The Gilmo Report

June 28, 2017

June 28, 2017

The strong action we saw in many stocks on our watch list on Friday saw little to no follow-through on Monday. I tweeted early Monday that I didn’t like the reversals I was seeing after small gap-up openings in a number of stocks, including those that I was holding long myself. This caused me to take a cautious stance as I moved into cash and threw out my usual hedge in the ProShares Ultra VIX Short-Term Futures ETF (UVXY).

That hedge worked well for one day yesterday as the NASDAQ Composite Index was hit hard. This sent it into a tail-spin as it busted below the 20-day moving average and ended the day just above its 50-day moving average on heavy selling volume. This gave the daily chart the look of an ascending neckline breakout to the downside in an overall head and shoulders type of formation.

But as I tweeted last night, was this just too obvious? A neckline breakout to the downside from an H&S-looking formation might have looked juicy on the short side back in the old days.  But in this market, just when the short side looks like the juiciest piece of filet mignon you’ve ever seen, the Ugly Duckling steps in and declares, “Denied!”

And if you stop to think about it, despite yesterday’s broad sell-off, the NASDAQ has so far done little more than successfully test its 50-day moving average. Today it rallied off the line on slightly lighter volume, which to me means that sellers didn’t swarm the market, despite all the drama.

For now, the NASDAQ remains within what is more or less a choppy one-month price range as it acts something like a bucking bronco, trying to throw investors off its back.

 

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The S&P 500 and Dow Jones Industrials Indexes didn’t suffer all that much yesterday relative to the NASDAQ, and we can see that the S&P 500 also remains in its own, perhaps less choppy, one-month price range. So far, the index has found support along the lows, without getting all that close to its 50-day moving average.

 

GR062817-$SPX

 

The small-cap Russell 2000 Index, not shown, also moved higher today and is acting much better than its larger-cap brethren. Today it closed at its second highest close ever as it makes a strong bid for new all-time highs. Meanwhile, financials regained their luster as the SPDR Sector Select Financial ETF (XLF) found the love once again and appears on the verge of a trendline base breakout.

Last week the financials came under some selling pressure, but as is generally the case in this market, pullbacks into areas of support are just something to buy. In this case, the XLF held the pullback to the 20-dema and the 50-day moving average and so far this week has turned back to the upside.

 

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One thing the market likes to do is keep you on your toes. That’s why it is a market for opportunists who are smart enough not to chase strength or weakness. I tweeted about this idea today, pointing out that even when I’m making money on the short side, as I did yesterday, I don’t become bearish. Mostly I become paranoid, looking to lock in my profits on any upside turn.

When the NASDAQ pushed down to the 50-day line yesterday, that was a good time to take at least partial profits, and the upside gap in the indexes this morning made that a smart move. Piling on the short side on weakness is not advisable in this market. If you’re going to short, I find that anticipating inflection points off the highs is a more successful strategy in general, albeit a challenging one.

On the long side, however, with the NASDAQ pinging off its 50-day line this morning, one had to be looking for the undercut & rally long set-ups. As I’ve written many times, when the market pulls back and begins to probe areas of support or the indexes undercut prior lows in their pattern, you start hunting for possible U&R set-ups in the making.

This morning I blogged about this exact topic, pointing out some undercut & rally moves I was seeing in several stocks, and advising members to review their own long watch lists for more U&Rs. Netflix (NFLX) was one of these, and despite failing on a move back above the 20-dema yesterday, it still looked actionable to me on the long side as it came back up through the prior 151.40 low of seven days ago on the chart.

That led to a two-point rally that held into the close as the stock did find some resistance at the 10-day moving average. For now, I’m willing to play this long using the 151.40 price level as a tight selling guide. So, for now, this is a U&R in progress.

NFLX’s weakness yesterday may also have been driven by news that Facebook (FB) was talking to Hollywood film companies about producing movie and show content. In my view, they are trying to build from scratch what NFLX already has, and I believe that in this space NFLX’s first-mover advantage is real. I still would not be surprised to see someone, perhaps Apple (AAPL), buy them, as the new paradigm of media and move content on the internet continues to spread its roots. FB’s move only serves to confirm this premise, as I see it.

