The Gilmo Report

February 15, 2017

February 15, 2017

The market began the week with an instructive demonstration of why paying attention to the pundits’ worries about excessively bullish sentiment, a low VIX, and the number of days the market has gone without a 1% pullback won’t make you money. Anyone reacting and jumping ship on the basis of things that go bump in the night would have missed some nice moves and trading opportunities in a number of stocks discussed in recent reports.

Defying the odds, the indexes all kept plowing higher on Monday and Tuesday to log more all-time highs, and then followed that up by doing the same thing today. I don’t know about you, but this is starting to get old! Okay, well maybe not that old, but the market action has the pundits scratching their heads and muttering things about how the market can’t go up forever.

While the indexes could be getting extended and in need of a pullback, they could just as easily consolidate recent gains by moving tight sideways. My approach remains centered on the action of individual stocks. The way I operate, when I have long positions that are running up sharply I will tend to take at least partial profits into the move and then lay back to see how things settle out.

If I see a very constructive pullback in one of my favored names, I simply move back in, hopefully at a favorable price level. Operating this way has mostly helped keep me out of any severe market pullbacks. The only issue with that happens to be the fact that so far in 2017 there haven’t been any! And, of course, what we might consider a severe pullback may not be all that much on a percentage basis these days.

At current levels, a 1% pullback in the Dow would be equal to about 206 Dow points. As a headline number, that might look a bit scary, but in reality would be nothing all that special. And that is why I won’t look too hard at the indexes, but instead just stay focused on the individual stock set-ups and continue to operate according to my own style (emphasis on my own) which incorporates a swing-trading approach.

With the market in a steady uptrend, however, it allows for a variety of bullish approaches. The Dow Jones Industrials Index has kept investors agog as it marches well past the magical 20,000, reaching a peak of 20,620.45 before settling in to close at 20,611.86. Now THAT’s a spicy meatball!

The S&P 500 Index, not shown, more or less looks the same, posting another all-time high today on higher volume.

 

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The NASDAQ Composite Index acts like it wants to go parabolic. It posted another all-time high today on substantially higher, above-average volume. As far as the indexes are concerned there isn’t much to say other than that they were up again on higher volume.

 

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One group that has certainly been on fire over the past few days, after being a bit down in the dumps a scant few weeks ago, has been the optical names. Leading the charge, oddly enough has been an Ugly Duckling move off the lows in Acacia Communications (ACIA), which I discussed in a blog post early Monday morning.

This led to a sharp two-day move that took the stock back above its 50-day moving average on a pair of high-volume bottom-fishing pocket pivots (BFPP). The stock then held tight today as volume declined but came in at above average, qualifying as supporting action at the 50-day line.

The primary limiting factor here is that ACIA is expected to report earnings a week from tomorrow on February 23rd. So while it has been playable here over the prior two days for a nice swing-trading type of move, the question as to whether one wants to play earnings roulette next week becomes a significant one. For now, it looks like it wants to go higher.  So swing-traders can view this as buyable on any pullback toward the 50-day line, with the idea of squeezing some further upside ahead of earnings.

 

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Applied Optoelectronics (AAOI), which I have discussed as the de facto leader in the opticals group, blasted to a new high yesterday on heavy buying volume. That move came after a continuation pocket pivot last Friday at the 10-day moving average, as I discussed in my weekend report. Today saw a small pullback as the stock basically held tight as volume declined. Pullbacks to the 10-day line at 32.93 would be your next references for lower-risk entries, otherwise AAOI is extended.

 

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Ocular (OCLR) also chimed in with a nearly 10% move of its own yesterday as it posted a successful re-breakout, something I was looking for, per my discussion of the stock over the weekend. Today it held tight, and is up about 6-8% from the breakout point, so I’d look at any pullback down to 10.50 as a potentially lower-risk entry opportunity as a base-breakout buy set-up.

 

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Finisar (FNSR) has surged mightily over the past several days since posting a roundabout pocket pivot at its 50-day moving average last Wednesday, as I discussed in my report of that day. Today the stock pulled back to the top of the prior base breakout as volume declined. Technically this could be considered buyable here on the basis of the standard base breakout. Any pullbacks closer to the 10-day line at 32.64, however, would offer more opportunistic entries. FNSR is expected to report earnings on March 9th.

 

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Notes on other optical stocks:

Ciena (CIEN) broke out to a higher high Monday and pulled back into the top of its base today on lighter volume. The stock is more or less in a buyable position since it is within range of Monday’s base breakout, although a pullback to the 10-day line at 24.73 would offer the more opportunistic entry.

