The Gilmo Report

October 8, 2017

October 8, 2017

The monotony of endless new highs all around was broken, at least partly, on Friday as the NYSE-based indexes closed slightly down. The NASDAQ Composite Index kept the heat on, however, by scoring another all-time high as volume declined. The index is now on a nine-day winning streak as it seemingly forgets how to sell off. The move is reminiscent of the NASDAQ’s 13 out of 14 days in a row winning streak during the month of July.

 

GR1010817-$COMPQ

 

The S&P 500 Index “lags” the NASDAQ after posting a down day on Friday, but it was a small inside day on lighter volume after an eight-day winning streak to the upside. It’s possible a one-day bull flag will pan out into a longer lag formation and consolidation, but so far, the rally shows no signs of abating.

 

GR1010817-$SPX

 

A weak jobs number showing a loss of 33,000 jobs vs. estimates of anywhere from 75,000 to 90,000 did not derail views that the Fed will raise interest rates again in December. Underscoring this, financials moved higher, with the Financial Select Sector SPDR Fund (XLF) posting another high on strong buying volume.

Big-stock banks like Citigroup (C) and J.P. Morgan remain in uptrends, but alert members might have noticed that JPM pulled right into its 10-dma on Thursday, giving buyers a lower-risk entry opportunity at the line. On Friday, JPM pulled back slightly on lighter volume while C emulated the XLF and move to higher highs. In any of these, pullbacks to the 10-dma would remain your reference for lower-risk entries.

 

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With the action of financials speaking to the view of another Fed interest rate increase, a different story was told by precious metals. The SPDR Gold Shares ETF (GLD) gapped down at the open on the jobs news, but quickly found its feet after undercutting the 120.58 August 15th low. It then moved back up through that low, triggering an undercut and rally (U&R) long set-up at that point.

That was actionable at that point, and the GLD ended the day Friday at 121.09, just below the 121.29 low of August 25th. Right now, the GLD is in play as a U&R long set-up using 120.58 as a stop, while any sustained move up through 121.29 would trigger a second U&R entry. I thought it was notable that gold rallied into positive territory despite the view of higher interest rates to come, at least in December. Perhaps the yellow metal is discounting something else, yet to be revealed. For now, it remains actionable based on the technical action alone.

 

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Gold miners moved in sync with the yellow metal on Friday. Franco Nevada (FNV) has been holding tight along its 50-dma as volume slowly declines. On Friday, it posted a bullish outside reversal to the upside as it found support off the intraday lows as the GLD undercut and rallied back above the August 15th lows.

Recall from my discussion on the stock on Wednesday that the current pullback throughout September took the stock right back to the top of a large cup-with-handle. So, the current action on the daily chart looks logical within the context of the macro-pattern on the weekly chart.

 

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FNV also resembles the Vaneck Vectors Gold Miners ETF (GDX), The main difference here is that the GDX found strong volume support at its 200-dma Friday as it also regained its 50-dma. The GDXJ, which pays a 4.4% dividend, performed similarly on Friday, but had a 2.37% upside move compared to the GDX’s 1.59% move.

Both gold miner ETFs are buyable here, using the 50-dma as a tight selling guide, or the 200-dma on the GDX as a wider selling guide for both it and the GDXJ, which is still below its 200-dma. I’d like to see the GDXJ clear its 200-dma this week as a bullish sign for gold and the gold miners.

 

GR1010817-GDX

 

Kirkland Lake Gold, Ltd. (KL) traded down on Thursday after posting a pocket pivot trendline breakout on Tuesday, as I blogged on that day. That move down to the 10-dma set up a lower-risk entry point, and the stock remained right at the 10-dma on Friday at the open.

From there it found some strong-volume support and moved sharply higher, breaking out of a five-week base on a pocket pivot move off the 10-dma and 20-dema. As I wrote on Wednesday, KL is a small gold miner that trades 448,100 shares a day on average, but offers a nice higher-octane play for those with smaller accounts. Otherwise, the GLD, the GDX, or a larger gold miner like FNV are your next-best vehicles for riding any developing upside in the yellow metal.

 

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Big-Stock NASDAQ Names:

Intel (INTC) continues to move higher, but remains well extended at this point. I’m watching the 10-dma as a possible reference entry point for any pullback from here.

