The Gilmo Report

October 1, 2017

October 1, 2017

The news of the week has been the orchestrated revealing of the Trump tax plan, with Congressional and Administration spokespeople hailing historical tax reform. That has helped to drive a move to new highs by the various major market indexes, including the NYSE Composite and Russell 2000 Indexes.

The NASDAQ Composite Index powered to a new all-time high on Friday on slightly higher volume. This defies the abnormal and abrupt sell-offs on heavy volume that we saw in a broad swath of leading NASDAQ names Monday. That day shows up on the chart below as a high-volume crack in the index down to the 50-day moving average.

As I wrote on Wednesday, the index action didn’t look bearish at that time in the least, and Friday’s breakout underscores that utter lack of bearishness in the index charts. Now that we’re at new highs again in 2017, the question is whether it meets up with some selling resistance as other such moves have this year. This sort of phenomenon of selling into new highs is what has generated the wildly choppy action of the indexes since June.




The S&P 500 Index moved to an all-time high as well on Friday with volume picking up on the day. The index, however, pushed into new highs in the early part of September, and the sell-off on Monday found support at the 20-dema and the top of the prior cup-like range. So, Friday’s action is more of a continuation move, as financials help to prod the index higher.




Financials, as represented by the Financial Select Sector SPDR Fund (XLF) have moved higher since breaking out earlier in the week. Their influence has been a driving force for the recent index breakouts. The XLF has so far followed through on Wednesday’s buyable gap-up move, as I discussed in my report of that day.

Big-stock banks like Citigroup (C) and J.P. Morgan have continued higher, with C leading the pack. JPM remains within buying range of Wednesday’s odd double-bottom breakout, where the mid-point of the “W” is higher than the right side of the “W.”




The gold trade is now entirely off the table as the SPDR Gold Shares ETF (GLD) has rolled to lower lows after busting below its 50-dma on Wednesday. As with most everything else in this market, the GLD was a great swing-trade if one moved in on the ETF in early July when it posted a big undercut & rally long set-up that led to a more than 10% upside move.

Once that move was in the books, the GLD then rolled back in. But you will notice that the July entry point on the U&R coincided with a lot of pundits and other financial media mavens babbling about the end of gold. More recently, I noticed an increase in commentary talking about a sustained upside move in gold, and the glorious coming of $2,000 gold prices. Right.




Big-Stock NASDAQ Names:

Big-stock NASDAQ names remain something of a mixed bag, and most of these were hit with some sharp selling on Monday, giving them the look of death. But as I was tweeting on Monday afternoon after the bell, when things start looking that bad there is always the possibility of the Ugly Duckling showing up.

Often, there is a strong Ugly Duckling rationale for such a recovery after a strong selling day like we saw on Monday. As I discussed last weekend, Apple (AAPL) was filling its prior gap-up “rising window,” which set up a logical rally attempt from there. That’s what we’ve seen for most of the week after the stock filled that gap on Monday.

Now AAPL has rallied back up to its 10-dma, where it has so far encountered near-term resistance. In the process, the stock has held tight in a short flag pattern as volume dried up on Thursday and then picked up on Friday in a show of minor support off the intraday lows. Now this is starting to look like a Wyckoffian Retest as the stock pulls down slightly to test the Monday low with selling volume drying up.

If it fails at the 10-dma, it is a clear short-sale target, but a move back up above the line would trigger the moving average undercut & rally (MAU&R) long set-up that I have discussed many, many times in prior reports as a typical Ugly Duckling long set-up. At the very least, if AAPL can clear the 10-dma, it could rally up as high as the 50-dma, where it might become shortable again.

Or, it could blast back up through the 50-dma on another MAU&R set-up. This is why I view every stock in a two-sided manner, looking for both bullish and bearish set-ups that might occur and then considering how I might handle them based on the real-time evidence. This market is a fluid one, and it is usually these Ugly Duckling patterns that provide at least reasonable swing-trading opportunities, if not more. Such is the nature of this market, but long-time Gilmo members are already well apprised of this fact.


