The Gilmo Report

April 10, 2019

April 10, 2019

The major market indexes brushed off a little selling yesterday and kept the melt-up rally intact by posting higher highs again today. Volume was light, but the NASDAQ Composite Index led the indexes with another higher high. The only laggard is the Dow Jones Industrials Index, which has been weighed down by Boeing (BA).



This market continues to operate in contradiction to previously accepted rules, namely that big-volume upside moves are often just a precursor to further upside, and big-volume downside breaks are a precursor to further downside. Making the point that if you see a stock down on big volume, that’s the new buy signal, money came piling right back into cloud names this week.

ZScaler (ZS) was hit with heavy selling volume on a sharp downside price break last week, but it has come back immediately on an undercut & rally (U&R) set-up. That set-up occurred yesterday as the stock moved above the prior 63.50 low in the pattern from late March and held. It did not hold the attempt the day before, but sometimes a U&R will take some persistence.

Now it’s back above the 10-dma and within spitting distance of the prior highs, just like that. The huge-volume selling we saw last week means nothing at this point, and I would be surprised to see ZS just keep moving back up toward its prior highs if the general market continues to rally.



Okta (OKTA) also proved the new equation of down big on heavy volume = buy signal by posting a big-volume re-breakout move yesterday. When they look ugly, that’s just means they’re sending out a call to the Ugly Duckling, who shows up and helps send the stock flying back to the upside. I suppose if one likes to buy breakouts, here’s one for you, but it’s not my cup of tea!



Coupa (COUP) also took its cue from a breach of the 50-dma last week to simply move back above the moving average yesterday. The stock was hit big with heavy selling volume over two weeks ago, but after some dancing around the 50-dma it found its feet and turned higher this week in a typical LUie type of move where the L-formation resolves as a U-formation.

Frankly, these moves don’t surprise me in the least. I talked about the possible U&R in ZS over the weekend, and in the same report I wrote that, “If COUP were to retake the 50-dma, this could set in motion a moving-average undercut & rally (MAU&R) type of long set-up. It’s just a matter of seeing how this plays out from here.”

Well, we’ve seen how this has played out from where it was sitting beneath the 50-dma over the weekend. And so, the whole concept of buying when stocks are up big on volume goes out the window, and we simply substitute the new rule, which is down big on volume = buy, buy, buy! It may only be good for a nice swing-trade, but it works.



Workday (WDAY) was blasted with heavy selling last week, but as I noted in my weekend report, “Just to complicate things, notice, however, that WDAY closed above the 185.43 low of March 25th, triggering a U&R long entry using the 185.43 low as a tight selling guide.”

If you thought a stock market couldn’t have a sense of humor, guess again. The Ugly Duckling, a comical character to be sure, is a force to be reckoned with in this market, and Ugly Duckling set-ups, that occur when things look most dire, remain your most effective long entry points.

The action of ZS, OTKA, COUP, and WDAY is typical of how the clouds have made an immediate comeback after taking some selling heat last week. For now, they maintain their leadership position after providing opportunistic and brave buyers some interesting Ugly Duckling long set-ups near their lows.



Thus, the second possibility among the three that I discussed in my weekend report with respect to cloud names has taken hold. They looked ugly for a very short period of time and have since turned back to the upside on various U&R and other Ugly Duckling long set-ups off their lows.

As I wrote over the weekend, “This, of course, would set up a wonderful opportunity for opportunistic buyers who understand Ugly Duckling set-ups like the U&R and MAU&R…” And so, it was.

Applied Materials (AMAT) has not had any additional upside thrust following its buyable gap-up (BGU) move of last week that was also a standard big-volume base breakout. Technically, however, it remains within buying range of both the BGU and the base breakout, using the 41.62 intraday low of the BGU day as a tight selling guide.



Advanced Micro Devices (AMD) has failed on its BGU of last week, finding support yesterday at its 10-dma. It held the line again today as volume declined, keeping it in a lower-risk entry position here using the 20-dema as a maximum selling guide. Pullbacks closer to the 20-dema would also provide even lower-risk entries, should that occur.

Note that AMD closed at 27.83 today, just a nickel below the intraday low of its prior BGU intraday low at 27.88. That’s close enough to keep it within buyable range of the BGU as well, using the 10-dma as a selling guide, since that allows for another 2% to the downside. That’s another way to play it, so play it as you choose and according to your own risk tolerance.



Xilinx (XLNX) popped off its 10-dma today to post a continuation pocket pivot as it also broke out to new highs on above-average volume. As I wrote over the weekend, it was in a voodoo long entry position at the 10-dma as of last Friday’s close, and thus actionable at that point for those interested in the stock. This is now slightly extended with earnings expected in the last week of April.



