The Gilmo Report

January 12, 2020

January 11, 2020 6:16 pm ET

The Force has been strong in this market (yes, I did just go see the latest Star Wars movie), and new highs have been the order of the day once the headwinds presented by the short-term Iran Crisis blew over. That all sent the NASDAQ Composite Index and the other major market indexes to all-time highs on Thursday.

On Friday, the indexes ran out of gas as they reversed from new-high price territory to close in the red. At this point, the market is quite extended on the upside, so a pullback would not be surprising, especially when we consider how extended the stocks that have led this rally have become.

 

 

Precious metals have pulled back for the same reason stocks have gone higher. But the pullbacks in the iShares Silver Trust (SLV) and the SPDR Gold Shares (GLD) are nothing serious within the overall context of the price moves they have had since early December. The GLD has pulled back slightly over the past three days but has found support above its 10-dma and the top of the prior range breakout.

 

 

The SLV looks a little less robust but we should keep in mind that of the two metals it has had the higher percentage move since early December. Since December 6th it is up 11.46% to the GLD’s 8.12%. Support for the SLV would be at the 20-dema, which would bring it into buyable range, in my view, if one is looking to add to an existing position.

Speaking for myself, I sold a large chunk of my SLV position overnight on Tuesday when the metals spiked, and Dow futures tanked over 400 points on news that Iran had launched missiles at a U.S. base in Iraq. Since then, I am looking to rebuild the non-core portion of the position on the current pullback, if things play out constructively. My longer-term view on the metals remains bullish.

 

 

As gold and silver have come in a bit, so have precious metals stocks. As members know, I prefer to simply play the metals, but some leverage can be gained by buying the stocks themselves. The trick, as with the metals themselves, is to try and buy on constructive weakness and avoid chasing strength altogether.

Franco-Nevada (FNV) is perhaps my favorite gold name since the company doesn’t mine the stuff, it just owns gold production streams. Therefore, it is a slightly purer play on precious metals. The stock pushed above the $100 Century Mark for the first time in its existence over two weeks ago on a base breakout, triggering a Livermore Century Mark long entry signal at that point.

However, waiting for a pullback was rewarded when FNV came in to test the $100 Century Mark and the top of the prior base. A small shakeout just below the $100 level found support and the stock has since bounced higher. Technically this remains within buying range of the Century Mark using it as a tight selling guide.

Remember that precious metals started moving sharply to the upside in early December, long before any stirrings of conflict between the U.S. and Iran showed up. Additional upside impetus was gained on the news earlier this week. But once that blew over, the metals have not blown up, they have simply pulled back in what I would characterize as a well-deserved breather.

It is also interesting to note that despite the supposed cessation of hostilities between the U.S. and Iran, defense names continue to hold up. Lockheed-Martin (LMT), has been holding tight along its recent highs and well above the 403 intraday low of last Friday’s gap-up price range. Given that the stock is 2% or so above the 403 BGU low, then it remains within buyable range of that BGU, using the $403 price level as your selling guide.

Note also that LMT’s move last week was also a Jesse Livermore Century Mark Rule buy signal at the $400 price level. Therefore, it remains in force as a Century Mark buy using the $400 price level as a selling guide. Despite the de-escalation of tensions between the U.S. and Iran, defense names, including LMT, are still holding up very well, which may offer a clue as to where the conflict is headed next.

 

 

Tesla (TSLA) looks at least near-term climactic to me, as I noted in my mid-week report, and has been bumping up against the $500 Century Mark. Interestingly, it hit an intraday high of 498.49 on Wednesday and then an intraday high of 498.80 on Thursday. So, as it turns out, the $500 Century Mark has been a reference for short-sale entries when the stock comes within range of $500.

Otherwise, if it can successfully clear the $500 price level, then we’ve got another Century Mark buy set-up on our hands. Depending on how many shorts are left in the stock at this point, it may or may not have the juice it needs to clear $500, and this could also serve as a point of resistance on the short side. A 360-degree situation at the $500 Century Mark!

 

 

Netflix (NFLX) was looking strong on Wednesday as it jacked to higher highs on a strong pocket pivot, but it only serves to illustrate why we do not chase strength in this market. The move turned out to be a bit on the double-toppy side, and the stock is now careening back toward its 200-dma.

If NFLX finds support at the 200-dma, then that would put it in a lower-risk entry position using the 200-dma as a selling guide. Otherwise, a breach of the 200-dma could turn the stock into a short-sale target at that point. NFLX is expected to report earnings on January 21st.

 

 

All four of the big stocks shown in the group chart below, Apple (AAPL), Amazon.com (AMZN), Alphabet (GOOG), and Microsoft (MSFT), are expected to report earnings toward the end of the month. All four are also extended on the upside, with AAPL and GOOG sitting above Century Marks at $300 and $1400, respectively.

