The Gilmo Report

May 31, 2017

May 31, 2017

The market’s story is best told by a chart of the NASDAQ 100 Index, which has been streaking higher as it left its much broader parent, the NASDAQ Composite Index, behind. From my perspective, the narrowness of the rally in the big-stock NASDAQ names relative to the rest of the market is a cautionary sign unless we begin to see things broaden out, which I think is a reasonable possibility




As I tweeted yesterday morning (follow me at @gilmoreport), some of the upside extension in leading stocks prompted me to sell into the strength and take profits on a swing-trading basis. When I do this, it is mostly as a defensive move, where I at least look to back away and wait to see how the upside extension plays out.

Often, an opportunistic pullback presents itself, as it did two Wednesday’s ago. Otherwise, there is always the possibility that a true correction develops, in which case I would expect the short-side to begin developing as leaders potentially start to break down. But so far that has not been the case.

The narrow outperformance of the NASDAQ 100 names in combination with the small-cap Russell 2000 Index rolling back below its 50-day line yesterday underscores the bifurcated nature of this market. To its credit, we can see on the daily chart of the Russell’s close proxy, the iShares Russell 2000 ETF (IWM), that the index found support off the intraday lows as volume spiked.

On the other hand, the Russell is back below its 50-day moving average, and I’d like to see the index regain the 50-day line in a move to sync up with its larger-cap brethren.




Overall, however, the major market indexes like the NASDAQ Composite and the S&P 500 Index, below, look the same as they found volume support today after an early-morning spin-out that saw the Dow drop over 80 points intraday. On its face, the S&P’s action just looks like big-volume support at the top of the prior range with a strong close near the highs of the day. For that reason, it can’t be seen as bearish, although there are areas of the market that are in fact acting bearishly.




One such area of concern is the financials, which have broken down sharply over the past couple of days, as the chart of the SPDR Select Sector Fund (XLF) illustrates below. The XLF rolled over on what looks to be a retest of the prior May low on heavy volume today, led by big-stock financials like Citigroup (C), Bank America (BAC), J.P. Morgan (JPM), and Goldman Sachs (GS) (which broke below its 200-day line today), just to name a few.




This would seem to argue for lower interest rates ahead, perhaps looking for a “one and done” from the Fed if they raise in June. This gets me looking more seriously at gold and the gold miners. The SPDR Gold Shares ETF (GLD) has been pushing above its 50-day moving average for the past several days since posting a gap-up pocket pivot on May 17th. My tendency here would be to look for any weakness below the 120 level down to the 50-day moving average as a tighter entry. The 50-day line would then serve as a tight selling guide.




If I were interested in going long gold-related stocks as a proxy for gold itself, my first choice would probably be Franco Nevada Corp. (FNV). The company is more of a pure-play on the price of gold since it doesn’t do any mining. Instead it bills itself as the leading gold royalty and streaming company, which is like what Silver Wheaton (SLW) does with silver.

In any case, FNV is the strongest-acting gold-related name on my list. Today it posted a five-day pocket pivot off the 10-day line. If you count May 18th, nine trading days ago on the chart, as a supporting day, then you could consider today’s action a bona fide ten-day pocket pivot. In any case, I would prefer to buy the stock closer to the 10-day line, if possible, using the line as a tight selling guide.




With the NDX plowing forward, most of the big-stock names have become as extended as the index, which is of course no surprise. Tesla (TSLA) is a nice example as it performs its own version of the Nutcracker Suite, squeezing shorts in the most painful way.

Yesterday the stock broke out to all-time highs on strong volume, and kept up the pace today on even higher volume. The price move was not as great as yesterday’s, so the higher volume reflected the fact that some profit-takers did come in to meet the demand, but not enough to knock the stock back to the downside. Short-term I would consider the stock extended enough to make any entry up here sub-optimal.




As TSLA runs over the shorts, other big-stock NASDAQ names have become extended for the most part. My notes on each below:

Notes on other big-stock NASDAQ names:

Apple (AAPL) has dropped below its 10-day moving average, and closed near its lows today on higher selling volume as it meets up with its 20-dema. This could be considered a lower-risk entry spot, if AAPL can hold support at the 20-dema.

Alphabet (GOOGL) got within 40 cents of its $1,000 Millennium Mark this morning but failed to clear it, pulling down today on above-average selling. The 10-day line at 972.79 would constitute the nearest support level. (AMZN) cleared the $1,000 Millennium Mark yesterday, but was unable to hold the move. It backed down today but found support near its 10-day moving average to close at 994.62, still within 1% of the Millennium Mark.

Facebook (FB) pulled an outside reversal to the downside today on above-average volume. Early in the day it looked set to break out to all-time highs, but that move did not hold. The 10-day line at 149.49 represents near-term support.

