In Wednesday’s report, I mentioned the seemingly humorous notion of using a “Down on Big Volume” screen as a long idea generator. While my comment may have come off as a joke, it was, to be frank, at least half-honest. Not only that, but it was also prophetic, because the very next day, Thursday, the market gapped down hard at the open and leaders across the board were getting hit with heavy selling volume initially.
If you ran a “Down on Big Volume” screen early in the day, you would have seen many of these names. Had you bought them when they reached logical areas of support, you would have then experienced a sharp tapering-off of selling volume and then a rally back to the upside to close. Many of these names ended the day nearly unchanged. In some cases, the stock might have even closed in positive territory.
But whenever I see the market start to sell off hard, my first thought is that something worse could be starting. Remember that August 2015 culminated in the infamous “Mini-Flash Crash” of August 24th, where anyone long was treated to a gut-wrenching evaporation of bids in leading stocks like Facebook (FB). You never know when a morning sell-off is going to become the start of something like that.
On Thursday, the financial media commemorated the 30th anniversary of the 1987 Black Monday market crash that saw the Dow Jones Industrials Index drop nearly 23% in one day. Today that would add up to about 5,300 points, something that many media pundits assured us could not happen again. Robert Shiller took the opposite side of the mostly positive musings and penned a nice piece in the New York Times warning of the opposite, which I think is worth a read. With all the commentary on the ’87 Crash that day, it was almost as if the morning gap-down was just part of the market itself engaging in its own commemoration.
I think periods like the original Flash Crash of May 2010 and the end of August 2015 show just how badly things can get unraveled, if only for a brief period of a few days. I wrote about the May 2010 Flash Crash in Trade Like an O’Neil Disciple: How We Made 18,000% in the Stock Market (John Wiley & Sons, 2010). That was a break that enabled me to make somewhere around 80% on the short side in less than a month. August 2015 was also very profitable on the short side, so these are breaks that one doesn’t want to miss if one likes to short.
Massive market breaks where bids suddenly evaporate, and even the most reliable, “quality” leaders cascade ridiculously lower in seemingly illogically wide and rapid price breaks, are something that we don’t see today. I would agree with the idea that they have, can, and will happen again. But when, exactly, is another story.
Right now, this market doesn’t seem all that interested in pulling back for anything more than the proverbial pause that refreshes. And I would note that these severe market breaks, October 1987, March 2000, October 2008, and more recently in May 2010 and August 2015, were all preceded by weak action in the indexes and leading stocks. So, there was ample warning for those who heeded it.
On Thursday, a variety of small bad news items helped to pull the plug on the futures, thresh out all the weak hands in a big-volume shakeout very early at the open, and then take it all back to the upside by the close. To me it all looks like algorithms taking advantage of the known tendency of investors to view high-volume selling as a negative, and vice versa, since we’ve seen this occur so often in this market. As O’Neil has taught everyone, “Big volume up gooooood, big volume down baaaaaad!”
Today the Ugly Duckling principle seems to be getting ever more obvious, and even outright obtuse at times. But thinking like an algo, and embracing the Ugly Duckling is objectively what works in this market. I have frequently mentioned those two concepts in these reports throughout the past couple of years of so.
In my Wednesday report, I noted that we looked to be in position for a pullback, and lo and behold, that’s precisely what we got to start our day off on Thursday. But the scary gap-down opening turned into a big shakeout on the NASDAQ Composite Index, resulting on a higher-volume bounce off the 20-dema. This was followed by a gap-up move on Friday, but the index churned around all day within a narrow range on slightly higher options expirations volume.
This looks a bit suspect as churning and stalling around the peak on higher volume. But this mostly tells the story behind where the more mobile leadership is in this market. The reality is that the NASDAQ is lagging, and the main reason is that big-stock NASDQ names are not where the action is.
The S&P 500 Index shook out on Thursday at its 10-dma, but showed more power on Friday as it broke out to a new all-time high on strong options-related volume. It, too, shook out below its 10-dma on Thursday, rallying back into positive territory by the close. This certainly shows you where the action was on Friday.
But the real action lately has been in the Dow 30 stocks as the Dow Jones Industrials Index starts to take on a parabolic look to its current uptrend. Friday saw the index power higher, leading all other indexes, on strong upside volume. This is where the action is currently, and this is no surprise as these well-established big-cap names attract strong volume flows as alt-currency types of situations.
