The Gilmo Report

September 24, 2017

September 24, 2017

The market indexes have an admittedly sanguine look to them which belies the turmoil going on under the surface with respect to what is going on with certain leading stocks. The chart of the NASDAQ Composite Index looks nothing less than constructive as the index pulls in off its recent highs and tests it 20-day exponential moving average on lighter volume.

 

GR092417-$COMPQ

 

The S&P 500 Index looks more or less the same, but it is doing slightly better as it only pulls back to its 10-day moving average on declining volume. From an index point of view, the market looks fine, and the rally that began in late August shows no signs of wavering or withering, at least based on the look of the index charts.

 

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Gold has continued to decline, with the SPDR Gold Shares ETF (GLD) pulling all the way back to its prior four-month range breakout where it also met up with the 50-day moving average on Thursday. This led to a small bounce on Friday, but volume was light as buyers showed little enthusiasm.

While the pundits cite the hawkish tone of the Fed on Wednesday as a reason for the yellow metal’s decline, the reality is that the GLD was already pulling down off its recent early September peak well before the Fed meeting. The pullback started in early September after what was already a relatively long uptrend off the early July lows.

It seems that whatever gold does, there is somehow a “reason” for it, ranging from the latest NoKo missile-launching to the prospects for Fed rate hikes. But in fact, the GLD has been doing its own thing since early July, and the latest pullback appears to be a normal bout of profit-taking and consolidating following a decent two-month uptrend.

Therefore, if we simply take the technical price/volume action at face value, this pullback to the 50-dma and the top of the prior range breakout represents a lower-risk entry point on the long side. If the GLD bounces with more vigor from here, then I’m sure there will be some “reason” for the move, but the bottom line is that the GLD can be tested here on the long side, using the 50-dma as a tight selling guide.

If it holds the 50-dma and rallies higher from here, then it may be indicating that the Fed is truly just blowing smoke, and the potential for any serious tightening of monetary policy going forward is not as great as many may think. A failure at the 50-dma that squelches the prior four-month range breakout, however, may offer a clue that the Fed is serious.

 

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We can see that the action in financials, which are seen as benefitting from higher interest rates, has been the exact opposite mirror image of the action in the GLD. The Financial Select Sector SPDR Fund (XLF) bottomed out in early September, precisely when the GLD peaked. Since then, both the XLF and the GLD have gone in opposite directions in a manner that appears to have predicted the Fed’s most recent policy announcement.

We might ask what the XLF and GLD knew before the Fed meeting and when they knew it, but the answer is easily found in their price action since early September.  Back in early September when it busted its 200-dma on heavy selling volume, the XLF looked like its proverbial goose was cooked. But if has magically and robustly rebounded in classic Ugly Duckling fashion since then, breaking to new closing highs this past week.

If the Fed is truly serious about moving forward with their incremental tightening and balance sheet trimming, then the XLF will likely hold this recent breakout and move higher. The proof, as they say, will be in the pudding, which in this case is the price/volume action of the XLF, the GLD, and of course, the U.S. Dollar.

 

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Big-Stock NASDAQ Names:

As I wrote previously in this report, the constructive action of the indexes belies what is going on with certain individual stocks. And this is more than evident in the action of Apple (AAPL) which has moved further below its 50-dma on heavy selling volume after breaching the line on Wednesday.

It has now filled the gap-up move of early July, which sets up the potential for a logical reaction rally back up to the 50-dma. Assuming this occurs on weak volume, this could set the stock up as a short entry near the 50-dma on just such a rally. In the meantime, AAPL demonstrates that underneath the hood, things are not as sanguine as they might appear on the index charts.

 

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Amazon.com (AMZN) is also looking weaker as it pushes to lower lows since failing to hold the prior week’s roundabout pocket pivot coming up through the 50-dma. This was shortable along the 20-dema earlier in the week per my prior comments, but is now slightly extended to the downside.

 

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Tesla (TSLA) is now failing on last week’s cup-with-handle breakout as it now tests its 50-dma. Selling volume on Friday was heavy as the stock broke sharply to the downside. It held just above the 50-dma, but is now in jeopardy of morphing into a full-blown base-failure type of short-sale set-up.

A weak rally off the 50-dma that runs into resistance at the 20-dema could set up a short-sale entry, so this should be watched for. TSLA also does a great job illustrating why it is better to buy stocks using early buy points such as the trendline breakout and pocket pivot the stock posted two weeks ago.

Buying the handle breakout last week would have simply left one with quick loss. Notice, however, that buying on the pocket pivot would have kept one in a lower-risk position, and perhaps able to exit promptly without a loss, and maybe even a small profit.

