The Gilmo Report

January 24, 2018

January 24, 2018

The government re-opened on Monday after lawmakers came up with a compromise measure, sending the indexes rocketing higher. But it wasn’t like the market was all that concerned with the two-day government shutdown when it opened up on Monday morning. The indexes came off a little bit, but then stabilized, moving higher once it was apparent that a deal to re-open the government was going to happen. Meanwhile, all of 12% of the government had in fact shut down, so the shutdown itself was a bit exaggerated to begin with.

The NASDAQ Composite Index was up 12 out of 15 days in a row, and this morning was working on another up day before things reversed to the downside. By the close, the index logged a distribution off the peak. Given how extended the index was already, this is not necessarily of great concern to me. The index is entitled to a pullback, as I see it, and as long as it holds above the 10-dma, the trend remains quite strong.

 

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The S&P 500 Index got churned around on higher volume, but did not sell off enough to post a distribution day. Meanwhile, the Dow Jones Industrials Index, not shown, closed up 0.16%, or 41.31 points after a wild intraday ride that saw the index open up and jack 189 points before reversing to nearly down 100, and then rallying back into positive territory by the close.

 

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Gold and silver both took their cue from a fresh three-year low in the dollar and rallied to higher highs. The SPDR Gold Shares (GLD) cleared resistance at 128.32 early in the day on a gap-up move that qualifies as a buyable gap-up using the 128.23 intraday low as a selling guide. This looks like a meaningful breakout for the yellow metal, and looks quite bullish.

Watching the way gold stocks tend to trade, my thinking is that if we want to play a move in gold then we should simply play the move in gold, without resorting to purchase of gold-mining stocks per se. For that reason, I think it is sufficient to stick to the GLD as a vehicle for playing further upside in gold. For those who want more juice on the upside (and the downside), then the Gold Double Long Exchange Traded Notes (DGP) might suit your tastes. The move today was basically identical in shape to the GLD’s, and treatable as a BGU using the 26.80 intraday low as a selling guide.

 

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Netflix (NFLX) posted some impressive earnings, sales and subscriber numbers on Monday after the close and gapped up strongly at the open yesterday. I viewed this as a cautionary buyable gap-up mainly because the stock was already quite extended before the gap move. As I’ve discussed in recent reports, the proper buy point was on the pocket pivot near the 50-dma in late December, since that enabled one to build a nice cushion going into earnings. Being able to hold through the report was certainly helpful in terms of participating in yesterday’s big gap-up move.

But a gap-up move can always be played as a buyable gap-up, in other words, as it lies, if the stock holds the intraday low, which NFLX did. While it did come close to its 148.02 intraday low yesterday by the close, it held this morning and continued higher. The beauty here is that any entry around the opening price at 150 or so could have utilized the tight stop at the 148.02 price level.

 

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Facebook (FB) was a quick stop-out for anyone trying to short the stock at the 20-dema on Monday. You could feel the bid under this thing on Monday, however, and once it got back above the 20-dema the idea of just flipping long was a compelling one. The stock then launched back up to new highs in a big, steep “V” formation, which looks improbable, but in this market what is “improbable” usually is. As it turns out, the initial undercut of the minor low at 176.46 turned out to be a U&R gift that has kept on giving.

 

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Apple (AAPL) breached its 10-dma and 20-dema today on heavy volume, which in my view triggered this as a short-sale at the 20-dema today. This is based on the late-stage base-failure today following last week’s breakout. A late-stage failed-base situation is generally confirmed on a preliminary basis by a break below the prior breakout point that also moves below the 20-dema.

AAPL has been under pressure from negative press and negative analyst views expressing skepticism over iPhone sales ahead of its expected February 1st earnings report. The stock has been a laggard as other big-stock NASDAQ tech names have rallied sharply in 2018.

The stock closed today right at the 50-dma, so I’d perhaps look for a bounce off the line and up into the 20-dema as a possible short-sale entry. Of course, there is always the chance that the stock simply tries to hold major support here at the 50-dma pending its upcoming earnings report. But for now, this is a dog, and it will likely take an earnings surprise to retrieve it from the dog pound.

 

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Amazon.com (AMZN) turned back up to new highs yesterday after a short pullback and consolidation. The stock remains quite extended ahead of its expected February 2nd earnings report, and is not within buying range. It was last buyable when it was within buying range of its prior base breakout, as I’ve noted in prior reports.

