The Gilmo Report

August 11, 2019

August 10, 2019

The market remains a highly volatile beast that is difficult, if not downright treacherous, to navigate. Both the S&P 500 and NASDAQ Composite Indexes cleared their 50-dmas on Thursday, something I noted as a possibility in my weekend report after Wednesday’s short-term climactic low. Both the S&P and the NASDAQ were unable to hold their 50-dmas on Friday, however, as both closed back below the line on lighter volume.

The indexes literally sit on the 50-dma fence here as we wait to see how these resolve from here. So far, both the S&P and the NASDAQ have retraced about half of their prior downside moves, so are technically in a position to reverse back to the downside.  Barring that, a melt-up back to the prior highs remains a possibility given the nature of this bizarre market.

 

 

Both the Dow and the small-cap Russell 2000 Indexes remain below their 50-dmas, and never regained them. Thus, for these indexes, the 50-dma still remains as solid resistance.

The race to zero by global central banks as they fall all over each other in a synchronized scramble to cut interest rates keeps a bid under precious metals. The SPDR Gold Shares (GLD) has held tight since Wednesday’s gap-up move to new six-year highs as volume has declined. This looks like it wants to simply go higher from here.

Interestingly, earlier this week, gold, which is up 16.855% for the year, was outperforming the S&P 500 year-to-date. Longer-term, I observe that since I first established my precious metals portfolio in year 2000 when gold was selling at $280 an ounce, gold is up 439% while over the same time period the S&P 500 is up only 132.73%. Would that make me the Warren Buffet of gold investing? 😉

Even if we want to be generous and use the S&P’s 768.67 low in 2002 as the starting point, the S&P is up 280% vs. gold’s 438.57% run off its 2000 lows. So, when you hear the pundits and investment sales pros tell you that stocks are a great long-term investment, the truth is that since year 2000, gold has been much better. My expectation is that with fresh rounds of QE on the menu, gold’s outperformance will continue.

 

 

The iShares Silver Trust (SLV) is keeping pace with its bigger brother, holding very tight after a similar gap to higher highs on Wednesday. Unless central banks start raising rates, or the U.S. and China suddenly come to a copacetic trade agreement, I don’t see what’s to stop the advance in precious metals.

It’s difficult to buy the GLD and SLV at current levels given the prior move off the May lows. However, Wednesday’s moves can theoretically be viewed as buyable gap-ups using their respective intraday lows from that day as selling guides. For the GLD that would be 140.88, and for the SLV 14.83.

 

 

The move off the Wednesday lows did give us some tradeable long set-ups, but in this environment it’s not clear how far they can go. One that materialized on Thursday was Advanced Micro Devices (AMD) on a buyable gap-up move through its 50-dma on news that both Twitter (TWTR) and Alphabet (GOOG) would be using their next-generation EPYC processor.

This move is a typical on-the-fly type of set-up that you have to be quick enough to recognize and execute. That said, it’s not easy to do this in real-time especially when the market is all over the place. But the set-up was relatively simple. The massive-volume gap-up was buyable using the 31.48 intraday low as a selling guide.

The other set-up going on here was a moving-average undercut & rally move through the 50-dma. In that case, one could have used that as their selling guide. The stock then streaked higher, looking like it was going to clear to new highs on Friday, but stalled at the prior highs. It is now in an area where it has previously been shortable, this is a critical juncture for the stock.

Besides all the BGU and MAU&R action going on over the past two days, you might also notice that AMD posted an undercut & rally (U&R) move on Tuesday when it rallied back up through the prior 28.67 low of late May. Whether one would have bought the stock there, given the general market action at the time, is another question, however.

 

 

That was good for a two-day 10% upside move in AMD, certainly a high time-value trade. But as I said, it’s not easy to a) recognize the set-up and more importantly b) execute the trade in real-time. I struggle with this as much as anybody else since this market can be very screwy and whip-saw you in short order.

