The Gilmo Report

December 17, 2017

December 17, 2017

Friday’s triple-witching options expiration saw the major market indexes make all-time highs on heavy, options-related volume. What perhaps fascinates me the most currently is the way many beaten-down leaders are recovering in v-shaped patterns. Some are even recovering to the point of retaking their old highs and forging new ones. In addition, where stocks haven’t broken down, there is some constructive basing action to be found.

Members know that when it comes to figuring out where the market is likely headed next, the action of individual stocks trumps all. A couple of weeks ago, the mass breakdown in tech, internet and growth leaders looked like a harbinger of doom for the general market.

The fact is that over the past few days, textbook shortable rallies have proven to be anything but, as v-shaped reversals and recoveries take hold. Some of these rallies were in fact shortable on the way up, and some were, at least for quick tactical short scalps. But after a small pullback from logical resistance, the bids began to form up again, and the stocks continued pushing higher.

But as I’ve discussed befor, this is an unusual QE-infused environment where one should be open to taking a two-sided view of stocks. When shorting into oversold reaction rallies in beaten-down leaders isn’t working, or only giving up quick short scalps, then that alone is critical visceral market information that can be used by nimble, flexible traders.

It’s not as if we don’t have the tools and methods to implement these two-sided approaches to stocks that recover from a sharp sell-off and then just keep rallying. By now, members should be well-versed in these tools and methods which come in the form of concrete long set-ups known as the moving-average undercut & rally (MAU|&R) and the undercut & rally (U&R) set-ups.

V-shaped recoveries that seem to defy technical common sense abound in an Ugly Duckling market, and the past two weeks has been no exception. A prime example is found in ServiceNow (NOW) which looked like death two Mondays ago as it busted through its 50-dma on huge selling volume. In the old days, that type of break usually meant something was seriously wrong, and the odds of further downside before the stock at least stabilized were high.

In this market, that kind of massive-volume price break to the downside is a buy signal. That may sound like a joke, but I’m not joking. From there the stock then pushed back up through prior late October lows in the pattern, paused at its 50-dma for four days, and then blasted through the 50-dma on above-average volume. On Friday, NOW posted a new all-time closing high on heavy volume.

Technically, NOW was buyable on Thursday as it pushed off the 50-dma. That move qualified as a moving-average undercut & rally set-up at that point, using the 50-dma as your selling guide just in case it failed. Now I’m not so sure I’d be willing to buy what is a straight-up-from-the-bottom base breakout, as it would seem to me that at least some overhead supply from the left side of the pattern will come into play here.

 

GR121717-NOW

 

Another example is Activision Blizzard (ATVI), which pushed right through the 50-dma on Wednesday and kept going. That move was initiated by an analyst’s buy recommendation, but it was enough to keep the stock moving all week long. On Friday, the ninth straight day of a rally off the lows at the 200-dma, ATVI then broke out to a new all-time closing high on strong volume.

This is another v-shaped, straight-up-from-the-bottom base breakout that looks difficult to buy here. Once the stock cleared the 50-dma, one should have just bought the stock on the MAU&R rather than trying to speculate as to the motives of the analyst issuing the buy recommendation at that time. In other words, just play it as it lies and forget the noise.

 

GR121717-ATVI

 

Both these stocks may have looked like textbook shorts on the rallies back up into their 50-dmas earlier this past week, but as I noted last weekend, what passes for textbook in this market is usually not. I don’t think there really is anything that can be called textbook in this market. That’s just the way this market rolls in an era where stocks are the new bonds, end of story.

While I may not believe in Santa Claus, I believe what the individual stocks are telling me right now. Right now, the action appears to be pointing in the direction of a rally heading into the long Christmas holiday weekend. From an index point-of-view, one can’t really argue with Friday’s breakout to new highs in the NASDAQ Composite Index on heavy triple-witching options expiration volume.

 

GR121717-$COMPQ

 

The same goes for the S&P 500 Index, which blasted to an all-time high on Friday on the same heavy triple-witching options expiration volume. At least for now, that’s a freight train I have no intention of standing in front of until I see a reason to. And right now, particularly heading into year-end, where institutions have no reason to unload their positions, there doesn’t appear any reason to do so, unless one is feeling suicidal.

