The Gilmo Report

December 30, 2018

December 29, 2018

Anyone expecting a quiet holiday trading week around the Christmas holiday this past week may have been pleasantly, or perhaps unpleasantly surprised. Records were set on both Christmas Eve and Boxing Day, the day after Christmas, and this was capped off with an equally wild reversal from a -611-point Dow deficit that turned into a 260-point upside move in the last 90 minutes of trade.

In a market where surprises are the norm, perhaps the nutty action over the past week should really come as no surprise. Maybe what was more surprising was the fact that Friday was a relatively benign session, despite the swings back and forth across the unchanged line as the indexes oscillated between the upside and the downside. By the time the dust had settled on Friday, we ended up with a miniaturized version of the rest of the week’s crazy action, as a 243.01 Dow point rally “only” faded into a -76.42-point decline.

 

GR123018-$INDU

 

If we cut through all the record-setting noise and volatility, what we have is a three-day rally attempt off an oversold condition. I wrote over the weekend that we were approaching a point where such a reaction bounce was becoming ever more likely given the deeply oversold conditions of the indexes and many former leading, but now completely busted, stocks.

Within this context, the bounce is for now only a reaction rally, despite the record-setting moves off the Tuesday lows. The S&P 500 Index has now bounced up only as far as its 10-dma, where it stalled and churned today on lighter volume. While the eternally wrong-way pundits on financial cable TV want to declare a final bottom, there is still no evidence to confirm this.

 

GR123018-$SPX

 

The NASDAQ Composite Index is also showing stalling and churning action after a wedging rally off the lows and into the 10-dma. The interesting thing about the final two days’ of the week is that I wrote in my Wednesday report that I felt the Wednesday rally might have legs, at least for a short-term move. For that reason, I wrote that I wouldn’t be in a hurry to short it just yet. That turned out to be entirely wrong, and then entirely correct, all on the same day Thursday when the market reversed off a deep deficit to close positive. If you shorted things early in the day you were making money, but if you lingered too long the market jacked into your face and peeled your skin right off if you didn’t react quickly.

By Friday’s high point, however, shorting the rally became a possibility again, as the market rolled over in the final hour of trade after the Dow peak at plus-243.01 points to the upside. A three-day wedging rally by the NASDAQ was one indication of potential resistance, but where we go from as we flip into the New Year is still an open question.

 

GR123018-$COMPQ

 

The comparison between the NASDAQ Composite Index chart of late 2007 into early 2008 and the chart of the NASDAQ Composite today that I showed in my December 5th report has been uncanny since that point. The final peak in early December of this year matches perfectly with the final peak seen in late-December 2007, with both eventually leading to downside breakouts on the second leg of respective bear market phases.

The breakdown from the late-December 2007 peak to its initial terminus in mid-January 2008 spanned 17 trading days before a sharp rally ensued. The index then flopped around for several days before slowly sagging back toward the mid-January low. It then undercut that low in early March and the market then embarked on a rally from there. This can be seen on the chart from that period, below.

Today, the NASDAQ has declined for 14 days from the early-December peak (which matches the late-December peak in 2007) before finally rallying extremely sharply off the lows this past Wednesday. If we were to continue tracking similarly to what we did in early 2008, then we might expect a period of chopping around over the next few weeks.

 

GR123018-$COMPQ 2007-2008

 

However, we cannot necessarily use the chart from 2008 as a road map, and things could turn out differently. The one difference, in my view, between now and the mortgage-bubble market break of 2008 is that this time around the bubble is an all-asset bubble, and it is much larger. Meanwhile, total global debt has increased to $250 trillion across all categories.

Microsoft (MSFT) didn’t quite make it as far as the 200-dma following its double undercut & rally moves on Wednesday and Thursday. The stock reversed at a point just below the 200-dma and just above the 10-dma before turning into the red and closing just below the 10-dma. So, we would simply call this a reversal at the 10-dma, which could have been considered as a first short-sale point on the rally off Monday’s lows.

Note, however, that MSFT closed Friday at 100.39, about 1% above the 99.35 low that marks the trigger point for the U&R moves. Volume was lighter on Friday, so it’s also possible that this is a retest of the U&R trigger point. Therefore, this could also be viewed as a low-volume retest that is buyable, using the 99.35 November low as a tight selling guide. Meanwhile, any weak rally back up toward the 10-dma or 200-dma might simply bring this into shortable range again.

