The Gilmo Report

January 8, 2017

January 8, 2017

The Dow Jones Industrials Index came within a measly 37 cents of the magical 20,000 price level on Friday before news of a shooting at Ft. Lauderdale International Airport put a damper on buyers’ enthusiasm. By the close, the Dow could only manage to close at 19,963.80. a full 35.20 points below 20,000.

Based on the fact that the Dow is holding within a very tight 1-2% wide, four-week price range and bull flag, I would tend to think that a breakout through the 20,000 is imminent. Certainly, a failure to the downside would not be a good thing to see, but the Dow has not shown any tendency to break down with any sort of authority. For now, the Dow chart is a bullish one.

 

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While Dow 20,000 is mostly the big sideshow these days as far as I’m concerned, the real action was going on in the NASDAQ Composite Index. On Thursday big-stock NASDAQ names took charge as the NASDAQ 100 stepped forward to within a point of its all-time closing high, helping the NASDAQ Composite achieve an all-time closing high by the thin margin of 50 cents.

Both indexes moved to new highs again on Friday with clean range breakouts on roughly even volume. On its face, this certainly cannot be characterized as bearish action, unless one wants to make an issue of the lighter-volume breakout. But based on the action of individual stocks I don’t see this as an issue unless we were to see an outright breakout failure.

 

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The S&P 500 Index also pushed out to a new all-time closing high on Friday on lighter volume. Based on this action, as well as that of the NASDAQ Composite and NASDAQ 100 Indexes, I would expect the Dow to follow these indexes to new highs on a break above the 20,000 price level relatively soon.

 

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There was some divergence in Friday’s action as declining stocks led 1545 to 1397 on the NYSE and 1569 to 1398 on the NASDAQ. Meanwhile, the broader NYSE Composite and small-cap Russell 2000 Indexes were down. Whether this is meaningful or not will likely make itself apparent as we progress through January and earnings season, but for now it is clearly a matter of focusing on the right stocks at the right time.

Over the weekend I went into a long-winded discussion of the Ugly Duckling Principle and its associated set-ups. I also noted in several tweets that the best price moves tend to occur in Ugly Duckling set-ups, such as roundabout and bottom-fishing pocket pivots, as well as undercut & rally set-ups. (See here for definitions of these.)

Usually these types of moves occur in leading stocks that have been down and out, and which have been building patterns that could resolve either bullishly or bearishly. Over the past couple of days, we’ve seen the NASDAQ bear its “FANGs,” so to speak, referring to strong moves in big-stock NASDAQ names like Facebook (FB), Amazon.com (AMZN) (Apple (AAPL) also works as an “A” stock in the FANG acronym), Netflix (NFLX), and Google (GOOGL).

Recall that last weekend both FB and AMZN were looking like possible head and shoulders (H&S) topping formations in the making. But as I pointed out in my latest book, Short-Selling with the O’Neil Disciples (John Wiley & Sons, 2015), textbook short-sale patterns don’t always have to resolve bearishly. Generally, short-sale patterns will work best during a general market correction or an outright bear market.

If the market keeps rallying, then the potential for these bearish patterns to quickly regroup and morph into bullish Ugly Duckling long set-ups rises. That is the essence of the Ugly Duckling Principle, because the stocks suddenly start acting bullishly just when their chart patterns were starting to look quite bearish.

Facebook (FB) snapped out of a two-month price range that previously looked like 1-2 right shoulders in an H&S formation on the weekly chart by posting two bottom-fishing/roundabout pocket pivots over the past two days. The first was quite subtle as the stock just barely cleared both its 200-day and 50-day moving averages, and then today’s was quite a bit more obvious as buying volume picked up to above average.

I noted FB’s pocket pivot action today in an early-morning tweet, and the stock pushed higher all day long. It now looks somewhat extended on this four-day move that is essentially straight up from the bottom, and I would be interested to see how this acts on any pullback to the 50-day line from here.

