The Gilmo Report

February 19, 2017

February 19, 2017

I consider myself a fairly open-minded person. I understand that the market hasn’t had a 1% move in many days, and I understand that the Volatility Index ($VIX) is “dangerously” low while the hoi polloi remain “dangerously” ebullient. In the face of such ominous-sounding punditry, I am psychologically and methodologically prepared to deal with such a market pullback. After all, I am told that it would be healthy. And who isn’t in favor of things that are “healthy?”

And so the easiest prognosis for any market pundit who doesn’t want to stick his or her neck out too far to make is that, “the market has gone too far too fast and is in need of a pullback.”  But the market seems to have its own idea of just what constitutes a needed pullback.

So far that seems to be little more than a nice tight, little bull flag with an all-time closing high on Friday thrown in for good measure, such as we see on the daily chart of the Dow Jones Industrials Index. It, along with the S&P 500 Index, not shown, posted new all-time closing highs on Friday on increased options-expiration volume.

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 ATVI, FTNT, NTES, and TWLO though positions are subject to change at any time and without notice.




The NASDAQ Composite Index traded lighter volume on Friday but continued in its attempts at imitating a parabola as it also logged an all-time high on Friday. It was interesting to note that while volume was lighter on the NASDAQ, breadth was positive as opposed to the negative breadth and higher volume seen on the NYSE, where the Dow and the S&P 500 closed up on the day.




But trying to make too much out of daily breadth doesn’t really help solve the current market problem any more than worrying about the $VIX or how many days we’ve gone without a 1% pullback. The reality of this market is that opportunities show up when they show up, and you have to take them when you see them.

And as far as the $VIX goes, I really don’t think that just because it is low you can draw any solid conclusions about the future direction of the market. The last time the $VIX was this low was back in 2006, and I show a daily chart of the $VIX from that period below. It initially dropped below the 11 level in early September of that year. It then proceeded to stay around that level or lower for nearly the next six months.


GR021917-$VIX 2006-2007


And as the $VIX dropped below 11 in September of 2006, the market, as measured by the NASDAQ Composite Index, simply kept going higher. Conclusion: we can put to rest this idea that a low $VIX in and of itself is cannot be relied upon as a short-term indicator of market direction.

Perhaps it’s important to recognize the basic causality between the $VIX and the market. The $VIX is derived from market behavior, not the other way around. For that reason, what the $VIX does is obviously not as important as what the market and, far more importantly, what leading stocks are doing. Watch the stocks, forget the noise.




Opportunities can and will pop up at any time in this market, and fretting too much about the market noise can blind you to these. An example would be something like Netease (NTES), which posted a buyable gap-up (BGU) on Thursday. I wrote in my Wednesday mid-week report that members should watch for an actionable BGU the next morning following NTES’ after-hours reaction to earnings that afternoon.

NTES opened up at 283.39, traded down a little over 1% within the first five minutes of the trading day, and quickly set a low at 278.80. Making use of a five-minute “620” intraday chart, one could have played the stock as a BGU at that point.

From there it ran higher all day to close 298.73 after getting to within 32 cents of the $300 “Century Mark.” On Friday it held tight as volume declined, and I would be on the lookout for a move through the $300 price level from here. Meanwhile, pullbacks close to Friday’s intraday low at 289.38, 4% above the 278.80 BGU low, look buyable to me.




As I pointed out in my Wednesday mid-week report, NTES had prior buy points lower in the pattern before Thursday’s post-earnings BGU move. The BGU, however, is merely the latest of these buy points. The same goes for Momo (MOMO) and Weibo (WB), not shown, both of which have come up to the right sides of cup formations as their respective earnings reports approach. WB is expected to report this week on February 22nd, and MOMO on March 21st.

Along with (JD), both MOMO and WB are extended and currently not in any lower-risk buy positions. JD is also expected to announce earnings at the end of February. Meanwhile, Alibaba (BABA) would be the only member of the Gilmo China Five that can be considered to be in a lower-risk entry position.

And that’s only because it is near support at the prior buyable gap-up (BGU) intraday low of 99.94 after closing at 100.52 on Friday. BABA also closed a nickel below its 20-day exponential moving average, which is not necessarily the end of the world. Selling volume picked up slightly but was still below average.

