The Gilmo Report

August 4, 2019

August 3, 2019

The market action this past week reinforced my general view of the current investing and trading environment. As I’ve said repeatedly, this remains a dangerous, volatile, and highly news-influenced market that can pull the rug out on investors in an instant. It can also suddenly reverse off its lows and rip the heads off of late short-sellers.

In addition, what the market does one day may not necessarily indicate what it will do the next. All of this is why we never chase strength on the upside or weakness on the downside. At the same time, I advise swing-traders to maintain an opportunistic, 360-degree trading posture. Intermediate-trend followers need not apply.

Again, the market has proven the utility of my approach. After Wednesday’s post-Fed sell-off, the market was rallying happily on Thursday when President Trump tweeted about moving forward with additional tariffs on China. That sent the NASDAQ Composite Index, which was up as much as 135.62 points, skidding 230.52 points to the downside before bouncing to close down -63.04 on the day.

The indexes gapped down again today, with the NASDAQ closing down -107.05 points, or -1.32% on heavy volume. The index managed to close about a 1/3rd of the way up from its lows and held support at the 50-dma. A reaction rally from here would be logical but is not a given.

 

 

The weekly tally for the NASDAQ is five straight down days, two of which were big-volume reversals off the highs. Overall, the action is quite obviously very bearish, and many leading stocks were slaughtered in the process. Semiconductors and techs took the brunt of the selling, but the prospect of tariffs on consumer goods like clothing also sent retailers spinning to the downside.

I blogged on Thursday that the market likely knows something the Fed doesn’t, which is that the Fed will be lowering rates more than it let on in the Wednesday policy announcement. Fed Chair Powell intimated during his press conference that the 25-basis point rate cut was nothing more than a “mid-cycle adjustment.” That is what set off the sell-off on Wednesday.

On Thursday morning, stocks seemed to have figured this out, and the market was rallying until the trade war issue reared its ugly head once again. Precious metals, which had sold off on Wednesday, recovered with stocks on Thursday morning. The two decoupled following the President’s tweet, with stocks splitting wide open, but gold and silver rallying.

I wrote in Wednesday’s report, I would take an opportunistic approach with precious metals, looking to buy into pullbacks to logical support or some other entry along the lows. While one had to be alert to it at the time, on Thursday the SPDR Gold Shares (GLD) undercut the prior low in its pattern of last week and rallied back through it, setting up an undercut & rally (U&R) long entry at that point.

That U&R long entry turned into a very large-volume pocket pivot coming up through the 10-dma and 20-dema. The U&R would have worked nicely as a long entry for the GLD for those interested in taking a position in gold, end of story. In this position, I’d look for any pullback to the 10-dma as a lower-risk entry, but the most opportunistic entry occurred on Thursday.

 

 

If one was also watching silver and the iShares Silver Trust (SLV), one would have noted that the low and U&R in gold also occurred as the SLV was finding support at the 20-dema. Both precious metals ETFs confirmed each other’s price/volume action. It is often useful to monitor both ETFs in real-time, since the action of one can often serve as a clue for the action in the other.

We can see how support at the 20-dema for the SLV correlated to a U&R low in the GLD on Thursday. Thus, the confirming correlation, but in different ways. GLD posted a U&R, but SLV found support at its 20-dema. Those looking to buy either could have taken their cue from this. I continue to view the outlook for precious metals as very bullish and buying on weakness remains the recipe for anyone looking to take a position in the metals.

 

 

As I wrote last week, the line-up of pundits claiming that the action of the semiconductors was a sign that all was well with the market at that time were missing the point. The fact is that the semis led the market higher for nearly the past two months. Those who like to read from the Book of Stock Market Bromides without thinking through the current market environment were citing this as a market positive. Yet the semis were ready to top. And so, they did.

While Thursday’s China tariff tweet from the President tanked semis and the market, we can see that from a purely technical vantage point, the rally that day into the 10-dma brought the Vaneck Vectors Semiconductor ETF (SMH) into a shortable position at the 10-dma. Interesting how that works, and anyone wary of the Thursday rally might have tested that proposition by shorting big-stock semis like Micron Technology (MU) or Applied Materials (AMAT), for example.

