The Gilmo Report

May 27, 2018

May 26, 2018

After a bullish recovery on Wednesday following the release of the latest Fed meeting minutes, the major indexes are all back to the top of their current two-week price ranges. The lone exception, of course, remains the small-cap Russell 2000. The main question for the market to answer currently is whether the other larger-cap indexes will soon join the Russell in new-high price ground.

That question doesn’t have to be answered immediately, since the non-Russell 2000 indexes could just continue to move tight sideways. In this spirit, the NASDAQ Composite Index spent Friday, just ahead of the three-day Memorial Day weekend, churning around in a tight range at the highs of its current two-week price range. Volume was understandably light.

Note that the action over the past two weeks has been relatively tight since the general market began gyrating in wide swings after the late January peak. But this tight sideways action could continue for a period of time before it resolves one way or another. Otherwise, the NASDAQ remains in a tight two-week range.

 

GR052718-$COMPQ

 

The S&P 500 Index is in a similar tight two-week price range, and Friday’s action looks a little more constructive since the index pulled back slightly on contracting volume. So far, it is holding up reasonably well along its 10-dma and 20-dema, despite the oil sector getting smashed on Friday as the price of crude oil plummeted from its recent highs.

 

GR052718-$SPX

 

Last weekend I wrote that while many pundits were making a big deal out of the new four-year highs in the 10-Year Treasury Yield, it could very well mark the top of the four-year range and therefore a near-term peak in interest rates. Since then, the $TNX has fallen sharply from its four-year range highs over the past week.

I still believe that with a massive and still growing amount of U.S. sovereign debt that the government must service, the Fed doesn’t have that much room to raise rates. An overly-aggressive rate of interest rate increases could easily be the pin that pops the massive debt bubble, bringing the markets down with it. It seems that the bond markets figured this out this past week.

 

GR052718-$TNX

 

So, if the Fed isn’t going to take the punchbowl away as quickly as investors thought they might, what does this mean for stocks? The answer to that question is, of course, only going to be found in the action of the stock themselves. In many cases, even though we’ve had some nice moves off the lows of earlier in the week, the action remains unresolved.

Aside from Netflix (NFLX), which I currently view as slightly extended from Wednesday’s pocket pivot breakout, most of the big-stock NASDAQ names are mimicking the sideways action of the indexes. Apple (AAPL) continues to consolidate its prior straight-up-from-the-bottom, or SUFB, breakout move in what can only be described as constructive fashion.

So far, however, no resolution in either direction has been forthcoming. For that reason, I would view pullbacks to the lower end of its two-week price range or the 20-dema as the preferred lower-risk entries. Otherwise, if one is confident of a move higher from current levels, buying along the 10-dma while using it as a tight selling guide would make sense.

 

GR052718-AAPL

 

Amazon.com (AMZN) is also moving tight sideways as it rises back up into re-breakout territory. In fact, the stock posted an all-time closing high today on weak volume. Nevertheless, pullbacks to the 10-dma, or even deeper to the 20-dema, would still represent the most logical entry opportunities from here. A new closing high on light volume isn’t exactly a roaringly bullish and buyable move, but the action remains mildly constructive as the stock merely continues to consolidate.

 

GR052718-AMZN

 

Facebook (FB) is also tracking tightly along its 10-dma as it consolidates a prior sharp move off the lows of its base. Volume dried up sharply today, but the stock closed just below the 10-dma. This puts the stock in a lower-risk entry position here at the line, using the 20-dema as a maximum selling guide.

 

GR052718-FB

 

While NFLX pulled off a nice re-breakout move this past week, Nvidia (NVDA) was unable to follow in its footsteps. Instead, the stock is looking a little wedgy here as it drifts back above its 10-dma on weak volume. Based on the prior failed breakout, this might be considered shortable IF the general market pulls back in the coming days.

 

GR052718-NVDA

 

All of these names above have the common feature of unresolved action. While NVDA looks like it could work out as a short, AAPL, AMZN, and FB are just moving sideways. And the odd thing about the action for nearly the past month is that it has all occurred on very light volume. I’m not sure if this is meaningful other than the fact that for now, the balance of very few buyers vs. very few sellers is tipped in favor of the buyers.