Pinterest (PINS) was discussed on Wednesday as one to watch for a possible U&R move back up through the prior 32.28 intraday low of last week’s buyable gap-up (BGU) price range. That approach worked well on Thursday when the stock pushed up through the 32.28 price area, and then rallied further to the 34-price area on Friday.

Now you’re back at the recent highs, and PINS has failed at the $34 price every time since last week’s buyable gap-up. That said, using the 32.28 price level as your entry trigger at least puts you in a slightly profitable position in case the stock moves higher. Otherwise, risk can be controlled by using the 32.28 low as your selling guide.

 

 

I discussed a handful of potential long set-ups on Wednesday, and most of these worked, at least for short upside moves. Amazon.com (AMZN), not shown, has rallied further off the 200-dma, but the reality is that buying right along the 200-dma on Monday, Tuesday, or Wednesday was the optimal entry. It is now slightly extended and running into resistance at its 10-dma.

One stock on my watch lists that looks to be setting up after a bit of sliding around after it reported earnings two weeks ago is Wix.com (WIX). WIX is a cousin to Shopify (SHOP), a stock that continues to trend higher and which I’ve discussed in my video reports along the way. Interestingly, WIX is expected to post $1.60 in earnings in 2020 while SHOP is expected to post 96 cents yet SHOP closed Friday at 369.95 while WIX ended the day at 148.43.

This may not be an apples-to-apples comparison necessarily, however. What is more relevant is the technical set-up here as WIX sits tightly along its 10-dma and 20-dema after finding support at the black 65-dema during this week’s market sell-off. The stock held support at the 50-dma on Friday, so any small pullbacks into the line might offer the best lower-risk entries from here.

 

 

Apple (AAPL) cleared its 50-dma on Wednesday which triggered a moving-average undercut & rally (MAU&R) move at the line as I discussed in my Wednesday report. It rallied a little further on Thursday but backed down to the 50-dma on Friday.

Volume declined, so technically this remains active as an MAU&R long set-up using the 50-dma as a selling guide. That said, a breach of the 50-dma on the downside would trigger AAPL as a short-sale target in 360-degree fashion.

 

 

While the indexes have bounced vigorously off their lows of earlier in the week, most big-stock NASDAQ names have rallied in tepid fashion. I discussed Netflix (NFLX) as a possible U&R trade on Wednesday, and we saw that U&R occur on Thursday. However, the upside move was weak, and NFLX ran into resistance at the 10-dma and reversed on Friday.

That would have offered a reasonable short-sale entry spot at the 10-dma, if one was alert to it. NFLX would remain shortable on rallied into the 10-dma from here, with the outside chance of a rally past the 10-dma and into the 20-dema offering a more opportunistic short-sale entry should it occur.

 

 

Facebook (FB) rallied up into the 50-dma on Thursday and reversed at the line to close down on Friday. As I wrote on Wednesday, rallies into the 50-dma would offer lower-risk short-sale entries using the 50-dma as a guide for an upside stop. That remains the case for now.

 

 

Remember that when it comes to shorting big-stock NASDAQ names, including semiconductors, into a rally, the 3x leveraged ProShares UltraPro Short QQQ (SQQQ) ETF is a good way to put on a blanket short. As I’ve discussed many times before, when the NASDAQ Composite and the NASDAQ 100 Indexes rally into potential resistance/inflection points, I will probe for reversals on the five-minute 620-chart of the SQQQ.

Friday’s action saw the NASDAQ Composite and NASDAQ 100 both reverse at their 50-dmas, and this was seen in real-time on the five-minute 620 chart of the SQQQ. About an hour after the open, a long entry signal came when the MACD orange fast line crossed above the blue slow line at around 34.10.

From there, the SQQQ rallied sharply, and a MACD cross to the downside occurred just before 8:00 a.m. PDT my time on the West Coast. Note, however, that the six-period moving-average had already crossed above the 20-period moving-average and held above it even as the SQQQ tested the blue 20-period moving-average and held.

