The Gilmo Report

October 18, 2017

October 18, 2017

This is probably the oddest market environment I’ve seen in my 26 years of market experience. 1999 was of course a very odd environment, but it was one where consistent, parabolic upside in the indexes was matched by similarly consistent, parabolic movement to the upside in growth stocks. Today we see a similar relentlessness in the way the indexes continue to grind higher, but it is a grind, not a parabolic move.

Another interesting observation is that money seems to flow into groups and stocks in a manner that has significant impact on the indexes, even though the stocks in question may not be growth names, much less showing any real growth at all. Witness the move in International Business Machines (IBM) today, after the company reported 0% earnings growth but its first incremental increase in revenues in over five years.

In this market, that’s enough to set a stock on fire, and IBM’s move today went a long way in pushing the Dow Jones Industrials Index past the 23,100 mark right at the open. Yesterday, it was United Health (UNH) and Johnson & Johnson (JNJ) helping to keep the Dow in record territory as the NASDAQ Composite closed down on the day.

This morning it was a similar story as the Dow rocketed to a peak of 23,172.93 while the NASDAQ Composite and NASDAQ 100 Indexes lagged severely, up 0.01% and down -0.13%, respectively as big-stock stock NASDAQ names took some selling pressure. By the close, the NASDAQ posted a stalling and churning day after posting a new high earlier in the day, on higher volume.

 

GR101817-$COMPQ

 

The S&P 500 Index also lagged the IBM-propelled Dow index today, up 0.07% vs. the Dow’s 0.70%, or a mere 1/10th of the Dow’s move. It still managed to post a new all-time high, however, although the action on the daily chart looks like stalling and churning on higher volume.

 

GR101817-$SPX

 

One of the measures of upside extension in the markets that we used to use back when I was head of the institutional services group at William O’Neil + Co., Inc. was the percentage of stocks trading above their 150-day moving average. This indicator is available on StockCharts.com, and I show the Nasdaq Percent of Stocks Above 150-Day Moving Average ($NAA150R) below. The same indicator for the NYSE can be found under the symbol $NYA150R, and it looks roughly the same as both lines go beyond their recent peaks.

Often, this indicator gave us an idea of when things were getting extended on the upside during an uptrend, and conversely when we were in a downtrend. We can see that currently this number is starting to back from its recent peak as the general market continues higher. In and of itself, it is not a predictor of an imminent market correction, but I do keep an eye on it. When we put it together with stalling and churning action on the S&P 500 and the NASDAQ as they diverged sharply from the Dow today, it might indicate that a pullback may be in the cards soon.

 

GR101817-$NAA150R

 

The pocket pivot action in Financial Select Sector SPDR Fund (XLF) as discussed in the weekend report helped push the ETF back up to its prior highs, but no more. The small upside movement in the XLF was prodded along by Fed head Janet Yellen’s comments in a speech on Sunday where she alluded to “sustained” rate hikes. The XLF is currently holding tight along its 10-dma, and looks constructive, for now. Pullbacks to the 20-dema, such as we saw last Friday where the ETF posted a supporting pocket pivot at the line, likely remain your best lower-risk entry opportunities.

 

GR101817-XLF

 

With respect to big-stock financials discussed in recent reports, the action has been mixed. J.P. Morgan (JPM) and Bank America (BAC) rallied to new highs today, but Citigroup (C) remains down along its 20-dema and well off its prior highs following last Thursday’s big outside reversal to the downside after earnings. Wells Fargo (WFC) remains weak as it reversed to the downside after running into resistance at its 20-dema early today.

Meanwhile, Goldman Sachs (GS) became the latest financial-stock nut job in the market after reporting earnings yesterday before the open. It gapped up at the bell and then reversed hard to the downside in a brutal outside reversal on huge volume. But in this market, a huge-volume bearish outside reversal isn’t bearish at all – it’s a buy signal! Today GS proved that point by rocking and rolling back to the upside in a show of support along its 20-dema. Stuff like this is why I now use my “Down on Heavy Volume” stock screen as a source of buy ideas these days!

