The Gilmo Report

March 18, 2018

March 18, 2018

The driving market theme over the past week has been a test of support for the NASDAQ Composite and the S&P 500 Indexes. The NASDAQ is pulling into its 10-dma and approaching the top of its trendline breakout of last week in the 7438-39 price area, so the picture hasn’t changed all that much from that described in my Wednesday mid-week report. If the NASDAQ can hold support, then the pullback is likely a healthy antidote to an extreme overbought condition. If not, then we will see further downside.

 

GR031818-$COMPQ

 

The S&P 500 Index, which remains well off its January highs, is having a test of support of its own as it drops down to its 50-dma. So far, over the past three days, the index has been able to hold support at the line, which serves as a good reference for assessing the health of the S&P. As with the NASDAQ, if we bust support, then more downside is likely in store.

The S&P 500 and the NASDAQ both churned around on Friday, opening higher and then closing below their opening highs and near the lows of their daily trading ranges. Volume was high due to triple-witching options expiration, giving their charts the look of heavy-volume churning action. This also resulted in a number of pocket pivots, with most of the volume coming in a large surge of shares crossing the tape at the close.

 

GR031818-$SPX

 

And while this past week is seeing the NASDAQ and the S&P 500 test near-term support, the Dow Jones Industrials Index has been testing resistance, and unsuccessfully so. It started the week out with a gap-up move further above the line after regaining the 50-dma two Fridays ago, and then reversing to the downside. Now the index remains trapped below its 50-dma as it diverges from its other two major market index cohorts.

 

GR031818-$INDU

 

If the Dow is to regain its 50-dma, it will no doubt need help from some of its big industrial components that are in a similar chart position, such as Caterpillar (CAT). The stock failed to clear the 50-dma earlier in the week and backed down to its 10-dma on below-average volume. On Friday, it posted a roundabout pocket pivot coming up through the 10-dma and the 2-dema, but the volume is mostly due to massive trade that hit the stock right at the close, courtesy of triple-witching options expiration.

 

GR031818-CAT

 

Deere & Company (DE), not shown, was able to regain its 50-dma on Friday on above-average volume that did not qualify as a pocket pivot, but as with CAT the higher volume was mostly due to a huge influx of volume right at the close. This can still be watched, however, to see if it holds the 50-dma and sets up somewhere around the line.

The situation with Diamondback Energy (FANG) remans exactly the same as I discussed in my Wednesday mid-week report. That is, I would be on the lookout for any undercut & rally maneuvers that occur around the two prior lows in the pattern at 128.89 (March 7th) and 120.66 (February 22nd).

Netflix (NFLX) has dipped below its 10-dma, but it’s more a matter of the 10-dma rising above Friday’s close since the stock is still sitting in a tight range. Volume picked up slightly, but I think that if I was looking to buy the stock on a pullback I’d take a more opportunistic approach by waiting to see if I can get a pullback down to the 20-dema at 304.48.

 

GR031818-NFLX

 

Nvidia (NVDA) continues to track tight sideways near its highs as it can’t decide whether it wants to break out or not. The pattern can be viewed as an ascending triangle, which is bullish, or an ascending wedge given that I can draw two trendlines, one across the highs and one across the lows, and both lines are rising. This gives it the look of a wedge instead of a triangle, but in this market, it’s difficult to try and label patterns for the purpose of gaining some predictive value.

As I see it, if it clears the top of the triangle, you’ve got a breakout, and if it busts the 20-dema, you may have something quite a bit less bullish. Technical Analysis 101 would view this as bearish if the stock broke below the lower trendline. My view is that a low-volume test of the 10-dma or 20-dema could represent a lower-risk entry opportunity, if you can get it. Otherwise, one can just wait for the breakout, if and when it ever occurs.

 

GR031818-NVDA

 

Amazon.com (AMZN) pulled into its 10-dma on Friday as selling volume picked up but remained below average. As with NFLX, I would not necessarily look to buy the stock at the 10-dma, but would take a more opportunistic approach by waiting for a possible test of the 20-dema, now at 1528.89.

 

GR031818-AMZN

 

Tesla (TSLA) has retained its schizophrenic nature, morphing back into a short on Wednesday as it breached support at first the 200-dma and then the 50-dma. Reports that the company is manufacturing defective parts and vehicles contributed to that decline, and now the stock has dipped below its prior lows as volume recedes.

Those reports haven’t been confirmed yet, so if there is any mitigating evidence to the contrary it could trigger a move back to the upside on a U&R, which is mostly what I’d be watching for with the stock in this chart position. Otherwise, from a longer-term perspective, there is no true trend here outside the realm of the zig and the zag.

 

GR031818-TSLA

 

Twitter (TWTR) is pulling into its 10-dma following Wednesday’s pocket pivot. Volume on Friday dried up sharply to -56% below average, putting the stock in a lower-risk buy position here along the 10-dma. The closer to the 10-dma at 35.26 you can buy it, the better, but the stock is about 1% above the line as of Friday’s close.

