The Gilmo Report

July 23, 2017

July 23, 2017

After posting nine straight up days the NASDAQ Composite Index finally took a day off, pulling back slightly on Friday as volume declined on an options expiration day. So far, the action remains constructive, with no signs of distress. A lot of leading stocks are extended, sure, but that in and of itself is not a sign of an impending, major correction.

 

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The S&P 500 Index displays similar constructive action as it, too, consolidates the recent gains since breaking out to new highs last week. Volume came in higher on Friday’s options expiration. On its face, the higher volume gives Friday’s action the look of supporting action as the index pushed up from its intraday lows and closed near the peak of its daily trading range.

 

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There has been a lot of talk about the Fed continuing to raise interest rates, with many expecting 2-3 more increases this year and again next. The U.S. Dollar, however, hasn’t shown such faith in future interest rate increases all year long. As we can see from the daily chart of the PowerShares U.S. Dollar Index ETF (UUP), below, the dollar has been in a steady downtrend channel since the first of the year. This past week it broke below the lower boundary of this trend channel, posting its lowest lows since August of last year.

As I wrote in my Wednesday mid-week report, the driver of this market is QE. The pundits like to try and come up with all sorts of economic and policy reasons for the persistent upside movement of the market in 2017, but in my view, it appears to simply be the old dollar to market inverse correlation that has dominated throughout the QE bull market of 2009 to the present. Until we see something snap, that may likely remain the case.

 

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But if the dollar isn’t expecting interest rates to rise, shouldn’t this be a negative for financials? Well, yes and no. While lower interest rates are viewed as a negative for the sector, the other dynamic affecting the group currently is the potential for banking legislation reform.

As best as I can tell, that dynamic may be what keeps the SPDR Financial Sector Select ETF (XLF) in base-building mode. I don’t see anything problematic about this base, as it looks quite constructive to me. The handle is forming normally as the ETF pulls back slightly and finds support along its 20-day exponential moving average.

Objectively, this puts the XLF in a buy position using the 20-dema as a tight selling guide. With the Republicans failing to get agree on and get anything done on healthcare, perhaps banking legislation reform is something that they can agree on. If so, then this could certainly provide a serious catalyst for a breakout by the XLF from this constructive-looking cup-with-handle formation.

 

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As we move into the heart of earnings season, I’m mostly interested in buying names that are not expected to announce earnings in at least two weeks. For that reason, I will focus primarily on names that fit this restriction and which are at lower-risk buy entry points in their patterns.

New-merchandise names discussed in recent reports had some nice moves last week and in the first half of this past week in several cases, but spent the second half of this past week pulling back. Yext (YEXT) exemplifies the idea of taking profits into a strong upside move and then looking to re-enter on a pullback to a logical area of support.

YEXT had a strong upside move after I first discussed it while it was tracking along its 10-day and 20-day moving averages last week, and has pulled back over the past two days, retracing about 50% of that prior move. On Friday, the stock ran right into its 10-day line on increased, but below-average volume.  This puts it in a lower-risk entry position here using the 10-dma or the 20-dema as reasonably tight selling guides. YEXT isn’t expected to report earnings until August 31st, which makes it quite playable in my view.

 

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Notes on other recent IPOs discussed in recent reports:

Alteryx (AYX) pulled into the top of its base and the 20-dema on Friday, setting up a lower-risk entry opportunity at that point. This is what we were watching for after the stock broke out the prior week and posted a 15% upside move before pulling back over the past three days. Earnings are expected on August 2nd.

Appian (APPN) pulled into its 10-day line on Friday where it found intraday support as volume dried up to -31.5% below average. APPN is expected to report earnings on August 3rd.

Cloudera (CLDR) ran into resistance at its 50-day moving average on Wednesday and has since pulled back. Watch for the stock to get down closer to the confluence of the 10-day and 20-day moving averages for a possible lower-risk entry opportunity. Earnings are not expected until September 7th.

Myomo (MYO) looks like it is headed for a retest of its prior 9.33 June low. I would watch for that to produce a possible undercut & rally move. I have no confirmed earnings report date on the company yet, but I have seen an estimated earnings report date of July 28th. Until I can get a handle on the exact earnings report date, however, I don’t think I want to own this stock.