Another interesting wrinkle here is that even though FB has posted two pocket pivots in a row, its 50-day moving average has finally dipped below its 200-day moving average, forming an allegedly bearish black cross. I don’t think I’ve ever seen a stock exhibit bullish bottom-fishing pocket pivots or roundabout pocket pivots at the same time as its daily chart is showing a black cross. FB is expected to announce earnings on February 1st.

 

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Amazon.com (AMZN) was looking bearish as well a week ago, and in a manner similar to FB as it looked to be forming a possible H&S topping formation. But all of that went right out the window yesterday as the stock posted a strong pocket pivot coming up through its 50-day moving average, as I noted in an early-morning blog post at that time.

Today AMZN continued to power higher as it came within 56 cents of the $800 price level before backing down to close at 795.99. In my view this was buyable yesterday per my blog post at that time. How much further it can move before earnings are expected to be reported on January 26th remains to be seen. But if one bought yesterday nearer to the 50-day line, one is probably in a better position to see how that works out.

 

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The main takeaway with FB and AMZN is the fact that strong action like this occurring in big-stock leaders on the comeback trail is bullish on its face. It also provides some clear evidence that the market wants to move higher. It will willingly and even eagerly rotate into previously down and out areas of the market in service of that inclination to rally. We can now return to spelling out “FANG” in order by looking at Netflix (NFLX). It had posted a nice pocket pivot off the 10-day line on Tuesday, as I noted in my Tuesday blog posts as well as my Wednesday mid-week report.

 

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I suppose I’ve now locked myself into finishing out the spelling of FANG by looking at the “G” stock in the acronym, Alphabet (GOOGL). The situation here is the same, as this big-stock NASDAQ name exhibits its own brand of bullish action with a pocket pivot breakout from a short, cup-with-handle formation.

Last week GOOGL wasn’t looking too hot as it broke below its 50-day moving average on the final day of trading in 2016 with volume expanding. But the Ugly Duckling became a factor as the stock immediately gapped back above the line as trading in the New Year commenced on Tuesday of this past week. This pocket pivot breakout move can be considered buyable using the 10-day line at 808.13, just 2% below Friday’s closing price, as a tight selling guide. GOOGL is expected to announce earnings on the same day as AMZN, January 26th.

 

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To further make my point, I’ll throw in the other “A” stock among the so-called FANG names, Apple (AAPL), seeing as how it, too, posted a pocket pivot breakout move from a cup-with-handle formation on Friday. This can be considered buyable using the 10-day line at 116.61 as a tight selling guide. The 20-day line at 115.60 could serve as a wider selling guide for those who prefer that.

In a market that is notable for its highly rotational nature, we can clearly see how money has suddenly started to move into big-stock NASDAQ/tech names. AAPL is expected to announce earnings on January 24th.

 

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I would also note that Priceline Group (PCLN), another one of the biggest of the big-stock NASDAQ names, posted a roundabout pocket pivot coming up through its 50-day moving average on Friday. This is impressive considering that the prior week PCLN looked headed for lower lows as it busted the 50-day line on higher selling volume on the final day of trading in 2016!

We might even consider that Tesla Motors (TSLA) is yet another big-stock NASDAQ name that is benefiting from strong money in-flows as buyers have swarmed the stock. Over the past couple of weeks, we have seen objective evidence of this in the form of three pocket pivots occurring at and around the 200-day moving average.

From here I would view pullbacks to the rapidly rising 10-day line, now at 218.92, as potentially lower-risk entry opportunities, should they occur. TSLA is now about 20% extended from its early December bottom-fishing pocket pivot at the 50-day line and the 193 price area, so a pullback from here would not be unexpected.

 

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As money has flowed into big-stock NASDAQ and other tech names, areas that showed strength earlier in the week retrenched a bit, such as the steels, for example. Both Steel Dynamics (STLD), not shown, and U.S. Steel (X) are acting the same after both stocks posted pocket pivots on Wednesday following undercut & rally moves off of their year-end lows of the prior week.

