The Gilmo Report

August 5, 2018

August 4, 2018

The market seemed to find more inspiration in Apple (AAPL) reaching the milestone $1 trillion market capitalization mark on Thursday than it did an allegedly “solid” 157,000 jobs increase reported by the Bureau of Labor Statistics on Friday morning.

I wrote on Wednesday that the buyable gap-up move that AAPL posted that day after earnings was in fact still buyable, both as a BGU and a base breakout. It struck me as somewhat obvious that the market would push the stock toward the magical $1 trillion market cap level simply out of a subconscious desire to see history in the making.

And so, history was made yesterday, and AAPL ended the day just above 207.04, the price level at which a $1 trillion market-cap would be in the books. While there were no “Apple $1 Trillion” hats to be found on the floor of the New York Stock Exchange (which for all practical purposes these days is a ghost town), the ebullience carried through into Friday as the stock marched just a little bit higher. It is now out of buying range.

 

GR080518-AAPL

 

Additional help on Thursday came in the form of a bottom-fishing buyable gap-up (BFBGU) from Tesla (TSLA) after the company reported that it expects to become profitable in the third and fourth quarters of this year. I tweeted early in the day that TSLA had set a low of 323.16, making the stock buyable at that point while using 323.16 as a tight selling guide.

The stock then rocketed higher from there, ending the day at 349.54, just under 49 points above its Wednesday close and up an even-14% for the day. On Friday the stock closed a little over a point lower on heavy volume as all the shorts that were fit to be squeezed were out of the way in the short-term. For now, it’s just a matter of seeing whether this will pull back and present a lower-risk entry closer to the 50-dma/200-dma confluence.

 

GR080518-TSLA

 

The strength in AAPL and TSLA also helped the market recover from a nasty downside gap open on Thursday morning. After printing the lows of the day at the opening bell, the NASDAQ Composite Index turned back to the upside and ended the day up 95.4 points, or 1.24%. The index remains off its recent highs, however, and in a choppy range where stocks mostly seem to fly back and forth without developing anything in the way of a sustainable and playable trend.

Meanwhile, the NASDAQ Composite has rallied over the past four days on declining, or wedging, volume. At the same time, it is pushing up into an area of overhead congestion from the latter half of July, so we will get a chance to see whether the index can get clear of this and push to new highs in the coming days.

 

GR080518-$COMPQ

 

While the NASDAQ showed less enthusiasm on Friday, the S&P 500 and the Dow Jones Industrials Indexes conveniently picked up the slack. I wrote on Wednesday that the overall index action seemed soft, and Thursday’s opening gap-down confirmed that. But, as is typical in this market, when things look most dire the market is susceptible to a turnaround.

The ability of the NASDAQ to hold support at its 50-dma on Thursday morning in conjunction with all the hype and flurry of “Apple $1 Trillion,” the context was set for a bounce. In addition, a broad number of leading stocks had been hammered over the prior 4-5 days, and things were, at that point, quite oversold on a near-term basis.

As I tweeted on Tuesday, the Piggy Principle on the short side was beginning to come into play. The principle dictates that when one is flush with profits on the long or short side (in this case, on Tuesday it was the short side), that is often the time to think about taking at least partial profits. In this market, when things start getting too good in one direction or the other, the market is often set for a change of direction.

The S&P 500 has matched the NASDAQ’s rally over the past four days with three up days of its own, the last one culminating in its second-highest close since the January highs. Volume, however, has been weak, but for now the index cannot be said to be in a downtrend. The NASDAQ, on the other hand, is in a choppy range that for now has a slight downward tilt to it.

 

GR080518-$SPX

 

With the Dow leading the market on Friday with a 0.54% gain, taking the baton from the NASDAQ, which led all comers on Thursday, big-caps have dominated while small-caps have lagged. This has resulted in the Russell 2000 Index, as represented by its proxy, the iShares Russell 2000 ETF (IWM), failing to get any thrust off its 50-dma both Thursday and Friday.

The Russell has labored to get past its 50-dma, closing right at the line on Friday. This was after an attempt to move higher that reversed as the index moved up into an area of overhead congestion. But overall, as with the other indexes, the underlying action remains choppy and trendless in the short-term.

