The Gilmo Report

July 22, 2018

July 21, 2018

The major indexes have struggled to make further upside progress after clearing to new highs last week. As I wrote on Wednesday, I believe that the fat part of the index rally in terms of catching high time-value trades on U&R long set-ups has passed, and that this sets the stage for a possible market pullback. The optimal point at which we saw these U&R set-ups materialize occurred at the point of impact when the NASDAQ Composite Index bounced off its 50-dma in late June.

After breaking out to an all-time high on Tuesday, the NASDAQ has stalled and churned over the past three days with volume picking up relative to Tuesday’s new-high breakout day. So far, the new high has produced nothing in the way of significant upside follow-through. This is why the action feels a bit sluggish to me. To some extent, the index may be on hold as it awaits earnings reports from several big-stock tech names this coming week, including Amazon.com (AMZN), Facebook (FB), and Alphabet (GOOGL).

 

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The S&P 500 Index was also grunting its way higher earlier in the week after a sharp upside move in early July. Over the past two trading days it has pulled in a bit as it loses upside momentum, failing to follow through after moving to higher highs on Tuesday and Wednesday. Volume was higher on Friday thanks to options expiration. While there is technically no damage to the current uptrend, the index, like the NASDAQ, is in a holding pattern.

 

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Perhaps one positive on Friday was found in the fact that the market didn’t blow to pieces following more ominous comments that morning from President Trump regarding the ongoing Trade Tiff. In an interview with CNBC, the President indicated that he was willing to go “all in” by imposing tariffs on all $500 billion worth of Chinese goods and services that currently come into the U.S.

After an initial gap-down in the NYSE-based indexes, the S&P 500 and Dow both rallied back into positive territory before stalling out and closing roughly flat on the day. For now, it appears that the market doesn’t believe that these tariffs will in fact go into effect, assessing instead that perhaps it is all one big negotiating tactic. We shall see if that assessment has any reason to change over the next few weeks.

On Saturday, however, Treasury Secretary Steven Mnuchin stated he “wouldn’t minimize” the potential for tariffs on all Chinese imports into the U.S. Thus, at least on the war of words front, there is still no let-up, and in fact the rhetoric appears to be ratcheting up on a continuous basis. At some point, the market may have no choice but to discount the reality of a real tariff war.

Big-stock NASDAQ 100 name Microsoft (MSFT) gapped up after reporting earnings on Thursday after the close, but it failed to inspire an up day for either the NASDAQ Composite or the NASDAQ 100 Indexes. MSFT posted 7% earnings growth on a 17% increase in sales. The prior quarter it posted 16% earnings growth on 16% sales growth, so it appears the better sales growth didn’t result in much earnings leverage.

At 27 times forward earnings growth of 4-5% over the next two years, MSFT doesn’t strike me as much of a bargain here. Investors may have agreed with that assessment as the morning gap-up on Friday was sold into. MSFT opened the day at 108.08, but closed at 106.27, 19 cents above the intraday low.

 

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Netflix (NFLX) breached its 50-dma on Thursday, triggering it as a short-sale at the line. It moved lower on Friday as selling volume receded, but the past two days have still seen higher-than-average volume. From here, any move back up into the 50-dma would present a lower-risk, short-sale entry opportunity.

In this market, most big-stock leaders that get smacked like this eventually just turn around and drift back to the upside. We’ll see if NFLX turns out the same way, but for now it is an active short-sale using the 50-dma as a guide for an upside stop. It is still only about 3% below the 50-dma and may be set to test the Tuesday intraday low at 344 even.

 

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Nvidia (NVDA) exemplifies the dull action among big-stock techs as it grinds sideways between its 10-dma, 20-dema, and 50-dma. Volume has been declining, but it’s not clear whether the stock will eventually resolve as a short at the 50-dma, or a long at the 20-dema. In the meantime, it may simply continue to meander about ahead of its expected August 16th earnings report, which could serve as the final catalyst for a meaningful move from current levels.

