The Gilmo Report

March 26, 2017

March 26, 2017

After undercutting their prior February and March lows on Wednesday, setting up a logical undercut & rally situation, the indexes continued to move higher into Friday morning. This was associated with a large number of similar types of undercut & rally moves in individual stocks, something I discussed in detail in my mid-week report of that day.

That Friday morning rally ended within two hours of the open as it became apparent that the current healthcare legislation before Congress, known as the “American Healthcare Act” or “AHCA, didn’t have the votes needed to pass. This was more or less admitted to by White House Press Secretary Sean Spicer at around the same time.

Initially the market hovered and slid slightly lower from there before breaking sharply to the downside with about an hour-and-a-half left in the trading day. This sent the Dow down over 100 points in short order. However, as they say on those cable TV infomercials, “But wait! That’s not all!” At that point it was announced that the bill was being pulled, triggering a sudden intraday jack back to the upside.

That in turn led to some wild intraday volatility in the final hour of the day. But by the time the closing bell rang and the dust settled, the S&P 500 Index ended the day down -1.98% points, or a mere -0.8%, on lighter volume. The overall action comes off as a light volume churning day with the index stuck between the prior February and March lows just above and the 50-day moving average just below.

 

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The NASDAQ Composite Index diverged from the NYSE-based indexes with a positive close on higher volume. However, the index ran into resistance at its 10-day moving average, resulting in what looks like a big churning and stalling day on heavy volume. On the heels of Tuesday’s big-volume reversal off the peak on heavy selling volume, this looks bearish on its face.

 

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Clearly, the news-influenced movement in the indexes presents a confusing and perhaps difficult situation for investors who focus entirely on the indexes. When things get this nutty, I find solace in simply concentrating on individual stock set-ups. I trust in the concept that if the market is indeed weakening, then short-sale set-ups will dominate my screen output. In this manner, I will naturally be pushed more toward the short side. Currently, I find myself operating on both sides of the market, and mostly on a very short-term basis outside of a few cases.

So far I like the action in Snap (SNAP) after it flashed a strong pocket pivot as it came up through its 10-day moving average on Wednesday. Alert members would have already been in the stock at that point, however, since it had already posted an undercut & rally set-up buy signal once it pushed above the prior 20.64 low earlier that day.

SNAP pushed higher on Thursday and cleared the 23 price level on an intraday basis before pulling in slightly. Note that it essentially ran into some overhead resistance from the left side of the pattern, something I’ve highlighted on the chart. On Friday, the stock pulled in slightly and held tight as volume dried up to -68.1% below average. This is highly constructive action.

From here, pullbacks to the 10-day line, now at 20.99, would present lower-risk entry opportunities. But the stock’s tight action likely argues for the possibility that the 10-day line, which is now starting to just barely turn back to the upside, will meet the stock somewhere in the middle.

 

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We’ve had considerable success with the few bio-techs I’ve discussed in my reports in 2017, namely the bio-tech Three Musketeers, Clovis Oncology (CLVS), Glaukos (GKOS), and Incyte Pharmaceuticals (INCY). All three of those stocks were up on Friday, with GKOS, not shown, pushing to a new closing high. GKOS was last buyable per my comments on the stock in my report of two Wednesdays ago.

CLVS, also not shown, bounced off its 20-dema on Wednesday and right off the top of its prior base, which put it in a lower-risk entry position at that time. Now it has “veed” its way back up near its prior highs and the 70 price level. Pullbacks into the 66-67 price level would still present lower-risk entry points in my view.

INCY, after getting a tremendous amount of upside thrust thanks to news that it was being added to the S&P 500 Index and then rumors of a possible buyout by Gilead Sciences (GILD) has pulled into its 20-day moving average here with volume drying up to -67.3% below average.

This would qualify as a nice voodoo pullback to the line, but the stock closed nine cents below the line. Therefore, one could use a move back up through the 20-dema as a buy “trigger” and then use the line as a tight selling guide. INCY has already had a big move, so it’s possible that it could need time to consolidate for a longer period. However, the 20-day line could serve as an area of support during any such base-building period.

 

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Something that might be nearer to the beginning of a sustained price move than the end is recent IPO spin-off Bioverative (BIVV). The company was previously the hematology division of Biogen Idec (BIIB) but was spun off as an IPO based on the idea that it’s very profitable business line did not fit in with BIIB’s core drug business.

