The Gilmo Report

September 10, 2017

September 10, 2017

Friday’s action had an odd odor to it, as the NASDAQ 100 and NASDAQ Composite Indexes were both hit with selling on lighter volume. The big-stock NASDAQ names, however, took the brunt of it as the NASDAQ 100 tanked -0.85% on the day. Meanwhile, in an interesting divergence, the S&P 500 and Dow Jones Industrials Indexes closed roughly flat, although both stalled and gave up on early rallies.

 

GR091017-$COMPQ

 

The S&P 500 Index doesn’t look all that much different from the NASDAQ as it also pulled into its 10-day moving average with volume declining. The Dow is, however, testing support at the 50-day moving average for the fourth time in the past three weeks. It closed up on Friday, along with the broader NYSE Composite, which was up 0.07%, and the small-cap Russell 2000, which was up 0.05%.

The divergences on Friday were a bit funky, to say the least, but in my view the breakdown in big-stock NASDAQ names could be telling if we also see the Dow bust support at the 50-day line in the coming days. As I’ve indicated previously in recent reports, this is a choppy market that lends itself more to an opportunistic swing-trading or tactical approach rather than a straight-forward investor’s approach where one builds positions in anticipation of an intermediate-term trend developing.

 

GR091017-$INDU

 

One could chalk up the market action on Friday to worries over Hurricane Irma, which hit Florida over the weekend. But this all just strikes me as another one of these alibis, in this case to sell big-stock NASDAQ names. After all, does it seem logical that big-stock NDX names, most of which are based in Silicon Valley, would be sold off because of a hurricane hitting Florida? I think not.

The U.S. Dollar remains in what I consider to be an ominous downtrend that has held in place all year long. The weekly chart below illustrates the steady downtrend channel that the dollar’s proxy, the PowerShares U.S. Dollar Index Bullish Fund (UUP), has formed since January. On Friday the UUP broke to lower lows as the dollar moves to its lowest levels since late 2014.

With so many expressing confidence of a robust economy and the certainty of more Fed rate increases to come all year long, the dollar has been singing a different tune since January. As I wrote on Wednesday, the dollar’s steady decline conjures up the specter of impending deflation. With rates already so low, the Fed would not seem to have many bullets left in the chamber to deal with a deflationary crisis. And if deflation is indeed on the horizon, it won’t likely be good for stocks today any more than it was in late 2008.

 

GR091017-UUP

 

The dollar’s deflationary demise in 2017 has been a boon for gold, as we already know from my numerous discussions in prior reports. The SPDR Gold Shares ETF (GLD) closed near the peak of its weekly range as it rapidly approaches its 2016 highs.

The yellow metal itself ended the week at $1,351 per ounce, a new 52-week high, and the GLD remains extended from any kind of lower-risk entry point. Those have come and gone per my prior discussions when the GLD was trading much lower.

 

GR091017-GLD

 

The rapidly dwindling impetus for more Fed rates hikes has not only taken its toll on the dollar, but financials as well. The Financial Select Sector SPDR Fund (XLF), not shown, and its second-largest component, J.P. Morgan (JPM), are both now flirting with their 200-day moving averages. The two look similar here, which is no surprise, and financials in general continue to come under pressure.

Whether this is due entirely to the likelihood of future interest rate increases is subject to debate. Continued deterioration in financials, no matter how you slice it, can be a serious warning sign for the market. Of course, we won’t know for sure until a crisis pops up, but until then we can certainly take advantage of the situation.

JPM was last shortable near the 50-day moving average. After breaking down to the 200-day line on Thursday, the stock was unable to muster any kind of bounce as it gave up all its initial intraday gains and closed near its lows for the day on above-average volume. From here I’d prefer a bounce up to the rapidly declining 10-dma or 20-dema as a shorting opportunity. But the stock could simply bust through the 200-day line from here without so much as a whimper.