 

GR123018-MSFT

 

The situation with Amazon.com (AMZN) is similar to MSFT. The stock posted an undercut & rally (U&R) move on Wednesday and remains above the 1420.00 trigger point. It stalled on Friday on above-average volume without getting as far as its 20-dema while remaining well below its 50-dma and 200-dma. Note the Black Cross in early December as the 50-dma moved below the 200-dma.

If I were looking to short this thing, a move to the 20-dema might be my first choice, with any further movement up to the 50-dma or even the 200-dma perhaps offering a juicier short entry point. That assumes, of course, that the general market is likely to make lower lows. Meanwhile, a low-volume test of the 1420 price level might bring this into buyable range.

 

GR123018-AMZN

 

There is a certain generic look to the charts of most of these big-stock NASDAQ tech names with some slight variations. The obvious difference between MSFT and AMZN is that the latter is much further down off its prior price highs than the former. Another variation might be seen in Alphabet (GOOG).

GOOG is different from MSFT and AMZN in that it topped in late July, and then broke down hard from the 50-dma in early October when the market, AMZN, and MSFT topped. But the set-up over the past three days is the same, with GOOG undercutting a prior 996.02 low from late November and rallying. Same low in its pattern, same rally back up through that low.

It ran into resistance on Friday at its 50-dma, where it became shortable at the line. Volume was light at -32% below average, so it almost qualified as a voodoo rally type of day. I originally coined the term “voodoo day” to refer to shortable rallies when stocks pushed up into a moving average or other point of potential overhead resistance on extremely light volume. The light volume indicates a potential lack of demand at that point, making the stock vulnerable to a reversal back to the downside.

More recently, I’ve also used voodoo day to describe low-volume pullbacks to support. Extreme volume dry-ups on a pullback to a moving average or the top of a prior base can present optimal lower-risk long entry points. In the short-sale case, however, a voodoo move up into a moving average can become shortable. That was the case with GOOG on Friday, such that further rallies into the 50-dma would also be shortable from here.

 

GR123018-GOOG

 

The generic U&R connection among busted former big-stock leaders also applies to Facebook (FB). On Wednesday, it also undercut an identical November 20th low in its pattern, exactly as MSFT, AMZN, and GOOG did, and rallied on Wednesday. The rally took the stock right into its 20-dema, where it stalled and reversed as volume declined on Friday.

That move brought the stock into an optimal short-sale position at the 20-dema, which got some traction on Friday. Note that the rally off the Wednesday lows has occurred on wedging volume. Technically, the U&R is still in effect, since FB remains above that 126.85 low of November 20th.

 

GR123018-FB

 

The FTD Four present something of a mixed bag. Twilio (TWLO) strikes me as the most constructive-looking of the bunch on the long side as it held right along its 20-dema on Friday on light volume. After failing from a couple of breakout attempts, the stock has dipped below its 50-dma only twice, and recovered each time, so far.

This latest recovery brings the stock up into the mid-point of a roughly 30%-deep base, which is a bit on the volatile side, but not to be unexpected given the nature of this market currently. I would want to see a clean breach of the 50-dma trigger this as a short-sale again. But if it can continue to hold above the 50-dma with volume remaining light and drying up, it could easily set up as a long if the general market avoids a return to its recent lows.

Aside from that, it remains a somewhat volatile stock on an intraday basis, which has made it an interesting day-trading vehicle on both the long and short sides over the past few trading days. In this position, one could anticipate a break back to the 50-dma, hence try and short it. But it remains a fluid situation that could resolve in either direction, based on the incoming evidence going forward.

 

GR123018-TWLO

 

Tableau Software (DATA) stalled and reversed at its 20-dema on Friday, which is a logical line of resistance. The flip side is that it is now back above its prior base breakout point which makes it yet another re-breakout after the original breakout failed back in early November. There is another way to look at this, which is that this recent rally and stall at the 20-dema creates a right shoulder in a fractal head-and-shoulders pattern.

The left shoulder of this fractal H&S would be the breakout high in early November, while the top of the head in the pattern would be the move above $130 in early December! This reflects the uncertainty of the set-up here, as it is difficult to determine with full clarity how this will resolve. I would note that it can also be argued that TWLO has a similar fractal H&S thing going on in its pattern.