 

 

Here’s the daily chart of Applied Materials (AMAT), which reversed at the 10-dma on Thursday. The move ended up as a big, ugly outside reversal to the downside on above-average volume, and AMAT ended the week below its 20-dema. Again, the technical evidence was there to short the stock before the break, and if one reacted quickly to the President’s tweet, one could have picked this off.

Of course, this requires a very alert 360-degree posture, so it’s not clear to me that most short-sellers would have been able to execute this trade in real-time. It’s perhaps more a matter of accepting the reality of this market, which is that sudden directional changes can occur at any time. Therefore, one must always have a plan for such reversals.

 

 

The Vaneck Vectors Retail ETF (RTH) shows the carnage in the retail area. This chart looks different from the chart of the SPDR S&P Retail ETF (XRT) primarily because it has a 20% weighting in Amazon.com (AMZN) vs. the XRT’s 1.3% weighting. The RTH ran into ready resistance along its 10-dma and 20-dema on Friday before breaking to the downside in a big outside reversal to the downside.

 

 

This coincided with similar action in its largest component, Amazon.com (AMZN). In this case, however, AMZN ran into resistance at its 50-dma for the second day in a row and turned back to the downside. It then moved lower the following day. Again, note how the technical action in AMZN’s chart indicated that the stock could be shorted at the 10-dma on Thursday.

This led to further downside on Friday as volume picked up even more. My point with all of this is that while Thursday’s reversal came as a result of President Trump’s tweet, the interesting coincidence is that the technical action in the charts of many stocks was showing a shortable set-up.

 

 

Of course, one could have taken the route of stalking Apple (AAPL) on the short side Thursday as well. As I wrote on Wednesday, “Don’t be surprised, however, if AAPL fails on this latest BGU attempt after earnings, just like it did the last time around on May 1st.” Lo and behold, that is what happened on Thursday, and it was an actionable short the second it broke below the 211.30 intraday low of Wednesday’s buyable gap-up (BGU) intraday low.

You will note, of course, that AAPL was one of those “leading stock breaking out” situations that again failed. The stock closed below its 20-dema on Friday on heavy volume. It could be viewed as shortable here using the 20-dema as a guide for an upside stop, but the more opportunistic approach might dictate waiting for a rally up to the 10-dma.

 

 

Netflix (NFLX) was a short on Monday when it ran into resistance at the 200-dma, and it spent the entire week moving lower. The Fed, the Tweet, and anything else influencing the market were not factors in its reversal back to the downside. From here the stock is extended to the downside, pending the next lower-risk short-sale entry showing up in the chart.

What is clear is that NFLX knew the market was weak even before the market did and was already falling away from the 200-dma before the major news events toward the end of the week. I believe the stock can fall a lot further, perhaps even eventually testing its 231.28 low of last December.

 

 

Tesla (TSLA) played out in line with my discussion on Wednesday as it ran into resistance at the 10-dma on Thursday and headed lower from there. Again, the technical evidence was already there for a short-sale entry before the President’s tweet. Rallies into the 20-dema from here may offer lower-risk short-sale entries, so can be watched for.

 

 

Of course, you can always skip trying to short AMZN, AAPL, NFLX, TSLA, and other big-stock NASDAQ names, including many big-stock semiconductors, by using the ProShares UltraPro Short QQQ ETF (SQQQ) instead. To paraphrase that old ETF commercial, “Why short just one NASDAQ 100 stock when you can short them all?” I always keep a close eye on the SQQQ’s five-minute 620-chart as a clue to potential changes in market direction on an intraday basis.

On Thursday, I was in fact going with the flow, long stocks that were rallying like MU, TWTR, WORK, and SNAP, for example. As I was watching the SQQQ 620-chart, I noticed a MACD cross occur just after 8:00 a.m. PDT my time here on the West Coast. The SQQQ made a slightly lower low, then rallied back up to 31. I took a position at 30.95 when I noticed it was hanging very tight sideways as intraday volume was drying up.

