The Gilmo Report

February 10, 2019

February 9, 2019

Things started to get a little sloppy over the past two trading days as the indexes gapped down on Thursday after comment from Chief Trump Economic Adviser Larry Kudlow intimated that the U.S. and China were still far apart on coming to a trade agreement by the March 1st deadline. The pullback, however, was logical given the position of the S&P 500 and NASDAQ Composite Indexes which were running right up into their 200-dmas.

In Wednesday’s report I said that I would not be surprised to see the indexes pull back from this position, and Thursday morning’s news gave them just the excuse they needed. On Friday, things again looked wobbly, with the Dow Jones Industrials Index breaching its 200-dma earlier in the day. But volume lightened up, and the index regained the 200-dma in its second day of successfully testing the line.

Meanwhile, the S&P 500 and NASDAQ Composite peeled back from resistance at their 200-dmas as I noted they might in Wednesday’s report. But with volume declining on Friday, the pullback did not have any legs to the downside, and both indexes closed well off their intraday lows and in plus-territory for the day.

Combined with the Dow’s successful test of the 200-dma, this was constructive action. As I noted in my Thursday GVR, the Dow’s ability to hold support at the 200-dma was key to the continuation of the current rally off the late-December lows. So far, it’s been able to maintain its position above the line.

 

 

It would also be a bullish sign for the market rally if the S&P 500 Index were to soon retake its own 200-dma. So far, the 200-dma has served as solid resistance for the index, and it gapped down from the line on Thursday as selling picked up substantially.

I wrote on Wednesday that investors should be patient and cautious, with a more opportunistic bent rather than one where one chases strength at all costs. This latest pullback did bring some favored names into more opportunistic entry spots, as we will see later in this report. My view is that such an approach remains relevant and will likely be so for some time.

 

 

The NASDAQ Composite Index doesn’t look a whole lot different from the S&P, gapping down on Thursday after running into resistance on the approach towards the 200-dma on Wednesday. Obviously, as with the S&P, its ability to retake the 200-dma at some point soon would be a bullish development for the market. For now, despite the near-term resistance at the 200-dma, the overall market uptrend is still intact.

 

 

The top three performing groups in this market are 1) Computer Software – Enterprise, 2) Computer – Tech Services, and 3) Computer Software – Database. The #1 and #3 ranked of these groups have a high concentration of cloud-related names. As I discussed in Wednesday’s report, these names continue to climb, and most are wildly extended from any lower-risk entry areas.

What was fascinating to see on Friday was that virtually all of these names were up even as the Dow, the S&P, and the NASDAQ all were reasonably deep in the red throughout the day. Below are my notes on all the cloud-related names I’ve discussed in my written reports. Note that many of these bounced off near-term support over the past two days, which I discussed as a possibility for each of these in my notes from Wednesday’s report.

Also note that many of these display these clowns’ feet formations on the weekly charts that I talked about in my last report. However, I would not assume that this is necessarily bearish, since I believe that we are currently in a liquidity-driven (call it QE-driven if you must) rally, where the impossible often happens. The Fed is on hold, and in my view will remain on hold for a while, with the possibility of lowering rates later this year. This continuation of easy-money policy can continue to inflate assets, including stocks.

If the general market were to roll over here and begin a new down leg in an ongoing bear market, then I would look for these stocks to begin breaking down en masse. They’ve certainly rallied en masse, and so they not only make a nice set of names to follow as a long watch list, but also have the potential to become great shorts under the right conditions.

I’ve been covering these stocks in both my written and video reports since early January when they were much further down in their patterns. A much broader number have been discussed in the videos. So, the initial long opportunities were there, and we were on top of them at the right time. But if these names continue to hold above key moving averages, and right now they are mostly all above their 10-dmas and 20-demas, their uptrends remain unscathed.

Now, with many pushing up toward their prior 2018 highs or breaking out, the question is whether these rallies are sustainable as significant new up legs that result in 30-50% or more gains from new-high breakout levels. The moves off the late-December lows in these names has been impressive – where will the breakouts lead?

Because the clouds are the de facto leading group of this market rally, I tend to think that the fate of the clouds will tie in closely with the fate of this current market rally phase. Herewith my notes on the group, with charts as necessary:

Atlassian (TEAM) is extended as it continues to hold above the $100 Century Mark. Both the $100 price level and the 10-dma at 99.55 are references for near-term support on pullbacks.

Coupa Software (COUP) remains extended with the 10-dma at 88.16 serving as your reference for near-term support on pullbacks. Earnings are not expected until March 11th.