 

GR121717-$SPX

 

Industrials have been the leaders in this market, and I made note of the railroad stocks in my last report as being prime examples of this. On Friday, CSX Corp. (CSX), which had been acting well over the past two weeks, gapped down big on news that its CEO was taking an extended medical leave of absence. He in fact died on Saturday.

This particular CEO was allegedly turning the company around, and his impending absence was not taken very well by investors who dumped the stock on massive volume Friday. But, CSX was able to hold support at the 200-dma, and by the close just barely cleared the 50-dma by four cents. Technically, this would qualify as an MAU&R at the 50-dma, but the stock must show some signs of stabilizing and holding the 50-dma this coming week. If it can, then it may have a chance at filling part or most of Friday’s gap-down “falling window.”

It may seem odd for me to be talking about something like this as a possible long set-up. But in this market, a massive-volume sell-off, as I “joked” earlier, is a buy signal! We’ll see if that turns out to be the case here with CSX, but for now I’d like to see it hold the 50-dma. Otherwise, a retest of the 200-dma might be in the cards.

 

GR121717-CSX

 

Another industrial that I’ve liked in recent reports, Caterpillar (CAT), is currently extended from its 10-dma at 143.75, closing Friday at 146.69. Pullbacks to the 10-dma would be your only reference for a potentially lower-risk entry opportunity.

I’ve hypothesized that the year-end Santa Claus Rally may just turn out to be an oversold rally in beaten-down tech, internet, and growth leaders that blew apart a couple of weeks ago. So far, that hypothesis has been playing out, as the examples of NOW and ATVI, above, attest.

Apple (AAPL), on the other hand, as the biggest of the big-stock tech leaders, has held up better than most. As I’ve noted in recent reports it was last buyable on the U&R move along the lows of its little double-bottom base two weeks ago. Now we see the stock nosing up to a trendline breakout on strong volume Friday.

I view this trendline breakout as buyable here using the 10-dma at 171 as a tight selling guide. If the market is going to rally into the long Christmas weekend, then I would expect AAPL, as one of the best-acting big-stock tech leaders, to move with the market.

 

GR121717-AAPL

 

One thing to keep in mind as we go through our daily charts is that Friday’s triple-witching options expiration skewed volume well to the upside. This has created a lot of strong moves and pocket pivots on the daily charts of many stocks that I follow. However, I have found that trying to second-guess the volume is pointless, so I generally take the action at face value.

As an example, we can see that Facebook (FB) posted a pocket pivot at its 20-dema. This is, in my view, buyable here using the 20-dema or the 50-dma as your selling guides. FB had a big shakeout the week before last, which is actually not an unusual thing to see in leading stocks. Back in the old days, I used to call this an “udder formation” where the shakeout gives the pattern the look of having a cow’s udder.

Today such moves seem to occur with more regularity, and the ensuing long entries occur on the moves back up through the 50-dma (the MAU&Rs) or on undercut & rally moves (the U&Rs). I’m willing to give FB a shot here on the long side with the idea that it will move with the market in any year-end rally. It is certainly set-up to do so from a purely technical basis.

 

GR121717-FB

 

Amazon.com (AMZN) also looks set up to move higher with the market in any year-end rally after setting up nicely along its 10-dma. Notice that the past two days qualify as five-day pocket pivot volume signatures, with Thursday’s action a clear five-day pocket pivot off the 10-dma. This is buyable here using the 10-dma as a tight selling guide.

 

GR121717-AMZN

 

Netflix (NFLX) has posted to five-day pocket pivots along the 10-dma and 20-dema over the past two trading days as it looks like it is setting up to make a run at the 50-dma. Notice that after posting a low in early December, NFLX staged a logical oversold reaction rally and then on Monday and Tuesday of this past week pulled back slightly. The lighter volume on the pullback constitutes a successful “Wyckoffian Retest” of that prior low, leading to a move back up through the 20-dema at the end of the week. I think this is buyable here using the 10-dma as a tight selling guide.

 

GR121717-NFLX

 

Nvidia (NVDA) also looks like it could be setting up for a quasi-LUie type of move here back up toward or even through the 50-dma. On Friday, the stock posted a five-day pocket pivot at the 10-dma after volume dried up the day before on a Wyckoffian Retest of the prior low of nine trading days ago on the chart. Even though Thursday was a flat day for the stock, note that it tried to move lower on an intraday basis but volume declined as the test for supply found very little, leading to Friday’s rally.

