The Gilmo Report

January 29, 2017

January 29, 2017

To paraphrase Forrest Gump, bullish action is as bullish action does. And so far that seems to be the case. The S&P 500 Index holds in a two-day bull flag with volume drying up nicely on Friday following Wednesday’s gap-up breakout to new highs.

 

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The NASDAQ Composite Index continues to one-up the S&P 500 and the Dow, matching their slight downside closes with an upside close of its own Friday. Volume came in lighter as sellers dried up and the index bobbed up off its intraday lows to close in the upper half of its daily trading range.

 

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And of course the strength in the NASDAQ is supported by a relatively broad swath of big-stock leaders, almost all of which are veritable household names. Peter Lynch (who, by the way, was also an O’Neil institutional client back in the day) would be proud!

Among actionable big-stock NASDAQ leaders, Netflix (NFLX) pushed its way out of a short five-day flag it has been forming since its buyable gap-up (BGU) move of last week following earnings. The above-average volume move came Friday, one day after volume dried up within the flag. This sent NFLX to an all-time high close, and there was a surge of volume into the close. We’ll see if this bodes well for Monday’s open. But for now, NFLX remains within buying range of the prior week’s BGU, using the 138.25 intraday low as a tight selling guide.

 

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Alphabet (GOOGL) opened slightly to the upside on Friday after reporting earnings Thursday after the close. The stock started up early in the day but sold off hard in a big-volume outside reversal to the downside. Note, however, that GOOGL had two earlier buy points within the pattern, and Friday’s reversal closed well above both. It also held above the 10-day moving average, which may be constructive given that the daily range was less than 3% in total.

Based on GOOGL’s tepid earnings growth, I tend to think I can find better big-stock NASDAQ names to play among those that have already announced earnings.

 

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Microsoft (MSFT) would probably be one of them. The company also announced earnings after the close on Thursday, and it turned out to be an earnings roulette winner. It celebrated by gapping up to all-time highs on big buying volume. The move also qualifies as a buyable gap-up (BGU) using the 64.89 intraday low as a tight selling guide. Simple enough.

 

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These are my notes on the other big-stock NASDAQ leaders I’ve discussed in recent reports and which continue to lead this market:

Facebook (FB) has formed a big cup formation ahead of earnings next week. One of the best leading stocks since posting a roundabout pocket pivot (RAPP) three weeks ago at the 50-day moving average, FB is now about 1% away from all-time highs.

Amazon.com (AMZN) is also forming a big cup formation very much like FB. The two stocks have been mirroring each other after each posted RAPPs three weeks ago. AMZN is holding tight and within about 1% of its all-time highs.

Apple (AAPL) is idling ahead of next week’s expected earnings report. I’m not inclined to do anything with AAPL ahead of then.

Priceline Group (PCLN) is extended after posting a pocket pivot at the 10-day moving average on Monday, as discussed in Wednesday’s report. The stock broke out to all-time highs today on above-average volume.

Tesla Motors (TSLA) continues to pull back slightly over the past three days. The stock is well-extended from the 200-day moving average but continues to track tightly along and above the 10-day line. With the stock this extended it is difficult to ascertain any truly lower-risk entry points from here.

For the most part, these big-stock NASDAQ names are all acting quiet, which further bolsters a bullish case for the market. As I blogged on Friday, Dow 20,000 is either the start of a big new bull rally or the mother of all short-selling opportunities, and for now the real-time evidence certainly argues for the former!

The Ugly Duckling came to call on Steel Dynamics (STLD) and U.S. Steel (X) Thursday and Friday. Both of these stocks looked fairly ugly as of Wednesday, with STLD by far the ugliest of the two after announcing earnings. By Wednesday’s close the stock might as well have been given up for dead based on the massive-volume breach and violation of the 50-day moving average.

But as is so often the case in this market, the Ugly Duckling suddenly rises from the market swamp when you least expect him to. STLD is then sent flying back the other way over the next two days and actually closes Friday above 10-day and 20-day moving averages, but just two cents away from its 50-day moving average.

If the stock can regain the 50-day line, then what we have here is one of these 50-day moving average violation fake-out situations that I’ve discussed in prior reports during 2016. While Wednesday’s selling volume was huge, somebody was on the bid as it came down.

So by Thursday the sellers had been fully absorbed and the stock turned back to the upside on volume that was equal to 70% of Wednesday’s volume. This is the sort of thing that is typical of this market. So while it is possible that it is a short into what is a wedging rally up to the 50-day line, the key is how and whether it can regain the 50-day line. It did briefly on Friday, but not by much, so I’m very interested to see how STLD plays out from here.

