The Gilmo Report

June 2, 2016

June 2, 2016

The indexes have been trying to pull back over the past few days, but so far the S&P 500 and the NASDAQ Composite Indexes have been able to hold up within 1% or so of their recent highs. The S&P 500 has been tracking tight sideways for the past four trading days, and today managed to log its highest closing high of 2016.

Volume was light ahead of tomorrow’s Bureau of Labor Statistics’ monthly jobs number, and sellers did not seem all that interested in exiting en masse. Another day this week where the indexes start out on the downside and manage to make up ground by the close.

 

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The NASDAQ Composite Index has diverged a bit from the S&P 500 in that it has decided to simply inch its way higher every day since plowing through the 50-day line seven trading days ago. It also logged a new absolute high for 2016. Both the S&P 500 and the NASDAQ Composite remain below their 2015 highs.  The action as the indexes push higher on lighter volume might argue for a pullback. However, that argument could have been made over the weekend, and so far this week the market has been reluctant to pull back much other than on an intraday basis.

As usual, it all comes down to what is happening with individual stocks, and on balance that looks quite constructive.

 

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The precious metals continue to languish well below their respective 50-day moving averages, but Silver Wheaton (SLW) apparently refuses to give up the ghost. As the precious metals ETFs have slopped around along their near-term lows over the past several days, SLW has held its 50-day moving average. In the process of holding tight along its 50-day line, SLW has seen volume dry up to “voodoo” levels. Today’s volume came in at about -51.1% below-average.  Thus the voodoo action is suggesting that the stock might want to move up and off of the 50-day line.

Tomorrow morning’s jobs number might have some influence on what the metals and SLW do from here. But there might be some permutations on exactly how this plays out. An in-line jobs number might confirm a Fed rate hike in June or July, but the market might see that as another one-and-done type of situation. This could trigger a rally in the precious metals. A weak number would probably do the same, whereas a very strong number might cause the market to consider that one-and-done might not be the right description for future Fed moves.

 

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In any case, ultimately it all comes down to the action of the stocks, and right now SLW appears to be arguing for a rally. If so, then we might also see the precious metals ETFs rebound from the depths of their recent pullbacks. Something to watch for tomorrow. Alibaba (BABA) got hit again with negative news, this time on an announcement by Softbank (SFTBY) that the bank would be unloading $7.9 billion worth of stock. BABA’s management countered by announcing they would buy $2 billion worth of that from SFTBY.

That purchase was actually priced at $74, just above the 200-day moving average at 73.95. Amazingly, BABA has held well above that, closing today at 77.30. In the process it looks to be attempting to stabilize after yesterday’s heavy selling. BABA’s purchase of SFTBY’s stock still leaves $5.9 billion, or about 75 million shares, of stock left for sale. Some of this has been absorbed by other buyers in private offerings, also priced at $74 over the past couple of days. By my tally, which is by no means complete, it appears to be close to $1.4 billion worth of stock.

If SFTBY’s sale of the rest of the stock that has not so far been accounted for occurs in an orderly manner and at prices similar to what have already been agreed to with other buyers, BABA could head back to the upside. I consider this a fluid situation, but one that should probably be monitored on the basis that the current weakness could provide an interesting buying opportunity.

 

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The cloud/enterprise software names have remained a relatively strong “wolfpack,” even in the face of a down market or gap-down reactions after earnings reports. The latest of the cloud names that I’ve been following to announce earnings, Workday (WDAY) reported their numbers Tuesday after the close. This led to an initial after-hours gap-down move that took the stock down nearly 10%.

By Wednesday’s open WDAY was back up, printing 74.50 at the bell. It then pulled down to test the 200-day line and proceeded to move higher for the rest of the day to close at 77.38. The net result was a pocket pivot off all of the major moving averages that I follow. This put it in a buyable position right at the 10-day moving average this morning. WDAY then rallied for the rest of the day and closed at 78.18 one penny off of its peak price. I view pullbacks to the 10-day line at 76.42 as your lowest-risk entry opportunities.

 

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Splunk (SPLK) has been relentless since finding support at the lows last Friday and flashing a huge-volume reversal pocket pivot off of the 20-day moving average. My timely blog post that morning hopefully brought some members into the stock down in the 52-53 price area.

