The Gilmo Report

May 7, 2017

May 6, 2017

Friday’s jobs number came out and the market yawned. The Bureau of Labor Statistics reported 211,000 new non-farm payrolls for April along with a new decline in the unemployment rate to 4.4%. At first the market didn’t know what to make of the number, but after an initial but brief sell-down, the indexes caught some wind in their sails and closed higher across the board on lighter volume.

What I find so puzzling about the unemployment rate is the fact that in the “old days,” by which I mean the days before quantitative easing, “full employment” was defined as being in the range of a 5 to 5.5% unemployment rate. In the past, when the market was in rally phase and the unemployment rate approached these levels and we got a strong jobs number, the market would tank.

That was because it was viewed as a sign that things were heating up. Consequently, investors would fear that Fed would have to come in and hose everything down by raising rates. Today, the data come in very much like the Scarecrow in the Wizard of Oz as it often points in two directions at once.

And in those days, when unemployment was dropping like a rock, we were seeing 3-4% economic growth, at a minimum. These days, the great paradox is a 4.4% unemployment rate, well below what is alleged to represent full employment, occurring in conjunction with utterly picayune GDP growth of 0.7%.

But the rub here is that pondering this type of stuff is absolutely pointless. No doubt, one can get themselves rather worked up with disgust over the incongruity of low unemployment and weak GDP growth. But the bottom line is that it won’t make you money in stocks, period.

So, when I find my busy little brain wading through deep thoughts about the meaning of low unemployment and low GDP growth, I pull myself back to reality. Once I’ve calmed myself down, I begin repeating my favorite stock market mantra, “Just watch the stocks, ohm mani padme hum, just watch the stocks, ohm mani padme hum…”

The S&P 500 Index took the spotlight on Friday by pushing to an all-time closing high on light volume. Investors seemed to be sitting on their hands ahead of Sunday’s French elections. I wrote on Wednesday that the S&P looked like it might be revving up for a breakout, and so it was.

However, the breakout wasn’t accompanied by a big upside volume thrust, which is understandable given the big weekend news that will allegedly create a big move in the market one way or the other come Monday morning–. I might postulate that we get another reaction, which is perhaps none at all, but we’ll see. It still all comes down to what the stocks are doing.

 

GR050717-$SPX

 

Not to be outdone, the NASDAQ Composite Index posted a new all-time closing high on Friday on lighter volume ahead of the French election. As with the S&P, one might try to find reason to be concerned with the low-volume move to new high. My view, however, is that as long as leading stocks continue to hold up, and new ones join the bullish fray, all is well, at least for now.

 

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Earnings season always presents opportunities, often beyond the usual gap-up or gap-down stuff. In this current environment, we have seen the Ugly Duckling show his face several times after a big-stock NASDAQ name has sold off after earnings. Apple (AAPL), not shown, would be one case, as it sold off after earnings on Tuesday but found support at its 10-day moving average on Wednesday, and then posted a new all-time high on Friday.

Netflix (NFLX), as we know, sold off and violated its 50-day moving average after earnings on April 17th. It then undercut the 140 low in its prior base, turned, and rallied back to new all-time highs. Since that undercut & rally move on April 20th, NFLX rallied about 10%. Currently, pullbacks to the 10-day or 20-day moving averages would present the best, lower-risk entry opportunities, in my view.

 

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Tesla (TSLA) is another example of a post-earnings opportunity that occurred on an initially bearish-looking sell-off. But the Ugly Duckling considers a bearish-looking chart to be nothing less than a party invitation. And the more bearish, the better.

TSLA got slammed after earnings on heavy selling volume Thursday after reporting earnings after the close on Wednesday. But that big-volume break below the $300 Century Mark never got more than 3% through the mark. In fact, it undercut both the 295.30 low of April 13th and the 294.10 low of April 6th. I tweeted about this several times on Thursday as something to watch for, in fact.

TSLA pushed lower all day but finally closed Thursday at 295.46, above both the April 6th and 10th lows. That created an immediate undercut & rally long set-up. In addition, anyone who hit the stock short earlier in the day on the gap-down should have been prompted to cover their short on the basis of the U&R move. In any case, the U&R set-up was immediately buyable once it occurred, using the lowest low at 294.10 as your tight selling guide.

