The Gilmo Report

August 16, 2017

August 16, 2017

The market seemed to be anticipating the softening of war-rhetoric emanating from North Korea by pulling a big futures led jack to the upside on Monday morning. As I wrote over the weekend, because of the NoKo news selling alibi, the market was susceptible to precisely this type of sudden upside relief rally.

This sent the NASDAQ Composite and S&P 500 Indexes flying back up through their 50-day moving averages on weak volume. This now gives us a chance to see whether last week’s selling was indeed alibied by the NoKo news. If we see the reaction rally reverse back to the downside, then we have a pretty good idea that last week’s selling was just the start of more to come.

Being an even-handed trader, I am of course willing to give the market a chance on either side, without taking a rigid bullish or bearish stance. However, I am having a hard time finding any compelling long situations outside of playing some short-term swing-trades on bounces.

Today’s action in the NASDAQ also may have confirmed that institutions are again selling into the rally as it stalled on higher volume, which is a type of distribution. The index did manage, however, to hold above its 20-day exponential moving average, but a breach of that line might infer that another test of the 50-day line is coming.

 

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The S&P 500 Index also stalled and churned today on heavy volume, but remains above its 20-dema. Volume came in higher today, which in my view constitutes distribution for the S&P 500 as well. So far, the rally over the past three days is quite logical as the NoKo news simmered down. Note that the S&P did find resistance along the upper portion of the prior June-July consolidation, adding to the logic of it all.

 

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To some extent we might consider that the stage was already set for a reaction bounce based on the position of the small-cap Russell 2000 Indexes, which I illustrated with a chart of its close proxy, the iShares Russell 2000 ETF (IWM). With the index sitting at its 200-day moving average on Friday after a three-week dive to the downside, the context for a rally, at least in the Russell, was set.

The bounce ran out of steam rather quickly, however, as the index began running into resistance at the 10-day moving average on Thursday. That resistance carried through to today as the IWM reversed on higher volume to close near its intraday lows.

 

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For those of you who are new to this report, the concept of “alibied selling” is something Bill O’Neil told me about way back in the late 1990’s. We must remember that institutions can’t sell their huge positions down or out in a single day. The process can take days, weeks, even months, depending on the concentration of any particular position within their overall portfolio. That’s why O’Neil used to say that the market can come under distribution even while it is rallying.

When some random news hits the market, and institutions are already looking to distribute stock, they will sell, but only up to a point. The market then finds a near-term low, and the original news that caused the sell-off develops into something less serious than originally thought. This triggers a reaction rally, which institutions can then use to sell more stock into.

Of course, not all sell-offs of this nature consist of alibied selling, so we have to look for confirmation. This of course, comes when we see another wave of selling hit the market as it stages its reaction rally once the original news either wears off or is shown to be benign.

In a “robo-market” where massive amounts of QE drive algorithmic traders to buy stocks in seemingly endless fashion, however, a heavy bout of selling can often be reversed on a moment’s notice. In my view, this selling and buying is less about institutions accumulating and then distributing stock, and more about machines flying in and out of stocks as the “carry trade” becomes their primary modus operandi.

At some point, institutions will have to start backing away from the market, so I am on high alert for signs of this whenever it may be starting to occur. We’ll see if this current action turns out to be a reaction rally following a round of alibied selling, but so far there is no resolution.

All we have seen so far is a low-volume bounce back to the upside that was capped off with some stalling and churning off the highs on higher volume today. This may turn out to be a short-term peak for the NASDAQ and S&P 500, but we won’t know for certain without further evidence. The market could still continue to move higher in halting fashion and without any significant volume, as it has done before.

Currently I’m not in the mood to take any new positions on the long side as the action strikes me as mostly random and volatile. Financials certainly don’t offer a compelling area of leadership for this market, as their action has been halting and erratic at best. Meanwhile, the “PFAANNGM” stocks remain a very mixed bag. Some are sagging, some are rallying, and some are just breaking down.

Something like Netflix (NFLX) is what I would call sagging as it tests its 50-day moving average following the prior buyable gap-up failure. Can one buy it at the 50-day moving average? Of course, since that can also serve as a reference for a tight selling guide in case things go awry.

NFLX put in a nice effort today as it tested the line and bounced right off it. But volume was below average, and within the context of volume levels over the past few days didn’t even qualify as a five-day pocket pivot, much less a ten-day one. Perhaps that can change, but for now the set-up is simple. If one chooses to buy this here, then the 50-day line becomes your tight selling guide.

 

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Nvidia (NVDA) posted a surprising upside move on Monday as it quickly regained its 50-day moving average following Friday’s shortable gap-down move after earnings. Assuming one had taken a short position on Friday when the stock gapped down on huge volume and closed below the 50-day line, the move back up through the line was a quick stop-out.

