The Gilmo Report

June 6, 2018

June 6, 2018

The prior three trading days were very good for Gilmo names, as everything that wasn’t up started jacking higher, and everything that was already extended became even more extended. All this ebullience helped to drag the S&P 500 Index into breakout territory on Monday as it posted a higher high coming out of a relatively tight three-week price range.

That was followed by a higher close yesterday followed by a much stronger follow-through, but on only about even volume. Financials were a big part of the outperformance in the S&P and the Dow today. Both indexes still have some ground to cover if they intend to retake the late January highs.

 

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Meanwhile, the NASDAQ Composite Index, along with its small-cap little brother the Russell 2000, keeps making all-time highs. The obvious question here is whether the move back to the highs of the prior five-month range, either to new highs or approaching new highs such as the S&P 500 and Dow are currently doing, will mark the end of the line.

This is the second move to new highs since the late January peak. With the S&P and the Dow lagging, the NASDAQ, led by big-stock NASDAQ 100 names, is showing extreme relative strength as it again marches into new-high territory.

 

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Will this latest move to new highs be the start of a glorious new, sustained uptrend that carried the indexes much further? It’s impossible to know. The only thing we can do is watch the stocks, most of which are getting extended. Thus, I think the first pullback, which could come at any time, will give us some idea of just how real this rally is.

Meanwhile, individual stocks have been doing very well, and getting more extended in the process. Apple (AAPL) illustrates this, since today’s move to a new closing high is a continuation move following the original early May breakout. The stock then consolidated tightly along the 10-day line, which it needed to do given the prior straight-up-from-the-bottom move off the late April lows.

The base breakout occurred more or less in the middle of that SUFB move, and AAPL’s last lower-risk entry point occurred five days ago at the 10-dma. Now the stock is extended, such that pullbacks to the 10-dma at 189.67 would be where you would be looking for your next lower-risk entry opportunities.

 

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Amazon.com (AMZN) had been drifting to new highs for nine days in a row on light volume before buyers suddenly capitulated yesterday. Volume picked up sharply from the prior nine days’ worth of low volume as the stock went near-term parabolic. That turned out to be a short-term climactic action as sellers gained the upper hand today, knocking the stock off its intraday highs and into the red on higher volume.

AMZN has been extended, at least in my book, for the past few days. It was last buyable along the 20-dema in the middle to latter part of May. Therefore, only pullbacks to the 10-dma down at 1638.14 would offer lower-risk entries from here.

 

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Facebook (FB) demonstrates what buyers can look for when a leading stock pulls back. In this case, the stock came under pressure again on news about how it mishandles and abuses its user data. This time, news that it provided user data to Chinese firms like Huawei and ZTE sent it back down to the 10-dma this morning.

However, it found support off the intraday lows and the 10-dma as volume picked up on the day. This creates supporting action at the 10-dma that also coincides with the top of the prior short flag formation. It is not clear whether FB will bounce sharply higher from here, but if it cannot hold the 10-dma, the 10-dema at 186.24 then comes into play as deeper support and a deeper possible entry point.

 

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Netflix (NFLX) drifted to another all-time closing high today, but volume remains low. The last proper entry points occurred on the pocket pivots along the 10-dma in the latter half of May. The stock is now extended, and pullbacks to the 10-dma at 355.52 can be watched for a possible lower-risk entry.

 

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Nvidia (NVDA) is consolidating the move that began at the 10-dema about two weeks ago. It has closed tight over the past two days after posting an all-time high on Monday. This was a continuation move following the re-breakout of last Friday, which I noted in my weekend report.

Even though NVDA is consolidating constructively up here in new high ground, only a pullback to the 10-dma at 255.10 would offer a lower-risk entry from here. The 10-dma is rising rapidly, so will probably be a fair bit higher over the next few days.

 

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Tesla (TSLA) blasted to higher highs after CEO Elon Musk announced at a shareholder meeting that the company would likely meet its Model 3 production goals. In addition, he stated that the company was also planning a new Shanghai plant. That sent the stock on a tear this morning, gapping up in a pocket pivot move off the 50-dema.

I discussed the stock as buyable along the 50-dma/20-dema confluence over the weekend. Before that, TSLA was buyable based on the prior undercut & rally move of two weeks ago when it undercut its early May low at 275.23. Today’s move took the stock right up into the 200-dma, which may serve as near-term resistance, or not.

