The Gilmo Report

February 3, 2019

February 2, 2019

The market logged another fascinating week as the market rally that started on dovish comments from Fed Chairman Jerome Powell persists. A signal-boost transmitted by the dovish utterings of the Fed policy statement on Wednesday set things alight again, pushing the Dow Jones Industrials Index right through its 200-dma.

The week didn’t get off to the best of starts, however, with an earnings miss and weak outlook from Caterpillar (CAT) and lowered guidance from Nvidia (NVDA) sending the market gapping lower on Monday morning. But by mid-week the Fed ruled all, and the market drove right through a weak earnings report from (AMZN) Thursday after the close by grasping onto Friday’s strong 304,000-strong jobs report and pushing higher.

Volume was lighter, however, as buyers didn’t find enough inspiration from the jobs number to hold the morning run to higher highs. The indexes all backed off as the Dow Jones Industrials Indexes stalled off the highs to log at least a higher closing high. It also managed to remain above the 200-dma, which is now a convenient reference for support. A reversal back through the 200-dma could harken a deeper pullback.



The NASDAQ Composite Index remains not quite 3% below its 200-dma, and simply ran in place on Friday as it faded from the intraday highs to close down on lighter volume. The index action was unimpressive, but NASDAQ advancers led decliners 1713 to 1292, which is constructive underneath the surface.

Overall, the moves in many stocks that have led the market rally off the late-December lows look to be getting a bit frothy. When everything starts looking too beautiful, one must wonder whether a pullback is coming. For now, however, it is a simple and practical matter of setting your trailing stops, and only buying on constructive pullbacks rather than chasing strength. If we get a pullback, that approach should keep one out of any potential difficulties.



In the same way that favorable earnings reports last week from the likes of Xilinx (XLNX) and Lam Research (LRCX), got the semiconductor names running, Thursday’s gap-up open from ServiceNow (NOW) got most of the cloud software names rolling as well. The company beat on earnings Wednesday after the close, and as I wrote in Wednesday’s report, this would set up a potentially actionable gap-up move on Thursday morning.

NOW opened at 211.36, printed a quick low at 209.99 right at the bell, and then just launched higher in a move reminiscent of what XLNX did one week before. That was immediately a buyable gap-up given the confirmation on the five-minute 620-chart, and the stock rocketed to an intraday peak of 228.41 before settling back to close at a more modest 220.02.

NOW displayed some characteristics of a spinner BGU since it gave up about half its intraday gains on Thursday, closing about mid-range. Friday’s close was relatively tight as volume declined. But the stock only becomes buyable on a move closer to the 209.99 intraday low of Thursday. In this position it is slightly extended, hence an opportunistic pullback is necessary for anyone looking to enter NOW shares now.



As I discussed it might in my Wednesday report, NOW’s move set off sympathy moves from its cousin-stocks, which included second-cousins as well. One such second-cousin would be one of the FTD Four, Twilio (TWLO), which finally shot further above the $100 Century Mark, where it had been floundering about over the prior two weeks. A little inspiration from NOW, was all it took to light its fire.

Thursday’s move resulted in a strong-volume pocket pivot off the 10-dma, but the stock was already buyable on Tuesday’s pullback to the 20-dema as volume dried up. Also, as I wrote in my Wednesday report, it was still buyable just above the $100 Century Mark as it tracked sideways along the $100 price level. Now, it’s extended, with earnings expected on February 12th.



Workday (WDAY), which can be considered a first-cousin of NOW, gapped to new highs in sympathy. Since Wednesday’s close was right at the 10-dma, the move qualifies as a pocket pivot off the 10-dma. The stock then continued higher on Friday on lighter, average volume and is now extended.



NOW’s bigger first cousin, (CRM) also posted a sympathy move on Thursday, but not of the gap-up variety. Instead, it put in a strong-volume pocket pivot move off the 10-dma. However, the more opportunistic entry occurred two days before on the low-volume pullback to the 20-dema.

CRM is near-term extended, in my view. Both it and WDAY will be reporting earnings at the end of February, with the 27th and 28th their respective, expected earnings report dates. Between the two, perhaps CRM was more playable Thursday as a sympathy move to NOW since it opened flat and then proceeded to post its pocket pivot from there.