Salesforce.com (CRM) bounced off its 10-dma Thursday and Friday. That was your reference for a buyable pullback, and the stock has moved higher from there. Further pullbacks to the 10-dma at 153.60 would offer low-risk entries, but keep in mind that earnings are expected on February 27th.

ServiceNow (NOW) is still quite extended from its prior buyable gap-up move over a week ago after earnings. The 10-dma has risen rapidly to 214.29 and is now above the 209.99 intraday low of the BGU day. Therefore, the 10-dma now serves as your nearest reference for support on a constructive pullback.

Splunk (SPLK). posted a new closing high on Friday after bouncing off the 10-dma on Thursday. Volume was light, and this is now extended again. Earnings are expected on February 28th.

Tableau Software (DATA) breached its 50-dma on Thursday following Wednesday’s big-volume gap-down breakout failure after earnings. On Friday it rallied back up into the 50-dma on above-average volume. It’s not clear to me whether this is a shortable move given the strong upside volume.

DATA could easily retake its 50-dma if the general market and the cloud space remain strong. In that case, one would treat this as a moving-average undercut & rally long set-up once it cleared the 50-dma, using the line as a tight selling guide. That’s one way it could play out from here.

Any weak continuation that fails at the 50-dma, however, brings this into play as a short-sale target, so it is still something of a two-side situation, and should be handled as such based on the future incoming, real-time evidence.

 

 

The Trade Desk (TTD) is one of two cloud names that I follow that has faltered recently. The breakout attempt early in the week was hit with heavy selling on Wednesday, leading to an immediate breakout failure. This is why I don’t buy breakouts, but notice how an opportunity after the failed breakout materializes when the stock comes down to test the 20-dema.

The stock found some minor support at the 20-dema on Thursday and held it on a retest again on Friday before rallying back above the 10-dma. The volume was light, however, but the stock has held the 20-dema, and we do not have any initial confirmation of a potential late-stage failed-base (LSFB) short-sale set-up without a breach of the 20-dema.

That breach of the 20-dema could still happen, but I would also be open to the possibility of a re-breakout attempt by the stock. Of course, with earnings expected on February 21st, the stock may just noodle around until then. But, in the meantime, just note and learn from this example of how a breakout may not be your best entry point, but the action after a breakout fails might offer a more opportunistic entry, including a re-breakout.

 

 

Twilio (TWLO) bounced right off its 20-dma on Thursday and Friday on light volume. That would have offered a lower-risk entry spot for those looking to buy shares. Otherwise, there isn’t much to do with the stock given that earnings are expected this Tuesday, February 12th, after the close.

Workday (WDAY) approached its 10-dma on Thursday but did not quite get there before rallying back to the upside on light volume. It now sits near its recent highs with the 10-dma at 182 as your nearest reference for support. Earnings are expected on February 28th.

Zendesk (ZEN) acted very poorly on Wednesday when it gapped up and reversed to close near the intraday lows. From there, however, it displayed action that is not atypical for a QE market, where stocks can’t be sold fast enough one day, but then can’t be bought fast enough the next, or even the next two.

Here we see that ZEN almost filled the gap-up rising window from Wednesday’s post-earnings gap-up move that turned to be a very shortable gap-up rather than a buyable one. In sheer defiance of Wednesday’s pathetic gap-up action, the stock has now nearly retaken all of that lost ground! In the process, it posted a re-breakout on Thursday.

I discussed this as still being in a buyable position despite the weak gap-up action in my Wednesday report. Again, a good example of how an opportunity can arise on the pullback following a failed buyable gap-up and breakout attempt the prior day. And, as we already know, the re-breakout phenomenon is one we see quite often in this crazy market, so it must always be watched for (note that TEAM was a re-breakout back in mid-January).

 

 

ZScaler (ZS) pulled back to its prior breakout point and the 10-dma on Thursday and Friday and bounced slightly on light volume. Technically, it remains within buying range of this current breakout. Earnings are not expected until March 4th.

This concludes my written report coverage of the clouds, and I will expand upon other names in the group in my weekend GVR. Also, I will be posting the full list of names on my cloud watch list in the Premium Section of the website this weekend.

Opportunism remains the name of the game in this market, and this was no less true for Roku (ROKU) this past week. The stalling pocket pivot at the 200-dma that I felt was a little suspect since it was caused by fake news turned out to be quite suspect when the stock gapped below the line on Thursday.

