The Gilmo Report

June 3, 2018

June 2, 2018

The market gave investors a bit of the bucking bronco act over the past two days, selling off on higher volume Thursday before rebounding sharply on Friday. In both cases, the movement was news-driven. On Thursday, the Trump Administration announced the imposition of new tariffs on its allies like Canada and the European Union, sending the indexes spinning lower on much higher volume.

On Friday, a strong jobs number had the opposite effect, sending the indexes rocketing higher on increased volume. This had the effect of negating Thursday’s failed breakout attempt by the NASDAQ Composite Index. The index led all comers on Friday, rallying 1.67%, but on lighter volume.

 

GR060318-$COMPQ

 

The S&P 500 Index is lagging the NASDAQ, trading only as far as the highs of its current three-week price range on Friday. Volume was much lighter than Thursday’s levels, thus the S&P’s move on Friday lacked any serious upside thrust.

 

GR060318-$SPX

 

As always, it all boils down to what is going on with individual stocks. What I find interesting is that while big-stock NASDAQ names powered higher on Friday, they all traded well below-average volume. Not that they weren’t buyable earlier in the week when they were quiet and sitting along key moving averages.

For example, here we see Apple (AAPL) posting a new all-time closing high on Friday on below-average volume. In my Wednesday report I noted that the stock was getting very quiet along the 10-dma, which put it in a lower-risk entry position. That would have been the preferred entry, since Friday’s breakout occurred on light volume.

As I discussed on Wednesday, “…but with the NASDAQ breaking out, the possibility of AAPL moving higher from here increases.” And that’s exactly what we saw on Friday. While there was no volume, the general move higher in the NASDAQ as it broke out of its three-week price range meant AAPL was going higher with it.

 

GR060318-AAPL

 

Amazon.com (AMZN) posted a new all-time high, finally surpassing the highs of its prior buyable gap-up range in late April. The stock traded in a narrow range on, you guessed it, light volume as it posted the new all-time absolute high. It was last buyable, in my view, near the 20-dema when it was quiet along the line.

 

GR060318-AMZN

 

Facebook (FB) is perhaps a little more legitimate since its base breakout on Thursday occurred on a pocket pivot volume signature. Pocket pivot breakouts can work in lieu of a high-volume breakout, and thus can be valid. The stock continued higher on Friday, but volume declined sharply from Thursday’s pocket pivot levels.

On Wednesday, I noted that FB had posted two five-day pocket pivots along the 10-dma and was therefore buyable on that basis at that time. That proved to be prophetic as the stock then launched higher on Thursday. So, the proper buy point was along the 10-dma earlier in the week, and I would not be looking to chase the stock here.

 

GR060318-FB

 

Netflix (NFLX) also posted an all-time high on Friday, but, as with all the other big-stock NASDAQ names, volume was light. The reality here is that NFLX was last buyable along the 10-dma on the pocket pivot of two weeks ago. It is now extended and I would not be looking to buy the stock up here.

 

GR060318-NFLX

 

As they say in those infomercials, “But wait, there’s more!” Here we see Nvidia (NVDA) pulling off a re-breakout maneuver on Friday on, you guess it again, light volume! So, you can see that there was a theme to the NASDAQ’s big move on Friday, which is that it featured low-volume moves in a broad number of big-stock NASDAQ 100 Index components.

 

GR060318-NVDA

 

Tesla (TSLA) is still holding up on last week’s undercut & rally move, but dipped below the 50-dma yesterday on light volume. However, the stock held the 10-dma and pushed off the line Friday on light volume to regain the 50-dma. This could be considered to be in a buyable position, using the 50-dma as a tight selling guide. Otherwise, the 10-dma would serve as a wider selling guide.

 

GR060318-TSLA

 

Twitter (TWTR) actually traded above-average volume on Friday as it broke out to a new all-time closing high. But the stock was already best bought along the 10-dma based on two prior pocket pivots in the pattern. Again, buying it when it’s quiet is preferable to chasing a move like today’s, as the stock is now extended from my perspective.

 

GR060318-TWTR

 

With FB and TWTR both moving to new highs, beaten-down Snap (SNAP) is also putting on a little show of its own. I had previously discussed the stock as a type of U&R set-up based on the fact that it had previously undercut its prior closing lows of early April. While the intraday lows all month long never got below 10.51, SNAP did push below the 10.74 closing low of April 7th.

The ensuing rally above that low and the 10-dma triggered what I might consider a creative U&R long set-up at that point. It has since followed through by posting two pocket pivots in a row at the 20-dema over the past two days. For those who like to take shots at this type of set-up, it is buyable here using the 20-dema as your selling guide.

 

GR060318-SNAP

 

CSX Corp. (CSX) and Norfolk Southern (NSC) are still both not in what I would consider to be the most optimal buying positions, although NSC did post a higher closing high on Friday on light volume. Either stock is best bought along the 10-dma, which is 152.67 for NSC and 64.38 for CSX.

