The Gilmo Report

December 10, 2017

December 10, 2017

The oversold rally in beaten-down techs and other growth names continued into Friday after a strong jobs number of 228,000 was reported by the Bureau of Labor Statistics. All the major market indexes were up roughly a half percent on the day on light volume.

After a three-day rally, the NASDAQ Composite Index stalled off its intraday peak on Friday as buying interest waned. Most of the movement seemed to be driven by beaten-down NASDAQ leaders that were in oversold rally mode, and the action lacked conviction. By the close, the NASDAQ posted a stalling day after a strong opening gap-up to finish near the lows of its daily trading range.




The S&P 500 Index showed a little more enthusiasm as it posted a new all-time closing high. The Dow Jones Industrials and the NYSE Composite Indexes also posted new all-time closing highs. The enthusiasm was perhaps muted by the fact that volume was quite light. It appeared to be more a function of sellers taking the day off.  Nevertheless, from an index point of view, the action can’t necessarily be seen as entirely negative as much as it was sleepy.

As always, it all boils down to what is going on with individual stocks, and as I see it the action can be classified as somewhat bifurcated. Those who try to make a blanket call that the market as a whole has topped for good are perhaps a bit premature. In my view, it’s a little more complicated than that.




As part of this complication, look at the daily line charts of the Percentage of Stocks Trading Above 50-day Moving Averages on both the NYSE and NASDAQ Exchanges, below. We can see that the market went through a stealth correction from the early part of October into mid-November as the percentage of stocks trading above their 50-day lines went into a tail-spin.







Near the lows in mid-November, less than 50% of stocks on both exchanges were trading above their 50-day moving averages. Now this number is starting to improve, and it suggests a simple, two-side question. Is this a sign of underlying weakness, hence an indication that a more serious index breakdown is coming? Or does it indicate that there is a pile of stocks sitting below their 50-dmas ready to jump into action, courtesy of the Ugly Duckling?

Obviously, that question is going to be answered by the action of the stocks themselves. Right now, I see many names among my former list of leaders that are rallying up to their 50-dmas after prior, severe price breakdowns over the past two weeks.

Does this bring them into more optimal short-sale range, or does it merely set them up for the typical moving-average undercut & rally (MAU&R) long set-up that we’ve seen so many times in this market? The good news is that if they do recover, they will do so in a concrete manner that is likely consistent with the quiver of Ugly Duckling set-ups that we have at our disposal.

Note to new subscribers: The term “Ugly Duckling” is one I’ve coined to refer to the nature of the current market environment whereby the market and leading stocks bottom out and then suddenly move back to the upside, usually at the point where they achieve maximum ugliness, so to speak. This has brought into play a variety of new long technical set-ups that have proven to be far more efficient and effective than buying standard base breakouts. These include the undercut & rally (U&R), which is derived from the “Wyckoff Spring” first identified by Richard D. Wyckoff. It’s corollary, the moving average undercut & rally (MAU&R), and the more standard “Wyckoffian Retest” or “test for supply” are other Ugly Duckling set-ups that I discuss in these reports.

Among rebounding tech/internet leaders that were slammed last week, one of the most buoyant has been Facebook (FB), which I discussed as a buy at the 50-dma in my last report. That was based on the moving-average undercut & rally (MAU&R) move that we saw on Wednesday on above-average volume.

Remember that in this market the old rules of looking to short late-stage breakout failures as they rally up into the 50-dma has now become a decidedly two-side affair, thanks to the Ugly Duckling. While a broken-down stock rallying back up into the 50-dma can indeed turn out to be shortable, if it can clear the line and hold, it can just as easily morph back into a long at that point.

This is what makes the short side of this market so tricky, but if one is willing to use any visceral evidence gained as a result of “feeling” a strong bid in a stock as it comes up to the 50-dma, there is no law that says you can’t flip back to the long side. This phenomenon has been common in this market, and one that I am always open to.

So, after regaining its prior base breakout point and flirting with its all-time highs on an intraday basis on Friday, FB backed off on above-average volume. This looks logical given the prior three-day rally followed by the sudden breakdown the week before and again this past Monday.

