The Gilmo Report

November 12, 2017

November 12, 2017

The market pulled another one of its “pull the rug out” type of moves on Thursday, something that is not uncommon in this market. A big futures-led gap-down open took the Dow Jones Industrials Index down around 250 points, or a little over 1%. In a market that seldom pulls back 1%, this counts as a bear market of sorts.

In the process, leading stocks start to look ugly but just end up pulling back into areas of logical support, and then turn back to the upside. The Dow, S&P 500, and the NASDAQ Composite all bounced off their 20-day exponential moving averages. And, as is also common in this market, a big, fat juicy buyable gap-up in a new-merchandise name, Roku (ROKU), occurs on a day like this, making it difficult to find the stomach to step in on the trade.

ROKU opened up Thursday at 24.75, quickly dropped to 23.86 in a few seconds, looking as if it might succumb to the general market selling pressure, and then immediately launched to 29 in a mere 15 minutes. If one had the intestinal fortitude to step in once a low was set, one profited handsomely. As always, easier said than done, but typical for this market.

 

GR111217-ROKU

 

Instead of the indexes dragging ROKU down, ROKU dragged the indexes off their intraday lows. The NASDAQ Composite Index can be seen bouncing off its 20-dema on Thursday and closing near the top of its daily trading range. On Friday, the index was unable to make much further progress, as buyers weren’t willing to step up after stepping in when the index was down on Thursday.

 

GR111217-$COMPQ

 

The S&P 500 Index also found support around its 20-dema on Thursday, dipping just below the line before rallying to close back above its 20-dema and the higher 10-dma. On Friday, the index closed just below the 10-dma in a tight range with volume down on the day.

 

GR111217-$SPX

 

Within the context of the market’s overall uptrend, Thursday’s 1% or so sell-off wasn’t much to sneeze at. As well, a little backing and filling in here would probably be a good thing to see. Meanwhile, I think that by focusing on individual stocks set-ups and trying to see past all the news noise, one can stay on track.

The big news this week was all the talk about tax reform proposals from the House and the Senate, neither of which strikes me as anything earth-shattering. The plans essentially give with one hand and take with the other, and the fact that cut in the corporate tax rate to 20% won’t take place for another year under the Senate plan doesn’t strike me as all too exciting.

But as I pointed out in my Wednesday report, I don’t think this market is about the news flow. Whether its glorious new “Trump Economy” or the “massive, wonderful, beautiful” legislative initiatives that have gone nowhere, or at least which have been watered down, I don’t consider these the primary drivers of the market rally.

It’s all about one thing, which is the massive amount of liquidity that remains in the financial system. And with all that money sloshing around, it needs a home. So, in the process, the primary driver is the basic idea and phenomenon whereby “stocks are the new bonds,” until they aren’t.

Currently the indexes are just chopping around in two week ranges without making any noteworthy progress over the past three weeks. A deeper pullback could occur at any time, and probably when investors least expect it. For that reason, we simply want to remain patient on the long side and wait for the lowest-risk entries on pullbacks while being mindful of our absolute and trailing stops.

 

More New Merchandise:

Since the first stock I’ve discussed in this report so far is a new-merchandise play that has gone blazing hot, there are a couple of other new-merchandise plays that catch my eye here.

The first is MuleSoft (MULE), which I blogged about early Friday morning. The company’s flagship product is the Anypoint Platform™ that, according to the company’s website, “solves the most challenging connectivity problems across SOA, SaaS, and APIs. It’s a unified, highly productive hybrid integration platform that creates an application networks of apps, data and devices with API-led connectivity.”

That sounds compelling enough, but what is the chart showing us? Currently I’m looking at an L-formation that may be in the process of trying to resolve as a U-formation, completing a typical “LUie” pattern.

MULE came public on March 17th of this year, and then spent nine weeks building a base from which it broke out in the latter part of May. That breakout failed, however, and the stock went into a decline that didn’t bottom out until recently at 19.40.

