The Gilmo Report

January 9, 2019

January 9, 2019

The market has kept things rather simple as it continues to follow through on last Friday’s follow-through day. This has been accomplished by the simple fact that there aren’t that many fresh set-ups or even breakouts to choose from if one wants to go aggressively long this market. But the handful of set-ups that have been available have been effective, so far.

The NASDAQ Composite Index has finally reached its 50-dma, where it stalled a bit on slightly higher volume. As I discussed nearly two weeks ago, the possibility of a rally as far as the 50-dma and the confluence of the October, November, and December lows would be logical. And that’s what we’re looking at so far, while the rally has yet to show any signs of failure.

 

GR010919-$COMPQ

 

The NASDAQ failed to flash a follow-through on Friday, but as I discussed in my recent GVR, this could be due to Apple (AAPL) skewing volume higher on Thursday’s gap-down break after it released lower sales guidance on Wednesday after the close. The lack of a technical follow-through in the NASDAQ has not kept it from moving higher with the rest of the market, however, so the whole FTD/no FTD thing here is moot.

The S&P 500 Dow Jones Industrials Indexes did post clean technical follow-through days on Friday but remain some ways away from their respective 50-dmas. Both the S&P and the Dow are running into resistance here at the October and December lows. The S&P has churned and stalled its way higher over the past three days on relatively light volume.

The indexes are now at potential resistance levels, with the NASDAQ bumping into its 50-dma while the S&P and Dow run up into the October and December lows. We’ll now have a chance to see whether this produces an inflection back to the downside, and if so, whether it kills the rally or leads to a constructive period of consolidation. This remains a question that has yet to be answered.

 

GR010919-$SPX

 

I’ve heard some pundits and talking heads on cable financial TV and elsewhere declare that we are in a new bull market. If so, this would be one of the most unusual new bull markets I’ve ever seen. Most stocks remain quite busted, and there have been very few breakouts among so-called leading stocks. In fact, among all the stocks that make up the NASDAQ 100 there are zero breakouts. In fact, nearly all are deep down in their patterns still, and a long way away from any breakouts. And this is a bull market?

Frankly, I don’t really care whether one wants to label this a bear market rally or a new bull market, since I do not believe that one can know for certain with respect to either. While it might make for enjoyable conversation, it means nothing to me – it’s the individual stock set-ups that matter, and nothing else.

All I know for certain is that the market began what is at least a reaction bounce the day after Christmas, and several very playable long set-ups, and not just breakouts, have been actionable since then. As I’ve discussed in recent reports, profit opportunities on the long side, even significant ones, can occur during bear market rallies, so the fact that it’s the set-ups that matter and nothing else should be intuitive to anyone with any common sense.

With respect to such set-ups, it hasn’t even been necessary to kiss all the babies, just the best ones, and I’ve been right on top of the de facto best one. The stock of the year so far in 2019 has no doubt been Roku (ROKU) as it puts on a bit of a New Year’s fireworks show over the past three days since I first identified it as an Ugly Duckling long set-up last week.

After a strong pocket pivot move on Friday, the stock gapped up on Monday after it released its latest subscriber metrics, which far exceeded expectations. I blogged before the open on Monday that members should be looking for a buyable gap-up situation to develop at the opening after this news hit. After posting an intraday low of 36.50 right after the bell, ROKU took off and never looked back, closing the day at 42.18. For anyone who bought the stock anywhere between 29.29, the Wednesday low, and 30.66, the Friday opening, that was a quick 30%-plus gain in just two days.

Once things got a bit piggy on Monday, however, a gap-up open yesterday ran into trouble when Citron Research declared the stock “uninvestable” at the new higher prices. It also cited news over the weekend that Apple (AAPL) and Samsung had announced a new partnership that will allow Samsung users to access Apple services such as TV and iTunes on Samsung devices like smart TVs. This of course brings up the question as to why this news, if it was announced over the weekend, didn’t hit ROKU on Monday.

In any case, the downgrade from Citron sent ROKU down over four points intraday yesterday before it stabilized to close just above the 50-dma. The profit-taking struck me as normal given the huge upside move over the prior two days. Today, ROKU again held tight along the 50-dma on declining but still strong volume.