 

GR091017-JPM

 

Citigroup (C) is another big-stock financial and component of the XLF, and it was previously one of the better acting names as it was near new highs as early as a week ago. The stock busted its 50-day moving average on Thursday on heavy volume, and like JPM started to the upside on Friday morning. It didn’t get very far before reversing to close near its intraday lows as buying interest failed to materialize.

You can probably look through the entire sector and find a number of patterns that look like JPM and C. Both stocks are full-fledged late-stage failed-base (LSFB) short-sale set-ups, where rallies back up into their 50-dmas bring them into the most optimal short-sale range.

 

GR091017-C

 

The sudden about-face in big-stock NASDAQ names on Friday negated some positive action that was seen in a few of these stocks on Thursday. For example, Facebook (FB) posted a pocket pivot at its 10-day moving average on Thursday, but gave that up on Friday as buyers couldn’t find the will to create any upside follow-through.

Instead, FB pulled back into its 10-dma on lighter volume, which technically brings it into a lower-risk entry position. A breach of the confluence of the 10-dma and 20-dema would, however, be problematic for the stock and could bring it into play as a short-sale target IF we see the general market start to get into trouble next week. This is, as they say, touch and go for now.

 

GR091017-FB

 

Tesla (TSLA) is another example of a Thursday pocket pivot to nowhere. We can see the pocket pivot off the 50-day moving average that day in the chart below, but all that did was run into resistance at the 20-dema. From there the stock pulled right back into its 50-day line on weak volume as buyers failed to show up.

This remains a two-side situation, since a breach of the 50-day line would bring TSLA back into play as a short-sale target. Conversely, if the stock can hold here at the 50-dma, it is then deemed to be at a lower-risk entry position, much like it was on Wednesday. Whether the stock will again find support and rally off the 50-dma as it did on Thursday remains to be seen, however. This is another fluid, two-sided situation that has yet to resolve, and it is important that members remain open-minded to whatever final resolution finally comes to pass.

 

GR091017-TSLA

 

Netflix (NFLX) has had a very nice move since pocket pivoting off the 10-day moving average not quite two weeks ago. It posted a second pocket pivot on Wednesday, as I discussed in my report of that day, but hasn’t gone any higher from there.

On Friday the stock posted an outside reversal to the downside on weak volume as buyers stood back. If one is truly interested in the stock, then one should wait to see how any further pullback to the confluence of the 10-dma and the 20-dema plays out. That would put NFLX in a lower-risk entry position, but one would have to remain alert since a breach of the moving average confluence could easily bring it into play as a short-sale target.

 

GR091017-NFLX

 

Nvidia (NVDA) is one big-stock name that has remained a two-side situation for some time, but which could now be shifting more toward the bearish side. After rallying up to its prior highs and the 170 price level, the stock has failed to gather any further upside momentum, and earlier in the week dropped back down to the confluence of its 10-dma and 20-dema.

On Friday, NVDA broke below the 20-dema on higher selling volume that was below average and met up with its 50-day moving average. The break back below the 20-dema is the first sign of a possible LSFB short-sale set-up in motion, and would only be confirmed by a subsequent move below the 50-day line.

I can and have played this both long and short over the past few weeks, depending on which direction it is moving in. Over the past two months, NVDA has remained within a choppy later-stage base that has yet to fail completely, but that might be in the cards if we see the general market get into trouble at some point. For now, I don’t consider the stock a long here, but would definitely be interested in seeing how any bounce back up into the 10-dma/20-dema confluence might present a short-sale opportunity. A murky situation, at best.

 

GR091017-NVDA

 

And as we see NVDA start to act a bit funky, Apple (AAPL) has now broken below its 20-day exponential moving average for the first time since early July. That move came on Friday with volume picking up to above average. That, in my view, triggers the stock as a short-sale, using the 20-dema as a guide for an upside stop. From here a test of the 50-day moving average seems quite plausible. This would also likely coincide with a breakdown in the NASDAQ Composite as well.

