The Gilmo Report

August 28, 2018

August 28, 2018

The indexes have charged higher as they at least act like the recent breakouts to new highs in the S&P 500 and NASDAQ Composite Indexes may be the beginning of new upside legs in what pundits are calling the longest bull market in history. While that may be true, it’s not as if there haven’t been enough serious downside breaks in the rally to offer some choice short-selling opportunities along the way, such as the sharp breaks in February of this year, January and February of 2016, and August 2015, to name three.

The breakout on Friday gave the NASDAQ wings, as that power drink commercial goes, with a gap higher yesterday and again this morning. Those wings were clipped just a wee bit today as the index closed below where it opened, and volume declined sharply. This gives the index the look of stalling and churning today as it lost some buying momentum.

 

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The S&P 500 Index also gapped up slightly this morning and then closed below its opening price level with volume declining. Like the NASDAQ’s action, this has the look of stalling and churning as buying momentum slowed sharply. Given that many of my favored long ideas are fairly extended after running up 3-5 days in most cases, a pullback here is perhaps necessary and certainly something I’d be looking for.

 

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According to Bloomberg, investors have been piling into the largest Chinese ETF, the iShares China Large-Cap ETF (FXI) as they attempt to call a bottom in the oversold Chinese markets. This, of course, showed up in many Chinese names, particularly some of those that I’ve discussed in recent written and video reports.

Bilibili (BILI) reported earnings yesterday after the close and beat estimates with a one-cent loss and 124% revenue growth that also topped estimates. This was one to watch per my video report over the weekend, and the stock did not disappoint with a buyable gap-up move this morning. It quickly set an intraday low at 12.64 and pushed above the 50-dma.

Despite stalling off the intraday highs, BILI held above the initial 12.64 intraday low and the 50-dma. Thus, this remains actionable as a bottom-fishing buyable gap-up (BFBGU) using either the 50-dma or the 12.64 intraday low as a selling guide, depending on how tight you want to keep things.

 

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Iqiyi (IQ) also moved higher yesterday in a pocket pivot move off the 20-dema. That move also cleared the 28.94 low from early July, the second U&R entry point after the initial 28.01 low of early August which the stock cleared last week. The stock ran into resistance today at the 50-dma as volume declined.

Nevertheless, IQ closed at 30.50 today, which keeps the U&R long entry at 28.94 in play. In addition, yesterday’s pocket pivot at the 20-dema is still in play, making the stock actionable here while using the 20-dema as a tight selling guide.

 

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Huya (HUYA) plowed through the 27.05 U&R long entry trigger low on Monday and continued higher into this morning before reversing off the intraday highs and closing four cents above the 20-dema. Yesterday, the stock triggered two U&R long entries, the first when it gapped just above the prior 27.05 low of early June.

The second occurred when the stock continued higher and moved above the prior 28.40 low of early July. That triggered a second entry at that point, using the 28.40 price level as a selling guide. Given that HUYA was able to hold above the 20-dema today, it remains actionable on the long side using either the 20-dema at 29.08 or the prior 28.40 low as your selling guides.

 

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I discussed Momo (MOMO) in Sunday’s video report, and the stock launched higher yesterday, putting it out of buying range. It’s cousin, Baozun (BZUN), however, is also setting up here after posting a U&R long entry on a second attempt at clearing the prior 54.31. It is now sitting on top of its 20-dema but just below its 50-dma.

If one did not come in near the 54.31 low, then one could watch for any pullback to the 20-dema as a possible lower-risk entry. Otherwise, I would keep an eye out for any move back up through the 50-dma, which would trigger a long entry using the 50-dma as a tight selling guide.

 

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Big-stock NASDAQ names have also continued higher and are mostly in extended positions, such as Apple (AAPL) and Amazon.com (AMZN) among those that I follow. Nvidia (NVDA) pulled in today and is technically within buying range of last week’s base breakout through the 263.64 price level.

 

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Facebook (FB) cleared its 10-dma yesterday on light volume, but this at least helps to create a reference point for near-term support. As I discussed in Sunday’s video report, the stock is still an active U&R long set-up after it pushed back above the prior 170.23 low of May 1st. Technically, it is still within buying range of this U&R trigger point, using it or the 10-dma as a tight selling guide.

 

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Netflix (NFLX) has rallied up to its 50-dma after posting three U&R long set-ups and two pocket pivots along the way. The first of those at the 323.43 price level was discussed in my report of two weekends ago and triggered a long entry at that point two Mondays ago. The ensuing rally up to the 50-dma carried about 16% before NFLX reversed at the 50-dma yesterday on heavy volume.

Yesterday’s reversal occurred on the highest volume in the pattern, so raises questions as to whether this is the extent of the move off the lows. In addition, the stock could potentially set up here as a short-sale, using the 50-dma as a guide for a tight upside stop. That said, if NFLX can get back above the 50-dma, it would be a bullish development.

Because the stock has already rallied significantly off its lows, I wouldn’t necessarily consider this a moving-average undercut & rally (MAU&R) move but it could be treated as a long entry if one simply uses the 50-dma as a tight selling guide. Thus, it is a bit of a two-sided situation right here just underneath the 50-dma, and we will have to see how things evolve from here and act accordingly, as I’ve outlined above.

 

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Tesla (TSLA) is back below its 200-dma, which puts it in position as a short-sale here, using the 200-dma as a guide for an upside stop. As I wrote over the weekend, a breach of the 200-dma could bring the stock back into play as a short-sale target, and that is what has occurred right here in real-time.

