The Gilmo Report

June 20, 2018

June 20, 2018

My last report discussed the idea of using sell-offs related to any escalation of the current U.S.-China Trade Tiff as potential entry opportunities in favored stocks. That strategy worked well on Monday right off the open, but the flavor of the pullback changed slightly on Tuesday. Stocks kept selling off, most of them down to deeper areas of support, such as their 20-dema’s.

In my view, this sort of action creates trading opportunities, but I would also remain wary of where this market is headed from here. Many leading stocks remain extended, and some have become even more extended, although have been quite playable on the long side. Case in point would be Netflix (NFLX), which pushed right up through the $400 Century Mark yesterday on strong volume.

 

GR062018-NFLX

 

The move was helped along by one analyst reiterating a $420 price target, while another, somewhat bolder analyst set a $500 price target for the online streaming-content juggernaut. That was playable on the long side at the point of impact, which was right at the $400 Century Mark price level, and the stock cruised right through that, trading even higher today before hitting a peak at $419.47 and then rolling in about 3 bucks into the close.

Facebook (FB) also put on its own Century Mark show today when it pierced the $200 price level for the first time in its history. As with all such long set-ups based on Jesse Livermore’s Century Mark Rule, that was actionable at the point of impact when it crossed 200. The stock closed the day just 1% above 200, but technically remains buyable here using the 200 price level as a tight selling guide.

 

GR062018-FB

 

Pockets of strength among tech names like NFLX and FB have helped to keep the NASDAQ Composite buoyant. This buoyancy can be observed on the daily chart of the index. We can see that over the prior three trading days, there has been a pattern of selling off at the open and then rallying back up near the highs of the daily trading range.

This culminated in a gap-up move this morning to all-time highs. Notice, however, that the index stalled and churned as it sat in new-high price territory on higher volume. Whether this is significant or not, we shall see in the coming days. But things have been getting a bit frothy lately, so this might be the perfect breakout fake-out that ends up pulling in from here. But, in the meantime, all you have to do is watch your stocks.

 

GR062018-$COMPQ

 

As the NASDAQ has pushed to new highs, it has diverged from its NYSE-based brethren, the S&P 500 Index and the Dow Jones Industrials Index. This is due in large part to the greater sensitivity of industrial, agricultural, and other areas of the market that are considered more sensitive and vulnerable to a trade war.

Today the S&P stalled and churned at its 10-dma on lighter volume. This looks vulnerable to further downside from here, but all of this will likely depend on how the current trade tiff rhetoric plays out. Unless, of course, the market is worried about something else.

 

GR062018-$SPX

 

The Dow, meanwhile, reversed into negative territory today. This gave the index its seventh straight down day in a row as volume declined. Buyers just don’t seem interested in Dow stocks, and that’s no surprise given their general vulnerability to a trade war, including names like BA, CAT, and even INTC.

 

GR062018-$INDU

 

One question that has surfaced in my mind is whether all this trade war rhetoric is just a convenient excuse for the phenomenon Bill O’Neil described to me as “alibied selling.” That would be where the trade tiff talk provides an alibi for some heavy selling, and once the news becomes old or is mollified to some degree, the market then rallies.

This rally is then sold into as the market runs into systematic distribution. So far, this hasn’t been confirmed by the price/volume action, but it is something to watch for in the coming days as things have heated up and become somewhat frothy in the near-term.

While big-stock names like NFLX and FB plow through Century Marks, Apple (AAPL), which both manufactures components for and sells its iPhones in China, has taken a hit. As I wrote over the weekend, the stock was shortable on the breach of the 20-dema. It rallied on weak volume right into the line on Monday and then gapped lower on heavy volume yesterday.

Now, the stock is trying to rally back up through the prior 185.10 low in the pattern, and closed today at 186.47. That would technically put it in a U&R long set-up position, using 185.10 as your selling guide. However, I would note that the stock stalled and churned today on light volume, so the move was less than convincing. However, it remains actionable on a concrete basis.

 

GR062018-AAPL

 

Meanwhile, Alphabet (GOOGL) broke out today, but the move stalled and closed near the lows of the day. If one needs to buy this breakout, it is technically still within actionable range. Good luck. Amazon.com (AMZN), meanwhile, was buyable yesterday off the 10-dma, from whence it bounced to make an all-time high today.

Volume was 5% above average, and the stock churned and stalled a bit off the peak. Obviously, this is slightly extended from the 10-dma, but looks like it may have a reasonable chance of retesting the line after stalling today.

 

GR062018-AMZN

 

Nvidia (NVDA) broke below its 20-dema yesterday, but recovered by the close to finish the day back above the line. A little rally into the 10-dma today came on light volume as the stock churned and stalled. It’s possible that this could morph into a short right here, using the 10-dma as a tight stop, and then looking for a breach of the 20-dema to confirm the potential weakness.

For now, NVDA remains above its prior base breakout point, where it found support yesterday, and the 20-dema. But I would watch for a possible breach of the 20-dema since upside volume has been weak here up near the highs, and today’s action looks a bit on the feeble side.

