The Gilmo Report

March 19, 2017

March 18, 2017

Financial stocks have been a bulwark of the market rally that began after the election. The Fed’s indication of more rate hikes to come caused many market pundits to begin forecasting three more rate hikes this year and then another 3-4 next year, financials don’t seem to agree.

While the Fed’s actions and words on Wednesday seemed to indicate a hawkish stance, the financials don’t seem to agree, at least not in the short-term. The Financial Select Sector SPDR Fund (XLF) has started to roll below its 20-day moving average on above-average selling volume. This coincides with several big-stock financials, from J.P. Morgan (JPM) to Goldman Sachs (GS), doing the same.

 

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This makes them all look like nascent short-sale targets, as the chart of Goldman Sachs (GS) would appear to indicate, below. Here we see the stock breaking below the 20-day moving average and the prior base breakout point as it meets up with the 50-day moving average.

Selling volume on Friday was heavy, coming in at 29% above average for the day. For a big stock like GS, that’s a sizable increase in volume, and the stock now finds itself standing at the gateway to the point of no return. Obviously, we’d need to see some strong volume off the line to keep this viable as a long, but the reality is that it’s starting to look more like a short to me, using the 20-dema as a guide for a tight upside stop.

As well, weak-volume rallies back up into the 20-dema could constitute potential short-sale entry points. So far the action in financials is puzzling, given the allegedly hawkish tone of Wednesday’s Fed policy announcement. At the same time, bonds and precious metals are moving in directions that would imply a dovish Fed tone.

 

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What this means for the general market isn’t entirely clear, but we do know that the entire financial sector has been driving a good part of the post-election rally. If this key area of the market gives way, then the question is whether a new one will rise up to take its place in rotational fashion, something that has been typical for this market.

From an index point of view, the action appears normal, as we can see on the daily chart of the S&P 500 Index, below. After poking its head back above the 10-day moving average on Wednesday after the Fed policy announcement, the index has pulled back into the line in what is more or less orderly fashion, outside of the huge triple-witching options expiration volume seen on Friday.

 

GR031917-$SPX

 

The NASDAQ Composite Index has held tight sideways since its move back up to the recent highs on Wednesday. The tight action looks constructive, unless we were to consider Friday’s massive options expiration volume to be meaningful. In that case, it looks like a big-volume churning day near the highs. Deciphering the precise meaning of the index action is probably not that critical, since this market still all comes down to what is going on in individual stocks. And that remains a very mixed, and at times random bag, as we will see a little later in this report.

 

GR031917-$COMPQ

 

The big story this week was Tesla’s (TSLA) secondary stock and convertible bond offering. It is quite interesting to see how the crowd was entirely fooled on this one. Everyone, including myself, expected the company to come out with a capital-raise of some sort given that they were on track to run out of cash later this year.

That expectation was confirmed earlier this past week with the announcement of an offering consisting of $250 million in stock and $750 million in convertible notes. What was entirely unexpected was the fact that the stock rallied on the announcement of the news, and that the offering was quite successful. Not only did it price favorably at $262 a share on the stock end, it was also up-sized due to strong demand.

But as I blogged early on Friday, TSLA is expected to earn $13.91 a share in 2021. This comes at the tail-end of current analysts’ estimates showing a big acceleration between 2018 and 2019 when annual earnings go from $2.48 to $7.54. That is a big acceleration no matter how you slice it, and could drive further upside form here IF the general market rally continues.

I wouldn’t, however, just jump on the stock right here given that the successful secondary offering likely saturated near-term demand for the stock. If we already know that TSLA posted a pocket pivot on Tuesday, surprising as it was, then the proper approach is to look for constructive weakness.

I would therefore be watching for an orderly pullback to the 20-day moving average, now at 254.80, with volume declining, as a possible lower-risk entry. In the interests of objectivity, however, keep in mind that TSLA is still holding within the confines of a fractal head and shoulders formation. In light of this, any volume breach of the 20-dema and 50-day lines would bring this back into play on the short side. Assume nothing!

 

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When looking to enter something on the long side of this market, it seems that the Ugly Ducklings become your best bet in terms of getting an immediate and decent-sized price move. A fantastic current example is found in the action of Lumentum Holdings (LITE) over the past week or two.

After looking like death warmed over earlier this past week as it broke below its prior base breakout point in a test of the 50-day line, LITE launched back to the upside on a bottom-fishing pocket pivot on Thursday. Volume was very heavy on the day, and the stock held those gains on Friday.

