The Gilmo Report

September 2, 2018

September 1, 2018

The market got blindsided by the Trump Train on Thursday when late in the day a headline crossed indicating that the President was going to move ahead with tariffs on an additional $200 billion of Chinese goods and services this coming week. The market took a small hit in the last hour or so of the trading day but did not come entirely unglued.

Ahead of the three-day Labor Day Weekend, a continued flow of uncertainty regarding the trade talks between the U.S. and China had the indexes spinning to and fro. By the close, however, the only bit of certainty was found in an announcement that the two sides would continue talks on Wednesday. No deal, but no busted deal, and so the indexes all rallied back to the upside to cut their losses and, in some cases, close positive.

Despite all the news noise, the NASDAQ Composite Index daily chart just shows an index that is consolidating its recent move to new highs in normal fashion. Tight sideways action ended the week as volume dried up, which so far looks constructive despite some stalling off the intraday highs on Thursday on higher volume.

 

GR090218-$COMPQ

 

The S&P 500 Index also held up relatively well on a slight pullback from Wednesday’s all-time highs. Thursday’s sell-off came on lighter volume, while volume picked up on Friday, creating the impression of supporting action off the intraday lows. So far, from an index point of view, the market remains intact on constructive price/volume action, despite the news flow.

 

GR090218-$SPX

 

Big-stock NASDAQ names continue to lead the charge, with Apple (AAPL) at another all-time high on strong volume Friday. Note that the action of the past two trading days has shown some stalling and churning on above-average volume. This may indicate that a pullback is coming, but the bottom line is that the stock has acted well since I first indicated that the early-August buyable gap-up was actionable on the long side.

AAPL is up not quite 15% since then, and while the gains may not be as exciting as those seen in other leading names in August, they are steady. In this position, the stock is extended, such that pullbacks to the 10-dma at 219.05 would be your next references for lower-risk entry opportunities.

 

GR090218-AAPL

 

Amazon.com (AMZN) looks like AAPL in that it also stalled and churned on Thursday and Friday. However, while volume was quite strong on Thursday, thanks to an analyst’s upgrade, volume on Friday was light as the stock churned around in a tight range but held above the $2,000 Millennium mark.

I’m not sure if Jesse Livermore had a Millennium Mark Rule, but this does qualify as another Century Mark, hence would be buyable using the 2000 level as a tight selling guide. That said, the stalling and churning action looks a bit suspicious. But the bottom line is that the 2000 level serves as near-term support, so play it as it lies.

 

GR090218-AMZN

 

Nvidia (NVDA) was buyable on Tuesday’s pullback toward the top of the prior base and went on to post an all-time closing high on Friday on light volume. If one believes in new-high breakouts as buy points, then technically the stock is still within range of the base breakout. However, my preference would be to look for an entry on an orderly pullback to the rapidly rising 10-dma, now at 269.03, as a lower-risk alternative.

 

GR090218-NVDA

 

Facebook (FB) posted a five-day pocket pivot on Thursday off the 10-dma but ran into resistance around its 20-dema. It pulled back on Friday as volume declined, bringing it into a lower-risk entry position using the 10-dma as a tight selling guide. For newer members, that means the stock can be bought here based on a) the prior undercut & rally set-up at the 170.23 low, and b) the low-volume pullback to the 10-dma, which can then be used as a reference by which to set your stop if it doesn’t work out.

 

GR090218-FB

 

Netflix (NFLX) has been somersaulting around its 50-dma, regaining the line and closing above it on Thursday for the first time since rallying off the lows two weeks ago. That rally was triggered as a long entry when the stock pushed back above the prior 323.43 low of May 15th. As I wrote on Tuesday, a move back above the 50-dma would trigger NFLX as a long instead of a short, using the 50-dma as a tight selling guide.

On the other hand, it’s not clear whether we can expect that NFLX will suddenly launch higher, or whether it will roll back below the 50-dma and trigger as a short again. That may depend on what the general market does. The stock was, until two weeks ago, trending lower even as the general market was in an overall uptrend.

If NFLX is going to move higher, then the higher-probability outcome is that it will need to spend some time consolidating the move off the lows. Therefore, it may not be worthwhile taking a shot at this here until the current action resolves in some tighter price action along the 50-dma, if at all.

 

GR090218-NFLX

 

Tesla (TSLA) has continued to move further below its 200-dma after triggering as a short at the 200-dma earlier in the week. Selling volume has been light over the past few days as the stock approaches the $300 price level. This has the look of a Wyckoffian Retest of the prior August 20th low, when the stock reversed back up through the 300 level on heavy volume.