Splunk (SPLK) also moved higher with NOW, although it is a second-cousin cloud name. It is now back up near its prior October highs. Note the lack of strong volume all the way up, something that can often be typical of how stocks will regain all their prior lost ground on nothing more than a lack of sellers.

SPLK is expected to report earnings on February 28th, so along with CRM and WDAY it will be a month-end earnings-fest for these three cloud names.



Tableau Software (DATA) did not gain much inspiration from NOW’s big move on Thursday, but it did find volume support at its 20-dema. The stock initially gapped down at the open to its 20-dema but held right there and then rallied back to the upside to close just above mid-range. This qualifies as a supporting type of pocket pivot at the 20-dema, and the stock edged higher on Friday, but on light volume.

There’s a good reason why DATA was reluctant to launch in sympathy to NOW and other cloud names, and that would be because earnings are expected this Tuesday, February 5th. So, we put this on our earnings watch list and see what kind of actionable move might occur once earnings are out.



Atlassian (TEAM) stalled again at the $100 Century Mark on Friday. This comes after the big stall and reversal at the $100 price level two weeks ago after earnings. That led to a break back to the 20-dema and then a re-breakout that then wedged back above the 10-dma last week. A pullback to the 20-dema on Monday and Tuesday of this past week on light volume helped to correct the wedge and also offered a lower-risk entry, as I discussed in Wednesday’s report.

It then popped off the 10-dma on Thursday, also in sympathy to NOW, and posted a five-day pocket pivot. It also posted an all-time closing high but failed on an attempt to clear the $100 Century Mark. A second attempt on Friday also failed as the stock stalled and reversed to close near its intraday lows.

It may be that TEAM is a short here using the $100 price level as a tight upside stop based on Jesse Livermore’s Century Mark Rule in reverse for the short side. On the other hand, if it can clear the Century Mark with some authority then it would obviously trigger as a buy based on the same rule for the long side.

Unless I see that occur, I’m inclined to look for a test of the 10-dma from here as a lower-risk entry if I want to be long the stock. If the clouds maintain their momentum, I don’t see why TEAM can’t remain at that party, so any short off the $100 price level could turn out be just a quick tactical short scalp. Otherwise, the long side comes into play on a clean move up through 100 or a constructive pullback to the 10-dma.



The Trade Desk (TTD) is another cloud-related name with applications for advertising, but it also moved in sympathy to NOW on Thursday. However, I’ve been following the stock in my written reports since it regained the 50-dma back in early January, and there have been numerous entry opportunities on pullbacks to the 50-dma, and 10-dma all the way up.

The stock is now pushing to higher highs on light volume and is therefore extended. As has been the case all the way up, look for pullbacks into the 10-dma from here as lower-risk entry opportunities. Earnings are expected on February 21st.



ZScaler (ZS) is yet another cloud name that I’ve discussed in my GVRs. It had posted two supporting pocket pivots on sharp pullbacks to its 20-dema in January. It broke out on heavy volume Thursday in another cloud sympathy move to NOW’s strong earnings.

Personally, I like the pullbacks into the 20-dema as more opportunistic entries, but if one likes to buy breakouts (I generally don’t, especially as an initial entry), then this is still within buying range of Thursday’s breakout. Earnings are not expected until March 4th.



You can see that the cloud-related names have done quite well since the late-December and early-January lows. In my mind, that’s where the best entries occurred, as well as on the pullbacks seen in January. Now, as we move into February, most of these names strike me as extended and certainly not in buyable positions.

One that is downright frothy is Coupa Software (COUP), which I first pegged as a buy down around 64 in my early January video reports. The stock is up nearly 50% since then, and only on Thursday did it break out to new highs. Proof that I’d much rather be buying stocks like this down in their bases using OWL-style buy points rather than chasing breakouts after a stock has come straight up from the bottom.

COUP has been relentless on the way up, and the straight-up-from-the-bottom, known acronymically as an SUFB, has made me think it will soon turn into a short. But it keeps proving me wrong by piling higher. An amazing move, and one that shows just how powerful the cloud space has been during the January rally.