Meanwhile, a breakout in Netflix (NFLX), while buyable on the basis of Monday’s pocket pivot, is a breakout on only average volume. The day following the breakout day, volume did pick up to above-average levels, but the stock also stalled a bit off the peak. The same stalling action was seen on Friday on lighter volume.

I think NFLX stands a reasonable chance of retesting the breakout point. That’s what I would watch as a possible lower-risk entry opportunity, although keep in mind that the potential for another breakout failure is always present. For now, however, we’re just watching to see how any pullback to the breakout point transpires, and whether it becomes buyable as a constructive pullback.

 

GR052718-NFLX

 

Twitter (TWTR) is again stalling near its range highs in the 34 price area. Volume remains light as the stock forms the handle of a cup-with-handle formation. For now, any pullback into the 10-dma or 20-dema would be my preferred lower-risk entry opportunity.

 

GR052718-TWTR

 

Tesla (TSLA) is holding tight along the 279 price level and the bottom of its current seven-week price range. The undercut & rally move it pulled on Wednesday as it rallied back above the May 3rd low remains in force, using that 275.22 low as your selling guide. Since early April, the stock has been stuck in this price range. Despite several negative news items hitting the stock while it has trekked up and down within that range, it hasn’t come completely unglued.

Objectively, this is a U&R long set-up until further evidence proves otherwise. Such evidence would be provided in a failure to hold the 275.22 May 3rd low. Play it as it lies.

 

GR052718-TSLA

 

CSX Corp. (CSX) and Norfolk Southern (NSC) both remain near-term extended. Volume in each has been light as they have moved back up near their recent highs. I would therefore take an opportunistic approach and look for pullbacks to the 20-demas as lower-risk entries.

Intuitive Surgical (ISRG) is again back at its 20-dema, which is where you want to take shares if you’re interested in owning the stock. Volume dried up on Friday to -45% below average, so, on its face, the pullback was constructive and thus buyable, with the idea of using the 20-dema as your selling guide.

 

GR052718-ISRG

 

Square (SQ) remains within the handle area of a cup-with-handle formation. On Friday, it wedged up to the highs of the handle on weak volume and backed off, stalling to close near the lows of its daily price range. This is still working on its pattern, so the best route to take here is the opportunistic one. Waiting for pullbacks to the 20-dema and the lows of the handle would therefore be the lower-risk approach here.

 

GR052718-SQ

 

Nutanix (NTNX) reported earnings Thursday after the close. On Friday morning it immediately gapped down at the open, rallied back into positive territory, and then finally turned tail on a big, ugly outside reversal to the downside. Volume was huge as the stock closed below its 50-dma.

This can be viewed as a late-stage, failed-base, short-sale set-up, with any rallies up into the 50-dma serving as potential short-sale entry opportunities. However, I would not discount the possibility of another rally back up through the 50-dma and into the 20-dema, assuming it is able to regain the 50-dma. Otherwise, the 50-dma remains your first reference for a shortable, overhead resistance level.

The breakdown is not surprising given NTNX’s low-volume breakout in early May. That alone was suspect, and the final death knell came on Friday after the company missed on earnings. Kaboom.

 

GR052718-NTNX

 

Cyber-security names have remained an area of strength, and one that I identified several weeks ago in my reports. Since then, several have had decent upside moves. Among them, CyberArk Software (CYBR) remains near its highs since rallying off the 20-dema back in early April. That was where I first began discussing the stock.

It is now hanging along the 10-dema but not in a position that I would consider a perfect place to get big in the stock. For now, its ability to hold the 10-dma is constructive, but I’d look for opportunistic pullbacks to the rising 20-dema, now at 58.14, as the most desirable entries from here.

 

GR052718-CYBR

 

Fortinet (FTNT) has proven to be quite buyable along its 20-dema, and it proved that once again on Wednesday, as I noted in my report of that day. The stock has come a long way since its undercut & rally long set-up after earnings in early May. Wednesday’s low-volume pullback into the 20-dema was the most recent lower-risk entry opportunity, and the stock is back up near its early May highs.

