The Gilmo Report

December 31, 2017

December 31, 2017

The major market indexes ended 2017 with a whimper, but the fact is that the overall action has been flat since the big gap-up move two Mondays ago. As the daily chart of the NASDAQ Composite Index illustrates, the past two weeks of holiday immersed trading have been nothing but one big gap-fill.

In the process, the NASDAQ Composite on Friday scored its lowest close of the holiday season and a distribution day, dropping below its 10-dma on surprisingly higher trade. This was also a big outside reversal to the downside. As it turned out, a slow start to the trading week was more a sign of a market losing energy rather than saving up its energy for a final push into the end of the year.

The year-end downdraft on Friday was led by the by the NASDAQ 100 and small-cap Russell 2000 Indexes. The gap-up move to all-time highs two Mondays ago is now starting to look like a bit of an exhaustion gap as the index goes into a shallow, eight-day downtrend. So much for the holiday spirit.

 

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The S&P 500 Index, which had been tracking tight sideways over the past seven trading days, matched the NASDAQ by pulling an outside reversal to the downside on higher volume Friday. This also resulted in a distribution day for the index. If there’s anything constructive going on here, it may be the sole fact that while overall market volume was higher, it was still below average.

Does this bode ill for the market this coming week as we ring in the New Year? Of course, we won’t know until Tuesday, but buyers’ enthusiasm was clearly lacking as we ended the year on Friday. If anybody was looking to position themselves for a big gap-up start to the New Year, it wasn’t showing up in Friday’s action.

 

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I’ve discussed in recent reports that I was mostly interested in finding swing-trading set-ups as opposed to position-building for more intermediate-term price moves. Assessing the action over the past two weeks as we’ve moved through the thick of the holiday season, we haven’t even seen much in the way of decent swing trades.

Aside from Bitcoin mania, which finally reached a crescendo the week before last, the market developed a bad case of the holiday blahs. The institutional support I was looking for into year-end as big money came in and pushed their largest holdings higher never materialized. So, as we move into the New Year and another earnings season in the latter half of January, things strike me as tentative at best.

One bright spot has remained the continued upside in gold, as we see in the chart of the SPDR Gold Shares (GLD), below. The most optimal entry point, in my view, was the 119.78 prior low of early October as the GLD rallied above that low, triggering an undercut & rally long set-up at that point.

It ran into a little bit of resistance on Friday as it pushed into the prior October highs near 124, but at that point it was getting a bit extended. So, if profit-takers were looking for a reference point at which to put something in the bank, the 124 level on the GLD made perfect sense.

 

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As you may recall, I blogged to members to be alert for a possible U&R set-up in the GLD on December 18th. In addition, I also noted that members should be alert to similar U&R set-ups in my two favorite gold stocks, Kirkland Lakes Gold (KL) and Franco Nevada. Each followed in the GLD’s footsteps by also posting U&R long triggers and moving higher from there.

Both are now extended from their respective U&R set-ups when they moved up through their 13.56 and 76.76 prior lows the week before last. KL closed Friday at 15.36 and FNV at 79.95.

KL is the stronger of the two, as we can see on the daily chart, below, but its move to new highs over the past week hasn’t seen any huge upside volume. The action is interesting, however, in that the actual base breakout occurred on a five-day pocket pivot move off the 10-dma after a sharp intraday pullback that then bounced to new highs. On Friday, KL moved to higher highs on slightly above-average volume. My preference is to try and buy this on weakness, so a pullback to the 10-dma would provide the type of lower-risk entry I’d be looking for.

 

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FNV was also actionable at its 20-dema on Wednesday, as discussed in my report of that day, but it did gap up on Thursday, putting it nearly out of buying range right at the open. Pullbacks to the 20-dema could provide lower-risk entries from here.

 

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The near-term move in gold is inversely correlated to the action in the U.S. dollar, which broke to the downside all week long. While the GLD ran into a little resistance on Friday near the early October highs, the PowerShares US Dollar Index Bullish Fund (UUP), has undercut the prior October and November lows in its current chart pattern.

