The Gilmo Report

January 27, 2019

January 26, 2019

QE and the flow of free money has been the life-blood of this market since 2009. That basic equation has not changed in my view. Sure, the Fed has stopped buying bonds, and has been raising interest rates, albeit begrudgingly, since 2016. But the prospect of a significant reversal of QE that continues to drain the liquidity swamp, so to speak, is what has rattled this market most of all, as it raises the specter of another Fed mistake that pops yet another asset bubble.

Anything that stems the tide of what the Fed and others fantasize about as a return to interest rate normalization is viewed positively by stocks. After getting quite oversold in late December, it was dovish comments and the admission by Fed Chair Powell that the Fed would be less aggressive on rates going forward that got the market going again.

Overnight on Thursday, news that the Fed was looking at ceasing its current run-off, whereby it was no longer reinvesting proceeds from its current balance sheet portfolio, something like a tapering of the taper, sent the futures on a tear. This was accompanied by additional news that the Trump Administration was looking to fill two Fed vacancies with dovish candidates. This is the kind of stuff that gets the market’s blood boiling.

When we first launched off the Christmas Eve lows, I surmised in my reports at the time that the market rally might have legs. How much I did not know. But add in the fuel of a Fed that is backing away from its previously perceived hawkish stance, and you get a rally with very muscular legs! China, the government shutdown, a slowing global economy, all are reduced to meaningless daily distractions. The spigots are open, the water is warm, and everyone can just jump in.

While the Fed’s gradually movement more and more toward the dovish side, the truth is that none of this comes as a surprise to me. Falling interest rates, a falling dollar, and rising gold prices, all of which began in the November-December time frame, were already flashing signals that the Fed would soon be on hold. Frankly, I myself would not be surprised if the Fed eventually found itself having to lower interest rates later in 2019.

The 10-year Treasury Note yield went straight down between early November and early January before bouncing with stocks.



The U.S. Dollar also declined between mid-December and into early January, also confirming a dovish Fed going forward. It has since bounced with the market, but on Friday rolled over again on the latest Fed news.



Gold continued higher, and the SPDR Gold Shares (GLD) broke out of a three-week flag formation to log a higher high. Gold futures closed Friday at $1302.40 per ounce. Gold has been rallying since early December, confirming the Fed’s turn to the dovish side.



Whatever the cause of the rally, it is real, and has in fact produced playable upside trends in individual stocks, at least since the Christmas Eve lows. It’s not necessary to judge the rally, since the individual stock patterns and set-ups were already there days and weeks ago, and opportunistic pullbacks have been a regular occurrence in my favored long ideas over the same period.

Despite all the excitement on Friday, the NASDAQ Composite Index remains in a short range just above its 50-dma. It gapped up Friday as high as the prior Friday’s highs, and remained there for most of the day as it churned around. Volume was higher. Technically, the index is simply holding in a constructive consolidation above the 50-dma.



The S&P 500 and Dow Jones Industrials Indexes both have the same story to tell. Like the NASDAQ, the two indexes held Wednesday’s pullback to the 50-dma and have bounced back up to the highs of two Fridays ago. They also remain in constructive consolidations above their 50-dmas. From a purely technical standpoint, there is not much going on beyond that, but the rally off the Christmas Eve lows remains intact.



Another bit of news that didn’t seem to have that much of an effect on the market on Friday when it was released was an agreement between all parties to re-open the U.S. government on a temporary basis. However, if an agreement is not reached on the President’s demands for border security, including “the wall,” by February 15th then the President has said he will invoke emergency powers to fund the building of a wall, and the government will close again.

What makes this all interesting to me, and as I tweeted on Friday, is that the market bottomed on the first day of trading after the government officially shut down at midnight on Saturday, December 22nd. The following Monday was a truncated Christmas Eve trading session that saw the Dow close a very bearish -653.17 points to the downside. But that marked the absolute low of the bear market/correction that began at the start of October.

Since then, the market has rallied sharply in a big v-shaped move off the Christmas Eve lows. We might even consider it to be the Government Shut-Down Rally as much as it is the Fed-Turns-to-the-Dovish-Side rally. Now that the government has re-opened, I’ll leave it to you to imagine the possibilities now that the market has run higher for a solid month.

Another oddity of the current rally is that even with a follow-through day on January 7th, we still have not seen a lot of base breakouts. Obviously, if this is a glorious new bull market that will soon lead to new highs, then we would expect to see some potentially longer-term trends develop from breakouts. So far, that’s not happening, and most of the tradeable set-ups, if not all the most profitable ones, have resulted from Ugly Duckling/OWL type set-ups down in the bases, sometimes deeply so.

