The Gilmo Report

January 31, 2018

January 31, 2018

The market finally took a good punch in the form of a -1.09% sell-off in the S&P 500 Index yesterday, but like a resilient prize-fighter it immediately punched back. The indexes gapped up sharply this morning after President Trump’s State of the Union speech and a strong ADP jobs number that showed 234,000 new jobs vs. expectations of 190,000.

As expected, the Fed held off on raising rates today, but indicated that they would likely raise rates at their next meeting. This sent the market into an initial rally, after which it steadily deteriorated until we had a full-blown reversal off the extreme morning highs. But the reversal didn’t hold and the market jacked to the upside by the close.

As I’ve discussed recently, the optics of even a small pullback in the market, say of 2-3%, is not going to look pretty given that 1% is the equivalent of 260 Dow points. That also means that a 300-400 point Dow decline could just be the start of a deeper and perhaps necessary correction.

The question is always what happens with individual stocks, and with most leaders quite extended, pullbacks and some time spent consolidating prior gains makes perfect sense at this point. It’s simply a matter of sticking to your selling guides and letting the market force you out naturally if things start to deteriorate.

Despite the upside close and the recovery from what was looking like an ugly downside reversal at the Fed policy announcement, the S&P 500 is still stuck below its 10-dma. It gapped below the line yesterday on higher volume, and traded on higher, above-average volume today as it churned around just below the line. This looks a little bit cautionary, and likely indicates that the market is going to take some time to work off its overbought condition.

 

GR013118-$SPX

 

The NASDAQ Composite Index churned around its 10-dma on heavy volume that was certainly higher than yesterday’s. Yesterday the index gapped down to the 10-dma and held support at the line today. However, the action looks slightly cautionary. I think it’s mostly a matter of being careful about taking new positions unless one finds something that is in a proper entry position, and there have been some situations that fit the bill, despite the recent market weakness.

 

GR013118-$COMPQ

 

Gold remains in bull mode as it consolidates the prior move to higher highs. The SPDR Gold Shares (GLD) didn’t hold its 10-dma, but found volume support today at the 20-dema and was able to quickly regain the 10-dma. This looks buyable here using the 20-dema as a tight selling guide.

 

GR013118-GLD

 

When I speak of limiting your new buys to stocks that are in the best entry positions, Take-Two Interactive (TTWO) illustrates what I’m talking about. I discussed the idea of watching Electronic Arts (EA) after its earnings report, which came out yesterday, for a potentially actionable move in TTWO. This morning, as EA gapped up to the 128 price level at the open, TTWO broke out just marginally, putting it in a very optimal entry position right off the open.

TTWO then jacked another several percent to close up 7.07% on the day, and out of range of its breakout. It’s now extended, but keep in mind that TTWO’s earnings are expected next Wednesday, February 7th.

 

GR013118-TTWO

 

Facebook (FB) reported earnings after the close, and as I write this afternoon is trading up after dropping down below 177 immediately after the report. This may turn out to be a buyable gap-up move tomorrow, so should be watched at the open.

 

GR013118-FB

 

Intel (INTC) pulled below the 48.12 intraday low of last Friday’s buyable gap-up move today but by the close rallied back to close two cents above that low. This puts the stock in a lower-risk entry position using the 48.12 level plus 2-3% downside porosity as your selling guide.

 

GR013118-INTC

 

Netflix (NFLX) remains extended, and the 10-dma down at 255.80 would be your first reference for a lower-risk entry on any pullbacks from here.

Apple (AAPL) busted through the lows of its current base yesterday, and as it came off over the past two days presented short-sellers with a nice opportunity to take the money and run ahead of earnings this Thursday.

 

GR013118-AAPL

 

Amazon.com (AMZN) keeps getting more extended to the upside as it finds further impetus from its announced intention to enter the healthcare business in partnership with J.P. Morgan and Berkshire Hathaway. Either way, there’s not much to do with the stock ahead of Thursday’s expected earnings report.

Nvidia (NVDA) is yet another big-stock NASDAQ name that remains wildly extended to the upside. With many of these names so stretched after strong rallies throughout the month of January, the obvious message is that one can just sit back and let things lie for a while as these stocks digest their gains. Earnings are expected on February 8th.

Tesla (TSLA) remains the archetypal swing-trading stock, as I dubbed it over the weekend, after bouncing off its 200-dma and rallying back up to its highs. The stock actually posted its highest closing high since mid-October. Earnings aren’t expected until February 21st.

 

GR013118-TSLA

 

Applied Materials (AMAT) is off my long watch list for now after breaking support at the 20-dema.

Arista Networks (ANET) shook out hard yesterday but found support near the prior breakout point on huge volume. That’s the sort of crazy move that is difficult to buy into, but if one was brave enough to do so then one would have been amply rewarded. The only problem is that if one were long the stock from the initial breakout back in early January, one would likely have been shaken out on the breach of the 20-dema!

 

GR013118-ANET

 

CSX Corp. (CSX) has held support along the 56 price level, but is having trouble around the 20-dema. I am removing this from my long watch list for now.

 

GR013118-CSX

 

Caterpillar (CAT) is beginning to waver a bit as it finds resistance along its 20-dema. In my view, profits can be taken here if one so desires, letting the stock take some time to build a new base. CAT has had a big run and is probably in need of a new base-building period.

 

GR013118-CAT

 

Weight Watchers Int’l (WTW) is consolidating its prior gains since its early January breakout. I would look for pullbacks to the 20-dema at 60.24 as your best, lower-risk entry opportunities from here.