This could set up a reaction rally to the upside, which would likely coincide with a pullback in the GLD and the associated gold stocks, FNV and KL. Thus, this could be watched closely as it may set up lower-risk entries in the GLD, FNV, or even KL.

 

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Perhaps one of the better swing trades over the past two weeks has been CSX Corp. (CSX), which offered a nice swing trade off the 200-dma after a news-related price break. After getting back above the 20-dema, it hasn’t budged over the past two trading days. To its credit, it has been holding tight along the line for the past five trading days with volume declining.

In this position, I view this as a two-sided situation. If it can hold the 20-dema and the general market acts well going into the New Year, then it’s a buy here using the 20-dema as a tight selling guide. Otherwise, a volume breach of the 20-dema could swing this into play as a short-sale, using the 20-dema as your upside stop.

 

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Caterpillar (CAT) finally pulled back on Friday as the Dow sold off into the close, ending its nine straight days of upside movement. It has been a very consistent upside play going into year-end, but could be getting a bit long in the tooth here. I’ve been asked where one sells this now that it’s about 15% past the prior base breakout of late November. In this market, that’s usually a decent gain to put in the bank, especially with an industrial name like CAT.

This all, of course, depends on one’s objectives for the trade, but as I see it the stock is starting to get a little bit “late stage,” as the chart below shows. Also, the strong move following the latest breakout is a little bit parabolic in the short-term. For that reason, my own preference would be to sell here and then see how the stock acts on any subsequent pullback to the 10-dma or even the 20-dema.

 

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In many cases, the action of individual stocks makes me want to wipe the slate clean and begin building an entirely new long watch list. On the other hand, it’s not clear exactly what would populate that list at the current time. Many names are starting to feel a bit stale, including a big-stock leader like Apple (AAPL). The stock has recently been plagued by negative press and apologies by the company for deliberately slowing down older iPhone versions as a method of planned obsolescence.

Analyst reports of much weaker-than-expected holiday iPhone X sales weighed on the stock early in the week when it gapped down to its 50-dma. AAPL then ended the week by closing below its 50-dma for the first time since late October. Volume was sharply higher relative to the prior day, but still came in just below average.

This was looking quite good as of the end of the prior week ahead of the long Christmas holiday weekend, but that came apart quickly on Tuesday of this week. Where does it go from here? Hard to say, but technically it can be treated as a short here, using the 50-dma as a tight upside stop.

 

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Of course, there’s always the possibility that AAPL suddenly springs back to life as was the case with Netflix (NFLX) on Thursday. Obviously, the stock must have read my Wednesday report where I wrote that “…[NFLX] may do nothing until its expected earnings report on January 22nd. The next day it launched higher on a pocket pivot coming up through its 10-dma, 20-dema, and finally its 50-dma on heavy buying interest.

On Friday, NFLX wasn’t able to hold above its 50-dma, which brings up the question as to whether this pocket pivot is indeed actionable. Technically, it is in fact a pocket pivot, so one can simply play it as it lies. With the 50-dma out of play as a support level after Friday’s close below the line, the 10-dma or 20-dema come into play as alternate support levels.

Finally, the bigger question is whether a strong upside price move is coming ahead of earnings, expected on January 22nd. There is a great deal of overhead price congestion just above the 50-dma, as is highlighted on the chart below. This could make the potential for any further upside from here more difficult, but NFLX has three weeks to show that it can. We shall see.

 

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Facebook (FB) continues to flop around its 50-dma and doesn’t provide much momentum for traders in either direction. The bottom line is that for the past two months it has gone absolutely nowhere since posting a clean base breakout in late October around its earnings report at that time. It then failed on that breakout by violating the 50-dma, rallied back above the 50-dma, and may be in position to fail again. I see nothing to do with FB in terms of an actionable set-up at this time.

Amazon.com (AMZN) pulled into its 20-dema on Friday on increased volume but is another leading name that is going nowhere as it basically tracks sideways. With most of these names, like NFLX, AAPL, FB, and AMZN, how much upside progress, if any at all, they can make before they all start reporting earnings later this month and into early February is questionable.

