The Gilmo Report

July 19, 2017

July 19, 2017

The market remains imperious as it keeps driving higher despite the negative news flow, all of which just mortars more bricks into the wall of the worry that this market likes to climb. Yesterday the bumbling ineptitude of the Republican-led Congress was on fully display, as another major policy initiative, namely healthcare reform, was shelved again.

The market sold off early in the day on the negative news, but eventually found its feet as it has so many times before and pushed back to the upside. By the close, the NASDAQ Composite Index had posted a new all-time high on higher volume. This morning the index gapped up in preparation for a repeat performance. It then ended the day at yet another all-time high on higher volume, capping off what is so far a nine-day winning streak.

 

GR071917-$COMPQ

 

Is the market getting a bit frothy here? Perhaps, but we can only follow the action of individual stocks to determine whether this translates into an impending pullback. We can see that the NASDAQ’s upside outperformance over the past nine days has been led by big-stock NASDAQ names. At times the persistent buying seems almost panicky.

But the moves in big-stock NASDAQ 100 names looks like a return to the inverse correlation between the market and the U.S. Dollar. If we look at a comparison chart of the $NDX vs. the PowerShares U.S. Dollar Index ETF (UUP) we can see the strong inverse correlation that has developed over the past few months.

So, it appears that the sharp movement in these stocks is at least partly due to the sharp decline in the dollar. It essentially forces money into the market, and the vehicles of choice are these modern-day blue chip names that dominate the current U.S. economic landscape.

 

GR071917-$NDX vs UUP

 

The Dow Jones Industrials Index posted a small distribution day yesterday, but did rally about 50% off its intraday lows. Today the index moved back up close to Monday’s all-time highs. Meanwhile, the S&P 500 Index rallied off its own intraday lows yesterday to close slightly in the positive, and today continued pushing to new highs on higher volume.

As I wrote over the weekend, the trend remains to the upside, and the only task for investors is to allow the trend to be your friend. But as leading stocks get extended, the message is clear. Simply stand aside and let things breathe as we await the next pullback. I would certainly not be chasing stocks that are not in lower-risk, proper entry positions.

 

GR071917-$SPX

 

Several of the smaller, new-merchandise names I’ve discussed in recent reports have done well. Cloudera (CLDR) and Yext (YEXT), not shown, have both moved higher as they attempt to come up the right sides of new bases and are now extended. Alteryx (AYX) and Appian (APPN), also not shown, have both continued to move into new high price territory after breaking out of their initial IPO bases, and are also extended.

With each of these names it is now a matter of watching for constructive pullbacks to the nearest moving averages for potential lower-risk entry opportunities. But not all of these new-merchandise names are moving in the right direction.

ShiftPixy (PIXY) ran into some serious problems yesterday as it plummeted over 20% to close well below support along the $9 price level and its recent 8 low of July 5th, three days after it went public. Note that the giveaway was the fact that the stock could not hold the newly-appeared 10-day moving average on Monday, which would have served as a reasonable selling guide. The prior day PIXY had pulled into the line on declining volume, which looked constructive, but failed to hold.

Recall that I first blogged about the stock when it was hanging in the low 9 price area, and it then had a sharp 10%-plus move from there as it cleared the $10 price level. Speaking for myself, I set the 10 price level as a trailing stop once I was up on my own positon, taken down closer to 9 and about two days after I first blogged about the stock.

When dealing with smaller, recent IPOs, I generally maintain two concepts in mind. The first is that I will start with a relatively small position, and the second is that once I’m up on the position, if at all, I will institute a reasonable trailing stop to ensure that I at least get out with a profit if things don’t pan out, because they don’t always cooperate.

I still like the company’s thematic underpinnings, but in the stock market that and $5.50 will get you an expensive cup of coffee at Starbucks. So now we have a busted pattern. At best it means the stock will have to spend some time setting up again, and I’m willing to let it do so. For now, it remains on my IPO watch list as I allow for any base-building process to take hold, or for a possible undercut & rally to develop if PIXY can regain the 8.00 price level.

 

GR071917-PIXY

 

Myomo (MYO) also hasn’t worked out, despite posting two roundabout pocket pivots early last week as it came up through its 10-day and then 20-day moving averages. The stock has since slumped back below the 10-day line on low volume, but is holding tight as it retests the prior lows with volume drying up in the extreme to -85.3% below average.

This would put the stock in a lower-risk entry based on the idea that this pullback represents a “Wyckoffian Retest” using the prior lows as a selling guide. The other option is to wait for a confirming move back up through the 10-day moving average as a buy trigger.

Sometimes the first roundabout attempt to move back above the moving averages doesn’t work, and a stock may back off constructively before making another attempt. Right now, that’s what MYO appears to be doing, and so I consider this current position to be a lower-risk entry opportunity using the appropriate selling guide.

