The Gilmo Report

August 7, 2019

August 7, 2019

Over the weekend it appeared that with the big-three major market indexes all sitting at their 50-dmas, we might get at least a small bounce. That might have given short-sellers an opportunity to re-enter at better prices, but no such luck. The indexes gapped down Monday morning and streaked lower until the Dow reached its 200-dma.

The NASDAQ Composite Index today demonstrated the treacherous, volatile nature of this market by gapping down 130.85 points within the first twenty minutes of trade. It then rallied from there all day long to close up 29.56. Volume was higher, and the index may be set for a test of its 50-dma, where near-term resistance lies.

 

 

If there was any logic to today’s index action, it was that the Dow has now found support at its 200-dma two of the past three days. Today the index retraced almost all of a 589-poing drop to close down 22.45 on higher volume. As with the other major indexes, it’s now a matter of seeing whether it can get up to and then through resistance at the 50-dma.

 

 

While stocks have remained weak, even as futures start to price in more Fed rate cuts in September and October, precious metals have moved higher. The SPDR Gold Shares (GLD) is now at six-year highs, as we can see on the monthly chart below.

 

 

Silver has perhaps been more impressive than gold lately. The iShares Silver Trust (SLV) put on a nice show today by gapping to higher highs. As I’ve written in recent reports, my view has been that precious metals will go higher in an environment where central banks around the world are racing to zero when it comes to interest rate policy.

Despite the near-term performance of the white metal, the monthly chart of the SLV shows that it has barely started to move up and off its lows. Right now, silver is playing catch-up to gold, and if gold continues higher then so should silver.

 

 

As I’ve said repeatedly, this is not a market for investors. The main issue with trying to swing-trade this market, however, is that you are forced to do everything on the fly. Things shift very quickly in real-time and you are at all times subject to the vagaries of any news regarding the Fed, China trade or the latest Dollar-Yuan price-fixing.

One must trade with a high-degree of alertness and flexibility under very difficult conditions that can best be described as untradeable macro-risk, or not at all. In simple terms, it all comes down to the fact that one cannot trade, much less invest, in a market they cannot trust. For that reason, as I indicated in my weekend GVR, it is impossible for me to pound the table on anything.

Near-term I see very little to do other than implementing the idea of swing-trading based understanding how a particular stock is acting within its chart pattern and playing it as it lies, so to speak, for short-term gains. That means being ready to go long or short, depending on how it sets up with a time-frame that may be only intraday. That’s it.

The basic idea can be applied to Pinterest (PINS) as follows. PINS posted a buyable gap-up (BGU) move last Friday. It has since dipped below the 32.28 intraday low of the BGU price range, closing today at 32.10 as volume declined to about average.

In this position, one could look for a move back above 32.28 as an undercut & rally (U&R) move back up through the BGU low as a long set-up. That would most likely work in a continued market rebound from here. Otherwise, resistance at the 32.28 price point and a BGU failure could turn the stock into a short-sale target.

 

 

Another type of set-up can be seen in big-stock NASDAQ name Amazon.com (AMZN). It has been able to hold support at its 200-dma three days in a row after getting fairly oversold on Monday. This could lead to a tradeable bounce up toward the 10-dma, 20-dema, or 50-dma from here. Otherwise, a breach of the 200-dma could trigger this as a short.

 

 

Another type of set-up can be seen in the biggest of the big-stock NASDAQ names, Apple (AAPL). The stock was slammed through its 50-dma on Monday on heavy selling volume, but today recovered back above the 50-dma on above-average volume. It was previously a short-sale target once it had failed on last week’s BGU attempt.

Initially, this can be viewed as a moving-average undercut & rally long set-up using the 50-dma as a tight selling guide. If AAPL breaks back below the 50-dma, however, then it could return to its former status as a short-sale target. How it plays out will depend on what the general market does from here.

 

 

Even though I think Netflix (NFLX) may be headed a lot lower in the longer-term, it could be setting up here for a long trade. It closed today at 304.29, just below the prior 305.81 low in the pattern. If it rallies back above that low, then that would trigger the stock as a U&R long entry at that point, using the prior 305.81 low as a tight selling guide.

A rally that emanates from a U&R move down here might carry as far as the 10-dma at 320.42, where we might once again investigate the stock as a short-sale target once again. That all assumes that NFLX will even rally from today’s close, but I would maintain awareness of the potential set-up, especially if it occurs within the context of a continued NASDAQ rally up to the 50-dma.

 

 

Facebook (FB) is still living below its 50-dma. I would likely view any weak rally back up into the 50-dma as a potential short-sale entry opportunity. Also be aware of the 10-dma and 20-dema as they come down toward the 50-dma. If FB rallied past the 50-dma, then shortable resistance might be more relevant at the 10-dma or 20-dema.

 

 

Twitter (TWTR) has remained buyable on a test of the $40 price level. That is the intraday low of its prior post-earnings buyable gap-up (BGU) move and serves as a reference for near-term support. Note that TWTR also ran into support at the 20-dema yesterday and then closed back above the $40 price level.

The stock is slightly extended in this position, but I would watch for further pullbacks into support as potentially lower-risk entry opportunities. That said, a breach of the 20-dema would trigger TWTR as a short-sale target.

 

 

I would tend to favor social-networkers that are acting reasonably well like TWTR and Snap (SNAP). SNAP, however, has dropped below the 16.08 intraday low of its post-earnings BGU day and also the 20-dema. This triggers the stock as a short-sale here, using the 20-dema as a guide for a tight upside stop.

That said, if it can recover back above the 20-dema and the 16.08 BGU low, then that would trigger an MAU&R (moving average undercut & rally) and a U&R long entry, using 16.08 or the 20-dema as a selling guide. SNAP has come under additional selling pressure after announcing a $1.1 billion convertible bond offering yesterday.

