The Gilmo Report

July 15, 2018

July 14, 2018

A news item citing one Chinese official who made mention of a need to come back to the negotiating table raised hopes of a trade détente and caused the market to rise from the ashes of Wednesday’s sell-off. This sent the NASDAQ Composite Index to all-time highs on Thursday on higher volume, keeping the market’s uptrend alive. Friday’s action slowed, but the index still closed relatively tight and at another all-time high.

 

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The S&P 500 Index also reversed course to post consecutive higher highs on Thursday and Friday, and remains less than 3% away from achieving all-time highs of its own. If anything, the action over the past three days underscores the highly fluid, news-oriented environment we are in currently. Even the slightest shift in the news flow can snatch victory from the jaws of defeat, and vice versa, on any given day.

In any case, I wrote on Wednesday that the pullback on that day didn’t seem abnormal given the prior four-day rally off the lows of the prior week. I didn’t expect to be proven correct so soon, however. One could argue that Friday’s action has the look of low-volume churning, but I would also argue that it can just as easily be argued that the indexes held their ground as volume declined.

 

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Where we go from here may depend more on how earnings season plays out. Big bank financials J.P. Morgan (JPM), Citigroup (C), and Wells Fargo (WFC) all reported on Friday in some of the earlier earnings salvos, and all three closed down on the day. While the bank earnings were considered a key earnings event on Friday, they ultimately had zero effect on the general market.

The news-oriented volatility does keep investors guessing, but it also creates opportunities where none perhaps existed the day before. That’s why I continue to view the market as more of a trader’s market than an investor’s market, although it is possible to sit with stocks that continue to trend upward, albeit in choppy, sometimes highly volatile fashion.

Such an approach, however, probably necessitates taking smaller positions and giving them more room. As long as they hold above a prior entry point or a critical reference level such as a key moving average, they can be held. But, to be fair, we have seen many fine-acting stocks suddenly come undone, so the efficacy of taking a swing-trading approach vs. that of taking a position-building/trend-following approach often comes down to the precise stocks one owns and plays. To each her own!

In general, I find that the volatile, news-oriented action creates an environment where nimble, active swing-traders may find plenty of fodder to play in the way of Ugly Duckling set-ups, many of which have worked well over the past few days. But this market has a way of pulling the rug out on investors just when things start looking very good, so I would not let my guard down no matter what approach I’m taking.

That’s because even the strongest-acting leaders can get hit, even while the market is rallying, as Netflix (NFLX) demonstrated on Friday. The stock was tagged with heavy selling after one analyst expressed caution ahead of the company’s expected earnings report after the close on Monday.

NFLX peeled off to the downside and closed below the 20-dema and the $400 Century Mark on heavy selling volume. This was its first close below the line since late April. Depending on where one owns the stock, there isn’t much to do here ahead of Monday earnings report. On its face, however, the stock is looking a little toppy, but Monday’s report will certainly figure into its future direction, to be sure.

 

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On a very basic, concrete level, Nvidia (NVDA) can be considered an active undercut & rally situation after it pushed up through its prior late May low at 240.25 last week. It has since rallied up to the 50-dma, where it has encountered resistance, but has also been able to hold support at the 20-dema as volume dried up to -47% below average.

Earnings aren’t expected until August 16th, so there’s plenty of time for the stock to move one way or the other if it wants to. The question is whether this is a short here underneath the 50-dma, or whether it is a voodoo pullback into the 20-dema that is actionable on the long side. Adding to the intrigue is the fact that it is sitting right at its prior base breakout point, through which it broke out twice before and failed.

Does the Rule of Three dictate that a third breakout is coming, and that this is the one that will hold up? The only way to find out is to buy the stock here while using the 20-dema as a tight selling guide. Otherwise, a breach of the 20-dema could bring it into play as a short-sale target. Play it as it lies.

 

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Amazon.com (AMZN) is expected to report earnings on July 26th, less than two weeks from now. Meanwhile, it just keeps making all-time highs as it gets more extended from its last potential lower-risk entry along the 20-dema last week. However, AMZN did push above another Century Mark, this time through 1800, on Friday, so could also be viewed as buyable here on that basis. Holding through earnings, however, is perhaps a mitigating consideration.

 

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Apple (AAPL) is expected to report on July 31st, but unlike AMZN isn’t streaking to all-time highs. Instead, it is drifting back up toward its June highs on weak buying volume, which of course makes this rally suspect. On the other hand, the stock may not have any substantial moves until earnings are out, so there is nothing to do here as I see it.

