The Gilmo Report

November 5, 2017

November 5, 2017

A strong earnings report from Apple (AAPL) provided the fuel for another new all-time high for the NASDAQ Composite Index, its 63rd of the year and the most since 1980. But the broader action still had some of the sloppiness that I alluded to in my last report, as declining stocks on the NASDAQ outnumbered advancing stocks, 1361 to 1325.

A similar reversal of breadth was seen on the NYSE, where decliners led advancers 1496 to 1402. With the NASDAQ 100 Index leading all comers with a 0.95% upside move on Friday, well above the S&P 500’s 0.31% and the Dow’s 0.10% moves, it was clear that big-stock NASDAQ names were in charge as the index charged to a new high on lighter, but still strong, above-average volume.

 

GR110517-$COMPQ

 

The S&P 500 Index didn’t match the NASDAQ’s all-time high but did manage to post another all-time closing high. It looks similar to the Dow Jones Industrials Index as both track higher along their rising 10-day moving averages, but the Dow matched the NASDAQ’s all-time high with one of its own. Negative breadth, as I noted above, shows that the current move to all-time highs was led by a narrowing group of stocks.

Whether that is an issue for the current market rally, which by all intents and purposes remains intact, at least from an index point of view, remains to be seen. Meanwhile, my approach centers around this idea that stocks are the new bonds. With a massive ocean of liquidity out there looking for a home, any kind of pullback here might just set up a buying opportunity for a year-end rally.

 

GR110517-$SPX

 

The odds of a pullback do increase, in my view, when we see the CBOE Volatility Index ($VIX), push closer to its all-time low of 8.84, posted on July 27th. On Friday, the VIX closed at 9.14, 30 cents above that low. Each time the VIX has reached these extreme lows we have seen a pullback where leading stocks have come off significantly.

However, each pullback has merely presented a buying opportunity during the persistent rally of 2017, but the spikes in the VIX were very profitable if one played them using one of the leveraged VIX ETFs. In my report of August 20th, I discussed in detail my intraday method for trading the UVXY using the five-minute “620” chart tool. Members can access that report in the report archives on the website.

 

GR110517-$VIX

 

Financials:

A light jobs number relative to expectations of 310,000 new jobs threw a little water on the idea of steady, continued rate increases from the Fed. The financials, not sure how to interpret the number in terms of future Fed policy, continued to run in place. All the big-stock financials I’ve discussed in recent reports, BAC, C, JPM, GS, and WFC, are all sitting right at their 10-dmas as volume declines, just like the Financial Select Sector SPDR Fund (XLF).

Volume declined across the board with these stocks and the XLF, putting them all in a technical long entry position at their 10-dma while using it or the slightly lower 20-dema as selling guides. While financials have been a leadership group, movement has been slow and steady as the XLF has stair-stepped higher since its Ugly Duckling lows of early September.

 

GR110517-XLF

 

Big-Stock NASDAQ Names:

Apple (AAPL) gapped up Friday after reporting earnings Thursday after the close. The gap-up move was not huge, but could have been treated as a buyable gap-up type of move using the 171.12 intraday low as a selling guide. That remains the case, for now. The stock stalled and closed Friday at 172.50, roughly the mid-point of its gap-up trading range, on very heavy volume, so the BGU lacked the kind of thrust I would like to see. However, it was already extended from the prior week’s pocket pivot trendline breakout.

 

GR110517-AAPL

 

Amazon.com (AMZN) came in on Thursday and within about 3% of the prior 1050.55 low of the prior week’s post-earnings buyable gap-up (BGU) move. It then posted a new all-time closing high on Friday on slightly above-average volume. The rising 10-dma at 1051.41 would serve as a reference for more opportunistic pullbacks from here that might provide lower-risk entries.

Alphabet’s (GOOGL) posted a new all-time high close on Friday but remains within buying range of its buyable gap-up (BGU) move of two Fridays ago.

Facebook (FB) gapped down slightly on Thursday morning after reporting earnings on Wednesday after the close. Despite beating estimates handily, the stock found little interest from buyers who instead sold the stock back down to the 10-dma and the top of its prior base. This put it in a lower-risk entry position on Friday near the 10-dma. I would continue to view pullbacks to the 10-dma as potentially lower-risk entries where risk can be controlled tightly by using the 20-dema and the top of the prior base as a tight selling guide.

 

GR110517-FB

 

Netflix (NFLX) continues to hold tight along its 10-dma with volume drying up. The stock was initially buyable along the 20-dema as it pulled into the line and the top of its prior cup-with-handle base breakout. Now it is back above the 10-dma where it is again buyable along the line, using the 20-dema as a maximum selling guide.

