The Gilmo Report

September 19, 2018

September 19, 2018

The week has so far had an odd feel to it, as I intimated in yesterday’s video report, and this was reinforced by this morning’s stark divergence between the Dow Jones Industrials and the NASDAQ Composite Indexes. This was preceded by yesterday’s big rally following the imposition of tariffs on an additional $200 billion worth of Chinese goods and services. This was met with a Chinese retaliatory tariff on $60 billion worth of U.S. goods and services going to China.

The market deemed it a positive that the U.S. tariffs on China would only start at 10% rather than the originally threatened 25%. This set off a sharp rally yesterday that stalled somewhat going into the close. This morning, the Dow streaked higher and the S&P 500 held slightly positive, while the NASDAQ Composite and NASDAQ 100 sold off.

The divergence struck me as indicative of a movement into lower PE names along with financials and out of higher PE names, namely techs and the like. By the close, the Dow had backed down slightly and the NASDAQ indexes rallied to close only slightly to the downside. Overall, the NASDAQ simply has the appearance of churning action along near-term support. Volume declined but was still above average.

 

GR091918-$COMPQ

 

The S&P 500 Index held up all day but traded around in a tight range to close right in the middle. The action has the appearance of churning and stalling near the highs on higher volume, but cannot be considered conclusive either way.

 

GR091918-$SPX

 

The Financial Select Sector SPDR Fund (XLF) spoke for most of the big-stock financials as they all made similar moves. Big-stock financial J.P. Morgan (JPM) had a similar breakout today. Its chart mimics the chart of the XLF, and either of these could be considered buyable. However, both also strike me as somewhat extended given the moves straight up from the lows of the bases. Also, I would note that JPM did not clear to a new high, so it remains to be seen whether this move has serious legs or not.

 

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The movement in financials was helped along by a rise in the 10-year Treasury Note yield to a three-year peak of 3.083%. It is now making a run for its May peak at 3.11, and if it can clear that then it will have achieved a more than seven-year high.

 

GR091918-$TNX Daily

 

Apple (AAPL) has been pulling back in a minorly negative reaction to the recent tariff news. It is somewhat interesting to note that it hasn’t fallen apart completely. In fact, today’s action represented an undercut and rally through last week’s low at 216.47. Technically, this triggers a U&R long entry right here, using the 216.47 low as a tight selling guide.

 

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Amazon.com (AMZN) busted its 20-dema on Monday, bouncing off the 50-dma and then running into resistance at the 20-dema again yesterday and today. It closed above mid-range today on lighter volume on a retest of the 50-dma. Note that it also undercut & rallied back above the prior 1917.00 low of last week, closing at 1926.42. Thus, this creates a U&R long entry using the 1917.00 low as a tight selling guide.

 

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Nvidia (NVDA) is holding support along its 20-dema as volume dried up to -43% below average. This would create a voodoo long entry point here using the 20-dema as a tight selling guide.

 

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These long entry set-ups we see above seem to coincide with the NASDAQ’s holding of support along the highs of the late-July to late-August consolidation. If they are to work, it will likely coincide with and help to create a bounce off support by the index.

Netflix (NFLX) won a bunch of Emmy Awards Monday night, which had the effect of jacking the stock back above its 50-dma on higher, but below-average volume. However, volume was high enough to qualify as a single five-day pocket pivot. Seeing more of these along the 50-dma would be constructive.

We can also see that the 50-dma doesn’t seem to mean much to NFLX as support or resistance. Today, it ran into resistance along the prior late-August lows and backed down in a higher-volume stalling maneuver. It did hold above the 50-dma, but the action is a bit unclear. This perhaps needs to settle down along the 50-dma, and for now remains a bit erratic to play, pending further evidence.

 

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News that the going-private-funding-secured tweet by Elon Musk was now under criminal investigation by the Department of Justice sent Tesla (TSLA) back to the downside. The stock had previously been rallying back above two prior lows in the pattern, as I discussed over the weekend, and so far, the rally has kept running into resistance at the 20-dema.

Today, however, the stock cleared and closed above the 20-dema on light volume. That’s the first close above the line since the last low on the ugly gap-down break through 260. Shorts may again be piling on TSLA, and if it can hold the 20-dema then the 50-dma is not too far off.

I’ve said many times that a removal of Musk as CEO and his replacement with someone more qualified to run an auto manufacturing operation could spark at least a short-term short-covering rally, maybe more. So, if I’m daring, and I might be, a rally from here in the NASDAQ could make TSLA buyable here using the 20-dema as a tight selling guide. This assumes, of course, that it opens above the line tomorrow.

