The Gilmo Report

February 8, 2017

February 8, 2017

While the major indexes pushed to all-time highs over the prior two days, odd divergences were beginning to crop up yesterday. The first was breadth, which, despite all three of the major market indexes finishing positive on the day, came in at roughly 1.5 to 1 negative on both the NYSE and NADAQ Exchanges.

The second divergence was the fact that both of the broader NYSE Composite and Russell 2000 Indexes, were down on the day. This sort of action will tend to bring the bears out of hibernation, but I’ve seen this type of divergence occur several times in this market on the way up. Usually, it leads to at least a market pullback, but since the election all pullbacks have been buyable pullbacks, at least in the right stocks!

So we can see that last week’s pullback in the NASDAQ Composite Index was yet another one of these buying opportunities as it inexorably trudges to yet another all-time closing high on higher trading volume.

 

GR020817-$COMPQ

 

The S&P 500 Index showed supporting action off of the intraday lows today on slightly higher trading volume. It has now formed a tiny two-week cup-with-handle formation and for all appearances looks like it is ready to break out. It was also constructive to see the NYSE Composite and the Russell 2000 Index find support today at the lows of their current price ranges.

 

GR020817-$SPX

 

I blogged during the market day that the thing to do in the midst of a market pullback was to watch those stocks acting strongest. In this market, sell-offs and pullbacks are always useful in helping to separate the wheat from the chaff. In the process, you will get buyable pullbacks or even undercut & rally situations if the selling remains orderly and the indexes rebound.

Stocks that just hold tight, on the other hand, are even better. And in this market, if I’m looking to go long anything, I want to pick on what’s working, because nothing works best than what’s working! J And that’s what I’m going to focus on in this report.

Among the big-stock NASDAQ names Netflix (NFLX) and Tesla (TSLA) remain the strongest leaders as others, including Amazon.com (AMZN), have fallen by the wayside. Both NFLX and TSLA have held tight over the past few days, with NFLX getting squeaky tight as I discussed over the weekend.

This extreme, voodoo volume tightness led to a nice pocket pivot yesterday off of the 10-day moving average. This was buyable, in my view, although one could have also used it to add to an existing position taken at the 10-day line on the basis of the extreme voodoo action.

Even with this move to new highs over the past couple of days, NFLX is still only 4.5% away from the 138.25 intraday low of its mid-January, post-earnings buyable gap-up move. In my view the 10-day line at 141.33 becomes a trailing type of selling guide as the stock pushes into all-time highs.

 

GR020817-NFLX

 

Tesla (TSLA), held tight yesterday after pushing to a higher high on an intraday basis but fell just short by the close. Today it made good on that move to another high as sellers were nowhere to be seen. It is now breaking out of a very short bull flag on below-average volume, which is quite amazing and not much of a let-up when you consider the perfectly steep trend it has been in since mid-December.

The company isn’t expected to announce earnings until February 22nd, so I don’t see any reason why it couldn’t just keep going higher. In the meantime, pullbacks to the 10-day line at 253.75, assuming you’re lucky enough to see any before earnings, would likely be your best references for lower-risk entries.

 

GR020817-TSLA

 

Facebook (FB) is also hanging in there after looking like it wanted to give up on its prior post-earnings breakout. On Monday, the stock dipped below the 10-day line but closed back above the line in a successful test. It again tested the line yesterday and held as volume dried up to -29% below average. Volume was of course not low enough for a voodoo volume signature but certainly reflective of a continued dry-up in selling over the prior three days since the big-volume reversal off the peak after earnings.

 

GR020817-FB

 

Apple (AAPL) has continued to move higher as it drives toward all-time highs following the last week’s buyable gap-up move after earnings. Volume came in fairly light today, but the stock continues to trudge higher. From here I’d watch the 10-day line as it starts to catch up to the stock. It is currently at 126.71, but I would expect will be well above 128 and the prior 127.01 BGU (buyable gap-up) intraday low in the next few days. Once it reaches those levels, it becomes your reference for any buyable pullbacks.

