The Gilmo Report

April 3, 2019

April 3, 2019

Improving manufacturing data in the U.S. and China combined with high hopes for today’s resumption of U.S.-China trade talks got the market off to a strong start on Monday. All the major indexes have moved to their highest levels since the Christmas Eve lows. Today began as another bullish gap-up open but ended as a big stalling and churning day on the NASDAQ Composite Index.

Volume was higher, as it was on the NYSE, where the S&P 500 Index posted a similar stalling and churning day at the highs on higher volume. The initial move was driven by hopes of a U.S.-China trade deal, despite a weak ADP jobs number that fell short at 129,000 news jobs vs. expectations of 178,000.

 

 

I’m still finding only a handful of buyable set-ups here and there, but most stocks continue to track within previously established price ranges. The key to finding good entries has been to remain opportunistic and wait for pullbacks. With the indexes pushing to higher highs this week, stocks simply become more extended, or have moved to the upper areas of their current price ranges.

So, it is a matter of catching the right stock on the right pullback at the right time. In my video report of last Thursday evening, I noted the pullbacks that were in buyable position in many stocks. In my view that was where one wanted to be buying. Chasing into a gap-up move like today is generally riskier, based on the observable evidence in this current market environment.

Social-Networking

Facebook (FB) was the big-stock mover yesterday after an analyst from Deutsche Bank (DB) speculated that, “We think a more streamlined e-commerce experience on Instagram could add an incremental $10B of revenue in 2021.” While this is little more than speculation about an outcome that is relatively far out in the future, it was enough to spark a big pocket pivot move in the stock.

I wrote over the weekend that FB’s pattern looked non-committal, although its position just above the 200-dma did put it in a buyable position, As I noted, “One could certainly test this as a long here while using the 200-dma as a tight selling guide.”  A breach of the line would have then triggered a potential flip to the short side, but that was not to be, and so it is the long trade in FB that was working this week.

The breakout yesterday, however, leaves something to be desired. Coming straight up from the 200-dma, the move struck me as a bit extended, and that proved to be the case today when FB reversed after a strong morning move to higher highs on even-heavier volume than yesterday’s breakout.

Such is the nature of this market, and of buying breakouts in general. FB was best bought closer to the 200-dma, where the 10-dma and 20-dema also were hanging out late last week. Reacting to breakouts is usually a late move. If the stock can hold up in here somewhere, then it may attempt a re-breakout, which I suppose can be watched for, but for my money the fat part of the trade occurred over the prior three days.

 

 

FB’s move didn’t inspire much from Snap (SNAP), but it did help send Twitter (TWTR) back above its 200-dma. The stock closed above the line for the first time since early February, just before it broke sharply back to the downside. It is now back up to those highs.

TWTR cleared its 200-dma yesterday, but on weak volume. Volume was about average today, more than yesterday, and the stock stalled a little off its intraday highs. In this position, the stock isn’t buyable since it is extended from any moving average. To be frank, I might be more inclined to short it here if we see the general market pull back.

 

 

Apple (AAPL) has regained the 200-dma, but volume has been light. Early last week, the stock was hit with three days of high-volume selling. But as I like to joke, in this market, down big on heavy volume is a buy signal. The stock proves this point by drifting back above the 200-dma on light volume as it approaches the prior highs.

If you’re a true AAPL aficionado, then buying it Monday when it cleared the 200-dma would have been the proper entry point. That requires understanding the basics of a moving-average undercut & rally (MAU&R) long set-up, which simply triggers once a stock regains a moving average after briefly dipping below it. Usually, such moves will play out over anywhere from two to five days.

 

 

Netflix (NFLX) has similarly rebounded off its 50-dma after finding support at the line last Thursday. In fact, that move was a moving-average undercut & rally (MAU&R) at the 50-day line. Volume was light, but high volume is not necessary for this type of Ugly Duckling long set-up to work.

Note the prior failed breakout, considered by many to be the “proper” buy point, but the reality in this market is that pullbacks tend to be more proper than the idea of chasing stocks on strength. NFLX proves this point and has now rallied back up to its prior breakout point, where it stalled today on weak volume.

This was buyable last Thursday and Friday on the MAU&R, and there is no logical entry at this point. That is, unless you want to treat this as a possible re-breakout, which can be done. In that case I’d advise using the 10-dma as a tight selling guide.

