The Gilmo Report

December 27, 2017

December 27, 2017

The market is off to a slow start to the final week of trading in 2017 as trading was relatively sleepy. Among names I’ve discussed in recent reports, however, there were some fireworks today, which I’ll get to in just a bit. Meanwhile, the major market indexes may just end the year with a whimper.

Yesterday, the NASDAQ Composite Index was dragged down by NASDAQ 100 Index components on news of weaker-than-expected Apple (AAPL) iPhone X sales. That took AAPL and anything related to AAPL down hard, sending the NASDAQ Composite down below its10-dma early in the day. By the close, the index managed to hold just above the line on lighter volume.

Today was more or less the same story, with the index closing just above the 10-dma on higher volume. The move has the look of stalling and churning around the 10-dma, but overall things were relatively quiet.

 

GR122717-$COMPQ

 

The S&P 500 Index is tracking tight sideways along its 10-dma and looks fine. Volume was slightly higher today as well, but as with the NASDAQ, NYSE volume was well below average, giving things a very sleepy feel. We’ll see if the indexes can gain any more upside velocity over the next two days as we finish out the 2017 trading year.

 

GR122717-$SPX

 

Gold has continued to move higher since pulling an undercut & rally move back up through the prior October 6th low, as I’ve discussed in recent blog posts and repots. My two favorite gold stocks, Kirkland Lake Gold (KL) and Franco Nevada (FNV), have followed gold higher, with KL pulling into its 10-dma yesterday on a crazy move that resulted in a big bounce off the 10-dma and back up to the recent highs.

FNV is currently sitting along its 20-dema and holding tight. This puts it in a buyable position along the 20-dema while using it as a tight selling guide. It was last buyable on the U&R move back up through the prior 76.76 low of October 3rd. It is now back up through another low in the pattern, the 78.20 low of October 27th.

Meanwhile, the SPDR Gold Shares (GLD) gapped up through its 50-dma yesterday on a bottom-fishing type of pocket pivot move.  It is now extended above the 50-dma, but of course was last buyable after rallying back up through the 119.78 low of October 6th. The move in gold is interesting, and in my view likely speaks of more QE, or at least sustained QE, to come.

As I’ve said before, you can’t taper a Ponzi Scheme, so I look for the vast ocean of QE liquidity to remain in this market, one way or another. This may drive a continued market rally into 2018, and it’s hard to argue with such a thesis until we see some concrete topping action.

 

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CSX Corp. (CSX) is hanging tight along its 20-dema, which puts it in a buyable position, using the 20-dema as a light selling guide.

 

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Caterpillar (CAT) has continued to make new highs, and is now up eight days in a row, with seven of those days representing all-time highs. It remains extended.

General Motors (GM) is not behaving in the manner I would expect following the undercut & rally move of two Mondays ago. That move carried up through the prior 41.35 low of November 6th, but the stock has not been able to hold its 10-dma or 20-dema on the subsequent reaction pullback. Today it closed below the prior 41.35 low in the potential double-bottom base, killing the current U&R long set-up.

 

GR122717-GM

 

Apple (AAPL) helped drag down the NASDAQ yesterday after an analyst reported lower-than-expected iPhone X sales. The company itself has had nothing to say about it, but this didn’t prevent the stock from gapping down to its 50-dma.

It did not breach the 50-dma, however, as volume came in at above average, which was at least partially constructive. Today AAPL again held support at the 50-dma as volume declined. This may indicate that sellers have finished their business, so to speak, and the stock might be tested on the long side here, using the 50-dma as a tight selling guide in case it can’t hold.

 

GR122717-AAPL

 

Facebook (FB) failed to hold Friday’s undercut & rally attempt back up through the prior 176.60 low of about two weeks ago. Yesterday it traded down, most likely in sympathy to AAPL, but was able to rally today in another U&R attempt back up through the 176.60 price level.

Technically, that would make the stock actionable on the long side using 176.60 as your tight selling guide, but FB also stalled out at the 50-dma today on higher volume. It certainly has a lot of overhead to work through if it is to make new highs, and it may be that the stock doesn’t do much into year-end or even before its expected January 31st earnings report.

 

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Amazon.com (AMZN) has rallied back above its 10-dma on news of strong Christmas sales, but the move has come on light volume. For that reason, I wouldn’t be jumping at the stock here, preferring instead to remain opportunistic on pullbacks to the 20-dema.

Netflix (NFLX) has dropped back below its 10-dma and 20-dema after looking like it might hold the 20-dema and move higher last Friday. This is in a non-descript position, where it cannot really be viewed as a long or a short. It may do nothing until its expected earnings report on January 22nd.

