The Gilmo Report

December 22, 2019

December 20, 2019 5:17 pm ET

The market completed eight-straight up days in a row on Friday in something I would call more of a Santa Claus Melt-Up than a Santa Claus Rally. What could be causing such unabashed ebullience? Many attribute the rally to the Phase One trade deal, but as I see it the deal is mostly a nothing-burger, although some see it as a truce more than anything else.

I tend to think that the market move is a function of the Fed’s latest round of QE. The chart below, taken from the St. Louis Fed’s website, shows the sudden and rapid increase in the Fed balance sheet that began in early September.



The NASDAQ Composite Index responded in early September with an initial rally, then it rolled over to test the early-August lows. From there, as the Fed further opened up the spigot, the market indexes took off. On Friday, the NASDAQ posted its eighth-straight up day in a narrow range on heavy options expiration volume. The action has the look of high-volume churning, and we’ll see if this has any significance as we move through the Christmas Holiday week.



I find it unconvincing that the market’s rally into this weekend is due to a strong economy, since precious metals have held their ground. The SPDR Gold Shares (GLD) continues to hold above its prior 137.80 U&R low, and on Friday poked its head above the 50-dma for the first time in nearly two months.



The iShares Silver Trust (SLV) continues to push higher after posting an undercut & rally (U&R) long entry signal when it came back up through the prior 15.55 low two weeks ago. It closed Friday above $16, posting a five-day pocket pivot that stalled at the 50-dma. Watch for a confirming move through the 50-day line.

While the GLD remains within about 1% of its prior 137.80 U&R low, the SLV is less than 4% above its own U&R low at 15.55. Technically, both are within buying range of their prior U&R trigger points, using those price points as selling guides.



Regardless of how one feels about the quality of this market rally, the fact is that it has been playable with most of the stocks I’ve discussed in recent reports. Apple (AAPL), not shown, has been the alt-currency stock of choice, and it logged its first close above $280 this past week. AAPL’s uptrend since it broke hard for three days straight back in early August has been so steady it’s almost boring.

AAPL’s new highs were matched by Tesla (TSLA), which broke above the $400 Century Mark for the first time in its history on Thursday. As you may recall, I first discussed TSLA as a bottom-fishing buyable gap-up (BFBFU) back in late September after it reported earnings. Aside from stuttering around the 20-dema earlier this month, the stock never looked back from there.

Technically, and according to Jesse Livermore’s Century Mark Rule, TSLA becomes buyable here while using the $400 price level as a tight selling guide. Of course, if the stock breaks below 400 then it could trigger as a short-sale target using Livermore’s Century Mark Rule in Reverse for the short side. Play it as it lies.



I wrote over the weekend that barring any serious market pullback, Netflix (NFLX) looked like it wanted to make a run for its 200-dma. I was wrong, however, since NFLX made a run past its 200-dma instead. The stock is of course now quite extended, but can be watched to see whether and how it sets up again, perhaps along the 200-dma.



Nvidia (NVDA), not shown, is quite extended after a two-week run that has lifted it about 15% off its 20-dema. Meanwhile, (AMZN) fails to impress after reversing on Friday near the highs of a short price range it formed this past week. The stock is stuck in no-man’s land between the 50-dma and 200-dma, and not in any kind of actionable position.



Most names that I like on the long side of this market are extended. One had to be opportunistic a few days ago when it came to most of these, as Facebook (FB) shows below. The U&R that materialized on Monday has taken the stock straight up to higher highs in a very sharp, V-shaped rally and out of buying range.



One might try their luck buying shares of Disney (DIS) which continues to cling to its 20-dema after pulling back from its recent all-time highs. Volume was about average on Friday, despite options expiration, so DIS sits in a buyable position using the 20-dema and perhaps an additional 1-3% of downside porosity as a tight selling guide.



Semiconductors have remained on fire since the Phase One U.S.-China trade deal was announced, and that has remained the case after an allegedly strong earnings report from Micron Technology (MU) on Wednesday. It and the other semis that I focus on as trading vehicles, Advanced Micro Devices (AMD), Applied Materials (AMAT) and KLA-Tencor (KLAC), are all extended on the upside and out of buying range, as can be seen on the group chart, below.



On the hunt for stocks that are still in buyable positions, we can see that DataDog (DDOG) is holding tight as it remains above near-term support along the 20-dema. This keeps it in a buyable position using the 20-dema or the 10-dma as selling guides depending on one’s risk preference.



Ping Identity (PING) is most definitely not in buying range after streaking to new highs on Friday. Volume was heavy most likely due to options expiration, but moot at this point since the last lower-risk entry opportunity was down at the 20-dema early last week.



CloudFlare (NET) posted a pocket pivot at its 10-dma on Friday thanks to options expiration. Nevertheless, one can take this at face value and view the stock as buyable here using the 10-dma as a tight selling guide.



