The Gilmo Report

March 30, 2016

March 30, 2016

Fed Head Janet Yellen dovish comments during a speech she gave yesterday overrode the hawkish comments of other Fed Heads who’ve been talking over the past few days. I am always fascinated at the extensive, circuitous sort of double-speak the Chairwoman uses to describe a concept as simple as “the economy is still weak, so we need to be cautious about raising rates too fast.”

After some initial translation and interpretation, the market took Ms. Yellen’s comments as confirmation of continued easy money policies that it needed. This sent the dollar diving to the downside, gold flashing higher, and stocks jacking to the upside. The big-cap NASDAQ 100 and small-cap Russell 2000 Indexes led the way yesterday with strong gains of 1.58% and 2.67% on higher volume. The strong action led to a nice gap-up open this morning, but that didn’t go much further as we can see on the daily chart of the NASDAQ Composite Index.

While the index was able to clear its 200-day moving average, it closed the day in the lower half of its trading range on lighter volume.

 

GR033016-$COMPQ

 

In conjunction with the NASDAQ’s stalling action I noticed a number of big-stock names in the group losing some “altitude” off of their intraday highs. Thus as the indexes continue their upside extension, the risk of a more severe pullback grows. The S&P 500 Index also stalled as volume declined sharply from yesterday’s levels. While it remains well above its 200-day moving average, it is now bumping up against its December highs.

 

GR033016-$SPX

 

Meanwhile I continue to puzzle over the stark divergence between the percentage of stocks above their 50-day moving averages vs. the percentage of those that are above their 200-day moving averages. This is obviously indicative to some degree of an extreme junk-off-the-bottom or JOBs type of Ugly Duckling market.

We can see that the recovery of stocks back above their 200-day moving averages is sorely lagging in this market. Is this due to the fact that many stocks remain in beaten-down positions way down in their chart patterns and the market perhaps has more room to run? Or is it more indicative of a weak rally?

 

GR033016-$NAA200R

 

The percentage of Nasdaq stocks above their 50-day moving average remains at an extreme peak, which is normally a cautionary sign. In combination with the stalling action we saw in the indexes today, this is probably not the place to be getting wildly aggressive on the long side.

 

GR033016-$NAA50R

 

But this is easily remedied on a concrete basis by sticking to our approach of looking to buy into weakness while selling into sharp upside strength. Remaining cautious with respect to long entries by trying to take positions as close to a logical area of support as possible allows us to achieve a particular ideal. That ideal is simply the idea that if things go wrong, we have a quick exit and thereby limit our risk. I have found that this approach will tend to keep one out of serious trouble.

Precious metals reacted sharply to the upside yesterday along with stocks following Chairwoman Yellen’s comments, but the yellow metal was unable to follow through on this move today. Gold’s proxy, the SPDR Gold Shares ETF (GLD), shows a pullback today on lighter volume. Not exactly a sign of strength.

 

GR033016-GLD

 

Precious metals stocks held up better than the metals themselves. While gold is dangling in mid-air above its 50-day moving average but below its 10-day and 20-day lines, Silver Wheaton (SLW) was able to hold at its 10-day line today as volume declined to -33.8% below average. Theoretically this puts the stock in a buyable position using the line as a guide for a tight downside stop. Alternatively, the 20-day moving average at 16.98 serves as a somewhat looser stop…

 

GR033016-SLW

 

Facebook (FB) plowed to an all-time closing high yesterday on a pocket pivot breakout, but was unable to hold its initial gap-up open today. The stock reversed on higher volume, although it did come in at -10% below average. To some extent the stock was extended after inching higher for seven straight days. The big question here is whether this turns out to be some sort of double-top that sees the stock turn lower from here. But it is perhaps useful to keep in mind that today’s decline was merely -1.24% deep, which can be considered a relatively contained pullback.

The litmus test for FB will occur on any continued pullback to the 10-day moving average, currently at 112.89. That would be my preferred spot at which to take a look at going long the stock on any further pullback from here.

GR033016-FB

 

Buying into constructive weakness, when we can find it, is of course our preferred method of entry for our favored long ideas. M/A-Com Technology Solutions (MTSI) illustrates this with a nice move off of its 20-day moving average after pulling into the line last Friday on a clear “voodoo” volume signature. This resulted in a move back up to the recent range highs around the 44 price level over the past couple of days. Chasing the strength becomes dangerous however, as the stock showed some churning action at the prior highs on heavy volume.

