The Gilmo Report

June 21, 2017

June 21, 2017

The market has taken on this random flavor where it seems to be moving in one direction and then suddenly shifts in not quite the blink of an eye. The most glaring example of this was the action two Fridays ago, on June 9th when the tech sector was beaming higher early in the day before reversing course in a brutal sell-off.

Since then, the indexes have been attempting to stabilize and recover. This looked to be the case yesterday just before the indexes sold off right into the close. That action looked bearish, and overnight the NASDAQ 100 futures were confirming this by tilting sharply to the downside.

But in the market, we often find that what appears to be can easily turn out quite differently. By the time the opening bell rang, the NASDAQ 100 futures had rallied back to the upside, and the potential gap-down open was nowhere to be found.

All day today, the NASDAQ Composite Index kept charging higher on what was a very narrow rally led mostly by big-stock NASDAQ names and Chinese stocks which were boosted by news that MSCI would include China A-Shares in its emerging markets index. But despite the big rally, breadth lagged all day as NASDAQ decliners led advancers by the close, 1442 to 1103.

For now, the index looks to be in something of a “LUie” formation of its own as it attempts to stabilize and set up along the 20-day moving average. On its face, this looks perhaps a bit constructive, but we should keep in mind that much of it is simply mimicking the action in a large number of big-stock NASDAQ leaders.




On the NYSE, breadth was much worse, with decliners leading advancers by 1914 to 1041. Of course, this was consistent with the decline in the Dow Jones Industrials and the S&P 500 Indexes. Both came off today on higher volume, with the S&P 500 closing just below its 10-day line




The small-cap Russell 2000 Index, represented below on the daily chart of its close proxy, the iShares Russell 2000 ETF (IWM), was tagged on slightly higher selling volume. By the close it posted a lower closing low as it diverged from the narrow rally in the NASDAQ Composite.




Overall the market has a sloppy, random feel to it as it ricochets back and forth, with money rushing into one group and then another on a daily basis. The narrow leadership shows up to some extent in the percentages of stocks trading above their 150-day moving averages on the NASDAQ and the NYSE. I show line charts of each, below, and we can see that despite the major market indexes rallying up near their all-time highs, these numbers have been declining since late February.






This is either testament to the narrowness of the current market strength, or a sign that there are a lot of stocks in “Ugly Duckling” positions ready to rise from the dead, as I pointed out in a blog post yesterday morning. In the meantime, the various price/volume cross-currents make things somewhat entertaining from a trader’s standpoint.

Bonds have been on a tear lately, which seems to fly in the face of the premise that the Fed will be raising rates 2-3 more times this year. Over the past few days, financials also seem to be gaining cognizance of the possibility that the Fed may be one-and-done here for the year.

One thing is certain, financials haven’t been contributing to any market rallies as the SPDR Sector Select Financial ETF (XLF) has pulled in from its recent highs. I suppose we could consider that the sector is due for a rest, and as long as near-term support at the 20-dema is held, then the pullback could be seen as normal.

Big-stock financials like Citigroup (C), and J.P. Morgan (JPM), among others, are mimicking the action. In all cases one can watch to see how these pullbacks play out as they could become buyable at support.




As far as big-stock NASDAQ names go, so far this has been the “Week of the LUie,” as many of these patterns played out as I indicated they could in my report of this past weekend. Facebook (FB) illustrates the concept quite nicely as it pushes back above its 10-day and 20-day moving averages. In the process, the initial “L” formation with support along the 50-day moving average has now turned into a “U” as the stock completes the “LUie” pattern.

Whether this is going to lead to immediate new highs remains to be seen. But if FB can hold tight along the two short moving averages with volume drying up it certainly stands a reasonable chance of pushing to new highs. Sure, market leadership may remain narrow, but in that case, you’d want to play the stocks that make up this narrow leadership. FB is certainly one of those stocks.


GR062117-FB (AMZN) is a more peculiar-looking LUie formation as it gaps back and forth over the past five days. Last Thursday the stock gapped down and tested the 50-day moving average again, where it held. This led to a gap-up move last Friday, which has since led to a tight consolidation along the 10-day and 20-day moving averages as volume declines.

Note that AMZN is once again perched just above the $1,000 Millennium Mark, and could be setting up to move higher again. Like FB, this can be considered to be in a buyable position using the 10-day or 20-dema lines as tight selling guides.




