The Gilmo Report

May 23, 2018

May 23, 2018

My Sunday video report made the point that the market and many leading stocks were starting to look somewhat late-stage. By Sunday afternoon, however, futures were rallying sharply after Treasury Secretary Steven Mnuchin went on cable TV with the line that the U.S. and China weren’t in a trade war, but rather a trade dispute. Keying on the positive semantics, the futures opened up sharply on Monday.

But, as I discussed in my Sunday afternoon video report, the move may turn out to be something that can be faded, as in short into. That turned out to be the case by Tuesday, when more of the same rhetoric got the futures moving to the upside again in the morning, but by the close the market reversed badly. NYSE volume was higher, while the NASDAQ Composite Index avoided a distribution day as volume was just a hair lighter.

This morning the indexes gapped down, taking them down to the lows of their current two-week price ranges. The NASDAQ Composite Index undercut its low of last Friday and turned at that point, putting an end to a two-day reversal off the Monday highs. I noted the undercut & rally action in both the NASDAQ and the S&P 500 in a tweet at that time.

As is usually the case in this market, the undercut of prior lows ended the sell-off, which was only good for a tactical short-sale expedition. This environment remains a swing-trader’s market. Later in the day today, the Fed released their latest meeting minutes, which were interpreted as quite dovish, sending the indexes rocketing back to the upside.

 

GR052318-$COMPQ

 

The S&P 500 Index didn’t quite undercut last Friday’s low on its own chart, but came close on a successful test of the low. Volume picked up on the day as the index held and rallied to close near its peak for the day. For now, the indexes remain in a short handle area following the rally off the lows of early May, when the S&P found support at its 200-dma.

Meanwhile, the small-cap Russell 2000 Index, not shown, pulled into its 10-dma and the top of its prior consolidation from whence it broke out last week. This was constructive action within the context of yesterday’s and this morning’s pullbacks.

 

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This remains a market for opportunistic investors, both long and short. In addition, one must remain focused on the action of individual stocks, since their story is often unrelated to what is going on with the indexes. Case in point is Netflix (NFLX), which posted a pocket pivot at the 10-dma on Friday.

It then tested the 10-dma this morning and held, posting another pocket pivot off the 10-dma on a re-breakout type of maneuver. As I’ve written in recent reports, NFLX has been on the fence, and had the potential to move in either direction. In this case, it triggered as a long based on Monday’s pocket pivot, and when the market turned this morning it bounced right off the 10-dma.

 

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If NFLX can pull off a classic re-breakout move, then perhaps we might look for Nvidia (NVDA) to do the same. It dipped below the 20-dema this morning but held along the lows of Monday and Tuesday before turning back to the upside to regain the 20-dema. With this in mind, we can view the stock as buyable here using the lows of this morning right at 240 as your selling guide.

 

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Amazon.com (AMZN), the third of the big-stock NASDAQ names that I follow and which were on the fence over the weekend, is another potential re-breakout candidate. The stock broke below the 20-dema at the open this morning when the indexes gapped down, but found its feet and quickly regained the line.

Volume picked up as the stock cleared the 10-dma and the 1600 Century Mark price level, qualifying as at least a five-day pocket pivot. I might be willing, however, to call this a ten-day pocket pivot since the higher downside volume last week was in fact supporting action at the 20-dema. Therefore, I would view this move as buyable using the 10-dma as your selling guide.

 

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Facebook (FB) pulled a nice outside reversal to the upside after testing last week’s lows, but volume was merely higher than yesterday’s and well below average. It also was not high enough for a pocket pivot, whether of the five-day or ten-day variety. What is constructive, however, is the fact that the stock has had a sharp move off the base lows since early April, and is now consolidating normally.

If you like FB, then this may be buyable here using the 10-dma as a tight selling guide. The idea here would be that we would want to see the stock make a bee-line for the $200 Century Mark, which is has never done before.

 

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Apple (AAPL) is also consolidating a sharp move off the bottom of its base and doing so admirably. The stock has held in a tight range over the past two weeks, like the indexes themselves, with selling volume drying up the whole way. Today, volume picked up slightly as the stock regained its 10-dma on a five-day pocket pivot.

If the market goes higher from here, which it looks to me like it very well may, then AAPL probably goes higher. Thus, while I would have preferred to take a more opportunistic approach here and look for a test of the 20-dema. The fact that it has held tight instead is a feather in the stock’s proverbial cap. Therefore, this can be bought here using the 10-dma as a tight selling guide.

 

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Twitter (TWTR) also looks very good here after posting a pocket pivot on Monday. It then pulled into the 10-dma yesterday as the general market sold off, but selling volume was light. Today, the stock regained the 10-dma as sellers failed to show up. In my view, this is buyable here on the basis of Monday’s pocket pivot, using the 20-dema at 32.19 as your maximum downside selling guide.

