The Gilmo Report

January 19, 2020

January 18, 2020 5:33 pm ET

New highs for the Big Three market indexes remain the order of the day. The second full trading week of the New Year ended with the NASDAQ Composite Index, shown below, the S&P 500 and the Dow at all-time highs. Volume was higher, so from an index point of view the rally remains more than intact.

 

 

That said, the action over the past couple of days on an individual stock basis offered some set-ups among issues I discussed in my last report that were actionable on the short side. While Friday was another up day for the indexes, my own visceral experience was that I did much better on the short side than the long side that day.

That was also borne out by the fact that NASDAQ breadth on Friday was decidedly negative, with 1769 decliners outpacing 1428 advances. NYSE breadth was positive, but only marginally so as advancers nosed ahead of decliners, 1479 to 1430.

Narrow leadership for Friday’s all-time highs was found in the usual suspects, including big-stock NASDAQ leaders Apple (AAPL), Alphabet (GOOG), and Microsoft (MSFT). All three are quite extended but note that GOOG has pushed 5% past the $1400 Century Mark. That triggered a long entry signal in the stock, as I noted in last weekend’s report, after which the stock has added another 80.39 points “in a jiffy,” as Jesse Livermore might say.

 

 

AAPL, GOOG, MSFT and a flood of other big-stock NASDAQ names (INTC, AMZN) will be reporting earnings over the next two weeks. One is therefore not likely to be piling into these names at this point given how extended they are with earnings just around the corner.

The NASDAQ also got a boost from another one of its bigger components, Qualcomm (QCOM). The stock broke out on Friday on heavy volume, thanks to options expiration. Nevertheless, the move was strong, and came right on the heels of a pocket pivot on Thursday off the 10-dma.

As I wrote on Wednesday, the pullback to the 10-dma on low volume could be viewed as a lower-risk entry. The proviso, as always, is that a breach of the 10-dma and 20-dema could trigger the stock as a short-sale target if that were to occur. This is the 360-degree view, but QCOM held up and played out as a long set-up when it held support and rallied on a pocket pivot.

QCOM is expected to report earnings on February 5th, so we’ll see how much progress it can make from here ahead of earnings. In my view, if one was interested in buying shares then the time to do it was Thursday morning when the stock held support at the 10-day line and moved higher. Otherwise, this is within buying range of the breakout for those who like to do so.

 

 

QCOM was one of the few choice long set-ups on Thursday. Most everything else is extended or lacking momentum. For example, cloud leader DocuSign (DOCU) was building a constructive-looking base until it breached its 20-dema on Monday of this past week. It has since reversed on a rally attempt back up to the 10-dma on Wednesday and then kept running into intraday resistance at the 20-dema over the next two days.

DOCU is acting like a late-stage failure type of situation, which would be confirmed by a clean breach of the 50-dma. If that does happen, then the stock could take advantage of its ugly-ish chart pattern to blossom as an Ugly Duckling and bounce off the 50-dma. This may be something to watch for as a 360-degree situation, long or short depending on how it plays out from here.

 

 

Lumentum Holdings (LITE) also went from a strongly-trending leader to a potential breakdown situation. It breached its 20-dema on Wednesday, which I discussed in my report of that day as potentially actionable on the short side on any rallies up into the 20-dema. LITE ran right into resistance and reversed at the 20-dema on Friday.

LITE is expected to report earnings on February 5th so one is looking for a short scalp between the 20-dema and the 50-dma. If short the stock on Friday’s rally, then the 20-dema becomes your covering guide and the 50-dma is your profit objective.

 

 

Spotify (SPOT) is a later-stage base breakdown that morphed into a short earlier this week as I discussed in my Wednesday report. As with DOCU and LITE, a rally into the 20-dema on Friday met with solid resistance as it reversed to close back at the 50-dma on higher volume. Like DOCU and LITE, SPOT has offered some nice tactical short-sale action this past week, contrasting with the new highs in the indexes.

SPOT closed just above the 50-dma on Friday and looks a bit ugly-ish. So, it is either a highly opportunistic entry on the long side or the precursor to a clean breach of the 50-dma. This can therefore be approached in 360-degree fashion, testing the long side here at the 50-dma while using it as a very tight selling guide. If it busts the 50-dma, then a new short-sale trigger would be at hand. Play it as it lies.