SPLK has continued to trek higher since then, posting its 13th straight up day in a row today on volume that was well above average. SPLK can be a volatile stock on an intraday basis, so any pullback that ran into the rising 10-day line, currently at 55.12, should be watched for as a potential secondary entry opportunity. As one member put it in a recent blog comment last Friday, SPLK is one “spicy meatball.” I’m certainly not one to argue with that assessment as it has become even spicier so far this week.

 

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I blogged in my Tuesday after-hours Market Wrap post that ServiceNow (NOW) had flashed a pocket pivot off the 10-day line that day. That was the second pocket pivot along the 10-day and 20-day moving averages over the past nine trading days. The stock followed up yesterday with a five-day pocket pivot signature as it pushed above the 200-day moving average. From here you want to watch for pullbacks into the 200-day line at 71.03 as potential lower-risk entry opportunities.

 

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I mentioned another, much smaller cloud name, Zendesk (ZEN) in the same Market Wrap blog post wherein I mentioned NOW. I was also pleased to see that one member actually picked up on the minor pun of “NOW and ZEN.” As I see it, if you have to write about the market, you might as well have a little fun with it! ZEN was quite buyable yesterday morning, and the stock dutifully launched higher. I also noticed a few other small cloud-type names rocketing along with ZEN yesterday, including Netsuite (N) and Hubspot (HUBS).

Clearly, the clouds are on fire now. But the initial signals were there last week as I indicated in my Wednesday mid-week report over a week ago.

 

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I should note that both N and HUBS broke out yesterday on heavy volume and look somewhat extended at current price levels. Their moves, as well as ZEN’s, might be attributable to the actions of our next cloud name on the docket for discussion. Salesforce.com (CRM) bounced off of its 10-day moving average on Wednesday after announcing it was buying another cloud name, Demandware (DWRE). The stock then settled back into its 10-day moving average today. The buyout sent a number of other smaller cloud names flying to the upside.

The pullback does bring CRM into a secondary buy position, with the idea that it should hold the 10-day line at 82.77. At the very least it should hold above the 20-day moving average at 80.38, which is just above the intraday low of its prior buyable gap-up. The reality is that while CRM has edged higher since its BGU, it really hasn’t moved significantly higher. Thus it could simply be pausing here at the 10-day line in what is so far a five-day consolidation and pullback in anticipation of higher highs to come.

 

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I blogged this morning that, among the cloud names I like, Citrix Systems (CTXS) appeared to be buyable at its 10-day moving average, along with WDAY. That turned out to be somewhat prescient as the stock bounced off the line on above-average buying volume to log a new closing high. CTXS has been a little squirrely lately, what with the break down to the 10-day line six trading days ago that came on very heavy selling. Something like that can throw you, but as I wrote this past weekend, if it could stabilize and hold the 10-day line it was still in a buyable position.

Volume on CTXS came in today at 25.1% above-average, which I suppose makes it a buyable breakout using the 10-day line at 84.57 or the 20-day line at 83.76 as nearby selling guides. However, the trick was to buy shares this morning per my blog post at the time.

 

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The parade of cloud stocks on fire continues with Adobe Systems (ADBE). ADBE should also be watched here as it flirts with the $100 Century Mark for the first time in its existence. The stock is holding tight just above the 100 price level as it approaches its earnings report, which is expected to be June 21st. Today’s action saw the stock pull in early in the day, but with volume coming in at -30.2% below average, it was a buyable pullback. The stock ended the day back above the 100 price level.

I suppose one could look at the stock as being buyable here based on Livermore’s Century Mark Rule, but it hasn’t really pushed decisively through the 100 level. On the other hand, the 10-day line at 98.78 or the 20-day line at 97.73 offer very convenient and nearby selling guides. Thus one could buy shares here in an attempt at playing for a more decisive upside move that might occur in the next few days.

 

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Both Facebook (FB) and LinkedIn (LNKD) looked to be revving up for moves to higher highs, but it was LNKD that stole the show on Tuesday. On that day the stock blasted out of its May price range on heavy volume. LNKD has since held tight sideways as volume has gone “voodoo,” coming in at -59.1% below-average today. This keeps it more or less in a buyable position, although yesterday’s pullback to the 132 level, near Tuesday’s breakout point, was the most opportune entry point.

