The Gilmo Report

April 14, 2019

April 13, 2019

The major market indexes kept their rallying ways going this week as the NASDAQ Composite and S&P 500 Indexes both posted higher highs on higher volume Friday. The NASDAQ eked out its highest high since the Christmas Eve lows on just barely higher volume while the S&P pushed higher on a relatively more robust volume increase. Either way, the market uptrend remains intact.

 

 

While it didn’t post a higher high, the Dow Jones Industrials stole the show on Friday with a 1.03% gain as compared to the S&P’s 0.66% gain and the NASDAQ’s 0.44%. The Dow was led higher by Walt Disney Co. (DIS) after it announced its new Disney+ streaming-video service. By pricing the new service at $6.99, DIS took direct aim at Netflix (NFLX), which took a hit on Friday.

Volume poured into DIS shares as the stock posted a buyable gap-up (BGU) with an intraday low of 126.36. The stock closed at 130.06, just within buying range, but any pullback closer to 126.36 from here would obviously create a lower-risk entry opportunity. It’s difficult to say that DIS is the next NFLX, but the volume speaks for itself. Certainly, if the stock sold at the same valuation as NFLX, it would have much more upside room from here.

 

 

Netflix (NFLX) took a hit on the news, crashing through its 50-dma on heavy selling volume. It now looks set to test its 200-dma, which serves as maximum downside support for the stock. If DIS is the new NFLX-killer, then there is a good chance that NFLX will lose its premium valuation. That could translate into a significant P/E contraction.

If such a dynamic takes hold, then NFLX may become a strong short-sale candidate. Consider that NFLX currently sells at about 137 times trailing earnings and 55 times next year’s earnings estimates of $6.36, while DIS sells at 19.28 times next year’s earnings estimates of $6.74.

This all strikes me as a very interesting situation, with lots of dynamics that could send DIS higher or NFLX lower. Things will get even more interesting after NFLX reports earnings, as it is expected to do on Tuesday after the close. Whether the moves in DIS and NFLX on Friday are one-offs or the start of something big for each will become more evident over the next few days.

 

 

The DIS news also impacted Roku (ROKU) which immediately rallied on the news. I was not sure why this would be so, since while DIS did buy most of the assets of 21st Century Fox (FOXA), they did not acquire FOXA’s stake in ROKU. However, there has been speculation in the past that DIS might buy ROKU.

That may have spurred foolish buyers who gapped the stock right up to the 50-dma at the open on Friday. But the 50-dma once again acted as stiff resistance for ROKU, which is still in an active Punchbowl of Death (POD) topping formation. ROKU then reversed back to the downside and ended the day down over two bucks on increased selling volume.

It remains a short on rallies up into the 50-dma but may just head straight down to the 200-dma before any reaction rally ensues. ROKU did have the potential for a U&R coming back up through the prior 59.63 low on Friday at the open. But the second failure at the 50-dma sealed the deal, and the stock is now looking like it will test the 200-dma.

 

 

With earnings season upon us once again, I am not looking to get long stocks that will be reporting earnings in the next 1-2 weeks or less. Unless one has a healthy profit cushion in a pre-existing position for any stock about to report earnings, taking a new long position, or even adding to an existing position, is tantamount to playing what I refer to as earnings roulette.

As is my general practice, I prefer to wait for leading and even not-so-leading stocks to report earnings. As I’ve discussed many times before, the highest beta, high-volatility and, therefore, high time-value moves in stocks often occur after earnings. Therefore, it is more a matter of watching and waiting with an opportunistic eye to see what sorts of actionable set-ups might appear after a company reports earnings.

Members who’ve been around for a while know how this works. We’ve seen many high time-value opportunities arise after earnings in the form of buyable gap-ups, shortable gap-ups, shortable gap-downs, and of course the Ugly Duckling special known as the buyable gap-down. In this report I will focus mostly on stocks that are not expected to report earnings in April.

