The Gilmo Report

August 23, 2017

August 23, 2017

The market staged an undercut & rally move yesterday that was quite logical within the context of the index chart positions. Both the NASDAQ Composite and S&P 500 Indexes were sitting just below their lows of the prior week (August 14-18), which put them in position for a possible U&R attempt, as I tweeted Monday evening.

That is precisely what we saw yesterday as the NASDAQ Composite Index gapped up and reclaimed the 50-day moving average on higher volume relative to Monday’s trade. However, volume was well below average as the index ran into resistance right at the 20-day exponential moving average today.

By the close the NASDAQ churned around on lighter volume to close just above its 50-day moving average. Regardless of whether someone tries to tell you that the uptrend is intact, the index remains right in the middle of a well-defined downtrend channel extending back to the late July peak. Another breach of the 50-day line from here will likely take the index to lower lows, as I see it.

 

GR082317-$COMPQ

 

The S&P 500 Index had deeply undercut its lows of the prior week last Friday, but also managed to pull off an undercut & rally move yesterday in sync with the NASDAQ. What wasn’t in sync, however, was the S&P’s inability to hold above the 50-day moving average today as volume picked up slightly on the day.

The sharp bounce and rally to start the week off was not surprising to me, frankly, given the chart positions of the NASDAQ and the S&P 500, as well as the Dow Jones Industrials Index, not shown. Over the weekend I pointed out that the Dow had pulled right down to its 50-day moving average, setting up a possible bounce off support at that point. So the context for the reflex rally that we saw Monday and yesterday was easy to spot over the weekend.

As I wrote at the time, “The break off Wednesday’s highs was a sharp one, and there is certainly a chance that the index could reflex rally back up to the 50-day line. Given the volatility of this current market environment, that would not surprise me, frankly.” And so I wasn’t surprised at the movement we’ve seen over the past two days.

 

GR082317-$SPX

 

The extreme volatility and incoherent action of this market is quite obvious on the index charts, which have shown a lot of the proverbial chop ‘n slop over the past 2-3 months. Some of this also shows up in the chart of individual stocks, making most of them difficult to play in either direction as everything zigs and zags to and fro.

For the most part, I do not see this current environment as much of an investor’s market to say the least. It is more of a nimble, short-term trader’s market. For those with a longer time horizon this means that they should probably be moving ever more into cash. In some cases, they may even be forced to do so.

The latest casualty among my favored long ideas from recent reports is one of my China Five, and a stock that has been a stellar performer and leader in 2017. That would be, of course, Momo (MOMO), which blew to tiny little pieces yesterday after reporting earnings before the opening bell.

If one was alert to  this, and something of a sophisticated short-seller, one could have hit it on the short side right at the open as a shortable gap-down. However, one would have had to be very quick on that since MOMO didn’t hang near its opening very long. At the opening bell the stock printed 40.37 and within five minutes was trading at 38.60.

From there MOMO moved steadily lower all day before closing at 36.02, down -20.1% on the day. Ouch! From here any rallies up to the 50-day moving average way up at 41.20 would be your references for potential short-sale entry points, assuming the stock doesn’t just keep moving lower and toward its 200-day moving average.

 

GR082317-MOMO

 

So now MOMO is a late-stage failed-base (LSFB) short-sale set-up, but we’ll have to wait for a rally to the 50-day line, if we can get it, to short it from here. JD.com (JD), however, is another LSFB short-sale set-up among my now deteriorating China Five that moved into a shortable position today as it pushed just above the 50-day moving average.

Here we can see the wedging rally into and just beyond the 50-day line today that stalled and reversed off the intraday highs to close just below the moving average on weak volume. This puts the stock in a shortable position here using the high of today at 43.06 as a guide for an upside stop.

 

GR082317-JD

 

Among the other China Five names, Alibaba (BABA), not shown, has continued moving higher since gapping up on earnings last week. The stock is well-extended at this point, and so is not actionable on the long side. Not that I’m interested in buying anything in this market currently, however. Anyone long the stock could consider selling into extended strength or using the 10-day moving average, now at 162.63, as a maximum selling guide.

Weibo (WB) and Sina (SINA), both not shown here on charts, moved to all-time highs today on higher volume. Both are extended to the upside so are also not in any lower-risk entry position — if anyone actually wanted to get long anything in this market right now. At this point, anyone long these names can consider selling into extended strength or designating one of the shorter moving averages, e.g., the 10-dma or the 20-dema, as maximum downside selling guides.