I have often referred to the idea of putting yourself in the position to get lucky, and in this case that is precisely what I did, although I didn’t know it at the time. I watched the SQQQ bounce above 31, then back below, then back above, and then suddenly it launched. As I’ve said many times before, I use the SQQQ to probe for and play possible downside inflections in the general market when it is running into trouble along its highs.

 

 

Thursday was an almost too-perfect example of how this works when it works very well. The SQQQ opened to the upside on Friday and rallied above the $35 level before backing down to close at 34.78. With the NASDAQ 100 Index holding support at its 50-dma on Friday like the NASDAQ Composite, I am out of the SQQQ and now looking for a bounce in the index that might provide another entry in the SQQQ this coming week.

Facebook (FB) is another big-stock NASDAQ name that was setting up as a possible short into Thursday’s morning rally. It has run into resistance along the confluence of the 10-dma and 20-dema the day before and pulled the same maneuver on Thursday. I wrote on Wednesday that FB is “a 360-degree situation, where any rallies back up toward the 20-dema could bring the stock into shortable range.”

FB closed Friday below the 50-dma, which theoretically could be viewed as a new short-sale trigger. With the stock down 10% from last week’s highs near $210, it may have the potential to rally back above the line, but one could simply guard against this by using the 50-dma as an upside stop. The best entry came on Thursday at the 10-dma.

 

 

FB’s smaller cousins are acting considerably better than it is. Twitter (TWTR) has continued to trend higher, despite the Thursday reversal off the highs, and posted a higher closing high Friday on above-average volume. This is one of the stronger names out there, and if the market stabilizes, I think it will go higher.

That said, pullbacks closer to the 10-dma at 40.36 would offer lower-risk entries. Buyers, however, have been persistent, and the stock may continue rallying if we see the indexes bounce off their 50-dmas in the coming days.

 

 

Snap (SNAP) is also holding up following last week’s buyable gap-up (BGU) after earnings. Overall, however, the BGU hasn’t resulted in any significant upside thrust, but pullbacks to the 10-dma would still offer lower-risk entries. The stock found support at the 10-dma on Friday as volume declined and did not seem to attract a lot of selling early in the day as the indexes were being pelted.

 

 

Atlassian (TEAM) has already reported earnings, and it is one of the few cloud software names that hasn’t sold off and broken near-term support over the past week. Instead, it has found support along its 10-dma and 20-dema and has been buyable along the lines. If the market can stage a reasonable reaction rally to start the week off, this is one of my better ideas on the long side.

That said, any breach of the 20-dma would trigger this as a possible short-sale target at that point. I wrote on Wednesday that continued market downside could see stocks that have currently been holding near-term support start to break that support, and TEAM remains a 360-degree situation in that regard. Play it as it lies.

 

 

The IPOs I’ve been following in recent reports have been something of a mixed bag. Most have been coming under pressure with the market. Beyond Meat (BYND) looked like a short along the $200 Century Mark as I wrote on Wednesday, but unless one shorted the stock on that day one would not have been in position to participate in Thursday’s gap-down break.

BYND priced a 3.25 million share secondary at $160 a share Thursday morning, which was responsible for the gap-down. Pricing a secondary 20% below the prior day’s closing price struck me as a sign of weak demand for the offering, but the stock opened at 175.14. You might notice that it is finding support along the area of price congestion that defines most of the prior base.

This illustrates a key point about buy points. The area of price congestion provides much better support than the prior 201.88 “buy point” that is sticking straight up in the air on the left side of the chart. For that reason, I would prefer to buy a pullback into the top of this area of price congestion rather than chase the stock through a new-high buy point like this one.

The other dynamic that is key here is that the sharp upside move three days before earnings could have been played simply by treating the stock as a Jesse Livermore Century Mark Rule situation. As Livermore said in Reminiscences of a Stock Operator, moves through a century mark would often result in a stock being up 20-30 points “in a jiffy.” That was back in his day in the earlier 1900’s and today Century Mark buy set-ups tend not to produce such strong immediate results.

