When I got up on Friday morning and saw the NASDAQ futures down 30 or so, I tried to remember the last time I had seen the futures down that much. These days it has been a rare occurrence in a market that seems to have forgotten how to sell off.
In a sense you could see the Friday morning sell-off coming on the basis of Thursday’s action. That was the day where we saw a number of leaders in the materials, oil, and tech spaces get smashed.
For example, U.S. Steel (X) broke down along with the rest of the steels on Thursday, essentially failing on its prior base breakout. Again, an example of why I do not advocate waiting for base breakouts to initiate positions in this market. Sometimes breakouts can offer reasonable add points IF one has taken advantage of the clear buy points much lower in the base (such as RAPPs and BFPPs) and already has a lower cost basis.
X found support on Friday near its 50-day moving average after getting shredded on Thursday and then again on Friday on an intraday basis. It’s hard to say whether this is a clear short, but it is a potential late-stage failed-base type of situation.
I think from here it may be shortable using the 20-day moving average at 37.21 as a tight upside top. There is no guarantee, however, that the Ugly Duckling won’t show up again, as it has before in X, and drive the stock back up to its highs. And there is good reason to consider that the Ugly Duckling might pay a visit here.
If we study the chart below carefully we will note that a) the stock held the 50-day line on Friday as volume declined, and b) it remains above the prior pocket trendline breakout of early February. Volume declined on Friday as sellers dried up a bit.
So this could easily set up a rebound from here that could include a typical “re-breakout,” something not uncommon for this market. Meanwhile, base breakout buyers may have already been blown out of the stock if it declined 7-8% below their entry point. But for all we know, THIS will turn out to be the lower-risk entry point for X, in contrast to the obviously bullish prior breakout!
Tesla (TSLA) also got shellacked on Thursday after reporting earnings Wednesday after the close. The stock gapped down on heavy selling volume and broke below its 20-day moving average. This technically puts it in position as a POD-like (Punchbowl of Death) failure at the 20-day line.
In this case, rallies up into the 20-day line would serve as potential short-selling opportunities using the line as a guide for a tight upside stop. The company is fairly upfront about the fact that it would be looking to raise more capital from investors, so this probably keeps a lid on the stock, at the very least. However, if more stock were issued, this could certainly send the stock lower.
While TSLA did find some support along the prior short flag it formed on the cusp of late January and early February, it’s not clear that this will generate a strong bounce from here. For now, this looks more like a short than a long. And after a huge move from the December and January buy points at 193 and then 215, respectively, it would be logical for the stock to back up and spend some time building a new base up here near its all-time highs.
And then there’s Weibo (WB), which split wide open after posting what looked to me like a pretty strong earnings report. WB simply opened up on Friday morning on a gap-down move of a little over two bucks. It then blew right through its 20-day moving average on massive selling volume.
On Friday WB attempted to rebound and regain the prior double-bottom buy point, as I’ve highlighted on the chart, but stalled at the coincident 20-day moving average on above-average volume. This looks like a late-stage failed-base (LSFB) short-sale set-up using the 20-day line at 52.26 as a guide for an upside stop.
If all you saw were these three stocks (and a few others that were slammed that day) you’d think the market indexes were coming unglued. But for the Dow Jones Industrials Index it all added up to two more up days to finish out the week once all the dust had settled.
That made it eleven up days in a row on higher volume. Anybody trying to short the indexes with inverse index ETFs or otherwise because they look too high, is probably pulling their hair out by now. Even when things look like they are going to come off, they don’t.
The S&P 500 Index, not shown, also closed up on Friday, making it 14 out of 17 days up in a row for that index on higher volume. For good measure, the S&P posted a new all-time closing high as well. Market correction? What market correction? So what is it now, 93 days without a 1% correction? Personally, I’ve lost count.
The NASDAQ Composite Index, which took the brunt of the selling on Thursday, logged what has been its only distribution day in the month of February but was able to close mid-range on the same day. On Friday the index found support along the 10-day moving average, as it did on Thursday, and rebounded off the line on lighter volume.
One distribution day does not make a market correction, and if anything it is probably good that we are seeing some selling in the index as a means of blowing off steam where it needs to be blown off. Certainly that has likely been the case with names like TSLA or NVDA, which led the blowing off of steam among big NASDAQ names on Thursday and Friday.
