The Gilmo Report

January 21, 2018

January 20, 2018

All the media hand-wringing over a possible government shutdown didn’t affect the market as it just went about its business of making new highs. The NASDAQ Composite Index posted an all-time high on Friday, extending its upside run in 2018. In the process, it closed above 7300 for the first time in its history and exceeded its inflation-adjusted high of year 2000. Volume was lighter despite it being the first options expiration day of the year.

 

GR012118-$COMPQ

 

Small-caps are starting to percolate here as the Russell 2000 Index attempts to follow through on its breakout to new highs two Fridays ago. This past Friday the index posted an all-time closing high. With its larger-cap brethren extended, I’m looking for small-caps to start participating with a bit more vigor if this market rally is to continue.

 

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The S&P 500 Index also ended the week at an all-time high on higher volume. The charts of the S&P and the NASDAQ show how steep the rally has been in 2018 relative to the prior uptrend that began in September of last year. With the government shutting down at midnight Saturday morning after lawmakers failed to reach an agreement on funding, it’s not clear how we will open up on Monday at the time of this writing.

That said, the indexes are in an extended state, and a pullback could ensue at any time solely as a natural reaction after such a steep uptrend. However, the pullback doesn’t have to be steep, as the indexes also have the option of just moving tight sideways in a more constructive consolidation of the prior uptrend. As always, it boils down to what the individual stocks are doing, and whether any general market pullbacks present buying opportunities such as we saw on Tuesday.

 

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The SPDR Gold Shares (GLD) is consolidating its recent gains as it approached resistance around the 128 level. The 10-dma would continue to serve as a near-term selling guide, while one could use the 20-dema at 124.54 as a deeper selling guide. I would expect the GLD to spend some time consolidating as it potentially sets up to clear resistance.

Meanwhile, Kirkland Lake Gold (KL) has dipped below its 10-dma as it also continues to consolidate after its recent base breakout. It has not had much progress from the breakout, and is essentially forming a sideways consolidation that is about two weeks in duration so far. Earnings are expected on January 28th.

 

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Facebook (FB) rallied as I expected it would after the minor undercut & set-up occurred on Wednesday. The rally carried through the 50-dma and just beyond the 20-dema on Friday before stalling to close just below the line. Volume was heavy. This is looking like a short here, using the high of Friday as an upside stop.

Remember that earnings are expected on January 31st. so I’d be looking for a retest of the Wednesday low that carries further down in the pattern as a reasonable short-sale swing-trade profit objective. But there is also the possibility that the stock doesn’t do much ahead of earnings.

 

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Apple (AAPL) is holding above its Wednesday breakout, and remains in a buyable position using the 10-dma as selling guide. Earnings are expected on February 1st.

Netflix (NFLX) is expected to report earnings Monday after the close, which will provide some excitement to the first trading day of the week. The stock was upgraded on Friday with a price target of $265. It gapped up nicely at the open, but then sold off to end the day up a mere 13 cents. Nothing to do here but see what transpires after earnings on Monday afternoon.

Amazon.com (AMZN) peaked out on Tuesday and has been settling back slightly, but the 10-dma at 1275.27 may be used as a reference for buyable pullbacks from here. Earnings are expected on February 1st.

Nvidia (NVDA) pushed to an all-time high on Friday after remaining within buying range of its prior base breakout for a total of seven days. Volume came in above average, but the stock remains just within the prescribed 5% buying range of the recent breakout. However, I think that the optimal opportunity occurred on the test of the 10-dma on Tuesday and Wednesday.

 

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Tesla (TSLA) posted a higher closing high after rallying off its 200-dma earlier in the week and is in an extended position currently. Earnings are expected on February 21st.

I blogged about strong action in semiconductor equipment manufacturers on Wednesday night, and one of the best-looking patterns in terms of something that isn’t coming straight up off the lows of its base is Applied Materials (AMAT). The stock posted a trendline breakout on Wednesday and then pulled back into the breakout point around 56 on Friday on lighter volume. This is buyable here using the 10-dma as a selling guide, although any further pullbacks toward the 10-dma from here would provide lower-risk entries.

