The Gilmo Report

September 30, 2018

September 29, 2018

Wednesday’s reversal on higher volume had a bearish tinge to it, no doubt, but the market is very much like a cheap drunk. It rarely remembers what it did the prior night, and just carries on as it pleases no matter what faux-predictive technical evidence its behavior provided the prior day.

The S&P 500 Index was the cheapest drunk of the bunch on Wednesday with its higher-volume outside reversal to the downside. It came right back the next day with an upside gap opening that held up all day. But note the stalling action as the index stalled off its intraday highs to close near the lows of the intraday price range.

The S&P finished out its best quarter in five years with a churning day on higher quarter-end volume. Following Wednesday’s outside reversal to the downside on higher volume, the index hasn’t done much, and has yet to fully resolve Wednesday’s bearish action. We will get a better sense of this as we move in to the new trading month.

 

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The NASDAQ Composite Index gapped up on Thursday as well but remains within a rising price range extending back to early September. The index held tight on Friday on higher quarter-end volume near the highs of the range. The action throughout September, however, was mostly a choppy affair that saw the index finish slightly negative for the month.

 

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Financials have continued to get pounded, with J.P. Morgan (JPM) coming apart over the past six days following a cup-with-handle breakout attempt. This negative action builds the case for a possible late-stage, cup-with-handle base-failure that results in a full-blown, late-stage, failed-base (LSFB) short-sale set-up. Once the stock broke below the prior breakout point and the 20-dema, the LSFB was set in motion.

One more rally up through the 20-dema that ran right into the 10-dma yesterday set up a potential short-sale entry when the stock reversed to close negative on the day. It has since moved lower, although by only 2% or so. It is now undercutting the prior base lows as it looks headed for a test of the 200-dma, at which point we might see some sort of undercut & rally move that takes the stock back into the 50-dma.

 

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Some have hailed the so-called return of the FANG stocks, but the reality is that most of these are just moving up within pre-existing consolidation and base price ranges.  As I see it, the time to get long some of these was on Monday when they issued undercut & rally long entry signals en masse. Amazon.com (AMZN) was one, and it has not pushed right back up toward its all-time highs just above the $2,000 Millennium Mark.

In this position, it is extended, although some could view this as a third attempt to break through and hold above the $2,000 price level. While AMZN closed negative on Friday as it ran out of steam, it ended the day at 2,003. Thus, if one wanted to treat this as a Century Mark buy point, the $2,000 price level would serve as a tight selling guide. Speaking for myself, I’d be looking for a low-volume pullback to the 20-dema as a lower-risk entry instead.

 

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Nvidia (NVDA) has followed through nicely on Monday’s U&R long set-up, gapping higher today on heavy volume after an analyst raised his price target on the stock to $400 from a previous $300. Now, that’s a spicy meatball! Today’s action constituted a strong-volume pocket pivot coming up through the 10-dma, but the stock is clearly extended in this position as of Friday’s close.

NVDA does show the wonderful things that can happen when one chooses to “kiss” a U&R long set-up, no matter how ugly the stock and the general market might look. Recall that Monday’s en masse U&R party came on a day when the NASDAQ was gapping down hard on news that the Chinese had canceled the upcoming fresh round of trade talks with the U.S.

It is this type of action that necessitates a gutsy, opportunistic approach that embraces the Ugly Duckling. But the beauty of any U&R long set-up is that risk is always tightly controlled. If you are right on top of it as it happens, then the chances of getting a tight entry not too far from the prior reference low are pretty good. This then allows one to keep losses to a minimum by using the prior reference low as a tight selling guide.

 

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Apple (AAPL) looked like it might move lower after Wednesday’s stalling action along the 20-dema, but instead it gapped back to the upside on Thursday. The stock was buyable the week before last on the U&R set-up I have discussed in the past two reports. In this position it is not buyable and remains within a short four-week base. If you’re a new-high base breakout buyer, the breakout buy point would be right around 230.

 

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Netflix (NFLX) has gone nowhere since Wednesday’s pocket pivot breakout through the September price range. Of course, as I pointed out in my Wednesday report, the stock was best bought on Monday when it bounced off the 50-dma. That was the opportunistic approach coming in on weakness as the stock hit a significant support level at the 50-dma. It is the preferred way to operate in a market where chasing strength is not as effective, in my view.

