The Gilmo Report

November 15, 2017

November 15, 2017

Two gap-down opens on Monday and Tuesday that looked potentially gruesome at the start fizzled out with the indexes closing well up and off their lows. But this only served to condition investors that every such gap-down was just another opportunity to “buy the freakin’ dip.” I believe this is more commonly known by the acronym “BTFD,” although the choice of F-word might vary among those less discrete.

Today the indexes again gapped down at the open and sold off sharply at the open, but not more than 1% before rallying off their lows as they did on Monday and Tuesday. By the close, the NASDAQ Composite Index was able to close just above mid-range and its 20-dema. Volume was lighter, giving the day an inconclusive look.




The S&P 500 Index looks a little weaker as it closed in the lower half of its daily trading range on higher volume. It did rally off the intraday lows, but not much. It is now floating around in no-man’s land between the 20-dema and 50-dma. In general, the indexes have gotten hit with selling right at the open all week long, but have done their best to hang in there as best as they can.

This action strikes me as weak but inconclusive, particularly when we see the biggest and best leading stocks just pulling into support. Unless we start to see these break down in earnest, we cannot yet conclude that the market is primed for a major sell-off. This may just be a bit of the old “shaking the tree” type action to see what falls out before a year-end rally, although I do not discount the potential for more near-term selling.




In recent reports, I’ve discussed the divergence in breadth as the major market indexes, particularly the NASDAQ, have made new highs. Because of this, I pointed out over the weekend that, “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.”

In general, I see the market as getting a little sloppy here, and while not every leading name that I follow is coming apart, there also isn’t a lot of upside being generated outside of a hot IPO rocket stock like Roku (ROKU). If you didn’t catch the move in ROKU over the past few days, you probably haven’t seen your long positions do much to get you excited. But if the lack of excitement in many names just means they are percolating for a strong year-end move, that would be fine with me. Let’s look at some stocks and sectors.



The Financial Select Sector SPDR Fund (XLF) found support at its 50-dma today, bouncing off the line on above-average volume. Similar moves were seen in one of its biggest components, J.P. Morgan (JPM), which also bounced off their 50-dma lines.

Other names in the group look less appetizing, such as Citigroup (C), which rallied up into its 50-dma today, making it look more like a short than anything else. With tax reform, which is expected to benefit financials, and further Fed interest rate increases at risk, the financials are not an area of interest for me at this time.




Gold also seems to lack any luster as the SPDR Gold Shares (GLD) bounces along its 10-dma and 20-dema following last week’s pocket pivot at the 10-dma. Nothing significant is developing here, although I would continue to watch this as it could be rounding out the lows of a new base. Another pocket pivot along the 10-dma, 20-dema, or even the 200-dma might be something to key on, should it occur.




Until gold can show me something more significant on the upside, gold stocks I’m watching like Franco Nevada (FNV) and Kirkland Lake Gold (KL) may not see a lot of upside. Both have acted well recently, but my broader concern is with the market in general. If we begin to see more concerted selling, my belief is that nothing will remain unscathed, despite the so-called safe haven status that precious metals sometimes enjoy in certain environments.

If this market is going to continue rallying into year-end, my belief is that it will mostly be led by the big-stock leaders that have led it all year long. Therefore, as far as long ideas go, one can simply focus on these best of breed names. The flip side of this is that if these names begin to break down, then they can also become short-sale targets, as has been the case with Tesla (TSLA), for example.



Big-stock techs are reflective of the market in that they either aren’t making much upside progress or are in fact pulling in as the indexes take some heat.

Apple (AAPL) was sold down to its 20-dema on increased but below-average volume, where it held. This is also slightly above the prior base breakout of about three weeks ago.

The question is whether this presents an opportunistic long entry point. Objectively, this can be tested here on the long side, using the 20-dema or the top of the prior base at around 165 as a selling guide.


GR111517-AAPL (AMZN) didn’t budge much today in the face of a weak NASDAQ Composite Index, holding right at its 10-dma as volume came in at above average. Technically, this puts AMZN in a buyable position along the 10-dma while using it as a tight selling guide for any shares purchased up here. The more opportunistic entry point would be on any further pullback to the 20-dema at 1087.27




Alphabet’s (GOOGL) has dipped below its 10-dma but today found support at its 20-dema. This coincides with the intraday low of the late October buyable gap-up (BGU) move at 1026.85. This is now at a secondary entry point at the 20-dema, using it as a tight selling guide.

Facebook (FB) is what I consider to be a big-stock go-to name if I want to get big and long for any potential year-end rally. While the stock hasn’t gone anywhere since its late October base breakout, it is pulling right into the top of its prior base and the 20-dema, where it found minor support today. Technically, this remains in a buyable position using the 20-dema or the 50-dma as selling guides.