There are perhaps a number of reasons not to like the stock, including the fact that they plan to go into the hold spending $18 billion to produce new shows and content. This past week revelations of sexual assaults and indiscretions by NFLX’s “House of Cards” star Kevin Spacey failed to torpedo the stock, however, as it reacted quickly to kill the show in light of these allegations.

Meanwhile, the technical picture for NFLX remains constructive, but I would remain alert for any faltering at the 20-dema that would morph the stock into a late-stage failed-base (LSFB) short-sale target. For now, however, the stock remains a long play until and unless evidence to the contrary shows up in the price/volume action.

 

GR110517-NFLX

 

Tesla (TSLA) gapped down on Thursday after reporting a horrible quarter after the close on Wednesday. Note that this gap-down on huge volume carried the stock well below its 200-dma, but in the process, it undercut the prior early July low in the pattern.

This triggered a very logical, minor undercut & rally move that took the stock back above the $300 price level on Friday.  In breakdown mode, but attempting to rally from a near-term oversold condition after breaking through the $300 price level early Thursday. This remains a short-sale target, and there are two ways to handle it from here, depending on how it plays out.

The first is to treat Friday’s move as a shortable gap-down (SGD) with the idea of shorting the stock here while using the SGD intraday high of 308.69 as a guide for a tight upside stop. If it pushes up above that, then watch for any possible move that carries up as high as the 200-dma at 319.14 as a lower-risk short-sale entry.

It will be interesting to see whether TSLA dies right here or whether it can reflex rally back up closer to the 200-dma. Either way, I view the company as being in deep trouble, and in need of another capital raise. I would expect that any such capital raise would be done through another secondary stock offering rather than digging a deeper debt hole by issuing more bonds as they did earlier in the year.

 

GR110517-TSLA

 

Nvidia (NVDA) has continued to post new highs after clearing the $200 Century Mark two Fridays ago, triggering a buy signal at that point, based on Livermore’s Century Mark Rule. The company is expected to report earnings this Thursday, November 9th after the close.

 

Cloud Names:

ServiceNow (NOW) is my favorite cloud name in terms of a) having already reported earnings and b) sitting at a lower-risk entry position in its pattern. This is buyable here using the 20-dema as your selling guide.

 

GR110517-NOW

 

Saleforce.com (CRM) is slightly extended after clearing the $100 Century for the first time two Fridays ago. The company is expected to report earnings on November 21st.

Workday (WDAY) continues to chop sideways after failing on a breakout attempt to all-time highs on Tuesday. I view this as buyable on pullbacks to the 20-dema, which is what we saw on Friday. Buying along the 20-dema would then implement the 50-dma at 106.72 as a selling guide.

Tableau Software (DATA) blew up after earnings, so has been removed from my long watch list. Notice, however, that after gapping down below the 72.50 price level on Friday the stock rallied back above the prior late September low at 73.18, triggering an intraday undercut & rally move. Theoretically, one could have tried to play that for a long trade, but the stock only rallied another 2% as it approaches its 50-dma.

After this big-volume gap-down I’d first look for this logical U&R reaction move to carry into the 50-dma as a possible short-sale entry point. Otherwise, it would have to move back above the 50-dma to trigger a moving average undercut & rally (MAU&R) type of situation, but for now this looks pretty bad.

 

GR110517-DATA

 

Square (SQ) is expected to report earnings this Wednesday, November 8th after the close, so the stock is on earnings watch for now.

 

Solar Names:

First Solar (FSLR) is still trying to stabilize after swinging wildly to the downside on Tuesday. As it turned out, that pullback took the stock closer to the 10-dma where the bold and the brave might have tried buying shares while using the 51.71 intraday low of last Friday’s buyable gap-up (BGU) move as a tight stop.

That’s tough to do in the face of a gnarly sell-off like we saw on Tuesday. Selling volume was heavy and picked up considerably from Monday’s volume when the stock pushed to higher highs above 60. Obviously, the stock is not actionable in this current, extreme v-shaped flag position, so it’s just a matter of seeing how the next pullback occurs from here.

 

GR110517-FSLR

 

SolarEdge (SEDG) is expected to report earnings on Wednesday, November 8th, so for now the stock is on earnings watch.

 

Semiconductors:

Micron (MU) has traded tight sideways since posting a pocket pivot off the 10-dma on Wednesday, as I discussed in my report of that day. Near-term the stock is slightly extended, and I would only view pullbacks to the 10-dma as lower-risk entry possibilities, should they occur.

