The Gilmo Report

July 17, 2016

July 16, 2016

The indexes continued their melt-up ways on Thursday, gapping higher at the open on news that the Bank of England was sitting tight with respect to any interest rate cuts. Many were looking for the British central bank to lower rates as a mitigating measure against the Brexit vote and its consequences. The fact that this didn’t happen was taken as a positive by the market, and off it went.

Thursday morning, amidst the pre-open futures jack, I flipped on the “telly” and listened to the pundits proclaim that the market was acting just like 1999. I found this somewhat interesting, if not just plain silly. Those individuals, apparently, have no real idea about what late 1999 was actually like. As I blogged and tweeted on Thursday, 1999 was a market period unto itself. Allow me to digress for a moment.

In late October 1999, just after the follow-through day of October 28th, stocks across the board broke out of standard base formation. There were vast numbers of recent IPOs going absolutely nuts to the upside in a flurry of new-merchandise activity. The economy was riding a tech and internet boom. President Clinton and the Republican-led Congress worked together to lower capital gains tax rates in 1997, enabling the government to balance the budget in 1998 through 2001, at least on a cash basis.

Even though the dot-com tech economy was booming, the Fed made sure enough liquidity was in the system ahead of the dreaded Y2K when all the computer clocks would suddenly have to account for years that started with a “2” instead of a “1.” As we know now, that was much ado about nothing. In 1999, life was good. People were quitting their day jobs to trade stocks for a living. The sheer velocity at which people were making money in the stock market fed a belief that they were omnipotent. The logic was inescapable: I buy a stock and it goes up 300%, so I must be a genius.

In this regard it really did mess with people’s heads. Many simply did not stop to realize just how exceptional and off the charts (literally) it was. But as I have written many times before, it helps to understand that as traders and investors we are no different than surfers. The ride we get is for the wave to decide. All we do is use our skills as best we can to put ourselves in the position of getting lucky.

When we started buying stocks on the follow-through day of October 28th 1999 that’s all we were doing. We were hopping on a wave. We had no idea how big that wave would turn out to be, and we certainly had no road maps from a prior market period to guide us. We just paddled out to meet the wave and put ourselves into position to catch a ride and get lucky. Where the difference between 1999 and 2016 is most pronounced, in my view, is in the action of the stocks. I already pointed out that everything was breaking out and running to the upside, and it wasn’t just internet IPOs.

Stocks I owned, like Oracle (ORCL), an established company that had been around for nearly two decades, were up 70% or more in less than a month following the October 28th follow-through. I recall that at the end of November I was up somewhere north of 250% for the year at that point, after being up somewhere north of 30% on the day of the follow-through, a month earlier.

At that time one of the other O’Neil internal portfolio managers came into my office with a panicky look on his face, urging me, “This is crazy. You’ve gotta take it! You’ve gotta take it!” Obviously, he was referring to the crazy, rapid upside gains we were making.

I decided not to “take it,” and held through the end of the year, picking up another 250% or so before finishing up 516% in the account I was running for the firm. To say we were making money hand over fist at that time really doesn’t do it justice. And you could do it with almost any decent growth stock that you could find.

As I see it, having been there, anyone who thinks the market in July 2016 is even remotely similar to 1999 either wasn’t in the market in 1999 and so didn’t experience it, or they weren’t paying attention at the time. Or maybe they owned dividend stocks. It was an exceptional time to be trading and investing, and I certainly I hope I see another such period in my lifetime.

If we see a bunch of stocks do over the next two months what something like Verisign (VRSN) did in late 1999 when it rocketed over 230% in just two months, then you might persuade me that 2016 has some similarities to 1999. But any such comparisons at this juncture strike me as more mirage than fact.

For one thing, I doubt if you will find as many stocks doing this in 2016 as we saw having these types of nutty upside moves in late 1999. On top of the velocity of the upside move, one also had to marvel at the tremendous breadth of it all. Like I said, it wasn’t just dot-com stocks and IPOs, as in the case of ORCL.

Looking at the daily chart of VRSN from that period, below, you can see how the stock never even violated its 10-day moving average all the way up. So if one were simply abiding by the Seven-Week Rule which is described in the book, Trade Like an O’Neil Disciple: How We Made 18,000% in the Stock Market, one would have simply stayed with the stock all the way up.

