The Gilmo Report

January 3, 2018

January 3, 2018

Last Friday, the lack of enthusiasm didn’t do much to inspire a bullish tone. But, as is typical of this market, it gapped up smartly yesterday morning and never looked back. Now that the New Year has begun, we can now conclude that the Christmas-hating Ebenezer Scrooge from Charles Dickens’ A Christmas Carole has nothing on the market.

During the allegedly favorable holiday season, the indexes proclaimed “Bah! Humbug!” and slowly slid lower. Once the holidays were over, however, the market was finally ready to party. Medical professionals might call this “bi-polar,” but we just call it the QE Ugly Duckling market. While the names have been changed to protect the not-so-innocent, the story remains the same.

Yesterday, big-stock NASDAQ and Chinese-related names led the charge, as money furiously rotated into beaten-down big-stock techs in a raucous start to 2018. The action struck me as distinctly rotational as most big-stock techs came flying up from the depths of their patterns.

This included many Chinese-related names, which found their reason to rally in the Chinese Caixin Manufacturing PMI numbers, which came in at 51.5 vs. expectations of 50.6. Certainly not a blowout number, but it did help to quell near-term fears of a slowing Chinese economy. Apparently, that was all beaten-down Chinese names needed to get fired up, at least for the day.

Today, the party continued with further upside in the NASDAQ Composite Index as it made it two-in-a-row accumulation days to start out the year. Volume increased over yesterday’s levels as big-cap NASDAQ 100 names again led the chart. No matter how you slice it, the market is off to a bullish start to the New Year.




The S&P 500 Index shrugged off last week’s sick-looking outside reversal to the downside on the last day of 2017 and has posted two new highs in 2018, one an all-time closing high and the other an all-time absolute high. Volume was higher again today.




As most members already know, I have come to appreciate the way this market loves to fool investors. Over the weekend, I read and heard endless comments about value stocks coming back into favor as growth took a back seat. We come in yesterday to start the New Year and techs, internet, and other growth names are all blasting higher.

Personally, I’ve always viewed a value stock as one that I buy at price X and then see it go up to price 2X. That clearly defines buying it at X as a value since it was a lot cheaper than 2X at that point. Market math for dummies that perhaps defines us all as value investors.

SPDR Gold Shares (GLD) pushed right through resistance at the 124 price level as the yellow metal also got off to a good start in 2018. However, it was also finishing off 2017 in strong fashion, posting eleven straight up days in a row off the lows of early December.




I was disappointed to see Franco Nevada (FNV) run into stiff resistance at its 50-dma and sell off over the past two days. It does, however, remain above its prior 76.76 undercut & rally trigger point, closing today at 77.85. Meanwhile, Kirkland Lakes Gold (KL), which has been in a much stronger technical position relative to FNV given its recent base breakout, has continued to move higher. Pullbacks to the 10-dma at 15.12 remain your references for lower-risk entries from here.

CSX Corp. (CSX) was buyable yesterday based on my discussion over the weekend. At the time, sitting at the 20-dema it was a two-sided situation. The bullish scenario I outlined was simple: “If it can hold the 20-dema and the general market acts well going into the New Year, then it’s a buy here using the 20-dema as a tight selling guide.”




Caterpillar (CAT) held support today at its 10-dma, which was your reference for support. So far, it acts well, and I would continue to use the 10-dma or the 20-dema as trailing selling guides. Thanks to a comment from a Citigroup analyst that there was a “40% chance” that AAPL would buy them at some point, Netflix (NFLX) sliced through overhead price congestion and resistance like a butter through knife. That’s no surprise, since an AAPL buyout rumor simply makes such resistance futile.

Over the weekend, I thought NFLX had at least a decent shot at moving higher to clear or at least move well up into the overhead price congestion ahead of earnings, which are a little less than three weeks away. But it was the AAPL buyout talk that lit the stock up in a manner that gave it enough thrust to slice through that overhead like a knife through butter.

