The Gilmo Report

September 3, 2017

September 3, 2017

The stampede into stocks over the past four days has been nothing short of ballistic. In my Wednesday report I discussed the resurgence in the bio-tech sector, led by sharp upside moves in the biggest of the big-stock bio-techs, Amgen (AMGN), Biogen Idec (BIIB), Celgene (CELG), and Gilead Sciences (GILD).

These four names make up the bulk of the weightings in the iShares NASDAQ Bio-Technology Index Fund ETF (IBB). All four stocks have had similar moves this past week, and we can see this in the ETF’s sharp, four-day upside move to new highs on heavy volume. The last time the IBB had a move this ballistic was back in June.

From that point in June, the IBB then briefly pushed to higher highs in July before rolling over and making lower lows in August. That action looked quite bearish, and one can see a sort of fractal head and shoulders formation forming from late June to late August.

But in the Ugly Duckling robo-market, when something looks that ugly, well, it’s time for a rally! And that’s just what we got as bio-techs surged back to life and made another high-volume run to new highs. At this point, this is likely to back and fill a bit here as it did after the June move, but big-stock NASDAQ bio-techs have helped send the NASDAQ Composite Index to all-time closing highs on Friday.

 

GR090317-IBB

 

In fact, by Friday’s close, the NASDAQ Composite Index posted its best weekly performance for all of 2017. This despite how grim things were looking Monday night following the latest NoKo missile launch. Such is the way of the Ugly Duckling! The flip side of this is that throughout the summer of 2017, there has been a tendency for the market to have the proverbial rug pulled out from under it.

This is seen in the big reversals and breaks off the peak in early June and late July. So, with the NASDAQ pushing into new-high territory again, one mustn’t get carried away with chasing upside strength. Stocks were best bought as early as Tuesday when the first signs of a turn were showing up into early Thursday, but at this stage it is best to wait for the next pullback and its associated lower-risk entries in selected stocks to materialize.

 

GR090317-$COMPQ

 

The action of the S&P 500 Index on Friday after a four-day price move to the upside might argue for some sort of pullback as the index churned and stalled near the prior highs on weak, pre-holiday weekend volume. A pullback would give us a chance to see how well this rally holds up, and could produce better entries for any desired long entries.

This has been a long, hot summer, with the major market indexes putting on some volatile fireworks displays on both the upside and the downside. Whether this is just shaking out all the weak hands it can find in preparation for what is probably a very unexpected burst higher is certainly something we will discover in the coming days and weeks.

The bottom line, and the only way to make any sense of this market, is to simply focus on the individual stock set-ups. In addition, it helps to expect the unexpected, and to be flexible and open-minded enough to shift into the appropriate long or short gears based on the real-time evidence.

 

GR090317-$SPX

 

Meanwhile, gold continues to rally, and I get the sense that the reason for its recent breakout to four-month highs is not due to a fear bid engendered by the recent NoKo missile launchings. The SPDR Gold Shares ETF (GLD) blasted out of its prior four-month price range this week impressively, closing at the peak of its weekly price range on heavy weekly volume, as the weekly chart shows below.

With stocks recovering strongly this past week and pushing up to their all-time highs, the primary culprit would logically seem to be the continued decline of the U.S. dollar. The dollar has been trending steadily downward throughout 2017, and this has correlated to a steady uptrend in stocks and gold.

The current decline in the dollar is its steepest since 2010, and to my mind, conjures up visions of deflation, which can have its own ominous effects over the longer-term, including a bear market in stocks. In the short-term, however, the dollar’s decline is a strong driver of stock and gold prices. In practical terms, the GLD has had several buy signals since bottoming out in early July, and for now shows no signs of letting up, with or without a fear bid.

 

GR090317-GLD

 

The decline in the dollar and the rise of gold implies that the Fed is likely on hold for the foreseeable future, and this is also showing up in weak action among the financial stocks. Friday’s weak jobs number likely helped build the case for the Fed’s inability to raise interest rates.

The Financial Select Sector SPDR Fund (XLF) has the look of a long head and shoulders formation extending back to early July. On Friday, the ETF stalled badly at the 50-day moving average and closed in the lower half of its daily trading range on weak volume. It continues to look like a short here, using the 50-dma as a guide for an upside stop.

