The Gilmo Report

February 22, 2017

February 22, 2017

The Dow Jones Industrials Index continued its monotonous ascent with its ninth-straight up day in a row. Volume was slightly lighter as sellers have remained reluctant to come into this market while every pullback is bought into. Meanwhile, the S&P 500 Index, not shown, held fairly tight today as volume declined.

There remains a steady drumbeat of pundits who continue to focus on how overbought the market is now that we’ve gone 91 full days without a correction of 1% or more. But if we look at this latest move following a breakout to all-time highs in early February and compare it to the last upside leg following the presidential election, we might consider that this latest up leg may be just getting started.

 

GR022217-$INDU

 

The NASDAQ Composite Index continues working on its increasingly parabolic upside move since the election, and so far there has been no let-up. Like the rest of the big indexes, the NASDAQ is trying its best to go a full month without a single distribution day. The last one occurred back in late January, and since then pullbacks have amounted to little more than a one-day pause before the index moves higher. So far, so good.

 

GR022217-$COMPQ

 

The Gilmo China Five have remained some of the strongest names in this market. Both Weibo (WB) and Momo (MOMO) broke out to new highs yesterday, with WB gapping up yesterday on heavy volume ahead of its earnings report this afternoon after the close. As I write, the report has been released and WB beat earnings estimates by six cents. It is trading down slightly in the after-hours but I would watch this tomorrow for any kind of actionable gap-up move, should that occur.

 

GR022217-WB

 

Netease (NTES) pushed above the $300 Century Mark this morning as it moved out of the short two-day flag it’s formed since its buyable gap-up move of last Thursday. By the close, the stock printed 304.07, a little over 1% beyond the $300 price level.

The stock has been holding tight since its buyable gap-up move over the prior two trading days, and today’s move through the Century Mark came on heavy volume. This may have legs from here, and I would look to use the $300 price level as a trailing stop for the stock. Also, the stock is buyable here on the basis of Jesse Livermore’s Century Mark Rule using the 300 level as your tight selling guide.

 

GR022217-NTES

 

Alibaba (BABA) also came “online” this morning as it broke above its recent range highs after finding support along the 20-day moving average on Monday morning. Another illustration of why buying weakness is preferred, particularly at points where risk can be kept to a minimum such as along the 20-dema. BABA hit a low of 100.30 on Monday morning as it dipped just below the 20-day line, but it never dipped below the 99.94 intraday low of the late January buyable gap-up (BGU) move. That led to a strong pocket pivot move today off of the 10-day moving average.

Today’s action also constituted a pocket pivot trendline breakout from a cup-with-handle formation. For those of you who like to buy base breakouts, then this is actionable as a pocket pivot using the 10-day line at 102.32 as a tight selling guide. BABA ran into some overhead resistance at the highs today, so I would consider any small back-and-fill type of action to be normal and likely buyable on the basis of today’s pocket pivot.

 

GR022217-BABA

 

BABA’s smaller cousin, JD.com (JD), not shown, continues to hold above the $30 price level and out of buying range. It has been on a slow but steady uptrend since early January where it flashed a number of pocket pivots along the confluence of its 10-day, 20-day, and 50-day moving averages. Earnings are expected at the end of February.

Often the trick to making money in this market is being in the right stock for the right move at the right time. Usually this means getting in at the lowest-risk entry position and then holding on for a move as long as the stock doesn’t bust. BABA is a good example of this, as are WB and MOMO.

Facebook (FB) was the right stock to be in this morning as it launched off the 10-day moving average in a clear pocket pivot move. As I discussed over the weekend, the stock was in the midst of a three-week handle with tight closes.

The tight action along the 10-day line prior to today’s pocket pivot was guide constructive, although I was also on the lookout for any pullback to the 20-dema as a more opportunistic entry point. With the stock holding the 10-day line one could have taken a position there using the 10-day line at 132.35 as a tight stop. As I wrote over the weekend, if you wanted to get long this stock, there wasn’t much difference between buying along the 10-day line or waiting for a pullback to the 20-day line given that they are less than 2% apart.

 

GR022217-FB

 

Netflix (NFLX) has been quiet, and perhaps in the process of putting would-be owners of the stock to sleep. But as I wrote over the weekend, the stock is in a lower-risk entry whenever it pulls into or near its 20-day moving average and volume remains light. As long as it holds the line it is fine. As I wrote, “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.”

And in this market sometimes you have to set aside your desire for pretty chart action. Just go with the fact that something has pulled back to and is holding at a key area of support and take your shot with the idea of using the same area of support as your selling guide, end of story.

