The Gilmo Report

August 19, 2018

August 18, 2018

The market on Thursday confirmed the point I made at the end of my Wednesday report. That afternoon, I wrote that in this market the highly dynamic geo-political and geo-economic news flow swirling around out there makes for sudden changes of direction. Thus, for swing traders anyway, being heavily long or short overnight has its risks in the potential for the market to gap sharply one way or another, depending on the news of the moment.

On Wednesday evening, news that a small delegation of lower-level trade officials from China would make their way to Washington for a sit-down session with U.S. trade officials sent the futures rocketing. This led to a sharp gap-up open that saw the Dow Jones Industrials Index gain over 400 points before settling down to a gain of 396.32 points, or 1.58%.

That far and away led all other indexes, especially the NASDAQ 100 Index which gave up most of its gains on the day, closing up a relatively meager 0.27%. The NASDAQ Composite Index did a bit better, up 0.42%. The action gave the two indexes the look of churning and stalling action on lighter volume as buyers failed to express any real enthusiasm.

On Friday morning, that lack of enthusiasm was made plain by a gap-down open after another overnight futures decline. The market found its feet, however, and rallied off the lows, spinning around for most of the day. That is until news that the U.S. and China had agreed to plot a roadmap toward a trade settlement by November. That, of course, sent the markets flying to the upside.

Once the dust settled, all the major indexes closed positive on the day, with the NASDAQ Composite posting lighter volume vs. the prior day. Within the context of a retest of the 50-dma, this makes Friday’s action a Wyckoffian Retest type of move, and is somewhat bullish, in my view.

 

GR081918-$COMPQ

 

Meanwhile, the S&P 500 Index appears to confirm the bullish implications of the NASDAQ’s action on Friday by breaking out to higher highs on increased volume. Within the context of Wednesday’s undercut of several prior lows in the pattern and the intraday bounce off the 50-dma on higher volume, the action over the past three days looks bullish.

 

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The action among individual stocks, however, has remained mixed, particularly among big-stock NASDAQ names. Apple (AAPL) followed through strongly as it posted a continuation pocket pivot at its 10-dma on strong volume, proving me wrong about not necessarily wanting to buy that pocket pivot. The stock streaked higher on Friday as volume picked up to its highest levels since the BGU of early August following earnings. Obviously, AAPL is extended in this position.

 

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Amazon.com (AMZN) gave opportunistic buyers their chance on Friday as it sold right down to its 20-dema. It then found intraday support and bounced off the lows, closing near the peak of its daily trading range on increased volume. This has the look of supporting action at the line given the increase in volume.

As I wrote on Wednesday, I was looking for a deeper pullback into the 20-dema as the more opportunistic entry for this persistent leader. For now, pullbacks into the 20-dema would remain your references for potentially lower-risk entries from here.

 

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Shows of strength in big-stock NASDAQ names like AAPL and AMZN contrasts sharply with weakness seen in other former leaders among the group. Facebook (FB) has been trending lower since running into resistance near its 20-dema two weeks ago. It is now testing the prior post-earnings gap-down lows as volume dropped back below average on Friday.

I’m watching this closely as it could move lower to under the prior gap-down low at 166.56 and trigger a big U&R at that point. The other potential outcome is a possible Wyckoffian Retest where FB pulls down a little lower as volume dries up, without in fact undercutting the 166.56 low. If we see the market rally from here, then the latter outcome is the first one to watch for right around current price levels.

 

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Netflix (NFLX) has also trended lower over the past two weeks after running into resistance near its 20-dema. The stock has been down for six-straight days and is now dipping into the midst of a prior, extensive base structure as support along the top of that base failed to hold. With NFLX down in this position, we might keep an eye out for a move back up through the prior 322.43 low of May 15th as a possible U&R point.

NFLX closed Friday at 316.78 on Friday, about 3% below that prior low. Therefore, one could set an alert at 322.43, and be ready to act on any such U&R move, if appropriate. At this point, the stock is getting quite oversold, as the two gray oversold bingo indicator bars show, and the need to sell is getting obvious. Thus, I’m more inclined to look for a reaction rally down here than significant additional downside.

 

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Nvidia (NVDA) reported earnings Thursday after the close and disappointed investors, leading to a gap-down open on Friday. The stock opened just above the 50-dma and quickly dropped through the line, triggering it as a short-sale at that point. It then kept moving lower all day on huge selling volume. From here, look for a test of the 200-dma.

