The Gilmo Report

November 8, 2017

November 8, 2017

The market has a bit of a bifurcated flavor here as we see short-sale opportunities crop up in certain individual stocks. But, the primary index trend remains to the upside, and the long side of this market is still driven by the theme of “stocks are the new bonds.” The other strong theme here is the idea of buying stocks after earnings if an opportunistic set-up arises, and there have been a few of those to speak of as well.

The NASDAQ Composite Index posted a new all-time closing high today on lighter, but above-average volume. The trend remains to the upside.

 

GR110817-$COMPQ

 

As the NASDAQ continues to make new highs, the rally becomes ever narrower as evidenced by the fact that breadth, as measured by the NASDAQ Advance-Decline line, continues to contract. The A/D line has been in a steady downtrend since early October as the NASDAQ has powered higher. In the old days, this was almost always a cautionary sign. Whether it is today is debatable.

 

GR110817-$NAAD

 

From an index point of view, all systems remain go for the S&P 500 Index as it logged another all-time closing high today on about even volume that was also above average. Meanwhile, the Dow Jones Industrials Index, not shown, is tracking tight sideways along its 10-dma.

NYSE breadth has also been tracking lower since early October as the rally narrows. Big stocks continue to play a key role in driving the indexes higher, and while I don’t consider this to be outright bearish, it does cause me to keep looking back over my shoulder from time to time!

 

GR110817-$SPX

 

Financials:

Big banks were tagged with heavy selling yesterday, and this is reflected by the big outside reversal bar to the downside on the daily chart of the Financial Select Sector SPDR Fund (XLF). Volume was heavy, upsetting the low-volume “voodoo” pullback to the 10-dma that we saw on Monday and last Friday. This sent the ETF further to the downside today, and seems to be arguing for a Fed that is on hold with respect to future interest rate increases.

 

GR110817-XLF

 

And as financials take a dip on the possibility of a Fed on hold, gold rallies off its recent lows. The SPDR Gold Shares (GLD) found support along its 200-dma last week, and then posted a roundabout type of pocket pivot on Monday that came up through the 10-dma and 20-dema. After a brief pullback into the 10-dma on lighter volume yesterday, the GLD made a higher high today. Keep an eye on this as there is always the possibility that gold is rounding out a low here, and confirmation is also being found in some of my favorite gold-related stocks as well.

 

GR110817-GLD

 

Kirkland Lake Gold (KL), which was all but dead early last week as it dropped below the $12 price level, suddenly sprang to life over the past six days and is back at its prior early October highs. Franco Nevada (FNV), which is more of a pure play on the price of gold since it only owns gold production streams rather than mining the stuff itself, is also acting well here.

After reporting earnings on Monday before the open, FNV rocketed higher on a big-volume pocket pivot and trendline breakout. It is now back up to its early September highs, and is extended from any lower-risk entry point. Watch for any retracement back to the 82 price level as a possible lower-risk entry opportunity. The action in KL and FNV may be hinting at higher gold prices to come.

 

GR110817-FNV

 

Big-Stock NASDAQ Names:

Apple (AAPL) keeps hopping and bopping higher, but as I blogged last Friday, was buyable on the basis of a buyable gap-up (BGU) type of set-up. Technically this is still within buying range of the BGU intraday low at 171.12, but I already noted this in the weekend report, and the stock has since moved higher. Remain opportunistic here, looking to buy pullbacks.

Amazon.com (AMZN) continues to make new highs and is well extended from its recent BGU move two weeks ago after earnings. Pullbacks to the 10-dma would offer lower-risk entries from here.

Alphabet’s (GOOGL) has also continued to make new highs after posting its own BGU after earnings nearly two weeks ago.

Among the big-stock tech names, Facebook (FB) is one of two that are at lower-risk entry positions as it meets up with its 10-dma. Volume dried up to -41% below-average today, qualifying as more of a “voodoo” meet-up with the 10-dma than a pullback to the 10-dma. This is buyable here using the 20-dema as your maximum selling guide.

 

GR110817-FB

 

Netflix (NFLX) may also be in a lower-risk entry position here along the 20-dema. The only caveat is that a clean breach of the 20-dema would immediately trigger this as a late-stage, failed-base, short-sale set-up. Volume dried up today to -45% below-average, setting up a typical “voodoo” pullback to the 20-dema. Barring any breach of the 20-dema, this low-volume pullback into the 20-dema makes the stock buyable as a long idea, using the 20-dema as a tight selling guide. Play it as it lies.