Nvidia (NVDA) looked like a short to me as I discussed in my Wednesday report, and it has since dropped lower, including a 3.90-point decline on Friday with volume picking up but remaining below average. The stock was looking like it might be trying to make a comeback earlier in the week, but its inconsistent nature came back into play and it now descends back into the lower part of its chart pattern.

Tesla (TSLA) keeps rolling lower after breaching the 200-dma and then the 50-dma five and four trading days ago, respectively. This weekend, the company will provide an update on their current sales and production numbers, but at the time of this writing nothing has been released. This may set up some kind of actionable move, and I would lean toward shorting any news-induced pop up toward the 50-dma.

 

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I must be frank here and say that I look over these big-stock NASDAQ charts and in most cases, it’s not even worth showing a chart. There is nothing truly compelling, even in the case of a pocket pivot like NFLX’s, which may have a tough time getting through overhead resistance ahead of earnings.

In new-merchandise land, where things are perhaps marginally compelling, Roku (ROKU) has dipped below its 10-dma and looks like it is headed for a test of the 20-dema. As I wrote on Wednesday, “…a more opportunistic approach might entail looking for a pullback to the 20-dema as an even better entry, if you can get it.” A move down to the 20-dema would also coincide with an undercut of the prior low of four trading days ago. This could provide an actionable entry on a quick test of the 20-dema that then resolves back to the upside and the prior 51.01 low.

 

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Apptio (APTI) has now posted two breakouts to nowhere, but you must admit that the base from which it emerged looked quite “pretty” ahead of the first breakout. Both of those breakouts, where the second even pushed to a new high on an intraday basis, closed near the lows of their daily trading ranges on heavy volume. It’s clear that the breakouts are being sold into.

That was also the case on Friday, when APTIO tried to rally early in the day but again reversed to close down near its 10-dma. This also took it right down to the top of its prior base, and selling volume was again well above average. If this is what a pretty base breakout gets you in this market, then things are looking bleak for breakouts in general. Perhaps APTI recovers from this position, so it can be tested here on the long side using the 10-dma as a tight selling guide.

 

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MuleSoft (MULE) looks constructive here as it seems to be setting up along its 50-dma. The action over the past week has been tight as volume remains low. Some minor support showed up on Friday as volume increased slightly and the stock bounced off its 50-dma. As was the case with APTI, I think it’s better to try and anticipate a breakout rather than to buy into the breakout once the stock is up and away. So, in MULE’s case, one would look to go long here along the 50-dma while using it as a tight selling guide.

 

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Switch (SWCH) on Friday gave us the pocket pivot up through the 50-dma that I was looking for per my discussion of the stock in my Wednesday report. However, it did stall a bit despite closing positive on the day and just above the 50-dma on heavy volume.

There was a small pullback toward the 20-dema on Thursday, which was a lower-risk entry I was also considering as a possibility. This was discussed in my mid-week report. That would have been the preferable entry, and Friday’s pocket pivot was a relatively constructive thing to see on the heels of the successful test of the 20-dema on Thursday.

If it can hold the 50-dma, then it can be viewed as buyable here based on the Friday pocket pivot. One can then use the 50-dma as a tight selling guide or the 20-dema as a wider selling guide, depending on risk preferences.

 

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All these new-merchandise names I’ve been watching in recent reports look reasonably constructive. This would even include Cloudera (CLDR), which is just sitting near the lows of a three-week price range. This looks like a normal consolidation of the prior move off the lows of the current base and back above the 50-day moving average in early December.

It closed on Friday just seven cents below the 16.59 low of six trading days ago, and is still within range of an undercut & rally type of move. The soft general market environment this past week has likely kept a lid on CLDR, along with other new-merchandise names I’m looking at.

 

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One new-merchandise name that hasn’t had a lid kept on it has been Rise Education Cayman Ltd. (REDU). I discussed it in last weekend’s report when it was sitting tight at the 10-dma, and it briefly pulled down into the line on Tuesday morning before launching sharply higher on Tuesday.

