The Gilmo Report

March 11, 2018

March 10, 2018

A strong jobs report on Friday sent the market rocketing, with the NASDAQ Composite Index gapping on a breakout to all-time highs. Surprisingly, volume was not rip-roaringly higher, coming in at less than 1% higher than Thursday’s levels. But a breakout is a breakout, and if it comes on even slightly higher and above-average volume, then it remains a bullish move, end of story.

 

GR031118-$COMPQ

 

In my Wednesday mid-week report I noted that, “The S&P 500 Index, along with the Dow, remains below its 50-dma but is forming a short flag formation that may be setting the index up to retake its 50-dma. If the final signing of steel and aluminum tariffs tomorrow shows a number of ‘carve-outs’ and exemptions, thus proving to be less onerous on consumers of steel, then the index could easily pop back above the 50-dma.”

That is precisely what happened on Friday as the S&P 500 Index gapped up through its 50-dma and never looked back on higher but below-average volume. For now, this is exact the move I was looking for, and the index posted its highest closing high since the February 9th lows.

 

GR031118-$SPX

 

My rationale for viewing the S&P 500 as being likely to retake its 50-dma was based primarily on the thesis I set forth in my Wednesday report. As I wrote at the time, “My guess is that ultimately this whole tariff thing will turn into a big buying opportunity for some of these stocks that are viewed as ‘dependent’ on cheap steel prices.” The two stocks I picked in my Wednesday report as likely to rally once the tariff news was out were Caterpillar (CAT) and Deere & Company (DE).

I first blogged about these names on Monday of this past week, when I was starting to get a sense that things were percolating as they both started to post undercut & rally type moves, which I explained in detail in my Wednesday report. CAT then put in a quick Wyckoffian Retest where it pulled back slightly to test the Monday low without getting very close while volume declined. It then launched higher on Thursday and Friday, and is now approaching its 50-dma. We’ll see if it can clear the line this week, which would trigger another long entry signal if it occurs.

 

GR031118-CAT

 

Deere & Company (DE) was in fact the stronger of the two as it launched through its 50-dma on strong, above-average volume. This contrasts sharply with CAT’s below-average volume move that remains below the 50-dma. DE’s move on Friday is also starting to poke at a possible trendline breakout, and just missed posting a pocket pivot volume signature on the day. From here, any pullbacks to the 50-dma would provide lower-risk entries if one had not already gotten on board per my previous comments on the stock.

Note that DE mimicked CAT in that it also posted an undercut & rally move coming back up through the prior lowest closing low in the pattern on Monday. It then also rallied from there, put in a quick Wyckoffian Retest, and then launched higher on Friday.

 

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Another name that I blogged about on Wednesday and which I thought might benefit from a “tariff tantrum” relief rally was Diamondback Energy (FANG). Note that the stock posted a voodoo pullback to the 20-dema on Thursday before moving higher on Friday. Volume was not very heavy, however, and the stock is still sitting in a cup-with-handle formation. Pullbacks to the 20-dema would offer lower-risk entries from here, or one could simply wait for a clean base breakout to buy if one prefers to buy breakouts.

My approach, however, would be to use low-volume weakness into the 20-dema as an anticipatory entry, if I can get it.

 

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Netflix (NFLX) shrugged off Wednesday’s analyst downgrade by holding tight for two days and then launching higher on Friday on news that former President Obama would be doing a show for the online network. This just made the stock more extended, with the last buy point in the pattern being the continuation pocket pivot off the 10-dma two Fridays ago.

Remember that continuation pocket pivots are quite actionable, as it does not matter whether the stock is breaking out of a proper base or not since it is a continuation buy point. This is quite extended here, and the last buy point was the pocket pivot at the 10-dma last Friday.

 

GR031118-NFLX

 

Nvidia (NVDA) rallied all of 2% off its 20-dema on Friday, so remains within buyable range of the 20-dema based on Thursday’s voodoo action at the line as it held tight. Overall, the pattern has the look of an ascending triangle as the stock has made two higher lows since early February and may now be poised to break out. In a strong market rally from here, assuming the NASDAQ’s breakout indicates the start of a new up leg that will have some legs, so to speak, I could see NVDA reaching the $300 price level.