How these stocks resolve will likely depend on whether the market rolls over relatively quickly after this sharp bounce off the Monday lows. If the market just chops around for a while, these may also continue to swing back and forth. Overall, I find that because I focus on what individual stocks are telling me, a lot of stocks are showing me different things.

 

GR123018-DATA

 

And the FTD Four are no different in this regard. Etsy (ETSY) has been wedging higher after posting an undercut & rally move through its prior 42.06 low of (you guessed it) November 20th. It acted more like a textbook short on Friday as it stalled and reversed at the 50-dma. The wedging volume pattern, where volume declined to voodoo levels of -58% on Friday is your classic voodoo day on the short side.

Therefore, we would view ETSY as a short right here, using the 50-dma as a guide for a tight upside stop. Note, however, that the stock did rally just past the 50-dma on Friday, running right into the rapidly declining 10-dma before turning tail and reversing to the downside. So that could serve as a slightly wider guide for an upside stop. We can also see a fractal H&S not unlike DATA’s. Play it as it lies.

 

GR123018-ETSY

 

Planet Fitness (PLNT) has also been pushing higher after posting a U&R move on Monday after it undercut its 48.02 low of (you guessed it again!) November 20th. Working in its favor, unlike ETSY, is the fact that it is holding above its 50-dma but stalled and churned around its 20-dema on Friday. Volume declined, which may or may not be constructive.

But now let me throw in another wrinkle here, which can also be applied to TWLO and DATA. This would be that the rallies off Monday’s lows are also finding resistance in short areas of overhead price congestion that formed in the first two weeks of December. And, we can also argue that PLNT’s pattern has the look of a fractal H&S as do the prior three FTD Four names.

The larger point I’m trying to make here is that I can analyze these charts to death and come away with both bullish and bearish points of view. Which will prevail I do not know. It’s more a matter of watching to see how these play out in the coming days, with the idea of letting the real-time price/volume action serve as your guide for how to handle them from here. In other words, play them as they lie, and be open to whatever evidence is there to be seen.

 

GR123018-PLNT

 

Perhaps no greater sign of a recovering stock market would be found than in an undercut-and-rally move by Canada Goose Holdings (GOOS). I incorrectly called the lowest prior low in its pattern at 47.42 in my last report, when in fact it is at 46.25. I suppose all this really means is that the stock doesn’t have to travel as far to reach that low, but it’s still over 10% away from Friday’s close.

GOOS, on the other hand, isn’t rallying much with the market these past few days. We might say, that its goose remains cooked, and that so far, the GOOS has not spread its wings and taken flight, if we’re going with bad puns to describe the stock’s current action. Just something to watch for now, since the severe breakdown was partially related to the U.S.-China trade dispute and its effect on GOOS’ ability to open a store in Beijing.

 

GR123018-GOOS

 

Twitter (TWTR) is stuck in no-man’s land after posting a U&R move on Wednesday when it pushed through the prior 27.31 low in the pattern. It tested that low again on Thursday when the market was selling off hard, reaching an intraday low of 27.26, a nickel lower, before turning back to the upside again at the end of the day.

If nothing else, this retest demonstrates the utility of allowing for some downside porosity through a U&R’s trigger point at the prior low. Giving TWTR at least a nickel below the 27.31 trigger point would have kept you in, but on the other hand this might have been difficult to do given that the Dow was selling off over 600 points at the time. Currently, I see nothing to do with the stock.

 

GR123018-TWTR

 

Tesla (TSLA) is flying back and forth between its 200-dma and its 50-dma, mostly based on various news reports. The latest upside catalyst came in an announcement on Friday that Oracle (ORCL) founder Larry Ellison was joining the company’s Board of Directors. That sent the stock back up through the $325 prior low in the pattern, triggering a U&R long entry.

TSLA then ended the day at 333.87, just below its 50-dma on a pocket pivot volume signature that could also be interpreted as a pocket pivot at the 10-dma. The question is whether the 50-dma serves as solid resistance, making the stock a short here while using the 50-dma as a guide for a tight upside stop. That may depend on what the general market does from here, but the U&R long trigger at 325 remains in force for now.

 

GR123018-TSLA

 

Workday (WDAY) continues to bounce off logical support at its 50-dma, but volume has been extremely pathetic, even on the market’s big rally days on Wednesday and Thursday. The weak-volume move has also created a re-breakout as the stock moves above the prior late November base breakout point.

