The Gilmo Report

August 30, 2017

August 30, 2017

The market got blindsided Monday after the close when North Korea decided to launch another missile, this time over Japan. That sent the after-hours futures careening to the downside, leading to a sharp gap-down open yesterday morning. But the whole affair ended up as a big shakeout with the market closing up on the day.

The context for the intraday bounce, however, came from the Dow Jones Industrials Index, not shown, which met up with and bounced off its 50-day moving average. This led to a big outside reversal to the upside on the part of the NASDAQ Composite Index on higher volume.

In bullish fashion, the NASDAQ today cleared to higher highs on a trendline breakout as volume picked up on the day. This move was driven almost entirely by money pouring into big-stock NASDAQ names as the index posted a 1.05% rise vs. the S&P 500’s 0.46% and the Dow’s 0.12% gains for the day.

 

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The S&P 500 Index performed less spectacularly than the NASDAQ yesterday as it merely ran into resistance at the confluence of its 20-day exponential and 50-day simple moving averages. But today the index was able to clear the 50-day line, albeit on lighter volume. While higher volume would have been preferable to see, we now have some simple reference points for support for both the NASDAQ and the S&P.

 

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As always, however, the point becomes where one finds suitable long ideas, and as I discussed over the weekend, I had a reasonable idea of where these might be found, as I discussed near the end of this past weekend’s report.

Despite the reaction rally yesterday, I still consider this less of an investor’s market and more of a trader’s market. If you are nimble enough to recognize and handle the set-ups, long or short, on a swing-trading basis, money can be made. But it’s not necessarily all that easy since the robo-market remains somewhat whippy and very difficult to navigate, even on a short-term basis.

The SPDR Gold Shares ETF (GLD) looked to be “on the verge of breaking out from a roughly four-month price range,” as I discussed over the weekend, and lo and behold, that’s what we have this week. One could say that the NoKo news on Monday was the culprit, but the bottom line is that gold and the GLD remain in an uptrend that began in early July on the undercut & rally move around the 116-117 price level.

On Monday gold broke out ahead of the NoKo news on Monday after the close, causing me to wonder whether it knew something ahead of time. What is also interesting is how the GLD has pulled back very slightly here and held tight today with volume drying up.

I have mentioned several potential entry points for the GLD on the way up since the initial early July U&R set-up. But at this point, only a pullback closer to the 10-dma and the breakout point at around 123 would provide your best lower-risk entries. Otherwise, buying the GLD here can be done using the 20-dema at 122.26 as a reasonable selling guide.

 

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As the market pushes up off yesterday’s lows, the Financial Select Sector SPDR Fund (XLF) moves back up into shortable range near its 50-day moving average.

 

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With the NASDAQ Composite somersaulting around its 50-day moving average, this action is being mimicked by several big-stock NASDAQ names. Tesla (TSLA) is one of them, and we can see that it has followed in the NASDAQ’s footsteps as it pirouettes around its own 50-dma, regaining the line yesterday in sync with the NASDAQ.

TSLA moved above its 20-dema today but volume was light. However, if it can hold the 20-dema with volume remaining light, this could revert to a long entry point using the 50-dma as a maximum selling guide. The flip side of this is that a breach of the 50-dma would trigger the stock as a short-sale at that point, if it occurred in sync with the NASDAQ breaking back below its own 50-dma.

Market context is critical in determine how any two-sided assessment of a stock will play out. In this market, that has really been the only way to play stocks in a choppy environment that is fraught with risk. So, we’ll see how TSLA acts from here, and play it as it lies.

 

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Netflix (NFLX) quickly negated any thoughts of shorting the stock on the dip below the 50-dma yesterday as it pushed right back above the line in short order. And, like TSLA, it did this in sync with the NASDAQ Composite Index. Today it continued up through the 20-dema thanks to a positive mention in Barron’s. Meanwhile, I simply focus on the technical action of NFLX itself.

What’s most interesting here is that NFLX’s action is basically exactly what I discussed would probably happen if the general market found its feet and rallied. As I wrote over the weekend, such an index move would likely see NFLX “rallying furiously off its 50-dma.”

