The NASDAQ Composite Index has taken a clear leadership role as the Dow Jones Industrials and the S&P 500 Indexes continue to move in tight sideways ranges. The upside charge in the Naz has been led by the big-stock NASDAQ names I’ve been discussing in recent reports and blog posts as having had recent pocket pivots.
On the index chart, we can see that an early morning sell-off on Thursday found support at the 10-day moving average. This also coincided with the top of the prior four-week price range extending from early December to early January. On Friday the index made yet another all-time high, but on lower volume, perhaps due to the three-day Martin Luther King Holiday weekend.
The S&P 500 Index has now built a five-week consolidation as it remains in a tight range. On Thursday, the S&P broke below the 10-day line, but recovered to close near the top of its daily trading range as selling volume remained light. Like the NASDAQ, Thursday’s long, lower tail on the S&P’s daily price bar looks bullish. Friday’s action as the index pushed up near its all-time highs showed a little bit of stalling and churning on higher volume. This looks a bit sluggish, but again may simply be due to the pre-holiday weekend trade.
Big-stock NASDAQ names have been on fire lately, leading the NASDAQ’s charge to all-time highs. Amazon.com (AMZN), not shown, has continued to move higher as it powered right through and held the $800 price level on Thursday despite the early morning market weakness. Point-wise the move has looked impressive, but other names I’m following have had better moves on a percentage basis. More on that later in this report.
The action in Facebook (FB) has been nothing short of impressive since it posted a roundabout/bottom-fishing type of pocket pivot two Fridays ago. It continued to rally all week long before ending Friday on a little gap-up move on higher volume. This brought the stock to within spitting distance of its all-time highs, where it is quite extended on the upside and certainly out of any reasonable buying range.
Netflix (NFLX) actually performed better on Friday alone than AMZN did all week long, posting a nice pocket pivot breakout to all-time highs on strong volume. On Thursday, NFLX held on the pullback and test of the 10-day moving average as volume declined to below average, setting up Friday’s move. Interestingly, NFLX’s pullback to the 10-day line coincided precisely with the NASDAQ Composite’s pullback to its own 10-day line on Thursday. Strong action for a stock expected to announce earnings this coming Wednesday.
Alphabet (GOOGL) and Priceline Group (PCLN), both not shown, have continued higher, albeit only slightly, over the past week as well. Both stocks remain within spitting distance of their own all-time high. GOOGL is expected to announce earnings on January 26th, while PCLN’s report isn’t expected until mid-February.
Apple (AAPL) loped along for most of the week following the prior week’s pocket pivot breakout from a two-month cup-with-handle formation, which I discussed in last weekend’s report. The stock mostly held tight within a short four-day range throughout the week as volume came in below average over those four days.
AAPL is expected to announce earnings on January 31st. In most of these big-stock NASDAQ names it’s tough to get aggressive with earnings due shortly, unless you think you can catch a strong upside move. So far it’s been the action in AMZN, FB, and NFLX that have been tradeable for some decent upside moves while AAPL, GOOGL, and PCLN have held steady.
In my Wednesday report I discussed pullbacks in Tesla Motors (TSLA) to the rapidly rising 10-day moving average as your best lower-risk entry opportunities, and therefore something to be on the lookout for. At the time, however, I thought the 10-day might catch up to the stock, setting up a constructive pullback to the line.
As it turned out, TSLA made a quick bee-line for the 10-day line on Thursday as the general market sold off, coming to within an eyelash of the line. It then pinged off of the line down at 225 or so and rallied back up to the 230 price level. On Friday the stock continued higher. Note that TSLA’s pullback to the 10-day line on Thursday coincided precisely with the NASDAQ’s pullback to its own 10-day line. That was the spot to move in on the stock, although it may not have been so easy to do since the NASDAQ was down nearly 1% on higher volume levels at that time.
My general view on handling something like this is to simply focus on the stock set-up, while putting the index action in the back of your mind. We already know that in this market the Ugly Duckling can arrive on the scene at any time, and because of this it is always better to focus on the precise stock set-up at hand.
