The Gilmo Report

July 12, 2017

July 12, 2017

Those who love to ride rollercoasters will find much to like about this market, but the unwary might have been shaken out by yesterday’s big sudden intraday sell-off. This occurred after news of Donald Trump Jr. releasing the email chain he exchanged with a Russian attorney with no ties to the Russian Government was released.

Once the news algos, algos that are allegedly programmed to read news and react accordingly, were done selling, the indexes found their feet and simply turned back to the upside. By the close, all the major indexes finished more or less flat, with the NASDAQ Composite Index holding critical near-term support at its 50-day moving average.

This morning the indexes gapped higher ahead of Fed Chair Janet Yellen’s testimony before Congress, and the rally held up into the close. This brought the NASDAQ right up into the declining tops trendline I’ve drawn on the daily chart, below, on higher volume. A nice move, albeit into potential resistance, but which could also be setting up a declining tops trendline breakout as well.

 

GR071217-$COMPQ

 

As the Dow Jones Industrials Index posted a new all-time closing high after posting an all-time intraday high earlier in the day, the S&P 500 Index posted a trendline breakout on higher volume. Is this presaging a trendline breakout by the NASDAQ? I’m sure we’ll find out soon enough.

 

GR071217-$SPX

 

I wrote over the weekend that the market looked a bit sold out, and so far this week most leading and formerly leading stocks have reflected that condition by drifting back to the upside. Some of these moves have come on higher volume, some on lower volume, and many as the result of a moving average undercut & rally (MAU&R) type of long set-up.

Financials, however, have been a bit of an outlier as they continue chopping sideways through the first few trading days of July. The SPDR Financial Sector Select ETF (XLF) tested its 10-day moving average today as volume declined, reflecting similar action in a number of individual financial names. The move in financials over the past month has been predicated on the idea of continued and consistent Fed interest rate increases, which is allegedly positive for financials, as well as the potential for legislative reform for the industry.

For these reasons, the group is somewhat news-sensitive, which should be taken into account by anyone looking to buy into this area of the market. So far, adopting a method of only buying on pullbacks into logical areas of support has proven effective. Thus, we see the XLF in a buyable position here along the 10-day line with volume drying up sharply.

This also continues its work on the handle area of a possible cup-with-handle pattern extending back to early March. In lieu of the XLF one can also look at playing big-stock financials in similar chart positions, such as Citigroup (C), or J.P. Morgan (JPM), among others.

 

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Crude oil prices have been trying to stabilize along their recent lows, which has given some impetus to my two favorite oil names, Keane Group (FRAC) and Jagged Peak Energy (JAG). Both stocks pulled down into the 50-day moving averages on Friday, and I indicated in my weekend report that these pullbacks “…would put either stock in a lower-risk buy position using the 50-day line as a tight selling guide.”

I don’t show FRAC here on a daily chart, but essentially did the same thing that JAG did on Monday and yesterday as it pushed up and off the 50-day line. Today FRAC held along its 10-day moving average, not too far from the highs of its now five-week price range. JAG, on the other hand, posted a buyable gap-up (BGU) type of move on heavy volume at the open as a result of an analyst’s buy recommendation today.

Initially JAG posted an intraday low of 14.13, but that failed to hold toward the end of the day as the stock set a second intraday low at 13.79. But that pretty much all negated the BGU, turning today’s move into a high-volume base breakout instead. Despite retracing a good deal of its gap-up move, JAG did manage to close at 14.37, just below mid-range.

 

GR071217-JAG

 

Tesla (TSLA), which is the big-stock NASDAQ name that has been hit the hardest in recent days, set the tone for a market rally after finding support within its prior base structure from May.  As I wrote on Wednesday, “A reaction bounce from here would, however, be logical.”

So, laying back and waiting for the stock to push up closer to the nearest moving averages was prescribed for anyone looking to short the stock. As the macro-pattern shows, TSLA has formed the left shoulder(s) and head of a possible head and shoulders top. The rally that we’ve seen so far this week helps to form the first potential right shoulder in the pattern.

Today the rally stalled near the 50-day moving average, and closed about 3% below the line as volume declined. I’d prefer to short this closer to the 50-day line, but it is possible to short it here and then use the 50-day line as a 3% upside stop, which is reasonable.