As I’ve written in recent reports, stocks are the new bonds, and the move into Dow 30 names serves as some evidence of this, in my view. And while the action has gone parabolic to some extent, this is not necessarily indicative of an imminent top. Parabolic moves often run out of momentum, but they don’t have to reverse, they can simply spend some time consolidating before going higher. Assume nothing until the hard evidence is there.
I showed the chart of International Business Machines (IBM) in my Wednesday report following its “deep doo-doo” bottom-fishing buyable gap-up (a DDDBFBGU???) of that day. As I noted, the stock also cleared the 200-dma, providing a conveniently tight reference for support. It tested the line briefly during Thursday’s morning sell-off (another example of a pullback to support in the midst of some morning mayhem) and then continued higher on Friday. Volume over the past three days has remained well above average.
IBM may not excite by-the-book O’Neil types with its 0% earnings and sales growth in the most recent quarter, but you can’t argue with the technicals. They are concretely bullish, and in my view the stock was actionable on Thursday morning at the 200-dma on this basis alone.
Here’s a list of a the 30 Dow stocks below, and if you run through the charts of these names you will see a number of recent breakouts. This includes “blah” names like Boeing (BA), which has the highest ERG rating of all Dow names a 234, and 3M Company (MMM), Cisco Systems (CSCO), Travelers (TRV), United Health (UNH), etc. Others have broken out a while ago and have continued moving higher, such as Caterpillar (CAT), Walmart (WMT)¸Microsoft (MSFT), and Johnson & Johnson (JNJ).
Boeing (BA) sports the highest quarterly earnings growth of all Dow 30 stocks at 680% in the most recent quarter. It had a nice breakout on Friday, but I’m not inclined to buy shares here since it is expected to report earnings on Thursday. It does provide an example of strength in Dow names, many of which are only recent breakouts.
So, if one wants to argue that the Dow is getting climactic on the upside, it doesn’t necessarily show up in the individual stock charts. And it would be on the individual stock charts that I would be looking for climactic topping type action.
If we want to invoke the Ugly Duckling, the ugliest of all the Dow stocks has to be General Electric (GE). The company reported earnings on Friday and immediately gapped down. This brought in a wave of pundits and commentators babbling about the demise of GE, but I noticed that the stock had been in a long-term downtrend, and NOW everyone was talking about the end of GE.
Looking at the gap-down move on heavy volume that morning, I noticed that the stock quickly turned back above its recent lows, triggering an undercut & rally long entry at the 22.83 low of seven days ago on the chart. Again, a big down move on heavy volume early in the day turned out to be…a buy signal!
By the close, GE was back up for the day, completing not only a U&R long move, but also a big outside reversal to the upside on massive volume. Is this the final turnaround for GE? The company announced that its CEO, Jeff Immelt, would be leaving, bringing in new management at the top. Immelt was famous for taking two company private jets when he traveled since he wanted a “back-up” jet in case something went wrong with the first one. Talk about excess at the top!
GE’s new CEO, John Flannery, indicated that “sweeping changes” were on the table for the company, including the divestiture of $20 billion worth of GE businesses. Unloading unprofitable lines of business to become leaner and meaner, especially for a bloated company like GE, is a good thing, in my view, and could trigger more upside in the stock.
All I know for sure is that we have two Ugly Duckling buy signals at play here. The first is the U&R off the absolute lows and back up through the prior 22.83 low, and the second is a massive-volume bottom-fishing pocket pivot move. I’d like to see this clear the 50-dma in a hurry here as confirmation of Friday’s turnaround move.
There is also something of a fundamental turnaround going on here, with next quarter’s earnings growth expected to come in at 26%, reversing the -4% growth posted on Friday. Sales were up 14% in the most recent quarter, as the acceleration out of negative territory continues from sequential -1% and -12% sales declines over the prior two quarters. This is a simple trade, as I see it. Go long here and use the 22.83 prior low as a tight selling guide. It is, no doubt, the ugliest of the Ugly Ducklings, but in my experience, this is how big-stock turnarounds begin.
Both J.P. Morgan (JPM), another strong Dow component, and Bank America (BAC) have charts that look like the chart of the Financial Select Sector SPDR Fund (XLF) as all three gapped to higher highs on Friday. Volume wasn’t heavy enough to call this a buyable gap-up, unlike the late September BGU, but it shows that financials are a mainstay of the current market rally.
The strength in financials is also being aided by comeback moves from stocks that were getting beaten down earlier in the week. Goldman Sachs (GS) has now completely negated Tuesday’s ugly, high-volume reversal to the downside and is now about 1% off its most recent high.