The low of its current four-week range is 100.06, so it is possible we could see a little undercut of that low, at which point I would be on the lookout for a possible undercut & rally move. The trade is simple: if BABA undercuts the 100.06 low and then moves back above that low, it is buyable using 100.06 as your selling guide.




Finisar (FNSR) demonstrates how a great trading opportunity can show up, provide a nicely profitable move after posting a roundabout pocket pivot (RAPP) at the 50-day moving average, and then get hit hard. That’s what happened to the stock on Friday after a brokerage firm voiced its concerns with the opticals space.

All of the opticals names I’ve discussed in recent reports initially sold off slightly on that news, but it was only FNSR that took the cliff dive down to the 50-day moving average. The others held relatively tight, and some closed up on the day, such as OCLR, AAOI, and CIEN, for example.

But at that point one could have stepped in and taken shares of the stock near the 50-day moving average as it hit an intraday low of 31.30, a mere 26 cents (a ¼-point in the old days) away from the line at 31.04. From there the stock flashed a buy signal on the five-minute 620 intraday chart and headed higher before closing at 33.74, down a 1.03 on the day.

I suppose the trick here is to a) have nerves of steel and b) be ready to bail out quickly if the stock can’t hold the 50-day moving average. One might also have been able to surmise that since the other opticals in the group weren’t getting smoked then FNSR might have a shot at a rebound. A trade for those with nerves of steel, or at least a rational trading plan. I generally go for the latter.




Meanwhile, the other opticals discussed in recent reports performed as follows:

Acacia Communications (ACIA) has held up well after posting a bottom-fishing pocket pivot this past Tuesday as discussed in my Wednesday mid-week report. The stock has found consistent support at the 50-day moving average since then as volume dried up. Earnings are due out this week, however.

Applied Optoelectronics (AAOI) ignored the concerns and simply move to a higher high as it remains extended and nowhere near a lower-risk entry position.

Ciena (CIEN) is still sitting right on top of its prior base breakout of this past Monday and remains in buyable position, using the 10-day line at 24.93 as your selling guide.

Lumentum Holdings (LITE) pulled back slightly on Friday in response to the analyst’s voicing of concerns over the opticals space and closed down ¾ points, or 75 cents. The stock remains extended such that pullbacks to the rising 10-day line, now at 47.13, would be your next references for a lower-risk entry opportunity.

Juniper Networks (JNPR) also ignored the news and moved up and off of its 50-day moving average. I wrote on Wednesday that I considered the stock, “…buyable right here using the 50-day line at 27.89 as a very tight selling guide.” Unfortunately, volume did not come in at pocket pivot levels, but as long as JNPR can continue to hold the 50-day line it remains viable on pullbacks to the line.

Ocular (OCLR) also moved to a higher high following Tuesday’s base re-breakout on strong volume. The stock remains extended and I would continue to view any pullback to or below the 10.50 price level as a potentially lower-risk buying opportunity.

I noted that at least one member saw the buyable gap-up (BGU) move in Arista Networks (ANET) on Friday that came on the heels of a favorable earnings report Thursday after the close. Whenever you see a stock gap up in response to earnings, it can always be treated as a buyable gap-up according to the rules of handling BGUs.

In this case, ANET opened up at 111, set a quick low at 110.31, less than 1% lower, and then took off to the upside. The trick is always in figuring out when and where the intraday low has been set, and I find that the five-minute “620” intraday chart is usually helpful in this process. Remember that there is no guarantee that a low set early in the day will hold throughout the day, but if it provides a reasonably tight selling guide (say 2-3% lower, maximum), then the trade can be taken.




Netflix (NFLX) remains somewhat sloppy along its 20-day moving average, but there is always the possibility that the Ugly Duckling is lurking here. Obviously, if it breaches the 20-day line on heavy volume that would be quite negative for the stock.

On the other hand, if selling volume dries up the way it did on Thursday and the stock is sitting at or near the 20-day line, it can be bought. Aside from Tuesday’s above-average volume breakdown through the 10-day line, selling interest hasn’t continued to come into the stock. So while the pattern doesn’t look exactly and perfectly bullish, the idea of buying leading stocks at logical areas of support still holds. Particularly, I might add, when they might not look so appetizing to technical perfectionists.


