The Gilmo Report

September 26, 2018

September 26, 2018

News over the weekend that the Chinese had cancelled the upcoming round of trade talks with the U.S. set up an interesting market permutation on Monday morning. NASDAQ futures took the brunt of the selling overnight on Sunday, and it looked like big-stock NASDAQ stocks would suffer the most that day once things got up and running.

Meanwhile, the Dow Jones Industrials Index opened down the least, as the NASDAQ Composite and NASDAQ 100 Indexes dropped over 1% early in the day. But, in another plot twist to this crazy market, the NASDAQ indexes spent the rest of the day recovering to close on the upside while the Dow and the S&P 500 ended the day in the red. After looking like it would be the least damaged index based on its opening levels, the Dow ended up being the most damaged index, down -181.45 points, or -0.68%.

Another down day for the Dow and the S&P on Tuesday was met with a second up day for the NASDAQ Composite Index. For the most part, the action had a tentative feel coming into today’s Fed policy announcement. At that point, the fireworks were unleashed. The market started to rally right after the release, with the Fed announcing a quarter-point interest rate increase. But by the close, all the major indexes posted reversals on higher volume.

The NASDAQ reversed off the highs of the slightly ascending price channel it has been forming throughout September. On its face, the action looks bearish, and necessitates a defensive posture here, ready to act if selling guides in individual stocks are breached at any point. From here, it appears that the NASDAQ may at least retest the lows of this September price channel.

 

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The S&P 500 Index, along with the Dow, also reversed off today’s intraday highs to post their third down day of the week. The S&P’s action looks much uglier as an outside reversal to the downside on higher volume. Taken at face value, this is bearish action.

 

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I began to view the rally after the Fed policy announcement with suspicion when I noticed that financials were not rallying sharply. Last week, we saw a number of these names move sharply higher on the assumption of higher interest rates. But the idea that financials were poised to assume a leadership role in an ongoing bull market was quashed today as the Financial Select Sector SPDR Fund (XLF), like many of its components, gave up all of last week’s gains.

The breakout in the XLF that we saw exactly one week ago, and which I was suspicious of at the time, was already failing by Monday of this week. Today, the XLF blew through all four of the moving averages on the chart below to post a lower low as it undercuts its prior September lows. This would seem to contradict the Fed, which seems poised to raise rates again in December and into 2019 as it continues its current path.

 

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The sharp downside opening on Monday in the NASDAQ indexes that resulted in a reversal back into positive territory for these indexes created a lot of undercut & rally set-ups in tech and growth names of all stripes. Early on Monday I posted a list of those that I was seeing in real-time. Among the big-stock NASDAQ names, for example, we can see a U&R long entry develop in Amazon.com (AMZN) on Monday.

That led to a three-day rally that stalled today, but the stock remains above the 10-dma. Anyone who bought the U&R down below the 50-dma would be in wait-and-see mode here, ready to run if the stock busts the confluence of the 10-dma and 20-dema.

 

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Another U&R long set-up also occurred in Nvidia (NVDA) on Monday. This also undercut the 50-dma before turning back to the upside. The rally ran out of gas today at the confluence of the 10-dma and 20-dema as volume waned. From here, anyone coming in long on the U&R would be using the prior low at 261.92 as your selling guide.

 

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Apple (AAPL) had already posted a U&R long set-up last week per my comments in last Wednesday’s report. This led to a rolling rally back up through the 10-dma and 20-dema yesterday, but the stock stalled today on light volume. While the pattern doesn’t look altogether troublesome, the bottom line is that the best long entry occurred on the rally back up through the prior September low.

At best, AAPL looks like it needs to spend more time consolidating. For this reason, I’d be looking for a pullback to the 50-dma as a possibility. This would also potentially create a more opportunistic entry point and given the stock’s move since early August I’d prefer to take this more opportunistic approach.

 

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In addition to U&R long set-ups showing up in a broad swath of stocks on Monday, we also saw some standard-issue pullbacks to key support that then resulted in bounces. Netflix (NFLX) was one, as it bounced off its 50-dma on below-average volume. It then consolidated at the 10-dma yesterday as volume dried up sharply.

Today, NFLX pulled off a surprising pocket pivot breakout through the highs of the September price range. I would not, however, be looking to buy this if the general market starts to sell off further after today’s reversal. The best entry was, in my view, the opportunistic one, when the stock tested the 50-dma on Monday.

The flip side of this is that the stock has made a marginal new high and has barely cleared resistance. For that reason, I’d also watch this as a short-sale entry zone if the general market gets into further trouble. Play it as it lies.

 

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Facebook (FB) has also joined in on the U&R party, but in delayed fashion. I discussed it in yesterday’s video reports as one to watch in this regard: The move back up through the 166.56 low of late July. The move was helped along by the company’s announcement of its new Oculus Quest VR Headset.

The move stalled, however, but FB still closed above the 166.56 prior low and the 20-dema. If one went long the U&R set-up this morning, then this is simple: use the 166.56 price level as your stop and you will avoid serious trouble if the U&R fails.

