The Gilmo Report

March 7, 2018

March 7, 2018

This continues to be an environment that I believe favors active traders. As I wrote over the weekend, the market is in something of a chop zone where news can become a factor, as was the case this morning when the market gapped down on news that White House Chief Economic Adviser Gary Cohn was resigning. This creates opportunities for enterprising investors who use the volatility to their advantage, rather than chasing strength and thereby becoming a victim of the volatility.

The ultimate illustration of an opportunistic approach was embodied in my Monday morning blog post where I discussed buying Caterpillar (CAT) and Deere & Company (DE) off their lows as they were testing and undercutting prior lows in what may be potential new bases. Since the charts look almost exactly the same, I can use CAT to illustrate what I was looking at and my corresponding approach in taking these trades.

Undercut & rally set-ups are tricky at times. But in addition to providing concrete long set-ups for those looking to buy into potential reflex rallies, one also must think through any potential rationales for the trade. For example, we know that names like CAT and DE, among others (like BA) were hit hard last week when the President began to foam at the mouth over steel and aluminum tariffs. As these stocks became oversold, investors began to think through whether these tariffs were that big of a factor for these companies in terms of raising their production costs.

My guess is that ultimately this whole tariff thing will turn into a big buying opportunity for some of these stocks that are viewed as dependent on cheap steel prices. So, in this case I’m looking at CAT’s chart on Monday and I notice that the ultimate closing low in the pattern is at 145.92. At that point I’m looking for a rally back up through that low as my first potential U&R set-up, although there is no guarantee that it is going to work – it’s just my first possible entry set-up, and I will take it at face value.

The other two lows in the pattern did not close in the lower parts of their daily price ranges, so I don’t view those lows as being so sticky since the stock may have traded down to those levels only briefly.

In any case, I can see the shot, and I take it. It did end up working, and the U&R set-up through that 145.92 low carried up to the 10-dma, for about a ten Livermorian points of tradeable upside. Today, CAT posted a bit of a Wyckoffian Retest before closing in the upper part of its price range. With the Trump Administration walking back their tariff talk with the idea of carve-outs, perhaps stocks like CAT can make a comeback IF the general market continues higher.

 

GR030718-CAT

 

But these are trades, and I tend to think that volatility will remain the rule of the day rather than the exception. So, while they may provide lower-risk entries, their longer-term success is going to depend very much on where this market goes from here. One can choose to trade these set-ups, or perhaps take a longer-term view, using the lower-risk entries to their advantage. Those looking to take a longer-term view can certainly take positions at lower-risk entry points while keeping in mind a clear stop in case the position doesn’t work out.

But I would also advise anyone taking such an approach to this market to keep positions smaller and be ready to give things a wide berth, as long as they don’t hit your stops.

Meanwhile, the indexes fly about and to and fro, as the daily chart of the NASDAQ Composite Index, below, shows, but managed to post a higher high in what is so far a four-day rally off the lows of late last week. It is now approaching near-term resistance along the highs of last week.

 

GR030718-$COMPQ

 

The S&P 500 Index, along with the Dow, remains below its 50-dma but is forming a short flag formation that may be setting the index up to retake its 50-dma. If the final signing of steel and aluminum tariffs tomorrow shows a number of carve-outs and exemptions, thus proving to be less onerous on consumers of steel, then the index could easily pop back above the 50-dma. And if that means a name like CAT can rally from here, then I’d also keep an eye on DE as well as any other stock that has sold off on the tariff talk news.

 

GR030718-$SPX

 

Netflix (NFLX) was tagged with a downgrade today based on valuation, but the stock held relatively tightly as buyers stepped up to meet sellers in the latter part of the day. This is quite extended here, and the last buy point was the pocket pivot at the 10-dma last Friday.

 

GR030718-NFLX

 

Amazon.com (AMZN) is holding along its 10-dma as it made another new high today on light volume. This is not in a position where I would be looking to buy the stock. Pullbacks to the 20-dema, now at 1476.05, would be your best bets as opportunistic entries, as was the case last week when the stock pulled into the 20-dema.

I tweeted on Monday to watch for Nvidia (NVDA) to potentially retake its 20-dema, which it ended up doing on Tuesday as it gapped above the line at the open. It then held tight today along the 20-dema as volume declined, putting it in a lower-risk entry position right here, using the 20-dema as a tight selling guide.

