The Gilmo Report

August 14, 2019

August 14, 2019

Untradeable macro-risk. The phrase makes more sense the longer this market trades. This is a market that can’t be trusted, and the action over the past two days poignantly highlights that fact. News yesterday that China was agreeing to possible phone talks with the U.S. over trade in a couple of weeks and the delay of $80 billion worth of Chinese tariffs to December 1st lit up the news algos, and the market rocked to the upside.

Some might have tried to pitch you on the idea that yesterday was a so-called follow-through day. In this market, however, where traditional institutional investors take a back seat to the machines, the concept is quaint at best. Yesterday’s rally didn’t last long as the indexes gapped down hard today at the open, and the NASDAQ Composite and S&P 500 Indexes both peeled away vigorously from resistance at their 50-dmas.

 

 

Volume was higher across the board today, and the Dow closed below its 200-dma. The NASDAQ Composite and S&P 500 may soon follow. Meanwhile, the small-cap Russell 2000 Index, which was already having a tough time getting back above even its 200-dma, much less the 50-dma, broke to lower lows today, as we see on the daily chart of its proxy, the iShares Russell 2000 ETF (IWM), below.

 

 

On the heels of a phony follow-through day yesterday, the action is very bearish on its face. In my view, it is machines that dominate this market, not institutions, and the same types of news algos that furiously bought stocks yesterday sold them even more furiously today. Such action cannot be trusted, and so this market remains a nimble swing-trader’s market, while investors and longer-term trend followers should stand aside.

The old concept of a follow-through day has become outmoded in this current market environment, and there is a good reason for this. When institutions like mutual funds dominated the market, a follow-through was a technical sign that they were shifting from a distribution phase to an accumulation phase. When there is no real institutional accumulation in a market dominated by machines, follow-throughs cannot reasonably be expected to work as a reliable indicator of market turns.

For a more detailed discussion of this topic and the real drivers of the current market environment, I would refer members to the video of my presentation at the Pacific Northwest Trading Workshop earlier this year. It can be viewed here.

Gold and silver sold off initially in reaction to the tariff news yesterday, perhaps based on some concept that their recent rallies have been due to their status as safe havens. In my view, the moves in precious metals have nothing to do with safe havens and are entirely related to imploding interest rates as global central banks race to zero. Once the market figured this out, the SPDR Gold Shares (GLD) bounced sharply off its 10-dma.

With the 10-year Treasury Yield now trading at lower lows, finishing today at 1.581%, and the yield curve inverting at the short end, the stage remains set for gold and silver to move higher. The GLD posted a supporting pocket pivot at the 10-dma yesterday on its heaviest single-day volume since it began its run back in late May.

 

 

The iShares Silver Trust (SLV) pulled a similar maneuver, bouncing off the 20-dema and the highs of the short flag it formed in late July. That move also qualified as a supporting pocket pivot along both the 10-dma and 20-dema on heavy volume. The trend in gold and silver remains up, and those looking to add to any position in either the GLD or SLV must be willing to use pullbacks like we saw yesterday as opportunistic entries.

 

 

Advanced Micro Devices (AMD) gives us a very nice example of how fleeting some swing-trades can be. First of all, one had to be extremely alert to see the buyable gap-up move through the 50-dma last week as actionable and pulled the trigger in order to catch a roughly 10% move in two days. Once the stock broke out, however, that was the end of it, and we added another failed breakout to our growing tally.

So, not only did you have to buy right, but you had to sell right, or you were left holding the bag. AMD pulled right into its 50-dma yesterday despite the market rally, and today gapped through all of its moving averages except the 200-dma, which it may test soon enough.

I wrote over the weekend as AMD sat along the base highs in the 34-35 price area that, “It is now in an area where it has previously been shortable, this is a critical juncture for the stock.” AMD failed quite miserably and could have been shorted around 34 on Monday if one was alert to that.

 

 

Pinterest (PINS) was another quick swing-trade, but only if you bought the true proper buy point on the undercut and rally back up through the 32.28 price level. That was the intraday low of its buyable gap-up move after earnings nine trading days ago on the chart. Doing that gave you an 11% move to a peak of 36.10 in three days.

Buying the new-high breakout on Monday was clearly for the slow animals in the herd. Thus, PINS’ brief foray into all-time high price territory ended quickly with a big reversal that left the stock mostly unchanged for the day. One more test of the highs yesterday was followed by a break today back below the 10-dma and the prior BGU low at 32.28.

 

 

In essence, what we see with AMD and PINS are perfect examples of the 360-degree action we see in this market. One day stocks are excellent long plays as they streak higher, the next they become excellent short-sale targets as they head back in the other direction.