Therefore, if you see a stock that you really like, and it is pulling right into a buyable position at a key support area or level like a moving average, you simply take your initial position right there. Risk is then minimized by using the key support level as your tight selling guide just in case the stock doesn’t turn. That would have worked with TSLA on Thursday.
Now TSLA is back in extended land and out of buyable range. Therefore, as before, look for pullbacks into the 10-day line as your closest reference for a potentially lower-risk buyable set-up. TSLA is expected to announce earnings on February 8th. So far it appears that shorts aren’t interested in hanging around for that! J
Over in Cloud Land, Veeva Systems (VEEV) remains my favorite name, mainly because the pattern strikes me as more coherent than that of Salesforce.com (CRM) and ServiceNow (NOW). The stock briefly tested its 20-day moving average on Thursday as the general market sold off early in the day, but bounced off the line to close in the upper part of its daily trading range as volume dried up.
In my Wednesday mid-week report I wrote that, “…VEEV has posted a cluster of five-day and ten-day pocket pivots over the past few days, but today reached a higher high on lower volume. This would seem to imply that a pullback is coming, so I would look for any pullback into the 20-day line at 42.44 as an opportunistic entry, should it occur.”
Again, as with TSLA, I didn’t anticipate that such a pullback would occur within an hour or so of the very next day’s opening bell. But it did, and VEEV held the line in constructive fashion, leading to a higher high on Friday. The 20-day line is now at 42.75, so that remains your reference point for any buyable pullbacks.
We can see below why I might consider Salesforce.com (CRM) to be less coherent on its daily chart. While the bottom-fishing type of pocket pivot at the 50-day moving average eight trading days ago was buyable, it is now pushing up against the underbelly of its 200-day moving average.
So this is slightly problematic, such that one might look for a pullback to the 10-day line at 73.29 as a more reasonable and opportunistic entry point. However, there is also the possibility of the stock pushing up through the 200-day line in another pocket pivot type of move, so that may be something to watch for. Otherwise, if it keeps tracking sideways the 10-day line will have a shot at catching up to the current price level. CRM is expected to announce earnings in late February, so that is not really a factor currently.
Meanwhile ServiceNow (NOW), not shown, is holding above the 50-day line after posting a pocket pivot at the line on Wednesday and then holding the line on a sharp intraday pullback on Thursday. But as the NASDAQ found support at its 10-day line that day, NOW found ready support at its 50-day line. I’m very interested to see what NOW does when earnings are out on the expected January 25th report date.
I think it’s helpful to look at a weekly chart of Square (SQ) in order to get a sense of where it is within its macro-pattern. We can see that the stock actually broke out from a cup-with-handle formation (albeit a deep one) back in early November.
Since then it has rallied 27.1% and moved all the way up to its prior April 2016.peak. With earnings not expected until March 8th, it’s not clear how much further upside progress the stock can make from here, but as I wrote on Wednesday, pullbacks to the 10-day line, not at 14.56, would represent lower-risk entry opportunities.
SQ came close to the 10-day line on Thursday during the early morning market sell-off and bounced slightly, but it is still mostly moving back and forth here around the highs. Look for this to perhaps consolidate further as earnings approach.
Chinese names I’ve been following in recent reports held up well during Thursday’s morning pullback, including Momo (MOMO), not shown, which held on a pullback to its 50-day moving average. That put it in a lower-risk buy position, and the stock closed near its recent highs on Friday. Pullbacks to the 50-day line at 20.73 remain your references for lower-risk entries.
Weibo (WB) bucked the sell-off on Thursday by holding tight at its 50-day moving average on a voodoo volume signature as trade came in -54% below average. That set up a pocket pivot on Friday that took WB to its highest high since pulling an undercut & rally move back in early December.
So far I’ve pegged the turn off the lows in several of these Chinese-related names, and my guess is that they have a reasonable shot at continuing to rally into earnings, which for MOMO and WB are not expected until early March. As I discussed last weekend, WB had flashed a roundabout pocket pivot (RAPP) off its 20-day moving average two Thursdays ago. Since then it has slowly edged its way up to and just along the 50-day line before flashing the second pocket pivot on Friday.