 

GR030718-NVDA

 

Tesla (TSLA) is bouncing along its lows over the past four days and is not in what I would call a shortable or buyable position. The stock is sitting just below its 50-dma but buying volume has been higher vs. selling volume over the past four days, which brings into play the possibility that it can retake its 50-dma.

Over the weekend I pointed out the three-weeks-tight flag pattern in Twitter (TWTR), and the stock has launched higher so far this week after posting a nice pocket pivot breakout on Monday. It is now extended, but was quite buyable on Monday morning as it sat at the 10-dma. Pullbacks to the top of the “3WT” flag formation near 34 would offer lower-risk entries from here.

 

GR030718-TWTR

 

Snap (SNAP) was rallying smartly into the 18.50 price area today before news of a big lay-off at the company sent it reeling back into the 18 price area by the close. A small pullback to the 10-dma on Monday morning, however, brought it into a lower-risk entry position along the line, and it is still holding above the 10-dma in a short price range. Pullbacks on lower volume to the 10-dma at 17.52 would perhaps offer lower-risk entry opportunities from here, so I’d watch for that in the coming days.

 

GR030718-SNAP

 

Facebook (FB) rallied just above its 50-dma today on increased but below-average volume today. For the most part, the stock has just been chopping back and forth along its 50-dma, but if you think it can keep rallying from here then you could play it as a moving-average undercut & rally (MAU&R) move using the 50-dma at 181.82 as a pretty tight selling guide.

Blackberry (BB) is holding up nicely after posting an undercut & rally move last Friday, as I blogged at the time. Over the past three days BB has held tight along the 10-dma as volume dried up to -58.9% below average today. This is buyable right here using either the 10-dma or the prior 11.87 undercut low that we used on Friday’s U&R move as your selling guide. This looks like it’s ready to move higher from here as it sets up constructively along the 10-dma.

 

GR030718-BB

 

Weight Watchers (WTW) posted an undercut & rally move today as it dropped below and then rallied back above its prior 61.00 low of early February. This can be played as a U&R long set-up using the 61 price level as a tight stop given that WTW closed the day today at 61.13. You could even allow another 2-3%, maybe even a little more, if you wanted to give it some room.

Notice, however, that the stock did not close above the 50-dma after pushing above the line early in the day. I would like to see this clear and hold above the 50-dma very quickly as confirmation of today’s U&R set-up.

 

GR030718-WTW

 

Square (SQ) broke out powerfully on Monday, but as I wrote over the weekend as the stock sat within the handle of a cup-with-handle formation, “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 breakout.”

With the general market indeed holding up as it has now posted a four-day rally off last week’s lows, SQ did break out, but is slightly extended in its current position. I would use pullbacks to the 49 price level or better as lower-risk entries, such as we saw this morning, if you can get ‘em.

 

GR030718-SQ

 

All of three of the recent buyable gap-up (BGU) situations I’ve discussed in recent reports, SolarEdge Technologies (SEDG), MuleSoft (MULE), and Planet Fitness (PLNT), all keep moving higher and remain extended. Watch for pullbacks to their 10-dmas as potentially lower-risk entry opportunities. The 10-dma for each are as follows: SEDG 50.49, MULE 31.57, and PLNT 37.22. I must say it’s a bit frustrating to see these stocks keep running away, but there’s not much you can do but watch and wait for a buying opportunity to present itself.

In the meantime, I think there have been plenty of other stocks to feast on in this market so far this week, such as SQ, TWTR, NTNX, etc.

Steel names remain extremely sensitive to news. When it was reported that President Trump would be signing off on tariffs tomorrow, steels rallied sharply. This sent U.S. Steel (X), which is our ambassador for the group, pushing higher on a breakout attempt. However, later in the day, when it was revealed that the tariffs would be mollified with carve-outs and exemptions, the X reversed off its highs to close in the lower part of its price range. Technically, this would qualify as a pocket pivot, albeit a stalling pocket pivot, at the 10-dma, using the 10-dma as a very tight selling guide.

 

GR030718-X

 

More impressive was Nucor Corp.’s (NUE) trendline breakout and pocket pivot move coming out of a short cup-with-handle formation. This looks good here, and can be considered buyable using the 10-dma as a tight selling guide, or the 20-dema as a wider selling guide.