GR021917-NFLX (AMZN) actually broke out to a new closing high on Friday on slightly higher weekly volume, as we can see on its weekly chart below. The other interesting point here is that Friday’s breakout move came on a pocket pivot volume signature. We can see that the stock broke out after the third week of building a handle to its prior cup base formation. For all of these reasons, AMZN can be considered to be in a buy position right here, using the 10-day line at 829.35 as a reasonably tight selling guide.




Facebook (FB) has been holding tightly along its 10-day moving average on the daily chart. This shows up on the weekly chart as a three-week handle with the stock closing Friday in a tight range near the highs of the handle.

To me this looks slightly wedgy, which is why I keep thinking the stock needs a pullback to the 20-day moving average at 131.71. In most cases you’d want to see the handle drifting to the downside and along the lows, not the opposite, which is what FB is doing here. On the other hand, it closed tightly with the prior week’s close as weekly volume dried up.

So there’s two ways to play this as I see it. You could buy the stock here at 133.53 where it closed Friday and use the 10-day line at 133.51 or the 20-day line at 131.71 as a tight selling guide. Otherwise one could look to be opportunistic on any pullback to the 20-day line and wait for that, although there’s no guarantee it will happen. From a practical standpoint, the two moving averages are less than 2% away from each other. For this reason, it’s a bit like the proverbial “six of one and half a dozen of the other.”




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

Apple (AAPL) remains extended and continues to act well as it builds a short three-day bull flag just below the $136 price level.

Priceline Group (PCLN) still remains within buying range of its base breakout of two Fridays ago.

Tesla (TSLA) got knocked down about 23-24 points from Tuesday’s intraday high before finding support at its 10-day moving average on Friday. Earnings are expected this coming week.

Nvidia (NVDA) undercut its 50-day moving average on Friday on an intraday basis but was able to close back above the line as selling volume declined. Technically we would look for some sort of bounce off the 50-day moving average, although the stock’s ability to hold the line on Friday seemed more a function of a lack of sellers than an influx of buying support.

That said, the 50-day line has served as steady support for the stock throughout its 2016 price run. From a trading perspective, one would look for support to hold and generate at least a bounce off the line. For that reason, while I have considered the stock a short further up in the pattern following the prior week’s big-volume reversal off the peak, it can probably be bought here using the 50-day line as a tight selling guide.




I’m still interested in the cyber-security space, but my focus is on those names that are building constructive patterns and which have already reported earnings. Fortinet (FTNT) qualifies in this regard and remains within a short flag formation it has formed since its early February buyable gap-up (BGU) move. FTNT undercut the prior 37.21 low in the flat pattern on Friday and closed back above it, ending the week at 37.46. This becomes an undercut & rally type of move using the 37.21 low as a tight selling guide.




You can see that FTNT looks to be forming the handle area of a possible cup-with-handle formation on the weekly chart below. The weekly closes have been squeaky tight and weekly volume has also dried up sharply. Thus this looks very constructive, and on the basis of the U&R on the daily chart, above, is buyable here.


GR021917-FTNT Weekly


Barracuda Networks (CUDA) continues to base-build in constructive fashion. The stock held the 50-day moving average on Friday as volume remained extremely low at -45% below average, low enough to qualify as voodoo action. As I see it this remains buyable here, particularly on any pullbacks, using the 50-day line at 23.13 as a maximum selling guide.




As with FTNT, the weekly chart of CUDA looks constructive as the stock holds tight along the 10-week moving average with volume drying up. In my view it’s just a matter of when this thing finally breaks out on a new leg to the upside.


GR021917-CUDA Weekly


Checkpoint Software (CHKP) continues to hold very tightly along its 10-day moving average as volume remains very light. This looks to be setting up to move higher as it sits just above the $100 Century Mark. This is buyable here using the $100 price level, which is actually now below the 10-day line, as a selling guide.




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

Palo Alto Networks (PANW) pulled back sharply on Friday but found support at its 20-day moving average before closing just above its 10-day moving average. That pullback would have offered a very opportunistic entry point for anyone brave enough to take it. However, earnings are expected on February 28th.

Symantec (SYMC) bounced off of its 20-dema on Thursday, which was what I preferred to see as a buyable pullback per my comments on Wednesday. Pullbacks to the 20-day line, now at 27.97, would remain buyable when you see them.

U.S. Steel (X) remains within buying range of its recent base breakout. Pullbacks closer to the breakout point at 37.42 would offer a preferred entry. On Thursday X pulled down as low as 38.03, which would have been close enough, in my view, to pull the trigger. Note that the 10-day moving average is now above the breakout buy point and is now at 37.48, so this would serve an additional support reference point.




