The Gilmo Report

July 27, 2016

July 27, 2016

The Fed came out with their usual policy announcement today, and to nobody’s surprise kept rates where they are. The statement came off as the usual Fed-speak, but with one new wrinkle, which was that “near-term risks to the economic outlook have diminished.” Overall, it was pretty much more of the same since whatever the Fed says about the near-term is subject to change in the near-term, as I see it. Certainly, much more clarity would result from the Fed offering an assessment of the long-term, but that’s not likely to happen anytime soon.

After sliding back and forth within a tight range following the Fed announcement, the NYSE-based indexes held more or less tight for the day, but the NASDAQ Composite Index outperformed on the day thanks to Apple (AAPL), which gapped up over 7% on the open after beating on earnings the night before. The company didn’t actually report anything stellar, but when beaten-down companies offer glimmers of hope that all is perhaps less bad, gap-ups can and do happen.

The morning gap-up took AAPL to 104.27 at the open, just above its 200-day moving average at 103.72. But by the close the stock was unable to hold the 200-day line and closed near the lows of its gap-up trading range on very heavy volume. The question now is whether AAPL is a short here using the 200-day line as a guide for a tight upside stop. Or is the stock actually an actionable buyable gap-up (BGU) using the intraday low at 102.75 as a selling guide? Decisions, decisions.

AAPL sold off hard right into the close, closing near its low under 103 when it was trading above the 200-day line with about 15 minutes going into the close. This would lead me to think that the stock may actually be more shortable here than buyable as a BGU, but the situation is fluid. I’ll be watching this closely tomorrow. Keep in mind, however, that the odds of AAPL being more shortable than buyable probably will have something to do with where the general market goes from here.

 

GR072716-AAPL

 

AAPL’s big-volume move helped bolster the NASDAQ Composite Index to a higher high as it gets ever closer to its prior all-time highs from last year. The index moved higher today on higher volume, partly as a result of AAPL.

 

GR072716-$COMPQ

 

The S&P 500 Index has been lagging the NASDAQ for the past couple of weeks as it moves tight sideways. The interesting phenomenon here is that volume is actually picking up as we move from left to right along the consolidation. Usually I might prefer to see volume decline during a consolidation. Whether this is meaningful, however, is probably a moot consideration. In the end, it all comes down to just watching the stocks. For now, the market rally remains intact, at least from an index point of view.

 

GR072716-$SPX

 

The precious metals briefly dipped to the downside following the Fed announcement, but once they realized the Fed was still on hold they quickly recovered and rocketed back the other way. Silver led the chart as the iShares Silver Trust (SLV) posted a strong-volume pocket pivot coming up through its 10-day moving average. This becomes buyable using the 10-day line as a tight selling guide. As I wrote over the weekend, the metals were all pulling back ahead of the Fed meeting. This, of course, is where you want to be buying them if you are longer-term bullish on the metals.

So taking a position ahead of the Fed meeting was probably the shrewdest, if not the bravest, way to play these in order to capitalize on today’s move in the metals. From here one might watch for any small pullback into the 10-day line as a buyable one, but the SLV is buyable right here using the 10-day line as a tight selling guide.

 

GR072716-SLV

 

The SPDR Gold Shares ETF (GLD) wasn’t too far behind the SLV as it picked up the volume pace into the close and posted its own pocket pivot. This move came from a position that was just below the lower 20-day moving average, resulting in a pocket pivot that came up through both the 20-day and 10-day lines. The GLD closed about 1% above its 10-day moving average, so this is a buyable move using the 10-day line at 126.70 as a selling guide. As with the SLV, the optimal time to buy them is when they are down, but today’s move is still technically actionable.

 

GR072716-GLD

 

While all three of the precious metals stocks I’ve discussed in recent reports, Silver Wheaton (SLW), Agnico Eagle Mines (AEM), and First Majestic Silver (AG) move higher on the day, only SLW pushed to a 52-week high. SLW’s breakout to new highs occurred on a strong-volume pocket pivot move. AEM and AG, on the other hand, both moved up through their 10-day moving averages without posting new highs. Nevertheless, this puts AEM and AG in buyable positions as well using the 10-day lines as selling guides.