 

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Alphabet (GOOGL) held Wednesday’s re-breakout attempt, so any ideas of shorting the stock at that point were quickly quashed. The stock then broke out to all-time highs on Thursday on a pocket pivot signature while also clearing another Century Mark at 1200. GOOGL is expected to report earnings on July 23rd, so there isn’t much to do here ahead of earnings. In any case, the breakout to all-time highs is notable.

 

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Facebook (FB) has continued to edge higher since regaining the $200 Century Mark two Fridays ago. As I wrote on Wednesday, the stock was in a buyable position, just over 1% beyond the 200 price level. The company is expected to report earnings on July 25th, so an extended position like this isn’t currently actionable.

The stock does illustrate the slow, choppy, upside grind that is typical of many leaders in this market. Intermittent bouts of weakness, combined with the fact that many of these are in long, extended uptrends, easily create short-term fake outs where the stocks begin to look toppy. And just when they begin to look their ugliest, they recover and trudge back to new highs.

 

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Tesla (TSLA) continues to play its game of chicken with the shorts, who currently hold a total short interest of 34.5 million shares. This is a substantial amount of short interest for the stock, and the question is whether the shorts will blink first by running to cover ahead of the company’s expected August 1st earnings report.

After trading to the downside on Friday, TSLA recovered in a show of supporting action at the 50-dma and closed positive on the day. This has the look of a Wyckoffian Retest of the prior week’s low where the stock found support along a prior area of price congestion.

TSLA’s short interest hit a peak of 39 million shares at the end of April. Shorts piled on the stock after its March breakdown to lower lows that was accompanied by several predictions of imminent doom for the company. The company’s demise did not materialize, and the shorts have been moving to untangle themselves from the big pile of shorts that formed by the end of April.

I’m going to take a bold stand here and say that if the general market continues higher, TSLA will move back up through its 200-dma and near the prior highs ahead of earnings in a short-term short squeeze. The simple way to test this theory is to buy the stock here and use the 50-dma as a tight selling guide.

 

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Twitter (TWTR) is expected to report earnings on July 27th, and so far, appears content to continue basing ahead of earnings. After the prior U&R set-ups that materialize earlier this past week, the stock has tucked into its 10-dma and 20-dema on a tidy voodoo volume signature of -44% below average.

Technically, this brings it into a lower-risk entry position, using the 20-dema as a selling guide. However, ahead of earnings, one would either be looking for a decent upside move for a swing trade or to build a reasonable profit cushion in order to hold the stock through earnings.

 

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Snap (SNAP), like TWTR, is stuck in neutral here as it flops around its 10-dma and 20-dema. The stock has attempted to rally off the moving average confluence a couple of times, but so far has failed to get any closer to its 200-dma than it did in mid-June. Investors may be waiting for earnings, which are expected on August 9th, to provide some clarity with respect to the company’s user growth.

In the meantime, the stock appears to hold support along the 20-dema as volume remains light. Whether we will see a stronger move off the 10-dma and 20-dema ahead of earnings remains unknown, but my guess is that the stock will likely remain stuck in neutral until earnings are out.

 

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Alibaba (BABA) is expected to report earnings on August 2nd. That’s more than two weeks away. However, the stock’s price moves are likely going to be dictated by how the U.S-China Trade Tiff plays out. If some sort of settlement materializes, then expect BABA to gap higher. Otherwise, ahead of earnings, there isn’t a heck of a lot to do here until then as the stock runs into resistance along its 20-dema after finding near-term support along its 200-dma last week.

 

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Momo (MOMO) rallied nicely off its 50-dma two Fridays ago and continued to move higher Monday morning. As it cleared the 20-dema, however, it ran into trouble, stalling and closing near the lows of its daily trading range. It has since moved back to the 50-dma, and on Friday reversed at its 20-dema to close below the 50-dma.

If I were still long the stock after buying it at the 50-dma the prior week, its action this past week would have kicked me out of the stock. Friday’s outside reversal to the downside doesn’t look too appetizing, and may indicate that a test of the prior lows of two weeks ago is in the offing. Watch to see how that plays out, and whether it generates a U&R type of set-up at that point.

 

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Baozun (BZUN) pushed up and off its 50-dma on Monday, but ran into resistance along its 20-dema on Tuesday. It then retested the 50-dma and held the line, rallying to close near the highs of its daily trading range. That move carried higher on Thursday before running into overhead resistance on Friday.