 

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U.S. Steel (X) is similar to STLD, but one key difference is that it did not close below its prior lows within the base on Wednesday. Selling volume was also lighter than Tuesday’s volume, and much lighter than the selling volume in STLD on the same day. STLD sold off hard Wednesday on volume that was 255.4% above average, while X’s volume increase was limited to only 35.3% above average. X also closed 45% above its intraday lows that day. The stock closed Friday eight cents below its 50-day moving average.

You might also notice that both STLD and X can be played as undercut & rally set-ups. STLD undercut and rallied back above the 35.23 low of January 18th on Thursday, and closed a full dollar above that low on Friday. X undercut and rallied back above its 31.29 low of January 19th, as well as the 32.93 low of December 30th.

 

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Allegheny Technologies (ATI) is the current leader among the steel names, and it gapped up on Tuesday after beating on earnings. I don’t show the chart here but the intraday low of Tuesday’s BGU is 19.10, and the stock closed at 21.83 on Friday, so it is way extended.

Pullbacks closer to the $20 price level, and the BGU low would be nice to see as lower-risk entries, but so far the stock has stubbornly held nearly all of the 20% or so gains it had on Tuesday.

I discussed Caterpillar (CAT) in my mid-week report after it gapped up on Wednesday. At that point we were still waiting for earnings to be reported the next morning on Thursday. So I advised waiting to see what transpired after earnings, just in case an opportunistic situation arose for a lower-risk entry.

CAT came out with earnings Thursday before the open and gapped up slightly at the open after releasing an allegedly weak report. It then reversed course and headed back to the 96 price area where it filled Tuesday’s gap. That allowed for an opportunistic entry at that point.

From there it bounced off the intraday lows to close at 97.22, just below mid-range for the day. Friday saw the CAT open up slightly and then push to higher highs, completely shrugging off Thursday’s weak earnings report and uneven market reaction after earnings. Technically, this remains within buying range of the base breakout.

 

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When it comes to the opticals, I’m sticking with the demonstrable leaders. Applied Optoelectronics (AAOI) is the undisputed leader of the pack, and it is holding up very well following its buyable gap-up (BGU) move of over two weeks ago.

On Friday the stock finally met up with its rapidly rising 10-day moving average where it found support as volume continues to dry up. This would put the stock in a lower-risk buy position using the 10-day line or Friday’s intraday low as a guide for a very tight stop. If one is already in the stock, then this could be a reasonable add point.

 

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Oclaro (OCLR) is holding its recent base breakout around the $10 price level. We can see a number of big blue weekly volume spikes in the base. The last two produced this past week’s breakout. So far this looks constructive, and for those who like to buy base breakouts, this is well within buy range, if not at a buy point. Those who got in lower closer to the $9 price level per my initial discussion of the stock in last weekend’s report can consider the breakout as an add point.

 

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Ciena (CIEN) illustrates why I generally shun buying breakouts, preferring to enter on a constructive pullback. CIEN broke out of a six-week base on Wednesday on above-average volume that also qualified as a pocket pivot breakout. It has spent the past two days pulling back into its base, but note that the pullback is coming down toward the confluence of the 10-day and 20-day moving averages. Volume dried up to -45.9% below average, so as it pulls into the moving average confluence it approaches a lower-risk entry point.

CIEN closed Friday at 24.61, and the 10-day line is sitting just a little over 1% lower at 24.36. The 20-day line is at 24.30. So while buying the stock as close to these two moving averages as possible is optimal, at 1% away it is already within buying range using the two moving averages as a tight selling guide.

CIEN’s softness might have been driven by a gap-down move in its close cousin, Juniper Networks (JNPR) Friday after JNPR announced earnings on Thursday after the close. CIEN isn’t expected to report earnings until March 2nd, but it has already been acting better than JNPR for some time.

If you look at a chart of JNPR on your own, you will notice that the stock gapped down through its 20-day line a little over two weeks ago. Thus it was already flashing warnings signs, and so far we have yet to see any similar warning signs in CIEN.

 

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In the materials space, my preferred names are Martin Marietta Materials (MLM) and Eagle Materials (EXP) based on the idea that they are breaking out of more constructive, tighter bases. That doesn’t mean the other names I mentioned in my Wednesday mid-week report won’t go higher if these go higher. Just to review, those included Vulcan Materials (VMC), U.S. Concrete (USCR), and Cemex (CX).

My guess is that if this build-the-wall project continues to move forward, these stocks will move higher as a wolfpack, as my late friend and sub-mentor Ian Woodward used to say. But these stocks may be subject to news developments regarding said wall as well as President Trump’s push to improve infrastructure in the U.S. Both MLM, not shown, and EXP are pulling in slightly and are within range of their current breakout points. In particular, the pullback here in EXP brings it into a very low-risk entry point, with the top of the base at 103.16, just 2% below Friday’s close.

