The Gilmo Report

February 4, 2018

February 4, 2018

Investors were finally provided a reminder of what a decent sell-off is like as leaders across the board were raked with heavy selling volume on Friday. NYSE breadth was about as ugly as it gets with decliners leading advancers by a whopping 2747 to 304. The volatile intraday action we saw earlier in the week looked cautionary, as I noted in Wednesday’s report, and we saw that funky action come to fruition in the form of a full-blown sell-off on Friday.

The sell-off doubled the “one-percenter” we saw on Wednesday as the S&P 500 Index slumped -2.12%, blowing through its 20-dema on higher selling volume. The Dow Jones Industrials, not shown, came off -2.54%, which isn’t necessarily a brutal sell-off, but the optics were hard on the eyes as that added up to -665.75 Dow points. The chart of the S&P, below, nevertheless reveals a sharp sell-off within the context of an orderly prior uptrend, no matter how you slice it.

 

GR020618-$SPX

 

The NASDAQ Composite Index looks identical to the S&P as it also blew through its 20-dema on higher but also heavy selling volume. All that churning around the 10-dma on heavy volume over the prior two days was already flashing cautionary signals, as noted on Wednesday, and Friday’s breakdown confirmed its negative implications.

 

GR020618-$COMPQ

 

The sell-off was bad enough that not even gold was able to hold up, as the SPDR Gold Shares (GLD) gapped back down to its 20-dema and closed right at the line on Friday. Volume was heavy, and in my mind, this speaks to the idea that when big money is liquidating stocks and bonds, related assets can also come under pressure. That means that if stocks sell off hard, gold becomes another fungible asset and source of funds, particularly if such a sell-off triggers margin calls.

 

GR020618-GLD

 

The culprit allegedly responsible for the weak action in stocks over the past few days has been interest rates. The Ten-Year Treasury Note yield, shown below, had a sharp upside move on Friday, taking it to its highest level since January 2014. This in turn was triggered by the allegedly strong jobs report where we saw 200,000 new non-farm payrolls vs. the expected 180,000. But we should remember that 200,000 jobs barely fall outside the margin of error for this particular report.

Bonds sold off, and so did stocks, so there was no movement of money out of bonds and into stocks in what had more of the feel of a general liquidation. And while some might call the sell-off “well contained,” that picture was not one that could be consistently applied to every stock in the market as some names came unhinged.

 

GR020618-$TNX

 

A case in point would be (AAPL) which gapped up to a peak of 174.25 after reporting earnings in the after-hours on Thursday. That high didn’t hold up by Friday morning, however, as the stock opened up over eight points lower at 166 and then just plummeted straight down to its 200-dma on extremely heavy volume. That, by no stretch of the imagination is “normal” selling. Now it remains to be seen as to whether the stock can rebound off the 200-dma, which has been a long-term support reference for the stock, or whether it slices right through it.

 

GR020618-AAPL

 

Facebook (FB) is perhaps an example of more normal selling as it pulled right back to the top of its prior breakout point as volume declined below Thursday’s strong breakout levels. Volume still came in at above average, but the good news is that the stock didn’t entirely fail on the breakout on massive selling volume. Technically, this could be treated as a lower-risk entry on Monday, using the 10-dma as a tight selling guide. Of course, this assumes that it doesn’t gap down Monday morning, but we shall see.

 

GR020618-FB

 

Intel (INTC) busted well below the 48.12 intraday low of its prior post-earnings buyable gap-up and dipped below its 20-dema on Friday. At the same time, it filled the gap of two Fridays ago, which could set up a rebound from there. However, the stock is certainly off the table as a buyable gap-up at this stage, obviously. But the gap-fill could set up an opportunistic trade on any rebound off the lows of the gap-down “falling window,” as I’ve highlighted on the chart.

 

GR020618-INTC

 

Netflix (NFLX) looks normal as well, holding nicely at its 10-dma on Friday and closing up amidst all the selling madness. Volume was lighter but came in just above average, which can be viewed as constructive in the face of a sharp market sell-off. Assuming it doesn’t gap down below the 10-dma on Monday, this is otherwise the first reference for a lower-risk, buyable pullback. A deeper market sell-off could, however, see the stock test the 20-dema and the low of the prior buyable gap-up move of two weeks ago after earnings.

Amazon.com (AMZN) gapped up after reporting earnings Thursday after the close, but gave up most of its gains on Friday as it came in and closed near the lows of its intraday range. It still closed above its 10-dma, so it hasn’t broken down completely by any stretch of the imagination. For now, I don’t see anything to do here until we get a sense of where this will settle down and find solid support.

Nvidia (NVDA) is expected to report earnings this Thursday, February 8th. The stock pulled right into its 20-dema on Friday and held, but selling volume was above average. I see nothing to do here given that earnings are pending this week.

