The Gilmo Report

July 1, 2018

June 30, 2018

The NASDAQ Composite Index briefly undercut its 50-dma on Thursday morning, as I indicated it might in my Wednesday report. That set up the context for an oversold bounce off the 50-dma that carried as high as the 20-dema on Friday. The upside push on Friday was no surprise given that it was also month-end, quarter-end, and the end of the first half of 2018. The bounce was also logical given how far down so many leading stocks had sold off over the prior few days.

By the close on Friday, the NASDAQ was trading near its intraday lows and below its gap-up opening levels. What we have now is a textbook oversold rally into resistance at the 20-dema with a weak close on Friday. It is now a matter of seeing whether this bounce has legs, or whether it will soon roll over again. For now, however, the action looks bearish.

 

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The S&P 500 Index had already undercut its 50-dma on Wednesday, and Thursday’s gap-down move ended up reversing to close just underneath the line. But, taking its cue from the NASDAQ’s bounce off its own 50-dma, the S&P gapped back up through its 50-dma on Friday, but stalled badly at the 10-dma and 20-dema on Friday to close near its intraday lows and lower than it opened.

Volume was lighter as buyers failed to show up on what looked to me like a weak window-dressing session. Sellers pelted the market into the close, resulting in a weak print at the closing bell. Both the S&P and the NASDAQ simply appear to be in short, five-day bear flags, but remain above their 50-dmas. We shall see if that holds up this week.

 

GR070118-$SPX

 

Big-stock NASDAQ leaders look a lot like the indexes, although some are perhaps holding up better than others. However, that may simply make them the next proverbial shoes to drop. Netflix (NFLX), for example, remains above its 20-dema but was tagged with some heavy selling volume on Monday as it gapped down off its all-time highs.

On Wednesday, the stock tried to rally strongly but reversed badly on heavy selling volume. On Thursday, NFLX found support again near its 20-dema, only to stall at the 10-dma on a lower-volume bounce on Friday that ran out of gas, not unlike the index rally we saw on the same day. Since its gap-down break below the 20-dema on Monday, the stock has been shortable each time it has rallied above the 10-dma.

In this position the next move is not necessarily easy to predict. But, if the general market continues to weaken, and we see the NASDAQ break below its 50-dma, then look for NFLX to possibly trigger as a short-sale on a breach of the 20-dema.

 

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Amazon.com (AMZN) looks slightly like NFLX, although it has already closed below its 20-dema twice over the past week. Like NFLX, it gapped down on Monday and proceeded to breach its 10-dma and 20-dema on heavy selling volume. On Friday, an attempt to regain the 10-dma failed as the stock reversed back below the line on above-average selling volume.

Notice the change of character in the daily price bars over the past several days. Previously, tight daily price ranges were the norm as the stock marched to all-time highs. Over the past seven trading days, the daily ranges have widened and downside selling volume has begun to dominate upside volume.

In this position, the stock at worst looks vulnerable to further downside, perhaps even a test of the 50-dma. Another breach of the 20-dema might trigger a tactical short-sale down to the 50-dma if it coincides with the NASDAQ Composite breaking below its 50-dma. At best, the stock is certainly not in what I would consider to be a buyable position.

 

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Facebook (FB) closed below its 20-dema on Friday on light volume. All week long, FB kept failing on attempts to regain or hold above the $200 Century Mark, but to no avail. I have previously viewed it as shortable on moves up near the $200 price level.

Friday’s move came within just over 1% of the 200 level, and the stock instead fell short and ran into resistance at the 10-dma. It then closed down on the day after an initial general market-inspired gap. It remains a short, in my view, on any further rallies up to 200, while using that as a guide for a tight upside stop.

 

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Nvidia (NVDA) is firmly entrenched below is 50-dma, spending the entire week underneath the line. It has been and remains a confirmed late-stage, failed-base (LSFB), short-sale set-up. Weak rallies back up into the 50-dma can be considered short-sale entry opportunities while using the 50-dma as a guide for a tight upside stop.

