The Gilmo Report

August 17, 2016

August 17, 2016

The Fed meeting minutes came out today with two hours left in the trading day and confirmed what investors have probably known for some time. The Fed is confused as it continues to talk in circles. The bottom line, in my view, is that interest rates probably remain where they are for some time.

The market appeared somewhat confused by the minutes as well, but by the end of the day the NASDAQ Composite Index managed to close in positive territory. Volume picked up on the day, giving the impression of supporting action along the 10-day line.

 

GR081716-$COMPQ

 

The S&P 500 Index also did a reasonable job of holding the top of its prior price range as it closed above its 10-day moving average. Volume came in slightly higher giving it the look of supporting action along the lows of the current nine-day price range.

The bottom line is that the indexes remain in sideways consolidations. In the meantime, however, there have been some decent profit opportunities in the hot IPO section of the market. Thus it has been more a matter of what the individual stocks are doing since we are also seeing some weakness among individual stocks as well.

 

GR081716-$SPX

 

The U.S. Dollar Index (UUP), not shown, broke to lower lows yesterday, perhaps discounting the Fed minutes ahead of the fact. Today the UUP held tight as the precious metals pushed up slightly. The iShares Silver Trust (SLV), not shown, found support near its 50-day moving average today on heavy volume, but still closed down on the day. This brings it into a lower-risk buy position using the 50-day line at 18.22 as a tight selling guide.

Meanwhile, the SPDR Gold Shares ETF (GLD) has held tight along its 20-day moving average and today saw a little supporting action along the line as volume picked up but remained below average. So while the dollar and the precious metals more or less held steady, there was nothing significant to be found in their overall price moves today.

 

GR081716-GLD

 

Silver Wheaton (SLW), First Majestic Silver (AG), and Agnico Eagle Mines (AEM) all got hit hard early in the day today, but by the close all managed to find support off of their intraday lows. Among the three, SLW remains the strongest acting as it found support at and held above its 10-day moving average. Volume came in at above average. SLW, AG, and AEM are all in lower-risk entry positions using their nearest moving averages as selling guides. This would be the 20-day line at 28.82 for SLW, and the 50-day lines for AEM and AG at 54.63 and 15.34, respectively.

 

GR081716-SLW

 

The new merchandise started out the week right where it left off with Twilio (TWLO) rocketing for a third day in a row on Monday. The past two days have seen the stock lose momentum as it forms a short little flag formation up here around the 60 price level. At this stage we want to keep an eye on the rapidly rising 10-day moving average, currently at 48.99. Any pullback into the line would be your next reference point for an opportunistic, lower-risk entry or add point. I would expect, however, that the 10-day line will have to move higher before that happens.

Meanwhile, volume is drying up as the stock pulls in here, and this remains constructive. Monday’s high-volume selling off the peak looks normal within the context of the sharp upside move since the stock cleared the 45 level.

 

GR081716-TWLO

 

Acacia Communications (ACIA) blasted through the $100 Century Mark on Monday, getting as high as 109.36 before backing down. Yesterday the stock dipped below the $100 price level on an intraday basis but managed to close at 102.17, just above the Century Mark.

Based on that action, it was possible to look at this as a Jesse Livermore Century Mark Rule buy right near the $100 price level. That would have worked quite well as the stock jacked another 12.84% higher today, hitting a new high at 115.29. This is acting very much in the spirit of Livermore’s rule, where he looked for the stock to quickly move several points higher.

However, it does not come without some volatility, and I think it is important to keep in mind that the stock is now 70.2% above where it was trading five days ago on the daily chart!  I suppose it goes without question that at this point ACIA is extended in the extreme and would need to settle down and pull back before setting up in lower-risk fashion. Shades of 1999, as far as an individual stock goes! The difference between now and then is that in 1999 everything was acting like ACIA.

 

GR081716-ACIA

 

Line Corp. (LN) has been able to hold above its prior IPO U-Turn formation breakout just above the 42 price level as it has pushed 15% higher from there. I noted in a blog post later in the day on Friday that this was a buyable situation based on the U-Turn pocket pivot breakout at that time.

