The Gilmo Report

February 12, 2017

February 11, 2017

It seems one can’t really look anywhere these days without seeing an article or a pundit decrying the fact that the market “hasn’t had a 1% correction in 87 days,” that the Volatility Index (a.k.a. “the VIX”), or that bullish sentiment has reached extremes. Currently, the Investor’s Intelligence survey shows that 62.7% of investment advisers are bullish vs. a scant 16.7% of whom are bears.

That’s enough to make “over-experienced” investors run for the proverbial hills! That is, unless they rely on the specific price/volume action of individual stocks more than they rely on various sentiment statistics. So I’ll pass on the statistics, thank you, and take a healthy serving of real-time price/volume action in individual stocks as my market barometer. There is no other way to operate in this market than on the basis of the real-time set-ups in individual stocks.

And as I discussed in my Wednesday mid-week report, the set-ups remain predominantly bullish. In addition, my own short forays on the short side have yielded nothing more than brief scalps. That, in and of itself, is valuable visceral information that helps me push to the right side of the market in force and in time to reap the benefits.

An example of a short scalp that yields some quick profits before the Ugly Duckling Principle is invoked is Caterpillar (CAT). I wrote on Wednesday that after breaking down in what looked like a shortable base-breakout failure, the stock was at that time in position to pull an undercut & rally move and was likely to rally from that point, despite the fact that it had just failed on a recent base breakout.

And that U&R simply leads to further upside as the stock retook its 50-day moving average on Friday. You may also note the classic “LUie” pattern that occurs after a stock shows some sort of very positive action and then fails immediately. CAT’s failed breakout of just over two weeks ago fits as this type of action.

It then finds support as it undercuts the prior lows in its base and violates the 50-day moving average. From there it clears the 50-day line on Friday as volume comes in well above average. So just like that, the Ugly Duckling rises from the market swamp to carry CAT right back up into breakout land and the “L” formation turns into a “U,” helping to complete the LUie formation.

 

GR021217-CAT

 

This sort of action is not uncommon in this market. When things start to look a little shaky on the basis of what might be going on with stocks like CAT for a few days, that is when they turn right back to the upside. It also serves to make me cautious, but not bearish, as I remain open to the fact that the Ugly Duckling is an inherent participant in this market environment.

Fortunately, however, this sort of action is not beyond the bounds of our market methodology. After all, for members who’ve been around at least a little while, a “U&R” set-up is now part and parcel of the weapons package I bring to the table as part of my current modus operandi.

So, with the help of a recovery in one of its larger components, the Dow Jones Industrials Index (not shown) “CATapulted” to an all-time closing high of 20269.37, having hit an all-time high earlier in the day at 20298.21. The S&P 500 Index also posted an all-time high on Friday on lighter NYSE volume.

 

GR021217-$SPX

 

In my last report I used the term “trudge” to describe the NASDAQ Composite Index’s continued move higher, and that term just as readily describes what we saw for the rest of the week. On Friday the NASDAQ trudged a little bit higher to log another all-time high, but volume was barely lighter by about 1%.

Do the new highs on lighter volume indicate that a pullback is at hand? Maybe, but I still think that investors are better served by just focusing on the action of individual stocks. Market tops and corrections can occur at any time, but generally your first clues will occur in serious breakdowns among leading stocks, and for the most part that isn’t what we’re seeing, at least not right now.

 

GR021217-$COMPQ

 

In the mean-time most of the set-ups I’m seeing currently are bullish, and that was certainly the case with Netflix (NFLX) which popped out of a squeaky-tight flag formation on Wednesday. It has moved slightly higher from there, ending the week at an all-time closing high. From here, pullbacks to the 10-day moving average at 142.08 would be your next references for lower-risk entry opportunities.

 

GR021217-NFLX

 

On Wednesday I wrote that Tesla (TSLA)isn’t expected to announce earnings until February 22nd, so I don’t see any reason why it couldn’t just keep going higher.” Apparently the stock didn’t see any reason why it couldn’t just go higher either. It expressed its conviction by gapping up on Thursday in a narrow-range buyable gap-up move on heavy buying volume.

