The Gilmo Report

January 28, 2018

January 28, 2018

As the Dow Jones Industrials Index pushes to within 1.5% of the 27,000 price level, the NASDAQ Composite Index passed another Century Mark on Friday, closing above 7,500 for the first time in history on higher volume. The steepening uptrend that began on January 2nd has continued unabated, and while the market looks like it has gone the proverbial “too far too fast,” it hasn’t gone parabolic just yet.

 

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The S&P 500 Index is within 4% of the 3,000 price level after making yet another new high on Friday on lighter volume. It may be an old story by now, but the market remains in an uptrend as it shakes off any selling and just keeps rolling back to the upside.

 

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The SPDR Gold Shares (GLD) was unable to hold the 128.23 intraday low of Wednesday’s buyable gap-up move, but the bottom line is that one could allow for 1-2% of downside porosity. Notice how the GLD reversed on Thursday on heavy volume but in the process merely filled the prior gap. Meanwhile, it is still holding above its prior breakout point and the bottom of the gap-up “rising window.” The uptrend in gold remains intact, despite the dollar’s attempt to find support on Thursday, which has so far not led to any sharp upside reaction.

 

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Playing on the theme that stocks are the new bonds, Intel (INTC) is an attractive buyable gap-up here as it posted its best single day since 2009 on Friday. The low of the day was 48.12, so the stock remains within 5% of that low, keeping it within buying range. The stock has suffered a lot of negative press lately after a flaw in its chips was revealed a few weeks ago, but this buyable gap-up puts it back in play. The move was fueled by a strong earnings report that saw the company post accelerating 37% earnings growth.

 

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Netflix (NFLX) has continued to move higher following Tuesday’s buyable gap-up move. Buying volume is starting to wane a bit, so I wouldn’t be surprised to see it start to level off and consolidate. The 10-dma is far below at 238.45, and would need to play some catch-up before providing a reference for a buyable pullback. Until then, the 148.02 intraday low of Wednesday’s BGU remains the best reference for near-term support.

 

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Facebook (FB) is expected to report earnings this Wednesday after the close. So far, it has made a good showing of itself by re-breaking out and posting a new all-time closing high on Friday. It’s difficult to step into the stock here ahead of Wednesday’s expected report, but it will be interesting to see if the stock can post some sort of buyable move following earnings.

 

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Apple (AAPL) performed according to the script I laid out in my Wednesday report by bouncing off the 50-dma on Thursday morning and running right into the 20-dema where it set up a lower-risk short-sale entry. That was good for a quick downside short scalp as the stock then reversed to breach its 50-dma on heavy selling volume. With the market in a strong uptrend, the ability to make money on the short side is obviously quite limited, so I’m inclined to take the money and run on this one ahead of its expected earnings report on Thursday after the close.

 

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Amazon.com (AMZN) is also expected to report earnings on Thursday after the close, and remains quite extended to the upside. If one bought the stock near the breakout point as discussed in prior reports, then one has the necessary cushion to sit through the report.

Nvidia (NVDA) posted another all-time high on Friday as it remains quite extended from its last buy zone near the 10-dma per my prior discussions of the stock. Earnings are expected on February 8th.

Tesla (TSLA) is probably what I would call the archetypal swing-trading stock as it oscillates back and forth within its chart pattern without really going anywhere on a macro-level. After clearing to a higher high around 360 last week the stock has since dropped all the way back down to its 200-dma, where it held support on Friday as volume declined. On Thursday, when it broke the 10-dma, it turned into a quick short-sale scalp, but so far, the 200-dma should be viewed as solid support until proven otherwise. Earnings aren’t expected until February 21st.

 

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Applied Materials (AMAT) gapped up on Thursday morning in sympathy to fellow semiconductor equipment maker Lam Research (LRCX) which was also gapping up. When LRCX failed to hold its gap move and reversed hard on heavy volume, AMAT also reversed in sympathy. Overall, it was just a highly sympathetic day for the stock. However, that reversal, which looks rather ugly on the chart, merely took the stock to its trendline breakout line and the 10-dma.

AMAT remains within a short consolidation above the 10-dma, 20-dema and its prior trendline breakout point. I noticed that on Thursday a number of chip stocks got clocked including names like XLNX and ADI. Most of these were already extended or sitting at or near new highs. AMAT is in a similar position, but isn’t expected to report earnings until February 15th. Buying it here leaves open the possibility of a breakout ahead of earnings, using the 20-dema as a maximum selling guide.

