The Gilmo Report

July 18, 2018

July 18, 2018

The undercut & rally (U&R) set-up remains our most potent long-entry weapon in this market. Even as Investors Business Daily laments the lack of standard-issue base breakouts by leading stocks, scores of names are turning on U&R moves and posting decent run-ups. As stocks push up the right sides of potential new bases and approach new highs, they tend to lose momentum and may need some time to consolidate.

This sets the stage for some general market backing and filling. Today, the NASDAQ Composite Index closed down a hair on higher volume, so the action has the look of churning at the highs. This comes on the heels of yesterday’s move to all-time highs on a slight increase in volume. Some consolidating notwithstanding, the uptrend remains in force.

 

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The S&P 500 Index has posted two higher highs in a row as it gets to just over 2% below its prior January highs. As with the NASDAQ, the uptrend here remains intact.

 

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Netflix (NFLX) has been one of the big stories of the week after reporting earnings on Monday after the close. The stock missed badly on new subscribers and gapped down about 12% at the open on Tuesday morning. Several analysts came out with buy recommendations at that time, helping to propel the stock back above the 50-dma.

Over the weekend I wrote, “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.” And Monday’s report did figure into its future direction, at least in the near-term. The interesting thing here is that NFLX made a decent attempt today at pulling a U&R move coming up through the prior 380 and 378.75 lows in the pattern but failed.

Instead, the stock slumped back down toward the 50-dma again but closed above the line. Volume was lighter vs. yesterday’s heavy levels, but still above average. We’ll see whether the stock can continue to hold support at the 50-dma, and whether any future U&Rs back up through those two lows at 380 and 378.75 will be successful. So, we’re watching for a breach of the 50-dma as a possible short-sale trigger, while being alert to any U&R moves that would alternately become actionable as long entry triggers.

 

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Tesla (TSLA) has also been in the news this week, but for all the wrong reasons. CEO Elon Musk got into a little repartee with one of the rescue divers who helped rescue and extract 12 Thai boys and their soccer coach from a cave in Thailand. Showing his typical restraint, Musk referred to the diver as “pedo guy,” apparently a reference to the rescue diver as some sort of pedophiliac.

Pretty dumb, in my view, but Elon has been operating on something of a short fuse these days. Thus, this little outburst after his cave submarine rescue scheme was criticized by the rescue diver as nothing more than a publicity stunt is not too surprising. It does, however, raise calls for Musk to step down as CEO of TSLA so someone who actually knows how to run a car company can take over.

In my view, a new CEO who understands the nuts and bolts of an auto-manufacturing enterprise might be just the spark to ignite a short-squeeze in the stock. As I wrote over the weekend, there are over 34 million shares of short-interest in the stock currently, so the powder is there, it just needs an ignition source.

In any case, Musk’s comments over the weekend sent the stock down to a low of 306.24 on Monday and just below the 50-dma. This set up a lower-risk entry since the news wasn’t all that material, save for the fact that it perhaps provided more evidence as to why it’s time for Musk to step aside. And as I see it, that possibility could certainly drive further upside in the stock, squeezing the shorts once again.

For now, TSLA held support at the 50-dma as volume dried up to -40% below average. It also managed to close above the 20-dema, which is currently its highest moving average among those that I follow, and the 200-dma. On that basis, the stock could be viewed as buyable here using the 200-dma as a tight selling guide.  Keep in mind, however, that earnings are expected on August 1st.

 

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Nvidia (NVDA) just missed posting a pocket pivot yesterday but continues to find support along its 10-dma, 20-dema, and 50-dma. The bottom line here is that the prior U&R from a little more than two weeks ago remains in force. It is now a matter of seeing whether the stock offers lower-risk entries along the moving averages ahead of its expected August 16th earnings report.

After regaining the 50-dma yesterday, NVDA pulled into the confluence of the 10-dma and 20-dema as volume declined to -39% below average today. That would create a lower-risk entry here using the two short moving averages as a selling guide.

 

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Amazon.com (AMZN) is expected to report earnings next week on July 26th, and Facebook (FB) the day before on the 25th. Alphabet (GOOGL) is expected to report on the 23rd, which would be this coming Monday, while Apple (AAPL) is expected to report on July 31st. All these stocks are extended on the upside except for AAPL, which pulled into its 10-dma today on below-average volume.

I’m not so sure, however, that I’d want to take a position in AAPL ahead of earnings since I tend to think upside is limited. As always, investors will be keying on the earnings report and what it says about current iPhone sales. So, for now, AAPL, like AMZN, GOOGL, and FB, remains on earnings watch.