That was a big-volume breakout from an IPO cup-with-handle base, and the stock kept moving higher all week, unlike the feeble general market. At this point REDU is extended, obviously, and pullbacks to the rapidly rising 10-dma would constitute your next references for lower-risk entries from here.

 

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All these new-merchandise situations, except for MULE, which is expected to report earnings on January 25th, aren’t expected to report earnings until February or March. With respect to REDU, I currently cannot find an expected earnings date, but we do know that the company last reported earnings on November 27th. This would imply that the next earnings report would occur about three months later, perhaps in late February or early March.

Aerojet Rocketdyne (AJRD) is a little sloppy here as it again looks set to test its 50-dma. What I don’t like about this is the fact that it should be setting up tightly here with my indicator bars across the top of my chart showing more positive blue color. So, while this can be tested on the long side near the 50-dma, it may simply need more time to set up here if it is indeed attempting to build a new base.

 

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For the time being I have put ServiceNow (NOW) on the back-burner since the other stocks in its group, namely Salesforce.com (CRM) and Workday (WDAY), aren’t showing confirming strength. In addition, NOW is expected to report earnings at the end of January, and with the stock already rallying sharply off its early December sell-off lows I don’t see massive upside potential from here.

Square (SQ) appears to be dead money after failing on several undercut & rally moves over the past month. That said, it also hasn’t split wide open to the downside. For that reason, I still think it has the potential to pull a swing-trading type of upside move from here if it can eventually get going on an undercut & rally move. Also, as discussed in my Wednesday report, I’d look for confirmation in the form of a strong move up through the highs of its current descending wedge formation.

First Solar (FSLR) is again testing its 20-dema as it pulled in with the market on Friday. Volume was below average but increased over Thursday’s levels. I’d look for support at the 20-dema to hold this week for this to remain viable.

SolarEdge (SEDG) is moving in synchrony with FSLR on a similar test of its 20-dema, but with volume drying up sharply. Both SEDG and FSLR are examples of leading stocks that have gone nowhere throughout most of December. SEDG has gone nowhere for a bit longer, however, since it posted a buyable gap-up to nowhere after earnings in early November.

Since then, SEDG has spent its time trying to build a new base, with the only truly profitable move coming on the test of and bounce off the 50-dma in early December. That pullback also perfectly filled the gap-up “rising window” to the exact penny, creating an opportunistic “Ugly Duckling” entry at that point.

Since moving back up to the prior highs, however, SEDG has remained tentative. It may continue to remain tentative into its mid-February earnings report. For now, the 50-dma constitutes maximum downside support for the stock.

 

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As I wrote earlier, in terms of truly actionable set-ups, I am not seeing much that inspires me to start deploying cash in copious amounts. Most everything has a “stale” feel to it, except for the bright, shiny, and new breakout in something like REDU.

When it comes to Chinese names, Alibaba (BABA) and Weibo (WB) have the feel of dead money, but YY, Inc (YY) may be more attractive here as it again tests its 10-dma. Volume was light on Friday, and one cannot deny that the stock looks to be setting up constructively in a cup-with-handle formation as volume dries up within the handle.

On the other hand, despite a few robust moves off the 10-dma, YY hasn’t broken out in an ultimate confirmation of strong, upside strength. Lately, however, that has been its nature, and we can see that a strong breakout in mid-November hasn’t gone anywhere since YY is still trading right at the top of that breakout day’s price range.

 

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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). In all cases I will mostly use the shorthand version of “10-dma,” “50-dma,” etc.

Last weekend it looked like a fair number of stocks were setting up to move higher in a year-end rally where big money supported their biggest holdings in a run for the finish line. That did not materialize, and instead we saw the market indexes post distribution days and outside reversals to the downside across the board on the final day of trading in 2017.

As I wrote on Wednesday, the individual stock set-ups, whether long or short, will take you where you need to be. For the most part, they have by default put me in a neutral, non-committed posture as we move into the New Year.

