The Gilmo Report

November 7, 2018

November 7, 2018

Henry David Thoreau, borrowing the words of one John O’Sullivan, the founder of the United States Magazine and Democratic Review, wrote in his well-known work, Civil Disobedience, “That government governs best that governs the least.” Thoreau, one of my favorite authors of all time, took that a little further by adding, “That government is best which governs not at all.”

To some extent the market appeared to agree with this premise as the futures rallied sharply overnight after the split-decision, mid-term election results were in. The Republicans, as expected, held the Senate, increasing their majority slightly, while the Democrats, as expected, took back control of the House. This will likely produce a situation where the two sides remain at loggerheads, producing good old government gridlock.

Gridlock, of course, isn’t such a terrible thing, in my view, and the market expressed its agreement by rallying sharply. All three of the big-stock index were up over 2%, with the NASDAQ Composite Index leading the way with a 2.64% gain, helped by an even stronger NASDAQ 100 Index, which was up 3.07%. The action qualified for an O’Neil-style follow-through day, as I see it, but this is less relevant than the action of individual stocks.

 

GR110718-$COMPQ

 

The S&P 500 Index, along with the NASDAQ Composite, regained its 200-dma in a 2.12% move higher on increased volume. Overall, the action of the general market does not surprise me. As I’ve written frequently over the past couple of weeks, the fat part of the short-selling game ended at the end of October. Since then, we have been in a chop zone where volatility with velocity, a v-squared condition in Gilmo terminology, has ruled.

This has created long and short opportunities on a short-term basis, but not in a manner that I would call overwhelmingly conclusive in most cases. The question now is whether this follow-through day, which in fact occurs after we’ve already found several long entries in certain stocks on U&R moves and the like, will lead to a sharp year-end rally.

 

GR110718-$SPX

 

Today, with the indexes gapping up on the big post-election relief rally, most beaten-down prior leaders simply extended their oversold bounces. In some cases, however, earnings reports helped to produce buyable gap-up moves in tech names like Twilio (TWLO) and Tableau Software (DATA), along with others like Etsy (ETSY) and Planet Fitness (PLNT). These sorts of earnings gap-ups can present both long and short opportunities, depending on how they play out.

I think these are worth examining. Twilio (TWLO) reported earnings last night and gapped up sharply this morning, printing an opening price of 82.25 before dipping to a low of 80.70, whereupon it turned back to the upside within the first five minutes of trade. Thus, it became actionable using 80.70 as a selling guide.

By the close, TWLO had executed a base breakout coming straight up from the bottom of its base. With the base high at 88.88, the stock is extended in this position. Pullbacks closer to the $90 price level and the top of the base would provide lower-risk entries from here.

 

GR110718-TWLO

 

Tableau Software (DATA) also reported last night and gapped up this morning to 113.66 at the open, backed off only slightly down to 112.54, and then very quickly launched to the upside. In the first five minutes of trade it went from an opening price of 113.66 to 123.88, rocket-like, before trading sideways for the rest of the day.

 

GR110718-DATA

 

If we look at DATA’s five-minute 620 intraday chart, we can see how almost all the stock’s gains for the day came in the first five minutes of trade. So, you were either on it or you weren’t. If you happened to be getting a cup of coffee at the time, thinking there would be nothing to do at the open, you were left behind, assuming you were even watching the stock at all.

Otherwise, if you came in late you went nowhere all day long. That said, based on today’s close relative to the peak high in its base, DATA is technically within buying range of the breakout.

 

GR110718-DATA Intraday

 

Etsy (ETSY) gapped up after last night’s earnings report and opened this morning at 46.24. It then dipped just below its 50-dma at 45.94, making it look very much like a possible shortable gap-up move at the 50-dma. It drifted a little lower to 45.58 before finding its feet and launching five points higher from there.

Unlike TWLO and DATA, however, ETSY did not clear to new highs, thus did not qualify as a base breakout. We’ll see whether it can clear the prior base highs, but for now only pullbacks closer to the 50-dma would bring the stock into a lower-risk entry zone. That said, it is possible that the prior highs up around 52 represent near-term resistance and thus would make the stock potentially shortable near those highs with the idea of reversing to the long side if the stock were able to break through and break out to new highs.

