The Gilmo Report

April 4, 2018

April 4, 2018

The market has so far proven to be one of sows’ ears rather than silk purses as I surmised it was over the weekend. Everything is still in a downtrend, but the intraday situation remains decidedly in the “spin-cycle.” This makes for a decidedly difficult trading environment on either side, especially when you throw in the “guess the gap” moves we’ve seen overnight this week. It’s tough to be long overnight when the market can gap down 400 Dow points over night, and tough to be short overnight when it can do the same thing on the upside the next night.

Things spun around nicely yesterday when the indexes first opened to the upside, then came in, with the indexes pushing into the red within an hour of a decent upside open. From there, the market took off on a rally that led the Dow Jones Industrials Index up over 400 points before things settled down for a mere 1.65% upside close. And this after a wild sell-off on Monday when it dropped over 700 points, undercutting its February lows and finding support at the 200-dma. This triggered a small undercut & rally move as the Dow rallied to close off a “mere” -458.92 points on the day.

This morning the Dow futures are showing down 400-plus at the open, and the index bottomed out somewhere south of negative 500 points before finding support on a retest of the 200-dma. It then rallied to close up 230.94, not quite 1%, on lighter volume. Technically, the Dow is in the seventh day of a rally attempt.

 

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The NASDAQ Composite Index was also stuck in its own spin-cycle, down -193.33 points, or -2.74%, on Monday and then up 1.04% yesterday after spinning around in the morning. This morning, it gapped down sharply but found support before it got all the way down to the 200-dma, ending the day up 100.83, or 1.45% on lighter volume. It is now in the second day of a rally attempt.

 

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The S&P 500 Index closed below its 200-dma line for the first time since June of 2016 on Monday, but regained the line yesterday only to open below the line this morning before again retaking the line on lighter volume. This is what you call “pirouetting” around the moving average. The bottom line with all the major market indexes is that they are currently just sloshing around near the lows of the downtrend that began three weeks ago, with the 200-dmas either looming just below or providing near-term support.

 

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Some argue that money has spent too much time fixating on big-stock tech names, many of which have reached stretched valuations, and that now these names are getting their comeuppance. That may be true, but I do keep a close eye on these names since their corrections have correlated well with the market’s correction. Thus, any recovery will likely see these names recover as well, with perhaps some rotation into newer areas.

Amazon.com (AMZN) has had the most news flow lately. After the initial break of the 50-dma, it hasn’t moved much lower as it sits within a short bear flag underneath its 50-dma. I’m watching reference lows here for possible U&R moves, the one on March 2nd at 1455.01 and the 1265.93 low of February 9th. Right now, the stock is in no-man’s land, so I don’t see any entry points here.

 

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Netflix (NFLX) is a slightly different story as it has now undercut and rallied above two of the three reference lows I’m watching on the chart. It undercut the February 22nd low today and rallied back above it. At the same time, it pushed back above the March 2nd low at 283.23. Volume came in slightly above average, but the stock still closed just shy of its 50-dma. Nevertheless, the U&R moves will get me into the stock for at least a day-trade, especially on a day when the market is having something of a panic open followed by an upside reversal.

 

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Nvidia (NVDA) has been fluttering around its own March 2nd low, and today again rallied back above that 221.85 low and pushed higher on above-average volume. That was certainly good for a day-trade, and perhaps the stock will continue higher, at least until it meets up with one of the moving averages running above today’s closing price. This sort of thing illustrates how I operate on a day like today, but be warned, it is not necessarily easy in a volatile market like this one. One must be alert, and able to keep an eye on things throughout the day.

 

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Social-networking names look dead, but cyber-security names seem to act well, and were one group I highlighted in my weekend video special. Fortinet (FTNT) is one current leader in the group that has held up very well during the entire market correction. I like this on pullbacks closer to the lows of the current three-week base near the 52 price range, but the 20-dema can also serve as a reference for buyable pullbacks. Volume was light on the rebound today.

 

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FireEye (FEYE) also is holding up reasonably well, successfully testing and bouncing off its 50-dma today on increased, but below-average volume. Note, however, that the pullback into the 50-dma as the market was declining sharply came on light selling volume. This brought the stock into a more buyable position this morning along the 50-dma. Now it’s a matter of seeing whether it can hold the 20-dema and move higher from here, otherwise, any retests of the 50-dma would be something to look at for possible lower-risk entries.

 

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Palo Alto Networks (PANW) is the big-stock leader in the group, and one I also highlighted in my weekend video special. It rallied back above the 181.43 March 23rd low yesterday, but opened below the lows this morning. However, as the market turned it quickly regained that low and pushed above its 20-dema and 10-dma to post a strong-volume pocket pivot. This takes it right near the highs of its current three-week range, such that pullbacks closer to the 10-dma would be the best lower-risk entries from here.