AAPL is churning near its highs on heavy volume, as is GOOG, while AMZN and MSFT finally rolled over their highs on Friday. Ahead of their upcoming earnings reports, all of these are far too extended to buy here. They illustrate the highly extended nature of those stocks that have been leading the market rally as of late.

 

 

KLA-Tencor (KLAC) has played out as a short over the past two days, something I discussed in Wednesday’s report. The stock opened just above the 10-dma on Thursday and then reversed back below the line, triggering a short-sale entry. It rallied back up to the 10-dma on Friday before reversing to close lower and at its 50-dma.

This is slightly extended on the downside but represented a nice short-sale scalp if you were watching it both Thursday and Friday. Now it’s a matter of seeing whether it can muster a convincing bounce off the 50-dma or whether the bounce becomes shortable near the 20-dema.

 

 

Applied Materials (AMAT), Advanced Micro Devices (AMD) and Micron Technology (MU) are all peeling off of their recent highs. AMAT and AMD are expected to report earnings in early February, while MU doesn’t report until March.

Only MU can be considered buyable here at the 10-dma and the top of a recent breakout, but I still do not find it all that appetizing up here. I have a bias against chasing stocks that are up in their patterns since I find that this bias is generally rewarded. The same goes for AMAT and AMD, but I might get interested in any opportunistic pullbacks to their 20-demas should those occur.

 

 

Qualcomm (QCOM) has continued higher after posting a pocket pivot U&R at its 50-dma on Tuesday. That move ran into resistance at the prior November highs on Friday as the stock reversed hard to close below where it opened and near the intraday lows on very heavy volume.

QCOM is extended in this position but can be watched for constructive pullbacks to the 10-dma as lower-risk entries. The company is expected to report earnings February 5th.

 

 

Universal Display (OLED) move to higher highs on Thursday but stalled badly before rolling back on Friday. I only like this on pullbacks to the 20-dema, but if one is already long the stock on the last pullback to the 20-dema on Monday everything is working fine, so far.

However, despite the rip-roaring market, OLED isn’t even 5% past its recent breakout point, so the move so far lacks any real upside velocity. While semiconductors have been a strong, leading area of the market, I remain vigilant to these as potential short-sale targets if we start seeing some near-term failures.

One example would be Broadcom (AVGO), not shown, which has morphed into a late-stage failed-base over the past couple of weeks. I’ll discuss this and other semiconductors in this vein in my weekend video report.

 

 

Disney (DIS) is now at last-stand support along its 50-dma. Volume dried up Friday to -51.8% below average as it met up with its 50-dma. This puts it in a lower-risk entry position using the 50-dma as a tight selling guide. But a breach of the 50-dma could also trigger this as a short-sale at that point, so play it as it lies in 360-degree fashion.

 

 

The rotation into cloud names that I began picking up over a week ago caught fire this past week as clouds across the board shot higher. The biggest moves, as is typical in this market, came from those cloud names rounding out the lows of potential new bases.

The group chart below shows the synchronized moves in nine cloud names, all of which I’ve discussed in recent reports and video reports. The question I have is why the sudden and persistent pile-driver action into these stocks for several days in a row? Has there been a fundamental sea-change in these names? Not that I can see.

But as is typical in this market, money will suddenly rotate into a formerly leading but now beaten-down group, resulting in what appears to be a highly synchronized move that strikes me as more machine-like than human. All these names are wildly extended at this stage, and I will discuss what we might do with them now in my weekend GVR.

 

 

Meanwhile, DocuSign (DOCU) is sitting at new highs but is still going sideways. On Friday it pulled into its 20-dema, where it found some support at the line as it traded up off the intraday lows and the 20-dema on higher volume. This puts the stock in a lower-risk entry position using the 20-dema as a tight selling guide.

 

 

RingCentral (RNG), not shown, is technically still within buying range of a recent breakout. However, I would not seek to chase the stock here and instead would take the more opportunistic route of waiting and watching for a pullback closer to the rising 10-dma, now at 175.06.

Coupa Software (COUP), not shown, is extended from last week’s base breakout to new highs. As with RNG, I would take the opportunistic approach here and watch for a pullback to the rising 10-dma, now at 159.61, for a potentially lower-risk entry.

Spotify (SPOT) popped out of its base early in the week on a pocket pivot breakout move. After a brief move up to the $160 price level, the stock is now pulling back into its 10-dma as volume declines. This brings it into a lower-risk entry position at the 10-dma, using the line as a tight selling guide.

 

 

I discussed Nutanix (NTNX) as another turnaround cloud name in my last report and it has since moved higher. The proper entry would have been along the 50-dma on Wednesday, but it is now extended. Just another example of the move into cloud-related names.

 

 

Recent cloud IPO DataDog (DDOG) is tracking tight sideways following Monday’s big-volume pocket pivot through the 10-dma and 20-dema. This is still extended, so I’m watching for any pullbacks to the 10-dma/20-dema confluence as lower-risk entry opportunities from here.

