The Gilmo Report

May 29, 2016

May 28, 2016

The S&P 500 and the NASDAQ Composite Indexes spent Thursday consolidating in tight fashion after blasting through their 50-day moving averages on Tuesday and Wednesday. Both then proceeded to drift higher on Friday ahead of the three-day holiday weekend.

Despite claims that Friday would be a slow trading day as traders all headed for the Hamptons, NYSE volume actually came in higher compared to Thursday. The S&P 500 Index rode the increased volume to higher highs as the market easily stepped over any pre-holiday jitters. While traders were running off to the Hamptons (yours truly was obviously not one of them) sellers didn’t seem to be in a big hurry to run out of the market in the face of a long weekend. In the process the week ended on a positive note.

 

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The NASDAQ Composite Index also moved to higher highs on Friday, but volume lagged. The NASDAQ is obviously wedging higher as it approaches its prior April highs. However, within the context of the upcoming three-day weekend, it is not clear whether this is something to be concerned about.

 

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Getting bogged down in the minutiae of what the indexes do is not necessarily the most productive use of our time. Instead, and as I’ve discussed repeatedly, we are better off simply watching the individual stock set-ups, long and/or short, and operating on that basis. At the same time, the long side of the market continues to flourish relative to the short side. In this manner we are naturally pushed more towards the long side as the market rally looks to be improving under the hood.

Fed Chair Janet Yellen gave a speech at Harvard University on Friday that came off as more of an afternoon tea party. She had nothing new to say, and after a quick and relatively light shakeout just after mid-day the market caught a bid. Precious metals read Yellen’s comments as a continuation of the interest rate increase drumbeat and moved lower. We already saw the SPDR Gold Shares (GLD) violate its 50-day moving average earlier this week, and the iShares Silver Trust (SLV) did the same on Friday.

The SLV is now testing the top of its prior February-April price range. At this point one simply cannot buy precious metals on the basis of their price/volume action. The only way one could justify purchasing the GLD or the SLV now would have to be on the basis of a belief system that dictates the Fed will eventually abandon its talk of interest rate increases.

Since we don’t operate on the basis of belief systems, the precious metals have to be taken off the table until their price/volume action indicates otherwise. And as they continue lower, the precious metals stocks like Silver Wheaton (SLW) will likely follow suit.

 

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When it comes to individual stocks, I view the market as fairly ripe with opportunities if one knows where to look. The approach of looking to buy on weakness while selling into strength continues to have its appeal as one that allows for greater chances of success and profitability.

I tend to be a fan of extreme opportunism as one way of operating in this market. Seeking to take advantage of pullbacks to prior support, even when they look a bit ugly (can you say “Ugly Duckling?”), certainly helps keep risk in check vs. chasing strength. It can also result in gaining a more rapid edge as stocks often tend to rebound faster than they trend.

Sometimes opportunities can arise as a result of news. Alibaba (BABA) is an interesting example, but I would have to say I was on to it perhaps just a bit too early. On Wednesday, news of an SEC request for information regarding the company’s accounting practices sent the stock careening all the way down to its 200-day moving average.

Initially the news didn’t strike me as anything all that terrible since the SEC was simply issuing a request for information. It does this relatively frequently with a variety of different companies. I took a shot at the stock based on the action on the 620 chart early in the day, which yielded a small bit of upside before the trade was stopped out with a small profit.

As the day worn on, the selling kept raining down and the stock didn’t find any relief until it finally managed to bounce off of the 200-day line. At the same time, it undercut the early May low at 76.97. Interestingly, all this occurred one day after BABA had flashed a fairly strong pocket pivot on Tuesday.

The next day, on Thursday, BABA gapped back to the upside and regained the 50-day line where it held by the close. On Friday, the stock again held the 50-day line, where in my view it became buyable on the basis of the prior undercut of the early May low combined with a Wyckoffian “spring” and a dash of Livermore’s shakeout-plus-three.

