The Gilmo Report

May 10, 2017

May 10, 2017

The broader market has been churning around its highs over the past few days as the NASDAQ Composite Index keeps posting new highs. This has been driven mostly by continued strong action in the big-stock NASDAQ 100 names, including the biggest of the big-stocks, Apple (AAPL).

The stock streaked higher over the prior three days before finally running into some selling today. On its face, the action might strike one as a shade on the climactic side. But today AAPL held tight as selling volume dissipated in a hurry. With big-stock NASDAQ leaders like AAPL holding gains in begrudging fashion, the market remains in a constructive frame of mind.

 

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This, along with strong action in several other big-stock NASDAQ names, including Tesla (TSLA), helped propel the NASDAQ to a new all-time high yesterday. But the move showed stalling and churning action as the index closed mid-range on higher volume. But, in an imitation of AAPL’s action today, the NASDAQ just shook it off and turned back to the upside to post a new all-time closing high on higher volume.

 

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The thing to watch for here is broader participation by the rest of the market. I would note that this is a strong possibility if we can see the S&P 500 Index break out to new highs. Currently the index is tracking tightly just below its March highs, and today found support at its 10-day moving average to close up on slightly lighter volume.

If we’re looking for a breakout by the rest of the market, then we can easily argue that the S&P 500 is as much set up for a breakout to new highs as not. Based on the action of leading stocks, I would lean toward a clean breakout from what is being called the psychologically important 2400 price level.

 

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I look at things more in terms of where the market is showing strong profit opportunities. Over the weekend I discussed Nvidia (NVDA) as one to watch after earnings given that the stock had spent a considerable amount of time forming a new base since peaking back in February. Yesterday NFLX reported earnings yesterday after the close, and launched higher this morning on a buyable gap-up (BGU) type of move. This became actionable as soon as the stock set an intraday low, which it did right after the open, printing 114.02 before turning back to the upside.

That made the stock buyable at that point, using the 114.02 low as your selling guide. By the close, NVDA had cleared to all-time highs on what was not only a BGU, but also a nice base breakout on heavy buying volume. With the breakout point at 120.92, NVDA closed within range of the base breakout for those who like to buy breakouts.

But the bottom line is that the BGU was buyable near the open and not too far from the 114 price level. Either way, if NVDA’s breakout is for real, it has a lot more upside ahead of it. If not, then look for this breakout to fail quickly. For now, I’m a buyer and owner of the stock.

 

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Netflix (NFLX) just missed posting a continuation pocket pivot today as it moved up and away from its 10-day moving average. With the 10-day line having more or less caught up to the stock over the past couple of days, however, the stock was in a lower-risk entry position using the line as a tight selling guide. The stock is now out of range of its prior base breakout of late April. Pullbacks to the 10-day line would remain your best, lower-risk entry opportunities when they occur.

 

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Tesla (TSLA) was a nice undercut & rally play if one came into the stock on Thursday or Friday of last week, but it did give enterprising traders an opportunity to jump in on Monday. That’s when the stock pulled in to test the 20-day exponential moving average, leading to a sharp upside turn that took the stock back up to its prior all-time highs of the prior week.

This V-shaped rally back up to the highs might be something to sell into for swing-traders who bought on the undercut & rally move five days ago on the chart. However, for those seeking to let the stock play out for, perhaps, a bigger gain, the 10-day moving average serves as a reasonable selling guide. Meanwhile, watch for any low-volume retest of the 10-day line as a lower-risk entry opportunity.

 

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Notes on other big-stock NASDAQ names:

Alphabet (GOOGL) is extended and holding tight as it hasn’t even pulled back to its rapidly rising 10-day moving average. Pullbacks to the 10-day line would represent lower-risk entry opportunities.

Amazon.com (AMZN) bounced off the 10-day moving average on Monday and pushed to a new all-time high yesterday. The stock is again testing the 10-day line, which may offer a lower-risk entry point.

Facebook (FB) is taking a little bit of a break as it pulls back slightly. Yesterday I tweeted about how 68% of FB’s float is owned by mutual funds, which could represent a saturation point. This might imply that the stock needs to spend some time consolidating around these levels after its heady upside move in the latter part of April. Lower-risk entry opportunities can be looked for on pullbacks to the 20-dema at 147.74.

Priceline Group (PCLN) got smoked after reporting earnings yesterday after the bell, and is now approaching its 50-day moving average. Whether that serves as solid support for the stock remains to be seen, but I would not be looking to buy shares into this decline just yet. If it can hold the 50-day line and show some dry-up on the volume side of the equation, it could set up as an Ugly Duckling.  So far, however, that is still yet to be determined.

Snap (SNAP) reported earnings after the close today, and as I write this afternoon the stock is getting chopped into mincemeat. At last glance, the bid is 17.20 and dropping. The after-hours breakdown is so severe that the 17.20 bid wouldn’t even show up on the daily chart, below. On balance, SNAP’s demise might be a positive for Twitter (TWTR), as investors perhaps shift their attention in the near-term.

