The Gilmo Report

June 24, 2018

June 23, 2018

The Dow Jones Industrials Index avoided a nine-day losing streak on Friday, rallying on the strength of oils and defensive names. On Thursday it set a 40-year record by finishing in the red for the eighth day in a row. Friday’s rally looked impressive for most of the day, but the Dow gave up not quite half its gains right into the close as it stalled at the 50-dma and closed in the lower part of its trading range.

 

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Volume was very heavy on Friday because of the Russell Index rebalancing, contrasting with the big red volume spike last week on triple-witching options expiration. The S&P 500 Index gave up more than half of its gains on Friday into the close, stalling underneath the 10-dma on very heavy volume. Friday’s rally in the S&P and Dow looked more like a movement into oils, thanks to a bump in oil prices, and more defensive value type names.

 

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The NASDAQ Composite Index again diverged, this time going down when the S&P and Dow were going up. Volume was also heavy on the NASDAQ exchange thanks to Russell Index rebalancing. On its face, we now have two distribution days off the peak on higher volume. This follows Wednesday’s exhaustion gap to all-time highs on lighter volume.

 

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The action of NASDAQ big-stock names and other leaders in the tech and internet space over the past two days has had the feel of rotation out of extended leaders. In my Wednesday report, I wondered as to whether the recent speculative froth seen in a group of recent IPOs that I listed was an indication of a possible near-term top in the market.

As I wrote at the time, “Hot IPOs that run up so fast become susceptible to equally fast sell-offs.” That was certainly the case with Dropbox (DBX), which had run up 41% in three days prior to Tuesday. It then spent the rest of the week, four days, giving almost all that move back.

This of course brings it back into buyable range of the prior base breakout, but one must wonder whether Cinderella is really coming back for another visit to the royal ball. DBX closed just below the 20-dema, and in my view support at the highs of the prior low-base range lies at around 32.50.

 

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Carbon Black (CBLK) also illustrates the now-you-see-it-now-you-don’t nature of these types of almost random, speculative, and frothy moves in hot IPOs that have zero to little in the way of earnings. Of course, many investors will get sucked into the trap of thinking they have some special investment acumen and speculative brilliance when they happen to buy one of these at the right point.

Not that CBLK didn’t have a proper buy point, because it did. That would be the pocket pivot breakout of early June, and then the small pullback into the 10-dma three days later. That then led to a big upside move, of which 30% was achieved in just the final three days of a very parabolic move.

At that point, one needs to know when they are looking at a gift horse in the mouth, and be ready to bank some profits. Holding out for some perceived, potentially huge move to the upside ignores the fact that the stock just had a huge, nearly instantaneous move to the upside!

 

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The other hot IPO names I mentioned in Wednesday’s report were: BILI, DOCU, EOLS, HUYA, INSP, IQ, PS, PVTL, SPOT, ZS, and ZUO. The majority have given up 20-30% or more of their recent gains. Some, like ZScaler (ZS), may be in buyable positions, but remain highly speculative and risky names to play if the general market weakens.

Here we can see ZS pull a nice round trip, about 20% off its recent peak at 44. It then posts an undercut & rally move along the prior buyable gap-up (BGU) low at 34.85 and then on Friday rallies to trigger a U&R. It then closes just above the 20-dema at 36.63 on a pocket pivot volume signature. Not bad, and objectively actionable using the 20-dema at 35.33 as a tight stop, but only if the general market stabilizes.

 

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Nvidia (NVDA) looked weak to me per my discussion in Wednesday’s report where I noted that, “It’s possible that this could morph into a short right here, using the 10-dma as a tight stop, and then looking for a breach of the 20-dema to confirm the potential weakness.” That occurred Thursday as the stock reversed at the 10-dma as buying volume failed to show up, and then broke below the 20-dema.

At that point it triggered as a short-sale, and then Friday broke lower on what appears to be an imminent test of its 50-dma on higher selling volume. This also took the stock below its prior base breakout and re-breakout point, which again brings this into play as a late-stage failed-base (LSFB) short-sale set-up. So, when it comes to keying on individual stocks, we may perhaps conclude that NVDA is signaling more weakness ahead.

 

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With a name like NVDA starting to come loose, we can look for other clues among other leading stocks. For example, keep a close eye on Netflix (NFLX) here as it sits right up at all-time highs following a strong-volume move through the $400 Century Mark on Wednesday.

