The Gilmo Report

November 1, 2017

November 1, 2017

A heavy news docket heralded the start of a new month, starting with today’s Fed policy announcement. Included in the mix is, of course, the big-stock earnings reports from the likes Facebook (FB), while tomorrow the Republican-led government is expected to divulge the details of its “massive, wonderful, beautiful” tax plan. We will also find out who the next Fed chairman will be.

Today the Fed came out and did nothing, as expected. The Fed paid its usual lip service to the alleged timeline for paring back its balance sheet. However, I would note that in October, the month in which the Fed was supposed to begin cutting back its balance sheet, the Fed’s own reported balance sheet numbers show an increase of about $10 billion on its balance sheet. As someone pointed out, you can’t taper a Ponzi scheme.

So, the swirl of liquidity remains, and this has continued to drive stocks higher, although the indexes did run into some stalling action off the highs today on higher volume. The NASDAQ Composite Index moved into all-time high price territory this morning but stalled to close down in the lower half of its daily trading range on barely more volume compared to yesterday.

This still qualifies as stalling action at the highs, and with some of the individual stock action being somewhat sloppy here I would not be surprised to see more of a pullback to come. After-hours, I’m certainly not seeing the kind of earnings report action in the after-hours that might drive a big gap-up tomorrow like we saw last Friday after several big-stock NASDAQ names reported earnings and then gapped up in response.

 

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The S&P 500 Index also stalled on an attempt to log new all-time highs on volume that was less than 1% higher vs. yesterday’s volume. I would call this as roughly even volume, but technically the day does qualify as a stalling day off the peak. As always, the situation boils down to what is going on with individual stocks, and currently this strikes me as something of a mixed bag.

 

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Financials:

Despite the Fed policy announcement, which again alluded to future interest hikes to come, the financials all ran in place today. The Financial Select Sector SPDR Fund (XLF) daily reflects this indecision by stalling along its 10-dma as volume picked up ever so slightly on the day.

 

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Goldman Sachs (GS), one of the major components of the XLF, tried to break out ahead of the Fed policy announcement, but failed on above-average volume. The reversal off the intraday peak took the stock right back to its 10-dma, so it wasn’t a total disaster. However this was a bit tentative given the Fed’s talk of more interest rates to come.

 

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Big-Stock NASDAQ Names:

Apple (AAPL) is expected to report earnings tomorrow after the close. Reports of strong iPhone X sales sent the stock higher on Monday as it broke out of an eight-week base on strong volume. With earnings coming up tomorrow, it is questionable whether one would want to buy this breakout, but buying the moving average undercut & rally (MAU&R) move on last Friday certainly would have produced a nice pre-earnings trade.

We’ll see what the company has to offer investors tomorrow. Many are looking for the company to report strong initial sales of the new iPhone X to compensate for allegedly tepid iPhone 8 sales. Any kind of disappointment could easily send the stock back below its prior breakout point.

 

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Amazon.com (AMZN) is holding tight after last Friday’s buyable gap-up (BGU), but I would only view pullbacks closer to the BGU intraday low of 1050.55 as your best lower-risk entries from here. For now, if one was alert enough to buy the BGU on Friday, this is just a hold.

Alphabet’s (GOOGL) remains within buying range of its buyable gap-up (BGU) move of last Friday, closing today at 1042.60, a little over 1.5% above its BGU intraday low of 1026.85.

Facebook (FB) reported earnings today after the close, and as I write, the stock is trading down about 1% at 180.12. The tepid move is interesting given that the company blew away estimates by 31 cents and reported revenue of $10.33 billion vs. estimates of $9.84 billion. This could be trouble for the stock, and the market, so we want to keep a close eye on this tomorrow morning.

Netflix (NFLX) is holding tight along its 10-dma as volume dries up.  Technically, this is in a lower-risk entry position using the 10-dma as a tight selling guide. I would stay alert here, however, as there is always the outside chance that a breach of the 20-dema triggers this as a late-stage failed-base (LSFB) short-sale set-up. So far, however, the stock has been able to hold support at the top of the prior base and the 20-dema, and remains viable here as long as it can hold the 10-dma in constructive fashion.