 

GR071217-TSLA

 

One could have gone long Facebook (FB) and/or Amazon.com (AMZN), right at the point at which they regained their 50-day moving averages per my discussion over the weekend. As I wrote at the time, “There is a simple way to test this. You go long either or both stocks here and use the 50-day line as a tight selling guide.”

That would have worked well for both stocks as FB pushed to new all-time highs today while AMZN, not shown, regained the $1,000 Millennium Mark on low volume. Between the two, FB’s move is much more buyable as a standard-issue base breakout on above-average volume. Keep in mind, however, that both FB and AMZN report earnings later this month.

 

GR071217-FB

 

Nvidia (NVDA) also denied any short-sellers trying to hit the stock short at the 20-day exponential moving average. Sure, volume was weak as the stock pushed into the 20-dema on Friday, but weak volume didn’t keep it from just continuing higher. On Monday NVDA pulled a moving average undercut & rally move (MAU&R) as it came up through the 20-dema, and was actionable at that point.

Today NVDA broke out on a new closing high as volume came in above average. Technically, as with FB, this can be considered a standard-issue base breakout with the idea that it should hold the 160 price level. Personally, I’d prefer to have entered on the MAU&R on Monday. Remember that an MAU&R set-up is a price set-up only. There does not have to be any higher volume signature associated with it.

The trade is then very concrete once the stock clears the moving average, whether the 50-day line or 20-dema, as you then use the moving average itself as a tight selling guide. This type of set-up has worked quite often in this market.

 

GR071217-NVDA

 

Netflix (NFLX) also pushed past its 20-day exponential moving average, and rallied as far as the highs of late June as it pushed just above the 50-day moving average this morning. As I wrote over the weekend, at that time an undercut & rally (U&R) long set-up was in force after the stock had pushed back above the 147.30 low of mid-June.

That U&R set-up was playable throughout the past three trading days. On Monday NFLX stutter-stepped at the 20-dema, looking like it might be a short at that point. Yesterday, the stock sold off with the general market on the big intraday news break, but recovered to push back up and beyond its 20-dema.

Keep in mind that if you’re busy trying to short something like NFLX at the 20-dema on Monday, you may easily begin to sense at that point that the bid is strong. Using this visceral information and feedback, you could easily flip long the stock once it cleared the 20-dema using the 20-dema as a stop on the downside. I often find that these types of trades can be good for at least decent swing-trading profits.

Note that today NFLX posted a roundabout pocket pivot (RAPP) as it came up through the 50-day moving average on above-average volume. It is pushing up toward possible resistance at the prior late June low, so I’d watch to see whether this pulls in on light volume to test the 50-day line, which would offer a lower-risk entry. After all, the stock has had two prior long entries on the initial U&R through the 147.30 price level, and then on Monday as it cleared the 20-dema, triggering an MAU&R.

 

GR071217-NFLX

 

Notes on other big-stock NASDAQ names below:

Alphabet (GOOGL) rallied back above its 50-day moving average on light volume. This does, however, trigger an MAU&R entry point using the 50-day line as a tight selling guide.

Apple (AAPL) closed just above its 20-dema, which would trigger an MAU&R at the 20-dema while using it as a guide for a tight stop.

Microsoft (MSFT) has floated back above its 50-day and 20-dema lines on light volume. However, it did trigger its own MAU&R long entry at the 50-day line on Monday.

Priceline Group (PCLN) has continued higher following Friday’s base breakout, and technically is still within buying range given that it has only moved 2.5% beyond the buy point at the late June high of 1898.68. Given the huge rally in big-stock NASDAQ names so far this week, that’s not much of a move following the breakout.

Earnings are expected for most of these big-stock NASDAQ names later this month, with NFLX expected to be the first on July 17th, which is next Tuesday.

Alibaba (BABA) was one of my favorite long ideas over the weekend, as discussed at the time. That was based on its constructive position within a mini-cup-with-handle formation where it was simultaneously holding tight along the 10-day moving average with volume drying up to voodoo levels on Friday.

Today BABA gapped up to all-time highs on low volume, so in my view this is extended. The time and place to buy it was on Monday when it was sitting along the 10-day line!

 

GR071217-BABA

 

JD.com (JD) was a moving average undercut & rally move on Monday as it pushed back above its 50-day moving average. I wrote over the weekend that, “if JD can more convincingly regain the 50-day line, it could come back into play as a long idea.” It did that, and based on how we play a moving average undercut & rally move (MA&UR), which triggers at the moving average, the stock was buyable at that point on Monday.

