The Gilmo Report

May 21, 2017

May 20, 2017

This has been a wild week, but from my perspective as a swing-trader it was a good one. The trick was, of course, avoiding the big sell-off on Wednesday where many leading stocks were hit hard, and I mean hard. When this happens and you are long a stock experiencing this type of downside pressure, the urge to pull the rip cord and bail out becomes strongest right at the lows.

Despite the severe downside break on Wednesday, I still elected to cover my short positions before the close, holding nothing but cash overnight. As I tweeted on Wednesday evening and again on Thursday morning, I was looking for some tangible evidence of an oversold rally materializing. Once the opening bell rang and the market gapped down, at that point the selling seemed a bit exhausted and obvious. That turned out to be the case, and the indexes turned sharply to the upside.

As I’ve written many times, the most potent weapon for swing traders looking to scoop stock on an oversold rally is the trusty undercut & rally set-up. Among the more notable undercut & rally set-ups, Alibaba (BABA) was perhaps the most profitable, and one that I mentioned in my Thursday morning tweets. Members should be sure to follow me on Twitter at @gilmoreport if they want this type of commentary from me.

 

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BABA shot up to new highs on Friday, but reversed off the peak to close near the lows of its daily trading range on heavy volume. So, while I certainly viewed Thursday’s undercut & rally move after the stock gapped down with the market and after reporting earnings before the bell, I didn’t view it as an entry in anticipation of a longer-term move.

I still don’t view this market as one where we want to start aggressively taking fresh long positions. Certainly, if one is long stocks here, then one only needs to adhere to the hopefully pre-determined selling guides. If the market starts to get into further trouble, you will then be naturally forced out.

For swing-traders like myself, selling into Tuesday’s giddy upside action struck me as the thing to do, and so after catching some U&R moves off the Thursday morning lows I remain in cash over the weekend. The market may still not be out of the woods, and we may still be in store for at least some nutty volatility with the potential to shake you in at the highs and shake you out at the lows.

The NASDAQ Composite Index gives some credence to a cautionary stance here. Since Wednesday’s brutal sell-off, all it has done is stage a wedging oversold rally that stalled and churned at the 10-day moving average on Friday. There is still potential for this to resolve back to the downside, setting up a test of the Wednesday and Thursday lows.

 

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The S&P 500 Index looked weak on Thursday as it failed to hold above its 50-day moving average after busting through the line on Wednesday as selling volume picked up sharply. On Friday, the index gapped just above the line and proceeded to trade up to its 10-day moving average where it stalled and churned on higher, options-expiration volume.

This remains in a questionable position, and so I would continue to maintain a cautionary stance. And I would remind members that this doesn’t mean one must toss all their stocks out the window and run screaming for the hills. Instead, it means that, for those who take a more intermediate-term approach and like to give their stocks more room to swing about, simply make sure that you know where your out points are and stick to them.

As I said earlier in this report, this will naturally force one out of the market IF the situation deteriorates. Speaking for myself, my approach dictates that I have already sold into Tuesday’s bullish frenzy, and am waiting to see whether I want to re-enter on the long side or whether the short side will come further into focus.

 

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In the meantime, I operate with absolutely no bullish or bearish bias, as I tweeted on Wednesday night and Thursday morning. In addition, I warned members about the potential for an oversold bounce per my blog post titled, “El Kabong.” In this market, when things get too obvious, one way or the other, a reversal is often at hand. That was the case after Tuesday’s rally party, and again after Wednesday’s ugly sell-off, and in both cases the market reversed course. C’est la vie.

After breaking down hard on Wednesday, Facebook (FB) staged a logical bounce off its 50-day moving average on Thursday. Nimble traders could have taken a position in the stock at the 50-day line on Thursday morning based on the oversold rally. This led to a wedging rally up to the 10-day line on Friday as volume declined.

Aside from trying to buy shares at the 50-day line, if one was brave enough to do so on Thursday morning, FB needs some time to settle down here. I would also be watchful of a possible 50-day moving average breach, since that would likely have implications for the general market given FB’s status as a key leader in the current bull phase.

 

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Netflix (NFLX) regained its 20-day exponential moving average on Thursday. But like FB it has staged a low-volume rally back up to, but not back above, its 10-day moving average. For this reason, I don’t consider the stock to be in any kind of optimal long-entry position, but it could be potentially shortable here using the 10-day line as a tight upside stop.

How this resolves, or how any of these big-stock leaders resolve following low-volume rallies over the past two days, will likely depend heavily on what the general market does this coming week. For that reason, I remain highly attuned to whatever real-time signals show up that may lead me in either direction, long or short, with these stocks.

 

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Tesla (TSLA) mirrors NFLX to some extent as it also regained its 20-day exponential moving average on Thursday. However, it also ran into resistance at the 10-day moving average and turned lower on slightly lighter selling volume.

As with most of these big-stock names, and some not-so-big-stock names, the current action puts the stock in no-man’s land to some degree. Anything could materialize out of this current action, and in terms of deciding whether TSLA is a short or long here I am willing to wait and see what develops this coming week. In the meantime, I refrain from having a rigidly bullish or bearish view of the stock. So, to dust off another French cliché, “Que sera, sera.”

