The Gilmo Report

July 5, 2017

July 5, 2017

Monday was supposed to be a quiet, short, pre-holiday session for the market, but investors were instead treated to an unexpectedly unusual and unique fireworks show. The 3½ hour trading session started out with a big upside gap thanks to a sizable overnight move in the futures that gained momentum in pre-market trade leading right into the opening bell.

For this market, it was just another manic Monday. But the upside fireworks show, at least as it related to the NASDAQ Composite Index. soon gave way to a downside fireworks show as the index gave up a 37 point gain and reversed sharply. By the time the dust had settled, the index ended the day down -30.36 points, or -0.49%. Volume, adjusted and normalized for the short trading day, came in at 6.44% above Friday’s levels, resulting in another distribution day for the index.

Big-stock NASDAQ names, which all opened to the upside on Monday, also reversed course, with some, like Nvidia (NVDA), selling off hard. Several other big-stock NASDAQ names also broke critical support at the 50-day moving averages, including Amazon.com (AMZN), Facebook (FB), and Microsoft (MSFT). Others, like Netflix (NFLX) and Google (GOOGL), moved further below their 50-day lines. On an individual stock basis, Monday was an ugly day for these previously leading “FANG” names.

This morning seemed like a replay of Monday as the NASDAQ 100 futures were up about 25 or so in pre-open trade and were pushing higher into the open, exactly as they did on Monday. But after big-selling in the NDX names on Monday, most of these stocks were in position for oversold reaction bounces.

That led to a rally in the NASDAQ Composite that carried right up into the 50-day moving average without clearing the line. Today’s move of course came on higher volume compared to Monday’s half-day session, but it was below average. This puts the NASDAQ in a do-or-die position here underneath the 50-day line. Failure here likely would mean a test of the mid-May lows down around 6000.

 

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The S&P 500 Index mostly just churned around today after recovering from an intraday dip into the red. Volume was of course higher than Monday’s volume, but still came in well below average. The index is now back above its 10-day line as it remains in a choppy range extending back to early June. My expectation would be that if we see the NASDAQ roll away from its 50-day line to the downside, then we will probably see the S&P retest its own 50-day line.

 

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The market strikes me as being at a critical point here. Financials have continued to act well, providing an oasis that keeps the NYSE-based indexes within their current price range. Oils, on the other hand, got tagged today, as was evident in Keane Group (FRAC), which was a decent long entry last Wednesday.

But the move back up to the top of the six-week range ran into resistance right there and reversed today on a sharp increase in selling volume. Jagged Peak Energy (JAG), not shown, also got hit after pushing up to the top of its own six-week price range. While oils might step up as an area of potential new leadership in this market, my guess is that this will not turn out to be the case as I believe this market is headed for more downside.

 

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The market’s Achilles’ Heel remains the big-stock NASDAQ names, which were hit in a surprising sell-off on what was expected to be a quiet pre-holiday trading day on Monday. Several of these are now showing the beginnings of busted patterns, but this would be an understatement in describing the action of Tesla (TSLA) today.

The stock gapped up on Monday on news that its Model 3 had met regulatory requirements ahead of schedule, but the reality of a mere 22,000 vehicles sold in the second quarter of 2017 sent the stock reversing to the downside. Objectively, TSLA is likely one of the most over-hyped companies on the planet, thanks in large part to its CEO Elon Musk’s ability to consistently over-promise and under-deliver. Some might even consider that Elon Musk is a master stock manipulator making profligate use of Twitter to keep stubborn shorts on the run.

While many have given us hundreds of reasons why the emperor has no clothes, that hasn’t prevented TSLA shares from rising to all-time highs nearing the $400 price level. But, to use another literary metaphor, Icarus’ wings melted today as the market finally came to the realization that Elon Musk’s endlessly exaggerated and fluffed up promises were simply fake news.

I tweeted early this morning that the stock was busting the neckline of a fractal head and shoulders formation after it gapped down into the mid-340’s at the bell. From that point, TSLA just kept streaking lower, failing to even pause at its 50-day moving average as it slashed through the line on heavy selling volume.