 

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An interesting side-development to note here with EXP is that it is also breaking out of a 27-month long-term base.

 

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ServiceNow (NOW) gapped up after earnings on Wednesday after the close, and held the gap-up move into Thursday’s open. The gap move was sold into, and NOW closed near the lows of its intraday trading range. On Friday, NOW held its ground, and after slightly undercutting the 89.41 intraday low of Thursday’s buyable gap-up (BGU) it managed to close back above the $90 price level. In my view, this is actionable right here as a BGU using the 89.41 price level or Friday’s intraday low at 88.71 as tight selling guides.

 

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Veeva Systems (VEEV), not shown, is holding along its 50-day moving average and just below it as volume dries up to -62% on Friday. While this puts it in a lower-risk entry position, the stock hasn’t shown any desire to push higher just yet.

Square (SQ) didn’t end the week closer to the $15 price level, so it isn’t showing any three-weeks-tight (3WT) sort of flag formation on the weekly chart. I discussed this as a possibility to look for in my discussion of the stock in my Wednesday mid-week report. But where no 3WT can be found, another lower-risk entry does present itself here on the weekly chart.

Here we can see that SQ successfully tested the 10-week moving average at 14.09 this past week, so can be considered to be in a lower-risk entry position here using the 10-week line as a selling guide. With weekly volume picking up slightly on the week, it can also be seen as slightly supporting action at the 10-week line.

 

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Barracuda Networks (CUDA) gave up on the nice upside move off of its 50-day moving average that we saw on Wednesday in rather short order. Volume even picked up slightly on Friday as the stock closed back below the confluence of its 10-day, 20-day, and 50-day moving averages.

This looks somewhat junky to me, which is a fairly quick change of character following Wednesday’s nice upside move. However, CUDA is still holding above the 10-week line at 22.77 on the weekly chart. This might put it back in a lower-risk Ugly Duckling type of entry positon using the 10-week line as a tight selling guide.

 

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The reality among the cyber-security stocks is that Checkpoint Software (CHKP) is the de facto leader. In this case it may be better to try and find an entry here, although it is slightly extended from the prior week’s buyable gap-up move. With the 10-day line rising quickly, it is now at 95.58 and above the 94.50 intraday low of the BGU seven days ago on the daily chart. Watch for any kind of pullback or meet-up with the 10-day line as a potentially opportunistic entry point, should that occur.

 

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The Ugly Duckling is at work in some of these other cyber-security names I’ve mentioned in recent reports. While CUDA flounders, Palo Alto Networks (PANW) is steadily working its way back up what could be the right side of a new base. Last weekend I noted its gap-up pocket pivot coming up through its 200-day moving average, and the stock has moved higher from there.

On Friday PANW dipped slightly on a test of its 10-day moving average and held successfully, closing near the peak of its daily price range. Volume dried up to -52% below average, so it looks to me like it may want to go higher. For those who can handle the risk, this looks buyable using the 10-day line at 142.14, less than 3% below Friday’s close at 145.18, as a selling guide.

I would also note that CyberArk Software (CYBR), not shown, is trying to set up along its 10-day moving average on light volume, but earnings are due in the next couple of weeks, whereas PANW’s earnings aren’t due until late February. Take a look at CYBR’s chart to see if there might be a trade possible before earnings are reported.

 

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Alibaba (BABA) is holding up well following Tuesday’s post-earnings buyable gap-up (BGU) move. After pushing higher on Wednesday, the stock has pulled in as volume dries up sharply. This puts it within better buying range of Tuesday’s BGU using the 99.94 BGU intraday low as a tight selling guide.

In my view BABA is a fairly constructive long-term story, with steady, strong earnings growth expected for some time to come. Next quarter’s estimates call for an acceleration in earnings growth to 49% on a hard number of 70 cents vs. the 30% growth on $1.20 that was reported on Tuesday. By 2021 BABA is expected to report $8.03 in annual earnings, 12.7 times its current price.

 

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BABA’s little Chinese e-commerce cousin, JD.com (JD), not shown here on a chart, is also pulling in slightly after making higher highs earlier in the week. Volume dried up sharply on Friday at -77.2% below average. For that reason, taking a shot at the stock here while using the 10-day moving average at 27.85 as a tight selling guide looks feasible. However, if I had to pick between JD and BABA (which I have, actually!) I prefer BABA as the big-stock Chinese e-commerce play.

Momo (MOMO) pulled into its 10-day moving average on Thursday and Friday, which is the buyable pullback I was looking for per my comments in the Wednesday mid-week report. On Friday volume dried up to -72% below average, a clear voodoo pullback that puts the stock in a much lower-risk entry position here following Tuesday’s very nice-looking pocket pivot.