 

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Back on April 27th I blogged that the bottom-fishing buyable gap-up (BFBGU) in Twitter (TWTR) when the stock was trading in the mid-16 price level, was actionable at that time, using the 15.76 BGU low as a selling guide. Now with TWTR blasting above its 200-day moving average, the true test of its viability would come on the first pullback to the 200-day line, as I blogged on May 1st.

Of course, that presumed that TWTR will pull back and consolidate along the 200-day line, which it didn’t. Instead, the stock kept blasting past the 200-day line, and last Tuesday posted a pocket pivot coming up through the line on strong volume. Interestingly, TWTR is only about 2.5 points above its buyable gap-up point, so is not that extended.

What we see now is that the stock is holding tight about a buck above the 200-day line as volume dried up to -44% below average, which in my view constitutes “voodoo” action. Meanwhile, the rapidly rising 10-day line is starting to catch up to the stock, and so provides a nice reference for support on any pullback from here. On the other hand, based on today’s voodoo volume signature with the stock holding very tight, the stock is in buying range using the 10-day line as a relatively tight selling guide.

 

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Square (SQ) continues to hang tight following last week’s post-earnings buyable gap-up (BGU), but that’s about it. It has yet to clear and hold the $20 price level, which has served as near-term resistance. But, the action cannot be described as anything but bullish, since the stock has held in a tight four-day flag since the BGU. At the same time, volume is drying up to the lowest levels seen so far in the pattern.

This remains in a buyable position, using the 19.18 intraday low of last Thursday’s BGU day as your selling guide. If you can get a pullback closer to that low, so much the better, but so far SQ is not giving up much ground here and rather looks like it wants to blast through the $20 price level soon.

 

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Three of my favored Chinese names, Alibaba (BABA), Weibo (WB) (BABA and WB are expected to report earnings next week), and JD.com (JD), have been streaking higher this week, but only JD has offered buyers a lower-risk entry. It did this on Monday after it announced earnings before the open.  This set off a buyable gap-up move, using the 37.69 intraday low as a selling guide.

Remember that while the stock looks extended, the fact is that the BGU, and the rules for handling a BGU, help to ensure that risk can be kept to a minimum. JD moved higher again today on strong, above-average volume, and is now slightly out of range of the BGU.

 

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While BABA and WB are expected to report earnings next week, Momo (MOMO) isn’t expected to report until May 25th. This gives it plenty of time to try and move higher ahead of earnings, as both BABA and WB have been doing recently.

Here we see the stock pulling into its 20-day exponential moving average as volume picked up. Because the stock closed in the upper part of its daily trading range and off the 20-dema, the higher volume can be seen as supporting action. In my view, MOMO is buyable here using the 20-dema as a tight selling guide, with the idea of catching a swing-trade ahead of earnings.

 

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With all the strength in these four names, even Netease (NTES) has been inspired to make a comeback as it rallied above its 50-day moving average today on a roundabout type of pocket pivot move. Earnings are expected after the close today, but so far I have not seen a report hit the wires. It likely will come out later this afternoon, probably after this report has been submitted for posting.

Based on the strong action today, we might expect a positive reaction to earnings when they are finally reported. However, there is nothing to do here until the report is out and we get a chance to see precisely how the stock reacts and whether it produces an actionable set-up in the process.

 

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ServiceNow (NOW) has made a nice move higher since I first discussed it as buyable along the 93 price level following its post-earnings buyable gap-up move. The stock came within 91 cents of the $100 Century Mark on Monday, but fell short as sellers came in on above-average volume and knocked the stock back to the downside.

This has led to further downside movement over the past two days. But with volume drying up on the pullback, this only brings the stock back into a lower-risk buy position as it approaches the 10-day moving average at 95.86. NOW closed at 96.47 today, within range of the 10-day line, so can be considered buyable here using the 10-day line as a tight selling guide.

 

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Applied Optoelectronics (AAOI) has returned to its rocket-stock ways after last week’s post-earnings pocket pivot move back up through the 50-day moving average. This sent the stock right up into the prior highs near 60 on Monday, at which point the stock backed down as volume declined from Friday’s huge levels.

Yesterday, AAOI found its feet and broke out to new highs through the $60 price level. For those who like to buy base breakouts, it was actionable as such at that point. Today the stock pushed higher, and is clearly out of buying range of the base breakout. From here I’d like to see a constructive pullback to the top of the base, which would seem likely given the rapid four-day 30% upside move from the 50-day line. A low-volume test of the 60 price level would present a lower-risk entry point, should it occur, and so is something to watch for.

 

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Cavium (CAVM) has been working as an Ugly Duckling type of set-up since I first blogged about the stock last Wednesday when it was trading in the 68-69 price area. Western Digital (WDC), not shown, was also mentioned in that same blog post when it pulled into its 10-day line and has also gone higher since then. WDC is now sitting at its 10-day moving average as volume dries up.