After yesterday’s follow-through day, there were in fact some decent-looking charts among my long watch list. I went through these in yesterday’s video report, and had the market continued higher some of these might have been actionable on the long side. Instead, however, they all busted support and headed lower today.

Wix.com (WIX) is one example from my weekend report. It was hanging nice and tight along the 50-dma over the weekend, hence qualified for my action watch list on the long side. But with the market context turning decidedly negative today, it simply broke support, which is what stocks do when the market comes apart as it did today.

If the general market keeps going lower, then situations like this, where a nicely-acting leader is basing and then suddenly falls out of bed by breaching its 10-dma and 20-dema, at least, can become ready short-sale targets. Thus, WIX can be played as such within the context of a continuing market correction while using the 50-dma as a guide for an upside stop.

 

 

Atlassian (TEAM) was another example from last night’s video report. It was holding along its 10-dma with volume drying up and looked very nice after yesterday’s action. But the suddenly shifting market context sent it below its 10-dma and 20-dema. It is now in initial failure territory and can be tested as a short here using the 20-dema or 10-dma as tight selling guides within the context of a continued market correction.

If you review my long watch list, the latest of which was posted this past weekend, you will see a number of stocks that are doing this. This could be where the next wave of breakdowns occurs in any continued market correction. Therefore, this is the place to start looking for short-sale targets at this stage of the market break off the peak.

 

 

Apple (AAPL) was setting up as a moving-average undercut & rally (MAU&R) at its 50-dma over the weekend, as I discussed at that time. Buying there would have allowed one to participate in yesterday’s pop on the tariff news, but it was a one-day wonder trade. The stock immediately reversed today on a gap-down move as volume remained heavy.

Thus, AAPL also looks like many of these leaders that have failed on recent breakouts. As I discussed in last night’s video report, yesterday’s move took the stock right up to the top of the prior base from which it failed in early August. As I noted, this would offer an initial short-sale entry point in typical 360-degree fashion. But today’s gap-down precluded one from doing so right at the optimal point around the $210 price area.

AAPL closed below the 20-dema today, and a new short-sale entry would be triggered on a breach of the 50-dma. Given the stock’s status as a big-name component of the NASDAQ 100 Index, an alternate way to play any further downside in the stock would be through the ProShares UltraPro Short QQQ ETF (SQQQ).

 

 

As the commercial goes, why play just one NASDAQ 100 stock when you can play them all on the short side via the SQQQ? This allows one to indirectly participate in the continued downtrend in Netflix (NFLX). The stock stalled yesterday at its 10-dma and then broke lower today to post a lower closing low.

I’m still maintaining my longer-term downside price target for NFLX at the prior late-December low at 231.23. So far, NFLX has been a great stock to campaign on the downside as it has rallied into resistance at its 200-dma and then the 10-dma over the past three weeks. These have offered short-sellers optimal entries into rallies.

 

 

Facebook (FB) has continued to offer short-sellers optimal entries each time it has rallied up into the 50-dma. I repeated in both my weekend report and last Wednesday’s report that rallies into the 50-dma would offer such entries. I found it interesting that FB stalled at its 50-dma yesterday despite the big index rally and follow-through day.

FB peeled further away from the 50-dma today on above-average volume, rewarding shorts who were brave enough to hit the stock at the 50-dma yesterday. It then posted a lower closing low, and now looks set to test its 200-dma.

 

 

Snap (SNAP) pulled right into its 20-dema today as volume declined, which would technically put it in a lower-risk entry position. However, I would be alert to any breach of the 20-dema within the context of a continued market decline as a short-sale trigger, should it occur. 360-degrees, please.

 

 

Twitter (TWTR) is in the identical position as SNAP as it, too, pulls into its 20-dema with volume declining. As with SNAP, this is technically a lower-risk long entry position using the 20-dema as a tight selling guide. But, in 360-degree fashion, if TWTR breaches its 20-dema, then it could morph into a short-sale target and a late-stage breakout failure at that point. Play it as it lies.

 

 

Beyond Meat (BYND) closed today below its 50-dma for the first time in its short existence, but volume was light. I wrote over the weekend that a breach of the 50-dma would trigger a short-sale entry at that point, so the stock is in play as a short right here, using the 50-dma as a guide for a tight upside stop.

Whether one can borrow shares or not is another issue, and I’ve noticed that put options seem to have exorbitantly high volatility premiums. Nevertheless, this may be the beginning of the end for BYND if it cannot soon regain the 50-dma.