 

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Tesla (TSLA) reported earnings after the close today and as I write is trading down below the $310 price level. As I wrote over the weekend, the stock had reached my downside price objective as a short-sale play once it hit the 200-dma. Conveniently, it did so just before its earnings report, leading to a neat short-sale trade that worked according to plan.

With the stock gapping below the 200-dma after the close, we would now look for a rally back up to the 200-dma as a lower-risk short-sale entry opportunity. For that reason, we want to keep a close eye on this when it opens for trading tomorrow.

 

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Nvidia (NVDA) cleared the $200 Century Mark on Friday, which did trigger a buy signal at that point, based on Livermore’s Century Mark Rule. That has led to a 4% rally so far this week, which I think makes for a good pre-earnings trade as I would not look to play earnings roulette with the stock next week when it is expected to report earnings next Thursday, November 9th.

 

Cloud Names:

ServiceNow (NOW) continues to track along the 10-dma and 20-dema following last Thursday’s undercut & rally move after earnings. So far this is only panning out to be a good trade that occurred on the day after earnings were reported, taking advantage of the U&R at that time in opportunistic fashion. Since then the stock has gone nowhere. For now, however, pullbacks to the 20-dema, like it had today, offer lower-risk entries using the 20-dema as a tight selling guide.

Saleforce.com (CRM) cleared the $100 Century Mark for the first time last Friday, and continued about 4% higher until reversing today on light volume. Pullbacks closer to the 100 price level and the 10-dma would offer lower-risk entries. Keep in mind that CRM is expected to report earnings on November 21st.

Workday (WDAY) seems to work in fits and starts, breaking out to new highs yesterday on barely above-average volume, but then falling right back into its 10-dma today on light volume. By the end of the day, WDAY closed above the middle of its daily price range, proving the pullback to the 10-dma to be a lower-risk entry opportunity.

It remains to be seen whether it can muster up a stronger breakout and price move ahead of its expected earnings date of November 30th, but for now pullbacks to the 10-dma, or more opportunistically, the 20-dema, would be your best possibilities for lower-risk entries from here.

 

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Tableau Software (DATA) is expected to report earnings tomorrow after the close. The stock has been slowly tracking higher along its 10-dma over the past month. What it does after earnings is anyone’s guess, but remains a name to watch.

After posting a continuation pocket pivot off its 10-dma last week, Square (SQ) has continued to move higher. Today it made an all-time high before reversing to close down on above-average selling volume after eight-straight up days. This is obviously extended ahead of next week’s expected November 8th earnings report.

 

Solar Names:

In this market, it’s often a matter of being in the right stock at the right time, and if one is in the wrong stock at the wrong time, the experience can be quite unpleasant. Witness the action in bio-techs like Alexion Pharmaceuticals (ALXN) as it has plummeted lower over the past two weeks, along with other bio-tech names.

And then there’s the case where one can be in the right stock at the wrong time. Such was the case with First Solar (FSLR) yesterday when it reversed off the 60 price level on heavy selling volume. But as I wrote over the weekend when the stock had posted a 13% gain on Friday, “This is now extended, and one could think about selling some shares into this move if it continues this week, and then wait to see if and how it sets up again on any consolidation of this very heady one-day price gain.”

That would have been a smart move ahead of yesterday’s sharp price break, which came on news that the International Trade Commission had ruled on solar tariffs. Their ruling and recommendation calls for a 30% tariff on solar cells with a 1 gigawatt quota, and a 30% tariff on solar modules.

The sell-off seemed odd since this news wasn’t necessarily negative for FSLR, but it might have engendered a “sell the news” type of reaction. The other thing to consider is that after running up over 25% in two days the stock was ready for a pullback. Now it’s a matter of watching to see how and whether this thing settles down and sets up again, if at all.

 

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SolarEdge (SEDG) has moved higher over the past several days but is currently extended from any kind of lower-risk entry point. Also, the company is expected to report earnings on November 8th, and with no set-up for at least a quick trade ahead of earnings in sight, there isn’t much to do with the stock right here and now.