 

GR071716-VRSN 1999 Daily

 

In the current market you don’t really see these types of uniform trends following base breakouts. Most of the best moves occur from positions down in the lower reaches of chart patterns. And stocks have a habit of breaking below key moving averages and then rallying back above those moving averages just when things start to look grim in Ugly Duckling fashion.

Personally, I don’t really understand the fixation with having to compare one market environment to another. There is no utility in trying to use the action of the market during a specified historical period as some type of road map for today’s market. We might also consider that in today’s environment, at least from the perspective of underlying conditions as Jesse Livermore used to refer to them, we are in wholly uncharted territory.

And so as some might waste their time trying to compare 2016 to 1999 or 2006, or 1899, or 1799, my esteemed conclusion is that the market is today most like 2016! Imagine that. While I think continued upside is a reasonable outcome as we move through the summer of 2016, I don’t think the current environment favors throwing caution to the wind and just buying stocks willy-nilly because somebody tries to compare it to 1999.

If there is any kind of similarity between 1999 and 2016 it might be found in the fact that both periods were characterized by ample liquidity. In 1999, such liquidity was mostly due to a booming economy spitting off tons of cash, a somewhat accommodative Fed (but remember, the fed funds rate was 5.5% in late 1999, today it is 0.5%), and the secular flow of money into stocks and mutual funds. In 2016 it is entirely due to the continuous money-printing that the world’s central banks have been engaging in for the past seven years.

A friend of mine once remarked, “How do you get to Dow 35,000? Hyper-inflation, that’s how!” So if one wanted to argue that we could see stock prices go on a tear as a result of all the liquidity sloshing around in this current financial system, one might also argue that while stock prices could go up on a nominal basis, it might be accompanied by hyper-inflation. So while the nominal value of stocks rises, their real value in terms of rapidly devaluing paper currencies around the globe could remain muted, or in fact deteriorate.

That’s why I tend to think that some sort of liquidity-based explosion in stock prices in 2016 might not be all that much fun if it occurs at the same time as a pronounced currency devaluation. So while your stocks might go up, the purchasing power of the currency that those stocks will be converted into when eventually sold might have deteriorated significantly and purchasing power is thereby destroyed.

This market has its own unique dynamics, and I have discussed these dynamics within the context of a concrete approach to handling individual stocks many times in this report. Currently I still lean towards the idea that we are playing the same short-term trader’s or swing-trader’s market that we have been for some time.

At the very least, this market differs from 1999 by the fact that it is not producing breakouts in stocks that then lead to massive upside moves. Making use of specific buying methods that might be seen as less O’Neil-style but certainly well within the philosophies of Jesse Livermore and Richard Wyckoff has become something of a way of life (at least for me) in this current market.

And the objective proof is there to support the validity of things like undercut & rally or Wyckoffian Retest set-ups (U&Rs and WRs), bottom-fishing and roundabout pocket pivots (BFPPs and RAPPs), and even bottom-fishing buyable gap-ups (BFBGUs).

So whatever the market is going to evolve into, a choppy uptrend, a choppy range, a glorious new bull, a disastrous mother of all bear markets, I think we simply continue to focus on what individual stocks are doing with the idea of using all of the trading tools, methods, and resources we have at our disposal.

With the indexes once again forging to all-time highs, at least in the case of the Dow Jones Industrials and S&P 500 Indexes, we are in a position where one must remain alert given the market’s propensity to roll over each time it has made new highs over the past year. But if the market can sustain a rally on the basis of more constructive themes, whatever those might be, then taking an active, profit-taking approach can still ensure that we participate in any continuing market rally.

Obviously, the pundits’ comments on Thursday comparing today’s market to 1999 got me riled up. But that is only because I felt that it expressed a point of view that entirely mischaracterizes what 1999 actually was like and misleads investors who weren’t there. So with that off my chest, let’s get back to today’s market.

After getting even more extended by Thursday, the indexes finally decided to take a breather on Friday as they pulled in during the day but by the close held up relatively tightly. Volume declined on the day, which is constructive, and we can see the tight action on the daily chart of the S&P 500 Index, below.