 

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Twitter (TWTR) is expected to report earnings next Friday, July 27th, before the open. So it, too, remains on earnings watch as we head into next week’s trading. The stock hasn’t participated in the NASDAQ’s move to all-time highs recently, remaining within what is now a four- to five-week base. Today, TWTR dipped below its 20-dema as it again probes the lows of the base.

 

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Meanwhile, Snap (SNAP) is dead in the water and not likely to make any kind of move ahead of its expected August 9th report. For the most part, I’m only interested in taking fresh positions in stocks that won’t be reporting earnings for at least 2-3 weeks from now, and most of the best set-ups in these stocks have occurred on U&R long entries.

CSX Corp. (CSX) was discussed in my weekend video report as one to watch on earnings Tuesday after the close. That was yesterday, and a strong earnings report created a buyable gap-up move this morning. The stock opened at 66.65, set a low at 66.30, and then turned higher to close at an even 69.

This was, of course, actionable this morning using the 66.30 low as a selling guide. Technically, CSX is still within buying range (5%) of the BGU, but if you missed the morning entry I’d try to stay opportunistic here and look for a pullback a little closer to the BGU intraday low at 66.30 as a better entry. However, this is also a standard base breakout, and the stock remains within buying range of the 67.66 new-high breakout point.

 

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Micron (MU) is one of those late-stage failed-base (LSFB) short-sale set-ups that never quite gives it up. This is quite typical of this market, as I noted in my weekend video report. LSFBs do not follow through on the downside, and the initial breakdowns only end up producing U&R long set-ups. The stocks then simply trudge higher on little volume, as if the prior heavy selling, which has the appearance of certain distribution, never happened.

Now MU has pushed just past the 50-dma and up into an area of overhead price congestion. It stalled today at this area of resistance on higher volume. If one was looking for a short-sale target, this would be worth a shot, in my view, while using the high of today at 58.15 as a tight upside stop.

 

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Two of the better-performing U&R plays that I’ve discussed in recent written and video reports are Okta (OKTA) and ZScaler (ZS). OKTA isn’t expected to report earnings until September 6th and posted a nice U&R long set-up over two weeks ago, as I discussed at the time. It is now extended and only pullbacks into the 10-dma would offer lower-risk entries from here.

 

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ZScaler (ZS) had a nice U&R long set-up 14 trading days ago on the chart and isn’t expected to report earnings until September 5th. It has steadily moved higher since regaining its 20-dema and 10-dma and yesterday posted an all-time closing high. Only the pullback to the 10-dma on Monday would have been considered a lower-risk entry.

With the stock now back at the right-side peak of a cup formation, we might look for it to form a handle. Thus, further pullbacks to the 10-dma or 20-dema would still be your best bets for lower-risk entries from here.

 

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Alibaba (BABA) continues to find resistance along its 20-dema and is another late-stage failed-base short-sale set-up. So far, after the initial breakdown off the peak that served as confirmation of a base breakout failure, the stock has been holding up in the region between its 50-dma and 200-dma. It remains within a short seven-day flag formation.

BABA is expected to report earnings on August 2nd, so theoretically one could try and short rallies into the 20-dema with the idea of taking short scalps. At best I could see a retest of the 200-dma before earnings, but what the stock does after that will, of course, likely depend on earnings as well as any further developments in the U.S.-China Trade Tiff.

 

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Momo (MOMO) is acting more like a short than a long given the way it keeps stalling and reversing at its 20-dema. Today’s action was its second stall-out at the 20-dema in July, but it was also technically a stalling pocket pivot at the 10-dma and 50-dma. So, how does one treat this?

I think that for now, play it as a pocket pivot, using the 50-dma as a tight selling guide. If the stock busts the 50-dma, then it could trigger as a short-sale at that point. Play it as it lies. Earnings aren’t expected until August 21st.

 

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Baozun (BZUN) was a slow-motion bouncer off its 50-dma but finally caught some momentum over the past five trading days. In fact, it has posted two five-day pocket pivots along its 20-dema over the past seven trading days. However, only the second one has held up, as the first led to a quick test of and bounce off the 50-dma.

The stock is now holding relatively tight near its prior highs as volume remains light. Watch for pullbacks to the 10-dma at 59.20 as possible lower-risk entries. Earnings are expected on August 21st.

 

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Roku (ROKU) posted a pocket pivot off the 10-dma yesterday. Apparently, NFLX’s misfortune is good news for ROKU, and the stock responded with a strong-volume move to higher highs. Some might think that weaker than expected subscriber growth for NFLX means they might be interested in acquiring ROKU.

