The Gilmo Report

April 6, 2016

April 6, 2016

The Fed released its monthly meeting minutes from March today and revealed what is already fairly obvious. The Fed remains somewhat confused and divided over the pace of interest rate hikes to come. And amidst the confusion are occasional reference to negative interest rates as a monetary policy tool. The market spun back and forth in reaction to the latest revelations regarding the Fed’s state of confusion before closing up on mixed volume. The NASDAQ Composite Index posted the best move as it rallied 1.59% on heavier volume.

Objectively speaking, this looks fairly constructive as the index found support at its 10-day moving average before reversing to close at its highest high since rallying off of the February lows.

 

GR040616-$COMPQ

 

The S&P 500 Index pushed back to the highs of its current six-day trading range on lighter volume. The index failed to trade at a higher high, whether closing or otherwise. Objectively, it remains in a short consolidation along its 10-day moving average, and this cannot be seen as negative action per se.

 

GR040616-$SPX

 

While the rally today was led by larger-cap names, the broader market as measured by the NYSE Composite Index has been tracking sideways for the past three weeks or so as it finds resistance at its 200-day moving average. What I’m looking for here is either a breakout through the 200-day line on strong volume or some kind of failure.

We already know that a large percentage of stocks have rallied beyond their 50-day moving averages, and that this has reached a peak that is often associated with at least short-term tops. So far, however, we haven’t seen any objective evidence of a short-term peak.

That of course doesn’t mean one can’t occur at any time, but if I have to guess, the action of the NYSE Composite Index might be a useful clue depending on what it does from here. A breakout would be bullish, obviously, while a failure might give us a clue that the other indexes are reaching a point where a more significant pullback becomes more likely.

 

GR040616-$NYA

 

The confused tone of the Fed kept the dollar and gold in a somewhat confused state. The dollar held steady today along its recent lows while the SPDR Gold Shares ETF (GLD) treaded water at its 50-day moving average where it has found support over the past several days.

If one is looking to buy at a low-risk point, right here at the 50-day line is probably as low-risk as you can get, I suppose. As well, the GLD’s ability to hold the line and rally will figure into whether a name like Silver Wheaton (SLW), not shown here on a chart, will be able to rally from a similar decline down near to its 50-day moving average at 15.52.

For now gold and gold-related stocks are suffering from a clear lack of buying interest. On the other hand they could be reaching logical points of support within consolidations of the sharp moves they had off their December 2015 lows. Enterprising, opportunistic, and nimble traders should keep a close eye on these as they come into logical support for possible lower-risk long entries.

 

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For the most part most stocks are tracking in sideways formations, where they become buyable on pullbacks. I blogged yesterday about keeping an eye on your buy watch list since a number of stocks on my list seemed to be pulling back on very light or “voodoo” volume signatures. There are some exceptions, however. In my weekend report I discussed the constructive action in Smith & Wesson Holdings (SWHC). At that time I suggested that one could test the stock on the long side using the 20-day line at 27.24 as a tight selling guide.

Nobody got a chance to put that trade on, and it was probably a good thing since SWHC gapped down through the 20-day line on Monday morning after a big downgrade from a large brokerage house. The main point of the down grade was the potential for slowing gun sales, and this turned out to be the proverbial straw that broke the camel’s back.

It wasn’t clear to me that confirmation of slowing gun sales would show up in the news flow for SWHC before it announces earnings in June. As it turned out, it was not straight news but rather an analyst’s downgrade that was good enough to do the trick. If one is alert as a short-seller, one would have immediately picked up SWHC’s break on Monday as a potential shortable gap-down early in the day. SWHC gapped down to 25.91 right at the open, hit an intraday high one penny higher, and then streaked another 12% lower by the close.

Now with the stock under the 50-day moving average, rallies into that line at 24.84 become the most optimal new short-sale entry points. However, we can see that the stock has only been able to muster up a weak dead cat bounce that didn’t even come close to the 50-day line today before reversing and closing near the intraday lows.

