The Gilmo Report

June 5, 2016

June 3, 2016

It’s only been one trading day since my last report, but that one day was a significant one. Friday’s Bureau of Labor Statistics jobs report turned out to be a real doozy, as they say, with the number coming in way, way below expectations. Analysts were looking for 155,000 new non-farm payrolls, but the BLS statistical massaging and manipulation machine only managed to spit out a meager 38,000. Meanwhile, private non-farm payrolls came in at 25,000 versus expectations for 160,000.

Whatever jobs that were created were mostly of the McJobs variety, namely lower-paying and part-time service jobs. Meanwhile, in typical Orwellian fashion, the sharp decline in the labor participation rate figured into a decline in the unemployment rate to 4.7%.

This sent the indexes diving at the open. However, within the context of the prior upside move that saw the NASDAQ Composite Index rally for seven-straight days, the pullback looked relatively normal. By the close, the NASDAQ had made up more than half of its early morning losses to close above mid-range on only slightly lower volume as sellers failed to swarm the market.

 

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The S&P 500 Index also closed in the upper reaches of its daily price range on higher volume. Like the NASDAQ, this has the look of supporting action off the lows and the 10-day moving average. However, technically, given that the index closed down -0.29% on higher volume, Friday would qualify as a distribution day.

Based on this, it’s not clear to me that the indexes will automatically launch to higher highs in short order after holding up on Friday. The market still has the weekend to digest and decide just what the exceptionally weak jobs number means. If it turns out to be a blip that keeps the Fed on hold, then perhaps we are off to the races. But if it is an indication of a sudden acceleration in the rate of slowing for the economy, then we may not want to break out the party favors just yet.

 

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Silver Wheaton’s (SLW) refusal to give up the ghost by holding its 50-day moving average on light volume Thursday turned out to be the key clue regarding the weak jobs number. SLW gapped up in response to a similar jack in gold and silver, which in turn were responding to the jobs report. As I wrote in my Thursday mid-week report, “In the process of holding tight along its 50-day line, SLW has seen volume dry up to “voodoo” levels…Thus the voodoo action is suggesting that the stock might want to move up and off of the 50-day line.”

Obviously, the weak jobs number set gold and silver afire, while SLW gapped to the upside on a trendline breakout. Volume was only 14.8% above average so the move cannot be considered a buyable gap-up. However, it was a trendline breakout on above-average volume. In this case it can be considered buyable using the trendline as a guide for a quick downside stop. My expectation is that if in fact the Fed is now on hold as a result of the weak jobs number, and precious metals and precious metals stocks should push higher from here, no questions asked.

 

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My other favorite precious metals name, Agnico Eagle Mines (AEM) did in fact post a buyable gap-up move on Friday. Because volume was 63.9% above average, it had enough volume thrust to qualify as a bona fide buyable gap-up, unlike SLW, which posted only a slight volume increase.

This can also be viewed as a strong base breakout through a 48.47 buy point at the peak of the base. One key characteristic about AEM relative to SLW is that AEM held tight along its 10-day and 20-day moving averages while remaining well above its 50-day moving average before breaking out on Friday.

This contrasts with SLW, which was holding tight along its 50-day moving average before posting a trendline breakout on Friday. And while SLW’s breakout was a trendline breakout, AEM’s was a clean breakout to new highs. Thus we get a sense that AEM is perhaps the stronger precious metals stock to own here.

 

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Among the precious metals ETFs, the only one that can be considered to be in a buyable technical position is the iShares Silver Trust (SLV). The SPDR Gold Shares ETF (GLD), not shown, is still trapped within its prior two-month price range formed in March and April. The SLV, however, when it failed at the 50-day moving average, did manage to hold at the top of its own prior February-April consolidation and price range. It, too, gapped up towards its 50-day moving like the GLD, and both ETFs failed to clear the line.

Volume on the SLV came in at about average, so was not all that impressive. The SLV also missed posting a ten-day pocket pivot coming up through the 10-day moving average, by a single day. If one believes the Fed will indeed be on hold with respect to raising rates in June or July on the basis of Friday’s weak jobs number, then the SLV offers the most technically coherent pattern to buy into. The idea here would be to buy SLV shares here and then look to use the top of the prior base/range at 15 as a nearby selling guide.