Tesla (TSLA) is holding above its 50-dma following Wednesday’s high-volume undercut & rally move. For now, this must be considered to be in a lower-risk entry position here along the 50-dma, while using it as a tight selling guide. Again, a volume breach of the 50-dma would trigger this as a short-sale target again.

For the most part, TSLA has been chopping around for the past several months, even after failing on a prior cup-with-handle breakout in late September. It’s not clear to me how much upside one will get from here ahead of earnings, which are expected on October 25th. But if one caught the U&R long set-up on Tuesday, the trade has been good so far.

 

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Netflix (NFLX) announced a price increase for its popular online streaming entertainment service on Thursday, triggering a big-volume breakout from a cup-with-handle formation. In my view, the correct buy point would be the top of the handle at 189.95, so the stock is currently extended from there.

Even better, and as I tweeted on Tuesday, the move back above the 50-dma on that day was a much more favorable entry based on the moving average undercut & rally (MAU&R) back up thru the 50-dma. This would have given one a big edge by the time Thursday’s breakout occurred, and the breakout could have been treated as a quaint add point.

Whether I would want to buy NFLX on this breakout up here given that earnings are expected on October 16th is another story. For that reason, if I owned shares closer to the 50-dma on the MAU&R set-up I might consider taking at least partial profits before earnings rather than play earnings roulette with the whole ball of wax.

 

GR1010817-NFLX

 

Nvidia (NVDA) is holding tight just above its 10-dma as volume dried up to -52% below average on Friday. That’s tight voodoo action, which looks like the stock is setting up to make another move for its highs near 190. This is buyable here using the 10-dma as a tight selling guide.

 

GR1010817-NVDA

 

Apple (AAPL) is drifting sideways in a position just above its 10-dma but just below its 20-dema. Volume dried up to -45% below average on Friday, which seems to be indicating that an attempt to clear the 20-dema is coming. If you like the stock, that would be something to watch for as an MAU&R type of entry at the 20-dema.

Amazon.com (AMZN) has traded as I thought it might, and in typical Ugly Duckling style. Notice that after triggering an MAU&R long set-up at the 20-dema, as I discussed in my Wednesday report, the stock then posted a second MAU&R at the 50-dma on Thursday.

That move also qualified as a five-day pocket pivot, and AMZN posted a second five-day pocket pivot on Friday as it moved higher again. Earnings are expected closer to the end of the month, so this is another case where you’re getting a nice trade ahead of earnings, and can then decide what to do with your profits as earnings approach.

Meanwhile, AMZN is a long way from any standard base breakout entry point. In my view, this highlights the utility of using U&R and MAU&R entries in an Ugly Duckling market as a way of catching moves before they become obvious, even as the stock heads into an upcoming earnings report.

 

GR1010817-AMZN

 

Facebook (FB) continues to flop around its 50-dma as it moves sideways along the line. Volume has been drying up, with upside volume exceeding downside volume over the past week. That looks positive, so the stock could be setting up for a breakout through the 174 price level. Pullbacks to the 50-dma, or even down to the confluence of the 10-dma and 20-dema appear to offer lower-risk entries when they have occurred over the past week.

Alphabet (GOOGL) remains extended as it approaches the $1,000 price level again. The stock posted a roundabout pocket pivot coming up through the 50-dma nearly two weeks ago, as I wrote at the time.

Semiconductors:

Micron (MU) continues to move higher following last week’s buyable gap-up move. The rising 10-dma remains a reference for buyable pullbacks from current extended levels.

Broadcom (AVGO) has been previously shortable on a short-term tactical basis, but the broader pattern does hint at the possibility of a move back up through the 50-dma. If we look at the chart below we can see that it has in fact executed an undercut & rally move after undercutting the prior 238.70 and 240.03 lows in the pattern from August 11th and 29th, respectively.

On Friday AVGO closed above the 20-dema after successfully testing the 10-dma. Volume was light at -33% below average, indicating that sellers weren’t all that interested in hitting the stock early in the day.

 

GR1010817-AVGO

 

Skyworks Solutions (SWKS) rallied back above its 50-dma on Friday, a move I told members to watch for as the stocks pulls a “LUie” type of move. This puts the stock in play as an MAU&R long set-up right here, using the 5-dma as a tight selling guide.