Lumentum Holdings (LITE), also not shown, cruised to a new high yesterday but finally pulled back today with selling volume coming in at above average. A pullback to the rapidly rising 10-day line at 44.51 would provide a lower-risk entry.

Juniper Networks (JNPR) is holding squeaky tight at its 50-day moving average and looks to me like it wants to move higher with the rest of the group. I actually consider this buyable right here using the 50-day line at 27.89 as a tight selling guide. Otherwise the 20-dema at 27.55 serves as a wider selling guide.

The Chinese names that comprise the Gilmo China Five has also been on a tear this past week. Momo (MOMO) and Weibo (WB), both not shown here on charts, have rallied all the way back to their late-2016 highs as they form cup-like bases. WB, however, is now in a double-bottom type of cup base. Both stocks are well above lower-risk entry positions currently, but pullbacks to their respective 10-day lines at 24.35 and 52.51 would offer entry opportunities from here.

JD.com (JD), not shown, has continued to move higher, while Alibaba (BABA) has lagged. However, BABA came through today with some pocket pivot support off of the 100 price level and the 20-dema today on above-average volume. BABA missed a bona fide pocket pivot by 4 cents since it failed to close positive, but in my view this is constructive support at the 20-dema.

I consider the stock buyable here using the 99.94 low of the late January buyable gap-up day as your selling guide. With the rest of the Chinese names on my watch list acting well, BABA will likely move higher in wolfpack fashion.

 

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Netease (NTES) came out with earnings today after the close and is gapping up to around 272 as I write this afternoon. The stock has acted very well since posting a bottom-fishing pocket pivot at the 50-day line back in early January. It has since come right up to its prior late 2016 highs in a cup-with-handle type of formation.

If the gap-up move holds tomorrow at the open, watch for an actionable buyable gap-up (BGU) to shape up once an intraday low has been set.

 

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With respect to members of my China Five that have yet to report, note that JD is expected to announce earnings on February 28th, while MOMO and WB are expected to report earnings on March 21st and March 2nd, respectively.

Among the big-stock NASDAQ names, Netflix (NFLX) is starting to get a little sloppy here. After last week’s pocket pivot, the stock has had no real upside thrust and in fact has dropped back below the pocket pivot price level. That break also saw the stock dip below the 10-day line on above-average selling volume.

Today NFLX rallied back up into the 10-day line on weak buying interest, which keeps it in a negative position on the chart. If you think the Ugly Duckling will come to call here, then I suppose one could buy the stock here using the 20-dema at 140.17 as your tight selling guide. Otherwise, a volume breach of the 20-day line would bring this into play as a short-sale target.

 

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Clearly the Ugly Duckling has come a ’calling on Amazon.com (AMZN), something that doesn’t really surprise me even after its prior gap-down move following earnings in early February. As I’ve discussed in recent reports, the stock was never more than 3-4% off its highs, even after the gap-down.

Given that AMZN had not put in enough time building a handle to its existing cup formation at the time of earnings, it was perhaps entitled to a nice shakeout in service of doing so. Now the stock is sitting right at the peak of its current cup-with-handle base, complete with a three-week handle. For those who like to buy base breakouts, this looks buyable already, using the 10-day line at 825.44, about 2% away, as your downside selling guide.

 

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Facebook (FB) may be similar to AMZN in that it has also been in need of building a handle to its current cup base formation. So in the process we see it backing and filling along its 10-day line here with volume drying up to -37% below average, just enough to qualify as voodoo action.

I actually tested FB today as a tactical short, thinking it might break the 10-day line and test the 20-day line, but there was no selling pressure. For that reason, the stock is buyable here on the basis of the voodoo action at the 10-day line using the line at 132.96 as your selling guide. Otherwise, the 20-day line at 131.28 would offer a wider selling guide just a little over a percentage point lower.

 

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

Apple (AAPL) picked up a buy recommendation from none other than Goldman Sachs. The big-stock brokerage firm also stuck their neck out by raising their price target to $140. That doesn’t leave much upside, but AAPL still ran to all-time highs on the news and is now quite extended from its prior buyable gap-up move of February 1st.

Priceline Group (PCLN) remains within buying range of last Friday’s base breakout.

Tesla (TSLA) is expected to finally report earnings next week, and has become quite extended. For that reason, there isn’t much to do here ahead of earnings, but this stock has been a real monster so far in 2017.

Nvidia (NVDA) busted its 20-day moving average on Monday on heavy selling volume. This is what I was looking for as an initial clue that a further breakdown was in the cards, per my discussion of the stock over the weekend. However, the stock is now doing its best to hold the 50-day moving average, which has served as a solid support line for the stock all the way up during its 2016 price move.