 

GR071917-MYO

 

Financials appear to be stuck in neutral as questions and doubts about the Fed’s future actions begin to surface. The SPDR Financial Sector Select ETF (XLF) reflects this as it continues moving sideways in what is the handle area of a large cup formation extending back to early March.

This pullback into the 20-day exponential moving average on declining volume brings it back into a lower-risk buy position. You will see similar pullbacks in any of several big-stock financials, but in my view if one wants to play a potential move higher in this sector, the XLF can serve as a sufficient vehicle.

 

GR071917-XLF

 

Also stuck in neutral to some extent are my two favorite new-merchandise oil names, Keane Group (FRAC) and Jagged Peak Energy’s (JAG). While the price of crude oil and the United States Oil Fund (USO) has been able to poke its head above its 50-day moving average, this has not led to any significant upside in oil stocks. Many are, however, attempting to move up off their recent June lows, like the price of oil itself, but so far, any significant upside thrust has been lacking.

While JAG, not shown, is testing its 10-dma and 20-dema at the top of its prior base (which does put it in a lower-risk entry position), FRAC acts better here as it posts a pocket pivot today off its 10-day moving average. Volume came in well above average, and the stock has shown a consistent pattern of higher buying volume over the past couple of months.

This may mean that oil stocks like FRAC are percolating underneath the surface, which I guess is a bad oil pun, and setting up for an eventual move higher. I think as long as the price of crude and the USO can hold above the 50-day line, that potential certainly exists.

 

GR071917-FRAC

 

As we move through earnings season, we obviously want to remain alert to any opportunities that arise once earnings are out for any particular stock. Netflix (NFLX) reported earnings on Monday after the close and posted a nice buyable gap-up yesterday at the open. The stock opened at 176.12, posted a low of 174.24, and then turned back to the upside on the 620 intraday chart on a MACD cross at about 176.60.

From there it pushed higher all day, finishing out the trading session at a new all-time high of 183.60 and near the top of its intraday price range on huge buying volume. Today, NFLX stalled off its intraday highs and closed in the lower part of its daily trading range on diminished volume as it lost momentum.

If you go back and study NFLX’s various gap-up moves after earnings, you will notice that at the very least the stock tends to hang around for a few days before going higher. Often, however, it just jacks around in a big sideways range without making any further upside progress. We’ll see whether this current action lasts for just a few more days, or whether the stock returns to a state of trendless, post-BGU (buyable gap up) monotony.

 

GR071917-NFLX

 

The rally this week has been driven by money that seems to be in a big hurry to plant itself in big-stock NASDAQ names. All the names I’ve discussed in recent reports that fit in this category have been pushing higher, many to new all-time highs. The one exception, of course, is Tesla (TSLA), which looks to be continuing its work on a potential right shoulder within an overall head and shoulders formation.

The stock has rallied back up to a region that surrounds its 10-day moving average, with the 20-day exponential and 50-day moving averages lying just above. Notice that today TSLA ran into resistance along last week’s reaction rally highs, when the stock bounced off logical support along the lows of a prior base from May.

This may put the stock in a shortable position here, using the 50-dma or the 20-dema as maximum upside stops. Optimally, I’d like to see a weak blip up to the 20-dema or even as high as the 50-dma as a better entry on the short side, should that occur. TSLA is expected to report earnings on August 2nd.

 

GR071917-TSLA

 

Big-stock NASDAQ names seem to represent something of a new-high party and have displayed remarkable persistence to the upside. In most cases earnings are expected within the next week or two, which of course brings up the question of playing earnings roulette. In the meantime, however, they have provided nice upside rides. My notes on each below:

Alphabet (GOOGL) has pushed back up to the highs of its current two-month double-bottom type of formation and has cleared the mid-point on light volume. Earnings are expected on July 24th.

Amazon.com (AMZN) posted a pocket pivot breakout yesterday and followed through with a new all-time high today. Earnings are expected on July 27th.

Apple (AAPL) has held above its 50-day moving average after clearing the line on Monday. This could be considered buyable here using the 50-day line as a tight selling guide, but keep in mind that earnings are expected on August 1st.

Facebook (FB) just keeps trucking higher after breaking out a week ago. The stock is of course extended currently, and earnings are expected on July 26th.

Microsoft (MSFT) continues to push further into new high price ground after breaking out to a new high last Friday. It has now rallied 8 out of 9 days in a row. Earnings are expected tomorrow after the close.

Nvidia (NVDA) appears to be losing momentum up near the intraday highs of June 9th, the day it posted a sharp price reversal off the peak on heavy selling volume. It looks to me like pullbacks to the 10-day line from here would offer lower-risk entries. Meanwhile, earnings are expected on August 10th.

