The Gilmo Report

December 24, 2017

December 24, 2017

The Senate and House passed their tax reform legislation and the President signed it on Friday, but the market just yawned. However, yawn was all it did as the indexes remain within short consolidations following their moves to all-time highs on Monday.

Illustrating the constructive consolidating action, the NASDAQ Composite Index is tracking sideways to slightly downward as it consolidates the Monday gap-up to all-time highs in constructive fashion. You can call all the tops you want, but so far, I don’t see any topping action, at least not in the major market indexes.

 

GR122417-$COMPQ

 

The S&P 500 Index looks pretty much the same. From a purely technical standpoint, we might also say that the NASDAQ and the S&P have both filled their prior Monday gaps. If we then infer that the bottom of the gap-up “rising window” is support, then the stage is set for a move to higher highs this coming final trading week of the year.

 

GR122417-$SPX

 

Gold and my favorite gold stocks, Kirkland Lake Gold (KL) and Franco Nevada (FNV), have continued to rally. KL posted a strong U&R long trigger at 13.56 on Tuesday, while FNV was the slower of the two as it waited until Thursday to rally back above its prior 76.76 low. Now both are in extended positions, although FNV could technically be considered with buying range of Thursday’s U&R buy signal, using the 76.76 price level as a reasonable selling guide.

More notably, perhaps, is the fact that the confirmation I was looking for in gold itself, where I wanted to see the SPDR Gold Shares (GLD) pushed above its 200-dma, occurred on Friday. The GLD cleared the 200-dma on higher volume, albeit below average, but the overall move qualified as a five-day pocket pivot.

Another five-day pocket pivot along the 200-dma, or a stronger pocket pivot through the 50-dma, would be constructive to see. For now, the GLD is wedged between its 50-dma and 200-dma, the former representing near-term resistance while the latter represents near-term support.

 

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Among my favored industrials, railroader CSX Corp. (CSX) ran into resistance at its 10-dma on Thursday as I surmised it would in my Wednesday report. In this position, I would look at re-entering the stock with the idea of using the 20-dema as a tight selling guide. On Friday, the company appointed its COO, John Foote, as its new CEO, resolving the vacuum created by the death of its prior CEO last weekend. Now that the bad news is out of the way, the odds of the stock retaking its prior highs near the 58 price level are at least reasonable enough to take a shot here.

 

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Caterpillar (CAT) is starting to look a little parabolic here as it continues to make all-time highs. What is interesting to note is that while CAT has continued moving higher throughout December, it has been joined by steel, copper, oils, and coal names. In most cases, by comparison, CAT’s move has been better.

So, while one could have been looking at any of these other industrial areas, all you needed to do was focus on CAT, which has the best earnings and sales growth of just about any of these other steels, coppers, coals, or oils. So, with industrials moving, why not just own CAT, which I first discussed after it broke out in early December (see the December 3rd report). It was buyable at that point and on the ensuing low-volume pullback to the 10-dma, but that was then, and this is now.

 

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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.

 

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Big-stock NASDAQ names are, in some cases, looking like they are setting up to move higher, which would make sense IF we see a year-end rally over the next four days. Apple (AAPL) is holding up along its rising 10-dma as volume declines following the prior week’s pocket pivot trendline breakout. Monday’s breakout attempt came on slightly above-average volume, but as is often the case in this market, the breakout didn’t carry higher from there. This four-day pullback as the 10-dma meets up with the stock looks like a reasonable entry position, using the 10-dma as a selling guide.

 

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Facebook (FB) hasn’t gone anywhere since regaining its 50-dma two weeks ago, but there is one notable subtlety in the pattern here that bears pointing out. Notice how despite dipping below the 50-dma over the past two days, on Friday the stock undercut a prior low in the pattern of about two weeks.

That low was at 176.60, and on Friday FB dropped to an intraday low of 176.23 before rallying to close at 177.20. That triggers an actionable undercut & rally move more typical of “Wyckoff’s Spring” using the 176.60 price level as a tight selling guide.

 

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Amazon.com (AMZN) is sitting at a lower-risk entry right on top of its 20-dema with volume drying up on Friday. If you like the stock for a year-end rally, or even more, then this is your entry spot, using the 20-dema as a tight selling guide.

