The Gilmo Report

February 7, 2018

February 7, 2018

All hell broke loose on Monday as the Dow slid to nearly -1,600 points lower on an intraday basis before closing down over 1,000 in the worst point decline in its history. The sell-off had the feel of panic, at least in the short-term, but at that point the indexes were only down about 7-8% below their recent peaks. That qualifies as an intermediate correction, and on Friday the indexes undercut their December lows, triggering a big undercut & rally (U&R) move from there.

This is quite evident in the daily chart of the NASDAQ Composite Index which undercut its December lows and came down right on top of a prior area of consolidation that formed in November. At that point, with stocks in extreme oversold positions, the market was set for a logical reaction rally, as I tweeted early in the day yesterday. This is something I have talked about many times in my reports in terms of assessing when the market might be ready for an oversold bounce. Yesterday that played out to a “T.”

 

GR020718-$COMPQ

 

But so far, the rally has lasted only one day as the NASDAQ stalled out and reversed at its 50-dma on lighter volume. While it’s difficult to say whether yesterday’s low marked the final terminus of the correction, one could argue that given the level of technical damage on this severe break off the peak it could go further over time. What I do know for sure is that almost all leading stocks now have busted chart patterns, and I don’t see clear long entry set-ups in any of them outside of yesterday’s sharp bounces off deep support levels.

The S&P 500 Index pulled a similar U&R move yesterday from an oversold position, but reversed today at its 50-dma on light volume. For the most part, it appeared that the reaction rally simply ran out of gas. In the final half hour, by my count, the Dow gave up 292 points to close down -19.42 after being up some 270 points going into the final half-hour.

 

GR020718-$SPX

 

In my view, these types of severe, oversold undercut & rally moves are mostly playable as short-term trades by nimble traders who are quick on their feet. The moves can be extremely rewarding if one has the courage to act at the precise moment and recognizes that the moves may be short-lived. I illustrated this last night with a blog post on Activision Blizzard (ATVI), which was playable off the 50-dma. Another example would be something like Netflix (NFLX), which bounced right off its 20-dema in a less compromised position and rallied sharply from there.

The first component to taking advantage of this is to be alert to the index’s as they start to undercut prior lows, as was the case early yesterday morning when the Dow was down 567.01 at its low point. At that point, the thing to do is to scan your long watch list for leaders coming right into areas of logical support. In the case of NFLX, this would have been relatively easy to step into, since it was right at its 20-dema. Risk is therefore under control since one can use the 20-dema as a tight selling guide.

 

GR020718-NFLX

 

A less appetizing situation is seen in Nvidia (NVDA), which had failed on a prior base breakout on Monday as selling volume ballooned. By the close on Monday, the stock held its 50-dma, but gapped below the line on Tuesday morning when the general market gapped down. That certainly looked like doom, but the stock then regained the 50-dma and rebounded sharply.

This is, of course, crazy action that is difficult to handle. The first point I would make here is that using the 20-dema as a selling guide would have solved at least half your problem, since you would have been forced out last week when the stock dropped below the 20-dema. That would have at least put you in position to think about playing the stock off the 50-dma on the moving-average undercut & rally (MAU&R) yesterday.

Otherwise, if you’re still sitting there long the stock as it busts the prior base breakout point playing Humpty Dumpty, you’re in a tough position. The odds are that you would have been shaken out of the stock on Monday or Tuesday.

 

GR020718-NVDA

 

Using the 20-dema as a final selling guide would have also been quite useful in keeping one in Weight Watchers (WTW) as it held the line throughout the carnage over the past few days. That would have left one long the stock and able to participate in a huge-volume pocket pivot move off the line today.

 

GR020718-WTW

 

For me, the whole idea in keeping tight trailing stops is embodied in this concept that I’ve talked about many times. That would be the tendency of this market to quickly pull the rug out on investors as it did over the past few days. In a matter of just a few days all the January gains evaporated. Poof.

Facebook (FB) was a sell early in the day on Monday as it failed to hold its prior breakout point and all three moving-averages below that, closing just below the 50-dma. Yesterday it reversed back up through the 50-dma on heavy volume but was unable to hold the line today as it closed back below on above-average volume. This is a busted pattern, and from here there is no clear long-entry set-up. However, one could view this as a short using the 50-dma as a tight upside stop.

 

GR020718-FB

 

Amazon.com (AMZN) has acted reasonably well after finding support at the 20-dema yesterday. For now, it is holding above its 10-dma but could easily drop below the line in any continued market correction. For now, I would simply use the 20-dema as a maximum downside selling guide.