Facebook (FB), not shown, remains within buying range of last week’s range/base breakout. Meanwhile, Snap (SNAP) gapped up on Monday after another analyst’s upgrade with a $17 price target. That gap-up move did not hold, however, and the stock today pulled right back into its 10-dma.

Volume picked up nicely as the stock bounced and closed near the top of its daily trading range in a show of volume support. It remains buyable on pullbacks to the 10-dma as lower-risk entry opportunities.



Twitter (TWTR) finally ended a nine-day winning streak by running into resistance along its prior February highs and reversing. Volume was light, and the profit-taking doesn’t seem abnormal given the extent and persistence of the prior upside run as the stock melted higher on volume that never got beyond average all the way up.

Pullbacks into the 10-dma at 34.12 may offer lower-risk entries from here. Note that TWTR and SNAP are expected to report earnings on April 23rd, while FB is expected on April 24th.



Big-Stock NASDAQ
Big-stock NASDAQ names that I follow are expected to report earnings over the next couple of weeks, so there isn’t much to do with these ahead of earnings. Netflix (NFLX) will be the first in the earnings line-up, as it is expected to report on Tuesday after the close. The stock failed on a breakout attempt in the latter half of March and hasn’t done much since, but we can wait and watch for something actionable to materialize after earnings.



Roku (ROKU) tested its 50-dma on Monday, as I thought it would per my weekend comments. I just didn’t think it would get there so fast. On Monday it gapped straight down to the 50-dma and then attempted to execute a U&R long entry by rallying back above its 59.63 low of March 14th.

That U&R, however, did not yield much on the upside before ROKU reversed back below the 50-dma yesterday. It moved lower again today in a technical violation of the 50-dma, but that is not something I put much stock into these days. I’d watch for another possible U&R attempt from here through the 59.63 low, which is now just below the 50-dma.



CyberArk Software (CYBR), not shown, has held its recent test of near-term support at the 20-dema despite dipping below the line briefly on Monday morning before turning back into positive territory. It posted a new closing high today, so is now extended. The 20-dema is my favorite moving average when looking for opportunistic pullbacks in leading stocks, and it worked again with CYBR.

The axiom of down big on volume = buy signal was again proven out by Mimecast (MIME) after it was slammed through its 50-dma last week on heavy selling volume. But that just led to an undercut & rally (U&R) move on Monday that triggered a long entry, taking the stock right back up to the highs of its prior March trading range.

While the idea that down-big-on-volume equates to a buy signal is perhaps partially a bit tongue-in-cheek, it does seem to work. However, note very carefully that one does not have to simply close their eyes and buy into any big drop on heavy volume that they see. The volume price break is usually followed by a concrete Ugly Duckling long entry signal, such as a U&R.

That was certainly the case with MIME on Monday. Now it’s back above its 10-dma, 20-dema, and 50-dma on a three-day rally that started off on a weak-volume U&R. Today, the stock picked up some strong buying interest as it cleared the 50-dma and is now extended off the initial U&R long entry point.

MIMI represents a very typical Ugly Duckling type of long set-up that occurs after a prior failed breakout and some ugly selling volume that sends the stock below its 50-dma. In other words, the strong-volume breakout is again the improper buy point, but the U&R when things look ugly is the proper buy point. Such is life in this market.



Palo Alto Networks (PANW) wasn’t buyable as of last Friday’s close. However, on Monday it pulled down to its 50-dma and bounced, triggering a U&R long entry as it came back up through the 235.70 low of March 27th. That was good for a ten-point move in just three days as it rallied up to today’s intraday high at 245.88, and it all started with a U&R.

PANW stalled today near its prior late March highs. I’d watch to see how this acts here along the 10-dma and 20-dema as this could provide another lower-risk entry spot right here. However, my preference is always to try and catch the U&R when you can get it, assuming you see it happening in real-time when it does occur.



Fortinet (FTNT) got back on the escalator this week, even to the point of pulling a base breakout on strong volume today. Is today’s breakout a new buy point, or was that proper buy point really the one that occurred last week when FTNT got slammed down to its 50-dma on heavy selling volume?
I suppose if you’re a breakout buyer you jump all over today’s move, which is still within the prescribed 5%-beyond-the-new-high breakout point. The chart pattern, however, lacks any tightness as FTNT has zigged and zagged up and down over the past several weeks. Play it as you see fit.



Acacia Communications (ACIA) held another low-volume pullback to the 20-dema on Monday, offering a lower-risk entry at that point. It found support today at its 10-dma, which also offered a lower-risk entry opportunity and bounced to close higher on the day.