AMZN and FB illustrate that one should never underestimate the power of the LUie formation in an Ugly Duckling market. Thus, we must wonder whether Netflix (NFLX) is setting up as a LUie formation in process as it forms the “L” component here just below and along the 50-day moving average.

In the old days, I would generally look to be shorting this sort of pattern as a bear flag following a prior failed breakout. In this case, the Ugly Duckling can be invoked given that NFLX closed two cents above the 50-day line today on increased buying volume. This then becomes a simple long set-up: You buy here and use the 50-day line as a tight selling guide.




Meanwhile, Tesla (TSLA) looks like it wants to go higher as it sets up nice and tight along the 10-day moving average. Volume is drying up nicely, which is quite constructive, and so this becomes buyable here using the 10-day line as a tight selling guide. Like I said, leadership may be narrow here, but if it continues to set up constructively, you might as well look to play the stocks that make up the narrow leadership. TSLA remains one such stock.




Notes on other big-stock NASDAQ names:

Alphabet (GOOGL) is setting up along its 20-dema with volume drying up, which puts it in a buyable position using the 20-dema as a tight selling guide.

Apple (AAPL) is the weak sister among the big-stock NASDAQ names as it continues to live below its 10-dma, 20-dema, and 50-dma. However, it is moving tight sideways as volume dries up in a clear “L” formation. I would watch for a move back up through the 50-day line as a long trigger looking for a possible move to the upside that would complete a LUie type of formation.

Microsoft (MSFT) is holding tight along its 20-dema similar to GOOGL as volume dries up. This puts the stock in a buyable position using the 20-dema as a tight selling guide.

Nvidia (NVDA) is also something of a LUie formation after its big reversal off the highs two Fridays ago, on June 9th. Since then it has tracked back up toward the highs on light volume, but did run into some volume selling yesterday on a retest of the 160 price level. This may be trying to set up again along the 10-day line, so I’m watching to see if it can hold tight sideways for a bit with volume continuing to dry up.

As I wrote at the outset of this report, Chinese names lit up on news that MSCI would not include China A-Shares in its emerging markets index. This brought (JD) back to life in a big way today. The stock was looking deathly just a few days ago, but in this market, you can generally count on something to flip things back to the upside when they look the ugliest.

That’s pretty much what happened with JD after it gapped above its 10-day and 20-day moving averages on Monday on strong volume and then set-up along the two lines yesterday. That led to a near-pocket pivot move today but still one that decisively cleared the 10-day and 20-day lines on heavy buying volume.

I’m not sure if this is just temporary interest fueled by the MSCI index, but what might help determining just how real this move is would be a constructive retest of the 10-day line. This would also set up a potential lower-risk entry opportunity at that point.




Alibaba (BABA) also jacked higher on the news, but was already in a buyable position along its 10-day moving average yesterday. I don’t show the stock on a chart here, but I would continue to look at pullbacks to the 10-day line as your lower-risk entry opportunities for the stock.

Over the weekend, I pointed out the actionable undercut & rally (U&R) set-up in Weibo (WB). The stock gapped up above its 10-day and 20-day moving averages on Monday, and then settled back below the lines yesterday as volume receded. That led to an upside jack today in response to the MSCI news today, sending the stock back above the two moving averages but on very weak volume. I’d like to see this pull back and test the 10-dma/20-dema confluence as a possible lower-risk entry opportunity.




Yesterday I blogged about the action in Momo (MOMO) looking interesting, and it also participated in today’s Chinese stock rally after the MSCI news. What I saw yesterday was very tight action just below the 10-day moving average as volume dried up sharply.

This was also an undercut & rally set-up as the stock pushed up above the prior lows in the base from May 25th and June 9th. MOMO did stall at the 50-day line today as volume picked up sharply, but the U&R set-up remains in force. This may still be buyable here using the 10-day line at 37.71 as a tight selling guide.




Netease (NTES), not shown here on a chart, pulled its own LUie formation this week by rallying back up through its prior breakout point on above-average volume. It is extended at this point so is not actionable.

I’d keep a close eye on Finisar (FNSR) as it pulls in with volume drying up to -47% below average today. This pullback is occurring after last Friday’s bottom-fishing buyable gap-up move, and the stock is just a quarter-point below the 27.38 intraday low of that gap-up move. For that reason, I would consider it within buying range of that low, allowing for a tiny bit of “porosity” here.