From here, rallies back up into the 50-day line would present your next lower-risk entry opportunities on the short side from here. When the jig is up, the jig is up, so to speak, and TSLA’s action today certainly speaks of a market that has woken up to the paucity of the company’s business model and future growth.

 

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Technically, Facebook (FB) hasn’t violated its 50-day line moving average, but it did slash through the line on Monday on volume that would have been above average if adjusted for a full trading day. Today the stock rallied back up into the 50-day line on below-average volume, which theoretically puts it in a shortable position, using the 50-day line as a tight upside stop.

If we look at the chart we can see that the stock has come under a lot of heavy-volume selling within this choppy, two-month range extending back to early May. It’s clear, therefore, that institutions have been selling into the moves up to all-time highs. Whether that results in the stock splitting wide open as it runs into potential resistance here at the 50-day line remains to be seen. But the chart, at least for now, cannot be considered to be bullish.

 

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Amazon.com (AMZN) has a similar look to FB as it rallies back up into its 50-day moving average on below-average volume following a breach of the line on Monday. Monday’s close was the first one for the stock since January 4th, but technically the stock has not violated the 50-day line yet.

AMZN also closed just above the 50-day line today, but a reversal back through the line would trigger a short-sale, in my view. One would then use the 50-day line as a tight upside stop. Note that the stock has run into heavy selling off the peak, first in the early part of June, and then in mid-June on news that it was buying Whole Foods Market (WFM). That move to new highs was sold into as the stock reversed off the highs on very heavy volume.

 

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Nvidia (NVDA) bounced sharply today on news that it was forging a partnership with Baidu (BIDU) “to bring the world’s leading artificial intelligence technology to cloud computing, self-driving vehicles, and AI home assistants.” Big deal. Isn’t everybody?

In reaction to the news NVDA staged a logical undercut & rally move after undercutting the January 12th low on Monday. But today’s move just resulted in a small gap-up price range where the stock essentially churned around on volume that was below average. That seems like a rather tepid reaction to this “big news.” Perhaps it is just fake news. In any case, NVDA is starting to act more like a short than a long. For that reason, I would welcome any kind of feeble rally up into the 20-dema at 147.49 as a very juicy short-sale entry point, should that occur.

 

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Other big-stock NASDAQ names were rallying today after getting hit on Monday, some into areas of potential resistance where they may become shortable. Here are my notes, below:

Alphabet (GOOGL) barely rallied today, although volume did come in at above average. I view this as shortable on rallies closer to the 10-day or 20-day moving averages, up closer to the mid-950 price area.

Apple (AAPL) remains within a bear flag where it keeps running into resistance along its 10-day moving average. This still looks like it can be tested on the short side here or on any little blip up into the 10-day line. The 10-day line then becomes your guide for a tight upside stop.

Microsoft (MSFT) is in a short, four-day price range as it zigs and zags back and forth, running into resistance at the 50-day moving average each time. Today the stock ran into the 50-day line and backed away slightly, putting it in a lower-risk short-sale entry point using the 50-day line as a tight upside stop.

Netflix (NFLX) has dropped back into its prior base, but is clinging to the high end of that price range around the 147-148 price level. I would see this as shortable on any rally back up into the 10-day line at 152.32.

Chinese names showed a little bit of perkiness today, perhaps in sympathy to the BIDU-NVDA news. One can’t really fault Alibaba (BABA) here as it holds up well within a nice flag formation. Keep a close eye on the stock, however, since it could follow in the footsteps of other big-stock leaders and begin to roll over. However, if one owns the stock, this can be handled very concretely by simply using the 20-dema as a tight selling guide from here.

 

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BABA’s smaller e-commerce cousin, JD.com (JD), not shown, has held support at the 50-day moving average over the past couple of days. Technically, this puts the stock in a lower-risk entry position, but as I wrote over the weekend, it has already had two moves to new highs that have failed. Is a third one likely?