 

 

Amazon.com (AMZN) is also back up to its prior highs of two weeks ago, and out of any reasonable buying position. Nvidia (NVDA) moved with the rest of the semiconductors today on hopes of a U.S.-China trade agreement, but it was already extended. The only reasonable entries were down along the 10-dma when it tested the line on low-volume over a week ago.

 

 

Semiconductors

The semis were the strongest sector of the market today, led by a huge gap-up move in my favorite semi, Advanced Micro Devices (AMD). Last week, however, sellers persistently knocked the stock down, until it finally met up with the 20-dema after failing on a breakout attempt. That, of course, was where your opportunistic entry point showed up, and the stock steadily rallied from there.

Today’s move would qualify as a buyable gap-up, using the 27.88 intraday low as a selling guide. The stock is obviously extended from there, so you’re looking for pullbacks closer to that point as potential lower-risk entries. That said, I would rather be in the stock at the 20-dema last week. As I wrote over the weekend, “AMD tends to be most buyable on an opportunistic basis, as chasing strength and base breakouts in the stock tend to be futile affairs.”

Today’s move is probably the most abject expression of strength by AMD, but I would still refrain from chasing the strength here. Instead, watching for an orderly pullback to 27.88 makes more sense, while looking to use that price level as a tight selling guide.

 

 

The at-times bizarre action of this market is exemplified by Applied Materials (AMAT). The stock broke out two weeks ago on impressive volume, but quickly failed. Five trading days later it closed below its 50-dma in bearish fashion. In this market, however, that’s a buy signal! The move back up through the 50-dma last Friday constituted a nice moving-average undercut & rally move (MAU&R) to buy into.

Since then, AMAT has rocketed to higher highs in a nice v-shaped move that we could consider a variation on the Flying V theme that I talk about as a common pattern in this market. It’s as if you must forget everything you knew about buying breakouts and instead just buy the bottom of the V, when you can find a logical Ugly Duckling set-up at that point.

In AMAT’s case, that was the MAU&R at the 50-dma last Friday. Shakeouts and fake-outs are the hallmark of this market. AMAT certainly makes that phenomenon plain to see, as do many other leading stocks in this market. Today’s move, which represents a re-breakout, can also be treated as a buyable gap-up, if one so chooses. In that case, one would simply use the 41.62 intraday low as a tight selling guide.

 

 

Cloud Stocks

Cloud names have been a mixed bag lately, but we did see one of the names I’ve discussed in recent reports break out today. That was Okta (OKTA), and I last noted its constructive action along the 20-dema in my March 20th report. It has since drifted higher along three moving averages, the 10-dma, 20-dema and 50-dma.

Today, OKTA finally broke out on an analyst’s upgrade and $90 price target. Volume was heavy, making the breakout actionable since it is still within the prescribed 5% buying range.

For my money, however, buying along the three moving averages made more sense, and I would prefer not to chase this strength. A pullback to 85-86 would make more sense as an entry using the 10-dma as a tight selling guide.

 

 

Coupa Software (COUP) is an interesting cloud chart to puzzle over. The extreme, voodoo rally up just above the 10-dma, 20-dema, and 50-dma looks imminently shortable. On the other hand, we also have a MAU&R type of move in a clear L-formation.

This, of course, brings up the potential for a LUie resolution, where the L turns into a U as the stock potentially tries to re-breakout. An orthodox approach would simply say this is a late-stage failed breakout and hence a clear short-sale target. And it is, if that’s how it plays out from here.

The Ugly Duckling evaluation, however, understands that the LUie formation is a very typical resolution to this type of L-formation in this current market environment. I’ve seen too many of these L-formations turn into U-formations to pretend otherwise. So, one must play it as it lies.

If the general market continues to rally, then this is buyable here as a MAU&R using the 50-dma as a tight selling guide. If it breaches the 50-dma, then it may very well come into play as a short-sale target at that point.

 

 

Most clouds look like Splunk (SPLK), where a breakdown two weeks ago has been followed by a rally back up near the prior highs. In this case, SPLK has only rallied back up to the highs of two weeks ago and remains well below its prior all-time highs that were logged on March 1st, when it posted a brutal and ugly outside reversal off the highs on heavy selling volume.

That breakdown occurred after earnings, and the stock eventually undercut its 50-dma right after the first week of March ended, and then took the escalator back up above all the moving averages in a MAU&R type of move. That was also typical elevator-down-escalator-up move, and it was followed by a sharp elevator move to the downside in late March.