 

GR020817-AAPL

 

Did I say that Amazon.com (AMZN) had fallen by the wayside? Well, maybe it has and maybe hasn’t. On Monday after the close I blogged that the stock had come “skidding” to a halt on the downside as selling volume dried up. At the same time, it hit a low of 803 on the nose, just undercutting the prior 803.44 low of mid-January.

That set up a logical undercut & rally move, and today AMZN regained the 20-day exponential moving average on light volume. The rally off of Monday’s low has a wedgy sort of look to it with volume declining, so I’d like to see the stock settle at the 20-day line as volume dries up.

That would put it in a buyable position along the line, although anyone who was alert to Monday’s undercut & rally set-up could have taken a shot on the long side at that point. Despite the post-earnings gap-down move last Friday on heavy volume, AMZN is less than 4% off of its recent all-time highs. So this stock is a long way from busted as it still holds above its early January bottom-fishing pocket pivot (BFPP)

 

GR020817-AMZN

 

And if you’re into big-stock NASDAQ names that are working, you might have also noticed that Nvidia (NVDA) moved to an all-time high yesterday, where it stalled before posting a closing all-time high. Today the stock pulled back but found support at its intraday lows as sellers failed to show up.

NVDA is expected to announce earnings tomorrow after the close, and it is going to be very interesting to see what it does after the report. For anyone who bought the undercut & rally move in mid-January as I discussed at that time, that has yielded a nice swing-trading move back up to the highs, as I suggested it very well might.

Well, that prediction has come to pass, and it’s now a matter of seeing if and how this thing sets up again, if at all, after earnings. Anyone still owning NVDA from the U&R set-up perhaps has enough cushion to sit through earnings with ½ of their position, or all of it if they really want to spin the “earnings roulette” wheel.

 

GR020817-NVDA

 

Chinese names, specifically the Gilmo China Five have been particularly strong this week, and of course represent another area of the market that is working, and working well. The trick, of course, is to use constructive weakness, generally in the form of low-volume or voodoo pullbacks into support levels for your entries.

Here we can see that this strategy would have worked with both Momo (MOMO) and Weibo (WB) over the past week or so. And lo and behold, both stocks have posted pivots for the week. MOMO’s occurred today on strong, above-average volume as the stock blasted above its 50-day moving average. The move took the stock to its highest high since it bottomed at the 200-day moving average and posted a successful Wyckoffian Retest as I discussed in my report of January 4th.

Today’s pocket pivot also qualifies as a trendline breakout from a cup-with-handle base formation. Those of you who like to buy base breakouts can do so here, using the top of the handle at 24 as your tight selling guide, or the 20-day exponential moving average at 22.59 as a wider selling guide.

 

GR020817-MOMO

 

Weibo (WB) started the pocket pivot party off on Monday with a nice pocket pivot off the 10-day line. That led to a double-bottom base breakout yesterday on heavy buying volume, for all of you who are fans of standard base-breakout buying. However, my preference would have been to simply buy the stock much lower in the pattern on the basis of its bottoming formation. This occurred as a bottom-fishing pocket pivot combined with an undercut & rally as the stock was coming down on top of its prior long-term consolidation.

I discussed my thinking behind this low in detail in my January 4th report, and I would refer members to that report to review just what was going on with the stock at that point. With this current double-bottom breakout, one would prefer to use pullbacks to the top of the base at around 52, such as we saw today, or the 10-day moving average, not at 49.38 as lower-risk entries.

 

GR020817-WB

 

Among the other names that comprise the Gilmo “China Five,” my notes herewith:

Alibaba (BABA) posted a five-day pocket pivot off of its 10-day moving average after coming very close to its 99.94 buyable gap-up day’s intraday low. In fact, on Monday, BABA came within eight cents of that price point and held. Today’s move takes it back up to its post-BGU highs, and from here any pullback toward the 10-day line at 101.52 would offer a lower-risk entry opportunity.

JD.com (JD) got close to its 20-day exponential moving average last week and has since rallied to higher highs, closing at 28.98. Volume has been light for the past two weeks or so, but sellers haven’t shown up yet. From here pullbacks to the 10-day line at 28.40 would offer lower-risk entry opportunities. Earnings are expected on February 28th.