 

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By the end of the day on Friday, BABA had closed roughly at the highs of Tuesday’s pocket pivot move on heavy buying volume. In fact, the buying on Thursday and Friday combined exceeded the selling volume on Wednesday. Of course, the risk of the SEC’s request for information developing into something more serious still exists. But the bottom line is that on a strictly price/volume basis the move constitutes a massive shakeout that was buyable at the 50-day line.

In this case, fortune favors the brave, but one also had to be alert and able to read what was going on in real-time in order to capitalize on this crazy action. Another example of fortune favoring the brave is seen in the example of Splunk (SPLK). The stock perfectly illustrates one facet of the overall process of looking for opportunities during earnings season.

While there are the usual buyable gap-ups and shortable gap-downs, there are also shortable gap-ups and buyable gap-downs. In this manner earnings season can treat us to a cornucopia of trading acronyms in BGU, SGD, BGD, and SGU. If that isn’t enough to get one’s trading blood boiling, I don’t know what is.

SPLK can be seen as a buyable gap-down following earnings, and I blogged right at the open on Friday morning that the drop was probably buyable based on a couple of simple factors. The first was that the stock had already had a decent upside price move before earnings, and the initial selling was likely “sell the news” type of stuff.

In fact, that turned out to be the case as SPLK rocketed off the early 52 intraday low and closed up about 8% higher from there at 56.34. In the process it also flashed a huge-volume pocket pivot off of the 200-day line. Obviously, this looks quite powerful, but one had to be privy to my blog post at the open to fully capitalize on the situation. In any case, it is a fantastic example of extreme opportunism in action.

 

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Facebook (FB) looks to be revving up for a breakout as it holds tight sideways after successfully testing and flirting with its 20-day moving average last week. Volume dried up sharply on Friday ahead of the long weekend. This looks quite buyable here using the 20-day line at 117.48 as a guide for a very tight stop. If that’s too tight for one’s tastes, then the 50-day moving average at 114.79 provides a reference point for a stop that is less than 5% from where FB closed on Friday.

 

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As FB moves tight sideways over the past four weeks, it starts to clear up some of the sloppiness in its weekly chart. The prior two bases have shown increased selling volume in the patterns but the stock has weathered these bouts of selling given that it has been able to break out since then.

 

GR052916-FB Weekly

 

I suppose the health of any rally can be measured to some degree by the health of its big-stock leaders. Amazon.com (AMZN) has proven itself to be resilient as one of these leaders as it holds along its 10-day moving average with volume drying up. Friday saw the stock pull in slightly on light volume, but I would view any low-volume pullback into the 10-day line at 704.12 as an opportune long entry point. One would then look to use either the $700 Century Mark or the rapidly rising 20-day line at 690.16 as a reasonably tight selling guide.

In AMZN’s case, however, I tend to think that the $700 Century Mark has proven to be somewhat meaningless. The stock has slipped back and forth along that price level a couple of times already, and overall the action has looked more constructive than not.

 

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We’re also seeing some big stocks that were former short-sale targets starting to spring back to life. As we know, this is often a sign that things are improving for the overall market environment. Alphabet (GOOGL) is one of these. The stock has flashed two pocket pivots coming up through the 200-day moving average and then the 50-day moving average over the past four trading days and appears to be gaining some momentum.

In this case, one can view the stock as buyable here using the 50-day line at 744.75 as a guide for a very tight downside stop. Worrying and speculating about whether the stock can hold the 50-day line is pointless. Simply play the price/volume action as you see it given that the set-up provides a very nearby reference point for a selling guide in the 50-day line.

 

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The rapidly improving tone of big-stock NASDAQ names can also be seen in another prior short-sale target, Microsoft (MSFT). The stock flashed a bottom-fishing pocket pivot (BFPP) coming up through the 200-day moving average on Tuesday of this past week. This is exactly the same as GOOGL’s pocket pivot on the same day, and brings up the possibility of MSFT pushing up through its 50-day moving average with another pocket pivot. If the general market rally continues, my guess is that it will.

