The Gilmo Report

March 4, 2018

March 4, 2018

The market has reached a chop zone where it has retraced roughly 50% of its sharp move up from the February 9th low, depending on which index you’re looking at. The NASDAQ Composite Index came close to retracing half of its prior rally, which by my reckoning would be down to the 7068 level. The index got as low as 7084.83 on Friday before rallying to close higher on lighter but at least above-average volume as it regained its 50-dma. We’ll now have a chance to see whether support at the 50-dma holds.

 

GR030418-$COMPQ

 

The S&P 500 Index retraced more than 50% of the prior rally, closing just below the mid-point between its January 26th high at 2872.87 and its February 9th low at 2532.69. Volume was lighter, and the index remains below its 50-dma. Both the S&P and the Dow have taken the brunt of the selling thanks to the Trump Administrations stated intention to impose steel and aluminum tariffs. Obviously, industries that use these metals, such as auto, machinery, oil services, infrastructure, etc. make up more of these indexes than they do the NASDAQ Composite, hence the reason for the S&P’s underperformance.

 

GR030418-$SPX

 

So, the market remains stuck between a rock and a hard place, as we now get to see just how vigorously other countries retaliate against these steel and aluminum tariffs. If a trade war escalates, then the market could move lower. If the situation simmers down, and the administration perhaps backs away from the unilateral imposition of tariffs and seeks to take a negotiable stance, then the market could rally sharply, as I tweeted early on Friday.

Ultimately, I tend to think that this market is mostly a trader’s market for those who take an opportunistic approach. Friday’s action was characterized by a broad number of stocks finding support at 10-dmas, 20-demas, and 50-dmas, and then bouncing very hard. In some cases, the volume was high enough to create pocket pivots.

One example would be Netflix (NFLX), which gapped down at the open just below its 10-dma but quickly moved back above the line. It eventually posted a pocket pivot on strong, above-average volume. One major reason for the support might have been the fact that the company has been nominated for several Oscars. The big Oscar Awards event will be held Sunday night. So, the question is, if they don’t win any trophies, does the stock sell off on Monday? Who knows, but an opportunistic trader could have scooped shares at the 10-dma on Friday.

 

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Amazon.com (AMZN) is another example after pinging right off its 20-dema on above-average volume on Friday. Note that buying stocks along the moving averages when they pull back is tricky, since one could have also considered Thursday’s action, where the stock closed above the 10-dma, as a potentially buyable pullback. AMZN gapped down through the 10-dma on Friday before finding support at the 20-dema and once again retaking the 10-dma on the upside.

If you were alert to the pullback down to the 20-dema, you could have bought into it if you are an opportunistic type who looks to buy on pullbacks instead of chasing extended strength.

 

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Nvidia (NVDA) busted its 20-dema on Thursday, morphing into a short-sale at that point, as I discussed it would in Wednesday’s report. That move carried below the 50-dma on Friday as the stock gapped lower at the open. But, like other big-stock NASDAQ names, it found support somewhere, which in this case turned out to be the 50-dma, and bounced.

Volume came in above average, which is constructive. Had one taken a stab at the stock as it regained the 50-dma one would have been successful, but had one taken the stock on Thursday when it tested the 20-dema, one would have been stopped out quickly. So, as you can see, when the general market is selling off, buying into these pullbacks to support requires a nimble approach.

 

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Tesla (TSLA) worked well as a short-sale target once it reached prior resistance up near the 360 price level. After pushing down toward the 200-dma on Wednesday, it rallied briefly on Thursday before rolling over and busting both the 200-dma and the 50-dma on heavy selling volume. It finally found support on Friday as it rallied with the market off the lows on light volume. By the close, TSLA ended up on the day and a mere 55 cents above its 50-dma. From here it could continue a little higher to the 200-dma and roll over again.

So, there are two ways to approach this at this stage. First, if it quickly breaks below the 50-dma then that would trigger it as a short-sale entry at that point. If it continues higher to the 200-dma, then shorting near the line while using it as a guide for a tight upside stop would be the prescribed approach

 

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I blogged early in the day on Friday that both Twitter (TWTR) and Snap (SNAP) were on track to post potential pocket pivots. Unfortunately, volume petered out by the end of the day for both, and the action did not qualify as pocket pivots. However, both stocks were up early in the day even as the general market was selling off, and finished the day near their intraday highs.

TWTR also closed above its 10-dma on a five-day pocket pivot, but remember that we want to see clusters of five-day pocket pivots in lieu of a single ten-day pocket pivot. Overall, however, the stock just looks like it’s basing.

