The Gilmo Report

August 25, 2019

August 24, 2019

The market ended the week with a big sell-off that sent the NASDAQ Composite peeling away from resistance along its 50-dma and back down toward the prior week’s lows. Volume was heavy across the board. The NASDAQ, which had been leading the other indexes by being the first and only index to reach its 50-dma, took the brunt of the selling with an even 3% decline.

 

 

Friday’s action also highlighted the impossibility of trading this market if one intends to leave their trading desk for even a minute. Friday morning, before the open, the futures were all up a healthy amount, and the market looked set for an upside day. At 5:00 a.m. Pacific, 8:00 Eastern, an hour-and-a-half before the opening bell, news came out that China was imposing additional tariffs on U.S. goods.

That set the market off on a big gap-down open with the Dow dropping nearly 180 points. At that point, around 7:00 a.m. Pacific, Fed Chair Jerome Powell spoke at the Fed’s Jackson Hole, Wyoming symposium, reiterating that the Fed stood ready to act “as appropriate.” That sent the market marching back the other way, and the Dow was up 68 points.

Just before 8:00 a.m. Pacific, President Trump tweeted that he was ordering all U.S. companies to leave China. The market immediately broke to the downside, spinning to an eventual loss of 623.34 Dow points. This is what it all looked like from the perspective of the NASDAQ 100 Futures on the five-minute 620-chart:

 

 

If there was ever a single day that so perfectly illustrated the mayhem that can engulf the market at any given time, even more than once in a day, Friday was it. And it is why this market remains one where investors looking for intermediate trends are better off in cash, while manic short-term traders can attempt to capitalize on the insane volatility.

Amid the trendless and manic volatility, precious metals made new highs on the combination of Powell’s dovish speech and Trump’s aggressive tweet. The SPDR Gold Shares (GLD) broke out on Friday to a new six-year high on strong volume. I noted the day before that I was looking for a spike in gold and silver prices in response to Powell’s speech at the Fed boondoggle.

What I didn’t expect was the additional help from the President’s tweet. Either way, precious metals remain in play on the upside. With central bankers around the world racing to zero as they all move in concert to lower interest rates in their respective sovereigns, the trend for gold and silver will remain intact. As I wrote on Wednesday, for now I don’t see what changes this equation.

 

 

The iShares Silver Trust (SLV) posted its highest close since January of 2018 on Friday and looks set to move higher. The weekly chart below shows that silver has lots of room to run as the poor man’s gold. With the gold-to-silver ratio now around 87-88, near its recent 27-year high of 93.44, one might expect silver to play catch-up to gold.

 

 

Apple (AAPL) was already looking a bit questionable per my comments in the Wednesday report as it was churning and stalling around its prior base-breakout level. That was a potentially shortable position, and the stock split wide open on Friday to close below its 50-dma.

Given the downside extension on Friday, I would not necessarily be looking to short the stock here just below the 50-dma. Technically, however, that is possible if one is willing to use the 50-dma as a guide for a tight upside stop. But there was a better way to play the break in AAPL.

 

 

We get a sense of the way to play Friday’s break in AAPL by first understanding that the group chart of big-stock NASDAQ names I’ve discussed in recent reports tells the story in broader terms. They all split wide open on Friday, not just AAPL.

AMZN closed below its 200-dma, GOOG was slammed into its 50-dma, and INTC slashed to lower lows in what is already a brutal downtrend. MSFT sliced through its 50-dma and triggered as a short at the line, NFLX broke further below the $300 price level, and NVDA was slammed back to its 50-dma.

 

 

Therefore, as I’ve discussed in recent reports, the easy way to play the broad, synchronous, and correlated declines in all these big-stock NASDAQ names was to simply take the 8:00 a.m. PDT long entry signal on the five-minute 620-chart of the ProShares UltraPro Short QQQ ETF (SQQQ). By now, members should be well-educated in how we use the SQQQ, or any other inverse index ETF, to probe for inflection points to the downside.

As I have discussed in my recent reports, and emphasized in Thursday’s video report, with the NASDAQ bumping into resistance at its 50-dma, we were in prime position to look for a downside inflection. And while it wasn’t all that evident early in the day Friday, the long entry signal was there for the taking.

