The Gilmo Report

December 6, 2017

December 6, 2017

The market continues to suffer from chaos underneath the surface as beaten-down techs, internets, and other growth leaders remain under pressure. My current approach consists of a tactical approach to both the long and short side, depending on what sorts of short-term set-ups I see in either direction. That’s it.

I’m not interested in building long positions here, since risk appears to have increased. Even the short side necessitates an alert and nimble eye, as things shift very quickly.

Anyone looking to take a more entrenched approach by building long or short positions with an eye toward riding an intermediate trend is, in my view, perhaps begging the question. With the market showing what some might consider topping signs based on historical norms, we do need to remember that this is still a QE market.

In addition, as broken techs, internets, and growth leaders become extended to the downside, the need to sell becomes somewhat obvious. This sets up potential reaction rallies that catch late shorts flat-footed. Thus, the need to be nimble. Downside extension, well below key areas of support, may also set up potentially tradable reaction rallies back up to these areas of potential overhead resistance, as I’ll get to later in this report.

This where a short-term, long side orientation can be implemented on a quick, swing-trading basis. In the meantime, whether the current topping signs indicate something worse is coming, or whether a Santa Claus Rally in the form of an oversold reaction rally occurs, remains to be seen.

All we know for certain right now is that a broad number of tech, internet and growth leaders have been beaten to a pulp over the last week, and now many are in potentially oversold positions. On an index basis, the NASDAQ Composite Index has pulled back on a low-volume retest of last Friday’s intraday lows and the top of the mid-November gap-up “rising window”. On a closing basis, the index sits just under 2% below its all-time high of last week, despite the carnage seen in big-stock NASDAQ names.




The S&P 500 Index meanwhile sits a mere 0.77% below its all-time closing high of exactly one week ago. So, if you’re trying to call a major top on the basis of what the indexes are doing, it strikes me as a bit premature. You can certainly draw some conclusions with respect to the severe breakdowns in big-stock leaders, and maybe some of these names have topped, at least in the short-term.

But, at the same time, you also must be aware of the fact that this could easily set up a sharp reaction rally in these names that sends the indexes to higher highs on an oversold Santa Claus Rally. So, making some assumption that the market’s Christmas goose is cooked doesn’t strike me as the wisest of thinking here. After all, this is still a QE market, and the Fed has yet to pull the drain plug on the ocean of liquidity that underlies this market.




My approach here is concrete, and relatively finite in the sense that I’m going to concentrate on a few stocks, with the idea that things could go in either direction. Thus, my plan of action incorporates a two-side approach. Let’s start with the big stocks.

Apple (AAPL) is in fact in a buy position here based on the fact that it undercut two lows in its pattern today and rallied back above them on above-average volume. It also closed in the upper half of its daily trading range today. This becomes actionable here using the 167.15 low of six trading days ago as your selling guide.




I also like the action in (AMZN), which never blew apart as it held what I consider critical near-term support at the 20-dema. It briefly undercut the line both Monday and yesterday, but selling interest dried up today as it drifted back above the 20-dema. This is therefore in a buyable position here using the 20-dema or the lows of Monday/Tuesday as a tight selling guide.




Facebook (FB) offers a two-sided approach, so is a little different. I blogged today that we should watch the stock as it rallied into the 50-dma, but a brief 620 sell signal quickly failed as the stock continued rallying. By the close, FB had regained its 50-dma on above-average volume, which technically triggers a moving-average undercut & rally long entry. In this case, one can use the 50-dma as a tight selling guide, plus an additional 1-2% of downside porosity.

The two-side aspect to this current pattern is that IF we see the stock reverse here at the 50-dma, it then morphs into a short-sale target, based on the idea of a late-stage failed-base. FB has one thing going for it, which is the fact that it is a mainstay of institutional portfolios, and likely to be supported in any year-end rally. Therefore, we play it as it lies, without any preconceived bias, end of story.




Netflix (NFLX) has been acting like a late-stage failed-base after breaking below its prior cup-with-handle breakout point. But, as I wrote over the weekend, I would only short this on a weak rally up into the 50-dma. Therefore, I’m looking for just such a rally to occur, and here’s why.

If we look at the prior cup-with-handle base breakout zone, which I’ve highlighted in yellow, we can see that this actually occurs on a move that comes straight up from the lows of the handle. The lows of the handle are formed by several days of backing-and-filling along the 180 price area. Therefore, that’s really your support area since there is no significant price congestion at the top of the handle.

And we can see that NFLX did in fact find support at that area of price congestion along the lows of the handle on Monday, closing mid-range on heavy volume. The past two days have seen the stock settle down as volume has dried up. Thus, I think there is a good chance that this will see a tradeable move back up to the 50-dma at 193.16. In this case, any small pullback from here on light volume would set up an entry, using the 180 level as a tight selling guide.




Nvidia (NVDA) is another 50-dma violation that looks rather ugly here. But, we can see that yesterday it found support along the highs of a prior base structure that extends from late September into early October. Today the stock held right as volume declined. Because this would only be considered a short on a rally back up into the 50-dma, then it is logical to look for this as a tradeable move from here.

In this case, I’d look for a low-volume retest of yesterday’s lows as a possible long entry trigger. Note that the set-ups in NVDA and NFLX are a little different and not so concrete as the set-ups in AAPL, AMZN, and FB. These are a little trickier, and what we’re looking for are “Wyckoffian Retest” types of moves where the stock pull in slightly on light volume, and then turn back to the upside.




