The Gilmo Report

August 13, 2017

August 13, 2017

The NASDAQ Composite Index blew through its 50-day moving average on Thursday on heavy selling volume to cap off a three-day decline that began on Tuesday. That’s when President Trump uttered his now famous “fire and fury” threat to North Korea’s belligerent and bellicose leader. Thursday’s sell-off was attributed to additional comments by the President that day when he stated that perhaps his original threat wasn’t “tough enough.”

In this manner, Wednesday’s undercut & rally attempt after the NASDAQ dipped below the prior lows of late July and early August failed immediately. That was accompanied by similar failures in individual stocks that were also attempting to post undercut & rally maneuvers Wednesday, such as Netflix (NFLX) and Amazon.com (AMZN).

The pundits and talking heads have attributed this week’s selling entirely to the rhetoric steaming back and forth between NoKo and the U.S. However, we should keep in mind that the current selling is also something of a downside follow-through to the ugly big-volume somersault and reversal off the peak that we saw the NASDAQ perform near the end of July.

Looking at the chart below, without any knowledge of the news that allegedly caused it, the NASDAQ Composite looks to be in a bearish state. Only a quick recovery back above the 50-day moving average would help to right the situation, and of course in this market that is always an outside possibility. But for now, things appear a bit unstable, at best, if not outright bearish.

 

GR081717-$COMPQ

 

The S&P 500 Index also busted its 50-day moving average on Thursday, which coincided with a failure of the prior new-high breakout of mid-July. Volume was higher on Thursday, but not above average. On Friday, the S&P rallied up into the 50-day moving average where it ran into resistance and stalled to close in the lower part of its daily trading range on weak volume.

 

GR081717-$SPX

 

Like the NASDAQ, the action on the S&P chart looks unstable, if not simply bearish, at best. Meanwhile, the much broader NYSE Composite, not shown, and small-cap Russell 2000 Indexes are acting much weaker. In fact, the Russell is so far down in its pattern that it met up with and found support at its 200-day moving average on Friday!

 

GR081717-$RUT

 

I continue to believe that the market’s weakness extending from late July into August is not entirely due to the NoKo situation. There are a number of other factors that add to the malaise, including a lack of action on the President’s legislative agenda and a coming debt-ceiling debate.

The SPDR Financial Sector Select ETF (XLF) finally broke its pattern of pulling into the 20-day exponential moving average and finding support. On Thursday, the ETF, expressing the overall weakness in financials and the general market, broke below the 20-day line on above-average selling volume.

On Friday, the XLF went nose-to-nose with its 50-day moving average, closing down on the day and near the lows of its intraday trading range. Volume declined. If one had bought the XLF at the 20-dema on Wednesday, then the breach of the line on Thursday would have quickly pushed you out. Now comes the question as to whether this position right at the 50-day moving average represents another lower-risk entry point.

 

GR081717-XLF

 

SPDR Gold Shares (GLD) continues to rally. Interestingly, the yellow metal ETF flashed an undercut & rally long set-up back in early July and has never looked back. After posting a pocket pivot at the 50-day moving average in late July, the GLD pulled back to test the line on Tuesday. It bounced hard as the NoKo news hit the market, and has since pushed back up to its early June highs.

While gold has been rallying lately as a result, they say, of the NoKo situation, the reality is that it has been rallying since bottoming out in early July. So, although the action in the indexes and precious metals is attributed to the supposed one-off of the NoKo news, on its face it merely looks like the continuation of what has already been going on with the GLD.

 

GR081717-GLD

 

Big-stock NASDAQ names as a group are starting to sag, which is no surprise since they have been the backbone of the market rally in 2017. I’m sure that by now there isn’t a soul in the stock market who hasn’t heard of the “FANG” stocks (now called “FAANG”).

Among these, Netflix (NFLX) is failing miserably after last month’s buyable gap-up move as it is now living back below its 20-day exponential moving average. This comes after failing on an undercut & rally attempt that occurred on Wednesday when the NASDAQ blew below its 50-day line on Thursday. That brought NFLX closer to its 50-day moving average and the lows of the prior mid-July gap-up move.

