The Gilmo Report

August 12, 2018

August 11, 2018

A run on the Turkish Lira and ominous comments from the Russian Prime Minister about economic war and beyond after the U.S. imposed additional sanctions on both Turkey and Russia, respectively, sent the indexes gapping down on Friday. The NASDAQ Composite Index gapped down off its highs on heavy volume after posting eight-straight up days in a row.

I’ve never understood why people like to talk about the so-called dog days of summer, allegedly when things are slow and quiet because everyone is at the beach or on vacation in some faraway exotic land. These days, I can be in either such place, but trading the markets remains at my fingertips, thanks to the utility of a fast laptop and mobile wi-fi.

The market action in the summer of 2018 may help make the case that this is true for most market participants, because the summer action has been anything but quiet. So far, this summer, the NASDAQ Composite has exhibited a bit of a rollercoaster feel with two sharp sell-offs in June and July. This all led into this past week’s action where we saw the index gap to higher highs on Tuesday, but then spend the next two days churning around for a few days.

On the second day of churning, the NASDAQ tried to push higher but reversed to close near its lows for the day. This led right into Friday’s gap-down open, which was then followed by more intraday churning within a small, gap-down price range. While the NASDAQ did in fact close slightly up for the week, the action is messy, if not entirely bearish on its face.

But the market is still highly news-oriented, so that much of the summer rollercoaster ride has been news-based. That was the case on Friday as well, and who knows what news will push the market in which direction this coming week or for the rest of the summer. Shifts in the news produce shifts in the market, often on the spur of the moment, and this will likely continue to make things tricky for investors.

 

GR081218-$COMPQ

 

The S&P 500 Index also gapped down on Friday on much higher volume. This came after three days of churning along the highs that almost looked like bullishly tight action as volume declined. In hindsight, we can now call this churning action that led to the gap-down break on Friday. At least that would be according to the logic of standard technical analysis.

Within the context of the prior upside action and the summer rollercoaster ride, Friday’s sell-off doesn’t look like much. At least not yet. But, as I’ve said in previous reports, the index action on a day-to-day basis is often entirely unrelated to what’s going on with individual stocks. That certainly seemed to be the case this past week.

 

GR081218-$SPX

 

Apple (AAPL) is perhaps the biggest of the big-stock leaders that is currently on the move. It remains about 4% past its prior buyable gap-up breakout. So, while the action is certainly bullish, it is not roaringly so. Most of the big moves in this market occur on gaps to the upside or downside following earnings, and that continues to be the major theme as we move into the final stages of earnings roulette season. Meanwhile, only a pullback to the 10-dma would bring AAPL back into buying range.

 

GR081218-AAPL

 

Amazon.com (AMZN) pulled back slightly on Friday on lighter volume after posting an all-time high on Thursday. Alphabet (GOOGL) pulled into its 10-dma on Friday on light volume. Microsoft (MSFT) also pulled into its 10-dma on light volume. For these three big-stock names, the action on Friday was not out of control, and held the 10-dma, such that these names could be considered buyable at the 10-dma while using the line as a tight selling guide.

Facebook (FB) dropped below its 200-dma on Friday but held support at the 10-dma. Volume picked up slightly vs. the prior day. As I wrote on Wednesday, a move below the 200-dma would trigger the stock as a short-sale at that point while using the 200-dma as a guide for an upside stop. That now remains the case, as this is, for now, an active short trade in process.

 

GR081218-FB

 

Netflix (NFLX) slid into its 10-dma on Friday as volume dried up in the extreme to -69% below average. It closed at 345.87, so it remains above the prior 344 low in the pattern. This keeps Monday’s undercut & rally (U&R) long entry signal alive, for now. Therefore, the stock is technically buyable here using either the 10-dma or the prior 344 low, about 0.5% lower, as very tight selling guides.

 

GR081218-NFLX

 

Nvidia (NVDA) is expected to report earnings on Thursday after the close, and so is not considered actionable here unless one is looking to play earnings roulette. On Friday, the stock pulled into its 50-dma and closed about mid-range on a slight increase in volume vs. the prior day. This can be viewed as slightly supporting action, but for now NVDA is on earnings watch, after which we can see whether anything actionable occurs.