GR100117-AAPL (AMZN) continues to rise after undercutting the prior 936.33 low of August 1st in the pattern. But the bounce has been somewhat weak, with no strong volume buying interest coming into play yet. All this rally has done is wedge up into the 20-dema, where it could be tested on the short side, using the 20-dema as an upside stop.

However, in two-side fashion, we should consider what a stronger-volume move back up through the 20-dema might present in the form of an Ugly Duckling long entry. Play it as it lies.




Facebook (FB) is a great example of the now you see it, now you don’t fake outs that seem to be a staple of this market. On Monday, the stock was hit hard on heavy volume, streaking well below its 50-dma. Any rational investor would consider this as very bearish action, even to the point of selling at least part of any long position one might be holding at the time.

Certainly, the objective price/volume action would argue for taking such defensive action. But the abnormal price break on very heavy volume was nothing more than a one-day wonder, and FB has since trudged back above its 50-dma on lighter volume.

I’ve discussed frequently in previous reports my view that FB is a relatively cheap stock in the sense that one is paying 20 times forward estimates for better than 20% growth. For that reason, I have had a difficult time seeing the stock blow apart since institutions would likely not have to sell the stock unless they were faced with an urgent need to raise cash.

Monday’s move certainly got me thinking that something was seriously wrong here, as any rational trader would. But this is what makes this market so funky. Brutally weak action on one day is quickly forgotten by the market, and the stock simply slides back up through the 50-dma.

This then triggers an MAU&R set-up here using the 50-dma as a selling guide. Another breach of the 50-dma, however, would trigger this as a short-sale. But, as it was on Monday, one has to wonder whether this would be a short-term affair, hence a quick short trade as Monday’s breach of the 50-dma turned out to be.




Tesla (TSLA) is one big-stock NASDAQ name that hasn’t rallied with the market as the NASDAQ Composite has broken out to all-time highs. So far, the stock has been a clear short on any rallies up to the 50-dma, such as what was seen on Tuesday and Wednesday of this past week after the stock breached the 50-dma on Monday.

Notice that on Thursday TSLA undercut the prior lows of August 29th and September 6th and then rallied back above the August 29th low. On Friday, the stock tried to rally further, but stalled to close in the lower part of its daily trading range on lighter volume, despite the new-high breakout in the NASDAQ Composite Index.

Obviously, the stock isn’t a short down here, as the proper short-sale entry point was at the 50-dma earlier in the week. The predominant question in my mind is whether it can maintain this current U&R set-up, which remains in effect, and push up to the 50-dma for a decent long swing-trade. The long side of TSLA can be tested here using the prior 338.75 low of August 29th as a tight selling guide.




Alphabet (GOOGL) is expressing some nice comeback type of strength here as it continues higher following Wednesday’s roundabout type of pocket pivot, which I mentioned in my Wednesday report. Note how choppy the stock was throughout August and September before finding a reason to rally hard on Wednesday on the pocket pivot.

This is now extended, but does illustrate how the Ugly Duckling can suddenly come into play, often surprisingly so, in any of these big-stock NASDAQ names that look weak on a short-term basis.




We can see the abnormal price break in Netflix (NFLX) that occurred on Monday, and then the support it found at the 50-dma on Tuesday as the selling turned out to be a one-day wonder. But buying volume on the move up and off the 50-dma hasn’t been all that impressive, and the stock has twice run into resistance at the10-dma since the Monday price break.

This almost seems to set NFLX up as a short-sale on these rallies into the 10-dma. But the flip side of this is that, so far, the 20-dema has served as near-term support. Volume dried up to -29% below average on Friday. However, that strikes me more as a lack of buying demand than selling pressure, particularly on a day when the NASDAQ Composite was breaking out to new highs.

Where this goes from here is hard to figure, since the 50-dma could continue to serve as support for the stock as we head into earnings in a couple of weeks. Nothing significant may happen until then.