Both names have pulled back into their 10-day and 20-day moving averages with volume drying up after Wednesday’s pocket pivots. This brings both STLD and X into lower-risk buy range, using their 20-day moving averages as 36.63 and 34.87 as tight selling guides. STLD is expected to report earnings on January 24th, while X has updated their expected earnings report date to January 31st. Whether either stock can generate significant upside from here ahead of their respective earnings reports remains to be seen.

 

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The action in metals name Rio Tinto Plc (RIO), not shown, has been weaker after it posted pocket pivots on Wednesday and Thursday, which is somewhat surprising. My tendency here is to favor STLD and X instead if I’m interested in playing industrials metals.

Square (SQ) has actually been leading a revival among cloud-related software names as several names have shown Ugly Duckling buy set-ups and signals over the past few days. This has occurred as SQ, which I consider a current leader in the space, pushes out to higher highs on strong volume.

As I noted earlier in the week and at the end of the prior week going into year-end, SQ had undercut the prior 13.65 low in its pattern, setting up a possible undercut & rally move. That’s precisely what we got to start the new trading week and the New Year off with as SQ recovered back above the 13.65 low on Tuesday and then posted a strong pocket pivot off the 20-day moving average and up through the 10-day moving average on Wednesday.

Thursday morning SQ briefly pulled into its 10-day moving average, bringing it into a lower-risk entry position on the basis of Wednesday’s pocket pivot. It then turned and launched higher on another pocket pivot off the 10-day line, leading to Friday’s above-average volume move to higher highs.

Based on my blog posts on the last two days of December and earlier this past week, I don’t think I could have been more on top of this at the precise point of impact near the prior 13.65 low. That was the place to get in, and the stock is now about 10% higher from there and is somewhat extended from my perspective.

 

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Over the past week I’ve seen venerable cloud names like Salesforce.com (CRM) and ServiceNow (NOW) posting some impressive bottom-fishing pocket pivot (BFPP) moves. Adobe Systems (ADBE) posted a strong roundabout pocket pivot on Friday as well. I don’t show charts of these names here, as I will leave it up to the reader to investigate them on their own.

But you will note that CRM and NOW have now posted BFPPs coming right up through their 50-day moving averages, putting them in lower-risk entry positions along the 50-day lines while using the lines as tight selling guides. But both strike me as near-term extended and so might need to track sideways along their 50-day lines for a bit. ADBE is somewhat extended from its 50-day line so would need to see a pullback toward the line to provide a possible lower-risk entry.

NOW is also expected to announce earnings on January 25th, while CRM’s expected report date is February 22nd and ADBE’s is way out on March 16th.

Other cloud names that are showing constructive action but which are perhaps less extended include Veeva Systems (VEEV) which I discussed in a blog post Friday morning. This blog post came before the stock started to move on what ended up as a second pocket pivot along the 50-day moving average for the week.

On Wednesday VEEV has posted a pocket pivot at the 50-day line on an undercut & rally move back up through the prior 41.27 low of December 23rd. On Friday VEEV’s pocket pivot sent the stock back above the 20-day moving average for the first time since mid-December. Frankly, I considered this quite buyable on Friday morning under 42 per my blog post at the time, the stock remains within buyable range using the 50-day line at 41.58 or the prior 41.27 December 23rd low as tight selling guides.

 

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I like the idea of looking at areas of the market that are just starting to show signs of perking up. When I see tech names like AMZN, AAPL, GOOGL, FB, and others on the move as they start to flash pocket pivots and other buy signals, it leads me to other areas where I’m seeing similar action, such as the cloud names mentioned above.

Bio-techs remain something of a mixed bag, however, but the handful of better-looking set-ups in the group that I’ve been watching appear to be acting constructively. All the big-stock bio-techs are scheduled to announce earnings later in January, so there is a possibility that we could see more long set-ups develop after earnings are released.

We can see below that Celgene (CELG) is trying to show some signs of life within what is basically a two-month bull pennant type of formation. Among the big-stock bio-tech names it has the most constructive-looking pattern. While the stock has gone nowhere since gapping up after the election, it is holding up within a reasonable base formation.