I’m not sure if Universal Display (OLED) qualifies as a semiconductor name, but it does make components for smart phones and other types of flat panel displays. The stock is interesting here as it pulls right back to the top of the prior base from which it broke out in early September. That breakout came after a big-volume MAU&R pocket pivot move back up through the 50-dma in early September.

Once the stock cleared the 140 price level it was somewhat extended, and then proceeded to pull back into its prior base, as so many breakouts seem to do in this current environment. However, OLED is finding support along the highs of the prior base as it holds tight along its 10-dma and 20-dema. This may be worth a short on the long side here, with the idea of using the lows of this current range at 125.35 as a tight selling guide.

OLED closed Friday above its 10-dma but remains just a hair below its 20-dema. A clean move back up through the 20-dema would trigger this as a better MAU&R set-up at that point, but the fact that it is holding the 10-dma with volume drying up to -45% below average on Friday may just make it buyable here. For those desiring a wider selling guide, the 50-dma can also be used.

 

GR1010817-OLED

 

Telecom-Related Names:

Arista Networks (ANET) moved to new highs on Friday on below-average volume. However, Friday’s volume still represented a big spike from Thursday’s extreme voodoo volume levels. I had previously discussed the stock as buyable along the 10-dma in my Wednesday report.

Lumentum Holdings (LITE) demonstrates quite well why I view every busted pattern as a two-sided situation. The Ugly Duckling is a potent force in this market, and this is certainly the case with LITE. On Wednesday LITE posted a single five-day pocket pivot at the 10-dma, and then on Friday cleared the 50-dma on a second, strong-volume five-day pocket pivot that also qualifies as a 50-dma MAU&R long trigger.

Since I like to see clusters (e.g., two or more) of five-day pocket pivots in lieu of a single ten-day pocket pivot, we have two five-day pockets in the past three days. Throw in a standard ten-day bottom-fishing pocket pivot off the 200-dma eight trading days ago, and you have some strong Ugly Duckling style technical action.

Any pullback from here down towards the 50-dma would offer a better entry point from here. However, the stock was actionable on Friday as it crossed the 50-dma in classic MAU&R style. The fact that this occurred on above-average volume and as a second five-day pocket pivot in three days is very positive, in my view.

 

GR1010817-LITE

 

Bio-Tech/Medical Names:

Alexion Pharmaceuticals (ALXN) is showing some hesitation after rallying off the confluence of its 10-dma and 20-dema on Thursday. On Friday, the stock plopped right back into the two short-term moving averages, putting it back in a lower-risk entry position, using the 50-dma as a maximum selling guide. Earnings are expected on October 26th.

The iShares NASDAQ Biotechnology Index Fund (IBB) is slightly extended after breaking out new highs on Monday on strong volume. Watch for pullbacks to the 10-dma as lower-risk entry opportunities. If you check the charts of BIIB, CELG, GILD, and AMGN, you can see why I prefer this as a big-stock bio-tech play that avoids all the news-risk associated with these names.

Vertex Pharmaceuticals (VRTX) cleared its 50-dma on Friday on an MAU&R move that came on a five-day pocket pivot. The stock was previously actionable along the 10-dma on the basis of Monday’s pocket pivot move at the 10-dma. This latest move triggers the stock as an MAU&R at the 50-dma while using it as a tight selling guide. Earnings are expected on October 24th.

 

GR1010817-VRTX

 

Bioverativ (BIVV) was discussed in my reports of over a month ago as one to watch for a possible turn off the lows of a potential new base. After a while, I lost interest in the stock, but lately have noticed it starting to fulfill my earlier expectations as it begins to round out the right side of a potential new base.

There are a number of pocket pivots along the lows of the pattern around the 10-dma and 20-dema that occurred in September. But over the past week the stock is showing more robust signs of percolation. On Monday, the stock posted a stalling pocket pivot at the 50-dma that still closed above the line and the mid-point of the daily price range.

Friday saw a sharper move in the stock on light volume, but the overall picture is one of a stock on the mend as it tries to come up the right side of a potential new base. I’d like to see this test the 50-dma for a much lower-risk entry opportunity using the 50-dma as a very tight selling guide. Earnings are expected on October 27th.

