The Gilmo Report

December 3, 2017

December 3, 2017

I’ve said this before but this time the market has outdone itself as this past week may in fact rank as the single most bizarre week I’ve seen in my 26-plus year career. While some might be looking for the proverbial Santa Claus Rally as we move into December, so far it looks like tech, internet and other growth leaders have been moved over to Santa’s naughty list. They still have about 22 days to get back on the “nice” list, however, and that’s a topic we’ll get to in a few paragraphs.

Meanwhile, laggards have been moved to Santa’s nice list as divergences emerge all over this market. My screens are mostly picking up strength in names with poor earnings and sales growth, creating something of a conundrum for strict growth investors. And while the indexes hold up near their highs, underneath the surface of this market chaos reigns.

The primary divergence witnessed this past week occurred on Wednesday when a big breakdown in leading techs, internets, and other growth names sent the NASDAQ Composite Index down -1.27% while the Dow Jones Industrials Index rallied over 100 points and the S&P 500 Index just churned around the flatline. At the same time, the Dow Jones Transportation Index, otherwise known as the “trannies,” was rocketing 322.35 points or 3.3%.

This was followed by a massive rally in everything but the NASDAQ Composite as the Dow launched 331.67 points and the trannies added another 198.39 points of upside on Thursday. The move was mostly a function of euphoria over the impending passage of the Senate’s version of its own tax reform bill.

On Friday, more mystery was added to intrigue at the end of what was already a crazy market week. Early in the day, the indexes were happily moving to the upside until ABC news released a report that former National Security Adviser Michael Flynn was ready to testify against President Trump. This immediately sent the market and stocks of all stripes diving to the downside as the Dow fell to -351 in a flash.

But closer investigation of the fake news showed that there was no constitutional crisis in the making, as some pundits who jumped the gun initially assessed, and the market made its way back to the upside. This shows up as a big shakeout in the major market indexes, as the daily chart of the NASDAQ Composite Index, below, shows.

 

GR120317-$COMPQ

 

The S&P 500 Index chart also illustrates the massive shakeout after it found support along the 10-dma and 20-dema. Any other market index chart you look at has the exact same type of shakeout consisting of a very long lower tail followed by a close that is nearly unchanged.

By the end of the day on Friday, the Dow posted a very minor -40.76 (-0.17%) loss, while the broad NYSE Composite Index recovered the most of its lost ground, down only -0.1% on the day.

 

GR120317-$SPX

 

The real question in my mind is just how do investors handle this type of nonsense? If your stocks are acting well early in the day, and you suddenly see the market plunge to the downside, how do you know it isn’t the start of some sort of Flash Crash? The answer is, you don’t.

All you can do is stick to your stops and selling guides to prevent yourself from experiencing some serious damage. If you get shaken out, which might have been the case on Friday, then your only recourse is to try and re-enter using moving average undercut & rally or straight undercut & rally (U&R) types of re-entry triggers. That is easier said than done.

The Senate tax reform bill was in fact finally passed at midnight on Saturday morning after much wrangling and horse-trading. Now the Senate and the House of Representatives must reconcile their differing bills to come up with a single bill that both houses of Congress must pass for any such tax legislation to become law. And this will no doubt create another stream of news flow that may push the market to and fro throughout the month of December.

Financials have alternately bored me and excited me over the past several weeks, and the daily chart of the Financial Select Sector SPDR Fund (XLF) gives some idea as to how this has worked. We can see constructive consolidation along the 10-dma in late October into early November that looked good. That then quickly deteriorated into a breakdown to the 50-dma, where the XLF trundled along as volume dried up.

Eventually, the low-volume consolidation along the 50-dma became buyable as volume dried up sharply, leading to a big upside launch on Tuesday of this past week. A gap-up move on Wednesday could have been played as a buyable gap-up (BGU), as I discussed in my report of that day, leading to a little more upside on Thursday.

On Friday, one could have used the intraday pullback to the 27 price level, essentially the top of the prior price range, as the XLF also successfully tested the 27.07 intraday low of Wednesday’s BGU. Again, that would have required some courage, but the bottom line is that the pullback turned out to be buyable, and if one was focused solely on the chart action of the XLF, one could have acted.

If one was focused on the index action, that might have been a different story. If you look at the daily charts of various big-stock financials like Bank America (BAC), Citigroup (C), or J.P. Morgan (JPM) you will see similar, if not identical moves.