 

GR080518-IWM

 

The crazy action we’re seeing across the board in many leaders and now former leaders can be illustrated with three good examples. Fortinet (FTNT), Square (SQ), and Take-Two Interactive Software (TTWO) illustrate that while the major indexes posted up weeks, the action under the surfaces was less sanguine. In my Wednesday video report, I went through my long watch list from the prior week and showed the way so many stocks were hit hard in unison over the prior 3-4 days.

In the old days, before QE, when this sort of thing occurred it was generally a very bearish sign. Today, it’s just another day at the office. Here we see Fortinet (FTNT) get slammed off its perch two Fridays ago and this past Monday, busting below its 50-dma. After earnings on Wednesday after the close, however, the stock launches back to the upside in a big buyable gap-up move. That was playable as a BGU on Thursday, but I would not be surprised to see the stock eventually pulled in again.

The bottom line here is that if one owned FTNT, one may have been pushed out of the stock on Monday when it busted the 50-dma. But, as is often the case, earnings roulette has the ability to turn night into day, and FTNT comes right back out to all-time highs.

 

GR080518-FTNT

 

Square (SQ) is a little bit different, but it too suffered from heavy selling two Fridays ago and this past Monday. The stock kept moving lower on Tuesday, meeting up with its 50-dma, where it found support. On Wednesday after the close, SQ reported earnings and the stock opened Thursday slightly to the downside.

From there, it again found support at the 50-dma and launched in a furious move to the upside that qualified as a pocket pivot as well. That took it right back up to the prior week’s all-time highs, at which point it promptly reversed on Friday on heavy volume to give up half of its pocket pivot gains. Where it goes from here is anybody’s guess, but one could theoretically try buying it here along the 20-dema, which would then serve as a tight selling guide just in case the stock decides to do what it did the prior week.

 

GR080518-SQ

 

And then there’s Take-Two Interactive Software (TTWO) which blew completely apart last week after its cousin, Electronic Arts (EA), missed on earnings and crashed to the downside. The sympathy breakdown took it all the way down to its 200-dma, where it held support on Thursday. A favorable earnings report, however, turned night into day, and the stock gapped up on Friday in a big buyable gap-up type of move.

The only problem with the BGU is that TTWO stalled badly on the move, failing on a bid to make all-time highs. By the close, the stock held above an intraday low 122.09, but the bad news is that the intraday low occurred only two hours before the close, and the stock had trouble rallying from there to close at 123.41, about 1% higher.

Technically, TTWO is buyable here as a BGU, using the 122.09 as a very tight selling guide. Hence, although one may be skeptical as to its true viability, it is still objectively in a buy position unless and until it busts 122.09. It does serve as a good example of another big price break two Fridays ago and this past Monday that we saw in so many stocks, including FTNT and SQ, above.

 

GR080518-TTWO

 

Amazon.com (AMZN) is back up near its highs after posting a stalling undercut & rally type move on Tuesday. Volume has been about average on the way up, and I would not consider the stock to be in a buyable position. I would rather take an opportunistic approach and look to pick it up on a constructive pullback to the rising 50-dma at some later stage.

 

GR080518-AMZN

 

Despite the NASDAQ’s rally over the past four days, the action remains tepid and choppy when it comes to individual names. Alphabet (GOOGL) has filled its prior gap-up rising window, generating a weak-volume rally back up to the 10-dma. In this position it can be considered to be at a lower-risk entry point using the 20-dema as a selling guide. Somehow, however, that just doesn’t thrill me.

 

GR080518-GOOGL

 

The action in Microsoft (MSFT) doesn’t thrill me all that much either. Since its post-earnings buyable gap-up move to nowhere, the stock hasn’t shown any convincing upside thrust. Technically, it was buyable along the 20-dema on the gap-fill, per my comments on Wednesday. It has since generated a 3% rally.

 

GR080518-MSFT

 

Facebook (FB) is still living below its 200-dma, but traders might have picked up on the undercut & rally move back up through the 170 low in a short flag formation that formed in late April/early May. That move occurred on Monday, and the stock then rallied in slow motion all week before stalling and churning on Friday on the approach to the 200-dma.