The stock is well within buying range of Thursday’s BGU intraday low at 266.15, but with earnings coming up in less than two weeks you are counting on continued upside until then. For now, anyone who bought on the bottom-fishing pocket pivot (BFPP) in early December of any of the three roundabout pocket pivots (RAPPs) in late December and early January is in a good position to sit with at least part of their position into earnings.

 

GR021217-TSLA

 

Amazon.com (AMZN) decided that it didn’t need to take any time consolidating along its 20-day exponential moving average and just kept rallying back above its 10-day moving average instead. Volume came in at about even, but for now seems to indicate that AMZN has more buyers than sellers in it. It has now roughly filled the prior week’s gap-down “falling window” where it could find resistance. However, I’d just watch to see how it acts along the 10-day or 20-day lines here on any pullback. If volume dries up sharply on such a pullback, then I would consider it buyable.

AMZN is another leader that has refused to come unglued, and is now less than 3% away from its all-time highs.

 

GR021217-AMZN

 

Notes on other big-stock NASDAQ names discussed in recent reports:

Apple (AAPL) remains extended, such that pullbacks to 128.77 would offer your nearest references for lower-risk entries.

Facebook (FB) is sitting at all-time highs, but buying interest seems to be waning a bit. Therefore, I’d look to be opportunistic here on pullbacks to the 10-day moving average, now at 132.28.

Priceline Group (PCLN) broke out to all-time highs on Friday on heavy buying volume. If the breakout point is around 1605, then the stock remains within buying range of this breakout, just about 3% higher based on Friday’s 1646.51 close.

Nvidia (NVDA) looks to be putting in a double-top here as it turned lower Friday on a big outside reversal after announcing earnings on Thursday after the close. I was looking for the stock to perhaps hold the 10-day moving average, but it could not, and is now testing the 20-day line just below.

If it breaks below the 20-day line on heavy selling volume, then it could be in play as a late-stage failure type of short-sale set-up. Of course, that’s not guaranteed to happen, but it is something to watch for. The flip side is of course whether selling volume dries up rapidly (as we saw earlier this week with AMZN) and the stock is able to hold support at the 20-day line. Thus NVDA is one to watch this coming week as a potential short-sale target if the situation continues to deteriorate.

 

GR021217-NVDA

 

President Trump made nice with Chinese President Xi Jinping on Thursday, committing to the U.S.’ long-standing agreement regarding a one-China policy. But Chinese stocks have already been on the move for the past several weeks, and I originally assessed that when it comes to China, President Trump’s bark would likely turn out to be worse than his bite.

However, after the two leaders spoke late Thursday, it became something of a sell-the-news event as several Chinese stocks pulled back on Friday. Among these, Momo (MOMO) shows why I don’t like to chase strength, and will instead look to sell into moves like Wednesday’s after buying on weakness near the 10-day or 20-day moving averages.

At that point I will look to re-enter on constructive weakness, assuming I am interested in the stock. On Friday MOMO pulled right into its 10-day moving average and found some volume support before closing near the peak of its price range and down about 1% on the day. I would continue to view pullbacks to or near the 10-day line as lower-risk entry opportunities.

 

GR021217-MOMO

 

Notes on the other four of the Gilmo China Five names:

Alibaba (BABA) pulled back on Friday after posting a five-day pocket pivot on Wednesday, also demonstrating why I prefer to buy on weakness while avoiding the temptation to chase strength. Volume remained light, so I’d watch for any test of the 10-day line at 101.61 as a potentially lower-risk entry opportunity. So far BABA is the only member of my China Five that has already announced earnings.

JD.com (JD) is extended, and pullbacks to the 10-day line at 28.63 should be watched for as potential lower-risk entries. Earnings are expected on February 28th.

Netease (NTES) has pulled into its 10-day moving average, but volume over the prior two trading days has come in well above average. With earnings expected next week on February 15th, there isn’t much to do here in my view.

Weibo (WB) is now extended following its pocket pivots earlier in the week, such that only pullbacks to the 10-day line at 50.53 would offer lower-risk entry opportunities. Earnings are expected on March 2nd.

Fortinet (FTNT) may be setting up to move higher as volume dries up within a very short and very tight four-day bull flag the stock has been forming since the prior week’s bottom-fishing buyable gap-up (BFBGU). Volume dried up to -44.1% below average on Friday, which would qualify as a voodoo (low volume) type of pullback.

