The Gilmo Report

July 4, 2018

July 4, 2018

The first half of a truncated Fourth of July holiday trading week has not typified what I would call quiet holiday trading. It started out with a sharp futures-led gap-down open on Monday that saw the indexes levitate off their lows in an apparently bullish reversal to close up on weak volume. But appearances in this market can be deceiving.

Tuesday, which was a short trading day ahead of the July 4th holiday on Wednesday, was anything but quiet. The indexes started the day in opposite fashion to Monday’s gap-down open by gapping up at the opening bell. That rally slowly melted away until the final hour when things came loose and the indexes reversed sharply.

The NASDAQ Composite Index, which had successfully tested and bounced off its 50-dma on Monday, ended Tuesday in the red. Volume was lighter due to the shortened trading session, but on a prorated basis would have come in higher than Monday’s volume. As it had for the previous five trading sessions, the 20-dema again served as near-term resistance for the index.

As I wrote over the weekend, the action is bearish. That remains the case, but all we know for sure is that so far, the index is working its way within a six-day bear flag that is wedged between the 20-dema on the top and the 50-dma on the bottom. Its next meaningful resolution will occur when it moves through one of these two moving averages, assuming it does so relatively soon.

 

GR070418-$COMPQ

 

The S&P 500 Index is also stuck in a six-day bear flag as it pirouettes around its 50-dma. On Tuesday, it closed below the line on lighter volume. The action here remains bearish, in my view, until further evidence to the contrary is forthcoming.

 

GR070418-$SPX

 

You’ll notice as we go through the following charts that big-stock NASDAQ leaders continue to look very much like the indexes, specifically the NASDAQ Composite. Therefore, while these all look bearish to me, how they ultimately resolve and whether they move lower will no doubt coincide with the NASDAQ Composite busting its 50-dma to the downside.

Thus, we would look for Netflix (NFLX), for example, to break its 20-dema on the downside if we see the NASDAQ break to lower lows. I already tend to think the stock has been shortable on the little moves into the 10-dma over the past six trading days, and in fact each rally up to and/or just through the 10-dma has been shortable.

 

GR070418-NFLX

 

The same exact concept applies to Amazon.com (AMZN) which has failed to clear its 10-dma three times over the past week. It closed right at its 20-dema on Tuesday, and I would view a breach of the 20-dema as a trigger for a short-sale entry at that point.

 

GR070418-AMZN

 

Facebook (FB) gapped down Tuesday after it was reported that the Department of Justice would be joined by the FBI, the SEC, and the Federal Trade Commission in its investigation of FB’s role in the Cambridge Analytica scandal. One can now wonder whether we’ll see FB CEO Mark Zuckerberg doing a perp-walk any time soon!

In any case, the gap-down move represented anther failure and reversal at the 10-dma as the stock closed below its 20-dema. Volume was about even with Monday’s volume, which is decent considering that Tuesday was a short trading session.

While the move below the 20-dema can be used as a short-sale trigger, using the line as a guide for an upside stop, my preference has been to hit the stock on rallies up into the 10-dma and closer to the $200 Century Mark.

 

GR070418-FB

 

Nvidia (NVDA) has been in the same kind of bear flag as the indexes, moving sideways for the past six trading days. The main difference is that it has remained below its 50-dma throughout. Thus, rallies up into the 50-dma, or even the 10-dma which is now below the 50-dma, serve as potential short-sale entry opportunities. Barring evidence to the contrary, NVDA still looks primed for a test of its 200-dma down below.

 

GR070418-NVDA

 

In this market, an opportunistic approach is as effective on the short side as it often is on the long side. Laying back and waiting for that rally up into an optimally shortable price level is generally my preferred way of operating. We can see in the examples above that waiting for the rallies to short into is much better than chasing something on the downside.

In some cases, something might even start to look bullish before it reverses in bearish fashion. That was certainly the case with Apple (AAPL) on Tuesday as it pushed above the 20-dema. But this move was short-lived, and the stock simply reversed back to the downside to close below three moving averages, the 10-dma, 20-dema, and 50-dma.

This still looks like a short here, using the 10-dma or even 20-dema as a guide for an upside stop. Even better, if you can get any additional rallies up into the 10-dma or 20-dema, those would certainly offer potentially lower-risk short-sale entries. On the other hand, as with many of these other big-stock NASDAQ names, it may be ready to break out to the downside from here. We shall see when trading resumes on Thursday.

 

GR070418-AAPL

 

Micron (MU) set up nicely at the 50-dma on Tuesday, offering short-sellers a convenient, lower-risk entry at the 50-dma early in the day. The stock then reversed sharply to the downside on much higher volume vs. the prior day. And, considering that Tuesday was a short trading session, the fact that volume ended up at 5% above average for the day means the selling was relatively heavy.

