The Gilmo Report

August 8, 2018

August 8, 2018

Earnings roulette continues to be the primary driver of significant price moves among individual stocks, including the usual assortment of big gaps to the upside and the downside. There are, however, some exceptions. Most notably, Tesla (TSLA), which rallied sharply as a news-mover after CEO Elon Musk tweeted that he was considering taking the company private at $420 a share, and that he had “funding secured.”

That sent the stock on a tear that got as high as 387.46, within 1% of its all-time high, before it backed down to close about eight points lower. The whole affair was one of the more bizarre dramas I’ve ever seen play out in the stock market in my 27-year career. News that the SEC was inquiring about Musk’s comments sent the stock back to the downside today on heavy volume.

The technical reality of TSLA, from my perspective, however, is that it was a bottom-fishing buyable gap-up (BFBGU) on Friday of last week as I tweeted at the time when it set an intraday low at 323.16. From there it was up, up and away, and from a technical perspective, yesterday’s move was just a continuation of the original BFBGU long entry point. Now it’s just extended from that original buy zone, regardless of the news noise.

 

GR080818-TSLA

 

When it comes to gap-up moves following earnings, many can be initially viewed as potentially buyable gap-up long set-ups (BGUs) and therefore actionable on that basis. However, the final outcomes can vary widely. In the Gilmo vernacular, BGUs come in three basic types: streakers, spinners, and sliders.

Zebra Technologies (ZBRA), which was down in the dumps before it reported, would qualify as a streaker. A streaker BGU gaps up, sets a low early in the day, and then just continues higher. ZBRA opened at 154, quickly set a low at 152.77, and then moved higher from there to close at 166.62. This also qualified as a base breakout.

From here it is best bought on a retest of the test of the 152.77 low given the failed breakout attempt. With ZBRA giving up a large chunk of its total gap-up gains as it heads toward that low, we may get that chance. We’ll see how constructive such a retest turns out to be, but latecomers to yesterday’s gap-up, e.g., those that bought the breakout, are underwater.

 

GR080818-ZBRA

 

Twilio (TWLO), is what I refer to as a spinner. In this case, the stock opened at 74.75, ran up to 77.31, then down to 72.24, and finally closed at 75.10. This has the look of a spinning top type of formation on a candlestick chart, which is what I show below. Technically, the stock remains within buying range of the BGU this morning, using the 72.24 intraday low of yesterday’s BGU as a tight selling guide.

 

GR080818-TWLO

 

Etsy (ETSY) is what I call a slider, because it opened yesterday at 49.78, ran up briefly to an intraday high of 50.60, and then slid all the way back to a closing price of 43.84. The stock then continued lower today but found support at the confluence of its 10-dma and 20-dema. Volume declined, so bold buyers could view this as a lower-risk entry position using the two moving averages as tight selling guides in case this morphs into a late-stage failed-base (LSFB).

 

GR080818-ETSY

 

And then there’s the BGU that reverses entirely and blows apart, becoming an SGU, or shortable gap-up, instead. Lumentum Holdings (LITE) blew away earnings this morning when it reported and gapped up to an opening price of 61 even. That also turned out to be the precise high of the day as the stock immediately broke to the downside on a big-volume reversal.

 

GR080818-LITE

 

What all of this illustrates is that buying BGUs in this market is not all it’s cracked up to be. How does one determine when a BFBGU is a TSLA or a LITE, or when a BGU is going to be a streaker and not a slider? Or when a BGU is really an SGU, or shortable gap up? The bottom line is that you can’t, at least not ahead of time.

All one can do is monitor the five-minute 620 intraday chart during the trading day and be ready to move in either direction, and fast! Sometimes, one might go long and then reverse short, or vice versa. Otherwise, the whole BGU thing just ends up being a wild dart-throwing contest.

My overall market view remains the same, which is that this is mostly a trader’s market with few playable or even coherent trends developing in individual stocks. One can even try buying breakouts, such as the buyable gap-up breakout in Apple (AAPL) after earnings last week.

As I wrote last Wednesday, the stock was actionable as a BGU, and that remained the case on Thursday morning. It has since traveled about 4% higher from the BGU point, and a total of 8.2% from the 191.45 close on the day of earnings. Not much to write home about, but for this market, a reasonable move so far.

 

GR080818-AAPL

 

Meanwhile, the major market index action strikes me as entirely irrelevant to what is occurring on the ground, so to speak, with individual stocks. The NASDAQ Composite Index was up six days in a row coming into today, and posted a seventh today, but just barely. The action looks tight with volume drying up, but it also has the look of churning, perhaps somewhat reflective of the mixed action seen in individual stocks.

