The Gilmo Report

April 7, 2019

April 6, 2019

The major market indexes remain in melt-up mode. A lack of negative news combined with the image of the Fed as a flock of doves keeps things moving higher. The rally is persistent at least from the standpoint of the indexes, since we did see at least one leading area come under selling pressure this past week.

A jobs number that was much like Goldilocks’ perfect porridge, not too hot as to provoke the Fed out of its dovish stance and not too cold as to conjure up images of an economy screeching to a sudden halt, kept things percolating higher on Friday. The NASDAQ Composite Index led the other indexes to higher highs, albeit on lighter volume.

 

 

Clouds

While the indexes melt to higher highs, the market’s broadest leading group, cloud-related software, took a group hit on Thursday. As I blogged on Thursday evening, every name on my cloud watch list was sold that day, some in brutal fashion. A case in point would be ZScaler (ZS), which busted its 20-dema on big selling volume. There was no news to account for the move, but an alert short-seller could have jumped on it at the time of the breach.

In my view, the 20-dema was a prudent selling guide for the stock given its extended state. One could have also used the 10-dma, an uber tight selling guide, but that is entirely a matter of risk-preference. In this position there is always the possibility of a U&R move back up through the March 25th low of 63.30, so that can be watched for, but the 20-dema may also present shortable resistance.

 

 

Okta (OKTA) on Thursday proved that buying breakouts continues to be a lower-probability long entry technique in this market. The stock blasted out of a base on Wednesday, as I noted in my report of that day, but reversed nastily on Thursday as sellers came in and unloaded shares in force.

OKTA found intraday support at the 50-dma that day, closing back above the 10-dma and 20-dema. It closed Friday just below the prior breakout point. I think, however, that if one wanted to step in as an opportunistic buyer, the time to do that was at the 50-dma on Thursday. Not an easy thing to do, but these days I find this type of entry easier to pull the trigger on than buying breakouts, which I trust far less.

Usually, such buying is good for at least a short-term swing-trade, whereas buying the breakout in OKTA was good for nothing more than getting slammed the very next day. C’est la vie in the odd, often contrarian, Ugly Duckling market we find ourselves in these days.

 

 

OKTA’s failed breakout is reminiscent of the same type of action in Coupa (COUP) two weeks ago when it also failed on what initially looked like a strong-volume breakout. The stock rolled over on Thursday with the rest of the clouds but found support off its intraday lows. Volume was only about average, so it was not like sellers came in and swarmed the stock.

That said, COUP was unable to rebound back above any of the moving averages and hold by Friday’s close. Instead, it churned and stalled just below the 50-dma and then closed below the 10-dma on lighter volume. Normally, this would be considered as a short here using the 50-dma as a guide for a tight upside stop.

The other possibility is a re-breakout attempt from an L-formation, resulting in a typical LUie resolution where the L-formation becomes a U-formation. 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.

 

 

Workday (WDAY) busted its 50-dma on Thursday on heavy selling volume. It ran into resistance at the 50-dma on Friday, but closed positive. This can also be viewed as a short here using the 50-dma as a guide for an upside stop.

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. Like COUP, this is a clear two-sided situation. But, despite the U&R move, the 50-dma still serves as near-term resistance.

For that reason, one would want to see the stock regain the 50-dma in a confirmation of the U&R. Otherwise, it may just be a short right here. This is how an Ugly Duckling market makes things a bit more complicated than they would be in a more typical market. You must react to the real-time evidence and play it as it lies, accordingly.

 

 

Tableau Software (DATA) was taking the escalator back to the upside into Wednesday, but that came to a premature end on Thursday as the stock broke sharply below its 50-dma. Volume was heavy on the break back to the prior lows. Note that this time around DATA was unable to break to marginal new highs, as it has three times prior before taking the elevator back to the downside.

DATA couldn’t muster much of a bounce on Friday and closed near the lows of its daily price range. This looks quite sick in this position, but if one were looking to short it, the only lower-risk entry would be on any bounce closer to the 20-dema which has just crossed below the 50-dma, or the 50-dma itself.

 

 

The mass breakdown in the cloud names that have been the primary leaders in the market rally off the Christmas Eve lows brings up a logical question. If the market is about the stocks first and the indexes second, does this leading group breakdown bode badly for the market? With the indexes melting to higher highs on light volume, that is certainly a possibility

The other possibilities are twofold, as I see it. The first is that the clouds look ugly for a short period of time and then turn back to the upside on various U&R and other Ugly Duckling long set-ups off their lows. 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, for example, and I will discuss this aspect in my weekend GVR.

