The Gilmo Report

June 4, 2017

June 4, 2017

The indexes blasted to new highs on Thursday, ahead of Friday’s Bureau of Labor Statistics’ jobs report. After a strong ADP jobs report that was released on Thursday morning, investors were anticipating a similarly strong number coming out of the BLS. That, however, was not the case, as a tepid 138,000 new non-farm payrolls were created in May (either in fact or by simple statistical sleight-of-hand) vs. expectations of 185,000.

Initially the market looked as if it would roll over on the jobs news, as this raised the specter of a weakening economy. But a soft economy merely keeps the Fed on hold, with a “one and done” interested rate increase likely in June. Beyond that, the massive pool of liquidity that remains in the global financial system becomes a driving force for the markets.

Some might conclude that because the Fed has ended its QE programs, the flow of liquidity has ended. But the reality is that the Fed’s portion of the liquidity pool remains untouched, while other central banks around the globe, including the Bank of Japan and the European Central Bank, continue to inject liquidity into the global financial system.

On Friday, sellers were nowhere to be seen. This sent the NASDAQ Composite Index to yet another all-time high, along with the other major market indexes, on lighter but still above-average volume.

 

GR060417-$COMPQ

 

And while the big-stock NASDAQ 100 names continue their respective upside romps, the small-cap Russell 2000 Index has also joined the party. On Thursday, the index pushed back up through its 50-day moving average with authority, and followed through with a push up near its prior highs on Friday.

This is precisely the sort of broadening out of the rally that I have been looking for per my comments in the last two reports. While the Russell did stall a bit near the highs of the day on Friday, the action remains bullish. This bullishness is also evident in the action of individual stocks.

 

GR060417-$RUT

 

The S&P 500 Index also broke to a new all-time high on Friday on light volume. Despite the weak jobs number, it was clear that sellers simply weren’t interested in unloading shares. If there were a reason to be bearish, I’d certainly be open to it, but for now I see no reason to try and stand in the way of this rally.

Despite the extension in the big three indexes, the NASDAQ Composite, the S&P 500, and the Dow, the strong action in the broader, small-cap Russell 2000 and the broader NYSE Composite Index, not shown, looks like it could just be getting started.

 

GR060417-$SPX

 

The idea of a Fed on hold after June remains evident in the action of a declining dollar, rising bonds, and rising gold. The SPDR Gold Shares ETF (GLD) pushed to a higher high on Friday on light volume, as the uptrend and move up through all its moving averages continues.

This also bodes well for gold-related stocks, and among these my favorite remains Franco Nevada Corp. (FNV), not shown. The stock moved to a higher high on Friday in sync with the yellow metal, but is extended from its 10-day moving average. However, alert buyers interested in the stock had opportunities to enter the stock closer to the 10-day line on Thursday. Further pullbacks to the line would still represent your lower-risk entry opportunities.

 

GR060417-GLD

 

The big-stock NASDAQ names retain their role as an area of major leadership in this market. And it’s not as if they are all wildly extended to the upside. Microsoft (MSFT), not shown, just broke out to a new all-time high on Friday, while Tesla (TSLA) technically remains within buying range (4.24%) of its more recent breakout. While a pullback closer to the 326 price level would offer a more opportunistic entry, the stock doesn’t seem all that interested in giving up much on the downside. On Thursday and Friday TSLA held very tight as volume declined.

Meanwhile, prominent hedge fund manager David Einhorn complains that TSLA is mispriced by a “huge amount.” I might agree with the man, although perhaps not in the same way since he is massively short the stock. I think it could easily make it to $400 in the face of a large and stubborn short interest and a continued general market rally, but that’s just me.

 

GR060417-TSLA

 

Netflix (NFLX) is another big-stock NASDAQ name that can’t be viewed as wildly extended. It has only recently broken out to new highs on a gap-up pocket pivot move, and has progressed all of about 2% higher from there. Technically, it remains in a buyable position using the 160.55 low of the prior gap-up day as a tight selling guide.

 

GR060417-NFLX

 

We can see that other big-stock NASDAQ names exhibit similar states of non-extendedness, and some are even showing actionable strength per my notes below:

Apple (AAPL) posted a pocket pivot on Friday as it pushed up through its 10-day moving average on above-average volume. This sent the stock back up near its prior all-time closing high, and the action is buyable using the 10-day line as a tight selling guide.

