The Gilmo Report

January 30, 2019

January 30, 2019

The market got off to a raucous start this morning thanks to what were perceived as favorable earnings reports from Boeing (BA) and Apple (AAPL), both of which are major components of the Dow Jones Industrials Index. This was why the Dow led the rally among the big-three market indexes, but the NASDAQ 100 was the fastest out of the gate this morning as everything tech rallied with AAPL.

As the day wore on, all this opening earnings-related action took a back seat to the Fed policy announcement. As expected, the Fed did nothing, and the policy statement came off as quite dovish. This got the market rallying to the upside right after the release.

The paradox of the Fed’s full turn toward a dovish kind of caution based on “changing economic and financial conditions” is that it flies in the face of government officials’ constant references to an allegedly strong economy. The so-called Trump Economic Boom can’t be that much of a boom if the Fed is that nervous about economic and financial conditions.

When I find myself a bit nonplussed from all the Orwellian doublespeak coming from the mouth of Fed Chairman Jerome Powell, I simply take solace in the chart action, where clarity is often found. When the dust finally settled at the closing bell, the NASDAQ Composite Index posted a higher high on increased volume but remains within an eight-day consolidation and right near the highs of this consolidation.

 

 

The Dow Jones Industrials Indexes became the first of the major market indexes to retake its 200-dma, just barely closing above the line today on higher volume. That is of course bullish action on its face, but I would like to see it soon accompanied by the other indexes, namely the NASDAQ and the S&P 500, as they also retake their 200-dmas sooner rather than later.

 

 

As I wrote over the weekend, the Fed’s turn to the dovish side was really no secret as we saw interest rates and the dollar start to decline while precious metals started to rise some time ago. This was your first clue, and so the Fed’s policy announcement is no surprise to me. The only thing about the Fed event today was that it highlights the fact that they really have no idea what they are doing and are like a blind man feeling his way through the dark.

But, the bottom line for stocks, and precious metals like gold, is that the asset bubble is too big to pop, sort of like banks that are too big to fail. The Fed has decided that it will back away from popping the bubble. Thus, we saw gold, which has been rallying since late November, move higher today as gold futures cleared $1,320 an ounce and are currently trading at $1,324.40 as I write this afternoon.

The SPDR Gold Shares (GLD) has now rallied for four days straight after breaking out last Friday on strong volume. My view remains the same on gold, which is that it will continue to move higher. I also believe that the Fed’s next move will be to lower rates, and that, of course, is a double-edge sword for stocks since it will likely be engendered by some event or economic deterioration that won’t be pretty.

 

 

My approach with stocks has been a simple one. In names where earnings are not due for at least 2-3 weeks, I look for pullbacks to support as lower-risk entry opportunities. Meanwhile, as we progress through earnings season, I am on the alert to any opportunities that might arise from high-volatility moves in either direction following a given stock’s earnings report.

The big earnings week got off to a bad start with Caterpillar (CAT), which posted weak results, citing a sharp slowdown in China. That sent the stock gapping below its 50-dma on Monday as sellers swarmed the stock. Comments from Trump Chief Economic Adviser Larry Kudlow on Tuesday regarding what he claims will be “the most comprehensive” trade talks ever held with China helped send the stock back up through its 50-dma.

Obviously, any positive news coming out of what are billed as the highest-level talks between U.S. and Chinese trade officials since President Trump’s meeting with Chinese President Xi last year will likely affect CAT’s movement from here. The stock ran into resistance at its 10-dma today and stalled to close right at the 20-dema.

Keep an eye on this tomorrow, since if nothing material comes from the current U.S.-China talks that end tomorrow, the stock could careen back to the downside. The situation remains fluid here, but in my view the only reason CAT has retaken its 50-dma has everything to with the Fed’s decisive turn to the dovish side.

 

 

Boeing (BA) posted a gap-up move at the open today, but there was little movement beyond the initial move. The stock printed 387.40 at the opening bell, and then 387.72 at the closing bell, a difference of 30 cents. In between, it ranged between a low of 380.50 and a high of 391.97, running into resistance right along its prior early-October high.

BA’s earnings didn’t strike me as all that impressive, but it was the sales number that got investors hot for the stock. Eight percent earnings growth on 14% sales growth doesn’t strike me as the stuff of a blistering fundamentals that might provide the foundation of a longer-term trend. The other question is whether all the good news is in for BA.

If one was shrewd enough, I suppose, one could have bought the stock early in the day when it bottomed out at 380.50 and then sold it and gone short near the highs of the day when it hit 391.97. Overall, the action was typical of what I call a spinner type of BGU, where the stock spins around all day but ultimately closes where it opened.