Some of you might have recognized NFLX’s action over the past couple of weeks as having a “LUie” pattern quality to it. Basically, you have the strong pocket pivot at the 10-day line a couple of weeks ago followed by a flop right back below the 10-day line into the 20-dema. That sort of action is what distinguishes a LUie formation in this market since it is a fake-out type of formation.

NFLX is still in a buyable position here given that it is less than 2% away from the 20-day moving average at 141.02. While it hasn’t had a powerful move since its mid-January buyable gap-up (BGU), it does continue to consolidate which may mean another leg to the upside is coming soon.

 

GR022217-NFLX

 

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

Apple (AAPL) continues trekking higher, with the 10-day moving average at 134.53 as your reference point for buyable pullbacks.

Amazon.com (AMZN) was buyable right at its new closing high per my comments on the stock over the weekend, “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.” Yesterday the stock pushed into clear all-time high price territory on a pocket pivot volume signature, so in my view this is still within buying range of the breakout using the 10-day line at 838.54 as a tight selling guide.

Priceline Group (PCLN) is sitting right at its 10-day moving average and within buying range of its base breakout of two Fridays ago. PCLN pulled into the 10-day line this morning and by the bell posted a new all-time closing high.

Tesla (TSLA) is trading up slightly after reporting earnings after the close today. As I write, the stock is printing around 278-279, which is only about 2% above today’s close. As with WB, I would watch to see what sort of actionable move might occur tomorrow at the open.

Optical stocks have lost some of their recent luster, but this is consistent with the phenomenon in this market whereby groups of stocks go nuts for a few days and then simmer down. A survey of the action in those opticals discussed in recent reports:

Acacia Communications (ACIA) is expected to report earnings tomorrow after the close, so profit-takers have sent the stock back down toward its 50-day moving average on heavy selling volume, which does not look very constructive. For now, I would not do anything with the stock until earnings are out.

Applied Optoelectronics (AAOI) is still the de facto leader in the opticals space by virtue of its continued strong performance. AAOI has pitched to new highs over the past couple of days, but from here only pullbacks to the 10-day line at 34.98 would be your next references for lower-risk entries.

Arista Networks (ANET) is well extended after Friday’s buyable gap-up move. This one can just be watched for a pullback to the 10-day line, which is still way down at 105.87.

Ciena (CIEN) isn’t going anywhere as it continues to sit right on top of its prior base breakout. This remains in a buyable position using the 10-day line, now at 25.29, as your selling guide. 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. CIEN is expected to report earnings on March 8th.

Finisar (FNSR) is trying to stabilize around its 10-day moving average after some extreme volatility last Friday. Based on today’s action, it looks like it wants to test the 20-day line at 32.81, so I’d step aside here and let the stock settle down before looking to take shares.

Lumentum Holdings (LITE) finally met up with its 10-day moving average this morning, which technically serves as your first reference point for a buyable pullback. The only issue here is that the stock is up about 30% over the past 11 trading days and so may be in need of a somewhat longer period of consolidation as it digests those gains.

Juniper Networks (JNPR) has continued to move higher and it is now right up against its prior January highs. This may set up in a cup-with-handle formation if it can hold tight sideways for at least a few days. Another fascinating example of the Ugly Duckling at work in this market.

Ocular (OCLR) demonstrates why you don’t want to chase strength in this market and instead want to wait for opportunistic pullbacks. As I wrote over the weekend, “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.” That’s precisely what we got today as OCLR pulled right into its 10-day moving average at 10.34, reaching an intraday low of 10.36.

The only problem is that it kept going lower, failing entirely on its recent re-breakout attempt on huge selling volume. This would qualify as schizoid action, but it does show why taking profits in extended upside moves in stocks is a sound approach in this market. The bottom line is that this breakout has failed, and where it sets up again remains an open question. In the meantime, moving to more fertile fields is certainly called for here.

 

GR022217-OCLR

 

Fortinet (FTNT) continues to work on a short flag formation following its early February buyable gap-up (BGU) move. On Friday of last week, the stock undercut the prior 37.21 low in its pattern and rallied on an undercut & rally maneuver. It has held above that price level over the past two trading days as volume dried up sharply to -61% below average. I want to see the stock hold the 37.21 price level, at least on a closing basis. Otherwise the 20-day line at 36.12 could come into play as your next reference point for support.

 

GR022217-FTNT

 

Barracuda Networks (CUDA) is pulling into its 20-day moving average with volume drying up to -64% below average. This remains in a buyable positon, using the 50-day line at 23.16 as a maximum selling guide. Generally, the closer to the 50-day line one can buy the stock the better.