Priceline Group (PCLN) also continues to move higher as it gets extended from its base breakout of not quite two weeks ago. Despite being about 90 points past its recent breakout point as it approaches the 2,000 Millennium Mark, the stock is still technically within buying range of the breakout. Earnings are not expected until August 8th.

Nutanix (NTNX) has followed through nicely on last Friday’s buyable gap-up move. The stock is now somewhat extended but has done quite well since I first flagged it as an Ugly Duckling situation down around the 17-18 price level. Last Friday’s action was a buyable gap-up, which I noted in a blog post at that time.

Since then the stock has continued higher, and if you look very carefully at the chart below you will notice that a red 200-day moving average has just appeared. Today NTNX ran right into this newly-appeared 200-day line and stopped right there. This may present near-term resistance as buying volume starts to wane, so for now we are simply left with waiting to see how the next pullback and lower-risk entry opportunity evolves from here.

 

GR071917-NTNX

 

Alibaba (BABA), not shown, has become more extended, but JD.com (JD) turned out to be buyable per my discussion over the weekend. At that time the stock was sitting right along its prior base breakout point and holding tight as volume was coming in very light. That led to a move this week on another breakout attempt that carried right into the prior June highs today.

JD ended up churning and stalling at these prior June highs on higher volume. Bottom line for now is that the stock is not at any kind of lower-risk entry point, and needs to show that it can hold up here at near-term resistance without reversing substantially. Earnings aren’t expected until August 10th.

 

GR071917-JD

 

Netease (NTES) looked like it might be able to clear the 320 price level and the near-term highs from last week, but instead today it reversed off the highs and closed in the red on slightly higher volume. That’s not really what you want to see, especially on a day when the major market indexes are making new highs.

This could still be a possible late-stage failed-base short-sale set-up in progress, but for now the action is not all that definitive in either direction. While NTES continues to hold above maximum support at its 50-day moving average, it still can’t get out of its way and clear to new highs. I suppose at best, if one really likes the stock, this pullback into the 10-dma and 20-dema might represent a lower-risk entry point. That, of course, means one would be using the two short moving averages as tight selling guides while the lower 50-day moving average would represent a wider selling guide.

 

GR071917-NTES

 

Notes on the other two China Five names:

Momo (MOMO) has rallied just past the early June peak at 42.27, but volume remains quite low. This is currently not in a buyable position, although it was buyable last week on the basis of the pocket pivot at the 50-day moving average.

Weibo (WB) is also out of position as it is slightly extended above the 50-day line. Today it reversed after trying to push to a higher high and back up closer to its prior highs of early June. It was last buyable at the line on the moving average undercut & rally move.

Applied Optoelectronics (AAOI) is the latest incarnation of a rocket stock as it has just kept rocketing higher in parabolic fashion. I don’t show the stock here on a chart, but it is now about 8% away from the $100 Century Mark. The stock got as high as 95.43 before running out of steam and reversing to close in the lower part of its daily trading range at 92.54. For now, it is way extended and out of buying range.

Lumentum Holdings (LITE) hasn’t been able to match the wild upside thrust of its cousin, AAOI, but it is back in a lower-risk entry position here along the 10-day simple and 20-day exponential moving averages. In fact, it posted a pocket pivot today at the two moving averages as buying volume picked up sharply. Therefore, the stock can be considered to be in a lower-risk buy entry position here using the 50-day moving average at 59.17 as your maximum selling guide.

 

GR071917-LITE

 

Fabrinet (FN) is the third optical name I’ve discussed in recent reports, but it is not in a lower-risk entry position currently. Pullbacks to the 10-day moving average at 44.36 would offer lower-risk entries, so that is something to watch for.

 

GR071917-FN

 

Notes on other names of interest, some with charts:

Activision Blizzard (ATVI) broke out to new highs today but stalled to close just back below its breakout buy point. Volume came in below average, so I can’t really view this as a buyable breakout. Retracements back down toward and closer to the 20-dema would offer lower-risk entries. Earnings are expected on August 3rd.

Arista Networks (ANET) is extended from its nearby moving averages and not in any kind of lower-risk entry position. Earnings are expected on August 3rd.

Bioverativ (BIVV) picked up some volume support at the top of its prior base and the 60 price level. This remains in a buyable positon using the 50-day moving average as a maximum selling guide. Earnings are expected on August 2nd.

Canada Goose Holdings (GOOS) is still sitting below its 50-day moving average as volume keeps coming in quite low. For now, I’m still looking for a sustained move back up through the 50-day moving average as a potential moving average undercut & rally move.

Edwards Lifesciences (EW) was in a lower-risk entry yesterday along the 50-day moving average, which I noted in my weekend report. Today the stock posted a strong-volume pocket pivot off the 10-day and 20-dema lines. From here I would view pullbacks to the 10-day line at 117.34 as lower-risk entry opportunities. Earnings are expected next week.

