The Gilmo Report

August 6, 2017

August 6, 2017

Earnings roulette season is in full swing, and has come with its share of big winners and equally big losers. On Friday, we saw the #1 stock in the #1 stock group, Applied Optoelectronics (AAOI) blow up in spectacular fashion with a 30% gap-down move. After posting a 50% or so rally over the prior month as it briefly flirted with the $100 Century Mark, AAOI provided disappointing guidance in its Thursday afternoon earnings report.

Of course, AAOI and its cousins weren’t looking too good as of Wednesday, per my discussion of these optical names in that day’s report. On that day AAOI and Lumentum Holdings (LITE) posted big outside reversals on higher volume. Perhaps they were giving investors a clue, but the bottom line is that AAOI should have been sold, at least in part, once it got over 20% above its 10-day moving average two weeks ago, as I discussed and tweeted at the time.

Friday’s move was so bad that it could have been treated as a shortable gap-down once it pushed below the 50-day line, because it just kept going lower from there. By the close AAOI posted a -34.07% loss for the day. When I look at this chart, two words come to mind with respect to the selling: brutal and merciless.

 

GR080617-AAOI

 

At least if one had sold ½ of their AAOI position when the stock became more than 20% extended from its 10-day moving average two weeks ago as it hit the 95 price level, one would have kept half their profit. AAOI only serves to illustrate why I advocate selling into extended strength.

My faux pas for the week was getting Lumentum Holdings’ (LITE) earnings report date repeatedly wrong, writing that the company was expected to report this past Thursday before the open. Wrong. It will report next week, but at that is a moot point after AAOI’s fiasco.

In fact, the stock was already asking to be sold as of Wednesday, and Friday’s action only served to seal the deal. LITE busted its 50-day moving average on heavy volume, becoming a short-sale at the 50-day line early in the day.

Based on this action, the optical names are no longer viable longs, and this would also include Fabrinet (FN), not shown. In the case of LITE, it morphed into a short-sale target on Friday as it broke below the 50-day line.

 

GR080617-LITE

 

Those electing to play earnings roulette with Take-Two Interactive (TTWO) had an entirely different experience. Anyone spinning the wheel and holding the stock into earnings saw their number come up with a big buyable gap-up (BGU) on Thursday morning following the company’s Wednesday after-hours earnings report. This would be considered actionable using the 86.02 intraday low of Thursday’s BGU as a tight selling guide. The only caveat is that the stock looks somewhat parabolic and potentially later-stage on the weekly chart, not shown.

 

GR080617-TTWO

 

TTWO’s cousins, Activision Blizzard (ATVI) and Electronic Arts (EA), both remain in the upper part of bases currently, but ATVI reported earnings on Thursday after the close and moved lower on Friday on heavy selling volume.

The pullback held the 20-day exponential moving average and closed just above the 10-day moving average, which might put the stock in a buyable position, using the 20-dema as a tight selling guide. I would also key off TTWO, since if it can hold its current BGU and push higher the rest of the group might follow along.

EA, not shown, is also in the upper part of a current base, and pulled into the 10-day line on Friday as volume declined to -43% below-average to qualify as a voodoo type pullback. This would put it in a lower-risk entry using the 20-dema as a selling guide.

I would watch this group carefully, however, since if it begins to fail this could be a negative for the general market. As a leading group, just as the optical stocks were a leading group, it may serve as a clue with respect to market leadership and hence, the market, is headed from here.

 

GR080617-ATVI

 

The NASDAQ Composite Index was up 13 out of 14 days in a row during the merry month of July, and that finally ended with a big outside reversal off the peak on heavy selling volume. Since then the NASDAQ has built a short bear flag, which also conjures up visions of an “L” pattern that certainly has the potential to fill out as a “LUie” formation. This formation has been a trademark of this market.

The key here will be whether the NASDAQ breaks out of this bear flag to the downside or regains its 10-day moving average with authority. Based on the action of individual stocks, however, the NASDAQ could continue to muddle about for a period of time before resolving the current pattern. For now, I am monitoring this closely for clues with respect to the future direction of this market.

