The Gilmo Report

November 9, 2016

November 9, 2016

Donald Trump’s victory in yesterday’s presidential election is being trumpeted as the most amazing political miracle in the history. Equally miraculous is the market bottom in the face of an outright “crash” in the futures last night. In fact, the futures hit their limit down levels once it became clear that Trump was going to pull it out, with the Dow futures getting close to a decline of -900 points.

That futures sell-off was worse than what we saw following the Brexit vote back in late June, but surprisingly the opening the next morning wasn’t even close to being similar. The Dow opened down only a few points and proceeded to sell off all of 80 points before steadying itself and then slowly sprouting into the green as the morning wore on.

As an aside, today’s market action defied conventional wisdom in a manner that perfectly complimented the surprising election outcome. As early as three weeks ago, Trump was being counted out by the pundits as a result of what were clearly misogynist statements made ten years ago.

Many were talking about how he would be forced to quit the election, but all that turned out to be as wrong as it could possibly be. In the end, however, the election merely provides another example of just how wrong the crowd can be. Getting back to the market action, during the entire day today stocks were led by big moves and outright gap-ups among financials, materials, and bio-tech names that are viewed as benefiting from perceived Trump policies like “building a wall” and re-building U.S. defense forces.

But as stocks rallied, bonds were pummeled given Trump’s promise to fire Janet Yellen and quell the Fed’s money-printing fetish. The iShares 20+ Year Treasury Bond Fund (TLT) shows the carnage in the form of a massive gap-down on huge volume.

 

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Municipal bonds were also slammed in a similar move as we can see on the daily chart of the iShares National Muni Bond Fund ETF (MUB), below.

 

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Clearly, the bond market is anticipating higher interest rates as a result of Trump’s victory. That was the reason for the big rally in financials. The question in my mind is whether higher interest rates are good for stocks, particularly when the market has been on an easy money binge for the past eight years.

By the close, the NASDAQ Composite regained its 50-day moving average on heavy volume. The 1.11% upside move doesn’t strike me as powerful enough to declare a rare third-day follow-through. But the bottom line remains what we see in terms of long-side set-ups for individual stocks in conjunction with today’s surprising and strong index action.

 

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The S&P 500 Index, which is chock-full of materials and defense names, blasted through its 50-day moving average on heavy volume. It too posted a 1.11% move, but instead of trying to declare this a follow-through day I remain focused on the set-ups at hand in individual stocks.

 

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In terms of long set-ups my best long idea for the week, in fact, was one I blogged about on Monday, Impinj (PI). At that time, I noted that the stock had flashed a pocket pivot last Friday as setting up in a possible roundabout position along the right side of a new base.

PI did not disappoint as it held along its 10-day line this morning when I again mentioned it in a blog post and then proceeded to blast 11.3% higher. This move took it up into its 50-day moving average, which may serve as near-term resistance. From here I would watch for pullbacks to the 20-day line at 27.70 as potentially lower-risk entry opportunities.

 

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Despite the market rally, big-stock NASDAQ names did not show tremendous amounts of upside thrust, at least not on the upside. For example, Apple (AAPL) traded heavy volume as it found support off of the intraday lows, but still closed in the red. If the stock rallies up into the 50-day moving average and we see that volume declined, I might still be inclined to view this as a short. Barring that, there is no immediate evidence that tells me I need to be long this thing right here.

 

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Amazon.com (AMZN) also didn’t benefit much from the big index rally as it also closed down on the day. While AMZN rallied off of the intraday lows, it still closed below the 10-day moving average on heavy volume. Note that the prior two-day rally came after a logical undercut & rally move following the stock’s move below the prior 756 low from early September. AMZN remains in no-man’s land, but might be looked at as a short on any feeble rallies up to the 20-day line at 294.30 or the 50-day line at 801.37.

 

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Alphabet (GOOGL) also closed down on the day after rallying off of the intraday lows. However, it closed just below its 50-day moving average on heavy volume. Overall, the stock’s action has the look of a big churn on heavy volume. Thus this keeps the stock in play as a possible short-sale target here at the 50-day line unless it is able to regain the line in the coming days. That is definitely a possibility, but I find the divergence between these big-stock NASDAQ names and the rest of the market as intriguing, to say the least.

 

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Count Facebook (FB) as yet another big-stock NASDAQ name that ended the day in the red, despite coming up off of the intraday lows. Volume was heavy, and the stock closed at 123.18, just below the 123.28 intraday high of last Thursday’s shortable gap-down (SGD) move.

Technically, this keeps the stock in play as a short-sale target unless it can move significantly above the 123.28 price level. That is certainly a possibility, but we should remember that FB is currently still a late-stage failed-base situation, and there is no concrete set-up here on the long side. For now, the closest thing to a set-up for FB is a short-sale set-up. If the market can keep rallying, however, then FB might rally further up to fill the gap and approach the 20-day moving average at 126.78. For now, it remains in a short bear flag following last week’s SGD.

