The Gilmo Report

September 9, 2018

September 8, 2018

Investors must now figure into their market assessment and strategy a new factor that can drive significant and often random price movements. That would be the arrival schedule for the Trump Train, which can blindside the market whenever the President decides to pile on the rhetoric regarding his current Trade War.

On Friday, a strong jobs number sent the futures careening to the downside ahead of the opening bell, but the market weathered a sharp, gap-down open to rally back into positive territory. At that point it looked like the market was set to roar down the tracks and back up toward its prior highs after a couple of days of weak action. Coming in the opposite direction, however, the Trump Train suddenly appeared, and the market ran headlong into it.

Remarks that another tranche of tariffs on an additional $267 billion of Chinese goods and services derailed the market and sent the indexes quickly sliding back to the downside. But the market again stabilized and slowly marched back toward the unchanged line. At least until another headline hit that the proposed tariffs would affect a wide range of Apple (AAPL) products.

I wrote on Wednesday that there was still plenty of potential mayhem to be caused by an ongoing news flow on any number of topics. The trade war (yes, it’s looking more like a war all the time) took center stage on Friday, however, and the indexes again sold off on an intraday basis for the third time before closing in the red across the board on lighter volume.

The NASDAQ Composite Index logged its fourth-straight down day as it starts to flounder a bit at support along the highs of its late-July to late-August consolidation. It also ran into resistance at its 20-dema, and while volume was light it was still slightly above average. We’ll get a chance this coming week to see how well the index can hold support, or whether it becomes further derailed because of its impact with the Trump Train.

 

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The S&P 500 Index looks like the NASDAQ as it also logged its fourth-straight down day in a row on lighter volume. It also stalled after an attempt to move higher and is sitting along support at the top of its August consolidation. Volume, while lighter, was slightly above average. As with the NASDAQ, we’ll get a better picture as to the seriousness of this current four-day sell-off and whether it evolves into something worse.

 

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Aside from the Trump Train, the most interesting news of the day on Friday was the video of Tesla (TSLA) CEO Elon Musk smoking cannabis on the Joe Rogan Experience podcast, an internet-based type of radio show. I had already discussed TSLA as a short the prior week at the 200-dma, and this news only served to split the stock wide open.

The break took the stock below the late May lows and down to a point just a little over 2% above the 244.59 low of early April. From there it rallied off the intraday lows but never made it back above the late-May lows. At this point the May low at 273.42 would serve as a trailing stop on the upside for any short position one began working near the 200-dma the prior week.

This week’s revelations about the company included news that Musk has hired top-gun attorneys that includes a former SEC commissioner to represent him in the SEC investigation of his claim that he had “funding secured” for a $420 million take-private buyout of TSLA. The whole thing is just another twist in the ongoing stock market soap opera which I call As the Tesla Turns. So far, however, it has been an effective short from the 200-dma, and that’s really all I need to know for now.

 

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The impact of tariffs on Apple (AAPL) products was perhaps the other big news of the day, at least on a company-specific basis. The stock has been acting well since its early-August buyable gap-up, marching 15% higher since then. Friday’s action took it below its 10-dma, where it closed on heavy selling volume.

If this carries further to the downside, it will no doubt have a negative effect on the NASDAQ 100 Index, as well as other stocks that might be viewed as being in the same general boat as AAPL, so to speak, with respect to the tariff situation. In any case, AAPL was already extended, so the 20-dema low just below may serve as near-term support. We’ll see if that holds up this coming week.

 

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Amazon.com (AMZN) slumped on Friday in sympathy to AAPL. It was busy attempting to rally off its 20-dema, where it opened on Friday morning, before the AAPL news hit. At that point, like most of the big-stock NASDAQ and tech names, it gave up the rally attempt and reversed to close down on declining but still slightly, above-average volume.

The pullback held near-term support at the 20-dema. This would therefore put the stock in a lower-risk entry position using the 20-dema as a tight selling guide. Note, however, that the stock has been getting hit with heavy selling volume over the prior two days. There may be higher risk of it breaching the 20-dema, but that’s what the tight selling guide is for.

 

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Netflix (NFLX) has run into resistance around the 20-dema twice over the past two trading days following Wednesday’s sharp price break. On both days the stock attempted to clear the 20-dema but failed. From here I would view any further moves up to the 20-dema as shortable, using the 20-dema or the highs of the past two days as guides for upside stops.

The tricky aspect of trying to short the stock here is that it is moving around in 8-10-point wide ranges over the past two days, or about 3-4%. Therefore, the idea in shorting the stock would be to catch it near the apex of any rally attempt. For now, it appears that resistance exists in the zone between the 20-dema and the 10-dma at around 256. Using that high as a reference for short entries on any additional rallies would seem to be the most practical approach here.

