The Gilmo Report

May 30, 2018

May 30, 2018

The futures were jacking higher Monday evening on news that the U.S.-North Korea summit was back on, and were near their highs when I posted my video report at that time. As I noted in that video report, I felt that the futures jack was something that could likely be faded (shorted into) at the open on Tuesday. Unfortunately, by Tuesday’s opening bell the futures had reversed sharply and the market opened down.

But, short-sellers were given a second chance as the indexes rallied back off their morning lows, closing in on the unchanged line before reversing hard to the downside once again. The Dow Jones Industrials Index led on the downside among the major market indexes with a -1.16% decline, but the broader NYSE Composite Index took the biggest hit, giving up -1.52% on the day.

That was all good for the tactical shorting opportunity I was looking for, even though it all didn’t transpire exactly the way I thought it would. This market remains something of a mosh pit, and sharp moves in one direction rarely see any continuity. News is often the culprit when it comes to market swings, and fears over Italy’s exit from the European Union helped to trigger yesterday’s sell-off.

But, as is often the case in this market, the sell-off turned out to be a short-lived affair. Of course, this was what I was looking for since, as I discussed in my video report and written report over the weekend, moves to the lows of the current price range would not be unexpected. In addition, the indexes found support off their lows yesterday, which was somewhat constructive.

True to form, the futures rallied overnight as European markets held their ground, and indexes opened to the upside this morning and just kept on going. The NASDAQ Composite Index posted a higher high in its quest to regain its prior all-time highs. Volume was lighter in comparison to yesterday, but note that it was higher than the upside volume we’ve seen in general over the past two weeks.

 

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The S&P 500 Index traded a bit looser than the NASDAQ yesterday as it sunk below the lows of its current two-week price range before finding support at the 50-dma. The successful test of the 50-dma was constructive, however, and the index gapped up and moved back up toward the highs of its current price range. I’m looking for a breakout here to confirm the breakout in the NASDAQ.

 

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Despite all the volatility, there are some decent trades to be had for those enterprising and opportunistic enough to make use of buy-it-when-its-quiet and undercut & rally types of long set-ups. It’s also useful to take advantage of pullbacks such as we had yesterday, even if one is also looking to work tactical, short-term short-sale trades. Let the volatility work for you, rather than trying to take a rigid bullish or bearish stance at all times.

Apple (AAPL) is getting quiet here as it tracks tightly along its 10-dma. This puts it in a lower-risk entry position using the 20-dema as your maximum selling guide. Obviously, any pullback down to the 20-dema would be even better, but with the NASDAQ breaking out the possibility of AAPL moving higher from here increases.

 

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Amazon.com (AMZN) keeps making all-time closing highs, but volume has remained quite low. Today the stock posted yet another all-time closing high as it edges up toward the 1638.10 intraday peak of its failed gap-up breakout attempt after earnings on April 27th.

Facebook (FB) rallied to a higher high today on light volume, but it was enough for its second five-day pocket pivot in a row at the 10-dma. The stock was in a buyable position at the 10-dma on Monday per my comments on the stock over the weekend.

Based on the pair of five-day pocket pivots, which is what I like to see in lieu of a single ten-day pocket pivot, the stock is within buying range using the 10-dma as a tight selling guide, or the 20-dema as a wider selling guide.

 

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Netflix (NFLX) posted an all-time closing high today on light volume. I consider the stock to be somewhat extended at this point for my tastes. I would prefer to see a pullback closer to the top of the prior base around 340 or to the 10-dma at 338.96 as a more opportunistic entry from here.

 

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Nvidia (NVDA) continued to drift higher above its 10-dma and is now nudging right up against its prior base breakout point. Perhaps this will act like AMZN and keep making higher highs on light volume. For this reason, as long as the NASDAQ holds today’s breakout to higher highs, this looks buyable here using the 10-dma at 247.27 as your selling guide.

 

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Tesla (TSLA) held up on the undercut & rally move I’ve been discussing in my last two reports and cleared its 50-dma today. Volume was higher, but below average. Nevertheless, the stock has the shorts on the run again, and if it can hold the 50-dma it may set up for more upside from here.

Therefore, I’d watch for volume to dry up here along the 50-dma with the idea of buying it here and then using the 50-dma as a tight selling guide. The stock has acted well since posting the U&R move last week along the lows of its current two-month price range, as I discussed in the past two reports. Shares were there for the taking down near the 280 level, and now we’ll see if the stock has any legs from here.

 

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Twitter (TWTR) ignored the market sell-off yesterday and posted a pocket pivot breakout on below-average volume. The move stalled somewhat as the weight of the general market sell-off took away some of the stock’s thunder. It then posted a higher closing high today on light volume. I favor this on pullbacks closer to the 10-dma, such as we saw yesterday, as it strikes me as slightly extended in this position. Nevertheless, the stock continues to act well.