That low occurred in late September, and now the stock is trying to come up the right side of a potential new base. Two weeks ago, MULE reported earnings and gapped up to 26.10 before reversing to close near the lows of the daily price range. Notice, however, that there was a large amount of overhead resistance on the left side of the chart. So, it was perhaps logical to expect some overhead selling into that powerful post-earnings gap-up move.

Since then, MULE has held tight sideways along the 20-dema as volume has dried up sharply, setting up the initial “L” in a possible LUie type of resolution. Please remember that a LUie pattern is not a buyable pattern in of itself, it merely describes how an L-formation can resolve in this market if we see tight action along the bottom of the “L.”

We rely on clues like voodoo type action along the bottom of the “L,” or an undercut & rally move, to tell us if and when the “L” has a chance to resolve into a “U.” When it does, you get the LUie pattern. On Friday, MULE was showing an extreme voodoo dry-up early in the day, which is why I blogged about the stock that morning. It remains buyable along the 20-dema.

 

GR111217-MULE

 

One caveat to be aware of is that currently MULE’s float is 5.5 million shares with 128.9 million shares outstanding. As the stock price moves higher, this does bring up the possibility of the company looking to unload more of these shares in a secondary offering in order. This would expand the float, which could be a positive beyond the short-term, in my view.

The second name, Switch (SWCH), is expected to report earnings on Monday after the close, and so I will be watching this one closely in case it pulls a “ROKU.” Not that it necessarily will, but like ROKU it was a hot IPO right off the bat but then went ice cold.

SWCH operates data centers that it claims provide the technology infrastructure to support the connected world and IoE (internet of everything) secular them. It also differentiates its data centers with higher power density enable by its Switch Modularly Optimized Design.

So, the company has what appears to be a compelling fundamental theme from a technology standpoint. And, of course, many pundits love to complain about the company’s valuation. Well, in response to this common line of thinking, ROKU is losing money, so is trading at an infinite valuation. That didn’t keep it from roughly doubling in two days this past week.

The company came public a little over a month ago on October 6th, ran up to a peak of 24.90 on the IPO day, and has since drifted lower in a shallow downtrend channel. If nothing else, I think the stock is one to keep our attention on once it reports earnings as an opportunity could arise at that point, and we want to be ready for it.

 

GR111217-SWCH

 

Financials:

Financials are losing their luster as a leadership group, with big banks like C GS and JPM almost looking like shorts as they test their 50-dmas. This shows up as similar action in the Financial Select Sector SPDR Fund (XLF) as it comes down to its own 50-dma. It was unable to sustain Thursday’s bounce off the 50-dma, but this has been the spot to buy the XLF and the financials – when they don’t look so great as they pull into deep support.

Taking a shot here is possible using the 50-dma as a tight selling guide. The whole argument for financials, however, centers around the Fed continuing to raise interest rates, and for now that seems to be questionable, as the action in financials illustrates.

 

GR111217-XLF

 

But even as the financials flounder, the SPDR Gold Shares (GLD) was hit with higher selling volume as it look set to retest its 200-dma. I’d have to see what this looks like when its gets to the 200-dma before deciding whether the GLD is a buy on this pullback or not.

 

GR111217-GLD

 

The odd divergence here is that as gold pulls in and flounders about, the gold-related stocks that I favor are continuing to act well. Franco Nevada (FNV) is holding tight sideways and giving up absolutely none of Monday’s big pocket pivot/trendline breakout gains that I discussed in Wednesday’s report.

Kirkland Lake Gold (KL), meanwhile, has pushed right back up to its highs and is now pulling back to the 14 price level as volume dries up sharply. Notice the “deep doo-doo” bottom-fishing pocket pivot at the 10-dma that occurred eight trading days ago?

I must admit, I saw that when it occurred, but did not act, since I wasn’t seeing any confirming action in gold itself at that precise point in time. That came later, but the fact is that KL has wildly outperformed gold over the past couple of weeks. So much for confirming action.

This may need to spend a little time consolidating the gains off the lows, so watch for the 10-dma to catch up to the stock price. At that point, the 10-dma would then serve as a reference for a possible buyable pullback.