Nvidia (NVDA) is also in something of an undefined position here after it successfully tested the top of its prior base and held earlier in the week. The Monday price break took the stock back below its 10-dma, giving the chart a very sloppy look. Tuesday’s attempt at a recovery took the stock up as high as the 10-dma but it simply reversed to close near the intraday lows on heavy volume.

By Tuesday’s close, the chart action looked very bearish, but again, the Ugly Duckling came into play, and NVDA simply turned around and drifted back above its 20-dema, and then on Friday gapped back up to the 10-dma on an analyst’s recommendation. It was unable to clear the 10-dma, so in my view isn’t out of the woods just yet. A low-volume test of the 20-dema might set this up as a lower-risk entry point.

If you think about it, however, the place to buy this on weakness was on Monday or Tuesday near the lows of either of those days. That was when the stock was right at its prior breakout point, and hence the lowest-risk entry opportunity. But would one have had the courage to do so after Tuesday’s bearish reversal off the highs. I tend to think not, but the stock has rallied from there. And this is what makes this market so difficult to navigate at times.




Telecom-Related Names:

Arista Networks (ANET) is another leader that was hit with a high-volume, abnormal price break on Monday along with many others, and that took it right back to the top of its prior base breakout point. On Tuesday, it churned around but held near-term support at the 20-dema before gapping up on Wednesday.

Note, however, the churning action on Wednesday, followed by a bounce off the 10-dma on Thursday and then a small rally back up closer to the highs on Friday on extremely light volume that was -49% below average. That’s a typical “voodoo rally,” and almost looks shortable, although this isn’t an orthodox short-sale entry position.

Taken all together, this past week’s action started with an abnormal price break on high volume, followed by a churning and stalling bounce back up near the prior highs on wedging volume. This certainly doesn’t look buyable up here, but if one simply ignored the bearishness of Monday’s action, that would have served as a lower-risk entry point. How reasonable this entry point was is debatable given the ugly selling on Monday.




Lumentum Holdings (LITE) bounced off its 200-dma on Wednesday thanks to an analyst’s buy recommendation, but I would view this with a bit of suspicion. Near-term the stock can’t get back above the confluence of its 10-dma and 20-dema, which may serve as a short-sale entry as it was on Friday when the stock reversed off the two lines and closed negative on higher volume. Optimally, I’d like to see another analyst put a buy rec on the stock so it rallies further up to the 50-dma, where it would be a much better short.

Bio-Tech/Medical Names:

Alexion Pharmaceuticals (ALXN) is still holding its 50-dma, so courageous souls can attempt to buy the stock while using the 50-dma as a tight stop.

Side-stepping the mixed action among individual bio-tech stocks, the ETF currently known as the iShares NASDAQ Biotechnology Index Fund (IBB) posted a pair of five-day pocket pivots on Thursday and Friday as it pushes back above its 10-dma. The ETF was in a lower-risk entry point earlier in the week as it held along the 20-dema, as discussed in my Wednesday report.




If you look at the largest components of the IBB ETF, you will note that Celgene (CELG) posted a pocket pivot off its 10-dma on Friday, while Gilead Sciences (GILD) broke down sharply on Thursday and is now below its 20-dema. This illustrates the mixed action among big-stock bio-techs.

Biogen Idec (BIIB), on the other hand, is somewhere in between as it has dropped below its 20-dema, but on Friday found support at its 50-dma on strong volume. The stock just missed posting a standard ten-day pocket pivot at the 50-dma by just one day.

While I only show the chart of BIIB, below, I also note that Amgen (AMGN) just missed a pocket pivot at its 20-dema and 10-dma by one day, but has posted two five-day pocket pivots over the past two days, similar to the IBB. Again, I tend to think that the best way to play any upside in big-stock bio-techs, and the bio-tech sector in general, with minimal headline risk, is with the IBB.




Chinese Names:

Only three names remain on my current watch list of Chinese names, although there are some others acting well, such as big-stock Chinese internet Baidu (BIDU), not shown. Alibaba (BABA) shows another leading stock that was hit with an abnormal, high-volume price break on Monday, and the stock appeared destined to meet up with its 50-dma after reversing to the downside on Tuesday.