WB remains within buyable range of this pocket pivot using the 50-day line at 45.46 as a selling guide. Note that the stock looks to be coming up the right side of a possible double-bottom base. If the stock clears the mid-point of the “W” that makes up the double-bottom as I’ve highlighted on the chart, then that would serve as a clean base breakout situation.
However, the recent pocket pivots get you in earlier, so my preference would be to already be working the stock on the long side ahead of any breakout. And, of course, this could have been done on the basis of two concrete buy set-ups created by the two pocket pivots over the past seven trading days.
Alibaba (BABA), not shown, has been holding tight around the 96-97 price level after pocket pivoting up through its 50-day moving average last week. The stock is currently slightly extended from the 50-day line, but the 10-day line at 93.58 would offer your closest reference for a buyable pullback, should that occur. BABA is expected to announce earnings on January 26th.
BABA’s Chinese e-commerce cousin, JD.com (JD) continues to work its way through what is now a 14-week base. While it has shown several strong up-volume moves within the base, several of which qualified as pocket pivots, it still hasn’t been able to clear to higher highs.
On Tuesday of this past week JD posted a strong-volume upside move, but it started from a point that was extended from the 10-day moving average, so did not qualify as a bona fide pocket pivot. However, it was a strong-volume upside move, and the stock has held in a tight three-day bull flag since then, which is constructive.
This keeps the stock in a buyable position using the 10-day line at 26.31, the 20-day line at 26.22, or the 50-day line at 25.90 as reasonably tight selling guides. Which one you decide to use is up to you based on your own risk preference. Earnings aren’t expected until March 7th, so I’d certainly like to see the stock finally make a move before then.
Netease (NTES), not shown, looks similar to MOMO, WB, and BABA as it cleared its 50-day moving average on Monday on a pocket pivot move as I blogged at the time. It has since held tight in a three-day bull flag. Pullbacks to the 10-day line at 229.56 would offer lower-risk entries from here.
For now, these five Chinese-related names, BABA, JD, MOMO, NTES, and WB, remain my focus list for names to play in this area of the market. As I wrote two Wednesdays ago, I don’t think that President-Elect Trump’s bite is going to be anywhere near as bad as his bark when it comes to actual trade policies vis a vis China. For that reason, I think a number of these Chinese names could continue coming up the right side of potential new bases as they currently have begun to do.
Metals have been a funky area of the market as of late, with copper name Rio Tinto Plc (RIO) and its cousin Southern Copper Corp. (SCCO) moving higher this past week. RIO, not shown, posted a buyable gap-up move on Tuesday and has moved higher since. SCCO, shown below, moved to higher highs on Friday on a pocket pivot volume signature. Thus this would qualify as a pocket pivot breakout, even though volume was below average. However, note that Thursday’s move also qualified as at least a trendline breakout on above-average volume.
On this basis, I would consider the stock buyable using the 10-day line at 33.63 as a maximum selling guide. Personally, I would prefer to buy this on constructive weakness rather than chasing near-term strength. The good news for SCCO is that earnings aren’t expected until February 24th.
What I find a bit puzzling is that as the coppers rally, the steels are getting smacked back to their 50-day moving averages. Both Steel Dynamics (STLD), not shown, and U.S. Steel (X) have met up with their 10-week moving averages on the weekly charts. With earnings expected to come out closer to the end of the month for both stocks, they need to hold these pullbacks to the 10-week line.
So far X is having some trouble holding above its 10-week line. On Friday it closed 18 cents below the line on higher weekly selling volume. On the daily chart, not shown, X is nearly a full point above its 50-day moving average. On Friday it tried to rally early in the day but reversed to close down on the day, which is not constructive.
It is possible to step up here and try and buy either X or STLD as close to the 50-day lines as possible. But this obviously necessitates using the line as your last-stand selling guide. From there I’d like to see a robust bounce off the 50-day/10-week moving averages ahead of earnings. So if you are so inclined, take your shots and set your tight stops.