The offering was priced today, but SNAP dropped further to the downside. It now lies in an area where we apply our 360-degree approach to the market and individual stocks. This of course applies to any stock I discuss in this report.

 

 

The simple idea of buying off the 50-dma when a stocks pulls into the line within the context of a market rebound off the lows (like today’s) also works. It certainly would have worked today with Atlassian (TEAM). If this was on your watch list today then you might have picked this off, unless you were fixated on the short side.

A 360-degree approach to the market does not fixate on any particular side of the market, except the right side at the right time. Watch for pullbacks like this in other leading stocks as lower-risk entries.

 

 

We might be seeing something similar in ZScaler (ZS), but with a little twist. Here we can see a shakeout through the 50-dma today, triggering a moving-average undercut & rally situation where the stock can be bought as close to possible to the line while using it as a tight selling guide.

That said, if ZS reversed and breaks back below the line, it would become a short-sale target at that point. In addition, a weak rally from here might push up into the 10-dma or 20-dema, and then roll over within the context of say, the market indexes running into resistance and reversing at their 50-dmas in the coming day(s).

 

 

Lyft (LYFT), not shown, has reported earnings after the close, and after a quick rally up to 68.30 in the after-hour session, it is back at the UNCH line at 60.28 bid as I write this afternoon. Not sure how this plays out tomorrow, but I’d keep an eye on it for something actionable in either direction. Remember also that Uber (UBER) is expected to report tomorrow after the close.

Anyone who bought the 3.25 million share secondary from Beyond Meat (BYND) that was priced at $160 a share last Thursday saw their instant profit evaporate today as the stock tested the 50-dma at 159.52. It held support at the line, however, and closed at 167. Buying along the 50-dma would have been quite opportunistic today, and one would have gotten away with a profit on the trade.

If BYND can hold here above the 50-dma, then it may be set for at least a rally up to the 20-dema at 180.44. I see this primarily as a short-term trading vehicle, as I do most stocks, since a weak rally into the 20-dema could set the stock up as a short-sale entry at that point. 360-degrees, please.

 

 

CrowdStrike (CRWD) is sitting right at its 20-dema with volume drying up to -71.8% below average. That puts the stock in a lower-risk entry position using the 20-dema as a tight selling guide. It 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.

 

 

Zoom Video Communications (ZM) rallied precisely into its 50-dma today, closing right at the line on weak volume. This can be viewed as a short-sale entry right here using the 50-dma as a guide for an upside stop. However, we might also consider that ZM closed at 92.45, just above the prior 92.10 intraday low in the pattern.

Objectively, that would trigger a U&R long entry using the 92.10 low as a tight selling guide. But if it is unable to move back above the 50-dma, then it would remain a short-sale target. Again, the 360-degree approach where we interpret the stock’s real-time action within the context of its overall chart set-up to determine where and in which direction the trade might lie.

 

 

Most chart patterns of stocks that were leading names a week or more ago, but which have since come apart, look like the chart of Ciena Corp. (CIEN). The stock triggered as a short last Friday when it breached the 20-dema, but unless you shorted it right there and held over the weekend you would not have participated in Monday’s big gap-down slash right through the 50-dma.

Over the past two days, the stock has posted a weak rally right up into the 50-dma, falling short of the line by a mere four cents. This would technically put it in play as a short-sale right here using the 50-dma as a guide for an upside stop. That said, if it can flip back up through the 50-dma, then you’ve got (you answered correctly!) an MAU&R long set-up.

 

 

After-hours I’m seeing Roku (ROKU) gapping up to its prior highs in the 110-price area after it reported earnings today after the close. As I write, the stock is above 110, so I’d watch for some sort of actionable gap-up move tomorrow at the open, whether that be a BGU (buyable gap up) or an SGU (shortable gap up).

ROKU has gapped up and run hard after its last two earnings reports, so it will be interesting to see if it can pull off a third gap-and-run type of move. If it can’t, then I’m certainly open to any possibility of a shortable gap-up (SGU) set-up. Just play it as it lies tomorrow.

 

 

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 indexes look like they may make a move up toward and closer to their 50-dmas after today’s higher-volume reversal off the lows. A lot of stocks have become quite oversold in the near-term, and the need to sell has become obvious.

I still lean toward the idea that we are in a very dangerous market, where instability reigns. Any number of news events could influence the market in either direction, including things like a sudden change of heart by the President regarding trade with China, a Fed interest rate cut, a further collapse in interest rates, etc.

Like I said, this market puts one in the position of having to figure things out on the fly and somewhat seat-of-the-pants. Is this a massive market shakeout, and we will soon see the indexes melt right up to new highs? If so, then create a watch list of your favorite stocks, mapping out on charts where they might go and what you will do in response, similar to what I’ve done with examples in this report. Doing this helps eliminate some of the emotion of reacting to market volatility.

At the same time, understanding where your long set-ups might show up can get you into one or two stocks in the event the market does melt right back up to the highs. On the other hand, if we see a failure on this current rally attempt, then also map out where short-sale points might occur in your watch list of favorite short-sale targets.

I find that from a practical standpoint, my lists of long and short targets overlap quite a bit. That is due to the fact that this is a 360-degree market, where most stocks have to be viewed as potential long or short ideas depending on how they play out and the rapidly changing context of what the general market is doing. The action in many leaders, acting as strong, long plays 2-3 weeks ago vs. how they’ve acted over the past week, bears this out.

For now, I see no other way to play this market, because the reality is that we are currently in a market correction of unknown magnitude. The 6-7% of downside we’ve already seen may be it, or just the start of something bigger. We have no way of knowing for sure, we can only look to put ourselves in position to get lucky by using a 360-degree approach and playing things as they lie. 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.