The Gilmo Report

December 20, 2017

December 20, 2017

The House and Senate both passed a final version of their much-hailed tax reform legislation, but the market didn’t seem too impressed. A strong gap-up open faded into the end of the day as the major market indexes sold off on lighter volume.

Objectively speaking, and setting all the political hyperbole and rear portal talking aside, the NASDAQ Composite Index pulled in today and filled the “rising window” formed by Monday’s gap-up move to all-time highs. Volume dried up as the index found support off the lows, but it stilled closed in the lower half of its daily trading range as it stalls off the highs.

 

GR122017-$COMPQ

 

While the pullbacks in the indexes today on lighter volume vs. yesterday’s volume levels may look constructive, there is another potential dynamic at work here. That is, that the gap-up open today did not find enough buying interest to continue higher as buyers stepped aside and sellers decided to turn the big tax cut hullabaloo into a sell-the-news session. Thus, we have the look of stalling off the peak on weak buying interest in the S&P 500 Index, which closed near its intraday lows.

Where we go from here is anyone’s guess, particularly ahead of the long Christmas holiday weekend. The answer to that, can only be found in the action of individual stocks, most of which are just chopping around within their patterns.

 

GR122017-$SPX

 

Will an historical tax cut drive an economic renaissance, creating millions of new jobs and sparking new waves of innovation? We shall see, but I would not make any assumptions with respect to any idea that this will drive a massive stock market rally. As always, let the stocks tell their story.

Gold has reacted positively to the tax legislation, perhaps based on the idea that it will blow a hole in the budget deficit. As I tweeted on Monday, we were watching my two favorite gold names, Kirkland Lake Gold (KL) and Franco Nevada (FNV), for possible undercut & rally moves.

We got precisely that in KL yesterday as it pushed up through the prior 13.56 low in the pattern and just kept on rallying from there. Notice that this move coincided with a move back up through the 50-dma, which would also qualify as a moving average undercut & rally (MAU&R) long set-up as well. Today the stock pushed further up toward its prior base highs on light volume. The proper entry, however, occurred yesterday and it’s now a matter of what the stock decides to do from here.

 

GR122017-KL

 

Franco Nevada (FNV) is in a similar position in its pattern with respect to an undercut & rally type of move. In this case we see the 76.76 low of October 3rd come into play here as the stock pushed up through that price point today on above-average volume. This remains within buying range of that U&R long set-up, using the 76.76 price level as a tight selling guide.

 

GR122017-FNV

 

The undercut & rally moves in these two gold stocks coincided with a similar U&R in the SPDR Gold Shares (GLD). This occurred over the past three days as the GLD rallied above the prior 119.78 low of early October. It is stalling a bit just below the 200-dma, so I’d view any decisive move up through the 200-dma as strong confirmation of a recovery in gold and gold-related stocks.

If you’re wondering whether the market views the tax cut legislation as something which will spark an economic renaissance and thereby bring in massive new tax revenues that will help bring the national debt and annual budget deficit down, perhaps gold has your answer. My view is that if we see the yellow metal, along with silver, rally sharply up through its 200-dma, then the verdict is that the tax cuts will only help to increase the national debt and, subsequently, the need for more fiat money-creation.

 

GR122017-GLD

 

As I’ve discussed in recent reports, I’m not necessarily interested in building positions in anticipation of a big intermediate bull trend developing. I’m mostly looking for trades as a way of playing any potential year-end rally, which right now looks to have a 50/50 chance of occurring. If such trades present themselves as Ugly Duckling set-ups, I’m more than happy to take advantage of them.

Over the weekend I discussed CSX Corp. (CSX) as one such trade. On Monday, the stock initially reacted to news of the CEO’s death on Saturday by gapping down. However, it found ready support at the 200-dma, which is what I was looking for if the move back above the 50-dma on Friday didn’t hold.

The stock bounced right off the 200-dma and turned higher, closing up on the day on strong buying volume. As I wrote over the weekend, this may seem like an odd situation to buy into, but the bottom line is that it worked. This underscores the Ugly Duckling nature of this market where opportunistic, contrarian approaches with respect to individual stock set-ups tends to work best.

Now the stock is pushing back up toward the highs of Friday’s gap-down “falling window” and right into the 10-dma. As I tweeted this morning, I might expect the stock to lose some momentum up here as the company seeks a replacement CEO, so taking profits on any position taken down in the region between the 50-dma and the 200-dma seems prudent at this point.

 

GR122017-CSX

 

Caterpillar (CAT) is seen as a certain beneficiary of a sharply lower corporate tax rate, so it continued rallying today as it made higher highs. It remains well extended from any lower-risk entry point. The last entry opportunity occurred at the 10-dma per my comments in the mid-week report of exactly two weeks ago.

I tweeted on Monday afternoon that General Motors (GM) had pulled a big undercut & rally move that day that also qualified as a strong-volume, bottom-fishing pocket pivot (BFPP). That led to further upside yesterday as the stock regained the 20-dema. Today it pulled in small and held tight along the 20-dema as volume dried up to -59% below average.