In this current position, DDOG is extended, obviously. Therefore, constructive pullbacks to the confluence of the 10-dma and 20-dema would offer lower-risk entries from here.

 

 

CloudFlare (NET) is getting a little schizophrenic here around the 50-dma. A U&R long entry through the prior 16.92 low in the pattern, followed by a strong-volume pocket pivot through the 50-dma on Monday, has gone nowhere. NET pulled an ugly outside reversal to the downside on Thursday and closed below its 50-dma again.

On Friday, NET just barely regained the 50-dma, so could be treated as a moving-average undercut & rally (MAU&R) type of long entry here. In this case, one would use the 50-dma as a very tight selling guide.

 

 

Inmode (INMD) has moved higher since Tuesday’s U&R through the early-November buyable gap-up (BGU) intraday low at 36.50, but finally ran into resistance around the 50-dma. The stock reversed off its highs on heavy volume. But after a four-day move into some overhead price congestion between the $40 and $50 price levels, the pullback is not surprising.

Watch now for any constructive pullbacks to the higher 20-dema or the lower 10-dma as lower-risk entry possibilities. Otherwise, if one can borrow this, it may also be playable in 360-degree fashion as a short right here, using the 50-dma as a tight covering guide.

 

 

Peloton (PTON) spent the last week reversing most of the run it had the prior week. Once it ran into overhead price congestion around the $32 price level, the stock began a steady descent back to the downside and breached the 50-dma on heavy volume on Thursday.

It found some support off the intraday lows on Friday to close in positive territory. However, at this point, the only actionable set-up on the long side would be a quick move back above the 50-dma. That would trigger a moving-average undercut & rally (MAU&R) long entry at the 50-dma and using the line as a tight selling guide.

Short-interest in the stock has continued to expand as of the latest report date on December 31st. Short-interest now numbers 28.3 million shares, 65.3% of the float and the highest since it reached 31.5 million at the end of October. It’s possible that the rally the prior week was fueled by short-covering, but if a critical mass remains it could fuel another move back above the 50-dma.

 

 

Zumiez (ZUMZ) gave buyers the opportunistic pullback to the 20-dema on Friday and bounced off the line as volume dried up sharply to -49% below average. The stock remains buyable on pullbacks to the 20-dema, but notice that it has gone nowhere since its early-December base breakout.

 

 

Roku (ROKU) has moved lower for four-straight days since running into resistance at the 50-dma on Monday and Tuesday. It is now testing its late-December low from whence it rallied up into the 50-dma, setting up the recent short entry. If short the stock at the 50-dma, then the 10-dma can be used as a trailing stop with the ultimate objective being a full breakdown to the 200-dma.

 

 

A couple of weeks ago or so, I began discussing Keysight Technologies (KEYS) as a potential 360-degree short-sale target. After breaching the 50-dma cleanly on December 30th it began the New Year with a rally into the 50-dma which offered a lower-risk, short-sale entry point.

From there, KEYS has bounced its way lower, most recently running into resistance at the confluence of the 10-dma and 20-dema on Thursday and Friday. It is now sitting right on top of its prior base breakout point from mid-October and the $100 Century Mark.

This could trigger a bounce back up toward the 10-dma/20-dema, which I would use as a short-sale entry opportunity. Otherwise, a breach of the $100 Century Mark would constitute another type of short-sale entry using the $100 price level as a tight covering guide.

 

 

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.

Currently, I don’t see much in the way of long set-ups that I’m willing to pound the table on. Opportunistic entries were prevalent earlier in the week, which is my preferred way to operate in this market. But one had to be brave enough to buy into the face of uncertainty over U.S.-Iranian tensions. Thus, the best long entry set-ups have come and gone.

Things could have turned out badly, but one is better off taking calculated risks on pullbacks to areas of support rather than chasing strength. So far, the pullbacks engendered by the news flow early this past week have worked out well, for the most part. This could change, of course, given how extended things are on the upside.

This week we will begin moving more earnestly into earnings season, with a full slate of big-stock financials set to report. As we move through earnings season, my focus begins to turn to playing the high-velocity moves that tend to occur after a company reports earnings. Remember that TSLA’s big price move began in October with a bottom-fishing buyable gap-up (BFBGU) after earnings.

For now, I don’t think one has to start piling into stocks at this stage. For me, it is enough to prepare for earnings season as we see what the financials give us in the way of high-velocity price moves as they parade through their earnings reports this coming week. On Monday, we’ll see earnings from C, JPM, and WFC, on Tuesday its BAC, GS, and USB, and on Wednesday SCHW and MS.

The week after, we’ll be seeing big-stock NASDAQ names start to report, starting with NFLX, and that will continue into the end of the month. This will no doubt produce a lot of tradeable, high-velocity price action. As we progress through earnings season, I will discuss where I see the best opportunities and how to handle them depending on how they play out. These may appear in more frequent video reports. Watch for them.

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.

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