 

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Arista Networks (ANET) posted an all-time high on Friday and is now out of buying range of its recent base breakout. Note the pullback on Tuesday that brought the stock back toward the top of the base and near the 10-dma. This is typical of what you are looking to buy into when the market is weak, since the 10-dma can be used as a tight selling guide. Earnings aren’t expected until February 15th.

 

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Universal Display Corp. (OLED) remains within buying range of its recent base breakout. An opportunistic approach would dictate that one look for a pullback to the 10-dma as a lower-risk entry, should that occur. Earnings are not expected until February 22nd. When I initially blogged about ANET and OLED at the time of their base breakouts nearly two weeks ago, one of the reasons for doing so was that their earnings reports weren’t expected for at least a month at that time. Thus, they both have plenty of time to build some profit cushion ahead of earnings.

 

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CSX Corp. (CSX) is trapped between its 10-dma and 20-dema, and sold off down to the 20-dema on Friday. Volume increased, which is not necessarily what you want to see, but the pullback does bring the stock down to key near-term support. Therefore, one can test this here on the long side using the 20-dema as a tight selling guide. However, a breach of the 20-dema could spring this into play as a short-sale with the idea that a test of the 50-dma is likely. Note also that the best “time value” move in the stock occurred on the Ugly Duckling set-up at the 200-dma which I discussed at the time.

 

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Caterpillar (CAT) is tracking tight sideways along its 10-dma ahead of its expected earnings report this Thursday, January 25th. Nothing to do here as we await earnings.

Weight Watchers Int’l (WTW) is way extended at this stage as it has been the hottest stock of 2018. And it all started with a little “voodoo.”

New-merchandise names sprang to life at the end of the week, as money shifted into smaller-cap issues. Apptio (APTI) finally woke up from its slumber along the top of its prior base and posted a pocket pivot on Friday with volume picking up nicely. Sometimes, patience does pay off, and in this case taking a position along the 20-dema and waiting would have worked. As I wrote on Wednesday, “Perhaps now that it has lulled us all to sleep it will finally get up off its rear end and do something.”

We still have earnings to get through, but these aren’t expected until February 5th. For now, it is encouraging to see the stock starting to wake up as money moves into some of these IPO situations.

 

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MuleSoft (MULE) is expected to report earnings on February 15th, not January 25th as I wrote in my Wednesday report. The stock bounced off its 20-dema on Wednesday and then finished the week back up near its recent highs. Volume was below average, but Friday’s volume qualified as a five-day pocket pivot at the 10-dma.

 

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Cloudera (CLDR) again proved to be buyable just when it was starting to look ugly again. Like I said on Wednesday, “…the way this thing trades it is best to try and buy it on weakness rather than chasing strength.” That was the proper course of action to take on Thursday morning when the stock tested the 20-dema and then launched off the line in a strong-volume pocket pivot move to higher highs. So, you were either on it there or you weren’t, as it is now extended, in my view.

 

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Rise Education Cayman Ltd. (REDU) popped up from a prior “voodoo” entry position along its 10-dma where it was buyable per my comments in the last report. This is the second such breakout we’ve seen in the stock over the past month and it was just as buyable based on the voodoo set-up as the last one. It’s now extended again, but you can’t say that it didn’t give us enough chances to buy it along the 10-dma over the past few days. Interestingly, REDU is expected to post $3.87 a share in annual earnings this year, more than twice what it was expected to earn last year. So far, the stock’s action seems to be confirming this lofty estimate.

 

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Stitch Fix (SFIX) let us down in the worst possible way when it failed to hold the 20-dema on the voodoo pullback to its 20-dema and the top of the prior base last week. The stock has since been drifting lower and has now undercut the 20.50 low in the prior base. It rallied 20 cents back above that low on Friday, triggering an undercut & rally long set-up at that point, using the 20.50 price level as a tight selling guide. Admittedly, it looks like garbage, but for those of you willing to try Ugly Duckling set-ups, this is one.