Once it became evident on Friday that there was nothing material other than some “good vibes” after the mid-level U.S.-China trade talks this week, Caterpillar (CAT) finally rolled over. After getting hit with heavy selling volume on a big gap-down move through the 50-dma on Monday, the stock halted and did an about-face.

It finally filled the prior gap-down falling window on Friday and did another about-face rolling back to the downside. That was good for a two-point short scalp, but the stock held at its 20-dema with volume declining. A high-volume reversal would have been more bearish, and in this position the stock is essentially in no-man’s land, hence not actionable.



Apple (AAPL) is holding above the 50-dma after Wednesday’s post-earnings bottom-fishing pocket pivot through the line. The action since Wednesday has seen the stock churn and stall as volume wanes, so a test of the 50-dma looks likely form here. That said, AAPL strikes me as uninspiring when compared to the much better action to be found in other areas of the market, like the cloud-related software names this past week.



Nvidia (NVDA), not shown, is expected to report earnings this Wednesday after the close, so I don’t see anything to do until then. Keep it on your earnings watch list, although how much of a move it has after earnings is questionable since the company already pre-announced lowered guidance for this week’s earnings report.

Netflix (NFLX) has stalled along the 200-dma over the past two trading days but remains above the line. This keeps it in a buyable position using the 200-dma as a tight selling guide. The flip-side, of course, is that a volume breach of the 200-dma on the downside would trigger this as a short-sale target at that point. Play it as it lies.



Facebook (FB) gapped up Thursday morning after reporting earnings after the close on Wednesday. The stock opened at 165.60 and pushed up to an intraday peak of 171.68 before rolling back below its 200-dma. This looks more like a shortable gap-up after the failure to hold the 200-dma as volume ballooned.

On Friday, FB again attempted to retake the 200-dma but was again denied as it reversed and closed near its intraday lows on above-average selling volume. Given the precise price/volume action right here along the 200-dma, I would treat this as a short using the 200-dma at 166.91 or the Friday high at 169.10 as guides for an upside stop. Also, rallies up closer to either of those two price levels might also present lower-risk, short-sale entry opportunities, should they occur. (AMZN) got tagged with some heavy selling on Friday after reporting earnings Thursday after the close. Proof that not everything is rallying after earnings in this market. Trying to short the stock on the gap-down move on Friday was possible, but one would have had to wait for the intraday high to set in, which it did at 1673.06, well above its opening price of 1622.01.

I’d want to watch to see how AMZN handles a test of the 50-dma, which is where it looks like it’s headed currently. If it can hold support at the line it might just become buyable at that point. If it breaches the line, then it would trigger another short-sale entry point at the 50-dma, while using the 50-dma as a guide for a tight upside stop.



Advanced Micro Devices (AMD), not shown, rallied another 5.72% on Thursday following Wednesday’s buyable gap-up move on Thursday. The stock is extended, so that only pullbacks closer to the rising 10-dma would offer lower-risk entries, but it may take a few days for that to happen as the line catches up to the stock.

Tesla (TSLA) did almost exactly what I was looking for after earnings, per my discussion in Wednesday’s report. The stock reported that day after the close, then gapped down toward the prior December and January lows at the open on Thursday. As I wrote on Wednesday, “However, if the stock opens tomorrow near those prior lows and holds, that could put it in a lower-risk entry position where you would then use those lows as your selling guides.”

That’s exactly how it played out as TSLA traded down to 294 on Thursday morning, just below the prior 294.09 late-December low. It then turned and rallied from there, triggering an undercut & rally move at that low once again. It ended the day in the upper part of its daily trading range, and on Friday continued higher before running into resistance at its 200-dma.

In this position it is extended from the prior U&R levels. Given the low volume on Friday and the resistance at the 200-dma, this could be construed as a short-sale here, using the 200-dma as a guide for an upside stop. If it can clear the 200-dma, then it would trigger as a long, using the 200-dma as a tight selling guide. Thursday’s U&R set-up was the most concrete entry for the stock, and that has now come and gone. With the stock up off those lows, this could go either way at this juncture, so just play it as it lies.



