The Gilmo Report

November 26, 2017

November 25, 2017

Quiet holiday action remained constructive, with no surprises besetting the market on Friday’s short three-and-a-half hour trading session. The NASDAQ Composite Index posted a new all-time high on Friday on truncated volume, thanks to the short trading day. Within that context we would not call this a wedging move to new highs any less than a light holiday volume melt-up.

 

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The same goes for the S&P 500 Index, which also logged a new high on light holiday volume. It was the first time the index has ever closed above 2600, so Friday’s action marked a milestone of sorts, at least for those who pay attention to such stuff. There were no S&P 500 2600 hats to be seen on the floor of the New York Stock Exchange, however.

 

GR112617-$SPX

 

If I was going to get picky about the technical look of things, then I’d have to say that the small-cap Russell 2000 Index looks the most normal in the sense that no wedging upside melt-up is evident. Instead, the index has held tight sideways with volume drying up after posting a new high on Tuesday as volume increased.

As I blogged the prior week, we might look for small-caps outside of small-cap financials to join in on a broad year-end rally in addition to many of these big-stock names which are mostly building bases, as we’ll see further in this report.

 

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Financials in fact aren’t really doing much of anything currently, and the Financial Select Sector SPDR Fund (XLF), not shown, is again pulling into its 50-dma. However, financials are not my focus right now as I see better percolating action in other areas of the market.

Meanwhile, gold is difficult to get a handle on since it seems to have no memory of what it did the day before. A pocket pivot by the SPDR Gold Shares (GLD) two Friday’s ago led to an immediate sell-off this past Monday with the move failing at the 50-dma in short order. From there the GLD has since stabilized and drifted right back up through its 50-dma on light volume, where it held tight on Friday’s short trading session.

Normally, this would be a buyable position for the GLD, but given its prior action, a stronger upside move would likely depend on some news event as a catalyst. Otherwise, the yellow metal continues to work on what could be the lows of a new base.

 

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The incoherency of the GLD continues to contrast with the action in my favored gold-related stocks. Kirkland Lake Gold, not shown, continues to hold tight along its 20-dema as volume remains low, while Franco Nevada (FNV) is holding squeaky tight along its 10-dma. Volume continues to dry up there as well, and if you favor gold stocks, then either of these is buyable using the 20-dema as a maximum selling guide for both stocks.

 

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Big-Stocks:

Apple (AAPL) is back up to its prior highs near the 175 price zone, and was last buyable along its 20-dema earlier in the week per my prior comments.

Amazon.com (AMZN) has rallied to new highs over the past two trading days, with an extra burst of upside movement on Friday as Black Friday retail sales numbers came in very strong. However, volume was not sufficient to trigger a continuation pocket pivot. AMZN was last buyable along the 10-dma as volume dried up.

 

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Alphabet (GOOGL) remains within a four-week price range with support along its 20-dema. Pullbacks to the 20-dema represent your best bets for lower-risk entry opportunities.

Facebook (FB) had a small pullback on Wednesday following Tuesday’s pocket pivot at the 10-dma. Volume was light on the pullback, and the stock was buyable closer to the 10-dma on Friday morning.  By the close, FB had posted a new all-time closing high on light volume that, when adjusted for the short trading day, was probably about average.

 

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Netflix (NFLX) successfully tested its 50-dma yesterday as volume dried up in the extreme, leading to a nice bounce early in the day back up through the 10-dma and 20-dema. The move stalled out near last Friday’s highs as volume picked up only slightly. Overall, NFLX just remains in what is now a little more than a five-week base, and I would consider it to be buyable here using the 20-dema as your tightest selling guide.

Of course, if one wishes to give the stock a little more room, the 50-dma can be used as a wider selling guide since that is absolute support. My thinking, however, is that the stock should move higher from here, particularly if we see the market begin a year-end move higher.

 

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Nvidia (NVDA) continues to track tightly along its 10-dma on light volume. It remains within buyable range using either the 10-dma or 20-dema as selling guides, depending on one’s risk-preference. This is another big-stock in percolation mode as we see my indicator bars at the top of my custom HGS Investor Software chart view go “Code Blue.” Don’t be surprised if we see this thing clear the 220 price level soon enough.

 

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I would be cautious here trying to short Tesla (TSLA) as it looks like it could make another run for the 200-dma, perhaps more. My suspicion is that another capital raise is coming, most likely in the form of a secondary stock offering.

In addition, if the general market continues to rally, the tide can also help carry TSLA higher with it, so I would look to be more opportunistic rather than coming after the stock right here. For that, I’d want to see a move up through the 200-dma that carries as far as the 50-dma, so keep an eye out for that.

In addition, if you like to take a hit and run approach to stocks on either side, this might even turn out to be a short-term long trade with the idea of using the 10-dma as a tight selling guide. One thing I never do with TSLA is let any macro view I might have get in the way of seeing the technical action for what it is. Play it as it lies.