The other possibility is that money rotates out of clouds and into other areas of the market. Where that might be, however, is not necessarily clear at this stage. I did note that one possibility was a move into semiconductor names, which sprung to life this past week on hopes of a U.S.-China trade deal. The fact that they didn’t come apart on Friday after the can was kicked down the road once again on a final U.S.-China trade deal adds some credence to this theory.

 

Semiconductors

I’m watching two of my favorite big-stock semiconductors that I’ve discussed in previous reports, Applied Materials (AMAT) and Advanced Micro Devices (AMD). Both stocks posted buyable gap-ups on Wednesday, and so far, both have held those BGUs. AMAT slid to higher highs on Friday on light volume, so I would not consider it to be within buying range.

AMAT would need to pull down closer to the 41.62 intraday low of Wednesday’s BGU price range. That may occur since Friday’s action saw the stock churn and stall on slightly higher volume as it gets extended. If it holds the BGU on any pullback, then my theory of rotation into semis might hold up as well. If it fails, then you’ve got a bearish and perhaps shortable situation on your hands.

 

 

Advanced Micro Devices (AMD) differs from AMAT in that even though both stocks exhibited BGUs on Wednesday, AMD was already extended to the upside. In fact, the best lower-risk entry occurred last week when the stock tested and held support at the 20-dema with volume declining. Therefore, I’m not surprised that the stock pulled in slightly on Friday.

The intraday low of Wednesday’s BGU is 27.88, and AMD closed Friday at 28.98. Therefore, we can watch for any constructive test of the 27.88 price level as a potential lower-risk entry. That said, AMD tends to be buyable more often on pullbacks, as buying into strength with this name has so far meant that one must sit through ensuing pullbacks.

 

 

Another semi that continues to act well and which has held up since a BGU after earnings in late January is Xilinx (XLNX). It will be reporting earnings later this month, so it’s not clear to me that this will have any upside juice in it until then. But it is holding tight along its 10-dma as volume dried up to -52% below average on Friday, putting it in a voodoo entry here using the 10-dma as a tight selling guide.

 

 

Social-Networking

If clouds roll, then maybe social-networkers come in and pick up the slack as well. Facebook (FB) got hit with some high-volume selling off the peak on Wednesday but has held up and remains above its prior breakout point. I’m not a big fan of buying breakouts, as you know, so I’d be interested in seeing how this handles any pullback to the rising 10-dma.

If you like to buy breakouts and have no qualms about potentially getting tagged with a possible breakout failure, then FB is technically within so-called buying range of the 171.58 breakout point. Not my cup of tea, however, and the reality is that FB was also quite buyable along the 200-dma earlier in the week per my comments in last weekend’s report before the breakout.

 

 

Snap (SNAP) is the surprise social-networking underdog coming to life in a big way since early February. Members may recall that I blogged in early February about the post-earnings buyable gap-up move, and SNAP hasn’t looked back since. It has quietly stair-stepped its way about 30% higher since that first BGU and has accentuated that rise with another big-volume BGU in March.

On Friday, SNAP broke out of a short two-week flag formation on heavy volume. This was last buyable along the 20-dema last week per my comments at the time. SNAP’s breakout on Friday was helped along by a presentation on Thursday where the company announced that it was getting into the mobile-gaming business.

A breakout from a two-week flag seems dicey to me, so I’d look for any retest of the rising 10-dma as a lower-risk entry. SNAP is doing a good job of retaining its younger users, and may continue to surprise on the upside, putting the squeeze to those short the stock to the tune of 17.7% of the stock’s float as of the last report dated.

 

 

Twitter (TWTR) is a bit of a puzzler here but can also be viewed as another social-networking name on the comeback trail. It has finally cleared and held above its 200-dma on the daily, and on the weekly chart below we can see a low-volume close above the 40-week moving average for the first time since last December.

We can also see that in this position TWTR is right at the prior highs of the series of right shoulders that make up this massive head-and-shoulders formation extending all the way back to February of last year. The stock has been wedging to these higher highs on weak volume and I did say in my previous report that I’d be more inclined to short the stock up here.

