The Gilmo Report

July 26, 2017

July 26, 2017

The Fed had no surprises for the market today, keeping rates steady and then issuing the usual central-planning hubris about “stimulus,” “accommodation,” and “guiding economies toward optimal levels of inflation and full employment.” I always feel that they should add in the line from that well-known TV commercial, “So easy even a cave-man (or woman) can do it!”

Following the Fed announcement, the NASDAQ Composite Index held up well enough to post its 14th up day out of 15 days in a row. It was also its 44th record close of the year. Today’s action, however, has the look of narrow-ranged churning at the highs on higher volume. Note that yesterday’s action also showed churning on higher volume. The past two days also show the highest volume in the upside streak. So, a pullback here would not be surprising, frankly.

 

GR072617-$COMPQ

 

The S&P 500 Index posted a new all-time closing high yesterday, and followed up on that with another new closing high today. While yesterday’s gap-up move came on much higher volume, today’s action came on lighter volume. This was accompanied by another all-time high in the Dow Jones Industrials Index, although most of the move was due to a big 9.88% upside move in Boeing (BA).

 

GR072617-$SPX

 

The Fed’s inaction and brief missive was viewed as dovish, sending the dollar even lower. Gold continued its rally after putting in a near-term low in early July, while bonds also rallied, but remain in a choppy range. The dollar’s continued dive can be seen below on the daily chart of the PowerShares U.S. Dollar Index ETF (UUP).

 

GR072617-UUP

 

Meanwhile gold, as represented by its proxy, the SPDR Gold Shares ETF (GLD), continues to rally after posting an undercut & rally long set-up in early July. I tweeted about that at the time, as the GLD was coming up through the prior 115.56 low of May 9th, and that rally has held. Today the GLD tested the 50-day moving average and then posted a pocket pivot off the line on strong buying volume. While I prefer to have entered the GLD closer to the prior U&R level, this could be considered buyable here using the 50-day line, about 1% lower, as a tight selling guide.

 

GR072617-GLD

 

The cup-with-handle base being formed by SPDR Financial Sector Select ETF (XLF) over the weekend turned out to be quite buyable, with the ETF busting out to new highs yesterday on a big-volume gap-up move. As I wrote over the weekend, I didn’t “see anything problematic about this base, as it looks quite constructive to me.”

Yesterday’s breakout is not surprising given the constructive base formation we saw as of the weekend. At that time the XLF was also in the prescribed lower-risk entry position along the 20-dema as it was pulling back within the handle. However, diving into yesterday’s breakout would have seen the position show a small but quick loss as the XLF came right back in on lighter volume.

This is why my preference has been to buy stocks and the XLF on constructive pullbacks. Technically, this gap-up breakout is buyable here using the 10-day line as a selling guide, but the perception of lower interest rates as confirmed by the dollar and gold isn’t exactly putting the wind at the financial sector’s back. It will need some help from banking regulation reform if it is to continue to show any sustained upside.

One thing you will notice if you check other big-stock financials is that many of them did not break out with the XLF, including BAC, C JPM, WFC, and others. This may be a telling divergence, and I would watch for these other financials to confirm the XLF’s move by breaking out to new highs, as well, in short order.

 

GR072617-XLF

 

Facebook (FB) reported earnings after the close today, and the numbers were good enough for a pop in the stock in after-hours trade as I write this afternoon. Currently I’m showing a bid at around 173, up about 5%. This, however, doesn’t create anything in the way of a buyable move based on the position of the stock on its current chart.

We can see below that the two spots to buy the stock were either the moving average undercut & rally move of early July (which I discussed at the time), or the more obvious base breakout two weeks ago as FB cleared the 156 price level. We’ll see where this goes tomorrow.

 

GR072617-FB

 

Alphabet (GOOGL) reported earnings on Monday after the close and gapped down about 3% yesterday on heavy selling volume. Currently the stock is hanging just below the 50-day moving average, which has so far served as near-term resistance following yesterday’s gap-down.

This looks like a later-stage base-failure type of situation, which would make the stock shortable here using the 50-day line as a guide for an upside stop. Also, one could treat yesterday’s move as a shortable gap-down (SGD) and use the intraday high at 976.73 as an alternative guide for an upside stop.