 

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Apple (AAPL) looks like a short here as it stalls and churns between its 10-dma, 20-dema, and 50-dma. I wrote on Wednesday that rallies up into the 20-dema might be viewed as shortable, and the stock did reverse at the line on Friday. Selling volume, meanwhile, dominates the pattern over the past two weeks, and AAPL may be setting up for a breach of the 50-dma. This would likely occur in conjunction with a breach of the 50-dma by the NASDAQ as well.

AAPL does remain above its early May base breakout, but notice how the upside progress since the breakout was tepid. The real move occurred off the lows of the pattern, which is typical of this market. Often, the very best price moves occur on U&R type set-ups (which AAPL was in late April) sending a stock back up toward its prior price highs.

Once the stock breaks out in a move that is at that time obvious to orthodox thinking, it loses momentum. AAPL is very much like that, and you can track other names that have done similar things, like Micron (MU), for example.

 

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While it has a two-letter stock symbol, Micron (MU) is in fact a large component of the NASDAQ 100 Index. On Monday, the stock confirmed as a late-stage failed-base (LSFB) short-sale set-up, such that any rallies up into the 50-dma can be viewed as potential short-sale entries.

MU illustrates my observation that in this market the best moves in leading stocks occur off the lows of bases. Note that in early May, the stock undercut prior April lows and rallied, triggering a U&R long set-up at that time. That triggered a steady and steep rally throughout May that finally culminated in a standard base breakout near the end of May.

But, as is often the case in this market, the breakout went nowhere, and MU quickly failed on the breakout. For a while, it looked like it might be building a cup-with-handle, but Monday’s big-volume gap-down breach of the 50-dma put the kibosh on that idea.

 

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Alphabet (GOOGL) rallied into its 20-dema on Friday, where it presented a short-sale entry opportunity per my discussion of the stock on Wednesday. As I wrote at the time, the stock is now an initial, late-stage, failed-base situation given the breakout failure on the Monday gap-down through the 20-dema. Yet another base breakout fails, and GOOGL looks like it may be setting up for a retest of its 50-dma.

 

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Tesla (TSLA) was good for a short scalp on Thursday and Friday as it rallied into resistance near its prior early 2018 highs. The stock reversed back below the 10-dma on Friday on light volume, but was good for about 11-12 Livermorian points of downside.

As I wrote on Wednesday, the company is expected to report its quarterly production numbers, so there was no need, in my view, to hold a short over the weekend. I’ve seen news items indicating that the company will report production numbers over the weekend, and some news items indicating this will occur on Tuesday.

Either way, I’m content to wait and see what sort of price move occurs once these numbers are out. The company has built production tents to boost production capability in an all-out effort to meet this 5,000 cars per week production goal. But, seriously, I must wonder whether anyone would really want a Model 3 that has been built under such rushed conditions.

If the release of the production numbers triggers a rally in the stock, then we might look for that to present a potentially shortable rally. We won’t know for sure what kind of actionable move, if any, develops, until the numbers are actually out, so for now it’s just a matter of waiting and watching.

 

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Because so many of these big-stock NASDAQ 100 names look the same, and in the same sort of weak way, I’ve already discussed a blanket approach to shorting these in my last report. Specifically, this approach utilizes the ProShares UltraPro Short QQQ ETF (SQQQ) as a proxy for these names in summation.

So far, I’ve found that it works reasonably well. Obviously, if one was long the SQQQ going into Thursday, as I was, the NASDAQ’s move to the 50-dma was an initial sell or cover point. On Friday, another entry signal on the five-minute 620 intraday chart occurred early in the day and held all day long before the SQQQ rallied sharply into the close.

Note how there were two MACD crosses early in the day, and the first didn’t go anywhere. But the second occurred in conjunction with an undercut & rally move as the SQQQ dipped below and then rallied back above the prior low at 14.07. From there, it never looked back and finished the day off with a nice upside burst into the close. This is a good example of how I use the 620 chart as an interpretive tool, NOT a mechanical trading system.

 

GR070118-SQQQ Intraday

 

Twitter (TWTR) appears to be working on a relatively tight flag formation as it drifts down to test its 20-dema. This could continue to base-build up here, but what I would watch for here is a breach of the 20-dema that occurs in conjunction with the general market rolling over to lower lows. In this case, a breach of the 20-dema would serve as a short-sale trigger.

