The Gilmo Report

August 7, 2016

August 6, 2016

Friday’s jobs number came in a bit hot with 255,000 new jobs reported vs. forecasts of 180,000. However, most of the growth came in service sector jobs while the number of long-term unemployed remained unchanged. In my view, while the jobs report might engender a belief that the Fed is more likely to raise rates when they meet again in September, there was some underlying softness that mitigates some of this.

Speaking for myself, I tend to think that higher rates would actually be a good thing for the economy, but what the market actually saw in this latest jobs report is anyone’s guess. All I know is that Friday’s rally sent the Russell 2000 Index to new highs, which is what I wanted to see as a way of negating the prior narrow movement we saw into big-cap NASDAQ 100 Index names.

The Russell’s proxy, the iShares Russell 2000 ETF (IWM), below, shows a nice shakeout-and-breakout to new highs following Tuesday’s test of the 20-day moving average. This is exactly the type of action I was looking for per my Wednesday report. It did, however, find its catalyst in the monthly jobs report.

By Thursday’s close, the Russell was showing some stalling action at the 10-day moving average as buying volume failed to impress.

 

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NASDAQ Composite Index is now within about 10 points of its 5231.94 all-time high from July of last year. Tuesday’s pullback to the 10-day line turned out to be a little head-fake as the index blasted to higher highs on Friday with volume picking up nicely.

 

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The S&P 500 Index also did its part to dissipate the divergence as it broke out to an all-time high on Friday on higher trading volume. The index pulled a little shakeout-and-breakout maneuver of its own as it pushed up and out of its nearly one-month consolidation.

 

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We might surmise that the market thinks the Fed is more likely to raise rates some time in 2016 as evidenced by the reaction in the precious metals. Both the iShares Silver Trust (SLV) and the SPDR Gold Shares ETF (GLD), were nailed on Friday.

The SLV took a bigger hit than the GLD, pushing -3.31% lower, while the GLD was down -1.79% by Friday’s close. The SLV gapped below its 20-day moving average, and looks headed for a possible test of the 50-day moving average at 17.67 that would coincide with an undercut of the prior July base lows at 18.34. The GLD, not shown here on a chart, appears headed for a test of its 50-day moving average at 124.68. This would also coincide with a breach of the July base lows at 125.11.

Friday’s action demonstrates why I do not advocate buying the metals into strength. It is always best to wait for a pullback to an area of potential support as a much lower-risk entry opportunity.

 

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The metals stocks, of course, all got hit, with Silver Wheaton (SLW), Agnico Eagle Mines (AEM), and First Majestic Silver (AG) all down on the day Friday. However, all three are holding above their 10-day moving averages and their recent range breakout levels.

AG, shown below, actually showed some supporting action around the 10-day moving average. The stock pushed up from the early morning lows on Friday and ended the day in the upper part of its daily trading range. It also closed above its opening price, which, along with the increased trading volume, has the look of support at the 10-day line.

AEM and SLW should also be watched as they pull back and approach their 10-day moving averages at 56.86 and 27.80, respectively. I certainly don’t believe that Friday’s jobs number means the Fed is certain to raise rates in September. This current pullback in the metals and the metals stocks, if it remains orderly, might simply end up as yet another buying opportunity.

 

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Facebook (FB) found support around its 10-day moving average, something we’d be looking for in a big-stock leader that is pulling back on light volume. As I wrote in my Wednesday mid-week report, “If FB can hold here and turn back to the upside, then this pullback may provide a lower-risk entry.” That turned out to be the case as the stock was able to push off of the line on Thursday. Despite the news, both with respect to earnings and the IRS notice that FB received last Thursday, the pullback looks quite normal from a purely technical perspective, so far.

However, I would note that after volume picked up to about average on the Thursday bounce off the 10-day line, on Friday FB stalled near the prior highs as volume declined. This may mean that a retest of the 10-day line is possible, although I would consider a pullback to the 20-day moving average at 121.51 as the most opportunistic potential entry point on a pullback.

