The Gilmo Report

August 22, 2018

August 22, 2018

The S&P 500 Index cruised to an all-time high yesterday on an intraday basis and looked ready to book it as an all-time closing high. That was before news hit that former Trump attorney Michael Cohen had struck a plea bargain with prosecutors in his case.

While I don’t think I need to get into the dirty details of it all, suffice it to say that the news-related shift in market direction is nothing new for this market. As I’ve noted in recent reports, whether it’s a trade tiff with Europe, or a trade war with China, or sanctions on Turkey or Russia or Iran, this market is constantly forced to deal with bumps in the road caused by news of one kind of another. Yesterday’s news was one more new spin on the entire theme that nobody was really expecting.

New highs for the S&P had to wait, as the indexes reversed to post stalling days on higher volume. Overnight, futures sold off, but by the open things had flattened out, leading to a benign open this morning, and a subsequent rally took hold. By mid-day, the market appeared to be shrugging off the Cohen plea bargain news, and I figured maybe the S&P would make another run at all-time highs.

That was until the Fed meeting minutes came out at 2:00 p.m. Eastern time, and both the Dow Jones Industrials Index and the S&P 500 sold off. Both indexes, along with the NYSE Composite, ended the day in the red on lighter volume as buyers didn’t seem interested in pressing a new high for the S&P. Save it for another day.

 

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The NASDAQ Composite Index already posted an all-time high back in July, but that new high did not result in any additional upside thrust. It has since been backing and filling and continues to press its nose against the prior highs. Volume was lighter today, but the bottom line is that the current uptrend remains in force.

 

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And while much is being made of the S&P’s current attempts at all-time highs, the small-cap Russell 2000 Index, as represented by its proxy, the iShares Russell 2000 ETF (IWM), quietly broke out to new highs yesterday on higher volume. It continued with another all-time closing high today, but on lighter volume. This doesn’t surprise me, since I tweeted yesterday that despite the uneven index action, most of the names on my buy watch list (over 80%), were up on the day.

Most of my ideas discussed in both written and video reports have had a good week so far. That is the true litmus test, as far as I’m concerned, and tells me all I need to do. One does need to remain nimble and opportunistic when it comes to playing individual stocks, however. But looking to buy on constructive weakness while avoiding the urge to get sucked in on strength remains the best way to handle any potential volatility.

 

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Apple (AAPL) is still the leader among the big-stock NASDAQ names. After posting an all-time intraday high on Monday, the stock has started to pull back slightly. The 10-dma would be your reference for a potentially lower-risk entry opportunity.

 

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I would classify Amazon.com (AMZN) as another big-stock NASDAQ leader that isn’t moving much in either direction. The stock did find support at the 20-dema last Friday and has since inched back above its 10-dma. The place to buy shares was at the 20-dema last week, and in this position, I view it as slightly extended.

 

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While AAPL and AMZN remain steady leaders, it’s not as if they’re producing big price moves at this stage. Interestingly, some of the best beta is coming from volatility in beaten-down NASDAQ leaders. We have two ready examples at hand.

The first, Nvidia (NVDA), has been on a wild ride this week, starting the day on Monday with a sharp move below the 240 level and the prior early August low at 241.21. It then reversed and rallied back above the 241.21 price point, triggering a U&R long set-up at that point. The reversal came on news of a new graphics card and the company’s decision to exit the crypto-mining business.

That was enough to send the stock back above the 50-dma, but it stalled and closed below the line on heavy volume. Yesterday, the stock regained the 50-dma and closed above it, triggering a moving-average undercut & rally (MAU&R) long entry at that point, using the 50-dma as a tight selling guide.

NVDA’s action is oh-so-typical for this market, where a big-stock leader comes apart after earnings but undercuts a meaningful low in its pattern, at which point it turns and rallies. The stock is now back up near the prior August highs, and is extended from any lower-risk entry point. I’d watch to see how pullbacks to the 10-dma from here act, and whether they might present lower-risk entries.

 

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Netflix (NFLX) is another busted big-stock NASDAQ leader that is triggering U&R long entries as it reflex-rallies off its lows. As I wrote over the weekend, the stock’s chart position at that time necessitated keeping “an eye out for a move back up through the prior 322.43 low of May 15th as a possible U&R point.” That is precisely what we saw on Monday as the stock rallied up through 322.43 and continued right up to its prior 328 low of July 31st.

Yesterday, NFLX cleared that 328 low, triggering another U&R long entry. Today, it topped that off with yet another U&R long entry when it moved back up through the prior 344 low of July 17th. Volume declined sharply today, so it’s not clear how much thrust is left in the stock, but the uncomplicated way to handle this is to just use the 344 level as a tight selling guide.

So, while NVDA and NFLX have both been beaten up in recent days and weeks, it is these types of stocks that produce the sharpest price moves. Meanwhile, the steady-Eddies, so to speak, like AAPL and AMZN, produce less excitement for swing traders.

