The Gilmo Report

May 20, 2018

May 19, 2018

The market spent the week consolidating the prior move off the early May lows. After a Monday gap-up attributable to a Presidential Tweet, the market pulled in and spent the remaining four days of the week in a tight sideways range. The S&P 500 Index, along with the rest of the market, traded in a tight range on Friday as volume expanded, thanks to options expiration.

 

GR052018-$SPX

 

The NASDAQ Composite Index looks roughly the same, holding along its 10-dma on Friday on roughly even volume, despite options expiration. So far, I don’t see anything abnormal here, since many leading names got extended coming into the week, as I noted in my report of last weekend, and were entitled to some rest. Same thing goes for the indexes, which have rallied so far in May and were also somewhat extended on the upside by the time we gapped up on Monday morning.

 

GR052018-$COMPQ

 

The only index that doesn’t look like all the rest is the small-cap Russell 2000 Index, which posted another all-time closing high on Friday. The daily chart of its proxy, the iShares Russell 2000 ETF (IWM), shows a wedging rally to higher highs. This of course may make it vulnerable to a pullback, but that could just mean that money swings back into bigger-cap names, many of which have been consolidating and resting.

On the other hand, I’ve heard a lot of pundits saying that the market can’t possibly top when the Russell is making new highs. I say there’s always a first time for everything. In any case, if the market rally off the early May lows has any legs to it, the larger-cap indexes should soon join the Russell in new-high territory. That’s still a ways away, however, so I continue to view the index situation as fluid – just focus on the stocks.

 

GR052018-IWM

 

I continue to advocate a patient, opportunistic approach, seeking to buy favored stocks at the lowest-risk points. I would look very carefully at the context within which any pullback is occurring, and then try to take the most opportunistic route based on this context. For example, Apple (AAPL) has had a very sharp upside move off its lows of late April that results in a breakout to new highs that was SUFB, or straight-up-from-the-bottom.

Within the context of a steep prior rally, am I going to view a pullback to just the 10-dma as the most opportunistic entry opportunity? No. Instead, I would look for a deeper pullback to the top of the prior base, which also roughly coincides with the 20-dema at 181.51. So, if I’m interested in buying AAPL on a pullback, I set an alert maybe 50 cents above the 20-dema. If it gets there I won’t miss it and will be able to assess it at that point.

 

GR052018-AAPL

 

While Warren Buffet may be smitten with AAPL stock, buying 75 million shares in the first quarter of 2018, institutions on balance sold 153 million AAPL shares, according to recent 13F filings. That’s the most since 2008, and one wonders whether they will come back to selling the stock up here at all-time highs. At the very least, it may argue for a test of the 20-dema from here.

The same opportunistic approach might also be appropriate for Facebook (FB), which dipped just below its 10-dma on Friday on extremely light volume that was -71% below average. That could make the stock buyable along these levels, but a pullback down to the 20-dema, which would bring the stock right on top of a prior area of price congestion along the 200-dma, would not be unexpected.

This would also bring it down on top of a short area of prior price congestion along the 200-dma, as I’ve highlighted on the chart. Such a pullback, deeper into the pattern and down to the 20-dema, might be more likely to occur if the general market pulls back a little further this week. So, one can buy the stock here and use the 20-dema, a little more than 2% lower, as a selling guide, or take the opportunistic approach and wait for any possible pullback to the 20-dema.

 

GR052018-FB

 

Amazon.com (AMZN), on the other hand, has spent all of April moving sideways after a failed gap-up breakout attempt following earnings. However, it has been able to hold above the intraday low of that prior failed gap-up move throughout. It is now resting just on top of the 20-dema, which puts it in a lower-risk entry position, using the 20-dema as a tight selling guide.

But before you get too bullish on AMZN, let me point out that it can also be viewed as a two-sided situation based on the fact that it did have a failed late-stage type of breakout attempt. That creates the potential for a late-stage, failed-base, short-sale set-up to evolve, and the first sign of that would be a breach of the 20-dema.