 

GR110817-NFLX

 

Tesla (TSLA) is forming a short bear flag following last Thursday’s shortable gap-down type of move. From here I’d watch for rallies up into the lower 10-dma or the higher 200-dma as potentially lower-risk short-sale entry points. For now, the idea of shorting the stock here using the 308.69 price level which is the high of last Thursday’s gap-down price range. If it moves up through that price point, then the strategy of shorting near the 10-dma or 200-dma is in effect.

 

GR110817-TSLA

 

Nvidia (NVDA) is expected to report earnings tomorrow, Thursday, November 9th after the close.

In the spirit of “stocks are the new bonds,” I blogged this morning about General Motors (GM) as it met up with its 50-dma. That turned out to be a timely blog post as the stock was trading around 41.60 at the time. It found ready support in the form of a five-day pocket pivot volume signature and rallied to close the day at 42.11. This remains within buying range of the 50-dma, using it as a selling guide, although the closer to the 50-dma at 41.70 I can buy it, the better.

 

GR110817-GM

 

Cloud Names:

ServiceNow (NOW) posted a five-day pocket pivot off the 20-dema today as it also made a new all-time closing high. This was buyable along the 20-dema per my prior comments, and is now short-term extended.

Saleforce.com (CRM) has continued to move higher after posting a Jesse Livermore Century Mark Rule buy signal two weeks ago after clearing the $100 Century Mark. It is now extended. CRM is expected to report earnings on November 21st.

Workday (WDAY) just missed posting a new all-time closing high as it pushed up and off its 20-dema today on a five-day pocket pivot. The action was somewhat similar to NOW’s action today. Like NOW, WDAY is best bought on pullbacks to the 20-dema, as I would consider it extended in its current position.

Square (SQ) reported earnings today after the close and as I write is trading down about 4%. 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.

Solar Names:

First Solar (FSLR) has moved to higher highs so far this week, defying last week’s sudden and wild sell-off on heavy volume. It is quite extended in its current position and likely needs time to set up again in order for a proper, lower-risk entry position to present itself.SolarEdge (SEDG) reported earnings after the close and as I write is gapping up about four points to the 36.50 price level. This is one to watch tomorrow for a possible buyable gap-up (BGU) to develop if the stock can set a firm low during the trading day.

Semiconductors:

Micron (MU) is holding tight along its 10-dma traded tight sideways since posting a pocket pivot off the 10-dma on Wednesday, as I discussed in my report of that day. Near-term the stock is slightly extended, and I would only view pullbacks to the 10-dma as lower-risk entry possibilities, should they occur.

 

GR110817-MU

 

Universal Display (OLED) is now way extended after last week’s buyable gap-up (BGU) following earnings. You either caught it at that time, or you’re now waiting for a pullback to the 10-dma as your next reference for a lower-risk entry opportunity.

Telecom-Related Names:

Buying Arista Networks (ANET) near the $200 Century Mark as I discussed was possible in my weekend report was a winning strategy for the stock this week, at least so far.

Lumentum Holdings (LITE) has broken below its 50-dma, and so is off the table as a long idea. Only a move back above the 50-dma might trigger an MAU&R type of set-up should it occur.

 

GR110817-LITE

 

Chinese Names:

Alibaba (BABA) is approaching its 10-dma, and I would watch for pullbacks to the 10-dma as lower-risk entry spots.

Both Sina (SINA) and Weibo (WB) presented nimble traders with opportunistic set-ups after reporting earnings yesterday before the open. WB’s move was probably the most interesting, as it first became shortable at the 50-dma right near the opening bell. It then plummeted to a low of 93.65 where it ran into its 10-dma.

From there it was rally all the way into the close to post a massive-volume pocket pivot off the 10-dma, closing right near the peak of its daily trading range. Today WB continued pushing right past its 50-dma, triggering a moving-average undercut & rally set-up at the line. By the close it was not too far off its all-time highs on strong volume. An amazing example of the sorts of two-sided opportunities that can arise after earnings. Hopefully, my blog post this morning on both WB and SINA was timely enough to help some members get on board this freight train.