 

GR081218-NVDA

 

News of an SEC investigation into CEO Elon Musk’s recent tweet about taking Tesla (TSLA) private at $420 with allegedly secured funding, among other things, sent the stock back to the downside after a rip-roaring rally on Tuesday. As I wrote on Wednesday, while the news flow surrounding the stock is full of intrigue, innuendo, and mystery, the easiest way to get a grasp on what the stock is doing is to just look at the chart.

The entire move back up near the all-time highs can be viewed as normal within the context of the prior bottom-fishing buyable gap-up (BFBGU) that occurred two Fridays ago. The pullback on Wednesday and Thursday brought the stock near its 10-dma by Friday, and the stock was able to rally off the intraday lows as volume dried up. This also occurred on a day when the NASDAQ was getting hit with some higher-volume selling.

Frankly, whether TSLA gets taken private or not is not all that relevant to the overall viability of the stock following the BFBGU, as I see it. That’s just a sideline, and if it does turn out to be true, of course, the stock will either streak or gap up near that price, destroying all shorts in the process. And if it doesn’t, I don’t think that is some sort of death knell for the stock.

I tend to think that a move to remove Musk as CEO and replace him with someone who knows how to manage an auto-manufacturing concern might just be the catalyst that sends the stock through $400 as well. Perhaps an SEC investigation into his comments might taint Musk just enough to make this possibility a reality.

So, it is quite possible to spin all of this in a variety of ways. Bottom line, however, is that if the company is not taken private, it remains viable on a technical basis. And, right now, any pullback into the 10-dma with volume declining would present a reasonable, lower-risk entry opportunity, regardless of the news noise, so that is what we want to be watching for, period.

 

GR081218-TSLA

 

Zebra Technologies (ZBRA), which I showed in my Wednesday report as a streaker BGU, was pulling down to test the intraday lows of the BGU intraday low. On Thursday, it held above the prior day’s lows and rallied slightly. It is now triangulating to some degree right at its base breakout point, just above the 161 price level. Volume dried up on Friday to -30% below average, which is too high to be a voodoo volume signature.

ZBRA sells at 18 times trailing earnings, and 16 times 2018 earnings, which are expected to come in at $9.90 a share. Therefore, I think this is a reasonable long play with the idea of picking up shares at a lower-risk entry position, which in this case would be closer to the 152.77 BGU intraday low. Closing Friday at 161.26, the stock is slightly extended from there, so I’d keep an eye out for a possible opportunity on a deeper pullback from here.

 

GR081218-ZBRA

 

Twilio (TWLO) has continued higher since Tuesday’s BGU move and is now extended. Pullbacks to the 72.24 intraday low of Tuesday’s BGU price range would offer lower-risk entries from here. Most of the stock’s price move this week can be accounted for by the gap-up move itself, which was a spinner type of BGU that has moved about 4% higher from Tuesday’s close.

 

GR081218-TWLO

 

Etsy (ETSY) provided bold buyers with their just rewards on Friday as it popped off the 10-dma and 20-dema on above-average volume. As I wrote on Wednesday, the failed BGU was not a reason to abandon the stock, since the pullback into the 10-dma/20-dema confluence was occurring as volume was drying up sharply. Like Take-Two Interactive (TTWO), which I discussed as a similar example in my Wednesday report, ETSY has rallied back into new-high price territory.

This is now a re-breakout situation, which is technically within buying range of the breakout point. If one wishes to play this tight, then the top of the base at 45.59 would serve as a tight selling guide, with the 10-dma serving as a slightly wider selling guide. ETSY, like TTWO, illustrates the second chance buyers can get after a failed BGU following earnings, and is one key set-up to look for in individual stocks when it occurs.

 

GR081218-ETSY

 

Fortinet (FTNT) is now extended after posting a streaker BGU two Thursdays ago. Watch for the 10-dma to catch up to the stock, at which point it might serve as a better reference for a buyable pullback. The cyber-security group, which got hit with heavy selling two weeks ago, along with a whole range of other tech names, has recovered and is again back in the driver’s seat.

 

GR081218-FTNT

 

Fellow cyber-security name CyberArk Software (CYBR) tested the intraday lows of Wednesday’s BGU move and rallied on Friday. That took it up to an all-time closing high on strong volume. In this position I consider the stock to be slightly extended, such that only pullbacks closer to the BGU intraday low at 67.26 would present lower-risk entry opportunities from here.