 

GR031118-NVDA

 

Amazon.com (AMZN) continues to trend higher and remains out of buying range. Pullbacks to the 10-dma, now at 1527.71, or deeper pullbacks into the 20-dema, now at 1492.38, would be your current references for any potential, lower-risk entries from here.

Tesla (TSLA) continues to bounce along the lows of the past week, and is showing some slight supporting action along those lows. On Thursday, the company announced that revenue growth in 2018 would accelerate from 2017’s levels based on the growth of its energy storage business and improving Model 3 deliveries. In 2016, the company made $181 million from energy storage while in 2017 that jumped to $1.1 billion and is expected to continue ramping up in 2018.

That, along with improving Model 3 deliveries, could provide the proverbial rabbit in the that that CEO Elon Musk needs to get the stock moving again. Over the past few months I’ve viewed the stock as a two-sided play, buyable along the lows (often on U&R set-ups) and shortable along the highs. But, if the NASDAQ follows through on Friday’s breakout to all-time highs, can TSLA participate, and how would this play out, exactly?

Well, the first thing to look at here are the technicals, which show a U&R move coming back up through the 322.07 low of six days ago on the chart. Thus, a U&R set-up can be tested here on the long side, using the 322.07 low, about 2% lower, as a tight selling guide. There is also something of an “L” formation here, which is always the first thing you need to see for a possible “LUie” to form. Although this is not a guaranteed outcome, the L must come before the U if there is any chance of a LUie formation showing up!

 

GR031118-TSLA

 

Another thing to consider here with TSLA is the persistent, high short-interest, which is currently at 28.7 million shares, or about 26.3% of its float. Despite everything going against the stock, from weak Model 3 deliveries to decreasing economies of scale the more cars they make, the stock has not come completely apart. In fact, the weekly chart, below, reveals that technically the stock has not topped and gone into a long-term decline. Instead, it is sitting within an eight-month range or consolidation.

While it has certainly ben tradeable in both directions when it reaches the top or bottom of the range, it has remained within the range, or base. But with the potential for the things that so far haven’t killed the stock to improve, such as improving revenue from a more diversified product mix and a successful ramp-up of Model 3 sales and deliveries, then what hasn’t killed TSLA may only make it stronger.

That is my bullish thesis for TSLA, which isn’t guaranteed to play out. But with the technicals as they are right now, and the stock near the lows of its eight-month price range, I am looking for confirmation of an upside move, particularly if the NASDAQ breakout has legs.

 

GR031118-TSLA Weekly

 

Twitter (TWTR) remains within technical buying range of Monday’s pocket pivot breakout from a three-weeks-tight (3WT) flag formation. Pullbacks to the top of the flag near 34 would offer the lower-risk option as a long entry, but the stock is acting very well here as it holds tight with volume declining to -37% below average on Friday.

 

GR031118-TWTR

 

Snap (SNAP) has suffered only slightly after announcing a “major” lay-off of 100 engineers. Despite the bad news, cited by some analysts as a sign of the company’s failing business model, the stock has merely pulled into its 10-dma. Volume dried up to -38% below average on Friday as sellers failed to swarm the stock. Short-interest, meanwhile, remains high at just over 90 million shares, or about 1/5th of the float.

While the stock could still decline from here, the fact that it hasn’t come completely apart after announcing lay-offs is a positive, especially since it has held the 10-dma and 20-dema on declining volume.  Therefore, this can be considered a lower-risk entry point here using the 10-dma as 17.58 as a quick getaway if it fails.

 

GR031118-SNAP

 

Facebook (FB) pulled into its 50-dma on Thursday, presenting a lower-risk entry position at that point, and then rallied further above its 50-dma on Friday as the market carried it higher. The stock remains stuck in a range and has not really developed any kind of trend in either direction. It is only currently buyable based on the moving-average undercut & rally move of Wednesday coming up through the 50-dma, using the 50-dma as a selling guide.