A Chinese court ruling that temporarily banned MU chip sales was cited as being responsible for the move. But, given that MU was already a late-stage, failed-base (LSFB), short-sale target after failing from a cup-with-handle base two weeks ago, one must wonder about what the stock already knew, and when it knew it. For now, any further rallies into the 50-dma remain lower-risk, short-sale entry opportunities from here.

 

GR070418-MU

 

Alphabet (GOOGL) mimics the NASDAQ Composite as it continues to find resistance at its 20-dema while holding above the 50-dma. As I’ve already discussed in recent reports, the stock is a late-stage failed-base (LSFB) short-sale set-up following last week’s confirmed breakout failure.

In this position, any further rallies up into the 10-dma or 20-dema would serve as short-sale entry opportunities as illustrated by Tuesday’s action. GOOGL attempted to rally above the 10-dma early in the day, only to reverse and close near the intraday lows.

 

GR070418-GOOGL

 

Over the weekend I discussed Tesla (TSLA) as one to watch after it reported its production numbers over the weekend. The company reported that 7,000 Model 3’s were produced in a week, exceeding the 5,000-car goal. However, overall production, when other vehicles were included, was rather feeble. My first thought was that great, they’ve produced an additional 2,000 cars that they’ll lose money on!

Apparently, the market wasn’t impressed either, aside from the initial gap-up on the news in the morning. And, as I wrote over the weekend, “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.” Using the five-minute 620 intraday chart, it was possible to hit the stock on the short side at around 162 early in the day.

From there, TSLA just kept plummeting lower in an incredibly ugly outside reversal that came on massive selling volume. The stock then kept on plummeting on Tuesday, ending the day right near the intraday lows and at its 50-dma. Any bounce from here up into the 200-dma at 321.99 would be your next reference for a potential short-sale entry.

 

GR070418-TSLA

 

With the big-stock NASDAQ names all running together and looking similar, my strategy of using the ProShares UltraPro Short QQQ ETF (SQQQ) as a blanket short in conjunction with the 620 remains quite viable. For those paying attention, the SQQQ triggered a MACD buy signal well before the open on Tuesday.

The interesting thing is that this initial signal, which occurred down around 13.82, the SQQQ never looked back as it kept rallying all day. Eventually, the six-period exponential moving average crossed above the 20-period, triggering a full 620 buy signal at 13.91 right at the market open.

Note that the MACD lines later crossed to the downside, but since the moving averages did not cross to the downside as well, the SQQQ remained a long hold. At least that’s how I will handle it. And as long as the SQQQ remains well above my entry, I will generally wait to be forced out more completely rather than just reacting to a MACD cross.

The SQQQ then began marching higher into the last hour of trade on Tuesday, finishing the day right at its intraday peak. Another good example of how we use the 620 chart in conjunction with the SQQQ (the UVXY also worked well on Tuesday using the 620 chart) to fade reaction rallies in the NASDAQ 100 Index.

 

GR070418-SQQQ Intraday

 

Twitter (TWTR) remains one of the better-looking patterns here. I keep looking for a breach of the 20-dema as a possible short-sale entry signal, but so far, it hasn’t happened. I do think that if the NASDAQ Composite Index busts below its 50-dma, you will see TWTR at least test its rising 50-dma, thus making it a tactical short.

The flip side is that if it continues to hold in a tight flag as volume declines, and if the market finds its feet and resumes its rallying ways, TWTR would probably be one of my top long ideas. As always, I don’t take a rigidly bullish or bearish view. Instead, I work out the various permutations with respect to the potential price/volume action and scenarios, and go from there.

In this market, what were once longs can quickly become shorts, and what were once shorts can quickly become longs. I’ve written many times about the idea that in this environment I can easily be short something I was just long, and long something I was just short. That is what is known as playing it as it lies!

 

GR070418-TWTR

 

While TWTR holds up well, Snap (SNAP), may be setting up for another attempt at its 200-dma. Unless, of course, a weakening general market sends it back down to the 50-dma. In any case, the stock is currently ignoring much of the market weakness and holding tight along its 20-dema with volume drying up sharply over the past eight trading days.

Thus, if the general market rally were to resume, SNAP might be one long idea to keep in my back pocket. As FB flounders, TWTR and SNAP might benefit, and so far, the technicals appear to argue for that possibility.

 

GR070418-SNAP

 

Chinese names still, for the most part, remain on the mend. Alibaba (BABA) has been rolling around its 200-dma and closed below the line on Friday. I would still prefer to short this on a weak rally into the 10-dma, which is the next highest moving average, or the 50-dma, which lies just above the 50-dma.

