The Gilmo Report

September 16, 2018

September 15, 2018

The market was pushing back up toward its prior highs after finding inspiration in a Tuesday Wall Street Journal report that the U.S. was inviting the Chinese to a fresh round of trade talks. This of course had the effect of turning the market on a dime Tuesday morning when it was selling off in earnest. The indexes then slogged their way back up toward their prior highs over the next two days.

But, on Friday, the Trump Train once again left the station at around Noon Eastern when Bloomberg reported that President Trump was going to go ahead with the next tranche of tariffs on Chinese goods and services. This would encompass, according to the report, tariffs on some $200 billion worth of stuff coming to us from China. This sent the indexes spinning to the downside, in what looked like a replay of the prior week’s action given that the positive news three days earlier had apparently been negated.

But by the close, the indexes fought back and were roughly where they started the day except for the NASDAQ 100 Index, which closed in the red by -0.21%, or -16.19 points. The NASDAQ Composite Index held tight along its 10-dma as volume declined. From an index point of view, the action looks constructive, but the 10-dma may or may not represent solid support. How this plays out in the near-term may be dependent on the coming week’s script for another kind of market soap opera, As the Tariff Turns.

 

GR091618-$COMPQ

 

The S&P 500 Index closed slightly higher on Friday, weathering its own version of Hurricane Florence and fighting back against the torrent of selling that hit just before midday. In the end, what looked like a possible Cat 5 hurricane for the market dissipated into a few sprinkles, followed by sunshine. Beyond all the timely hurricane metaphors, we can also say that the index held tight along the highs as volume declined only slightly.

 

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The tariff news was perhaps a bit scarier for Apple (AAPL), which has numerous manufacturing ties to China. The stock sold off 1.14% on above-average volume, closing below its 10-dma. If the Bloomberg report on Friday turns out to be true, and another $200 billion in tariffs go through, AAPL could react negatively. For that reason, I would not be too eager to jump on the stock up here.

If the news did pan out, negatively, then it would tend to reward an opportunistic approach here. That means a sharp sell-off on the news that takes the stock down to a lower, lower-risk entry point, perhaps closer to the 50-dma. The bottom line is that when a stock has this much news risk, at least in the very near-term, why play with fire if you don’t have to?

 

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Consistent with the NASDAQ 100 leading on the downside Friday, we also saw Amazon.com (AMZN) pull back. The pullback appeared minor as the stock came right down to its 20-dema with volume declining. Technically, this would offer a lower-risk entry position here, with the simple idea of using the 20-dema as a tight selling guide.

 

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Nvidia (NVDA) has moved from no-man’s land into re-breakout land, after it found support on Wednesday near what I view as the true breakout point closer to 260. The move on Friday stalled as volume picked, up, but qualified as a re-breakout through the new-high breakout point closer to 270. Technically, if one believes in buying new-high breakouts, then the stock is within buying range.

As I’ve already discussed, my preference would have been to take shares at the true breakout point. Given the lack of support due to the move straight up from the bottom in late August, the new-high breakout point is a relatively unreliable reference for support. But after some backing and filling, the stock may try and settled down along its 20-dema, which can be used as a reference for near-term support. Thus, we can watch for low-volume pullbacks to the 20-dema as lower-risk entry opportunities.

 

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Netflix (NFLX) is pulling back down toward its 50-dma, which it regained on Wednesday, as I noted in my report of that day. I also stated that, “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.” So far, that is the case as volume dries up and the stock gets to a little over 1% within the 50-dma at 359.91.

I would watch for a test of the 359.91 price level as the lowest of the lower-risk entry opportunities. However, with the stock closing a little over 1% above the 50-dma on Friday, it is still in a lower-risk entry position using the 50-dma level as a tight selling guide.

 

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Tesla (TSLA) cleared the U&R long entry at 286.13 on Wednesday per my discussion of the stock on that day, and is also now well above the mid-August low at 288.20. Thus, we can move our trailing stop to the higher low at 288.20 if we so desire to keep risk tighter. So, while TSLA was a short in late August per my comments at that time, it has over the past three days turned into a U&R long play.