 

GR072617-GOOGL

 

Notes on other big-stock NASDAQ names:

Amazon.com (AMZN) is expected to report earnings after the close tomorrow. In the meantime, it has continued to notch new, all-time highs after decisively clearing the $1,000 price level on its third breakout attempt.

Apple (AAPL) is expected to report earnings next Tuesday after the close, so there is nothing to do with the stock before then. The stock has, however, been able to grind back up near its prior May and June highs since clearing the 50-day line last week.

Microsoft (MSFT) is sitting right up near its all-time highs after last week’s earnings report turned out to be a non-event. I don’t consider the stock to be in a lower-risk entry position at the current time, although a pullback to the 10-day line at 73.49 might present a reasonable entry for those who are jonesing to buy the stock.

Netflix (NFLX) continues to push higher as it moves ever closer to the $200 Century Mark. I don’t see this as a meaningful price level since NFLX has split many times over the years, passing the $200 price mark before. For now, it simply remains extended after last-week’s post-earnings buyable gap-up.

Nvidia (NVDA) pulled into its 10-day moving average yesterday and then bounced off the line today to post a new all-time high before closing back down near the 10-day line and near its intraday lows. Earnings are expected on August 10th.

Tesla (TSLA) has rallied right up into its 50-day moving average ahead of next week’s expected earnings report. Technically this would put the stock in a lower-risk short-sale entry position, but it’s not clear to me that the stock will move decisively in either direction before the expected August 2nd earnings report.

Priceline Group (PCLN) is now officially extended and out of buying range of its early July base breakout. Earnings are expected on August 8th.

Moving from big-stocks to smaller, new-merchandise names, I like Yext (YEXT) here as it drifts down into its 20-day exponential moving average with volume remaining well below average. Selling volume did pick up slightly, but the fact that it is holding the line as it spends a couple of days testing it seems constructive.

However, if YEXT fails to hold the 20-dema then the 50-day moving average down at 13.31 would come into play. Watch for a potentially lower-risk entry here to develop, using the 50-day line as a maximum selling guide, which is not too far below today’s close at 13.61. YEXT isn’t expected to report earnings until August 31st

 

GR072617-YEXT

 

I must admit to being a bit remiss in overlooking the fact that ShiftPixy (PIXY) reported earnings on July 18th, and this is what led to the sharp breakdown off the peak that day. Because the stock had doubled since its $6.00 IPO less than a month ago, it was perhaps priced for perfection going into earnings.

From my perspective, having been long the stock at that point when it was trading above the $10 price level and the newly-appeared 10-day moving average, that break below both of those price levels triggered my trailing sell-stop. Sticking to that trailing stop was fortuitous, as the stock has continued some 40% lower from there!

But when a stock, particularly an IPO, goes into breakdown mode and tries to bottom and set-up again, opportunities can arise for those who have the tools to deal with them. On Monday, PIXY undercut the $6.00 IPO price as well as the 6.30 low of July 3rd, triggering an unusual type of undercut & rally move. As I tweeted at the time, that was and is still playable here using either the 6 IPO price or the 6.30 prior low as a selling guide. Today PIXY held tight and closed above the 6.30 price level as volume declined to -87.8% below average.

 

GR072617-PIXY

 

Notes on other recent IPOs discussed in recent reports:

Alteryx (AYX) – the stock has been finding support along its 20-dema and the top of its recent IPO base breakout, but earnings are expected next week on August 2nd.

Appian (APPN) – stock has pulled into 20-dema twice this week setting up a pair of lower-risk entry opportunities. Keep in mind, however, that earnings are expected next week on August 3rd.

Cloudera (CLDR) – is pulling into its 10-dma as it attempts to hold its 50-dma. In my view, looking to buy as near to the 10-dma at 18.20 as possible is your best lower-risk entry, assuming you get it. Earnings are far off, and not expected until September 7th.

Myomo (MYO) is attempting to find a bottom along the lows of its first IPO base, but has yet to undercut the prior 9.33 intraday low in the pattern. Instead, it rallied yesterday on news but ran into resistance at its 10-dma. The wrinkle here is that MYO is expected to report earnings later this week, so I’m not interested in playing earnings roulette with this one, preferring instead to see what shakes out after earnings.

Nutanix (NTNX) is trying to hold at its 10-day moving average but closed 13 cents below the line today on declining and light volume. From here the next support levels would be the 21.62 intraday low of its prior buyable gap-up (BGU) move or the 20-day exponential moving average at 21.68.