BIVV has been growing earnings and sales steadily, most recently posting 60% earnings growth on a 43% sales increase. I’ve been watching this thing for a while, and I note that it is currently working on a base-on-base type of formation. After undercutting a prior 50.30 low in its upper base, BIVV has pushed right up to that prior low, matching it at the close on Friday.

So here we have the stock holding tight at the 20-dema and the prior 50.30 low, setting up a possible U&R set-up on the long side. In addition, it can be viewed as a voodoo pullback to the 20-dema given that on Friday volume dried up to -77.3% below average. Thus, this is in a lower-risk entry position here, using the 20-dema as a tight selling guide.

 

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Keep in mind that most long ideas are contingent on what the general market does from here. And there is enough evidence on an individual stock basis to at least be very cautious right here.

In this regard, the big-stock NASDAQ names could hold the key to this market, but in most cases the bearish action has not been 100% conclusive, at least not yet. That is not the case for Alphabet (GOOGL) which was already looking ugly per my discussion of the stock in Wednesday’s mid-week report. Over the past two days it has become even uglier.

On Thursday, a big-volume gap-down break sent the stock back below its 50-day moving average for the first time this year. That was followed by a reversal at the 50-day line as the stock tried to rally early in the day along with the general market. But by the close it logged another lower closing low on above-average selling volume.

Now GOOGL appears to be a late-stage failed-base short-sale set-up using the 50-day line as a guide for an upside stop. We can see that the current bout of heavy-volume selling follows a prior high-volume selling period back in late January. This could imply that the stock is now under systematic distribution.

 

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Netflix (NFLX) could also be morphing into a late-stage failed-base short-sale set-up. Objectively, it had a clear breakout failure on Tuesday after pulling a big, ugly outside reversal to the downside on huge volume. This came just as the stock was pushing for all-time highs before the sharp intraday reversal took hold.

That move sent the stock back below its 20-day moving average, but it held support at the 50-day line on Wednesday. However, it hasn’t rallied much from there as it holds tight in what could be a short bear flag. A breach of the 50-day line would trigger this as a short at that point, while the bullish resolution could see a move back above the 20-dema on volume as a “LUie” type of set-up.

How this resolves may likely depend on what the general market does from here, so NFLX is one name to key on as a prior big-stock leader that is at worst on the ropes or at best sitting on the fence here between the bull pasture and the bear forest.

 

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Amazon.com (AMZN) is another big-stock NASDAQ name that is on failure-watch here after its own high-volume reversal and breakout failure on Tuesday. Notice how on Wednesday AMZN undercut the prior lows in the base and rallied in a typical undercut & rally move.

That rally ran out of gas on Friday as the stock bumped into its 10-day moving average and then reversed to the downside to close in the red. Selling volume picked up slightly. This can potentially be considered to be a short-sale target right here, using the 20-dema or the 10-day line as guides for tight upside stops.

While AMZN could right itself and attempt to “re-breakout,” a move that is not atypical for this market, the current price/volume action is objectively bearish. It also looks very similar to NFLX, which could also be viewed as a short-sale target in similar fashion to AMZN.

 

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Tesla (TSLA) has been bucking the trend lately, and has in fact worked out as a moving average undercut & rally set-up or “MAU&R.” I discussed this possibility in my Wednesday mid-week report, and it now seems somewhat prophetic. TSLA pushed up and off the line on Friday on volume that was slightly above average, confirming my MAU&R theory on the stock.

This brings it right up to the prior March highs in the 265 price area, which could present some overhead resistance. In fact, I would consider this to be a critical test for the stock, since it could still easily reverse back into the 50-day moving average, break the line on volume, and then morph back into a short-sale target.

I think that currently shorts who swarmed the stock after the high-volume gap-down off the peak after earnings in late February were counting on a big secondary stock-offering to take the stock down big-time. Since that did not happen, even after throwing in a big secondary convertible-note offering as well, and TSLA rallied in response, the shorts are badly out of position in the near-term.

That is what is putting a floor and a bid under the stock lately, and the undercut of the 50-day moving average earlier this week helped to set that up. Shorts were likely heartened by that move on Tuesday, but when it didn’t pan out they were set to scrambling by the end of the week.

