The Gilmo Report

July 9, 2017

July 8, 2017

On Wednesday I wrote that if we see the NASDAQ Composite Index peel away from its 50-day moving average on the downside then the S&P 500 Index would likely retest its 50-day moving average. That is what we saw on Thursday, with the S&P closing just below the 50-day line on higher selling volume.

Friday’s jobs number came in at a seasonally adjusted 222,000 new non-farm payrolls, triggering a rally in the futures that carried through all day long. Given how oversold everything had become, a reflex rally was not surprising, and the jobs number gave the indexes a convenient excuse to do so.

By the end of the day, the S&P 500 closed just below its 10-day moving average after regaining the 50-day line on the opening gap-up. Volume came in very light, so this looks mostly like a low-volume reaction type of bounce on a news push after things got somewhat oversold. But we cannot necessarily assume that it will bust the 50-day line again given that the objective evidence so far shows that support at the line is holding, for now.

 

GR070917-$SPX

 

Something you might notice on the S&P 500 chart is the fact that the move down to the 50-day line also coincides with the undercutting of prior early June lows. Throw in the potential for near-term support at the 50-day line and Friday’s rally certainly seems well within the realm of possibilities after a tough week for most leading stocks.

The NASDAQ Composite Index is also bouncing along its own prior June lows, but remains below the 50-day moving average. With most NASDAQ tech stocks, both big and not so big, having been beaten down severely earlier in the week, a logical reaction bounce on Friday seemed normal to me.

But the Friday rally pushed up only as high as the 50-day moving average, where it ran into resistance as buying volume was quite light. This may tell us that near-term the market is sold out unless we see sellers return here along the 50-day line. That will be something to watch for this coming week.

 

GR070917-$COMPQ

 

The strong jobs number gave impetus to the theory of higher interest rates to come, keeping financials in the driver’s seat as one of the few areas, if not the only area, of strong-acting leadership in this market. The SPDR Financial Sector Select ETF (XLF) has now pushed back up to its prior early March highs and formed a cup or saucer formation.

The XLF has spent the past week forming a short handle to this saucer-like formation as the financials ignore the gyrations and sell-offs in other areas of the market. Pullbacks in the XLF as well as other big-stock financials have been the best lower-risk entries, and from here a pullback to the 10-day moving average could be viewed in a similar manner.

 

GR070917-XLF

 

Oils, which looked like they might be turning earlier in the week, gave up the ghost in the latter half of this past week and turned lower. However, an oil name like Keane Group (FRAC), has the look of a constructive pullback after running into resistance along the highs of its prior six-week price range. Volume declined on Friday to -27% below average, which isn’t low enough to declare a “voodoo” day, but it did represent declining volume on a pullback to the 50-day moving average. FRAC found intraday support right at the line and closed in the upper half of its daily trading range.

Jagged Peak Energy (JAG), not shown, acted in similar fashion on Friday, pulling into its 50-day line on declining volume. This would put either stock in a lower-risk buy position using the 50-day line as a tight selling guide.

 

GR070917-FRAC

 

Tesla (TSLA) has come completely undone, gapping down hard again on Thursday as it streaked to lower lows. It is now attempting to find support within a prior base structure from April and May. Volume on Friday was heavy, but buyers couldn’t push the stock more than a percent or so back to the upside.

A reaction bounce from here would, however, be logical. I would look for any weak rally into the 50-day line from here as a potentially lower-risk short-sale entry opportunity. Note that the big dome-like pattern formed throughout June now looks like the “head” of a head and shoulders formation that has yet to form any right shoulders.

Rallies into the 50-day line from here would help to form these right shoulders in an overall head and shoulders top. My guess is that we may look back at TSLA several months from now and see that this was indeed the case, although I wouldn’t fully discount a continued price break that carries all the way down to the 200-day moving average.

 

GR070917-TSLA

 

Both Facebook (FB) hasn’t Amazon.com (AMZN), not shown, rallied just above their 50-day moving averages on Friday on light volume. I only show the chart of FB here, but the concept is the same for both stocks.