Arguing for continued strength in the opticals sector, Lumentum Holdings (LITE) is holding tight at its 10-day moving average with volume declining to -59% below average. This would therefore qualify as a voodoo type of set-up along the 10-day line, using the 20-day exponential moving average at 60.22 as your selling guide.




Applied Optoelectronics (AAOI) retested its 50-day moving average after holding support at the line last week. That pullback also coincided with the top of the prior base, which for now appears to be providing a floor of support for the stock. Volume dried up to -48% below average today, but I would prefer to buy the stock as close to the 60 price level as possible.

For that reason, LITE may be in a better lower-risk entry position here. I would also note that LITE has held up much better over the past couple of weeks relative to AAOI, which has pulled back much more. However, note that AAOI is forming an “L” pattern here, and so has the potential to complete a LUie formation if it can clear the 20-dema. So, alternatively, one could use a move back up through the 20-dema as a long trigger, and then use the line as your tight selling guide.




Tableau Software (DATA) turned out to be the hot ticket among the cloud names this week, pulling off a nice trendline breakout today on above-average buying volume. As I wrote over the weekend, I liked this along the 20-day exponential moving average, and from here only a pullback to the 10-day line at 62.34 would present a lower-risk entry opportunity.




Keep an eye on the other cloud names on my watch list. These have all been forming “L” formations and while these can look shortable, we must concede that they also have the potential to morph into LUie long set-ups. (CRM) is a nice example as it forms what is either the beginnings of a LUie formation or a bear flag. My guess is that if the general market continues higher, this will turn into a LUie formation. The stock regained its 50-day line today on increased buying volume, after initially selling off earlier in the day. I was actually short the stock off the open, and did in fact scalp a small short-sale profit before I could sense that there was a bid in this thing and I’d best get out of the way. This becomes buyable here using the 50-day line as a tight selling guide.




Working in CRM’s favor is the fact that both Workday (WDAY) and ServiceNow (NOW) are rallying back above their 10-day and 20-day moving averages as they begin to form the “U” in LUie formations that are currently in progress. I don’t show either stock here on a chart, but I would watch for pullbacks into the 20-dema in one or the other as potential lower-risk entry opportunities.

Among the “lipstick” video-gaming stocks, both Electronic Arts (EA) and Activision Blizzard (ATVI) have completed LUie formations. Imagine that! Both, not shown here on charts, are buyable on constructive pullbacks to their 10-day or 20-day moving averages.

Meanwhile, Take-Two Interactive (TTWO) remains in an “L” formation as it tracks just below its 20-day exponential moving average. Is this going to fool the bears by emulating its two video-gaming cousins and pulling a LUie formation from here? That’s a good question, but answering it is not necessary to determine an actionable entry in the stock right here.

Notice that today TTWO undercut the prior 72.53 low in the “L” formation of five trading days ago. It hit a low of 72.36 this morning before turning back to the upside to close at 73.05. Therefore, this becomes an easy trade: you buy here and use the 72.53 prior low, less than 1% away, as your selling guide. Simple enough, and the fact that the other members of the group, ATVI and EA, have pulled off their own LUie moves, TTWO may be set to follow suit.




With so many stocks still trading below their 150-day moving averages, we might consider, as I mentioned earlier in this report, that this simply means that a plethora of Ugly Ducklings are waiting to rise up out of the market swamp. One name that is above its 150-day line, but still below its 200-day line, which is just as “bad,” I suppose, is Palo Alto Networks (PANW).

I mentioned the name yesterday in a blog post as something to look at on the long side. Since posting a bottom-fishing buyable gap-up (BFBGU) after earnings on June 1st, PANW has flopped back below its 200-day moving average following the June 9th “tech wreck” sell-off. To me that seems reasonable within the context of that sell-off.

Today PANW closed at 132.94, just below the 133.00 intraday low of its June 1st BFBGU move. This has come after a test of the 20-day exponential moving average on June 10th, followed by a retest five days ago on the chart. Today the stock pulled in to test the 20-dema one more time as volume declined to -50% below average.

This looks like a possible Wyckoffian Retest that can be bought using the 20-dema at 130.50 as a reasonably tight selling guide. Certainly, this is an Ugly Duckling set-up in all its glory, but the chart position within the context of the prior action is constructive enough while at the same time ugly enough to get me interested.