 

GR101817-GS

 

The SPDR Gold Shares ETF (GLD) broke support at its 50-dma on Monday, which in my view triggered a trailing stop for any GLD position taken closer to 121. That was where the prior undercut & rally long trigger occurred in early October.

Now the yellow metal ETF is floating lower into no-man’s land where there are currently no discernible long entry set-ups brewing. We might keep an eye on the 122.03 low of six trading days ago as a reference for a possible undercut & rally back up through that low. If we did see that, I’d want to see a relatively quick confirmation in the form of the GLD quickly retaking the 50-dma on the upside.

 

GR101817-GLD

 

With gold breaking support and stopping me out of any long GLD position, the mining plays are also off the table, at least for now. This includes the Vaneck Vectors Gold Miners ETF (GDX), Franco Nevada (FNV) and Kirkland Lake Gold, Ltd. (KL). KL does have something of an Ugly Duckling look to it here, however, as it sits just below the 20-dema and along the highs of its prior base.

Somehow this strikes me as a possible lower-risk entry here, using the 50-dma at 12.71 as a maximum downside selling guide, or the recent lows along the 13 price level as a tighter selling guide. KL’s action hasn’t correlated to the action in gold itself, so I would tend to assess it as having its own context.

Meanwhile, GDX and FNV should also be watched closely as they settled into areas of potential support with volume declining. GDX is pulling down toward its 200-dma as volume dries up sharply to -43% below average, while FNV is hanging along its 10-dma and 20-dema with volume declining to -56% below average.

 

GR101817-KL

 

Big-Stock NASDAQ Names:

 

Netflix (NFLX) has been the NASDAQ big-stock story of the week so far after reporting earnings on Monday after the close. That led to a high-volume sell-off from the peak yesterday, which continued lower today as the stock dipped below the 10-dma.

Volume is declining here, which may bring the stock into a lower-risk entry near the 20-dema and the top of the prior breakout point. Keep an eye on this as it approaches these key support levels, and watch for selling volume to continue drying up as a sign of a potentially lower-risk entry opportunity.

 

GR101817-NFLX

 

Apple (AAPL) defied my expectations that it would do nothing until earnings, which are expected on November 2nd, by posting a roundabout type of pocket pivot on Monday at the 50-dma. Notice how this pocket pivot is occurring after the stock filled the prior early August gap-up “rising window.”

That sort of gap-fill entry is another type of Ugly Duckling long set-up, and I discussed the potential for the stock to rally after filling the gap back at that time. If one had had the courage to step into the stock at that point, they would have been rewarded with what has so far been a 10-point rally. At this point, however, I’m not inclined to do much with the stock ahead of earnings.

 

GR101817-AAPL

 

Amazon.com (AMZN) remains extended after regaining the $1,000 price level and is currently out of buying range, particularly with earnings expected next week on October 26th.

Facebook (FB) broke out yesterday on a pocket pivot move with volume 12% above average. Technically, this would be considered buyable, but keep in mind that FB is expected to report earnings on November 1st.

Alphabet (GOOGL) continues to hold above the $1,000 price level as volume declines, but I don’t see much to do here with earnings expected next week on October 26th.

Intel (INTC) pushed to a higher high today but there is no reason to venture into this at current price levels since earnings are expected next week on October 26th.

Nvidia (NVDA) isn’t expected to report earnings until November 11th, and it continues to hold up near the $200 Century Mark and above the 10-dma. It is also holding above last Tuesday’s buyable gap-up (BGU) move to higher highs. I view pullbacks to the 10-dma at 190.62 as opportunistic entries if you can get ‘em.

Tesla (TSLA) is expected to report next week, on October 25th, and has so far been able to hang around its 50-dma, moving above and below the line on different days. Today it ran into resistance along the highs of the current October price range as volume increased.

