The Gilmo Report

April 1, 2018

March 31, 2018

One trading day has passed since my last report and what has changed since then? Well, not a lot. So, in the interests of invoking some variety and perhaps a change of perspective, here’s an interesting candlestick chart of the NYSE Composite Index. This comes from HGS Investor Software and was created by my old friend and sub-mentor Ian Woodward.

This is an interesting chart to look at, and there is no shortage of indicators overlaying this thing, but then Ian was the master of overlaying indicators. His “rainbow” charts are works of art in this regard. So, here we are looking at the NYSE Composite, which doesn’t look a whole lot different from the narrower S&P 500 Index as it flops around its 200-dma. The S&P hasn’t yet dropped below the 200-dma, but note that the NYSE Composite has, closing below the line three times over the past five trading days.

So far, the index has held above the February lows, but is close enough so that an undercut of those lows isn’t too far away. This could coincide with a similar undercut of the February lows by the S&P 500 and the Dow Jones Industrials Index, both of which have not yet closed below their 200-dmas. Or they could just breach their 200-dmas, which alone would be enough to get the crowd babbling about how bearish things are getting.

Something that catches my eye here is that we saw a medium-blue “small Kahuna,” flash four days before the final lows in February. Kahunas are based on significant one-day percentage moves, and can have bullish implications. Four days ago, on Monday, we saw another one of these show up in the NYSE Composite. While I tend to focus on the action of individual stocks as my guide, this is interesting.

 

GR040118-NYSE Composite Daily

 

Now let’s flip over to the same chart view of the NASDAQ Composite Index, which has come off sharply from its prior all-time highs of early March, not unlike the way it did in February. But on Monday it flashed a dark-blue “big Kahuna,” which is much stronger than a small Kahuna. Meanwhile, the NASDAQ Composite remains well above its 200-dma, but a test of the 200-dma would bring it right near the February lows.

Stuck here between the blue 50-dma and the red 200-dma, the index is in “no-man’s land,” and so there are no clear support or resistance lines to be found. That is, unless, one looks at the Bollinger Bands shown on this chart, which shows that the index is resting at the lower boundary of the current set of bands. Is this bullish? Well, I’m not so sure it is or isn’t, since we can see that the index dropped well below the lower boundary of the Bollinger Bands back in February. So, we could see something like that occur again.

 

GR040118-NASDAQ Composite Daily

 

The bottom line is that we are not in a bullish trend, even though reaction rallies that occur based on the technical position of the S&P 500, the Dow, and the NYSE Composite at their 200-dmas could turn out to be very tradeable moves.

So, for me the index situation boils down to a quasi-binary outcome: either these indexes bust their 200-dmas and we move lower, perhaps at the same time sending the NASDAQ Composite down to its 200-dma and the February lows, or they hold support at the 200-dmas and trigger a reaction rally that might even evolve into a final low that includes a follow-through day. Technically, the S&P 500 is in fact still in a four-day rally attempt off the lows of two Fridays ago.

All we can do for now is wait and watch. However, nimble, resourceful traders who understand how to use undercut & rally moves and other “Ugly Duckling” set-ups during reaction rallies or better may be able to use the current volatility to their advantage. In fact, that’s what makes Ugly Duckling trades some of the most profitable, since they tend to work best at or near market lows, where large volatility is often seen.

Amazon.com (AMZN) has taken the role of “headline-getter” over the past couple of days as President Trump has directly attacked the company as a parasitic, unfair corporate predator. Personally, any company that can offer me same-day delivery on items that cost ½ as much as the same thing at the brick-and-mortar (in California, that would be “stucco”) retailers is going to get my business. And if you are going to target them by jacking up their postal rates, then don’t be surprised if they just start the Amazon Postal Service.

Whatever your feelings on the topic, including the anti-AMZN rantings of the President, the real question is whether this is the final death knell and top for one of the biggest of the current big-stock leaders in this market. The reality, however, is that the stock isn’t that far below its February highs here in early April, and seems to be finding at least intraday volume support along its February lows.

On Wednesday, I discussed the stock as being potentially shortable on “weak” rallies back up into its 50-dma, but the huge magnitude of volume on Wednesday and Thursday does not in any way constitute a “weak rally.” In fact, it looks like a lot of buyers are stepping up to meet the sellers at those levels, and on an intraday basis they appeared to win the battle on Thursday as the stock closed near the peak of its daily trading range.