But the Ugly Duckling suddenly came a ’calling, and the stock has since drifted back above its 20-dema on light volume. This is technically a wedging rally back above the 20-dema, and perhaps a short-term short-sale trade could be made if the stock reversed back below the 20-dema, looking for a move down to the 50-dma as a quick short scalp.

Otherwise, one could simply focus less on the wedging volume and view this as a strict MAU&R at the 20-dema, using the line as a tight selling guide. I’ve seen many wedging rallies after a high-volume sell-off simply continue higher, with the stock eventually finding some volume interest up higher in the rally. This another phenomenon of this market where we often see high-volume sell-offs become entirely negated by low-volume rallies that just keep going.




Sina (SINA) gapped up into its 10-dma on Friday and just stalled and churned along the line in a tight range on very light volume. This is simply building a short flag formation here, with support along the 20-dema. If you really like the stock, then buying pullbacks to the 20-dema would represent lower-volume add points up at these levels.




Weibo (WB) is in a less constructive position as it has been living below its 20-dema for the past eight trading days since breaking below the 20-dema the prior week. On Friday, the stock rallied up into the confluence of the 10-dma and the 20-dema where it encountered resistance.

If one is looking for a short scalp, then it might be possible that the stock is a short here using the 20-dema as a tight upside stop. One would then look for a break down to the 50-dma as a downside objective.





On Wednesday, I wrote that both cyber-security names discussed in my report of last weekend had morphed back into short-sale targets. Well, that turned out to be half right, as Palo Alto Networks (PANW) simply kept bouncing up through its 20-dema and then its 10-dma after breaking down on Monday.

In fact, PANW posted a pocket pivot at the 10-dma on Friday within a v-shaped position. According to the original “Ten Rules of Pocket Pivots” first published in the book, Trade Like an O’Neil Disciple: How We Made 18,000% in the Stock Market, pocket pivots that occur in v-shaped positions are failure-prone.

Maybe that’s the case with PANW here, but the bottom line is that unless one bought the stock at the 10-dma on Friday, it is now extended on the upside. It will be interesting, however, to see if the stock has some sort of orderly test of and pullback to the 10-dma with volume drying up. In that case, the stock might be buyable along the 10-dma using the line as a tight selling guide.

So, while I may have viewed PANW as a short at the 20-dema on Wednesday, the subsequent evidence over the past two trading days negates that, and morphs the stock back into a long idea! Such is the two-sided nature of stocks in this market where the Ugly Duckling can always come into play.




Fortinet (FTNT), on the other hand, worked out very nicely as a short at the 50-dma, as I discussed in Wednesday’s report. The stock broke hard to the downside on Thursday on heavy selling volume, even busting through its 200-dma. Selling volume was very heavy, making for an ugly-looking day on the chart.

On Friday, volume came in heavier, but FTNT held its ground closing nearly unchanged on the day. Note, however, that it also undercut some prior lows from early August, which could trigger an undercut & rally (U&R) move back up to the 200-dma. For that reason, I would cover my short here based on the U&R, looking to possibly re-enter closer to the 200-dma, assuming I got the chance.





Broadcom (AVGO) continues to wedge up into the confluence of the 10-dma and 20-dema, which makes it a short here, using the 20-dema or the intraday highs of Friday as an upside stop. Currently, AVGO is in play as a late-stage failed-base (LSFB) short-sale set-up, and we will see whether it continues to play out as such. In the meantime, all you can do is play it as it lies.




Skyworks Solutions (SWKS) is trapped in no-man’s land between the confluence of its 10-dma, 20-dema, and 50-dma on the top side and the 200-dma on the bottom side. Rallies up closer to any of those three moving averages could present lower-risk short-sale entry opportunities.

While AVGO and SWKS are short-sale targets, Micron (MU) remains a long as it continues to move higher following Wednesday’s buyable gap-up (BGU) move after earnings, as I discussed in my report of that day. This is now extended, but has so far provided a decent long trade as the stock has moved 6% higher from Wednesday’s close.




