The Gilmo Report

January 5, 2020

January 4, 2020 5:16 pm ET

The 2020 trading year has started out as a two-day microcosm of what made 2019 so much fun. News of more QE from the Chinese central bank sent the market shooting higher on Thursday, and then news of the U.S. taking out a top-level Iranian commander in Iraq overnight on Thursday sent it skidding back in the other direction.

The action on Friday was not as bad as it started out to be overnight when the Dow futures were down over 400 points. As I blogged on Friday, the market is going to assess the likelihood and potential severity of any Iranian retaliation. However, in my view, despite the indexes closing off their intraday lows, a Pandora’s Box of sorts has been opened, and a whole lot of uncertainty is flying out of it.

This could get worse before it gets better, unless Iran backs off or ends up retaliating in some muted fashion. This is nothing more or less than a Black Swan situation, unknown consequences, so anything is possible. Technically speaking, the NASDAQ Composite Index is running into some turbulence around the highs, nothing decisive, but the technical action per se is less meaningful than the news flow and whether the current U.S.-Iran conflict escalates or not.



More QE and more global tension and uncertainty may rock the indexes, but it presents a good place for precious metals to move higher. The iShares Silver Trust (SLV)and the SPDR Gold Shares (GLD) both moved higher, but it was the GLD that showed the most strength as it gapped up to its prior 2019 highs.

Meanwhile, the SLV, not shown, is still holding up along its prior late October/early November highs. Both are out of buying range, but if anybody was going to be in these then the time to buy them was several weeks ago as I indicated in my reports at that time.



Tesla (TSLA) reported a 50% increase in auto deliveries in 2019 on Thursday after the close, and the stock sprinted into new-high price ground once again. This comes after Tuesday’s pullback to the $400 Century Mark, which offered a lower-risk entry at that point while using the $400 price level as a tight selling guide.

That was the last lower-risk entry point as the stock although one could treat Friday’s move as a buyable gap-up using the 436.92 intraday low as a selling guide. However, the action looks more toppy to me, at least in the short-term, so I would only use this as an add point and be ready to sell if it fails.

Otherwise, only a pullback to the rapidly rising 10-dma would offer a potential lower-risk entry. But given the big upside extension in the stock, I would rather wait for an opportunistic pullback to the 20-dema, which is just starting to move into the $400 price level.



Netflix (NFLX) pulled off an MAU&R long entry on Thursday when it regained the 200-dma, but Friday’s market sell-off brought the stock back to the 200-dma. Volume was light, so this moving-average undercut & rally set-up is still in force.

However, as I noted in my prior report, this is a 360-degree situation right here along the 200-dma. Therefore, we also have to be alert to any breach of the 200-dma to the downside, as this would then trigger the stock as a short-sale at that point. This would most likely occur if the general market continues to sell off further. (AMZN) could have been bought near the 200-dma on Tuesday, allowing one to participate in Thursday’s gap-up move back to the $1900 price area. That’s where the stock ran into resistance and backed off slightly on Friday.

This is not in any buyable position here, but if the general market continues lower this could develop as a short-sale as close to the $1900 level as possible, using that as your covering guide.



Among other big-stock NASDAQ names I’ve discussed in recent reports, both Apple (AAPL) and Facebook (FB), not shown, remain extended. With either stock, however, I would just be looking for any pullback to the 20-dema, in either as potential lower-risk entry depending on how and in what market context it occurs.

The selling in most stocks on Friday was not brutal, but that doesn’t mean it can’t continue this coming week. So, stocks will begin to take on more of a 360-degree nature. For example, among the semis I follow, Applied Materials (AMAT) fell short on a breakout attempt Thursday, but on Friday held its ground above the 20-dema.

This becomes relatively simple as a 360-degree situation, since if it can hold support at the 20-dema, then that becomes your best lower-risk entry position. Otherwise, a breach of the 20-dema in AMAT, or its cohorts, KLA-Tencor (KLAC) or Micron Technology (MU), might trigger them all as short-sale targets.



