The Gilmo Report

July 25, 2018

July 25, 2018

I wrote over the weekend that I wasn’t seeing anything that compelling on the long side. I’ve already discussed in the last two reports the idea that most of these U&R long set-ups that occurred 2-3 weeks ago have run their course in the near-term and that this set up the potential for a market pullback, or at least some backing and filling.

We’ve seen a bit of that over the past few days, but the action is perhaps a bit more erratic than I might be looking for. The NASDAQ Composite Index gapped up sharply yesterday on the heels of a strong earnings report from Alphabet (GOOG), charging nearly 87 points higher while the NASDAQ 100 Index pushed over 100 points higher. But by the close, the NASDAQ’s gains had evaporated entirely as the index ended the day down -1.10.

A broad number of stocks posted high-volume reversals, which, when paired with the index action, looked quite bearish. This morning the NASDAQ rallied and then sold off, with the NDX dropping into the red. But the prior day’s bearish reversal was quickly erased from the market’s memory and we were again off to the races.

During the last hour of trade today, a report that the European Union was agreeing to trade concessions, including agreeing to buy more soybeans from the U.S., suddenly sent the indexes rocketing higher. All of this added to the wild and wooly flavor of the week’s market action, so far.

So, amidst all the noise, this leaves the NASDAQ at an all-time high on higher volume. This comes on the heels of yesterday’s ugly reversal off the intraday highs on higher volume. Today’s upside move was also influenced by news, so we’ll see how this holds up tomorrow given some of today’s high-profile, after-hours earnings reports.

 

GR072518-$COMPQ

 

While the NASDAQ was reversing yesterday, the S&P 500 and the Dow Jones Industrials indexes diverged with big moves to the upside. The S&P stalled a bit on its move on higher volume, but that didn’t prevent it from rallying to higher highs today on increased volume, thanks to the trade news that came in near the end of the day.

This puts the S&P within 1% of its all-time highs achieved back in late January. Frankly, I didn’t realize that soybeans were the be-all, end-all of the U.S. economy and stock market, but the indexes certainly responded robustly to the news by rocketing significantly at the end of the day. How this carries through tomorrow remains to be seen.

 

GR072518-$SPX

 

Alphabet (GOOGL) served as the big-stock driver du jour yesterday, gapping up after a strong earnings report on Monday after the close.  Technically, that was a buyable gap-up (BGU) using the 1244.14 intraday low as your selling guide. The stock remains within buying range of the BGU low.

 

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After the close today, Facebook (FB) reported earnings and as I write this afternoon the stock gapped down to the 200 price area and then slid further to the downside. As I write, the stock is now testing its 200-dma down at 181.53. Where it ends by the time it stops spinning in after-hours trading ends is anyone’s guess. Of course, the pundits have been out in force this afternoon that a drop in FB is a “buying opportunity.”

The catalyst for the breakdown in after-hours trade came during the company’s earnings conference call where it called for single-digit revenue growth in the third and fourth quarters of this year. The more I write, the lower it goes, and is now below 180. Ouch! We’ll see where this ends up by tomorrow’s opening bell.

 

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Microsoft (MSFT) continues to rally after its own post-earnings buyable gap-up move last Thursday. The stock closed weekly on the gap-up day, printing right near the lows of the day at the bell. It held the intraday low of the gap-up day on Monday, however, and continued higher from there. Today, MSFT pushed to all-time highs on above-average volume.

 

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Netflix (NFLX) remains below its 50-dma as it drifts back down to its lows of last week. The stock undercut the 356.25 low of June 8th on Monday and attempted another U&R type of move. That fell short, however, and the stock reversed yesterday on higher volume.

NFLX is still trying to hold above the 356.25 low, however, closing today at 362.87. Technically, that keeps the U&R long set-up alive, although for my money I’d prefer to be buying closer to that low. With FB perhaps set to bring tech stocks down tomorrow, we’ll see whether NFLX can continue to hold above that 356.25 low.

 

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Nvidia (NVDA) continues to spin around its 10-dma, 20-dema and 50-dma without going anywhere. So far, it has merely become shortable at the highs of this 2-3-week range and buyable on the spinouts to the lows of the range. You can even see how a sell-off on Monday undercut a prior low in the pattern to trigger a U&R type of move.

As I wrote over the weekend, the stock may continue to hang in this current price range ahead of earnings. At best, if one is looking for actionable long set-ups, in NVDA, undercut & rally types of moves like we saw on Monday would probably be what you’re looking for. But how much profit can be generated before the company’s expected August 16th earnings report is unclear.

