The Gilmo Report

July 8, 2018

July 7, 2018

In the face of bearish action on Tuesday, the market once again proves why one simply cannot take a rigid bullish or bearish position at any given point in time. The reality of this market is that there is still plenty of liquidity to drive a herd of algos in either direction, and one must be ready to move with the action as it unfolds in real-time.

Not that it is always that easy. This market loves to throw investors wide-arcing curve balls, and those looking for trending action in the short-term are still left in uncertain territory. Friday’s jobs number started out looking like a bust as the futures rolled lower in pre-open trade, but the indexes soon found their feet and launched higher.

The NASDAQ Composite Index, which had regained its 20-dema on Thursday, continued to push higher. I tweeted on Thursday that investors should have a plan ready just in case the NASDAQ held above and continued beyond its 20-dema. With the continuation further above the 20-dema on Friday, the index has now filled the gap of June 25th, and is within 2% of its all-time high.

 

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The S&P 500 Index also cleared its 20-dema on Thursday, and after a brief drop below the line on Friday, turned back to the upside to close up on the day on lighter volume. In the process, it also filled its June 25th gap-down and is within 2% of its prior June highs, but about 5% away from the January highs.

 

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The primary method for capitalizing on the action over the past two days has been the venerable undercut & rally long set-up. Many of these individual stock set-ups coincided with the NASDAQ’s first test of its 50-dma last week, and after Monday’s successful second test of the 50-dma they were able to stabilize and move higher.  Several of these were delayed U&Rs, as I’ll explain below.

In some cases, the rally is bringing certain formerly-leading stocks into areas of potential resistance. Here we see that the market rally this week has brought Nvidia (NVDA) right up near its 50-dma. Volume was light on Friday as the stock ran into the 20-dema and closed just below the line.

Is this a short here? That’s certainly a possibility, with the idea of using the 50-dma as a guide for a tight upside stop. On the flip side, if the stock pushed right on through its 50-dma it could end up as a double re-breakout after failing on a prior breakout and then breaking out again once before.

 

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After a brutal break two weeks ago and a retest of those lows on Monday, Netflix (NFLX) has retaken the $400 Century Mark price level and its 10-dma. The 10-dma had previously served as resistance for the stock, but on Thursday it was able to close just above the line for the first time since the brutal June 25th gap-down break.

NFLX did not, however, clear the highs of seven trading days ago on the daily chart when it reversed back below the 10-dma on heavy volume. I’m not sure if I’d be looking to buy the stock here, although one could take a shot on the long side with the idea of using the 10-dma or the 20-dema as a selling guide.

Otherwise, any reversal back below the 10-dma could trigger the stock as a short-sale at that point. At best, this is an unclear situation that may still break down, or simply go sideways as it builds a consolidated without resolving either way. Play it as it lies.

 

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Amazon.com (AMZN), which closely resembles NFLX on its daily chart, is in the same position. It regained its 10-dma on Thursday and then pushed further above the line on Friday. Note, however, that it has not moved above the highs of this past Tuesday and the prior Friday.

Nevertheless, the stock is sitting at the 10-dma in a relatively tight range as volume dries up. Hence it can be considered buyable here using the 10-dma or 20-dema as a tight selling guide. If it should reverse and breach the two shorter moving averages, the flip side, of course, is that it could trigger as a short-sale at that point.

 

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Apple (AAPL) has also pushed back above its 20-dema after regaining the 10-dma and 50-dma on Thursday. Volume picked up slightly on Friday, but was well below average. Notice how AAPL, like the prior three stocks I’ve discussed so far in this report, has pulled a delayed sort of undercut & rally move. It is in a buyable position here using the 50-dma as a tight selling guide.

NVDA, NFLX, AMZN, and AAPL have all undercut prior lows in their patterns the prior week when the NASDAQ first tested its 50-dma and bounced. They have since gone sideways, chopping above and below those prior lows, before gaining some traction over the past two days. This is delayed U&R stuff, and while not so easy to execute on the long side, remains valid until and unless we see these stocks break down again.

 

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Alphabet (GOOGL) has the same look after failing on a prior breakout, bouncing off its 50-dma, and then pushing back above the 10-dma and 20-dema Friday on light volume. This brings it right into its prior June 25th gap-down window. Like the rest, it also undercut a prior low in the pattern twice over the past six trading days, and eventually rallied above that low in a delayed U&R.

Also, like the rest, this may be tested on the long side with the idea of using the 10-dma or 20-dema as tight selling guides. Otherwise, a reversal back below the moving averages could trigger the stock as a short-sale at that point.