 

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Tesla (TSLA) ignored the index movement over the past three days and just held tight along its 20-dema as volume continued to remain in a dry state. I discussed this as a possible long entry point, using the 20-dema as a tight selling guide. So far, however, we can see that the 10-dma has served as more reliable support as the stock bounced off that line on Monday and Tuesday.

That took the stock up to the 50-dma today, where it stalled slightly on higher volume. This could bring the stock into shortable range again, using the 50-dma as a tight selling guide. TSLA has been a short-term, long swing-trade since rallying back above the prior 286.13 low in the pattern a couple of weeks ago. The ride has been choppy, however, but the stock has now reached the 50-dma, which I believed was a possibility per my prior comments on the stock.

If the general market starts to come off after today’s weak close, then TSLA may very well develop into a short here or near the 200-dma, which is slightly higher. In either case, shorting near either of these key moving averages would then necessitate using those same moving averages as your guides for tight upside stops.

 

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Among other tech and growth names, Okta (OKTA) on Monday undercut the 66.09 intraday low of its early-September buyable gap-up (BGU) move and rallied from there. That of course triggered a U&R long set-up once it moved back above the 66.09 price point, using that same 66.09 price point as a tight selling guide in case it did not work out.

But it did, and OKTA has edged a bit higher before running into resistance along its 10-dma. Despite today’s weak general market close, however, OKTA still ended the day in positive territory on slightly higher, but below-average volume. For now, if one bought the stock on the U&R long entry near 66.09 on Monday then that same price level would serve as your downside stop.

The alternative here is to just view the Monday U&R opportunity as a swing trade and take profits into the rise. Otherwise, if the general market starts to worsen, you may simply find yourself getting stopped out at the prior 66.09 low with nothing gained, but nothing lost either.

 

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Zebra Technologies (ZBRA) meanwhile, found support along its 20-dema yesterday and Monday, which brought it into a lower-risk entry position. That led to a move back up to the prior highs today, but the stock stalled and reversed with the market to close slightly in the red.

We’ll see how this plays out within the context of the general market action. For now, pullbacks to the 20-dema remain your references for potentially lower-risk entries from here.

 

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Square (SQ) went from a struggling leader to a rocket stock yesterday after getting an analyst’s upgrade and $125 price target after it announced a new payroll app. That created a massive-volume pocket pivot move and breakout from a one-week flag formation on the weekly chart, not shown, that looks more like a three-week flag on the daily chart, below.

The move ran into heavy selling today, however, but the stock held yesterday’s breakout. I understand yesterday’s news was hailed by many as another sign of how great and wonderful SQ is. But keep in mind that this thing has gone a long way since I first began discussing it in my reports around $10 last year.

When things are this rosy, I start to get suspicious and wary. For that reason, I’d be alert to the two-sided possibilities here if SQ fails to hold this current short flag breakout. A breach of the breakout point at 92.92 followed by a breach of the 10-dma and 20-dema might be the trigger for a possible late-stage breakout-failure and short-sale set-up.

Not that it must play out this way. But within a market context that sees lower lows for the major market indexes, that is one scenario that could take place. It helps to be aware of this as a possible late-stage failure to keep an eye out for if the general market situation worsens.

 

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Etsy (ETSY) found deep support at its 50-dma on Monday, setting up a very opportunistic long entry even though the stock has more recently acted like a late-stage breakout failure. There is no guarantee that today’s weak-volume re-breakout attempt won’t fail as well.

For that reason, I’d keep an eye out for a breach of the 10-dma and 20-dema as a short-sale trigger. Otherwise, if one was looking to get long ETSY, the time to do that was on Monday as it tested the 50-dma. From here, this is certainly not in a buyable position as I see it and could easily fail on this re-breakout attempt. Play it as it lies.

 

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ZScaler (ZS) looked busted over the weekend, but as is typical in this market, the Ugly Duckling came to the rescue. ZS posted a U&R long set-up on Friday of last week, and rather than reverse at the 50-dma it just plowed right through the line on above-average volume. Thus, the U&R long set-up dominated the action as a shortable rally into the 50-dma failed to materialize.

ZS pulled back slightly today as volume receded, holding above the confluence of the 10-dma, 20-dema, and 50-dma. Technically, this would be in a lower-risk entry position along the three moving averages using the 50-dma as a maximum selling guide. However, my preference would have been to take a position at the U&R trigger point at 39.62.

 

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Interestingly, the past couple of days have seen big breakouts in three names that I’ve discussed in recent video reports. These were Acacia Communications (ACIA), Canada Goose Holdings (GOOS), and Planet Fitness (PLNT). Here’s the breakout in GOOS today, which got goosed by an analyst’s upgrade and $68 price target after the company announced they were going to do business in Asia.

Below is GOOS’s chart, and technically it remains within buying range of its breakout. The same is true for ACIA and PLNT but given the extended moves in all three of these I would probably look to come in on weakness rather than chasing strength, especially in this tape.