Near-term, high short interest has worked in TSLA’s favor, as I see it, and this may take some time to work off IF the stock doesn’t break down again soon. The flip side of this is that we see the general market stabilize and resume its rally, at which point TSLA could just as easily join the party by setting up again and breaking out to new highs.

For now, it is near-term extended from the 50-day line, where it could have been bought on the basis of the MAU&A. At the same time, it certainly isn’t showing any signs that it should be shorted right here. But all of that could change over the next few days, so keep an eye on TSLA.

 

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Notes on other big-stock NASDAQ names:

Apple (AAPL) continues to hold along its 10-dya moving average, but has been running into some higher-volume selling over the past week. I would not be buying this thing up here, and would watch for a high-volume breach of the 20-dema at 138.97 as a sign that AAPL’s run might be over.

Facebook (FB) is also tracking along its 10-day moving average after bouncing off the 20-day moving average on Wednesday on the associated index undercut & rally rebound. For now, I would not be looking to take any fresh positions in the stock up here, and would watch for support to hold up at the 20-dema from here. If it doesn’t, then that would likely be a bearish sign for the stock, at least short-term.

Priceline Group (PCLN) has spent most of the past week below its 10-day moving average, and the 20-dema at 1734.13 would be considered near-term support for the stock on any pullbacks from here. As is the case with these other big-stock NASDAQ names, a high-volume breach of the 20-dema would likely spell trouble.

There isn’t much I see in a buyable position among my remaining China Four names. JD.com (JD), not shown, had a nice undercut & rally move off the Wednesday lows that ran into resistance at the 10-day moving average and reversed. Now it needs some time to stabilize, but if one bought the stock on the basis of Wednesday’s U&R move, the 29.96 prior low would serve as a maximum selling guide.

Netease (NTES) is sitting on top of its 10-day and 20-day moving averages as volume dries up. This is coming after an undercut & rally move back up through the prior 282.92 March low on Wednesday. Technically one could consider this buyable here using the 20-dema as a selling guide, but a volume breach of the line could send this into short-sale target land.

This is another fluid situation in a current leader that needs to be monitored closely. If the general market begins to break down then NTES could go with it, and vice versa if the general market can stabilize and resume its rallying ways.

 

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More notes on the two remaining China Four names:

Alibaba (BABA) rallied nicely after finding support at its 20-dema on Wednesday. It is now back up to the highs of Monday, but not in any lower-risk buying position up here. BABA is best purchased on pullbacks to the 20-dema, now at 104.87.

Momo (MOMO) remains extended, and I would only be interested in taking shares on a constructive pullback to the 20-dema at 31.28.

Nvidia (NVDA) is starting to look like it wants to make another run at its prior highs. After undercutting its prior January base lows twice, the stock has rallied back above its 50-day moving average five trading days ago.

Since then NVDA has held very tightly along the line as volume dries up. This is constructive action, and could portend a move back up toward the other highs as long as it does not breach the 50-day moving average from here.

How this resolves itself will likely be influenced by the action of the general market over the coming days, so I would maintain a two-sided view of the stock. In this manner, I am willing to look at it as a potential long here if it can hold the 50-day line constructively, while at the same time would shift my treatment of the stock to the short side should it bust the 50-day line on heavy selling volume.

 

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As we saw with JD, above, some of these undercut & rally moves that started out on Wednesday have lost momentum as they push back up to the upper areas of their current price consolidations. A good example is Square (SQ), which undercut its prior buyable gap-up (BGU) low on Wednesday and then rallied from there on a typical U&R move.

That move ran out of gas at the 10-day line on Thursday and Friday, sending the stock back into its 20-day moving average as volume dried up sharply. SQ ended the day two cents below the 20-dema, which puts it in a slightly compromised position.

If it can show some thrust off the 20-dema on volume, then it could post a pocket pivot as it remains within what is now a four-week consolidation, so that is certainly something to watch for. In my view SQ’s current U&R move remains in force as long as it holds the 16.32 intraday low of the late February BGU, although selling into the move up to the 10-day line on Thursday and taking a profit was a possibility for swing-trader types.

 

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Don’t look now but lower-priced optical name Oclaro (OCLR) has been paid a visit by the Ugly Duckling! Certain opticals names have surged recently (I discuss those in my notes below), and this has led to resurgence in this previously beaten-down optical name.