In my Wednesday report I discussed the idea of keying off the price of crude oil as a way of playing oil stocks like Keane Group (FRAC) and Jagged Peak Energy (JAG). At that time, crude oil, as represented by the daily chart of the United States Oil Fund (USO), below, had regained its 50-day moving average.

My view at the time was that as long as oil could hold above support at the 50-day line, oil stocks would be in play. Unfortunately, that did not turn out to be the case as the USO reversed back below its 50-day line on Thursday and Friday, with volume picking up sharply on Friday.

Near-term this takes FRAC and JAG off the table as oil-related long ideas. Both stocks broke near-term support on Friday, mimicking the action in crude oil. Eventually, oil stocks may find a low and begin a concerted uptrend, but for now the brief showing of constructive evidence has now evaporated into thin air. Poof.

 

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Netflix (NFLX) has continued higher since posting its buyable gap-up move on Tuesday after earnings. This is the fourth BGU in the past year, and each time the stock has gapped up, it has moved up a little bit or none at all, and then settled into a long choppy consolidation. More recently, after gapping up in late April, NFLX spent the next six weeks making new highs before giving up all those gains in all of two days in early June.

This time around the stock seems to be showing a little more strength, and looks poised for a run at the $200 price level. For now, NFLX is extended but is currently the strongest of the big-stock NASDAQ names still leading this market.

 

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Notes on other big-stock NASDAQ names:

This week we’re going to see expected earnings reports from Alphabet (GOOGL) on the 24th, Facebook (FB) on the 26th, and Amazon.com (AMZN) on the 27th, so there is nothing to do in any of these stocks for now ahead of earnings. As members know quite well, I am not a fan of playing earnings roulette.

(AAPL) is expected to report earnings on August 1st, and I am not interested in doing anything with the stock before then. Currently it is doing its best to hold support at the 50-day moving average.

Microsoft (MSFT) reported earnings on Thursday after the close, and traded down all of 43 cents on Friday. I don’t consider this to be in a lower-risk entry position here, but pullbacks to the 10-day line at 72.42 might offer an opportunity for anyone eager to own the stock. Frankly, for my money, I think there are better stocks to buy.

Nvidia (NVDA) keeps wedging upward, posting a new all-time closing high on Friday. Volume was extremely light, so I don’t see any lower-risk entry in the pattern currently. Earnings are expected on August 10th.

Tesla (TSLA) is expected to report on August 2nd, and the stock is currently wedging up toward its 20-dema, currently at 334.92. I suppose if I could get a quick short scalp on the stock before earnings I might be inclined to do so, but I would not want to hold through earnings and play the dreaded earnings roulette.

Priceline Group (PCLN) remains within buying range of its early July base breakout. Earnings are not expected until August 8th.

Nutanix (NTNX) reversed at its newly-appeared 200-day moving average on Thursday, pulling back a little further on Friday as volume declined sharply. The stock posted a buyable gap-up (BGU) two Fridays ago, as I blogged at the time, and then scooted 10% higher from there before running into the 200-day line and backing off.

So far this looks normal, and the main issue here is that if one took partial or full profits at or near the 200-day line, where does one look to re-enter? With the stock about 5% off the Thursday peak, one could think about buying some back, but the other option is to wait for the 10-day moving average to catch up to the stock. At that point the 10-day line might provide a reference for a lower-risk entry. And if NTNX holds tight in here just below the 200-day line I would expect the rapidly-rising 10-day line to play catch-up very quickly.

 

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In the land of Chinese leaders, Alibaba (BABA), not shown, pulled into its 10-day moving average on Friday and bounced off the line. That pullback to the 10-day line did present a lower-risk entry opportunity for anyone alert to it. That said, I wouldn’t necessarily be an aggressive buyer of the stock ahead of earnings, which are expected on August 9th.

JD.com (JD) continues to look interesting here as it snuggles up to its prior June highs and forms a miniature cup-with-handle. What is different and perhaps notable here is the fact that the last two highs in June were followed by immediate reversals to the downside. This time around, JD is pulling back off Wednesday’s peak in constructive fashion as volume dries up.

