The Gilmo Report

April 28, 2019

April 27, 2019

Leading stocks have been something of a mixed bag after reporting earnings, with several big-stock names getting slammed this past week. However, leading names have also had their fair share of gap-ups following earnings, helping to propel the major market indexes to new highs.

The NASDAQ Composite posted an all-time closing high on Friday, after posting an all-time intraday high of 8151.84 on Thursday but failing to hold those levels by the close. The market started the day off on Friday by selling off at the bell. But as has often been the case in this rally off the late-December lows, found its feet and closed positive on the day.

 

 

Meanwhile, the S&P 500 Index posted an all-time closing high on Friday and remains only 1.03 points away from all-time absolute highs. Thanks to weakness in names like 3M Company (MMM) and Caterpillar (CAT) this past week, the Dow remains more than 400 points, less than 2%, away from all-time highs. For now, the uptrends all remain intact.

Cloud Names

Cloud names have been recovering and/or acting well over the past week and picked up a boost from Microsoft (MSFT) when it reported earnings and showed strong results in its cloud business. Additional impetus came from a strong earnings report from ServiceNow (NOW) which posted a buyable gap-up after earnings.

The move was also a breakout. However, I would keep risk much tighter by viewing it as a BGU using the 258.18 low of Thursday’s BGU price range as a tight selling guide. NOW closed Friday at 267.08, so is now extended and only pullbacks closer to the 258.18 price level would offer lower-risk entries on the BGU.

 

 

As discussed in my last report, I’m only interested in cloud names that have either already reported earnings or which aren’t expected to do so for at least two weeks or more. So, my three favorites to play since none of them is expected to report earnings until early June remain Okta (OKTA), ZScaler (ZS) and Coupa (COUP). These stocks have in fact served double-duty at times, given their tendency to have sharp, tradeable pullbacks on the short side.

Okta (OKTA) continues to hold above the $100 Century Mark. It pulled back to the $100 price level Friday morning, bringing it back into buyable range. It is still buyable here as a Jesse Livermore Century Mark Buy Rule candidate, using the $100 price level as a tight selling guide.

 

 

ZScaler (ZS) continues to rally following the prior week’s undercut & rally move through the prior 61.39 low of over two weeks ago. It cleared the 20-dema on Thursday and has held support at that level over the past two days.

Volume dried up to -49% below average on Friday. This keeps it in a near-term buy position using the 20-dema as a tight selling guide for shares purchased above or at the line.

 

 

Coupa (COUP) finally cleared the $100 Century Mark on its fourth attempt Friday. Three prior failures resulted in miserably-failed base breakouts. Each time the stock was hit on heavy selling and sent back to the lows of its base around the $88 price level, it recovered.

The move is also a base breakout, and a surprising one given the v-shaped recovery off the lows of the prior week. But, in this market, down on big volume is a buy signal, and COUP doesn’t seem to be any different in this regard. The question is whether this above-average volume breakout is another buy signal.

I think the best way to approach this is to view it as a Livermore Century Mark buy and then simply use the $100 price level as a tight selling guide. If it reverses back below the $100 level, you’re out, and it is even possible that the stock could morph into a short-sale target at that point.

 

 

V-shaped moves have been the order of the day for cloud stocks over the past week, and Workday (WDAY) is no exception. If there is any stock in this market that defines the new math of down-big-on-volume = buy signal, it is WDAY. It broke out on Friday, but volume was light, so technically this would not qualify as a buyable breakout.

However, there is one other factor at play here. That would be the fact that WDAY cleared the $200 Century Mark for the first time and closed at 204.41. Therefore, this can be viewed as a Livermore Century Mark buy using the $200 price level as a tight selling guide (2%).

 

 

Social-Networking

There are currently two active buyable gap-ups among social-networking names, Facebook (FB) and Twitter (TWTR). Snap (SNAP) is the one outlier here after failing on its gap-up attempt after earnings on Wednesday. That actually turned out to be a shortable gap-up, and SNAP has been beaten all the way down to its 50-dma since.

TWTR is pulling back slightly after Tuesday’s BGU move as volume dries up nicely. This brings it closer to the 36.91 intraday low of Tuesday’s BGU price range.

Pullbacks closer to 36.91 would offer lower-risk entries from here. However, as volume dries up and the stock holds tight, watch for the 10-dma to catch up to the stock and provide a higher reference for support.