LITE’s action would seem to argue for an overall approach where one does not get bedazzled by strength, and instead looks for those unlikely “Ugly Duckling” pullbacks. As I’ve pointed out in prior discussions of LITE, everybody gets excited when they see the stock jacking to the upside. But interest is quickly lost when the stock pulls into a final point of no return at the 50-day line. It is at that point that one must act. Based on Thursday’s big-volume pocket pivot, orderly pullbacks into the 10-day line at 46.28 might be considered lower-risk entries.

 

GR031917-LITE

 

Among the few remaining opticals on my long watch list, Applied Optoelectronics (AAOI), not shown, found pocket pivot volume support near its 20-dema on Friday, but still probably needs some time to base given its prior upside move since early January.

Arista Networks (ANET), also not shown, is in an extended position near its highs. Pullbacks to the 10-day line at 124.93 would offer lower-risk entries.

Another great example of an Ugly Duckling that comes alive can be seen in Netease (NTES). Over the weekend I pointed out that, “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…”

That was precisely what we saw on Friday when NTES popped back above its 10-day and 20-day moving averages on a strong-volume move. This qualifies as a clear pocket pivot, using the 20-day line at 287.08 as a tight selling guide.

 

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Ander here we see Weibo (WB) attempting to hold above its 20-day moving average after regaining the line on Thursday. That possibility was actually discussed in my Wednesday report. As I intimated at the time, “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.”

While Thursday’s volume was not enough to generate a pocket pivot, it did come in at above average. This was followed by a low-volume dip back toward the 20-dema, which could put this in a lower-risk entry position for an Ugly Duckling long set-up.

This could also end up resolving to the downside, in which case a breach of the 20-dema or the 50-day lines would bring this back into play as a short-sale target. For now, it is acting like a typical “LUie” formation, so I would treat this even-handedly based on the real-time action as it plays out in the coming days.

 

GR031917-WB

 

Among my other China Five names, Momo (MOMO), not shown, is currently quite extended and out of buying range. Alibaba (BABA), also not shown, seems to remain buyable on pullbacks to its 20-dema at 103.45, but so far has not been able to follow through with any substantial upside following a continuing stream of breakout attempts.

JD.com (JD) is holding nicely along its 10-day moving average. This remains in a buyable position using the 10-day line at 31.23 as a tight selling guide. Given my druthers, I’d probably prefer to try and be opportunistic here, looking for any possible pullback to the 20-dema at 30.80 as a better entry.

 

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Netflix (NFLX) keeps flashing all these wonderful pocket pivots and pocket pivot volume signature, but still can’t seem to bust out of its current price range. The stock got within about 1% of the 10-day moving average on Friday before rallying to close positive on another pocket pivot volume signature.

I suppose one could allow some leeway here and view Friday’s action as a bona fide pocket pivot. But that simply means buying the stock here while using the 10-day line at 142.66 as a tight selling guide. And as I wrote on Wednesday, perhaps NFLX has now sufficiently bored us all to death to the point that a more substantial upside move can now materialize.

 

GR031917-NFLX

 

If financials start to come undone, perhaps one big-stock tech name ready to pick up the slack is Amazon.com (AMZN). As we can see on the weekly chart, below, the stock is holding excruciatingly tight over the past three weeks with volume drying up nicely.

One could argue that the tightening weekly price ranges are also wedging along the lows, but it’s not clear to me whether this is a problem. This sort of “wedging along the lows” is something Bill O’Neil showed me as a potential defect way back in the 1990’s, and I’m not so sure it necessarily applies to today’s market environment. The bottom line is that the stock is sitting right at its February base breakout point and along the 10-day line. Therefore, it can be considered buyable here using the 20-day moving average at 847.72 as a tight selling guide.

 

GR031917-AMZN

 

Notes on other big-stock names:

Apple (AAPL) pulled into its 10-day line on Friday on heavy selling volume. If one were truly interested in buying the shares of a stock that is growing earnings at 9%, then I would be inclined to look for an opportunistic pullback to the 20-dema at 137.76.

Alphabet (GOOGL) continues to edge higher, posting another all-time high on Friday, but remains extended. Pullbacks to the 10-day line at 861.26 would constitute lower-risk entries.

Facebook (FB) remains above its 10-day moving average following Wednesday’s continuation pocket pivot. Technically in a buyable position using the 10-day line at 138.79 as a tight selling guide.

Priceline Group (PCLN) remains extended, but pullbacks to the 10-day line at 1756.45 would offer lower-risk entries.

I’ve been looking for a possible rally in Nvidia (NVDA) back up to its 20-day or 50-day moving averages per my comments in last weekend’s report. In this regard, we could say that the stock has taken the high road by getting up as far as its 50-day line on Friday. Not only that, but Friday’s action also constituted a roundabout or bottom-fishing type of pocket pivot at the 20-day moving average. NVDA then ran right into its 50-day line at 106.25, closing 18 cents below the line on heavy volume. This looks buyable still, using the 20-dema as your selling guide.