While in previous years I have been able to come up with some themes to focus on for the New Year (remember my discussion of TSLA as the “stock of the year” last December?), I see nothing compelling here at the end of 2017. If I had to speculate about anything, it might be that precious metals could be an area of unexpected strength in 2018. Lately, both gold and silver have shown some percolating action.

The thesis here would be based on a follow-on move to the Bitcoin phenomenon. If we believe that at least part of the Bitcoin mania in 2017 was based on a move away from government-controlled fiat currencies and more toward alternative currencies, then we might look for this to spread into the historically alternative currencies of choice, namely precious metals.

A weekly chart of the SPDR Gold Shares (GLD) reveals a large reverse head and shoulders type of bottom formation, with consistent resistance along the “neckline” at around 129-130. Obviously, any major trend developing in the GLD will have to clear this level, and do so decisively. That would be the move to look for in 2018.

 

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While some have likened the massive move in Bitcoin to a speculative mania, which a good deal of it is, especially lately as it has rushed up to the $20,000 level, we might also consider that relative to Bitcoin, the dollar has collapsed. That’s not something you will hear from the mainstream media, but I think there is at least a kernel of truth in this wholly alternative, and perhaps offbeat, way of looking at the Bitcoin mania.

The potential for consistent monetization of ever-increasing debt must have long-term consequences for the dollar, as it has since President Nixon made budget deficits the norm as a component of government fiscal policy back in the early 1970’s. Currently, there is little talk of the still expanding national debt, now on track to exceed $21 trillion in 2018.

The major assumption is that the recent tax cut legislation, which is primarily a corporate tax cut, will cause a massive economic boom that will then bring in massive tax revenues, essentially allowing the U.S. to grow its way out of debt. That’s a popular theory, but it hasn’t held true over time simply because the government doesn’t stop spending money. Spending cuts are never talked about as true spending cuts, but as cuts in the growth of spending.

Remember that despite the Reagan tax cuts, which did bring in more tax revenues, the national debt was still tripled during President Reagan’s two terms. So much for tax cuts bringing down the national debt. So, the reality is still the same – we don’t have a tax problem, or even a tax revenue problem, we have a spending problem. If that remains the case in 2018, and the tax cuts don’t translate into the economic growth that has been promised, expect bigger deficits, and an ever higher national debt.

More debt means more debt monetization, which means further devaluing of the U.S. dollar. Ultimately, the proof in the pudding of my thesis will be the price of gold and silver. So that is something I will be watching closely in 2018.

With respect to stocks, I believe that blockchain technology is a significant development. Outside of companies that make tea, like Long Island Iced Tea (LTEA) suddenly spiking their stock price by announcing they have registered an internet domain www.longblockchain.com and nothing else, there will likely be real companies making real use of the technology, and that is where new opportunities may arise in 2018.

In my mind, blockchain today is like the internet was in the late 1990’s. In its relative infancy, it sparked a huge speculative price run in anything related to the internet, and the joke at one time became that all a company had to do was add “.com” to the end of their name to trigger a 100-point price move. Sound familiar? Today, all a company needs to do is say they’re buying Bitcoin miners, or exploring the possibility of crypto-currency trading platforms, exchanges, services, etc. and they get an insane price move, no questions asked.

So, as I run my screens and sift through stocks in 2018, blockchain will be a theme that I’ll be on the lookout for. Of course, I am more interested in how the winners in blockchain will exploit it to drive earnings and sales after the initial speculative dust settles, much as AMZN, FB, GOOG, NFLX and many others were the long-term winners on the internet as many other fledgling “dotcoms” went down in flames.

That is enough to get me excited about 2018. And if it means that we need to see a major market correction first, then my short-selling methods will no doubt come in handy. Finally, 2018 will mark a major milestone for The Gilmo Report, which is set to celebrate its 10th birthday in March. A Happy and Prosperous New Year to all of you who have joined me for a part or the entirety of this wild ride over the past 10 years!

Gil Morales
CEO and Principal, Gil Morales & Company, LLC
Managing Director and Principal, MoKa Investors, 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. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.