The Gilmo Report

June 10, 2018

June 9, 2018

The NASDAQ Composite Index got hit with some selling volume on Thursday as extended tech names finally came under some profit-taking. As I’ve been writing in recent reports, as these names get more extended on the upside, the more in need of a pullback to help consolidate things. On Friday, the futures were down sharply, but the index held the Thursday intraday lows and rallied back to the upside, closing higher on lighter volume.

To me, it simply appeared as if there was no follow-through to Thursday’s selling, although investors certainly had the weekend G-7 meeting to worry about if they wanted to. In addition, many leading names among my favorites pulled back into logical areas of support, creating lower-risk entries for opportunistic traders.

 

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The S&P 500 Index also shrugged off the opening futures gap-down on Friday and moved to a higher closing high. Volume was lighter, which again reflected a lack of selling pressure, as I saw it. On Thursday, the index fared better than the NASDAQ, closing about mid-range on lighter volume. The action, therefore, all looks normal within the context of the S&P following through on Monday’s breakout to higher highs. The indexes remain in an uptrend.

 

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Most of the big-stock NASDAQ names I follow pulled into logical support on Friday, which just put them in lower-risk entry positions, at least for now. Despite a report that Apple (AAPL) was cutting its order for iPhone components by 20%, the stock found support at the 10-dma and rallied to close near the highs of its range and down only about 1%. This puts the stock in a lower-risk entry position here, using the 10-dma as a tight selling guide.

 

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Amazon.com (AMZN) has pulled back for three straight days as volume has dried up constructively. It remains above its 10-dma, so the pullback has been more than well-contained, so far. The 10-dma at 1654.97 would be your reference for a lower-risk entry spot on any further pullbacks from current levels.

Facebook (FB) failed to hold the 10-dma on Thursday, but found support at the 20-dema as volume dried up. This is my favorite short-term moving average to use for buyable pullbacks since a test of the 20-dema tends to hold up better than one of the 10-dma. That’s why I prefer to look for these types of pullbacks when the 10-dma is not a great deal lower than the recent highs.

Volume over the past three days has been below average, so despite the negative news over the past couple of days as noted in my Wednesday report, sellers haven’t swarmed the stock. FB is therefore in a lower-risk entry position here using the 20-dema as a tight selling guide.

 

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Netflix (NFLX) pulled into its 10-dma on Friday on light volume that was -48% below-average. This could be considered a lower-risk entry here, but if it doesn’t hold up then look for the 20-dema at 347.90 to come into play.

Nvidia (NVDA) continues to consolidate its prior move up off the 20-dema over the past two weeks or so. It is in the process of forming what appears to be a high handle to a short cup formation that it formed in May, and held support at the 10-dma on Friday. Pullbacks to the 10-dma can be considered buyable given that the stock is not wildly extended in its current chart position.

 

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Tesla (TSLA) remains the Jekyll and Hyde stock that changes from a short to a long and then back again. After turning into a long back in the latter part of May on an undercut and rally move off the recent lows, the stock has rallied all the way back up to its 200-dma. It ran into resistance at the line on Thursday, reversing to the downside and back below the line on heavy volume.

Friday’s volume declined, but the stock again failed to hold the 200-dma. This looks weak, and probably has the preponderance of shorts salivating at the idea of another break to the lows. For that reason, I’d take a two-sided approach here, as another move back up through the 200-dma could lead to higher highs.

Otherwise, one can test this as a short here, using the 200-dma as a guide for a tight upside stop. If it pushes through the 200-dma, be ready to flip to the long side. Play it as it lies!

 

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Twitter (TWTR) posted another higher high on Friday, as buyers continue to scoop up the stock. The stock was officially made a component of the S&P 500 Index on Thursday after being announced as a new component on Tuesday. Thus, what appears like index fund buying has propelled the stock higher.

Volume has declined, although it still came in at above average on Friday. I’d be looking for a pullback here, probably down to at least the 10-dma at 37.21. That would set up the next potentially buyable pullback, depending on how constructively it occurs. One should also keep an eye on the 20-dema, which is rising just below the 10-dma, as a deeper reference for potentially buyable support.