Yesterday it was reported that the company fired somewhere between 400 to 1200 employees, allegedly for “poor performance.” That strikes me as a large number of incompetent employees to suddenly fire on the basis of poor performance. In other universes, where the money-losing, low-production, high-hype TSLA business isn’t allowed to exist, that is known as a lay-off.

And with TSLA having production short-fall issues, how does firing all these employees help the cause? Go figure. In any case, we can see that the 50-dma doesn’t seem to have much relevance for the stock here as it moves above and below the line daily.

What may be more relevant is resistance at the 160 price level and the top of the price range. That’s what TSLA ran into today. I consider it shortable here using today’s high as an upside stop, with the idea of catching a quick downside move ahead of earnings. I don’t think TSLA will have good things to say in next week’s earnings report, so I would look for money to start leaving the stock over the next few days.

 

GR101817-TSLA

 

Semiconductors:

Micron (MU) is holding tight along its 10-dma. As I discussed over the weekend, the stock likely needs to spend some time setting up again along the 10-dma. However, adding shares here while using the 10-dma as a tight selling guide for any added shares is a feasible move.

Cavium (CAVM) moved to higher highs today as it posted a pocket pivot at the 10-dma. The stock was in a better buying position along the 20-dema earlier in the week per my comments on the stock over the weekend. From here, pullbacks to the 10-dma would be your next reference for a lower-risk entry opportunity. CAVM is expected to report earnings on November 1st.

 

GR101817-CAVM

 

Broadcom (AVGO) broke below its 50-dma yesterday on above-average volume, negating last week’s pocket pivot at the 50-dma. This is not constructive action, obviously, and the stock is currently not in any kind of long set-up position. Earnings are not expected until December 7th.

Skyworks Solutions (SWKS) continues to move back toward its prior September highs, and this morning found support at its 10-dma at 105.67 before closing back up near the peak of its daily trading range. In my view, however, this was best bought per my prior comments on the stock when it was closer to the 50-dma at 104.

Universal Display (OLED) was last buyable along the confluence of its 10-dma and 20-dema per my discussion of the stock a week ago. It is now extended ahead of earnings, which are expected on November 2nd.

Telecom-Related Names:

Arista Networks (ANET) is holding along its 20-dema with volume drying up in the extreme today. This puts it in a buyable position at the 20-dema, using it as a selling guide. Note that over the weekend the stock was in a buyable position along its 10-dma but broke below the line on Monday. This brings the 20-dema into play as the next area of logical support, but doesn’t add weight to the idea that it can rally sharply before earnings which are expected on November 2nd.

Lumentum Holdings (LITE) has settled all the way back into its 50-dma as volume has dried up to -47% below average. However, earnings are expected on October 26th, so unless one is looking to buy the shares here along the 50-dma, while using it as a selling guide, with the idea of catching a quick pre-earnings pop, there isn’t much to do here currently.

Applied Optoelectronics (AAOI) has continued to move lower after last Friday’s shortable gap-down move and is now extended to the downside.

 

Bio-Tech/Medical Names:

The iShares NASDAQ Biotechnology Index Fund (IBB) has pulled back to its 20-dema on light volume, which puts it back in a lower-risk entry position using the 20-dema as a selling guide. Keep in mind that several big-stock bio-tech components of the IBB will be reporting earnings over the next couple of weeks, so I would advise laying back and seeing what transpires after those reports are out.

Chinese Names:

Alibaba (BABA) broke below its 20-dema yesterday on above-average selling. But as I pointed out before, a sell-off on above-average volume that breaks a key support level is just a buy signal! Proving my point, BABA rallied back above the 20-dema to post a pocket pivot at the line.

So, if you bought it on the basis of yesterday’s above-average volume breach of the 20-dema (a move which defies logic, but not the logic of this market!), you caught the move today. Otherwise, I don’t see much to do here ahead of earnings, which are expected on November 2nd.