This is consistent with the stock’s nature as the perfect swing-trading vehicle given that it has swung around in a roughly 100-point range all year long. Every time the shorts get the upper hand, the stock finds a floor somewhere and rallies back to the upside. My approach with the stock has been to treat it objectively, moving in sync with the real-time technical evidence rather than being ruled by a long-term bullish or bearish opinion of the company.

So, objectively, TSLA remains in play as a U&R long set-up using the 288.20 or 286.13 price levels as your selling guides. I could see this rallying further to the 50-dma if the worst of the news flow is behind the stock in the near-term.

 

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Okta (OKTA) is now in a five-day flag formation following the buyable gap-up move of two Fridays ago after earnings. Volume was higher on Friday’s pullback, but the stock closed mid-range. This is constructive, but I would still try and lay back here, looking for a potentially more opportunistic entry on a pullback to the fast-rising 10-dma.

 

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ZScaler (ZS) is still a bit iffy as it stalls and reverses at its 20-dema on above-average volume. The stock has already had two prior breakout failures, and Friday’s action keeps the stock in failure territory. Technically, this looks more like a short than a long, using either the 20-dema or the 10-dma as a guide for an upside stop.

Otherwise, if one wants to look at this as more of a long, then you’d have to see a constructive pullback to the 50-dma as a lower-risk entry opportunity. The other possibility is that the stock undercuts one or both of the two prior September lows along the 50-dma and then rallies back above them, triggering a U&R long entry. Play it as it lies.

 

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The last time Square (SQ) pulled into its 10-dma today on light volume was back in mid-August, which I noted at the time as a voodoo entry point. It has since moved about 20 points higher and is again setting up along its 10-dma with volume drying up. If the stock is going to make a run for the $100 Century Mark, then look for it to move off the line here.

For that reason, if one has been playing the stock from at least the mid-August buy point, one could consider adding some shares here along the 10-dma. In this case, one would then use the 10-dma as a tight selling guide for shares purchased up here. Otherwise, the opportunistic approach would look for a pullback to the 20-dema as a potentially lower-risk entry point.

 

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Etsy (ETSY) broke out on Friday on strong volume. This is still within buying range of the breakout, so is technically actionable on that basis. Otherwise, the pullback to the 50-dma and the top of the prior base last week was a lower-risk entry as I discussed at the time.

 

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Perspecta (PRSP) is now extended following Monday’s cup-with-handle base breakout, as I discussed in my Wednesday report. From here, look for pullbacks to the 10-dma at 24.52 as potentially lower-risk entry opportunities closer to the base breakout point.

 

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Carbonite (CARB) is holding tight along its 20-dema following Wednesday’ UUR long set-up coming back up through two prior lows in the pattern.  As I discussed on Wednesday, the stock is buyable here using either of the two prior lows, the August 23rd low at 40.15 or the September 4th low at 40.65 as tight selling guides. Currently, CARB is forming an L-pattern that, based on the U&R long set-up, has the potential to evolve into a U-pattern that completes a LUie type of move that is common in this market.

Remember that a LUie is not in and of itself a pattern that you buy, but more a description of how an ugly-looking L-pattern can suddenly turn bullish. What gives the initial L-pattern the ability to evolve into a U-pattern and a fulfilled LUie are concrete buy signals along the lows of the L-pattern. So, CARB’s U&R moves back up through the two prior lows, triggering U&R long entry signals, would constitute precisely this type of concrete, objective price action that gives CARB a shot at becoming a fully-formed LUie.

In addition, if you study the chart carefully you will notice that CARB posted a very subtle pocket pivot along the 20-dema on Friday. Therefore, the stock is buyable here with the idea of using the 20-dema as a tight selling guide.

 

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As I wrote on Friday, the positive news regarding the U.S.-China trade war was good for Chinese stocks but presented investors with additional news risk if Tuesday’s news was negated. That’s what happened with Friday’s news, and most of the Chinese names that had rallied over the prior 2-3 two days sold off.

This was true for Iqiyi (IQ) and Huya (HUYA), along with other big-stock Chinese names like Alibaba (BABA) and Baozun (BZUN). In most of these cases, the bounces this week just look like reaction rallies in deeply oversold patterns. In my Wednesday report, I also noted that I didn’t necessarily think that IQ and HUYA were the best of patterns.

