The Gilmo Report

December 13, 2017

December 13, 2017

New highs in the major market indexes remain the order of the day. Those trying to make a blanket call about a top in the market are at best half-right, depending on what day it is. Certain areas of the market, such as semiconductors, Chinese-related, internet, and tech, certainly are showing signs of severe weakness as they remain in beaten-down positions.

Meanwhile, the QE beat goes on. The Fed came out with their December policy announcement, raising interest rates by 25 basis points as expected. Outgoing Fed Chair Janet Yellen conducted her final press conference in fine style, continuing with her usual line of economic gobbledygook about full employment, balanced risk, improving outlooks, etc.

This sent the market higher, and then lower, but the movements were minimal and devoid of any serious technical drama. That is, until the last few minutes of the trading day, when the S&P 500 Index turned negative, while the Dow Jones Industrials Index gave up about half of its peak gains on the day.

Volume was slightly higher as both indexes stalled and churned along their highs, although the Dow did manage to post an all-time closing high. The S&P, meanwhile dipped a couple of points below yesterday’s all-time closing high. Overall, not impressive action, but with the indexes as extended as they are, a pullback here would not be surprising.

 

GR121317-$INDU

 

The NASDAQ Composite Index also failed to impress as it, too, stalled and churned around in a narrow range near its highs on slightly higher volume. This looks weak to me, and I wouldn’t be surprised to see the index at least pull in to test its 10-dma or 20-dema from here.

 

GR121317-$COMPQ

 

Despite predictions of anywhere from 3-5 interest rate increases in 2018, financials weren’t really buying it, as the Financial Select Sector SPDR Fund (XLF) sold off on heavy volume. This brought it back into its 10-dma, where we might expect short-term support to hold. However, the higher selling volume may indicate that a test of the 20-dema is more likely.

 

GR121317-XLF

 

Gold also wasn’t buying the idea of many more interest rates to come as the yellow metal and the stocks of companies that mine the stuff rallied strongly. However, the position of the SPDR Gold Shares (GLD) within its overall chart pattern isn’t showing what I would consider a concrete, actionable long set-up.

That could change, however, if the GLD can push above the last major low in the pattern, which I peg as the October 6th low at 119.78. The GLD closed 61 cents below that prior low today, so a move back up through 119.78 would trigger an undercut & rally long set-up at that point. Per the rules for handling U&R set-ups, the 119.78 prior low then serves as your selling guide.

 

GR121317-GLD

 

Gold miners also rallied strongly, with my favorite name (if I have a favorite given how erratic these have been trading as of late), Kirkland Lake Gold (KL) posting a five-day pocket pivot as it pushed off its 50-dma on heavy buying volume.

An interesting move that mimicked that seen in the Vaneck Vectors Gold Miners ETF (GDX). However, among the vast array of gold mining stocks that rallied sharply today, KL is sitting the highest up in its pattern and is only one of two stocks in the group trading above $10 a share and their 50-dmas!

 

GR121317-KL

 

For the most part money is moving into industrials and cyclicals, with financials also chiming in as the view toward higher interest rates to come firms up. In the old days, when industrials, the so-called capital spending stocks as Bill O’Neil used to call them, started to lead, that generally meant that you were approaching the end of the market cycle.

But one cannot use this as a sign of an imminent top. It is simply something to be aware of as you discern where you might be in the cycle. In a QE market, however, where massive amounts of liquidity remain in the system, it is not clear whether old axioms still hold true.

What I do know with much more certainty is that most of the action currently consists of trending industrials, like Caterpillar (CAT), for example, combined with stocks that are mostly range-bound as they move this way and that without really going anywhere. CAT was buyable along the 10-dma last Wednesday, as I noted in that report at that time, and it has since moved higher from there.

 

GR121317-CAT

 

Strong, trending moves are also being seen in railroads like Union Pacific (UNP) and CSX Corp. (CSX). But the conundrum of 14% and 6% earnings growth for each of these stocks, respectively, in the most current quarter seems more indicative of the phenomenon of these stocks now becoming the “new bonds” as money looking for a home pours into them.