BYND, however, did, and a smart trader would have simply sold the stock into the move ahead of earnings. But in my view, thinking that the prior 201.88 high was some magical buy point in anticipation of an intermediate-trend move that you simply sit through until you are stopped out if the stock drops 7-8% below your buy point is naïve at best.

In this market, one must think outside the old boxes, because they simply do not work as well as they used to. With BYND sitting right here on top of the prior area of price congestion, it could offer a lower-risk long entry here in anticipation of a possible trade back to the upside during any market bounce. Play it as it lies.

 

 

CrowdStrike (CRWD) found support along the 10-dma during the first four days of this past trading week, but on Friday finally closed below the line. This looks like it may test the 20-dema, and I might be interested in an opportunistic long entry depending on what it looks like if and when it gets there.

 

 

Pinterest (PINS) reported earnings Thursday after the close and gapped up on Friday in a buyable gap-up (BGU) move. It printed 32.53 at the open, immediately set a low at 32.28, and then launched as high as 35.21 before descending back to its opening price by mid-day. It ended the day at 33.57 in a mixed showing. No doubt, the stock ran into clear resistance at the late April peak.

Some might try to tell you that this peak at 35.29 is a “proper buy point” but I would tell you to ignore such nonsense. In this position, the correct buy point is anywhere close to the 32.28 intraday low of Friday’s price range, using that same low as a selling guide based on BGU rules.

One might also notice that the stock posted an undercut & rally long entry set-up two weeks ago along the lows of its base. This would be considered a proper OWL entry point, and one theoretically could have bought this and then had a little cushion with which to sit through earnings. I’m not so sure the cushion would have been enough, however, to entice me to hold through earnings.

 

 

Zoom Video Communications (ZM) failed at the $100 Century Mark on Monday, as I noted in my Wednesday report. It is now testing its 50-dma as volume dries up sharply. In fact, volume on Friday was the lowest volume seen on any trading day since the stock began trading as an IPO in late April.

This brings the stock in a potentially lower-risk long entry position here with the idea of cutting bait if the stock breaks the 50-dma. At the same time, ZM could turn into a short-sale target on any such break of the 50-dma. The action on Friday looked constructive as sellers didn’t swarm the stock early in the day, so we’ll see how this plays out this week.

 

 

Lyft (LYFT) and Uber (UBER) report earnings this week. Both stocks are breaking down and may be near-term oversold, but one could have said that two days ago. With earnings coming up, it may very well turn out that any rallies after earnings in either of these would present a short-sale opportunity.

I had already discussed in earlier reports that UBER could be treated as a short-sale target on any breach of the 20-dema. But it took a breach of the 50-dma to confirm the stock as a short-sale on Tuesday, and it kept on declining from there. We’ll see if anything actionable transpires after earnings, which are expected on Thursday.

 

 

I wrote on Wednesday that a breach of the 10-dma and 20-dema in Ciena Corp. (CIEN) could trigger the stock as a short-sale at that point. That’s what it did on Friday as it opened at the line and then continued lower from there. It is now testing the 50-dma, which could trigger a bounce off the line.

Whether that turns into an opportunistic long entry, or whether any bounce off the line merely sets it up as a short-sale closer to the 20-dema remains to be seen. You might also notice that CIEN cleared one of these mythical new-high “proper” buy points on Monday and failed very quickly from there.

The last proper buy point, in my view, occurred along the 20-dema two weeks ago. Had one purchased shares there, one would likely not be suffering losses at this point. Chasing the new-high breakout, however, with the idea that this was a proper buy point pretty much ensured that one would now be stopped out with a fast 7-8% loss.

 

 

ZScaler (ZS) was one to watch for as a shortable breach of the 20-dema. That breach occurred on Friday as the stock opened just above the line and then quickly dropped through it. It recovered, however, to close back at the line. At the same time, notice that it undercut and rallied back above a couple of recent lows in the pattern.

