The Gilmo Report

January 25, 2017

January 25, 2017

We can now mark this date as an historic one for the market, at least for those who have a fetish for big, round numbers. The Dow Jones Industrials Index opened this morning at 19,994.48 and then within an instant was trading above the “magical” 20,000 price level. By the time I was able to click my mouse to capture a screen shot of the event it was already above 20,012.

 

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In the process of clearing Dow 20,000, the index finally broke out of its six-week price range on a slight increase in trading volume. The S&P 500 Index, not shown, also broke out of its tight range, gapping to new highs this morning right at the open and holding up all day long.

 

GR012517-$INDU

 

So far the “sell the Inauguration” pundits have been dead wrong. Monday’s sell-off just turned out to be a nice shakeout, as I expected per my blog post early that day. Monday’ action simply demonstrated, as I saw it, that if you tell enough people to sell the Inauguration, and you bleat that all weekend long, then they will. In the process they are happy to hand you their stock. Thank you, drive thru!

The NASDAQ Composite Index has been the de facto leading index in this market as it has cleared two consecutive new highs in a row. Each one also came on expanding upside volume. This probably comes as little surprise if one is attuned to the action in big-stock NASDAQ names. No matter how you slice it, the action is bullish.

 

GR012517-$COMPQ

 

Among the big-stock NASDAQ leaders driving this strong index action, Facebook (FB) is within spitting distance of its all-time highs, clearing the 130 price level early this morning and closing at 131.48. Amazon.com (AMZN) also keeps moving higher, getting to within just over 1% of its all-time high of 447.21 to close at 436.52.

Apple (AAPL) has also become more extended after its short cup-with-handle breakout of nearly three weeks ago, as noted in my report at that time. With today’s 121.88 close, AAPL is now within 10% of its prior 134.54 high of May 2015.

Priceline Group (PCLN) has also continued higher after last Friday’s pocket pivot at the 10-day line, as discussed over the weekend, and today logged an all-time closing high. Alphabet (GOOGL) followed suit with its own pocket pivot on Monday, sending the stock to all-time highs today on the breakout from a cup-with-handle base.

 

GR012517-GOOGL

 

Netflix (NFLX) isn’t showing a lot of upside thrust following last week’s post-earnings buyable gap-up move, but it hasn’t broken down either. Yesterday the stock was starting to look like it might fill the prior gap and perhaps test the 10-day moving average, where I would have been inclined to load the proverbial boat.

At the time, the stock was trading down to 137, such that the 10-day line was less than 2% away. A buyable gap-up can easily fill the gap and dip 2-3% below the BGU intraday low and then recover, so I didn’t see this as necessarily bearish action. But NFLX found its feet at 137.07 and then turned back to the upside.

Today the stock held tight with volume continuing to decline at about average for the day. For now, this remains within range of last Thursday’s BGU using the 138.25 intraday low of that day as a tight selling guide. A wider selling guide can also be implemented at the 10-day moving average at 135.36, about 3% away from today’s close at 139.52

 

GR012517-NFLX

 

Tesla Motors (TSLA) remains nothing short of a monster as it climbs in an almost unnervingly steady uptrend channel even as earnings loom ahead in early February. I sold stock into last Thursday’s gap-up move, which struck me as being a little bit island-like, but that assessment was a little premature.

TSLA has since cleared the 250 price level and is now about 10% away from its all-time high of 286.65. So far, the stock is living up to its billing as “the stock to watch in 2017,” as I discussed in my January 1st report. Given its extended state, if you’re not in this one all you can do is watch in awe.

Meanwhile, the weekly chart shows that TSLA is working on its eighth straight up week. As it does so, it gets closer to the top of the big, choppy range it has been stuck in since September of 2014. That choppy range has produced a lot of swing-trading moves both long and short since then, but is this thing getting revved up for an eventual break to new highs? I suppose we’ll find out soon enough.

 

GR012517-TSLA

 

The optical stocks all sprang to life yesterday when fiber-optic glass-maker Corning (GLW) beat handily on earnings. This led to big bottom-fishing pocket pivots in Lumentum Holdings (LITE) and Acacia Communications (ACIA), and an undercut & rally move by Finisar (FNSR). In the process, all of these stocks ran into their 50-day moving averages yesterday or today.

And while the current leader in the group, Applied Optoelectronics (AAOI), remains extended and clear of any overhead resistance as it makes new highs, Oclaro (OCLR) cleared resistance to break out of a nine-week base. Volume was strong yesterday, and the stock continued higher today to clear the range highs on above-average volume. This remains within buying range for you breakout buyers, although the stock was buyable closer to the $9 price level per my comments over the weekend.