With TSLA back above the $300 price level and only about 2-3% above it, it remains in a buyable position using the Century Mark as a selling guide. TSLA still has huge short interest in it, to the tune of 31.2 million shares, and I wouldn’t be surprised if Thursday’s downside break sucked in a couple million more.

That won’t be known until the next short-interest numbers are reported.  For now, I’m long this thing watching to see if it can clear the 10-day moving average. This would be the next logical point of resistance now that it has cleared the $300 Century Mark and the 20-dema. If it can retake that, it may be off to the races again.

 

GR050717-TSLA

 

Facebook (FB), not shown, sold off slightly after reporting earnings Wednesday after the close, but so far has found support at its 10-day moving average. If you are jonesing to own the stock, then buying at the 10-day line is currently the lower-risk entry spot.

Nvidia (NVDA) is expected to report earnings next Tuesday, but it is sitting along the confluence of its 10-day, 20-day, and 50-day moving averages as volume dries up sharply. An opportunity might arise with the stock once earnings are out, so it will be one to watch closely on Tuesday after the close.

We can see that NVDA has spent many weeks (19, to be precise) chopping around in a big base. After a big prior upside run, spending this amount of time consolidating and base-building can be constructive. The base has three selling waves in it, with each wave creating a short-term undercut & rally move after undercutting a prior low in the pattern. Study the chart carefully, and you’ll see what I’m talking about.

Thus, NVDA may very well be in position for a breakout as much as a breakdown after earnings. Or, in similar fashion to NFLX and TSLA, perhaps an undercut & rally long set-up following an initial downside reaction after earnings. Who knows? But regardless of what happens after earnings, we have the tools and methods to deal with it.

 

GR050717-NVDA

 

Notes on other big-stock NASDAQ names:

Alphabet (GOOGL) is extended from the prior week’s buyable gap-up move. Pullbacks to the 10-day line at 919.62 would present your next lower-risk entry opportunities.

Amazon.com (AMZN) is drifting into its 10-day moving average at 927.56, which puts it closer to a lower-risk entry spot following its post-earnings buyable gap-up of two Fridays ago.

Priceline Group (PCLN) is still extended with earnings expected next Tuesday.

As expected, Square (SQ) gapped up on Thursday after a strong earnings report on Wednesday evening. The stock opened at 19.23 on a buyable gap-up (BGU) move and kept running all morning until it hit an intraday peak of 20.42. From there it slid back to the downside, finally ending the day in the upper part of its gap-up trading range at 19.90.

On Friday SQ pulled back again, but held well above the 19.18 intraday low of Thursday’s BGU. After posting a low of 19.35, the stock turned back to the upside to close relatively tight on declining volume. With volume still coming in at above-average, Friday’s action can also be interpreted as supporting action off the intraday lows.

 

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Snap (SNAP) posted a pocket pivot on Thursday as it launched off the confluence of its 10-day and 20-day moving averages. The move was looking like a clean trendline breakout early in the day, but the stock began to fade and closed closer to the mid-point of its daily trading range.

On balance, the move did provide a nice swing-trade, which is something I noted we would be looking for if we bought the stock Thursday on the basis of Wednesday’s voodoo pullback into the 10-day and 20-day lines. That lower-risk entry opportunity produced a nice upside move in the stock that featured a pocket pivot on Thursday followed by a trendline breakout on a pocket pivot volume signature on Friday.

This is all very interesting action considering that SNAP is expected to report earnings Wednesday after the close. SNAP is widely scorned by the pundits and the analysts alike, which perhaps means it will gap up after earnings. Speaking for myself, I am long the stock here and looking for a push up to 25 before earnings, if I can get it. However, whether I will want to hold anything but a very small position into earnings remains an open question, and I’ll make a final decision on Wednesday before the closing bell.