Tesla (TSLA) pushed right back up to its prior January highs on Thursday and promptly reversed back to the upside. This is becoming too predictable as TSLA swings from resistance to support and back again as the archetypal swing-trading stock. Other than treating this as a swing-trading target on both the long and short side, there isn’t much of a uniform, coherent trend to play ahead of earnings, which aren’t expected until February 7.

 

GR020618-TSLA

 

Take-Two Interactive (TTWO) spun around wildly on Thursday after announcing yet another delay to their highly-anticipated new game, “Red Dead Redemption.” That sent the stock down below its prior breakout point before it stabilized and closed about mid-range on heavy volume. On Friday, TTWO sold back down to the breakout point. Right now there is nothing to do here ahead of this Wednesday’s expected earnings report.

Over Wednesday and Thursday on an intraday basis, the stock had about a 10% move on the breakout, which would have given investors a decent swing-trade ahead of earnings, but no more. Technically and objectively, however, the stock is sitting right on top of its prior base, which puts it in a lower-risk entry position, the upcoming earnings report notwithstanding.

 

GR020618-TTWO

 

Arista Networks (ANET) held support at its 20-dema but needs to hold that support if it is to survive any continuing market carnage. With earnings expected on February 15th, I would be inclined to take profits here and lay back, especially if the general market sells off further this coming week.

In my Wednesday report I wrote that one could take profits on Caterpillar (CAT) as it wavered just below the 20-dema, and the stock has moved lower since. On Friday it headed straight down toward its 50-dma on heavy selling volume, and looks set to meet up with the line this week. At that point, one can see whether the pullback is buyable at the 50-dma, while using the line as a tight selling guide.

 

GR020618-CAT

 

Weight Watchers Int’l (WTW) has started to live below its 10-dma, but as I wrote on Wednesday, I would look for pullbacks to the 20-dema as the best, lower-risk entries. A report that Oprah Winfrey isn’t interested in running for President (can’t say I blame her) came out on January 25th, which started the stock moving to the downside. Earnings are expected on February 28th, so if the stock can hold the 20-dema, my maximum selling guide for the stock, it may remain viable.

On the other hand, the upside move it had in January since the “voodoo” entry on January 5th as I discussed in the report at that time has been a torrid one, and taking profits isn’t necessarily a bad idea ahead of earnings.

 

GR020618-WTW

 

Apptio (APTI) is expected to report earnings on Monday after the close, so there’s nothing to do here ahead of the report. The stock has acted well as it continues to move tight sideways along the 10-dma, but the main issue now is whether some sort of strongly actionable move occurs after earnings.

Cloudera (CLDR) came off with the market on Friday, and as small-caps will often do, it sold down about 2 times what the market did. Volume was extremely light, and carried the stock down just below the 20-dema, but along the rising trendline it has followed since the lows of mid-November. Had the market not gone into correction mode, the stock might have moved higher off the 10-dma where it was holding in tight fashion before Friday.

But small stocks like CLDR are often easily buffeted about during a market sell-off, even if on light volume. This was the case on Friday, and assuming the market does come off further this coming week, the stock can be viewed as being in a lower-risk entry position.

 

GR020618-CLDR

 

Rise Education Cayman Ltd. (REDU) is pulling back to its last breakout point as the market drags it down. The 20-dema at 15.62 serves as near-term support, which I first called buyable when it was sitting along the 10-dma on December 22nd.  Then it was trading at 12.19. It has since reached a peak of 15.66, over 28% higher. So, one can certainly consider taking profits if the stock cannot hold the 20-dema.

 

GR020618-REDU

 

My three big cloud names, Salesforce.com (CRM), Workday (WDAY) and ServiceNow (NOW), are all holding recent breakouts, but should be watched for possible breaches of support. CRM dipped below its 20-dema on Friday, which I consider a breach of near-term support. NOW is way extended but holding support above its 10-dma. I would use this as my selling guide in case the general market continues lower and drags the stock down with it.

WDAY is sitting right on top of its recent base breakout point, where it found some support on Friday during the general market sell-off. Of the three big clouds, it is in the most reasonable lower-risk entry position. The 20-dema at 114.74 would represent your maximum downside selling guide. However, be alert to any failure at the 20-dema, which could trigger this as a late-stage failed-base (LSFB) short-sale set-up.

 

GR020618-WDAY

 

Square (SQ) is starting to pull in here after approaching its prior highs on Wednesday. At that point, it was moving higher on increased volume, but note how overall buying interest was waning. So, as the market came in, so did the stock, and it is now testing its 20-dema after reversing at the 10-dma on Friday. In fact, the stock looked strong early in the day as it rallied while the general market was coming off sharply, but it could not hold up and turned lower by the close.

For now, the 20-dema is my near-term selling guide. Don’t lose sight of the possibility that SQ could morph into a base-failure here and hence a short-sale target on a breach of the 20-dema. Just because one research firm says the stock is the “next Amazon” with a $62 price target doesn’t mean it is impervious to a sharp decline.