I’m not saying this must happen, however, But, since I always take a two-side view of every stock, I would not be surprised to see the stock roll lower, particularly within the context of a deeper general market correction. Thus, it remains fluid as a situation that could evolve into a short, or, after a period of setting up again, as a long again. I’m open to either outcome, but my guess is the general market action will dictate how this plays out from here.

 

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Chinese names continue to look like garbage, and it was interesting to see that even Alibaba (BABA) has not been able to muster up much of a bounce off its 200-dma. The stock gapped down and busted the 50-dma on Monday, and since then has slumped down to the 200-dma. It attempted to rally early in the day on Friday, but reversed to close back at the 200-dma.

This was initially shortable on the gap-down break Monday, although some might have shied away from it since it was about 1.5% below the $200 Century Mark. To be frank, 1.5% isn’t enough to scare me away if I’m using 200 as my guide for an upside stop, so that was entirely actionable from my perspective.

Now BABA seems a bit too deep in its pattern and hence extended to the downside to make it all that delectable as a short-sale at this point. It does, however, serve to illustrate the weakness we are seeing in Chinese names. And I’m not so sure this is all due to the current U.S.-China Trade Tiff, since the Chinese markets are now in what they call “official bear market territory,” down some 20% from their peaks.

 

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Baozun (BZUN) also can’t seem to generate any kind of strong upside bounce off its 50-dma and the top of its prior base breakout just above the 50 price level. On Friday, the stock gapped higher but reversed to close up only slightly.

In this position, a clean breach of the 50-dma that coincides with a move below the prior breakout point at 51.22 would bring this into play as a late-stage failed-base (LSFB) short-sale set-up. Barring that, for now, I’d look for any rally back up closer to the 20-dema as perhaps a potentially lower-risk short-sale entry opportunity.

 

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Momo (MOMO) is also struggling to hold its 50-dma and the intraday lows of its prior buyable gap-up move of late May. On Friday, the stock attempted to gap higher but reversed to close down on lighter, but still above-average, volume. A breach of the 50-dma could trigger this as a possible LSFB short-sale set-up.

The flip side here is that according to CAN SLIM™ dogma, this is the first pullback to the 50-dma since the BGU gap-up breakout of late May. Thus, this can theoretically be viewed as a lower-risk entry point, using the 50-dma as a tight selling guide. Play it as it lies.

 

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Autohome (ATHM) confirmed as a late-stage failed-base (LSFB) short-sale set-up on Wednesday when it blew through its 50-dma on extremely heavy selling volume. That triggered a U&R type move on Thursday, but that move stalled on Friday as buyers’ enthusiasm waned. Given the confirmed LSFB, I view this as a short on any weak rallies back up into the 50-dma from here.

 

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I blogged on Friday that after we saw the NASDAQ trade down to, undercut, and then rally off its 50-dma, we should be aware of where potential undercut & rally (U&R) set-ups might lie. I included a list of symbols for stocks that I felt were posting or in position to post a U&R long set-up. I would suggest that members also go through their own recent long watch lists for other U&R type of set-ups.

Remember, in this Ugly Duckling-style environment, I never take a rigidly bullish or bearish stance. I go with the set-ups that I see in real-time and which I have observed to work in this type of tidal wave market. And when I refer to a “tidal wave” market, I mean those sharp movements that suddenly conjure out of nowhere, and usually when they are least expected.

Most of these U&R set-ups that occurred on Thursday and which I blogged about early Friday morning didn’t go anywhere on Friday. Some, however, remain in technically actionable U&R positions. Okta (OKTA) is a good example of what to look for following Thursday’s U&R move back up through the early June low and the 50-dma.

On Friday, OKTA held in a tight range and just above its 50-dma as volume dried up to -46% below-average. Technically, this keeps it in a U&R buy position using the 50-dma or the prior June 8th low at 49.12 as reasonably tight selling guides.

 

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Nutanix (NTNX) was another U&R set-up that I mentioned in my Friday morning blog post, but it stalled and reversed on Friday on light volume. Technically, the stock has not moved below the 51.05 low of May 29th, so the U&R long set-up remains in force. Friday’s move, however, lacked vigor, so it is suspect.