In NASDAQ big-stock land, we continue to see a mixed bag, but in my view the overall picture of these leading names is one of slow deterioration. That, of course, is not without the usual zigging and zagging back and forth that typifies much of the movement in individual stocks.

For example, Tesla (TSLA) started to come apart on Monday as it broke below the 340 price level, reaching an intraday low of 331.85. But with the NASDAQ in undercut & rally land, TSLA pulled its own U&R by undercutting the prior August 3rd low of 343.15 and rallying from there. Remember that 1% in TSLA is the equivalent of about 3.5 points, so when it hit a low of 331.85 on Monday it was about 3% below the prior BGU low, certainly in position for a possible U&R move in sync with the NASDAQ Composite’s own U&R move.

Today TSLA was rallying back to the upside in U&R fashion on news that its Model 3 SUV (the souped-up one, not the standard model) beat a Lamborghini. Soccer moms everywhere were no doubt rejoicing at the news. This took the stock up just beyond the confluence of the 20-day exponential and 50-day simple moving averages and right into the 10-day moving average.

TSLA probably now becomes shortable again as it rallies up into the 10-day line. For now, however, one can wait for a reversal back down through the 50-day moving average as a short-sale trigger. For those of you who are more crafty and cunning, the alternative is to look to short into a continued rally once a potential reversal signal can be identified on the five-minute “620” chart that I also use for trading the UVXY.

 

GR082317-TSLA

 

Netflix (NFLX) has been beaten down to its 50-day moving average during the month of August after its buyable gap-up to nowhere failed over two weeks ago. Over the past several days the stock has held support along the 50-day moving average but for the most part looks to be building a bear flag along the line.

I say this because it has simply moved sideways over the past several days without bouncing sharply back to the upside, even when the general market is rallying. Objectively, however, one can take a two-sided view of the stock. It can be viewed as buyable here using the 50-day line as a tight selling guide, while a clean breach of the 50-day line could be viewed as a trigger for a short-sale at that point.

My guess is that if we see the NASDAQ continue lower over the next few days, NFLX will be dragged below the 50-day line, at which point it would morph into a short sale. Alternatively, I am also watching how it acts on any little movements up into the 20-day exponential moving average at 171.57. A weak rally into the 20-dema could also serve as a lower-risk short-sale entry point, so that is something to be alert to.

 

GR082317-NFLX

 

Nvidia (NVDA) can best be described as a former leader that has gone somewhat erratic on us. The big gap-down break below the 50-day moving average on huge volume after earnings two weeks ago had the look of certain doom for the stock. But it simply gapped back up above the line and continued moving higher before losing momentum near the 170 price level and the prior all-time highs.

NVDA then slid back down to the 50-day moving average on light volume where it found support on Monday. As erratic and incoherent as this action appears, I can try and make some sense of it by viewing as a possible late-stage failed-base (LSFB) situation in the making. Note that in early August the stock tried to break out to new highs.

That breakout failed as the stock broke back to the downside, culminating in the big gap-down after earnings. It then rallied back up to the prior breakout point last week before rolling over, and is now back to testing that prior breakout point. Therefore, the closer to the 170 price level it gets, the more shortable it may become.

I can also see something of a fractal head and shoulders formation here, as I’ve outlined on the chart. NVDA closed today at 165.80, which puts it within about 2% of the prior breakout point just under 170. This could become shortable into this rally using the 170 price level as a tight upside stop if we see the general market roll over again.

 

GR082317-NVDA

 

If you were desperate to buy a big-stock “PFAANNGM” leader, then I suppose Facebook (FB) would be worth looking at. The action here looks constructive as the stock holds tight along the 20-day exponential moving with volume drying up to -46% below average. If I really had to get long something big and liquid, I suppose FB would fit the bill with the idea of using the 20-dema as a tight selling guide. A breach of the 20-dema, however, would be bearish and could, I say could, trigger the stock as a short-sale at that point.

 

GR082317-FB

 

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

Apple (AAPL) is wedging up into the 160 price level, not too far below its prior all-time highs. While it is not in a buyable position, there is always the possibility that this wedging rally fails as it pushed up into the four-week range highs.