 

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Netflix (NFLX) is holding tight along its 10-dma after posting two five-day pocket pivots at the 20-dema two Fridays ago and this past Monday. Can the stock rally into year-end? Perhaps, but the main issue here is that there is no discernible set-up, other than just buying it here along the 10-dma and then using that as your selling guide, with the idea that the stock has a shot at moving up to the 50-dma or higher.

Nvidia (NVDA) was hanging tight along its 20-dma but it appeared that a massive sell-off in Bitcoin on Friday might have affected the stock on an intraday basis. The company’s role in providing crypto-currency technology is limited, according to analysts, but the stock sold off slightly anyway as crypto-currency related names were hit across the board.

The sell-off didn’t last that long, and by the close NVDA was back above its 10-dma but closed just below the 20-dema. I still think the stock has a shot at rallying at least as far as the 50-dma, and I’d look for a move back up through the 20-dema as a long trigger. The other approach would be to take shares here and use the 10-dma as a tight selling guide.

 

GR122417-NVDA

 

Tesla (TSLA) broke below its 200-dma on Friday, but is holding up just above the 50-dma. This puts it in a sort of no-man’s land here between the 200-dma and 50-dma after a so-called bearish black cross occurred the prior week just after the stock (ironically) broke above the 50-dma on strong volume. The breach of the 200-dma, however, does provide a reference for shorting the stock here while using the 200-dma as a guide for an upside stop. In this case, we’d want to see the stock break below the 50-dma as confirmation.

 

GR122417-TSLA

 

Here comes Roku (ROKU) back into its 10-dma, which is my first reference for a buyable pullback. Volume dried up sharply, which is what you want to see on such a pullback, so this can be viewed as buyable here using the 10-dma as a tight selling guide.

One caveat is that given ROKU’s somewhat volatile tendencies, a pullback further to the downside is also a possibility, and something we should be alert to. So, if the stock can’t hold the 10-dma, then the 20-dema down at 47.20 becomes my next reference for a more opportunistic entry, should that occur.

 

GR122417-ROKU

 

MuleSoft (MULE) looked grim on Wednesday, but as I noted in my report of that day, there was a “tricky” long set-up here that was actionable. As I wrote on Wednesday, “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.”

The stock must have read my report, because the next day, Thursday, it gapped back up through the 20-dema. On Friday, it continued higher to clear the 50-dma on lighter volume. The way MULE acts, it seems like the best approach is to always look at buying the stock when it looks weak, assuming one can discern a buyable long set-up.

The optimal buy point occurred on Wednesday, but here the stock would still be considered buyable using the 20-dema as a selling guide. I’d want to see the stock hold and move further above the 50-dma from here, however, in any year-end rally. Overall, the stock appears to be basing, perhaps in preparation for a breakout.

 

GR122417-MULE

 

Switch (SWCH) is now percolating with a little more vigor. On Friday, it moved up to the 50-dma, following through on the three roundabout type of pocket pivots I discussed in my Wednesday report. In this position, I’d look for a low-volume pullback to the 20-dema as a lower-risk entry opportunity. Overall the stock looks to be improving here as it tries to round out the lows of its first post-IPO base.

 

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Apptio (APTI) is perhaps one of the prettiest bases I’ve seen in this market currently as it tracks tightly sideways in what is now a seven-week base. On Friday, the stock dipped into the 10-dma on volume that was -67% below-average, which puts it in a very buyable position here using the 10-dma or 20-dema as your selling guides.

 

GR122417-APTI

 

Cloudera (CLDR) is a recent IPO that came public back in late April. It had a short upside move that topped out in early June, and the stock plummeted back to the downside. It then mounted another rally back up toward its prior highs in the low 20’s, and again broke down.

It is now attempting to round out the lows of a second cup base as it moves above its 10-dma, 20-dema, and 50-dma, all of which are now turning to the upside. The past two weeks CLDR has built a very tiny cup-with-handle along its rising 10-dma, and is now meeting up with the line. This puts CLDR in a buyable position here using the 10-dma or 20-dema as selling guides. I note that over the past two weeks, support at the 20-dema has been more reliable, so that may be a more reasonable selling guide given the stock’s recent character.