Allegheny Technologies (ATI) is acting a bit on the doggy side here as it slips below the 20-day moving average and is now testing the prior week’s low at 19.99. While this looks a bit weak, I would watch for a possible undercut & rally (U&R) move to develop if the stock dips below the 19.99 price point.

Remember that undercut & rally trades are fairly simple. Once the stock undercuts the prescribed prior low in the pattern and is able to rally back above that low, it becomes buyable using that prior low as your selling guide. In this manner a U&R move can be played more precisely than the somewhat vague “shakeout-plus-(insert number here)” buy signal.

The intraday low of the late January buyable gap-up sits at 19.10, but I would consider the stock to be fairly weak if it were to pull that far to the downside from here. As I’ve discussed in recent reports, if I’m going to play steels I prefer X.




Steel Dynamics (STLD) has the highest EPS rating among all the steel stocks, and its chart pattern has some similarities to X. STLD is also the only steel stock to post strong triple-digit earnings growth over the past three quarters, with the most recently reported quarter showing a 400% earnings increase.

STLD was looking rather done for good back in late January as it broke to the downside and violated its 50-day moving average on heavy selling volume. But it was right at that point that the Ugly Duckling moved in to keep the stock from breaking down further. STLD eventually tightened up along the lows before moving back above its 50-day moving average on a pair of five-day pocket pivots that came on strong buying volume.

Now the stock is drifting back down toward the 50-day moving average at 36.31 as volume dried up to -48% below average on Friday. The closer to the 50-day line I can buy this the better, but it is moving into buying range here based on the voodoo volume action with the idea of using the 50-day line as a tight selling guide.




The Ugly Duckling was at work in Square (SQ) on Friday after it started looking quite sloppy, if not outright troublesome, on Thursday. At that point SQ had already been under some high-volume selling pressure over the prior three days, and a move to new lows on more above-average selling volume was looking rather bleak.

At that point, the Ugly Duckling stepped in and SQ blasted back to the upside on Friday. That move finished out the day as a high-volume pocket pivot back up through the 50-day line. There was some news on Thursday that Starbucks (SBUX) had sold some of its stake in the company, reducing it from 11.73 million shares to 9.46 million shares.

That’s only a little over 2 million shares, so it’s not clear to me that the prior selling we saw throughout most of the last week was a function of that. Nevertheless, I do like this pocket pivot as a nice recovery move by SQ in the spirit of the Ugly Duckling Principle. However, with earnings expected to be reported this Wednesday, February 22nd, I would not be inclined to play earnings roulette without a larger profit cushion.




Tableau Software (DATA) still looks okay here as it flops around its 10-day moving average. Wednesday’s strong upside move ran into some overhead selling, most likely from the buyable gap-up day of two weeks ago, on Thursday. It then stabilized on Friday as it shook out below the 10-day line with volume drying up nicely and then closed back above the line.

On the weekly chart, not shown, DATA has posted two weeks of tight closes within very narrow weekly price ranges in what is a short two-week flag formation. This remains in a buyable position using the recent lows along support at 52.68 or 53.30 as selling guides.




Twilio (TWLO) is doing its best to try and settle down after last week’s IPO lock-up expiration that made nearly all of the shares of the company eligible for sale by insiders. That, of course, doesn’t mean they are all going to sell all their shares all at once. But it does appear that the stock is still in the process of working off some selling as it consolidates recent gains.

The initial move back up through the 50-day moving average came on strong upside volume, and the stock has actually held up quite well since the first day of the IPO lock-up expiration. It is now sliding back down toward the 20-day moving average, which could provide a lower-risk entry opportunity if we continue to see volume dry up.




The video-gaming stocks have been strong lately, with Electronic Arts (EA) recovering from a post-earnings sell-off and recently breaking out to new highs. I don’t show a chart of the stock here, but it is technically still within buying range of its base breakout through the 84.25 price point. The 10-day moving average at 85.01 would serve as the nearest pullback reference level, however.

Activision (ATVI) recently posted a buyable gap-up (BGU) after earnings. That was a big move that took the stock to new highs, and it has since pulled back into the left side peak of the pattern on very light volume. In addition, it has been able to hold above the 44.93 intraday low of the BGU day. Thus the stock is in a buyable positon here using the 44.93 price level as a tight selling guide.