These slow-growth or, rather, nearly no-growth, industrials are certainly cases where the market is making the proverbial silk purse out of a sow’s ear. I have preferred CAT as an industrial play solely because it posted triple-digit earnings in the most recent quarter, maintaining some semblance of robust growth.

However, I suppose if you have a strong belief that stocks are indeed the new bonds, then a breakout in UNP coming the day after a much subtler pocket pivot within the base makes it just that. So, if you operate on technicals alone, and ignore the formula that stipulates certain threshold requirements for earnings and sales growth, you just close your eyes and buy!

 

GR121317-UNP

 

In tech land, the situation remains mostly one of stocks chopping around as they engage in reflex rallies of varying strength after becoming rather oversold last week.

Apple (AAPL) was still buyable as of last Friday per my comments in last Wednesday’s report regarding its undercut & rally set-up on that day. On Monday, AAPL cleared its 10-dma and 20-dema on a five-day pocket pivot signature that also came on strong, above-average volume.

Bottom line here is that AAPL is still just working its way through what is now a five-week base. In my view, the lower-risk and hence preferable entry spot occurred last week on the U&R. If it pulls into the 10-dma/20-dema confluence on light volume, then maybe it becomes buyable there.

 

GR121317-AAPL

 

Facebook (FB) appears to act normally here as it comes right back into its 50-dma after posting a moving-average undercut & rally long set-up last Wednesday. This may make it buyable here using the 50-dma as a tight selling guide. Of course, if it busts the 50-dma then it becomes a short-sale target at that point. Play it as it lies.

 

GR121317-FB

 

Amazon.com (AMZN) is tracking along its 10-dma as volume declined to -31% below-average, not quite enough for me to call it a “voodoo” day at the line. This could go either way, and, frankly, I’d rather take an opportunistic stance here and look to enter on a low-volume pullback down lower at the 20-dema at 1149.66

Netflix (NFLX) remains somewhat non-committal here as it hangs along its 10-dma and just below the prior cup-with-handle base breakout point. This could go either way from here, as volume remains low. So, I’d be looking at a breach of the 10-dma with volume picking up as a short-sale trigger, while on the flip-side I’d watch for a strong move back up through the 20-dema as a possible MAU&R type of long set-up at that point.

I think that with most of these big-stock NASDAQ names, where they go from here all depends on whether we see a strong year-end move to the upside. Will institutions come in to support their big-stock tech holdings into year-end? If so, then NFLX, AMZN, FB, AAPL, and others can easily push back to the upside as part of continuing oversold rallies that began last week.

 

GR121317-NFLX

 

Some of these names may also simply decide to go their own way, as Nvidia (NVDA) did today. In this case, the stock ran into resistance at its 10-dma and rolled over as selling volume picked up. Volume was about average, so it wasn’t heavy, but the price action was weak.

We can also see that NVDA looks to be forming a head and shoulders type of topping formation here, and a test of the neckline looks possible. We’ll see whether it bounces at that point, perhaps undercutting the low of two Tuesday’s ago.

 

GR121317-NVDA

 

Tesla (TSLA) finally came through on the rally I was predicting in my last two reports. At that time, it looked to be setting up along the 10-dma and 20-dema as volume dried up sharply last Friday. That set up a big move on Monday after PepsiCo (PEP) announced that they were going to reserve an order for 100 of TSLA’s still-to-be- produced electric semi-trucks.

In the grand scheme of things, 100 electric trucks aren’t even a drop in the bucket, but when over a quarter of your stock float has been sold short, it’s enough to get the shorts scampering. Thus, the rally. But it was interesting to note that the technicals were already setting up ahead of the news.

 

GR121317-TSLA

 

Roku (ROKU) pulled into its 10-dma today on volume that was -32% below-average, so that didn’t qualify as a “voodoo” pullback in my book. I want to see volume decline at least -35%, but for a stock like ROKU a volume decline of -50% or more would be preferable to see as the stock holds tight along the 10-dma.

That is something to watch for, although a more opportunistic approach would be to simply look for a possible drop below the 10-dma and back down to the 20-dema as a better entry, assuming you can get it.

