The Gilmo Report

March 15, 2017

March 15, 2017

The 91% probability of the Fed raising rates today went to 100% as this elite group of “anointed” individuals deemed fit to wield their omniscience over the U.S. monetary policy raised rates by a quarter point. This sent the indexes into their usual gyrations, but mostly to the upside.

By the time the dust had settled, the S&P 500 Index had completed a little trendline flag breakout on increased trading volume. On its face, the index action looks positive.

 

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Not to be outdone, the NASDAQ Composite Index also posted its own trendline flag breakout on higher volume as well. It just missed posting a new all-time high, but I suppose there’s always tomorrow.

 

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But while the index action looks very positive, it is still a matter of what is going on with the individual stocks, and that has been a mixed bag. Yesterday I pointed out in a blog comment to one member that this market seems like less of a bull or bear market than it is an “experiential” market. In other words, this market can look bullish, bearish, or just frustratingly choppy depending on what you own/short and when you own/short it.

So, if you’ve been playing short some of the opticals like FNSR, CIEN, or LITE, the airlines like DAL, UAL, and AAL, the oils (pick one), or something like CAT or GRUB, your experience would confirm a bearish environment. On the other hand, if you’ve been long MOMO or INCY or CLVS lately, your experience might confirm a bullish environment.

If you’re trying to sit with or buy names like BABA or NFLX, or even AMZN, you experience is of a go-nowhere market. And then of course you might find yourself experiencing a mix of all three, which is probably where frustration can be found. And when it often seems like your experience is at least partly due to the luck of the draw, the frustration can become palpable. To at least attempt to add weight to the idea that I’m not cherry-picking here after the fact, we can simply look at the names I’ve been discussing in recent reports. Let’s start with the opticals.

What do we have here? Well, on the one hand prior optical leaders like Ciena (CIEN), Finisar (FNSR), Ocular (OCLR) have come completely unglued over the past week or two.  This week we see Lumentum Holdings (LITE) give it up at its 20-day exponential moving average and make a break for its lower 50-day moving average. So, if you were shorting the stock at the 20-dema, you got a nice move to the downside. But once it got to the top of the base and near the 50-day line, it would have been possible to flip from short to long in Ugly Duckling fashion! To my eye, this sort of action is more the norm for this market.

 

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While one set of opticals breaks down, the two leaders in the group, Applied Optoelectronics (AAOI) and Arista Networks (ANET), not shown, hold up near their recent highs within what have been strong uptrends. They both act like they are in a bull market. AAOI has pulled into its 20-day line and is probably in the process of building a new base, assuming it can hold the 20-day line, while ANET has just moved higher following last week’s pocket pivot at the 10-day line.

Can both stocks defy the rest of the optical group and move higher? Who knows, but for now I’d be using the 10-day line as a selling guide for ANET and the 20-dema as a selling guide for AAOI just to keep things tight.

The airlines, which I’ve mentioned as potential punchbowls that could develop into PODs earlier in 2017, have all broken through their 20-dema lines recently on heavy selling volume. Short-sellers who are savvy to the process, and have the airlines on their short watch list based on this POD potential discussed in prior reports in 2017, might have gone after them on the short side at that point.

Of course, as is typical in this market, even for the short side, DAL hasn’t necessarily been entirely cooperative despite the big, profitable break over the past few days. For example, note the prior breach of the 50-day line in late January, which looked like certain death for the stock. But once it undercut the prior low from late November of last year, the stock turned and rallied right back above the 50-day line and up toward the prior highs. Last week DAL again broke through its 50-day line on a shortable move at that point.

After coming down for the last six days, DAL finally turned and rallied today after (you guessed it) undercutting the late November low and the early February low. Now the stock is heading back to the upside where it may become shortable again once it gets up to the 10-day, 20-day, or even the 50-day moving average. It’s tricky stuff, and does provide a reasonable visual argument for why one must treat things in a swing-trading manner, particularly on the short side. Without a full-on correction or bear market, this is probably how the short side remains until the trend changes.

 

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In the proverbial oil patch, Diamondback Energy (FANG) has been ping-ponging its way lower before meeting up with its 200-day line yesterday. I wrote over the weekend that “I would continue to view rallies back up into the 10-day or 20-day moving averages as shortable moves…” That approach would have worked well on the short side on Monday.

