The Gilmo Report

July 30, 2017

July 28, 2017

The market once again did what it loves to do when things start looking just a bit too rosy on the long side: the old “yanking of the rug.” On Thursday, it pulled the rug out from underneath investors after a brisk opening move to the upside led by a post-earnings gap-up move in Facebook (FB). But that move in FB topped out around 178 in conjunction with a similar intraday top in the major market indexes, and it was all downside from there.

The NASDAQ Composite Index posted an ugly outside reversal to the downside, but managed an intraday bounce off its 20-day exponential moving average. As I noted in my Wednesday mid-week report, the two days of churning action around the peak at that time led me to conclude that, “…a pullback here would not be surprising, frankly.” I also closed that report by urging members to review their selling strategies, including both absolute and trailing stops, as well as upside price objectives.

The upside jack in a number of leading names at the open on Thursday might have presented decent moves to sell into for those who use a swing-trading approach as I do. For those who don’t, it was the time to be on high alert and acutely aware of where your exit points are for each position.

Thursday’s selling was sharp and substantial, as trading volume swelled on that day. The NASDAQ Composite was knocked right down to its 20-day exponential moving average, which served as near-term support. The index then bounced to close nearer to the mid-point of its daily trading range and back above the 10-day line.

On Friday, the NASDAQ Composite gapped lower and back below the 10-day line, but reflex-rallied back up to the line on lighter volume. For now, the 10-day line looks like near-term resistance, and I would take a go-slow approach here since I don’t think a one-day sell-off is an automatic “buy-the-dip” signal.

 

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We could see some choppy madness like what we saw during June. That zig-zag of a correction bottomed in early July, producing a sharp rally to new highs from there. That rally culminated in the NASDAQ posting 14 up days out of 15 days in a row before finally running into some selling on Thursday. Some sideways action, whether choppy, tight, or manic, might be in order here over the next few days.

The S&P 500 Index also flipped out on an outside reversal to the downside on Thursday, but the Dow Jones Industrials Index diverged by closing up about 85 points on the day. However, the S&P was able to put on a show of recovery as it rallied off the intraday lows to close in the upper half of its daily trading range that day.

On Friday, the S&P held support along the 10-day line as volume declined. This action looks somewhat more constructive than the NASDAQ’s, and strikes me as being slightly divergent. What it actually leads to in terms of what happens to individual stocks remains to be seen.

 

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One thing perhaps working in the market’s favor is the action of the U.S. dollar. The greenback continues to dive ever deeper within its chart, and the PowerShares U.S. Dollar Index ETF (UUP), not shown, logged its lowest close of 2017 on Friday. The falling dollar appears to have a teeter-totter effect on the price of gold, with the SPDR Gold Shares ETF (GLD) making a higher high since posting an undercut & rally move on July 12th, when it undercut and rallied back above its prior 115.56 low of May 9th.

Friday’s higher high also comes on the heels of Wednesday’s pocket pivot move back up through the 50-day moving average, as discussed in my report of that day. A small pullback on Thursday allowed for a reasonable entry, leading to Friday’s higher high. Currently the GLD is short-term extended.

 

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The SPDR Financial Sector Select ETF (XLF) illustrates the indecisiveness in the overall sector as it pulls into the 20-day exponential moving average on light volume. The action on Thursday and Friday served to completely fill the prior gap-up that occurred on Tuesday’s cup-with-handle breakout.

As I wrote at that time, the breakout in the XLF was not being confirmed by other big-stock financials, including C, BAC, JPM, WFC, and others. That proved to be telling as the XLF slumps back into its handle. Not too impressive, but if you like the financials then this current pullback in the XLF would represent a lower-risk entry using the 20-dema as a tight selling guide.

 

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Facebook (FB) gapped up on Thursday after reporting strong earnings on Wednesday after the close. The opening gap-up took the stock as high as 179.21 in pre-open trade on Thursday, but by the opening bell FB was down to 174.70. It briefly traded higher, reaching a peak of 175.49 before reversing and getting as low as 167.50.

By the time the dust had settled, FB printed a closing price of 170.44. It’s not clear to me that this move qualifies as a bona fide buyable gap-up given the prior upside extension in the pattern. It was able to hold up above Thursday’s intraday low with volume declining on Friday, which is constructive. If one so desired, one could play it as a BGU using the 167.50 low of Thursday as a tight selling guide.