 

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Tesla (TSLA) is perhaps representative of the two-side opportunities that can exist in this market. As I wrote over the weekend, the stock had undercut the prior May low on Friday and rallied just above that low by the close that day. That triggered an undercut & rally long set-up at that point, and the stock then rallied on Monday.

That rally carried as far as the confluence of the 10-dma and 20-dema before the stock reversed. Yesterday, TSLA again undercut the May 3rd low at 275.23 that was posted on May 3rd.  Today, it rallied back above that low on light volume, but nevertheless triggering another U&R long set-up using the 275.23 price level as a tight stop.

 

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CSX Corp. (CSX) closed above its 10-dma on light volume today, but I still like it best on pullbacks to the 20-dema, now at 61.89, if I can get ‘em. Norfolk Southern (NSC), on the other hand, triggered an undercut & rally (U&R) long set-up today after undercutting its prior 149.17 low of May 15th and then closing back above it on much higher volume. This is therefore actionable using the 149.17 price level as a tight selling guide, less than 1% below today’s 150.49 closing price.

 

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While this is getting to be an old story, Intuitive Surgical (ISRG) again found support at its 20-dema today. At the same time, it also undercut its prior May 15th low at 453.11 and closed above both it and the 20-dema. Thus, the stock is in a lower-risk buy position here using the 20-dema 455.26, less than 1% away, as your selling guide.

 

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Square (SQ) sold off yesterday with the market, and I did in fact play the stock as a short-term, tactical swing-trade on the short side. But today it retested the low of seven trading days ago and held. That low is key in my view because last Friday the stock undercut that low and rallied back above it, triggering a typical U&R long set-up at that point.

Today, SQ held above that low, so the retest of that low brought it back into buying range of last Friday’s U&R. Simple enough. SQ then rallied off the lows with the market to close right at its 10-dma. The stock is forming a cup-with-handle base here, and whether it is late-stage or not in the sense that it is vulnerable to a top here is irrelevant.

Remember, late-stage is at late-stage does, so do not assume that the stock can’t break out again to new highs. I’ve seen many leaders form five, six, seven, or more bases on the way up. So, unless the market were to top here, I would not assume that SQ is going to top just because it’s in a third-stage base.

 

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Among cyber-security names, CyberArk Software (CYBR) has posted two five-day pocket pivots in a row at its 10-dma. It didn’t even get close to its 20-dema during the market sell-off yesterday and today, so this is buyable here using the 20-dema at 57.68 as a selling guide.

Fortinet (FTNT) gave opportunistic buyers yet another shot at buying the stock this morning when it came right down to the 20-dema. Volume was low as buyers failed to come in and hurl shares out the window on the opening market gap-down. That is constructive, and the stock remains buyable on just this type of pullback to the 20-dema.

 

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Palo Alto Networks (PANW) never even dropped below the $200 Century Mark during the market sell-off yesterday and this morning. Instead, it held the 10-dma and rallied today on light volume. I still prefer to remain opportunistic and look for pullbacks to the rising 20-dema, now at 200.09; so coinciding with the $200 Century Mark, as lower-risk entries from here. PANW is expected to report earnings on June 4th.

With the other cyber-security names acting well, we might look for some sort of Ugly Duckling set-up to emerge in beaten-down FireEye (FEYE). And, lo and behold, that Ugly Duckling set-up occurred today when the stock undercut the 16.60 low of May 4th and closed seven cents above that low. That puts it in play as a U&R long set-up, using the 16.60 price level as a tight selling guide.

 

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Sailpoint Technologies (SAIL) got swept to the downside yesterday during the general market sell-off, but the Ugly Duckling was persistent here as it made a second undercut & rally move through the April 25th low of 22.51. Compared to last Friday’s U&R attempt through the same low, today’s move put the stock back above its 50-dma.

Thus, SAIL is buyable here using the 50-dma at 22.57 as your maximum selling guide. One might also wait for a low-volume retest of the 50-dma as a lower-risk entry opportunity, if you can get it.

 

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Okta (OKTA) broke below its 10-dma yesterday on increasing but below-average volume. It remains extended, such that pullbacks to the 20-dema at 47.36 would be my favored opportunistic entries, if I can get ‘em. OKTA is expected to report earnings on June 6th.

DropBox (DBX) is retesting its low of last Tuesday as volume declined to a bone-dry -70.7% below average today. That low is at 29.50, and DBX got as low at 29.55 today, but the lack of selling pressure couldn’t send it any lower. I look at this as a Wyckoffian Retest, using the 29.50 low as a tight selling guide.