 

GR080617-$COMPQ

 

Meanwhile, the role of narrow leadership has fallen on the shoulders of the Dow Jones Industrials Index. The index has been more than willing to do so, logging nine straight up days in a row as volume declined on Friday. This reminds me of the NASDAQ’s big up-day streak in July, as it pushed higher on the backs of a narrower number of big-stock NASDAQ names at the time.

 

GR080617-$INDU

 

With 500 names vs. the Dow’s 30, the S&P 500 Index shows how the broader market is lagging as it holds tight sideways and along its 10-day moving average. The fact that it is able to hold tight with volume drying up looks constructive, however, so we would look for the S&P to play catch-up to the Dow as a positive sign for the market.

 

GR080617-$SPX

 

A strong jobs number on Friday gave impetus to the thesis of more Fed interest rate increases in 2017, and this subsequently drove the financials higher. The SPDR Financial Sector Select ETF (XLF) posted a higher high on Friday with volume increasing, but still below average.

Several big-stock financials showed similar action, including BAC, C, JPM, and others. Can the financials serve as an area of dynamic leadership for the market from here? That’s an interesting question, and I believe the answer lies in the potential for some sort of banking regulation reform legislation coming down the pipeline.

For now, the group seems to move on economic news that either bolsters or contradicts the potential for further interest rate increases sooner rather than later. For this reason, my view of the financials remains the same. You look to buy them on constructive weakness coming into the 20-day exponential moving average.

 

GR080617-XLF

 

As I wrote on Wednesday, big-stock NASDAQ names remain an area of focus on both the long and the short side. Whichever side works best, however, will depend on how the NASDAQ Composite resolves the current “L” or bear flag formation it is forming.

Apple (AAPL) is still holding its buyable gap-up (BGU) and base breakout of Wednesday following Tuesday’s after-hours earnings report. What we see here is the stock consolidating that move as it holds tight sideways and above the BGU intraday low of 156.16. This can be considered buyable using the 156.16 price point plus 1-3% as a tight selling guide.

 

GR080617-AAPL

 

Facebook (FB) is looking constructive here as it drifts into its 10-day moving average with volume drying up to -45% below average on Friday. This can be considered buyable here using the 10-day line as a tight selling guide.

 

GR080617-FB

 

Netflix (NFLX) is drifting down toward its 20-day exponential moving average after dipping below the 10-day line earlier in the week. So far it has held above the 20-dema and the prior buyable gap-up (BGU) low of 174.24. Volume dried up to -38% below average on Friday, so it is possible that the stock is moving into a buyable position here, using the 20-dema as a tight selling guide.

Note that the action over the past seven trading days mimics the NASDAQ index as NFLX forms an “L” pattern. You may have also noticed that FB has a bit of an L look to its current formation, and so moves by these stocks back to the upside might coincide with the NASDAQ Composite’s daily chart resolving as a “LUie” formation with a rally back up towards the highs. This is something to key on this week as these stocks perhaps spring back to the upside in conjunction with a NASDAQ move from an “L” to a “U” pattern.

 

GR080617-NFLX

 

Amazon.com (AMZN) is a bit of a sagging L formation as it drifts sideways and slightly downward over the past week. Volume dried up to -33% below average on Friday, which is not low enough to call it a “voodoo” pullback. However, I have been viewing AMZN as a late-stage failed-base short-sale set-up after last week’s breakout failure after earnings.

For that reason, I have viewed rallies up to the 50-day line as potentially shortable. However, there is a slight wrinkle here to be mindful of, and that is that if AMZN pushes back above the 50-day line, it could turn its sagging L-formation into a U-formation and complete a type of LUie formation that would also be a moving average undercut & rally set-up.

This sort of thing is not unusual for this market, and the fact that AMZN looks rather ugly here may set this up from a contrarian point of view. I’m open to however the stock wants to resolve this current action, and look for the general market direction to help determine just how the final resolution here plays out with AMZN. So, stay flexible here and attuned to what the real-time action is telling you.

