The Gilmo Report

December 29, 2010

December 28, 2019 6:14 pm ET

The NASDAQ Composite Index looked like it was ready TO celebrate the twelve days of Christmas on Friday as it embarked on another rally early in the day to build on its first-ever move above 9,000 on Thursday.  This would have made it twelve-straight up days in a row, but a late-day sell-off took the index back into the red on higher but still light volume.



One day certainly does not make or break a trend and given the extended state of the index and most leading stocks, a pullback is not unexpected. Meanwhile, the Dow posted a new high on Friday while the S&P 500 posted a new closing high. Thus, the uptrend remains intact, but as I wrote in my last report, investors should remain alert as this market has a habit of pulling the rug out on things just when all is rosy.

In addition, I’m not seeing much in the way of fresh set-ups that get my blood boiling. Many set-ups that looked promising a few days ago have fizzled, as we’ll see later in this report. Despite the record highs in the indexes, the action among leading and would-be leading stocks outside of a few streakers like Tesla (TSLA) or grinders like Apple (APPL) is decidedly mixed.

The action in precious metals this past week, meanwhile, adds some weight to my view that the main driver of this rally is QE as the Fed continues to expand its balance sheet. The iShares Silver Trust (SLV) caught fire over the past few days, starting with a gap-up pocket pivot through the 50-dma on Monday. It then streaked back up toward its late-October highs before backing off slightly on Friday.



The SPDR Gold Shares (GLD) did not post any pocket pivots like its little brother the SLV, but it still rallied right along with silver after clearing its 50-dma last week. Because the two metals tend to correlate relatively closely, however, a buy signal in one, whether a pocket pivot or a U&R, can often be implemented in the other even though the other may not be showing the same signal.

In this case, the GLD had already cleared its 50-dma on Thursday and Friday of last week, but it was the SLV that posted the pocket pivot on Monday as it gapped through the 50-dma. Both are now extended as they approach resistance at their October highs.

As members who’ve been around for at least a little while know, I never advocate chasing strength in the metals. One must always take an opportunistic approach and seek to love them when everyone else hates them. That, of course, does not mean we ignore the technicals, but both the GLD and the SLV are doing quite well after posting U&R long entries earlier in December. We can now see how and when they consolidate the current strength.



The sharp upside in the metals has also resulted in correlating moves among precious metal stocks. Franco Nevada (FNV) cleared the $100 Century Mark on Tuesday, as I discussed that day, and that move was also a low-volume breakout. As with the metals themselves, I do not advocate chasing strength in the metals-related stocks.

The proper entry for FNV was the pullback to the 50-dma on Monday that resulted in a pocket pivot rebound. With FNV now above the $100 Century Mark for the first time, we’ll see how well it holds that price level or whether it pulls down further to the rising 10-dma.



Big-stock NASDAQ stocks have tended to grind higher with Apple (AAPL) leading the way as the alt-currency stock of choice in this market. It finally ran into some heavy-volume selling on Friday as it came within about 3% of the $300 price level. I’ve felt that in a continued market rally the stock is very likely to reach $300, and 3% is close enough for, as the old saying goes, horseshoes and hand grenades, and maybe AAPL as well.

The reference level for support on any pullback would be the 10-dma at 282.26. The 20-dema, which has served as more reliable support for the stock during its uptrend since early September, however, strikes me as more meaningful with respect to near-term support. Meanwhile, AAPL remains extended and not in any buy position. (AMZN) finally joined the big-stock alt-currency party on Thursday with a strong-volume pocket pivot through its 200-dma. Since I consider AMZN to be an alt-currency type of name, I must admit I’ve found the weak action over the past several months to be somewhat surprising. I would have thought for sure money looking for a home in this market would have seized on AMZN sooner, but I suppose yesterday’s move is a case of better late than never.

Indications from the company that it had its best Christmas sales season ever sent it rocketing higher Thursday on strong volume. It continued higher again today, and is now extended. But it shows how alt-currency names can quickly find favor if the right catalyst comes along.



Netflix (NFLX) tested its 200-dma this morning, which served as a lower-risk entry spot for those brave enough to step into the stock at that point. Pullbacks to the 200-dma would remain lower-risk entry opportunities, with the 360-degree understanding that a breach of the 200-dma could trigger it as a short-sale target within the context of a market pullback.



Tesla (TSLA) looks like it is leveling off, at least for one day, after running up over 30 points “in a jiffy,” as Jesse Livermore might say, since breaking above the $400 Century Mark for the first time. Now I’d be watching for a pullback or meet-up with the 10-dma, which is now at 402.75, as a lower-risk entry opportunity.



Facebook (FB) remains near-term extended. Pullbacks to the rising 10-dma, now at 203.25, should be watched for potentially lower-risk entry opportunities. The proper entry was down along the 50-dma on the prior U&R a couple of weeks ago, and just because something has moved to new highs does not qualify it as a being in a buy zone as I see it.



Disney (DIS) is still holding its U&R long set-up through the prior December 10th low at 145.05. The stock closed Friday at 145.75, which keeps the U&R long entry in play using the 145.05 low as a tight selling guide. The flip-side, or rather the 360-degree view, is that the reversal at the 20-dema may also make DIS a short-sale target here using the 20-dema as a covering guide.



How does one play this? Market context is likely the deciding factor. If we see the general market pull back from its current record highs, then stocks like DIS may begin to fail in earnest. Note that on the weekly chart, DIS is sitting just above its 10-week moving average as it dips just below the prior new-high breakout point.

In a late-stage failed-base (LSFB) short-sale set-up, the first indication of a potential failure is almost always a breach of the 20-dema. This is then confirmed by an ensuing break below the 50-dma, so with DIS sitting in this crucial position it can go either way and should be acted upon based on the real-time market evidence as well as the general market context.