 

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Facebook (FB) pulled a classic Ugly Duckling maneuver as it went from ugly to beautiful over the past two days. A sudden surge back up to the prior highs and an all-time closing high on Friday completely changed the pattern. This sudden change of character in an individual stock, especially a big leader like FB, is not unusual for this market, however.

This is why I always prefer taking an opportunistic approach by buying weakness without chasing strength, and shorting rallies without chasing weakness. If I was looking to short FB at the 20-dema, then that would have served as a guide for a tight upside stop, and if the stock keeps going, there is always the option of flipping and going long while keeping risk to a minimum on the short side.

Technically, this second move above the $200 Century Mark is buyable using the 200 price level as a selling guide. Another failure at 200, however, could bring the stock back into play on the short side. All of that will no doubt depend on where the market goes from here.

 

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Micron (MU) has looked pretty ugly for the past couple of weeks. It reached maximum ugliness on Tuesday when it reversed at its 50-dma and closed down on higher, but only average volume. Since then it has held tight on two tight-ranged little inside days.

Note also that Tuesday’s move undercut two prior lows in the pattern. MU on Thursday rallied above these lows in a U&R long set-up using either the 51.68 or the higher 52.83 low as selling guides. Yes, I know it looks like it should be shorted on any weak rally up into the 50-dma, but the U&R here is setting up the rally.

Also, if the stock rallies up into the 50-dma and then keeps going, don’t discount the possibility that it could revisit its prior May and June highs. It is the absolute hallmark of this market that stocks can have strong upside moves just when they look their ugliest, and certainly ugly enough to lure in late short-sellers! Play it as it lies!

 

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Tesla (TSLA) didn’t give us a bounce off the 50-dma to short into on Thursday, instead pushing lower and closing below the line. Volume was heavy, and given the strong close off the intraday lows, has the look of support along the area of price congestion that extends from early April to early June.

On Friday, TSLA again closed below the 50-dma. If this market doesn’t roll over, the shorts may again be confounded if we see the stock regain the 50-dma. At that point, I might be inclined to go long the stock on a moving-average undercut & rally type of situation (acronymically, an MAU&R) using the 50-dma as a tight selling guide.

The flip side is that this can also be viewed as a short-sale entry point right here, using the 50-dma as a guide for a tight upside stop. Obviously, this is a two-sided situation, so you want to be aware of how this might play out to take appropriate action based on the real-time evidence.

 

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Twitter (TWTR) was one of the better patterns out there as I noted in my Wednesday report, and has held up much better than the market. A breach of the 20-dema did not occur, and instead on Friday we saw the stock pull a trendline flag breakout on increased, but below-average volume.

I don’t think I’d chase this here, and would prefer instead to see what a pullback to the 10-dma might look like, assuming it were to occur. TWTR got some help from another analyst buy recommendation on Friday, which makes me wonder where this analyst was when I first liked the stock much lower.

 

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I offered Snap (SNAP) as a potential buy idea in my Wednesday report. At that time, the stock was holding tight along its 20-dema as volume dried up sharply. SNAP hung out one more day on Thursday, and then on Friday launched slightly higher on light volume. It is now extended, but was there for the taking Friday morning as it hung along the two moving averages.

 

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If I’m going to take a shot at any Chinese stocks, I think I’d focus on Baozun (BZUN) and Momo (MOMO). These both seem a little more coherent in terms of their chart patterns and the fact that both are still holding above recent base breakouts.

Baozun (BZUN) is hanging right along its 50-dma in a sort of Wyckoffian Retest of the prior week’s lows. That was when it tested the top of its prior base breakout and held. Thus, I view this as buyable here using the 50-dma or the top of the prior base just below 52 as a selling guide, depending on how tight you want to keep things.

 

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Momo (MOMO) has also held along its 50-dma after undercutting the intraday low of the prior late May buyable gap-up (BGU) and base breakout. The stock has since rallied, although in somewhat delayed fashion. I like this on any retest of the 50-dma from here with the idea of using the line as a tight selling guide.

 

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Okta (OKTA) has continued to move higher following its prior U&R long set-up, which I discussed last weekend, in my last video report, and in my Wednesday report. The stock has been inching higher, and pushed a little bit higher on Friday on light volume.