Either these rallies will turn into shortable moves, or the stocks will hold their 50-day lines and set up again. There is a simple way to test this. You go long either or both stocks here and use the 50-day line as a tight selling guide. If the stocks roll over and breach their 50-day lines, however, that would trigger a short-sale at the line, using it as a tight upside stop. Both AMZN and FB can be viewed as two-sided situations, with bullish or bearish resolution both well within the realm of possibilities, depending on what the general market does from here.

 

GR070917-FB

 

Nvidia (NVDA) looks more like a short here as it completes a three-day wedging rally up to the confluence of its 10-day moving average and 20-day exponential moving average. Volume was light on Friday as the stock churned around and closed just below the two moving averages.

This would set up a potential short in the stock right here, using the 10-dma or 20-dema as your guides for a tight upside stop. Whether this works as a short right here will likely depend on what the general market does this coming week. If the NASDAQ peels away from its 50-day line on the downside, then names like NVDA could be dragged down with it, so market context is important here.

 

GR070917-NVDA

 

Netflix (NFLX) is starting to have the look of a “fractal” head and shoulders top, although it has yet to break out to the downside and through the neckline of the pattern. Note that the stock found support on Thursday at the neckline, at least as I’ve drawn it on the chart below. It then posted an undercut & rally move on Friday as it pushed back up through the prior 147.30 low of June 15th.

Technically, this would set the stock up as an actionable U&R trade at that point for anyone who was alert to that development in real-time. The move came on below-average volume, so now it’s a matter of seeing whether the stock runs into resistance and reversed at any of the moving averages that are above the current share price. This would include the 10-dma, 20-dema, and 50-dma lines.

This could resolve in either direction as far as I’m concerned, with Friday’s U&R move serving as a long entry set-up at the 147.30 price point. Of course, the rally could give way as it runs into resistance and reverses, bringing the stock into play as a short-sale target. Note that TSLA also formed a fractal H&S (as I noted in Wednesday’s report) before splitting wide open later in the week.

 

GR070917-NFLX

 

Not all big-stock NASDAQ names are breaking down or struggling to hold up. Priceline Group (PCLN) looks strong here as it posted a trendline breakout on Friday on above-average volume. This is buyable using the 10-day moving average as a tight selling guide.

 

PCLN Daily

 

Notes on other big-stock NASDAQ names below:

Alphabet (GOOGL) rallied into its 10-day moving average on Friday on below-average volume. This could be considered a lower-risk short-sale entry point, but keep in mind that the stock could continue higher on an attempt to reach its 20-dema or 50-dma.

Apple (AAPL) is still trundling tight sideways within a four-week bear flag with no resolution yet. The stock can probably still be tested here on the short side using the 10-day line as a tight upside stop.

Microsoft (MSFT) rallied into its 50-day moving average on Friday on light volume, stalling and closing just below the line. This puts the stock in a lower-risk short-sale entry position, using the 50-day line or Friday’s high at 69.84 as a guide for an upside stop.

If the general market can regain its mojo, which I would view as likely IF the NASDAQ can regain its 50-day moving average this coming week, then one of my favorite long ideas would be Alibaba (BABA). The stock is holding squeaky tight along its 10-day moving average as volume dried up to “voodoo” levels at -55% below average on Friday.

This puts the stock in a buyable position using the 20-day exponential moving average as a reasonably tight guide. Of course, if we see the general market get into further trouble BABA may simply be the next shoe to drop. But for now one can take a shot at this here since the set-up allows for very tight risk-management in case things do go awry.

 

GR070917-BABA

 

Chinese names in general just ran in place on Friday, including BABA’s smaller e-commerce cousin, JD.com (JD). The stock tried to rally back above its 50-day moving average early in the day, but by the close stalled and reversed as buying volume came in low.

This looks like a short to me, using the highs of Friday or the 50-day line as a tight upside stop. As I wrote on Wednesday, it’s not clear to me that the stock can make another move back to the prior highs of June, when it attempted to break out twice but failed both times. After all, Cinderella only has two shoes to lose, and she may be out of shoes with JD.