 

 

Lockheed-Martin (LMT), not shown, closed Friday at 425.66, well extended above the $400 Century Mark and therefore well out of buying range. The company is expected to report earnings on January 28th so is relegated to the Earnings Watch List based on the proximity of earnings and its extended technical state.

Tesla (TSLA) looks like a textbook climax top, but then it was looking that way last week. Monday’s big blast-off through the $500 Century Mark finally pulled back on Wednesday, but the stock remains above its 10-dma and the $500 Century Mark. I’m not a buyer here even though TSLA is back within range of the $500 Century Mark, which could be viewed as an actionable entry using the Century Mark as a selling guide.

The issue is more one of how much more upside can be achieved in the near-term given that the company is expected to report earnings on January 29th. That, and the potential for at least a near-term climactic top right here makes the stock less appetizing than it was far lower when it crossed the $400 Century Mark.

 

 

Netflix (NFLX), not shown, is expected to report earnings after the close on Tuesday, January 21st. This should be a good one to watch for some post-earnings volatility that may present a high time-value set-up one way or the other. This is what I live for during earnings season, and in my view NFLX is the first of the high-beta big-stocks to report.

NFLX’s earnings report will also likely induce some sympathy movement in Roku (ROKU). I find the stock’s current action interesting more on the long side than the short. Sure, it has acted like a short on rallies up into its 20-dema and 50-dma as it has formed a descending triangle/wedge, but it posted a U&R move along two prior lows on Monday and is still holding above those lows.

This puts ROKU in an interesting position. It can be treated as a long target right here based on Monday’s U&R using the two lows at 126.30 and 127.22 as selling guides. The pullback over the past four days has seen volume dry up, reaching -48% below average on Friday. While we can likely expect some movement in response to NFLX’s earnings on Tuesday, ROKU itself is not expected to report earnings until February 20th.

 

 

In Semiconductor Land, Intel (INTC) is expected to report this Thursday. No doubt its earnings report will provoke sympathy in other big-stock semis like Advanced Micro Devices (AMD) primarily, as well as Applied Materials (AMAT), KLA-Tencor (KLAC), Micron Technology (MU), Texas Instruments (TXN) (TXN posted a pocket pivot on Friday, by the way), and others.

This is what INTC’s chart looks like right here, right now. The stock is hanging along its 20-dema following a trendline breakout and move to higher highs in late December. Another breakout-to-nowhere, but perhaps we’ll see some fireworks light up the chart pattern once earnings are out later this week, along with some playable sympathy moves in other big-stock semis.

 

 

Universal Display (OLED) has pulled into its 20-dema where it picked up some supporting action with a pocket pivot at the line. Volume dried up on Friday as the stock pulled in a little after running into resistance at the 10-dma. This remains a long set-up, however, at the 20-dema and using the line as your selling guide. Earnings are not expected until February 20th.

 

 

Disney (DIS) remains a short-sale target at the 50-dma. The stock again reversed at the line on Friday after doing so on Wednesday. As noted in my mid-week report, the company is expected to report earnings on February 4th so you’re looking for a sharp move to develop for a potentially profitable short-sale scalp ahead of earnings.

 

 

Streaking cloud names coming off their lows over the past 2-3 weeks have finally run into some resistance in several cases. The group chart I posted in the last two reports reveals pullbacks in several of these names over the past 2-3 days. Note that Twilio (TWLO) and ZScaler (ZS) provided easy references for short-sale entries as they rallied into and around their 200-dmas.

Money has continued to drive into cloud-related names. Although the stocks come from a wide variety of specific business lines within the cloud, they almost all moved in synchrony over the past couple of weeks. The best moves, of course, have come from the stock moving up off the lows of their chart patterns.

We also see Avalara (AVLR), MongoDB (MDB), Atlassian (TEAM), and Workday (WDAY) backing off slightly from their recent highs. My short-side stalking operations were successful over the past two weeks in several of these stocks. However, I am now watching for clean breaches of the sharply rising 10-dmas in all these stocks as triggers/confirmation for potentially deeper pullbacks.

 

 

The sheer upside extension in these cloud names makes them more tactical short-sale targets along these recent peaks. Now that they’ve lost momentum, the 10-dmas becomes the first references for support on pullbacks off the current highs.