Alphabet (GOOGL) is wedging back up into last week’s highs now, and closed just above the 20-dema today on light volume. I would watch for a reversal back below the 20-dema as a short-sale trigger since the stock is currently an active LSFB short-sale set-up.

Amazon.com (AMZN) is hovering along its near-term lows around the 950 price level. Yesterday it ran into resistance at the 20-dema and backed down slightly today. I would continue to view rallies into the 20-dema, now at 978.60, as potentially lower-risk short-sale entry opportunities given that AMZN remains a current, active LSFB short-sale set-up.

Microsoft (MSFT) keeps chopping back and forth within a four-week price range. I suppose one could consider shorting the stock near the highs of the range in the 74-75 price area, but for the most part MSFT is just a stock I monitor as a big-stock NASDAQ barometer name.

Priceline Group (PCLN) is still way extended to the downside and would need to get at least back up as far as it rapidly descending 10-dma, now at 1835.00 (note that the 10-dma was at 1891.57 over the weekend) before it might run into logical resistance.

Salesforce.com (CRM) reported earnings yesterday after the close and was a bit hesitant today as it could never really figure out whether it wanted to rally or sell off. The stock finally ended the day near the middle of a very wide daily price range as it held a base breakout move on heavy volume. The heavy volume implies that buyers and sellers were doing some serious battle with no decisive outcome.

By the close, CRM gained all of twelve cents on the day, and in my view, should be watched for a possible base-breakout failure. This breakout attempt is coming out of an arguably very late-stage base position, and if the general market runs into more trouble from here, a breakout failure is likely.

I tried the stock out both long and short today, but ultimately couldn’t get any traction in either direction. I think if I saw the stock move up closer to today’s intraday high at 94.63 I might be inclined to short it. Otherwise, a clean breach of the 92 price level would trigger this as an LSFB short-sale at that point.

 

GR082317-CRM

 

Both of CRM’s cousins, Workday (WDAY), not shown, and ServiceNow (NOW), should also be watched for possible late-stage failures. Both stocks have already failed on recent breakout attempts and over the past couple of days have been rallying up into their respective prior breakout points.

NOW serves to illustrate the basic idea here. We can see that the action so far this week has taken the stock right up into the prior breakout point around the 110 price level. From here, one could short the stock using the highs of the past two days near 111 as a guide for tight upside stops.

Alternatively, one could wait for a clean breach of the 20-dema as a short-sale trigger. However, my studies of LSFB short-sale set-ups show that one can also use the prior breakout point as a short-sale point when the stock has rallied above the 20-dema or the 50-dma. This would apply to NOW, so one can play it as they choose.

 

GR082317-NOW

 

The video-game leaders Activision Blizzard (ATVI), Electronic Arts (EA), and Take-Two Interactive (TTWO) have all continued to hold up, but at least two of these, ATVI and EA, have the potential to morph into late-stage breakout failures. Of course, they don’t have to, but that will likely depend on what the general market does from here.

As I pointed out over the weekend, ATVI’s weekly chart reveals a stock in what is arguably an extended upside trend that could be getting late-stage. The same might be said for EA, but again, late-stage is as late-stage does, so I would need to see ATVI and/or EA bust below their 20-dema lines as confirmation of a possible LSFB situation in the making.

And yes, I am leaning to the short side of this market based on the underlying action. So while all three of these stocks can also be viewed on a two-sided basis, taking into account their positive characteristics which might make them longs in a continued market rally, I think it is helpful to be aware of leading stocks that are a) in longer-term extended rallies and b) may be in positions where a late-stage failed-base situation could arise IF the general market breaks to lower lows.

 

GR082317-EA

 

Notes on other short-sale ideas discussed in recent reports and blog posts:

Applied Optoelectronics (AAOI) is extended to the downside, but I would take an opportunistic approach here and look for any possible rally up to the 20-dema at 70.70 as a lower-risk short-sale entry from here.

Fabrinet (FN) is extended on the downside but rallies into the 200-dma at 40.62 should be watched for potentially lower-risk short-sale entry opportunities.