 

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Tesla (TSLA) is now out looking for handouts, according to a report that appeared in the Wall Street Journal over the weekend. Apparently, the company is asking its suppliers to refund money it has spent buying parts for its cars over the past couple of years. They’re asking their suppliers to view it as an “investment.” The auto part supply business is a notoriously low-margin one, so I wouldn’t be looking for such rebates to begin materializing in force any time soon.

The report does highlight the somewhat desperate situation TSLA is facing as it burns up all its cash. This revelation sent the stock back below the 300 price level where it undercut its prior 296.22 low of early June, triggering a small U&R move back to the upside from there. TSLA is expected to report earnings a week from today, on August 1st, so at that point investors will get a better picture of the company’s current fundamental state.

 

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Among big-stock names that remain on my earnings watch list, Amazon.com (AMZN) is expected to report tomorrow after the close, while Twitter (TWTR) is expected to report on Friday before the open. Apple (AAPL) is expected to report next Tuesday, July 31st, after the close.

Buyable gap-ups in big stocks after earnings seem to be working. Case in point would be CSX Corp. (CSX). The stock has continued to rally following last Wednesday’s buyable gap up (BGU). Today, CSX, posted a new high on above-average volume. For now, it remains extended.

 

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Micron (MU) remains one of my very few orthodox short-sale targets as a continuing late-stage failed-base (LSFB) short-sale set-up. The stock triggered as a short-sale last week when it broke below its 50-dma, and then triggered again on a low-volume rally up into the 20-dema yesterday. From here, any further rallies into the 20-dema would offer lower-risk short-sale entries.

 

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Okta (OKTA) proves that an opportunistic approach is generally rewarded in this market. I wrote over the weekend that the most opportunistic stance here would be to look for a pullback to the 20-dema. That’s what happened yesterday as the stock dropped like a rock before bouncing from a point 35 cents above its 20-dema.

While volume did increase yesterday, it was still well below average. Today’s rebound took the stock to an all-time closing high, but volume was very weak. Thus, I would view the stock as being back in an extended state. Any further pullbacks to the 20-dema should be watched for opportunistic entries, with yesterday’s being a good example of what you’re looking for.

ZS isn’t expected to report earnings until September 6th, so it still has plenty of time to set up within this current base and break out. But, given its current position, we should continue to take an opportunistic approach with the stock, seeking to buy shares on pullbacks into logical support, which for me is the 20-dema.

 

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ZScaler (ZS) is also continuing to work on a new base, and like OKTA, isn’t expected to report earnings until early September, on the 5th of the month. As it builds a potential handle to its current cup formation, we continue to look for pullbacks to the 20-dema as opportunistic entries, when we can get ‘em.

ZS pulled into the 20-dema yesterday and undercut the line on increased, but still well below-average volume. The stock again tested the 20-dema and rallied off the line, but on weak volume. For now, I’d lay back and continue to look for entries along the 20-dema, but so far, the stock is acting as it should as it goes about the business of building this new base.

 

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Chinese names have been quite the mixed bag over the past few days. Today Alibaba (BABA) posted a nice volume pocket pivot off its 10-dma and up through the 50-dma. I didn’t see any news today that might have been driving the move, but it looks good ahead of the company’s expected August 2nd earnings report which will come out before the open. However, I would not be chasing this ahead of the earnings report, which is only five full trading days away.

 

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Momo (MOMO) finally cut loose on the downside after repeatedly stalling at its 20-dema. The stock was able to close above the line on Monday, but that didn’t hold very long as it pulled a huge-volume outside reversal to the downside, busting all three of its nearest moving averages. This took MOMO down below its prior BGU low of 42.49 and the 41.44 of June 27th.

From there it was able to rally back above the 41.44 low by yesterday’s close, and then today pushed back above the 42.49 BGU low, closing at 43.17. This technically triggers a U&R set-up using either the 42.49 or 41.44 lows as tight selling guides. You have a choice of which price level to use as your selling guide if you choose to venture into the water on this U&R, so choose wisely!

The flip side of this is that any weak rally back up into the 50-dma would bring MOMO into a potentially shortable position, so be ready to play this as it lies, depending on how it plays out from here. Keep in mind that MOMO is expected to report earnings on August 21st, before the open.

 

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I wrote over the weekend that Baozun (BZUN) would only be buyable on pullbacks to the 20-dema. That occurred yesterday, but on a big, ugly outside reversal to the downside on higher, but below-average, volume. That kind of price/volume action might make one a bit hesitant to buy the pullback, but the stock did hold support at the line.

Unfortunately, the rebound today showed little vigor, coming on extremely light volume. Nevertheless, BZUN continues to work on a potential new cup-with-handle base and remains buyable on pullbacks to the 20-dema. Earnings are expected on August 21st.

