The Gilmo Report

December 9, 2018

December 8, 2018

This may have been the craziest market week we’ve seen in a while, but we’ve seen so much wild action since the October top that it’s getting hard to keep track of it all. All we know for sure is that the week started out with a big, news-related gap-up after President Trump and Chinese President Xi apparently came to some sort of cease-fire understanding on the ongoing trade war. That didn’t last long as the market stalled on Monday and then plummeted on Tuesday.

A brief respite for a day of mourning, whether for Tuesday’s bulls or for a former U.S. president, on Wednesday led to another gap-down on Thursday, with the Dow Jones Industrials nearly duplicating its 800-point dive on Tuesday before suddenly rallying to make up all but 77 points of its prior intraday decline. The initial morning gap-down break was caused by news late on Wednesday that the CFO of Chinese telecom giant Huawei had been arrested in Canada at the request of the U.S. Justice Department.

Late in the day on Thursday, however, some cooing from a Fed head who uttered something about being less aggressive on rates, and a comment from IMF Chairwoman Christine Lagarde that fears of a global economic slowdown are overdone, got things stirred up. This helped to send the indexes back to the upside, and the NASDAQ Composite Index closed positive on the day on heavy volume after a big cliff dive early in the day. The supporting action off the intraday lows looked quite bullish, to be blunt.

But visions of sugar plums and a bullish continuation dancing in investors’ heads turned into a nightmare on Friday, at least for the longs. The indexes initially opened in good cheer, rallying at the outset, only to reverse sharply back to the downside. By the closing bell, the NASDAQ Composite posted an ugly outside reversal on lighter volume as buyers stepped aside, letting the hot potato index fall -3.05% on the day. While the market has a very random and erratic feel to it, a move below the recent lows seems to be in the cards.

 

GR120918-$COMPQ

 

The rally off the intraday lows on Thursday coincided with the S&P 500 Index posting an undercut & rally move back up through its prior November lows on heavy volume. As with the NASDAQ, this looked bullish, and an upside opening on Friday morning looked like it would keep the good vibes going. But, the index reversed and retraced virtually all of Thursday’s rally off the intraday lows, sending the S&P down -2.33% on the day.

 

GR120918-$SPX

 

On the daily charts, we can see that the S&P and the NASDAQ both show three peaks in their patterns since mid-December. The first two peaks led to declines that took about nine days each, while this latest decline off the third peak has much more downside velocity. It has only taken three days to reach the prior November lows. This indicates that the volatility and price velocity are increasing, and I’m sure anyone trading this market over the past week has gained a supremely visceral sense of this.

In Wednesday’s report I showed the similarities between today’s NASDAQ Composite daily chart and late 2007. The action over the past three days is so far looking quite like the action we saw in late-December 2007, just before the market split wide open in January 2008. Certainly, the sharp downside market break over the past three trading days has more the look of a Christmas Crash than a Santa Claus Rally.

Individual stocks can also be seen to be ricocheting back and forth within their chart patterns, making life difficult for anyone looking for a trend, even a two-day trend! In the old days, such action was often a sign that something, somewhere, was very, very wrong. Maybe the Fed knows what that is, as Fed members have backed away from their previously stated path of steady rate increases. Friday’s weak jobs number helped to reinforce this notion.

On Friday, one non-voting member of the Fed even suggested that it might be a good idea to pass on a December rate hike. This has sent the Ten-Year Treasury Yield lower as pundits start to fret over an inverting yield curve. Meanwhile, gold, as represented by its proxy the SPDR Gold Shares ETF (GLD), has broken out of a five-week range as it works its way off its summer lows.

 

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If you missed hitting any of the FTD Four as tactical shorts on Tuesday, you got another chance on Friday. However, wedged in between was the potential for long trades off the gap-down lows of Thursday. This is schizoid trading at its finest. Take Twilio (TWLO), for example. The stock broke down hard on Tuesday, but then gapped down to its 20-dema on Thursday before rallying sharply off the lows to post, of all things, a pocket pivot.

I suppose if one were shrewd, fearless, and perhaps a little crazy, one could have bought the stock at the 20-dema on Thursday morning. But who in their right mind would have wanted to step in front of the freight train that was careening down the tracks early on Thursday when the Dow was dropping nearly 800 points? It would have made no sense to do so, but in this market, what often doesn’t make sense ends up working.

But, let’s say you missed the short trade on Tuesday and then the long trade on Thursday. By Friday, you could have gotten in on the ricochet action by shorting TWLO at the open and realizing a seven-point drop to the downside. That might have made more sense and was certainly a more coherent trade given the general market reversal and sell-off.

Now TWLO is sitting right above its 20-dema. A breach of the line would trigger the stock as a late-stage breakout-failure and a short-sale target at that point. Otherwise, if the general market decides to rally on Monday, it could be a long trade off the 20-dema! The fact that we can even speak about the stock in such a two-sided manner tells you how odd this market is.