Netflix (NFLX) tested the 160.55 of last Thursday’s gap-up pocket pivot breakout to new highs and closed in the upper half of its trading range on light volume. Pullbacks to the 160.55 level would remain lower-risk entries for the stock, while the 10-day line at 159.06 represents near-term support.

Nvidia (NVDA) became even more extended this morning after meeting up with and deflecting upward off its 10-day moving average last Friday. The stock closed down slightly on above-average volume, but needs time to set up again if it is to present a more optimal long entry opportunity from here.

We have seen a change of character in several of the big Chinese leaders, including those on the Gilmo China Five list. Momo (MOMO) closed below its 50-day moving average yesterday for the first time since the first week of January. However, today it regained the 50-day line on heavy supporting volume.

The heavy volume, however, was not able to produce a more substantial bounce off the 50-day line today as the stock mostly churned around. But it was still able to close above the line, putting it in a theoretically lower-risk entry position here using the 50-day line as a tight stop.




Other Chinese-related names look a little toppy, at least on a short-term basis, per my notes below:

Alibaba (BABA) rolled below its 10-day line today on about average volume, bringing the 20-dema at 120.97 as near-term support. (JD) rolled below its own 10-day line on heavy selling volume, bringing the 20-dema at 39.35 as your next reference for near-term support.

Weibo (WB) has slid further below its 10-day line, but is still holding above the 20-dema at 70.24 and the 69.54 intraday low of its May 16th buyable gap-up move following earnings. Pullbacks to the 20-dema would be your first reference for a potentially lower-risk entry opportunity.

Netease (NTES) has pulled back down to its 20-dema on average volume, which may present a lower-risk entry using the 20-dema at 283.45 as a tight selling guide. Otherwise, the 50-day line at 277.41 remains the next reference point for near-term support.

Opticals are holding up as Applied Optoelectronics (AAOI) remains above its 10-day moving average with volume drying up. Any low-volume pullback closer to the 10-day line at 67.76 would offer a lower-risk entry from here.




Lumentum Holdings (LITE) is a similar situation to AAOI. Today it found some support along its 10-day moving average and closed up and off the line on light volume. The stock has had a sharp move since coming up through its 50-day moving average in early May, so would be entitled to taking a little time to back-and-fill as it consolidates those gains.

Ideally, some tightening up along the 10-day line at 55.93 as volume continues to decline would present a very coherent, lower-risk entry spot, should that occur. For now, the 10-day line serves as your first reference for near-term support with the 20-dema at 53.89 serving as lower support.




Snap (SNAP) is consolidating normally along the confluence of the 20-day exponential moving average and the 50-day moving average as volume declines. Volume levels evaporated down to -58% below average today, constituting a “voodoo” volume signature and pullback to the 20-dema.

This puts the stock in a lower-risk entry using the 20-dema as a tight selling guide. As I tweeted yesterday, my sense was that after the sharp undercut & rally move followed by another sharp move back above the 50-day line, SNAP needed at least a little time to consolidate those gains and set up again. My preference, therefore, is to seek to enter the stock here along the 20-dema as volume dries up nicely.




Twitter (TWTR) posted a five-day pocket pivot yesterday as it regained the 10-day moving average on about average volume. Today the stock held the 10-day line after testing the 20-day exponential moving average earlier in the day. This puts the stock in a lower-risk entry position using either the 10-day or 20-day lines as tight selling guides.




Nutanix (NTNX) failed very quickly yesterday on the bottom-fishing buyable gap-up move it had last Friday when it broke below the 19 price level. That was the intraday low of Friday’s BGU move, so it served as a tight selling guide. Once that was broken, however, and one was stopped out, as I was, the next thing to look for was possible support at the lows of last Friday’s gap-up “rising window.”

That’s what the stock did today as it filled the gap and then rallied as volume declined but still came in at above average. Given the sharp move off the lows near the 14 price level after last Friday’s BGU, a gap-fill move is perhaps the more logical entry once the BGU failed. Sometimes this is how a BGU can play out if it fails. It then turns into a gap-fill type of move that can be bought at a lower-risk point at the lows of the rising window.




Tomorrow morning, keep an eye on Palo Alto Networks (PANW), which could post a bottom-fishing buyable gap-up move. As I write after the close, the stock is trading up to 133.50, which would put it just below its 200-day moving average, as I’ve highlighted on the chart below.

If the stock can clear the 200-day line at the open or shortly thereafter, the 200-day line can serve as a tight selling guide and reference for support. Also, keep an eye on higher relative strength cousin-stocks in the cyber-security area, such as Fortinet (FTNT), not shown, which has pulled down to logical support at its 50-day moving average.




