The Gilmo Report

February 28, 2018

February 28, 2018

The market has reached what I would call muddy waters here as the strong-thrusting v-shaped rally off the lows of over two weeks ago starts to lose momentum. Yesterday all the major market indexes posted losses of more than -1.2% on higher volume, and followed up with similar declines today. The NASDAQ Composite Index posted its third distribution day since jacking sharply off the February 9th lows. Note the cascading action off the peak over the past two days as volume has increased each day

 

GR022818-$COMPQ

 

The story is more or less the same for both S&P 500 and Dow Jones Industrials Indexes which also posted their third distribution days since the February 9th lows. However, a more bearish development for these NYSE-based indexes is the fact that both dropped back below their 50-dmas. So perhaps we’re going on a retest of the prior lows, and it is just a matter of seeing how low we go from here, if at all.

 

GR022818-$SPX

 

Netflix (NFLX) broke out on Monday from a very short, mini-cup-with-handle formation on the daily chart. But the weekly chart still shows this straight down and straight up move to new highs that I find a little difficult to buy into as a longer-term breakout in search of a longer-term trend. The bottom line is that this isn’t a base, at least on the weekly chart, and we’re seeing wedging action as the stock pushes into new high ground. Granted, we still have two days left in the week, but don’t be surprised if this starts to pull back.

 

GR022818-NFLX

 

Amazon.com (AMZN) is showing the exact same type of action on its weekly chart, despite breaking out to new highs this past week. As with NFLX, this is not a base to buy into, and in both the case of NFLX and AMZN, we may still be looking at “Flying V” short-sale set-ups as these stocks wedge up into new high price ground.

I suppose I could be wrong given the volatile environment we live in these days, but at the very least these are not patterns I want to buy into, end of story. For nimble traders, some of these might be shortable in radical fashion, using the recent highs as your guides for relatively tight upside stops.

 

GR022818-AMZN

 

And Nvidia (NVDA), which is another “Flying V” formation, is exhibiting some signs of potential failure here as it rolls below the 10-dma en route to what appears to be an imminent test of the 20-dema. If it busts the 20-dema, then it may very well morph into a short-sale at that point. But, as with NFLX and AMZN, the weekly chart shows us no real, solid base structure that can be bought into.

 

GR022818-NVDA

 

Meanwhile, while you can’t really fault Apple (AAPL) for its sharp Flying V rally off the lows of over two weeks ago, the pattern remains suspect, in my view. The wild, v-shaped rally off the lows of over two weeks ago culminated in two failed attempts to break out into all-time high price ground over the past two days. To me, this looks vulnerable to downside failure, and despite those who might try and tell you this is a base breakout you should buy into, I don’t view it as such.

The risk of buying into this pattern is simply too high, in my view, to yield much big upside potential from here. Sure, if you practiced the BTFD method of buying the stock off the lows around 150, you got a nice trade, but substantial upside from here right near the highs? I think one is asking for a bit too much at this stage, and I would in fact view this pattern as more failure-prone in this position than I would as bullish. And, in that sense, it may set a cautionary tone for the market in general.

 

GR022818-AAPL

 

Because of the jagged nature of its chart, no matter how far Tesla (TSLA) moves in one direction or the other, it always seems to find resistance or support at some logical level. Here we see that this week the stock found resistance at the logical 360 price level, and promptly reversed back to the downside from there as selling picked up substantially. The trick with TSLA is to remain flexible and willing to re-enter the stock on the short side as it rallies up through various resistance levels.

So even though it did clear the 200-dma on Monday, that merely brought resistance around the 360 price level into play as a new short-sale point. Short-selling most definitely requires that one be persistent. In this case, coming after TSLA on the short side yesterday as it approached the 360 price level would have worked well, at least over the past two days. It now appears poised for a test of the 200-dma, which lies just below, so we’ll see how it does once it gets there.

 

GR022818-TSLA

 

Both Twitter (TWTR) and Snap (SNAP) are getting a little shaky here, but of the two TWTR is holding up a little better in its pattern. However, TWTR stalled out today at its 10-dma and I would only be interested in looking at it as a long entry if it a) got down to the 20-dema at 30.51, and b) the general market isn’t falling apart.