Netease (NTES) is also acting well as it posted a pocket pivot on Monday on strong volume, held tight yesterday and then moved to a higher high today on above-average volume. It is now within 2% of its prior 52-week high and the left side of what is now a nearly-completed cup base.

All of these Chinese stocks that make up the Gilmo “China Five” demonstrate how stocks form the lows of bases as a natural process. And during this process of building the lows of a base, one can use alternative “OWL” methodology buying techniques, such as BFPPs (bottom-fishing pocket pivots), RAPPs (roundabout pocket pivots), voodoo pullbacks, and even Wyckoffian Retests, as entry points along the lows of a potential new base. In my view, this gives one a huge edge over standard base-breakout buying methods. Failing to take advantage of them puts one at a significant disadvantage to those who do.

My video on swing trading is here.

Over the weekend I briefly mentioned Fortinet (FTNT) as a cyber-security name that “…one can also think about playing FTNT…as a bottom-fishing buyable gap-up (BFBGU), using the intraday low of Friday at 36.10 as a selling guide.” On Monday we got a nice pullback down to 36.80 that was buyable before it turned back to the upside and closed up on the day.

So far FTNT is holding up as it pulls back slightly off of its peak on slightly higher volume today. Notice that the stock is also pulling back to potential support at the left side of a cup formation of which it has now completed the right side.  and looks like it wants to go higher, so I simply look to buy the stock on pullbacks towards the 36.10 BGU low of four days ago on the chart.

 

GR020817-FTNT

 

Barracuda Networks (CUDA) had a nice shakeout this morning as it pitched down to its 10-day and 20-day moving averages right after the opening bell. However, it found ready support at this moving average confluence and ended well off the lows by the closing bell.

Over the weekend my view of CUDA was clear, based on the objective reality of the shakeout, undercut & rally move, and subsequent five-day pocket pivots at the 50-day line. As I put it, “The bottom line, however, is that it remains buyable on pullbacks into the 10-day moving average at 23.28, using the 50-day line at 22.91 as a selling guide.”

And so that was the spot to buy the stock this morning as CUDA dropped into the confluence of its 10-day and 20-day moving averages. It found solid support at the moving averages and rallied to close down only 16 cents. Pullbacks to the moving average confluence at around 23.50 would offer lower-risk entries from here. But given that the moving averages lie only about 2% below today’s closing price, the stock can also be considered to be within buying range. In this case, one would use the 10-day and 20-day lines as your selling guide.

 

GR020817-CUDA

 

Among the other cyber-security names discussed in recent reports, my notes herewith:

Checkpoint Software (CHKP) is holding just below the $100 price level as it pulls into its 10-day moving average. This would put the stock in a potentially lower-risk entry position using the 10-day line as a tight selling guide. Alternatively, one could watch the 20-day line, now at 96.20, as it starts to catch up to the current stock price, as a pullback to the line would offer an even more opportunistic entry point, should that occur.

CyberArk Software (CYBR) is expected to announce earnings tomorrow after the close. Currently it is hanging along its 10-day moving average, but I would wait until after earnings to see what transpires in terms of a buyable set-up.

Palo Alto Networks (PANW) continues to drift higher after last Friday’s pocket pivot gap-up move off the 10-day moving average. Pullbacks to the 10-day line at 147.75 would offer your best lower-risk entry opportunities. I’m interested to see if anything opportunistic takes place in reaction to CYBR’s earnings tomorrow after the close.

Symantec (SYMC) is extended after last Thursday’s big outside reversal and bounce to the upside off of the 20-day exponential moving average. Pullbacks to the 10-day line at 27.81 would offer references for lower-risk entry opportunities.

U.S. Steel (X) is looking like it wants to move higher following last Thursday’s big-volume pocket pivot coming back up through the 50-day moving average. What differentiates X from other steel stocks is that it is not a mini-mill like Steel Dynamics (STLD) or Nucor (NUE), for example, which use scrap steel to make their products. X makes steel directly from ore using the blast furnace process, so they could advertise that their steel is “fresher.”

