The Gilmo Report

December 5, 2018

December 5, 2018

The market has now failed on its second follow-through day since the current correction began in early October. This only adds weight to my view that follow-through days are useless contrivances in this current market environment, and ever more the reason to refrain from relying on them as green lights for piling into the market on the long side. I can almost hear the notorious character Gordon Gekko in the original Wall Street movie, admonishing investors, “Follow-throughs are for sheep, and sheep get slaughtered.”

At least in this market, that certainly seems to be the case. The rally off the Thanksgiving lows, was, however, tradable, for those using Ugly Duckling set-ups such as downside gap-fills and undercut & rally entries. Over the weekend, the futures foretold of a magical Monday opening, which was impressive with the Dow Jones Industrials gapping up some 450 points right off the open. But, as I indicated in my Sunday evening video report, one could not buy a big gap-up move in anything given the already sharp moves off the lows of nearly two weeks ago – that was simply too risky.

Instead, I mused over the idea that the big gap-up open could also present a massive shorting opportunity, given that the much-ballyhooed dinner meeting between President Trump and Chinese President Xi might turn out to be a red herring. Much to my satisfied surprise (well, maybe not that much surprise), that’s precisely what we got. The big opening gap-up rally faded by the close on Monday, with the weakest of the big-three market indexes, the NASDAQ Composite Index, flashing a big stalling and churning day at its 50-dma on higher volume.

As I tweeted on Tuesday, that was a bearish sign, at least in the days of old, but it seems that what was once old is now new again. The bearish stall and churn at the 50-dma panned out into a brutal downside break on Tuesday, taking the NASDAQ further below its 50-dma and 200-dma. Even after the follow-through day of one week ago, the index never made it past its 50-dma, unlike its NYSE-based brethren, the Dow and the S&P 500.

 

GR120518-$COMPQ

 

What made Tuesday’s action all the more interesting on the NASDAQ was Monday’s Black Cross, where the 50-dma crosses below the 200-dma. Typically, in Technical Analysis 101, this is considered an ominously bearish sign. I have found, however, that as a sole indicator it is fairly unreliable, but it is interesting to see how it neatly “predicted” Tuesday’s big price break.

However, the dynamics driving the action on Monday and Tuesday, as I saw it, involved the exaggerated claims of the President and his Administrative minions regarding just what the U.S. and China agreed to on Saturday night with respect to a trade rapprochement. 90 more days of unresolved negotiations, Presidential tweets, and the cornucopia of claims and comments that will no doubt emanate from various Administration officials may only create a volatile elixir of uncertainty for the markets.

Meanwhile, the Dow Jones Industrials Index crashed through both its 200-dma and higher 50-dma, which it had regained on Monday, despite churning and stalling on higher volume. The S&P 500, which had also cleared its 50-dma on Monday, broke below its 50-dma and 200-dma on Tuesday as volume ballooned. And so, another follow-through day bites the dust.

 

GR120518-$SPX

 

Another interesting feature of this current market action is how much the charts of the S&P 500 and the NASDAQ look like their counterparts from October-December 2007. Back then the market topped at the end of October, leading to the first leg down in what became the 2007-2009 bear market. Following the first leg down, a little undercut & rally move triggered the first move back to the 50-dma, and after another test of the lows a second rally just barely cleared the 50-dma.

That was something of a token Santa Claus Rally that lasted all of six days before the index and the rest of the market rolled over as we headed into New Year’s Eve. From there, a sharp break ensued on a second leg down in a continuing bear market. You will note that the action up to yesterday looks similar to the action just before New Year’s 2008.

I’ve discussed this example at length in my video reports, warning members that expecting too much too soon following the first break off the peak in October might be too much to ask. Even if we are in a potential longer-term bear market, a period of consolidation is likely. This is what we’ve seen throughout November, and it looks like what the market did between late November and late December 2007, just before it broke sharply to the downside.

 

GR120518-$COMPQ 2007-2008

 

Whether this market follows a similar path remains to be seen, since the dynamics with respect to event and news flow are somewhat different. One must admit, however, that the similarities are a bit eerie.

The week’s action so far serves to illustrate how quickly things change in this market. Buyers of Monday’s big gap-up move, expecting a big momentum move that would continue into year-end in a big Santa Claus Rally, were, to be it bluntly, “Trumped.” The stalling action along the 50-dma in the NASDAQ and similar action among the other major indexes on Monday, however, were the first clues of a short-term exhaustion rally, and by Tuesday the reversal was in full force.

The rapidly shifting tides of this market of course make it difficult for traders on both sides of the market.  For example, Amazon.com (AMZN) was looking quite strong on Monday as it gapped and held above its 50-dma. However, as it turned out, this was just a test of the prior November peak, and the stock rolled back below its 50-dma and 200-dma on heavy selling volume. It essentially morphed into a short on the breach of the 50-dma and would remain so on any rallies from here back up into the 200-dma.

 

GR120518-AMZN

 

Microsoft (MSFT) posted a similar move, and its action since the lows of two weeks ago looks very much like AMZN’s. Both stocks posted undercut & rally moves off the lows, leading to strong rallies, and MSFT even posted a trendline breakout on last Wednesday’s market follow-through. That trendline breakout is now failing as the stock reverses back below the 50-dma, triggering as a short at that point.