Note that the stock stalled a bit off the highs on Thursday on the heaviest volume since April. The move through $400 was also helped along by an analyst putting a $500 price target on the stock. So, what I would watch for here is how any retest of the $400 price level occurs, since a break back below that level would be a bearish development.

 

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Facebook (FB) is hanging tight along the $200 Century Mark as volume declines, which looks constructive on its face. This keeps the stock within buying range of the Century Mark, using the $200 level plus 1-3% of downside porosity as a tight selling guide. Otherwise, if FB’s move through $200 turns out to be a “false movement,” as Jesse Livermore might say, then that would of course have bearish implications.

 

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Apple (AAPL) attempted to move higher after the marginal U&R move it had on Wednesday, which I noted in my report of that day. But, as I also noted, that was an unconvincing move, and the ensuing rally right up into the 20-dema became shortable. So, if you went long on the U&R, you were flipping back to the short side on Thursday as the stock pulled a higher-volume outside reversal to the downside.

AAPL now looks primed for a test of its 50-dma and the prior base breakout point of early May. If it fails at that point, then that of course has bearish implications, and not only for the stock, but likely the general market as well. The bottom line is that the stock offers more evidence that leading stocks are starting to break down here and there, which may be giving us a clue as to where this market is headed.

 

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Alphabet (GOOGL) might also be watched after it has gone nowhere following a base breakout on Monday. The stock stalled and reversed off the highs on Wednesday on heavy volume, and is now back at the breakout point. This technically puts it back in a lower-risk entry position based on the prior base breakout. If you like breakouts, here it is, but as I said on Wednesday, good luck!

 

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Amazon.com (AMZN) ran into some heavy selling off the peak on Thursday. In my Wednesday report, I noted that the stock “looks like it may have a reasonable chance of retesting the line after stalling today.” That was three days ago on the daily chart, below, and we now see the stock closing below the 10-dma on an unsuccessful retest of the line.

This should be watched closely, as well, as a big-stock leader. A test of the 20-dema may be in store now, and if the stock fails to hold the line, it could have bearish implications since it has obeyed the 20-dema quite nicely since breaking out from a cup-with-handle in late May. A successful test of the 20-dema would of course bring it in to a potentially lower-risk entry position at that point, using the line as a tight selling guide.

 

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I also wrote about Tesla (TSLA) in my Wednesday report as follows: “Nevertheless, the stock has had a nice run over the past month, so a pullback closer to the 20-dema or even the 200-dma would not be out of character for the stock.” That’s exactly what we saw on Friday as the stock broke down hard from the prior highs around the 360 level on heavy volume.

That brought it right into the 20-dema on heavy volume Friday. Obviously, if it can’t hold the 20-dema, then the 200-dma comes into play as your next reference for potential support. Of course, it’s also possible that TSLA’s move through 360 earlier in the week was its last hurrah before moving back to the prior lows around 280.

 

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Twitter (TWTR) is holding along its 10-dma where it has found support over the past two days. I would not be looking to buy shares up here given its extended position. Instead, wait to see if you get any kind of pullback to the 20-dema down at 41.79 as a more opportunistic entry.

 

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Snap (SNAP) may have had its run after reversing from a point near the 200-dma earlier this past week, but it doesn’t seem to want to die just yet. After holding the 50-dma on Thursday, the stock rallied back above its 20-dema and then held tight support at the line again on Friday.

Volume dried up to -56.4% below average on Friday. This creates a technically actionable voodoo buy point using the 20-dema as your very tight selling guide, or the 50-dma as a wider selling guide.

 

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Nutanix (NTNX) provides some bearish market evidence as it has now failed badly on its last two breakout moves. While this was potentially buyable along the 20-dema, I noted in my Wednesday report that, “…if the stock were to break below the 20-dema, that could trigger the stock as a late-stage failed-base short-sale entry at that point. Play it as it lies.”

And, indeed, if one were playing it as it lies, NTNX morphed into a short Friday as it busted the 20-dema after briefly rallying above the line in the morning. The break was brutal, and came on extremely heavy volume. This makes it a late-stage failed-base (LSFB) short-sale set-up, and any rallies back up into the 50-dma would provide your next potentially lower-risk short-sale entry opportunities. As the song goes, “Boom-boom, out go the lights!”

