The Gilmo Report

June 17, 2018

June 16, 2018

The market uptrend remains intact, despite a sell-off on Friday, thanks to news that the Trump Administration was moving forward with $50 billion in sanctions on Chinese goods and services. The indexes gapped down at the open, but eventually found support around mid-morning before rallying to close near the intraday highs.

The NASDAQ Composite Index illustrates this with a close near the highs of its daily trading range on heavy triple-witching options expiration volume. In my view, triple-witching volatility combined with a news excuse to sell helped create a bit of a shakeout type of day.

 

GR061718-$COMPQ

 

The S&P 500 Index also closed well off its lows on Friday as volume spiked in typical triple-witching options expiration style. Overall, the action didn’t seem all that deleterious. In fact, given just how frothy things had gotten on Thursday, a little bit of a pullback was more than expected. The idea, of course, is that we want to use pullbacks as possible entry/re-entry opportunities in favored stocks, so we remain focused on the stocks first, and the indexes second.

 

GR061718-$SPX

 

Apple (AAPL) is beginning to flounder a bit here as it dips below its 20-dema on heavy volume that was obviously due to triple-witching options expiration. It’s possible that this is triggering a short-sale entry right here at the 20-dema, and this can be tested while using the 20-dema as a stop on the upside.

Notice also, however, that the stock is dipping below the low of six days ago on the chart. This could also trigger an undercut & rally move if the stock is able to regain the 20-dema and move back above that low, which is at 189.77. So, while the breach of the 20-dema can be played as it lies, i.e. as a short entry trigger, a move back above the 20-dema could reverse the situation and bring AAPL back into play as a long. Play it as it lies!

 

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As AAPL wavers a bit, Alphabet (GOOGL) appears to be setting up in a cup-with-handle formation. It finished Friday at the highs of the two-week handle and along its 10-dma. Moves down to the lows of the handle and the 20-dema perhaps would offer better entries, although we can see that the stock posted a pocket pivot in late May on a low handle breakout. Otherwise, watch for a breakout.

 

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I find it interesting that Amazon.com (AMZN) just keeps drifting higher on light volume, and seems to be very reluctant to give up much in the way of downside off the peak. The stock held relatively tight on Friday amid a storm of heavy options expiration selling, but remains away from any lower-risk entry positions. I still prefer the 20-dema down at 1661.43 as a lower-risk entry that is more of the opportunistic variety.

 

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Nvidia (NVDA) can be interpreted as a recent breakout from a high handle that has pulled into the 10-dma. The stock remains within buying range of this breakout, so is actionable here, using the 10-dma, 20-dema, or the O’Neil style 7-8% on the downside as your selling guides. However, keep in mind that I consider a 7-8% downside stop to be somewhat anachronistic and inefficient.

 

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Facebook (FB) is within buying range of a recent cup-with-handle breakout that occurred on a pocket pivot signature rather than the standard 50% volume increase that is required by the O’Neil orthodoxy. However, the real buy point was on the voodoo pullback to the 20-dema last week.

Nevertheless, this remains within buying range of the breakout. Also keep an eye on the $200 Century Mark as the stock gets to within 2-3% of that price level. A move through there could trigger Livermore’s Century Mark buy rule, so is certainly something to watch for.

 

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Speaking of Century Marks, Netflix (NFLX) made a run for the $400 Century Mark on Friday but fell short, reversing to the downside on heavy options expiration volume. The stock had already posted a continuation pocket pivot at the 10-dma on Wednesday, was already extended at that point. This should be watched, however, for a move through the $400 price level as a trigger for Livermore’s Century Mark buy rule.

The flip side of Century Marks, however, is that they can also serve as high-water marks for a leading stock that fails to clear the specified price level. Thus, if NFLX fails at 400, which it did on Friday, that could bring the stock into play as a short-sale. I’ve seen other big leaders do this sort of thing, such as AAPL did in late 2007-early 2008 at the $200 price level. So, play it as it lies.

 

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I wrote on Wednesday that Tuesday’s gap-up move in Tesla (TSLA) could be treated as “…as a buyable gap-up, buying shares here and using the 338 low of yesterday’s intraday trading range as a tight selling guide.” So far, the stock has followed through on that BGU, and is now testing the highs of January and February. We’ll see if it can clear resistance here, but the BGU from Tuesday worked, and the stock is now extended.

 

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Dropbox (DBX) went from being the dullard of the group to the hot Gilmo stock of the week following Wednesday’s pocket pivot. On Thursday, the stock broke out of its low-base range on a big-volume gap-up move that just kept going. The stock is now about 30% past where it was on Monday morning.

As I wrote on Wednesday, I was getting the sense of steady accumulation of DBX by someone or something along the lows of the range. The stock then caught fire on Thursday, and is now way extended, but the volume levels tell you that this is a serious contender, and should be watched for any buyable pullbacks from currently extended levels.

