The Gilmo Report

May 6, 2018

May 6, 2018

News that iconic value investor Warren Buffett bought 75 million more shares of Apple (AAPL) sent the stock and the market pushing higher on Friday. This came on the heels of a big shakeout and reversal as the S&P 500 Index broke below its 200-dma, bringing on the consternation of market pundits who see the line as a critical level of support, but then reversed back to the upside to regain its 200-dma.

Today, the index pushed higher clearing its 10-dma and 20-dema but remaining well below its 50-dma. Volume was lighter. Technically, the index remains in a big, choppy range extending back to January, but things are starting to tighten up as all the moving averages start to converge. So, we might expect some sort of more pronounced resolution sooner rather than later.

 

GR050818-$SPX

 

AAPL’s breakout on Friday helped to power the NASDAQ Composite Index just beyond its 50-dma. The day before, on Thursday, the index took its cue from the S&P 500 which reversed at its 200-dma, to post its own reversal off the intraday lows on higher volume. The retaking of the 50-dma is constructive, except for the fact that it occurred on much lighter volume.

We’ll see whether this move has legs, and the 50-dma serves as a convenient reference for such legs. If it holds the line and moves higher, we could see a strong move back up toward the March highs. Otherwise, a breach of the 50-dma may be an indication of lower lows to come. As always, however, take your own cue from the action of individual stocks.

 

GR050818-$COMPQ

 

One such individual stock was Apple (AAPL). It’s Friday breakout built upon the gap-up move it had after earnings on Wednesday, sending the stock to new, all-time highs. As I discussed in Thursday night’s video report, the buyable gap-up type of move was holding up well and looked like it would go higher in concert with a general market rally.

The stock was also helped by the Buffett buying news, and for those who like to buy base breakouts, this one is still within buying range. It is, however, straight up from the bottom of the base, so not exactly a picture-perfect breakout. But, in this market it’s often the imperfect that works the most perfectly. Play it as it lies.

 

GR050818-AAPL

 

One trading characteristic that is in a sense de rigueur in this market is the need to be entirely flexible and open to incoming real-time information. Rigid bullish or bearish views are not useful, as I’ve noted many times. This was the case on Thursday, when I revised my view on stocks following the big shakeout we saw that day. This was conveyed to members in a timely fashion via Thursday night’s Gilmo Video Report.

Previously, I viewed Amazon.com (AMZN) as a two-side situation, but the pattern is starting to look more bullish. Note that it is holding tight along the lows of its prior buyable gap-up day’s price range. The low of that day was 1567.39 price level, and the stock has not moved more than 1.3% below that price level since the BGU day.

On Thursday, AMZN found support near its 10-dma, which was constructive, and remains in a sort of short handle to a cup-with-handle type of formation extending back to the first half of March. In my view, this looks buyable here, using the 10-dma as your selling guide as long as the general market is able to move higher from here.

 

GR050818-AMZN

 

Netflix (NFLX) also required a slight revision, although it was also something of a two-side situation, as the stock looked to be forming an “L” pattern that had at least a reasonable chance of evolving into a “U” formation, thus completing a “LUie” formation. In this market, it pays to mind your L’s and U’s so to speak, since what often looks like a bear flag is just a LUie in process.

After holding tight along its 10-dma, 20-dema, and 50-dma, NFLX posted a five-day pocket pivot on a move up through the 10-dma, which had previously served as near-term resistance. I noted in my Thursday video report that the stock looked buyable along the line, and on Friday morning gave buyers a convenient entry opportunity along the 50-dma before rebounding to a higher high. From here, watch for any retest of the 10-dma as a lower-risk entry opportunity.

 

GR050818-NFLX

 

Nvidia (NVDA) moved above its 50-dma on Friday, but the company is expected to report earnings on Thursday after the close. For now, the stock remains on earnings watch as we await earnings this week.

Intel (INTC) was discussed in my Thursday night video report as a name to watch following a failed breakout attempt the prior week. This may be another “LUie” formation in the making as the failed breakout followed by five days of tight sideways action creates an L-formation. Any pullbacks closer to the 10-dma, 20-dma, or even 50-dma present lower-risk entries while using the 50-dma as a tight selling guide.