 

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Workday (WDAY) remained the latest momentum name among the cloud/enterprise software names I’ve been discussing in recent reports. After a quick buyable pullback into the 10-day line at the start of the day, the stock then streaked to a higher high on strong buying volume. While this can be viewed as a trendline breakout on above-average volume, the move has taken the stock to the highs of its two-month price range. For that reason I might look for any pullback to the 78 price level from here as a more opportunistic entry point.

Otherwise one could simply treat this as a base breakout using the 10-day line at 77.08 as a guide for a tight stop.

 

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The rest of the cloud names on my watch list took a break on Friday, with most pulling back on lighter volume. Splunk (SPLK) was an exception in that it actually found volume support off of the intraday. I would still prefer to pick this up on a pullback to the 10-day moving average, now at 55.85.

 

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ServiceNow (NOW) held tight and closed down less than 1% as volume remained exceptionally light. Here I would use pullbacks to the 200-day moving average at 71.91 as an optimal lower-risk entry opportunity. Otherwise, if one purchased the stock below the 200-day line earlier in the day on the basis of the prior pocket pivot action, the 200-day line would serve as a reasonable guide for a trailing stop.

 

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Zendesk (ZEN) is another cloud name that ignored the general market sell-off and proceeded to drift to higher highs following Wednesday’s big-volume breakout. From here I would look for any pullback to the 10-day line, now at 24.88, as an optimal lower-risk entry point. Technically, the stock is within 5% of the breakout point at 25.09, but my preference is to take the lower-risk approach IF one did not purchase the stock closer to the 10-day line per my blog post on Tuesday after the close.

 

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Salesforce.com (CRM) is still digesting the news of its buyout of Demandware (DWRE) as it drifts below its 10-day moving average on light and declining volume. The stock is holding above the intraday low of Wednesday when it initially sold off in reaction to the buyout news.

With volume declining, this brings it into a more buyable position relative to the late May buyable gap-up move. The stock is still less than 3% away from the 80.15 intraday low of the buyable gap-up day. With the 20-day line closer at 80.59, risk can be controlled reasonably well if one is looking to buy into this pullback.

 

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Citrix Systems (CTXS) pulled into its 10-day moving average on Friday, bringing it into lower-risk buyable range. Volume came in at -41.5% below-average, qualifying as a “voodoo” pullback to the line. Buying here, one could then use the 20-day moving average at 83.91 as a guide for a reasonably tight downside stop.

 

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Adobe Systems (ADBE) pulled in on Friday to test its 20-day moving average and held. The stock was able to close about mid-range as volume increased, but came in at about average for the day. The action can be viewed as support at the 20-day moving average. In addition, the pullback came right into the top of the prior base breakout point. That breakout occurred on about average volume, so lacked any real power.

Buying on this pullback with the idea of using the 20-day line at 97.83 as a nearby selling guide keeps risk to a minimum. Keep in mind that ADBE is expected to announce earnings on June 21st.

 

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Facebook (FB) didn’t seem to draw much in the way of selling interest on Friday and continues to hold squeaky tight along its 10-day and 20-day moving averages. Volume dried up to -48.9%, qualifying as voodoo type action along the moving average confluence. This remains in a very buyable position using either the 20-day line at 117.89 or the 50-day line at 115.32 as a reasonable selling guide. My assessment of the stock remains as it has. If the indexes are able to move to higher highs, FB will eventually break out to new highs as well.

 

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LinkedIn (LNKD) pulled right into its 10-day moving average on Friday, where it was buyable per my discussion of the stock in my Thursday mid-week report. The pullback also brought the stock right back into the top of the prior May price range from which the stock broke out on Tuesday. This pullback presented a very optimal, opportunistic entry today, and the fact was that one had to buy it as it came into the 10-day line on the basis of the actual set-up. If one hesitated as a result of the general market action, one would have missed it.

Such is the nature of this type of opportunity. You have to look at any market pullback as having the potential to create such opportunities. The idea then becomes that if the stock fails, you at least have a nearby reference point for a very tight downside stop.

 

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We probably shouldn’t forget that Amazon.com (AMZN) is also a cloud-related name given that most of its current growth is coming from Amazon Web Services. In fact, we might consider it the biggest of the leading big-stock cloud names in this current market environment. I look at the stock as being buyable on pullbacks down towards the 10-day moving average. Generally, I am willing to buy a stock within 1-2% of a particular moving average on any pullback. In this case, AMZN came within 1% of its 10-day line, currently at 713.53, on Friday.