 

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With all of my favored Chinese names set to report earnings soon, there isn’t much to do with any of them. This includes Alibaba (BABA), which is expected to report on May 18th, JD.com (JD), which is expected to report this Tuesday, Weibo (WB), which is expected to report this Thursday, and Momo (MOMO), which is expected to report on May 16th.

All three stocks, none of which I show here on charts, continue to act well, with JD and WB both posting pocket pivots at their respective 10-day moving averages on Friday. But with earnings coming up on Tuesday and Thursday, respectively, it’s not clear that I’d want to act on these buy signals. I would prefer to see what the stocks do after earnings, and whether an actionable opportunity emerges at that point.

Netease (NTES) is the fifth name in the Gilmo China Five, but currently has been relegated to the doggie pile. It is expected to report earnings on Thursday, and it will be interesting to see what the stock can pull off after the earnings cat is out of the bag.

The stock has worked as a short-sale target over the past month or so, but we can see that it may very well be trying to round out a new base. On Friday, the stock undercut the 261.31 low from the previous Friday, and rallied back above the low on an undercut & rally move. Volume was higher, and gave the impression of supporting action off the intraday lows. This is another one to watch closely when it reports this coming week.

 

GR050717-NTES

 

ServiceNow (NOW) was in a lower-risk entry position on Wednesday, as I discussed in my Wednesday mid-week report based on the low-volume pullback within the tight four-day bull flag. This action came on the heels of a buyable gap-up (BGU) move two Thursdays ago. Over the past two days since, NOW has pushed to new highs as it approaches the $100 Century Mark. If it can clear the 100 price level at some point over the next few days, that would trigger a new entry point using Jesse Livermore’s Century Mark Rule on the long side.

 

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Applied Optoelectronics (AAOI) morphed back into a long after reporting earnings on Thursday after the close. The stock initially gapped up to 51.53 at the opening bell, printed a high of 52.34, and then promptly headed back below its 50-day moving average. At that point the stock was looking like it was headed back into short-sale target land.

But AAOI flashed a 620 buy signal a little over an hour after the market open, and just kept going higher from there. Anyone alert to the move could have taken a long position at that point. Remember that I was very clear in my Wednesday mid-week report about standing back and waiting “to see what sorts of opportunities, long or short, emerge once the earnings cat is out of the bag.”

By the close on Friday AAOI printed 55.96, up 9.15, or 19.55% on the day. Now THAT’S a spicy meatball! With the stock approaching its all-time highs around 60, it could pull back here in the next day or two. I would watch for a 50% retracement of the move above the 50-day moving average down to 52-53 as a lower-risk entry, using the 50-day line as a selling guide.

If you were going to catch a ride on AAOI, however, the time to do it was Friday morning. After the initial reversal after the open, that might have been hard to do. But simply going with what you see on the 620 five-minute intraday chart once it shows you a buy signal can help take any emotion out of the equation as you close your eyes and pull the trigger.

In a case like this, once you see the 620 buy signal, you can then simply operate on the basis of using a 620 sell signal as a downside stop. While the action in AAOI on Friday was wild, the prescribed approach on the long side was actually quite concrete.

 

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Arista Networks (ANET) reported earnings on Thursday after the close and opened at 138.95 on Friday, roughly flat to slightly down. The stock quickly rallied to a high of 144.31 within the first five minutes of trade. From there it was straight down over the next hour of trade before the stock bottomed out at 135.21.

That’s some wild action to start the day off, and looked fairly bearish at the outset. But as they say on the infomercials, “But wait! There’s more!” After printing a low at 135.21, ANET posted a MACD stretch and cross to the upside at the 138 price level within about 20 minutes and turned back to the upside. 40 minutes later it posted a 620 buy signal at around 140.77 and continued moving higher from there to close at 144.72.

Another nutty move in another telecom-related stock like AAOI that presented a quick short and then long opportunity during a single day on Friday. The closing action posts as a big pocket pivot and outside reversal to the upside coming up through the 10-day moving average on huge volume. While it would be optimal to enter the stock as close to the 10-day line at 140.50 as possible, the stock is within buying range of Friday’s pocket pivot, using the 10-day line as your selling guide. Wild!