 

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SWHC is an important example of how one must react to changing real-time information. A stock can look one way one day and then quite another the next. One simply needs to look at the objective real-time evidence and then formulate a trading plan from there in order to capitalize on what is a material change.

A similar situation developed yesterday in First Solar (FSLR), a stock that I’ve looked at on both the long and short sides so far in 2016. As I blogged on Monday, the stock was looking like it could be shorted at that time using the 20-day moving average as a guide for an upside stop. At that point it was pushing into the 20-day line on light volume. By the close that weak-volume rally reversed and the stock closed back below the 50-day line.

Yesterday, FSLR then blew through its 50-day moving average, gapping down to 65.23 before rallying up to 65.97 where it set the high for the day. From there it plummeted on heavy selling volume. Thus it could have been treated as a shortable gap-down, not unlike SWHC, using the 65.97 intraday high as a guide for an upside stop.

The sharp break yesterday was due to an analyst day event at which the company was presenting. This obviously did not do much for investors’ enthusiasm for the stock. From here I would watch for rallies back up into the 65.97 high of Monday as a potential short-sale entry point.

 

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Interestingly, SolarEdge (SEDG), not shown here on a chart, did turn out to be good for a trade after last Friday’s “Wyckoffian Retest” of the low of the prior Tuesday. I discussed this in my weekend report, and while the stock did push just above the 50-day line on Monday, it eventually reversed to close in the lower part of its daily trading range. This morning SEDG again tried to rally to the 50-day moving average, coming within nine cents of the line before stalling and closing mid-range. This is a great day-trading stock, but not much else right.

In general, when it comes to solars, what we’re now seeing is that the overall weakness in the solar group is simply dragging FSLR and SEDG down with it. In the process, FSLR now becomes a short-sale target once again. Silicon Motion (SIMO) does a nice job illustrating why one should look to take 10-15% gains in stocks when they have them. SIMO was first mentioned at the time of its base breakout near the 34 price level. From there the stock pushed some 17% higher on a big-volume streak to the upside last Thursday.

Of course, that show of extreme strength wasn’t something to get starry-eyed over. It was something to sell into and bag a 15-17% gain in the stock, depending on exactly where one bought the early March breakout. SIMO then gave up a bit more than half of those gains by this morning, but had come back into a lower-risk buy position around the 20-day moving average. By the close it pushed back above the line and also cleared the 10-day line on above-average volume.

So overall a good example of how a leading stock can be sold into a strong upside move and then bought back at or around a logical support level.

 

GR040616-SIMO

 

Among other semiconductor names I’ve discussed in recent reports, below are my current notes on each name. In most cases these stocks haven’t progress any further to the upside over the past couple of weeks as they attempt to consolidate whatever prior gains they have had:

Broadcom (AVGO) has held along its 10-day moving average for the past six trading days. Pullbacks into the 20-day moving average at 151.39 would provide lower-risk entries on the long side.

M/A-Com Technology Solutions (MTSI) has pulled back into its 20-day moving average again after testing the line ten trading days ago. With the stock at the 20-day line, this puts it in a lower-risk buy position using the 20-day line at 42.58 or the intraday low of today at 41.75 as a tight selling guide.

Maxlinear (MXL) continues to find support at its 20-day moving average, and did so again today, closing up off the line on lighter volume. Pullbacks into the 20-day line at 17.87 would represent my preferred entry opportunities.

Nvidia (NVDA) pulled down within about 1% of its 20-day moving average today before finding support on higher volume. It was buyable at the 20-day moving average this morning, and the only optimal entries from here would only occur on any future pullbacks to the line.

Facebook (FB) ran into an analyst’s downgrade on Monday and pitched hard to the downside and into its 20-day moving average. The analyst raised the possibility of a soft quarter for the big-stock social-media leader, sending the stock gapping down right at the open.