 

GR090317-XLF

 

Big-stock financials like J.P. Morgan (JPM) mimic the action of the XLF, and this can be seen in other big financials like Bank America (BAC) and Goldman Sacs (GS). Meanwhile, something isn’t smelling quite right over at Wells Fargo (WFC), which has been in a steady decline for the past ten weeks.

I only show the chart of JPM, below, but it is worthwhile to investigate the charts of the entire sector. Financials looked like a strong, leading group as they pushed to higher highs in early August. But since then, the group has wilted in the summer heat and is starting to look like a mass short.

 

GR090317-JPM

 

As the financials fade, bio-techs surge, and I am pleased with the performance of my single recommendation in the group per my Wednesday report, Vertex Pharmaceuticals (VRTX), so far. The stock posted a subtle pocket pivot on Wednesday, which was discussed in the report that day.

On Thursday morning VRTX briefly pulled right into its 10-day moving average where it found strong volume support and launched higher. That move constituted a second, but far less subtle, pocket pivot coming on the heels of Wednesday’s subtler pocket pivot. This is now extended and should be watched for pullbacks closer to the 10-dma as lower-risk entries.

 

GR090317-VRTX

 

Among other bio-techs I see breakouts in names like Alexion Pharmaceuticals (ALXN) and Supernus Pharmaceuticals (SUPN), both not shown, that are in buyable range, and you can investigate those charts on your own. However, these strike me as obvious, and I prefer to dig around and look for stocks in a strong group that might be in less obvious Ugly Duckling types of positions.

In my Wednesday report I hinted at Bioverativ (BIVV) as being one type of possible Ugly Duckling in the making. The stock was spun out from Biogen Idec (BIIB) back in early February of this year. It had a nice uptrend from there which was covered in my reports earlier this year up to early August when the stock began its latest correction.

There are a few things here that perk up my Ugly Duckling feathers a bit, the first being, of course, that the stock has been in a correction and potential base-building period for the past five weeks. This has taken it down into the cup-with-handle price structure it formed from early May to the latter part of June.

Last week the stock posted its first gray, oversold “Bingo” bar indicator after which it has stabilized and drifted slightly higher to regain its 10-day moving average. Notice also that the first strong move off the lows of the prior week occurred nine trading days ago on the chart on a ten-day pocket pivot volume signature. This did not, however, qualify as a bottom-fishing pocket pivot since the stock remained below the 10-dma.

Nevertheless, BIVV regained the 10-dma on Monday of this past week, and on Thursday posted a five-day pocket pivot at the 10-dma. Remember that I like to see clusters of five-day pocket pivots in lieu of a single 10-day pocket pivot. Therefore, we can watch for more five-day pocket pivots to show up here along the 10-dma as entry signals right here while looking to use the 10-dma as our tight selling guide.

Finally, note that BIVV closed Friday at 55.96, 25 cents above the 55.71 low of August 11th. Therefore, on that basis, the stock is an active undercut & rally long set-up using the 55.71 price level as a selling guide. If the stock is going to make a stand here and put in the lows of a potential new base, this is probably where it needs to happen, so keep a close eye on this as a possible Ugly Duckling play amidst a resurgent bio-tech sector.

 

GR090317-BIVV

 

While I could make money shorting Tesla (TSLA) in mid-August as it found resistance near the 170 price level and broke below its 50-dma, my view of the stock’s price/volume action is now shifting toward the bull side. Unlike those who seem to have a firm stake in being TSLA perma-bulls or perma-bears, I simply see it as a vehicle for making money based on the current potential trend.

I have no axe to grind, although it appears that there is never a shortage of investors who do, one way or the other, especially when it comes to TSLA. Objectively, what we see here is a cup-with-handle formation that has now defined a new low area for the handle as volume has steadily dried up within the handle. Note also that TSLA has posted two five-day pocket pivot signatures over the past week as it regained its 50-dma. On Friday, the stock held very tight as volume dried up to only half of average.

Another interesting development I’ve noticed with the stock in recent days is that suddenly I can’t borrow the stock, even if I did want to short it, which I don’t right now. The reason for that is likely found in the fact that short interest in the most recent reported period ended August 15th increased 75% over that reported for the period ended July 31st.