BZUN may now be in a position that is similar to where MOMO was on Monday of this past week. Thus, I would not be surprised to see a pullback and test of the 20-dema, at which point we might be able to determine whether that serves as a lower-risk entry opportunity, depending on how it plays out in real-time.

 

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Among other Chinese names I’ve discussed in recent reports, Autohome (ATHM) acts like a typical late-stage failed-base short-sale set-up. After a logical undercut & rally move two weeks ago, the stock rallied just beyond its 20-dema and 50-dma before reversing to close below both moving averages on Monday.

One more run-up just above the two moving averages on Tuesday followed by a stutter-step move back up into the 20-dema on Friday morning led to lower lows. Even when a stock acts like a textbook short, like ATHM is, one can see how the action is choppy enough to test even the most stalwart of short-sellers.

 

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Micron (MU) might also be considered another textbook LSFB short-sale set-up, but so far it continues to rally past its 50-dma. Earnings are already out and the next report isn’t expected until September, so earnings roulette is not a factor. After a breakdown from the handle of a late-stage cup-with-handle formation, the stock has bumped up against the 50-dma several times.

It has now rallied just past the 50-dma on light volume, which brings it into potentially shortable range. While in this market environment it would not surprise me if the stock just kept rallying back up toward its prior highs, objectively this would trigger as a short-sale entry on a reversal back below the 50-dma. Notice that it is also filling the gap on the late June gap-down failure through the 50-dma, which may provide a second reference for upside resistance.

 

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As we move into the heart of earnings season over the next 2-3 weeks, I am mostly interested in looking for set-ups in stocks that won’t be reporting earnings for at least three weeks from now. That allows for a profit cushion to develop ahead of earnings if the set-ups in question lead to reasonable upside moves.

Okta (OKTA) isn’t expected to report earnings until September 6th, so it qualifies nicely in this regard. The stock was already buyable on the prior undercut & rally (U&R) move two weeks ago per my discussion of the stock at that time. On Thursday, it posted a pocket pivot off the 10-dma, 20-dema, and 50-dma. So far this looks good, and I would look for any further pullback to the three moving averages as potential lower-risk entries from here.

 

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ZScaler (ZS) also isn’t expected to report earnings until early September (September 5th), and it has worked quite well as an undercut & rally set-up. I discussed that set-up two weeks ago, and the stock has since pushed back up to the highs of what is turning into a cup base formation. The last entry opportunity occurred on Wednesday when the stock pulled back into the 10-dma and 20-dema.

From here, I’d look for pullbacks into the 10-dma at 38.18 as potentially lower-risk entries. the 10-dma/20-dema confluence remains buyable, as was the case today. Given the huge upside gap-up and move in early June, I would expect that at least a little overhead resistance will come into play, so the likelihood of at least one more buyable pullback, maybe two, into the 10-dma or 20-dema seems reasonable at this stage.

 

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Roku (ROKU) continues to move higher, posting another higher high on Friday on a pocket pivot volume signature. The last lower-risk entry occurred on the pullback to the 10-dma, per my discussion of the stock in last weekend’s report following its pocket pivot move eight days ago on the chart. ROKU is expected to report earnings on August 8th.

 

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Stitch Fix (SFIX) doesn’t seem too interested in giving up its gains following a cup-with-handle breakout six trading days ago. Meanwhile, the 10-dma is moving rapidly higher, setting up a potential meeting between it and the stock price. With the high in the handle at 30.82, pullbacks below 32 technically bring the stock back into buyable range.

However, laying back for a pullback to the 10-dma, now at 30.58, would be the more opportunistic approach given the stock’s strong run over the past month. SFIX isn’t expected to report earnings until October.

 

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DropBox (DBX) has followed through to the upside, albeit slightly, after undercutting its 30.65 low of June 28th on Wednesday and then rallying back above the 50-dma on Thursday. It tucked back into the 10-dma and 50-dma on Friday as volume dried up to -48% below average. This puts it in a lower-risk entry here, using the two moving averages as tight selling guides. DBX is expected to report earnings on August 9th.

 

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Turtle Beach Corp. (HEAR) has edged higher since posting a pocket pivot this past Monday after I first discussed the stock in last weekend’s report when it was sitting in a voodoo position along the 10-dma. The stock has tried to break out to new highs, but reversed on two attempts this past week, one on Tuesday and one on Thursday.

Volume dried up sharply on Friday as the stock pulled in slightly, but your best, lower-risk entry opportunities would occur on pullbacks to the rising 10-dma, now at 22.33. HEAR is expected to report earnings on August 9th.