FANG moved quick down to its 200-day moving average yesterday, reaching a short-term cover point, where it bounced off the intraday lows. Today the stock rallied right back up into a shortable area at the 10-day and 20-day moving averages. Technically this would put it in a more optimal short-sale entry positon, using the 50-day line at 103.49 as your maximum upside stop.

Wash, rinse, repeat seems to be a workable strategy with FANG, and an alert swing-trader could play it both long and short with entries at the various inflection points! Also, watch for rallies in Parsley Energy (PE) and Rowan Companies (RDC) into their respective 200-day lines at 32.60 and 16.45 as possible short-sale entry points in those two oil names.

 

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U.S. Steel (X) has mostly been acting like a short, but it has its moments. Usually these moments entail a random gap-up move or spring to the upside just when the technical action would cause one to least expect it. That’s exactly what we saw it do today. Yesterday’s low-volume rally back up to the 50-day moving average looked like a perfect short-sale entry point. But in typical psycho-stock fashion, X simply kept rallying right through the 50-day line on higher, but below-average buying volume.

Now that it’s starting to look bullish again, I would watch my 620 intraday chart for a possible reversal that would take it back below the 50-day line in typical psycho-stock (which is what I refer to X and other similarly-acting stocks in this market) style.

 

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Momo (MOMO) would qualify as the de facto leader among my prior China Five favorites. That’s primarily because of its big price move since I first discussed the stock as buyable back in early January, and the fact that it is still holding up near its prior highs. The stock is holding up near last week’s highs in constructive fashion, and the 29 intraday low of last week’s buyable gap-up (BGU) would remain your trailing stop. It’s also possible that low-volume pullbacks to the rising 10-day line would offer lower-risk entries, especially if volume dries up.

 

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Netease (NTES) closed below its 20-day exponential moving average for the first time in 2017 today. Volume was up on the day but still below average with the stock closing off its intraday lows. It’s tough to determine whether this is supporting action around the line, or the first hint of a move lower.

Over the weekend I pointed out how the stock looks like it could be forming a fractal head and shoulders here, but how this resolves is still undetermined. I would surmise, however, that this is a do or die position for the stock, and it needs to show some energy on a move back up through the 20-dema.

With volume remaining light for the past two weeks, it is also in position for a possible pocket pivot if it can regain the 20-dema in style. That is something to watch for, as well as a failure from here that puts the stock firmly into the realm of being a short-sale target. Another tricky stock, but I would have to say that I don’t care much for the fact that it has gone nowhere since last month’s buyable gap-up move following earnings.

 

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Alibaba (BABA) also seems unable to develop any real conviction, even when it starts to look like it is doing so. On Monday, the stock posted a pocket pivot as it sucked buyers into what was essentially a breakout attempt from a seven-week base. But as the stock has already done several times before in this current base, the move went nowhere.

And while Monday’s pocket pivot breakout failed in short order, the stock perhaps became more buyable on the weakness coming into the 20-day moving average. It was able to find support at the line today and close in the upper half of its trading range and above the 10-day line. So, the bottom line with BABA is that as long as it can hold the 20-dema it remains viable, but one should only buy it on pullbacks to the line. Chasing strength only puts you behind the eight-ball in short order given the stock’s propensity to quickly give up on brief shows of strength.

 

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Weibo (WB) is technically looking shortable here as it wedges up into the 50-day moving average on weak volume. Note that the stock has rallied back up into the line after undercutting the prior low of late February when the stock blew up after earnings.

I would initially be inclined to test this on the short side right here using a tight stop. There is, of course, always the possibility that the stock does something like X did today by simply moving up through the 50-day line. If that were to happen, I’d like to see some strong volume come into the stock, perhaps even enough to generate a pocket pivot move.

 

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JD.com (JD), not shown here on a chart, is holding along its 10-day moving average with volume drying up. This would put it in a lower-risk entry position using the 10-day line as a guide for a tight stop.

Netflix (NFLX) got tired of living below its 20-day moving average and posted a five-day pocket pivot move back up through both its 20-day and 10-day lines. Today UBS Securities upgraded the stock to “hold” from “sell,” triggering another five-day pocket pivot on a trendline breakout to all-time closing highs!

Another example of how stocks go from acting dicey to suddenly springing back to life, just when they seem to be on the verge of failure. As I tweeted this morning, perhaps NFLX has bored us all to death to the point where it will now work on a breakout that carries it further into new-high price territory.

 

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Notes on other big-stock names:

Facebook (FB) posted a continuation pocket pivot at its 10-day line today on slightly above-average volume.  This helps to correct the low-volume wedging type of action and makes the stock buyable here using the 10-day line at 138.20 as a tight selling guide.

