The Gilmo Report

June 8, 2016

June 8, 2016

Fed Head Janet Yellen spoke on Monday and came off as somewhat cautious, fueling the idea that the Fed may remain on hold when it meets next week. The indexes all pushed higher, with the S&P 500 Index moving to its highest highs for the year over the past three days.

Volume came in slightly higher today as the index pushed to a new 2016 closing high. The S&P 500 has now cleared above its November 2015 high and is flirting with the highs of last summer.

 

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The NASDAQ Composite Index meanwhile remains well off of its November-December 2015 highs. However, the index posted its highest closing high so far in 2016 today as it holds tight along its prior April highs. In the process we’ve seen a number of our favored long ideas streak higher as they become quite extended on the upside. In most cases stocks are now out of buying range and we are left looking for the next pullbacks to provide lower-risk entry points.

 

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Over the weekend I noted that, “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.” Fed Head Janet Yellen’s speech on Monday helped to make this case. Today, the European Central Bank’s commencement of its latest round of QE in the form of corporate bond buying helped to confirm that QE in any and all forms remains in force.

This in turn helped push precious metals and their associated stocks even further to the upside in some very strong moves. Precious metals stock Silver Wheaton’s (SLW), which was buyable on Monday per my discussion over the weekend, gapped up to new highs this morning on heavy volume. By the close, however, it had given up most of that move and closed in the lower portion of its daily trading range.

 

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Agnico Eagle Mines (AEM), another buyable gap-up move among precious metals names, also gapped up further today on above-average buying volume. Like SLW, however, it closed near the intraday lows as it reversed off the day’s highs. Since I look to sell precious metals stocks into sharp upside jacks, selling into today’s move made sense if one were long the stock as of last Friday or this past Monday. The move in the stocks seemed to be inspired by the ECB’s bond buying program going into action today, but this was something that was already known.

Thus taking profits into the strong upside move this morning with the idea of seeing how these stocks settle in is a feasible strategy. It is in fact the way I prefer to play these names since they tend to be volatile, and bouts of strength that are often short-lived make these names very trade-able.

 

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The precious metals ETFs, the iShares Silver Trust (SLV) and the SPDR Gold Shares ETF (GLD) also gapped up today. Both ETFs managed to clear their 50-day moving averages, with the GLD, shown below on a daily chart, also moving back above the top of its prior March-April consolidation.

 

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The iShares Silver Trust (SLV) gapped back above its 50-day moving average after holding at the top of its prior February-through-April price range last week. Volume was much stronger today than that seen in the GLD. In addition, the SLV rose 3.91% vs. the GLD’s 1.48% upside move. As I wrote over the weekend, the SLV could have been purchased just below the 50-day moving average while using the top of the prior February-April price range and the 15 price level as a selling guide.

This gap-up move today looks quite strong, and I would expect that it will hold the 20-day moving average at 15.72 on any pullbacks from here. Overall, the action in the metals and their associated stocks certainly argues for the Fed standing pat next week.

 

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The cloud stocks we’ve been tracking for the past few days and weeks have all become quite extended. In some cases the price moves have become, shall we say, semi-euphoric. Workday (WDAY) is perhaps the closest to a potential buy zone as it pulls down into the top of its April-May consolidation. The stock emerged from that formation on a high-volume trendline breakout four trading days ago. It is now pulling back in towards the top of that base formation and the 10-day moving average as volume declines.

As I see it, WDAY could stop at the highs of the price just under the 80 price level or the 10-day moving average at 78.70. In either case, it is coming back into buyable range using the 10-day line or the 20-day line at 77.17 as a selling guide.

 

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Salesforce.com (CRM) is also still within buying range as it holds tight along its 10-day moving average. Volume has remained low over the past three days, and today came in at -36% below average. This just barely qualified as “voodoo” action. As I wrote over the weekend, CRM also still remains within buying range of the 80.15 intraday low of its May 19th buyable gap-up move following earnings. In addition, the 20-day moving average is now at 81.25 and can therefore serve as a tighter selling guide for those who prefer it.

 

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Adobe Systems (ADBE) is also in a buyable position. The stock has pulled back into its 20-day moving average on below-average volume. This roughly coincides with the top of its prior base from which it broke out in late May. This brings the stock into a lower-risk entry point using the prior breakout point or the 20-day moving average as a selling guide. Keep in mind that ADBE is expected to announce earnings on June 21st.

 

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

Citrix Systems (CTXS) is currently extended but offered buying opportunities along the 10-day moving average both yesterday and on Monday. Today the stock pushed higher on about average volume. It remains buyable on pullbacks to the 10-day line, now at 84.76.

Splunk (SPLK) remains well extended as it approaches the $60 price level. Pullbacks to the 10-day moving average at 57.59 or the 20-day moving average at 55.19 would be your next possible entry points.

ServiceNow (NOW) is another one of these semi-euphoric cloud names that has continued to move higher. The stock actually broke out of a shallow cup formation today on above-average volume, which theoretically makes it buyable using the top of the base around the 76 price level as a nearby selling guide. Otherwise, pullbacks into the 10-day moving average at 73.22 would offer your lowest-risk entry opportunities.

