The Gilmo Report

September 20, 2017

September 20, 2017

The Fed came out today and did nothing about interest rates, leaving them unchanged. What was different about today’s policy announcement was their reiteration that they remain on track to begin paring back their $4.5 trillion balance sheet in October. The market thought about this for a little while, and then began to sell off hard, with the big-stock NASDAQ names leading the way down.

But as is often the case in this market, just when things looked dire, the NASDAQ Composite Index found its intraday feet and rallied off the lows. By the close, it posted what is, at least on the surface, a higher-volume supporting action type of day based on higher volume. Things under the hood, however, remain a bit uneven, as we’ll see later in this report.

 

GR092017-$COMPQ

 

The S&P 500 Index also recovered from its intraday lows, and posted a new all-time closing high on higher volume. So, while the market certainly assessed the Fed’s announcement today as hawkish, it wasn’t quite hawkish enough to derail the rally, and all the major market indexes showed supporting action off the lows on higher volume.

 

GR092017-$SPX

 

While the equity indexes ignored any signs of hawkishness from the Fed, there was plenty of other evidence that the market saw the Fed’s remarks as indicative of tightening monetary policy, at least on an incremental basis. This was confirmed by a sharp downside break in gold, as the SPDR Gold Shares ETF (GLD) pulled an outside reversal to the downside on heavy volume.

It is now sitting right on top of its prior breakout point, and is on the verge of failure. Of course, the real move in the GLD began back in early July on the prior undercut & rally move down around 116 per my comments back then. What it does from here is anybody’s guess. But if you believe the Fed is bluffing, then this pullback to the top of the prior four-month base would perhaps offer a lower-risk entry, using the 50-dma at 122.13 as a relatively tight selling guide.

 

GR092017-GLD

 

The Financial Select Sector SPDR Fund (XLF) and the action of financials in general also confirmed the view of incremental tightening by the Fed. The ETF rallied to a new closing high as it completes a straight-up-from-the-bottom or “SUFB” breakout. This comes after the XLF was looking like it was on its deathbed back in early September when it busted its 200-dma on heavy selling volume.

As I wrote over the weekend when the XLF was sitting along its 20-dema and just below its 50-dma, “Frankly, I would not be surprised to see this push back above the 50-dma on a moving average undercut & rally type of move after shaking out below all the prior base lows.” This breakout could be considered buyable, although the lower-risk route would be to look for a constructive pullback to the 20-dema.

 

GR092017-XLF

 

Big-Stock NASDAQ Names:

Big-stock NASDAQ names remain an uneven bunch, with some names flying higher while others languish. Apple (AAPL) broke below its 50-dma today after being shortable along the 20-dema earlier in the week. It then undercut the prior August lows in the pattern, leading to a small intraday undercut & rally move.

It did, however, remain below its 50-dma, which keeps it in a compromised position. If one wishes to invoke the Ugly Duckling, however, the U&R move today is the 154.63 low of early August as a tight selling guide. Assuming it holds that, then confirmation of that U&R would be found on any move back up through the 50-dma from here.

 

GR092017-AAPL

 

Amazon.com (AMZN) has also failed on its pocket pivot of exactly one week ago, when it cleared the 50-dma on what looked like a nice roundabout type of move. But as I discussed over the weekend, the stock was showing zero follow-through to last Wednesday’s pocket pivot. That was perhaps a clue since the stock busted below the 50-dma on Monday and is now trading below its 20-dema.

Today it found support off the intraday lows and pushed back up into the 20-dema, which in my view likely makes it shortable here using the 20-dema as a guide for an upside stop. Obviously, in this market, AMZN could easily fake everyone out and head back to the upside, since its technical action has been somewhat incoherent and difficult to decipher. For this reason, shorting the stock here necessitates using a tight stop.

 

GR092017-AMZN

 

Alphabet (GOOGL) has rallied back up into its 50-dma on above-average volume, but failed to clear the line, closing just below it. This could put the stock in a shortable position here using the 50-dma as a tight upside stop. The flip-side is that if the stock can post a strong move up through the 50-dma, it would become actionable as a long at that point, using the 50-dma as a tight selling guide.

One of the current big-stock NASDAQ stars, Nvidia (NVDA), has held above its recent base breakout as it moves with the semiconductor group. Semis have become another “pile in” type of situation, not unlike bio-techs were in August, or Chinese names a week or so ago, and NVDA has certainly been one of the names that everyone has piled into. Given its current extended state, I would look at pullbacks closer to the breakout point down near 172 as your best, lower-risk entry opportunities.

