The Gilmo Report

January 18, 2017

January 18, 2017

I tweeted yesterday that the long side of this market looked to be laboring as the indexes lost some traction and current leaders like Arista Networks (ANET) came under severe pressure after the U.S. Customs and Border Protection Agency revoked its November 2016 finding that Arista’s redesigned products don’t infringe on key patents owned by Cisco Systems (CSCO).

Alert short-sellers might have recognized the move as a shortable gap-down (SGD) once it opened just below the 50-day moving average, using the line as a guide for a tight upside stop. Usually a gap-down of that magnitude coming on that much volume is a bad sign, particularly when it breaches a key moving average.

That turned out to be the case as ANET continued lower, ending the day at 88.23, or about 6% lower than it opened up that morning. As well, if one had been long the stock and blind-sided by the news and gap-down, selling quickly was the most intelligent thing to do. I would also assume that a 6-7% downside break at the open would be enough to immediately stop anyone out who bought on the basis of the prior flag breakout.

 

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While ANET did undercut some prior lows in the pattern from early December yesterday, that did not do much to create a strong undercut & rally move that might have carried up into the 50-day moving average. Instead, ANET stalled and closed in the lower part of its daily trading range today after an early-morning rally. I would, however, watch for rallies back up toward the 50-day line at 94.25 as potential short-sale opportunities.

Another name shot down by news flow yesterday was Qualcomm (QCOM), a stock that has been on my short-sale watch list for some time now. QCOM’s break was caused by the filing of a lawsuit by the Federal Trade Commission alleging unfair trade practices.

This sent the stock careening to the downside yesterday as it peeled away from the underbelly of its 50-day moving average and broke to the downside on heavy selling volume. The move carried it below a prior low in the pattern from the early-December low, triggering a rally when QCOM countered by calling the lawsuit nonsense. QCOM was able to rally early in the day back up to its 20-day moving average, but stalled there to close just above mid-range on heavy trade. With QCOM expected to announce earnings next week on the 25th, I don’t see much to do here.

 

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The action in ANET and QCOM looks like the stuff of bear markets, or at least a market correction. The reality is, not really. It is more illustrative of the dangers lurking in stocks at all times, as well as the fact that you have to be alert to the action of individual stocks. And this is all because the indexes aren’t doing much more than chopping around.

When it comes to the NASDAQ Composite Index chopping around, it has actually been able to chop its way higher. At least until it pulled back yesterday to test its 10-day moving average on higher trade.

 

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As the NASDAQ chops higher, the Dow Jones Industrials and S&P 500 Indexes are still holding with tight price ranges. I would even venture to call the S&P’s action to be squeaky tight, despite some of the intraday volatility we might see on the Dow, which is now bouncing along the lows of its own tight price range.

We have to remember that while the Dow has the appearance of being far away from the 20,000 price level at today’s 19804.72 close, the reality is that it’s about 1% away from 20,000. So while the indexes aren’t showing any bearish signs, it simply becomes a matter of what is going on with individual stocks.

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.

 

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Strength in the financials since the election has been cited as a sign of overall market strength based on the idea that financials always perform well in bull environments. But yesterday we saw sharp breaks in many financials, including big banks like J.P. Morgan (JPM). This sent the Financial Select Sector SPDR ETF (XLF), breaking below its 20-day moving average and down to its 50-day moving average where it found support early this morning.

I don’t really adhere to any idea of “as the financials go, so goes the market,” because I have seen other periods in market history where financials have gone one way, while other stocks go the other. So from my perspective it’s just another one of those bromides that doesn’t really tell me much about what my stocks are doing right here, right now.

However, within the context of the prior strong upside move in the financials, the pullback to the 50-day line looks normal. Thus it might produce some buying opportunities in financial names if they can hold similar pullbacks, such as JPM, GS, and others. If not, then my guess is that there are plenty of other areas of the market ready to take over a strong leadership role if the market rally continues.

 

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Big-stock NASDAQ names have been holding steady as of late. But with earnings coming up for all of these over the next two weeks, the issue of having to play earnings roulette is a stubborn reality. Doing so, however, would have paid off with Netflix (NFLX), which came out with earnings after the close today. As I write, it is gapping up to the mid-140 price level.

This will set-up a possible buyable gap-up (BGU) move tomorrow, and will certainly have a positive effect on NASDAQ futures, assuming the move holds up into tomorrow’s open. I’ll be keeping a close eye on NFLX tomorrow at the open as a possible BGU opportunity.