 

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Nutanix (NTNX) pulled back to the top of its recent base breakout on Friday as volume dried up. The stock was previously buyable along its 10-dma and 20-dema a few days earlier in anticipation of the breakout. This pullback, however, brings it back within buying range of the breakout, using the 60 price level and the top of the prior base as your selling guide.

 

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Roku (ROKU) charged higher on Thursday before finally pulling back a little on Friday during triple-witching options expiration. Buyers had been piling in on Wednesday and Thursday as the stock went near-term parabolic, so the small pullback here is normal and warranted given the prior sharp move. Remember, this was first buyable along the 50-dma nearly a month ago per my prior discussions at that time.

The 10-dma is rising rapidly here, so it will be interesting to see how the stock eventually meets up with the 10-dma. Either the 10-dma catches up to the stock as it holds tight, or ROKU pulls back a little further and sets up again in a lower-risk entry near the line. That’s what you’re watching for at this stage of the move.

 

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Twitter (TWTR) was up 15 out of 16 days in a row as of Thursday, and looked like it was set for 16 out of 17 early Friday morning. But the short-term climactic action finally ran out of gas as the stock reversed on heavy options expiration volume. I would tend to think that the move is over for now, at least on a short-term basis.

Therefore, it is now a matter of seeing how this sets up again, perhaps building a new base. No matter how you slice it, the stock has been on a tear since posting subtle pocket pivots along the 10-dma and 20-dema a month ago. That was the time to begin playing the stock on the long side.

 

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Snap (SNAP) posted a higher closing high on Friday as it continues to edge up toward its 200-dma. For now, the 10-dma at 13.23 would offer a reference for a buyable pullback. This has, however, been a great performer since it was first buyable on the Ugly Duckling U&R set-up around 10.51 nearly a month ago.

 

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Industrials have been having a tough time lately thanks to the tariff tiffs, and this is largely responsible for the relative underperformance of the S&P 500 and Dow indexes. But railroads have continued to act well and have remained buyable on weakness. CSX Corp. (CSX) has been buyable on pullbacks to the 20-dema, and that’s what you saw on Friday. The stock then bounced hard off the 20-dema and back up through the 10-dma on a nice volume pocket pivot move.

 

GR061718-CSX

 

Norfolk Southern (NSC) moved in tandem with CSX, doing almost the exact same thing but slightly undercutting its 20-dema before bouncing hard off the line. It, too, posted a pocket pivot off the 20-dema and back up through the 10-dma. This would make both stocks buyable using the 10-dma or 20-dema as tight selling guides.

My preference, however, would have been to use the pullbacks into the 20-dema as buying opportunities as I previously prescribed. In any case, we also saw a pocket pivot in another railroad, Union Pacific (UNP), on Friday, so the group may be revving up for a strong breakout from here.

 

GR061718-NSC

 

I know this is getting old, but CyberArk Software (CYBR) and Fortinet (FTNT) are still extended and not in what I would consider the most optimal entry points on their charts. CYBR is pulling down toward its 10-dma, but I would still prefer to use the 20-dema at 62.72 as a more opportunistic entry. Same goes for FTNT and its 20-dema, which is now at 62.22, although constructive pullbacks to the 10-dma at 63.61 can also be looked at as potential lower-risk entries.

Palo Alto Networks (PANW) is acting very well following last week’s U&R move off the 50-dma. That carried the stock to all-time highs, where it has become near-term extended, although I did like the supporting action off the intraday lows on Friday. For now, I’m watching for pullbacks to the 10-dma at 206.21 as potential lower-risk entries from here.

 

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FireEye (FEYE) broke below its 20-dema on heavy volume, which takes it out of play as a long idea. For now, I’m only watching for any U&Rs that might develop at the 16.78 low of June 8th or the 16.27 low of May 29th. I would just set alerts at those price points and see if they don’t trigger, at which point I’d watch for any rallies back up through those lows as potential U&R set-ups.

Okta (OKTA) was a stellar performer after I first discussed it as a voodoo buy set-up and then a pocket pivot along the 10-dma back in April. It then went parabolic into early June, and finally got hit with heavy selling volume after reporting earnings last week.

This is, however, starting to look like an L-formation that wants to blossom into a U-formation, completing another Ugly Duckling set-up known as a LUie pattern. What we look for are signs of a turn within the L-formation, and we saw the first of these in the form of a moving-average undercut & rally on Tuesday as OKTA regained its 20-dema.

The stock then held tight along the line for two days, and then on Friday posted a strong-volume outside reversal to the upside that also cleared the 10-dma. From my perspective, this is in play as a potential LUie set-up, using either the 10-dma or 20-dema as reasonably tight selling guides.