 

GR120317-XLF

 

Big-Stocks:

Big-cap leaders are a mixed bag, and some look downright ugly after getting beaten to a pulp on Wednesday. I’ve been discussing in recent reports the idea that many of these names looked to be basing constructively, perhaps winding up for a move into year-end.

That theory was blown to pieces on Wednesday as the market pulled the rug out on many of these basing leaders. Some, however, are holding up, such as Apple (AAPL), which undercut its prior November low during the Wednesday carnage and rallied back above it, triggering a U&R entry at that point.

It has since found support along the lows over the past two trading days, closing just above its 20-dema on Friday after also doing so on Thursday. For now, AAPL’s U&R long entry remains in force, and a move back up through the 10-dma would confirm this. This pattern is a bit more coherent than most, and AAPL also benefits from the fact that it is a Dow component.

 

GR120317-AAPL

 

Amazon.com (AMZN) is hanging along the underside of its 10-dma, which brings it into a lower-risk entry position using the 20-dema 1139.17 as a selling guide. The alternative here, which I prefer, is to look for a more opportunistic entry on a pullback to the 20-dema given that selling volume has been above average since Wednesday.

 

GR120317-AMZN

 

Alphabet (GOOGL) found support at its 50-dma on Friday and bounced off the line. Watch now for a possible undercut & rally (U&R) long trigger IF the stock can move back up through the prior November low of 1029.33.

Facebook (FB) submerged below its 50-dma on heavy selling volume on Wednesday, but is hanging onto its 50-dma for dear life. So far it is succeeding, and a close that is just a few cents below the 50-dma doesn’t necessarily spell doom for the stock.

The action, of course, doesn’t look all that constructive, either, but we know that the Ugly Duckling loves to show up just when things look less than perfect. That may be the case here. On Friday, FB undercut its Wednesday low, looking like it might violate the 50-dma. But I have noted many times that 50-dma violations often end up being big fake-outs.

That was the case on Friday as FB rallied back above its Wednesday low to close. From a textbook perspective, FB might be viewed as morphing into a late-stage failed-base since it has now dropped below its late October base breakout point. However, this market is anything but textbook, and I wouldn’t be surprised if the stock pushed back up through the 50-dma to trigger an MAU&R (moving average undercut and rally) long entry at that point.

In fact, we could consider Thursday’s action to be an MAU&R, and the stock never dropped enough to trigger a 2-3% stop on Friday if one did buy it Thursday. On the other hand, we can see that the stock has run into resistance at the green 20-dema, which is typical for an LSFB short-sale set-up. But if the market rallies in December, FB could recover and rally back to the upside, just when it starts to look like a short, as it has at other junctures during 2017.

 

GR120317-FB

 

Microsoft (MSFT) may be boring investors to death following its late October buyable gap-up to nowhere, but it is acting better than most of the big-stock NASDAQ names that I’ve discussed in recent reports. Here we see that the stock has weathered the tech carnage over the past week in fine style, posting two pocket pivots over the past two days.

Both pocket pivots are occurring within the base, and may be precursors to a potential breakout to new highs. Certainly, if the Dow moves higher, MSFT, as a big Dow component, could clear to the 86 highs of its late October BGU.

 

GR120317-MSFT

 

Netflix (NFLX) looks ready to come apart completely as it flounders below its 50-dma. It has also failed on its recent cup-with-handle breakout, so can be considered a possible late-stage failed-base (LSFB) short-sale set-up in progress. Volume over the past two days following Wednesday’s big breach of the 50-dma has declined, which could trigger a reflex rally back up into the 50-dma.

The way I would handle this is simple. I would only short a weak rally up into the 50-dma as the lowest-risk entry opportunity. But, if I saw the stock push back up through the 50-dma I would then flip to the long side and treat it as an MAU&R type of set-up.

 

GR120317-NFLX

 

Nvidia (NVDA) is another busted pattern among big-stock NASDAQ tech leaders, and the whole cascade to the downside began early in the week when one analyst declared that the company’s exposure to cryptocurrencies and blockchain technology was “limited and declining.” On Wednesday, NVDA split wide open and broke below its 50-dma, giving up an entire month’s worth of upside gains in one day.

This is illustrative of how this market loves to pull the rug out on certain stocks at certain times, and investors can often be caught flat-footed as their beloved position blows up in their face. There is some similarity here to FB, as NVDA is desperately trying to cling to the underside of its 50-dma. Notice that it is trapped between the lows of mid-October and the $200 Century Mark.

