The Gilmo Report

December 19, 2018

December 19, 2018

Monday brought lower lows for the major market indexes, in line with what I wrote on Wednesday that I was looking for a market move to lower lows, with the S&P 500 Index undercutting and closing below its February low on higher volume. Fears of a government shutdown were cited as the reasons for the sell-off. When things settled down and the warring parties appeared to be near agreement on a government funding bill, the market rallied.

Monday’s selling on the alleged shutdown news struck me as alibied selling, and when things simmered down the market jacked back to the upside. This was also technically logical since the S&P 500 had undercut its February low, setting up the potential for a U&R type of reaction rally heading into today’s Fed policy announcement.

The crowd consensus coming into today’s announcement was that the Fed would issue a dovish interest rate increase. Basically, this would entail raising rates another 25 basis points while announcing that they would be taking their foot off the interest rate raising gas pedal. That didn’t exactly happen. The Fed raised rates 25 bps as expected, but the chatter from Fed members was mixed, despite Fed Chairman Powell indicating that the Fed now sees two interest rate increases instead of the original three.

After an initial rally, the market went into a serious spin cycle, flying to and fro before a deep red color settled over things and we headed sharply into negative territory. By the time the dust settled, the S&P 500 Index had undercut and closed below its February lows on heavy volume. This was something I had been anticipating over the past 2-3 weeks as you all know from my recent reports.

The S&P 500 has now embarked on a new down leg in what is an ongoing correction/bear market. Short-term, there is the question as to whether this undercut of the February lows will lead to some sort of reaction rally given the steep decline from the 50-dma over the past three weeks, so is something to watch for.

 

GR121918-$SPX

 

The NASDAQ Composite Index also cleared a new down leg in an ongoing bear phase. Unlike the S&P, however, it was able to rally slightly off the intraday lows after undercutting its February low. This might be seen as a very minor undercut & rally move, but the action overall is very bearish, no matter how you slice it.

This is what I’ve been playing for, and now the new down leg is in the books, so to speak. It is now a question whether we see some sort of reaction rally from here into Tuesday’s Christmas holiday, or whether we break further in a steepening second down leg to what is shaping up as a bear market type of correction.

 

GR121918-$COMPQ

 

If one had simply chosen to forget about the fact that today was a Fed policy announcement day and just focused on the charts of individual stocks, the picture would have been quite clear. I don’t think this is a coincidence, since it was mostly a matter of watching where stocks came up into resistance and then taking a couple of shots on the short side at that point.

Case in point is Microsoft (MSFT), which simply rallied into its 200-dema after finding support at its 200-dma on Monday and Tuesday. This is textbook, as a bounce off the 200-dma was quite logical. But then, the rally into the 20-dema provided a nice short-sale re-entry/entry point, which was also quite logical. At the risk of sounding like Dr. Spock from Star Trek, shorting into the rally today in almost all our short-sale target names was quite logical.

 

GR121918-MSFT

 

It was also quite logical to short Facebook (FB) at the 50-dma this morning, before it split wide open and reversed in a big-volume price break. What else can be said? I discussed this as a short at the 50-dma in my weekend report, and even went over why the stock is not cheap at these prices. Apparently, with the help of ever more unwelcome news about just how slimy the company’s business practices are, the market agrees.

 

GR121918-FB

 

With the major market indexes forging a new down leg as they broke out to lower lows this week, the FTD Four also faltered. Twilio (TWLO) slashed through its 20-dema on Monday, triggering a short-sale entry at that point. It then undercut the prior early December low yesterday after briefly rallying above the 20-dema at the open. This led to a short-term undercut & rally move that carried up to the 20-dema today.

Again, logic came to the forefront as the stock pushed right up into the 20-dema and then rolled over on the 620-intraday chart, where it became shortable again. The breach of the 20-dema is our first indication of a late-stage, failed-base, short-sale set-up in its potentially earliest stages. If the market goes lower from here, this will do likewise. Meanwhile, any further rallies into the 20-dema would provide potentially lower-risk short-sale entries from here.

