The Gilmo Report

January 11, 2017

January 11, 2017

The Dow Jones Industrial Index keeps stumbling along just below the 20,000 level, leaving many commemorative baseball cap vendors very unhappy. From an investment/trading standpoint, however it’s been all about watching the set-ups in individual stocks and simply going with the flow of set-ups.

The bottom line is that who needs Dow 20,000 when the NASDAQ Composite Index keeps posting all-time highs? The index recovered from a mid-day sell-off and reversal to close up near its highs as it posted its seventh straight up day today. On its face, the action appears bullish.

 

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While the NASDAQ forges new highs, the S&P 500 Index looks similar to the Dow. Both indexes are continuing to hold within tight, roughly four-week price ranges. Like the NASDAQ, the S&P 500 and the Dow both recovered from early sell-offs and negative reversals this morning to close back near their highs on lighter volume.

While higher volume might have been more impressive to see, the NYSE-based indexes don’t seem to want to yield ground, despite the early-morning reversal. Ultimately, in terms of making money in this market, however, it still boils down to catching the right stock in the right set-up at the right time.

 

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In this vein, we have seen Chinese names take the driver’s seat in this market over the past few days since I first mentioned Momo (MOMO) as a buyable situation around 19 in a blog post over a week ago.  At that time, I was seeing what looked like turnaround or roundabout type action in a number of Chinese names. Also, in last Wednesday’s report I discussed my view that when it comes to China, President-Elect Trump’s bite may be worse than his bark.

At the same time, we saw China announce production cuts of excess steel and coal on Monday, which seems to express a willingness by China to work with the incoming administration by making some concessions. And who could miss the wonderful photo op to be found in Monday’s allegedly constructive meeting between Alibaba (BABA) founder Jack Ma and the incoming President?

Chairman Ma pledged to create a million jobs in the U.S. by helping small U.S. businesses sell directly to Chinese and other Asian customers through BABA’s e-commerce platform. While watching the two hold a brief, little press conference after their meeting, I was waiting for President-Elect Trump and Chairman Ma to break out in a version of “Kumbaya.”

Kumbaya or not, the Chinese-related news hitting the wires on Monday certainly helped to boost shares of BABA, as well as the rest of the Chinese-related stocks. After I discussed BABA as a bottom-fishing or roundabout type of pocket pivot in this past weekend’s report, the stock immediately pulled in just slightly to test its 50-day moving average on Monday morning.

From there it moved higher in a pocket pivot move off of the 50-day line, and then gapped up on Thursday where it churned around the 97 price level. The stock is now extended, but pullbacks to the 50-day line at 92.71 could present lower-risk entries. Otherwise, the stock was able to hold tight today as volume dried up, which is constructive. Keep in mind that BABA is expected to announce earnings on January 26th.

 

BABA

 

And as BABA continues higher, Momo (MOMO) has shown the most upside momentum. most of the thunder among the group with a roughly 15-18% move from the 19 price level where I first mentioned it early last week. For me that’s enough, particularly when you see that the stock ran right up into overhead resistance from the prior base formed in November and December.

But after running into resistance along the prior base lows, MOMO did not lose its mo-mo as it held the pullback to the 50-day line with volume declining. I still like this on pullbacks approaching or reaching the 50-day line at 20.81.

 

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Notes on other Chinese-related names discussed in recent reports and/or blog posts:

Weibo (WB) has marched alongside MOMO and BABA as it too has moved higher over the past few days after flashing a pocket pivot at the 20-day moving average last Wednesday. The stock has found near-term resistance at the 50-day line, but in my view this just keeps the stock in buyable range using the 20-day line at 44.12 as a tight selling guide.

JD.com (JD) remains something of a teaser, even after getting a nice analyst upgrade yesterday that sent the stock gapping above the 27 price level. The move would have qualified as a pocket pivot except for the fact that it came from a position that was extended from the 10-day moving average. This is a slow boat to China, pun intended, so far, but remains buyable on weakness down to the 50-day line at 25.86, using the line as a selling guide.

Netease (NTES) was mentioned in a blog post on Monday as it posted a pocket pivot coming up through the 50-day line. It looks very similar to BABA and MOMO on its daily chart. Pullbacks to the 50-day line at 229.28 would present lower-risk entry opportunities.

