The Gilmo Report

July 12, 2018

July 11, 2018

The announcement of more U.S. tariffs on an additional $200 billion worth of Chinese goods yesterday after the close upended a four-day market rally. The news sent the futures down hard overnight, leading to a gap-down open this morning, sending all the major market indexes down on the day.

The NASDAQ Composite Index came within 0.4% of its all-time highs yesterday, but the action was already showing signs of tiring as the index churned and closed below its gap-up opening price. Thus, today’s pullback wasn’t necessarily abnormal within the context of the overall action over the prior four days.

However, whether this is just a pullback or the start of a potentially deeper correction of a double-top type of set-up remains an entirely open question. For now, the critical test will be to see how the index holds the 20-dema on any further pullback from here, or whether it simply holds tight up near the highs.

 

GR071118-$COMPQ

 

The S&P 500 Index gapped up to higher highs yesterday, getting within 3% of its late January highs. Today, the index gapped back to the downside on lighter volume, which is perhaps somewhat constructive. Within the context of the sharp move off the lows of last week, where the S&P was up five out of six days in a row, today’s pullback doesn’t necessarily look terribly bearish.

But the critical test will occur over the coming days where we get a chance to see how well the index holds support on any continuing pullback. Whatever the outcome, I tend to see this current market environment as more of a trader’s market and less of an investor’s market.

 

GR071118-$SPX

 

I define a trader’s market as one where the moves tend to consist mostly of volatile swings within overall chart structures. This creates opportunities on either side, long or short, which can show up at any time. Undercut & rally moves can be played for swing trades off the lows, most of the time, and then in some cases can be reconsidered as shorts as they rally up into potential resistance. A lot of stocks have demonstrated this sort of tendency as they remain in an overall trendless state.

Given such choppiness inherent in the chart patterns of many individual stocks, my approach to this market has been to keep handy a brief list of tradeable names that I will work short or long at any given time, depending on how the real-time evidence is playing out. This is perhaps a stylistic consideration, since it is possible to sit long with stocks that remain technically sound.

But the choppy action likely means that little meaningful progress is being made on the upside for long-only players, at least in the short term. On top of that, the news flow regarding tariffs on both China and alleged U.S. allies, the oil ban on Iran, sell-offs and bear markets in emerging markets including China, and other geo-political and geo-economic concerns, the action may remain choppy, with rallies subject to having the proverbial rug pulled out from underneath from time to time.

This all, of course, assumes that the market doesn’t top and go into a deeper correction. With the Trump Administration plunging headlong into what is starting to look more like a trade war and less of a trade tiff, the potential for the market to come off here, now that the indexes are back up at the highs of their wide, choppy 2018 price ranges, is certainly increasing.

One example of a two-sided situation is Nvidia (NVDA), which rallied with the market over the past week, clearing its 50-dma yesterday on a five-day pocket pivot. That move ensued after the stock undercut prior lows in the pattern and then turned to the upside. For nimble OWL-style traders, that was playable.

While the rally through the 50-dma was impressive, it’s not the place to get long the stock. The proper entry occurred on the delayed U&R move last week. So, rather than get all bulled up on the stock up here, my short-sale antennae go up as the stock clears the 50-dma on an extended, four-day price run.

This morning, NVDA gapped below the 50-dma, triggering a short-sale at that point while looking to use the 50-dma as a guide for an upside stop. The downside objective here would be the 200-dma, and would depend on the market correcting further from current levels.

 

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Alibaba (BABA) is a comparable situation, and it has been playable both long and short over the past couple of months. More recently, the stock became a short when it broke below the $200 Century Mark, taking it all the way down to its 200-dma.

After undercutting the 200-dma and finding support along a prior area of price congestion from late April into very early May last week, it then rallied into the 20-dema. Note that volume dried up sharply on the run up into the 20-dema, where the stock became shortable. It then gapped lower today as selling volume picked up.

 

GR071118-BABA

 

Micron (MU) is a similar type of set-up. The undercut & rally move off the lows last week set up the rally into the 50-dma, but that failed today as the stock gapped back below the line. While MU could have been played on the long side based on the U&R, I would now view this sputtering rally into the 50-dma as a short on any small bump up into the 20-dema or 50-dma, while using the moving averages as guides for tight upside stops.

 

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Netflix (NFLX) can be considered more of a trending stock, despite the big-volume breakdown a couple of weeks ago. That break held the 20-dema, so the stock has not yet violated what I would consider to be critical near-term support at the line. It has since rallied to post an all-time closing high today on above-average volume.

I don’t consider the stock buyable up here, however, since a more opportunistic, and in my view correct, approach would have been to come after the stock on the pullback to the 20-dema. Had it then busted the 20-dema, one could have easily cut and run quickly, with the additional option of flipping to the short side.