 

GR062018-NVDA

 

Tesla (TSLA) generally becomes a long at the bottom of its price range and a short at the top of that same price range. After the late May undercut & rally set-up down near 275, the stock has had a heck of a run. It is now trying to clear resistance along its prior January and February highs, where it ran into some volume selling yesterday.

CEO Elon Musk has been buying shares and taunting the shorts lately, telling them they don’t have much time left before their short positions blow up. Frankly, I don’t know whether he’s bluffing or not, given his prior track record of making promises he generally doesn’t keep. But we shall see.

For now, TSLA is holding right at and above those prior highs, where it could become vulnerable to some downside. But I would at least need to see a breach of the 10-dma first, since there are no reference points for support beyond that. Nevertheless, the stock has had a nice run over the past month, so a pullback closer to the 20-dema or even the 200-dma would not be out of character for the stock.

 

GR062018-TSLA

 

Twitter (TWTR) bounced off its 10-dma yesterday, but stalled today near last week’s highs on about average volume. It is, however, now up 17 out of 19 days in a row, but looks vulnerable to at least a pullback that would meet up with its rapidly rising 20-dema. Therefore, I’d be looking for that before getting interested in buying shares up here.

Snap (SNAP) finally ran into trouble at its 200-dma on Monday stalling near the line on higher and above-average volume. That led to a gap-down break on Tuesday that found intraday support at the 50-dma on heavy volume. That support did not hold, however, as the stock gapped down again and closed near the 50-dma.

Volume was lighter, but the action doesn’t look promising, even though its current position right at the 50-dma does put it in a lower-risk entry spot. You’d of course want to use the 50-dma as a very tight stop. Personally, I think the nice 30% run from the 10.51 U&R buy point in mid-May is probably it for SNAP, at least for now. But brave souls can try and buy shares here, with the idea of cutting and running quick if it can’t hold the 50-dma.

 

GR062018-SNAP

 

One thing about this market that bothers me perhaps a little, is the extreme froth we’re seeing in a broad number of recent IPOs. Names like BILI, CBLK, DOCU, EOLS, HUYA, INSP, IQ, PS, PVTL, SPOT, ZS, and ZUO have been going nuts on the upside over the past month. This includes one of my favorites, Dropbox (DBX). Between all 14 names, only 3 have any earnings whatsoever.

But who needs earnings? Whatever the drivers here, this sort of speculative froth in so many recent IPOs reminds me of 1999. If you’re long any of these, that’s a tough problem to have, but I would emphasize that this sort action does get my antennae to perk up a bit. Hot IPOs that run up so fast become susceptible to equally fast sell-offs.

In any case, like the rest of this herd of white-hot IPOs, DBX is way extended after a blistering upside move and base breakout. The breakout itself was preceded by two failed pocket pivots and a third that finally worked. That led to a 41% rocket ride in just three days.

Over the past two days, however, DBX illustrates that what goes up can and will come down. Small heater-stocks, as we used to call them, like this, and the rest of the hot IPOs can come in fast and hard, and that’s just what DBX has done. The 10-dma at 34.76 now comes into play as potential near-term support.

 

GR062018-DBX

 

Nutanix (NTNX) found support at its 10-dma on Monday, and then its 20-dema on Tuesday, both days where the indexes gapped down at the open. Today, it didn’t follow through on that support, dipping back into the 10-dma and 20-dema on lighter volume.

Technically, this puts the stock in a lower-risk entry position at the 20-dema and the top of the prior base. However, one would want to keep things tight by using the 20-dema as a tight selling guide. Furthermore, if the stock were to break below the 20-dema, that could trigger the stock as a late-stage failed-base short-sale entry at that point. Play it as it lies.

 

GR062018-NTNX

 

Roku (ROKU) remains on fire as it posted its eighth up day in nine-straight trading days on above-average volume. The stock has gone quasi-parabolic since I first discussed it in mid-April as an Ugly Duckling long set-up, and is extended from its 10-dma. Not much to do here as we wait to see if and how the stock sets up again for a new potential entry.

 

GR062018-ROKU

 

My favorite railroad stocks, CSX Corp. (CSX) and Norfolk Southern (NSC) were both looking good over the weekend, but apparently the Trade Tiff rhetoric has put the kibosh on that. Both stocks now look alike, and the daily chart of CSX illustrates the action in both. After pocket pivot support moves on Friday, both stocks flopped out on Monday and then gapped below their 20-demas Tuesday.

Both CSX and NSC have now closed below their 20-dema for the first time since their respective late April gap-up moves after earnings. Technically, this makes either one shortable here, using their respective 20-demas as tight upside stops. Otherwise, the failure to hold above the 20-demas yesterday and today takes them both off the table as long plays, for now.

 

GR062018-CSX

 

Among cyber-security names, CyberArk Software (CYBR) remains extended after bouncing off its 10-dma yesterday.  Both Palo Alto Networks and Fortinet (FTNT) look similar after finding support at their 20-demas yesterday and then bouncing a little bit higher today.

