The Gilmo Report

March 21, 2018

March 21, 2018

Playing a strong defense came in handy on Monday as the markets gapped down, sending the S&P 500 Index diving below its 50-dma at the open. Things got crazy today after the Fed raised interest rates by a quarter-point, triggering a sharp rally to the upside that gave out into the close as the major market indexes reversed to the downside. In the process, the S&P reversed into negative territory on higher volume.

 

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The NASDAQ Composite meanwhile broke below its prior breakout point and tested its 50-dma on Monday. It rebounded off the line on an intraday basis, but hasn’t progressed much from there. Today the NASDAQ reversed back to the downside on higher volume for another distribution day. Obviously, a breach of the 50-dma would be the second bearish development coming on the heels of Monday’s breakout failure.

 

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The big story of the week has been the abuse and misuse of personal data at Facebook (FB), which is probably well-known by everyone at this point. The news sent FB gapping down on Monday with the stock closing right at its 200-dma on heavy selling volume. But the selling continued apace the next day as the stock closed well below the 200-dma despite a nice bounce off the intraday lows. That was followed by another gap-down move this morning before the stock stabilized and rallied back up to a point just above the 200-dma where it ran into resistance and stalled.

Right now, I view the stock as a short on rallies into the 200-dma from here.

 

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The news also had a deleterious effect on Twitter (TWTR), which was hit with some bad news of its own after Israel announced it was imposing sanctions against the company for ignoring requests to remove content supporting terrorism. That sent the flying below its 10-dma on Monday, my near-term selling guide for the stock, and quick action at that point would have saved one from enduring a brutal drop from there. Otherwise, anyone using the 20-dema as a wider selling guide would have also been stopped out as the stock plummeted lower.

Once the stock had undercut the lows of the three-weeks-tight flag it formed throughout most of February, it was ready for a typical undercut & rally (U&R) move as it rebounded off the Tuesday lows and back above the prior 31.26 low of February 27th. That led to a nice rally today that carried up to within 37 cents of the 20-dema before the stock stalled. While the U&R move was certainly playable as a trade, it’s not clear where the stock is headed from here, although one could continue to play it as a U&R long set-up using the 31.26 low as a tight selling guide.

 

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Meanwhile, Snap (SNAP) busted its 50-dma yesterday, but I was already looking for it to at least test the 50-dma per my comments over the weekend. Today the stock rallied back up through the prior 16.31 low in the pattern in a typical undercut & rally move, but closed less than 2% above that low. Obviously, this can be played as a U&R long set-up using the 16.31 price level as your selling guide. The bottom line is that SNAP has not followed through at all on its early February buyable gap-up (BGU) after earnings.

 

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Oils were strong today as crude oil pushed back up to its late January highs. My favorite oil name, Diamondback Energy (FANG), played out according to a script I’ve discussed in my last two reports. As I wrote, I would look to buy the stock on an undercut & rally move through one of the prior lows in the pattern, and that’s precisely what we saw yesterday. On Monday FANG dropped below the 123.24 low of March 7th and then turned back up through that low yesterday.

Note that a typo in the weekend report showed that low as 128.29, but anyone looking at the chart would have seen where the low of March 7th was at 123.24. In any case, the U&R coming up through that low led to a move back up to the early March highs, but no further.  Volume trailed off into the close and the stock failed to post a pocket pivot, although it had been on track to do so early in the day. In any case, with or without a pocket pivot today, FANG’s most actionable buy point occurred yesterday at the 123.24 price level.

 

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Both Caterpillar (CAT) and Deere & Company (DE), which I discussed in the weekend report after they had strong moves last Friday, gave up on those moves and are back in no-man’s land. Nothing to do here with either of these names.

In this market, I generally advocate taking an opportunistic approach, since the market is prone to these sudden downside breaks, both in the indexes and in leading stocks. Such pullbacks often provide better entry opportunities relative to chasing strength. For example, we saw Netflix (NFLX) bounce off its 20-dema on Monday and continue higher, but so far it hasn’t been able to clear back above its 10-dma. Nevertheless, if one was hellbent on buying the stock, the pullback to the 20-dema was probably your best bet. So far that has worked.

 

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Nvidia (NVDA), on the other hand, failed to hold its 20-dema on Monday and plummeted all the way down to its 50-dma, most likely because of news that a self-driving Uber vehicle had hit and killed a pedestrian in Arizona. Volume was above average, but the stock held the 50-dma and bounced off the line intraday before quickly regaining its 10-dma and pushing back to its recent highs.

While one had to hold their nose and buy the stock at the 50-dma to benefit from the rebound, the stock is now sitting at its 10-dma as volume declines. This puts it in another lower-risk entry spot using the 10-dma as a tight selling guide, or the 20-dema as a wider selling guide.

 

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Amazon.com (AMZN) pulled right into its 20-dema on Monday, which is what I was looking for per my comments over the weekend, where I wrote, “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.”

Not every stock on my long watch list has been getting hit when the market sells off. Square (SQ), for example, posted a continuation pocket pivot off its 10-dma yesterday. So far, the stock acts well despite all the market turmoil this week, and for now one can use either the 10-dma or the 20-dema as near-term selling guides.

 

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PayPal Holdings (PYPL) has weakened with the market, dipping below its 20-dema and 50-dma on Monday as the market sold off. It closed Monday just above both moving averages, which kept it in play as a long idea and put it in a lower-risk entry position for those who prefer the opportunistic approach. But so far, the stock isn’t showing any upside spunk following last week’s strong-volume pocket pivot, and it stalled out today on a rally attempt as the market also stalled out.

Perhaps buyable here close to the 20-dema and 50-dma, but be careful if the general market continues to sell off as it will likely break support in that case.