 

GR072716-SLW

 

The big story this afternoon as I write is Facebook (FB), which is gapping up about 10% in after-hours trade after announcing earnings after the close. The stock is currently trading above the 130 price level, which brings up the possibility of a buyable gap-up move tomorrow at the open. FB actually broke out to new all-time highs today ahead of the report on volume that was above-average. Keep in mind that some of the volume shown on the daily chart, below, is due to after-hours trade, so it wasn’t that big.

 

GR072716-FB

 

Mobileye (MBLY) has been fascinating to watch and play on the long side over the past couple of days. The company reported earnings yesterday before the open, and in the process announced that they were discontinuing their relationship with Tesla Motors (TSLA). This sent the stock gapping down to the 40 price level at the open.

While MBLY beat earnings expectations and raised guidance, investors seemed to focus on the end of their relationship with TSLA. As I blogged early in the morning, I felt that this didn’t make much sense after my own investigation of the facts, and that it might simply create a buying opportunity in the stock.

As I read it, MBLY ended their relationship with TSLA because they were not happy with the way TSLA represents MBLY’s technology. TSLA likes to call it auto-pilot when MBLY actually considers it to be adaptive cruise control. Ultimately, MBLY’s CEO came off as being uncomfortable with TSLA’s propensity to hype things. And when TSLA is 1% of your business, why not steer clear of TSLA’s questionable representations?

While we can spend time arguing those points, the bottom line is that MBLY was buyable yesterday once it began to flash actionable signals on the 620 5-minute intraday chart. I went into great detail covering this in very precise terms in an early-morning blog post yesterday, so I won’t waste time doing that now. The bottom line is that the stock has now regained its 20-day moving average on above-average volume. This comes after the stock dipped just below its prior early-July low at 42.94 before staging a massive-volume undercut and rally move.

With the stock back above its 20-day moving average, it could pull back into the line on a quick Wyckoffian Retest. The stock actually did retest the 20-day line today on an intraday basis and held, which is constructive. With some potential overhead resistance along the lows of the prior mid-July consolidation, a small retest here would not be abnormal.

Regardless of what it does in the short-term, I tend to think that MBLY stands a good chance of pushing right back up to its prior highs around the 50 price level. If you missed my early morning blog yesterday and are looking for an entry from here, then a low-volume pullback to the 20-day line would be just what the doctor ordered. But the stock could just keep going higher.

 

GR072716-MBLY

 

Tesla Motors (TSLA) also reacted to the news of its partnership with MBLY ending. Initially it too sold off but found support at the 10-day line as volume came in well below average. The day before, on Monday, TSLA posted a five-day pocket pivot coming up and off of its 20-day moving average. Recall that when evaluating the significance of five-day pocket pivots, I like to see them occur in clusters. Two to four five-day pocket pivots clustered closely together can often be a sign of strength that is as legitimate as a single standard ten-day pocket pivot.

One five-day pocket pivot alone is not necessarily that strong. However, TSLA’s action has been constructive as it continues to hold above its 20-day moving average. Earnings are expected to be announced next Wednesday.

 

GR072716-TSLA

 

Netflix (NFLX) worked out on the Wyckoffian Retest trade I discussed in my weekend report. Yesterday anyone who bought shares on the basis of that discussion got lucky when it was reported that a long-time board member, Jay Hoag, had purchased 600,000 shares last week around the lows.

When a board member of any stock buys that many shares, people stand up and take notice. And that’s what NFLX did as it gapped above its 20-day moving average yesterday on heavy volume. However, that move did not hold as the stock reversed and closed below the line by the bell.

Today, NFLX pulled in a little further, but selling volume failed to materialize. Thus NFLX passed the test for supply in another Wyckoffian Retest and regained its 20-day moving average on light volume. This looks constructive, and I would be looking for the stock to perhaps make a move for its 50-day moving average at 94.36 soon.