Lumentum Holdings’ (LITE) has rallied up into its 20-dema, where it stalled out today on above-average volume. This would represent a reference point for a lower-risk short-sale entry here, using the 20-dema at 56.09 or today’s intraday high at 56.70 as a guide for a tight upside stop. There is always the possibility that the stock will continue rallying to its 50-day moving average, currently at 59.81. That, perhaps, would represent the juiciest short-sale entry for the stock., should that occur.

Palo Alto Networks (PANW) has been shortable on rallies up to the 20-dema over the past week, but any short-sale trades in the stock should be  limited to quick scalps since the company is expected to report earnings a week from tomorrow, August 31st.

I am still watching some names as possible long ideas here IF we see the general market find its feet and truly resume its uptrend. Currently I see no evidence for that, and the reality is that the indexes remain in downtrends that extend back to their prior late July/early August highs. In this spirit, here are my current notes on these names. Please note carefully the selling guides for each, since continued general market weakness could seep into these names and eventually drag them down as well:

Alteryx (AYX) is holding tight at its 10-dma as volume dries up. This puts it in a potentially lower-risk entry position, using the 20-dema as a maximum downside selling guide.

Appian (APPN) posted a pocket pivot today at its 10-dma, but lower-risk entries were available closer to the 10-dma before the pocket pivot, per my prior discussions of the stock.

Arista Networks (ANET) is holding up in a tiny cup-with-handle formation and along its 10-dma with volume declining to -37% below average today. This may put it in a lower-risk entry position using the 10-dma as a tight selling guide. However, I would note that the stock has had a long move over the past year, so it could be getting late-stage.

First Solar (FSLR) is living below its 20-dema but is in position for a possible moving average undercut & rally (MAU&R) if it can regain the moving average. This would coincide with a more decisive move back up through the prior 46.45 low in the pattern from August 10th. FSLR closed at 46.48, technically triggering a U&R entry here, using the 46.45 low as an extremely tight selling guide.

GrubHub (GRUB) is holding tight aloing the 10-dma with volume drying up to -53% below average today. This would put it in a lower-risk entry position using the 10-dma as a tight selling guide.

Nutanix (NTNX) continues to hold extremely tight along its 20-dema as volume dried up to -52% below average today, putting it in a lower-risk entry position using the 20-dema as a tight selling guide.

SolarEdge Technologies (SEDG) has pulled into its 20-dema with volume drying up to -53% below average today. It is also holding above the 25.80 intraday low of its August 3rd buyable gap-up (BGU). This would put it in a lower-risk entry position here, using the 25.80 price level as a maximum downside selling guide.

Square (SQ) has wedged back up above its 20-dema after regaining its 50-day moving average yesterday. My inclination is to take profits in this here if one still owns it. Furthermore, I would also watch for another breach of the 50-dma as a potential short-sale trigger, should that occur in conjunction with continued general market weakness.

Tableau Software (DATA) looked bullish over the weekend, and has since broken out to new all-time highs. Volume has been extremely low, however, which puts the breakout in question. For that reason, I would not be looking to buy the stock up here as it sits in new-high price territory.

Yelp (YELP) is holding up in a short three-week flag formation but is in an overall extended position. As I wrote over the weekend, pullbacks to the 20-dema down at 39.30 would offer the most opportunistic entries, and I would prefer to look for that rather than chasing the stock up here.

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).

At best, I consider this to be a difficult market. Random price moves in either direction are always possible, often on a moment’s notice. Therefore, as I wrote earlier in this report, I don’t see this current environment as an investor’s market. It is a trader’s market, and one must be nimble and alert to capitalize on the various price movements we are seeing individual stocks, sometimes on an intraday basis.

Long-only players should consider moving more to cash as warranted, and looking to sell into extended upside strength when you have it.

My sense is that we are going to move lower from here, but I fully recognize that this assessment could turn out to be wrong. For that reason, I am watching the action of various leading stocks and the market indexes very closely. Currently we have the S&P 500 running into resistance at its 50-day moving average today as it remains below this key near-term resistance level. Conversely, the NASDAQ is holding above its own 50-day moving average.

So the stage is set for the S&P 500 to drag the NASDAQ back below its 50-day line, or for the NASDAQ to drag the S&P 500 back above its own 50-day line. This serves as a very simple analogy for the overall uncertainty and confusion in this current market environment. Therefore, I think it makes sense to maintain higher cash levels, mostly in the interests of prudent risk-management given the current environment. That is all.

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.