 

GR081218-CYBR

 

Square (SQ) offered buyers a lower-risk entry on both Thursday and Friday when it pulled into the confluence with volume drying up. That led to a nice upside move on Friday, ironically amid the index gap-down break. The strong price move stalled, however, and the stock closed mid-range.

It remains within a six-day price range that is has formed following the big-volume pocket pivot after earnings. Note that despite the extremely strong price/volume thrust on the pocket pivot day, SQ has failed to produce any further upside from there. This is very typical of this market, where the biggest price moves tend to occur right after earnings, after which the tremendous price velocity all but dissipates.

For now, SQ remains buyable on pullbacks closer to the 10-dma/20-dema confluence. However, it can also be considered within buying range right here while still using the 10-dma/20-dema confluence as a tight selling guide for any entries taken within this six-day price range.

 

GR081218-SQ

 

Intuitive Surgical (ISRG) is still hanging tight along the confluence of its 10-dma and 20-dema but reversed on two attempts to move higher Thursday and Friday. After early moves to the upside, the stock closed near the lows of its trading ranges on those days but did not break the two short moving averages. This would keep it in buying range, using the 10-dma/20-dema confluence, or the mid-July low of 512.42, as tight selling guides per my prior comments in Wednesday’s report.

 

GR081218-ISRG

 

Here comes Stitch Fix (SFIX) as it completes a full LUie formation where its prior L-pattern turns into a U-pattern and approaches its prior high. I was looking for a more opportunistic pullback as a lower-risk entry per my comments on Wednesday. But note that on Thursday it posted the second of two five-day pocket pivots for the week along the 10-dma.

Five-day pocket pivots, which I like to refer to these days as “sprouts,” tend to have more meaning when seen in clusters of two or more. When this occurs, it can be viewed as a buyable signal in lieu of a single ten-day pocket pivot. Thus, the second sprout on Thursday led to the move higher on Friday, and SFIX is now back to being in an extended state. Pullbacks to the higher 20-dema would offer lower-risk entries from here.

 

GR081218-SFIX

 

Turtle Beach Corp. (HEAR) is settling nicely into its 10-dma here after a failed attempt at a gap-up move following earnings on Tuesday. At that point, the stock was over 50% extended from my original voodoo buy point along the 20 price level, as discussed in my reports back in early July. The failed gap-up attempt on Tuesday, however, still qualified as a stalling continuation pocket pivot at the 10-dma.

HEAR has now spent three days holding tight at its 10-dma with volume drying up sharply to -44% below average on Friday. This puts it in a lower-risk entry position, using the 10-dma as a tight selling guide. Given the stock’s somewhat extended chart position, I would make sure to keep a tight leash on it.

 

GR081218-HEAR

 

Sailpoint Technologies (SAIL) was first discussed in my reports as a buy idea back in early April when it was sitting at 20.42. At that time the stock was displaying tight, voodoo price/volume action along its 10-dma and 20-dema. The stock immediately launched higher and went on a consistent run up to the 29 price level before correcting and going into a very labored base-building process.

We can see two sharp declines in the pattern that correlate to market declines in June and July. The second decline, which was the ugliest, only served to bring the Ugly Duckling out of hiding. At the lows, SAIL was undercutting the prior lows from the June price break, and then rallied back above that 23.64 low to trigger a U&R long set-up.

From there, SAIL pushed back above its 10-dma, 20-dema, and 50-dma ahead of earnings, which were reported on Wednesday after the close. A strong earnings report results in a buyable gap-up move on Thursday, with an intraday low of 27.69. The stock then tested that low on Friday and held, rallying back up to the intraday highs.

Note that this is also a base breakout from a double-bottom type of base, with the stock closing right at the buy point on Friday. This is in a buyable position here, using the 27.69 BGU low as a tight selling guide.

 

GR081218-SAIL

 

Carbon Black (CBLK) is a recent hot IPO that had a huge upside move a little over a month after it came public in early May and then came crashing back to earth. On the first trading day of August the stock posted an unlikely U&R long set-up that led to a sharp rally back up to the 27.50 price level in short order.