 

GR111217-KL

 

Big-Stocks:

Big-stock techs aren’t doing much in the way of sharp upside movement as they mostly chop back and forth along with the NASDAQ Composite Index.

Apple (AAPL) remains extended, but the 10-dma at 171.91 would serve as your reference for possible lower-risk entries.

Amazon.com (AMZN) has finally met up with its rising 10-dma, but I would look for opportunistic pullbacks deeper and into the 20-dema as the best lower-risk entries if I can get ‘em.

Alphabet’s (GOOGL) closed tight at its 10-dma on Friday with volume declining to -38% below-average. This remains within buying range of its buyable gap-up (BGU) move of two weeks ago.

Facebook (FB) is pulling into its 20-dema, where it becomes buyable using the 20-dema as your selling guide. The 20-dema is about 0.5% above the top of the prior base at 176, so the top of the base can also serve as a reference for a tight selling guide.

Netflix (NFLX) is getting sloppy here, and in the short-term actually morphed into a short-sale at the 20-dema on Thursday, but was able to bounce off its intraday lows near the 50-dma and close near the top of its trading range. On Friday, NFLX came down again and met up with the 50-dma where it found some support and closed up and off the line.

This can be viewed in one of two ways. The first is as a long here using the 50-dma as a last stand support level. The other is to watch for a weak rally back up into the 20-dema as a short-sale entry, with the idea of cutting and running if NFLX can regain the 20-dema.

Theoretically, it may even be possible to treat this as a two-side situation, where you can short it and then go long at various points within the pattern.  Bottom line for NFLX, however, is that a breach of the 50-dma turns this into a full-fledged late-stage failed-base (LSFB) short-sale target. Stay tuned.

 

GR111217-NFLX

 

Tesla (TSLA) remains trapped within what is now a six-day bear flag after gapping down on a bad earnings report two Thursdays ago. This remains as I discussed in my Wednesday report. It is a short here using the 308.69 high of its gap-down price range, but a rally up through that level would stop one out quickly.

If that occurs, then we watch for a rally up to the 200-dma as a secondary short-sale level. On Friday, TSLA did rally up into the 10-dma, which is the lowest moving average in the pattern, and turned tail to close near the lows of the day. The 10-dma therefore also serves as a reference point for overhead resistance that is about one point, about a third of a percent, above the 308.69 shortable gap-down day’s intraday high.

 

GR111217-TSLA

 

Nvidia (NVDA) gapped up on Friday after reporting earnings Thursday after the close. This resulted in a buyable gap-up move using the 211.63 intraday low of Friday as a selling guide. The stock stalled slightly off the intraday highs, but remains within range of the BGU set-up.

 

GR111217-NVDA

 

General Motors (GM) was buyable along the 50-dma earlier in the week per my blog comments and my discussion in Wednesday’s report. It finally popped up and off the 50-dma on Friday on increased, but only average buying volume. This remains buyable as close to the 50-dma at 41.95 as you can get it while using the 50-dma as a tight selling guide.

 

GR111217-GM

 

Cloud Names:

ServiceNow (NOW) is sitting at its 10-dma as volume dries up, putting it in a lower-risk entry position using the 20-dema as a tight selling guide. The stock looks like it is revving up to move higher as long as it continues to hold the 20-dema.

Saleforce.com (CRM) remains extended, but did pull back to its 10-dma on Thursday and Friday where it presented a lower-risk entry opportunity. Remember that earnings are expected on November 21st.

Workday (WDAY) turned sloppy on Thursday as it got slammed below its 50-dma on above-average selling volume. On Friday, it was able to regain the 50-dma on an undercut & rally type of move after undercutting a prior low in the pattern on Thursday.

This would technically make the stock buyable here using the 50-dma as a tight selling guide. WDAY is expected to report earnings on November 30th.

 

GR111217-WDAY

 

Square (SQ) reported earnings on Wednesday after the close and immediately traded down in the after-hours as I was writing my report of that day. I noted at the time, “Keep an eye on this tomorrow morning to see what sorts of opportunistic action might present itself to enterprising traders. If the stock gaps down, which I’m assuming based on its current after-hours action, watch for a test of the 20-dema at 34.60.”

