The Gilmo Report

September 27, 2017

September 27, 2017

The bottom line is that a broad swath of leading stocks have gone entropic as their technical integrity begins to unravel. In some cases, this has happened suddenly and has been characterized by intense selling that hit many stocks on Monday.

Facebook (FB), arguably the biggest of the formerly stable big-stock leaders in this market, illustrates what is going on under the surface of this market. Market indexes have an admittedly sanguine look to them which belies the turmoil going on under the surface with respect to what is going on with certain leading stocks.

We can see that FB was acting just fine heading into the weekend last Friday, with the stock showing some supporting action at the 50-dma as volume declined. For the most part, the stock appeared to be going about its business of building what was an eight-week base as of Friday, in an orderly and relatively quiet manner.

That all changed on Monday as the stock literally fell out of bed, slicing through its 50-dma on huge selling volume. That was the second-highest daily selling volume for the stock this year, and sent it well below the 50-dma as it also undercut the lows of its current base. From here, weak rallies up into the 50-dma would be something I might look to short, but FB mostly serves to illustrate the sudden entropy that abruptly overtook its orderly chart pattern on Monday.

 

GR092717-FB

 

Today FB continued a two-day rally off Monday’s lows as volume declined again. This is typical wedging type action, and as FB approaches the 50-dma I have to look at it as a short-sale target unless and until it can regain the 50-dma.

So, while FB looks quite compromised here, the indexes, on the other hand, retain their relatively sanguine appearance. The NASDAQ Composite Index looks strong here as it pushes back up to its highs, stalling only slightly off the peak on higher trading volume. Does this look bearish? The resounding answer is obviously no.

 

GR092717-$COMPQ

 

The S&P 500 Index just missed posting a new all-time high, not unlike the NASDAQ, as trading volume increased. On Monday, the index found support at the 20-dema, setting up the rebound back up to the highs today.

 

GR092717-$SPX

 

In support of the argument that more interest rate increases are yet to come, the U.S. Dollar rallied, bonds got slammed, and gold broke below its recent four-month range breakout point. Its proxy, the SPDR Gold Shares ETF (GLD), shows a gap-down break below the 50-dma today.

Oddly enough, on Monday, the GLD posted a sharp rebound off the 50-dma on strong volume, although it didn’t qualify as a pocket pivot given the higher volume on Friday of last week. The rebound, however, didn’t last as the GLD reversed yesterday to give up all its Monday gains and boomeranged right back into the moving average. Today the 50-dma was breached, and the short-term long case for gold is now off the table. Only a rapid move back above the 50-dma would bring the GLD back into play on the long side, at least for me.

 

GR092717-GLD

 

Financials, which are helping to keep the market buoyant, particularly the Russell 2000 Index (not shown) which posted a new all-time high today. The Financial Select Sector SPDR Fund (XLF) broke out to a new high on a gap-up move, but stalled to close just below the mid-point of its gap-up trading range.

The XLF is mimicked by similar gap-up moves in its largest components, including Citigroup (C) and J.P. Morgan. If you believe that financials like these represent wonderful new areas of leadership for the market, then you could consider buying C, JPM, or the XLF as buyable gap-ups, using their intraday lows of today as tight selling guides.

 

GR09271-XLF

 

Big-Stock NASDAQ Names:

Apple (AAPL) filled its prior gap-up “rising window,” essentially coming down to the “window sill,” and bounced over the past two days. This was quite logical, as I discussed in my weekend report, and led to a wedging rally over the past two days. However, as the stock approaches the 10-dma it becomes shortable, in my view, using the 10-dma as an upside stop.

Even better would be a rally up higher to the 20-dema or 50-dma, but the stock is still a couple of points away from those moving averages. I consider AAPL a short-sale target here, with the idea of using the moving averages as references for short-sale entries on any continued rally. There is, of course, always the possibility that the stock just rolls over here IF we see the NASDAQ 100 Index and big-stock NASDAQ names follow through on Monday’s selling.

 

GR092717-AAPL

 

Amazon.com (AMZN) generated a feeble bounce today after undercutting its prior 936.33 low of August 1st. This set up the logical undercut & rally move, but the stock stalled a bit on lighter volume. I would view rallies up closer to the 10-dma or the 20-dema, around 965, as potential short-sale entry points.

Tesla (TSLA) attempted to rally up to its 20-dema on Monday, but fell short before breaking below its 50-dma on heavy selling volume. I indicated over the weekend that I would view any bounce off the 50-dma and up into the 20-dema as a shortable move. The stock didn’t quite get there before reversing and busting the 50-dma on heavy selling volume.

Over the past two days the stock has attempted to regain the 50-dma and failed both times. For now, TSLA is therefore a short on rallies up into the 50-dma. Technically, with the stock less than 3% below the 50-dma, it could still be shorted here using the 50-dma as a tight upside stop.