It is true that the two companies are next door to each other in Silicon Valley, so nobody would have to relocate! The pocket pivot, however, puts the stock back in an extended state, with pullbacks to the 10-dma at 47.66 serving as your reference for lower-risk entry opportunities. ROKU is expected to report earnings on August 8th.

 

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Stitch Fix (SFIX) continues to hold up just fine following its early July cup-with-handle breakout. Yesterday, the stock finally met up with its rapidly rising 10-dma and bounce off the line on above-average volume. This remains a bit extended for my tastes, however, so I’d look for pullbacks closer to the 20-dema, rising fast but now at 30.43, as more opportunistic entries if I can get ‘em.

 

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DropBox (DBX) got tagged with some heavy selling yesterday on a report that Facebook (FB) was considering moving its cloud storage to Google from DropBox. The stock spun around but eventually closed about mid-range on heavy volume. It also held above the prior 30.75 low at which it posted a U&R long set-up last week. Today, DBX sold off small on volume that was -72% below average.

It’s not clear to me that losing FB as a customer is the end of the world for DBX. I would simply watch to see if selling volume continues to dry up, and whether the stock can quickly regain the 50-dma. That said, DBX is expected to report earnings on August 9th, so the closer it gets to that date without any resolution to this current bout of selling, the less likely it is that I’d want to play the stock.

 

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Turtle Beach Corp. (HEAR) posted a new all-time closing high today on very light volume as it continues to edge higher following last Monday’s pocket pivot. For now, only pullbacks to the 10-dma at 23.68 would provide lower-risk entry opportunities from here. HEAR is expected to report earnings on August 9th.

 

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Activision (ATVI) pulled in yesterday to test last week’s base breakout point and bounced off support at the 20-dema on a nice pocket pivot move. That pullback offered a lower-risk entry, and the stock is right back to where it started the week. Technically, it remains within range of the base breakout, for those of you who like to chase such things.

Meanwhile, remain mindful of the fact that Electronic Arts (EA) is expected to report earnings next Thursday, July 26th. Both ATVI and its other cousin, Take-Two Interactive (TTWO), will likely move in sympathy to the report. With all three stocks in recent breakout land, I would be looking for buying opportunities, if any, that might arise following EA’s report, or the earnings reports of TTWO and ATVI, which are both expected to report the following week on August 2nd.

 

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Huya (HUYA) continues to edge slightly higher following last Wednesday’s pocket pivot. I’m still looking for a pullback to the 10-dma at 35.04 as a lower-risk entry, so stay alert for that. HUYA is not expected to report earnings until September 5th.

 

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Bilibili (BILI) posted a pocket pivot today off its 10-dma, but ran into resistance at the 50-dma, just as it did last Friday. This all comes on the heels of last Thursday’s pocket pivot coming up through the 10-dma. In my view, the stock remains within buyable range, using the 10-dma as a selling guide. That said, any pullbacks closer to the 10-dma from here would offer lower-risk entries, if you can get ‘em.

 

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I’ve previously discussed Box (BOX) in my video reports after it posted an undercut & rally move in late June. Since then, the stock has continued to rally and yesterday regained its 50-dma on a pocket pivot move. Today, BOX backed up just a bit and held above its 50-dma with volume drying up to -64% below-average.

This puts the stock in a lower-risk entry position on the basis of yesterday’s pocket pivot. One can use the 50-dma as an uber-tight stop, or the 10-dma at 26.47 as a slightly wider stop. BOX also avoids earnings roulette for now since earnings aren’t expected until August 29th.

 

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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.

Currently, most of the best long set-ups, most of which have been U&Rs or “springs” as Richard Wyckoff used to call them, have come and gone. Now it’s a matter of laying back and watching for constructive pullbacks. Meanwhile, standard-issue breakout buyers are still looking for things to buy. The danger, and one which is not atypical for this market, is that once you start to see more breakouts, the market is ready to roll back.

Meanwhile, I would not be surprised to see the indexes pull back at any time, particularly with the NASDAQ Composite at all-time highs. Since many initial U&Rs and other long set-ups are now extended, market pullbacks might provide secondary entries by helping to create constructive pullbacks in the individual favored long ideas.

For now, we remain focused on two things. The first would be long set-ups that show up in real-time in stocks that won’t be reporting earnings for at least 2-3 weeks from now, and the longer the better. This would include constructive pullbacks. The second would be to watch for actionable set-ups to appear following earnings reports, as was the case with CSX today on the post-earnings buyable gap-up. As always, just play them as they lie, and remain alert and opportunistic.

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.