But as I’ve written in the last two reports, we must guard against sudden upside jacks following the initial sell-off inducing NoKo news last week. That’s why I have been loath to hold any significant, if any, positions overnight, long or short, in this current environment. It is often simply too random.

NVDA also illustrates the random, “Ugly Duckling” nature of this market. Often when a stock looks absolutely done for, it suddenly turns back to the upside, running over any shorts in short order. Pile in, pile out, then pile back in again!

Now the question is whether the stock is buyable in this positon. My best assessment is that one could certainly test a long position up here with the idea that the 20-dema would serve as a tight selling guide. However, an alert trader would have noticed that Monday’s move constituted a moving-average undercut and rally move. Surprise!

But we are well aware of this type of set-up, and if one can gain an entry on the long side as close to the moving average (in this case the 50-dma) as possible, then it can be bought. It doesn’t necessarily have to work, but in this case that led to a sharp upside move in NVDA on that day.

 

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Over the weekend, I noted that Priceline Group (PCLN) and NVDA were looking somewhat similar as both stocks had gapped down hard and closed below their 50-day moving averages following their respective earnings report. PCLN is perhaps less beloved than NVDA in this market, and, unlike NVDA, remains below its 50-day moving average in ugly fashion.

This is not in a shortable position here, as only a rally back up toward and closer to the 50-day line would set up a lower-risk and more optimal short-sale entry point from here. It does illustrate the weak action we are seeing in certain big-stock NASDAQ leaders/former leaders.

 

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Amazon.com (AMZN) remains another weak big-stock NASDAQ leader, and its late-stage failed-base (LSFB) short-sale set-up remains in force. The stock ran into resistance yesterday at its 20-day exponential moving average, which has recently moved below the 50-day moving average. There is no evidence here that would cause me to change my view of AMZN as a short-sale target. Rallies into the 20-dema or the 50-dma, should those occur, should be watched for possible short-sale entry points.

 

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Facebook (FB) held support at the 20-dema, gapping above the 10-day moving average on Monday on very light volume. I discussed over the weekend that the stock could be bought at the 20-dema as an “opportunistic entry point,” but the reality is that one would have had to buy the stock there on Friday to participate in the Monday gap-up.

I’m not so sure I’d be willing to make a fresh entry at that point with the idea of holding the stock over the weekend given the current environment. However, that was a nice holding of support at the 20-dema if one is already long and holding a position purchased further down in the pattern. Near-term I would be inclined to use the 20-dema as a selling guide for existing FB positions.

 

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Tesla (TSLA) continues to hold above its 50-day moving average, as well as its rapidly rising 10-day line. Meanwhile, resistance near the 170 price level has remained in force, as the stock has backed away from that price level on an intraday basis consistently over the past few days.

Today the action struck me a bit as wedging up into resistance, and the stock did close near the lows of the daily price range as buying interest failed to materialize. I still view this from both sides of the spectrum, but in this position a retest of the 50-day line looks more likely than a move to new highs, especially with buying interest starting to wane.

A clean breach of the 50-day line, however, would confirm TSLA as a short-sale target. Currently, I would not consider it a long idea unless it were to constructively test the 50-day line or, alternatively, hold tight along the 10-day line with volume drying up. So, this one remains in flux, and we just have to watch the price/volume action from here to figure it out. For that reason, I am in no hurry to act aggressively in either direction for now.

 

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Notes on other big-stock NASDAQ names on my watch lists:

Apple (AAPL) rallied to all-time highs today but reversed to close down on the day. It remains extended from its 10-day moving average, where it was buyable last Thursday or Friday as it also came down to test the top of the prior base breakout point around the 156 price area.

Alphabet (GOOGL) has rallied into its 20-dema, and here it stalled today to close just below the line. This would put the stock in a potentially lower-risk short-sale entry position using the high of today at 949.90 as a guide for an upside stop. GOOGL is currently active as a late-stage failed-base (LSFB) short-sale set-up.

Microsoft (MSFT) has rallied back up to its late July highs around the 74 price level on light volume. There is nothing currently actionable in the stock, although if the general market started to get into trouble again this could be considered shortable here using the recent highs at 74.42 as a very reasonable and tight upside stop.

Among my China Five names, JD.com (JD) became a casualty of sorts after reporting earnings Wednesday before the open. The stock broke below its 20-day exponential moving average on heavy selling volume, but closed mid-range. So, this could be viewed as at least a partial attempt at supporting action given that it did hold above the highs of the prior base from which it broke out in late July.