The question is whether the breakdowns in previously hot leading stocks leads to rotation into other areas of the market. Despite the carnage in some names, I can still find plenty of constructive bases and pullbacks to logical areas of support among other nascent or potential leaders. If this market rally is to continue, that may be from whence the next round of market movers emerges.
All of this merely serves to underscore the fact that this market is still all about focusing on individual stock set-ups. At the same time, prudence is exercised by buying in lower-risk areas within the base using any number of tools at our disposal, from bottom-fishing and roundabout pocket pivots (the proverbial BFPPs and RAPPs) to undercut & rally moves (the proverbial “U&R:) to “voodoo” pullbacks and others.
And as I wrote in my Wednesday mid-week report, the market also remains one of taking your shots when you have them, and remaining opportunistic and active. In service of this, I myself prefer to take more of a swing-trading approach. My experience thus far in this regard is that it tends to save me a lot of pain in many cases.
Knowing when to hold ‘em and when to fold ‘em, as in taking profits into extended movements one way or the other depending on whether you’re playing something long or short, is often critical in this market. While names like WB, X, and TSLA argue for taking profits into extended upside on the long end of this market, Nvidia (NVDA) also shows why knowing where to cover shorts in the short-term is also useful in a market that is not showing any signs of full-blown bearishness.
But despite the fact that one certainly cannot make any bear case for this market based on the action of the indexes, there are still times when a tactical short-selling approach will be rewarded in the right names. NVDA was a clear short on Thursday morning when it gapped below its 50-day moving average, as I discussed in my Wednesday report.
The stock started the day out at an opening price of 106.39 and ended the day just above the $100 Century Mark at 100.49. The next morning it gapped down along with the rest of the market but undercut a set of two lows in its prior base. This was a short-term cover point for anyone short the stock from further above in the pattern, and NVDA then duly rallied after the undercut on above-average volume.
My guess is that the stock may attempt to move back up toward the 50-day moving average, now at 107.31, where it could become shortable again. We’ll see how this plays out, but NVDA serves as a decent example of the profit potential available to short-sellers when the set-up is just right.
With Weibo (WB) getting obliterated on Thursday after its earnings report, the rest of the Chinese names in the Gilmo China Five pulled back as well, but for the most part held up reasonably well. As an example, Alibaba (BABA) came off on Thursday on a failed breakout attempt, but volume as just about average on the day.
That led to a test of the 20-day moving average on Friday as volume dried up again. BABA stabilized at the line and then rallied to close up on the day on light volume. This pullback to the 20-day line would represent my favored method of buying BABA shares vs. chasing a breakout.
The 20-day line at 101.35 now serves as your downside selling guide, although one could also continue to use the 99.94 intraday low of the late January buyable gap-up (BGU) move. In the meantime, what would you rather do? Buy the stock when it pulls back constructively into an area of potential support or get sucked into a breakout where you end up buying high? For me the choice is clear.
Netease (NTES) actually turned into a nice tactical short on Thursday when it failed to hold the $300 Century Mark. It then dropped sharply and pulled down to a low of 187.51 that day before rallying to close back up near the 300 price level. While that was good for a short scalp, the pullback did come right into the area where I considered the stock buyable on pullbacks, around 189 per my prior discussions of the stock.
At that point NTES rallied and closed just below the $300 price level, and then on Friday was able to trade back above 300 before fading and stalling a bit to close at 299.93. Using the “620” 5-minute intraday chart may have even allowed one to play this both ways on Thursday, first short and then long. Such is the nature of this market!
NTES is probably still in play as a long here, with the idea of using any pullback down toward the 10-day moving average at 282.86 as an opportunistic buy point. Otherwise, watch for any fresh attempt to finally and decisively clear the $300 Century Mark.
Meanwhile, among the other China Five names, which is now down to a China Four thanks to WB’s demise. Here are my current notes:
Momo (MOMO) found support at its 20-day moving average at 25.00 on Friday and closed up on the day. With earnings coming up in a week or so I’m inclined to lay back here for now.
JD.com (JD) hasn’t moved much and remains above the $30 price level as it finds support along the 10-day moving average. Earnings are expected out next week, so there isn’t much to do here ahead of that, particularly given the stock’s extended state at the current time. The pullback in the NASDAQ over the past couple of days, including Friday’s gap-down opening, gave us some insight into the stronger-acting big-stock names in the index.
