The Gilmo Report

September 5, 2018

September 5, 2018

The market’s glorious end to the summer of 2018 has run into some selling here in early September. As I noted in a tweet yesterday, none of the new set-ups I thought I was seeing over the weekend were showing any traction. In some cases, the stocks were getting outright blasted. Applied Optoelectronics (AAOI), was one shining example, blowing up spectacularly over the past two days.

The stock looked to me like a possible Ugly Duckling set-up as it was trading along its 10-dma, 20-dema, and 50-dma. On Monday it briefly opened just above the 20-dema, but immediately broke to the downside. Anyone taking a position that morning at the 20-dema would have been blown out of the position in short order.

 

GR090518-AAOI

 

Arista Networks (ANET) was another, gapping down 10 points at the open yesterday. This represented a buyable gap-up (BGU) failure and a late-stage base breakout failure. It closed today just below the 50-dma, but this has now morphed into a late-stage failed-base (LSFB) situation. I would view any rallies up to the 20-dema at 284.19 as shortable.

 

GR090518-ANET

 

While AAPL has continued higher since reaching the $1 trillion market cap level, and remains extended despite selling off slightly today, Amazon.com (AMZN) only briefly kissed the $1 trillion mark yesterday when it traded above 2,050.  This lasted for an almost imperceptible split-second, as it immediately reversed to the downside but still managed to close at yet another all-time high.

Today, AMZN pushed broke further to the downside on heavy volume. At this point, it looks vulnerable to at least a test of the 10-dma, perhaps more, given today’s selling volume. Somebody, or several somebodies, decided to use the hype and hoopla over the $1 trillion market cap achievement as an opportunity to sell some stock.

 

GR090518-AMZN

 

Meanwhile, Netflix (NFLX) rolled over and back below its 50-dma yesterday, triggering it as a short-sale again. It then immediately opened slightly to the downside and then broke hard on increased selling volume. If one was on top of that this morning, one could have easily gone short at that point, using the 50-dma as a tight guide for an upside stop.

NFLX is now acting more like a textbook short, where a right shoulder has now formed following the logical undercut & rally move up to the 50-dma. That rally started two-and-a-half weeks ago on the first undercut & rally through the 322.43 low of May 15th. NFLX now appears headed for a test of the early August lows.

 

GR090518-NFLX

 

Tesla (TSLA) gapped below the psychological $300 price level yesterday, building on its existing downtrend after it became shortable along the 200-dma, as I discussed in my reports of over a week ago. Today it gapped down through the 286.13 low of July 31st, and just kept going.

By the end of the day, TSLA failed to rally above any of the prior summer lows and is now on the verge of undercutting its late May lows at 273.42. Anyone playing the stock as a short from the 200-dma would now use the 286.13 low as a trailing stop.

 

GR090518-TSLA

 

Facebook (FB) also came apart as it, too, acts more like shorts used to act in the old days, before QE turned every busted pattern into an Ugly Duckling long set-up. If this wasn’t a QE market, I would have confidently told you to short FB on the rallies up to the 20-dema, all of which failed. But, in this market, I’ve seen enough of these breakdowns turn completely around and rally back up to the highs.

But now we see FB acting like a textbook short of old, and my attempts to try and interpret an Ugly Duckling long play have been for naught. The same thing goes for any number of stocks I’ve discussed in recent reports, which I believe is telling me something.

The technical reality here is that FB was a short last week at the 20-dema. It has since plummeted for three days in a row and logged a lower closing low today on above-average volume.

 

GR090518-FB

 

All this nastiness among individual stocks has led to a rough start to September for the major market indexes. The NASDAQ Composite Index is now showing two distribution days in a row off the peak. It held its ground at the 20-dema and just above the top of its prior late July to late August price consolidation. A breakout failure would obviously be a bearish development.

 

GR090518-$COMPQ

 

The S&P 500 Index avoided a distribution day yesterday by closing in the red less than 0.2% but did post one today on a -0.28% drop on heavy volume. The index also showed some supporting action off the intraday lows and closing in the upper half of its daily trading range. With the Dow Jones Industrials closing up 0.09% on the day, the action had the feel of a safety rotation into bigger, established, non-tech names.

