The Gilmo Report

May 24, 2017

May 24, 2017

The major indexes took four days to recover last Wednesday’s steep one-day losses, something that is not unusual for this Ugly Duckling market. One of the major factors that has enabled the market to maintain its paces has been the ability of certain groups to step up and provide support to the rally at critical points along the way. In many ways, this sort of rotational action is healthy and constructive.

Most recently the Chinese names have been significant drivers of market upside, and this was preceded by the big-stock NASDAQ names. On Monday, optical names of all stripes went nuts on the upside after an analyst made comments regarding “metro upgrades” in China. China was previously viewed as an area of slowing business for telecom and fiber-optic-related names, but the utterings of a single analyst to the contrary were enough to set the group on fire.

My favorite name in the group has been, of course Applied Optoelectronics (AAOI), which has been moving higher since posting a strong pocket pivot off the 50-day moving average back on May 5th. That led to a new-high base breakout, and then a pullback to the top of the base and the 10-day moving average last Thursday following the big market sell-off.

AAOI also posted a pocket pivot off the 10-day line on that day, and then posted another one on Monday as it again launched to a new high on strong buying interest. Over the past two days it has settled down a bit and looks to be in a buyable positon using the 10-day line as a selling guide, although I’d prefer to buy into a pullback to the 10-day line should that occur.

 

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When it comes to the opticals, to steal a line from the second Star Wars movie, “There is another.” In this case this would be Lumentum Holdings (LITE), which recently broke out of a seven-month cup formation with a one-week handle, as I see it on the daily chart. LITE is pulling back into the top of the base as volume dried up to -64% below average today, putting it in a lower-risk entry position using the 10-day line as a tight selling guide.

Besides its telecom-related aspects, LITE also has a more compelling fundamental theme in the area of 3-D sensing technology. During its last earnings conference call, the company indicated that orders for 3-D sensing are ramping up significantly, and that there has been one large customer contributing to this substantially. Some have speculated that this is Apple (AAPL).

If that is true, then of course any formal announcement of such an order would probably send the stock gapping higher. But for now, all we can do is go with the current price/volume action and take it from there. Thus, this pullback to the top of the base puts the stock in a buyable position, end of story.

 

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As I wrote over the weekend, when I consider the market to be “cautionary” it does not mean “bearish,” and it is still a matter of watching your stocks. The bottom line for any investors is quite concrete: if trailing stops and selling guides are hit, then you let the market naturally force you out.

This would be the basic approach for those who move a bit slower, since there are also some, like myself, who sell into extended strength and then seek to use pullbacks like we saw on Wednesday as buying opportunities in a more active approach. These opportunities might result in nothing more than profitable swing-trades, or they can present constructive, lower-risk entries for favored stocks.

After today’s action, however, the NASDAQ Composite Index is right back up near its prior highs and looking like it wants to head higher. In addition, last week’s sharp price break looks like little more than a big-arse shakeout. In addition, the emergence of some new leadership helps to make the case for a potential continuation to higher highs.

 

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The S&P 500 Index shrugged off what looked like stalling action all the way up to post a new closing high today on higher trading volume. If the index can clear to all-time highs, then the action over the past week is little more than a good, old-fashioned “shakeout & breakout.”

 

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Chinese stocks have started to lose some of their momentum, but this is a relative term since most are way up there. Momo (MOMO), however, looks like it has put in at least a short-term top after reporting earnings yesterday before the open. The stock gapped higher at the bell, but reversed hard on heavy selling volume to close down on the day.

The selling continued today as the stock was pummeled again. With the 50-day moving average approaching, a rendezvous with this key moving average looks likely. Whether it can hold at that point and present some sort of Ugly Duckling entry opportunity remains to be seen, but it might be something to watch for.

 

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The rest of the stronger-acting Chinese names, Alibaba (BABA), JD.com (JD), and Weibo (WB), all not shown here on charts, remain extended and not in what I would consider prime long entry positions. However, BABA is sitting right at its 10-day moving average with volume drying up, which is constructive.

JD is also trying to hold at its 10-day moving average, but likely needs some time to stabilize and set up again. WB is extended after last week’s buyable gap-up (BGU) move, but should be watched for a constructive pullback to the 10-day moving average at 73.18 as a lower-risk entry opportunity.

Netease (NTES) looks healthy here as it remains above its 50-day moving average. Volume came in just above average today as the stock closed above the 10-day moving average where it found support on above-average volume. This puts the stock in a lower-risk buy position using the 10-day line as a much tighter selling guide than the lower 50-day line.

 

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Among the big-stock NASDAQ names, Facebook (FB) looks like it is prepping for a move back up toward its prior highs. After breaking hard for its 50-day moving average last Wednesday, the stock was able to recover and regain its 20-day exponential moving average where it held very tight over the past three trading days. Today FB lifted off the 20-dema on above-average volume, which in my view is a buy signal within the base. Thus, the stock can be bought here using the 20-dema as a tight selling guide.

 

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Netflix (NFLX) may also be trying to set up here along its 10-day moving average after getting hit hard in last Wednesday’s general market sell-off. Volume dried up to -52% below average, which looks constructive. Given that the stock is not too far from its 20-dema at 155.63, I would consider this buyable here using the 20-dema as a tight selling guide.

