The Gilmo Report

May 28, 2017

May 27, 2017

Skittish investors spent the morning on Friday clearing out ahead of the long Memorial Day Weekend. Once they got out of Dodge, as they say, the market then stabilized and drifted slightly higher, enabling the NASDAQ Composite Index to post a new closing high on Friday.

Volume came in lighter, giving the action the look of constructive consolidation following Thursday’s higher-volume breakout to all-time highs. The NASDAQ’s outperformance is being fueled by the continued movement into big-stock NASDAQ 100 names and other technology areas, such as clouds and telecom.

 

GR052817-$COMPQ

 

But the S&P 500 Index is doing its best to keep up as it also gapped up to all-time highs on Thursday on slightly lighter volume. On Friday, the index was able to push to an all-time closing high on even lighter volume ahead of the three-day holiday weekend.

From an index point of view the action remains bullish as the NASDAQ and the S&P 500 have logged seven straight up days since last Wednesday’s massive sell-off. As I wrote on Wednesday, the whole thing was looking like one big old “shakeout & breakout,” and by week’s end that was precisely what we got as the indexes broke out to new highs.

 

GR052817-$SPX

 

Many cite the divergence of the small-cap Russell 2000 Index as a troublesome sign, but let’s get real. When something looks negative in this market it tends to indicate that the Ugly Duckling is about to show up. And we can see from the chart below that the small-cap benchmark index is in position to launch off its 50-day moving average after regaining the line on Tuesday. So, the Russell’s current action helps to set up the potential for an upside move in small-caps as much as it is a negative for the market.

 

GR052817-$RUT

 

The key to the market, as always, is what is going on with individual leading stocks. For the most part, that looks very bullish. Applied Optoelectronics (AAOI), which can be seen as a newly emergent leader now that it has come out of a new base, continues to exemplify this constructive type of action among leading stocks.

After posting a big-volume pocket pivot on Monday, the stock pulled back into its 10-day moving average where it presented a lower-risk entry spot. This led to another pocket pivot at the 10-day line on Friday, sending the stock to all-time highs. So, your latest buy point came and went on Thursday when the stock kissed the 10-day line and then turned higher from there on Friday.

 

GR052817-AAOI

 

Lumentum Holdings (LITE) also acts coherently constructive as it also stair-steps its way higher. Wednesday’s “voodoo” pullback to the top of the prior base presented a lower-risk entry. The stock then continued to all-time closing highs on Friday as volume increased slightly.

I view the stock as technically extended here, but would view any pullbacks closer to the 10-day moving average and the top of the prior base as potential, lower-risk entry opportunities. As I wrote on Wednesday, I like the thematic story behind the stock based on the new 3-D sensing opportunity which helps to take the business beyond just the build-out of fiber-optic networks.

 

GR052817-LITE

 

In big-stock NASDAQ land, the charts continue to argue for further upside. After regaining its 20-day exponential moving average and holding tight along the line as volume dried up earlier in the week, Facebook (FB) is back near its prior highs. I had discussed on Wednesday that it “looks like it is prepping for a move back up toward its prior highs,” so that is no surprise.

After a strong upside move on Thursday, FB held tight on Friday as volume declined. This leads me to believe a breakout is likely in the next few days. For that reason, I still view the stock as buyable here using the 10-dma as a selling guide.

 

GR052817-FB

 

Netflix (NFLX) is a similar story, although the stock has already broken out to all-time highs. In my Wednesday report I noted that I considered the stock to be buyable at that time, using the 20-dema as a tight selling guide. However, on Thursday NFLX gapped up on a breakout on relatively heavy buying volume.

While the volume wasn’t high enough to call this a bona fide buyable gap-up (BGU), it was enough to qualify Thursday’s action as a pocket pivot breakout. On Friday, NFLX held very tight with volume declining, which in my view keeps the stock in a buyable position using the 160.55 intraday low of Thursday as a tight stop, or the 10-day moving average as a wider stop.

 

GR052817-NFLX

 

The action in FB and NFLX strikes me as indicative of further upside in these names that will in turn continue to drive the indexes, specifically the NASDAQ Composite, higher. Tesla (TSLA) also adds weight to this possibility as it moves back to its prior highs while posting a pocket pivot volume signature on Friday.

