The Gilmo Report

January 1, 2020

January 1, 2020 3:22 pm ET

The indexes sputtered into year-end with the NASDAQ Composite Index selling off for two days in a row off the all-time highs before finding support at the 10-dma on Tuesday. Volume was higher on the final trading day of the year, giving the day the look of supporting action at the line. So far, just a bout of year-end profit-taking.

 

 

Precious metals held their December gains into year-end, closing tightly along their prior October-November highs. The iShares Silver Trust (SLV), shown below, and the SPDR Gold Shares (GLD) have rallied nicely throughout December, with their 10-dmas now serving as reference points for potentially buyable pullbacks from here.

 

 

The Snag of the Day on New Year’s Eve had to be Tesla (TSLA). I blogged on the day after Christmas that I would be looking to sell the stock into the extended move. After all, 20-30 points of upside “in a jiffy,” as Jesse Livermore once put it, is what we’re looking for with a Century Mark Rule trade, and we certainly got that and more.

Once something gets extended and you sell into the strength, you then look for a buyable pullback. The more opportunistic such a pullback is the better, and Tuesday’s move afforded just such an opportunistic entry. However, I would note that most traders would probably miss this unless they had TSLA on a daily action watch list of just a handful of stocks that are being watched very closely, an approach that I have advocated in this market.

TSLA had already broken off its highs above $430 last Friday and again on Monday. One sharp pullback to the 10-dma is not enough to get me to buy, however, since I tend to be of a more opportunistic bent in this market, and TSLA provided that kind of pullback when it tested the $400 Century Mark on Tuesday, coming within half a percent before sharply careening back to the upside.

 

 

The five-minute 620-chart tells the story. TSLA was already gapping down at the open and opened at 405.18 after closing Monday at 414.70. Within the first minute of trade, it hit a low of 402.08 and shot back to the upside. The movement was so quick that even the fastest trigger-finger would have had trouble picking it off before it got up to $410 within the next three minutes.

However, since the 405.18 open was about 1.25% above the $400 price level, one could have entered there with the idea of using the $400 Century Mark, all of 1.25% lower, as a selling guide. TSLA then closed the day at 418.33, but most of the price movement occurred within the first 90 minutes of trade, quite typical for this market.

TSLA is expected to release their latest sales and delivery numbers tomorrow. This could have some bearing on where the stock goes from here, so be prepared if long the stock.

 

 

While TSLA illustrates one aspect of opportunistic OWL-style trading, Zumiez (ZUMZ) helps to illustrate another. That is shunning breakouts as long entry signals and instead taking the opportunistic route of waiting for weakness following such a breakout to buy into.

ZUMZ powerful breakout in early December led to an immediate six-day pullback that caused the breakout to fail and sent the stock back below the 50-dma. At that point, ZUMZ had filled the prior gap-up rising window and was also rallying back above the 50-dma which then triggered a moving-average undercut & rally (MAU&R) long entry signal.

Bingo. The stock then consolidated for several days along its 50-dma, offering several additional entry points on low-volume pullbacks to the line before pressing higher. On Friday, it came back up into re-breakout territory as it now approaches the prior, early-December highs.

 

 

In the land of big-stock NASDAQ stocks, Amazon.com (AMZN) gave opportunistic buyers a nice entry on Tuesday as it pulled into its 200-dma on light volume. This came after a big-volume pocket pivot last Thursday, which we of course don’t try and chase. Instead, the pullback to the 200-dma offers a lower-risk entry and that remains the case for any additional pullbacks using the 200-dma as a tight selling guide.

 

 

Among the big-stock NASDAQ names that I follow, everything is extended. Apple (AAPL) closed 2019 at 293.64, which puts it a little over 2% away from the $300 price level. Meanwhile, Facebook (FB) is coming in to test its 20-dema, where I would view the stock as being in a lower-risk entry position using the 20-dema as a tight selling guide.

 

 

Netflix (NFLX) has closed below its 200-dma two days in a row, ending the year just below the line as volume remains very light. There are two ways to look at this, and the first would be as a short right here using the 200-dma as a tight covering guide.

The 360-degree view, however, indicates that a move back above the 200-dma would not only stop-out any short-selling attempt but would also create a MAU&R long entry signal which would then use the 200-dma as a selling guide. This will be interesting to see how it plays out, but simply be aware of the two-sided set-up here and be prepared to go with it based on the real-time price/volume evidence.