The reason for this is that TSLA’s recent $1.8 billion junk bond offering has been steadily declining in price since it was issued a couple of weeks or so ago. The TSLA perma-bears likely think they smell blood based on this, but this isn’t showing up on the stock chart as I see it. For that reason, I view the stock as a buy here using the 50-dma as a tight selling guide.

 

GR090317-TSLA

 

Netflix (NFLX) should be watched for a low-volume pullback to the 20-dema or 50-dma as a lower-risk entry opportunity. The stock held tight on Thursday and Friday following Wednesday’s roundabout type of pocket pivot as it leapt up off the 10-dma and 50-dma, which is constructive action.

 

GR090317-NFLX

 

Nvidia (NVDA) was holding tight along the confluence of its 10-dma and 20-dema with volume drying sharply per my comments in the Wednesday mid-week report. That led to a five-day pocket pivot move back up to the prior highs on Thursday, and the stock held tight again on Friday as volume declined.

It has now posted two five-day pocket pivot volume signatures as it moves up to its highs, but was best bought along the 10-dma and 20-dema per my Wednesday comments. I would watch for any low-volume pullback closer to the 10-dma/20-dema confluence as a potentially lower-risk entry opportunity. NVDA has spent nearly two months in a near base, and this certainly helps set up the possibility of a breakout IF we see the NASDAQ Composite continue to forge new highs.

 

GR090317-NVDA

 

Amazon.com (AMZN) pushed through its 20-dema on Thursday, as I surmised it might in my Wednesday mid-week report. It then rallied as high as the 50-day moving average on Friday before turning tail and reversing on light volume. One could have scalped the stock on the short side right at the 50-dma on Friday for a small profit.

However, I would keep a close eye on the stock here as I believe it could easily regain the 50-dma again IF the general market keeps rallying. We can already see that AMZN is an undercut & rally long set-up that remains in place after the stock undercut its prior August lows earlier in the week and turned back to the upside. If the general market remains steady as we move into the first full week of trading in September, then a low-volume pullback to the 20-dema might present an opportunistic entry for those invoking the spirit of the Ugly Duckling. Play it as it lies.

 

GR090317-AMZN

 

Below are my notes on other big-stock NASDAQ names on my current long watch list:

Alphabet (GOOGL) posted a bottom-fishing/roundabout pocket pivot on Thursday as it cleared its 50-dma. On Friday, the stock pulled back into the 50-dma as volume declined, putting the stock in a lower-risk entry position while using the 50-dma as a tight selling guide. Another example of the Ugly Duckling in action in another big-stock NASDAQ name.

Apple (AAPL) keeps posting new all-time highs and is currently extended to the upside.

Microsoft (MSFT) posted a breakout on Thursday on above-average volume, but promptly pulled back in below the breakout point on Friday with volume declining to about average. If you’re a lover of MSFT, then this would be a lower-risk entry, in my view, using the 10-dma as a tight selling guide.

Optical names in general look quite dead in the water these days. The entire group kept suffering all week long, including its former high-flying leader, Applied Optoelectronics (AAOI), not shown. The stock has steadily dripped lower along with the rest of the group, and I can only see it as a possible long trade if it rallies back above the prior lows along and just above the $60 price level.

As a former hot stock, AAOI always has the potential to jack back up toward the 50-dma, which is something for Ugly Duckling-style swing-traders to keep an eye out for. The first sign of this would be a U&R move back above the more recent August lows.

I would also keep an eye on Lumentum Holdings (LITE). While it came under pressure after earnings and made a fantastic short-sale target in early August, the stock is now trying to stabilize here along the 20-dema. On Thursday, the stock posted a roundabout pocket pivot at the 20-dema on big volume.

This was followed by tight action at the 20-dema with volume drying up to -57% below average, clear “voodoo” type action at the 20-dema. While the telecom side of LITE’s business may have some issues, there is an emerging opportunity that the company hinted at in its recent earnings report and which may be driving the current constructive action.

In its recent earnings report, LITE stated that it received $200 million in bookings for the next quarter for its vertical-cavity surface-emitting lasers, that it had boosted production capacity by 30%, and that one customer was responsible for most of that demand. Analysts are speculating that this customer is Apple (AAPL), which would make sense.

Based on this, and the current price/volume action, the stock looks buyable here using the 20-dema as a guide for a tight stop. Alternatively, the lower 10-dma could be used as a wider stop.