TSLA has the shorts on the run once again, and while it was buyable at the 50-dma yesterday, it is now extended, pending some new potential set-up along the 200-dma. For now, it’s a bit early to make any clear-cut calls as it tests potential resistance at the 200-dma. For all we know, the stock becomes shortable here once again!

 

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Twitter (TWTR) was added to the S&P 500 Index as of yesterday morning, and that sent the stock up to the 40 price level in a gap-up move. This morning TWTR announced a private offering of $1 billion worth of convertible notes, which sent the stock about a buck to the downside at the open. But it recovered to close up 30 cents at 40.10.

That would be TWTR’s first close above 40 since April 28th, 2015. It is obviously way-extended at current levels, so that the 10-dma way down at 35.81 would be your nearest reference for support on any constructive pullback. The 10-dma is rapidly moving higher, so it should get closer to the 37-38 price area shortly.

 

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Snap (SNAP) followed through nicely on Thursday’s and Friday’s pocket pivot pair at the 20-dema, which I indicated as buyable in the weekend report. The stock then rocketed up through its 50-dma this morning to post another pocket pivot. However, the stock is extended in this position such that I would want to see it consolidate here by holding tight along the 50-dma and setting up again. Nevertheless, a nice move to play this week!

 

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CSX Corp. (CSX) pulled into its 20-dema yesterday and found support at the line. That was a lower-risk entry opportunity if one was watching for it. Meanwhile, fellow railroader Norfolk Southern (NSC) dropped below its 20-dema today but rallied to post an undercut & rally long set-up at the prior 148.99 low of May 23rd.

That would have been buyable today if one was interested in the stock and watching for a move like this. The stock closed well off its intraday lows, and I would prefer to buy a pullback closer to the 20-dema at 150.73 if I had missed today’s U&R at 148.99.

 

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I blogged this morning about Nutanix (NTNX) to note that members should watch for a low-volume pullback into the 20-dema. The stock ended up pinging right off its 20-dema at 55.55, hitting an intraday low of 55.54. One thing I don’t like here is the slight increase in selling volume as I would have preferred to see volume dry up further as the stock settled into the line.

Therefore, if one tests this on the long side at the 20-dema, then the 20-dema serves as a tight selling guide. I would keep things tight there since NTNX could morph back into a late-stage failed-base (LSFB) short-sale set-up if it busts the 20-dema. The stock was hit with heavy selling after earnings last week, so could end up failing. Play it as it lies!

 

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CyberArk Software (CYBR) and Fortinet (FTNT) continue to lead the charge among cyber-security names, with both moving to all-time highs today as they become ever more extended on the upside. Pullbacks to the 10-dmas in either would offer the preferred lower-risk entry opportunities from here.

Meanwhile, FireEye (FEYE) has followed through on last week’s undercut & rally (U&R) move back up through the 16.60 prior May 4th low in the pattern. The stock is now encountering resistance just below its 50-dma, which looks normal. Today, it found intraday support at the 20-dema as volume came in above average.

From here, low-volume pullbacks into the 20-dema would offer your next references for lower risk entries. But so far, the U&R long set-up down at 16.60 has played out well as the Ugly Duckling remains a potent force in this market.

 

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Palo Alto Networks (PANW) reported earnings before the open on Monday, which caught me off guard. I recall that the company used to report after the close, but this time they changed things up by releasing the report ahead of the opening bell. That led to a short gap-up move at the open that reversed hard on heavy selling volume.

After opening at 214.60, PANW plummeted to an intraday low of 199.87, before finally ending the huge-volume spin-cycle day at 208.09 and just above the 10-dma. That didn’t last long, as the stock then broke below the 20-dema yesterday, and then again this morning attempted to rally back above the 20-dema before rolling below the line once again.

Now it’s in a little L-formation hovering just below the 20-dema as volume declines sharply. If I’m bullish on the stock, then I’m looking for this to hold up in a tight L-formation with volume continuing to dry up. If I’m bearish, I’m looking at this as a possible short right here, using the 20-dema as a guide for a tight upside stop. This has a two-side look to it, so watch for the proper cues and play it as it lies.