 

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Facebook (FB) continues to make lower lows, and the weekly chart helps gives us a better view of just where it is in the grander scheme of things. This week the stock broke below the prior September 2017 low, which in my view is not a valid undercut & rally point. The more relevant reference low is the March 2018 low at 149.02.

I can recall many a pundit declaring that FB was cheap even when it was trading at 220. That tells you just how worthless assessments of just how cheap or expensive a stock is can be. Stocks are dynamic, and their worth is whatever the current price is in real-time, until it isn’t. Trying to make predictions based on how cheap or expensive something is perceived to be is ineffective at best, disastrous at worst.

From here, FB looks primed to test the March low. From a practical standpoint, however, it is too far extended on the downside to enter a short at this point. What is interesting to note, however, is that since its big post-earnings bust, which defines the right side of a head in an H&S formation, it has been a textbook short-sale set-up on the rebound into the 20-dema, with the Ugly Duckling nowhere to be found.

 

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Nvidia (NVDA) pulled back to its 10-dma on Wednesday, but while the pullback was buyable in the sense that it was technically within buying range of the prior new-high base breakout, it only resulted in further downside. That further downside has brought the stock right into its 20-dema and the top of its prior new-high base breakout. Technically, this would put it in a lower-risk entry position using the 20-dema as a tight selling guide.

From my perspective, the true breakout point occurred at the mid-August highs. Thus, I would not be surprised to see NVDA test that price level, just above 160, in any continued market correction. In addition, do not discount the possibility of an outright breakout failure on a breach of the 20-dema.

A breach of the 20-dema, in my view, would trigger the stock as a short-sale at that point, with the idea of looking for a move down to the 50-dma. This is something to watch for and be alert to if we see a deeper market correction. But if one maintains a bullish view of the stock, then this pullback would technically offer a lower-risk entry, if it holds.

 

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The end of earnings season saw some interesting movement in stocks I’ve covered in recent reports. Palo Alto Networks (PANW), gapped up after earnings to test its prior all-time highs above 230, but by the close evolved into a slider that closed at the lows of the intraday price range. I don’t really care for this action, but it did hold above the 10-dma.

Technically, this implies that it could be treated as a buyable gap-up (BGU) using the intraday low at 227, a mere 61 cents below where the stock closed, as a very tight selling guide. A breach of the 10-dma might, however, trigger the stock as a short-sale at that point. How this works out will likely depend on where the general market goes this coming week, so play it as it lies.

 

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Okta (OKTA) has been a favorite of mine since it first flashed a pocket pivot back in early April at around $40 a share. It has had a choppy ride since then, but has consistently traded higher, even after some nasty pullbacks along the way. Its action this past week was no exception.

The company beat on earnings Thursday after the close and raised guidance, triggering a gap-up open on Friday morning. This was not a simple one to play, however. OKTA opened at 69.25, immediately plummeted to a low of 66.09, and then rallied to as high as an even $75 before rolling back to close at 71.92.

It is now extended from the 66.09 intraday low, so out of buying range. However, assuming it can hold up, pullbacks closer to 66.09 might offer lower-risk entries if they occur in constructive fashion.

 

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ZScaler (ZS) reported earnings after the close on Wednesday and was trading down around 42 in after-hours trading as I was writing my report of that day. As I wrote, this was one to watch for a possible buyable pullback somewhere along the 20-dema or 50-dma. As it turned out, the 50-dma was where the stock found intraday support and it bounced off the line on heavy volume.

Note that this was still a breakout failure. But as is common in this market, ZS kept moving higher on Friday, virtually ignoring all the general market mayhem, and staged a re-breakout. Re-breakouts are something I’ve gotten quite used to seeing in this market, and one could have bought this one as it crossed back up through the 20-dema on Friday.

It is now extended, in my view. It does illustrate that in this market, regardless of what the general market is doing, there are always good trades to be had. However, I think one must be extremely opportunistic, courageous, and even downright lucky to catch the right pullback in the right stock at the right time. ZS on Thursday morning was one such situation.

 

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Roku (ROKU) is another one that doesn’t want to stop rallying, even after news that AMZN was going to move into its territory with a similar streaming Fire TV service. I’ve been thinking this is likely to bust the 20-dema in any deeper market correction, and that may still happen. But for now, the stock was not having any of that, and simply traded up to another all-time high on Friday on increased but below-average volume.

Since the 20-dema is a critical level of support that, as I see it, will define the stock as a continuing long or a possible Punchbowl of Death short-sale set-up. I should emphasize that the short-side of ROKU remains just a theory for now until the necessary technical evidence appears. But if it occurs, it is helpful to understand how that may play out in order to make the shift as necessary.