Nvidia (NVDA) has joined names like AMZN and NFLX in the extended zone as it pushed to an all-time high yesterday. It was last in a buyable position along its 10-dma per my prior discussions of the stock. From here, pullbacks to the 10-dma at 227.85 might offer more opportunistic, lower-risk entries, and should be watched for.

Tesla (TSLA) remains extended from its last buy position along the 200-dma last week, but today was knocked back to its 10-dma on below-average volume. That would put it in a lower-risk entry position using the 10-dma as a tight selling guide. A breach of the 10-dma, however, would trigger this as a short-sale at that point. But this is a tricky stock and one must remain fluid and open-minded to playing it in either direction depending on the precise real-time evidence at hand. Earnings aren’t expected until February 21st.

 

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Applied Materials (AMAT) pulled into its 10-dma today, bringing it into a lower-risk entry position following last week’s trendline breakout. The stock is buyable here using the 10-dma as your selling guide.

On a related note, fellow Semiconductor Equipment maker Lam Research Corp. (LRCX) reported strong earnings after the close and is gapping up in after-hours trades. Watch for a possible buyable gap-up move tomorrow morning in LRCX, as well as a sympathy move from AMAT.

 

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Arista Networks (ANET) is extended and only pullbacks to the 10-dma at 264.57 from here would provide lower-risk entry opportunities.

Universal Display Corp. (OLED) failed miserably on its recent base breakout as it smashed through its 10-dma and 20-dema yesterday, and then its 50-dma today. OLED is a supplier to AAPL, and companies that supply iPhone components to AAPL have been hit hard across the board over the past few days. When you find yourself long a breakout like this and it begins to fail, your first reference point for selling is the 20-dema. If it can’t hold that, then chances are the breakout will fail outright.

That’s precisely what happened to OLED today as it slashed below its 50-dma on heavy selling volume. While the stock briefly opened above the 20-dema this morning, once it failed to hold it had to be sold. Now I’m not sure I’d want to touch this thing just yet, although if AAPL surprises with stronger numbers than analysts currently expect, we could see OLED rebound. Thus, be mindful of and watchful for any possible undercut & rally (U&R) move that might ensue.

 

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CSX Corp. (CSX) has dipped below its 20-dema but appears to find support along the 56 price level. This is right on top of a prior consolidation it formed along the 20-dema in late December. Notice also that the stock undercut & rallied back above a prior low in the pattern from six days ago as volume dried up. Thus, this can be tested on the long side using the 56 price level as a tight selling guide.

 

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Caterpillar (CAT) is expected to report earnings tomorrow before the open. It closed just below its 10-dma today on heavy selling volume. I would use the 20-dema as a maximum downside selling guide if the stock runs into trouble after it reports earnings tomorrow.

Weight Watchers Int’l (WTW) continues to rally in relentless fashion. The stock is up over 20 points, or about 40% since its “voodoo” buy point at the 20-dema and 50-dma on the last day of December, as I wrote in my report at that time. Nothing to do or say here except, “Wow.”

Apptio (APTI) gave buyers a second chance after last Friday’s pocket pivot breakout move by pulling right into the 20-dema again on Monday. From there it then broke out again today on another strong-volume pocket pivot move. This is trying to get going, but so far it proves that it is best buyable along the 10-dma or 20-dema on pullbacks.

 

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MuleSoft (MULE) swung around in a very wide range today on heavy volume. I did not see any news that might have caused the wild swing, but I think one must be opportunistic here and look to buy shares when the stock comes into the 20-dema and the lows of the current three-week price range. Earnings are not expected until February 15th.

 

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Cloudera (CLDR) is slightly extended from its 10-dma but pulled into the line yesterday, providing a lower-risk entry opportunity. My preference, however, and as I’ve discussed in recent reports, is to take an opportunistic approach on deeper pullbacks into the 20-dema, currently at 17.80.

Rise Education Cayman Ltd. (REDU) remains within buying range of last Friday’s cup-with-handle breakout, but I would prefer a) to have bought it at the 10-dma before the breakout per my comments on the stock last week, or b) wait and see if we get a more optimal pullback to the 10-dma before taking shares after the breakout.