 

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Salesforce.com (CRM) is just barely within range of last Monday’s better-volume base breakout. It followed that move with an immediate body-slam back to the 10-dma on higher volume the very next day, but that pullback turned out to be a buyable one. In my view, this speaks to the persistence of this market rally. Even when stocks don’t pull back in constructive fashion, they still find support and simply turn back to the upside, even without heavy volume.

 

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Workday (WDAY) has rallied back up to last week’s highs after testing the 10-dma on Tuesday. That was another higher-volume pullback to the 10-dma that, like CRM’s was also buyable. The rally over the past three days has occurred on wedging volume as the stock melts back to the upside after Tuesday’s higher-volume price break.

 

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ServiceNow (NOW) was last buyable along its 10-dma, as I discussed in my reports during the latter half of December. At that time, it was showing “voodoo” volume levels right at the 10-dma. It has since steadily moved higher, and is now up 13 days a row without a single down day so far in 2018! NOW is expected to report earnings on January 31st.

 

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Square (SQ) popped off its 10-dma on Friday on a five-day pocket pivot. At the open, the stock looked like it was poised to post a buyable gap-up (BGU), but by the end of the day volume levels fell short at only 11% above average. The move was triggered by an analyst’s buy recommendation and $64 price target. With such a lofty target, however, I would have expected a little more volume on this move. We’ll see if we get that this coming week, but the reality is that the stock was best bought on the recent pullback to the 50-dma. Pullbacks to the 10-dma from here would constitute lower-risk entry opportunities.

 

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First Solar (FSLR) closed Friday right at its 20-dema on light volume, which technically puts it in a lower-risk entry position using the 20-dema as a very tight selling guide. This is, however, its “last stand” support level. The stock appears to be waiting for the Trump Administration to come out with its final solar policy, which is expected to be announced before January 26th. However, the date is not set in stone, and it may be that the stock does nothing until a final announcement is made.

 

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Alibaba (BABA) continues to hold along its 20-dema and 50-dma, where it looks to be in a buyable position using the 50-dma as a tight selling guide. Earnings are expected on February 1st, so if this is going to try and break out ahead of earnings time is starting to run a little short. If we’re looking to buy shares on this pullback, we would want to see a move ahead of earnings. Relative to other Chinese names, the stock has been a serious laggard, but it is still holding up in an eight-week cup-with-handle base.

Weibo (WB) is extended from its recent base breakout, and pullbacks to the 10-dma at 123.63 would be your next reference for lower-risk entries from here. Note that it has been making new highs on lighter volume, so a pullback looks likely here. The stock has had a strong move since its pocket pivot on the first trading day of 2018, which I blogged about at the time.

 

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YY, Inc (YY) is also wedging back up to its highs after posting an ugly-looking reversal off its highs on Tuesday. That produced a buyable pullback to the 10-dma, and the stock has since melted back to the upside on very light, wedging volume. YY has had an outstanding move since I first discussed it as buyable when volume was drying up in the extreme along the 10-dma at the end of 2017.

 

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Take-Two Interactive (TTWO) is still working on what is now an eight-week base with tight closes over the past two weeks. Both weeks also saw supporting action off the 10-week moving average. The stock has been buyable each time it pulls into its 20-dema on the daily chart, not shown, as the weekly chart, below, starts to shape up. Breakout buyers can put this on their watch list, waiting for a move out of the base, while the alternative route is to use pullbacks to the 20-dema as lower-risk entries within the base.

 

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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.

Depending on how this government shutdown drama plays out, we could see the market use it as an excuse to pull back at worst or consolidate for a bit at best. My guess is that eventually it will be resolved, which could then trigger more market upside. So far, the market hasn’t seemed to be all that concerned with a government shutdown.

Meanwhile, we have stocks that are quite extended on the upside, like NFLX, and we also have a number of names that are continuing to base, like AAPL or TTWO, for example. And then we have laggards like FB and BABA. If the general market is going to continue higher, then I think we will see new waves of breakouts help to fuel that. Now that we’re headed right into ground zero of earnings season with NFLX expected to report on Monday and other big-stock leaders chiming in over the next two weeks, we’ll get a sense of where fresh opportunities can be found.

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.