The Gilmo Report

February 25, 2018

February 24, 2018

A week full of soft closes, where the market started up in the morning and stalled to close down or well off its highs, ended on a more bullish note on Friday as all the major indexes achieved higher closing highs. The NASDAQ Composite Index led the charge with a 1.77% gain on slightly lighter volume.

 

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The S&P 500 Index also posted a higher closing high as it regained its 50-dma on lighter volume. Despite the higher closing high, it remains in a five-day range as it consolidates the prior move up from the absolute lows of two weeks ago. As I tweeted on Friday, the indexes weren’t looking all that negative despite Wednesday’s somewhat bizarre and negative reversal that looked quite bearish at the time, and were in fact consolidating prior gains.

However, the lack of volume might be a sign of a continuing oversold melt-up rather than robust accumulation of stocks in anticipation of a longer-term uptrend, but for now we’ll just have to let the stocks tell their story.

 

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If the indexes had followed through to the downside after Wednesday’s very bearish-looking close, my “Flying V” short-sale strategy might have worked out well. As it turned out, shorting big-stock NASDAQ names like Netflix (NFLX) and Amazon.com (AMZN) on Thursday at the right-side peaks of what were big V-shaped, double-top types of patterns only worked out as one day short-sale scalps. On Friday, everything held up just fine, with no further downside.

Netflix (NFLX) started to come down off its highs on Thursday, but selling volume never really picked up, and the stock held well above its 10-dma. On Friday, the stock posted a new, all-time closing high on light volume, but remains within a relatively tight four-day range. The longer the stock can continue moving sideways and holding above its 10-dma, the less “double-toppy” the v-shaped formation becomes, and the greater the potential for a possible breakout to new highs from here.

 

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It was the same story with Amazon.com (AMZN), which started to peel off from the $1,500 price level to the downside on Thursday before bottoming out at 1475.76. From a short-sale perspective, that was a decent scalp from the highs of the day at 1502.54. Twenty-five “Livermore” points on the downside aren’t bad, if you can get ‘em. I shorted both AMZN and NFLX near the open on Thursday, and the trades worked out, but only for quick short-sale scalps.

Now, AMZN looks to be wedging up into the $1,500 price level after an analyst’s buy recommendation and lofty $2,000 price target. Despite the big price target, buying volume didn’t come roaring into the stock, as is evident on the daily chart below. The stock closed right at 1500, and in my view, does remain vulnerable to a pullback from here.

While this might be worked as a short here using the 1500 price level as your guide for an upside stop, the trade will likely only work if we see the market roll over. That said, AMZN is nowhere near a lower-risk entry point on the long side.

 

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One thing you’ll notice on the NFLX and AMZN charts is that Friday’s upside movement came on light volume. Nvidia (NVDA) also traded light volume as it bounces for two days following Wednesday’s above-average volume break off the peak. If it broke below the 10-dma and 20-dema, it would likely become a double-top short, but if it can continue to track sideways above the 10-dma as it corrects the v-shaped formation, then the pattern might become more bullish.

Right here, I don’t see anything to buy into, but a low-volume test of the 10-dma or 20-dema might be worth looking at.

 

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Apple (AAPL) failed to trigger a short-sale as it held the 50-dma on Thursday and then popped up off the line on Friday on increased but below-average volume. For now, AAPL is just a “market stock” that appears to move with the NASDAQ Composite Index, and so in a sense serves as a proxy for the index. Barring a break below the 50-dma, the pattern for now looks more positive than negative.

 

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The bullish case won out in Tesla (TSLA) as the low-volume pullback into the 50-dma turned into a sharp upside move on Thursday that carried right up through the 200-dma. Recall that I mentioned this in my discussion of the stock on Wednesday as I took a two-sided view of the stock. Thursday’s action qualified as a single five-day pocket pivot, and was helped along by news that the company has now started to deliver on Model 3 orders. It’s about time.

In any case, the move would have quickly stopped out any would-be short-sellers, and is now carrying up to resistance around the 360 price area. We’ll see what it does once it gets there.

 

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Twitter (TWTR) continues to consolidate its prior sharp buyable gap-up move following earnings. So far, I don’t see anything wrong with the pattern, despite Friday’s close just below the 10-dma. After a strong move back up to the highs of the range, the stock is simply backing off a bit as profit-takers move in. Volume over the past two days has remained at about average or lower, so sellers are not swarming the stock. The 20-dema has now risen to 30.07, above the 29.71 BGU low. If, and I say if, we were to get a pullback to the 20-dema, that would constitute a more opportunistic entry from here.

