The Gilmo Report

February 21, 2018

February 21, 2018

The release of the Fed meeting minutes today set the market on fire, sending the Dow Jones Industrials Index up over 300 points on the day. But it didn’t take too long for the fire hoses to come out, and the fire was quickly put out. By the close, The Dow had pulled a big outside reversal to the downside on higher volume as it failed at its 50-dma. This would appear to be the end of the line for the sharp reaction rally that began two Fridays ago.

 

GR022118-$INDU

 

While the S&P 500 Index looks very much like the Dow, the NASDAQ Composite Index, which has led the rally off the lows over the past eight trading days, stalled and reversed from a higher high today on increased volume. Today’s action capped off three days of stalling around the highs, but the index remains above its 50-dma. With the S&P and the Dow now back below their 50-dmas, I give the NASDAQ reasonable odds of doing the same.

 

GR022118-$COMPQ

 

Over the long weekend, I put out a blog post alerting members to the fact that many weekly chart patterns were showing one or two weeks’ straight down on heavy volume followed by one week back to the upside on heavy volume. From the perspective of weekly charts, these did not create any buyable set-ups while exhibiting a certain cautionary look. Things that go straight down and then straight back up to their highs generally need to spend some time consolidating, at best. If they don’t, then they can simply reverse, and that’s what we may be seeing now.

The Fed minutes released today were initially viewed as dovish, at least according to the pundits, and gold began moving higher in confirmation of this. But like the market, the SPDR Gold Shares (GLD) reversed to the downside and broke below its 10-dma and 20-dema.

 

GR022118-GLD

 

Meanwhile, the dollar rallied and bonds sold off, with the iShares 20+ Year Treasury Bond ETF (TLT) making its lowest low since March of last year. With the markets quickly reassessing the Fed minutes as hawkish, as evidenced by the sharp reversal to the downside, the drivers for gold, bonds and the dollar returned the basic idea of higher interest rates to come.

 

GR022118-TLT

 

Here we see the straight-down-and–straight-up concept as a cautionary sign in Nvidia (NVDA). The stock blew apart with the market two Fridays ago, busting its prior breakout point and the 50-dma. It then magically levitated back to the upside, charging back to its highs before reversing hard today on above-average selling volume. This looks like a possible double top, and will likely be confirmed as such if we see the NASDAQ break below its 50-dma.

 

GR022118-NVDA

 

Keeping NVDA firmly in mind, I am going to propose something that members might view as quite radical. Basically, I am looking at a number of these straight-down-and-then-straight-up moves in leading stocks as potential double-top short-sale set-ups. Based on my observations in this nutty QE market, normal short-sale set-ups don’t necessarily pan out in optimal fashion.

Usually, we get sharp, short breaks that undercut a nearby low and then the stock flips right back to the upside. Meanwhile, I observe that some of the sharpest breaks occur when stocks roll over from their peaks. And we can look at NVDA’s breakdown last November and December as a good example of what I’m talking about. That breakdown, which was best shorted when the stock broke down through its 10-dma and 20-dema, eventually formed a head-and-shoulders topping formation.

That formation, however, turned out to be a false H&S, and the stock simply set up  and ran right back up to new highs. So, the question I am asking is whether we can take the radical position of trying to short stocks near the highs if we can identify certain characteristics and devise a way to short these stocks while maintaining strong risk management.

 

GR022118-NVDA Chart 2

 

For that, let’s examine Netflix (NFLX). Here we see a V-shaped move right back up to the highs that has stalled out over the past two days. The stock has closed in the lower part of its daily trading range over the past two days, and volume picked up today to above average as sellers pushed it back down off its peak.

A double-top formation is one of those venerable old “Technical Analysis 101” formations that is one that both I and Bill O’Neil completely ignored in our studies of short-sale set-ups. But I find that in a QE market, where the market tends to reverse course quickly, pulling the rug out on investors during a rally and then quickly reversing course on a steep ugly sell-off, just when things look their ugliest, a double-top formation tends to work better as a short-sale set-up.

So, this is my radical proposal: short NFLX here using the recent highs as your guide for a tight upside stop. If you look around, you may find many more stocks that fit this short-sale “template,” and that alone may be telling us something about the state of this market right here, right now, so we’ll see.

 

GR022118-NFLX

 

We can also take the same view of Apple (AAPL), which has had an extremely V-shaped move off its lows and right back above the 50-dma, near its prior highs. Over the past three days, it has mimicked the NASDAQ as it stalls and closes near the lows of its daily trading ranges just above the 50-dma. In this case, we can view the 50-dma as a short-sale trigger, such that if the stock breaks the 50-dma, we short it at that point, using the 50-dma or the recent highs near 175 (about 2-3% higher) as your guide for a tight upside stop.

 

GR022118-AAPL

 

Amazon.com (AMZN) is the same exact thing. A deep, V-shaped rally right back up to the highs that on a weekly chart shows one week straight down and then one week straight back up to the highs. Today, the stock stalled out near the highs on above-average volume, as it did yesterday. Therefore, I play this as a double-top short-sale set-up using the highs of today 1503.49, just a hair over 1%, as a guide for a tight upside stop.

 

GR022118-AMZN

 

Tesla (TSLA) is another V-shaped short-sale set-up, but one that is a bit more orthodox within the context of our short-selling vernacular. If you study this chart carefully, you will notice a secondary, fractal sort of head and shoulders that has formed since early December. The left shoulder occurs during the month of December, while the peak of the head occurs around the end of January. The stock has reversed at the 200-dma each of the past three days, and has therefore been shortable around the 200-dma.