The daily chart of Palo Alto Networks (PANW) illustrates this current look, and, as we can see, is extended in this position. As is the case for all three of these stocks, pullbacks to the 20-dema remain your best, lower-risk entry spots, when you see them.

 

GR062018-PANW

 

FireEye (FEYE) dipped below its June 8th low at 16.78 and rallied today. This triggers an undercut & rally long set-up here, using the 16.78 low as a tight selling guide given that the stock closed just 21 cents above the low. Play it as it lies.

 

GR062018-FEYE

 

Okta (OKTA) is still stuck in an L-formation, but has so far managed to hold above its 10-dma and 20-dema after yesterday’s spinout that occurred in conjunction with the general market’s gap-down open. The stock tried to push back to the Monday highs today, but stalled to close just below mid-range on light volume.

Technically, this keeps it in a buyable position using the confluence of the 10-dma and 20-dema as tight selling guides. The flip side of this is that a breach of the 20-dema could bring it into play as a short-sale target. That would most likely occur if the general market pulls down in the coming days. Play it as it lies.

 

GR062018-OKTA

 

Sailpoint Technologies (SAIL) found support at its 20-dema yesterday, which presented a lower-risk entry as I’ve prescribed in recent reports. Notice that it also pulled a U&R move as it rallied back up through the 26.14 low of June 8th. The stock then stalled at the 10-dma today as buyers failed to show up. For now, I’d want to see SAIL hold the 26.10 low and/or the 20-dema on any pullbacks from here.

 

GR062018-SAIL

 

Twilio (TWLO) found support at its 20-dema yesterday, which is where one looks for the typical opportunistic buy opportunity. That worked as the stock bounced hard off the lows and closed above the 10-dma. Today it held along the 10-dma as volume declined, but I still prefer pullbacks to the 20-dema as the best, opportunistic entries when you get ‘em.

 

GR062018-TWLO

 

Intuitive Surgical (ISRG) continues to hold up well following its late-May base breakout. The stock stalled and reversed along the 10-dma today on extremely light volume. However, I would look for constructive pullbacks closer to the 20-dema at 481.24 as lower-risk entries. A more opportunistic approach would look for a pullback closer to the top of the base at 472.78 as an even better entry, if you can get it.

 

GR062018-ISRG

 

Baozun (BZUN) was hit hard yesterday at the open, gapping down and breaching its 20-dema early in the day. However, it rallied sharply off the intraday lows to close back above the 20-dema on heavy volume. Today, it regained the 10-dma on lighter volume and is no longer in any lower-risk entry position. Note, however, that yesterday’s move would have triggered a U&R long entry when it popped back above 60.20 of June 7th.

 

GR062018-BZUN

 

Momo (MOMO) finally gave up some ground yesterday when it gapped below the 10-dma on heavy selling volume. That was followed by a weak-volume rally back up into the 10-dma, where the stock stalled and churned. This looks vulnerable to a test of the 20-dema at 49.03, thus I would wait to see what any pullback to the line looks like in real-time if and when it occurs.

Otherwise, the stock remains far too extended from its May late buyable gap-up to present a truly juicy entry opportunity at current levels. It’s possible that this stalling and churning move into the 10-dma makes the stock shortable on a tactical basis using the 10-dma as a tight upside stop, looking for a test of the 20-dema as a downside objective. Just a thought.

 

GR062018-MOMO

 

Autohome (ATHM) stalled at its 10-dma today on higher and heavier volume today. This makes it vulnerable to at least a test of the 20-dema at 112.48. That may be something to watch for as a potential lower-risk entry opportunity.

 

GR062018-ATHM

 

Tariff tiff rhetoric sent Alibaba (BABA) careening to the downside yesterday, but it found support at the $200 Century Mark and the top of the prior base. As I wrote over the weekend, if you’re interested in owning the stock you must absolutely wait for such a pullback. To quote myself, “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.” This remains the case for now.

 

GR062018-BABA

 

Notes on other names discussed in recent reports:

Carbonite (CARB) is hanging along its 10-dma. I’m looking for a test of the 20-dema at 38.52, but as I’ve written previously, the stock probably needs some time to build a new base up here.

Square (SQ) made an all-time high today after bouncing off the 10-dma yesterday. The stock remains well-extended at this point and therefore out of buying range.

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.

As I discussed it might over the weekend, the escalating Trade Tiff rhetoric is having its effect on the general market. It is also having a deleterious effect on stocks that are more vulnerable to the consequences of a trade war. Meanwhile, we’ve seen some frothy, speculative nutzo-runs in hot IPO names, which seems to suggest a bit of a speculative blow-off on a near-term basis.

Whether this indicates that we are going to see further pullbacks in the general market, or maybe even a near-term market top, remains to be seen. Certainly, many leading names remain extended, and some have become even more extended, as in the case of NFLX and ROKU, for example. Thus, it is a matter of laying back and waiting for the next potential entry opportunities on any market pullback. So, don’t chase strength, look for opportunistic entries on pullbacks, and watch your stocks. Easy enough.

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.