The Gilmo Report

January 13, 2019

January 12, 2019

The indexes have spent the past two days consolidating their recent gains. This is consistent with the NASDAQ Composite Index at least pausing as it runs into a logical line of resistance at its 50-dma. Whether this sets up a general market move higher or whether we see a deeper pullback and retest of the Christmas Eve lows is still an open question yet to be answered.

However, the tight sideways action with Friday’s price range narrowing sharply while volume declines looks constructive. So, we might look for the index to push through the 50-dma in the coming days if this type of constructive consolidation continues.

 

GR011319-$COMPQ

 

The context for a NASDAQ Composite move up through its 50-dma is provided by the fact that the S&P 500 Dow Jones Industrials Indexes both look the same as they remain a stone’s throw away from their own 50-dmas. Thus, a rally up to the 50-dma in the S&P and the Dow could easily coincide with a NASDAQ move up through its own 50-dma.

The lows of October, November, and December are also coming into play here, so there are plenty of hurdles for the indexes to clear. If they can, then we could see the rally continue further, perhaps up to the 200-dma. If they can’t, then a retest of the Christmas Eve lows may occur, although this doesn’t necessarily have to break to lower lows.

 

GR011319-$SPX

 

A retest would be more consistent with the example of early 2008, where the market just chopped around for a period of time after a second leg down in an ongoing bear market. After a retest of the prior February 2008 low, the indexes then embarked on a bear market rally that ended in early June. That finally resulted in the third bear market leg down in September/October 2008.

Where we go from here, however, does not have to trace out exactly like 2008, although the market peak in October 2018 down to the Christmas Eve low had traced out very much like the market peak in late October 2007 into the late February 2008 low. I’ve shown that chart many times before, but here it is one more time:

 

GR011319-NASDAQ Composite 2007-2008

 

You can see that a lot happened between the second leg and third leg down in that bear market. The ensuing bull market rally between March 2008 and June also resulted in a sharp down leg from early June 2008 to early July. This produced some very playable short-term to intermediate-term trends both long and short before the brutal third leg down that began in September 2008.

Studying this chart from 2007-2008 only serves to keep us aware of the possibilities that can occur, even during what turned out to be a very crisis-laden, brutal bear market. We can see that in-between the second and third legs down the market showed both a bull and a bear face.

The market rally off the lows has produced very similar action in many formerly broken-down leaders, as well as other formerly broken-down stocks that are pushing back to their highs. In some cases, as with Alteryx (AYX), for example, they are trying to break out, resulting in a straight-up-from-the-bottom (SUFB) breakout to all-time highs.

Such SUFB breakouts are vulnerable to failure, but I would say that at the very least these types of moves have to consolidate those sharp, v-shaped gains and spend some time digesting. Such digestion could result in pullbacks to areas of support, such as a moving average. If support doesn’t hold, then the stock becomes vulnerable to a late-stage type of failure.

 

GR011319-AYX

 

On the daily chart we can see that AYX spent a few days around the cusp of the New Year pulling into the 50-dma, where it found support before breaking out. On the weekly chart, we only see three weeks up coming straight off the lows. The pattern is also wide and loose, which doesn’t look all that appetizing on the breakout – a preferable entry would have been on the pullbacks to the 50-dma over a week ago.

 

GR011319-AYX Weekly

 

AYX is an example of a stock that is approaching its prior highs or breaking out to new highs from a v-shaped position. How these patterns resolve and/or consolidate from here will provide a very big clue as to the future direction of this market. Some of the FTD Four are in similar situations, as I discussed in my Wednesday report.

Twilio (TWLO) has spent the past three days digesting the v-shaped gains off the late-December lows, and on Friday tried to clear the $100 Century Mark. It failed and reversed back below 100 to close near the intraday lows on above-average volume. It remains near the highs of its current two-month base, with no breakout to speak of yet.