Otherwise one could watch for a potential failure and reversal at the 50-day line as a short-sale opportunity. However, it could be asking for too much at this stage as big-stock NASDAQ names gain some momentum off of their recent lows.

 

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A case in point would be Netflix (NFLX) which has streaked higher over the past six trading days. Mid-way through this price move the stock flashed a bottom-fishing pocket pivot as it cleared the 50-day moving average on Tuesday. Talk of Apple (AAPL) looking to buy a media company like NFLX sent the stock higher on Thursday. It now sits just below its 200-day moving average and looks like it wants to flash another pocket pivot on a move back above that key moving average.

While the rumors of an AAPL for NFLX deal may not pan out, the stock shows no signs of reversing in fear of this potentiality. It held tight on Friday as volume dried up. It may be risky to buy the stock here, given that confirmation of AAPL buying another company could send the stock lower. However, it does illustrate how quickly these big-stock NASDAQ names are in fact springing back to life. This alone may be a constructive development for the market.

 

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LinkedIn (LNKD) is another potential big-stock leader that appears to be revving up for a move to higher highs. It in fact achieved a higher closing high on Friday, albeit on light volume. The stock has repeatedly tested the 131-132 price area over the past month where it has been turned back several times. I have treated this as a “lather, rinse, repeat” type of situation where I go long on the pullbacks into the 20-day moving average and then sell and/or go short at the 131-132 price level.

However, this may not go on forever, and if the general market continues to move higher then LNKD will likely follow suit. As I blogged on Thursday, this was buyable on the “voodoo” pullback to the 10-day moving average at that time, and I would continue to view such pullbacks as potentially buyable. Meanwhile the rapidly-rising 20-day line is now at 126.44, and this can serve as a second reference for buyable pullbacks as well as a potential selling guide if the stock fails for any reason.

 

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Tesla Motors (TSLA) was able to clear its 200-day moving average on Thursday, but volume was not sufficient for a pocket pivot. Nevertheless, it is sitting right on top of the line after pulling back Friday on lighter volume. This puts it in a lower-risk entry position using the 200-day line as a guide for a tight downside stop. In the meantime, we can watch for a pocket pivot to potentially develop at the 200-day line given the stock’s current position on the chart.

 

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The post-earnings gap-down move in SPLK early Friday morning also provided us with some opportunistic entry points in other cloud/enterprise software-related names. I noted this in my opening bell blog post, titled “Cloudy with a Chance of Meatballs.” The early weakness in cloud names did in fact provide traders with some meaty opportunities. Among these was ServiceNow (NOW) which dipped just below its 20-day moving average early in the day.

Volume was light, however, setting up an opportunistic entry on the pullback. By the close NOW was able to post a five-day pocket pivot at the 20-day and 10-day moving averages as volume picked up slightly. This has the look of slight support at the 20-day line. Combined with the two prior pocket pivots at the 20-day line over the past two weeks, the action looks constructive. NOW remains buyable on pullbacks into the 10-day or 20-day moving averages.

 

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Salesforce.com (CRM) has trended higher since its buyable gap-up move of last week but remains in an extended position. If you wanted to own CRM you had to do it when I discussed the stock last week as it held tight sideways following the BGU. With the 10-day moving average rapidly moving higher as it attempts to catch up to the current stock price, any pullback to the line can be viewed as a potential entry opportunity. Otherwise, if one is long the stock from the BGU then the 80.15 intraday low of that day remains your downside selling guide.

 

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After getting hit with some serious selling volume on Wednesday following Tuesday’s pocket pivot breakout, Citrix Systems (CTXS) was able to stabilize on Thursday. The stock held at the 10-day moving average as buying interest took hold and provided support at the line. Wednesday’s selling failed to drive the stock lower towards the 20-day moving average. The stock’s ability to stabilize rather quickly looks constructive. Pullbacks into the 10-day moving average at 83.66 can be viewed as potential lower-risk entry opportunities.