Netease (NTES), also not shown, has now pulled all the way back to its 50-day moving average after two failed breakouts in June. While a bounce from here would be likely, the bottom line is that the stock is now a late-stage failed-base type of short-sale formation. For that reason, I would look at any weak rally up into the 20-dema at 305.31 as a potential short-sale entry opportunity.

Weibo (WB) attempted to rally back above its 50-day moving average today but failed at the 20-day exponential moving average, where it reversed back to the downside. It then closed back below the 50-day line on increased volume. This is looking very much like a short here, using the 20-dema or the 50-dma as tight upside stops.

 

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I find it interesting that most “L” formations we’ve been tracking over the past week or so have not resulted in LUie type back to the upside now that everyone seems to think every L formation will result in an automatic move to the upside. That is a naïve position to hold, and so we must consider whether Momo (MOMO) is in a bear flag more than it is in a L formation awaiting a LUie type of resolution to the upside.

The stock has been able to hold support along the lows of its late May to late June price range, but so far hasn’t been able to hold any rallies back above the 50-day moving average. That may be a problem for the stock. My guess is that if we see other Chinese names come under pressure, then this becomes shortable here or on any weak push up further into the 50-day moving average, so that is something to watch for. I certainly don’t view the stock as an automatic buy here.

 

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Lumentum Holdings (LITE) and Applied Optoelectronics (AAOI) are looking questionable here as leaders in the opticals space. AAOI looks like it wants to break below the top of its prior base along the 60 price level as it is now living below its 50-day moving average.

AAOI is now looking like a potential late-stage failed-base (LSFB) here, as well as a nascent head and shoulders top formation where the 60 price level would represent the neckline. Therefore, the stock can be viewed as shortable using the 50-day line as a tight upside stop. A clean, high-volume break below the 60 price level would seal the deal. So far, however, the breach of the 10-day, 20-dema and 50-day lines sets it up for failure as a potential LSFB/H&S unless it can convincingly regain the 50-day line.

 

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With AAOI faltering, look for Lumentum Holdings (LITE) as a possible cohort as it begins to show signs of wobbling here. The stock fell out of bed last week when it broke below the 10-day moving average previously holding tight along the line in constructive fashion. That is a bit of a “Jekyll & Hyde” sort of change of character, and a potentially bearish indication, in my view.

LITE can be looked at as a recently failed breakout attempt from a so-called cup-with-high-handle formation after breaching the 20-day exponential moving average. On Monday, the stock attempted to clear the 20-dema but failed and reversed to close near the lows of the day on above-average volume despite the short trading day. This therefore looks like a short to me on any small rallies back up into the 20-day exponential line. A breach of the 50-day moving average would confirm LITE as an LSFB short-sale set-up.

 

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A lot of names that were previously on my long watch list have been moved to my short watch list. Obviously, these would include virtually all the stocks I’ve discussed so far in this report. And that is useful feedback for where this market may be headed from here.

As they say on the cable TV infomercials, “But wait! There’s more!” In my view, former leader Salesforce.com (CRM) represents a potential short-sale entry right here at the 20-day exponential moving average. Today it rallied back up into the line on average volume. This action comes within what looks like the right shoulder of a fractal head and shoulders pattern. In this case, the stock is shortable here using the 50-day moving average as your maximum reference for an upside stop.

 

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I’ve written in recent reports that I would be selling solars into their recent move that was caused by President Trump’s off-the-cuff comments about putting solar panels on the proposed U.S.-Mexican border wall. The solars were all trending lower when this news hit, and it sent them all flying up to higher highs.

In my view, however, those moves are moves to sell into, or maybe even short. I’ve been hitting First Solar (FSLR) on the short side every time it rallied up to the mid-40 price level, and it finally gave way today when it broke below its 10-day moving average. Those of you who follow me on Twitter (which should be all of you), are aware of my tweets in this regard.

Volume was light today, but probably more reflective of the fact that dumb money buying into such a nonsensical move has finally run out. I still think this is a short, with a breach of the 20-day exponential moving average serving as confirmation of complete failure after this silly news rally.

