The Gilmo Report

May 16, 2018

May 16, 2018

The upside extension we were seeing in many leading stocks coming into the weekend finally ran into some logical selling yesterday. The catalyst for the market decline was allegedly higher interest rates, as the 10-year Treasury Note yield set a four-year high at 3.082% In addition, the Two-Year Treasury Note yield pushed up to 2.58%, its highest close since July 2008.

Interest rate fears sent the NASDAQ Composite Index gapping to the downside yesterday on higher volume. Today, the index recovered more than half of the prior gap-down decline on slightly lighter volume. Note that the index was already stalling and churning on Monday as it closed lower than its gap-up open on lighter volume.

 

GR051618-$COMPQ

 

The S&P 500 Index, which I noted was looking a little wedgy over the weekend also gapped down yesterday on higher volume. The day before, on Monday, the index stalled and churned as it made a higher high, presaging yesterday’s weakness. Like the NASDAQ, it also rebounded today on light volume, churning around and stalling slightly after rallying for most of the day.

Meanwhile the 10-year Treasury yield posted a new four-year closing high today at 3.095%. Some pundits say that the market is simply getting used to higher interest rates. What this means I have no idea, but near-term the market could continue to chop around.

 

GR051618-$SPX

 

As the larger-cap market indexes essentially remain in big, choppy ranges extending back to late January, the small-cap Russell 2000 Index, as represented by the iShares Russell 2000 ETF (IWM), broke out to a new high today on higher volume. This gives us a bit of an interesting divergence as small-cap stocks lead the market. Whether they can lead the rest of the market higher, however, remains to be seen.

 

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My current market view has been and remains consistent with this idea of maintaining an opportunistic approach toward stocks. This means avoiding the urge to chase strength and instead seeking to swoop in when things pull back sharply, while keeping risk to a bare minimum. The concept of utilizing alternative long entry signals, like undercut & rally moves, is the proverbial linchpin to this approach.

Psychologically, chasing strength, or even chasing weakness, is the easier thing for us to do as traders and investors. I sometimes think this is due to a primal herd mentality linked to survival, but in the current market environment it can decrease one’s chances of surviving, much less prospering. Thus, I find it helpful to look at my charts with an eye toward figuring out where the more opportunistic entry points, long or short, exist.

Case in point would be Apple (AAPL) which has pulled into its 10-dma, where it held support today, which theoretically puts it in a lower-risk entry position. But the stock is still well extended after a big upside run throughout May. Volume has remained light over the past seven trading days, so I would not necessarily be looking to chase the stock here.

The more opportunistic approach here would be to lay low and look for a pullback to the top of the prior base. This would also bring the 20-dema up a bit more, which would serve as an additional reference for opportunistic support on a deeper pullback, which is likely given the sharp upside extension straight up off the lows of the prior base.

 

GR051618-AAPL

 

Amazon.com (AMZN) remains in flux here along its prior highs and just below its prior failed breakout point. Yesterday, the stock found support at the 20-dema, but a low-volume rally today ran into resistance at the 10-dma. Given the fact that the market was rallying early in the day, I would have expected more volume today on the upside.

It is quite possible that a breach of the 20-dema on the downside turns AMZN into a late-stage failed-base type of short-sale situation. That is certainly something to watch for. In the meantime, I’d take a two-side approach here and therefore would also be willing to buy the stock on a constructive retest of the 20-dema that holds. That would also constitute the more opportunistic approach on the long side.

 

GR051618-AMZN

 

Netflix (NFLX) is also flopping around its short moving averages, and has so far found support along its 10-dma. As with the other big-stock NASDAQ names bouncing around along near-term support levels. I think this is also a matter of where the market goes from here. If the indexes roll lower, then we might look for NFLX to break below its 10-dma and 20-dema.

Note that volume has been well below average for the last 15 trading days in a row. While a rally is a rally, the low volume means that the balance could easily be tipped to the downside. Otherwise, a low-volume pullback here into the 10-dma puts the stock in a lower-risk buy position, using the 20-dema as a maximum selling guide.