 

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Notes on other big-stock NASDAQ names:

Apple (AAPL) bounced off its 20-dema on Thursday as it gapped to the upside, but ran into resistance at its 10-day moving average on Friday. This actually looks shortable here using the 10-day moving average as a tight stop, with the idea of getting a playable downside retest of the 20-dema at a minimum. At the very least this does not look like a spot to be trying to go long the stock, although enterprising and extremely courageous traders could have taken a long position at the 20-dema on Wednesday. However, given the ugly action on that day, it’s doubtful one would have had the intestinal fortitude to do so!

Alphabet (GOOGL) also ran into resistance at its 10-day moving average on Friday on light volume, which gives the bounce a bit of a wedging look. I don’t see that as anything I need to short or go long at the current time.

Amazon.com (AMZN) remains above both its 10-day and 20-day moving averages, and so has not triggered even its tighter selling guides at those two moving averages. In addition, for those long the stock and wishing to implement the Seven-Week Rule as a risk-management system, the 50-day moving average at 902.37 would remain your maximum selling guide.

Nvidia (NVDA) gapped up to new highs on Friday, but stalled to close back below its Tuesday peak. Speaking for myself, Friday’s move looked like an extended rally that could be sold into. Otherwise, the stock is nowhere near any of its current selling guides at the 10-day or 20-day moving averages and is well above its prior 120.92 base breakout point. If one bought at that breakout point, then one must decide whether that serves as your selling guide or whether you want to use the 10-dma or 20-dema lines as tighter selling guides that would ensure getting out at a profit if the stock pulls in further.

Weibo (WB) retested the buyable gap-up (BGU) low of Monday when it pulled down with the market early on Thursday morning. That pullback held above the BGU low, producing a sharp rally back up to the highs that carried into Friday. At that point, however, things got just a bit frothy and the stock reversed to close down on the day.

Volume declined relative to the prior three days, but still came in at 207% above average. This implies that the stock has some selling resistance above 80. For those long the stock, however, the BGU low at 69.54 remains your maximum selling guide.

 

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Netease (NTES) exhibits some volatility here as it chops around in a range just above the 50-day moving average. The moving average undercut & rally (MAU&R) that I told members to be on the lookout for on Monday did produce a nice upside move. With the stock chopping around here and holding well above the 50-day line, it is not in any kind of lower-risk entry position, long or short.

My tendency here would be to take the long trade profit on the MAU&R and see whether NTES can settle down and set up again along the 50-day line. Of course, anyone who bought the stock on Monday can simply use the 50-day line as a maximum downside selling guide.

 

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Notes on other Chinese names discussed in recent reports:

JD.com (JD) found volume support at its 10-day moving average on Thursday and proceeded to log a new all-time high on Friday. The stock did stall to close about mid-range on heavy volume. In any case, the stock is extended in this position, and I would wait to see whether it can settle down and set up again before taking on a new position or adding shares to an existing position in the stock.

Momo (MOMO) moved back up to its highs on Friday after finding support at the 10-day moving average on Thursday. Earnings are expected to be reported this week, so there isn’t much to do here ahead of the report.

Applied Optoelectronics (AAOI) held a pullback to the top of its base and the 60 price level on Thursday, which put it in a lower-risk entry position at that point. On Friday AAOI settled down to hold the 10-day moving average on light volume, which is constructive.

My preference is to look to buy the stock closer to the 60 price level. Given that the stock rallied back to the top of the week-long price range on Friday, a pullback to the 60 level as the stock continues to consolidate would be normal. Otherwise, if this breaches the 60 price level on heavy selling volume, all long bets would be off at that point.

 

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Snap (SNAP) may be morphing into a short-sale target after running into resistance at the declining 10-day moving average on Friday. The stock had previously posted an undercut & rally move after undercutting the prior 18.90 low in the pattern last week after earnings.

Despite the big index rally on Friday, SNAP could not get anything going, and ended up reversing to close down on the day as selling volume picked up slightly. Notice also the bright red colors dominating my indicator bars at the top of the chart, a clear Code Red set-up. For this reason, I now view SNAP as a short, using the 10-day line as a tight upside stop. Surprise!

The flip side is that if the stock can come down with volume drying up, then it may be able to hold in a Wyckoffian Retest type of long set-up. But this will likely have much to do with the general market action this coming week.

 

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Twitter (TWTR) is also looking questionable here after failing on what initially looked like a strong flag breakout earlier in the week. Like SNAP, the stock could not hold a rally on Friday and reversed back below the 10-day moving average to close down on the day. Volume came in below average and was lighter than Thursday’s volume, but the action looks sloppy at best. Furthermore, it does not provide any semblance of a lower-risk entry opportunity, and a test of the 20-dema down at 17.80 may be in store for the stock.

 

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First Solar (FSLR) broke below its 200-day moving average on Thursday morning, which as I discussed in my Wednesday report would trigger a short-sale at that point. That trade would have worked only briefly, however, as the stock found support at the 20-day exponential moving average and then turned higher.