We can see that the first MACD cross to the upside, a clear long entry signal, occurred around 5:00 a.m. Pacific when China announced its retaliatory tariffs. That led to a nice move to the upside, but the MACD crossed back to the downside within an hour, and the sell signal was confirmed when the six-period exponential moving average crossed below the 20-period line.

Just before 8:00 a.m. Pacific, however, we saw a MACD stretch & cross as the orange fast line slashed up through the blue slow line, triggering a long entry for the SQQQ. From there it was just a matter of buckling up for the ride as the SQQQ rallied about 10% higher from there, and 9.15% from the prior close.

Ultimately, going long the SQQQ was much better than shorting AAPL, which was down 4.84% on the day. As the ETF commercials on financial cable TV might put it, “Why short one big-stock NASDAQ name when you can short them all, and with 3x-leverage?”

 

 

The market took no prisoners on Friday with decliners overwhelming advancers 2584 to 497 on the NASDAQ exchange. Just about any chart you look at will show a very ugly, red price bar on heavy selling volume. Facebook (FB) fits that bill and was in fact shortable at the 10-dma on Friday before it broke to lower lows. It looks set for a test of the 200-dma.

 

 

The stock that we were keeping a close eye on Friday was Salesforce.com (CRM). I discussed the stock in detail in a blog post Thursday evening after the company had reported earnings and the stock was gapping up to about 158 in the after-hours that day. I followed the stock with real-time comments on Twitter and on the live Gilmo Blog page.

The stock started the day out as a possible buyable gap-up but recall that in my Thursday blog post I was slightly skeptical that the market would pay 55.6 times forward earnings of $2.84 in 2020. We followed the 620-chart all day and the final signal came on a MACD cross to the downside that flipped to the short side as it reversed to close near its lows and the 50-dma.

 

 

With CRM coming to rest Friday just above its 50-dma and 200-dma, it may bounce off the lines, setting up a potential short into the rally. Otherwise, a breach of the two moving averages would trigger a new short-sale entry using the moving averages as guides for an upside stop.

One member emailed me this past week asking me to discuss examples of how one handles a gap-up move to determine whether it’s a buyable gap-up or a shortable one. This member also correctly observed that the action in gap-up moves is often very volatile, particularly around the opening, and wondered how to handle this.

The answer, in a nutshell, is that one must try to interpret what’s going on in the 620-chart and within the context of the stock’s overall chart as well as the general market action at that time. Flexibility and a willingness to exit and enter more than once, in either direction or both on the same day, is critical as one feels out the stock’s action.

CRM is a very good example of 360-degree trading with respect to a BGU using the 620-chart. We can see that CRM opened in volatile fashion on Friday, immediately dipping to a low of 154.37 and then rallying within the first ten minutes of the trading day. It then pulled back over the next 15 minutes to retest the 154.37 low as it came down into the low 155 price level.

At that point the MACD lines crossed to the upside, signaling a long entry. The stock then rallied above 158 before faltering at the same time the market began to falter following the President’s tweet just before 8:00 a.m. Pacific time. At that point, the MACD lines crossed to the downside, triggering a sale of any long position taken on the original MACD long entry signal.

I blogged in real-time, before this bearish MACD signal occurred, that I would use a MACD cross to the downside as a stop for any long position taken on the first bullish MACD signal near the open. I did one better than that and flipped to the short side on the bearish MACD cross.

Twenty minutes later, the orange six-period moving average crossed below the 20-period line for a full-blown 620 sell signal, and CRM kept moving lower from there. Hopefully, anyone following my comments and tweets (where I used the code name “BlogStock” so non-members would not know what I was talking about) in real-time got a sense of how to handle these things in real-time.

The bottom line is that there is a great deal of uncertainty involved with determining whether a gap-up move is a BGU or an SGU. The only solution is to remain alert to the 620 signals and to be ready to “dance” with the stock and those signals in real-time. By the close, CRM worked out as a nicely-profitable shortable gap-up move, and we will see where it goes from here.