This, of course, doesn’t entirely erase the possibility of another move back above the 200-dma, since the news flow swirling around the stock is always unpredictable, particularly when it comes to predicting which way the stock will move in response to any specific piece of news. If Elon Musk gets tagged by the SEC for fraud, the stock could respond negatively.

On the other hand, if he is forced to step down and a strong replacement CEO is named, the stock could rally. For now, the fact that the stock is back below the 200-dma makes it a short-sale here, using the 200-dma as your guide for a stop. But be prepared to remain flexible here and seek to flow with the real-time price/volume evidence, as things can change quickly.

 

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Etsy (ETSY) pulled into its 10-dma today on lighter volume and held. Therefore, this pullback can be used as a lower-risk entry using the 10-dma at 47.32 as a tight selling guide. If one already took a position on the re-breakout down below 44-45, this would be an appropriate add point.

 

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Perspecta (PRSP) closed just below its 10-dma on an extreme volume dry-up that was -78% below average. This brings it back into buying range of the prior buyable gap-up move of two weeks ago, using the 22.83 intraday low of the BGU day as a tight selling guide.

 

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I like the look of Applied Optoelectronics (AAOI), which is hanging tight along its 10-dma, 20-dema, and 50-dma as volume dried up to -69% below average today. This is buyable here using the 50-dma at 42.19 as a tight selling guide, or the 10-dma at 41.43 as a slightly wider selling guide.

Earnings and sales have been negative for the past two quarters, but the stock is a potential turnaround as growth is expected to return in the latter part of 2018 into 2019. The technical set-up here is compelling, since risk can be kept to a minimum by using the 50-dma or 10-dma as relatively tight selling guides.

 

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In my Sunday video report, I discussed Acacia Communications (ACIA) as being buyable on the gap-fill of last Friday. The stock was originally buyable on the undercut & rally (U&R) move last Monday that also showed supporting action along the 20-dema. The upside move over the past two days has regained the 10-dma, but volume has been light.

I’d like to see the stock settle along the 10-dma with volume continuing to dry up. That would help to set up a lower-risk entry along the 10-dma while using it as a tight selling guide.

 

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Notes on other names discussed in recent written reports. Most names are extended after rallying for several days in most cases, so I give the nearest pullback points for lower-risk entries as applicable:

Carbonite (CARB) – look for pullbacks to the 10-dma at 40.30 as lower-risk entries.

Intuitive Surgical (ISRG) reversed after posting an all-time high this morning. Pullbacks to the 10-dma at 532.99 would offer lower-risk entries from here.

Okta (OKTA) posted another all-time high today and is extended ahead of next week’s expected earnings report. Pullbacks to the 10-dma at 57.24 would offer lower-risk entries from here, but I would be inclined to leave the stock alone until earnings come out.

Roku (ROKU) is selling off slightly after-hours on news that AMZN is planning to offer advertising-supported Fire TV streaming services. That said, the stock was already extended to the upside, and therefore I would watch to see how any pullback develops. My first reference for an entry on any pullback would be the 10-dma, now at 59.35, so lay back and let the stock come to you.

Sailpoint Technologies (SAIL) is pulling down toward its 10-dma at 29.62, which brings it closer to a lower-risk entry point. The closer to the 10-dma one can buy shares, however, the better, so I would let it come in a little more before attempting to pull the trigger. The stock was last buyable along the 28 price level per my prior reports, so I see no reason to chase it up here.

Square (SQ) posted another all-time high today as it posted its ninth straight up day in a row. It is, quite obviously, extended on the upside. Only pullbacks to the 10-dma, down at 75.81, would provide lower-risk entries from here.

Stitch Fix (SFIX) – look for pullbacks to the 10-dma at 35.19 as lower-risk entries from here.

Twilio (TWLO) – look for pullbacks to the 10-dma at 78.03 as potential lower-risk entries from here.

Turtle Beach (HEAR) failed to hold its 50-dma and closed below the 25 price low of August 15th on heavy volume today. The 50-dma serves as a near-term stop-out, and now only a move back above the prior 25 price low would trigger a buyable U&R, so can be watched for.

Zebra Technologies (ZBRA) – look for pullbacks to the 10-dma at 166.97 as lower-risk entries from here. However, for those who like to chase things, this remains within buying range of its early August base breakout through the 161.72 price level.

ZScaler (ZS) has shot higher after posting a trendline breakout last week. Earnings are coming up next week, so one can either take profits here into earnings or hold and hope your profit cushion is sufficient in case things go awry after earnings roulette.

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). In all cases I will mostly use the shorthand version of “10-dma,” “50-dma,” etc.

Almost all my favored long ideas over the past few weeks have gotten extended on the upside, and very few are in lower-risk buy positions. For that reason, the current situation dictates that when it comes to these extended situations we simply lay back and see how the stocks handle any pullbacks from their current extended price levels.

The extended state of many leaders may also be providing a clue that the market is set for a pullback here, which would not be the end of the world. As always, we look to enter favored names on constructive weakness to a key support level, usually a moving average or the top of a prior base and/or consolidation. It is generally a market pullback that creates those opportunities, as well as our trusted and reliable U&R long entries.

When your stocks are extended, that’s what is known as a rich man’s (or should I say rich person’s) problem. If there’s anything I consider to be at a lower-risk entry point and therefore actionable, it’s been discussed in this report. However, if for any reason we see the market stage a pullback that is anything deeper than a short-term correction (2-3%), then keeping your entries to areas where you can determine a very tight exit point will be critical.

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. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.