On Thursday, FTNT accentuated those highs with a pocket pivot move to a new all-time closing high. It then held tight on Friday as volume dried up. In this position, and in this market environment, I consider the stock to be extended, and would remain a more opportunistic buyer on pullbacks to the 20-dema, now at 58.41.

 

GR052718-FTNT

 

Palo Alto Networks (PANW) finally cleared the $200 Century Mark with some authority this past week after a failed attempt in early May. At the time, however, I continued to advocate looking for pullbacks to the 20-dema as your lower-risk entry opportunities. The stock is now extended above the $200 Century Mark.

On Friday, PANW stalled at the highs on weak volume, and so may be in for a retest of the 200 price level. That is possible if profit-takers decide to come in and bank this move to new highs ahead of earnings, which are expected on June 4th.

 

GR052718-PANW

 

FireEye (FEYE) failed to hold its undercut & rally attempt of this past Friday, closing at 16.56, four cents below the 16.60 low of May 4th. That isn’t the end of the world, however, as U&R moves can take more than one attempt before working. Volume was also very light on Friday’s sell-off. Therefore, one can watch for any further attempts to clamber back above the 16.60 May 4th low as potentially actionable U&R set-ups, should they occur.

 

GR052718-FEYE

 

Sailpoint Technologies (SAIL) became buyable again after an undercut & rally move that cleared the 50-dma, as I noted in Wednesday’s report. I also declared the stock to be buyable at that point using the 50-dma as a tight selling guide, while noting that, “One might also wait for a low-volume retest of the 50-dma as a lower-risk entry opportunity, if you can get it.”

Thursday morning that retest occurred as the stock came down to its 50-dma and then bounced hard to post a big-volume pocket pivot. It then carried higher on Friday, and is now extended. Watch to see how the stock handles any pullbacks to the 20-dema at 23.37 as potential lower-risk entry opportunities.

 

GR052718-SAIL

 

Okta (OKTA) broke out to new highs on Friday on light volume. The stock remains extended ahead of earnings, which are expected on June 6th. Not much to do here unless one wants to bank profits ahead of earnings since the stock is now 32% above where it was when I first discussed it as buyable on April 10th.

DropBox (DBX) continues to tighten up along the lows of its current first IPO base. Volume dried up on Friday to -80.3% below average, its second-lowest daily volume level since the stock came public in late March. As I wrote on Wednesday, this pullback looks like a Wyckoffian Retest of the prior 29.50 low of May 15th.

 

GR052718-DBX

 

On the weekly chart, I note that weekly volume was far and away the lightest we’ve seen since the IPO date. This may indicate that a move back to the upside is imminent, but the alternative scenario is an undercut of the 29.50 low followed by an actionable U&R move back up through that low. This is still a fluid situation, but so far I think the base is setting up reasonably well.

 

GR052718-DBX Weekly

 

Lumentum Holdings (LITE) looked like it was headed for a pocket pivot off the 50-dma on Friday after the New York Times reported that the Trump Administration was set to announce a deal to rescue Chinese telecom company ZTE. (Please refer to recent reports for a more complete discussion of the relationship that LITE has to ZTE as a supplier of equipment it uses in its business.)

Despite the reports, the administration wasn’t willing to disclose anything concrete, and the pocket pivot attempt fizzled by the end of the day. Nevertheless, LITE remains in a tight holding pattern along its 50-dma, with volume again drying up on Friday, this time to -60% below average. Thus, it remains in a buyable position using the 50-dma as a selling guide.

 

GR052718-LITE

 

I like the action Twilio (TWLO) as it pulls a little Wyckoffian retest of its May 15th low. The stock hasn’t shown any willingness to pull down all the way back to its 20-dema, which is probably constructive. It is now sitting just below its 10-dma and holding tight as volume dried up to -40% below average.

However, I would still prefer to remain opportunistic here and look for any kind of pullback closer to the rising 20-dema which is currently down at 50.45. Otherwise, one can watch for a move back up through the 10-dma in the next few days, which might produce a possible pocket pivot at that point.

 

GR052718-TWLO

 

Alibaba (BABA) stalled again after an early attempt at clearing the $200 Century Mark price level on Friday. Volume came in above average, which makes the day a clear stall-out even though the stock posted its second pocket pivot off the 10-dma in the past two trading days. My thinking is that if BABA fails here on its third attempt at clearing the $200 price level in 2018, it may occur in conjunction with a general market pullback.