 

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Bucking the trend among these big-stock NASDAQ names, Priceline Group (PCLN) is a bona fide long set-up here as a buyable gap-up (BGU) move following a strong earnings report on Monday after the close. Today the stock closed slightly down but remains above the 1540 intraday low of yesterday’s BGU price range.

Notice that PCLN had undercut a prior low in the pattern four days ago, leading to a sharp undercut & rally move on Monday. Yesterday’s BGU creates a more concrete long set-up. Should this BGU fail in short order, then perhaps it would have negative implications for the market.

 

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Qualcomm (QCOM) was another stock I mentioned as buyable this morning in my first blog post of the day, posted 21 minutes after the open. At that time, the stock was trading around the 67 price level. By the close it had regained the 20-day moving average on increased volume, but was still slightly down on the day.

If the general market can keep going, then QCOM looks like a reasonable big-stock play. It can be bought here using the 20-day line at 67.42 as a tight selling guide. Otherwise the 50-day line at 65.48 provides a wider selling guide for those who prefer that.

 

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Netflix (NFLX) remains viable following its prior buyable gap-up after earnings in mid-October. I’ve thought for a while now that the stock probably needs to pull into its 20-day moving average, and the stock almost obliged me this morning. It didn’t quite get there, but it did undercut the prior lows from last week along the 121.62 price level and closed just above at 122.19. Technically this would bring the stock into a lower-risk entry position for the long side, using the 20-day line at 119.64 as a reasonably tight selling guide.

One thing to keep in mind here is that a high-volume breakdown below the 20-day line could bring NFLX into play as a late-stage failure situation. For now, however, if the general market continues to move higher, I would continue to view this as a potential long using the appropriate, tight stop in case it doesn’t work out.

 

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The Ugly Duckling came to the rescue for Microsoft (MSFT), which was looking quite hideous last Friday as it broke below its 20-day moving average on above-average volume. That was all negated on Monday, however, as the stock gapped back above its 10-day line on higher volume. This morning MSFT traded down to around its 20-day moving average, but found support near the line and rallied back above the 10-day moving average on heavy volume. Given that the stock closed back above the 10-day line, it has the look of pocket pivot support.

If you like MSFT and believe the general market is headed higher, then this can be considered buyable using the 20-day line at 59.33 as a tight selling guide.

 

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Recall that over the weekend I recognized the potential for any of these big-stock names to rally off of Friday’s lows based on current undercuts of prior lows. As I wrote:

“Before moving on, one major point I’d like to make about any of these big-stock breakdown situations that have just undercut prior lows in their patterns, like AMZN, BABA, GOOGL, TSLA, and PCLN, for example. And that is that the undercuts do create the context for rally attempts in typical U&R fashion. The key is in watching how this all synchronizes, or “syncs up,” with the general market.”

That is basically what we saw in a number of those names, and in a case like PCLN it led to a big gap-up breakout. However, I still view Tesla Motors (TSLA) as a short-sale target. Note that the stock undercut prior lows in the pattern last week, leading to a rally on Monday. That rally ran into clean resistance at the 20-day line, and this morning TSLA gapped down to lower lows but managed to close back above last week’s lows. However, it was not likely that one would have shorted the stock yesterday going into the overnight election results.

In this position I would look at rallies up to the 20-day moving average at 196.20 or the 50-day moving average at 200.59 as your lower-risk short-sale entry opportunities.

 

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Gigamon (GIMO) has remained probably the best-acting name on my long watch list, as I noted over the weekend. This morning it kissed the 10-day moving average before rallying into positive territory. Volume was up compared to yesterday, which indicates some support at the 10-day line. For now, I would consider pullbacks into the 10-day line at 54.35 or the 20-day line at 53.41 as references for potentially lower-risk entry opportunities.

 

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ServiceNow (NOW) is one of those stocks that I take a two-sided view of as I’ve been watching for a failure through its 20-day moving average as a sign of an impending breakout failure. As I noted over the weekend, it does have some POD-like characteristics, but these can easily be negated in a continuing market uptrend.

On the constructive, NOW is now back above the 84.56 intraday low of its late October buyable gap-up move following a strong earnings report. The thing to keep in mind here is that NOW attempted this BGU move during what was a worsening downside general market trend.

So within the context of this simultaneous market downtrend, the stock’s ability to hang above the prior BGU intraday low at 84.56 and the 20-day line is constructive. Assuming the market is able to continue moving higher, this is in a buy position here using the 20-day line at 82.59 as a reasonably tight selling guide.

 

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On the short side, I was surprised that I was still able to make some short scalps on Friday despite the big general market rally. The trick was picking on the right stocks. For example, Electronic Arts (EA) ran up to its 20-day moving average this morning, where it put itself in a lower-risk short entry position.

By the close, the stock had moved lower to close just beneath its 10-day moving average, which is below the 20-day line. I might continue to view this as shortable on rallies into the 20-day line at 81.24 or the 50-day line at 82.57, particularly if the general market starts to weaken again.