This occurred despite the low-volume pullback into the 200-dma on Wednesday, which looked constructive. I still did not quite trust this action, and Thursday’s breakdown confirmed that for me. However, the move resulted in a pullback down to the 10-dma where ROKU found ready support and bounced to close in the upper half of its daily trading range on higher volume.

That was the spot to come into the stock if anyone was interested in doing so. Earnings are expected on February 20th, so as that date approaches there is less and less to do with the stock. Also, if you’re trying to buy the stock up here, then you’d better hope for a decent rally before earnings to build some sort of profit cushion, otherwise you’re playing earnings roulette!

 

 

Etsy (ETSY) has recovered back above its 50-dma after the breakdown through it and the 20-dema following Tuesday’s blistering upside breakout to nowhere. That move looked like money early Tuesday morning, but it faded fast, and a 10.66% upside gain faded to 1.28% by the close. A nasty sucker rally if there ever was one, caused by an analyst upgrade.

Earnings are expected on February 21st, so the question for me is whether this is a short here on the move up to the 20-dema. Volume on Friday was 2% above average, so it was not a low-volume move back up into the 20-dema. If it fails here, then it becomes a short, but you’ve got about a week-and-a-half to generate some profit cushion ahead of earnings.

The flip side of this is that the Ugly Duckling comes into play and ETSY can retake the 20-dema and post a re-breakout move. Although I don’t annotate it on the chart, you will notice that Friday’s move was an undercut & rally through the prior 52.62 low of eight days ago on the chart. That creates a U&R long entry using the 52.62 low as a tight selling guide. Surprise!

Breakouts have little appeal to me in this market simply because they are so obvious. What is less obvious are these Ugly Duckling/OWL™ set-ups that look ugly, but suddenly spring to life. My guess is that if the general market rally holds up, look for ETSY to resolve bullishly, and this could include a gap-up move after earnings next week on the 21st.

 

 

Planet Fitness (PLNT) can be viewed in similar Ugly Duckling fashion. It failed on a breakout attempt the exact same day that ETSY did, although in far less spectacular fashion. PLNT’s breakout occurred on a 3% move, but it failed and the stock broke to lower lows on Thursday.

Note that it also posted a U&R long set-up that day coming back up through the 56.51 low of ten days ago on the chart. It closed Thursday at 57.50, making good on the U&R. Friday’s close held tight just below the 20-dema, but the U&R is still in effect here, using the 56.51 price level as a tight selling guide. This is the type of set-up I favor vs. blindly chasing breakouts. Keep in mind that PLNT is expected to report earnings on February 25th.

 

 

Nvidia (NVDA) is expected to report earnings this Thursday, February 14th, after the close. It remains on earnings-watch for now, pending any actionable movement once the report is out Thursday afternoon.

Netflix (NFLX) brought itself back into buyable position on Friday when it successfully retested and held at the 200-dma. That was a lower-risk entry opportunity right at the line and the stock rallied from there. Further test of the 200-dma should be treated similarly, unless and until it breaches the 200-dma, which would serve as a tight selling guide.

 

 

Facebook (FB) doesn’t seem to pay much attention to the 200-dma as it pirouettes around the line. It started to look like a short on Thursday as it broke below the line, but on Friday quickly pirouetted back above it. What I am noticing here is that volume is not very heavy at all. In fact, it’s rather light.

That seems to be telling me that after the bottom-fishing buyable gap-up (BFBGU) after earnings the week before, sellers are not looking to sell into the move. I wrote on Wednesday that, “I am willing to give FB a chance on the long side if it can constructively hold the 200-dma. Some tight sideways action along the line with volume drying up could set up further upside potential, so that is something to keep out for here.”

That remains the case. So far it has not broken and closed below the 165 intraday low of the BFBGU, seven trading days ago on the chart. It has successfully tested that low twice, which is bullish, in my view. Therefore, the stock may in fact be buyable here using 165 as your selling guide, less than 2% lower.

 

 

With cloud names by far taking on the role of a strong, leading group in this rally, the obvious question to start asking is whether any other groups will begin to take up the slack as the clouds get extended. One theory I discussed in my Wednesday report is the idea of these big-stock NASDAQ names, which so far have rallied tepidly off their prior lows, coming to life.

NFLX is trying to do that, as is FB. AAPL has rallied back above its 50-dma and is extended from the line. If we look at Amazon.com (AMZN) it looks bearish after breaking below the 50-dma on Friday as selling volume picked up. But there is a subtlety here, and that’s that Friday’s move found support near the intraday lows as the stock undercut two prior lows in the pattern.