 

GR121717-NVDA

 

Tesla (TSLA) worked as a short-sale scalp on Thursday, and even again on Friday until it found support off its intraday lows and rallied on a pocket pivot volume signature. This would not qualify as a bona fide pocket pivot, however, since the stock is well-extended from any major moving average.

Note also that TSLA is pushing up against resistance along overhead resistance defined by the August, September, and October lows. While it seems hard to believe, the fact is that the stock is consolidating the prior rally off the 20-dema, which I discussed as a possibility last weekend. That possibility, of course, became reality, confounding the big short interest in the stock currently.

Right here, based on the technical action, one cannot call this a short with any conviction. If anything, the short three-day bull flag is holding relatively tight, and has the look of something that wants to move higher still. I would say that it certainly has enough short interest to propel such a move, and that may be the primary driving force here. And, in my view, that driving force may be sufficient to produce more upside.

 

GR121717-TSLA

 

Roku (ROKU) held tight on Wednesday and Thursday and above near-term support along the 10-dma. Volume dried up again on Thursday, although again not to what I would call “voodoo” levels. However, this became moot as Walt Disney Company (DIS) confirmed its buyout of certain assets of 21st Century Fox (FOXA) and its investment in ROKU.

In addition, ROKU has previously been allowing NFLX and YouTube to stream through their device for free, and it may now be in position to charge its usual 20% fee for carrying such streaming services. That news was what likely propelled the flag-on-flag base breakout on Friday on a pocket pivot volume signature.

I suppose if you like to buy base breakouts, this one is still within buyable range, although a pullback closer to 50 would offer a potentially lower-risk entry from here. I’ve compared the potential of ROKU to the way TSLA acted after its first big buyable gap-up move in May of 2013 (see the November 19th report).

 

GR121717-ROKU

 

Other new-merchandise names I’ve discussed in recent reports have been persistent in resisting any demise as they show signs of life off their recent lows. The first is MuleSoft (MULE), which is rallying off its lows of the prior week on what was an undercut & rally long set-up five trading days ago on the chart.

This has been followed by a five-day pocket pivot on Wednesday and then a ten-day pocket pivot on strong volume on Thursday, both as the stock came up through the 50-dma. On Friday, triple-witching options expiration had no effect on the stock’s volume as trade dried up and the stock held tight.

While this was actionable on the U&R move five days ago, MULE is again actionable here on the basis of Thursday’s pocket pivot move up through the 50-dma, using the 50-dma as a tight selling guide. Another example of the Ugly Duckling at work, this time in a new-merchandise situation.

 

GR121717-MULE

 

Switch (SWCH) may also be coming back to life after regaining its 10-dma six trading days ago and then posting a big-volume pocket pivot at the 10-dma on Friday. Volume may have been skewed by triple-witching options expiration in this case, but I don’t see why this can’t be tested here on the long side.

The trade is concrete and well-defined, while risk can be kept to a minimum by using the 10-dma as a tight selling guide. If Friday’s pocket pivot is indeed legitimate, then we might expect to see the stock quickly regain the higher 20-dema as well within the next few days, so this is something to watch for as well.

 

GR121717-SWCH

 

Take-Two Interactive (TTWO) is another example of a textbook short at the 50-dma that isn’t panning out that way. In fact, Friday’s action would constitute a moving average undercut & rally (MAU&R) long set-up using the 50-dma as your selling guide. As I’ve said repeatedly in recent reports, textbook shortable rallies after big price break often don’t turn out that way.

For that reason, one must always be open to a two-side interpretation depending on how the technical action plays out. Perhaps one of the giveaways here that TTWO was likely to regain its 50-dma is the fact that after rallying up to the 50-dma early in the week, it held tight sideways as it tracked along the underside of the 50-dma.

I have found that MAU&Rs will often occur after an oversold reflex rally then holds tight in a formation that is not exactly like an L-formation, but acts similarly in that it then turns into a wider cup or U-formation. This is like the “LUie” formation we see occur regularly in this market, but is strictly actionable on the basis of the MAU&R move back up through the 50-dma, as TTWO now is. With its cousin ATVI recovering strongly as well, TTWO is likely to follow suit, in my view.