It is also much nearer to its all-time highs. All of this contrasts sharply with other big-stock bio-techs that are merely trying to rally off of lows within downward-trending or busted chart patterns. All of these, like AMGN, BIIB, and GILD, are also way down from their all-time highs.

So as it tries to regain some of its former mojo, CELG flashed a stalling pocket pivot on Friday on about average volume. Unfortunately, the stock just didn’t have enough momentum to clear overhead resistance from the far left side of the pennant formation. With earnings expected to be announced on January 26th, it may simply continue to base-build until then, at which time some material resolution might be forthcoming.

 

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Clovis Oncology (CLVS), not shown, is holding up near its recent highs, but was last buyable along the 20-day moving average on Wednesday, as I discussed in my mid-week report of that day. In this position I would not consider the stock to be in a lower-risk entry area.

My other bio-tech favorite, Myovant Sciences (MYOV), is in a better position as it sits tight just above its 10-day moving average. This action comes on the heels of a very strong pocket pivot move the prior week, six days ago on the daily chart, and a second pocket pivot that occurred on Wednesday of this past week.

With the stock quieting down here as it tightens up just above the 10-day line with volume drying up in the extreme to -87.8% below average, this might be the spot to quietly pick up some shares. Remember that MYOV remains a smaller, thinner, speculative bio-tech name. But for risk-oriented investors with account sizes that can make better use of smaller positions, it may be appropriate. In this case the 10-day line at 11.75 might serve as a reasonably tight selling guide.

 

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Overall, while the action is spotty, I am seeing other bio-tech names perk up here. Incyte Pharmaceuticals (INCY) and Glaukos (GKOS), both not shown here on charts, are two bio-techs that had nice moves on Friday. INCY posted a pocket pivot on Friday as it tries to break out of a two-month base, while GKOS posted a roundabout type of buyable gap-up move on Friday.

So as we see more names in the bio-tech space perk up and present concrete long set-ups, I see no reason why one cannot simply go with the objective, real-time price action. A week ago, the bio-tech space did not impress me all that much. But new price/volume information over the past week has done much to improve the situation, and we know that in this market things can change quickly. For that reason, one must always remain objective and ready to move with the flow when the evidence dictates.

Chinese names have been on the move over the past few days, and I have been discussing certain names in the space in my blog posts over the past week as well as my Wednesday mid-week report. What we’ve seen, however, has been a broad move in almost every significant Chinese-related name that trades on U.S. stock exchanges.

It helps to be aware of the fact that this broad move in Chinese stocks was likely helped somewhat, at least over the past 2-3 days, by a strong move off the bottom in China’s currency, the renminbi, which is also known as the yuan. My daughter, who speaks Mandarin, tells me that yuan is pronounced more like saying “yoo-en” quickly and softly rather than the “yoo-awn” pronunciation that many seem to like to use.

In any case, we can see that the USD/CNY currency pair (U.S. Dollar/Chinese Renminbi or Yuan) broke down sharply off its peak over the past few days. This would correspond to the CNY bouncing sharply off of its prior lows, and it occurred after the Chinese government cracked down on those selling its currency short.

 

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That led to an immediate bounce in the CNY that likely had an effect on Chinese stocks. However, I’m not necessarily convinced that the rebound in Chinese stocks is being driven by the currency movements alone, although it does help. As I postulated on Wednesday, the slow realization by the Trump Administration that an aggressive trade stance toward China will not be helpful to either side may also have the potential to take the pressure off of these names.

If we look at the daily chart of Momo (MOMO), which I first noted in a blog comment I made on Tuesday, we can see that it actually bottomed nearly three weeks ago when it found support at the 200-day line. That led to a “Wyckoffian Retest” of that prior low at the 200-day line early in the week on light volume.

We then saw a five-day pocket pivot occur on Wednesday, followed by a stronger pocket pivot coming right off the 20-day moving average on Thursday. This has carried the stock up nearer to the 50-day moving average and some overhead from the left side of the chart in the 21 price area. MOMO held tight on Friday as volume dried up sharply, so I’m looking for a possible move up through the 50-day line from here.