Wells Fargo (WFC) is another “dead” big-stock bank name on the mend as the Ugly Duckling breathes new life into the share price. WFC gapped down hard two Fridays ago after reporting earnings, but found support at its 50-dma. One more test of the 50-dma on Thursday set up a strong-volume move back up through the 200-dma.
Now ladies and gents, can anyone tell me what this is now called? That’s right, it’s a moving-average undercut & rally (MAU&R) long set-up that was triggered at the line on Friday, using it as a tight selling guide. My preference has been to focus on the XLF, although those wily enough to see and act upon some of these Ugly Duckling bank stock set-ups might be able to squeeze a little more juice out in terms of profit potential.
Gold remains out of play for now, and not actionable. The vehicle of choice when it is actionable, the SPDR Gold Shares ETF (GLD) remains below its 10-dma, 20-dema, and 50-dma, and subsequently is way out of position for any kind of long set-up, at least for now.
However, gold mining stocks don’t look as dead as gold itself. The Vaneck Vectors Gold Miners ETF (GDX) is trying to hold support along its 200-dma, while Franco Nevada (FNV) is holding squeaky tight along its 10-dema, 20-dema, and 50-dma. On Friday, it closed just above the 20-dema.
Kirkland Lake Gold, Ltd. (KL) has the pre-LUie look after failing on a recent breakout attempt. Here we see it pulling into the 50-dma, which represents a last-stand entry point using the 50-dma as a tight selling guide. So far all we have is an “L” formation, which is not in and of itself a “buy” signal.
A long entry off such a formation must be concrete, either in the form of a low-volume pullback to a moving average, a U&R, or an MAU&R. it is generally this type of long trigger that causes the “L” to turn into a “U,” completing the LUie formation, which is an observable resolution to the original “L” formation. Where KL and any other gold-related stock are likely going to depends to a large extent on where gold goes from here. Keep in mind also that gold miners will be reporting earnings throughout the next two weeks.
Big-Stock NASDAQ Names:
Apple (AAPL) continues to defy my expectations that it would do nothing until earnings, but the way in which it is going nowhere is quite interesting. Monday’s pocket pivot up through the 50-dma looked quite convincing at the time, but it didn’t last long. On Thursday, AAPL gapped down through its 50-dma as well as the lower 10-dma and 20-dema.
On Friday, the stock rallied back up into the 50-dma, but it turned out to be a short at that point as it reversed back to the downside. It ended Friday right near its intraday lows as buyers didn’t seem too keen on trying to push the thing back above the 50-dma. Earnings are expected two Thursdays from now on November 2nd, and I’m still not inclined to do much with the stock. But an alert AAPL bear could have hit it on the short side Friday morning and come away with a small short-scalp.
Netflix (NFLX) did exactly what I was looking for per my comments in Wednesday’s report. I wrote at the time, “Volume is declining here, which may bring the stock into a lower-risk entry near the 20-dema and the top of the prior breakout point. Keep an eye on this as it approaches these key support levels, and watch for selling volume to continue drying up as a sign of a potentially lower-risk entry opportunity.”
That is exactly what happened on Thursday, as the stock found support right at the 20-dema and the top of the prior cup-with-handle base. It moved higher on Friday, but ran into resistance at the 10-dma and pulled in slightly, closing near the lows of the day. Note that selling volume is drying up here, so it may turn out that a low-volume retest or Wyckoffian retest where it doesn’t come all the way back down to the 20-dema offers another entry opportunity.
There is, of course, the outside chance that NFLX will morph into a late-stage failed-base, but so far, the stock has held expected support. If it were to breach the 20-dema and the prior breakout point, then it could most certainly become an LSFB short-sale set-up. The idea would then be to play, at the very least, a test of and pullback to the 50-dma.
This week will be a big one for big-stock NASDAQ earnings. On Wednesday, October 25th, we’ll see Intel (INTC) report earnings. We’ll also hear from Tesla (TSLA), which was a short near the 160 price level per my discussion in Wednesday’s reports, and my tweets during the day. Since then the stock has broken lower.
My idea shorting the stock per my Wednesday comments was to get a move to the downside ahead of earnings as I believed investors would not be too keen holding TSLA into the report. And that appears to have been the case on Friday as the stock rolled right through the 50-dma on about average volume. Let’s see if it doesn’t at least undercut the prior 331.28 October low ahead of earnings, providing a decent short scalp ahead of earnings.
On Thursday, October 26th we’ll hear from Amazon.com (AMZN) and Alphabet (GOOGL). AMZN is looking a little sloppy as it drops below its 20-dema en route to what looks like a test of the 50-dma. GOOGL is hanging along its 10-dma and above the $1,000 Millennium Mark. The following week, on Wednesday, November 1st, we await expected earnings from Facebook (FB), which over the past week has made half-hearted attempts at breaking out from an 11-week base, but with little net effect.