TWLO’s weekly chart, not shown, looks very similar to AYX’s weekly chart, and the two are certainly very sloppy when viewed on that time frame. Thus, even with AYX’s breakout, and the potential for TWLO to breakout, the set-ups don’t strike me as all that appealing. As I like to joke, they are chart patterns that only a machine (as in computer algos) could love.

 

GR011319-TWLO

 

If one shorted TWLO on the failure at 100 on Friday, then it was good for a nice short-sale scalp, but nothing more. With earnings expected in the second week of February, it’s possible that the stock just keeps flopping around in its current base until then. But I would not be averse to any opportunistic entries that might arise on a constructive retest of the 10-dma/20-dema confluence.

Planet Fitness (PLNT) has broken out to new highs and has done a reasonable job of holding those highs as the market has tracked sideways over the past two days. The stock has mimicked the market in this regard, but I still tend to think it is in an extended position given the move that was straight up from the bottom.

The constructive pullback into the 50-dma over a week ago was a better entry, in my view. Also, if one wanted to be creative, there was something of a trendline breakout to be had six days ago on the chart on a single five-day pocket pivot move. From here pullbacks to the 10-dma would offer better, lower-risk entries from here.

 

GR011319-PLNT

 

Tableau Software (DATA) failed to hold its 20-dema on Friday, triggering it as a short-sale at that point. Remember that an initial breakdown below the 20-dema is your first clue of a possible late-stage type of failure, but only a subsequent breach of the 50-dma would confirm this, obviously. Volume dried up on Friday as the stock approaches the 50-dma without breaching it.

So, this could be viewed as a lower-risk entry given the volume decline. DATA also had less of a sharp v-shaped move off the late December lows as it never broke that far below its 50-dma, and when it did in November and December it recovered quickly. If buying here, then the 50-dma would serve as a tight selling guide, with the flip-side idea of the stock turning into a short-sale target if it were to bust the 50-dma.

 

GR011319-DATA

 

Etsy (ETSY) is wavering on a re-breakout attempt as the action becomes choppy following a v-shaped rally off its late-December lows. Thursday’s pullback to the 20-dema provided a lower-risk entry opportunity for those interested in going long the stock. However, it still appears to need some further consolidation above the 20-dema, so that pullbacks similar to Thursday’s would offer lower-risk entries from here.

 

GR011319-ETSY

 

Workday (WDAY) is one of the more perfectly v-shaped patterns I see among stocks I’m following on my watch lists. It has pushed right back up to the prior highs around the $170 price level rallied right up to its prior highs around $170 today where it has stalled over the past three days. Volume has been drying up, so it could simply be working on a little handle to this little v-shaped cup formation.

That said, I think pullbacks to the 10-dma or even the lower 20-dema would offer lower-risk entries from here. I like the FTD Four and WDAY as possible long plays on constructive pullbacks here, which is enhanced by the fact that all five companies are not expected to report earnings in February. This takes the need to play earnings roulette out of the picture.

 

GR011319-WDAY

 

Atlassian Corp. (TEAM) does have earnings roulette hanging over its head since it is expected to report earnings next Thursday, January 17th, after the close. It continues to hold its recent cup-with-handle breakout but isn’t making much further progress as it holds tight sideways with volume drying up.

With earnings coming up this week, I don’t see anything to do with the stock, and unless one is comfortable with any profit cushion gained as a result of buying the stock near the 10-dma on Monday, as I discussed last weekend, perhaps taking some off the table would be prudent.

 

GR011319-TEAM

 

Splunk (SPLK) and Salesforce.com (CRM) have identical shapes, which are also similar to the FTD Four’s shapes although at different levels in their charts. Both SPLK and CRM are down further in their bases and have drifted to higher highs on light volume. In both cases I look at these less as buyable situations right here given their extended state, but there is always the possibility that they could have sharp pullbacks to near-term support at their 10-dmas.

This would make them potential tactical shorts, but I think this would only be the case if we were to see a general market pullback as part of a retest of the Christmas Eve lows. At the very least it would produce a possible short-sale scalp, while a more serious market break could see the stocks break below their 200-dmas. In any case, neither is in an actionable position in either direction, just yet.