 

GR091017-AAPL

 

Below are my notes on other big-stock NASDAQ names discussed in recent reports, short or long:

Alphabet (GOOGL) ran into resistance at the 50-dma on Friday, which implies that rallies up into the 50-dma are shortable until further notice, using the 50-dma or the highs of last week near 960 as a possible guide for an upside stop.

Amazon.com (AMZN) has been unable to regain its 50-dma even as the NASDAQ Composite itself has been able to regain its own 50-dma. The stock dipped back below the 20-dema on Friday on light volume, but for now I would consider rallies up near the 50-dma at 986.27 as likely shortable affairs.

Microsoft (MSFT) tucked back into its 10-dma on Friday as volume declined. Technically this could be considered a lower-risk entry point, but the stock is still trying to hold up after failing on a breakout attempt two Fridays ago.

Bio-techs seem to be consolidating normally after strong moves the week before. Here we see Vertex Pharmaceuticals (VRTX) pulling into its 10-day moving average as volume declines to -44% below average on Friday. This puts it in a lower-risk entry position using the 10-dma or 20-dema as tight selling guides.

VRTX posted two pocket pivots coming up through the two short moving averages the prior week, and ran into resistance near the highs of the range two Fridays ago. So far, support has held along the 10-dma and 20-dema, but the trick is to buy the stock as close to the moving averages as possible.

 

GR091017-VRTX

 

Alexion Pharmaceuticals (ALXN) is another bio-tech on my watch list that is pulling back on light volume. This is coming down just below the 10-day moving average but right to the top of the prior base breakout point. In this case, I’d look to use the 20-dema as a selling guide.

Note that ALXN previously broke out in late July and reversed that day to close near the lows of its intraday range, which looks bearish. Nevertheless, it held up and spent another month building another base. It then broke out from the second base six trading days ago on the chart.

In the old days this would be a base-on-base type of formation, which would imply that the stock was coiling up for a big upside move. In this market, however, things don’t work exactly like they used to, and the key is to always look to buy on constructive weakness, such as this lighter volume pullback to the top of the base.

 

GR091017-ALXN

 

Supernus Pharmaceuticals (SUPN), another bio-tech I like but which I don’t show here on a chart, is extended near-term. Note, however, that the stock pulled right into its 10-dma on Thursday and pushed higher on a pocket pivot move, which is constructive. Again, buying on the pullback Thursday was key.

Bioverativ (BIVV) has been my Ugly Duckling candidate among bio-techs, and I first discussed it a week ago as it was posting a minor undercut & rally move back up through the prior August low. While there wasn’t much upside thrust following that U&R move over a week ago, the stock is now starting to percolate as it confirms the U&R set-up.

This additional confirmation came on Thursday and Friday as the stock posted two bottom-fishing pocket pivots (BFPPs) at the 10-day moving average, closing above the 20-dema on Friday. In my view this confirms the stock as a buy here while using the 10-dma as a tight selling guide as it finally regained the 10-day moving average.

 

GR091017-BIVV

 

Cyber-security stocks all got a boost on Friday after news hit Thursday after the close that Equifax (EFX) suffered a hack attack that resulted in 143 million customers’ personal data, including social security and credit card numbers, being stolen. Ah, life in the internet age!

This sent stocks like my favored Palo Alto Networks (PANW) gapping to the upside Friday morning in moves that didn’t last very long before petering out to the downside. The stock ran all the way up near its prior buyable gap-up (BGU) highs before backing down to close right near the lows of its daily trading range.

Volume was 69% above average, which is not what I want to see. PANW set up nicely on Thursday as it pulled in to the lows of a three-day price range on lighter volume. Buying it there would have put one in the position of benefiting from Friday’s move, but the end results were disappointing.

This may simply set up again, so I’d watch how it acts along the lows of this post-BGU range and the 142.23 intraday low of the BGU day.

 

GR091017-PANW

 

Lumentum Holdings (LITE) has been the only optical name I’ve considered worth looking at as a potential Ugly Duckling play. This is based on the fact that its business may be shifting more toward 3-D sensors in smart phones as a more robust line of business relative to its communications network business.

