The Gilmo Report

August 9, 2017

August 9, 2017

I suppose I could say that my caution as expressed in recent reports was finally rewarded yesterday as the market reversed to the downside, quashing the Dow Jones Industrial Index’s attempt to post twelve straight up days. The break occurred after President Trump uttered a stern, if not an outright saber-rattling, warning to North Korea, promising, “fire and fury” and a veritable military fireworks show if its belligerent little leader kept up with his threatening antics.

Some might see the news as much ado about nothing, some might see it as indicative of an impending military conflict that simply cannot be avoided. Either way, it sent the market spinning to the downside, but there were already some cracks in the market’s armor prior to the news.

From an entirely objective and concrete point of view, as I see it, the fact that I was starting to pick up some short-sale targets on my screens in the form of recent later-stage failed-base types of set-ups in stocks like Amazon.com (AMZN) and ServiceNow (NOW), for example. That gets me leaning slightly to the short side, even though several of the long ideas I discussed in the weekend report worked out as decent swing-trades over the prior two days to start the week off.

So, while the week started off with a bit of a bifurcated flavor as I saw it, it may very well end with a severe tilt toward the short side. The NASDAQ Composite Index posted an ugly reversal yesterday on the beating of the war drums, and then gapped down today at the open. It then undercut last week’s lows and turned back to the upside.

We might say that the index was saved by the old undercut & rally move. The NASDAQ then rallied into the close to end the day near the peak of its daily trading range on higher volume. A surprise that is perhaps not too surprising, given the dynamics of this current market environment. The U&R turn is something we’ve seen many times in this market.

 

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The S&P 500 Index, which was looking constructive over the weekend, reversed yesterday on higher volume after posting an all-time intraday high. That high, of course, didn’t hold and the big red shooting star candlestick pattern didn’t look too good on the charts by the close.

That led to further downside today as the index gapped down at the open. But like the NASDAQ and the rest of the market, it spent most of the day in a slow recovery off the lows. By the bell, the S&P was back up above its 20-day exponential moving average and right near the peak of its daily trading range on lighter volume.

Based on the index action, the only conclusion one can draw is that the indexes remain within choppy ranges extending back to mid-July. I can easily see the market remaining within a choppy range, somewhat news and event-dependent, where opportunities may crop up on both the long or the short side.

 

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In my view, the market sell-off over the past two days is not necessarily due to the North Korean news. That instead serves as the alibi for the selling, as institutions bail out of undesirable positions and perhaps rotate somewhere else, or raise cash.

This also sets up the potential for a situation where any lessening of tensions between the U.S. and “NoKo” triggers a sharp reaction rally. That was one reason I advised members to cover into the close the two short-sale targets, Lumentum Holdings (LITE), and Tesla (TSLA) that I blogged about as being actionable early in the day when they were trading at higher prices. I believe the potential for gap moves in either direction may make holding heavy positions, long or short, somewhat dangerous.

The selling over the past two days helped to set up another buying opportunity in the financials, specifically the SPDR Financial Sector Select ETF (XLF), which has been discussed frequently in recent reports. My conclusion in all those prior discussions was always that the XLF is best bought on pullbacks to the 20-day exponential moving average.

As we can see on the daily chart, below, the XLF tested the 20-dema this morning, and this again offered an opportunistic entry at the line. From there it bounced back into positive territory to close slightly up on below-average volume. The XLF remains buyable on constructive pullbacks to the 20-dema.

 

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From my perspective, the best trade of the day was a short-sale in Lumentum Holdings’ (LITE), which opened up at 64.25 this morning after reporting earnings before the open. I blogged exactly 10 minutes after the opening bell that this was likely a short-sale target, and indicated that I had taken a short position myself at that time, when the stock was trading somewhere between 63-64.

From there, LITE completely blew apart, reversing to close down -3.12% at 57.40, a full -10.66% below its opening price. Now, that’s a spicy meatball! From here, rallies up into the 50-day moving average at 61.36 would offer lower-risk entry opportunities, should they occur.

 

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Some members may have noticed that LITE’s cousin, Applied Optoelectronics (AAOI), not shown, which blew up after earnings last Friday, was another example of a new short-sale target that can be shorted on rallies up into the 50-day line. The stock ran into resistance at the 50-day line yesterday and reversed, closing lower again today. I would continue to view rallies up into the 50-day line as potentially lower-risk short-sale opportunities in AAOI from here.

Big-stock NASDAQ names remain an interesting area of focus, both long and short. Netflix (NFLX) got tagged with some selling yesterday after the close on news that Disney (DIS) was pulling all their movies from NFLX’s content menu. That was enough to send the stock through the 20-day exponential moving average and below the prior 174.24 intraday low of its July 18th buyable gap-up (BGU) move.

But by the close, NFLX rallied back above that prior 174.24 low to close at 175.78 and just below its 20-day exponential moving average. Objectively, this is an undercut & rally long set-up right here, right now, using the 174.24 price level as a tight selling guide. Notice that NFLX’s U&R coincides with a similar U&R in the NASDAQ Composite Index (see chart above).