The only issue is that there aren’t any real solid support levels above the 36.10 intraday low of the prior week’s BFBGU price range. The 10-day line is now at 35.88 and rapidly approaching the stock price. For that reason, my dream set-up here would be a pullback that undercuts the lows of this short four-day flag and meets up with the 10-day line, which I would expect will be a bit higher once we move into the new trading week.

As with most long set-ups, I prefer to take the more opportunistic approach if I can get it. And in some cases that means being patient and simply waiting for the move you’re looking for. We’ll see if that turns out to be the case with FTNT.

 

GR021217-FTNT

 

Barracuda Networks (CUDA) tested its 10-day moving average on Friday but found some volume support on a five-day pocket pivot move. The stock closed at its highest closing high since the failed breakout attempt in early January. This actually started to have the look of a possible “LUie” formation in the making.

For now, CUDA remains buyable on any pullbacks and tests of the 10-day moving average at 23.75. However, the stock did give would-be buyers a chance to take positions twice this past week when it successfully tested the 10-day moving average.

 

GR021217-CUDA

 

Notes on other cyber-security names discussed in recent reports:

Checkpoint Software (CHKP) cleared the $100 price level with more price authority on Friday, closing at 101.19, its highest close since the buyable gap-up over mid-January. I would still prefer to look for pullbacks into the 10-day line at 99.34 as lower-risk entry opportunities.

CyberArk Software (CYBR) got hit Friday after earnings on Thursday but held its 20-day moving average. I need to see this stabilize and set up again before looking to buy shares.

Palo Alto Networks (PANW) is extended. Pullbacks to the 10-day moving average at 149.76 would offer the most opportunistic entries, should they occur. Earnings are expected on February 28th.

Symantec (SYMC) made a higher high on Friday on light volume, but was already extended. Pullbacks to the 10-day moving average at 28.16 would be your next references for lower-risk entry opportunities.

U.S. Steel (X) roared to life on Thursday after I discussed it as being quite buyable in my Wednesday mid-week report. The stock launched on an 8.25% upside move that qualified as another pocket pivot and a trendline base breakout.

This took X right up to the left-side peak of its current base formation where it slowed up a bit but held tight as volume declined to slightly below average. While the proper entry occurred at the 10-day line on Thursday morning, I would watch for any kind of pullback into the 35-36 price area as a potential add point, or even an initial entry point for anyone who wants to buy it on the basis of the trendline breakout.

 

GR021217-X

 

It seems to me that if one wants to play steels, then playing the biggest big-stock steel in the group, X, works as well as any other steel name. And in many ways the stock is acting like the leader of the pack lately.

Allegheny Technologies (ATI), not shown, has been a bit sluggish since its big buyable gap-up move of late January. The stock did find support at its 20-day moving average on Wednesday and bounced to the upside on Thursday. Pullbacks to the 20-day line at 20.14 would still be your best, lower-risk entry opportunities.

However, when it comes to steels, then in the spirit of Dos Equis beer’s “most interesting man in the world” commercials I would have to say, “I don’t always play steel stocks, but when I do, I prefer Uno Equis!” Stay thirsty my friends! J

Martin Marietta Materials (MLM) and Eagle Materials (EXP) both took a spill after Vulcan Materials (VMC) came out with poor earnings on Tuesday. These stocks have become notorious for showing brief bouts of strength and then sliding right back from whence they came. MLM has yet to announce earnings, but EXP has already reported, so there is a little bit of an advantage to looking at EXP on this current sympathy pullback.

First, note that it didn’t budge much when VMC came out with earnings on Tuesday and closed near the peak of its narrow daily price range with volume drying up to -46% below average while also finding support at its 20-day moving average. It has also held the 102.98 intraday low of the January 24th buyable gap-up (BGU) and base breakout. So this looks buyable here using the 102.98 price level as a tight selling guide.

 

GR021217-EXP

 

Optical stocks have gone from a state of confusion to a state of conviction as Finisar (FNSR) aptly demonstrates. All of this in sympathy to strong earnings from Lumentum Holdings (LITE) on Wednesday. FNSR’s sympathy move started with a pocket pivot at the 50-day line on that day, which actually came on the heels of a stalling pocket pivot at the line the day before.