While other Chinese names have been moving as of late, including names like big-stock Chinese internet name Baidu (BIDU) all the way down to smaller names like Baozun (BZUN), I don’t think it’s necessary to try and kiss all the babies. Sticking to a small handful of candidates among the group and working them carefully seems more efficient to me. I think the names I’ve discussed so far offer reasonable vehicles for further potential upside in the China space, should that remain the case going forward.

China’s announcement of cuts in excess steel and coal production on Thursday breathed life back into steel names, as well as metals and coals. Some, like Rio Tinto Plc (RIO), gapped up in what were buyable gap-up type moves after looking fairly sluggish early in the week. If you were alert to this yesterday (which I would assume you would be if you understand how to handle BGUs), this was buyable using the 40.34 intraday low as a selling guide. RIO continued a little higher today as it approaches the early December highs.

 

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And as metals names like RIO gapped up, steels also came back to life after looking weak on Monday. Steel Dynamics (STLD) actually posted a pocket pivot yesterday as it regained the 10-day and 20-day moving averages on a strong-volume move.

I actually scalped some profits shorting STLD into the opening today (as well as U.S. Steel (X), by the way), but as the stocks came into their 20-day moving averages you could sense the bid underneath.  By the close STLD printed 30 cents below yesterday’s close, which I consider to be a “tight” close. It also held the 10-day and 20-day lines with volume declining.

This looks buyable here using the 20-day line as a selling guide. Keep in mind, however, that STLD is expected to announce earnings on January 24th. Whether any decisive action in either direction occurs before then remains to be seen. But for now STLD is just working sideways in a range, and so far it seems that buying weakness to the lows of the range is your lower-risk entry proposition.

 

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U.S. Steel (X), not shown here on a chart, doesn’t look a whole lot different from STLD, except for the fact that it did not post a pocket pivot yesterday. Also, on Monday, X sold off and broke below its 20-day moving average on higher selling volume. Yesterday’s China news obviously helped stave off this negative action. X is expected to announce earnings on January 31st, but I would expect it to act in sympathy to earnings reports from any number of other steel stocks, including AK Steel (AKS), which is also expected to announce earnings on the 24th.

The bio-tech sector has seen some strong moves among selected names recently, but today the group took some heat as the President-Elect slammed drug companies again. All of the big-stock bio-techs, including Celgene (CELG), were hit with volume selling today.

CELG was actually showing a little bit of constructive action on Monday with a stalling pocket pivot off the 10-day and 20-day moving averages. But that was all for naught as the stock broke to the downside today on heavy selling volume. In its favor, however, was the fact that the stock was able to find support at and hold above the 50-day moving average.

Is Trump really going to torpedo the bio-tech sector? Aside from a harsh word here and there, it is not clear exactly what policies his administration will push to control drug prices, if at all. In that case, does this type of sell-off merely set-up a buyable pullback in CELG? If one is bold enough, then buying the stock here while using either the 50-day line at 116.40 or today’s intraday low at 115.26 as a selling guide is one way to test this theory.

 

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Clovis Oncology (CLVS), not shown, is fairly extended at this point, but it more or less ignored Trump’s comments and held above its 10-day moving average today. Volume was above average, but this doesn’t look like a problem, at least for now. I would prefer to look at pullbacks into the 10-day line at 46.33 or the 20-day line at 44.37 as opportunistic entries.

I mentioned Incyte Pharmaceuticals (INCY) and Glaukos (GKOS) as buyable set-ups in my weekend report based on INCY’s pocket pivot trendline breakout and GKOS’ buyable gap-up (BGU) on Friday of last week. INCY started this week off with its own BGU on Monday as bio-techs in general rallied on group-related buyout news.

However, Trump’s negative comments today may help create a more opportune and lower-risk buy opportunity on the basis of Monday’s BGU. The intraday low of the BGU day is 112.83, so with INCY testing that low without breaching it while closing about 2% above it, the stock is in a lower-risk buy position using the 112.83 price level as a reasonably tight selling guide.

 

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GKOS has continued higher after Friday’s buyable gap-up and has now moved up to the left side peak of what is now a completed cup formation. Now we might look for the stock to form a handle here, with the rising 10-day moving average, now way down at 35.73, as a reference point for a potentially lower-risk entry opportunity on any pullback from current levels.