I can count six days over the past three weeks where the stock has bumped up against or cleared the $200 price level before stalling and closing lower in its price range. At some point, push will come to shove, and BABA will resolve in a more decisive manner. For now, this almost looks like something that should just be shorted at the 200 level whenever it hits or clears it.

That alone would have been good for numerous short-term short-sale scalps! For now, this action looks dicey, and BABA needs to clear the 200 price level and hold it if it is going to avoid morphing into a big short-sale target. For now, I suppose one can continue buying the stock along the 10-dma or 20-dema with the idea of using the 20-dema as a tight selling guide, but this remains a potentially two-sided situation that could resolve in either direction. Play it as it lies!

 

GR052718-BABA

 

Sunlands Online Education is showing absolutely no follow-through after Tuesday’s pocket pivot move off the 20-dema and through the 10-dma. Over the past two trading days it has drifted below the 20-dema and out of buying position. Perhaps the only good news on Friday was that the stock held tight as volume evaporated to 82.8% below average. A move back above the 20-dema would trigger a possible long entry, so watch for that.

 

GR052718-STG

 

Notes on other Chinese names:

Autohome (ATHM) has pulled right back to the top of its prior base at $100, closing Friday at 100.48. This brings it into a lower-risk buy position, but if it cannot hold the prior breakout point it could morph into a possible late-stage breakout failure.

Baozun (BZUN) remains extended after its prior base breakout after earnings as discussed in Wednesday’s report. Only a pullback below the 54 price level would bring the stock back into buyable range of the prior breakout.

Tal Education Group (TAL) is extended and remains one to watch for possible pullbacks to the 20-dema at 40.72 as more opportunistic entries.

Notes on other long ideas:

Carbonite (CARB) posted a new all-time closing high on Friday. It is now quite extended from the 29 price level, where I first discussed the stock as buyable back in early April. As of Friday’s close, it is now 28% higher from there.

Intel (INTC) posted a new closing high on Friday, but remains extended. Pullbacks to the 20-dema at 54.01 remain your references for 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.

After the move up from the early May lows, the indexes have been tracking sideways over the past two weeks. This index action has also been mimicked by many leading stocks. In cases where we saw strong price performance over this past week, such as with FTNT, the move was simply one that carried from the lows of a two-week price range back to the highs.

Better juice, at least for now, seems to be getting squeezed from those set-ups of the Ugly Duckling variety. For example, Roku (ROKU) has been a mainstay of the Gilmo Video Reports recently. After setting up along its moving averages, it finally had a big move on Friday, thanks to comments from the infamous short-seller, Andrew Left of Citron Research, saying that the firm was re-thinking their negative view of the company.

That was all it took to ignite the high short interest in the stock, sending it sharply higher on Friday on heavy volume. This also qualifies as a roundabout type of pocket pivot. The stock was best bought when I first identified it as a buy-it-when-it’s-quiet voodoo type of set-up along the 10-dma, 20-dema, and 50-dema two weeks ago.

This may still have legs, and I would watch for any pullback that retraces 50% of Friday’s move as a possible entry or re-entry opportunity. Friday’s move was a sharp one, and it may indicate that the stock has some legs here as it rounds out the lows of a possible new base.

 

GR052718-ROKU

 

Generally, if the market as a whole is going to move higher, I will almost always see some beaten-down leaders somewhere start to move up off the lows of potential new bases. ROKU would fit the bill, and I will discuss some more of these types of situations in my next video report, which I plan to post on Monday.

In the meantime, the market is still in something of a holding pattern, but so far one that looks constructive. Nevertheless, that doesn’t mean we can’t swing back and forth within this current two-week price range, and with the NASDAQ at the highs of its current price range, pullbacks, some perhaps news-related, might be expected here and there. At least until the current sideways action resolves itself.

In the meantime, it remains a matter of finding those actionable set-ups, both orthodox and of the more unorthodox Ugly Duckling variety, as a way of building some profit cushion ahead of any major advance. And, so, as always, my battle cry remains, “Play it as it lies!”

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.