 

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Snap (SNAP) has continued to move lower following an analyst’s downgrade to “sell” on Wednesday, taking it down to the 20-dema as I discussed was likely in my last report. The move to the 20-dema came on comments from reality TV star Kylie Jenner’s comment that she no longer uses the Snapchat app. The stock has held at the 20-dema, which in my view puts it in a last stand opportunistic entry position using the 20-dema as a tight selling guide.

The v-shaped rally back to the intraday highs of the buyable gap-up range of over two weeks ago was certainly not something to buy into. SNAP was more buyable on the prior low-volume pullback toward the lows of the BGU price range the prior week, and that led to a 10% move back up to the highs.

As it runs into the 20-dema, the stock has also undercut the low of eight days ago in the pattern, and it admittedly looks about as ugly as it can get right here. Certainly, nobody in their right mind would buy it here, but this is generally when the Ugly Duckling makes an appearance. And with the stock sitting right at the 20-dema, long-side risk can be kept to a bare minimum.

 

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Facebook (FB) is exhibiting schizoid personality disorders as it first runs into resistance at the 50-dma and sells off and then retakes the 50-dma on Friday. Volume was light, but given that this is a moving-average undercut & rally move it can be played as a long set-up using the 50-dma as a tight selling guide. The question, of course, is whether this will lead to more substantial upside that takes the stock back into prior breakout territory and the prior highs.

Note that the prior undercut & rally set-up deep in the pattern that occurred when the market bottomed two weeks ago is still intact, and Friday’s move is the first time the stock has traded above the 50-dma since. Play it as it lies.

 

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Weight Watchers (WTW) remains one of the best-acting leaders in this market and a stock I first discussed in my last report of 2017, just before it broke out and launched on a huge price run. The stock is now sitting right at its 10-dma as volume dries up, setting up a “voodoo” entry right here at the line. However, WTW is expected to report earnings Tuesday after the close, so there’s nothing to do here but wait and see what transpires after earnings are released on Tuesday.

 

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Blackberry (BB) is a new name for the report as its posts a roundabout pocket pivot coming up through its 50-dma. Friday’s volume was the largest buying volume in the pattern since the stock peaked out in mid-January. The stock had a strong move in early January but has since backed down and built a new base. In my view, this roundabout pocket pivot, or “RAPP,” is buyable using the 50-dma as 12.37 as a tight selling guide. BB’s focus has moved away from smartphones and more toward technology centered around the “Internet of Things” or “IoT.”

 

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Square (SQ) is expected to report earnings on Tuesday after the close. Along with WTW it should provide some afternoon excitement on that day. After forming a v-shaped recovery off the lows of two weeks ago, it has moved tight sideways in a constructive consolidation ahead of this week’s expected earnings report. This will be one to watch on Tuesday after the close, as I would not be looking to buy the stock at this stage, just ahead of the expected earnings report.

 

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Alibaba (BABA) just barely cleared resistance along the highs of its prior base and back into breakout territory. Since the market didn’t break down following Wednesday’s bearish reversal, the stock held up well on Thursday and then made a higher high on Friday. Volume was light, but high enough to qualify as a five-day pocket pivot, its second in the past three trading days.

The last optimal entry point occurred on the pullback to the 50-dma earlier in the week, but if one wanted to play this as a five-day pocket pivot re-breakout, then the 20-dema would serve as a tight selling guide.

 

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Baozun (BZUN) is quietly setting up in a base ahead of its expected earnings report this Wednesday. The action looks constructive, and I would keep a close eye on this one when it reports earnings as it could present some sort of buyable gap-up move at that time. Other Chinese names have been rallying as of late, most notably Weibo (WB), which I discussed after it posted a sharp pocket pivot move after earnings nearly two weeks ago but which is now extended.

On Friday, Momo (MOMO) posted a bottom-fishing buyable gap-up (BFBGU) after announcing that it was buying another company, Tantan, for $600.9. It is, however, expected to report earnings on March 13th.

 

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With Weibo (WB) acting well but a little extended currently, a related name that appears more actionable is Sina Corp. (SINA), which owns a 46% stake in WB. Here we see the stock breaking out on volume that was 69% above average in a typical base breakout buy position.

 

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We’ve seen a number of buyable gap-up moves after earnings over the past week or so. I’ve already discussed SolarEdge Technologies (SEDG) and MuleSoft (MULE), both of which remain extended from the lows of their BGU price ranges. On Friday, we saw MOMO, Financial Engines (FNGN), GoDaddy (GDDY), and Planet Fitness (PLNT), post buyable gap-ups or bottom-fishing buyable gap-ups. Among these, PLNT remains within buyable range, and might be viewed as a cousin stock to WTW.