Notes on other long situations discussed in recent reports (stocks in lower-risk buy positions are denoted with a [B] after the symbol):

Carnival Cruise Lines (CCL) [B] broke below its 20-day moving average on Friday on above-average volume. This is not what you’d like to see, however the stock is still holding above the lows of the current three-week price range. Watch for a possible undercut & rally move around the prior 55.02 or 54.75 lows in the pattern.

Clovis Oncology (CLVS) posted a pocket pivot at the 10-day line on Friday on above-average volume. More constructive action as we head into earnings, which are expected to be reported on February 23rd. Nothing to do here ahead of earnings.

Eagle Materials (EXP) [B] is sitting right at its 20-day moving average. It needs to hold here otherwise it will simply join its big-stock materials brethren MLM and VMC as recently failed breakout attempts within the group.

Incyte Pharmaceuticals (INCY) [B] is holding tight at its 20-day moving average with volume drying up to -32% below average on Friday. This looks buyable here using the 20-day line at 119.68 as a tight selling guide.

Glaukos (GKOS) has finally met up with its 10-day moving average. Volume dried up to -57% below average, so I would consider this a potential add-point for any position taken lower in the pattern. Earnings are expected on March 1st.

Goldman Sachs (GS) [B] holding very tight at the 250 price level where it remains buyable on the basis of its base breakout which occurred on a pair of five-day pocket pivots on Tuesday and Wednesday of this past week. The 10-day line at 244.77 could serve as a tight selling guide.

Mobileye (MBLY) is expected to report earnings on Wednesday, February 22nd. Nothing to do ahead of earnings.

Nutanix (NTNX) [B] pulled right into its 10-day moving average on Friday as volume dried up to -38% below average, low enough to qualify as voodoo action. This is buyable here in opportunistic fashion on the basis of Wednesday’s pocket pivot, using the 10-day line as a tight selling guide. Earnings are expected on March 2nd.

Royal Caribbean Cruise Lines (RCL) [B] dipped below its 10-day moving average on Friday as selling volume picked up but remained below average. This looks similar to CCL in that it remains within its current flag formation, and the dip here could simply provide a more opportunistic long entry point. In this case the 20-day moving average at 93.58 would serve as a selling guide.

ServiceNow (NOW) [B] tested its 10-day line again on Friday and held as selling volume failed to materialize. This is buyable here using the 20-day line at 89.83 as a maximum selling guide. Otherwise the 10-day line would serve as a tighter selling guide, depending on one’s risk-preferences.

Veeva Systems (VEEV) [B] is holding steady within its base and along the confluence of its 10-day, 20-day, and 50-day moving averages. Nothing really notable here in terms of strong upside movement, but the base-building activity continues to look constructive and the stock is in a lower-risk entry position, but keep in mind that earnings are expected on February 28th.

While the indexes don’t show much desire to pull back, we have seen that there are instances where leading stocks will pull back on their own. In this manner they provide lower-risk entry or (for you swing-traders) re-entry points for interested buyers.

I see a lot of very decent chart patterns out there, and despite the alleged upside extension of the indexes, this has become something of a target-rich environment, and I include Ugly Duckling type set-ups within this universe. So it simply remains a matter of finding the most optimal set-ups using all of the weapons our current methodology provides us.

Look at many of the roundabout and bottom-fishing pocket pivots and U&R set-ups that have come our way (and which I’ve discussed in the report) since the start of the New Year and you will see objective proof that these methods provide investors with a very tangible edge. Buying breakouts is still viable, but often they do not lead to very much in the way of immediate upside thrust.

I do think this market will make you work for your money, as it does not seem to hand out anything on a silver platter. You have to recognize the set-ups when you see them and have the courage to pull the trigger, sometimes even in the midst of an intraday market pullback. But, at the risk of beating a dead horse, it’s simply a matter of ignoring the noise and operating on the basis of what the objective set-ups are showing you in real-time.

Meanwhile, the indexes may need to spend some time consolidating their heady gains so far in 2017, but that doesn’t necessarily mean a sharp pullback is coming. Sometimes gains are digested by the simple act of moving tight sideways, so we cannot make assumptions about what the market allegedly needs to do, because the bottom line is that it will do what it is going to do, nothing more and nothing less! Not much else needs to be said.

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

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.