 

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Amazon.com (AMZN) and Facebook (FB) remain in extended positons ahead of earnings, but both, not shown, are holding relatively tight after strong prior upside moves. Watch the 10-day lines on both of these. Meanwhile Apple (AAPL), Alphabet (GOOGL), and Priceline Group (PCLN), not shown here on charts, all remain within short consolidations ahead of their own earnings reports. GOOGL and PCLN found ready support today at their 10-day moving averages.

As far as expected earnings report dates for all of these big-stock NASDAQ names, AMZN and GOOGL report next week, AAPL on the last day of January, and FB on the first day of February. PCLN isn’t expected to report until mid-February. If you own or are interested in any of these names, I would suggest checking the respective websites of each to confirm earnings report dates.

As I blogged earlier today, Tesla Motors (TSLA) is probably the best-trending stock on my buy watch list. I wrote in my last report before the New Year’s trading began that TSLA would be a stock to watch in 2017, either way. So far that way has been to the upside, and the stock has moved higher in a steady, steep upside trend-channel the early part of December.

 

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Outside of the big-stock NASDAQ names, some true trading excitement was to be found in the steels, which were looking quite ugly early this morning as they wobbled about their 50-day moving averages. In some cases, as with U.S. Steel (X), for example, the stocks have been stuck below their 10-week moving averages on the weekly charts.

But ugly turned into Ugly Duckling once President-Elect Trump’s nominee for Commerce Secretary, Wilbur Ross, began his confirmation hearing. During the hearing, he made comments to the effect that the U.S. needs to increase its tariff focus on the dumping of steel and aluminum. That sent steels rocketing to the upside in a hurry.

Both X and Steel Dynamics (STLD), not shown, posted similar pocket pivot moves off of their 50-day moving averages on huge volume. Volume was large in both, although the percentage increase was higher for X at 77.3% above average compared to STLD’s 53%. Either way, the action was buyable early in the day once you saw the volume spike on the move off of the 50-day line.

I wrote over the weekend that “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.” We certainly got that today as X and STLD launched off the 50-day lines and cleared back above their 10-week lines, all of which is bullish.

Between the two stocks, I prefer X because it is much more liquid and, most of all, because it isn’t expected to announce earnings until January 31st. STLD is expected to announce next Wednesday. Overall, great examples of how the Ugly Duckling can suddenly breathe life into a stock that is, for all intents and purposes, looking to be on the verge of death.

 

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With a number of names on my current buy watch list set to announce earnings over the next few days, I want to focus on those that aren’t expected to announce until the latter part of February or later, as well as those that have already announced. NFLX would certainly qualify in this regard.

Running through my list, I note that Veeva Systems (VEEV) isn’t expected to announce earnings until March 7th. Last week the stock got somewhat extended, so I wrote over the weekend that, “The 20-day line is now at 42.75, so that remains your reference point for any buyable pullbacks.” Today we saw a voodoo type of pullback in VEEV right to the 20-day line as volume declined to -59.5% below average.

 

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Notes on VEEV’s “cousins” discussed in recent reports:

Salesforce.com (CRM) is running into resistance at its 20-day moving average. Would need to clear that in pocket pivot fashion ahead of earnings, expected on February 22nd.

ServiceNow (NOW) is expected to report next week. Nothing to do here.

Another cloud cousin is Square (SQ) which isn’t expected to announce until March 8th. Note that the stock got hit with some selling volume today but remains above its 20-day moving average. My thinking recently with the stock is that it has had a big move over the past couple of months as it has reached the left-side peak of a big cup or punchbowl formation.

For that reason, it may need to spend some time consolidating here. Today’s heavy selling volume is a bit disconcerting, but it did hold relatively tight, declining only a nickel on the day. This could set up a further pullback to the 20-day moving average at 14.38 where it could present a lower-risk entry opportunity.

 

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The Chinese names that constitute the Gilmo China Five Index (a bit tongue-in-cheek, yes) seem to be holding up just fine. The five are: Alibaba (BABA), JD.com (JD), Momo (MOMO), Netease (NTES), and Weibo (WB). Among these, BABA is expected to announce earnings next week, and NTES on February 22nd. The rest all report in March.

BABA, not shown, is currently holding tight while NTES, shown below, has pulled back to its 10-day moving average on about average volume. This would present a lower-risk entry opportunity, although any pullback to the 20-day or 50-day lines, only about 2-3% lower, would provide more opportunistic entries.

 

GR011817-NTES

 

When you look at all five of these stocks’ charts, they all look more or less the same, except for JD.com (JD). JD simply remains in a relatively tight range extending back to mid-November, and is currently at the highs of this range. As I wrote over the weekend, JD is best bought on pullbacks to the 10-day or 20-day moving averages at 26.62 and 26.40, respectively.