That would put it in a buyable position here with the convenience of using the 20-dema as a tight selling guide in case it doesn’t work. Optimally, however, one should have been watching the undercut & rally on Monday as it occurred in real time. Remember to keep an eye on stocks on your long watch list or on prior long watch lists as they plumb the lows of potential bases as this is often where a U&R move will occur.

 

GR122017-GM

 

Big-stock NASDAQ names don’t inspire me very much, since for the most part they’re all just chopping back and forth within their chart patterns. Buy ‘em on weakness near a moving average like the 20-dema or 50-dma and then trade ‘em back to the upside. That seems to be the gist of any action seen in these names.

Apple (AAPL) acts well, but overall is going nowhere as it tracks within what is now a six-week base. The stock is buyable within the base when it pulls into the 10-dma, as it did this morning, but that’s about it. Notice that this pullback comes after the stock broke out to new highs on Monday on slightly above-average volume.

In my view, however, the better entry if one was looking to buy a breakout would have been to pick it off on Friday’s trendline breakout which occurred on a strong pocket pivot volume signature. Otherwise, this pullback today was technically a lower-risk entry opportunity, with the idea of using the 10-dma as a tight selling guide.

 

GR122017-AAPL

 

Facebook (FB) is also chopping around, and it becomes buyable on pullbacks to the 20-dema or 50-dma.  Yesterday it was the 20-dema that provided intraday support, but that was broken today as FB dipped below the line and tested its 50-dma on light volume. Overall, FB has spent the last six weeks chopping around with zero upside progress.

Objectively, however, FB is buyable here at the 50-dma on this pullback using the line as a tight selling guide. No guarantee it will work, since a breach of the 50-dma could quickly morph the stock into a short-sale target at that point. Play it as it lies.

 

GR122017-FB

 

Amazon.com (AMZN) keeps tracking along its 10-dma, but is also going nowhere, and news of the  tax cut today didn’t inspire any upside movement in its stock price either. However, today’s pullback to the 10-dma came on light volume, so technically AMZN can certainly be bought here along the 10-dma, with the idea that it will perhaps move up and off the line before it moves below the line.

Netflix (NFLX) posted two five-day pocket pivots along the 10-dma and 20-dema last Thursday and Friday, but so far that hasn’t led to any significant upside movement. It, too, is just chopping around below its 50-dma, and yesterday dropped below the 20-dema on increased selling volume. I don’t see this as being buyable here as long as it remains under the 20-dema. But I suppose one could view it as shortable here just under the 20-dema, using it as a tight upside stop.

Nvidia (NVDA) is hanging tight along its 20-dema as volume dried up to -53% below average today, and might be prepping for a move up closer to its 50-dma. Whether it can clear the 50-dma in a show of strength and recovery is another question, however. But it might be good for a trade from here up to the 50-dma, using the 20-dema or the 10-dma as appropriate selling guides.

 

GR122017-NVDA

 

Overhead resistance from the left side of its chart turned out to be too much for Tesla (TSLA) to get through as it rolled over yesterday on heavy volume. This sell-off came on news that United Parcel Service (UPS) had reserved 125 of TSLA’s currently mythical, non-existent electric semi-trucks.

Apparently, the market has woken up to the silly hype upon which TSLA has relied to levitate its stock price. When you consider that in 2016 nearly 200,000 semi-trucks were sold, with about 100,000 of those coming from the largest global seller of such trucks, Daimler Freightliner, TSLA has a long way to go before it can compete with the proverbial big boys.

And, in my view, it is doubtful just how many of these mythical EV semi’s that TSLA can produce, which I’m assuming wouldn’t even begin to occur until it figures out how to manufacture enough of its also over-hyped Model 3. Thus, yesterday, as soon as the stock broke down on the five-minute “620” intraday chart, it was a short.

Today, TSLA did find support at the 200-dma, but from here I’d tend to look at any rally up closer to the 340 price level, should you see one, as a juicy short-sale opportunity. I still believe that a capital raise most likely in the form of a secondary stock offering is coming for TSLA, which has finely honed its ability to burn cash like no other company on the planet.

 

GR122017-TSLA

 

In the realm of new-merchandise plays, Roku (ROKU) continued moving higher Monday and yesterday after posting a strong pocket pivot breakout to new highs on Friday. Note, however, that upside volume declined sequentially on Monday and Tuesday as the stock lost momentum and then sold off today off the peak.

Today’s sell-off, however, looks constructive as it came on volume that was -35% below average, just barely low enough for a “voodoo” pullback. I would not be looking to buy into this pullback just yet as I’d like to see the stock meet up with its 10-dma firs, and preferably with volume drying up a little more. So, watch for that.

 

GR122017-ROKU

 

MuleSoft (MULE) failed badly on Monday after posting a strong pocket pivot last Thursday at the 50-dma on strong buying volume. Monday’s breach of the 50-dma also occurred on strong volume, which is not exactly what you’d like to see two days after a strong pocket pivot.

But this seems to be MULE’s nature, and it is often best bought when it looks more like an ugly MULE than a pretty one. There is a tricky way to look at this right here from the long side, however. That would be to look at this as a test of the prior 21.56 low in the pattern on a retest of the U&R move that occurred eight trading days ago on the chart. Therefore, brave trades can look to buy the stock here using that 21.56 low as your selling guide. I would, however, want to see the stock push back to the upside in short order.

