The Gilmo Report

October 3, 2018

October 3, 2018

This has been a most interesting week for the market, with cross-currents aplenty. On Monday we were treated to a massive upside gap-up open after the U.S. and Canada had agreed to terms that would create the so-called U.S.-Mexico-Canada-Agreement, or USMCA for those with a fetish for acronyms. By the close, most of those gains evaporated, and the NASDAQ Composite Index posted an ugly reversal on heavy volume.

A similar occurrence was seen yesterday when the NASDAQ opened down, then rallied, and then finally turned negative again on higher volume. Today, we were treated to another big upside gap on the open, but by the close most of those gains evaporated on much higher volume. The index closed below where it opened in a big stalling and churning day.

 

GR100318-$COMPQ

 

What is quite noticeable on the charts of the NASDAQ and the S&P 500 Index are the number of days we’ve seen over the past couple of weeks where the indexes have stalled and churned or outright reversed, often on higher volume. It has been a consistent pattern and brings up the question of systematic distribution. If this is the case, then we can look for confirmation in the coming days.

 

GR100318-$SPX

 

The Dow Jones Industrials Index remained in positive territory on Monday despite stalling and churning on lighter volume. Note that all the major indexes posted lighter volume on Monday. This would argue for a less-than-enthusiastic response from buyers following the USMCA news, and the index action certainly helped to confirm this.

But as the NASDAQ and the S&P stall and churn, the Dow has diverged somewhat by posting all-time highs yesterday and today. However, it again stalled and reversed off the intraday highs on higher volume. Thus, overall, the index action across the board is showing some trouble keeping its intraday gains into the close, despite ending the day in positive territory.

 

GR100318-$INDU

 

Small-caps continued to get pounded, as money moves out of the safe haven of smaller stocks that are perceived to be unaffected by trade war issues, especially now that the U.S. is making nice with its North American trading partners. However, the chart of the iShares Russell 2000 Index ETF (IWM) shows a steady downtrend throughout September well in advance of the news regarding USMCA.

This has culminated in lower lows this week. Today the Russell attempted a small bounce, as smaller-cap names that had been beaten to a pulp over the prior two days staged oversold bounces themselves.

 

GR100318-IWM

 

The 10-Year Treasury Yield spiked to 3.16% today, its highest level in over seven years. Meanwhile, bonds were pummeled, and if one looks at a chart of the iShares National Muni Bond Fund ETF (MUB), you might say muni bonds are crashing. Long-dated Treasuries don’t look any better, and it brings up the possibility of bond market weakness spilling over into stocks.

 

GR100318-MUB

 

Financials finally rebounded from an obviously oversold position, J.P. Morgan (JPM) illustrates this as it tries to build on an undercut & rally move it had on Monday. This was something that I discussed looking for in my weekend report, where I wrote, “…we might see some sort of undercut & rally move that takes the stock back into the 50-dma.”

That’s what we’ve seen so far this week, but the rally appeared to run out of gas right at the 50-dma today. JPM stalled and churned to close just below the 50-dma after clearing the line earlier in the day. This puts it in a lower-risk, short-sale, re-entry position using the 50-dma or today’s intraday highs as a guide for a tight upside stop.

 

GR100318-JPM

 

Apple (AAPL) cleared the 229.67 high of its latest base today, on higher but below-average volume. The stock has remained the powerhouse of the big-stock NASDAQ (and Dow, for that matter) names as it drives to all-time highs. Obviously, if one is a textbook base-breakout buyer this is not actionable because of the below-average volume.

 

GR100318-AAPL

 

Amazon.com (AMZN) got hit with some volume selling yesterday, causing it to drop back below the $2,000 Millennium Mark and then the 20-dema today. This looks like it may be headed for another test of the 50-dma.