 

GR010919-ROKU

 

After such a torrid upside move, up some 39% from the 30.66 opening price seen Friday morning, I’m inclined to invoke the Piggy Principle and put this one in the bank, at least partially. At this stage I’m interested in seeing how well the stock can hold along the 50-dma, and whether this results in a new, lower-risk set-up occurring as the stock digests its recent gains and volume continues to dry up.

ROKU’s bigger cousin, Netflix (NFLX) has also been on a tear as the two stocks seemingly move in synchrony. After a buyable gap-up type of move on Friday that occurred in conjunction with the market follow-through day, the stock is now extended as it approaches its 200-dma and the October highs.

 

GR010919-NFLX

 

Breakouts in this market have been far and few between, so orthodox O’Neil-style traders and investors are stuck with just a handful of choices. Among these has been Atlassian Corp. (TEAM), which I had discussed as buyable along its 10-dma in my weekend report before the stock broke out on Monday.

 

GR010919-TEAM

 

If you’re looking for something a bit fresher in the breakout category, then recent Chinese IPO and therefore new-merchandise play Pinduoduo (PDD) showed us a cup-with-handle breakout today. This comes on the heels of Friday’s pocket pivot move, which I discussed in my weekend report. This is the only breakout among Chinese names, most of which have been rallying over the past few days on hopes of a U.S.-China trade deal this week.

So, even if one is trying to anticipate some sort of trade agreement or an announcement of considerable progress on such an agreement by buying Chinese names, one could have kept things very concrete with PDD. Other Chinese names remain deep down in their patterns, and the only set-ups would be undercut & rally types of moves, which all occurred several days ago.

This breakout is now extended. Pullbacks to the 24 level down to the 10-dma at 22.71 would offer lower-risk entries from here. But if you’re looking for breakouts, TEAM and PDD were to opportunities that were still in position following pocket pivots and before the breakouts.

 

GR010919-PDD

 

As the indexes push up toward their 50-dmas and the confluence of October, November, and December lows, I note that some broken-down former leaders are also moving into potential overhead resistance. Microsoft (MSFT) has rallied right up into the space between its 200-dma and the higher 50-dma on light volume.

To my eye, this brings the stock more into a potentially shortable position here, using the 50-dma as a guide for a tight upside stop. MSFT is the type of short-sale target that serves as a proxy for the general market, since its movements will likely track closely with the general market. If the general market rolls over from here, expect MSFT to roll with it.

 

GR010919-MSFT

 

Amazon.com (AMZN), not shown, is approaching its 200-dma after clearing the 50-dma on Monday. This is not in a buyable position as it lies currently, but retests of the 50-dma can be watched for possible lower-risk entries from here. Otherwise, if the 200-dma turns out to be material resistance, it could easily become shortable if it reaches the line, particularly if that coincides with the NASDAQ running into near-term resistance at its own 50-dma.

Apple (AAPL) has continued to move higher after clearing the 146.59 prior low in the pattern of over a week ago. It closed today at 153.31 and remains well below the 159.10 low of February 2018 that I consider to be the major low in the pattern. While the first U&R move is holding its stop-out point at 146.59, we await the possibility of another one if the stock can eventually clear 159.10.

Meanwhile, Alphabet (GOOG) remains extended above its 50-dma, while Facebook (FB) has cleared its 50-dma but could run into resistance near the December highs when it last ran into and failed at the 50-dma, which was higher at that time. The stock benefited from a research call from J.P. Morgan (JPM) calling the stock one of its favorite ideas for 2019.

The recommendation sent FB through its 50-dma yesterday on a pocket pivot move. This would be the proverbial bottom-fishing pocket pivot (BFPP) and can be tested on the long side using the 50-dma as a tight selling guide. Otherwise, a critical test may come as it tests the December highs, but the stock has been well beaten-down and thus susceptible to a slow melt-up higher if the general market rally remains intact.

 

GR010919-FB

 

I discussed watching for breakouts in the FTD Four over the weekend, but so far, the only one to do so has been Planet Fitness (PLNT). The stock posted a new closing high yesterday on above-average volume and then again today but has not cleared its intraday peak of 58.50 from early December.