Therefore, while AMZN can be looked at first as a long here as it pulls into the 20-dema on light volume, it does have its dark side. If it busts the 20-dema, then it would then trigger as a short-sale at that point, based on the premise of a confirmed LSFB set-up.

 

GR052018-AMZN

 

Netflix (NFLX) has a very similar look to AMZN, following its own failed gap-up breakout attempt after earnings in mid-April. That led to a sharp breakdown through the 20-dema and then the 50-dma over the next six days. The stock then found support at the 50-dma and has drifted back up to the top of its prior base on light volume.

Now NFLX is drifting to the downside as it tests its 20-dema on extremely light volume that came in at -66% below average. That would qualify as a voodoo pullback. Of course, as with AMZN, there is the context of a prior base breakout failure that makes this a two-side situation as well.

NFLX’s prior failed breakout attempt on a post-earnings gap-up move puts it in the category of a potential late-stage base failure. The fact that it has rallied back above its 20-dema doesn’t negate this, since this is not unusual for an LSFB if it occurs within the context of a general market rally. Since the market has rallied since early April, so has NFLX.

But, as the stock now sits along the 20-dema, this could easily evolve into an LSFB short-sale target. The trigger, as you may have already guessed, would be a breach of the 20-dema. It’s clear that NFLX is consolidating here, but the question remains as to which direction it resolves, and that can only be determined in real-time, based on whatever evidence shows up in the next few days.

 

GR052018-NFLX

 

Twitter (TWTR) is hanging along its 10-dma here as volume dried up sharply to -63% below-average. This puts the stock in a lower-risk entry position using the 20-dema at 31.80 as a tight selling guide, or the 50-dma at 31.23 as a wider selling guide.

 

GR052018-TWTR

 

Nvidia (NVDA) continues to look to me like an emerging late-stage failed-base (LSFB) short-sale target in process. The stock had broken out ahead of earnings. But once earnings were out, the breakout began to fail, with the stock breaking down to the 20-dema on Tuesday.

It then rallied back up to the 10-dma over the next three days, stalling each time. It reached its highest point on Friday, running into the rising 10-dma and the prior base breakout level. That turned the stock back to the downside, and it now looks to be headed for another test of the 20-dema.

A breach of the 20-dema would trigger this as a short-sale at that point, so is something to watch for, Meanwhile, the stock has been shortable for intraday scalps each time it rallied into the 10-dam over the past three days. We’ll see how this plays out next week, but I think that all of these names hanging above near-term support need to be watched closely, like AMZN and NFLX. They could easily turn out to be shortable LSFB set-ups.

 

GR052018-NVDA

 

After confirming as a short-sale once it reversed below the 50-dma on Tuesday, Tesla (TSLA) has now moved back to the lows of its current six-week price range. On Friday, the stock undercut two lows in that range, one at 275.23 that was posted on May 3rd, and the other at 276.50 on April 26th.

Interestingly, TSLA ended Friday at 276.82, just above both lows. This, of course, triggered an undercut & rally long set-up, with the idea that the stock may rally back up as far as its 20-dema. Volume was higher on Friday but not heavy, so it may be that near-term sellers are out of the stock, for now. Thus, this might be good for a trade up to the 20-dema, at which point it may be viewed as a potential short-sale entry opportunity.

 

GR052018-TSLA

 

CSX Corp. (CSX) remains extended, posting another higher closing high on Friday, 62.53, with the 20-dema serving as the more opportunistic reference point down at 61.27. Norfolk Southern (NSC) is in a similar configuration, with the 10-dma at 150.37 and the 20-dema at 146.83.

Intuitive Surgical (ISRG) found support at its 20-dema on Friday as volume dried up. The 20-dema remains your reference for lower-risk entries on pullbacks to the line. So far, the approach of waiting for the stock to get down to the 20-dema has proved out as an opportunistic strategy.

 

GR052018-ISRG

 

Square (SQ) reversed Thursday on above-average selling volume on news that rival PayPal (PYPL) was buying a European company that is allegedly the “European Square.” That sent the stock lower on Friday morning, undercutting the low of four days ago, which is also the low in the current handle of a cup-with-handle formation that is in process.

