The Gilmo Report

May 2, 2018

May 2, 2018

The market has remained in the chop zone, with much of the action being dictated by the outcomes of big-stock earnings reports. On Monday, things looked to be starting out with a bang on the back of a strong earnings report from McDonald’s (MCD). But, as I tweeted early in the day, the gap-up rally looked like it could simply serve as the peak of a fourth right shoulder in a possible overall head and shoulders formation that has been “in process” since the end of last year.

That turned out to be the case as the stock quickly reversed the next day and broke back below its 200-dma this morning. It moved lower all day and finally ended up on top of the confluence of its 10-dma and 20-dema. The 50-dma is another 1% lower at 159.06, so we’ll see if Mickey D’s ends up taking that moving out as well on the way down.

 

GR050218-MCD

 

This morning it was Apple (AAPL) leading the charge, but not something that I found unexpected per my discussion in Sunday evening’s Gilmo Video Report. As I pointed out at that time, AAPL was so beaten down and dirty that a rally following earnings was a likely possibility. After a more than acceptable report yesterday after the close, the stock gapped up this morning right up through its 50-dma and approached its prior highs.

Technically, one could have tried to play this as a buyable gap-up, using the 173.80 intraday low as your selling guide. But then, one could have also played MCD as a buyable gap-up on Monday, but the intraday low on MCD was taken out quickly on Tuesday. With AAPL now approaching its prior highs, we’ll see whether it can break out, or whether it joins MCD in the ranks of the failed BGUs.

 

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While AAPL’s move might look bullish, and thus good for the market, that didn’t turn out to be the case, even after the Fed held rates steady when they released their monthly policy announcement. The indexes started to the upside, but by the close the action was decidedly bearish, with the NASDAQ Composite Index reversing to close down -0.42% on higher volume. And that was with AAPL moving higher on the day.

 

GR050218-$COMPQ

 

The S&P 500 Index also reversed after the initial intraday post-Fed rally, closing down -0.72% on higher volume. The index got away with another successful retest of the 200-dma yesterday as it approached the line before finding intraday support and closing up on the day. But that rebound rally didn’t hold today, and my guess is that the S&P’s days above the 200-dma are likely numbered. Ultimately, I might look for a test of support along the lows of the current descending triangle formation, below the 200-dma.

 

GR050218-$SPX

 

If this market starts to break down in earnest from current levels, I don’t think one has to look far for possible short-sale candidates. At the same time, some of these can be viewed as two-sided situations, so that IF the general market is able to sustain a more pronounced rally from current levels, they could also work on the long side given the right triggers.

Amazon.com (AMZN), for example, is still holding above last Friday’s buyable gap-up breakout low of 1567.39, but it barely closed two points above that level today on light volume. The lack of volume today is interesting, since it shows that even a strong AAPL earnings report and price move wasn’t enough to inspire buyers to start pouring money into AMZN.

If the stock can hold the 1567.39 price level, BGU intraday low, then I would use that as a short-sale trigger if we also see the general market start to come off. If the general market holds its ground, then if AMZN can hold above the 1567.39 price level, it may very well work as a long. The key is to remember that these are probably better for trades given the choppy, trendless trading environment.

 

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Netflix (NFLX) is a prior failed BGU breakout from mid-April that broke down sharply last week before finding support around the 50-dma. Since then it has rallied back up into the 10-dma, which has served as resistance, but has held along the 20-dema and above the 50-dma. Notice how this week’s drift to the upside (all three days have been upside closes) has come on very light volume, hence has a wedging aspect to it.

This is, therefore, another two-side situation to keep on your watch list. A breach of the 50-dma triggers this as a short-sale, although the stalling rallies up near and into the 10-dma have been shortable over the past few days. My inclination might even be to take my cue from the general market and just short the stock here, using the 10-dma as a guide for a tight upside stop.

If NFLX can hold its 50-dma, perhaps testing it again successfully on very light volume, then it might be good for a move back up toward the prior base breakout point. However, this seems like the less likely outcome, since to me this pattern looks weak and vulnerable to a downside break from here. That would likely occur, of course, in a continued downside market move from here.

 

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Nvidia (NVDA) strikes me more as a short here as it shows “voodoo” volume along its 20-dema. To me, this represents a severe lack of demand and thus I’d look for the stock to retest last week’s lows. So, shorting it here while using the 230 price level (last Friday’s high) as your guide for an upside stop seems reasonable. Keep in mind that earnings are expected next week on May 10th, so you’d be looking for a quick break to the downside to develop before then.

