The Gilmo Report

September 23, 2018

September 23, 2018

The Dow Jones Industrials Index finally caught up to the rest of the indexes by posting its own all-time high on Thursday, exceeding the prior highs of late January. The S&P 500 also logged another all-time high, but NYSE volume was lighter on the day. On Friday, the Dow made another all-time high but churned and stalled in a narrow price range on heavy quadruple-witching options expiration volume.

 

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The S&P 500 Index reversed on Friday after posting another all-time high on Thursday. Volume was heavy, thanks to quadruple-witching options expiration. However, the action can be taken at face value as a high-volume reversal off the highs after a three-day rally.

 

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The NASDAQ Composite Index, which was the first of the major indexes to post new highs back in June when it cleared its January peak, remains below its recent all-time highs. The index closed slightly in the red on Friday on higher options-expiration volume but remains within a choppy range for the month of September.

On its face, Friday’s action looks near-term bearish, as is the case with the action in the Dow and the S&P 500. The NASDAQ just missed posting a complete outside reversal to the downside by a mere 56 cents. Meanwhile, I’m seeing a lot of leading stocks struggle a bit.

 

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In terms of providing fresh, new breakouts, the financials are not showing tremendous follow-through momentum on the upside. The Financial Select Sector SPDR Fund (XLF) had a sharp move off its base lows on Wednesday, but that move ran out of gas as it cleared to new highs. It then backed down a bit on Friday on heavy volume.

As I wrote on Wednesday, I would not be looking to buy this move in its extended state off the base lows. Rather, if one is interested in buying financials, then waiting for a pullback to the trendline breakout level closer to 28 is advisable.

 

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Conceptually, the same thing would apply to a big-stock financial like J.P. Morgan (JPM), which has one of the better patterns among these names. Wednesday’s move in the stock did not result in a breakout to higher highs, but it was a trendline breakout on heavy volume. Once the stock got to new highs on Thursday, it stalled and reversed back to the downside on Friday on heavy options expiration volume.

JPM’s action mimics the action in the XLF, such that a pullback to its trendline breakout level closer to 115 would provide a lower-risk entry opportunity. Of course, all of this presupposes that the financials will serve as a big-stock area of leadership for any continuing market rally.

 

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Volume levels in a broad number of stocks were extremely high on Friday, thanks to the quadruple-witching options expiration. Here we can see Apple (AAPL) dropping below its 20-dema on heavy volume as a result. Friday’s close held above the 216.47 of the prior week, so technically the U&R long set-up remains intact until and unless the stock breaks below that price level.

On balance, however, the pattern doesn’t strike me as all that appetizing. Obviously, the higher volume because of options expiry can be explained away, theoretically speaking. That said, the pattern looks a bit dicey here, but with the U&R still in play one can simply play it as it lies until the U&R is proven to be invalid. Don’t be surprised if it turns out be a false buy signal.

 

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Amazon.com (AMZN) has failed on its own U&R attempt after closing below the 1917.00 low of the prior week. I discussed this set-up in my Wednesday report, and it is now on the verge of complete failure, depending on how much downside porosity one applies to their selling guide. The stock closed at 1915.01, about 1% below the 1917.00 low.

Speaking for myself, I generally just exit a U&R long set-up as soon as it breaks the prior low. Of course, I am willing to come back into the stock long if it regains the prior low. AMZN looks a bit weak here, even with the extra options expiry volume. That’s because Friday’s volume was lower than the three prior selling volume spikes in the pattern, so I don’t like the look of AMZN here either.

 

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Nvidia (NVDA) also let us down by failing to hold its voodoo pullback to the 20-dema on Wednesday. The stock never even gave us a chance to buy the stock, since it gapped below the 20-dema on Thursday morning and stayed down all day, even amid a big market rally. It is now testing the 50-dma on above-average selling volume.

I suppose if you truly like the stock, then this pullback to the 50-dma could present a lower-risk entry opportunity. My only issue with that is the above-average selling volume on Friday. Generally, you want to see pullbacks to a moving average occur on light volume, so we’ll have an opportunity to see what this wants to do from here, without options expiration volume clouding the scene a bit.

But, NVDA represents another wavering big-stock NASDAQ leader having problems even as the index action looks so bullish with the Dow and the S&P 500 making all-time highs on Thursday. As I wrote in my Wednesday report, these long set-ups in names like AAPL, AMZN, and NVDA should work, and the fact that they aren’t represents action underneath the surface that may be our first clue that things are not entirely right with this market.

 

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Netflix (NFLX) is also wavering, despite holding above its 50-dma. Solid resistance continues to hold along the prior late-August highs. NFLX ran into this resistance on Wednesday, and has continued lower, posting an outside reversal to the downside on Friday on higher selling volume. This is problematic, and NFLX could trigger again as a short-sale if we see it breach the 50-dma on continued selling.

