The Gilmo Report

September 17, 2017

September 16, 2017

The indexes keep stepping higher as they march to the tune of the QE band currently comprised of the Fed, the European Central Bank, the Bank of Japan, and others. At times the tune gets a little funky as it did on Thursday when the big-stock NASDAQ 100 Index names took a heavy dose of selling, but on lighter volume.

It looks very much like the NASDAQ Composite Index, which held up in similar fashion on Friday amidst heavy triple-witching options expiration volume. So far, the indexes are holding up near the highs as they consolidated the sharp move off the lows of over two weeks ago, in late August.

 

GR091717-$NDX

 

The $NDX and NASDAQ Composite sell-off on Thursday contrasted with the Dow Jones Industrials Index, which was up on the day, creating a suspicious divergence. But in this market divergences, convergences, or solar eclipses cannot help you predict where stocks will go next. All you can do is play the set-ups and keep your stops tight. Otherwise you can easily get lost.

The reality from an index point of view currently is that most of the major indexes are consolidating prior gains as they back and fill along or near their highs. Meanwhile, new highs are being confirmed by the much broader NYSE Composite Index, not shown, which also posted a new high on Friday.

 

GR091717-$SPX

 

Gold continues to pull back, mostly as the U.S. Dollar tries to stabilize and bounce off its recent lows. The SPDR Gold Shares ETF (GLD) is approaching its 20-day exponential moving average, but remains well above the prior four-month range breakout point at 123.31. Pullbacks closer to that price level would present lower-risk entries from here, although a constructive low-volume test of the 20-dema could offer a higher potential entry opportunity.

 

GR091717-GLD

 

The Financial Select Sector SPDR Fund (XLF) aptly illustrates the Ugly Duckling at work (or is it play) in this market. Last week the ETF was getting blasted through its 200-day moving average on heavy volume, looking like it was a cooked goose.

But as it undercut all the prior lows in its previous base it was less a cooked goose and more of an Ugly Duckling as it turned back up through all the lows of the prior base on an undercut & rally (U&R) move this past Monday. That took the XLF right up to the 50-dma, where it ran into slight resistance and backed down to its 20-dema on Friday.

Higher volume acted as supporting action at the 20-dema, and the XLF closed near its intraday peak. Frankly, I would not be surprised to see this push back above the 50-dma on a moving average undercut & rally type of move after shaking out below all the prior base lows.

 

GR091717-XLF

 

Members might notice that there are a number of pocket pivots among names on my watch lists and which have been discussed in recent reports. Some of this volume activity could be due to Friday’s triple-witching options expiration, but I will take this price/volume action at face value without trying to over-think it. However, I would also watch to see how this all plays out this coming week as we look for signs of confirmation that the action isn’t just a one-day wonder resulting from options expiration.

 

Big-Stock NASDAQ Names:

Apple (AAPL) made a decent attempt to retake its 20-dema on Friday but failed, closing just below the line on heavy options expiration volume. This still looks like a short to me, using either the 10-dma or the 20-dema as guides for upside stops. However, it’s not clear to me that this would be a big profit proposition if the general market keeps rallying.

 

GR091717-AAPL

 

Nvidia (NVDA) blasted out of what is technically a six-week base on Friday. Volume was huge as the stock picked up a big buy recommendation and $250 price target. That sent the stock scurrying to new highs on Friday, and it remains within buying range of the 174.56 breakout point for those of you who like to buy standard base breakouts.

 

GR091717-NVDA

 

Tesla (TSLA) posted a pocket pivot trendline breakout on Monday, as I discussed in Wednesday’s report, and then held tight over the next two days. This set up another breakout, this time a clean breakout through the highs of the handle in its current cup-with-handle base.

An interesting point I would make about both breakouts is that they occurred on relatively light volume increase of 9% and 6% above average, respectively. But both qualify as pocket pivot volume signatures, hence both breakouts were valid based on OWL methods that I use. The peak of the handle is an even 370.00, and TSLA closed at 379.81 on Friday. That’s less than 3% away, so the stock remains within buying range of Thursday’s handle breakout.