Advanced Micro Devices (AMD), meanwhile, is getting a little bit parabolic here but held its ground very well on Friday. The stock closed down only slightly on heavy volume as buyers matched sellers most of the way.

This, however, is also extended such that I’d only be watching to see how and when this eventually meets up with the 20-dema as a potentially lower-risk entry.



Qualcomm (QCOM) gapped below the 20-dema on Friday, but it was already looking a bit suspect on Thursday when it stalled and closed near the lower part of its daily price range. It is now testing the 50-dma, which could put it in a lower-risk long entry position, but ONLY within the context of a general market turnaround.



Universal Display (OLED) is again pulling into its 10-dma with volume declining slightly on Friday. Given that the 10-dma has risen steeply over the past few days, I would prefer to use the 20-dema as a more opportunistic entry point. A pullback to the 20-dema would bring the stock right back to Monday’s low, which would offer a better, lower-risk entry.

That said, this could be considered a later-stage breakout attempt, so that if it fails it could quickly morph into a short-sale target on any breach of the 20-dema. With the market in an uncertain position right now, I would watch for this as a potential 360-degree play in any continued market pullback.



Disney (DIS) followed through Thursday on Tuesday’s U&R long entry signal at the prior 144.33 low but ran into resistance along the December price range highs. It pulled back into the 10-dma and 20-dema on lighter volume, which brings it into a lower-risk entry position using those same moving averages as tight selling guides.

That said, the 360-degree assessment here is that if DIS were to breach the 10-dma/20-dema confluence then it would again trigger as a short-sale at that point. Play it as it lies.



DocuSign (DOCU) finally got going on Thursday with a pocket pivot breakout to new highs, but that move was reversed on Friday. The stock then found intraday support along the 20-dema on Friday to close down slightly as volume dried up. This remains in a lower-risk entry position using the 20-dema as your selling guide.



RingCentral (RNG) posted a strong-volume pocket pivot on Thursday as it also looked like it was going to start to move. Friday’s market sell-off killed that pocket pivot as the stock tucked back into its 10-dma with volume drying up to -52.5% below average. This keeps it in a lower-risk entry position using the 20-dema as a tight selling guide or the 50-dma as a wider selling guide.



In my mid-week report I noted that Coupa Software (COUP) looked “interesting on the long side” as it set up on its weekly chart. It turned out to be a little more than interesting on Friday, however, as it posted a big-volume base breakout in the middle of a market sell-off. If you like to buy breakouts, then I suppose this becomes actionable.



I had noted in my Thursday video report that I was seeing some roundabout action among other cloud names like Avalara (AVLR), Atlassian (TEAM), (WIX), and MongoDB (MDB), among others, that were posting roundabout pocket pivots. Overall, including names like COUP and even (CRM), it appears that money is coming back into this area of the market.

Below is a group chart of AVLR, MDB, TEAM, and WIX. You can see that all four posted roundabout pocket pivots on Thursday and then held up very well on Friday despite the market sell-off. If the market finds its feet, and U.S.-Iran tensions ratchet down, watch these cloud names trying to turn up the right sides of potential new bases as money could rotate in this direction.



And among some of the recent cloud IPOs I’ve been covering in recent reports, we’re seeing constructive action in the face of general market weakness. DataDog (DDOG) remains in a lower-risk entry position along its 50-dma following Tuesday’s U&R long entry signal through the prior 33.06 low in the pattern.

Since DDOG is also holding above the 50-dma, at least by Friday’s close, the coincident moving-average undercut & rally (MAU&R) long entry signal at the 50-dma is also still in force. If the general market gets into further trouble, however, those U&Rs may not remain in force.

As with most set-ups on the long side that I’m seeing right now in this market, their success may be entirely contingent on how the current U.S.-Iran escalation of tensions plays out. But I like the action among a wide variety of cloud names here. If you try any of these out on the long side, just stay true to your stops!