 

Clouds

 

ZScaler (ZS) continues to act well following last Tuesday’s undercut & rally (U&R) move through the prior 63.50 low. Most investors will initially react to this as a rally they want to short into. But if the stock holds support at the 20-dema with volume drying up, as it is now, it remains in a buyable position thanks to the original U&R long set-up at 63.50.

ZS is about 5% extended from the U&R long entry, but a secondary entry can be had here along the 20-dema. As long as it holds support at the line and volume continues to dry up, as it did on Friday, it remains viable. In my Wednesday report, I incorrectly typo’d that I would be surprised (when I meant I would NOT be surprised) to see ZS head back up toward the prior highs if the general market continues to rally.

 

 

Okta (OKTA) continues to wedge higher after Monday’s re-breakout move as volume declines on the way up. This could set up a pullback to the rising 10-dma, which is now at 89.49. Watch for that as a lower-risk entry opportunity, since earnings aren’t expected until early June.

 

 

Coupa (COUP) posted a pocket pivot on Tuesday as it cleared the 50-dma, but buying the stock based on the MAU&R alone was enough. The 50-dma can then be used as a tight selling guide, and COUP has not reversed back below the line since. Note that over the past three days the stock has found steady support on intraday pullbacks closer to the 50-dma, with the intraday lows moving higher each day.

Pullbacks to the 50-dma thus offer your best lower-risk entries. This may be revving up for a breakout soon enough if the general market keeps rallying, so that can also be watched for. I, however, like the pullbacks to the 50-dma as lower-risk entries within the base. Earnings are not expected until early June.

 

 

Semiconductors

Applied Materials (AMAT), not shown, is in an extended position but should be watched for pullbacks closer to the rising 20-dema, which I prefer to the 10-dma given the stock’s current chart position. These would offer lower-risk entries from here. It is not expected to report earnings until mid-May.

Advanced Micro Devices (AMD) is expected to report earnings on April 24th, so it’s not clear how much upside will occur before then. In this position, however, following a buyable gap-up (BGU) that went nowhere, a pullback to the 20-dema looks likely. That might provide a lower-risk entry, but I am more interested in seeing what AMD does after earnings are out.

 

 

Social-Networking

All the social-networkers are expected to report in the middle of next week, near the end of April. Facebook (FB), not shown, continues to hold above its recent range breakout point, while Twitter (TWTR) dipped below its 10-dma on Friday. That brings the 20-dema at 33.59 into play as a lower-risk entry. However, I’m more interested in seeing what FB and TWTR do after earnings, which are expected on April 24th and 23rd, respectively.

Snap (SNAP) is expected to report earnings on the same day as TWTR, so the 23rd and 24th will be days to watch for possible actionable movement following earnings in all the social-networkers. All three stocks have perked up lately, moving to the forefront of potential continued market leadership.

Oddly enough, SNAP has what I might call the cleanest chart pattern as it has stair-stepped higher since its early February gap-up the last time it reported earnings. I blogged about that BGU at the time as an actionable move, and it has steadily slogged its way higher.

On Friday it tested the 10-dma for the second time in three days and held as volume dried up to -49.6% below average. That sets up a lower-risk entry spot here, but the idea would be to see a strong upside move ahead of earnings. There is still nearly 20% of the float sold short, so we’ll see if the shorts are inspired to get out of the way ahead of earnings.

 

 

Cyber-Security

In the cyber-security area, we see that Mimecast (MIME) (expected to report earnings on May 13th) has now pulled a typical re-breakout move after an ugly failure from a prior trendline pocket pivot breakout the prior week. The stock got slammed below its 50-dma on heavy volume two Fridays ago, but as we know, in the new math that characterizes this market, down big on volume = buy signal!

Now, with the re-breakout, breakout buyers can decide whether they want to buy it here since it is technically within range of the prior trendline breakout point. The reality, however, is that the U&R offered a long entry point on Monday of this past week, and the retest of the 50-dma on Tuesday offered another long entry opportunity.

