The Gilmo Report

December 24, 2019

December 24, 2019 1:17 pm ET

The Santa Claus Melt-Up has remained in force, with varying results from individual stocks underneath the surface. If you’re in the right names, however, there has been plenty of money to be made. The NASDAQ Composite Index tucked itself to bed today with another new closing high, its tenth in a row to be precise, and visions of sugar plums no doubt dancing in its head.

Heading into the end of the year, I don’t see any big reasons for the market to sell off. However, given its extended upside state, a profit-taking pullback could always come into play. But, barring some sort of critical news between now and New Year’s, the indexes remain in a buoyant melt-up trend, for now. Nevertheless, stay alert, because this market has a habit of pulling the rug out on investors just when things look their rosiest.

 

 

Despite strong holiday sales and a stock market that keeps on rolling higher, precious metals have sprung to life over the past few days. The iShares Silver Trust (SLV) posted a pocket pivot as it gapped up through its 50-dma yesterday and is now extended.

Of course, members who wanted to be long the SLV know that the proper entry point came much lower in the pattern when it posted its latest U&R long entry at the 15.55 price level.

The SPDR Gold Shares (GLD), not shown, is tracking along with silver as it also gaps above its 50-dma and moves higher. The last buy point, however, was down around the 137.80 U&R low, as I’ve discussed ad nauseum in recent reports. What is most intriguing about the action in precious metals is that they are coming while stocks are rallying and on no apparent news.

 

 

The movement in precious metals has also brought precious metals stocks to life. Here we see Franco Nevada (FNV) posting a pocket pivot yesterday, followed by a move through the $100 Century Mark today. I don’t like to chase strength in either the metals or metals-related stocks, since the best lower-risk entry on FNV came on the pullback to the 50-dma yesterday.

But the Century Mark buy signal is also in effect, with the idea of buying here and using the $100 price level as a tight selling guide. In general, however, the momentum in precious metals and their related stocks is impressive if not intriguing because of the fact that there is no news to account for the moves.

 

 

Apple (AAPL) and Microsoft (MSFT), Netflix (NFLX), and Nvidia (NVDA), all not shown on charts, continue to track higher (recall my view that AAPL would likely hit $300 if the market kept rallying – it closed today at 284.27). They are now quite extended to the upside, while Alphabet (GOOG) is losing traction at its 10-dma.

The stock has closed two days in a row below the 10-dma, which isn’t all that unusual for the stock. Now it becomes a matter of whether a pullback into the 20-dema holds up as a lower-risk entry or whether GOOG pushes lower to test the 50-dma.

 

 

Amazon.com (AMZN), not shown, is trapped in no-man’s land between the 50-dma and 200-dma down in the lower reaches of its pattern. But among big-stock NASDAQ names, Tesla (TSLA) is the big star. Jesse Livermore likely would be proud to see that the stock has acted in the manner more typical of how Century Mark Rule buy set-ups used to work.

Livermore used to say that when a stock pushed above a Century Mark it would generally rally “20-30 points in a jiffy.” I would have to say that TSLA’s move since clearing the $400 Century Mark last week has encompassed exactly that. The stock closed at 425.25 today, moving 25.25 points past the $400 price level in what is most certainly “a jiffy.”

 

 

Facebook (FB) also acts well after clearing the $200 Century Mark again (the last attempt occurred in July). But the real buy point came on the U&R and the ensuing moving-average undercut & rally (MAU&R) move seven trading days ago on the chart.

In this position, we can wait and watch for pullbacks toward the highest moving average on the chart, the 10-dma. Those may offer lower-risk entries from here, given the stock’s upside extension since the prior U&R entry point down around 195.

 

 

Disney (DIS) has dipped below its 20-dema, which technically triggers it as a possible short-sale target using the 20-dema as a covering guide. However, there is a 360-degree aspect to DIS’ set-up here since it is also posting a U&R long entry signal after undercutting and rallying back above the 145.05 low of December 10th.

One can therefore play this as a long here, using the 145.05 price level as a tight selling guide. Within the context of a market pullback, however, it could play out more as a short here using the 20-dema as a covering guide. Play it as it lies.

 

 

The four semiconductors that I follow closely are all quite extended and out of buying range. Some are so extended they’re looking a bit double-toppy, like Micron Technology (MU) and KLA-Tencor (KLAC), as can be seen on the group chart below.

Applied Materials (AMAT) is tracking along its 10-dma while Advanced Micro Devices (AMD) continues to drive higher on strong volume for a half-day of trading. None of these are in buyable positions, although AMAT is near its 10-dma, which could qualify as a lower-risk entry spot if one uses the 10-dma or 20-dema as tight selling guides.