Blackberry (BB) posted another pocket pivot at the 50-dma on Thursday as volume came in strong. That led to an orderly pullback into the 50-dma on Friday, putting the stock in a lower-risk buy point using the 50-dma as a tight selling guide. BB was previously buyable as it came back up through the 11.87 low of late January two Fridays ago as I blogged at the time, and this latest pocket pivot provides a new entry point, even for initial buyers of the stock.

 

GR031118-BB

 

Weight Watchers (WTW) has retaken its 50-dma after undercutting and rallying back up through the prior 61 low of early February. While this is what I had wanted to see as confirmation of the prior U&R move, which itself was not altogether straightforward as the stock flipped back and forth around the 61 level, it’s still a little unclear. We can see that the move back above the 50-dma has come on wedging (declining) volume, so there is the possibility that the rally will fail back below the 50-dma.

For now, if one is playing the U&R through the 61 price level, then that can be used as a selling guide.

My guess is that WTW is building a new base after its torrid price run after breaking out from a very long base in early January. So, while the stock could recover and rally quickly from here, it could also take more time to build a new base, which is another possibility to consider. Therefore, just play it as it lies, and keep in mind that there are other good stocks to play in this market currently, so one needn’t fixate on WTW.

 

GR031118-WTW

 

Square (SQ) has pushed higher into all-time high price ground and remains extended from its Monday base breakout. I would look for pullbacks to the 50 price level or better as lower-risk entry opportunities if you can get ‘em.

SolarEdge Technologies (SEDG) remains extended from its February buyable gap-up move after earnings but is holding very tight along its 10-dma as volume declined to -43.5% below-average on Friday. Thus, this could be considered a reasonable entry point here using the 10-dma at 51.11 as a tight selling guide.

Within the solar group, I’m seeing some names start to come up off their lows, but the leader on a relative basis, aside from SEDG, remains First Solar (FSLR). The stock has been building what appears to be a new base and is now back above the 50-dma. Note that over the past week there have been four five-day pocket pivots, one coming up through the 10-dma and 20-dema, and the other three occurring along the 50-dma.

Volume has also been drying up sharply (-48.4% below average on Friday) as the stock holds tight along the line. This is subtle, constructive action, and in my view makes the stock worth a shot on the long side right here using the 50-dma as a tight selling guide.

 

GR031118-FSLR

 

Recent BGUs MuleSoft (MULE), and Planet Fitness (PLNT) remain extended. I’m still watching their 10-dmas as references for buyable pullbacks. MULE’s 10-dma is at 32.22, while PLNT’s is at 38.15.

Steel names suffered the reverse of the “tariff tantrum” relief rally that we saw in names like CAT and DE as the group sold off on Friday. U.S. Steel (X) plopped right back into its 20-dema on heavy selling volume, but remains within a four-week base. The fact that it didn’t bust the 20-dema is perhaps a positive, and brings up the Ugly Duckling possibility of buying it on this selling reaction here near the 20-dema while using it as a tight exit point if the stock fails.

 

GR031118-X

 

Nucor Corp.’s (NUE) has also pulled back, but is holding support along its 20-dema and 50-dma with volume coming in at about average. This may also be buyable here using the two moving averages as tight selling guides. While the steel and aluminum tariffs appear to be less onerous than originally thought, a constructive use of the current tariff actions as a negotiating tactic for the purpose of creating a more positive environment for U.S. steel production could ultimately be longer-term bullish for the stocks.

Therefore, we want to remain open to whatever technical action we see on the charts, so that if they aren’t busting support, pullbacks to support could present more opportunistic long entries.

 

GR031118-NUE

 

Nutanix (NTNX) qualifies as this past week’s rocket stock as it continues to streak higher following its base breakout of two Fridays ago, which I discussed in my report of last weekend. For now, it’s a matter of seeing how and to where this thing pulls back when it eventually does.

Atlassian (TEAM) is also extended from its recent breakout. Watch for pullbacks to the 10-dma, now at 57.09, as possible lower-risk entry opportunities, if you can get ‘em.