Otherwise, if JD can more convincingly regain the 50-day line, it could come back into play as a long idea. I try to look at every stock, even those that look like shorts, with an even hand, assessing the conditions under which I would view it as a long or a short. In this market, we already know that the Ugly Duckling can show up at any time, so it helps to understand and have a plan for bullish and bearish resolutions to patterns that show up in real-time.

 

GR070917-JD

 

As a real-time pattern, Momo (MOMO) may be setting up here as a short-sale as it clears back above its 50-day moving average but runs into potential resistance at the prior late June high at 40. Note that the rally over the past three trading days has come on extremely light, wedging volume.

On Friday, volume came in at -63% below average, which tells me that buyers weren’t all that interested in the stock. I suppose the resolution to this current move will occur within the context of a continued market sell-off or a rebound rally. If the stock can hold the 50-day line with volume remaining low, it can effectively correct the wedging action and set up as a long, so it is something to watch for.

 

GR070917-MOMO

 

Weibo (WB) still looks like a short here as it tucks up into and churns around its still-rising 50-day moving average. The 50-day line would also serve as a tight upside stop. The flip side here is that a move back up through the 50-day line that holds would trigger a “moving average undercut & rally” (MAU&R) long set-up.

 

GR070917-WB

 

Applied Optoelectronics (AAOI) benefited from a big buy recommendation and $95 price target by a brokerage firm. A $95 price target is a pretty “spicy meatball” considering that AAOI was trading around 63 as of Thursday’s close. At the time, it was also looking a bit like a fractal head and shoulders formation, but remember that an H&S is as an H&S does, to paraphrase Forrest Gump. Not all will resolve as you think.

The stock was looking shaky, even as late as Thursday as it sat right at last-stand support along the 60 price level and the top of its prior March/April base formation. But a buy recommendation apparently goes a long way in this market, and AAOI blasted up through its 50-day line on strong, volume. The move also qualified as a five-day pocket pivot.

So now what? Well, what I would say is that one could have acted on the long side of AAOI early Friday morning as it cleared the 50-day moving average. Remember that we can employ moving average undercut & rally techniques on something like this.

When a stock moves below a key moving average, generally the 50-day line, any move back above the line can be bought at that point. We then use the 50-day line as a tight selling guide in case the stock fails and reverses back below the line. But buying as close to the line as possible and then using it as your stop keeps risk to a bare minimum. From here I’d be interested in seeing how the stock acts on any pullback and retest of the 50-day line. A constructive, low-volume pullback could present a lower-risk buy opportunity.

 

GR070917-AAOI

 

Lumentum Holdings (LITE) rallied in sympathy to AAOI on Friday, after holding above its 50-day moving average earlier in the week. This resulted in a pocket pivot move back up through the confluence of the 10-day simple and 20-day exponential moving averages. To its credit, LITE held last stand support at the 50-day moving average earlier in the week as big-stock NASDAQ names were getting hit. Friday’s pocket pivot move may indicate that the stock is ready to recover, particularly if we see the NASDAQ Composite regain its 50-day moving average.

We’ll find out just how real this move is if the stock can constructively hold above the 10-day and 20-day lines on any low-volume pullback from here. And if that does occur, such a pullback would present a lower-risk entry opportunity. I have to think that if the general market can resume its rally, there will be some representation from tech names with strong fundamentals, and AAOI and LITE would qualify in this regard.

 

GR070917-LITE

 

Salesforce.com (CRM) looks like a short here as it stalls at its 50-day moving average. Volume on the rally over the past couple of days dried up to -52% below average on Friday, representing a “voodoo” rally. Remember that I originally identified voodoo days as things to watch for during wedging rallies in short-sale target stocks.

But in this market, we’ve also seen the voodoo concept applied profitably to long ideas that are pulling back. However, in this case, CRM is rallying up into a potential line of resistance at the 50-day moving average. The voodoo volume signature therefore represents a lack of demand at the highs of a short-term rally and right at a significant potential resistance level.

