The Gilmo Report

December 12, 2018

December 12, 2018

Insane volatility and price velocity remain the order of the day, combined with overnight futures jacks and futures declines. To get some sense of how crazy things are, leading up to today the Dow Jones Industrials Index posted end-to-end intraday swings, starting with yesterday’s move and going backwards, of 570.2, 613.44, 810.84, 708.79, and 765.01 points.

The net result has been a sharp, rapid drop from last week’s highs when the index cleared the 50-dma. This led to an undercut of the prior October and November lows by the NYSE-based indexes that created a short-term low on the undercut & rally move. Yesterday, a rally early in the day was sold into, and it appears that these big, news-triggered gap-up rallies are in general being sold into.

This morning, the market again gapped higher, thanks to overnight reports that the Chinese would lower auto tariffs on American exports and buy more soybeans. Just before the open, the Wall Street Journal reported that China was looking to make it easier for foreign companies to do business in China, citing unnamed sources that were described as “people briefed on the matter.”

Frankly, the news struck me as the usual promises and allusions that don’t really represent anything in the overall scheme of a comprehensive U.S. China trade agreement. But the market took it more to heart than I did, with the Dow rocketing some 458 points higher before losing traction late in the day to close up a mere 157.03 on higher volume. Another rally was sold into, and the indexes still look like they want to break lower following Monday’s logical U&R move.

 

GR121218-$INDU

 

The S&P 500 Index posting an undercut & rally move back up through its prior October and November lows on Monday, triggering a stalling rally that, like the Dow has been sold into over the past two days on higher volume. The S&P gave up most of a 48.66-point gain at today’s highs, closing up 14.29 points.

 

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The NASDAQ Composite Index did not undercut its prior October and November lows on Monday but rallied nevertheless by taking its cue from the U&R move posted by the S&P 500 and the Dow. As with the other two major indexes, the NASDAQ’s rallies yesterday and today were sold into, with today’s posting higher volume on a sharp, stalling, reversal day.

 

GR121218-$COMPQ

 

In last night’s video report, the market looked like it was ready to break out to the downside today. But, as I noted at the close of that report, you can never know for certain, or even with a solid probability, what the market is going to do on a day-to-day basis. Some little news item, or a tweet from the President, or a comment from a Fed head or Administration member can turn the market on a dime. We’ve seen that happen many times since the October peak.

And that’s what we saw today. But as I also noted in last night’s GVR, the fact that rallies are getting sold into on these big gap-up news moves looks bearish to me. While the indexes may flop around here going into the Christmas holiday, it still seems to me that we are headed for lower lows. This may be resolved sooner, or it may be resolved later. The action today argues for a sooner resolution, but that’s what I thought yesterday.

The only way to navigate such a rapidly shifting environment is to focus on a small list of stocks, long or short. Sometimes my watch list is a two-way watch list, where I will play stocks long or short depending on the short-term set-up. Often, the trades in either direction do not last very long, and many are simply day-trades. The market environment for trend-followers has become that treacherous, and buying breakouts is hazardous to one’s investment health.

That of course doesn’t mean one can’t act on this basis if a set-up presents itself. For example, the first member of my FTD Four, Twilio (TWLO), broke out today on strong volume. Well, let’s say it was breaking out earlier today before it finally failed on the breakout on heavy volume. So, one who buys breakouts could have bought this, but they would have been met with instant rejection.

Such are the hazards of buying breakouts. This failure could potentially signal a top for TWLO, so I am certainly open to that. Meanwhile, there is no breakout to buy, and the last place one could have even entertained buying the stock, at least from my perspective, was along the 20-dema on Monday. Otherwise, I’d be on the lookout for a confirmed, late-stage, breakout failure which would trigger if we see the stock bust the 20-dema on volume in the coming days.

 

GR121218-TWLO

 

Tableau Software (DATA) is another re-breakout situation after moving to new highs in early December before rolling back to test its 10-dma last week. As with TWLO, I wrote over the weekend that, “The prognosis for DATA is the same as for TWLO, or any of the other FTD Four stocks. If they breach the 20-dema then they trigger as short-sale targets at that point. If they hold support at the 10-dma or 20-dema they could simply be tradeable pullbacks.”

It’s that simple, and that complex, because on a day-to-day basis you never know what these things are going to do. And when the Dow is swinging around an average of 600 points a day, the process is even further complicated, especially from a psychological point of view. It’s hard to step into the path of an oncoming train, but that train has been known to stop on a dime and reverse course in less time than one can get a cup of coffee!

Nevertheless, after three breakout attempts, the last two re-breakouts, DATA has marched into new-high price territory on light volume. In my view, this looks like a shortable move based on the LSA-method, looking for a possible late-stage breakout failure. In this position, I would view a breach of the 10-dma on volume as an initial trigger for such a failure, with the 20-dema serving as confirmation should it breach that line.

 

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Etsy (ETSY) posted an all-time closing high today, but while volume increased vs. the prior day, it was still well below average. This comes after one failure breakout and one re-breakout that occurred in late November. The low-volume move to new highs strikes me as suspicious, and I would look for this to potentially fail.