That qualified as a supporting pocket pivot, as I tweeted Thursday night, and the stock continued higher on Friday. This is the type of action that requires one to be alert to changing intraday conditions, but is admittedly difficult to deal with in either direction. However, if one was alert to the market’s oversold bounce potential per my pre-open blog post, then buying at the 20-dema would have presented the most opportunistic entry.

Given the deleterious market action at the time, however, that was likely a big “if.” But this did not prevent the Ugly Duckling from showing up and saving FSLR from what looked like a shortable set-up right after the open on Thursday. On the other hand, FSLR isn’t a true leader in this market, so is likely not one to focus on as the market tries to resolve this week’s volatile action.

 

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In my Wednesday report I referred to Impinj (PI) as “too volatile” to mess with in this current environment following Wednesday’s brutal sell-off. Interestingly, the stock turned into one of the less-volatile names that I follow as it has spent the past two days holding tight at its 10-day moving average after spinning around in wild fashion over the first three days of the week.

Friday’s volume came in at “voodoo” volume levels of -59% below average. This would therefore put the stock in a lower-risk buy position using the 10-day line as a tight selling guide. But, as I indicated on Wednesday, if the general market starts to get into trouble this name tends to be volatile, which in the popular investment vernacular basically translates to “down big in a hurry.” Otherwise, if the market can stabilize this coming week, PI would present a potentially actionable, new long idea.

 

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Most stocks on my long watch list are in positions that remain unclear. That doesn’t necessarily present a problem. If they are holding near-term support then they remain viable, but so far there isn’t much I would consider to be in a lower-risk buy position. Herewith my notes on those not already discussed in this report:

Activision Blizzard (ATVI) is not in a lower-risk entry position, but could have been viewed as buyable Thursday morning at the 20-dema.

Arista Networks (ANET) is not in a lower-risk entry position, so can simply be monitored for support at the 20-dema.

Cavium (CAVM) is flopping around its recent base breakout point, and is not acting coherently enough to determine whether this is a long or short now. Stay tuned on this one.

Citigroup (C) is flopping around its various moving averages in volatile fashion, and would at least need to settle down before making a determination as to a lower-risk entry for the stock, long or short.

Edwards Lifesciences (EW) is holding up reasonably well as it never broke below its 10-day moving average. However, it is not in a lower-risk entry position here, and likely needs to set-up again before it can be considered as such.

Electronic Arts (EA) remains just above its prior BGU intraday low of 104.76. On the long side, this can be considered buyable as close to that low as possible while using it as a tight selling guide. Currently the stock is trading along its 10-day moving average with the stock ending the week at 107.64.

iRobot (IRBT) is still way extended but holding above its 10-day moving average which can be used as a tight selling guide. Otherwise, the 20-dema down at 85.11 would serve as a wider selling guide.

ServiceNow (NOW) failed to hold the $100 price level for the second time this week, reversing back below the Century Mark on Friday on above-average volume. This is in no-man’s land to some extent, since the failure at the $100 Century Mark could also be seen as a short-sale signal using Livermore’s Century Mark Rule in Reverse. If that’s the case, then one would consider the stock a short here and then use the $100 level as a tight upside stop, but it is difficult to draw any firm conclusions here, long or short, in my view.

Square (SQ) is holding along its 10-day moving average after dropping back into the three-week consolidation it has formed since its early May buyable gap-up move after earnings. For now, the 20-dema at 19.25 would serve as a reasonable selling guide.

Take-Two Interactive (TTWO) is chopping around and not presenting any kind of lower-risk entry yet. It likely would need more time to set up again, at best.

Veeva Systems (VEEV) is expected to report earnings this coming week, but the stock has continued to move higher. On Friday, it gapped up to a new high on strong volume, but stalled to close in the lower part of its daily trading range. My preference here would be to bag profits on the stock ahead of earnings and then wait to see what develops after the report.

Western Digital (WDC) looks like a short as it wedges back up into its 20-dema line after busting through the line on Wednesday. Volume has remained below average for all of May, interestingly, which seems to imply a lack of conviction by investors one way or the other. If one chose to test this out as a short here, then using the 20-dema as a tight upside stop is advised.

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.

It’s clear to me that things are getting a bit sloppy here, despite the ability to catch some nice oversold bounces on the long side on Thursday morning. Those trades lost their upside momentum on Friday, and now most leading stocks sit somewhere in no-man’s land.

This likely means that at best we need to spend some time consolidating, both in the indexes and in leading stocks. As I wrote on Wednesday, “This sell-off could be temporary, or it could be the start of something much worse.” Right now, there isn’t any conclusive evidence regarding either outcome. But that is not necessarily a problem.

If you sell into extended strength in swing-trader fashion as I do, you are likely mostly in cash. If you take a more intermediate-term approach and give your stocks more room to swing about, then your task is quite simple and concrete.  If stocks bust your selling guides, then you are gone, no questions asked, and that will naturally force you out of a worsening market environment, should that be the ultimate resolution to the current action.

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 no positions, 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.