The Gilmo Report

July 24, 2016

July 23, 2016

It has been said that markets do not go straight up forever, but so far the NASDAQ Composite Index has the look of an index that simply doesn’t know how to go down. While the upside momentum has arguably slowed up a bit over the past two weeks, the index has been relentless in its quest for higher highs.

The NASDAQ likes to give the impression that it is lagging its NYSE-based brethren, the Dow Jones Industrial and S&P 500 Indexes, in the sense that it has yet to match their respective moves to all-time highs. While the Dow and the S&P 500 have moved to all-time highs, the NASDAQ remains approximately 2.5% below its all-time high of 5231.89 from July 2015.

However, appearances can be deceiving, as the NASDAQ has rallied 11.5% above 4574.20 where it bottomed after the late June Brexit sell-off. Meanwhile, it is the S&P 500 and Dow that lag with 9.24% and 8.83% gains, respectively, off of their own late June Brexit sell-off lows.




All the NASDAQ needs to do now is clear to all-time highs, and the major market indexes can all become one big, happy family. As the indexes become ever more extended to the upside, perhaps this is what we will need to see before the indexes engage in any meaningful consolidation phase. The other option, of course, is that they keep going higher, forever!

However, as we’ve seen with the charts of NYSE and NASDAQ stocks that are above their 150-day moving averages in my Wednesday mid-week report, things appear to be in an extended state when viewed in this context. But it may still be a matter of just watching the individual stock set-ups. For now I see much more that favors the long side than the short side.

The S&P 500 Index maintains its impressive beanstalk formation as it continues to grow toward the sky. However, it did briefly pause to pay its respects to its 10-day moving average on Thursday and Friday before ending the week at an all-time closing high. The index has seen a couple of days of distribution along the highs, which, in the absence of a wholesale breakdown, may or may not be meaningful. In the near-term the index simply continues to shrug off any selling as it forges to the upside.




Next week could be an impactful one for the market with the Fed policy announcement scheduled for Wednesday. In addition, big-stock heavyweights like Apple (AAPL), (AMZN), and Facebook (FB), among others, are all expected to report earnings during the week.

The Fed meeting will also likely have a strong impact on the precious metals as they try to find their feet near areas of potential support. The SPDR Gold Shares ETF (GLD) remains right above its prior June breakout point, bringing into a lower-risk entry position. The top of the base at around 124 or the 50-day line at 123.03 offers a reasonably tight selling guide from here.

GLD Daily

Silver remains the stronger of the two metals as the iShares Silver Trust (SLV) remains about 10% above its own late-June breakout point. The SLV found support at the 20-day moving average on Thursday, and then dipped back down toward the line as volume dried up sharply.

With the metals pulling back into lower-risk entry positions, the question is now whether Wednesday’s Fed policy meeting will spark a move back to the upside. That is what happened in June when the Fed stood pat, and it is possible that it could happen again if the Fed again decides to leave rates where they are. If you are a lover of the precious metals and believe that they have further to go on the upside on an intermediate- to longer-term basis, then this is your moment.




Precious metals stocks also present lower-risk entry opportunities for those looking for the upside trend in the metals to continue. Both Silver Wheaton (SLW) and Agnico Eagle Mines (AEM), not shown here on charts, are pulling into areas that represent lower-risk entry positions. SLW has given up very little off of its recent highs and continues to hold very tight along its 10-day moving average as volume dries up sharply. AEM, on the other hand, is slightly weaker as it sits just above its prior breakout from a June consolidation.

It does appear that precious metals stocks with an emphasis on silver are out-performing other names in the group. A name I’ve been watching but which I haven’t mentioned in previous reports is First Majestic Silver (AG). Whereas a company like SLW simply owns the rights to silver production streams, AG is actually a pure-play in actual silver mining and production. It currently owns and operates six silver mines in Mexico.

The stock tends to mimic the SLV fairly closely, although with perhaps a bit more leverage in terms of price movement. It is currently sitting right on top of its 20-day moving average as volume declined to -38.7% below average on Friday.