 

GR110817-WB

 

SINA, was a different type of set-up, although it too recovered from a sharp, post-earnings gap-down move early in the day to close near the middle of its gap-down trading range. Today the stock pushed up through the prior 104.01 low of October 30th, triggering an undercut & rally move at that point. That was good for about four points of upside by the close, with the stock running into resistance at its 20-dema and closing right at the 10-dma. Like WB, this is another good example of an opportunistic long set-up appearing after an ugly gap-down break following earnings.

 

GR110817-SINA

 

Internet Related:

Yelp (YELP) failed to hold last Friday’s low-volume pullback to the 10-dma, breaking below the line yesterday as selling volume increased. While volume was higher relative to the prior day, it was only about average, and today volume dried up as the stock found support near the 50-dma. This is pretty much the last stand buy zone for the stock, as it must be able to 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.

 

GR110817-YELP

 

Software:

Veeva Systems (VEEV) continues to track higher as it now shows a tendency to obey the 10-dma on pullbacks. This changes the equation a bit here, since now we can view any low-volume pullbacks to the 10-dma as lower-risk entries. Remember that earnings are expected on November 28th, so buying it here means you’re looking for some upside cushion to develop in a hurry.

 

GR110817-VEEV

 

I wrote over the weekend that I would like to see Nutanix (NTNX) pull down to its 20-dema as a much better, lower-risk and highly opportunistic entry point. That’s precisely what we got today as the stock dipped into the 20-dema and then bounced to close back up near its intraday highs. Still looking good, but your entry opportunity came and went this morning. Keep in mind that NTNX is expected to report earnings on November 29th.

 

GR110817-NTNX

 

Video-gaming Names:

Take-Two Interactive’s (TTWO) gapped up strongly this morning after reporting strong revenue yesterday after the close. The intraday low of today’s BGU was 116.35, and the stock closed at 117.65, putting it just over 1% above that low. Therefore, this remains buyable as a BGU, using the 116.35 price level as a tight selling guide.

 

GR110817-TTWO

 

On Monday, I tweeted to members that if one had shorted Activision Blizzard (ATVI) at the 50-dma right at the open that day, the downside price objective would be near the 60 price level. As I noted in my tweets, this would bring the stock just below the prior October lows. At that point, I would be looking for a typical undercut & rally move to occur.

Yesterday ATVI dropped below those October lows, triggering my short-cover signal. It then proceeded to rally back up above those lows, triggering an undercut & rally long set-up at that point. Today ATVI then cleared the confluence of its 10-dma, 20-dema, and 50-dma on strong buying volume, mostly in sympathy to TTWO’s strong gap-up.

This is another example of the Ugly Duckling at work in this market. While ATVI was a very nice short-sale “hit and run” type of trade on Monday and into early yesterday, it was a cover once it undercut the prior October lows. At that point, it then morphed into a long based on the U&R set-up, and then today posted a moving average undercut & rally (MAU&R) long set-up once it crossed the 50-dma.

It remains buyable, using the 50-dma as a tight selling guide. This is a splendid example of how stocks can be played both ways, depending on the precise set-up at hand. This action is quite typical for this market, as I’m sure many of you have experienced for yourselves. The trick is to remain open-minded and not locked into a bullish or bearish frame of mind, thus being able to move fluidly with the action in real-time. Easier said than done, to be sure!

 

GR110817-ATVI

 

Electronic Arts (EA) pulled its own U&R move yesterday after undercutting the prior October low. This led to a continuation move today, also likely in sympathy to TTWO’s gap-up today, that ran into resistance at the confluence of the 10-dma and 20-dema.

Among the three video-gaming names that I watch, EA is the weakest. For that reason, there is the possibility of treating the stock as an LSFB type of short-sale here at the 10-dma and 20-dema, using today’s high as a quick stop-out point. There is always the possibility that the whole group comes back to life, however, so be open to shifting gears and flipping long if it can push decisively through the 10-dma/20-dema confluence. Play it as it lies!

 

GR110817-EA

 

One thing I don’t like about this current market is the lack of new-merchandise plays. In my view, a truly healthy bull market has some newer, dynamic, smaller stocks that are acting well and providing some new merchandise for investors to feast on as the market remains in a rally phase. Such names have been few and far between.

One new-merchandise type of name to keep an eye on tomorrow at the open is Roku (ROKU), which came public back on September 28th at $14 a share. It had a big two-day move, then died a slow death, until today. After beating on earnings today after the close, ROKU is gapping up into the mid-23 price area, which I’ve highlighted on the chart below.