 

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Facebook (FB) hardly budged over the past two days as it clung nicely and tightly to its 10-day moving average today, close in near the peak of its daily trading range. Volume dried up to -44% below average, so the stock is basically hanging very tight in the face of market volatility and flashing a “voodoo” pullback to the 10-day line. This is buyable here using the 10-day line as a selling guide. Alternatively, the 20-dema at 166.48 can serve as a wider selling guide for those who prefer it.

 

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Amazon.com (AMZN) has continued to drift lower and below its 50-day moving average. Coinciding with today’s U&R move in the NASDAQ Composite, however, was a similar U&R move in AMZN as it closed above the 981.73 low of August 2nd. By the close, the stock printed 982.01, putting it in play as a U&R long set-up here using the 981.73 low as an uber-tight selling guide.

At the very least, I think this U&R could set up a move up to the 50-day moving average by AMZN, which could then put it back into optimal shorting range. On the other hand, there is always the possibility that the stock will push up through the 50-day line if the general market continues higher.

 

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I blogged early this morning that Tesla (TSLA) was looking like a short at around the 368 price level, based on what I was seeing on the five-minute 620 chart. Using the 370 high of the day as a stop, shorting the stock at that point was successful, as the stock then dropped into the red to close at 363.53.

If the general market had continued selling off for the day, I might have been amenable to holding the stock short overnight. But the bottom line is that in this position, about 3-4% above its 50-day moving average, TSLA’s chart pattern is entirely unresolved. Certainly, a breach of the 50-day line would bring me in more aggressively on the short side at that point, but today’s action was just a minor pullback on lighter volume.

The company is floating yet another bond offering, this time to the tune of $1.5 billion as it seeks to offset the high cash-burn rate it had in the last quarter. Fundamentally, TSLA is in a do-or-die position, as it must start producing cars at a faster rate than it has. Meanwhile, it is burning through cash at a rapid pace.

Obviously, in this position where it is extended from the 50-day line, I’m not going to go long the stock. However, depending on what the 620 chart is showing me on an intraday basis, I might be willing to short it on a short-term tactical basis for a test of the 50-day line. Then we can see whether it has the “cojones” to hold the line and push back to the upside, even in the face of a pending $1.5 billion bond offering.

 

GR080917-TSLA

 

The “joy” of playing earnings roulette was demonstrated today by Priceline Group (PCLN), which gapped down in gnarly fashion this morning after missing on earnings yesterday after the close. This took the stock on a massive-volume move where it opened below its 50-day moving average, pushed lower on an intraday basis, and then rallied to close roughly where it began the day.

The only way to play this is as a shortable gap-down here, using the 50-day line as a guide for a tight upside stop. The breakdown in PCLN, a big-stock NASDAQ leader, attests to the developing bifurcation that we are seeing in this current market environment. Play it as it lies!

 

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Notes on other big-stock NASDAQ names:

Apple (AAPL) has pushed to new closing highs after being buyable last week on the basis of last Tuesday’s buyable gap-up move. A little extended here for my tastes.

Alphabet (GOOGL) is testing last week’s lows, but has not triggered a U&R type of move. Barring that, this also can’t be viewed as an optimal short here either. For that to occur, it would need to rally up into its 20-dema at 955.20 or its 50-dma at 965.61.

Microsoft (MSFT) is hanging right along its 20-dema but managed to close two cents above the line today on light volume. This would make it a moving average undercut & rally set-up here using the 20-dema or today’s low near 72 as a selling guide.

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

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.

The most interesting about the market right here and now is that I am seeing a number of stocks that do look quite buyable. For example, among my China Five, this morning both Weibo (WB) and its majority shareholder, Sina (SINA) both reported earnings before the open. Both look more or less the same on the daily charts as they both went on what amounted to Mr. Toad’s Wild Market Ride.

Initial sell-offs led to reversals back to the upside, with WB posting an all-time closing high. SINA, meanwhile, closed near the peak of its daily price range at an even $100 and down only seven cents on the day, but not before posting an intraday low of 92.81 first! Crazy action, and something that would have been difficult to jump on board during the day. From here, I think either stock should be watched for any kind of pullback to their 10-dmas as potentially lower-risk entry opportunities from here.

 

GR080917-WB

 

Nutanix (NTNX) posted an undercut and rally long set-up on Monday as it pushed back up through the prior 21.62 BGU low of mid-July. This move also took it back up through the 20-day exponential moving average. Today the stock pulled into the 20-dema and held to close near the peak of its daily trading range. Volume dried up to -57% below average, qualifying as a “voodoo” pullback. This makes the stock buyable right here using the 20-dema at 21.65 as a selling guide.

 

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With WB and SINA out of the way, we now have the other three China Five left to report earnings over the next few days. Alibaba (BABA) is expected to report earnings on August 17th, before the open. JD.com (JD) is expected to report earnings on August 14th before the open. Momo (MOMO) will bring up the rear and is expected to report earnings on August 22nd before the open. We shall see if any opportunistic movements occur after any of these earnings reports.