 

GR100318-AMZN

 

Nvidia (NVDA) is retrenching after powering to an all-time high on Monday on the heels of Friday’s gap-up pocket pivot move back up through the 10-dma and 20-dema. The original entry point occurred two Mondays ago when the stock posted an undercut & rally (U&R) long set-up along the 50-dma when it undercut and then rallied back up through the 261.92 low of September 12th.

Last Friday’s pocket pivot gap-up move came on an analyst’s upgrade, and that carried to all-time highs on Monday. So far, NVDA is holding its gains off the lows of the pattern quite well, closing tight today on light volume. However, since the true buy point in my view was the U&R down near the 50-dma, I’d only look to come into the stock on a constructive pullback to the confluence of the 10-dma and 20-dema around 274.

 

GR100318-NVDA

 

Netflix (NFLX) is still idling in neutral after last Wednesday’s pocket pivot breakout through the September price range. The past two days have seen it stall on attempts to move higher, and today it tucked into its 10-dma as volume declined. This could be viewed as a lower-risk entry spot here at the 10-dma, using the line as a tight selling guide.

The flip side would come into play, I think, if the stock busted the 10-dma and the 20-dema to the downside. If the general market continues to soften, and we see the current pattern of stalling and churning result in some downside action, NFLX could get sent back to its 50-dma. Thus, I would watch for any breach of the 10-dma and/or the 20-dema as a possible short-sale trigger, depending on the general market context at the time. Play it as it lies.

 

GR100318-NFLX

 

The daily market soap opera, As the Tesla Turns, continued this week after the SEC announced a settlement with both the company, Tesla (TSLA) and its CEO, Elon Musk. For a mere $20 million each, all was forgotten, and the parties were able to continue their merry way. That sent the stock gapping right up to the 200-dma on Monday, in a gleeful response.

That, however, only sent the stock back up to whence it had come, the 50-dma/200-dma moving average confluence. As I tweeted yesterday, TSLA ran into ready resistance at the 200-dma and then reversed to close lower on the day. Yesterday, TSLA reported that it produced 53,239 Model 3 vehicles in the latest quarter, which fell within their guidance range of 50-55,000 vehicles.

That did not help, however, and the stock has since moved lower as it peels away from the 50-dma/200-dma confluence. If one is short at the 200-dma, the using today’s highs as a trailing stop might make sense. Otherwise, the 200-dma would be your absolute stop, looking for a possible fill of Monday’s gap-up rising window.

 

GR100318-TSLA

 

Facebook (FB) posted lower lows yesterday, reaching an intraday low of 158.67 yesterday. That undercut the prior September low at 158.87. When FB rallied back above that price level before the close yesterday, it triggered a U&R long entry at that point, ending the day at 159.33. That resulted in another three points (2%) of upside from there as the stock ran into resistance at the 10-dma.

Volume was weak today, and if FB can’t clear the 10-dma in confirmation of yesterday’s U&R move, then it may be short-lived. After all, the stock was clearly oversold after getting pounded for three days back to its prior September lows, so today’s bounce is not that surprising within this context.

 

GR100318-FB

 

Okta (OKTA) got smacked back to its 20-dema yesterday on heavy selling volume and is now floundering a bit around the line. It closed below the 20-dema today for the second day in a row but continues to hold above the 66.09 intraday low of its early September buyable gap-up (BGU) move. While the stock is within buying range of the BGU low using that same low as a tight selling guide, it may be set for a move lower.

That’s one possibility that I would look for in the event of a market correction. Thus, OKTA would become a short here using the 20-dema as a guide for a tight upside stop. Any market weakness would likely see the stock test the 50-dma, so we can take a two-side view here and see how this plays out in the coming days.

 

GR100318-OKTA

 

Square (SQ) has been unsuccessful in three prior attempts to clear and close above the $100 Century Mark. As long as it can’t get through the $100 price level I continue to hit it short when it approaches 100. If it can clear 100 then I will gladly flip and go long, but for now this is having some trouble clearing 100. I am open to the possibility that it could also evolve as a short-sale based on Jesse Livermore’s Century Mark Rule in reverse.