 

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When you have more liquid names like CLVS, GKOS, and INCY working, it’s not necessary to deal with a “thinnie” like Myovant Sciences (MYOV), not shown. So far, while the stock is given to fits of upside fury, those tend to be brief, and the stock then descends back into the 11 price zone. Of course, that’s where your lower-risk entries will occur, so for those looking to play MYOV that’s essentially what you’re waiting for as an opportunity to jump into the shallow waters of MYOV!

Among the FANGs that have helped to drive the NASDAQ to seven straight up days, Facebook (FB), not shown, has had the most upside thrust but is now well extended. The same can be said for Apple (AAPL), also not shown, as it moves higher following last Friday’s pocket pivot breakout from a small cup-with-handle, as I discussed in this past weekend’s reports.

The fact that these names are powering higher is probably constructive for the general market. Amazon.com (AMZN) illustrates its reluctance to give up the gains made last week on a strong-volume roundabout pocket pivot (RAPP) that it posted last Thursday, as I blogged at the time.

Here we see AMZN holding tight in a short, three-day bull flag as it heads into its expected earnings announcement on January 26th. It certainly looks like it wants to move higher before then, so if one bought the pocket pivot at the 50-day line, then sitting a little longer before earnings come out may be possible, and potentially profitable. For now the $800 price level has represented near-term resistance. But I must say that if I saw the stock clear that price point I would simply go long or add to an existing position and use the $800 level as a tight selling guide.

 

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Notes on other FANGs which continue to build on prior constructive action:

Alphabet (GOOGL) has continued higher after last Friday’s pocket pivot breakout from a short cup-with-handle base, as discussed in the weekend report. Note that GOOGL has held the 820 price level on three intraday tests over the past three days in a row. This still looks buyable using the 820 level as a selling guide. Earnings are expected to be announced on January 26th.

Netflix (NFLX) is holding tight along its 10-day moving average, but earnings are expected next Wednesday, January 18th.

Priceline Group (PCLN) is pushing up into resistance around the prior December highs, but has managed to move higher after last Friday’s pocket pivot move back above its 50-day moving average, as discussed in my weekend report. Earnings are expected to be announced on January 26th.

While it isn’t a “FANG” stock, Tesla Motors (TSLA), not shown, has been one of the stronger big-stock NASDAQ performers over the past month as it has marched about 20% from its original buy point along the 50-day moving average back in early December. As initially discussed in my December 14th report, TSLA had flashed a bottom-fishing pocket pivot at that point. After flashing pocket pivots higher up at the 200-day moving average last week, it is now extended, and pullbacks to the 10-day line at 223.87 would be your next reference for lower-risk entries.

With any of these big-stock names that are set to announce earnings over the next week or two, the big question is whether to hold positions through earnings. My own preference is to avoid playing earnings roulette unless I have a decent profit cushion. So what one does will likely depend on what kind of additional upside movement we see in any of these names ahead of earnings.

Nvidia (NVDA), not shown, offered a nice trade off of the 20-day moving average on Monday so far per my discussion of the stock this past weekend. Over the past two days it has pulled into the 20-day line again. Note that volume dried up sharply today, so this puts the stock in a very buyable position using the 20-day line at 103.22 as a tight selling guide. The idea here, as previously discussed, is to try and play a possible swing-trade back up to the prior highs near 120.

 

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Unlike NVDA in December, Arista Networks (ANET), not shown, has been unable to generate any significant upside since breaking through the $100 Century Mark itself over the past week or so. Today ANET dropped back below the 100 price level, but found support at its 20-day moving average and closed above its 10-day moving average. This puts it right on top of its prior three weeks tight breakout of last Wednesday.

I’m more or less on the fence with this one, as an inability to regain the 100 price level could turn the stock into a short-sale target per Jesse Livermore’s Century Mark Rule in Reverse. Otherwise, if the stock can retake the $100 Century Mark soon, it may again be in play as a Century Mark Rule play on the long side. We’ll see how this plays out in the coming days as its expected earnings report on February 16th approaches.

Veeva Systems (VEEV) has showed some spunk so far this week after flashing a roundabout pocket pivot last week, as I discussed in my weekend report. With the stock now moving up to the highs of its low-base price range in the 44 price area, some short-term resistance might be expected.

Notice that VEEV has posted a cluster of five-day and ten-day pocket pivots over the past few days, but today reached a higher high on lower volume. This would seem to imply that a pullback is coming, so I would look for any pullback into the 20-day line at 42.44 as an opportunistic entry, should it occur.

