The Gilmo Report

June 25, 2017

June 24, 2017

This remains a “Market in LUie Land” as the recoveries in techs and other names that were beaten to a pulp on June 9th continue.  All of these recoveries are occurring as L-shaped “bear flags” morph into U-shape “LUie” formations in defiance of conventional technical analysis. If this were all new to me I might be amazed at the sight of these LUie-type moves. But I myself am all too familiar with this set-up since I first identified it long ago, as most members who’ve been around for at least a little while know.

The biggest LUie formation in this market can be found in the NASDAQ Composite Index, which has been busy turning its own post-tech-wreck sell-off “L” formation into a “U.” Russell Index re-balancing on Friday created huge volume levels for the market, giving the index the look of a powerful 10th-day follow-through on Friday.

Whether you follow the whole follow-through day concept or not is not, in my view, relevant, however. For me, the bottom line is that until the NASDAQ breaks support at the 20-day exponential moving average followed by a breach of the 50-day moving average, the rally remains intact.

While we can go into minute detail about distribution days within the pattern as I showed in my blog post Thursday evening, the true state of the market is reflected in the action of leading stocks. And while many of these broke down with the market on the tech-wreck sell-off of June 9th, most have recovered and set up again. That tells the real market story as I see it.

 

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The S&P 500 Index also saw heavy NYSE trading volume as a result of Friday’s Russell Index re-balancing. This gives the daily chart the look of huge-volume support at the 10-day moving average. While the S&P 500 did fail on a low-volume breakout attempt on Monday, I don’t see any reason why it couldn’t pull a re-breakout at some point in the next few days.

 

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The small-cap Russell 2000 Index, as represented below on the daily chart of its close proxy, the iShares Russell 2000 ETF (IWM), benefited from Friday’s index re-shuffling to close up on the day in a show of support at the 20-day exponential moving average. The index posted a 0.73% gain, leading all other major market indexes. Like the S&P 500, the Russell 2000 also failed on a recent breakout attempt, but it is starting to look like another attempt may be in the offing here.

 

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Financials have lost their luster as the SPDR Sector Select Financial ETF (XLF), not shown, has broken down for four straight days and is now within spitting distance of its 50-day moving average. Meanwhile, bonds continue to rally, and precious metals are attempting to bounce off their Wednesday lows. In my view, all of this is likely signaling that the Fed is one-and-done for the year when it comes to interest rate increases.

As I have discussed before, central banks around the globe, ex the Fed, have been pouring liquidity into the system at a fast pace. This is the wild card that continues to drive the market higher, in my opinion. Even after it takes a licking, it just keeps on ticking higher. All this money needs to go somewhere, so it just keeps sloshing into stocks, which appear to have become the new bonds.

Looking for LUies seems to be the best approach to finding new entries in leading stocks. I theorized in my Wednesday mid-week report that Netflix (NFLX)is setting up as a LUie formation in process as it forms the “L” component here just below and along the 50-day moving average.”

On Friday, the stock pushed back above all its moving averages in a five-day pocket pivot move that came on volume that was below average but much higher than Thursday’s volume. This puts the stock in a lower-risk entry position on the basis of the potential LUie formation using the 50-day line as a tight selling guide.

Note that NFLX is also a type of undercut & rally set-up based on its undercut of the prior 153 low in the pattern from May 17th. So, there are essentially two reasons why this becomes a long here, and given NFLX’s status as the big-stock new-paradigm media play, I would not be surprised to see the stock regain its prior highs at some point in the not-too-distant future in a continued market rally phase.

 

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Amazon.com (AMZN) remains in a buyable position right along the $1,000 Millennium Mark. The action is very tight here as the stock quiets down following a nice LUie-style rally off the 50-day moving average last week. This looks buyable using either the 1,000 price level as a tight selling guide or the 10-day line at 986.91 as a wider selling guide (less than 2% lower).

 

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Nvidia (NVDA) looks a bit troubling here as it dipped below its 10-day moving average on Friday. Volume came in above average, and on the heels of the prior massive-volume reversal off the peak two weeks ago, looks quite weak. For now, I don’t see any reason to get involved with the stock at this point. I would simply wait and see if it settles down and sets up again.