Facebook (FB) held its ground quite impressively on both Thursday and then again Friday morning, finding support at the 10-day moving average on both days. This action comes on the heels of Wednesday’s pocket pivot breakout from a cup-with-handle formation. In this case the correct buy point occurred on the constructive pullbacks into the 10-day line on Thursday or Friday as volume declined. This continues to be buyable right here using the 10-day line at 134.35 as a tight selling guide, or the 20-day line at 132.87 as a slightly wider selling guide.
Netflix (NFLX) has also held up reasonably well, and ended the week back above its 10-day moving average after starting out the week below the line. The weekly chart below reveals a stock that is actually holding very tightly with a very narrow, tight weekly range and weekly close being posted this past week. In my view the stock remains buyable here using the 20-day moving average at 141.38 as a tight selling guide. Alternatively, the 138.25 intraday low of the January 19th buyable gap-up (BGU) can serve as a wider selling guide given that it is only about 3.4% away.
Notes on other big-stock names discussed in recent reports:
Apple (AAPL) found support at its 10-day moving average on Friday as buying volume picked up on the day. That put the stock in a lower-risk entry position per my comments in my Wednesday mid-week report.
Amazon.com (AMZN) gave buyers a better shot at picking up some shares on a constructive pullback Friday as it traded down to its 20-day moving average on an increase in volume, reflecting some supporting action at the line. It then closed back above the 10-day line, so it is in a lower-risk entry position using the 10-day at 844.14 as a very tight selling guide. Previously the 10-day line was down at 829.35, so now the 20-day line at 834.70 can serve as a lower selling guide for those who prefer to give the stock more room.
Priceline Group (PCLN) is perhaps looking the weakest among the big-stock NASDAQ names I follow, and so I find myself focusing more on FB, NFLX, AAPL, and AMZN. Of course, “weakest” is a relatively term here, since the reality is that so far all PCLN is doing is testing its 20-day moving average at 1616.89 where it found some support on Friday. That perhaps puts it in a lower-risk entry position using the 20-day line as a tight selling guide.
Applied Optoelectronics (AAOI) came out with earnings Thursday after the close and posted a buyable gap-up (BGU) move on Friday. The stock has been the de facto leader among the optical stocks, and this big-volume gap-up move merely serves to confirm this. The stock is now somewhat extended from the 40.55 intraday low of Friday’s BGU.
Notes on other optical names discussed in recent reports:
Arista Networks (ANET) is still extended but the 10-day line is starting to catch up at 110.22. I would look for any kind of pullback toward the line as a potential lower-risk entry opportunity.
Ciena (CIEN) is still buyable here along the top of its prior base. The 20-day line at 25.13 serves as support and a tight selling guide. Finisar (FNSR) is trying to stabilize around its 10-day moving average after some extreme volatility last Friday. Based on today’s action, it looks like it wants to test the 20-day line at 32.81, so I’d step aside here and let the stock settle down before looking to take shares.
Finisar (FNSR) looks buyable here as it stabilizes following the prior week’s big shakeout down to the 50-day line and now pulls back on light volume. The 20-day moving average at 33.06 serves as a tight selling guide. Earnings are expected in the second week of March.
Lumentum Holdings (LITE) dropped below its 10-day moving average on Thursday on heavy volume but found support near the 20-day line to close in the upper half of its daily price range. The stock held reasonably tight on Friday. As I wrote on Wednesday, the stock probably needs some time to digest the prior gains in the first half of February, so this pullback to the 20-day line is probably just what the doctor ordered. I’d watch to see if the stock settles closer into its 20-day line at 45.97 as a lower-risk entry given that the stock closed Friday at 47.80.
Juniper Networks (JNPR) found support at its 50-day and 20-day moving averages on Friday as volume dried up nicely. This remains in a buyable position using the 50-day line at 27.97 as a selling guide.
Ocular (OCLR) has been removed from my buy watch list.
The two cyber-security names that I consider to be in the most buyable positon, Fortinet (FTNT) and Barracuda Networks (CUDA) continue to base in constructive fashion on their weekly charts. FTNT, below, is now in a three-weeks-tight sort of flag formation as weekly volume dries up sharply.