The very low volume here makes me think this is more a short than a long, but it likely depends on how well WDAY can hold the re-breakout.  A move below the prior breakout point at 157.12 could trigger this as a short-sale at that point, although a clean breach of the 20-dema at 153.42 would serve as more concrete confirmation of a re-breakout failure. Play it as it lies.

 

GR123018-WDAY

 

Salesforce.com (CRM) looks like a possible short here as it runs into the 200-dma and stalls. The stock kissed its 200-dma on Friday before backing down a couple of points to close at 134.68. The closer to the 200-dma one can short it the better, with the obvious idea of using the 200-dma as a guide for a tight upside stop.

 

GR123018-CRM

 

Meanwhile, Splunk (SPLK) continues to trek past its 50-dma as it approaches the 200-dma. There are two ways this could become a possible short-sale on this rally. The first would be a clean breach of the 50-dma, which would trigger it as a short at that point. The second would be a weak rally into the 200-dma, setting up a more optimal short entry into the rally.

The first is reactive, the second is more anticipatory and opportunistic. How this plays out likely depends on the associated general market action. And there is also the third possibility that the stock clears the 200-dma and just keeps going. This scenario could also apply to CRM, so shorting into rallies on either necessitates having clear upside stops in mind when putting on the trade.

 

GR123018-SPLK

 

Shopify (SHOP) has moved higher for three days since posting an undercut & rally move on Monday. The rally has come on wedging volume as each successive day’s volume has been lighter than the prior day. This led to a stall at the 20-dema on Friday, but the stock still held in positive territory by the close.

While the U&R move through the prior $122 low was a proper long entry trigger, the stock may now be approaching another short-sale entry spot on the chart. The first reference levels would be the 20-dema at 137.19, which SPLK approached on Friday without quite reaching it. The second and third reference levels would be the 50-dma and the 200-dma, at 139.98 and 144.63, respectively.

Right now, I’m just watching this rally unfold as it approaches these three moving averages. The very light volume on the past three-day period makes this suspect, but it is still a matter of finding the right short-sale entry point without getting overeager.

 

GR123018-SHOP

 

There are many patterns and price moves over the past three days among my extensive list of short-sale target stocks that remain suspect, and I will be covering these in my weekend video report. Two examples of stocks on this list that became shortable, at least intraday on Friday, were Walt Disney Company (DIS) and Amgen (AMGN).

Here we can see that DIS was shortable at the 200-dma on Friday as it stalled at the line on wedging volume. The stock is a recent late-stage breakout failure that has since broken below all its major moving averages in synchrony with the major market indexes embarking on a second leg down to lower lows in an ongoing bear phase. It has been rallying back up into resistance as the general market posts its logical reaction rally over the past three trading days.

 

GR123018-DIS

 

Amgen (AMGN) fell short on a late November breakout attempt without ever reaching new-high price ground. It then broke down sharply to its 200-dma, then posted a natural bounce back up just above the 20-dema and 50-dma, at which point it went crashing back down to and through its 200-dma.

It then undercut a prior late-October low in its pattern and rallied, with the low-volume move into the 50-dma on Friday becoming a short-sale entry point as the stock stalled. In this position, any movement back up into the 50-dma would remain shortable.

 

GR123018-AMGN

 

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.

After getting severely oversold even before we came into Monday’s history-making Christmas Eve sell-off, we are now seeing the market and individual stocks bounce. As the examples in this report show, some of our short-sale target stocks are moving into shortable range, while others have pushed above key moving averages and are currently holding above these support reference levels, such as, for example, TWLO and DATA.

I would not assume, however, that these rallies are guaranteed to fail. And if they do roll back after running into logical overhead resistance, they may not break cleanly to lower lows. If we go into a period of choppy sideways action following this current reaction rally off the lows, then many of these patterns will simply become swing-trading affairs as they chop around with the market.

I think the situation remains fluid and am open to whatever outcome we see in the coming days as we roll into the New Year. Since we are three days into a rally attempt, unless we were to see some fantastic follow-through day this week that is accompanied with a respectable number of decent long set-ups, this remains a market for swing-traders and day-traders, assuming they can handle the bizarre, abrupt, and wild volatility that characterizes this market currently. Otherwise, those seeking more intermediate-term trends on the long side can remain in cash, for now.

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.