The Gilmo Report

March 1, 2017

March 1, 2017

The Trump Train rolled through Dow 21,000 this morning, but nobody was passing out hats or coffee mugs, even though it cleared 21,100 just for good measure. The rally was notable for coming on the heels of President Trump’s first address (a.k.a. speech) to Congress. While the rally was attributed to Trump’s speech, this struck me as a bit odd since there was nothing truly new in the speech.

For the most part, the rally appeared to be led by the financials, and this occurred against the backdrop of several Fed heads voicing hawkish views as they virtually assured the markets of a rate increase in March. This led to a big gap-up move by almost every financial stock in the market, as represented by the action in the Financial Select Sector SPDR Fund (XLF), below.

 

GR030117-XLF

 

If you like this gap-up move in the XLF, then I would suggest looking at any buyable gap-up move in any big-stock or not-so-big-stock financials and buy it, using the intraday low of today as your selling guide. This would include big banks like J.P. Morgan (JPM) or Wells Fargo (WFC), for example.

Meanwhile, we can see that the big gap-up move in the XLF doesn’t look all that different from the gap-up move in the Dow Jones Industrials Index, except that the XLF’s move came on huge buying volume. NYSE volume came in lighter today, but this is in comparison to yesterday’s month-end levels, which may account for the volume differential. Overall, it struck me that the move in the financials led the rest of the market up with it, and in some cases, quite constructively so.

 

GR030117-$INDU

 

The NASDAQ Composite Index also gapped higher on slightly higher volume to post another all-time high. Not much to say here except that to draw the academic conclusions that the index remains in an uptrend, end of story. This would be true for most other major market indexes, including the S&P 500, not shown.

 

GR030117-$COMPQ

 

Despite the Dow’s move through 21,000 and the strength we’ve continued to see in the indexes, I have noticed a subtle bifurcation of sorts developing in this market. This is based on the visceral feedback I’m getting from the individual set-ups that I’m seeing and acting upon. I must admit that over the past few days the short side of this market has been kinder to me than the long side, but today the long side came back with a vengeance!

At first glance, this might appear to create for investors something of a quandary wrapped in a conundrum. But you just play the set-ups as you see ‘em and take it from there. Mostly this implies that one be a bit opportunistic and perhaps somewhat resourceful in a contrarian sort of way, given the propensity of the Ugly Duckling to rear his ugly head (as if he had any other kind) when things start to look bleak.

Case in point would be U.S. Steel (X), which looked like death last week but has since surged back up to its highs. I pointed out over the weekend that the stock could very well be in the proper buy point down back within its base and near the 50-day moving average.

Sure, enough, X jacks to the upside for three days straight and right back above the $40 price level on a re-breakout type of move. On a net basis, X is making very little in the way of trending price progress either way. But it sure as heck provides some interesting swing-trading opportunities as it pitches back and forth within its overall pattern in erratic and at times nutty fashion.

X wasn’t able to hold the $40 price level by the close as it stalled to close in the lower part of its daily trading range on higher, above-average volume. Am I going to buy this here? Probably not, as I wouldn’t be surprised if the stock simply moved back into its base.

 

GR030117-X

 

And if the Dow is up 250 points on the day, the only thing to do is to continue operating based on the set-ups at hand. On a day like today, I find that Activision (ATVI) is sitting tight at its 10-day moving average near the open, where it is buyable at that point, even with the market gapping up big right at the bell.

It then posts a nice pocket pivot off the line as it moves back up to its prior buyable gap-up highs of early February. In this case, I’d be inclined to buy the stock at the 10-day line and then sell into the move to the upside. Someone else might buy it at the line and then see what it does from here, using the 10-day line at 45.53 as a tight selling guide.

 

GR030117-ATVI

 

As an example, on the short side, Nvidia (NVDA) is still in play as a late-stage failed-base short-sale set-up. But as I pointed out over the weekend, any short position taken near the 20-day moving average last week should have been covered on Friday when the stock undercut the lows of the prior base.

That led to a typical undercut & rally move back up toward the 10-day moving average, which is the closest among the three that are currently sitting just above the stock price. So regardless of what the indexes are doing, I’m watching this as it rallies up toward the three moving averages looking for a reversal to short into.

NVDA was a decent scalp on the short side Friday as it gapped up but reversed to close just below the mid-point of its daily trading range. This remains on my short-sale watch list for now as we see whether it can push up just a little bit further into even more optimal short-sale range.