Keysight Technologies (KEYS) dropped through its 50-dma on Friday, which triggers it as a short-sale using the 50-dma as a tight covering guide. That said, if the stock were able to regain the 50-dma, then that would trigger a moving-average undercut & rally (MAU&R) going the other way.

Therefore, while it is technically a short here, a move back above the 50-dma would trigger it as a MAU&R long entry using the 50-dma as a selling guide. Play it as it lies, in 360-degree fashion.



RingCentral (RNG) regained its 50-dma on Wednesday when it posted a pocket pivot move through the line on healthy volume.  That was also the MAU&R move that I discussed watching for in my Tuesday report. RNG has held tight along the 50-dma, as well as the 10-dma and 20-dema, since then.

It is currently slightly extended from the 50-dma so one should watch for small pullbacks to the confluence of the 20-dema and the 50-dma as lower-risk entries.



DocuSign (DOCU) continues to hold support at its 10-dma. This is pretty straightforward as a long entry spot using the 20-dema down at 72.13 as a maximum selling guide.



Coupa Software (COUP) briefly ran into resistance at the 50-dma on Tuesday, as I discussed that day, but quickly shrugged it off by pushing back above the 50-dma on Wednesday. That resulted in a MAU&R long entry signal at the 50-dma, negating the short-sale set-up at the 50-dma in 360-degree fashion. COUP is now extended.



Crocs (CROX), not shown, has moved to higher highs and is now quite extended after last being buyable at the 10-dma on Monday morning, as I discussed it would be in last weekend’s report. Meanwhile, I’m still eyeing Zumiez (ZUMZ) as a potentially opportunistic Ugly Duckling long entry here on this recent gap-fill following a failed BGU breakout.

I discussed watching for something opportunistic in ZUMZ in my Tuesday report given its position where it was filling the prior BGU gap-up rising window and trying to hang along the 50-dma. On Tuesday it closed below the line but found support off the intraday lows, then followed this up with a moving-average undercut & rally (MAU&R) long entry signal on Wednesday when it regained the 50-dma.

That led to a little more upside off the line, and ZUMZ has now pulled back into the 50-dma. Volume was heavy on Friday due to options expiration, but on its face the action can be viewed as somewhat supportive. Therefore, one could test this one on the long side here, using the 50-dma as a tight selling guide.



It’s been a long time since I’ve discussed my stock of the year, Roku (ROKU), in my written reports, although I have discussed it regularly in my video reports. Most recently, ROKU was a short at the 20-dema, and it has come down further since then and is now running into resistance at its 50-dma. The weekly chart below shows the entire move from when I first recommended the stock as a U&R long entry around 29-30.

The stock then went up six-fold from there, finally topping out at 176.55 in early September. A rapid three-week break off the highs followed by a nine-week move back up toward those highs formed a punchbowl-like formation that resolved as a Punchbowl of Death or POD short-sale set-up. ROKU is now dangling beneath its 10-week moving average.



The daily chart shows things on a more granular level, including the short-sale entry at the 20-dema that I discussed in my video report nearly two weeks ago. ROKU broke lower from there before undercutting the prior December 2nd low at 132.40 and then rallying from there. It has since run into resistance at the 50-dma, but the prior U&R long entry at 132.40 remains in force.

If the general market continues to rally, then there’s always the possibility that ROKU could move back above the 50-dma, triggering a MAU&R long entry at that point. Technically, right here, right now, ROKU looks like a short on any rally back up into the 50-dma, but I would be prepared to play this as a 360-degree situation and be ready to move with it long or short depending on how things play out from here.



I’ve discussed Spotify (SPOT) in recent video reports, and the stock has slowly edged higher since I first mentioned it. Note the moving-average undercut & rally (MAU&R) long entry signal down at the 200-dma in late November.

Now SPOT is pulling into its 10-dma as volume dried up on Friday to -46% below average. This puts the stock in a lower-risk entry position using the 10-dma as a tight selling guide. If it cannot hold the 10-dma, then watch for the 20-dema to come into play as a potentially lower-risk and opportunistic entry on any deeper pullback.



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.

This week the place to be was in big-stock NASDAQ names NFLX and TSLA, both of which had sharp upside moves. Only TSLA, however, is within buying range of the $400 Century Mark. Aside from that, there is a great deal of melting-up going on, along with the usual mix of choppy action within well-defined price ranges among individual stocks.

So, even with the indexes making new highs, the situation on a stock-by-stock basis remains one of looking for set-ups that offer lower-risk entries and then letting them work from there. Meanwhile, one need only set trailing stops on long positions that are working and let things play out into year-end.

As we move through the holiday season over the next two weeks, the melt-up may continue, so remain aware of where your best, lower-risk entries lie among those names on your watch lists. If sellers suddenly show up, then knowing where your trailing stops are should keep things safe and sane.

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 SLV, though positions are subject to change at any time and without notice.