Friday’s jobs number presented the market with a mixed set of data as 215,000 new non-farm payrolls were reported against 205,000 that were estimated. However, the unemployment rate rose to 5.0% from 4.9%. The market initially read this as a negative and started the day off with a nice downside gap.
However, after considering that most of the jobs growth was in the retail and restaurant sectors, the market reconsidered. Ultimately, as I blogged on Thursday, the only way the report could derail the market would be if it fully contradicted Fed Head Janet Yellen’s uber-dovish comments earlier in the week.
It didn’t, and the morning sell-off turned out to be a big shakeout as the indexes pushed back to the upside by mid-day. The NASDAQ Composite Index effectively somersaulted around its 200-day moving average, opening the day below the line but finishing the day back above the line on heavier volume.
This action, at least as far as the index itself is concerned, appears to be reasonably constructive. The pullback back below the 200-day line and down to the 10-day line helps to counteract and correct the stalling action we saw along the 200-day line over the prior two days on Wednesday and Thursday.
The S&P 500 Index also posted an outside reversal following an initial downside gap at the bell. The reversal took it up to higher highs on slightly higher volume. The index is now only 2.9% away from its 2134.72 intraday peak of May 20, 2015, not quite a year ago.
The market’s reversal off the morning lows was associated with a reversal in the U.S. dollar to the downside. After an initial gap to the upside at the open, the PowerShares U.S. Dollar ETF (UUP) flipped back into the red by the close.
The implication, of course, is that the market views Friday’s jobs report as still preventing the Fed from getting too aggressive on raising interest rates. This was also confirmed by a move in the Dow Jones Utility Index, not shown here on a chart, into all-time high price ground on Friday. And so the dollar continues its two-month slide off of the December peak.
The dollar’s reversal was met with gold also reversing off of its lows as its proxy, the SPDR Gold Shares ETF (GLD), found support at its 50-day moving average. As I wrote last weekend, the most opportunistic entry point for gold, assuming one really wants to own it, would be on a pullback down to the 50-day moving average.
Well, for you gold bugs out there, here’s your pullback. If the thesis of a continuously accommodative Fed holds, and the dollar continues lower, I do not see why gold could not eventually move higher. Here at the 50-day line, the GLD makes its last stand.
While I could be wrong, I tend to think that individual stocks probably offer better upside leverage than gold in a market rally that continues to be fueled by easy-money policy and a declining dollar. So far, in practice, that has turned out to be the case. Precious metals stocks like Silver Wheaton (SLW) have also lost some of their luster as gold has slithered down to its 50-day moving average. Of course, if you like to invoke the Ugly Duckling, we might consider that SLW is now at the ugliest point in its recent decline off of the mid-March peak.
As the GLD tested its 50-day moving average, SLW actually came within 1% of its 10-week moving average on the weekly chart (not shown) on Friday. This coincided with a one-penny undercut of the 15.86 intraday low of the March 9th low. So, if you believe in the Ugly Duckling, then this would be an undercut-and-rally type of buy point using the 15.85 intraday low of Friday as a reasonably tight downside stop.
I continue to view Facebook (FB) as a big-stock leader in this current market environment. That status does not, however, mean that it is guaranteed to go higher. What it means is that it is likely a linchpin sort of name in the market or what I like to call a “market stock.” If the market goes higher it likely goes higher, and if it begins to falter then it could have negative implications for the market.
As I wrote in my Wednesday mid-week report, “The litmus test for FB will occur on any continued pullback to the 10-day moving average, currently at 112.89. That would be my preferred spot at which to take a look at going long the stock on any further pullback from here.” On Friday FB went right to the 10-day line where it found support and reversed back to the upside. Volume, while below-average, increased over the prior day which implies some supporting action at the line.
FB was not necessarily looking all that promising Friday morning as it streaked for the 10-day line, but that was the place to step in on the long side, and the Ugly Duckling took over from there! Pullbacks to the 10-day line remains your best opportunistic entries, assuming the stock has any more left.
In my Wednesday mid-week report I discussed GoDaddy (GDDY) as a stock that “may be trying to set up on the long side.” As I pointed out, I couldn’t help noticing the stock as it was sitting extremely tight and quiet along its 10-day and 20-day moving averages. This action showed up as 3-4 weeks of excruciatingly tight closes on the weekly chart I showed in my last report. On Friday, it finally resolved to the upside on a pocket pivot type of breakout from a cup-with-handle base. Volume came in at 89.5% above average, which is quite strong.