 

GR050717-ANET

 

As of late, bio-techs don’t seem to be getting much respect. Back in January I first discussed CLVS, GKOS, and INCY (the bio-tech “Three Musketeers” as I dubbed them) as strong buys that moved significantly higher from that point. But all three topped in March and have since proceeded to make lower lows. Three more arguments for knowing when to sell and take profits in this market.

Last weekend I discussed Vertex Pharmaceuticals (VRTX) as a new potential buy in the bio-tech space, but so far the stock is acting “doggily,” if I may make up a new stock market term. The stock failed to hold the 10-day moving average on Thursday, and on Friday broke down to the 20-day exponential line on higher and above-average trading volume.

As our new President might tweet, “Not good!” the only constructive thing about the pattern right now is that the stock is still holding above the 20-dema, but only by one thin dime. That could change quickly in the next day or two. We’ll see how this acts over the next few days, but for now this is on the danger list.

 

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I blogged earlier this past week on Wednesday that Cavium (CAVM) was setting up as a possible Ugly Duckling situation. The stock’s action since reporting earnings on April 26th after the close is quite interesting. Like a few other names discussed in this report CAVM had a big outside reversal to the upside the day after reporting earnings.

This resulted in a big-volume base breakout, but the very next day the stock came completely unglued as it slashed back below the 50-day moving average on heavy selling volume. Talk about schizoid action. But where there is bizarre, bearish action, there is opportunity if one invokes the spirit of the Ugly Duckling.

As I blogged on Wednesday, CAVM looked buyable in the low 68 price area where it was holding right at the 65-day exponential moving average (not shown on the chart) with volume drying up that morning. To me, that was a classic Ugly Duckling long entry point, and by the close CAVM was making a run for the 50-day moving average.

On Thursday CAVM cleared the 50-day line for a moving average undercut & rally move (MAU&R). Friday the stock held tight along the 50-day line as volume dried up to -46% below average, qualifying as a voodoo action along the 50-day line. This puts the stock in a buyable position using the 50-day line as a tight selling guide.

 

GR050717-CAVM

 

In my Wednesday, mid-week report I discussed my short-sale operations in First Solar (FSLR) on that day, which were profitable as the stock reversed at the 200-day moving average after gapping up at the open. As I blogged on Friday, however, I noted that the stock was finding a bid under the 34 price level, which I could feel as a result of being short the stock at that point.

That “feel” got me to cover my short and then reverse to the long side of the stock as it pushed back up toward its 200-day moving average. Despite whatever fundamental theories I might have about a stock, the bottom line for me is to always move with the technical action. Theories are theories, but price/volume action, at least to me, is real and incontrovertible.

So, from a strictly technical perspective we can see on the chart below that FSLR posted a bottom-fishing buyable gap-up (BFBGU) move on heavy buying volume. That was followed by tight action on Thursday and Friday, with the 200-day line serving as near-term resistance so far. What I would be watching for here is a move up through the 200-day line to confirm the constructive, tight action we are seeing following Wednesday’s BFBGU. Volume has dried up as the stock has closed relatively tight for two days in a row, setting up a possible upside move from here.

As I discussed in a blog post on Friday, FSLR is awaiting the outcome of a petition filed by bankrupt solar company Suniva asking the Trump Administration to impose tariffs on imported solar cells. This may have some effect on the price depending on whether the petition is granted or denied, even though FSLR did not file the petition. Keep this in the back of your head, but for now the price/volume action in FSLR seems to imply that higher prices are coming. Meanwhile I am trying to find out when a final decision is scheduled for Surviva’s petition. Play it as it lies!

 

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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:

Activision Blizzard (ATVI) reported earnings on Thursday but is currently not in a lower-risk buy position. Looking for some sort of set-up to develop along the 10-day or 20-dema lines.

Citigroup (C) is holding along its 50-day moving average with volume declining. This is not a short, but could be a long using the 50-day line at 60.24 as a tight selling guide. The outcome of the French elections may give the Fed a green light for a June rate hike, which will be positive for financials.

