The Gilmo Report

March 28, 2018

March 28, 2018

I told members over the weekend to fasten their seatbelts in preparation for the new trading week, but a neck brace might have also been appropriate given the extreme whiplash action we’ve seen over the past three days. News over the weekend that China and the U.S. were conducting talks to settle their trade differences sent the market rocketing on Monday. But the rally wasn’t entirely unexpected given the S&P 500 Index’s position at the 200-dma, which it closed right at on Friday.

What was unexpected was the sheer velocity of the upside move, resulting in the Dow Jones Industrials Index posting its third-largest one-day point gain in its history on Monday. Meanwhile, the NASDAQ Composite Index led with a 3.26% gain, helped along by torrid moves in big-stock NASDAQ names.  But all of that dissipated into the close yesterday as the indexes busted loose on the downside, giving up all or most of Monday’s gains.

The NASDAQ looked the ugliest, but not by much, posting a big outside reversal that gave up all of Monday’s gains and more. Today, the index whipped around some more before closing at a lower low on higher volume. Right here you’re more or less in no-man’s land, but on balance the action this week has added another bearish brush stroke to the market canvas.

 

GR032818-$COMPQ

 

The S&P 500 Index has held above its 200-dma after knocking at the door on Friday, and it is again knocking at the door of this final, key moving average on a higher-volume retest today. Unlike the NASDAQ, the S&P isn’t sitting in no-man’s land, since the 200-dma can be considered major support. Bottom line – it needs to hold the 200-dma here, otherwise a test of the February lows comes into play.

 

GR032818-$SPX

 

Monday’s rallies in leading stocks were short-lived, as I mentioned, and we can see this in the chart of Amazon.com (AMZN). A low-volume rally on Monday tried to keep going the next day, but a nasty reversal on above-average volume sent the stock back toward its 50-dma. It then busted the 50-dma today on huge volume after Quebec said it was looking at levying a provincial sales tax on the company’s sales. There was also talk that the White House was looking at ways to tax AMZN’s sales.

Where the stock goes from here is anybody’s guess, but the action is bearish on its face, despite the move off the intraday lows, such that weak rallies into the 50-dma could be viewed as short-sale opportunities.

 

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Netflix (NFLX) also saw a higher-volume rally back above its 20-dema and 10-dma on Monday, which looked bullish, give way yesterday on slightly above-average volume. That volume picked up sharply today as the stock sold off down to its 50-dma, where it held. If you’re the adventurous type, then I suppose looking for a tradeable bounce off the 50-dma might be worth a shot, but so far this isn’t what we would call a bullish set-up.

 

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Nvidia (NVDA) rallied on news that supposedly China was going to look at importing more semiconductor chips from the U.S., sending the stock on a sharp but low-volume rally back up through its 50-dma. However, that rally was short-lived as the stock pulled a massive outside reversal to the downside on huge volume yesterday after it announced it was suspending its autonomous driving tests. It continued lower today, but notice how it is just undercutting its March 2nd low.

Does this trigger an undercut & rally move from here? So far it hasn’t, but this might be something to watch for over the next few days.

 

GR032818-NVDA

 

Social-networking names are coming apart as the government starts to call for deeper investigation into how the companies handled private user data. Facebook (FB) is now deeply in violation of not just its 50-dma, but its much-lower 200-dma as it sits just above stock market Hades, over 20% below its all-time highs. Snap (SNAP) is drifting near its 20-dma and Twitter (TWTR) became the latest serious casualty in the group when it busted its 50-dma yesterday on huge selling volume.

That move came on the heels of a similar big-volume break, but through the 20-dema. This gives the pattern an orderly look of a nice, cascading waterfall to the downside. Based on this action, weak rallies up into the 50-dma could be considered potential short-sale entries.

 

GR032818-TWTR

 

When the selling gets serious, nothing is safe, not even a nice-looking, strong-volume breakout like the one Diamondback Energy (FANG) had on Monday. The stock looked strong as it came plowing out of a cup-with-handle base, but that breakout reversed yesterday on about average volume.

Today, FANG gave up on the breakout completely by trading back below its 50-dma on heavy selling volume. Another breakout that bites the dust, but note how the prior U&R set-up along the prior lows last week would have provided a much lower-risk entry. Technically, however, FANG has now morphed into a late-stage failed-base (LSFB) such that any little blip back up into the 20-dema would make it a possible short-sale at that point.

 

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Square (SQ) has sold off all the way back to its early March cup-with-handle breakout point, which coincides with its 50-dma, where it found support today on huge selling volume. This could be considered a last-stand sort of entry point here given the dual support (at least in theory) at the prior breakout point and the 50-dma. But if it fails to hold the 50-dma, then you’re looking at a possible late-stage failed-base (LSFB) short-sale set-up in action.

 

GR032818-SQ

 

Blackberry (BB) came out with earnings this morning and came in with what was initially perceived as a strong report. But after gapping up to 12.96 at the open, it reversed course on a huge-volume reversal to the downside that also constituted a violation of its 50-dma. Based on the heavy selling today, this looks like it’s headed for a rendezvous with its 200-dma. Otherwise, there’s no reason to be buying this thing right here, right now.