 

GR091918-TSLA

 

Okta (OKTA) closed below its 10-dma today on lighter volume but remains above the 66.09 intraday low of its early September buyable gap-up (BGU) move after earnings. The action is a bit indecisive, so I’d probably prefer to look for a pullback to the 20-dema at 66.25 as a lower-risk entry opportunity from here.

 

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While OKTA is hanging in there, ZScaler (ZS) has come apart so far this week and illustrates the weakness seen in many formerly hot, smaller growth and tech names in this market. After faltering as a possible late-stage breakout failure several times, I discussed the stock as looking more like a short here along the 20-dema in my weekend report.

ZS has peeled away from its 20-dema and broken to lower lows on heavy selling volume over the past three days. Anyone giving the stock a chance on the prior failed breakout attempts should have used the 50-dma as a last-ditch selling guide. Otherwise, ZS worked well as a short at the 20-dema.

 

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Square (SQ) closed below its 20-dema today for the first time since late July on heavy selling volume. It was another hot growth name that took some heat today. Today’s move brought the stock below the pullback low of early September, but I don’t consider that to be a solid low in the pattern to use as a reference for a U&R move.

Usually, a single, one-day pullback isn’t enough to establish what I would call a psychological low since it isn’t necessarily viewed as a level of support. We’ll see how quickly SQ can regain the 20-dema, otherwise a test of the 50-dma is always a possibility. The stock was acting well as of Friday’s close, but has been hit with increased selling volume so far this week.

 

GR091918-SQ

 

Etsy (ETSY) may be another breakout to nowhere after failing twice on a breakout attempt last Friday and a subsequent re-breakout attempt yesterday. The one positive here may be that the second failure on the re-breakout attempt has come on much lighter volume and held support at the 10-dma.

Technically, one could view this as a lower-risk entry spot here along the 10-dma, using the line at 49.43 as a tight selling guide. Otherwise, a breach of the 20-dema could trigger this as a short-sale at that point. The stock has come a long way, so one must alert to the potential two-sided nature of the situation after two failed breakout attempts.

 

GR091918-ETSY

 

Perspecta (PRSP) pulled into its 10-dma today on volume that was -56% below average. Technically this would serve as a lower-risk add point for any position one first bought lower in the pattern, beginning with the U&R long set-up at the end of August and then following up with the cup-with-handle breakout last week.

I don’t think I would be inclined to initiate a new position on this pullback and emphasize that I view this as an add point only. The other minor negative here is that while volume was very light today, the stock still broke relatively sharply to the downside and closed near its intraday lows. Thus, this makes it much higher risk as a point to initiate a new position.

 

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One factor that gets my guard up is when individual stock set-ups that look good start failing more often than they work. With many names on my long watch list showing weak action, this may indicate underlying issues for the market.

Another example is Carbonite (CARB) which looked reasonably good as it held tight along its 20-dema last week. It also posted a U&R and a pocket pivot along the line, which was constructive. Somebody, apparently, forgot to tell the stock this, and after a quick rally attempt on Monday morning it posted a big, ugly outside reversal back below the 20-dema on a sharp increase in selling volume.

A quick rally back up into the 20-dema yesterday ran into the same problem today. CARB pushed above the 20-dema early in the day but then reversed on another increase in selling volume. This was the second outside reversal in two days, and both have shown very long price ranges, which is bearish. Now CARB is back at its true breakout point and the 50-dma.

Note, however, that this is starting to look like a late-stage failed-base (LSFB) situation in the making. The only issue with treating CARB as a short-sale target is that it does not meet my liquidity requirements, trading only 442,000 shares a day on average. As a long idea, it does not look very appetizing here after two big downside breaks in a row. Perhaps it will manage a bounce off the 50-dma and back up toward the 20-dema, but I would be more inclined to use that as a selling opportunity if still long the stock.

 

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Stitch Fix (SFIX) was getting quite extended by this past Monday, and I tweeted at the time that things were getting a bit piggy at that point. After closing slightly to the downside yesterday, SFIX got hit today with heavy selling volume before finding support at its 20-dema. The price range was quite wide, but the stock managed to close mid-range.

While one could have taken an opportunistic shot at the stock near the 20-dema today, it is no longer in a lower-risk entry position after closing well up from the 20-dema. This likely needs some time to settle down, and for now, I’d want to see how it acts on a retest of the 20-dema, which I consider meaningful support. Therefore, I would also use the 20-dema as a selling guide for the stock if it continues to weaken.