Intuitive Surgical (ISRG) broke out to new highs on Friday, and it did so on strong, above-average volume. While I viewed the stock as buyable along the 20-dema, particularly since it had posted two pocket pivots along the 10-dma and 20-dema on Wednesday and Thursday, this breakout is within buying range for those of you who like to buy base breakouts.

 

GR060318-ISRG

 

Square (SQ) continued the parade of low-volume moves to all-time highs on Friday. The stock cleared the left-side peak of a cup-with-handle formation on Friday on increased, but below-average volume. I would not be looking to chase this here, and instead would be more interested in buying any constructive pullbacks into the 10-dma at 56.50.

 

GR060318-SQ

 

Nutanix (NTNX) looked like it might work as a short on Friday when it initially rallied up to the 20-dema, but after backing down early in the day the stock turned and rallied with a vengeance. As I wrote on Wednesday, you had to take a two-side approach here, and advised, “…if one tests it as a short near the 20-dema, be prepared to stop out and possibly flip long if it can push above the 20-dema.”

Well, that is what the stock did on Friday, pushing right through the 20-dema on increased, but only about average, volume. One could treat this as a moving-average undercut & rally move using the 20-dema as a tight selling guide, since the stock also pulled a re-breakout move, clearing the highs of its prior base.

My comments on Wednesday, where I wrote, “In this market, the unexpected often occurs, and in this case the last thing I’d expect from NTNX here would be a re-breakout attempt.” Bingo. Play it as it lies!

 

GR060318-NTNX

 

Cyber-security names all were up on Friday, and both CyberArk Software (CYBR) and Fortinet (FTNT) remain extended on the upside. Pullbacks to the 10-dma would be the preferred lower-risk entries, which for CYBR would be 60.24 and for FTNT 60.11.

Palo Alto Networks (PANW) pulled into its 10-dma on Friday and held, closing up on the day. However, the company is expected to report earnings on Monday after the close, so there is nothing to do here ahead of earnings. The stock is on earnings watch as we wait to see if anything actionable occurs once earnings are out Monday afternoon.

FireEye (FEYE) has been able to hold above its prior May 4th low at 16.60 over the past couple of days. This keeps its current undercut & rally long set-up in play, using the 16.60 low as your selling guide.

 

GR060318-FEYE

 

Sailpoint Technologies (SAIL) remains up near its current highs and is consolidating the U&R move off the lows. In this position I consider the stock to be extended, so I would take an opportunistic approach here and wait for a pullback to the 10-dma down at 24.08, if I can get it.

 

GR060318-SAIL

 

Okta (OKTA) made another all-time high on Friday, remains quite extended. Of course, this is somewhat moot since the company is expected to report earnings this Wednesday, June 6th, after the close.

DropBox (DBX) has been something of a disappointment here as it failed to hold the 10-dma and 20-dema on Friday, despite the strong market rally. That was my selling guide for the stock, and it is now a matter of waiting to see if it can post a more sustainable undercut & rally move off the 29.41 low of this current three-week price range.

 

GR060318-DBX

 

Lumentum Holdings (LITE) continued to pull back in a test of its 200-dma on Thursday, but the stock didn’t quite make it down as far as this key moving average. Volume was light, and once the selling dissipated the stock gapped up and rallied back above its 50-dma on Friday. Volume was below average, though higher than the prior day.

With the stock back above the 50-dma, one could treat this as a moving-average undercut & rally move here, using the 50-dma as a tight selling guide. The other option is to look for a move back above the 61.60 low of May 24th, which would trigger an undercut & rally long set-up at that point.

 

GR060318-LITE

 

Twilio (TWLO) ripped to new highs on Friday, posting a strong-volume breakout and pocket pivot off the 10-dma. The stock was previously buyable along the 10-dma per my comments on Wednesday, although it looked just a tad wobbly along the 10-dma on Thursday. But, it then held the line on Friday, where it was buyable at the open, and then launched higher.

On the weekly chart, not shown, TWLO is wedging higher so I would not look to chase the stock here. Because there is no real flag pattern that has formed over the past three weeks as the stock has edged higher, this cannot be viewed as a three-weeks-tight or other type of short, flag breakout.

 

GR060318-TWLO

 

Roku (ROKU), is a roundabout situation based on last week’s strong pocket pivot move off the 10-dma.  This pocket pivot followed the buyable low-volume pullbacks to the 50-dma it had earlier in April, as I discussed in my video reports at that time.

The big-volume pocket pivot of two Fridays ago put the stock in an extended position, so it was out of buyable range – until Friday. On Friday, ROKU pulled into the 10-dma and rallied to close just above mid-range on the day on higher volume. That, to me, represents supporting action at the 10-dma, and the stock is therefore buyable here using the 10-dma at 36.48 as a tight selling guide.