 

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My notes on other big-stock NASDAQ names reveals that these, too, either found support at logical areas today or pulled U&R type moves:

Alphabet (GOOGL) undercut its prior 936.79 low of June 12th today and then rallied. It also undercut the 50-day moving average early in the day and closed back above the line on heavy, increased buying volume. This puts GOOGL in a lower-risk entry position here, using the 50-day line as a tight selling guide. Constructive action, to be sure.

Amazon.com (AMZN) simply bounced off its 50-day moving average and rallied on below-average volume today. Technically, that pullback was buyable as the stock got to within ½% of the 50-day line at 965.42 before it rallied to close at 990.33. If you were too busy trying to be bearish, you probably missed it.

Apple (AAPL) undercut its prior 144.61 low of June 21st and rallied back above it today on light volume. The stock is tracking in a well-defined “L” formation, but so far, it’s not clear whether this will resolve as a full “LUie” formation or a bear flag. I suppose if the general market continues higher, then AAPL will be dragged higher in LUie style.

Facebook (FB) looked fairly bearish yesterday when it reversed off an all-time high intraday on heavy, above-average selling volume. That brought the stock back into its 50-day moving average, where opportunistic buyers could have picked up shares at that point. FB then rallied smartly off the 50-day line on below-average volume. The 10-day line at 151.73 would offer your best lower-risk entries.

Microsoft (MSFT) undercut its prior June 15th low of 68,80 today and rallied back up through it. Like GOOGL, this U&R move was associated with support at and a close back above the 50-day moving average.

Nvidia (NVDA) undercut the prior 146.50 low of June 15th and rallied today, also finding support at its 20-dema on above-average volume.  In this case, the stock becomes buyable here and the 20-dema at 149.60 can now be used as a tighter selling guide vs. the June 15th 146.50 low.

Tesla (TSLA) also undercut a June 15th prior low in its pattern today and rallied. That low was at 366.49, and the stock turned and rallied to close at 374.23. It also found support right at its 20-dema, which made it buyable at that point using the 20-dema at 363.48 as a tight selling guide.

So, what we have with all of these big-stock NASDAQ names today is a bunch of undercut & rally moves, some of which found support at the 20-dema or the 50-dma. Some, like NVDA or TSLA, for example, may simply be in the process of building new bases, but the undercut & rally moves offer lower-risk entries along the lows of these potential bases. This, in my view, is a useful set-up within this technical context.

My favored Chinese names all found support today along their lows and rallied. Both JD.com (JD) and Netease (NTES), not shown, pulled into the confluences of their 10-day and 20-day moving averages where they found support and rallied on the day. This would put both in buyable positions using either their 10-day or 20-day lines as tight selling guides.

Meanwhile, Alibaba (BABA), also not shown, hasn’t shown any desire to sell off hard as it tracks tight sideways in a mini cup-with-handle pattern. Pullbacks to the 10-day moving average, now at 140.46, would offer your next lower-risk entry opportunities from here.

This morning I mentioned Momo (MOMO) as being in position to rally back above the prior 36.91 low of five days ago on the daily chart below. At the time the stock was trading right around 36.91, and it closed at 37.96, just six cents below the 10-day moving average. The undercut this morning also successfully tested the lows of the current six-week base.

What it needs to do now is clear the 10-day, 20-day and 50-day moving averages to confirm the so far successful undercut & rally move today. That would obviously be something we want to watch for in the coming days if we are long the stock near the 36.91 price level on the U&R move this morning.

 

GR062817-MOMO

 

Weibo (WB) has been sliding lower over the past few days since it was hit with negative news last Thursday. Today the stock undercut two prior lows in the pattern from June 15th and 22nd at 68.76 and 68.66, respectively, rallying back above both by the close. It also found support at the 50-day moving average on slightly higher volume.

It is, however, still below the 69.54 intraday low of the mid-May buyable gap-up (BGU) move it had after reporting earnings. WB closed today at 69.36, only 18 cents lower. So, using the 50-day line as a tight downside selling guide, I am willing to go long the stock here and then look for a strong move back above the 69.54 BGU low as upside confirmation.

 

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The optical names I’ve discussed in recent reports were all looking strong last Friday, but so far this week things have gotten a little sloppy-looking. For example, Finisar (FNSR), not shown, broke down to lower lows today but reversed back to the upside and held support at its 20-day exponential moving average. This, however, might put the stock in an opportunistic, lower-risk buy position using the 20-dema at 26.46 as a tight selling guide.