CSX Corp. (CSX) posted a new high on Friday, but is best bought on pullbacks to the 10-day line at 51.27.

Edwards Lifesciences (EW) remains in a squeaky-tight flag formation, now seven days in duration, since posting a buyable gap-up move on April 26th after earnings. This remains in a buyable position using the BGU intraday low at 106.74 as a maximum downside selling guide.

Electronic Arts (EA) is expected to report earnings this coming Tuesday, May 9th.

iRobot (IRBT) remains extended from its prior buyable gap-up. Watch for pullbacks to the 10-day line as potential lower-risk entry opportunities.

J.P. Morgan (JPM) is still holding along its 10-day and 20-dema lines but below its 50-day line with volume drying up. The situation here is the same as with C. A “favorable” French election outcome may be perceived as a green light for the Fed to raise in June, sending the stock higher. The low volume, tight action along the 20-dema does put the stock in a lower-risk entry position.

Take-Two Interactive (TTWO) moved to new highs on Friday on a pocket pivot off the 10-day moving average. This is constructive action, but keep in mind that the company is expected to report earnings on May 16th.

Veeva Systems (VEEV) is expected to report on May 25th and is holding tight along its 10-day moving average. It missed posting a pocket pivot on Friday by one day’s worth of volume.

On the short side, GrubHub (GRUB), not shown, isn’t acting like a short at all. After gapping up on a strong earnings report on April 27th, the stock has continued to move higher. I did tweet on Thursday that my feel for the stock indicated that it was likely to move higher, and for that reason I was flipping long and going with the flow. For now this is best left alone until further notice.

There have been a lot of stocks flying higher after earnings, including names like MELI, OLED, CTRL, PI, MTZ, SWIR, Z, and others that launched on Friday. This sets a positive underlying tone for the market, and likely bodes well for more upside, the weekend elections in France notwithstanding.

This report was written before the Sunday elections in France, and much has been said about how critical this election is for the survival of the European Union. That’s what was said about the Brexit vote last year, and after an initial sell-off that whole thing just turned into a big buying opportunity, as I thought it would per my blog posts back then. If we get a sell-off on an “unfavorable” Marie Le Pen victory, that too may be nothing more than a buying opportunity.

But then, a Trump victory was supposedly unfavorable for the market, and after a limit-down futures sell-off the night of the election, the market immediately righted itself and took off on a mad rally that continues today. If I had to guess, the French will elect Emmanuel Macron, and the market will then do what it really wants to do. If that means it wants to launch higher, so be it.

Ultimately all we can do is go with what the individual stocks are telling us. In the face of allegedly critical and crucial uncertainty over the weekend, the market chose to rally, and a broad swath of leading stocks jammed higher. And while the index volume was light, the volume in stocks that were moving higher on Friday was heavy. That’s all I need to know.

Meanwhile, the pundits tell us that the market is overvalued and in need of a pullback. Excuse me, but did anyone notice the month-long consolidation that occurred in March? With the indexes, now joined by the S&P 500 and its NYSE-based brethren, all breaking out or starting to break out, a new market up leg may just be getting started. Only the stocks know for sure.

As I like to put it, the market rally will end in fire or ice, an allusion to the famous poem by Robert Frost. For the purpose of stock market relevance, we can take some artistic license by substituting the word “market rally” for “world” in what is one of my all-time favorite poems:

Some say the world will end in fire,

Some say in ice

From what I’ve tasted of desire

I hold with those who favor fire.

But if it had to perish twice,

I think I know enough of hate

To say that for destruction ice

Is also great

And would suffice.

So, does the market rally end in ice, where it freezes up, stalls and then rolls over? Or does it end in fire, where a big upside blow-off move and fiery blow-up occurs as we saw in late 1999 into early 2000? Well, as one who has tasted the desire of a bubble market blow-off like we saw in late 1999, a year where I logged a 1,001% return in my personal account, I’ll go with fire!

What this market does is, well, up to this market. But whether the rally gets “French-fried” over the weekend is not really my concern at this point in time. I’ll just let the stocks tell me what to do when they tell me to do it.

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 SNAP, SQ, and TSLA, 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.