 

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Weibo (WB) has more or less done the exact same thing, pulling into its 10-day and 20-day moving averages on Thursday and Friday. Volume remained low at -50% below average on Thursday and then dried up in the extreme on Friday at -71.6% below average. This is therefore in a lower-risk buy position right here using the 20-day line at 46.40 or the 10-day line at 47.50 as your selling guides. Add salt to taste!

 

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Netease (NTES) is also acting well after testing its 10-day moving average on Thursday. As I’ve discussed several times in recent reports, you have to sit back and wait for the pullbacks to the 10-day line if you’re interested in snagging shares of the stock. The 10-day line continues to rise and is now at 245.73. Pullbacks near to that price point would offer lower-risk entry opportunities. NTES continues to come up the right side of what is shaping up as a clear cup formation, and is now only about 7% below its prior October highs.

 

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Clovis Oncology (CLVS), not shown, flashed a continuation pocket pivot on Thursday on strong volume. It then moved higher on Friday, but remains in an extended position. Earnings are expected to be reported on February 23rd.

Incyte Pharmaceuticals (INCY), not shown, is also slightly extended, but pullbacks into its 10-day moving average at 118.02 might offer lower-risk entry points. INCY is expected to report earnings on February 14th.

Glaukos (GKOS) is roaming around its 10-day line on the daily chart, but as I wrote over the weekend I’d look for pullbacks to the 20-day moving average at 37.31 as lower-risk entries if I got them. The company isn’t expected to report earnings until March 1st.

In the meantime, we can also see that the weekly chart is developing in constructive fashion as the stock forms a tight, two-week handle to its current, cup-with-handle base formation. So far this looks very good, so it’s a matter of waiting for an opportunistic pullback to snare some shares, if one has a desire to own GKOS.

 

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When it comes to the oil patch, I really don’t have much new to say about the three names I’ve discussed in recent reports, Diamondback Energy (FANG), Parsley Energy (PE), and Rowan Companies (RDC). They all continue to lope along the lows of potential new bases, but there has been no catalyst to drive any kind of substantial breakout attempts just yet. For now, I just keep these on my watch list.

Mobileye (MBLY) is coming into its 10-day moving average with volume drying up to -48.2% below average. This puts it in a lower-risk entry position using the 10-day line at 42.05, less than 1% below Friday’s close, as a tight selling guide.

MBLY is expected to report earnings on February 23rd, based on the most current reports. It has had a fairly strong upside run since coming up through the 50-day moving average back in late December, so it is possible that it will take some time to consolidate those gains ahead of earnings.

 

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Nvidia (NVDA) continues to notch higher highs as it pushes off of the confluence of its 10-day and 20-day moving averages following the prior week’s undercut & rally (U&R) move. We can also see a couple of five-day pocket pivot volume signatures along the confluence of the short moving averages.

So far sellers don’t seem to be interested in hitting the stock ahead of its expected mid-February earnings report date, and the U&R long set-up is working. As I wrote in my last report, I would not be surprised to see NVDA eventually push right back up to its prior highs around the 120 price level.

So far this has been a great U&R trade for NVDA fans over the past eight trading days. And whether the stock has topped for good, remains an open question, in my view. That’s why I prefer to focus on the price/volume action that has developed over the past couple of weeks since this has obviously led us in the right direction with the stock.

 

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GrubHub (GRUB) is holding excruciatingly tight along and just below the 42 price level. As I’ve discussed in previous reports, this is a big short-squeeze type of play that has the additional kicker of strong earnings growth. This looks like sellers have no interest in hitting the stock as it gets extended following its prior roundabout pocket pivot (RAPP) at the 50-day line two weeks ago. This looks like it wants to go higher ahead of its expected February 8th earnings report.

 

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Lately I have noticed that the spread between the number of names on my long watch list and the number on my short watch list is getting rather high. I should point out, however, that in and of itself this is not a “bearish” indication. The spread has often become much wider, and sometimes it merely serves as evidence of strong, bullish underpinnings to any particular market rally phase.

Rather than rely on indicators like this, it makes far more sense to simply focus on the precise price/volume action of individual stocks. That is where all the clues you need will be found. So if leading stocks start to break down and in the process transform into possible short-sale targets or set-ups, you will see it on the charts at the moment of impact.

In the meantime, everything I’m seeing with respect to the action of individual stocks indicates a bullish environment. What’s not to like? Meanwhile, one can read many cautionary articles and commentaries with ominous titles like, “The Warning Signs Are Building” from an article dated January 18th.

But you know what they say about opinions. In the meantime, we just go with the action of individual stocks. For now, they are telling us to simply stay the course.

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 BABA, MOMO, NFLX, OCLR, 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.