Not being cloud-related names, the other two FTD Four names I’ve been following since November, Planet Fitness (PLNT) and Etsy (ETSY), aren’t moving much. For newer members, I should explain that the FTD Four refers to four stocks, TWLO, DATA, PLNT, and ETSY, that gapped up after earnings on the same day around the early-November market follow-through. All four names then failed in December and were briefly short-sale targets before they bottomed and set up as longs again.

As high relative-strength names back then, I viewed their fate as tied to the general market outcome at that time. When the FTD Four failed in December, so did the market, and marked the start of the second leg down in the market correction that began in early October. When they all bottomed in late December, so did the general market.

All four stocks remain high relative-strength names, and so far, only TWLO has broken to new highs. Etsy (ETSY) remains in a base as it tracks tightly along its 10-dma and 20-dema. Volume has remained low, which leads me to think this thing is revving up to break out soon, the question is when. For now, it looks buyable along the 20-dema, using that as a tight selling guide, ahead of its expected earnings report on February 25th.



Planet Fitness (PLNT) is like ETSY in that it has tracked sideways throughout most of January but holds tight along its 10-dma and 20-dema. Also, like ETSY, it bottomed with the general market in late December when it posted a similar undercut & rally (U&R) long set-up after undercutting its prior November low. Over the past three days, the stock has posted stalling pocket pivots along its 10-dma, with Friday’s looking somewhat bearish after a move higher early in the day that reversed to close near the intraday lows.

Technically, PLNT remains in a buyable position, using the 20-dema as a tight selling guide. Earnings are expected on February 21st. One must wonder whether the stock’s rally in early January was due to its new advertising campaign at the time seeking to capitalize on the New Year’s resolutions that people tend to make about exercising more and losing weight.

As we all know, those resolutions often are short-lived, and so perhaps PLNT’s constructive pattern will be short-lived as well. It may go nowhere until it reports earnings, but now that I’ve dissed the stock perhaps it will mock me by breaking out this coming week. Play it as it lies.



Roku (ROKU) has been drifting higher with the market over the past three days on lighter volume after reversing near the 200-dma on Tuesday. Volume was above average that day, which indicates that sellers were willing to cash out at those levels as its expected February 20th earnings report date approaches. Overall the stock acts reasonably well, although I admit to scalping short-sale trades in it on the rallies into the 200-dma this past week after the nice bounce off the 10-dma on Monday.

For the most part, ROKU strikes me as range-bound, and this may remain the case until earnings are reported later in the month. For now, if seeking to be long the stock, pullbacks to the 10-dma or, even better and more opportunistically, the 20-dema, would offer lower-risk entries from here.



As I wrote on Wednesday, Yeti (YETI) is off the table after breaking below the 17.35 intraday low of its buyable gap-up (BGU) move of three weeks ago when the company raised guidance. It has since been drifting down toward its 50-dma, and the 10-week moving average on the weekly chart, which I show below.

Earnings are expected next week on February 14th, although the company has pre-announced those same earnings. Therefore, it’s hard to say whether the earnings report will offer anything new that will serve as a catalyst for a move off the 50-dma/10-week lines. In this market, however, being opportunistic when things look less than appetizing has been a workable approach, and so one could consider buying shares down here and using the 50-dma at 16.15 as a selling guide.



All my favored weed patch names are expected to report earnings in eight to ten days from now, so I’m not inclined to do much with any of them at this point. I will wait until earnings are reported. That said, Aurora Cannabis (ACB), which is expected to report on February 11th is looking strong here as it moved to higher closing highs on strong volume.

I would not, of course, be looking to buy the stock here, but the action is positive ahead of earnings in eight days’ time. The last of the lowest lower-risk entries occurred on the pullback two weeks ago to the 50-dma. The stock was again buyable along the 200-dma earlier this past week and is now extended.



With no U.S.-China trade deal materializing this week, profit-takers likely saw this as a good excuse to sell some Pinduoduo (PDD) after it has become quite extended on the upside. I show the two proper buy points in the stock on the chart below, and it’s obvious at this point that the move above 30 this past week was getting a bit frothy.