Big-stock bio-techs don’t really strike me as offering anything all that compelling in terms of upside price action. This is probably not surprising since most of these stocks, including Celgene (CELG), not shown, are expected to announce earnings in the next couple of weeks.
Where the action has been taking place has been in the smaller names in the group. Clovis Oncology (CLVS) has been on a tear since testing the top of its prior base breakout two weeks ago, and then flashing a pocket pivot off of the 20-day moving average the next day.
That has led to significant further upside, one can now decide whether to take partial profits or hold this for the big move, assuming there is one. Recall, however, that when I first discussed CLVS over two weeks ago I pointed out that this was a good example of a high risk/reward ratio. It has proven itself so far to have high reward, but that comes with the risk inherent in the potential for adverse product news, which is what happened to the stock back in 2015. So far, however, this has been the real heater among the bio-techs. It is now extended.
Incyte Pharmaceuticals (INCY) gave us the lower-risk entry point on Thursday as it successfully tested the prior intraday low of this past Monday’s buyable gap-up (BGU) move. That test occurred on Thursday, amidst the early-morning sell-off that we saw in the indexes.
Again, there is a good lesson here, and it helps point out the fact that I like to focus on the action of individual stocks rather than getting psyched out by the index action. If INCY is five cents away from the 123.83 BGU low on Thursday, then that represents a low-risk entry point using that same price level as a tight selling guide.
You might give it 1-2% additional downside porosity, but the bottom line is that whatever the indexes might be doing at the time, risk can be managed if one decides to take the shot. But if one focuses entirely on what the indexes are doing, they might not be able to take the shot. And it’s not as if it’s all that scary, since you can take a shot on the long side as the stock approaches the BGU low knowing that risk can be kept at a minimum.
This contrasts psychologically with the fact that when a stock is moving up on strong volume, and the indexes are all up on the day, one likely has no problem jumping on something like that. But that is also the wrong thing to do. Why is it that many investors willingly chase upside strength but are fearful of buying into pullbacks, particularly if risk can be managed tightly as was the case with INCY on Thursday?
The bottom line is that they fear being wrong, and having to take a 2-3% loss. But I say if you aren’t willing to take those kinds of losses at the outset, and accepting it as just part of your trading strategy, you won’t put yourself in a position to “get lucky.” I would continue to look at pullbacks toward the 123.83 intraday low of Monday’s BGU range as potentially lower-risk entry opportunities. INCY is expected to report earnings on February 9th.
Glaukos (GKOS) has done well since last week’s roundabout type of buyable gap-up, which could also be seen as a roundabout pocket pivot (RAPP). The stock has now run up to the left-side peak of a current cup or saucer base formation, where it ran into some resistance on Friday.
This sets the stock up to build a potential handle in the pattern. So I’m watching the rapidly rising 10-day moving average, now at 36.70, as a reference point for a potentially lower-risk entry opportunity should the stock pull back to the line. I would, however, expect that it will continue to rise and get closer to the stock over the next few days, so that is something to watch for.
Razor-thin small-cap bio-tech Myovant Sciences (MYOV) is likely revving up for a move higher as it sits right on top of its 20-day moving average in voodoo fashion. Volume declined to -79% below average on Friday as the stock held squeaky tight on the day.
This looks buyable right here using the Tuesday low at 11.18 as a reasonable selling guide given the stock’s volatility. Again, keep in mind that MYOV trades about 134,000 shares a day so it is quite thin. For investors with smaller accounts that can benefit from 1-2,000 share positions reasonably well, this can be played relatively easily.
Nvidia (NVDA) is sitting at what we might call a near-term crossroads of sorts as it sits and holds tight right at its 20-day exponential moving average following the prior climactic top it had back in December. Volume dried up to -40.2% below average on Friday, so if this thing is going to bounce off the 20-day line this is the time and place to do it.
Otherwise, it may be possible to look at NVDA as a short if it decisively busts the 20-day line. In that case, the 50-day moving average down at 94.06 becomes the next area of potential support. Who knows, NVDA may have climaxed near-term, but could always build a new base IF the story is as sound as many think it is.
