The Gilmo Report

November 28, 2018

November 28, 2018

The market has spent this post-holiday week pulling the melt-up move that it passed on during the Thanksgiving holiday week. This has most resulted in oversold bounces in severely beaten-down leaders, which, in combination with the major market indexes testing their October lows, is logical. I wrote over the weekend that a decent catalyst, either from the Fed or a U.S.-China trade rapprochement could trigger further upside in the market based on this technical condition.

That’s precisely what we got today when Fed Chairman Jerome Powell, speaking at a New York Economic Club luncheon, cooed something about interest rates being very close to what the Fed considers to be neutral territory. While the remark was somewhat subtle, it nevertheless lit the indexes on fire, sending the leading index, the Dow Jones Industrials, rocketing back above its 200-dma on higher volume.

 

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The S&P 500 Index also blasted higher, trailing the Dow’s 2.5% move with a 2.3% move of its own. It is now approaching its 200-dma as we approach the start of the final trading month of the year. So far, the market looks like it’s trying to put out the cookies and milk for Santa.

 

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Despite the strong moves in the NYSE-based indexes, the NASDAQ Composite Index led the charge among the Big Three major market indexes with a 2.95% move higher, paced by the NASDAQ 100 which was up 3.17%. Both indexes remain below their 200-dmas.

Note that volume was higher across the board, leading to the proverbial follow-through day (FTD) on the fifth day of a rally attempt. Based on my discussion over the weekend with respect to the potential for a market rally given the technical position of the indexes and the deeply oversold nature of formerly leading stocks, I suppose today’s action is no surprise.

 

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What is perhaps most surprising is how the entire thing was triggered by just a few utterings from the Fed Chairman. However, this shows how the market’s technical position merely put it in the right place at the right time. And like a pile of dry kindling, it only needed a small spark to ignite a massive fire.

The question now is, at least for those who view an FTD as a green light to start piling into stocks, what do you buy? Just about everything is bouncing off its deep, bargain basement lows and not in the most optimal buy positions. Meanwhile, for the more orthodox among you, breakouts are far and few between.

But, as I wrote over the weekend, if we see the market start to rally sharply, the simple approach is to buy the undercut & rally moves we saw in big-stock leaders like Amazon.com (AMZN) and Microsoft (MSFT) last week. As I wrote over the weekend, “Thus, if the NASDAQ rallies from here, both stocks are likely to move higher as well.”

With respect to Amazon.com (AMZN), I wrote, “So, if the market starts to rally next week, one could hop on board AMZN as a way to ride any reflex move back to the upside off a double-bottom/U&R set-up.” As I noted, AMZN was mimicking the action of the NASDAQ, so seemed likely to follow suit if the index rallied off the recent lows.

And there it is. AMZN is now pushing up into the 200-dma, and we shall see whether this represents stiff overhead resistance for the stock. Meanwhile, the U&R came in handy as a useful arrow in our quiver of buying techniques given the beaten-down nature of nearly all formerly leading stocks.

 

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Microsoft (MSFT) also continued to move higher following a U&R long set-up last week, which I discussed in my weekend report. It, too, was mimicking the action of the NASDAQ, and its move today is consistent with that characteristic. Today the stock cleared the 50-dma on strong volume in a move that also qualified as a trendline breakout. So, if you like to buy breakouts, here’s your ticket, at least on a trendline basis.

 

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I suppose if you missed those you might then look for U&Rs among other big-stock former leaders, such as Netflix (NFLX). It closed today about 4% above its 271.21 low of late October, keeping it within buying range while using the 271.21 low as your selling guide.

 

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One of the better-looking charts in this market remains Bilibili (BILI), although it seems to suffer from the same weight that other Chinese names must contend with as uncertainty over the U.S.-China trade war continues to swirl. President Trump and Chinese President Xi are expected to conduct a so-called working dinner this Friday, and the market seems to be pinning some hopes on a breakthrough when the two leaders break bread.