Notes on other names discussed in recent reports, some with charts, some without:

Activision Blizzard (ATVI) is pulling back to its 50-day line where it found intraday support today and closed up on the day and a nickel above its 20-dema. This puts is in a lower-risk entry position using the 50-day line as a tight selling guide.

Alteryx (AYX) is pulling back here on light volume after poking its head up into new-high price ground last Friday. Pullbacks to the 10-day line at 21.29 would offer lower-risk entries from here.

Appian (APPN) followed through nicely on Friday’s undercut & rally move, which I discussed in the weekend report, by driving back up to new highs. It is now extended, and pullbacks to the 10-day line at 20.43 would be your next references for lower-risk entries.

Arista Networks (ANET) is pulling back to test the 166.50 intraday low of last Friday’s buyable gap-up (BGU) move, closing today at 167.46. Volume declined significantly from last Friday’s huge levels, but still came in at 21% above average. This is in a lower-risk entry position here since using the prior 166.50 BGU low as a tight selling guide keeps risk to a minimum.

Bioverativ (BIVV) remains below its 50-day moving average, but still on top of its prior late June breakout point at 58.88. Volume came in at -57% below average, which gives this pullback the look of a Wyckoffian Retest of last Friday’s pullback. This therefore puts the stock in a lower-risk entry position here (for those bold enough to do so) with the idea of keeping risk to a minimum by using the 58.88 prior breakout price level as a selling guide.

 

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Electronic Arts (EA) is holding support at its 20-dema, with volume drying up to -49% below average today. This puts the stock in a lower-risk entry position using the 20-dema as a tight selling guide.

First Solar (FSLR) is, in my view, extended here after two prior gap-up moves. The stock was last buyable per my comments in the report back when it was trading along the 20-dema in early July.

GrubHub (GRUB) was discussed in a weekend blog post, and is now quite extended from Friday’s breakout. The stock is, however, holding tight sideways as volume dries up sharply, giving the 10-day line some time to catch up to the stock, at which point a new entry point may emerge.

Palo Alto Networks (PANW) is currently on my short-sale target list, and is shortable on rallies up into the 50-day line at 135.37. It is currently extended on the downside.

ServiceNow (NOW) is a recent late-stage failed-breakout situation that is on the cusp of morphing into a full-out short-sale target. The stock was able to hold six cents above its 50-day line today as volume dried up to -56% below average. For that reason, one could view the stock as buyable here using the 50-day line as a tight selling guide. Otherwise, a clean breach of the 50-day line could serve as a short-sale trigger, so I view NOW as a two-side situation depending on how it resolves from here.

 

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

Square (SQ) is selling down and correcting after last week’s earnings report, but we need to keep in mind that it has had a long run since I first discussed it as a buy idea back when it was trading in the mid-teens much earlier in the year. It likely needs some time to form an entire new base, so I’m more than willing to sit back and let it set up again, assuming that’s what it wants to do.

Tableau Software (DATA) is still extended from last Thursday’s buyable gap-up move. Pullbacks closer to the intraday low of that BGU day at 66.75 would provide lower-risk entry opportunities from here.

Take-Two Interactive (TTWO) is slightly extended from last Thursday’s buyable gap-up. Pullbacks to the intraday low of the BGU day at 86.02 would provide lower-risk entry opportunities from here.

Universal Display (OLED) has been removed from my buy watch list.

Workday (WDAY) is in a similar position to NOW as it hangs along its 50-day line with volume drying up in the extreme today at -60% below average.

Yelp (YELP) was discussed in a weekend blog post, and was still buyable on Monday morning on the basis of Friday’s buyable gap-up move. The stock is now extended, and only pullbacks to the 40 price level or better would provide reasonable, lower-risk entry opportunities from here.

Also like NOW, WDAY is sitting on the fence here, but could be considered buyable here using the 50-day line as a tight selling guide.

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).

Running through my charts this afternoon, I see stocks that could present very reasonable long opportunities, and I see stocks that could present equally reasonable short opportunities. Meanwhile, the indexes remain in a choppy range extending back to mid-July, with individual stocks “under the hood” engaging in various moves in either or both directions.

As I wrote over the weekend, a nimble, flexible, and highly alert approach is advisable currently. However, I might throw in another requirement, which would be to remain shrewdly opportunistic. As always, when the market pulls back, the undercut & rally (U&R) set-up is one to look out for among stocks on both your long and short watch lists.

If the market can turn up and out of here to new highs once more, it will likely be the U&R long set-up that again becomes your most potent weapon. However, if the market remains in a choppy, trendless state, many of these may only result in profitable swing-trades at best.

For the most part, then, I am content to focus on a small handful of ideas, both long or short (or both long and short, depending on how they play out) to keep things simple. When the market acts funky, and is prone to sudden moves in either direction, having a small but dependable group of names to concentrate on is generally a less onerous task than trying to track 20-30 names or more in real-time. 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 positions in FB and NTNX, 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.