For now, I am impressed with the stock’s ability to shrug off the potential encroachment of the Amazonian juggernaut. However, it did benefit from a buy recommendation and $74 price target from a firm that goes by the name of Guggenheim, which I’ve never heard of. That may have been driving the stock higher over the past three days, but I view this analyst call as late since we were into the stock at $35.

 

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Twilio (TWLO) was technically buyable at the 10-dma per my comments on Wednesday, but it dipped below the line on Thursday before finally turning back to the upside. Friday’s rebound stalled, however, and the stock is in a somewhat undefined position here since the stalling action could be viewed as bearish given the stock’s upside extension since its early-August buyable gap-up (BGU).

I would be more comfortable seeing how the stock tests the 20-dema before stepping into this current action, since a breach of the 20-dema could be a bearish development. TWLO hasn’t really had a big upside move since its BGU, despite two strong pocket pivots along the 10-dma, so I would keep a tight leash on this one.

 

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Zebra Technologies (ZBRA) is still holding along the 20-dema, which technically keeps it in a lower-risk buy position using the 20-dema as a tight selling guide. There is always the outside chance that it retests the 160 new-high base breakout level, even the 50-dma, if we see the general market correct further.

 

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Etsy (ETSY) was another one of these re-breakout examples that we see so often in this market. That re-breakout occurred in early August after a failed breakout after an initial gap-up move following earnings. The re-breakout led to a slow but steady uptrend back up to the highs, but after kissing new-high price territory on Tuesday the stock was pushed right back to its prior breakout point.

This is another signature type of action that we see in this market, where 2-3 weeks of steady gain suddenly disappear in 2-3 days, sometimes less. Technically, ETSY’s ability to hold the 50-dma and the prior breakout point at 45.59 puts it in a lower-risk entry position, using the 50-dma as a tight selling guide.

 

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Perspecta (PRSP) is holding up well after Tuesday’s move to the highs of its current four-week price range. On Friday it pulled into the 10-dma and found support, closing about mid-range as volume dried to -42% below average. From here, we can now look at pullbacks to the 10-dma as potential lower-risk entries.

 

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Sailpoint Technologies (SAIL) held support at its 20-dema today again on Thursday and rallied. It closed near its highs on Friday but stalled after making a bid at an all-time high. I’d continue to take an opportunistic approach here by looking for constructive pullbacks to the 20-dema as lower-risk entry points.

 

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Carbonite (CARB) may be within range of its recent new-high base breakout, but I view this more as a double-bottom type of breakout with the actual buy point at 38.99. This is the primary reason why I consider it extended in its current position. Pullbacks closer to the 20-dema at 40.77 would be a more opportunistic and preferable approach.

Note that the double-bottom breakout came on light volume, yet it worked, and the stock has continued to move higher. The true buy point, however, was the undercut & rally (U&R) move that occurred when the stock came back up through the first low in the double-bottom down at 33.70!

 

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Notes on other names discussed in recent written reports:

CyberArk Software (CYBR) is holding up and remains extended.

Fortinet (FTNT) has a similar look to CYBR and remains extended.

Square (SQ) is still trading up near its recent highs and remains extended.

Stitch Fix (SFIX) has continued to rally and is currently leveling off around the $45 price level. It is wildly extended and probably needs to build another base up here at these levels.

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.

The month of September has the distinction of being all red on the charts as the first four days of the month were all down days for the major market indexes except the Dow Jones Industrials. The trade tiff appears to be expanding into an outright trade war, and it seems that the Trump Administration looks for a new target every day. Japan was cited as the next big target to go after on trade as the situation worsens.

I’m not arguing that much of the way trade has gone since World War Two is fair. In most cases, it was designed to give countries attempting to recover from the war some assistance in getting their economies back up and running after the United States and 22 other nations signed the General Agreement on Trade and Tariffs (GATT) in 1947. Later, GATT was replaced by the creation of the World Trade Organization (WTO) in 1995.

President Trump argues that all of this put the United States in a disadvantaged position, and that it’s time for an update and reboot that corrects these alleged inequities. As he likes to say, we’ve been getting ripped off for years. While I don’t necessarily agree with this premise, that’s not my concern.

The point is that this market has been running for a while, and everyone knows that valuations have been stretched to a point not seen since early 2000. Meanwhile, global debt, on an individual, corporate, and sovereign level is off the charts. It is a bubble of epic proportions. The question is what becomes the pin that pops the bubble?

If it’s a full-blown trade war that pops the bubble as the current world trade order is turned upside down, then I suppose we’re on the verge of finding out. The ultimate evidence will be found in the action of individual stocks, a number of which are faltering while a decent number remain relatively healthy.

The next few weeks are going to be interesting, and the market has a bit of an edgy, random feel to it, which makes it difficult to content with. The concrete approach is to therefore review your trailing and absolute stops and be ready to act if and as necessary. That is all.

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.