 

GR101817-BABA

 

Sina (SINA) is holding support at its 20-dema with volume drying up to -70% today, a “voodoo” pullback that is buyable, using the 20-dema as a tight selling guide.

Weibo (WB) is holding support right at its 50-dma as volume dried up to -58% today. That puts it in a lower-risk entry position here using the 50-dma or today’s intraday lows as a tight selling guide.

 

GR101817-WB

 

Cyber-Security:

Palo Alto Networks (PANW) is holding at its 10-dma as volume remains low, but is above what I would define as “voodoo” levels. Technically, this is a lower-risk entry spot right here along the 10-dma, using it as your selling guide.

Fortinet (FTNT) is on fire here as it extends the amazing rally it has had since undercutting its prior early-August low on a classic Ugly Duckling U&R long set-up. The undercut of that prior low has created a lop-sided sort of double-bottom base, and today’s strong-volume move above the mid-point of the pattern constitutes a standard-issue base breakout from a not-so-standard double-bottom base.

It is extended from the breakout point, as I see it, and I would not be trying to buy the stock up here with earnings expected on October 26th. However, if you were bold enough to see and act on the U&R long trigger on October 2nd, you have a nice cushion to work with going into earnings.

 

GR101817-FTNT

 

Cloud Software Names:

Salesforce.com (CRM) is sitting at its 10-dma, putting it in a lower-risk entry position while using the 20-dema as your selling guide.

ServiceNow (NOW) pulled an outside reversal to the downside today, which looks a bit ugly. Watch how this acts as it pulls closer to the 20-dema at 119.28. If volume is drying up at that point, that could put the stock in a lower-risk entry position.

 

GR101817-NOW

 

Square (SQ) is taking a breather as it starts to meet up with its 10-dma after being up 15 days in a row after Monday’s up day. Earnings are expected on November 2nd, so with the stock in a very extended position from its early September base breakout, there is nothing to do here currently.

Tableau Software (DATA) is extended and out of buying range. I prefer looking at it on pullbacks to the 20-dema from here.

Workday (WDAY) was down nearly three points early in the day today before finding support near its 50-dma and closing back above its 20-dema. Volume declined to -35% below average today which makes the stock a little more buyable here using the 50-dma as your maximum selling guide. Notice, however, that the stock has been volatile over the past couple of weeks, such that an opportunistic approach where one looks for deeper pullbacks like today’s holds less risk.

 

Internet Related:

Yelp (YELP) pulled the classic Ugly Duckling maneuver as it ran into its 50-dma yesterday on volume that represented extreme “voodoo” levels at -60% below average. That led to a gap-up move that carried back up through the 20-dema on increased buying volume.

The key here was to buy shares at the 50-dma yesterday, although the stock would have been buyable as it moved back up through the 20-dma on the MAU&R type of set-up. Meanwhile, YELP is expected to report earnings on November 2nd, so you would want to see a sharp move higher in order to build some sort of reasonable profit cushion if choosing to hold through earnings. Speaking for myself, I just take the money and run before earnings.

 

GR101817-YELP

 

Solar Names:

First Solar (FSLR) is acting unstable here along its 50-dma. Yesterday the stock sold off on an intraday basis, undercutting the lows of its early October price range. It then rallied back up toward the 50-dma to close near the peak of its daily trading range, but did not regain the 50-dma. Today it rallied back up through the 50-dma early in the day, but reversed back below the line by the close.

Earnings are expected next week, on October 26th, so there is nothing to do here ahead of the report.

 

GR101817-FSLR

 

SolarEdge Technologies (SEDG) is extended after posting a pocket pivot at the 10-dma on Friday. Earnings are expected on November 2nd, so one will soon have to decide when and where to lock in a profit. Otherwise, brave (some might say foolish) souls can play earnings roulette.

 

Video-Gaming Names:

Activision Blizzard (ATVI) is running into resistance along its 10-dma where it looks more like a short to me here, using the 20-dema at 62.46 as a hard stop. Last week’s brief undercut & rally move took the stock back up into its 10-dma, but so far, the stock has not been able to press higher, and buyers seem to be losing interest here. ATVI is expected to report earnings on November 2nd.