Meanwhile, as things pertain to Snap (SNAP), it is now on life support as it clings to life along the 20-dema and just above the prior buyable gap-up (BGU) low at 16.96. If the general market continues lower, I would not be surprised to see the stock test the 50-dma and 200-dma down below 16. Mostly, however, TWTR and SNAP both demonstrate that there isn’t much upside to be found in either of these stocks currently.

 

GR022818-SNAP

 

And speaking of failing to make any long-side progress, Facebook (FB) has given up on its 50-dma today as it also dropped below its 20-dema and 10-dma in succession as selling volume picked up. Basically, an incoherent pattern for an incoherent market, and FB essentially triggered as a short-sale at the 50-dma earlier today as it first opened up above the 50-dma and then reversed back below the line.

It is again acting more like a late-stage failed-base (LSFB) short-sale set-up than a long, although it has exhibited schizophrenic action over the past couple of weeks that makes it difficult to read. That alone is a strong reason to avoid this as a long for now, especially if the general market continues to move lower from here.

 

GR022818-FB

 

Last week I talked about the fact that I would view Weight Watchers (WTW) as a short-sale if it broke below its 20-dema. That’s precisely what it did today after gapping up to its prior highs this morning on the heels of a strong earnings report last night. But that move quickly reversed course, and WTW ended the day posting a big, ugly outside reversal to the downside on heavy selling volume. If you were alert to the intraday reversal on your 620-intraday chart, the stock was in fact shortable earlier in the day.

Now with it sitting just below the 20-dema, we can still consider it shortable here while using the 20-dema as a guide for a tight upside stop. In any case, WTW is looking like a busted leader, unless it can quickly regain its feet.

 

GR022818-WTW

 

Blackberry (BB) has failed to hold the 50-dma after posting a roundabout pocket pivot at the line last Friday. Selling volume, however, has been non-existent, but this likely won’t work if the general market keeps coming off. Right now, BB is about 2% below the 50-dma, which means you wouldn’t want to give it more than another 1-3% on the downside before stopping out if you are giving it more room beyond the 50-dma.

The bottom line is that I’m not very pleased with the stock’s inability to follow through with more vigor after last Friday’s pocket pivot, but that is of course a function of the general market. If it can quickly regain the 50-dma, then I might be willing to re-enter the trade, provided the general market improves.

 

GR022818-BB

 

I blogged this morning about the similarity between Square (SQ) today and Sunpower (SPWR) back when it topped in late 2007/early 2008. Members can refer to that blog post for the SPWR chart, but here we can see that SQ fully flaked out on its breakout attempt today after reporting earnings last night. The stock ended the day up a mere 14 cents, printing 46.05 at the bell after hitting an intraday high at 48 even.

So, if we think about this for a second, what would make it begin to look more like SPWR in 2007/2008? Well, as with all late-stage, failed-base, short-sale set-ups, the initial clue is a breach of the 20-dema. So, from here we’d want to see SQ break below the 20-dema of 43.89 to help confirm a possible LSFB short-sale set-up. If you study the SPWR example, it took a couple of days to break down after failing to follow through on a post-earnings breakout attempt.

While the similarities are there, there is certainly no guarantee that SQ will play out exactly like SPWR. I still think this has potential to morph into an LSFB short-sale set-up IF we also see the proper general market context of a continued correction or at least a retest of the February 9th lows.

 

GR022818-SQ

 

I can’t say that any of the Chinese-related names I discussed over the weekend, have been much of an inspiration this week. Baozun (BZUN) is now expected to report earnings on March 6th, so there’s nothing to do there. Weibo (WB) has dropped back below its 20-dema, so that I’d only be willing to buy into the stock here if it were to regain the 20-dema, and Momo (MOMO) failed to hold its bottom-fishing buyable gap-up (BFBGU) of last Friday.

However, there isn’t much to do with MOMO anyways, since it isn’t expected to report earnings until March 13th. Sina Corp. (SINA) failed on a breakout attempt Monday, and has pulled back into its 20-dema as volume, which could be considered a lower-risk entry point using the 20-dema as your selling guide. Overall, all, however, Chinese names are a just a pile of blah.