 

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If we consider Apple (AAPL), it continues to trek higher following last week’s buyable gap-up move and subsequent choke hold on the 200-day moving average. As I’ve discussed in the past couple of reports, as long as the stock remains above the 200-day line it continues to be a bullish situation. And with AAPL acting well as it gets closer to my near-term price target of 112, this provides some constructive backbone to the current index rally to new highs.

 

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Amazon.com’s (AMZN) pullback into the 10-day moving average on Thursday brought it into an optimal long-entry position with the idea of using either the 10-day or 20-day lines as selling guides. That led to some small upside from there, and on Friday the stock stalled around the highs on weak volume. This looks a little bit like FB’s action, so it is not something I would look to be chasing. I would simply continue to look for pullbacks into the 10-day moving average at 753.30 as potentially lower-risk entry points.

 

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After showing some reasonable “voodoo” type action as it tracked tight sideways and just under the $800 Century Mark, Alphabet (GOOGL) popped back above the mark on Friday as buying volume increased. Thursday’s very tight action just below the 800 price level came on volume that was more than -40.4% below average.

(A voodoo is Gilmo slang for VDU, or volume dry-up, a pullback that occurs in a leading stock which is pulling into a logical area of support. That can be either at a key moving average like the 10-day, 20-day, or 50-day moving average, or the top of a prior base. Generally, volume on a voodoo day is less than -45% below-average, although it can also be measured contextually relatively to the volume seen on preceding days on the chart.)

The stock could have been bought right there on that basis. Now that it has cleared the $800 Century Mark, one could be long the stock with the idea of using the 800 price level as a tight selling guide. Livermore’s Century Mark Rule might imply a strong move up toward 820 or more fairly quickly.

 

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Netflix (NFLX) was buyable at the 20-day moving average on Thursday, per my comments in Wednesday’s mid-week report. As I wrote, “…the move back into the 20-day line brings the stock back into buyable range, using the 20-day line at 92.32 as a tight selling guide.” On Friday the stock posted a roundabout sort of pocket pivot as it cleared the 50-day moving average on strong volume. There were some rumors that Alibaba’s (BABA) interest in acquiring NFLX helped to drive the move.

However, in my view, BABA buying NFLX doesn’t really make any sense. Another less-speculative driver might have been news that NFLX is currently in talks to enter the Chinese market through a partnership deal with Chinese company LeEco, and this strikes me as a bit more likely.

In any case, the place to buy this was closer to the 20-day moving average on Thursday when the stock tested the line on very light volume that came in at -67% below average. Now with the stock extended from the 50-day line at 94.36, pullbacks into that price level would represent your lower-risk entry opportunities.

 

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Mobileye (MBLY) looks to me like it needs a good yank back down toward the 50-day moving average if it’s going to give us an opportunistic entry point any time soon. Currently the stock is wedging back above its 20-day moving average, which may or may not indicate that a pullback is required to correct the wedge.

The other option would be for the stock to simply hold tight along the 20-day line in a short consolidation as volume remains extremely light. This would also help to correct the wedging action. Either outcome is possible, so stay alert here if you are looking to re-enter or even enter for the first time any MBLY position.

 

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Similar action can be seen in a few of the cloud names as they move back to the upside on declining volume. After finding strong support along the 20-day moving average earlier in the week, ServiceNow (NOW), has wedged back up to the prior highs from last week.

For the benefit of newer members, wedging action is simply the act of rallying on very weak or declining volume. In this case, we see that NOW pushed back higher Friday on volume that was 43.9% below average. I would like to see a nice, low-volume pullback into the 10-day line at 74.45 as a way of correcting this wedge and also providing a lower-risk entry from here.

 

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Workday (WDAY) is showing similar action, and along with NOW has been engaged in what is technically a voodoo rally. In other words, a rally that is occurring on extremely light and/or declining volume. WDAY held its 20-day line on Tuesday with volume picking up but remaining well below average. It has since moved back up near last week’s closing highs on declining volume that dried up sharply to voodoo levels on Friday.  From here I would like to see a low-volume dip into the 10-day line at 81.84 as a lower-risk entry.

WDAY is not expected to announce earnings until August 24th.