We can see that within the context of the prior sharp upside move off of the late June lows a pullback to the top of the range and the 10-day moving average around the 2120-2130 level would be normal. Should that occur, it would likely bring a lot of our favored long ideas back into lower-risk buy positions, at least those that aren’t doing so already.

 

GR071716-$SPX

 

The NASDAQ Composite Index is also well extended past its breakout of this past Monday, and like the S&P 500 could pull back from current levels. In this case a drop down to 4980 and the top of the April-June range would be normal. Of course, the indexes don’t have to pull back as they could simply hold up tight at current price levels before attempting to move higher. My objective here is to simply map out where the indexes might go on a normal pullback. At the same time, I would be looking for entry opportunities to crop up in individual stocks.

 

GR071716-$COMPQ

 

The bottom line currently is that the indexes are extended as well as many of our favored long ideas. Therefore, in most cases we are either taking profits into extended upside moves, sitting tight (for those who want to give stocks more room on the downside during pullbacks), or waiting for stocks to come back into lower-risk entry areas.

Precious metals were pulling back all week long, and this has brought SPDR Gold Shares ETF (GLD) right down into its 20-day moving average. Obviously, the Bank of England passing on any rate cut helped to fuel what is so far a short-term decline in the metals.

As we know, for those interested in owning them, the time to buy the metals is when they pull back. So with the GLD sitting at the 20-day line at 26.44 it is in a lower-risk entry area using the line as a nearby selling guide. Otherwise, a pullback to the top of the prior base from which the GLD broke out in late June down near 124 would be your second reference point for a potentially opportunistic buy point.

 

GR071716-GLD

 

The iShares Silver Trust (SLV) continues to hold up relatively better as silver maintains its outperformance between the two major precious metals. Here we see the SLV pulling into its 20-daymoving average on just below-average volume.

This could be considered a possible pullback entry point here, although the 20-day moving average down at 18.21 would certainly offer the most opportunistic entry. Whether the SLV is going to pull down that far is an open question, however, but it would likely occur in synchrony with the GLD pulling down to the top of its prior base at 124. That may be something to watch for.

 

GR071716-SLV

 

And of course the precious metals stocks continue to hold near their highs, as we can see in the daily chart of Silver Wheaton (SLW), below. Agnico Eagle Mines (AEM), not shown, looks more or less similar to SLW (and just about every other precious metals stock). Both continue to hold along their 10-day moving averages after recently posting 52-week highs. The most opportunistic entry points would occur, however, on any potential pullbacks to SLW’s or AEM’s respective 20-day moving averages. SLW’s is currently at 24.07, AEM’s at 53.85.

 

GR071716-SLW

 

“Stock of the Week” honors have to go to our little Chinese friend, Yirendai Ltd. (YRD), which is up 30% over the past four days.  I discussed this as being more or less in a buyable position in last weekend’s report as it held just above the little double-bottom breakout point at around 15.30. As a tiny-cap stock, it’s not so much a rocket stock as it is a bottle rocket stock.

We can see that the stock pushed right off of the 10-day line on Tuesday, and then pushed higher throughout the rest of the week save for a brief pause on Thursday. From here YTD is now way, way extended, and the only possible pullback one could buy into here would be one coming down into the top of the base at 17.40.

 

GR071716-YRD

 

Weibo (WB) has also held up well following its standard base breakout last week and the voodoo buy point of two weeks ago. The stock reversed off of all-time highs on Tuesday on heavy volume, but has been able to hold tight sideways over the past three trading days. Volume has been drying up, coming in at -44% below average on Friday. I would be interested in looking at the stock on any continued low-volume pullback into the 10-day moving average at 30.94.

 

GR071716-WB

 

Mobileye (MBLY) backed away from its prior highs after forming a little double-top on Monday, but held very tight sideways for the remainder of the week. The stock is up over 20% from our last entry point of three weeks ago near the 20-day and 200-day moving averages and just below the 40 price level. I like this right action very much, however, and may look to buy the stock back on any little pullback from here. Your nearest reference point for such a pullback would be the 10-day moving average at 46.49.