Facebook (FB) dipped below its 20-dema on Monday as selling volume picked up sharply, but that ugly action merely led to an immediate rebound back above the line yesterday. Volume was not high enough for a pocket pivot. However, astute OWL-style chart readers will notice that yesterday’s rally triggered an undercut & rally (U&R) long set-up in the stock as it pushed back above the lows of September 5th and 6th.

That led to a small upside move that ran into resistance at the 10-dma. Overall, however, FB just remains in an eight-week base along its 10-dma and 20-dema as volume remains light. One could seek to take a position in the stock here, in anticipation of a breakout, while using the 20-dema as a tight selling guide, or the 50-dma down at 168.59 as a wider selling guide.

 

GR092017-FB

 

Netflix (NFLX) is still working on a possible handle to a cup-with-handle base. The stock has had a strong run since its roundabout pocket pivot of August 30th, and from here I’d prefer to see a nice pullback into the 10-dma or, better yet, the 20-dema as an opportunistic entry.

Tesla (TSLA) is pulling back down toward its 10-dma after posting a new all-time high on Monday. Volume dried up today to -22%, so watch for volume to continue drying up as the stock perhaps meets up with the 10-dma in the next few days.

 

GR092017-TSLA

 

Telecom-Related Names:

Arista Networks (ANET) made another new high today and is now quite extended from last week’s breakout. For that reason, one would have to wait for at least the 10-dma to catch up to the stock as a possible reference point for a lower-risk entry opportunity on any pullback to the 10-dma.

Lumentum Holdings (LITE) failed today at its 50-dma on higher selling volume, which in my view reversed the stock from a long to a short at that point. With the stock breaking below the 20-dema as well today, that triggered a second short entry point, using the 20-dema as a guide for a tight upside stop.

 

GR092017-LITE

 

Bio-Tech/Medical Names:

Alexion Pharmaceuticals (ALXN) has pulled into its 20-dema, which puts it in a lower-risk entry position here using the 20-dema or the top of the prior base at 140 as a selling guide.

 

GR092017-ALXN

 

Supernus Pharmaceuticals (SUPN) yesterday demonstrated the headline risk inherent in all bio-techs after it reported poor testing trial results for one of its products, currently known as “SPN-810.” It presented buyers with a nice entry opportunity on Friday as it pulled down to test the 20-dema. When you are long something like this and it gaps down through a key level of support, in this case the 20-dema, you simply unload your shares, no questions asked. It has been removed from my long watch list.

Vertex Pharmaceuticals (VRTX) closed below its 50-dma for the first time since early January of this year, but is holding along the lows of the past two days. This might become more interesting if it can quickly regain its 50-dma. Alternatively, if it undercut the lows of its current base around 147-148, I would simply use the 50-dma as a tight selling guide. After having a torrid run in August, bio-techs have run out of steam, but once the crowd starts losing interest in them, that may be the time to remain opportunistic as the stocks pull back.

 

Chinese Names:

Currently my favored Chinese names number four, so we have a China Four given that Momo (MOMO) has been unable to flash any kind of actionable long signal as it continues to move lower.  Alibaba (BABA) and Sina (SINA) both found support along their 10-dmas today, but I still consider both to be sub-optimal in terms of lower-risk entries relative to how extended these names are to the upside.

My main concern is that they could end up like Weibo (WB), which failed to hold its 10-dma on Monday, and then today busted its 20-dema on above-average selling volume. It’s now dangling in mid-air underneath the 20-dema with the 50-dma way down at 89.02 representing the next nearest support level on the downside.

Note that WB has had a strong move since breaking out back in early August, so is entitled to some backing and filling. The question is where one’s trailing stop is, and whether it is prudent to take profits here and allow the stock to set up in a lower-risk entry position once again, assuming it hasn’t topped.

 

GR092017-WB

 

JD.com (JD) pulled into the confluence of its 10-dma, 20-dema, and 50-dma today, holding support at the 10-dma. Volume dried up to -35% below average, which is precisely the minimum for a “voodoo” pullback. This puts the stock in a lower-risk entry position here, using the moving average confluence as a selling guide.