Meanwhile, the 50-day line is down at 26, about 5% away. Any pullback down that far would offer a more opportunistic entry, should that occur. So far, JD has remained something of a swing-trading vehicle as it does little more than move back and forth from the lows of the range back up to the highs, and then back down again.

 

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I suppose if I had to play favorites, I would say that I prefer the smaller internet-related names. Momo (MOMO) and Weibo (WB). Both stocks are sitting tight and just above their respective moving average confluences.

MOMO displays tight price action over the past three days as volume declined to extreme voodoo levels at -73.1% below average today. Bottom line: Nobody’s selling this thing after the move back up through the 50-day moving average. Note that last week’s pullback to the 50-day line offered a lower-risk entry opportunity, and it is those sorts of pullbacks you want to be on the lookout for in pursuit of such entries. Your closest reference point for any near-term pullback would be the 10-day line at 21.25, with the 50-day line at 20.66 next in line.

 

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Weibo (WB) is also holding very tight on a closing basis over the past two days after testing the 50-day line on a pullback yesterday. This comes on the heels of last Friday’s pocket pivot move off of the 50-day moving average. WB offers lower entry risk here given that the 50-day moving average 45.53 is a little over 2% below today’s closing price of 46.76.

Between MOMO and WB, the latter is the more liquid name, trading over 2 million shares a day, or about $97.5 million in average daily dollar volume. MOMO, on the other hand, is still fairly liquid, trading 2.4 million shares a day on average but $52.8 million in average daily dollar volume, a little more than half of WB’s. WB isn’t expected to announce earnings until March 1st, while MOMO is much further out at March 22nd.

 

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Among my favored bio-techs Clovis Oncology (CLVS), not shown, remains well-extended. Pullbacks to the 10-day line at 50.94 would represent lower-risk entry opportunities, and the stock isn’t expected to announce earnings until February 23rd.

Incyte Pharmaceuticals (INCY) is expected to announce on February 9th, which is a bit earlier than I’d prefer. However, the stock looks good for at least a trade ahead of earnings right here. This current position shows the stock holding right at the 10-day moving average at 113.31 and the 112.83 intraday low of last week’s buyable gap-up move. Thus it is in a lower-risk entry position using the BGU intraday low as your maximum downside selling guide.

 

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Glaukos (GKOS) is expected to announce earnings on March 7th, well out of current range. It attempted to clear to new highs last Friday on a breakout attempt from a cup formation. Some selling from the left side of the pattern looks normal, so this pullback over the past three days might present a lower-risk entry opportunity. Preferably, I’d like to see the rapidly rising 10-day moving average meet up with the stock, one way or another. It would then offer a reasonable reference point for a lower-risk entry opportunity.

 

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With respect to Myovant Sciences (MYOV), I do not have information relating to its expected earnings announcement. That said, the action in the stock, which I don’t show here on a chart, isn’t playing out as I would like to see, so as a thin name it is not one of my favorites. I would certainly consider INCY and CLVS as my preferred bio-techs given their much higher liquidity as measured by average daily dollar volume.

Barracuda Networks (CUDA) put in a poor showing to start the week when it couldn’t hold its 10-day moving average yesterday and sold off on above-average volume. I had held a relatively small position over the weekend, but tossed it when it could not hold the 10-day moving average.

I tend to run a tight ship when it comes to my positions, as I prefer to be holding cash as I watch stocks pull back further than I initially expected. CUDA is one such case, and on its face doesn’t look all that exciting here. But I might look to invoke the Ugly Duckling here and point out some possible positives here that may put the stock in a lower-risk position right here.

Since CUDA announced earnings last week, having to play earnings roulette isn’t a factor. That’s one positive. We can also see that this pullback has now reached the 50-day moving average, and the stock closed all of four cents below the line today. Volume continued to decline. In this position, I might look to re-enter, using the intraday low at 22.75 as a fairly tight selling guide.

 

GR011817-CUDA

 

Among oil names I’ve discussed in recent reports, Diamondback Energy (FANG) and Rowan Companies (RDC), not shown, have not been able to hold near-term support. Both are expected to announce earnings in the latter part of February. So is Parsley Energy (PE), which is currently acting the most constructive among the three.

Oils really haven’t been an area of great strength since they all gapped up in late November. This has kept any real upside potential “on the come,” as one might seek to buy the type of tight action PE is showing here along the confluence of its 10-day, 20-day, and 50-day moving averages. So while FANG and RDC are slumping, albeit only very slightly, PE found some minor support today at its 50-day moving average.