In any case, X would have good exposure to any big pipeline project that uses steel pipes. That may be why it acts better than the rest. Here we see that it held above the 50-day moving average today with volume drying up to -30.8% below average. This puts it in a buyable position on the basis of the prior pocket pivot, using the 10-day line at 33.55 as a selling guide.

 

GR020817-X

 

Allegheny Technologies (ATI) is a little different in that it manufactures specialty steel alloys. This is a big turnaround story, and it may be in an opportunistic buy position right here at the 20-day exponential moving average. The stock is now about 5% away from the 19.10 intraday low of its late January buyable gap-up (BGU). This puts it in about as low a risk position as one could hope for as the 20-day line at 19.93 provides a ready selling guide.

 

GR020817-ATI Daily

 

Optical stocks have looked like confused money as many of the names in the group have gone nowhere, but I notice things percolating in several names within the group. Applied Optoelectronics (AAOI) remains the leader of the group as it slowly trends high along its 10-day and 20-day moving averages following its early January buyable gap-up move after earnings. This looks buyable here using the 20-day line (remember that whenever I refer to the 20-day line I am always referring to the 20-day exponential line) as a tight selling guide.

 

GR020817-AAOI

 

Finisar (FNSR) also looks less and less like a short, and more and more like a long. Over the past two days it has regained its 50-day moving average on back-to-back roundabout pocket pivots (RAPPs) that occurred yesterday and today. This looks buyable here using the 50-day line at 30.75 as a tight selling guide.

 

GR020817-FNSR

 

Earnings reports have a way of jolting stocks back to life. Lumentum Holdings (LITE), another optical stock that was going nowhere fast before earnings, found its way after earnings by gapping up and breaking out to new highs today. The move came on heavy volume, and cleared the 45.25 prior high in the base. This is obviously somewhat extended, but pullbacks into the 44 price level and the top of the base might be buyable. Otherwise, some of the other optical names, such as FNSR or AAOI, are sitting in better, lower-risk entry positions.

 

GR020817-LITE

 

Notes on other opticals mentioned in recent reports, some of which may fit the bill of being at lower-risk entry positions:

Ciena (CIEN) found support at its 50-day moving average today on a five-day pocket pivot. The stock remains in what is now a nine-week flat base. If you think this stock has a shot at going higher, then buying at the lows of the base here using the 50-day line at 23.82 as a tight selling guide is your ticket to a lower-risk entry possibility.

Oclaro (OCLR) remains stuck within what is now a 12-week base. The stock pulled down toward its 50-day line at 9.02 today and held, so those interested in the stock should probably look to buy into weakness rather than chasing strength, as unlucky buyers of OCLR’s late January breakout attempt found out. In this case the 50-day line appears to serve as downside support.

Juniper Networks (JNPR) looks like it is trying to set up to move higher. It remains just below its 20-day moving average but is holding tight as volume declines. So it’s possible this isn’t a short at all, and in my view if it continues to hold above the prior 27.11 low of mid-January it would be a valid undercut & rally type of set-up. In this case you would look for confirmation in the form of a move back up through the 20-day line in short order.

Notes on other long situations discussed in recent reports:

Clovis Oncology (CLVS) posted a pocket pivot at its 20-day moving average today where it found support on heavy buying volume. That pullback would have presented a very opportunistic entry point, but keep in mind that earnings are expected on February 23rd.

Incyte Pharmaceuticals (INCY) also posted a pocket pivot today as it found support at its 20-day moving average on strong buying volume. This looks very similar to CLVS’ move as both stocks remain two of the strongest bio-tech leaders in 2017. Earnings are expected next week, on February 14th.

Glaukos (GKOS) keeps moving higher, and is now quite extended to the upside.  Pullbacks to the 10-day line at 41.80 would offer lower-risk entry opportunities. Keep in mind that earnings are expected on March 1st.

