The Gilmo Report

November 19, 2017

November 19, 2017

Three gap-down opens on Monday helped to summon the Ugly Duckling, who came to visit with a vengeance on Thursday as the indexes gapped up and just kept rolling higher right into the close. Interestingly, the stage was set on Wednesday for an Ugly Duckling visit when the NASDAQ Composite Index undercut a prior low in the pattern from early November.

Within that context, Thursday’s big gap-up run to the upside was perfectly normal. Throw in the anticipated passing by the House of Representatives of its own version of so-called tax reform legislation and you had the ingredients for at least one-day show of upside ebullience.

 

GR111917-$COMPQ

 

The S&P 500 Index remains within a short, choppy range, and ran into resistance at its 10-dma where it churned around on Friday on higher volume.

 

GR111917-$SPX

 

Despite Friday’s sell-off, breadth was quite positive on Friday, with NYSE advancers beating out decliners, 1902 to 1031. This is reflected in the NYSE Advance-Decline posting a sharp two-day rebound off the lows of Wednesday. It also makes the point that in this market, when breadth starts to deteriorate badly, it may just mean that a whole host of stocks are waiting in the wings ready to jump in and help drive the market to the upside.

 

GR111917-$NYAD

 

NASDAQ breadth has also been quite positive over the prior two trading days, despite the 0.15% decline in the NASDAQ Composite. That decline was mostly led by big-stock NASDAQ names as the NASDAQ 100 Index was down -0.39%. Meanwhile, advancers led decliners 1742 to 1026.

 

GR111917-$NAAD

 

Before getting too excited about the improvement in breadth, however, we should note that it was helped by a mass move to the upside in retail stocks which are viewed as primary beneficiaries of lower corporate taxes. This can be seen on the daily chart of the Vaneck Vectors Retail ETF (RTH), below.

So, the mass of stocks waiting in the wings, ready to help foster a market rally, were the beaten-down retailers. Imagine that! In this market, money quickly rotates into beaten-down groups, which we’ve seen happen more than a few times in 2017. The only problem is that the new 20% tax rate, assuming the new tax legislation gets through the Senate and becomes law, isn’t slated to go into effect until 2019. So, the sudden jack in retail stocks may be a short-lived affair, but we’ll have a chance to see just how real it was in the coming days and weeks.

 

GR111917-RTH

 

Financials:

The Financial Select Sector SPDR Fund (XLF) is retesting its 50-dma as financials in general don’t show a lot of spunk. This does, however, put it in a lower-risk entry position if one is interested in owning financials. One could also look at individual stocks like J.P. Morgan (JPM), which is also retesting its 50-dma.

 

GR111917-XLF

 

But then, if one wishes to be more creative and invoke the Ugly Duckling, there are some undercut & rally set-ups in big-stock financials like Citigroup (C), which posted an undercut & rally move from a position below its 50-dma. Goldman Sachs (GS), on the other hand, had its own U&R move on Wednesday, but that helped it to regain its 50-dma.

On Friday, GS mirrored the action in the XLF as it tested its 50-dma. Technically, this puts it in a lower-risk entry position, using the 50-dma or Wednesday’s low as a selling guide/stop.

 

GR111917-GS

 

Or maybe one wishes to be slightly more orthodox and go for something like Bank America (BAC). BAC didn’t post a U&R long set-up on Wednesday like C and GS, but it did them one better by posting a pocket pivot off its 50-dma. By default, this makes BAC the strongest big-stock financial, and after a two-day Wyckoffian Retest where it pulls in slightly as volume dries up sharply. It becomes buyable using the 50-dma as a selling guide.

No sooner did I discuss watching for another pocket pivot to develop in the SPDR Gold Shares (GLD) than it happens on Friday as the yellow metal ETF gapped up and cruised right through its 50-dma on heavy buying volume.

Silver, as represented by the iShares Silver Trust (SLV), also posted a pocket pivot on Friday, but with less thrust than the GLD. This pocket pivot in the GLD, however, is quite buyable, using the 50-dma as a tight selling guide, or the 10-dma as a wider selling guide.

The only catalyst I can see for the move in precious metals on Friday was the dollar moving lower. Meanwhile, counter-catalysts like tax legislation and the supposed predictions of two more quarters of 3% GDP growth would appear to reinforce the case for higher interest rates to come, but precious metals seem to be ignoring this. What, if anything, do they know?

 

GR111917-GLD

 

With gold on the move, my interest in gold-related stocks also perks up. Both Franco Nevada (FNV) and Kirkland Lake Gold are in buyable positions. What was interesting here, however, is that FNV diverged from the move in gold by closing down on the day, but it held support at the 10-dma on above-average volume.