I cannot emphasize enough the Ugly Duckling Principal that prevails in this market. The examples are numerous and can be seen by anyone smart enough to open their eyes and see that this is the new math, and “how the market really works” these days. It defies the prior rules that we have been taught, but in my vernacular, the phrase adapt or die is quite meaningful for this market.

 

 

Palo Alto Networks (PANW) has been setting up in a new base since it immediately failed on a buyable gap-up (BGU) move after earnings in late February. It was last buyable along the 50-dma as it successfully tested logical support as it triggered a U&R long entry as it came back up through the 235.70 low of March 27th.

After moving back up through the 10-dma it is now pulling back to the line. Volume dried up to -40.4% on Friday, so the closer it gets to the 10-dma, now at 241.25, the more buyable it becomes. PANW is not expected to report earnings until June 3rd.

 

 

Cyber-security names have mostly been a strong area of leadership in this market. We saw Fortinet (FTNT), not shown, come back to life on a standard base breakout on Wednesday, and this came after the stock got slammed on massive volume down to its 50-dma two Thursdays ago. But, again, down big on volume = buy signal, and that was the case with FTNT, which is expected to report earnings on May 2nd.

Another cyber-security name that may be percolating and which I’ve discussed in previous reports a few weeks ago is Qualys (QLYS). The company is expected to report earnings on May 1st and is currently working on a long L-formation. Volume has been drying up to almost nothing, and on Friday came in at -69.1% below average.

This is the lowest volume level seen along the bottom of the L-formation. Since it is occurring after a U&R long set-up several days ago, it sets up a voodoo entry here along the 10-dma. This is how an L-formation develops the potential to blossom into a U-formation and complete the LUie formation.

The LUie formation is NOT a meaningful formation as something to mindlessly buy. It is just a description of what happens when an L- turns into a U-formation based on concrete buy signals along the bottom of the L-formation. QLYS is currently showing action that may imply a move back to the upside from here.

 

 

Telecom-Related

Among telecom names I’ve discussed in recent reports, Acacia Communications (ACIA), Arista Networks (ANET), and Viavi Solutions (VIAV) are all extended from recent lower-risk entry positions. I discussed the most recent entries in ACIA and VIAV in the more recent reports, while ANET continues to trudge higher.

Something new in the group is starting to percolate in a beaten-down prior leader in the group, Ciena (CIEN). The stock was a very nice shortable gap-up play after earnings back in early March, and it has since formed a slightly sagging L-formation. It has traded tight recently and on Friday posted a strong-volume pocket pivot at the 10-dma and 20-dema.

At the same time, CIEN is also rallying back above the 37.69 early March low, so is something of a U&R long set-up as well. It closed Friday at 37.99, so is within range of that entry point. In addition, Friday’s pocket pivot suggests that the L-formation has the potential to blossom into a U-formation.

CIEN is not expected to report earnings until May 30th, so it has plenty of time to get going here if it wants to. I note that my indicator bars along the top of my HGS Investor Software chart view have suddenly shifted to mostly blue, with a light blue Kahuna showing up on Friday.

An interesting Ugly Duckling set-up among the telecoms, which have been a relatively strong group. CIEN’s close cousin, FNSR, has also moved back up to the highs of a current base, and its resurgence after breaking down in March adds some weight to a possible turn in CIEN.

 

 

Retail

Etsy (ETSY) has been holding tight on its weekly chart, as I discussed in Wednesday’s report, but sellers got the upper hand on Friday. Volume picked up but wasn’t heavy as it came in at -37% below average. There was no news that I saw to account for the move, but it is not outside the boundaries of the stock’s current base.

What this may do is set up an opportunistic entry as it tests the prior late-March low at 64.95 and the 50-dma at 64.22. A bounce off the 50-dma could coincide with a possible U&R long set-up IF the stock is able to regain the 64.95 price level. There are two ways to approach this. If it hits the 50-dma, then that can become a buy point using the line as a tight selling guide, while the alternative is to just wait for a U&R through 64.95 to develop. Play it as it lies!