 

GR051618-NFLX

 

Sellers took the upper hand in Nvidia (NVDA) yesterday, sending the stock below its prior breakout point and back down to its 20-dema on heavy volume. The stock attempted to rally off the 20-dema today, but stalled at the 10-dma to close just above the mid-point of its daily trading range.

This could easily be a late-stage failed-base (LSFB) situation that is just getting started. Confirmation of an LSFB is typically given by a breach of the 20-dema, which is something to watch for closely at this juncture. This would trigger the stock as a short-sale at that point, using the 20-dema as a guide for an upside stop. Otherwise, the stock would have to settle down here along the 20-dema and attempt a re-breakout to remain viable as a long.

 

GR051618-NVDA

 

Intel (INTC) is hanging along its 10-dma, but as with most stocks I’d prefer to see a pullback to the 20-dema at 53.30 as a more opportunistic entry point.

A tentative tone among big-stock leaders is also evident in Facebook (FB), which has been rallying off its 200-dma on several straight days of low volume. So far, this week it has been pulling back down toward the 10-dma on even lighter volume. The 10-dma is down at 181.09, so that might be a spot at which to check out the stock for a long entry.

The opportunistic approach, however, would be to look for a deeper pullback into the 20-dema down at 177.30. Given the sharp move off the lows of the pattern, which includes the big post-earnings gap-up move to the 200-dma, a deeper pullback would not be unexpected.

 

GR051618-FB

 

Twitter (TWTR) is another one of these stocks that has rallied over the past 2-3 weeks on light volume. Over the past five days, it has stalled on attempts at higher highs, which to me smells of a possible retest of the 50-dma from here. That would be the spot where I’d look at buying shares, assuming such pullback occurs on light volume and in constructive fashion.

 

GR051618-TWTR

 

Tesla (TSLA) confirmed as a short-sale on Monday when it opened above its 50-dma and then reversed on heavy volume. The point of impact occurred at the 50-dma and the stock is now back down to the lows of its six-week price range. This stock is a great swing-trading vehicle, but at some point, it is going to break out of this price range. The $65 million question is, in which direction?

TSLA could easily break out to the downside from here. One way to play this is to short the stock here and use the highs of today at 288.81 as your stop. Otherwise, the prior and proper entry occurred on Monday when it breached the 50-dma. Now, the more opportunistic approach would be to look for a rally up into the 20-dema at 294.63 as a lower-risk short-sale entry point.

 

GR051618-TSLA

 

CSX Corp. (CSX) remains extended, posting a higher closing high today. The 10-dma at 61.71 would be the nearest reference for a buyable pullback. Meanwhile, fellow railroader Norfolk Southern (NSC) is also extended, making the 10-dma at 148.36 as your nearest reference for a buyable pullback from here.

The opportunistic approach was also the correct route to take with Intuitive Surgical (ISRG) over the past two days as it has successfully tested and held its 20-dema. While the stock isn’t necessarily rebounding strongly off the 20-dema, buying as close to the line as possible unquestionably remains the lower-risk approach if one is interested in buying shares of the stock. That remains the case for now.

 

GR051618-ISRG

 

It was possible to pick up shares of Square (SQ) yesterday as it dipped down close to its 10-dma. However, the stock came only within 73 cents of the 10-dma, so might not have triggered an entry given that it didn’t exactly touch the 10-dma. By the close, however, the stock was trading positive, and it followed through with a move to higher highs today on expanding, but below-average volume.

This can be viewed as a pocket pivot trendline breakout, since volume did meet the requirements for a pocket pivot volume signature. However, as with everything else, I would prefer to take the opportunistic approach with SQ, seeking to buy and future pullbacks to the 10-dma from here. The stock has remained a strong performer since the late April lows.

 

GR051618-SQ

 

CyberArk Software (CYBR) and Fortinet (FTNT) are both pulling into their 10-dmas, which puts them in near-term, lower-risk entry positions, However, I still think CYBR is a bit more extended, hence would take the lower-risk route of looking for a pullback closer to the 20-dema, now down at 56.25.