Cavium (CAVM) sold off on heavy volume after reporting earnings after the close on Wednesday. However, the stock traded back up to the 73-75 price level in the after-hours on Friday after it was announced that Marvell Technology Group (MRVL) was considering a merger with CAVM.

This comes on the heels of talk during the day on Friday that Broadcom (AVGO) was going to make a takeover bid for Qualcomm (QCOM), sending QCOM over seven points higher on the day. The broader question is whether this sudden merger-mania in the chip sector will get the whole group moving this coming week. Make your list of chip stocks and check it twice!

Universal Display (OLED) reported earnings Thursday after the close and posted a big buyable gap-up (BGU) move, opening up at 148.85 and then pushing nearly ten points higher to close at 158.10 on Friday. This is extended now, but any pullback closer to the 153-154 level, about half-way back to the 148.75 intraday low of Friday’s BGU move, would present a possible lower-risk entry.

Another example of a strong opportunity developing after earnings are reported. There was no need to play earnings roulette to catch a nice upside move based on the rules of playing BGUs.

 

GR110517-OLED

 

Skyworks Solutions (SWKS) is on earnings watch, expected to report earnings on Monday after the close. SWKS broke out on Tuesday of this past week and then pulled right back into the 10-dma and the top of the prior bae on Thursday before finding support and closing up on the day. It continued moving higher on Friday as it cleared back up near Tuesday’s highs. This is one to watch after earnings are reported.

 

Telecom-Related Names:

Arista Networks (ANET) went schizoid this week, flying in both directions before and after Thursday’s after-hours earnings report. On Thursday, the stock suddenly dropped over 16 points on massive selling volume, sending the stock slicing through its 50-dma like a knife through butter.

This is what I’m talking about when I say that this market can often display funky action underneath the surface. That certainly was the case for ANET, and any sane, risk-managing investor would have likely sold the stock on Thursday, and hopefully quickly so. That certainly would have been the rational, intelligent, risk-controlling thing to do.

But ANET then beat on earnings, sending the stock gapping back to the upside and above its 10-dma, the highest moving average in the pattern, on Friday. There are a couple of interesting oddities here, the first of which is the fact that Thursday’s big price break undercut a prior low in the pattern and then rallied back above it.

That triggered a near-term U&R long set-up at that point, but it’s not likely one would have acted on that ahead of Thursday’s after-hours earnings report, especially after the brutal sell-off that occurred during the regular trading session. Nevertheless, Friday’s gap-up move could have been treated as a buyable gap-up once the stock set a low near the 20-dema.

But wait, there’s more! On top of that, on Friday, ANET finally cleared and held above the $200 price level, triggering yet another buy signal based on Jesse Livermore’s Century Mark Rule. Acting on this buy signal would then simply employ the $200 price level as a tight selling guide. And with no sane person on the planet trusting this nutty stock now, it probably has a good chance at going higher from here. We shall see this week.

 

GR110517-ANET

 

Lumentum Holdings (LITE) has been tagged by heavy selling after reporting earnings on Wednesday before the open. That took the stock all the way back down to its 5-dma, where it last posted a pocket pivot two weeks ago. LITE missed earnings estimates by a dime, but guided Q2 EPS above consensus, noting that its 3D sensing business “will accelerate significantly in the second quarter.”

Perhaps that keeps the stock alive from a thematic basis, and the supporting action at the 50-dma looks constructive. I would want to see this settle down here with an entry closer to the 50-dma. LITE is currently stuck between its 20-dema and the top of the prior low-base range at around 60 above and the 50-dma below.

 

GR110517-LITE

 

Chinese Names:

Alibaba (BABA) may be the only Chinese name worth considering for purchase these days as the entire group has come under pressure over the past few weeks and months. BABA reported earnings Thursday before the open and gapped up, but never set a clear low until it gave up on the gap-up move and closed down on the day.

That produced a nice bearish reversal off the peak on heavy selling volume. On Friday, the stock continued lower with volume declining as it appears set to test its 20-dema or 10-dma, maybe even the 50-dma. One thing that comes up here is whether BABA has formed an ascending base where we see three higher highs followed by three pullbacks that form higher lows.

What I would point out here is that ascending bases are something to look for during a market correction. The market has not been in a correction over the past couple of months, so this doesn’t strike me as a clear ascending base. If anything, I’d just watch to see if the stock finds support near its 20-dema, which would constitute the first lower-risk entry point in the pattern.

 

GR110517-BABA

 

Sina (SINA) and Weibo (WB) are both expected to report earnings Tuesday before the open. Both stocks are sitting below their 50-dmas, so are in position for Ugly Duckling type recoveries after earnings. But for now they are on earnings watch, and nothing more.