With its ability to hold and rally back above the 20-dema on a pocket pivot move, NFLX is off the table as a short. In fact, a nimble trader could have gone long the stock yesterday as it came back up through the 50-dma based on a clean moving average undercut & rally (MAU&R) move that occurred in sync with the NASDAQ’s shakeout and rally back above its own 50-dma.

NO doubt today’s action is constructive, but I would still tend to view any long play in NFLX as a swing trade, and remain open to the stock reversing course at some point. Objectively, NFLX would only become a short again on any break back below the 20-dema. It now serves as an example of why I approach every stock on a two-sided basis based on the available real-time information.

 

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Amazon.com (AMZN) shows how it also helped create the context for a NASDAQ rally off the lows yesterday as it undercut its prior August low and rallied back above it. This was followed by further upside today, back above the 10-dma. By the close, the stock was right at its 20-dema.

This could be considered a potential short-sale entry point at the 20-dema, using it as a guide for a tight upside stop. However, if the general market keeps rallying, expect it to at least test the 50-dma. And, of course, given the nature of the Ugly Duckling robo-market, it could be done correcting and is simply ready to start jacking back to new highs!

For that reason, I would be open to whatever evidence shows up that would validate the idea of AMZN as an Ugly Duckling long play. Already we have a U&R type of move, and this could be followed up by a move back up through the 50-dma.

 

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Nvidia (NVDA) is holding tight along the confluence of its 10-dma and 20-dema with volume drying up to -53% below average. This could be viewed as a “voodoo” long set-up at the two moving averages, using them as tight selling guides.

I have maintained a two-sided view of the stock, open to the idea that a clean breach of the 50-dma would trigger the stock as a short-sale idea. That is still the case, but a two-sided view dictates looking at the current real-time evidence to conclude that the stock is in fact in a lower-risk entry position right here, right now.

 

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I don’t think that one really needs to focus on much else but the big-stock leaders here, and that includes looking to play Ugly Duckling type set-ups if and as any of these can move up the right sides of new bases. For this reason, I take a two-side view of everything here. We certainly saw how that worked with NFLX as it flashed a very buyable long signal over the past two days!

Herewith my notes on other big-stock NASDAQ names on my watch lists:

Alphabet (GOOGL) has found support along its recent August lows around the 920 price level and is back above its 20-dema. A move back above the 50-dma could bring this back into play as a long idea. Otherwise, the 50-dma could present near-term resistance and hence a possible short-sale entry point.

Apple (AAPL) posted a pocket pivot off its 10-dma yesterday on above-average volume. That was best bought along the 10-dma, as it is now slightly extended from the line. However, it does show the strength inherent in these big-stock NASDAQ names.

Microsoft (MSFT) just missed posting a new all-time high today, closing just 41 cents below its all-time high. Volume picked up today but remained below average.

Priceline Group (PCLN) is way extended to the downside and remains the weakest of the big-stock NASDAQ names that I follow.

Optical names remain down in the dumps, but their positions deep down in their chart patterns make them susceptible to logical reaction rallies that occur in sync with the general market.

Applied Optoelectronics (AAOI), which looks like it might be riding along the neckline of a possible head and shoulders in progress, is one such candidate. As I discussed near the end of my weekend report, the stock’s position here along the neckline might mean that a logical rally (within the context of the continued formation of a head and shoulders) up to the 50-dma that is tradeable on the long side.

Right now, the stock is hanging just below the 10-dma, so it would be possible to use a move back up through the 10-dma as a long trigger with the idea of trying to catch a rally up to the 50-dma. I think there’s a good chance that would happen IF the general market keeps rallying from here. In this case, I’m looking at what was previously a short-sale target and figuring out how it could serve as a long vehicle for a trade on a natural rally back up to the 50-dma.

 

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Lumentum Holdings (LITE), not shown, might present a similar opportunity as it sits long its 20-dema. A rally up to the 50-dma is not out of the realm of possibility, so buying the stock here along the 20-dema while using it as a tight selling guide is feasible.

Fabrinet (FN), also not shown, might also rally back up to its 200-dma. However, I think if we get any massive reaction rallies in the group in a continued general market rally, AAOI would have the strongest move since it was previously the strongest leader in the group.