Meanwhile both Baozun (BZUN) and Momo (MOMO) are holding at their 50-dmas after deep pullbacks off their recent price peaks. Both can be considered as being in last-stand positions on their charts. For this reason, one could view either as buyable here right at their 50-dmas with the idea of using the 50-dma as a tight selling guide. If they bust the 50-dmas, then one could reverse to the short side.

Autohome (ATHM) rallied up near its 50-dma on Tuesday before stalling to close in the lower half of its daily price range. The stock got as high as 104.68, about 1% away from its 50-dma at 105.70 before stalling to close at 103.13. I prefer trying to short this as close to the 50-dma as possible, although it was possible to hit it short on Tuesday near the intraday highs given its proximity to the 50-dma.

Thus, one could wait for any potential rally up closer to the 50-dma. Otherwise, shorting it here means one is conceding 2% of potential upside to the 50-dma while using the line as a guide for what is still a relatively tight stop.

 

GR070418-ATHM

 

The weakness in Chinese stocks does not strike me as being entirely due to the ongoing Trade Tiff between the U.S. and China. In fact, the daily chart of the iShares China Large-Cap ETF (FXI), below, reveals that the Chinese equity markets have been in a bear market since peaking in January.

After the initial breakdown and first leg off the peak in early February, the FXI spent the next four months in a bearish consolidation. In early June it then proceeded lower on what is now a second leg down in an ongoing bear market.

 

GR070418-FXI

 

With Chinese markets in bad shape, and the country’s currency, the Yuan, diving like a Peking Duck, a trade war seems like the last thing the Chinese need. In addition, we have the issue of weakening emerging markets which have been slammed by the strong U.S. dollar. These all can provide the necessary ingredients for a contagion of sorts that can bring U.S. markets further into correction territory.

Regardless of how bearish things might look, I want to have at least a few potential long ideas in my quiver just in case the Ugly Duckling shows up and sends the market back to the upside. TWTR and SNAP are perhaps two such situations.

Okta (OKTA) is still holding above the 50-dma after posting an undercut & rally move through the early June lows. The stock may still be in a buyable position using the 50-dma as a tight selling guide. If the general market heads lower, however, all bets would be off, and a breach of the 50-dma could morph this into a short-sale target on a moment’s notice. Play it as it lies.

 

GR070418-OKTA

 

ZScaler (ZS) also looks interesting here following an undercut & rally move. In fact, this was more of a double U&R, and the stock has now pulled into its 10-dma and 20-dema with volume declining. This puts the stock in a lower-risk potential entry position using the 20-dema as a tight selling guide.

 

GR070418-ZS

 

DropBox (DBX) might consider renaming itself to Dropping Like a Rock, as it bounces along its 50-dma. The stock has entirely retraced the 41% rocket ride it had two weeks ago in what we might term a rapid re-entry trajectory. The question here is whether this represents the extent of the pullback and the stock acts like a SpaceX re-usable rocket booster and launches again.

On the other hand, the Cinderella Principle might be more applicable. As we all know from the Disney-fied fairy tale, Cinderella only attended the ball once, so the prospects of her returning to the ball may be slim and none. On the other hand, if the general market finds its feet, DBX may be good for at least a bounce from here. Otherwise, the 50-dma would serve as a tight selling guide.

 

GR070418-DBX

 

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 last two days of the July 4th trading week, which has endured what we might in Latin refer to as a commercia interruptus, are fixing to be somewhat eventful. On Friday, of course, we have the monthly jobs number, and the first scheduled imposition of trade tariffs by the U.S. on China. $34 billion worth of Chinese goods are scheduled to be hit with U.S. tariffs on Friday.

The Chinese have already stated their intention to retaliate with tariffs on U.S. goods of an equal value, but today said they would not be the first to do so. Originally, their tariffs were scheduled to go into effect at 12:01 a.m. Friday Beijing time, which would be 12:01 p.m. EST Thursday in the U.S. So, they will wait until the U.S. officially imposes its own tariffs on Friday U.S. time, and only then will they return the favor.

Meanwhile, stocks remain on edge. With Commerce Secretary Wilbur Ross stating on Monday that the Trump Administration would hold its ground on tariffs no matter how much the stock market sold off, the stage is set for a further market decline and correction.

From an individual stock perspective, I would keep things concrete by having a list of potential long ideas and another of potential short ideas. If one is a long-only player, then if one has not already been stopped out and forced into at least a partial cash position, then simply be ready to take action as necessary based on the real-time action. Take it from there.

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.