More opportunistic short-sellers could wait for a feeble rally back up to the 50-dma, but the stock has already done that twice this week. To some extent, therefore, the chance to short the stock at the 50-dma has already presented itself, so you were either on it or not, based on my discussion of the stock over the weekend.

 

GR092717-TSLA

 

Alphabet (GOOGL) posted an interesting bottom-fishing pocket pivot today as it slammed back up through the 50dma on strong buying volume. I suppose if one wants to test this as a long here that is possible, but I would prefer to look for an entry closer to the 50-dma. On the other hand, the stock is less than 2% above the 50-dma, so one could simply buy the stock here and then use the 50-dma as a tight selling guide.

Netflix (NFLX) was blasted with selling volume on Monday, taking it straight down to its 50-dma. These sorts of sharp downside price breaks in stocks that are otherwise acting strongly are what makes this market dangerous.

Sometimes, the market just pulls the proverbial rug out on you, and your healthy long position comes crashing down, often giving up 2-3 weeks of gains in one or two days. After the rug was pulled out on holders of NFLX on Monday, the stock found support along the 50-dma and has since bounced on declining, or wedging, volume.

It ran into resistance at its 10-dma today, which might make it a short here using the 10-dma as a tight selling guide. Otherwise, if one feels like the stock is more a long than a short, the chance to buy it was on the successful test of the 50-dma yesterday. NFLX is expected to report earnings in a couple of weeks, so the situation will likely remain fluid until then. Play it as it lies.

 

GR092717-NFLX

 

Nvidia (NVDA) has pulled right back to the top of its base after its breakout of two Fridays ago. So far, the stock has been able to hold support at the 20-dema and the top of the prior base as volume declines. Technically, this would be considered a lower-risk long entry spot, using the 20-dema or 50-dma as selling guides. However, I’d be alert here to a possible two-sided assessment as a breach of the 20-dema could trigger the stock as a short-sale target at that point. Play it as it lies!

 

GR092717-NVDA

 

Telecom-Related Names:

Arista Networks (ANET) got hit with some heavy selling volume on Monday on a sharp break off the peak. That also constituted an outside reversal to the downside, but the stock was able to find support at the top of the prior base and the 20-dema. Since then ANET has bounced off the line, but volume has been weak.

Today’s action saw the stock push back up to the prior highs before reversing to close near the lows of its daily trading range. Volume was tepid, indicating a lack of buying interest. This looks suspect here, and I would be wary of a breach of the 20-dema as selling guide as well as a possible short-sale trigger. This is a two-sided situation, and given ANET’s somewhat late-stage status, could easily turn out to be another failed breakout that morphs into an LSFB short-sale set-up.

 

GR092717-ANET

 

Lumentum Holdings (LITE) broke down to its 200-dma on Monday and undercut the moving average yesterday as selling volume receded. This led to a logical reflex bounce off the 200-dma that was helped along by an analyst’s buy recommendation. The rally carried as far as the confluence of the 10-dma and 20-dema today, but no further.

Volume was high enough to qualify the move as a bottom-fishing pocket pivot off the 200-dma, but I would tend to view this more as a short-sale as the stock rallies up into the 10-dma and 20-dema. It could push higher up into the 50-dma, but I would simply watch the stock’s volume levels as it could reverse right here at the 10-dma and 20-dema if more buying interest doesn’t come in here to push it up as far as the 50-dma.

 

GR092717-LITE

 

Bio-Tech/Medical Names:

Bio-techs have come under increasing pressure, with Alexion Pharmaceuticals (ALXN) breaking below its 20-dema yesterday on light volume. It is now testing its 50-dma, so could be considered buyable here using the 50-dma as a tight selling guide. However, I remain skeptical of the stock here.

Vertex Pharmaceuticals (VRTX) is bouncing along the lows of its current 10-week base, but already technically violated its 50-dma last week. It churned around today on higher volume, and I am skeptical of both VRTX and ALXN at this point.

While individual bio-techs are a mixed bag, objectively the iShares NASDAQ Biotechnology Index Fund (IBB) continues to hold support at its 20-dema, so doesn’t look much different on its chart than it did when I showed it in my weekend report. One could still view the IBB as buyable here with the idea of simply using the 20-dema as a tight selling guide.

I would, however, be cautious and keep things tight with the IBB, because some of its biggest component stocks, like Biogen Idec (BIIB), are showing some signs of wobbling. Today BIIB dropped below its 20-dema on increased selling volume on a day when the NASDAQ was up 1.15%. Not a sign of strength.

 

GR092717-BIIB

 

Chinese Names:

Chinese names have come under pressure lately, including Alibaba (BABA), which was tagged on heavy volume Monday. That took it below its 20-dema, and today the stock rallied weakly up into the 20-dema where it stalled and churned on light volume.

