The Gilmo Report

September 12, 2018

September 12, 2018

After starting the month off with four-straight down days, the major indexes found logical support and rallied on Monday and Tuesday. They even shook off a gap-down open yesterday on news that China was asking the World Trade Organization for permission to sanction the U.S. $7 billion for alleged trade violations.

The NASDAQ Composite Index bounced off the top of its late-July to late-August consolidation on Monday and Tuesday, which was a logical reaction bounce after four days of selling. Absent any additional downside fuel from the Trump Train, the index was free to rally. This morning, however, the index again headed sharply to the downside until, out of the blue, the Wall Street Journal reported that the U.S. was proposing a new round of trade talks with China.

This sent the market rocketing to the upside, but the rally faded and eventually all the major indexes turned back into the red. The session remained volatile all day, with a mixed close that saw the NASDAQ down -0.26% on barely higher volume, qualifying as a distribution day.

Notice, however, that the index has done its best to hold support along the prior late-July to late-August consolidation. Volume over the past two days has picked up as the index has bounced off support and closed in the upper part of its trading range.

 

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The S&P 500 Index also bounced off logical support along the top of its prior August consolidation, which also coincided with its 20-dema, although the moving average is not shown on the chart below. Volume was heavy today on the continuation rally as the index churned just below its 10-dma.

Despite the pullbacks off last week’s highs, the major indexes are holding near-term support. If support is broken along the tops of the prior consolidations and the 20-demas, then we may see things get exciting. For now, however, we are in a wait-and-see position, watching to see whether these current 4- to 5-day ranges represent short bear flags or constructive near-term holding of support.

While the action along prior support as the indexes hold can be seen as constructive, there is the other argument that their inability to decisively bounce makes it difficult to draw any firm conclusions. As always, it comes down to what is going on with individual stocks.

 

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Apple (AAPL) held its annual new product event and the reaction was less than stellar. The stock sold off on heavy volume but closed above its 20-dema. As a big-stock leader, AAPL should be watched carefully here since a continuation of today’s heavy selling that pushes the stock below the 20-dema would be bearish.

 

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Amazon.com (AMZN) strikes me as another key big-stock market name to keep a close eye on. So far, the stock has been able to hold support along the 20-dema, which is constructive. Today’s action carried the stock just barely back above the 10-dma on lighter and below-average volume. My view on the stock remains the same, which is that constructive pullbacks to the 20-dema can be bought, with the idea of using the 20-dema as a tight selling guide.

 

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Nvidia (NVDA) is interesting in that it broke below the new-high breakout point and tested the true breakout point, at least as I see it, today on heavy volume. I wrote over the weekend that, “From my perspective, the true breakout point occurred at the mid-August highs. Thus, I would not be surprised to see NVDA test that price level, just above 160, in any continued market correction.”

That’s precisely what happened today, but the stock managed to rally off its intraday lows on above-average volume. However, it closed below the 20-dema, which potentially brings this into play as a late-stage breakout failure. Technically, one could treat this as a short using the 20-dema as a guide for a tight upside stop. On the other hand, it remains above the 50-dma and the true breakout point, so may still be viable. The bottom line is that NVDA has really gone nowhere since its new-high breakout, which came up straight from the bottom of the pattern after a heavy-volume, two-day sell-off in mid-August.

I would not be inclined to buy the stock right here, however, since one had to act this morning when it was closer to the true breakout point just above 160. From here, I’d look for a test of the 50-dma as a possible long entry, but that might only be good enough for a bounce back up to the 20-dema. A two-sided situation that is in no-man’s land to some degree, so one must play this fluidly based on the developing technical evidence from here.

 

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Over the weekend, I advised using the 273.42 May low as a trailing stop for any short position in Tesla (TSLA). On Monday, the stock pushed up through that low, triggering the trailing stop. Today, the stock closed back above the prior late-July low of 286.13 and the 10-dma. From here, it looks like it may be headed for a test of the 20-dema.

I would watch for that as a potential short re-entry point. The 20-dema currently lies at 300.66, not quite ten points, or a little over 3%, higher from today’s close. The news flow on TSLA has calmed down a bit, so there is always a possibility that the stock keeps rallying toward the 50-dma.

Now, there is one other thing to consider here, and that is that the move above the July low at 286.13 triggered a U&R long set-up today. If one was alert to that today then one could have played it as a long trade at that point, using the 286.13 prior low as a selling guide. Play it as it lies.

 

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Netflix (NFLX) pushed right through resistance around the $356 price level and the 50-dma today, which would have been a quick stop-out for anyone trying to short the stock at resistance. Volume was higher, but below average, and did not qualify as a five-day or a ten-day pocket pivot.

Therefore, there isn’t any significant long entry signal here unless one wants to treat this as a simple moving average undercut & rally (MAU&R) move through the 50-dma. In that case, I would not chase the stock here but would look for a low-volume retest of the 50-dma as a lower-risk entry opportunity.