Nvidia (NVDA) is typical of some of the better set-ups in the market that are more of what I call bottom-fishing set-ups. In this case, we see a bottom-fishing pocket pivot as the stock pushed above the 50-dma. A small pullback to the 50-dma on Friday morning was met with ready buying, and the stock then reversed to close higher on the day.

So, in a sense, it was nice to see a fresh Ugly Duckling type of set-up occur in a big-stock NASDAQ name on Friday. The only issue with this is that NVDA is expected to report earnings on February 6th, less than two weeks from now. Perhaps the action is an early clue as to how the stock will react to earnings when they are finally reported.



NVDA’s action was coincident with a mass upside jack in semiconductors across the board that began on Thursday and continued into Friday. It was triggered by earnings reports in a handful of semi-related names. The only one that wasn’t just jacking up from the lows of its pattern was Xilinx (XLNX), which also reported strong earnings and sales growth.

This led to a buyable gap-up move that was also a base breakout. The stock printed 98.10 at the open, then only briefly pulled back to 96.80 within the first couple of minutes of trade and then launched higher. In the process. It also cleared the $100 Century Mark for the first time in its life, bringing into play Jesse Livermore’s Century Mark Rule on the long side. It then cruised higher to close at 106.60, and on Friday continued the rally to close at 110.37.

This is how Livermore Century Mark buy set-ups are supposed to work! The stock pushes through the Century Mark and keeps pushing higher. At this stage it is also extended, but buying based on the buyable gap-up early in the day and closer to the opening prices under $100 was best. XLNX is, however, one of the scant few breakouts I’ve seen working since the follow-through day, but we’ll see how long it maintains its momentum



The BGU breakout move in XLNX, along with big post-earnings bounces in Texas Instruments (TXN) and Lam Research (LRCX) off the deep lows of their patterns got the entire semi-group dancing to the upside. This is illustrated by the action in the Vaneck Vectors Semiconductor ETF (SMH), which also jacked up toward its prior early December highs.

What I found somewhat humorous was the number of talking heads on financial cable TV declaring that “the semi’s have turned!” or that the strength in semiconductors is somehow indicative and predictive of further general market strength. I say, hogwash. Strength in the semiconductors is indicative of strength in the semiconductors, and what they are doing today tells you nothing about what they will do tomorrow, next week, or next month.

The chart of SMH illustrates this quite well. We can see strength in the semiconductors in early June, late August, and late November/early December of last year. Where did that “strength” lead? Nowhere. This latest jack looks strong but is not all that much different from the last jacks off the lows I late October and late November.

And for those playing the role of Captain Obvious on financial cable TV Thursday, the true turn in the semiconductor stocks occurred in late December into early January. And that was precisely coincident with the bottom and upside turn in the general market. So, to quote Gordo Gekko from the epic movie, Wall Street, “Tell me something I don’t already know, pal!”



So, the primary question for me, at least as it relates to the semiconductor group as a whole, is where are the set-ups? We saw some undercut & rally moves occur 2-3 weeks ago, but now everything is sticking straight up in the air, but deep down in their patterns. XLNX is one of the rare exceptions as a base breakout, and we need only have focused on this name as our primary long play on Thursday.

The set-up was there for the taking but handling BGUs in this market can be tricky. That was the case with Atlassian (TEAM), which gapped up after earnings two Fridays ago and promptly reversed. Of course, the bearish clues on the five-minute 620 chart were there when TEAM failed at the $100 Century Mark, while XLNX’s 620 chart was bullish from the start.

Here’s the 620 chart from Thursday, and you can see that the MACD posted a bullish cross right at the open. This was followed by a bullish moving average cross when the 6-period exponential moving-average crossed above the 20-period EMA. The stock then cruised about 10 points higher over the next 75 minutes before consolidating.

Notice the MACD cross to the downside that occurs right around 8:00 a.m. my time on the West Coast. That could have possibly been exploited by a nimble short-seller looking to pick off a couple of points on the downside, but XLNX quickly righted itself around the $104 price level and held steady for the rest of the day. Conversely, if you study TEAM’s 620 chart of two Fridays ago on your own, you will notice it was the near-exact opposite situation.



So that’s how a BGU breakout is played after earnings, and I would like to see more of this type of action as confirmation of the current market rally phase. As we progress through earnings season, situations like TEAM as a short and XLNX as a long will present themselves, no doubt. But handling them requires some facility with the 620-chart to guide you, and the willingness to remain very flexible in case things flip on you.

