The market started the week out on a decidedly negative note after the Wall Street Journal reported that the Trump Administration was planning to impose restrictions on Chinese investment in U.S. technology companies. This sent the futures down sharply over the weekend, leading to a big sell-off on Monday.
After stalling and churning yesterday on a reaction rally attempt, the indexes looked set for another cliff dive this morning when overnight futures were down big. But Treasury Secretary Mnuchin went on CNBC at 8:00 a.m. Eastern time to clarify that restrictions on Chinese investment in U.S. tech companies would be done via a Committee on Foreign Investment in the U.S., which will be known acronymically as CFIUS.
This was interpreted as a softening of the Administration’s hardline stance. The futures quickly did an about-face, and the market was off and running to the upside once the opening bell was rung. For those of you who follow me on Twitter at @gilmoreport (which you should, frankly), the whole thing smelled bad to me, so I decided to press on the short side into the rally.
That turned out to be a smart move as the indexes all reversed sharply into the red as we moved through the middle of the day. By the close, the NASDAQ Composite Index had given up all its morning gains to close -1.54% to the downside on higher volume. The index ended the day just above its 50-dma, so I’d be looking for a possible undercut of the index tomorrow, but we shall see.
The S&P 500 Index closed below its 50-dma for the first time since early May on a big outside reversal to the downside. Volume was higher, and a test of the 200-dma doesn’t seem too far-fetched of a possibility. On its face, the action is bearish, period.
The market action over the past few days has left the long side of the market in shambles as many leading stocks have broken down sharply. Long-only players have been mostly relegated to trying to catch the deep pass, so to speak, by jumping in at deep support levels in leading stocks as they get shellacked.
Case in point would be Netflix (NFLX), which went crashing back below the $400 Century Mark on Monday before finally finding deep support at its 20-dema. A bold soul would have closed their eyes, perhaps, and bought stock there, allowing them to participate in the next morning’s gap-up open.
But that move gave it up quickly today as NFLX opened higher and then reversed on heavy selling volume. The action is not bullish, and certainly not buyable, since there is the possibility of a potential breach of the 20-dema coming. Rather, I considered NFLX to be a short this morning, and it was.
Worst of all, the perceived escalation of the Trade Tiff has utterly decimated Chinse names like Alibaba (BABA), Autohome (ATHM), Baozun (BZUN), and Momo (MOMO). The carnage in all these names has been evenly spread about, with all four breaking down sharply over the past few days. They continued lower today even as the indexes rallied.
Alibaba (BABA) gapped below the $200 Century Mark on Monday and sliced right through its 50-dma. It has since been unable to rally back above the line. It was technically a short when it breached 200 on Monday. Thus, another leader quickly morphs from a long to a short in the flash of an eye.
It is now setting up as a late-stage failed-base (LSFB) short-sale target and has been shortable on rallies up closer to the 50-dma over the past couple of days. It closed today just below the 200-dma on heavy selling volume.
Autohome (ATHM) has also failed on a recent breakout attempt as it gets slammed below its 50-dma. This is on LSFB-watch, and is technically a confirmed LSFB. Now we look for any rallies back up into the 50-dma as potential short-sale entries.
Baozun (BZUN) has been in a free-fall over the past three days and broke below its 50-dma today on heavy volume. It remains above its prior base breakout point at around 52, but just barely. This may be an LSFB in process, such that rallies into the 50-dma from here could be used as lower-risk short entries using the line as a tight stop.
Momo (MOMO) held above its 50-dma by the close today, but had already been cascading sharply lower over the past five trading days. Note that it also held above the intraday lows of its late May buyable gap-up (BGU).
I suppose if one were either brave enough or crazy enough to buy it here with the idea of using the 50-dma as a tight selling guide, the stock can viewed as being in a lower-risk entry position here. I know one thing, given the prior cascading downside break, I wouldn’t be looking to short this thing, at least not until I saw what any bounce off the 50-dma looked like.
Despite all the trade tiff rhetoric and rhetoric-softening, the Chinese stocks are telling us all we need to know. In all cases above, these stocks became actionable short-sales on Monday based on the methods taught in this report and in my book, Short-Selling with the O’Neil Disciples.”
Short-selling in this market, however, does require some serious intestinal fortitude, given the general market’s intraday volatility. In my tweets, I have likened it to a series of mini-tidal waves as the market sloshes back and forth, even as it etches out an overall trend to the downside, as it did today. Going into the close, it almost looked like the indexes would try and rally back to the unchanged line, but by the close had given it up to finish the day right near the intraday lows.
