The Gilmo Report

May 3, 2017

May 3, 2017

Earnings roulette season is in now in full swing, with the biggest of the big-stock tech juggernauts, Apple (AAPL), releasing earnings yesterday. Today, in after-hours trade we have heard from our friends Facebook (FB) and Tesla (TSLA), and both are trading down as I write this afternoon.

Adding to the excitement was the Fed’s monthly policy announcement, at least leading up to the 2:00 p.m. Eastern hour. But the actual Fed missive turned out to be anti-climactic as the Fed did nothing. In addition, there was nothing inspiring or disconcerting in their language, which contained the usual both-sides-of-the-mouth blather about an economy that is strong but not that strong while showing softness that may not stay soft.

As might be expected, the market didn’t react much, but the net result was still a gap-down distribution day for the NASDAQ Composite Index. To its credit, perhaps, the index was able to close off the lows of its daily trading range.

 

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The S&P 500 Index held its ground today after finding support at the 10-day moving average on higher trading volume. Currently the index appears to be consolidating near its prior March highs, which looks constructive. At first glance, it looks like the S&P is revving up for a breakout to new highs, but this will of course depend on what happens with the individual stocks.

 

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Apple (AAPL), not shown, reported earnings yesterday and beat estimates slightly, coming in with earnings of $2.10 vs. estimates of $2.01. iPhone sales came in somewhat weak, but the stock did not do much on the day, closing down all of 45 cents.

Facebook (FB) reported after the close, as I indicated earlier in this report, and as at the time of this writing is trading down slightly, although not by much. Tesla (TSLA) also reported after the close, and is also trading down in the after-hours. I don’t show charts of either since I don’t consider either one to be in a buyable position currently.

We’ll have to see what happens tomorrow, and whether the resulting gaps in whatever direction is taken will provide us with any long or short opportunities. Obviously, a breach of the $300 level by TSLA might bring it into play as a short-sale target at that point. FB, on the other hand, would need to bust its 20-day exponential moving average to be considered in failure-mode.

The stock that is up strongly in after-hours as I write is Square (SQ) which reported after the bell and handily beat earnings and revenue estimates. Currently the stock is trading above 19, which would indicate a gap-up at the open tomorrow. I would watch to see if a buyable gap-up move is generated at the bell as a potential entry opportunity on the long side tomorrow.

 

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The crowd perception currently seems to be that FB is eating Snap’s (SNAP) lunch as it brings on more subscribers to its Instagram app which is a direct competitor to the Snapchat app. So far, however, SNAP doesn’t seem to all that intimidated, at least from the stock’s point of view. Despite the potential for today’s FB earnings report to show that the company is losing share to its much larger social-networking sibling, the stock simply pulled into its 10-day and 20-day moving averages on the lightest daily volume in the pattern.

This puts the stock in a lower-risk entry position here using the lower 20-dema line as your selling guide. Of course, buying it here means you are either looking for a pop ahead of earnings, which are expected a week from today, or you plan on playing earnings roulette with the stock. Speaking for my own preference, I would prefer to buy the stock here and look for a nice pre-earnings pop as shorts decide to get out of the way rather than risk getting squeezed on an earnings surprise. That may be hoping for too much, perhaps, but all we can do is play it as lies.

 

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Over the weekend, and despite making money shorting Amazon.com (AMZN) into Friday’s gap-up open, I was careful to note that, “I would not rush to judgment and instead remain open to the stock potentially stabilizing and holding up as a BGU, should that be the case.” As it turned out, AMZN held the 924.33 intraday low of Friday on Monday’s open and turned robustly to the upside in short order.

From there the stock ran right back up to the prior highs around 950 and over the past two days has backed up slightly with volume declining. My preference would be to remain opportunistic here and look for a constructive pullback to the 10-day moving average as a lower-risk entry.

 

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Notes on other big-stock NASDAQ names:

Alphabet (GOOGL) has continued higher after last Friday’s post-earnings buyable gap-up move. The stock is out of buying range, but on Monday it did briefly dip below the 923.22 intraday low of Friday’s BGU before turning back to the upside. If one was alert to the turn on Monday morning that would have presented a lower-risk entry opportunity.

Netflix (NFLX) is holding tight and just within buying range of its recent base breakout up through the 148-149 price area. Ideally, the most opportunistic approach here would be to see if we don’t get a pullback to the rising 10-day line at 150.29 as a potentially lower-risk entry.

Nvidia (NVDA) is bouncing along the confluence of its 10-day, 20-day, and 50-day moving averages but going nowhere ahead of earnings, which are expected to be reported next Tuesday. For that reason, there is nothing to do with NVDA until earnings are out.

Priceline Group (PCLN) remains extended from its prior base breakout of eight trading days ago. Earnings are expected next Tuesday, so there is nothing to do with the stock until the earnings cat is out of the bag.