 

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Alphabet (GOOGL) remains a short-sale target on rallies up into the 50-day moving average. The stock failed to clear the 50-day moving average three times this past week and has since moved lower. I would continue to view rallies up into the 50-day line as potential short-sale entry points.

While this pattern does qualify as a late-stage failed-base (LSFB) type of short-sale set-up, we’ll see whether it actually results in further downside. Corrections and pullbacks, even ugly ones, in leading big-stock names have simply led to new Ugly Duckling long entry set-ups as the stocks recover and break out again. If something like GOOGL is going to work as a short-sale set-up, my guess is that it will need the cooperation of the general market. Translation: a deeper general market correction from here. Play it as it lies.

 

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Amazon.com (AMZN) reported earnings Thursday after the close and gapped down to 1012.14 at the open on Friday morning. It then came within about three points of its 10-week moving average on the weekly chart and about five points of its 50-day moving average on the daily. From there it rallied to end the day down -2.48%. The media made much of the point decline in the stock, but the reality is that the percentage decline was not that severe, and percentages are far more accurate.

But the stock looks to be trapped in no-man’s land after Thursday’s huge-volume reversal off the peak and after-hours sell-off and then Friday’s logical bounce off the 50-day moving average. Would I buy the stock here? No, but I might have bought it near the 50-day line on Friday, if only for a trade. In this position the stock isn’t in what I would consider a coherent buy position, much less a lower-risk one.

 

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Tesla (TSLA) rallied up to its 50-day moving average on news that it will be delivering its first Model 3 vehicles at a party/media event that it held on Friday afternoon. The company has made an art out of hyping their stock higher, and this latest move is probably no different. It is effective, however, at least in the short-term.

The news rally carried above the 50-day line on Wednesday as volume dried up, something of a “voodoo” end-point. On Thursday, the stock broke back below the 50-day line on higher selling volume, but found support at the 10-day line, which is the lowest of its nearer-term moving averages. TSLA is expected to report earnings on Wednesday after the close. While I am not averse to day-trading the stock on the short side, as could have been done on Thursday, I’m not so sure I would choose to hold a position into Wednesday’s expected earnings report!

 

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Notes on other big-stock NASDAQ names:

Apple (AAPL) is expected to report earnings this Tuesday, August 1st, after the close. So far it is holding support along its 50-day moving average.

Microsoft (MSFT) is holding support at its 20-dema as volume declines, and is technically in a lower-risk entry position.

Netflix (NFLX) sold off on Thursday like most leading stocks, but found support at its 10-day moving average on Thursday and Friday. This does put it in a lower-risk entry position along the 10-dma while using it as a tight selling guide. Otherwise, I like pullbacks to the rising 20-dema at 173.21 as more opportunistic entries, should they occur.

Nvidia (NVDA) is holding support at its 20-dema, bouncing off the line on Friday on light volume. This could be considered a lower-risk entry here using the 20-dema as a selling guide, but keep in mind that earnings are expected on August 10th.

Priceline Group (PCLN) remains extended from its early-July base breakout. Earnings are expected on August 8th.

Yext (YEXT) has been a victim of the general market action, as smaller stocks often will be during market sell-offs like we saw on Thursday. That action sent the stock diving through its 20-day exponential and 50-day simple moving averages on volume that was higher, but below average. The move took it right along the tight lows it was posting in late June into early July, when I first discussed the stock as buyable.

If the general market finds its feet this coming week, then look for YEXT to hold along these lows on either side of the $13 price level. On Thursday, the stock did undercut three early July lows at 12.88, 12.90 and 12.93 and then rallied to close at 13.11. On Friday, the stock held tight and above the prior July lows. Technically this puts YEXT in a U&R long set-up using the 12.88 low of July 3rd as your selling guide. Earnings are not expected until August 31st.

 

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Cloudera (CLDR) is another new-merchandise IPO play discussed in recent reports, and it is not expected to report earnings until September 7th. After posting an undercut & rally move in late June, the stock rallied all the way back up to its 50-day moving average where it encountered resistance earlier this past week.

That resistance at the 50-day line is logical, and led to a test of the 20-day exponential moving average on Thursday and Friday. CLDR held above the line on both days with volume picking up sharply relative to prior days in the pattern as it was bumping up against the 50-day line. This looks like supporting action at the 20-dema and along the prior highs of the low-base range the stock formed in late June into early July.

Catching the pullbacks down to the low-17 price level on Thursday and Friday was preferable to buying it along the 20-dema where the stock closed on Friday. I might look for any further pullbacks below the 18 price level as potentially better entries from here with the idea that the stock will hold more or less along the 20-dema.