 

GR071716-MBLY

 

Some of the upside momentum caused by CEO Elon Musk’s tweet about a top secret master plan last weekend has dissipated for Tesla Motors (TSLA) as the stock drifts back to the downside. Volume has continued to dry up as the initial buying interest wanes but sellers are waiting to see just what this master plan is.

Personally, I tend to think that if the Great and Magnificent Elon (yes, that’s a sarcastic reference to the Wizard of Oz) had something significant in terms of a so-called game-changing master plan, it would already be on the table by now. That would seem self-evident given how far along the company is with the Model X and the Model 3 as their newest offerings.

Technically, if we simply focus on the price/volume action of the stock, this low-volume pullback into the 10-day line at 219.15 looks buyable. It could, however, keep drifting lower on ever lighter volume down to the 200-day line at 216.93. Who knows, maybe the Great and Magnificent Elon has something up his sleeve and the stock turns back to the upside.

 

GR071716-TSLA

 

Maybe Mr. Musk’s master plan has something to do with SolarCity (SCTY), which the company proposed buying out a few weeks ago at a price of between 26.50 and 28.50 a share. I’m thinking something along the lines of solar-powered, self-driving cars, which is one reason why I’ve juxtaposed MBLY, TSLA, and SCTY together in this report.

While many consider TSLA’s proposed buyout of SCTY to be a potential disaster, I myself would not necessarily draw any firm conclusions from the opinions of others. SCTY’s price/volume action seems to argue for the fact that the deal is likely to go through as it tracks tightly along its 10-day moving average as volume dried up to -59% below average on Friday. If you’re feeling lucky, I suppose you could buy this here, hoping that the buyout goes through. If it does, you might score 10% of upside or more. If not, the stock may be back below 20.

 

GR071716-SCTY

 

If SCTY gives you an appetite for solar names, then you might also consider SolarEdge (SEDG). The stock reached a climactic selling low back in early May, and has been trying to work its way up off of those lows ever since. SEDG retested the May lows during the Brexit sell-off, and then recovered back above its 10-day and 20-day moving averages. Currently it is holding tight along the 10-day moving average after posting two five-day pocket pivots this past week.

Volume dried up on Friday to -68% below average, so perhaps the stock is setting up for some sort of upside move here. SEDG mostly illustrates how I look for possible bottoming candidates. Generally, a major low on heavy selling volume followed by a retest and then tight sideways action as the stock rallies off the second low can be a clue that a stock is at least in position for a swing-trade on the upside.

Whether SEDG has something like this in store remains to be seen, but it is on my watch list as I keep a close eye on it down here. My general view is that something like SEDG would have a better chance at some upside IF the general market rally continues into the end of the summer.

 

GR071716-SEDG

 

Amazon.com (AMZN) has been coming under some selling pressure over the past week, as I first noted in my Wednesday mid-week report. On Tuesday AMZN reversed off of all-time intraday highs as cable financial TV talking heads hailed it as the “stock of the year.”

I’m not sure if that was tantamount to the kiss of death for the stock, but sellers became very interested in locking in gains in the stock at that point. Volume picked up sharply off the peak on Tuesday, and the stock continued lower all week. It ended Friday just below its 10-day moving average as selling volume picked up on the day but remained below average.

Earnings aren’t expected until July 28th near the end of the month, and with AMZN now pulling down to the top of its prior low-volume base breakout, a breakout failure becomes a distinct possibility. Either way, I am not interested in buying the stock here ahead of earnings.

 

GR071716-AMZN

 

Despite all the market strength and comparisons to 1999 this past week, the biggest of the big-stock social-networking leaders, Facebook (FB), hasn’t been able to make much upside progress relative to the market. While the indexes have pushed to all-time highs, FB remains within a base as it tracks along the 50-day moving average after rallying about 10% off of the Brexit sell-off lows of late June.

Selling volume picked up on Friday as the stock posted a little outside reversal to the downside, which doesn’t look all that appetizing as a buyable pullback to the 50-day line. This is looking like it’s locked in place here ahead of earnings at the end of the month.