This is instructive since it demonstrates that not every breach of the 20-dema by a leading stock will result in a big, sustained dive to the downside. If one shorted the stock as it broke the 20-dema, one could have played it for a quick short scalp at the point where the indexes were finding support at their 50-dmas earlier in the day.

That’s one way to handle it. Also, using the five-minute 620-chart as a guide would have prevented any losses as the stock rallied off the lows. In this manner, the stock would have been a matter of nothing ventured, nothing gained. I would continue, however, to watch for any further breaches of the 20-dema as potential short-sale triggers going forward within the context of further market weakness.

 

 

CyberArk Software (CYBR) offers another example of how new-high breakouts tend to fare in this market. The stock’s breakout in the first half of July was good for a another 10-11% past the new-high “buy point” at 138.72. If one bought that breakout, one has now seen a small profit disappear, and the stock is now trying to hold support at its 50-dma.

CYBR started getting into trouble Monday when it broke sharply off its peak on heavy selling volume. It then ran into resistance along its 10-dma over the next three days before breaking below the 20-dema on Friday. This is on the verge of a complete late-stage breakout failure, although for now the stock has already failed on the July breakout attempt.

From here, it could bounce off the 50-dma, providing a lower-risk long entry that may be good for a swing-trade. For now, the 20-dema can be viewed as upside resistance, however, such that rallies back up into the line might offer lower-risk short-sale entries. How this plays out will likely depend on what the general market does going forward. A breach of the 50-dma, however, triggers this as a late-stage failed-base (LSFB) short-sale set-up.

 

 

If one is looking to get long this market, then the only practical set-ups to watch for would be pullbacks to support or undercut & rally set-ups. On the other hand, we could be on the verge of a deeper correction. Therefore, keeping risk to a minimum if one elects to venture on the long side is critical. Buying breakouts and then using a 7-8% stop is not advisable since it is not consistent with my opportunistic, 360-degree approach to this market.

I’ll discuss more breakdowns in leading stocks in this weekend’s Gilmo Video Report (GVR) and cover the mechanics of how these might play out as more intermediate-term short-sale targets. As well, I’ll discuss how breakdowns in leading stocks might also set-up as OWL-style Ugly Duckling set-ups.

If the Fed is put in a position of initiating another round of QE, then I am open to any possibility that this would trigger a cash-is-trash move into stocks. But this is unclear. We are in uncharted territory in so many ways, so that the traditional linkages and catalysts may not work as they have in the past. Last week, when the European Central Bank announced that they are ready to lower rates again, European stocks sold off, which may indicate that there are limitations to the effects of QE going forward.

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’m not sure whether it was prescient or not when I closed my Wednesday report with, “The one thing we know for certain about this market is that you can never truly tell what it will do one day based on what it did the day before.” After Thursday’s ugly reversal, we might add a corollary to that, which is that you can never tell what the market will do in the second half of the trading day based on what it was doing during the first half.

However, I don’t think anyone should be surprised. We’ve known for quite some time that this market is wildly capricious and prone to sudden moves and reversals based on the latest news, fake-news, Fed comments, or the President’s most recent tweets. Sometimes it takes even less than that. And the only way to limit risk in such an environment is to take an opportunistic approach by buying near support and then using that as your selling guide.

Case in point: on Friday morning, when the NASDAQ 100 futures were down over 70 points pre-open, we saw them suddenly rally off their pre-open lows on a report that a “senior” Trump official told CNBC that the President was open to delaying tariffs if China takes positive action. That move took the NASDAQ 100 futures from deep in the red at 7724.50 to almost unchanged at 7804 in 20 minutes, and no more.

By the time the opening bell rang, the “news” had worn off and the futures were back around their prior pre-open lows. The point here should be starkly obvious. Random news, comments, tweets, etc. can get the market moving suddenly and sharply on a moment’s notice, even if only for a short period of time, and the moves can be BIG.

This just confirms that we are in a very difficult and at times impossible market to deal with. For now, at least, I don’t see it getting any easier. In the meantime, I’m happy to take what the market is giving, which is a lot of volatility-induced swing-trading opportunities. 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 a position in TWTR, 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.