Now it’s a matter of seeing how well FB can hold the three moving averages that lie just below Friday’s close. If you see volume dry up on a pullback that carries down to the 10-dma/20-dema confluence or a little further to the 50-dma, that would just be a lower-risk entry position, using the 50-dma as a tight selling guide.




Apple (AAPL) is still in a buyable position following Wednesday’s undercut & rally back up through two prior lows in its current four-week base. While the stock did pull a small reversal at the 10-dma on Friday, it is still holding above that 167.15 low. That low would serve as a tight selling guide if one were going to enter the stock on the long side of this current, active U&R set-up.

If AAPL fails to hold that low, then of course the 50-dma comes into play as its final support level. At that point, it either holds the line and rebounds, or it adds to the percentage of NASDAQ stocks trading below their 50-dma. Play it as it lies.




I feel it is important to watch these big-stock techs as they flop around here since where they go is likely going to tell us where this market is headed. This is the area of the market where buying has been concentrated in 2017, and when the air starts to come out of these names, they can and will turn into strong short-sale candidates. For now, I am willing to play them in either direction, depending on how things play out. (AMZN) is one such name that is in a minor correction and pullback here. It remains relatively constructive thanks to the fact that it continues to hold near-term support at the 20-dema. If it breaches the 20-dema, however, it may very well morph into a short-sale at that point.

For now, my actionable reference point is the 20-dema, such that a low-volume pullback to the line would offer a lower-risk entry position. On the other side of that, a breach of the 20-dema would bring me in on the short side, pronto, with the idea of using the 20-dema as a tight upside stop.




Netflix (NFLX) is one of the weakest of the big-stock NASDAQ names I’ve discussed in recent reports, and it morphed into a late-stage failed-base (LSFB) short-sale set-up last week as it busted the 50-dma on heavy selling volume. It then moved down to the lows of its prior handle from which it broke out in early October and has since rallied over the past week.

Friday’s rally took the stock up into the confluence of the 10-dma and 20-dema, both of which coincide, roughly, with the underside of the base it formed between mid-October and late November. I am willing to test this on the short side using the 20-dema as my stop, but a more optimal entry might occur on a push higher into the 50-dma.

What it does from here depends on, well, what it does from here, so this requires close monitoring, perhaps with the help of the five-minute 620 chart. I think NFLX has reached a point of maximum near-term valuation, and with Walt Disney Company (DIS) looking to buy the production facilities of 21st Century Fox (FOX) the gauntlet is being thrown down as more competition moves into the streaming entertainment space.




Nvidia (NVDA) is another of the weaker big-stock NASDAQ names I follow, and it is now rallying back up toward its 50-dma. Note that on Friday it ran into resistance well within 1% of its lower 10-dma before reversing on light volume. This doesn’t strike me as conclusive action, as I’d prefer to tag this on the short side up closer to the 50-dma, now at 199.57.

However, that may be asking for too much, as that is about 5% higher from Friday’s close. I would probably look to exercise patience here, and if NVDA doesn’t get up as high as the 50-dma, I would simply look for another target stock to pick on as a short-sale closer to the 50-dma where I can find it.




I wrote in my last report that Tesla (TSLA) looks like it could set up a rally up to the 200-dma at 324.39. So far, despite a little downside flip-out on Thursday, it still looks like that may be the case. On Friday, the stock held at the confluence of the 10-dma and 20-dema as volume dried up to -44% below average.

Based on the company’s propensity to burn cash the way a coal-fired power plant burns coal, I have to think that a capital raise is coming at some point. That would also likely come in the form of a stock secondary offering. In the meantime, however, TSLA might be able to work the 26% of its float that has been sold short.

That’s a lot of short interest, and it is one factor that I believe has helped to keep the stock buoyant throughout 2017. But the stock would likely need a catalyst, and one might come in the form of a short-squeeze if shorts see that the stock just doesn’t want to let go.

This does, however, remain a two-sided situation, such that a breach of the 10-dma/20-dema confluence would trigger a short-sale entry point, regardless of what I might think about the stock’s potential for a rally up to the 200-dma. Certainly, a rally up to the 200-dma would offer a more optimal short-sale entry, if it occurred, but it must happen first, and there is no guarantee that it will. Play it as it lies!