 

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Snap (SNAP) pulled in with the NASDAQ on Thursday, but given its extended state from the late May lows, this was not a surprise. The pullback found some support off the intraday lows, and the stock regained the 50-dma on Friday on above-average volume. It did not, however, qualify as a pocket pivot volume signature.

Nevertheless, SNAP is consolidating the prior move off the lows in constructive fashion. I would like to see it continue to hold along the 50-dma, perhaps with volume drying up, to create a more reliable, new long-entry set-up.

 

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Nutanix (NTNX) launched higher Thursday morning after testing the 10-dma/20-dema confluence on Wednesday, which I noted in my blog post on the stock that day. The move was looking quite strong before the market tide sent the stock into reverse on heavy selling volume.

But NTNX pulled up and stopped at the confluence of its 10-dma and 20-dema, where it had found voodoo support the prior day. It held tight at the moving averages on Friday as volume declined. This is now on the fence here as sellers have been unable to send it careening down through the 10-dma and 20-dema.

This may indicate that the stock has weathered some selling off the peak and is now ready for a new re-breakout attempt. Therefore, this becomes a two-sided situation, buyable here along the 10-dma and 20-dema with the idea of using the two moving averages as a tight selling guide. Otherwise, a beach of the 20-dema could bring this into play as a short-sale set-up, so play it as it lies.

 

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CyberArk Software (CYBR) continues to streak higher as it gets ever more extended, but Fortinet (FTNT) paused and pulled back on Thursday and Friday to give buyers a lower-risk entry opportunity at the 20-dema. Volume dried up on Friday as the stock held the 20-dema and then rallied back up through the 10-dma. Pullbacks to the 20-dema remain your preferred lower-risk entries.

 

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FireEye (FEYE) ran into resistance right at the 50-dma on Thursday, turning back to the downside in a big outside reversal. Volume, however, was light, and the stock held support at the 10-dma. On Friday, it again held support at the 10-dma as volume declined a bit further.

A couple of things to note here. The first is that the move from the prior undercut & rally long set-up acted in textbook fashion. In the old days, undercuts of prior lows were places where I would cover shorts, looking to re-enter on the ensuing rally up into a moving average, usually the 50-dma. Note that FEYE did just that, rallying back up into its 50-dma before turning back to the downside on Thursday.

In addition, Thursday’s move failed to hold the 20-dema, which is less constructive for the long-side argument here. Therefore, this would most certainly need to hold the 10-dma to remain viable as a long. Otherwise, guess what, this was a short at the 50-dma on Thursday, and that would have worked quite well.

FEYE’s saving grace on Thursday was found in the fact that volume was light, and volume again dried up on Friday. Therefore, one could test this as a long right here using the 10-dma as a tight selling guide. But take notice of the fact that the U&R long set-up along the lows last week was only good for a swing trade. Whether FEYE can rally from here and eventually regain the 50-dma remains to be seen.

 

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Palo Alto Networks (PANW) worked out as a short at the 20-dema if one was bearish on the stock, as I discussed in my Wednesday report. On Thursday, it attempted to retake the 20-dema but failed, reversing sharply to the downside before running into the 50-dma. It found some minor support at the 50-dma on Friday.

Friday’s move also set up as an undercut & rally move since PANW was able to rally back above the prior 197.35 low of May 15th. PANW closed Friday at 199.33, so this could be played as a U&R long set-up using the 197.35 price level, about 1% lower, as a tight selling guide.

 

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DropBox (DBX) was a big disappointment on Thursday after posting two relatively strong pocket pivots in a row at the 10-dma and 20-dema on Tuesday and Wednesday. The stock gave it up quite readily as tech stocks sold off on Thursday, and is now back to the lows of its current six-week price range. Volume dried up to -38% below average as the stock moved lower on Friday.

DBX’s Relative Strength line moved to a new low on Friday as well, which probably indicates that some sort of undercut of the six-week lows is in store. This may set up a U&R move somewhere along the lows, so that is something to watch for. DBX has remained one of those stocks that is best bought on weakness and then sold into strength such as that seen earlier in the week when it posted two pocket pivots in a row.