 

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Two of the other clouds I noted in passing in my weekend report, Salesforce.com (CRM) and ServiceNow (NOW) have both moved higher this week. While CRM is rallying up into its 200-day moving average, where it might run into near-term resistance, NOW actually posted a pocket pivot today off of its 50-day moving average.

As I pointed out over the weekend, entering NOW along the 50-day line was feasible, although it may need to track along the line for a short period of time. That turned out to be a very short period, actually, of only two days. NOW then launched today on heavy buying volume as earnings loom ahead on January 25th.

 

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The smallest cloud name among those I’ve been following in recent reports, Square (SQ), has pushed all the way back up to its April 2016 highs. It has subsequently run into resistance along those highs but had been able to hold the top of the near-term price range (which is more of a tiny cup pattern) at 14.82. With SQ recovering all the way back up to its prior highs, it has now formed a big cup formation, which we could also call a “punchbowl.” However, that does not mean it is a Punchbowl of Death, since it remains in a strong technical position.

With earnings expected to be announced on March 7th, I would not be surprised to see the stock perhaps build a handle here ahead of earnings. In the meantime, the rising 10-day and 20-day moving averages at 14.38 and 14.23, respectively, would represent your reference points for potentially buyable, lower-risk pullbacks.

 

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The oils may still be in play as the three names I mentioned in my weekend report, Parsley Energy (PE), Diamondback Energy (FANG), and Rowan Companies (RDC) all remain in buyable positions. PE, not shown, actually priced a 22-million-share secondary offering today which was absorbed rather well. By the close, PE printed an even 36 on the tape and closed above its 50-day, 10-day and 20-day moving averages. This keeps it in buyable range using the 50-day line at 35.48 as a tight selling guide.

Interestingly, the other two, FANG (which I suppose is a different type of “FANG” stock ;-p) and RDC, both posted pocket pivots today. RDC’s was the stronger of the two as it moved up 4.4% today on a nice pocket pivot and trendline breakout. This looks buyable using the 10-day line at 19.47 as a tight selling guide.

 

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Diamondback Energy (FANG) posted a subtler pocket pivot on a 1.2% move back up through its 10-day and 20-day moving averages. This looks buyable using the 10-day moving average at 102.83 as a tight selling guide. Alternatively, one could implement the 50-day line at 100.66 as a somewhat wider selling guide, depending on one’s risk preference.

For the record, PE, FANG, and RDC are not expected to announce earnings until the third week of February. So there is plenty of time for them to generate some kind of upside movement from their current consolidative types of positions based on these percolating pocket pivots today.

 

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Mobileye (MBLY) remains in play here after posting a sharp pullback on Monday that took the stock back below its 200-day moving average. Selling volume was heavy. But I would say that, realistically, this looks normal within the context of the prior, sharp 19.3% upside move up through the 50-day and 200-day moving averages.

MBLY found support above its 10-day moving average before regaining the 200-day line yesterday. I’m sure shorts were encouraged by Monday’s price break, but all the selling dissipated quickly as the stock has been able to drift back up above the 200-day line since then. That may put more squeezable shorts in position to get, well, squeezed. For now, I would be willing to go long the stock here using either the 200-day line at 40.70 or the 10-day line at 39.98 as reasonably tight selling guides. MBLY is not expected to announce earnings until February 22nd.

 

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With the Dow closing within 46 points of the elusive 20,000 level, we could be in position for that to occur shortly so that the hype can end and we can all get on with our lives. And by “getting on with our lives” I mean basically doing what we’ve already been doing, which is focusing on the individual stock set-ups.

The trick to making money currently is to stay ahead of the rotation. In most cases, rotational movement into big-stock NASDAQ names or Chinese names that have been where most of the action has been this week have started with pocket pivots, most notably bottom-fishing pocket pivots and roundabout pocket pivots. These are defined in the Gilmo glossary.

In the case of the oils discussed in this report, FANG and RDC are showing RAPP types of moves. Perhaps that’s where money will flow to next, and I think these stocks provide examples of the early percolating action we want to look for as we hunt for the next round of long set-ups. In the case of percolating action that has led to upside moves, as with the Chinese names, then we are also on the lookout for buyable pullbacks as lower-risk entry opportunities.

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. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.