over the past two days with volume drying up. Like the S&P, it is also trying to catch its breath after posting an ugly outside reversal to the downside on heavy volume Wednesday. The NASDAQ is now showing two higher-volume reversals off the peak over the past three weeks. In both cases the index was attempting to clear to all-time highs on an intraday basis before getting upended and blown back to the downside.

 

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Both the S&P 500 and NASDAQ Composite Index charts can be interpreted as bearish based on the heavy distribution seen over the past three weeks. On the other hand, both indexes have taken a lot of heat and negative news recently but have still hung in there. The NASDAQ is less than 1% off its all-time highs, while the S&P 500 is less than 2% below its own all-time highs.

From a percentage standpoint, those declines don’t even qualify as short-term corrections. Does this imply that more downside could be coming? Or is it a sign of resilience? Find out this week when we all tune into another episode of As the Market Turns.

I’ve got my eye on big-stock leaders that are at what I would consider to be critical junctures in their patterns. Amazon.com (AMZN) has initially failed on an attempt to clear the $900 Century Mark, something that can trigger Livermore’s Century Mark Rule in Reverse and morph the stock into a short-sale target.

However, in this market the Century Mark Buy Rule for the long side, where Jesse Livermore would look for a quick move of 10-20% higher after a stock breached a century mark, doesn’t always lead to immediate upside. In AMZN’s case, after clearing the $900 level, the stock only rallied 2.6% from there and has since dropped below the century mark, closing Friday at 894.88.

Note, however, that AMZN has pulled down close to its 10-day moving average with volume declining sharply. So, there is always the possibility that the stock will make another run for the $900 level, which is not even 1% away. This may also coincide with what the general market does from here.

There is also the earnings factor to think about, since AMZN is expected to announce earnings at the end of the month. For that reason, the stock could simply spend some time backing and filling ahead of earnings, but the pullback to the 10-day line on lower volume does create a potential lower-risk entry point right here.

 

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Tesla (TSLA) is doing somewhat better than AMZN, as it holds tight along and above its own $300 Century Mark milestone with volume drying up sharply. This looks constructive, and so the stock remains buyable here using the 300 level, with 1-2% additional downside to account for any downside “porosity,” as a tight selling guide.

 

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Other big-stock NASDAQ names aren’t showing much movement either way, as my notes on these stocks indicate:

Apple (AAPL) has dipped below its 10-day moving average but only by a razor-thin margin, and volume has dried up sharply. While I wouldn’t necessarily buy the stock here, there is no reason to sell it since it has not substantially breached its 20-dema. Earnings aren’t expected until early May.

Netflix (NFLX) is sitting right at its 50-day moving average as volume dried up to -37% below average on Friday. This would put it in a lower-risk entry position using the 50-day line as a tight selling guide. Of course, a bust of the 50-day line on heavy selling volume would trigger a short-sale entry signal. Earnings are expected to be reported next week.

Facebook (FB) moved down to its 20-dema on Friday as volume dried up to -31% below average, a reasonable volume dry-up for a big-cap stock like this. As with AAPL, while I wouldn’t be looking to buy this here, there is also no reason to sell the stock. Earnings aren’t expected until early May.

Priceline Group (PCLN) is holding tight at its 20-dema, which, as I’ve discussed in recent reports, has served as reliable support for the stock since early January. Volume dried up to -30% below average on Friday, so this looks buyable here using the 20-dema as a selling guide.

Nvidia (NVDA) remains a big-stock short-sale target here following Tuesday’s gap-down break below the 50-day moving average on heavy selling volume. Over the past three trading days the stock has held in a tight range just above the $100 price level.

While I would optimally like to short a rally back up into the 10-day or 20-day, or even 50-day, moving averages, this could be considered shortable here. One could then use the 20-dema at 104.47 as a 4% upside stop. For my money, however, I prefer to keep things tighter, so I would either look for a move back up toward the 20-dema to short into, or short it here using the highs of the current three-day bear flag as a tighter stop. The downside target then becomes the 200-day moving average.

 

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Weibo (WB) strikes me as another one of these stocks that can’t make up its mind as it flips back and forth. Objectively, the stock remains in a consolidation extending back to the late-February later-stage breakout failure. It failed over a week ago on a low-range base breakout attempt, and has since drifted below the 50-day moving average.

