The Gilmo Report

December 26, 2018

December 26, 2018

The market made history on Monday when it posted its largest Christmas Eve decline ever. Until this past Monday, the S&P 500 Index had never posted a greater than -1% decline on Christmas Eve in its history, and all the major market indexes posted their largest Christmas Eve declines in their history.

As I wrote over the weekend, the extreme decline we’ve seen off the peak of mid-December has put the market in a very oversold position within the context of what is the second leg down in an ongoing bear market. As things get deep, down, and very dirty, this always brings to the fore the possibility that a natural oversold reaction rally can set in at any time. That’s what we saw today, in the extreme.

The S&P 500 and the Dow Jones Industrials Index rallied furiously today with the Dow posting a 1,086.25-point rally on much higher volume. To me, the upside reaction is no surprise given the oversold condition we reached over the past few trading days, but the magnitude is without question mind-blowingly huge. Without referencing my market history sources, I’d venture to guess that today’s move is the biggest post-Christmas rally in market history, just as Monday’s move was the biggest Christmas Eve sell-off.

 

GR122618-$SPX

 

Wild market action for wild times. The NASDAQ Composite Index posted only its second rally in the past nine trading sessions, but its rally today was no less furious that its other market index brethren. Volume was much higher than Monday’s truncated session, but it’s enough for me to believe that this rally has some short-term legs, so I would not be in any hurry to try and short it.

Instead, it was possible to catch a ride on the train using our trusty undercut & rally long set-up, and there were more than a few to be found today. I’ll get to that in a bit but suffice it to say that we’re likely going to have to let this rally play out before it becomes shortable again, if at all.

 

GR122618-$COMPQ

 

At this point the approach becomes two-pronged. As stocks rally from here, we can watch for potential resistance to show up as they move higher in their patterns. The flip side is that in some cases we are seeing undercut & rally moves that looked tradeable today. Even Microsoft (MSFT) posted one such U&R move after slashing through several lows in its pattern and then rallying back above them today.

The most recent low in the pattern is at 99.35, and the stock closed just above it today, ending the session at 100.56. So, one way to play this would be to buy it here and use the 99.35 low as a tight stop. This U&R could easily take the stock up to its 200-dma, at which point we’ll see what kind of heart it really has.

 

GR122618-MSFT

 

Amazon.com (AMZN) pushed up through its prior 1420.00 November low today in a clear undercut & rally (U&R) move, closing at 1470.90. It is now extended from the 1420.00 U&R trigger point but can be watched for constructive tests of that price level.

Note that these U&R moves were something I discussed watching out for in my Sunday video report. Many busted leaders were approaching prior lows, or in some cases trading just below prior lows as of last Friday. This set up the possibility of U&R rallies from deeply oversold conditions and was most definitely something one had to be aware of coming into the last trading week of the year.

 

GR122618-AMZN

 

Facebook (FB) undercut its prior November low on Friday, as I noted in my weekend report. It was unable to rally in the face of Monday’s record Christmas Eve record sell-off but still held its ground, relatively unchanged. Today the undercut & rally move kicked in as it pushed above the 126.85 November low.  It is now slightly extended from the U&R entry point and can be watched for constructive tests of the 126.85 low. 

GR122618-FB

 

The FTD Four have continued to move lower, breaching their 20-demas and 50-dmas along the way and moving deep into their prior bases. With the market rallying today, some of these are pushing back up into areas of potential resistance while others have cleared near-term resistance. Twilio (TWLO), for example, has pushed just above its 50-dma in a moving-average undercut & rally (MAU&R) move on higher volume.

When the market is this oversold, short-sale target stocks rallying into a moving average must be watched for strong moves back above a key moving average. TWLO is a good example of what I have discussed many times before as a moving-average undercut & rally move where one can flip long once the stock clears the moving average.

The key here is understanding that the market is in an oversold condition, which is when stocks can slingshot back to the upside. The MAU&R is one long set-up that comes into play when this happens. From here, I’d like to see how TWLO tests its 50-dma, since a constructive pullback to the line would keep it in play on the long side, while a volume breach of the 50-dma would again trigger this as a short-sale. Such a break, however, would likely have to occur in synchrony with a general market reversal.

 

GR122618-TWLO

 

Tableau Software (DATA) is an analogous situation, as it careens back up through its 50-dma, bringing the 20-dema into play as potential near-term resistance. Note, however, that if one was working this as a short previously, the 50-dma would have come into play as a trailing stop on the upside. With the stock pushing back up through the 50-dma today in MAU&R fashion, one would be stopped out on the short side.