 

 

Chinese Stocks

Chinese names have remained a mixed bag at best, and none of the names I discussed in my last report have been able to pull out of their current funks in any meaningful way. That includes Iqiyi (IQ) and Huya (HUYA). Tencent Music Entertainment Group (TME) has moved back above its 20-dema, but the action looks uninspired as volume did pick up on Friday but remained well below average.

My guess is that a constructive test of the 50-dma would offer the best, lower-risk entry. Overall, however, Chinese names remain somewhat sluggish, even as the U.S. and China claim to be approaching a final trade deal.

 

 

I’ve discussed in recent video reports that Alibaba (BABA) is probably the best China name to play, although its action has also been erratic at times. Here we see it breaking out on volume that was a mere 5.2% above average. As I indicated in my prior reports, pullbacks to the 10-dma would offer lower-risk entries, and that remains the case for now.

 

 

Two cousin stocks that I’ve discussed in previous reports broke out this week. GoDaddy (GDDY) popped out of a six-week base on Friday. Volume was strong, and this remains within buying range of the breakout. GDDY is expected to report earnings on May 2nd.

This almost seems too obvious, and I might suggest that if the stock failed on the breakout and found support, say, along its 50-dma, for example, it might work better as a re-breakout. That’s a little tongue-in-cheek, I admit, but in this market the failed breakout followed by a re-breakout has occurred with some regularity.

 

 

GDDY’s cousin, Wix.com (WIX), is quite instructive as a concrete example of how an L-formation becomes a U-formation and completes a LUie move. I was discussing this one back in late February and early March as one to watch for a possible LUie resolution, and it finally got going in mid-March

The concrete buy signal occurred as a pocket pivot at the 50-dma the day before it launched higher on an analyst’s upgrade. That sent WIX back up to its prior February highs to complete a full LUie. Again, we see how a concrete buy signal sets the L-formation in motion to the upside to complete a U-formation.

Now, it’s trying to break out of a cup-with-handle formation, but volume was weak on Friday as it pushed to new highs. Notice, however, that the last more opportunistic entry occurred on Monday when the stock pulled into the 20-dema and volume dried up to -54% below average.

That was a voodoo entry at that point, if one was alert to it. We can see how WIX offered at least two entries within the lower reaches of the L-formation and within the handle of the ensuing cup-with-handle that occurred before Friday’s feeble breakout. This illustrates the advantage of OWL buy points vs. standard base breakouts, as well as how concrete signals along the lows of an L-formation indicate a potential LUie resolution.

 

 

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.

Things have been perking up lately, and I’m encouraged by certain Ugly Duckling set-ups more recently in certain stocks that have taken flight. This report highlights some other potential set-ups, but my focus is now shifting to earnings season and the high time-value trades that will, as they always do, materialize in individual stocks after they report earnings.

We’ve got NFLX on deck for Tuesday, and this will be an interesting one to watch. J.P. Morgan (JPM) is a good example of a buyable gap-up and long entry materializing after earnings on Friday. Rest assured, as we progress through earnings season, there will be more.

 

 

While there has been a fair amount of constructive action in this market, I am a bit disappointed by the Weed Patch, which remains moribund. No worries, however, since there are other open doors to walk through in this market, and that is where we go as we run for daylight. The Weed Patch may rise again, so we can just keep monitoring these names for any possible future developments.

So, as we move deeper into earnings season this week and next, and I’m looking forward to seeing what emerges from the cloud of dust that is kicked up after earnings reports. Many stocks I follow, including several big-stock names, are on deck for earnings next week, which is when things will heat up, no doubt. Batter up!

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 a position in SNAP, 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. ©2008-2019 Gil Morales & Company, LLC. All rights reserved.