 

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The video-gamers continue to act well, but cannot be considered to be in optimal buy positions at the current time. Reviewing where they are on their weekly charts is useful here to get a sense of where the next big move might be. Activision (ATVI) in fact broke out of a cup-with-handle base four weeks ago, but this is somewhat misleading. While the weekly chart shows the breakout as a uniform upside move, the fact is that it occurred on a buyable gap-up. Thus anyone looking to buy that breakout as a standard base breakout would have considered it too extended to be buyable.

However, the stock gave investors a shot at buying the pullback over the next two days following the BGU, as I discussed in a blog post on May 10th. The stock has since progressed higher, kissing the $40 price level before reversing on Friday. Currently, ATVI is slightly extended, but pullbacks to the 10-day moving average at 38.54 would be your nearest entry opportunities. Otherwise, a deeper pullback down to the 20-day moving average at 37.58 would provide a much more opportunistic entry, which would be my preference.

Because we can see on the weekly chart that the stock has pushed up to the highs on the left side of the cup, some backing and filling would appear necessary and normal. This is why I would prefer to use the 20-day line as my reference point for any buyable pullbacks.

 

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Electronic Arts (EA) is in a similar position to ATVI on its weekly chart in the sense that it is up against the highs of a big base it has been working on since late October of last year. This has presented some near-term overhead resistance, but the stock has been steadily consolidating this as it forms a short two-week flag.

Like ATVI, it may need more time to consolidate as it works off some of this overhead resistance from the left side of its current chart pattern. Thus, while pullbacks to the 10-day line at 74.72 might present an opportunistic entry point, my preference would be to try and take advantage of a pullback to the 20-day line at 71.80 instead.

 

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Weibo (WB) has been the focus of much of my attention over this past week. It has been mentioned in two key blog posts as well as a long, detailed discussion in my Wednesday mid-week report. As I blogged on both Monday and again on Thursday, the stock was pulling into its 10-day moving average on light volume.

Monday’s action was classic “voodoo” type stuff where the stock held very tight right at the line as volume dried up to -50% below average. WB then attempted to clear the 24 price level on Wednesday only to pull back to the 10-day line once more on Thursday. And, as I blogged on Thursday, that low-volume pullback presented another entry point for the stock. Acting on that signal would have paid off handsomely on Friday as the stock jacked 8.3% higher on the day with volume picking up substantially.

Now this can be viewed as a standard-issue breakout from a short flag formation. WB closed Friday at 25.61, 3.3% above the 24.79 base breakout buy point. This means it is still within buyable range of the breakout point for those who like to buy those types of set-ups. My preference of course would have been to buy shares on the voodoo pullbacks earlier in the week. Other animals in the herd, can, of course, buy the breakout.

 

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WB might also be getting some help from the fact that Chinese names in general are showing some life lately. While BABA is one big-stock Chinese name that has acted well, in my mind the biggest of the big-stock names among Chinese stocks is Baidu (BIDU). BIDU is also more of a cousin-stock to WB as another Chinese name in the internet content/media industry group. BIDU posted a bottom-fishing pocket pivot on Friday as it pushed up through its 50-day moving average.

This can be considered buyable using the 50-day line at 182.01 as a guide for a tight downside stop.

 

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Yirendai Ltd. (YRD) might also be considered to have something in common with WB in that both are smaller Chinese names. I discussed YTD in last weekend’s report as it was sitting on top of the confluence of its 10-day, 20-day, and 50-day moving averages.

At the time, the stock had posted a single five-day pocket pivot at the moving average confluence. As members know, however, I want to see a cluster of five-day pocket pivots as an alternative to a single ten-day pocket pivot. In this case, one could have only bought YRD at the moving averages with the idea of using them as a guide for a tight downside stop.

With the stock about 40% higher over the past eight trading days ago and at the highs of its current two-month price range, we can consider it fairly extended right here. A nice pullback to the low 12 price area would probably be your best entry opportunity if you are interested in owning the stock. Otherwise, WB works just fine as a small Chinese “heater” that could potentially develop some further upside momentum in a continued market rally.