In my view, however, the index action is merely secondary. I focus on the individual stocks, and many were hit hard on heavy selling volume today. That is at least a cautionary sign, and where a trailing stop or absolute stop was hit, one should exercise their risk-management discipline by paying attention to that. If the selling gets any worse, adhering to your selling guides is what will keep you out of deeper trouble.

 

GR090518-$SPX

 

Not everything that got hit hard with heavy selling was a total disaster. Nvidia (NVDA) was tagged with some selling today but only retested its 10-dma and held. It also closed up and off its intraday lows, which is at least minorly constructive. Technically, this pullback brings it into buying range of the prior new-high base breakout.

The only caveat is that if the general market gets into further trouble, a late-stage base-failure becomes a possibility. Therefore, it is a simple matter to keep your selling guides at hand and perhaps be ready to flip the other way, i.e., short, if NVDA is in the mood to change character. For now, however, the pullback is a buyable one, technically speaking.

 

GR090518-NVDA

 

Roku (ROKU) was tagged with a four-point decline right after the open today, but eventually found support near its 20-dema. At that point it recovered to close about mid-range, but just under its 10-dma. I don’t really see any reason to have to step into the stock here, although an enterprising and opportunistic trader might have taken a shot at the 20-dema today, since that is our maximum selling guide for the stock.

Had the stock busted the 20-dema, then this would have brought it into play as a possible Punchbowl of Death late-stage base-failure. That could still happen if the general market continues to come down. That said, it would seem likely that there isn’t big upside left in the stock unless the market continues higher and/or the stock puts in more time consolidating its prior buyable gap-up (BGU) breakout from a 50% deep, cup-with-handle base.

 

GR090518-ROKU

 

Twilio (TWLO) was on fire yesterday, posting a big price move on heavy volume. This also qualified as a continuation pocket pivot off the 10-dma, its second pocket pivot off the line since the early August buyable gap-up after earnings. As I wrote over the weekend, the stock was buyable right at the 10-dma, and it followed through with a strong move yesterday.

However, all of that was given right back today as the stock reversed to the downside on equally heavy selling volume. Perhaps the second pocket pivot off the 10-dma was a bit too obvious. Technically, one could buy the stock here using the 10-dma as a tight selling guide. However, you could be stepping in front of a train here if the general market continues to slide. In any case, TWLO is a good example of how hard leading stocks were hit today.

 

GR090518-TWLO

 

Zebra Technologies (ZBRA) displayed some relative coherency and constructiveness today in contrast to many other leading names. The stock was already slightly extended after its early-August BGU breakout, at least in my book, so today’s pullback to the 20-dema looked somewhat orderly. Volume dried up to -57% below-average today, so sellers weren’t as brutal with ZBRA as they were with any number of other stocks.

The stock closed off the lows and the 20-dema, which looks constructive unless we see the general market get into further trouble. This pullback does bring the stock into a lower-risk buying area using the 20-dema at 165.10 as a relatively tight selling guide.

 

GR090518-ZBRA

 

Etsy (ETSY) was flying higher yesterday as it posted an all-time high on about average volume. The move qualified as a pocket pivot off the 10-dma, so had a bullish look to it. That bullish look did not last long, however, as the stock was tagged today on above-average selling volume. This sent it right back to its 20-dema, where it held support after dipping below the line earlier in the day today.

Notice also that it undercut the low of six days ago on the chart and rallied back above it. Technically, one could treat this as a buyable pullback, using that prior low at 46.76 or the 20-dema as a tight selling guide. That, of course, presumes that today’s heavy selling is not a harbinger of more trouble to come for ETSY. But at least if one takes a shot here, risk can be kept to a minimum.

 

GR090518-ETSY

 

Perspecta (PRSP) has more or less ignored all the market drama by moving back up to the highs of its current three-week price range that has formed after its post-earnings BGU. As I wrote over the weekend, the stock was an active U&R long entry set-up using the 22.83 BGU low as a tight selling guide. The stock paused at the 20-dema yesterday morning and then took off.

It attempted to clear to higher highs today but stalled and closed slightly down on increased but just about average volume. This is obviously in an extended position after the prior U&R move that was buyable yesterday along the 20-dema. One example of a stock on my long watch list that held its ground today.

 

GR090518-PRSP

 

Sailpoint Technologies (SAIL) held support at its 20-dema today on about average volume and closed back above its 10-dma. Today’s pullback also brought the stock right back on top of its prior base breakout point, and the close above the mid-point of the trading range was bullish. My preference, however, would be to look for a retest of the 20-dema as a lower-risk entry option, particularly given the general market environment.