Apple (AAPL) just missed posting a pocket pivot at its 10-day moving average. The stock is holding tight at its 10-day moving average.

Alphabet (GOOGL) posted a pocket pivot volume signature today as it posted a new all-time high, and remains within buyable range using the 10-day line at 856.91 as a selling guide.

Amazon.com (AMZN) still acts fine as it tracks along its 20-dema. It just missed posting a pocket pivot today but remains within buying range of its late February breakout.

Priceline Group (PCLN) is extended as it continues to track higher following last month’s buyable gap-up move.

Over the weekend I wrote that Nvidia (NVDA) is starting to feel like it is running out of selling pressure” and that a rally was likely. So far this week we have seen the stock push to the upside on a successful undercut & rally move that carried above the 10-day moving average on Monday.

Over the past two days NVDA has found support at the 10-day line, with volume picking up today as the stock bounced off the line. This could be putting it in position for a pocket pivot move up through the 20-dema, so is something to watch for. In addition, it is possible to be long the stock here as a U&R set-up using the prior lows at 99.11 as a maximum downside selling guide.

 

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Perhaps NVDA will pull a Tesla (TSLA) and jack back above its 20-dema. Both would be considered Ugly Ducklings given how brutal their breaks off their recent price peaks have been. TSLA got a boost yesterday when noted short-seller Andrew Left of the infamous Citron Research said he had covered his short in the stock.

This sent TSLA on a pocket pivot move back up through its 20-day line on heavy buying volume. If I’m alert to it, I’m certainly not averse to trading a move like we saw in the stock yesterday on the long side, but I would want to have caught it as close to the 50-day moving average as possible.

After-hours today TSLA announced a combo-secondary offering of $250 million in stock and $750 million of convertible senior notes. While the conventional wisdom was that a secondary offering like this would send the stock tanking, Elon Musk’s coincident announcement that he would buy $25 million of the offering has sent the stock up a couple of percent in the after-hours.

My guess is that this move won’t hold, but I would certainly watch the stock to see how it acts once the secondary is priced. While the stock has looked like a fractal head and shoulders lately after getting smashed off its peak in late February on huge selling volume, we know that in this market appearances can often be deceiving, and one must be ready to move with changing information.

Thus, if TSLA can set up again after pricing the secondary, I would have no issue coming back to the stock on the long side. It is exactly this type of flexibility that led me to get bullish on the stock in late December based on the precise price/volume evidence at that time. For now, I’d like to see how this settles out following the pricing of the offering.

 

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Not to toot my own horn, but over the weekend I did point out that Clovis Oncology (CLVS) has spent the last month-and-a-half basing, and may be starting to turn again. This could be buyable here using the 20-dema at 60.53 as a selling guide.” That turned out to be prescient as the stock launched to new highs over the past two days on very strong buying volume.

Not much else to say here except that this is a very nice second-stage breakout, but in my view is slightly extended here. Thus, I would look for a pullback closer to the top of the base at 66-67 as a lower-risk entry

 

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Another one of the three bio-techs I first discussed in January when they were ALL much lower, Glaukos (GKOS) looks like it may be setting up again. After failing on a post-earnings buyable gap-up (BGU) move in early March, the stock is settling down here along its 10-day and 20-day moving averages.

This could be setting up for another breakout attempt, and should probably be watched for more voodoo action along the two moving averages as being indicative of an impending, potential move higher. If looking to enter or re-enter GKOS, my preference would be to look for a pullback closer to the 44 price level.

 

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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, 20-day exponential, 50-day simple and 200-day simple moving average.

Among names I’ve discussed on the long side, these continue to look okay, although not all are in what I would consider lower-risk entry positons. Below are my notes on these stocks still on my long watch list, some with charts, some without:

Activision (ATVI) found support today at its 10-day moving average. The pullback offered a lower-risk entry at the line, and any further pullbacks to the line can be used as lower-risk entries should they occur constructively.

Carnival Cruise Lines (CCL) is holding last Friday’s trendline breakout quite well, and remains in buyable position using the 10-day line at 56.40 as a selling guide.

Charles Schwab (SCHW) spun around after the Fed announcement but held its 10-day moving average. This remains in a buyable position using the 10-day line at 42.34 as a selling guide.

Checkpoint Software (CHKP) continues to act well along the 10-day and 20-day moving averages and is in a buyable position using the 20-dema at 99.47 as a selling guide.