Cloud Software Names: (CRM) is holding support at its 50-dma with volume picking up on Friday. This puts it in a lower-risk entry position, using the 50-dma as a tight selling guide. Remember that this remains a two-sided situation, since a breach of the 50-dma would trigger this as a short-sale using the line as a tight stop on the upside. Play it as it lies.




ServiceNow (NOW) has moved right back up to its prior highs following Wednesday’s supporting pocket pivot at the 50-dma, as discussed in my report of that day. Volume has been below average over the past two trading days as the stock completes a deep, v-shaped move over the past week. The only lower-risk entry point here was at the 50-dma on Tuesday, as it is now extended to the upside.




Square (SQ) suffered its own abnormal, high-volume price break on Monday, but held the 20-dema and the top of its prior base. This led to a bounce back up to an all-time closing high on Friday. The bottom line is that the place to buy the stock was on the abnormal, high-volume break right down to the 20-dema, although it is questionable whether one would have had the courage to stand in front of a sell-off that severe.

Tableau Software (DATA) is holding tight along its 20-dema, and appears to be buyable on pullbacks to the line. Given how extended it is from its early August buyable gap-up move, it may, however, need time to base further before it can move higher.

In the meantime, constructive pullbacks to the 20-dema can be bought, using the line as a tight selling guide. The more time it spends building a base here, the more I like buying it on these types of pullbacks.




I wrote on Wednesday that “Workday (WDAY) is now a confirmed late-stage failed-base (LSFB) short-sale set-up after busting below its 50-dma Monday on heavy selling volume.” So much for “confirmation.” In classic Ugly Duckling fashion, WDAY has now regained its 50-dma on strong volume, triggering a moving average undercut & rally (MAU&R) long set-up at the line.

WDAY illustrates the “up is down and down is up” nature of this market. The late August breakout might have looked like a classic O’Neil-style buy point, but that eventually failed, sending the stock crashing through its 50-dma on Monday. At that point, however, what looked like a confirmed LSFB short-sale set-up was actually a buy point!

Obviously, I’m being facetious, of course, but it’s clear to me that WDAY illustrates the new math of this market, where buy points are sell points, and sell points are buy points. Just turn everything you think you know about the stock market upside down, and it makes perfect sense!




Internet Related:

Yelp (YELP) has regained its 10-dma and 20-dema following Monday’s breach of the 20-dema which came on below-average volume. Thus, it wasn’t as severe or abnormal as the price breaks we saw in many other leaders on Monday.

Because volume is not a factor when it comes to MAU&R or U&R set-ups, this was actually a U&R long set-up on Wednesday when the stock rallied back above its prior September lows. The MAU&R then came on Friday as the stock pushed above the 20-dema.

The low-volume rally does, however, maintain a certain two-sided status for the stock, since another breach of the 20-dema could morph the stock back into a short-sale at that point. The idea would then be to look for a move down to and test of the 50-dma.




Solar Names:

First Solar (FSLR) has now spent the past five days in a row living below its 50-dma as volume dries. Notice, however, that the stock is currently undercutting the late August and early September lows of its prior base formation, which could set up an undercut & rally move from here.

On Thursday, FSLR did undercut the 45.76 low of August 21st, and closed Friday just above it at 45.88. This would be one U&R reference point, with the other being the 46.52 low of September 8th. FSLR is still trading below that low, so I would use that as a reference point for a U&R long set-up from here, assuming that’s what the stock wants to do.

The flip side of this is that a weak rally into the 50-dma would also present a lower-risk short-sale entry point. What makes this difficult here, as is the case with many other stocks in similar positions right now, is the fact that in the “old days” a pattern like this would be a slam-dunk short. But in this market that is not the case, and one has to be ready to move with the stock based on the real-time price/volume evidence.




SolarEdge Technologies (SEDG) helps to illustrate the possibilities for FSLR, since it has twice looked very ugly during the month of September, but all this just turned out to be so much noise before the stock posted a strong base breakout on Wednesday.