Buying it along here implies that one is looking for a move to develop before earnings in late February. If oils are going to move, PE offers a more coherent and constructive-acting name currently. Given PE’s demonstrable tendency to obey its 50-day moving average, the line then serves as a reliable selling guide.

 

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Mobileye (MBLY) is expected to announce earnings on February 22nd, more than a month away. Here we see the stock holding very tight along the prior New Year’s highs after testing the 200-day and 10-day moving averages last week. I like this action, so I would consider the stock buyable here using the 10-day line at 41.41 as a tight selling guide.

However, pullbacks to the line might present lower-risk entry opportunities, while a pullback to the 200-day line at 40.80, about 3% below today’s close, would be even better. With so many shorts still in the stock as of year-end as I discussed over the weekend, they will have to decide what sort of stand they intend to make as earnings approach. Otherwise they may simply move to cover.

 

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Moving to the optical names discussed in my last report, I would note that while a name like Finisar (FNSR), not shown here on a chart, doesn’t announce until late February, I don’t care much for the action currently. In essence, it did not do what I was looking for it to do, which was to clear the 20-day moving average in a hurry after last Friday’s “deep doo-doo” bottom-fishing pocket pivot, otherwise known as a “DDDBFPP” for you acronym fetishists.

It would need to regain the 10-day line in robust fashion soon for me to get interested in this as a bottom-fishing situation again. That could happen, so I would certainly be open to it should it occur, and the low-volume pullback over the past two days could easily set this up, so keep an eye on it nevertheless. As X demonstrated today, the situation with any individual stock can change quickly!

As a side note, Lumentum Holdings (LITE), not shown, is off the table as an undercut & rally possibility after it fails to hold the 35.90 prior low in the pattern. The 200-day moving average at 34.52 looms just below.

Applied Optoelectronics (AAOI) is a different story, since it now has earnings out of the way, after which it posted a very impressive buyable gap-up (BGU) move as I discussed in last Wednesday’s mid-week report. I don’t show it here on a chart as it is now extended, and only a test closer to the 26.11 intraday low of last week’s BGU would put it in a lower-risk entry positon.  That is something to watch for, of course.

Nvidia (NVDA) is getting a little bit interesting here as it actually posted an undercut & rally move today with buying volume picking up. That might surprise anyone who wants to look at this move up into the 20-day line as a shortable one. Personally, I don’t see this as a short at all.

In fact, the action looks somewhat bullish. The prior low in the pattern from the first day of trading in 2017 was logged at 99.38. Today NVDA got as low as 99.11 before turning back to the upside and closing at 102.95. That created a clear undercut & rally buy point once the stock cleared the prior 99.38 low, using that low as a tight selling guide.

If you can handle a 3.6% downside stop from here based on today’s closing price of 102.95, then this can be considered to be in a lower-risk entry position here using the 99.38 low as your stop. Simple trades for simple minds – my favorite kind!

 

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I note that First Solar (FSLR), which isn’t expected to announce earnings until February 28th, has pulled into its 10-day and 20-day moving averages today on volume that was 58.3% below average. That would put it in a lower-risk entry position for anyone looking for an upside move ahead of earnings.

If you’re going to mess around with any of these solars I’ve discussed in recent reports and blog posts, I think FSLR is your safest bet. It has better earnings estimates and higher liquidity, making it easy to handle in real-time in case things don’t work out for the stock. Right here the stock is in a lower-risk entry position using the 20-day line at 33.96 as a tight selling guide. And, I would add that I look at this as mostly an idea for swing-traders. Swing away!

 

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One final stock note on GrubHub (GRUB), not shown, which is expected to announce earnings on February 2nd. The stock is currently extended but continues to act well. Volume is declining here, so I would look for a pullback to develop.

For that reason, while I consider it one of my favorite names, currently, I would just leave it alone and wait to see what happens after earnings unless I saw a very opportunistic entry develop on a pullback to the 20-day line at 37.76.

Many are talking about a market sell-off developing after the Inauguration this coming weekend. In my view I think one is better off just ignoring such blather. My approach is to focus on a smaller handful of stocks, preferably those that have already announced earnings or which will not announce earnings until the latter part of next month.

To that end, I’ve focused on a few names I like here. Those of you who are experienced traders and investors may have a few of your own. So, whatever stocks you like, stick to a small group and watch them closely. I find this useful in an environment that is seeing the NYSE-based indexes continue in a trendless but tight sideways consolidation while the NASDAQ chops its way higher in a very shallow uptrend.

Within this context stocks can swing around, so keeping a tight handle on a small group of names offers a more reasonable way to handle the current action. 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, TSLA, VEEV, 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. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.