Obviously, based on my discussion of the stock in the Wednesday report, Friday’s pullback into the 20-day line was your best opportunity to pick up shares and would have been well-rewarded by the close. Nevertheless, this breakout is still within buyable range since the 20-day moving average remains nearby at 31.70, a little over a point from Friday’s 32.95 close.
Square (SQ) has continued to be a mini-rocket stock as is streaked higher this past Thursday on very heavy volume. However, at that point SQ was about 32% away from my original buy point at 12.05 (see March 20th report).
Given that SQ has these 10% moves in either direction, my approach has been to campaign the stock, buying on pullbacks and then selling into the strong upside moves. Thursday’s move struck me as another move to sell into given the extreme extension from the 12.05 price level. The stock has actually be quite tradeable, and it may become buyable once again as it streaks back towards its 10-day moving average.
After an initial up open on Friday SQ finally just became too extended and reversed as profit-taking overcame the stock. I would watch for a continued pullback into the rising 10-day moving average, now at 13.56, as the next potential opportunistic entry point.
Vantiv (VNTV) is another one of these generous stocks in the sense that it continues to give buyers numerous chances to buy into pullbacks. On Friday the stock again pulled into its 10-day and 20-day moving averages where it again became buyable.
By the close VNTV had rallied back into positive territory to make an all-time closing high by a seven-cent margin. This remains buyable on pullbacks into the 10-day line at 53.12 or the 20-day line at 52.45. Another example of how you want to look to buy on weakness, particularly in a stock like VNTV that gives one ample opportunities to do so.
Maxlinear (MXL) decided to forego retesting its prior low on the big-volume spin-out to the 50-day moving average the week before last. Instead, it simply continued clawing its way right back up to the prior highs.
Certainly, I would have liked to see the stock perhaps undercut the 20-day moving average on a retest of that low of six trading days ago on the chart. However, given that the stock is right back up to the highs we would look for any pullback into the 20-day moving average at 17.68 as an opportunistic entry point from here. A small pullback here would also help to correct the v-shaped action over the past six trading days. Just keep in mind that MXL can be subject to sudden spin-outs to the downside, which are evident if one studies the chart over the past four months.
Fresh on the heels of this past Tuesday’s pocket pivot at the 10-day moving average, D.R. Horton (DHI) dutifully pulled right back into the 10-day line on Thursday as volume dried up. This put it in a low-risk buy position along the line. Despite the slight upside move on Friday of the 10-day line, the stock remains in a buyable position on the basis of Tuesday’s pocket pivot. In this case the 10-day line at 30 or the 20-day line at 29.36 would serve as your selling guides depending on your risk preference. Add salt to taste!
Smith & Wesson Holdings (SWHC) was able to push back above its 20-day moving average on slightly above-average volume on Friday, which takes it out of play as a short-sale target in the short-term. The stock was able to rally as far as the 10-day moving average but did manage to close one penny below the intraday high for the day.
So far the stock has been able to hold the 26 price level which is roughly the point of the prior base breakout from early March. By attempting to short the stock myself each time it has pushed up into the 20-day line, I’ve gotten the sense that it runs out of sellers each time it approaches the 26 level. This can also be seen as concrete action on the daily chart. We can see that the pullback on Thursday was confined to a very small daily trading range while volume dried up sharply. This looks like a Wyckoffian Retest that then resolves to the upside.
If one was trying to short the stock within this current little bear flag, that action was significant in that it was telling you that the stock just didn’t want to come down any further. Whether this has the ability to retake its prior highs is another question. But consider that SWHC is not expected to announce earnings until June 6th.
So unless there is some other news before then that would corroborate the slowdown in gun sales that was intimated by outdoor sports retailer Sportsman’s Warehouse (SPWH) last week, it could push higher. The way to test that would be to go long here and use the 20-day line at 27.24 as a tight selling guide.
It may say something about this market, however, when the best short-sale set-up I can find, SWHC, doesn’t work. And for all we know it could make a move back up to the prior highs if the general market continues to rally. Mobileye (MBLY) has been a very tradeable stock throughout March, which of course makes me wonder whether this pattern will continue in April. The alternative is that it finally finds its legs and makes a run for the 200-day moving average up at 44.46.