Note the two tests of the 50-dma that resolved bullishly in September, leading up to this week’s base breakout. As I wrote last weekend, the stock was best bought along the 10-dma and 20-dema following the second bounce off the 50-dma. Now the stock has pulled back slightly with volume drying up to -48% below average on Friday.

This could be considered to be within buying range of Wednesday’s base breakout, since the stock is within 5% of the 27.40 buy point in the base. The 28.80 right side peak of the base from early August is not relevant, in my view. I prefer the 27.40 price level as a reference for the breakout since it represents the top of a five-week price range, a much more established and therefore solid area of potential support for the stock.




Video-Gaming Names:

The video-game leaders have all acted similarly over the past five days as all three exhibited abnormal, high-volume price breaks on Monday. But all three have since rallied back above any moving averages they may have broken through on the way down, confounding would-be short-sellers.

Activision Blizzard (ATVI) busted its 50-dma on Monday, looking very much like an LSFB in progress at that point. It has since regained the 10-dma, 20-dema, and 50-dma on average volume or less over the past three days. Again, an “up is down and down is up” situation where the base breakout of late August was a sell point, and Monday’s big-volume price break was a buy point!




Electronic Arts (EA) is pretty much the exact same situation, as Monday’s abnormal price break turned out to be a buy point. It’s base breakout of late August, however, was a sell point, based on hindsight, and now the stock is back above the 50-dma on below-average volume.

Technically one can buy the stock here as an MAU&R using the 50-dma as a tight selling guide. If it reverses back below the 50-dma, then the LSFB short-sale set-up is back in play. Play it as it lies!




It’s possible that both ATVI and EA will reverse back below their 50-dmas, and if that’s the case, then they would become short-sale entries at that point. That may be something to watch for, but as is the case with many leading stocks in similar positions, one wonders what, if any, predictive value the current price/volume action has!

In my Wednesday report I had also discussed the idea that Take-Two Interactive (TTWO) might join ATVI and EA as LSFB type situations, but in fact it joined them in an entirely different way. After getting this with an abnormal, high-volume price break on Monday, TTWO simply drifted back up above its closest overhead moving averages and back up near its prior highs.

Volume was wedging, that is declining, on the rally up through Thursday, but on Friday the stock finally picked up above-average volume that was 18% above normal. I don’t see any reason to jump on the long side of the stock right here, but it’s also not clear that the short side is necessarily going to be in play here either.

ATVI and EA are clearly in weaker positions on their charts, so I would keep an eye on these as potential short-sale targets if they begin to failure. Meanwhile, TTWO remains the strongest of the three by a wide margin, and it may take some time to determine where the stock is headed to from here.




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).

The action this past week strikes me as a bit confusing. After a broad number of leading stocks were hit with abnormal price breaks on heavy volume Monday, the indexes stabilized and drifted higher for the rest of the week. Major market indexes for the most part then finished the week at all-time highs or all-time closing highs.

As the indexes broke out to new highs, they simply dragged the busted leading stocks that were hit on Monday back to the upside. Many of these, from FB to WDAY to ATVI and even PANW, pushed back up through moving averages that they had previously busted in convincing fashion on Monday.

After the carnage on Monday, many of these stocks appeared to present short-sellers with a nice array of short-sale targets. But in almost all cases, save for a few exceptions like TSLA, for example, shorts would have been stopped out rather quickly on the ensuing, persistent rallies. But even as the indexes make new highs, I don’t see a lot of names among these leaders that I would necessarily want to pile into on the long side, right here, right now.

For that reason, I still think taking a measured, cautious, and deliberate approach here is warranted. As we move through earnings season in October, it would be nice to see some new thematic situations emerge, as it has mostly been a story of the same old leaders, most of which offer their best entry points when they get slammed to the downside.

As we move into October, there may be some developments that become more actionable. If this is the case, I intend to expand on any new ideas in timely blog posts during the week, so members should stay tuned to the Gilmo live blog as we sort out the confusing action of the past week.

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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