As with DATA, the initial trigger would be the 10-dma, while a clean breach of the 20-dema would confirm ETSY as a late-stage breakout failure. To some extent I am sticking my neck out here since more orthodox players might view these as “leading stocks.” But given the current market situation, as I discussed over the weekend, a break to lower lows by the general market could cause all the FTD Four to fail, ETSY among them.

 

GR121218-ETSY

 

Planet Fitness (PLNT) has had three breakouts to nowhere from an arguably late-stage base. Last Friday it confirmed a potential late-stage failed-base short-sale set-up when it broke the 20-dma on higher volume. It has since tracked back to the upside with the general market over the past three days before running into resistance and stalling at the 10-dma.

If the general market heads lower, I would look for PLNT to break back below the 20-dema. For that reason, I view it as shortable here using the 10-dma or today’s intraday high as a guide for an upside stop. With three prior breakouts now having failed, this looks like the proverbial “three-and-out” to me.

 

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Canada Goose Holdings (GOOS) might be considered a model stock for what I’m looking for in the FTD Four with respect to potentially shortable late-stage breakout failures.  The stock triggered as a late-stage breakout failure when it busted the 20-dema on volume last Thursday and has since moved lower. Over the past three days it has tried to stabilize along the 50-dma, and despite some heavy-volume churning today it managed to close just above the line.

Yesterday there was a news item that Chinese consumers of GOOS’ jackets were planning on boycotting the company after the arrest of the CFO of Huawei in Vancouver, Canada, two Saturdays ago. Some cited this as the reason for the stock’s weakness, but it had already failed through the 20-dema before that news hit. Therefore, I don’t consider that news to be relevant.

In this position, however, the most optimal short-sale entry would occur on any rally up into the 20-dema. One could also take the approach of looking for a break back below the 50-dma as a new short-sale trigger if the stock is unable to even manage a rally back up to the 20-dema.

 

GR121218-GOOS

 

There has been a steady parade of financial cable TV pundits and talking heads declaring a bottom for Apple (AAPL), but so far the stock doesn’t seem to be buying it. A small undercut & rally move back up through its prior late-November low has not held, and the stock reversed to close near its lows today on weak volume. Thus, it appears that even the buyers aren’t buying the AAPL-has-bottomed theory.

 

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If the market breaks to lower lows, then my guess is that so will Tesla (TSLA). The stock is hovering near its recent highs, which isn’t too far away from its all-time high of 387.46, achieved on that fateful day when CEO Elon Musk tweeted about taking the company private at $420 with “funding secured.” That, of course, turned out to be a big lie, if not an expensive one given the $20 million settlement Musk was forced to pay.

The recent move to higher highs has been accompanied by tepid buying interest, as in light volume. Thus, this remains on my short watch list as a potential late-stage breakout failure waiting to happen. Last Friday’s move to higher highs after an analyst put out a $450 price target on the stock went nowhere, and TSLA reversed to close down on heavy volume.

 

GR121218-TSLA

 

If you’re paying attention to Amazon.com (AMZN) you might have noticed that it reversed at its 50-dma today on higher volume. Thus, it was shortable at the line earlier, while using the 50-dma as a guide for an upside stop. Also, note that the 50-dma has now crossed below the 200-dma, forming an allegedly bearish Black Cross.

A couple of weeks ago I wasn’t giving a lot of predictive value to the NASDAQ Composite’s Black Cross, but that ended up presaging last week’s sharp downside break. Is AMZN’s Black Cross presaging the same type of breakdown in the stock? For now, rallies into the 50-dma would remain your lower-risk short-sale entries.

 

GR121218-AMZN

 

Microsoft (MSFT) remains vulnerable to another breach of its 50-dma after reversing off the intraday highs today. Volume was lighter, but I view this as a more of a lack of buying interest, which is suspect on a day when we see the indexes rallying so sharply, at least early in the day.

But, of course, one can dispense with trying to short stocks like AMZN, MSFT, TSLA, AAPL, etc., and just take the easy route by working the ProShares UltraPro Short QQQ ETF (SQQQ). That’s generally my preference since it avoids individual stock headline risk. But one thing I do when I’m working the SQQQ is to monitor the charts of big-stock NASDAQ 100 names like MSFT, AMZN, et al. The weakness in these charts means that playing the SQQQ is a viable strategy when looking to short a market reversal like we’ve seen over the past two days.

 

GR121218-MSFT

 

I still view Workday (WDAY) as less a stock I want to buy on its recent post-earnings base breakout and buyable gap-up (BGU) move and more as one I’m monitoring for a potential breakout failure. The stock remains fairly strong, however, as it holds up near its recent all-time highs. It did reverse off its intraday peak today on higher volume.

For now, I’m watching for a possible breach of the 10-dma as an initial clue of a possible late-stage breakout failure. From there, a breach of the prior 157.12 breakout point would serve as a secondary trigger, while a clean breach of the 20-dema would confirm WDAY as a late-stage, failed-base (LSFB) short-sale target.