Nvidia (NVDA) found support at its 10-dma during Thursday’s morning breakdown, and closed up on the day. As I wrote on Wednesday, “I view pullbacks to the 10-dma at 190.62 as opportunistic entries if you can get ‘em.” Well, there it was on Thursday morning, but would the market action at the time it made contact with the 10-dma have kept you from pulling the trigger?
Buying in the face of general market weakness like that is entirely contrary to the imbedded mentality that most investors have because of what they’ve been taught. It’s often easier said than done, but the only thing that can make it palatable is the idea of using the nearest level of support as a tight stop if the general market mayhem gets worse and drags the stock lower. If it does get worse, you’re stopped out quickly. If it doesn’t, you’re a winner. That was the case with NVDA, among others, on Thursday.
Note that most of these big-stock NASDAQ names remain dormant or are breaking down, as in the case of TSLA. Meanwhile, the best-acting big-stock NASDAQ names, Cisco Systems (CSCO), Intel (INTC), and Microsoft (MSFT) all also happen to be Dow components.
Micron (MU) remains in a short two-week range. I would look for a third week of consolidation with the stock holding tight to set up a possible three-weeks-tight (3WT) entry, most likely along the rising 20-dema with volume drying up. That would be something to watch for.
Cavium (CAVM) was good for a trade off the 20-dema this past week, but with earnings approaching on November 1st it would make sense to lay back and wait until earnings are out before doing anything with the stock currently.
Broadcom (AVGO) and Skyworks Solutions (SWKS), both AAPL suppliers, continue to slash back and forth incoherently. I see nothing to do with either name currently.
Universal Display (OLED) is pulling into its 10-dma as volume declines but with earnings expected on November 2nd this is not on my current actionable stock list.
Arista Networks (ANET) found support along its intraday lows on Thursday but continues to just chop back and forth. I’m waiting to see what happens after earnings, which are expected on November 2nd.
Lumentum Holdings (LITE) is expected to report earnings on October 26th, so there is nothing to do here ahead of the report.
Bio-tech names were whacked on Friday, mostly in sympathy to Celgene (CELG), which gapped down -10.76% on a 566% increase on volume. The stock was already acting poorly as it had dipped below its 50-dma on Thursday. It then split wide open on Friday, closing below its 200-dma.
The general breakdown in bio-techs on Friday took the iShares NASDAQ Biotechnology Index Fund (IBB) down near its 50-dma. However, it had already failed to hold support at the 20-dema on Thursday. In my Wednesday report I was not keen on buying the IBB at the 20-dema anyway, since, as I wrote that day, “Keep in mind that several big-stock bio-tech components of the IBB will be reporting earnings over the next couple of weeks, so I would advise laying back and seeing what transpires after those reports are out.”
Currently I don’t see bio-techs as a major area of leadership, although they did have a nice spurt back in late September and then again in late October. In general, the group has been somewhat erratic, and the lack of any substantial movement over recent weeks as we head into earnings reports for many big-stock bio-techs makes the group uninteresting to me at this time.
China-related stocks have come under some pressure recently as the previously hot group starts to cool off. Alibaba (BABA) is expected to report on November 2nd, so I don’t see much to do with the stock ahead of earnings. It is, however, holding above its 50-dma for now, and I would consider the 50-dma to be the maximum selling guide for the stock.
Sina (SINA) and Weibo (WB) are showing signs of wobbling. SINA looked buyable on Wednesday as it held tight along its 20-dema on a “voodoo” volume signature, but that failed on Thursday when the stock gapped below the line to test the 50-dma. That led to a morning bounce on Friday, but the stock closed back at the 50-dma on increased selling volume. Right now, I see nothing I want to buy into based on SINA’s current technical action.
WB is on the verge of violating its 50-dma after gapping below the line on Thursday. In fact, this was a short on Friday as it rallied back up into the 50-dma. Volume increased on the day as the stock reversed off the 50-dma to close down on the day and near the lows of its intraday trading range. Not what I would call constructive action. I’d need to see the stock regain the 50-dma as a possible MAU&R long trigger from here.
Palo Alto Networks (PANW) is holding at its 10-dma with volume declining to -40% below average. This would be a lower-risk entry position here, using the 10-dma as a tight selling guide, or the 20-dema as a wider selling guide. Earnings are not expected until late November.