Today the stock pushed back up to the Monday intraday highs to post a new closing high, but volume was quite light. This may or may not need to back and fill a bit here before it can go higher, but I would certainly view any pullback to the 43-44 price level as a very opportunistic buy entry should that occur. Otherwise the stock is too extended for a lower-risk entry right here.

 

GR081716-LN

 

Our two Chinese new-merchandise plays, Weibo (WB), not shown here on a chart, and Yirendai (YRD) are flopping around after hitting new highs earlier in the week. WB is holding above its 10-day moving average and I would consider pullbacks to the line at 40.97 as your lower-risk entry opportunities.

YRD pushed to new highs yesterday on an intraday basis, but reversed on heavy volume. Today it closed up slightly on above-average volume, but overall this thing looks like it needs to settle down and set up again. We have to consider that. Since I first started discussing YRD (see May 29th report) the stock has tripled in price.

I would like to see the stock settle down along the 10-day line here as volume declines, as it potentially tries to set up again before I’d look to enter this on the long side again.

 

GR081716-YRD

 

I would also note that big-stock new-merchandise play Alibaba (BABA), not shown here on a chart, is still holding well above last Thursday’s buyable gap-up move. It is, however, quite extended, and I would only view a pullback into the rapidly rising 10-day line as a lower-risk entry from here.

Nvidia (NVDA), not shown here on a chart, pulled back into its 10-day moving average today on heavy selling volume. Volume came in at 23.92% above average today, which is not what you want to see on a test of the 10-day line. The stock also closed at 61.15, just above the 60.63 intraday low of last Friday’s buyable gap-up move. Technically one could view this pullback as buyable using the 60.63 low as a tight selling guide.

The big-stock NASDAQ names are still acting very much like their namesake market index as they all continue to move sideways with no major resolution one way or the other. They are acting much like the NASDAQ Composite itself as they mostly track sideways. Apple (AAPL) is perhaps less in a consolidation than the rest as it pulled into its 10-day line today and found support off the line on light volume.

 

GR081716-AAPL

 

Notes on these other big-stock NASDAQ names:

Amazon.com (AMZN) also tested its 20-day moving average and held today, which put it in a lower-risk entry position per my prior comments on the stock.

Alphabet (GOOGL) is holding along its 10-day moving average and just above the 800 price level as it continues to consolidate last month’s buyable gap-up move. So far it hasn’t gone anywhere, however.

Microsoft (MSFT) dipped below its 10-day moving average today but is holding just above its 20-day moving average. This is also just consolidating a shallow uptrend that has followed its mid-July buyable gap-up move.

Netflix (NFLX) is just tracking along its 10-day and 20-day moving averages, and appears to be buyable on low-volume texts of the 20-day line, currently at 94.27. It, too, is going nowhere as it consolidates the prior gains off of the mid-July lows following its post-earnings gap-down break.

Priceline Group (PCLN) moved back up toward the highs of its August 5th buyable gap-up move as it pushed up and off of the 10-day moving average today. While volume picked up in a slight show of supporting action, it was not sufficient for anything more than a five-day pocket pivot. Remember that I prefer to see clusters of five-day pocket pivots in lieu of a single ten-day pocket pivot.

If all of these names could manage to bust out from these current consolidations, then I would expect to see the NASDAQ Composite do the same. If they begin to break down, then that would certainly be a clue that something is amiss in the market.

We can probably also throw Facebook (FB) into that category as it dips below its 10-day moving average but holds above the 20-day line. Volume has remained light, and I can attest to flipping this thing long and short within the current price range but not getting the sense of any conviction either way.

The stock drifts down to the lows around the 122-123 area, and then drifts back up to the highs in the 125-126 area with little in the way of decisive volume in either direction. This may continue to track sideways, but remains a barometer stock of sorts as is the case with the rest of the big-stock NASDQ names that continue to consolidate.

If these can all start breaking out, then the indexes could begin to rip higher. If they do the opposite, then we can certainly make use of that information with respect to its implications for the general market.

I suppose one could view FB as buyable here using the 20-day line at 123.14 as a guide for a tight stop.