Clearly there are some motivated sellers up around 44, but that would not be an issue if one had taken a position near the 20-day line. Pullbacks into the line at 42.02 remain your best lower-risk entry points.

 

GR033016-MTSI

 

The situation is less clear with Maxlinear (MXL) which looks to be losing momentum as it bounces back up towards its prior highs. This is occurring after last week’s high-volume spinout that found support at the 50-day moving average. The problem with this chart is that the action has gone from a nice orderly pattern to a disorderly one. Therefore I’d want to see this put in some sort of constructive “Wyckoffian Retest” of last Friday’s low as a means of settling down and consolidating this disorderly action into something more orderly.

Generally, by “orderly” I mean something we can make sense of. And what we could make sense of would be a nice low-volume retest of the Friday low down to either the 20-day moving average at 17.49 or even a bit lower. Keep an eye out for this.

 

GR033016-MXL

 

Homebuilders have remained a strong group, but as with anything else in this market your best shot on the long side comes when the stock pulls into a logical area of support. Over the weekend I pointed out that D.R. Horton (DHI) was in “a lower-risk entry using the 200-day line as a guide for a tight downside stop.” As we can see, it was sitting right on top of its 200-day moving average as volume dried up to about half of its daily average. This led to a nice pop to higher highs as the stock posted a pocket pivot off the 10-day moving average yesterday.

Today DHI pulled back into the 10-day line on lighter volume. This pullback brings it more or less back down into the line at 29.94, which would provide a second lower-risk entry using the line as a guide for a tight stop based on yesterday’s pocket pivot.

 

GR033016-DHI

 

Smith & Wesson Holdings (SWHC) is an interesting situation as it sits in a small bear flag just under its 20-day moving average. This little flag is forming after the stock broke sharply down to its prior base breakout point at around the 26 price level last Friday on very heavy selling volume. As I discussed in my weekend report, the catalyst for that sell-off were some comments coming out of Sportsman’s Warehouse (SPWR) intimating at slowing gun sales. If that turns out to be material for the group as a whole, it could send SWHC lower.

Technically, the first sign of a possible base-breakout failure is typically a breach of the 20-day line on heavy volume. We got exactly that on Friday. So far the 20-day line has served as resistance each time the stock has tried to push back above the line on an intraday basis as volume declines. I tend to view this as a short using the highs of the past two days at around 27.50 as a maximum guide for an upside stop. So far the bear flag simply looks like a short consolidation of last Friday’s downside break, with support showing up at the prior base breakout point.

 

GR033016-SWHC

 

Square (SQ) is the star stock of the week as it blasted to all-time highs today. Today’s close at 15.02 exceeds the 14.78 intraday high of its first day of trading back on November 19, 2015 and came on huge upside volume. As I wrote over the weekend, SQ appeared to be “trying to work off some of this overhead congestion from buyers who went long the stock as it formed a post-IPO flag pattern back in November-December of last year.” So it looks like the stock didn’t need much time to work that overhead off as it cleared to new highs today.

One of the factors helping to drive SQ is the huge short interest in the stock, which consists of about 1/3rd of the total current float. On top of that, there are likely some natural buyers here, but the stock is way extended at this point. Pullbacks into the 10-day line at 13 would offer the next best opportunistic entry opportunity, should they occur.

 

GR033016-SQ

 

Vantiv (VNTV) achieved an all-time closing high today on light volume as it churned around its recent highs. The stock still remains within the handle price range in an overall cup-with-handle pattern extending back to early December 2015. As I wrote over the weekend, your opportunistic, lower-risk entry point was right at the 10-day line where the stock closed on Friday. On Monday it hung out at the line as volume dried up to extreme voodoo levels at -63% below-average. This was more or less a textbook voodoo type of pullback to the 10-day line that was quite buyable.

With the stock at the highs of the handle price range, I don’t consider it to be in the lowest-risk position. Therefore pullbacks down to the 10-day line at 52.56 or the 20-day line at 52.13 would remain your best shots at an opportunistic long entry.