This pullback is forming the handle of the tiny cup-with-handle formation with the 10-day line serving as a reference for downside support if one wanted to buy the stock here. This looks like it wants to go higher, and it will be interesting to see whether it can generate a decent upside move ahead of earnings which are expected on August 10th.

 

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Some of these slumbering Chinese names, in addition to JD, may be revving up for some upside movement as they look to be setting up again in constructive fashion. Momo (MOMO) posted a pocket pivot coming up through its 50-day moving average nine trading days ago on the chart and has since edged up along its rising 10-day moving average.

Volume dried up on Friday to -72% below average, which creates a nice “voodoo” pullback toward the 10-day line that looks buyable while using the line as a tight selling guide. Earnings aren’t expected until August 14th.

 

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Weibo (WB) may also be setting up here after regaining its 50-day moving average at around the same time MOMO regained its own 50-day line. While the stock ran into some resistance along the prior highs on Wednesday, the movement back down toward the 50-day line has been constructive as volume dries up sharply.

Friday’s volume came in at -67% below average, which in my view puts the stock in a buyable position using the 50-dma as a tight selling guide. WB is expected to report earnings on August 7th, and I recall how the stock started moving higher several days before reporting earnings back in mid-May. It then gapped up after earnings. We’ll see if we can get a repeat performance this time around.

 

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Because Netease (NTES) has been acting somewhat erratically as of late, I’ve decided to boot it out of my China Five and replace it with another big-stock Chinese internet name, Sina Corp. (SINA). While NTES chops back and forth after two prior failed breakouts in recent months, SINA looks to be rounding out the right side of a potential new base after a big price run-up in May.

Another thing that distinguishes SINA from NTES are the annual earnings estimates for this year and next. NTES is looking at 8% and 15% annual earnings growth in 2017 and 2018, while SINA is expected to post annual growth of 89% and 41%. So, from a fundamental standpoint SINA seems to be the stronger of the two names.

Its chart pattern also looks better to me as it forms a cup-with-handle here. On Friday SINA pulled into the 10-day moving average with volume declining to -69% below average. That would put the stock in a lower-risk entry position here using the 10-day line as a tight selling guide, or the 20-dema or 50-dma as wider selling guides.

The way several of these Chinese names are setting up right now tells me we may be looking at a “wolfpack” type of move higher ahead of their respective mid-August earnings reports. Usually, when I see several names within the same group setting up simultaneously, that is a bullish development.

 

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Applied Optoelectronics (AAOI), not shown, got over 20% extended beyond its 10-day moving average earlier this past week, which in my view is a reasonable spot to take at least partial profits. I tweeted that on Thursday, and the stock has since backed up a little bit. The 10-day line is quickly catching up to the stock, and is now less than 10% below the current price. One could therefore use the 10-day line as an alternative trailing stop for any position in the stock.

Lumentum Holdings (LITE) on Friday posted its fourth pocket pivot at the confluence of the 10-day simple and 20-day exponential moving averages in two weeks. However, I do not like to chase strength in this stock, and on Wednesday I wrote that it was buyable along the 10-day and 20-day lines at that time as it was holding tight along the two short moving averages.

On Friday morning, LITE again tested the 20-dema and found support, rallying back up toward its prior June highs on an above-average pocket pivot volume signature. This remains buyable on pullbacks closer to the 10-dma or 20-dema when they occur. Earnings are expected on August 8th.

 

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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. FN is not expected to report earnings until August 14th.

 

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Palo Alto Networks (PANW) looks to be setting up here as it pulls into the confluence of the 10-day simple and 20-day exponential moving averages. Volume dried up to -64% below average on Friday, putting the stock in a buyable position using the 10-dma or 20-dema as tight selling guides.

What I find so fascinating about these cyber-security names like PANW is that despite all the hullabaloo about hacks and malware attacks, the stocks have been relatively dormant. I do notice FireEye (FEYE) and Fortinet (FTNT), both not shown here on charts, starting to come to life as they are also forming new bases, but both names are expected to report earnings within the next six trading days.

Meanwhile, PANW isn’t expected to report earnings until August 28th, but I’m sure it will move in sympathy, at least temporarily, to FEYE’s and FTNT’s impending earnings report. FTNT is expected this Wednesday, July 26th, while FEYE is expected next Tuesday, August 1st.