Per my comments in my Wednesday mid-week report, I was looking for the stock to hold tight sideways with volume drying up as a positive attempt at setting up again. Friday’s action has taken that off the table, for now.

 

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Microsoft (MSFT) is another LUie set-up that is starting to show signs of life. On Friday, the stock pushed above the 10-day and 20-day moving averages on a five-day pocket pivot move, which looks constructive. As I wrote in my Wednesday mid-week report, the prior action along the 20-dema as volume dried up was your lower-risk entry point.

The stock can still be considered buyable here using the 20-dema as a tight selling guide. Personally, however, I’ve always considered MSFT to be a boring stock. And I’d have to say that aside for some post-earnings gap-ups, the stock hasn’t disappointed in this regard. But if you like slow-movers, this might be for you. And who knows, maybe MSFT will suddenly launch higher in a frenzied upside move from here! ;-p

 

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Notes on other big-stock NASDAQ names:

Alphabet (GOOGL) popped up and off its 20-dema on Friday as volume picked up but came in below average. As I noted in my Wednesday mid-week report, the stock was holding tight along the 20-dema in LUie fashion with volume drying up. This put it in a buyable position using the 20-dema as a tight selling guide. So far that approach is working.

Apple (AAPL) sits well below its 50-day moving average in an “L-shaped” formation here. I suppose this has a chance of becoming a LUie formation as well, but I would need to see the stock regain the 50-day line at 148.94 to confirm it as such.

Facebook (FB) achieved a new all-time closing high on Friday as it continues to rally within a successful LUie formation after testing its 50-day moving average over a week ago. It is now extended, and pullbacks to the 10-day line at 151.73 would offer your best lower-risk entries.

Tesla (TSLA) posted a new all-time closing high on Friday as it moved up and off its 10-day line, where it was last buyable per my comments in the Wednesday mid-week report. Volume on this breakout is very light, so the stock may simply settle back into spending more time working on a base ahead of earnings which are expected on August 1st.

Chinese names have been a mixed bag since they all jacked to the upside on Wednesday after MSCI announced it would include China A-Shares in its emerging markets index. JD.com (JD), not shown, has kept moving higher, and on Friday posted a new all-time closing high. It is now extended.

Alibaba (BABA), not shown, is also extended after being previously buyable along its 10-day moving average earlier in the week, before the MSCI news. Pullbacks to the 10-day line at 138.87 would offer lower-risk entry opportunities.

Among the internet-related China Five names, Netease (NTES), not shown, remains extended from its re-breakout move earlier in the week. At that time, it was buyable on the move up through the 10-day line, but is now well past the line. Momo (MOMO), on the other hand, may be in a better entry position here along the 50-day moving average.

Per my comments in the Wednesday mid-week report, the stock was buyable at that time along the 10-day and 20-day moving averages. On Thursday, an early-morning sell-off on news related to Weibo (WB) sent the stock back below the 10-day line, but it recovered and closed up on the day as sellers failed to show up en masse.

On Friday MOMO then regained the 50-day moving average on a small upside move as it held in a tight range. Volume dried up to -58% below average, which in my view puts the stock in another buyable position here using the 50-day line as a tight selling guide, or the 10-day line as a wider one. Your choice.

Note that MOMO is working on a type of undercut & rally move after undercutting two prior lows in the pattern. This may indicate that it is about to move higher in a bid to come up the right side of a potential new base.

 

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Weibo (WB) was hit with negative news on Thursday, sending the stock on a decline that took it under two prior lows in the pattern. Later in the day WB confirmed that the People’s Republic of China requested that authorities suspend the company’s video/audio services due to the lack of internet program license.

Apparently, the news wasn’t disastrous, as the stock rallied sharply off the intraday lows and closed in the upper half of its daily trading range. In the process, it also pulled an undercut & rally long set-up as it came back up through the two prior lows at 69.54, the BGU intraday low of May 16th, and 68.76, the low of seven trading days ago on the chart.

WB intends to cooperate with the authorities to come up with a remedy, which I would guess is the likely outcome. It is certainly clear from the price/volume action that the news is not seen as a killer of the stock. On Friday, it held right just under resistance at the 10-day and 20-day moving averages and within a very tight daily price range as volume declined.