Short-term the stock seems a bit oversold, so I would look for a recovery back up through the $200 Century Mark and the 50-dma as a possible long entry. That could trigger a rally back up as far as the green 20-dema, which would make for a decent short-term trade. Otherwise, if NVDA is in fact topping and developing into a longer-term short-sale target, it will probably have to do some work after this sharp initial break off the peak.

 

GR120317-NVDA

 

Tesla (TSLA) is not in a shortable position currently but I would watch for rallies up into the 20-dema at 314.22 as potentially lower-risk short-sale entries.

General Motors (GM) has continued lower since failing on Tuesday’s pocket pivot move off the 10-dma. Apparently, investors weren’t much impressed with its webcast presentation on Thursday, sending the stock through the 50-dma where it became a short-term tactical short.

That was good for a couple of points of downside as GM broke below the 42 price level, but at that point the Ugly Duckling paid a visit. Once the stock had undercut the prior 42.10 low in the pattern, it then turned back up through it amidst the fake news sell-off on Friday, triggering a short-term U&R long entry at that point.

That led to a small intraday rally back up toward the 50-dma, but the stock is still about a point away from that. The real question is whether this just turns out to be a 50-dma violation fake-out maneuver where the stock then quickly regains the 50-dma. All I can tell you for now is that the U&R at the 42.10 low was playable on the long side, and a weak rally up into the 50-dma could bring this into short-sale range.

 

GR120317-GM

 

If you’re into double pocket pivots that also double as double base breakouts from a five-week base, then Caterpillar (CAT) is your ticket. This is one of the stronger names in the Dow, and the only Dow component with triple-digit earnings growth in the most recent quarter. If you like to buy base breakouts, here’s one for you, so have at it!

 

GR120317-CAT

 

New Merchandise:

Roku (ROKU) looks to be settling into the 10-dma as volume dries up in the extreme here. Friday’s volume levels came in at -59% below-average, so the pullback is so far constructive. Buying the stock right at the line on Friday would have been the prescribed approach here, but one would have had to have done that in the face of the sudden market sell-off early in the day.

Again, it’s all a matter of ignoring the index action and focusing on the set-up at hand, remaining vigilant and setting a tight stop in case things do in fact get out of hand.

 

GR120317-ROKU

 

Cloud Names:

ServiceNow (NOW) blew through its 50-dma on heavy volume and is off my long watch list for now. However, this position is not unlike any number of other broken leaders as it forms this little two-day bear flag just along its 50-dma after a big bust on Wednesday. Again, the textbook approach is to treat this as a short, and the current pattern as a “bear flag.”

Of course, we all know that bear flags are also L-formations, and have shown a propensity in this nutty market to morph into “LUie” formations as the stock rallies out of the L-formation. The whole cloud group, however, looks suspect, particularly after we’ve seen Workday (WDAY) blow apart completely as it slammed into its 200-dma on Friday.

This may bode ill for the rest of the group, most of which are selling at high-PE ratios after reasonable expansions. Thus, I might give NOW a better shot as working out as a short-sale here, and for that reason it now sits on my short-sale watch list.

 

GR120317-NOW

 

Square (SQ) has continued to parachute lower after bailing out of its climactic topping action on Monday. It is now closing in on the 50-dma as volume declines precipitously. In fact, on Friday, the stock didn’t quite make it to the 50-dma, but it did make contact with its 10-week moving average on the weekly chart, dropping just two cents below the line before bouncing back to the upside.

Notice how the green 20-dema served as resistance on Thursday, while the 10-week line on the weekly served as intraday support. I’m watching to see how this settles down along the 50-day/10-week moving averages as volume dries up as this could set up an upside trade.

Often, after an initial sell-off from the peak following a climactic run, those who missed the run will see the stock as cheap, driving it quickly back to the upside. This also drives in shorts who begin to swarm the stock once it breaks off the peak.

Another alternative outcome to be aware of here is the possibility that the stock in fact breaks below the 50-dma, undercutting the early November lows. That could then set-up a U&R long trade set-up if SQ can then rally back above them. Additional upside impetus could also be created by shorts swarming the stock when they see it violate support at the 50-dma.

Overall, I think SQ has topped for now, and at best needs to build a whole new base. In the meantime, there could be some nice swing-trading opportunities for nimble traders, and that is why I am trying to map this out for you to give you some sense as to how it might be played, depending on how the price/volume action pans out over the next few days.