 

GR030117-NVDA

 

Tesla (TSLA) also remains a short-sale target here after failing at the 20-day moving average last week on huge selling volume after earnings. That led to a move down to the 50-day moving average, coinciding with an undercut of the prior flag lows from late January and early February. That was a logical point from which the stock could bounce, hence a cover point for any short in the stock.

The ensuing rally has not even been able to get up as far as the 20-day moving average, even on a day like today when the indexes were up big in mid rally. After gapping up at the open with the rest of the market, TSLA then reversed to close at the lows of its daily trading range on weak volume as buyers shunned the stock.

This remains shortable on any rallies back up toward the 20-day line at 258.71, assuming the stock can even make it that far. My guess is that the next leg down will occur when TSLA announces another secondary offering of some sort. Given that they virtually admitted in their earnings report that they are going to run out of cash in short order and will need to raise capital again from investors, this is a high-probability event, in my view.

 

GR030117-TSLA

 

Among the big-stock NASDAQ names, Apple (AAPL) huffed and puffed its way to a continuation pocket pivot at its 10-day moving average today. This is slightly extended, but not by much. Thus, anyone who bought a position in AAPL on the original buyable gap-up at the end of January could consider this an add point. Otherwise, if one is coming into the stock here for the first time, the 10-day line at 136.73 would serve as a selling guide.

 

GR030117-AAPL

 

I was surprised that Netflix (NFLX) didn’t get rolling to the upside today during the strong market rally, but it’s not clear to me that this is necessarily an issue with the stock. If the rally continues tomorrow, then NFLX may see fit to join the party. The bottom line is that it continues to hold very tight and constructively along the 10-day and 20-day moving averages as volume remains light. That would in my mind keep the stock in a buyable position here using the 138.25 intraday low of the mid-February buyable gap-up day as your maximum selling guide.

 

GR030117-NFLX

 

Notes on other big-stock names discussed in recent reports:

Alphabet (GOOGL) posted a pocket pivot off its 10-day moving average today. The stock is in a buyable position using the 10-day line at 847.68 as your selling guide.

Amazon.com (AMZN) is still sitting just above its prior base as it holds along the 10-day moving average. Technically the stock is in a buyable position using the 20-day line at 838.43 as a selling guide.

Facebook (FB) cleared to an all-time high today, but is slightly extended. It was last buyable along the 10-day line per my prior comments on the stock.

Priceline Group (PCLN) posted a buyable gap-up (BGU) move yesterday after beating on earnings Monday after the close. As with any BGU, this would be actionable using the 1698.10 intraday low as a reasonably tight selling guide given that the stock is within 2% of that low.

The Gilmo China Five group of stocks have officially become bifurcated following Weibo’s (WB) base failure last week after earnings. Obviously, the stock was shortable on the gap-down break last week before it finally got down near its 50-day moving average on huge selling volume.

That led to a near-term bounce that appears to be stalling at the 20-day moving average. This could roll over and retest the 50-day moving average, but again we must consider the Ugly Duckling situation that might arise here. If the other China Five names continue to act well, then WB might be dragged out of its stupor and back into play as a “LUie” type of set-up.

We can see that so far we have the “L” forming, and of course the stock looks quite ugly after last week’s breakdown and base failure. What I would watch for here, however, is a move back up through the 20-day line, which could turn the “L” into a “U,” completing the LUie pattern. Remember that LUies form after some prior negative, ugly price/volume action makes the pattern look ugly.

At that point, however, and especially in this market, the Ugly Duckling can step in and turn these things back to the upside. I would watch for that, particularly if the general market continues to rally. You can also take my approach, which is to buy the stock here and use today’s intraday low at 50.50 as an uber-tight stop.

 

GR030117-WB

 

Notes on the other China Five names:

Alibaba (BABA) posted a stalling pocket pivot today but found resistance near the highs of its current five-week base formation. This remains buyable on pullbacks to the 20-day moving average at 101.92, or even the lows of the current base around the $100 price level.

JD.com (JD) continues to hold tight along its 10-day moving average.  Earnings are expected to be reported tomorrow before the open.

Netease (NTES) has regained the $300 Century Mark, but stalled today around the Century Mark on heavy volume. The stock did find intraday support off its 10-day moving average at 296.37, so in my view this is buyable here using the 10-day line as a tight selling guide.

Momo (MOMO) has rallied off its 20-day moving average after finding support at the line last Friday, and is back at its prior base-breakout highs. Not much to do here ahead of earnings, which are expected to be out tomorrow.

The leading names in the optical space don’t seem to be in good shape here, and remain names to look at when they come into buyable positions. I would note that both Arista Networks (ANET) and Applied Optoelectronics (AAOI) are both holding tight after recent buyable gap-up moves that followed their respective earnings reports.