The stock may test the 20-day moving average before attempting that, however. For that reason, I would also look at pullbacks into the 20-day line at 19.41 as potentially opportunistic entries, should they occur. For now, if one got long on the basis of my blog posts when the stock was under 19, you can afford to use the 10-day line at 19.02 as a tight selling guide. One thing you won’t have to worry about with MOMO is earnings. They aren’t expected to be reported until March 21st.

 

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Weibo (WB) is looking very much like MOMO, as it also posted a pocket pivot off of its 20-day moving average on Thursday, and then held tight as volume dried up on Friday. WB is in a slightly different position, however, as it could be trying to build the second low in a possible double-bottom formation that is in process.

It is also holding tight just below its 50-day moving average, where it found intraday resistance on Thursday’s pocket pivot. On Friday the stock closed tight on the day with volume drying up sharply. This looks buyable here on the basis of Thursday’s pocket pivot, using the 20-day moving average at 43.67 as a reasonably tight selling guide. Also, any pullbacks toward the 20-day line would offer lower-risk entry opportunities, should they occur.

As with MOMO, anybody trafficking in WB doesn’t have to concern themselves with having to play earnings roulette since the company isn’t expected to announce earnings until March 1st.

 

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JD.com (JD) flashed yet another stalling pocket pivot on Thursday, closing in the lower part of its daily trading range, but about half-way up from where it closed the prior day on Wednesday. On Friday the stock pulled into the confluence of its 20-day and 50-day moving averages and found support at the 20-day line as it closed up near the peak of its intraday trading range with volume drying up.

This remains within buying range, and particularly on any pullbacks to the 20-day or 50-day moving averages, with the 10-day line also figuring in as it starts to rise above the 50-day. JD is also free of earnings roulette in the near-term as earnings are expected to be announced on March 7th.

 

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As MOMO and WB might be considered Chinese cousins given that they are both internet content names, JD as an e-commerce name might be considered a cousin of big-stock Chinese name Alibaba (BABA), which has been correcting for some time.

More recently, however, the stock has begun rounding out what may become the lows of a new base. The objective evidence is of course found in Thursday’s roundabout pocket pivot (RAPP) coming up through the 50-day moving average. Friday’s tight action held at the 50-day line as volume dried up to -39.8% below average. This puts BABA in an optimal buy position right here along the 50-day line while using the line as a tight selling guide. The only issue here might be the fact that the company is expected to announce earnings on January 26th.

 

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If I’m trying to figure out where money might rotate to next in this market, one candidate area would be the oil patch. Most oil-related names have been in consolidation mode after big-volume breakouts and gap-ups following the late-November OPEC production limits agreement.

A number of these have similar-looking patterns, of which Parsley Energy (PE) serves as a reasonable example on its daily chart, below. Others to look at would include Diamondback Energy (FANG) and Rowan Companies (RDC), for example.

Whenever I run screens on the oil companies with the best fundamentals, however, PE is always at the top, so I will focus on it in this discussion. I also blogged about PE as looking like it was ready to move on Friday morning as it hovered just above the 36 price level. By the end of the day, the stock did move higher, but it was the pocket pivots of this past Wednesday that werethe first real clue of a possible move higher.

I’ve been watching PE as a possible late-stage failed-base (LSFB) short-sale set-up, looking for a high-volume breach of the 50-day moving average as a signal to act on. But what I’ve noticed in testing the stock on the short side is that the bid is fairly persistent just under and around the 35-36 price level. For that reason, I flipped to the long side once I saw the pocket pivot on Wednesday, and the stock has so far given me some positive feedback.

From here I would look at this as still within buyable range, using the 20-day line at 35.89 as a tight selling guide. FANG and RDC can also be checked out as they both appear to be at buyable points in their patterns as well, using nearby moving averages as tight selling guides.

