The Gilmo Report

March 14, 2018

March 14, 2018

After rallying for seven-straight days, the NASDAQ Composite Index reversed sharply yesterday on higher volume. Given that this was the epicenter of upside leadership as big-stock NASDAQ names rocketed over the past several days, the pullback is perhaps not surprising. The sell-off was blamed on more tariff talk, this time targeting China, and the sudden firing of Secretary of State Rex Tillerson.

Whatever the “reasons” for the sell-off, we might simply consider that the market and leading stocks were already extended coming into the week, and a pullback wasn’t unexpected. Yesterday’s action in the Composite resulted in a big outside reversal to the downside on higher volume, which looks near-term bearish, but today the index held up much better than its NYSE-based brethren.

The index ended the day down only -0.19% on declining volume as it pulled in to test the prior new-high breakout of last week. We would now look for the index to hold the break, since a failure to do so would have bearish implications.

 

GR031418-$COMPQ

 

The S&P 500 Index, which has been lagging, is now testing its 50-dma as it pulled into the line today on higher volume and held. Meanwhile, the Dow Jones Industrials Index, not shown, has run into solid resistance at its own 50-dma. So, the market has a mixed flavor to it, as industrials have been getting hit while techs try to hold their ground.

 

$SPX

 

The action in names like Caterpillar (CAT) and Deere & Company (DE) has been disappointing, as DE gave up its 50-dma, breaking below the line yesterday on higher and above-average volume. CAT, meanwhile, failed right at the 50-dma on Monday and reversed back to the downside. The prior U&R moves turned out to be just swing-trading opportunities, but both names are now well below their 50-dmas and attempting to hold at their 10-dmas, as CAT illustrates.

 

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Diamondback Energy (FANG), is doing a little better as it drops only slightly below its 20-dema and 50-dma on increased, but below-average volume. I would watch this for any possible undercut & rally (U&R) move around the two prior reference lows I show on the chart below. Otherwise, this needs to show me some better action along the moving averages before I’d look at buying it right here, right now.

 

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Meanwhile, the pending imposition of steel and aluminum tariffs doesn’t seem to be doing much for the stocks, as they have all broken down on heavy selling volume. U.S. Steel (X) serves as a reasonable representative of what’s happened to the group as it has now busted its 50-dma. Nucor (NUE), not shown, has also broken below its 50-dma, but the bottom line for both stocks is that their failure to hold near-term support takes them out of play as long ideas. From a stock performance standpoint, the tariffs are failing!

 

GR031418-X

 

Netflix (NFLX) has pulled into its 10-dma on light volume and held the line today. This technically would put it in a lower-risk entry position using the 10-dma as a tight selling guide for shares purchased at current price levels. Prior to, the continuation pocket pivot off the 10-dma on March 2nd was the last buy point in the pattern.

If the NASDAQ Composite holds last week’s new-high breakout, then Nvidia (NVDA) may stand a chance of pulling off its own breakout to new highs. The stock attempted to move higher yesterday and Monday but failed both times. However, the action wasn’t entirely bearish considering that the market was selling off from its recent highs.

Now the stock is holding tight just below its breakout point and should be watched for any possible breakout on the one hand, or a pullback to the 10-dma and 20-dema down around 242, where it was last buyable per my comments in last week’s mid-week report.

 

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Amazon.com (AMZN) was up today despite the market weakness, but this was the case for a number of big-stock tech leaders. For now, however, the 10-dma at 1550.83 and the 20-dema at 1518.29 remain your nearest references for buyable pullbacks since the stock is still extended on the upside and not too far from its highs as it tries to clear the 1600 price level.

Tesla (TSLA) helped to make my point about what doesn’t kill the stock helping to make it stronger as it reported on Monday that it would be suspending production of its Model 3. Instead of sending the stock spinning to the downside, the “bad” news pushed the stock into rally mode, sending it up through its 50-dma and 200-dma on heavy volume that qualified as a bottom-fishing pocket pivot (BFPP).