In this position, TSLA is sitting right on top of its 50-dma as volume declines, which could also be viewed as a constructive pullback to the 50-dma. What I would want to see here would be a break below the 50-dma as a short-sale trigger. Otherwise, another rally back up near the 240 price level and the 200-dma would be the alternative approach to trying to short this thing.

 

GR022118-TSLA

 

On the long side, Twitter (TWTR) is holding tight near its recent highs. The stock started moving rapidly to the upside around midday, looking like there were some buyout rumors swirling around to drive the stock higher in such a manner. That move gave way at around the 34 price level as the stock backed off from its intraday highs on above-average volume.

For now, the 10-dma at 31.96 serves as my nearest reference for support on any pullback from here. After that, the 20-dema, now at 29.55 and just below the prior BGU low of 29.71, would serve as secondary support. Assuming the market doesn’t come apart, pullbacks to these levels might provide opportunistic entries.

 

GR022118-TWTR

 

Snap (SNAP) got hit with a downgrade to “sell” yesterday, something that you rarely see from an analyst, and that sent it down below its 10-dma on relatively heavy, above-average selling volume. The 10-dma was my reference for a buyable pullback but the fact that SNAP couldn’t hold the 10-dma either yesterday or today is not constructive. Watch for a possible test of the 20-dema at 17.34, which lies just above the prior BGU low of 19.69.

 

GR022118-SNAP

 

Facebook (FB) morphed back into a more traditional late-stage failed-base short-sale set-up today when it ran right into its 50-dma and reversed on about average volume. If SNAP and TWTR run into trouble, then FB may just end up retesting its 200-dma. I had previously thought that the stock might resurrect itself by moving up through the 50-dma, but today’s action quashed that idea.

 

GR022118-FB

 

I wrote over the weekend that Weight Watchers (WTW) “looks like it wants to blast to higher highs as it consolidates tightly near its prior highs,” and that’s what it did yesterday morning early in the day. But, in the spirit of its V-shaped little double-top formation, it reversed course, posting a big outside reversal to the downside on average, but much higher, volume.

It closed today just below its 10-dma, which brings the 20-dema at 68.20 as the next reference for support. If you’re still long the stock from early January, the 20-dema would serve as my maximum selling guide. And if it busted the 20-dema, I might be inclined to short it at that point, depending on what the general market was doing at the time.

 

GR022118-WTW

 

I tested out my V-shaped double-top theories on Square (SQ) today with some success, although so far this is just a small pullback from the highs. I would have liked to see volume pick up sharply, but it was more a case of buyers standing aside. This isn’t all that surprising since the stock has had a sharp V-shaped run off the lows over the past eight trading days. SQ is expected to report earnings next week so if you bought the stock off the 50-dma per my prior discussions of the stock on the way up, taking profits ahead of the report seems sensible to me.

 

GR022118-SQ

 

Alibaba (BABA) popped off its 50-dma yesterday, as I discussed it might over the weekend. From there the stock rallied back up to prior highs in the pattern that forms what Wyckoff would call an “axis” line. That line served as resistance for the stock as it reversed on higher, but only average volume. The action since early January is looking a bit like a fractal head and shoulders formation, so if the general market retests its prior lows, don’t be surprised if BABA breaks back below its 50-dma and tests its low of eight trading days ago as well.

 

GR022118-BABA

 

SolarEdge Technologies (SEDG) has continued to make new highs after last week’s buyable gap-up move, and remains extended. Meanwhile, we are looking for earnings tomorrow from First Solar (FSLR), which is expected to report after the close.

MuleSoft (MULE) remains extended from last Friday’s buyable gap-up move. As would also be the case with SEDG, if the general market gets into trouble I would certainly be loath to step into these up here, but it’s possible that a test of their respective BGU intraday lows could present lower-risk entries, assuming they were able to hold those lows.

Over the weekend I blogged about the big move in steels and aluminums on Friday after the Commerce Department recommended the implementation of steel and aluminum tariffs. While the moves were very nice and very tradeable if one was watching the news and on them very quickly on Friday, my tendency is to think that these will now start to drift back in.

Over the past two days I’ve been working X on the short side, and it has come in for me. Today it started to the upside and ended up down nearly 2 points on the day. Near-term support is either at the 40 price level or as far down as the 20-dema at 38.86.

 

GR022118-X

 

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.

Today’s reversal off the highs on increased volume looks short-term bearish at the very least. In many cases, stocks have simply shot higher in what I like to call “Flying V” formations to form what look like little double tops. I showed several examples of this in today’s report. The question now is whether continued market weakness, perhaps in a test or even a breach of the lows of two Fridays ago, turns those into shortable double tops. For now, I’m willing to test some of those out as shorts, and if the market holds I can be out quickly.

Otherwise, you’d want to see these V-shaped formations move sideways for a while in attempts to consolidate the prior, sharp gains. I tend to think, however, that we’re going to see the indexes pull back further, and so if one has profits from positions taken two Fridays ago on various undercut & rally set-ups, I would consider banking some, if not all, of those profits.

The market remains extremely volatile and somewhat haphazard, whip-sawing back and forth on an intraday basis. This keeps risk higher than normal no matter which side of the market you are trying to play. Therefore, stay nimble, and stay cautious.

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.