In my view this is just setting up to move higher, and it is simply a matter of when it finally decides to make a move. The stock has drifted down toward its 20-day moving average without actually touching it, so I consider it buyable here using that moving average at 36.32 as a maximum selling guide.
Barracuda Networks (CUDA) is also holding tight in what is now a 19-week base. The stock held the 50-day moving average on a pullback on Friday and closed up on the day in constructive fashion. The issue here is simply being patient and looking to pick up shares on any weakness down toward the 50-day moving average at 23.20. Like FTNT, I continue to think that it’s just a matter of time before CUDA breaks out as well. The fact that two stocks in the group are acting constructively as they go about building constructive bases is a good sign.
Symantec (SYMC) looks interesting here after it tested its 20-day moving average and closed back above the 10-day moving average on Friday. Volume dried up to -49% below average, so I see this as very buyable here using the 20-day line at 28.22 as a tight selling guide. It, along with CHKP, is one of the old-guard big-stock leaders in the cyber-security space currently.
Notes on other cyber-security names discussed in recent reports:
Checkpoint Software (CHKP) pulled into its 20-day moving average on Friday and held as volume picked up and the stock closed in the upper part of its daily trading range. This would put the stock in a lower-risk buy position here, using the 20-day line at 99.12 or Friday’s intraday low at 98.51 as tight selling guides
Palo Alto Networks (PANW) is expected to report earnings this week. Perhaps it can provide a catalyst for breakouts in its cousins, FTNT and CUDA.
As expected following its favorable earnings report, Square (SQ) gapped up on Thursday morning and set an intraday low of 16.32. While it did stall a bit on the day and close mid-range, the buyable gap-up (BGU) held up just fine on a day when the NASDAQ was getting smacked around.
I’m sure everyone is very excited to buy SQ here, but I think that being patient and looking for a test of the Friday low at 16.90 would offer the lower-risk option if one is looking for an entry. In that case the 16.32 intraday low is not that far down for a “teenaged” stock, but certainly any pullback from here that approached closer to that low would offer a much more opportunistic entry, should it occur.
If Twilio (TWLO) has a shot at getting anything going on the upside following the big-volume pocket pivots we saw over two weeks ago, then this is likely where it will need to make a stand. This current action where the stock has drifted in orderly fashion down to its 20-day moving average with volume drying up is pretty much what I’ve been looking for.
On Friday TWLO held up fairly well on the opening gap-down and found support along the 20-day line as volume dried up to “voodoo” levels at -52% below average. This is therefore quite buyable here using the 31.01 intraday low of Friday as a maximum selling guide. Alternatively, the 50-day line at 30.15 can serve as a wider selling guide for those who prefer it, but my thinking is that unless the market gets into serious trouble next week, it should make a move from here.
Activision (ATVI) looks very constructive as it posts a very tight close this past week on the weekly chart. Weekly volume is drying up sharply, even if we account for the holiday-shortened four-day trading week. In previous reports I’ve discussed the 10-day line at 44.36 (at the time) as near-term support for the stock on the daily chart, not shown.
While FTNT briefly dipped below the rising 10-day line on Friday, it closed two cents above the line and never moved below the lows of its two-week flag formation. It has also never closed below the 44.93 of its February 10th buyable gap-up (BGU) move. This looks fine and I appreciate the way it held tight in the face of Thursday’s NASDAQ sell-off. This continues to look buyable to me using the 20-day moving average at 43.23 as a maximum selling guide.
On Friday I happened to have lunch with a close Stanford friend who is one of the top programmers at ATVI, mainly responsible for designing and coding all facial movements for the characters featured in their games. He described the video-game names, including ATVI, Electronic Arts (EA), and Take-Two Interactive (TTWO), as “lipstick stocks,” which is another way of saying they sell products that people will buy in any economic environment.
What I find interesting about the group is that of the three, TTWO has the most consistent uptrend, but posted a loss in the most recent quarter, as did EA, while ATVI posted an 11% earnings gain on a 49% sales increase. In any case, I note that TTWO, not shown, has pulled into its 20-day moving average at 56.63, which might make it buyable there while using the line as a selling guide.
