The Gilmo Report

July 16, 2017

July 16, 2017

The NASDAQ Composite Index shrugged off any ideas of resistance at the prior declining tops trendline and instead flashed a nice trendline breakout on Thursday. As I pointed out on Wednesday, the declining tops trendline could just as easily provide a point of reference for just such a breakout as it could overhead resistance.

Low volume accompanied Friday’s continuation move back up to the prior early June highs. But this wasn’t a problem. The fact that the market was sold out as I wrote it might be in last weekend’s report seems to be an overriding force as sellers have been shaken out of the market, leaving nobody left to sell!

We can see that the NASDAQ also posted a double-bottom type of breakout as it cleared the mid-point of the “W” on Friday. This comes after two sharp, ugly sell-offs that just served to shake out all the sellers. Meanwhile, the light volume keeps longs a bit worried, creating its own unique type of wall of worry for the market to climb.

 

GR071617-$COMPQ

 

The Dow Jones Industrials Index logged another all-time high on Friday, while the S&P 500 Index joined in with its own new all-time high on lighter volume. We can see that the S&P was shaking out all along the lows of its prior one-month consolidation, but kept finding support at its 50-day moving average. Obviously, the index breakouts are all bullish, and only a series of breakout failures by each would provide evidence to the contrary.

 

GR071617-$SPX

 

In my Wednesday report I featured several small, new-merchandise names that have moved higher over the past two days. This movement in smaller growth names is perhaps mirrored by the action of the small-cap Russell 2000 Index, which posted a new all-time closing high on Friday.

If the current market rally has some legs, expect the Russell to break free of this current five-week price range and joint the other major market indexes in new high price ground. This even includes the NYSE Composite Index, not shown, which broke out to new highs on Friday as well. After putting in several weeks of consolidation, the odds of another strong leg to the upside are pretty good as I see it.

 

GR071617-RUT

 

Citigroup (C), or J.P. Morgan (JPM), and Wells Fargo (WFC) all reported earnings on Friday, and all three stocks reacted to the downside. This showed up in the SPDR Financial Sector Select ETF (XLF) as a gap-down move to the 20-day exponential moving average that was mimicked by C, JPM, and WFC.

All three big-stock banks found support at the 20-dema, as did the XLF. While the banks are not what I would consider a dynamic area of the market, they are plodding higher. As I noted in my Wednesday mid-week report, they are still best bought on pullbacks to support, and today’s pullback to the 20-dema by the XLF presented that opportunity for anyone looking to own financials. For now, that remains the case with this group.

 

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Following Jagged Peak Energy’s (JAG) gap-up breakout on Wednesday, Keane Group (FRAC) was not to be outdone as it posted a pocket pivot off its 20-day exponential moving average and back above its 10-day moving average. It’s still sitting near the highs of the current eight-week price range and has yet to clear the highs of that range. For now, FRAC remains buyable on pullbacks toward the 20-dema. JAG, not shown here on a chart, is holding its Wednesday breakout and appears buyable on pullbacks to the top of the prior price range at around 14.

 

GR071617-FRAC

 

Crude oil, as represented by its ETF proxy, the United States Oil Fund (USO), continues to work its way off of its recent June 21st low. It is now running into its 50-day moving average, where it could find resistance. A breakout through the 50-day moving average on the upside would certainly be a bullish development for crude, and is something to watch for as confirmation of the percolating strength we’re seeing in oils like FRAC and JAG.

 

GR071617-USO

 

The only real short-sale target I have currently is the recent big-stock NASDAQ leader known as Tesla (TSLA). As I wrote on Wednesday, rallies into the 50-day moving average would likely present the best short-sale entries. However, TSLA did run into resistance at the 10-day moving average on Thursday, backing down slightly from there.

I shorted the stock at that point, but on Friday noticed support showing up in the 320 price area again as it did on Thursday. Also, notice how TSLA has pulled back here after rallying off the low of last week. This pullback is orderly and looks like a near-term “Wyckoffian Retest” as the stock pulls in just slightly with volume drying up sharply. In my mind this argues for a rally from here, perhaps closer to the 50-day moving average. For that reason, I would not be so hot to short it here just yet. Also, keep in mind that TSLA is expected to report earnings on August 2nd.

 

GR071617-TSLA

 

While TSLA remains a big question mark, the strength of the current market rally off the Tuesday lows is attested to by the fact that even beaten-down Apple (AAPL) has decided to join the party in a nascent “LUie” formation. Note that the turn in this LUie formation occurred on a pair of five-day pocket pivots, the first at the 10-day moving average, and the second at the 20-day exponential moving average.