Caterpillar (CAT) is extended after being buyable along its 10-dma per my comments in Wednesday’s report. Low-volume pullbacks to the 10-dma would present lower-risk entries from here, although it is possible your last lower-risk entry came and went on Thursday morning.

Roku (ROKU) may be setting up for another move higher after testing its 20-dema on Wednesday on a five-day pocket pivot signature. Volume dried up to a little below average, so it may need more time to set up along the 10-dma, and a constructive sign would be to see volume continue to dry up here.

After a negative hit job from the infamous Citron Research at the peak nine trading days ago on the chart, ROKU has settled down nicely. The latest short interest numbers haven’t been reported yet, but if shorts did swarm the stock after the recent reversal off the highs, then the stock could be set up for another short squeeze.

One caveat to keep in mind here is that currently ROKU’s float consists of 17.9 million shares with 97.8 million total shares outstanding. This does bring up the potential for a secondary offering if management decides to take advantage of the huge price run in the stock. Not to scare anyone away from the stock, but there could be some risk in holding large, concentrated positions in the stock overnight.

The flip side is that more stock supply could turn out to be a positive for ROKU, so it could hold up after announcing such a secondary offering. This is all mere speculation on my part, but have predicted this sort of thing before, namely in a stock called Airgain (AIRG) after it had a torrid run back in November of 2016 (refer to the November 20, 2016 report in the report archives).




The concept of stocks moving in wolfpacks, as my late friend Ian Woodward used to put it, applies to the short side as much as it does to the long side. Interestingly, I’m seeing some identical action among recently busted video-game and cloud-based enterprise software leaders.

Starting with the video-gamers, here’s Take-Two Interactive (TTWO) rallying right into its 50-dma on Friday, where it ran out of gas and reversed on light volume. Note that this move comes after the stock broke down hard on heavy volume on Monday, undercutting prior lows in the pattern.

This triggered a typical undercut & rally (U&R) response, which technically brings the stock into more optimal short-sale range here, using the 50-dma as a guide for a tight upside stop.




Almost identical action has been seen in fellow video-gamer Activision Blizzard (ATVI), which on Monday sold off sharply on heavy volume. It then ran into its 200-dma, where it found support and then rallied back above prior lows in its pattern for a typical U&R type of reaction rally.

That rally carried as far as the 50-dma on Friday before the stock reversed on light volume and in identical fashion to TTWO. The group remains under pressure, as I see it, and I would be willing to take a shot on the short side of either of these stocks, with the idea of using the 50-dma or Friday’s intraday highs as tight upside stops.

Of course, if they hold up against the underside of their 50-dmas and then push back above this key moving average, we could then have some MAU&R situations on our hands. Again, just play it as it lies, and remain open to the price action as it unfolds in real time.




ServiceNow (NOW) and Workday (WDAY), both players in similar cloud-based enterprise software businesses, are also showing identical wolfpack behavior following severe price breakdowns earlier in the week.

NOW sold off sharply on Monday, but has since managed to push back up to its 50-dma, where it reversed on Friday as volume dried up. This puts it in a shortable position, using the 50-dma as a guide for a tight upside stop. Note the U&R type action following Monday’s severe breakdown, leading to the logical rally back up into the 50-dma.




Workday (WDAY) is a similar situation, rallying up only as far as its 20-dema on Friday as volume dried up but still came in above-average. This is shortable closer to the 20-dema or 50-dma, as I see it, but I would remain flexible here with both NOW and WDAY.

I would note that both stocks picked up above-average buying volume off their Monday lows, so we must watch for the possibility that they then consolidate up here just below their respective 50-dmas. This could then set up MAU&R types of moves, which would then bring this back into play as long ideas.

In the old days, these rallies were textbook short-sale entry opportunities, but this is not your father’s stock market anymore. Therefore, a nimble and quick approach is warranted here if one chooses to test these on the short side. At the same time, be open to MAU&R action if it occurs in a discernible manner.




Square (SQ) is retesting its 50-dma as it pulled back on Friday after running into resistance at its 20-dema. The prior climax run was confirmed as at least a near-term climax top, but whether the stock has topped for good or whether it will simply correct 20-30% and then build another base is unknown at this point.