I stand corrected on the earnings report date for Alibaba (BABA), which I’ve been citing as May 4th. That is incorrect, and the actual, expected earnings report date is May 18th. That said, the stock, which I don’t show here on a chart, isn’t something I’d be looking to be in its current extended position ahead of earnings.

I should note that BABA did get hit with some selling volume today, but held its 10-day moving average, as did JD.com (JD).  JD, not shown, did hold above the 10-day line after dipping lower earlier in the day, but with earnings coming up next Tuesday there isn’t much to do with the stock ahead of earnings.

Momo (MOMO) was also tagged today for some downside action as it dipped just below its 10-day moving average. Selling volume increased on the day but still came in well below-average. This might be considered a lower-risk entry here using the 20-dema at 37.35 as a tight selling guide, but keep in mind that earnings are expected on May 16th.

 

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Weibo (WB) also got pushed back down to its 10-day moving average today as it came under selling pressure with the rest of the Chinese leaders. Volume was extremely light at -47.5% below average as the stock found support at the 10-day moving average. This would put the stock in a lower-risk entry position using the 10-day line as a tight selling guide. However, WB is expected to report earnings on May 10th, so you’d be looking for a pop back up toward the old February highs around the 57-58 price level ahead of earnings.

 

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Netease (NTES), not shown, is also expected to report earnings on May 10th, which is one week from today. The stock is bouncing along and just below the 10-day moving average in inconclusive fashion, so I don’t think there is anything to do here until after earnings are out.

Looking for fresh set-ups that might have significant upside potential is tough in this current market environment given how extended most leading stocks are. Whether ServiceNow (NOW) can buck this trend remains to be seen, but at least it is in a lower-risk entry position after breaking out on a buyable gap-up move after earnings last week.

Since then the stock has been tracking tight sideways with volume declining to -29.2% below average, not enough to call a “voodoo” volume signature. It is still, however, constructive within the context of the overall chart. Therefore, NOW remains in a very buyable position using the 93.30 intraday low of the BGU day as a tight selling guide.

 

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Over the weekend I discussed three fresh long ideas, Edwards Lifesciences (EW), iRobot (IRBT) and Vertex Pharmaceuticals (VRTX). At the time my stated preference was for IRBT, and as it turned out the stock has had a decent upside move so far this week. This came after a buyable gap-up last Wednesday, exactly one week ago, following earnings.

Generally, tight action after a buyable gap-up, particularly squeaky-tight action like we saw in IRBT over the weekend, is a good sign. At this point, however, the stock is extended, but perhaps provides some indication that there are some fresher ideas that can work in this market, at least on a short-term basis. We’ll see where this goes from here, and whether a new, lower-risk entry opportunity shows up again in the pattern.

 

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Both VRTX and EW are still holding tight and haven’t moved yet, but both remain in buyable positions. EW is holding squeaky-tight after posting a buyable gap-up last Wednesday, and today volume dried up to -53% below average. This puts it in a lower-risk entry position here, using the 106.74 intraday low of the BGU day as a reasonably tight selling guide.

 

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VRTX continues to hold tight along its rising 10-day moving average. Volume dried up today to -33% below average, just missing what I would consider to be “voodoo” volume levels.  Nevertheless, it remains in a buyable position here using the 10-day line as a tight selling guide, or the 20-day exponential moving average as a wider selling guide for those who prefer it.

 

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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, 20-day exponential, 50-day simple and 200-day simple moving average.

Notes on long ideas discussed in recent reports with expected earnings report dates, some of which have been corrected/updated:

Activision Blizzard (ATVI) is expected to report on tomorrow, May 4th.

Arista Networks (ANET) is expected to report on tomorrow, May 4th.

Caterpillar (CAT) has failed to hold the 102 intraday low of last week’s post-earnings buyable gap-up move. It is, however, testing its 10-day moving average, which may be more of an opportunistic entry given that the 10-day line is less than 2% away from the BGU intraday low at 102. Buying here would entail using the 10-day line as a tight selling guide.

Citigroup (C) is traded back above its 50-day moving average today, but volume was light. Currently it is not clear to me whether this is a long or a short. For that reason, at least until the situation clarifies itself, I choose to leave it alone.

CSX Corp. (CSX) has managed to drift higher after its post-earnings buyable gap-up move of two weeks ago, but volume has been declining as the stock has wedged higher. I consider this extended currently, and likely vulnerable to a pullback from here.

Electronic Arts (EA) is expected to report on May 9th, but can also be expected to react in sympathy to ATVI’s earnings reports tomorrow.

J.P. Morgan (JPM) is holding along its 10-day and 20-dema lines but is still trading below its 50-day moving average. As with C, it’s not clear to me what the stock’s next move will be, so I prefer to stand back and allow the situation to clarify itself.

Take-Two Interactive (TTWO) is not expected to report earnings until May 16th, but will likely react to tomorrow’s report from ATVI.

Veeva Systems (VEEV) is expected to report on May 25th but is currently extended from any kind of lower-risk entry point.