Getting back to U.S. big-stocks, Facebook (FB) dropped back below the $200 Century Mark on Monday, and briefly regained that price level this morning. It eventually found resistance above 200 and around the 10-dma posting a big outside reversal on increased, but below-average, volume. For now, this can be viewed as a short at 200, using that as your guide for an upside stop.
Nvidia (NVDA) is now living below its 50-dma, and is a confirmed LSFB short-sale set-up. In this case, the weak rally into the 50-dma today offered a short-sale entry. The stock then posted a lower closing low on light volume as buyers failed to show up.
Note that it has also failed to hold above the prior base breakout and re-breakout point, as highlighted in green on the chart. A broken leader, to be sure.
Apple (AAPL), which is another LSFB short-sale set-up, rallied back up into its 20-dema this morning and promptly reversed to the downside on higher selling volume. The stock had closed below its 50-dma on Monday on heavy selling volume, so the shortable rally into the 20-dema was textbook. Such rallies might still be viewed as shortable from here.
Alphabet (GOOGL) failed on its recent breakout attempt, although I must admit it came as no surprise to me. As I’ve written in the last two reports, anybody who is wedded to the idea of buying breakouts could have bought this one, but I could only wish them good luck if they did. So far, their luck hasn’t been so good.
GOOGL is now an initial late-stage failed-base situation given the breakout failure on a gap-down through the 20-dema. As short-sellers who have read my book on short-selling, the first sign of an LSFB is the initial bust of the 20-dema on a breakout failure. That’s what you’re seeing in GOOGL, as well as many other former big-stock NASDAQ leaders.
Amazon.com (AMZN) broke below its 20-dema on Monday on heavy selling volume. It rebounded with the market over the past two days, running into resistance at its 10-dma today. This led to a big outside reversal to the downside on higher, above-average volume. This may now be starting to show signs of a possible LSFB in the making.
Note that AMZN’s breakout in late May occurred on feeble volume levels. Throughout June we’ve seen mostly higher down volume compared to up volume in the pattern. This is now starting to look like a short on any rallies back up to the 10-dma or 20-dema, using the 10-dma as a tight upside stop.
We’re seeing a lot of these big-stock NASDAQ names starting to show some cracks in their armor. These are all exhibiting the initial signs or even confirmations of late-stage base-failures. Thus, we must all take the action at face value and thereby be alert to the fact that this could be a harbinger of more weakness to come.
With the NASDAQ Composite approaching its 50-dma, there is always potential for a reaction bounce, so short-sellers will have to remain nimble. But that’s nothing new for this market. Something is bothering this market, and may have yet to run its course, even if we see a logical reaction bounce off the 50-dma by the NASDAQ.
I tweeted this morning that one way to short big-stock NASDAQ names when they are showing the appropriate group-wide technical characteristics is to simply use the ProShares UltraPro Short QQQ ETF (SQQQ) as a sort of blanket short. For those of you who are new to The Gilmo Report, I will review how the 620 chart can be used.
This morning we had a news gap-up in the market after Secretary Mnuchin babbled something about a CFIUS solution to the issue of regulating foreign investment (read: Chinese) in U.S. tech companies. That immediately gets my antennae up since news gap-ups in a weak environment can often reverse, and so create some of the better intraday shorting opportunities.
Once I saw the first MACD cross of the day about 35 minutes after the opening bell, I entered a long position in the SQQQ. It then pulled down less than 1%, but the MACD lines did not cross back to the downside, so it was a hold. At around 8:25 a.m. PST, the 6-period line crossed above the 20-period line, issuing a full-blown buy signal.
The 6-period line never crossed back below the 20-dema line, so the SQQQ was a hold given that there was some minor cushion from the initial entry despite the fact that the MACD lines did briefly cross to the downside. Remember, the idea here is not to quibble over 10-15 cents, since you’re looking to catch a nice move in the SQQQ that carries into the close. That’s precisely what we got today
I would emphasize in the extreme that this is not a mechanical approach. It involves a fair amount of judgment and flexibility. At the same time that I’m working the SQQQ based on what I’m seeing on the 620 intraday chart, I’m also watching the indexes and the major components of the QQQ, which is simply a proxy for the NASDAQ 100 Index. When things line up and stay lined up, I know I’ve probably got a nice move developing in my favor, as was the case today.
To review, a 5-minute 620 intraday chart is created as follows: On the price bar area of the chart, we use an orange 6-period exponential moving average and a blue 20-period exponential moving average. Since one period is five minutes, a 6-period moving average is really a 6×5 or 30-minute exponential moving average. Likewise, the 20-period is a 20×5 or a 100-minute exponential moving average.