Short interest has remained high in the stock, after swelling to 25.9% of the float at the end of July. It will be interesting to see what the latest August 31st numbers look like when they are reported in the next week or so. At this point, as the stock comes down on light volume to retest the August 20th low, I’m looking for a possible rally, but it’s not clear what the trigger would be since there are no reference lows around the stock’s current chart position.

It would be much easier if we saw an undercut of the August 20th low and then a reversal back up through that low. Otherwise, the stock has been down five days in a row, and where it goes from here may be dependent on the near-term news flow, or rather lack of it. Thus, if shorts have piled on the stock in the latter half of August, a rally back up to the 200-dma may be in the cards, with the idea that the 300 level serves as near-term psychological support.

 

GR090218-TSLA

 

Roku (ROKU) gapped down on heavy volume Wednesday after news came out that AMZN was planning to offer advertising-supported Fire TV streaming services. The stock has now closed three days below its rising 10-dma but remains on top of the prior flag structure it built after its post-earnings buyable gap-up (BGU) move, as I’ve highlighted on the chart.

I’m not sure if AMZN CEO Jeff Bezos woke up Tuesday morning and decided he wanted to crush ROKU, but a move into ROKU’s line of business may not necessarily be its death knell. Granted, the stock is now trading below its 10-dma, but it was already extended as it pushed up toward the $65 price level. Remember, I was first discussing this as a buy way down at 35, so it’s come a long way.

In addition, recall my discussion a few reports ago where I compared this 50% deep cup-with-handle breakout to Cisco Systems (CSCO) in 1995. I noted that after breaking out of a similar cup-with-handle formation, CSCO tried to move higher but had not spent enough time consolidating in its handle to set up a strong upside move. Thus, CSCO spent another 13 weeks building another base and higher handle.

It may be that ROKU needs to do the same, and this might imply a retest of the 20-dema from here. Thus, I would lay back and see whether that occurs, which might give us an idea as to how resilient the stock is. AMZN has yet to make a formal announcement regarding this, but I don’t see why it is necessarily an all-or-nothing proposition for ROKU. There may be enough room in this growing market for two major players.

There is also the outside chance that the stock could morph into a POD short-sale set-up. The first sign of that possibility would be a high-volume breach of the 20-dema. From there, we would then expect to see a test of the 50-dma as the prior buyable gap-up after earnings fails. But, for now, that is only a possible bearish scenario to be aware of. It is too early to call ROKU an outright short just yet, as a small, orderly pullback to the 20-dema would make the stock buyable at that point.

 

GR090218-ROKU

 

Twilio (TWLO) has been consolidating in tight fashion after posting a pocket pivot the prior week off the 10-dma. It is now meeting up with the 10-dma once again as volume dries up sharply. Therefore, this is in a buyable position here using the 10-dma as a tight selling guide.

 

GR090218-TWLO

 

Zebra Technologies (ZBRA) pulled into its 10-dma on Friday as volume dried up and bounced off the line. As I wrote in my Tuesday report, pullbacks to the 10-dma were buyable. These would work best as add points to any position taken down closer to the prior buyable gap-up and base breakout. Therefore, shares can be bought here now that the 10-dma has caught up to the stock price, using the 10-dma as a tight selling guide for shares bought up at these higher prices.

 

GR090218-ZBRA

 

Etsy (ETSY) is holding tight along its 10-dma as volume dried up sharply. This keeps it in a buyable position here using the 10-dma as a tight selling guide, or the 20-dema at 46.62 as a wider selling guide.

 

GR090218-ETSY

 

Perspecta (PRSP) remains in play following its buyable gap-up (BGU) move of over two weeks ago. The stock is essentially building a flag formation here, and on Friday pulled an undercut & rally move through the prior 22.83 BGU low. This is now an active U&R long entry set-up using the 22.83 BGU low as a tight selling guide.

 

GR090218-PRSP

 

I find it quite interesting to see how a small wolf pack of formerly hot Chinese IPOs are all moving together in similar patterns. Bilibili (BILI), Huya (HUYA), and Iqiyi (IQ) all act like they are trying to turn up the right side of potential new bases, but so far only BILI is doing this in what I would call a more definitive fashion by clearing its 50-dma.

BILI gapped up to the 50-dma on Wednesday after reporting earnings Tuesday after the close. Before that, it had flashed a U&R long entry at the 10.70 price level and continued higher before rolling back into the 11-12 price area ahead of earnings. On Wednesday, the stock broke below the 12.64 BGU intraday low and traded all the way down to 12.18.

This likely would have forced one out of the stock at that point. But when it regained the 12.64 level, it then flashed a re-entry signal as an undercut & rally set-up coming back up through the BGU low. It then ended the day at 13.76. That is more than a 10% intraday swing from trough to peak. Usually, when I see that kind of intraday volatility I lay back and wait to see whether the stock can settle down more properly.