 

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Tesla (TSLA) did its best to hold support at the 50-dma, but things came apart after the New York Times published an interview with CEO Elon Musk. The interview, obviously, revealed some things about the CEO that unnerved investors, and the stock gapped down toward its 200-dma at the open on Friday. It then blew right through the 200-dma on heavy volume, ending the day at 305.50. The stock looks to me like it has enough selling velocity to reach the prior July lows down at 286.13.

As I wrote on Wednesday, however, TSLA was shortable on a breach of the 50-dma. Using the five-minute 620 intraday chart, the gap-down on Friday opened about 3% below the 50-dma, but one could have played this as a shortable gap-down once it set an intraday high at 326.77. Based on the technical evidence, TSLA’s proverbial goose is looking like it’s just been placed in the oven at 550 degrees!

 

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But, before we get ourselves leaning too far in one direction, I would keep in mind that this current company angst that TSLA is experiencing might somehow turn out to be a cleansing angst. My view is that the departure of Musk as CEO and the installation of a high-profile name with proven, practical experience and understanding of what it takes to run an auto-manufacturing operation could send the stock rocketing back to the upside.

That’s one scenario to keep in mind, because it has a reasonable probability of occurring. TSLA could undercut the late July lows, or even lower, and post some kind of undercut & rally move. As an exercise, go through the stock’s weekly chart and mark all the major lows in the stock, and commit them to memory. Right now, the 286.13 low is the first one to be monitoring closely as the stock closes in on it.

Zebra Technologies (ZBRA) has finally met up with its 10-dma, where it found ready support on Friday. The stock has held up in a relatively tight flag since posting a streaker BGU not quite two weeks ago after earnings. In this position, the 10-dma can be used a tight selling guide if one decides to buy shares here, along the line.

 

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Twilio (TWLO) ran into its 10-dma on Friday morning, putting it in a lower-risk entry position at that point. It then bounced off the line with volume increasing slightly. This would qualify as a minor show of support at the 10-dma. However, I’d continue to use pullbacks to the 10-dma or, if we saw it, to the lows of the prior BGU low at 72.24.

 

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Etsy (ETSY) has held up well on its re-breakout attempt, holding the 10-dma on Wednesday as the market pulled back. On Friday, it was buyable near the 10-dma, and bounced to a higher closing high from there. In fact, that would be an all-time closing high for the stock. It remains buyable on pullbacks to the 10-dma, or right here since it remains within buying range of the base breakout.

 

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Stitch Fix (SFIX) is pulling back down toward its rising 10-dma at 32.22 as volume dried up to -44% below average on Friday. I’d look for an entry in here just above or at the 10-dma as a lower-risk opportunity to take shares.

 

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Sailpoint Technologies (SAIL) has acted according to script, giving buyers two more chances to take shares on Thursday and Friday. Both days saw pullbacks that were some combination of intraday moves to the top of its prior base, the low of its prior BGU, and the 10-dma and then bouncing on Thursday and Friday. As I discussed in my Wednesday report, those were opportunistic entry points to be watched for.

Friday’s supporting volume at the 10-dma was above average, indicating some decent buying enthusiasm for the stock. If we throw out the prior day’s volume spike, which may have been related to some exogenous factor, this would be a pocket pivot. Either way, SAIL remains buyable on pullbacks to the 10-dma from here.

 

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Roku (ROKU) is holding up well in a relatively tight (at least for this stock) flag formation following last week’s buyable gap-up (BGU). Note the small undercut and rally move on Wednesday and Thursday after undercutting the low of five days ago on the chart. With six days elapsed since the BGU, this is the time when ROKU should make a move to higher highs, if this recent BGU is all it’s cracked up to be.

For now, the bullish view of ROKU is in force, since it cannot be viewed as a POD topping formation unless and until it busts the 20-dema. So far, that hasn’t happened, so there is no need to assume that it will until the evidence is there to do so. But as the 10-dma and 20-dema quickly move up to meet the stock price, they become references for downside support.

In this position, any pullback to the 10-dma at 53.67 would be imminently buyable. Based on the tight action, however, buying it here is feasible, using the 10-dma as your selling guide.

 

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Turtle Beach (HEAR) has been correcting nicely since it reported earnings. The pullback, however, is to be expected within the context of the stock’s prior price move. It did get more than 50% beyond the point at which I first discussed it as buyable along the 20 level back in June, so was certainly entitled to a pullback as it digested those heady gains.

As always, I keep a keen eye on favorite stocks that are pulling back, and often the uglier the pullback. With HEAR getting down near its 50-dma and right on top of its 10-week moving average on the weekly chart, the stage was set. On Wednesday, the stock undercut the prior 25.01 low in the pattern from July 26th by a single penny before turning back to the upside.