In my report of last weekend I suggested that one could use the pullback into the 20-day moving average at that time to take a position in the stock. I also noted that taking a shrewdly opportunistic view of the pullback “…would cause one to take a long position at the line with the idea of jettisoning it rather quickly if it failed through the 20-day line.”
In my view, particularly in this market, this is the best way to buy stocks. MBLY did not disappoint as it moved back up to its mid-March highs just above 38 throughout most of this past week before stalling at those exact highs and pulling back in on Friday. The move was at least partially attributable to news that Tesla Motors (TSLA) CEO Elon Musk was in Israel, MBLY’s home country, visiting the company to see several “breakthrough developments.”
If those developments are as breakthrough as Musk says, perhaps they can provide a catalyst for further upside in the stock. Musk’s visit might have fueled hopes of some big announcement related to MBLY during TSLA’s Thursday-night Model 3 product event.
My view of Friday’s pullback is that a) it was normal and b) likely based on profit-taking after no big MLBY-related news came out of the TSLA product event. Now the stock is sitting right at its 10-day moving average at 35.95, putting it in buyable range using the 20-day line at 34.99 as your maximum downside selling guide.
Momentum has been building in Salesforce.com (CRM) over the past week. We saw another strong day on Friday as the stock briefly pulled into its 200-day moving average early in the day before reversing back to the upside on higher volume by the close. This sent the stock further above its 200-day moving average on its third five-day pocket pivot in four days. This forms a nice cluster of five-day pocket pivots which I like to see as a constructive alternative to a standard 10-day pocket pivot.
The stock gave buyers two chances to scoop up shares on pullbacks to logical areas of support this past week as well. The first came on Tuesday as the stock found support at the 20-day moving average, and the second came on Friday when the stock found support at the 200-day line.
As I wrote last weekend, the way you have to operate in this market is to know what you like on the long side, and then take a shrewdly opportunistic view of pullbacks. And you must often do so when the market and sometimes the stock in question don’t look all that appetizing. However, the key is in being able to buy as close to a support level as possible so that your stop can be set squeaky tight, thus limiting risk.
Workday (WDAY) has also provided buyers with at least two entry opportunities this past week. The first occurred on Tuesday as the stock held tight at the 10-day moving average, and the second occurred on Thursday when the stock came in to within 1% of its 200-day moving average before pushing back into positive territory by the close. Thursday’s close also qualified as a roundabout type of pocket pivot off the 200-day line. While it is quite subtle, volume was still higher than any down-volume day over the prior ten trading days.
WDAY is somewhat extended at this point, and of course we would be watching for the next logical pullback point to emerge. Currently this would be the 200-day line at 74.86. Frankly, I would like to see the stock hold these current gains and then give the 10-day line some time to catch up.
Splunk (SPLK) is another one of these cloud-related Ugly Duckling names that continues to make higher highs. Like CRM, it has also posted three five-day pocket pivots over the past four days as it tracks along its 10-day moving average. The stock also gave buyers two shots and scooping up shares this past week, and this pattern is similar to CRM and WDAY. On Tuesday SPLK pulled into the 20-day moving average before turning higher and closing up on the day on a five-day pocket pivot.
On Thursday and Friday the stock dipped into the 10-day moving average with Friday’s dip just a little deeper. But both days saw the stock turn back into positive territory by the close and both also qualified as five-day pocket pivots. SPLK looks to me like it wants to go higher. As cloud-related names start to gather some momentum after spending most of March in consolidations after their prior sharp moves up from the February lows, it could make a run for its 200-day line at 56.80.
The stock is in a buyable position here on the basis of the five-day pocket pivot cluster using the 10-day line at 48.14 as your tightest selling guide. The 20-day line down at 46.95 provides a somewhat looser selling guide.
My Ugly Duckling favorites did reasonably well this week, and I have basically focused on four of them in recent reports. However, if one goes back to my blog post of March 4th where I first published a list of Ugly Ducklings, there have been a number of stocks on this list that have done reasonably well over the past month. These include AAPL, BABA, BIDU, JAH, TSLA, VMC, and VRSN, while others look like they could be setting up.