At best it probably just tracks sideways, while at worst I would watch for a breach of the 50-day moving average as a possible short-selling signal that could be good for a quick short trade before earnings. I would not, however, hold a position in FB into earnings long or short unless I had a significant profit cushion in any such position. FB and AMZN offer examples of big-stock leaders that aren’t really showing blistering upside strength that might otherwise be suggested by the steep rally we’ve seen in the indexes off of the late June lows.

 

GR071716-FB

 

In terms of sheer upside price velocity, the cloud names coming off of their lows have offered the most excitement. Among these, Workday (WDAY) has rallied 14% off of its Brexit sell-off lows and right back up to its prior highs just above the 80 price level. The stock is now consolidating that move and is pulling back as volume declines. As I wrote in my Wednesday mid-week report, I would look to buy the stock on a pullback towards the 78 price level, which is what we saw on Friday.

Such a pullback brings the stock down into the lows of the prior June price range it formed just before the Brexit sell-off. Those lows, which I’ve highlighted on the chart, represent an initial reference point for potential support. However, the stock could pull in further to its 20-day moving average at 76.92. This would represent your most opportunistic entry point, should it occur.

 

GR071716-WDAY

 

Splunk (SPLK) is similar to WDAY in that both stocks have been bandied about as potential buyout candidates. While rumors have circulated that SAP is considering a buyout of WDAY, SPLK has benefited from rumors that both AMZN and ADBE are interested in acquiring the company.

Either way, the technical action of the stock has already made it buyable on the basis of both an undercut & rally and a subsequent Wyckoffian Retest set-up 14 trading days and 8 trading days ago, respectively. On Friday SPLK gave opportunistic buyers a chance to jump on the stock as it pulled down toward its 20-day moving average early in the day.

In such cases I am looking for either a low-volume pullback into the moving average or a turn back to the upside that can be seen on the five-minute 620 intraday chart that I use. When selling volume is initially heavy, then obviously a voodoo pullback isn’t something you can rely on.

Instead, you would watch for the high volume to turn into supporting volume as the stock potentially issues a 620 buy signal on an intraday basis and turns back to the upside. This is how SPLK played out on Friday, and one had to rely on a 620 buy signal to determine a possible entry on what turned out to be a supporting volume day at the 20-day line.

This is an important distinction to make in terms of how we use the specific price/volume action in conjunction with the tools and methods we have at our disposal. We don’t rely on voodoo pullbacks alone – when volume is heavier, we watch for possible supporting volume to come in and create a 620 buy signal. SPLK remains buyable on pullbacks toward the 20-day moving average, in my view. Friday presented such an opportunity for those using the 620 chart as a buying guide on the turn back to the upside.

 

GR071716-SPLK

 

Other cloud names I’ve been following, such as Adobe Systems (ADBE), Citrix Systems (CTXS), and Salesforce.com (CRM), are all in positions where they could be vulnerable to reversal back to the downside. None of these are pulling into moving averages just yet, although CRM looks a little better than the rest.

The only issue I have with CRM is that its relative strength is a paltry 68 although it remains within 3% of its all-time highs. That might seem a bit odd, but I would remain focused on the precise price/volume action here as the stock appears to be consolidating normally on both the daily and weekly charts. A pullback into the 10-day, 20-day, or 50-day moving averages, all running between 80.20 and 80.52, might present an opportunistic entry point. CRM is not expected to announce earnings until late August, so earnings aren’t much of a factor for now.

 

GR071716-CRM

 

It is often said that the strength of a chain is determined by the strength of its weakest link. If I considered the cloud stocks I’ve discussed in my reports over the past few months are something of a chain, then ServiceNow (NOW) might be considered the weakest link. But perhaps its ability to show any strength or constructive action here might be a measure of the strength in the clouds in general.

I’ve played NOW on the short side on an intraday basis over the past few trading days. However, doing so has made me viscerally cognizant of the fact that the pullbacks down into the 50-day line after the stock finds resistance at the 200-day line are occurring on light volume as sellers seem to disappear. NOW is therefore more or less in no-man’s land as it remains stuck between its 200-day and 50-day moving averages. Does resistance at the 200-day line mean it will eventually fail back to the downside, hence making it a prime short-sale target?