Lumentum Holdings (LITE) posted a pocket pivot last Friday, but this only led to a price breakdown back below the 10-day and 20-day moving averages. But the sell-off on both Monday and Tuesday came on below-average volume, so was not indicative of heavy selling pressure. Today the stock found support along its intraday lows and rallied to close up on the day on higher buying interest.

LITE closed today at 60.20, just below the prior 60.30 low in the pattern from June 15th. I would therefore watch for a move back above this prior low as a long trigger for an undercut & rally set-up. LITE has generally been a stock you want to try and take an opportunistic view toward, looking to find a way to buy on weakness rather than chasing it on the upside.

So here we have a nice pullback that looks to be floating below the 20-dema, and perhaps not so buyable. But as we know based on our alternative approaches to buying stocks, it is actually on the verge of posting a potential U&R buy trigger if it can rally back above 60.30 low. So, watch for that to occur in the coming days.

 

GR062817-LITE

 

Applied Optoelectronics (AAOI) looks a bit funky here as it bounces along the top of its prior base and just below the 50-day moving average. Of course, everyone can see that the stock is now bearishly sitting below the 50-day line. But this may only serve to set up a very opportunistic buy entry point here.

The idea here is simple, because we already have an undercut & rally set-up in progress. Today AAOI rallied back above the prior 60.89 low of June 20th and closed just above at an even 61.00. It is still 15 cents below the 50-day line, but any move back above the line could be viewed as a moving-average undercut & rally (MAU&R) move that would be buyable at the line while using it as your tight selling guide.

From my discussions of individual stocks so far in this report, you might be getting the idea that while some may fret over the weakness some of these leaders are showing as they pull back, I see potential Ugly Duckling entry opportunities shaping up. If I know what my long triggers are, and I know where my tight stops are, I can easily consider any of these pullbacks opportunistically actionable using my alternative buy set-ups. Vive la difference!

 

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In cloud land, new-merchandise cloud IPO Appian Corp. (AAPN) isn’t acting all that badly here following last Friday’s sharp pocket pivot move back up through the 10-day moving average. Today the stock pulled into the 10-day moving average with volume drying up to -44.2% below average.

That would qualify as a “voodoo” pullback to the 10-day line and a constructive pullback and consolidation of the prior, strong pocket pivot move of last Friday. Thus, this is buyable here as an add point if you bought the stock last week before the pocket pivot based on my blog post of June 22nd, or as a new entry, using the 10-day line or the 20-dema as your tight selling guides.

 

APPN

 

Salesforce.com (CRM) is trying to hold its 50-day moving average within an as yet unresolved “L” formation. Technically, with the stock holding at the 50-day moving average, it is buyable here using the line as your tight selling guide. For that reason, it remains a LUie play as long as it can continue to hold the 50-day line.

On Monday I blogged that I was getting a lot of emails from members who were seeing “LUie” formations in every stock. The problem with this is that LUie is not a label. It is an active, actionable, and dynamic potential long set-up that needs to trigger under the right conditions. Clearing back above a key moving average like the 50-day line and holding it is one such trigger, and for now CRM is so far maintaining that trigger.

Note that NFLX, which had regained its 20-dema last week as a potential LUie set-up in progress, failed on that LUie attempt Monday. However, with today’s undercut & rally, we are again setting up to play a possible continuation back up through the 20-dema as a bona fide LUie long set-up. Sometimes LUies must be worked persistently before an upside breakout occurs, but not every “L” pattern is a LUie. Learn to tell the difference and the details with respect to how it can evolve and then trigger a buy entry signal or just fail outright in a bear flag breakout to the downside.

 

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APPN’s and CRM’s other cloud-cousins Workday (WDAY) and ServiceNow (NOW), not shown, have been moving around in short ranges, with WDAY’s being much more volatile than NOW’s. NOW is holding in a mini cup-with-handle type of formation while WDAY is slashing up and down but today found support near its 50-day moving average.

As with anything else in this market, buying WDAY near the 50-day line, perhaps on a retest, might present your best lower-risk, opportunistic entry point. NOW, on the other hand, would simply need to pull back to its 10-day moving average to present a lower-risk entry opportunity from here.