For that reason, the stock becomes shortable here using the 50-day line as a tight upside stop. We can also base our assessment of the stock on the fact that it is currently building a fractal head and shoulders type of formation. Remember, however, that a head and shoulders pattern is as a head and shoulders pattern does. Whether it works well or not will likely depend on what the general market does this coming week.

 

GR070917-CRM

 

As far as CRM’s other cloud cousins, Workday (WDAY) and ServiceNow (NOW) go, WDAY is trying to hold last stand support at it 50-day moving average. That would put it in a last stand position where the courageous could try buying the stock at the line while using it as a tight stop. NOW is trapped between its 10-day and 20-day lines with no set-up, either long or short, evident in the current pattern.

The “baby” in the cloud family, Appian Corp. (AAPN), roared back to life on Friday, posting a five-day pocket pivot on heavy buying volume as it blasted back up through its 10-day simple and 20-day exponential moving averages. The move qualified as a five-day pocket pivot, as volume was insufficient to call a standard ten-day pocket pivot.

In this case one had to be extremely bold and opportunistic by buying the stock as it either came up through the two moving averages or right near the 17 price level where it found support earlier in the week. Note also that Friday’s move constitutes a trendline breakout, so we want to watch how any pullback to the trendline or the 10-day moving average plays out from here. A low-volume pullback into either level of potential near-term support could put the stock back in a lower-risk entry position.

 

GR070917-APPN

 

Nutanix (NTNX) has remained on my long watch list based on the fact that it isn’t in an extended position after a big price run. The recent market weakness has brought the stock back into its 20-day exponential moving average with volume declining to -50% below average on Friday. This puts the stock in a lower-risk entry positon here using the 20-dema as a tight selling guide.

 

GR070917-NTNX

 

My short scalps in First Solar (FSLR) came to an end on Friday as the stock found support at its 20-day exponential moving average with volume drying in the extreme to -65% below average. I’ve been able to hit it above the 40 price level and make money shorting the stock on several attempts, but on Friday there was no sign of selling pressure whatsoever.

In fact, this is almost looking buyable here based on the voodoo pullback to the 20-dema on Thursday and Friday. Assuming one wanted to test this as a long, the 20-dema would serve as your tight selling guide. Otherwise, a breach of the 20-dema might being me back to the short side of FSLR. But so far, we can see on the chart that selling volume off the highs has been near non-existent.

My general view on solars has been that they rallied solely because of President Trump’s comments about making his U.S.-Mexican border wall a solar wall. While Sunpower (SPWR), not shown, has confirmed that thesis by breaking down about 15% off its recent highs, FSLR has not. For that reason, I cannot view this as a short pending further evidence.

 

GR070917-FSLR

 

Notes on other names of interest:

Activision Blizzard (ATVI) has regained its 50-day moving average, triggering a moving average undercut & rally long entry using the 50-day line as a tight selling guide.

Arista Networks (ANET) has just barely regained its 50-day moving average, triggering a moving average undercut & rally long entry using the 50-day line as a tight selling guide.

Bioverativ (BIVV) is sitting right on top of its prior base and is in a buyable positon using the top of the prior base at 59.50 as a tight selling guide.

Edwards Lifesciences (EW) continues to hold squeaky tight along its 10-dma and 20-dema today which puts it in a lower-risk entry position here while using the 20-dema as a tight selling guide.

Electronic Arts (EA) stalled at its 50-day moving average on Friday and closed below the line. Technically, this looks like a short, using the 50-day line as a tight upside stop. The flip side of this is that if the stock can regain the 50-day line and hold above it, it would trigger a moving average undercut & rally long set-up.

Canada Goose Holdings (GOOS) is now below its 50-day moving average, and only a move back above the 50-day line at 19.36 would have any chance of bringing this back into play as a long idea.