CloudFlare (NET), another recent cloud IPO discussed in recent reports, remains tucked up underneath its 50-dma following Monday’s U&R through the prior 16.92 low in the pattern. That U&R long entry remains in force given Friday’s 17.17 close. Of course, we’d want to see this clear the 50-dma sooner than later, and that may only occur within a favorable general market context.



Recent bio-tech IPO Inmode (INMD) keeps putting in U&Rs all the way down from its mid-November peak, and they have all resulted in nothing more than small rallies before the stock has turned lower. It is now in what I would consider a final U&R position at the prior early November buyable gap-up (BGU) intraday low at 36.50!

INMD closed Friday at 36.85, so it’s got all of 35 cents of downside left before its final U&R attempt gets stopped out. This is certainly worth a shot right here, since risk can be kept very tight if it doesn’t work out.



Peloton (PTON) is starting to squeeze the shorts here as it rallies for five days in a row. The last entry here was on Tuesday on the moving-average undercut & rally (MAU&R) long entry signal, and then on the retest of the 50-dma on Thursday. It then moved higher on Friday.

Now PTON has pushed above the prior mid-December low at 29.86. PTON closed Friday at 30.60, so that prior 29.86 low can be used as a trailing stop for any position bought closer to the 50-dma on the MAU&R Tuesday or the ensuing 50-dma retest on Thursday.



Zumiez (ZUMZ) is backing up just a hair here after retesting the prior highs on a re-breakout attempt. So far, the re-breakout is holding, but I still consider the stock slightly extended here. I would watch for constructive pullbacks into the 10-dma at 33.10 as potentially lower-risk entries from here.



Roku (ROKU) has rallied for three days since posting a U&R move through the prior mid-December 127.53 low on Tuesday. That rally has seen volume decline steadily over the past two days, resulting in a low-volume wedging rally into the confluence of the 10-dma and 20-dema.

This may become shortable right here using the 10-dma or 20-dema as tight covering guides. If it is able to continue rallying, watch for the 50-dma to come into play again as resistance and therefore a lower-risk, short-sale entry point, using the 50-dma as your covering guide.



Spotify (SPOT) is another cloud-related name that doesn’t seem to be fazed by the current market action. It held support at the 20-dema on Friday as volume picked up. So far, it has proven to be buyable on pullbacks to the 20-dema and that remains the case until evidence to the contrary shows up.



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.

In my Thursday GVR I noted the strong market action that day and expressed my view that I couldn’t see anything immediately derailing the market at that point. Speak of the devil! A little later Thursday afternoon the news of the U.S.  missile strike that took out an Iranian general hit the wires, and the futures sold off hard.

Some are saying this is heavy stuff, and that the potential for further escalation after essentially assassinating a high-level official of another country will have serious and for now unknowable consequences. Others point to the fact that the market wasn’t even down 1% on Friday as evidence that the whole thing was just not that big of a deal.

I tend to view this more from the perspective of uncertainty. With leading stocks extended, an excuse for profit-taking could come with further uncertainty, especially if we see an escalation of current U.S.-Iran tensions. That is a real possibility, and if the market wasn’t down more than 1% on Friday, then perhaps that just leaves more room for a deeper pullback.

So, assume nothing. Stick to your own technical reality, which means knowing your exit points in the way of trailing and absolute stops and heed them. It’s that simple, but the market situation in 2020 has suddenly run into some material complications, so at the very least investors should be alert to any sudden shift in trend.

It’s not often that I find the market in a position where news may overwhelm technicals. But if you think about this, it is not unlike what we saw in 2019 from time to time. Volatility may reign here, but volatility also creates opportunity, so armed with our opportunistic OWL methods I am very interested to see where the current news flow takes us.

My approach here is to focus on a very short list of long and short ideas, and to watch them very closely. This is the best way to operate if we start to see extreme volatility, because things will move and change quickly, and watching too many stocks makes things more complicated and difficult to handle. Keep it simple, safe, and sane.

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.

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