This is sort of in no-man’s land here, and the question is whether a weak rally back up into the 20-dema is a shortable event. I guess we won’t know until we see it, since there is always the outside chance that the stock pulls a moving average undercut & rally IF it can regain the 50-day line. Stay tuned.

 

GR081717-NFLX

 

Nvidia (NVDA) reported earnings on Thursday after the close and immediately went into some wild after-hours somersaults. It first traded down toward the 150 level, then back above the 170 level, and then just as quickly turned back to the downside, ending the after-hours session on Thursday at 154.10.

This led to a gap-down move on Friday, with the stock printing 157.14 at the open, just below the 50-day moving average. After a brief rally that took it back above the line, it churned around for the rest of the day to close just below the 50-day line. Technically, this is a late-stage base-failure that is shortable here using the 50-day line or Friday’s high at 159 as a tight upside stop.

 

GR081717-NVDA

 

NVDA’s breakdown on Friday looks very much like Priceline Group (PCLN) after it gapped down on Wednesday following its Tuesday after-hours earnings report. Note how the stock also gapped below the 50-day moving average, and then churned around before closing just below the line. It then proceeded lower on Thursday and moved toward the lows of the small base structure that formed from late June to early July.

As I wrote on Wednesday, PCLN was shortable at that point based on the shortable gap-down and late-stage failure that was created by Wednesday’s gap-down bust. At this stage, the safest way to try and short the stock would be on any weak rally back up into the 50-day line.

 

GR081717-PCLN

 

NVDA and PCLN both represent big-stock NASDAQ leaders that aren’t contained within the FAANG acronym. But, as large-cap, NASDAQ issues of the day (as Livermore might call them if he were alive today), they might as well be part of a broader “PFAANNGM” acronym that would represent the big-stock leadership backbone of 2017 that I’ve discussed regularly in my reports this year.

Since it has been these types of stocks that have served as a primary driver of the 2017 market rally phase, their demise cannot be considered a positive development for the market as a whole. Whether it is a harbinger of further weakness to come remains to be seen, but at the very least I think it is telling us to be cautious, alert, and nimble currently.

I suppose if we started to see stocks like Facebook (FB) start coming apart that would add evidence to the crumbling leadership theory. As of Wednesday, the stock was holding tight along its 10-day moving average as volume dried up sharply. That looked like a very actionable “voodoo” type of entry point along the 10-dma.

But appearances turned out to be deceiving as the stock dropped below the 10-day line on Thursday as the NASDAQ and S&P 500 broke below their respective 50-day moving averages. This has led to a test of the 20-day exponential moving average, and a breach of that moving average would not be a good thing to see.

Of course, if it can hold support at the 20-dema, then this could be viewed as an opportunistic entry point with the idea of using the moving average as a tight stop. And the bifurcated approach might then dictate that one could flip from long to short as the real-time evidence changed and developed. In other words, play it as it lies!

 

GR081717-FB

 

How FB resolves here will likely occur in sync with the NASDAQ either being able to regain its 50-day moving average, or peeling away to the downside. If we see the latter, then FB could break below the 20-dema.

A similar situation could arise with Apple (AAPL) which on Thursday broke below the 156.16 intraday low of the prior week’s buyable gap-up (BGU) and base breakout after earnings. That breakout hasn’t gone anywhere, but the stock rallied back above the 156.16 price level on Friday to close at 157.48 in a small show of positive action.

Right now, AAPL is holding support at the 10-day line, but a breach of the line on a possible late-stage base-failure is something to be on the lookout for if the general market continues lower this coming week. Otherwise, one could take the bifurcated approach here and view this pullback to the 10-day line as a lower-risk entry for the stock. Certainly, there is no reason one could not react quickly and flip to the short side (or cash if one doesn’t play the short side) if the stock fails to hold the 10-day line and the prior breakout point.