 

GR050818-INTC

 

I see a lot of big-stock NASDAQ names looking like they are trying to set up here, and this is associated with a tightening up in the NASDAQ Composite and S&P 500 Index charts, as I noted above.  Even Cisco Systems (CSCO), which is expected to report earnings on May 16th, looks to be setting up in a cup-with-handle formation. Note the pocket pivot on Thursday followed by a move to higher highs on Friday.

 

GR050818-CSCO

 

So, is Facebook (FB) a long or a short here? So far it hasn’t progressed beyond the overhead resistance I’ve discussed in recent written and video reports, but at the same time it hasn’t broken below its 50-dma. In fact, it is doing a reasonable job of holding along the 200-dma as volume dries up sharply, down to -54% below average on Friday. It also traded up to a higher closing high.

I tend to think that FB will resolve with the market. If we see the NASDAQ fail at its 50-dma and head lower, FB will likely go with it, hence become a short-sale target. But if the index holds and we move higher, I would look for FB to potentially move back up closer to its prior highs in the 190 price area. So, what I’d look for here is any low-volume retest of the 200-dma, like we had on Friday, as a possible long entry.

 

GR050818-FB

 

In my Thursday night video report, I revised my views on Twitter (TWTR) to reflect the fact that the stock is holding up very tightly along its 10-dma and 20-dema. However, it does remain below its 50-dma, which sets up the possibility of a move back above the moving average if the NASDAQ is able to hold above its own 50-dma and continue higher from here.

In addition, as I noted Thursday night, TWTR is showing accelerating earnings and sales growth. Earnings growth, in particular, has gone from 0% four quarters ago to a strong triple-digit 129% in the most recent quarter. Therefore, one can make a bullish argument for the stock as long as it holds along its 10-dma and 20-dema. Of course, I’d like to see the stock regain its 50-dma in short order if we see the general market continue higher.

So, as I noted Thursday night, this can be viewed as being in a buyable position here with the idea that it will continue to hold the 10-dma and 20-dema, and soon regain its 50-dma as confirmation. I would also expect to see TWTR move higher if FB does the same, which remains a distinct “Ugly Duckling” possibility.

 

GR050818-TWTR

 

Tesla (TSLA) once again confounded late short-sellers who thought they were going to be able to pounce on the stock on Thursday morning’s gap-down open. That did not turn out to be the case, although alert traders who watched the stock in the after-hours on Wednesday following the company’s earnings report could have done very well shorting the stock above $300 and closer to the 50-dma.

But the next morning, TSLA gapped down hard, undercutting a prior late April low in the pattern. At that point, the Ugly Duckling appeared and the stock rallied on what was a not-so-unusual undercut & rally type of move that carried through Friday. The question I have is whether anyone but me saw this U&R occur in real-time and was open to actually buying TSLA at that point rather than trying to short it?

This attests to just how tricky this market can get at certain times, since it appeared that TSLA was headed for certain death on Thursday. If more shorts pounced on the stock Thursday morning, they are now being squeezed, and this could send shares pushing higher toward the 50-dma, maybe even beyond. My view is that if TSLA can hold the 20-dema and 10-dma here, then it may very well move higher and thus present a possible long trade from here.

 

GR050818-TSLA

 

Perhaps what amazes me most about TSLA is that the crowd knows very well about the company’s allegedly deteriorating finances. But the stock seems to know something else, at least on a short-term basis, and again, what did not kill TSLA may only make it stronger. There is always the risk that the company does indeed come out with another secondary stock or bond offering, so I tend to see TSLA as more of a great day-trading vehicle, which it certainly was on Thursday and Friday.

As a quick side note, both Cree (CREE) and Inphi (IPHI) were great shorts right after their earnings report-related gap-up moves, but in this case Cinderella only came to the ball once on IPHI and twice on CREE as both stocks are now stop-outs if one is trying to short them again. In this market, the short side is often fleeting, where good profits can be had. You either catch the fat downside move or you are left muddling around in the ensuing chop.

CSX Corp. (CSX) held the 20-dema on Thursday and rallied off the line on Friday, regaining the 59.19 intraday low of its buyable gap-up of over two weeks ago. As is usually the case in this market, the 20-dema tends to serve as a more solid line of support vs. the 10-dma, and this was the case with CSX on Thursday and Friday. Thursday’s move was also an undercut & rally back up through the prior low as shown in the chart below.