 

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The weekly chart of TWTR shows that this is the case, with the stock posting three tight weekly closes in a row for a “three weeks tight” or 3WT flag formation. Some might even call it a “high, tight, flag,” although I don’t think it’s necessary to label the pattern as anything special. For now, the tight closes in a well-formed flag formation look constructive, no matter what you want to call ‘em. Perhaps TWTR will be able to post a more decisive pocket pivot at the 10-dma in the coming days as a follow-through to Friday’s action, and is something to watch for.

 

GR030418-TWTR Weekly

 

Snap (SNAP) moved into positive territory before TWTR on Friday morning, pushing back above its 20-dema as volume ramped up early in the day. It was the beneficiary of a positive analyst report from Needham & Company. But, as with TWTR, volume levels receded as the day wore on and by the close the stock posted a five-day pocket pivot at the 20-dema and 10-dma, closing just above the 10-dma on volume that was 12% above average.

So, what started out looking like a possible pocket pivot at the 20-dema turned into just a nice move back above the 20-dema and 10-dma. Nevertheless, Friday’s showing demonstrated that SNAP isn’t exactly dead yet, and if it can constructively hold the 20-dema on any small pullback from here, that might set up another possible lower-risk entry opportunity.

 

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Facebook (FB) is floundering badly here as it undercut the prior 175.11 low in the pattern and rallied back above it on Friday. One could play this as an undercut & rally move using the 175.11 price level as a selling guide, less than 1% lower. The reality is that the stock was a short on the prior rally above the 50-dma late last week and into Monday of this past week. Notice the wedging volume followed by the stalling day at the peak, five days ago on the daily chart.

Depending on what the market does, we could see the stock attempt to drift back up toward the 50-dma, but I think what ails FB is the fact that it is over-owned, and there is little in the way of fresh money to drive it substantially higher from here. At best, that likely means it will need to spend a lot more time basing as it works out weak hands and brings in stronger hands, while at the same time it works to energize its business model.

 

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I blogged early in the day on Friday that Blackberry (BB) was posting an undercut & rally move as it came up through the prior 11.87 low in the pattern. It closed at 12.36, retaking both its 10-dma and 20-dema in the process. Volume was light, and I’d like to see the stock regain the 50-dma as well in short order as a follow-through to Friday’s U&R long set-up.

 

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Weight Watchers (WTW) offered short-sellers a nice entry opportunity Thursday at the open as it briefly rallied into the 20-dema before reversing to the downside. On Friday, it ran right into the 50-dma and held at the line. Volume was above average but has been receding on the way down. The thing to watch for here is a possible break below the 50-dma that undercuts the lows of late January and early February, as I’ve highlighted in purple on the chart, whereupon an undercut & rally move might occur.

However, this is something to watch for, since it has hasn’t happened yet, and there’s no guarantee it will. For now, WTW has worked as a decent short-sale target at the 20-dema but is reaching an “Ugly Duckling” position where it could present an opportunistic long trade under the right circumstances.

 

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Square (SQ) isn’t ready to roll over and die just yet, finding support at its 20-dema on Thursday as it pinged right off the line on above-average volume. On Friday, the stock pulled back in the morning with the market but then rallied to close above its 10-dma with volume drying up. This looks like it wants to move higher from here, perhaps in another breakout attempt. If the general market can hold up this week, I would not be surprised if it did break out.

Remember, only a breach of the 20-dema would turn this into a short-sale target, and as I have discussed previously, this would only likely happen during a continued market correction. For now, this is looking like a cup-with-handle base where the handle itself is a mini-cup-with-handle formation. It is in play as a potential long from here and if the general market can hold up.

 

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Buyable gap-ups (BGUs) that I’ve discussed in recent reports over the past week or so have all held up well. In fact, the stocks act like the market hasn’t sold off at all as they hold tight in their patterns. Here’s all three on daily charts, SolarEdge Technologies (SEDG), MuleSoft (MULE), and Planet Fitness (PLNT), below.

SEDG has found support along its 10-dma on both Thursday and Friday, and remains extended.

GR030418-SEDG

 

MULE found support along its 10-dma on both Thursday and Friday. It also remains extended.

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PLNT is moving straight sideways as it ignores the general market mayhem. It is just out of buying range of last week’s buyable gap-up and base breakout move, but a pullback closer to the rising 10-dma would offer a potentially lower-risk entry from here.