Given how well the stock is holding up, we might also consider that it is still less than 2% above the 10-day line. This, then, technically puts it within buying range of the 10-day line, using either that moving average or the 20-day line at 701.77 as a downside selling guide. When dealing with AMZN, it is important to remember that 1% represents 7.25 points.

 

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Fortinet (FTNT) is probably the only cyber-security name among those I’ve discussed in recent reports that is anywhere close to an optimal entry point. On Friday the stock pulled into its 10-day moving average where it was buyable per my discussion of the stock in Thursday’s mid-week report. Volume came in at -48.7% below-average, which is clear voodoo action at the 10-day line. The stock remains in a buyable position using the 10-day line at 34.24 as a guide for a downside stop.

 

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With respect to the other cyber-security names that I’ve discussed in recent reports, CyberArk Software (CYBR), not shown here on a chart, remains well-extended and nowhere near an optimal buy point. This had to be purchased along the 200-day line either last Friday or this past Tuesday. Pullbacks into the rising 10-day line at 44.77 would be your best entry opportunities.

FireEye (FEYE), also not shown here on a chart, continues to hold above its 50-day moving average. I would look to use any pullback to the 50-day line, currently at 16.29, as the most optimal entry opportunity.

Mobileye (MBLY) flashed a pocket pivot Thursday on a range breakout, as I discussed in my report of that day. It then reversed in a logical move to the downside after approaching the 200-day moving average. On the weekly chart, not shown, the stock actually pushed just above its 40-week moving average. Thus the fact that it found resistance near the 40 price level was logical on this basis.

MBLY pulled down towards the 10-day line on Friday as volume dried up somewhat. Optimally, I would look to buy a pullback into the 10-day line at 37.85.

 

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Tesla Motors (TSLA) actually bucked the market sell-off at the beginning of the trading day on Friday. Early on, it pushed up to a high of 221.94 as it managed to poke its head just above the 200-day moving average. Eventually, the general market selling dragged the stock back below the line as volume picked up ever so slightly. This action obfuscates matters here for TSLA, because it looks as much, maybe even a little more, like a short as it does a long right here.

For me the issue is fairly straightforward. Because the stock is sitting below all the major moving averages that I watch after reversing at the 200-day line on Friday, it’s difficult to call this a solid long idea. Theoretically one could try and test this as a short using the 200-day line at 220.29 as a guide for a tight upside stop. Otherwise, the long side could come back into play if the stock is able to more convincingly regain the 200-day line on the upside.

 

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We saw both Ambarella (AMBA) and Broadcom Ltd. (AVGO) gap up on Friday morning, but neither stock gained much upside momentum beyond their respective gap-up moves alone. AMBA, not shown, posted an intraday low of 44.80 and closed mid-range at 46.76. Thus if the stock were to pull back closer to the 44.80 price level it would present a lower-risk entry possibility.

AVGO, shown below on a daily chart, traded as high as 166 but ended the day at 162.56. This placed it in the lower part of its daily trading range, and within 1% of its 161.20 intraday low. It is also just above the 159.65 high on the left side of the cup base. This puts it in a lower-risk buy position using either the 161.20 BGU intraday low of the 159.65 left side high of the base as a reasonably tight downside selling guide.

Overall, however, the gap-up move appeared to have been sold into. However, if one chooses to test this on the long side, risk can be controlled fairly tightly by adhering to the suggested selling guides.

 

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My video-gaming cousin stocks appear to be parting ways to some degree. Activision (ATVI), which had pushed to a higher high two Fridays ago, spent most of this past week selling off of that peak. On Friday the stock pushed below the 20-day moving average on fairly heavy, above-average selling volume.

I actually tested a long position right at the 20-day line, but the stock showed little resilience at that point so I summarily dumped it at a tiny loss. As it approaches the late May low at 37.16, we might keep an eye out for some sort of undercut on lighter volume that might set up a better entry on the pullback.

However, one thing that concerns me here is the fact that most of the higher, above-average volume over the past month since the early May buyable gap-up has been selling volume. We can see this in the form of higher red volume bars on the chart, while blue upside volume bars are not nearly as high. For this reason I would be somewhat cautious here unless and until we see selling volume begin to dissipate.

 

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If I had been more prescient on Friday, I would have instead bought shares of Electronic Arts (EA) at its 10-day moving average. EA pulled right into its 10-day moving average on Friday morning where it found support, closing in the upper half of its daily trading range. On the day, volume dried up to 48% below average, which would qualify as a voodoo pullback to the 10-day moving average. The trick here was to buy shares at the 10-day line which would have worked.