 

GR011319-SPLK

 

GR011319-CRM

 

Perhaps ServiceNow (NOW) is in a better position here as it builds a small handle to its recent v-shaped move off the Christmas Eve lows. The stock is a little closer to its 10-dma, so that constructive pullbacks to the 10-dma would offer lower-risk entries from here. Those who pay attention to such things might also notice that the stock is forming something of a reverse head-and-shoulders formation.

NOW did pull down close to its 10-dma on Friday, and then pulled an outside reversal to the upside to close positive as volume picked up but remained well below average. The only mitigating factor here is that the company is expected to report earnings on January 30th, so if buying it at these levels, one would be looking for a strong move over the next two weeks before earnings.

 

GR011319-NOW

 

The Trade Desk (TTD) is sporting very strong earnings and sales growth and regained its 50-dma earlier this past week. Note that volume was light all the way up off the Christmas Eve lows. But volume dried up even more to -43% below average on Friday as the stock pulled back toward its 50-dma.

Because it has regained the 50-dma, the stock qualifies as a moving-average undercut & rally (MAU&R) set-up using the 50-dma. As with the standard price U&R, the trigger point, which in this case is the 50-dma, would serve as a tight selling guide.

 

GR011319-TTD

 

Roku (ROKU) continues to consolidate its big move earlier in the week on the buyable gap-up (BGU) through the 50-dma. Despite the stock closing just below the 50-dma on Friday, the sideways action following Monday’s BGU looks normal and constructive. Volume has steadily dried up as the stock has formed a short four-day bull flag.

Volume on Friday represented a sharp dry-up relative to the prior four days, including the BGU day, as the stock held in a very tight price range. ROKU has also weathered a downgrade from the infamous Citron Research, as well as news that Apple (AAPL) and Samsung are teaming up to provide AAPL content on Samsung devices. That news in fact came out last weekend, and it did not prevent ROKU from blasting significantly higher on Monday.

The intraday low of Monday’s BGU price range is 36.50, so as the stock drifts closer to that price level it offers lower-risk entry opportunities. It’s not clear, however, that it will pull back that far, as it has held reasonably tight over the past four days with the daily price range getting narrower each day. Any move below 38.50 would make the stock quite attractive after the strong BGU.

If I saw the stock drop closer to the 36.50 BGU low and the rising 10-dma/20-dema confluence, I might consider that a gift. But the way the stock is holding tight here means it may just wait for the 10-dma and 20-dema to catch up, at which point they would certainly provide strong references for support and a lower-risk entry within the current post-BGU flag formation.

If one began playing the stock when I first discussed it around the $30 price level and participated in the BGU, then one has some profit cushion in the stock to play with. I tend to think that a secondary entry following the BGU is coming, and we just need to wait and see how this plays out in the coming days. Details, details!

 

GR011319-ROKU

 

Netflix (NFLX) has been unstoppable since bottoming in late December, posting 11 out of 12 up days in a row as it has rapidly cleared the 50-dma and then the 200-dma on Friday. Friday’s move also qualified as a pocket pivot through the 200-dma, but the move is moot. That’s because the company is expected to report earnings on Thursday, January 17th, after the close, so I wouldn’t be doing anything with the stock at this point ahead of earnings.

It’s interesting to note a couple of things about NFLX and its little cousin ROKU. First, both have had similar percentage moves off their lows of late December from trough to peak. Secondly, I discussed in my New Year’s Day video report that we needed to watch both stocks, since a move in NFLX would likely coincide with a move in ROKU. So far that has played out according to script, and attests to the reality of wolf pack moves in the market.

 

GR011319-NFLX

 

Speaking of wolf pack moves, the weed patch stocks have all rocketed this week, but for those who are privy to my video reports, you know that last weekend I discussed Aurora Cannabis (ACB) as one stock in the group that was setting up after posting an undercut & rally move nearly three weeks ago.

