The Gilmo Report

June 14, 2017

June 14, 2017

Things got quite oversold Monday morning as the indexes opened lower amidst continued heavy selling in the tech sector. I tweeted early in the day that an oversold bounce was becoming more likely. At the time, this was showing up on the 5-minute “620” intraday charts in the form of MACD “stretch & cross” types of moves.

That’s the first thing I look for when things start to get oversold, and it may in some cases coincide with undercut & rally types of set-ups on the long side. By the close on Monday, the oversold bounce had come to full fruition once the NASDAQ Composite Index had cleanly undercut the late May low.

That triggered a short rally that ran out of momentum today as the index churned around the 20-day moving average on lighter volume. The action following the Fed policy announcement was quite wild, with the NASDAQ selling off over 60 points before finding its feet to close -24.75 to the downside, or -0.43% on lighter volume. This avoided a distribution day, but a number of big-stock NASDAQ and tech names were knocked off their highs, giving the underlying action a bit of a black eye.

 

GR061417-$COMPQ

 

The Fed’s hawkish tone, even after they announced a 25-basis-point interest rate increase, put a floor under financials, which initially sold off but then recovered into the close. This had the effect of helping to stabilize the S&P 500 Index, which held above its 10-day moving average on higher volume.

 

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Strength in financials also added support to the small-cap Russell 2000 Index, as the daily chart of its close proxy, the iShares Russell 2000 ETF (IWM), shows below. The index sold off after the Fed meeting but rallied off the 10-day line to close mid-range on much higher volume.

 

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While Friday’s tech sell-off may be viewed as a function of healthy rotation, there wasn’t much coming through my screens that would be indicative of robust new leadership. Financials were cited by some as one area of potential new leadership, but for the most part these stocks are all just stuck in wide-ranging bases.

The SPDR Sector Select Financial ETF (XLF) is attempting to come up the right side of its current base as it makes a bid for a test of the prior March highs. Overall, the action today seemed a bit incoherent, with the financials perhaps exhibiting the most coherent action based on the idea of a hawkish Fed.

 

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While the pundits declared Friday’s tech wreck over and done with as techs allegedly staged a rebound over the past two days, frankly, I didn’t see it. Most of the action struck me as just natural reaction bounces after things got brutally oversold.

In some cases, as with Netflix (NFLX), there hasn’t been any oversold bounce. The stock remains stuck below its 50-day moving average. In the process the stock has failed on three straight undercut & rally attempts back up through the mid-May low. While I suppose NFLX could magically rebound back above its 50-day moving average and recover in a successful undercut & rally move, for now it looks more like a short every time it rallies above the 50-day line.

 

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Apple (AAPL) also remains quite weak as it can’t even muster a rally back up to even its 50-day moving average. It tried to move higher today, but reversed hard on above-average volume. This one also looks like a short on rallies up toward the 50-day line.

 

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Facebook (FB) also presented itself as a short-sale candidate today as it ran into resistance at its 10-day moving average and reversed. That took it back below its 20-day exponential moving average on higher and above-average selling volume.

So far FB is looking like a late-stage breakout failure type of situation, which would be confirmed by an eventual breach of the 50-day moving average. So far that hasn’t happened, but it could if the general market, particularly the NASDAQ, gets into further trouble. All I know for sure is that this looks more like a short than a long. And if I did want to view FB as a long, I would need to see it stabilize and set up along one of its moving averages first. Not that it couldn’t magically turn back to the upside and back to new highs, but the current evidence should make one wary.

 

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Amazon.com (AMZN), not shown, looks a little bit like FB in that it also reversed at its 10-day and 20-dema lines, but on about average volume. As with FB, I would need to see this settle down and set up again in a lower-risk position, preferably along one of its major moving averages.

I would also have to throw Alphabet (GOOGL) and Microsoft (MSFT) both not shown here on charts, into the same boat as AMZN and FB. Both stocks ran into resistance at the 10-day and 20-day exponential moving averages, which puts them in at best unclear but compromised positions. And both were shortable today at their 10-day lines, as were AMZN and FB.