Meanwhile, Alibaba (BABA) is dipping right back into its 50-dma as volume recedes, declining to just below average today. Technically, this would put the stock in a lower-risk buy position, using the 50-dma as a selling guide. However, a breach of the 50-dma would trigger this as a late-stage, failed-base (LSFB), short-sale set-up at that point. Therefore, this is a two-sided situation, and where BABA goes from here will likely be dependent on where the general market goes from here, so play it as it lies based on the technical evidence as it emerges in real-time.

 

GR022818-BABA

 

Both SolarEdge Technologies (SEDG) and MuleSoft (MULE) remain extended from their recent buyable gap-up moves, and aren’t acting too badly considering the general market action. For now, references for each stock lie at their 10-dmas, which for SEDG is 47.34 and for MULE is 29.66.

Planet Fitness (PLNT) remains just within buying range of its recent buyable gap-up/base breakout, with the 35 price level serving as near-term support. Over the weekend, I noted that the stock is something of a cousin stock to WTW, but with WTW reversing and failing today, it could strike a cautionary note for PLNT. Bottom line: While this breakout remains within buyable range, be prepared to keep your selling guides in mind just in case it fails.

 

GR022818-PLNT

 

In general, I don’t consider it a good sign for the market when leaders that might be on the mend suddenly bust support on heavy volume. That’s what happened to Caterpillar (CAT) today. The stock busted the 50-dma on heavy selling volume after looking relatively strong yesterday as it pushed further above the 50-dma. But that all ended today as the stock morphed into a short-sale at the 50-dma. For now, this is out of play as a long idea.

 

GR022818-CAT

 

Taking its cue from the general market action, Deere & Company (DE) is retesting its 50-dma as selling volume picked up today. Technically, this could bring it into a lower-risk entry position if we see volume decline tomorrow, but I would keep a tight leash on this thing if it busts the 50-dma. There’s always the possibility that it will do what CAT did today by busting the 50-dma and morphing into a short-sale target at that point.

 

GR022818-DE

 

Steel names are weakening here as both Arcelor Mittal (MT) and Schnitzer Steel (SCHN) have broken back below their 50-dmas. Both stocks look almost identical on their daily charts, so showing MT here, which is far more liquid, will suffice. This goes from looking quite nice as it holds tight along the 50-dma with volume drying up sharply to looking not so nice as it breaks the 50-dma on increased selling volume.

Now, I would look at any small move back up toward the 50-dma as a short-sale entry. While SCHN looks the same, it only trades 364,000 shares a day on average so would not meet my liquidity requirements, whereas MT does with its average daily volume of 3.4 million shares.

 

GR022818-MT

 

Meanwhile, U.S. Steel (X) remains the strongest of the group by virtue of its ability to hold tight sideways and remain above both its 10-dma and the prior breakout point. Of course, if the group as a whole is weakening, then we could see X breach the 10-dma and move lower, perhaps to test its 20-dema down at 40.77.

 

GR022818-X

 

The weekly chart of X reveals a straight-down-and-straight-up move in February, which may be suspect. Therefore, at the very least, if I were interested in buying X, I would wait for a pullback to the 20-dema as the more opportunistic option here. Otherwise, based on the action of the other steel names, I might be inclined to short a volume breach of the 10-dma.

 

GR022818-X Weekly

 

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 find that this market is still one where one can be crossed up pretty easily. Things started to look weak last Wednesday, then they improved over the weekend, and now we’re back to where things are looking less constructive. Of course, this is due to the action of the past two days where we’ve seen the major market indexes cascade lower off Monday’s highs with volume picking up each day. This has been accompanied by the “Flying V” leaders starting to run out of gas.

Intraday, the action has remained volatile, and I find myself pulled this way and that as stocks fly around all day long before coming apart late in the day as they have over the past two days. Somehow, this doesn’t strike me as the stuff of great bull market opportunities. For now, I remain cautious on the long side, and ready to pounce on the short side depending on how things play out from here. In the case of something like TSLA, which has been my “go to” short in the event of market weakness, pouncing yesterday as it failed near the 360 resistance level was the ticket.

Now we’ll see what other opportunities on the short side, as I’ve outlined in this report, will perhaps emerge in the coming days. However, I tend to think that unless you’re willing to take an active approach here, the best place to be may be mostly in cash. While there is a breakout here and there that can be bought, such as with PLNT, for example, there isn’t a lot of traditional set-ups there for the taking. And that alone is a reason to take things slow.

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.