So, here’s my take on the stock, which is concrete. If we see volume decline here as it nudges into the 50-dma it may very well be a short. However, it closed Thursday at 1447.34, just below its 1455.01 low of March 2nd. Therefore, if it can move up through that low it would trigger an undercut & rally (U&R) long set-up at that point, using 1455.01 as your selling guide. A move from there might carry up to the 50-dma at 1469.48, and if the stock dies there you might flip and go short. If it clears the 50-dma, however, the U&R gets added confirmation.

This defines how I’ll approach the stock this week, and I dare say that certainly it saves me from having to “deep-think” whether the President really has the power to torpedo AMZN for good.

 

GR040118-AMZN

 

And if you doubt the potential for U&Rs to show up in a stock like AMZN, then look at the other two big-stock NASDAQ names I’ve focused on in recent reports. Netflix (NFLX) even went two better than that, by undercutting and rallying back above its 50-dma on Thursday while at the same time posting a supporting pocket pivot at the 50-dma. That all coincided with a U&R move back up through the prior March 2nd low on above-average volume.

 

GR040118-NFLX

 

Nvidia (NVDA) also came through with its own U&R long trigger on Thursday as it pushed above its March 2nd low and kept rallying through it on above-average volume. This is what I was looking based on my discussion of the stock in my Wednesday report. It took it one day to get going, since Wednesday’s initial intraday rally attempt stalled, but it worked reasonably well on Thursday. Sometimes, U&R moves take time, but the stock also had some help from the general market, which rallied on the same day.

 

GR040118-NVDA

 

The real question is whether these U&R moves in these stocks hold up and produce another run at the highs. The flip-side of these is that they simply result in rallies back up to the next moving average, which for NFLX would be the 20-dema, and the 50-dma for NVDA. Depending on how the general market situation plays out, they could evolve in either manner.

In the bust social-networking zone, Facebook (FB) is rallying after reaching a deep oversold position, but without undercutting and rallying back above any meaningful prior lows in the pattern. Twitter (TWTR) is also rallying back up towards its 50-dma on light volume, which may simply make it shortable once it gets to the 50-dma if volume remains tepid. The only one that looks like it might become buyable based on a concrete set-up would be Snap (SNAP).

The stock has undercut and rallied back above the low of eight days ago at 15.62, and has been holding above that low as volume dries up. The pattern is also something of a descending wedge, which opens up the possibility of a move up through the upper trendline. So far, however, there is a U&R long trigger in effect right here, using the 15.62 price level as a tight selling guide.  Whether that results in any significant upside from here remains to be seen.

 

GR040118-SNAP

 

Square (SQ) held support at the top of its prior cup-with-handle breakout and the 50-dma on Thursday, so remains “alive” for now. Volume was above-average but nothing spectacular relative to the heavy selling volume seen on Wednesday. If it continues to bounce from here, then the 20-dema becomes a critical test for the stock, since a reversal at the 20-dema followed by a move back below the 50-dma would turn this into a late-stage failed-base (LSFB) short-sale set-up. Not a clear-cut situation in either direction, frankly.

 

GR040118-SQ

 

The problem with this market, at least for me, is the lack of clear-cut set-ups in either direction. Yes, we have some reaction rallies after sharp downside breaks this past week, but the action doesn’t strike me as offering anything concrete in either direction. Weight Watchers (WTW) is one stock I’ve viewed as a short, but that was a week ago, and the stock did have a quick downside move from the 50-dma. Now it’s drifting sideways on light volume as nobody seems willing to buy or sell the thing in size.

That could change quickly, of course, so this low-volume rally up into the 20-dema does bring the stock into shortable range, although I’d prefer to try and short a weak move into the 50-dma, if I can get it.

 

GR040118-WTW

 

Atlassian (TEAM) also looks like it might be pushing back into shortable range after gapping to lower lows on Wednesday. This latest move up to the 50-dma should be watched as the stock gets close to the line as a possible lower-risk short entry spot. But as with any of these recent breakdowns, including WTW, NFLX, NVDA, the current rallies could carry further up into the patterns, depending on what the general market does. Thus, TEAM could push back above the 50-dma and run into resistance at the 20-dema instead.

