The Gilmo Report

July 6, 2016

July 6, 2016

The Fed meeting minutes came out today at 11:00 a.m. my time here in California and offered something of an anti-climax to an otherwise interesting, Ugly Duckling kind of day. Futures were down sharply this morning before the bell, and this sent the NASDAQ Composite Index gapping below its 200-day moving average. Things were looking fairly ugly at that point before the Ugly Duckling arose from the market swamp and the index faithfully responded by turning back to the upside.

By the close, the NASDAQ had pulled a complete outside reversal to the upside, regained both its 200-day and 50-day moving averages, and posted higher volume than the prior day. On its face, that is bullish action until proven otherwise.

 

GR070616-$COMPQ

 

Meanwhile, as the NASDAQ was going through its trials and tribulations, the S&P 500 Index encountered its own. After a nice gap-down move at the open, the index slid lower before just barely undercutting its 50-day moving average.

About an hour later the index came in again as it undercut the 50-day line for a second time. Surely, it had to be curtains for the S&P 500. But as with the NASDAQ, the Ugly Duckling arose from the market swamp (not unlike the way the Great Pumpkin arises from the pumpkin patch at Halloween), and the S&P 500 responded by pulling an intraday undercut & rally move!

We can see what that undercut and rally looked like on the 5-minute 620 intraday chart of the S&P 500 Index below. We can see that at the open the index gapped down and slid lower for the first 15 minutes of the day. It then rallied over the next 20 minutes, but gave way and turned back to the downside over the next 30 minutes. At that point, it undercut the prior intraday low and the 50-day line and voila, an intraday bottom was born!

 

GR070616-$SPX Intraday Chart

 

This looks considerably less exciting on the daily chart of the S&P 500 below. Here it merely shows up as a dip below the 50-day line followed by a positive close in the upper part of the daily trading range. And like the NASDAQ, the S&P 500 posted a big outside reversal to the upside on higher volume. And, like the NASDAQ, this is bullish action.

 

GR070616-$SPX

 

The precious metals posted higher highs today in anticipation of a dovish message from the Fed, but are starting to get extended here. However, that doesn’t mean they can’t just keep going higher, especially if the Fed is on hold for the foreseeable future. The iShares Silver Trust (SLV), not shown, finally cleared and held the 19 price level, while the SPDR Gold Shares ETF (GLD), shown below, cruised above the $130 price level for the first time since March of 2014.

If the precious metals are proving anything in this market, it is that breakouts can work as both are moving higher from gap-up base breakouts they posted in late June. As we can see on the chart below, the GLD broke out on June 24th, while the SLV broke out a few days later on June 29th.

 

GR070616-GLD

 

As we might expect, precious metals have also continued higher, and both Silver Wheaton (SLW and Agnico Eagle Mines (AEM), both now shown here on charts, are well-extended from their late June breakouts. In any of these, as well as the GLD and the SLV, the nearest point of reference for a buyable pullback would be their 10-day moving averages, which need some time to catch up.

Over the weekend I wrote that I figured pullbacks by Tesla Motors (TSLA) down to the 20-day moving average would present new entry opportunities. I was wrong, however, as instead we use another pullback to the 10-day line yesterday as a new entry opportunity.

TSLA has had one bad news item after another thrown at it over the past week and it has weathered them all. The first item of bad news was a late story on a fatality involving one of Tesla’s vehicles while on auto-pilot last Friday. The stock gapped down on the news that morning, but bounced right off of the 10-day line and close up near the 200-day line on above-average volume.

On Tuesday, yesterday, the stock was hit by news of a shortfall in its auto sales that was announced over the weekend. It held above the 10-day line and closed back near the highs of the price range. Today, another report of an accident involving a self-driving Tesla vehicle came out, and the stock again opened down but closed up for the day and near the highs of its daily price range.

The shorts in this stock, of which there are still many, must be going crazy. Notice that each gap-down open over the past two days has held up a little higher than the previous day. The overall action shows tight, sideways closes holding the 20-day line as volume declines. This looks to me like it wants to make a run through its 200-day and 50-day moving averages, which loom just ahead. In this case the 20-day line at 212.31 serves as a guide for a tight downside stop.

 

GR070616-TSLA

 

The action in this market, particularly with respect to individual stocks can be quite erratic and volatile at times. A case in point would be Netflix (NFLX), which gapped up last week on a buyable gap-up move, only to drop back below the low of that BGU yesterday. That pullback, however, took it right down to the 20-day and 50-day moving averages. If one had bought that pullback, one would have been rewarded rather quickly as the stock then launched above the 100 price level later on in the morning on positive news that hit at that time.