 

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I’ve been working Tesla (TSLA) on the short side over the past few days since it failed to hold at the 320 price level last week, and I have been able to derive some short scalp profits in the process. However, over the past couple of days, as I’ve tweeted in real-time, I don’t get the sense that sellers are swarming the stock here.

Yesterday TSLA undercut the prior low from last Wednesday, and today turned back up through that low on increased buying volume. This is an undercut & rally move coming up through the 305.31 low, and is buyable using the 305.31 low as a tight selling guide. Keep in mind that based on TSLA’s closing price of 310.22 today, that is less than 2% away, so risk is well-contained.

 

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Notes on other big-stock NASDAQ names:

Apple (AAPL) is hanging along its 10-day moving average, and looks very much like NFLX here as volume remains below average. I might prefer a pullback to the 20-dema at 151.15 as a lower-risk entry, should that occur.

Alphabet (GOOGL) has moved to new highs on light volume, so remains in an extended position with no lower-risk entry points showing up currently.

Amazon.com (AMZN) is also pushing to higher highs as it gets ever closer to the $1,000 “Millennium Mark” and is now about 2% away. Volume has remained light, however, and the stock is currently not in any kind of lower-risk entry position. Pullbacks to the 10-day line at 961.87 might present lower-risk entry opportunities.

Nvidia (NVDA) is still well-extended from its prior buyable gap-up (BGU) and base breakout of 11 trading days ago. For now, the 10-day line down at 133.68 would be your first reference point for a lower-risk entry opportunity.

Snap (SNAP) looked like it was ready to launch higher this morning as it quickly pushed above the 20.50 price level. Allegedly, the move was caused by comments from one “Muddy Waters” to the effect that it was “too early” to short the stock right now. How comments from one source can trigger such a sharp intraday rally seems far-fetched. A more likely source of the move, however, was the fact that the company was presenting at the J.P. Morgan Global Technology, Media, and Telecom Conference.

Adding to the intrigue, at around 7:45 a.m. PST my time, the stock was suddenly hit with a million or so shares of selling that, as I blogged at the time, had the look of a “fat thumb” order entry error. Perhaps one or two too many zeroes on that order screen? In any case, it sent SNAP right back down to the 20 price level where it began the day. Eventually, the nutty action dissipated and SNAP settled down.

It then regained its mojo and moved back up to the high of the day, closing at 20.53. After-hours as I write, the company announced continued ad discounts into June, which has the stock trading down about 20 cents. I don’t see this as a big issue, and might consider a pullback in the morning as a buying opportunity, assuming it holds until then.

SNAP has been able to hold tight within a six-day bull flag following the undercut & rally move of about two weeks ago when it pushed back above both the 18.90 prior low from March and the April low at 19.73. This looks like it wants to go higher, particularly with volume drying up in the extreme yesterday as the stock held excruciatingly tight along the 20 price level.

My view is that if SNAP can hold the 19.73 low of mid-April, it remains in play as a long idea, based on the current constructive action. This has the look of a strong Wyckoffian Retest where the stock has hardly even pulled back to test the prior lows of two weeks ago.

 

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Twitter (TWTR) is looking quite unloved as it pulls back into its 20-day exponential moving average. This action is occurring after a breakout attempt last week that failed. That breakout came out of a short flag formation, which may have been somewhat premature.

With the stock sitting right at the 20-dema, this puts it in a lower-risk entry position using the 20-dema as a tight selling guide. With selling volume coming in below average, at least sellers aren’t swarming the stock, so it could hold here at the 20-dema or the 200-day line down at 17.60. In this case, buying anywhere around here and using either line as a tight selling guide is feasible.

 

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First Solar (FSLR) apparently wasn’t too happy with my comments over the weekend, wherein I dissed the stock by writing that it perhaps wasn’t a big-stock leader in this market. Well, the stock proved me wrong today by launching off the 10-day moving average on above-average buying volume today.

The action wasn’t sufficient for a pocket pivot, however, if one counts the down-volume day of five trading days ago in the mix. However, that day was in fact a supporting type of pocket pivot off the 20-day exponential moving average and back up through the 200-day line on above-average volume. For that reason, we can look at that as a positive day, and thus today’s action could be considered a modified pocket pivot off the 10-day line.

 

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Solar names have been coming to life lately, and that includes solar stalwarts like Sunpower (SPWR) and SolarEdge Technologies (SEDG). Like FSLR, both names are coming from deep Ugly Duckling positions way down in their patterns. I don’t show SEDG here on a chart, but you can see SPWR’s chart below as it powers through its 200-day moving average on strong volume over the past two days.

Yesterday’s move qualified as a bottom-fishing buyable gap-up coming up through the 200-day line. SPWR followed through today by continuing a bit higher on above-average volume. This may have some legs here, and I consider the stock buyable here using the 200-day line at 7.69 as your selling guide.

The stock is fairly cheap in terms of its single-digit price, so any movement back toward the 200-day line would not represent that much of a move on an absolute basis. It would, however, offer a lower-risk entry opportunity, although I’d have to say that the stock doesn’t seem to display any interest in pulling back from current levels.