 

GR121717-TTWO

 

Workday (WDAY) looks like another one of these Wyckoffian Retests in a busted former leader. The stock blew apart in late November and early December as it broke through its 200-dma, but then pulled an MAU&R move back up through the 200-dma that held.

That could have been viewed as a long set-up at that point, for one bold enough to take the short, and so far, it has worked. On Wednesday, WDAY pulled in on lighter, below-average volume in a Wyckoffian Retest and then rallied on Thursday and Friday. Friday’s action constituted a five-day pocket pivot at the 10-dma.

With NOW recovering strongly, and WDAY’s big-stock cousin Salesforce.com (CRM) also acting constructively along its 10-dma and 20-dema (you can check that chart for yourself, as it looks buyable as well), I would look for WDAY to make a move for its 50-dma.

 

GR121717-WDAY

 

While Square (SQ) did, in hindsight, post a climactic top in late November, I don’t think we can assume that it has necessarily topped for good. This would be more likely the case if we went into a longer-term market correction or bear market. If we don’t, then after -25.3% off its peak, SQ could easily start building the lows of a potential new base.

What we do know for sure is that my comments in the last report where I noted that, “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” were on the mark.

SQ has since rallied back up through the prior 35.90 low and is trying to stabilize along the 50-dma. Volume dried up on Friday to -31%, which was interesting to see on a triple-witching options expiration day. I know that some might try to see a head and shoulders formation on the daily chart, but that is not so evident on the weekly chart.

Objectively, SQ is currently in an active U&R long set-up after pushing up through the prior 35.90 low. From here, I’d like to see a move back up through the 50-dma at 37.29 as a clear MAU&R move that would also become actionable at that point.

 

GR121717-SQ

 

First Solar (FSLR) is still in an extended position, but should be watched for any pullbacks to its 10-dma at 66.45 as a potentially lower-risk long entry opportunity.

SolarEdge (SEDG) is also acting well but is slightly extended from its 20-dema. I would continue to look for lower-volume pullbacks to the 20-dema, now at 36.37, as lower-risk entry opportunities.

I don’t know if any of you “trading cowboys” took my advice on Arista Networks (ANET) Wednesday’s report and bought the stock on the pullback to the 20-dema, but it is working so far. The 20-dema at 223.67 remains your reference for buyable pullbacks.

Alibaba (BABA) is a good example of a textbook short at the 50-dma on the oversold reaction rally as it did pull back from there, providing a nice short-sale scalp. Now it has pulled back to the prior lows and is holding support at the prior U&R lows.

Volume has been heavy over the past two days, but notice that the stock closed well off its intraday lows and closed near the peak of its daily trading range on both days. That was supporting action along the lows. Friday’s action also came on a pocket pivot volume signature, but I’d like to see the stock retake the 10-dma as a long trigger for it to become actionable on the long side again.

 

GR121717-BABA

 

Shifting gears a little bit here within the realm of Chinese-related stocks, YY, Inc (YY) is hitting my radar screen as a constructively-acting name in the space. The company is another Chinese live-streaming platform that competes with Momo (MOMO), a former favorite name of mine that has since lost its mo-mo and fallen out of favor in the worst possible way.

YY, on the other hand, has continued to hold tight over the past few weeks and appears to be setting up along its 10-dma as volume recedes. I would also note that the stock is flashing “code blue” as all my indicator bars at the top of my custom HGS Investor Software chart view turn a nice, bright blue.

 

GR121717-YY

 

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 were looking a bit extended on Wednesday and perhaps vulnerable to a pullback at that time, as I wrote in my report of that day. We did in fact see a pullback on Thursday that looked a bit on the weak side, but the market recovered strongly on Friday as tax reform legislation looked to be on the verge of final passage.

Over the weekend, a final bill was settled upon, and we will see the House of Representatives vote on the alleged “tax reform” legislation on Tuesday, while the Senate will vote on Tuesday or Wednesday, according to the latest reports. Passage could trigger a big market rally, or perhaps a “sell-the-news” response.

My bet would be on a rally, and I have a handful of names in buyable positions and at the ready that I can act on to hopefully participate in any such rally that might carry into the long Christmas Day weekend.

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 positions in CSX, FB, and SQ, 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. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.