 

GR060318-ROKU

 

In the Chinese stock space, both Baozun (BZUN) and Autohome (ATHM) have been on fire over the past few days, with both stocks posting all-time highs on Friday. Both stocks, however, stalled and closed near the lows of their daily trading ranges, so are obviously not in any kind of buyable position.

Baozun (BZUN) traded in a narrower range on Friday on average volume. From here I’d look for a pullback to the 10-dma at 57.45 as your best, lower-risk entry opportunity.

 

GR060318-BZUN

 

Autohome (ATHM) reversed sharply off its intraday highs on Friday on above-average volume. The stock was, admittedly, getting somewhat extended at that point after going on a four-day run from the top of the prior base. As I discussed in last weekend’s report, the stock was buyable at that point, right along the top of the prior base and the 20-dema. From here, pullbacks to the rising 10-dma at 105.69 would represent your best, lower-risk entry opportunities.

 

GR060318-ATHM

 

My comments on Alibaba (BABA) in Wednesday’s report turned out to be correct. I mused on that day, “Volume also dried up today, so one must wonder whether investors are so worn out and disgusted with the stock that it will now finally clear the $200 price level and hold it.” That’s what happened on Friday as BABA convincingly cleared the $200 Century Mark on strong, above-average volume.

This can also be viewed as a breakout from a cup-with-handle formation. Therefore, if you are a base breakout buyer, this one is tailor-made just for you, so have at it since it is all of 2% above the $200 breakout point.

 

GR060318-BABA

 

Momo (MOMO) pulled in close to the 42.49 BGU intraday low on Wednesday, but it didn’t stay there for long. The stock gapped up slightly on Thursday and then just took off from there, so if you were looking to buy it that was the time to move on the stock, using the 42.49 low as your selling guide. The stock is now way extended.

 

GR060318-MOMO

 

Tal Education Group (TAL) pulled in to test its 20-dema Friday and held the line on Friday., turning back to the upside and closing back above the 10-dma. As I wrote on Wednesday, “…I prefer pullbacks to the 20-dema as lower-risk entries given its current extended position.” That’s what buyers got on Friday, as the stock came right into a lower-risk entry spot at the 20-dema. Pullbacks to the 20-dema remain my preferred entries for TAL.

 

GR060318-TAL

 

I sort of lost interest in Sunlands Online Education (STG) in my last report, stating that, “Only a move back up through the 20-dema or an undercut & rally at the 9.15 low of May 21st would get me interested in the stock again.” The stock must have heard me, because on Friday it blasted back up through not only the 20-dema, but the 10-dma as well.

Here it looks a little extended, and the only way to buy it would have been as it was coming up through the 20-dema on Friday. Meanwhile, I think other names, such as MOMO, BZUN, or ATHM, have been easier Chinese stocks to play on the upside, and just as profitable, if not more.

 

GR060318-STG

 

Notes on other names discussed in recent reports:

Carbonite (CARB) has held tight sideways over the past two days after going slightly parabolic earlier in the week. I’d give this some time to settle down and build a potential new base.

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.

Thursday’s reversal and failed breakout in the NASDAQ Composite didn’t look too good, since it also took the other major indexes down into the lows of their current price ranges. That was not the sort of action one wants to see, but it again came down to what was going on with individual stocks. Those that I’ve been following in recent reports hung in there just fine.

With Friday’s re-breakout by the NASDAQ, it is now approaching its prior 2018 highs, which of course brings up the possibility that things now look so good that we might be primed for a pullback. That’s what happened in early March, when the NASDAQ broke out to new highs and then gave it up pretty quickly, breaking all the way down to its 200-dma from there.

You can refer to the daily chart of the index at the top of this report to see what I’m talking about. If this occurs, then using what I like to refer to as “my little friend,” the leveraged VIX ETF known as the UVXY, is often effective as a hedge, if not an outright profit vehicle. In this market, it’s always good to have options, since things can change quickly, particularly if some random news hits the tape.

While most names are now extended and/or out of buying positions, there are a few still in buying range, so those remain actionable for now. However, keep in mind that I prefer the buy-it-when-it’s-quiet approach, so I’m generally not in the mood to chase strength. This market tends to pull back when things start looking too good. So for me it’s a matter of cutting back and selling into extreme strength and then laying back and waiting for the next optimal long set-ups to show up.

Otherwise, I’d like to see the S&P 500 follow the NASDAQ’s move to higher highs by breaking out of its own three-week price range. I tend to think that all this tariff talk is weighing down on industrial type names. So unless some of this starts to simmer down, the S&P 500, and the Dow, for that matter, may continue to lag. In the meantime, just watch your stocks.

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 ROKU 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. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.