Alphabet (GOOGL) remains in an uptrend as it tracks along its 10-day moving average, and looks set for a move up through the $1,000 Millennium Mark which has served as near-term resistance over the past several days

Amazon.com (AMZN) did finally clear its own $1,000 Millennium Mark on Friday, closing at an all-time high of 1006.73. If you want to treat this in the same manner as a Century Mark breakout, then the stock is buyable here using the 1,000 price level as a tight selling guide (less than 1%).

Facebook (FB) finally broke out to all-time highs on Friday, with volume coming in at 4% above average. The stock did offer a lower-risk entry opportunity on Thursday morning when it successfully tested its 20-day exponential moving average and bounced off the line to close up for the day. The 20-dema is 2.4% below Friday’s close, so technically the stock is still within buyable range using the 20-dema as a selling guide.

Nvidia (NVDA) is one big-stock NASDAQ leader that is extended, but it has been quite begrudging when it comes to giving up any of its recent gains. I would just watch to see whether this settles down and sets up, perhaps in a tight flag, along the 10-day or 20-day moving averages.

I wrote on Wednesday that Momo (MOMO) was in a potentially lower-risk entry position along the 50-day moving average, and repeated that view in a blog post on Friday. What I’m seeing here is a potential “LUie” type of set-up following the big-volume breakout failure after earnings two weeks ago.

That failed breakout creates the vertical line of the “L,” and the past few days’ of very tight action along the 50-day moving average form the horizontal line of the “L.” Now what we are looking for is the “L” to turn into a “U” as the stock moves back up toward the prior highs. That, of course, is not 100% guaranteed, but the theory can be tested by buying the stock here along the 50-day line.

Another key characteristic to note in the pattern is the fact that MOMO has undercut the prior lows in the base from early May. In fact, the stock is currently in an active undercut & rally buy set-up after undercutting the 37.32 low of May 11th earlier and now pushing just above it. In this case, the 37.32 can serve as a maximum downside selling guide. Otherwise the 50-day line can serve as a tighter selling guide.

 

GR060417-MOMO

 

Alibaba (BABA) qualifies in my mind as a big-stock leader in this market. While it has steadily trundled higher along its 10-day and 20-dema lines since gapping above the $100 price level after earnings in January, it hasn’t had a big, dynamic price move. It has basically baby-stepped its way higher.

For that reason, I might consider that it is getting ready to accelerate to the upside in more pronounced fashion, and the big-volume shakeout of two weeks ago may assist in this. Currently BABA is hanging very tight at its 10-day moving average as volume dried up to -31% below average on Friday. For a big stock that trades over 10 million shares a day on average, this would qualify as a decent volume dry-up. For this reason, I see BABA as being quite buyable here at the 10-dma while using the 20-dema as a maximum selling guide.

 

GR060417-BABA

 

Other Chinese-related names don’t look terrible, but may need a little more work as they try to set up again. Here are my notes on the rest of the China Five below:

JD.com (JD) is trying to settle down as it floats between its 10-day and 20-dema lines as volume declines. The stock looks toppy only in the sense that it probably needs some time to digest its recent sharp gains and set up again. For that reason, I’d watch to see how it acts as the 20-dema catches up to the current price level of the stock.

Weibo (WB) is also toppy in the same sense as JD. Currently it is stuck between its 10-day and 20-dema lines as volume dries up. On Friday volume declined to -48% below average, but the stock isn’t in a position where I could call it a lower-risk entry. The 20-dema is starting to catch up to the stock, so I’d watch for some sort of constructive pullback to the 20-dema as a potentially lower-risk entry.

Netease (NTES) looks a bit choppy on its daily chart, but is trying to stabilize along the 10-day moving average as volume dried up to -50% below average on Friday. I’d like to see the stock tighten up a bit more before taking a shot at it here, although one could consider it buyable here using the 20-dema as a maximum downside selling guide.

Applied Optoelectronics (AAOI) has been on fire since its roundabout pocket pivot through the 50-day moving average back in early May. On Friday, the stock pushed to above its 10-day moving average on a strong pocket pivot move to all-time highs. I don’t show the stock here on a chart as it is quite extended, and only pullbacks to the 10-day line would offer lower-risk entries from here.

Lumentum Holdings (LITE), a cousin of AAOI’s, is holding in an eight-day price range in new-high price territory. Volume is drying up sharply here, with Friday’s volume coming in at -53% below average. Any small pullback to the 10-day line would be imminently buyable, in my view. Barring that, the stock could be bought here while using the 10-day line as a tight selling guide.

 

GR060417-LITE

 

Snap (SNAP) is living up to my assessment of the stock early in the week when I noted that it likely needed to do some work along the confluence of the 50-day moving average and the 20-day exponential moving average before it could move higher. Volume has continued to dry up constructively as the stock holds above the 20-dema.