Look for pullbacks to the 10-dma or, even better, the 20-dema as lower-risk entries from here. PDD is not expected to report earnings until March 20th.



Momo (MOMO) might be in a better position along the 10-dma as volume dries up. My preference, however, would be to take an opportunistic approach here and look for a pullback to the 20-dema as a better, potential lower-risk entry.

Another round of trade talks is scheduled for mid-February, and at that point it’s likely to become a case of put-up-or-shut-up, so perhaps a catalyst for upside in the Chinese space will occur then. Meanwhile, MOMO is expected to report earnings on March 7th.



Notes on some other stocks discussed in the last report:

Boeing (BA) is holding above the 380.50 intraday low of Wednesday’s buyable gap-up move but stalled off the highs on Friday on above-average volume. Pullbacks to 380.50 with volume drying up would offer the best, lower-risk entries from here.

Canada Goose Holdings (GOOS) is expected to report earnings on February 14th. The stock has run into resistance at its 200-dma recently, and may present tactical short-sale opportunities at the 200-dma on rallies into the line ahead of earnings, but I would not hold any positions, long or short, through earnings.

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.

O’Neil-style investors tend to get excited when they start seeing breakouts. And we have seen more breakouts occurring in this market, many on gap-up moves following earnings, as was the case with NOW this past week and XLNX the week before. If I’m going to start buying on breakouts, those are the types of set-ups I like to play, mostly because of the high-velocity upside show they can display on the gap-up day.

But most of these names were already moving in late December and early January. Some are in extremely steep, v-shaped moves off the lows as they start to break out, and it is these types of breakouts that I am less interested in buying because of the straight-up-from-the-bottom nature. A good example of this is Veeva Systems (VEEV).

VEEV posted a buyable undercut & rally (U&R) set-up in synchrony with the market lows. This, to my way of thinking is the original proper buy point. With earnings coming up in late February, buying into this breakout can be risky unless one started buying the stock on the U&R or the subsequent retest about a week later.

VEEV demonstrates the huge advantage one has using OWL-style set-ups off the lows that occur in synchrony with a market low. ROKU was another great example, among many others. Now things strike me as somewhat obvious and extended as they pertain to individual stocks, especially those that have yet to report earnings. But, if you like to buy breakouts exclusively, the stock is still within so-called buying range of the breakout – good luck with that.



So, my approach remains the same, which is to buy strongly-acting stocks on constructive weakness, as many of the examples discussed in my reports, both written and video, have demonstrated throughout January. Chasing strength and chasing breakouts after a stock has come straight up from the late-December lows is not my preferred way of operating.

But, as we move through earnings season, I am very keen to capitalize on high-velocity buyable gap-up (BGU) moves when I see them. Not all post-earnings BGUs produce big moves after the gap-up as XLNX and NOW did. Some, like BA, just spin around near their prior highs, lulling certain investors into thinking they see a breakout, or some, like FB, may turn out to be shortable as they run into resistance at a major moving average like the 200-dma.

In some cases, as with AMZN, NFLX, and MSFT, all big-stock NASDAQ names, we’ve seen the stocks gap down and/or move lower after earnings. So, the market and earnings season has not been a one-way street to the upside. It is also notable that even though we are now three weeks past the January 7th follow-through day, big-stock techs are not participating.

This past week we saw cloud-related software names go nuts. The week before we saw semiconductors go nuts. And the moves all occurred after certain key stocks in these groups reported earnings and gapped higher. The best plays on the long side have been XLNX on its BGU and NOW on its BGU. AMD was also quite playable on its BGU and is one name I’ve discussed in my video reports throughout January.

Right now, everything is beautiful, and this is obvious to all. What wasn’t so obvious was buying into the turn back in early January as we did with several names that have since moved significantly higher. While the indexes seemed to stall a bit on Friday, despite the strong jobs number, it is not clear when we will see any significant pullback and/or consolidation of the gains off the late- December lows.

But then it doesn’t have to be clear, since we just focus on the stocks, I tend to think this market will remain a market of stocks, where we must be alert to actionable set-ups in certain names when appropriate and be ready to move when the fruit is just ripening, not long after it has already ripened. 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 no positions, though positions are subject to change at any time and without notice.

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