Nvidia (NVDA) acts better than the rest, although marginally so, as it continues to hold above its 10-day moving average. This action comes on the heels of last Friday’s massive-volume reversal off the peak, and looks a little bit wedgy to me. If the general market runs into trouble in the coming days, I would watch for a breach of the 10-dma as a possible short-sale trigger on the stock.

That huge selling off the peak strikes me as an initial wave of distribution in the stock. That doesn’t mean, however, that the stock couldn’t levitate back up to its Friday intraday highs. That’s why I would be inclined to use a breach of the 10-day line from here as a short-sale entry point and then use the line as a guide for a tight upside stop.

 

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Meanwhile, Tesla (TSLA) continues to do what it does best these days, which is munch away on the shorts. Even when the stock posts an ugly outside reversal to the downside as it did on Friday, the shorts can’t get a break! TSLA found support at its 10-day line on Monday and has since launched to all-time highs, thanks to a nice analyst upgrade yesterday with a corpulent $464 price target.

Notice, however, that the stock churned around in a relatively narrow range today on heavy volume, which indicates that sellers were busy meeting buyers. This could set up a pullback from here, which means I’m not a buyer at these levels.

 

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The big-stock NASDAQ names remain a messy affair, and I don’t see any of these names that I’ve just discussed as lying in lower-risk entry positions on the long side. They either settle down and set up again, or they may simply morph into short-sale targets in the event of any further general market weakness.

While financials are an area of strength, will it be possible to make big money with this sector of the market alone? The other thing nagging me a little bit today was the fact that financials allegedly rallied on the hawkish tone of the Fed. After all, higher interest rates are seen as a positive for the financials.

But bonds didn’t agree with this assessment and rallied hard on the Fed announcement. Gold, however, did agree, as the SPDR Gold Shares (GLD), not shown, reversed hard on heavy selling volume. In general, the long side of this market presents something of a conundrum.

Chinese names, and the Gilmo China Five in particular, have weakened considerably recently, with the exception of Alibaba (BABA). So far the stock has been able to hold above the 135.21 intraday low of last week’s buyable gap-up (BGU) move. This puts it in a low-risk entry position using the 135.21 low as a tight selling guide.

 

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But meanwhile we see Weibo (WB) breaking below its 20-day moving average on light volume, which might set up an undercut and rally move, so that can be watched for. In this case, we would be using the 72.29 low in the base as our reference point, such that a rally back up through that price level would trigger a U&R buy set-up using the same price as your selling guide.

Otherwise, maximum support lies at the 69.54 intraday low of the mid-May buyable gap-up (BGU) following earnings. WB remains in flux, obviously, but as it pulls down on very light volume it may be one to keep an eye on if the general market stabilizes.

 

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Notes on other “China Five” names:

JD.com (JD) looks like a short on rallies up to the 10-day and 20-day moving averages, as it was yesterday and today. The stock failed on a breakout from a short flag formation last week, and looks primed to test the 50-day moving average from here. For now, it looks more like a short than a long.

Momo (MOMO) remains trapped below its 50-day moving average, and has been unable to rally above the line all week long. In fact, it has been shortable at the 50-day line, using the line as a guide for an upside stop. MOMO is also a recent breakout-failure situation, and cannot be considered a long in its current chart position.

Netease (NTES) has moved lower since failing on a standard-issue base breakout attempt last week. Today it closed just below its 20-day exponential moving average, but on light volume. Perhaps it can stabilize here, but attempting to go long the stock would necessitate keeping a very tight stop since the 50-day line looms some 14 points lower. Overall, though, NTES looks weak.

It’s still not quite lights out for Lumentum Holdings (LITE) following last Friday’s big-volume reversal. On Monday, the stock found support at the 20-day exponential moving average as selling pressure failed to materialize and then rebounded back up to its prior highs. That’s where the stock ran into resistance yesterday, but today was able to stabilize and hold at the 10-day moving average with volume drying up to -25% below average.

That doesn’t qualify as “voodoo” action, so I don’t consider LITE to be buyable in this position. I’d prefer to see another successful test of the 20-day exponential moving average on light volume as a better entry point. This assumes, of course, that the stock doesn’t’ come apart altogether in the event of any continued tech sector weakness.