I suppose an opportunistic argument could also be made for FTNT, waiting for a pullback to the 20-dema at 57.36 as the best, lower-risk entry spot. The actual proper entry, however, was the prior undercut & rally of nine trading days ago, as I indicated at the time. Now it’s best to lay back and wait for another opportunistic entry to show up again.

 

GR051618-FTNT

 

A market rally today couldn’t keep Palo Alto Networks (PANW) from failing to hold the $200 price level as it reversed back below the Century Mark on light volume. Buyers didn’t seem all that interested in keeping the stock in positive territory, and it is now looking like it will test its 20-dema at 197.36. That would be your lower-risk entry point, assuming the stock pulls into the line in constructive fashion.

 

GR051618-PANW

 

What you will notice about these cyber-security names is that after initial bouts of strength last week, they have started to lose momentum. FireEye (FEYE) had already lost its momentum back in mid-April before splitting wide open after earnings in early May. But the Ugly Duckling showed up at that point, triggering an undercut & rally move from there that carried back above the 50-dma last week.

This week, however, the stock has had trouble holding above the 50-dma as volume has dried up. This was looking like a normal “Wyckoffian Retest” or a test for supply until the stock broke sharply lower this morning. By the close, however, buyers sucked up the supply near the lows and supported the stock. It then closed near the upper part of its daily trading range on above-average volume.

So, for now, we can view today’s low at 17.09 as near-term support, such that any successful retest of that price level might provide a lower-risk entry point from here. I would then look for a move back up through the 50-dma as confirmation. Also, keep a close eye on the other cyber-security names, which are also pulling back here. My guess is that a strong rebound in FEYE would also synchronize with the same action in other cyber-security leaders.

 

GR051618-FEYE

 

Sailpoint Technologies (SAIL) rallied up to its 10-dma on Monday following last Thursday’s undercut & rally move, as I show on the daily chart below. That move failed at the 10-dma and reversed on about average volume. SAIL then held the 50-dma yesterday and today made another move up and off the line, but only got as far as the 20-dema this time around as it reversed on heavy selling volume.

It did, however, hold above the 50-dma by the close. It’s obvious that the 50-dma serves as critical support for the stock, and while one might like to try buying the stock here, the technical evidence seems to indicate that lower lows are more likely. Therefore, I think there are better things to buy if one is in fact looking to buy anything right here, right now.

 

GR051618-SAIL

 

Okta (OKTA), SAIL’s IPO cousin, is holding along its 10-dma but remains in a position that I find a bit too extended for my taste. Therefore, I’d watch for a pullback closer to the 20-dema at 45.97 as a more opportunistic entry point.

DropBox (DBX) is a new-merchandise situation that came public at $21 a share back in late March. After an initial move higher following the IPO, it has since spent the past five weeks building its first true IPO base. The company reported earnings last week and sold off slightly, testing its 10-dma and 20-dema last Friday.

It then broke below the two moving averages on Monday, but yesterday volume dried up in the extreme at the end of a three-day sell-off. This resulted in a move today back above the 10-dma and 20-dema on slightly higher volume. I like the stock as a new-merchandise play, so I’d watch for constructive action to develop along the 10-dma and 20-dema with volume drying up as a possible lower-risk entry opportunity.

It may be notable that big-stock cloud name Salesforce.com (CRM) bought 4.9 million DBX shares in the first quarter of 2018. Generally, that certainly represents a vote of confidence in the company, although it’s not clear whether it means that CRM might look to buy the company at some point.

 

GR051618-DBX

 

I still like the look of Lumentum Holdings (LITE) on its daily chart, despite Monday’s reversal off the gap-up intraday highs. That gap-up move on Monday came as a result of a Sunday tweet from President Trump that he had ordered the Commerce Department to come up with a solution to take the pressure off Chinese telecom concern ZTE, which had been banned from buying equipment from U.S. companies, including LITE.