Nevertheless, the stock remains buyable on any pullbacks to 134 or better, as I see it. This remains well in range of the roughly 132 breakout point at the top of the prior range. Note that one could actually have built a position in LNKD using the pullbacks into the 20-day line in May as lower-risk entry points. An interesting example of a stock where a position-building strategy could work.

LNKD certainly offers an interesting example of a stock that has presented orderly buy points on the way up over the past month.

 

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Facebook (FB) appears to be the laggard between the two big-stock social-networking plays that are still acting well. However, all it is doing is moving tight sideways along what is now the confluence of its 10-day and 20-day moving averages. The trick here has been to be patient and look to buy the pullbacks into the moving averages. In practical terms, however, the stock has more or less remained in a 1% price range for the past two days. So unless 1% means a lot to you, the stock is pretty much buyable anywhere along the 10-day and 20-day moving average confluence.

Volume dried up to -52.3% below-average today, which is constructive ahead of tomorrow’s jobs number. This may be approaching a point where a breakout is imminent.

 

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Amazon.com (AMZN) remains one of my big-stock favorites on the long side. While I’ve been willing to entertain it as a possible short IF the general market were to fail to the downside and IF the stock broke down through the $700 price level and its 20-day moving average, it has nevertheless proven out as a decent long idea.

As I wrote over the weekend, AMZN “has proven itself to be resilient as one of these leaders as it holds along its 10-day moving average with volume drying up.” Today AMZN cleared to a new all-time high on below-average volume, but I would look to be opportunistic on any pullbacks into the 10-day line at 710.82.

 

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I’m starting to see the cyber-security names be another technology-based wolfpack type of situation. Over the weekend I surmised that Palo Alto Networks (PANW) was in position for an undercut & rally move. As I wrote: “It [PANW] is now testing its prior May low which could set up some sort of undercut & rally move. This in turn might reinforce some upside impetus in CYBR, FTNT, and FEYE, but that is not entirely clear right now.”

Here we see PANW rallying sharply after the undercut of its prior 128.51 May low. The stock pushed just below that point, hitting a low of 128.25 on both last Friday and this past Tuesday. I was happy to see that one member was actually right on top of this, buying the stock at those levels. In this market, undercut & rally set-ups, which are also in the same category as Wyckoff’s “spring” and Livermore’s Shakeout-Plus-Three, are valid buy set-ups.

 

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That situation became much clearer on Tuesday as CyberArk Software (CYBR) flashed a big pocket pivot at the 200-day moving average and has since cruised higher. Right now I would consider it the leader of the pack, with the others looking to keep up.

CYBR was buyable on Tuesday after flashing a pocket pivot, as I noted in my after-hours Market Wrap blog post of that day. The stock has since continued higher and is now quite extended. Only a pullback into the 10-day line at 44.27 would offer a reasonable entry point, but the line may need to move higher first. That’s something to watch for.

 

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Fortinet (FTNT) has also cleared its 200-day moving average after finding support at the 10-day moving average last Friday. On that day, like the rest of the cyber-security names, FTNT sold off early in the day in sympathy to PANW, but the stock found support at the line and closed back above the 200-day line. This is probably buyable here using the 10-day line at 34.11 or the 200-day line at 33.72 as selling guides. My preference would be to look for a pullback to one or the other as the most opportunistic entry points.

 

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I’ve also felt you could throw FireEye (FEYE) into the mix of cyber-security names coming to life as it works its way back up through the 50-day moving average. The stock is now up ten days in a row. Seven trading days ago we can see that FEYE also had a big-volume bottom-fishing pocket pivot coming up through the 20-day moving average. That move probably could have been bought as the stock tracked tight sideways or the past several days.

Now with the stock sitting above the 50-day line, I consider it buyable here using the 50-day line at 16.31 as a reasonably nearby selling guide. If the group keeps moving I think the stock has a chance at eventually getting to the 200-day line. Overall, I like the action in the cyber-security name as they attempt to come back to life. Cyber-security and the cloud strike me as reasonable, potential thematic drivers for leading stocks IF the general market rally continues.

 

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Mobileye (MBLY) flashed an odd, big-volume pocket pivot on Tuesday, which I noted in my after-hours Market Wrap blog post that day. While the volume was anything but subtle, the pocket pivot was somewhat quiet. Nevertheless, the stock has continued higher and today posted a range breakout on a big-volume pocket pivot move. Obviously, one had to buy it Tuesday or Wednesday on the basis of the pocket pivot mentioned in my blog post.

