The Gilmo Report

March 25, 2018

March 25, 2018

The market split wide open on Thursday, sending the NASDAQ Composite Index gapping below its 50-dma. This came on the heels of Monday’s bearish breakout failure and now puts the index in limbo below its 50-dma. As I have discussed in recent reports, the Trump Tariff Rampage had the potential to create near-term chaos in the markets, and it is chaos that ruled the market action this past week.

The NASDAQ broke below its March 2nd low Friday, with the next reference low being the early February low that marked the end of the prior rapid correction seen at the outset of that month. The 200-dma, however, lies between here and there, so a move down to the 200-dma that finds support at the line is possible. The bottom line is that the action here is ugly and so far, no concrete low has been set as the indexes appear to be in free fall.

 

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The S&P 500 Index was already below its 50-dma by the time Thursday’s 724-point Dow sell-off took all the major headlines. It has now undercut its March 2nd low and is now meeting up with its 200-dma. This could be a logical spot for a possible reaction bounce, although the other possibility would be a move below the 200-dma that then tests the early February low. A break to lower lows would certainly be seen as bearish, but could bring about some sort of undercut & reaction rally move.

 

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The carnage in this market runs deep and wide, and many accuse Facebook (FB) of being the spark that lit the selling fire. I don’t know if that’s necessarily true, although it is one of several news developments, including a Fed interest rate increase, the Trump Tariff Rampage against China, and then China’s ensuing counter tariffs that set a broad backdrop for this week’s rough market breakdown. I tend to think that what the market doesn’t like the most is the uncertainty surrounding a possible trade war.

The interesting question to ponder here is whether the severe breakdown in FB makes the stock a poster child for a longer-term market top. Bull market tops are often characterized by longer-term tops in established and allegedly “bullet-proof” long-term big-stock leaders, so in my view this is a fair question to ask. What is notable on the weekly chart after this week is the largest one-week price break in the stock’s history.

There was one week that had larger downside volume in October 2013, but that week closed in the upper half of the weekly trading range, so was more support than selling. This week, FB closed only 37 cents above its weekly low, clearly a sign of distribution.

 

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This market is full of busted patterns, including FB’s younger siblings, Twitter (TWTR) and Snap (SNAP). I suppose we can see whether TWTR is able to hold support at its 50-dma, or whether SNAP can hold the undercut & rally move back up through its prior 16.31 as it did on Friday when it closed at 16.36 (that U&R was discussed in Wednesday’s report). But such bounces off moving-average support or U&R long set-ups generally have to coincide with a market low, so we must first wait to see if, when, and how the market puts in at least a short-term low.

Big-stock NASDAQ leaders have also taken a great deal of heat, which is no surprise given the NASDAQ Composite’s break below its 50-dma on Thursday. Netflix (NFLX) broke below its 20-dema on Friday and looks ready to test its 50-dma. That might be your opportunistic entry point, but right now the best course of action would be to stand aside until something more concrete shows up.

 

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Nvidia (NVDA) busted its 50-dma and looks like it might be headed lower. Interestingly, the stock was acting like one of the stronger big-stock NASDAQ names when it pushed right back up to its prior highs on Tuesday. But that strength has dissipated entirely with the stock breaking below the 50-dma. As with NFLX, best to stand aside here and let the stock figure out if and where it wants to find a low.

 

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Amazon.com (AMZN) broke below its 20-dema on heavy selling volume and looks ready to undercut the prior March low in a potential rendezvous with its 50-dma. But what it looks like and what it does once it gets there is an open question. Note how, after all the heavy volume selling during the steep early February market correction, AMZN has slowly drifted into new-high price ground on volume that has been tepid, to say the least. When it finally cleared the 1600 price level, that led to a reversal on higher volume at that point, and the stock has moved lower since.

 

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NFLX, NVDA, and AMZN have been some of the better-acting big-stock NASDAQ names, but they are starting to crumble off their highs. Others in this same category, like Apple (AAPL), Google (GOOG), and Microsoft (MSFT) are well below their 50-dmas. GOOG has already met up with its 200-dma, while AAPL and MSFT looked primed to meet up with their own 200-dmas.

