The Gilmo Report

February 14, 2018

February 14, 2018

Stronger than expected inflation numbers this morning sent the indexes trading down hard at the open. But the selling quickly subsided and the indexes began moving back to the upside. The NASDAQ Composite Index led the rally as it pushed past its 50-dma to post a surprising fourth-day follow-through coming straight up from the lows.

 

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The S&P 500 Index wasn’t up as much as the NASDAQ’s 1.86%, coming in with a 1.34% gain, which I suppose would be enough for a follow-through day based on the old rules. However, the NASDAQ’s move alone is sufficient to call a follow-through.

 

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The prospect of higher inflation as reflected in this morning’s Consumer Price Index numbers sent gold on a big upside romp. This shows up as a big-volume breakout through the 10-dma on the SPDR Gold Shares (GLD) that would also qualify as a five-day pocket pivot. However, the breakout is sufficient as a buy signal, in my view, and so gold is back in play using the 10-dma as a tight selling guide.

Note that today’s 10-dma breakout came on the heels of a very subtle undercut & rally move as the GLD rallied back up through the prior 125.80 low of January 18th. Tomorrow we will get the Producer Price Index which might have some effect on what gold does tomorrow, so we will want to watch this carefully. Any constructive retest of the 10-dma would present a lower-risk entry opportunity, should we get it.

 

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Okay, so now that we have a follow-through, what are we supposed to do? In the “old days,” usually a follow-through would be associated with a number of stocks breaking out or within buying range of an existing breakout. That’s not really the case here, but I think it was enough to go with the handful of ideas I had discussed over the weekend.

Twitter (TWTR) opened down yesterday and held in negative territory only briefly before turning and launching to a new two-year high.  The downside opening brought the stock within 3% of the 29.71 BGU low of four trading days ago, well within buyable range. As I wrote on Wednesday, as Facebook (FB) has fallen by the wayside, TWTR has been on the ascendancy, and yesterday’s move was a strong confirmation of my theory.

Today, TWTR opened down with the market, but quickly found its feet and headed back up toward the highs of last Thursday’s big-volume buyable gap-up move. The proper entry point was yesterday when it came within buying range of the 29.71 BGU low. Now we’re a little extended here, so we want to see how it holds up here and whether any pullback from here shows volume drying up, which would be constructive. No need to search for this after the follow-through day because you were already in it if you were operating according to my discussion of the stock over the weekend.

 

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Snap (SNAP) continued to slide in after its big-volume, big-percentage buyable gap-up of six trading days ago as volume has declined. As I wrote over the weekend, I felt that a low-volume pullback into the 18 price level would be constructive and offer a lower-risk entry opportunity. Today, the stock pulled into the 18.12 price level and then turned off the lows, pushing back up toward the 20 price level. Thus, this was buyable this morning, before the market had posted a final follow-through based on my weekend discussion. It is now extended.

 

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If this follow-through works out, and both TWTR and SNAP continue to work, then I would expect Facebook (FB), which has been the laggard among the social-networking names as of late, to make a comeback. We already saw the stock post an undercut & rally move on Friday that occurred in conjunction with a bounce off the 200-dma, as I discussed over the weekend. That has so far worked, and today FB was able to clear the higher 175.80 low in the pattern on above-average volume, triggering a second U&R entry.

It’s now approaching the 50-dma, so we can look for a possible move up through the 50-dma as a moving-average undercut & rally (MAU&R) trigger at that point, should it occur. A lot of broken-down leading names are pushing up off their recent lows in v-shaped moves, so I would not discount FB’s ability to do so as social-networking names like TWTR and SNAP show their muscle.

 

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Netflix (NFLX) held right along its 20-dema on Monday as it tested the line and then rallied back to the upside. That was a lower-risk entry opportunity at that point, with the idea of exiting promptly if the stock failed to hold the line. Low-volume pullbacks to the 10-dma would offer lower-risk entry opportunities from here.

 

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Nvidia (NVDA) held right along its 10-dma and 20-dema as well yesterday as volume declined, putting it in a lower-risk entry position. As I wrote over the weekend, IF we saw the general market continue higher, then the stock would likely join the party, and those willing to take the risk of buying along the 20-dema could do so using the line as a tight selling guide.

