The Gilmo Report

June 13, 2018

June 13, 2018

The NASDAQ Composite Index powered to an all-time high yesterday, and looked set to do so again today. But a strong rally that held up even after the Fed announced another quarter-point increase in its Fed funds target rate gave it all up into the close as the index ended in the red, down -8.09, or -0.11%, on higher volume.

But, as I noted in a tweet earlier today, and ahead of the Fed announcement, things were getting a little piggy on the upside, hence a pullback became more likely. As Jesse Livermore would say, “Action, reaction, action, reaction,” in that every upside move brings with it a natural reaction to the downside as the prior upside move’s excesses are worked off.

 

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The S&P 500 Index looks less appetizing here as it pulled an outside reversal to the downside off the highs on heavy and higher volume. Despite today’s action, the index uptrend remains intact, but a further pullback from current levels is not out of the question. As always, we just focus on and key off the stocks.

 

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Given the way a lot of my favorite long ideas (from both the written and video reports) have been acting lately, I believe the Piggy Principle is beginning to set in as things get piggily extended to the upside. That’s when things start to look so good and one begins to feel quite fat and happy as their long positions streak to the upside.

At that point, we generally see some kind of pullback, and that’s pretty much what we saw today in the indexes. But there is no doubting the gratification one can feel being long some of these Gilmo ideas as they’ve gotten quite piggy on the upside. As they say, it’s a tough problem to have, but it does clue us in to the fact that a pullback is probably likely at this stage.

Nutanix (NTNX) held its 20-dema nicely on Monday as volume remained dry in an instant replay of Friday’s voodoo action. That led to a sharp upside move yesterday as the stock pulled a typical Ugly Duckling-style re-breakout on big volume. The stock continued higher today, and is just out of range of the breakout at this point.

However, my preferred entry was at the 10-dma on the voodoo action at the line, sticking to the principle of buy-it-when-it’s-quiet. Nevertheless, the Piggy Principle has certainly been a factor in NTNX over the past two days, and only pullbacks closer to the top of the base around 60 would offer lower-risk entries from here.

 

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Roku (ROKU) looked like it wanted to go higher, as I wrote over the weekend, and so it’s not surprising to see that it has done exactly that. A sharp move on Monday was followed by a tight close yesterday, and then another sharp move to higher highs on strong volume came today. It is now well extended.

So far, ROKU has been a nice winner since I first identified it as a voodoo set-up along the 50-dma back in mid-April. At this point, it’s now a matter of waiting and watching to see how it eventually meets up again with its rising 10-dma, and whether that presents another lower-risk entry opportunity.

 

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Twitter (TWTR) picked up an analyst’s buy recommendation and $50 price target yesterday, sending it to a three-year high. The stock has been on a tear since posting pocket pivots down along the 10-dma back in May, and is now way extended. The 10-dma is rising rapidly, but is still about 10% below the stock’s current price, and that would be your only reference for any kind of buyable pullback from here.

 

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Snap (SNAP) posted some low-volume action along the 50-dma on Monday, holding tight after regaining the line last Friday. That might have presented a possible add point for the quick and nimble, but the stock is also quite a way up from its original 10.51 entry point down along the recent lows.

From the 50-dma set-up on Monday, the stock has now moved to higher highs as it approaches its 200-dma. Notice how it has stalled and closed near the lows of its daily price range over the past two days. This would argue for a pullback and retest of the 50-dma, which might offer a lower-risk entry opportunity.

 

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Given that the NASDAQ Composite and the NASDAQ 100 Indexes have been leading the larger-cap side of this market rally, we want to keep a close eye on these names. The biggest of the big-stock NASDAQ leaders, Apple (AAPL), dipped below its 10-dma today on higher volume, bringing into play a potential test of the 20-dema.

If it holds, then that may offer a lower-risk entry for the stock. If it doesn’t, then this could come into play as a possible short-sale on a breach of the 20-dema. This would also likely have broader implications for the market.

 

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Amazon.com (AMZN) is stalling a bit as it makes all-time highs, but for now remains well above its 10-dma. For now, the 20-dema down at 1648.51 would be the best lower-risk entry on any pullback from current levels.

Facebook (FB) is also stalling a little as it pushes up against its all-time highs. Volume picked up slightly today but the stock did hold above the 10-dma. It is only buyable, in my view, on pullbacks to the 20-dema from here.