The stock has since formed a short bear flag, but has still held above the prior base, more or less, as volume has declined. Today it reversed at the 20-dema, however, so it acts more like a short on moves up to the 20-dema. JD could be turning into a late-stage failed-base (LSFB) situation, and the first clue is the breach of the 20-dema.

For that reason, I would view rallies up into the 20-dema as short-sale entry points. The flip side is that if the stock can hold the top of the prior base, it may still be viable as a long, but it may still end up pushing down to the 50-day line at 42.39 first before making a stronger bounce attempt.

 

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Weibo (WB), not shown, logged a new all-time closing high today on light volume, but remains extended from any kind of lower-risk entry position. Its majority shareholder, Sina (SINA) is sitting along its 10-day moving average with volume drying up today to -52% below average. This would therefore put the stock in a lower-risk entry position here, using the 10-day line as a tight selling guide.

 

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Alibaba (BABA), not shown, is expected to report earnings tomorrow before the open, so there is nothing to do there. It will be interesting, however, to see what it does after earnings. Momo (MOMO) is expected to report next week, and it is currently chopping around with the market, bouncing sharply off its 50-day moving average and pushing back up through the 20-day exponential moving average on Monday on weak volume.

The pattern looks a bit erratic, and I’m not inclined to do anything with the stock until earnings. Over the past three weeks it has run into heavier selling volume off the highs relative to buying volume. This gives the pattern a bit of a weak look to it, and we’ll see whether this figures into next week’s expected earnings report.

 

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Short-sale targets Lumentum Holdings’ (LITE) and Applied Optoelectronics (AAOI), both not shown on charts, are extended to the downside. Both stocks should be watched for potentially shortable rallies up into resistance. For LITE this means the 10-day line at 56.18, the 20-dema at 57.96, or the 50-day line at 60.77. For AAOI, current references for overhead resistance ate the 10-day line at 70.32 and the 50-day line at 73.86.

The one optical name that has given us several shots at shorting it at the 50-day moving average over the past few days has been Fabrinet (FN). The stock ran into resistance at the 50-day line both yesterday and today, but appears to be able to find its footing down at the 200-day line.  Currently it is wedged between the 50-day and 200-day lines.

Earnings are expected to be reported next week, August 21st, so it’s not clear to me that much can be done here with earnings approaching. That is, unless one uses rallies into the 50-day line to short into with the idea of scalping a quick short-sale profit (assuming it doesn’t stop you out by pushing back up through the 50-day line!) ahead of earnings. It does, however, along with LITE and AAOI, attest to the broken-down nature of what was a formerly strong (even powerful) leading group in this market.

 

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Among the cloud names I’ve been watching for possible breakdowns, ServiceNow (NOW), Salesforce.com (CRM), and Workday (WDAY) I would note that CRM and WDAY, not shown, broke out today! Volume was all of 8% above average for CRM, so it’s not even an actionable breakout. WDAY’s breakout was a little stronger at 22% above average, but both stocks are expected to report earnings over the next several days on August 22nd and 30th, respectively.

ServiceNow (NOW) has been moving up along with its cloud cousins, but in less, shall we say, attractive fashion. Buying interest has remained non-existent as the stock has wedged (perhaps “floated” is a better term) back above the confluence of its 10-dma, 20-dema, and 50-dma on a “voodoo” volume signature today of -54% below average.

I suppose one could try and short into this wedging action, but keep in mind that it will likely have some movement in sympathy to next week’s expected earnings reports from CRM and WDAY. The action in all three of these stocks has been erratic and wide-ranging, but today CRM and WDAY did negate their recent late-stage breakout failures by breaking out again today.

NOW is the only one that hasn’t recovered from its prior late July breakout failure, so it would be my choice between the three as a short-sale target. If the stock breaches the 50-day moving average, a short-sale would be triggered at that point.

 

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Video-game leaders have held up reasonably well over the past several days. I have been watching the group with interest, as any breakdown would likely offer a clue about the future direction of the general market. So far, however, I can’t fault the action in this wolf pack of leading names.

All three stocks held near-term support last week and have since rallied with the market so far this week. Take-Two Interactive (TTWO), not shown, continues to forge new highs but on light volume, while today Electronic Arts (EA), also not shown, made a new all-time closing high on light volume. The action speaks more to a lack of sellers than robust buying interest, but the group continues to act well.

Activision Blizzard (ATVI) gapped back above its 20-dema on Monday, which almost looked like a shortable move. But despite Monday’s reversal off the highs, it has held above the line all week. The only issue is that if one wanted to play this on the long side, one had to buy it Friday at the 50-day moving average, and this of course brings up the issue of holding new positions over the weekend in an uncertain environment.