The stock is now pressing up against the 50-day moving average. A breakout above the 50-day line would of course be a bullish development, and could also be played as a possible moving average undercut & rally (MAU&R) type of long set-up.

 

GR071617-AAPL

 

Notes on other big-stock NASDAQ names below:

Alphabet (GOOGL) has pushed a tiny bit further above its 50-day moving average after triggering an MAU&R entry point at the line three trading days ago. Earnings are expected on July 24th.

Amazon.com (AMZN) is holding tight along the $1,000 Millennium Mark, which does put it in a buyable positon using the 20-dema as a selling guide. Keep in mind that earnings are expected on July 27th.

Facebook (FB) has moved higher since breaking out on Wednesday. The stock is a bit out of buying range in my view, especially ahead of earnings, which are expected on July 26th.

Microsoft (MSFT) broke out to a new high on Friday after rallying for six straight days off the lows of last week. Volume was 4% above average. Remember that MSFT triggered an MAU&R long entry at the 50-day line five trading days ago. Earnings are expected after the close next Thursday, July 20th.

Netflix (NFLX) pushed further above its 50-day moving average after flashing a roundabout pocket pivot on Wednesday as it cleared this key moving average. Earnings are expected after the close on Monday, July 17th, so I don’t see much to do here unless one is intent on playing earnings roulette. The stock has had a nice move since triggering an undercut & rally (U&R) long set-up six days ago, when it pushed back above the prior 147.30 low in the pattern from June 15th. That move alone after a concrete long entry using the U&R method has already resulted in a very nice swing trade, at the very least, for those not wishing to play earnings roulette.

Nvidia (NVDA) is holding its recent double-bottom breakout of this past Wednesday, Technically, this is within buying range of that breakout through the 160 price level, using it as a tight selling guide. Earnings are not expected until August 10th, so this has time to run if it wants to.

Priceline Group (PCLN) has continued higher following its base breakout of two Fridays ago, and is technically still within buying range of that breakout.

Nutanix (NTNX) received a big boost on Friday thanks to Goldman Sachs (GS) putting the stock on its “conviction buy” list and declaring the company a takeout candidate. I’ve liked the stock for a while now, and it was quite buyable near its 20-dema over the past few days per my comments in recent reports.

Friday’s upgrade from Goldie resulted in a bottom-fishing buyable gap-up (BFBGU) range breakout that had the stock up 10% that morning in pre-open trade. My first instinct was to sell into that move and bag the 10% profit, using the 620 chart for a possible re-entry. Eventually, NTNX set an intraday low 21.62 and ended the day at 22.12, near the highs of the day.

This is therefore an actionable buyable gap-up move, using the 21.62 low as a tight selling guide.

 

GR071617-NTNX

 

Among my favorite Chinese names, Alibaba (BABA), not shown, remains extended and not in a lower-risk buy position as it keeps logging new all-time highs. JD.com (JD), however, may be setting up for another move higher as it pushed just above the prior 41.97 breakout point on two previously failed breakout attempts.

While a third breakout attempt might seem unlikely based on my “Cinderella” analogy, we might consider that such a breakout might be rationalized by invoking the Rule of Three. Per this rule of Bill O’Neil’s, once something happens twice, the third time is likely to fake out the crowd and go in the other direction. For that reason, I would give JD reasonable odds of doing just that, and breaking out successfully after two prior failed breakouts based on the Rule of Three. If it did want to break out, it would have some time to run given that earnings aren’t expected until August 10th.

 

GR071617-JD

 

Momo (MOMO) looks good here as it nicely consolidates the prior pocket pivot move off the 50-day moving average and holds tight with volume declining. The stock ran into logical near-term resistance at the prior June high in the 42 price area, but that just brought it back into buyable range on Friday, using the rising 10-day or 20-day moving averages as tight selling guides. Earnings aren’t expected until August 15th, so I would continue to look at any pullbacks closer to the 40 price level as potentially lower-risk entry opportunities.

 

GR071617-MOMO

 

MOMO’s cousin, Weibo (WB), not shown here on a chart, is somewhat extended from its 50-day moving average, so low-volume pullbacks to the line near 71 would offer lower-risk entry opportunities. Netease (NTES), on the other hand, may be offering an Ugly Duckling entry here as it finds support right at the 20-day exponential moving average.