Some of the China Five names also provided some context for yesterday’s reaction bounce off the lows. For instance, Momo (MOMO) finally got down to its 200-dma yesterday, triggering a logical reaction bounce from there. An alert Ugly Duckling style player might have picked it off at that point, and that would have worked as a long trade from there.

Of course, I’m not going to buy it here, but it does illustrate how busted stocks can reach points where a bounce becomes likely. And since this is an Ugly Duckling style robo-market, often these are your best long trades, at least in the short-term. Right now, MOMO seems a long way away from setting up again as anything more than a short-term long trade.

 

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Another example would be JD.com (JD), not shown, which undercut its lows of nine trading days ago and pulled a typical undercut & rally move from there. Today it rallied up through the 10-dma on increased but below-average buying volume. This brings it back closer to short-sale range as it approaches the 20-dema at 42.60 and the 50-dma at 42.77.

However, one could have picked up shares on yesterday’s clean undercut & rally move as it pushed up through the August 18th low of 39.93. At that point one then uses the low as a tight selling guide.

 

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As the best-acting names among the China Five, Alibaba (BABA), not shown, pulled into its 20-dema yesterday, where it could have been bought for a nice bounce. Weibo (WB), also not shown, which has also been acting very well, bounce off its 10-dma yesterday. So, both of these strong China Five names presented long swing-trade entry points yesterday at the 20-dema and 10-dma, respectively.

Meanwhile, Sina (SINA) has pulled back to the top of its prior base breakout point. The stock has had a couple of failed breakout attempts, but has managed to keep its head above water in the sense that it hasn’t busted the 50-dma and is now sitting back above the 20-dema. This would be a lower-risk entry position here, using the 20-dema as a selling guide. Conversely, the lows of the prior two days could be used as alternative selling guides, or the 50-dma as a much wider selling guide.

 

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Workday (WDAY) reported earnings after the close today, and as I write this afternoon is trading dead flat with its close. Of course, the stock was up 3.13 points today on strong volume, so the fact that it is holding those gains in the after-hours might be considered a positive.

Obviously, with the company reporting earnings today, there was nothing to do with it or its cousins, Salesforce.com (CRM) and ServiceNow (NOW), both not shown, until earnings were out. But NOW broke out today with WDAY, and CRM moved higher following last week’s post-earnings breakout.

As with other short-sale targets, these have been two-sided situations. A breach of the 20-dema by any of them could have triggered them as possible late-stage failed-base (LSFB) short-sale situations, but that has not happened. Instead, we get a breakout today in WDAY that is actionable as a buyable standard base breakout.

 

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Keep an eye on ServiceNow (NOW) as it sits in the better lower-risk entry position compared to CRM. Today’s action qualified as a pocket pivot breakout today despite volume coming in below average.

 

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The video-gaming stocks were another group of two-sided situations where I was looking for them to either break down as possible LSFB short-sale set-ups, or to potentially set up again as long ideas. Today we saw Activision Blizzard (ATVI) break out to new highs on a pocket pivot off the 10-dma that was also a clean base breakout.

This becomes buyable here on the basis of the standard-issue base breakout. However, I would have preferred to come into the stock yesterday when it was sitting at the 10-dma and 20-dema with volume drying up and the market turning off the intraday lows. That’s just me, although this is actionable for you base-breakout lovers!

 

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Take-Two Interactive (TTWO), not shown, remains the clear leader of the video-game group as it continues to truck higher and is out of buyable range. However, its other cousin, Electronic Arts (EA), also not shown, broke out today on a pocket pivot volume signature. Although not as powerful as ATVI’s breakout, this is actionable here using the 10-dma as a selling guide, although one could look for a constructive pullback to the line as a lower-risk entry opportunity.

Broadcom (AVGO) was discussed over the weekend as a late-stage failed-base (LSFB) short-sale set-up in the making. Here we see the stock rallying into the 50-dma on weak volume, which could set it up as a short-sale right here, using the 50-dma at 246.87 as a guide for a tight upside stop.

Keep in mind that if the general market continues rallying, AVGO could simply re-breakout in classic Ugly Duckling fashion. The first indication of this would be the stock pushing back up through the 50-dma. This would then come into play as a moving-average undercut & rally (MAU&R) long set-up, which is one set-up that has taken hold in several other leaders like NFLX and TSLA, for example.