Today ATVI posted its second-highest close of all time, but volume was well below average. While TTWO is extended, I would like to see ATVI and EA, which are near the tops of current price ranges, set up along their nearby 10-day moving averages as volume dries up. This would put them in lower-risk entry positions, which is preferable to chasing low-volume upside strength.

 

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Nutanix (NTNX) is in a lower-risk entry position here as it consolidates Monday’s gap-up move back through the confluence of the 10-day simple and 20-day exponential moving averages. Volume dried up to -49% below average today, which is constructive, although the stock did stall a bit off the intraday highs.

If NTNX can hold the 10-dma/20-dema confluence with volume drying up, then it remains viable as a long idea. As I discussed over the weekend, the stock could be trying to round out the lows of a potential new base after getting quite extended to the upside in mid-July.

 

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Appian (APPN) is forming an “L” formation here as it pulls back into its 20-day exponential moving average with volume drying up to -77% below average today. That would qualify as some extreme “voodoo” action, and could be a precursor to an attempt at forming a “LUie” type of re-breakout after last week’s failed breakout attempt.

For that reason, APPN is in a lower-risk entry position here using the 20-dema as a tight selling guide. Keep in mind that as a smaller, thinner, recent IPO, the stock can carry higher risk if the general market starts to get in trouble, so remain nimble with this one.

 

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Notes on other names discussed in recent reports, some with charts, some without:

Alteryx (AYX) has pulled back into its 10-dma with volume declining, which puts it in a lower-risk entry position using the 20-dema as a tight selling guide. The stock is somewhat erratic, so handle this one with caution, and only look to buy it on weakness down to a clear area of support that can then serve as a tight selling guide.

Arista Networks (ANET) is back up to its prior all-time highs but is currently not in any kind of actionable positon, long or short.

First Solar (FSLR) did bounce off its 20-dema after pulling into the line last week, as noted in my weekend report. It is now back in an extended position near its prior highs and out of buyable range.

GrubHub (GRUB) is sitting right at the 10-day moving average with volume drying up to -57% below average. This would put it in a lower-risk entry position, using the 10-dma at 54.16 or the prior BGU low of last week at 53.36 as tight selling guides.

Palo Alto Networks (PANW) has rallied back above its 200-day moving average on very weak volume. The stock is currently in no-man’s land with earnings expected on August 31st, not quite two weeks from today.

SolarEdge Technologies (SEDG) has dipped below its 10-dma but it is probably best to take an opportunistic approach and wait for a pullback to the 20-dema at 25.62 before buying shares. The stock is extended from the intraday low of its early August buyable gap-up (BGU) move, and for that reason I prefer the opportunistic route.

Square (SQ) closed today right at its 50-day moving average with volume drying up to -49% below average. This puts it in a lower-risk entry position using the 50-day line as a very convenient and very tight selling guide.

Tableau Software (DATA) is back near its highs of last week and while it is tracking along its rapidly rising 10-day moving average is in an extended position and not in an optimal, lower-risk entry position. I would take an opportunistic approach here and see if you can’t get a pullback closer to the 20-dema down at 67.81.

Yelp (YELP) is still well-extended to the upside and awaiting the next potentially lower-risk entry opportunity.

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).

Over the weekend, I noted that, “Some names have been outright shorts, but other leaders, although wobbling currently, could also find their feet and set up again in typical Ugly Duckling fashion. The patterns show that this is a possibility.” I also noted that the market was susceptible to a sharp reaction rally once the NoKo news cooled off a bit, and that’s precisely what we saw on Monday as the rhetoric was toned down a notch or two.

In this market the Ugly Duckling is always a factor. This sets up long opportunities, at least from a swing-trading perspective, in leading names when the market rebounds after a sharp sell-off. Whether these materialize into something more substantial on the upside is another matter.

For the most part, I still believe that a cautious and nimble approach is warranted as the action strikes me as a bit erratic and potentially dangerous and news-driven. This means the rug can be pulled out on longs at any time with hardly a moment’s notice, while getting too piggy on the short side can leave one holding the proverbial bag as things suddenly veer back to the upside.

This remains a difficult environment, and the difficulty is exacerbated by the fact that I find very little, if anything, that is compelling enough to warrant taking a more aggressive stance, long or short. Last week we had a great short-sale play in LITE, but such opportunities are a bit few and far between. And then of course we have the case of NVDA, which looked all but cooked on Friday, only to suddenly and magically rebound back up near its prior highs!

I don’t anticipate things getting any easier from here as we head toward the end of summer and into the often-volatile months of September and October. I have my handful of actionable ideas on both sides, depending on how things play out. For now, that is enough. When in doubt, keep things simple!

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.