As I wrote on Wednesday, TSLA posted an undercut & rally buy set-up on that day as it came back up through the prior 305.31 low, and that this was buyable at that point. On Thursday, the stock opened down slightly and then turned higher, back up through the 310 price level and Wednesday’s close.

At that time, I tweeted that I was looking for a move back to the prior highs, and by Friday that is precisely what we got as TSLA printed 325.14, just eight cents below its prior all-time closing high of 325.22. It now lies within one percent of its all-time high of 327.66. Meanwhile, I was surprised to see that short interest increased between the end of April and May 15th, the most recent short-interest reporting date.

Any pullback from here that retraces 50% or more back toward the 10-day moving average at 312.93 would offer a lower-risk entry opportunity. However, the time to jump on the stock was Thursday morning per my discussion in the Wednesday mid-week report.

 

GR052817-TSLA

 

Notes on other big-stock NASDAQ names:

Apple (AAPL) is still hanging along its 10-day moving average, and looks very much like FB and NFLX before they moved higher on Thursday and Friday. While this could be considered to be in a buyable position, I prefer names like FB and NFLX as I tend to think AAPL is beginning to become stretched as a value play.

Alphabet (GOOGL) is a big-stock monster as it comes within less than 1% of the Millennium Mark. This is something that isn’t catching the attention of the financial media, probably because the stock has already gone through 1,000 previously in its lifetime. Nevertheless, it attests to the continued power of NASDAQ 100 names.

Amazon.com (AMZN) gets a bit more press as it pushes to within 1% of its own Millennium Mark. Pullbacks to the 10-day line at 969.88 might present lower-risk entry opportunities. It’s interesting to note the similarities in AMZN’s and GOOGL’s daily chart as they both push toward the $1,000 price level.

Nvidia (NVDA) finally met up with its 10-day moving average on Thursday, leading to a bounce to new highs on Friday as volume picked up to 16% above average. The move stalled as the stock closed mid-range, but I would remain patient here and let the stock perhaps take more time to set up again along the 10-day line as it is now extended from the line.

Snap (SNAP) gained some buying momentum on Thursday as it pushed above the 50-day moving average on a five-day pocket pivot signature. As I noted on Wednesday, the after-hours pullback down to about 20.20 on news of the company continuing to offer ad discounts through June was likely a buying opportunity, and that was the case as the stock blasted up through the 50-day line.

On Friday, SNAP pulled back into the 50-day line as volume declined to -42% below average, qualifying as a voodoo type of pullback. This puts the stock back in a lower-risk entry position, using the 10-day line at 20.55 as a selling guide.

 

GR052817-SNAP

 

Twitter (TWTR) found support at its 20-day exponential moving average after posting a voodoo pullback to the line on Thursday. Volume picked up slightly as the stock pushed up and off the line in a show of minor support.

This remains buyable here using the 20-dema as your selling guide. Note that after failing on a breakout attempt about two weeks ago, TWTR has fallen back down to the 20-dema in a “L” type of formation. This sets up the possibility of the “L” turning into a “U” as it potentially completes a “LUie” formation, which is a typical Ugly Duckling pattern we see in this current market.

While many evaluate names like FB, SNAP, and TWTR based on their current social-networking business models, there is one potential driver of future upside that some may be over-looking. And this is the fact that these companies are evolving beyond being just social-networking platforms and more into media platforms. This creates a certain dynamism among the group that can drive future price performance, and it should not be discounted, in my view.

 

GR052817-TWTR

 

Nutanix (NTNX) becomes a new bottom-fishing buyable gap-up (BFBGU) situation here as it gapped up sharply after reporting earnings on Thursday after the close. This is something I was watching for per my blog comments on the stock Wednesday evening in my “Odds and Ends” blog post.

While NTNX continues to lose money, investors were encouraged by the company’s addition of several big, new customers. The stock was already upgraded by Goldman Sachs (GS) earlier in the week with a price target of $33, and I would say that if the stock can hold the 19.00 intraday low of Friday it stands a reasonable chance of eventually getting there.

Note that the stock was able to hold above the 65-day exponential moving average, the thin black line on the chart, below. And while NTNX did stall a bit to close in the lower half of the gap-up price range, it remains viable as a BFBGU similar to TWTR following its own stalled BFBGU on April 26th. So, this is buyable here using the 19 price level as a tight stop.

 

GR052817-NTNX

 

Chinese names have lost some of their upside momentum, but for the most part this probably means they are taking a break as they set up for further upside. We can see this in the action of Alibaba (BABA), which remains a big-stock leader in the current market environment.