All we know for certain is that SQ is now 23% below its peak price of 49.56 and is now attempting to hold support along its 50-dma. Volume on Friday came in at above average, so I’d want to see any retest of the 50-dma occur on volume that continues to dry up, and the more the better. I think this remains one to watch as a swing-trade idea IF it can hold the 50-dma in constructive fashion.




First Solar (FSLR) rocketed another 10% after being buyable on Wednesday’s base breakout, as I discussed in my report of that day. It is now extended.

SolarEdge (SEDG) has had a decent run-up after filling its prior gap and bouncing off the 50-dma. It finally ran into some selling on Friday as it approached the prior highs, which looks logical to me. It did, however, hold support at the 20-dema and should be watched here to see if it can continue to hold the line with selling volume drying up.




Arista Networks (ANET) found logical support at its 50dma and has since rallied back above its 20-dema, where it held support on Friday. This came after a reversal at the 10-dma on a slight decline in volume to about average. I’m looking for a retest of the 50-dma on light volume as a possible Wyckoffian Retest for supply.

Otherwise, tight action along the 20-dema with volume drying up would also be constructive to see, and could set up an entry point along the line. However, I would tend to think that if ANET is going to set up along the 20-dema, then it may need more time. Speaking for myself, I’d be more interested to see an opportunistic retest of the 50-dma as the best entry option.




Alibaba (BABA) has rallied up into its 50-dma and 20-dema where it churned and stalled on Friday on above-average volume. This looks like a textbook short here using the 50-dma as a tight upside stop. Otherwise, the standard Ugly Duckling formula here is to watch for the stock to trigger an MAU&R if it can regain the 50-dma.




Weibo (WB) is acting like a full-blown late-stage failed-base (LSFB) short-sale set-up here as an attempt at a MAU&R move on Friday failed miserably at the 20-dema. After rallying up to the line early in the day, the stock reversed hard on heavy selling volume to close back below the 50-dma.

This looks like a short here using the 50-dma as a tight upside stop. Chinese names in general have looked like garbage over the past few weeks, and we are now seeing some of the stronger names in the space, like WB and BABA begin to deteriorate. This could turn out to be a ripe area for short-sellers as a wolfpack theme, so play ‘em as they lie.




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.

Friday’s action didn’t impress, even after a “strong” jobs number, but then for anyone willing to investigate it, the numbers of jobs reported over the past few months lie within the standard margin of error for these statistical compilations. Wage growth came in below expectations, but overall the number seemed to confirm that the Fed will raise rates when it meets this coming week.

For now, I mostly see a lot of leading stocks rallying back up into what look to be shortable positions. Even semiconductors, which were acting in strong, coherent fashion right up into late November, as was the case with big-stock chip leader Micron (MU), for example, have been blasted.

Now MU is rallying back above its 50-dma, but ran into resistance at its 20-dema and reversed on higher volume on Friday. It is now holding support at the 50-dma, but a breach of the line would bring this into play as a short at that point. But the main reason I bring up MU is that it illustrates how a strong, coherently-acting leader can suddenly come apart in this market as investors get the rug pulled out from underneath them.




And if one is looking for new leadership, there are a fair number of slow-growth names moving higher, but who is to say whether these aren’t the next coherently-acting “leaders” to suddenly come apart. Financials are one area of leadership that has continued to hold up, but if the market perceives that the Fed is done raising rates in the short-term if in fact it does do so on Wednesday, then these could sell off in reaction.

The undercut & rally moves that we saw take hold earlier in the week, many of which are in the examples I show in this report, have perhaps run their short-term course. As they run into resistance at logical points on their charts, such as the 50-dma, my inclination is to pounce on the short side this coming week.

But that will require nimble feet. This environment is particularly treacherous, and I continue to think that holding more cash is a preferable option to trying to play things aggressively on the long side, looking to build positions for longer-term or intermediate-term moves.

I don’t see what I would consider to be the type of dynamic leadership we need to fuel sustainable price moves. But if the real-time information begins to shift favorably in this regard, I am open to it. I’m just not seeing it right now. For that reason, I remain both cautious and opportunistic, but with an eye looking more toward swing trades on either the long or short side where I can find them. That is all.

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.

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