Fortinet (FTNT) is expected to report earnings this Thursday, October 26th. It remains extended from any lower-risk entry point.
Cloud Software Names:
Cloud names remain a leading group in this market. Both Salesforce.com (CRM) and ServiceNow (NOW) broke out to new highs on Friday on strong-volume moves. These were previously buyable along their 20-demas. While NOW is in an extended position, CRM’s breakout is occurring from a six-week cup-with-handle formation on a pocket pivot volume signature. At 10% above-average volume, it was not high enough for a standard O’Neil-style breakout, but enough for a pocket pivot breakout.
Square (SQ) continues to consolidate and looks to be working on a new base ahead of earnings, which are expected on November 2nd.
Tableau Software (DATA) is extended and out of buying range. I continue to prefer taking a more opportunistic approach by looking to buy on pullbacks to the 20-dema, if you can get ‘em.
Workday (WDAY) is working on a six-week cup-with-handle formation that looks similar to CRM’s before CRM broke out. Perhaps that means WDAY will soon break out as well. I would prefer to buy the stock closer to the 20-dema at 106.89, but I would also note that the stock was buyable in opportunistic fashion on Thursday when it held support at the 50-dma.
Yelp (YELP) is expected to report earnings on November 2nd, so there’s nothing to do here ahead of the report. It has, however, regained its 10-dma and 20-dema and is back above the prior 44.25 base breakout point, closing Friday at 44.52.
First Solar (FSLR) is expected to report earnings this Thursday, October 26th, so there is nothing to do here ahead of the report. It continues to move tight sideways along the confluence of its 10-dma, 20-dema, and 50-dma, which does look constructive, but I’m not going to play earnings roulette with this by buying it ahead of earnings and then holding through the report.
SolarEdge Technologies (SEDG) became buyable on Thursday when it pulled into the 20-dema where it found ready support. But earnings are expected on November 2nd, so I don’t see much to do here ahead of the report.
Two out of my three previously favorite video-gaming long ideas are slowly deteriorating ahead of earnings. Activision Blizzard (ATVI) is expected to report on November 2nd, Electronic Arts (EA) on October 31st, and Take-Two Interactive (TTWO) on November 7th. ATVI and EA both act more like late-stage failed-bases, while TTWO continues to hold tightly along its 10-dma. As far as being actionable, this group is on hold for now, pending their upcoming earnings reports.
Opportunism is the name of the game when it comes to Veeva Systems (VEEV). Pullbacks below the 50-dma over the past week or so have found support at the 10-dma and 20-dema each time, providing opportunistic entries for brave souls willing to take the shot. Thursday’s dip below the 50-dma found support at the 20-dema, and the stock then pulled a bit of a sling-shot back to the upside on a move to higher highs. The stock is now extended, but watching for opportunistic pullbacks is probably your best bet for potential entries. VEEV is expected to report earnings on November 28th.
Nutanix (NTNX) dipped right back into its 10-dma on Thursday on light volume, presenting an opportunistic entry at that point. It stalled Friday near its recent highs, so I continue to look for pullbacks to the 10-dma, or, even better, the 20-dema, as more opportunistic entries if I can get ‘em. NTNX isn’t expected to report earnings until November 29th.
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.
Some ask whether the outperformance of the Dow 30 stocks is a sign of a narrowing rally. I would note, however, that the NYSE Advance-Decline line continues to make new highs, in sync with the strength seen on Friday in the S&P 500 and the Dow. The NASDAQ Advance-Decline line is lagging slightly, but appears consistent with the lagging action of the NASDAQ Composite itself.
Given the upside extension in the Dow and the S&P, however, a more substantial pullback is not out of the question. The key, as with Thursday’s sell-off, is how well leading stocks hold near-term support. If they can, then such a pullback can present opportunistic long entries. If they can’t, then you are forced out naturally. Therefore, simply sticking to your absolute and trailing stops should force you out if we see any kind of severe pullback or correction from here.
The next two weeks will be big for earnings. Because of this, I believe investors’ focus should be on opportunities that arise after earnings are reported. This was essentially the point I made in my Wednesday report, and it remains valid.
Earnings reports can lead to buyable gap-ups followed by wild upside moves like we saw in Atlassian (TEAM) on Friday. And then there are the Ugly Duckling moves like we saw in General Electric (GE) on Friday. In terms of new entries, this remains my approach for now. Play them as they lie.
CEO and Principal, Gil Morales & Company, LLC
Managing Director and Principal, MoKa Investors, LLC
Managing Director and Principal, Virtue of Selfish Investing, LLC