 

GR121918-TWLO

 

Tableau Software (DATA) broke through its 20-dema on Monday as well, but that marked a short-term low given the sharp break off the peak once the stock breached the 10-dma early in the day. There’s a little lesson to be learned here in that if a stock breaches the 20-dema on a long price bar down off the peak, it can get slightly short-term extended in the process. That appears to be the case with DATA, and this led to a rally back up to the 10-dma today.

That would have made the stock testable on the short side at the 10-dma, and the stock dutifully reversed back down to the 20-dema. It did manage to close above the line, but a clean breach of the 20-dema from here would trigger this as a short-sale again. Remember, if shorting at the 10-dma, then the 10-dma becomes your guide for an upside stop, but if shorting on a breach of the 20-dema, should that occur, then the 20-dema would become your guide for an upside stop. Play it as it lies.

 

GR121918-DATA

 

Etsy (ETSY) also breached its 20-dema on Monday, and then hung along the 20-dema yesterday and early today. Once the market began to split wide open after the Fed announcement, the stock reversed back below the 20-dema and became shortable at that point. It is now at lower lows, where any rally back up into the 20-dema would provide a lower-risk short-sale entry from here.

 

GR121918-ETSY

 

The FTD Four, which includes TWLO, DATA, ETSY, and Planet Fitness (PLNT), are all right at the starting points of potential late-stage, failed-base (LSFB), short-sale set-ups. This is because they have all only just started to come loose as they begin to fail at their 20-demas. This puts them in early short-sale positions.

Here we see PLNT reversing at its 20-dema today on higher selling volume. This puts the stock in shortable position using the 20-dema as a guide for an upside stop. Notice, however, that the stock has not really obeyed its 20-dema, and instead found resistance near last week’s highs. This is normal action and is something to be watched for when a stock pushes past a key moving average.

 

GR121918-PLNT

 

Canada Goose Holdings (GOOS) was trying to hold along its 200-dma over the past two days and again today. This for me was a short-term cover point. Obviously, a breach of the 200-dma would then re-trigger this as a short-sale entry at that point, and that’s precisely what happened today once the general market came unglued.

GOOS has been a very effective LSFB short-sale set-up once it breached the 20-dma last week, offering short-sellers entry opportunities at that time. There’s not much more to be said at this point, unless one wants to look for any small rallies back up into the 200-dma as short-sale entry points from here. Otherwise, I consider this to be somewhat extended on the downside from the original short-sale entry at the 20-dema last week.

 

GR121918-GOOS

 

Tesla (TSLA) breached the 20-dema on Monday, triggering as a short-sale at that point, as I discussed it would in my weekend report. It has since moved lower and is now testing the 50-dma with volume picking up vs. the prior day. This was a short-sale entry at the 20-dema and is now extended on the downside.

From here, any bounces off the 50-dma and up closer to the 20-dema would serve as potentially lower-risk short-sale entries/re-entries from here. You will also note that TSLA’s breakdown centers around the same theme as GOOS and the FTD Four, namely that these were all late-stage breakout failures with a breach of the 20-dema serving as the trigger for shorting any of them when it occurred.

So TSLA turns out the same way, and its 20-dema breach has coincided with the general market breakout to lower lows on a new down leg in an ongoing market decline/bear phase. You get a sense of how this works, and why I was looking for these specific types of short-sale set-ups to occur in sync with a new market down leg, as I’ve been discussing in recent written and video reports.

 

GR121918-TSLA

 

Workday (WDAY) has not breached its 20-dema, yet, but it did reverse at its 10-dma similar to what DATA did today. Now we are watching for a breach of the 20-dema as a trigger for a short-sale entry from here. Note, however, that volume declined today as the stock held the 20-dema, so a bounce off the 20-dema might occur first, such as we saw this morning. Play it as it lies!

 

GR121918-WDAY

 

Salesforce.com (CRM) and Splunk (SPLK) both set up as short-sale entries today in similar fashion. CRM had gapped through its 200-dma on Monday on heavy selling volume, and then today rallied right up into the confluence of its 10-dma, 20-dema, 50-dma, and 200-dma lines. That created a thick layer of resistance, and the stock reversed sharply to the downside on higher volume.

 

GR121918-CRM

 

Splunk (SPLK) had already broken below its 200-dma last Friday and pushed down to its 50-dma on Monday. It hung along the 50-dma yesterday before rallying right up into its 10-dma, which lay just below the 200-dma. It then reversed on higher selling volume. Both CRM and SPLK were shortable today at their respective moving-average confluences.