 

GR101817-ATVI

 

Electronic Arts (EA) regained its 50-dma on Friday, but that MAU&R didn’t last long when the stock broke the line on above-average volume on Monday. That led to a gap-down break today, but notice how the stock undercut the prior late-September low at 112.85 and then rallied to close near the peak of its gap-down price range.

This could set up a rally further to the upside that fills today’s gap “window.” If that occurs on weak volume, I would look to short the stock at that point. EA is expected to report earnings on October 31st, so shorting ahead of earnings would imply that you’re looking for more downside in advance of the report.

 

GR101817-EA

 

Take-Two Interactive (TTWO) is holding tight along its 10-dma as volume continues to dry up. Technically this puts the stock in a lower-risk entry position, but so far TTWO hasn’t shown any desire to push higher, and with its two cousin-stocks coming under selling pressure I’m not interested in the name ahead of earnings, which are expected on November 7th.

 

Software:

Veeva Systems (VEEV) is settling back into its 50-dma following last Thursday’s roundabout pocket pivot. The stock actually presented a much better entry opportunity yesterday when it tested its 10-dma on light volume. It remains in a buyable position, using the 10-dma or 20-dema as maximum selling guides, although I’d prefer an entry as close to the 50-dma at 58.72 as possible. VEEV is expected to report earnings on November 28th.

Nutanix (NTNX) is drifting in slightly as volume dried up to -47% below-average today. The action is constructive as the rising 10-dma moves higher on a bid to catch up to the stock. I would watch for any opportunistic entry that occurs on a pullback closer to the 10-dma and the top of the prior base. NTNX isn’t expected to report earnings until November 29th.

 

GR101817-NTNX

 

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.

As we keep moving through earnings season, taking initial positions in stocks that have yet to report, especially those expected to report imminently, is a dicey proposition. As I discussed over the weekend, you want to lay back and see what sorts of opportunities arise after earnings, which affords one the luxury of refraining from playing earnings roulette.

An interesting example, despite being a 0% earnings grower and a dog of a big-cap tech, is International Business Machines (IBM). The stock posted a bottom-fishing buyable gap-up (BFBGU) today on huge upside volume. The move would have been buyable near the open, using the 156.95 intraday low as your selling guide.

Of course, IBM isn’t what you would call your standard CAN SLIM™ buy candidate, but the technical set-up was there. In a market where stocks are essentially the new bonds, and money is seeking a home in anything it can find, including such stalwarts as General Motors (GM) or Johnson & Johnson (JNJ), it can work.

Note that IBM, also cleared the 200-dma today, which now serves as a trailing stop if one decided to try and buy the thing right here on the basis of the BFBGU. IBM accounted for about 100 points of the Dow’s upside move today, and for all we know it may continue to help push the Dow even higher if it can continue to hold the 200-dma.

 

GR101817-IBM

 

While IBM serves as an example of one type of opportunity that can emerge following an earnings report, we can also look at the current pullback in NFLX after it reported earnings on Monday as a potential opportunity in the making. As I wrote further above in this report, the post-earnings pullback could present a lower-risk entry spot as it approaches the 20-dema and the top of the prior base.

For now, this is what your focus should be – those set-ups, either on buyable gap-ups or constructive pullbacks after earnings, are what you are looking for as we move through earnings season where playing earnings roulette carries a high degree of risk. Obviously, if you hold a stock through earnings and your number comes up on the roulette wheel, you can profit handsomely. In my view, however, it is not necessary to play that game unless one has a prior, reasonably comfortable profit cushion.

And so, this once again brings us back to where we begin, which is to focus on the individual stock set-ups in real-time, and to play it as it lies. In the meantime, we could easily see a market pullback, even a sharp one, but in my view, that would give us a chance to see just how much further potential the current market rally has. 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. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.