The Gilmo Report

July 29, 2018

July 28, 2018

Earnings roulette season has been living up to its name with stocks flying in various directions after reporting what are deemed to be good or bad reports. Over the past two weeks, we’ve seen high-profile rallies after earnings in Amazon.com (AMZN) and Alphabet (GOOG), while Netflix (NFLX), Intel (INTC), Facebook (FB), and Twitter (TWTR) have been busts.

But even the upside earnings gappers aren’t getting that much love. Amazon.com (AMZN) reported an allegedly blow-out quarter on Thursday after the close and gapped up to an opening price of 1876.05 on Friday. It hit an intraday peak at 1880.05 early in the day and it was all downhill from there.

By the close, the stock had barely avoided a complete outside reversal to the downside, ending the day up a mere 9.27 points, or just over ½ percent. Enterprising and gutsy short-sellers could have hit the stock short based on my tweets Thursday afternoon that I was hoping for an upside market open on Friday to short into. Along with the faux-GDP number, AMZN helped achieve my ideal for the day.

So, what looked like a possible buyable gap-up (BGU) for AMZN was nothing more than a shortable gap-up. The stock closed Friday just below the 10-dma, but I would be looking for a breach of the 20-dema as a potential sign of further trouble to come, including a possible test of the 50-dma. Right now, however, none of that is entirely clear, and we will just have to see where this goes from here. All we know for sure is that the blow-out quarter didn’t produce a blow-out price move.

 

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Thursday and Friday gave us the one-two social-networking punch of big post-earnings busts in Facebook (FB) and Twitter (TWTR). Both stocks gapped down after earnings, and by Friday’s close were down similar percentages relative to their pre-earnings closes. FB is down -19.59% from Wednesday’s close, while TWTR is down -20.54% from its Thursday close.

Both stocks could have been treated as shortable gap-downs once they set firm intraday highs on their respective gap-down. FB also had the added benefit of being just below the 200-dma on Thursday morning, thus one could have used the 200-dma as an alternative guide for a relatively tight upside stop. There has been no shortage of mindless pundits calling the stock a bargain, but as far as I’m concerned, this thing is dead unless and until it can at least regain its 200-dma.

 

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Twitter (TWTR) gapped well below its 50-dma after its earnings report revealed a decline in users to the tune of 1 million. This sent it into the wide region between he 50-dma and the 200-dma. The stock set an intraday high at 37.47 shortly after the open on Friday, as I tweeted early that morning, and headed straight down from there, closing at 34.12. A test of the 200-dma looks likely.

 

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I’ve made plain my suspicions regarding this market in the past three reports. And in Wednesday’s report I made it clear that I believe this market presents more danger than it does profit opportunity. Over the past two days that has been the case as we’ve seen the NASDAQ Composite Index first gap down off its Wednesday all-time high on heavy volume Thursday. It then gapped up on Friday, thanks to AMZN’s earnings and a mythical 4.1% Q2 advance GDP number, and then promptly reversed to a -1.46% decline for the day.

At that point, as I was tweeting in real-time, this was the point at which I wanted to get short. And that, to put it poetically, was a beautiful thing, as the NASDAQ pulled a big, ugly outside reversal to the downside on lighter, but still above-average, volume. The index is now undercutting the lows of the last three weeks as it approaches the 50-dma, where it could attempt to bounce this week.

 

GR072918-$COMPQ

 

The S&P 500 and the Dow Jones Industrials Indexes held up better on Friday, down only -0.66% and -0.30%, respectively, vs. the NASDAQ’s -1.46% and the Russell 2000’s 1.89%. Friday’s action was still bearish since the breakdown to the 10-dma came on the heels of Thursday’s higher-volume churning near the highs. We’ll see how well the index holds the 10-dma this coming week.

 

GR072918-$SPX

 

Alphabet (GOOGL) is back to its buyable gap-up day’s intraday low after getting about 8.5% past its pre-earnings close. The stock gave up about half of that on Friday on above-average volume, so anyone who bought the stock on the prior cup-with-handle re-breakout is up about 5%. That’s not what I would call a sizzling price move.

Nevertheless, technically the stock is buyable based on the prior BGU using the 1244.14 intraday low as your selling guide. If the stock fails outright, then that will no doubt be part of a continuing correction among NASDAQ big-stocks and the NASDAQ Composite Index.

