The Gilmo Report

January 14, 2018

January 13, 2018

The market continues to display incredible upside thrust in the New Year as the major market averages as the NASDAQ Composite Index made another all-time high on Friday, along with most of its other major market brethren on volume that was a shade higher. So far, barring a courtesy pullback on Wednesday, there has been no stopping this market.

On Friday, the NASDAQ also decisively broke out of its uptrend channel extending back to late September as it begins to accelerate to the upside. This is also evident in the action of several big-stock NASDAQ names, which are leading the charge. This is, however, not the case all around, as we will see further below.

 

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The S&P 500 Index looks virtually identical, and if there is a laggard to be found among the major market indexes it would appear to be the small-cap Russell 2000 Index. That only recently broke out on Thursday on a long upside price bar. Volume was lighter that day, but a breakout is a breakout.

 

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The U.S. Dollar fell sharply on Friday as it looks set to test the low of September 2017. This has the inverse correlative effect of sending gold higher. The SPDR Gold Shares (GLD) posted a higher high on Friday and is set to test resistance around the 128 price level, something I was looking for in my last report of 2017.

While it was difficult to ascertain what major themes might drive the market in 2018, my take on gold was bullish, and so far, that is proving to be the case. However, it’s still early in the year, but the way things are rolling currently it appears that further devaluation of the dollar is coming, which is the root cause of inflation as I see it. This will in turn drive gold higher.

 

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As the GLD moved higher, Kirkland Lake Gold (KL) held at its 10-dma where it remains in a lower-risk buy position as other gold mining names played catch-up. KL is the leader since it already sits at all-time highs, while most gold miners look similar on their charts. This is seen in the Vaneck Vectors Gold Miners ETF (GDX), which posted a pocket pivot off its 10-dma in conjunction with a big-volume trendline breakout on Friday. So far, the case for gold and, by association gold miners, remains intact.

 

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Despite the big market rally on Friday, the big story, or at least one of them, on that day was not a bullish one, but a bearish one. In what struck me as an “oops” moment, Facebook (FB) announced that it would make changes to its news-feed, which was seen as causing users to spend less time on the website.

It gapped down below its 50-dma at the open and closed just below the line on massive selling volume. Is this just a hiccup? If it was, the huge volume made it look more like a big “blowing of the chunks.” The stock was acting well, until Friday, and it is now questionable whether it can recover meaningfully ahead of its expected earnings report of January 31st.

I know some pundits will tell you that you should buy this dip, but this strikes me as the obvious response. I would look at the prior early December lows around 170 as a possible undercut & rally zone that would present more of an Ugly Duckling type of entry if the stock continues to move lower. Certainly, a breach of that price level would be a very bearish development, and we all know that the Ugly Duckling loves to show up when things look their ugliest.

 

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Apple (AAPL) did turn out to be buyable as it tucked into its 10-dma, 20-dema and 50-dma on Wednesday per my discussion of the stock in my report of that day. While no fireworks were lit, the stock did manage to post a new all-time closing high on Friday on slightly below-average volume. Again, breakout buyers can watch for a breakout ahead of earnings, which are expected on February 1st.

 

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Netflix (NFLX) is one of the primary drivers of the upside in the NASDAQ over the past two weeks, and its chart looks exactly like the NASDAQ’s chart. Earnings are expected on January 22nd, and if one bought the stock on the pocket pivot of December 28th enough profit cushion has been generated to justify holding through earnings, assuming the stock doesn’t cough it all up before then.

Amazon.com (AMZN) is now out of range of its recent base breakout after clearing the 1300 price level on Friday. However, if one wanted to treat this as a Century Mark buy signal at the 1300 level using it as a tight selling guide for stock bought up here, that is certainly possible. Just remember that earnings are expected on February 1st.

Nvidia (NVDA) remains within buying range of Monday’s buyable gap-up and base breakout. The 10-dma at 214.90 can be used as a selling guide. Also, I might look for a pullback to the 10-dma as a more opportunistic entry if I can get it. But so far, the pullback to the top of the base is acting constructively as volume declines. Earnings are expected on February 8th.

 

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Tesla (TSLA) remains in a position just above its 200-dma, where it has found support over the past two days. Technically, this remains at a lower-risk entry point on the long side as volume dried up further on Friday. However, I would be alert to any serious breach of the 200-dma as a trigger for a short-sale. The stock has tended to chop back and forth around its 200-dma over the past two months within a range between 300 and 340. It is now just below the 340 price level as it sits above the 200-dma, so it may be at an inflection point.