 

GR080617-AMZN

 

Tesla (TSLA) has been able to hold its 50-day moving average following Thursday’s bottom-fishing sort of buyable gap-up move using the 343.15 intraday low as a selling guide. My view here is concrete. If the stock breaks back below the 50-day line, it becomes a short-sale target. Until then, pullbacks that hold the 50-day line might be considered buyable.

Short interest in TSLA has remained high, with the latest report showing a little over 28 million shares still being held short. That may be what is fueling the continuation to Thursday’s gap-up move, and we’ll see whether this starts to give way at some point.

 

GR080617-TSLA

 

Notes on other big-stock NASDAQ names:

Alphabet (GOOGL) remains a short-sale target on rallies up into the 50-day. The stock is currently slightly extended to the downside.

Microsoft (MSFT) remains below its prior breakout point at 72.89, closing Friday at 72.68.

Nvidia (NVDA) is expected to report earnings this Thursday, August 10th.

Priceline Group (PCLN) is holding tight along its 10-day moving average and can be considered buyable here using the 10-dma as a tight selling guide. Keep in mind, however, that earnings are expected this Tuesday, August 8th.

If this market is going to go higher, then my best guess is that some of these big-stock NASDAQ names that continue to hold up will provide some reasonable long targets to work with. But there are some short-sale ideas out there, although not a lot.

Palo Alto Networks (PANW) ran into resistance at its 50-day moving average on Wednesday and reversed to the downside on increased selling volume. On Friday, it reversed at the 200-day moving average on increased selling volume and posted its lowest closing low since the end of May.

Rallies into the 200-day moving average remain shortable, in my view, using the line as a guide for a tight upside stop. There is always the outside chance that PANW will push up through the 200-day line and find resistance at the 50-day line, so one must be willing to remain flexible here as this plays out.

 

GR080617-PANW

 

Most new-merchandise names I’ve discussed in recent reports have fallen by the way side, but a couple still remain viable. How long they remain viable, however, remains to be seen, but as always we just play it as it lies. 

Alteryx (AYX) reported earnings Wednesday after the close and on Thursday morning opened at 21.96, immediately traded down to 20.22 and the 50-day moving average, and then bounced to close back up near where it opened. Volume was extremely high as the stock posted a pocket pivot at the 50-day moving average.

This is now extended, but it will be interesting to see how this consolidates this strong two-day move. A pullback into the 10-day or 20-day moving averages down near 21 might provide lower-risk entry opportunities, but that would represent a nearly 10% pullback if it happened immediately. I would look for the 10-dma and 20-dema to catch up to the stock, which might set up a more reasonable entry opportunity.

 

GR080617-AYX

 

Appian (APPN) reported earnings Thursday after the close and gapped down Friday morning. But it found support along the prior low-range base highs as I’ve highlighted on the chart below and rallied to close near the top of its daily trading range on heavy volume.

APPN didn’t get back above its 10-day or 20-day moving averages on Friday, so this would not qualify as a pocket pivot. However, the fact that it found support along the prior low-base range highs around the 18 price level on heavy volume was constructive. In addition, note that the stock has posted an undercut & rally move coming back up through the prior 19.02 low in the pattern. Thus, this might be buyable here using the 19.02 price level as a selling guide. I would prefer, however, to see a pullback closer to the 19.02 price level as a better, lower-risk entry opportunity.

 

GR080617-APPN

 

Nutanix (NTNX) is developing a reputation for having strong upside moves that then fizzle out, which it has done three times since gapping above its 50-day moving average back in late May. The last buyable gap-up in mid-July led to a nice 10% move from there, but the stock has since gone flat and drifted below the 21.62 intraday low of that BGU day.

Now it is tracking just below its 20-day exponential moving average as volume dried up to -64.6% below average. I’d watch for a move up through the 20-dema as a long trigger on a potential moving average undercut & rally move. The 20-dema is at 21.53, so this might also coincide with a move back up through the prior 21.62 BGU low, which would be even better.