It is likely that LITE will win business for its VCSELs from Apple (AAPL), but that alone may not be enough to drive the stock since manufacturing constraints are an issue. This may consequently not be enough to offset slowdowns elsewhere. So far LITE has been able to hold above the 10-dma and 20-dema, but on Friday ran into solid resistance at the 50-dma, just as it did on Tuesday and Wednesday of this past week.

In addition, the stock closed below the 20-dema, which I was using as a tight selling guide. I bought some shares on Thursday as LITE pulled into the 20-dema with volume drying up sharply. But I ended up selling near the 50-dma as the stock ran out of gas on my 620 intraday chart. If it can settle down and regain the 20-dema over the next few days, it may be worthwhile testing out on the long side. But the flip-side of this is that it can also be viewed as a short into rallies up to the 50-dma. Another two-side situation that has yet to resolve itself completely.

 

GR091017-LITE

 

The China Three names on my long watch list continue to act reasonably well, with Weibo (WB) and Sina (SINA), both not shown here on charts, remaining monsters on the upside. Pullbacks to the nearest moving averages, the 10-dma and the 20-dema, should be watched for opportunistic entries, should they occur.

Alibaba (BABA) was an upside monster back in the middle of August, but has since gone into consolidation mode. The higher selling volume as the stock bounces off the 20-dema might be a bit concerning, but only if it eventually busts the 20-dema on heavy selling volume.

At this stage, BABA is certainly entitled to spend more time building a longer base, and I would simply be patient and let it do so. If one owns the stock closer to where I first began discussing it earlier in the year when it was closer to $100, then it is a simple matter of knowing where your maximum selling guide is, depending on how you intend to handle the position.

 

GR091017-BABA

 

Momo (MOMO), which is no longer on my long watch list, almost looked like a nascent Ugly Duckling long set-up this past week as it held tight along the 10-day moving average with volume drying up nicely. On Friday the stock made a move up toward its 20-dema, but ran into solid resistance there and reversed to the downside on higher, but below average, selling volume.

When MOMO reported earnings in the latter part of August, it gapped down on a late-stage, failed-base move, and then proceeded to slide lower until it caught a break and some support at the 200-day moving average. While the earnings and sales were fantastic, higher expenses were what spooked investors, resulting in the brutal breakdown off the highs three weeks ago.

So while MOMO may still try and set up along the lows of what eventually becomes a new base, there is also a two-side reality here. That is, namely, that it acted more like a short-sale target on Friday on the rally into the 20-dema, which would certainly function as a logical overhead resistance point. For this reason, I am willing to play MOMO in either direction, as a short or an Ugly Duckling long, depending on how things pan out from here. For now it is firmly planted on my short-sale watch list, but is also on my Ugly Duckling long watch list as well. Play it as it lies!

 

GR091017-MOMO

 

Activision Blizzard (ATVI) and Electronics Arts (EA) continue to move more or less in sync with each other, but are still having trouble getting any upside momentum going after recent breakouts. While ATVI, not shown, is still holding above its prior breakout point of two Wednesdays ago and is in a lower-risk entry position currently at its 10-dma, EA is sputtering a bit.

The prior week’s pocket pivot breakout looked good at the time, but it has since failed, and EA is now living below the prior breakout point at 120.25, closing Friday at 118.28. Last quarter’s earnings were up 343%, so the stock is no fundamental slouch, but then fundamentals always look best at the top.

At this precise point in time, EA is acting more like a late-stage, failed-base, short-sale set-up. Even worse, on Friday it was added to Goldman Sachs’ “conviction buy list.” This only briefly sent it up back above the 120 price level before the stock reversed to close down on higher, but only average, volume.

I’m willing to go with this either way, but I’d like to see some clues from the other names in the group. If ATVI starts to show signs of failing on its recent breakout, then it may make sense to go after EA on the short side right here. This would be while using the 10-dma or the prior breakout point at 120.25 as a guide for an upside stop.