Opportunistic short-sellers, however, might look to use any rallies up into resistance just below 380 as short-sale entries, if you can get ‘em. To some extent, however, the action is inconclusive, even if still erratic and less than appetizing as a long play.

 

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Tesla (TSLA) provided a sharp contrast to all the quadruple-witching volume spikes seen in so many other stocks on Friday. It traded in quiet volume that was -50.2% below average as it sat tight along its 20-dema. Technically, this keeps the stock in an actionable position as a voodoo long set-up, using the 20-dema as a tight selling guide.

My one caveat here would be that long set-ups like this have not been working as well lately, so a failure is always a possibility. Therefore, if one does elect to try this as a long idea, be prepared to flip short if TSLA fails to hold the 20-dema!

 

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The theme of struggling leaders even as the Dow and the S&P 500 make all-time highs can be applied to many of my previously favored names. Okta (OKTA) is another one as it ran into resistance at the 10-dma on Friday on above-average volume. I already wrote on Wednesday that I would not try to buy this until and unless it got to the 20-dema on constructive, light volume.

It appears that a test of the 20-dema is imminent, and I would watch closely to see how this plays out. A secondary level of theoretical support also lies at the prior buyable gap-up low at 66.09, while the 20-dema is just above at 66.87. This more or less remains intact on this pullback, but a breach of near-term support would obviously be bearish.

 

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Zebra Technologies (ZBRA) is stalling around its current all-time highs but held at its 10-dma on Friday. Volume was heavy, and the move technically qualifies as a pocket pivot, albeit a stalling pocket pivot, at the 10-dma. That said, I wouldn’t be looking to buy this here. The 20-dema at 171.39 would be the more opportunistic entry spot, assuming the stock were to pull into the line in constructive fashion. Watch for it.

 

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Square (SQ) is another struggling leader as it again closes below its 20-dema. Volume on Friday was slightly below average, but higher than Thursday’s levels. Note that the stock’s action was somewhat tepid on Thursday when the general market was rallying sharply. SQ reversed on Friday despite an analyst’s upgrade and $101 price target. Note the selling volume spikes in the pattern along the highs as buying volume diminishes so far in September.

Nimble traders might look at this as two-sided since a failure to regain the 20-dema would bring the stock into play as a short-sale target, using the 20-dema as an upside stop. Right now, this is inconclusive, but SQ does represent another struggling leader in what looks like a very positive market on the surface.

 

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Etsy (ETSY) is yet another struggling leader that is morphing into a late-stage, failed-base (LSFB) short-sale set-up. Two breakout attempts followed by two breakout failures have now sent the stock below the 20-dema as selling volume picks up. As I wrote on Wednesday, “…a breach of the 20-dema could trigger this as a short-sale at that point.”

Technically, therefore, this can be viewed as an LSFB short-sale set-up here using the 20-dema as a guide for an upside stop. I would prefer to come in on any rally up into the 20-dema, however, as a more optimal short-sale entry. ETSY closed only 2% below the 20-dema on Friday, so is still within a reasonable short-sale range of the line. However, I tend to be a bit nit-picky about these things!

 

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Fortinet (FTNT) is meanwhile having its own issues as it struggles to hold its 20-dema. The stock has held in a steady, plodding uptrend along its 10-dma since gapping up after earnings in early August, but is finally running into some selling. We can see three straight days of high-volume selling along the 20-dema, but so far FTNT is holding the line.

Given the high volume, I don’t view this pullback as currently buyable. I’d need to see further evidence along the 20-dema to get a better idea of whether a buyable set-up is in play or not. But it is this type of action that typifies many leading names in this market as the indexes take on a very rosy hue by contrast.

 

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Palo Alto Networks (PANW) is holding along its 20-dema on below-average volume, which technically puts it in a lower-risk entry position using the 20-dema as a tight selling guide. Note that while volume was below average on Friday, it was higher vs. the prior day. A breach of the 20-dema could bring this into play as a short-sale target, looking for a test of the 50-dma down at 218.68. Play it as it lies.

 

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Perspecta (PRSP) acts a bit more like a leader as it holds at its 10-dma following its cup-with-handle breakout near the $24 price level. The stock posted a below-average-volume pocket pivot at the 10-dma on Thursday. It held the 10-dma on Friday on above-average volume, which looks like supporting action at the line.

Technically, this would be an add point for any prior position taken at lower prices following the U&R long set-up at the end of August and the cup-with-handle breakout two weeks ago. The 10-dma would serve as your selling guide for any shares purchased above the line, with the 20-dema serving as a reasonable trailing stop for the entire position.

 

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Sailpoint Technologies (SAIL) was in a lower-risk entry position along the 20-dema this past Wednesday per my comments on that day. The stock then went on to post two pocket pivots along the 20-dema on Thursday and Friday. This is one leader that isn’t struggling, but I would have preferred to buy shares at the 20-dema, rather than chasing the pocket pivots.