 

GR120918-TWLO

 

Similar action is seen in Tableau Software (DATA). After reversing off the highs on Tuesday and closing near its intraday lows, the stock gapped down near its 10-dma on Thursday morning and then rebounded sharply, posting an all-time closing high, as you can plainly see on the daily chart below. It then pushed a little higher on Friday morning and promptly reversed back to the downside.

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.

 

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I don’t even have to comment on Etsy (ETSY) since it is doing almost exactly what TWLO and DATA are doing. My general view on these stocks, however, is that they are most likely biding their time before they break down as the general market embarks on a new down leg in what may be a developing bear market.

So, while the stocks have been playable short, then long, then short again so far this week, my Gilmo sense tells me that eventually they will resolve as full-blown, late-stage, breakout failures and hence late-stage, failed-base (LSFB), short-sale set-ups. How long they take to resolve this, however, is another question altogether, and will no doubt be influenced by the general market action as we move through year-end, maybe sooner.

 

GR120918-ETSY

 

Planet Fitness (PLNT) is the only one of the FTD Four that has finally broken below its 20-dema, triggering as a short-sale at that point while using the 20-dema as a guide for a tight upside stop. Note that has now dropped and closed below its prior breakout point and the 20-dema, so this would be the initial indication that this is a likely LSFB in progress.

Of course, the thing to keep in mind here is that it was also setting up as an LSFB in mid-November, only to fill a prior gap and then turn right back to the upside. Perhaps the second time will be a charmer, especially if we see the major market indexes break to lower lows.

 

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Canada Goose Holdings (GOOS) also triggered as a short-sale on Thursday when it breached the 20-dema on heavy selling volume. This also sent it below the intraday low of its mid-November, buyable, gap-up price range, which it had been holding above over the past three weeks. No longer, however, as it now sits right on top of its 50-dma.

This is the resolution I’ve been leaning toward, although I admit that in my commentary I try to maintain an even-handed approach. However, once the technical evidence is there to be seen, the path becomes clear. Interestingly, GOOS couldn’t rally off its intraday low on Thursday, as the FTD Four did.

And then on Friday, a brief rally into and just above the 20-dema quickly reversed and failed, offering another short-sale entry opportunity as the general market reversed. Any further rallies from here would offer lower-risk, short-sale entries from here. Of course, the trade that makes no sense would be to view the pullback to the 50-dma as a pullback to support, hence a possible long entry point for potential short-term trade. Play it as it lies!

 

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In the land of big-stock former leaders, Apple (AAPL) posted its lowest low since peaking out in early October, precisely at the market top. Volume was above average as sellers remain focused on getting the heck out of Dodge even as the pundits keep telling us that the stock is a “bargain.” So far, all it has done is drop deeper into the so-called bargain basement.

Anecdotally, there is some similarity between AAPL in 2018 and AAPL in late 2007 and early 2008. Back then, the financial media made a big deal over the stock’s first move over $200, which is not comparable to 2018’s move through $200 since the stock split 7-for-1 in 2014. What is comparable is that AAPL printed 201.96 back on December 27, 2007, to much media fanfare, and that marked the top.

By the end of February 2008, AAPL had declined -43.1% off its all-time high. That took all of two months. Below is the daily chart of AAPL from that notable market period, the start of the Great Financial Crisis and bear market of 2008.

 

GR120918-AAPL 2007-2008

 

Fast-forward to today, and we see a great example of how market history never repeats, but it can rhyme. In this case, the rhyme is the huge media fanfare over AAPL becoming the first publicly-traded company in history to achieve a market capitalization of $1 trillion. Like its first move above $200 in 2007, that marked a significant peak in the stock, as well as the start of a sharp market decline.

AAPL is about 2/3rds of the way to matching that decline, dropping -27.83% since it peaked in early October. I remember thinking at the time that the media was making such a big deal over this $1 trillion market cap milestone that it reminded me of late 2007. It was, in fact, one of the pieces of the complex puzzle I was putting together that made me suspicious of this market back at that time. As a big-stock juggernaut, AAPL’s top marked the market’s top, and it remains in freefall.

 

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Tesla (TSLA) picked up a buy recommendation on Friday that included a tantalizing $450 price target. One of the strangest paradoxes about TSLA is that the company is technically the largest automaker in the world based on market cap. However, based on the number of vehicles it sells, it doesn’t even make it into the top ten. That market cap looked set to rise even further on Friday as the stock made a run for its prior highs.

Instead, the move reversed and TSLA closed in the red on heavy volume. This contrasted with three prior breakout attempts earlier in the week that came on light volume. This brings up the possibility of a late-stage, breakout failure type of short-sale set-up, which would be triggered on a breach of the 20-dema. Opportunistic short-sellers, however, might have decided to hit the analyst-induced breakout on Friday, but that is less cut-and-dried.

A breach of the 20-dema would provide a more concrete short-sale entry. Risk would then be controlled by using the 20-dema as a guide for an upside stop. Just because an analyst gives a stock a big target price doesn’t mean it will be achieved. After all, AAPL was given a $266 price target by a J.P. Morgan analyst a few weeks ago and look what that has done for the stock – nothing.