Arista Networks (ANET) has been through the ringer over the past few days, busting through its 20-day moving average Thursday as the market sold off early in the day. But that didn’t last long as the stock recovered to close back above the line in a show of supporting action. Now the stock is sitting right at its 10-day moving average and just above the $100 Century Mark. Volume dried up to – 52.3% below average. For that reason, I would be comfortable taking a position here and using the $100 Century Mark as a selling guide.
ANET’s action on Thursday makes for a fascinating 620 chart study for those who make use of this five-minute intraday chart template or something similar that they’ve concocted. Here we see ANET make a break to the downside on Thursday at the opening bell.
That move continues lower for about a half hour before a long red price bar shows up on huge selling volume. At the same time, on the daily chart the stock was crossing below its 20-day moving average. But when you see a very long red price bar occur after a stock has already been moving to the downside for several price bars, I can sense selling exhaustion once the volume balloons.
This was also confirmed by the “MACD stretch” occurring at around the same time. A little later the fast MACD line (orange) crossed above the slow MACD line (blue), creating the MACD Cross. An hour-and-a-half later the 6-period exponential moving average crossed above the 20-period exponential moving average, confirming a complete “620 buy signal.”
On the short side, if one were short near the $100 Century Mark earlier using Livermore’s Century Mark Rule in Reverse, the 620 chart was telling you to cover not too far off the lows. At that point the downside price extension accompanied by a MACD stretch was flashing a cover signal. If you did not heed that, then the moving average cross at around 9:00 a.m. PST my time was the final call to cover your short and back away.
As I’ve discussed before, I don’t use the 620 chart as a trading system. I use it as a tool to guide me in handling positions in real-time, and I interpret it within the context of what is simultaneously occurring on the daily chart. It was easy to think the breakdown below the 20-day line Thursday morning was ANET’s final death knell, but the 620 chart was telling you that, at least near-term (e.g., on an hourly basis) the stock was likely to bounce.
At that point one could decide whether to re-short the stock into such a bounce, particularly if, say, the stock found resistance back up at the 20-day moving average (at 98.17 on that day). But as the stock was moving back above the 20-day line that morning the 620 chart was flashing a buy signal.
That could in turn give one enough reason to flip and go long the stock. And as of Friday, per my discussion regarding the daily chart, further above, the stock looks like a long again. The market loves to shake out and fool investors, and you have to be on your toes at all times, completely open to new information as it appears in real-time. I find my 620 chart indispensable in this regard, and the example of ANET on Thursday makes this point quite nicely.
The oil stocks I discussed in my last report are not really making any significant upside just yet. Despite posting pocket pivots this past week, Parsley Energy (PE), Diamondback Energy (FANG), and Rowan Companies (RDC) are all hanging above their 50-day moving averages. However, while RDC, not shown, met up with its 20-day line on Friday with volume declining, FANG met up with its 50-day line with selling volume picking up.
This may put both in lower-risk entry positions with the idea of bailing out quickly if they can’t hold near-term support at their respective 20-day and 50-day moving averages. While pullbacks, even less-than-pretty ones, can often provide lower-risk entries where one can take a shot while limiting risk, they also have to be handled alertly and flexibly.
Parsley Energy (PE) is showing some interesting action lately after pricing a 22-million-share secondary offering, which shows up as a big volume spike on Wednesday. The stock traded 19.4 million shares that day, which I assume means they released the secondary into the market on that day. I haven’t seen any news regarding the exact pricing, but I would guess it is somewhere between $35 and $36 a share. I will be looking for some clarification of this during the coming week.
For now, the technical action shows a stock that is trying to hold along the confluence of its 10-day, 20-day, and 50-day moving averages. I would like to see the Bingo and Force indicators turn a better shade of blue, frankly. But notice the light blue up “Kahuna” on Wednesday, which is unusual to see amidst so much red on the other indicator bars that day.