That move ended with an undercut & rally long entry at the prior low six trading days ago. I’ve pointed out repeatedly that the best entries in most stocks occurred around last Thursday and Friday. This was the case for SPLK as well, and now it is sitting right back on top of its 50-dma, which it regained today on very light volume.

I would not necessarily want to call today’s move a MAU&R because it undercut the moving average two weeks ago. I’d want to see it set up again along the moving average, if that’s what it wants to do, as a lower-risk entry. Otherwise, if it reverses back below the 50-dma it would trigger as a short-sale entry at that point.

 

 

The Weed Patch

Over the weekend, I liked some of the undercut & rally set-ups we were seeing in various Weed Patch names. Despite the market rally this week, these U&R long set-ups did not lead to any significant upside. Aurora Cannabis (ACB), which undercut the 8.55 intraday low of its March 13th last (you guessed it) Thursday, is now pulling in to retest its 20-dema as volume dried up to -39.1% below-average today.

ACB today announced the filing of a preliminary prospectus that will allow the company to issue stock offerings, debt securities, subscription receipts, units or warrants for an aggregate value of up to $750 million over a period of 25 months. To its credit, the stock did not blow up on the news, but given that this will be spread out over 25 months indicates that no secondary offerings are immediately pending.

However, a big stock offering would likely put some pressure on ACB, should that be announced at some point. In the meantime, it is possible to view this low-volume pullback into the 20-dema as a potential lower-risk entry spot.

 

 

Both Cronos (CRON) and Tilray (TLRY) have failed on their prior U&R attempts, but Canopy Growth (CGC) is still clinging to life. It undercut the prior 41.68 low in its pattern from February 12th last week and rallied back above it, triggering a U&R long entry at that point. It’s now extended from that buy point as it ran into resistance at its 10-dma today on slightly higher but very light volume.

 

 

It’s clear that cannabis stocks could care less about the U.S.-China trade talks, unless China agreed to up their offer to increase soy bean purchase by throwing in the purchase of a few tons of ganja into the offer. Otherwise, the Weed Patch doesn’t respond much to all the trade deal hype.

This is also the case with Weed Patch pharmaceutical GW Pharmaceuticals (GWPH), which dipped below its 20-dema today on very light volume. It also held three cents above the prior 165.02 low of March 19th, keeping its U&R long entry alive while using the 165.02 low as a tight selling guide.

 

 

Roku (ROKU) also didn’t seem to find much inspiration from all the trade deal hype today, choosing instead to sell off on increased but only average volume today. This comes after Monday’s pocket pivot move back up through the 10-dma. I wrote over the weekend that, “…I would remain open to any concrete long trigger that might turn this L-formation into a full-blown LUie.”

Monday’s pocket pivot did constitute a valid long signal, but only nearer to the 10-dma. With the stock extended from the 10-dma now, only a pullback closer to the 10-dma at 66.15 would offer a lower-risk entry on the basis of the prior pocket pivot.

That said, we should also remain aware of the fact that a breach of the 20-dema could also easily trigger the stock as a short-sale target at that point. ROKU is still within the realm of a possible Punchbowl of Death (POD) topping pattern, so that how it acts on any pullback to the 10-dma/20-dema confluence will provide some idea of where it might go from here.

 

 

Cyber-Security

CyberArk Software (CYBR), the de facto cyber-security leader, remains extended. Meanwhile, Mimecast (MIME), which I’ve discussed many times in recent reports, posted a pocket pivot yesterday on a trendline breakout. Note, however, that MIME posted a U&R long entry two weeks ago after undercutting and rallying back up through the 45.06 low of March 7th.

Note also that the U&R occurred after MIME had broken support at the 10-dma and 20-dema and moved to lower lows on heavy selling volume. But, as we know, in this market, down big on heavy volume = buy signal. A bizarre axiom to be sure, but one that paradoxically holds up in this market, and we have plenty of examples to prove this.

Also note that MIME spent nearly two months doing nothing after a prior buyable gap-up in mid-February that eventually failed. At that point, one would justifiably become fed up with the stock, and abandon it. That’s precisely when it springs back to life and pulls a pocket pivot trendline breakout!

MIME ran into resistance near its prior BGU highs of mid-February today, backing off on weak volume as buyers failed to show up. I’d want to see it hold the 47-48 price level here on any pullback that would offer a potentially lower-risk entry.

 

 

Palo Alto Networks (PANW) is like MIME in the sense that it just continues to build a long L-formation after failing on its own February buyable gap-up move after earnings. This is an L-formation in search of a LUie resolution. But so far, I’m not seeing anything that serves as a reliable trigger to jump in on the long side of this just yet.