Previously, when the GLD was going nowhere a couple of weeks ago, FNV was jamming to the upside on a strong-volume pocket pivot. This looks buyable here, however, using the 20-dema as a very tight selling guide.

 

GR111917-FNV

 

Big-Stocks:

Apple (AAPL) us retesting its 20-dema which objectively brings it back into a lower-risk entry zone using the 20-dema as your selling guide.

Amazon.com (AMZN) continues to track along its 10-dma, but I’m still of a mind to look for a more opportunistic pullback to the 20-dema, now at 1095.64, as a potential lower-risk entry if that should occur.

Alphabet’s (GOOGL) has.

 

GR111917-GOOGL

 

Facebook (FB) doesn’t look too much different than it did on Wednesday, as it just continues to track sideways along its 10-dma and 20-dema. I continue to view pullbacks to the 20-dema and the top of the prior base as potentially buyable, assuming that they occur in a constructive manner. Overall, it’s a bit of a snoozer, not unlike other big-stock NASDAQ names, but it could simply be percolating in anticipation of a year-end move.

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 must be watched for. How this resolves will probably have something to do with whether we see a year-end market rally or not.

 

GR111917-NFLX

 

Tesla (TSLA) did in fact become shortable on Friday morning when it gapped up to the 326-327 price level after unveiling its electric semi-truck Thursday night, as I discussed it might in my Wednesday report. For those of you who follow me on Twitter (which should be all of you!), you know that I broke my foot last weekend. I also ended up straining my arm on Friday patting myself on the back for my TSLA short call into the baloney news rally! 😉

I still think that Elon Musk is the P.T. Barnum of the modern age, wowing investors with flights of fancy and feasts of the imagination at regular intervals. The latest is, of course, the idea that the company will be hugely profitable adding semi-trucks to its menu of products when it can’t even manufacture enough of its existing products and do so profitably.

TSLA is a rare example of a company that efficiently achieves “diseconomies of scale,” since the more cars it makes the more it loses per car! In the real world, manufacturing a product in greater numbers generally leads to economies of scale, resulting in lower and lower marginal costs. Right now, TSLA is just a capital parasite in need of a new host, so I think another equity secondary offering is likely to come, driving the stock well below $300 at some point.

In the near-term, the short into the news gap-up on Friday was correct, and the 200-dma can now serve as a convenient trailing stop. Otherwise, any blip back up into the line would perhaps help to create another short-sale entry point.

 

GR111917-TSLA

 

Nvidia (NVDA) would be one my favorite stocks to try and play big and long into any year-end rally, but it doesn’t seem to want to go anywhere following last week’s buyable gap-up (BGU) after earnings. We can see from the daily chart, below, that the BGU did stall a bit on heavy volume.

This was followed by what I considered to be a buyable dip down to the 10-dma. On Friday, NVDA received a big buy recommendation with a $250 price target. But, all this did was trigger a nice gap-up move to 215 at the open, after which the stock drifted back to the downside to close in the red and at the lows of its daily trading range on higher, but below-average volume.

Not the sort of action I’d like to see after an enthusiastic price upgrade from an analyst bubbling about an additional “Call the Spartans Upside Target” of $300. I’m looking for perhaps an opportunistic test of the 20-dema as a lower-risk entry from here, although technically the pullback to the 10-dma can be tested on the long side using it as a very tight selling guide.

 

GR111917-NVDA

 

General Motors (GM) is acting well after finding support at the 50-dma, initially over a week ago as I blogged to members at that time. The stock briefly tested the 50-dma one more time on Wednesday, and then pushed to a higher high on Friday, but on light volume.

Now watch for this to set up again along the 20-dema as volume declines in constructive fashion. At seven times forward estimates, I don’t see why GM can’t maintain a certain status as a haven for cash consistent with the theme of “stocks are the new bonds.”

 

GR111917-GM

 

New Merchandise:

Roku (ROKU) is trying to settle down here, and I would say that so far this is occurring constructively. On Saturday morning, I read an article making the case for ROKU being a strong buyout candidate, citing Microsoft (MSFT) as a likely buyer. The rationale is that buying ROKU would give MSFT instant access to the smart-TV operating system market.

I can go with that, but I’ll let the price/volume action guide my actions from here. After all, ROKU is a staple here at my house, and we’ve been using it for a while. What we can see so far on the chart after the prior week’s buyable gap-up (BGU) is a four-day flag as the stock levels off in the high-30’s and volume dries up very sharply on a relative basis.

My thinking here is that the rapidly rising 10-dma needs to catch up to the stock, or the stock needs to have a constructive pullback to the line, to set up a lower-risk entry reference point.