As I’ve discussed in previous reports, I consider FB to be a big-stock leader in this current market environment. As I explained over the weekend, this does not mean it is guaranteed to go higher, but that it likely serves as a barometer for the market. Given FB’s steady, low-volume rise to new closing highs throughout most of March, a nice, “cleansing” sell-off was probably due. That sent FB right down to its 20-day moving average on Monday on heavy selling volume. Yesterday, as I Tweeted during the second half of the day, selling volume seemed to be drying up at the line.

The selling vacuum continued today and enabled FB to bounce lightly off of the 20-day moving average. From here, pullbacks to the 20-day line remain buyable, and that’s where you look to step in with the idea of setting a tight stop around the line.

 

GR040616-FB

 

Failure analysis is always an instructive process to go through, but in the case of GoDaddy (GDDY) failure based on a simple event. That was the pre-open announcement of a 16.5 million share secondary offering yesterday. The stock is being offered by selling shareholders with no proceeds going to the company. It will also increase the company’s current 65.5 million share float by about 25%. That’s a lot of stock for the market to absorb, and GDDY immediately tossed its cookies in reaction to the announcement, gapping down to the 30 level right at the open.

From a practical standpoint, this kills last Friday’s cup-with-handle breakout, and perhaps does more to point out the futility of buying breakouts in this market. But it was caused by an exogenous event that cannot be foreseen, and once the stock busts the 20-day line it is a sell as far as I’m concerned.

In the meantime, we can monitor GDDY to see how the secondary prices and whether it is able to stabilize and set up again over time. For now, with so much supply coming into the stock I doubt if there is much upside from here while further downside remains a distinct risk. I am actually testing this out as a short right here, putting out a small position into today’s rally.

 

GR040616-GDDY

 

Unlike GDDY, Square’s (SQ) recent cup-with-handle is faring much better, but then the company hasn’t killed it with the announcement of a large secondary offering. The stock has pulled back into its 10-day moving average as volume has dried up sharply, a constructive pullback so far. This led to some slight upside off the line over the past three days, but little else. Given that the stock is still some 20% extended beyond our original buy point at 12.05, this probably needs some time to digest these gains and set up again.

I still like the stock on pullbacks, but probably would view the 20-day line down at 13.28 as your most opportunistic entry point, should that occur. However, I might expect the rising 20-day line to get closer to the stock over the next few days, making that possibility dependent on a less-severe pullback.

 

GR040616-SQ

 

Tesla Motors (TSLA) has been this week’s unlikely star as it has continued to rally further above its 200-day moving average. As I discussed in my weekend report, the stock had two stalling pocket pivots off of the 200-day line, which were still objective buy signals as long as it continued to hold the 200-day line.

So far this week the stock has continued to power higher on above-average volume. As I’ve pointed out in recent reports, TSLA has had very high short interest as shorts attack the company’s “ridiculously high P/E” ratio. However, as I Tweeted on Monday, TSLA has been a stock that one only shorts if one is a glutton for punishment.

Sure, one can certainly make an argument that TSLA is “just a car company” that sells very few cars. On that basis, the argument would therefore be that it should sell at the same valuation at which established car makers sell for.  For example, Ford (F), which sells millions of cars, sells at 12 times forward estimates while TSLA sells at 201 times forward estimates. If we want to get offended, we might wonder what right TSLA has to sell at such “lofty” valuations.

But of course, we know where valuation arguments like this get you in the face of strong technical action. You can argue all you want, but standing in the way of an electric car can get you killed just as surely as standing in front of a fast-moving train! So, like I Tweeted on Monday, why argue? The stock was going higher as I saw it at that time, and so it has. Better to play the move on the long side than to stand in front of a speeding Model S. Now it’s about 10% extended beyond the 200-day line so somewhat out of range at today’s close of 265.42.

 

GR040616-TSLA

 

Mobileye (MBLY) is holding up tightly along its 10-day line as volume continues to dry up. I still view this as buyable using the 20-day line at 35.45 as a guide for a very tight stop. So far, the 20-day line has served as reliable support for the stock. As long as the 20-day line can continue to hold, this remains a long-side play. A breach of the 20-day line, however, would bring this into play as a potential short-sale target, so one must be alert to this should it occur.