Zendesk (ZEN) is also way extended, and is up just over 13% since the pocket pivot of May 31st. At this point only pullbacks into the 10-day moving average at 25.68 would offer your lowest-risk entry opportunities.

ZEN illustrates quite nicely the advantage that pocket pivots give investors over buying on breakouts alone. As the stock streaks higher on above-average volume, it also serves as a nice illustration of what I mean when I use the term “semi-euphoric” when referring to the recent moves in my wolfpack of cloud names.

 

GR060816-ZEN

 

Among the cyber-security names I’ve discussed in recent reports, only 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.

 

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With respect to the other cyber-security names that I’ve discussed in recent reports, CyberArk Software (CYBR), not shown, pulled right into its 10-day moving average today on above-average volume. This would present a possible entry point on the pullback, but I would prefer to see volume drying up. I would watch to see how this settles in along the 10-day line, perhaps, and whether volume dries up.

FireEye (FEYE), also not shown, is pulling back into its 10-day and 50-day moving averages on below-average volume. I would prefer to buy shares in this one closer to the 10-day line, currently at 16.41, exactly 40 cents below where the stock closed today.

Facebook (FB) and LinkedIn (LNKD) were both hit with negative news yesterday, sending the stock sliding to the downside. However, selling volume remained light in both names despite reports of slowing activity in terms of usage for FB and job postings on LNKD. FB ended yesterday down slightly on volume that was -37% below average. The selling volume did, however, show a slight increase from the prior day.

Today FB undercut the lows of its prior range extending back over the past eight trading days as well as its 20-day moving average. Volume dried up even further to -47.4% below average as the stock regained the 20-day line. So far FB hasn’t wanted to join the indexes on their move to higher highs as it simply continues to track straight sideways. Technically, this does, however, remain in a buyable position along the 20-day moving average.

 

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LinkedIn (LNKD) was also tagged with some selling on Tuesday’s negative news, but volume actually declined and came in at -56% below average, qualifying as a voodoo pullback. The stock moved slightly lower today as it undercut the 10-day moving average, but held at the line, more or less, on another voodoo volume signature.

Today’s volume levels declined to -65.4% below average as the stock retested last Friday’s pullback to the top of the prior May price range. In my view, Tuesday’s news was likely more of a rear-view mirror type of thing while the stock’s current action is based on more of a forward-looking view of the company’s potential from here. In any case, the voodoo pullback brings the stock into buyable range using the top of the prior base at 131.80 as a guide for a tight stop.

 

GR060816-LNKD

 

Mobileye (MBLY) has shown no inclination to follow-through on the pocket pivot move it had five trading days ago. Obviously, we do not like to chase strength like that, and anyone who was in the stock for that move should have been buying it along the 10-day and 20-day moving averages a day or two before.

The lack of any upside follow-through to that pocket pivot has result in a slide back down to the 10-day and 20-day moving averages. Selling volume increased, which is not necessarily what you want to see.However, as the stock pulls closer to the 20-day line at 37.92 keep an eye on whether volume dries up in the process.  This would create an optimal, lower-risk entry point for the stock.

 

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Tesla Motors (TSLA) has pulled a classic Ugly Duckling so far this week as it jacks back above both its 200-day and 50-day moving averages on back-to-back pocket pivot moves. On Monday the stock was looking a little feeble as it gapped down right at the open, reaching an intraday low of 215.45.

I had previously considered that 215 price area as one of potential support that could be used as a selling guide for any position in the stock taken just below the 20-day moving average over the prior two weeks. TSLA held that level on Monday and then reversed to close back in positive territory for the day.

Yesterday TSLA launched through its 200-day moving average and was trading at around 226-227 when I blogged that it was on track to post a pocket pivot. The stock then continued higher to reach a high of 240.85 today before pulling back in towards its 50-day moving average. This qualifies as two pocket pivots in a row. Despite the fact that today’s pocket pivot coming off of the 50-day line stalled a bit, it still qualifies, and can be considered buyable using the 50-day line at 232.44 as a guide for a tight downside stop.

For the most part, however, I would have considered the stock’s move over the past two days as a nice swing-trade type of move. Now with the stock pulling back into the 50-day line we might look for volume to dry up, setting up another lower-risk entry.

 

GR060816-TSLA

 

The trade of the week turned out to be Ambarella (AMBA), which had set up as a buyable gap-up last Friday. As I wrote over the weekend, the stock “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.” On Monday morning I tweeted that both AMBA and Broadcom Ltd. (AVGO) were coming very close to the intraday lows of the Friday buyable gap-up moves. AMBA got as low as 45.16, a mere 36 cents above its 44.80 BGU low of last Friday.

That brought the stock into a very low-risk entry position, and it never looked back from there. Today AMBA posted a pocket pivot move coming up through the 200-day moving average. If you’re long this one from Monday’s test of the BGU low, the 200-day line at 50.59 can now serve as a convenient trailing stop.