OCLR was a leader in the group a month ago, but that breakout to new highs was simply met with selling that overwhelmed the stock and sent it back into its previous base. The breakdown continued until the stock undercut its late February low and touched a prior January low and the 40-week moving average on the weekly chart (it got close to the 200-day line on the daily chart).

This was a classic Ugly Duckling undercut & rally situation just when the stock was starting to look as if all hope was lost. But this is a great example of just how this market rolls. Leading stocks build some upside momentum and then suddenly come apart as they break down and push to the downside.

Once things start to look as bleak as they can, the stock suddenly gains newfound strength and recovers in fine style. In many ways OCLR is just acting like other opticals leaders that have broken down to the perceived point of no return before magically turning back to the upside. Think ANET and LITE as strong examples.

Like I said, that’s how this market rolls, and one must always be keeping a close eye out for these types of Ugly Duckling set-ups. Meanwhile, OCLR sits on the cusp of a re-breakout, and is probably buyable here and on any constructive pullback into the 50-day moving average at 9.46.

 

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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, 20-day exponential, 50-day simple and 200-day simple moving average.

Notes on other names discussed on the long side in recent reports below. In most cases, you will see that these stocks found support at logical points in their charts:

Activision (ATVI) found support at its 20-dema on Wednesday, and is now out of position for a lower-risk entry position. The 20-dema at 47.89 remains your selling guide.

Applied Optoelectronics (AAOI) followed up on Wednesday’s strong-volume pocket pivot by moving higher on Friday. This is now out of position for any kind of lower-risk entry, but should be monitored for constructive pullbacks to the 20-dema at 48.71.

Arista Networks (ANET) is extended as it tracks to new highs. I would stay opportunistic here and look for pullbacks to the 20-dema at 124.35 as a possible lower-risk entry.

Carnival Cruise Lines (CCL) is extended on the upside. Watch for pullbacks to the 20-dema at 57.19.

Checkpoint Software (CHKP) is extended in my view following a low-volume breakout on Wednesday. I would only look at this as a lower-risk entry proposition on constructive pullbacks to the 20-dema at 100.94.

Electronic Arts (EA) continues to hold support at its 20-dema with volume declining, which technically puts it in a lower-risk buy position using the 20-dema line at 88.58 as a tight selling guide.

Lumentum Holdings (LITE) has shot up to new highs following Wednesday’s test of support near the 10-day and 20-day moving averages. The stock is in an extended position, in my view, despite breaking out on Friday. Since I do not advocate buying this type of breakout, I would simply look for a constructive pullback to the 10-day line at 48.60 as a lower-risk entry.

Royal Caribbean Cruise Lines (RCL) is pulling down toward its 10-day moving average after posting a pocket pivot at its 10-day and 20-day moving averages on Wednesday. It is still best bought on constructive pullbacks to the 20-day line at 96.93.

Splunk (SPLK) is still holding support at its 50-day line. Technically this puts it in a lower-risk entry position using the 50-day line at 60.25 as a very tight selling guide. A volume breach of the 50-day line, however, would turn this into a short-sale target.

Symantec (SYMC) is best bought on constructive pullbacks to the 20-dema at 29.98. It continues to act well, but a breach of the 20-dema would certainly be a bearish development, should that occur.

Take-Two Interactive (TTWO) stalled out at its 10-day moving average on Friday after pulling an undercut and rally move on Wednesday up through the prior February 27th low at 56.79. That may be the extent of this short-term U&R move, but constructive pullbacks to the 50-day line at 56.35 could present lower-risk entries.

Veeva Systems (VEEV) is in an extended position after bouncing off its 10-day moving average on Wednesday and then rallying back above the 50 price level on Friday. It then reversed to close down on heavy selling volume, so I would not be looking to buy the stock up here. In fact, as far as I’m concerned, VEEV was best bought back when it was sitting nice and quiet along the 10-day and 20-day moving averages in early March. Let it base.

On the short side, former Gilmo China Five member Weibo (WB) remains a short-sale target, as I indicated it was in my Wednesday mid-week report. As I wrote at that time, rallies up into the 20-dema (which roughly coincides with the 50-day moving average) could be used as short-sale entry opportunities. On Friday WB pushed just above the 50-day line but reversed to churn and close below the line on Friday. Volume picked up on the day. This is in short-sale position right here using the 50-day line at 50.27 or the Friday intraday high at 50.78 as a guide for an upside stop.

