The Gilmo Report

December 21, 2016

December 21, 2016

The group with the biggest stake in achieving Dow 20,000 appears to be the media, which has hyped the whole thing non-stop. Institutional investors likely could care less. Unless, like the denizens of the New York Stock Exchange, they’ve invested in the printing of hundreds of Dow 20,000 baseball caps.

Over the past couple of days, I’ve heard some media babbling about Dow 20,000 being the point at which the train is leaving the station. But with the Dow Jones Industrial Index up over 11% since the election, one might argue that the train already left the station, and Dow 20,000 is perhaps its arrival destination.

In any case, once the Dow does get to 20,000, assuming it does any time soon, we’ll have a chance to see whether it’s the end of the line or whether it is just the first of many more stops to come. So far, all we know for sure is that the Dow continues to prove the old adage that a watched pot never boils.

But as it holds tight within a little over a half percent away from the 20,000 level, volume is drying up. So the pause just below the 20,000 almost looks like the index is just catching its breath before it makes the hurdle over this magical price level.

 

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As the Dow dilly-dallies just below the 20,000 level, the NASDAQ Composite Index has decided to take matters into its own hands as it logged a new closing high yesterday on roughly even volume. Today the index pulled in slightly as volume declined, which looks constructive.

 

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As we head into the long Christmas holiday weekend, the likelihood of a low-volume melt-up is always a possibility. Most of the action in individual stocks has been choppy and a bit erratic, making significant progress long or short a bit difficult. But despite this, it’s not necessarily impossible to make some money on the long side. While the Dow flirts with 20,000, I don’t have to be long everything, just the stocks I think have the best shot at some decent and tradeable upside in the near-term.

Among my very few long-side ideas in recent reports, The Trade Desk (TTD) has provided a reasonable upside vehicle. Yesterday it pushed to a higher high and its second highest close since coming public in September of this year. The prior closing high of 33.39 was achieved on September 28th, the sixth day of trading for the new IPO.

Yesterday’s breakout decisively cleared the 30 price level, but as is typical in this market, strength generally doesn’t lead to more strength, but a pullback. That is what we saw today in TTD, bringing the stock back closer to a lower-risk entry point.

 

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Impinj (PI) was also in a buyable position over the weekend, as I mentioned in the weekend report: “Technically this could be considered to be in a buyable position using the 10-day line at 32.50 as a tight selling guide.” That led to a big 16% upside move over the prior two days, with yesterday’s action accounting for 13% of that total move.

On the chart, that all shows up as a big-volume base breakout to all-time highs, but today the stock reversed after decisively clearing the 40 price level early in the day. Today’s decline came on lighter, but still slightly above-average volume and brought PI right back into the prior breakout point. I still view this as a stock to sell into sharp, extended upside moves, with an eye toward buying it back in opportunistic fashion. In this case, I might look for a pullback into the rapidly rising 10-day line at 34.47 as a possible lower-risk entry, should that occur.

 

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While Everbridge (EVBG) was not in a buyable position over the weekend, at least from my perspective since I normally don’t buy new-high breakouts, it has also performed well since I first discussed and then brought up the stock again in my report of December 7th. At that time, the stock was sitting along its 10-day moving average in the low-16 price area.

Over the past week, EVBG has broken out of its IPO base, which it formed after coming public in early September of this year. On Monday, EVBG cleared the 20 price level before backing down toward the 10-day line where it found support today. Volume dried up on the pullback, so in this case this would have provided a lower-risk entry point early in the day today. I would continue to look at pullbacks into the rapidly rising 10-day line as potentially lower-risk entry opportunities.

 

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TTD, PI, and EVBG are all new-merchandise names that I re-introduced in the report in the earlier part of December. These are also some of the very few long set-ups I’ve been able to figure out and which have also shown strong price performance over the past couple of weeks. Another smaller new-merchandise name that continues to act well, despite being extended from any lower-risk entry point currently, is Square (SQ). The stock has actually been in a well-defined and well-contained uptrend channel since early November.

It was last buyable at the 10-day line five days ago on the chart, and has since been able to move higher. For now, pullbacks to the 10-day line at 14.13 would offer your next references for lower-risk entry opportunities from here.

 

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So this is what’s working, but where are the fresher long set-ups to be found in this market? I admit that is not necessarily an easy question to answer, but let’s see what’s showing up on my radar during this Christmas Eve Week.

Amazon.com (AMZN) is trying to figure out whether it is a long or a short here. Over the weekend I pointed out the possible head and shoulders formation it might be forming currently on the weekly chart. However, for anyone who has read my latest book, Short-Selling with the O’Neil Disciples, you know that not all H&S patterns will resolve bearishly.