That triggered a U&R long set-up at that point using the prior 25.00 low as your selling guide. The U&R remains in force for now, with the option of also using the 50-dma at 25.70 as a slightly wider selling guide.

 

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Perspecta (PRSP) is a recent IPO that provides IT services to the government. Recently, it won several new contracts as the Trump Administration seeks to improve government efficiency. The Computer-Tech Services group has been acting well, with an O’Neil Group Rating of A-, and the company announced a 54% increase in quarterly earnings last Tuesday after the close.

That earnings report led to a buyable gap-up move on Wednesday. The stock pulled in to test the 22.83 BGU intraday low and rallied as volume dried up to -56.5% below average. The stock remains within buying range of the BGU, using the 22.83 BGU low as a tight selling guide.

 

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With the U.S. and China agreeing to draw a roadmap to a potential trade settlement by November, the continuous ratcheting up of trade-tiff rhetoric is likely at an end. This, at least for now, eliminates some of the uncertainty and volatility caused by the news flow stemming from the trade tiff. Chinese names rallied from extreme oversold positions on Friday in response to the news.

With most, if not all, Chinese names in Ugly Duckling positions on their charts, one should run through their list of Chinese names (I always maintain a list of Chinese stocks, regardless of their current technical action) looking for potential Ugly Duckling long set-ups. One example of this would be Bilibili (BILI), which had already posted a U&R long set-up on Wednesday.

The critical low was the 9.86 low within the IPO base BILI formed in April into early May. BILI then tested that low on Friday, getting down as low as 9.94, before rallying from there with volume declining -60.7% below average. Friday’s close at 10.70 is about 10% beyond the 9.86 low, so the stock is a bit extended from the U&R trigger low.

Any pullback to 10.50 or better might offer a lower-risk entry from here. The other mitigating factor here is that BILI is expected to report earnings two Mondays from today, on August 27th. But it does represent a good example of what to look for in terms of actionable long set-ups among beaten-down Chinese names. Among recently hot IPOs gone cold, also keep an eye on Huya (HUYA) and Iqiyi (IQ), both of which are noodling around below prior lows in the patterns.

 

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Notes on other names discussed in recent written reports:

Carbonite (CARB) has moved higher after posting three five-day pocket pivots along its 50-dma and is now extended. Pullbacks to the 10-dma from here would offer lower-risk entries.

Intuitive Surgical (ISRG) has posted two pocket pivots along its 10-dma over the past four trading days as it holds tight along the 10-dma and 20-dema. This puts it in a lower-risk entry position right here using the 10-dma/20-dema confluence as a tight selling guide.

Okta (OKTA) is holding tight along the confluence of its 10-dma, 20-dema, and 50-dma with volume drying up, putting it in a lower-risk entry position using the 50-dma as a tight selling guide. Look for a strong move to build profit cushion ahead of its expected September 6th earnings report.

Square (SQ) continues to hold tight along its 10-dma as volume dries up sharply. This puts it in a buyable position using the 10-dma at 71.80 as your selling guide.

ZScaler (ZS) has posted two pocket pivots in a row, and is slightly extended, although one could test the waters here while using the 50-dma at 38.86 as your selling guide. I’d prefer to look for any pullback to the 50-dma as a lower-risk entry, however. Earnings are expected on September 5th.

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.

The index action looks constructive as the market is thrown a bone by the U.S.-China agreement to reach a trade agreement by November. That eliminates one key driver of market volatility, which has been the constant ratcheting up of rhetoric and the verbal addition of more tariffs. As I’ve written in recent reports, the trade-tiff news flow has the potential to drive the market out of its doldrums and into rally mode when previously negative news is resolved positively. That’s what we saw on Friday.

With the S&P 500 breaking out to a higher high, and the NASDAQ rallying on a Wyckoffian-style retest of its 50-dma, I’m inclined to look for actionable long set-ups, more of which I will discuss in my weekend video report. There are also those isolated short-sale set-ups that become actionable in real-time, such as we saw in NVDA and TSLA on Friday.

However, one must be alert to those when they occur, and knowledgeable enough about short-selling to know how to handle them. But for those qualified to do so, the short-side profit potential does exist in this market. My feeling here is that we may be set to rally out of the summer, like what we saw in August-September of 2010, when the indexes rallied out of a five-month slop and chop phase.

For now, it is enough to go with the set-ups we see in real-time. Based on my own screens and research currently, most of these set-ups fall on the long side of the market. Therefore, it is simply a matter of playing them as they lie and keeping risk to a minimum by going for the ripest set-ups in lower-risk entry positions. 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 positions in HEAR and ROKU, 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.