 

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Notes on other recent IPOs discussed in recent reports:

Alteryx (AYX) –expected to report earnings this Wednesday, August 2nd.

Appian (APPN) – expected to report earnings this coming Thursday, August 3rd.

Myomo (MYO) is expected to report earnings in the next few days, although no confirmed date is available. It 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 roulette1` with this one, preferring instead to see what shakes out after earnings.

ShiftPixy (PIXY) continues to hold along the low-6 price area, and as of Friday’s close is four cents above the 6.30 intraday low post on the day of its IPO, June 30th. This is technically in a buyable position, using the $6 IPO price level as a tight selling guide.

In this market, most of the time when you see something streaking higher it pays to just lay back and wait for the most opportune and opportunistic entry to show up. Nutanix (NTNX), which was on fire following its buyable gap-up (BGU) move of a little over two weeks ago, may be an example of this.

The stock has given up its fiery upside ways in exchange for a lukewarm pullback to the 20-day exponential moving average. It has also undercut the prior 21.62 intraday low of the July 5th BGU day, and rallied back above that low and the 20-dema two days in a row. Volume dried up to -46% below average on Friday, setting this up as an actionable U&R long using the 21.62 price level as a selling guide.

In my Wednesday mid-week report, when the stock was pulling back to the 10-day moving average, I noted that, “While this pullback could be considered buyable, there is always the possibility that NTNX pushes 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.” So here it is.

 

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In the China Five camp, JD.com (JD), Weibo (WB), and Sina (SINA) are all expected to report earnings within the next two weeks, so there is not much to do with any of them currently unless one is looking for a quick, and hopefully profitable, trade. All three stocks, not shown here on charts, have held support along their 10-dma, 20-dema, and/or 50-dma lines over the past two trading days, and look to be building constructive bases.

Momo (MOMO) isn’t expected to report earnings until August 22nd, and it has already given us some nice upside since its pocket pivot off the 50-day moving average back on July 10th. Thursday’s action was wild, and would likely have had many a MOMO shareholder thinking about bolting for the exit. The stock traded in a more than 10% range that day, swinging around in volatile fashion before closing mid-range and just above the 10-day moving average.

On Friday, MOMO pulled into the 10-day line and bounced on lighter volume. While I would not want to buy the stock up here, buying near the 10-day line or the 20-day exponential moving average would have been feasible on Thursday and Friday. The only question would be whether one could muster up the courage to pull the trigger on an ugly market day. Easier said than done!

 

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Alibaba (BABA), not shown, is expected to report on August 9th. It continues to hold above its 10-day moving average, but I don’t see anything to do with the stock ahead of earnings. Pullbacks to the 10-day line, however, might present short-term trading opportunities since the stock has shown a tendency to bounce off the line after such a pullback.

Applied Optoelectronics (AAOI) and Lumentum Holdings (LITE), not shown here on charts, are both expected to report earnings this Thursday, August 3rd. LITE is expected to report before the open that day, and AAOI is expected to report after the close. Expect both names to act in sympathy with one another. We might also expect Fabrinet (FN), which is not expected to report until August 21st, to act in sympathy as well.

FN is holding up on this logical pullback to the 20-day exponential moving average. Volume on Friday dried up in the extreme to -69% below average. The stock is technically buyable here using the 20-dema as a tight selling guide. However, keep in mind that AAOI and LITE earnings reports will likely have some influence on the stock. AAOI already pre-announced, so LITE, which reports before the open may have the greater effect on FN’s Thursday trading action.

 

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Palo Alto Networks (PANW) was tagged hard on Thursday as the big-stock tech names took it on the chin. The stock, which was pulling into and holding tight along its 20-day exponential moving average in constructive fashion on Wednesday, broke below the 20-dema and bee-lined down to the 50-day moving average. Volume was higher, but below average.

PANW is not expected to report earnings until the end of August, so if it can hold the 50-day line on this pullback it may still be viable for a move back to the highs of the current two-month price range. That said, any failure to hold the 50-day line would be a bearish development, and could send the stock down on a test of the mid-June lows down under 130.

 

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ServiceNow (NOW) reported earnings Wednesday after the close and gapped up to 115.18 at the opening bell. It then slid lower throughout the day, dropping back below its 10-day moving average before finding intraday support at the 20-day exponential moving average. I played this on the short side Thursday, and successfully so, but I did notice that the stock seemed to find a bid around the 105 price level.

