The Gilmo Report

January 17, 2018

January 17, 2018

The rally finally ran into some selling yesterday when the indexes all reversed on much higher volume. The evaporation of a big gap-up open and ensuing rally that saw the Dow Jones Industrials Index briefly clear the 26,000 level was attributed to a possible government shutdown as Democrats refused to play ball with the Republicans and pass a stop-gap spending measure.

Of course, in this market, if you don’t like the action on one day, just wait another day. As I tweeted yesterday during the reversal, that was the last pullback to buy before Dow 30,000. I was only half serious, but I seemed more than half right today as the indexes resumed their merry rallying ways, and the Dow closed decisively above 26,000.

And as the Dow cleared the 26,000 milestone, the NASDAQ Composite Index made a run for its own milestone of sorts, but fell just short of the 7300 price level. Volume was lighter on the NASDAQ, but still above average.

 

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The S&P 500 Index cleared the 2800 price level on lighter volume. Despite yesterday’s reversal off the highs on higher volume, the indexes haven’t flinched, and the rally remains intact.

 

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The U.S. Dollar steepened its slide yesterday, keeping the fires burning underneath the gold rally. The SPDR Gold Shares (GLD) is currently extended after last being buyable along the 10-dma last week. It is again pulling down toward the 10-dma on heavy volume. For that reason, I would use the 10-dma as a selling guide for the purpose of banking profits on any position taken down below 120 on the prior undercut & rally set-up.

Leading gold name Kirkland Lake Gold (KL) pushed off its 10-dma, where it was buyable per my comments in the last two reports, and posted a new all-time high today. The 10-dma would remain a tight selling guide.

 

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The action among individual stocks remains uneven, with some out-performing quite starkly, while others lag or even break down, as remains the case with Facebook (FB). As I wrote over the weekend, the stock was not an automatic “reflex” buy on the gap-down move through the 50-dma. Instead, I was looking for the stock to continue lower and test the lows of its pattern. The first low comes into play at 174.67, while the second low consists of two lows, one at 168.89 and one at 169.01.

FB could have been viewed as a short yesterday when it briefly gapped back above the 50-dma with the market right at the open. It then reversed and move to lower lows on heavy selling volume. Today, however, the stock undercut a less prominent low at 176.46, and rallied in a slight U&R twist. It closed just below mid-range as selling volume dissipated.

Outside of being a tactical short yesterday, I consider the stock to be in no-man’s land here as it remains below the 50-dma. With selling volume dissipating, it may attempt to regain the 50-dma, so that is something to watch for. Things don’t always set up the way you expect, so some flexibility is called for. For now, I view this as a minor U&R set-up on the long side, using the 176.46 price level as a selling guide. From here, however, you’d want to see a decent price move ahead of earnings, which are expected on January 31st. This, of course, is problematic.

 

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Apple (AAPL) found support today at its 10-dma after selling off early in the day. A lengthy press release detailing the repatriation of money back to the U.S., expanding operations, hiring more employees, and increasing capital spending helped trigger the move back to the upside. This led to a pocket pivot breakout to all-time closing highs on above-average volume. If you like AAPL, then this breakout is buyable, with the idea that it will create some profit cushion ahead of its expected February 1st earnings report.

 

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Netflix (NFLX) is expected to report earnings next Monday after the close, and given its extended state, I would not be looking to add shares ahead of the report. If one bought on the pocket pivot down at the 50-dma in late December, one has a reasonable profit cushion with which to hold through the report.

Amazon.com (AMZN) has been pulling back over the past two days as the 10-dma rises to meet up with the stock. For now, the 10-dma, currently at 1257.86, would be your reference for buyable pullbacks from here

Nvidia (NVDA) flipped below its 10-dma this morning, but closed back above the line by the end of the day. It isn’t going anywhere just yet, but remains within buying range of last Monday’s buyable gap-up and base breakout.