Note that ACIA is another one of these failed breakouts that then worked on a re-breakout, something that is typical for this market. I would remain opportunistic here and watch for further pullbacks to the 20-dema as your best, lower-risk entry opportunities.



Arista Networks (ANET), not shown, pinged right off its 20-dema on Monday, which was a lower-risk entry spot if one was looking for it. Meanwhile, Viavi Solutions (VIAV) has moved up and off the confluence of its 10-dma and 20-dema on light volume. It was last buyable along the two moving averages as a voodoo type of set-up per my comments over the weekend.



Etsy (ETSY) remains in a buyable position along its 10-dma and 20-dema on the daily chart, which I don’t show here. The weekly chart, below, shows a nice-looking six-week base that has been tightening up over the past three weeks. This looks constructive, so I view the stock as buyable here using either the 10-dma/20-dema confluence as a selling guide or the recent lows around 66 as a wider selling guide.



The Weed Patch
The Weed Patch is still flat on its back, but Canopy Growth (CGC) is still clinging to another U&R attempt after closing today just above the prior 41.68 low from early February. The Weed Patch in general looks quite ugly, but as we know this can simply be an invitation for the Ugly Duckling to pay a visit. Thus, one can act on this U&R in CGC and see if it can get any traction from here.



Cronos (CRON) is in a position where it could post a U&R if it can move above the prior 18.72 low of early February, so set your alerts for that possibility. CRON closed today at 18.02, not far from the February U&R trigger point.

Another way to look at this is as a Wyckoffian Retest of the late March low Where the stock initially tried to rally back above the February low. It came in yesterday to retest that low and held as volume dried up. Thus, this can be viewed as a Wyckoffian Retest entry using the prior late-March low at 17.24 as a selling guide.



Aurora Cannabis (ACB), not shown, continues to hold along its 10-dma and 20-dema as it works on a new base. Today’s move could be considered a U&R move back up through the 8.82 low of six trading days ago.

GW Pharmaceuticals (GWPH) may bode well for the other areas of the Weed Patch after it arose from the depths of its base on an undercut & rally move back up through the late-March lows. Note that it had previously rallied above the prior early-March low last week, although the move was less than convincing.

GWPH benefited from news yesterday regarding the FDA’s rejection of a competitor’s epilepsy drug filing. It continues to work on a new base here, with pullbacks to the 10-dma at 166.73 offering lower-risk entries from here.



Chinese Stocks
Iqiyi (IQ), which has been referred to as the Chinese Netflix, looks interesting here as it regained its 50-dma today and closed above it by two cents. This can be viewed as a moving-average undercut & rally (MAU&R) move that is also a Wyckoffian Retest of the prior late-March low. Notice that on Monday IQ pulled down as it approached that prior low, but volume dried up in the extreme.

It has since taken the 50-dma, which puts it in a long entry position using the 50-dma or the 10-dma at 23.82 as your selling guides. I would like to see the stock confirm this retest by soon clearing the 200-dma and the prior early-March low at 24.56.



Tencent Music Entertainment Group (TME) dropped below its 20-dema yesterday on increased but below-average selling volume. That took out the nice-looking voodoo pullback to the 20-dema on Monday. But today the stock moved back above the 20-dema in a typical MAU&R move back up through the line.

Thus, this can be viewed as a long entry position right here, using the 20-dema as an extremely tight selling guide. Alternatively, the 50-dma down at 17.23 could be used as a wider selling guide. One might also entertain the possibility of waiting for a more opportunistic pullback to the 50-dma as a lower-risk entry possibility, should that occur.



Huya (HUYA) priced a total offering of 18.4 million shares this morning at $24 a share. This sent the stock diving below its 50-dma and 200-dma on heavy volume resulting from the secondary offering. However, note that the stock undercut the prior early-March low at 22.70 this morning and then closed just above it at 23.21.

That triggered a U&R long entry using the 22.70 price level as a tight selling guide. As I wrote over the weekend, the secondary offering might set up some sort of opportunistic entry, and this U&R would be the first concrete set-up resulting from the secondary offering. If today’s action is a one-off, then we might see it work, but keep that tight selling guide at 22.70 in mind.



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.

This remains a market for opportunistic trades and investors. The action so far this week proves that point, and my approach to the market remains geared toward this basic market concept. U&Rs and the like have seen clouds immediately reverse course, fulfilling one of the possibilities I discussed over the weekend.

Perhaps we will see more of this Ugly Duckling type of action in other areas of the market, such as the Weed Patch, if the market rally persists. For now, we go with the set-ups we see in real-time. The market rally may be getting stretched on the upside, as the pundits like to say, but the set-ups are what the set-ups are, and that’s all we 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 a position in CRON and ROKU, 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. ©2008-2019 Gil Morales & Company, LLC. All rights reserved.