 

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Salesforce.com (CRM) has been on both sides of the fence lately, looking like a long possibility until it breached the 20-day moving average on Tuesday. Note that CRM was already showing signs of weakening when it moved below the 10-day line six trading days ago on very heavy selling volume. That was a clue and precursor to Tuesday’s breakdown, which was associated with a general market sell-off. Now with CRM stuck below its 20-dema, it becomes shortable here using the line at 82.25 as a guide for an upside stop.

 

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We should also understand that CRM’s action on the daily chart is occurring within the context of a possible Punchbowl of Death (POD) failure and short-sale set-up. On the weekly chart, we can see the big punchbowl formation that is characterized by a sharp, rapid rally up the right side.

Notice the weekly stalling action as the stock has approached the highs around the 84 price level. As we know from the book, Short-Selling with the O’Neil Disciples, your first clue of a possible POD failure is a breakdown through the 20-day moving average, which is what CRM did earlier this past week. While this is not guaranteed to work, the pattern is objectively set up as a short-sale right here unless and until CRM can regain its 20-day exponential moving average.

 

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If the short side of this market is about to blossom, you don’t have to be short every stock in the market. Focusing on a handful of names makes it possible to keep track of when and where some of these target stocks reach a more optimal short-sale entry point.

Airlines have been a very weak group over recent weeks, with massive breakdowns in names like Delta Airlines (DAL), American Airlines Group (AAL), and United Continental Group (UAL). As a group of stocks weakens, it begins to bring down all of them, and so we now see Alaska Air Group (ALK) setting up as a late-stage base-breakout short-sale situation.

After failing on a breakout attempt in early March, ALK has broken down with the group and is now living beneath its 50-day moving average. Thus, rallies into the 50-day line can be looked at as potentially optimal short-sale entries. In this case, we see ALK staging a wedging (moving higher on successively lighter and light volume) rally up into the 50-day line as volume has dried up.

This puts the stock in a shortable position here, using the 50-day line at 95.38 as a guide for a tight upside stop. I would also monitor the other names in the group mentioned above, as a breakdown in ALK will likely coincide with breakdowns in DAL, AAL, and UAL. If you investigate the charts of these names, you will see that each of them has also rallied into or around their 10-day moving averages, putting them in position for a possible inflection back to the downside.

 

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Notes on other short-sale targets discussed in recent reports:

Diamondback Energy (FANG) is best shorted on weak rallies up into its 50-day moving average at 103.35.

GrubHub (GRUB) is shortable on rallies into its 10-day moving average at 34.20, although any move back up to the 20-dema at 34.71 would offer a more optimal and opportunistic short-sale entry point. Note, however, that GRUB had a “shake-in” type of move on Tuesday where it rallied hard early in the day but then reversed back below its 20-dema on heavy volume. This could indicate that a bear flag breakout to the downside is imminent.

U.S. Steel (X) is extended to the downside after failing at the 50-day moving average on Tuesday. From here watch for weak rallies back up into the 50-day line at 35.79 as more optimal short-sale entry opportunities. X tends to be quite volatile within its pattern, so you have to be on your toes with this one.

I wrote on Wednesday that Tuesday’s big market break “…could be a warning shot across the bow…” That remains the case as the index action looks dicey, as does the action in a number of leading and formerly leading stocks.

But despite some of this questionable action in certain areas of this market, there are still plenty of stocks that continue to act constructively. These are the names we want to keep an eye on as potential “go to” names if the market stabilizes and the rally continues.

This has created something of a bifurcated market, where there are profitable set-ups on both the long and short sides of the market. But as I’ve been saying for a while, one’s experience in this market is largely determined by what they are long or short and just when they are long or short it. Therefore, it remains a matter of focusing on the precise set-ups that appear in real-time and acting accordingly.

The perceived consensus seems to be that the Trump Administration’s pulling of the AHCA bill on Friday is a negative for its other policy initiatives, such as tax reform. But the fact that around 22 Republican members of Congress opposed what was nothing more than “Obamacare Lite,” strikes me as specific to this piece of legislation. Over the next few days we shall see whether the market chooses to focus on the foregone conclusion of scuttled healthcare legislation or the promise of tax reform. The stocks will tell us all we need to know.

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 SNAP, 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.