 

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CyberArk Software (CYBR) pulled back on Friday in sympathy to its cousin Palo Alto Networks (PANW). PANW cratered on Friday after announcing earnings on Thursday after the close. In response, CYBR dropped as low as its 10-day moving average at 42.76 before pushing back up to 43.83, just below the 200-day moving average at 42.90. Taking at least partial profits ahead of PANW’s earnings announcement would have been a smart move, putting one in the position of potentially buying back shares on the pullback to the 10-day line.

The action has the look of support at the 10-day line. Thus one could view this as potentially buyable using the line at 42.76 as a guide for a very tight downside stop.

 

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Fortinet (FTNT) acted almost identically to CYBR in response to the massacre in PANW shares. Volume ballooned as the stock found support at its 10-day moving average and closed near the peak of its daily trading range. The only difference between the two is that while CYBR closed seven cents below its 200-day moving average FTNT closed six cents above its own 200-day line. If we decided to split the difference we could simply say that both closed more or less at their 200-day moving averages.

Both stocks exhibit enough intraday volatility such that a dime or so of price movement is fairly negligible in the grand scheme of things. With FTNT, one can look to buy shares here using either the 10-day line at 33.59 or the 20-day line at 33.03 line as a guide for a tight downside stop.

 

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It was interesting to see that both CYBR and FTNT (you could throw FireEye (FEYE) in there as well) showed supporting action in the face of PANW’s decimation on Friday. While these stocks all recovered off of their early intraday lows, PANW continued streaking lower. It is now testing its prior May low which could set up some sort of undercut & rally move. This in turn might reinforce some upside impetus in CYBR, FTNT, and FEYE, but that is not entirely clear right now.

PANW looks more like a shortable gap-down in its current state. However, I would not be looking to short it here since it is in position for a possible undercut & rally move.

 

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Below are my current trading journal notes regarding other long ideas discussed in recent reports:

Fabrinet (FN) was buyable at its 20-day moving average on Wednesday as I discussed in my mid-week report, and the stock has since moved higher from there. Pullbacks into the 10-day line at 33.54 would present your best near-term, lower-risk entry opportunities.

Maxlinear (MXL) is slightly extended from its prior breakout point along the 19 price level. Would look at pullbacks to the top of the base at around 19 as the most opportunistic entries.

Mobileye (MBLY) flashed two pocket pivots at its 50-day moving average on Tuesday and Wednesday of this past week. Some of this may have been due to rumors of it being involved in some announcement between Uber and Toyota Motor Corp. (TMC). When none of that was confirmed, the stock broke back below the 50-day line on heavy selling volume, but regained the line again on Friday. The stock may still be viable as a roundabout type of play, with the idea of buying the stock here and using the 10-day moving average as a guide for a tight downside stop.

Silicon Motion (SIMO) moved to new highs on Friday as volume came in above average. This remains well-extended for now. It was last buyable seven trading days ago when it flashed a voodoo pullback to the 10-day line.

While we’ve seen some names like Carnival Cruise Lines (CCL) and Royal Caribbean Cruise Lines (RCL) come apart on the short side over the past couple of days, my general view is that the long side is the place to be focused currently. With a number of big-stock NASDAQ names coming back in strong fashion, there seems to be something of at least a near-term tidal shift of sort.

Even names like Apple (AAPL), not shown here on a chart, have persisted on the upside. And for all we know, AAPL may decide to move higher and flash its own pocket pivot coming up through its 50-day moving average this coming week. That might be something to watch for. The action of the dollar, precious metals, and bonds all seem to be arguing for a Fed rate increase when they meet in June. And the market does not seem to have a problem with that.

Certainly, I think we have enough to work with in terms of long ideas at the present time. As long as the S&P 500 and the NASDAQ Composite continue to hold their 50-day moving averages I don’t see a problem with the current rally, at least not at the present moment. In the meantime all we need do is go with the set-ups as they occur in real-time and play them as they lie, end of story.

 

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 BABA, FB, NOW, and SPLK, 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.