The Gilmo Report

January 8, 2020

January 8, 2020 3:28 pm ET

The market started the week off with another gap-down open with the same result. A downside gap in the morning provided a long-entry opportunity near the open and the market then slugged its way back to the upside from there. In essence, by Monday’s close it appeared that the market was entirely shrugging off any geopolitical risk.

Yesterday the market seemed to be sensing something was in the works as the indexes closed down, and later that evening Iran launched its much-vaunted retaliatory strike. That sent the Dow futures down over 400 points, but once it appeared that no U.S. casualties had been sustained the market viewed it as a “one and done” type of situation, as I tweeted at the time, and the futures rallied right back by the open today.

After President Trump toed a conciliatory tone during a press conference this morning, the market was cleared for take-off. But just when it looked like it was safe to go back into the water, reports of more explosions in Baghdad hit just before the close. The major market indexes gave up a good chunk of their gains for the day, but the end result was another all-time high for the NASDAQ Composite Index on higher volume.

 

 

Objectively, throughout all the wild news gyrations, the major market indexes have retained their uptrend status. But on an individual stock basis, most if not all of my favorite long ideas as discussed in recent written and video reports are now quite extended on the upside and out of buying range. Therefore, I would not be surprised to see some pullbacks start to show up in some of these extended names.

As the market shrugged off geopolitical risk to start the week, precious metals still gapped higher and held their gains into Tuesday. When the Iran missile strike news hit, gold spiked to over $1,610 an ounce before settling back to around $1,575. The iShares Silver Trust (SLV)and the SPDR Gold Shares (GLD) have both pulled off their Monday and Tuesday highs with the U.S.-Iran affair appearing to deescalate.

That said, both the GLD and the SLV have had a torrid run over the past two weeks and both are consequently wildly extended on the upside and entitled to a pullback. Note that both metals were moving well before the U.S.-Iran news hit last Thursday, so I remain bullish on both metals.

That said, we can only watch and wait to see how both test their highest moving averages in their respective charts, namely the 10-dmas. Either they pull further down to their 10-dmas or their 10-dmas catch up, and in either case I would be interested in any kind of meet-up with the 10-dmas as something to watch for as potential lower-risk entry spots.

 

 

In my weekend report, I discussed the action of Aerospace & Defense group names in the wake of Thursday’s news. One of my old flames in the group, Lockheed-Martin (LMT), a stock with which I made a fair bit of money with after 9/11 in September 2001 thru Spring of 2002, is one of the biggest of the big-stock names in this group.

It gapped up on Friday in response to the news, and the move was not only a buyable gap-up (BGU), but also a base breakout from a 14-week, cup-with-handle base, as I noted in a blog post yesterday. With things simmering down today, LMT reversed off its opening highs on heavy volume. I would watch how this acts, however, as it potentially pulls back to its rising 10-dma and the 403 intraday low of last Friday’s gap-up price range.

 

 

If one had told me three months ago that Tesla (TSLA) would be pushing for the $500 price level, I would likely have considered them to be nuts. But price action is what price action is. The move that saw the stock push above $490 started out in October with a concrete Ugly Duckling long entry set-up on the post-earnings bottom-fishing buyable gap-up, or BFBGU.

One of my favorite things about TSLA is that the price action has been fairly continuous, meaning that one doesn’t have to hold it in size overnight since it has presented entry and re-entry points along the way. As the last few days have shown, I don’t generally like to carry heavy positions, long or short, overnight, so I love stocks that allow me to play the daily moves and then back away into the close with the idea of coming right back in the next morning.

This is my style in this market, and one that tends to work well for me. It may not be suited to everyone, however, so know thyself! Getting back to TSLA, today’s move came on over 31 million shares of volume as the stock starts to go parabolic. One wonders whether all the shorts in the stock have now thrown in the towel.

While the stock is certainly too extended to buy up here, I would watch for a possible climax top, at least on a near-term basis, as the stock approaches the $500 Century Mark.

 

 

Netflix (NFLX) pulled a moving-average undercut & rally (MAU&R) in combination with a pocket pivot off the 20-dema on Monday and has since jacked to higher highs. Note that Monday’s move was a strong pocket pivot move that even carried above the 10-dma. Today’s action constituted another pocket pivot off the 10-dma, and the stock is now well extended at this point.

The lesson here is that the more opportunistic entries down around the 200-dma were your best lower-risk entries. One can only find these if one is focused on NFLX at the time it pulls into and just below the 200-dma and one is brave enough to take the shot. This is the essence of my approach to buying stocks in this market as I do not endorse chasing today’s strength.