Canada Goose Holdings (GOOS) is a Canadian apparel manufacturer, known for their high-end coats and jackets, that came public back in March. Yesterday I mentioned the stock in a blog post as it was posting a voodoo pullback to its 20-day exponential moving average on volume that was -51% below average.

That was a nice entry point near the line, and today we saw the stock get goosed sharply to the upside on a pocket pivot move that carried back up through the 10-day moving average. Frankly, I’d prefer to gotten long the stock closer to the 20-dema yesterday or this morning, as I now consider it to be slightly extended. However, watch for a constructive pullback to the 10-day line at 21.57 as a possible lower-risk entry opportunity.




While Sunpower (SPWR) is floundering about (although still holding support at holding its 200-day moving average), its solar cousin First Solar (FSLR) has sprung back to life. Today the stock pushed back above its 10-day and 20-day moving averages on a nice pocket pivot move.

This is a typical Ugly Duckling style recovery just when the stock was looking butt-ugly as it descended below both the 10-day and 20-day lines. But as is often the case, this is just where one must remain alert for any possible move to the upside that might generate an actionable buy signal, such as a pocket pivot. We’ll now see whether this holds up, but for now this looks buyable using the 10-day line at 36.41 as a tight selling guide.




Notes on other names discussed in recent reports below (note that some have formed LUie patterns, confirming this week as the “Week of the LUie”:

Arista Networks (ANET) – the short bear flag it was forming as of the weekend has now turned into a completed LUie formation.

Edwards Lifesciences (EW) – completed a LUie formation as it pushes to new highs. Pullbacks to the 10-day line would present lower-risk entries.

Impinj (PI) – holding in a tight flag after rallying sharply last Friday following the news of AMZN acquiring WFM. Volume is drying up sharply here as the stock tracks tightly along the 55 price level, so for that reason one could take a shot at the stock here using yesterday’s low at 53.17 as a selling guide.

iRobot (IRBT) – holding tight along the 10-dma and 20-dema in constructive fashion. The stock closed above the $100 Century Mark today, printing 101.08 at the close. This puts it in buying range of the Century Mark based on Livermore’s rule, using the $100 price level, the 10-day line or the 20-dema as your selling guides.

SolarEdge Technologies (SEDG) – acting well but extended.

Square (SQ) – holding tight along the 10-day moving average. Could be considered buyable here using the 10-day line as a tight selling guide. Otherwise pullbacks to the 20-dema would represent lower-risk entries, assuming they occur.

Universal Display (OLED) – holding tight along the 20-dema as volume dries up. This could be one set up for a possible LUie resolution as it forms an “L” along the 20-dema. Therefore, consider this buyable here using the 20-dema as a tight selling guide.

Zillow (Z) – posted a new high today, so remains quite extended.

For newer members: Please note that when I use the term “20-day moving average,” “20-day line,” or “20-dema” I am referring to the 20-day exponential moving average. I use four primary moving averages on my daily charts: a 10-day simple (the magenta line), 20-day exponential (the green line), 50-day simple (the blue line) and 200-day simple moving average (the red line). On rare occasions, I will also employ a 65-day exponential moving average (thin black line).

The LUie formation has proven its mettle this week as a large number of stocks have completed this Ugly Duckling pattern so far this week. Perhaps more are coming, and I’ve discussed those in this report, such as NFLX, TTWO, OLED, etc.

Meanwhile, this market remains tricky, but I can see where things might be setting up as the NASDAQ Composite tracks along its 20-day exponential moving average with volume declining. As far as I’m concerned, as long as the NASDAQ holds the 20-day line, this keeps the long side of this market alive.

It is therefore simply a matter of identifying actionable patterns and set-ups and then pulling the trigger. And with so many stocks still sitting below their 150-day moving averages, we might simply consider this as evidence that the Ugly Duckling is lurking in the background.

As I wrote over the weekend, this market may not necessarily be about the economic fundamentals, or the Trump agenda. It may simply be about nothing more than the continued flow of money into the financial system that is looking for a home somewhere, anywhere. In the process stocks become the new bonds, although bonds have been finding plenty of buyers lately as well.

This would appear to argue for a Fed that is more one-and-done than one that is about to embark on an interest-rate tightening frenzy. This remains the wild card in this market, if not the primary driver of potentially higher stock prices to come. Take it from there.

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 FNSR, LITE, MOMO, and NFLX, though positions are subject to change at any time and without notice.

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