Note that the stock also broke out of a volatile double-bottom formation of roughly eight weeks’ duration. I’m not going to get into whether the base is proper or not, since this can just be played as a BGU using the 35.16 intraday low of Friday’s price range as a tight selling guide. In addition, the top of the base sits at 34.99, which should also serve as an area of support for the stock on any pullbacks from here.

 

GR022518-PLNT

 

Earlier in the week I blogged to members to keep an eye on Caterpillar (CAT) as it may be building the lows of a potential new base. In this case, I was looking for a decisive move above the 50-dma to trigger a moving-average undercut & rally (MAU&R) long set-up at that point, using the 50-dma as a tight selling guide. Volume was light on Friday’s retaking of the 50-dma, but comes on the heels of a low-volume test of the 10-dma on Wednesday during the market’s bearish reversal.

In my view, this can be tested on the long side, using the 50-dma as a tight selling guide, or the 10-dma down below as a wider selling guide.

 

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Deere & Company (DE) is also revving up again after correcting and building a new base. The stock posted a big-volume pocket pivot last Friday after reporting earnings, and it has since settled back into its 50-dma where it has held tight as volume has receded in constructive fashion. This looks buyable here using the 50-dma as your selling guide. Note that fertilizer stocks have been rallying as of late, which puts the agricultural space in focus here, and with DE setting up constructively here it looks like a less v-shaped way to play this.

 

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Steel names have pulled back and consolidated following the prior week’s big upside moves on news regarding the implementation of steel tariffs. U.S. Steel (X) strikes me as the strongest of the group as it has held up the best in a tight four-day pullback and consolidation. The only problem here is that after the close on Friday an analyst firm put out a $52 price target on the stock, sending it up about two bucks in after-hours trade ahead of the weekend.

 

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Other steels that look to be setting up, however, include Schnitzer Steel (SCHN), which has pulled into its 50-dma and is showing very tight “voodoo” action along the line. In my view, this action is quite buyable, using the 50-dma as a tight selling guide. Hopefully, it doesn’t jack to the upside too much in sympathy to X’s price target recommendation.

 

GR022518-SCHN

 

Another steel name acting well here as it consolidates the prior week’s strong action is Arcelor Mittal (MT), which looks similar to SCHN. It, too, has pulled into its 50-dma as volume dries up in the extreme, setting up a typical “voodoo” entry point at the line. The 50-dma then becomes your tight selling guide. Again, let me digress a bit by reminding members that when I use the term “selling guide” I don’t necessarily mean selling immediately if it drops below the line.

Sometimes, allowing for 1-3% of downside porosity below the line fits in with the concept of maintaining tight risk-management, which is why I use the term “guide” instead of “stop.” However, members should use their own judgement in determining where their stops are, based on how much they are willing to lose on any single trade.

 

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For newer members: Please note that when I use the term “20-day moving average,” “20-day line,” or “20-dema” I am referring to the 20-day exponential moving average. I use four primary moving averages on my daily charts: a 10-day simple (the magenta line), 20-day exponential (the green line), 50-day simple (the blue line) and 200-day simple moving average (the red line). On rare occasions, I will also employ a 65-day exponential moving average (thin black line). In all cases I will mostly use the shorthand version of “10-dma,” “50-dma,” etc.

The numerous “Flying V” quasi-double-top formations I was seeing earlier in the week have in fact spent several days consolidating those moves by moving tight sideways. This is not uncommon for this market, and while I might have had one view of things on Wednesday, I never maintain a rigid stance toward the market. I allow my view and my actions to flow with the real-time evidence as I see it. The fact is that we’re seeing more constructive action among individual stocks, including some new breakouts.

Rather than try and make some sort of blanket call that the correction isn’t over, I’m just going to go with the individual stock action and set-ups as I see them in real-time. If a long set-up looks right to me, I will buy it, no questions asked. In addition, from a technical standpoint, the fourth-day follow-through we saw in the NASDAQ Composite two Wednesdays ago remains in force. That, combined with the appearance of actionable long set-ups is all I need to figure out what I should be doing, end of story. Take it from there.

Gil Morales

CEO and Principal, Gil Morales & Company, LLC
Managing Director and Principal, MoKa Investors, LLC
Managing Director and Principal, Virtue of Selfish Investing, LLC

At the time of this writing, of the stocks mentioned in this report, Gil Morales, MoKa Investors, LLC, Virtue of Selfish Investing, LLC, and/or Gil Morales & Company, LLC held positions in MT and TWTR, 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.