 

GR030418-PLNT

 

After the initial jack to the upside following the first news of steel and aluminum tariffs, steels haven’t made much upside progress. There was some nice movement on Thursday as the President reiterated his intent to impose tariffs. But, as we can see on the daily chart of the leading stock in the group, U.S. Steel (X), it just remains within a two-week price range. Thursday’s action did, however, create a pocket pivot at the 10-dma, but so far, the stock is in a holding pattern.

Based on the pocket pivot, and the stock’s ability to hold the 10-dma on Friday, this is still technically buyable using the 10-dma or the 20-dema as a selling guide. But I would expect that X and other steels will be subject to a heavy news influence as the debate over the positives and negatives of steel tariffs rages.

 

GR030418-X

 

Another example of a big-stock steel name, in this case Nucor Corp. (NUE), shows a lagging pattern where the stock hasn’t moved to higher highs as X has. It is, however, forming a little cup-with-handle as it hands along three moving averages, the 10-dma, the 20-dema, and the 50-dma. Over the past two days, NUE has posted pocket pivots at all three moving averages. But, like X, these have not been enough to propel it higher and out of its current two-week price range.

 

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As I wrote on Wednesday, some steel names are not seen as strong beneficiaries of tariffs, despite showing initial good upside a couple of weeks ago, as was the case with Arcelor Mittal (MT). The Luxembourg-based steel concern was probably seen as benefiting from higher steel prices because of the U.S. tariffs, but a re-think by investors sent the stock crashing through its 50-dma on Wednesday. At that point it became a short and has moved lower since, giving short-sellers a shot at hitting it on Thursday morning when it came within 1% of its 20-dema.

 

GR030418-MT

 

For those of you who like breakouts, our old friend Nutanix (NTNX), looks to be back in business with a strong-volume breakout following earnings on Thursday after the close. The company beat earnings and revenue estimates handily, but the real driver of Friday’s move was probably the reported acceleration in large deal signings and customer adds.

Analysts from Needham & Company and Oppenheimer subsequently put a $48 price target on the stock. NTNX still posted a loss in the latest quarter, but the main driver for NTNX has been thematic more than earnings-based. This breakout remains in buyable range right here.

 

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Another old friend of ours, Atlassian (TEAM), is also showing up as a breakout buyer’s delight, popping out of a base and into new high price ground on strong volume Friday. Earnings growth has been improving sharply for the company over recent quarters, with a peak 44% earnings growth number reported in the last quarter. One thing you’ll notice on its daily chart is that the stock tends to be a bit on the volatile side, with wide swings occurring every now and then.

For that reason, I might be more comfortable looking for a pullback into the top of the base (say in the 54-56 range) as a better entry, although the stock technically remains within buying range of the breakout.

 

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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 (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.

I find it interesting that during a hairy, three-day sell-off we’re seeing a lot of stocks acting quite well, including some new breakouts. In addition, Friday’s action saw lot of pocket pivots and supporting pocket pivots as the market rebounded off the intraday lows, such as we saw with NFLX at the beginning of this report.

Other names on my watch lists and screen output lists that posted pocket pivots or supporting pocket pivots on Friday include: AQ, CHGG, FTNT, LGND, LITE, NKTR, NOW, PFPT, SFIX, SFLY, SGH, SPLK, SRPT, and VRTX. I’ll leave it to the reader to investigate these on their own, although NOW and LITE have previously been discussed in recent reports, and both stocks continue to trend higher.

The action over the past few days adds weight to the idea that this is a market tailored to an opportunistic approach where one uses logical pullback entries to buy stocks rather than chasing strength. The pullbacks into support at the 10-dmas, 20-demas, and 50-dmas on Friday were logical points at which enterprising, nimble, and mostly courageous traders could step in.

And, of course, there are the usual undercut & rally (U&R) types of moves to watch out for, such as we saw in BB on Friday. Stepping into these would have been quite rewarding, particularly when you consider the trough-to-peak moves on Friday. NFLX and AMZN are good examples.

Where we go from here is anyone’s guess, since Friday’s rebound in the indexes came on lighter volume, so didn’t strike me as a selling “washout.”  But one can simply go with the set-ups as they appear in real-time. Some of this may depend on where the tariff talk goes, and whether a mass of retaliation is forthcoming from the U.S.’s trade partners.

On the other hand, if the President’s hard line stance is merely a starting point for negotiations as he walks back the tough talk, then the market could rebound smartly. In this case, you go with the set-ups at hand, and simply 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 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.