 

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Microsoft (MSFT) also gave up all its post-BGU gains on Friday but managed to hold support at its 10-dma. Selling volume was heavy. The stock is all of 3.14% beyond its pre-earnings close the day it reported earnings. So, again, even after a strong earnings report and gap-up response, the net gains here are paltry.

Thus, we can surmise that while the breakdowns among stocks that miss on earnings have been severe, the rallies among those that have reported allegedly strong reports have not been anywhere close to being an upside mirror image. In fact, they’ve been snoozers.

 

GR072918-MSFT

 

Netflix (NFLX) reversed to the downside Friday on an outside move after running into its 10-dma. Volume was higher but below average. The stock has twice undercut prior lows and rallied, once on the day it gapped down after earnings, and then again on this past Monday. Both of those U&R attempts have now failed.

The stock was shortable at the 10-dma on Friday and could have been selected as a short-sale target based on my view at the time that any market rally at the open on Friday was a rally to short into. In the larger scheme of things, NFLX was just another NASDAQ 100 Index ($NDX) name helping to send that index down -1.40% on Friday. The stock looks like a short to me on any further rallies up closer to the 10-dma from here.

 

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Nvidia (NVDA) was rallying to higher highs on Friday in concert with the morning index gap-up but gave up the ghost as the market reversed to the downside. The stock held above the 50-dma as it pulled into the line on lighter volume. I’m inclined to short the stock as it pushes to higher highs and the top of its current three-week price range, but only for short scalps ahead of its August 16th earnings report.

 

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Apple (AAPL) is expected to report earnings after the close on Tuesday, July 31st. Ahead of earnings, however, it has turned out to be a bit of a double-top type of short-sale set-up after getting tagged with some heavy selling on Friday. While I’m not inclined to do anything with the stock into earnings, I would not be surprised to see it break down after the report.

 

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Tesla (TSLA) is expected to report earnings on August 1st, and I must wonder whether this earnings report will be the company’s final death knell. Investors currently don’t seem to be all that convinced as it has been the longs that have finally blinked ahead of earnings. Monday’s gap-down break undercut the prior early July low, triggering a logical U&R move at that point.

That U&R rally didn’t last long, and the stock didn’t even make it past its descending 10-dma. On Friday it rolled over on higher selling volume and is now testing the Monday gap-down lows. Obviously, with earnings expected on Wednesday, there’s nothing to do here ahead of the report, unless one feels like playing earnings roulette!

 

GR072918-TSLA

 

Micron (MU) held up on Thursday and Friday on positive earnings news from other semiconductor names like Advanced Micro Devices (AMD) and Lam Research (LRCX), and Xilinx (XLNX). As I wrote on Wednesday, however, I felt that, “From here, any further rallies into the 20-dema would offer lower-risk short-sale entries.”

MU drifted up into the 20-dema on Thursday and Friday and stalled out there, pulling in on Friday to close about mid-range. I would continue to view this as a short on rallies into the 20-dema until evidence to the contrary shows up.

 

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All the stocks discussed so far in this report are $NDX names, or a component of the NASDAQ 100 Index. In my report of June 27th, I went into detail on how one can simply blanket-short NDX names by going long the ProShares UltraPro Short QQQ ETF (SQQQ) as a proxy for NDX names as they roll over as a group. The charts above show that on Thursday and Friday, breakdowns in NDX stocks were well-mimicked by the SQQQ.

In essence, going long the SQQQ is the equivalent of going short a basket of NDX names. When the index leads to the downside, as it did on Thursday and Friday, the SQQQ can be a beautiful thing. And using the five-minute 620 intraday chart is a useful tool in timing long entries in the SQQQ at inflection points, as I discussed in my June 27th report.

So, if you were keying off my tweets on Thursday afternoon and Friday morning, you probably picked off the initial MACD cross and long entry signal right near the open at around 6:20. About a half-hour later, the six-period exponential moving average crossed above the 20-period e.m.a., giving us a full 620 buy signal. Note that the 6-period line never crossed below the 20-period line all day long, so even though the MACD lines crossed a couple of times to the downside, the moving averages would keep you in.

 

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I have discussed many times that in this environment, whenever the market is looking either too good or too bad, my antennae go up, looking for a possible inflection going the other way. Shorting into gap-up rallies or shorting leading stocks on extended late-stage type moves works when we head to the downside, and the venerable undercut & rally, or U&R, long set-up is the primary weapon when the market finds a low and turns back to the upside.