This will hopefully set up a buyable gap-up move tomorrow at the open once the stock is able to post a firm intraday low. There is likely some overhead from the left side of the pattern that consists of fools who dove into the stock right at the IPO, something that is ill-advised, to be sure, for any hot IPO. So, this may be a bit tricky tomorrow, but it is one I’ll be watching closely for a possible IPO BGU long entry.

 

GR110817-ROKU

 

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 NASDAQ advance-decline line I showed further above in this report illustrates why this current market has a bifurcated flavor to it. Even in the face of strong upside movement in many strong leaders, particularly after earnings, there are some short-sale targets that can be picked on successfully.

When the market moves into such a bifurcated state, then it simply (perhaps it’s not so “simple,” however!) becomes a matter of focusing on the individual stock set-ups in real-time. In addition, maintaining a two-side, nimble trading approach can help one capitalize on movements in either direction, or at least be open to taking a contrary stance when an Ugly Duckling set-up appears in real-time. No guts, no glory, as they say.

So, what we’re dealing with is mostly a mosh-pit of bifurcation and opportunistic set-ups. It is filled with twists and turns, intrigue and mystery. But through the haze of reasons given for the current market rally, from tax reform to North Korea to Russian collusion to the Trump Economy and more, there is one clear picture that tells the entire story.

And that is that the primary reason for the endless market rally can be seen in the chart below. A steady stream of fiat money-printing, debt monetization, whatever you want to call it, has resulted in a monetary base that simply keeps inflating. The correlation between the monetary base and the S&P 500 in the chart below speaks for itself.

 

GR110817-Monetary Base Chart

 

Throw in the fact that money velocity has been on a steady decline over the past twenty years and is now at all-time lows, and you know where all that money has gone. Certainly not into the economy. Instead, it has gone into bonds, real estate, and of course, stocks. And now, stocks are the new bonds.

 

GR110817-Money Velocity Chart

 

This is why the old sell signals, like when a stock would bust its 50-dma on huge volume, are now the new buy signals. And this in turn has given rise to the Ugly Duckling and all the new long set-ups he carries in his bag of tricks, like U&Rs, MAU&Rs, BFPPs, RAPPs, etc. The Ugly Duckling provides the primary context within which we can begin to understand this market.

To paraphrase the old opening line from the hit 1960’s science fiction television show Outer Limits. I’ve substituted my own words and phrases to make it more relevant to the QE market: “There is nothing wrong with the television [stock market]. Do not attempt to adjust the picture [quote screen]. We are now in control of the transmission. We control the horizontal and vertical [bid and the ask]. We can deluge you with a thousand channels [QE], or expand one single image to crystal clarity and beyond. We can shape your vision to anything our imagination can conceive. For the next hour [six-and-a-half hours], we will control all that you see and hear.”

While it would seem that the lower-risk “call” to hear from pundits is that this rally is “long in the tooth,” it only seems to get longer. And the problem of how we make money in such a market environment is one that I’ve dealt with many times in this report, and that is to play it as it lies. If the market wants to dance the limbo, you dance the limbo. If it wants to dance the twist, you dance the twist. Hopefully, this can be achieved without pulling a muscle!

Sure, the market could be setting up for a pullback, especially with breadth signaling a narrowing of the rally. Or maybe the weak breadth just means that there is a whole cast of stocks waiting in the wings ready to jump on stage and begin to dance in concert with the general market rally.

We cannot know for sure, so all we can do is go with the line of least resistance. And that means moving with the individual stock set-ups you see in real-time, while adhering to your selling guides as a means of staying out of trouble if this market does decide to correct.

Gil Morales

CEO and Principal, Gil Morales & Company, LLC
Managing Director and Principal, MoKa Investors, LLC
Managing Director and Principal, Virtue of Selfish Investing, LLC

At the time of this writing, of the stocks mentioned in this report, Gil Morales, MoKa Investors, LLC, Virtue of Selfish Investing, LLC, and/or Gil Morales & Company, LLC held a position in FB, though positions are subject to change at any time and without notice.

Gil Morales & Company, LLC (“GMC”), 8033 Sunset Boulevard, Suite 830, Los Angeles, California, 90046. GMC is a Registered Investment Adviser. This information is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to GMC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Gil Morales & Company, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.