The Gilmo Report

April 8, 2018

April 8, 2018

The market ended the week the way it began the week, with a big sell-off on more tariff news. While Monday’s sell-off was brought on my tough talk from the Chinese, Friday’s sell-off came after President Trump asked for consideration of another $100 billion in tariffs against China. This appeared to overshadow a weak jobs number of 103,000 vs. estimates of 175,000. And so, the trade war of words continues to heat up, creating uncertainty that the market obviously doesn’t like.

As I’ve written in recent reports, this all creates a highly news-oriented environment that makes for a virtually non-investable market. The NASDAQ Composite Index declined over -2.28% on Friday as volume picked up, looking like it may be set for a test of its 200-dma. This, of course, may depend on what the weekend tariff news looks like come Monday morning. Technically, the NASDAQ remains in a four-day rally attempt off the Monday lows as the overall downtrend from early March remains in force.


GR040818- $COMPQ


The S&P 500 Index briefly dipped below its 200-dma on Friday as the Dow sunk well over 700 points to the downside. But what was probably machine-led support at the line kept things intact, resulting in a retest of the 200-dma on higher, but well below-average volume. Whether we decisively bust the 200-dma this coming week will, again, likely depend on where the trade war of words goes from here. Meanwhile, investors are left with little to do, unless they desire to rapid-fire trade this market. Holding positions overnight, long or short, is a dicey proposition given the potential for big overnight gaps in either direction.


GR040818- $SPX


The downside index action on Friday produced similar moves in most stocks. NYSE advancers shriveled, coming in at 627 vs. 2,315 declining stocks. On the NASDAQ, decliners dominated advancers by a margin of 2,290 vs. 641. Thus, we saw stocks like (AMZN) and Netflix (NFLX) roll to the downside, but the action wasn’t entirely ugly, at least for those two names. AMZN rolled off its 10-dma to the downside, and remains above its lows from earlier in the week but below its 50-dma. NFLX came off on slightly higher volume, closing just below its 50-dma.

But the light volume doesn’t keep these stocks from moving lower in some cases. Nvidia (NVDA) made a lower closing low on Friday since it busted its 50-dma on heavy selling over a week ago, and volume was light. But, technically, this now qualifies as a technical violation of the 50-dma. Perhaps this means the stock is headed for a test of its early February lows and the 200-dma, which would make sense if we see the general market continue lower this coming week.


GR040818- NVDA


Tesla (TSLA) got hammered last week after analysts came out and declared the company to be on the verge of bankruptcy. Then, on Tuesday, the company came out with its latest production numbers, which showed a 40% quarter over quarter increase to 34,494 vehicles. The company also stated that it expects its Model 3 production rate to climb rapidly throughout the second quarter, and more important, that it will not require an equity or debt raise this year.

That sent the shorts scrambling to cover all week long as the stock shot back up to the underside of its prior five-month price range, where it ran into resistance on Friday. Shorts swarmed the stock as the sharp break over the prior week looked like the final death knell for TSLA shares. But once again, the cat-and-mouse game between the shorts and the company came into play, and shorts were once again forced to run for cover.

The net result of all the drama is that TSLA is now back up into resistance along the 300 price level, maybe a little higher. Whether it can clear through this area of overhead resistance remains to be seen. Depending on how it acts from here, it could also come back into range as a short-sale, with the 50-dma at 323.15 being the first major moving average standing in the stock’s way from here.


GR040818- TSLA


Because of the market’s tendency to ricochet in opposite directions, I have mostly operated from a list of two-sided, actionable ideas. This means I’m looking at these names, which may be wavering or holding at key support levels, as either shorts or longs depending on what they do that day. This is not necessarily a long-term, or even intermediate-term strategy, obviously, but it does produce some scalps on a day-to-day basis. And that’s what I mean when I say this is a trader’s market, and not an investor’s market.

Square (SQ) is an example since its pullback to the 50-dma and the prior breakout point of early March can make it a short or a long, depending on what it does. Wednesday’s undercut & rally move made it a long trade, but only for a single day. Friday’s action, as it just began to break below its 50-dma early in the day, made it a short. The stock then closed below the 50-dma for the first time since early February.

Where does it go from here? Well, if the general market continues lower, then a test of the 200-dma might be in store. What I find problematic about this, however, is the lack of volume “conviction” from sellers. It seems more like there’s a buyers’ vacuum at play here as volume picks up but remains below-average. That could change, however, depending on what the market does this week.


GR040818- SQ


Another case in point is Applied Materials (AMAT), which reversed at its 50-dma on Thursday after posting an undercut & rally move back up through its March 2nd low on Wednesday. That move didn’t last long as the stock reversed back to the downside on Thursday, completing a move to lower lows on Friday as volume increased.

However, again, we see that volume is below-average, so while we’re seeing sellers increase on balance, the selling volume isn’t huge. The 200-dma lies one point lower, where we would expect to see the stock find at least temporary support.


GR040818- AMAT


Finally, we can see that Weight Watchers International (WTW) is another analogous situation. This undercut and rallied back up through a prior low on Wednesday took the stock right up to the 50-dma on Thursday, but it ran out of gas right there and reversed. Note that volume was extremely light, qualifying as a “voodoo” rally into the 50-dma.

The term “voodoo,” which indicates an extreme volume dry-up, is one I coined when referring to just this type of rally up into a moving average. More recently, I’ve also applied the term to “voodoo pullbacks,” which are pullbacks to a key moving average on volume that is drying up sharply. Generally, I consider voodoo volume to be -35% below-average or lower, but the lower, or “drier,” the better.