Enterprising traders who understand how a two-sided approach works would know that once the stock clears the 50-dma it can then flip into a long play. With the stock now slightly extended from the 50-dma, a constructive retest of the line could bring it into a lower-risk long entry position, while a breach of the 50-dma could bring it back into play on the short side.

These are not situations where one can step in one way or the other without understanding that a fluid approach must always be maintained. While the market is not in a so-called confirmed uptrend, it may be turning back to the upside on a tradeable rally, and these MAU&Rs, along with U&Rs, are often the first signs of such a tradeable move. I mean, let’s face it, things were getting a bit piggy on the short side by Christmas Eve!

 

GR122618-DATA

 

Etsy (ETSY) undercut its prior 42.06 November low on Monday and then rallied slightly above that low by the close. Today it followed through on that U&R move as it pushed higher and closer to its 50-dma on strong volume. Note also that the stock held support at the 40-week moving average on its weekly chart, although it never quite reached its 200-dma on the daily chart, which is what I show below.

As I’ve discussed in my video reports, it is important to monitor both the daily and weekly moving averages for possible support levels. In this case, however, ETSY did not bounce off its 200-dma on the daily chart, but it did post a U&R move as it came back up through the prior 42.06 November low. The stock is now about 9% extended from that 42.06 U&R trigger point but might be watched for a move back up through the 50-dma from here, or a constructive retest of the prior 42.06 low.

There is also a possibility that the rally fails at the 50-dma and the stock rolls over, so this should be watched for. However, members who follow me on Twitter know that I tweeted on Monday that I was starting to sniff around for possible U&R set-ups at that time, and ETSY was in fact one of them given that it closed Monday at 46.90, well above the 42.06 prior November low and U&R long trigger point.

 

GR122618-ETSY

 

Planet Fitness (PLNT) also undercut its November low and rallied, but cut it even closer than ETSY did, undercutting that prior 48.02 low by a whopping two cents on Monday. It then rallied to close at 49.05, more than a point above the 48.02 U&R long trigger. Today, PLNT followed through with an above-average volume move that just barely cleared the 50-dma.

The stock is extended from the 48.02 U&R trigger point. However, it is now nine cents above the 50-dma, which triggers the stock as a moving average undercut & rally set-up. In this case, one would use the 50-dma as a tight selling guide, with the understanding that a volume breach of the 50-dma would bring the stock back into play as a short-sale target.

 

GR122618-PLNT

 

The U&R set-up is something that I’ve taught members about in my reports for many, many months, even years, now, so I would assume that some of you likely saw these set-ups in real-time Monday and then again today. Not that it was necessarily all that easy, since the market started the day out with a big rally that reversed before finding its feet and heading sharply back to the upside. But when you get this oversold, and I am telling you to watch out for this type of action, that is the time to be on high alert.

Canada Goose Holdings (GOOS) is perhaps the most beaten-up of my short-sale target names over the past month. It now sits well below its prior October lows, which of course brings up the possibility of a U&R move back up through the lowest of these lows at 47.42. GOOS ended the day today at 43.14, well below that low, but if one wanted to try and anticipate a U&R I suppose one could take a shot here and set a tight percentage stop.

 

GR122618-GOOS

 

Along with ETSY, Twitter (TWTR) was one of three charts I tweeted on Monday as possible undercut & rally set-ups to watch out for. So even non-premium members got a glimpse of what I was at least watching out for on Monday, despite the record sell-off. TWTR cleared the prior 27.31 low of late October today and bombed its way to a close of 28.66. It was there for the taking today.

 

GR122618-TWTR

 

The third stock that I tweeted about on Monday as a possible U&R to watch for was Fortinet (FTNT). In my Sunday video report, I went through a complete and extensive list of short-sale target stocks that were in possible U&R positions, and therefore should be watched for these to trigger if we see the market react to the upside after getting deeply oversold. So, by tweeting three of these with their charts, I gave a Christmas gift to non-premium members, and I wonder how many recognized it as such! Hopefully, some did.

Whether they did or not, the bottom line is that FTNT also triggered as U&R long set-up on Monday when it traded below its prior 64.65 late November low, reaching an intraday low of 64.41 before rallying to close at 65.51. This is classic action for U&R set-ups, since they tend to occur when things look quite bad, as they did on Christmas Eve. But one must be aware of these set-ups in real-time and ready to act under the right conditions.

FTNT is now pushing up toward its 200-dma. If it can clear it convincingly, then we may have an MAU&R set-up in force at that time. Otherwise, if the 200-dma becomes stiff resistance, and the general market rally turns out to be a one-day wonder, it could become shortable at the line.