 

GR081717-AAPL

 

Amazon.com (AMZN) is already a late-stage failed-base (LSFB) type of short-sale set-up after reversing off the highs and breaking below its 50-day moving average over two weeks ago. After Wednesday’s small undercut & rally move, I was hoping for a rally up to any of the three closest moving averages, the 10-dma, 20-dema, and 50-dma, as a possible short-sale entry opportunity.

That didn’t happen, and the stock simply continued lower on Thursday before finding support along the early July lows without undercutting those same lows. For now, only rallies back up to the moving averages would constitute a safe-enough entry on the short side, as I see it. AMZN is just another faltering big-stock NASDAQ leader as the backbone of the 2017 market rally continues to develop a case of sciatica.

 

GR081717-AMZN

 

Tesla (TSLA) has come down a bit since I blogged about it as a short on Wednesday morning. In fact, the stock was testing the 50-day and 10-week moving averages in pre-open trade Friday. That represented about 15-17 Livermore points on the downside from Wednesday’s entry as the stock came well within 1% of support along those key moving averages.

Volume dried up sharply on Friday, which looks like a constructive Wyckoffian retest of the 50-day moving average. This would seem to imply that we will see another test of the 170 price level on the upside, which represented overhead resistance coming from the small area of congestion that the stock formed along the highs in June.

How this resolves, however, will likely be a function of the general market action, and a breakdown from the 50-day line by the NASDAQ could coincide with TSLA breaking below its own 50-dma. I think that one could simply wait for a breach of the 50-dma as a safer trigger on the short side and then use the line as a tight upside stop from there.

Otherwise, it is possible to try and short the stock near 170 which represents near-term resistance. In that case, the 170 level could serve as a tight stop, but keep in mind that the stock could keep going higher. TSLA has the unique status of being a favorite of short-sellers, and still has a high short-interest. This has enabled it to continue torturing stubborn shorts (I am not one of them – I will move with the stock in either direction, depending on the real-time evidence). Again, play it as it lies.

 

GR081717-TSLA

 

Notes on the last two big-stock NASDAQ names on my watch lists:

Alphabet (GOOGL) is still in drift mode as it tests the lows of its pattern around the 920-930 price area. Rallies up to the 20-dema or 50-dma should be watched for as potentially more optimal short-sale entry points.

Microsoft (MSFT) is now testing support at the 50-day moving average. I follow the stock as a market barometer, but truth be told I don’t think it’s all that interesting as a long idea. Among the big-stock NASDAQ names, I prefer more dynamic names among those I discuss in the report on a regular basis.

The big-stock NASDAQ names, in my view, are like the keys to the market car. Without them, the car may have some trouble moving forward. A copious supply of QE in 2017 has turned them into alternative currencies as this liquidity looks for a home. Remember that while the Fed has slowed down a bit, other central banks have been pouring liquidity into the global financial system at the fasted rate since the QE madness began in 2009.

When this flow of liquidity begins to reverse and contract, it will likely show up in a severe breakdown in market leadership. Translation: the big-stock NASDAQ leaders will all become shorts. Some already have, and this doesn’t make me uneasy so much as it makes me ready to pounce on and exploit the short side of this when it eventually occurs, because it will at some point.

Meanwhile, I can derive joy from shorting other areas of prior market leadership that are coming apart, such as Lumentum Holdings’ (LITE). I blogged in real-time that the stock was a short when it was trading somewhere around 62-64, and by Friday the stock was making a move further toward its 200-day moving average, closing the day at 51.95. Boom!

The stock even gave us a chance to re-short/short it on Thursday morning as it hovered around the 57 level. Altogether, the three-day breakdown was good enough for over 20% of downside and some very nice short-sale profits for anyone who worked that breakdown.

 

GR081717-LITE

 

The biggest leader in the optical group, Applied Optoelectronics (AAOI), not shown, remains in a dilapidated state about 11% below its 50-day moving average. For now, rallies back up into the line at 74.21 would present optimal short-sale entries.