 

GR080617-NTNX

 

My current China Five names are expected to report earnings in August. These are their expected report dates with any relevant notes:

Alibaba (BABA) is expected to report earnings on August 17th, before the open. The stock is currently holding support along the 10-dma and 20-dema.

JD.com (JD) is expected to report earnings on August 14th before the open. The stock posted a new closing high on Friday on very light volume that was -47% below average.

Momo (MOMO) is expected to report earnings on August 22nd before the open. Would be buyable on a low-volume pullback to the 20-dema, looking for an upside move before earnings in two weeks.

Sina (SINA) and Weibo (WB), are both expected to report on Wednesday, August 9th before the open, SINA owns a stake in WB.

Notes on other names discussed in recent reports are below. Note that some names appearing in recent reports have been removed based on recent technical deterioration, such as VEEV, for example:

Arista Networks (ANET) – stock was looking ugly before it reported earnings but has been resurrected with a buyable gap-up on Friday following its Thursday after-hours earnings report. The intraday low of the BGU day on Friday is 166.50, so pullbacks closer to the level would be more buyable vs. chasing it up here at Friday’s 172.05 close.

Bioverativ (BIVV) – broke below its 50-day moving average on Friday on above-average selling volume. Not in a buyable position, and may be failing here as it tests the top of its prior May thru June base.

First Solar (FSLR) – holding along the 10-dma following its BGU move of two Fridays ago. Too extended to offer any kind of lower-risk entry up here, in my view.

ServiceNow (NOW) – bounced off its 50-day line on Friday and closed just above the 10-dma and 20-dema. Watch for a move back below the 20-dema as a trigger for a short-sale entry point.

SolarEdge Technologies (SEDG) – way extended after Thursday’s buyable gap-up move.

Square (SQ) – reported earnings on Wednesday after the close and has since moved lower, testing its 50-day moving average on Thursday. So far, however, the stock isn’t showing any signs of stabilizing along the 50-day line, which should be watched for.

Tableau Software (DATA) – posted a buyable gap-up move on Thursday with a 66.75 intraday low and continued higher on Friday. Extended for now.

Universal Display (OLED) – acted poorly on Friday after reporting earnings Thursday after the bell. Not in what I would call a lower-risk entry position here unless it can stabilize along the 50-day moving average.

Workday (WDAY) – looks like a short here using the 20-dema as a guide for a tight upside stop. A breach of the 50-day line would be the confirmation you’re looking for as an indication of further downside.

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).

What strikes me most about the current market environment is that most, if not all, of the real action consists mostly of big jacks or big blow-ups following earnings reports. Other than that, I find it to be a distinctly target-poor environment, as opposed to the more target-rich environment we saw earlier in the year. That may be telling us something.

What that is, of course, is something we can’t and won’t know until it starts to happen, but I’m open to any outcome as it unfolds in real-time. Meanwhile, when you don’t see much to do, then you can simply not do much. And the bottom line is that I don’t see many set-ups on the long or short side currently, and I only act on the basis of the set-ups that I see.

As Dow names provide narrow leadership to carry the media’s favorite market index to all-time highs beyond the 22,000 level, sentiment remains ebullient. One can cite all sorts of measures that show things are a bit stretched, from the low VIX to near-record household ownership of stocks to high margin levels, but so far, the market has ignored all of this as record levels of QE continue to slosh the market higher.

The destruction of the optical names over the past couple of trading days is not what you want to see from a leadership perspective. At the very least it reminds us all that stocks are risky, and failing to take advantage of extended upside moves by selling and taking at least partial profits can be detrimental to one’s investment health.

I’m sure many holders of AAOI were feeling fat and happy going into earnings, and in this market, that can be a sign to take at least partial profits. Using simple measures such as the percentage extension from a key moving average, such as the 10-day or 200-day lines, can be helpful in this regard.

Meanwhile, I think it is best for investors to take things slowly until we start to see something more definitive, particularly in the way of set-ups, both long and short. In the meantime, a handful of each on either side might provide enough to keep active investors satisfied, since I still believe a nimble, flexible, and highly alert approach is advisable right here, right now. Take it from there.

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.