 

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In my Wednesday mid-week report I discussed the potential Ugly Duckling set-up developing in Salesforce.com (CRM). As I wrote, “…watch for an Ugly Duckling rally by the stock back up into the 50-day line from here. CRM did manage to hold tight today as volume dried up, which could make this buyable using yesterday’s low at 79.60 as a tight selling guide.”

CRM had previously violated its 50-day moving average on Tuesday, but notice that it held the 65-day exponential moving average, which I show on the chart as a thinner black line. I have noticed that in some cases where a leading stock technically violates the 50-day line, it will actually find support at the 65-day exponential line. This is the classic “50-day Moving Average Violation Fake Out,” as I called it last year in one of my reports. With the stock closing just above its 50-day moving average on Friday with volume picking up, it may be able to move higher from here.

Notice that it has undercut the prior 81.04-81.05 lows in the July base range and is now back above those lows. Therefore, this could be buyable as an undercut & rally set-up using the 81.04 level as a very tight selling guide. CRM’s earnings report is expected to be released on August 29th.

 

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Adobe Systems (ADBE) also turned out to be the Ugly Duckling set-up I thought it was in my Wednesday mid-week report as it rallied back up through the 50-day moving average on Friday. As I described the situation on Wednesday, the stock’s action, “…creates something of a possible Ugly Duckling type of set-up where the undercut on below-average volume sets up a move back to the upside.”

Notice that the undercut of the prior July low in the base also found support around the 65-day exponential moving average. While I don’t usually show this on the charts I use for my reports, it is an old trick of mine when watching for undercut & rally moves or moves that are more like CRM’s 50-Day Moving Average Violation Fake Out.

ADBE is now back up above the July highs as it broke out of the near-term price range on a classic undercut & rally maneuver. Don’t say we didn’t see it coming! This is the type of set-up that one has to be alert to in this market, as it is all too common these days.

 

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Splunk (SPLK) is sitting right along the highs of its prior June-July base formation after a failed pocket pivot breakout last week. The stock is continuing to hold reasonably well above the 60 price level and the 20-day moving average, which keeps it in a lower-risk buy position.

That said, I would want to see some sort of significant movement to the upside before it is expected to announce earnings on August 25th. This looks like a reasonable entry point here with the idea that it must continue to hold above the 20-day moving average at 59.42. In the meantime, any low-volume pullbacks to the line would represent slightly lower-risk entry opportunities.

 

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Among the cloud stocks that I like, Zendesk (ZEN) had the strongest move on Friday. The stock was quite buyable on Thursday as it sat along the 28 price level and the top of the prior base. As I wrote on Wednesday, this could be seen as a support level since the stock was essentially back at its prior breakout point after going through the washing machine after earnings.

For that reason, the stock was in fact at a lower-risk entry point right along the 28 price level. Anyone who took advantage of that fact scored a 6.61% gain on Friday. Now the stock is extended, and only pullbacks back down toward the 10-day moving average at 28.98 would offer lower-risk entry opportunities.

 

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Electronic Arts (EA), not shown, has continued higher since going through the washing machine after earnings on Wednesday of this past week. At this point the stock is slightly extended from Wednesday’s pocket pivot. Therefore, pullbacks into the 10-day line at 77.31 should be watched for as potentially lower-risk entry opportunities.

EA recovered from its post-earnings washing machine action as it spun around on Wednesday but closed up strongly for a big pocket pivot. Its close cousin, Activision Blizzard (ATVI), was not able to pull off the same type of bullish maneuver.

Instead, the stock gapped up at the open but reversed hard to close down on heavy selling volume. It did manage to hold above the 50-day moving average and the top of the prior base, so one might watch to see whether volume dries up near the 50-day moving average this coming week.  This could present a possible Ugly Duckling type of entry opportunity, and risk can be kept low by using the 50-day line as a tight selling guide if one decides to take the plunge on ATVI.

 

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Fitbit (FIT) is holding up very tightly following Wednesday’s post-earnings buyable gap-up move. The stock moved higher on Thursday after I discussed it in my Wednesday mid-week report. It then held tight on Friday as volume declined sharply.

Notice that volume is constructive in two ways. The first is that following the BGU the stock is holding up as volume declines. That means selling is drying up. On the other hand, volume came in on Friday above average but the stock closed in the upper part of its daily trading range. So this also has the look of supporting action off of the intraday lows.