Tesla (TSLA) has so far worked as a long idea on the move back up through first the 50-dma and then the 200-dma. As I wrote over the weekend, it was in a buyable position along the 200-dma as volume declined, with resistance around 340 price level. Today, the stock decisively cleared resistance on strong volume. While it may seem unlikely, TSLA has worked well as a long since rallying above its 50-dma seven trading days ago. This is why one must cast their opinions aside and just go with the price/volume action, playing it as it lies.

 

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Among techs that I’ve discussed, both Arista Networks (ANET) and Universal Display Corp. (OLED) have been working after breakouts last week. Both stocks remain within buying range of their recent breakouts. At the time I preferred OLED to ANET, but the two are both moving higher in tandem. With either of these names you have to buy the pullbacks to the 10-dma if you can get ‘em.

 

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CSX Corp. (CSX) beat on earnings yesterday and immediately sold off in after-hours trade. That led to a decline down to the 20-dma this morning, but the pullback looked normal given that the stock had rallied strongly off the 200-dma ahead of earnings. That turned the earnings report into a sell-the-news event, but once the selling dissipated the stock rebounded right back to the upside.

In the process, CSX posted a pocket pivot at the 20-dema, and remains a viable long here, as I see it. It had trouble clearing intraday resistance around 58 all day long today, but that doesn’t strike me as a major issue given that the stock rallied nicely off its lows below the 20-dema. As I see it this is buyable in here using the 20-dema as your selling guide, and the beauty is that you don’t have to worry about having to play earnings roulette anymore!

 

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Caterpillar (CAT) is hanging tight ahead of its expected earnings report next week on January 25th.  It has been hit with some selling volume over the past couple of days, but remains above its 10-dma.

Weight Watchers Int’l (WTW) qualifies as the monster stock of 2018. It is now up about 20% since I first made the call on the stock as it was showing voodoo volume action along the 20-dema eight trading days ago. Today, it logged another all-time high on above-average volume, with nary a pullback in sight.

 

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New-merchandise names aren’t seeing much traction here, but this remains mostly a big-stock market. This makes sense, given that “stocks are the new bonds,” so the objective evidence is telling us to focus where things are moving, and in the right direction. However, testing some starter positions in these recent IPOs may be warranted with the idea that eventually the market will rotate their way as big stocks get extended.

Apptio (APTI) can’t seem to get going as it remains along its prior base breakout point and the 20-dema. Technically, this remains in a buyable position here, but it may be that investors are hesitant to jump on the stock ahead of its expected earnings report on February 5th. Perhaps now that has lulled us all to sleep it will finally get up off its rear end and do something.

 

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MuleSoft (MULE) is expected to report earnings next week, on January 25th.  For now, it has been holding support along the top of its prior low-base range breakout just below 24. For now, I’d sit back and wait for the company to report earnings before doing anything with the stock.

Cloudera (CLDR) dipped just the 17.52 intraday low of last week’s buyable gap-up move yesterday, and rallied back above the low today. Volume was light, but the way this thing trades it is best to try and buy it on weakness rather than chasing strength. Thus, this pullback presents a lower-risk entry, using the 10-dma as your selling guide.

 

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Rise Education Cayman Ltd. (REDU) remains in a buyable position along its 10-dma as it continues to build a short handle to a more classic-looking cup-with-handle formation.

Stitch Fix (SFIX) failed miserably on its attempt at holding support along the 20-dema on the voodoo pullback. This has failed, so for now has been removed from my long watch list. Note that the strong breakout of about three weeks ago was in fact something to sell into. A hot IPO that has suddenly turned very, very cold.

Salesforce.com (CRM) remains within range of last week’s base breakout. The 10-dma at 108.51 can serve as a tight selling guide, although the 20-dema down at 106.89 works just as well.

Workday (WDAY) got knocked back to its 10-dma yesterday on just above-average volume, and held support at the line today. This presented a more opportunistic entry, if one was bold enough to take it. As I wrote over the weekend, the stock was quite extended from the initial move off the 200dma over two weeks ago. So a good pullback yesterday that filled the prior gap-up “rising window” and tagged the 10-dma provided a more opportunistic entry today.