Today, some of that market weight lifted and BILI did what it wanted to do last week after earnings. Last Wednesday, in my mid-week report of last Tuesday I noted that the stock was one to watch after reporting earnings that afternoon. I also blogged early on Wednesday, before the open, that the stock was likely in play as a mini-gap-up move.

On a day when the general market sputtered, BILI ran into some resistance as it attempted to clear to new highs. This Monday, however, it held support along its 10-dma, making it buyable at that point, before posting a new closing high today on a pocket pivot move.

I consider this a low-base breakout, so for those of you who like to buy breakouts, this is one to consider. The interesting thing here is that with so many big-stock NASDAQ names having big moves today, BILI’s 7.82% move bested them all.

 

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The FTD Four have continued to provide trading vehicles on the long and short side as the market bounced off the October lows. Today, they worked as long-side vehicles given the market rally, based on my observation over the weekend that these are the high relative-strength names in the market. Once we were off to the races, it was a simply a matter of flipping the switch and going long.

In some cases the FTD Four are benefiting from analyst upgrades, such as Twilio (TWLO). The company received a reiteration of a $110 price target on Monday, helping the stock to blast higher and clear the 10-dma as it approaches its prior base breakout point.

This latest move would be the stock’s second re-breakout attempt as it has mostly chopped back and forth in highly volatile fashion since posting its buyable gap-up move after earnings in early November. I wrote over the weekend that, “If it can stabilize here along the 50-dma, however, it could attempt to move higher still in a possible re-breakout attempt. So far, that appears to be what the stock is trying to do, and it sits just above its re-breakout point, putting it in buying range for those of you who like to buy breakouts.

 

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Tableau Software (DATA) also benefited from an analyst’s upgrade and price target of $123 on Monday, sending that stock back above its 10-dma in a move that was identical to TWLO’s. These stocks appear to be joined at the hip, and DATA is now attempting to post a second re-breakout attempt, like TWLO.

DATA traded slightly below-average volume today but held above the prior 118.08 new-high breakout point. If you like to buy breakouts, this one is manageable using the 118.08 price point as a tight selling guide. While volume on today’s re-breakout was below average, I find that re-breakouts don’t necessarily have to show strong volume.

 

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Etsy (ETSY) cleared its 50-dma on Monday as it slashes back toward its prior breakout point on weak volume. Any attempt to short the stock at the 50-dma on Monday never materialized as the stock pushed right past the line early in the day. Instead, ETSY has gone on a five-day run after filling its prior gap-up move that occurred in early November after earnings.

In this position I don’t consider it buyable, although it will likely head higher and make a run for a possible re-breakout if the general market continues higher. For those of you who are orthodox breakout buyers, the new-high buy point sits at 53.25.

 

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Planet Fitness (PLNT) is the final member of my FTD Four, and it is playing out as expected based on what the general market is doing. Remember, as I’ve written in recent reports, one can watch these as a very short list of ideas that could work out as longs or shorts based on what the general market does. Given that these are the highest relative-strength names in the market, they would either be re-breakout situations if the market turned back to the upside, or the next wave of late-stage breakout failures to break down.

With the market turning off the late-October lows on the retest last week, these are now all showing potential re-breakout action. Either that, or they are all going to re-breakout and then fail! For now, however, given the lower position of this latest follow-through day as we prepare to move into December, I am leaning to the long side here on these names, until further evidence to the contrary appears.

PLNT posted an all-time closing high today as it comes off a combination gap-fill and U&R move off the lows of last week. Following that bottoming maneuver, the stock has just kept trucking higher, barely looking back yesterday as volume declined. This v-shaped action is very typical of how leading stocks will act when the market turns in a QE market, re-breaking out after an initial failed breakout during a market correction.

With the stock just barely clearing the 55.35 new-high breakout point on the re-breakout, it is within buying range. In most cases, however, where these FTD Four names are extended on the upside, I am more inclined to look for any kind of small pullback from current levels as a potentially lower-risk entry opportunity.