 

GR031818-TWTR

 

Snap (SNAP) again became a victim of the wrath of a pop star icon, this time in the form of the Barbadian singer who goes by her middle name of “Rihanna.” This took the stock below its 20-dema on below-average volume, and by Friday the stock still hadn’t recovered from the news. I also saw a news item about TWTR adding a “camera-first” feature to its service that would compete with SNAP directly. I suppose the scorn of Rihanna gets top-billing for the sell-off.

From here I’d want to see the stock push back above the prior 17.22 low of four trading days ago to trigger an undercut & rally long entry at that point. Otherwise, the stock is hanging just above the prior BGU intraday low of 16.97, and it’s not clear to me that it won’t test the 50-dma at 16.27. However, if it presents a reasonable U&R set-up coming back up through the 17.22 price level, then play it as it lies. Overall, however, the action since the early February buyable gap-up move has been sloppy, at best.

 

GR031818-SNAP

 

Facebook (FB) has been technically buyable along the 50-dma, as I noted in my Wednesday mid-week report, and Thursday’s pullback to the line on light volume did offer a lower-risk entry for those who like the stock. On Friday, FB posted a pocket pivot at the 10-dma, helped along by options expiration volume coming in at the close. This can still be bought here, using the 50-dma, 1.4% lower, as a reasonably tight selling guide.

 

GR031818-FB

 

Blackberry (BB) logged another pocket pivot on Thursday in what was also a trendline breakout. The breakout did not hold up on Friday as the stock slipped back to the downside on declining volume. The stock tends to pull back after a one-day show of strength and then pulls back into support in an orderly fashion. This has been the case all the way up since the lows of early February, so that the best way to buy this is on weakness coming into the 50-dma.

The stock closed Friday 21 cents, less than 2% from the 50-dma at 12.74 and the 10-dma which is at 12.75. The closer to the moving averages one can pick off shares, the better.

 

GR031818-BB

 

Weight Watchers (WTW) followed through reasonably well to the upside after posting a couple of days of “voodoo” action along its 50-dma as volume dried up to less than -50% on both Wednesday and Thursday. This led to a strong move higher on Friday that stalled out a bit to close mid-range. The trick was to buy the stock along the 50-dma on Thursday or on Friday morning, as the stock is now slightly extended, in my view.

 

GR031818-WTW

 

Square (SQ) remains extended from its 10-dma, such that only pullbacks to the rapidly rising moving average, now at 52.48, would serve as potentially lower-risk entry opportunities. Meanwhile, SQ’s cousin, PayPal Holdings (PYPL), has pulled back slightly following Wednesday’s pocket pivot as volume has receded. So far it has not actually touched the 10-dma, now at 60.40, but a pullback down to the line would be your best lower-risk entry opportunity if you can get it.

Otherwise, it remains buyable on the basis of Wednesday’s pocket pivot, using the confluence of the 10-dma, 20-dema, and 50-dma as your selling guide.

 

GR031818-PYPL

 

SolarEdge Technologies (SEDG) remains extended as it has trended higher, and at this stage I think I would opt for a more opportunistic approach here by looking for a pullback to the 20-dema as the better lower-risk entry spot if I can get it. If you were looking for a good solar-related trade, however, you got it Friday in First Solar (FSLR), which I discussed as a “voodoo” set-up along the 50-dma in my Wednesday mid-week report.

The Friday move, however, didn’t hold up as the stock ran up over three bucks intraday before sliding back to the downside and closing near the intraday lows.

Nevertheless, the move did qualify as a pocket pivot, albeit a stalling one, and could be viewed as actionable using the 10-dma at 68.44 as a selling guide. Alternatively, the 50-dma could be used as a wider selling guide. My guess is that Friday’s move was a bit premature and perhaps due to options expiration. Therefore, I’d continue to look to buy this on constructive pullbacks into either the 10-dma or 50-dma.

 

GR031818-FSLR

 

MuleSoft (MULE) is sitting tight along its 10-dma, although it did dip just below the line on Friday. It is, however, in an extended state following the mid-February buyable gap-up move, so if one is looking to buy the stock up here one should be nimble since I tend to think that a pullback to the 20-dema is always an outside possibility. I also think that I would look for a pullback to the 20-dema as a more opportunistic approach here rather than chasing it up here, despite the tight action along the 10-dma.

 

GR031818-MULE

 

Planet Fitness (PLNT) has moved lower after dipping below its 10-dma on Wednesday. As I discussed at that time, I would look for a pullback to the 20-dema, now at 37.38, as your best, lower-risk entry point based on how the stock is acting currently.

Nutanix (NTNX) is hanging tight near its highs but remains quite extended. At this point, it may need to build a new base or consolidation before it can set up again in a proper long entry position.