 

GR081716-FB

 

As I’ve been expecting per my comments in recent reports, Mobileye (MBLY) finally came in to test its 50-day moving average today and held. While it managed to close near the highs of its daily trading range, volume remained -40.7% below average.

While the volume was certainly lacking, the other way to look at this is as a potential undercut and rally move. Today MBLY undercut the prior 44.52 low of August 2nd and recovered back above the low. Thus the stock can be played as an undercut and rally set-up using the 44.52 low as a guide for a tight stop.

 

GR081716-MBLY

 

The action in some of the cloud names we’ve been following has gone from constructive last week to not-so-constructive this week. For example, ServiceNow (NOW) looked to be holding tight over the weekend and primed for further upside.

However, over the past two days the stock has made a break for its 50-day moving average as selling volume has started to cascade slightly. The 50-day line is down at 72, so it is possible that the stock might enter a lower-risk buy position at that point. However, I would certainly keep a tight leash on the stock if testing that on the long side.

 

GR081716-NOW

 

In fact, the cloud names I’ve discussed in recent reports have all acted poorly over the past couple of days as some come under severe pressure. These are my notes on each:

Adobe Systems (ADBE) closed below the 10-day moving average and the $100 Century Mark today as volume picked up slightly. The next test is the 20-day moving average at 98.98.

Salesforce.com (CRM) has split wide open, gapping down below its 10-day, 20-day, and 50-day moving average confluence on Monday on heavy selling volume. Yesterday and today it continued lower before finally reaching its 200-day moving average on selling volume that was more than twice average. This stock is busted, and could have been viewed as a shortable gap-down situation on Monday, using the intraday high as a guide for an upside stop.

Splunk (SPLK) pushed to higher highs on Monday, but has since pulled back into its 10-day moving average at 62.56. Selling volume came in at about average. Technically this pullback to the 10-day line might be considered a lower-risk entry point using the line as a tight selling guide.

Workday (WDAY) looks similar to NOW in that it has broken below its 10-day and 20-day moving averages, but today sold down closer to its 50-day moving average on volume that was just slightly above average. This comes after the stock was holding tight along the 10-day line and the top of its prior base breakout, and is not constructive. A test of the 50-day line at 79.14 looks imminent.

Square (SQ) remains in a two-week consolidation following its post-earnings buyable gap-up of ten days ago on the chart below. Today’s pullback into the 10-day line came on volume that was 15.4% above average.

I would prefer to see volume drying up on this pullback, so I would not be surprised to see the stock test the 11 price area. If that occurs, then a low-volume test of those levels could present a lower-risk entry opportunity.

 

GR081716-SQ

 

Below are Notes from my Trading Journal regarding other long ideas discussed in recent reports. Most of these have earnings coming up in the next few days, so should be watched for anything actionable that might develop following their respective earnings reports:

Ambarella (AMBA) – holding tight in extended land. Pullbacks to the 10-day line at 62.07 or the 20-day moving average at 60.37 would be your reference points for lower-risk entries.

Atlassian Corp. PLC (TEAM) – has pulled back into its 20-day moving average with volume coming in at -35.5% below average. This could be considered a lower-risk entry point, but the stock would need to hold the 20-day line at 29.50 to remain viable.

Barracuda Networks (CUDA) – tracking along the 20-day line as volume dries up to -71.1% below average. This puts the stock in a lower-risk entry position using the 20-day line at 21.25 as a tight selling guide.

CyberArk Software (CYBR) – stalled today at its 20-day moving average on above-average volume. Still looking more like a short than a long here.

Electronic Arts (EA) – posted another five-day pocket pivot today. This is the second five-day pocket pivot over the past three days as the stock has found support at the 20-day moving average. Any low-volume pullback into the 10-day line at 78.72 or the 20-day line at 78 would present a lower-risk entry opportunity.

Energy Recovery (ERII) – pulled into the 12 price area today, just above the 20-day moving average at 11.75. That brought it into a lower-risk buy position, although I would prefer to see a full pullback to the 20-day line as the most opportunistic entry, should that occur.

Fitbit (FIT) – pulled all the way back to the 20-day moving average today as selling volume increased but remained only 1.8% above average. This is losing some momentum here as it moves back to the lows of the prior nine-day price range. If so inclined, one could test this on the long side right here using the 20-day line at 14.57 as a guide for a tight stop.