 

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I’ve been keeping a close eye on Nvidia (NVDA) as it has pulled back here following last week’s climactic move up to and reversal at the 120 price level. Interestingly, the stock has been able to hold at its 20-day moving average and the $100 Century Mark. NVDA was probably one of the best Livermore Century Mark Rule buy set-ups I’ve seen in a while as it cruised nearly 20% in just a few days after finally clearing the $100 price mark.

Now this pullback has started to settle down a bit and we might even consider that the stock is showing some supporting type action at the 20-day line as it refuses to break down. If shorts have swarmed the stock after the big reversal off the peak, I would give the stock a reasonable chance of retesting the prior highs, which might make it good for at least a trade from here.

With the stock closing down at 103.10 on Friday, you have two very good reference points for tight stops at the $100 price level and the 20-day line at 102.17. I have seen stocks that have looked like climactic tops retest their prior highs. In rarer instances, such as with Netease (NTES) in July of 2009, I have seen stocks quickly recover from a climactic type of top and then just push to new highs.

If NVDA’s “climax top” starts getting just a bit too obvious, then a retest of the prior highs, at the very least, is certainly not too far-fetched. However, a clean breakdown through the $100 price level would probably indicate that NVDA at best will need more time to build a new base.

 

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As long as we’re on the topic of Livermore Century Mark Rule buy situations, we might note that telecom leader Arista Networks (ANET) has just recently pushed up through the $100 price level. The stock did this on Wednesday on a big pocket pivot breakout that was preceded by some nice “voodoo” action along the 20-day moving average.

With ANET closing at 101.28 on Friday, this becomes a simple trade for anyone willing to take it. You simply go long here and use the $100 price level as your selling guide, with an additional 1-3% of downside porosity added according to one’s risk preferences.

 

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Mobileye (MBLY) has continued to act in impressive fashion since I first figured out this thing wanted to go higher after the prior week’s bottom-fishing pocket pivot (BFPP) at the 50-day moving average. Since then the stock has posted two strong pocket pivots that are of a more roundabout nature, hence RAPPs, coming up through and off of its 200-day moving average.

After finally getting a bit extended on Wednesday, MBLY has backed down over the past two trading days but is holding tight as volume declines. As of the last report date on December 15th, MBLY had 22 million shares sold short against a float of 94 million shares and average daily volume of about 3.4 million shares.

So it’s pretty clear to me that shorts have been getting squeezed badly here. Now the $60 million question becomes whether MBLY is a re-emerging growth story that can bring in natural buyers. Certainly, its earnings and revenue estimates look to be fairly positive.

The real test, however, is more of a price/volume affair as we now get to see how well it holds the 200-day line as it consolidates the prior big gains off the lows over the past six trading days. I tend to think MBLY has a reasonable chance at developing further as a potential turnaround play, particularly with all the current interest in self-driving cars.

Optimally, I’d like to buy this as close to the 200-day line as possible if it continues to drift in toward the line with volume drying up sharply. MBLY is one stock to keep an eye on in 2017, and may be thematically linked to something like TSLA, as well as NVDA.

 

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There seems to be a fair bit of hand-wringing over the Dow’s inability to reach 20,000 and Friday’s lack of breadth. But my view is that the more important and relevant action is to be found in individual stocks. If I can make strong profits on the long side as certain names begin to show me actionable long set-ups in real time and those set-ups actually work, then obviously that is the direction toward which I will let the market push me.

Again, it all boils down to being able to see what individual stocks are actually doing as opposed to what you think they should be doing. That’s how one avoids getting hung up on trying to short AMZN’s move this week instead of seeing the action for what it is and shifting to the long side in order to capture some nice gains on the upside. The same thing has applied to names like TSLA and MBLY, among others.

While things can change quickly, and we always have to remain alert and vigilant in this market, I just go with what the set-ups show me. Of course, that assumes that we know where to look, and use the broad array of tools at our disposal as I have taught in these reports. I believe this is much more efficient and timely than just sitting around waiting for obvious base breakouts.

For now, at least until the market starts showing me more short-sale set-ups as long set-ups start to fail, the market’s message is clear: Be long until further notice.

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 PE and VEEV, 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.