The Gilmo Report

December 2, 2018

December 1, 2018

The market continued to rally into the weekend on a higher-volume, month-end move in anticipation of something significant taking place when Chinese President Xi and President Trump meet for dinner on Saturday. The Dow Jones Industrials pushed further beyond its 200-dma, which it cleared on a follow-through type move on Wednesday, before running right into its 50-dma.

 

GR120218-$INDU

 

The S&P 500 Index also pushed higher, but instead ran into its 200-dma as it lags the Dow. So far, Wednesday’s follow-through is holding up, but in my view the true, discernible market turn occurred on the prior week’s successful test of the prior late-October lows.

 

GR120218-$SPX

 

That test of the lows saw both the Dow and S&P hold above the lows, while the NASDAQ Composite Index issued a more concrete signal on an undercut & rally move back up through those lows. All of that occurred during a relatively ugly Thanksgiving holiday week that started out with a big market plunge two Mondays ago.

But when things look that Ugly, the Ugly Duckling often shows up, and this time it wasn’t an overcooked turkey. So, as we turn into the final trading month of the year, the indexes continue to rally off last week’s lows in fine Ugly Duckling style, with a follow-through as a side dish.

 

GR120218-$COMPQ

 

At least with respect to the Dow and the S&P 500, the indexes are running up into potential resistance at their 50-dma and 200-dma, respectively. The NASDAQ, which is the laggard among the three, still has some room to run before it gets as far as its 50-dma, which this week crossed below the 200-dma.

As the indexes come up into potential resistance, however, it will still be all about the stocks. Amazon.com (AMZN) was discussed in last weekend’s report as an apt vehicle for riding any NASDAQ rally off the lows following its undercut & rally move during Thanksgiving week that mimicked the NASDAQ’s same move.

The stock has tracked well with the rally this week and was moving higher even before Wednesday’s follow-through. This is why I felt it was possible to key on these U&R set-ups before any follow-through and is why I consider follow-throughs to be a bit on the late side. Now AMZN is pushing up into its 200-dma as it consolidates with volume declining. We’ll see if it can clear the line next week, but so far so good with its Thanksgiving Week U&R.

 

GR120218-AMZN

 

Microsoft (MSFT) is in a much better position than AMZN but had the same type of U&R move that occurred in sync with the general market lows and the NASDAQ’s own U&R. After Wednesday’s trendline breakout, the stock is hanging tight along the 50-dma with a slight show of volume support at the 50-dma on Friday. It remains in a buyable position here along the 50-dma, while using the line as a tight selling guide.

 

GR120218-MSFT

 

Netflix (NFLX) has extended Wednesday’s undercut & rally move as it runs into the 20-dema. The stock remains deep down in its pattern and ran into resistance at its 20-dema on Friday as volume declined. It is not in a buyable position but was on Thursday when it came in slightly to retest the 10-dma and the prior late-October low.

 

GR120218-NFLX

 

The FTD Four all continue to move as an odd, motley wolf pack given that their industry groups vary, but they all move right in sync as they mimic one another. Twilio (TWLO) has followed through on Wednesday’s re-breakout move by pushing up towards its prior all-time highs. Volume has been declining in a wedging move that looks a bit like a double-top.

For that reason, I be looking for some sort of pullback to correct this wedging action. Such a pullback could dip below the prior 88.88 new-high buy point and test the 10-dma at 85.22, so should be watched for as a potential lower-risk entry opportunity, should it occur.

 

GR120218-TWLO

 

Tableau Software (DATA) looks just like TWLO as it also follows through on Wednesday’s re-breakout. As I discussed on Wednesday, the fact that the re-breakout came on below-average volume was not an issue for me, since I have found that such re-breakouts don’t necessarily have to come on strong volume to work. This is one of the paradoxes of this market, but one that is clear to those who truly understand how this market works.

This is not a wedging move to new highs since volume has picked up over the past two days, but I do consider the stock to be slightly extended in this position despite being within 5% of the new-high breakout point at 118.08. From here, a pullback toward that price level, even lower to the rising 10-dma, now at 113.20, would be the lower-risk option if we were to see such a pullback.