Some have argued that the recent outperformance in silver is due to an improving global economic outlook, which may be true. On the other hand, silver is often considered to be poor man’s gold. So in a world where fiat currencies are being printed willy-nilly, silver also has some value as an alternative currency. Whatever the case, look for some pronounced movement in gold and silver following the Fed announcement, one way or the other.

In terms of stocks, while the indexes are sticking straight up in the air, many stocks continue to sit in buyable positions are have had buyable pullbacks this past week. We have seen Facebook’s (FB) breakout to all-time highs on Wednesday, but that didn’t lead to any major upside follow-through. In fact, on Friday, FB dipped back into its base after being downgraded by an analyst firm. This, however, brought the stock down into its 10-day moving average and a lower-risk entry position.

By the end of the day, FB had posted a pocket pivot coming off of the 10-day line. The stock is now sitting right on top of its prior breakout point, more or less, ahead of earnings which are expected to be announced on Wednesday after the close. Personally, I am not willing to play earnings roulette with FB and prefer to wait and see what it does following earnings.




Mobileye (MBLY) pulled into its 10-day moving average earlier in the week before posting a pocket pivot on Friday. This took it to a new high, and its highest levels since last November. On the daily chart, below, the stock has broken out of a miniature ladle-with-handle type of formation. Earnings are expected out on Tuesday before the open, so I don’t see much to do here with the stock until then. If one had purchased shares down near the 40 price level back in June as I discussed at that time, then one perhaps has some cushion to sit through earnings roulette.




Gigamon (GIMO) tends to be a volatile stock, something I’ve noted in previous reports, and its action over the past two days bears this out. On Thursday, GIMO flipped to the downside on heavy selling volume as it tested the low of two Fridays ago. That move might have scared some owners of GIMO out, but in my view one could have sold into the sharp move and pocket pivot that we saw on Monday to avoid that. In that case, one was then in position to watch how Thursday’s sell-off developed.

If one were viewing things from an opportunistic standpoint, the sell-off might have presented a re-entry possibility. Once it held on Friday, it turned back to the upside on even heavier volume than Thursday’s sell-off and launched to an all-time high. GIMO is now emerging from the three-year base I talked about in my “New Merchandise” blog post of July 3rd. It, along with MBLY, were discussed as new-merchandise plays that were somewhat more established as IPOs that came public 2-3 years ago. GIMO is expected to announce earnings this coming Thursday.




I find myself continuously fascinated by the ongoing saga and melodrama of Tesla Motors (TSLA). After rallying on Monday through Wednesday the stock finally dipped back into its 20-day moving average after CEO Elon Musk finally revealed his top-secret Master Plan. When the plan turned out to be nothing special, the stock headed back to the downside on volume that was about average. Earnings are expected out in a couple of weeks, so it is not clear if the stock will do much of anything before then.

The stock did hold at its 20-day moving average on Friday as volume dried up to -46% below average, so there could be a short move off the line this week ahead of earnings. The flip side of this is that a high-volume breach of the 50-day moving average could set this back into motion on the short side.




Of course, as I pointed out in my Wednesday mid-week report, the short side of the market will work best during a market correction or, at the very least, during a market pullback. In the case of a normal market pullback, the short side takes on more of a short-term tactical nature. I have hit Netflix (NFLX) a couple of times since it gapped down on Tuesday after missing on subscriber numbers when it reported earnings after the close on Monday. Each time it has rallied up toward 88 the opportunity was there to short the stock on the basis of a potential shortable gap-down.

Being short the stock, however, I have noticed that sellers seem to disappear as it comes down toward the lows of Tuesday morning. Those lows also undercut the prior June low, which in turn set up the undercut and rally move over the next couple of days.




If one looks at a weekly chart of NFLX, below, once can see that the stock is at a major support area that is also the neckline of a big head-and-shoulders formation extending back to July of 2015. Does the stock bust through the neckline this time and plummet to lower lows?

It may eventually, but what I’ve noticed over the past couple of days on the daily chart, back up above, is that the stock is retesting the Tuesday low as volume dries up to -14.4% below average. This could set up a Wyckoffian Retest following Tuesday’s undercut of the prior low that leads to a bounce back up toward the 50-day moving average at 94.23.