 

GR050218-NVDA

 

As I wrote over the weekend, Facebook (FB) is now a busted former big-stock leader that is now viewed as a valuation play given its low P/E. The stock broke below the 200-dma on Monday, triggering it as a short-sale at that point, but yesterday was able to find support at the 50-dma. That rebound was helped by a recommendation as a “best idea” from Wedbush-Morgan.

This sort of thing is typical for big-stock leaders that become so-called valuation plays. Analysts consider them low-risk recommendations given their tendency to view the market through the lenses of a valuation-based approach. I discussed over the weekend why I consider a low P/E in a busted big-stock leader to be a sign of danger more than a compelling valuation argument.

So, I would expect analysts to come on now and then upgrading FB to a valuation buy, which can keep it hanging along its 200-dma. Today, FB was able to regain the 200-dma, but it again stalled at the area of overhead resistance and price congestion defined by the prior base from which it failed in mid-March. I still view the stock as a short, analyst-fueled rallies notwithstanding, with the idea of using a break below the 200-dma as your initial short-sale trigger.

 

GR050218-FB

 

Over the weekend, I discussed Twitter (TWTR) as a short-sale target, where weak rallies up into the 20-dema might present potential short entries. The stock has done one better by rallying up into the 50-dma today where it came close to touching the line before reversing and stalling to the downside on weak volume.

For this reason, I view the stock as shortable here using the 50-dma at 31.45 as your guide for an upside stop. Certainly, the closer to the 50-dma one could short the stock the better, and TWTR came within 23 cents of the line before turning tail.

 

GR050218-TWTR

 

After hours, Tesla (TSLA) rallied following its earnings report, but is now trading below the $300 price level as I write this afternoon. This is slightly below today’s closing price of 301.15. The 50-dma lies at 308.10, and the stock did in fact run right into the line today before reversing to close about 2.5% below the line. In after-hours trade I also saw the stock again trade back up to that level before coming off again.

I’m not sure where this opens up tomorrow, but if it does have any move up closer to the 50-dma, I would consider it a short right there, using the 50-dma as a guide for a tight upside stop. If it opens on a gap-down move, then watch for a possible shortable gap-down type of situation to develop. Otherwise, I’ll be watching this closely tomorrow to see if and where it can be shorted.

 

GR050218-TSLA

 

Inphi (IPHI) rallied through its 50-dma yesterday, which would have stopped out any would-be short-sellers at that level. The stock rallied again today on slight above-average volume, bringing up near its prior range highs above 32. It is possible that the stock develops into a short again even though it is beyond the 50-dma, since the range highs offer a secondary reference point for possible resistance and, thus, a downside reversal.

I’d simply watch this on the 620 intraday chart for any such reversal, which would likely occur in sync with a general market that moves lower from here. IPHI was a great short last week, and the lower-volume move back to where it started is interesting, but not so unusual in this “Ugly Duckling” style market.

 

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Cree (CREE), which was another instant gratification short play after it reported earnings last week, has rallied back up into its 10-dma and stalled on below-average volume. This brings it back into shortable range, using the 20-dem at 39.84 or the 50-dma at 40.31 as guides for an upside stop. The closer to the 50-dma, however, that one can short the stock, the better.

CSX Corp. (CSX) has dipped below its 10-dma, bringing the 20-dema down at 58.46 into play as a potential line of support. If the stock busts the 20-dema I would use that as a trigger to short the stock at that point.

Norfolk Southern (NSC), has pulled into its 10-dma on light volume. Theoretically, this might be considered a lower-risk entry, but notice that the stock actually tried to rally earlier in the day, but turned negative thanks to a lack of buying demand.

 

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On Monday, I tweeted that Boeing (BA) was looking more like a short after it breached its 50-dma. Over the weekend, the stock was holding tight along its 50-dma as volume dried up, but the stock morphed into a short-sale on Monday as it reversed back below the 50-dma. This helps to illustrate why I treat all stocks, whether they start out as long ideas or short ideas, as being playable in the opposite direction if they fail to work out as originally planned.

This is why, as I discussed in last Tuesday’s Gilmo Video Report, I simply use my long watch list as a short watch list, since most stocks are just moving up and down within broad ranges. As I’ve noted many times before, what one is long one day one can easily be short the next, and vice versa. It’s simply that type of market.

Intuitive Surgical (ISRG) is stalling a bit along its 10-dma, and over the past four days has run into resistance near the intraday low of last week’s now failed buyable gap-up (BGU) move at 448.91. For me, this is in no-man’s land, although the unorthodox trader might view this as a short with resistance at the prior BGU low of 448.91. Aside from that, I would only view it as a possible long on a constructive, low-volume retest of the 20-dema, such as we saw last week.