The 170 price level was tested for three straight days before the stock developed any upside velocity on Thursday, making for a U&R in slow motion. The stalling action near the 200-dma came on weak volume, which appears to make the stock vulnerable to a little rollover action in the coming days.

Technically, the U&R move on Monday was buyable, and it was buyable again on the following three days when the stock successfully retested the 170 price level. The U&R has come and gone, however, and it’s not clear to me that this current move has any real legs, but we shall see.

 

GR080518-FB

 

It isn’t hard to notice that the big move in AAPL this week hasn’t really altered the landscape for most big-stock NASDAQ leaders, especially the busted ones. Netflix (NFLX) pulled a logical bounce off the top of a prior consolidation area that formed in mid-May. But that ran out of gas on Friday as the stock stalled and reversed near the 10-dma on increased volume.

As I wrote on Wednesday, weak rallies (which this one was) into the 10-dma were to be viewed as potential short-sale entry opportunities. Friday’s move was exactly this, and the stock dutifully pulled in from the line. The question now is whether this near-term support at the May consolidation holds and produces some sort of meaningful upside movement, perhaps back up into the 50-dma. We shall see, but for now NFLX is an official former leader.

 

GR080518-NFLX

 

Nvidia (NVDA) is expected to report earnings on August 16th, and its price action seems to get more volatile as it moves about in a broadening megaphone type of price range. The stock pulled a U&R move on Thursday, rallying with the AAPL hype and flurry, but stalled in a tight range right at its 50-dma on Friday.

This may not get to the upper trendline of its megaphone-like price range and might just be a short right here using the 50-dma or Friday’s high as a guide for an upside stop. Otherwise, if it moved higher to test the top of the price range I might look to short it there, all with the idea of catching a decent scalp ahead of earnings, and nothing more.

 

GR080518-NVDA

 

If the market is going to continue to rally, I think I would prefer to look for stocks that might be in Ugly Duckling positions. Semiconductors have proven to be prime Ugly Duckling stocks, as the action in Micron (MU) all year long has demonstrated. I’ve been working and discussing this as a short for the past three weeks, roughly, and it has steadily drifted lower.

Now it’s finding resistance along its 10-dma on a consistent basis. However, on Thursday MU posted a U&R through a prior low from mid-July. That low is at 52.22, and MU held above it on Friday as volume dried up sharply. Technically this can be viewed as an actionable U&R, using the 52.22 low as a tight selling guide. If it busts that, then it may again trigger as a short-sale at that point, although I would prefer to short this into a rally, which hopefully the current U&R might generate for us. Play it as it lies.

 

GR080518-MU

 

Chinese stocks have remained under pressure, mostly because Chinese markets remain under pressure. As we can see on the daily chart of the iShares China Large-Cap ETF (FXI), below, the Chinese market is acting like it wants to form the third down leg in an ongoing bear market that started in late January and early February. The bear market action in China that is occurring as U.S. markets remain near their highs has some thinking that the Trump Administration has won the trade war with China.

This may or may not be true, but I think the market is acting like it expects no trade war to take place. That may be an overly confident assessment, but it may not necessarily be a matter of winning a trade war or not. This is because continued deterioration in China and other Asian markets can create an Asian Contagion effect that brings down U.S. markets.

We’ve seen this in the past, many times. Most recently, a nasty breakdown in Chinese markets back in the middle of 2015 brought about the infamous Flash Crash of August 24th in U.S. markets. That was so bad that the Chinese authorities outlawed short-selling, and even began to persecute sellers as being irresponsible. Thus, a breakdown in Chinese and other Asian markets can still create problems for U.S. markets with or without a trade war that someone will supposedly win or lose.

 

GR080518-FXI

 

Baozun (BZUN), which was up until recently one of the strongest-acting Chinese names, is now rolling over to lower lows after a double-top type of breakdown the prior week. After busting the 50-dma on Monday, the stock rallied into the 50-dma and reversed, leading to lower lows by Friday.