Friday TSLA declined to have its new Model 3 submitted for consideration for the 2018 North American Car of the Year Award, which may have had something to do with the sharp decline. In any case, it does raise material suspicions over the potential success of the Model 3, upon which TSLA has pinned its hopes for penetrating the broader, lower-end car market.

 

GR092417-TSLA

 

Alphabet (GOOGL) reversed to the downside on Friday after rallying up into the 50-dma on both Wednesday and Thursday. In my view, this remains a short on any further moves up into the 50-dma.

Facebook (FB) remains below its 20-dema but is just holding within what is now an eight-week base as it finally meets up with the 50-dma. Volume picked up slightly on Friday as the stock held support at the 50-dma, which looks like minor supporting action at the line after the stock close at about mid-range for the day. Technically, this puts FB in a lower-risk entry position here with the 50-dma serving as a convenient and tight selling guide.

 

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Netflix (NFLX) came close to posting a new all-time closing high on Thursday but fell 30 cents short of doing so by the closing bell. It has now fully completed a cup formation extending back to late July. If it is going to move higher from here, my guess is that it will need to form a handle to its current cup formation as a matter of properly consolidating the prior move up from the lows of the cup and the 50-dma. In my view, a breakout to new highs directly from here, without taking the time to build a handle, could be suspect.

Nvidia (NVDA) finally got hit with some selling following its prior base breakout. This occurred after TSLA announced it was partnering up with Advanced Micro Devices (AMD) to produce chips for self-driving cars. This sent NVDA back down towards it 10-dma on heavy selling volume on Thursday. On Friday, it churned around and stalled after trying to rally off the line to close in the lower part of its daily trading range.

Volume, however, was light, and NVDA did close just above the 10-dma. It is also holding well above its prior breakout point at 174.56, which puts it in buying range. If I were thinking about buying this pullback to the 10-dma, which is technically feasible, then I would simply use the 20-dema or the top of the base as a tight stop. No 7-8% O’Neil-style stop-loss for me, thank you very much.

 

GR092417-NVDA

 

Telecom-Related Names:

Arista Networks (ANET) has continued to forge new highs and is now well-extended from this past Monday’s base breakout. We’ll have to see what this looks like on a pullback from here.

Lumentum Holdings (LITE) could have been shorted Thursday morning per my comments in Wednesday’s report as the stock did push lower from there. It has now undercut all the lows in the four-week price range it began forming in late August, which could trigger a rally back up into the 20-dema or perhaps even as far as the 50-dma. In either case, I would watch for weakness on the rally as a potential signal to short the stock into any such rally.

 

GR092417-LITE

 

Bio-Tech/Medical Names:

Bio-techs are showing some of the same sluggishness as many other leading areas of the market. Alexion Pharmaceuticals (ALXN) is still sitting right along its 20-dema and near the top of its prior base breakout point at 142.47. This makes it a convenient long entry here using either the 20-dema or the prior breakout point as a tight stop.

Vertex Pharmaceuticals (VRTX) has technically violated its 50-dma after closing further below the line on Friday. However, it has yet to move below the 147.18 low of its current nine-week base. I would be looking for a possible undercut & rally move IF we saw the stock undercut that 147.18 low and rally above it. That would be one way to play the stock at this juncture.

This past week we saw SUPN come apart, and BIVV also ran into trouble, making the bio-tech space a difficult one to play on an individual stock basis. Another way to play the bio-techs, in my view, is to focus on the iShares NASDAQ Biotechnology Index Fund (IBB), which has pulled back to the top of its late August breakout point and the 20-dema.

This puts the IBB in a lower-risk entry position here, using the 20-dema as a tight selling guide. The big-stock bio-techs such as CELG, GILD, and BIIB all represents significant weightings in the IBB, and they are all forming similar flag type of formations with GILD and BIIB currently pulling into their own respective 20-demas. Buying the IBB may help diversify against the headline risk always inherent in any individual bio-tech stock, as SUPN demonstrated this past week.

 

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Chinese Names:

The current “China Four” names on my watch list are back to three after JD.com (JD) busted its 50-dma on Thursday on above-average selling volume. Now I would be watching for a reflex bounce back up into the 50-dma as a potential short-sale entry. Unfortunately, JD’s nascent “LUie” formation did not quite make it all the way back up to the peak of the U formation, and it is now failing.

Alibaba (BABA) remains healthy as it holds tight along its 10-dma, which could be considered a lower-risk entry point using the 10-dma as a tight selling guide for any shares purchased up at these levels. However, I would consider the stock’s current position to be more of an add-point for an existing position rather than a spot to take an initial position.

Sina (SINA) has dipped below its 10-dma, but remains well-above its 20-dema in an extended position since “re-breaking out” on September 1st. It likely needs to consolidate some more if it is to continue higher from here, and could end up testing its 20-dema.