As I blogged on Monday, anyone buying the stock that morning could use the 50-dma as a trailing stop, or even the 200-dma given that the stock had closed above that key moving average as well. That BFPP looked strong, and the stock held support at the 200-dma yesterday even in the face of a sharp NASDAQ sell-off.

But today, news that the company was manufacturing flawed parts caught up with the stock, sending it flying back below its 200-dma and 50-dma. At that point, your prescribed trailing stop was trigger. TSLA closed today at 526.63, right about where it started Monday’s move and down 15.21 points on the day. It illustrates why stops should always be respected!

 

GR031418-TSLA

 

Twitter (TWTR) tested its 10-dma during yesterday’s sell-off, and followed through with a strong pocket pivot bounce off the 10-dma today. That move took the stock to its highest high since July of 2015, believe it or not, and the stock is now extended from any lower-risk buy point. The move into the 10-dma was your shot, and from here only further pullbacks into the rising 10-dma would present lower-risk entries.

 

GR031418-TWTR

 

With TWTR extended, Snap (SNAP) still looks buyable after undercutting the prior 17.53 low in its seven-day price range and then rallying back above that low today. That triggered an undercut & rally long entry at that point using the 17.53 low as a selling guide. Meanwhile, the stock is still holding tight along its 10-dma and 20-dema, closing above the 20-dema and right at the 10-dma today. Thus, this is actionable using the 17.53 price level as a selling guide.

 

GR031418-SNAP

 

Facebook (FB) still acts like dead money as it continues to flop around its 50-dma. For my money, I like both TWTR and SNAP much better as fresher social-media plays. Technically, however, with FB sitting on top of its 50-dma one could try going long the stock here using the 50-dma at 182.48 as a tight selling guide or 10-dma at 181.49 as a wide selling guide. Who knows, maybe now that I find the stock utterly uninteresting it will have some sort of significant move from here.

Blackberry (BB) is hanging tight along the 50-dma and 10-dma, the two moving averages from which it posted Friday’s pocket pivot. Volume remains light so this continues to sit in a lower-risk entry position here along the 10-dma and 50-dma, using the 10-dma as your selling guide.

 

GR031418-BB

 

Weight Watchers (WTW) pulled into its 50-dma today on volume that was well below “voodoo” levels at -59% below-average. The stock was previously buyable on the undercut & rally (U&R) move coming up through the prior 61 low in the pattern last Wednesday, as I discussed in my report at that time. It has since retaken its 50-dma, and today’s voodoo pullback into the 50-dma is constructive. Thus, the stock is buyable here using the 50-dma selling guide. Alternatively, the 10-dma at 62.87 could be used as a wider selling guide.

 

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Square (SQ) pulled back toward its 10-dma yesterday on below-average volume and then launched to a new all-time high today on strong volume. It is again extended, and pullbacks to the 10-dma, like we saw yesterday, remain your references for lower-risk entries from here.

If you’re into payments stocks, I also note that PayPal Holdings (PYPL) posted a pocket pivot today coming up and off its 10-dma. Volume was strong, and this can also be viewed as a trendline breakout. I’ve been watching the stock as it has tracked along the confluence of its 10-dma, 20-dema, and 50-dma, and it finally popped up and off the line today on strong volume. I consider this a cousin play to SQ.

 

GR031418-PYPL

 

SolarEdge Technologies (SEDG) is now extended from its 10-dma and out of buying range. Pullbacks to the 10-dma at 52.27 could present lower-risk entries. Meanwhile, First Solar (FSLR) posted a pocket pivot on Monday after I discussed it in my weekend report as a “voodoo” set-up along the 50-dma. It has held tight over the past two days and remains within buying range of the pocket pivot, using the 50-dma just above 67 as a tight selling guide.