On Thursday I discussed going after other names in the group, including Fabrinet (FN), which I had shorted at the time. The stock opened up slightly as it tested the rapidly declining 10-dma and 20-dema before breaking below the 50-day line. On Friday, the stock then rallied back up to the 50-day moving average, presenting another optimal short-sale entry opportunity and then closed down near the 200-day moving average.

FN isn’t expected to report earnings until August 21st, which would be two Mondays away from today’s report date. If we consider that every other optical stock that has already reported earnings has come apart afterwards, we might wonder whether holders of FN are willing to play earnings roulette when the company finally reports.

If not, then they might just end up taking the stock further to the downside ahead of the report. For that reason, I would certainly love to see a rally back up toward the 50-day line as a possible short-sale entry point. Otherwise, a breach of the 200-day moving average from here would trigger a new entry going the other way.

 

GR081717-FN

 

I’m watching for other groups to start breaking down as a sign that the short side of the market is expanding. A number of new situations materialized after Thursday’s market break, including the cloud names, all of which look almost identical. To give you a good idea of how ServiceNow (NOW), Salesforce.com (CRM), and Workday (WDAY) have all morphed into shorts, I only need to show the chart of one of them, NOW.

All three stocks look just like this as current late-stage failed-base (LSFB) short-sale set-ups. All three broke below their 50-day moving averages on heavy volume Thursday, and then on Friday rallied back up toward the line. This puts them in more optimal short-sale positions as they get close to their 50-day lines.

 

GR081717-NOW

 

The group short-sale set-up in these big-stock cloud leaders is somewhat obvious, and you need to look at the charts of CRM and WDAY to see this. NOW has already reported earnings, while CRM is expected to report on August 22nd and WDAY on August 30th.

Chinese names have been another area of strength in the 2017 bull market phase. For now, Weibo (WB) and its majority shareholder, Sina (SINA), are holding finding support on pullbacks, but SINA has dropped below its recent base breakout point. WB, on the other hand, is holding above Monday’s base breakout point, flashing a pocket pivot at the 10-day moving average on Friday on strong buying volume.

Between the two, and I show both charts below as a comparison, WB looks to be the one I’d look to buy if I were interested in looking at something on the long side of this market. This would definitely be the case if the NASDAQ and S&P 500 both regain their 50-day moving averages in the coming days.

 

GR081717-WB

 

GR081717-SINA

 

We might conclude here that WB looks just fine, while SINA is wobbling a bit as a possible late-stage base-failure. The first sign of a potential LSFB is a break below the 20-day exponential moving average, and so far, SINA is holding above the line, along with the 50-day moving average where it found support on Friday.

The potential for Chinese leaders to roll over here is always a distinct possibility. In some cases, as with Netease (NTES), a stock that I recently removed from my China Five list and replaced with SINA, the stock blew apart after earnings on Thursday, and is now all the way down to its 200-day moving average.

 

GR081717-NTES

 

One must wonder what that means for Alibaba (BABA), JD.com (JD), and Momo (MOMO), when they report earnings. JD is expected to report Monday before the open, while BABA is expected to report on Thursday before the open. Both BABA and JD, not shown here on charts, are pulling back off their recent peaks but holding above their 20-day exponential moving averages heading into this week’s expected earnings reports.

MOMO isn’t expected to report until August 22nd, two Mondays from now, before the open. That, however, hasn’t kept it from breaking down sharply off Monday’s all-time high closing price and crashing through its 10-day and 20-day moving averages. It finally found support at the 50-day moving average on Friday. In this position the stock is neither a long or a short, but the action doesn’t look all that good for what has been a strong Chinese leader during the 2017 bull market phase.
GR081717-MOMO

 

If we see the general market get into more trouble on the downside, I would expect to see more deleterious action among these Chinese leaders, such as we’ve already seen in NTES and MOMO. WB and/or SINA could fail on recent breakouts (SINA is already starting to do so), while we will get to see how JD and BABA react after they report earnings this coming week.