In my view, situations like TEAM and XLNX are what make earnings season exciting, if not fun! So, study those examples, and keep track of upcoming earnings reports before they are released, so that you can be ready to go if something actionable arises.

Stocks I’ll be watching closely this week for movement after their respective earnings reports include: Monday: CAT, AKS, SANM; Tuesday: BIIB, CVLT, NUE, AMD, ALGN, AMGN, AAPL, CNI, ILMN, KLAC, MXIM, EGHT, and SANM; Wednesday: BABA, BA, CHKP, MCD, CREE, CRUS, MSFT, PYPL, QCOM, NOW, TSLA, X, V, and WYNN; and Thursday: CELG, TSCO, AMZN, and CY.

Getting back in the hunt for breakouts, I notice that while it wasn’t exactly a new-high breakout, Tableau Software (DATA), one of my FTD Four long watch list names, posted a trendline breakout on Friday. This also qualified as a strong-volume pocket pivot move, but the best long entry was along the confluence of the 10-dma and 20-dema on Thursday when it held support.

The only issue with DATA, as with NVDA, is that the company is expected to report earnings on February 5th, less than two weeks away. So, buying into these set-ups could require one to play earnings roulette unless one were simply looking to play them as quick trades ahead of earnings. In that case, buying along support on Thursday was the best entry, not chasing Friday’s strength.



Twilio (TWLO) still isn’t showing much upside thrust since its slow-motion breakout two weeks ago. It was buyable along the 10-dma on Thursday per my comments on the stock in Wednesday’s report, and it closed Friday near the prior highs and above the $100 Century Mark level. While it acts fine, it isn’t giving breakout buyers any upside excitement just yet, with earnings expected on February 12th.



Planet Fitness (PLNT), which broke out right after the January 7th follow-through day, still can’t get things going. Since the breakout, it has just spun around and gone sideways. Higher-volume selling hit the stock on Tuesday and again on Friday this past week, and the stock is flipping around on either side of its so-called 58.50 new-high buy point.

In the old days, when the market followed through, the first breakouts were generally your strongest stocks, Today, breakouts don’t seem to be worth the trouble. PLNT still has some time to get going, as earnings aren’t expected until February 21st, but so far it has been something of a breakout laggard.



Etsy (ETSY) might be revving up for a breakout as it tracks along its 10-dma with volume drying up quite sharply over the past three days. Volume has been relatively light for about the past two weeks. Note, however, that volume has dried up even further, more recently.

This could therefore be viewed as a buyable voodoo type of set-up using the 10-dma or the lower 20-dema as your tight selling guide options. ETSY also has some time to get things going here since it is not expected to report earnings until February 25th.



Atlassian (TEAM) is a recent base breakout that went nowhere before it reported earnings two Thursdays ago. That led to a big gap-up open at the $100 Century Mark that turned into an ugly downside reversal on huge selling volume. But the selling came and went, and the stock then found its feet on Tuesday of this week to post a re-breakout move on above-average volume.

It has now wedged its way back above the 10-dmna on very light volume and is not in what I would consider to be a buyable position. I would also consider the breakout point to be around $90 even, so that it is still out of buying range. Therefore, I’d want to see a constructive test of the 20-dema or the $90 breakout price level as a lower-risk entry on any pullback from here.



The Trade Desk (TTD) was in a lower-risk entry position along the 10-dma on Thursday per my comments in the Wednesday report and made a move for the weekly highs on Friday. The stock stalled at those highs on higher volume. Pullbacks to the 10-dma would remain your lower-risk entry opportunities from here. Earnings are not expected until February 21st.



Workday (WDAY) is another recent breakout that occurred on light volume, but it has managed to edge slightly higher since then. Friday’s action saw the stock move to a new closing high but on extremely light volume. This looks vulnerable to a pullback, so I would not be looking to buy the stock here.

The last buyable pullback was to the 20-dema last week, as I noted in my report at the time. This pullback preceded the low-volume base breakout and offered the best lower-risk entry opportunity at the time, in my view. From here I’d be looking for another pullback of some sort for a better long entry opportunity, depending on how it plays out. WDAY is expected to report earnings on February 27th but could have a sympathy move when ServiceNow (NOW) reports earnings as expected on Wednesday after the close.



ROKU (ROKU) remains one of my most solid ideas since I first discussed it in early January down around the $30 price level. That was soon followed by a bottom-fishing buyable gap-up move that produced a roughly 39% gain in just three days. Since then, ROKU has gone tight sideways as volume has dried up.