This is a bit tricky given that the precise outcome of this bit of news flux is unknown, but so far the market seems to be taking a cautiously positive view towards the situation. For now, it is probably best to take an opportunistic view here with the idea of buying into any retest of Thursday’s lows and the U&R move of that day.

 

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Finisar (FNSR) turned out to be quite buyable per my comments in the Wednesday mid-week report. At that point the stock was pulling down in a tight little flag with volume drying up to “voodoo” levels following a bottom-fishing buyable gap-up last Friday.

That put the stock in a lower-risk entry position and on Friday FNSR pushed back up to a higher closing high on strong volume. From here I’m either looking for a small pullback to buy into, or a strong move that carries above the 200-day moving average. This would then put the stock in a buyable positon using the 200-day line as a selling guide, should that occur.

 

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The opticals names remain an area of strength, with FNSR representing more of an Ugly Duckling set-up within the group. Lumentum Holdings (LITE), on the other hand, is not, as it sits near its all-time highs and holds tight along the 10-day moving average. On Friday, by the time the volume tallies had come in, LITE posted a pocket pivot and pushed up and off its 10-day moving average on strong volume. This is constructive action, but the stock is still best bought on small pullbacks to the 10-day line from here.

 

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Applied Optoelectronics (AAOI) is another optical leader that is still holding above its prior breakout point from early May, but more recently has taken on a little bit of an Ugly Duckling flavor. After finding support at the 50-day moving average last week, the stock was able to rally and hold above the line over the past week. On Friday AAOI regained its 20-day exponential moving average on a five-day pocket pivot signature, which puts it in play as a LUie type of set-up. In this case, the stock becomes buyable here using the 10-day or 20-day lines as your selling guides.

 

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Salesforce.com (CRM) is attempting to pull off a LUie type of move here as it pushes back above three major moving averages, the 10-dma, 20-dema, and 50-dma.  The stock looked buyable on Wednesday at the 50-day line, per my comments in the Wednesday mid-week report.

Interestingly, I actually shorted CRM on Thursday morning when it gapped up in sympathy to big-stock cloud “granddaddy” Oracle (ORCL), which had reported a “strong” 10% earnings growth number the night before. The stock did come in from there, but I could feel the bid coming in near the 50-day line and covered for a small short scalp.

On Friday, CRM again pulled into the 50-day line early in the day but held as volume picked up to 4% above average. So far it looks (and feels) like CRM wants to pull a LUie type of move, so I must still consider this buyable here using the 50-day line as a tight selling guide.

 

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CRM’s cloud cousins, Workday (WDAY) and ServiceNow (NOW) have continued rallying and are still in extended positions. In either case, I’d need to see pullbacks into the 10-dma or 20-dema lines as lower-risk entry opportunities.

Meanwhile, another cloud cousin, Tableau Software (DATA), also not shown here on a chart, has moved higher since it was first buyable along the 10-dma and 20-dema per my comments in last weekend’s report. The stock is now extended and only pullbacks to the 10-day line at 63.22 would offer lower-risk entries.

Speaking of clouds, a new-merchandise play in the space is fresh IPO Appian Corp. (AAPN). I blogged to members early in the day on Thursday to watch for a possible undercut & rally move to develop in the stock as it plumbed the lows of what looks like its first IPO base. The stock priced its IPO at $12 in late May and went on a quick upside tear from there before correcting.

This correction has formed a potential new base, and I’ve been watching this closely for an entry point along the lows of this potential base. On Thursday APPN undercut the Monday low of 17.05, and then on Friday rallied back above it, triggering an actionable U&R long set-up at that point early in the day.

That resulted in a strong upside move of 8.52% and a strong-volume pocket pivot back up through the 10-day moving average. This is, obviously, extended at this point, but I am very interested in seeing how this consolidates this move in the coming days. Tight sideways price action along the 10-day line with volume drying up might create another buyable set-up, so this is something to keep an eye out for.

 

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Palo Alto Networks (PANW) has followed through nicely after posting a Wyckoffian Retest of the 20-dema earlier in the week, as I discussed in my Wednesday mid-week report. The stock then spent the next two days recovering back above the 200-day moving average on healthy, albeit below-average, increases in trading volume.