It will be interesting to see how these all play out as we progress through earnings season. But as they get extended, I start to probe for possible tactical short-sale opportunities on pullbacks. Sometimes the upside volatility/velocity results in sharp, high-velocity pullbacks that offer decent short-sale scalps. That approach worked well with a few of these names in the latter part of this past week.

Cloud names discussed in recent reports that aren’t coming up from the lows of their patterns continue to act well, however. RingCentral (RNG), not shown, continues to trek higher and remains extended ahead of its expected February 10th earnings report.

Coupa Software (COUP) is pulling into its 10-dma as volume dried up to half of average on Friday. This puts it in a lower-risk add position following its prior base breakout. As members know, however, I considered the stock buyable along the 10-dma and 20-dema before the breakout.

I might also say that my own preference would be to watch and wait for any pullbacks to the 20-dema as the more opportunistic approach. COUP has plenty of time to get a head of steam on the upside going if it wants to, as earnings aren’t due until early March.

 

 

Nutanix (NTNX) posted higher highs on Thursday on a pocket pivot volume signature, although the move was not technically a pocket pivot since the stock is well extended from the 10-dma. That breakout attempt lasted all of one day as the stock came right back in on Friday.

As I wrote in my last report, the stock was already extended, so it’s now a matter of watching for lower-risk entries on pullbacks to the 10-dma or, even more opportunistically, the 20-dema. Otherwise, a breach of those moving averages could trigger the stock as a short-sale should it occur.  NTNX is expected to report earnings on February 27th.

 

 

DataDog (DDOG) is flopping around following Monday’s failed breakout attempt and reversal from the prior base highs. It bounced off the 20-dema on Wednesday and has been rallying up along the rising 10-dma as volume steadily declines. So, essentially, it is wedging up along the 10-dma.

For this reason, I’d be looking for pullbacks to the 20-dema as more opportunistic and prudent entries given the slight wedging action along the rising 10-dma. The weekly chart, not shown, also doesn’t look ripe enough for a breakout, and so the stock may need more time to consolidate ahead of its expected March 4th earnings report.

 

 

CloudFlare (NET) streaked right up to its prior base highs around $19 early in the week after posting a moving-average undercut & rally (MAU&R) long entry at the 50-dma two Fridays ago. Note how the MAU&R has a shakeout feel as the stock quickly undercuts the line one day and then rallies back above the next.

This is the type of MAU&R that I like best, as it tends to have more upside velocity. However, as I wrote in my Wednesday report, the move back up to the highs was something I was inclined to sell into. Now NET is pulling back from those highs on light volume as it starts to come into the 10-dma, which would be where I would look for the next lower-risk entry ahead of its expected earnings report on February 13th.

 

 

Inmode (INMD) didn’t follow through to the downside after Tuesday’s high-volume break below the 50-dma and the ensuing low-volume bump up into the 50-dma. Instead, it popped back above the 50-dma on light volume and then stalled on Friday on heavy volume.

Technically this can be treated as buyable using the 50-dma as a tight selling guide.

A breach of the 50-dma could bring it into play (as would be the case with any stock, frankly) as a short-sale, but the stock may be difficult to borrow given its tiny 10.3 million share float. The primary feature of the chart action is that INMD is still working on the long side after last week’s U&R along the prior lows in the base, so it may make more sense to try and treat this as a long on pullbacks into the 10-dma and 20-dema.

 

 

Peloton (PTON) has edged higher following Wednesday’s MAU&R and pocket pivot at the 50-dma, but not much. It has pushed into axis-line resistance around the $32 price area on light volume. Look for pullbacks to the confluence of the 10-dma, 20-dema, and 50-dma as lower-risk entries from here.

 

 

Zumiez (ZUMZ) has stabilized along its 10-dma after a shakeout at the 20-dema on Wednesday. Volume dried up to -31.8% below average, not low enough to qualify as voodoo type action, but still constructive. This puts the stock in a lower-risk entry position using the 10-dma or 20-dema as your selling guides.

 

 

I haven’t discussed Crocs (CROX) since I last noted it as being in a buyable position along its 10-dma and 20-dema back in early December. Since then it has trended steadily higher along its 10-dma. It does help to illustrate, however, how I don’t like to buy stocks trending higher along their 10-dmas when they pull into the 10-dma.

I almost always prefer the lower-risk opportunistic approach using the 20-dema as my “go to” moving average for buying into pullbacks. We can see that this past week CROX had a sharp pullback to the 20-dema on Monday and found support at the line on heavy volume.