 

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Lumentum Holdings (LITE) is also on hold as a long idea after gapping below its 200-dma on Friday. Its action may be related to AAPL, which was reported to have cut its iPhone component orders by 20%. This is significant in my view if it is true, and so far, the market seems to be saying that it is. Thus, I move LITE to my Ugly Duckling watch list for now.

Twilio (TWLO) found support at its 10-dma on Friday, but I would still look for a more opportunistic pullback into the 20-dema at 56.23 as a lower-risk entry point. That said, the stock looks like it may just want to move higher from here as it moves in an ascending pattern. Buying shares up here, however, means using the 10-dma or 20-dema as tight selling guides.

 

GR061718-TWLO

 

Baozun (BZUN) is now drifting below its 10-dma as volume declines. Watch for a move down to the 20-dema as a possible lower-risk entry. There is also the possibility of a dip below the 20-dema that also drops below the 60.20 low of seven days ago on the chart. If that happens, look for a possible U&R to set up along that low and the 20-dema.

 

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Momo (MOMO) is still on fire, and hasn’t given up much as it moves tight sideways but it is way, way extended from its late-May buyable gap-up move. For now, I’m just hanging back waiting to see if a new entry opportunity emerges at some point in the not-too-distant future.

Autohome (ATHM) was one of several stocks that spun out on Friday because of triple-witching options expiration volatility. But all this did was create a buying opportunity in the stock after it held tight at the 10-dma on Wednesday. Friday’s action was the second pocket pivot in six days, this time along the 10-dma.

This comes on the heels of last week’s big pocket pivot bounce off the 20-dema. As I’ve discussed many times before, the proper way to handle ATHM with respect to entries is to wait for a pullback, often one that doesn’t look so appetizing when it occurs. But this is a far lower-risk way to handle the stock vs. chasing it on strength. For now, the most opportunistic pullbacks would occur on any tests of the rising 20-dema, now at 11.26.

 

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Technically, Alibaba (BABA) remains within buying range of its late May base breakout. However, the best post-breakout entry was the pullback last week to the 20-dema and the $200 Century Mark that also coincides with the prior base breakout point. On Friday, the stock showed some supporting action along the 10-dma, which is constructive.

This week we may see the U.S.-China Tariff Tiff ramp up after the U.S. imposed $50 billion of tariffs on China this past Thursday. China has threatened to retaliate, and the U.S. will likely counter-retaliate with another $100 billion in tariffs. This should get things nice and heated up, and so I would watch to see if it creates any opportunistic pullbacks in a name like BABA. This is preferable to chasing strength, and the 20-dema at 203.04 and the $200 Century Mark would serve as my references for near-term support.

 

GR061718-BABA

 

Notes on other names discussed in recent reports:

Carbonite (CARB) sold off Friday and finally broke decisively below its 10-dma. It appears to be en route to a test of the 20-dema at 38.16, so this should be watched for. Again, remember that this thing has had a big move since it was first buyable along the 27 price level back in April, so may need some time to build a new base and set up properly for the next up leg, if it is to occur.

Intuitive Surgical (ISRG) is still sitting just out of range of its recent base breakout, but I would prefer to see constructive pullbacks to the 20-dema, now at 478.59, as lower-risk entries from here.

Square (SQ) remains extended but did find support at its 10-dma. I still prefer the opportunistic approach of looking for pullbacks to the 20-dema at 59.85 as possible lower-risk entries.

Sailpoint Technologies (SAIL) has pulled into its 10-dma, but given the sharp prior move off the lows and up through the 50-dma three weeks ago, I would prefer to look at pullbacks to the 20-dema at 26.35 as lower-risk entries, if I can get ‘em.

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.

Despite Friday’s sell-off on a triple-witching options expiration day, the situation more or less remains the same. Most leading stocks are extended, so we are just laying back waiting for the next pullback entries to show up. Some were to be found on Friday, as I showed in names like CSX, NSC, ATHM, NTNX, etc.

Meanwhile, until further evidence to the contrary, the market uptrend remains intact. I would for some of these big-stock NASDAQ names, such as NVDA, for example, to perhaps develop some upside momentum. In addition, watch to see whether any news sell-offs as the U.S.-China Tariff Tiff perhaps heats up this week. This could create opportunities in industrials, including names like CAT or BA, which got hit hard on Friday.

I’ll be covering some other ideas later this weekend (assuming this report is post before I post my video report), so be ready to have your pen and notepad ready. I was busy traveling this past week, so didn’t have time to put out any video reports during the week, but I’m back in the cockpit, so to speak, and ready to rock once again. Last week was a good one for mostly sitting and not thinking, anyways, except when it came to jumping on breakouts in names like DBX, for example. 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 positions in NTNX 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.