Meanwhile, big-stock semiconductor leader Micron (MU), which is also in the NASDAQ 100 Index, blew apart today after earnings, and Tesla (TSLA) is now plumbing its early February lows down around the $300 price level.

Oils have been leading lately, but a breakout attempt by Diamondback Energy (FANG) was swamped by a late-day Market sell-off to lower lows. Nevertheless, it remains above the confluence of its 10-dma, 20-dema, and 50-dma moving averages as it continues to build a long handle to a somewhat v-shaped cup formation. This remains on my list of more desirable patterns, but we’ll see whether a continued market downdraft doesn’t end up dragging the stock lower.

 

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Square (SQ) was already dropping off its highs before getting hit with a sell rating from an analyst firm I’ve never heard of, Craig Hallum. This sent the stock just below its 20-dema on heavy selling volume. It may be set to approach and test the prior cup-with-handle breakout point at the 48 price area. Meanwhile, PayPal Holdings (PYPL), not shown, has come undone, breaking well below its 50-dma over the past two days. Scratch that one from the buy watch list!

 

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Blackberry (BB) has also broken support at all three of its key moving averages, the 10-dma, 20-dema, and 50-dma, although volume was below average on Friday. Now it’s just a matter of checking off all the lows in the pattern and then seeing if and where the stock tries to pull some sort of undercut & rally (U&R) move at any of those lows. I like the thematic aspects of BB, so this is one I’ll watch if it continues to come down.

 

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The reality of Friday’s action was that you could have been short almost anything and made some nice profits. Picking off a clean entry on a clean short-sale set-up was perhaps a little more difficult, but Weight Watchers (WTW), which I discussed as a short-sale target on Wednesday, gave shorts a chance to come in right at the 50-dma. It then reversed to the downside, closing 4.4% below the entry point at the 50-dma. If one is trying to play this out for a bigger move, then the 57.57 low is your downside target while the 50-dma serves as your trailing stop on the upside. Easy enough.

 

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SolarEdge Technologies (SEDG) and First Solar (FSLR) are both coming down, but I would wait to see what they look like when they get to their 20-demas. For SEDG that would be 52.21 and for FSLR the 20-dema is at 69.17. Selling volume on both stocks has been light as they’ve come off the past 2-3 days. So if the market finds a low in the next 1-2 days then they may have a chance at holding their 20-demas.

Planet Fitness (PLNT) closed Friday right at its 20-dema, but I’d be a holdout here and look for a pullback closer to the 36 price level and the 50-dma, which is all near the lows of the prior buyable gap-up move in February. My view is that the market is likely to come down more this coming week, so if one is hellbent on playing the long side, let the stocks come to you. Trying to catch falling knives is not advisable.

 

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Nutanix (NTNX) was removed from Goldman Sachs’ (GS) “Conviction Buy List” on Friday, sending it careening below its 10-dma. Another stock that helps to make the argument that sometimes looking for the opportunistic pullback to the 20-dema in an extended stock is often better than looking to gain entry at the 10-dma, particularly if one doesn’t already have a position in the stock. To Goldman’s credit, NTNX was added to this particular buy list when it was trading in the low 20’s.

 

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Atlassian (TEAM) wasn’t a buy at its 20-dema on Wednesday, as I wrote in my report of that day, and it probably isn’t a buy here near the prior breakout point and the 50-dma. But, if one loves this stock, buying at the 50-dma would, I must admit, be the lowest of the lower-risk entry spots if one is ready to jump ship if it can’t hold the 50-dma. On the other hand, this is already starting to show signs of becoming a late-stage failed-base (LSFB) short-sale set-up.

Note how it reversed at the 20-dema on Friday after moving below the line on Thursday. It is generally a breach and failure at the 20-dema that can mark the start of a possible late-stage breakout failure, so this is one to watch as a possible short-sale target here if it can’t hold the 50-dma.

 

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The surprising strength in Chinese names last week and early this week, even in the midst of tariff talk, finally gave way to the delayed reaction I discussed as a possibility at the end of my Wednesday report. As I wrote, “Perhaps there will be a delayed reaction, so if one is working any of these names make sure you know where your out points are.”