That set up the typical undercut & rally (U&R) move as the stock recovered from Thursday’s losses. As I wrote on Wednesday, pullbacks to the 20-dema are your best, opportunistic entries, and that turned out to be the case on Friday as the stock pulled down toward the 20-dema. The U&R move, however, was the long trigger for anyone looking to buy shares.

Whenever the market pulls in, as it did this past week, you want to be on the lookout for U&R moves in your favored long ideas. That’s usually when the best lower-risk entries show up, and it, of course, requires an opportunistic approach rather than a chase-the-strength approach.

 

GR052018-SQ

 

Among cyber-security names, CyberArk Software (CYBR) remains extended as it hangs along its 10-dma. I would prefer to take the opportunistic approach and look for a pullback into the 20-dema at 56. 97. Meanwhile, Fortinet (FTNT) gave opportunistic buyers a shot at buying the stock when it came in to test its 20-dema on Thursday.

That pullback held the line and the stock regained the 10-dma on Friday, but remains in a short consolidation following its recent breakout to new highs. I would continue to look for pullbacks to the 20-dema as your lower-risk entry opportunities.

 

GR052018-FTNT

 

Palo Alto Networks (PANW) moved back above the $200 Century Mark on Friday, but as I wrote in my report on Wednesday, at that time the stock looked like it was going to test the 20-dema. That’s precisely what happened on Thursday as the stock dropped down to the line early in the day and then rallied to close just two pennies above $200 on Friday.  I still prefer to buy the stock on pullbacks to the 20-dema, now at 198.01, since it is not showing much upside thrust through the 200 price level.

FireEye (FEYE) is still working on a Wyckoffian Retest as it pulls in slightly after breaking hard after earnings and then recovering on a U&R move. It is now just barely above its 50-dma and under the declining tops trendline extending back to its April peak.

I suppose that one could buy the stock here and use the 50-dma as a tight selling guide, which with only two cents of cushion above the 50-dma means giving it about 1-3% on the downside from the 50-dma. I would look for a move above the declining tops trendline as confirmation or a possible move back to the highs.

 

GR052018-FEYE

 

While there may be better things to buy in this market, as I noted in my last report, I thought it would be interesting to revisit Sailpoint Technologies (SAIL) based on Friday’s action. After selling off on earnings, the stock broke below its 50-dma, but on Friday pulled an undercut & rally move as it pushed back above two prior lows in the pattern, the May 10th low of 22.27 and the April 25th low of 22.51.

Friday’s close printed at 22.59, above both lows. Therefore, one could play this as a U&R long trigger, using either the 22.27 or 22.51 lows as very tight selling guides of 1% or less. SAIL was looking quite cooked by Wednesday of this past week, but Friday’s action brings it back to life, at least to some degree. It needs to hold those prior lows to keep any U&R attempt alive.

 

GR052018-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 tastes. Therefore, I’d watch for a pullback closer to the 20-dema at 46.61 as a more opportunistic entry point.

 

GR052018-OKTA

 

DropBox (DBX) is wobbling back and forth here, closing just below its 20-dema on Friday. Volume was extremely light at -76.7% below average. The stock sold off last week and into early this past week following its earnings report of two Thursday’s ago. The pullback then lost momentum as volume dried up sharply on Tuesday, triggering a move back up through the 10-dma and 20-dema on Wednesday.

While the stock did not hold at the 20-dema on Friday, the pullback here is most certainly a Wyckoffian Retest of Tuesday’s low. With the extreme volume dry-up on Friday, I’d look for the stock to quickly regain its 20-dema. Therefore, one could look at buying shares here with the idea of it at least holding well above Tuesday’s low at 29.55.

 

GR052018-DBX

 

Lumentum Holdings (LITE) looks like it’s just waiting for some resolution to the ZTE ban that I’ve discussed in recent reports. As it stands right now, if the company ends up finalizing its purchases of Oclaro (OCLR), which has 30% exposure to ZTE, then LITE will have 10% exposure. I’m not sure if this is all that significant, but it does appear to be keeping the stock in a holding pattern pending some decision by the Commerce Department to throw the floundering ZTE a lifeline.