I did, however, like Bilibili (BILI), which seems to have a more constructive roundabout look to it. The stock held up as others in the space sold off, holding tight on declining volume following Wednesday’s roundabout pocket pivot coming up through the 50-dma.

The most opportunistic approach here, however, remains watching for a pullback closer to the 50-dma at 12.29. If you consider that the stock had about a 30% move from the Tuesday lows to the Thursday highs, a little bit of consolidation is likely necessary up here.

 

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Momo (MOMO) was also one of the more coherent patterns among Chinese names that I was looking at on Wednesday. The stock looked buyable at the 50-dma as of Wednesday’s close. But it left any potential buyers behind by gapping up and posting a pocket pivot on a move up through the 10-dma.

It is now sitting up near the highs of late August, where it will likely have to get through some resistance. Therefore, a pullback to the 10-dma, at least, looks possible, and would offer a lower-risk entry opportunity if it occurs on constructive, lighter volume. Otherwise, you have the 20-dema at 44.41 and the 50-dma at 43.23 as secondary levels of support to look at on any deeper pullbacks.

There does remain some news risk with respect to Chinese names and the ongoing U.S.-China trade war. But the fact that these two names, BILI and MOMO, held up well on a day when negative trade news came out speaks in their favor. Play them as they lie.

 

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Funko (FNKO) has been the best-performing stock of any that I’ve discussed in the written and video reports since April. I first pegged it as a buy around $8 back in April when it was sitting in a nice, tight handle within an overall cup-with-handle formation. This was its first IPO base. The stock then nearly quadrupled in a mere 20 weeks.

The stock was getting parabolic coming into this week, and by Monday had posted eight-straight up days in a row. On Tuesday, it got whacked on heavy volume, on news that Call of Duty: Black Ops 4, a video game produced by Activision Blizzard (ATVI), was getting rave reviews. This was viewed as detrimental to Fortnite, another popular video game produced by Epic Games. FNKO had announced a partnership with Epic back in July to create a range of Fortnite toys and collectibles.

This struck me as a bit odd, since FNKO’s product line encompasses far, far more than just the figures from a single video game. The company is also moving in other directions with respect to content, and has struck deals with several major retailers, including Walmart (WMT), where the products are featured in their own massive wall display.

But a -17.8% price break like we saw on Tuesday, coming on extremely heavy volume after a parabolic run, is generally more than a good reason to get out of the way. As I’ve discussed in recent video reports, one would also look to use the 20-dema as a maximum selling guide. But when a stock breaks that hard on that much volume after a big run, one can often just pull the ripcord quicker than that.

What we have now is a hot-stock that has now seen the biggest one-week price break in the pattern coming on the most massive selling volume in the entire run. This past week, FNKO traded over 13 million shares, which is more than twice the total float of 5.6 million shares. It is now meeting up with its 10-week moving average, which, ironically, is also the first pullback to the 10-week line since the cup-with-handle breakout back in April.

So, does one seek to buy this first pullback to the 10-week line? That’s a tricky question, since daily volume has been above average over the past four days since the sell-off began. It is, however, starting to dissipate. I’d be interested to see how it acts in the coming days, but the massive selling off the peak is a bit unsettling.

The other thing to consider here is that the 13 million shares of volume traded this week likely means that a lot of the prior holders of the stock have handed it off to other buyers, who in turn handed their shares off to additional buyers on the way down. So, the question is whether we’ve re-cycled the entire float (more than 2x, as I said) in a manner that has created an entire new set of hands in the stock.

As far as I’m concerned, any Gilmo member who owned the stock should have been out on the breach of the 20-dema, at the very least. Those who recognize the Piggy Principle might have been out sooner, particularly if they were on high alert for any potential sell-signal as the stock went parabolic and up eight days in a row.

When you have a 4x price gain in a stock, you must at least maintain some awareness of the Piggy Principle while avoiding the urge to buy an engagement ring and propose marriage to the stock. I’ve been doing this for 28 years, and to me the story is always just the story, no matter how good it gets or sounds. Technicals rule all, and the animals who run at the front of the herd abide by the technicals, while avoiding the urge to visit the jewelry store!