This may or may not pan out, but I am testing a small long position here to see if a tradeable rally up to the 50-day moving average develops. Otherwise, the stock may simply remain in a short range here before proceeding lower, and I would just as quickly flip back to the short side under the right conditions.


GR072416-NFLX Weekly


As I wrote earlier in this report, while the indexes have refused to give up much on the downside, it has been more useful to simply focus on the action of individual stocks. Buyable pullbacks can occur regardless of what the indexes do in the short term, and so should be watched for in favored names.

Ambarella (AMBA) recently emerged from a more than one-month range it formed since its big early June buyable gap-up (BGU) move. That BGU set the stock off on an upside romp that took the stock back above the 200-day moving average. It then spent a month consolidating that sharp move and eventually broke out a couple of weeks ago.

Now the stock has pulled right back into its 10-day moving average on volume that was -59% below average on Friday. That is your classic voodoo pullback, and so I consider this actionable with the idea of using the 20-day moving average at 53.94 as your maximum downside selling guide.

The 20-day line more or less coincides with the highs of the one-month consolidation from early June to early July, but it is not clear to me that the stock will pull down that far. This latest pullback brings it into the 10-day line and the short one-week consolidation that AMBA formed over the prior week.




Twilio (TWLO) may also be back in a buyable position here as well. The stock has acted very well since it started trading on June 23rd. It has now pulled into its 10-day moving average where it also sits on top of a little consolidation it formed in late June and early July, as I’ve highlighted on the chart.

Now we see the stock holding along the 10-day moving average as volume dried up to -71% below average on Friday. Earnings are not expected to be announced until August 8th, so there is a possibility of further upside before then. This would be your lowest-risk entry at this stage, using the 10-day line as a tight selling guide.

TWLO has now been trading for 21 days, so has another nine to go before it becomes marginable by most brokerages. This can hamper any attempt to trade this stock actively, since it can eat into your buying power very quickly and produce margin calls for those unfamiliar with margin rules. If you trade this one, make sure you check with your broker with respect to how it will affect your margin buying power and precisely what actions have the potential to create a margin call when trading the stock actively.




Cloud names continue to look like they are setting up to move higher as they spent most of the past week consolidating in sideways price ranges. For example, ServiceNow (NOW), which is expected to announce earnings on Wednesday after the close, has been holding along its 200-day moving average in constructive fashion. On Wednesday the stock broke out above its 200-day moving average on above-average volume, although this did not qualify as a pocket pivot. It was, however, a short range breakout on above-average volume.

It then flipped back down to its 50-day line on Thursday before regaining the 200-day line on Friday. I would watch this closely when earnings come out, as I might be interested in the stock should it post a buyable gap-up after the report. So far the action is constructive ahead of earnings.




Workday (WDAY) is another cloud name that continues to consolidate constructively. As I’ve discussed in recent reports, the stock is buyable on pullbacks to the 20-day moving average, and it has obliged by doing so no less than four times over the past week. Volume has remained quite low, and on Friday dried up to -55.8% below average as sellers disappeared and the stock moved back above its 10-day line. This thing looks to me like it is revving up to break out soon, and it could do so in sympathy to a positive announcement from NOW on Wednesday.




Splunk (SPLK) is yet another cloud name in a similar consolidative position. On Wednesday it posted a pocket pivot coming off of the 20-day moving average and up through the 10-day moving average, as I noted in my report of that day. On Friday the stock pulled back below the 10-day line, but volume was running low at the time. This again brought it into a lower-risk buy position, and by the end of the day it traded back above the 10-day line on volume that was -47% below average as sellers disappeared.

This remains in a buy position on the basis of Wednesday’s pocket pivot move. I would look for the 10-day line at 57.47 to continue to serve as a reasonable guide for a tight downside stop. However, one could give the stock more room to the downside by using the 50-day line at 55.88 if one so desired.