Stitch Fix (SFIX) has in fact triggered an undercut & rally long set-up after pushing up through the 20.50 price level on Monday. It is now pulling back slightly as volume dried up to -80.8% below-average today. This remains in a buyable position using the 20.50 low, 36 cents below today’s close, as your selling guide.

 

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Salesforce.com (CRM) remains extended and out of buying range of its prior base breakout.

Workday (WDAY) is sitting right at above its 10-dma and just below its prior base highs, so this is on breakout watch. However, one could anticipate a breakout here by buying shares and using the 10-dma as a tight selling guide. Remember that buying a stock this way may require some flexibility. If, for example, the stock fails to hold the 10-dma and one is quickly stopped out, then a deeper pullback to the 20-dema, down at 111.10, might present a second entry opportunity, depending on how the situation develops.

 

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ServiceNow (NOW) is now up 16 days in a row since moving off its 10-dma on January 2nd, where it was last buyable. It has not had a single down day in 2018. Earnings are expected next week, on January 31st.

Square (SQ) has been swinging around on an intraday basis over the past two days after a cup-with-low-handle breakout on Monday. Both yesterday and today it shook out hard to the downside but was able to recover most of its intraday decline after finding support along the handle breakout point just under 43. Volume is drying up, but I’d like to see a pullback to the 10-dma at 42.12 as a lower-risk entry opportunity, if I can get it.

 

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New solar tariffs announced by the Trump Administration sent First Solar (FSLR) gapping above its 10-dma at the open yesterday. It printed 71.49 at the bell and then sprinted as high as 74.86 before turning tail and going negative on the day. Solar tariffs are a double-edge sword, since they are likely to create higher prices for solar panels, and, as anyone with a rudimentary knowledge of basic economics knows, higher prices often result in lower demand.

Apparently, the market “re-thunk” the whole thing and sent FSLR careening to the downside on what looks like a clear, late-stage base-failure. Today the stock tried to push up through its 20-dema but ran into resistance right at the line before swinging around into the red and back again to close up slightly on average volume. Is this a short? Possibly, but you would use the 20-dema as a tight upside stop.

However, we must recognize that in this market, appearances can often be deceiving. Therefore, a move back up through the 20-dema could trigger a moving average undercut & rally long set-up if it occurs. So, remain fluid and flexible with this one as it figures out what it wants to do.

 

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Alibaba (BABA) was buyable along its 20-dema and 50-dma, as discussed in my weekend report. Frankly, while it was clearly buyable along the two moving averages I was skeptical as to whether it would charge significantly higher. However, in this market, expect to be surprised because charge higher it did, pushing right back up to the prior highs in classic “LUie” fashion yesterday.

Today, BABA broke out on heavy buying volume, but stalled to close about mid-range. Of course, given the strong “LUie” move off the 20-dema, this is probably to be expected. For those of you who are strictly base-breakout buyers, this is within buying range of the breakout. Earnings are expected on February 1st.

 

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Weibo (WB) pulled into its 10-dma and held above the line, but selling volume was heavy. This looks like it may need to spend some time consolidating after getting extended from the original pocket pivot entry point down around 112-113.

YY, Inc (YY) pulled into its 10-dma yesterday and held the line, bouncing to close up on the day. That was a lower-risk entry at the 10-dma, but keep in mind that it is well-extended from its original buy point near the 113 price level.

Take-Two Interactive (TTWO) continues to chop back and forth as it works on a new base. This one is on breakout watch, while pullbacks to the 20-dema can be used as lower-risk entries for those who like to buy within the base.

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 weekend report, I referred to FB and BABA as laggards, and of course they immediately take offense at my comments and jack straight up to their prior highs. BABA even decides to break out. This is an example of how, in this market, appearances can be quite deceiving. Once something bores you to death, or looks dead in the water, it suddenly comes to life. C’est la vie!

While the indexes remain extended, and obviously vulnerable to a pullback at any time, it all boils down, as usual, to watching what the individual stocks are doing. So, we look for pullbacks to areas of support when the market decides to pull back, and buy our favored stocks when that occurs. As long as your stock holds support, you’re fine. But if you find yourself owning something like OLED as it breaks apart, you must take decisive action at the proper point of impact. It’s that simple.

Play it as it lies.

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 positions in AMAT, 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.