While that may still hold true, a constructive test of the rising 10-dma, which has just crossed above the 200-dma, could change my mind. This is because another way to look at the pattern over the past five months is as a reverse head-and-shoulders rather than a fractal head-and-shoulders. Obviously, TWTR is a bit too extended to be buyable here, but I’m interested in seeing how it can hold any pullback closer to the 10-dma, which could bring it into a lower-risk buy position.

 

 

You can get a good sense of why the NASDAQ has continued to melt higher in the group chart of Big-Stock NASDAQ names that I follow, below. Apple (AAPL), Amazon.com (AMZN) and Cisco Systems (CSCO) are all edging back up to higher highs on light, wedging volume, so are not in buyable positions.

Alphabet (GOOG), Intel (INTC), Microsoft (MSFT), and Nvidia (NVDA) are in similar situations. Netflix (NFLX) pulled into its green 20-dema on Friday as volume dried up sharply, so might be considered to be in buying range here along the line, but it will need to hold this critical area of near-term support to remain viable.

Oracle (ORCL) is trying to settle down after some volatile swings (at least for ORCL) over the prior two weeks. It found support at its 20-dema on Thursday, but is not in what I would view as a lower-risk entry position based on Friday’s close.

 

 

Suffice it to say that while these big-stock NASDAQ names are doing their part in helping to drive the NASDAQ and the NASDAQ 100 Index to higher highs, they are not in buyable positions currently. The wedging volume as they move higher, however, does make them susceptible to pullbacks. And it is on pullbacks that I prefer to buy stocks of all stripes, so the big-stock NASDAQ names are no exception.

Moving outside the group themes, Roku (ROKU) is breaking down again and triggered as a short-sale on Thursday when it gapped down and broke below its 20-dema. This came two days after a strong-volume pocket pivot off the 10-dma, as I discussed Wednesday, which again shows how strength does not often beget strength in this market.

After gapping down and rolling below the 10-dma/20-dema confluence on Thursday, ROKU then rallied back up to the 20-dema on Friday. But it stalled and reversed to post a lower closing low. Volume was light, so while sellers didn’t continue to swarm the stock, it wasn’t as if buyers were eager to jump in on any perceived bargain prices.

The interesting dynamic here on the daily chart to be mindful of is that ROKU looks like it is set to test its 50-dma down a 59.43. If it does meet up or approach the 50-dma, then it will also likely be undercutting one of two prior lows in the pattern. That could set up one or a combination of U&R long set-ups in concert with a bounce off the 50-dma. Whether that turns out to be a shortable bounce of a glorious new long entry point remains to be seen.

 

 

After all, we also must remain cognizant of the big punchbowl formation ROKU has formed on the weekly chart, below. Two big downside volume weeks off the right-side peak of the punchbowl combined with a recent breach of the 20-dema make this a Punchbowl of Death (POD) in progress. So, one must be flexible with this.

If the general market corrects, even if it is a small short-term correction of 3-5%, which would not be abnormal given how extended things are, then ROKU could plummet right through its 50-dma on the daily and 10-week line on the weekly. The moment of truth is fast approaching for the stock as it plumbs the prior lows of the past four weeks and the 50-dma/10-wma. Play it as it lies!

 

 

Cyber-Security

Cyber-security name also took a hit on Thursday. CyberArk Software (CYBR), not shown, was slammed right back to its 20-dema on heavy selling volume but held the line on Friday. Because the stock has obeyed the 20-dema all the way for more than seven weeks, I would use the 20-dema as a selling guide.

More evidence that strength does not beget strength in this market was offered by Mimecast (MIME), which posted an impressive, strong-volume pocket pivot and trendline breakout on Wednesday. As I noted in my report of that day, I wanted to see it test the 47-48 price area on a pullback before buying, since I am not all that keen on chasing strength in this market.

That point of view was proven correct as MIME collapsed back to the downside on surprisingly light volume. One must wonder where all the buyers that we saw on Wednesday went. On Friday, however, it was sellers who took control, sending the stock below its 50-dma on heavy selling volume.

This sort of action is what makes this market difficult at times on a stock-by-stock basis. In the old days, big, above-average volume on a breakout move was supposedly the rocket fuel for a sustained upside jaunt. These days, you can’t always trust it, if at all, and it is why I favor looking to buy on constructive weakness.

 

 

Palo Alto Networks (PANW), not shown, also got hit on Thursday, but volume was light, and the stock bounced slightly off its 50-dma. It remains below its 20-dema, and not in a position I would consider buyable at this point.