 

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The U.S. Commerce Department on Thursday morning before the open announced the settlement reversing the ban on U.S. sales to Chinese telecom firm ZTE. I was anticipating this per my Wednesday report, and U.S. stocks that do business with ZTE gapped up at the open, but the news was sold into.

In the process, Lumentum Holdings (LITE) reversed and closed below its 50-dma. Volume was extremely light, but perhaps somebody had foreknowledge of the report that would come out the next morning on Friday. That report claimed that AAPL has asked its supply chain to prepare around 20% fewer components for iPhones debuting in the second half of 2018. LITE is looking to capitalize on AAPL’s increased use of 3-D sensors, known as VCSELs, in its new phones.

That report sent LITE all the way down to its 200-dma on Friday, where it found intraday support but rallied off the lows of the day. That move also undercut the prior 58.11 low of May 31st and the stock then closed at 59. This set up an undercut & rally long set-up as the stock moved up through 58.11 earlier in the day. This can still be considered buyable as a U&R long set-up using the 58.11 price level, less than 2% away, as a tight stop.

Despite the report, selling volume on Friday was only about average, so this may turn out as a final last-stand support level here along the 200-dma. At the very least, 58.11 price level serves as a tight selling guide with the 200-dma serving as maximum support.

 

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Acacia Communications (ACIA) also gapped up on Thursday on the ZTE news, but reversed to close down on the day on above-average volume. The company is probably the biggest beneficiary of the lifting of the ZTE ban, and not a supplier to AAPL as LITE is. So, it held support at the 10-dma as volume declined on Friday, closing higher on the day.

Despite Thursday’s selling, my indicator bars at the top of the chart went Code Blue on Friday. This, in my view, makes the stock buyable here using the 10-dma at 33.26, a little over 2% lower, as a tight selling guide.

 

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Roku (ROKU) has stair-stepped its way higher, and had an expected pullback on Thursday after pushing to higher highs above the 40 price level on Tuesday. Thursday’s pullback occurred during the general market tech sell-off that day, but the stock held support along its 10-dma to close up on the day.

On Friday, volume dried up as the stock held tight at the 10-dma. Personally, I like to buy this thing when it comes in, usually sharply, and then sell it when it blows back to the upside and makes higher highs. The stock acts well, so I consider it buyable here along the 10-dma using the line as a tight selling guide.

If you get any pullbacks closer to the 20-dema, as you did on Thursday, that’s even better as an entry-/re-entry opportunity. This is one stock for which it pays to wait and look for the most opportunistic entry to show up. In this position, the stock looks like it wants to go higher, and my guess is that if the general market rallies next week, so will ROKU.

 

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Twilio (TWLO) is another one of those names for which it pays to remain patient and wait for that oh-so-special pullback that makes it buyable on weakness. Following the pocket pivot of two Fridays ago, the stock edged higher, taunting buyers who wanted to get in following the pocket pivot.

But, as is usually the case with most stocks in this market, the buying opportunity eventually comes, and it is often a sharp pullback to support. In this case, TWLO yanked right into the 10-dma during Thursday’s tech sell-off, but held at the line. This led to a lower-volume rebound on Friday. I would continue to look for pullbacks to the 10-dma as your best, lower-risk entry opportunities when they occur.

 

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Baozun (BZUN) is holding along its 10-dma, but my preference would be to just lay back and wait for a pullback to the 20-dema, now at 57.55 as the most opportunistic entry given its current extended state. Autohome (ATHM) illustrates this concept quite nicely following a big move to new highs earlier in the week.

Remember that ATHM was last truly buyable along the $100 price level and the top of its prior base two entire Tuesday’s ago. I wrote at the time that this was your most opportunistic entry point, and the stock then launched to new, all-time highs from there. Bingo.