 

 

Facebook (FB) gapped up on Thursday after earnings Wednesday after the close, opening at 196.98. It then slid to the downside from there to close at 193.26 and near the intraday low of the BGU price range at 192.12. On Friday, FB dropped below the 192.12 price level and hit an intraday low of 189.09 before finding its feet and rallying back to the upside.

It fell short of the 192.12 BGU low but is less than half a percent below it. That keeps it in buying range with the idea of allowing no more than an additional 2-3% downside porosity from here as a selling guide.

 

 

Semiconductors

Semiconductors have taken some heat this week after two high-profile names were slaughtered after earnings. Intel (INTC), not shown, report on Thursday after the close and broke down -8.99% on Friday as sellers swamped the stock.

Another big semiconductor leader, Xilinx (XLNX), reported earnings Wednesday after the close and immediately gapped down to its 50-dma. It quickly dropped below the line, which could have been used as a reference for an upside stop, treating the stock as a shortable gap-down around the $126 price level.

XLNX then broke all the way down to a low of 110.31 on Friday before rebounding. That breakdown wiped out nearly three months’ worth of gains in just one day. Notice, however, that XLNX has now rebounded back above the 116.57 low of March 8th, closing at 118.93 on Friday.

That could be viewed as a U&R long set-up using the 116.57 price level as a tight selling guide. After all, in this market down big on volume has been known to equate to a buy signal, and when a U&R long set-up helps make things more concrete and therefore more controllable from a risk standpoint, it could turn out to be the case. Play it as it lies!

 

 

Advanced Micro Devices (AMD) to report on Tuesday after the close, as is expected, before trying to do anything with the stock currently. Applied Materials (AMAT) is expected to report earnings on May 16th but has been holding near-term support at its 10-dma. I’m not inclined to do anything with the stock, however, ahead of earnings.

Finally, Micron (MU) is a bit sloppy here after gapping high on Thursday but then reversing to close down on the day. On Friday, it broke below its 50-dma but pulled an undercut & rally move as it came back above the prior 41.20 low of April 15th. It closed at 42.10, so could have been treated as a U&R long set-up on Friday if one was alert to it.

 

 

In big-stock NASDAQ land, Netflix (NFLX) helps to prove my assertion that buying new-high breakouts is an inferior way to buy stocks. As I wrote last weekend and on Wednesday, I would look for a pullback to the 20-dema and/or the top of the prior price range around 370 as a lower-risk entry.

 

 

Amazon.com (AMZN) sputtered around after reporting earnings on Thursday after the close, but eventually found its feet just below the $1900 price level on Friday. It then pushed to higher highs on strong buying volume. Unfortunately, there is no discernible, lower-risk buy point to be found here, but the action looks strong nevertheless.

 

 

Railroads

I must admit that I have a hard time getting excited about the recent buyable gap-ups in railroaders like Union Pacific (UNP) and CSX Corp. (CSX). But both look the same following post-earnings buyable gap-ups in the prior week as they hold within buying range of their respective BGUs. Both stocks have very similar charts, so I only show CSX’s chart below.

Both stocks are simply tracking sideways after their BGUs as volume dries up. If I just focus on the technicals and set aside any reservations I might have about railroads selling at more than 20 times estimates, this sort of action is constructive, period. And, for that reason, makes them actionable as longs right here, using their BGU lows or their 10-dmas as tight selling guides.

 

 

In my Wednesday report I discussed Roku (ROKU) as a two-side situation. While it had been shortable on rallies up into the 50-dma, I noted that the stock had posted a delayed U&R long entry after rallying back above the prior 59.63 low in the pattern. Thursday’s action was also constructive when it held support at its 20-dema with volume drying up to -43% below-average.

On Friday, ROKU cleared the 50-dma, which I discussed as something that would help confirm the bullish angle for the stock. The only mitigating factor here is that the company is expected to report earnings on May 8th, so one would be looking for some serious upside to develop between now and then if one were going to hold through earnings.

 

 

Cyber-Security

We’ll be seeing a number of cyber-security names report earnings over the next couple of weeks, and the only one in the group where earnings are not yet a factor remains Palo Alto Networks (PANW). It illustrates the efficacy of remaining opportunistic with favored names after bouncing off its 50-dma on Thursday.