 

GR050218-ISRG

 

Nutanix’s (NTNX) is expected to report earnings on May 24th, so there is plenty of time to game the stock before then. As I noted over the weekend, the stock was hit with an average-volume selling spike on Friday on news it was delaying its cloud launch due to an engineering problem. Over the past three days, NTNX has wedged on light volume back above its 20-dema, and today got fairly close to its prior highs before reversing on weak volume.

While the rally today was shortable on an intraday basis, NTNX was still able to hold above its 20-dema. However, I would look for a breach of the 20-dema as a short-sale trigger given that selling volume has been much higher relative to buying volume over the past two weeks. If it works, it could be good for at least a short scalp down to the 50-dma.

 

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Square (SQ) is blowing up after reporting earnings today after the close, potentially putting it into play as a short-sale target, depending on how it sets up tomorrow. Meanwhile, FireEye (FEYE) is gapping down to its 50-dma after its own earnings report this afternoon. We’ll see if it can hold support at the 50-dma tomorrow. Fortinet (FTNT) and CyberArk Software are expected to report earnings tomorrow, both after the close.

Sailpoint Technologies (SAIL) and Okta (OKTA) are both acting well, but are currently extended ahead of their expected earnings reports. SAIL is expected to report on May 9th, while OKTA isn’t expected to report until June 6th, according to the latest updated release. OKTA was previously showing a May 9th report date.

Palo Alto Networks (PANW) again proved to be buyable along its 20-dema, as it pulled into the line yesterday before rebounding to close near its range highs. Today, the stock broke out to a new all-time closing high on weak volume. In after-hours trade as I write, PANW is trading down at around 194 in sympathy to FEYE, which is still above its 10-dma. See what this does tomorrow, but as far as I’m concerned, only pullbacks to the 20-dema remain your best, lower-risk entries given the state of the general market.

 

GR050218-PANW

 

First Solar (FSLR) blew up in the worst possible way on Monday, and yesterday proceeded lower as it breached its 50-dma. Volume was heavy, and as I wrote over the weekend, a low-volume pullback would be the only pullback to the 10-dma you would want to step into. Monday’s selling volume was brutal, and therefore made the breach of the 10-dma a short-sale trigger and not a long trigger.

With the stock floundering below its 50-dma, we would now watch for any weak rallies back up into the 50-dma at 70.07 as potential short-sale entry opportunities. Alternatively, if FSLR were able to regain its 50-dma, the 20-dema would then serve as the next reference point for a possible short-sale entry. Notice that FSLR is yet another stock that was acting well last week, only to bust wide open this week. This pattern is increasing, and is likely a cautionary sign for the general market.

 

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Notes on other long ideas:

Carbonite (CARB) is expected to report earnings tomorrow after the close.

Planet Fitness (PLNT) is expected to report earnings next Tuesday, May 8th, based on updated information. The expected earnings date was previously reported as May 1st, which would have been Monday.

Applied Materials (AMAT) should be watched for any weak rallies up into the 200-dma at 52.16 that might present lower-risk short-sale entries. The stock has been living below the 200-dma for the past two weeks, so for now the 200-dma serves as a solid reference for upside resistance.

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.

The action of individual stocks in this market is quite telling, in my view. As I’ve often said, I prefer to let the stocks tell their story rather than relying solely on the action of the indexes. What I’m noticing is that more short-sale set-ups are presenting themselves in real-time, and in many cases, we are seeing very shortable gap-up moves after earnings.

It’s getting so that every morning I make a list of stocks gapping up in pre-open trade after reporting earnings and then watching for them to fail on the five-minute 620 intraday chart as short-sale targets. Stocks that have worked well in this regard recently have been CREE, IPHI, LITE, AKAM, INTC, MSFT, and AMZN, among others. MCD was a one-day delay after closing strong on Monday, which makes me wonder whether we’ll see AAPL do the same tomorrow.

So, while I still don’t necessarily want to take a rigidly bullish or bearish stance toward this market, the fact is that the objective evidence “on the ground” has been quite bearish. When it’s easier to make money shorting stocks into earnings-related gap-ups than buying those same types of post-earnings gap-ups, I am de facto a bear, at least at the point of impact.

Given this type of action as it relates to individual stocks, I would not be surprised to see the S&P 500 eventually break below its 200-dma, while the NASDAQ breaks lower to eventually test its own 200-dma. And if I continue to see more bearish, shortable set-ups working well, then that is likely what will happen in the process. Take it from there.

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.

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