 

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Roku (ROKU) is holding near-term support at its 10-dma, but I would not be chasing the stock up here. Since it has had a very nice run since I first discussed it in mid-April as an Ugly Duckling long set-up down around the 35 price level, my approach would shift to one of being more opportunistic. That means waiting to see if you get some kind of pullback to the 20-dema down at 41.81 as a potentially lower-risk entry.

 

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Railroaders CSX Corp. (CSX) and Norfolk Southern (NSC) both still look shortable up around their 20-demas. Both stocks look similar on their charts, and in Wednesday’s reports I showed CSX’s chart, so this time I’ll mix it up by showing NSC’s chart. Here we can see NSC stalling and reversing at its 10-dma before closing back below the 20-dema on heavy volume.

CSX never got as high as its 10-dma on Friday, instead reversing at and closing below the 20-dema. So, both stocks remain in shortable positions, using their 20-demas or 10-dmas as tight upside stop.

 

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CyberArk Software (CYBR) illustrates why there is often little point in trying to keep buying a leading name as it continues to rally. At some point, the stock reaches such an extended point after a prolonged uptrend that pullbacks to the 10-dma or 20-dema do not produce immediate and strong upside moves.

Here we see CYBR not only break the 10-dma, but finally close below the 20-dema on Friday. That’s the first close below the 20-dema since I first began discussing it in early April along the confluence of the 10-dma and 20-dema. Therefore, this is an automatic entry point. The stock likely needs more time to build a new base, and there is also always the possibility of a near-term top.

 

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Fortinet (FTNT) found support at its 20-dema for the second time this week, holding the line on Friday on heavy selling volume. Given the extended state of the stock, I would not be looking to go for any reflex entries at the 20-dema. I think at best FTNT would need to build a new base or longer consolidation before moving higher. At worst, a breach of the 20-dema would have bearish implications and could bring the stock into play as a short-sale target.

 

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Palo Alto Networks (PANW) broke below its 20-dema on Friday on heavy volume. This contrasts with its earlier bounce off the 20-dema on Tuesday where volume was rather light. This isn’t looking so hot, so it’s possible that a test of the 50-dma might be coming, depending on the general market action this coming week.

I prefer to see light volume on a test of a moving average like the 20-dema, so this isn’t exactly what the doctor ordered. Perhaps taking a more opportunistic approach by waiting to see what any test of the 50-dma looks like is the more prudent way to go here. Speaking for myself, that is the preferred approach.

 

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In my Wednesday video report, I had to correct the discussion on FireEye (FEYE) in my written report since the chart I used in the written report did not show the price and volume data for Wednesday. As I noted in my video report, the stock had reversed at the confluence of its 10-dma and 20-dema on weak volume, making it a short-sale target at that point.

On Thursday, FEYE briefly rallied up into the confluence of its 10-dma and 20-dema, again on weak volume. It then reversed hard to the downside and continued lower into Friday before undercutting and then rallying back above its 200-dma and the prior late-May low in the pattern.

The stock is looking rather ugly, but perhaps it becomes buyable here based on the U&R move through the May 29th low at 16.27. FEYE closed Friday a dime above that low, but frankly I wouldn’t be surprised if it busted the 200-dma altogether.

 

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More evidence of stocks that aren’t acting bullishly is found in Okta (OKTA), which I discussed as a two-side situation in my Wednesday report. As I wrote, “…that a breach of the 20-dema could bring it into play as a short-sale target.” That’s what occurred on Friday as the stock breached the line early in the day, and then broke lower before finding intraday support off the lows and closing about mid-range.

That was good for a quick short scalp, and now the stock can be viewed as a short on rallies back up into the 20-dema. Overall, however, I see the stock’s action as a sign that leading stocks are losing their spunk, which may have broader implications for the general market.

 

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Sailpoint Technologies (SAIL) has also lost some of its spunk, pulling the maximum pullback to the 50-dma on Friday instead of holding support at its 10-dma.  While the stock may bounce off the 50-dma, depending on the state of the general market, anyone looking to buy the stock here would need to stay nimble with the idea of using the 50-dma as a tight selling guide.

On balance, the action looks weak. Therefore, any bounce off the 50-dma could just as easily become shortable on a rally back into the 20-dema, so play it as it lies.