 

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Chinese Names:

Alibaba (BABA) is holding squeaky tight up near its all-time highs as it forms a miniature cup-with-handle formation. Volume dried up to -53% below average on Friday, which may imply that a breakout is imminent. Any kind of pullback closer to the 20-dema, which is the nearest moving average, might provide a more opportunistic entry.

 

GR1010817-BABA

 

Sina (SINA) is sitting right at its 10-dma, putting it in a lower-risk entry position using the 10-dma as a tight selling guide. The stock traded higher volume on Friday, but it was -6% below average as the stock held in a tight range.

Weibo (WB) also traded higher volume on Friday, but it remained quite light at -30% below average. It is also sitting right at its 10-dma, putting it in a lower-risk entry position while using the 10-dma as a tight selling guide.

Cyber-Security:

Palo Alto Networks (PANW) posted its highest closing high on Friday since bottoming out in April and May of this year. A voodoo pullback on Wednesday led to a move higher on Thursday and Friday as volume picked up but remains below average. This is extended in its current position, so not actionable until the rising 10-dma catches up to the stock and perhaps provides a reference level for a buyable pullback.

Fortinet (FTNT) is on fire after posting an MAU&R long set-up at the 200-dma on Thursday. I wrote on Wednesday that technically one would view the edging rally up to the 200-dma as a shortable affair. But I also pointed out that in this market, “Wedging rallies up to a moving average just mean the stock is about to push back up through the moving average.”

That turned out to be the case. If was alert to the MAU&R possibility on a move up through the 200-dma, one could have caught a nice two-day move. FTNT is now extended, but certainly serves to illustrate how the old rules can often just be tossed out the window. Wedging rallies mean nothing when a stock can just pull an MAU&R and morph into a long set-up on a moment’s notice.

 

GR1010817-FTNT

 

Cloud Software Names:

All the cloud names that I follow have moved higher since Wednesday, and are all in extended positions.

Salesforce.com (CRM) has continued to rally after finding resistance at its 50-dma last week and is now extended.

ServiceNow (NOW) ignored its wedging rally back up to its prior highs and just kept going, closing at a new all-time high on Friday on a 5% increase in volume. The stock is currently not in a buyable position.

Square (SQ) remains extended on the upside and out of buying range.

Tableau Software (DATA) broke out to a new all-time high on Friday after being buyable along the 10-dma per my comments in Wednesdays report. The breakout occurred on light volume, further illustrating the fact that in this market volume doesn’t necessarily have to be present for a breakout to new highs.

Workday (WDAY) was last buyable along the 50-dma per my discussion of the stock in Wednesday’s report, and on Friday streaked 3% higher to post a new all-time closing high. It is now out of buying range, as I see it, but certainly provides a shining example of the mischievous work of the Ugly Duckling!

Internet Related:

Yelp (YELP) keeps posting higher highs on light volume, but as with most stocks in this market, light volume is not a limiting factor. It is currently extended on the upside and out of buyable range.

GrubHub (GRUB) came apart on Thursday on an analyst’s downgrade, blowing back below its 50-dma. This ended its bid for an MAU&R as soon as it started.

Solar Names:

First Solar (FSLR) doesn’t seem to have any interest in breaking down again as it regains the 50-dma and holds tight along the line. As I wrote in my Wednesday report, despite the wedging rally up to the 50-dma at that time, “But there is also the possibility that the stock moves back up through the 50-dma, triggering an MAU&R long entry at that point, using the line as a tight stop.”

And so, it has. On Friday, FSLR closed tight right at the 50-dma with volume drying up to -49% below average. Note that this action is occurring on a five-day rally that started after the stock undercut the prior August low in the base. This becomes actionable on the long side here, using the 50-dma as a tight selling guide.

 

GR1010817-FSLR

 

SolarEdge Technologies (SEDG) is finally meeting up with its rising 10-dma, pulling down into the line on Friday. Volume dried up to extreme “voodoo” levels at -71% below average. This puts the stock in a buyable position here using the 10-dma or 20-dema as tight selling guides.