Today, NVDA pushed off the line on above-average volume. If the general market continues higher then I would expect the stock to push to new highs from here. For now, any pullback to the 10-dma would offer a lower-risk entry opportunity.

 

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Amazon.com (AMZN) looks similar to NFLX and NVDA as it pushes off its 10-dma after holding along its 20-dema earlier in the week. From here I would simply take the same approach of watching for a test of the 10-dma on low volume as a lower-risk entry opportunity.

Weight Watchers (WTW) was also buyable lower in the pattern before today’s follow-through when it pulled into the 10-dma last Friday and held as the general market bottomed. It has now drifted back up toward the prior highs and is extended.

 

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Tesla (TSLA) continues to rally up toward its 50-dma at 331.06 but fell short today as it stalled out near last week’s low on light volume. This is interesting action because the stock was unable to get closer to the 50-dma on a strong index rally day like we had today. The stock is within about 3% of its 50-dma, so could be considered in shortable range, using the 50-dma as a guide for a tight upside stop.

I think it’s helpful to have at least one short idea in your quiver here just in case the follow-through fails. I consider TSLA to be one of the weaker names in this market currently, and so it fits the bill.

 

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Square (SQ) rallied up to its 50-dma on Friday but failed to clear the line. On Monday it was able to close a dime above the 50-dma in a moving-average undercut & rally (MAU&R) move. This helped to confirm a prior undercut & rally coming up through the prior 38.67 low in the pattern, although that was a double-edged U&R since the stock failed to clear the 50-dma. Once it cleared the 50-dma yesterday it was then playable as a U&R.

The stock did run into resistance at the 20-dema today, and closed just below the line as it churned around on higher volume. I would first play this as a possible short here, using the 20-dema as a tight upside stop. Notice that there is an area of overhead price congestion from the latter part of January that lies just above the stock on either side of the 44 price level. If the stock can clear the 20-dema, then it may make a run for the late January highs ahead of its expected earnings report on February 27th.

 

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If today’s follow-through day is for real, and there aren’t a lot of breakouts to buy, then we simply go with alternative set-ups. After prior sell-offs, we’ve seen prior leaders just bottom out and start moving back to the upside, and the first indications of this are generally U&R moves that may or may not be associated with moving average undercut & rally (MAU&R) moves. FB, of course, is one example.

Alibaba (BABA) is another interesting “big-stock” example after attempting to post an undercut & rally move last week that failed. Today it again cleared the prior 179.32 mid-January low as volume increased. It then closed above the 50-dma, triggering an MAU&R at that point. This can be bought here using the 50-dma as a tight selling guide, or one can take the cautious route and look for a low-volume pullback to the 50-dma as a lower-risk entry, assuming you can get it.

We saw Weibo (WB) break out to new highs today after posting a pocket pivot yesterday after earnings, so I would look for other big-stock Chinese names that have already announced earnings to follow WB’s lead. WB is extended now, of course, but BABA is in the same position WB was in four days ago.

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.

Nimble players who aren’t strict breakout buyers have been able to take advantage of the rally off the lows, but with a follow-through day now on the books, things would appear to be shaping up for the market to move higher. The S&P 500, however, has yet to clear its 50-dma, so I would look at this as strong confirmation of the rally if it can do so.

In the meantime, I don’t see any reason to have to chase everything in sight, just go with the buyable set-ups in the names you know. In addition, if you didn’t play names like SNAP or TWTR, look for lower-risk entry set-ups in other names to develop over the coming days. A lot of stocks got extended off their lows rather quickly today, and so jumping into those situations where you can’t maintain tight risk control is not advisable.

Also, be patient, since there is often time to get into names at proper, lower-risk entries after a follow-through day. We may see some backing and filling in here after a move straight up off the lows, even with a NASDAQ follow-through. That may give us an opportunity to assess some new set-ups and find better, lower-risk entries. So, keep your head and maintain a methodical approach rather than succumbing to the feeling that you have to jump in with both feet at this stage, particularly after a sharp rally coming right up from the depths a deep sell-off, the fastest 10% or more sell-off we’ve seen in 80 years!

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 TWTR, though positions are subject to change at any time and without notice.

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