For now, this is technically a buyable situation, using the 380.50 low as your selling guide. Whether the stock has the potential to move higher may, as with CAT, depend on whether anything material comes out of the currently ongoing U.S.-China trade talks.

 

 

In tech land, Apple (AAPL) reported yesterday after the close and posted a very weak 7% earnings growth number on -5% sales contraction. AAPL attributed the weakness to a huge drop in sales to China, but CEO Tim Cook stated that he believed a trade agreement was coming. That was good enough for a gap-up move at the open today.

Initially, that worked out as a shortable gap-up as AAPL ran into resistance at its 50-dma early in the day. But, with the help of the Fed announcement, the stock pulled off a bottom-fishing pocket pivot (BFPP) coming up through the 50-dma. Thus, this is buyable, using the 50-dma as a tight selling guide. AAPL is the equivalent of an alternative-currency, in my view, and if the market continues higher so will the stock.

 

 

Nvidia (NVDA) isn’t expected to report earnings until next week, but on Monday morning the company issued its guidance and it was not good. Also citing lower sales to China, the company cut revenue and margin guidance. This was good for a -18.8% dive to the downside, or -22 points. Not good. I’m not sure there’s much to do here, although the rallies back up into the highs of Monday’s gap-down range have been good for short-sale scalps, so far.

With earnings expected next week on February 6th, the stock may hold in this short bear flag until then. Otherwise, I don’t think I need to focus on this right now as there are plenty of other stocks to look at that have either already reported earnings or don’t report for at least 2-3 weeks. It does illustrate that the earnings roulette knife cuts both ways, and sometimes without earnings even being reported – just guidance.

 

 

The excitement, well at least the limited excitement, in AAPL today sent Netflix (NFLX) back up into its 200-dma, and with the help of the Fed it was able to push above the 200-dma. This now becomes playable one of two ways, and the first is of course as a long play based on a simple moving-average undercut & rally (MAU&R) set-up.

With the 200-dma at 335.45, the stock is buyable here using the 200-dma as a tight selling guide. On the flip-side, if NFLX breaks back below the 200-dma, it would trigger as a short-sale at that point. I tend to think how it resolves from here depends on what the general market does from here, so play it as it lies.

 

 

Facebook (FB) reported earnings after the close today and as I write is gapping up above the $160 price level as it approaches its 200-dma in after-hours trade. The 200-dma could serve as solid resistance for the stock, so depending on where and how it opens tomorrow it could be a buyable or shortable gap-up move. I’ll be watching this one closely tomorrow morning.

 

 

Advanced Micro Devices (AMD), a name I’ve discussed in recent GVRs, reported earnings last night after the close and gapped up this morning. It quickly set a low at 21.37 and turned higher from there. With help from the Fed, the stock finally closed at 23.09 in a nice BGU move.

Given that AMD is now extended, pullbacks closer to the $22 price level and the 21.37 intraday low of today’s BGU price range would offer lower-risk entries from here. Notice that AMD is deep down in its pattern and well off its September highs. If this thing has legs, it certainly has room to run if the general market continues higher.

 

 

Tesla (TSLA) reported earnings after-hours and as I write this afternoon is down about 2% in after-hours trade. The company reported earnings of $1.93, missing estimates by nine cents. That was not enough to completely kill the stock, and so this might be worth watching tomorrow at the open.

It is already working on a U&R move coming up through the zone of its late-December and early-January lows at 294.09 and 297.38, respectively. It’s not as if one would have wanted to buy those moves given the upcoming earnings report, but these are still active. However, if the stock opens tomorrow near those prior lows and holds, that could put it in a lower-risk entry position where you would then use those lows as your selling guides.

 

 

Breakouts, even trendline breakouts, are still not producing anything in the way of significant upside. This has been a noticeable oddity about the current market environment since the follow-through day on January 7th. Breakouts are far and few between, and most of the strong upside price action is occurring in stocks coming up from the lows of their current price structures.

As I wrote over the weekend, in the old days, a follow-through day, if it were going to develop into a strong bull trend, would generally see numerous breakouts occurring in the first couple of weeks after the follow-through day. We’re not seeing that currently, but that does not prevent one from playing strong price moves in stocks off the lows, since we have the tools and methods to do so.

But breakouts, that’s another story. Tableau Software (DATA), which posted a trendline pocket pivot breakout last Friday has not produced any further upside. However, it has remained in a buyable position, what with yesterday’s low-volume pullback into the 10-dma. With any stock in this type of position, this is the type of pullback you are looking to buy into.