An opportunistic buyer would have used that pullback to the 50-dma as a lower-risk entry opportunity. Now PANW is sitting tight just above its 10-dma with volume drying up sharply on Friday to -56% below average. One could therefore consider this an actionable buy point here, using the 10-dma as a tight selling guide.

 

 

Telecom-Related

Acacia Communications (ACIA), Arista Networks (ANET), Viavi Solutions (VIAV) are all expected to report earnings this week on Thursday, so they all remain on earnings watch for now pending their respective earnings reports.

Ciena (CIEN), meanwhile, is not acting well as it breaks back below its 50-dma. The stock broke down in sympathy to its cousin, Juniper Networks (JNPR), which reported Thursday after the close and got slammed. In my view, CIEN was a sell when it failed to hold the 50-dma on Thursday.

This would have ensured a profit on any position taken along the 20-dema, as I discussed in my report of last weekend. At this point, it looks set to test the low of six days ago on the chart, so at best it may try to pull a U&R around that low. For now, however, that is an unknown, and we will only know if and when it occurs.

 

 

Chinese Stocks

Chinese names remain an area where I find little of interest. Even U&R attempts in stocks like Tencent Music Entertainment Group (TME) haven’t worked. And with Alibaba (BABA) set to report earnings in a couple of weeks, I see little to do there.

I suppose if I were truly jonesing to own a Chinese name, which I’m not, I might take a look at Momo (MOMO), since it isn’t expected to report earnings until late in May. Here we see the stock tucking into the 50-dma as volume dries up to a voodoo extreme of -72% below-average.

Thus, this can be viewed as a voodoo entry point here using the 50-dma as a tight selling guide. The stock tends to be a bit sloppy and choppy, so buying on pullbacks is your best approach with MOMO. Play it as it lies.

 

 

Recent IPOs

Maybe it’s time to look at something a bit more new-merchandise. There have been a lot of high-profile IPOs recently, including Zoom (ZM), Pinterest (PINS), and Lyft (LYFT). Only one, however, is in a logical long set-up currently, and that would be LYFT.

Billed as the worst-performing IPO since Facebook (FB) back in May 2012, the stock has gone straight down since coming public at $72 a share. It opened for trading at 87.24, briefly kissed 88,59, and then plummeted from there. Anyone who bought shares on the offering at $72 is well underwater at this point.

But for those who are patient and let hot IPOs simmer and stew a bit before testing the waters, LYFT is showing its first truly concrete long entry signal right here. On Friday it undercut the prior 55.56 low in the pattern and rallied to close at 57.24.

So, there you have it. This is a clear U&R long set-up using the 55.56 price level as a tight selling guide. There’s no guarantee that it will hold up, but the bottom line is that if one is looking for some sort of concrete long entry spot, this it, without having to catch the proverbial falling knife. Keep in mind, however, that LYFT is expected to report earnings on May 7th.

 

 

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.

This is not what I would call a target-rich environment on the long side right now. That’s mostly because we will be seeing a lot more companies on my long watch list reporting earnings over the next couple of weeks, and I am not inclined to play earnings roulette, frankly. But, we do have some actionable set-ups among favored names that have already reported, and I will show a few more ideas in my weekend GVR.

That said, there are some interesting cross-currents, and at times I have difficulty in determining whether these are cautionary flags or not. Traditionally defensive names like Hershey (HSY) and Pepsico (PEP) streak higher. Is this a function of defensive positioning or simply the need for money to get into stocks, any stocks?

We’ve seen industrials like MMM and CAT get slammed, while semiconductor bellwether INTC also got whacked this past week. But when something gets slammed as say, CAT did this past week, does it just become another down-big-on-volume = buy signal, especially when combined with a typical U&R long set-up maneuver?

 

 

I do notice, however, that there are a lot of bases forming out there, and its possible that a lot of these stocks are percolating for another leg higher. That is, of course, assuming that they don’t turn into base-failures instead. My preference is to limit risk by buying opportunistically (see CAT above) rather than chasing strength. And, of course, as I’ve discussed many times before, at the same time I see taking advantage of earnings season by looking for actionable, high time-value set-ups to materialize after an earnings report.

As we move deeper into earnings season there are a lot more stocks on my buy watch list yet to report than those that have already reported. For that reason, I’m very much looking forward to the post-earnings action over the next few weeks. That should remain a fertile area as we move forward, and I will be posting my earnings watch list for this week on the Premium section of the site this weekend.

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

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