That caused me to hold my position, and the SQQQ then moved higher. Eventually, however, the MACD crossed to the downside as the SQQQ broke support at the 20-period moving average, which sent me out of the position to book a profit.

There was another long entry signal toward the end of the day around 34.50, which was also actionable but yielded only about 1% after closing at 34.86. We’ll see whether this sets up again this week as the NASDAQ Composite sits on the fence at the 50-dma.

 

 

To review quickly, the 620-chart is a five-minute intraday candlestick chart that uses a 6-period (6 x 5 minutes = 30 minutes) and a 20-period (20 x 5 minutes = 100 minutes) exponential moving average. The MACD is set to (6,20,C,9) based on the settings I use on eSignal®. The “6” refers to the fast MACD line, and the “20” refers to the slow MACD line.

Snap (SNAP) was another potential long trade I discussed in my Wednesday report. In order to trigger as a long entry, it had to clear the 20-dema and the 16.08 intraday low of its prior buyable gap-up move after earnings in late July. It did that, and pushed higher on Friday, clearing the $17 price level before stalling to hold at the 10-dma on light volume.

SNAP is now extended, but was one of the few trades I could find on Wednesday after the market had rebounded sharply off the lows that morning. Most long trades had to be initiated that day as stocks were coming off of deep support, as I noted in my Wednesday report. Meanwhile, SNAP could have been bought Thursday morning as it sat below the $16 price level.

 

 

Twitter (TWTR) is trying to settle down in here after bouncing off the 20-dema and posting a U&R move through the prior $40 intraday low of its late-July BGU following earnings. The stock isn’t in what I would call a lower-risk entry position, as I would prefer to look for a possible entry on any pullback to the 20-dema at 40.23, which is now above the BGU intraday low at 40.

 

 

I discussed both Atlassian (TEAM), not shown, and ZScaler (ZS) as stocks that could have been bought along their 50-dmas in my Wednesday report. Both stocks gapped higher on Thursday, so one would not have had the opportunity for a lower-risk long entry at that point. Nevertheless, both stocks have rallied on light volume back up near their prior highs in typical v-shaped QE fashion.

The wedging, low-volume rallies might now be viewed as setting up the stocks for short-sale reversals as they flirt with their prior highs. Experienced short-sellers can watch for intraday reversal signals on the five-minute 620-chart for any opportunistic short-sale entries into these weak rallies. Assuming such a reversal signal occurred in either, I would then look for reversal back through their 20-demas as confirmation.

 

 

Lyft (LYFT) and Uber (UBER) both bombed out after their respective earnings reports. LYFT turned out to be a shortable gap-up, while UBER simply gapped lower. On LYFT’s chart we can see that it opened up high and closed near the intraday lows and the 50-dma on Thursday. After UBER reported on Thursday, I was looking for something actionable to appear in LYFT.

As it turned out, the only thing actionable was the breach of the 50-dma as a short-sale trigger once the stock opened below the line. It then streaked back toward its recent base lows. Overall, pretty sad action, and I would look at rallies back up in to the 50-dma as potential short-sale entries.

 

 

Uber (UBER) disappointed investors after reporting earnings on Thursday after the close and gapped down Friday at the open. In hindsight we can see that Thursday’s rally right into the 50-dma would have provided a nice short-sale entry spot for those wishing to play earnings roulette after the close.

As it turned out, UBER gapped down but eventually found support off the extreme intraday lows on heavy volume. It did manage to undercut the prior 39.15 low of late May and rally back above it to close at 40.05. Technically, that might set up a U&R entry using the 39.15 low as a selling guide.

I would also be alert to any rally that develops and carries up to the 20-dema or even the 50-dma. Rallies into these moving averages might also present lower-risk short-sale entries as well. Overall, I do not see how either UBER or LYFT present any opportunities for catching strong trends, and so they remain 360-degree trading targets at best.