 

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Salesforce.com (CRM) also acts well as it tracks just above its 10-day line. The stock pulled back on Monday and Tuesday as volume dried up, and this looks like a normal pullback following last Friday’s extended move off of the 10-day moving average. I would continue to view low-volume pullbacks into the 10-day line at 73.82 as lower-risk entry opportunities. As well, pullbacks into the 20-day line at 72.83 would be even better as lower-risk entry points.

 

GR040616-CRM

 

Workday (WDAY) is drifting in slightly after pushing up towards the 80 price level on Monday. Volume has been light on the pullback, which is constructive. The nearest reference point for support on any pullback from current levels would be the 10-day moving average at 75.75, followed by the 200-day line at 74.84. Both WDAY and CRM have continued to drift higher on mostly below-average volume, which of course can make the rallies questionable.

The flip side is that so far we haven’t seen sellers become all that eager to unload shares on the way up. Until that happens, low-volume pullbacks into logical areas of support remain your best potential entry points on the long side.

 

GR040616-WDAY

 

Splunk (SPLK) is also holding tight along its 10-day and 20-day moving averages in a shallow ascending pattern. Like WDAY and CRM, upside volume hasn’t been coming in heavy, but on balance it has been larger than the volume seen on any downside days. Today SPLK pulled right into its 20-day moving average where it found minor support as volume picked up slightly. This remains in a buyable position using the 20-day line at 47.47 as your selling guide. My preference, of course, would be to use a pullback to the line, like it had today, as your best entry opportunity.

 

GR040616-SPLK

 

One major point and caveat I would make about these three names, CRM, SPLK, and WDAY, is that while they look constructive as potential long ideas, they do have a heretofore hidden dark side. That dark side is the fact that they have come up a long way off of their February lows, and look quite extended. Likewise, they are approaching areas of potentially significant overhead supply. I would use the weekly chart of WDAY, below, as an example.

Here we can see that it has had something of an extreme v-shaped rally up into an area of overhead congestion from the right side of the chart. This also coincides with the lows of the base from which WDAY failed back in May of last year.

 

GR040616-WDAY Weekly

 

So while these look constructive on the daily charts, and can be played on the long side on that basis, they are in position for potential failures on their weekly charts. Such failures would likely be initially confirmed by breakdowns through their respective 20-day moving averages followed by ensuing breaches of their 50-day moving averages. So if you are playing these names, you want to remain very alert to any signs of deterioration.

Something that might provide another relevant example to this discussion is the recent action in Alaska Airlines (ALK). The stock has rallied all the way back up near the left side highs of a big, 30%-deep cup formation. I first discussed the stock as a buy idea when it had a pocket pivot coming up through the 200-day line back in early March.

The stock has had a good run since then, but ran into trouble on Monday on a big-volume gap-down that hit the stock after it announced it was buying Virgin America (VA). This sent the stock gapping through its 20-day moving average, which can be an initial sign of a POD-type of failure. In this case we have a fairly deep cup with POD-like characteristics.

After stalling at the 10-day line yesterday, the stock closed just under the 20-day line, and today held at the line as volume declined. This may make the stock shortable here using the 20-day line at 79.88 as an uber-tight stop. Alternatively, the 10-day line at 81.01 offers a looser stop. However, given that this is not necessarily as clear-cut as I would like it to be, my preference would be to use the 20-day line as a very tight stop. Simple enough.

 

GR040616-ALK

 

Ambarella (AMBA) is trading squeaky tight sideways following its big-volume gap-up and bottom-fishing pocket pivot of seven trading days ago. Volume has meanwhile dried up sharply.