 

 

With everything busted after Friday’s brutal sell-off, there is very little left in a chart position where it would offer a lower-risk short-sale entry. You cannot chase weakness in this market any more than you can chase strength. However, I am hopeful that members were able to use a very concrete strategy with respect to CRM on Friday with the help of my real-time comments on Twitter and the live blog.

In addition, with the NASDAQ Composite and NASDAQ 100 Index sitting right below their 50-dmas, it was very possible for members to capitalize on the massive downside inflection that occurred on Friday as these indexes peeled away sharply from their 50-dmas. In that case, the SQQQ strategy on the second 620 long entry signal of the day was the ticket.

At this stage we would view any reaction rally on Monday as a potential new opportunity to come in again on the short side, but at the time of this writing we have no idea how the market will open on Monday. Perhaps the only thing we can be reasonably certain of is that this week’s action will be accompanied by a great deal of volatility as the U.S.-China trade war heats up.

Twitter (TWTR) closed two cents below its 20-dema on Friday on above-average selling volume. This was one of the less brutal sell-offs on the day, but the stock still has the potential to break for the 50-dma. Shorting it right here at Friday’s close leaves only two cents on the upside to the 20-dema, so I’d watch for any short rally back above the line that fails as a short-sale entry.

 

 

Snap (SNAP) closed a nickel below its 50-dma on Friday, but volume was light. An alert short-seller might have hit the stock short near the 20-dema on Friday. In this position, the situation is like TWTR but at the 50-dma instead of the 20-dema. One could theoretically short SNAP here using the 50-dma as a guide for a tight upside stop, or one could look for a rally back up through the 50-dma and closer to the 20-dema as a more opportunistic entry.

 

 

Advanced Micro Devices (AMD) posted a moving-average undercut & rally (MAU&R) long set-up on Wednesday, as I discussed in my report of that day. But I also noted that, “This is a 360-degree set-up, however, since any reversal back through the 50-dma might trigger the stock as a short-sale entry at that point.”

It took two days for that concept to gain traction, and the President’s tweet on Friday morning sealed the deal. Once AMD breached the 50-dma, it triggered as a short-sale entry at that point and broke lower on heavy selling volume. Rallies back up into the 50-dma can now be watched as potentially lower-risk short entry opportunities.

 

 

Applied Materials (AMAT) triggered as a short on Friday as well when it breached its 20-dema and 50-dma on above-average selling volume. The 50-dma now serves as upside resistance on any weak rally from here, and therefore a potential short-sale entry point using the line as a guide for an upside stop.

 

 

I find that stocks near their highs tend to produce the sharpest downside breaks when the market rolls over. Witness the break in AAPL on Friday, for example. In this vein, I also favor short-sale set-ups along Century Marks. CrowdStrike (CRWD) spent the first three days of the past week bumping into and failing at the $100 Century Mark before breaking down on Thursday and Friday.

If one did not short the stock earlier in the week near the $100 price level, one could have acted on subsequent breaches of the 10-dma and 20-dema on Thursday and Friday. Each time, CRWD moved lower. Now I’d watch for any weak rally into the 20-dema as a potential short-sale entry opportunity.

It may simply continue lower to the 50-dma this week, at which point a logical reaction bounce might ensue. This would also coincide with a possible U&R at the early-August lows along the 20-dema. Short-term traders should be aware of how this may play out at this stage since it could provide both short and long opportunities on a short-term basis. 360-degrees please.

 

 

Pinterest (PINS) has failed on two separate new-high breakout attempts and illustrates why I am more likely to try and short breakouts than buy them. Both breakout attempts produced short-term swing-trades on the short side once the stocks cleared to new highs. Each trade produced roughly 10% moves back to the downside.

PINS pulled into its 10-dma on Friday and held support at the line as volume declined. It’s not clear to me that this will attempt to break out again, but I think it’s worth watching for a possible break below the 10-dma if the general market continues lower. That would trigger a short-sale entry at that point, and then I would look for a subsequent breach of the 20-dema as confirmation.