 

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Netflix (NFLX) announced that it was going to start adding video games to its entertainment content, sending the stock to all-time highs. The stock had already offered buyers a lower-risk entry at the 10-dma as volume dried up, per my comments over the weekend. Today’s move qualifies as a pocket pivot off the 10-dma, but in my view, it was best to buy it when it’s quiet, and that opportunity came and went yesterday.

 

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You’d think that with the NASDAQ posting consistent new highs over the past few days, a stock like (NVDA) might itself be able to clear to new highs. So far, that hasn’t happened, but the stock remains in a seven-day price range along the 10-dma. If you are bullish on the stock, then this would be a lower-risk entry position here, with the idea that it will hold above the 10-dma and move higher in short order.

 

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Tesla (TSLA) pushed up through the 200-dma, so as I wrote over the weekend, if one was trying to short it at the 200-dma, “…be ready to flip to the long side. Play it as it lies!” The stock then blasted higher yesterday and today, and is now extended from the 200-dma. Another example of how TSLA makes a living beating up the shorts.

The stock has now pushed all the way up near its prior late February highs, where it stalled yesterday off the intraday peak on a high-volume gap-up move. I suppose one could treat yesterday’s move as a buyable gap-up, buying shares here and using the 338 low of yesterday’s intraday trading range as a tight selling guide.

Otherwise, if it fails to hold the BGU, it may become shortable again. TSLA has been a bit like that, swinging back up to its highs and then retesting its lows, as it alternately becomes a long and then a short and then a long again. Play it as it lies!

 

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CyberArk Software (CYBR) and Fortinet (FTNT) are near-term extended and should be watched for buyable pullbacks. Their 10-dmas, at 63.65 and 62.85, respectively, would be your references for potentially buyable pullbacks.

Meanwhile, Palo Alto Networks (PANW) added another successful case study to the U&R long set-up phenomenon in this market. As I discussed over the weekend, “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.”

PANW paused briefly at the 50-dma on Monday as volume dried up to -25% below average. That wasn’t enough to create a voodoo type of pullback, but the stock was still in play as a U&R since it never dropped below the 197.35 prior low in the pattern. The stock then sprang to life and posted a new high today. It is now, obviously, somewhat extended, but was there for the taking on the U&R at the 50-dma per my comments over the weekend.

 

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FireEye (FEYE) pulled into its 20-dema this morning as volume dried up to less than half of average early in the day. By the end of the day, volume came in at -46% below average as the stock found some slight supporting action at the 20-dema. That set up a lower-risk entry opportunity at the 20-dema, using the line as a tight selling guide, and that remains the case, for now.

 

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Dropbox (DBX) came right back with another pocket pivot move back up through the 10-dma and 20-dema yesterday. Despite the prior disappointment after posting back-to-back pocket pivots last week, buyers keep coming after the stock every time it dips below the 30 price level, which strikes me as systematic accumulation along the lows.

The stock stalled a bit yesterday as it likely ran into overhead supply from last week’s failed pocket pivot moves. I’d like to see the stock hold above the 10-dma and 20-dema with volume drying up here as confirmation of its recent strength. This would also bring it into a lower-risk long entry position, using the two short moving averages as tight selling guides.

 

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Chinese telecom firm ZTE re-opened for trading again yesterday, and promptly dropped 40% in the Chinese markets. Apparently, the lifting of the ban by the U.S. Commerce Department still isn’t doing much for investor confidence. For this reason, I’m inclined to leave Acacia Communications (ACIA) alone as the situation remains fluid. Congress appears hell-bent on blocking the ZTE settlement, which creates some news risk I don’t think is necessary to endure given that so many other stocks are working so well..

By my own calculation, I have figured about 10% of Lumentum Holdings’ (LITE) business would be due to ZTE if they bought Oclaro (OCLR). I have read other estimates of 5% of their business being due to ZTE, but the bottom line is that their exposure is relatively limited. I think the bigger issue for LITE is whether last week’s report of AAPL cutting iPhone component orders by 20% may be more relevant.

That said, the stock has not been acting well. After an undercut & rally move on a bounce off the 200-dma, LITE ran into resistance at the 50-dma today and reversed back to the downside. Volume was slightly higher than yesterday’s levels, but still came in a very dry -58% below average.

At this point, I’m ready to give up on the stock, which may mean that a test of the 200-dma is at hand that then results in a stronger bounce back to the upside. For now, LITE is still holding up as it remains above the 58.11 prior low in the pattern, but I would not be surprised to see it at least retest the 200-dma, which is only about 2% lower.

 

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Square (SQ) remains extended from its recent base breakout, but has been taking some higher selling volume over the past week. For that reason, I would look for constructive pullbacks to the 20-dema at 58.89 as potential lower-risk entries from here.