NFLX is expected to report earnings next week, on Monday, after the close. For that reason, I don’t see that there is any need to buy shares up here at current price levels.

 

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Amazon.com (AMZN) is like NFLX in many respects, but differs in the fact that it broke below its 20-dema two weeks ago. However, that move carried below a prior low in the pattern from early June, triggering what became a delayed undercut & rally (U&R) long set-up.

That U&R took three days to work, but once it did it didn’t look back. Today, AMZN bucked the general market sell-off by posting an all-time closing high on increased, but still below-average volume.

I don’t consider the stock buyable in this position, however. Also, with earnings coming up at the end of the month, I see no reason to take any fresh positions in the stock right here and now.

 

GR071118-AMZN

 

Apple (AAPL) pulled back into the confluence of its 10-dma, 20-dema, and 50-dma today on higher, but below-average volume. The reality for the stock is that it has gone nowhere over the past two months. This illustrates the idea that most stocks aren’t making much in the way of net upside progress.

Earnings are expected at the end of the month, and I’m guessing that the stock will continue to go nowhere until earnings are out. Of course, if the general market starts to correct further, AAPL, as a big index name, will likely get dragged down with it.

 

GR071118-AAPL

 

Alphabet (GOOGL) will also report earnings near the end of the month, and it remains in a trendless, choppy range extending back to early June. The stock tried to break out in mid-June, but that breakout attempt failed, sending the stock down to its 50-dma. It then pulled a double, delayed U&R move that has since propelled it back above its 50-dma and up near the prior breakout point.

This could set up a short-sale entry point here at the prior breakout point. In this case, one would simply use today’s high as a guide for a tight upside stop. Of course, one would also be looking for a quick downside scalp ahead of earnings since I would not want to try and hold any positions in the stock going into earnings.

 

GR071118-GOOGL

 

Facebook (FB) posted an all-time high on Monday, and has since drifted in slightly on below-average volume. So far, this latest move back above the $200 Century Mark is holding up well. As long as the stock doesn’t breach the 200 price level it is actually in a buyable position here, using the 200 level as a tight selling guide. FB is expected to report earnings on July 26th.

 

GR071118-FB

 

As I theorized it might over the weekend, Tesla (TSLA) rallied off support along the highs of a prior area of price congestion, as I’ve highlighted on the daily chart. The rally was helped along by CEO Elon Musk showing up in Shanghai, China, to ink a deal to build a car factory in that city. That got the stock moving up into its 20-dema yesterday, where it stalled and reversed slightly on above-average volume.

It is now back below its 200-dma, but held support today at its 50-dma as volume dried up to -46% below average. In this position, it’s difficult to call this a long or a short, but I would first treat this as a potential long, particularly if the general market does not continue selling off, with the idea of using the 50-dma as a tight selling guide.

TSLA is expected to report earnings on August 1st, so it’s now down to a game of chicken with the shorts. Assume nothing!

 

GR071118-TSLA

 

Revelations regarding the substantial number of fake accounts on Twitter (TWTR) sent the stock reversing to the downside on Monday. As I wrote over the weekend, I wasn’t inclined to chase the stock’s move on Friday as it rallied right up to the highs of its current three-week price range.

Such an opportunistic approach was useful as the stock broke below the lows of its current price range, undercutting the prior 42.49 intraday low of June 28th, and then rallied back above the low on an intraday basis. TWTR undercut that low again today on the general market gap-down open, but again rallied to close above its 20-dema.

TWTR is expected to report earnings on July 27th, so I wouldn’t be looking for any significant upside moves from here ahead of earnings. It has, however provided some trading fodder over the past three days on a pair of U&R moves, and that is mostly what this market is about.

 

GR071118-TWTR

 

Snap (SNAP) isn’t expected to report earnings until August 9th, so it has some time to push up and off the confluence of its 10-dma and 20-dema. Today, SNAP held up and rallied slightly as volume dried up -65.3% below average. Sellers just weren’t interested in tossing shares despite the general market sell-off.

This keeps the stock in a buyable position, using the 20-dema as a selling guide. Otherwise, one could use today’s intraday low at 13.05.

 

GR071118-SNAP

 

Baozun (BZUN) and Momo (MOMO) both continue to hold above key support levels after selling off sharply from their recent highs. BZUN has regained its 20-dema and closed above the line today as volume dried up. I would prefer to look at this on the long side on a pullback closer to the 50-dma at 56.05.

Meanwhile, Momo (MOMO) is retesting its 50-dma as it pulled back today on lighter volume. The pullback actually held up a little better closing just above the higher 10-dma. If the general market doesn’t get into further trouble, this becomes actionable on the long side here, using the 50-dma as a tight selling guide.

Earnings for BZUN and MOMO are not expected until late August.