Objectively, we can see that Thursday’s action, despite the big-volume stall off the gap-up highs that morning, did qualify as a stalling pocket pivot. On Friday NOW held support at the 20-dema again, and closed up on the day as volume declined. This is still buyable here, using the 20-dema as a tight selling guide.

Another side to this is that any failure below the 20-dema would bring this into play as a failed-breakout type of short-sale set-up. That would likely coincide with the general market also correcting further to the downside. For now, however, as long as NOW continues to hold support at the 20-dema, it is a long set-up.

 

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NOW’s cousins, Workday (WDAY) and Salesforce.com (CRM), not shown, are also holding support at their 20-day exponential moving averages. They can both be considered to be in buyable positions using the 20-dema as a tight selling guide.

Veeva Systems (VEEV) got hit with some heavy selling volume on Thursday, sending the stock a nickel below the 50-day moving average by the closing bell. On Friday, the stock magically regained the 50-day line on light volume, setting up a moving average undercut & rally set-up at that point.

This is a bit touch-and-go, however, since Thursday’s selling volume is troubling. VEEV absolutely must hold the 50-day line to remain viable. Technically, however, it can be considered buyable here using the 50-day line as a tight selling guide. Earnings are not expected until August 28th.

 

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Notes on other names discussed in recent reports are below, with impending, expected earnings report dates listed as well, some with charts:

Activision Blizzard (ATVI) – earnings are expected this Thursday, August 3rd.

Arista Networks (ANET) – stock is breaking below the 50-day moving average, so is not on my watch list currently. Earnings are expected this Thursday, August 3rd.

Bioverativ (BIVV) – on Friday the stock tested the 60 price level and the top of the prior base breakout of mid-June and held on below-average volume. Not much to do here since earnings are expected this Wednesday, August 2nd.

Canada Goose Holdings (GOOS) – still living below the 50-day moving average with earnings expected this Friday, August 4th, before the open.

Edwards Lifesciences (EW) – displaying erratic price behavior, so it has been removed from my buy watch list.

Electronic Arts (EA) – reported earnings on Thursday after the close and gapped down to its 10-day moving average at the open on Friday. It held support at that point, where it was in a lower-risk entry position, and broke out to a new all-time closing high. This remains within range of the 116 breakout point.

 

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First Solar (FSLR) – reported earnings on Thursday after the close and gapped higher on Friday. That move qualifies as a buyable gap-up using the 47.44 intraday low of Thursday’s BGU as a selling guide.

Jagged Peak Energy (JAG) – stock remains volatile and somewhat incoherent. Earnings are not expected on August 10th.

Keane Group (FRAC) – also acts incoherently like JAG. Earnings are expected this Tuesday, August 1st. Oil names like JAG and FRAC seem directionless and volatile, so for that reason I’m removing them from my buy watch list.

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

Square (SQ) – earnings are expected this Wednesday, August 2nd.

Tableau Software (DATA) – earnings are expected this Wednesday, August 2nd.

Take-Two Interactive (TTWO) – earnings are expected this Wednesday, August 2nd.

Twitter (TWTR) – stock got blasted after earnings and is now trading below its 200-day moving average. It has been removed from my long watch list.

 

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Universal Display (OLED) – earnings are expected this Thursday, 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).

The low levels of the CBOE Volatility Index ($VIX) finally came to fruition on Thursday when the market came under heavy selling pressure. That led to a nice pop in the VIX after posting an undercut & rally (U&R) move as I discussed in my Wednesday mid-week report.

As I wrote with respect to the new lows in the VIX at that time, “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.” Right now, the VIX is still in an active U&R long set-up if we want to apply U&R rules to a market indicator.

Will a further market correction take the VIX even higher? That is a possibility, and I am starting to see names drop off my long watch list, while others get knocked down to areas of critical support. Either the pullbacks hold support or they don’t, and this is where we will find our answers with respect to where the general market goes from here.

On Wednesday I wrote that, “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.”

I am certainly willing to test buyable pullbacks as well as U&R long set-ups in my favored long ideas, but I will do so with a clear eye toward keeping risk to a minimum. Any failure to hold near-term support at a key moving average will cause me to exit, stage right, in a hurry!

My guess is that nimble feet will turn out to be an asset right here, right now, and in either direction. So, be alert, be cautious by keeping risk to a minimum on any fresh buys, but most of all know where your exit points are and stick to them if the general market situation remains difficult. In short, be ready for anything.

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.