But that action stalled around the 100 level as the stock came very close to the 200-day and 40-week moving averages on the daily and weekly charts, respectively. Nevertheless, this would qualify as a big-volume pocket pivot, albeit a stalling one, at the 20-day and 50-day moving averages.

Today NFLX again came in to test the 20-day and 50-day lines as volume declined but still came in above average. This has the look of settling into the two moving averages as volume declines, but I would watch for volume to dry up further on this pullback. NFLX is expected to announce earnings on July 18th, by the way.

 

GR070616-NFLX

 

I suppose if you’re going to play the cloud names you might as well go with the biggest of the big-stock names that I consider to be part of the group. And that of course would be Amazon.com (AMZN), which broke out to an all-time high today on about average volume but enough for a five-day pocket pivot.

Basically, this shapes up as a shakeout and breakout move with the stock pushing out of its June base and into new-high price ground. As I wrote over the weekend, and pointed out in my blog post of four trading days ago last Thursday, AMZN pulled a little nip and tuck maneuver as it pulled into its 10-day moving average that day.

That nip and tuck action came after the stock had regained its 10-day line following an undercut of the May lows and supporting action at the 50-day line last Monday. If you like to buy standard-issue breakouts, this would not qualify since volume is not sufficient. However, buying it along the 10-day line last week per the voodoo-like pullback into the line was the proper entry point based on how we like to buy things. Now the stock is slightly extended from the 10-day line.

 

GR070616-AMZN

 

Here are my Trading Journal notes on the other cloud names I’ve discussed in recent reports:

Citrix Systems (CTXS) bounced off the 200-day line last Monday, rallied, and is now pulling back in what looks like a possible Wyckoffian Retest.

Salesforce.com (CRM) bounced off of a point near its 200-day moving average last Monday, rallied up to its 20-day moving average where it reversed and pulled back. The pullback has now extended for two days to the downside and volume has come in at about average. This should also be watched as it looks like a possible Wyckoffian Retest.

ServiceNow (NOW) undercut a prior low in its pattern last Monday, has rallied back above that low, and has pulled back over the past four days as volume has declined. This could develop into a Wyckoffian Retest, as it is definitely not in a shortable position given that it is so far below all of its major moving averages.

Workday (WDAY) broke below its 200-day moving average last Monday on huge selling volume, found support along its May lows and rallied back up through its 200-day moving average before running into resistance at its 50-day moving average last Friday. The stock has pulled back two more days and is now back below its 200-day line. However, volume dried up today as the stock held tight, and this is another potential Wyckoffian Retest.

By now, if you’ve never read me using the term Wyckoffian Retest you’re probably wondering just what the heck this type of retest is. First, let me just say this is what I call it, and we will use the example of Splunk (SPLK) for the purpose of illustrating just what a Wyckoffian Retest is.

All of the names for which I posted my notes on above have the same look to their current daily charts. In SPLK’s case, it broke down hard two Fridays ago and last Monday after the Brexit vote results. That took it through its 200-day moving average on an undercut of the prior late May low.

That set up a nice undercut and rally move from there that took the stock right up near its 20-day moving average before it began to slide back down as volume dried up. So here we see the essence of what I call a Wyckoffian Retest.

Basically, the idea here is that the stock makes a low and then pulls back to retest that low without actually ever reaching it again. In the process, volume dries up in a test for supply that yields no additional sellers. At that point the stock has a reasonable chance of continuing back to the upside.

In SPLK’s example we can see that the stock closed just below the 50-day moving average yesterday on volume that was –33% below-average. Today volume was running quite low until the close, when a burst of volume came in and the stock closed just above its 50-day line.

Notice that SPLK was doing just fine before the Brexit vote hit. At that point it was pushing the 60 price level and looking quite healthy. When the Brexit vote hit, all hell broke loose. Now the stock is trying to recover, and if the shockwaves from the Brexit have indeed passed, it may have a chance at moving higher from here.

 

GR070616-SPLK

 

Any of these cloud names could do the same thing, but I would tend to pick the ones that were acting the best before the Brexit. I’ll leave it to you to go through the charts of each and figure this out for yourself as part of today’s homework assignment. The best way to make money in this market, or at least give yourself a decent chance of doing so, is to take a highly opportunistic approach and then be unafraid to pull the trigger when the time comes.

Gigamon (GIMO) illustrates the concept of extreme opportunism on today’s pullback right down to the 20-day moving average. I discussed this name over the weekend as a new merchandise name that might be starting to come of age. GIMO gave investors a wonderful entry opportunity this morning as it pinged right off of its 20-day moving average and rallied sharply from there. By the close the stock had regained the 10-day moving average on increased volume.