 

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Take-Two Interactive (TTWO) illustrates the Ugly Duckling character of this market quite well with its action so far this week. On Monday after the close TTWO announced that the release of its much-anticipated new video game, “Red Dead Redemption 2” would be delayed until Spring of 2018. This immediately sent the stock down to about 60-62 in after-hours trade.

However, this was merely a buying opportunity for anyone privy to this in the after-hours on Monday. The next morning TTWO announced earnings and beat handily, sending the stock gapping up to 72.50 at the open. It then proceeded above the 76 level and by the close round-tripped to close at 72.83 and right near its opening price.

However, that was technically a buyable gap-up using the 71.16 intraday low of yesterday as a selling guide. TTWO held that low today and launched higher, clearing to 77.73 by the close. The stock is well out of buying range now, but it does illustrate how one sometimes can profit handsomely by taking a highly opportunistic and courageous approach when the situation is just right.

In this case, one could have bought the stock around 62 on Monday in the after-hours given that it was about a 10% decline. With earnings expected the next day, the worst that could happen is that the stock would probably trade down where it already was in the after-hours on Monday.

 

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Notes on other long ideas discussed in recent reports.

Activision Blizzard (ATVI) reversed off its highs yesterday on heavy volume, but has stabilized at the 10-day line. This is best bought on pullbacks to the 10-day line at 56.36.

Arista Networks (ANET) is holding tight along its 20-dema as volume dried up to -48% below average. This puts the stock in a lower-risk entry position using the 20-dema as a tight selling guide, or the 50-day line as a much wider selling guide.

Cavium (CAVM) is holding along its 10-day moving average as it tries to settle down after getting hit hard in last Wednesday’s market sell-off. I like it on low-volume pullbacks to the 10-day line, even better if it pulls down to the 20-dema or 50-day moving average.

Citigroup (C) has held above its 50-day moving average, and is back up near its 2017 highs and within its current base. It appears that pullbacks to the 50-day line are your best lower-risk entry opportunities.

Edwards Lifesciences (EW) is holding tight at its 10-day moving average with volume drying up to -47% below-average today. That puts it in a very nice lower-risk entry position using the 10-day line as a tight selling guide. and likely needs to set-up again before it can be considered as such.

Electronic Arts (EA) was buyable per my comments over the weekend after testing the prior BGU intraday low of 104.76 last week. Today it launched higher and off the 10-day moving average on strong upside volume.

Impinj (PI) was discussed over the weekend as being in a very low-risk “voodoo” buy position at its 10-day line with volume drying up in the extreme. The stock gapped up on Monday, setting up a mini-buyable gap-up move and has since continued higher. This one tends to be volatile, so watch for a pullback to the 10-day line as your next potential lower-risk entry opportunity.

iRobot (IRBT) is still way extended but holding above its 10-day moving average which can be used as a tight selling guide. Optimally, I’d like to see a constructive pullback to the 20-dema as a lower-risk entry opportunity.

ServiceNow (NOW) finally pushed through the $100 price level on Monday and held, even after announcing a $750 million convertible bond offering after the close on that day. It has since continued higher, but remains within buyable range of the Century Mark, using the $300 price  level as your selling guide.

Square (SQ) popped off its 10-day moving average on strong volume Monday and has since moved higher. It is now extended.

Veeva Systems (VEEV) is expected to report earnings tomorrow after the close. Nothing to do here until then.

Western Digital (WDC) shrugged off its recent weakness and posted a pocket pivot today on strong volume. This is buyable using the 10-day moving average as a selling guide.

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

As I wrote over the weekend, there was no evidence to warrant becoming conclusively bearish, while at worst things were cautionary. But many leading stocks have spent the past few days stabilizing and setting up again, with some currently sitting in lower-risk buy positions, such as FB, NFLX, TSLA, and others. Some have even blasted higher, such as TTWO and EA. Based on the precise set-ups we see in real-time, many of which I’ve covered in this report, stocks can be bought here, as I see it.

Most remain incredulous with respect to the insane persistence this market displays, even when there are so many things “wrong” out there. Today we had a downgrade of China by Moody’s Investors Service from A1 to Aa3, but that didn’t seem to faze U.S. markets much at all. Meanwhile, the media frets over the Trump agenda, and terrorist attacks persist in Europe.

But all of this seems to do little more than add mortar more bricks into the proverbial wall of worry. Perhaps this means that when it comes to the market ending in fire or ice, fire in the form of a big parabolic blow-off move might be the right call here. At least I’m pretty sure that is one outcome that the crowd is absolutely not looking for right here, right now. Take it from there.

Gil Morales

CEO and Principal, Gil Morales & Company, LLC
Managing Director and Principal, MoKa Investors, LLC
Managing Director and Principal, Virtue of Selfish Investing, LLC

At the time of this writing, of the stocks mentioned in this report, Gil Morales, MoKa Investors, LLC, Virtue of Selfish Investing, LLC, and/or Gil Morales & Company, LLC held positions in LITE, SNAP, SPWR, and TWTR, 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.