So, WTW fails on the voodoo rally into the 50-dma and posts a lower closing low on Friday. Volume was higher, but still well below-average. Another day, another short scalp. It remains to be seen whether WTW breaks for the 200-dma or continues to chop around below its 50-dma.


GR040818- WTW


Even among stocks that aren’t looking too bad, the action can be indecisive and lackadaisical. As I discussed in Wednesday’s report, the cyber-security names have been one area holding up well within the tech sector, but they remain in holding patterns. Fortinet (FTNT) is working on what is so far a four-week base, but selling volume in the base has been higher than buying volume.

This would likely need to tighten up a bit on the weekly chart before it can get going. But if it can continue building a tight base, then it would be one stock to watch in the event of a market turn. The question, of course, is whether we see some sort of stabilization in the general market, because until we do, this remains a non-investable market.


GR040818- FTNT


Palo Alto Networks (PANW) is anything but lackadaisical, however, as it followed up on Wednesday’s pocket pivot with a pocket pivot breakout on Thursday. Volume was strong, coming in well-above average, and the stock then held reasonably tight on Friday as the general market got pummeled. However, I wouldn’t want to buy the stock up here, and would be more interested in seeing how it acts on a test of the 10-dma and 20-dema if we see the general market pull back next week.


GR040818- PANW


FireEye (FEYE) regained its 10-dma and 20-dema on Wednesday after finding support at the 50-dma, as I noted in my Wednesday report. But volume has remained light, so this is still in a building phase. So far, the stock has formed a cup-with-handle formation with a four-week handle that has held above the 10-week line as volume dries up.

FEYE pulled into its 20-dema on Friday with volume declining, which struck me as constructive given the general market mayhem. Basically, what I’m doing here with FTNT, PANW, and FEYE is looking at stocks within groups that appear to be acting well. With the market coming undone over the past few weeks, I’m busy rebuilding my long watch list, and these names fit the bill – for now.


GR040818- FEYE


CyberArk Software (CYBR) is another well-known cyber-security name, and it is also acting reasonably well. Friday saw the stock pull into the confluence of its 10-dma and 20-dema as volume dried up to -58% below-average. I prefer the “thicker” stocks in the group that trade more volume, however, since CYBR only trades 490,000 shares a day on average so is relatively thin.

I do monitor CYBR, despite its thinness, however, to assess the overall health of the group. Right now, the group acts reasonably well in the face of a sharp market sell-off, and if the market does eventually find its feet (meaning, we don’t get into a deeper correction or even a bear market), then I have to think that some areas of tech that haven’t been overplayed may remain viable.


GR040818- CYBR


Atlassian (TEAM) looked hot on Wednesday as it posted a big-volume pocket pivot coming back up through its 50-dma in Ugly Duckling fashion, but that move went nowhere. The stock dipped back below the 50-dma on Friday on about average volume. TEAM has been mentioned as a possible buyout candidate, so I’m wondering whether the move on Wednesday was a result of some M&A talk, although I did not see any specific news item in support of this.

The bottom line here is that unless the general market perks up, this likely needs to do more work. Notice that the indicator bars along the top of the chart remain mostly red, which is a big “soft.” I like to see things turn a bright blue color within a base as confirmation of a better set-up.


GR040818- TEAM


Nutanix (NTNX) remains on my long watch list, but as I wrote on Wednesday, I’d be more comfortable seeing whether it can successfully retest the March 28th low and/or the 50-dma in a new base-building process.

Carbonite (CARB) can’t get any traction and remains in an as yet unresolved L-formation. The stock tried to get going on Thursday but reversed on above-average volume, which isn’t exactly what you want to see following Tuesday’s move back above the 10-dma and 20-dema. My guess is this would only resolve into a U-formation, hence a completed “LUie,” if and only if we see the general market get its act together.


GR040818- CARB


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.

I wrote on Wednesday that I wasn’t getting a sense of strong thrust off the lows, and that has turned out to be the case. The indexes ran out of gas on Thursday, and reversed back to the downside on Friday, keeping the market in an uncertain and volatile. As I’ve said, this is not a market for investors, and has the potential to get worse, depending on the trade war of words that so far continues unabated.

Like I said on Wednesday, there is no “all clear” sign just yet, and this could remain the case for some time. Right now, to be entirely honest and forthright (as if there is any other way to be), there is very little one can do in an environment where things are so unstable and highly sensitive to news outside of trying to play the volatility on a short-term basis. This is, of course often easier to do in hindsight than in real-time.

I saw an interview with investing legend Jack Bogle, founder of the Vanguard Group, who noted that he had never seen a market this volatile in his entire career. I’ve made the same observation with respect to my much shorter career. I also heard on financial cable TV reporter complaining that whenever he tries to write an intraday market piece that he intends to air an hour or two alter, the market has completely change. Such is the nature of this market.

Speaking for myself, it’s also very difficult to devise a daily trading plan, since I have no idea whether I’ll be long or short a particular stock until I see how the market opens up on any given day. It’s become something of a two-sided ad hoc sort of thing. From my experience, this is highly unusual. I can’t remember when I’ve been faced with this problem before. But that’s all you get in this market.

On Friday, we gapped to the downside, and then rallied once President Trump’s new Chief Economic Adviser Larry Kudlow went on Fox Business News to assure us all that “there is no trade war.” But that’s what turned the market around earlier in the week, and this time around it had no lasting effect. As I like to say, Cinderella only comes to the ball once! The intraday bounce turned out to be shortable, and things just came apart from there.

What this coming week brings us is anyone’s guess, but my guess is that we will not return to an entirely investable market any time soon. The trade war of words seems to be heating up by the day, and uncertainty remains very high. So, for now, stay safe, and stay sane, even when the market isn’t.

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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