 

GR012517-OCLR

 

Over the weekend I discussed big-stock fiber-optics leader Ciena (CIEN) as being in a lower-risk entry position near the lows of its current base formation. An entry at that point on Monday morning would have rewarded an investor/trader with a nice upside move yesterday on increased volume. CIEN followed up on yesterday’s upside action by breaking out today on a pocket pivot volume signature. So while this was buyable on Monday per my comments over the weekend, here’s another base breakout on above-average volume for you base-breakout fans.

 

GR012517-CIEN

 

Over the weekend, I suppose I more or less dared nimble traders to make a move on Acacia Communications (ACIA) in anticipation of a possible bounce off of recent lows. As I wrote, “If you think the shorts might have to move to cover before earnings, then you could buy the stock here on the basis of Thursday’s “DDBFPP” using the 10-day line as a very tight selling guide. For nimble traders only!

Lo and behold, ACIA jacked to the upside yesterday on strong volume, but that move turned out to be a one-day wonder trade. ACIA ran right into its 50-day line yesterday, just clearing it by the close, but it gave up almost too willingly today as it reversed hard to the downside on even heavier selling volume.

This illustrates why if I am playing a name like this and actually catch an upside move like yesterday’s I would tend to take profits at the 50-day moving average since a) it represents near-term resistance, and b) a 5% swing-trading move off of a five-day pocket pivot is a nice gift horse you don’t want to look in the mouth!

 

GR012517-ACIA

 

I tend to think that while names like ACIA can offer some “DDBFPP” trading opportunities, there is a better way to play the move in telecom and fiber-optics, the so-called opticals. Basically, that means you can just stick to the leaders that I’ve discussed further above.

As the opticals gain momentum, the steels are losing theirs, and in the worst possible way. The steels all started rallying yesterday on strong earnings reports from the likes of AK Steel Holdings (AKS) and Allegheny Technologies (ATI), not shown. While ATI held its buyable gap-up move, AKS reversed badly on heavy selling volume.

Steel Dynamics (STLD) came out with earnings last night and failed to impress, sending the stock flying below its 50-day moving average. U.S. Steel (X), not shown, did the same thing, and selling volume in both was huge. The carnage on STLD’s daily chart is quite ugly. Some members might also notice that alert traders oriented toward the short side could have hit X or STLD as shorts right at the open today as they breached their 50-day lines.

 

GR012517-STLD

 

With these names falling by the wayside, we may be seeing some rotation out of these “Trumpkin Stocks” and into more growth-oriented names. Certainly the rotation into big-stock NASDAQ names over the past couple of weeks argues in favor of this, but we have seen some rotation as of late into materials and construction names like Martin Marietta Materials (MLM), for example.

The stock broke out of a 10-week base on strong volume, so for those of you who like to buy breakouts, there you go. A big-stock materials name breaking out on big volume. The moves in these names were, of course, helped along by more definitive acts from President Trump such as ordering the building of a wall along the U.S.’ southern border.

Some analysts speculate that the amount of cement will be meaningful for providers of aggregates used to make cement. MLM is one of those, as are other names like Vulcan Materials (VMC), Eagle Materials (EXP), U.S. Concrete (USCR), and even Mexican cement-maker Cemex (CX). I suppose if indeed Mexico ends up paying for the wall, they may want to give CX the business!

While all of these look strong, MLM is breaking out of a better-looking and tighter base, along with EXP, not shown. MLM’s breakout point is 233.76, and the stock closed about 4% above that, so it remains within buying range for you base-breakout fans. EXP is extended, but should be watched for any pullback closer to the top of the base at 102.32 as I measure it.

 

GR012517-MLM

 

All this talk about building materials got the company that makes machinery that moves building materials around, Caterpillar (CAT), going as well. In fact, this company that gave me my first job offer after I graduated from Stanford University flashed a buyable gap-up (BGU) move today.

This also qualified as a base breakout on strong, well above-average volume. Today’s intraday low is at 97.32, so the stock is within buying range, using that low as your selling guide. Note, however, that CAT is expected to announce earnings tomorrow before the open, so be alert here as an entry opportunity could arise.

 

GR012517-CAT

 

Veeva Systems (VEEV) has been flirting with a breach of its 50-day moving average, but so far has not technically violated the line as volume has remained light. In fact, Monday’s close below the line merely led to a little undercut & rally move as the stock closed back above the 50-day line on light volume.

Today VEEV held the 50-day moving average as it flashed a five-day pocket pivot. Remember that in general we want to see clusters of five-day pocket pivots in lieu of a single, ten-day pocket pivot. This remains in lower-risk buying range along the 50-day line, using yesterday’s low at 42.02 as a tight selling guide. VEEV is expected to report earnings on February 28th, based on the latest updated reports.

 

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Moving along through Cloud Land, we can see that Square (SQ) is working on a three-week flag formation. If it can end the week closer to the $15 price level, I might even consider it a “three-weeks-tight” (3WT) flag formation. We’ll see how this ends the week. For now, the 20-day moving average at 14.58 remains your reference for lower-risk entries.