That said, an orderly pullback to the 20-dema at 151.54, while providing a tactical short-sale opportunity, could bring the stock into a lower-risk entry position. This would, of course, depend on what the general market does from here, so play it as it lies.

 

GR121218-WDAY

 

Salesforce.com (CRM) has been able to hold support along its 200-dma since rallying back up through the line two weeks ago. I view the rally as a potentially shortable event, however, so I would consider a decisive breach below its 50-dma from today’s close as a short-sale trigger, should it occur. Otherwise, this needs to settle down along the 50-dma or 200-dma if I were to consider it as a potential long play, since this rally looks more to me like a shortable move than a buyable one.

 

GR121218-CRM

 

Splunk (SPLK) is a little bit different since its chart has the 200-dma above the 50-dma whereas CRM has the moving averages in the opposite configuration. In this case, I am looking at a breach of the 200-dma as a short-sale trigger, should that occur. Meanwhile, the stock has been able to hold along its 200-dma, but in my view remains on the fence here, pending the general market action going forward.

 

GR121218-SPLK

 

Shopify (SHOP) has drifted past its prior December highs, but this doesn’t take it off the table as a short-sale target as far as I’m concerned. The movements over the past couple of months have been extremely volatile. The chart shows us that taking an opportunistic stance on the stock at the extremes of its jagged movements is really the only way to trade this thing.

Yesterday’s move stalled and reversed near the prior December highs, but today it pushed beyond those highs. However, today’s move also stalled and churned as buying volume declined. Thus, I think this is vulnerable to a sharp downside break from here. As with many of these stocks I’m discussing as possible short-sale targets, shorting into rallies requires the use of the five-minute 620-chart as a timing tool.

If one shorts into a rally, then the 620-chart helps one to time an entry as well as control risk by setting a stop using the appropriate signals on the 620-chart.  This is how one avoids trouble when shorting into a rally and finding that the stock just keeps rallying. I discuss this in my video reports, as I did yesterday with SPLK as one example. SHOP can be handled in a comparable manner.

 

GR121218-SHOP

 

This is a tricky market, hence difficult at its core, and requires a certain opportunistic yet highly nimble and flexible approach. If we consider SHOP’s chart and recent move to higher highs, we might notice some similarity to railroader CSX Corp. (CSX). In early December CSX pushed to higher highs as it cleared all its moving averages.

That, however, was the peak, and the stock then broke hard to the downside. It slashed right through its 50-dma before finally finding support at and bouncing off its 200-dma. The rally from there carried right into the confluence of its 10-dma, 20-dema, and 50-dma, where it became shortable again today, if one had it on their watch list.

The main point I want to make, however, is that these moves to marginal higher highs often serve as opportunistic short-sale entry points. One must be persistent, however, as it may take some time for the stock to break down again. SHOP right here, right now, may be like CSX was in early December. In the meantime, CSX remains a primary short-sale target and has been on my watch list, which I provided to premium members on my blog page yesterday.

 

GR121218-CSX

 

Twitter (TWTR) gapped through its 200-dma yesterday but stalled on a breakout attempt, only to attempt a re-breakout today that was successful. The stock picked up a buy recommendation and $39 price target on December 6th, and I didn’t see any news that would account for yesterday’s move other than a mention on a certain financial cable TV show.

While the breakout looks convincing, I would not be interested in buying the stock here, for obvious reasons. It is near-term extended, despite the breakout, and I might be more inclined to short the breakout than buy it. That was certainly the case yesterday. We’ll see how this plays out in the coming days, as a break back below the 200-dma would trigger this as a short-sale target again.

 

GR121218-TWTR

 

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.

This is a crazy market, and the degree to which it has become so is embodied in the fact that it is very difficult for me to give precise guidance. This is especially true since I myself don’t have a precise idea what I may doing on any trading day, or at any time of the trading day. I may be long something in the morning, but then flip to the short side, or I may be short something in the morning, but then later flip to the long side.

My own visceral experience tells me with a great of certainty, however, that this is a market for nimble, persistent, and alert short-term traders. A lot of the action provides wonderful day-trading opportunities, but not much else. For that reason, this is still not a market for intermediate-trend followers. There is no follow-through day, there is no resumption of an uptrend, there is only choppy action along the near-term lows.

All I can do is outline some potential trades for members oriented toward short-term, even day-trading, indicating what I would do under various circumstances. I expand on this in the video reports. But I must tell you, I never know what I’ll be doing on any given day prior to the opening bell. I do come in with various long and short plans, but I find that the action changes so quickly that these cannot be written in stone, so to speak, and I adapt as I go along, all in real-time.

Maximum flexibility is necessary to handle this market if one chooses to play. Right now, I’m looking for a break to lower lows, but I cannot say that this will happen with any degree of certainty. We could melt to the upside going into the Christmas and New Year’s holidays, or we could melt down. Thus, it is a matter of being ready for anything, and knowing what to look for in terms of the real-time information flow in order to make trading decisions.

For most traders and investors, this is an environment that is not so cut and dried.  For that reason, if one finds the action simply too crazy and inconsistent to handle, cash is a wonderful place to be. 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 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.