Volume dried up to -38% below average on Friday, qualifying as a “voodoo” volume signature. Buying the stock here means using the 20-dema as a tight selling guide, or the 50-day line as a wider selling guide for those who prefer it.

 

GR071617-NTES

 

Applied Optoelectronics (AAOI), not shown, broke out of a cup-shaped base on Thursday, triggering a standard-issue base breakout entry at that point. The stock continued higher on Friday as it remains on fire. Lumentum Holdings (LITE) caught fire on Thursday as AAOI broke out to new highs, flashing a nice pocket pivot off the 10-day line on heavy volume.

On Friday, LITE held very tight as volume declined sharply. My preference would be to look to buy shares on any pullback closer to the 20-dema at 60.82 while using the line as a reasonably tight selling guide. With AAOI moving to new highs, I would expect an eventual breakout from LITE as well.

 

GR071617-LITE

 

While I think it is sufficient to focus on AAOI and LITE as bona fide leaders within the “wolfpack” known as the optical stocks, another interesting name in the group is Fabrinet (FN). FN recently signed up AMZN and TSLA as new customers with recent design wins. The stock is currently within the handle area of a nascent cup-with-handle formation.

Note that the handle is itself a miniature cup-with-handle as the stock holds tight just above the 10-day line. Watch for a breakout as confirmation of strength in the group, something that might coincide with a new-high breakout by LITE. Otherwise, if you like FN and prefer to find an entry point before any obvious base breakout, pullbacks closer to the 10-day line would offer lower-risk entries from here.

My small herd of new-merchandise names has acted well this week, including the leader of this new-merchandise pack, Appian Corp. (AAPN). APPN briefly pulled into its prior trendline breakout point on Thursday, giving buyers a lower-risk entry opportunity. It then held there on Friday morning before launching to another new all-time closing high. In this position the stock is slightly extended, as I see it, so watch for any further pullbacks down closer to the trendline breakout point at around 19.40-19.50 as potential, lower-risk entries.

 

GR071617-APPN

 

Alteryx (AYX), not shown, remains extended from Wednesday’s big-volume base breakout. Pullbacks to the 21 level or better would offer your best, lower-risk entry opportunities.

Yext (YEXT) is another recent IPO that is starting to come up off the lows, as I discussed in my Wednesday mid-week report. On that day, the stock posted a bottom-fishing pocket pivot as it came up through the confluence of its 10-day and 20-day moving averages. On Thursday YEXT flashed another pocket pivot, this time coming up through the 50-day moving average.

Note that the three prior trading days were all pocket pivot volume signatures, with Wednesday’s and Thursday’s action qualifying as actual pocket pivots. Friday’s move was extended from the 50-day line to qualify as a bona fide pocket pivot, but is constructive nevertheless. From here, any small pullbacks closer to the 50-day line at 13.31 would offer lower-risk entries.

 

GR071617-YEXT

 

ShiftPixy (PIXY) got going on Thursday after I discussed it in Wednesday’s report. One member tried to attribute the move to a Gilmo member buying a big position in the stock, but in my view this is not likely. PIXY traded over a million shares on Thursday as it broke out of the short two-day range it had formed following Monday’s sharp pullback off the recent highs.

That move occurred on an IPO pocket pivot that occurred two Fridays ago, and the subsequent low-volume retest of that pocket pivot point was buyable per my comments on Wednesday. On Friday PIXY held tight as volume declined.

As I pointed out in my Wednesday mid-week report, PIXY is perhaps the freshest of IPOs that I’ve ever discussed. However, I feel that the business concept here as an “Uber for employers and gig-workers” is a compelling one, and bears watching. From here I would consider any pullbacks below the 10 price level as buyable.

 

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Cloudera (CLDR) is another recent IPO that I discussed in my Wednesday mid-week report. Clearly, it is the ugliest of Ugly Ducklings as it tracks along its recent lows. However, this became actionable down closer to 16 on the basis of the prior undercut & rally move that occurred about two weeks ago.

So far, the stock has held that U&R move and slowly moved higher, clearing its 20-day exponential moving average on Friday. Volume picked up slightly that day, but still came in -47.8% below average. CLDR did test the 10-day moving average earlier in the day, giving buyers a lower-risk entry opportunity at that point, and the stock then turned back to the upside and closed at its highest high since bottoming two weeks ago.

I like this on any further pullbacks into the 10-day line from here. So far, only the U&R long set-up is in force, as there have been no pocket pivots in the pattern yet. That is, therefore, something to watch for going forward.