As I wrote over the weekend, these types of Century Mark tops are often associated with market corrections. Thus, a real failure and downside break from the 100 mark by SQ would likely be dependent on a market context where the indexes are pushing lower and in correction mode. We shall see how this plays out over the next few days.

 

GR100318-SQ

 

Etsy (ETSY) has failed on its third re-breakout attempt, but buying volume was clearly lacking on this latest move back up to the prior highs. That sort of action screams “Double top!” to me, and the stock became a nice short on Monday when it opened up slightly and then broke to the downside. Yesterday it pierced its 20-dema and broke to the 50-dma.

Today we saw a low-volume bounce off the 50-dma, approximately, but I wouldn’t be surprised to see the stock bust the 50-dma. I would, however, take a lower-risk approach here and look for any rally back up into the 20-dema as a short-sale entry. Otherwise, a breach of the 50-dma would trigger the stock as a short-sale at that point, using the 50-dma as a tight upside stop.

 

GR100318-ETSY

 

ZScaler (ZS) was a short Monday as it was breaching the 50-dma. I posted this on the live blog as a short-sale idea yesterday morning at that time. It then moved sharply lower to undercut its prior low of two weeks ago. In that position, that’s where I look to cover my short and then possibly re-enter on any ensuing U&R type of move.

I would look at any rally up closer to 40 and the 10-dma/20-dema moving average confluence as a possible short-sale re-entry opportunity. ZS is playing out as a late-stage failed-base (LSFB) short-sale set-up and should continue to be played as such until it shows more constructive technical evidence, such as a sharp move back up through the 50-dma.

 

GR100318-ZS

 

 

Some evidence that bolsters my argument that only buying base breakouts is a flawed approach to this market can be found in Canada Goose Holdings (GOOS) and Planet Fitness (PLNT). Both stocks had big-volume breakouts last week, and both have failed in almost identical fashion. GOOS, shown below, has now failed on its prior breakout and closed today below the 20-dema.

Thus, this is starting to play out as a possible LSFB short-sale set-up. Either a breach of the 50-dma, or any feeble rally from here, might set up a short-sale entry trigger point. The flip side is that GOOS attempts a re-breakout, such that this pullback into the 50-dma sets up a lower-risk entry with the idea of using the 50-dma as a tight selling guide. And if the stock does break the 50-dma, one can then flip to the short side. Play it as it lies.

 

GR100318-GOOS

 

Planet Fitness (PLNT) closed one penny above its 50-dma after busting the 20-dema and its prior breakout point yesterday. This is almost identical to GOOS in terms of how we might approach it as a long or a short. The set-up is the same. In either case, any weak rally back up into their 10-dma or 20-demas would likely offer a lower-risk, short-sale entry opportunity.

Otherwise, if you’re feeling lucky on the long side, one could try and go long here looking for a possible re-breakout attempt. We’ve seen this sort of thing occur many times before in this market. I am fairly certain that how this plays out will depend on how the general market action plays out in the coming days. Thus, keep a close eye on market context, and play GOOS and PLNT as they lie.

 

GR100318-PLNT

 

Twilio (TWLO) has now failed on last week’s pocket pivot breakout attempt. It busted the 20-dema yesterday on heavy volume, and although it is in U&R land, I would be more inclined to treat this as a short on any rallies up into the 20-dma. The stock tried to rally today but stalled to close in the lower part of its daily trading range, so it may not even make it as far as the 20-dema on the upside!

However, if I did see any kind of move closer to the 20-dema at 83.05, I would look to short the stock there while using the 20-dema as a guide for a tight upside stop. TWLO, along with other names I’ve discussed in this report, illustrates the difficulties that smaller growth names have run into over the past few days.

 

GR100318-TWLO

 

Bilibili (BILI) gapped up this morning on news that Tencent Holdings (TECHY) is taking a 25 million share stake (approximately $317.5 million) in the company. That sent the stock as high as 15.50 on an intraday basis, but the gap move ran out steam in a big way and reversed to close near its low for the day.