 

GR122417-CLDR

 

Aerojet Rocketdyne (AJRD) is extended from its moving averages following its pullback to the 50-dma on Tuesday. The 10-dma has now crossed above the 50-dma, so pullbacks to the 10-dma at 31.45 would be your next references for lower-risk entry opportunities.

ServiceNow (NOW) is a puzzling situation, as it has now recovered from a sharp break it had back in late November and early December and broken out to new highs from a v-shaped formation. Now, the stock is pulling back from those highs but is doing so in constructive fashion as it drifts into the 10-dma with volume lightening up.

Among all the other enterprise-software/cloud names I’ve discussed in recent reports, such as Salesforce.com (CRM) or Workday (WDAY), NOW is the strongest-acting of the bunch. And while a breakout from a v-shaped formation is not something I would buy into, a normal, constructive consolidation and pullback from that v-shaped breakout is something I would look at buying.

From a fundamental standpoint, NOW is showing accelerating sales growth with 65% earnings growth in the most recent quarter. Therefore, this might be worth a shot here using the 10-dma as a tight selling guide.

 

GR122417-NOW

 

Moving to something a bit more unorthodox within the group, we can see that Workday (WDAY) is retesting its prior undercut low and the 200-dma as volume dried up all week long this past week. In early December, the stock bottomed out just below its 200-dma after a brutal sell-off at the end of November following earnings.

That move resulted in an undercut & rally through the prior late September low that took the stock up as far as the 20-dema. This current pattern is one I like to refer to as a “slingshot” as it drifts in slowly to retest the prior low and the 200-dma. The declining volume is like a slingshot being pulled back slowly, resulting in another sharp rally back up to resistance, which in this case would be the 20-dema or 50-dma.

Obviously, we can’t view WDAY as a shortable set-up here given its current position near support at the 200-dma, but it could easily jack to the upside in any year-end rally we see this week. Thus, this remains a two-side situation where I am willing to go long if this “Wyckoffian Retest” leads to an upside reaction rally from here.

 

GR122417-WDAY

 

My assessment of Square (SQ) in my Wednesday report turned out to be the correct one as the stock on Friday did undercut its prior November 9th low at 34.83 and then rallied to close at 35.14. On Thursday, the stock had undercut the 35.80 low and began to rally, but that did not hold up.

When playing these U&R types of set-ups, one can keep things close to the vest so to speak, by using the prior low as a tight selling guide. Usually, if I try to buy into a U&R as the stock comes up through the prior reference low, whatever that is, I want to see some upside price progress into the close. On Thursday, I did buy into the undercut and rally back up through the 35.80 low, but cut the stock loose given the weak close.

I tend to think that SQ was weak on Friday for the same reason that NVDA was, namely that crypto-currency-related names were weak on the day due to the sharp downside break in Bitcoin. SQ got a nice ride on the Bitcoin mania train in November when it announced that it would allow certain users of its Cash App to buy Bitcoin. That led to the climactic top and breakdown from there.

Friday’s gap-down move, while also a U&R move through the prior 34.83 low, looks like a downside breakout through a head and shoulders type of formation extending back to early November. In this market, however, I’ve noticed that such neckline “breakouts” to the downside tend to be near-term fake outs.

For that reason, I wouldn’t be looking to short the stock here as much as I’d be looking for a rally back up to the 50-dma based on this deeper U&R set-up. The stock may then become shortable on the rally up to the 50-dma, while at the same time Friday’s U&R sets up a possible long trade up to the 50-dma, using the 34.83 price level as a tight stop.

This is mostly a set-up for nimble swing-traders who will look to play a stock in either direction depending on the precise real-time action. In this market, recoveries from prior breakdowns can be more profitable than base breakouts, as stocks like NOW, TTWO, and others have proven.

 

GR122417-SQ

 

First Solar (FSLR) is in what I would call a two-weeks tight formation in an extended position. For this reason, I would let the stock continue to base here before looking for a new entry.  As I wrote on Wednesday, I would prefer to use a pullback to the 20-dema, now at 66.34, as a more opportunistic entry, should that occur.

SolarEdge (SEDG) got hit with a downgrade on Thursday, sending it back to its 20-dema, where it held support. On Friday, it held in a tight range as volume declined, putting it in a lower-risk entry position using the 20-dema as a tight selling guide.