Baozun (BZUN) zipped back up to the highs of its buyable gap-up price range on Thursday after a gap-down sell off the day after the BGU. It is now out of buying range, but pullbacks closer to the BGU intraday low of 40.75 might be buyable. It’s more a matter of seeing how this sets up again given its extreme, extended state.

Momo (MOMO) offered a lower-risk entry opportunity on Thursday as it pulled closer into the prior BGU intraday low at 35.17. It then turned back to the upside on Friday as it is back up near the intraday highs of Wednesday’s BGU move. Watch for any further pullbacks closer to the 35.17 low as lower-risk entries from here. So far, this is holding up as a bottom-fishing buyable gap-up (BFBGU).

 

GR031118-MOMO

 

In my Wednesday report I told members to keep an eye on 58.com (WUBA), the next morning when it was expected to report earnings. Earnings were reported and the stock initially gapped up, then sold off, finally ending the day right at its 10-dma. The entire day has the look of a massive spin-cycle move on heavy volume, but it appears that Thursday’s struggle between buyers and sellers was eventually won by buyers as the stock posted a low-base range breakout through the 80 price level on strong, above-average volume.

This looks buyable using the 80 price level as a selling guide, or for the more orthodox among you, a 7-8% standard O’Neil-style stop. You know which one I prefer!

 

GR031118-WUBA

 

As other Chinese names are showing some resurgence, I note that Weibo (WB) looks like it’s ready to break out here as it sits near its recent highs with volume drying up nicely. WB had two big-volume pocket pivots in the earlier half of February, one at the 10-dma/20-dema and the other on a breakout to new highs the very next day. That move came straight up off the lows, and the stock has since spent some time consolidating that strong move, even briefly retesting its 50-dma.

This could probably be bought here in anticipation of a breakout, although I would love to see a quick pullback to the 10-dma at 132.96 as a more opportunistic entry, although there is no guarantee that you will get it.

 

GR031118-WB

 

Applied Materials (AMAT) has pushed to higher highs but remains just barely within buying range of its double-bottom base breakout, which I discussed in my Wednesday mid-week report.

Back in my report of February I discussed Lumentum Holdings (LITE), a stock that I considered a strong thematic play back in late 2017, as follows: “My view is that if the 3D sensing theme is for real, the stock will eventually break out and begin a significant new up leg, and I am willing to be patient and let that set up. Thus, the first reliable, longer-term entry strikes me as being right here along the 200-dma and 40-wma.” While I have not discussed the stock since then, that buy call remained in force, and I wonder how many members acted on that, because it has gone straight up from there.

Below we can see LITE’s weekly chart, and after regaining its 200-dma and 40-week moving averages, where it was last buyable per my prior comments, the stock is now breaking out to all-time highs! Imagine that. The stock also broke out on Friday on a pocket pivot volume signature, so is technically buyable, although the “straight-up-from-the-bottom” look of the weekly chart would understandably scare one away from buying the stock. It might make more sense to look for a pullback into the rapidly-rising 10-dma, now at 63.53, as a lower-risk entry if you can get it.

 

GR031118-LITE

 

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.

This has been a bit of a crazy week, with the gap-down sell-off on Wednesday following White House Chief Economic Adviser Gary Cohn’s resignation and all the steel and aluminum tariff twitching, but the end result was a new-high breakout in the NASDAQ Composite on Friday, which looks quite bullish. I suppose that if it fails in short order we’ll quickly know that this rally does not have legs. But if this breakout does have legs, there are plenty of vehicles with which to participate. I already discussed most of them as buys before Friday’s strong index action.

I’ve also discussed some potentially fresher buy ideas, which I think provides plenty of fodder with which to play any continued market rally from here. The bottom line is that this remains a QE-infused market, and despite all the talk of more Fed rate increases, they still haven’t decreased their $4 trillion-plus balance sheet. Meanwhile, the European Central Bank remains on full-spigot QE maneuvers, as they confirmed on Thursday morning, and the global pool of QE liquidity more or less remains in place.

Meanwhile, a “strong” jobs number on Friday, which was mostly due to a jump in retail hiring, not the stuff of high-paying jobs, provides the spark that ignites a strong rally. For now, the trend is up, so 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. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.