 

GR072716-NFLX

 

Ambarella (AMBA) has move to higher highs following its orderly, “voodoo” volume pullback into the 10-day moving average last Friday.  I noted this pullback into the 10-day line in my weekend report, and the attractiveness of this as a lower-risk entry opportunity was almost too obvious. For anyone wondering what a textbook voodoo pullback to the 10-day moving average looks like, consider AMBA to be your model stock. This is the type of stuff you are looking for when searching for those lower-risk entries on pullbacks.

 

GR072716-AMBA

 

As I write this afternoon, I’m seeing ServiceNow (NOW) trading down in the after-hours following the post-close release of its earnings report. Currently the stock is trading just under the 70 price level, as I’ve highlighted on the daily chart, below. NOW actually beat estimates on both earnings and revenues while raising guidance. Analysts were looking for nine cents a share while NOW came in with 15 cents. I would watch this carefully tomorrow morning since it could undercut the prior 69.63 low of July 19th to set up an undercut and rally move.

I’ve actually taken a small position in the after-hours to test this thesis, but would plan on working it more aggressively under the proper conditions tomorrow.

 

GR072716-NOW

 

NOW’s after-hours pullback as a result of beating earnings and revenue estimates and then raising guidance has brought some of the other cloud names I’ve been watching down slightly in the after-hours as well. Among these is Workday (WDAY) which actually flashed a pocket pivot trendline breakout today. As I wrote over the weekend, this thing looked like it wanted to go higher, and in fact it has. I would watch for a possible pullback tomorrow morning as a potentially opportunistic, lower-risk entry point.

 

GR072716-WDAY

 

The same goes for Salesforce.com (CRM) which has been consolidating for nearly the past three weeks. The stock is currently testing its 20-day and 50-day moving averages and the lows of the current three-week range. A small undercut of these lows that also just barely undercuts the 20-day and 50-day moving averages could set up a buyable pullback.

 

GR072716-CRM

 

Splunk (SPLK) might also pull back tomorrow morning in sympathy to NOW, but the reality is that its business isn’t really related to NOW’s in the way that WDAY’s and CRM’s are. The stock posted a pocket pivot six trading days ago and has been moving tightly along its 10-day moving average and up against the prior highs along the 60 price area.

SPLK held its 10-day line today on a small intraday pullback as volume dried up to -49.6% below average today. Earnings are not expected until August 25th. Thus this is actionable here with the idea of using the 10-day line at 58.96 or the 20-day line at 58.04 as your guides for reasonably tight stops.

 

GR072716-SPLK

 

I also like the action in Adobe Systems (ADBE) and Citrix Systems (CTXS). As I pointed out over the weekend, these two stocks were also acting constructively along with the other names in the group.

ADBE is holding tight along its 10-day and 20-day moving averages, which in my view puts it in a lower-risk entry position using the 20-day line as a selling guide. Notice how the stock sold off below the 20-day line by less than 1% five days ago but quickly recovered. Thus one might consider allowing for some downside porosity through the line when determining a precise stop. ADBE is not expected to announce earnings until September.

 

GR072716-ADBE

 

Citrix Systems (CTXS) came out with earnings yesterday after the close and gapped down after the report. However, in typical Ugly Duckling fashion the stock found support at the 20-day moving average and rallied back up toward its prior highs on massive-volume.

This could be considered a supporting type of pocket pivot that is actionable using the 10-day line at 86.34 as a selling guide. Additionally, one might look at any pullback into the 10-day line as a lower-risk entry. Like NOW, CTXS also beat earnings and revenue estimates and raised guidance. For this reason, I might look for a similar outcome with NOW tomorrow.

 

GR072716-CTXS

 

Below are Notes from my Trading Journal regarding other long ideas discussed in recent reports:

Acacia Communications (ACIA) – came close to the 10-day line at 59.04 yesterday before turning back to the upside and posting a new closing high. Still extended ahead of earnings, which are expected out on August 4th.

Activision Blizzard (ATVI) – broke just below its 20-day moving average today on heavy selling volume. Looking for a test of the 50-day line at 39.41 as a potentially lower-risk entry point on the pullback. Keep in mind, however, that earnings are expected next Wednesday.