Goldman Sachs (GS) looks buyable here as it pulls into its 10-day and 20-day moving averages following last Friday’s big-volume pocket pivot. This puts it in a lower-risk entry position here using the two moving averages as very tight selling guides.

GrubHub (GRUB) had a wild day after announcing earnings, dropping to a low of 37.50 before rallying as high as 41.51 and into positive territory on an intraday basis. By the close, however, GRUB ended the day at 39.86, but in the upper half of its daily trading range. Volume was huge at 763% above average! I’m not sure where this is going from here, but I’d watch to see whether it can hold the 50-day line at 38.52 from here. Otherwise, a strong move back above the 20-day line at 40.23 could bring this back into play as a long in short order.

Mobileye (MBLY) plopped back into its 20-day moving average today as selling volume picked up slightly but remained below average. Earnings are expected to be announced on February 22nd, so my guess is that this does nothing until earnings.

ServiceNow (NOW) is still holding up in what is now a nine-day flag formation following its late January buyable gap-up move after earnings. It looks like the stock found support today at the 10-day line, so I’d consider this to be buyable using the near-term lows around 88 price level or the 20-day line at 87.02 as a selling guide.

Square (SQ) again found support at its 50-day moving average on Monday, and has traded slightly higher over the past two days. As I wrote over the weekend, the pullbacks into the 50-day line offer lower-risk entries using the 50-day line, now at 14.16 as a reasonably tight selling guide. Earnings aren’t expected until the first week of March.

Veeva Systems is in a lower-risk buy position here as it holds along its 50-day moving average following last Thursday’s roundabout pocket pivot, as I discussed in the weekend report. Today VEEV pulled into the confluence of the 50-day, 10-day, and 20-day lines where it found support with volume drying up to -52.2% below average.

On the short side, it looks like Caterpillar (CAT) is set to rally after undercutting the 92.20 low in its base from mid-January. This was good for a short scalp, and I’ve played it as such, but it looks to me like the Ugly Duckling is setting up to jump into action here. I would look for at least a rally to the 50-day moving average, perhaps even more.

 

GR020817-CAT

 

A lot of the selling in the market has been in financials, and Charles Schwab (SCHW) has been one of them. Today it retested its low of last week and held as volume picked up as the stock remained in a tight trading range. This looks to me like it wants to rally back up toward the 50-day moving average, at which point it can be revisited as a short, assuming it doesn’t pull an Ugly Duckling move back up through the 50-day line.

 

GR020817-SCHW

 

Oils have been hit across the board. Parsley Energy (PE), not shown, gapped below its 200-day moving average on heavy volume today. This looks like a short-term cover point as we wait to see whether it finds resistance at the 200-day line at 31.81 on any reaction bounces from current price levels.

Rowan Companies (RDC), also not shown, closed today at 17.73 after failing at its 50-day moving average last Friday where it was shortable at that time. With the stock down at these levels, I’d be watching to see how it acts on any reaction bounce back up toward the 20-day line at 18.60 or all the way back up to the 50-day line at 19.04, assuming it can bounce that far.

Even as the indexes continue to forge new highs, one has to be in the right stocks at the right time. As well, the short side of the market does seem to produce some results, but also only in the right stocks. Others that appear to be deteriorating (think LITE) often seem to receive a visit from the Ugly Duckling. So shorting in this market mostly strikes me as a tactical activity.

While I am happy to scalp short profits when I can get ‘em, my main focus has been on trying to discern where the next big money longs might be. For the most part, I prefer the big-stock names that have already announced earnings, as this simplifies the process.

In this spirit, I like names like NFLX and FB, my “China Five” names (of which BABA can be considered a very attractive “big stock”), and selected areas of groups like cyber-security and opticals when and where I can find the proper set-ups. In some cases, one has to be open to Ugly Duckling types of set-ups as names like FNSR (and maybe JNPR) might be showing us right now, and which NVDA showed us back in the mid-January.

So the bottom line is that this market requires one to be resourceful. And by resourceful I mean taking an opportunistic approach when it comes to finding the best entries on the long side. 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 FB, NFLX, WB, and X, 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.