Notice that volume dried up sharply today as the stock held tight and held support at its 10-week moving average at 107.62 on the weekly chart. This might indicate that short-term selling pressure has dried up in the stock and it will make some sort of rally attempt from here. For that reason, I would be inclined to test this out on the long side using the 10-week moving average at 107.62 as my tight selling guide. NVDA has worked well as a short-term tactical short over the past few days, but it may be trying to find support at current levels.

 

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Cyber-security names have been percolating for some time now, but only Palo Alto Networks (PANW), not shown, has held a steady trend after posting several bottom-fishing and roundabout pocket pivots since bottoming at the start of the New Year. (Note: PANW earnings are expected on February 28th) The rest appear to be setting up, and I’ve got to think that the group will gather some momentum at some point IF this market rally continues.

Fortinet (FTNT) has continued to hold squeaky tight after last week’s buyable gap-up (BGU) move. Volume dried up to -60% below average today, so I consider this buyable using the 10-day line at 37.31 as a tight selling guide.

 

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Barracuda Networks (CUDA) is back in slushy mode as it drifts back and forth but was able to hold support at its 20-day moving average today as volume picked up slightly. This qualifies as supporting action at the 20-dema, and I consider the stock buyable here using the 50-day line at 23.10 as your selling guide.

 

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

Checkpoint Software (CHKP) is holding excruciatingly tight here at the 10-day moving average at 100.12, just above the $100 Century Mark. It closed today at 100.85, and I consider it buyable here using the 10-day line at 100.10 or the 20-dema at 98.04 as reasonably tight selling guides.

CyberArk Software (CYBR) has been bouncing around after selling off on Friday after reporting earnings on Thursday after the close. Volume dried up today as the stock holds along the 10-day and 20-day moving averages, so I’m keeping a close eye on this to see if it becomes buyable somewhere in here between the two short moving averages. So far it appears to be trying to stabilize, and if I can find a lower-risk entry on some sort of tight action here I might be inclined to step in on the long side.

Palo Alto Networks (PANW) is still extended. It is the last of the cyber-security names that I follow that has yet to announce earnings. It is expected to report on February 28th.

Symantec (SYMC) is pulling back after an extended price trend that began in early January. I think the stock may need some time to base here, so I’d prefer to see a pullback to the 20-dema at 27.82 as a lower-risk entry.

U.S. Steel (X) not shown, has been on a streak so far this week, breaking out of a nine-week base on Monday. The base breakout point is at 37.40 as I see it, so I’d watch for any pullbacks to that level as lower-risk entries. However, the stock is within range of Monday’s base breakout for all you base-breakout buyers. In my view, however, the early entry along the 50-day line last week as I discussed in my report of exactly one week ago was the one to jump on.

Allegheny Technologies (ATI) is trying to hold at its 10-day moving average, but closed a single penny below the line today as volume picked up to about average on the day. In my view this is in a buyable position using the 20-dema at 20.49 as a maximum selling guide, although a pullback to the line would offer the lower-risk option should it occur.

 

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Eagle Materials (EXP) seems to be the sole big-stock materials name holding up well. The stock tested the 10-day line yesterday and held up on the day as volume dried up. When the stock pulls in, as it did last week when it tested the 20-day moving average, selling doesn’t seem to come in at all. So this remains buyable on pullbacks now to the 10-day line at 105.63.

In the meantime, I note that Martin Marietta Materials (MLM), not shown, has dipped further below its 50-day moving average on heavy selling volume over the past two days. Vulcan Materials (VMC) has also been living below its 50-day line for the past week or so. So EXP is the last man standing in the big-stock materials space.

 

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Mobileye (MBLY) popped to the upside on Monday when it announced another partnership, this time with Volkswagen AG (VLKAY). That move came on huge volume, qualifying as a pocket pivot flag breakout. I did note over the weekend that the stock was in a voodoo buy position along the 20-day moving average at that time.

With earnings expected next Wednesday, February 22nd, I pointed out that “…unless a big move is imminent, buying here would likely imply a swing-trade ahead of earnings.” Well, there’s your swing-trade off of the 20-day line, but the stock looks like it might have more in it ahead of earnings. It does have, after all, four full trading days to move higher. And with MBLY holding tight here today as volume declined, it may be setting up to move higher again. At least if one bought along the 20-day line early on Monday one can decide whether to hold out for more upside or not.

As I’ve written in recent reports, I think that MBLY is a stock to watch in 2017, and so far its performance after the late December bottom-fishing gap-up pocket pivot has borne that out. I would look for the stock to at least hold yesterday’s intraday low at 44.30 given that I would expect the stock to continue tightening up here if it doesn’t move higher imminently.