 

GR120218-DATA

 

Etsy (ETSY) mimics both TWLO and DATA as it posted an all-time closing high on Friday as DATA did but is now testing its prior highs on below-average volume, as TWLO is. All three of these stocks exhibit extreme v-shaped moves off the lows where the true buy point was on the gap-fills and U&Rs along the lows that occurred in sync with the NASDAQ Composite doing the exact same thing.

I was asked how one plays these U&R types of moves when they tend to occur just as things are looking quite ugly. The trick is to take smaller positions, while using the lows of the gap-down window of the prior low on the U&R set-up as tight selling guides. The idea then becomes to use the sharp upside price velocity that usually ensues when these U&Rs work to your advantage. The smaller position limits risk in case they fail.

ETSY cleared its 53.25 re-breakout point on Friday, but volume was below average as it now tests the prior absolute highs. In this v-shaped position the stock looks a bit double-toppy, as do the rest of the FTD Four. So I’d look for some sort of pullback from somewhere between the 50-51 price area and the 10-dma at 48.02 as a more opportunistic entry.

 

GR120218-ETSY

 

The fourth member of the FTD Four, Planet Fitness (PLNT), illustrates the double-top pullback type of action I’m looking for in the other three. It posted a re-breakout on Wednesday but has since dropped back below the breakout point after testing its prior highs in a double-top type of formation. I would emphasize that I don’t necessarily consider these double-tops in the sense that they signal imminent downside breaks, only that these v-shaped moves are near-term extended and at the very least in position for a normal pullback.

Whether such pullbacks remain orderly and buyable, or whether we do in fact see these stocks break down is unknown. For now, with the market trending higher off the lows of last week, we will assume that any pullback is likely to present a lower-risk entry opportunity until and unless we see evidence to the contrary. Obviously, if we saw all these names break down and breach their 20-demas or 50-dmas, they could again come into play as late-stage breakout types of short-sale set-ups.

For now, however, there is no evidence of this given that the stocks remain well above these moving averages and in re-breakout territory. That, however, doesn’t mean they can’t have some festive pullbacks from here, and that’s what I’m watching for at this point since I consider the stocks to be near-term extended.

 

GR120218-PLNT

 

Canada Goose Holdings (GOOS) didn’t hold up on Wednesday’s re-breakout move but the stock only pulled back slightly on what was also a small down day for the general market. The dip on Thursday took the stock just below the 65.82 new-high buy point as it closed at 64.92. It then broke out again on Friday as volume increased to above average.

In this position, breakout buyers can act here given that the stock is obviously within range of the 65.82 breakout point. However, my preferred entry would have been at the 20-dema on Wednesday when the stock also tested the prior buyable gap-up (BGU) low at 61.76. I still tend to think that pullbacks to the 20-dema are the lower-risk option with GOOS, which remains a bit volatile here as it swings around in a three-week range since its mid-November BGU after earnings.

 

GR120218-GOOS

 

Chinese names took some heat on Thursday when President Trump expressed his view that he was under no pressure to make a deal with Chinese President Xi at dinner on Saturday. This sent most Chinese names to the downside but hopes of some sort of rapprochement were kindled again when U.S. Trade Rep Robert Lighthizer said that he would be surprised if something didn’t come out of that dinner.

This helped stabilized the Chinese names, among which is my favorite, Bilibili (BILI). While the stock did pull a decent low-base range breakout on Wednesday, it still tends to best be bought on pullbacks to support. In this case, Friday’s pullback to the 10-dma was a better lower-risk entry spot as opposed to trying to chase the breakout.

 

GR120218-BILI

 

With the weekend dinner between Xi and Trump still yet to occur, at least at the time of this writing, I consider owning Chinese names something of a binary-outcome gamble. If something meaningful comes out of the dinner, then the stocks will no doubt jack on Monday. If not, then they will likely gap down. Since I don’t like to play this type of game, I prefer to sit back and wait to see what happens.