 

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Tesla (TSLA) isn’t turning any heads either, although it still refuses to blow apart despite all the bad press it’s been getting. On Friday, the company garnered a positive review of the new Model 3 that appeared in the Wall Street Journal. That, however, failed to trigger any significant movement in the stock to the upside, and instead it pulled a nice outside reversal that took the stock back below the 200-dma and the 50-dma.

Based on this action, I would view this as a short here using the 50-dma as a tight upside stop. Keep in mind that TSLA is expected to report earnings in eight trading days, on August 1st, so you’d be looking for at least a break to the $300 price level ahead of earnings. Assuming it continues lower ahead of earnings, it’s not clear that I’d want to hold through the report, although it could work for a nice short-scalp up until then.

 

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Amazon.com (AMZN), Facebook (FB), and Alphabet (GOOGL) are all expected to report earnings this week, as I noted above and in my last report, and all three can be watched for any potentially actionable moves following earnings. GOOGL will kick things off on Monday, with FB on Wednesday and AMZN on Thursday. Twitter (TWTR) is expected to report on Friday before the open. So, we can expect a busy earnings calendar for some of our favored names.

Apple (AAPL) is expected to report on July 31st, seven trading days from now. It is currently holding up in a short cup-with-handle formation and along its 10-dma. It will be interesting to see how the stock does after earnings, but I would note that some iPhone component suppliers, like LITE, FNSR, SWKS, and QRVO, for example, were hit hard on Friday.

LITE was a big-volume gap-down break, while SWKS and QRVO were very ugly outside reversals to the downside on heavy selling volume. Whether this bodes ill for AAPL’s earnings report remains to be seen, but for now I see nothing to do with the stock ahead of the report.

 

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CSX Corp. (CSX) has continued slightly higher following Wednesday’s buyable gap-up (BGU) and base breakout. Technically, it remains within buying range of the breakout. However, we shall see whether it can do better than its last earnings-related BGU back in late April. That BGU moved higher for another day-and-a-half before the stock backed down and failed on the BGU.

It eventually found support along the 20-dema, and then began to turn higher in a more concerted uptrend. That eventually peaked in early June. For now, whether one buys this on the basis of the BGU or the base breakout, I would continue to use the 66.30 intraday low of Wednesday’s BGU as your selling guide. In my view, a 7-8% downside stop is not efficient or even necessary.

 

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Micron (MU) triggered as a short-sale on Thursday when it breached the 50-dma on higher selling volume. I discussed watching for this to develop in my Wednesday report. The stock then moved lower on Friday, but volume declined. For now, any short-sale entry at the 50-dma would simply use the moving average at 56.84 as a guide for an upside stop.

In this market, so-called textbook, late-stage, failed-base (LSFB), short-sale set-ups only rarely pan out, but all we can do is play MU as it lies. For now, it lies as a short-sale after breaching the 50-dma, and will remain such until it is able to regain the 50-dma, end of story.

 

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Okta (OKTA) has so far made for a nice undercut & rally (U&R) trade since late June, and has had one pocket pivot on the way up. It is now back up near the prior highs of early June, where it stalled on Friday on higher, but still well below-average, volume.

I don’t see a lot of further upside for the stock at this point and would look for a pullback to the 10-dma at 54.13 as a possible lower-risk entry or re-entry point. OKTA is expected to report earnings on September 6th, so earnings are not a factor.

 

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ZScaler (ZS) illustrates my thinking with respect to most of these late June/early July U&R long set-ups that have rallied back up near their prior highs. In the short-term these moves are played out, as I see them, and it is now a matter of seeing how something like ZS pulls back and consolidates now that it is back near its early-June highs.

Obviously, it is in a logical position to start building a handle, and this may take several days. The stock is now pulling back for three days, and selling volume picked up on Friday but was still below average. I’m looking for a test of the 20-dema at 38.77 as a potential lower-risk entry point.

 

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Nobody was making money in Chinese names this week as most flat-lined. Alibaba (BABA) pulled down to its 200-dma on Friday, which was something I was looking for per my comments on Wednesday where I wrote, “At best I could see a retest of the 200-dma before earnings…”

We could look for a breach of the 200-dma as a short-sale trigger, otherwise the stock may simply keep flopping around above the 200-dma ahead of its expected August 2nd earnings report. In the meantime, it isn’t getting any help from the President’s comments regarding additional tariffs, and this may continue to be the case for the near-term.