Gigamon (GIMO) – pulled into the 20-day moving average today on declining volume that was -39.7% below average. The stock closed six cents below the 20-day line, which is at 36.48, so we would want to see the stock regain the moving average in short order.

GrubHub (GRUB) – pulled into the 20-day moving average today as volume picked up but came in just barely below average. This was a great trade following the initial buyable gap-up move of July 28th, but this has probably run its course for now after finding resistance around the 40 price level.

Imperva (IMPV) – pulling into the 10-day line here as volume dries up to -58.2% below average. This brings it into a lower-risk buy position using the 10-day line at 46.20 as a selling guide.

Silicon Motion (SIMO) – holding tight along the 10-day moving average as volume remains light. This is in a buyable position using either the 10-day line at 54.10 or the 20-day line at 53.26 as nearby selling guides.

Zayo Group Holdings (ZAYO) – posted a pocket pivot off of the 50-day moving average today as it regained the 10-day and 20-day moving averages. This puts it in a buyable position using the 50-day line at 28.13 as a guide for a tight downside stop.

Zendesk (ZEN) – dipped below the 10-day moving average yesterday and tested the 20-day line today on lighter volume that was 31.6% below average. This would put the stock in a lower-risk entry position using the 20-day line at 29.58 as a tight selling guide.

I note that some short-sale set-ups have emerged over the past three trading days among stocks that we have been watching on the long side. I already made note of CRM earlier in this report, and we can see that Activision Blizzard (ATVI) has now morphed into a short-sale target.

The stock gapped below its 20-day moving average yesterday and continued right on through its 50-day moving average. This was its first close below the 50-day line since late June amidst the Brexit sell-off. Thus we can consider this to be a late-stage failed-base set-up in the making.

Today ATVI pushed back up into its 50-day moving average on a logical, small undercut & rally move after it undercut the prior early August low. I view this as a short here using the 50-day line at 40.04 as a guide for a tight upside stop. The other option would be to look for a rally up into the 20-day line at 40.74 as a more optimal short entry.

 

GR081716-ATVI

 

What we need to keep in mind here with ATVI is that it has recently attempt to break out from a deep, POD-like, cup-with-handle formation. This is arguably a later-stage formation given that the stock has been on an extended upside move extending back to February 2013 when the stock was trading at around $14 a share.

Thus this breach of the 10-week moving average on higher weekly volume, despite the fact that only three days of this week have passed, could be the initial indications of a possible Punchbowl of Death, or POD, failure. Certainly, I am not averse to acting on short-sale set-ups if I see some that I consider worthwhile.

 

GR081716-ATVI Weekly

 

If you also investigate the weekly charts of some of these cloud names like CRM, for example, you will see similar POD-like patterns in these names. Thus these could all turn into similar late-stage or POD short-sale set-ups similar to what ATVI might be doing right now. I will leave it up to the reader to study these for themselves.

I generally act on the basis of what I am seeing in terms of individual stock set-ups rather than the indexes themselves. If the market enters a bifurcated condition where we see set-ups on both the long and short side, then I have no problem taking any of those set-ups as I see them in real-time.

I have found that such an approach will naturally start moving me more to the short side of the market before the indexes actually start getting into serious trouble. Currently, however, the long side of this market has been where the action has been, although one has to be in the right stocks.

If you have owned names like ACIA, LN, TWLO, WB, or YRD over the past several days you have done quite well. But this has not been the case for everything we’ve been following on the long side of this market, as with names like NOW, WDAY, CRM, or ATVI, for example.

Therefore, we want to remain alert to the balance of long and short set-ups that we see in the market at any given time. This will be our first clue of potential trouble for the market. In the meantime, it is enough to simply abide by what you are seeing in the individual stocks without having to overthink things. As long as risk can be controlled via the use of nearby reference points in determining tight stops, any set-up can be tested, long or short.

A significant market correction could develop at any time, but it will likely first show up in the action of individual stocks. Thus it is the same story on a different day. Just watch the 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 positions in ATVI and MBLY, 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.