 

GR121317-ROKU

 

Take-Two Interactive (TTWO) remains a textbook short here as it found resistance today at its 50-dma on higher volume. Rallies into the 50-dma are your opportunities to go short the stock, using the 20-dema as a guide for an upside stop, although it has yet to break substantially to the downside. That, however, may occur soon enough.

 

GR121317-TTWO

 

Activision Blizzard (ATVI) regained its 50-dma on Monday, and then yesterday pushed further above the line thanks to a recommendation from Goldman Sachs (GS). After a six-day rally, one must wonder why the analysts at Goldie weren’t hot for the stock down near the 200-dma. Thus, I question their motives.

Today, ATVI pushed higher up near its all-time highs around the 66 price level, reaching an intraday peak of 65.28. It then stalled and churned on light volume to close lower at 64.60. I view this as shortable here, using the prior highs in the 66 price zone as your guide for an upside stop.

Even better, if we saw the stock push just a little further up toward the 66 price level, that would, in my view, offer a much more optimal short-sale entry at that point.

 

GR121317-ATVI

 

ServiceNow (NOW) is in a position where it could go either way. Today it pushed right up into the 50-dma on lighter volume that was about average, but did not clear the line. Obviously, it could push up through the 50-dma, but for now I’d be willing to short the stock here while taking advantage of the proximity of the 50-dma as a guide for a tight upside stop just in case it does continue to move higher.

 

GR121317-NOW

 

Workday (WDAY) was shortable Monday at the 20-dema, and has since rolled over to the downside. It is now slightly extended to the downside and away from the 20-dema as it looks set to retest the 200-dma.

Yesterday I tweeted that Square (SQ) was looking less like an Ugly Duckling long and more like a short after running into resistance at the 20-dema two out of three days in a row. Today the stock followed through on that comment by breaking below its 50-dma on above-average selling volume.

For anyone who might have shorted the stock based on that tweet, you are now watching for a possible undercut of the prior December 4th low at 35.90. SQ closed 29 cents above that today, so I’d watch for a cover point to emerge IF we saw the stock undercut that 35.90 low and then rallied back above it.

 

GR121317-SQ

 

First Solar (FSLR) is extended from here and so I’d watch for a pullback to the rising 10-dma, now at 65, as a more optimal, lower-risk entry opportunity.

SolarEdge (SEDG) is holding along its 20-dema, which puts it in a lower-risk entry position using the line as a tight selling guide.

 

GR121317-SEDG

 

Arista Networks (ANET) pulled back yesterday on a slight test for supply, otherwise known as a “Wyckoffian Retest” of the 50-dma, without getting very close to the line.  Volume picked up slightly, but remained below average. That led to a five-day pocket pivot move back above the 20-dema today.

If one wants to be a trading cowboy here, one could try taking a long position here while using the 20-dema as a tight selling guide. Otherwise, I’d like to see it settle in for a day or two with volume drying up as it holds support at the 20-dema. That would set up a more coherent entry, but as always you can just play it as it lies.

 

GR121317-ANET

 

Alibaba (BABA) became a textbook short at the 50-dma on Monday, and then dutifully dropped down toward its 10-dma. It’s now attempting to hold support at the 10-dma. I continue to view this as a short on low-volume rallies into the 50-dma, such as we saw on Monday.

 

GR121317-BABA

 

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.

From an index point of view, things look extended and prone to a pullback, at least in the near-term. From a stock point of view, there is very little to nothing that strikes me as terribly compelling on the long side. Meanwhile, short-sale set-ups work sporadically, and when they do the ensuing move is more a short-term scalp than anything else.

As I wrote over the weekend, I’m not looking to start engaging in position-building activities with an eye toward playing an intermediate trend. What I am interested in, however, is the possibility of a playable year-end rally based on some of the set-ups I discuss in this report. In addition, I am willing to take shots on the short side where I see a weak rally in a broken-down leader run into areas of potential resistance like the 50-dma.

Speaking for myself, my activity currently is somewhat muted since I don’t see a lot that looks all that compelling. It’s possible to take a shot here and there, but most of these lead to limited movements. That seems to be the general lay of the land currently. Until I see more things ripen up I will continue to take things slowly, without trying to force anything and staying alert to those juicy opportunities that might crop up as we head into year-end.

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.