That is what we saw on Thursday as SQ traded right down to its 20-dema in the morning and then bounced hard on big volume. That resulted in a pocket pivot as it came back up through the 10-dma, and another pocket pivot off the 10-dma showed up on Friday. This is now extended, but illustrates the opportunistic entry presented at the 20-dema after earnings. You either caught it there or you didn’t.

 

GR111217-SQ

 

Solar Names:

First Solar (FSLR) is hanging along its 10-dma but may need to consolidate more along the line following the big gains it has seen over the past couple of weeks. I would watch for opportunistic pullbacks to the 20-dema as the lowest-risk entries, should they occur.

SolarEdge (SEDG) gapped up on Thursday after blowing out earnings Wednesday after the close. I noted the buyable gap-up (BGU) move in my report of that day, and it was buyable right at the open on Thursday. SEDG opened at 35.75 and never looked back, as that was also the intraday low. By the close the stock was up at 38.80, and is now extended. Watch for pullbacks closer to the 35.75 BGU intraday low as possible lower-risk entry opportunities from here.

 

GR111217-SEDG

 

Semiconductors:

Micron (MU) continues to act well since I first discussed the stock as a buy back when it posted a buyable gap-up (BGU) move in late September. On Thursday, the stock posted a supporting type of pocket pivot at the 20-dema, but was buyable at the 20-dema per my prior comments on the stock. The supporting action off the 20-dema was just the icing on the cake.

On Friday, MU posted a pocket pivot at the 10-dma, but in my view, is slightly extended.  My preference is to buy the stock on weakness into the 20-dema when you can get it, which is what happened on Thursday during the hairy market pullback.

 

GR111217-MU

 

Universal Display (OLED) is even more extended as it keeps pushing to new highs. The 10-dma is trying to catch up, but remains about 18 points below the stock’s current price. For now, a pullback to the 10-dma would be your only reference for a lower-risk entry opportunity.

 

Telecom-Related Names:

Arista Networks (ANET) made another new high on Friday, and remains way extended from its last entry along the $200 Century Mark, closing Friday at 221.05. This is a good example how if one had been shaken out two Thursdays ago one could have simply re-entered the stock on the ensuing buyable gap-up the next day, or the move up through the $200 Century Mark per Livermore’s rule.

I discussed these buy points in last weekend’s report, and I did so in detail. Amazingly, this thing is now twenty points higher, and would have more than made up for any losses taken if one sold on the sudden, bizarre price break seven days ago on the chart. Crazy stuff, but in fact quite concrete if you’re paying attention, and not so unusual for this nutty market.

 

GR111217-ANET

 

Chinese Names:

Alibaba (BABA) found support at its 20-dema on Thursday, which provided a lower-risk entry opportunity if you were paying attention. It’s now back above the 10-dma, but I would say that pullbacks to the 20-dema remain the most opportunistic entries if you can get them.

Sina (SINA) has been unable to regain its 10-dma and 20-dema after Tuesday’s undercut & rally move. This looks out of sorts here and not something I would look to buy unless it can regain and hold above the 20-dema.

Weibo (WB) is the stronger of the two since it broke out on very strong volume on Wednesday. I blogged about the stock on Wednesday early in the morning as it was coming up through the 50-dma following Tuesday’s post-earnings pocket pivot on heavy buying volume.

Now WB is pulling in as volume declines sharply, which should bring it into a lower-risk entry position. So far, the stock has retraced about half the distance between the 50-dma and Thursday’s high, which could be considered an entry point using the 50-dma as a selling guide.

Otherwise, one can try and wait to see if the stock gets closer to the 50-dma with volume declining even further. In that case, the entry would be more optimal, but the 50-dma would remain your selling guide if the stock failed to hold up. Watch your 620 chart on Monday for a possible buyable pullback, as I illustrated in my blog posts on WB during trading hours on Friday.