 

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Applied Optoelectronics (AAOI) remains as weak as it looks en route to its 50-day moving average with selling volume picking up today. This also takes it down to the top of its prior base around the 60-price level, which could offer some support for the stock.

A failure at the 50-day line would simply morph this into a short-sale target at that point. The main point here is that we have another high-flying leader turning into a chocolatey mess in short order over the past four days, and it needs to find support somewhere around here soon.

 

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I don’t see all that much that I find compelling on the long side currently, and several names have been removed from my long watch list and placed on my short-sale watch list over the past few days. Notes on those I consider worthwhile, either long or short, are below, some with charts, some without:

Activision Blizzard (ATVI) – bounced back above the 20-dema today and ran into resistance at the 10-day line. Certainly, not a buy here, but could morph into a short on a breach of the 20-dema.

Arista Networks (ANET) – bounced back above the 20-dema and is trying to hold the line with volume declining. No lower-risk entry here however.

Edwards Lifesciences (EW) – holding along its 20-dema with volume declining. This would have to hold as support, otherwise a test of the 50-day line way down at 107.81 could be next.

Electronic Arts (EA) – holding along the 20-dema in a short bear flag after breaking hard off the peak last Friday. This could be morphing into a short-sale target here using today’s high at 111.11 as a tight stop. This could go either way, however, and will likely depend on the state of the general market from here.

 

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Impinj (PI) – holding at the 10-day moving average in a very deep V-shaped position. Not buyable here given the funky pattern.

iRobot (IRBT) – posted a new all-time high today but churned around to close in the lower half of its daily trading range. While not a short, it’s also not in a buy position. In fact, if I happened to own this one I’d be selling here and bagging my profits.

Palo Alto Networks (PANW) – this looks like a short here, using the 200-day line at 134.74 as a tight upside stop. The flip side, however, is that the stock did find support at its 20-dema on Monday and despite finding resistance at the 200-day line over the past two days is back above the 133 intraday low of the prior bottom-fishing buyable gap-up (BGU) of nearly two weeks ago.

So, there are two ways to play this, and I would key off the general market action to help determine which way might work out the best. That can also be the case for many of these stocks that are trying to hold along their 20-demas.

 

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Salesforce.com (CRM) – rallied back up into the 50-day line today and closed six cents higher on light volume. This may be a short here using the 50-day line plus 1-2% as a tight upside stop. Watch other cloud names as possible sources of confirmation.

ServiceNow (NOW) – in a short bear flag with resistance along the 20-dema. This looks shortable here using the 20-dema as a guide for an upside stop. However, notice that NOW continues to find support along the $100 Century Mark, so this could also be a two-sided affair that will play out depending on how the general market plays out in the coming days.

 

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SolarEdge Technologies (SEDG) – acting surprisingly well, but extended on the upside.

Square (SQ) – extended, but running into near-term resistance at the 10-dma. Nothing to do here either way.

Sunpower (SPWR) – holding tight along the 10-day line as volume declined to -56% below average today. This puts the stock in a lower-risk entry position using the 10-day line as a tight selling guide.

 

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Take-Two Interactive (TTWO) – holding along its 20-dema, but in a compromised position. A break below the 20-dema could trigger a short-sale entry.

Universal Display (OLED) – holding support at the 20-dema as volume declines. Could remain viable if it can settle down along the 20-dema.

Workday (WDAY) – like CRM and NOW, it is holding along its 20-dema but just below the $100 Century Mark. I see this as a short on any rallies up toward the $100 price level.

Zillow (Z) – acting well but extended on the upside.

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).

No doubt about it, this is a messy market at best. I can see any number of the names I’ve discussed in this report panning out on the long or short side given their current chart positions. How these play out, however, will likely depend heavily on what the general market does from here. More weakness in the tech sector will certainly see many of these names break down further.

 

Meanwhile, the massive sell-off in techs last Friday was a classic example of how this market likes to pull the proverbial rug out from under investors just when things look their best. That keeps one constantly looking back over one’s shoulder, listening carefully for the footsteps of the selling algos creeping up on them.

In most cases, I think leading stocks have already forced investors mostly into cash at this point. That’s certainly where I am, and where I will remain (or on the short side) until I see something more concrete emerge in an otherwise very messy market. Take it from there.

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. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.