 

GR120518-MSFT

 

The FTD Four were all pushing higher on Monday morning, continuing their look-alike v-shaped re-breakout moves after bottoming two weeks ago. As I wrote over the weekend, I was looking for at least some sort of pullback in all these names to correct these steep v-shaped moves, since they are failure prone.

On Wednesday all four backed down and should be watched for possible late-stage breakout failures on these latest re-breakout attempts. Twilio (TWLO) got close to the $100 Century Mark, where it failed in early November, and is now testing its prior breakout point. A breach of the 10-dma and the 20-dema would trigger this as a late-stage failed-base (LSFB) short-sale target.

In my Sunday report, I discussed the possibility of TWLO and its three other FTD Four counterparts as potential tactical shorts. TWLO certainly got tagged on Tuesday as it dropped -6.19% on higher selling volume. For now, it remains just above its prior breakout point pending the resumption of trade tomorrow.

 

GR120518-TWLO

 

Tableau Software (DATA) is a v-shaped rally that only a machine could love, because most humans would see this as improper and just wildly extended. That didn’t stop the stock from making all-time intraday highs on Tuesday, before it also reversed to the downside on heavy selling volume.

Technically, this would only become a late-stage failure if it breaks below its 10-dma and 20-dema, both of which sit a few percent away on the downside.

Of course, the pattern isn’t necessarily a bust just yet, and has some room to play out. What I can say for certain is that it is not in a buyable position, as only a low-volume pullback closer to the re-breakout point would make that a possibility.

 

GR120518-DATA

 

Etsy (ETSY) was also posting all-time intraday highs yesterday morning but reversed on higher volume. All these names look so similar that one need only comment on one to cover the action in all four. Therefore, as with the others, a breach of the 10-dma and 20-dema would trigger this as a late-stage failed-base short-sale target. On the other hand, an orderly retest of the prior breakout point, and the two short moving averages could offer a lower-risk entry opportunity.

 

GR120518-ETSY

 

Planet Fitness (PLNT) is the spitting image of its three other counterparts. It also tried to hold an intraday all-time high yesterday but instead pulled a full outside reversal to the downside on much higher, but about average volume. Al four of these have a double-top look to them, and it is now simply a matter of seeing how they play out from here.

Only clean breaches of the prior breakout point and the 20-dema would offer the first concrete clues of potential late-stage breakout failures, and so should be watched for. Trying to short these stocks into the v-shaped double-top formations is a bit trickier, however, and is best reserved for nimbler, experienced short-sellers who know how to use a five-minute 620 chart to handle such ventures.

 

GR120518-PLNT

 

Canada Goose Holdings (GOOS) is another high-relative strength name that I’ve been discussing in recent reports but is not part of the FTD Four since it did not gap up and break out after earnings on the follow-through day of exactly two weeks ago. It is nevertheless a stock to watch on both sides of this market, depending on how it plays out from here.

So far, GOOS has been buyable on pullbacks to the lower end of its current three-week post-breakout, post buyable gap-up (BGU) move after earnings, but hasn’t been able to bust out of this range. The stock came in slightly yesterday but managed to hold above the 10-dma on higher volume, which could be interpreted as supporting action off the intraday lows.

Should it bust its 20-dema, which currently sits just below its re-breakout point, it would potentially confirm as a late-stage failed-base short-sale target. Conversely, it is technically within buying range of its re-breakout point of 65.82 since it is less than 5% above that price point. However, I would not be looking to buy this in such an extended position. Orderly pullbacks to the 20-dema would be more of what I would be looking for on the long side of the GOOS.

Given the nature of this market, where volatility and velocity are the order of the day, chasing strength or even chasing weakness is not something I care to expose myself to. We may still see whipsaw action rule the day in what remains a very difficult market phase. All we can do is maintain awareness of the set-ups, keeping it simple by focusing on a select few names that can serve as target stocks long or short depending on how things play out.

 

GR120518-GOOS

 

Certainly, chasing strength in Workday (WDAY) was not advisable as it moved to all-time intraday highs yesterday. As with the prior five stocks I’ve discussed in this report, it also reversed off the intraday highs and closed down on heavy volume. Now we need to see how this acts at it approaches the re-breakout point and the BGU low at 152.01.

 

GR120518-WDAY

 

Salesforce.com (CRM) lost momentum on Monday as it cleared the 50-dma but stalled on about average volume. It then proceeded to break back below the 50-dma on roughly average volume, but slightly lighter than Monday’s. Technically, one could view the breach of the 50-dma as a short-sale trigger while using the 50-dma as a guide for a tight upside stop.

As with any of these names that I’m discussing in this report, the action over the next few days is not necessarily all that clear. Given its short-term extension on the upside since bottoming two weeks ago with the market, CRM could simply come into the 20-dma, hold and then attempt to rally again. Market context is going to be very important with respect to how any of these stocks plays out, and it may mean that this remains more of a trader’s market than an investor’s market.