 

GR090518-SAIL

 

ZScaler (ZS) reported earnings today after the close, and as I write is trading down around its 20-dema. The company came in with a profit of four cents, beating estimates, and came in with better-than-expected revenue. It also guided Fiscal Year 2019 earnings and revenue higher. That, however, does not appear good enough for a gap-up response, at least not this afternoon.

Keep an eye on this one tomorrow. Based on what it is doing this afternoon in after-hours trade, I’d watch for some stabilization along the 20-dema as a potentially lower-risk entry opportunity. But that’s not entirely clear just yet, so we’ll have to see exactly where and how this opens tomorrow, as well as whether the general market sets a bullish or bearish backdrop after today’s distribution day.

 

GR090518-ZS

 

All three of my formerly hot Chinese IPO turnaround candidates, Bilibili (BILI), Huya (HUYA), and Iqiyi (IQ) are all failing on recent long entry signals. Given the indecisive action, and the state of Chinese markets currently, these are probably best left alone until things stabilize.

The weekly chart of the iShares China Large-Cap ETF (FXI) says it all. The ETF, which is representative of Chinese markets, remains in what is now a two-month bear consolidation following a second leg down in an ongoing bear market that started in January. A breakout to the downside from here could trigger an even steeper decline, since successive legs down in a bear market will tend to show increasing price declines, finally ending with a climactic low.

 

FXI Weekly

 

In my view, this is likely the primary culprit leading to the weakness we are seeing in Chinese names across the board. Momo (MOMO) is one of the very few, if any, holding above its 50-dma. Since posting a pocket pivot gap-up move last Monday, the stock has pulled back into the 20-dema on light volume. Is this buyable? I suppose, if one is willing to keep a tight leash on it by using the 20-dema as a tight selling guide.

Otherwise, if the weakness in Chinese names and markets persists, I would not be surprised to see MOMO bust the 50-dma and morph back into a short-sale target. Play it as it lies.

 

MOMO Daily

 

Notes on other names discussed in recent written reports:

Carbonite (CARB) broke out to new highs today on a five-day pocket pivot volume signature but is extended and not in a position I would consider lower-risk enough to venture a long entry, particularly given the current general market action.

CyberArk Software (CYBR) was hit with selling volume today but held above its 10-dma. I would be more comfortable looking for a pullback to the 20-dema at 72.25 as a lower-risk and more opportunistic entry spot.

Intuitive Surgical (ISRG) broke hard today on heavy selling volume, closing just below its 20-dema. I would want to see whether this can stabilize before looking at this on the long side just yet.

Okta (OKTA) broke down hard today on heavy selling volume ahead of tomorrow’s expected earnings report. Nothing to do here based on the negative technical action and the fact that earnings are expected tomorrow after the close.

Square (SQ) finally pulled back today on heavy selling volume after posting 13-straight up days in a row and getting a little bit parabolic. The stock remains extended but is still holding up well above its 10-dma.

Stitch Fix (SFIX) entirely ignored the market turmoil today and posted another all-time high on strong volume. The stock remains extended.

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.

September has gotten off to a poor start, but it has only been two days. I have not liked the action in individual stocks, for the most part, however, and feel this does lend a cautionary tone to the current market situation.

Not all my favored longs are coming apart at the seams, however, and we should maintain an even psychology by being aware of where potential support might lie as stocks pull back with the market. If today’s sharp sell-off in the NASDAQ and tech names in general was a one-off, then we should expect to see some stabilization over the next two days.

If not, then review your selling guides, stops, and trailing stops, and have your exit plan ready if any of your positions starts to get into severe trouble. In addition, those with a yen for shorting stocks should be alert to potential triggers as certain names roll over and break near-term support, as was the case with NFLX. Keep an eye out also for potential late-stage breakout failures which can also produce playable short-sale set-ups. ANET, which I discussed near the outset of this report, is a good example.

On the long side, remain opportunistic, as it’s still not clear whether the market will correct further from here. But there’s certainly enough news flow left in the week to cause some mayhem, with the current U.S.-Canada trade negotiations still ongoing and the deadline for the imposition of tariffs on another $200 billion worth of Chinese goods and services looming on Friday. Stay alert!

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.