The stock looks like it wants to test the 50-dma, so I view it here as a possible short, using the 20-dema as a tight selling guide. BABA is a good example of how orderly action along the 10-dma last week suddenly went entropic as the stock blew through its 20-dema on Monday. This instantly negated about two weeks’ worth of upside gains, another instance of the market pulling the rug out on investors, this time in BABA.

 

GR092717-BABA

 

Sina (SINA) is holding support at its 20-dema, but in my view, isn’t quite buyable here as it likely needs more time to set up again. Of course, that just reflects my expectations, which are an opinion. Objectively, one could use this type of low-volume pullback to the 20-dema as an add point for an existing position. If it busts the 20-dema, however, I’d be looking to use that as a tight selling guide.

Weibo (WB) remains below its 20-dema, and I view this as a short here using the 20-dema as a tight upside stop. The stock broke to lower lows on Monday as selling volume came in at above average, and has since wedged back up toward the 20-dema. The closer to the 20-dema one can enter this as a short-sale the better, in my view.

Unless WB can quickly regain the 20-dema, I will continue to view it as a near-term short-sale target, pending further evidence in the form of a move back up through the 20-dema. With other Chinese names coming under pressure, the odds of WB at least testing the 50-dma down at 91.50 increases dangerously.

 

GR092717-WB

 

Cyber-Security:

Both cyber-security names I discussed in my weekend report have both morphed back into short-sale targets. Palo Alto Networks (PANW) bounced off its 50-dma yesterday and today rallied up into the 10-dma, where it ran into resistance and closed back below the 20-dema. I view this as a short here, using the 20-dema as a tight stop.

Fortinet (FTNT) failed to hold its 50-dma, as it should have if it was to remain viable as a long idea, and pushed below the line on Monday on below-average selling volume. It then rallied back up into the 50-dma today and stalled to closed back below the line on heavy volume. I view this as a short-sale here, using the 50-dma as a tight upside stop.

A quick note on using moving averages as stops. One can use the line itself as a “hard” stop, or add 1-2% or more above the line to allow for some upside porosity. Stocks rarely stop precisely at moving averages, so it makes sense to make some allowance for this when setting stops at a moving average, whether on the short side or the long side.

 

GR092717-FTNT

 

Semiconductors:

Broadcom (AVGO) ran into its 10-dma today and reversed. As I discussed over the weekend, the stock remains a short-sale target on rallies up into the confluence of the 10-dma and 20-dema, which is what we saw today. This remains the case for the stock on any further rallies, using the 10-dma or 20-dema as a tight stop.

Skyworks Solutions (SWKS) is pulling an undercut & rally move after undercutting its late August lows on Monday, which looks logical to me. I would view any further rally up to the 20-dema at 103.90 as a potentially lower-risk short-sale entry opportunity.

Semiconductors as a group are much like bio-techs – a mixed bag. I presented Cavium (CAVM) as a possible Ugly Duckling long set-up in my weekend report, but that failed quickly, stopping out anyone who tested the stock at the 10-dma instantly on Monday.

The Vaneck Vectors Semiconductor ETF (SMH), however, remains constructive, mostly thanks to a strong move in big-stock semi Micron (MU) after it reported earnings yesterday after the close. This sent the SMH gapping off its 20-dema, where it was holding support yesterday.

 

GR092717-SMH

 

The move in Micron (MU) today was a buyable gap-up, and could be considered actionable using the 35.92 intraday low on heavy volume as a tight selling guide. The stock is already somewhat extended on the upside after breaking out in early September just above the 32 price level. However, if one does choose to test this on the long side, risk can certainly be managed very tightly by using the 35.92 low as your selling guide. Whether it results in a huge upside continuation move from here remains to be seen.

 

GR092717-MU

 

Cloud Software Names:

Salesforce.com (CRM) bounced weakly off its 50-dma today on light volume. A breach of the 50-dma would trigger this as a short-sale using the line as a tight stop.

ServiceNow (NOW) had one of those “nutzo” bounces today that seem to come out of nowhere in leading stocks. NOW was on the verge of a full-blown late-stage base failure last week as it tested the 50-dma, and today’s bounce is actually logical within the context of the overall pattern. The bounce was a little more than a bounce, however, as the stock in fact posted a pocket pivot supporting move at the 50-dma on above-average volume.

This looks a little failure-prone to me, however, so I would not be chasing it up here. I would like to see how its holds the 20-dema. Otherwise a breach of and reversal back down through the 20-dema would trigger the stock as an LSFB short-sale set-up.

 

GR092717-NOW

 

Square (SQ) has held near-term support at its 20-dema, but the bounce off the line is wedging, and ran into resistance at the 10-dma today. If the stock breaches the 20-dema, then I would view that as a possible LSFB short-sale trigger at that point. For that reason, if one is long the stock the 20-dema would serve as a reasonable selling guide.