So, everyone should be out of the stock at this point, with some cash in their pockets. This puts one in the comfortable position of seeing whether some sort of re-entry opportunity shows up here near the 10-week line, but the situation remain fluid. FNKO has been a wonderful stock, and continues to teach its lessons, so just play it as it lies.

 

GR091618-FNKO

 

Most names I’ve been discussing in recent reports are relatively extended. Therefore, it is a matter of watching for pullbacks in these names as they occur. Here are my notes on some of these:

CyberArk Software (CYBR) closed below its 10-dma on Friday on slightly above-average volume. This is still extended such that the 20-dema down at 74.22 would be your next reference for buyable support, while using the 20-dema as a tight selling guide.

Fortinet (FTNT) posted yet another all-time closing high on Friday and, of course, remains extended.

Palo Alto Networks (PANW) again found support along the 10-dma on Friday, which has been our reference for buyable pullbacks. It is slightly extended from here, and pullbacks to the 10-dma would continue to serve as references for potentially buyable pullbacks. If the general market gets into any kind of trouble, however, look for the 20-dema at 226.83 as deeper support.

Roku (ROKU) posted an all-time closing high on Friday and remains extended. Pullbacks to the 10-dma at 66.52 would be your references for potentially lower-risk entries from here.

Sailpoint Technologies (SAIL) pulled back on Friday but remains above its 10-dma. My approach with SAIL, however, would be to take an opportunistic approach here and look for a deeper pullback to the 20-dema at 31.09 as a lower-risk entry.

Stitch Fix (SFIX) continues to rocket higher as it approaches the $50 price level. The stock is well-extended in this position and out of buying range.

Twilio (TWLO) has edged back up to its prior highs of two weeks ago on light volume and is extended. I would view pullbacks to the 20-dema at 81.16 as references for more opportunistic entry points.

Zebra Technologies (ZBRA) posted an all-time high on Friday on strong, above-average volume. It was last buyable along the 20-dema per my prior comments on the stock and is now further extended on the upside.

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.

One of the primary mitigating factors present in this market is of course the random news flow, while the second is the fact that there are not a lot of fresh long set-ups. Most leading stocks have been trending higher for a while, and except for PRSP, fresher and newer first-stage set-ups are mostly far and few between.

That is all well and good, however, since if the market continues to trend higher we have more than enough names to play. A lot of the action consists of stocks moving back to the upside within their patterns or edging higher in what are already well-established longer-term uptrends. The key in most cases is in maintaining an opportunistic, lower-risk approach that seeks to enter on constructive weakness as the lowest-risk areas of the chart.

In this manner we can use the news flow to our advantage by looking to buy into news-related sell-offs while not getting sucked into the need to chase extended strength when the news flow turns positive. If the news flow creates something worse than a short-term pullback, we’ll likely see the evidence in stocks not holding near-term support and breaking down further, as was the case in early February and to a lesser extent during the June and July sell-offs.

The whole trade war fracas, from Europe to Canada and mostly to China, is coming to a head, and the news flow may get more exciting in the coming days and weeks. Does the U.S. move ahead with more tariffs? Does China retaliate? Does Canada have a peanut-butter-chocolate moment and join the latest NAFTA agreement? Does Europe work out a Trumpian deal with the U.S.?

As this occurs, we will get a chance to see whether the trade war that is starting to look like World War Three tanks the market, or whether it all turns out to be much ado about nothing. So far, we can see that there are still plenty of stocks that could not care less. Sure, if you’ve tried to be a perma-bull in the “cheap” (and getting cheaper) shares of Facebook (FB) or Chinese names in general you’ve been beaten up pretty good.

But if you’ve been playing smaller growth names like ROKU, SQ, ETSY, OKTA, SAIL, ZBRA, and others, your experience has been decidedly different. So, the prescription for handling this market remains a tried-and-true one. Watch the stocks, go with the set-ups, and remain opportunistic by seeking to buy on constructive weakness rather than chasing strength, all of which can be distilled down to a five-word phrase: Play them as they lie.

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.