 

GR120317-SQ

 

Solar Names:

First Solar (FSLR) rallied on Thursday, but then pulled back into its 20-dema on light volume on Friday. Given the extreme general market volatility that day, a 3% sell-off that holds support at the 20-dema just keeps the stock within a five-week base. So, this pullback to the 20-dema puts FSLR in a lower-risk entry position, using the 20-dema as a tight selling guide.

SolarEdge (SEDG) has been getting pelted on the downside over the past three days but finally met up with its 50-dma on Friday, bouncing off the line to close mid-range. At the same time, it filled its prior early November gap-up “rising window” to the exact penny, bottoming out at 32.90, which is the high of the day before the gap-up day.

If you were watching that, that would have presented the most opportunistic of entries, using the 50-dma as a tight selling guide. SEDG might retest the 50-dma again, and it’s possible that a low-volume test of the 50-dma that does or doesn’t exactly meet up with the line would represent a buyable “Wyckoffian Retest.” So, watch for that.

 

GR120317-SEDG

 

Semiconductors:

Chip stocks in general have blown apart over the past few days, and I find myself sifting through the sector’s wreckage like Tom Cruise in the scene where he is walking through the airplane crash site in the remake of the Orson Well’s movie classic, War of the Worlds.

Universal Display (OLED) perhaps looks like one of the better names here since it has shown supporting action at the 20-dema on Wednesday and Friday of this past week. The stock closed Friday at 176.70, a little over 1% above the 20-dema, which is at 174.47. This would put it in a lower-risk entry position using the 20-dema as a tight selling guide.

An alternative approach here would be to look for a move below the mid-November low at 167.65, which might trigger an undercut & rally move at that point. Two ways to play it, depending on whether it can hold near-term support at the 20-dema or not.
GR120317-OLED

 

Telecom-Related Names:

Arista Networks (ANET) continues to look a lot like OLED after showing supporting action at the 20-dema on Wednesday and Friday. It also has a mid-November low at 221.16 that can be used as an alternative entry if the stock is unable to hold near-term support at the 20-dema across the board.

 

GR120317-ANET

 

Chinese Names:

Chinese names have been under pressure lately, which speaks of perhaps more systemic issues related to the economic situation in China. For that reason, these names have been removed from my current long watch list.

 

Internet Related:

Yelp (YELP) has blown apart and has been removed from my long watch list.

 

Software:

Nutanix (NTNX) gapped up Friday morning after reporting earnings Thursday after the close, but the BGU doesn’t look that attractive here given the stock’s prior run after its early October BGU. That BGU was much more playable, in my view. I would like to see how the stock settles down in here since it closed sloppily and out of range of its 33.77 intraday low.

 

GR120317-NTNX

 

Video-gaming Names:

Take-Two Interactive (TTWO) is the last man standing among the video-gaming names. So far, it has been able to hold above its 50-dma after testing the line twice on Wednesday and Friday. With the group weakening, however, I’m not so sure I want to play in this particular sandbox.

 

GR120317-TTWO

 

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 I find so odd about this market is that the indexes remain near the highs, but my long watch list continues to dwindle in terms of the number of buyable names I’m finding. And it’s not like I’m suddenly going to jump into transportation names like the airlines, which were all rallying on Wednesday and Thursday but then sharply reversed course on Friday.

And if you’re holding leading names that were acting just fine a week ago, you’re now left scratching your head and wondering if anyone got the license plate number of the truck that came rumbling through on Wednesday. In addition, it doesn’t look all too constructive to see that many of these names haven’t recovered strongly since Wednesday. In some cases, the stocks have moved lower, such as NVDA, BABA, WB, WDAY, MU, etc.

With the Senate passing its version of tax reform on Saturday morning, will we see a big rally to start the week off? And, if we do, what do we buy, if anything? Will beaten-down techs, internets, and other growth names spring back to life in Ugly Duckling fashion? Who knows? And I would also say that I’m not entirely confident that this market is one big short, despite all the ugly-looking patterns.

In my view, the best approach may be to focus on a select handful of names, and be ready to move with them in either direction as necessary, based on the real-time action, while keeping a close eye on your exit points in case things start to flip out again. In short, as we move into the holiday month of December, be prepared for more thrilling episodes of what is rapidly becoming a soap opera titled, As the Market (Twists and) Turns. Stay tuned.

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 ROKU, 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.