Okta (OKTA) illustrates this two-sided approach that is contrarian at its core. The initial U&R long set-up off the lows in late June set up a very playable uptrend that took the stock right up to the prior early-June highs. At that point, it morphs into a double-top short after rallying to all-time closing highs on extremely weak volume. In some ways, the continuous rally over the past two weeks has been puzzling given this dearth of upside volume.

But that sort of action as a stock approaches its prior highs can make one alert to the potential for a reversal. OKTA posted two such reversals off the highs this week, with Friday’s being the most severe. Volume did not have to be heavy to slam the stock back -5.77% and down to its 20-dema, but it was higher than the prior day’s volume and higher than upside volume over the past several days.

At this stage I’d look for the stock to test the 50-dma if the general market continues to weaken, at which point we can see what it looks like at that point. In a severe market correction, I would even look for the stock to test the late-June lows. OKTA isn’t expected to report earnings until September 6th.

 

GR072918-OKTA

 

ZScaler (ZS), along with OKTA, has been one of my favorite longs to play on the way up since it posted a similar U&R set-up back in late June. That led to move right back up to the prior early June highs, producing what has now become a double-top, short-sale set-up. Note that upside volume was very light on the way up, which in and of itself does not necessarily scare me away from the stock.

What begins to get my antennae up, however, is when we see volume pick up as it did on Tuesday as the stock reversed to the downside and closed right above the 20-dema. Another low-volume rally on Wednesday then brings the stock into play as a short-sale when the general market begins to reverse on Friday.

ZS was then swept lower by the market tide, busting through its 20-dema with authority. It now looks primed to test its 50-dma, so we can see what it looks like when it gets there. Both ZS and OKTA show the inverted, two-sided and contrarian manner in which stocks tend to act in this current market environment. ZS isn’t expected to report earnings until early September, on the 5th of the month.

 

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Currently I don’t see anything that makes me want to plunge in on the long side of this market. Even stocks that appear strong one day are losing it the next, such as Alibaba (BABA). The stock posted what looked like a strong-volume pocket pivot as it regained its 50-dma on Wednesday, but that didn’t even last another day as the stock immediately gapped back below its 50-dma.

On Friday morning, BABA gapped up slightly right back up to the 50-dma, but at that point the general market reversed, and the stock simply became a short-sale entry at that point. It then broke down to the 200-dma but bounced slightly off the line by the close. What we might note here is that the stock’s strong-looking pocket pivot on Wednesday only served to set the stock up as a short into that strength.

And this is how the market really works in this environment, no matter what the parrots who keep repeating investment bromides they picked up from the book, How to Make Money in Stocks want to tell you. Things may change at some point, but right now, this is what the market is giving, and it takes a nimble, alert, and open mind to capitalize on it. BABA is expected to report earnings this Thursday, August 2nd, before the open.

 

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Momo (MOMO) has shown no signs of life after an attempted U&R move on Wednesday. The stock has simply run into resistance just below the 10-dma and the lows of the prior consolidation that was formed in the first half of July. So, there is nothing here that I find attractive on the long side.

I would therefore lean more toward the idea of viewing any rallies up into the 10-dma, 20-dema, or even the 50-dma as more likely to be shortable rallies than anything else. MOMO is expected to report earnings on August 21st, before the open.

 

GR072918-MOMO

 

Baozun (BZUN) has acted better than either BABA or MOMO, but it may be another one of these double-top shorts that is starting to set up. On Tuesday the stock pulled a big, ugly outside reversal off the peak on a strong increase in selling volume. It then drifted back up to the highs and the 64 price level over the next two days but note that volume was extremely light.

That’s the type of action that will get my shorting antennae up in a hurry, and on Friday a brief early morning rally turned into a shortable move within the context of the general market reversing to the downside. The stock is now back to its 20-dema, and in my view has a reasonable chance of evolving into a late-stage, cup-with-handle failure.

You will note that BZUN has a similar look to OKTA and ZS in that it had a U&R long set-up in late June, and then rallied back to the highs of what became a cup formation. That would also be a double-top type of formation as well. Note that upside volume as the stock has inched higher over the past two weeks has been extremely low, making it vulnerable to a possible double top. Earnings are expected on August 21st.