Fortinet (FTNT), another cyber-security name that has been on the comeback trail since the late-December market turn, is another one of these escalator-up-elevator-down situations. The stock got slammed for the third time in a little over a month. The last two came after slow escalator rides back up to the highs of its current price ranges, and Thursday’s action constituted another fast elevator ride to the downside.

Selling volume was heavy, and the stock did not bounce much on Friday. The question now is whether it finally ends up breaching the 50-dma for good, at which point it would trigger as a short-sale, or does it get back on the escalator and attempt to reach its prior highs. As I see it, just another example of the escalator-up-elevator-down phenomenon that we see with regularity in this market.

 

 

Telecom-Related

Acacia Communications (ACIA) is pulling back into its 10-dma following a re-breakout the prior week. That re-breakout came after a failed breakout in mid-March, leading to a test of the 20-dema eight trading days ago on the chart. Obviously, that pullback to the 20-dema was your most opportunistic buy point.

With the stock dipping back into its 10-dma and volume drying up to -53.8% below average on Friday, this puts it in another lower-risk entry. The 10-dma becomes your selling guide, with the idea that ACIA will hold this recent breakout.

 

 

Arista Networks (ANET), not shown, has been hit with some selling over the past two days, but is holding near-term support at its 20-dema. The stock has obeyed the 20-dema since its buyable gap-up back in early February after earnings, when I first discussed it as buyable. Therefore, the 20-dema can be used as a reasonable selling guide and trailing stop.

Viavi Solutions (VIAV) is in a lower-risk entry position here as it sits right on top of the confluence of its 10-dma and 20-dema. It’s basically in the same position it was in on Wednesday, when I discussed in my report that day. Volume dried up to -65.5% on Friday, so this is in an extreme voodoo entry point using the two moving averages as very tight selling guides.

 

 

Retail

Etsy (ETSY) posted a pocket pivot on Tuesday as I discussed in my Wednesday report, but that led to no further upside. Instead, the stock was hit with selling early in the day on Thursday but managed to recover off the intraday lows and close back above the confluence of its 10-dma and 20-dema.

Volume on Thursday was about average, so it was not as if sellers were swarming the stock. However, it does make plain the fact that, in this market, strength on one day does not beget strength the next day. But a reasonable pullback following strength can set up a lower-risk entry, as is the case with ETSY right here.

ETSY held tight at the 10-dma/20-dema confluence on Friday as volume dried up to -60.2% below average. This puts it in a lower-risk entry using the two moving averages as tight selling guides. Ideally, Thursday’s action was just a shakeout, and so I would look for the stock to react quickly on the upside if this is going to work as a decent long entry right here.

 

 

The Weed Patch

The Weed Patch is wilting fast, with Canopy Growth (CGC), Cronos (CRON), and Tilray (TLRY) all living below their 50-dmas and failing on recent undercut & rally attempts. TLRY is the weakest as it dropped to lower lows on Friday, not a good sign for the group. The last man standing is Aurora Cannabis (ACB), which remains above its 10-dma and 20-dema.

Note the voodoo pullback into the 20-dema on Thursday, which did provide a lower-risk entry at that point. ACB then bounced slightly higher on Friday as volume picked up but remained well below-average. While this was buyable along the 20-dema, if the group remains as weak as it is currently, ACB may begin to falter, and I would need to see things begin to stabilize and improve before seeking to be aggressively long here.

 

 

Financials

With a good portion of the market putting on something of a circus act as strength one day turns into a disaster the next, and leading groups start to crack as sellers pull the rug out from beneath otherwise constructive patterns, what exactly is helping to lead the market higher? Well, semis and the big-stock NASDAQ names have been two recent drivers of higher index highs.

Another more recent helping hand is coming from financials, which have been riding the escalator back up to their prior mid-March highs. Note the sharp five-day down-elevator price break from the 200-dma in the SPDR Select Financials ETF (XLF) that has been followed by what is so far a nine-day escalator ride back up to the 200-dma.

Another trademark pattern for this market, but it may simply bring the financials back into shortable range, as I discussed in my Wednesday report. With first-quarter earnings season rapidly coming into focus, impending reports from big financials will figure heavily into where the group goes from here.