 

Cyber-Security:

Cyber-security names in general don’t strike me as an appealing group currently, but I do note that Palo Alto Networks (PANW) posted a moving average undercut & rally (MAU&R) move on Friday. On Thursday, the stock had dropped below the 50-dma but rallied off the intraday lows to close near the top of its intraday trading range and right underneath the 50-dma.

That might have been viewed as a short-sale entry point, but instead PANW kept moving right up through the 50-dma on a strong move to the upside. Volume was weak on the move, but remember that an MAU&R long set-up does not require that any particular volume level be met for it to become actionable, just like a U&R long set-up. In both set-ups, only price movement above the moving average (or above a prior low in the pattern for a U&R) is all that’s required.

 

GR110517-PANW

 

Internet Related:

Yelp (YELP) reported earnings after the close on Wednesday and got hit hard in after-hours trade that day, as I wrote in my Wednesday report. By Thursday’s open, however, things weren’t so bad and the stock merely sold off down to the confluence of its 10-dma and 20-dema. It then closed above the two moving averages in a show of minor support.

On Friday, YELP held tight at the 10-dma/20-dema as volume declined sharply. This puts the stock in a lower-risk entry position using the 20-dema as a tight selling guide, or the 50-dma as a wider selling guide.

 

GR110517-YELP

 

Software:

Veeva Systems (VEEV) posted its highest closing high since moving back above its 50-dma a month ago. This is extended currently, but still remains buyable on pullbacks to the 20-dema. Earnings are expected on November 28th.

Nutanix (NTNX) is dipping below its 10-dma, and as I wrote on Wednesday, I would like to see this pullback continue lower to the 20-dema. A constructive pullback to the 20-dema on light volume would trigger a lower-risk entry point from my perspective. Earnings are expected to be reported on November 29th.

 

GR110517-NTNX

 

Video-gaming Names:

The video-game stocks are starting to deteriorate, with two of the three names in the group that I follow coming apart after earnings over the past week. The latest casualty is Activision Blizzard (ATVI), which gapped up after earnings but then reversed to close down on huge selling volume. This is quite the ugly outside reversal and it sent ATVI back below its 50-dma.

ATVI attempted to regain the 50-dma during the trading day, but failed to close just below the line. This might be considered a short here, using the 50-dma as a guide for a tight upside stop. At the same time, be on the lookout for a possible MAU&R if the stock can regain the 50-dma. So, I view it as a short first, with the option of flipping long if we get an MAU&R trigger on a move back up through the 50-dma.

 

GR110517-ATVI

 

Electronic Arts (EA) also got hit after earnings, gapping down on Wednesday but finding support off the intraday lows. It is now sitting in a short bear flag as volume declines, which might trigger a move back up toward the 20-dema or even the 50-dma.

What might figure in how EA and ATVI play out from here is Take-Two Interactive’s (TTWO) earnings report, expected on Tuesday after the close. For that reason I will keep all three names on earnings watch pending TTWO’s report, which may create actionable moves in any of the three stocks, and in either direction.

 

GR110517-EA

 

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.

Suffice it to say that we could be moving into a higher-risk position here as breadth narrows and the major market indexes move to all-time closing and absolute highs.

On a concrete level, however, my approach remains the same. That is to watch for opportunities that arise after earnings are reported, especially where a buyable gap-up or shortable gap-down occurs. Then there are the undercut & rally moves that can occur, but which require high alertness and a willingness to act boldly when things look bleakest, as was the case with NOW two Thursdays ago.

We might also take note of the fact that more potential short-sale set-ups are popping up, with breakdowns in names like DATA, TSLA, and the video-gamers. There is also the fact that strong earnings reports in big-stock leaders like BABA and FB didn’t lead to any significant upside as both stocks sold off after earnings. Both stocks should be watched, however, as they pull back for signs of support and any potential to move back to new highs.

All of this could be telling us something important, or we may simply be seeing a bifurcation take hold in this market where stocks become actionable long or short, depending on the precise real-time set-up at hand.

For now, the theme of this market remains that “stocks are the new bonds,” and this will help define my thinking with respect to what individual names I want to focus on. My view is that in a period of high liquidity where money is looking for the safest, most reliable and established names in which to find a home, big-stock leaders will remain your best bets.

Therefore, looking to buy those names on constructive pullbacks, particularly during any market pullback that might ensue in the next few days or weeks, might set one up to benefit for a year-end rally, should that occur. Again, just stick to your stops and watch your stocks.

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 UVXY, 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.