 

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Okta (OKTA) reported earnings after the close, and as I write is currently trading up less than $2 at 55.85 after closing at 54.14. As you can see, the stock is far extended from the original voodoo entry point along the 20-dema back in early April, as I discussed back at that time.

If this after-hours gap-up move holds into tomorrow’s open, it’s not clear to me that this will be a buyable gap-up given the stock’s extended state. Therefore, I’d just watch to see if the stock settles into a new buy zone, and that may mean that it will have to spend some time setting up again.

 

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DropBox (DBX) tested the lows of its current three-week price range again on Monday and held. That led to a nice picket pivot move yesterday on a strong volume increase. The stock is now slightly extended, although it did briefly pull into the 10-dma and 20-dema this morning before bouncing off the line to post a second pocket pivot. Pullbacks to the 20-dema would be my preferred lower-risk entries, if I can get ‘em.

 

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News of a possible deal to rescue shuttered Chinese telecom firm ZTE has put some dynamic news play into optical names with exposure to ZTE. As you will recall, U.S. telecom gear companies were banned by the Commerce Dept. from selling anything to ZTE, putting the company out of business. Now there is talk of a settlement designed to bring ZTE back to life!

So, as we survey the landscape of affected stocks, we go back to our old friend, Lumentum Holdings (LITE), which I have been discussing continuously in recent reports as it goes nowhere.  Over the past four days, the stock has attempted to retake the prior 61.60 low in the pattern in a possible U&R type of move, but so far to no avail.

It has, however, been able to retake the 50-dma. Today, LITE tested the 50-dma and held as volume dried up to -38% below-average. This puts it in a lower-risk entry using the 50-dma as a tight selling guide. My guess is that in the next few days we will see a ZTE settlement that allows the company to resume operations, and this will likely send LITE higher – it’s  just a matter of timing your entry.

 

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Another supplier to ZTE that might see a pop is Acacia Communications (ACIA). This was a once-hot IPO that reached a high of 128.73 in September of 2016. I remember at the time, someone sent me a detailed “Precedence Analysis” comparing the stock to Cisco Systems (CSCO) in 1991. That’s one precedent that didn’t pan out, no matter how great the comparative analysis is!

In any case, ACIA is a beaten-down former hot-IPO and market leader, but could represent a turnaround situation. After seeing earnings drop -86% in 2018 to a low of 25 cents a share, the company is expected to turn things around in 2019, posting 240% earnings growth on 85 cents a share. Right now, however, I’m looking at this mostly on a technical basis.

What ACIA has going for it right now is a pocket pivot at the confluence of the 10-dma, 20-dema, and 50-dma yesterday. This was followed by a gap-up pocket pivot today that stalled but still closed in positive territory on higher volume. I think the closer to the 10-dma at 32.97 you can buy this the better, and you may get that chance in the coming days.

While various news organizations from Reuters to the Wall Street Journal have reported that a deal is at hand, nothing final has occurred. That may take a few days, and so I may want to be in LITE or ACIA when that final agreement is finally announced. The risk, of course, is that there will be no rescue of ZTE, so position-size accordingly!

 

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Roku (ROKU) was one of the few stocks still in a lower-risk buy position come Monday morning. If one bought it there at around 37 per my discussion in the weekend report, one got to participate in a strong move back up to new highs and above the 40 price level. That move brought in some overhead selling today, but ROKU held well above its 10-dma.

Since the stock’s last truly lower-risk entry occurred near the 10-dma last Friday and again on Monday, I would look for similar pullbacks into the 10-dma as your best lower-risk entries from here. There is no need to chase the stock here since the original buy points were down near the 50-dma 2-3 weeks ago.

 

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Baozun (BZUN) and Autohome (ATHM) both remain extended, but both stocks pulled back from their recent all-time highs today. For now, the 10-dma on both stocks would serve as references for lower-risk entry opportunities on constructive pullbacks. BZUN’s 10-dma is at 60.24 while ATHM’s is at 109.13.

Momo (MOMO) is also way extended after last week’s buyable gap-up, such that pullbacks to its 10-dma would also be your only current references for lower-risk entries. The stock closed today at 50.09 and the 10-dma is way down at 45.15, but is rising rapidly.