Another leadership group in 2017 has been the video-gamers. This is another group to keep an eye on for possible late-stage base-failures that might indicate topping action. Currently, Activision Blizzard (ATVI) and Electronic Arts (EA) are wobbling after recent breakout attempts. ATVI is holding support at the 50-day moving average but at the same time is showing resistance on moves back up to the 20-day exponential moving average. It has also failed on a recent breakout attempt and continues to trade below the breakout point.

 

GR081717-ATVI

 

EA is in a similar position as it closed Friday just below the 116.04 prior base breakout point, printing 115.45 at the bell. It looks marginally better as it holds above the 20-dema on a weak-volume recovery Friday. This looks a bit sketchy here, and it could certainly turn into a full-blown late-stage failed-base (LSFB) short-sale set-up, as could ATVI.

 

GR081717-EA

 

Meanwhile, the third member of this key leadership group, Take-Two Interactive (TTWO), continues to hold above its post-earnings buyable gap-up (BGU) move of last week. The stock is pulling in off the peak slightly here as it posts what looks like a Wyckoffian Retest of the prior BGU low and the rapidly rising 10-day moving average.

If we saw TTWO break below its 10-day line and the 86.02 intraday low of last week’s BGU move, that might coincide with ATVI and EA filling out into clear LSFB (late-stage failed breakout) shorts. Keep an eye on this group, since TTWO is still holding up well, while ATVI and EA could also attempt to re-breakout if the general market finds its feet and we see the NASDAQ and the S&P 500 move smartly back above their 50-dmas.

 

GR081717-TTWO

 

As my view on some of the big-stock NASDAQ names, Chinese names, and video-gamers shows, I am willing to take a two-sided approach and consider bullish or bearish outcomes for any of the patterns I’m currently seeing. If I understand the dynamics of the patterns, I can then deduce what sort of real-time price/volume action I would need to see to make a decision as to whether to play a particular stock on the long or the short side.

Nutanix (NTNX) falls into this category as it starts to meet up with its 50-day moving average. So far, the stock is a clear failure following the July buyable gap-up (BGU) move, and is now trying to find some footing down here near the 50-day line. This past week it failed to hold the undercut & rally move that I discussed in my Wednesday report when it broke down with the general market on Thursday.

That took the stock to a lower low as it continues to move further below the 200-day moving average and closer to the 50-day moving average. On Thursday, it undercut the prior 20.80 low of last week, which itself was an undercut of the prior BGU low at 21.62. On Thursday, NTNX rallied back above the 20.80 price level, triggering another undercut & rally move at that point.

Near-term the 20-dema looks like resistance, but there is the distinct possibility that NTNX is forming the lows of a new base. Friday’s U&R move is one clue that this might be the case, but more clues are needed, starting with a move back above the 20-dema. In any case, this remains one off-beat Ugly Duckling type of long idea I’m keeping in my back pocket in case the market finds its feet and resumes the rally.

 

GR081717-NTNX

 

Notes on other names discussed in recent reports, some with charts, some without:

Alteryx (AYX) bounced sharply off its 20-dema on Friday as volume picked up but came in at -1% below-average. I suppose this remains buyable on pullbacks to the 20-dema, provided one uses the line as a tight selling guide.

Appian (APPN) has failed on a recent IPO base-breakout attempt, but it just barely held above its 20-dema on Friday. This could put it in a lower-risk entry position, if the general market rallies this week. Otherwise, as a thinner, small, new-merchandise name, this stock, along with AYX, presents higher risk if the general market continues lower.

Arista Networks (ANET) on Friday closed below the 166.50 intraday low of its prior buyable gap-up (BGU) move, printing 165.69 at the close. This looks a bit wobbly here, and should be watched for a possible late-stage failed-base situation arising if the stock begins to fail back down through the 162.97 breakout point

Bioverativ (BIVV) has been removed from my buy watch list.

First Solar (FSLR) is pulling into the 20-dema as volume dried up to -57% below average on Friday. This could put the stock in a lower-risk entry position using the 20-dema as a tight selling guide.