 

 

At the end of this coming week, we will see the big financials start to report earnings, with J.P. Morgan (JPM) and Wells Fargo (WFC) expected to kick things off on Friday. Citigroup (C) and Goldman Sachs (GS) are expected to report the following Monday, with Bank of America (BAC) and Charles Schwab Corp. (SCHW) expected to chime in with earnings the day after on Tuesday, April 16th.

Chinese Stocks

The latest round of U.S.-China trade talks came and went, producing a lot of cooing about good feelings, smiles, and handshakes but nothing in the way of a concrete, final trade agreement. All the bloviating did manage to create a bit of a circus atmosphere for Chinese stocks, however, with some rallying madly off their lows this past week. Alibaba (BABA) is one example of a big-stock Chinese name in a better overall position, but still showing some circus-like price action.

On Wednesday, the stock gapped down and broke below its 10-dma and 20-dema on heavy selling volume. A bearish sign, to be sure, but it only served to demonstrate another one of the paradoxes of this current market. Namely, that often down-big-on-volume is not a sell signal, but a buy signal!

That was the case with BABA, which quickly turned around on Thursday and then posted a trendline breakout on Friday on strong upside volume. So, are we looking at a big shakeout & breakout move that is going to produce big upside gains from here? Hard to say, those who trust breakouts in this market can take their chances on this one. Good luck!

 

 

Since the market turn back in late December, I’ve focused on Chinese names that I believe exist independently of the news flow surrounding the U.S.-China trade talks. Early in the year I favored Pinduoduo (PDD), which had a big run before blowing up, and Tencent Music Entertainment Group (TME), primarily because they represented new-merchandise names in the China sector.

TME has done well since I first discussed it in early January, but it ran into some heavy selling after earnings in mid-March. It held support near the 50-dma, however, and posted an undercut & rally (U&R) long set-up as it slowly worked its way back above the prior early March low at 16.65. I discussed that U&R in a GVR at that time, and it has resulted in a move back up to the prior pre-earnings highs.

Now TME is putting in a little downside reaction as it retests the confluence of the 10-dma and the 20-dma with volume drying up to -64.7% below average. That puts it in a lower-risk entry position using the moving averages as your selling guide.

 

 

Rather than chase extended Chinese names right here right now, my preference is to look for more opportunistic situations. Huya (HUYA), which I’ve liked since early January when I first discussed it as a long idea, announced a $550 million secondary offering on Wednesday. That sent the stock down where it is now plumbing the lows of its current one-month price range.

Note HUYA’s massive upside move in early March after it reported earnings that went nowhere. One-day wonder moves like this are common in this market, and HUYA got slammed to lower lows before it found its feet and has since taken the escalator back to its prior highs near $30.

If HUYA prices its secondary at $25, which is just an educated guess on my part, that would equate to a 22 million share secondary offering. This probably prices this week, and I would keep HUYA on my radar screen to see if anything actionable occurs in the stock. With 36.6 million shares in the float already, it will be interesting to see how well or even whether it can digest an additional 22 million.

 

 

I’ll discuss a few other names in the China Zone in this weekend’s GVR. Additions to my long watch list will also show up when I post my latest long and short watch lists later this weekend.

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.

There are a handful of names I consider actionable in this market, as discussed in this report. With the wave of breakdowns in some leading areas of the market perhaps raising a cautionary flag, however, we may be looking at an opportunistic pullback coming into play soon. Cloud names that have been hit this past week, for example, are either turning into short-sale targets or will pull into areas where they can post Ugly Duckling long entries such as the venerable U&R.

Meanwhile, we’ve seen money pile into certain Chinese names (BABA, JD, ATHM, NTES, etc.) as well as big-stock NASDAQ names and semiconductors. Financials have contributed to the higher-high party by retracing the prior sharp breakdown that occurred after the Fed meeting over two weeks ago.

Overall, I find things to be a bit murky, so I’m content to lay back and wait for the most attractive set-ups to show up. I would especially love to see a decent market correction that might set up more opportunistic entries, or even bring the short side into play. There were certainly some short-sale set-ups to play among cloud names this past week, so we know the potential for the short side to come further into play exists.

If you happened to own something that got nailed with heavy selling this past week and broke near-term support, then hopefully you had your exit plan ready if necessary. I strongly advise going through this exercise with any long positions, because you never know when the market will pull the rug out from underneath. Stay alert, stay nimble, stay opportunistic and stay tuned.

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.

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