 

GR122017-MULE

 

Switch (SWCH) continues to percolate, and a strong intraday move today appeared to be quashed by a weak general market. That resulted in a wide-ranging, stalling type of pocket pivot along the 10-dma. Note that over the past five days support has shown up along the 16.60-16.70 price level. Therefore, if I’m looking to buy into this pocket pivot today I would use that price area as my selling guide. Even better, low-volume tests of the 16.60-16.70 price area might offer lower-risk entry opportunities.

 

GR122017-SWCH

 

Apptio (APTI) was discussed in a blog post a couple of days ago as it tracks sideways following a pocket pivot about two weeks ago. The stock is basing well as it tracks tight sideways, but so far, no breakout to new highs has occurred. Today the stock pulled into its 10-dma and 20-dema on higher but still below-average volume.

This brings it in a better entry position, although we can see from the chart that support within the base, at least over the past month, has been more solid along the 22 price level. For that reason, I’d use that as my selling guide, although I’d prefer to pick up shares closer to the 22 level, if possible.

 

GR122017-APTI

 

Please note that any of these new-merchandise plays are only actionable IF the general market doesn’t start getting into further trouble here. If the market can find its feet and execute a year-end rally, then these may have some upside profit potential as vehicles with which to play such a rally.

Aerojet Rocketdyne (AJRD) was discussed yesterday in a blog post as a “voodoo” pullback that followed a prior pocket pivot last Friday. Yesterday, volume was drying up to voodoo levels on an intraday basis as the stock pulled into the 50-dma, prompting my blog post.

By the end of the day, volume had picked up relative to the prior day, creating some supporting action at the 50-dma. Today AJRD continued higher, and is now extended. I would look at any further pullbacks into the 50-dma on light volume as lower-risk entries from here, but the bottom line is that my blog post yesterday was timely and actionable.

 

GR122017-AJRD

 

For the most part, I’m operating with a small handful of long ideas since several others I discussed in my weekend report have gone somewhat incoherent. For example, Take-Two Interactive (TTWO) failed to hold its MAU&R set-up at the 50-dma and is now below the line. Is it a short, or a long? Hard to tell, and if I can’t figure this out, I don’t play.

But, those who thrive on the unorthodox might view this as a buyable pullback since the stock held support at the 10-dma, which is below the 50-dma. At the same time, volume dried up sharply to -56% below average today. So, adventurous types could test this on the long side, but be ready to bail out if it can’t hold the 10-dma.

 

GR122017-TTWO

 

Workday (WDAY) is also another one that isn’t showing any coherent action, and hence is not in a buyable or shortable position currently.

Square (SQ) posted a lower closing low as the 20-dema continues to serve as stiff upside resistance. Right now, I want to sit back and see if this doesn’t end up undercutting the November 9th low at 34.83. Then, perhaps, we will see an actionable U&R develop at that point, but I need to see it first.

 

GR122017-SQ

 

First Solar (FSLR) has dipped below its 10-dma but volume came in very light today. I would prefer to use a pullback to the 20-dema at 65.76 as a more opportunistic entry opportunity, assuming I can get it.

SolarEdge (SEDG) is extended and pullbacks to the 10-dma at 37.23 would be your next references for lower-risk entry opportunities.

Arista Networks (ANET) is extended from its 10-dma and 20-dema, and I’d need to see a constructive pullback to either moving average before I’d be interested in picking up shares at this point.

Alibaba (BABA) is still in an actionable undercut & rally set-up here as it backs down in a sort of complex “Wyckoffian Retest.” A test on the long side could be made here by buying shares and using the 172 price level as a tight selling guide. I would then want to see the stock quickly regain the 10-dma on increased volume as confirmation of a successful retest.

 

GR122017-BABA

 

YY, Inc (YY) has a nice move on Monday after my discussion of the stock as being buyable along the 10-dma in the weekend report. Now the stock is holding tight here along the rising 10-dma as volume dried up to -48% below average today. This makes the stock buyable here using the 10-dma as a tight selling guide.

 

GR122017-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.

As was the case over the weekend, I’m focusing on a small handful of names as a way of playing any potential year-end rally. So far, that rally seems to be in question after the sell-the-news reaction today following the passage of final tax reform legislation by the Senate and the House of Representatives. Apparently, the 1,000-point Dow rally the pundits were calling for has been put off, for now, and I would not be surprised to see the market come in a little more from here.

My view remains the same: This is a swing-trader’s market where I am not necessarily interested in building positions for an intermediate price move of longer duration. For that reason, stay alert and play things close to the vest, but don’t be afraid to take a shot if you see something actionable and in a lower-risk entry position.

The market may very well be at a crossroads here, and the ultimate resolution of that may not occur until we begin the New Year. Therefore, be patient, pick your shorts carefully, and don’t try to force things. Meanwhile, members should be on the alert for any blog posts, as I will use the live blog as a forum for putting out any real-time ideas, long or short, that crop up as we head into the long 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 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.