 

Semiconductors:

Micron (MU) was in a buyable position per my discussion of the stock over the weekend: “This is still in a buyable position, using the 20-dema as a selling guide for shares purchased up at these levels.” Yesterday MU posted a pocket pivot on a small gap-up move off the 10-dma, and it is now extended. The spot to buy it, of course, was at the 20-dema earlier this week. Meanwhile MU remains well above its September 27th BGU, down around 37, when I first discussed the stock.

 

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Cavium (CAVM) reported earnings after the close, and as I write, is doing absolutely nothing. This is one to keep an eye on tomorrow for any possible opportunities that might arise in either direction.

Universal Display (OLED) broke out yesterday on the APPL iPhone X news since it is a supplier of components for the phones. It gave all that breakout back today, however, likely because investors decided to take the money and run ahead of earnings. OLED is expected to report earnings tomorrow, after the close, so if one did get lucky enough to catch yesterday’s move, selling into it ahead of earnings doesn’t strike me as a bad idea, frankly.

 

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I would also note that other AAPL suppliers like Broadcom (AVGO) and Skyworks Solutions (SWKS) also broke out yesterday but gave up most of those breakout moves today, not unlike OLED.

 

Telecom-Related Names:

Arista Networks (ANET) is expected to report earnings tomorrow, November 2nd. It has been flirting with the $200 price level over the past three trading days without being able to hold a close above this latest Century Mark.

Lumentum Holdings (LITE) reported earnings this morning and missed analysts’ estimates by a dime while guiding Q2 earnings and revenue estimates higher. This sent the stock spinning first to the downside where it kissed the 62 price level, and then right back to the upside and as high as 66.90. But wait, there’s more!

From there the stock then broke hard to the downside, making a new intraday low at 60.15 before rallying to close up a nickel at 63.20. Note also that LITE closed right smack in the middle of its daily price range on huge volume. Technically, this can be viewed as a supporting type of pocket pivot at the 10-dma and 20-dema. But the wide, 10% price range today likely means that we need to see this thing settle down a bit before venturing into the waters, long or short.

 

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Chinese Names:

Alibaba (BABA) has spent the last five days in a row moving straight back up to all-time highs. This five-day rally comes after the stock had violated its 50-dma last week, but notice how consistent it is with the way the stock has acted over the past couple of months.

In late August, BABA pulled into its 20-dema, which looked normal, and then turned to rally back up to new highs. In late September, it violated the 20-dema but held well above the 50-dma on above-average selling volume, but again just turned back to the upside and into new-high price ground. Note the weak volume on that rally that carried into the second week of October.

Last week, BABA finally violated its 50-dma, but as is often the case in this market, when a big, leading stock looks about as ugly as it can get, it will rally. And so, the stock followed its typical pattern of ignoring ugly action, even a 50-dma violation, and then rallying right into new-high price territory. With earnings coming out tomorrow morning, we’ll simply have to wait and see what transpires once we open for trading tomorrow morning.

 

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Sina (SINA) and Weibo (WB) both blew up last week, but as is typical in this market, that’s usually when stocks are ready to rally. While WB’s bounce over the past three days has been weak, I note that SINA posted a bottom-fishing type of pocket pivot coming up through the 50-dma today on heavy volume. One could take a shot at this here, using the 50-dma as a tight selling guide. The only issue is that SINA and WB are both expected to report earnings next Tuesday before the open.

 

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Cyber-Security:

Palo Alto Networks (PANW) is starting to come undone as it tests its 50-dma on heavy selling volume. Fortinet (FTNT) had already come off my long watch list after getting smashed after earnings, and now PANW is wavering badly ahead of its expected November 21st earnings report. Overall, the cyber-security group hasn’t lived up to expectations, and Checkpoint Software (CHKP), one of the big-stock cyber-security names I’ve discussed in reports much earlier this year, became the latest casualty.

CHKP, not shown, gapped down through its 200-dma and continued lower, likely inducing a sympathy move today in PANW, which broke down to its 50-dma. It held support at the line on above-average selling volume. If one is adventurous and brave, this could be considered an opportunistic entry at the 50-dma while using it as a tight selling guide. The idea would then be to get some sort of decent bounce as a short-term long trade ahead of earnings in three weeks.