What made today’s pullback in the stock so enticing was the fact that a) it was right at the 20-day line, so risk could be minimized by using that as a guide for a tight stop, and b) it was showing very light selling volume as it had over the prior days. So what we end up with is a nice big outside reversal to the upside on increased volume that would qualify as a five-day pocket pivot as well.

 

GR070616-GIMO

 

I also discussed Atlassian Corp. PLC (TEAM) as another new-merchandise situation, and that was actually buyable yesterday on the pullback to the 20-day moving average. Volume came in above-average in a nice show of support at the 20-day line. This morning TEAM briefly acknowledged the general market gap-down by selling off a few cents, but it quickly turned back to the upside as volume ballooned to 152.7% above average. Now that’s what I call taking one for the TEAM, if you’ll pardon the pun.

 

GR070616-TEAM

 

Leading-edge fiber-optic name Acacia Communications (ACIA) was another one I featured in my “New Merchandise” blog post of this past weekend. At that point the stock was slightly extended above its 10-day moving average, but it has simply held tight along that point as volume has dried up sharply relative to prior volume in the pattern.

Because ACIA hasn’t been around for more than 50 days, there is no 50-day moving average of volume, so we have no reference for what can be considered average daily volume. So in this case you just end up eyeballing the volume to get a sense of whether it’s drying up or not. This thing traded between 40 and 41 all day long today. Suddenly, with about ½ hour left in the trading day, the stock launched to the upside as buying volume came streaming in, sending up to a close of 42.89.

ACIA is not really in a coherent buy position, but I noted the tight action today which caught my eye as constructive stuff to see. Optimally, if we were to see a constructive pullback into the 10-day line at 39.18, that would provide your best, lower-risk entry opportunity if that were to happen.

 

GR070616-ACIA

 

With a name like Ambarella (AMBA), you have to bide your time and wait for the deep pullback into the 200-day line before pulling the trigger. As I’ve discussed in recent reports. AMBA’s sharp upside price move following the early May bottom-fishing buyable gap-up move probably requires some time to consolidate properly.

Overall, I’d have to say that the stock has been doing just that for most of the past month. So it becomes a matter of just waiting and giving the stock some time to wring out all the momentum buyers and consolidate long enough to set up another upside move. In this case, the 200-day line serves as your maximum downside reference point for pullbacks. Thus far, waiting for that precise pullback has been the right thing to do.

If one was truly alert over the past two days one might have also noticed that the pullback down into the 200-day line undercut the prior late June low. That low was 47.80, and yesterday the stock hit a low of 47.77 while today’s low came in at 47.78. From there the stock turns and rallies back above the 10-day and 20-day moving averages as volume remains light. So there’s the opportunity, and you had to be able to see it in real-time, assuming you weren’t freaking out over this morning’s gap-down open in the general market.

 

GR070616-AMBA

 

FireEye (FEYE) is also best bought on opportunistic pullbacks. In this case, following last Thursday’s pocket pivot, the stock dipped below the 10-day line yesterday but held at the 50-day moving average. This was a much lower-risk entry point as volume also dried up sharply on the day.

Today FEYE was able to get back above the 10-day line but stalled slightly as volume came in at -40.1% below average. This is tight action along the 10-day and 50-day moving averages with volume drying up sharply, so it puts FEYE in a lower-risk buyable position using the 50-day line or some point 2-3% below the line as your selling guide.

 

GR070616-FEYE

 

Speaking for myself, my objective with a trade in FEYE would be to see a rally up to the 200-day moving average at 19.74. That would be optimal, although one could use an upside profit objective of 10-15%, which would take you up to around the $18 price level. Fabrinet (FN) is a smaller fiber-optic-related name I’ve discussed in recent reports over the past few months. After hitting an all-time high in early June, the stock has been working on what is now a four-week base. There’s a couple of interesting things going on here.

The first is probably the most obvious, and that is that the stock has pulled into its 50-day moving average as volume dries up to -49% below average. That’s a nice voodoo pullback into the 50-day line that makes the stock quite buyable using the line as a selling guide. The second thing going on here is that the pullback into the 50-day line is also a sort of Wyckoffian Retest of the prior low of seven days ago on the chart. Overall, an interesting set-up that stands a good chance of working if today’s action sees the market carry higher from here.

 

GR070616-FN

 

Mobileye (MBLY) continues to drift below the 45.29 intraday low of last week’s roundabout sort of buyable gap-up move. The stock has slid down as low as 44.37, a little over 2% below the BGU intraday low. For a stock like MBLY, that sort of downside “porosity” below the 45.29 BGU intraday low looks to be within acceptable ranges. Laying along the 44-45 price level and looking to buy into this pullback has been my preferred entry strategy here. The idea is to see the strength that we saw on the BGU come back into the stock, sending it higher.