It is generally necessary to take a more granular view of the situation by tracking what is going on with respect to the price/volume action on the daily chart. Here we can see that the stock has spent the past couple of months tightening up along the 10-day and 20-day moving averages. Today volume dried up to -54.7% below average as the stock held tight along the two shorter moving averages.

That would qualify as voodoo action, and in my view I would be more willing to take a shot here on the long side with the idea of using the 20-day line at 766.08 as a very tight selling guide. While the current pattern looks like a possible H&S formation, we can also remain objective by understanding that it also looks like the stock is working on the right side of a possible new base. As long as it can hold the lower, rising dotted trendline I’ve drawn on the chart, the latter theory is in force. Obviously, a breach of the 20-day line and that trendline could bring the stock into play as a short-sale target.

 

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Facebook (FB) has also had the look of an H&S type of formation, but the key thing to remember here is that a) it is a widely-owned institutional stock, and b) it could be supported going into year-end. Here we can see that the stock found resistance last week near the prior November high and the 50-day moving average. From that point, it reversed and closed back below the 200-day line last Friday on slightly above-average volume. Since then it has drifted lower over the past three days, but volume has now dried up to -55.6% below average.

So in this case I might look for some sort of slingshot type of move back up through the 200-day moving average. Thus if I take a position here I would be keeping a tight selling guide near the 117.61 low of seven days ago on the chart.

 

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Over the weekend I thought that Netflix (NFLX) looked a little failure prone, and on Monday it did breach the 10-day moving average on the downside early in the day. But by the close, it regained the 10-day line and closed back in positive territory as sellers failed to swarm the stock and volume declined sharply.

NFLX attempted to clear to higher highs today on a breakout attempt but fell short. It did, however, post a higher closing high on slightly higher volume and managed to close around mid-range. It now lies about 2% above its 10-day moving average. Thus, this could be viewed as buyable here using the 10-day line at 124.25 as a reasonably tight selling guide.

 

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Some of you might have caught some of the wild action in Twilio (TWLO) over the past two days as it tries to come up off of its recent extreme lows. Yesterday the stock received a buy recommendation from a brokerage firm and it set off to the upside on heavy volume. That looked like it was going to pan out into a bottom-fishing pocket pivot coming back up through the 20-day moving average. By the end of the day, however, the stock stalled badly and closed in the lower half of its daily trading range and below both the 10-day and 20-day moving averages.

Today TWLO made another run for it, and this time cleared both short moving averages on huge buying volume that qualifies as a bottom-fishing pocket pivot. Today’s move took the stock up a whopping 15.6% and right up into its 50-day moving average. This on news that it was expanding its relationship with AMZN.

From here, I would watch to see how this pulls back, if at all, and whether it holds the 20-day moving average, currently at 31.64, on any such pullback. This is interesting action, and may indicate that TWLO is finally going to make a reasonable attempt at coming up the right side of what would be a rather deep punchbowl formation.

 

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Meanwhile, keep an eye on Acacia Communications (ACIA), which is in a similar position as TWLO, but has yet to make any meaningful attempt at a rally off of its current lows.

 

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Qualcomm (QCOM) is another one of these names that hasn’t been able to figure out if it’s a long or a short. Over the past month the stock has shown alternatingly bullish and bearish action as it swirls around its 50-day moving average. Last Friday the stock busted the 50-day moving average on heavy selling volume, but so far that hasn’t led to any further downside.

I’ve been hitting the stock on the short side along the 50-day line over the past three days, but it has not shown any tendency to give way. Today, even with the market down, the stock closed up on light volume as sellers stayed away. This was quite interesting, and leads me to wonder whether this won’t pull a “LUie” type of move where it sets up in what looks like an L-shaped bear flag type of pattern but ends up pushing back above the 50-day line. This would then turn the “L” pattern into a “U” pattern, hence the term “LUie” formation.

That would be something to watch for, whereupon one could go long the stock and use the 50-day line as a tight selling guide, should that occur. Otherwise, if QCOM peels away from the 50-day line on the downside with selling volume picking up, the short side of the stock comes firmly into play.

 

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I would also note the action in Martin Marietta Materials (MLM), which has held its recent test of the 20-day moving average and is now back above the 10-day line as volume dried up to -42% below average. This looks like a constructive base, and as long as the stock can continue to hold near-term support along the 20-day line then it remains viable as a long idea. Testing MLM on the long side here is fairly simple. One simply buys the stock here with the idea of using the 20-day moving average at 222.10, about 1.5% away from today’s close, as a tight selling guide.

 

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Another name I’ve been watching for a possible failure that has not happened is Delta Airlines (DAL). For the stock to morph into a short-sale target, it needs to break the 20-day moving average on the downside, and so far that hasn’t happened.