Alibaba (BABA), which is perceived as having much to lose in a China-U.S. trade war, gapped down on Thursday and blew right through its 50-dma. From here it looks set to test its 200-dma on a possible undercut of the early March lows.

 

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Baozun (BZUN) is testing its 20-dema after a severe price break on Thursday off the peak. That downside move was nearly 10% deep, and Friday’s early-morning bounce attempt failed at the 10-dma and reversed on slightly above-average volume. As with other Chinese names, all of this is highly news-oriented, so it’s dangerous to try and step in and buy these names until all this tariff dust settles.

 

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Because of the extreme news-sensitivity with respect to Chinese names, buying at support levels does not guarantee a lower-risk entry. For example, Weibo (WB) gapped down near its 50-dma on Thursday, but then sliced right through the line and continued lower on Friday. It is now testing its prior early March low, with lots of room left before it can reach the 200-dma. This is of course looking like a late-stage, failed-base, short-sale set-up here, with the idea of using any little rally back up toward the 50-dma as a lower-risk entry point.

 

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Momo (MOMO) is holding up okay, however, as it continues to remain above its 10-dma. It could, however, have a delayed selling reaction if tariff threats heat up some more this coming week so I’d prefer to leave this alone on that basis, at least at current prices. 58.com (WUBA) is pulling into its 50-dma, so it’s a matter of seeing whether it can hold support there.

Autohome (ATHM) is again testing its prior breakout point and the 20-dema. This basically must hold here, otherwise you’re looking at a possible late-stage breakout failure. Selling volume was above average on Friday, but lighter than Thursday’s heavy levels. I think the key here with ALL these Chinese names is to let them come down, but remain keenly aware of prior lows and support levels in their patterns. If there is some sort of negotiated settlement that comes out of all this tariff talk, it could trigger a rally in these names.

And my guess is that if this were to occur, it would show up in the form of concrete set-ups like undercut & rally moves, or bounces off support in cases where these stocks are still holding above a key support level, like the 20-dema or 50-dma. On the flip-side, some of these can morph into LSFB short-sale set-ups, as BABA and WB already have. Again, these names will all likely remain highly news-sensitive, so anyone trafficking in these names in either direction must remain nimble and alert!

 

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Here we see Applied Materials (AMAT) busting its 20-dema and dipping below the 50-dma on Friday on heavy selling volume that makes the stock a confirmed late-stage failed-base (LSFB), short-sale set-up. From here, any rally back up closer to the 20-dema at 58.30 would bring this into shortable position again.

 

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Lumentum Holdings (LITE) is approaching its 20-dema and the top of its prior base breakout. I’ve discussed the idea of constructive pullbacks to the 20-dema as being potentially lower-risk entry opportunities, but the jury is still out on this one. The stock could come in further if the general market continues lower since there isn’t any solid support along the highs of the base.

LITE essentially came straight up into new highs without ever consolidating near those highs, so there is little price congestion at the breakout point to offer much in the way of solid price support. Your best hope would be the 20-dema, but if it fails to hold that then it’s not clear how far it could come down from there, and could even trigger the stock as a short-sale target at that point.

 

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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.

The market situation continues to deteriorate, but it’s not like we didn’t see it coming. Last weekend I wrote that stocks had clearly lost upside momentum, and then on Monday the first shoe to drop was the NASDAQ’s failure at its prior new-high breakout point combined with the S&P 500 gapping below its 50-dma. The second show came on Thursday when the NASDAQ gapped below its own 50-dma.

Now the S&P 500 is sitting right at its 200-dma. Does this result in a reaction bounce, or do we see the index bust the line to test the February lows? That remains an open question, but I would imagine that most members have already been pushed more, if not entirely, into cash, as stocks have busted support levels and (hopefully) triggered proper trailing stops. As I wrote last weekend, it may be necessary to play a strong defense, and that certainly turned out to be the case for what was a tough market week for the longs.

With cash in hand, it is much easier to sit and watch to see how the current sell-off plays out. And if the market does find a low and we get another one of these infamous v-bottoms, then having cash in your pocket comes in very handy if one knows what to look for in the form of undercut & rally set-ups. So fasten your seatbelts, and see what Mr. Market’s Wild Ride brings us in the coming week.

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.