 

GR033016-VNTV

 

Mobileye (MBLY) pulled right into its 20-day moving average last Friday on a voodoo volume signature. This led me to point out in my weekend report that, “Now the stock sits at a point where it has pulled into the 20-day line as volume remains extremely light. Technically, this would put the stock in a lower-risk buy position right at the line.”

MBLY held the line on Monday and proceeded to move higher yesterday and today as volume started to pick up, albeit at below-average levels. However, despite the low volume, today’s action actually qualifies as a pocket pivot at the 10-day moving average. My preference, however, remains to look at MBLY as a nice long pick-up on pullbacks to the 20-day line, now at 34.63.

I also pointed out over the weekend that if MBLY were to bust the 20-day moving average on heavy volume it could come back into play as a short-sale target. This did not happen, which shows why one must always operate on the basis of the real-time price/volume action. Doing this would cause one to take a long position at the line with the idea of jettisoning it rather quickly if it failed through the 20-day line. At that point one could then consider flipping to the short side if one so desired. Ultimately I let the stocks tell me what to do, rather than vice versa!

 

GR033016-MBLY

 

I wrote over the weekend that, “Objectively, however, I would have to say that I am not seeing much evidence of failure in any of these Ugly Ducklings I’ve been discussing in recent reports. In most cases, pullbacks appear to be normal. In addition, they seem to create optimal buying opportunities.”

That turned out to be the case with Salesforce.com (CRM) yesterday as it pulled into its 20-day moving average and then bounced on a five-day pocket pivot. As I blogged yesterday, the move could be seen as a standard 10-day pocket pivot off the 20-day line based on the fact that the heaviest downside volume in the pattern over the last ten trading days occurred on triple-witching options expiration.

If we want to exclude that volume as an anomaly, then we could view both yesterday’s and today’s moves as pocket pivots. Today’s action carried the stock through the 200-day moving average on increased buying volume. In any case, it was quite buy able yesterday, and is now somewhat extended. I would prefer to look at any pullback into the 200-day line at 72.70 as offering a lower-risk entry from here.

 

GR033016-CRM

 

Workday (WDAY) mimicked CRM by also pushing above its 200-day moving average on a pair of five-day pocket pivots. While I’ve traded the stock both long and short throughout March, I was watching it closely today as it pushed up just beyond the 200-day line. However, the stock held the line on an intraday pullback and flashed a buy signal on my 620 intraday chart before charging back through the highs of the day. The stock was also buyable yesterday at the 10-day line.

WDAY is somewhat extended, and remains a name to look at opportunistically on any pullbacks, perhaps into the 200-day line at 74.88.

 

GR033016-WDAY

 

Apple (AAPL) has been able to push higher as it now runs right into the 40-week moving average on its weekly chart, which I show below. As I wrote over the weekend, this could reach the 200-day/40-week moving averages in a continued market rally. Given that this is what we’ve seen over the past two days, I’m not surprised that AAPL has been able to reach the 40-week line. It is just about 2% shy of its 200-day line however, but this could be a reasonable short entry point using today’s high at 110.42 as a guide for a very tight stop.

Alternatively, any further rally up to the 200-day line at 111.58 would present a secondary area of potential overhead resistance. Keep in mind, however, that AAPL’s success as a short-sale target probably depends on what the general market does from here.

 

GR033016-AAPL

 

Over the weekend I discussed the action in Netflix (NFLX) as giving “the impression of supporting action around the line following a shallow four-day pullback. Thus the action appears constructive and may indicate that the stock is going to make a run for its 200-day moving average at 105.93.”

That is in fact what we’ve seen so far this week as the stock came within about 1% of its 200-day moving average today on light volume. NFLX did end the day reversing to the downside, however. The short upside move started Monday with a pocket pivot off the 20-day moving average and up through the 10-day line. Good for a trade, but as the stock approaches the 200-day line at 106.04 it should be watched as a potential short-sale target once again.

 

GR033016-NFLX

 

Tesla Motors (TSLA) appears to be in a holding pattern along its 200-day moving average ahead of tomorrow’s big Model 3 product announcement event. Rumor has it that the company will have a working prototype that members of the media will have a chance to drive. What this means for the stock, however, remains unclear. If the new model is compelling it could send the stock higher given the extremely high short interest in the stock currently. Otherwise, it could just turn into a “sell the news” event.