Instead, if we remain entirely objective about what the stock is actually doing as opposed to what we think it should be doing, we can see that it is in fact holding tight along its 10-day moving average with volume drying up to -60% below average today. That is clear voodoo at the 10-day line, and is occurring within a consolidation that has formed after a short flag breakout two weeks ago on a pocket pivot.

So this looks more like a long than a short here, and is therefore buyable, in my view, using the 10-day line at 50.53 as a very tight selling guide. One could also use the 20-day line at 49.47 as a somewhat wider selling guide, but speaking for myself that is generally not my preference.

 

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Silica Holdings (SLCA) is another stock that looked failure-prone last week but has since made a nice comeback. As I discussed over the weekend, the stock looked to be on the verge of a full-blown breakout failure as it sat along its 20-day moving average.

That did not happen, so objectively we can say that the potential late-stage, failed-base set-up (LSFB) was in fact never confirmed. Instead the stock gapped up to its 10-day line on Friday on a buy recommendation from a major brokerage firm. I actually shorted into that move, and the stock did reverse back below the 10-day line by the close.

Now, notice an important detail here. The very next day, on Monday of this week, SLCA held tight just below the 10-day line as volume dried up sharply. I could see at that point that there were no sellers in the stock, so there was no reason to press the issue on the short side. Now the stock is pushing back up to its prior December highs on below-average volume, which is problematic to buy into. Frankly, the only way to enter this would have been on the voodoo action of three days ago, or by closing one’s eyes and buying it last week at the 20-day line.

 

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I would also note that another oil-related name I was looking at as a potential LSFB, Continental Resources (CLR), not shown here on a chart, is still holding along its 50-day moving average. This may put it in a lower-risk buy position using the 50-day line at 51.46 as a very tight selling guide. This is something of a “close your eyes and buy it at support” type of trade, but risk is easily managed if one employs the tight selling guide at the 50-day line.

Keep an eye on fiber-optic leader Finisar (FNSR) here as it pulls into its 50-day moving average on declining volume after a big-volume breakout failure two weeks ago. This sets up a potential “LUie” type situation IF the stock can continue to hold the 50-day line.

FNSR’s cousins, Juniper Networks (JNPR) and Ciena (CIEN), which I’ve discussed in recent reports, are both acting well, so for this reason I might look for FNSR to make a recovery attempt here as long as it can hold the 50-day line. In this case, one can take a position here and then use the line at 30.73 as a tight selling guide if the “L” doesn’t turn into a “U.”

 

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Despite some of these possible short-sale targets I was looking at over the weekend failing to pan out, there is still some action to be found on the short side, although how profitable it will be going into year-end remains to be seen.

Over the weekend I was looking for Tesla Motors (TSLA) to make a move toward the 200-day moving average on the basis of last week’s roundabout type of pocket pivot coming up through the 50-day moving average. While it didn’t quite make it to the 200-day line on the daily chart today, it did make it up to the corresponding 40-week moving average on the weekly chart.

That turned out to be solid resistance for TSLA as it reversed to close down on the day on heavy selling volume. That was perhaps the spot to take a short position in the stock using the 200-day line at 214.52 or the 40-week line on the weekly chart at 213.38 as a guide for a tight upside stop.

 

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Northrop Grumman (NOC) is a bit more well-defined as a short-sale target, in contrast to situations I was looking at over the weekend like DAL and SLCA. In this case the stock had already broken below its 20-day moving average two weeks ago, and followed that up with a gap-down move below the 50-day moving average two days later. Both of these moving average breaches came on heavy selling volume.

Since then, NOC has edged higher along the underside of its 50-day moving average. Today the stock peeled away from the line on slightly higher selling volume. I would continue to view this as a short here using either the 50-day line at 234.97 (less than 1% away) or the 20-day line at 237.69 (2% away) as guides for tight upside stops.

 

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Flexibility has been the name of the game this week as one has had to assess the real-time information and adjust as necessary. As I wrote over the weekend, we should remain alert to any shifts as they occur. In this light, I would have to conclude that short-sale set-ups I was looking at over the weekend have not panned out.

This of course makes sense given the current state of the general market. It’s not as if we’re seeing any of the major market indexes fall apart. As long as they remain intact, short-sellers are not likely to feel any love in their shorting operations. Personally, I prefer to move in the direction of daylight, at least where I can see it.

So, as we head into the long Christmas holiday weekend, I have taken note of the handful of potential long set-ups I’m currently seeing. A few of these look actionable and may offer some profit potential as we move toward the end of the year. 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 ACIA, AMZN, FB, and TWLO, 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.