I emphasized over the weekend, that I “…try to look at every stock, even those that look like shorts, with an even hand, assessing the conditions under which I would view it as a long or a short. In this market, we already know that the Ugly Duckling can show up at any time, so it helps to understand and have a plan for bullish and bearish resolutions to patterns that show up in real-time.”

This is critical for successful swing-trading, as well as taking advantage of Ugly Duckling long set-ups when they occur in real-time. It is also why I NEVER take a rigid bullish or bearish position on a stock and sit there. I am prepared to play it as it lies, so to speak, based on the precise price/volume action I am seeing in real-time.

It’s that simple, and it’s that complicated, because many traders and investors somehow always seem to have their emotions on the line. I say “Fuhgettaboutit!” It won’t make you money. In any case, JD has now moved back up to its prior breakout point around 42, where it may run into short-term resistance.

 

GR071217-JD

 

Momo (MOMO) did exactly what I was looking for as a positive sign for the stock on Monday. As I wrote over the weekend, “If the stock can hold the 50-day line with volume remaining low, it can effectively correct the wedging action and set up as a long, so that is something to watch for.” On Monday, the stock pulled into its 50-day moving average early in the day and then launched higher on a roundabout pocket pivot (RAPP) move.

MOMO is now back near the prior early June high, which puts it in an extended position. But if you paid attention to my discussion of the stock in the weekend report, and correctly deciphered Monday’s price/volume action, the stock was ripe for the taking at that point. It has since moved three points higher and is now short-term extended.

 

GR071217-MOMO

 

Weibo (WB) took the second route today, choosing to push above its 50-day moving average on heavy volume. I wrote over the weekend that the stock was a two-sided situation, such that “The flip side here is that a move back up through the 50-day line that holds would trigger a moving average undercut & rally (MAU&R) long set-up.”

And that’s precisely what happened today. WB pushed up through its 50-day line on a five-day pocket pivot signature. Generally, I like to see a cluster of five-day pocket pivots in lieu of a single ten-day pocket pivot, but all of that is solved by employing a simple MAU&R long trigger at the 50-day line, no questions asked. From here watch for low-volume pullbacks to the 50-day line as potentially lower-risk entries.

 

GR071217-WB

 

Applied Optoelectronics (AAOI), not shown, remains on a tear but is short-term extended, and is a long way away from its nearest moving average, which would be the 20-dema down at 65.03. Lumentum Holdings (LITE) was moving in sympathy to AAOI last week, but this week ran out of momentum on Monday.

LITE spent the last couple of days consolidating and pulling into the confluence of the 10-dma and 20-dema as volume declines. This brings the stock into a lower-risk entry position here, using the 10-day line as a selling guide. In my view, AAOI and LITE are the two leaders in the opticals space. So, while there are others in the space acting well out there like Fabrinet (FN), not shown, I think one can do fine just focusing on these two.

 

GR071217-LITE

 

Appian Corp. (AAPN) remains a hot new-merchandise play in the cloud space, and one of my favorites. It tends to be a little volatile, so buying into constructive weakness while selling into extended strength has been an effective way of operating with this stock.

For example, following last Friday’s pocket pivot coming up through the confluence of the 10-dma and 20-dema, APPN pulled right into its 10-day line as volume dried up to voodoo levels, providing buyers with a lower-risk entry opportunity. It then launched higher today to post a trendline breakout on a pocket pivot volume signature. APPN is now extended, in my view, and pullbacks to the 19-19.50 level and the top of the trendline breakout might present lower-risk entries from here. Obviously, the lower-risk entry opportunity occurred yesterday at the 10-day line.

 

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Yesterday I blogged about some recent IPOs that seemed to be acting well. Among these, Alteryx (AYX) was the best performer today as it broke out to all-time highs on heavy buying volume. Yesterday I noted that the stock was sitting at its 10-day line and hardly budged during the big intraday sell-off, which struck me as constructive.

For that reason, I mentioned it in my blog post yesterday, and anyone who bought it realized a very nice base breakout today on strong volume. The stock is now extended, but pullbacks closer to the 20.50 level and the top of the base on lower volume would present better potential entries from here.