 

GR071617-CLDR

 

Notes on other names of interest, some with charts:

Activision Blizzard (ATVI) is holding tight along its prior June highs after posting a pocket pivot off the 20-dema Wednesday. Retracements back down toward and closer to the 20-dema would offer lower-risk entries.

Arista Networks (ANET) is holding in a tight three-day flag after clearing its 50-day moving average on Tuesday. Retests of the 20-dema might offer lower-risk entries from here.

Bioverativ (BIVV) has pulled back right down to its 20-dema, which puts it in a lower-risk entry position using the 20-dema as a tight selling guide, or the 50-dma as a wider selling guide.

Canada Goose Holdings (GOOS) remains below its 50-day moving average. The stock temporarily cleared the 50-day line on Friday but stalled and closed back below the line. I continue to watch out for any sustained move back above the 50-day line as an MAU&R long set-up.

 

GR071617-GOOS

 

Edwards Lifesciences (EW) is getting a little sloppy here, but pulled back to its 50-day line on Friday which puts it in a lower-risk entry using the 50-day line as a selling guide.

Electronic Arts (EA) has pulled back to its 50-day moving average after retaking the line on Wednesday. This puts it in a lower-risk entry using the 10-day line at 107.60 as a selling guide.

First Solar (FSLR) had a small pullback on Thursday, which brought it back into buying range of Wednesday’s pocket pivot.

 

GR071617-FSLR

 

Palo Alto Networks (PANW) ran into some selling after fellow cyber-security name CyberArk Software (CYBR) got slammed after reporting earnings Thursday after the close. The selling came on very light volume, so the stock remains within buying range of its 10-day moving average at 136.51, using that as a tight selling guide.

Salesforce.com (CRM) is holding squeaky tight after Wednesday’s gap-up move on a five-day pocket pivot signature coming up through the 50-day line. This looks constructive, and the stock may just be buyable here using the 50-day line as a reasonably tight selling guide.

 

GR071617-CRM Daily

 

ServiceNow (NOW) got hit with a downgrade on Friday, but all this did was to bring the stock right into its 10-dma, where it was buyable. By the close, NOW was back near the intraday highs on big-volume support off the 10-dma.

 

GR071617-NOW

 

SolarEdge Technologies (SEDG) is losing near-term momentum and should be watched for a low-volume test of the 10-dma or 20-dema as potential lower-risk entries.

Square (SQ) remains extended from Tuesday’s base breakout.

Tableau Software (DATA) has pulled into the confluence of its 10-dma, 20-dema, and 50-dma, where it found support on Friday and closed back above all three moving averages. This would put the stock in an Ugly Duckling entry position here using the 50-dma as a tight selling guide.

Take-Two Interactive (TTWO) is holding tight here as volume dried up in the extreme to -74% below average on Friday. This looks buyable here using the 10-day line as a tight selling guide. As I wrote on Wednesday, make sure to keep an eye on TTWO’s cousins, ATVI and EA, for confirming wolfpack action.

 

GR071617-TTWO

 

Twitter (TWTR) posted a higher closing high on Friday, but is well-extended from where it was last buyable along the 10-dma and 20-dema on Monday per my comments in my report of last weekend.

Universal Display (OLED) was last buyable as it cleared its 50-day moving average on Wednesday, where it trigged an MAU&R long entry at that point. The stock has since moved higher and is slightly extended as of Friday’s close.

Workday (WDAY) is holding tight up against its prior June highs, but out of any kind of lower-risk buy position. As with NOW, I might wait to see if the stock presents any kind of buyable pullback down closer to the 20-dema, about 4% below Friday’s close.

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).

The breakouts in the S&P 500 and NASDAQ Composite are objective evidence that this market remains in rally mode. Until and unless these breakouts begin to fail, the rally remains in force, and with a vengeance, I might add. Meanwhile, leading stocks confirm this by posting strong upside action, including a large number of U&R, MAU&R, LUie, and even bottom-fishing buyable gap-ups as was the case with NTNX on Friday.

For these reasons, there is no need to argue with the trend – just make it your friend. It certainly is not as if there haven’t been enough opportunities to do so. The set-ups have been there right in our faces. It has only been up to us to see them without having any pre-conceived ideas of what the market and individual stocks should be doing. So, continue to look for actionable long set-ups as they appear in real-time, and act accordingly. Nothing else needs to be said.

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

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.