After the big undercut & rally shakeout after earnings two Thursdays ago, BABA is now sitting at the 10-day moving average as volume dries up. In my view, the prior massive-volume shakeout after earnings has likely taken out a large number of weak hands and brought in an equivalent number of strong hands. This then has the potential to set up further upside from here.

For that reason, I view the stock as buyable here using the 20-dema as a maximum downside selling guide. However, if my theory about a massive shakeout helping to clear the decks proves correct, so to speak, I would expect the stock to hold the 10-day line and move higher in short order.

 

GR052817-BABA

 

JD.com (JD), BABA’s smaller Chinese e-commerce cousin, which I don’t show here on a chart, is in a similar positon as it sits on its 10-day line with volume drying up. This sets the stock up as buyable, but without the massive shakeout that BABA had the prior week. Between, I would tend to favor BABA, although by stating this it probably ensures that JD moves first and higher! ;-p

Weibo (WB) has been holding in a somewhat choppy range since posting a buyable gap up (BGU) move two Tuesdays ago, and is now meeting up with its 10-day moving average. If one was wowed by the BGU move at that time, then buying here at the 10-day line is one way to enter the stock while keeping risk to a minimum by using the line as a tight selling guide.

WB’s Chinese internet content cousin, Momo (MOMO), not shown here on a chart, is faring less admirably as it has been hit with heavy selling after announcing earnings earlier this past week. The stock is, however, holding at the 50-day moving average, and did find some support at the line on Thursday.

For those of you who believe that the Ugly Duckling may come into play here, buying MOMO’s obviously ugly test of the 50-day line while using the line as a tight selling guide becomes a viable strategy. As well, we might keep in mind the potential for a “LUie” pattern to evolve here given the ugly breakdown off the peak following a now failed breakout to new highs two weeks ago.

 

GR052817-WB

 

Netease (NTES) looks to me like it’s just working its way up the right side of a new base as it tracks along the 10-day moving average. Volume dried up on Friday to -41% below average, and so I continued to view any small pullback toward the 10-day line as a lower-risk entry opportunity.

I also note strong action in some of the old guard Chinese internets as Sina (SINA) has surged in a big way over the past few weeks while the biggest of the big-stock Chinese internets, Baidu (BIDU), continues to set up in a long base extending back to late 2014. These are both names to add to your long watch list.

 

GR052817-NTES

 

Solars, which have been slowly getting up off their backs over the past several weeks, tend to flare up on the downside and then just as quickly flare out. But that only means that we should look to buy them on weakness while perhaps selling into strength IF we prefer to employ a swing-trading approach.

Here we can see that First Solar (FSLR) failed to follow through on Wednesday’s strong volume move to higher highs and has since pulled back into its 10-day moving average. Volume picked up to slightly above average on Friday, but I would still be alert to this as a possible lower-risk entry position. In this case the 10-day line at 36.69 would serve as a tight selling guide.

FSLR has come under selling pressure once before, notably during the big market sell-off two Wednesdays ago, but eventually recovered and moved higher. Therefore, since FSLR is an Ugly Duckling long candidate, it must be treated as such when trying to enter the stock on the long side.

 

GR052817-FSLR

 

SolarEdge Technologies (SEDG), not shown, is probably the most coherent of the three solar names I’m currently following on my Ugly Duckling Watch List. It is, however, somewhat extended currently but should be watched for more opportunistic entries, should they occur.

Sunpower (SPWR) is now pulling back toward its 10-day moving average after getting extended to the upside and beyond its 200-day moving average earlier in the week. Note that the 10-day line at 7.66 is now two cents above the 200-day line, so it serves as your first reference for support. On Tuesday, the stock posted a bottom-fishing pocket pivot (BFPP) coming up through the 200-day line, a typical Ugly Duckling long set-up.

So far this pullback is occurring in orderly fashion as volume declines. Volume levels got down to -30% below average on Friday, but this is not low enough to call a “voodoo” pullback just yet. Ideally, I’d like to see volume dry up a bit more as the stock gets a little closer to the 10-day/200-day moving average confluence.