 

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Meanwhile, Facebook (FB) might be considered a steady-Eddie, but one that is going nowhere while it remains deep in the bowels of its chart pattern. Here we see the stock gingerly testing the prior late-July lows around the 170 level as volume dries up, which of course brings up the possibility of a Wyckoffian Retest, as I noted in my weekend report.

Ideally, we might look for an undercut of the 166.56 low of late July, at which point any rally back up through 166.56 would trigger an obvious U&R long entry signal. If the stock instead refuses to undercut that low, then we may still be looking at a possible Wyckoffian Retest. Perhaps the best way to test this, assuming we even wanted to, would be to take shares here and use the 170 level as a tight selling guide.

Wyckoffian Retests are by definition always going to be trickier than U&Rs. A U&R is very concrete. Once the stock pushes back up through the prior low, you go long and use that exact low as your selling guide. In a retest, you’re looking for a turning point that materializes without the stock undercutting the prior low. This requires a little bit of guesswork, and one can simply peg a stop-out point if the guess doesn’t work.

That’s why I would use 170 as a selling guide if trying to buy shares down in this position. The final option is to just forget about the stock entirely until something more concrete shows up and go buy something else!

 

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Tesla (TSLA) got hit with a price downgrade from big-bank broker J.P. Morgan on Monday, which chimed in with a $191 downside target for the beleaguered e-auto-maker. But, as I wrote over the weekend, assuming that the stock’s proverbial goose is cooked when bad news hits may find one leaning too far in the wrong direction at the wrong time.

That turned out to be the case on Monday as the downgrade sent TSLA gapping down and sliding to an intraday low of 288.20, less than 1% above its prior 286.13 low of July 30th. Even without undercutting that low, however, the stock was able to turn on a dime and head back to the upside, closing in the black at 308.44. Yesterday it pushed up another 13.46 points to close at 321.90 back above its 200-dma.

One point I would make here is that while TSLA did not undercut the July 30th low, it did undercut and rally back up through the 292.55 low of July 24th. For the creative U&R player, that would then have given you a reasonable reference to use for a tight selling guide once the 292.55 low was cleared, which is still less than 3% above the 286.13 July 30th low.

Today, TSLA held tight along the 200-dma as volume dried up sharply to -44.8% below average. That would qualify as a nice voodoo pullback, putting the stock in a lower-risk buy position here using the 200-dma as a selling guide.

 

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Zebra Technologies (ZBRA) has moved to new highs and is extended in this position. It was last buyable along the 10-dma per my comments in the last two reports. The stock broke out yesterday on below-average volume, leading to a move to new highs today, but the stock churned around on higher volume. I would look for constructive pullbacks to the 10-dma at 164.09 as potentially lower-risk entries from here.

 

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Twilio (TWLO) rolled right into its 10-dma yesterday, closing just below the line on lighter volume. It moved a little lower this morning but found its feet to rally back into positive territory and close right at the 10-dma. This puts it in a lower-risk entry position using the 10-dma as a selling guide, but since the stock closed right at the line, that’s a bit too tight.

My preference would be to take an opportunistic approach here, however. Thus, I would lay back and wait to see if some sort of pullback below the 75 level and closer to the prior BGU low at 72.24 occurs and look to come in on that. However, aggressive players can handle however they like, provided one can determine a reasonably tight selling guide. In this case, that might be today’s intraday low at 75.21.

 

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Etsy (ETSY) has continued to move higher, posting a new closing high today on light volume. While it was still within buying range of last week’s base re-breakout, it is now slightly extended. Pullbacks to the 10-dma from here would offer potentially lower-risk entries.

 

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Stitch Fix (SFIX) blasted to all-time highs today on strong volume. It was last buyable per my comments over the weekend as it sat along the 10-dma Monday morning. Today’s move constitutes a breakout from a mini-cup-with-handle formation, but the stock stalled to close near its intraday lows on heavy volume. Pullbacks to the 10-dma at 33.48 remain your references for potentially lower-risk entries.

 

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Sailpoint Technologies (SAIL) posted a new closing high today on above-average volume. It was last buyable along the 10-dma last Friday and is now extended. Pullbacks into the 10-dma from here would offer potentially lower-risk entries from here, but the stock is still within buying range of its prior BGU base breakout, so is actionable on that basis.

 

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Roku (ROKU) posted an all-time closing high today on slightly above-average volume but remains below its all-time high of 60.64 achieved two Fridays ago. That high represents the peak of its current two-week flag formation. From here, your best lower-risk entries would occur on any pullbacks to the 10-dma at 56.96.

Even better would be any pullbacks, assuming you can get ‘em, down to the 20-dema, which has risen to 53.41, just above the 52.41 intraday low of the BGU cup-with-handle breakout. ROKU remains one of my favorite stocks in this market, and I would certainly remain alert to any opportunistic weakness in the stock, should we see it.

