The Gilmo Report

August 1, 2018

August 1, 2018

I wasn’t looking for an upside opening on Monday morning, but a brief upside pop to start the week gave short-sellers a nice opportunity to hit the short side of the market. As I indicated to members in my Sunday afternoon video report, I would be looking to short any upside market open the next day. And so, we opened to the upside on Monday, giving short-sellers an easy lay-up to enter short positions, and the market then promptly reversed sharply to the downside.

The move took the NASDAQ Composite Index below its 50-dma, but the NASDAQ 100 Index, which had been the epicenter of selling over the past few days, found support at its 50-dma. This set up a logical context for a reaction bounce. We got that yesterday, thanks to some news out of Bloomberg regarding the alleged restarting of trade talks between the U.S. and China.

 

GR080118-$NDX

 

That triggered a sharp rally that lasted most of the day, but by the close the major indexes gave up a good chunk of their gains to post a big churning and stalling day on higher volume. The NASDAQ Composite Index held support at its 50-dma, however, and got some additional help today from a strong Apple (AAPL) earnings report. This sent the market rallying early in the day, ahead of the Fed policy announcement. But everything except the NASDAQ had dissipated into negative territory by the time the Fed did what everybody expected them to do, which was nothing.

That remained the case for the rest of the day as the NASDAQ Composite and NASDAQ 100 both posted stalling and churning days on higher volume. So far, the indexes are in two-day rally attempts off their 50-dmas. Objectively, despite the big Apple (AAPL) rally, the action looks a bit soft.

 

GR080118-$COMPQ

 

The S&P 500 and the Dow Jones Industrials Indexes continue to hold up relatively better than the NASDAQ, with the Dow still holding above its 10-dma. The S&P 500, however, is stalling and churning around its 10-dma. Yesterday it did so on higher volume, today on lighter volume. Overall, the indexes seem to be struggling to hold their ground, with varying results.

 

GR080118-$SPX

 

Meanwhile, the formerly leading small-cap Russell 2000 Index, as represented by its proxy, the iShares Russell 2000 ETF (IWM), has closed the past four days in a row under its 50-dma. This indicates that a risk-off attitude is now starting to permeate the market, and some of that is obvious in the action of individual stocks.

 

GR080118-IWM

 

Apple (AAPL) provided not only the excuse for a sharp market rally this morning, but also the context for some of the most pathetic inanity I’ve ever seen on financial cable TV. One talking head was caught exhorting viewers to “go buy Apple stock” for the sole purpose of driving it to 203, whereupon it would become the first company in history to achieve a $1 trillion market cap.

All the hype and inanity aside, the earnings report was impressive, and it sent the stock up at the open on a buyable gap-up (BGU) move. AAPL opened at 199.13, pulled in slightly to post a low at 197.31 and then headed for the $200 Century Mark from there. Personally, I was looking for the stock gap down after earnings, but was quite wrong, reinforcing my view that there is never any need to play earnings roulette!

In any case, AAPL ended the day at 201.50, and remains buyable based on the BGU move, using the 197.31 intraday low as your tight selling guide. Also note that the BGU was a standard-issue base breakout, with the buy point at around 195, so the stock remains within buying range of that as well.

 

GR080118-AAPL

 

I went through the charts of my entire long watch list in my Sunday video report, showing just how ugly things were by Friday’s close. Amazon.com (AMZN) is one example following a high-volume reversal off the highs on Friday after it initially gapped up at the open. This all came after a strong earnings report on Thursday after the close, but big money just used the gap-up move to sell into.

As of today’s close, AMZN is actually lower than Friday’s close, as it wobbles along its 20-dema. However, alert readers will notice that the move yesterday was an undercut & rally coming up through the lows of eight days ago on the chart. That was good for a long trade for the enterprising and bold, but we’ll see whether AMZN can get back up above its 10-dma.

 

GR080118-AMZN

 

Alphabet (GOOGL) has also failed to produce any meaningful upside following its own post-earnings buyable gap-up. That BGU, however, failed on Monday, as the stock dropped back below the 1244.14 intraday low of two Tuesdays ago.