 

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Internet Related:

Yelp (YELP) reported earnings after the close today and as I write is getting blasted back below its 50-dma. Watch this tomorrow for any possible set-ups that might emerge following a gap-down opening, either long or short.

 

Software:

Veeva Systems (VEEV) rallied off its 20-dema over the past three days, after sitting in a lower-risk entry position at the 20-dema last Friday, per my discussion of the stock in the weekend report. Today it pushed to a higher high but reversed to close down on the day. This remains buyable on constructive pullbacks to the 20-demaback with the idea of catching a short-term (and hopefully profitable) long trade ahead of earnings, which are expected on November 28th.

Nutanix (NTNX) made an attempt at higher highs today, but reversed off the intraday peak to close down at the day and right at its 10-dma. Volume increased over yesterday’s levels, but remained -31% below average. Earnings aren’t expected until November 29th, and from here I’d look to be more opportunistic, trying to catch a possible pullback that carries further and closer to the 20-dema at 26.51.

Technically, this is buyable here at the 10-dma, using it as a tight selling guide. If it can’t hold the 10-dma, then the 20-dema would be your next reference for near-term support. Given the short-term extension in the stock and the fact that today’s pullback came on increased, not declining, selling volume, my preference is, as I said, to be more opportunistic, looking for any possible pullback to the 20-dema where volume is in fact drying up as a better entry spot.

 

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Video-gaming Names:

All three of the video-gaming names that I follow have reported or will report within the next week or so. Electronic Arts (EA) reported earnings yesterday after the close and gapped down below its 50-dma this morning. It then proceeded to spill lower before finding its feet at an intraday low of 111.28.

That move also undercut last week’s lows along the 112.50 price low, triggering a rally from there that carried back up as far as the 10-dma. If one was alert to that move, one could have played it as a U&R long set-up on an intraday basis once it pushed up through the prior 112.59 low of last Wednesday. Now the stock is back up to and just below the 10-dma, which brings this up as a possible short-sale here, using the 10-dma as a tight upside stop. Alternatively, the 20-dema could be used as a wider stop.

That said, the stock could improve and turn into a long again depending on what its cousins do after they report earnings. Activision Blizzard (ATVI) is expected to report earnings after the close tomorrow, so that will be one to keep an eye on as it relates to both ATVI and EA. The de facto monster leader of the pack, Take-Two Interactive (TTWO), is expected to report earnings next Tuesday after the close.

 

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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 (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.

Despite the endless spiral of the indexes into higher and higher highs, almost daily it seems, this remains a tough market to navigate. While it’s often hard to get a firm grasp on what is going on, I can tell you that we aren’t likely to see a big gap-up open tomorrow given the weak earnings from TSLA and FB’s tepid response to an allegedly strong earnings report.

That could set the stage for a more concerted pullback, and one could argue that the market is perhaps entitled to a pullback. But as I pointed out over the weekend, it is not as if this market hasn’t had its share of carnage in certain areas, such as Chinese names and bio-techs.

I’ve even seen some of these smaller semiconductors like Advanced Energy Industries (AEIS) and Ultra Clean Holdings (UCTT), names mentioned in passing a few reports ago, blow up after earnings over the past few days. This is another trademark of this market. Stocks will act very well for a period of time, sometimes weeks, or even a couple of months, and then suddenly blow up, giving up all those prior gains in just a few days.

That makes life tough for anyone thinking they’re playing for a big move after a standard base breakout. Holders of UCTT found that out the hard way.

 

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Things strike me as just a little bit funky here, so I would again advise members to review their trailing and absolute stops. In addition, unless one has a big profit cushion in a particular stock, playing earnings roulette by holding a stock with no profit cushion through earnings is a dangerous game to play.

Tomorrow’s “great reveal” where Republican leaders will disclose the details of the pending tax reform legislation that they are trying to get passed. Outside of lowering the corporate tax rate to 20%, I personally don’t see where the “massive” tax cut is, but then maybe I’m just blind to the brilliance of President Trump and his Administration and Congressional cohorts.

The whole thing could simply set up a sell the news situation depending on the exact details and the ensuing reaction from various members of Congress, Democrat and Republican alike. So, stick to your stops and watch your stocks. That is all.

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 no positions, 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.