 

GR110718-ETSY

 

Planet Fitness (PLNT) gapped up on earnings this morning, printing 52.43 at the opening bell and then dipped to an intraday low of 51.69 before turning back to the upside. Note that this is a re-breakout move following a prior, late-stage, failed-base type of breakdown in early October. Today’s buyable gap-up move took the stock just past the prior breakout high of late September. I would look for any small pullback to the 52-53 price area as a lower-risk entry zone.

 

GR110718-PLNT

 

The interesting thing with all four of these post-earnings gap-up moves is that they were all actionable as buyable gap-ups after posting intraday lows right near the open. The five-minute 620 charts also never wavered until we moved into the second half of the trading day. I found it very unusual and interesting to see four stocks on my watch list acting in almost identical fashion after reporting earnings last night.

As for other names on my watch list reporting earnings, both Square (SQ) and Roku (ROKU) have reported earnings after the close today. As I write, both are trading down. We can watch these two for any actionable set-ups tomorrow, including shortable gap-downs or even U&R reversals, depending on how they play out.

Meanwhile CyberArk Software (CYBR) is gapping up this afternoon in after-hours trade after reporting earnings. This brings us near the prior October peak, when it failed on a base breakout at that time. I would watch this tomorrow for any possible buyable gap-up move if it can post a solid low on an intraday basis and move higher from there.

 

GR110718-CYBR

 

With CYBR gapping up in after-hours trade, its cyber-security cousin Fortinet (FTNT) might try to build on today’s undercut & rally (U&R) long set-up. Last Friday, FTNT broke sharply to the downside after earnings, making for a great one-day short trade. That downside streak undercut the prior 76.02 low of late October, and the stock rallied back above that low today to close at 77.86.

This would put it in a buyable position as a U&R long set-up using the 76.02 price level as a tight selling guide. Ideally, the closer one can buy this to the prior 76.02 low the better, but we will have to see how this opens tomorrow.

 

GR110718-FTNT

 

Despite the big move in the NASDAQ 100 Index, which led all comers today, big-stock NASDAQ names remain mired in the depths of their chart patterns. Even Apple (AAPL), which was holding up better than the rest, could only manage a tepid move back up into the lows of its prior base on below-average volume.

However, despite the weak-looking move relative to the thunderous index rally, AAPL did manage to undercut and rally back up above its nearest base low at 206.09, closing today at 209.95. Thus, this would be an actionable U&R long set-using the 206.09 price level as a tight selling guide.

 

GR110718-AAPL

 

Amazon.com (AMZN) is also still dwelling in the depths of its chart pattern, but we have ways of identifying buy set-ups even near the lows of the pattern. This is, obviously, the venerable undercut & rally move, which AMZN pulled today when it rallied back above the prior mid-October low of 1685.10. It also rallied back above the 200-dma, triggering a moving-average undercut & rally set-up (MAU&R).

AMZN closed today at 1755.49, which is a bit extended from the prior 1685.10 low and the 200-dma down at 1681.32. Thus, pullbacks closer to the 1685.10 low would create lower-risk entry opportunities, so can be watched for. The success of AMZN’s or AAPL’s U&R set-ups will depend on whether this current rally holds up, or whether today’s follow-through day turns into a “phollow-through” day, or a phony follow-through day.

 

GR110718-AMZN

 

A nearly identical type of U&R occurred in Netflix (NFLX) as it rallied back above its prior 315.81 low of October 11th.  Unlike AMZN, however, the stock is still sitting below its 200-dma at 335.36, so this could present near-term resistance for the stock, such that it could become a possible short-sale target at the line. This, will, of course, depend on what the general market is doing at that time.

 

GR110718-NFLX

 

The weed patch has done well over the past week going into yesterday’s elections where several states were voting on legalization of cannabis for recreational and/or medical use. In addition, the stocks got an extra boost today after Attorney General Jeff Sessions resigned. The AG was a big opponent of cannabis legalization, so his departure could open the door up for the continued expansion of the cannabis industry.