Note that the BGU failure has brought the stock down to the lows of the gap-up day’s rising window, which would now serve as near-term support for the stock. One could also view this as a lower-risk entry position on the pullback given the gap-fill using the 20-dema as a tight selling guide.

 

GR080118-GOOGL

 

Microsoft (MSFT) is also starting to fail on the buyable gap-up it posted after reporting earnings nearly two weeks ago. After filling the gap-up day’s rising window on Monday, the stock stabilized along the 20-dema, and today closed back above the 106.08 BGU intraday low.

So, technically, this can be viewed as a lower-risk entry position using the 20-dema as a tight selling guide. Notice that GOOGL and MSFT are both in possible lower-risk entry positions. But if they should fail to hold their 20-demas and the lows of their respective gap-up rising windows this would likely have negative implications for the general market.

 

GR080118-MSFT

 

Facebook (FB) and Twitter (TWTR) are both utterly cooked, with the former now living below its 200-dma while the latter is trying to hold above its own 200-dma. I only show FB on a chart here, since it’s the only one of the two that is close to a possible short-sale point. With the 200-dma about 5-6% above today’s closing price, any rally up to the line would present a lower-risk short-sale entry.

 

GR080118-FB

 

Netflix (NFLX) has been making lower lows and may well be set for an eventual test of its 200-dma which is way down at 284.94. For now, it is attempting to find support at the top of a prior base but so far has been unable to generate much upside velocity. Volume was weak today on a stalling rally, even with the help of a big AAPL rally.

I suppose one could look for some sort of set-up that would allow for trying to play a bounce given that the stock is sitting on top of a prior base. For that to happen, I’d like to see a U&R develop at one of the many lows on the left side of the chart. Otherwise, from here, rallies up to the 10-dma, 20-dema, or 50-dma would present lower-risk entries on the short side.

 

GR080118-NFLX

 

Nvidia (NVDA) broke below its three nearest moving averages, the 10-dma, 20-dema and 50-dma on Monday as selling volume picked up. This was the short scalp I was looking for, and the stock undercut a prior low before rallying over the next two days. Today NVDA stalled as it approached its 10-dma and 20-dema without quite making it that high.

So far, the stock continues to act weakly, and looks quite shortable on low-volume rallies back up to 10-dma, 20-dema, or 50-dma. Of course, such short-sale entries would be taken mostly with the idea of scalping some downside movement ahead of NVDA’s expected August 16th earnings report.

 

GR080118-NVDA

 

Tesla (TSLA) reported earnings today after the close and is currently trading up between its 20-dema and the confluence of its 50-dma and 200-dma, as I’ve highlighted on the chart below. The company missed estimates by 24 cents but reaffirmed GAAP profitability in the third and fourth quarters. This was enough to send the stock gapping higher in after-hours trading.

The question here is whether it can get back above its 50-dma and 200-dma, which appears to be serving as resistance in the after-hours as I write. I would watch to see where this opens tomorrow, as it could turn out to be something of a bottom-fishing buyable gap-up or a short at its 50-dma/200-dma confluence.

 

GR080118-TSLA

 

Micron (MU) continues to find resistance along the confluence of the 10-dma and 20-dema.  Today, it ran into resistance at the 10-dma as it peels away from the 20-dema on the downside. Optimally, I’d like to short this on a rally up to the 20-dema from here. Otherwise, if one is working the stock short from the 50-dma, where it first triggered as a short per my comments at that time, the 20-dema would serve as an upside trailing stop.

 

GR080118-MU

 

My long watch list, which I reviewed over the weekend, remains a scene of extreme carnage. Note, for example, how Okta (OKTA) broke hard as it sliced through its 50-dma on Monday on heavy selling volume. At that time, it also undercut a prior low in the pattern, triggering a U&R move today.

I’m not willing to say that one can buy this U&R and expect that the stock just continues its merry way higher. While the U&R is definitely playable on the long side, it may turn out to be little more than a trade, so keeping the prior low as a tight stop is of paramount importance.