On the short side of the market, Applied Optoelectronics (AAOI) flipped back into a short-sale target yesterday when it busted the 50-day moving average. The optical names as a group have been buffeted about by news and various analysts panning the outlook for these stocks. AAOI has been no exception to this news effect.

In the process, it has formed a “fractal” head and shoulders formation, as I’ve outlined on the chart below. It will be interesting to see whether this pans out in bearish fashion over the next few days. And there will be a clear catalyst for some sort of resolution here tomorrow.

That would be because AAOI is expected to report earnings tomorrow after the bell, but the company already announced preliminary results back on April 13th. Whether any surprises show up in tomorrow’s reports remains to be seen, but I would simply stand back here and wait to see what sorts of opportunities, long or short, emerge once the earnings cat is out of the bag.

 

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When it comes to the short side, I’m always alert to opportunities that emerge on post-earnings gap-up moves. Sometimes these actually turn out to be long opportunities, but in some cases, if I can make a strong determination on an intraday basis, they can be executed as short-sale opportunities.

Case in point is First Solar (FSLR), which has been beaten into oblivion over the past year. Back in March of 2016 the stock was trading at 74.29 back in March 2016, and just five weeks ago hit a low of 25.56 before attempting to rally off this oversold condition.

This morning FSLR “surprised” on earnings and gave an allegedly upbeat outlook, but the reality is that earnings declined -87% quarter-over-quarter. I was skeptical at the outset, but let the stock rally as it cleared the 200-day moving average early in the day and hit a high of 36.27 within the first hour of trade.

Shortly thereafter the stock posted a MACD “stretch and cross” which prompted me to put out a short position. At that point I am not sure that the short will work, but once I short the stock on the basis of the MACD stretch and cross I will simply use the 36.27 high as my upside stop, no questions asked.

FSLR never got back above that price level, and instead flashed a confirming 620 sell signal at around 35 two hours later. The stock then kept declining, but not after a couple of short intraday bounces that remained well below my initial entry, and closed at 33.91. This looks like it has a good shot at moving lower from here, so for now I use the 200-day line at 34.96 as my trailing stop on the position.

Otherwise, weak rallies up into the 200-day line could offer lower-risk short entries. In my view, FSLR is no longer a growth stock, but a solar utility. And most utilities pay a dividend, which gives them some support at certain price levels, but in general utilities will rarely if ever sell for more than 20-times earnings.

FSLR sells at 37 times 2018 earnings estimates and pays no dividend. For that reason, I fail to see how the stock can hold this rally, but we shall see. For now, all I know is that the short trade is working until I am stopped out. My objective is a move back down to fill the gap near the 50-day line, or a stop-out at the 200-day line, end of story.

 

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In general, I consider it important to be aware of all the stocks that might be gapping one way or the other each morning after announcing earnings. This keeps one attuned to opportunities in either direction, depending on how the gaps play out.

(GRUB) is an example of a post-earnings gap-up that I will actually play both long and short, depending on the real-time evidence I see during the trading day. As I wrote over the weekend, I shorted the stock on Friday as it was streaking up through the 44 price level.

That move came the day after last Thursday’s buyable gap-up move, which was playable on the long side if one entered early in the day. From there GRUB continued higher and closed near the peak of its daily trading range. At the time, I figured it had a good shot at moving higher given the huge short interest (around 17 million shares) in the stock.

By Friday, however, it looked like most of the shorts had been squeezed out of the stock, and I came in on the short side based on what I was seeing on the 620 intraday chart, as I discussed in the weekend report. At that point I covered the position before the close, choosing not to hold the stock short over the weekend.

GRUB pulled back slightly on Monday, but yesterday turned back to the upside on above-average volume. Today the stock pushed right back up to the Friday intraday highs on very weak buying interest. Now my short-selling antennae are up as I look to see whether this rally gives way up near the 45 price level.

On Friday, the 620 chart started to show a sell signal around the 44.50 price level, but that did not hold as the stock turned back to the upside and closed at 44.89. I will, however, be watching GRUB closely on Monday for any kind of 620 sell signal that would bring me back into the stock on the short side.

 

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With FB and TSLA selling off after-hours as I write this afternoon, we can probably expect to see the market open down tomorrow. We did see today how a less-than-spectacular earnings report from AAPL affected the entire NASDAQ, which was down -0.37% with declining stocks trouncing advancers by 1802 to 1014. The NYSE showed similar negative breadth, with decliners exceeding advancers by 1736 to 1170.

Again, it is a matter of watching the stocks, and being aware of the set-ups showing up in real-time, long or short. Currently I am taking a bifurcated approach, and letting the set-ups come to me in either direction. I get the sense that things are weakening here, but not conclusively so.

For that reason, I say remain alert, watch your stocks closely, and have a game plan for whatever transpires tomorrow and in the coming days as we progress through earning season. That means having some idea of where your lower-risk entries are for favored long ideas, as well as a handful of short-sale targets for those of you who also like to operate on the short side when appropriate.

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 FSLR, 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. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.