On Thursday, ROKU posted a five-day pocket pivot on strong volume. This could also be viewed as a trendline breakout within a short three-week flag formation. I still prefer to take the most opportunistic approach here and look to buy into pullbacks. A pullback to the 10-dma at 40.94 might offer the best lower-risk entry from here.



Yeti (YETI) continues its sluggish ways, failing to rally on Friday but still holding its 10-dma on light volume. The stock continues to work off what I see as overhead from the big reversal on the left side of the cup, and this is resulting in your basic handle formation over the past two weeks. So, while the action looks normal, I still would look for opportunistic entries on pullbacks toward the lows of the handle.

Because the BGU low at 17.35 is not reliable, and the stock has spent eight days since without gathering any serious momentum, I shift my focus to other support references on the chart. The 20-dema, which is slowly rising and is now at 16.82, would also offer a reference level for deeper support on any pullbacks below the $17 price level, and I tend to favor that here. While the company has already given its earnings guidance, the report itself isn’t expected until February 28th.



If you ever needed a definition of what an opportunistic entry is, then the action in Canada Goose Holdings (GOOS) over the past two trading days probably would suffice. The action here is a bit crazy, and one would have had to be both shrewd and courageous to take advantage of it. On Wednesday, the stock was pulling into the confluence of the 10-dma and 20-dema as volume dried up.

That looked like a lower-risk entry spot, but on Thursday morning GOOS gapped below the two moving-averages after suffering a downgrade to market perform from outperform by Wells Fargo. Their rationale didn’t strike me as all that dire, just another whimsical analyst call out of the blue. Something about “Risk/reward conditions not being as compelling as they formerly were.”

But it was enough to send the stock down over 10% on an intraday basis before it closed at 46.05. Note, however, that this resulted in an intraday undercut & rally move through the 45.70 low of January 10th. Whether one would have bought into the stock after it got shellacked so badly on huge selling volume is questionable, but the U&R was not.

GOOS then blasted higher on Friday, as if nothing had happened, and regained both the 10-dma and 20-dema on above-average volume. While quite scary, to be sure, the pullback offered an opportunistic entry on the ensuing U&R set-up, which would have been good for a nice upside move on Friday. Now, in this position, the question is whether it is now shortable, but my guess is there isn’t too much to do ahead of earnings, which are expected in less than two weeks, on February 7th.



Aurora Cannabis (ACB) snapped back quickly after testing the 20-dema and 50-dma on Wednesday. The stock popped off the line on Thursday and then pushed back to just barely retake the 200-dma on above-average volume. If the stock can hold tight along the 200-dma here it could set up again along the line, but any retest of the 20-dema/50-dma would offer the most opportunistic entry, should it occur.

ACB has benefited from continuing positive press and analyst comments regarding the weed patch group. It is expected to report earnings on February 11th, so may simply consolidate until then.



Canopy Growth (CGC) has been another weed patch name I’ve discussed in my GVRs over the past month, even longer, and it has had a very sharp upside move since bottoming in early January. As noted in my GVRs at the time, it had a slow-motion U&R set-up similar to ACB’s.

After setting up in a very short but tight flag formation as it met up with the 10-dma, CGC posted a buyable gap-up move on Friday. The intraday low here was 45.75, and the stock closed at 48.48. In this position the stock is slightly extended from the BGU low at 45.75, so watch for small pullbacks closer to 45.75 as potential lower-risk entries. CGC is expected to report earnings on February 13th.



Netflix (NFLX) has rallied back up to its 200-dma, closing just above the line on Friday. Volume was light. A reversal back below the 200-dma would trigger this as a short-sale target again. The flip side of this is that we also have a moving-average undercut & rally move that can initially be played on the long side, using the 200-dma as a tight selling guide.

Thus, NFLX could first be tested on the long side, but if it fails to hold the 200-dma then flipping to the short side could be in order. We’ll see how this handles itself in the coming trading week. Several big-stock NASDAQ names will report earnings this week, so this could have an affect on NFLX as well as the general market.



Pinduoduo (PDD) posted its third higher high since utterly shrugging off Tuesday’s IPO lock-up expiration. The expected selling by insiders that short-sellers were looking for never materialized, and the stock has just kept moving higher, and is now 98 cents away from its all-time highs. Meanwhile, there were plenty of long entry points along the way, as I’ve discussed in recent reports over the past month.