 

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Twilio (TWLO) looks to be settling down as it holds very tight today with volume drying up to -30% below average. This is not low enough to qualify as voodoo type action, but within the context of the high-volume pocket pivots over the past several days this does qualify as constructive consolidating action.

As I blogged yesterday, I wanted to see the stock settle down here along the 10-day line with volume drying up as a clue that the IPO lock-up sellers that hit the stock late last week were potentially out of the way. That looks to be the case here, so I consider this buyable in this position using the 10-day line at 32.24 as my selling guide.

 

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I blogged Monday at 11:05 my time, just a little less than two hours before the close that cloud name Tableau Software (DATA) looked interesting on the basis of its tight, low-volume pullback following a post-earnings buyable gap-up (BGU) that occurred on February 3rd.

At the time DATA was trading just below 54 and holding very tight over the prior several days. That tight action continued yesterday, and today the spring finally sprung as the stock pushed away from the 10-day moving average and to the upside on volume that was 82% above average.

That’s strong volume, and in my view makes the stock buyable right here using the 10-day line at 53.58 as your tight selling guide. However, buying on the basis of the tight action when I blogged about the stock on Monday was a little more efficient. But if DATA is truly worth buying it likely has a lot more upside in it from here.

 

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Notes on other long situations discussed in recent reports:

Carnival Cruise Lines (CCL) found support at its 20-day moving average and posted a pocket pivot today as it moved back above the 10-day line on a nice volume increase. Tis remains buyable here using the 20-day line at 55.46 as your selling guide.

Clovis Oncology (CLVS) is building a short two-week flag with support along its 20-day moving average ahead of its expected earnings report next week on February 23rd. Nothing to do here ahead of earnings.

Incyte Pharmaceuticals (INCY) reported earnings yesterday and didn’t really move much, although it did post a stalling pocket pivot at the 10-day moving average yesterday. However, today it dipped below the 10-day line but held the 20-day line. Not sure what to make of this, but I would consider this buyable using the 20-day line at 119.54 as your tight selling guide.

Glaukos (GKOS) remains well-extended ahead of its expected earnings report on March 1st.

Goldman Sachs (GS) broke out yesterday on volume that was about average and then moved slightly higher today on volume that was -4% below average. Both yesterday and today qualified as five-day pocket pivots so one could consider this as a buyable breakout using the 10-day line at 241.92 as your maximum selling guide.

Nutanix (NTNX) has been discussed in recent blog posts along with TWLO, and today posted another pocket pivot at the 10-day moving average. That said, I prefer trying to buy this one closer to the 10-day line at 31.55. Earnings are expected on March 2nd.

Royal Caribbean Cruise Lines (RCL), cousin to CCL, pulled into its 10-day moving average and held today as volume picked up slightly but remained below average. This remains in a buyable position using the 10-day line at 95.43 as a tight selling guide.

ServiceNow (NOW) tested its 10-day line yesterday and held, moving to a higher high. It posted another higher high today on slightly above-average volume. This was buyable along the 10-day line last week per my report of exactly one week ago. It is now slightly extended, although pullbacks to the 10-day line at 91.29 would offer potentially lower-risk entry opportunities from here.

Square (SQ) is looking sloppy here as it gets hit with some selling volume along the 50-day moving average, closing just below the line today on about average volume. Earnings are expected to be out next Wednesday, February 22nd, so in my view there is nothing to do here ahead of the report. If I’m going to play clouds, I prefer those that have already announced earnings, like TWLO and DATA, for example.

Veeva Systems continues to hold tight along its 10-day and 20-day moving averages, and remains buyable on pullbacks to either moving average. Keep in mind that earnings are expected on February 28th.

So we now have a market that has gone 87 days without a 1% pullback. Along with a few other monsters in the closet like bullish sentiment and a low VIX, everyone is looking for a pullback. But the market doesn’t seem to know that it is supposed to pull back, and so a pullback doesn’t come. Instead, the indexes act like they want to go parabolic.

And, frankly, if I’m looking at the action of individual stocks alone, I don’t know about any of this either, because it isn’t evident in the real-time set-ups and price/volume action I’m seeing. In fact, as this report shows, there is a lot of bullish technical action among leading stocks and would-be leading stocks. And with that happening, a 1% pullback in the indexes might just create a nice buying opportunity in any number of these constructively-acting stocks.

So what to do? The same thing we’ve been doing, which is to focus on the action of individual stocks, and not the indexes, which in my view always and only tell a small part of the overall market story. Maybe the market will go 120 days without a 1% pullback. Who knows? Who cares? Just watch the stocks!

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 BABA, CUDA, FTNT, MBLY, NVDA, and TWLO 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.