 

 

If one is looking for a semiconductor that is in a better entry spot, then perhaps Qualcomm (QCOM) fits the bill. I’ve discussed this one previously in my video reports over the past three months. It has moved higher since then, including a gap-up move that went nowhere after earnings back in early November.

Now QCOM is meeting up with the 10-dma as it moves tight sideways within the handle area of a short cup-with-handle. Volume dried up sharply today, even considering the half-day of trading, so this puts it in a lower-risk entry position using the 10-dma or 20-dema as your selling guides, depending on risk preference.

 

 

DataDog (DDOG) is remains buyable along the 50-dma on pullbacks. Here we see it pulling back over the last two days as it comes in for a retest of the line. This is where you watch for a lower-risk entry opportunity as close to the line as possible, using it as a selling guide if necessary.

 

 

CloudFlare (NET) is also coming in to test its 50-dma with volume drying up. This can be used as a lower-risk entry point with the 50-dma as a tight selling guide.

 

 

RingCentral (RNG) acts well here as it holds tight just above its 20-dema with volume drying up. This puts it in a lower-risk entry position using the 20-dema, 10-dma, or 50-dma, in that order, as tight selling guides. Note that with most of these stocks, I consider volume to be light today if it’s less than half of normal, roughly.

 

 

DocuSign (DOCU) sits in a lower-risk entry position here along the 10-dma as volume dried up to -72% below average today. One can then use the 10-dma or 20-dema as a selling guide depending on how tight one wishes to keep their risk management on this one.

 

 

Coupa Software (COUP) acts like it wants to go higher as it settles into the 20-dema following a U&R at the prior 136 low of December 3rd.  It has since cleared the 10-dma, 20-dema, and 50-dma. The pullback into the 20-dema offers another lower-risk entry spot using any of the three aforementioned moving averages as your selling guide.

 

 

Keysight Technologies (KEYS) teeters on the verge of becoming a full-blown, late-stage, failed-base (LSFB), short-sale target here, but the action remains volatile around the 50-dma. Clear resistance, at least in the near-term, appears to lie at the 10-dma, so one could view rallies into the 10-dma as potential short-sale entries.

Otherwise, for this to become a long idea, it would have to clear the 10-dma on a moving-average undercut & rally (MAU&R) type of move. With the market rallying steadily for the past two weeks, I would have expected this to occur sooner, so the general market may simply be helping to hold this thing up for now. A market pullback could see KEYS push lower in that case.

 

 

With Crocs (CROX) extended, right now you’re watching for pullbacks to the rising 10-dma at 38.29 as possible lower-risk entries. Meanwhile, Zumiez (ZUMZ) is holding support along its 50-dma after posting a moving-average undercut & rally (MAU&R) long entry signal last Wednesday at the 50-dma.

Volume dried up today to -63% below average, which is fairly dry for a half day of trading. Also consider that when interpreting volume levels on a shortened trading session like today one can also assume that a little more volume will be compressed into the half day, inflating the levels slightly.

 

 

Over the weekend I discussed the idea that if the market keeps rallying, then my Stock of the Year, Roku (ROKU), might try to trigger a moving-average undercut & rally (MAU&R) long entry at the 50-dma. That’s what we saw today, so one could view this as actionable on the long side using the 50-dma as a tight selling guide.

The flip side, or rather the 360-degree view here, is that if ROKU were to reverse and break back below the 50-dma it could potentially morph back into a short-sale target at that point. Play it as it lies.

 

 

Spotify (SPOT) continues to hold tight along its 10-dma, which puts it in a lower-risk entry position using the 10-dma as a tight selling guide. The stock has been in a steady uptrend since mid-November, so another way to approach this is to hang back and take the opportunistic approach of waiting for any possible pullback into the 20-dema at 147.59.

 

 

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.

Yesterday we saw durable goods growth ex-transportation come in at 0% while the headline number surprised to the downside at -2% vs. expectations of a positive 1.4%. As has been the norm, economic data remains extremely inconsistent with the idea of a booming economy.

But the primary force behind this market, in my view, remains the Fed and the current and rapid expansion of its balance sheet in response to tight conditions in the overnight repo market. Remember that such imbalances in the overnight repo market began in 2007 and 2008 and were precursors to the insolvency of Bear Stearns in March 2008 and the ensuing financial crisis in late 2008.

In this light, I find the movement in precious metals to be cautionary. At the very least, I believe they indicate that the Fed will be pushing more QE in 2020, despite what they currently say. This will certainly be bullish for precious metals, and it is likely bullish for stocks, unless, of course, the need for more QE results from a severe financial or other systemic crisis.

For that reason, know your out points, including trailing stops and absolute stops on long positions. As always, I assume nothing going into New Year’s, I simply watch the stocks. Play it as it lies. Happy Holidays, Happy Hanukkah, and Merry Christmas!

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.

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