While the stock could just continue higher from here, we should note that it is now back at the late-August lows, which could serve as a second area of overhead resistance. For that reason, I would tend to think that a retest of the 50-dma is likely and would look for that as a lower-risk entry if it occurs in constructive fashion.

 

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As I wrote over the weekend, Palo Alto Networks (PANW) could have been treated as a buyable gap-up despite the weak close last Friday. After beating on earnings, the stock gapped up to new highs but closed right near its intraday lows, yet above the 10-dma. Nevertheless, as I discussed, this remained actionable as a BGU as long as it held support at the 20-dma.

It did exactly that on Monday and continued to all-time highs. Another pullback to the 10-dma this morning brought the stock back into buyable range and it then posted another all-time closing high. In this position the stock is extended, but pullbacks to the 10-dma would remain your references for lower-risk entries from here.

 

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Okta (OKTA) posted a new closing high today but remains within the price range it has formed since last Friday’s buyable gap-up (BGU) move after earnings. As I wrote over the weekend, I would prefer to buy shares closer to the BGU intraday low at 66.09, but you’re a long way from there at this point.

With the 10-dma moving up rapidly I would simply lay back and watch to see whether this pulls into the 10-dma at some point in the next few days. A constructive pullback into the rising 10-dma that is above the 66.09 BGU low would offer a lower-risk entry from here, otherwise the stock is extended for now.

 

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ZScaler (ZS) is behaving erratically after failing on its third breakout attempt over the past 2-3 weeks. The breakout failure carried as far down as the 50-dma today, where it again found support as it did last Thursday. Volume was heavy, so the action can be viewed as support at the 50-dma.

But the tricky point here is that ZS is technically a failed base breakout, and therefore a potential late-stage, failed-base, short-sale set-up. After three failed breakouts, will it post another one? The odds of that would seem minimal, but in this market your never know, since the unexpected can often occur.

We can see that the last breakdown to the 50-dma also closed below the 20-dema, as ZS did today. That would not have worked as an LSFB short-sale point since the stock moved right back above the 20-dema last Friday. So, it is to some extent in no-man’s land, although one could technically try to short it here and then use the 20-dema as a guide for a tight upside stop.

Otherwise, another re-breakout attempt, which would have to carry back above the 20-dema, could serve as a trigger for a long entry. The volatile, unpredictable action makes this difficult to figure out right here, right now, so we’ll see how this develops in the coming days.

 

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Roku (ROKU) remains tenacious as it endured another sharp sell-off early in the day today but rallied to close nearly unchanged and back near yesterday’s all-time high. The stock is now officially a double since I first discussed it as a buy, down around the $35 price level back in April. At this stage it is quite extended, and likely needs some time before another entry point, if any, develops again.

 

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Twilio (TWLO) came into buyable range this morning along the 10-dma, but the stock has remained somewhat volatile around the moving average over the past few days. While pullbacks to the 10-dma can be viewed as lower-risk entry opportunities, I also wouldn’t mind seeing the stock hang along the 10-dma and set up tightly with volume drying up for a few days.

 

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Etsy (ETSY) was last buyable on the pullback to the top of the prior base, as I discussed in my weekend report. It has since moved back up near its prior all-time highs and held support at the 10-dma today as volume declined. The stock is looking a little v-shaped up here, so I’d like to see it settled in along the 10-dma and tighten up a bit with volume drying up before venturing to take shares at these levels.

ETSY’s nature is such that it is generally better to wait for pullbacks to buy shares, as it tends to pull in after a short rally phase. In this position, one could still elect to buy shares here along the 10-dma, but I would use the 10-dma as a tight selling guide for any shares purchased above the line.

 

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While it has perhaps been a bit slow following its post-earnings buyable gap-up (BGU) back in mid-August, Perspecta (PRSP) now appears to be finding its mojo. That prior buyable gap-up was followed by a three-week flag formation that was in fact the handle of a nascent cup-with-handle base formation.

PRSP then broke out of that C&H pattern on Monday on strong volume that was 55% above average, although it’s hard to see on the chart below because of the scaling. The stock closed today at 24.99, just within maximum buying range of the C&H breakout point at 24.12.

Note that PRSP was previously a U&R long entry on the U&R set-up along the lows of the handle back on September 4th, and it has steadily moved higher from there. We can therefore see that the U&R long set-up gives one a clear leg up on buying only breakouts. One could have taken an initial position on the U&R, and then followed up with another purchase on the breakout. Expand your mind and your profits by expanding your methods!

 

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Carbonite (CARB) is another example of a stock that was technically within buying range of a recent new-high base breakout, but which I actually viewed as a double-bottom breakout much lower in the pattern at 38.99. Therefore, I considered the stock extended as of Friday’s close, per my comments in this past weekend’s report.

For that reason, and as I wrote, I preferred pullbacks closer to the 20-dema as a more opportunistic and potentially lower-risk approach to buying shares in the stock. After all, CARB has had a very steady upside run from the $34 price area where it first posted an undercut & rally long set-up back in late July. By keeping things in perspective, and understanding where the true buy points are, rather than just operating by rote based on any and every new-high breakout, one can wait for the best entries.