Ambarella (AMBA) is one name that actually moved lower after that list was published in the blog. However, it is now back above its price at that time following a big-volume bottom-fishing gap-up move four days ago. You can see that the stock has tracked tight sideways along its 65-day exponential moving average following the gap move on Tuesday. This could be treated as a buyable gap-up type of set-up using the 42.58 intraday low of the gap-up trading range as a selling guide.
I would also take note of the ascending 10-day and 20-day moving averages at 41.92 and 41.76, respectively. These could provide reasonable reference points for entries on any significant pullback. Notice also that the stock has gone “Code Blue” for the first time since August 2015. AMBA may also benefit from a) the fact that it is a semiconductor name, and semis have been a leading group since the market turn in February; and b) as of March 15th 11.3 million shares of its 28.1 million share float have been sold short.
Apple (AAPL) continues to push up towards its 200-day moving average on the daily chart after running into its 10-week moving average on the weekly chart, not shown, earlier this past week. However, as it does so, it does not look like it wants to morph into a short-sale target again, at least not at the current time.
Selling volume has remained muted while buying volume has posted a number of pocket pivot signatures despite the fact that none of those have come along the 10-day moving average. If they did, they would then qualify as bona fide pocket pivots, but that may just be a matter of semantics as far as the stock is concerned.
AAPL is just another short idea that is not panning out. As a market stock, it may simply continue to trundle higher as the general market rally remains in force. It is also a name I put on my Ugly Duckling watch list on March 4th, and continued to move higher since then.
Netflix (NFLX) has finally made it right up to its 200-day moving average as it pushed to a higher high on Friday. I’ve been playing this more as a long as it has tracked along its 10-day and 20-day moving averages. As I noted in my Wednesday mid-week report, NFLX posted a pocket pivot at the 10-day/20-day lines on Monday, and has since moved to higher highs. A major reversal at the 200-day line could bring this into play as a short-sale target, similar to what could happen with AAPL, but so far this looks more constructive than it does shortable.
The next constructive step for NFLX would be a pocket pivot type of move up through the 200-day line. The way most of these Ugly Duckling names have been acting lately I would certainly not put it past NFLX to do so as well.
I wrote in my Wednesday mid-week report that the best way to handle Tesla Motors (TSLA) going into Thursday’s big product event for the new Model 3 was to not handle it at all. Rather, my preference was to leave it alone and “then see whether a ‘fade-able’ move ensues.”
That turned out to be the case on Friday as the stock flashed a sell signal on the five-minute 620 chart at around the 244 price level and then pushed down as far as 233.25 by midday. This was good for ten “Livermore points” on the downside, but the stock found its feet less than 1% away from the 10-day moving average before closing at 237.59.
Despite the stalling action on both Thursday and Friday, both moves qualify as pocket pivots at the 10-day and 200-day moving averages. TSLA has had a huge amount of short interest, about 32% of its total float, and I wouldn’t be surprised if a lot of that volume was short-covering. However, I’m not so sure this means the stock will necessarily streak back to the downside from here. If it stabilizes along the 10-day/200-day moving average confluence, it could resume its upside move, especially if more shorts see the rally as an opportunity to pile on the stock.
Otherwise, a major breach of the 200-day line could bring the stock back into play as a short-sale target. That, however, may depend on what the general market does from here. Therefore, one has to watch how TSLA’s real-time price/volume action plays out and then play it as it lies without taking a rigid bullish or bearish stance.
Solar stocks currently look like absolute garbage lately, and the pressure may not let up after Sun Edison (SUNE) announced yesterday that it is filing for Chapter 11 bankruptcy protection. This has put pressure on the group as a whole as the company goes from a market cap of $10 billion in the middle of last year to one of $136 million, almost nothing on a relative basis.
This represents one of the largest meltdowns in corporate financial history and has called into question the entire solar business model, which in many cases incorporates financial engineering and huge debt loads to make it work.
SUNE was in the business of building solar power plants, and recently called off plans to move into the residential side with the acquisition of Vivint Solar (VSLR). Solar names on both the residential and power plant sides have suffered as SUNE reveals the soft underbelly of the industry. Solar names from SPWR to RUN to SCTY all currently look like the ugliest of Ugly Ducklings.
Meanwhile, First Solar (FSLR) continues to falter along its 50-day moving average (see my notes on the stock further below) while SolarEdge (SEDG) continues to flounder. About the only good thing I can say about either stock is that both remain within consolidations that extend over the past 2-3 months, albeit at their lows, unlike the other names in their respective groups.