 

GR012517-SQ

 

Keep a close eye on cloud name ServiceNow (NOW) tomorrow at the open. The stock is gapping up to around 91-92 in after-hours trade after announcing a strong earnings report this afternoon as I write. NOW was already moving prior to earnings, as I’ve discussed in recent reports, and had flashed some bottom-fishing pocket pivots along its 50-day moving average earlier in January.

Assuming the after-hours gap-up holds up at current levels as I write this afternoon, it would constitute a base breakout to higher highs. Therefore, tomorrow morning I’ll be on the lookout for a potentially actionable buyable gap-up (BGU) move to develop early in the day.

 

GR012517-NOW

 

I noted in a blog comment yesterday that while Barracuda Networks (CUDA) looks like it is floundering at the 50-day moving average on the daily chart, the weekly chart actually looks far more constructive. While Checkpoint Software (CHKP) and Symantec (SYMC) are the big-stock leaders in the cyber-security space (but with less robust earnings!), CUDA is really the only smaller, more dynamic name in the group that is forming a coherent base.

Here we can see CUDA on the weekly chart holding tight along its 10-week moving average as weekly volume declines. This looks constructive as the stock works off some overhead supply from the left side of the base. Note that throughout the base, weekly volume has remained relatively low, with two big, blue upside volume spikes in the pattern.

 

GR012517-CUDA Weekly

 

What is interesting is that yesterday CUDA started to break to lower lows, looking like it was in trouble on a downside breakout from a short bear flag. But it seems that in this market stocks almost need to move below their 50-day moving averages as a way of faking everyone out and invoking the Ugly Duckling.

While I wouldn’t have looked to short CUDA given that it doesn’t meet my minimum volume requirements for short-sale targets, it was looking a bit questionable early in the day yesterday. But of course, this merely set it up to recover back above its 50-day moving average. This led to a strong upside move today as the stock finally turned what was a short bear flag into a typical “LUie” pattern where a weak-looking “L” morphs into a “U” as the stock recovers.

Today’s move doesn’t qualify as a standard ten-day pocket pivot but it does qualify as a single five-day pocket pivot. Combining that with an undercut of the prior 22.75 low in the bottom of the “L” and a rally back above that low, it turns into a big buy signal from my perspective, particularly with volume coming in at above average.

Over the weekend I wrote that, “CUDA is a fairly simple trade as an entry right here [along the 23 price level.]” using 22.75 low as a selling guide.  After today’s upside move, I would expect the 10-day line at 23.54 to serve as near-term support on any pullbacks from here.

 

GR012517-CUDA Daily

 

Other more dynamic names in the cyber-security space have been acting better as of late as well. As I wrote over the weekend, CyberArk Software (CYBR) and Palo Alto Networks (PANW) are showing some signs of resuscitation, and those should be watched for possible BFPPs (bottom-fishing pocket pivots) and RAPPs (roundabout pocket pivots) as they occur in real-time.

As for CHKP and SYMC, not shown here on charts, I consider them to be barometers of a strength and interest in the cyber-security space. With CHKP, a mere turn from single-digit earnings growth to 22% earnings growth in the most recent quarter was enough to trigger a massive buyable gap-up move. Both of these names remain extended, but I’m happy to play CUDA as a good-looking cyber-security long set-up.

The Gilmo “China Five” continue to act well. Alibaba (BABA) came out with earnings before the open yesterday and promptly gapped back above the $100 price level. It fiddled around all day before setting a low at 99.94 and pushing back above the Century Mark. That was an actionable buyable gap-up (BGU), using 99.94 as a tight selling guide.

BABA is now about 3% above that low, which keeps it within buying range of the BGU, using the prescribed selling guide. It was possible to get into BABA closer to the 50-day line when it flashed a nice roundabout pocket pivot (RAPP) at that time. This would have provided some cushion going into yesterday’s earnings report. But for now yesterday’s BGU is actionable enough.

 

GR012517-BABA

 

JD.com (JD), not shown, moved up in sympathy to BABA but did not flash any actionable buy signals. It remains extended ahead of its expected March earnings report.

My favored Chinese internets reacted positively as well, but Momo (MOMO) had already posted a big pocket pivot off of its 10-day moving average on Monday by the time BABA announced earnings. The stock is a little bit extended, so I’d watch for any pullbacks from current levels as lower-risk entry opportunities. The closer to the 10-day line at 22.35 the better.

However, after Monday’s pocket pivot, we can see that MOMO doesn’t appear all that interested in pulling back. The stock has simply held very tight over the past two days since the pocket pivot as volume dried up to -52.6% below average.