 

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Momo (MOMO) continues to flop around its 10-dma, 20-dema and 50-dma without going anywhere. Earnings aren’t expected until August 21st, so there’s still time for the stock to make a more decisive move one way or the other. Which way, however, is not necessarily easy to figure out here.

What we can see for certain is that it has stalled on three attempts at clearing the 20-dema. Friday’s stall-out occurred on lighter volume, and MOMO finished the day just below its 20-dema and 50-dma but held support at the 10-dma. So far, nothing conclusive, although shorting rallies that push just above the 20-dema would have resulted in some minute short-sale scalps, but nothing else.

 

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Baozun (BZUN) was a successful U&R long set-up in late June, and has slowly rallied back up near its prior June highs. It stalled on Friday on slightly higher but far below-average volume. This may be the end of the line for this move, and the stock may simply bounce along its 10-dma and 20-dema ahead of its expected earnings report on August 21st.

For now, only pullbacks to the 20-dema at 59.67 would offer lower-risk entries from here. How much upside can be generated after the prior move off the U&R low ahead of earnings is questionable, however. Nevertheless, a buyable pullback is a buyable pullback, so if it does test the 10-dma or 20-dema constructively, play it as it lies.

 

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Cyber-security names have continued to trend higher, with both CyberArk Security (CYBR) and Fortinet (FTNT) both posting continuation pocket pivots on Wednesday. However, FTNT is expected to report on August 1st while CYBR is expected to report on August 7th. Both were buyable much, much lower per my comments earlier in the year, and I don’t see these current moves to new highs as reasons to load up on the stocks now, with earnings approaching.

Palo Alto Networks (PANW) won’t be reporting until the very end of August, so it is less subject to earnings roulette. The stock was last buyable on a small undercut & rally move it had at the 50-dma. It has since broken out to new highs, doing so seven trading days ago on a pocket pivot signature.

That pocket pivot breakout, however, has shown no follow-through to the upside. PANW has since drifted back below the 10-dma and is right at the pocket pivot breakout point. This does put it in a lower-risk entry position using the 20-dema as a maximum selling guide.

Note that the stock has been very volatile over the past three months, and that the best entries have occurred on U&R set-ups along the 50-dma. While it has certainly be a nice swing-trading target, there is no significant uptrend as the stock has merely chopped its way in a relatively wide range, making marginal new highs along the way.

 

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Activision (ATVI) dipped below its 10-dma on Friday on above-average volume. This might have been related to options expiration, but the bottom line is that this brings it within buying range of the prior cup-with-handle breakout. With Electronic Arts (EA) expected to report earnings this coming Thursday after the close, the stock may remain in a holding pattern until then.

Both EA and Take-Two Interactive (TTWO) remain viable candidates within the video-gaming group. Along with ATVI I am particularly interested in seeing what sorts of opportunistic action might transpire after any of the three report earnings. ATVI and TTWO are expected to report on August 2nd, so all of these names can be considered to be on earnings watch.

 

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Huya (HUYA) finally got hit with some selling volume on Thursday as it got slammed back to its 10-dma and 20-dema. Given the prior 30%-plus move from the early July U&R long set-up at the 30 price level, this is not surprising. There was no follow-through to the selling on Friday, however, and the stock held support at the 20-dema as volume declined.

This also brought it right back on top of the low-base range it formed in late June and early July. This is what I was looking for per my discussion of the stock in my Wednesday report. Thus, this is a lower-risk entry position, using the 20-dema or Friday’s low as a tight selling guide. HUYA is not expected to report earnings until the first week of September.

 

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Bilibili (BILI) can’t seem to get past its 50-dma, having run into the line three times over the past six trading days and getting turned back each time. Nevertheless, it remains within buying range of the pocket pivot of seven trading days ago, using the 10-dma as your selling guide. BILI is expected to report earnings on August 22nd.