 

GR091717-TSLA

 

Amazon.com (AMZN) has shown zero follow-through to Wednesday’s pocket pivot, which I discussed in my report of that day. The next two days showed higher, above-average selling volume as the stock dipped back below its 50-dma. This is not what you would want to see, since a constructive pullback to the 50-mda would not only hold at the line but would also see declining volume.

It’s not clear to me whether this is just temporary options-related type of action, so this could still be in a buyable position using the 20-dema, 1% lower, as a reasonably tight selling guide. AMZN closed less than 0.2% below the 50-dma on Friday, so it’s not as if it is busting through the line with any kind of authority, so watch to see if this settles down when the new trading week starts Monday.

 

GR091717-AMZN

 

Alphabet (GOOGL) rolled over on Friday on higher selling volume. This isn’t on my long watch list currently since it would need to clear back up above the 50-dma on a pocket pivot or some other strong technical signature. It is currently a laggard among the big-stock NASDAQ names.

Facebook (FB) dropped below its 10-day moving average on Thursday on increased volume that was about average on the day. On Friday, the stock successfully tested the 20-dema and bounced, closing up on the day to post a pocket pivot at the 20-dema. This remains in a lower-risk entry position here, using the 20-dema as your selling guide.

If this market is going higher, I have little doubt that FB will eventually break out as well. It is the single, dominating, big-stock social-networking leader in this market and it sells at about 20 times forward estimates. Unless something goes seriously wrong with their business, don’t be surprised if the stock goes through the $200 Century Mark in any continued market rally.

 

GR091717-FB

 

Netflix (NFLX) is pulling back slightly after forming what is an eight-week cup formation. It has yet to build a handle, so we want to keep an eye out for this process to take place. With the 10-dma and 20-dema rising to meet up with the stock, those would be your reference points for lower-risk entries. The stock is currently 1.3% above its 10-dma, which is your first point of reference for a buyable pullback. So far, the stock has acted well since posting a pocket pivot at the 10-dma and 20-dema over two weeks ago.

 

GR091717-NFLX

 

Microsoft (MSFT) tested its 20-dema on Friday and rebounded strongly to post a pocket pivot on a re-breakout type of move to all-time closing highs. I suppose if MSFT is acting this well the market must be in good shape. And if you’re a believer in more upside for MSFT, then this would be an entry trigger on the long side, using the 20-dema as your maximum downside selling guide instead of the standard 7-8% for base breakouts.

 

GR091717-MSFT

 

Telecom-Related Names:

Arista Networks (ANET) continues to hold tight along its 10-dma and 20-dema. For now, buying it while it’s quiet along the 10-dma and 20-dema looks like a possible lower-risk approach here, using the 20-dema as a tight selling guide.

Lumentum Holdings (LITE) remains in an unresolved position between its 20-dema on the downside and its 50-dma on the upside. Over the past several days it has been shortable at the 50-dma and then buyable at the 20-dema. But all it’s really doing is consolidating on relatively constructive fashion as I see it, despite Tuesday’s big-volume reversal at the 50-dma.

That selling came on the day of AAPL’s new product event, where it was revealed that the new iPhone would include features like facial recognition. This feature makes use of vertical cavity surface emitting lasers, or VCSELs, which LITE makes.

In any case, the heavy selling on Tuesday didn’t carry any further as the stock stabilized along the 20-dema on Wednesday. On Friday, it held the 20-dema with volume picking up to 18% above-average. The stock therefore looks buyable here using the 55 price level as a maximum downside selling guide, although I would like to see it continue to hold above the 20-dema and the recent lows of its current three-week price range.

 

GR091717-LUMI

 

Bio-Tech/Medical Names:

Alexion Pharmaceuticals (ALXN) posted another pocket pivot, this time on Friday as it held tight along the 10-dma. This would create another actionable entry point, using the 10-dma as a tight selling guide. Otherwise, the more opportunistic approach would be to wait for a pullback to the 20-dema, assuming that were to occur.

Bioverativ (BIVV) failed to hold the 10-dma and sold off on heavy volume on Friday. It has been removed from my buy watch list.

Supernus Pharmaceuticals (SUPN) presented buyers with a nice entry opportunity on Friday as it pulled down to test the 20-dema. By the close, the stock was back above the 10-dma as well, posting a strong-volume pocket pivot for the day.