 

 

Other NASDAQ names I’ve discussed in recent reports, Apple (AAPL), Amazon.com (AMZN), Alphabet (GOOG), and Microsoft (MSFT) continue to drive higher, with AAPL, and GOOG posting all-time highs today. Some have asked whether AAPL’s move through the $300 Century Mark can be treated as a new entry point, and I would say this can be tested using the $300 price level as a selling guide for shares purchased above that level.

AAPL has had many stock splits over the years, so Century Marks become a bit obscured. Nevertheless, this is a new high for the stock and the first time it has crossed the $300 Century Mark on a post-split basis. If one treats this as a Livermore Century Mark long entry signal, then the worst that can happen is you get stopped out at $300.

Note also that GOOG pushed through the $1,400 Century Mark today, so could also be treated in the same manner as AAPL.

 

 

Applied Materials (AMAT), Advanced Micro Devices (AMD), Micron Technology (MU), and KLA-Tencor (KLAC) demonstrate the erratic action displayed by the group over the past few days in the midst of the U.S.-Iran news. The group chart below shows sharp breaks followed by sharp recoveries yesterday in all but AMD, which found support today at its 10-dma.

In my view, if one was going to buy AMAT or MU, then the time to do it was Monday on weakness. Of course, it’s not clear to me that one would want to step in at that point. Meanwhile, KLAC is looking like a short as it stalls at the 10-dma today on weak volume. One would then use the 10-dma as a tight covering guide.

We will start seeing a large number of semiconductors begin to report earnings as we move into the second half of January. At this point, therefore, it is questionable as to whether one would want to buy the stocks now after they’ve shot higher and as earnings season approaches.

 

 

Qualcomm (QCOM) held at the 50-dma on Monday as it undercut and then rallied back above the line on an intraday basis. That triggered a moving-average undercut & rally move at that point and the stock then posted a strong gap-up pocket pivot yesterday as it popped up through the 10-dma and 20-dema.

QCOM held support today at the 20-dema, keeping it in a lower-risk entry position. In this case, one could choose to use the 10-dma, 20-dema or 50-dma as selling guides. Not, however, as is often the case in this market, that the best entry came on the highly opportunistic Ugly Duckling MAU&R entry at the 50-dma on Monday.

 

 

Universal Display (OLED) found support at its 20-dema on Monday as it bounced off the line on higher volume. As I wrote over the weekend, I prefer to use the 20-dema as a reference for buyable pullbacks in the stock, and Monday’s pullback fit the bill. Even though OLED held along the 10-dma today, given the steep ascent of the 10-dma I am still more comfortable using the 20-dema as the more opportunistic reference for a lower-risk entry from here.

 

 

Disney (DIS) is going nowhere fast, but at the very least it closed today at 145.40, above two prior lows in the pattern. That would be the 144.33 low last week and the 145.05 low of early December. Therefore, the stock remains in play as a U&R long entry right here, using the 144.33 low as your maximum selling guide.

 

 

Cloud names have seen strong rotation into the group, something I discussed in my video reports last week and my written report over the weekend. The moves in names that I mentioned over the weekend, like Avalara (AVLR), Salesforce.com (CRM), Atlassian (TEAM), Wix.com (WIX), and MongoDB (MDB), have been quite impressive.

 

 

The strongest cloud action, as I noted in my GVRs last week, has come from names that are showing rounding action along their lows or up the initial and potential right side of potential new bases. This is typical for this market. Names like DocuSign (DOCU) look stronger on their charts if one takes an orthodox approach to chart-reading.

These days, however, it is the Ugly Ducklings that tend to produce the highest-velocity price moves. Nevertheless, DOCU has been buyable on pullbacks to the 20-dema, doing so three out of the last four trading days, thanks to the exciting news flow. Over the past four days, it has posted two pocket pivot breakouts. It remains buyable on pullbacks to the 20-dema.

 

 

Sometimes patience is a virtue as RingCentral (RNG) gathers some strong momentum after breaking out on Monday. We’ve liked the stock along the moving averages based on the tight action, so the move to new highs is not surprising. The stock was coiling up for this move previously and is now extended on the upside.

In this position it is extended, although those who like to buy base breakouts can view this as being within “buying range.” I would prefer to try and enter on a pullback to the rising 10-dma as a lower-risk proposition.

 

 

Coupa Software (COUP) is also extended on the upside following its own base breakout last week. Previously, we viewed it as buyable along the 10-week moving average on the weekly chart per my discussion of the stock two Tuesdays ago. Along with RNG, we’re looking at more traditional upside thrust following base breakouts, which may be good to see, but these are still early breakouts.

COUP is showing some stalling action off the highs here as it rallies on lighter and lighter volume. I’d be watching for a pullback to the 10-dma as a potentially lower-risk entry from here.