The stock had a steep move following the BGU, so the 10-day line has risen very rapidly and steeply, which in my view would account for some slight porosity around the 10-day line. While this pullback could be considered buyable, there is always the possibility that NTNX pushed lower and closer to the 20-dema. This would be a much more opportunistic entry and perhaps worth waiting for unless the stock can stabilize at the 10-day line quickly.

 

GR072617-NTNX

 

Being in the right stocks at the right time is helpful in this market, even as the indexes inexorably trudge higher. This week buying into the wolf pack action I was seeing over the weekend in the China Five names was a profitable endeavor. JD.com (JD), Momo (MOMO), Weibo (WB), and Sina (SINA) all pushed higher on Monday in unison. The first three, not shown, strike me as being a little extended, but still acting quite constructively.

SINA, on the other hand, is sitting at a lower-risk entry position here right along the 10-day line. Volume remains quite dry, and today came in at -57% below-average. This puts the stock in a lower-risk entry position here, using the 10-dma, 20-dema, or 50-dma as selling guides, depending on your risk-preference. SINA is expected to report earnings before the open on August 7th.

 

GR072617-SINA

 

Keep in mind that JD, MOMO, and WB are all expected to report earnings on August 10th, August 14th, and August 7th, respectively. Meanwhile, Alibaba (BABA), not shown, is expected to report on August 9th. BABA today lifted off its 10-day moving average on below-average volume. It would only be actionable on pullbacks to the 10-day line, which is where it was sitting prior to today’s move.

Applied Optoelectronics (AAOI), not shown, remains extended but came within two cents of the $100 Century Mark for the first time in its stock market lifetime. It turned back from that level, but with earnings coming up next week I don’t see much to do here.

Lumentum Holdings (LITE) is also expected to report earnings next week, on August 3rd, and it quickly gave up on Monday’s strong-volume breakout today as it pulled an outside reversal to the downside. It is now coming back into the 10-day moving average as volume declines, which is constructive.

But with earnings expected a week from today, buyers didn’t seem ready to feast upon yesterday’s obvious big-volume base breakout. That’s why I would have preferred to buy the stock as it was sitting along the 20-dema and posting a series of pocket pivots, as I’ve discussed in recent reports.

 

GR072617-LITE

 

The slight weakness in optical names, sans AAOI, today was likely due to Juniper Networks (JNPR) cratering today after earnings. Fabrinet (FN) suffered only slightly today as it pulled back small on light volume. This takes it right back to yesterday’s breakout buy point, using the 10-day line at 45.37 as a tight selling guide. FN is not expected to report earnings until August 21st, based on the latest confirmation. However, expect it to react in sympathy to whatever earnings are posted by AAOI and LITE next week.

 

GR072617-FN

 

Current cyber-security leader Fortinet (FTNT), not shown, reported earnings today after the close and as I write is trading down about 4%. Palo Alto Networks (PANW) is also down a couple of dimes in after-hours trade in sympathy, but the move looks like a non-event for PANW.

Today the stock pulled into its 20-dema on light volume, which may put it in a lower-risk entry position tomorrow. I would expect it to open at or above the 20-dema tomorrow morning, at which point a position could be taken using the 20-dema as a tight selling guide. PANW is not expected to report earnings until the end of August.

 

GR072617-PANW

 

ServiceNow (NOW) reported earnings today after the close and is trading up about 1% or so as I write this afternoon. This may set up a buyable move tomorrow morning using the 10-day line as a tight selling guide. The stock looks like it posted a pocket pivot today off the 20-day exponential moving average, but the increased volume is due to after-hours trading.

 

GR072617-NOW

 

Meanwhile, Workday (WDAY) broke out today on low volume, which is not something I would consider buyable. This was better bought near the 10-day moving average at 103.26 per my comments in prior, recent reports. Salesforce.com (CRM), not shown, also posted a low-volume trendline base breakout today which is not buyable, in my view. Pullbacks to the 10-day line at 89.93 would, however, offer lower-risk entries for the stock.

All three of these cloud names, NOW, CRM, and WDAY, should be watched closely tomorrow for potentially actionable entries depending on how they set-up in reaction to NOW’s earnings this afternoon.

 

GR072617-WDAY

 

Veeva Systems (VEEV) popped nicely on Monday following my discussion of the stock over the weekend. After the nicely buyable “voodoo” pullback into the 20-day exponential moving average last Friday, the stock posted a pocket pivot and trendline breakout on Monday.