 

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Blackberry (BB) posted yet another pocket pivot, this time on a gap-up move yesterday after news of a collaboration with Microsoft (MSFT). While the stock was best bought on the pullback to the 50-dma and 20-dema on Monday, something that is clear in hindsight, one could view yesterday’s move as a buyable gap-up move of sorts. This despite volume being only 149% of average, rather than the “required” 150%, but what’s 1% among friends. Therefore, one could buy the stock here using the 12.99 intraday low of yesterday’s gap-up range as a tight selling guide.

 

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Weight Watchers (WTW) attempted to rally to a higher high yesterday but fell short and then reversed back below its 50-dma today, closing three cents below the line on light volume. This has become something of a two-side situation here because you will notice that the stock is forming what could turn out to be a fractal head and shoulders that leads to another break toward the prior lows. While last Friday’s move looked good, volume was likely exaggerated by triple-witching options expiration.

Thus, I might be inclined to short the stock here and use the 50-dma, three cents higher, as a guide for a tight upside stop, believe it or not, especially if the general market trades lower from here.

 

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SolarEdge Technologies (SEDG) is the same old story. It remains extended, but its cohort, First Solar (FSLR) was buyable along the 10-dma on Monday after posting a pocket pivot on Friday. That pocket pivot stalled and closed near the intraday lows, which didn’t scare me away from the stock, which I still considered buyable on pullbacks into the 10-dma or 50-dma, as I wrote in my weekend report. FSLR then went on to post another pocket pivot on Monday, and has continued higher since. It is now extended.

 

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MuleSoft (MULE) is being bought out by Salesforce.com (CRM) for $44.90 in cash and stock. Hopefully, some Gilmo members owned this one on the news.

Planet Fitness (PLNT) continues to hold above its 20-dema but remains below its 10-dma. Pullbacks to the 20-dema at 37.66 are your best lower-risk entries.

Nutanix (NTNX) has been our March Monster Stock, and after a sharp rally in the first two weeks of the month it hasn’t given up much of its gains as it tracks tight sideways along its recent highs. This has given the 10-dma a chance to catch up to the stock, and the two are now starting to meet up. Because the stock is already quite extended, buying here along the 10-dma as volume declines is more of an add point for any position taken down near the early March breakout point.

 

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Atlassian (TEAM) traded down to its 20-dema on increased volume today, which isn’t what I want to see on a pullback to a key support level. Watch out for further downside if it busts the 20-dema.

Chinese names have continued to hold up, despite all the talk of tariffs on Chinese goods coming into the U.S. Baozun (BZUN) tested its 10-dma on Monday and held, and then bounced to new all-time highs yesterday on above-average volume. Momo (MOMO) also tested its 10-dma on Monday and held, closing right at the line. Yesterday the stock pushed off the 10-dma to a higher high, and followed that up with another higher high today.

58.com (WUBA) offered another entry opportunity at the 10-dma on Monday as it ran into the line on light volume. It has since moved back up to the highs of its current base. If the general market holds up, this remains one to buy on pullbacks to the 10-dma.

 

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Weibo (WB) gave opportunistic buyers a chance to buy the stock as it ran into the line on Monday. That was my suggested entry point, and the stock has pushed higher from there. It now sits right at its 10-dma and 20-dema with volume drying up sharply today, putting it in another lower-risk entry position using the 10-dma or 20-dema as your selling guides.

 

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Autohome (ATHM) pulled into its 20-dema and 50-dma on Monday, holding support at the 20-dema. Over the past two days it has rebounded to all-time highs as it ignores the market turmoil. In fact, one could say that all these Chinese names I’ve just discussed have ignored the market turmoil, and all could be actionable IF the general market is able to hold up here and resume its prior rally phase. All are good names to keep on your buy watch list, in my view.

 

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Alibaba (BABA) is back below the 196.52 intraday low of last Thursday’s buyable gap-up move and is sitting at its 10-dma. Because the 10-dma is a little over 1% from that low, it is within a normal range of porosity below the BGU intraday low. Therefore, one could use the 10-dma as an alternative selling guide if one wishes to give the stock more time to work on this latest BGU. Personally, I would have preferred to see it gain some quick momentum following the BGU, but if the general market doesn’t break to lower lows, it still has a shot at making higher highs.

 

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Applied Materials (AMAT) gave opportunistic buyers a shot at the 20-dema on Monday, which was my recommended entry point to watch for since it coincided with the prior double-bottom breakout point. The stock held the line that day and has since continued higher. Today it cruised right up through the 10-dma, just missing a pocket pivot by about 150,000 shares.

 

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Lumentum Holdings (LITE) is hanging along the underside of its 10-dma, but my view remains the same. Pullbacks to the top of the prior base, just above the 60 price level, would offer the lowest of the lower-risk entry opportunities. However, one can also watch for constructive pullbacks to the 20-dema at 66.17, higher up in the chart, as lower-risk entries if the stock acts well as it meets up with the 20-dema.

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.

As I wrote over the weekend, “It’s evident that stocks have lost their momentum this past week after the indexes reversed on [last] Tuesday on heavy volume. As the NASDAQ and S&P 500 test support, the stage is set for a rebound or failure.” What we got was failure as the NASDAQ broke below its recent new-high breakout point and the S&P gapped below its 50-dma on Monday.

While the easy answer is that President Trump’s current tariff rampage against China is to blame, one must wonder why Chinese-related stocks have held up so well, some even making all-time highs, like BZUN and ATHM. Perhaps there will be a delayed reaction, so if one is working any of these names make sure you know where your out points are. This of course also applies to any stock one might own that continues to act well.

If the general market continues to weaken, even the strongest leaders may start to correct, and it’s just a matter of knowing where your trailing stops are in these names. That is all.

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.