Note that Friday’s pocket pivot was the second of back-to-back pocket pivots at the 10-dma after Thursday’s stalling pocket pivot at the line. However, I would not necessarily chase the strength here and would look for a pullback to the 10-dma at 47.99 as a potentially lower-risk entry. The bottom line is that anyone who really likes the stock should have been on top of it at the 20-dema on Friday morning.

 

GR091717-SUPN

 

Vertex Pharmaceuticals (VRTX) has been unable to hold at its 20-dema and dropped below the line on Thursday. However, it is now testing the 50-dma, which would be the last-stand level of support for the stock. Technically, Friday’s action also showed up as a stalling pocket pivot at the 50-dma as the stock came within 1% of the line, so would be actionable using the 50-dma as a tight selling guide.

 

GR091717-VRTX

 

Chinese Names:

The China Three have become at least a China Four consisting of Alibaba (BABA), JD.com (JD), Sina (SINA), and Weibo (WB). All, however, are quite extended although BABA can be considered to be within range of a pocket pivot flag breakout using the top of the flag as a selling guide. It’s Chinese e-commerce cousin, JD, is extended from its 50-dma, so pullbacks to the 50-dma should be watched for possible lower-risk entries.

While these four continue their winning ways, I’m keeping an eye on Momo (MOMO) to see whether it will try and return to the list and make it a China Five once again. As of over a week ago, both JD and MOMO looked similar as they tracked tight sideways along their 10-dma and 20-dema following recent attempts at putting in lows after prior sell-offs.

JD was able to clear its 50-dma this week, but MOMO continues to drift lower in what looks like bearish fashion. So far, there have been no long triggers to get one into the stock, but it still bears watching, in my view. To come after the stock in a big way on the long side previously, I wanted to see it clear the 20-dema with some authority. But that hasn’t’ happened.

Now, with the stock drifting below the lows of the little sideways flag pattern it has formed since the end of August, we can now look for a different type of trigger that is within the realm of the Ugly Duckling. In this case, we can set our alerts on MOMO to trigger if it can rally back above the 36.88 prior low in the short flag. At that point, an undercut & rally (U&R) long entry would be triggered.

 

GR091717-MOMO

 

Cyber-Security:

 

Palo Alto Networks (PANW) can be described in pretty much the exact same way I described it in Wednesday’s mid-week report. So, I will. The stock is still consolidating after its post-earnings buyable gap-up (BGU) two weeks ago. So far it has held the 142.23 intraday low of that buyable gap-up, and as the 10-dma starts to catch up to the stock, it becomes buyable right here using the 142.23 price level as a selling guide.

 

GR091717-PANW

 

The cyber-security group is in fact starting to percolate here. Now we see Fortinet (FTNT) starting to round out the lows of a potential new base after getting shellacked back in late July. On Friday, the stock posted a pocket pivot at the 50-day moving average. I would look at any pullbacks to the 50-dma from here as lower-risk entries. However, the stock can be considered actionable here, using the 50-dma as a tight selling guide.

 

GR091717-FTNT

 

If you like extreme Ugly Ducklings, I’m noticing some signs of life in CyberArk Software (CYBR), which you can check out on your own. See if you can identify some of the BFPP (bottom fishing pocket pivot) type action in the pattern. I think, however, that the stock mostly helps to confirm the percolating that we are seeing under the surface in the cyber-security stocks, which have been laggards throughout the year.

 

Semiconductors:

Broadcom (AVGO) defied any attempts at shorting the stock at the 50-dma as it has now morphed back into a long by virtue of Friday’s pocket pivot at the 50-dma. Of course, I have discussed this as a stock that has been a two-sided situation that can be viewed as a short or a long depending on how it resolves itself as it moves sideways in what is little more than a potential new base. On Friday, AVGO pocket pivoted at its 50-dma, as well as its 10-dma and 20-dema, on strong volume. This triggers the stock as a long here, using the 50-dma as your selling guide.

 

GR091717-AVGO

 

As a supplier to Apple, AVGO’s action finds its confirmation in Skyworks Solutions (SWKS), another previously two-side situation as discussed in recent reports that has now resolved to the upside as a long. On Friday, SWKS broke out of a ladle-with-handle formation, which is just a cup-with-handle where the handle is longer than the cup and therefore has more the look of a ladle.