This could set up the potential for a visit from the Ugly Duckling, as I think trying to short AMZN here is a bit too obvious. What isn’t obvious, at least to the crowd, is the possibility of a U&R occurring if AMZN can regain the 1590.72 low of eight trading days ago on the chart.

That’s the move I’d be looking here if the general market rally continues to hold up. AMZN closed Friday at 1588.22, just a hair below the prior 1590.72 low, and one thing you know for sure is that the crowd doesn’t see that as a bullish set-up at all. But we know better, and a move up through that low should be watched for as an actionable U&R.

 

 

Advanced Micro Devices (AMD) tested its 10-dma on Thursday and Friday and held. That was the sort of pullback I discussed as being buyable in my Wednesday report. The stock remains in a buyable position here along the 10-dma, using either the 10-dma or the 20-dema as selling guides.

Semiconductors continue to act well, although breakouts are not to be seen aside from Xilinx (XLNX), not shown, which remains quite extended from its BGU of two weeks ago. AMD, on the other hand, is a big stock in the group, and this pullback, while not guaranteed to work, is what we look for with respect to seeking lower-risk entries on pullbacks following prior strength.

 

 

Tesla (TSLA) continues to flop around, with its latest flop occurring at the 200-dma on Thursday. The stock gapped below the 200-dma and cruised lower into Friday before rallying off the intraday lows to close near the peak of its daily trading range. I wrote on Wednesday that the stock “could easily return to the status of a short-sale target if it were to breach the 200-dma.”

That’s what we saw on Thursday, and now TSLA is stuck in no-man’s land. Since gapping down after earnings in mid-January, the stock is having trouble doing anything more than flopping around below its 200-dma. While the stock can often serve as a great short-term trading vehicle, even an intraday trading vehicle, it has yet to establish any kind of sustainable trend up or down.

While TSLA is stuck within what is arguably a wide-ranging downside trend channel, the big swings up and down make it difficult to navigate. On Friday it retested the late-December and early-January lows successfully, so this could be a Wyckoffian Retest of those U&R lows given the declining volume on Friday. Personally, I think there are better stocks to mess around with, at least for now.

 

 

Yeti (YETI) is expected to report earnings on Thursday after the close. Ahead of earnings, the cup-with-handle formation it has continued to build looks very constructive. Maybe too constructive, but be that as it may, the stock is holding tight along the 10-dma with volume drying up sharply to -55% below-average on Friday.

The question here, of course, is whether one wants to take a position in the stock ahead of earnings. YETI pre-announced earnings back in the first half of January, which is what led to the gap-up move at the time. Unfortunately, it hasn’t gone anywhere since then. If one is in a betting mood, then viewing this constructive base as a sign of an impending upside mood might make it worth a shot for the brave and daring.

 

 

Weed patch names will be reporting earnings this week, so all are currently on earnings-watch pending anything actionable that might transpire after earnings. Among the group, Aurora Cannabis (ACB) is currently showing the most constructive formation as it tucks into its 10-dma with volume declining.

That said, I don’t see anything to do with any of these names until earnings are out. ACB is expected to report on Monday after the close, while Cronos (CRON) and Tilray (TLRY) are expected to report on Wednesday and Canopy Growth (CGC) is expected to report on Thursday, all after the close.

 

 

Pinduoduo (PDD) looked vulnerable as I discussed in my Wednesday report, and using the 20-dema as a maximum selling guide would have forced one out on Thursday, assuming one didn’t sell into the piggy rise to new highs earlier in the week. At that point it was looking somewhat POD-like, and so the break over the past three days is not surprising from a technical standpoint, but it was also caused by a significant piece of news.

That was the announcement of a 55 million share secondary offering that was priced on Friday at $25 a share. That’s a lot of stock, and I would now want to see how well the market is able to absorb this extra supply. Therefore, I’d take the opportunistic route here and look for a pullback to the 50-dma as a lower-risk entry from here. PDD is expected to report earnings on March 20th.

 

 

The potential for a U.S.-China trade agreement seems to be diminishing as the March 1st deadline approaches. There is no shortage of commentary coming from the pundits, talking heads, and even Trump Administration officials. Personally, if I consult my Ouija board, my crystal ball, and my magic bones, I can’t come up with anything that makes sense.

The news on Thursday that the two sides were still far from a deal was not kind to Chinese stocks. Many are percolating along their lows but can’t get anything significant going in the face of the uncertainty, PDD notwithstanding. Meanwhile, there is mounting pressure for something to happen, as the failure to come up with something, anything, that resembles a trade agreement, even a short-term stop-gap, may be negative for an already faltering global economic backdrop.