The other possibility is that it holds the 10-dma and tries to break out again. I tend to think that is the lower-probability outcome, but with the stock holding support at the 10-dma a reaction move back up toward the prior breakout point might occur. That in turn could provide a shortable move, but we’ll have to see how this plays out in the coming week before jumping to any firm conclusions.

 

 

I’ve wanted to short Zoom Video Communications (ZM) every time it runs up into the 50-dma, but I have not been able to borrow the stock. I have, however, been able to borrow CRWD and PINS, but would certainly welcome the ability to borrow ZM as well.

In its current chart position, ZM continues to run into resistance at the 50-dma but remains trapped within a slightly more than two-week price range. It broke to the lows of this price range on Friday, and any further rallies up into the 50-dma can be viewed as lower-risk short-sale entries for anyone who is able to borrow the stock.

Unless and until ZM can decisively clear the 50-dma on the upside, this remains a bear flag within the context of any further market decline. It has already worked as a short-sale near the $100 Century Mark in late June and again in late July, as I’ve discussed in previous reports.

 

 

Sometimes one can use the Century Mark Rule for the short side when searching for shorts in a market with potential to correct further. CRWD, ZM, even Beyond Meat (BYND), have all been shorts around Century Mark price levels. But they are not always recent IPOs.

Look at something like Shake Shack (SHAK), which has been on a tear since breaking out after earnings in early August. This may be due to a short squeeze. As of the end of July, SHAK had 13.4% of the float sold short, or 3.99 million shares vs. a float of 29.3 million shares.

SHAK finally kissed the $100 Century Mark on Friday and reversed, so I’m looking at this as a possible Century Mark short-sale at 100, which keeps things very concrete. At the same time, the $100 price level serves as a guide for a tight upside stop. If it breaks down from here, then look for an eventual breach of the 10-dma as confirmation.

 

 

Another interesting aspect about SHAK’s longer-term position can be seen in its monthly chart, below. It came public back in early 2015 and had a big upside run that topped out on the approach to $100. It then broke to the downside for the rest of the year, and then spent the next two years going sideways along its lows.

It finally came back to life in early 2018, but that move finally ended and SHAK spent the rest of the year descending back to its prior lows. In 2019, the stock has had a sharp upside move that is again approaching the $100 Century Mark.

Is this long-term resistance? We shall see, but the bottom line is that the stock can be treated in a very specific, concrete manner based on the parameters of Livermore’s Century Mark Rules for both the long and short sides as it approaches the Century Mark once again.

 

 

I have liked Atlassian (TEAM) as a potential long idea IF the market had continued to rally off last week’s lows, but that went out the window on Friday. Now, in 360-degree style, the stock can be viewed as a possible short right here using the 20-dema as a guide for an upside stop.

TEAM closed Friday just six cents below the 20-dema, so the 10-dma could at 142.37 be used as a slightly wider, but still very tight guide for an upside stop. The reality is that if the general market continues lower, you’re likely to see a lot of stocks that have been holding up near their highs or around recent breakout and re-breakout points (think AAPL) start to bust.

TEAM is one example, but if you review my long watch list posted in the Premium Member section of the website you will find at least several more in similar positions.

 

 

Avalara (AVLR) can be viewed in similar fashion. I view this as buyable along the 20-dema in any continued market rally, but at the same time a breach of the 20-dema would trigger this as a short-sale. I’ll cover more of these types of situations in this weekend’s video report. Play it as it lies.

 

 

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.

Friday’s sell-off was brutal, and somewhat capricious given that the market was once again taken down by a mere tweet from the President of the United States. Market-moving tweets are a new but significant aspect of what drives this current market environment.

Presidential tweets are also a major factor among an overall mix of market influences that make this an impossible environment for investors, and a difficult one even for the best of short-term traders. And while Friday’s action was quite ugly, another tweet from the President that contradicts Friday’s tweets can quickly send the market flying back to the upside.

At some point, the market will call the Trump Administration’s perpetual baloney for what it is. For now, however, we remain in the soup, and the question now is whether the gloves are finally off for good in the U.S.-China trade war. In that case, the global economy will likely tank, the Fed will likely scramble to lower rates and invoke another round of QE, and precious metals will likely continue to trend higher. 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.