 

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General Motors (GM) is backing up into its 10-dma, which is the fastest-rising moving average on its chart. The 10-dma is now at 43.82, 64 cents below Friday’s 44.46 close. I would like to see a pullback just a little further into the line as a lower-risk entry opportunity.

New Merchandise:

Roku (ROKU) successfully passed its first test and moment of truth, as I called it in Wednesday’s report. On Wednesday morning, sellers slammed the stock down near the 35 price level where it found intraday support and regained the 10-dma in a moving-average undercut & rally (MAU&R) type of move.

I understand one might not have bought into the scary-looking drop to 35, but a more concrete way to handle this would have been to wait for ROKU to regain the 10-dma, at which point one could have treated it as an MAU&R using the 10-dma, plus 1-3% of downside porosity, as your selling guide.

On Friday, ROKU pulled into the 10-dma and held at the line as volume dried up on a short trading day. This puts the stock in a lower-risk entry position here, using the 10-dma as a tight selling guide for any shares but at these higher prices for those who might be adding to an existing position.

 

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MuleSoft (MULE) is slightly extended following Tuesday’s pocket pivot at the confluence of the 10-dma and 20-dema. Pullbacks into the moving average confluence would offer lower-risk entries from here.

Switch (SWCH) pushed above the 18 price level later in the day on Wednesday, as I blogged at the time, but didn’t hold above the prior early November low by the close. However, it remains well within 1% of that low. Now that it has cleanly undercut the low, it could easily rally back above it again, triggering a true undercut & rally (U&R) long signal. One to keep an eye on as a small-cap recent IPO.

 

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Cloud Names:

ServiceNow (NOW) remains extended and pullbacks to the 10-dma at 126.36 would represent your best, lower-risk entries from here.

Saleforce.com (CRM) reported earnings today after the close, and as I write is currently trading down a couple of bucks. Keep an eye on this tomorrow morning in case something actionable transpires after what appears will be a gap-down open.

 

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Workday (WDAY) is expected to report earnings this coming Wednesday after the close.

Square (SQ) illustrates the Forrest Gumpian concept that a climax top is as a climax top does which in SQ’s case is not at all. It is now up 10 out of 11 days in a row currently, and shows no signs of letting up, despite having the look of a climactic run.

On Wednesday, the stock opened up above the 49 price level and quickly reversed to the downside. That started to look like a big reversal, but the stock found support near the 46 level and then rallied back into positive territory.

By the close, SQ was up at a new all-time high on heavy volume. Friday’s action showed the stock holding tight as volume receded. While this could be a climax top, I’m not sure if the old rules regarding climax tops are valid in this type of liquidity-driven market. For all we know, SQ just goes tight sideways here and builds another base.

One thing is for certain, however, and that is that I would not be trying to short the stock other than for a quick, tactical short scalp. That would have been possible on Wednesday morning, but one had to cover based on the intraday signals shown on the five-minute “620” intraday chart as the stock rallied off the 46 price zone.

 

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Solar Names:

First Solar (FSLR) looks to be percolating here as it tracks tight sideways along its 10-dma. Friday’s action saw the stock post a pocket pivot volume signature, but did not qualify as a bona fide pocket pivot since it closed just below the 10-dma. I see two ways to handle this, depending on how it plays out from here.

The first is to look for a shallow move back up through the 10-dma as a long trigger, while the second is to buy it in here based on the three-weeks-tight (3WT) action and use the 20-dema as a selling guide. A third option, assuming you got it, would be to take an opportunistic approach and look for a pullback to the 20-dema as perhaps the lowest-risk entry opportunity.

My favored solar names continue to act well as they base, and for now there is no reason to assume this is nothing less than another leadership group in this current market rally.

 

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SolarEdge (SEDG) popped off the 10-dma on Friday, which makes it slightly extended. However, anyone paying attention over the past few days would have had several opportunistic entry chances when the stock pulled into the 10-dma four times over the past five days. Pullbacks to the 10-dma remains your best lower-risk entry opportunities, when they occur.

Interestingly, FSLR and SEDG are really the only two solar names out there that are acting well. But they remain de facto leaders, and perhaps indicative of stocks that are the stronger companies amid an array of lesser solar companies.

 

Semiconductors:

Micron (MU) and Universal Display (OLED) remain well-extended from their nearest levels of support, which for both is currently the 10-dma. Only pullbacks to the 10-dma by either would provide potentially lower-risk entry opportunities from current price levels.

Here’s a little semiconductor name that trades 440,900 shares a day that may be appropriate for smaller accounts, Advanced Energy Industries (AEIS). The stock is currently in a typical Ugly Duckling type of set-up as it forms an “L” pattern after a prior undercut & rally (U&R) move and regains the confluence of its 10-dma, 20-dema, and 50-dma.

This has the potential to become a “LUie” formation, but remember that the LUie formation itself is not what we are looking for. What we are looking for are concrete buy signals along the lows of the “L” while the pattern is still an L-formation.

