The Gilmo Report

May 14, 2017

May 13, 2017

The market looked like it was headed for a spin-out on Thursday as the Dow quickly broke 140 points to the downside early in the day. But as has been the case with intraday sell-offs over the past couple of weeks, the indexes rallied to recover most of their losses by the close.

In the midst of all the intraday gyrations, the NASDAQ Composite Index remains in what can only be described as a robust uptrend. Since gapping up to all-time highs in the latter part of April, the NASDAQ hasn’t closed below the 10-day line even once. And while a pullback to the 20-day moving average might look scary, it would still be normal within the context of the prior, steep uptrend.

 

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The S&P 500 Index remains in a position where a breakout to new highs cannot be ruled out, despite all the trepidation over the low VIX and the “end of the Trump Rally.” If the market likes to climb a Wall of Worry, then I suppose these two known crowd facts might be viewed as just two more bricks to mortar into the wall. As always, it all boils down to what individual stocks are doing, and nothing else!

 

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If the market is going to broaden out with a breakout by the S&P 500, I’d also keep an eye on the small-caps. The Russell 2000 Index is hanging along its 50-day moving average which puts it in a logical position for two possible outcomes. The first, is of course, a breach of the 50-day line, and the second would be for the 50-day line to serve as support and a springboard for a bounce off the line and back up to the prior highs.

 

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Nvidia (NVDA) followed through on Wednesday’s buyable gap-up (BGU) with more upside as it continued to push through the top of its prior base at 120.92. While the BGU got one in early, the ensuing base breakout was also buyable, and constructive pullbacks to the top of the base should be watched for as your next lower-risk entry opportunities.

 

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Tesla (TSLA) is hanging up near its highs in a V-shaped pattern as volume declines. The low volume would lead one to believe that a pullback to correct the wedge is likely. In this market, however, what looks likely generally isn’t. In any case, I would continue to look for a low-volume retest of the 10-day line as a lower-risk entry opportunity, end of story.

 

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Facebook (FB) continues to spend its time consolidating its prior gains as volume dries up sharply. Optimally, I’d like to see a low-volume test of the 20-dema. But instead the stock isn’t giving up much ground here, even on days when the market spins out 140 Dow points early in the day.

So far FB is just holding squeaky tight here with volume drying up to -45% below average, which qualifies as a “voodoo” volume signature. The fact that this kind of dry-up is occurring in a big-stock name like FB is very interesting, and probably means the stock is headed higher from here.

 

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Notes on other big-stock NASDAQ names:

Apple (AAPL) is relentless in its climb to new highs, piercing the 155 price level on Friday. The stock remains extended, and is still looking a bit climactic, although this doesn’t necessarily mean a top is imminent.

Alphabet (GOOGL) has met up with its 10-day moving average with volume drying up nicely. This puts the stock in a lower-risk entry position using the 10-day line as a selling guide.

Amazon.com (AMZN) bounced off its 10-day line on Thursday and pushed to all-time highs on Friday as volume increased on the day. It moves ever closer to the $1,000 “Millennial Mark,” but I’m not sure Jesse Livermore had any rules for that!

Netflix (NFLX) remains in steady rally mode after last being buyable along its 10-day line. It is now extended and out of buying range. I might look for a random pullback to the 20-dema as an opportunistic entry in the off chance that it was to occur. Otherwise one can try and snag shares on pullbacks to the 10-day line instead.

Snap (SNAP) may be down, but it isn’t entirely out, at least not just yet. After gapping down in ugly fashion on Thursday following a terrible earnings report, the Ugly Duckling naturally decided to pay a visit. Against what seemed like all odds, and with everyone, including those who loved the stock before Wednesday’s earnings report, hating it even more, the stock pulled a classic undercut & rally (U&R) move on Friday.

Using the prior March low at 18.90 as our reference low, once SNAP pushed back above that point it could have been bought on the basis of the U&R set-up. Per the usual way we handle a U&R set-up, the 18.90 low also becomes our downside reference point for a tight stop in case the trade doesn’t work out.

Volume came in well above average at 121% over normal, so buying interest was certainly to be found in the stock on Friday. Obviously, the crowd doesn’t see this U&R set-up, as they are too busy finding ever more reasons to hate the stock. Therefore, I give it a reasonable chance of working, but remember that the 18.90 price point remains your selling guide.