GR072416-SPLK (CRM) is one of the bigger-stock cloud names out there, although perhaps not quite as big as (AMZN). It might, however, be considered to be a grand-daddy of sorts when it comes to the cloud space.

It, too, is holding up in a very nice consolidating since regaining its 50-day moving average back in early July. And as should be apparent by now, its pattern closely mimics the patterns of other cloud stocks. Generally, when I see an entire group acting in a similar manner, particularly as they look to be setting up in bases/consolidations, I consider it highly constructive. All they need is a catalyst, and it could come in the form of a strong earnings report from NOW or even AMZN if its report includes some positive numbers from the Amazon Web Services (AWS) side of the business.

CRM pulled back down to the confluence of its 2-day and 50-day moving averages on Friday as volume came in at -35.9% below average, just low enough to qualify as a voodoo volume signature. I see CRM as being in a buyable position here using the 50-day line at 80.90 as a tight selling guide.




In all of these cloud stocks that we are discussing here, it seems that Friday’s pullbacks failed to bring in many sellers. Thus the stocks simply moved back to the upside. I saw similar action in other cloud names I’ve been following recently, such as Adobe Systems (ADBE) and Citrix Systems (CTXS). These, too, are forming patterns that are similar to the other cloud stocks as the group appears to be revving up for more upside.

The smallest cloud name I’ve discussed in recent reports, Zendesk (ZEN), is also consolidating. But this is occurring only after having a sharp move off of its late June lows that resulted in a move to new-high price territory. The pullback has been orderly, in my view, and has brought the stock right back to its 20-day moving average and the top of its prior early-July base breakout. The stock picked up some volume support at the 20-day line on Friday, which is constructive.

ZEN is therefore in a lower-risk buy position using the 20-day line and the top of the prior base, as highlighted on the daily chart below, as a tight selling guide. Pullbacks to the top of a base following a breakout often present lower-risk entry opportunities in leading stocks. ZEN is no different in this regard.




One of the reasons I have favored the cloud stocks is because the whole cloud phenomenon presents a compelling growth theme in the stock market. Likewise, I have considered the theme of cyber-security to be potentially compelling as well. Unfortunately, when it comes to individual stocks, the results have been uneven.

However, if this market keeps rolling higher, I have to think that more cyber-security names will begin to rise up from the dead. We’ve already seen that in names like Barracuda Networks (CUDA), CyberArk Software (CYBR), and even Fortinet (FTNT), which actually broke out of a six-week base on Friday on a pocket pivot move. FTNT is expected to announce earnings this week, so whether that pocket pivot breakout is actionable ahead of earnings roulette is an open question.

Those three names in the group have been acting well, which leads me to believe that they will eventually prod other members of the group to move into recovery mode. Among these is the big-stock cyber-security name, Palo Alto Networks (PANW), which I have discussed in recent reports.

PANW finally had a nice move off the confluence of the 10-day and 20-day moving averages on Wednesday, but ran into resistance at the 50-day line. However, as I wrote in my report of that day, a pullback down to the 10-day and 20-day lines could present an entry opportunity, should it occur. That did in fact occur on Thursday, and the stock then pushed right back up to its 50-day moving average from there. What this looks like to me is tight action along the 10-day/20-day moving average confluence as volume dried up to -47.7% below average on Friday.

This may be setting up for a bottom-fishing pocket pivot coming up through the 50-day moving average, so it is something to watch for. Perhaps FTNT’s earnings announcement, expected on Thursday after the close, might provide a catalyst for this.




Weibo (WB) has held its 10-day moving average religiously since breaking out nearly three weeks ago. I pegged that breakout before it occurred as the stock was setting up in voodoo fashion along its 10-day moving average several days earlier (see June 29th report). At that time, WB looked like it might need to consolidate a bit more before breaking out, and it then moved up to the highs of the range over the next four days before breaking out on July 7th. Now the stock is holding tight right along its 10-day line with volume drying up to -49.5% below average on Friday.

This looks like a good add point with the idea that the stock should continue to hold the 10-day line.