The indecision is evident in LITE’s extreme volume dry-up on Friday at -58% below average. The stock nevertheless dipped below its 50-dma, and undercut the 62.35 low on an intraday basis before closing at 62.40, a nickel higher, but nine cents below the 50-dma. That would, however, have set up a U&R long entry at that point, using the 62.35 low as a selling guide.

However, this is a news-dependent situation, so my guess is that any strong move back up through the 50-dma will occur in anticipation of a favorable resolution to the ZTE ban. Over the weekend, more comments were made by the administration, and it may indeed be the case that a favorable resolution is forthcoming this week. News or no news, a move above the 50-dma would help to confirm Friday’s marginal U&R move.

 

GR052018-LITE

 

In my Wednesday report I noted that members should watch for anything actionable to develop in Baozun (BZUN) after it reported earnings on Thursday before the open. Well, it gave us not one, but two actionable buy signals, the first of which was a buyable gap-up at the open.

BZUN opened at 47.50, pulled in just slightly at 47.33, and then didn’t look back to close at 53.51. The second actionable buy point was for the slower animals in the herd when the stock broke out through the 52.33 peak in the base to post a standard-issue base breakout.

Anyone sitting around waiting for that to happen would have gained about a point by the close, while those acting on the BGU move at the open got closer to six points, or somewhere around 13-15%. Thus, prima facie proof of the utility of using alternative buy points in the base as opposed to being a strict base-breakout buyer. BZUN closed Friday at 54.85, keeping it just barely in range of the base breakout.

 

GR052018-BZUN

 

Alibaba (BABA) still can’t get through the $200 Century Mark, backing down on Friday to close just below its 10-dma. It does remain within the six-day price range it’s been in since first failing to clear the $200 price level the week before. Volume picked up slightly on Friday, so a test of the 20-dema might be in the cards.

On Friday, it was announced that China had agreed to increase its purchase of U.S. goods, which may or may not be seen as the most favorable of compromises to the current U.S.-China trade dispute. I suppose we’ll find out Monday, since there is still the chance that BABA might clear the $200 price level with some conviction, depending on how Friday’s news is interpreted.

I noted that BZUN’s breakout on Thursday was accompanied by a sympathy breakout in Momo (MOMO) a day later, on Friday. MOMO is expected to report earnings on May 29th, so it’s not clear to me that one can buy this breakout and get a huge upside move ahead of earnings. Better to stick with BZUN.

 

GR052018-BABA

 

Autohome (ATHM) pulled into its 10-dma on Friday, which brings it back into buying range of its base breakout from the prior week. Any further pullback closer to the actual breakout point and the 20-dema down at 100.01 would offer the most opportunistic entry, but this is buyable using the 20-dema as your selling guide.

 

GR052018-ATHM

 

Tal Education Group (TAL) attempted to break out on Friday, but reversed to close back in the short, one-week handle of a cup-with-handle formation. My guess is that the handle is too short after the move from the original “voodoo” buy point as I discussed in a video report at that time, so the stock needs to do a little more work up here.

While pullbacks to the 10-dma offer lower-risk entries in the handle, my approach would be to watch for any funky pullbacks to the 20-dema. The 20-dema is only a couple of bucks lower at 39.21, so a pullback to that level doesn’t strike me as unrealistic. In any case, I always prefer to take the more opportunistic approach to limit risk, but members can play this as they see fit.

 

GR052018-TAL

 

With TAL acting well, watch for Sunlands Online Education, another Chinese education stock, when it reports earnings this week. According to information I found on the internet, the company is expected to report earnings on May 21st, which would be Monday, perhaps before the open.

I first discussed STG in a video report where I focused on Chinese names. At the time, the stock was trading at 9.15, and it has since moved above the 10 price level. It is now working on the handle of a cup-with-handle formation, its first IPO base since coming public. It pulled in on Friday with volume drying up to -85.7% below-average on the day. One to watch on Monday, assuming my information is correct.