 

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Chinese stocks finally staged reflex rallies today across the board, but most, if not all, remain in positions that aren’t conducive to being actionable on the long side. Among the two that I have favored, the technical action remains constructive, but no huge price moves have developed yet. Nevertheless, if there was some mass exodus of money into allegedly lower-valued Chinese names, then I would go with the strongest patterns.

Bilibili (BILI) has been tracking tight sideways since last Wednesday’s pocket pivot back up through the 50-dma. It pulled back today on volume that was -54% below average. The 10-dma lies just below at 12.64 so the closer to the line one can pick up shares the better, with the idea of then using the 10-dma as a tight selling guide.

 

GR091918-BILI

 

Momo (MOMO) has also been a strong name among battered Chinese stocks. Following last Thursday’s gap-up pocket pivot through the 10-dma, the stock pulled in from resistance along the $48 price area on lighter volume to retest the 10-dma. That worked out successfully and the stock then closed yesterday at its highest high since late June.

Resistance became a factor again today, however, as the stock pulled back on lighter volume. I like this best on pullbacks closer to the 10-dma, although some of you might see a so-called reverse head and shoulders setting up here with the stock closing right along the neckline.

 

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I pointed out in my weekend report that most of the names I’ve discussed as long ideas in recent and not-so-recent reports have become extended. Several have had some nice, long price runs, and therefore I saw things as being more susceptible to pullbacks than further, significant upside.

The action over the past few days reflects that, and we have seen some sharp pullbacks in more than a few of our favored long ideas. Some of the pullbacks may be actionable as lower-risk long entries, some not so much. My notes below review the current situation with these names:

CyberArk Software (CYBR) broke below its 20-dema on lighter volume, but this came after stalling badly at the 20-dema yesterday on heavy volume. It’s looking near-term questionable and needs to settle down.

Fortinet (FTNT) broke below its 10-dma today on heavy selling volume but found support along its 20-dema. The stock has been extended for some time after a long price run, and I would use the 20-dema as a tight selling guide.

Palo Alto Networks (PANW) broke below its 10-dma today on increased but still-light selling volume before finding support along its 20-dema. This would technically put the stock in a lower-risk entry position, but I would be more inclined to take an opportunistic approach here and look for a pullback closer to the prior 220 base breakout level and the 50-dma, now at 218.11.

Roku (ROKU) held support at its 10-dma and remains in a short one-week flag formation as it meets up with the rising 10-dma. Pullbacks to the 20-dema at 65.62 would offer the better, more opportunistic entries since I consider the stock as still in an overall extended position.

Sailpoint Technologies (SAIL) broke below its 10-dma today on light volume, finding support along the 20-dema. This technically puts the stock in a lower-risk entry position here, using the 20-dema as a tight selling guide.

Twilio (TWLO) pulled into its 20-dema today on lighter volume. This puts it in a potentially lower-risk entry position here using the 20-dema as a tight selling guide.

Zebra Technologies (ZBRA) broke to the downside today and closed just below its 10-dma. Volume was light. For now, I view any constructive pullback that carried a little further to the 20-dema at 170.59 as a lower-risk entry, but we’ll have to see what it looks like when and if it gets there.

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.

I generally base my market view on what individual stocks are doing, and the evidence over the past three days tells me that things have softened a bit. This may be due to the continuing uncertainty surrounding the escalating U.S.-China trade war, but in most cases leading stocks are entitled to take a break as the market sorts things out.

While I see some potentially buyable pullbacks in leading names, such pullbacks need to hold up. If we start seeing leading stocks begin to break near-term levels and areas of support, that would obviously automatically force us out of positions we may still be holding. Meanwhile, I don’t feel compelled to pound the table on anything right now, as the choppy action may continue for some time. Nimble swing-traders can act on set-ups as they see them, but the key is to remain nimble to keep risk at a minimum if taking new positions, long or short.

Things can, of course, change quickly, depending on the real-time information flow, and we’ll see how things look by the weekend. If the indexes can remain above near-term support levels, then things may hold together. If they don’t, then we simply abide by our trailing and absolute stops when it comes to handling individual stocks and let the market push us out naturally.

But, in my view, this is a time to be more cautious than aggressive, while staying alert to changes in the real-time information flow that may provide some clarification (and thus some opportunity) to the current market situation.

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.