Aurora Cannabis (ACB), which I discussed last week as a U&R long set-up when it undercut the prior 5.89 low and rallied back up through it last Tuesday has marched another 20% or so higher. Today it posted a pocket pivot at the 200-dma and the 20-dema as it pushed just above the shorter of the two moving averages.

This sets up a secondary entry/add point here along the 20-dema and the 200-dma, using the 200-dma as a maximum selling guide. Of course, pullbacks to the 200-dma would offer your best, lower-risk entry opportunities if you can get ‘em.

 

GR110718-ACB

 

Fellow weed patch denizen Cronos (CRON) posted a similar pocket pivot, but off its 20-dema. Yesterday the stock posted a pocket pivot off the 200-dma and is now pushing up toward its 50-dma. The stock became actionable yesterday based on the pocket pivot off the 200-dma as well as an undercut & rally (U&R) long set-up at the 8.68 October 10th low. Pullbacks closer to that low and the 20-dema would offer lower-risk entries from here.

 

GR110718-CRON

 

With today’s follow-through, I suppose orthodox O’Neil-style investors will look to buy breakouts, and of course we saw several, including those in TWLO, DATA, and PLNT, as I discussed above. There was also Tractor Supply Co. (TSCO), which I’ve discussed in recent reports. The stock has remained within buying range of last week’s base breakout, and that remains the case for now.

 

GR110718-TSCO

 

Twitter (TWTR) was buyable along the 200-dma on Monday and has bounced slightly from there. As I wrote over the weekend, “…pullbacks on light volume to the 200-dma would offer lower-risk entry opportunities from here.” That remains the case as the stock tracks sideways and just above the 200-dma as volume dries up.

 

GR110718-TWTR

 

Viomi Technology (VIOT) continues to work on a short handle within its first IPO cup-with-handle base. It’s now about a week or so into building that handle and has been buyable on each and every pullback into the 10-dma and/or 20-dema since I first discussed the stock down near the $8 price level.

As best as I can tell, the last time VIOT filed its earnings report was on September 21, 2018. That would imply that the next one isn’t due until December, which keeps it out of the picture for now. However, if you’re interested in or own the stock, I would keep checking news on the company for the announcement of a firm earnings report date for Q3.

 

GR110718-VIOT

 

Tesla (TSLA) has continued to push up against the $350 price level without giving up much ground. The 10-dma has now risen rapidly to catch up to the stock, but for now I still consider the stock to be extended, such that your best, lower-risk pullbacks would be into the 20-dema, now at 315.85.

That’s a bit off in the distance from today’s close, but the line is rising rapidly and will likely be much higher in the next few days. As it does, it presents a more viable reference for a buyable pullback. Like TWTR, VIOT, and the weed patch names, TSLA was buyable several days ago when the first buy signals showed up and I discussed them in my reports, long before today’s follow-through day.

 

GR110718-TSLA

 

I prefer to operate on this basis, working stocks on the long side when I see the proper set-ups and I am convinced that the first leg down off the peak has been put in. As I’ve discussed repeatedly over the past couple of weeks, the fat part of the short-selling game had come and gone by the end of October, and that is when we can start looking for possible Ugly Duckling set-ups. Let the record show that I discussed several of these over the past 1-2 weeks and they have all progressed higher since.

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.

Today’s follow-through will have buyers scrambling to find breakouts and other orthodox set-ups to move into. But tomorrow we have the Fed, and while they are not expected to do anything, we may get an update on where they stand with respect to their current interest rate-raising trajectory. That may or may not move the market, but again I would look to use any volatility to my advantage.

I give the current rally better than 50-50 odds that it continues based on the set-ups that were already playable well in advance of today’s follow-through day and the ones I’m seeing today. This would include the identical U&Rs we see in AMZN and NFLX, as well as those seen in other stocks, like AAPL and FTNT.

If and as the rally continues, perhaps evolving into the proverbial Santa Claus rally, I would expect to see more long set-ups present themselves, and as they do I will cover them not only in my written reports, but also my video reports, so 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

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