 

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Square (SQ) gapped up on Thursday following Wednesday’s after-hours earnings report, but the move closed near the intraday lows on heavy volume. One thing to consider here is that I last discussed SQ as buyable on the pocket pivot of July 25th when the stock moved back above its 50-day moving average for the first time since May.

From there, SQ was about 30% higher at the open on Thursday so that if I were long the stock from the July 25th pocket pivot and had held through earnings I would probably have sold into that move. The stock was simply quite extended at that point. It was approaching overhead supply at the highs of the May 5th gap-down break shown way over on the left side of the chart.

A lot of trapped longs probably saw the gap-up move as a chance to relieve their pain and sell shares. On Friday, however, the selling dissipated as volume declined sharply. In addition, while volume did remain above average, the stock also managed to close mid-range for the day. This gives Friday’s action the look of some supporting action off of the intraday lows.

I blogged early in the day on Friday that members should watch SQ on the five-minute 620 intraday chart for any discernible signs of a turn. About five hours after the open at 11:15 a.m. my time in California SQ finally flashed a 620 buy signal and began to push back above the 11 price level. This may need to flatten out a little bit here, but I would look for the stock to at least hold steady in here around the 11 price level as volume continues to dry up. That could set it up for a move back up toward the BGU highs.

 

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I have continued to believe that cyber-security has to remain a compelling theme in this market. But among the stocks in the group, only prior Ugly Duckling Bottom-Fishing BGU play Barracuda Networks (CUDA) and CyberArk Software (CYBR) have acted anything like possible leadership in this space. Otherwise, we’ve seen names like FireEye (FEYE) and Fortinet (FTNT) blow apart after missing on earnings. A couple of weeks ago, I first discussed a more-obscure cyber-security name, Imperva (IMPV), which did not blow up after announcing earnings on Thursday after the close.

In fact, after an initial sell-off in reaction to an allegedly poor earnings report, the stock posted a supporting type of pocket pivot off of the 50-day moving average and back up through the 20-day moving average. Given the magnitude of Friday’s volume, I would look for this to move quickly beyond the 20-day and 10-day moving averages while using the 20-day line at 45.65 as a tight selling guide.

 

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Palo Alto Networks (PANW) isn’t expected to announce earnings until August 25th, so it represents one of the last remaining hopes for the cyber-security sector. As CYBR and CUDA lead the way higher while FEYE and FTNT come unglued and IMPV acts like it may want to move higher, PANW is tracking tight along its 50-day moving average as volume remains light.

I tweeted on Friday that I was picking up some voodoo action along the 50-day line in the stock, and by the close it was able to rally a couple of points from there. One interesting development on the chart is the fact that my indicator bars along the top have gone “Code Blue” for the first time in quite a while.

 

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Based on some of the blog comments I’ve seen, I know that some of you have been following an old friend of ours, Energy Recovery (ERII), as it has spent time correcting and base-building again. This occurs after a nice move earlier in the year that saw the stock nearly double from March through April. After topping in late April, ERII got down as low as 7.77 as it round-tripped that move.

Around the lows, however, we see two big, gray oversold bars that begin signaling a possible low at that point. That was confirmed when it flashed a bottom-fishing type of pocket pivot (BFPP) on July 18th as it moved back above the 50-day moving average. That was a very subtle move but the start of a potential recovery off of the May lows.

The stock did not make much progress from that BFPP as earnings approached, so I did not discuss it since I did not feel it was necessarily actionable on an earnings roulette basis. But after announcing earnings, ERII posted a big-volume pocket pivot on a trendline breakout that brings the stock back into play on the long side.

ERII’s business is built supplying pumps to oil and gas suppliers like Schlumberger (SLB). It recently received a purchase order to install its first multiple IsoBoost system at what will be one of the largest gas processing plants in the Middle East. It has the extra kicker of making pumps for the water desalinization industry, which could become a bigger story down the line.