In this case, we see that a sharp breakdown off the peak in late October after earnings formed a low along the 50-dma. Seven trading days ago, AEIS undercut that low and the 50-dma and then rallied, triggering both a U&R and an MAU&R long set-up at that point, using either the prior low or the 50-dma as a selling guide.

With the stock now tracking along three moving averages, the 10-dma, 20-dema, and 50-dma, it is in a buyable position using the 50-dma as a tight selling guide. In the old days, this would be considered a “bear flag,” but in this market, it can just as easily become an L-formation en route to a LUie formation IF we see concrete buy signals along the lows of the “L,” which in this case, we do.

 

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Telecom-Related Names:

Arista Networks (ANET) is holding tight after peaking on Tuesday, but the 10-dma remains your nearest reference for any kind of buyable pullback from here.

Lumentum Holdings (LITE) might confound those who think they need to see strong volume accompanying an upward price move, but remember that U&Rs and MAU&Rs do not require any particular volume signature. The volume can be light, or it can be heavy, since the primary indicator is the price itself. This is another signature long set-up of the liquidity-infused market we live in these days.

I’ve met a lot of traders over the years who say that volume doesn’t matter, just price, and they trade on this basis. In today’s market environment, I have found that many of these Ugly Duckling types of set-ups are dependent solely on price action, while volume is only a secondary consideration, if at all.

LITE has regained its 20-dema, where it was last buyable per my prior comments on the stock. It closed Friday 3.1% above the line. I’d look for a pullback to the 20-dema as a lower-risk entry, if I can get it.

 

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Chinese Names:

Alibaba (BABA) posted another new all-time closing high on Friday on light holiday volume. As I’ve discussed repeatedly, the best approach here is to remain opportunistic and look for entries on pullbacks to the 20-dema or the 50-dma, but now the 10-dma can also be used as a reference for potentially buyable pullbacks from here.

Weibo (WB) gave buyers what they were looking for per my prior comments on the stock when it pulled right into the 10-dma on Friday. That was a nice entry opportunity, and the stock held support at the line to close slightly up on the day. The 10-dma remains near-term support on pullbacks, with the 20-dema bringing up the rear as your second line of support in the event of any deeper pullback.

 

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Internet Related:

Yelp (YELP) continues to base and now sits within the short handle of a small cup-with-handle type of formation on the daily chart. I continue to view pullbacks to the 10-dma or 20-dema as your best lower-risk entries. Meanwhile, the indicator bars at the top of my custom HGS Investor Software chart are flashing bright blue, which may indicate the stock is about to break out.

If you’re a strict breakout buyer, then you can watch for a breakout. My preference, however, has been to use pullbacks to the various moving averages lower in the base as your best lower-risk entries ahead of any potential new-high or higher-high breakout.

 

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Software:

Veeva Systems (VEEV) is expected to report earnings this Tuesday, November 28th.

Nutanix (NTNX) is expected to report earnings this Wednesday, November 29th. That didn’t keep the stock from posting a sharp 10%-plus move over the past two trading days as it cleared to higher highs above the 33 price level.

Video-gaming Names:

Take-Two Interactive (TTWO) is still sitting squeaky tight at its 10-dma, keeping it in a buyable position using the 20-dema as a maximum selling guide. The stock closed four cents below the 10-dma on Friday, but is just building what is so far a tight two-week flag formation. It may need another week to complete a 3WT, at which point we might see my indicator bars go fully “Code Blue.”

 

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Activision Blizzard (ATVI) did turn out to be buyable along the confluence of its 10-dma, 20-dema, and 50-dma following Monday’s “voodoo” pullback to the lines. Volume that day was -49% below-average, and the stock has since moved higher. Wednesday saw the stock reverse off the highs of the current base range on increased buying volume, but that is likely just a function of overhead resistance near the prior highs.

Both ATVI and TTWO continue to base, while their cousin, Electronic Arts (EA) has come apart and is currently testing its 200-dma. As long as the two leaders continue to base, they remain viable as long candidates that certainly have the potential to break out if we see a strong year-end rally. For this reason, they remain leading names to keep on one’s watch list.

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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 big news event this week will be the Senate vote on its own version of alleged tax reform legislation. As I see it, this is not so much tax reform as it is re-jiggering of the current tax code that effectively just creates a new set of winners and losers.

While a corporate tax rate cut to 20% from the current 35% is a good thing to see, the idea that putting an additional $1,182 of spending money in the pockets of middle-class families earning $59,000 a year will spark an economic renaissance seems a bit specious, at best.

Whether any of this is already baked into the market, as they say, is subject to debate. I don’t think it’s possible to determine with any accuracy whether passage of the Senate’s tax bill will spark a manic upside rally or a sell-the-news reaction.

So, while the news might provide some volatility in either direction, our approach to the situation remains constant: Just watch the stocks. As I pointed out in my Wednesday report, I see a lot of leading names just biding their time as they continue to work on basing formations. These could easily serve as the launch pads for a strong year-end rally, which I think is what we should be looking for as we move into the end of November.

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 SWCH, 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. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.