Netflix (NFLX) is again testing its 50-dma, coming right into the line today on increased, but well below-average trading volume. Again, this remains a two-side affair. It can be tested on the long side at the 50-dma while using that as a tight selling guide. The flip-side is that a breach of the 50-dma confirms this as a late-stage failed-base situation, so this much watch for.




Tesla (TSLA) is another one to watch as a short-sale target. So far it has been able to regain its 10-dma, pushing up through it today after an initial sell-off. Tomorrow night, the company is scheduled to unveil its electric semi-truck, which will, like everything else the company unveils, be hyped beyond recognition.

My issue with this whole concept is that these guys have enough trouble just being able to produce the new Model 3 and getting it right. Stories of works having to pound vehicle components into shape so they fit doesn’t strike me as evidence of manufacturing prowess. And now TSLA wants to start trying to produce an electric semi-truck. Good luck.

In any case, this may bring about a rally right up into the confluence of the 20-dema and 200-dema, which I’m looking at as potential resistance on any news rally following Thursday’s unveiling. CEO Elon Musk assures everyone that it will blow their minds, but the question is whether it can blow the stock price higher, or whether it just becomes a big sell-the-news situation.

A rally up to the 200-dma/20-dema may be a shortable one, depending on how things play out following yet another hyped-up TSLA product announcement. I tend to think the company is better at hyping up product events than actually manufacturing the things, so we’ll see whether this turns out to be anything more than a mind-blowing short-sale opportunity.




Nvidia (NVDA) would be another big-stock name I’d look to play on the long side in any year-end rally. Right now, however, it has been unable to hold the 211.63 intraday low last Friday’s buyable gap-up (BGU) after earnings. However, it closed today within 1% of that low, so that would be within the range of allowable porosity.

This could be similar to Take-Two Interactive’s (TTWO) pullback below its own BGU low as I discussed in the weekend report, so members can reference that report to get a better idea of what I’m talking about here. Allowing 2-3% downside porosity below a prior BGU’s intraday low can be done, as such a pullback can also be a function of general market action.

NVDA closed today just below the 10-dma but remains well above its 20-dema. I think one can test this one on the long side here, using the 20-dema as a relatively tight (2%) selling guide. There is also the possibility that it pulls right into the 20-dema, which of course would be a more opportunistic entry point.




General Motors (GM) provided buyers with another entry opportunity this morning as it again tested the 50-dma. By the close, the stock rallied up and off the 50-dma on increased volume for a show of support at the line.  As I wrote over the weekend, “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.”

That approach would have worked well today as the stock closed near the peak of its daily trading range. And of course, this occurs when the general market is getting pelted with selling and things are red all around, but this is generally when such opportunities occur. Play ‘em as they lie.




New Merchandise:

When it comes to the new-merchandise department, I’m batting one-for-three. Only Roku (ROKU) gave us any love, but oh what love it was! If you must be one-for-three, then at least it’s nice to hit a massive double grand-slam homerun with one of the three at-bats.

Of course, when you buy into something like ROKU’s post-earnings buyable gap-up of five trading days ago that saw the stock double in three days from the BGU intraday low, I guarantee you that you will never have bought enough! Now the stock is trying to level off and perhaps set up again, but for now there are no reference points for a buyable pullback until the rising 10-dma catches up to the stock.




MuleSoft (MULE) failed miserably as a new-merchandise play, dipping below its 20-dema yesterday before plunking right down to its 50-dma today. This looks ugly, but there is always the outside chance that MULE holds the 50-dma. Therefore, one could invoke the Ugly Duckling here and buy the stock at the 50-dma, being ready to run for the hills if it can’t hold the line.

The third new-merchandise “at bat,” Switch (SWCH) reported earnings on Monday after the close. But unike ROKU, Cinderella only came to the ball once and only once, sticking to the beloved fairy tale’s original script. Instead of rocketing higher on a hoped-for BGU, SWHC gapped to the downside but was able to regain its 10-dma by the close.

Today it sold off with the market on an intraday basis, but by the close bucked the overall general market selling to close up on the day and back above its 10-dma. Notice that yesterday’s action could be viewed as a supporting pocket pivot as volume increased sharply and the stock closed above the 10-dma.

This may still be actionable here using yesterday’s low as a selling guide. While SWCH didn’t gap up after earnings like ROKU, it could still set up again, and I have no aversion to playing another new-merchandise situation if we get a year-end rally. It would add a nice mix to also looking to play big-stock long positions above as discussed above.




Cloud Names:

ServiceNow (NOW) is floundering below its 20-dema as it tests its 50-dma. I have no handle on this currently, so am avoiding it until things clear up. (CRM) remains extended, and earnings are expected on November 21st.