 

GR091017-EA

 

As ATVI and EA fail to show any upside thrust, Take-Two Interactive (TTWO) remains the clear leader in the group as it doesn’t seem to have any desire to pull back much at all. The stock has kept trundling higher along its rising 10-dma since its early August buyable gap-up (BGU) after earnings.

On Thursday, TTWO showed that it means business by posting a classic continuation pocket pivot along the 10-day line. Typically, a continuation pocket pivot like this along the 10-dma is a textbook add point, which can be bought using the 10-dma as a selling guide for the additional shares added up at these higher price levels.

 

GR091017-TTWO

 

With AAPL breaking below its 20-dema on Friday on heavy selling volume, we’ve seen both of the AAPL suppliers that I’ve discussed in recent reports, Broadcom (AVGO) and Skyworks Solutions (SWKS), come under some pressure.

AVGO slid back below its 50-day moving average on Thursday, which in my view triggered a short-sale at that point. It then continued lower on Friday and looks poised to test its prior August lows along the 240 price level. On Wednesday, the stock was pulling into its 10-dma, 20-dema, and 50-dma as volume dried up to -42% below-average. That actually looked buyable at that point.

But on Wednesday I also pointed out that AVGO was a two-sided situation that could be a long or a short depending on how the pullback to the 10-dma, 20-dema, and 50-dma played out. Well, we’ve now seen how this is playing out, and the stock became a short on Thursday as dipped below the 50-dma. Now any rallies back up into the 50-dma would provide more optimal short-sale entries from here.

 

GR091017-AVGO

 

Skyworks Solutions (SWKS) looks less troublesome here as it dove right back into the confluence of its 10-dma and 20-dema. Volume was light, so this initially looks like a lower-risk entry right here using the 10-dma as a tight selling guide.

However, if we see volume pick up this week as the stock moves below the two short moving averages and/or the 50-dma, as AVGO did on Thursday, then we have another AAPL-supplier as a short-sale target on our hands. Again, play it as it lies!

 

GR091017-SWKS

 

None of the three cloud names I’ve discussed in recent reports, Salesforce.com (CRM), ServiceNow (NOW), and Workday (WDAY), have shown any signs of breaking down. While I don’t show them here on charts, all three are holding above recent breakout points, with CRM and NOW extended and out of what I would consider lower-risk buying range.

WDAY, on the other hand, pulled into its 10-dma on Friday on volume that was 11% above average. I would prefer to see volume drying up on the pullback instead of increasing, but the stock is within a single point of its 106.75 base breakout point. Therefore, buying here is a lower-risk proposition if one uses the breakout point as a tight selling guide.

If you like Ugly Duckling flocks, which is the Ugly Duckling version of a wolf pack, then both Twitter (TWTR) and Snap (SNAP) might be attractive here. Both stocks have been given up for dead, but the flock was revived this past week on reports that 2/3rd of Americans get their news from social-media sites, including TWTR and SNAP.

According to Pew Research, Twitter, YouTube, and Snapchat have grown their news usership the most since 2016. Meanwhile, Facebook, Instagram, and LinkedIn have not grown theirs much at all, as the graphic below illustrates.

 

Chart of News Usership

 

This lit up both stocks as they posted bottom-fishing or roundabout types of pocket pivots on Thursday. Twitter (TWTR), has been showing clusters of standard ten-day pocket pivots for the past month, as we can see on the chart below. All of these clusters also started showing up as the stock undercut and rallied back above its prior June low, giving the action a bit of an undercut & rally flavor.

On Wednesday, TWTR posted a pocket pivot at its 10-dma and 20-dema, and followed this up on Thursday and Friday with pocket pivots at its 200-dma, the flat-lining, red moving average on the chart. The interesting thing here is that the stock was already percolating and revving up well before this past week’s news usership numbers came out.

TWTR closed Friday dead even with its 50-dma. It either clears the 50-dma to trigger a long entry there while using the line as a selling guide, or one waits for a pullback to the 200-dma. All of the four moving averages that I use on these charts are in play here as support and resistance levels, which help provide references for tight selling guides that keep risk to a minimum.