Below are Notes from my Trading Journal regarding other long ideas discussed in recent reports:

Acacia Communications (ACIA) – still extended ahead of earnings, which are expected out on August 4th. The 10-day line at 55.34 remains your sole reference point for any lower-risk, buyable pullback.

Activision Blizzard (ATVI) – pulled into its 20-day moving average on Friday where it presented a lower-risk entry opportunity following last month’s base breakout.

Alibaba (BABA) – last pullback buying opportunity occurred on Monday of this past week per my prior comments in last weekend’s report. Pullbacks into the 10-day line at 82.53 would represent lower-risk entry opportunities. (AMZN) – holding tight along its 10-day moving average as earnings are expected to be reported this coming Thursday after the close.

Atlassian Corp. PLC (TEAM) –  slightly extended, but pullbacks to the 10-day line at 27.50 might be considered lower-risk buy opportunities. Earnings are expected on August 4th.

Barracuda Networks (CUDA) – still way extended. The 10-day line at 20.35 provided support to the stock on Friday, but I would prefer to take a more opportunistic approach and look for any sort of pullback into the 20-day line, now at 18.67, as a lower-risk entry opportunity given how extended the stock is.

CyberArk Software – pullback into the 20-day line on Thursday gave investors the most opportunistic entry opportunity. Pullbacks to the line remain buyable.

Electronic Arts (EA) – doing its best to hold the 50-day moving average after failing on a prior breakout attempt from early in July. The Ugly Duckling could be at play here as the failed breakout looks bad, but buying here at the 50-day line while using it as a guide for a tight stop might work.

Fabrinet (FN) – a nice voodoo pullback on Friday into the 20-day line brought the stock into a lower-risk buy position. Stock remains in a buyable position using the 20-day line as a selling guide. Given the stock’s volatile tendencies, a pullback into the 50-day line at 30.65 is never beyond the realm of possibility, however.

Imperva (IMPV) – another cyber-security name that is holding in a tight range along its 10-day and 20-day moving averages. On Friday the stock tested the 20-day line at 44.75, bringing it into a very opportunistic buy position before regaining the 46 price level.

Nvidia (NVDA) –  remains extended, although it found support at the 10-day line on Thursday and Friday. Earnings are expected the week after next.

SolarCity (SCTY) – the buyout by TSLA is probably a done deal, so maximum upside would be 28.50 as the stock closed Friday at 26.45, just below the low end of the proposed buyout range of 26.50-28.50. Not sure if there is much upside in this unless TSLA’s stock rises as well ahead of the shareholder vote.

Square (SQ) – stock shows that you have to remain opportunistic, even after a pocket pivot, by waiting for and being willing to buy into any subsequent pullbacks. SQ pulled right back into the 10-day line at 9.39 on Thursday before closing at a higher high on Friday. Earnings are expected to be reported on August 3rd.

Twitter (TWTR) – earnings are expected out on Tuesday after the close. Nothing to do until then.

Yirendai Ltd. (YRD) – still way extended, but earnings aren’t expected until mid-August. At this point we’re just waiting to see how and where this thing sets up again, but it has been a bottle rocket stock over the past two weeks, to be sure!

Zayo Group Holdings (ZAYO) – stock is gathering momentum over the past three days as it traded to higher highs each day on very heavy buying volume. Was last buyable in the low 28 price area as discussed in previous reports, so you’re either in or you aren’t by this point.

As I wrote last weekend, “For now, there is no reason to assume that this rally will fail.” But is there a reason to assume that this market has to at least take some time to pause and consolidate? My answer to that question is simple: Just watch the stocks.

Even as the indexes have moved higher, many of our favored long ideas have presented buyable pullbacks. That is really what we are keying off of, not the precise action of the indexes. Unless we begin to see things come apart in a meaningful way, I would remain focused on the action of individual stocks.

A number of names that we’ve been following in recent reports, at least since the Brexit sell-off low of late June, are currently in buyable positions. Translation: Despite the straight-up-in-the-air action of the indexes, many stocks remain actionable where they lie. So play it as it lies.


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 NFLX and SPLK, though positions are subject to change at any time and without notice.

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