We can see here that ANET is in a tight seven-day flag following its prior BGU. At the same time the 10-day moving average is catching up to the stock and now sits at 116.28. I would love to get a pullback to that price level as a lower-risk entry point, but the alternative would be to buy the stock here and then use the 10-day line as your selling guide. AAOI, not shown, has only formed a three-day flag so it probably needs to pull in a little to become buyable in lower-risk fashion. The 10-day line lies at 40.74, and pullbacks to the line would serve as reference for lower-risk entries.

 

GR030117-ANET

 

Notes on other optical names discussed in recent reports:

Ciena (CIEN) is expected to announce earnings on March 8th, so I’m not inclined to do anything with the stock until then.

Finisar (FNSR) remains in a buyable position here using the 20-day moving average at 33.31 as a tight selling guide.

Lumentum Holdings (LITE) has held support at the 20-day moving average, and is in a lower-risk entry position here using the 20-day line at 46.19 as a tight selling guide.

Juniper Networks (JNPR) is my least favorite name in the group, but it is holding above its 50-day and 20-day moving averages.  This puts it in a buyable position using the 50-day line at 27.95 as a tight selling guide.

Big-stock cyber-security name Palo Alto Networks (PANW) was decimated today after missing on earnings yesterday after the close. The stock was down 24%, or 36.69 points, today on a brutal gap-down blow-up. PANW had a nice move before earnings, and illustrates why there is no need to play earnings roulette with a stock like this.

In any case, PANW’s disintegration put some pressure on other names in the group, including the four names that I still like in the group and which continue to act constructively. Fortinet (FTNT), for example, was hit right at the open but found support right at its 20-day moving average. It then rallied throughout the day to close down a mere four cents.

Basically, this was supporting action at the 20-day moving average that qualifies as a supporting type of pocket pivot. If cyber-security names like PANW aren’t making the grade, perhaps money moves toward constructively-acting names like FTNT. I still like the stock right here with the idea of using the 20-day line at 36.59 as a reasonably tight selling guide.

 

GR030117-FTNT

 

Barracuda Networks (CUDA) is also acting constructively as it weathered just a bit of selling pressure in sympathy to PANW this morning before posting its second pocket pivot of the week today. With the indexes gapping up huge at the open, both FTNT and CUDA were in buyable positions early in the day on the PANW sympathy pullbacks.

While the two pocket pivots this week are exciting to see (okay, maybe not THAT exciting, but constructive), the bottom line is that CUDA remains in what will become a 20-week base by Friday if it doesn’t break out before then. In my view, this is still just revving up to move higher in any continued market rally. Therefore, CUDA remains buyable here using the 50-day moving average at 23.27 as your selling guide.

 

GR030117-CUDA

 

Notes on other cyber-security names discussed in recent reports:

Checkpoint Software (CHKP) is holding tight along its 20-day moving average and is in a buyable position using the 98.51 low of today as a very tight selling guide.

Symantec (SYMC) squeaked to a new closing high today, clearing its prior mid-February closing high by three cents. I prefer to buy the stock closer to the 10-day or 20-day moving averages at 28.70 and 28.37, respectively, although it remains within buying range using the 20-day line as a reasonably tight selling guide.

Veeva Systems (VEEV) had a wild day today after announcing earnings yesterday after the close.  holding tight ahead of earnings this week. Nothing to do until then. The stock gapped down at the open, printing 43.06 at the bell. It then dropped as low as 41.30 and shook out sellers at that point before reversing back to the upside and posting a massive-volume pocket pivot by the close. Wild!

If we assume that today’s action served as a big shakeout-and-breakout type of move given that VEEV emerged from its low-base price range extending back to early December, then this pocket pivot is buyable. In this case, we would use the 10-day line at 44.02 as a tight selling guide.

 

GR030117-VEEV

 

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, 20-day exponential, 50-day simple and 200-day simple moving average. I wanted to clarify this in case there is any confusion.

Notes on other long situations discussed in recent reports (stocks in lower-risk buy positions are denoted with a [B] after the symbol:

Carnival Cruise Lines (CCL) [B] continues to base-build and remains buyable on pullbacks to the 10-day line at 55.98 or the 20-dema at 55.76. That said, today’s close at 56.50 is also buyable using either of the two short moving averages as tight selling guides.

Charles Schwab (SCHW) [B] gapped down yesterday in ugly fashion on news of another discount brokerage cutting its fees as well, but that is old news. Today SCHW followed the rest of the financials to new highs on a strong-volume breakout. If you like to buy breakouts, here you go.