 

GR022217-CUDA

 

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

Checkpoint Software (CHKP) dipped just below its 10-day line today but is holding above the $100 Century Mark. This remains buyable here using the 20-day line at 99 as your maximum selling guide.

Palo Alto Networks (PANW) is expected to report earnings next week. For that reason, I don’t have any reason to mess with the stock ahead of the report.

Symantec (SYMC) looks like it is setting up for a test of its 20-day moving average at 28.10. In the process it could also undercut the 27.97 low it posted last Thursday, which could set up an undercut & rally move. I would lean toward being more opportunistic here, waiting to see if just such a U&R move transpires.

I’ve said it before and I’ll say it again. If I’m going to play the steels, then my favored name in the group remains U.S. Steel (X). Allegheny Technologies (ATI) is coming apart while Steel Dynamics (STLD) is a bit slower than X given that it is still stuck in a base while X has broken out. However, STLD, not shown here on a chart, is sitting right at its 10-day line so could be considered buyable using the 10-day line at 37.01 as a tight selling guide.

Meanwhile, X is pulling back slightly after moving slightly beyond buying range of its recent high-volume base breakout. I would favor a move down into the 10-day line at 38.89 as a lower-risk entry point that would also bring it back within buying range of the prior breakout through the 37.50 price area. However, members know that X has already offered us a number of sound entry points within the base and much lower than where it is trading now.

 

GR022217-X

 

Square (SQ) has made the transformation from Ugly Duckling last week into a beautiful swan this week, particularly after reporting strong earnings today after the close. As I write, the stock is trading around 15.90, and if it can hold this move into tomorrow’s open it will post a potentially buyable gap-up move. Once the stock opens up tomorrow, I’ll be watching for it to post an intraday low, setting the BGU into motion as an actionable buy set-up. This move will take SQ right up to its prior all-time high at 15.91, and a move that clears this high could set up a nice upside leg from here.

 

GR022217-SQ

 

Twilio (TWLO) finally got down to its 20-day moving average today, something I was looking for per my discussion of the stock in the weekend report. Volume declined to -21% below average, but the stock held tight at the line in constructive fashion. This puts the stock in a lower-risk entry position right here using the 20-day line at 31.64 as your selling guide. I would like to see the stock pick up some buying volume as it regains the 10-day line in short order as a sign of strength and that insider selling as a result of the recent IPO lock-up expiration has subsided.

 

GR022217-TWLO

 

Activision (ATVI) still looks fine as it continues to work on a short flag formation following its prior post-earnings buyable gap-up (BGU) move. The stock has dipped below the 44.93 intraday low of the BGU day a couple of times, but each time has closed above that low. The same thing happened today as ATVI dipped to an intraday low of 44.68 before rallying to close near the peak of its intraday range. This remains actionable, in my view, with the idea of using the 10-day moving average at 44.36 as a tight selling guide, or the 44.93 low as an even tighter selling guide.

 

GR022217-ATVI

 

Mobileye (MBLY) came out with earnings this morning before the opening and gapped up to 47.75 at the bell. It traded around all day long and eventually closed at 47.42. In essence the move stalled on heavy volume, but the stock still managed to post a higher high on very strong buying volume.

The only problem here is that the stock is not in a lower-risk buy position here. If we got it, I would like to see the 10-day line, currently at 44.89, rise up to meet the stock and provide a reference point for a buyable pullback. That is what I would be looking for here, so it is a matter of seeing just how and whether the stock is able to set up again in a lower-risk buy position. So far, however, the stock has been a winner in 2017 since first posting a buyable gap-up way down at the 200-day moving average per my comments on the stock back at that time.

 

GR022217-MBLY

 

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] undercut the 54.75 intraday low of its current flag formation and rallied today to close at 55.50. This puts the stock in a buyable position as an undercut & rally move using the 54.75 low as your selling guide.

Caterpillar (CAT) is holding in a tight six-day flag formation after posting a “re-breakout” two Mondays ago. The stock remains within buying range of this base breakout using the 20-day line at 96.52 as a selling guide.

Charles Schwab (SCHW) is in a buyable position here using the 10-day line at 41.01 as a selling guide. The stock looks to be taking a few days to consolidate the prior gains off of the early February lows in anticipation of a breakout. The key here, as with any financial name, is the idea that the Fed remains on track to raise rates further in 2017, and today’s release of the most recent Fed meeting minutes didn’t do much to change that assessment.

Clovis Oncology (CLVS) missed earnings estimates by 16 cents after the close today, but as I write, isn’t moving much. We’ll see what happens with the stock tomorrow at the open and whether any actionable move occurs.