 

GR111917-ROKU

 

To understand how this could play out, let’s look at Tesla (TSLA) back in May of 2013, right around when it had its first big BGU that led to what became a massive price run that eventually topped out at 389.61 just a few weeks ago. After the BGU, the stock kept going, even as many kept citing it as a big short-selling opportunity because the stock, which was already “ridiculously overvalued,” was now even more overvalued.

On the third day after the BGU day, TSLA had a big reversal off the peak on extremely heavy volume. This can be viewed as normal profit taking given the fact that the stock had nearly doubled in four days’ time, not unlike ROKU today. But it did help to get the bears salivating again, and so shorts rushed in to take advantage of the ludicrous move in TSLA.

But to no avail, as TSLA simply hung out for seven more trading days, giving its 10-dma time to catch up. At that point, the stock could have been bought around the 10-dma, leading to a nice 24-25% move over the next four days from trough to peak. So, while I don’t consider TSLA in 2013 to be a strict road map for ROKU in 2017, keep this example in mind as we watch ROKU’s 10-dma attempt to catch up to the stock price.

 

GR111917-TSLA in 2013

 

While MuleSoft (MULE) failed to hold its 20-dema as I had originally thought it might, my secondary assessment turned out to be more accurate. As I wrote on Wednesday, “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.”

MULE dropped below the 50-dma on Thursday, but at that point buyers stepped in and pushed it back above the line. That triggered a moving average undercut & rally long set-up as well as a big-volume supporting pocket pivot at the 50-dma. On Friday, MULE ran into resistance at the confluence of the 10-dma and 20-dema before closing in the lower part of its daily trading range as the general market ran into some selling.

Watch for the stock to perhaps move closer to the 50-dma with volume drying up this week, although it can be considered buyable here based on the supporting pocket pivot. The 50-dma is about 2% below Friday’s close, so it is within buying range of the line. This is a good example how one failed set-up can often lead to a second set-up lower in the pattern which one can act on if one is persistent, opportunistic, and willing to invoke the spirit of the Ugly Duckling when things look, well, ugly.

 

GR111917-MULE

 

Switch (SWCH) couldn’t hold support along the 10-dma on Friday, dropping back below the line on volume that was -71% below-average. The huge volume on the first day of trading after the company came public, however, probably skews the average volume calculation. Volume on Friday looks more average if we exclude the first day of trading.

A pocket pivot on the day of earnings, before the report was released, and a supporting pocket pivot after earnings were release, were unable to generate any further upside for the stock as it pushes back toward its lows and the $17 IPO price.

The only references for an actionable long entry would be an undercut & rally type of move if the stock undercuts the current base lows around the 18 price level or a move back above the confluence of the 10-dma and 20-dema. One to watch, for now, in case something actionable starts brewing.

 

GR111917-SWCH

 

Cloud Names:

ServiceNow (NOW) went from floundering below its 20-dema to posting two pocket pivots in a row in a matter of two days. Classic action for this market environment, as far as I’m concerned. As I wrote on Wednesday, I was inclined to avoid the stock “until things clear up.” It appears that the stock read my report and decided to clear things up in a hurry with two pocket pivots in a row.

Aside from being consistently buyable at the bottom of what is now a four-week base, NOW is still going nowhere after the undercut & rally and pocket pivot it posted after earnings in late October. However, it could just be percolating for a stronger year-end move that sends it breaking out of its current base formation. Based on the dual pocket pivots, this can be considered buyable using the 20-dema as a tight selling guide, or the 50-dma as a wider selling guide.

One lesson to be learned from NOW is that in this market, one should assume nothing! Anything is possible at any time, particularly when the Ugly Duckling continues to lurk beneath the surface of this market.

 

GR111917-NOW

 

Saleforce.com (CRM) is expected to report earnings this Tuesday, after the close. I will be watching the stock closely for its reaction after earnings in case a buyable set-up of one sort or another presents itself.

Workday (WDAY) blasted back up through its 50-dma on Thursday and then broke out to a new all-time closing high on Friday after looking a bit ugly as it tracked below its 50-dma. This went from an L-formation to a U-formation in two days as it became a full-blown LUie formation. Earnings are expected at the end of the month.

Square (SQ) rallied sharply on Friday in what was its biggest one-day point move in its entire price run since I first discussed the stock back in the mid-teens way back in February and March of this year. This looks a bit near-term climactic, and of course makes the stock quite extended, so it isn’t in any buyable position.

I have to think, however, that the near-term climactic action at least means the stock needs to build another, perhaps more extensive base from here. I would not, however, call this a climax top since the stock’s action, while a bit parabolic, was only showing six out of seven days up in a row.

I’m also not entirely convinced that climax tops, based on rules concocted back in the secular bull market of the 1990’s, are all that valid in a market where stocks are the new bonds. If you own the stock, and have owned it for a while, just decide where your maximum selling guide is and how much room you are willing to give the stock on the downside in a normal correction and new base-building process.