 

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Video-gaming cousin stocks to HEAR have now all broken out to new highs. Last weekend I discussed the potential for a group move here, and that has turned out to be accurate. Electronic Arts (EA) and Take-Two Interactive (TTWO) broke out on Thursday, following Activision (ATVI), which broke out from a cup-with-handle base on Wednesday, as I noted in my report of that day.

EA is expected to report earnings in less than two weeks, on July 26th, and all three stocks will likely move in sympathy to the report. Therefore, while these breakouts are technically actionable, the question of playing earnings roulette by holding through earnings remains an issue. TTWO and ATVI are both expected to report on August 2nd.

 

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I’ve been keeping a close eye on all these hot IPOs that had huge moves in May into mid-June and then collapsed. Sometimes, stocks like these will have one more move back up to or near the prior highs as investors who missed the first move come piling into the stocks. If they can gain some momentum, then a second round of speculative fever can potentially ensue.

Here’s two of these names that aren’t expected to report earnings until late August and early September and which fit into what I consider to be a potentially strong, current group theme. The first, Huya (HUYA) is a Chinese company that provides a live-streaming gaming platform for video-game players that also serves as a type of social network. I view this as immune to the current trade tiff since it focuses on the Chinese video-game market and population.

After a torrid upside run the stock topped in mid-June and gave up over 40% of its gains off the peak. It then undercut a prior low in the pattern six trading days ago on the chart and posted a pocket pivot coming up through the 10-dma and 20-dema. It followed this up with another pocket pivot on Wednesday. Thus, HUYA is in a roundabout position where it may be forming the lows of a second, new base.

From here, I’d be on high alert for a pullback closer to the higher 20-dema at 33.81 as a potential lower-risk entry. HUYA is not expected to report earnings until September 5th.

 

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Bilibili (BILI) is another Chinese streaming video-game company with a slightly different business than HUYA’s. The company is more diversified with entertainment tie-ins to anime and comics in addition to video games. It currently has over 77 million visitors, and this is growing at 35% annually. Both HUYA and BILI also tie in to the current e-sports phenomenon.

BILI is like HUYA in that it had a torrid upside run that ended at the same time, in mid-June, and it is likely immune to the U.S.-China Trade Tiff as well. It has since given up more than 40% of that move and is now in a possible roundabout position. Note that the stock had a bottom-fishing pocket pivot on Thursday, but ran into resistance at its 50-dma on Friday.

The pullback brought the stock back into the 10-dma as volume declined but still came in at above average. I would prefer to see volume drying up more sharply, but I might look for the stock to settle in here with volume drying up further this week. Otherwise, one could just step in here and use the 10-dma as a tight selling guide.

BILI has pulled all the way back to its initial IPO base, so my view is that if this is going to set up along the lows of a potential new base, this is where it is likely to occur. And finally, please note that both HUYA and BILI fit into my video-gaming group theme, which includes HEAR, ATVI, TTWO, and EA, all of which are acting well.

 

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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). In all cases I will mostly use the shorthand version of “10-dma,” “50-dma,” etc.

In my Wednesday report, I wrote that, “With the latest batch of proposed tariffs out of the bag, is the market set up for news that moves in the opposite direction? In other words, if the Chinese agreed to come back to the negotiating table, would this trigger a big upside move in the market? It probably would.”

Interestingly, Thursday’s recovery rally was based on exactly this after a news item appeared citing one Chinese official who indicated that the two sides needed to go back to the negotiating table. This is the only spark necessary to send the market flying back to the upside, and that is precisely what happened Thursday.  And this points out the danger of playing a rigidly bearish short hand in this market.

Even after Wednesday’s sell-off and before Thursday’s recovery, my market view was not deterred. As I wrote, “The only thing that is clear to me in the here and now is that this is a market of stocks, and there are plenty of names that I’ve discussed in recent reports that continue to act well. I would focus my attention on these names, and other long set-ups that may develop as I find them.”

For now, this remains my view, and I advise members to continue operating on the basis of individual stock set-ups. Sometimes, I think I should remove all the index quotes on my computer monitors and just watch the stocks. Often, the noise just creates buying opportunities, and if one simply focused on the objective, technical evidence without all the index volatility and news flow getting into their head, the situation might be much easier to interpret in real-time.

I’ll be discussing more ideas in a weekend video report, which may or may not be posted before the written report is posted. In it, I will cover other names that have been discussed in recent written and video reports, as well as a few newer ideas. So, as always, just play it as it lies.

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 no positions, 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.