Palo Alto Networks (PANW) gapped above its 200-day moving average on Friday after receiving a buy recommendation from an analyst firm, but the stock stalled and closed near the lows of its daily trading range. It did, however, hold above the higher 10-day line, so could be viewed as buyable here using the 10-day line as a tight selling guide if it doesn’t hold up.

SolarEdge Technologies (SEDG) gapped up on Friday after it was announced that it would be added to the S&P Small-Cap 600 Index.

Square (SQ) is still holding within a five-week base. On Friday, it held tight at the 10-dma and 20-dema with volume drying up to -59% below average. This could be viewed as a lower-risk entry here, using the 20-dema as a very tight selling guide.

Tableau Software (DATA) bounced off its 50-day moving average on Friday on weak volume. Would still view rallies up into the 20-dema as potentially shortable moves.

Take-Two Interactive (TTWO) has held support along its 50-day moving average and is pushing up to the highs of its current four-week price range on light volume. Not in a buyable or a shortable position. I would also note that it will likely be important to watch what the other stocks in the group, ATVI an EA, do since the video-gamers tend to move together.

Twitter (TWTR) is still holding tight along the confluence of its 10-dma, 20-dema, and 50-dma. For this reason, we can continue to view the stock as buyable using the three moving averages as tight selling guides.

Universal Display (OLED) is still finding resistance at its 50-day moving so for now I’d treat this as a short here, using the 50-day line as a tight upside stop.

Zillow (Z) broke below its 20-dema on Friday on higher selling volume. Not in a buyable positon here, and in fact looking somewhat questionable.

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).

When I penned (or should that be “tapped”) my last report, I noted that the market looked questionable. And on Thursday we saw that assessment come to fruition as the S&P 500 Index broke below its 50-day moving average and the NASDAQ Composite moved to a lower closing low as it peeled away from its 50-day line to the downside.

On Friday, stocks attempted to make a stand, with the rally holding up while certain big-stock leaders like AMZN and FB, for example, regained their 50-day moving averages. Currently I see the market as being at a critical crossroads of sorts, and I am open to a resolution in either direction.

What individual stocks are showing me, however, is a decidedly mixed bag where I can pick out potential long set-ups as well as short-sale set-ups. This brings up the possibility of operating on a bifurcated basis, buying or shorting individual stocks based on their specific price/volume action and chart set-ups. It would not be the first time that such a possibility has occurred in this market.

The only thing I know for sure is that the past week or so has been very profitable for me on the short side, which is a form of visceral market feedback. Sometimes, however, the feedback is telling me that once I’ve become fat and happy on the short side the potential for a swing back in the other direction is becoming more likely, especially in this market.

This market can be like a train coming down the tracks at high speed. It hits the market and sends leaders flying to the downside. Once it passes, investors wonder if another train is coming, and often as they are looking down the tracks in one direction, another train comes from the other direction as the market flips back to the upside.

Currently I am fully prepared to operate on a bifurcated basis in this market as the situation potentially clarifies in the coming days and as we begin to move into summer earnings season. Armed with a handful of ideas on both the long and short side, I am prepared to do battle. However, I would emphasize that regardless of what side of a stock one chooses to play, one should operate on the basis of concrete set-ups.

Just shorting something sticking up in the air is not advisable. Likewise, just buying something because it is down is equally dangerous, as anyone trying to catch TSLA at the 50-day moving average on Wednesday quickly found out. Operating on the basis of concrete long or short set-ups that also allow for maintaining very tight risk management (such as a U&R or MAU&R on the long side, for example) is optimal. As long as a trade meets this test, then it is doable, as I see it.

The primary clue that I’m looking for right now centers around the ability of the S&P 500 to hold above its 50-day moving average combined with the NASDAQ Composite regaining its own 50-day line. That would be a bullish clue, and a cue to become more aggressive on the long side.

If the NASDAQ Composite cannot regain the 50-day line, and the S&P 500 reverses back below its own 50-day line, then more downside is likely. That would then cause me to become more aggressive on the short side. In other words, stay alert, stay flexible, keep an entirely open mind, and play it as it lies! 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 LITE and NTNX, 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.