 

 

Among the semiconductors discussed in recent reports, Applied Materials (AMAT) is sitting in a lower-risk entry position along the 20-dema. The 20-dema serves as a tight selling guide. When it comes to leading semiconductors, including names like Micron Technology (MU) and Advanced Micro Devices (AMD), I’d watch for similar such pullbacks to the 20-dema as potential lower-risk entry opportunities.

 

 

Qualcomm (QCOM) continues to show tight action along its 10-dma and 20-dema, with the 20-dema serving as near-term support. This remains in a buyable position using the 20-dema as a tight selling guide, or the 50-dma as a wider selling guide depending on risk preference.

 

 

Universal Display (OLED) is a semiconductor name I’ve discussed frequently in my GVRs over the past couple of months, and it posted a big-volume breakout last Friday. The move came on news that someone or something had swept the June 19th 260 calls that day, but the breakout quickly lost momentum.

OLED illustrates again why I do not chase strength, especially on standard-issue base breakouts. I am simply not wiling to take excessive risk by buying a breakout up high and then using what I consider a meaningless 7-8% stop. While this might rattle the cages of those who prefer to deal in dogma than reality, there is zero statistical evidence to support the idea of a 7-8% stop as optimal.

I never buy stocks using this concept as it is simply not confirmed as optimal by the data. However, with the stock pulling right back into the breakout point and the 10-dma it becomes much more buyable because risk can be controlled much more tightly by using the 10-dma as a selling guide. Thus, this becomes my preferred entry vs. chasing the breakout.

 

 

Disney (DIS) remains interesting to me as a 360-degree play because I view its future as being tied to the idea of whether the new Disney+ streaming surface gains dominance and thus garners the stock a P/E expansion more like NFLX’s. From a tactical swing-trading perspective, however, the stock was a short on Monday at the confluence of its 10-dma and 20-dema, and then moved to lower lows from there.

That negated the prior U&R attempt through the December 10th low at 145.05. Now DIS is trying to pull another U&R using a more current low in the pattern at 144.33. The stock closed Tuesday at 144.63, so this U&R is in force using the 144.33 low as a tight selling guide.

 

 

DataDog (DDOG) shrugged off last Friday’s heavy selling as it rebounded back above its 50-dma and the prior 33.06 low in the pattern on Monday. So, this was not only a standard U&R long entry but also a moving-average undercut & rally (MAU&R) long entry at the 50-dma on Monday.

Call it a two-for-one deal. DDOG is now extended but one can watch for orderly pullbacks to the 50-dma as potentially lower-risk entries from here

 

 

CloudFlare (NET) rebounded smartly on Monday to post a U&R long entry as it rallied back above the prior 16.92 low. This quickly brings it back into focus as a U&R long entry right here using the 16.92 low as a tight selling guide.

 

 

Inmode (INMD) is another recent IPO that came public back in August and then suddenly surged to the upside in November. It has since been consolidating that torrid move, and it certainly is taking its sweet time about it. The prior move got somewhat parabolic in November and the stock has now completed three waves to the downside since then.

Thus, my thinking is that if this thing is going to pull off a successful U&R this current position likely has a better chance of working. And so far, we’re looking at a U&R that is in force through the prior 38.04 low given INMD’s 39.20 close on Tuesday.

INMD is one of the few recent IPOs in this market that has strong earnings and sales growth of 77% and 57%, respectively, in the last quarter, and 109% and 55% in the prior quarter. Play it as it lies.

 

 

Peloton (PTON) has been something of a controversial stock lately thanks to its sexist commercials and analysts calls for a virtual implosion and decimation of the stock. The infamous and often wrong Andrew Left of Citron Research (the same guy who called ROKU “uninvestable” at $38 last January) has put a $5 price target on the stock.

With so many hating the stock, the most current short-interest report shows 27.5 million shares sold short as of December 13th. That would be an increase over the 26.5 million shares of short-interest that were reported at the end of November against a current float of 43.3 million. That’s a whopping 63.5% of the float sold short, and I’m trying to remember when, if ever, I’ve seen a stock with short-interest as a percentage of float that large.

In any case, as I’ve discussed in recent video reports, PTON came all the way down to the top of the prior base and area of price congestion that I’ve highlighted on the chart. It then bounced for three days and is now back above the 50-dma, which factors in as a MAU&R long entry using the 50-dma as a tight selling guide.

This may require some finesse here along the 50-dma as the stock could also retest last Friday’s low. But my thinking is that the closer you are to the top of the prior area of congestion the better the chances of a bounce if no natural sellers show up at these levels.