 

 

CrowdStrike (CRWD) tends to be a fun stock to play on a swing-trading and intraday basis, assuming you catch the moves correctly, as it swings back and forth in regular 10% ranges. Pullbacks to the 10-dma have offered lower-risk entry opportunities, but yesterday’s failure to hold the $100 Century Mark level offered an opportunistic short-sale entry for those alert to it.

CRWD attempted to clear 100 during yesterday’s big market rally, but could not hold it, closing at 99.36. It then gapped down with the market this morning, and then made another run for the $100 level before falling just short and posting an intraday peak of 97.73 before breaking sharply to its intraday low of 91.60.

 

 

If you were stalking CRWD on any move back up toward the $100 Century Mark this morning, this is what you would have seen on the five-minute 620-chart, below. An initial breakdown at the open was followed by a rally back up to a peak of 97.73, and shortly thereafter the MACD line crossed in a bearish signal. That would have been a short entry signal.

CRWD then broke sharply to a low of 91.60 as the orange fast MACD line stretched away from the slow blue MACD line and then crossed back up through it. That triggered an intraday cover signal, and CRWD simply sloshed back and forth for the rest of the day. This is an instructive example of how to use the 620-chart when stalking a stock into potential resistance at a Century Mark level.

 

 

I’ve discussed repeatedly that it is very difficult for me to pound the table on any idea. All I can do is analyze a stock with respect to its position within its chart pattern and what the various outcomes could be. From there, I can then discuss how to handle the stock based on how it plays out.

Zoom Video Communications (ZM) is an example, since it looked buyable along its 50-dma over the weekend. Now it is starting to slop around its 50-dma and has closed below the line two out of the past three days. Today it ran into resistance at the 50-dma on an intraday rally attempt off the lows.

This therefore puts it in short-sale mode right here, using the 50-dma as a guide for an upside stop. Conversely, if it can quickly regain the 50-dma, it would trigger as a moving-average undercut & rally set-up on the long side. How it resolves here will likely depend on what the general market does, so play it as it lies.

 

 

Roku (ROKU) has done pretty well since last Thursday’s buyable gap-up after earnings. That was a buyable set-up at that point and has produced a little better than 10% more upside since then. It is now dipping back to the downside and remains extended.

I’d like to see what this looks like if and when it ever meets up with its rising 10-dma and 20-dema, so keep an eye out for that. If a deep pullback like that occurred after a few days of market downside, and things in general became oversold, then if ROKU were sitting down along its 10-dma or 20-dema we could be looking at an opportunistic long entry.

Of course, we won’t know for sure until we see it, and in what sort of market context such a pullback, if at all, occurs. All I know for sure is that ROKU is extended in this position, hence certainly not buyable.

 

 

Ciena Corp. (CIEN) is another recently busted leading stock that was flopping along its 10-dma and 20-dema over the weekend. As I discussed in my weekend report, a breach of the 20-dema would trigger this as a short-sale target. However, the situation has complicated slightly on Thursday when the stock rallied back above the 20-dema, but then stalled to close below the line and above the 50-dma.

It then gapped through and well below the 50-dma today on light volume. I noticed several formerly leading stocks breaking support today on light volume, which may be an ominous development. If we get a buyer’s vacuum going in this market, we could see some of these stocks break hard from here if sellers begin to swarm these stocks. That said, I would view any rallies back up into the 50-dma by CIEN as lower-risk, short-sale entry opportunities.

 

 

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.

Most set-ups in this market tend to appear on the fly, as I noted in my last two reports. So be aware of how things might play out, because in this market you may have a rally one day that certain people want to believe is a follow-through day, and then a big, hairy sell-off the next. Given yesterday’s action, could one have predicted today’s action?

Probably not. So, if one is going to trade this market at all, then one must absolutely take a 360-degree approach and be ready to act in either direction, depending on the real-time evidence. Otherwise, long-only players should exercise extreme caution, and be ready to raise or increase cash levels as necessary.

If the market continues lower, then look for new waves of leading stocks to break down. I showed several examples in this report of what to look for. Stock teetering and tottering at support along their 10-dma, 20-dema, or 50-dma may be the next to break in any continued market correction, so look for these to provide a potential new wave of short-sale set-ups if you are the short-selling type.

With the Dow closing below its 200-dma for the first time since the recent highs, we may see the other Big-Three market indexes at least test their 200-dmas. Right now, I’m looking for more downside from here, but given the nutty news-orientation of that market, just about anything could happen. All we know for certain is that there is no uptrend and there is no “confirmed rally,” there is only a volatile mess that could get a lot messier.

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 SQQQ, 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.