Semiconductors that I follow closely, Advanced Micro Devices (AMD), Applied Materials (AMAT), KLA-Tencor (KLAC), and Micron Technology (MU), are still extended and not in any kind of buyable position. However, as these have rallied, the action begins to look a little double-toppy.

Take KLAC, for example. The stock has spent all of December rallying right back up to its mid-November highs where it blew up after earnings. That breakdown led to an undercut & rally (U&R) move in early December, and the stock hasn’t looked back since.

As it approaches those November highs, however, it begins to look like a potential double-top. In this market, I now consider a double-top as a valid short-sale formation, but a tricky one to handle. In this case, one can either try and test something like this as a short along the highs, probing with the help of the 620-chart, or one can wait for a breach of the 10-dma as an initial short-sale trigger.

In any case, most of these big-stock semiconductors that have been rallying sharply in December, mostly on the promise of a Phase One U.S.-China trade deal, are wildly extended at this point, and pullbacks become more likely as a result.



Qualcomm (QCOM) remains in a tight holding pattern along its 10-dma. This keeps it in a lower-risk entry position using the 20-dema as a tight selling guide given the stock’s tendency to show porosity around the 10-dma.



DataDog (DDOG) closed below its 50-dma on Friday on heavy volume. What it looks like to me is that insiders are probably still selling stock after the 20% lock-up expiration that hit on December 8th. It may therefore be a matter of seeing how this sets up again once any year-end selling is done.

The stock could rally back above the 50-dma, triggering a moving-average undercut & rally (MAU&R) long set-up, or it could test and/or undercut the prior December low at 33.06. For now, DDOG’s promising set-up along the 50-dma is out the window, and whether it can set-up again is something to watch for.



The Santa Claus Melt-Up has not been kind to all stocks. DDOG obviously illustrates that. Once-promising CloudFlare (NET) has also flared out as it broke below its 50-dma on increased volume on Friday. Now the only likely set-up to watch for here on the long side would be a U&R back up through the prior 16.92 low.



With most of the stocks that have led this rally off the early-October low extended on the upside, those that remain in tight patterns would appear to be buyable. This presumes that stocks still sitting in bases will be the next to break out and move higher. But so far that hasn’t happened in something like RingCentral (RNG), despite the general market move to record highs.

But the stock remains in a base as it tracks tightly along its 10-dma and 20-dema while volume dries up. If a new wave of stocks is going to lead this market higher, this is as good a candidate as any based on the technical action here. RNG is therefore in a lower-risk entry spot here along the 10-dma and 20-dema, using the 50-dma as your selling guide.



DocuSign (DOCU) is also in a lower-risk entry spot along its 10-dma as volume dries up. In this case I would look to use the 20-dema at 72.72 as my selling guide, since the 50-dma would be far too wide of a selling guide for my tastes. Still, Santa Claus has not seen fit to let DOCU ride in his sleigh with a sharp move off the 10-dma, at least not yet.



Coupa Software (COUP) also looks like it’s trying to coil up along its 20-dema. It was last buyable at the line per my comments in the mid-week report, and it remains in a lower-risk entry position using the 20-dema as your selling guide.



Keysight Technologies (KEYS) remains one of my potential short-sale targets here as it keeps running into resistance along its 10-dma. It again closed below the 50-dma on Friday, which puts it in a shortable position using the 10-dma as your covering guide. So far, the stock is acting more like a potential late-stage failed-base (LSFB) short-sale target and less like a long set-up.



Crocs (CROX) keeps making higher highs, so is still extended, while Zumiez (ZUMZ) has been able to regain its 10-dma. The stock pushed through the line on Thursday and pulled back into it on Friday, bringing it in to a lower-risk entry position using the 50-dma as a maximum selling guide.



Roku (ROKU) triggered a short-sale entry on Friday as it broke back below its 50-dma, but by the end of the day volume was well below average. While the volume may not be convincing, the stock’s chart position for now can be viewed as a shortable one, using the 50-dma as a tight covering guide.



The weekly chart gives you a better idea of what we’re looking at here with ROKU. The stock is actually failing from a cup-with-handle breakout, and the move below the 10-week moving average is bearish, and therefore a short-sale entry point using the line as a covering guide.

The cup-with-handle has a one-week handle where the stock goes straight down and then one sharp week back to the upside where it then stalls for two weeks before failing. My guess, as is the case with most potential short-sale targets, is that ROKU will play out as a short-sale target within the context of a general market pullback.



Spotify (SPOT) fell short of a breakout attempt on Friday as it stalled near the prior early-November high in the base. I would certainly not be looking to enter the stock here since only a pullback to the 10-dma would offer a lower-risk entry. Even better, a deeper pullback to the 20-dema might provide a more opportunistic entry, which I would prefer, speaking for myself.



Otherwise, I would be prepared to treat SPOT as a 360-degree situation here, since it could also play out as a double-top type of short-sale set-up. This is based on what I’m seeing in the weekly chart, where the stock has rallied right back up to the highs of a big, wide price range its been stuck in for most of 2019.

The latest move back up to the range highs has occurred on light volume during the month of December, which makes it suspect. Therefore, SPOT is one to watch closely as a potential 360-degree situation.



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.

What perhaps puzzles me most about this market is the fact that despite the record index highs we’re not seeing a lot of upside thrust in would-be leaders. The best moves in individual stocks still tend to occur off the lows of the pattern and usually on a U&R type of set-up. In other words, this still isn’t your grandfather’s bull trend.

That said, we have the tools to handle this type of market, and the set-ups have been there to be had. So, we just keep operating the same way, looking for those OWL set-ups that we know and love and using them to our advantage in contrarian fashion while leaving the chasing-of-strength to others. Take it from there.

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.