EA, on the other hand, is more like ATVI in that it has only recently broken out of a base. On Friday the stock pulled right into the top of the base and its 20-day moving average while holding well above the 84.13 intraday low of its February 10th buyable gap-up move. While the stock is within buying range of its base breakout through the 85 price level, pullbacks to the 20-day line at 85.03 would represent more opportunistic entries.
The interesting thing about EA is that the stock actually sold off in early February after it reported earnings. It didn’t gap-up until ATVI announced earnings, at which point the BGU was more of a sympathy move to its cousin’s earnings report. Go figure.
The cruise liner stocks Carnival Cruise Lines (CCL) and Royal Caribbean Cruises (RCL) are both bouncing around in tight ranges. This puts would-be buyers in the position of looking to enter on constructive weakness. Between the two I tend to prefer CCL, particularly since the company announced on Thursday that it was expanding into China.
That news triggered a pocket pivot move on a gap-up at the open, but the stock stalled and closed near the lows of the day. It still closed up on the day, and then found support at the 20-day moving average on Friday. I consider this buyable here using the 20-day line at 55.61 as a tight selling guide or the 50-day line at 54.26 as a wider selling guide.
Royal Caribbean Cruise Lines (RCL) posted a pocket pivot at its 10-day moving average on Wednesday, as I discussed in my report of that day, but reversed on Thursday after an attempt at new highs. That move, along with the stalling pocket pivot in CCL, was likely a function of the general market action. On Friday RCL also tested its 20-dya moving average but closed up on the day as volume dried up. This puts it in a lower-risk entry position using the 20-day line at 94.31 as your selling guide.
Notes on other long situations discussed in recent reports (stocks in lower-risk buy positions are denoted with a [B] after the symbol:
Caterpillar (CAT) has failed on another breakout attempt but is holding at its 50-day moving average. The action here has become too incoherent to trade with, so it has been removed from my buy watch list.
Charles Schwab (SCHW) [B] found support along its 50-day line on Friday and is in a buyable position here using the 50-day line at 40.69 as a maximum selling guide.
Clovis Oncology (CLVS) is a stock I would look to take profits on here. It has had a great run since I first discussed it down near the 40 price level in early January and likely needs some time to base-build. In the meantime, I would watch for any secondary types of buy points occurring here, such as an undercut & rally move or a pocket pivot somewhere within the base.
Eagle Materials (EXP) has been removed from my buy watch list. The materials names seem to be far too dependent on the news of the day regarding the Trump Administration’s forthcoming infrastructure initiatives, which appear to have been pushed out another year.
Incyte Pharmaceuticals (INCY) [B] posted a buyable gap-up on Friday after it was announced that it would be added to the S&P 500 Index. This can be considered to be buyable here using the 127.67 intraday low of Friday as your selling guide.
Glaukos (GKOS) just missed posting a pocket pivot on Friday as it found support at its 20-day moving average. Earnings are expected next week on March 1st, so there is perhaps not much to do here ahead of earnings.
Goldman Sachs (GS) [B] has pulled back to its 20-day moving average and the top of its prior base breakout where it comes into a lower-risk entry point using the 20-day line at 244.90 as a tight selling guide. Again, as with SCHW, financials appear to be dependent on further interest rate increases as well as the Trump Administration’s rolling back of Dodd-Frank legislation. If any of these scenarios don’t pan out favorably, then financials like GS and SCHW may not pan out either.
Nutanix (NTNX) [B] has pulled all the way back to its 50-day moving average where it held on Friday. If you think you can get a nice bounce out of this off the 50-day line ahead of earnings on Thursday of this week, then this would be the spot to buy it using the 29.30 intraday low of Friday as a tight selling guide.
Mobileye (MBLY) found support at its 10-day moving average on Friday, which is what I was looking for. I actually played this as a tactical short looking for just such a pullback to occur and I got away with it, but covered as the stock broke down to the 10-day line since at that point I tend to think of the stock as a long, not a short. This is typical of how I operate from time to time, but I would continue to look at pullbacks in MBLY down to the 10-day line at 45.88 as lower-risk entry opportunities.
ServiceNow (NOW) [B] has pulled into its 20-day moving average, putting it in a lower-risk entry position using the 20-day line at 90.74 as your selling guide.
Tableau Software (DATA) has undercut the lows of its current flag formation but found support at the 20-day moving average on Friday. What I would do here is look for a move back above the prior 53.30 lows in the flag base as a potential undercut & rally buy set-up.