From there FNSR has shot higher over the past two trading days, resulting in a base breakout on Friday on heavy buying volume. This looks a little frothy at this point, despite the base breakout, which has come straight up from the bottom. For this reason, I’d look for some sort of pullback into the 32-33 price area as a possibly more opportunistic entry. FNSR is expected to announce earnings on March 9th.

 

GR021217-FNSR

 

I wrote on Wednesday that Applied Optoelectronics (AAOI) “looks buyable here using the 20-day line as a tight selling guide.” And that indeed turned out to be the case as the stock followed up with an all-time high on Friday on a pocket pivot move off of the 10-day line. AAOI is the current leader of the optical wolfpack, and is buyable here on the basis of Friday’s pocket pivot using the 10-day line at 31.51 as a selling guide. Alternatively, one could use the 20-day moving average at 30.48 as an alternative, wider selling guide.

 

GR021217-AAOI

 

Lumentum Holdings (LITE) has recently surged from the depths of its prior base to join AAOI as another current leader among the optical stocks.  This is obviously extended at this point, so the thing to do here is wait and see if there is any kind of pullback closer to the 44-45 price level and the top of the base as a lower-risk entry opportunity.

 

GR021217-LITE

 

With opticals heating up, Oclaro (OCLR) may decide to make another breakout attempt, and let’s face it, re-breakouts in this market are actually more common than some would perhaps like to think. When is a failed breakout not a failed breakout? Answer: when it’s a re-breakout!

LUie formations are also one corollary to the whole concept of re-breakouts, and perhaps OCLR is in the process of producing its own variation on this theme. As I wrote on Wednesday, the 50-day line has been serving as solid support for the stock over the past couple of weeks, and that was the case again on Friday.

OCLR pulled down early in the day but found volume support near the 50-day line, closing back above its 20-day moving average and near the peak of its daily trading range. I consider this to still be in a buyable position using the 50-day line as your selling guide, although being opportunistic on the pullback to the line on Friday would have been most optimal.

 

GR021217-OCLR

 

True to form, big-stock optical name Ciena (CIEN) keeps bouncing up and down within what is now a nine-week base. On Wednesday the stock successfully tested its 50-day moving average on a single five-day pocket pivot, and has now posted two more five-day pocket pivot signatures as it moves back to the highs of the current base.

CIEN is expected to announce earnings on March 1st, so I’d prefer to play opticals that have already announced earnings, such as AAOI, LITE, and OCLR. However, it remains true for CIEN that the best way to buy the stock is on pullbacks to the lower reaches of its current base.

 

GR021217-CIEN

 

Juniper Networks (JNPR), not shown, is another optical that has already announced earnings, but the stock gapped down hard right after the report was released. It has continued to drift higher since then, and is now back above its 20-day moving average but just below its 50-day moving average. Volume has been declining, so it’s not clear whether this one becomes a short at the 50-day line, or whether it can clear the line with some conviction, morphing back into a long situation.

I’ve already discussed the fact that last year I did well shorting cruise line stocks Carnival Cruise Lines (CCL) and Royal Caribbean Cruise Lines (RCL). But in 2017 it’s been a different story for these names, which have emerged as leaders in this current market rally.

Both stocks jacked higher in late January, with RCL posting a buyable gap-up move with an intraday low of 92.28. It has since drifted higher and is holding tight along its 10-day moving average. I consider this buyable along the line as it forms a tight flag formation following the late January BGU. Since it is technically within buying range of the BGU, the 92.28 price level serves as a logical selling guide.

 

GR021217-RCL

 

Carnival Cruise Lines (CCL) has not held up as tightly as RCL, but the action still looks quite constructive. On Thursday the stock posted a pocket pivot at the 10-day moving average, and then held tight on Friday as volume declined to -23% below average.

Both CCL and RCL provide cheaper vacation options for individuals, and as the CEO of RCL indicated earlier this past week, they are seeing their business picking up. As well, that has shown up in the 34% earnings growth that RCL posted in the last quarter. CCL meanwhile posted a 31% earnings increase in the last quarter.

CCL is buyable here using the 10-day line at 55.62 or the 20-day line at 55.11 as your selling guides. These stocks don’t have the sizzle of a hot tech or bio-tech name, to be sure, but the price/volume action looks constructive. Sometime “boring” names can have profitable price moves, just ask Domino’s Pizza (DPZ) and Jack in the Box (JACK)!