 

GR081717-FSLR

 

GrubHub (GRUB) undercut the prior BGU low of this past Monday when it dipped below that 53.36 price point and rallied to close at 54.46 on Friday. That set-up a U&R type of move using the 53.36 BGU low as a selling guide. Otherwise the stock is quite extended and could pull back much further if we see more general market weakness in the coming days.

Palo Alto Networks (PANW) is currently on my short-sale target list, and is shortable on rallies up into the 200-day line at 131.58.

SolarEdge Technologies (SEDG) held a pullback to the 10-dma on Thursday, but remains in an extended position within its overall chart pattern.

Square (SQ) closed a nickel below its 50-dma on Friday as volume declined to -36% below average. As I noted on Wednesday, it likely needs some time to form an entire new base. However, watch for possible U&R set-ups to develop along the 50-dma if the general market regains its footing. Otherwise, SQ is also in danger of morphing into a late-stage failed-breakout situation if it busts the 50-dma in decisive fashion.

 

GR081717-SQ

 

Tableau Software (DATA) is one cloud name that isn’t coming apart. It held a pullback to its 10-day moving average on Thursday and Friday as volume declined to -27% below average. That is constructive action following the prior week’s buyable gap-up (BGU) move after earnings. From here the BGU low of 66.75 would serve as a maximum downside selling guide.

 

GR081717-DATA

 

Yelp (YELP) remains extended after the prior week’s post-earnings buyable gap-up move. Waiting to see what a pullback in this looks like when it finally does occur, and whether it presents a long or short opportunity at the time.

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 breakdown in the indexes this past week looks quite bearish. In this market, that has frequently been when the Ugly Duckling steps in and chart patterns that look to be on the verge of massive failure suddenly spring back to life. This generally occurs on various U&R moves up through prior pattern lows or key moving averages by individual stocks in sync with the general market indexes.

With this basic characteristic in the back of my mind, I take a two-sided approach with the wobbling leaders I have discussed in this report. Some names have been outright shorts, but other leaders, although wobbling currently, could also find their feet and set up again in typical Ugly Duckling fashion. The patterns show that this is a possibility.

Since I know what to look for in terms of real-time action and am entirely willing to be fully flexible in reacting to such real-time action and evidence, I feel prepared to handle whatever the market throws at us in the coming days. Therefore, I think it is critical to understand the overall pattern and position of any stock you are considering, long or short, and then be ready to play it as it lies in real-time.

I do think the market is susceptible to a sharp upside reaction if we were to see NoKo make nice with some softening of their current belligerent and bellicose rhetoric, which is being matched by our own President’s increasingly hostile rhetoric. Personally, I feel that standing up to tyrants is smarter than doing the opposite.

If such a softening of the rhetoric does occur, perhaps being replaced by some very subtle cooing sounds, then a sharp reaction rally could take place. This adds a special dynamic to the short side, if not an outright risk. On the other hand, the potential for things to escalate into armed conflict of some sort can unhinge the market in a hurry. This creates special and significant risk for the long side. And how such a good news reaction rally plays out will tell us whether the whole NoKo thing was just alibied selling.

My conclusion is that a swing-trading approach, long or short, is probably sound for generating profits long or short. Lingering too long in one direction or the other carries some event risk now, and for that reason I’m not too keen on holding heavy positions overnight right now.

Caution is advised, and it probably doesn’t hurt for investors to raise at least some cash. In the meantime, if you’re still long this market, just know where your out points are, and hope that an event doesn’t occur that causes your stocks to gap way below those out points! A lot of investors ran into exactly this type of issue in late summer of 2015, when we saw the “mini-Flash Crash” of August 24, 2015.

 

GR081717-$COMPQ 2015 Daily

 

So, consider the risks inherent in this market right here, right now, and understand that event risk can create situations that cannot necessarily be controlled using typical risk management. You might even think about developing a plan that is perhaps less about risk management and more about chaos management. Stay alert and stay nimble!

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. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.