This is a good example of moving average bias on my part. I generally like to buy pullbacks into the 20-day moving average in extended stocks. This is why I chose to buy ATVI at the 20-day line instead of EA at the 10-day line. In this case what I should have noted more carefully was the fact that EA’s selling volume was drying up precipitously.

This is an important detail that I overlooked. Thus we might come up with a rule when assessing pullbacks in two cousin stocks. In essence, look to buy the one that is showing lighter volume on the day, regardless of which moving average it is pulling down into. In any case, EA remains buyable on these types of low-volume pullbacks into the 10-day line. If, for any reason, the stock were to fail at the 10-day line, then I would look for a low-volume pullback.

 

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A leading stock that has been basing and ripening for some time now and which may be in a nice buy position right here is Acuity Brands (AYI). The stock attempted to post a pocket pivot breakout on Tuesday, but that move failed as the stock reversed and closed at the lows of its intraday price range. On Friday AYI pulled into and held its 20-day moving average as volume dried up to -57.7% below average. This puts it in a lower-risk entry area using the 20-day line at 252.51 as a guide for a tight downside stop given that the stock closed less than 1% above the line on Friday.

AYI has been a steady, dependable, and strong earnings grower for many quarters now. It last posted a 53% earnings increase back in early April, and is expected to post a healthy 47% earnings growth number when it is expected to report earnings on July 6th.

 

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Below are my current trading journal notes regarding other long ideas discussed in recent reports that I consider to remain viable:

Alibaba (BABA) held up reasonably well on Friday as selling volume continues to decline. As it settles down here, watch for a possible move back up through the 50-day line as a potential long entry signal.

Fabrinet (FN) appears to be starting to work on a handle to a short month-long cup formation. The stock actually made a new all-time closing high on Friday on slight above-average volume, which was surprising in the face of the weak general market. Still prefer to snag this one on any pullback to the rising 10-day line, now at 34.74.

Maxlinear (MXL) pulled into the 10-day moving average on Friday on light volume, which brought it into a lower-risk buy point. While that was buyable in the near-term, I would still like to see a pullback to the rising 20-day moving average, now at 19.49, as an optimally opportunistic entry point.

Silicon Motion (SIMO) held tight on Friday in the face of the general market weakness. The stock more or less moving sideways over the past few days at the 10-day moving average starts to catch up to the stock. Pullbacks to that moving average, now at 43.77, or the 20-day moving average at 42.60 would represent lower-risk entry opportunities.

Weibo (WB) is still on fire, closing at new all-time highs on Friday on below-average volume. It remains extended from the prior breakout point at 24.70, so a pullback to the rising 10-day line at 25.07 would represent your next reference point for a potentially lower-risk entry.

Yirendai Ltd. (YRD) reversed off of its intraday peak on Friday as volume came in 11.6% above average. This could bring the stock down towards its rapidly rising 10-day moving average, now at 14.07, which would then present a much more optimal and lower-risk entry opportunity.

What struck me most about Friday’s initial sell-off was the number of stocks on my buy watch list that were showing light selling volume. I define a “voodoo” pullback as one that occurs on volume that is lighter than -35% below-average. While many names showed such low-volume pullbacks, there were also a large number that had pullbacks on volume that was below average. The bottom line is that most of my favored long ideas didn’t get hit with heavy selling volume. That may be a significant clue with respect to where this market is headed from here.

There are also a large number of stocks that are showing constructive chart patterns, as I mentioned in my Thursday mid-week report. That may also be a clue as to where this market is headed. Regardless of what the indexes may or may not do on a day-to-day basis, it remains a matter of watching the set-ups in individual stocks and picking your entry points carefully. When you get a pullback like we did on Friday, that is often where opportunities will tend to be found on the long side.

With a weak jobs number perhaps pointing to the Fed standing pat, the looming uncertainty now becomes just what it will actually do when it meets next. This may cause some gyrations in the indexes, but as always just remain focused on the set-ups as they develop in real-time. Keep an open mind and be ready to act when the opportunities are there and risk can be controlled tightly.

 

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 AEM and FB, though positions are subject to change at any time and without notice.

Gil Morales & Company, LLC (“GMC”), 8033 Sunset Boulevard, Suite 830, Los Angeles, California, 90046. GMC is a Registered Investment Adviser. This information is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to GMC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Gil Morales & Company, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.