 

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On the short side, Weight Watchers (WTW) has moved further below its 50-dma, but has yet to break down in decisive fashion. Rallies up into the 50-dma at 66.30 would be considered lower-risk short entries if you can get ‘em. Meanwhile, Atlassian (TEAM) morphed into a full-blown, late-stage, failed-base (LSFB) short-sale set-up yesterday after it reversed at the 20-dema and 10-dma and broke below the 50-dma.

I discussed this possibility in my weekend report since the stock was already showing the first signs of transposing into an LSFB. From here, rallies up into the 50-dma would offer lower-risk short entries.

 

GR032818-TEAM

 

It doesn’t get any better for any other names on my long watch list. SolarEdge Technologies (SEDG) and First Solar (FSLR) have both breached their 20-demas, Planet Fitness (PLNT) has also dropped below its 20-dema and may be headed for a test of the 50-dma down at 35.42. If any of these names is to be considered a viable long play, I’m going to need to see some concrete price/volume action that helps to improve the current picture.

Nutanix (NTNX) has retraced about half of its prior move following the March 2nd breakout, which led to a strong upside move. Generally, I use the 20-dema as a maximum downside selling guide when things get this stretched to the upside, but if one is willing to give it room all the way down to the 50-dma near 40 and the prior breakout point, they certainly can. However, you may end up watching it come all the way in as holders of SQ have with that stock.

 

GR032818-NTNX

 

Applied Materials (AMAT) was already a confirmed late-stage failed-base (LSFB) short-sale set-up per my discussion of the stock over the weekend, and it performed according to script. As I wrote over the weekend, “From here [Friday’s close], any rally back up closer to the 20-dema at 58.30 would bring this into shortable position again. That turned out to be the case yesterday as the stock pulled a big outside reversal to the downside on heavy selling volume.

It moved slightly lower today on above-average volume. Notice, however, that it is now undercutting its March 2nd low, which could set up another shortable rally. Otherwise I consider this a little too extended on the downside to be shortable here. If I were short the stock from the 20-dema failure of yesterday, then the 50-dma would serve as a trailing stop while the 20-dma at 51.03 would serve as my downside price objective.

 

GR032818-AMAT

 

Chinese names all look pretty bad right here, and most would need to show some signs of a re-set before I could look at buying any of them. Alibaba (BABA) in fact offered itself up as a short-sale target yesterday when it rallied up into the 10-dma and then reversed back through the 20-dema and 50-dma on light volume as sellers shunned the stock. I wrote over the weekend that the stock looked like it was set to test the 200-dma, and it still does, but with the quick interpolation of a one-day wonder rally on Monday that in fact brought the stock into a nice, lower-risk short-sale point.

 

GR032818-BABA

 

Meanwhile, Baozun (BZUN) is now trading below its 10-dma, Momo (MOMO) has traded down to its 200-dma where it’s trying to hold support, Weibo (WB) has violated its 50-dma, and 58.com (WUBA) has dipped below its 50-dma. The only one still holding near-term support is Autohome (ATHM) which pulled into its 50-dma today on volume that was -44% below average, qualifying as a “voodoo” pullback.

Technically, this can be tested on the long side based on the voodoo pullback, using the 50-dma as a tight selling guide. The premise here, however, would be that the market is able to stage a rebound, helping to produce some reaction rallies in busted leaders. ATHM offers a more coherent set-up, however, that does not have to be bought in mid-air.

 

GR032818-ATHM

 

Lumentum Holdings (LITE) gapped below its 20-dema and the prior base breakout point in the 65-66 price area today on heavy selling volume.  As I discussed over the weekend, the main issue with LITE was that it had come straight up into new highs without ever consolidating near those highs, so there was little price congestion at the breakout point to offer much in the way of solid price support. Technically, LITE morphed into a late-stage, failed-base, short-sale situation on the gap-down through the 20-dema and the prior breakout point at 65-66 today. It now looks poised to test its 50-dma.

 

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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 S&P 500 sitting at support on the 200-dma on Friday certainly set up Monday’s rally, which was ignited by news of China and the U.S. being willing to discuss their trade differences like adults. That rally was, however, nothing more than a one-day wonder rally to nowhere after yesterday’s extremely bearish reversals in the indexes and leading stocks that were also rallying on Monday. With the S&P 500 back at the 200-dma, the stage is set for a more decisive and meaningful bounce and reaction rally, or a failure through the 200-dma that sets the market up for a test of the early February lows.

Meanwhile, this market is one of the craziest I’ve seen in a long while. Volatility, which was scarce leading into the end of January, has now become the norm. We now regularly see several-hundred point spins in the Dow throughout the day on an intraday basis, which makes for a difficult trading environment. A trading environment is all it is, at best, because there are no real trends, only ricochet type moves back and forth that can make life difficult for longs or shorts depending on which direction they are moving.

Admittedly, a lot of leading stocks, or at least formerly leading stocks, look pretty oversold. In some cases, there may be a concrete long set-up that is at least good for a trade. Examples discussed in this report would be a possible U&R in NVDA, a bounce off breakout support and the 50-dma in SQ, or a voodoo pullback into the 50-dma in ATHM. These are things to look for as you go through your long watch list, and decide where you might find such set-ups.

If you can find some possibilities, and you see them play out and set up in real-time, then that would make them at least potentially playable for a swing trade if the market is able to stage some sort of reaction rally based on the S&P successfully retesting its 200-dma. A reaction rally might also bring some short-sale targets back into lower-risk entry points, so it could have dual benefits for nimble traders. Meanwhile, keep your seatbelts fastened!

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.