Weibo (WB) was looking very much like SINA a week ago, but it has since shown worse signs of deterioration. On Wednesday, the stock broke below its 20-dema on above-average selling volume and has since built a short bear flag type of formation just below the line.

In my Wednesday report I discussed the idea of taking profits in the stock when I wrote, “The question is where one’s trailing stop is, and whether it is prudent to take profits here and allow the stock to set up in a lower-risk entry position once again, assuming it hasn’t topped.” Right now, WB looks like it may be a short here just under the 20-dema, using that as a guide for a tight upside stop. I would also keep an eye on the other Chinese names as a group movement to the downside could confirm WB as a short along the 20-dema.

 

GR092417-wb

 

Cyber-Security:

Palo Alto Networks (PANW) continues to flail about but remains above its 20-dema, by a razor-thin margin of four cents. It has already dropped below the 141.30 peak in its prior three-month base and it at a “last stand” level of support here at the 20-dema. Technically it can be tested here at the 20-dema, using it as a tight selling guide in case the trade doesn’t work out.

Fortinet (FTNT) is another cyber-security “pseudo-leader” that has made zero progress since its roundabout pocket pivot of two Fridays ago. Currently it remains right above the confluence of its 10-dma, 20-dema, and 50-dma but on Thursday posted a big reversal day where the stock rallied as high as 39.51 but ended the day at 38.32 and back at the moving average confluence. Technically, this is also in a lower-risk entry here, using the 50-dma as a very tight selling guide.

Semiconductors:

Broadcom (AVGO) remains a short-sale target and rallies up into the confluence of the 10-dma and 20-dema would present lower-risk short-sale entry opportunities from here. Short-sellers should keep a close eye out for this.

Skyworks Solutions (SWKS) is another late-stage failed-base short-sale set-up like AVGO. It should be watched for weak rallies up into the 50-dma as potential, lower-risk short-sale entries from here.

I must say that I find some humor in the fact that semiconductors as a group have been doing quite well lately, and the two that I pick, AVGO and SWKS absolutely stink. In fact, they’re currently short-sale targets. But many other semis are doing just fine, and we can’t know for sure whether this is just a sudden rotation of money into what was a beaten-down group a month ago, like the financials.

If this flow of funds into semis continues, then it may just be a matter of buying something like the Vaneck Vectors Semiconductor ETF (SMH), This broke out in slow motion last week, but gathered some momentum earlier this past week. A pullback and test of the 10-dma on Thursday met with some big volume support, which might imply further upside from here. Therefore, this could be considered buyable here using the 10-dma as a tight selling guide.

 

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If you are like The Gilmo, and like to think that you are oh-so-smart, you could get tricky and try and buy something of the Ugly Duckling variety but which has big earnings growth, like the recent comeback kid, Cavium (CAVM). The stock posted a pocket pivot coming up though the 200-dma over a week ago, and has since slashed its way back to the line as volume dries up.

Friday’s pullback took the stock just below the 200-dma, but it held at the 10-dma. Notice also that this pullback is about a 50% retracement of the prior strong move off the 50-dma for which the pocket pivot at the 200-dma pegs the mid-point. This could make the stock buyable in an opportunistic, Ugly Duckling sort of way while using the 10-dma as a selling guide to keep risk to a minimum.

 

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Cloud Software Names:

Salesforce.com (CRM) is still clinging to its 20-dema today, which in my view remains a key level of near-term support. A breach of the line could trigger the stock as a short-sale target if it occurred, but this pullback to the 20-dema can also be considered a lower-risk long entry position using the line as a tight selling guide.

In this case, one can take a two-sided view of the stock, being ready to “play it as it lies” depending on how the action unfolds from here. For now, however, the voodoo pullback into the 20-dema, with volume coming in at -44% below average on Friday, keeps this as a long idea until and unless it breaches the line on volume.

 

GR092417-CRM

 

ServiceNow (NOW) also continues to hold near-term support along its 20-dema as volume dries up to voodoo levels. This keeps it in a lower-risk entry position here using 20-dema as a tight selling guide. On Thursday, it again dropped down below the prior 114.50 low of seven trading days ago and posted an intraday low of 113.93. It then again rallied above that low to close at 115.81. This can therefore also be viewed as an undercut & rally long set-up, using the 114.50 price level as a very tight selling guide.

Square (SQ) is slightly extended from its recent base breakout through the 27.97 price point, and I would continue to only view pullbacks closer to the 10-dma as the best, lower-risk entries given my penchant for avoiding buying base breakouts, particularly when they are extended from the breakout point.

Tableau Software (DATA) is sitting very tight along its 10-dma, so it remains in a lower-risk entry point here, using the 10-dma as a tight selling guide. As I noted on Wednesday, the stock is currently extended from its early August breakout near 67 and so not what I would consider a “fresh” breakout.