 

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In the realm of stocks setting up that also don’t report earnings for at least two weeks, big-stock cloud name Workday (WDAY) hits my current buy watch list. The stock is forming a little cup-with-handle pattern here and has spent the past six days forming the tight little handle.

On Friday WDAY held tight along its 10-day moving average with volume declining to -67% below average, a clear “voodoo” buy point at the 10-day line using it as a tight selling guide. WDAY isn’t expected to report earnings until August 24th, but note that its close cousin, ServiceNow (NOW), not shown, is expected to report this Wednesday, so the stock may move in sympathy.

 

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Salesforce.com (CRM) is in a similar positon as it too forms a miniature cup-with-handle formation, albeit one that is considerably sloppier and less well-formed than WDAY’s. Nevertheless, if the clouds are going to move on out of these current bases and trek higher, CRM will likely participate as well as the second-biggest of the big-stock cloud names (ORCL is the granddaddy of cloud names and largest, de facto).

CRM can be viewed as buyable here using the 10-day line as a tight selling guide, or the 50-day line as a wider selling guide. Earnings are expected to be reported on August 17th.

 

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Our old friend Veeva Systems (VEEV) has spent the past two months building a new base after a nice price move in late April through May of this year. In late May, the stock topped out after gapping up in an exhaustion type of move. It has since gone into what looks like a normal base-building period and may be setting up here for a new leg to the upside.

I’ve been watching this for some time, and we can see that the stock has found consistent support along the 50-day moving average throughout this recent base-building period. Note that it cleared the confluence of its 10-day simple and 20-day exponential moving averages nine and eight trading days ago on the chart on a pair of five-day pocket pivot signatures.

Since then VEEV has been holding tight along the 10-day line. Volume dried up to -54% below average on Friday, putting the stock in a buyable position here using the 20-dema as a tight selling guide or the 50-day line as a wider selling guide. Earnings are not expected until August 28th.

 

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Notes on other names of interest, all of which are expected to report earnings within the next several days. For that reason, these all remain on my buy watch list, pending the release of their respective earnings reports:

Activision Blizzard (ATVI) – earnings are expected on August 3rd.

Arista Networks (ANET) – earnings are expected on August 3rd.

Bioverativ (BIVV) – earnings are expected on August 2nd.

Canada Goose Holdings (GOOS) – earnings are expected on August 4th.

Edwards Lifesciences (EW) –earnings are this Wednesday, July 26th. Electronic Arts (EA) – earnings are expected this week on Thursday, July 27th.

First Solar (FSLR) – earnings are expected on August 2nd.

ServiceNow (NOW) – earnings are expected this Wednesday, July 26th.

SolarEdge Technologies (SEDG) – earnings are expected on August 2nd.

Square (SQ) – earnings are expected on August 2nd.

Tableau Software (DATA) – earnings are expected on August 2nd.

Take-Two Interactive (TTWO) – earnings are expected on August 2nd.

Twitter (TWTR) – earnings are expected this week on July 27th, which is Thursday.

Universal Display (OLED) – earnings are expected on August 3rd.

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).

Franklin Delano Roosevelt once said that “We have nothing to fear but fear itself.” In this market, it seems that investors have nothing to fear but the lack of fear itself. The #1 topic among the pundits seems to be the extremely low volatility of this current market environment which is in turn viewed as an indication of extreme complacency.

The question then becomes whether all the fear or a lack of fear is just another brick that will get mortared into the wall of worry that this market has loved to climb. As always, this brings us back to the most relevant consideration, which is what the individual stocks are telling us.

What I see right now, and as this report exemplifies, are a number of stocks within leading areas of the market setting up within bases and sitting at lower-risk buy positions within their charts. And these are occurring in stocks that aren’t expected to report earnings for at least a couple of weeks, which makes me happy since I do not like to play earnings roulette!

So, if our rallying cry is, “Watch the stocks!” then we know what to do, right here. For that reason, the market uptrend remains in force and I am still focusing on the long side of this market until material evidence to the contrary finally shows up. Take it from there.

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 NTNX, PANW, VEEV, and YEXT, 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.