 

GR092017-JD

 

Cyber-Security:

Palo Alto Networks (PANW) has failed below the prior 142.23 intraday low of its September 1st buyable gap-up (BGU) move. Today it slammed into its 20-dema before rebounding, but still closed down on the day. Volume remained light but did pick up on the day in a minor show of intraday supporting action off the 20-dema.

Notice that this pullback has also brought the stock right back to the top of its prior base. Thus, this might serve as a lower-risk entry position given that PANW closed less than 1% below the 142.23 prior BGU low. In this case the 20-dema and the top of the prior three-month base serve as reasonably tight selling guides.

 

GR092017-PANW

 

Fortinet (FTNT) pulled right into the confluence of its 10-dma, 20-dema, and 50-dma and closed mid-range in a show of support off the lows. Volume, however, was light, but did pick up only slightly. This would represent a lower-risk entry here using the 20-dema at 37.94 as a maximum selling guide.

Semiconductors:

Broadcom (AVGO) morphed back into a short today as it failed at the 50-dma. Not much to say here except that if one was testing the stock as a long along the 50-dma, one would have been quickly stopped out today. For those ready to move in either direction with a stock, AVGO could have then been flipped to a short once it busted the 50-dma. It is now extended to the downside, and weak rallies up into the 10-dma at 247.18 should be watched for potential short-sale entry opportunities.

Both AVGO and Skyworks Solutions (SWKS) are now back to being late-stage failed-base short-sale set-ups. SWKS joined its fellow AAPL supplier by failing on the base breakout it posted last Friday. Yet another example of why I do not prefer breakouts, unless I can catch ‘em very early and then maintain a tight stop at the breakout point.

Once SWKS broke below the prior breakout point around 108 and then the 20-dema, it was a sell at that point. Once it broke below the 20-dema today it was triggered as a short-sale at the 20-dema. By the close, SWKS ended up below its 50-dma as well, and is now shortable on any rallies back up into the 50-dma at 104.71.

 

GR092017-SWKS

 

Last Friday both stocks looked to be off to the races with AVGO’s pocket pivot at the 50-dma and SWKS’ base breakout on strong volume. But those have now failed, and the stocks are back on my short-sale watch list. They are also testament to the difficult nature of this market, where some things work well, and some things don’t.

Cloud Software Names:

Salesforce.com (CRM) clung to its 20-dema today, closing just above the line after dipping below it earlier in the day. This might present a lower-risk entry here, using the 20-dema as a tight selling guide

ServiceNow (NOW) continues to hold near-term support along its 20-dema, which keeps it in a lower-risk entry position here using 114.50 low of five trading days ago as a selling guide. Note that today NOW undercut that 114.50 low and closed just above it and the 20-dema, triggering a U&R long set-up at that point.

Square (SQ) remains within buying range of last week’s base breakout, using the 20-dema at 27.09 as your tightest selling guide. I don’t advocate the 7-8% O’Neil-style stop when buying breakouts, and my preference would still be to look for a pullback into the 20-dema or the top of the base as a lower-risk entry opportunity.

Tableau Software (DATA) is sitting right at its 10-dma with volume drying up to -41% below average today. This could be considered a lower-risk entry point here, but I would keep a tight stop along the 10-dma given the stock’s current extended state from its early August breakout near 67.

Workday (WDAY) is starting to fail on its prior base breakout of nearly three weeks ago, but is holding “last stand” support at its 50-dma. Volume came in at above-average today as the stock closed about mid-range after finding intraday support at the 50-dma.

I don’t like the fact that so far WDAY is just another breakout to nowhere, but opportunistic buyers might see this as actionable here using the 50-dma as a tight selling guide. The flip side here is that it could also be shortable using the 20-dema as a guide for an upside stop, looking for bearish confirmation in a clean breach of the 50-dma. This could go either way, as I see it, so play it as it lies!

 

GR092017-WDAY

 

Internet Related:

Yelp (YELP) continues to trend higher along its 10-dma, but pullbacks to the 20-dema at 42.76 would seem to offer the best, lower-risk and very opportunistic entry points, should they occur.

Social-Networking Names:

Twitter (TWTR) is sitting right at its 50-dma with volume drying up to -51% below average today. This puts it in a lower-risk entry here, using the 50-dma as a tight selling guide.

Snap (SNAP) has busted its 50-dma, which was the maximum downside selling guide for the stock. I was using the 10-dma, and it busted that on Monday, so it was exit, stage right, at that point for me.