 

 

The other three FTD Four names, Twilio (TWLO), Planet Fitness (PLNT) and Etsy (ETSY), which I don’t show here on charts since they all look the same as they continue to track sideways as they’ve done over the past two weeks, can be treated the same way. Today’s big index move did nothing to inspire breakouts to new highs, but the stocks are still forming constructive patterns.

TWLO is expected to report earnings on February 12th and continues to hold above the $100 Century Mark. Thus, technically, it is buyable here using the $100 price level as a tight selling guide.

PLNT found support at its 20-dema on Monday, where it offered a lower-risk entry, but went nowhere today as it stalled along the 10-dma. However, the stock did post a very subtle pocket pivot today at the 10-dma, which is constructive. Thus, technically, one could buy the stock here anticipating a move before earnings, which are expected on February 21st using the 20-dema at 57.02 as a tight selling guide.

ETSY is not expected to report earnings until February 25th, so if it wants to do something it has plenty of time to do so. Unfortunately, so far, it has chosen not to. It did, however, post a five-day pocket pivot at its 20-dema today, which puts it in a lower-risk entry position using the 20-dema at 53.04 as a tight selling guide.

Atlassian (TEAM) is also tracking sideways and has the luxury of having already reported earnings. Of course, that earnings report two Thursdays ago sent the stock on a big-volume outside reversal to the downside, which was good for a one-day short-sale trade. Since then it has regained its prior breakout point and is still sitting in re-breakout territory, bouncing along its 10-dma and 20-dema.

As I wrote over the weekend, I wanted to see a pullback to the 20-dema to correct the upside wedging action as it reclaimed its 10-dma last Friday. That pullback came yesterday and Monday as the stock came into the 20-dema with volume drying up sharply. That offered a lower-risk entry, and further such pullbacks to the 20-dema should be treated likewise.

 

 

The Trade Desk (TTD) continues to track along its 10-dma, and yesterday offered buyers a lower-risk entry on a pullback right into the line as volume dried up sharply. This is the type of pullback you’re looking to buy into, so further pullbacks into the 10-dma or even deeper into the 20-dema at 135.53 would offer additional lower-risk entries from here. Earnings are not expected until February 21st.

 

 

Workday (WDAY) has failed on its recent breakout attempt, getting hit with higher selling volume yesterday. As I wrote over the weekend, the low-volume move to new highs was suspect and made the stock vulnerable to a pullback from the highs. With the help of the Fed, the stock rebounded smartly off its 20-dema, but on light volume.

It may respond tomorrow, however, to its cousin, ServiceNow (NOW) which reported earnings after the close today and is currently trading at around 207 as I write. That’s a big gap-up move from its close today at 194, so I’d watch NOW and its cousins WDAY and Salesforce.com (CRM) for sympathy moves tomorrow that may be actionable.

 

 

For reference purposes, here’s the daily chart of ServiceNow (NOW). Based on the after-hours trade today as I write, the stock looks like its going to open somewhere around the prior September high at 206.29. NOW is on my action list for tomorrow as either a buyable or shortable gap-up move, depending on how it plays out tomorrow.

 

 

ROKU (ROKU) was a nice pick-up at the 10-dma on Monday morning, as I blogged at the time. I also stated in my weekend report that pullbacks to the 10-dma would be the best lower-risk entry opportunities. That led to a nice move up toward the 200-dma, thanks to the stock getting a pump from a well-known cable financial TV personality.

I blogged yesterday that I would consider taking profits into the move as it approached the 200-dma, when the stock was trading above 45.50. That turned out to be a fortuitous call, since ROKU reversed from there to close in the red on heavy selling volume.

Keep in mind that ROKU’s buyable gap-up in the earlier part of January came on raised subscriber guidance from the company. We were looking at the stock as a buy around $30, before that news hit. We were beneficiaries of that news, which is a good example of how, in the stock market, to get lucky you first must put yourself in a position to get lucky.

My main point, however, is that the good news is out, for now, pending its expected upcoming earnings report on February 20th, and the stock has had its big move. It simply continues to consolidate ahead of earnings and is likely awaiting other details about ROKU’s earnings and sales, as well as yesterday’s rollout of premium subscriptions.

So, it may not clear the 200-dma until earnings are out, which might serve as an impetus for another gap-up move. But obviously we won’t know until earnings come out. In the meantime, if you’re jonesing to buy the stock, I would maintain an opportunistic approach and look for pullbacks to the 20-dema as the best lower-risk entries if you can get ‘em.

 

 

Yeti (YETI) has so far been a big disappointment since its buyable gap-up (BGU) move of three weeks ago when the company raised guidance. The expected earnings release date was updated by the company today to February 14th. So, we’ll see if the stock gets any love on Valentine’s Day when it reports.