One thing to keep in mind here is that I would tend to view the top of the base as being closer to the 27 price level and the top of the low-base range extending from mid-August to late September. For that reason, be alert to the possibility a pullback that comes in a little further and down closer to the 20-dema and the 27 price area.

 

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Video-Gaming Names:

Take-Two Interactive (TTWO) continues to lead the video-gaming pack as it posted a new all-time high on Friday on a 9% increase in volume over average. I was looking for the stock to spend perhaps a bit more time setting up along the 10-dma, but it was having none of that. It is now extended on the upside with earnings expected at the end of the month.

Activision Blizzard (ATVI) looks like it could break lower, but in this current market I frankly would not be surprised to see it move back up through its 50-dma in a typical MAU&R type of move. For that reason, as long as the general market holds up, I would simply watch for a move up through the 50-dma as a trigger for an MAU&R long entry at that point.

Electronic Arts (EA) has already started to regain its 50-dma, so is currently actionable as an MAU&R long set-up here (as discussed in my Wednesday report) while using the 50-dma as a tight selling guide.

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).

From an index point of view, you cannot fault the action as the general market uptrend remains well intact. At the same time, we are seeing a lot of leading stocks moving up off the lows of their current bases as they perhaps set up for breakouts. NFLX is the latest example of a leading stock that came up off the lows of a new base and has now broken out.

The best moves appear to be coming from stocks that are severely down and out, but which then recover strongly after an undercut & rally (U&R) or a moving average undercut & rally move. Examples would be AMZN, WDAY and FTNT, among others.

This is extremely interesting action. That’s because after the broad number of abnormal price breakdowns we saw in a number of leaders nearly two weeks ago, things were not looking too good. Historically, when you see so many leading stocks break down together, and do so in abnormal fashion, that spells trouble for the general market.

But this is a market where the Ugly Duckling rules the roost, so to speak. In such an environment, your best long entries come when things look bleakest. But these Ugly Duckling entries known in acronymic style as U&Rs and MAU&Rs are extremely concrete set-ups where the long entry triggers are well-defined. In addition, risk is kept to a bare minimum based on the use of a prior low or a very nearby moving average as a tight selling guide.

So easy, even a caveman can do it, as the well-known commercial goes. But it also requires that one set aside emotions and act instinctively, like a caveman (or cavewoman, as the case may be). Fortune, as they say, favors the brave, and this market is no exception.

Standard O’Neil base breakouts are nice, I suppose. In my view, a base breakout makes a nice add point for a position already taken down within the base on a U&R, MAU&R, or pocket pivot entry. An example would be NFLX, which was buyable as an MAU&R on Tuesday at 178, and then broke out on Thursday through a 189.95 buy point, where shares could have been added.

This is the way to play this market on the long side, and in the search for fresh ideas I find it useful to go back and review my old long watch lists from earlier in the year. I keep these archived by date, and so I can back and look at former leaders that have corrected and which might be in the process of rounding out the lows and/or right sides of potential new base. A case in point would be BIVV, which came from an old buy watch list from earlier this summer.

We hear a lot from pundits and market commentators who are “worried” about this market because it just keeps going higher. But let’s think about this for a second. The indexes have only recently emerged from an extremely volatile summer period where they chopped around violently, even bearishly so, at times. But they didn’t break, and a true bear market, much less a correction, never ensued.

So, for all we know, the summer could have been an extended version of shaking out weak hands and bringing in strong hands. Now it looks like we had a big shakeout two weeks ago, and everything is starting to set up again as stocks move back up to the highs of their current bases after posting U&R or MAU&R long set-ups. Look at FB as one possible example of this.

What it looks like to me is that stocks are the new bonds, so to speak. With so much money sloshing around, and interest rates starting to inflect upwards, money is leaving bonds and looking for a new home. That’s why you’re seeing a torrid upside move in a bland, no-growth name like General Motors (GM), which made another higher high on Friday.

Even after a big price move, GM still sells at only seven times estimates, so why not stash some cash there if you’re an institution trying to figure out where to put all this money coming out of bonds? And if money keeps coming out of bonds, it may very likely keep going into stocks.

Meanwhile, if you own stocks, just stick to your selling guides. And if you’re looking to buy something, just stick to the lower-risk long set-ups where risk can be controlled tightly. In short, 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

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 GDXJ and NVDA, 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.