Nvidia (NVDA) got within 1% of its 50-dma yesterday, but it first had to shakeout again down to the 10-dma early in the day. Currently I don’t see it as being in an actionable long position here, and would need to see it clear the 50-dma to do so. The flip-side of this is that the stock becomes a short here using the 50-dma as an upside stop. The pattern still has the look of a possible head & shoulders formation that is in progress. Play it as it lies.

 

GR122717-NVDA

 

Tesla (TSLA) worked as a short just below the 200-dma near the open yesterday. The stock quickly breached the 50-dma, confirming the short-sale entry between the 50-dma and 200-dma, ending the day at 317.29. It then continued lower today and closed at 311.64 on slightly higher selling volume.

Right now, TSLA looks like it is headed for a test of the prior lows around the $300 price level, so I would watch for that as a possible cover point over the next two days. The company is expected to provide an update on its current production and sales numbers this coming weekend.

 

GR122717-TSLA

 

Roku (ROKU) rallied yesterday off its 10-dma, and is again extended from the line. Pullbacks to the 10-dma at 52.46 would serve as your nearest reference for lower-risk entry opportunities. However, the 20-dema is rising to a point near the prior breakout that occurred two Fridays ago coming up through the 50 price level. Therefore, a more opportunistic approach might entail looking for a pullback to the 20-dema as an even better entry, if you can get it.

Apptio (APTI) posted a pretty breakout this morning to go with the pretty base I talked about in my weekend report. That breakout move got up as high as 7% or so before sliding right back in toward the top of the base. That looks like some pretty ugly stalling off the highs, but the bottom line is that the stock still closed above its breakout point.

So, if you are a strict base breakout buyer, this remains within range of the breakout point at 23.62, despite the stalling action. Remember that we saw First Solar (FSLR) post a similar ugly-looking stalled breakout on December 12th, but then moved sharply higher from there over the next three days.

 

GR122717-APTI

 

MuleSoft (MULE) has rallied up to the highs of its current price range and would only be buyable on pullbacks from here down to the 50-dma.

Switch (SWCH) is holding tight sideways but in a position that is just below its 50-dma. A move above the line would be constructive, particularly if it occurred on a pocket pivot volume signature. However, for now, pullbacks to the 20-dema at 17.48 should be watched for as lower-risk entry opportunities.

 

GR122717-SWCH

 

Cloudera (CLDR) got a little funky over the past two days and fell below its 20-dema this morning. However, by the close, it managed to hold above the 20-dema as it also undercut the prior 16.59 low in the pattern and rallied back above it. Volume today came in at -57.4% below average, so this was a textbook voodoo pullback.

That sets up a U&R long entry here using the 16.59 price level as a tight selling guide. Over the weekend, CLDR looked like it was forming a tiny, cup-with-handle pattern, but that failed quickly at the 10-dma yesterday. With names like this, where volatility is the norm, one must be ready to exit quickly and then look to come back in at a potentially more favorable level. Today’s action would constitute a second chance lower in the pattern.

 

GR122717-CLDR

 

Aerojet Rocketdyne (AJRD) got tagged yesterday as sellers sent it flying back to its 50-dma. Volume, while higher than Friday’s low pre-holiday levels, was still well below average. Today, volume dried up to -55.1% below average, so this can be tested here on the long side, using the 50-dma as a tight selling guide if it doesn’t hold.

 

GR122717-AJRD

 

ServiceNow (NOW) rallied off the 10-dma today on light volume. Over the weekend it looked buyable along the 10-dma, which was the case today, but I would only look to buy this on pullbacks to the 10-dma. The question is whether its cousins can hold up and perhaps help drive a group move.

But I begin to have my doubts when I look at Workday (WDAY) which remains deep in its pattern and so far, has not been able to clear its 20-dema. In fact, it has acted more like a short on small rallies up into the 20-dema. I was looking for this to potentially slingshot back up through the 20-dema, but so far, that hasn’t happened.

I would therefore be inclined to play this first as a short here, using the 20-dema as a guide for a tight upside stop. If it can clear the 20-dema with any authority, then I would look to flip and go long on the basis of a possible moving-average undercut & rally (MAU&R) type of move. Shorting the stock here might also give one some visceral feedback with respect to how strong the bid feels here if it does manage to retake the 20-dema.

 

GR122717-WDAY

 

Square (SQ) keeps trying to pull an undercut & rally move back up through the prior 34.80 low in the pattern, but so far has not been able to hold it. Today the stock rallied above the 36 price level but lost momentum to close at 35.75.

There is still the potential for a more decisive U&R move back up through the 35.80 low, so I would count it out entirely.