Today, NFLX broke out on strong volume, so strict breakout buyers have what they’re looking for as this is technically in buy range. The problem with this is that earnings are coming up in less than three weeks, and it would be nice to have a better profit cushion if one chooses to hold into earnings. Buying last week’s pocket pivot would have provided that cushion by now, which highlights the advantage of using pocket pivots within the base. I find it interesting that I didn’t think NFLX would clear resistance so easily, but the AAPL buyout talk was a nice catalyst. I’ll take it.




The news also helped Apple (AAPL) to regain its 50-dma. Today it stalled out after filling the prior gap-down of two Tuesdays ago. Essentially, this was resistance at the highs of the gap-down “falling window,” but the stock was able to hold at its 20-dema. I would need to see the stock do something more decisive, in the manner of NFLX, for example, to want to come in on the long side of this right here. In addition, earnings are expected at the end of the month.




Facebook (FB) sprang to life yesterday after looking like there was really nothing brewing with the stock, at least in terms of an actionable long set-up. That quickly changed yesterday as the stock gapped up through the 50-dma on a strong pocket pivot move, and I blogged about that early in the day.

The move carried as far as the highs of the current three-week price range, but the stock had enough additional momentum to break out to all-time highs today. Volume was about average, however, so lacked the strict breakout buyers would want to see with respect to volume. Personally, yesterday’s pocket pivot was good enough for me. Keep in mind that earnings are expected at the end of the month.


GR010317-FB (AMZN) broke out today on a pocket pivot volume signature, which technically makes it buyable using the 10-dma as a selling guide. The last lower-risk entry position, however, was at the 20-dema last week, but admittedly the market wasn’t helpful in providing the confidence one might have needed to take a position at that point.

Nvidia (NVDA) acted like a short last week as it continuously ran into resistance each time it approached its 50-dma. That all changed today at the open when the stock gapped above the 50-dma on heavy volume right at the start. If you can recognize a buyable gap-up and a moving average undercut & rally entry signal, this was it. This morning I was distracted by other things for about an hour after the open, so could not put out a blog post. But I would hope that most members are able to see this as it occurs in real-time.




Tesla (TSLA) didn’t release its sales and delivery numbers until today after the close, and it is now moving lower as I write this afternoon. The stock had, however, already rallied up above its 50-dma, 10-dma, and 20-dema yesterday and today, which technically put it in a lower-risk short-sale entry point. But with the sales and delivery numbers still unreleased, that might have been considered too risky. However, now that the numbers are out, it would have worked out quite well for anyone holding a short position overnight.




I must pause here to chuckle as I read my comment over the weekend, “I must be frank here and say that I look over these big-stock NASDAQ charts and in most cases, it’s not even worth showing a chart.” LOL. The fact is, over the weekend, it wasn’t! But in this market, one day can make a huge difference, and that was certainly the case yesterday.

That’s why it’s important to keep an open mind at all times, and not let yesterday’s action influence your ability to see real-time change. I do it all the time, since I find that quite often what I thought about a stock one day changes very quickly the next.

Roku (ROKU) went strictly according to the script I outlined over the weekend by undercutting the prior low in the two-week flag and then bouncing off the 20-dema. That triggered an undercut & rally buy point yesterday, and the stock continued sharply higher today. The action was strong enough for a pocket pivot at the 10-dma, and any retest of the 10-dma would provide a lower-risk entry from here.




Apptio (APTI) remains within range of last week’s base breakout, although the stalling seen on those breakout moves were not inspiring. Nevertheless, it does remain within buying range of the breakout.

MuleSoft (MULE) broke out of its low-base price range on strong volume today. It was last buyable along the 50-dma per my comments in the past two reports. Yesterday’s open near the 50-dma was your last lower-risk entry opportunity, although strict base breakout buyers can buy it here since it is technically within range of the breakout.




Switch (SWCH) has been a disappointment so far after coming apart over the past two days and dropping below its 50-dma. That pushed out any position one might have taken at the 50-dma. I would watch to see if it can set up again, perhaps after undercutting the lows of mid-December.

Cloudera (CLDR) came through with an undercut & rally (U&R) move yesterday off the lows of its current three-week price range. That move carried back up through the 20-dema and up to the highs of the range. It also qualified as a single five-day pocket pivot. CLDR is now extended, as I considered the best, lower-risk entry to be down near the lows of the current price range as discussed over the weekend. In addition, the U&R set-up was the key buy trigger to look for yesterday, so you either caught it there or you didn’t.