A volume reversal at the 50-day line, however, would bring this back into play as a short-sale target. As with other Ugly Duckling moves we’ve seen this week, including WB and TSLA, this remains a two-sided situation, and one must simply react and flow with the real-time information as it presents itself without having a rigidly bullish or bearish view.

 

GR031917-NVDA

 

Clovis Oncology (CLVS) is holding up quite well following its big-volume base breakout earlier this past week. Consistent with my views this past Wednesday, I would continue to look for a pullback closer to the top of the base at 66-67 as a lower-risk entry, maybe even 67-68 given that the absolute high of the base is 67.16.

 

GR031917-CLVS

 

Glaukos (GKOS) helps reinforce the point that Ugly Duckling set-ups are often your best entry points, even though anyone operating in accordance with a strictly O’Neil-style orthodoxy would likely shun them. I talked about this as being buyable along the 10-day line in my Wednesday report, and the stock has now posted to strong moves to new closing highs.

You can also toss GKOS into your pile of “LUie” chart examples, where the ugly-looking “L” formation blossoms in to a “U” as the stock suddenly and almost randomly turns back to the upside. A typical pattern for this market, to be sure.

 

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A lot of members have speculated on whether bio-techs will emerge as leaders in this market, but most of that has centered on the big-stock bio-tech names. As Biogen Idec (BIIB) and Amgen (AMGN) have demonstrated this week, those big-stock bio-techs seem to have lost their mojo.

The reality is that the Gilmo bio-tech “Three Musketeers,” CLVS, GKOS, and Incyte Pharmaceuticals (INCY) have all been stellar bio-tech performers since I first discussed them in early January. So instead of sitting around speculating about big-stock bio-techs, these three have been sitting right in front of our noses the whole time.

Here we see INCY’s 10-day moving average huffing and puffing to catch up to the stock’s now well-extended price. INCY has benefited handsomely from the news flows over the past few weeks. In late February, it was announced that the stock would be added to the S&P 500 Index, sending it gapping to new highs.

Two Friday’s ago, speculation that Gilead Sciences (GILD) might be looking to acquire the company sent INCY shares jacking even higher. From here, only pullbacks to the 10-day line at 144.21` would serve as proper references for lower-risk entry opportunities.

 

GR031917-INCY

 

Square (SQ) was buyable Thursday morning per my comments in the Wednesday mid-week report. Over the past two trading days the stock has posted a pair of five-day pocket pivots as it pushed up and off the 10-day line with some authority. Remember that I like to see five-day pocket pivots show up in clusters, and that this can substitute for a single ten-day pocket. For this reason, SQ remains buyable here using the 10-day line at 16.96 as a tight selling guide.

 

GR031917-SQ

 

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.

Notes on other names discussed on the long side in recent reports:

Activision (ATVI) found support again at its 10-day moving average on Friday. This would put it in a lower-risk entry position using the 10-day line as a tight selling guide.

Carnival Cruise Lines (CCL) attempted to clear to new highs on Friday on strong options expiration volume. My view here is to look at pullbacks to the 10-day line at 56.69 as less-extended entries rather than chasing a breakout.

Charles Schwab (SCHW) is off my long watch list based on the current weakness in the financials as discussed at the beginning of this report.

Checkpoint Software (CHKP) moved to new highs on Thursday but pulled in slightly on Friday as volume increased. I would continue to view pullbacks to the 20-dema at 99.87 as opportunistic entries.

Electronic Arts (EA) has gotten hit with some selling volume over the past two trading days, but was able to find support at the 20-dema on Friday. This might put it in a lower-risk entry position using the 20-day line at 88.39 as a tight selling guide. It’s not clear that the selling volume is a problem for the stock since it endured similar selling volume back in late January but recovered and moved higher from there.

 

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Royal Caribbean Cruise Lines (RCL) is acting well as it broke out to new highs on Friday on about average volume. Still prefer to look to buy this on weakness down to the 10-day line at 96.18.

Salesforce.com (CRM) dipped below its 10-day moving average on Friday on heavy options expiration volume. This needs to hold the 20-dema at 82.51 to remain viable.

ServiceNow (NOW) moved above its 20-dema on Thursday, but volume was very light on the move. It held above the 20-dema on Friday as volume remained light, so would need to hold here at the line to remain viable as a long idea. A breach of the 20-dema on volume would turn this back into a short-sale target.

Splunk (SPLK) has regained its 20-dema, but buying volume has been lacking. If this is to remain viable as a long, it needs to hold tight along the 20-dema with volume drying up. Otherwise, a breach of the line on heavy selling volume would bring this back into play as a short-sale target.