Getting back to CAVM, we can see that it has a little more upside thrust on a percentage basis since I blogged about it and WDC early last week. In fact, it posted a pocket pivot today as it blasted up and off of the 50-day moving average on strong volume. As I wrote over the weekend, CAVM was again buyable along the 50-day line, and it is now making a move for its prior base breakout point at 73.01.

I consider CAVM to remain buyable here using the 10-day line at 70.39 as a selling guide. Notice also that the stock has completed a classic “LUie” pattern by turning the prior “L formation into a “U” formation. This is the essence of a LUie pattern, which is generally created by ugly action that forms the vertical portion of the “L.” In CAVM’s case, we can see that this was formed by the late April breakout and immediate, brutal reversal back to the downside and below the 50-day line.

In the “old days,” I might have been looking to short CAVM as a late-stage failed-base type of short-sale set-up. But in the Age of the Ugly Duckling, the situation is far different, and the LUie pattern is quite typical in this market.

 

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First Solar (FSLR) is another Ugly Duckling that I discussed over the weekend and in prior blog posts last week. Over the weekend I noted that I could feel a bid in the stock under the 34 price level, so flipped back to the long side on that basis. Since then I’ve traded the stock back and forth once, but it is now firmly above the 200-day moving average.

In fact, with no down-volume days in the pattern over the past fifteen days, both yesterday’s and Monday’s action would qualify as bottom-fishing pocket pivots coming up through the 200-day moving average. From here, low-volume pullbacks into the 200-day line at 34.64 would constitute lower-risk entry opportunities.

Keep in mind, however, that FSLR may be subject to some news volatility over an unknown period of time. This is because of a recently filed petition by Suniva (a U.S.-based maker of crystal and silicon concern that is in turn owned by a Chinese company) asking the Trump Administration to impose tariffs on foreign solar cells.

 

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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, 20-day exponential, 50-day simple and 200-day simple moving average.

Notes on long ideas discussed in recent reports:

Activision Blizzard (ATVI) keeps blasting higher as the rest of the video-gaming names that comprise the “lipstick stocks” come through with earnings and send the group higher. It is currently way extended from any kind of lower-risk entry position.

Arista Networks (ANET) is tracking higher and just above its 10-day line. Pullbacks to the line would offer your lowest-risk entry opportunities from here.

Citigroup (C) is now holding tight along what is its 10-day moving average, and just above the 50-day moving average as volume came in at -32% below average today. Financial names in general may be getting ready to spring higher, particularly if the general market rally continues. For this reason C can be viewed as buyable here using the 50-day line as a selling guide.

CSX Corp. (CSX) pulled into its 10-day line today with volume drying up to -47% below average. This puts it in a voodoo entry position using the 10-day line as a tight selling guide.

Edwards Lifesciences (EW) is still holding tight sideways since its buyable gap-up move of over two weeks ago, and is now sitting right at its 10-day moving average. This remains in a buyable position using the BGU intraday low at 106.74 as a maximum downside selling guide. Hopefully, the tight action is winding the stock up for a breakout to higher highs.

Electronic Arts (EA) report earnings yesterday after the close and gapped up through the $100 Century Mark in a buyable gap-up (BGU) move. The BGU intraday low is 104.76, so given that the stock closed at 108.16 I would look for a pullback closer to the 104.76 low as a lower-risk entry opportunity, should it occur.

iRobot (IRBT) remains extended from its prior buyable gap-up. Watch for pullbacks to the 10-day line as potential lower-risk entry opportunities.

J.P. Morgan (JPM) is sitting right at is 10-day and 20-day moving averages as volume dried up to -47% below average today. In my view, the stock remains in a lower-risk entry position using the two shorter moving averages as tight selling guides.

Take-Two Interactive (TTWO) launched higher today with the rest of the video-gaming lipstick stocks and is far out of range of a lower-risk entry position. TTWO is expected to report earnings next week, and if it can come in with reports anything like those posted by ATVI and EA, it may very well keep the group on its rocket ride to new highs across the board.

Veeva Systems (VEEV) is still expected to report earnings on May 25th and it is still out of buying range as it continues to move higher.

Currently many of the pundits are citing the low levels in the CBOE Volatility Index, otherwise known as the VIX, as a danger sign. On Monday, the VIX made its lowest close since December 1993, which many are taking as a sign of impending doom for the markets.

Before everyone starts running for the exit doors in a fit of mass hysteria, I would point out that lows in the VIX are indeed often seen ahead of market pullbacks or even outright tops. The only problem from the standpoint of its predictive value is that such pullbacks and tops may not materialize for 1-3 months. Therefore, trying to time a market top solely because of the VIX is a fool’s game.

Instead, I would focus on the action of individual stocks, and right now there is just too much bullish action to indicate that the market is susceptible to anything more than a normal pullback. In addition, we might consider that the S&P 500 is in prime position for a breakout, and if we see this it may coincide with a massive broadening of the current rally. And, of course, that would be bullish.

For that reason, there is nothing to do but to keep watching the stocks while hitting the mute button on all the ancillary noise that seems to be in copious supply currently.

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, TWTR, 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.