The Gilmo Report

August 2, 2017

August 2, 2017

Your first clue that things aren’t exactly right is the failure of leading names to hold constructive pullbacks to logical areas of support. Since we seek to buy stocks on such pullbacks and then keep risk to a bare minimum by then using that same area or line of support as our selling guide, these failures to hold support will quickly and naturally force us out of any new positions we take.

This is a concrete, lower-risk approach, and as with anything in this market, its failure or success constitutes real-time feedback that we should pay close attention to. As a number of stocks on my long watch list have come under pressure, the NASDAQ Composite Index has built a short bear flag.

Strong action in Apple (AAPL) kept the index righted as it formed a wide price range and closed roughly mid-bar on higher volume. On its face, it looks like big churning action, perhaps masked by the action of AAPL, which has a large index presence on the NASDAQ Composite and the Dow Jones Industrials Index. It is also a large S&P 500 Index component.

 

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While the NASDAQ looks troublesome, the S&P 500 Index looks relatively more constructive as it holds tight up near its all-time highs and along the 10-day moving average. Volume was about even for the day. Meanwhile the Dow Jones Industrials Index, not shown, posted a new all-time high as it cleared the 22,000 price level for the first time in history.

 

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Financials also aided the NYSE-based indexes today, with the SPDR Financial Sector Select ETF (XLF) posting its highest close since late 2007, nearly 10 years ago. While the new high is nice, it came on light volume. In addition, and as I’ve written frequently in recent reports, the best time to buy the financials is when they pull back into support.

As a group, the biggest of the big-stock financials have been somewhat tentative, and this is reflected by the slow movement of the XLF to new highs. Each show of strength was not the place to buy, but each pullback to the 20-day exponential moving average has. So, the story remains the same with the financials. If you like ‘em, then you buy them on weakness down to the 20-dema, end of story.

 

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Big-stocks remain an area of focus in this market, and the surprising thing (or perhaps in this market it’s not that surprising) is the focus can be long or short, depending on the precise stock in question.

Apple (AAPL) reported earnings yesterday came in with a strong report, sending the stock gapping up to 159.28 at the open. It came within a quarter-point of the 160 price level but never quite made it, closing near its intraday lows.

I suppose the market likes the fact that APPL is currently posting what is at least a three-quarter earnings acceleration that has seen EPS growth go from -15%, 3%, 7% and then 18% over the past four quarters. Sales have also accelerated in sequence -9%, 3%, 5% and 7%. For any other company this would be mediocre growth, at best, but for AAPL it’s a reason to celebrate!

And yes, I’m being sarcastic! J Sarcasm or not, the bottom line here is that this move is technically a base breakout on a buyable gap-up (BGU). The intraday low checked in at 156.16, so technically this is buyable here using the 156.16 price level as a tight selling guide.

 

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Facebook (FB) today undercut the 167.50 low of last Thursday’s post-earnings buyable gap-up (BGU) and the 10-day moving average on early in the day today. But it found its feet intraday and rallied off the lows to close at 169.30, above the BGU low, and also above the 10-day moving average. The slight increase in volume has the look of supporting action at the 10-dma.

This would therefore be considered a buyable position using the 10-day line as a tight selling guide. If it doesn’t hold, it doesn’t hold, but a long set-up is a long set-up, and if the market doesn’t break down further from here this is actionable. A breach of the 10-day line, however, will push you out quickly, so risk can be kept to a minimum if it doesn’t work.

 

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Amazon.com (AMZN) is evolving into a late-stage failed-base (LSFB), and was shortable along its 50-day moving average and above the $1,000 Millennium Mark today. It broke to the downside from there, but found support and rallied off the intraday lows on about average volume. Despite the rally off the intraday lows, it still closed just below the 50-day moving average, which makes it a very concrete short-sale target right here. Execute a short here as close to the 50-day line as possible and then simply use the line as your guide for an upside stop. Easy enough.

 

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Tesla (TSLA) reported earnings today after the close and is now rallying up toward the 50-day moving average around 344 and beyond. Whether this after-hours gap-up holds into tomorrow’s close remains to be seen (my guess is it will), but I tend to favor the stock as a short-sale target given the macro-formation.

The stock has been forming a possible head and shoulders top since early May, and I have recently viewed rallies up to the 50-day moving average as short-sale entry opportunities. A gap-up move tomorrow would therefore provide a potential short-sale entry opportunity, especially if it fails at or near the 50-day line. We will simply have to wait and see how things develop tomorrow.

 

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Notes on other big-stock NASDAQ names:

Alphabet (GOOGL) remains a short-sale target on rallies up into the 50-day. Today it undercut last week’s 937.06 low and rallied. If this carried up into the 20-dema or 50-dma, then it may be looked at as a potential short at that time.