I blogged this morning that it made sense to lay back into the Fed announcement and then watch to see where short-sale target names were rallying into areas of resistance. If the market faltered after the meeting, then short-sale target names pushing into such areas of resistance would become shortable. CRM and SPLK are good examples of these short-sale entry opportunities cropping up today.

 

GR121918-SPLK

 

Shopify (SHOP) was also a textbook short-sale entry when it rallies right into its 50-dma this morning and then reversed hard on heavy selling volume. I had already pushed this as a strong short in last Wednesday’s report when it was stalling up near the highs above the $160 price level. It then split wide open on Friday and then again on Monday before finding its feet and attempting a reaction rally.

That rally carried into this morning, but once the market reversed following the Fed meeting SHOP turned tail after running into resistance right at the 50-dma. From here, rallies into the 50-dma remain shortable, but the time to hit it was today at the 50-dma.

 

GR121918-SHOP

 

In my report last Wednesday, I wrote that I would be more inclined to short the breakout in Twitter (TWTR) than be dumb enough to buy it. That inclination turned out to be quite accurate. The stock failed on its breakout attempt on Monday as sellers slammed the stock back below its 200-dma. It then regained the 200-dma this morning before reversing with the market and closing below the line on higher selling volume.

My inclination on the rally, however, was not based on some ephemeral feelings. As I showed in my weekend report, TWTR’s weekly chart showed a possible peak of a right shoulder in a large head and shoulders formation. In fact, most of these stocks I’ve discussed in this report were showing H&S formations over the weekend, and I included weekly charts to back up that assessment. Bingo.

Now we’re looking at any rallies up into the 200-dma in TWTR as potentially lower-risk short-sale entry opportunities from here. Otherwise, shorting the breakout was effective for a near-term price break, and we’ll see where this thing goes from here.

 

GR121918-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.

The breakdown to lower lows marks a new down leg for the market in an ongoing correction/bear phase that began in early October. This is exactly what I’ve been looking for per my recent reports. And this was no accident, as I’ve showed in recent reports. The preponderance of textbook head-and-shoulders patterns was arguing for the likelihood of lower lows, and I discussed this in my weekend report.

That said, this market is still very difficult to handle on an intraday basis. The intraday volatility and price velocity means one must be extremely alert and nimble. As I’ve said repeatedly, however, one way to handle this is to maintain a very short list of candidate stocks on the short side and the long side. With less to watch and focus on, the process is simplified when the market starts to go nutzo.

When the Fed released its policy announcement today, volatility and price velocity were in full force as the Dow suddenly jacked to plus 380 points. But shortly thereafter, the indexes all reversed hard and it was all downhill from there. The five-minute 620-intraday chart of the Dow, below, shows how this all played out.

About a half hour before the Fed announcement the 6-period exponential moving average on the chart had already crossed below the 20-period line. That alone is not an actionable signal, but when the MACD lines crossed right after the policy announcement, a full 620 sell signal, where both a moving average and MACD cross are present, was in effect.

 

GR121918-$INDU Intraday

 

There was one rally into the 20-period line before the index split wide open and the Dow closed in the red by -351.98 points on higher volume. While the action was crazy on the quote screen, to be sure, the 620 chart adds some sense of definable coherency and price action to the volatility. When things get this crazy, using the 620-intraday chart is the only way I know of to operate without getting caught up in the sheer drama of huge price fluctuations. It’s not perfect, but it generally keeps you on the right side of things and serves its purpose even if it just keeps you from getting hit with quick, massive losses if nothing else.

Where do we go from here? That’s unclear, but it is possible that we could see a panic low set in over the next day or two. Given the steepness of the decline from the 50-dmas in the major market indexes over the past three weeks, some sort of reaction rally from here would also not be a surprise. That said, I think the odds that we are in a full-blown bear market are quite high.

In some cases, whether one wants to define the current environment as a bear market or not is moot. For many individual stocks, such as AAPL, AMZN, FB, NVDA, NFLX, MU, and many others, it already has been a bear market based on their price declines over the past 2-3 months. More may be coming, especially among those stocks that are still holding up, so play ‘em as they lie.

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.