Electronic Arts (EA) was in a lower risk entry position on Monday as it pulled back to its 50-day moving average as I noted in my weekend report. It has since posted two five-day pocket pivots at the 50-day line in a row, which is constructive. Earnings are expected next week, however, so if one goes long the stock here, one is looking for some kind of strong move ahead of the report.

 

GR071917-EA

 

First Solar (FSLR) has been on a tear ever since I reversed my position on the stock from a short to a long two weeks ago as it found support along its 20-day exponential moving average. Solars have all been on fire lately, and the group, including FSLR is extended and out of buying position at this point. Earnings are expected on August 2nd.

Palo Alto Networks (PANW) continues to be buyable on pullbacks to the 10-day moving average at 138.34 using the line as a tight selling guide. The stock found support at the line yesterday, but buying volume has not been all that strong.

Salesforce.com (CRM) posted a pocket pivot today at its 10-day moving average, and remains in buying range of this pocket pivot using the 20-dema at 88.61 as a tight selling guide.

ServiceNow (NOW) is pulling into its 10-day moving average as volume dries up. I would consider pullbacks to the 20-dema at 107.99 as your lowest-risk entry opportunities ahead of earnings next week.

SolarEdge Technologies (SEDG) is extended along with the rest of the solar names. 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 last week’s base breakout. Earnings are expected on August 2nd.

Tableau Software (DATA) was in an Ugly Duckling entry position as of last Friday, as I noted in my weekend report, and the stock gapped up slightly on Monday. It is now sitting in a position slightly extended from the 10-dma and 20-dema as volume remains quite low in the handle area of a miniature cup-with-handle formation. I like this on constructive pullbacks to the 10-dma at 63.22. Earnings are expected on August 2nd.

 

GR071917-DATA

 

Take-Two Interactive (TTWO) has bounced off its 10-day moving average two days in a row and is best bought on any pullbacks to the 10-dma. Earnings are expected on August 2nd.

Twitter (TWTR) is extended ahead of earnings, which are expected next week on July 27th.

Universal Display (OLED) is extended here at the top of its current price range extending back to early June and is nowhere near a lower-risk entry positon. Earnings are expected on August 3rd.

Workday (WDAY) is showing nice, tight action as it forms the handle of a miniature cup-with-handle right up near its prior highs in the 104-105 price area. Pullbacks to the 10-day line at 100.76, about 2% below today’s close, would offer the more opportunistic entries, should they occur. WDAY is expected to report earnings on August 23rd. It should be watched in conjunction with its cousin stocks, CRM, DATA, and NOW, all of which appear to be setting up.

 

GR071917-WDAY

 

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).

Currently most of the stocks on my long watch lists are in extended positions, particularly some of my smaller favorites such as NTNX and YEXT, in addition to all the big-stock NASDAQ names. There are other names setting up, as this report shows, and that is where I would focus any new buying. However, buying into many of these names on my long watch list is problematic due to the fact that earnings for nearly all are expected in the next week or so.

I prefer not to have to play earnings roulette, speaking for myself, but where there is a name that I like sitting at a lower-risk entry position where earnings aren’t due for at least a couple of weeks, I am okay with taking a shot. Meanwhile, the upside extension in many names we’ve been following lately is also logical since the market and a broad swath of leading stocks have been rallying quite strongly over the past few days.

In this case, we can again take our cue from the action of individual stocks, and consider that the upside extension means that we needn’t try to stick our necks out and start buying stocks in extended positions, while focusing on those names still at lower-risk entry positions.

The stocks are for the most part telling us to lay back and see how far the current upside thrust carries them. If the market stages what might just be a normal pullback after some torrid upside action, then we get to see how the stocks act on any such pullback.

The simple approach here is quite concrete, as I see it. Simply review your trailing stops and/or your profit objectives, if you are one to swing-trade leading stocks as I like to do. As I see it, a number of stocks have produced enough upside to warrant at least paring back down to core positions, especially if earnings are approaching soon. This allows one to have some cash in their pocket to exploit any pullback opportunities that might arise. In the meantime, at least for now, let the trend be your friend.

Gil Morales

CEO and Principal, Gil Morales & Company, LLC
Managing Director and Principal, MoKa Investors, LLC
Managing Director and Principal, Virtue of Selfish Investing, LLC

At the time of this writing, of the stocks mentioned in this report, Gil Morales, MoKa Investors, LLC, Virtue of Selfish Investing, LLC, and/or Gil Morales & Company, LLC held a position in EA and LITE, though positions are subject to change at any time and without notice.

Gil Morales & Company, LLC (“GMC”), 8033 Sunset Boulevard, Suite 830, Los Angeles, California, 90046. GMC is a Registered Investment Adviser. This information is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to GMC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Gil Morales & Company, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.