 

GR122417-SEDG

 

Arista Networks (ANET) remains extended from its 10-dma and 20-dema, where it was last buyable, but it is holding squeaky tight in what is now a short handle to a short cup formation. This was another stock that took a massive hit in early December, only to find support at the 50-dma and then drift back to the upside.

While the tight action is certainly constructive, I would prefer to buy into a pullback and retest of the 10-dma if I can get it. Otherwise, buying here in anticipation of a possible breakout to new highs is possible using the 10-dma as a selling guide. Breakout buyers can just wait for a breakout.

 

GR122417-ANET

 

Alibaba (BABA) rallied off the lows near the 170 price level as I was looking for it to do per my discussion of the stock in Wednesday’s report. On Friday, it just barely cleared the 20-dema on light volume, which makes it look like it a possible short into the wedging rally.

The move back up through the 20-dema would trigger this as a long at the 20-dema while using it as a tight selling guide. If it can’t hold the 20-dema, then perhaps one could come back after this one on the short side. Remember that BABA was one of the few shorts that worked when it rallied back up into the 50-dma back in early December.

 

GR122417-BABA

 

YY, Inc (YY) moved up and off its 10-dma, which is what I was looking for per my discussion of the stock in Wednesday’s report. It is now slightly extended from the 10-dma, so anyone looking to enter the stock at this point would want to take advantage of a pullback to the 10-dma.

If you missed YY at the 10-dma, then perhaps Weibo (WB) gives you an alternate option since it is sitting at a lower-risk entry position here along its 10-dma, 20-dema, and 50-dma. Volume is drying up sharply as the stock consolidates the five-day pocket pivot move back up through the 50-dma that it had on Monday of this past week.

Notice how the breakout in early November led to a decent 20% move or so, and then the stock fell back into the base. What is important to recognize here is that while the breakout point was near the 105 price level, the pullback into the base found support in an area of price congestion just below the 50-dma.

That’s where the long upside price bar on the breakout originated, and so it also serves as a reference for support on the pullback and violation of the 50-dma that occurred in early December. So far, that 50-dma violation has been nothing more than a fake out, and WB is now setting up again along the 50-dma. I like this set-up, particularly since we can just use the 50-dma as a tight selling guide.

 

GR122417-WB

 

Chinese names took a lot of heat back in November, with many of our favored names, at least as they were earlier in the year, breaking down and moving into steady downtrends. A recent IPO in the space is Rise Education Cayman Ltd. (REDU) which came public back on October 20th at $14 a share.

The stock went into an immediate downtrend from there, most likely because of the general pressure on Chinese stocks at that time. Since then, REDU has bottomed and is now forming what looks like an initial IPO cup-with-handle base. On the weekly chart, not shown, no handle shows up yet, but we can see that in fact there is a two-week handle on the daily chart, below.

This is holding tight along the 10-dma as volume dries up, which puts it in a lower-risk entry position here using either the 10-dma or the 20-dema as your selling guide. There is still no 50-dma on the chart since the stock hasn’t been around for more than 50 trading days.

Those who would prefer to buy a breakout can simply keep REDU on their watch list as it works on this cup-with-handle base. REDU is a Chinese provider of English-language education and tutoring for children. It has big annual earnings estimates of $1.72 (999% growth) and $3.87 (125% growth) in 2017 and 2018, respectively.

 

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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.

The market’s ho-hum response to final passage and signing of alleged tax reform legislation likely indicates that the whole thing was already well priced into this market. Those calling for a massive rally in response to the new tax law have been proven wrong, so far.

But in my view, none of this takes away from what I consider to be the primary driver of this market, which is the massive amount of QE that remains in the system. Bitcoin mania aside, most stocks are just chopping back and forth within their patterns. As I review my screens and watch lists this weekend I see a lot of stocks that look to be setting up for potential upside. Meanwhile, I don’t see anything I find all that attractive on the short side.

So, as I see it, the action of stocks is telling us which way to lean in this market as we move into the final trading week of the year. As is probably obvious from this report, that would be the long side. Play it as it lies. Have a great holiday weekend, and to those who celebrate the upcoming holidays, Merry Christmas and Happy Kwanzaa!

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 APTI, 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.