 

GR052817-SPWR

 

SPWR’s solar panels have been shown by third-party studies to be the most efficient and durable currently on the market. Their X-Series panels have tested out to a “record-breaking” 22.8% efficiency and deliver 44% more power per solar panel. My guess is that the Trump Administration will move to protect the U.S. solar industry, and that is why the group is starting to edge higher. In the meantime, we can just play the stocks as they lie.

Western Digital (WDC) posted a pocket pivot on Wednesday as it moves to the top of its current base. As I wrote at the time, that was a buyable move using the 10-day moving average as a tight selling guide. The stock has since tracked tight sideways as it found support at the 10-day line on Friday with volume remaining low.

The action over the past two days following the pocket pivot looks like constructive consolidation off the rally off the 50-day moving average the week before. Thus, this looks to be setting up for a move to new highs and is therefore buyable here using the 10-day line as a selling guide.

 

GR052817-WDC

 

Notes on other long ideas discussed in recent reports.

Activision Blizzard (ATVI) was down on Friday as it comes off its recent highs. Watch for a pullback to the 10-day line as your first reference point for a buyable pullback.

Arista Networks (ANET) posted a pocket pivot off the 10-day line on Thursday and pulled right back to the line on Friday. Thus, this would be in a lower-risk entry position using the 10-day line as a tight selling guide. One could also use the 20-dema or 50-day lines as wider selling guides.

Cavium (CAVM) found support at the 10-day moving average on Friday. As I wrote on Wednesday, I like it on low-volume pullbacks to the 10-day line, even better if it pulls down to the 20-dema or 50-day moving average.

Citigroup (C) continues to base and is holding tight here as volume declined to -36% below average on Friday. Still buyable on pullbacks to the 10-day, 20-dema, or 50-day moving averages. However, it’s not clear to me that it can generate significant upside thrust unless we see some news regarding more banking deregulation and rolling back of Dodd-Frank from the Trump Administration.

Edwards Lifesciences (EW) is holding tight at its 10-day moving average as volume remains low. Therefore, it remains in a buyable position here using the 10-day line as a tight selling guide.

Electronic Arts (EA) is extended and should be watched for any pullbacks to the 10-day moving average as potentially lower-risk entries. Your best entry, however, was last week when it tested the prior BGU intraday low of 104.76.

Impinj (PI) is way extended and needs to settle into its 10-day or 20-day moving averages before I’d consider picking up shares again.

iRobot (IRBT) posted a new closing high on Friday and is still in an extended position. Like I wrote on Wednesday, optimally, I’d like to see a constructive pullback to the 20-dema as a lower-risk entry opportunity.

ServiceNow (NOW) was still within buyable range of the Century Mark, as of my last report on Wednesday, but it is now extended from the $300 price level at this point. So far it is acting in accordance with the expectations of Livermore’s Century Mark Rule on the long side as it pushed further above the 300 price level.

Square (SQ) is in no way extended from its 10-day moving average and now it’s just a matter of seeing how this pulls back and where it finds support whenever such a pullback occurs. So far the stock doesn’t seem to want to give up much as it is now up seven days in a row, right in step with the general market indexes.

Take-Two Interactive (TTWO) is yet another extended name on my buy watch list. At this point, we’re just waiting to see how this is able to set up in a new lower-risk entry position.

Veeva Systems (VEEV) gapped up on Friday after reporting earnings on Thursday after the close. The intraday low came in at 63.62, and VEEV closed at 66.82. It is now extended and should be watched for any constructive test of the 63.62 price level.

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).

It’s interesting, if not entertaining, to listen to the pundits continue to lament the fact that this market is due for a pullback. Well it was, I suppose, and it had one two Wednesday’s ago. And in this market, that’s all you get. In the end, it all comes down to what individual leading stocks are doing.

And all I see on the charts are a bunch of stocks that shook out weak hands two Wednesday’s ago and then set up on the long side once again. Many have also moved higher, such as AAOI, LITE, AMZN, NFLX, FB, and others. We’ve even seen previously dying big-stock NASDAQ names like PCLN bounce off its 50-day line and the top of its prior base and MSFT recover and move to new highs.

This all, of course, tells us that the Ugly Duckling is alive and well in this market, and some of your best opportunities occur when things appear to be their ugliest. Some say that this all argues for what is essentially market manipulation on a massive scale. Manipulation or not, the fact that we have a variety of Ugly Duckling set-ups at our disposal simply shows that we have adapted to such manipulation. Carry on.

 

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 positions in LITE, NTNX, SNAP, 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.