 

 

RingCentral (RNG) is still tracking tightly along its 10-dma, 20-dema, and 50-dma as volume remains rather dry. This remains actionable here using the lowest of the three moving averages as your selling guide, but I’d be looking for some resolution to this pattern to occur sooner than later if I’m going to get long here.

 

 

DocuSign (DOCU) is a bit like RNG in that it continues to track tight sideways. So far, as I’ve indicated in recent reports, pullbacks to the 20-dema have been the more opportunistic entries, and we saw such a pullback on Monday. The stock then found ready support around the line and rebounded to close in the upper part of its daily price range.

DOCU remains in a buyable position here using the 20-dema as your selling guide. If this market wants to go higher, I see a number of stocks continuing to coil up here as they hold tightly within bases, and both DOCU and RNG fit the bill here.

 

 

Coupa Software (COUP) remains a very indecisive stock that continues to flop around as it works on what is so far a 12-week, cup-with-handle base, so the view on the weekly chart perhaps helps to add some clarity. This base has formed after a prior failed breakout back in October. The stock has pulled into its 10-week moving average so far this week which may put it in a lower-risk entry position.

Keep in mind that COUP’s base is also later-stage, and so a breach of the 50-dma/10-week lines could trigger this as a short-sale. For now, this is a 360-degree situation that has yet to resolve decisively, but the fact that it is still setting up here in a base makes it interesting on the long side pending further information to the contrary.

 

 

Roku (ROKU) has worked as a tactical short after failing at the 20-dema last week. As I discussed over the weekend, the overall pattern is playing out as a late-stage, failed-base (LSFB), short-sale set-up following a recently failed breakout from a later-stage, cup-with-handle formation.

Notice that I always use the term “later-stage” as opposed to “late-stage.” That is because the idea that stocks will form 3-4 bases on the way up before they top is another one of those myths that is not corroborated by statistical evidence. Leading stocks can form 3, 4, 5, 6, 7 or more bases on the way up before topping, and the idea of “later-stage” considers the idea of lateness combined with overall market context.

In a roaring, sustained bull market a fifth base may not be late-stage, although it is undeniably “later-stage.” Likewise, in a tepid, uncertain market, a second base on the way up could turn out to be the “late-stage” base depending on market context. Therefore, one must interpret the idea of later-stage within the context of the general market environment – one-size-fits-all rules about late-stage bases are not helpful..

When it comes to ROKU, the recent C&H is certainly later-stage, and in any case the stock is certainly not in a shortable position here. In fact, it posted another U&R, its second in December, after undercutting and rallying back above its prior mid-December low at 127.53. Therefore, this could work as a long swing-trade back up to the 10-dma, 20-dema, or 50-dma where the stock could then become shortable again.

 

 

I discussed watching for some double-toppy type action in Spotify (SPOT) over the weekend and so far, the stock has pulled back over the past two days. This was not too hard to figure out since the best entries for the stock occurred down lower in the pattern. If one was looking to get long the stock, as I wrote over the weekend, then a “a deeper pullback to the 20-dema might provide a more opportunistic entry, which I would prefer, speaking for myself.”

That is what we saw on Tuesday, and SPOT held support along the 20-dema as volume dried up. This created a profitable two-day tactical short-sale swing-trade off the near-term, double-top set-up. Now SPOT is attempting to pull a U&R at the prior 148.81 low of two Fridays ago. So, this, combined with support at the 20-dema, may put it in a lower-risk entry here using the 20-dema or the prior low as a tight selling guide.

Otherwise, a breach of the 20-dema would trigger this as a full-blown, later-stage, short-sale set-up. And my guess is that this would likely work best as a short within the context of a general market pullback and correction. Play it as it lies.

 

 

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.

As I wrote above, I see enough in the way of stocks holding tight within bases or other lower-risk long entry positions that may work out profitably if the general market keeps rallying into the New Year.

In 2020 I see the Fed lowering rates sooner than later and the dollar declining. This should be good for gold and silver. As I’ve indicated in recent reports over the past month, I was accumulating the SLV down below 16, and that strategy has been working so far. We’ll see how that plays out, but if the Fed remains in easing mode this may be just as good for stocks as it is for precious metals.

Therefore, our approach remains the same in 2020 as it was in 2019. Maintain a 360-degree approach by being aware of the possible permutations or price-volume action in your watch list names on both the long and short sides and be ready to play them as they lie. Happy New Year!

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.

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. ©2008-2020 Gil Morales & Company, LLC. All rights reserved.