 

GR120918-TSLA

 

Things aren’t going very well for Amazon.com (AMZN) after it reversed at the prior November high on Monday. A rally back up to the 50-dma and 200-dma on Thursday just set up another short-sale entry point at the 50-dma. The stock then reversed back to the downside in a more-than-90-point drop off the intraday high.

Overall, AMZN has the look of a big head-and-shoulders formation with a large amount of selling on the right side of the pattern. This is quite textbook and seems to imply that a test of the prior low around 1420 is a distinct possibility. The question is whether AMZN is cheap at 61 times 2019 estimates of $26.68 a share, or whether it, like AAPL, can get a lot cheaper.

 

GR120918-AMZN

 

Microsoft (MSFT) mirrors AMZN’s action, although it is less deep in its pattern. You can also see a fractal type of head-and-shoulders formation setting up here, with resistance along the prior November peak. A brief rally into the 50-dma on Thursday set up a short-sale entry on Friday, and the stock is now heading for its 200-dma.

 

GR120918-MSFT

 

Given the general market action, a stock like Workday (WDAY), which broke out last week on a buyable gap-up move is probably better watched for a possible breakout failure. This would trigger a late-stage, failed-base, short-sale entry on any breach of the 20-dema. More nimble, opportunistic short-sellers might view a breach of the breakout point at 157.12 as an earlier, short-sale entry point with the idea of exiting quickly if the trade did not work out.

 

GR120918-WDAY

 

Salesforce.com (CRM) is flipping around its 50-dma and 200-dma, reversing around the 50-dma on Friday. You can see here how an opportunistic short-seller could have tried to hit the stock on Monday when it pushed further above the 50-dma, or on Tuesday once the general market began to turn. I find that when the market reverses hard, as it did on Tuesday and then again on Friday, almost any stock can be shorted in this manner.

CRM closed 13 cents below its 200-dma on Friday, which technically puts it in a shortable position using the 200-dma as a guide for a very tight upside stop. Whether it breaks lower from here or tries to put in one more rally up into the 50-dma will probably depend on what the general market does this coming week.

 

GR120918-CRM

 

Splunk (SPLK) is another one of these post-earnings gappers that can’t decide whether it wants to be a long or a short. On Thursday it acted like a long as it rallied back up through the 200-dma, while on Friday it acted like a short as it broke back below the 200-dma. I could probably think of other stocks I’d rather short, but if there was any kind of knee-jerk move back up toward 110, it could make the stock more optimally shortable at that point.

 

GR120918-SPLK

 

Shopify (SHOP) is in many ways the poster child for huge price volatility and velocity in this market. The stock gave short-sellers another chance to hit it on Friday when it again rallied up near the $160 price level before coming unglued and busting all the way down to the 200-dma. In this position, a breach of the 200-dma would trigger a short-sale entry at that point, but I would say that the best place to short this stock was near 160, where the opportunistic entry was.

 

GR120918-SHOP

 

Twitter (TWTR) also continues to give short-sellers very nice entry opportunities at the 200-dma. After doing so on Tuesday, the stock went in for a repeat performance by rallying right back up to the line on Friday. This met with the same result, as the stock reversed to close back in the red. It is now sitting along its 10-dma and 20-dema, right between its 50-dma and 200-dma.

For now, I would lean toward shorting the stock on any further rallies into the 200-dma. However, Friday’s rally may have been its last hurrah before again testing the 50-dma and the prior November low.

 

GR120918-TWTR

 

One of the things I notice about this market is that when it sells off, just about everything sells off. The broad selling, especially in index names, makes the use of leveraged index ETFs along with the five-minute 620-chart quite effective. This is especially true in an environment where the market tends to ricochet back and forth, producing many inflection points along the way. Friday’s opening rally produced one such inflection point not long after the opening bell.

We can see how that played out on the 620-chart of ProShares UltraPro Short QQQ ETF (SQQQ) right after the open. An initial MACD cross to the upside was soon followed by a moving-average cross, with the 6-period exponential moving average crossing above the 20-period exponential moving average. The moving average cross then held all day long as the SQQQ closed near its peak for the day, producing a 10% gain for the SQQQ.

 

GR120918-SQQQ

 

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.

At this stage, it is more than a foregone conclusion that this is not an investor’s market, it is a trader’s market. But it is a market for very fast, nimble, alert and highly opportunistic traders. The set-ups are there for the taking, but persistence is critical, and tight risk management is even more critical. If one is not oriented toward this type of approach, then cash is king.

In my view, the odds that we are entering a longer-term bear market are increasing. And if we begin a new leg down either in the remainder of December or not until the New Year, then some of these recent breakouts among the FTD Four and others, like WDAY, for example, may provide some actionable short-sale targets.

As I discussed in last weekend’s video report, I have hard time believing that a breakout in a stock like WDAY is going to produce a big intermediate-term upside trend. It seems like a bit too much to ask for in a nutty, mostly bearish environment based on the charts of scores of formerly leading stocks. So, if you choose to play, stay nimble, be aware of your opportunities by focusing on a select handful of target stocks (as I showed in my Thursday Instant Video Report). Stay safe!

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.