 

GR080118-OKTA

 

Chinese stocks are a mess, with Baozun (BZUN) finally breaking down yesterday as it busted below its 50-dma on above-average trading volume. As I discussed over the weekend in my video report, the stock was perhaps developing as a double-top short-sale set-up. This theory of mine was confirmed yesterday.

Now, rallies up into the 50-dma would offer lower-risk short-sale entries from here. Keep in mind that BZUN is expected to report earnings on August 21st.

 

GR080118-BZUN

 

Things also continue to deteriorate for Alibaba (BABA). After failing on a one-day wonder of a pocket pivot last Friday, the stock has continued lower and closed today below its 200-dma for the second time this week. Earnings are expected tomorrow before the open.

 

GR080118-BABA

 

Fortinet (FTNT) reported earnings today after the close and as I write this afternoon is trading up around the 70 price level. Technically, this might turn out to be a buyable gap-up tomorrow, depending on where it opens. I would also be alert to the possibility of a BGU failure, depending on how it plays out tomorrow.

The gap-up response to earnings is interesting given how brutally FTNT sold off on Friday of last week and this past Monday. Volume was heavy as the stock sliced right through its 50-dma. But as is often the case with earnings roulette, a winning spin of the wheel can change the situation quickly! We’ll see how this plays out tomorrow.

 

GR080118-FTNT

 

I also find it a bit unnerving to see what was at one time the strongest cyber-security names on my long watchlist, CyberArk Security (CYBR), completely blow apart over the past several days on very heavy selling volume. Notice how this extreme breakdown takes the stock back below the lows of late June, which could trigger a U&R move back up to the 50-dma.

Such a move, however, while playable on the long side, might just bring the stock into shortable range near the 50-dma up at 64.34. Keep in mind that CYBR is expected to report earnings next week, on August 7th.

 

GR080118-CYBR

 

Square (SQ) reported earnings today after the close and is currently trading flat in the after-hours as I write this afternoon. The stock got bashed with everything else late last week and again on Monday but found support at its 50-dma as it also undercut a prior low in the pattern.

That triggered a little U&R move back up into the 20-dema today. With no upside reaction to earnings this afternoon, however, this could simply set up as a late-stage, breakout-failure, short-sale set-up here, using the 20-dema as a guide for an upside stop. We shall see how this opens up tomorrow.

 

GR080118-SQ

 

The advance/decline numbers on both exchanges were negative today. The negative breadth on the NYSE was not surprising, however, given that both the Dow and the S&P were down on the day. The NASDAQ, however, was also negative, which showed that the rally in the index today was mostly an AAPL affair.

This was evident in the action of many of my previously favorite smaller long ideas, such as Stitch Fix (SFIX). The stock has pulled right back to its prior cup-with-handle breakout point and attempted to rally this morning before reversing at its 20-dema and turning tail to close near the intraday lows.

This is typical for most of my prior long ideas as the deterioration among leading names has been broad and deep. While the occasional U&R long set-up is popping up on my screens over the past couple of days, the action overall has been dicey, and SFIX has been no exception. I would be watchful for any possible breach of the 50-dma as a maximum selling guide.

 

GR080118-SFIX

 

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.

I have been beating a bearish drum for the past couple of weeks, and the objective evidence is that my warnings to members have been quite prescient. A two-day bounce in the NASDAQ 100, which has been the epicenter of selling more recently, resulted in some serious stalling and churning action at the 20-dema today on higher volume, and looks vulnerable to at least a retest of the 50-dma.

Overall, I would remain cautious, and my guess is that most investors have been forced into higher cash holdings because of the breakdowns in many leading stocks. Right now, the action has caused me to remove many names from my long watch list. If this market is going to find its feet and resume its rallying ways, my long list will have to be rebuilt first.

So far, I still don’t see anything that appears to be benefiting from some type of bullish rotation. In this market, money just sloshes back and forth, and that may remain the case for some time. In the meantime, cash is a good option for long-only players until we see things start to set up more broadly again.

Meanwhile, short-sellers might look for a deeper correction to provide more downside opportunities. That will be the primary gist of my video report, which I will post later today. Take it from there.

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.