CBLK reported earnings on Tuesday, after the close, and gapped up slightly on Wednesday before reversing entirely to close in the red on an ugly outside reversal. Normally, this type of action would be just too bearish to even consider, but this isn’t a normal market. What I would do here is watch to see whether the stock continues to settle in along its 10-dma and 20-dema with volume drying up, which could set up a possible long entry.

CBLK exceeded estimates and guided higher when it reported earnings, but the gap-up move on Wednesday may have just run into too much overhead from all the fools who bought into the big upside streak in June. If that overhead supply gets worked off, CBLK could set up and move higher, so I think this is one to watch, especially if the general market holds up and recovers from Friday’s sell-off.

 

GR081218-CBLK

 

ZScaler (ZS) may be setting up for another run at its highs as it sits nice and tight along its 50-dma with volume drying up. The stock is currently in a double-bottom type of base, with the second low not exactly undercutting the intraday lows of the first low. Note that both pullbacks in the base occurred in synchrony with the general market sell-offs in late June and late July.

The second low was not a precise U&R, technically. However, sometimes, when the bottoming day on the first low is an up day, and/or shows a long price range with the stock closing near the highs of the intraday price range, I will use closing low as my reference low for a U&R. As is the case with all U&Rs. Risk is kept to a minimum by using the reference low as your selling guide.

In this position, ahead of earnings which are expected on September 5th, ZS looks buyable using the 50-dma as a tight selling guide. If desired, one can also use the 10-dma at 36.93 as a wider selling guide. Over the past four days, however, it appears that pullbacks to the line have offered the better, lower-risk entries, so one can also choose to lay back and see if such a pullback doesn’t show up this week.

 

GR081218-ZS

 

Roku (ROKU) has been one of my favorite stocks to play in this market and was first discussed down at around 35 as it was rounding out the lows of a possible new base. As I discussed in my Wednesday report, the stock was one to watch on Thursday morning for a possible actionable BGU move after it reported favorable earnings Wednesday after the close.

ROKU did not fail to impress in this regard. It opened Thursday morning at 52.80, set a low at 52.31, and then never looked back as it streaked to a closing price of 57.32, near the top of its BGU price range. It then moved slightly higher on Friday but stalled to close in the bottom half of the daily price range.

The stock is now well-extended from the BGU low, hence out of buying range. Now it’s a matter of seeing how this develops and whether it offers a lower-risk entry at some later point. There is also a macro view of ROKU that I think members should be aware of, and this macro view was one of the drivers of my long thesis for the stock when it was near its lows back in April.

 

GR081218-ROKU

 

The weekly chart helps to understand this. First, we can see that ROKU came public back on September 29, 2017 and had a huge upside price move from there. If you recall, that was when I first began discussing the stock in my reports, just as it was gapping out of its IPO base.

The stock then doubled from there, and eventually topped out. That led to a 13-week price decline that took the stock down over 50% from its 58.80 high of mid-December. If you’ve read my books on shorting and understand how a Punchbowl of Death (POD) situation evolves, you could theorize that ROKU might have another move back to its highs based on what I call the upside POD theory.

That theory is based on the idea that a hot IPO with a sharp breakdown from its initial highs represents the first half of any possible POD formation. You can’t have a deep cup, which is more like a punchbowl, without a steep decline down the left side first. So, when I saw ROKU begin to percolate along its lows after the 13-week decline, I began to theorize that it could have an equally steep upside move to complete a big punchbowl formation.

That theory was correct, but note carefully that it was based first and foremost on seeing some tangible bullish technical signals along the lows of the potential punchbowl. The upside POD theory provides a general backdrop for understanding how things could play out. In the end, we must rely on pocket pivots, voodoo pullbacks, U&Rs, and the like to determine when and where our entries occur around the lows of the pullback. This is well before we know for sure whether the stock is going to rally and form a complete punch bowl.

So now, here we are. My upside POD theory on ROKU has been deadly accurate, and the stock is now breaking out of a 31-week punchbowl-with-handle (the more orthodox will try and call this a cup-with-handle) formation. Of course, everybody sees this, and this breakout may or may not lead to immediate, further, and robust upside movement from here.

As a matter of optimization, as well as a true understanding of how this market really works, the time to start working ROKU on the long side was as it was rounding out the lows of the punchbowl. The first signs of this began to occur as it regained the 50-dma back in early May.