Electronic Arts (EA) held support near the 20-dema today and closed up on lighter volume. I like this on pullbacks to the 20-day line at 85.57.

Incyte Pharmaceuticals (INCY) is extended following last Friday’s buyable gap-up move after it was announced it would be added to the S&P 500 Index. Watch for pullbacks to the BGU intraday low at 127.67 as potential lower-risk entry opportunities.

Glaukos (GKOS) [B] announced earnings after the close and should be watched tomorrow for an actionable buyable gap-up (BGU) at the open.

Goldman Sachs (GS) [B] broke out today with the rest of the financials on strong volume. This puts it in a buyable postion using the 10-day line at 25.25 as a tight selling guide.

Nutanix (NTNX) is expected to report earnings tomorrow after the close. Nothing to do here until then.

Mobileye (MBLY) strikes me as a little weak here as I’ve played with it on both sides recently. Weakness on the long side last week led me to short the stock, and I still consider it shortable using today’s high at 46.84 as a tight upside stop.

Royal Caribbean Cruise Lines (RCL) is slightly extended here as it posted a higher closing high today on light volume. I prefer to look at this on pullbacks to the 10-day line at 96.11 or the 20-day line at 94.94 as lower-risk entries.

Square (SQ) successfully priced an upsized offering of $400 million worth of senior convertible bonds today, and has so far weathered this by remaining well above the 16.32 intraday low of last week’s post-earnings buyable gap-up (BGU) move. Volume has been coming in at above-average over the past two days, so I would look to enter the stock on any pullback closer to the 16.32 BGU low.

Take-Two Interactive (TTWO) was buyable today at the 20-day moving average. I then posted a five-day pocket pivot on strong, above-average volume. This remains buyable on pullbacks nearer to the 20-dema at 56.93.

Tableau Software (DATA) has been able to hold at its 20-day moving average and today found minor support at the line. If the stock were to bust the 20-dema on heavy volume it would morph into a short-sale target, but so far it is holding. Therefore, this would be considered a lower-risk entry position using the 20-day line at 52.58 as a tight selling guide.

Twilio (TWLO) remains in a lower-risk buy position here using the 20-day line at 31.83 as your selling guide. Note that it does show some porosity around the line, so for those who prefer it the 50-day line at 30.31 can serve as a tighter selling guide.

On the short side of the market, I find that most set-ups are playable as relatively quick swing-trades. I got away with shorting Workday (WDAY) at around 188 and change on Monday after the close when it announced earnings, and the stock then broke down to the 200-day line. That was good for a quick swing-trade on the short side.

Today WDAY bounced off the 200-day line on strong, above-average volume. This makes me wonder whether it will regain its 20-dema tomorrow if the buying interest continues. The flip side is that if it fails to hold at the 20-day line it would remain in force as a short-sale target. But a move through the 20-day line would bring me in on the long side here after covering my short yesterday.

 

GR030117-WDAY

 

The reason why I suspect that WDAY might push back to the upside has to do with the action in Salesforce.com (CRM) today. CRM actually started to the downside yesterday in after-hours trading following its earnings report. Today, however, the stock opened up slightly and kept pushing higher on a big-volume pocket pivot breakout to higher highs. This caused me to flip from short to long, and now the stock looks like it may have legs to the upside from here. Thus, this is buyable here using the 10-day line at 81.88 as a tight selling guide.

 

GR030117-CRM

 

For this reason, I am also watching other names in the cloud space, including Tableau Software (DATA) and Splunk (SPLK) as long plays that have already announced earnings.

A quick note of caution on GrubHub (GRUB) which has been a recent short-sale target of mine. Note that today the stock undercut the lows of early January which could trigger an undercut & rally move back up through the 200-day moving average.

With the market going nuts to the upside today, including a 300-point move in the Dow, one begins to wonder whether the market is overbought and subject to an immediate correction. My answer is the same as it was at the outset of this report: It doesn’t matter.

All we need to do is operate on the basis of what the set-ups show you. If I see a short-sale set-up that allows me to take some points on the short side of a swing-trade, I’ll take it. If the Dow is up 250 points at the open, I don’t chase names that are extended or worry about whether the market is up too much to buy stocks. I just start looking for stocks that are in a lower-risk buyable position, and put my long focus there.

This is all you need to – just follow the set-ups. I would also emphasize that this procedure and approach applies to days when the indexes are up big just as much as when they are down. In a market that is often full of surprises, and certainly full of noise, this is the only way to operate. Take it from there.

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 AAPL, CRM, MBLY, NFLX, TWLO, 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. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.