Watch now for pullbacks to the 200-day line as potential lower-risk entry opportunities from here. Names like PANW and FNSR do show that the Ugly Duckling is alive and well in this current market environment – but then what else is new?

 

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Canada Goose Holdings (GOOS) was mentioned on Tuesday in my blog post to members early in the day as it posted a “voodoo” pullback to its 20-day exponential moving average. That led to a pocket pivot move on Wednesday that carried back above the 10-day moving average. Volume was also quite robust on the pocket pivot.

As I wrote on Wednesday, at that point one would then be looking for any kind of pullback to the 10-day line as a secondary, lower-risk entry opportunity. That’s precisely what we got on Friday, and that could have been taken advantage of right at the line on that day. The stock is still within buying range of the 10-day line, using it as a tight selling guide.

 

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I’d have to say that what I like most about seeing strong action in names like APPN and GOOS is the new-merchandise aspect. New merchandise is always the lifeblood of a strong market environment, and seeing this in a number of new and recent IPOs is likely a good sign.

Don’t look now, but Snap (SNAP) is trying to pull off a clean undercut & rally move as it flirts with the prior 17.59 low in the pattern from May 11th. I blogged about the stock Wednesday evening in a discussion that included Twitter (TWTR) as well. TWTR, not shown, posted a bottom-fishing pocket pivot on Tuesday and has since continued higher, hence is extended near-term.

SNAP, on the other hand, opened up at around 17.30 on Thursday morning, and I decided to go long the stock at that point in anticipation of a possible undercut & rally move. We got one early in the day on Friday as the stock pushed up to an intraday high of 17.82 before backing down to close at 17.54, five cents below the prior 17.59 low.

Sometimes U&R moves can take several attempts before finally achieving success. Just look at something like NFLX, for example. Note that on Friday SNAP couldn’t get anything going amid the Russell Index re-balancing madness, but it did hold tight just under its 10-day moving average with volume drying up to -65% below average.

It’s pretty clear that sellers aren’t interested in dumping the stock right here, while short interest had doubled since the prior report date. If TWTR can resurrect itself, I don’t see why SNAP can’t fool all the now high-conviction shorts (after all, things are just terrible for SNAP right now, aren’t they?) and complete a U&R move. Something to keep a close eye on this coming week.

 

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Notes on other names discussed in recent reports below:

Activision Blizzard (ATVI) – pulled in on Friday on heavy Russell Index re-balancing volume, but is still extended from the 10-day line. Stock posted an all-time high on Thursday, but from here only pullbacks closer to the 10-day line would offer lower-risk entry opportunities.

Arista Networks (ANET) – broke out to new all-time highs on Thursday, now extended. As of the weekend has now turned into a completed LUie formation.

Edwards Lifesciences (EW) – pulled back to the 10-day line on Friday where it was buyable per my comments in the Wednesday mid-week report. It then bounced off the 10-day line on strong volume to post a pocket pivot as it broke out to a new closing high.

Electronic Arts (EA) – stock has been a successful LUie play as it has rallied back up to its prior highs. It dropped back below the 10-day and 20-day lines on Friday on heavy Russell Index re-balancing volume, so probably needs to settle down and set up along the line to remain viable.

First Solar (FSLR) ­– stock followed through nicely after Wednesday’s pocket pivot move back up through the 10-dma and 20-dema. It is now extended. Solars in general have been on fire since President Trump babbled about putting solar panels on the wall he proposes building along the U.S.-Mexican border. Clearly, this was a news-created move, and the President’s comments may turn out to be so much hot air. For that reason, I’d be selling solars into the jack.

Impinj (PI) – was buyable within the tight three-day flag per my comments in the Wednesday mid-week report, and then launched to an all-time high on Friday on heavy buying volume.

iRobot (IRBT) – still holding tight along the 10-dma and 20-dema but isn’t going anywhere just yet. Looks to me like pullbacks to the 10-day line or the 20-dema would offer opportunistic entries, if you can get them. However, remember that it also remains within range of the $100 buy point based on Jesse Livermore’s Century Mark Rule, using the 100 price level as a selling guide. In this case, however, I think the 10-day or 20-day lines would serve as reasonable selling guides if one wants to give it more room.