 

GR072918-BZUN

 

Like I said, I don’t see anything on the long side that looks attractive. Signs of spreading market weakness have not emanated into what were strong-acting cyber-security names. On Friday, all three of the names in the group that I follow, CyberArk Security (CYBR), Fortinet (FTNT), and Palo Alto Networks (PANW), were all tagged with higher-volume selling.

CYBR was the worst of the three, busting right though its 50-dma on heavy, above-average selling volume. With earnings expected this week in FTNT and the following week in CYBR, there doesn’t seem to be any reason to try and step in front of these pullbacks. As I see it, weakness in these names is more likely symptomatic of a weakening general market environment.

 

GR072918-CYBR

 

More group weakness can also be seen in the video-game space, where all the big leaders in the group were acting quite well, until the past two days. Electronic Arts (EA) reported earnings after the close on Thursday and failed to impress investors, gapping down harshly on Friday. The daily and weekly charts of EA reveal this to be a late-stage breakout failure.

From here, I’d look at rallies back up toward the 50-dma as potentially lower-risk short-sale entry opportunities. This is a nasty gap-down bust, and in my view does not bode well for EA or the rest of the group.

 

GR072918-EA

 

And if you need another reason why only buying breakouts is a fool’s game in this market, you can see that Activision Blizzard (ATVI) is following EA’s lead by posting its own late-stage breakout failure on heavy selling volume. The chart below shows a nice, cup-with-handle breakout about three weeks ago.

But that breakout has now failed miserably as the stock broke below its 50-dma on Friday in sympathy to EA. ATVI, along with Take-Two Interactive (TTWO), is expected to report earnings Thursday after the close. What I would watch for here is a possible upside reaction that carries up to the 20-dema, at which point the stock could become a lower-risk, short-sale entry.

TTWO is also starting to fail from a late-stage breakout, by the way. When I see an entire group start to break down from what look like late-stage patterns, what initially looked like a long-side group play suddenly morphs into a short-side group play. Proof that things change quickly in this market, and usually in a contrarian way.

 

GR072918-ATVI

 

The bust in the U.S.-based video-gamers also keeps me from getting excited about the long side of Chinese names in the space, Huya (HUYA) and Bilibili (BILI). Both are breaking down, so until I see something more positive in their charts, they are out of play.

Intuitive Surgical (ISRG) was a sell on the move back to the highs on Wednesday, which only served to create a little double-top formation. The stock then busted below the 10-dma but held support at the 20-dema. As I’ve written in the last two reports, I would use either the 10-dma or 20-dema as my trailing stops for the stock, depending on risk preference.

 

GR072918-ISRG

 

Stich Fix (SFIX) has continued lower after getting body-slammed back to its 20-dema yesterday on heavy selling volume Tuesday. The stock is now moving into the middle of the prior handle area of the cup-with-handle formation from which it broke out in early July. A test of the 50-dma looks likely, and I would stay away from the stock for now.

 

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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.

Later this weekend, I’ll be posting a video report discussing more stocks on my long watch list that have broken down over the past few days. The number of names coming apart is without question sounding an alarm for the general market. For that reason, members should carefully review their trailing stops and have an exit plan clearly in mind in case things begin to deteriorate further.

This market has mostly been a swing-trader’s market, and I’ve made that case repeatedly in my reports. Those thinking that they’re going to buy a breakout in a leading stock and then make a killing riding a big upside trend are misguided, in my view. In this light, The Gilmo Report will never be about parroting mindless bromides taken straight out of HTMMIS.

I expend a great deal of time and effort on my own original market research in real-time and I believe my reports are de facto proof that I can indeed identify how the market really works, at least with respect to the current environment. That is the ethic that I learned from Bill O’Neil – one studies the market in real-time and develops a true understanding of how one needs to handle things based on the context of the current market environment. Everything else is just conversation.

This is an odd, difficult market, and may continue to be for some time. At some point, a real bear market will develop, but we cannot ascertain ahead of time when that will occur. It could be starting now, or we could simply see a short market correction that could be shallow, as it was in late June, or steep, as it was in early February.

That said, I do not like the action in individual stocks over the past several days, and I was already expressing my skepticism well over a week ago. Either way, we keep an open mind, and with the tools at our disposal, can be confident in our ability to handle and capitalize on whatever short-term or longer-term trends develop in this market.

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 SQQQ, 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.