If one wanted to play this as a buyable gap-up (BGU), then using the 14.03 intraday low of today as your selling guide would be the proper approach. However, it looks to me like the news was sold into, so I’d keep a very tight leash on this, with the idea that the closer to 14.03 one can buy this, the better.

 

GR100318-BILI

 

Momo (MOMO) failed on the Friday undercut & rally attempt, breaking to lower lows yesterday and again this morning on an intraday basis. However, it managed to rally back above the prior early-September low today, triggering a U&R long entry at that point. The stock now needs to rally convincingly back above the 50-dma to confirm the U&R.

Otherwise, this is acting more like a short here, using the 50-dma as a tight upside stop. Otherwise, MOMO is a prime example of how Chinese names remain under pressure, with little relief in sight. And even when it does come, as was the case with BILI today, it doesn’t result in much sustainable upside.

 

GR100318-MOMO

 

My notes on other stock discussed in recent reports below:

CyberArk Software (CYBR) reversed sharply to the downside on Monday and is now back down to the confluence of its 10-dma and 20-dema. This looks vulnerable to further downside from here.

Fortinet (FTNT) posted another all-time high on Monday but reversed to close near its intraday lows. It is still in an extended position and not in what I would consider an optimal entry area.

Intuitive Surgical has pulled into its 20-dema on below-average volume. Technically, this puts it in a lower-risk entry position here using the 20-dema as a tight selling guide.

Palo Alto Networks (PANW) reversed at its 20-dema today and closed near the 50-dma. As I’ve discussed in recent reports, the stock has been a short at the 20-dema with the idea of looking for a test of the 50-dma. That is occurring now, such that a breach of the 50-dma would trigger the stock as a short-sale at that point.

Perspecta (PRSP) broke out today to a higher high but is in an extended position. Only pullbacks to the 20-dema at 25.20 would offer lower-risk entry opportunities from here.

Roku (ROKU) got hit hard yesterday on only average volume, and this morning finally found support at its 20-dema. As I’ve discussed in recent reports, that would be my preferred entry point, and ROKU was able to rally back into positive territory for the day. However, it is now slightly extended from the 20-dema. A breach of the 20-dema at 70.51 would serve as my tightest selling guide for the stock, with the 50-dma at 61.35 serving as the maximum selling guide.

Sailpoint Technologies (SAIL) has closed below its 20-dema for two days in a row. I don’t care for the action here and would look for a more opportunistic pullback to the 50-dma down at 30.06 as the lowest of the lower-risk entry points.

Zebra Technologies (ZBRA) busted support at its 20-dema yesterday, although volume was light. I don’t see a lower-risk entry for the stock currently, so for now I’m stepping aside pending further evidence.

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 strange divergences and morning rallies followed by late-day sell-offs and give-ups give this market a faint odor. This started on Monday, and has been going on all week, despite the record highs seen in the Dow. In many ways, new highs in the Dow appear to me to provide a nice decoy and cover for institutional selling in other areas of the market.

This has been obvious to me as smaller growth names have been hit hard over the past few days. Meanwhile, bonds are selling off hard while interest rates start to spike on a relative basis. For me, this is signaling caution, but as I’ve written in recent reports I have not seen much in the way of overly compelling long set-ups in fresher names to convince me that this market is ready to embark on a glorious new leg in what is allegedly now the longest bull market in history.

For that reason, I would advise members to review their selling guides and strategies for existing positions, and to be ready to act in case the strange action we’ve seen over the past few days reveals something ominous. Meanwhile, adept and alert short-sellers are starting to see potential set-ups developing, and I will continue to post real-time short-sale ideas on the live blog as appropriate.

As I finish writing this report in the after-hours I notice that futures are breaking further to the downside after a weak close today. This may set up further downside tomorrow, and help to confirm my assessment of this market. Stay alert!

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.