The question of course becomes whether FSLR and SEDG follow their solar brethren to lower lows, or whether SUNE’s demise represents the start of a culling out process that eliminates the weakest players in the solar herd?
Perhaps the answer will be forthcoming this week as the news hits the markets on Monday when trade opens up again. Keeping an entirely open mind, I’m watching both FSLR and SEDG here without having a bullish or bearish bias in mind. I hypothesized last weekend that SEDG could rally after undercutting its late February low on an undercut & rally type of move. That’s exactly what happened, and produced at least a tradeable move back up to the 50-day and 200-day moving averages.
Since failing at the moving average confluence, SEDG has been in retest mode as it comes back towards the low of six days ago on the chart. Volume is drying up on this retest, which gives it a Wyckoffian flavor. Therefore what I’m watching for is some sort of stabilization right here that could set up another tradeable move back to the upside using the 24 price level as an exceptionally tight stop.
Meanwhile First Solar (FSLR), which I don’t show here on a chart, dipped below its 50-day moving average on Friday on increasing but below-average volume. There is nothing really concrete here although one could take the view that the stock is shortable with the idea of using the 50-day line eight cents above where the stock closed on Friday as a tight stop.
The alternative view is that FSLR did successfully retest and hold the prior lows from March 8th and March 24th at 66.58 and 66.61, respectively. Given that you are right at the lows of the March price range, this would be the Ugly Duckling’s lowest-risk buy point within the pattern, using the 66.58 March 8th low as a guide for a downside stop.
Panera Bread (PNRA) was in fact one of the first stocks to break out when the market bottomed in the early part of February. That led to a 10% move to the upside before the stock began retracing and giving back all but 1% of that 10% gain right after the breakout. Of course, the pullback to the top of the prior base served to bring the stock back into a buyable position given that we look to buy pullbacks into logical areas of support. We can see how seven days ago on the chart PNRA made a low at 201.44 before rallying back above the 10-day and 20-day moving averages.
That was followed by a Wyckoffian Retest on Wednesday and Thursday of this past week. This then led to a strong-volume pocket pivot on Friday back up through the 10-day/20-day moving average confluence. Pullbacks into the 10-day line at 207.19 might present opportunistic entries from here.
If I’m being totally objective here with respect to PNRA I would have to conclude that I made a mistake in not looking at the stock as a long idea when it came within 1% of the $200 Century Mark price level. The problem here from a psychological point of view is that I probably had a subconsciously bearish view of the stock based on the fact that my last trade in the stock was a short at the 220 price level.
When the stock reversed hard on heavy volume off of that price peak, my bearish thesis on the stock was proven correct. The only issue was that I did not clear my mind enough once the trade was completed so that I could properly assess the pullback into the top of the prior base.
That is arguably a low-risk entry point using the top of the base and the 200 Century Mark price level as a very tight stop. In essence, I missed that trade, and my analysis has revealed that mistake. Another lesson to learn in the ongoing process of remaining a pure student of the market, even after 25 years of experience.
Below are my current notes on other semiconductor names I’ve discussed in recent reports:
Alaska Air Group (ALK) – in the Wednesday report I wrote that “Pullbacks into the 20-day line at 79.60 would be your most optimal low-risk entry opportunities.” On Friday ALK came within a mere 39 cents of the line before finding support and closing above its 10-day moving average. The story here remains the same: buy pullbacks into the 20-day line at 80.04. Meanwhile the stock is approaching its prior highs and the left side of a big cup formation with a two-week handle forming so far.
Amazon.com (AMZN) – was good for a quick short scalp per my comments in the Wednesday report, but on Friday reversed back to the upside. I might be interested in buying this on a pullback into the 10-day line at 578.37 depending on how such a pullback might play out.
Broadcom (AVGO) – pulled a big outside reversal to the upside on Friday. The pullback came close to within 1% of the rising 20-day moving average, now at 149.68 before the stock turned back to the upside and posted a new all-time high.
Fabrinet (FN) – holding tight over the past three days after getting nearly 10% extended from the prior base breakout at the 30 price level. Pullbacks into the 10-day line at 30.61 should be watched for as potential lower-risk entries.