What I note here is that while buyers haven’t shown much enthusiasm for the stock, sellers haven’t been rushing for the exits. It seems that buyers come in at the lows of the range, while sellers hit the stock at the highs. As the stock pulls down here, it begins to take on a slight Ugly Duckling character which might imply that a rally back up to the 50-day line is coming. Whether that turns out to be a short-sale entry point or a possible pocket pivot move back up through the 50-day line is something to watch for over the coming days.

 

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Netease (NTES) still looks like a short as it consolidates below its 50-day moving average, which has served as a ready point of reference for overhead resistance over the past three trading days. Shorting it at the line every day since Tuesday’s high-volume breach of the 50-day line and its 278.80 buyable gap-up (BGU) intraday low of February 16th has been good for repeated short-side scalps, but nothing more.

Unless NTES can regain its 50-day line, it remains a short-sale target on moves back up toward the line. That said, any move back up through the 50-day line could set up a moving-average undercut & rally move, what we now refer to as an “MAU&R.” For that reason, I would remain fluid with this and open to whatever real-time price/volume action emerges here over the next several days.

 

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Chinese names in general responded well to the conclusion of the meeting between President Trump and Chinese President Li Xinping. While I don’t show them on charts here, the other three China Five names, Alibaba (BABA). JD.com (JD), and Momo (MOMO) all held pullbacks to near-term support on Thursday.

Both BABA and MOMO successfully bounced off their 20-day exponential moving averages, while JD continues to hold above its 10-day line. For now, all of these names have remained buyable on pullbacks to their respective 20-demas until evidence to the contrary tells us otherwise.

Snap (SNAP) looks to me like it is headed for a possible test of the prior absolute low of 18.90 in its current base formation. After breaching the 20-day exponential moving average on Wednesday on higher volume, it broke its pattern of holding tight on pullbacks as volume dried up.

So, unless we see another pocket pivot move back up through the 10-day and 20-day moving averages, the most prudent approach here is to lay back and let the stock figure out what it wants to do from here. An undercut of the absolute 18.90 low in the pattern might set up an undercut & rally move at that point. Certainly, a breach of the 18.90 price level would likely turn the crowd bearish on the stock again. So, remain patient and wait for the right time to re-enter the stock, assuming it becomes buyable again at all.

 

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Take-Two Interactive (TTWO) has been holding tight at its 50-day moving average with volume declining to -46% below average on Friday. This puts it in a lower-risk entry positon using the 50-day line as a tight selling guide.

TTWO has been working on what is so far a seven-week flat base, which could be setting the stock up for a breakout. My preference, however, is to buy ahead of that on voodoo-type action along the 50-day line, which is what we’re seeing right now, while keeping my risk to 1-3% maximum. Earnings aren’t expected until the latter half of May.

 

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Activision (ATVI), not shown, is also holding tight in its pattern, and on Thursday flashed an extreme “voodoo” volume pullback to its 20-dema as volume declined to -61% below average. I prefer to use pullbacks to the 20-dema as lower-risk entry opportunities.

Electronic Arts (EA) has looked like a sell as it drops below its 20-dema, which could imply that it will move lower from here. The other side of this, which I want to remain open-minded about, is that the stock has undercut the prior 87.90 low in its pattern since peaking in mid-March. On Thursday and Friday, it rallied back and closed above that level, setting up a possible undercut & rally move. That would make this playable as a U&R move, using the 87.90 low as a tight selling guide.

 

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Checkpoint Software (CHKP) and Symantec (SYMC) remain the two cyber-security leaders in this market. SYMC, not shown, has remained buyable on pullbacks to its 20-day moving average, as has been the case with CHKP as well.

CHKP has the additional feature of having flashed a pocket pivot on Monday as it found support off the 20-dema. Since then it has held tight along the 20-dema with volume drying up to -48% below average on Friday. My general feeling is that if this market can push out of what has been a six-week consolidation and pullback in the indexes, stocks that have been basing over the same period may have a decent chance at breaking out to new highs.

For this reason, names like CHKP and SYMC remain stocks to keep a close eye on, along with others that have been basing over the past several weeks.

 

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Fortinet (FTNT) has returned to its floundering ways after a show of strength over the prior week when it gapped up on heavy buying volume and flashed a standard base breakout move. Of course, in this market breakouts don’t have the same credibility of past markets, and the stock has since pulled into its 20-day moving average.