 

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Twitter (TWTR) made a reasonable attempt at a breakout to higher highs on Friday, but fell short, closing just below the mid-point of its daily trading range. This doesn’t strike me as bearish action since a five-day flag formation is perhaps not enough time spent consolidating the prior gains coming up from the 15 price level, some 24% lower.

I still view the stock as buyable here using the 10-day line as a tight selling guide. A pullback to the 200-day line is not out of the question, however, but if that were to occur I might view it as a more opportunistic entry, depending on how it played out with respect to volume levels and general market context.

 

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Square (SQ) looks similar to TWTR in that it also tried to break out of a short five-day flag following last week’s buyable gap-up (BGU) move after earnings. The breakout didn’t clear to all-time highs, but SQ did manage to post an all-time closing high and its first close above the $20 price level. SQ continues to act well, but I would view it as being most buyable on any pullbacks to the rapidly rising 10-day moving average, currently at 19.45.

 

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In the Land of the Panda, Alibaba (BABA), Weibo (WB) and JD.com (JD), all not shown here on charts, are in extended positions on the upside after continuing to move higher all week long. BABA and WB are expected to announce earnings this coming week.

Momo (MOMO) turned out to be a good trade off the 20-day exponential moving average, as I indicated it might be in my Wednesday mid-week report. The stock in fact ended the day Friday at all-time highs while posting a pocket pivot off the 10-day moving average.

Earnings aren’t expected until May 25th, so if one bought shares at the 20-dema, then there is still some time to see if this can play out further to the upside. Certainly, BABA and WB have been able to continue moving higher even as their own expected earnings reports approach as early as this week. In light of this, I tend to think that MOMO has a reasonable chance of doing the same before it reports the following week.

 

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Netease (NTES) finally reported earnings late Wednesday evening and gapped up through its 50-day moving average on Thursday, looking like it was going to head higher on a buyable gap-up type of move. But the stock was not able to hold any intraday low and ended the day on a big reversal back below the 50-day line.

On Friday, the stock again attempted to clear the 50-day line but again failed, closing down at the confluence of its 10-day and 20-day moving averages on above-average selling volume. This looks pretty ugly currently, and the stock may very well continue lower. But, we must always be aware that the Ugly Duckling could be lurking in the shadows, ready to move in just when things look their ugliest.

If we see selling volume dry up here and the stock can hold the confluence of its shorter moving averages, then there is always the potential for a moving average undercut & rally (MAU&R) developing if NTES can regain its 50-day line. Watch for this, particularly if the general market continues higher this coming week.

 

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On the hunt for new ideas, I notice our old friend Impinj (PI) is setting up along its 10-day moving average with volume drying up to voodoo levels on Friday. Following a post-earnings pocket pivot last week, the stock has settled down and is holding very tight as volume dried up to -58% below average on Friday.

This puts the stock in a very buyable position, in my view, using the 10-day line as a tight selling guide. Note that PI is attempting to clear a long, choppy 32-week base structure. This structure has formed after the initial sharp upside rally the stock had right after it came public in July 2017.

PI has posted triple-digit earnings growth over the past two quarters, and as of the first quarter of 2017 reported a new high of 135 mutual funds owning the stock vs. 124 at the end of Q4 2016. If you’re looking for a new idea in a buyable positon, PI appears to fit the bill, using the 10-day line as your selling guide.

 

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What might help propel the S&P 500 to a new-high breakout is similar action in the financials. That would certainly be a bullish development. Citigroup (C) might be flashing early signs of this as the strongest-acting big-stock bank name on my radar. On Thursday and Friday, the stock posted consecutive pocket pivots along its 10-day moving average as it begins to percolate here.

I had already considered the stock buyable here along the confluence of its 10-day, 20-day, and 50-day moving averages per my discussions in recent reports. The current pocket pivots make the chart look even better as my indicator bars along the top go “Code Blue.” Therefore, this remains buyable using the 50-day line as your selling guide.

 

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Electronic Arts (EA) gapped up on Wednesday following a strong earnings report on Tuesday after the close, as I noted in my Wednesday mid-week report. Over the past two days the stock has held tight following the buyable gap-up (BGU) on Wednesday.

If you go back and look at the daily chart of iRobot (IRBT) when I first discussed it in my May 30th, report, you will notice that EA looks very similar. So, while EA might look too high after this most recent BGU, it may very well simply continue to move higher from here. The tightest way to play this is to use the low of Thursday at 106.83 as a very tight selling guide, with the idea that the stock will soon move higher in the same manner as IRBT did two weeks ago.