If one is looking to play the stock either way, my suggestion would be to wait until the event takes place, and then see whether a fadeable move ensues.

 

GR033016-TSLA

 

Looking around for something on my buy watch list that may be trying to set up on the long side my eye can’t help noticing GoDaddy (GDDY). As we can see on the weekly chart below the stock has spent the entire month of March in an extremely tight four-week base as volume remains quite low.

On the daily chart, not shown, each pullback into the 20-day moving average, now at 31.49, has held up. Therefore, we might consider the stock to be in a buyable range here right along the 10-day moving average at 31.86 while using the very nearby 20-day line at 31.49 as a reasonable downside selling guide.

 

GR033016-GDDY

 

Below are my current notes on other names I’ve discussed in recent reports:

Alaska Air Group (ALK) – holding along the 10-day line as it remains in an uptrend off the early February lows. Pullbacks into the 20-day line at 79.60 would be your most optimal low-risk entry opportunities.

Amazon.com (AMZN) – stock broke out through its March price range yesterday on light volume and stalled today around the $600 Century Mark price level. While it is too extended to go long here, it could become shortable using the 603.24 high of today as a very tight upside stop.

Broadcom (AVGO) – making new highs on light volume. Probably setting up for a pullback. My optimal pullback for AVGO would be down to the top of the base and the 20-day moving average at 148.23.

Fabrinet (FN) – extended from last week’s breakout at the 30 price level. Pullbacks into the 30 price level or the 10-day line at 29.69 might provide lower-risk entries from here.

First Solar (FSLR) – having a weak bounce off of its 50-day moving average as it found resistance at the 10-day line today. I might consider this as a lower-risk long opportunity on another low-volume retest of the 50-day line at 67.30. But if it busts the line on heavy volume it could morph into a short-sale target.

Hawaiian Holdings (HA) – still tracking along the 10-day moving average. Prefer a more opportunistic approach looking for a pullback into the 20-day moving average at 45.17 as a potential lower-risk entry should that occur.

Nvidia (NVDA) – way extended from its recent breakout point through the 34 price area. Look for pullbacks back into the 10-day line at 34.24 as lower-risk entry opportunities.

Silicon Motion (SIMO) – stock jacked sharply higher today on no apparent news. Extremely extended at this point, and only pullbacks into the 10-day line, now at 36.64, would present a more reasonable entry from here. Look for the 10-day line to catch up to the stock a bit first since SIMO is about 9% extended beyond the line at this time.

SolarEdge (SEDG) – stock rallied from last Friday’s undercut low but again found resistance at the confluence of its 10-day, 20-day, 50-day, and 200-day moving averages. Good for a quick trade, but that’s about it for now.

Southwest Airlines (LUV) – stock is back up to last week’s highs but stalled out today on light volume. Would still view pullbacks to the 20-day moving average, now at 43.38, as your most opportunistic, lower-risk entry opportunities.

Splunk (SPLK) – at the highs of its ascending March price range. Would continue to look at pullbacks into the 20-day moving average, now at 46.45 as potential lower-risk entry points.

While I am somewhat cautious on the market on an index basis, the concrete way to handle this is to simply continue taking advantage of pullbacks in individual stocks. When a name you like pulls into a lower-risk entry point along a key moving average or prior area of support on the chart, don’t be afraid to pull the trigger.

As long as your entry is as close to a potential area of support as possible, risk can be controlled by setting a tight stop. This is not possible if one likes to chase strength. Therefore, don’t do it – it’s that simple. Stick to the simple plan of buying on constructive weakness. That way, if the market does start to come apart one should be able to slide through the exit door while sustaining minimal damage.

Certainly we could be reaching a point of maximum danger as the indexes approach their December highs. Over the past several months, each time the market has pushed up to its highs it has rolled over again. We cannot, however, try and predict this. We can only go with the real-time price action.

For now, that means that buying pullbacks earlier in the week has so far yielded some upside reward. In this market that’s about as good as we can expect to do as we see what happens going into Friday’s jobs number. Stay tuned.

 

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 AAPL, CRM, 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.