Apptio (APTI) has made little progress since breaking out last week, but it remains just within buy able range of that breakout. However, earnings are expected to be reported this Monday, so for now I’d leave this one alone until earnings are out.

 

GR013118-APTI

 

MuleSoft (MULE) has been removed from my long watch list for now. The action has become erratic with higher selling volume in the pattern. Normally, I’d be willing to overlook this if the stock were able to prove that the selling is shaking out weak holders and then moving higher. In this case, the stock continues to flop around without going anywhere as the pattern becomes loose and sloppy. Earnings are expected on February 15th, and I’m inclined to leave this alone until then.

 

GR013118-MULE

 

Cloudera (CLDR) remains in a buyable position along its 10-dma as volume dried up to -64% below-average. Earnings aren’t expected until March 7th. This is the longest period that the stock has held tight along the 10-dma without dropping lower to test the 20-dema. Yesterday it did not move much despite the big market sell-off, so I’m willing to give this a shot here with the idea that it should quickly launch off the 10-dma.

 

GR013118-CLDR

 

Rise Education Cayman Ltd. (REDU) remains within buying range of its recent cup-with-handle breakout. The stock tested the 10-dma today on a small pullback and held the line. I would continue to use any pullbacks to the 10-dma as lower-risk entry opportunities. So far, the stock acts flawlessly, and as I noted over the weekend, REDU is probably the most orderly-looking name I’ve seen in this market in a long time.

Stitch Fix (SFIX) is faltering on its recent undercut & rally attempt coming up through the prior 20.50 low. While it was able to regain the low and close at 20.67 today, the action looks weak and so I have removed this from my long watch list for now.

Salesforce.com (CRM) remains extended and out of buying range of its prior base breakout. Meanwhile it continues to track higher along its 10-dma.

Workday (WDAY) followed through on Friday’s low-volume breakout by posting a strong-volume pocket pivot to new highs off the 10-dma. This was a surprising move to see, especially during a big market sell-off. While the move is interesting, in my view the stock is currently extended and was last buyable along the 10-dma per my prior comments on the stock last Wednesday.

 

GR013118-WDAY

 

ServiceNow (NOW) reported earnings after the close today and is doing nothing in after-hours trade. As I wrote over the weekend, I felt one could take at least partial profits ahead of earnings. This was already quite extended after a strong rally throughout the month of January, and it is now a matter of seeing how the stock can set up again.

Square (SQ) acts well but is in an extended state. However, if one was extremely opportunistic and, of course, very brave, the stock could have been picked up at the 20-dema on yesterday’s steep pullback at the open.

Again, this is not so easy to do in real-time when you see the market streaking to the downside right at the open, but it is typical of the sort of opportunistic approach that can work when the market pulls back. Interestingly, volume was light yesterday but the shakeout sent the stock to higher highs today before closing at 46.91. Pullbacks to the 10-dma at 44.64 would represent your best lower-risk entries from here.

 

GR013118-SQ

 

First Solar (FSLR) failed to hold its 20-dema on Monday, dropping down to its 50-dma yesterday. In my view this was a short on the breach of the 20-dema on Tuesday, but one had to be alert to it at the time. From here I would look for any rallies back up to the 20-dema as short-sale entry points. Earnings aren’t expected until February 21st.

 

GR013118-FSLR

 

Alibaba (BABA) is expected to report tomorrow before the open. Nothing to do here ahead of the report, especially with the stock being extended to the upside. Note that it has cleared the $200 “Century Mark” price level for the first time.

Weibo (WB) gapped down with the market yesterday before finding support at its 20-dema. I still view the stock as extended and would lay back for now as it digests its prior gains. Meanwhile, pullbacks to the 20-dema at 125.34 could be used as opportunistic long entries. Earnings are expected February 22nd.

 

GR013118-WB

 

YY, Inc (YY) broke sharply to the downside yesterday but found support along the top of its prior base. Notice that this looks very much like ANET, even though both stocks are in entirely different groups. The action here is quite erratic, and if one wasn’t shaken out on yesterday’s breach of the 20-dema, I would simply take profits here.

 

GR013118-YY

 

Both Gilead Sciences (GILD) and Biogen Idec (BIIB) have pulled back after prior breakouts after President Trump spoke about bringing drug prices down at last night’s State of the Union address. This took BIIB just below last week’s breakout point, which just serves to illustrate the difficulty in buying bio-techs these days. When the President can make comments at any time about instituting drug price controls, additional risk is created that makes these stocks difficult to deal with.

GILD, not shown, also pulled back into its recent breakout point and its 10-dma. But with earnings expected next week on Tuesday, February 6th, I think it’s best to lay back and see what develops after the earnings report.

 

GR013118-BIIB

 

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. 

While the optics of yesterday’s market sell-off yesterday was quite ugly, most leading stocks held up well within the context of their prior strong upside moves in January. I think it’s reasonable to expect some consolidation and pullbacks in these names, and I would simply be mindful of where your trailing stops and selling guides are.

Meanwhile, I would take the action of individual stocks at face value when presented with a fresh buy entry opportunity, as was the case with TTWO today. Tomorrow it could be FB, which continues to rally in after-hours trade and is currently trading just above a potential base breakout point. I would not be surprised to see it make it as far as the $200 Century Mark if it holds the after-hours rally.

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 a position in FB, 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.