 

GR092017-SNAP

 

Solar Names:

First Solar (FSLR) is another failed base breakout as it acts somewhat incoherently. First, after posting a strong pocket pivot and gap-up base breakout last week on heavy buying volume, the stock gave it all up on Monday as it pushed back below the breakout point around the 50 price level.

This is why the OWL entry on last Thursday’s pocket pivot at the 50-dma was the proper entry point, rather than getting sucked into the standard-issue O’Neil-style base breakout. Today FSLR was on the ropes as it broke down to and just below its 50-dma. But it rallied from there to close near the top of its range and back above the 10-dma/20-dema confluence.

However, this is also a late-stage failed-base situation where the stock has rallied back up into but still below the prior breakout point. The issue, however, is whether this will cooperate on the downside, or whether today’s action is setting up a re-breakout to the upside.

One way to test this would be to go long here using the 10-dma/20-dema as your selling guide. If the stock reverses back below the two short moving averages, then it may be treated as a short-sale at that point. This is typical two-sided craziness that seems to characterize any number of stocks in this market.

 

GR092017-FSLR

 

SolarEdge Technologies (SEDG) is holding support along the confluence of its 10-dma and 20-dema. This puts it in a lower-risk entry position here, using the 50-dma as a reasonably tight selling guide.

Video-Gaming Names:

Activision Blizzard (ATVI) can’t decide whether it wants to re-breakout or simply morph into a late-stage failed-base short-sale set-up. Today the stock rallied back up above the prior 64.45 breakout point to close at an even 65 on above-average volume. It also closed above the 20-dema, which technically puts it in a lower-risk entry position using the 20-dema as a tight selling guide.

 

GR092017-ATVI

 

Electronic Arts (EA) is holding tight along the confluence of its 10-dma and 20-dema as volume comes in at about average over the past three days. But this is very much like ATVI in the sense that it can’t figure out what it wants to do. After a breakout attempt in late August, it has failed on one re-breakout attempt as it goes nowhere.

Now the stock is back above that prior late-August breakout point and may be in a lower-risk entry position here using the 20-dema or the lows of today as a selling guide. But as with ATVI, this could fail again and morph into a late-stage failed-base situation, depending on how it resolves the current choppy three-week range since the late-August breakout.

 

GR092017-EA

 

Take-Two Interactive (TTWO) is extended currently and nearly 3% above its 10-dma, so it is not in a lower-risk entry position.

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).

Over the weekend, I pointed out that there were numerous pocket pivots to be found among leading and potentially leading stocks, including a number of names that I have discussed in recent reports. There have also been some base breakouts, but some have failed, as with FSLR and SWKS, while others, such as NVDA and ANET, have worked very well.

How do you know when you’re looking at a breakout that is going to succeed? Well, you don’t. All you can do is take the shot and sell if you get stopped out. The trick, however, is in setting a tight stop at the nearest support levels without settling for a 7-8% loss if you’re wrong. In this market, you can get hit with a lot of 7-8% losses if you’re only buying breakouts, and in my view, that is not acceptable.

Meanwhile, we should probably recognize that the upside extension in the major market indexes makes them vulnerable to a pullback, which is what looked like was going to happen today after the Fed announcement. In the end, it boiled down to what the individual stocks were doing, and in some cases, as with AAPL, AVGO, and SWKS, for example, this was bearish.

So, while we see some constructive action in leading stocks, we are also seeing some names morph into short-sale targets. That alone may be telling us something here, and I think it is advisable to stay very alert here. The Fed is embarking on something no central bank has ever attempted to do in the history of central banks.

Assuming the Fed proceeds, as it said it would today, with its plan allow $10 billion of principle to run off each month, then we are in the early stages of the Fed taking the QE punchbowl away from this market. And unwinding $4.5 trillion of assets, what is the biggest long trade ever taken in the history of the world, may not be as easy as Fed head Janet Yellen lets on.

If they get it wrong, the market may react adversely, and it may begin to reassess this differently in the coming days. Given the current extended upside state of the market, this could trigger a pullback here. After all, as I said, it has never been done before.

My advice is to keep things tight, and know where your exit points are in the event things get a bit unruly. Meanwhile, if you take new positions, do so at the usual, prescribed lower-risk entry points, and keep risk to a minimum. This market strikes me as a bit confusing and full of cross-currents when it comes to the action of individual stocks, and often it is the stocks themselves that flash the first warning signs. 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.