Tableau Software (DATA) is giving us the type of pullback action that we generally want to act upon, with the idea of having a tight selling guide nearby in case things don’t go quite right. DATA was last buyable per my comments two weeks ago, when it was sitting nice and tight and quiet along its 10-day and 20-day moving averages. That led to a short flag breakout that is now seeing the stock pull into the top of the prior flag. Volume dried up to -47% below average, so this would put the stock in a lower-risk entry position using the 20-dema at 63.30 as a tight selling guide.

 

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Palo Alto Networks (PANW) has also pulled back into a buyable position here as it settles back into its 200-day moving average. The stock found support at the line on a five-day pocket pivot signature, which comes after a prior five-day pocket pivot signature four days ago on the chart. Note also that my indicator bars at the top of the chart are going “Code Blue,” which is positive.

This therefore puts the stock in buyable position here using the 200-day line as a very tight selling guide. Alternatively, the 10-day or 20-day lines would offer slightly wider selling guides depending on one’s risk-preferences.

 

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Canada Goose Holdings (GOOS) announced a 12.5-million-share secondary stock offering on Monday morning, which killed the short-term rally in the stock. According to my numbers, the company had 4 million shares of stock in the current float, and this new secondary, coming rather soon after the March IPO, basically quadruples the float. Not that this is necessarily a bad thing, since it depends on how the offering is absorbed by the market.

Sometimes a stock with a tiny float of 4 million shares gets overlooked by institutions for that reason. Enlarging the float to a more substantial 16.5 million shares can be a good thing. However, on a short-term basis, I had come in long the stock over the weekend, and decided to “exit, stage right” and then wait to see how the secondary settled out once it was priced and released.

Fortunately, for me, at least, GOOS held up it held up above our original entry at the 20-dema from last Tuesday when the Monday opening bell rang. This provided a quick exit opportunity with minimal damage. Today the secondary was priced at $20.75 a share and released into the after-market. So now what do we see on the daily chart below?

Well, the first thing I see is an undercut & rally long set-up after the stock undercut the prior 20.50 low of June 16th and rallied back above it to close at 20.75. So, all I know for sure right now, is that the pricing of the secondary was not a disaster, and appears to have been relatively well-absorbed. In addition, we have an actionable U&R long set-up here using the 20.50 low as a selling guide, end of story. It either works or it doesn’t, but there’s the trade, in your face.

 

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Snap (SNAP) has been flopping around with the market over the past three days, but all the NASDAQ-based volatility hasn’t really unsettled the stock. It keeps rolling around the prior 17.59 low in the pattern from May 11th, but today closed back above the low, printing 17.76 at the close.

This keeps it in play as an undercut & rally set-up using the 17.59 low as a selling guide. Now, SNAP has traded as low as 17.20 this week, so if one were using a stop less than 3% below the 17.59 level, one would have been stopped out. But U&Rs, like LUies, require some persistence. Sometimes the stock will make several attempts at clearing the prior low in the pattern for good before succeeding.

One caveat here is that there is a big insider share lock-up expiring at the end of July, which by my reckoning is this Friday. Sometimes these share lock-up expirations turn out to be a non-event, but we won’t know until we get there. So, I would remain opportunistic here if looking to own SNAP shares, and try to enter at 17.59 or better if possible.

 

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Meanwhile, one can satisfy their urge to buy FB’s smaller cousins by looking at Twitter (TWTR) here. The stock had a nice “roundabout” or “bottom-fishing pocket pivot” last week as it popped back above its 10-dma, 20-dema, and 50-dma all in one fell swoop.

Now TWTR is consolidating this prior pocket pivot move by pulling back into its 20-dema right here. Today it displayed some minor supporting action at the 20-dema, closing up and off the line on an increase in trading volume. This would put it in a lower-risk entry position here using the 20-dema as a tight selling guide.

 

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Notes on other names discussed in recent reports below:

Activision Blizzard (ATVI) – stock broke below the 10-day moving average yesterday, and is now dangling below its 20-dema. Watching for something to set up here.

Arista Networks (ANET) – reversed off its all-time highs on Monday, and pulled all the way into its 20-dema today. That puts it in a lower-risk entry spot using the 20-dema as a tight selling guide.