 

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EA’s cousin Activision Blizzard (ATVI) also remains weak as it plumbed lower lows today on heavy selling volume. The stock didn’t quite undercut the prior mid-August low at 39.29, but did manage to rally off of its intraday lows.

This is obviously extended to the downside, and was only shortable last week near the 20-day line as it broke to the downside following earnings. It is, however, representative of the opportunities one can find on the short side. For now, however, I would only view rallies up into the 20-day line at 42.76 as potentially lower-risk short-sale opportunities. Both EA and ATVI represent late-stage failed-base short-sale set-ups.

 

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Outside of these stocks, however, there hasn’t been much to do on the short side. In fact, we can see that Adobe Systems (ADBE), which was looking like a potential short-sale target last week, appears like it is setting up to move higher. After gapping below its 50-day moving average this morning, ADBE reversed to close back above its 10-day and 20-day moving averages on a pocket pivot volume signature.

It missed being a full-fledged pocket pivot by a mere ½ percent. This put the stock in a buyable position along the 20-day moving average. In this case, one would use the 50-day line at 106.12, about 1.5% below where the stock closed today, as a tight selling guide.

 

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Airgain (AIRG) was discussed in my Monday evening blog post along with PI. At the time, AIRG was undercutting the prior early October low in its pattern, and I noted that members should watch for an undercut & rally move. I had anticipated that this move might come after the company announces earnings, which are expected tomorrow after the close. But AIRG jumped the gun, literally, when it launched on an 11.9% move higher on a big-volume pocket pivot. That took it not only back above its 10-day and 20-day moving averages, but also its 50-day moving average.

However, with earnings scheduled for tomorrow, if one had bought the stock earlier this morning based on my Monday blog post, banking the move might make sense. Hopefully, we will see another entry opportunity show up after earnings. How exactly that occurs remains to be seen, so I’ll be following the stock closely tomorrow after it announces.

 

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Another one to keep an eye on is Internet advertising name The Trade Desk (TTD), which I also discussed in my Monday after-hours blog post. The stock came public back in mid-September, had a brief move to the upside, and has steadily trended lower since then. In this position the stock is sitting below its early October lows at 23.50, which of course sets up a possible undercut & rally move from here. Earnings are expected to be announced after the close tomorrow, so I’m interested in seeing how the stock acts after the report.

If the report is favorable, it could generate some sort of playable undercut & rally move or some type of gap-up move that carries above the late October peak at 29.42. If that were to occur, then we would have a double-bottom base breakout on our hands. My preference would be to try and enter before that on a possible undercut and rally move. But as I said, we just have to wait and see how this plays out after earnings. It is an interesting Ugly Duckling IPO type of set-up to keep an eye on.

 

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Another stock I discussed this morning in a blog post an hour and 21 minutes after the open was Finisar (FNSR). At that time, the stock was trading below the 29 price level and ended the day at 29.72. FNSR had a buyable gap-up move way back in early September, and more recently has been building what is now a four- to five-week base. Following the pullback to the 50-day line, FNSR has been able to regain its 20-day moving average, and was hanging tight along the line this morning as volume was coming in light.

It was at that point that I blogged about the stock as being buyable at that point, and moved higher from there by the close. I would view any pullbacks into the 20-day line at 28.69 as lower-risk entries from here. Note that FNSR is a telecom name, and with Acacia Communications (ACIA) set to announce earnings tomorrow after the close, could have a sympathy move one way or the other.

 

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Over the weekend I considered what might occur after the election. As I wrote, “A big sell-off might be something to fade, particularly if it has an exhaustive feel to it. Like the post-Brexit sell-off, once the last of the chicken littles jumps out the window then the market may be free to rally.”

That was precisely what we saw today, although the rapidity with which the market recovered from the massive overnight futures sell-off was wild, to say the least. Anyone who reacted on the short side right at the open got crushed today, but as I blogged early this morning the market looked buyable not too long after the open.

On its face the index action looks quite bullish, and there are a decent handful of long set-ups to go with this bullish index action. The only caveat is whether the market’s anticipation of higher interest rates to come as evidenced by the big sell-off in bonds ends up putting a damper on this rally.

The good news is that we only need to go with the long set-ups. So far, based on today’s action, we can surmise that some upside progress was possible in the few names that I mentioned early in the day. PI, which I was looking at as early as Monday as a possible go-to set-up on the long side, was the most profitable with an 11.3% upside move today alone. Now THAT’s a spicy meatball! ;-p

This market remains challenging, and it is not necessarily clear to me that we are about to embark on a massive new uptrend. However, since we cannot predict the future, and we know that sometimes some of the best investing opportunities can come when you least expect them, all we can do is go with the few long set-ups that we see.

That said, I would remain alert as the market is now up three days in a row in a very sharp rally off of last Friday’s lows when the S&P 500 met up with its 200-day moving average. A pullback from here would not be unexpected, and would give us a chance to see just how real the Trump Rally is.

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.