 

GR111217-WB

 

Internet Related:

Yelp (YELP) is holding support at the 50-dma, so it remains buyable on pullbacks to the 50-dma while using it as a selling guide. Thus, it remains as I discussed in my Wednesday report: “This is pretty much the “last stand” buy zone for the stock, as it must be able hold support at the 50-dma to remain viable. Therefore, it can be tested here on the long side, but keep a tight leash on the stock by using the 50-dma as a tight selling guide.”

 

Software:

Veeva Systems (VEEV) pulled into its 20-dema on Thursday, where it presented buyers with a lower-risk entry opportunity. It is now back above the 10-dma, and in fact posted a pocket pivot on Friday. Earnings are expected on November 28th.

 

GR111217-VEEV

 

Nutanix (NTNX) pulled down to its 20-dema on Thursday during the general market mayhem. I had already discussed in my Wednesday report that pullbacks to the 20-dema would remain your best, opportunistic entries if you can get them, and you did on Thursday. It is now extended. NTNX is expected to report earnings on November 29th.

 

Video-gaming Names:

Currently I’m focused on just two of the three video-gaming names I have discussed in recent reports. Take-Two Interactive (TTWO) remains buyable here as it dips just slightly below the 116.35 intraday low of Wednesday’s BGU.

The stock has gotten as low as a little less than 3% below the 116.35 price level, which can be considered allowable “porosity.” This therefore remains in a buyable position using a point 3% below the 116.35 price level as a reasonable selling guide.

 

GR111217-TTWO

 

Activision Blizzard (ATVI) may also be buyable here following Tuesday’s undercut & rally (U&R) move. After regaining the 50-dma on Wednesday, the stock has dipped back below the confluence of the 50-dma, 10-dma, and 20-dema as volume has dried up.

The key point here is that volume is drying up as the stock settles down and pulls back slightly, which makes it look buyable to me, using the 62.15 low of Wednesday as a selling guide. However, a move back up through the 20-dema might confirm a possible re-breakout attempt by the stock, and so could be played as a moving average undercut & rally (MAU&R) move using the 20-dema as your selling guide at that point.

 

GR111217-ATVI

 

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 I wrote on Wednesday, the market continues to have its unusual twists and turns. This has been true for both the indexes and individual stocks, as Thursday’s “pull the rug out” gap-down move and ANET’s odd action have demonstrated over the past week or so.

This market is mostly a matter of being in the right stock at the right time. Earnings season has presented a number of actionable moves following individual stocks’ reports, but the set-ups are not your garden variety O’Neil type of stuff. They are primarily OWL™ set-ups like BGUs, U&Rs, and the like, and if you don’t know how to implement those, you’re mostly left holding the bag.

I continue to monitor breadth somewhat warily, I must admit, as the NYSE Advance-Decline Line has not confirmed the Dow’s and S&P 500’s recent moves to new highs.

 

GR111217-$NYAD

 

Meanwhile, the breadth situation over on the NASDAQ is even worse, as the NASDAQ Advance-Decline Line continues to make lower lows after peaking in early October. I brought this up in my last report, on Wednesday, and it was somewhat ironic to see the big gap-down open on Thursday. Unless breadth starts to improve dramatically, which is certainly possible in an Ugly Duckling sort of market, we may see more sharp pullbacks in November.

 

GR111217-$COMPQ GR111217-$NAAD

 

In the meantime, I would remain focused on the individual OWL-style stock set-ups you see in real-time, because that is where the opportunities have been. Many occurred on Thursday, during a sharp market sell-off that was looking ugly by the time the Dow had gone down about 250 points in the middle of the day.

This, of course, makes acting on these set-ups, when they occur during an ugly market sell-off, much easier said than done. But as I have discussed many times in my reports during 2017, you have to be courageous when you see a stock coming into a potentially lower-risk buy zone or setting up in a very proper OWL-style long set-up.

So, be ready for anything, and stay alert as we begin to move through what is “normally” a favorable holiday season. Of course, some might argue that this market is far from normal at times, so all we can do is (repeat it with me) 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

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.