Another point I would make here is that the stock has been moving lower in a type of “descending wedge,” so a move back up through 35.80 combined with a strong move back up through the highs of the descending wedge might indicate that a very tradeable turn was at hand. Something to watch for those of you who like the unorthodox set-ups that this market sometimes presents.

 

GR122717-SQ

 

First Solar (FSLR) pulled right into its 20-dema today and bounced nicely. As I wrote over the weekend and last Wednesday, I would prefer to take an opportunistic stance and pick the stock off on a pullback to the 20-dema, if we could get it. Well, we got that pullback today.

In addition, the pullback and bounce off the 20-dema coincided with an undercut & rally move back up through the prior 67.27 low in the pattern. That triggers a U&R long set-up using the 67.27 price level or the 20-dema as a selling guide.

 

GR122717-FSLR

 

SolarEdge (SEDG) continues to hang along its 20-dema as volume dries up, which looks constructive. Over the past two days, it has found ready intraday support at the line with volume declining to -64% and -57% on each day, respectively.

SEDG remains buyable here along the 20-dema with the idea of using the line as a tight selling guide. Some might say the stock is forming a bullish reverse head and shoulders formation, with the current pullback representing the low of the right shoulder. As one who is a fan of colorful technical terminology, I can go with that. However, the two current “voodoo” pullbacks to the 20-dema are enough for me given that they are concrete entry signals. At the same time, the 20-dema serves as a very concrete and tight selling guide.

 

GR122717-SEDG

 

Arista Networks (ANET) broke out of its little cup-with-handle formation today but volume was lacking. This isn’t actionable for that reason, at least not right now. Pullbacks to the rising 10-dma might provide references for lower-risk entry opportunities from here.

Alibaba (BABA) continues to track sideways just above the 170 price level, but isn’t going anywhere just yet. This thing acts more like a short when it rallies up to the 20-dema, which has served as reliable near-term resistance. And, some might notice that the pattern is looking very much like a complex head and shoulders top formation.

That may mean, therefore, that rallies up into the 20-dema should be shorted, while using the 20-dema as a guide for a tight upside stop. Otherwise, if it can clear the 20-dema with any authority, one could flip long. I see several stocks developing in such a manner, including NFLX and NVDA, discussed above, and they could easily turn out to be shorts rather than longs. Play ‘em as they lie.

 

GR122717-BABA

 

YY, Inc (YY) continues to hang along its rising 10-dma, keeping it in a buyable position while using the 10-dma as a tight selling guide.

Weibo (WB) remains tentative here along the 50-dma. I’ve been looking at this as a long here, using the 50-dma as a selling guide. The stock has shaken out below the 50-dma over the past two days on an intraday basis, but has still closed above the line for two days in a row.

Thus, this remains actionable as a long here, using the 50-dma as a selling guide. Remember that when I refer to a moving average as a “selling guide,” it indicates that one can allow 2-3% of downside porosity below the moving average before selling, depending on their risk tolerance. Sometimes, I will do exactly that, other times I will use the moving average as a hard stop either intraday or on a closing basis.

 

GR122717-WB

 

Rise Education Cayman Ltd. (REDU) should probably be moved to the section of the report where I discuss new-merchandise situations instead of being lumped in with other Chinese names. It’s clearly a stronger performer, at least near-term, and may benefit from the fact that it is new merchandise in comparison to the old merchandise that is BABA, WB, and YY.

Today, REDU followed through on yesterday’s minor breakout with a big-volume, cup-with-handle breakout that sent the stock up 11.25%. That made it the star stock of the day, and it was quite buyable yesterday based on my incredibly insightful discussion of the stock in this past weekend’s report (yes, I’m being facetious). It is now extended, and only pullbacks to within 5% of the 12.79 breakout point would bring it into buying range from here.

 

GR122717-REDU

 

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.

Despite the sleepy action today, there is some interesting action occurring in some of these newer-merchandise names that I’ve been following. My thinking is that if we are going to see a continuation of the market rally in 2018, then some of these should play a bigger role.

In some cases, we must be flexible and prepared to “bob and weave” with a stock, as would be the case with CLDR, while something like REDU just launches higher after being quite buyable along its 10-dma. Meanwhile, the action in a reasonable handful of big-stock leaders, such as BABA, NFLX, NVDA, AAPL, and FB for example, is a bit wobbly, at best.

Is it time for a changing of the guard? Or do big-stock names begin to fall apart as we move through earnings season in the latter part of January? Does this bring about a final top? We shall see. In the meantime, go where the set-ups are, long or short, and play them as they lie! Whether the market rally continues or falters into 2018, the set-ups will take you where you need to be. So, watch the stocks!

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.