 

GR080818-$COMPQ

 

The S&P 500 and the Dow Jones Industrials Indexes have both moved to higher highs as big-cap industrials and defensive names continue to march higher. A four-day rally in the S&P 500 came to an end today as the index closed down slightly on lighter volume. This also looks like tight action with volume down, but within the context of yesterday’s churning at the highs on higher volume, doesn’t look especially great.

 

GR080818-$SPX

 

Facebook (FB) overcame Friday’s stalling action just under the 200-dma with some help from news that the company was seeking customer transaction and account data from banks, so it could provide certain services. This sent the stock up through the 200-dma on Monday, but it reversed near the 20-dema yesterday.

I wrote over the weekend that the stock was a live U&R play after undercutting the 170.23 low of May 1st and rallying above it last week. That sets up a concrete long set-up that is potentially good for at least a trade. The question is how much further FB can go from here. The key in my view is that it should continue to hold above the 200-dma, so a successful lower-volume retest of the line might confirm this and set up a lower-risk entry.

The flip side of this is that resistance at the 20-dema may simply present a lower-risk short-sale entry opportunity. This would also be the case if the stock reversed and broke below the 200-dma, which would then trigger a short-sale at that point, using the 200-dma as a guide for a tight upside stop.

 

GR080818-FB

 

Amazon.com (AMZN) remains one of the strongest big-stock NASDAQ leaders in this market, posting another all-time high today. It remains extended. Alphabet (GOOGL) has rallied back up near its all-time high after filling its prior gap-up rising window, which I discussed in the weekend report. Microsoft (MSFT) has done the exact same thing. None of the three are in what I would consider buyable positions currently.

Netflix (NFLX) has pushed higher after finding logical support along the top of a prior consolidation area that formed in mid-May. Yesterday it found logical resistance along the lows of the bear flag it formed after its post-earnings gap-down break. It remains above the 344 intraday low of the gap-down day following earnings, so technically can be viewed as a U&R long set-up here, using 344 as a tight selling guide.

It’s not clear to me, however, whether the stock will have any upside thrust from here, but technically the U&R is in effect. On the flip side, I might also be aware of weak-volume rallies up into the 20-dema as potential short-sale entry opportunities. Play it as it lies.

 

GR080818-NFLX

 

Nvidia (NVDA) has broken out of a low-base price range that formed along the confluence of its 10-dma, 20-dema, and 50-dmas. The breakout has occurred on light volume, but in this market, volume is often not relevant.  The company is expected to report earnings on August 16th, so is not actionable on this breakout unless one is looking for a quick upside move ahead of earnings.

As well, as I’ve discussed many times before, the best way to try and buy NVDA, if one is keen on doing so, is to buy the U&Rs along the lows of the prior price range. While the action around the three moving averages has been quite erratic, that’s probably your lowest-risk way of buying the stock. Otherwise, it’s obviously extended in this position currently.

 

GR080818-NVDA

 

Fortinet (FTNT) was a streaker BGU last week when it broke out to new highs early in the day and just kept on rolling higher. It has since moved sideways with no upside follow-through. Technically, this is within buying range of the BGU, using the 70 intraday low as a tight selling guide. However, the closer to 70 one can buy it, the better.

 

GR080818-FTNT

 

FTNT’s cousin, CyberArk Software (CYBR), reported earnings yesterday after the close, and gapped up this morning in a potential BGU move. The stock opened at 67.69, rallied to an intraday high of 71.25, looking like it might be a streaker. But instead, it morphed into a slider, closing closer to the lows of the buyable gap-up price range but roughly mid-range.

Technically, this would remain actionable as a BGU, using the intraday low at 67.26 as a tight selling guide. As always, however, the closer one can buy it to the BGU intraday low, the better.

 

GR080818-CYBR

 

Looking for leaders in all the right places, perhaps Square (SQ) is setting up here along its 10-dma as volume dries up. The stock posted a pocket pivot after earnings last Thursday but has not continued higher in any kind of follow-through move. Instead, it has tracked tight sideways along the 10-dma, which technically puts it in a lower-risk entry position using the 10-dma or 20-dema as a tight selling guide.

 

GR080818-SQ

 

Intuitive Surgical (ISRG) is hanging tight along its 10-dma and 20-dema following a prior undercut & rally move back up through two prior lows in the pattern. Volume dried up to -59% below average today, which puts the stock in a lower-risk entry position here. One can use the 10-dma/20-dema confluence, or the lower of the two prior lows of 512.42, as tight selling guides.

 

GR080818-ISRG

 

Stitch Fix (SFIX) isn’t affected at all by earnings roulette season since it doesn’t report again until October. But it has pulled in after posting a cup-with-handle breakout a month ago. We could call that another breakout to nowhere. So far, SFIX has been able to hold above the prior handle breakout point and is currently hanging along its 20-dema.