 

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CSX Corp. (CSX) posted a continuation pocket pivot today at its 10-dma, but remains extended.  Norfolk Southern (NSC) pulled in today and came close to its 20-dema before finding support off the lows and closing mid-range. That would have represented a lower-risk entry position at that point.

 

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Flexibility is critical in figuring out how to take advantage of pullbacks in your favored stocks, especially when they fail to hold the first line of support. Yesterday, Intuitive Surgical (ISRG) gapped below the 20-dema, which would have thrown off anyone looking to buy the stock on a pullback to the 20-dema.

However, ISRG undercut last Wednesday’s low and rallied back above it on an intraday basis, triggering an undercut & rally (U&R) long set-up at that point. It followed that up with a stalling pocket pivot coming back up through the 20-dema that also closed above the 10-dma.

Overall, however, the stock remains within a small cup-with-handle type of formation extending back to mid-April. For that reason, I still view pullbacks to the 20-dema and/or the lows of the handle as your best, lower-risk entries.

 

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Square (SQ) broke out of its cup-with-handle formation today to post an all-time closing high. However, volume was light, so I would not chase this breakout. Instead, look for pullbacks closer to the 10-dma at 55.87 as lower-risk entry opportunities, if you can get ‘em.

Nutanix (NTNX) has rallied back above its 50-dma up into its 20-dema following last Friday’s massive-volume reversal after earnings. Obviously, this could turn out differently if the stock can quickly regain the 20-dema. Therefore, if one tests it as a short near the 20-dema, be prepared to stop out and possibly flip long if it can push above the 20-dema.

In this market, the unexpected often occurs, and in this case the last thing I’d expect from NTNX here would be a re-breakout attempt. However, there are ways to gauge this, and the first way would be a move above the 20-dema or a low-volume test of the 50-dma that holds. Play it as it lies.

 

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As I gloated in the last report, I pegged the cyber-security names as an area of potential leadership many weeks ago, and for the most part they haven’t disappointed. Today, CyberArk Software (CYBR) posted a continuation pocket pivot at its 10-dma as it posted an all-time high. I prefer buying the stock closer to the 10-dma, although one could add shares here and use the 10-dma as a selling guide for that portion of their position.

 

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Fortinet (FTNT) also posted an all-time high today but volume was light. I would lay back and look for pullbacks to the 10-dma, now at 59.48, as lower-risk entry opportunities from here.

Palo Alto Networks (PANW) is expected to report earnings next Monday, so there isn’t much to do here with the stock ahead of earnings. In the meantime, it is holding well above the $200 Century Mark around the 210 price level and acts well.

By now, most members understand that U&R long set-ups don’t always work the first time, or even the second time, and sometimes they don’t work at all. Persistence, alertness, and flexibility are critical traits for U&R players. Thus, we can again take a look at cyber-security name FireEye (FEYE) which is making its second attempt at clearing the prior 16.60 low of May 4th.

FEYE closed today at 16.65, a nickel above the low. That puts it in a U&R long set-up configuration, using the 16.60 low as a conveniently tight selling guide. With the rest of the group acting well, I’m willing to play this U&R since risk can be kept to a bare minimum based on today’s closing price.

 

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Sailpoint Technologies (SAIL) ran all the way back above the 26 price level after last being buyable along the 50-dma, per my report of last Wednesday. The stock is now extended, but serves as an excellent Ugly Duckling example of how a leading stock gets beaten down to the lows of its pattern and then rises out of the swamp back to new highs.

SAIL is also a notable example of how persistence is critical when making use of U&R long set-ups. Note that it had three, count ‘em three, U&R set-ups coming back up through the prior April 25th low before the fourth one worked, sending it back up to its prior highs. Now the stock is extended and only pullbacks to the 20-dema at 23.67 would offer lower-risk entries from here.

 

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Okta (OKTA) remains relentless as it posted another all-time high today and is now 41% above the point where I first discussed it as buyable back on April 10th. The company is expected to report earnings next Wednesday, June 6th.

DropBox (DBX) undercut two prior lows in its pattern yesterday and turned back to the upside, triggering an undercut & rally long set-up. The primary low I was looking at is the May 15th low at 29.50, and yesterday DBX pushed down as low as 29.41 before rallying back up through that low and last Wednesday’s 29.55 low.

Today, DBX posted a five-day pocket pivot as it pushed up through the 10-dma and 20-dema. It missed posting a standard ten-day pocket pivot by one single day. Based on the U&R set-up, which is clearly in play, that one day may not matter as the stock goes Code Blue on my indicator bars.

 

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Yesterday the Trump Administration announced 25% tariffs on $50 billion worth of Chinese goods and services, which most certainly put the kibosh on any rescue of destroyed Chinese telecom concern ZTE. U.S. suppliers to ZTE, which include Lumentum Holdings (LITE), have all been crushed on the news.