 

GR040118-TEAM

 

Applied Materials (AMAT) can also be viewed similarly to TEAM. It has been another short-sale target but was probably best shorted on the reversal at the 20-dema this past Tuesday. It has since broken lower and is rallying up to the 50-dma on lighter volume. Note, however, that it has also undercut and rallied above the prior 55.12 low of March 2nd, triggering a U&R set-up. At the same time, it stalled Thursday at the 50-dma.

So, how do you play this? In my view, the lower-risk approach is to see if you don’t get a rally back up to the declining trend channel and the 20-dema. After all, the stock is a bit extended to the downside since its prior breakout failure the prior week, so getting eager to short this thing into oblivion may not be the smartest move.

Also, LSFBs, like TEAM or AMAT, among others, once they break below the 50-dma, can often rally back above the 50-dma and then run into the higher 20-dema, especially if the 20-dema is near the prior breakout point. So, depending on what the market does, we could see either of these stocks do this. In my view, if AMAT is going to bust hard from here, then it’s going to take a similar breakdown in the general market to help out.

 

GR040118-AMAT

 

Another point I would make that addresses a practical matter with respect to entries is the extreme intraday volatility in the market these days. What makes this market difficult in real-time is that individual stocks can look one way in the morning, and then become something entirely different by the close. So, while a daily chart can look quite concrete on its face, the intraday action that produces that daily price bar is something else altogether, and often fraught with a great deal of volatility.

Nutanix (NTNX) completed a 50% retracement of its prior early March price move following the March 2nd breakout and rallied on Wednesday and Thursday, but volume has been weak. I tend to think the stock has more work to do, so I wouldn’t fall into the trap of thinking that it will somehow have another sharp rally as it did in the first half of March.

As I like to say, Cinderella didn’t come to the ball twice. NTNX has been hit with a lot of heavy selling volume over the last two weeks, so it wouldn’t surprise me to see the stock stall out on this rally attempt, perhaps as it approaches the 10-dma, which served as solid resistance last Tuesday.

 

GR040118-NTNX

 

I don’t see any Chinese names that look all that appealing to me, since the only one among those I follow that is still holding a recent breakout is Baozun (BZUN). And even this one is looking somewhat non-descript here, although it did undercut and rally back above the 44.65 and 45.01 lows of March 14th and 23rd, respectively, on Friday. It also regained its 20-dema, and continues to hold well above its prior buyable gap-up move of early March.

Technically, that triggers a U&R long set-up using either of those lows as a tight selling guide, or the 20-dema as a tighter selling guide. Whether it produces anything more than a quick upside trade is another matter.

 

GR040118-BZUN

 

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 I would love to write a report that spews out all sorts of wonderful long or short set-ups, the reality is that this market reminds me of how Bill O’Neil would describe certain environments to me by saying, “You can’t make a silk purse out of a sow’s ear.” This market seems to be full of sows’ ears, and not many silk purses. In my view, it remains a rapid-fire trading environment for those who are nimble and bold, and can handle the extreme volatility.

Those seeking a longer-term or intermediate-term trend are best advised to lower their exposure and hold lots and lots of cash, assuming they haven’t done so already.

Probably the best feature of this current market environment is that it has helped me flush out my long watch list, which has diminished to a couple of handfuls of names. I also think that it is useful to focus on a limited number of names here, which allows you to keep a closer eye on things without being so “spread out” in terms of what you’re trying to monitor. If we get a market follow-through in the next few days, then perhaps the long side will improve. But a follow-through with few set-ups and breakouts could also be suspect.

I’ve spent a lot of time this weekend running through my screens and looking at hundreds of charts, and just don’t see anything that gets my blood boiling, quite frankly. Therefore, I’m not going to try and feed members a line of bull about it being easy to make money in this market right here, right now. The market is extended to the downside, but remains in a downtrend, stuck between the proverbial rock and a hard place.

So, aside from perhaps trying to pick off a couple of U&Rs here and there when they pop up, or shorting weak rallies into resistance on a tactical basis, I prefer to lay low here, and wait for some silk purses to show up.

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 no positions, 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. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.