 

GR031418-FSLR

 

Recent BGU MuleSoft (MULE) is sitting right along its 10-dma, but is slightly extended from the line. Pullbacks right into the line at 33.26 would provide lower-risk entries, in my view.

Planet Fitness (PLNT) dipped below its 10-dma today on light volume, which could put it in a lower-risk entry position, but I think I would take a more opportunistic approach here and look for a pullback closer to the original breakout point and buyable gap-up at the 20-dema, which is currently at 37.13.

Nutanix (NTNX) remains on an upside tear and is now up nine days in a row, including its initial base breakout which I first discussed in my report of March 4th, a week-and-a-half ago.

Atlassian (TEAM) pulled into its 10-dma today, which was your reference for lower-risk entries as I discussed in my weekend report. This can be considered buyable here, using the 10-dma at 59.25 as your selling guide.

 

GR031418-TEAM

 

Baozun (BZUN) is pulling down toward its 10-dma, and I would watch for a further pullback to the line at 43.48 as a lower-risk entry opportunity.

 

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Momo (MOMO) is holding tight along its prior buyable gap-up (BGU) high in the 37-38 price area. I’d watch for any pullback to the 10-dma at 35.34 as a much lower-risk entry opportunity, if I can get it. That would bring it closer to the BGU intraday low at 35.17. Otherwise, I consider it to be extended at current price levels.

58.com (WUBA) bumped into its 10-dma yesterday on a low-volume pullback with the market. Today, volume picked up slightly and the stock bounced off the confluence of the 10-dma, 20-dema, and 50-dma moving averages. The most opportunistic approach would look for a pullback closer to the moving averages down around 78 as the lowest of the lower-risk entry possibilities. Otherwise, one could also buy it here and use the 10-dma at 78.15 as a tight selling guide.

 

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Weibo (WB) looked like it might be ready to break out based on the tight action I noted in its chart in my weekend report, but instead the stock got knocked down toward its 50-dma on Monday on heavy selling volume. This could be normal profit-taking, and it’s now a matter of seeing whether a further pullback on low volume might make this buyable at that point. The 50-dma is currently at 127.73, and the wedging action as the stock has drifted up slightly after Monday’s sell-off looks indicative of a possible test of the 50-dma, at least.

 

GR031418-WB

 

Applied Materials (AMAT) has pulled into its 10-dma, closer to its prior double-bottom breakout point, which offers a lower-risk entry right here. We could also see a pullback to the 20-dema at 57.85, which coincides with the top of the double-bottom mid-point at 58.73. That might present a more opportunistic entry, should it occur. Buying it here means you can use the 10-dma at 59.40 or the 20-dema at 57.85 as your selling guides, a maximum of 4-5% downside from today’s close.

 

GR031418-AMAT

 

Lumentum Holdings (LITE) gapped to all-time highs on Monday after it announced it was buying out fellow fiber-optic company Oclaro (OCLR). The stock is currently quite extended, but pullbacks to the rapidly rising 10-dma, now at 67.07, would be your next references for lower-risk entries from here.

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.

Monday’s index action was certainly near-term bearish, but the de facto evidence is that the market acts more like a market of stocks than a stock market. We see weakness in some areas, but strength in others, and it all boils down to what the individual stocks are doing in terms of their precise set-ups and real-time action, as names like TWTR, SQ, and NTNX illustrate.

Personally, I think the firing of Secretary Tillerson is a non-event, but talk of additional tariffs on China may have the potential to upset the market’s apple cart in the short-term. However, I tend to think that the news flow is more likely to produce buying opportunities in favored stocks. This has has been the case over the past couple of days, as long as stocks pull back normally and hold near-term support. I’m a buyer, until I see the NASDAQ Composite fail on its recent breakout to new highs.

Currently the index is testing the top of that breakout, and this should be watched closely for not only a possible bearish failure, but, perhaps more importantly, for associated buying opportunities in favored stocks. 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 a position in PYPL, 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. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.