 

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Box (BOX) is showing no follow-through to Tuesday’s pocket pivot, and has instead dropped below the 10-dma and 20-dema after failing to regain the 50-dma on Friday. This obviously doesn’t look great, but note that the stock has pulled back to the lows of the prior week around 26. Therefore, we could look for it to hold price support along the 26 level and attempt to retake the 10-dma and 20-dema.

Thus, one could attempt to buy into the stock here, using the 26 price level as a tight selling guide. BOX is expected to report earnings on August 29th. If it has any shot at making new highs ahead of earnings, this is the spot where it should make its move.

 

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DropBox (DBX) continues to drift ever so slightly lower after Tuesday’s report of FB moving its cloud storage from DropBox to Google. While that hasn’t killed the stock entirely, buyers don’t seem all that interested in getting involved with the stock. For now, this remains a difficult one to figure out, but if some confirmation one way or the other with respect to the FB news comes out, it may begin to move again, so stay alert to this possibility. In the meantime, it may remain dead money.

 

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Intuitive Surgical (ISRG) reported earnings Thursday after the close and gapped to an all-time high on Friday morning. That move didn’t last long as the stock reversed to the downside in nasty fashion as selling volume ballooned. The stock has done well since I first discussed it much earlier in the year down around 430, and this may be at least a short-term top for the stock.

For now, if one didn’t sell into the post-earnings gap-up move, I would use the 10-dma as a tight selling guide, or the 20-dema as a wider selling guide. Either way, after an extended move to the upside, Friday’s action looks very bearish. If I had been long the stock on Friday, I would have certainly sold it based on the putrid price/volume action.

 

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Notes on other long ideas discussed in recent reports:

Roku (ROKU) remains in an extended position following Tuesday’s pocket pivot off the 10-dma in a reverse-sympathy move to NFLX’s post-earnings drop. Earnings are expected on August 8th.

Stitch Fix (SFIX) remains slightly extended from its early-July cup-with-handle breakout. I would look to take an opportunistic approach here and lay back for any pullbacks to the 20-dema at 31.14 as potential lower-risk entries, if I can get ‘em.

Turtle Beach Corp. (HEAR) posted another all-time closing high on Friday and remains extended. Pullbacks to the 10-dma at 24.53 or the 20-dema at 23.37 would be your references for potentially lower-risk entries.

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.

As I wrote in my Wednesday report, most of the best long set-ups, of which the majority have been U&Rs, have come and gone. And this is confirmed by the fact that very little that I would consider to be a compelling long entry is coming through my screens currently. Things like BILI or HUYA look actionable, but beyond that I can’t say there is a lot around that whets my buying appetite.

That is not necessarily a problem, although it could indicate that the market is going to spend more time pulling back and/or consolidating. Obviously, based on my last report, I was starting to see this by the middle of this past week, and I would have to say that nobody’s been making big money on the long side over the past couple of days.

With several high-profile earnings reports expected this week, we may get an idea of just how strong this market’s legs are. Given the character of this market, however, I am more inclined to seek opportunistic entries on the long side rather than chasing strength. In the meantime, I do not discount the possibility of a pullback at any time, particularly with the very random impact of the currently developing geo-political/geo-economic backdrop.

To reiterate my closing remarks from Wednesday’s reports, on the long side we can remain focused on two primary approaches. As always, we look for set-ups or constructive pullbacks in stocks that aren’t subject to imminent earnings reports while seeking to take advantage of any actionable moves that occur in stocks following their earnings reports.

Practical examples in this regard vary from long side to the short side. CSX, for example, worked as a long, but NFLX offered a short-sale opportunity on its reaction rally back up through the 50-dma. And then there were opportunities in names like SWKS, which gapped up after earnings and then reversed hard, making for a decent short-sale play on Friday.

How these play out, however, is often highly dependent on the precise intraday action, which makes them difficult for all but the nimblest of traders. But when you hit one right, it can be quite rewarding. Nevertheless, this remains a difficult market at this stage, and I get the sense that momentum is waning. This week will likely give us a better picture of the macro-picture, so, as always, just stay alert and play them as they lie.

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.