 

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

CSX Corp. (CSX) held around the 56 price level on Thursday and then rallied sharply. As I discussed in my Wednesday report, this could have been tested on the long side along the 56 price level, and the stock didn’t get any lower than 55.87, which is certainly allowable porosity. Volume was light on the rebound Friday, so I’d want to see this hold the 20-dema on any pullback.

 

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Caterpillar (CAT) took investors on a wild ride on Thursday after reporting earnings that morning. The stock initially gapped up but then reversed hard, dipping just below its 20-dema. From there, however, it recovered strongly to close up on the day but just below the 10-dma. On Friday, it again tested the 20-dema, pinging the line almost precisely before closing about mid-range on declining volume. For now, I view this as buyable along the 20-dema using the line as a tight selling guide.

 

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Weight Watchers Int’l (WTW) finally met up with its 10-dma and held the line on Thursday and Friday. I would not, however, look to jump on the stock here, perhaps waiting in more opportunistic fashion for a pullback to the 20-dema which is also rising rapidly and is currently at 59.01.

 

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Apptio (APTI) has cleared to new highs and is now extended from its last buy point along the 10-dma.

MuleSoft (MULE) swung around in a 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 still ever-so-slightly extended from its 10-dma but holding tight as volume dried up to -64% below-average on Friday. This creates a voodoo set-up along the 10-dma, using the 10-dma as a tight selling guide for shares bought up here. Alternatively, one can forget about this entry point and take a more opportunistic approach that is perhaps more consistent with the stock’s character, which means waiting for any possible pullback to the 20-dema down at 17.95. Earnings aren’t expected until March 7th.

 

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Rise Education Cayman Ltd. (REDU) is one of the more orderly-acting stocks among recent IPOs that I’ve seen in this market. It has stair-stepped its way higher since first becoming buyable along the 10-dma down near the 12.30 price level. This included a classic, perfect cup-with-handle breakout two Fridays ago.

While there is currently no date set for its earnings release, we can extrapolate from the last one, which was released on November 27, 2017, and assume that earnings will likely be released again near the end of February. Hopefully, before then, a firm earnings release date will be made public. Meanwhile, the stock remains within buying range of this most recent cup-with-handle breakout.

 

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Stitch Fix (SFIX) is still in an active undercut & rally long set-up after pushing up through the 20.50 prior low in the pattern five days ago. It has since moved excruciatingly tight sideways as volume dried up to -77.4% below average on Friday. The stock also closed just above the 10-dma.

 

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

In my Wednesday report I suggested that one could anticipate a breakout in Workday (WDAY) by buying shares along the 10-dma. That would have worked as the stock broke out on Friday, but on volume that was less than half of average.

 

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ServiceNow (NOW) is expected to report earnings this Wednesday, and its chart is something to behold. This is now up 18 days in a row and on Friday the stock had its biggest single up day in the entire run. For anyone fortuitous enough to buy it at the “voodoo” buy point along the 10-dema, there is certainly enough cushion to hold through earnings. But with the stock getting a little bit climactic here one could also consider locking in half of their profits.

 

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Square (SQ) held tight on a closing basis for three days after its cup-with-low-handle breakout point on Monday. Volume dried up sharply on Thursday, and then picked up again just slightly as the stock made a higher high. You may hear that it is approaching a buy point near the left side peak of this current cup formation, but the best entry points occurred lower in the pattern.

The first occurred down near 36 on the undercut & rally set-up as I discussed at that time in early January, and then the second occurred on the pullback to the 50-dma two weeks ago. At this point you’ve either been working this for the past four weeks on the long side or you’re sitting around waiting for the stock to approach a new buy point at the highs.

 

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First Solar (FSLR) proves the point I made on Wednesday that in this market appearances can often be deceiving. After an ugly high-volume reversal on Tuesday following positive solar tariff news, the stock has regained its 20-dema, triggering a moving-average undercut & rally long entry at that point on Thursday. It then held tight at the 20-dema on Friday as volume dried up to -41% below-average. Thus, this is in a buyable position using the 20-dema as a tight selling guide. Earnings aren’t expected until February 21st.