In this position, I would prefer to try and buy the stock on a low-volume pullback into the 10-dma or 20-dema. The 20-dema is higher at 51.50, while the 10-dma is down at 50.59. The stock has some overhead congestion from mid-June to work through, so it may be that the more opportunistic approach of waiting for a pullback to the 10-dma is better. However, you won’t know for sure until you see it, so play it as it lies!

 

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ZScaler (ZS) is another U&R long set-up that I’ve discussed over the past week or so in written and video reports. It has since edged higher and on Friday pushed higher on a five-day pocket pivot signature. I like the action, but in this position, I would prefer to wait for a pullback to the 10-dma at 36.27 as a lower-risk entry, if I can get it.

 

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On a weird trading day ahead of July 4th on Tuesday, our old friend Roku (ROKU) posted a pocket pivot gap-up move through the 10-dma on heavy buying volume. The stock benefited from an analyst’s buy recommendation and $50 price target.

This has taken ROKU all the way back to its prior highs, and just missed posting a higher high on Friday. The pocket pivot is a good thing to see, but I would look to use any pullbacks into the 10-dma at 43.73 as lower-risk entries from here, as we saw on Thursday.

 

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Don’t look now, but Stitch Fix (SFIX) has broken out of a cup-with-handle base on heavy volume. This came after a pocket pivot off the 20-dema and up through the 10-dma on Thursday. This is slightly extended, so I would look for any pullback into the 30 price level down to the 10-dma at 28.44 as a lower-risk entry.

 

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The Cinderella Principle keeps working against DropBox (DBX) as it simply cannot regain its prior glory. It is somewhat puzzling to see a stock have such a monstrous, three-day upside move on huge volume and then just as quickly see all the air come out of it. One has to wonder what drove that move in terms of the decision-making that caused so many buyers to pile into the stock back in mid-June.

Whoever, or whatever, they were, they have melted away, and the stock is now dipping below its 50-dma with selling volume picking up on Friday. DBX is now sitting more or less on top of a prior region of price congestion extending back to early May. I’m still waiting for it to follow through with some sort of concrete long entry signal, but so far, no dice.

Certainly, DBX is now living up to its name. But maybe, just maybe, something might develop if we see an undercut of last week’s low at 30.65 and the stock is able to rally back above that low. That’s one potential scenario, but so far, the concrete evidence to support it is yet to be had.

 

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Turtle Beach Corp. (HEAR) is sitting in a flag-on-flag (maybe even a high-tight-flag-on-high-tight-flag!!!) formation after posting a massive turnaround in earnings and sales growth back in early May. Forward annual earnings estimates look strong as well, and the stock is sitting right at its 10-dma with volume drying up to -69% below average on Friday.

HEAR designs and markets what are known as “premium audio peripherals for video game consoles, PCs, and mobile devices, including officially-licensed headsets for the next-generation Xbox One™ and PlayStation® 4 consoles,” according to the company’s website. The video-game area of the market, including ATVI, EA, and TTWO, all look to be setting up as well, so I would look for a possible group move to develop.

 

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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.

In my last report I closed by advising members to “…keep things concrete by having a list of potential long ideas and another of potential short ideas.” The way this market acts, you must be ready to move in any direction as necessary. And you get a pullback, you especially must be alert to how and where the indexes might be finding support and where the potential long set-ups might lie if their tests of support are successful.

Once again, the U&R long set-up has proven its worth in this type of general market situation. Leading stocks pull down in their patterns, often looking like they are done for. At that point, they simply find a low to undercut and then rally back above that low, triggering a U&R in-motion. So far, these have served as high-utility long entries when the market turns off a low.

Someday, however, the U&Rs will stop working, and maybe then we will go into a true bear market. For now, we’ve seen a number of U&Rs among names I’ve discussed in recent reports, including last week’s video report. Most of these have moved higher, and now it’s a matter of seeing how they consolidate.

In terms of actual breakouts, those are far and few between, if not entirely non-existent, except for a stock like SFIX. In the meantime, the situation remains fluid, and there is always the chance that this current rally in the major indexes loses momentum as they approach their June highs. U&R set-ups remain in effect, however, until a nearby level of support, such as a moving average, or the prior low through which the stock initially rallied to set up the U&R, are broken.

There isn’t anything to get theoretical or fancy about, since we can just keep things concrete. The U.S.-China Trade Tiff is allegedly heating up, but I must think at some point the market mind will have figured out all the worst-case scenarios and their probabilities. Once all that has been properly discounted, then we will see which areas of the market have the potential to assume leadership roles. And the only way you can figure that out is to simply watch the 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 positions in BZUN, MOMO and ROKU, 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.