Alibaba (BABA) – pulling into its 10-day moving average as selling volume picked up slightly today but remained below average. I would be looking for a pullback to the 20-day line at 81.72 as a more opportunistic entry point, however. Earnings are expected out on August 10th.

Amazon.com (AMZN) – earnings expected tomorrow after the close.

Atlassian Corp. PLC (TEAM) –  Earnings are expected on August 4th. Stock remains extended.

Barracuda Networks (CUDA) – still way extended. Your nearest reference point for a lower-risk entry on a pullback would be the 10-day line at 20.90. The 20-day line at 19.40 is much lower, but would probably represent your most opportunistic entry point should the stock get there.

CyberArk Software – last week’s pullback into the 20-day line on Thursday was your most recent lower-risk entry opportunity, and that has come and gone as the stock moves to higher highs. Earnings aren’t expected out for another two weeks.

Electronic Arts (EA) – earnings are due out next week. Stock is floundering along its 20-day and 50-day moving averages as it has fallen back into the base from which it broke out in early July.

Fabrinet (FN) – was buyable on the voodoo pullback last week as I noted in my weekend report. So you’re either in at the right time or you just get to watch the stock launch higher on Monday. Of course, speaking for myself, Monday’s move would be one to sell into given that FN is expected to announce earnings tomorrow.

Gigamon (GIMO) – expected to announce earnings tomorrow after the close. Nothing to do here until then.

Imperva (IMPV) – another cyber-security name, IMPV continues to hold tight along the 10-day and 20-day moving averages. Earnings are expected to be announced on August 4th.

Nvidia (NVDA) –  remains extended. Earnings expected next week.

Palo Alto Networks (PANW) – pulled right into its 50-day moving average today on volume that was -47.6% below average. That would make it buyable here at the line while using the line as a selling guide.

Square (SQ) – continues to move higher after last week’s pocket pivot coming up through the 50-day moving average. Stock is slightly extended here ahead of earnings next week.

Twilio (TWLO) – was in a buyable position along the 10-day line earlier this week per my discussion of the stock in the weekend report. Good for a trade perhaps, ahead of earnings which are expected in early August.

Twitter (TWTR) – blew up on earnings. Another example of why I do not like to play earnings roulette, even when I do have a profit going into the report. A bird in hand is definitely worth 2-3 in the bush in this market!

Weibo (WB) – is holding support along the mid-July lows and just above the 20-day moving average. Looks buyable on pullbacks closer to the line at 31.45. Earnings are expected to be announced on August 16th.

Yirendai Ltd. (YRD) – still way extended, so not much to do here ahead of earnings which are expected on August 9th.

Zayo Group Holdings (ZAYO) – stock knocked back to the 20-day moving average today on above-average selling volume. This brings it into a lower-risk entry position, although I would like to see selling volume dry up in here.

Zendesk (ZEN) – having some trouble getting up and off of the 20-day moving average. The stock flashed some voodoo action at the 20-day line yesterday and tried to move higher today but reversed to close back at the line. Probably not much to do here ahead of earnings which are expected next Tuesday.

As the market continues to act well, our main task is in finding buyable, constructive pullbacks in our favored long ideas. Most stocks have been obliging in providing us with just such pullbacks. In some cases, they might be extreme, as in the case of MBLY, or unorthodox and Wyckoffian, as in the case of NFLX.

The cloud names continue to catch my eye as a group that acts well. Most of the names I’ve been following in the group remain in reasonably lower-risk entry positions as they look to be setting up. As some of these names announce earnings, the burden of having to play earnings roulette is removed.

So as we get through earnings season, I will naturally tend to focus more among names that have already announced earnings. And when an earnings report also creates an actionable opportunity, whether that comes on strength (e.g., a BGU) or weakness, so much the better. Therefore, we simply want to continue to remain alert and opportunistic as set-ups emerge in real-time. 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 positions in MBLY, NFLX, NOW, and SPLK, 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.