Alibaba (BABA) is still within buying range of last Friday’s base breakout and decisive move through the $200 Century Mark. I would prefer to take the opportunistic approach and lay back for a pullback closer to the 10-dma at 201.73 and the $200 Century Mark, if I can get it. The bottom line is that one could have easily gotten into this one already at the 200 price level on the Century Mark breakout, or at the 10-dma on Thursday per my prior comments in Wednesday’s report.

 

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Tal Education Group (TAL) dropped below its 20-dema on Monday, but rallied to hold above the line by the close. Volume was heavy; therefore, this could have been viewed as a supporting pocket pivot at the 20-dema. It is now at new highs, so only pullbacks to 10-dma at 43.07 would offer lower-risk entries from here.

Sunlands Online Education (STG) is a thin trader at 498,000 shares a day in average volume, and reminds me of Rise Education (REDU), another extremely thin Chinese educational stock. REDU is pretty much out of play now, but it certainly provided some nicely profitable moves on the run from 12.50 to 16.70 between December 22, 2017 and January 19 of this year.

Now STG looks like it might be setting up to move higher here as it settles into its 10-dma and 20-dema. Volume dried up to -80.5% below-average today, so if you have a smaller account that doesn’t need to buy 10-30,000 shares to have a decent percentage position size, this is actionable here using the 10-dma at 9.87 as your selling guide.

 

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Notes on other names discussed in recent reports:

Carbonite (CARB) bounced off its 10-dma yesterday and closed today at an all-time high. I still believe this needs more time to set up again in order to present the best, lower-risk secondary entry following the prior entry down near 28-29 in mid-April per my discussion of the stock at that time.

Intuitive Surgical (ISRG) broke out on Friday and has continued to move higher. While technically it is within range of last week’s breakout point at 472.78, my preferred entries came and went last week when the stock was holding along the 20-dema. Therefore, in my view, ISRG is a bit extended here and out of buying range for my tastes.

Sailpoint Technologies (SAIL) keeps sailing higher, and has drifted to all-time highs on light volume. This is extended, hence there is nothing to do here until it sets up again.

Square (SQ) has continued to move higher and is now quite extended to the upside. Only pullbacks to the 10-dma at 58.44 would offer lower-risk entries from here.

Twilio (TWLO) remains extended following last Friday’s pocket pivot off the 10-dma. Pullbacks to the 10-dma at 55.21 would be your next possible references for lower-risk entries from current extended price levels.

For newer members: Please note that when I use the term “20-day moving average,” “20-day line,” or “20-dema” I am referring to the 20-day exponential moving average. I use four primary moving averages on my daily charts: a 10-day simple (the magenta line), 20-day exponential (the green line), 50-day simple (the blue line) and 200-day simple moving average (the red line). On rare occasions, I will also employ a 65-day exponential moving average (thin black line). In all cases I will mostly use the shorthand version of “10-dma,” “50-dma,” etc.

As I wrote over the weekend, with most leading stocks extended it is mostly a matter of laying back and waiting for the next pullback that sets up the next round of lower-risk entry opportunities. That assumes, of course, that the market is going to move higher from here. Things certainly do look very good, but that’s what often makes me nervous about this market. When things look too good, that’s usually when we see some sort of pullback.

But, the easy solution to all of this is to just focus on what the individual stocks are doing. Despite most stocks being extended over the weekend, we did have two great buy ideas from my weekend report in ROKU and SNAP work out well this week. And maybe names like LITE and ACIA are setting up to offer good trading opportunities as well.

Meanwhile, when it comes to stocks that are extended, we simply mark the lower-risk entry spots on our charts and wait. Meanwhile, if this rally does fail, we have convenient reference levels for both the NASDAQ and the S&P 500 at their recent breakout points. If those breakouts fail, then the game may change. Until then, play it as it lies.

Gil Morales

CEO and Principal, Gil Morales & Company, LLC
Managing Director and Principal, MoKa Investors, LLC
Managing Director and Principal, Virtue of Selfish Investing, LLC

At the time of this writing, of the stocks mentioned in this report, Gil Morales, MoKa Investors, LLC, Virtue of Selfish Investing, LLC, and/or Gil Morales & Company, LLC held no positions, though positions are subject to change at any time and without notice

Gil Morales & Company, LLC (“GMC”), 8033 Sunset Boulevard, Suite 830, Los Angeles, California, 90046. GMC is a Registered Investment Adviser. This information is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to GMC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Gil Morales & Company, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.