For now, it just continues to flop around in what has now become a handle within an overall cup-with-handle formation. The initial BGU itself is now, for all practical purposes, dead. Now it’s a matter of seeing whether YETI can hold maximum downside support at its 50-dma, so tests of the 50-dma could offer lower-risk entries from here if one is truly interested in owning the stock ahead of its expected February 14th earnings call.

 

 

Canopy Growth (CGC) tested the low of Friday’s buyable gap-up (BGU) move yesterday and did so successfully. As I wrote over the weekend, the stock at that time was slightly extended from the BGU low at 45.75, “…so watch for small pullbacks closer to 45.75 as potential lower-risk entries.” CGC got down to an intraday low of 46.13 yesterday, bringing it into buyable range of last Friday’s BGU.

The stock closed today at 48.02, so is extended again. However, keep in mind that CGC is expected to report earnings on February 13th, along with Cronos (CRON) and Tilray (TLRY), so how much upside is in the stock ahead of earnings remains to be seen. Buying it here and then seeing it go nowhere such that you have no profit cushion going into earnings is not what you want to do, as I see it.

 

 

Aurora Cannabis (ACB) is expected to report on February 11th and will be the first among the weed patch names that I’ve favored to report earnings. In general, with earnings coming up, these are moving into a state of being on earnings watch only. How far one wants to stick their neck out going into earnings remains a question of what kind of profit cushion one is showing in any one of these names.

However, I do like the action in ACB here as it holds tight along the confluence of the 10-dma and the 200-dma with volume declining to just below average today. That technically puts it in a lower-risk entry position here using the 10-dma at 6.70 as your selling guide. As with CGC, you are looking for some movement here before earnings on February 11th to develop some profit cushion.

 

 

Chinese names may be dependent on the outcome of the ongoing higher-level trade talks between the U.S. and China. These are expected to conclude tomorrow, so whatever news that comes out of this may have a pronounced effect on Chinese stocks and those that I follow.

Pinduoduo (PDD), not shown, fell eight cents short of its all-time, post-IPO high at 30.48 yesterday, and another attempt today resulted in a reversal. But, either way, the stock is well extended from its original buy point at the pocket pivot around 22 and again more recently when it pulled into the 20-dema around 24. For now, I’m just watching for any actionable pullbacks with the 10-dma being my first reference for support on any such pullbacks.

Momo (MOMO) is pulling into its 10-dma again as volume declines. This puts it in a lower-risk entry position using the 10-dma or the lower 20-dema as tight selling guide options. In general, with these Chinese names, including other names I’ve liked and mentioned in previous reports like HUYA, IQ, BILI, etc., I’m looking for something to develop after the current U.S.-China trade talks end tomorrow.

 

 

Notes on some other stocks discussed in the last report:

Canada Goose Holdings (GOOS) is holding along its 10-dma and 20-dema but I don’t see much to do ahead of earnings, which are expected next week on February 7th.

Coupa Software (COUP) is holding tight sideways but remains extended.

Shopify (SHOP) is sitting along its recent highs with earnings expected on February 12th. Nothing to do here until then.

Square (SQ) got smashed yesterday after an analyst downgrade, dropping over 10% on heavy selling volume before finding support at its 200-dma.

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.

As I wrote over the weekend, I tend to think that when it comes to what matters to this market it’s the Fed that matters first and foremost. That was as much as proved today as the Dow Jones Industrials regained its 200-dma on higher volume after the Fed emitted the soft cooing sounds that identify the song of the dove.

If we’re looking for confirmation of this rally, then we probably want to see the NASDAQ Composite and the S&P 500 Indexes also follow the Dow by moving above their own 200-dmas. Right now, both indexes remain well below their 200-dmas. If these turn out to be stiff resistance, then the rally may be reaching at least a near-term terminus.

In the meantime, I keep my strategy simple. I look to buy constructive pullbacks in stocks that have either already reported earnings or which don’t report for at least another 2-3 weeks. Stocks that have yet to report earnings need to build some profit cushion ahead of earnings to avoid playing earnings roulette.

The risk of holding through earnings is real. Even though we see names like FB and NOW and others gap up after earnings, after the close today I can see that TSLA, MSFT, and PYPL are all gapping down. Not being involved with these by holding a position into earnings, I have the luxury of seeing what sorts of actionable set-ups in these names, whether gapping up or down, serve up tomorrow.

The big, bullish move in the indexes today is nice, of course, but the point at which the rubber meets the road, so to speak, has to do with the set-ups in individual stocks. My strategy, as I’ve already described it, deals specifically with that part of the problem as we continue to move through earnings season. That is all.

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 AMD, 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.