While fireworks are yet to occur, we must remember that SNAP has rallied over 24% from its post-earnings absolute low of 17.59. It has also rallied over 16% from the prior 18.90 low that triggered an undercut & rally long set-up on May 12th. Within this overall context the action can therefore be considered constructive, if unexciting in the near-term. Selling volume picked up slightly on Friday, but still came in at -55% below average. This remains in a lower-risk entry position here using the 20-dema at 21.04 or the 10-day line at 20.89 as selling guides.

 

GR060417-SNAP

 

Twitter (TWTR) posted a five-day pocket pivot yesterday as it regained the 10-day moving average on about average volume. Today the stock held the 10-day line after testing the 20-day exponential moving average earlier in the day. This puts the stock in a lower-risk entry position using either the 10-day or 20-day lines as tight selling guides.

 

GR060417-TWTR

 

Nutanix (NTNX) remains in play as a gap-fill type of set-up after the failure of its initial bottom-fishing buyable gap-up two Fridays ago. The stock has twice tested the lows of the gap-up “rising window” twice over the past week and held both times. Meanwhile, the price action is tightening up here as volume declines.

My view has been that the stock is buyable as close to the 18 price level as possible, although it can be considered to be in a lower-risk buy position here using 10-day line at 17.91 as a maximum selling guide. I would tend to think, however, that if the stock is going to move higher it will do so from here without testing the 10-day line and the 18 price area again.

 

GR060417-NTNX

 

In my Wednesday report I noted that Palo Alto Networks (PANW) was gapping up in the after-hours that day after reporting earnings. As I pointed out, we wanted to watch for a gap-up move that cleared the 200-day moving average, at which point the stock would be very actionable on the long side, using the 200-day line as a tight stop.

Of course, that was just one way to play it. Alternatively, once the stock set an intraday low at 133 after opening at 133.13, one could have gone long at that point. On Friday, the stock held tight as volume declined in constructive fashion. In my view, PANW remains in a buyable position based on the Thursday bottom-fishing buyable gap-up (BFBGU) using the 200-day line as a tight selling guide.

 

GR060417-PANW

 

Line Corp. (LN) is a bit of an odd situation, as one could have bought the stock on Thursday following the Wednesday BFBGU up through the 50-day line. On Thursday, the stock closed slightly down on the day and just below the 50-day line, but held above the 35.50 intraday low of Wednesday’s gap-up price range.

This led to yet another gap-up move on Friday, but on light volume. This gap-up looks a little less buyable, primarily because of the light volume. For that reason, the only good entry came on Thursday, and we’ll see what the stock can do from here.

 

GR060417-LN

 

GrubHub (GRUB) was discussed in a very timely blog post Thursday morning as it was pulling into the 20-day exponential moving average early in the day. At that point I felt the stock was quite buyable, and it then turned back to the upside following several “voodoo” days along the 20-dema.

On Friday, GRUB continued higher on a single, five-day pocket pivot. So far this looks good, with the proper entry coming on Thursday morning per my blog post at that time. I must admit that GRUB’s action has been surprising to me since I at one time advanced a detailed short theory on the stock.

However, as has been the case with many such theories that I might devise, I do not adhere to them once the technical action proves me wrong. Long-time members are well-acquainted with this process, as I have reversed prior short theories on other stocks (TSLA is one notable example in December 2016) and gone long the names instead.

This is one way that I emulate what I considered to be one of Bill O’Neil’s great skills. That was his ability to take a stand, but quickly realize when his stand was dead wrong, reverse his position, and then make a pile of money going in the other direction. I believe Jesse Livermore was also a strong practitioner of this type of reacting to new information with an open mind, being willing to reverse his prior view, and then making money going the other way.

Opinions are just that, opinions, and probably just make for good “filler” when attempting to write commentary on the market and individual stocks, and not much else. In the end, price/volume action is all that matters, and, as Gordon Gekko in the movie Wall Street would say, “Everything else is just conversation.” Our job as traders and investors is to simply maintain an open enough mind to capitalize on real-time shifts in the stream of price/volume information coming at us.

 

GR060417-GRUB

 

Notes on other long ideas discussed in recent reports, some with charts, some without.

Activision Blizzard (ATVI) is extended. We’re just waiting to see whether this can set up again in constructive fashion.

Arista Networks (ANET) broke out to all-time highs on Friday after posting a big-volume pocket pivot at the 10-day line on heavy volume that may or may not have been related to month-end activity. The time to jump on the stock was on Thursday morning per my discussion of the stock in Wednesday’s report. It is now slightly extended.