 

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Square (SQ) tests its 50-dma yesterday on higher, but below-average volume. This doesn’t look abnormal to me, and the stock was certainly entitled to a pullback after the strong move from its initial undercut & rally move of January 1st. Selling volume dissipated nicely today at the 50-dma, so this pullback can be viewed as buyable, using the 50-dma as your selling guide.

 

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First Solar (FSLR) has pulled right back into its prior base as volume dries up nicely. The big-volume breakout of four days ago was a one-day wonder, but with news expected out before the end of the month regarding the Trump Administrations solar policy, this isn’t surprising. The question is whether it’s worth taking a shot here on the technically lower-risk entry here at the top of the prior base with a news overhang. As they say, however, fortune favors the bold!

 

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Alibaba (BABA) looked like it was on the verge of a breakout yesterday before reversing hard and closing down on the day on heavy selling volume. The pullback, however, did not extend beyond the 50-dma today as the stock found support at the line. Earnings are expected on February 1st. but I would use this pullback to buy shares while implementing the 50-dma as a tight selling guide.

 

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Weibo (WB) looked ready to break out per my comments on the stock over the weekend, and that’s exactly what we saw yesterday early in the day. But the stock reversed off its intraday highs on heavy volume as the breakout looked to be in jeopardy. By the close, however, WB held the breakout point and remained up for the day.

Therefore, the breakout remained in force, and the stock turned back to the upside and into new all-time high price ground today on lighter volume. The best way to avoid getting whipped out of the breakout is to not chase the breakout in the first place. Buying when the stock was lower in the pattern, along the 10-dma as volume declined, and being in position before the breakout was perhaps the best way to handle this.

 

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YY, Inc (YY) reversed off its highs yesterday along with the market, but held support near its 10-dma today. It remains buyable on any further pullbacks to the 10-dma, now at 128.39.

Lumentum Holdings (LITE) is not performing as I expected, and so I am leaving this one alone for now. Yesterday the stock ran into resistance at its 50-dma and reversed on heavy selling volume, which is the opposite of what I wanted to see.

Earnings reports are coming up for all the video-gaming names with Electronic Arts (EA) expected to report on January 30th. Activision Blizzard (ATVI), which broke out last Thursday, pulled into buyable range yesterday on the market sell-off and then rallied back to the upside today on above-average volume. Take-Two Interactive (TTWO) looks like it will be the next one to break out, following in ATVI’s footsteps. I like it here as a long, using the 20-dema as your selling guide.

 

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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.

In my view, today’s AAPL news was a big positive for the market, since it indicates that companies able to repatriate money at a one-time lower rate will do so. In addition, AAPL demonstrated its willingness to use this money to expand operations and hire more employees. I tend to think that more companies will be announcing similar moves. This, in turn, validates the Trump tax policy in terms of its potential economic benefits.

Meanwhile, the drama over a government shut-down does have the potential to create temporary setbacks for the market, as we saw yesterday. However, I would be alert to any opportunities this might present. In my view, all this does is create the potential for positive news once the whole mess is settled and the government does what it always does, which is find a way to keep funding itself. That in turn can trigger more upside in the market.

As we move deeper into earnings season, the issue of taking fresh positions ahead of an earnings report becomes an important one to consider. CSX showed today that those who bought the stock near the 200-dma per my prior discussion of the stock could sit through the report and hang in there as it closed down all of 44 cents. NFLX will be the next test when it reports next Monday.

Meanwhile, I would look to exploit opportunities that arise after earnings in situations where I don’t want to hold a position through the report. CSX also provided an example of that approach working today as it found support around its 20-dema. So, stay alert, and remain opportunistic where possible as the market gets ever more extended on the upside and we move through the thick of earnings roulette season.

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. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.