 

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Alibaba (BABA) is expected to report earnings this Thursday, February 1st. The stock is doing a fine job of building some cushion as it moves higher, following through on the “LUie” breakout it posted on Tuesday. The stock was previously buyable along the 20-dema per my comments last weekend, and the stock is up well over 10% from there.

 

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Weibo (WB) shook down just below its 10-dma on Thursday, which presented a lower-risk entry point within what is already an extended upside move since the pocket pivot of January 2nd. It then catapulted to a new high on Friday on below-average volume. Earnings are expected February 22nd.

YY, Inc (YY) keeps tracking higher along its 10-dma, which is constructive. So far, there have been no strong moves off the line, although the upside trend has remained relatively uniform and very much intact. Earnings aren’t expected until March 14th. If one is looking to add shares to this position, then I would look for a pullback to the 20-dema as a more opportunistic approach given how extended the stock is from its original “voodoo” buy point along the 20-dema and the 113-114 price area.

 

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Take-Two Interactive (TTWO) posted a new all-time closing high on Friday, on lighter volume. Volume did pick up slightly, however, and the stock is still confined to its current 11-week base. As I’ve written in recent reports, the stock looks set to break out, and pullbacks to the 20-dema can be used as lower-risk entries for those who like to buy within the base, as was the case on Wednesday and Thursday.

We’ve already seen Activision Blizzard (ATVI) break out and move higher over the past two weeks, as I noted in my report at that time. Electronic Arts (EA), is expected to report earnings on Tuesday after the close, so this will likely cause some sympathetic movement in ATVI and TTWO, which should be watched in the event it creates any actionable opportunities.

 

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Certain big-stock bio-techs, such as Gilead Sciences (GILD) and Biogen Idec (BIIB) have been acting quite strong lately, but these present a bit of a problem from a fundamental point of view. GILD, for example, has posted negative earnings and sales growth for several quarters, and in 2018 is expected to see earnings decline another 23% on an annual basis, from $8.70 in 2017 to $6.71.

Nevertheless, it broke out on Friday on heavy volume, and is within buying range of the breakout. Obviously, a pullback closer to the trendline breakout point would present a lower-risk entry, should it occur. Keep in mind that GILD is expected to report earnings on February 6th.

 

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Meanwhile, Biogen Idec (BIIB) broke out on Thursday after reporting 4% earnings growth on Thursday morning. It initially sold off on the news, but then rebounded off the 10-dma and broke out on strong volume. This is just out of buying range of the breakout, but pullbacks to the 360 price level or thereabouts can be watched for as lower-risk entries.

 

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Fundamentally, neither GILD or BIIB would qualify as “CAN SLIM” type stocks given the poor earnings and sales growth. But in this market, stocks are the new bonds, and money is desperate to find a home in stocks. This is what has driven names like the railroads and airlines more recently, although we did see Union Pacific (UNP) come apart this past week after a slow trend to the upside, courtesy of an analyst’s downgrade. And airlines got smashed across the board on Wednesday after United Continental Holdings (UAL) was creamed after earnings. I show the charts of each below as examples of how stocks that are acting perfectly fine one day can suddenly change character.

 

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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. 

As the market continues to trend higher, the action in areas like the airlines and semiconductors shows that not all stocks are immune to risk. Reversals, sell-offs and outright, brutal gap-down breaks can and do occur. We also saw the introduction of a new kind of risk in the market, where the CEO of Wynn Resorts (WYNN) was accused of sexual harassment, sending the stock down over 20 points in a heartbeat.

Some of this perhaps speaks to the rotational nature of this market as certain beaten-down groups come to life while other leading groups start to roll over. We’re seeing some of that in the housing names, which have lost some of their upside coherency and momentum lately. Meanwhile, bio-techs have been improving, and we saw two breakouts in big-stock names GILD and BIIB this past week. At the same time, we may soon see the video-gaming names begin to gather more group momentum as ATVI leads off with its own breakout and follow-through to the upside.

So, while the market rally remains well intact, and the bullish sentiment continues to bubble and boil, members should not allow themselves to fall into a trap of complacency. Stay alert, set profit objectives for your positions or at least reasonable selling guides that will keep you from getting into serious trouble in case things do go awry with any of your holdings. In short, stay sober amidst the intoxication of an incorrigible, record-setting rally! 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 positions in AMAT 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. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.