Microsoft (MSFT) made a break for its 50-day moving average today but found support at the intraday lows and near the 50-day line as volume came in just above average.

Netflix (NFLX) has broken below its 10-day moving average and appears headed for a test of its 20-day exponential moving average. This is an example of a leading stock failing to hold at near-term support levels at the 10-dma, but still holding above the 20-dema and the intraday low of its July 18th buyable gap-up move following earnings.

Nvidia (NVDA) is sputtering along its 20-dema but still holding tight as volume remains low. Technically, it could be tested as a buy here using the 20-dema as a tight selling guide, but keep in mind that earnings are expected next week on August 10th.

Priceline Group (PCLN) is holding up reasonably well as it holds tight along its 10-day moving average. This could technically be considered buyable here using the 10-dma as a tight selling guide. Keep in mind, however, that earnings are expected on August 8th.

When stocks fail at what should be near-term support levels, and they are a leader or a recent leader, they metamorphose into short-sale targets at that point. Some of these big-stock NASDAQ names have done that, and there are others that are less “big-stock” on the level of an AAPL or AMZN, but still big stocks in their space.

Cyber-security names have been getting smacked around after earnings, and an example of a stock that gets shifted from my long watch list to my short-sale action list is Palo Alto Networks (PANW). As I wrote over the weekend, the stock had to hold at the 50-day moving average, and any “failure to hold the 50-day line would be a bearish development, and could send the stock down on a test of the mid-June lows down under 130.”

That’s just what happened today as PANW rallied up into the 50-day line at the open in sympathy to AAPL and the overnight futures jack. At that point it was shortable around the 50-day line, and it then reversed at the line and closed below the 200-day moving average. Now it looks shortable here using the 200-day line as a tight selling guide. If it can bounce back up through the 200-day line, then look for the 50-day line to once again serve as near-term overhead resistance, and hence a secondary short-sale point if the 200-day line does not hold.

 

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With respect to all the recent IPOs and new-merchandise ideas I’ve discussed in recent reports, I think it is best to stay away from this area for now. Some of these stocks have had some decent moves over the past couple of weeks, and we are now seeing these moves reverse and dissipate. That is not good.

Prime examples would be Alteryx (AYX), which reported earnings today after the close and is trading slightly up in the after-hours as I write, Appian (APPN), and Yext (YEXT). In each case I think the charts speak for themselves. All three stocks had strong upside moves recently, but in each case, have given up on those moves, some in uglier fashion than others.

 

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Cloudera (CLDR), Myomo (MYO) are also IPO “no-go’s” while ShiftPixy (PIXY) has simply come completely apart, closing at a paltry $4.30 a share today. Scratch these names from my long watch list.

Nutanix (NTNX), for which I had high hopes following its buyable gap-up (BGU) move of July 14th, has completely flopped out and failed at this point. Today NTNX was at a “last stand” point as it tried to rally back up through the prior BGU low at 21.62. It got as high as 22.17 today before reversing in ugly fashion to close below both its 10-day and 20-day moving averages. Volume picked up on the day, and the stock looks poised to fill its prior July 14th gap-up “rising window” and test its 50-day moving average. Another example of good lovin’ gone bad in this market.

 

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I would not be looking to buy any of the China Five names as they go into earnings over the next few days. JD.com (JD), Weibo (WB), and Sina (SINA), not shown, although all three have been able to hold above their 10-day moving averages recently, despite the market turmoil. In each case, if one were looking for a move of some sort ahead of earnings, they could be considered buyable along the 10-dmas using the 20-demas as tight selling guides. Good luck.

Momo (MOMO) keeps running into resistance along its prior highs and the left side of a current cup base. Notice how volume has increased each time the stock has reversed off the intraday highs over the past five trading days. With earnings coming up on August 22nd, the only place to buy this is along the 20-dema with the idea of catching some upside ahead of earnings. Otherwise, I much preferred MOMO as a long back when it was pocket-pivoting off its 50-day moving average in early July.

 

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Alibaba (BABA) is expected to report earnings next week on August 9th. It has been getting hit with higher selling volume each time it has rallied off the 10-day line and then found resistance at the 160 price level. Today the stock broke below the 10-day line on slightly above-average selling volume. But BABA continues to show a pattern of higher selling volume vs. weak buying volume on the recent move to new highs. That’s evident from the daily chart, below, and so in my mind it’s not clear that much upside can be expected for the stock ahead of earnings.