At that point, it was more of a sell-the-news situation, since there was nothing concrete with respect to lifting the ban on ZTE. But that move also qualified as a pocket pivot at the 50-dma, since the gap-up move came from a point at the 50-dma based on Friday’s close. The ensuing pullback to the 50-dma has come with volume drying up in the extreme today at -61% below average. That puts LITE in a lower-risk entry position here, using the 50-dma as a tight selling guide.

 

GR051618-LITE

 

In the land of Chinese stocks, keep in mind that Baozun (BZUN) is expected to report earnings tomorrow before the open, so I’ll be watching that closely tomorrow to see if anything actionable develops. The stock has been getting kicked around the past three days as it moves down toward the lows of its current eight-week base formation.

Alibaba (BABA) is still extended, and seems to be running into consistent resistance along the $200 Century Mark price level. The last time BABA cleared the $200 price level was back in mid-March, which followed another attempt at the 200 price level in late January. Both of those attempts failed badly, with each resulting in an ensuing 15%-plus drop to the downside.

Does the Rule of Three indicate that this current attempt will be successful? Or will it result in another failure and reversal to the downside that is ultimately a short-sale opportunity? Over the past five days, BABA has stalled at the 200 price level, with volume each time declining in succession. Are buyers beginning to disappear?

Based on the technical position, there are two ways to play this as a two-side situation. The first is to assume that $200 is resistance, and short the stock here using the 200 price level as a guide for a tight upside stop. If the stock can clear the $200 Century Mark, then it becomes a long at that point using 200 as your selling guide.

Right here, BABA is basically a “straight-up-from-the-bottom” (also known in acronym form as “SUFB”) mover off the lows of its base over the past three weeks. This does, in my view, make it vulnerable to at least a pullback from here that may even be shortable on just a tactical basis alone, looking for a move down as far as the 20-dema. Play it as it lies.

 

GR051618-BABA

 

Among other Chinese names discussed in recent written reports, Autohome (ATHM) is currently extended from last week’s breakout. Only pullbacks to the 10-dma at 100.84 would serve as lower-risk entry possibilities from current levels. Tal Education Group (TAL) is also extended, such that I would take the opportunistic approach of looking to buy shares on a constructive, deeper pullback into the 20-dema at 38.76.

Notes on other long ideas:

Carbonite (CARB) is moving tight sideways as it holds along its 10-dma. This puts it in a lower-risk entry position using the 10-dma as a tight selling guide. Otherwise, the opportunistic approach would be to look for a pullback closer to the 20-dema down at 32.75 about two points below today’s close.

Nutanix’s (NTNX) broke out last week on weak volume, so I’m not a buyer at current levels. It can be watched, however, for any pullbacks to the 20-dema at 55.20 as possible lower-risk entries.

Planet Fitness (PLNT) successfully tested its 50-dma on Monday and again yesterday before rallying back above its 10-dma and 20-dema today. This is now extended, and would need to set up again along the 10-dma and 20-dema.

Twilio (TWLO) remains extended, and I’d look for pullbacks to the 10-dma at 49.59 as your best lower-risk entry opportunities from here.

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.

When I look at the action in individual stocks, I see a lot of extended names that appear to have lost some near-term momentum. This is not necessarily a bearish development, but a sign that things got a bit too good on the upside and are in need of some rest time. That is a normal part of any uptrend.

As I wrote over the weekend, most stocks I was looking at were in extended positions, although I did review my actionable watch list for Monday morning in a weekend video report. As it turned out, more than a few of those names have had some decent tradeable moves so far this week, but I still want to remain opportunistic and looking to buy favored stocks on pullbacks.

Alternatively, I am looking for stocks that are holding tight at support levels, such as LITE, for example. If you like a stock, it is always preferable to buy it when its quiet, as I am fond of saying. So, on the long side, patience is counseled as we look for the ripest set-ups to emerge.

Meanwhile, it is always possible for the short side to come into play if the indexes pull back further to retest their 50-dmas. I have discussed a couple of names in this report as two-sided plays that can be watched closely with this in mind. Also note, that today’s report will be accompanied by a video report.

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.