 

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Canada Goose Holdings (GOOS) isn’t one of the FTD Four, but it has been one of the higher relative-strength names on my short lists of two-side situations, both long and short. The stock was shortable on Monday near the highs of the current post-BGU (buyable gap-up) range, and it came in sharply down to the 20-dema and the 61.76 intraday low of the BGU price range yesterday.

From there, it found ready support during today’s big upside market rally and rallied sharply on a re-breakout move. The stock closed 17 cents above the new-high breakout point at 65.82, putting it within buying range of the re-breakout.

 

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Shopify (SHOP) has rallied all the way back to its prior November highs following last week’s undercut & rally move of the prior 120.11 late October low. This stock exemplifies the idea of high volatility with high velocity as it flies back and forth, presenting long and short opportunities at the respective ends of current price range extending back to mid-October.

Is this again a short here? Hard to say, but one could always test it here with the idea of using a tight 2-3% stop on the upside. Otherwise, if the general market keeps on trucking higher into year-end, SHOP may do the same.

 

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Twitter (TWTR) has continued to hold its U&R move through the prior late-October post-earnings buyable gap-up (BGU) and the 50-dma. So far this week, it has held support along the 20-dema. Notice also that it has pulled a second U&R move through the earlier November low at 31.47. The stock held that low today and regained the 20-dema on an intraday basis on higher volume.

One could treat this as a buyable U&R, using either the 20-dema or the 31.47 price level, less than 4% lower, as your selling guide. The other option is to sit back and wait for a low-volume retest of the 50-dma as a potentially lower-risk entry point. TWTR is growing earnings at triple-digit percentage increases and is currently showing three-quarter sales growth acceleration. If the market heads back for the prior highs during December, I would not be surprised to see TWTR follow along.

 

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Railroaders rallied strongly today with the market. CSX Corp. (CSX) posted the strongest move as it regained its 50-dma to test the prior November highs on increased but below-average volume. The railroaders remain what I would call market-dependent names. If the market moves higher, so will they, and if we see the market break down again, they will likely do so as well. That said, I prefer other names on the long side in any continued market rally from here.

 

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Norfolk Southern (NSC) and Union Pacific (UNP) are less convincing as they remain below their 50-dmas. So, they could be watched as possible short-sale targets if they run into resistance at their 50-dmas. That, however, is something that will depend on whether the current market follow-through fails in short order or not.

Something that has been quietly building a flag base following a prior breakout without giving up that breakout during the market correction throughout November is Acacia Communications (ACIA). The stock blasted out of a base on a big-volume buyable gap-up move in early November and has held very tight even as the general market rolled over and retested the late-October lows.

It is now sitting right at its 10-dma as volume dries up within a three-weeks-right flag formation. ACIA is a turnaround situation, looking to increase earnings by 75% in 2019, to $1.42 a share.

 

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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.

While breakouts are somewhat difficult to come by on this latest follow-through day, I note that re-breakouts and other unorthodox long entry signals have occurred over the past several days, even as the general market was testing the October lows last week.

With the earlier November follow-through failing rather quickly, skepticism may be high with respect to today’s action. Therefore, it may have a better chance of working, and currently I see no reason to try and stand in the way by getting short into it, at least not just yet.

As I discussed in my weekend video report, even if we assume that the market topped in October, that could simply be the first leg in what could be a long bear market process. Thus, a rally into year-end is certainly within the logical confines of this scenario, with the possibility of another market break once the New Year begins.

Of course, we won’t know until we get there, and unless further evidence to the contrary presents itself in short order as it did in early November on the first failed follow-through, it may be smarter to focus on the long side of things as we head into December and year-end. Those seeking more orthodox, intermediate trends may test the waters, but know where your out points are, and maintain discipline in this wild, news-oriented market. Keep it simple and keep it safe.

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 positions in BILI and TWLO, 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.