 

GR071118-MOMO

 

Okta (OKTA) is doing a reasonable job of holding support at its 50-dma following the undercut & rally move of nearly two weeks ago. Using the higher low of June 8th at 49.12, OKTA’s U&R move up through that low remains in force. The closer to that price point you can buy it, the better. OKTA isn’t expected to report earnings until September 6th.

 

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You might notice that there are still a lot of good-looking patterns in this market, which means this is less a stock market and more a market of stocks.

ZScaler (ZS) continues to fit in this category as it held support this morning on a test of its 10-dma and 20-dema. Volume dried up to -32.3% below average today as sellers didn’t seem too eager to dump shares on an ugly general market gap-down open.

ZS has acted well since posting an undercut and rally move not quite two weeks ago, which I discussed at the time as an actionable long set-up. ZS isn’t expected to report earnings until September 5th, so this pattern has plenty of time to run ahead of earnings if it wants to. Meanwhile, constructive pullbacks to the 10-dma/20-dema confluence remain buyable, as was the case today.

 

GR071118-ZS

 

Roku (ROKU) pulled into its 10-dma this morning, where it offered a lower-risk entry per my discussion of the stock over the weekend. The stock then closed in the upper part of its daily trading range as volume declined. The stock may continue to move sideways along the 10-dma, so I would watch for pullbacks to the line as lower-risk entry opportunities. ROKU is expected to report earnings on August 8th.

 

GR071118-ROKU

 

Stitch Fix (SFIX) ignored today’s market sell-off by posting a new closing high on above-average volume. This remains extended, but I’d watch for any pullback closer to the 10-dma at 29.69 as a lower-risk entry. SFIX isn’t expected to report earnings until October.

 

GR071118-SFIX

 

DropBox (DBX) undercut its 30.65 low of June 28th today and closed about 1% above it at 30.94 on light volume. This puts the stock in a last-stand U&R long set-up position here, using the 30.65 low as a tight selling guide. In the realm of the Ugly Duckling, this is about as ugly as a U&R can get, but there it is. Play it as it lies! DBX is expected to report earnings on August 9th.

 

GR071118-DBX

 

Turtle Beach Corp. (HEAR) posted a pocket pivot on Monday on above-average volume after I discussed it in my weekend report. There was plenty of time to buy the stock on Monday near the open as it first pulled in slightly to test the 10-dma, and then launched higher. It has since drifted in as volume declines, and I would like to see it come in closer to the 10-dma at 21.71 as a lower-risk entry opportunity. HEAR is expected to report earnings on August 9th.

 

GR071118-HEAR

 

Over the weekend, in my discussion of HEAR, I noted that the entire video-gaming group looked constructive, and to watch for set-ups in other names in the group, including Activision (ATVI), Electronic Arts (EA), and Take-Two Interactive (TTWO). All these names have been working on bases, and today ATVI broke out on a strong-volume pocket pivot move.

If you look at this on a weekly chart, not shown, you will notice that this big outside reversal to the upside was a breakout from a big cup-with-handle formation. The only mitigating factor here is that ATVI is expected to report earnings on August 2nd, the same day as TTWO. EA is expected to report on July 26th.

I would want to see ATVI generate some decent profit cushion ahead of earnings if I were going to hold through the report. Nevertheless, it confirms what I was seeing over the weekend as a thematic argument for buying HEAR, which is a cousin-stock to the video-gaming names, all of which look good here.

 

GR071118-ATVI

 

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.

Personally, I find the entire tariff thing to be somewhat puzzling. I wonder whether the President, in his apparently limited wisdom, thinks that in a perfect world every nation would have a zero-trade balance with every other nation. To me, this simple consideration points out the absurdity of a trade war, or even the idea that a trade deficit is, in and of itself, a terrible thing.

With the latest batch of proposed tariffs out of the bag, is the market set up for news that moves in the opposite direction? In other words, if the Chinese agreed to come back to the negotiating table, would this trigger a big upside move in the market? It probably would. And this points out the danger of playing a rigidly bearish short hand in this market.

The only thing that is clear to me in the here and now is that this is a market of stocks, and there are plenty of names that I’ve discussed in recent reports that continue to act well. I would focus my attention on these names, and other long set-ups that may develop as I find them.

As far as the short side goes, I have only been able to get away with swing trades that are of short duration. An example would be TWTR on Monday, which broke hard. But once it undercut the prior low in the base, it was a cover, and one could have then profitably flipped to the long side. Such is the nature of this market.

Therefore, as I indicated over the weekend, I would simply keep things on a concrete level. If you see a strong long set-up, don’t be afraid to take a shot, even if the general market is coming off. That was certainly the case today in names like ROKU or ZS, which pulled into their 10-dmas and then bounced. So, it all comes back to the same general concept, which is to watch your stocks, and play them as they lie.

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 a position in TWTR, 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.