Eagle Materials (EXP) was buyable at its 20-day moving average per my comments on the stock over the weekend. It has now rallied back up near the highs of its current one-month price range. For now, it appears that pullbacks to the 20-day line at 105.51 remain buyable.

Incyte Pharmaceuticals (INCY) [B] continues to hold tight along its 10-day and 20-day moving averages as volume dried up to -36% below average today. This remains in a buyable position using the 20-day line at 120.07 as a tight selling guide.

Glaukos (GKOS) continues to track along its 10-day moving average but remains in an extended position. Earnings are expected next week on March 1st.

Goldman Sachs (GS) [B] is still within range of its recent base breakout through the 247.77 price level. Any pullbacks toward that level would provide a lower-risk entry opportunity, but the stock is still buyable here on the basis of the base breakout.

Nutanix (NTNX) isn’t getting any big-volume support on this current pullback to the 20-day moving average. With earnings expected next week on March 2nd, looking for a strong upside move ahead of the report may be asking for too much. However, volume dried up to -50% below average today as the stock closed just below its 20-day moving average. If it can find its footing and move back above the 20-day line, it could be good for a swing trade ahead of earnings.

Royal Caribbean Cruise Lines (RCL) [B] posted a pocket pivot at its 10-day moving average today, putting it in a buyable position here using the 10-day line at 95.85 or today’s intraday low at 95 as a reasonably tight selling guide given today’s 95.95 close.

ServiceNow (NOW) [B] is holding tight at its 10-day moving average, with volume drying up to -62% below average today. On the basis of this voodoo action, either the 10-day line at 92.42 as a very tight selling guide or the 20-day line as a looser guide can be used. I believe the stock is buyable here using the 20-day line at 90.42 as a wider selling guide.

Tableau Software (DATA) is still working on what is now the third week of a short flag formation it has formed since its buyable gap-up move after earnings on February 3rd. The issue here is that DATA is trading below the 54.69 intraday low of that BGU day, closing today at 54.03. For that reason, the BGU may be considered to be off the table, but if it continues to set up in a tight flag here with volume drying up (it hit -47% below average today), this may turn out to be buyable on any kind of undercut & rally move that develops along the lows of the flag. Currently those lows sit at around 43.30.

Veeva Systems (VEEV) is expected to report earnings next week, so despite the fact that it continues to act well within its current base I don’t see any reason to play earnings roulette going into earnings.

This morning I blogged about a couple of short-sale targets I was looking at in the form of Nvidia (NVDA) and GrubHub (GRUB). Below we can see that NVDA actually held the 10-day line as volume declined to -45% below average. That would be constructive action.

However, after the close NVDA got hit with an analyst downgrade and is currently trading in the after-hours at 107-108. That could set up a shortable gap-down move tomorrow at the open, which is something I would watch for. In that case, the 20-day line at 110.37 would serve as a guide for an upside stop.

 

2017-02-22_NVDA

 

GrubHub (GRUB) came within 1% of both its 50-day moving average on the daily chart and the 10-week moving average on its weekly chart today before reversing to close down on light volume. This outside reversal to the downside looks like it may be setting the stock up for a test of the 200-day line at 36.09.

For now, however, the place to get short the stock was above the 38 price level this morning when I blogged about the stock as a possible short-sale target. I would watch for any rallies back up toward the 38 price level and the 50-day moving average at 38.59 as potentially lower-risk short-sale entry points.

 

GR022217-GRUB

 

Admittedly, I tend to view the short side of this market as more of a scalping affair in the face of a continued market uptrend. If we moved into a deeper market correction, then the short side could develop further. However, that also depends on the action of individual stocks and the short-sale set-ups that develop in specific names.

For now, the fact that very little shows up on my screens in terms of viable short-sale set-ups while at the same time I’m seeing a fair number of constructive long set-ups coming through is testimony to the soundness of this current market rally. For that reason, my focus remains on the long side, although I am not averse to taking a short position IF the set-up looks juicy enough.

Meanwhile, the long set-ups continue to work in most cases, but one should avoid chasing strength and look to buy on constructive weakness or when a stock is very quiet. In addition, as names like OCLR demonstrate, taking profits into extended upside moves isn’t necessarily a bad idea, and so it remains a favored tactic of mine. Usually, I find that if a stock is sold into a strong upside move, the stock will set up again, sometimes even after a constructive pullback.

Until further evidence to the contrary presents itself, the market rally remains in force. Stay the course. That is all.

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 CUDA, FTNT, NTES, 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. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.