Veeva Systems (VEEV) is holding tight ahead of earnings this week. Nothing to do until then.
One interesting development that I observed on Thursday was that the number of stocks coming through my short-sale screens increased a fair bit. This contrasted with my comments in the Wednesday mid-week report that I wasn’t seeing much on the short side. That all changed on Thursday.
Names discussed at the outset of this report, like X, TSLA, NVDA, and WB, represent stocks that I believe may have morphed into short-sale targets. Another one I discussed on Wednesday and which I also blogged about as a short-sale target on Wednesday along with NVDA is GrubHub (GRUB).
GRUB was shortable on Wednesday per my blog post at that time, and the stock broke down to its 200-day moving average on Thursday. It held the line on Friday as volume declined, which may set up a bounce back up toward the 10-day, 20-day, or even 50-day moving averages.
I would prefer to see a rally back up to at least the 20-day line at 38.14 as a more optimal re-entry point on the short side. That doesn’t mean the stock can’t just break below the 200-day line from here, but I would expect that at least a few days of consolidation along the line would occur first.
This is one to keep an eye on as a short-sale target into any bounces or rallies off the 200-day line that run into resistance at the 10-day, 20-day, or 50-day moving averages. The other possibility would be the formation of a short bear flag followed by a volume breach of the 200-day moving average, at which point the stock would become shortable at the line while using the 200-day line as a guide for an upside stop.
On the basis of what the indexes are doing, the current market rally phase remains intact. Notwithstanding that, we are seeing some breakdowns in leading stocks. Whether this is an early clue of an impending market correction remains to be seen, since there are still plenty of stocks acting quite well.
Perhaps if we start to see names like AMZN, FB, NFLX, and others that are currently engaged in what looks like constructive action, then we will see a more concerted market correction. But for now the market may simply do what it does best when one group of stocks breaks down, which is to rotate into other groups.
So as TSLA and NVDA split wide open, money may begin to push AMZN, FB, and NFLX higher. When it comes to owning big-stock NASDAQ growth names, those names are perhaps better bets for more upside in a continued market uptrend.
Meanwhile, I have no problem acting on short-sale set-ups when I see them. Despite the eleven straight up days for the Dow, it is still quite obvious how one could have shorted WB, TSLA, or NVDA and made some decent short-sale profits if they were alert to those set-ups in real-time on Thursday and Friday.
I even took the bold course of shorting Baidu (BIDU) at about 188.20 on Thursday after the close when the stock jacked about five points in the after-hours following its earnings report. My assessment was that user growth was slowing, despite the bottom-line beat on earnings, and that the after-hours gap would fail.
Of course, that was a trade for an experienced short-seller, but it certainly paid off on Friday as BIDU busted 9.47 points to the downside before finding support at its 50-day moving average. Now I’d watch for any rally back up to the 20-day line at 180.66 as a short-sale re-entry if I can get it.
For those of you (hopefully all of you) who follow me on Twitter, I noted that BIDU was looking like it might set up as a short depending on what happened after earnings were reported on Thursday afternoon. And so the after-hours rally up to about 190 turned out to be the rally to short into, although it is definitely something that is not for the faint of heart!
In this manner, to me BIDU was just another set-up that in this case happened to be an actionable short-sale set-up on Thursday afternoon. What the market is or isn’t doing, or how many days it has gone up without a 1% correction isn’t even considered. At the same time, I’m quite willing to take advantage of pullbacks in my favored longs when they look constructive, despite whatever the market is doing at the time and despite whether I’m making good money short some other stocks.
For my psychology, this is the best way to operate, as it sidesteps all the noise about how high and scary the market is. Normally, the market will naturally push me more in one direction or the other, long or short, depending on the specific stock set-ups I see in real-time.
This week the set-ups had more of a balanced feel, with both the long and short side becoming actionable in the right stocks at the right times. So for now, with the index rally still in force, and with apologies to one of my all-time favorite rock bands, Led Zeppelin, it remains a matter of The Song Remains the Same. Just watch the stocks.
CEO and Principal, Gil Morales & Company, LLC
Managing Director and Principal, MoKa Investors, LLC
Managing Director and Principal, Virtue of Selfish Investing, LLC