NFLX pulled back slightly on Friday as volume declined. I would watch for a test of the 10-dma at 368.33 on low volume as a potentially lower-risk entry from here. We should also be alert to the fact that keeping risk to a minimum here is critical. The stock could be susceptible to another test of the 50-dma given that it is having trouble decisively clearing prior resistance just below the $380 price level.

 

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Tesla (TSLA) blew apart on Friday on news that the SEC was filing a lawsuit against CEO Elon Musk for investment fraud. As I wrote on Wednesday, I felt the stock had completed its reaction rally off the early September lows and was shortable at the confluence of the 50-dma and 200-dma. While it was based entirely on the technical set-up, it’s interesting to see how acting on the technicals alone would have put one in position to benefit from the news gap-down.

The stock is in a position where it is too late to short, although it may continue lower to test one or both prior lows in the pattern.  Those lows would be the 244.59 low of early April and the 252.25 low of early September. Interestingly, the early September low occurred on a news gap-down related to the take-private-funding-secured tweet from Musk once it was determined that no such take-private plan, much less the funding for it, was in place.

Note, however, that the stock did not move lower from there, and instead stabilized and moved higher. It is possible that somehow the SEC charges lead to a change at TSLA that is positive for the company, and this should be watched for. Therefore, I’d watch not only the two prior reference lows but also the reference low of nine trading days ago at 275.50 as areas where we could see a U&R develop, depending on the coming news flow surrounding the company.

 

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Facebook (FB) was another news bust on Friday after it reported that its engineers had discovered a significant security issue affecting nearly 50 million user accounts. On Wednesday the stock posted a U&R long set-up as it moved back up through the prior 166.56 low of late July. Note that both days of the rally attempt on Wednesday and Thursday stalled, as if the market knew something.

That something turned out to be the news on Friday that sent the stock trading back down to the 10-dma on higher and above-average selling volume. At this stage the U&R long set-up has failed, and only another move back up through the 166.56 prior low would re-trigger the U&R long set-up. That said, a stock can sometimes take two or more attempts at a U&R before it is finally successful, so we’ll see whether FB can recover from this latest news hit.

 

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Okta (OKTA) remains alive after Monday’s undercut & rally move back up through the 66.09 intraday low of its early September buyable gap-up (BGU) move. It held along the 10-dma on Friday as volume dried up. An optimal entry opportunity would occur on any test of the 20-dema at 68.01.

That would bring the stock closer to the prior BGU low at 66.09, where the Monday U&R long entry was triggered. The bottom line is that for now the Monday U&R remains in effect using the 66.09 price level as a selling guide. We’ll see how this acts in the coming days and whether it can settle in and tighten up along the 10-dma and the 20-dema after the initially successful U&R long entry.

 

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Square (SQ) took the high route given the inability of the market to break down after Wednesday’s bearish reversal and decided to make a run for the $100 Century Mark. After clearing the mark earlier in the day, the stock then stalled and closed below 100 on declining but still above-average volume.

It remains to be seen whether the stock can decisively clear the $100 price level. If one wishes to play this according to Jesse Livermore’s Century Mark Rule on the long side, then buying a move through 100 and then using that same price level as your selling guide would be the way to do it. Unfortunately, trying that out on Friday would not have worked out as the stock closed at 99.01.

That leaves open the possibility of a move through 100 over the next few days. The other possibility is that the Century Mark turns out to be a topping level for SQ. This is not unusual, since Livermore also used his rule in reverse for short-sale entries. And we’ve seen many a stock top at a key Century Mark level, such as AAPL back in December of 2007 after it hit a high of 202.96, clearing the $200 Century Mark for the first time.

That breakdown coincided with a general market top, and AAPL plummeted over 60% lower from there. As with my discussion of what would constitute a late-stage failure for SQ in my Wednesday report, it is useful to be aware of the potential for a top at the $100 Century Mark, and therefore ready to act as appropriate based on the real-time evidence. For now, SQ is actively trying to clear $100, so we’ll give it some time and see how things transpire. Otherwise, below $100, it is extended and not in a buyable position.

 

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Etsy (ETSY) is a classic Ugly Duckling situation. The stock fails on two breakout attempts and then plummets down to its 50-dma on Monday. At that point, when things look their most dire, the stock finds support at the 50-dma and bounces hard on light volume. It then continues drifting back up near its all-time highs on light volume.

This is classic action for this market, and the perplexing thing about it is the utter lack of volume as the stock rebounds right back to where it started, before it got slammed on heavy selling volume. In this position, the pattern remains erratic, although buying shares at the 50-dma was the most opportunistic entry if one was alert to it and brave enough to step in and buy it.