 

GR020618-SQ

 

I would avoid falling in love with SQ just because we’ve had a successful run from the initial undercut & rally set-up down around 36, where I first liked it per my discussions of the stock back in December. The stock has had a 31% run from there, and has now climbed up the right side of a short cup formation. You have five weeks down and four weeks up before this past week saw the stock reverse on above-average weekly volume.

This is why I think you must be open to this as a possible short if it begins to break down. It’s not uncommon for stocks to have a climax top, break down, and then rally back up near the prior highs before breaking down again. In this case, the 20-dema becomes a crucial guide in determining when the breakdown may be starting to occur.

 

GR020618-SQ Weekly

 

I am reminded of SunPower (SPWR) back in late 2007 and early 2008. The stock also had a climax top in November of 2007 and then came down hard, setting up again in an undercut & rally move off the lows and the 50-dma in the latter part of November 2007. It spent some time building a handle before breaking out in late December. That breakout failed and the stock blew apart from there.

 

GR020618-SPWR 2007

 

While the daily chart looked “constructive,” you could pick out the flaws in SPWR’s weekly chart, which showed a narrow cup-with-handle formation following a prior climax top. Notice the breakout attempt on light weekly volume. Whether SQ pans outs the same way is still an open question, but I offer this analysis in the spirit of remaining entirely objective about the actual situation as it develops in real-time and thus open to any flaws.

Do not let starry eyes get in the way of seeing the real picture. Secondly, do not become swayed by the utterings of analysts who see what they want to see.

 

GR020618-SPWR Weekly 2007

 

First Solar (FSLR) moved up toward its 20-dema on Thursday, where I considered it shortable per my discussion in Wednesday’s report. On Friday the stock closed below the 50-dma for the first time since October of last year. What makes me think this is more of a short than a long here is the fact that my indicator bars at the top of the chart have gone completely red, or what I call “Code Red.” I now view this as a short here using the 50-dma as a tight upside stop. Earnings are expected on February 21st.

 

GR020618-FSLR

 

Alibaba (BABA) has morphed into a late-stage failed-base (LSFB) short-sale set-up here as it breaches the 20-dema and the prior breakout point. The stock gapped down on Thursday after reporting earnings, sending it back below the $200 Century Mark. Selling volume was quite heavy on Thursday as the stock initially tried to bounce off the top of the prior base on an intraday basis but then failed to close near the lows of the day. From here, I would look at any rallies up to the 20-dema as possible short-sale entries, using the 10-dma as your guide for an upside stop.

 

GR020618-BABA

 

Weibo (WB) is also starting to show the initial signs of a potential LSFB in progress as it breaches its 20-dema on heavy selling volume. As I wrote on Wednesday, I viewed the stock as extended, and that I would lay back for now as it digests its prior gains. Well, the stock is now developing a case of indigestion as it tests the top of its prior base. A rebound up into the 20-dema could set up a short-sale opportunity. Earnings are expected February 22nd.

 

GR020618-WB

 

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.

Note that in my Wednesday report I was already removing names from my long watch list, such as CSX, MULE, SFIX, AMAT and others while advising to take profits on CAT and YY. On Friday all these names sold off further. Most notably, CSX busted its 50-dma, while AMAT gapped down and looks like it’s headed for its 200-dma. So, the signs were there, as I was removing names from my long watch list before the fact, and Friday’s sell-off merely serves to confirm this.

Meanwhile, we are seeing breakdowns in other leaders, such as the Chinese names, for example. If names like BABA pan out as late-stage failed-base (LSFB) short-sales set-ups, then we might start to watch for others to show up among stocks that are currently holding up. That would include SQ and WDAY, for example.

Meanwhile, in situations where stocks are holding up well, such as with FB, NFLX, or NVDA, then it is simply a matter of sticking to your selling guides. For those who are open to the short side, it is also often possible to short a stock once the 20-dema is broken following a prior base breakout. A great example of this is Universal Display (OLED). Note how the initial indicator came in the form of a breach of the 20-dema on heavy selling volume, such as you’re seeing right now in WB, for example.

Confirmation of the LSFB occurs when the stock busts the 50-dma, and note how OLED briefly tried to rally back above the 50-dma seven trading days ago before dutifully breaking lower. That’s textbook acting like textbook is supposed to act. If we start seeing more of these textbook LSFB’s pan out, then we will likely be in a full-blown market correction at that time. Therefore, I want to be alert to these situations as they potentially develop in real-time, as I often find myself going short that which I was just long.

 

GR020618-OLED

 

If we have a sharp gap-down open on Monday, which is currently unknown until we see the futures open for trading on Sunday afternoon, then we might have a short-term low. It will then be crucial to see how things play out on any subsequent rally.

Meanwhile, I will let the set-ups guide my actions. In this way, the market may naturally move one more toward playing the short side if more short-sale set-ups appear in real-time should things start to deteriorate further. Otherwise, I don’t see a big problem in taking at least partial profits in names that are extended, or starting to break near-term support levels as discussed above. Stay alert, and let the set-ups and technical action guide you in the right direction.

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.