Workday (WDAY) is now living below its 50-dma, and technically looks like a short here using the 50-dma or the higher 20-dema as an upside stop. If it can regain the 20-dema I might have more confidence in it as a long, but the other overriding factor in my view is the fact that it is expected to report earnings on November 29th.




Square (SQ) was rallying early today on news that it would now allow some user to buy and sell Bitcoin through its Cash app, but stalled to close in the lower half of its daily trading range. I actually shorted the stock at the peak on the basis of the general market action and the fact that this was a news rally on news that I didn’t see as all that of a big deal.

That was a profitable scalp, but I still view SQ as a leader in this market, with pullbacks to the 10-dma at 38.12 as the next references for lower-risk entry opportunities. However, with the stock having had such a big move this year, it may need more time to set up in a proper base.

Solar Names:

First Solar (FSLR) continues to hold along its 10-dma but I would only be interested in the stock on more opportunistic pullbacks to the 20-dema at 57.23., as I wrote over the weekend.

SolarEdge (SEDG) is holding in a four-day flag formation after last Thursday’s buyable gap-up (BGU) move following earnings. I would prefer to use a pullback to the 10-dma at 35.48 or the BGU intraday low at 35.75 as lower-risk entries if interested in owning the stock here.



Micron (MU) is holding support at its 10-dma following last Friday’s pocket pivot, as discussed in the weekend report. It remains in a buyable position here at the 10-dma, using it as a tight selling guide.  I would also consider MU a big-stock leader that could potentially rally with the market into year-end, if Santa Claus’ sled doesn’t get shot out of the sky in December.

Universal Display (OLED) pulled right into its 10-dma at 167.50 today, bouncing off the line to close above the mid-point of its daily trading range. That pullback was your lower-risk entry opportunity, as I discussed in the weekend report. It remains buyable on any further constructive pullbacks to the 10-dma, although there is always the outside chance that a more opportunistic entry could be found on a deeper pullback into the 20-dema at 157.20.




Telecom-Related Names:

Arista Networks (ANET) is currently extended, and only pullbacks to the 10-dma at 212.48 would be your next references for lower-risk entry opportunities from here.


Chinese Names:

Alibaba (BABA) dropped below its 20-dema yesterday and then gapped lower today but found support at the 50-dma. This would be the last stand support level for the stock, so technically it is buyable here using the 50-dma as a tight selling guide.

Weibo (WB) was buyable along the 105 price level as I discussed in my weekend report. As I wrote, at that point, the stock had “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.” It is now extended, and only pullbacks to the 105 price level would offer lower-risk entries from here.


Internet Related:

Yelp (YELP) is holding support at the 20-dema after finding support at the 50-dma last week. Volume increased slightly as the stock regained the 20-dema by the close today, resulting in a show of minor support at the line. This would technically put it in a lower-risk entry position using the 50-dma as a maximum downside selling guide.





Veeva Systems (VEEV) is starting to get sloppy as it broke below its 20-dema today and closed just below the line, despite finding support off the intraday lows and closing near the peak of its daily trading range. I’m abandoning this one for now given that earnings are expected on November 28th.

Nutanix (NTNX) found support at its 10-dma, but I don’t see much to do here since the stock is a) extended from its early October buyable gap-up move and b) is expected to report earnings on November 29th.


Video-gaming Names:

Take-Two Interactive (TTWO) recovered nicely after dipping below the 116.35 intraday low of last Wednesday’s BGU in a normal occurrence of downside porosity, as I discussed in the weekend report. Today it closed at 117.37, within 1% of the 116.35 BGU low, so it remains within buying range of the BGU, using either the 116.35 price level or the 10-dma as selling guides, depending on one’s risk-preference.




Activision Blizzard (ATVI) turned out to be buyable per my discussion of the stock in the weekend report, but after moving above the 50-dma yesterday it moved back below the line today. This is out of play for now, although TTWO remains actionable.

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.

The deteriorating breadth situation in this market, as I’ve discussed in my last two reports, has caused me concern. So far, this week, that concern has come to fruition to some extent, but the market still doesn’t seem to want to let go entirely.

This is likely a function of the phenomenon I refer to as “stocks are the new bonds.” Massive liquidity remains in the system, and I think it has the ability to prop up the market and big-stock leaders whenever things start to get out of hand on the downside.

Right now, I advise staying on high alert. Review all your positions and watch lists and know where your exit points are as well as potential opportunistic entry points in stocks you favor on the long side in case the deterioration stabilizes. So far, we can see that some big-stock leaders are holding up in their patterns, which for now is constructive.

The situation remains fluid. Stay cautious and manage your risk diligently.

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 no positions, 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.