 

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Western Digital (WDC) is a name I first blogged about as buyable on the same day that I discussed Cavium (CAVM) as being in an Ugly Duckling buy position (May 2nd). WDC was a bit more orthodox since it had broken out two days earlier on big volume and was at that time pulling into its 10-day moving average with volume drying up.

This put WDC in a lower-risk entry position along the 10-day line, which is where it was trading at the time of my May 2nd blog post. Since then the stock has moved a little over three points higher. It is currently sitting right at its 10-day moving average in a tight three-day formation with volume drying up to -55% below average, a “voodoo” volume signature.

This creates a nice add point, or even an initial entry, while using the 20-dema at 87.38 as a conveniently tight selling guide. WDC is a big turnaround story, with annual earnings in 2017 jumping 60% to $8.89 a share vs. $5.54 a share in 2016. In 2018 annual earnings will increase by 34% to $11.88 a share.

 

GR051417-WDC

 

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) is way extended and only pullbacks to its 10-day moving average, now at 54.19, would present lower-risk entry opportunities.

Applied Optoelectronics (AAOI) remains extended from its recent base breakout through the 60 price level. I would view any pullbacks to 62 or better as potentially buyable if they occur in constructive fashion.

Arista Networks (ANET) continues to track along and just above its 10-day moving average. Pullbacks to the line would offer your lowest-risk entry opportunities from here.

Cavium (CAVM) is pulling back toward the confluence of its 10-day, 20-day, and 50-day moving average on below-average volume. Watch for a low-volume test of the moving average confluence as a potential, lower-risk entry opportunity.

CSX Corp. (CSX) is holding at its 10-day moving average with volume drying up into its 10-day line today with volume drying up to -54% below average on Friday. While this is a nice “voodoo” entry position using the 10-day line as your selling guide, keep in mind that CSX is a slow, big-cap railroad name, so may not have the same upside “juice” that other more dynamic names might have. Of course, now that I’ve said this the stock will rally 10% on Monday! J

Edwards Lifesciences (EW) is now stuck in a very tight 12-day bull flag following its late April buyable gap-up move. It is sitting right at its 10-day moving average, and it is so tight that if you listen carefully you might hear its chart squeak. This is buyable using the BGU intraday low at 106.74 as a maximum downside selling guide.

First Solar (FSLR) is consolidating its recent BFBGU (bottom fishing buyable gap up) and rally back above the 200-day line.  Volume is drying up sharply, and pullbacks to the 35 price level can be viewed as lower-risk entry opportunities. I note that another name in the group, SEDG, is also showing Ugly Duckling-like movement. You can investigate the chart on your own.

iRobot (IRBT) hasn’t looked back since its buyable gap-up move of nearly three weeks ago after earnings. It remains quite extended and only pullbacks to the 10-day line would offer lower-risk entry opportunities from here.

ServiceNow (NOW) has pulled into its 10-day moving average with volume drying up. This puts the stock in a lower-risk entry position while using either the 10-day line or the 20-dema as your selling guides, depending on your risk-tolerance.

Take-Two Interactive (TTWO) remains way extended ahead of its expected earnings report this week.

Veeva Systems (VEEV) remains something of a monster as it just keeps trucking to new highs, even with earnings expected on May 25th.

Despite the low VIX levels, the market hasn’t seen fit to crash just yet. Thursday’s morning spin-out as short-lived, and the ensuing recovery within the context of many leading stocks acting very well is constructive. Meanwhile, those whose thoughts turn to the short side whenever the indexes start to spin-out should think more carefully about this.

The reality is that IF the general market were to top and go into a severe correction, your short-sale watch list would start to quickly become populated by failing leaders. As I blogged on Thursday, this might come in the form of a stock like NVDA, for example, failing back below its prior 120.92 breakout point. I did not mean at that time that NVDA was a short, I only used it as an example of a change in character that might turn the stock into a late-stage failed-base short-sale target if it occurred in tandem with the general market getting into serious trouble.

For now, leaders like NVDA, AAPL, FB, EA, NFLX, AMZN, GOOGL, NOW, AAOI, EA, ATVI, TTWO, TSLA, and many others all continue to act just fine. Unless that starts to change substantially, the market rally remains in force, end of story.

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 EA, Pi, SNAP, and TWTR, 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.