 

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In the realm of cyber-security names, I’m still going to lay back and wait for CyberArk Security (CYBR) and Fortinet (FTNT) to report earnings, which they are expected to do on August 7th, and August 1st, respectively. Meanwhile, Palo Alto Networks (PANW), which won’t be reporting until the end of August, remains a volatile stock to play.

Yesterday, PANW was pushed back to its 50-dma on a retest after bouncing off the line on Monday. Volume was higher, so one might think twice about buying the stock at the line. But that would have put one in position to benefit from a sharp bounce today, albeit on weak volume. In my view, PANW is a sloppy stock, and nowhere near as coherent as its two cousins, CYBR and FTNT.

However, for fearless traders willing to take a shot on pullbacks to areas of logical support, like the 50-dma, it does provide some play. But as far as a meaningful trend goes, this thing is a slug. So, play it as it lies.

 

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Electronic Arts (EA) expected to report earnings tomorrow after the close, so by tautology we will be watching for sympathy moves in Activision (ATVI)

Take-Two Interactive (TTWO). All three stocks remain in breakout positions, but I like ATVI here as it sits along its 20-dema and the top of its prior base breakout. ATVI and TTWO are expected to report earnings on August 2nd.

 

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Huya (HUYA) came in with the market yesterday and found support along its newly-appeared 50-dma. It’s a good thing the 50-dma finally showed up on the chart, otherwise the stock would be hanging in mid-air and below support at its 10-dma and 20-dema. The bounce off the 50-dma has carried the stock not quite 10% above the line, so I would not be looking to buy the stock here.

Instead, I would watch for any retest of the 50-dma as a lower-risk entry opportunity. HUYA is holding above the origination points of the two pocket pivots we saw in early July. A low-volume retest of the 50-dma would certainly be worth taking a shot at. Earnings are not expected until September 5th.

 

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Bilibili (BILI) has been unable to hold support at its 10-dma as it drops back near the early-July lows. Volume was heavy today, which is not what I want to see. At this point we’re just watching this as it comes down, waiting to see if it can post an undercut & rally move on any rally attempt back up through the lows from earlier in July. 12.50 of July 6th, the 12.76 low of July 11th, and the 13.10 low of July 17th. BILI is expected to report earnings on August 22nd.

 

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Box (BOX) looked a bit on the ugly side yesterday when it pulled an outside reversal to the downside on higher volume. Volume was well below-average, however, and the stock drifted back up to the confluence of its 10-dma, 20-dema and 50-dma on weak volume today.

The only coherent thing about today’s action was that you did get an undercut and rally back up through the 25.75 low of July 11th. Technically, that would be an actionable U&R using the 25.75 price level as a selling guide.

 

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DropBox (DBX) is looking worse every day, and yesterday posted a pretty ugly-looking outside reversal to lower lows on higher selling volume. Unless this can show some more constructive price/volume action, I’d stay away, especially with earnings coming up on August 9th.

 

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Intuitive Surgical (ISRG) recovered from last Friday’s post-earnings reversal by holding support at the 10-dma and then rallying to an all-time closing high today. Volume today was about average, but over the prior two days came in at above average. While this could still turn back to the downside, I would simply use the 10-dma as a selling guide, or the 20-dema as a wider selling guide depending on one’s risk preference.

 

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Stich Fix (SFIX) got body-slammed back to its 20-dema yesterday on heavy selling volume. The stock was able to find its feet right at the prior cup-with-handle breakout point and close just above the 20-dema today. Volume, however, was light, hence unconvincing. Nevertheless, this pullback does provide a lower-risk entry opportunity, using the 30 price level as a tight selling guide.

 

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Notes on other long ideas discussed in recent reports:

Roku (ROKU) was slammed down to its 20-dema on heavy volume yesterday but managed a weak rally today on light volume. I see nothing to do here with the stock ahead of its expected August 8th earnings report.

Turtle Beach Corp. (HEAR) has been slammed back to its 10-dma but remains well above its original entry point where I first discussed the stock at around 22. Earnings are expected on August 6th, so I would use the 10-dma as a tight selling guide given the heavy selling off the highs over the past two days.

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.

I still tend to think that there is more danger lurking in this current market environment than there is wild profit opportunity.  The action in FB after-hours attests to this, and will no doubt contribute to a weak market opening tomorrow. In addition, the market’s action on Tuesday when $GOOGL helped drive a big opening gap-up move that mostly evaporated by the close struck me as cautionary.

I also noticed that a broad number of stocks on my favored long list pulled some ugly downside reversals and breaks on higher selling volume, which is not constructive. Several of these can be seen in this report. For that reason, I would remain cautious, but opportunistic, keeping in mind that a breakdown in FB could precipitate a sharp market sell-off, possibly even a more serious market correction. Either way, tomorrow should be a very interesting day.

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.