Notice how CARB broke below the 20-dema early in the day but using the resources and methods we have at our disposal, we can see an alternative set-up that developed below the 20-dema. That would be the venerable, trusted undercut & rally (U&R) set-up after the stock undercut and rallied back up through two prior lows in the pattern, as I show on the chart below.

The two lows in question would be the August 23rd low at 40.15 and the September 4th low at 40.65. CARB undercut both of those lows and then rallied back above both of those lows to close at 41.05 and back above the 20-dema. Therefore, one could have gone long today as soon as the stock pushed back above 40.15, and then again when it rallied above 40.65. Now, one can buy the stock here using the 40.65 low or the 20-dema as a tight selling guide.

A lot of the best long entries in this market occur on precisely this type of action. That is why I advise putting together a brief list of long ideas every day for the next day’s trading. Five to ten names are plenty, and by focusing on a few stocks that you like best you can watch them closely during the day and see when the long set-ups, if any, emerge. That is something that should be part and parcel of your daily stock market homework routine.

 

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With the news that the Trump Administration was reaching out to China one final time to restart trade talks before imposing the next round of tariffs, a lot of Chinese names rallied strongly. Not all China names rallied, however, but there were a few on my favorites list that acted well.

Among these were Iqiyi (IQ) and Huya (HUYA), both of which posted what I call deep doo-doo bottom-fishing pocket pivots through their 10-dmas. But IQ’s was only a five-day pocket pivot, While HUYA stalled at its 20-dema. Both, however, can be watched to see if they develop further as long set-ups.

The one that acted the best, in my view, was Bilibili (BILI), which posted a strong pocket pivot coming up through three moving averages, the 10-dma, 20-dema, and 50-dma. Volume was strong, and the stock stalled a bit as it approached the late August highs, which seems logical to me.

The risk here is that the news turns out to be nothing, and China ends up rejecting the Trump Administration’s latest overture. This could send these stocks back to the downside in nothing flat. Nevertheless, we can take the technical action for what it is, looking for any constructive, low-volume pullback in BILI to the 10-dma or 50-dma as a lower-risk entry opportunity. At the same time, the two moving averages, or the lower 20-dema, would serve as tight selling guides.

 

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Momo (MOMO) is another Chinese name in a more coherent potential long entry position. Most everything else I’ve looked at in the China space, as it were, is so deep down in its pattern that there is no way to discern a concrete long entry point. MOMO, however, offers some coherency here as it regained its 50-dma today on a five-day pocket pivot.

This puts it in a lower-risk entry position right here. One could therefore take a shot right here while looking to use the 50-dma as a tight selling guide. Again, there is some potentially substantial news risk with these names right now if China rejects the latest U.S. proposal to restart talks. But often the technical evidence shows up before the news, so play them as they lie, but keep ‘em on a tight leash.

 

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Notes on other names discussed in recent written reports:

CyberArk Software (CYBR) posted an all-time closing high today and remains extended.

Fortinet (FTNT) posted an all-time closing high today and remains extended.

Sailpoint Technologies (SAIL) has moved to new highs after holding support at the 20-dema last week. It is currently extended and out of buying range.

Square (SQ) pulled into its 10-dma today on heavy selling volume. I would take an opportunistic approach here and look for pullbacks to the 20-dema at 83.83 as lower-risk entry opportunities, if you can get ‘em.

Stitch Fix (SFIX) pulled into its 10-dma today and held today on heavy volume. As with SQ, I would take the opportunistic approach here and lay back for any possible pullback down to the 20-dema at 40.19 as the lowest of the lower-risk entries given the stock’s extended state.

Zebra Technologies (ZBRA) was last buyable along the 20-dema per my prior comments on the stock. It went on to post a new high today on light volume, although it did qualify as a single five-day pocket pivot. I consider the stock extended at these levels, however.

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 nutty news-oriented volatility, where the market turns on a dime whenever a news item that the algos deem important hits the scrolling market headlines, makes this a difficult environment to contend with. Stocks can flip out, but at the same time we have seen these flip-outs lead to actionable long entries based on moves to prior support (sometimes deeper than we might expect), or the venerable and reliable low-risk U&R long set-up.

So, while I’m not all that keen on getting aggressively long with fresh cash here, I am more than willing to take an opportunistic set-up when it presents itself on a pullback and I am able to see it in real-time. That is why we put together a brief watch list of names we favor and watch them closely, rather than trying to focus on 25-50 or more names.

Watching a large number of stocks makes it difficult to catch the actionable moves when they occur, because often they are fast and fleeting. If you’re not alert to them, and are too busy watching something else, you might miss them. Nobody is saying this is easy, because the action can get crazy at times, and it can also be difficult to act when it looks like the market may be starting to come apart.

With the indexes near their all-time highs, things could go either way here. This will also depend very much on the news flows, so always know where your out points are and be ready to act as necessary. Otherwise, play ‘em as they lie, and watch your stocks.

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.