Rise Education Cayman Ltd. (REDU) made another higher high today and remains extended from last week’s cup-with-handle breakout. Again, pullbacks to the rapidly rising 10-dma would constitute your next references for lower-risk entries from here. (CRM) and posted a bottom-fishing or roundabout pocket pivot yesterday, which puts it into play as a cloud leader on the mend. It is slightly extended here, but pullbacks closer to the 50-dma would provide lower-risk entry opportunities from here.




Square (SQ) is another stock trying to shirk my characterization of it as “dead money” by also coming back to life over the past two days. Yesterday it pushed back up through the prior 35.58 low of December 20th, triggering an undercut & rally entry at that point.

The move then continued today with a five-day pocket pivot coming up through the 20-dema. Despite considering it to be dead money over the weekend, I felt the stock still had a reasonable chance of some sort of rally off its current lows. We may be seeing the start of that now, after the stock has worn us out with three other failed U&R moves. This can be considered buyable for you followers of the Ugly Duckling, using the 20-dema as a tight selling guide.




First Solar (FSLR) posted a pocket pivot off its 20-dema and up through the 10-dma yesterday. Today it pulled back into the 10-dma on slightly higher, but below-average volume. This puts it in a buyable position here, however, using the 20-dema as a maximum selling guide.

SolarEdge (SEDG) has spent more time building a new base than FSLR has, and is now showing signs of percolating. Today, we saw the stock post a strong pocket pivot coming up through the 10-dma. The stock was previously buyable along the 20-dema per my prior comments in recent reports.




I’m beginning to develop a new investment strategy based on the idea that once a stock starts to put me to sleep, or looks like dead money, it should be bought! That was certainly the case with Alibaba (BABA) and Weibo (WB), both of which looked rather blah over the weekend.

Yesterday both stocks blasted to the upside on big pocket pivot moves up through their 50-dmas. BABA pulled in today on a test of its 50-dma but didn’t quite make it all the way down to the line as volume declined. That was probably a more favorable after-the-fact entry, but one can watch for additional tests of the 50-dma as lower-risk entry opportunities.




Weibo’s (WB) move remains extended from the 50-dma, and only pullbacks closer to the 10-dma at 107.27 would offer lower-risk entries from here.

A similar move to BABA and WB was also seen yesterday in YY, Inc (YY), which I thought looked more attractive over the weekend. At that time, it was setting up along the 10-dma with volume drying up within a short, cup-with-handle formation. All it needed was a catalyst, and the Chinese Manufacturing PMI was that catalyst.

While BABA and WB’s moves come from the depths of their charts, YY’s move yesterday was in fact a pocket pivot trendline breakout. Today the stock pulled back into the breakout zone with volume declining. This puts it in a lower-risk entry position, using the 10-dma as a maximum selling guide. I might consider, however, that a little bit more of a pullback to the 10-dma would perhaps be optimal, IF you can get it.




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.

Yesterday’s strong start to the New Year might have been surprising after the feeble end to 2017. But things can change quickly in this market, and that was certainly the case yesterday. In addition, there were some concrete set-ups to look at per the handful of ideas I had over the weekend, including things like CSX and ROKU, for example.

In addition, since it has always been my objective to teach members how to recognize set-ups and act accordingly and on their own when necessary, I would like to think some of yesterday’s moves in say, FB, and today’s move in say NFLX, were on members’ radars near the open.

There is some irony, of course, in the fact that the move I was looking for in beaten-down former tech, internet, and growth leaders into year-end ended up happening in the first two days of trading in 2018. This is a perfect example of how the market gives you what you expect, but in an unexpected way!

This market also has a way of resurrecting that which looks like dead money and recycling it in bullish ways. This has led to the rotational nature of the persistent rally in the market throughout 2017, and it is this rotation that the rally seems to feed on. That is what has carried the S&P 500 Index to 14 straight up months, something that has never occurred in stock market history.

So, as we move into the first two trading days of 2018, keep your mind open, and perhaps expect the unexpected. This may only be the beginning of surprises that this market may have in store for us in 2018.

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 SQ, 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.