Now as it approaches the 200-day moving average I’m interested to see how any resistance and potential pullback from the 200-day line might develop. Something to watch for, but hopefully anyone who owns this got in on Wednesday, at the latest.

 

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I’ve been trying to decide whether MBLY and Tesla Motors (TSLA) represent some sort of cousin-play, but I suppose ultimately that is not all that necessary. What I do notice about TSLA is that it has pulled back in voodoo fashion today with volume coming in at -63.7% below average.

While the stock has dipped below all the major moving averages that I track, the undercut of all those lines on extreme voodoo volume levels is interesting. Thus it may be considered opportunistically buyable here using the 212-215 price areas as a maximum downside selling guide.

 

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After-hours as I write I’m noticing both Ambarella (AMBA) and Broadcom Ltd. (AVGO) gapping up. This could set up buyable gap-ups tomorrow morning, so I’ll be watching both of these stocks closely at the open.

Below are my current trading journal notes regarding other long ideas discussed in recent reports that I consider to remain viable:

Activision (ATVI) is holding right at the 10-day line, which brings it into a buyable position using the 20-day line at 37.91 as a nearby selling guide.

Electronic Arts (EA) has held tight along its recent highs in the 76-77 price area as volume dries up today to -42.7% below average. This could be a buyable set-up here, but I would feel more comfortable picking it off on a pullback to the 10-day line at 75.09.

Fabrinet (FN) pushed to new highs today before reversing on above-average volume. The stock was quite extended from its 10-day line at that point, however, and resistance at the prior early-May peak is quite logical. Pullbacks to the 10-day line at 34.27 would present your best near-term, lower-risk entry opportunities.

Maxlinear (MXL) remains slightly extended from its prior breakout point along the 19 price level. Would look at pullbacks to the 20-day moving average at 19.38 as a reasonable entry opportunity. However, any pullback under the 20 level would bring the stock well into buying range of the prior breakout through the 19 price level.

Silicon Motion (SIMO) is still in an extended position and pullbacks into the 10-day line at 43.36 or the 20-day line at 42.37 can be watched as possible lower-risk entry points.

Weibo (WB) has become quite extended from its original buy point of two Monday’s ago as I blogged at the time. The stock has had a better-than-10% move from there and can be watched for a buyable pullback into the rising 10-day moving average, currently 24.63.

Yirendai Ltd. (YRD) is well extended at this point, but seems to confirm that small Chinese names are in favor here while bigger-cap names like Baidu (BIDU) and Alibaba (BABA) run into near-term difficulties.

One aspect of this market that strikes me currently is the number of nice-looking long set-ups I’m seeing. To some extent it is almost like being a kid in a candy store. Most of these, of course, are not standard breakouts, but that is consistent with our approach whereby we augment breakout buys with less-orthodox buy points, such as roundabout and bottom-fishing pocket pivots, undercuts and rallies (which include shakeout-plus-three and “spring” types of set-ups).

Outside of what I’ve discussed in this report, set-ups and breakouts have been seen in names like NUVA, CYNO, MDN, YELP, GIMO, VMW, DATA, HUBS, N, MDVN, DGX, IBKR, MDT, ISRG, BSX, CBM, DGI, DHI, EBIX, INGR, MNST, JPM, TWOU, and WOOF. Some of these I’ve also discussed in recent blog posts. Look harder and you probably can find more.

As I wrote over the weekend, it is fairly clear that we have enough to work with in terms of long ideas in this current environment. The trick is in figuring out which of these have “big stock” potential. In a non-trending market, however, this may be less important that finding profitable set-ups that can be traded for decent 10% moves or better.

Today’s ADP jobs report indicated some very slight softness, coming in at 173,000 versus expectations of 174,000. We might expect tomorrow’s jobs number to be similarly weak, although with all the statistical massaging that goes into the Bureau of Labor Statistics work in this area you never quite know for sure.

Either way, tomorrow’s jobs number could create some opportunities on an intraday basis. Thus we want to remain mindful of our set-ups and where our watch list stocks are in the event of any early morning pullback. Just remain focused on the individual stock set-ups and 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 a position in FB, FEYE, and WDAY, 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.