 

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Baozun (BZUN) pulled back today but remains above its 10-dma. Given how extended the stock is since its big buyable gap-up and base breakout of  mid-May, I would take a more opportunistic approach here and look for deeper pullbacks to the 20-dema at 59.52 as possible lower-risk entries if you can get ‘em.

Momo (MOMO) is also way extended following its post-earnings buyable gap-up back in late May. I alerted members to this in my video report the night before earnings. The stock is up over 30% since then, such that only pullbacks to the 20-dema, currently at 46.73, would be my preferred opportunistic entries if I can get ‘em.

Autohome (ATHM) showed us a little voodoo action today as it held tight along the 10-dma. It is currently consolidating the strong pocket pivot it had last Friday off the 20-dema and back up through the 10-dma. Volume today dried up to -56% below average, so this can be considered to be in a lower-risk entry position using the 10-dma as a tight selling guide for shares purchased above the line.

 

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Alibaba (BABA) pulled into its 10-dma today on lighter volume, which puts it in a possible add position if one bought shares on the retest of the 20-dema and the $200 Century Mark last Friday. Otherwise, I’d only be looking to buy this on any further and constructive tests of the 20-dema from here.

 

GR061318-BABA

 

Tal Education Group (TAL) came apart after noted short-seller Muddy Waters claimed that the company is a fraud. In such a case, sticking to your selling guides is critical. Today’s move took the stock all the way back to the 50-dma, where it was initially a voodoo set-up along the 50-dma as I discussed at that time. Using the 10-dma or 20-dema as a selling guide once the stock was extended to the upside would have been advisable. This is a busted pattern and a stop-out at the 20-dema.

 

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Sunlands Online Education (STG) continues to hold along its 10-dma as volume remains light. Considering what’s going on with TAL, one might choose to leave this one alone for now.

Notes on other names discussed in recent reports:

Carbonite (CARB) posted a big-volume pocket pivot at its 10-dma on Monday, and is again extended. The stock has been on an upside run since I first discussed it as buyable down in the 27 price area. It is now at 40.50, so I don’t think this is the place to suddenly get aggressive with the stock on the long side. In the meantime, the 20-dema, now at 37.83, would serve as a reasonable guide for a trailing stop

Intuitive Surgical (ISRG) is just out of range of its recent base breakout, but I would prefer to see constructive pullbacks to the 20-dema, now at 475.43, as lower-risk entries from here.

Railroads CSX Corp. (CSX) and Norfolk Southern (NSC) have been working their way higher, but the stocks are still best bought on pullbacks to their 20-demas at 64.83 and 152.30, respectively.

Sailpoint Technologies (SAIL) has continued to move to all-time highs, such that only pullbacks to the rising 20-dema, now at 26.02, would offer lower-risk entries from here.

Twilio (TWLO) is near-term extended. Pullbacks to the 10-dma have been buyable, but the most opportunistic approach would be to look for a pullback into the 20-dema at 55.50 as a lower-risk entry given the stock’s extended uptrend.

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.

So far, it’s been a good week for a broad number of my favorite long ideas. That said, things are getting a little bit frothy here, and with few things in the most optimal of lower-risk entry positions on their charts, laying back here perhaps makes sense.

My own preference, as always, is to sell into extended strength and then look to buy back shares on a constructive pullback. For me, that remains my primary modus operandi. Thus, I wouldn’t mind seeing the market pull back a little bit here, as that would help bring favored names into lower-risk entry positions, and that is my primary concern for now.

While the indexes could correct more deeply from here, assuming they’re even in the mood for a nice correction, it still remains a matter of focusing on the individual stock set-ups. For now, most of my favored names are extended, so I am willing to patiently wait for the right pullbacks to buy into. No hurries, no worries. Play ‘em as they lie!

Gil Morales

CEO and Principal, Gil Morales & Company, LLC
Managing Director and Principal, MoKa Investors, LLC
Managing Director and Principal, Virtue of Selfish Investing, LLC

At the time of this writing, of the stocks mentioned in this report, Gil Morales, MoKa Investors, LLC, Virtue of Selfish Investing, LLC, and/or Gil Morales & Company, LLC held no positions, though positions are subject to change at any time and without notice

Gil Morales & Company, LLC (“GMC”), 8033 Sunset Boulevard, Suite 830, Los Angeles, California, 90046. GMC is a Registered Investment Adviser. This information is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to GMC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Gil Morales & Company, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.