The bottom line here is that if one thinks oil stocks have a shot at moving higher and break out of their current basing patterns, this is where you look to take your initial entries. If they bust support at the 50-day lines or other relevant price levels, then all bets are off.
But if I’m looking at groups of stocks that are still in longer-term uptrends and which have been basing for a long period of time (action that hopefully serves as a constructive ripening process), then a number of oil-related chart patterns fit the bill. PE just happens to be one of the most fundamentally sound names on my list of oil names lately.
On Wednesday I discussed the fact that “Mobileye (MBLY) remains in play for now, and I would be willing to go long the stock here using either the 200-day line at 40.70 or the 10-day line at 39.98 as reasonably tight selling guides.” That strategy would have worked on Thursday as the stock tested the confluence of its 10-day and 200-day moving averages and held on very light volume, -41.8% below average.
That led to a gap-up move on Friday as buying volume picked up, putting the stock back up to its most recent highs. As I’ve discussed in recent Twitter and blog posts, MBLY was a stock I started out trying to short at the 50-day line back in December. When the stock kept pushing right through the 50-day line I used the visceral evidence gained by being short the stock to flip and go long.
MBLY strikes me as the stuff of a potential turnaround situation. Over the next three years, annual earnings growth is expected to come in at 46%, 53% and 55%, sequentially. After seeing quarterly earnings growth slow to 27% in the most recent quarter, analysts are looking for a re-acceleration over the next seven quarters of 33%, 40%, 41%, 47%, 50%, 57%, and 58%, sequentially.
In addition, we have to consider the positive thematic dynamic of self-driving auto technology. NVDA has certainly capitalized on this theme, and MBLY remains a force in the space given its Tier 1 partnerships with companies like Intel (INTC), Bayerisch Motoren Worke AG (BMWYY), General Motors (GM), Delphi (DPI), and others.
This remains buyable here, but especially on pullbacks down to the 200-day line at 40.74, using the 200-day line as a selling guide. Interestingly, despite the big move in the latter part of December, short-interest data released on December 30th show 24.85 million shares sold short in the stock going into January.
Clearly the stock has huge short interest in it, and that has remained the case in the face of the big move off of the December lows and back above the 200-day line. So while MBLY is compelling on a thematic basis as a possible turnaround play, it still remains a potential short-squeeze candidate.
On Thursday after the close I blogged about the big buyable gap-up (BGU) in Applied Optoelectronics (AAOI), following a strong earnings report. This was a strong move, but notice that the stock retraced a good portion of the gap-up day’s price bar on Friday. Volume was well above average, but note that it did dry up sharply relative to Thursday’s volume.
I would watch carefully for the stock to hold near the 26.11 intraday low of Thursday’s BGU day on this pullback as a potentially lower-risk entry possibility. If the so-called optics build-out and systems upgrade remains a strong theme going forward, then AAOI is your current leader.
It is also a turnaround story as well. After posting -5% earnings growth this past week, earnings growth is expected grow at 241%, 1,050%, 200%, and 47% over the next four quarters. In this case, looking backward at what has already happened may be less important than the forward-looking story, which is what the current price/volume action is telling you if this current BGU set-up holds.
I theorized in my Thursday after-hours blog post that the gap-up move in AAOI might produce a halo effect that extends to some of the other fundamentally sound names in the group. So as I look around I find that while other fundamentally strong names in the group have been weak, they may be in Ugly Duckling positions within their patterns.
Case in point is Finisar (FNSR), which I have more recently viewed as a short-sale target as it failed on a big post-earnings breakout attempt back in December. FNSR has been showing a strong earnings acceleration over the past three quarters, with earnings growth expected to accelerate further to 148% next quarter.
But beyond that, estimates start to slow down sharply into single-digit earnings growth by early 2018. That may be what the market doesn’t like here. Nevertheless, FNSR did post a bottom-fishing pocket pivot on Thursday as AAOI’s halo effect held, but did not follow through to the upside on Friday.