 

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Broadcom Ltd. (AVGO) also tested its buyable gap-up low on Monday and held before the stock turned back to the upside. It is now back near the highs of what is a four-day price range. The contrast between AVGO and AMBA, however, offers confirmation of the fact that in this market the moves in bottom-fishing set-ups tend to be more powerful. AVGO is a combination base-breakout/buyable gap-up move that looks quite textbook, but its performance since the BGU has been dismal in comparison to AMBA’s.

Nevertheless, AVGO’s close today at 163.70 keeps it within buying range of last Friday’s BGU given that it lies less than 2% above the 161.20 BGU intraday low.

 

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If anything, AMBA probably benefits from the fact that as of the last reporting date, 34.3% of its float, about 10 million shares, has been sold short. Yirendai Ltd. (YRD) showed up as a voodoo pullback yesterday on the list I posted on my blog at 12:07 p.m. Pacific Daylight Time, 53 minutes before the close. Volume at that time was showing up as -63.8% below average.

With the stock sitting right at the 10-day line, that was a clear entry point per my discussion of the stock in the weekend report. The stock then turned higher today as volume increased, posting an all-time closing high since YRD came public in December of last year.

 

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Yesterday I blogged that several solar names were coming through my bottom-fishing screens. Among these, my favorite is always SolarEdge (SEDG), which illustrates a classic bottom-fishing set-up. Back in early May the stock gapped down on huge selling volume. Given that this was already extended to the downside, it was something of an exhaustion gap. Three days later the stock undercut the lows of that exhaustion gap-down day as volume was receding.

That set up a classic undercut & rally maneuver as the stock has rallied since mid-May. I thought it was buyable yesterday along the 10-day and 20-day moving average confluence, and that turned out to be correct as the stock moved higher today and is now approaching its 50-day moving average.

However, volume is coming in very light, which is mostly due to a lack of sellers who were washed out on the early May exhaustion gap to the downside. My preference here would to continue watching for another test of the 10-day or 20-day moving averages as lower-risk entries.

 

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Among the solars, I tend to prefer those showing better fundamentals. While SolarCity (SCTY) has been quite trade-able over the past two days, it tends to be volatile and erratic. A steadier name is First Solar (FSLR), which is holding tight along its 10-day and 20-day moving averages. The tight action along the moving averages sets up the possibility of a bottom-fishing type of pocket pivot off of the two moving averages. Volume on such a move would need to exceed 1,644,766 shares, the highest down volume in the pattern over the prior ten trading days.

Both SEDG and FSLR are in positions where a pocket pivot could occur, so they should be watched given that bottom-fishing set-ups in the market have tended to work well.

 

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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:

Activision (ATVI) has yet to price a 171.9 million share secondary offering but was able to find support at its 20-day moving average today on heavy volume. I am waiting to see how/when this secondary prices given that it represents a large amount of stock.

Acuity Brands (AYI) held the 20-day moving average yesterday and moved back to the highs of its price range. As I wrote over the weekend, it was buyable along the 20-day moving average and is now extended.

Alibaba (BABA) continues to find resistance along the confluence of its 10-day, 20-day, and 50-day moving averages. Volume has been drying up, however, which could set up a move back up through the 50-day line, and this should be watched for.

Amazon.com (AMZN) pulled into its 10-day moving average today on a voodoo volume signature as volume declined to -44% below average. This remains in a buyable position using the 10-day line at 720.86 or the 20-day line at 707.70 as reasonably nearby selling guides.

Electronic Arts (EA) pulled back to its 10-day moving average today on light volume. Theoretically, this would bring it back into a lower-risk entry point, but I would still prefer to remain highly opportunistic and look for a pullback to the 20-day line at 74.22 as the lowest-risk entry point.

Fabrinet (FN) continues to make new highs on above-average volume. It is now well-extended beyond any low-risk buy point.

Maxlinear (MXL) posted a continuation pocket pivot on Monday off of its 10-day moving average but has not been able to build upon that. The stock pulled into the 10-day line today on volume that was -37.3% below average. This brings it into a secondary entry point using the 10-day line at 20.57 as a very tight selling guide. Otherwise, I like pullbacks into the 20-day moving average at 19.81 as more opportunistic entries.

Silicon Motion (SIMO) is holding tight along the 10-day line as volume remains very light. Personally, I would like to see a pullback into the 20-day moving average at 43.31 as the most opportunistic entry point.

Weibo (WB) remains extended, and I would look for a pullback into the 10-day moving average at 26.73 as a lower-risk, secondary entry point.

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. The indexes may be starting to look somewhat extended, but I always consider the action and positions of leading stocks first in assessing whether a pullback is imminent. While the S&P 500 might look extended, the NASDAQ Composite is holding tight for three days right along its April highs.

That would easily set up a possible breakout to higher highs. Therefore we simply remain focused on the individual stock set-ups, looking to sell or lighten up on extended strength while buying or adding to positions on constructive weakness. Until we see some material change in the market, there is no reason to alter our strategy. Therefore, until evidence to the contrary presents itself, we simply stay the course.

 

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 AMBA, CRM, and LNKD, 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. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.