Yes, I see the undercuts and rallies back above the prior lows of the past mid-March, but overall the action remains tentative. For now, PANW is sitting along its 20-dema where it might be considered buyable using the 20-dema as a selling guide. If it’s going to work, it should move sooner rather than later, otherwise it may spend more time lolling around in the Land of the L.

 

 

Telecom-Related

Acacia Communications (ACIA) and Arista Networks (ANET) are extended to the upside, so are out of the running when it comes to an actionable long set-up. However, Viavi Solutions (VIAV) has bounced off its 50-dma and is now sitting right on top of its 20-dema after regaining the line last Thursday.

Volume dried up to -41.6% below average, but you will note that VIAV was not inspired by today’s trade deal hype. Nevertheless, this voodoo pullback into the 20-dema brings the stock into a lower-risk entry position while using the 20-dema as a tight selling guide, or the 50-dma as a wider selling guide.

 

 

Retail

Our old friend Etsy (ETSY) sprang to life yesterday when it posted a pocket pivot at the confluence of its 10-dma and 20-dema. Volume was only about average, however. This is actionable here, however, using the 10-dma and 20-dema as tight selling guides.

 

 

Financials

Over the weekend, I reviewed the excellent short-sale trade in the financials that I presented to members three Tuesdays ago on March 19th, the day before the Fed policy announcement. The chart of the SPDR Select Financials ETF (XLF) illustrates the perfect timing of that trade as it reversed at the 200-dma and the ensuing sharp five-day break to lower lows.

That five-day break took the XLF below its prior 25.34 low of February 8th and then rallied. This triggered a U&R cover point, as well as a U&R long entry for those who were alert to it. Just because one might have shorted the financials and the XLF at the 200-dma five days prior does not mean one can’t decide to play the ensuing U&R off the lows on the long side!

Now, the XLF has rallied all the way back up to its 200-dma, where it stalled and reversed today on higher volume. This puts the XLF in a new short-sale entry position, as I see it, while using the 200-dma as a guide for a tight upside stop.

 

 

If one chooses to pick on individual financial stocks, I would note that Citigroup (C) and Charles Schwab Corp. (SCHW) are both running up into their 50-dmas. Meanwhile, J.P. Morgan (JPM) is approaching its own 200-dma, while Morgan Stanley (MS) and Goldman Sachs (GS) are moving back up toward their prior failed breakout points.

If one is interested in shorting the financials by shorting the XLF or going long the Direxion Daily Financial Bear 3X ETF (FAZ), then one should monitor the big financials to help with assessing potential entry points. If one is interested in going after a single financial, then the group chart below can be reviewed for potential candidates.

 

 

Please note that StockCharts.com, where these group charts come from, adjusts their price data for splits, dividends and other events, which alters the moving averages. Therefore, I would double-check any of these against other charting services to confirm where the moving averages lie on a relative basis.

With the U.S.-China trade talks moving Chinese stocks in either direction, I did not discuss any of these in the last report. I had previously noted some in buyable positions in last Thursday’s video report, and those names are mostly extended at this point. Case in point would be Momo (MOMO), which was best bought (you guessed it) last Thursday when it pulled into the 200-dma on light volume.

So, with Chinese names extended, I would only sit back and look for the next pullbacks. Also, if the current session of talks doesn’t produce anything concrete, these could all come sliding right back to the downside. This creates some news-risk for the group, but I would also note that the market in general may be subject to the same risk based on the outcome of the current meetings.

 

 

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 market uptrend remains intact, but today’s action showed some stalling and churning on the major market indexes as they pushed to higher highs. Volume was higher, so that action does qualify as stalling and churning. How meaningful that is we shall likely see shortly.

The market seems to be pinning its hopes on an imminent U.S.-China trade deal, which, despite the hype, has not occurred yet. And it may not. Some administration officials admit that talks could continue into June. If that occurs, this current frothiness might simmer down a bit, resulting in a possible market pullback.

What I do know for sure, however, is that long set-ups are not that prevalent as stocks get extended to the upside. That keeps things mostly simple since when we have no proper long set-ups to act on, there is no need to commit to fresh positions. We simply wait for the next pullback. As stocks get extended, study your watch list charts and get acquainted with where these optimal-entry pullback zones might lie. 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. ©2008-2019 Gil Morales & Company, LLC. All rights reserved.