That U&R led to two weeks of tight sideways action that never saw the stock drop below the prior 4.69 low. Finally, the U&R seed sprouted this past week as ACB launched nearly 30% higher in three days. The entire group, including Canopy Growth (CGC) and Tilray (TLRY) also launched, and all are extended currently.

ACB cleared its 50-dma on the third pocket pivot in a row on Friday before running into the 200-dma. From here, pullbacks to the 50-dma would offer lower-risk entries. I will discuss the dynamics of the other weed patch names in this weekend’s video report.

 

GR011319-ACB

 

Canada Goose Holdings (GOOS) retested the 46.24 low of its prior undercut & rally (U&R) move on Monday. This was the retest I was looking for and gave alert buyers a very reasonable shot when it sold down to 45.70 on Thursday morning and came within 1.5% of the 10-dma. It then shot back up through the 46.25 low, triggering the U&R once again. I also discussed in detail how one would have handled it on the 620 five-minute intraday chart in my Thursday video report.

This is not unusual action since some U&Rs can take as many as 2-3 attempts at clearing a prior low in their patterns before finally gaining some traction. Go study the late-December low in NFLX and you will see that there were two back-to-back U&Rs right at the low where the first one failed and the second succeeded, and in grand fashion.

I think the reason GOOS had a steep pullback on Thursday was because it had already had a big move off the prior late-December lows near 40. By the time it triggered the 46.24 U&R buy point, it was up over 15%, so it was susceptible to some profit-taking as it got extended. For that reason, the action looks entirely acceptable.

GOOS closed at 47.82 about 3-4% above the 46.25 low on Friday. From here I would watch for any pullbacks closer to 47 as lower-risk entry opportunities, should they occur. The company is expected to report earnings on February 7th, and I would not be surprised if the company reported strong results as it did last time it reported.

 

GR011319-GOOS

 

The mid-level ministerial trade talks between the U.S. and China don’t appear to have produced any concrete agreements, keeping most of the Chinese stocks in limbo. This did not deter Pinduoduo (PDD) from posting higher highs. I discussed the stock as a buyable situation last weekend based on its initial pocket pivot at the confluence of the 10-dma and 20-dema.

PDD is now extended but demonstrates how one can simply choose the best set-ups among so many beaten-down Chinese names and get good results. The stock has performed very well so far even as the rest of the Chinese stocks continue to chop around, and no trade agreement has been forthcoming.

As far as PPD seems to be concerned, a trade agreement is not a factor, because it just keeps going higher. The stock is extended from its recent breakout through the $24 price area following the initial pocket pivot, such that pullbacks to 24 or better would offer lower-risk entries from here.

 

GR011319-PDD

 

Big-stock NASDAQ names outside of NFLX don’t really thrill me, but all of those that I follow have been trundling higher off their Christmas Eve lows. Most will also report earnings in January, which keeps them mostly on earnings watch for now. Below are my notes on those discussed in recent reports:

Amazon.com (AMZN) sits between its 50-dma and 200-dma as it consolidates its gains off the Christmas Eve lows. There is no long set-up here unless the stock constructively tests and pulls back to the 50-dma, which would of course present a potentially lower-risk entry opportunity. Earnings are expected on January 31st.

Apple (AAPL) is holding tight along its 10-dma as volume declines. This comes after the stock cleared the 146.59 prior low in the pattern from late December. The next reference low for a possible U&R move would be the 159.10 low of February 2018. AAPL closed Friday at 152.29, and earnings are expected on January 29th.

Alphabet (GOOG) has pulled back into its 50-dma as volume declines, putting it in a lower-risk long entry position using the 50-dma as a tight selling guide. Earnings are expected on February 2nd.

Facebook (FB) remains above its 50-dma after regaining the line on Wednesday. Pullbacks to the 50-dma could present lower-risk entries while using the line as a tight selling guide. Earnings are expected on January 30th.