 

GR030718-NUE

 

Nutanix (NTNX) was a buyable breakout on Monday morning as I discussed in my weekend report, and the stock has had a blistering upside move from there. It is now, of course, extended, and out of buying range. From here I’d look at any pullback into the 42 price level or better as a lower-risk entry opportunity, if you can get it.

This is one breakout that has worked quite well. As I pointed out over the weekend, the main driver for NTNX as I saw it is a thematic one rather than the idea that it fits some sort of rote template for earnings and sales growth.

 

GR030718-NTNX

 

Atlassian (TEAM) is another breakout that I showed in my weekend report. It is now extended, but pullbacks to the rising 10-dma, now at 55.55, would perhaps offer lower-risk entries from here. The 10-dma is rising rapidly, so I would imagine that any pullback to the line in the coming days would occur at a higher price than 55.55 where the 10-dma is now.

 

GR030718-TEAM

 

On Monday after the close I blogged to keep an eye on YY, Inc. (YY) and Baozun (BZUN) for potentially actionable moves after each reported earnings. YY reported Monday after the close, and did gap up at the open yesterday, but it never set a firm low, so was never actionable as a buyable gap-up. BZUN, on the other hand, did post a firm low and just kept moving higher from there all day in a very strong, massive-volume runaway sort of buyable gap-up move. That was about a 32% move from Monday’s close, which was a bit frothy, to say the least.

Today BZUN gapped down and moved lower, but remains well above its BGU intraday low of 40.75. Given the huge move it had yesterday, the pullback doesn’t surprise me. Volume was above average today but did decline substantially from yesterday’s massive volume levels. I would watch to see how this pullback plays out as it potentially approaches the 40.75 BGU low. If the stock levels off somewhere between here and there as volume begins to dry up sharply, it could provide a lower-risk entry opportunity, so is one to watch.

 

GR030718-BZUN

 

Our old friend, Momo (MOMO) also sprang to life after reporting earnings this morning before the open. It posted a buyable gap-up today, opening at 37.85 before declining to post a firm low at 35.17, and then rallied to close the day at 37.02. While it was actionable earlier in the day today, it is now slightly extended from the 35.17 intraday low, so any low-volume retest of that low could set up a lower-risk entry opportunity. Otherwise, if you can handle the extra risk, buying it here and using the 35.17 low as your stop is a feasible strategy as well.

 

GR030718-MOMO

 

As a side note, another Chinese name to keep an eye on tomorrow morning is 58.com (WUBA), which is expected to report earnings before the open. Whether it turns out to be a BZUN or a YY, of course, remains to be seen. But I would certainly keep my eyes peeled for some sort of actionable set-up developing in the stock tomorrow morning after its expected earnings report.

On Monday I was watching the breakout in Micron Technology (MU) and tweeted at the time that Applied Materials (AMAT) would likely break out next. In fact, that’s what happened yesterday as the stock broke out through the mid-point of a double-bottom base. So, here’s another one for you base breakout lovers, as the stock held tight and within buying range of the breakout today, so have at it!

 

GR030718-AMAT

 

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.

Over the weekend I noted that despite the volatile action, including a hairy three-day sell-off right in the middle of last week, we were in fact seeing some decent set-ups develop. A number of those that I discussed in the weekend report have played out very well since then, including TWTR, SQ, and NTNX. Armed only with those three ideas, one could have had a very nice week so far as we get through “hump day.”

After a four-day rally for the NASDAQ, which has been less affected by the steel and aluminum tariff news, we cannot say that this market necessarily looks bad. And with the S&P 500 sitting in a two-day flag just below its 50-dma, it may perhaps be setting up for a move back up through this critical moving average in a bullish confirmation of the NASDAQ’s strength.

This would be logical, as I already noted, if the market gets over its tariff tantrum once the President signs off on the tariffs and the market finally knows exactly what they will consist of.  That could set up a rally in steel-consumers like CAT, DE, BA, and other names seen as victims of such tariffs.

So that is one potential theme I’m looking at here as a catalyst for keeping the current rally going and bringing the S&P and the Dow into play once again if they can regain their 50-dmas. We shall see how this develops tomorrow, and be prepared to play the set-ups as they show up in real-time.

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 BB, CAT, and NVDA, 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.