Tesla (TSLA) reported earnings after the close and as I write is dead flat in afterhours trading. This should be watched tomorrow as it could present some sort of actionable set-up, although in which direction is quite unclear given the small after-hours moves. However, given the state of the general market, I would look for any move below the 20-dema 340.88 as a trigger for a short-sale entry.

 

GR020718-TSLA

 

Take-Two Interactive (TTWO) reported earnings after the close and as I write is trading down.  This is a busted pattern and has been removed from my long watch list at this point, and should have been sold after failing on its recent base breakout attempt.

Even Rise Education Cayman Ltd. (REDU), which was previously the most coherent, tight-acting pattern in this market, has gone haywire. The stock completely fell out of bed on Monday, busting hard and down to its 50-dma on heavy selling volume. It then found support at the 50-dma yesterday on higher, above-average volume which was high enough for a supporting pocket pivot. But the stock is starting to exhibit uncharacteristic volatility and was a clear sell on Monday when it failed to hold the 20-dema.

 

GR020718-REDU

 

Square (SQ) posted a supporting pocket pivot at the 50-dma yesterday, but volume was only average on a day where most stocks rebounding off deep support were showing heavy buying volume. The rally gave way today at the 20-dema as volume declined sharply. I view this as a short here using the 20-dema as a guide for a tight upside stop.

 

GR020718-SQ

 

First Solar (FSLR) was one of my short-sale ideas from the weekend report and it has moved lower, but is now extended to the downside. From here, however, I’d look to use any rally back up toward the confluence of the 10-dma, 20-dema, and 50-dma, all within the 66.75-67.71 price area, as a potential short-sale entry opportunity. Note, however, that the stock is one of the weakest in the market as it failed to generate any upside during yesterday’s strong index reaction rally. Earnings are expected on February 21st.

 

GR020718-FSLR

 

Over the weekend I discussed Alibaba (BABA) as a late-stage, failed-base, (LSFB) short-sale set-up after it breached the 20-dema. As I indicated, any rally back up into the 20-dema would offer a potentially optimal short-sale entry opportunity. On Monday, the stock briefly rallied up into the line where it became shortable. It then rolled back to the downside, closing below the 50-dma.

Yesterday we saw the stock find support around the 50-dma as the indexes staged their big reaction rally, but today BABA reversed back below the 50-dma as buyers failed to follow through. I view this as a short here using the 50-dma as a guide for a tight upside stop. Keep in mind that this is in play as a short-sale at the 20-dema, so this is a lower entry in the pattern. In any case, the LSFB short-sale set-up is in play here.

 

GR020718-BABA

 

Weibo (WB) was also discussed as a potential LSFB in progress as it failed and broke below its 20-dema on heavy selling volume. At that point I indicated that a rally back up into the 20-dema could set up a short-sale opportunity, and that turned out to be the case on Monday. WB rallied up into the 20-dema early in the day and then reversed on heavy volume, breaking down to its 50-dma.

Yesterday, the stock posted a supporting pocket pivot at the 50-dma, but was unable to follow through with additional upside today. However, it held the 50-dma as volume declined. Where this goes from here is anybody’s guess, but a breach of the 50-dma would trigger this as a short-sale at that point, using the 50-dma as a tight upside stop. Earnings are expected February 22nd.

 

GR020718-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.

Volatility in this market, particularly intraday volatility, is off the charts currently. Even today, going into the last half-hour the Dow was up some 270 points, but in the span of less than 30 minutes gave up all those gains and more to close down -19.42, as I noted at the outset of this report. Yesterday, the Dow hit a low at down -567.01 points near the open and then swung around all day in a wide range before closing up 567.02 points, nearly the mirror-image of its downside move early in the day.

This makes it very difficult to operate in this market whether one is trying to play it long or short. As far as I’m concerned, cash is king for now, and only nimble traders should attempt to come into this market on either side, depending on the precise real-time set-ups they see and believe to be actionable.

This is a short report for a good reason. When there isn’t much to do, or the volatility increases risk to a point that makes doing anything a potentially disastrous proposition, one doesn’t do much. I cannot, in good conscience, throw out an entire smorgasbord of long and short ideas when I believe the environment presents probably the highest degree of uncertainty and volatility we’ve seen in a long while. Until I see things settle down, we should assume that the extreme volatility is a sign of a highly dangerous market, and respect it as such. That is all.

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.

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