In this position, with the stock extended from the 10-dma, 20-dema, and 50-dma, I would not necessarily be looking to buy such a breakout. I would rather look for a retest, whether a full retest or a partial Wyckoffian Retest, as a potentially lower-risk entry opportunity from here.

 

GR010919-PLNT

 

Twilio (TWLO) pushed back up to its prior highs near the $100 Century Mark on Monday but has since backed down. In this sense, it was shortable back near the $100 price level based on Jesse Livermore’s Century Mark Rule in Reverse, but the resulting downside move was only good for about 3-4% at most. Today’s pullback was small, and volume dried up sharply to -55% below average.

As I see it there are two ways to handle this on the long side. The first is to wait for a clean breakout through the Century Mark at $100, using the Century Mark as a tight selling guide. The second would be to take an opportunistic approach by waiting for any possible pullback closer to the rapidly rising 10-dma, now at 89.59. Thus, one can be flexible with this and just wait for whichever set-up shows up in real-time.

 

GR010919-TWLO

 

Tableau Software (DATA) made a move toward its prior highs up around $130 on Monday but reversed to close down on heavy selling volume. Yesterday saw the stock churn around and close only slightly higher on above-average volume, and today DATA pushed a little lower on heavier selling volume.

This would probably look more appetizing as a long entry if we saw it test the 10-dma and 20-dema with volume drying up. That would be something to watch for, although any volume breach of the 20-dema would trigger this as a short-sale target at that point.

 

GR010919-DATA

 

Etsy (ETSY) is making another re-breakout attempt, but notice that volume has been wedging over the past three days as the stock has moved higher. This could be the peak of a right shoulder in a fractal head-and-shoulders formation if the breakout fails. It seems to me that the stock is at least primed for a pullback to the 20-dema from here.

If that pullback occurs in an orderly manner with volume declining, then the stock could be buyable at that point. Otherwise, as with DATA, a volume breach of the 20-dema would trigger this as a short-sale target at that point.

 

GR010919-ETSY

 

You might notice that the FTD Four all have this double-top look to their patterns, with v-shaped moves right back up toward their prior highs. This v-shaped type of move is a very common pattern among stocks on my Busted Stocks watch list, which is posted in the Premium section of the website, along with some of these higher relative strength stocks like the FTD Four, which look like they’re trying to break out.

We also see this in something like Workday (WDAY) which rallied right up to its prior highs around $170 today and reversed on higher selling volume. A nimble, opportunistic short-seller might have been able to pick this one off near the highs with the idea of shorting into a possible double-top formation. We might then expect the stock to inflect back to the downside if we see the general market pullback.

Obviously, there is no final resolution here as a double-top short, but I do know that if I were interested in this as a long play I’d prefer to look for a test of the 10-dma at 160.53 or the 20-dema at 158.02 as lower-risk entry opportunities. This would also bring you closer to the prior base breakout point 157.12, which would serve as an additional reference for support.

 

GR010919-WDAY

 

A variation on this v-shaped pattern is seen on both Splunk (SPLK) and Salesforce.com (CRM). In this case, however, both these stocks are on my Busted Stocks watch list, and their v-shaped rallies off the Christmas Eve lows just brought them back to the highs of current price ranges extending back to late October. Granted, they have moved higher as the market has moved higher, but their action now brings them into areas where price resistance could come into play.

SPLK has pushed just beyond its early-December high on very volume. In this position, I am on the lookout for any kind of reversal that coincides with a general market pullback. This would likely produce at least a tactical, short-term short-sale play on a possible retest of the 200-dma.

 

GR010919-SPLK

 

Salesforce.com (CRM) is very much like SPLK, except that it has stalled at its prior early-December high on weak volume. In my mind, this brings up a possible short-sale entry here, using today’s highs at 147.50 as a guide for a tight upside stop. As with SPLK, we would then look for at least a retest of the 200-dma for a tactical short-sale play.