 

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Turtle Beach (HEAR) had a strong move on Monday and Tuesday after posting an undercut & rally move through the prior 25.00 low. I discussed the stock in my weekend report, and it opened flat on Monday before launching higher. It then stalled yesterday but closed just above its 10-dma, where it found intraday support today.

Today’s pullback into what is now the confluence of the 10-dma and the 20-dema represented a lower-risk entry position using the two lines as tight selling guides. Volume dried up nicely to -48.2% below average, creating a nice voodoo volume signature on the day.

 

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ZScaler (ZS) today gave investors the pullback closer to the 50-dma that I was looking for, per my comments over the weekend. The stock came right into the confluence of the 10-dma, 20-dema, and 50-dma this morning, dipping one penny below yesterday’s intraday low. It then pulled a big outside reversal to the upside on strong volume.

That produced a nice trendline breakout on a pocket pivot move. Those who buy breakouts can buy this one, since it remains within buying range. However, keep in mind that earnings are expected on September 5th, so you’d be looking for a strong upside surge to produce some profit cushion if intending to hold through earnings.

 

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Perspecta (PRSP) keeps stalling but remains within buying range of last Wednesday’s buyable gap-up move, using the 22.83 low of the BGU day as a tight selling guide. Today’s action saw volume pick up to about average as the stock reversed from an attempt at a higher high for the week. Nevertheless, it remains in a buyable position, given that risk can be kept to a minimum using the prior BGU low.

 

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Bilibili (BILI) cleared the 10.70 low in its pattern on Monday, triggering a second U&R entry at that point. It then rallied to an intraday high of 12.43 before backing down. Today the stock gave up most of the 24-odd percent it made on Monday and Tuesday. Thus, it worked well as a quick swing-trade ahead of its expected earnings report next Monday for those who paid attention to my tweet yesterday afternoon when I advised banking BILI profits.

 

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Iqiyi (IQ) rallied above its 28.01 prior low in its pattern, on Monday, and then gapped higher yesterday before running into resistance along its 20-dema. Technically, the U&R remains in force using the 28.01 price level as your selling guide, but my preference would be to pick up shares as close to 28.01 as possible on any pullback from here.

 

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Huya (HUYA) was the slowpoke among the three hot-IPO Chinese names I mentioned in my weekend report, which includes IQ and BILIB. The stock made two attempts at clearing the 27.05 prior low in its pattern from mid-July on Monday and Tuesday but failed on both. This morning it looked like it might actually make it this time as it reached an intraday high of 27.40.

By the close, however, HUYA backed down to an even 27, a scrawny nickel below the 27.05 U&R trigger point. It may yet pull it off, since the stock has now moved tight sideways over the past two days with volume drying up to -68.4% below average. If the market can keep rallying, look for this to eventually clear 27.05 for good, so I would remain persistent.

 

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Notes on other names discussed in recent written reports:

Carbonite (CARB) broke out today on light volume, but I wouldn’t be looking to buy it on this breakout. The stock was best bought per my prior comments on the stock where it was setting up along the 50-dma. In this position it is extended, as I see it, with the idea of looking for a pullback to the rising 10-dma, now at 38.87, as a potentially lower-risk entry opportunity.

Intuitive Surgical (ISRG) has moved to higher highs and is about 1% off its all-time highs after posting two pocket pivots along its 10-dma last week. Pullbacks to the 10-dma at 525.41 would offer lower-risk entries from here.

Okta (OKTA) has moved higher since setting up along its 20-dema on Monday. I discussed the stock as buyable over the weekend, and it is now somewhat extended on the upside from here. As an alternative entry, one could look for a strong breakout ahead of its expected September 6th earnings report.

Square (SQ) was buyable along the 10-dma on Monday per my comments over the weekend and has since rallied to all-time highs on light volume. It is now extended.

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 way that the indexes get buffeted around by news on a regular basis might seem to make things difficult for traders. But, as I’ve discussed many times before, it is often enough to simply focus on the individual stock set-ups as a way of adding some clarity to the situation. Not that this is a perfect solution, since even individual stocks can spin around.

The trick is in using this volatility to one’s advantage by seeking to buy into weakness that brings a favored stock into a lower-risk entry position along a key moving average or other area of support. This then allows one to maintain very tight risk control by buying as close as possible to that area of support and then using it as a tight selling guide.

The movement in many leading stocks makes this a ripe environment for opportunistic swing-traders as stocks mostly move up within existing bases. Sometimes this movement off a support level within the base leads to a move to new highs, as was the case, say, with SFIX today. But as we saw with the stock today, chasing strength is not the preferred way to operate in this market.

Currently, I feel that most of my best ideas are a bit extended right here, right now. Therefore, it’s a matter of seeing whether any lower-risk entries present themselves on pullbacks, and taking it from there. Otherwise, going with lower-risk entries in the typical U&R set-ups is always something to watch for in beaten-down names. Keep it simple and keep it lower-risk. That is all.

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 ROKU and HUYA, 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.