Microsoft (MSFT) has rallied right up into the space between its 200-dma and the higher 50-dma on light volume. I have considered this a short at the 50-dma previously, but in this position there is no clear entry either way. The company is expected to report earnings on January 30th.

In my Wednesday report I discussed Tesla (TSLA) as a two-side situation as it was stalling at the 50-dma at that time. Initially, the stalling action at the 50-dma made the stock look like more of a short than a long. However, given the market’s current stage following two legs down in a bear market correction, I do not view anything as one-side, and noted at the time that, “Should it clear the 50-dma with any authority, I would quickly shift to the long side of this as well.”

On Thursday, TSLA gapped down at the open, which took off the table as a short entry simply because I never short gap-down opens unless I can determine that they have a reasonable chance of being a shortable gap-down (SGU). That was not the case with TSLA on Thursday morning, and you could see it turn on the 620 chart early in the day.

That led to a sharp move back into positive territory and above the 50-dma. So, as the stock moved back up through the 50-dma, it triggered as a buy at that point per my Wednesday comments. I then pushed further above the 50-dma as volume declined. I would now like to see the stock consolidate constructively along the 50-dma, and that may take some time.

Earnings are expected on February 6th, which is a good three weeks away, so we may simply want to wait until then before committing to the stock. If this current rally results in an extensive bear market rally, or even a new bull market rally, then I think TSLA can go a lot higher over time, so it’s one stock I’ve got my eye on for 2019, and the year is still quite young.

 

GR011319-TSLA

 

Shopify (SHOP) reminds me of TSLA only because it has the same type of incoherent, extremely choppy chart pattern which is evidence on both the daily and weekly time frames. But here we see a v-shaped move off the late-December lows following a U&R move off those same lows that is now consolidating normally along the 200-dma.

SHOP held the Thursday pullback to the 200-dma when the market opened down that morning and closed near the top of its daily trading range. That’s constructive action. Earnings aren’t expected until February 14th, so I’d still be willing to step into the stock on the long side on any further constructive retests of the 200-dma from here.

 

GR011319-SHOP

 

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.

This week we move further into earnings season. As I’ve discussed many times in the past, significant opportunities can arise after an earnings report, ranging from buyable gap-ups, shortable gap-ups, shortable gap-downs and buyable gap-downs. There can also be other set-ups that occur once the earnings report is out of the way.

For this reason, I often look forward to earnings season. With the market attempting to rally off the lows of a two-legged bear market correction, this may be a significant time for stocks. So, we want to be alert to these opportunities, and I will be discussing these as we progress through earnings season in both my written and video reports.

There are also several potential catalysts on the news front. As I’ve written in recent reports, crisis type news also contains within it the potential for a bullish resolution. Thus, any kind of U.S.-China trade agreement could spark further upside, any resolution to the current record-setting government shutdown could do the same. And then there’s the Fed Rate Decision on January 30th.

So, there will be plenty of news fodder over the next few weeks to create movements, even volatile movements, that in turn create opportunities on both the long and short side. Currently, I see the indexes consolidating normally as they spent the last two days digesting strong gains off the Christmas Eve lows.

Breakout buyers aren’t seeing much in the way of high-velocity breakouts, and the strongest moves have occurred in beaten-down names moving sharply off their late December lows. As I noted in my last report, among NASDAQ 100 Index component names, there are zero breakouts. This either means the rally is weak, or we’ve got more rallying to do before we see these names start to break out again!

The action off the lows in most cases is constructive, for now, and is confirmed to some extent by the fact that stocks rallying off the late-December lows aren’t breaking down. Instead, they are acting well. Certainly NFLX, ROKU, and the weed patch names are. So, I prefer to run for daylight and go with the flow where I see it. If we are headed higher from here, then more set-ups will appear, and I anticipate identifying these in my written and video reports as things develop. 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 no positions, 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. ©2008-2019 Gil Morales & Company, LLC. All rights reserved.