I have to think that the stock is setting up to move higher as sellers disappear and volume dries up to -49.1% below average. Pullbacks into the 20-day moving average at 42.44 would present the most optimal entries, but so far the stock hasn’t wanted to drop below the 10-day line at 43.23. I think it’s buyable anywhere around the two moving averages using the 20-day line at 42.44 as your maximum downside selling guide.

 

GR040616-AMBA

 

An opportunistic approach would have paid off with Panera Bread (PNRA) today as it pulled into the confluence of its 10-day and 20-day moving average. This came after last Friday’s strong-volume pocket pivot coming up through the two short moving averages. As I wrote over the weekend, pullbacks into the 10-day line might present the best opportunistic entries, and that turned out to be the case today. Another example of not chasing strength and instead using constructive weakness to buy a stock on a pullback following a prior display of strength.

 

GR040616-PNRA

 

Below are my current notes on other names I’ve discussed in recent reports:

Apple (AAPL) has shown some stalling action around the 200-day moving average and closed just under the line today. This remains in flux ahead of its earnings announcement later this month.

Amazon.com (AMZN) gave opportunistic buyers an entry yesterday when it pulled into its 10-day moving average on light volume. Not much more to say here other than that you have to step up to the pullbacks when you have them if you want to participate in a stock on the long side. AMZN proves to be no different in this regard.

D.R. Horton (DHI) had a pocket pivot off of its 20-day moving average and up through its 10-day moving average in a nice show of support after yesterday’s pullback. Again, a pullback to buy into yesterday as I blogged during the trading day.

Fabrinet (FN) is still holding along its 10-day moving average, but I would only view a pullback into the 20-day line at 30.20 as the most optimal opportunistic entry from here.

Hawaiian Holdings (HA) posted a pocket pivot off of the 10-day moving average on Monday. Yesterday and today the stock tucked back into the 10-day line on light volume, putting it in a buyable position using the 10-day line at 46.96 as a selling guide.

Netflix (NFLX) has been running into resistance at its 200-day moving average so far this week. I would still consider looking at this as a short-sale target on such rallies into the line, now at 106.29, while using the line as a guide for a tight upside stop.

Southwest Airlines (LUV) is starting to look sloppy as it undercuts its 20-day moving average. It held a penny above the line today, which could provide a lower-risk entry using the line at 43.66 as a tight stop.

Vantiv (VNTV) was buyable yesterday and this morning right at the 20-day moving average. The stock posted a pocket pivot coming back up through the 10-day line today as it made a new closing high. Pullbacks into the 10-day line at 53.49 or the 20-day line at 52.80 remain your best lower-risk entry opportunities.

I have to admit I remain cautious on this market given its extension off of the February lows. However, this is easily dealt with on a practical basis by taking the approach of buying stocks on weakness rather than chasing strength. In some cases I might also throw in a short position here or there to help allay some of that cautious psychology.

We’ve seen time and time again that, when the stocks we like pull into logical areas of support, that is the point to step in and buy shares. The idea then becomes, as I’ve discussed repeatedly, to use the nearby support level as a guide for a very tight stop.

And, as I’ve discussed in recent reports, the market and/or the stocks themselves may not look so appetizing when they are pulling back. I think that was clearly the case yesterday, but if you stepped in you were reasonably well-rewarded today.

There’s not much else to say in this regard. I don’t need a thousand buy ideas, I only need a few, and those are the ones that I focus on in my reports. I certainly saw the big buyable gap-up move today in Acuity Brands (AYI), after it beat on earnings last night after the close, but that is a bit too extended for my tastes.

 

GR040616-AYI

 

A pullback into or near the 240 level and the 239.08 intraday low of today’s BGU range would of course provide a lower-risk buying opportunity. This also coincides with the top of the prior base.

In general, I prefer looking for stocks in buyable positions before they launch higher, or buy into constructive weakness following a show of strength. I believe this is the safest way to operate in this market. So in my view we continue to operate as we have. Stay tuned.

 

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 ALK, AMBA, FB, and GDDY, though positions are subject to change at any time and without notice.

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