 

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Chinese names have had their fits and starts over the past couple of weeks, but even my favorites in the group are unable to make progress. For every step forward, they may take one or two backward, and, for the most part, are just chopping around near their lows. Bilibili (BILI) offers a good example of this type of action.

A breach of the 50-dma on Monday, which I would have viewed as a short-sale trigger, did not hold, and the stock drifted back above the 50-dma yesterday on light volume. It then stalled today at the 10-dma on higher but below-average volume. On balance, we can see that BILI is just hopping back and forth within a price range it has formed since late August. For now, I see nothing actionable in the stock.

 

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Momo (MOMO) broke hard to the downside on Monday morning, but then bounced hard off its 50-dma and back up to the 20-dema. Volume was light. It has since regained the 20-dema but cannot clear the 10-dma. The only long entry here would have been on the pullback to the 50-dma on Monday, as it is now in a less appetizing position on its chart.

Like BILI, MOMO remains within a choppy range that it has formed since late August. It has been shortable at the highs of the range, and then buyable again along the lows of the range. In this position, sitting right on top of the 20-dema but below the 10-dma, I might watch for a breach of the 20-dema as a short-selling trigger. Otherwise, this remains unclear.

 

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My notes on other stocks discussed in recent reports below:

CyberArk Software (CYBR) continues to track below its 20-dema. At this stage the thing to look for is a possible U&R set-up that might occur on a pullback to the 50-dma at 70.84. There is a prior reference low in the pattern at 71.53 that occurred six trading days ago. A bounce off the 50-dma that then rallies back above the 71.53 price point would trigger a U&R, so is something to watch for.

Fortinet (FTNT) bounced off its 20-dema on Monday and is back near its highs. It remains extended, such that only further pullbacks to the 20-dema might produce lower-risk entry opportunities from here.

Intuitive Surgical bounced off its 20-dema on Monday. As I noted over the weekend, the 20-dema would serve as a reference for more opportunistic, lower-risk entries, and that turned out to be the case on Monday morning.

Palo Alto Networks (PANW) broke below its 20-dema today on slightly above-average volume. I would view this as a short-sale trigger using the 20-dema at 228.45 as a tight upside stop, about 1% higher.

Perspecta (PRSP) got tight around its 10-dma yesterday but given its relatively extended position from the original buy points down below 23, I thought the 20-dema was a better reference for an opportunistic entry point. That’s what I noted over the weekend, and that’s what we saw today when the stock pulled into the 20-dema and bounced to close in the middle of its intraday range.

Roku (ROKU) posted another new high this morning, resulting in a new closing high as it reversed off its intraday highs. I still prefer the 20-dema down at 68.52 as my reference for a potentially buyable pullback from current levels.

Sailpoint Technologies (SAIL) again tested the 20-dema on Monday morning, bringing it into a lower-risk entry position at that time. It has since bounced to new highs and is now extended.

Twilio (TWLO) posted a pocket pivot move to new highs yesterday and this morning but reversed to give up most of yesterday’s gains and close back below the 10-dma today. Watch for a test of the 20-dema at 83.13.

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.

Over the weekend I maintained my view that the action among individual stocks mostly dictates a wait-and see approach. The hoped-for rotation into financials as bold new leadership in an ongoing bull market has fallen apart, and most big-stock NASDAQ names are just chopping around within their patterns.

If today’s action is a precursor to further market downside, then some may want to look for short-sale set-ups. But, as I’ve shown with examples like NFLX, ETSY, SQ, TSLA, and others in this report, your best short-sale targets if the market starts to correct further will be your current leaders. Another example of this can be found in a big-stock financial, J.P. Morgan (JPM), below.

Here we see JPM bust below its 20-dema on heavy selling volume and close six cents below its 50-dma. This comes after last week’s attempted cup-with-handle breakout, so what we have here is a later-stage base failure. Thus, this could be viewed as a short-sale here, using the 50-dma as a squeaky-tight upside stop or the 20-dema as an only slightly less squeaky-tight upside stop. This is, however, the type of thing you would look for if the market is in the process of inflecting to the downside after all-time highs in the S&P 500 and Dow last week.

 

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In this market, however, short-selling is for the most sophisticated and nimble of traders, because it is very difficult and requires that one react quickly to changing real-time information.

I think it is important to remember that the first wave of short-sale set-ups as the market is rolling off its highs will likely and mostly occur as late-stage breakout failures. Therefore, watch your leading stocks and positions, as this is where you will find your first short-sale set-ups, if in fact this becomes a market for short-sellers. If leading stocks and positions hold up well, then today’s action may turn out to be a one-off type of situation.

For now, however, I remain cautious and discriminating. Monday’s action proves that waiting for the most opportunistic set-ups, often in the form of pullbacks to deep support or the classic U&R long set-up, is the most prudent approach in this market. For now, most of those U&Rs and moving-average bounces are holding up. How they play out in the coming days will provide some clarity to today’s bearish index action. Take it from there.

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.