There is always an outside chance that the stock could pull back further to fill the gap down to around the 10-day moving average at 43.09. That may or may not happen, so my first entry points occur here as the stock slides 2-3% below the 45.29 BGU intraday low.

 

GR070616-MBLY

 

Yirendai Ltd. (YRD) certainly fooled me by pushing sharply higher over the past two days as it ignored the general market weakness. Notice how last Thursday the stock held very tight as volume dropped to voodoo levels at -63% below average. This came after the stock had undercut a prior June low and held right at its 50-day moving average last Monday. That was constructive action, and in hindsight I should have picked up on this. When the stock regained its 10-day and 20-day moving averages last Friday that was an additional sign of constructive action.

Yesterday YRD posted a five-day pocket pivot on a bounce off the 10-day and 20-day lines and is now back at its all-time highs. The stock is extended here but offers a good example of some subtle buy signals seen along the 10-day and 20-day moving averages following the undercut & rally move.

 

GR070616-YRD

 

Facebook (FB) is actually pulling off a successful Wyckoffian Retest of its low of last Monday. As we already know, that low occurred as the stock filled the prior gap-up “rising window” from late April. That then led to a rally back to the upside that carried as far as the 20-day moving average.

As I blogged yesterday, we wanted to keep an eye on FB for a successful test of the 10-day moving average in a little nip and tuck type of maneuver with volume drying up. Volume did come in at -38% below average yesterday, thus qualifying as a voodoo pullback with a constructive close near the peak of the daily price range.

Today FB completed the successful Wyckoffian Retest by launching up through its 50-day moving average on volume that was only 2% above average. It was enough for a five-day pocket pivot. With the stock running up into the underside of its May through early June base, some resistance might be encountered. I’d watch to see how any pullbacks develop from here, as any small pullback towards the 20-day line might present a better entry point if one did not buy into yesterday’s nip and tuck into the 10-day line.

 

GR070616-FB

 

Alibaba (BABA) is a big-stock Chinese internet name that may be setting up for a move higher following its undercut of the prior May low and its 200-day moving average last Monday during the Brexit sell-off. Following that undercut the stock drifted back above its 50-day moving average on below-average volume over the next four days.

Over the past two days the stock has come back into the confluence of its 10-day, 20-day, and 50-day moving averages as volume has dried up sharply to -52% below average. Thus I consider BABA to be in buyable range here using the 10-day line at 77.95 as your tight selling guide.

 

GR070616-BABA

 

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

Activision Blizzard (ATVI) pulled back into the top of its base yesterday following last Thursday’s breakout. That presented a lower-risk entry point for the stock. From here I would continue to look at pullbacks into the 39-40 price area as potential entry opportunities.

Electronic Arts (EA) was buyable this morning on the pullback to the 20-day moving average, per my discussion of the stock in this past weekend’s report. I would continue to look at such pullbacks as lower-risk entry opportunities.

Nvidia (NVDA) was buyable yesterday on the pullback to the 20-day line and then again today on the pullback to the 10-day line. Such pullbacks into the two moving averages remain your best potential entry opportunities.

Twitter (TWTR) is holding tight along the 10-day line as volume dries up. This is in a lower-risk entry point right here using the 10-day line at 16.72 or the 20-day line at 16.27 as selling guides.

Weibo (WB) is pulling back down towards its 10-day moving average with volume drying up. The stock tried to break out yesterday but could not do so as it stalled on above-average volume. I would continue to view low-volume pullbacks into the 10-day line at 27.66 as the best potential entry points for the stock.

On the short side of this market I would have to say that not much looks all that enticing here given that the market looks to be in rally mode. However, members should keep a close watch on names on the Gilmo Short 50 Index list, posted last week. If the general market situation starts to deteriorate, I will post any real-time short-sale ideas to the Gilmo Blog. Therefore, members who are oriented towards selling stocks short when the market dives should stay tuned to the blog at all times!

On its face, today’s action was quite bullish, and so the only things to do is to take the action at face value and look to come in on the long side here. Opportunities have presented themselves over the past two days as the major market indexes have successfully tested their 50-day moving averages.

For the NASDAQ, the test also included the 200-day moving average, but the end result was the same: bullish action. If one did not act in opportunistic fashion today given some of the buyable pullbacks we saw as the market turned today, there are still a number of names in buyable positions. I have discussed those names in this report, and hopefully that provides something in the way of actionable ideas.

In the meantime, with the jobs number coming up on Friday, stay alert! In addition, in the face of potentially market-moving news, make sure that all long entries are done at the most optimal, lower-risk points in the chart patterns. Ultimately, buying as close as possible to a nearby reference point for a tight selling guide is the best way to keep risk to a minimum. Carry on.

 

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 FEYE, GIMO, MBLY, SPLK, and TSLA, 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.