Whatever you want to call it, however, is irrelevant. But for you base-breakout buyers this one is very much within buying range and actionable here using one of the moving averages just below as a tight selling guide. I blogged on Friday that SWKS was just starting to break out early in the day, and by the close it printed near its intraday highs on strong volume.

 

GR091717-SWKS

 

Cloud Software Names:

Cloud names have taken a little bit of selling heat this week, but for the most part these pullbacks might just put them in lower-risk entry positions. Big-stock, grand-daddy of the cloud, Oracle (ORCL), got hit hard on Friday after missing on earnings Thursday. But it is not clear to me that this is necessarily a problem for the group.

Salesforce.com (CRM) has taken some heavy selling volume over the past four trading days and is now sitting right at its 20-dema. This is either a lower-risk entry, if it can hold, or the stock is going to bust the line and make a move toward its 50-dma. If you like the stock, this would be your lower-risk entry point if the stock can stabilize at the 20-dema with volume drying up.

ServiceNow (NOW) has found support along its 20-dema over the prior two trading days and looks okay here. I would consider this buyable here based on the late August pocket pivot base breakout, using the 20-dema as a tight selling guide.

 

GR091717-NOW

 

Square (SQ) broke out of a seven-week base on Thursday and is still within buying range of the breakout, using the 10-dma as a tighter selling guide, although you dogmatists can use the standard O’Neil-style 7-8% selling guide. I, however, do not recommend this since I consider it to be outmoded and statistically false in the current market environment.

Tableau Software (DATA) posted a continuation pocket pivot on Monday on a gap-up move off the 10-dma. Pullbacks to the 10-dma would allow for lower-risk entries from here, using the line as a selling guide. It has been one of the stronger cloud names since breaking out on August 3rd.

Workday (WDAY) has pulled back below its prior base-breakout point following the successful pricing of a $1 billion convertible bond offering earlier in the week.

 

GR091717-WDAY

 

Internet Related:

GrubHub (GRUB) has violated its 20-dema on heavy selling volume. This is quite negative in the face of pocket pivots seen earlier in the week. This takes the stock off the table as a long idea until it can stabilize and set up again.

Yelp (YELP) posted a pocket pivot at its 10-dma on Friday, which makes it actionable here, using the 10-dma as a tight selling guide.

Social-Networking Names:

Twitter (TWTR) looks like it needs to retest its 50-dma, so I’d lay back and see if a lower-risk entry opportunity doesn’t present itself on just such a pullback. So far, the stock has acted well since I first discussed it in last weekend’s report.

Snap (SNAP) pulled further into its 10-dma on Thursday as volume declined to -47% below average. That led to a small rebound on Friday as volume picked up on the day. I view this as buyable here using the 10-dma, although Thursday’s pullback was your best lower-risk entry closer to the 10-dma.

 

GR091717-SNAP

 

Solar Names:

First Solar (FSLR) came with 32 cents, a little over ½ of a percent, of its 50-day moving average on Thursday before turning back to the upside. It then went on to post a subtle pocket pivot coming up through the confluence of its 10-dma and 20-dem. That in turn led to a big-volume breakout from a six-week base on Friday.

That breakout stalled to close just below the mid-point of the gap-up daily price range. However, it did hold above the 50.21 peak in the base, closing at 50.45 on Friday. If you are a base-breakout buyer, then the stock is certainly well within buying range of Friday’s breakout, but OWL traders would have been in the stock on Thursday based on the early entry provided by the pocket pivot.

 

GR091717-FSLR

 

SolarEdge Technologies (SEDG) is slightly extended following Tuesday’s pocket pivot off the 50-day moving average. From here I would expect the stock to perhaps consolidate that move by pulling into the confluence of its 10-dma and 20-dema at 26.35 and 26.36, respectively. The stock closed Friday at 26.90 so technically is within buying range of the 10-dema, using that as a selling guide, but the closer to the 10-dma or 20-dema, the better.

 

Video-Gaming Names:

Activision Blizzard (ATVI) is now approaching the 20-dema, closing 56 cents above the moving average on Friday. This puts it within 1% of the line, which I consider a lower-risk entry point using the 20-dema as a tight selling guide. Volume was heavy on Friday, likely due to options expiration, so look for volume to dry up along the 20-dema early this coming week as a constructive sign.