 

GR122618-FTNT

 

Tesla (TSLA) triggered another short-sale entry on Monday when it breached the 200-dma, but today managed to rally back up through the 50-dma on the furious upside general market action and news of strong Model 3 sales. Anyone shorting Monday’s breach of the 200-dma would have been stopped out today at the line, at which point the option was there to flip and go long by treating it as a moving average undercut & rally set-up (MAU&R) long set-up.

Note also that TSLA closed today at 326.09, just above the prior 325 November low in the pattern. This of course triggers a U&R long set-up right here, using the 325 low as a tight selling guide. When playing a U&R long set-up, the prior low can serve as a hard stop, or one can allow for 2-3% of downside porosity depending on one’s risk-preference.

The closer one buys to the prior low, the looser one can set their stop, obviously, and TSLA closed today less than a third of a percent above the prior 325 low. It could also easily open up just below the $325 price level, so watch this carefully here for any opportunistic entry possibilities.

 

GR122618-TSLA

 

Workday (WDAY) found logical support at its 50-dma yesterday, rebounding off the line sharply today on higher volume. It also cleared the 20-dema but remains below its prior breakout point. An opportunistic entry would have been found at the 50-dma once the market rally took hold today, if one was alert to it.

In this position, it’s not clear whether this is going to re-breakout or not, and the outcome will likely depend on where the general market goes from here. If the general market rally continues, and one believes the stock can continue back toward its prior highs, then one could take a position here along the 20-dema and then use it as a tight selling guide.

 

GR122618-WDAY

 

WDAY’s cousins, Salesforce.com (CRM) and Splunk (SPLK), are both trading much weaker, with only SPLK managing to clear any of its moving averages. It closed seven cents above its 50-dma, which could be viewed as an MAU&R using the 50-dma as a tight selling guide. Meanwhile, CRM, remains below its 10-dma, 20-dema, 50-dma, and 200-dma, and I would need to see further evidence telling me this is worthy of consideration as a possible long play in any continued market bounce from here.

The most important thing to understand about U&R long set-ups is that they don’t occur until they occur. When a stock retests prior lows in its pattern several times, you do not know for certain whether it will hold support at those lows or whether it will slice right through them on a new leg to the downside. After all, this is what constitutes a prolonged downtrend.

So, when I see Shopify (SHOP) retesting and closing below its prior October and November lows as it did on Monday, I’m not assuming it will turn back to the upside – until it does. Today, the stock rallied back up through those prior lows, triggering a bona fide U&R long set-up once it pushed above 122. It did exactly that today and continued higher to close at 130.21.

As I wrote over the weekend, “We’ll have to see whether it holds these lows and rallies, or whether it just breaks down further from here.” That evidence finally presented itself today and could have been acted on today once the stock pushed through the prior 122 low.

 

GR122618-SHOP

 

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.

Over the weekend, I wrote that “I have no idea whether this week will offer more profitable short-side action, or whether a year-end reaction move, which would be logical, is coming.” As it turned out, Monday did in fact offer some additional short-side profitability, but one still had to be alert to any reaction rally that might ensue as things got even more oversold.

Today, that’s what we saw, and U&R moves in many of the stocks we’ve been watching closely for the past few weeks were there for the taking if one was a) alert to them and b) brave enough to act on the signals when they saw them, if they saw them.

That said, if you missed them, then you missed what was so far a one-day trading opportunity. If this rally has legs, there will be more to be found. Constructive retests of prior lows among today’s U&R long set-up movers can be watched for. As well, constructive retests of moving averages for stocks that have cleared key moving averages, like TWLO, DATA, or TSLA, for example, can also be watched for, all as potential lower-risk long entry opportunities.

As I’ve been discussing in recent reports, a bear market will generally have 3-4 downside legs. Right now, assuming we are in a bear market, we are likely at the terminus of the second down leg. Each down leg in a bear market will be followed by a period of choppy rises and falls, like we saw in November into early December after the first leg down in October.

Therefore, it is entirely logical that we could now move into another period of choppy rises and falls, all of which will help to create short-term swing-trades on both the long and short side of the market. Today saw an oversold rally that brought into action a number of long set-ups in the form of U&Rs and MAU&Rs. For those who understand these set-ups, the signals were there.

Where we go from here, however, is another story. As I see it, the market could retrace as far as the prior November low, and for that reason I would not be overeager to short this rally willy-nilly. Like I said over the weekend, things were getting a bit piggy on the downside and at the point the Piggy Principle is in effect, and this market loves to rally further than you think it will.

This therefore remains a market for nimble swing-traders on both the long and short side, while those seeking more orthodox intermediate-trends or more can simply remain in cash. As far as I’m concerned, anything can happen, and it is simply a matter of assessing the real-time evidence as it plays out. 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.