Cavium (CAVM) has failed to hold at its 20-dema and on Thursday tested its 50-day moving average on heavy volume and held in a show of supporting action. On Friday, the stock pulled back in as it looks to test the 50-day line again on lighter volume. This could set up a lower-risk entry near the 50-day line.

Edwards Lifesciences (EW) is now further extended from the 10-day line. Pullbacks to the line would offer lower-risk entries.

Electronic Arts (EA) remains extended. Watch for pullbacks into the 10-day line at 111.79 as potentially lower-risk entries, although the 20-dema could come into play in the event of a deeper pullback.

First Solar (FSLR) has pulled into its 10-day line with volume drying up to -58% below average on Friday. This puts it in a lower-risk entry position using the 10-day line as a tight selling guide.

 

GR060417-FSLR

 

Impinj (PI) hopped off the 10-day moving average on Thursday after pulling into the line on Wednesday where it was buyable per my comments in my report of that day. It has since moved higher to test the prior highs and pulled back on Friday. Pullbacks to the 10-day line remain your references for lower-risk entries. Remember that PI tends to be a volatile stock, so seeking to buy into constructive pullbacks is the best approach with this name.

iRobot (IRBT) found support near its 20-dema on Thursday after getting hit with some heavy selling volume on Wednesday. This likely needs to put in some time here setting up again, so I would simply watch for low-volume pullbacks to the 20-dema as lower-risk entries as the stock works on a potential new base.

ServiceNow (NOW) is extended from the $100 price level, and only pullbacks to the 10-day moving average would offer lower-risk entries from current levels.

SolarEdge Technologies (SEDG) is holding along its 10-day moving average as volume remains low. The stock has had a sharp upside move since the second week of May and likely needs some time to consolidate those gains. So, I might be more inclined to lay back and take a more opportunistic approach, looking for a deeper pullback, perhaps to the 20-dema, as a better entry if I’m interested in owning this stock.

Square (SQ) looks like it may take some time here to consolidate its prior strong gains since clearing the $20 price level. For now, it’s a matter of letting the stock set up again.

Sunpower (SPWR) is holding in a tight six-day price range following its prior bottom-fishing buyable gap-up (BFPP). It is sitting right at the 10-day line with volume drying up to -49% below average in voodoo fashion. This remains in a buyable position using either the 10-day, 20-dema, or 50-day lines as your selling guide, depending on risk preference.

 

GR060417-SPWR

 

Take-Two Interactive (TTWO) is holding in a tight five-day price range after getting quite extended following its strong post-earnings jack to the upside. The video-gaming “lipstick” stocks all remain quite strong, but in need of some consolidation so that new, lower-risk long set-ups in these names can emerge. So far that remains the case for TTWO.

 

GR060417-TTWO

 

Veeva Systems (VEEV) found support at its 10-day line on Thursday after reversing off the peak Wednesday on heavy selling volume. I still think this likely needs some time to set up again after spending some time working on a new base. VEEV has had a massive upside move since I first discussed the stock when it was trading around the 45 price area back in January/February.

Western Digital (WDC) is holding tight along its current highs, such that small pullbacks to the 10-day moving average could present lower-risk entries, although the stock can also be viewed as buyable here while using the 10-day line as a tight selling guide.

Zillow (Z) was featured in a long-winded, two-chart blog post I put up on Wednesday evening after the primary Gilmo Report was posted.

 

GR060417-Z

 

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).

Anybody trying to take a bearish stand on the market as it continues to move higher is doing nothing more than beating their head against a wall. On Friday, I caught an interview with a retired NFL player who is now investing in the markets and has been short the market all the way up in 2017.

I was absolutely amazed at his bearish persistence in the face of contradicting evidence. As he put it, he still believes the market rally is sluggish and therefore he remains bearish and short. I’m not sure what market he’s looking at, but the action in so many leading stocks is far from sluggish.

Basically, this guy is like that famous film clip of a confused football running back going in the wrong direction and running into his own end zone. Instead of a touchdown, he scored a safety for the other team. I’m not sure if there is a stock market equivalent of scoring a two-point safety for the other team, but I suppose being persistently short in 2017 is as close as you can get!

Currently I don’t see anything all that wrong with this market, unless a persistent uptrend is something we need to worry about. In terms of controlling risk, there is no reason to be concerned about anything – just adhere to your price objectives and trailing stops and the rest will take care of itself. For now, the uptrend remains intact, and I think we all know  which end zone to run toward.

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 MOMO, NTNX, SNAP, and TWTR, 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.