 

GR081218-ROKU

 

ROKU’s breakout on the weekly chart has come off a two-week handle. After a 19-week move up the right side of the punchbowl, the question is whether this is sufficient to help foster a strong upside move following the breakout. I have very clear memories of trying to buy Cisco Systems (CSCO) way back in late 1994/early 1995 when it tried to break out of a 50% deep cup-with-handle (punchbowl-with-handle is what I would call it now) with a four-week handle. As we can see from the weekly chart of the stock from that time, the breakout faltered and took another 13 weeks to set up again properly.

Once it had spent more time building this second handle, it was then able to launch higher in what became the big tech bull market of 1995. That was a huge year for me, as I posted a return in excess of 520%. CSCO wasn’t my primary holding that produced that gain, C-Cube Microsystems (formerly: CUBE), was, but that’s an entirely different story.

 

GR081218-CSCO1995

 

So, my point here is that we should be aware of the fact that ROKU’s breakout this week may be too obvious, and the handle may be too short of a consolidation to help produce a sufficient launching pad for a big gain from here. There is also the outside possibility that the stock could morph in a POD short set-up, but that is still premature. The first signs of a possible POD failure would only occur if we saw ROKU break sharply below its 20-dema. Currently, it’s a long way from that.

Understanding how things might play out is one key component to my process on the long side, particularly in an Ugly Duckling market. When I see how the punchbowl in ROKU has played out, I begin to look at other stocks in this market that have been hot movers and then broken down badly. These breakdowns might produce the left sides of possible future punchbowls, which in turn may evolve into full-blown PODs.

So, when we look at the declines in many of these hot IPOs that had huge upside moves in May and June, we might ask whether these have the potential to evolve into long POD theory situations. Bilibili (BILI) illustrates the idea, as it slides to lower lows on a continuous basis, giving up all and more of its torrid May/June price run.

CBLK, discussed above, might be another similar situation, as it was also part of the group of hot IPOs that went nuts in May and June. It is in fact showing some concrete signals of an attempt at turning to the upside. BILI, on the other hand, remains dead in the water, but we should keep an eye on this to see how and whether it eventually tries to rally again.

 

GR081218-BILI

 

So, a lesson in POD theories is the fact that any punchbowl must first have a big decline to form its left side. This then then sets up the potential for a rally that forms the eventual right side of a POD. The concrete buy signals, in the form of pocket pivots, U&Rs, etc., along the lows, are the first clues that this may be happening. Therefore, having a watch list of busted, formerly red-hot names like this is useful as a way of monitoring stocks that have this potential.

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.

There are certainly trades to be had in individual stocks in this market, regardless of the index action. However, I maintain the idea that these are mostly to be viewed as swing trades where one seeks to maintain tight risk management. One can certainly try to take a longer-term view if one’s stop isn’t hit, but I still view this market as one containing a high degree of risk, thanks to a very dynamic news-oriented environment.

Nevertheless, if one had bought a stock like ROKU down near 35 and just held while using the 50-dma as a selling guide, one could have easily ridden the upside trend. It was a volatile trend, but if one takes smaller positions one can afford to give a stock more room. Of course, there is always the issue of how much performance a small position adds to one’s overall account performance. But taking an intermediate-trend approach is still possible in this market.

While the Asian Contagion I’ve discussed as a possible catalyst for a deeper market correction hasn’t taken hold, this week has given us a taste of other types of contagions that might lurk. Sanctions against Russia, tariffs against Turkey and China, all are part of the swirl of news that has affected this market from time to time, and while the market has bent, it hasn’t broken.

As Jesse Livermore used to insist, underlying conditions matter. Today, underlying conditions have the potential to wreak market havoc, but there is a flip side to all of this as well. If sanctions and tariffs against certain countries create negativity for the markets to feed off, then consider that any positive resolution to these trade disputes, tariffs, economic sanctions, and the like could just as easily spark a massive rally.

Therefore, we again come full circle to the usual conclusion, which is that the only thing that matter is what is going on with individual stocks. And so, we simply maintain our usual discipline, keeping risk to a minimum, and working long or short set-ups as we see them in real-time. As Bill O’Neil used to tell me, never operate from a position of fear. 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 a position in HEAR, 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.