In fact, alert short-sellers could have picked it off at the 50-dma on Wednesday. The stock now looks set to test the lows of late June. BZUN is expected to report earnings on August 21st.

 

GR080518-BZUN

 

My information regarding Alibaba’s (BABA) expected earnings date was incorrect in my last report. The actual date is August 23rd before the open. In the meantime, the stock continues to plumb lower lows, gapping further below the 200-dma on Thursday. The hype and flurry of AAPL $1 Trillion was not enough to get the stock to move much, and on Friday it simply filled Wednesday’s gap and turned back to the downside.

One will note, however, that BABA is now undercutting an early-June low in the pattern. This could generate some sort of U&R move, which can be watched for. Simply set a price alert to “at or above 181.06” and if it goes off you take the long entry while using 181.06 as a tight selling guide. However, I don’t think I’d expect much more than a trade back to the 200-dma, unless, for some reason, the U.S. and China start cooing at each other and making nice on trade again.

 

GR080518-BABA

 

Cyber-security name Palo Alto Networks (PANW) got a nice boost from the post-earnings gap-up move in its cousin, FTNT, on Thursday, taking it back up to its 50-dma. But what has previously been support along the 50-dma is now turning into resistance as the stock’s rally stopped at the 50-dma on Friday.

Until and unless the stock can regain the 50-dma, I view this as a short right here, or as close to the 50-dma at 208.82 as possible, using the line as a guide for a tight upside stop. PANW isn’t expected to report earnings until the end of August, but keep in mind that its other cousin, CyberArk Software (CYBR), is expected to report earnings this Tuesday after the close, so it could generate a sympathy move from PANW.

 

GR080518-PANW

 

While TTWO was gapping up on Friday after earnings, Activision Blizzard (ATVI), which reported the same day, turned into a very shortable outside reversal to the downside for those monitoring the 5-minute 620 intraday chart. The stock was already forming up as a late-stage, failed, cup-with-handle base, as I discussed in my Wednesday video report.

After a brief rally on Friday after reporting earnings on Thursday after the close, ATVI ran into resistance at its 10-dma, turned tail and broke hard to the downside. It appears set to test its 200-dma in the coming days. One example of a prime short-sale opportunity in a late-stage, failed-base, (LSFB) short-sale set-up.

 

GR080518-ATVI

 

Two stocks on my long watch list that continue to chug higher, Turtle Beach Corp. (HEAR), not shown, and Funko (FNKO), are expected to report earnings this week. HEAR, which posted a new high on Friday, is expected to report on Monday after the close, while FNKO is expected to report on Thursday after the close. FNKO also posted a new high on Friday, but only closing higher. Nevertheless, the move came on a five-day pocket pivot signature.

It will be interesting to see how the stock acts after earnings are released. The stock currently has a very small float of 5.6 million shares and remains relatively thin, trading 491,000 shares a day on average. This is considerably more than the less-than-200,000 a day it was trading when I first discussed the stock in one of my original video reports back in April when it was trading at around $8 a share.

I’d like to see the company do a secondary offering to increase the float. This would have two potential advantages, one of which is that it could create a buyable pullback. The second is that a larger float would make the stock more attractive to institutions, which could drive a continued uptrend, perhaps even well beyond the $20 level.

Analysts are looking for 2 cents in earnings when the company reports on Thursday. For 2018, FNKO is expected to earn 65 cents a share, a 117% annual increase, and 86 cents in 2019, a 32% annual increase. FNKO sells at 28.3 times 2018 earnings, and 21.5 times 2019 earnings, so I see room for multiple expansion if the company can show that their business continues to expand as robustly as it is now. It is the only stock that I’ve seen double in price since April and it has done well for members that acted on my original discussion of the stock back then.

 

GR080518-FNKO

 

For newer members: Please note that when I use the term “20-day moving average,” “20-day line,” or “20-dema” I am referring to the 20-day exponential moving average. I use four primary moving averages on my daily charts: a 10-day simple (the magenta line), 20-day exponential (the green line), 50-day simple (the blue line) and 200-day simple moving average (the red line). On rare occasions, I will also employ a 65-day exponential moving average (thin black line). In all cases I will mostly use the shorthand version of “10-dma,” “50-dma,” etc.