Tableau Software (DATA) continues to act well as it holds near-term support at the 20-dema. The stock is a bit extended from its early August buyable gap-up move, so I would not be looking to get aggressive on the long side here.

Workday (WDAY) is now a confirmed late-stage failed-base (LSFB) short-sale set-up after busting below its 50-dma Monday on heavy selling volume. So far, the stock hasn’t been able to muster up much of a bounce as it forms a short two-day bear flag. However, I’d keep an eye out for any weak rally back up into the 50-dma or the rapidly descending 10-dma and 20-dema lines as a potential short-sale entry opportunity.

 

GR092717-WDAY

 

Internet Related:

Yelp (YELP) breached its 20-dema on Monday on increased selling volume, and has since pushed back up into the 20-dema on weak volume. I view the stock as a short here, using the 20-dema as a tight stop, or the 10-dma as a slightly wider stop. 

Social-Networking Names:

Twitter (TWTR) busted its 50-dma on Monday and is no longer on my long watch list.

Solar Names:

First Solar (FSLR) is now a late-stage failed-base (LSFB) short-sale set-up following the rapid failure of last Friday’s base breakout (or, more accurately, “re-breakout”) attempt. On Monday, the stock streaked below its 50-dma on heavy selling volume, and has spent the past two days living below the line.

This becomes shortable on rallies up into the 50-dma, using it as a tight upside stop. Another example of a recent base breakout that fails rather quickly.

 

GR092717-FSLR

 

I wrote over the weekend that if SolarEdge Technologies (SEDG)can hold above the 10-dma and 20-dema, then it could be considered buyable here using the two lines as a tight selling guide.” That was a feasible entry, and would have put one in position to benefit from today’s big-volume base breakout that saw the stock surge 8.33%.

Obviously, I’m not willing to chase the stock up here, but it does bring up the question as to whether this base breakout will work. We’ve seen many base breakouts fail in this market, as FSLR, a cousin-stock to SEDG, illustrates so well above. So, that risk at least keeps me from chasing SEDG here. The correct entry point was along the confluence of the 10-dma and the 20-dema, per my weekend comments.

 

GR092717-SEDG

 

Video-Gaming Names:

I have repeatedly discussed a broad number of long ideas mentioned in my reports as two-sided situations that could easily morph into short-sale set-ups, depending on how they played out. We are now seeing two of the video-gaming leaders break down in confirmed late-stage failed-base (LSFB) short-sale set-ups.

Activision Blizzard (ATVI) broke out in late August on above-average volume, but that breakout has now failed. On Monday, the stock broke below the 50-dma on heavy selling volume. Today a weak, low-volume rally pushed the stock right up into the 50-dma, where it is shortable using the 50-dma as a tight stop. Another failed breakout!

 

GR092717-ATVI

 

Electronic Arts (EA) helped to create a wolf pack on the short side as it joined ATVI on Monday by blowing through its own 50-dma on heavy selling volume. When two stocks in the same group begin to break down in such a manner, that’s a bearish sign for the group.

Today EA gapped up and churned around in a small range on light volume just below its 50-dma. I’d prefer to short the stock closer to the 50-dma, but I would watch to see how this acts here since ATVI is already at its 50-dma. If the two continue to move together, then if ATVI fails at its 50-dma EA may just break to the downside from here.

 

GR092717-EA

 

With ATVI and EA breaking down in LSFB fashion, it is possible that Take-Two Interactive (TTWO) might join them. In fact, the stock did break to the downside on Monday as it moved in sync with its cousins, despite being in an entirely different position on its chart.

This was an ugly break that certainly had the look of having the rug pulled out on it, and TTWO closed below the 20-dema on Monday. Today it rallied back up to its 10-dma on lighter volume, which constitutes wedging action. If Monday’s breach of the 20-dema is the first shot across the bow for the stock, and ATVI and EA both remain weak, TTWO could easily join them by topping here.

Adventurous short-sellers might even consider shorting the stock here, using the 10-dma as a tight stop. However, ATVI and EA are in what we would consider more orthodox short-sale position as full-fledged LSFB set-ups. However, in this market, it is often the unorthodox that has the greatest effect!

 

GR092717-TTWO

 

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).

The indexes may look fine, but I don’t like what’s going on under the hood with respect to the action of leading stocks. There are too many failed breakouts, and many patterns are looking suspect. Since we look to the stocks as our first clue as to the health of the market, the current action must be viewed with deep suspicion.

The objective evidence for this is found in the fact that a lot of the leading stocks I’ve been discussing in recent reports are rapidly morphing into short-sale targets. All you need to do is re-read this report to see that this is so. For that reason, long-only players should consider moving further to cash, if not entirely to cash, while short-sellers will find plenty of targets to shoot at based on the concrete price/volume action of broken-down leaders.

And that is all you need to know. 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. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.