On Thursday and Friday, BILI did that as it tucked into its 50-dma on volume that dried up to -42% below average. This puts the stock in a lower-risk entry position here using the 50-dma at 12.70 as a tight selling guide.

 

GR090218-BILI

 

Iqiyi (IQ) has been moving lower since running into resistance at its 50-dma on Tuesday following Monday’s U&R move up through the 28.94 low of early July. It closed Friday four cents below that prior low, which is reasonable downside porosity. It does, however, remain above the initial 28.01 low of early August, about 3% lower, so that can also be used as a selling guide since one would have bought on the move up through 28.01 two Mondays ago.

Something to be aware of here is that you can see on the chart that IQ has had two waves of selling off the peak. If a third wave develops, then we would want to be out of the stock on any breach of the 28.01 price level with the idea of then waiting to see how a move to lower lows might set up again as a U&R from there. Otherwise, if the stock is trying to form a double-bottom, then we have our two lows in place, so it’s just a matter of remaining flexible with the stock and seeing how things develop from here.

 

GR090218-IQ

 

Huya (HUYA) has held above the prior 27.05 of early June, which it moved up through on Monday, triggering a U&R long entry at that point. It then tried to clear the 28.40 low of early July on Tuesday but fell short. On Friday it got as low as 26.40 but rallied to close back above its 10-dma.

That pullback looks buyable here using the 10-dma as a selling guide. What you will notice with all three of these stocks, BILI, IQ, and HUYA, is that in addition to the similarity of their patterns they are also quite volatile. This makes them more difficult to handle, and some of this may be due to them having to take some flack every time news regarding the U.S.-China Trade Tiff pops up.

With President Trump threatening to move forward with tariffs on additional $200 billion of Chinese goods, this will likely influence how these stocks play out. Both IQ and HUYA have two waves of selling in their patterns, so if these tariffs are pushed through then a third wave could materialize. If not, then we could see a relief rally in these names, and they would then act more like double-bottoms.

 

GR090218-HUYA

 

One of the main reasons I find all three of these formerly-hot Chinese IPOs interesting is the potential for a long POD situation to develop. In studying how PODs, or Punchbowls of Death, form, I know that the highest velocity movers among these tend to occur in formerly-hot IPOs or other stocks that suddenly become hot, have a huge, rapid run-up, and then fall rapidly back to earth, Icarus-like.

This was the same theory that drove my long thesis on ROKU back when it was down at 35 a few months ago and had broken down for 13 weeks and over 50% after a massive run-up after it came public. Following the 13-week breakdown, I was then looking for clues that the stock might be rounding out the lows of a possible POD formation. And since we know that a POD consists of one rapid breakdown on the left side of the punchbowl, we can then theorize that an equally rapid run-up back to the highs could form the right side of the punchbowl.

So, with BILI, IQ, and HUYA all having come down for nine weeks and about 50% before trying to bottom two weeks ago, they could be in position for POD-like run-ups coming up the right side of a possible POD formation.

 

GR090218-HUYA

 

When I look at the weekly charts of these three stocks I am reminded of Trina Solar (TSL) back in 2007 when it formed two short PODs in a row that were 6-7 weeks down the left side and then 5-6 weeks back up the right side. Below is the weekly chart of TSL in 2007 taken from the book Trade Like an O’Neil Disciple – How We Made 18,000% in the Stock Market.

While BILI, IQ, and HUYA certainly don’t have to play out the way TSL did, I am acutely aware of how this stock acted as a hot Chinese IPO that went cold and hot a couple of times before blowing up altogether. In addition, the idea of using some sort of so-called precedent is flawed on its face, as far as I’m concerned.

For that reason, we simply operate on the basis of concrete price/volume signals that may occur along the lows of any potential POD. That is what got us into ROKU around 35, and the same will hold true for the current “Three Musketeers” of hot Chinese IPOs, BILI, IQ, and HUYA, as they play out. As always, we just play them as they lie.

 

GR090218-TSL Old Chart

 

Momo (MOMO) pulled into its 10-dma on Friday and then rallied on strong volume. This produced a pocket pivot at the 10-dma, although the stock was buyable at the 10-dma early on Friday. I would watch for any pullback toward the 10-dma/50-dma zone for any further buyable pullbacks. Since posting a bottom-fishing BGU last week, MOMO has acted well by clearing the 50-dma and then moving higher from there on strong volume.

As with other Chinese names I’m watching, news flow regarding the additional tariffs on China this week could create some sharp price movement. This might then offer opportunistic traders some lower-risk shots on any pullbacks that might occur from here.