 

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Lumentum Holdings (LITE) has been in a holding pattern as the alleged rescue of Chinese telecom firm ZTE has so far only produced a lot of lip-service, but nothing more. But here’s a radical thought, what if a ZTE rescue doesn’t matter? I’m beginning to think this might be the case as LITE holds very tight along its 50-dma, and closed today just above its 10-dma.

Volume picked up slightly today in a show of support at the 50-dma. It was clear, also, that sellers weren’t intent on dumping the stock early in the day since volume never got that high, ending the day at -59% below average. Thus, LITE posts another voodoo volume day at the 50-dma, where it remains buyable, using the 50-dma as a tight selling guide.

 

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Here comes Twilio (TWLO) on a potential test of its May 15th low and the 20-dema. Volume was heavy today, so it may push a little lower from here. Therefore, I would watch for a possible bounce off the 20-dema that perhaps coincides with an undercut & rally move back up through the May 15th low at 50.57.

 

GR052318-TWLO

 

Baozun (BZUN) pulled right into its prior base breakout point on Monday and held, holding tight yesterday during the market sell-off. It then bounced off the top of the base today and pushed to all-time highs. It is now extended, but is a good example of how one could have simply focused on the stock’s action alone yesterday as it held its prior breakout, buying the stock right there at the lower-risk entry spot.

 

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Will Alibaba (BABA) finally clear the $200 Century Mark on its third attempt in four months? While I’m not in the business of making such predictions, the stock did pull down closer to its 20-dema, which presented a more opportunistic entry point for those who were patient enough to wait for it.

In addition, BABA also pulled an undercut & rally move today, triggering it as a long set-up once it moved above the lowest low in its two-week consolidation just below the $200 Century Mark. That low was the May 11th low of 193.38, and BABA undercut that today on its test of the 20-dema and then closed above it at 196.80.

BABA is therefore actionable on the long side on the basis of the U&R trigger using the 193.38 price level, less than 2% away, as a tight selling guide. My view is that if the general market can break out to higher highs, BABA stands a very good chance of clearing the $200 Century Mark on its third attempt.

 

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Sunlands Online Education (STG) reported earnings Monday before the open and sold off before recovering to close back above its 20-dema. It then posted a pocket pivot yesterday off the 20-dema and up through the 10-dma. Today, STG pulled back into its 20-dema today as volume dried up to -73.2% below average. This puts it in a lower-risk entry position using the 20-dema as a tight selling guide.

 

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Notes on other Chinese names:

Autohome (ATHM) continues to hold tight along its 10-dma following its base breakout of two weeks ago. That breakout occurred right at the $100 Century Mark, and the stock closed today at 105.07, out of buying range. I would look for any pullbacks into the 20-dema at 101.20 as lower-risk entry opportunities.

Tal Education Group (TAL) moved to all-time highs today and remains quite extended. For now, it’s a matter of seeing where and how it might set up again, as it is now way above the 50-dma, where it was last buyable per my video report comments at that time.

Notes on other long ideas:

Carbonite (CARB) posted a higher closing high today, and remains extended. Look for pullbacks to the 20-dema, now at 33.93, as your most opportunistic entries, if you can get ‘em.

Intel (INTC) has continued to hold the 20-dema on pullbacks, such that it remains buyable on pullbacks to the 20-dema, now at 53.77.

Nutanix’s (NTNX) pulled into its 20-dema and held the line while at the same time undercutting and rallying back above its May 15th low of 55.59. However, the company is expected to report earnings tomorrow after the close, so I would wait to see if anything actionable transpires after earnings.

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.

So, the Fed released their latest meeting minutes and we find out that they consider monetary policy to be reaching a normal level. That was viewed as a dovish statement, and the market was sent rallying sharply back to the upside. But, as I noted in my weekend report, there’s a decent chance that a Ten-Year Treasury Yield above 3% may mean interest rates are at the top of the range, rather than setting up for a big upside leg.

Meanwhile, the gap-up moves on Monday and Tuesday, which I thought could be faded on the short side, worked out exactly as I figured they would. But once things settled down this morning, I saw a large number of stocks on my long watch list pull undercut & rally moves, or hold near-term support. And this is, after all, a swing-trader’s market, so the “piggy principle” had to be invoked this morning on that basis.

With the indexes turning here, and perhaps looking like they want to break out to higher highs, there are plenty of stocks sitting right at buyable spots on their charts. I think one could do quite well just focusing on the set-ups I’ve discussed in this report. This market hasn’t changed, in my view, and one is always well-served by focusing on the set-ups at hand, while maintaining an opportunistic approach on both sides.

Meanwhile, we may get a breakout to higher highs in the indexes following today’s reversal, so that is what I’m playing for now. Play ‘em as they lie!

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, LITE, SQ, 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. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.