 

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Square (SQ) has been a bit shaky along its 50-dma as it pulls into its prior breakout point, but it managed to hold both levels today after an ugly gap-down at the open. Volume was light, which indicates that while buyers weren’t piling into the stock sellers also weren’t piling out, even on the gap-down open. Thus, the stock was able to push back to the upside and regain the 50-dma by the close. Volume was light, however, but this still keeps the stock in a buyable position, using the low of four days ago on the chart as your reference low on the U&R.

 

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Weight Watchers (WTW) continues to act indecisively. I broke to the downside with the market yesterday on higher volume, but found support near the lows and rallied back above the 61.52 low of March 28th. Right here it’s difficult to tell whether the stock is forming a new base and may soon rally back above its 50-dma in decisive fashion. Tough to discern in either direction, although if the general market keeps rallying I would expect it to at least hold the 61.52 prior low and quickly regain the 50-dma from here.

 

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Applied Materials (AMAT) did end up busting hard to the downside on Monday, thanks to the help it got from the general market, but today made up all of that decline and more on increased, but below-average, volume.  It did, however, regain the prior 55.12 low, triggering another U&R at that point. Thus, if the general market keeps rallying that low can be used as a tight selling guide while looking for the stock to quickly regain the 50-dma.

 

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Atlassian (TEAM) violated its 50-dma last week, but as I have often discussed in my reports, in this market violations of the 50-dma are often fake-outs. That has turned out to be the case with TEAM as it has now regained all three of its higher moving averages on a strong-volume outside reversal and pocket pivot. Three days ago, this was looking like a short as it rallied back up into the 50-dma; now it’s looking like a buy with the idea that it will hold support at the 50-dma.

 

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Nutanix (NTNX) has been holding up along its 20-dema after completing a 50% retracement of its prior early March price move following the March 2nd breakout. It rallied higher today, pushing off the 20-dema on higher but below-average volume. It remains a leader, and its correction after a torrid upside run in March is to be expected as it rebuilds and resets.

The question for me is whether the stock is a buy here along the 20-dema or whether it will have to retest the prior reference low in the process of building a new base. NTNX closed just above the 10-dma today, but I’d like to see if it perhaps doesn’t set up along the 20-dema or even retest that prior low before jumping in here. It does, however, remain on my long watch list.

 

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All the Chinese-related names I have discussed in recent reports do not strike me as being in buyable positions currently. Because of the swirl of news flow surrounding these stocks, it’s difficult to see them as concrete buys anywhere in their patterns given the potential for the news flow to change quickly.

In the “LUie” category, my screens are picking up Carbonite (CARB) as it sits along its 20-dema with volume drying up to -53% below average today. Their service allows one to automatically back-up their files to the cloud, and they have been ramping up their earnings lately, posting 150% earnings growth in the most recent quarter, with an overall annual increase of 89% expected for 2018. The stock trades 437,700 shares a day so is a bit on the thin side, but I like the L-formation here following the strong-volume move back up to the 20-dema.

Today CARB settled into the 20-dema as volume declined sharply, putting it in a lower-risk entry position here with the idea of using the 20-dema as a tight selling guide. Obviously, the stock didn’t move today with the market, but it also had a sharp upside day yesterday during a down market. All I know is that when I see an L-formation, I then look for some clue that it could be turning, and yesterday’s strong-volume move back above the 20-dema that just missed a pocket pivot by one day is good enough.

 

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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.

Over the weekend I didn’t see anything that looked like a high-probability trade, and for the most part that is how this market has played out so far this week. Volatile moves in either direction only serve to whip-saw all but the nimblest of traders. Meanwhile, breakout buyers and those looking for follow-through days as all-clear signs to re-enter the market haven’t gotten what they want either. There are some Ugly Duckling set-ups cropping up here, although they are not without risk.

But when the market is trying to turn, as it may be right now, you take your shots where you see them while keeping risk tight in case things don’t work out.

The 200-dma is considered a critical long-term support level for the S&P 500, and so far, it has been able to hold above the line despite closing below it for the first time since 2016 on Monday. Some may theorize that this is where the machines, or algos, step in to buy since it represents long-term support. If it doesn’t hold, then perhaps the machines send it plummeting lower.

For now, the market is attempting to rally, and we can let it do so while looking for Ugly Duckling trades where we can find them as a way to capitalize on the bounce and ensuing volatility. How far it carries remains an open question.

Despite the strong bounce off the lows, more than a 700-point round-trip for the Dow, I didn’t get the sense of strong thrust off the lows. That could change, however, so I would remain cautious with an eye toward keeping your risk to a minimum. And, as I discussed over the weekend, the best way to handle this current market environment is to focus on a small group of names that you believe are some of the better leaders.

If the market does turn, one or more of these will flash you a buy signal. We’ll see how things develop in the coming days, and unless one is an Ugly Duckling-style trader utilizing these types of set-ups, there is no all-clear sign just yet.

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.

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