ERII is currently about 9% extended from that trendline breakout point. For that reason, I would watch for any pullbacks that approach the 10-day moving average at 10.89. Otherwise the stock could just track tight sideways here as the 10-day line plays catch-up. This is a thinner, more speculative name that has to be handled a little more carefully, so be advised.

 

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Below are Notes from my Trading Journal regarding other long ideas discussed in recent reports. Most of these have earnings coming up in the next few days so should be watched for anything actionable that might develop following their respective earnings reports:

Acacia Communications (ACIA) – hanging along the 10-day moving average with earnings expected to be reported on August 11th. Don’t see much to do here ahead of earnings.

Alibaba (BABA) – earnings are expected this coming Wednesday, so not much to do here until then. Meanwhile, the stock is holding above its 10-day moving average and the Monday pocket pivot.

Ambarella (AMBA) – stock found low-volume support at the 20-day moving average on Thursday and moved back up to the highs of the range on Friday. Would view any pullback and retest of the 20-day moving average at 56.39 as a potentially lower risk entry opportunity.

Atlassian Corp. PLC (TEAM) – Jacked higher Friday on a big-volume continuation pocket pivot off of the 10-day moving average. The stock is now extended, so from here any pullback into the rapidly rising 10-day moving average might offer your next reference for a lower-risk entry point.

Barracuda Networks (CUDA) – holding tight along its 10-day moving average but would prefer to see a pullback to the 20-day line at 20.73 as the most opportunistic potential entry point.

CyberArk Software –Earnings are expected to be announced this Tuesday, August 9th. Nothing to do with this until then.

Gigamon (GIMO) – still consolidating last Friday’s big upside move after earnings. Low-volume dips into the 10-day line at 43.94 would represent potential lower-risk entry opportunities.

GrubHub (GRUB) – holding very tight along the post-BGU highs around the 39 price level. Would look to be opportunistic by watching for a possible pullback to the 10-day line at 36.36 as a potential entry point on a more concerted pullback.

Nvidia (NVDA) – earnings expected this coming Thursday, so nothing to do here until then. Stock continues to act well as earnings approach, logging another all-time high on Friday on increased buying volume.

Silicon Motion (SIMO) – now holding above the 10-day moving average. Friday’s pullback into the line at 52.56 offered a lower-risk entry opportunity. I would continue to view such pullbacks as buyable with the idea that the stock must continue to hold above the 20-day moving average at 52.11.

Tesla Motors (TSLA) – stock has shown no decisive movement either way following its earnings report of this past Wednesday. The stock came in to test the 20-day line at 225.97 on Friday. But by the close, it held above the 10-day line as volume declined to about -30% below average. I suppose if one is adventurous enough one could test the long side of this with the idea that it should hold above the 20-day line, otherwise it’s a tosser.

Twilio (TWLO) – expected to report earnings on Monday, August 8th, after the close. Nothing to do with TWLO until then.

Weibo (WB) – per my discussion of the stock in my Wednesday mid-week report, the pullback on that day had put it “…back into a lower-risk entry position.” On Friday the stock posted a big-volume base breakout and remains within buying range for those who like to buy standard base breakouts. Keep in mind that earnings are expected to be announced on August 16th and this is the stock’s fourth base breakout so far in 2016.

Yirendai Ltd. (YRD) – stock has pulled back into its 10-day moving average as selling volume remains above average. YRD went into a climactic upside move on Monday, and this reversed hard to the downside on Tuesday. With earnings expected to be announced this Tuesday, there is nothing to do here.

Zayo Group Holdings (ZAYO) – this has not acted well as it attempts to make a last stand at its 50-day moving average just above the prior low-28 base breakout from early July. Buying it here means using the 50-day line as a tight selling guide.

The shakeout and breakout move in the indexes over the past several days has helped to revive the market rally. In addition, the S&P 500 and Russell 2000 Indexes’ ability to break out to new/higher highs has served to negate the prior divergence in the NASDAQ 100 relative to the rest of the market. In the meantime, earnings season brings with it fresh, actionable opportunities. In most cases we want to be alert to these, particularly when they occur in newer-merchandise situations. For now, the market rally remains intact. Carry on.

 

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 positions in FIT, NFLX, and SQ, though positions are subject to change at any time and without notice.

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