 

GR050818-CSX

 

Norfolk Southern (NSC) also found support around its 20-dema on Thursday, but in fact bounced off the 50-dma. As I noted in my Thursday night video report, this was a buy along the 20-dema, and the stock did pull into the line on Friday morning, giving buyers a shot if they chose to take it.

 

GR050818-NSC

 

Intuitive Surgical (ISRG) also once again became buyable at its 20-dema on Thursday, and it rebounded nicely to post a higher high on Friday. As I wrote in my Wednesday report, “I would only view it as a possible long on a constructive, low-volume retest of the 20-dema, such as we saw last week.” That’s what we saw on Thursday, and opportunistic buyers had their chance at buying the stock at that point.

 

GR050818-ISRG

 

Nutanix’s (NTNX) continues to drift higher following the prior weeks’ news regarding a delayed cloud product launch. Volume has been light on the move back up near the prior base highs, so may make the stock vulnerable to a pullback from here. Earnings are expected on May 24th, which is still more than two weeks ago.

 

GR050818-NTNX

 

The Ugly Duckling remains a potent force in this market, as we’ve already seen in several of the examples I’ve discussed so far in this report. To that list we can add Square (SQ), which looked to be blowing apart at the open on Thursday morning. But, lo and behold, the Ugly Duckling came a-calling and sent the stock back to the upside on a big-volume pocket pivot move.

Interestingly, Citron Research’s Andrew Left, who has been putting out numerous bearish comments on the stock all the way up, took a victory lap on CNBC Wednesday after the close, but that victory lap got shortened a bit by Thursday’s close. Now SQ is wedged between its 10-dma and its 50-dma, but I wouldn’t be averse to buying it here and then using the 10-dma as a selling guide.

Certainly, if the stock could convincingly regain its 50-dma then it could also be bought at that point. In that case we’d have a “moving-average undercut & rally” move in play where we simply use the 50-dma as a selling guide.

 

GR050818-SQ

 

Earnings season has helped to separate the proverbial wheat from the chaff as various names in the group have moved in different directions after reporting earnings. FireEye (FEYE) has come completely apart, for example, after reporting earnings Wednesday after the close. It is currently in no-man’s land as it plumbs lower lows.

CyberArk Software and Fortinet (FTNT) both reported earnings on Thursday after the close, and each stock had a different reaction. CYBR, not shown, spiked higher in a big pocket pivot move off the 10-dma, but is now quite extended. Meanwhile, FTNT looked like it might gap up in the morning based on its Thursday after-hours trade, but that was not the case.

FTNT opened down slightly and then broke sharply lower, dropping below its 50-dma on an intraday basis. It also undercut a prior low from late April and then rallied above that low. The earnings report was decent, so the question is whether, after a long run throughout February into mid-April, we’re just seeing some corrective action where the 50-dma serves as potential support.

One thing is clear, however, and that is that at least right now the FTNT has a U&R long set-up in force after undercutting and then rallying back up through the 54.26 prior low in the pattern. The stock closed 48 cents above that, or less than 1%, so the 54.26 price level would serve as a very tight selling guide if one wished to test that U&R on the long side.

 

GR050818-FTNT

 

Palo Alto Networks (PANW) is expected to report earnings at the end of the month, and it’s not clear if it will snap out of this very tight, constructive base it’s been stuck in since early April. Every time it has pulled into the 20-dema, as I’ve noted, it has been buyable, but the ensuing upside move doesn’t carry beyond the top of the current four-week price range.

As has been the case for the past month, the best way to handle PANW for now is to look at buying it on pullbacks to the 20-dema. Buyers had opportunities to do so on Thursday and Friday, so it remains a matter of taking an opportunistic approach with respect to where and when one should try and step into shares of PANW.

 

GR050818-PANW

 

I was surprised that the U.S. delegation, including Treasury Secretary Steve Mnuchin and Commerce Secretary Wilbur Ross, went to China and came back with little in the way of major announcements or pronouncements that were either positive or negative. Amid this trade war news vacuum, Alibaba (BABA) sprang back to life following a positive earnings report.

On Friday, BABA posted a big-volume roundabout pocket pivot move that carried well beyond its 50-dma in impressive fashion. I like this move, but one needed to catch it early on Friday. Interestingly, BABA served as a nice “hit and run” short-sale on Thursday when it reversed about 4 points from the 50-dma, but then turned with the market to close up on the day.