 

GR090317-LITE

 

My China Five names have now been reduced to three as both Momo (MOMO) and JD.com (JD), both not shown, have fallen by the way side. This leaves Alibaba (BABA), Weibo (WB), and Sina (SINA) as my remaining China Three.

In my Wednesday report I noted that SINA, not shown, was in a buyable position along its prior base-breakout point, and the stock has since launched higher. WB also launched higher this past week, and both stocks are well-extended at this point and out of buying range. Alibaba (BABA), on the other hand, might be in a marginally buyable position here as it dips slightly below its 10-dma.

The best spot to pick up shares for anyone wanting to buy the stock up here came on Tuesday when it tested the 20-dema and then bounced back to the upside. The thing to watch for here is a possible “Wyckoffian Retest” of Tuesday’s pullback and the 20-dema. This would occur with volume drying up, which might make the stock buyable at that point.

Otherwise, outside of BABA, my China names are either busted or extended to the upside in what has been a stark bifurcation. The e-commerce names BABA and JD have gone their separate ways, while the internet content names have done the same with MOMO busting to the downside while WB and SINA rocket higher.

 

GR090317-BABA

 

Several stocks that I’ve discussed in recent reports illustrate my concept of “late-stage is as late-stage does.” Basically, that means that a stock’s current base can never be considered late-stage simply because it’s the 3rd, 4th, 5th, or more base it has formed in an upside price trend. A base isn’t late-stage until it breaks down.

Among such stocks, the cloud names provide ample examples, such as ServiceNow (NOW). It found its feet along the 10-dma and 20-dema earlier in the week and then broke out on two pocket pivot volume signatures that were both below average. Pocket pivots can often serve as substitutable technical validation of a breakout attempt in lieu of the O’Neil rule of something having to trade 50% above average on a breakout.

This strikes me as a little bit extended, and my preference would be to see how this acts on any pullback toward the 10-dma. At that point a lower-risk entry might be determined.

 

GR090317-NOW

 

Notes on NOW’s two cloud cousins discussed in recent weeks:

Workday (WDAY) remains within buying range of Thursday’s post-earnings breakout. Risk can be kept to a minimum by using the 10-dma as your selling guide.

Salesforce.com (CRM) is also within range of its own post-earnings breakout of over a week ago, but I would prefer to see a low-volume pullback into the 10-dma as a lower-risk entry.

The video-gamers are also a group that helps illustrate the concept of late-stage is as late-stage does. These stocks have all had long prior price runs and are in arguably later stage if not exactly late-stage positions on their weekly charts. But despite this, all have still managed to hold up and even break out to new highs over the past week.

Activision Blizzard (ATVI), not shown, broke out on Wednesday on a strong above-average volume move. It then offered investors a second chance and a more optimal entry on Friday when it pulled back to its 10-dma and held, closing the day near the high of its daily trading range.

Take-Two Interactive (TTWO), also not shown, pushed back down to its 10-dma on Friday as selling volume picked up. This is not the type of pullback I would want to see if the stock is going to test the 10-dma. The most opportunistic approach here would be to look for a pullback to the 20-dema instead.

Electronic Arts (EA) broke out on Wednesday on below-average volume. Based on the data I had at the time, it appeared that this breakout occurred on a pocket pivot volume signature, but that was not the case. The low-volume breakout immediately came back into the 10-dma on Friday as selling volume picked up on both Thursday and Friday. I’m not sure if this makes EA all that attractive to buy on the pullback to the 10-dma, but it is actionable nevertheless. Buying here along the 10-dma means using the 10-dma or the 20-dema as tight selling guides.

 

GR090317-EA

 

Both Broadcom (AVGO) and Skyworks Solutions (SWKS) have rallied back above their 50-day moving averages, but both stocks have done so with wedging volume. This could keep both stocks in play as shorts if they reverse course from here.

I’ll use SWKS as a chart example here, where we can see that volume has dried up rather quickly as the stock drifted above its 50-dma. In this case I might consider shorting the stock here while using Friday’s intraday high as a stop in anticipation that the wedging rally will fail here. I would view AVGO similarly, although in both cases constructive pullbacks to the 50-dma might instead set them up as longs as that point, so one can take a two-sided approach here.

 

GR090317-SWKS

 

Palo Alto Networks (PANW) is starting to look interesting after Friday’s buyable gap-up move following earnings, which were reported Thursday after the close. The stock opened Friday at 144.81 and then set a low at 142.23 before rallying to close at 146.67, about two-thirds of the way up the daily price range.