Friday’s volume came in at -52% below average, representing a voodoo pullback to the line. Therefore, this can be considered to be in a buyable position here using the 20-dema as a selling guide. While the breakout has failed, the Ugly Duckling might come to the rescue here at the 20-dema.

 

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

Notes on other long ideas discussed in recent reports:

Arista Networks (ANET) has dipped below its 10-day moving average, but the 20-dema remains your reference for a logical selling guide.

Bioverative (BIVV) has continued higher after breaking out on light volume two Fridays ago. My preferred entry, however, would be on a pullback to the 10-day moving average, which also serves as a selling guide for this current low-volume breakout.

Carnival Cruise Lines (CCL) has run into some high-volume selling over the past week, but the 20-dema would remain your selling guide as well as a reference for potentially buyable pullbacks on low volume.

Glaukos (GKOS) acts well and remains above its 10-day and 20-day moving averages. For now, the 20-dema serves as a tight selling guide.

Incyte Pharmaceuticals (INCY) held above its 50-day moving average on Monday as volume dried up nicely. This seems to be buyable on pullbacks to the 50-day line as it continues to base-build.

Royal Caribbean Cruise Lines (RCL) has met up with its 50-day moving average as selling volume came in heavy on Friday. Since I was using the 20-dema as a selling guide, I would be out of the stock here. Earnings are expected at the end of the month.

Splunk (SPLK) reversed below its 50-day moving average today on increased volume, which morphs this into a short-sale target right here using the 50-day line as a tight upside stop.

Square (SQ) has been running into resistance at its 10-day and 20-day moving averages, and still looks to me like it wants to test the 50-day moving average. The 50-day line has been rising and is now at 16.10, only 59 cents below where the stock closed on Friday. I would watch for pullbacks closer to the 50-day line as the better lower-risk entry option.

Veeva Systems (VEEV) posted a new closing high on Friday, and one still can retain the option of taking some profits here on any position taken closer to the 50-day moving average back in early March. Otherwise the 20-dema can serve as a reasonable selling guide should the stock come under any significant selling pressure.

The long-side situation in this market remains pretty much the same. Long positions can be handled in one of two ways. Either one looks to sell into strength if their profit objectives are reached, or one simply abides by trailing and absolute stops. If the general market starts to get into trouble, then simply sell when your stops are hit. This is a concrete approach to what is currently a volatile, news-oriented environment that takes emotion out of the equation.

Short-sale target GrubHub (GRUB) is showing signs of wanting to rally, which is not necessarily all that surprising given how far it has declined from its early February peak. On Friday, the stock flashed a bottom-fishing pocket pivot at the 10-day and 20-day moving averages, closing one penny above the 20-day line.

This might imply that a move back up toward the 50-day moving average is likely here, assuming that the stock can hold above the 20-dema at 33.85. If it can’t, then this could serve as an optimal short-sale entry point here, but I would keep a tight stop on this. My preference would be to hit a rally up to the 50-day line as a more optimal short-sale entry, but there is no guarantee that this will occur.

 

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Longs in this market still need to remain on high alert, as I pointed out in my Wednesday mid-week report. The bottom line is that while I don’t see a lot that is wildly compelling on the short side, I also don’t see much that is as compelling on the long side. Within the context of the indexes remaining in a consolidation and only 1-2% below their recent highs, the current action in individual stocks is logical.

With earnings season approaching, most stocks may just bide their time. For that reason, exercising patience and being ready to act if one’s long-side stops are hit is the best approach here. If the general market starts to come apart then one can simply maintain a concrete approach. Otherwise, any buying should be limited to constructive pullbacks in favored stocks to keep risk to a minimum.

Over the weekend, there was news of Russia sending its own cruise missile destroyer into the Mediterranean off the coast of Syria. Meanwhile, U.S. officials have indicated that they are ready to do more militarily if necessary, so the potential for a perceived dangerous escalation in that region is quite possible.

Furthermore, if investors reassess Friday’s weak jobs number as a negative, in combination with continued tough talk from the Fed about staying the course with respect to raising rates and starting to wind down their $4.5 trillion balance sheet, then the market could remain on edge. In this case, playing a strong defense is more important than playing an aggressive offense. 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.