Today LITE busted its 50-dma on increased selling volume, but volume that was only average. The stock kept dropping all day until the last couple of hours when it finally showed a turn on the five-minute 620 chart that I use to time entries in stocks at possible inflection points.

After hitting a low of 59.20, LITE did turn back to the upside to close more than 1% off the lows at 59.90. LITE’s exposure to ZTE stems from its expected acquisition of Ocular (OCLR), which gets 30% of its business from ZTE. After the acquisition, assuming it goes through, LITE will have 10% of its business coming from ZTE.

Is this enough to kill LITE if the Trump Administration does not throw out some kind of lifeline to ZTE? I tend to think not, so I’m watching for a possible turnaround here in the coming days. Otherwise, a test of the 200-dma at 57.18 may be likely.

 

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Twilio (TWLO) has pushed back above its 10-dma, but just barely, and held tight at the line today as volume declined. Ideally, I’d love to see a pullback closer to the 20-dema at 51.09 as a more opportunistic entry if I can get it, but it could be considered buyable here along the 10-dma. However, one would then have to use the 10-dma as a selling guide in order to avoid getting caught in any downdraft that does in fact meet up with the 20-dema.

 

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Carbonite (CARB) posted another new all-time high today on a gap-up move. The stock is now going parabolic, and is now 33% above where I first discussed it down around 29 back in early April. Despite the choppy action, there have been some strong, trending stocks discussed in my reports, such as OKTA, for example. CARB is another one.

 

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While Baozun (BZUN) continues to post new highs, Gilmo members have not been left high and dry and without other Chinese names to buy in opportunistic entry spots ahead of a move. Today, Autohome (ATHM) blasted to new highs on a strong-volume pocket pivot breakout after presenting buyers with a lower-risk entry right at the top of its prior base.

That opportunity came amid a market sell-off and news that the Trump Administration was imposing 25% tariffs on $50 billion worth of Chinese goods and services, again raising the specter of a trade war after things were seen to have settled down last week. Of course, these tariffs have nothing to do with ATHM’s business, and so the stock just bounced off support at the top of the prior base and launched to new highs.

This is now extended such that pullbacks to the 10-dma at 104.03 would represent lower-risk entries from here. Otherwise, you had to be on the stock yesterday at the top of the prior base. As always, fortune favors the brave (and the opportunistic!).

 

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Alibaba (BABA) is doing its best to wear investors out after two more failed attempts to clear the $200 Century Mark this week. That makes eight failed attempts, but the good news is that the stock is still holding near-term support at the 10-dma. Volume also dried up today, so one must wonder whether investors are so worn out and disgusted with the stock that it will now finally clear the $200 price level and hold it.

The easy assessment here would be to simply conclude that the eight failed attempts to clear 200 mean the stock is a short right here, using the 200 price level as a guide for an upside stop. The alternative might be to view the stock’s persistence since it hasn’t failed outright as a positive, and the stock is just working through some overhead supply. Therefore, on that basis, one could take a long position in the stock here at the 10-dma, with the idea of bailing quickly if it fails to hold the line.

 

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In my video report of this past Monday evening, I noted that we wanted to keep an eye on Momo (MOMO), which was set to report earnings Tuesday morning before the open. The stock ended up gapping up at the open in response, opening up at 42.84, setting a low at 42.49, and then streaking higher from there on a buyable gap-up (BGU) move.

Today, MOMO pulled back in as it now tests that 42.49 BGU intraday low, closing today at 43.13. I’d watch this closely to see how well it holds that low, and whether a pullback closer to 42.49 presents another entry opportunity.

 

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Notes on other Chinese names:

Sunlands Online Education (STG) is drifting further below its 20-dema. Only a move back up through the 20-dema or an undercut & rally at the 9.15 low of May 21st would get me interested in the stock again. There are better Chinese names to play, in my view.

Tal Education Group (TAL) has pulled into its 10-dma, but I prefer pullbacks to the 20-dema as lower-risk entries given its current extended position.

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.

While the indexes have chopped around within their current two-week ranges, the action in individual stocks has presented many opportunities. With the NASDAQ breaking out to a higher high today, perhaps some of those will blossom into longer-trending moves.

Aside from what I’ve discussed in the written report, I’ve pegged many strong ideas in my video reports as well, including names like CROC, GRUB, PI, PRLB, RNG, and ROKU, among others. So, the objective evidence is that there are in fact many actionable long set-ups that have emerged in recent days, despite the volatility we’ve seen in the market indexes.

With the NASDAQ breaking out, I am now looking for the S&P 500 to do the same. If, instead, we see the NASDAQ fail on today’s breakout attempt, then we may have to take action as necessary. In the meantime, it is simply a matter of watching your stocks, and, as always playing them as they lie. 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 DBX, FEYE, LITE, and ROKU, 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.