 

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CSX Corp. (CSX) is expected to report earnings on January 16th, which is this Tuesday, after the close. It is currently sitting right at its all-time highs. As I discussed on Wednesday, if one bought a position near the 200-dma when I first mentioned the stock, then one has enough cushion to sit through the report.

Caterpillar (CAT) made another new all-time high on Friday. Not much to say here as it remains extended from any lower-risk entry point. Earnings are expected on January 25th.

Weight Watchers Int’l (WTW) made a new all-time high on Friday on above-average volume. If the news of Oprah Winfrey, a large owner of the company, running for President was the sole driver of the big move we saw this past week, that doesn’t seem to be the case for now. This is way extended and I would watch as the 10-dma starts to move higher and closer to the current stock price as a reference for a lower-risk entry.

 

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Apptio (APTI) Is back above its 10-dma, but was buyable at the 20-dema per my comments in the Wednesday report. It held tight at the 10-dma on Friday as volume declined to -50% below average. This keeps it within buying range of the prior base breakout. APTI still has time to get going and build some profit cushion before it is expected to release earnings on February 5th.

 

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The recent stalling breakouts in APTI might be explained by the fact that the stock has made a round-trip all the way back up to its IPO-week highs as it forms what looks like a giant cup-with-handle formation. Those who bought the initial post-IPO jack to 24 and change have since suffered through a 56% decline, assuming they are too dumb to use stops, so some overhead selling as they get even makes sense.

I would also not call this a “Punchbowl of Death” (POD) since it has spent a lot of time consolidating on the way up. PODs are characterized by a straight-down and then straight-up look with no consolidation on the way up. This rapid price ascent back to the prior highs is what makes them prone to failure.

 

 

GR011418-APTI Weekly

 

MuleSoft (MULE) is still trying to recover from Wednesday’s odd gap-down to the top of its prior low-base range breakout and the 20-dema. It’s now sitting just a hair below the 10-dma as volume dried up to –64% below-average on Friday. Earnings are expected on January 25th, so it’s going to need to push much higher before then to produce any reasonable profit cushion that would allow one to hold through the report.

 

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Cloudera (CLDR) is still within buying range of Wednesday’s buyable gap-up, but the closer to the 17.52 intraday low of the BGU day you can buy it, the better.

Rise Education Cayman Ltd. (REDU) looks to be setting up again along its 10-dma in what is a more conventional-looking cup-with-handle formation. Volume dried up to -58% below-average on Friday as the stock held support at the handle lows to close four cents above the 10-dma. This is in a reasonable entry position, using the 20-dema as a selling guide. However, any quick test of the 20-dema would of course produce a more opportunistic entry if it were to occur.

 

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Stitch Fix (SFIX) has tried to bounce off the 20-dema but so far, no such luck. The bottom line is that the stock is sitting right at the 20-dema with volume reaching extreme “voodoo” levels at -87% below-average on Friday. Therefore, SFIX is still in a lower-risk buy position using the 20-dema or the 24 price level as a selling guide.

 

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Salesforce.com (CRM) broke out to new highs on Friday on above-average volume, which makes it buyable on that basis. It had previously posted a pocket pivot at the 50-dma, then drifted back up to the highs of its current base where it spent a few days consolidating before Friday’s breakout.

 

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Workday (WDAY) is pulling back slightly here as it tests the Wednesday BGU low at 111.76 with volume declining. The closer you can buy it to the 111.76 price level, the better, but the stock is fairly extended from its move off the 200-dma. Thus, it’s not clear whether this will produce any immediate, further upside thrust from here.

 

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Square (SQ) pushed to higher highs on Thursday as buyout talk circulated. Volume was higher, but not necessarily heavy. The stock is extended from its initial undercut & rally move of January 1st and the ensuing pocket pivot at the 50-dma four days later. With the 10-dma now moving above the 50-dma, that becomes your reference for a buyable pullback from here.

 

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First Solar (FSLR) looked like it might be on the verge of a breakout, as I noted near the end of my Wednesday report, and that turned out to be highly prophetic. At the time, I noted that it was showing “voodoo” volume levels as it held tight at its 20-dema and was therefore buyable on that basis. On Thursday morning, the stock opened up slightly and just kept going on what turned out to be a big-volume base breakout.