The MACD settings, which show up in their own window along the bottom, are as you can see on the chart below, which is an eSignal® chart. While other systems’ settings may vary slightly, I am using (6, 20, C, 9, false, true) as my settings. If you need help setting this up then I suggest that you contact customer support for the specific charting service you are using.
Another vehicle that can be used is the ProShares Ultra VIX Short-Term Futures ETF (UVXY). As most of you no doubt know, if you go long this you are supposedly going long the VIX, although you will notice moves in the $VIX itself may not always correlate to moves on the UVXY, but the basic idea is that you are shorting the market, end of story.
We can see that this morning, there was a nice MACD cross on the UVXY’s 620 chart not quite an-hour-and-a-half after the opening at 6:30 a.m. my time here on the West Coast. That price on a closing bar basis on that MACD cross was 11.60. It then moved higher from there, reaching a peak of 13.54 before finally closing at 13.15.
Tesla (TSLA) CEO Elon Musk keeps taunting short-sellers that they allegedly have a week until their short positions “blow up.” Supposedly, the be-all, end-all of the company’s existence rests on its ability to finally manufacture 5,000 Model 3’s in a week. Companies like Toyota manufacture 13,700 vehicles in a single day, so we already know that the world sets the bar very low for a company like TSLA.
All I know for certain is that the stock was shortable today at the 10-dma. It was last shortable above the 360 price level, which I alluded to in my report of exactly one week ago when I was looking for at least a test of the 20-dema or even the 200-dma. We got that, and the ensuing bounce has carried as far as the 10-dma where it ran into resistance.
TSLA will update investors on its currently quarterly production numbers, so I’m guessing that the company will have produced 5,000 Model 3’s somewhere in the current quarter. While I wouldn’t hold a position in the stock ahead of this allegedly all-important news, I am not averse to shorting the stock at the 10-dma with the idea of taking a short-scalp on any retest of the 20-dema or even the 200-dma.
Twitter (TWTR) has been holding up perhaps a little better than other leaders in this current market slide. However, it did reverse today at the 10-dma as selling volume picked up vs. the prior day. This looks like it is primed to test the 20-dema.
Therefore, if the stock busts the 20-dema in conjunction with the general market weakening, then it could morph into a tactical short at that point. Otherwise, longs would have to see the stock hold the 20-dema in conjunction with a market low. Play it as it lies.
Currently just about everything I’ve discussed on the long side in prior reports has come apart. Of course, I began to get a sense of this based on my discussions in last Wednesday’s written and video reports. And pullbacks in most leading stocks have not given us lower-risk entries as stocks have failed to hold up.
Even previously flash-in-the-pan hot IPO Dropbox (DBX) can’t hold its 50-dma as it gives up all its prior huge gains. Two weeks ago, the stock went nutzo on the upside, rocketing 41% in a mere three days. But, as I discussed last Wednesday, I viewed the sudden ebullience and speculative froth in a broad number of recent IPOs that included DBX as a potential warning sign for the market.
Since then, most of these hot IPOs, such as BILI, CBLK, DOCU, HUYA, IQ, and others come crashing down to earth, Icarus-like. Do these give-ups in these flash-in-the-pan hot IPOs make them buyable again? I suppose that depends on whether you believe Cinderella will attend the ball twice or not.
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.
Everything seems to be off the table as a long play given the broad breakdowns we’ve seen. Names like CARB, CSX, CYBR, FTNT, ISRG, NSC, NTNX, OKTA, PANW, ROKU, SAIL, SQ, and TWLO, among others are all busting their 20-demas and in some cases even their 50-dmas.
When the action in individual stocks is this uniformly bad, you cannot sit there and pretend nothing is happening. If you haven’t already moved to cash, in my view you either a) have big profit cushions in core positions or b) are a slow animal in the herd. Speaking for myself, I view anyone who sits through such deleterious action as being described by b), but that’s just me.
I always think better when I have a pocket full of cash, or am making money on the short side. As I wrote over the weekend, “The bottom line in this market is that more individual leading stocks are acting like shorts instead of longs.” That has certainly played out to fruition so far, this week, and I believe that if one is focusing solely on the set-ups, long or short, alone, then the market has naturally pushed two-sided traders/investors to the short side. That is where I have been.
Where I remain depends on where we go from here, of course. Therefore, if we see the NASDAQ bust the 50-dma in the coming days, we will get a chance to see whether the long side even has a chance at setting up again. Otherwise, over the past week, it has been the short side that has produced material profits, and for now that’s all I need to know.
CEO and Principal, Gil Morales & Company, LLC
Managing Director and Principal, MoKa Investors, LLC
Managing Director and Principal, Virtue of Selfish Investing, LLC