 

GR091017-TWTR

 

Snap (SNAP) bottomed and turned at about the same time as TWTR, but in a slightly different way. Instead of undercutting a prior June low, it undercut a prior August 3rd low on August 14th and then rallied back up through it on a big-volume outside reversal. This made for a big, exciting U&R long set-up at that point for those willing to take the shot. Now SNAP is starting to add some confirmation to that initial U&R off the absolute lows by flashing a pocket pivot at its 50-day moving average on Thursday. Volume picked up sharply, and we can see that on balance volume has remained quite strong since the August 14th U&R.

Could SNAP and TWTR be on the comeback trail now that the crowd has given them up for dead? The objective reality is that since early August both have. Now we are starting to see things heat up with some concrete and actionable buy set-ups right here, right now. They don’t have to work, but the set-ups are there, and risk can be kept to a minimum if they don’t pan out bullishly.

 

GR091017-SNAP

 

Herewith my notes on other stocks discussed in recent reports:

Appian (APPN) keeps making new highs and is now way extended on the upside after posting its last pocket pivot at the 10-dma on Tuesday and Wednesday.

First Solar (FSLR) posted an outside reversal to the downside on Friday on higher but below-average volume. While it continues to hold within what is now a six-week base, a test of the 50-dma down at 45.65 may be in the cards. I would maintain the same opportunistic approach I discussed in my Wednesday mid-week report by waiting for a pullback to the 50-dma as the best lower-risk entry point.

GrubHub (GRUB) pulled down to its 10-dma on Friday on increased but below-average volume. If it can hold the 10-dma and volume dries up in the process, then the pullback might be buyable. So far, I am not seeing the volume signature I’m looking for on such a pullback, which would obviously be volume drying up rather than increasing as it did on Friday.

Square (SQ) was featured in a Wednesday evening blog post after it flashed a pocket pivot at the 50-dma that day. It has since moved back up to the top of its current six-week base, and only pullbacks to the confluence of its 10-dma, 20-dema, and 50-dma would present lower-risk entry opportunities from here. This past week, SQ put in an application to fund and launch an industrial loan bank known as Square Financial Services, Inc. The news has helped to fuel the upside move in the stock over the past few days.

SolarEdge Technologies (SEDG) posted a lower low on Friday as it is now undercutting the prior 25.90 low in what is now a five-week base. If the stock can rally back above that low, a U&R long set-up would be triggered at that point. Otherwise, a test of the 50-dma down at 24.45 may be in the cards. SEDG and its cousin, FSLR, have both had strong moves over the past several months, so remain open to the fact that their runs could be over. On a practical level, this simply means sticking to your stops and selling guides.

Yelp (YELP) posted a higher closing high on Friday and is near-term extended. As it moves along the rising 10-dma, one can wait for a continuation type of pocket pivot similar to what TTWO had on Thursday, but overall the stock seems to be losing upside momentum as volume remains light.

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).

This remains something of a frog market as opposed to a bull or bear, where choppy action rules the day, as I noted in my closing comments to Wednesday’s mid-week report. And this frog-legged state of affairs presents something of a bifurcated environment as well. One can operate long or short, depending on the precise, real-time individual stock set-ups at hand.

Another difficult aspect of this market is that the action one day does not necessarily provide any clues or indication of what will happen the next. A very weak index day such as we saw on Tuesday to start the week off has not led to any further downside, at least not yet. And often, the indexes reaching extremes in one direction or the other only means that it’s time to inflect in the opposite direction.

And as the indexes do this, individual stocks can be doing something entirely different. The only sane way to operate is to simply wait for the optimal point at which you can keep your entries, long or short, very tight with respect to risk management.

I suppose that we could wake up one day to see that the U.S. has nuked North Korea into oblivion, and this would probably send the market gapping down hard, although you can never be sure. But then a grim realist might say that the start of World War Three might send stocks down hard, but that would be the worst of our problems. Take it from there.

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.