 

GR120518-CRM

 

Sellers didn’t seem too hell-bent on dumping shares of Splunk (SPLK) yesterday. The stock held the 200-dma with volume declining, which technically puts it in a lower-risk long entry position. Obviously, a breach of the 200-dma would trigger this as a short-sale target at that point. Like CRM, this remains in flux, and where it goes from here will no doubt depend on where the general market goes.

 

GR120518-SPLK

 

Chinese names gave up the ghost yesterday after the market realized that nothing concrete and substantial took place Saturday night outside of an agreement to declare a 90-day cease-fire in the ongoing trade dispute between the U.S. and China. Both Bilibili (BILI) and Nio (NIO) broke down to their 50-dmas, while Alibaba (BABA) reversed hard after gapping up in exhaustion style on Monday.

It traded down to its 10-dma yesterday before bouncing slightly off the intraday lows as volume declined. Does this put BABA in a lower-risk entry position? I suppose it could if one is looking to trade the stock. The movements, however, may be dictated by the latest news coming out of the mouths of U.S. and Chinese trade representatives, however, and that may go on for the next 116 days, at least.

 

GR120518-BABA

 

Shopify (SHOP) gapped higher on Monday with the market, churning and stalling on higher volume. The lack of heavy volume, however, indicated to me that buyers weren’t all that eager to snap up shares. After spinning around at the open yesterday the stock eventually took its cue from the big market sell-off and broke back to the downside. It is now sitting right on top of the prior November highs.

If it breaks below these highs, then it may form out as another right shoulder in an ongoing head-and-shoulders formation. A breach of the 50-dma would confirm this, but the stock is still about 4% above the line after yesterday’s close. Mostly, this worked out well if one was trying to opportunistically short the stock near the highs as the general market began to break down early in the day yesterday.

 

GR120518-SHOP

 

Twitter (TWTR) was also an opportunistic short yesterday at the 200-dma. It reversed sharply, albeit on lighter volume, as it remains within the choppy five-week range it has formed since its post-earnings bottom-fishing buyable gap-up (BFBGU). Three U&R moves since then have not resulted in any major upside, although last Friday’s undercut & rally resulted in the best price move given that the stock made it all the way to the 200-dma.

Such are the scraps that this market offers in what remains a confusing and highly news-driven market. TWTR reflects this type of haphazard action, with little in the way of sustained trends. This can be frustrating for investors, but traders might find it more rewarding, although that depends on what side one is on as the market ricochets this way and that.

 

GR120518-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.

In my weekend report I surmised that a pullback on Monday might present a buyable event, but by the time I posted my Sunday video report and we knew that the futures were gapping up massively, I was leaning more toward a possible shortable gap-up. As it turned out, that’s what we got, but the situation remains extremely murky.

Often, I rely on signals issued by my five-minute 620 charts of the inverse index ETFs such as the ProShares UltraPro Short QQQ ETF (SQQQ). Below we can see how an early MACD cross about an hour-and-a-half after the open signaled a potential market reversal. That was shortly followed by a moving-average cross to the upside, with the six-period exponential moving average clearing the 20-period exponential moving average.

The six-period line held above the 20-period line all day, touching the line as we went into the last hour of trade. At that point, the MACD line again crossed to the upside, and the SQQQ broke out of its roughly 1.5-hour long trading range and posted higher highs into the close. This is one way of trying to assess when a market turn might be at hand, but it is by no means perfect. It worked very well yesterday, however.

 

GR120518-SQQQ

 

Today China confirmed the 90-day tariff cease-fire that begins on January 1, as well as its intent to crack down on intellectual property theft. According to the Wall Street Journal, however, ”The Commerce Ministry’s statement didn’t mention purchases of agricultural and other products, tariff reductions for imports of U.S. autos or negotiating about intellectual property protection, technology transfers and other structural issues the U.S. says are on the agenda.”

As I write this morning, futures are up, so we could see a gap-up open tomorrow on this latest bit of news flow. It all just attests to the sloppy, nutty, and volatile environment we are in currently. I can’t say that I expect the situation to improve if we’re looking at 116 more days of an unresolved trade dispute despite a tariff cease-fire agreement, since it only serves to maintain the uncertainty.

Meanwhile, the Ten-Year Treasury Yield ($TNX) has plummeted to 2.924%, which may be signaling a coming economic slowdown. This has in turn sent financials breaking to the downside in a continued downtrend, while gold is back up to its prior November highs.

 

GR120518-$TNX

 

This market is awash in cross-currents, and which will take hold of this market at any given moment only adds to the v-squared condition. Certainly, the massive volatility and velocity we’ve seen over the past two days tells us that this v-squared condition remains alive and well. For that reason, I am returning to my emphasis of this market as a trader’s market, and not an investor’s market.

Therefore, those seeking to play this highly volatile environment as primarily a trader should try to keep things simple by focusing on a few select names that might offer opportunities on both sides. That’s what I’ve been doing by focusing on the FTD Four and a small handful of other names, which I find to be a more practical approach to trading a very difficult market. And if one doesn’t have the stomach for this type of thing, then cash probably remains king. 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.