VEEV has since pulled back in slightly as it tests the 10-day moving average without touching it. Volume dried up to -45% below average, qualifying as a voodoo type of pullback. This puts the stock in secondary, lower-risk entry position here using the 10-day line at 64.08 as a tight selling guide. However, if you can get a pullback closer to the 10-day line (the stock closed today at 65.05) that would provide a much more opportunistic and lower-risk entry should that occur. Earnings are not expected until August 28th.

 

GR072617-VEEV

 

Notes on other names discussed in recent reports are below. I note where applicable the expected earnings report date. In all such cases, unless I have a big profit cushion going into earnings I am not interested in doing anything with the stocks now since this would necessitate playing earnings roulette.

Activision Blizzard (ATVI) – Stock broke out to new highs today on light volume, but earnings are expected on August 3rd.

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

Bioverativ (BIVV) – stock tested the 10-day line this morning and did so successfully, turning back to the upside to close near its intraday highs. Earnings are expected on August 2nd.

Canada Goose Holdings (GOOS) – stock keeps failing to hold its 50-day line and over the past two days has dropped back below the line but is trying to hold at its 10-day moving average. Not much to do here based on the lack of a viable set-up as well as the fact that earnings are expected on August 4th.

Edwards Lifesciences (EW) – reported earnings after the close today and is moving higher in the after-hours but does not seem to be in any kind of buyable position.

Electronic Arts (EA) – stock broke out today on strong volume thanks to an analyst upgrade, but earnings are expected tomorrow, July 27th, after the close.

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

Jagged Peak Energy (JAG) – oil stocks regained their mojo after crude oil catapulted back above the 50-dma after falling below it last week. This sent JAG bouncing off the 50-dma yesterday where it could have been bought. It is now short-term extended.

Keane Group (FRAC) – regained its 50-dma with authority today, triggering a moving average undercut & rally entry at the line this morning. Earnings are expected on Overall, oil stocks are being led around by the nose by the price of oil, so the risk in this group lies with the fact that any news that sends oil ricocheting this way or that will likely have a correlative effect on oil stocks. Caveat emptor!

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

Square (SQ) – stock posted a new high today on below-average volume. 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) – stock is pulling in and testing its 20-dema, but earnings are expected tomorrow, July 27th.

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).

Investors have recently witnessed a bit of history as the CBOE Volatility Index ($VIX) hit an all-time low yesterday, exceeding its 9.31 low of December 1993 when it traded down to 9.04 on an intraday basis. Today the VIX did itself one better by hitting an intraday low of 8.84 before turning back to the upside and closing at 9.60.

This is interesting, and makes me wonder whether we are seeing a super undercut & rally move as the VIX undercuts the prior 9.31 low of 24 years ago and rallies back above it. That certainly is a possibility, but the VIX is an unusual animal with little predictive value so far in this incessant market rally of 2017.

While many view the low VIX as a sign of “complacency,” I tend to see it more as a sign of the times with respect to the persistent effects of QE. If the ultra-low levels of the VIX are in fact bearish, I would assume that we will find out soon enough. But a market top is as a market top does, and so far, we have yet to see anything but new highs by all the major market indexes.

I would note, however, that the small-cap Russell 2000 Index and the broader NYSE Composite Index both traded down in divergence to the new highs posted by the other major market indexes, the Dow, the S&P 500, and the NASDAQ Composite.  Certainly, with the NASDAQ up 14 out of 15 days in a row, we could be setting up for a pullback, and I note that many names on my long watch list are starting to get extended on the upside.

For that reason, investors want to keep their buying limited to stocks that have already reported earnings or are not expected to do so for at least two weeks. In addition, new purchases should only be made at the proper, lower-risk entries that I prescribe and which keep risk to a minimum. And finally, make sure that as part of your daily market prep you review all your trailing stops and absolute stops as well your upside price objectives for all current positions.

With the market looking quite rosy, selling stocks is probably the last thing many of you are thinking about. But as the market gets extended to the upside, know your exit points and have an exit plan ready in case we begin to see a pullback develop. Knowing beforehand what you will do under certain conditions takes the emotion out of the process when gray skies eventually do show up.

Otherwise, play it as it lies, and keep risk to a minimum. That is all.

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. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.