Atlassian (TEAM) isn’t doing much following Wednesday’s supporting action at the 10-dma. Here we see it drifting just below the line as volume dries up sharply, down to -52% below-average on Friday. In my book, it is just out of buying range of the early March breakout, so that I’d look for a pullback closer to the 20-dema at 57.54 as a lower risk and proper post-breakout entry opportunity.

 

GR031818-TEAM

 

Despite the President’s intent to impose tariffs on $60 billion worth of Chinese tech and telecom goods, Chinese-related names are holding up remarkably well in most cases. For example, Baozun (BZUN), not shown, is holding tight near its highs as its 10-dma rises rapidly to meet up with the stock. The 10-dma is now at 46.21, and would serve as your nearest reference for a buyable pullback.

Momo (MOMO) pulled into its 10-dma on Friday, which was something to watch for per my discussion of the stock on Friday where I wrote, “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.” The stock hit the line and bounced to the upside, closing about mid-range on the day as volume picked up slightly. This is in a buyable position here using the 10-dma at 36.37 as a tight selling guide. Otherwise, the BGU intraday low at 35.17 would represent a wider selling guide.

 

GR031818-MOMO

 

58.com (WUBA) was buyable near its 10-dma on Thursday per my discussion of the stock in my Wednesday report, and the stock is now attempting a trendline breakout on heavy options-expiration volume. The stock is slightly extended here, in my view, however, and I would rather look to buy this on pullbacks to the 10-dma at 79.75, although one can treat this as a marginal trendline breakout and then use the 10-dma as a selling guide. Tariff news or not, this stock is just going about the business of building a new base as it looks to break out.

 

GR031818-WUBA

 

Weibo (WB) is so far holding along its 20-dema following Monday’s high-volume sell-off through the line and has yet to test the 50-dma as I feared it might per my discussion in my Wednesday mid-week report. Obviously, a low-volume pullback to the 50-dma might offer the lowest risk option as a long entry point, but if it holds the 20-dema as it is currently doing, it could turn right up and out of here on a base breakout.

With the stock only 3.5% away from its 50-dma, the other possibility for those willing to take slightly higher risk here is to just buy it along the 20-dema and then use the 50-dma as a selling guide.

 

GR031818-WB

 

While WUBA and WB may be on the verge of new breakouts, another Chinese name, Autohome (ATHM) has already broken out and is pulling into its 10-dma and the top of the prior base. This brings it into prime buying range of the prior breakout, using the 10-dma as a tight selling guide. One could also implement the O’Neil-style 7-8% stop on the breakout as well, although this is far too much risk to take in my view. But, to each his/her own!

 

GR031818-ATHM

 

The big-stock Chinese leader that is most actionable right here, right now, is Alibaba (BABA), which sprang to life on Thursday after announcing it was planning a secondary stock listing on a Chinese exchange. This sent the stock gapping to the upside on Thursday, and it held tight again on Friday. Thus, this is a buyable gap-up (BGU) long set-up as well as a trendline breakout, using the 196.52 intraday low of Thursday’s BGU as a tight selling guide.

 

GR031818-BABA

 

While Chinese names are holding up in the face of target tariffs from the Trump Administration, the tariff talk also seems to be putting a lid on the stocks from a short-term perspective. Outside of BABA, they are all holding in consolidations, some short-term like BZUN and MOMO, and some longer-term such as ATHM, WB, and WUBA. Depending on how these tariffs pan out, a catalyst for a more pronounced move in either direction may be coming, and should be watched for closely.

Applied Materials (AMAT) continues to hold the 10-dma, but my view is that taking the more opportunistic approach of looking for a pullback to the 20-dema, now at 58.08, and the top of the double-bottom base breakout at 58.73 is the lower-risk option, as I discussed in my Wednesday mid-week report.

Lumentum Holdings (LITE) pulled into its 10-dma on Friday on increased volume. It remains extended from its recent base breakout, and has now dropped below the intraday low of the buyable gap-up move of five days ago on the chart. That gap-up move came after a long uptrend extending off the lows of the prior base, so comes as more of a short-term exhaustion move than a catalyst for more blistering upside. Volume was higher on Friday, so I’d watch for a pullback closer to the top of the prior base as a possible lower-risk entry opportunity.

 

GR031818-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.

It’s evident that stocks have lost their momentum this past week after the indexes reversed on Tuesday on heavy volume. As the NASDAQ and S&P 500 test support, the stage is set for a rebound or failure. That is what we are watching for here, and so it boils down to what individual stocks do as they pull back. Pullbacks into areas of support on lower volume would offer lower-risk entry opportunities, and should be watched for.

I do believe that Trump’s current tariff rampage, while perhaps morally justified given that countries like China steal our intellectual property, does have the potential to create some near-term chaos in the markets. Therefore, one should be ready to play strong defense if necessary. This means reviewing your trailing and absolute stops, while keeping risk to a minimum when it comes to entering new positions or adding to existing positions by buying at the lowest-risk entry spots. In other words, keep it concrete, and keep it simple, and watch your stocks.

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.