Of course neither did AAOI, so the pullbacks might just be buyable if they can hold their respective support levels. For FNSR, that would be the 10-day line at 29.24. On Friday, volume did come in at -22% below average, which is constructive. So this could be worth a shot using the line as a tight selling guide. I would, however, want to see this thing get back above the 20-day line in short order.
Lumentum Holdings (LITE) is another name in the optical space in a possible Ugly Duckling chart position. Specifically, the stock is now undercutting a prior early December low in the pattern that preceded what became a failed breakout attempt a few days later. Like FNSR, however, LITE’s earnings are expected to lighten up as we progress through 2017 and into 2018. Annual earnings growth in 2017 is expected to come in at 57%, but 2018 growth only at 17%. That may be a forward-looking issue.
Bottom line here from a technical perspective is that the stock undercut the prior 35.90 December low and rallied back above it to close at 36.05 on Thursday and then at 36.35 on Friday. This puts the stock in an undercut & rally buy position using the 35.90 low, plus another 1-3% of downside porosity as preferred, as your selling guide.
Finally, in the Ugly Duckling area of this market, I was prompted to discuss what I’ve been seeing in solar names recently after seeing a timely and observant comment from a member in the comments section of the Gilmo Live Blog regarding Sunpower (SPWR). All of the solars have been decimated, and the general crowd view seems to be that a Trump Administration will be bad for solar. Based on the action of something like First Solar (FSLR) since it topped out at 283 in 2008 and is now at 35.75, it was the Obama Administration that was bad for solar.
But the real question is whether the current price/volume action in the group indicates a possible turnaround. Currently I consider FSLR, SPWR, and SolarEdge (SEDG) as the bigger names in the group (remember that SolarCity (SCTY) got bought out by TSLA, so now TSLA is a solar name as well, and it’s on fire!). And of these three, FSLR seems to have the best forward estimates.
But earnings growth is still expected to remain negative until the second quarter of 2018, when growth is estimate to suddenly balloon to 157%. Currently FSLR is selling at 6.9 times 2020 annual estimates of $5.27. I tend to think that some sort of catalyst needs to appear on the horizon to kick some of these stocks out of their torpor. For now, all I know is that FSLR gave me a nice little trade over the past two trading days, but it’s not clear to me how much more this thing has in it.
Meanwhile, a name like SEDG, not shown, is about to show its first negative earnings growth quarter since 2013, which is not good. It does, however, have over 38% of its float currently sold short. So if some catalyst for the solar group does arise, SEDG may benefit from a short-squeeze. From a purely price/volume perspective, the stock did flash a pocket pivot on Friday – check the daily chart. Overall, I consider the solar group one to keep an eye on, although it may not be entirely ripe for massive upside just yet.
When it comes to Ugly Ducklings, the cyber-security group has probably been one of the ugliest during 2016. But more recently we’ve seen leaders like CyberArk Software (CYBR) and Palo Alto Networks (PANW) post bottom-fishing pocket pivots lately, while Check Point Software (CHKP) has recently broken out of a 19-month consolidation.
While CHKP, not shown, doesn’t always comes readily to mind when we think about cyber-security names, it is a leader in the space. The recent breakout through the 87 price level remains within buying range with the stock closing at 90.71 on Friday. CHKP has been posting 6% to 13% earnings growth over the past 15 quarters on single-digit sales growth the whole way.
Next quarter’s estimates call for earnings growth of 4%. So what is driving CHKP’s recent move to all-time highs is not clear on the surface. But the reality is that CHKP’s products are considered to have the best catch rate when it comes to cyber-security threats. Symantec (SYMC), is another big-stock cyber-security name with putrid earnings growth that recently broke out, but on weak upside volume. What seems to be going on here is a general sea-change coming from ever greater emphasis on cyber-security as the topic has recently come back into the limelight.
So the big-stock names in the group get buoyed in anticipation of a rising tide for the sector. Among the smaller, perhaps more dynamic names in the group, I like the recent action in Barracuda Networks (CUDA). I actually blogged about CUDA on Monday morning as it posted a pocket pivot relatively early intraday. But buying into this was limited by the fact that the company was reporting earnings that day after the close.