However, the only way this fails is by, well, failing. This means it has all of 52 cents of downside before it breaches the 51.05 prior low, and only that would confirm it as a failed U&R. It also means that if one is bold enough to test a long position here, then risk is limited to less than 1% of downside if one uses the 51.05 prior low as a tight selling guide.

 

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While Thursday’s NASDAQ bounce off its 50-dma helped to create a lot of these near-term U&R type moves, they are not guaranteed to work. In fact, at some point, when we go into a deeper correction or even a bear market, U&Rs will become what they started out as in the first place – short-sale cover points that then produce shortable rallies up higher in the pattern!

In any case, I think it’s important to maintain an awareness of where U&Rs might be setting up among some of our broken leaders. This is how the Ugly Duckling works his magic in this market, so we do not want to be ignorant of what have proven to be some of the better long opportunities that occur off the lows of patterns and NOT at new-high breakout points. Refer again to the example of MU, as proof.

While most stocks look terrible, little toy/collectible figure company Funko (FNKO) acts like it’s in its own little bull market world. I first discussed the stock in my video reports back in April when it was acting very quietly and tracking tightly along its 10-dma, 20-dema, and 50-dma. From there the stock broke out of a cup-with-handle formation and has moved steadily higher, over 50% from where I first discussed it.

More recently, FNKO gapped to new highs in early June, and looked like it was going short-term parabolic. But that did not lead to a top, and instead the stock has been building a short base since then. On Friday, it posted a pocket pivot breakout that occurred six days after a prior stalling pocket pivot at the 10-dma two Fridays ago.

One of my main difficulties with FNKO is its lack of liquidity. The stock trades all of 222,000 shares a day on average, or $2.775 million in dollar volume. That is quite paltry, but volume has been slowly increasing. Nevertheless, for small accounts, this has been quite playable, and represents a bright spot in what has become a difficult couple of weeks for leading stocks in general.

 

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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.

The action over the past week-and-a-half looks bad. And in many cases, when it comes to individual stocks, it is. The main question is whether the recent bounce by the NASDAQ off its 50-dma, which coincides with the S&P 500 attempting to keep its head above its own 50-dma, holds, and we see the indexes rebound back to the upside.

I don’t think that is a question that lends itself to predictive analysis. We’re not in the prediction business anyway, as Bill O’Neil used to tell me, we’re in the evaluation business. And that means we can only evaluate things in real-time and use our available set-ups, long or short, and the appropriate technical tools to find the proper course of action.

In pre-QE market environments, I would say that the current action among so many leading stocks speaks of a deeper correction. That may very well be the case. But we should also remain aware of the presence of the Ugly Duckling and the potential for ugly patterns to suddenly morph into U&R type long set-ups. Because we are not mindless and naïve breakout-only buyers, we certainly have the proper tools and frame of mind to not only deal with any market turnaround, but to also profit handsomely depending on how things play out.

This remains an unusual market environment. We are sitting on what is far and away the largest debt bubble in known history, all while the Trump Administration touts the lowest unemployment ever. But the reality is that most of the drop in the unemployment rate is due to a drastic decline in labor participation. If the total work force were the same as it was in the early 2000’s, unemployment would be closer to 10%. Meanwhile, John Williams of Shadowstats.com calculates true unemployment at 21.7%.

In addition, the government also touts 2-3% GDP growth as “robust.” But the reality is that GDP is adjusted for inflation, and since the government understates inflation (currently 1-2%), then it by definition overstates GDP growth. Hence, if inflation is closer to 5-7%, as some calculate it is, GDP is closer to flat or even negative.

These are unusual times, and in my view stock prices have been driven primarily by one factor, and one factor alone. That is, the massive printing of fiat money which has driven up asset values across the board, including real estate and stocks. That has created another bubble, and the question is what it takes to finally pop this bubble.

Bubbles, however, can go on longer than anyone thinks, so it all comes back to one thing. Just watch the stocks. Currently, stocks are flashing a bearish message, so I remain cautious but still opportunistic and acutely aware of where my set-ups might lie, no matter in which direction the market goes from here. So, as always, play it as it lies!

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

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.