I’ve been doing this for 27 years, and I have to say that in my experience this is one of the strangest markets I’ve ever been involved with. Even though the indexes are near all-time highs, the market has a strange feel to it. The action is often random and erratic, where gains that take many days and/or a few weeks to achieve suddenly dissipate in 2-4 days. We’ve seen that happen with a lot of stocks over the past few days. I give you Shopify (SHOP) as an example of this general malaise.

The whole thing starts with a steady upside march in late May into the first half of June. At that point a month’s worth of gains disappear in five days. As the stock busts the 50-dma and begins to look quite ugly, it simply turns back around and hops back above the 50-dma. This is what I call a moving-average undercut & rally, where a stock breaks a moving average in bearish fashion but then quickly moves back above the line.

At that point, an MAU&R, as it is known acronymically, goes into effect, with the idea of buying the stock as close to the moving average as possible and then using the line as a very tight selling guide. SHOP then marches steadily to the upside over the next four weeks, even achieving an all-time closing high of a 173.78 just a scant seven days ago on the chart.

With little warning, on July 27th, four days before its expected earnings report on July 31st, SHOP suddenly falls out of bed and breaks for its 50-dma. The next day, it slashes through the line and keeps diving. After reporting earnings, SHOP gaps down one more time, halting just above its 200-dma, but undercutting its prior May lows and rallying (triggering a technical U&R long set-up, by the way).

 

GR080518-SHOP

 

What I find most troubling about the example of SHOP is that it isn’t a one-off sort of thing. We see this occur in a lot of stocks, and it is precisely what has given rise to the concept and formation of the U&R long set-up. But my main point is that the action is very odd in its consistency, and it certainly makes life difficult for those who insist on only buying breakouts. This is not your father’s CAN SLIM® market, for sure.

In any case, the market is mostly a swing-traders, even a day-traders, market, and not one for trend-following investors outside of a handful of situations like FNKO or HEAR (at least for now!). Keeping plenty of dry powder handy on a day-to-day basis seems to be the most prudent strategy, given the potential for news- and event-driven drop-outs, gap-ups, reversals, and the like. In this market, there is always a rug under your feet, and the potential to have it pulled out from under you is always there, long or short. You can see it happen with regularity in the chart patterns themselves.

If you can take advantage of set-ups where you see them, long or short, I see no reason why nimble traders cannot act when an opportunity presents itself. You never know when you’ll find another FNKO. Most of this relies on members’ ability to independently use what I have taught them, and to do so in real-time.

Things change quickly, but we have a variety of tools and weapons at our disposal, so understanding which one to use and how and when to use it is critical. Members who have any questions about OWL methods or techniques should not hesitate to email me at support@gilmoreport.com. My goal is and always has been to empower members to recognize set-ups and make the associated trading decisions on their own.

Once I see how things are developing later this weekend, I may post a video report covering any possible ideas, long or short, that pop up during the remainder of my weekend research. AAPL and TSLA prove that there are indeed actionable long set-ups in this market, while names like BZUN and ATVI do likewise for the short side.

Right now, the long side looks less compelling, but this is more a market of stocks than it is a stock market, and one good idea is one good idea, whether it’s a long or a short. So, my approach remains as it always is: Avoid a rigidly bullish or bearish bias, watch the stock carefully, and play them as they lie.

Gil Morales

CEO and Principal, Gil Morales & Company, LLC
Managing Director and Principal, MoKa Investors, LLC
Managing Director and Principal, Virtue of Selfish Investing, LLC

At the time of this writing, of the stocks mentioned in this report, Gil Morales, MoKa Investors, LLC, Virtue of Selfish Investing, LLC, and/or Gil Morales & Company, LLC held no positions, though positions are subject to change at any time and without notice.

Gil Morales & Company, LLC (“GMC”), 8033 Sunset Boulevard, Suite 830, Los Angeles, California, 90046. GMC is a Registered Investment Adviser. This information is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to GMC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Gil Morales & Company, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.