I might look for a test of the 50-dma that includes an undercut of last week’s low and the 50-dma. This would set up a possible U&R and MAU&R combination. I would be more inclined to watch for that rather than jumping in here along the 10-dma and 20-dema just yet, although that is a possibility for those willing to take the added risk of a pullback to the 50-dma.

 

GR080818-SFIX

 

Turtle Beach Corp. (HEAR) blew away earnings and sales estimates Monday afternoon when it reported after the close, gapping up yesterday. But the small gap-up move came after the stock had already been trending strongly higher from my original entry point along the 20 price level back in late June, and it failed as the stock dropped back into the 10-dma.

Despite the failed attempt at a gap-up, HEAR did technically post a pocket pivot, albeit a stalling pocket pivot, at the 10-dma. It then held near-term support at the 10-dma today as volume declined. However, I don’t think I’d be looking to buy it just yet as if it’s going to turn and rocket higher after failing to do so on a gap-up attempt.

 

GR080818-HEAR

 

Take-Two Interactive Software (TTWO) gapped up last Friday, but the BGU was just a slider as the stock opened at 129.47, rallied to an intraday high of 130.43, but ended the day at 123.41. The BGU then failed the next day as the stock moved down to the 10-dma. However, it held support at the 10-dma and has since bounced back to the upside.

The video-gaming group in general is a busted affair, but TTWO remains the only viable name among the three big-stock video-gaming names. In this case, despite the failed slider type BGU, the pullback into the 10-dma was an opportunistic entry point. However, where it goes from here is unclear.

TTWO gives you an idea of what to look for in cases where a BGU fails but holds a critical near-term support level. Often, failed BGUs can set up again, but in a different form and lower in their patterns, either by holding a critical moving average or pulling an undercut & rally (U&R) move.

 

GR080818-TTWO

 

Roku (ROKU) reported earnings this afternoon after the close, and as I write is trading just above the 51 price level. This looks like it will gap up at the open tomorrow morning, so we want to keep an eye on it for any possible, actionable set-up that might arise, whether it be a streaker, a spinner, a slider, or a complete bust.

 

GR080818-ROKU

 

Chinese markets remain under pressure, as we can see in the daily chart of the iShares China Large-Cap ETF (FXI), below. This is also quite evident in the charts of Chinese stocks trading on U.S. exchanges, many of which, such as Alibaba (BABA), Autohome (ATHM), Baidu (BIDU), Baozun (BZUN), Momo (MOMO), SINA (SINA), Weibo (WB), and others, just keep rolling lower.

Recently-hot but now-cold Chinese IPOs like Bilibili (BILI), Huya (HUYA), and Iqiyi (IQ) also keep sliding to the downside. Is this getting so bad that a visit from the Ugly Duckling is perhaps overdue? I’ve been thinking that for a few weeks now, and so far, there have been no visits, not even postcards, from the Ugly Duckling.

As I wrote over the weekend, if the Chinese markets and the Chinese currency, known as the yuan or renminbi, keep diving, we could end up with an Asian Contagion type of situation. I’ve already noted that the last serious decline in yuan and Chinese markets three years ago eventually had its effects on U.S. markets, culminating in the Flash Crash of August 24, 2015.

This is one of the primary reasons I believe that danger may lurk in this market, making it more suitable for traders rather than investors when it comes to buying stocks. Meanwhile, Chinese names have yet to give me a good reason to buy ‘em.

 

GR080818-FXI

 

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.

If you’re watching this market trade during the day you can certainly get a sense of how mixed it is. Most of the significant price movements occur after earnings or on news, while the bulk of the action consists of stocks moving up and down within their patterns. In my view, there is not a lot that I find terribly compelling here on either side of the market, aside from short-term trades.

Opportunistic, alert traders can catch moves long or short, and there are plenty of examples of each. Today we saw LITE morph into a beautiful short, and yesterday, those who shot at the ETSY gap-up were rewarded with an ugly slide to the downside. There are shots to be taken, but one must guard against having something ricochet against you, whether one is long or short.

This potential for stocks to shift direction suddenly presents investors and traders with some inherent difficulty. In addition, I’m noticing something with respect to my daily stock screen output that is very interesting. Normally, if the market is up or flat, I will see far more stocks up on volume than down on volume. Over the past few days I’m seeing reasonably large numbers of stocks down on volume, even on days when the indexes are up, and this may be telling us something.

All of this is why I advocate keeping plenty of dry powder available on a day-to-day basis. And for those who do wish to get involved, long or short, I would maintain the strictest risk-management parameters and be ready to move quickly as the real-time price/volume action dictates. In other words, play it as it lies, but play it close to the vest.

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.