Meanwhile, Momo (MOMO) bounced right off the confluence of its 10-dma and 50-dma and coming right into the 10-dma on Thursday morning. From there the stock pushed higher and posted a higher high on Friday. It is now extended. Chinese names in general should be watched as the U.S. and China will be conducting higher-level trade talks this week. Anything meaningful that arises out of these talks, maybe anything not so meaningful, could set these names in motion one way or another.



Notes on other stocks discussed in the last report:

Coupa Software (COUP) is on a tear and is now above the $80 price level. It is now over 25% above its last lower-risk entry near 63 per my GVR discussion three weekends ago. (CRM) is holding tight along its 10-dma which keeps it in a lower-risk entry position using the 10-dma as a tight selling guide. However, the stock tends to dip below the 10-dma, so given the range of choices in this market, a better approach might be an opportunistic one, looking for a pullback to the 20-dema instead, should that occur. With cousin stock NOW reporting earnings this week, look for a possible sympathy move one way or the other.

Shopify (SHOP) broke out to higher highs on Friday on light volume. It is extended but was last buyable along the 200-dma per my comments in my report of two weeks ago.

Splunk (SPLK) keeps edging higher and is out of buying position.

Square (SQ) keeps rallying after getting an upgrade from Nomura Securities. While, I had thought it might spend at least a couple of days consolidating along the 200-dma, nothing gets a stock going like an analyst upgrade and $110 price target. SQ is now extended, again.

Tesla (TSLA) is rallying back up toward the $300 price level and has rallied back above its late-December low. However, with earnings expected this coming Wednesday after the close this one remains on earnings watch for now.

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.

At this stage of the market rally off the Christmas Eve lows in the great Government Shutdown Rally of January 2019, most of the names I’ve liked off the lows in both my written and video reports are extended on the upside. But, with earnings season now in full swing, we can shift our attention to actionable situations that arise after earnings are reported, long or short, as we’ve seen over the past week or so with TEAM and XLNX.

Being alert to these means knowing in advance what companies are expected to report on which day, and then monitoring their action after earnings are reported. This is when the opportunities arise, and they can be very simple and straightforward, or more on the tricky side. Either way, this is what makes earnings season very interesting for me, and it should for you as well.

This week we will have earnings reports from big-stock names like AMZN, AAPL, MSFT, and TSLA, to name just a few (see my list of expected earnings reports further above in this report). These could be market moving. We also have higher-level U.S.-China trade talks on the docket, and most importantly, perhaps, the Fed policy announcement on Wednesday.

With the Fed seemingly turning to the dovish side with a bit more determination every week, we’ll get a chance to see just how dovish they are feeling on Wednesday. This, of course, could have market-moving implications. In my view, stocks as a whole are moving higher, not just semi’s, not just financials, nor any other single group.

It is to a large extent a generic rally following an oversold condition and a second leg down in what was a bear market type of correction as measured by its downside magnitude in the NASDAQ and the Russell 2000 Indexes. There is no single group that serves as an indicator of further upside to come, or even a sole driver of a potential new bull market, because just about everything turned in late December/early January, and that alone was the tell.

In my view, it is the Fed that will be the driver of a new bull market. If they return to a full-court press on the dovish side, even reversing course on interest rate and balance-sheet policy going forward, then certainly gold will rally further, but so will stocks, unless there is a black swan hiding somewhere. In the meantime, we just go with the flow.

With the government shutdown now ended, at least until February 15th, I might raise the specter of the market now rolling over after beginning the current rally right after the shutdown began. But that’s just a facetious bit of humor, because I tend to think it’s the Fed that matters first and foremost. We can simply take our cue from the action of individual stocks themselves as they clue us in on where the real opportunities lie in real-time.

I don’t know if we’re in a bear market rally, a new bull market, or whatever other label the pundits need to slap on this market, and I don’t really need to know. All I know is that long ideas are working well, with the occasional short-sale set-up showing up here and there. For the most part, however, most short-sale positions I’ve tested have been quick stop-outs, whereas most of the love in this market appears to emanate from the long side.

So, as the old CSN&Y song goes, love the one you’re with, and maintain a high degree of awareness with respect to opportunities that may arise from earnings season. I find that some of the higher time-value trades, e.g., big price movement in a very short period of time, occur after earnings, so we must ready to capitalize on these with a plan ahead of time.

I’ll have more on this in this weekend’s GVR, as I review the patterns and potential set-ups that might arise among stocks that are expected to report this week. I will also post my earnings watch list for this week in the Premium section of the website, along with my current long watch list. So, 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

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