 

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The MAU&R has also triggered in Skyworks Solutions (SWKS). However, it was already buyable yesterday as an undercut & rally (U&R) set-up as it pushed back up through the 100.06 low of August 21st. Imagine that! But if you missed yesterday’s U&R, SWKS is also an MAU&R at the 50-dma today. Therefore, this can be bought here using the 50-dma as a tight selling guide.

There is useful market feedback here in the form of all these stocks that looked to be on the verge of major failure coming back to life on a variety of U&R and MAU&R set-ups over the past two days. I must say it doesn’t surprise me, and I tweeted yesterday after the close that members should review two-side situations for these U&R and MAU&R types of long set-ups given the bullish NASDAQ Composite action.

 

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Bio-techs have come to life over the past couple of days following yesterday’s shakeout. Among my favorites in the group, I note that Vertex Pharmaceuticals (VRTX), posted a roundabout type of pocket pivot today as it came up and off the 10-dma and 20-dema.

This is buyable here using the 10-dma/20-dema confluence as a tight selling guide. We saw a big 13-month base breakout today from big-stock bio-tech Biogen Idec (BIIB) today, along with strong moves in other big-stock bio-tech names. Bio-techs have been languishing for some time, and it is possible that a new market up leg will be fueled by leadership emerging from this area of the market. VRTX remains one of my favorite ideas in the space.

I would suggest reviewing the entire group for names that are either at or near potential long entry points. This would include Ugly Duckling types of set-ups in situations that have been correcting and building potential new bases, such as our old friend Bioverativ (BIVV), not shown. Have fun with it!

I will be reviewing the group later this evening, and if I find anything compelling I will post it on the Gilmo live blog.

 

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Herewith my notes on other stocks that have remained on my watch lists, long and short:

Alteryx (AYX) broke out to new highs today but stalled on higher volume. Lower-risk entry positions remain closer to the 20-dema down at 22.38.

Appian (APPN) is holding tight up near its early August highs but is out of buyable range. The stock was last buyable along the 20-dema last week, and it then proceeded to post a pocket pivot at that point.

First Solar (FSLR) is working on what is now a five-week base. Pullbacks to the 10-dma at 47.40 offer your best lower-risk entries from here.

GrubHub (GRUB) posted a pocket pivot today off the 10-dma. Over the weekend, I noted that, “In my view the most opportunistic entry would occur on a pullback to the rising 20-dema, now at 52.78, which could set up an undercut of the lows of the 3WT formation.” That’s precisely what we saw yesterday as the stock bounced right off the 20-dema. Pullbacks to the 10-dma at 54.51 would offer lower-risk entries from here.

Nutanix (NTNX) is expected to report earnings tomorrow after the close. Nothing to do here until then.

Palo Alto Networks (PANW) is expected to report earnings tomorrow after the close. Nothing to do here until then.

SolarEdge Technologies (SEDG) is pulling back within a four-week base or flag formation. Over the weekend, I wrote that, “It seems that an opportunistic approach where one attempts to buy the stock closer to the 20-dema is best, using the moving average as a tight selling guide.” That precise pullback to the 20-dema occurred yesterday, but the stock still looks to be in buyable range given that the 20-dema is only 35 cents below today’s close.

Yelp (YELP) pushed to higher highs today and remains out of buyable range. The 20-dema would be your most opportunistic entry, should that occur.

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).

This market tends to change quickly, and when it does it is usually the Ugly Duckling that has come a ’calling. That certainly appears to be the case over the past two days after yesterday’s NoKo news shakeout. Like I said, this doesn’t surprise me, and I noted over the weekend that, “While I’m currently seeing more bearish evidence piling up in this market relative to bullish evidence, I have a plan for either side of the market, depending on how things play out in the coming days and weeks.”

Well, we’ve seen how things are playing out, and even though things have appeared dire for certain stocks in recent days, we are seeing the Ugly Duckling scenario play out all over again. On that basis, I simply go with the set-ups I’m seeing in real-time, and leave the big-think stuff to others. Play it as it lies!

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 a position in NVDA 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.