 

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Twilio (TWLO) has changed character after a steady, shallow uptrend extending from its early May buyable gap-up (BGU).  On Thursday and Friday, it broke to the downside, breaching the 20-dema on both days. Volume was heavy on the break.

Notice that on Friday the stock broke below the prior 55.09 low in the pattern and then rallied to close just above it at 55.25. That creates a technically actionable U&R long set-up here using the 55.09 low as a very tight selling guide. If it doesn’t hold, then look for a test of the 50-dma.

 

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Baozun (BZUN) is bouncing around along its 20-drma, closing below the line on Friday. That’s the first close below the 20-dema since its base breakout of mid-May. At best, this needs to build a new base or at least a longer consolidation, perhaps along the 20-dema. I’d give this some time to set up again, assuming it doesn’t break down altogether.

 

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Momo (MOMO) is drifting down closer to its 20-dema after making for a quick short scalp off the 10-dma on Thursday. Volume dried up on Friday to -51.1% below average, but the stock is still sitting just above the 20-dema. If I really need to buy this thing up here, given how extended it is from the prior buyable gap-up, I would at least wait for it to hit the 20-dema after spending a little more time consolidating the prior strong upside move from the BGU.

 

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Autohome (ATHM) is holding tight along its 20-dema as volume declined to -1% below average, virtually flat on the day on Friday. I wrote on Wednesday that I believe the stock was vulnerable to at least a test of its 20-dema, and we’ve now seen that. Technically, this is in a lower-risk entry position using the 20-dema as a tight selling guide.

 

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Alibaba (BABA) sits as last-stand support here right along the $200 Century Mark. Volume dried up on Friday to -45% below average, so this is a voodoo entry here. In this case you would use the 200 Century Mark level as a tight selling guide given that the stock is now sitting below its 20-dema. This could also fail at the 200 price level, at which point it would potentially morph into a short-sale target at that point. So, play it as it lies.

 

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Notes on other names discussed in recent reports:

Carbonite (CARB) has split wide open, breaking sharply below its 20-dema on Friday on heavy volume. That made it a sell at that point, in my view, given the prior extended upside run since I first discussed it as a buy in early April along the 29 price level.

Intuitive Surgical (ISRG) pulled into its 20-dema on Friday on light volume, which technically brings it into a lower-risk entry position using the 20-dema as a tight selling guide.

Square (SQ) has pulled into its 10-dma, but remains in an extended position. Watch for a test of the 20-dema at 62.48.

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 bottom line in this market is that more individual leading stocks are acting like shorts instead of longs. This would include the cloud names I discussed as shortable in my Wednesday video report: Salesforce.com (CRM), ServiceNow (NOW), Workday (WDAY), and Splunk (SPLK). RM. Those have all come apart over the last few days.

All these names are starting to show signs of breaking down from potential late-stage bases. SPLK is perhaps the worst of the bunch. On Friday, the stock split wide open on huge selling volume, setting up a clear late-stage base failure.

 

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So, in addition to what I’ve discussed in this report, there is a lot of bearish action to be seen in leading and recently-leading stocks. In many cases these have turned into outright short-sale targets, as has been the case with AAPL, NVDA, SPLK, NTNX, and others. Therefore, this is turning into a de facto bifurcated market, where we see some leaders break down altogether, while others may be pulling into lower-risk buy zones, such as BABA.

But if these remaining leaders holding near-term support start to break down, you can bet that we then have a deeper market correction on our hands. I have no problem with that, since individual stocks have in most cases already forced one out if one uses reasonably tight selling guides. If things want to set up on the long side again, then I can afford to just watch and wait.

In the meantime, I have no problem moving to the short side if and when I see actionable set-ups. There have certainly been more than a handful over the past few days. That, in and of itself, is giving us a clue as to where this market is likely headed. I say, for now, just look to go with the set-ups, long or short, and refrain from developing a rigidly bullish or bearish point of view.

In this manner, you will naturally be pushed to the correct of the side of the market, or at least the correct side of individual stocks. For now, if you only play the long side, I say sit back and see if and how things set up again. There are some broader danger signals flashing in the here and now, so waiting for prudent, lower-risk entries if you’re a long-only player is the prescribed approach. 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 no positions, 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.