But once it pushed into new-high price ground, patience was your best strategy. This is because ATHM has a habit of making strong upside moves and then yanking right back into a deep support level, where it again becomes buyable in lower-risk fashion. That was the case on Friday as it came right into the 20-dema and pinged right off the line to post a strong-volume pocket pivot off the 20-dema and back up through the 10-dma.

So, you were either on it at the 20-dema on Friday or you weren’t. That said, one could view this pocket pivot as buyable using the 20-dema at 107.87 as a tight selling guide.

 

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Momo (MOMO) remains on fire as it posted another all-time high on Friday. This thing is now so extended there’s no way one can buy shares until we finally see some sort of consolidation that helps create a new long set-up in the pattern.

Alibaba (BABA) gave opportunistic buyers the pullback they were waiting for on Friday as it came all the way down to not only its 10-dma, but also its 20-dema, before bouncing back to the upside. That pullback on Friday also brought it right back to the $200 Century Mark, which I consider the primary support level for the stock.

BABA closed a little over 2% above the $200 price level on Friday, which keeps it well within buying range of its recent base breakout. It’s possible that the continued uncertainty over how the U.S.-China trade dispute will finally play out has kept a lid on BABA’s breakout. If some sort of friendly solution is found, this stock could move a lot higher from here. Thus, it is buyable here using the 200 price level as your selling guide.

 

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Tal Education Group (TAL) rocketed to a new high on Friday on above-average volume. It was last buyable on Monday’s test of the 20-dema, and it is now extended on the upside.

Sunlands Online Education (STG) is still hanging tight along its 10-dma and 20-dema. Volume has been vaporized to almost nothing as the number of shares traded on Friday evaporated to -91% below average. Therefore, this would be buyable right here based on the voodoo action, using the 10-dma and 20-dema, both at 9.92, as tight selling guides.

 

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Notes on other names discussed in recent reports:

Carbonite (CARB) pulled an outside reversal to the downside on Friday, but held near-term support at its 10-dma. The 20-dema at 36.78 would be the preferred lower-risk, opportunistic entry, but this still likely needs more time to consolidate properly and set up again, assuming it is eventually going to new highs.

Intuitive Surgical (ISRG) remains within buying range of its base breakout of two Fridays ago, although I would prefer to use pullbacks to the 20-dema at 469.62 as lower-risk, opportunistic entries.

Railroads CSX Corp. (CSX) pushed to a new high on Friday on light volume and is therefore extended. Norfolk Southern (NSC) moved higher following Wednesday’s undercut & rally move. Pullbacks to the 20-dema at 151.19 would be your best, lower-risk entries if you can get ‘em, as was the case on Wednesday.

Sailpoint Technologies (SAIL) remains extended. Pullbacks to the 20-dema at 25.24 would offer the best, lower-risk and much more opportunistic entries, should they occur.

Square (SQ) broke sharply on Thursday on heavy selling volume, but held support at the 10-dma. I would hang back here and look for pullbacks to the 20-dema at 57.67 as your more opportunistic entries from here. No need to chase the stock in this extended position.

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). In all cases I will mostly use the shorthand version of “10-dma,” “50-dma,” etc.

Thursday’s pullback in leading tech names, where most of the upside thrust in this market was coming from, seemed logical. In most cases, the pullbacks were not severe. Meanwhile, we saw some rotation into industrials and financials. For the most part, however, the current leadership remains intact, and it has remained a matter of laying back and waiting for actionable pullbacks to occur rather than chasing strength.

This week will be a busy news week, with the G-7 summit ending over the weekend and the U.S.-North Korean Summit meeting scheduled to take place on Tuesday. Add to that a Fed policy announcement on Wednesday and you have plenty of news to move the market. If I was in the prediction business, I’d be looking for better-than-expected news from the G-7 (where most of the establishment media have taken a morose slant) and the U.S.-NoKo Summit, and another rate increase from the Fed.

With all of the major indexes closing higher for the week, and the Dow posting its best single week in three months, the market uptrend remains intact. So, remain focused on the leaders and abide by our preferred strategy of looking to buy on constructive weakness, sometimes with the help of some news item that gives the market a temporary hot flash. Play it as it lies.

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 ACIA and ROKU, 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.