The next day CUDA gapped up in a buyable gap-up type of move, but failed to hold the gap, closing near the lows of its intraday trading range but still up on the day. Volume was extremely heavy. If the stock had failed outright at that point that would have been a very bearish development, but it didn’t.
Instead, CUDA held above Tuesday’s intraday low and pushed back to the upside, again on heavy volume. This was followed by a pullback early in the day on Thursday as the stock moved with the general market sell-off that morning. However, CUDA found support at its lows and just above the confluence of its 10-day, 20-day, and 50-day moving averages.
I read that action as indicating that the stock probably ran into some overhead resistance from the left side of the base, which would be normal. That overhead was worked off near-term and the stock is now trying to settle down and tighten up as volume declines. Above-average volume levels as the stock holds relatively tight also tell me that buyers are stepping up to meet any sellers.
In my view this puts the stock in a buyable position, using the 10-day line at 23.27 as a tight selling guide. Certainly, any low-volume test of the 10-day would offer a more optimal entry, if that occurred, but it may not. In any case, if you like the prospects for the cyber-security group given the renewed emphasis on the industry, then CUDA looks like a reasonable prospect based on its price/volume action.
I’ve recently had another one of these visceral trading experiences where I’m shorting a stock and then am able to feel the bid underneath the thing as it refuses to go down. For a while I’ve considered GrubHub (GRUB) as a head and shoulders type of short-sale set-up, but now it is starting to act the way AMZN and FB recently have after I thought those two stocks were forming the right sides of potential H&S patterns.
On Wednesday, three trading days ago on the chart, I shorted the stock into an opening upside move. By the close I thought I was onto something as it closed back below the 50-day moving average on above-average volume. A reversal that was going to lead to big profits, right? Wrong. The next day the stock started going lower, and I noticed that it was starting to pick up a strong bid. Once the 620 chart began to turn, I flipped and went long. That turned out to be a smart move as GRUB then gapped up on Friday and moved another 4.5% higher.
By the close GRUB had posted a strong-volume roundabout pocket pivot move. This takes it up to the highs of the price range extending back to early November. But Friday’s big volume tells me that it may have more gas left in the tank and will clear these low-base highs the same way that AMZN and FB cleared similar low-base highs in their patterns earlier this past week.
In any case, of note are GRUB’s most recent quarterly growth of 77% on a 44% increase in sales. Meanwhile, estimates for its upcoming earnings report, expected on February 2nd, call for 32% earnings growth on a hard number of 25 cents per share. In the most recently reported quarter, mutual fund sponsorship has increased from 321 to 375 funds. I would certainly look at any lower-volume pullback from here closer to the 50-day line at 37.27 as buyable.
I think in many cases when trying to look at potential turnaround situations, trying to project the forward-looking prospects for the company is difficult. Sure, you have analyst consensus earnings estimates to work with, but analysts are also just humans trying to predict the future. Often they are surprised, which is what creates earnings surprises, and in turn upside stock price momentum.
My experience is that price/volume action is your first clue of a stock’s forward-looking prospects, and so I am often satisfied with simply operating on that basis. In any case, in this highly rotational market, I am constantly scouting the horizon, looking for where the next rotational set-ups might be forming.
Often, these are Ugly Duckling set-ups, and I have discussed a number of these in this report. Whether we see money rotate into some of these down and out areas of the market remains to be seen, and of course there is the crowd’s view that the market will sell off after the Inauguration.
I’m not sure where they’re buying their crystal balls from, but all I know is that my crystal ball works about as well as my Ronco® Electro-Static Laser Nose Hair Clippers. Wasn’t it that same crowd that thought the market would sell off after Brexit and after the elections if Trump won? So perhaps we’ll see a rally take hold after the inauguration. But rather than try to predict the future, just stick to watching the stocks. And you probably already knew I’d say that. Take it from there.
CEO and Principal, Gil Morales & Company, LLC
Managing Director and Principal, MoKa Investors, LLC
Managing Director and Principal, Virtue of Selfish Investing, LLC