SAIL did provide buyers with a second chance on Friday when it retested the 20-dema and bounced hard to post the second pocket pivot. In this position as of Friday’s close, it is now extended such that only further pullbacks to the 20-dema would provide lower-risk entries from here.

 

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The action in my two (and pretty much only) favorite Chinese stocks is also somewhat uneven. Bilibili (BILI) couldn’t hold its 10-dma or 20-dema on Friday and ended up breaking for the 50-dma on a -7.51% downside move. Volume was below average but significantly higher from Thursday’s voodoo levels.

Frankly, after the voodoo action at the 10-dma on Thursday, I think the stock should have held up better on Friday. Now it’s a matter of seeing how and whether it can hold final support at the 50-dma. A breach of the 50-dma could turn this in to a short-sale target at that point, so this can be viewed as a two-side situation, depending on how it plays out in the coming days.

 

GR092318-BILI

 

Momo (MOMO) is acting perhaps a little better than BILI as it pulls into its 10-dma on declining volume. This is coming after a prior gap-up pocket pivot coming up through the 10-dma the prior week, with resistance showing up around the $48 price level just above. Technically, this brings MOMO into a lower-risk long entry position, with the idea of using at least the 20-dema at 45.42 as a maximum selling guide. I would remain flexible with this, since a breach of the 20-dema could bring a test of the 50-dma into play. There is also the outside chance of this morphing back into a short-sale target, so I would be alert to this should we see it break support in real-time.

 

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My notes on other stocks discussed in recent reports below (note that a few are now busted names):

Carbonite (CARB) – busted!

CyberArk Software (CYBR) is still living below its 20-dema and stalled at the line on heavy options-expiry volume on Friday. No long set-up herein for an extended leader that has been struggling this past week.

Intuitive Surgical reversed off its intraday highs on Friday to close in the red but right at the 10-dma. The 20-dema down at 550.43 would, however, serve as a reference for more opportunistic, lower-risk entries.

Roku (ROKU) continues to hold support at its 10-dma after posting an all-time closing high on Thursday. I still prefer the 20-dema as my reference for a potentially buyable pullback from current levels.

Stitch Fix (SFIX) – busted!

Twilio (TWLO) is hanging along its 10-dma and just above its 20-dema as it goes nowhere. Technically, the 20-dema serves as your reference for potentially buyable pullbacks, with the idea of using the 20-dema as a tight selling guide.

ZScaler (ZS) is busted after breaking below its 50-dma earlier in the week. On Friday, the stock rallied up near the 50-dma, so should be watched for a possible short-sale entry near the line at 40.13.

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.

As I wrote on Wednesday, the action of individual stocks creates what I see as more of a wait-and-see situation. Despite the media hoopla over new Dow highs and another new high in the S&P 500, leading stocks strike me as somewhat sluggish. That may be telling us something. Meanwhile, bears have gone into hibernation for the winter, and the pundits are left to sing and dance about how “Everything is Beautiful,” to steal the title from the Ray Steven’s song that was released in 1970.

Will a rotation into financials carry the day and lead another new up leg in the market? Will FFAANNNGG (or whatever they call it these days) stocks rise from their slumber and drive this market to heights heretofore unseen? Who knows. All I know is that right now I’m not seeing a lot of set-ups that get my blood boiling, and that alone may be telling me something.

So, when I don’t see much to do, I don’t do much. That seems to be the case right at this precise moment in time. I would think that a whole slew of first-stage breakouts would be streaming through my daily screens, but mostly what I’m seeing are extended leaders, and in some cases, busted or busting leaders.

Perhaps the coming days will add some clarity to the situation. For now, I am mostly content to hang loose, as I tweeted to one member on Friday, and see what starts to develop as the Dow and the S&P make new highs. Maybe we’re at the top of the range, so to speak, and about to revert to the mean. But whatever the possibilities, I’m not getting a clear picture of what they might be in real-time, so exercising patience strikes me as the most prudent course to take at this precise moment in time.

Such patience may not last long. On Friday night, news came out that the Chinese had cancelled the upcoming two-level trade talks that were to take place at or around the end of September. This could serve as a catalyst for market clarification, whether the market shrugs it off as it did with the imposition of additional tariffs this past week, or whether it takes this more seriously.

In my view, this could open the door to the additional $257 billion in tariffs that the President threatened as a response if China retaliated to the original $200 billion that went through earlier in the week. China did retaliate with tariffs of its own on $60 billion worth of U.S. goods, so the imposition of the additional threatened $257 billion in tariffs from the U.S. seems like a slam dunk at this point.

So, we will get a clear view of just what the market thinks of this additional, and I think substantial, escalation. It certainly argues for the reality of an all-out trade war between the world’s two largest economies. This should be an interesting week. Stay tuned.

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.