AYX plays in the self-service data analytics field, and today’s move was fueled by news that it would be offering its Alteryx Serve “in a cloud computing environment on Microsoft Azure.” That set up today’s base breakout, and I’m very interested in seeing how it handles any pullback from here as a new entry opportunity. AYX came public on March 24th.

 

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Yext (YEXT) is another recent IPO that is showing signs of life. The company bills itself as a pioneer in the “digital knowledge management” space, and partners with companies like Yelp (YELP). I would suggest going to their website and getting familiar with their business.

In the meantime, the stock has been holding tight along the confluence of its 10-day and 20-day moving averages for the past 3-4 weeks as volume has dried up in the extreme. Overall, it has been building what is its first IPO base since coming public back in mid-April. Today YEXT posted a pocket pivot and is still in a buyable position here using the recent lows around the 12.80 to 12.90 price area as a selling guide.

 

GR071217-YEXT

 

Another recent IPO, in fact extremely recent, is ShiftPixy (PIXY), which is sort of like an Uber for employers. In the so-called gig economy, employers often make use of short-term contract workers, and PIXY has created a service that brings employers and gig workers together in much the same way that Uber brings those needing a ride somewhere together with those providing rides.

In my view, PIXY has a very compelling theme, and the company makes money. It came public eight trading days ago at $6 a share and then posted an IPO pocket pivot on its fifth trading day. That led to a mover higher on Monday morning as the stock nearly doubled from its IPO offering price in just six days!

The stock has now pulled back into the IPO pocket pivot price level as volume has dried up sharply, which brings it back into a lower-risk buy position. Because the stock is so new, this is a bit tricky, but so far, the 9 price level looks like near-term support, so that can serve as a near-term selling guide.

In my view, PIXY has a compelling theme, and so at the very least I think this bears watching to see if it can build a longer IPO base. That said, the IPO pocket pivot, which was essentially last Friday’s breakout from a short three-day post-IPO flag formation, can be tested on the long side.

 

GR071217-PIXY

 

Another recent IPO that is interesting on a thematic basis is another cloud play, Cloudera (CLDR). It is also an Ugly Duckling of the lowest order (which can sometimes be a good thing. The company is a player in the machine learning and advanced analytics field, and came public on April 28th at $15 a share. It opened up for trading at 17.80 and then trended higher from there before peaking at around the 23 price area.

CLDR reported earnings on June 8th, and promptly gapped down the next day, even though the company came in with a much lower than expected loss and higher revenue than analysts were looking for. Since then the stock has trended lower as it approaches its IPO offering price. More recently, the stock posted an undercut & rally move after undercutting the prior 15.86 low of June 15th.

This obviously sets up a U&R long entry, and the stock was trading closer to 16 yesterday when I blogged about it. It rallied today to close at 16.49, but ran into resistance at its 20-dema. While this is what you might call an extreme Ugly Duckling set-up, it is still playable for the more adventurous among you. For now, I like entries as close to the 10-day line as possible, while using that as a tight selling guide.

 

GR071217-CLDR

 

I’m still fond of Nutanix (NTNX) as an a more mature recent IPO from last year that continues to round out the right side of a potential new base. I discussed the stock as buyable over the weekend as it sat along its 20-day exponential moving average on light volume. Yesterday the stock posted a voodoo pullback to the 20-dema, which looked buyable to me during the intraday market news sell-off.

Today NTNX posted a five-day pocket pivot as volume picked up sharply compared to yesterday. Watch for another pocket pivot off the 10-day line in the coming days as confirmation of today’s strength. But in any case I like the stock on any small pullbacks from here down to the 20-dema.

 

GR071217-NTNX

 

Notes on other names of interest:

Activision Blizzard (ATVI) posted a pocket pivot today off the 20-dema on strong, above-average volume.

Arista Networks (ANET) has moved higher since it triggered a moving average undercut & rally long entry using the 50-day line as a tight selling guide last Friday.

Bioverativ (BIVV) is within buying range of its prior base breakout through the 58.88 buy point, but I would look for small pullbacks into the 10-dma or 20-dema as lower-risk entry opportunities.

Canada Goose Holdings (GOOS) is living below its 50-day moving average, but I’m still keeping an eye on it for some sort of MAU&R move if it can move back above its 50-day line.

Edwards Lifesciences (EW) remains buyable along its 20-dema when pullbacks to the line occur.