 

 

Spotify (SPOT), which we might also consider a different type of cloud name since it delivers music from the cloud, has also been following through nicely. The stock has been buyable on pullbacks to the 20-dema, although we did have to remain alert to any breaches of the 20-dema as possible failure signals. SPOT has refused to fail, however, and it broke out Monday on a pocket pivot, and can now only be bought on constructive pullbacks to the 10-dma.

Monday’s breakout was helped along by recent reports showing SPOT has been taking market share from Apple Music and now has a larger share of the market than its juggernaut rival. AAPL has always been seen as the insurmountable foe for SPOT in the streaming music business, but it looks like SPOT is winning the war.

 

 

One name to keep an eye on here as a possible turnaround cloud-in-progress is Nutanix (NTNX). The stock posted a bottom-fishing buyable gap-up back in late November after earnings and has been building a base beneath some overhead congestion back in early 2019.

 

 

NTNX’s daily chart shows a U&R long set-up through the prior 30.26 low last week as the stock bounced off the 50-dma. It has since regained the confluence of the 10-dma and 20-dema and posted a single five-day pocket pivot at the 10-dma/20-dema today. As you know, I want to see a cluster of five-day pocket pivots in lieu of a single ten-day pocket pivot, so one is not a cluster.

I’d watch this for some tight action to develop along the 10-dma and 20-dema, with the idea of buying constructive pullbacks to the two shorter moving averages.

 

 

As cloud names gather a tailwind, cloud IPOs I’ve covered in recent reports also look to ride with the breeze. DataDog (DDOG) followed through on last week’s U&R through the prior 33.06 low in the pattern by posting a big-volume pocket pivot through the 10-dma and 20-dema on Monday.

In this current position, DDOG is extended, obviously. Therefore, constructive pullbacks to the confluence of the 10-dma and 20-dema would offer lower-risk entries from here.

 

 

CloudFlare (NET) made good on last week’s U&R long entry through the prior 16.92 low in the pattern by posting a pocket pivot move through its 50-dma on Monday. From here, watch for constructive pullbacks into the 20-dema or 50-dma as lower-risk entries.

 

 

Recent bio-tech IPO Inmode (INMD) is holding up on a U&R through the early-November buyable gap-up (BGU) intraday low at 36.50 as it hangs along its 10-dma. As I wrote over the weekend, this was a last-stand sort of U&R since the stock has been failing on U&R attempts all the way down from its mid-November peak.

This remains an actionable U&R using the prior 36.50 low as your selling guide. In my view, if INMD has any chance of working on a U&R after so many failures, then this is indeed the last stand.

 

 

Peloton (PTON) has had a nice run up off the lows over the past week or so and is now pulling back into the 10-dma. It triggered a near-term trailing stop yesterday when it dropped below the prior 29.86 low of December 12th. However, PTON found support at the confluence of its 10-dma and 50-dma today, putting it in a lower-risk entry position using the two moving averages as tight selling guides.

 

 

Zumiez (ZUMZ) acts well as it meets up with the 10-dma. In this position I’m only looking for opportunistic pullbacks to the 20-dema as lower-risk entries if I can get ‘em.

 

 

Roku (ROKU) ran right into the 50-dma on Monday, setting up a nice short-sale entry for persistent short-sellers. The stock immediately pushed up through the 10-dma and 20-dema that day, but eventually ran into trouble at its 50-dma. This illustrates why short-sellers have to be almost maniacally persistent as they “dance” with short-sale targets when they’re rallying into resistance.

I would continue to view rallies into the 10-dma/20-dema confluence or the 50-dma as ones to watch for possible lower-risk short-sale entries. How ROKU plays out may depend on the general market action, but so far it remains in a five-week price range where it has been shortable at the highs and buyable at the lows.

 

 

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.

No doubt, 2020 has gotten off to a raucous start, maybe even in a way that can be classified as heart unhealthy. But as I’ve indicated in previous reports, investors should try and use the volatility to their advantage. That means using pullbacks, even scary pullbacks, as more opportunistic entry opportunities when such pullbacks occur in a way that produce some type of concrete, Ugly Duckling long entry signal.

As long as risk can be controlled tightly, such entries can be tested. Given the risk inherent in this market, buying lower in the pattern is always preferable to buying higher in the pattern and into an extended move, in my view.

As we begin to move into earnings season again, my “most wonderful time of the year” that occurs four times a year, we will again see the potential for high-velocity, actionable set-ups to emerge after earnings, whether on the short or long side.

As long-time members know, I enjoy earnings season for this reason. High time-value, high price-velocity set-ups are the earmark of earnings season, and you can confirm this on almost any stock chart. The biggest moves tend to come right after earnings, and one can use this to their advantage.

Unless we see U.S.-Iran tensions heat up again, something that some U.S. generals say could still be the case, our focus will turn to earnings season and the opportunities afforded by its associated high-velocity price moves. Stay tuned.

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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