 

GR021217-CCL

 

Notes on other long situations discussed in recent reports:

Clovis Oncology (CLVS) dipped into its 10-day moving average on Friday as volume came in very light. This comes after Wednesday’s strong pocket pivot off of the 20-day moving average. Earnings are coming up soon, with the expected report date of February 23rd.

Incyte Pharmaceuticals (INCY) is expected to announce earnings on Tuesday of this coming week, and it is currently holding at its 10-day moving average on light volume. Nothing to do here ahead of earnings.

Glaukos (GKOS) has been pulling back small over the past two trading days, but remains well above its 10-day moving average. The 10-day line has been rising quickly, and is now at 42.99 vs. Friday’s close at 44.59. Pullbacks to the line would be your next references for lower-risk entry opportunities. Earnings are expected to be reported on March 1st.

Goldman Sachs (GS) rallied slightly off of its 10-day and 20-day moving averages where it was buyable per my comments in Wednesday’s mid-week report. Pullbacks to the two moving averages at 236.68 and 237.58, would offer lower-risk entries. You might notice a number of big financials looking similar to GS, such as JPM, MS, BAC, WFC, and others. We can also see how the Ugly Duckling recently came into play on GS and others after they shook out below the lows of their current bases

GrubHub (GRUB) demonstrates why I refrain from playing earnings roulette. The stock essentially blew up after earnings but tried to hold at its 50-day moving average on Wednesday, which gave it at least half a chance of surviving. But that was not the case as the stock broke below the line on Thursday, taking this entirely out of play for now. GRUB was a nice swing trade from the 50-day moving average earlier in January, but for now looks like dead money.

Mobileye (MBLY) is expected to announce earnings on February 22nd, and is holding up in a nice flag formation as it runs along its 20-day moving average. This is in a lower-risk buy position right here, but the question then becomes whether enough profit cushion can be built up before then, even if the stock does move up and off of its 20-day line. Therefore, unless a big move is imminent, buying here would likely imply a swing trade ahead of earnings.

ServiceNow (NOW) closed at higher highs on Friday after moving up and off of its 10-day moving average on Thursday. As I discussed on Wednesday, NOW was buyable at the 10-day line where it was finding support that day. Look for pullbacks to the 10-day line at 90.48 as lower-risk entry opportunities.

Square (SQ) has regained its 10-day and 20-day moving averages after bouncing off of the 50-day moving average on Monday of this past week. On Friday the stock pulled back into the confluence of its 10-day and 20-day moving averages as volume dried up to -48.6% below average, so I would consider it to be back in a lower-risk buy position using the 50-day line at 14.25 as your maximum selling guide.

Veeva Systems is back at the prior January highs of its current low-base price range. The stock is slightly extended such that pullbacks to the 10-day line at 43.16 from current levels would present lower-risk entry opportunities.

In addition to all the names I’ve discussed in recent reports, I see a lot of big-stock names out there acting well. Among some of the tickers that appear to be setting up nicely are: AXP, BA, CMI, CSCO, CSX, DD, GD, DOW, HD, IBM, MCD, MRK, MSFT, UTX, and V, for example. Most of these are stocks that can be found in the Dow Jones Industrials Index.

Take the time to run through these charts, and you will see the constructive action in these names for yourself. That sort of action doesn’t seem to argue for an imminent market top, at least not at this precise moment in time. While sentiment seems to be getting excessively bullish, the price/volume action of individual stocks seems to reflect a healthy balance of names acting well.

However, this market does require the resourcefulness I discussed in my last report. Remaining patient and opportunistic will give one the best chance to enter on constructive weakness in the right stocks, and at the right time. So rather than allow oneself to see ghosts where none exist, especially in the face of so many citing “concerning” bullish sentiment statistics, we simply do what we’ve done all along – we focus on the individual stock set-ups.

If the market does start to get into trouble, then the first sign will come in the form of your stops and trailing stops getting hit. From a practical perspective, that should be enough to steer one clear of trouble if indeed all of the current bullish sentiment is signaling that a major correction or bear market is imminent.

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 CCL, CUDA, NFLX, and OCLR, 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.