Edwards Lifesciences (EW) – stock is acting well as it holds tight along its 10-day and 20-day moving averages with volume drying up. This puts it in a lower-risk entry position using the 20-dema as your selling guide.

Electronic Arts (EA) – stock has pulled back to its 50-day moving average where it held support and closed up on the day. EA also undercut and rallied back up through the 107.32 low of June 15th. That would make it actionable here using either the 107.32 low or the 50-day line as your selling guide.

First Solar (FSLR) ­– I would still look to sell FSLR and its cousins into this current jack which came on the whimsical utterings of President Trump when he mused about installing solar panels on the “big, beautiful” U.S.-Mexican border wall that he fantasizes about building.

Impinj (PI) – got fairly extended by Monday, and on Friday gapped to the downside off the peak. It is now trying to hold support along its 10-dma and 20-dema, but I would have simply taken the money and ran when it jacked to 60 on Monday. After all, the stock was first buyable along the10-day line two weeks ago per my comments at the time, and has mostly been moving after news that AMZN was buying Whole Foods (WFM). It now probably needs some time to set up again.

iRobot (IRBT) – was slammed down to its 50-day moving average yesterday, which it hasn’t touched since mid-March. It held the 50-day line today on above-average volume, and this is the first pullback to the 50-day line since the buy able gap-up move of late April. Therefore, this could be used as an entry point using the 50-day line as your selling guide.

Nutanix (NTNX) – company signed a cloud partnership with GOOGL today, sending the stock back up through the 20 price level. For now, it’s extended.

SolarEdge Technologies (SEDG) – apparently the solar border wall won’t be using any storage devices so after an initial jack to the upside last week after the President’s comments on building such a wall, the stock was pushed back down to its 20-dema where it held support today on above-average volume. This could put it in a lower-risk entry position using the 20-dema as a tight selling guide.

Square (SQ) – was knocked down to its 20-dema yesterday on light volume, and recovered today on increased but still below-average volume. The stock continues to base constructively, so pullbacks to the 20-dema, such as we saw yesterday, would be your lower-risk entry opportunities when they occur.

Sunpower (SPWR) – I continue to view solars as sells into their respective news rallies. Short-term I see the jack as news-oriented, so a pullback is likely, as we saw in SEDG earlier this week. Then one can see whether they are buyable on the pullbacks. Otherwise, anyone owning the solars can simply designate a trailing stop for their position and operate accordingly.

Take-Two Interactive (TTWO) – I blogged this morning that the stock was an undercut & rally buy after pushing back up through the prior 71.20 low in the pattern from June 12th. That was actionable on the long side at that time, and the stock then rallied to close at 73.27 by the bell. If long this, per my blog post today, the 71.20 serves as your selling guide. We shall now see whether it can pull off a LUie type of move from here.

Universal Display (OLED) – undercut the prior 114.05 low of June 15th and rallied today, triggering an actionable U&R set-up using the 114.05 low as your selling guide.

Zillow (Z) – stock has pulled back to the 10-day line with volume drying up today. This offers a secondary entry point using the 10-day line as a tight selling guide.

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).

This market is tricky. It was perhaps easy to get bearish after yesterday’s selling in the NASDAQ and tech-concentrated areas of the market. But as I’ve written many times, you must stay alert during these pullbacks, no matter how gnarly and snarly they may be. Usually, the indexes will find support at a logical area, such as the NASDAQ did today at the 50-day line, or on an undercut & rally type of move.

When I see that, I begin to consider covering any shorts, and then scanning quickly through my buy watch list for any opportunistic entries that may be occurring in real-time. I try to be objective, and I will act on any concrete set-up where risk can be controlled tightly. That is where the U&R set-up, sometimes on conjunction with support at a key moving average, such as the 20-dema 50-dema, comes in very handy.

I don’t know whether the market will roll over and again, and we’ll see the NASDAQ Composite bust through its 50-day line for good. All I know for sure is that today the index found support at the 50-day line, and this was associated with a broad number of actionable U&R set-ups. In some cases, stocks were bouncing off major support at moving averages.

In this market, what you know and see in real-time is all you have to go on. Grand theories about stocks being overvalued, or the stalling Trump Agenda, or rising interest rates won’t make you money. See what the market is doing, not what you want it to be doing. And keep risk to a minimum when you can in case things do go awry. 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 APPN, MOMO, NFLX, and WB, 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.