Technically this is a buyable gap-up (BGU) using the 142.23 low as a selling guide, 2.97% lower. That would keep things tight here from a risk-management perspective, but any pullback closer to the 142.23 BGU low would offer a tighter entry, should that occur.

I tested the stock out on the short side Friday, hitting it in the 147-148 price area. This was successful only on a short intraday basis as the stock traded down to about 145 from there. At that point, however, you could feel the bid firming up and my conclusion is that the stock should be bought in here, as close to 142.23 as one can get.

 

GR090317-PANW

 

Short notes on other stocks discussed in recent reports:

Alteryx (AYX) is pulling into its 10-dma, which puts it in a lower-risk entry position with the idea of using the 10-dma or the 20-dema as tight selling guides.

Appian (APPN) pulled back down toward its 10-dma on Friday without quite getting there as volume dried up sharply. If it gets any closer to the 10-dma as volume remains light, then this can be viewed as a lower-risk entry opportunity using the 10-dma or 20-dema as your selling guides.

First Solar (FSLR) has completed a five-week base and is sitting right at the confluence of its 10-dma and 20-dema with volume drying up to -44% on Friday. This puts the stock in a lower-risk entry position using the 20-dema as a very tight selling guide, or the 50-dma down at 45.07 as a wider selling guide.

 

GR090317-FSLR

 

GrubHub (GRUB) posted a pocket pivot off the 10-dma on Wednesday and is now pulling back toward the 10-dma as volume declines. The closer to the 10-dma one can buy this the better, using the 10-dma or 20-dema as selling guides.

Nutanix (NTNX) gapped up on Friday after reporting earnings on Thursday after the close, but the stock gave up all its gains and closed dead flat for the day on heavy volume. It did close right at its 10-dma and 20-dema, so if you’re not scared off by the big gap-up and full give it up reversal on Friday, this could represent a lower-risk entry position using the 20-dema as a tight selling guide. On its face, however, the action on Friday was bearish, but some might argue it was more duck-ish as in the Ugly Duckling.

SolarEdge Technologies (SEDG) posted a pocket pivot at its 10-dma on Friday, putting it in a lower-risk buy position here while using the 20-dema as a selling guide. The stock looks very much like FSLR, although its base is one week shorter.

 

GR090317-SEDG

 

Yelp (YELP) posted a higher closing high on Friday as it tracks along its slightly rising 10-dma. Ideally, I’d prefer to look for a more opportunistic entry on any kind of pullback closer to the 20-dema, although that doesn’t necessarily have to happen. Otherwise one can try and buy this along the 10-dma while using the line as a very tight selling guide.

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).

Most of the stocks I discussed as being in buyable positions in my Wednesday report have moved higher as the market has done the same. While this is positive feedback, I would still refrain from chasing things that are extended to the upside. Instead, wait for lower-risk pullbacks, or look for stocks that are setting up in lower-risk buy positions. Examples would be something like TSLA or FSLR, among others.

Bio-techs might represent an area of renewed interest, but most of these names are extended at this point, particularly after the torrid run the big-stock bio-techs have this past week. A lot of those moves came from Ugly Duckling type positions where the stocks looked like they were possibly done for. The daily chart of Biogen Idec (BIIB), one of this week’s strongest-performing bio-techs, illustrates this.

Note how after two failed breakout attempts the stock looked to be on the verge of failure. But in this market, when something starts looking that bad, it’s just a prerequisite for a move back to the upside! And so, it was, as the “Rule of Three” took effect and the third breakout attempt worked with spectacular upside results.

 

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In this market, things aren’t always what they seem. Often, the market and individual stock seem to forget that they are acting bearishly, and suddenly spring back to life. This is the Ugly Duckling working his twisted magic, and if you’re alert to its possibilities, and understand the various Ugly Duckling set-ups, you can stay out of trouble, and maybe even profit.

Currently the American Association of Individual Investors shows that 25% of individual investors in their survey are bullish, 35.1% are neutral, and 39.9% are bearish. So, on balance, only ¼ of the survey respondents are bullish. In this sense, expectations for the market are quite low.

For now, focus on the stocks, embrace the Ugly Duckling, and play it as it lies.

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.