The question now is whether it settles into its 10-dma or 20-dema and tightens up or whether it will break down again. It is this sort of action that can make holding concentrated positions in a stock like ETSY difficult, but it is a trademark of this market.

 

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ZScaler (ZS) had about a 2-3 point move from the U&R long entry of two Fridays ago, but it is now starting to show some signs of weakening. On Friday, the stock pulled into the 50-dma on increased but still below-average selling volume. Technically, however, this brings it into a lower-risk entry position using the 50-dma as a tight selling guide.

The flip side of this is that a breach of the 50-dma would trigger the stock as a short-sale at that point. Notice also that ZS is running into resistance along the highs of the prior base and the breakout point, despite clearing the 20-dema on Tuesday. So, as a long idea, this isn’t out of the woods yet, and may easily become a more pronounced late-stage base-failure and therefore a potential short-sale target on a breach of the 50-dma.

 

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The three base breakout situations I discussed in my last report, Acacia Communications (ACIA), Canada Goose Holdings (GOOS), and Planet Fitness (PLNT) are all holding up, but only ACIA has pulled into a more buyable position. Here we see it pulling back into the top of its prior base breakout point which puts it in a lower-risk entry position here. One can then use the confluence of the 10-dma and the 20-dema as a tight selling guide.

 

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Canada Goose Holdings (GOOS) is extended from my point of view and looks to be running into some resistance along the left-side peaks of the base. Here we see the stock stalling right around the mid-July peak as volume declines. Given that Wednesday’s breakout was actually a trendline breakout and not a new-high breakout, I’d be patient and look for a pullback closer to the confluence of the 10-dma and 20-dema, down in the mid-59 price area as a lower-risk entry opportunity.

 

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The same idea would apply to Planet Fitness (PLNT). Although it can be considered to be within buying range of a new-high breakout, the fact is that this was a trendline breakout lower in the pattern on Tuesday. Therefore, some sort of retracement back to the trendline, which coincides with the 10-dma and 20-dema, seems logical.

 

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I’ve noticed that one of the best long strategies over the past week was to buy stocks that looked dormant along the lows of their patterns and then wait for an analyst upgrade to send the stock launching higher. Sharp upside moves in AMZN, NVDA, SQ, GOOS, and TWLO this past week were the result of analyst upgrades and price target increases.

CyberArk Software (CYBR) also came to life on Thursday after an analyst raised the stock to overweight from underweight. The stock was previously living below its 20-dema as it attempted to come through with a decisive U&R move through the early-September and late-August lows. I was looking for a test of the 50-dma that might produce more of a shakeout type of U&R coming back up through all the lows in the pattern, but this was pre-empted by the upgrade.

CYBR gapped up on Thursday after the upgrade and opened at 77.77, dropped to a low of 76.18, and then rallied to a close of 78.76. This can also be viewed as a pocket pivot coming up through the 10-dma and 20-dema, but the stock is extended in this position. Look for pullbacks that retrace at least ½ of the move from the BGU intraday low of 76.18 as potentially lower-risk entries.

 

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In my Tuesday video report, I discussed the various permutations on Funko’s (FNKO) daily chart following its deep dive off the peak in early September. There were several meaningful lows in the pattern, and I was looking for a possible U&R to set up along any one of those lows. On Wednesday, the stock finally came through with a close just above the prior 21.30 low of early September.

That led to a quick pullback to 21.18 and the 10-dma/50-dma moving average confluence on Thursday morning, which initially looked like a U&R failure. But the stock quickly recovered and again triggered the U&R resulting in a strong upside move that cleared the 20-dema. From here, I’d like to see the stock hold along the 20-dema and set up again, but the U&R on Thursday was quite actionable for anyone who viewed my Tuesday video report.

Some of my best ideas have been discussed in my video reports, and FNKO was one of the first. It was initially discussed in one of my pilot video reports back in April when it was trading around $8 a share. The stock then went on a tear, posting a nearly four-fold move before breaking down hard in early September.

At that point, however, the stock was up eight days in a row and starting to get a bit parabolic and climactic. While it is possible this latest U&R move may set the stock on a move back up toward the prior highs in short order, the higher probability may be that it spends more time moving sideways as it builds a new base. In fact, a new base here would be its first base since it broke out of a cup-with-handle back in April at 8.50.