 

GR111917-SQ

 

Solar Names:

First Solar (FSLR) is still holding along its 10-dma as volume remains quite low. If I’m truly interested in owning this stock, then I would prefer to just be patient and look for a more opportunistic entry on a pullback to the 20-dema.

SolarEdge (SEDG) has now formed a six-day flag formation after the buyable gap-up (BGU) move of two Thursdays ago. The 10-dma is also starting to catch up to the stock price, so is in a reasonably buyable position here on the basis of the prior BGU, using the 10-dma at 36.39 as a tight selling guide.

The one negative, perhaps, is the fact that after a big-volume BGU over a week ago, SEDG is still tracing sideways with no further upside thrust. But, as is often the case with certain types of BGUs, a sideways move of five to six days, sometimes a little more, can eventually resolve in a strong flag breakout. Therefore, buying into the lower-end of a constructive flag formation, which this is, can position one to benefit from an ensuing flag breakout.

 

GR111917-SEDG

 

Semiconductors:

Micron (MU) is extended from its 10-dma and the pocket pivot of this past Monday. Looking for pullbacks to the 10-dma as lower-risk entries.

Universal Display (OLED) met up with its 10-dma on Wednesday, as I noted in my report of that day, and bounced hard, continuing that bounce into Friday as it posted a new all-time high. This is now extended, and only constructive pullbacks to the 10-dma would provide lower-risk entries from here.

Telecom-Related Names:

Arista Networks (ANET) can’t be stopped after posting a buy signal based on Jesse Livermore’s Century Mark buy rule over two weeks ago after earnings, as I discussed at that time. If it was extended as of this past Wednesday, it is certainly even more extended now.

 

Chinese Names:

Alibaba (BABA) bounced off support at its 50-dma on Thursday and Friday after hitting the line on Wednesday. This took it up into the 10-dma and the highs of a short, weak descending price range on light volume. I don’t consider this a buyable position, and for now this thing is best bought on pullbacks to the 50-dma.

We can see that BABA has been in an at-times confusingly weak two-month price range where the stock has chopped up and down in subtly wider and wider moves. What BABA needs to do is settle down and start tracking tight sideways as volume dries up, which would add some coherency to its current action. This might then set the stock up for a potentially stronger move to the upside that breaks out of this big, choppy range as we go into year-end.

 

GR111917-BABA

 

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) continues to track sideways along its 20-dema, and I prefer to buy into pullbacks to the 50-dma as potential lower-risk entry opportunities.

 

Software:

Veeva Systems (VEEV) is just chopping around and I don’t consider it actionable until we get something more decisive, perhaps after it reports earnings as expected on November 28th.

Nutanix (NTNX) keeps tracking higher along its rising 10-dma, but I don’t see much to do in terms of taking aggressive long positions up here ahead of its expected earnings report on November 29th.

 

Video-gaming Names:

Take-Two Interactive (TTWO) remains within buying range of its buyable gap-up move (BGU) of two Wednesdays ago, using the 10-dma at 115.31 as a tight selling guide. Also, pullbacks to the 10-dma would offer the better, lower-risk entry opportunities if you can get ‘em.

Activision Blizzard (ATVI) may be coming back into play here, although I admit to getting bored with it per my comments in Wednesday’s report. After regaining the confluence of its 10-dma, 20-dema, and 50-dma eight trading days ago on the chart, the stock has tracked tight sideways as volume remains low.

I’m sure members who’ve been around for a while know exactly what we’re looking at here. That would be the infamous L-formation that looks ugly after a prior failed base breakout. As we know, this can simply set the stock up to jump on the back of the Ugly Duckling and fly back to the upside, turning the “L” into a “U” and completing the by now well-known “LUie” formation.

If you wish to anticipate this by going long the stock here, that can be done, using the recent lows as your selling guide.

 

GR111917-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.

Things may slow down this week as we head into the Thanksgiving holiday, but I can tell you that history does not confirm this idea. I have seen significant market movements, as well as significant movements in individual stocks, occur on either side of “Turkey Day.”

But, in any case, I consider it amateurish, if not downright silly, to try and devise a market and stock strategy based on what historically occurs around any holiday. A lot of stocks are currently just chopping around. In rare cases, they provide short-selling opportunities, as with TSLA.

But, otherwise, pullbacks into logical areas of support by most leading stocks have been buyable. You might not be making big money after buying into such a pullback, but the stocks hold support anyway, and for all we know things are just percolating for a strong move into year-end.

All we can do is go with the real-time price/volume evidence as we remain on high alert for any kind of more significant market move, whether to the upside or the downside. Play them as they lie.

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. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.