Or does the light volume pullback into the 50-day line make it buyable? My guess is that its fate is likely dependent on how the group acts going forward. This in turn may also depend on how far this market rally is able to carry. Taking the long side argument here means using the 50-day line at 70.38 as a selling guide, while taking the short side means using the 200-day line at 71.73 as a guide for an upside stop. The other option is taking a flexible view of the stock and being ready to move either way with the stock based on the real-time evidence.

 

GR071716-NOW

 

Electronic Arts (EA) is a reasonable example of a stock that is pulling back into a lower-risk area as it comes back down onto the top of its prior base. Last week’s breakout didn’t have any real volume behind it, but Thursday’s pullback turned into a supporting pocket pivot at the 10-day moving average.

EA then retested the 10-day line on Friday as volume declined slightly. The stock is currently sitting right at the 10-day line and the top of the prior base. If this breakout is going to hold, then the 20-day line at 76.49 would be your maximum downside selling guide. There probably isn’t too much to do here with EA since the company is expected to announce earnings on Tuesday of this week.

 

GR071716-EA

 

Both Barracuda Networks (CUDA) and CyberArk Software (CYBR) (neither shown here on a chart) remain in extended positions. CUDA is still well above its buyable gap-up move of last week while CYBR is extended from its pocket pivot of this past Tuesday. Neither is shown here on a chart.

The strength in some cyber-security names isn’t being seen in other names, so my theory of a group-led turn to the upside in some of these laggard names isn’t playing out just yet. FireEye (FEYE) occasionally shows flashes of brilliance with pocket pivots here and there, but it is doing little more than moving sideways in what is approaching a two-month consolidation.

If we look closely at the various pocket pivot signatures on the chart which are highlighted with lighter blue bars, we can see that each of these just runs into resistance at the highs of the two-month range. The big-volume pocket pivot that occurred at the end of June showed clear stalling and churning action. The most recent pocket pivot of four days ago only led to a bunch of low-volume churning the next day and the stock has since drifted lower.

Perhaps FEYE is on the verge of an eventual breakout, but that may not happen until the company announces earnings, more buyout rumors or an outright buyout. That said, the stock is back at the 10-day line on declining volume, which theoretically puts it in a lower-risk buy position. Whether this will lead to eventual meaningful upside remains to be seen.

 

GR071716-FEYE

 

Palo Alto Networks (PANW) has failed to hold its 10-day and 20-day moving averages as it continues to drift lower on what is so far a buyer’s boycott. Volume has remained quite low, but the action is getting a little sloppy for my tastes. I’d like to see this regain the 20-day line as an indication that its attempt at a turn off the June lows remains intact.

 

GR071716-PANW

 

Imperva (IMPV) is another cyber-security name that looks like it wants to make a run back up towards its 200-day moving average. The stock had a buyable gap-up move on Monday but that ran into resistance near the 200-day moving average. If one references the weekly chart, not shown, one will see that the stock actually ran into resistance right at the 40-week moving average.

This action doesn’t look so hot on the weekly chart, but on the daily chart it looks somewhat more constructive. While the buyable gap-up day saw the stock close in the lower half of the price range, the next day saw the stock trade much heavier volume as it found support off the intraday lows to close near the peak of the price range.

Volume dried up to -53.8% below average on Friday as the stock held along the 10-day line. This brings it into a technically buyable position using the 10-day line 45.05 as a tight selling guide. This would be something I might look at as a possible slingshot trade up to the 200-day line.

 

GR071716-IMPV

 

Gigamon (GIMO) finally pulled back after going on a short upside rumble after bouncing hard off of its 20-day moving eight trading days ago. This current four-day pullback ran into the 10-day moving average on Friday and the stock traded up off the line to close in the upper half of the daily price range.

Buying the stock here, however, means that one is looking for a strong move before earnings are expected to be announced at the end of July. On the other hand, anyone who began buying the stock when I first began discussing it in my reports back in early June would at least have a nice profit cushion with which to sit through earnings.