 

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Chinese names have been quite volatile over the past few days, and Bilibili (BILI) is a prime example of this. As I pointed out in my Wednesday report, the stock is simply moving around within a price range it has been forming since late August into early September. The only problem with this price range is that it is anything but tight, with a range that is as much as 20-25% wide.

So, unless one wants to get caught in a sudden 20% downdraft, the best way to try and buy this is on a pullback to the lower reaches of the current price range. This is easier said than done, since the stock has a habit of ignoring its moving averages. Note how over the past month it has flipped both above and below its 10-dma, 20-dema, and 50-dma, without exhibiting any tendency to tighten up while holding along any of them.

You can also see that Monday’s gap-down break below the 50-dma did not undercut any prior lows in the pattern, so there were zero reference points with which to determine a lower-risk entry point. Nevertheless, the stock has continued to drift back up to the highs of the range on light volume. So, for now, we are left to trying to buy it at the lows of the range or waiting for something more constructive to develop in the pattern.

 

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Momo (MOMO) bounced hard off its 50-dma on Monday, but there was no bounce to be had on Friday as it broke below its 50-dma on below-average volume. If one was alert to it, the stock did post a U&R long entry when it rallied above the 46.11 intraday low of Monday and the 50-dma.

That triggered a long entry at that point and MOMO finished the day back above the 50-dma. Therefore, this is actionable as a very opportunistic long entry here using the 50-dma or the prior 46.11 low of Monday as your selling guide. Meanwhile, the stock has exhibited a great deal of volatility, so this current U&R long entry may only provide a swing-trade back up toward the prior highs, if that.

On the other hand, if one wants to give a chance of potentially clearing to higher highs, then holding a position as long as MOMO does not break below the 46.11 low is feasible. On balance, the stock has been very difficult to handle given its tendency to ignore moving averages as it flops around within a four-week price range.

 

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My notes on other stock 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) posted an all-time closing high on Friday. It remains extended. Pullbacks to the 20-dema at 86.94 might produce lower-risk entry opportunities from here.

Intuitive Surgical is sitting near its highs and in an extended position, as I see it. Pullbacks to the 20-dema at 558.70 would present lower-risk entries from here.

Palo Alto Networks (PANW) has closed below its 20-dema three days in a row. A test of the 50-dma at 219.88 looks likely from here.

Perspecta (PRSP) is tracking in a short flag formation between the $25 and $26 price levels. I like it best on pullbacks to the 20-dema at 24.98 as lower-risk entry opportunities.

Roku (ROKU) had been making new highs all week on light volume before finally running into some selling on Friday. Volume was higher vs. the prior day but not heavy. I still view the 20-dema at 69.48 as my reference for a potentially buyable pullback from current levels.

Sailpoint Technologies (SAIL) remains slightly extended. The 20-dema at 32.32 remains my preferred reference level for a buyable pullback. That may not happen, but I see no reason in chasing the stock as it sits right near all-time highs.

Twilio (TWLO) posted a pocket pivot on Tuesday but did not progress any further to the upside from there for the rest of the week. It closed along the 10-dma on Friday as it stalled on increased volume. I still prefer looking for a test of the 20-dema at 83.65 as a more opportunistic, lower-risk entry possibility.

Zebra Technologies (ZBRA) was last buyable along its 20-dema on Monday. It is now extended, in my view, despite posting a pocket pivot at the 10-dma on Thursday. I would continue to view pullbacks to the 20-dema as the most opportunistic, and hence preferable, long entry points for the stock.

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.

In my Wednesday report I closed out by noting that despite the ugly reversal on that day following the Fed policy announcement, “If leading stocks and positions hold up well, then today’s action may turn out to be a one-off type of situation.” That is precisely what we saw on the resumption of trade Thursday morning, and while it may have been surprising to many, it really didn’t surprise me.

But the action remains choppy, and most leading stocks are simply bouncing around within their overall chart pattern. In some cases, we have had breakouts in names like GOOS, PLNT, CYBR, and ACIA, but these are not all new-high breakouts. Meanwhile, financials remain weak, which may be more a function of a potentially softening economy going forward than the outlook for higher interest rates.

Once I see the futures open on Sunday afternoon I’ll start to put together my action plan for Monday morning. This will be discussed in a video report that day, so that’s something for members to look forward to. This remains something of an odd market, and I continue to maintain that the best approach is to remain opportunistic, looking to buy on weakness (especially when the venerable U&R set-up appears) and avoiding the urge to chase strength.

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.