Electronic Arts (EA) regained its 50-day moving average on Monday, triggering an MAU&R long entry at that point. It has since moved higher, but low-volume pullbacks to the 50-day line would provide lower-risk entry opportunities.

First Solar (FSLR) was buyable per my comments on the stock in the weekend report, and the stock broke out today on strong volume as it also posted a pocket pivot off the 10-day moving average. Another example of why I don’t adopt rigid bullish or bearish views on a stock, and instead go with the price/volume action that I’m seeing in real-time. That’s why I changed my view to looking at the stock as buyable near the 20-dema per my weekend comments.

Palo Alto Networks (PANW) was buyable near the 10-day line per my comments over the weekend, but is now back at the highs of its one-month price range and not in a lower-risk entry position any longer. Watch for pullbacks closer to the 10-day line at 135.61 as potentially lower-risk entry opportunities.

Salesforce.com (CRM) gapped up today on a five-day pocket pivot move as the prior “fractal” H&S formation does not resolve in a bearish outcome. Imagine that! Instead, CRM became an MAU&R play over the past three days as it clears its 50-day line.

ServiceNow (NOW) broke out to new highs today on below-average volume. It is now extended.

SolarEdge Technologies (SEDG) gapped up on Friday after it was announced that it would be added to the S&P Small-Cap 600 Index and has continued higher since. It is currently not in a lower-risk entry position given its near-term extended state.

Square (SQ) was buyable at the 20-dema per my comments over the weekend, and yesterday it broke out of a short, five-week base on strong volume. It continued higher today, and is now out of buying range of the base breakout.

Tableau Software (DATA) morphed into an MAU&R long set-up yesterday when it regained its 20-dema. It is now back above the prior base breakout point along the 64 price level.

Take-Two Interactive (TTWO) has held support along its 50-day moving average and is pushing up to the highs of its current four-week price range on light volume. Not in a buyable or a shortable position. I would also note that it will likely be important to watch what the other stocks in the group, ATVI an EA, do since the video-gamers tend to move together.

Twitter (TWTR) was buyable along the 10-dma and 20-dema on Monday per my comments on the stock in my weekend report. It briefly pulled into the 20-dema yesterday during the intraday market news sell-off, but held up well. It continued higher today and is now out of buying range.

Universal Display (OLED) regained its 50-day moving average today, triggering an MAU&R long entry at that point. Volume was light on the move, but I will reiterate that volume is not a factor in playing an MAU&R– it is a price-only type of long set-up, which makes it very simple and concrete.

Workday (WDAY) is back up near its prior June highs, and was yet another stock that could have been played on the long side solely on the basis of yesterday’s MA&UR set-up. It moved higher today on strong volume as it approaches the prior June highs. one that has worked many times in this market.

Zillow (Z) posted a supporting pocket pivot yesterday just above its 50-day moving average but right at its 10-week moving average on the weekly chart. That support did not hold today, however, as the stock busted its 50-day line on heavy selling volume. I wrote over the weekend that it was looking slightly questionable, and that assessment won out over yesterday’s supporting pocket pivot.

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

Many of the stocks I’ve discussed in the past two reports demonstrate quite aptly why I NEVER take a rigid bullish or bearish view of a stock. I simply go with the set-ups I see in real-time. In cases where a particular stock set-up can be viewed in both bullish or bearish terms, as several were per my weekend report discussions, I go with the real-time resolution as it unfolds before my eyes. The trick, of course, is being entirely open to what the market is showing you, rather than seeing what you think it should be showing you.

A huge number of MAU&R set-ups have dominated the action this week, and the beauty of these is how concrete and simple they are to act on. Volume is not a factor, just the price move back above a key moving average, usually the 20-dema or the 50-dma. I don’t need to catch the proverbial falling knives, or play macho-man trying to buy things off their lows, I just watch the set-ups and act accordingly with no ego and no emotion.

I wrote over the weekend that the primary clues I was looking for would be “…the ability of the S&P 500 to hold above its 50-day moving average combined with the NASDAQ Composite regaining its own 50-day line. That would be a bullish clue, and a cue to become more aggressive on the long side.”

So far this week that’s what the market has given us, and so it is now a matter of acting on any set-ups still available to us on the long side. As this report demonstrates, there are still a number of actionable set-ups, so 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 a position in NTNX and YEXT, 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.