 

GR090218-MOMO

 

Telecoms seem to be percolating here, although the action in more than a handful of names in the group may be influenced to some extent by the ongoing U.S.-China Trade Tiff. More than a few of these names have some exposure to China, so can be buffeted about by the ongoing trade tiff news flow.

Applied Optoelectronics (AAOI) is flaking out as it drifts back below its 10-dma, 20-dema, and 50-dma. The stock looked like it was setting up nicely along the 50-dma on Tuesday, when I first discussed it. But after a brief upside move on Wednesday early in the day the stock has closed down three days in a row. This is also undercutting the low of four days ago on the chart, so one might watch for some sort of U&R to develop in here. My guess is that some of this may be related to the current China trade news, so how this resolves may be dependent on the news flow this coming week.

 

GR090218-AAOI

 

Acacia Communications (ACIA) has moved back up toward the highs of the prior week’s buyable gap-up move that turned out be a one-day wonder before getting shot down by an analyst’s downgrade. The initial big-volume gap-up move was caused by another analyst upgrading the stock and calling for 20% upside, which turned the stock into a Battle of the Analysts.

For opportunistic traders, however, the stock reversed back to the downside the day after the buyable gap-up ended up filling the gap, as I discussed in my video report at the time. That set up a long entry at that point, and the stock has drifted higher from there. So, if one didn’t buy the gap-fill, then pullbacks to the 10-dma would offer lower-risk entries from here.

 

GR090218-ACIA

 

Arista Networks (ANET) posted a buyable gap-up two Fridays ago after reporting earnings and has spent the past five days drifting back toward the intraday low of the BGU day. That low is at 294.92, and the stock did briefly dip below that level on Thursday before rallying back above it. Thus, this remains in force as an actionable BGU, using the 294.92 price level plus 1-3% downside porosity, as your selling guide.

 

GR090218-ANET

 

Notes on other names discussed in recent written reports:

Carbonite (CARB) pulled into its 10-dma on Friday and held, bringing it into near-term buying range.

CyberArk Software (CYBR) posted a continuation pocket pivot along its 10-dma on Friday. Volume was quite strong, so this looks like it might be headed higher from here, such that any small pullback to the 10-dma at 73.46 would be buyable, using it as a tight selling guide.

Intuitive Surgical (ISRG) continues to post new highs, hitting another one on Friday as volume picked up to just about average on the day. Only pullbacks to the 10-dma, now at 542.74, would offer lower-risk entries from here.

Okta (OKTA) remains extended but is on earnings watch ahead of this week’s expected earnings report on Thursday after the close.

Sailpoint Technologies (SAIL) tested its 10-dma on Friday where it offered a lower-risk entry per my comments in Tuesday’s report. It remains buyable on pullbacks to the 10-dma at 30.17.

Square (SQ) posted another all-time closing high on Friday and remains in a semi-parabolic, extended state.

Stitch Fix (SFIX) blasted to all-time highs on Friday on above-average volume. The stock is way extended at this point, with the 10-dma way down at 36.89 as your only reference for near-term support.

ZScaler (ZS) has shot higher after posting a trendline breakout last week. Earnings are coming up next week (expected on Wednesday after the close). One can either take profits here into earnings, or hold and hope your profit cushion is sufficient in case things go awry after earnings roulette.

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.

A couple of days of sideways action in the major indexes combined with a little bit of news flurry here and there have created some new set-ups on the long side. Two weekends ago I theorized that the major indexes’ breakouts to all-time highs may portend a new up leg that is like what we saw at the end of August 2010.

I remember going on the set of Fox Business News in New York at the very end of August 2010, right around this time eight years ago, and talking a bullish line. Liz Claman and Cheryl Casone were the hosts on the set, along with another money manager who was cautious at the time. Dr. K and I had flown into New York on my chartered jet to promote our first book, Trade Like an O’Neil Disciple. In any case, my bullish conjecture turned out to be correct, as the NASDAQ Composite chart from that period, below, shows.

 

GR090218-$COMPQ 2010

 

I also remember that there was a lot of talk about the NASDAQ Composite setting up in a bearish head-and-shoulders formation. You can see that pattern on the chart, and how it eventually resolved with a big multi-month rally. This is another example of why I don’t consider H&S formations in the indexes to be meaningful, although a lot of people like to fixate on them.

So, as we head into what the pundits like to refer to as the two most difficult months for the stock market, I think we just keep doing what we always do. And that is, of course, to focus on the individual stocks, which, outside of the occasional break down here and there, are showing constructive action. We can always correct at any time, particularly with all the potential news flow out there, but for now I’d just watch the stocks. That is all.

On an administrative note, later this weekend I will post a new video report covering what I see as nascent areas of the market, including bio-techs, so keep an eye out for that. Otherwise, enjoy the long Labor Day Weekend. I know I will.

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.