Symantec (SYMC) remains extended, but pullbacks to the 10-day line at 30.12 would present lower-risk entries. However, my preference would be to take a more opportunistic approach and see if the stock doesn’t give us a better entry on a pullback to the 20-dema at 29.63.

Take-Two Interactive (TTWO) has run into volume selling similar to its cousin, EA, but unlike EA did not find support at its 20-dema, closing below the line on Friday on heavy options expiration volume. This looks problematic, such that I would look for a possible undercut of the late February low at 56.69, which could coincide with a pullback to the 50-day moving average, as a more opportunistic entry point, should that occur.

Veeva Systems (VEEV) keeps powering to new highs and remains way extended. It was last buyable along its 50-day moving average about two weeks ago per my comments at that time.

Snap (SNAP) failed to hold the prior 20.64 low in the pattern and broke to lower lows on Thursday and Friday. The stock hit a low of 18.90 on Friday before bouncing back to the upside. By the close it ended up in the upper half of its daily trading range on increased volume, which has the look of supporting action off the intraday lows.

The pundits all now seem to be convinced that SNAP is a buy at the IPO offering price of 17, which I suppose implies that they know for certain this is going to occur. My guess is that they don’t, but it makes for good analyst logic. I still see the potential for an IPO “U-Turn” pattern to show up here, and I like the supporting action off the lows on Friday.

That said, a move back above that prior 20.64 low would likely have more thrust as an undercut & rally set-up now that the stock has probably shaken out every last buyer who jumped in right after the IPO. So, you can wait to see if this moves back above the 20.64 low, or one could test a long here using the 18.90 low of Friday as a quick exit point.

While the stock could continue pulling back to the $17 IPO offering price, my guess is that if this is what the crowd expects it is not likely to occur. For that reason, I’m watching closely for a U&R to develop here as confirmation of a possible IPO “U-Turn” base starting to form.

 

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The short side of this market has been something of a volatile, hit or miss affair. For example, Delta Airlines (DAL), not shown here on a chart, rallied right up into its 10-day moving average on Friday where it became shortable at that point. It then reversed to close down on the day. It is now stuck in no-man’s land.

U.S. Steel (X) still suffers from stock psychosis as it just flies back and forth within its pattern without heeding what would be considered logical areas of support and resistance. Early in the week it found support at a point well below the 50-day line and then rallied back up into the line, where it looked shortable based on the weak volume.

But X just kept rallying the next day as it cleared the 50-day line on increased, but below-average, buying volume. Over the prior two trading days X has found resistance just above the 38 price level as buyers have failed to come into the stock. In this position, it’s difficult to decipher the stock’s next potential move, but I suppose a volume breach of the green 20-dema might bring it into play as a short-sale at that point. Otherwise, I don’t see any real coherence to this pattern, other than that it seems to change direction on a random basis, making it tough to play either way!

 

GR031917-X

 

Among the oils, Diamondback Energy (FANG) is the only one that is anywhere near a potentially shortable position after rallying back above its 50-day moving average. This bounce has occurred after the stock found logical support at its 200-day moving average earlier in the week.

Volume on this move back to the upside has come on above-average buying volume, which is not necessarily negative. Normally you’d like to see such a rally occur on weak or declining volume. In this case, the only thing you can do is watch for a reversal back below the 50-day line as a re-entry signal on the short side.

 

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This market seems to require that one be as resourceful as possible, and willing to take shots at Ugly Ducklings when they look their bleakest. We’ve seen this occur in short-sale targets like NVDA and TSLA, as well as long ideas that have been on the fence recently like NTES and LITE, which have had the potential to morph into short-sale targets before finding support and launching back to the upside.

Trying to judge the market’s next move, including whether we will see a more substantial pullback or correction any time soon, based on the action of individual stocks is getting somewhat difficult. Things seems to move in random directions at times, and the Ugly Duckling is always lurking, as several stocks discussed in recent reports, both long and short, have demonstrated.

If the financials continue to weaken, we might look for some rotation into other areas that have been percolating. Perhaps this means that NFLX and AMZN roar to life, or TSLA sets up and finally clears the $300 Century Mark. It might also include an unlikely recovery in names like NVDA and WB.

This is where having all the tools at our disposal becomes critical. Bottom-fishing and roundabout pocket pivots, undercut & rally set-ups, and even the oddball “LUie” set-up can be seen to work in this environment, and usually better than standard breakouts.

Because of this, I think that maintaining a flexible and opportunistic approach by considering stocks more buyable in the lower reaches of their patterns as opposed to the upper reaches can keep one out of trouble. And if we do start to see the market pull back, buying as close as possible to areas of near-term support is the best recipe for limiting downside losses. Carry on.

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.