 

GR052018-STG

 

Notes on other long ideas:

Carbonite (CARB) posted a higher closing high on Friday, but volume was light and the stock stalled badly. This might be a spot to consider taking profits, although the 10-dma or 20-dema can be used as selling guides instead.

Intel (INTC) was pushed down to its 20-dema on Friday on higher volume. This may offer a lower-risk entry at the line. But in my view, it would have to hold the line to remain viable.

Nutanix’s (NTNX) is still one to watch for a pullback to the 20-dema at 55.75 as your best, lower-risk entry. Earnings are expected this Thursday after the close.

Planet Fitness (PLNT) still needs to settle down, as I indicated in my last report. The stock gapped back down to its 50-dma on Friday, so is not something I’m looking at on the long side right now.

Twilio (TWLO) remains extended after posting a higher closing high on Friday. Your references for potential lower-risk entries would be the 10-dma at 51.76 and the 20-dema at 48.44. This thing is up well over 20% over the past couple of weeks so one certainly wants to take an opportunistic approach here and just lay back in anticipation of a deeper pullback 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.

Since I’m writing this report on Saturday morning, it’s not yet clear whether the market will have any significant reaction to the late Friday news of China agreeing to purchase more U.S. goods and services. That news was already being announced by the President’s Chief Economic Advisor, Larry Kudlow, on Friday morning. It’s also not clear just how much of a solution this is. But we shall see.

On its face, the index action doesn’t look bearish, although distribution days are starting to pile up. The indexes could also push down closer to their 50-dmas. Thus, it remains a matter of watching individual stocks, and to my eye most of the leaders have lost near-term momentum and are in the process of consolidating and resting, such as AAPL, FB, BABA, etc.

I continue to implement a two-side approach with certain names, like NFLX, and AMZN, and others like TSLA and NVDA may be developing into more strategic shorts rather than short-term tactical shorts. My general view is that if we see the market roll over, then names like NFLX and AMZN will bust their 20-demas and present us with reasonable short-sale targets, at least for those oriented toward the short side of the market when appropriate.

Meanwhile, I want to take an opportunistic approach on the long side. This means coming in every day with a list of favored long ideas and having a keen idea of where their pullback points are. And, as always, as your favored stocks pull back, be alert to possible U&R long set-ups which always occur within a pullback context, as was the case with SQ on Friday.

One of the main reasons cited for the market pullback this past week (although I still think it was mostly a function of an extended market needing a rest), was higher interest rates. The Ten-Year Treasury Yield broke out to a four-year high, as we can see on the weekly chart of the $TNX, below. This was accompanied by a new high in the Two-Year Treasury Note Yield, its highest since 2008.

 

GR052018-$TNX

 

While many view this as a problem for the markets, I wonder if this breakout isn’t just a fake out move to the four-year range highs. This would then imply that rates, at least from the perspective of the 10-year Treasury Note Yield, are at a peak. According to The Economist, current global public (read: government) debt is now approaching $59 trillion. One can view the number as it grows at: https://www.economist.com/content/global_debt_clock.

When we include public and private debt together, the numbers expand to $277 trillion and above, as of late 2017. So, with all this debt out there, can central banks, including the Fed, go on an interest-rate increasing binge? We already know that the European Central Bank has talked back any ideas of tapering. So, just how far can the Fed go?

With the U.S. government borrowing $488 billion in the first quarter of 2018, exceeding the old record of $483 billion set eight years ago, it’s clear that the U.S. government’s borrowing binge has no end in sight. So, I would consider the possibility that maybe rates are at peak, rather than breaking out on a sustainable uptrend.

But if the Fed does continue to raise rates aggressively, will we reach a tipping point, where the massive bubble of debt around the globe finally pops? That could result in all sorts of nasty outcomes, but from an investment strategy perspective, I might keep a close eye on the U.S. dollar and gold, which have been moving sharply in opposite directions as of late.

Some sort of U&R move could develop in the yellow metal at some point, which may be something to watch for. As always, I tend to get interested in gold when nobody wants it, rather than when everybody wants it. We may be getting to that point again. So, as with individual stocks, play it all as it lies! That is all.

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 a position in DBX, 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.