 

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I’d also be short Sunpower (SPWR), but unfortunately couldn’t get a borrow on the stock to do so. I believe some members have been able to short the stock up near the 10 price level based on comments made on my Twitter page, however. If so, they were nicely rewarded today when the stock broke -8.83% to the downside on heavy selling volume. In my view this proves my thesis that the upside moves in solar stocks as a result of President Trump’s comments will turn out to be brief and therefore should be sold into or even shorted.

 

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Other leaders continue to falter, and some of these are evident in my notes on names discussed in recent reports below:

Activision Blizzard (ATVI) is holding “last stand” support at the 50-day moving average.

Appian Corp. (AAPN) has dropped below its 10-dma, but held support along the recent June lows along the 17 price level. There is no set-up here that can be bought currently, but the stock can be watched to see if it can set up again.

Arista Networks (ANET) is holding last stand support at the 50-day moving average.

Edwards Lifesciences (EW) continues to act well and posted its second five-day pocket pivot along the 10-dma and 20-dema today in the past three days.

Electronic Arts (EA) is now living below its 50-day moving average and ran into resistance at the line today on higher volume. This could be viewed as shortable here using the 50-day line as a tight upside stop.

Canada Goose Holdings (GOOS) is approaching the 19.43 low of its prior upside gap “rising window” but looks like it is going to run into the 50-day moving average before it has any chance to rally. I would stay away for now.

Nutanix (NTNX) is holding at the 10-day moving average where it could be viewed as buyable using the 10-day line as a tight selling guide.

Palo Alto Networks (PANW) is holding below its 200-day moving average but remains above its 20-dema. It needs to hold above the 20-dema to remain viable, although that will likely depend on where the general market goes from here.

Snap (SNAP) has failed to hold the prior 17.59 low. Sell.

SolarEdge Technologies (SEDG) reversed today at its 10-day moving average, which looks bearish. It may head lower as the group comes under pressure, notably SPWR and FSLR.

Square (SQ) rallied back up into its 10-day moving average today on slightly above-average volume. For now, it remains within a five-week base.

Tableau Software (DATA) has been able to hold last stand support at its 50-day moving average, but is a late-stage, failed-base type of situation. For that reason, I’d watch for weak rallies up into the 20-dema at 62.73 as potential short-sale entries.

Take-Two Interactive (TTWO) rallied up into its 20-dema at 73.31, closing three cents below it. In my view this could be viewed as shortable here using the highs of today at 73.79 as a tight upside stop.

Twitter (TWTR) is holding support along its 200-day and 20-dema lines, but is now below its 10-day and 50-day moving averages. One could view the stock as buyable here using the 20-dema or the 200-day moving average as tight selling guides.

Universal Display (OLED) rallied above its 50-day moving average today but stalled to closed just below the line on higher volume.  This is now looking like a late-stage failed-base (LSFB) short-sale set-up here, using the 50-day line as a tight upside stop, or the 20-dema as a wider upside stop.

Zillow (Z) is still holding up okay, but anyone still owning the stock should look to the 20-dema as a reasonable selling guide should the stock come under selling pressure.

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).

As I wrote over the weekend, the index action looks questionable, and many leading stocks are showing deterioration in their patterns or attempting to make a final stand at their 50-day moving averages. For that reason, I advocated keeping plenty of dry powder in one’s pocket in the form of cash on hand.

I also noted over the weekend that while Monday was a short trading day, it may not necessarily be as quiet as everyone expects. That was certainly the case as we saw NASDAQ and other tech names sell off hard on a big downside reversal following an initial, futures-led gap to the upside at the open. That was clearly bearish action on a day where we might expect the market to have an upside bias ahead of the 4th of July, one of the more upbeat holidays during the year.

The next few days may be critical for the market, but the bottom line is that a fair number of stocks that were previously on my long watch list have been moved to my short watch list, as I’ve discussed in this report. If the general market continues to weaken, some of these, depending on where they are within their chart patterns, look quite shortable for those of you who are oriented to and comfortable with the short side.

Otherwise I continue to believe that caution is warranted, and that one should seek to raise more cash in response to the current market and individual stock action. 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 a position in FSLR, 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.