 

GR071716-GIMO

 

Below are Notes from my Trading Journal regarding other long ideas discussed in recent reports:

Acacia Communications (ACIA) – way extended. 10-day line at 47.05 would be your nearest reference point for a buyable pullback. The froth is building here, so be cognizant of how far this has come in so short a time.

Activision Blizzard (ATVI) – buyable on pullbacks to the 10-day line at 41.30

Alibaba (BABA) – pulling down toward the 10-day moving average at 79.69 but not quite there yet. That would represent your best reference point for a buyable pullback.

Ambarella (AMBA) – buyable on pullbacks to the 10-day line at 53.07

Atlassian Corp. PLC (TEAM) –  use the 10-day line at 26.87 or 20-day line at 26.32 as your reference points for buyable pullbacks.

Fabrinet (FN) – holding tight. Buy pullbacks to the 10-day line at 36.97.

Netflix (NFLX) – announces earnings on Monday after the close. Nothing to do with the stock until earnings are out.

Nvidia (NVDA) –  the10-day line at 50.50 is your nearest reference point for a buyable pullback.

Square (SQ) – stock is dead in the water. Looking for signs of life to emerge soon, otherwise this may not be worth your time or your money.

Twilio (TWLO) –the 10-day line at 38.06 would be your reference point for support on any pullbacks, but this stock has gone straight up over the past three weeks. Stock was up again Friday but on much lighter volume, so this could be running out of momentum in the near-term.

Twitter (TWTR) – pulled back into the 10-day line at 17.67 on Friday which put it in a buyable position. The stock then closed near the highs of the day. Earnings are due out at the end of July.

Zayo Group Holdings (ZAYO) – holding very tight just under the 28 price level. Still prefer to use pullbacks down toward the 10-day line at 28.30 as lower-risk entry opportunities.

Zendesk (ZEN) –  still extended. Nearest pullback entry point would be the 10-day line down at 28 or the 20-day line at 27.49

My expectation for the market this week would be to see more consolidating action. And, as the market consolidates we would also look for favored long ideas to pull into lower-risk buy points. In some cases, some already have, such as EA, for example, but it is doing so ahead of earnings this week.

Meanwhile, many stocks have a similar pattern where they have rallied strongly off the lows of the Brexit sell-off, retested those lows, moved higher, and are now moving sideways as they consolidate those gains. You can see that in names like MBLY, SPLK, CRM, or even something like Maxlinear (MXL), which has moved all the way back up to its early June highs after looking quite ugly.

Of course, when something gets ugly enough, that may be when it gets ugly enough for the Ugly Duckling to show up and send the stock flying back to the upside. MXL blasted back up through its 50-day moving average on strong buying volume two Fridays ago and is now holding tight right near the prior highs as it consolidates with volume drying up sharply.

For now, the best move has already occurred, and one would only be looking to buy something like this on a pullback down to the confluence of the 10-day, 20-day, or 50-day moving averages. Otherwise you’re left to waiting for a standard base breakout to show up. MXL’s pattern is typical of many stocks in this market, and it serves as an illustrative example. At this stage the action argues for more consolidation ahead of earnings, which are expected in the second week of August.

 

GR071716-MXL

 

As we move through the heart of earnings season over the next 2-3 weeks, we should be on the lookout for any buyable gap-ups or other buyable post-earnings price reactions that occur. Some of these might occur in names that haven’t garnered our attention just yet. These types of situations are what I am mostly on the lookout for as potential new long ideas, particularly once earnings roulette is out of the way.

And, as far as earnings roulette goes, this week should get off to an interesting start with NFLX expected to report earnings on Monday after the close. On Tuesday, Apple (AAPL) will add to the suspense when it reports after the close as is expected. For now, there is no reason to assume that this rally will fail. It may pull back, and as I discussed at the outset of this report, there is some room for such a pullback to occur. Hopefully, this would create some buyable pullbacks for those who abide by an opportunistic approach.

Meanwhile, earnings roulette season, as it usually does, may also create some fresh situations that may become actionable once earnings are out of the bag. So remain alert and opportunistic as the market shows us what it’s got after a very sharp move off of the Brexit sell-off lows of late June.

 

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 SPLK and WDAY, though positions are subject to change at any time and without notice.

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