Nutanix (NTNX) – stock was mentioned in a Tuesday morning blog post I put out to members as looking interesting and one that could be nibbled on. It has since jacked higher and is approaching the 20 price level and the highs of its prior bottom-fishing buyable gap-up of May 26th.

SolarEdge Technologies (SEDG) – getting even more extended over the past couple of days as solar names have jacked to the upside following President Trump’s comment about putting solar panels on the U.S.-Mexican border wall.

Square (SQ) – this looks buyable as it holds tight along the 10-day line. It was hit with some selling volume on Friday, most likely due to Russell Index re-balancing, but held the line. This puts it in a lower-risk entry right here using the 10-day line as a tight selling guide.

Sunpower (SPWR) – stock had been removed from my long watch list after looking quite ugly as it broke support at the 10-dma and 20-dema last week. On Tuesday, the stock was looking like it was ready to break below its 200-day line but was saved by President Trump’s comment about putting solar panels on the U.S.-Mexican border wall. It then jacked wildly to the upside, but I would look to sell into this move, frankly.

Take-Two Interactive (TTWO) – all the video-gamers got hit with selling volume into the close on Friday during the Russell Index re-balancing. TTWO rallied above the 50-day moving average earlier in the day in what looked like a LUie-style breakout but backed down into its current 10-day bear flag formation which forms the bottom of the current “L” formation. I want to see this hold the 72.56 low in the flag if it is to have a shot at a true LUie-style breakout.

Universal Display (OLED) – this looks a bit odd as it closed slightly down on Friday and right at the 20-dema on what looks like heavy Russell Index rebalancing volume. My guess is this is temporary, and so I would look at the stock as being buyable here at the 20-dema using it as your tight selling guide.

Zillow (Z) – stock is going short-term parabolic here. An unlikely winner that was first featured when it was quite buyable down along the 43 price level per my blog post of May 31st titled, “Report Addendum.”

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).

Keep in mind that a lot of the action in individual stocks was probably influenced by Russell Index rebalancing. In cases where a stock was rallying early in the day but then sold off into the close or vice versa, the likely culprit was the index re-balancing. We’ll have the chance to see how things stabilize and perhaps set up again as trade resumes on Monday.

Members might have noticed that I was reluctant to editorialize about the charts I showed in my Thursday evening blog post titled, “Clues at the Scene of the Crime.” I was more interested in showing what looked like bearish action in the index charts along with the lack of breadth as evidenced by the downtrends in the Percentage of Stocks Trading Above their 150-day Moving Average charts that I also showed.

All the way up it has been possible to make bearish cases on the basis of the macro picture, and that is more or less what I was doing in Thursday night’s blog post. But I did not draw any conclusions as I was curious to see what members thought.

Overall, members’ comments seemed to be even-handed, which made sense to me. Nobody seemed wedded to a bearish assessment based on these index and breadth charts alone. After all, just because we think we see bearish action on the index charts, as well as weak breadth and any other macro factor we wish to throw into our assessment, doesn’t take away from the fact that this market is all about the action of individual stocks.

More importantly, it is all about the action of individual stocks when it comes to invoking the Ugly Duckling, which continues to work in this market. That’s because when the Ugly Duckling comes a ’calling, things always look ugly and bearish. And this is consistent with my observation that traditional breakouts and other constructive or bearish technical action no longer have the same kind of predictive value that they had in the past. These days, everything must be viewed through the lens of the Ugly Duckling view-finder.

As I wrote in my Wednesday mid-week report, “It is therefore simply a matter of identifying actionable patterns and set-ups and then pulling the trigger. And with so many stocks still sitting below their 150-day moving averages, we might simply consider this as evidence that the Ugly Duckling is lurking in the background.”

So far that seems to be the case. What I like most about understanding these Ugly Duckling set-ups, from U&Rs to LUie formations, is that these are technical patterns that the crowd is totally unaware of. At least until I write a book on the topic of the Ugly Duckling in all its facets! For now, we operate in a realm where the crowd does not tread, and in this market, that most certainly gives us the edge necessary to succeed. Carry on.

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 GOOS, MOMO, NFLX, and SNAP, 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.