Speaking of BFBGUs, look at an old friend of ours, Japanese/Asian internet content name Line Corp. (LN). LN had a brief move following its IPO in mid-July of last year when it was priced at $32.88 a share. That move lasted about eight weeks before the stock topped in late September and began a steep slide to the downside that ended in February of this year.

Since then the stock has been trying to work its way back to the upside. Most recently, LN had been acting constructively along the 20-day exponential moving before gapping up above its 50-day moving average today on volume that was 90% above average. The fact that it held right above the 50-day line makes this an easy trade. Buy the stock here using the 50-day line as a tight selling guide, and then see if the Ugly Duckling can work his magic.




Notes on other long ideas discussed in recent reports, some with charts, some without.

Activision Blizzard (ATVI) is holding tight and just above its 10-day moving average. It posted a pocket pivot volume signature today but was too extended from the 10-day line to qualify as a pocket pivot. Watch for a pullback to the 10-day line as your first reference point for a lower-risk entry opportunity.

Arista Networks (ANET) posted another pocket pivot at the 10-day line today on volume that was likely related to month-end activity. Nevertheless, the stock is in a lower-risk entry position using the 20-dema as a tight selling guide.




Cavium (CAVM) got shoved into its 20-dema today on light volume. This puts it in a lower-risk entry position using the 20-dema at 72.43 as a tight selling guide.

Citigroup (C) has broken down with the rest of the financials but is holding support at the 50-day line. The group strikes me as a laggard area of the market, so I’m not necessarily interested in this unless it can show some volume support off the 50-day line.

Edwards Lifesciences (EW) is slightly extended from the 10-day line. Pullbacks to the line would offer lower-risk entries.

Electronic Arts (EA) remains extended. Watch for pullbacks into the 10-day line at 110.17 as potentially lower-risk entries.

First Solar (FSLR) was on fire yesterday as it streaked to a higher high on heavy volume. The stock then pulled down closer to the 10-day line as volume dried up to -27%. This puts it in a lower-risk entry position using the line as a tight selling guide.




Impinj (PI) pulled right into its 10-day moving average today on increased selling volume but still below average. This puts the stock back in a lower-risk entry position using the 10-day line as a tight selling guide.

iRobot (IRBT) finally got hit with some volume selling today as it broke below its 10-day moving average for the first time since its late April buyable gap-up move, when I first discussed the stock as buyable (see April 30th report). If I’m long the stock the 10-day line would serve as my trailing stop.

ServiceNow (NOW) has pulled back for two days after getting extended from the $100 Century Mark and hitting an intraday peak of 106.80 yesterday morning. Look for a pullback to the 10-day line at 102.38 as a possible lower-risk entry opportunity.

SolarEdge Technologies (SEDG) is sitting at its 10-day moving average in a lower-risk entry position using the 10-day line as a tight selling guide. Alternatively, the 20-dema down at 17.81 would present a more opportunistic entry, should that occur, but the stock looks buyable here along the 10-day line.




Square (SQ) is still way extended. Pullbacks to the 10-day line at 21.41 would be your next reference for lower-risk entry opportunities, if you can get ‘em.

Sunpower (SPWR) has pulled into its 10-day moving average at 7.80 on light volume. The 200-day moving average at 7.62 would be your next reference for support should the pullback continue further, although the stock looks buyable here using the 200-day line as a maximum selling guide.

Take-Two Interactive (TTWO) remains extended and likely in need of some time to consolidate its prior strong gains over the past five weeks. The 10-day line at 73.07 is your reference for near-term support.

Veeva Systems (VEEV) reversed off its peak yesterday on heavy selling volume. This looks climactic on a near-term basis. My inclination would be to take profits here, assuming one hasn’t already, and let the stock settle down and potentially set-up again.




Western Digital (WDC) reversed today on above-average volume. Look for the 10-day line at 88.43 to serve as near-term support.

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). On rare occasions, I will also employ a 65-day exponential moving average (thin black line).

The weakness in financials looks cautionary, but the rest of the market doesn’t seem to be all that concerned about what the financials are doing. They may simply be indicating that rates aren’t going to rise as much as everybody thinks they are in 2017. The action in the dollar, bonds and gold seems to argue in favor of this possibility.

In the meantime, I welcome any pullbacks in the market and leading stocks, assuming they remain constructive and well-contained, as potential buying opportunities. In my case, they often represent lower-risk re-entry opportunities. As far as I’m concerned, it remains a simple matter of handling your own stocks the way you see fit and per your own trading plans and risk-management methods.

For the most part I see leading stocks pulling into logical areas of support, mostly in constructive fashion. Meanwhile, the action in the primary indexes remains bullish, while the laggards like the Russell 2000 could be in position for a resurgent move back above its 50-day moving average. Play it all as it lies. That is all.

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 NTNX, SNAP, and TWTR, though positions are subject to change at any time and without notice.

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