 

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We will expect to see Applied Optoelectronics (AAOI) and Lumentum Holdings (LITE), both not shown here on charts, report earnings tomorrow, with LITE chiming in before the open and AAOI after. LITE posted an outside reversal today on heavy volume but held support at the 50-day moving average. AAOI also posted an outside reversal on heavy volume as it ran into resistance around the $100 Century Mark. Not very inspiring action ahead of tomorrow’s expected earnings reports!

Fabrinet (FN) will likely move in sympathy to AAOI’s and LITE’s earnings report, but today’s cookie toss was all its own as it smashed through its 20-day exponential moving average on above-average selling volume. Not very inspiring price/volume action, and perhaps the action of AAOI, LITE, and FN today are hinting at what we might expect tomorrow after the earnings reports. Stand aside!

Notes on other names discussed in recent reports are below, with impending, expected earnings report dates listed as well. Note that several have reported earnings today after the close and are gapping up:

Activision Blizzard (ATVI) – earnings are expected this Thursday, August 3rd but the stock is moving higher in the after-hours as I write in sympathy to TTWO’s strong earnings report today after the close.

Arista Networks (ANET) – stock has busted below its 50-day moving average on heavy selling volume. Earnings are expected tomorrow, August 3rd, so it will take an earnings surprise to revive this and get it back above the 50-day line. Otherwise it will be removed from my long watch list.

Bioverativ (BIVV) – reported a favorable earnings report today after the close, but is only gapping up about a buck or so in the after-hours as I write. I’d wait and see where this opens up tomorrow, with the idea that it could be bought in lower-risk fashion near the 10-dma or 20-dema.

Electronic Arts (EA) – held support at the 20-dema today and has remained buyable on pullbacks to the 10-dma or 20-dema over the past few days as it tries to break out from a two-month long base.

First Solar (FSLR) – found support today near the 10-day line and last Thursday’s buyable gap-up low at 47.44. This brought the stock into a lower-risk entry earlier today using the 10-dma as a tight selling guide. It then closed constructively well of the intraday lows and near the highs for the day.

Salesforce.com (CRM) broke down to its 50-day moving average today but held on higher but below-average volume. This doesn’t seem to show much upside impetus from here, and is not something I’m all that interested in buying ahead of earnings later in August.

ServiceNow (NOW) may be morphing into a short-sale target as it fails to hold the 20-dema here on increased selling volume. I would therefore view this as a short on any bounce back up into the 20-dema from here. That opportunity might come tomorrow if the stock moves up in sympathy to DATA’s after-hours earnings report today (see notes below).

SolarEdge Technologies (SEDG) – gapping up big after reporting earnings today after the close. Watch this tomorrow morning to see how the gap-up move develops after the opening bell.

Square (SQ) – reported earnings today after the close and as I write is trading roughly flat in the after-hours action.

Tableau Software (DATA) – gapping up slightly in the after-hours after reporting earnings this afternoon. As I write the stock is trading at around 67, so should be watched tomorrow for a possible BGU to develop.

Take-Two Interactive (TTWO) – stock is gapping up to the 90 price level, over 10% higher, in the after-hours after reporting earnings this afternoon after the close. Watch to see how this develops tomorrow morning as a possible BGU.

Universal Display (OLED) – earnings are expected tomorrow, Thursday, August 3rd.

Veeva Systems (VEEV) – has broken below its 50-day moving average and the pattern looks somewhat incoherent now that it has lost its “tight” look. Staying away until this sets up again.

Workday (WDAY) – broke below the 20-dema and 50-dma today on higher selling volume. Weak action which makes the stock a short on rallies either up to the 50-day line or the 20-dema if it can rally above the 50-dma. Watch this tomorrow as it could provide a short-sale entry point if it bounces in sympathy to DATA’s earnings report.

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).

The action of individual stocks is starting to get a bit sloppy. Yes, there are the post-earnings gap-ups, which mostly benefit those who elect to play earnings roulette. But outside of that, the market is starting to develop pockets of weakness. At the same time, I see some short-sale set-ups developing.

That keeps me cautious here as I’ve already indicated in the last couple of reports. I am also willing to take a bifurcated approach where I am acting on the basis of individual stock set-ups both long and short. It’s possible that opportunities on both sides will start to show up within a potentially choppy market backdrop, assuming we don’t see a strong trend develop soon.

As I wrote over the weekend, nimble feet will likely turn out to be an asset currently in this market, and so far this week that, I believe, has been quite true. Where support fails to hold, quick stop-outs are the order of the day, while some stocks can hold support and recover, as we saw in several names discussed in this report. In all cases, nimble feet are helpful!

So, it’s back to the usual message of just watching the stocks, and playing the set-ups as they lie, long or short, and then keeping risk to a minimum by employing tight stops. Meanwhile, for existing positions, maintain awareness of your out points, and stay alert, as this market could throw us a curve at any time.

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.