That was good for a quick short scalp, but as I noted earlier in this report, the short side of this market is often fleeting before a sharp reaction rally or otherwise takes place. I’d look for any pullback closer to the 50-dma in BABA as a lower-risk entry from here given the stock’s current extension from the line.

 

GR050818-BABA

 

Among other Chinese names acting well, Baozun (BZUN) continues to hold tight ahead of its expected May 14th earnings report. Autohome (ATHM) and 58.com (WUBA) are also acting well but are expected to report earnings within the next two weeks.

Meanwhile, Tal Education Group (TAL) reported earnings on April 26th, posting a 75% earnings increase on a 59% increase in sales. I see TAL as a cousin to our old friend, Rise Education (REDU), which is also basing ahead of its expected earnings report this coming week.

TAL has posted four five-day and ten-day pocket pivots in its pattern over the past month, and looks to be setting up nicely here along the confluence of its 10-dma, 20-dema, and 50-dma. So, I see this as buyable here (even better on any small pullback to the moving averages) using the recent lows along the 35 price level as your selling guide.

 

GR050818-TAL

 

Notes on other long ideas:

Carbonite (CARB) is now expected to report earnings Monday, May 7th after the close, according to the most recent release.

Planet Fitness (PLNT) is expected to report earnings this Tuesday, May 8th, based on updated information. The expected earnings date was previously reported as May 1st, which would have been Monday.

Sailpoint Technologies (SAIL) is expected to report earnings on Wednesday after the close.

Okta (OKTA) is currently extended, and was last buyable along the 10-dma and 20-dema per my prior reports. OKTA is to report earnings on June 6th.

Applied Materials (AMAT) has moved above its 200-dma and has posted two five-day pocket pivots off the 10-dma over the past two trading days. Best to leave this alone ahead of earnings, which are expected on May 17th.

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.

The action of individual stocks in this market remains our focal point, and the reality is that things have been shifting quite rapidly. Earlier in the week, and last week as well, the short side was very effective. That all came to an end Thursday morning when the market reversed from a nearly 400-point dive by the Dow.

That was accompanied by the S&P 500 Index undercutting its 200-dma, which I was looking for, at which point the bearish punditry spread like wildfire. And, as the crowd started to lean one way, the market decided to lean the other way.

A weak jobs number on Friday also got the market off to a weak start on Friday. But, the realization that a slow jobs number might keep the Fed from getting too aggressive slowed the selling and created some buying opportunities in names I discussed in my Thursday night video report.

The interesting fact is that while the individual stock action prior to Thursday and early Thursday morning was calling for a decidedly bearish approach on the ground, one had to be open to the change that occurred that morning as the market reversed. That is why in this market environment I NEVER take a rigidly bullish or bearish view, as I’ve emphasized repeatedly in my reports.

Usually, when the market is moving fast in one direction, my little trader’s antennae perk up and begin looking for signs of a turn. Is an index undercutting a key support level, thereby bringing out a contrarian preponderance of bearishness? Are investors getting too ebullient as stocks streak to new highs? Where are the U&Rs? Where are the reversals?

These are all questions, among others, that I am constantly asking myself in real-time. And, as I’ve said many times before, since late January this has mostly been a swing-trader’s market. But as the indexes begin to tighten up, could we soon see a better trending market develop? I’m seeing a number of stocks setting up currently, and I will cover more of this in my next video report. This leads me to believe we may indeed move higher from here, so I am prepared to play the long side here for as long as it lasts.

If we see the NASDAQ bust the 50-dma, then the situation may again change quickly, but this is typical for this market. On the other hand, if I want to stay bullish I need to see the NASDAQ hold the 50-dma, and the S&P 500 quickly regain its own 50-dma. I would also want to see the small-cap Russell 2000 Index, which is holding along its 50-dma, continue to do so, since it is also tightening up in what looks like constructive fashion.

 

GR050818-$RUT

 

In general, I would urge members to stay alert, and to seek to keep risk to a minimum by choosing the best, lower-risk entries when you get them. In addition, I would remain opportunistic. The market has been difficult these past few months, but I can remember difficult markets of the past that wear trend-followers out, only to suddenly begin a strong new trend just when everyone has given up on the market. Stay tuned!

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 INTC and TWTR, though positions are subject to change at any time and without notice.

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