On Friday, the stock came in and retraced most of the prior breakout move on above-average volume. There remains some “news overhead” here with respect to evolving Trump Administration policies toward the solar industry. That may account for the selling into the breakout, but we might also consider the fact that the breakout occurred from a four-week base.

What perhaps sets this apart from a breakout like we saw in WTW is that WTW had formed a very long base with two prior failed breakouts. Often the longer base helps produce a more decisive upside move, and there is a simple reason for this. The more time spent base-building, the more weak hands are taken out of the stock and the more strong hands come in.

 

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Alibaba (BABA) is pulling back to its 10-dma in constructive fashion as volume dried up to -44% below-average on Friday. For a big stock like BABA, this is considered a reasonable “voodoo” volume dry-up. The stock is therefore buyable here using any of the lower moving averages, the 10-dma, 20-dema, or even 50-dma as selling guides. The stock was last buyable on the pocket pivot off the 10-dma and up through the 50-dma per my blog comments on that day. Earnings are expected on February 1st.

 

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Weibo (WB) picked up some support as it pulled back to the 10-dma on Friday, where it was buyable near the line. It then rallied to close up on the day with volume picking up. As I wrote on Wednesday, the 10-dma was your reference for support and a lower-risk entry opportunity. This looks like it’s ready to break out, frankly, but any further tests of the 10-dma would still present your best, lower-risk entries from here.

 

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YY, Inc (YY) could be considered within range of the breakout through the right-side peak of its previous base, but for my money the pocket pivot trendline breakout on January 1st was the real breakout. From there, pullbacks to the 10-dma were your next lower-risk entries, and the stock has since had two such pullbacks to the line, one on Wednesday and one on Friday. Friday’s pullback found strong support, producing a pocket pivot at the 10-dma on above-average volume, but for my money the stock was buyable at the 10-dma early on Friday morning.

 

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Lumentum Holdings (LITE) picked up a couple of research firms’ endorsements this past week, one from Barclays and one from B. Riley FBR, which made it its “top optical stock for 2018.” With so many optical stocks looking quite ugly, however, I have to wonder what this designation means. In any case, the analyst calls produced upside in the stock, but nothing decisive, in my view. LITE remains below its 50-dma. At the same time, it has held up above its 20-dema as volume declines, so I’m still on watch for some sort of roundabout or bottom-fishing pocket pivot coming up through the 50-dma.

 

GR011418-LITE

 

Video-gamers have been resurgent lately, with Activision Blizzard (ATVI) breaking out on Thursday. Take-Two Interactive (TTWO), which has been the monster in the group, looks like it is setting up to break out as well. On Friday, it posted a pocket pivot volume signature, but from a point a little over 1% above the 10-dma. Usually, that’s close enough, so I view this as buyable here using the 20-dema as a tight selling guide. Breakout buyers can, of course, just watch for a breakout, while pullbacks to the 20-dema, which are still possible, would present the lower-risk option for pullback buyers.

 

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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.

Despite the strong, continuous upside in the market so far in 2018, I can find some set-ups that have been buyable, and some which currently are, as this report shows. Interestingly, since I made the comments in my last report that “Other big-stock leaders are also forming bases and may be on the verge of breakouts, such as AAPL and FSLR, for example,” both of those stocks posted new all-time highs over the next two days. So, the set-ups are there, you just have to find them.

The main issue is whether a recently-purchased stock can generate enough profit cushion to justify holding through “earnings roulette” season. In the case of situations like NFLX and CSX, for example, there appears to be a reasonable profit cushion to do so. Also, BABA and WB, as measured from their January 1st pocket pivots, may also provide similar profit cushion potential, and they still have time to break out and move higher ahead of their expected February earnings reports. Both are also in what I would consider secondary entry positions, looking for breakouts.

This market to a large extent seems to be acting less like a QE market and more like a “normal” market where breakouts occur and actually work in most cases. The action is strong and broad, but without trying to “kiss all the babies,” I think I’ve provided enough actionable material in recent reports to participate in this current rally.

Of course, we’re only two weeks into the new year, so we can’t jump to firm conclusions just yet, and we could see a decent, but normal, pullback at any time. Meanwhile, we just go with the precise price/volume action we see in real-time, and then let the stocks tell us what to do. That is all.

 

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 s positions in LITE and 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.