Tesla (TSLA) almost looked shortable today as it rallied up into its 10-dma and 20-dema. But, by the close, the stock was able to push above its 20-dema on above-average volume. This looks like it could set up a rally up to the 200-dma at 324.39. Given the fact that many tech leaders look oversold currently, I’d prefer to look for a rally further up in the pattern before getting excited about hitting this on the short side. On the short side, sometimes patience can be a virtue, and this may turn out to be the case with TSLA.




Caterpillar (CAT) remains quite viable as a Dow leader. Here we see it has pulled in with the NYSE-based indexes, of which the S&P 500 is one, and today found support right at its 10-dma. This puts it in a lower-risk entry position using the 10-dma as a tight selling guide, or the 20-dema as a less tight selling guide, but certainly tight enough.




Roku (ROKU) illustrates why I am a huge fan of the 20-dema as a critical level of near-term support. Sure, the 10-dma can be useful when things are trending strongly, but in a choppy, volatile general market environment where the indexes are pulling in, the 20-dema usually represents the more opportunistic pullback level. That turned out to be the case as ROKU came right into the line and then turned back to the upside on a strong increase in volume. With the stock back above the 10-dma, one could theoretically buy it here with the idea of using the 10-dma as a tight selling guide.

It does seem to me, however, that the prime moment of opportunistic entry occurred right at the 20-dema, and a retest of the 20-dema is quite possible. After-hours I’m noticing the stock trading down to a bid of 42.70 after closing at 44.26, so a retest of the 20-dema looks like a very real possibility tomorrow morning. Watch to see how the stock acts on any such retest.




ServiceNow (NOW) was the only short-sale idea that I discussed with any conviction over the weekend, and that worked out quite well on Monday. The stock briefly rallied just above its 50-dma and then reversed hard, splitting wide open to the downside on heavy volume. I think the group is still weak, but this would need to rally back up to the 50-dma to become shortable again, so it remains on my short-sale watch list in the event we see just such a rally.




Square (SQ) ran into its 50-dma on Monday and held support on above-average volume. As I wrote over the weekend, I thought a pullback to the 50-dma could represent an opportunistic, Ugly Duckling entry opportunity that would be good for at least a trade back to the upside. Today, SQ rallied further at the open and ran into resistance at the 20-dema on above-average volume. This looks like it may set up a retest of the 50-dma, which I’d watch for as a possible entry point with the idea of catching a more substantial rally.




First Solar (FSLR) looked pretty well cooked on Monday as it streaked lower on heavy selling volume. Yesterday, however, the company issued very strong guidance for next quarter, triggering a sharp rally back to the upside that results in a pocket pivot once it cleared the 10-dma.

Today, FSLR broke out on heavy volume but stalled to close near the lows of the intraday trading range. The stalling action seems like logical profit-taking within the context of the torrid move off the Monday lows. The stock also held above the base breakout point, so remains actionable here using the 10-dma as a tight selling guide.

SolarEdge (SEDG) is holding support at its 50-dma where it also filled the prior gap-up move’s “rising window” from early November. Today it stalled slightly as volume dried up sharply, but in my view, the stock is within buying range of the 50-dma while using the line as a tight selling guide.




Arista Networks (ANET) has been bombed all the way back its 50-dma as volume declines sharply. This pullback is the first pullback to the 50-dma since the stock pushed up through the $200 Century Mark, so I’m inclined to view this as a buyable pullback. In this case the 50-dma serves as a very convenient and tight selling guide.




Alibaba (BABA) is yet another busted leader trying to find its feet, and I would say that it did so today after undercutting three lows in the pattern extending back to early September. For now, I’d use the nearest low at 168.58 as a reference for an undercut & rally long set-up here, using that same low as a tight selling guide.

From here, a small pullback closer to the 168.58 prior low would be optimal, and should be watched for as a better potential entry based on the U&R set-up seen today. I discussed a week ago that we have to remain aware of the potential for U&R set-ups to appear as stocks come down, because this is the trademark of an Ugly Duckling market. So, you either pay attention to them, or you don’t.

And, the best way to be in the right frame of mind to pay attention to and capitalize on these is to have sold the stock on the initial breach of near-term support at the 20-dema last week! Otherwise, if you’re sitting there today still long BABA, you’re wondering if the stock is going to streak even lower, which is not a comfortable position from which to recognize and act on a U&R set-up.




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.

As I wrote over the weekend, “In my view, the best approach may be to focus on a select handful of names, and be ready to move with them in either direction as necessary, based on the real-time action, while keeping a close eye on your exit points in case things start to flip out again.” I think that approach still holds here, and for that reason I am focusing on the small handful of names discussed in this report, ready to move with them as necessary.

Despite any proclamations of a market top by the Great Houdini or any other market pundits out there, we must remember that this remains a QE market. And in the QE market, where the ocean of liquidity remains in force, stocks will remain the new bonds. It’s just a matter of finding the right set-ups at the right time, long or short, and acting on them as necessary.

So, as leaders get hit and the need to sell starts to become obvious, the stage is then set for an oversold rally. In some cases, this may just set up shortable rallies as broken leaders push back up into logical areas of resistance, mostly at their 50-dmas.

But, such rallies can also offer nimble investors at least tradeable short-term moves to the upside in any oversold market rally from here. And, as I’ve already said, the best way to handle and capitalize on these was to raise cash over the past few days as leaders broke near-term support levels. Personally, I always think a lot better when I’ve got a pocket full of cash, so I want to be ready for whatever opportunistic set-ups are lobbed in my direction. 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 a position in SQ, 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.