It is again pulling back into the 20-dema on lighter volume than Monday’s pullback, and closed just above the line on Friday. This brings it into an opportunistic entry position at the 20-dema while using its as a tight selling guide.

 

 

Snap (SNAP) proved my double-top theory to be dead wrong on Friday when it gapped up on a breakout move after getting a big analyst’s upgrade and a $24 price target. That said, the stock wasn’t showing any signs of giving it up on Thursday and wasn’t shortable on the 620-chart anyway.

The question now is whether this can be treated as a buyable gap-up, and the straight answer is that it can. SNAP opened at 19.10 on Friday, set an intraday low at 18.75 and closed at 19.11 on heavy volume. Thus, this is an actionable BGU using the 18.76 low as your selling guide. Surprise!

This is a great example of how one can postulate a theory on a stock based on the current technical action at the time. But once that technical evidence shifts, one should be smart enough to recognize when they are on the wrong side. As I’ve written many times before, in eight years of working with Bill O’Neil I saw him make a ton of mistakes, but his strength was not in being right all the time.

Bill’s great strength was in very quickly recognizing when he was wrong and changing course in an instant. For now, that is the case with SNAP, and I am willing to test this as a BGU first based on Friday’s action. If it fails, then perhaps my double-top theory comes into play again, but for now it is out the window pending further evidence to the contrary. SNAP is expected to report earnings on February 4th.

 

 

SNAP’s cousin, Twitter (TWTR) is also showing signs of life as it slowly tries to round out the lows of a potential new base. The stock posted a pocket pivot on Thursday at the 10-dma and held up on Friday despite an analyst’s downgrade from the same analyst who upgraded SNAP the same day.

In this position, TWTR is probably best bought on pullbacks closer to the 10-dma. However, with social-networkers aside from Facebook (FB), which is quite extended, confirming some group strength here, it could also be viewed as buyable here using the 10-dma as a tight selling guide.

 

 

Silver is holding support at the 20-dema, so the iShares Silver Trust (SLV) for now serves as the trigger for both metals since the SPDR Gold Shares (GLD) is just bouncing around and along its 10-dma. Refer to my discussion regarding the SLV and GLD and their respective set-ups currently.

As discussed, for now, the 20-dema on the SLV serves as a support reference for both, and if the SLV breaches the 20-dema, then the 20-dema on the GLD chart becomes a new support reference for both. Both metals remain in extended positions, so may still need to back-and-fill a bit. Approach them in an opportunistic spirit and exercise discipline when it comes to respecting their support levels and your stops.

 

 

Meanwhile, precious metals stocks Agnico-Eagle Mines (AEM) and Franco-Nevada (FNV) are extended on the upside. AEM posted a U&R earlier in the week and is back above the 50-dma, so watch for support along the 50-dma to develop. FNV continues to move further above the $100 Century Mark and should be watched for pullbacks to the 10-dma as lower-risk entries.

 

 

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.

The market, at least on an index basis, is extended and, as many pundits like to say, overbought. I’ve never really understood the term overbought. After all, it seems to me that stocks are always bought just enough to push them to whatever price they are at. And, as we know, overbought can become a lot more overbought.

I think it’s best to keeps things at a more concrete level by focusing on individual stocks. Extended stocks may be vulnerable to pullbacks here, some deep and some not so deep, but such pullbacks could just help to create lower-risk opportunistic entries.

There also still many stocks that aren’t extended as they putter back and forth within their chart patterns. In addition, I can find set-ups long and short that produce at least some nice swing-trading moves, but it appears that the best approach in either case is to be opportunistic rather than chasing strength or weakness.

Over the next few weeks, my primary focus will be earnings season and attempting to capitalize on high-velocity, high time-value moves in stocks after they report earnings. This week we move more earnestly into the thick of earnings season. On Tuesday, we get NFLX, and this comes with the added potential for sympathy moves in ROKU, another stock I find useful as a swing-trading vehicle.

This is still a 360-degree market where the best, high-velocity moves tend to come from the lower parts of chart patterns. And earnings season will no doubt reinforce the 360-degree concept and approach, as I’m sure there will be plenty of high-velocity moves in both directions following the slew of earnings reports coming out over the next 2-3 weeks. Be prepared to play them as they lie.

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.