 

 

Beyond Meat (BYND) is still sitting at its 50-dma, and volume dried up sharply to -68.8% on Friday. This is therefore in a lower-risk entry position using the 50-dma as a tight selling guide. That said, a breach of the 50-dma would trigger the stock as a short-sale target at that point. One could easily argue that the stock is forming a short bear flag, so this remains a 360-degree situation.

While many laud the product, I have tried it and I must say it tastes like garbage. I, however, eat mostly a vegetarian diet, and the taste of highly-processed foods in general does not sit well with me. Most vegetarians are happy to obtain their protein from natural vegetarian sources such as beans and legumes, so I don’t see how this would be a major attraction to vegetarians or vegans.

And since this is in fact unhealthier that beef itself, I do not see dyed-in-the-wool meat eaters as ready converts. So longer-term I believe there is tremendous risk in BYND shares. At some point, reality will catch up with the hype, and when it does, the first sign of it will be a failed breakout, which BYND already has, followed by a significant breach of the 50-dma.

 

 

CrowdStrike (CRWD) was discussed as a long entry at its 20-dema on Wednesday as volume dried up sharply in typical voodoo fashion. That led to a rally on Thursday and then a nice move to new highs on Friday on higher volume. But the stock stalled a bit off the peak as it approached the $100 Century Mark and only posted a new closing high.

This is extended, since I would not advocate buying a breakout through a short two-week flag. The 10-dma, however, can be viewed as near-term support, so low-volume pullbacks to the line might present lower-risk entries.

 

 

Zoom Video Communications (ZM) cleared its 50-dma on Thursday at the open, which qualified as a moving-average undercut & rally long entry. ZM pulled back slightly on Friday, however, but held support at the 50-dma. Volume dried up to the lowest daily level in the stock’s short history.

That would put the stock in a lower-risk entry position here, using the 50-dma as a tight selling guide. A breach of the 50-dma would, conversely, trigger the stock as a short-sale target if it occurred.

 

 

Roku (ROKU) was actionable as a buyable gap-up on Thursday as I discussed it might be in my Wednesday report. It opened at 118.70, set an intraday low at 117.56, and closed at 122.03. This was quite a bit different from ROKU’s last two buyable gap-ups after earnings in early January and early May when it opened at the lows and streaked substantially higher.

The move on Thursday was somewhat muted, but ROKU did push another 3.29 points higher on Friday as volume declined but still remained well above average. Pullbacks closer to the 117.56 intraday low can be watched for lower-risk entries.

 

 

Ciena Corp. (CIEN) gapped through its 50-dma on Thursday, so was immediately extended from the line and not necessarily actionable as a MAU&R long wet-up. It then stalled at the 10-dma but held two cents above the 20-dema by the close on Friday.

This needs to settle down in here to become actionable again. One could also argue that a move back below the 20-dema, only two cents lower, would trigger the stock as a short-sale entry at that point. 360-degree please!

 

 

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 move I was looking per my comments in Wednesday’s report occurred as expected on Thursday. Resistance at the 50-dma came into play on Friday, and we are now at a crossroads. From an individual stock perspective, there are swing-trading set-ups to be found on both the long and short side.

Not that these necessarily have big profit potential. We saw a very nice 10% move in AMD in two days, but most of the rallies over the past couple of days in long ideas have been modest, but respectable in most cases. Meanwhile, the macro-environment remains unstable, and risk remains high.

The unresolved positions of the major market indexes also complicate the situation, such that caution is advised. If a set-up presents itself, I see no reason not to act if one does so with the idea of understanding the potential of the trade while keeping risk tight. However, I don’t see much to pound the table on, as most set-ups occur on the fly, as I discussed in my Wednesday report.

Bottom line: We are in an unclear position with an as-yet unknown resolution. The action of individual stocks is mixed (a topic I will cover in more detail in this weekend’s video report), hence sends no clear signal either way. Therefore, stay alert, and be ready to position yourself for the next significant market move, whether to the upside or the downside. 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

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.