Most Chinese names remain way down in the dumps, and if there is some huge upside trend about to develop, it isn’t likely to all occur on one day. Therefore, even if we do see Chinese names gap up on Monday, there would no doubt be long entry spots to be found along the way, if in fact such gap-ups were the precursors to strong upside continuations.

It is interesting to note that the biggest of the big-stock Chinese names, Alibaba (BABA), bottomed on a big U&R type move back in late October, when U.S. markets posted their first low. As the indexes retested those lows, BABA continued to chop its way higher. On Friday, it blasted to higher highs on a strong-volume move.

Whether this gets cut off at the knees, or whether the stock’s continued uptrend since the late-October lows is an early signal as to how this U.S.-China trade scuffle will eventually resolve is unknown. It is, nevertheless, an interesting development to take note of from a purely technical perspective.

Other Chinese names on my radar which have been trying to turn off recent lows include MOMO, HTHT, PDD, WB (which posted a pocket pivot at its 50-dma on Friday), IQ, and HUYA (both had BFPPs at the 10-dma on Friday), So you can put those on your brief watch list of Chinese names. I’ll be posting a new video report on Sunday once we know the outcome of Saturday’s dinner meeting between Trump and Xi.

 

GR120218-BABA

 

You might consider adding recent IPO and Chinese electric car maker Nio (NIO) which posted a strong-volume low-base range breakout a couple of weeks ago. It has since tracked sideways as it pulls into the 10-dma with volume drying up to –44% below average on Friday. This puts it in a lower-risk entry spot using the 10-dma as a tight selling guide.

 

GR120218-NIO

 

Hopefully it won’t end up like Viomi Technology (VIOT) which gapped up after earnings on Monday and then reversed on heavy volume. Since the original entry was just above the $8 price level, that would have been your selling guide. With Friday’s move to lower lows on higher volume this at best needs to set up again, maybe on an undercut and rally move, but that is currently unclear.

What strikes me as a bit surprising here is that VIOT reported earnings of 39 cents a share on revenues of $82.31 million vs. estimates of $72.8 million. Go figure. The stock is thinly traded, so I’m not sure if this was some sort of sell-the-news situation since forward guidance was in line. Therefore, I will be keeping an eye on this to see if it sets up again.

 

GR120218-VIOT

 

Shopify (SHOP) cleared its prior November highs on light volume Friday but is not a name I would consider buying in this position. While it is off the table as a short for now, if the general market were to roll over and fail on this latest follow-through attempt this would be a go-to short for me on a breach of the 50-dma.

 

GR120218-SHOP

 

Somebody asked me on Friday whether Twitter (TWTR) was dead. If it is, it’s still flopping around in the final throes of its life like a fish that’s just been caught and heaved onto the deck of fishing boat. I don’t think I’ve ever seen a stock pull three successful U&R moves through a prior low, in this case the stock has undercut and rallied back above low of the prior late October post-earnings bottom-fishing buyable gap-up (BFBGU) and the 50-dma.

The frustrating thing here is that if one was using that 30.76 low as a selling guide for the first two U&Rs, you’ve been stopped out and shaken out twice! On Friday, TWTR pulled another U&R, holding above the 50-dma and closing positive on the day. Perhaps its only potential saving grace is that since this is the third U&R attempt over the past month, and the first two went nowhere, then maybe the Rule of Three tells us that this one will work. Play it as it lies!

 

GR120218-TWTR

 

I’m not sure what causes Acacia Communications (ACIA) to fall out of bed on Thursday as selling volume ballooned, but the move just took the stock to the 50-dma. It then found support at the line and the top of the prior base on Friday and rallied. I don’t care much for the way my indicator bars went from Code Blue to nearly a full Code Red, but this may be a China-dependent name, therefore something to watch depending on how the China situation develops over the weekend.