 

GR012517-MOMO

 

Netease (NTES), not shown, is well-extended from its 10-day moving average at 242.72, so only pullbacks to the line would offer references for lower-risk entry opportunities. Weibo (WB) is drifting higher as well, but stalled a bit yesterday after rallying in sympathy to BABA. I would look for pullbacks to the 10-day line at 47.10 as lower-risk entry opportunities, should they occur.

 

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Again, be mindful of expected earnings dates for the remaining four Chinese names on my favorites list that haven’t reported yet. NTES is February 22nd, JD is February 28th, WB is March 1st, and MOMO is March 21st. Make sure you double-check earnings report dates by going to each company’s website, since sometimes earnings report dates can be rescheduled or clarified as the report date approaches.

As a group, bio-techs remain a mixed bag. The big-stock bio-techs continue to flounder, but Clovis Oncology (CLVS), not shown, keeps rising in what has been a big price move since breaking out in mid-December. The stock has yet to even test its 10-day moving average since posting a pocket pivot at the line on January 4th. Earnings are expected to be reported on February 23rd.

Incyte Pharmaceuticals (INCY) remains in a tight bull flag here as earnings approach the expected report date of February 14th. After last Friday’s reversal on a failed attempt to break out to new highs, the stock has held the 10-day line quite well as volume declined. Note that the 20-day moving average has cleared the intraday low of the prior buyable gap-up (BGU) day. Pullbacks to the 20-day line at 113.13 would offer your most opportunistic entries, if in fact the stock wants to pull back at all ahead of earnings.

 

GR012517-INCY

 

Glaukos (GKOS), not shown, is roaming around its 10-day line, but as I wrote over the weekend I’d look for pullbacks to the 20-day moving average at 37.31 as lower-risk entries if I got them. The company isn’t expected to report earnings until March 1st. The Trump Administration’s move to restart the Keystone Pipeline project got the oil patch stirring yesterday. I’m looking at a lot of names in the group that are showing rounding action where they look to be trying to round out the lows of a potential new base.

Among these, I have my three favorites, as I’ve discussed many times before in recent reports, Diamondback Energy (FANG), Parsley Energy (PE), and Rowan Companies (RDC). They’ve been taking their turns showing positive action along the lows of similar-looking bases, but nothing that has resulted in a substantial breakout.

Perhaps that is coming, and it is just a matter of letting the names percolate a bit as they build bases ahead of earnings. For now, my preference is to go with stocks that are showing more decisive upside action, although I admit I am not very patient. For that reason, stocks like FANG, PE, and RDC don’t necessarily wear me out or scare me out as much as they simply bore me to death.

 

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Mobileye (MBLY) posted a higher closing high in the rally it has generated off the December lows. We’ve been following this rally very closely in recent reports since the bottom-fishing pocket pivot (BFPP) through the 50-day moving average a month ago. I would look for any pullbacks to the 10-day moving average, now at 42.55, as potential lower-risk entry opportunities from here. MBLY is expected to report earnings on February 23rd, based on the most current reports.

 

GR012517-MBLY

 

Nvidia (NVDA), not shown, continues to base-build along its 10-day and 20-day moving averages. I would note that the 50-day moving average has been steadily rising and is now at 99.05, which would be your first point of reference for longer-term support. With the stock acting well here along the two short moving averages, you can see that my indicator bars are starting to firm up as the positive blue color begins to show up on the daily and weekly Force Index.

I’m beginning to think NVDA is going to squeeze any swarming shorts as a result of the climax top and try to retest the prior highs, particularly if the market continues higher from here

 

GR012517-NVDA

 

Over the weekend, I wrote that GrubHub (GRUB)may rally further before earnings after holding tight here for the past four days.” This assessment was based on the fact that the company’s expected earnings report date is further out than I thought, now at February 8th, combined with high current short interest.

The tight action as of the end of last week set up what has been a nice upside move so far this week, but it is getting fairly extended at this point. For now, the shorts appear to be getting squeezed, driving the stock back to the upside in a rally that extends back to GRUB’s roundabout pocket pivot (RAPP) of about two weeks ago.

 

GR012517-GRUB

 

I wrote over the weekend that the action was perhaps “arguing for a breakout by the indexes in a continued market rally that would certainly surprise the ‘sell the Inauguration’ crowd.” After a nice shakeout on Monday, this is precisely what we’ve seen so far this week. Meanwhile, there are breakouts aplenty, and other, less orthodox buy set-ups aplenty.

Frankly, I don’t see how one gets bearish here, unless one is going to do so solely on the fact that the Dow has finally cleared to new highs and is therefore too high. That is a recipe for disaster, frankly, particularly if one is going to think that they will short into this rally.

So far, the action in individual stocks is bullish, and that’s all we need to know for now. As far as I’m concerned, if we move into an environment that is more friendly to breakouts, then this rally may go a lot further than the wrong-way “sell the Inauguration” crowd thinks. I remain long and strong. 

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 CUDA, GRUB, MOMO, NFLX, and OCLR, 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.