Electronic Arts (EA) posted a pocket pivot volume signature today but was extended from its 10-day moving average to be actionable. Nevertheless, it remains extended.

Incyte Pharmaceuticals (INCY) remains extended, and along with CLVS and GKOS has been a strong bio-tech performer among the three that I’ve discussed in the report so far in 2017.

Goldman Sachs (GS) posted a higher volume reversal today at the 10-day and 20-day lines. Volume was below average, but this looks questionable here as it may be on the verge of failing on its mid-February breakout.

Royal Caribbean Cruise Lines (RCL) is holding along its 10-day line with volume drying up to voodoo levels at -53% below average today. This puts it in a very buyable position here using the 20-dema at 95.66 as a selling guide.

Symantec (SYMC) is extended, and we would look for pullbacks to the 10-day line, now at 29.82, as lower-risk entry opportunities.

Take-Two Interactive (TTWO) found support at its 20-dema today and posted what I would call a supporting pocket pivot at the 10-day line. Therefore, I consider this buyable using the 20-dema at 58.24 as a tight selling guide.

Square (SQ) closed just above its 10-day moving average now living below its 10-day moving average, but is still holding up above its prior 16.32 BGU low of February 23rd.  The rising 20-dema is now at 16.28. I would prefer to take a shot at this on any low-volume pullback to the 20-dema, should that occur.

Veeva Systems (VEEV) has launched to new closing highs over the past three days as it shows some power after tightening up along its 50-day moving average last week. This is obviously extended, but pullbacks to the 10-day line at 45.13 would present your next references for lower-risk entry opportunities.

I’ve talked about several cloud-related names as potential short-sale set-ups, but as I blogged earlier today, some of these could be setting up as Ugly Duckling longs instead. That’s not too surprising in this market since stocks can often recover just at the point when they start to look quite ugly.

In my blog post earlier today I mentioned Splunk (SPLK) as an undercut & rally set-up today when it was trading near the prior 61.01 low of late February. It then rallied back up through that low, putting the U&R long set-up into play at that point.

Note how volume dried up sharply four days ago when the stock found support near its 50-day moving average, which turned out to be exact support right at its 10-week moving average on the weekly chart. With the stock closing back above the 10-day line today, I would be watching for some sort of move off the line from here as confirmation of the U&R set-up. Either way the U&R long set-up is in force here using the late February low of 61.01 as a tight selling guide.

 

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I would also study ServiceNow (NOW) as a similar type of undercut & rally set-up now that it is holding above its prior lows from early February. One could consider this as a long here using the 50-day line at 87.40 as a tight selling guide.

 

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And then there’s Salesforce.com (CRM), which instead of confirming any spreading weakness in the group is instead holding up in constructive fashion. It has spent several days now holding tight along its 10-day moving average following its March 1st pocket pivot breakout.

Volume has been drying up nicely along the 10-day line, coming in at -41% below average yesterday and -38% below average today. With mother-ship big-stock cloud name Oracle (ORCL) beating on earnings today after the close, the clouds could come alive. Therefore, I consider CRM to be buyable right here using the 20-dema at 82.34 as a selling guide.

 

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Snap (SNAP), which I erroneously keep referring to as Snapchat, continues to have abuse heaped upon it by the analyst community. Today yet another one, this time from brokerage firm Cantor Fitzgerald, putting an $18 price target on the stock. That sent it down to the 20 price level before it turned and rallied back above the 20.64 prior low in the pattern from last week.

That set up an undercut & rally move today, although the stock did spin around quite a bit on an intraday basis. By the close, however, it held above the 20.64 prior low to print at 20.77, so this is in play as a near-term undercut & rally long set-up. If it fails it fails, but this would be your first reference point for a reasonable entry in this hot IPO gone cold. Meanwhile, the entire world seems to hate the stock. I would therefore view it as a positive on a contrarian basis, and so this could set up a move back up toward the 24 price level. Stay alert on this one if you choose to play it!

 

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The index action today looks quite positive.  And while there are individual stocks that have produced some nice potential gains on the short side over the past several days, one also has to remain focused on the long set-ups where they can be found. As this report shows, there are more than enough to bite on here.

Should the indexes break back below their 10-day lines and today’s trendline breakouts fail, then we might have a problem. Otherwise, I continue to play the set-ups as they show up in real-time long or short, with no bullish or bearish bias either way. Just 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 positions in NVDA, SNAP, and SQ, 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.