Electronic Arts (EA) posted a pocket pivot at the confluence of its 10-dma and 20-dema on Friday. This keeps the stock in a lower-risk entry position here using the 20-dema or Friday’s intraday low at 117.75 as a tight selling guide.

Take-Two Interactive (TTWO) posted another continuation pocket pivot at its 10-dma, the second such pocket pivot in the pattern over the past seven trading days. This keeps the stock in a lower-risk entry position along the 10-dma, while using the line as a tight selling guide.

 

GR091717-TTWO

 

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).

Another North Korean missile shot over the extreme northern portion of Japan sent the futures down slightly Thursday evening, but by Friday’s open the selling had dissipated. This is typical for news events of a certain category, and we can certainly lump this news into the NoKo Missile Mania category. When a certain category of news first hits, making it truly news in the sense of being “new,” the market will generally sell off hard in reaction.

That’s what we saw a few weeks ago, in early August. By now, however, NoKo missile launches are decidedly old news, and the market just yawns. This is constructive, and perhaps the only new news regarding NoKo would be a U.S. attack on the rogue totalitarian state.

Meanwhile, we’re seeing a lot of breakouts in addition to the continued formation of constructive bases by a lot of leading stocks, many of which have been discussed in this report. There is, in fact, much on my list of long ideas that is currently actionable, either as a standard base-breakout or a subtler OWL type of entry, such as pocket pivots of various varieties (five-day, ten-day, bottom-fishing, and roundabout) or “voodoo” pullbacks.

For those of you who are new to the concept, I am what I consider to be an “OWL” investor, a concept I discussed at length in the introduction to my short-selling book, Short-Selling with the O’Neil Disciples: Turn to the Dark Side of Trading, published in 2015. OWL™ is an acronym for “O’Neil-Wyckoff-Livermore,” which is how I described the unique approach that my colleague Dr. Chris Kacher and I have developed in recent years.

The OWL™ is founded on the basic principles and philosophies of three great, but similar-thinking investors, William J. O’Neil, Richard D. Wyckoff, and Jesse Livermore. Because we move forward with the markets, adjusting and evolving our methods along the way, we can consider the OWL™ method to be evolved from its original foundations, including the CAN SLIM™ “system” popularized and sold by O’Neil.

In this market, I think the OWL approach gives one an edge, but we’re now seeing some more orthodox types of breakouts occurring, which I must think is constructive for the market as a whole. We’ve come out of a very volatile and jagged summer of 2017 with the indexes just starting to break out to new highs.

Previously, during the summer, such moves to new highs were met with voluminous and ominous selling, which slammed the indexes back to the downside. I must admit, based on the real-time evidence available at the time, the market was flashing numerous warning signals, at least based on historical norms.

But that’s the rub with this market – it doesn’t seem to have any muscle memory, and what it does one day does not necessarily predict what it will do the next, or even the day after that. Historical norms are not something this market abides by. That’s why the Ugly Duckling has been and remains a potent thematic force in this market.

For now, we can simply occupy ourselves by acting on the long set-ups we are seeing in real-time. The action over the past few days has been constructive, in my view, and argues for perhaps more upside this time around as the indexes break out to new highs.

On the other hand, as things start to look too good, we could see a sell-off come out of nowhere. But you have absolutely no way of predicting this, unless you are going to adopt a rigidly bearish view when the market breaks to new highs and insist on standing in front of the rally. At some point, that can be fatal.

If I’m going to stand in the way of a rally with a bearish trade, I would prefer to just use my UVXY 620 method as an intraday hedge. If things start turning ugly, the UVXY can then serve double-duty as an outright profit vehicle in a market decline. And the beauty, in my view, is that you don’t need to take a big position in the UVXY to obtain an effective hedge against a sharp sell-off. This keeps plenty of buying power available for long positions.

By now, you know the drill. Keep your entries to the lowest lower-risk points you can find as a way of keeping risk to a minimum. Invoke the Ugly Duckling when necessary, and keep your trades concrete, with strict entry and exit points that are well-defined. After that, just play it as it lies.

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 a position in FB, NVDA and 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.