Workday (WDAY) closed Friday 19 cents below its 50-dma, and is also below its prior base breakout point at 106.59, so this I clearly in a potential failure position that could morph it into an LSFB short-sale set-up.

 

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All of these cloud names except DATA and SQ are at levels of key support within their patterns. This either makes them lower-risk entries at these current levels of support, or could morph them into short-sale targets if they end up breaching support on volume. Play them as they lie.

 

Internet Related:

Yelp (YELP) continues to trend higher along its 10-dma and 20-dema, and is somewhat extended from its early August gap-up move. I am not necessarily interested in taking a positon here in the stock simply because of the fact that it is extended on the upside and could be vulnerable to pullbacks much as GrubHub (GRUB) was two weeks ago.

In fact, if we look at GRUB we can see that it has broken below its 50-dma, but rallied back up to the line on Friday, well off its intraday lows. This is therefore a failed-base type of short-sale set-up that could be entered on the short side here while using the 50-dma as a tight upside stop. Any further movement up towards the line on weak volume would certainly facilitate an even better short-sale entry.

 

GR092417-GRUB

 

Social-Networking Names:

Twitter (TWTR) continues to hold along its 50-dma as volume dries up to extreme “voodoo” levels, coming in at -63% below average on Friday. This keeps the stock in a lower-risk “voodoo” entry position here, using the 50-dma as a tight selling guide.

 

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Solar Names:

First Solar (FSLR) was looking very much like a possible base-failure short-sale set-up on Friday as it reversed off its highs and turned into the red early in the day. But news that the U.S. Trade Commission had voted 4-0 to impose tariffs on foreign (read: Chinese) solar panels sent the stock rocketing back to the upside. While FSLR is seen as benefitting, at least initially, the news was not good for solar installers. This may also have impacted TSLA, which now owns solar installer Solar City.

This ended up creating a “re-breakout” situation with FSLR posting a higher high on heavy trading volume. It seems to me, however, that the tariffs will simply make solar prices rise, which could have the effect of stifling demand for the industry as a whole. We shall see how this plays out, but I would not be chasing this breakout on news, as I do consider it extended, at least for my tastes.

 

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SolarEdge Technologies (SEDG) tested its 50-dma on Friday and looked like it was in trouble early in the day. The trade commission news on solar tariffs, however, breathed life back into the stock and it rebounded sharply off the 50-dma and back above the confluence of its 10-dma and 20-dema on increased, but below-average volume.

If SEDG can hold above the 10-dma and 20-dema, then it could be considered buyable here using the two lines as a tight selling guide. But as I discussed with FSLR, the tariffs could end up dampening demand, and hence back-firing. In addition, the U.S. Trade Commission’s decision requires the Trump Administration to move things forward, and it has until November to act.

 

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Video-Gaming Names:

Both Activision Blizzard (ATVI) and Electronic Arts (EA) remain in bases and are currently testing their 50-dmas. Technically, the pullbacks to the 50-dma in each case would represent lower-risk entry opportunities, but so far both stocks have been unable to get up and out of these current base structures.

Take-Two Interactive (TTWO) is perhaps the “monster” in the group as it just keeps rambling higher along its 10-day moving average following its early August buyable gap-up (BGU) move. The stock has been throwing something of a pocket pivot party in the month of September, posting five pocket pivots along the 10-day moving average.

The question is whether all this pocket pivot action means the stock is percolating and revving up for a strong move off the line to the upside. I suppose the only way to test this possibility is by taking a position here along the 10-dma based on the pocket pivots, and then waiting to see what, if anything, transpires on the upside. The 10-dma can be used as a selling guide for the purpose of keeping things tight if TTWO resolves in the other direction.

 

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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 (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 market action over the past two days does little to change my assessment as stated in Wednesday’s report. As I wrote at the time, “This market strikes me as a bit confusing and full of cross-currents when it comes to the action of individual stocks, and often it is the stocks themselves that flash the first warnings signs.”

So, are breakdowns in names like AAPL and TSLA signs of an impending market correction, or more Ugly Duckling-like rotation, such as the sudden turnaround we’ve seen in financials so far in the month of September? But financials were seen as an area of new leadership back in July, and they quickly failed after the XLF pushed to new highs.

Such is the nature of what has been mostly a trendless, volatile, and highly rotational market throughout the summer. Now we move into fall, with third-quarter earnings season about to begin in the next week or so. In the meantime, I consider this more of a swing-trader’s market than an investor’s market, and as long as the news flux around the Fed, North Korea, pending tax and healthcare legislation remains in force it could simply be more of the same.

Anyone seeking to enter this market, long or short, needs to remain alert. In addition, tight risk-management is imperative if one is to avoid danger. As TSLA demonstrated this past week, today’s breakout can easily turn into tomorrow’s breakdown. Enough said.

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.