Hawaiian Holdings (HA) – finally pulled into its 20-day moving average on Friday as selling volume increased from the prior day. Volume was still below average so this pullback could be considered a potential lower-risk entry point using the 20-day line at 45.43 as a selling guide. The stock remains in a fairly extended position from its prior breakout point around the 40 price level. Buying it here assumes it will continue its uptrend from current price levels.
M/A-Com Technology Solutions (MTSI) – closed at a new closing high on Friday, but volume was -37% below average on the day. However, the stock did pull right into its 10-day moving average at 42.96 before finding support and turning back to the upside. Would look for pullbacks into the 10-day line or the 20-day line at 42.42 as your most optimal opportunistic entry points.
Nvidia (NVDA) – came within 32 cents of its 10-day moving average on Friday before turning back to the upside and posting a new closing high. Pullbacks to the 10-day line remain your lower-risk entry opportunities.
Silicon Motion (SIMO) – stock reached a peak of 17% above the 34 base breakout level where I first mentioned the stock (see March 11th report). One might have considered banking profits at that point. Now it’s a matter of looking for a pullback to the 10-day line at 37.39 or the 20-day line at 36.08 as your most optimal entries on constructive pullbacks.
Southwest Airlines (LUV) – stock pulled right into its 20-day moving average at 43.61 on Friday, providing an optimal, lower-risk entry point for shrewdly opportunistic buyers.
In my last report I laid out a general approach to this current market in fairly simple terms: “While I am somewhat cautious on the market on an index basis, the concrete way to handle this is to simply continue taking advantage of pullbacks in individual stocks. When a name you like pulls into a lower-risk entry point along a key moving average or prior area of support on the chart, don’t be afraid to pull the trigger.”
This past week gave us a number of shots on the long side that fit this approach to the proverbial T, and I currently see no reason why the market can’t keep acting this way. When big stocks like McDonald’s (MCD) and Microsoft (MSFT) trundle back up to their prior highs, it’s hard to fault the underlying action of this market on the long side.
There are also a number of stocks acting well, from utilities to consumer staples (both of which strike me more as yield plays) to semiconductors to builders to restaurants like PNRA, SONC, TXRH, DPZ, and SBUX, to name a few. I don’t try to “kiss all the babies,” to use one of Bill O’Neil’s favorite sayings, I just try to focus on a somewhat finite list of names that continue to act well. In the process I also try to get to know them well from a technical standpoint.
This is helpful since one does have to take something of an Ugly Duckling approach. As I’ve discussed in recent reports, when it’s time to buy a pullback, the general market and the individual stocks in question may not look all that appetizing. From a psychological perspective this complicates matters somewhat. But understanding the technical character of each individual stock you are tracking is something I find to be helpful.
From the perspective of having a concrete trading plan, this Ugly Duckling approach has a very practical fail-safe aspect to it. And that is, I’ve discussed repeatedly, the idea of buying stocks on pullbacks to logical areas of support which then enables the placement of a tight stop. Ensuing gains are then locked in on any sharp rallies.
This is the most practical way of limiting risk while giving yourself a decent chance of making money in a market that can quickly morph into a snarling, fang-gnashing, profit-eating beast. The old ways of buying a breakout in a leading stock and then sitting as you wait for that big gain to materialize haven’t worked as well as they have in the past.
However, there have been some breakouts that have produced decent gains, such as with SWHC and SIMO, for example. Even PNRA had a decent gain once it cleared through the $200 price level and became one of the first breakouts when the market bottomed in early February.
So while one can recognize the fact that most breakouts don’t lead to massive upside gains in this market, one must also recognize that breakouts could begin to work again at some point. That point would be if and when the general market ever starts a new, sustainable bull market trend. For now the indexes remained mired in a wide, choppy range that extends back to the first half of 2015.
As the indexes once again approach their prior highs, a day of reckoning is at hand. Do they break out in convincing fashion or do they again fail and begin a sharp downside price break? For that answer, all we need to do is to continue to operate as we have. If things start to break down, there will be plenty of time to react. We need only let the stocks tell us what to do, and to ensure that our minds remain open enough to hear it. That is all.
CEO and Principal, Gil Morales & Company, LLC
Managing Director and Principal, MoKa Investors, LLC
Managing Director and Principal, Virtue of Selfish Investing, LLC