 

GR120218-ACIA

 

We witnessed a big wolf pack move this week after three big-stock cloud names reported earnings. In my video report of last weekend, I discussed the upcoming earnings reports for these stocks that were expected during the week, and that these should be watched for actionable moves, one way or the other. The interesting thing here is that there is some similarity between all these names as they have exhibited, at least over the past couple of days, the mark of a wolf pack.

Salesforce.com (CRM) was the first to report on Tuesday after the close, leading to a gap-up move the next morning that opened above the 200-dma. It then spun to the downside, breaching the 200-dma, at which point it looked more like a shortable gap-up than a buyable one. But, with the market rocketing to the upside later in the day, CRM found its feet and pushed back above the 200-dma and beyond its opening price.

With the opening and closing prices so close together within a wide daily price range, this is the type of buyable gap-up (BGU) I call a spinner, because it essentially spins around all day. By the close, CRM had pushed right into its 50-dma, which presented near-term resistance on Thursday. But on Friday the stock was able to clear the line as volume picked up slightly.

I am now interested in seeing how this acts along the 50-dma. If it holds tight, then it could set up to move back up toward the highs. If it were to reverse back through the 50-dma on strong volume, then it could trigger as a short-sale at that point. Right now, the evidence is more bullish than bearish, however, and this should be monitored as such until further evidence presents itself.

 

GR120218-CRM

 

Workday (WDAY) reported on Thursday after the close and gapped up through near-term price resistance that had formed just below the $150 price level. It opened at 155.15, posted an intraday low at 152.01, and then rallied on a breakout through the prior left-side base highs. WDAY is more of what I call a streaker BGU, because its opens near the lower part of the daily price range and then closes significantly higher.

Technically, this is on the cusp of being extended as a breakout, so I would be more interested in the stock if it pulled down closer to the BGU low at 152.01. That said, you are coming straight up from the bottom of an arguably later-stage base, which I would emphasize does not mean a final late-stage base. Late-stage is as late-stage does, in my book, but a move straight up from the lows in just eight days may be near-term climactic.

For this reason, I would expect some consolidation here as it perhaps tests the area between the new-high price point at 157.12 and the lows of the BGU range.

 

GR120218-WDAY

 

Splunk (SPLK) also reported Thursday after the close and gapped above its 200-dma, opening at a price of 108.99. It then spun all the way down to an intraday low of 103.83 before finding its feet and closing at 112.70. If one is trying to act on this as a BGU, it’s very difficult to handle this type of action. The reality is that the stock was a short at the open, and the ensuing break below the 200-dma was a bearish sign intraday.

But the inherent volatility combined with velocity that we see in this market among both the indexes and leading stocks is always a force to be reckoned with. Sometimes it can just end up whipsawing traders on both the long side and the short side, even on the same day. SPLK is a good example of this.

Is it an actionable long? Near-term it strikes me as somewhat extended. If you study SPLK and WDAY’s daily charts, you will notice that they were both U&R long set-ups the prior week when the NASDAQ also posted a U&R move. So, you must ask yourself, where was the true lower-risk entry point? Crazy stuff for a crazy market, but for now these three names go on my long watch list, with any possible failures going forward quickly pushing them back onto my short watch list!

 

GR120218-SPLK

 

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.

As I write early on a Saturday morning, the outcome of the dinner meeting between Presidents Xi and Trump is unknown. If I were to guess, it may turn out to be nothing more than a red herring, as in much ado about nothing. But if it creates a pullback on Monday, then it may turn out to be a buyable one, depending on how it plays out.

This is, of course, sheer speculation on my part, but as I see it the technical action on its face is what we need to pay attention to right now, and the market is in rally mode. I am scouting the market for possible U&R set-ups as we move through December and will cover my findings in this weekend’s Gilmo Video Report (GVR).

Whether December presents a smooth upside trend right into New Year’s Eve is an open question. This has been and remains a difficult market, with the usual volatility and velocity, what I call a v-squared condition, still able to help or hinder, depending on what side of it you are on at any particular moment in time. Again, keep it simple and keep it safe.

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 NIO, 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. ©2008-2019 Gil Morales & Company, LLC. All rights reserved.