 

GR010919-CRM

 

Canada Goose Holdings (GOOS) finally pulled off the elusive undercut & rally (U&R) move I was looking and hoping for (probably more hoping than anything else! 😊) on Monday. The stock pushed right up through the prior 46.25 low of late October on strong volume and has moved higher since then as it now sits just above the 20-dema. The stock closed today at 49.24, one thin penny shy of three points higher than the 46.25 U&R trigger point.

If it can hold support along the 20-dema, that would be the most constructive action we would want to see. However, any retest of the 46.25 U&R trigger low might offer a lower-risk entry, assuming such a retest occurs in a constructive manner. Otherwise, you either caught the U&R trigger on Monday or you were left behind.

 

GR010919-GOOS

 

In my weekend report I discussed the idea that Tesla (TSLA), “…has the potential to slash its way back up towards the 50-dma as it did the prior week” if the general market continued to move higher. At the time it also looked buyable at the 200-dma. The general market has moved higher over the past three days and, sure enough, TSLA has slashed its way back up to the 50-dma.

It was helped along by news yesterday that Oracle (ORCL) founder Larry Ellison had taken a $1 billion stake in the company. Now TSLA is pushing up against the 50-dma as it stalls and churns on weak volume. This suggests that the stock can be tested here on the short side, while using the 50-dma as a guide for a tight upside stop. Should it clear the 50-dma with any authority, I would quickly shift to the long side of this as well. Play it as it lies.

 

GR010919-TSLA

 

If the indexes are rallying, and doing so in persistent fashion, you are not going to have any significant luck on the short side. When the market wants to rally, anything you target on the short side has a much lower probability of working. Even when something rallies on weak volume.

Such is the case with a stock like Shopify (SHOP), which has rallied seven out of nine days in a row and straight up through its 50-dma and 200-dma on weak volume the whole way. I even noted this characteristic in my weekend report when I said, “Any sane person looking at this chart would conclude that it has no chance of clearing the 50-dma, but with SHOP you must be ready for low-volume floater moves to higher highs to occur at any time.”

And so, SHOP is now back above the 200-dma and pushing up against the prior-November highs while still well below the December highs. The only way it fails here is if the general market pulls in after its strong rally off the Christmas Eve lows. So, I suppose a breach of the 200-dma could be used as a short-sale trigger with the idea of just covering it if it regains the 200-dma. The flip side here is that it found support at the 200-dma as volume remained low.

On that basis, it could just as easily be viewed as a long here, using the 200-dma as a tight selling guide. I say watch this closely in conjunction with the general market action, maintaining a two-side view until the real-time evidence provides more clarity with respect to where it is headed from here. In other words, play it as it lies!

 

GR010919-SHOP

 

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.

The main issue for orthodox O’Neil-style breakout buyers after Friday’s follow-through day is that there is very little in the way of fresh breakouts in so-called leading stocks. For me, this is not a problem since a) I don’t pay attention to follow-through days per se, b) I don’t need breakouts to buy stocks, and c) I have many other tools and methods at my disposal to capitalize on a market rally off the lows, whether a new bull market, a bear market rally, or just a temporary reflex move. ROKU proves that much.

Meanwhile, the indexes are rallying up into potential resistance, and could set the market up for a pullback and/or period of consolidation following a strong rally off the Christmas Eve lows. All of this is logical and consistent with my view that we had two legs down in a bear market, which is what it was as measured by the declines in the NASDAQ Composite and the Russell 2000 Indexes from their prior October highs.

Where we go from here will obviously depend on what the individual stocks do. If this rally is for real, then I would expect to see more set-ups appear in real-time, and I can simply take my cue from this. There is no need to rush things, and there is certainly no need to force things. Right now, I think we have enough names to work with long or short, depending on how things play out. So, keep things simple by making a list of 5-10 long and 5-10 short ideas, and watch them carefully, with the idea of acting when the appropriate conditions dictate.

Frankly, I’d like to see the market pull back here since I believe this will give us a decent and useful reading on the health of this current rally off the lows. A constructive pullback and consolidation would be positive, while a sloppy breakdown and retest of the lows would not. For that reason, I believe we are at a critical juncture here as keep an open mind and be prepared to take whatever action is optimal based on the real-time evidence. 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

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 MSFT and ROKU, 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.