So, while things seem dire, I would maintain an open mind about the entire situation. In other words, don’t be surprised if something does happen. In the meantime, I would take the opportunistic approach with any Chinese names I am interested in. And, as I discussed in my Wednesday report, this would apply to Momo (MOMO), which is one name I like for any possible trade agreement rally.

I wrote on Wednesday that taking the opportunistic approach and looking for pullbacks down to the 20-dema as lower-risk entries was preferred. That’s what we got on Thursday, and this also came with a nice little undercut & rally (U&R) move through the prior 28.49 low of nine trading days ago on the chart.

MOMO closed Friday 29.21, triggering a U&R long set-up at that point using the 28.49 low as a tight selling guide. The company is expected to report earnings on March 7th.

 

 

Notes on some other stocks discussed in the last report:

Boeing (BA) pulled into the $400 Century Mark on Friday and held. It is now buyable based on Jesse Livermore’s Century Mark Rule for the long side, using the $400 price level as a tight selling guide for shares purchases above the Century Mark.

Canada Goose Holdings (GOOS) is expected to report earnings on Thursday, February 14th, after the close. It has regained its 200-dma, which is bullish, but for now remains on earnings watch pending Thursday’s report.

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 latter half of this week saw things go from “everything is beautiful” to a nice pullback that presented some lower-risk entries in favored stocks as they pulled into their 10-dmas and 20-demas. We also picked up a couple of shortable gap-ups and breakouts, but for the most part I view these as tactical (in other words, hit & run) trades.

As of yet there is nothing to suggest that the rally is breaking down in earnest, and until I start seeing more evidence of this I am not going to jump to any pat judgments. I must think, however, that if this market rally has legs we will soon see more groups joining the party, including big-stock NASDAQ names.

I will discuss the potential for some newer ideas to emerge in this weekend’s Gilmo Video Report (GVR). I view it as a meaningful companion to the Gilmo Written Report (GWR), and the combination of the two is intended to increase the odds that what is still the low cost of a full premium membership will more than pay for itself.

This week we will again see the government approach the brink of another shutdown as the Friday, February 15th deadline approaches. If the market pulls back on any negative news regarding a shutdown, then I would tend to view it as a buying opportunity.

I wrote on Wednesday that the action of individual stocks, and the set-ups that occur in real-time will naturally force one to the short side, or into cash, if things start to break down. I am finding that pullbacks work out more as buying opportunities, and short-sale set-ups, such as shortable gap-ups, are quick hit & run trades, as was the case with ZEN, which then morphed into a long on the re-breakout.

Earnings season creates opportunities on both sides, long and short, and sometimes even first long, and then short, or first short and then long. Here are two examples of each, the first one being Match Group (MTCH), which runs the online dating site Match.com.

The company reported negative earnings growth on Wednesday after the close and gapped up to 57.90 at the open on Thursday. It rallied a bit further to an intraday high of 60.91, flashed a sell signal on the five-minute 620-chart, and then rolled over to close at 55.76. On Friday, it slid lower, undercutting the 10-dma before finding an intraday low at 53.35, at which point it flashed a buy signal on the 620-chart and rallied.

What made this suspicious to me was the deep cup formation from which MTCH was trying break out. Combined with negative earnings growth, it seemed less likely to hold up, and once the 620-chart flashed a MACD cross to the downside, the short-side was on. The breakdown then turned into a long trade off the 10-dma on Friday, as short went to long.

 

 

GrubHub (GRUB), which I’ve discussed many times before in 2019 in the GVR, gapped down on Thursday morning after reporting earnings on Wednesday after the close. Earnings growth came in at -49%, a big contraction of 19 cents per share vs. 37 cents in the same quarter a year ago.

That sent GRUB gapping to the downside, and it opened Thursday at 71.06. It briefly rallied to 71.82 in the first minute of trade, then slid down to 66.62. At that point, GRUB was a shortable gap-down, good for about five points of downside from the morning high.

But this is where smart traders must be alert to the overall chart position. The first point I would make about the daily chart is that the stock had already been beaten down and has spent the last month or so consolidating along its 50-dma. Thursday’s move took it down as low as 66.62, just two cents below the prior late-December 66.64 low, and it never looked back from there on the turn.

GRUB eventually launched back up through the 50-dma to close -2% below Wednesday’s close after a peak-to-trough drop of -20.64%! From the U&R entry point at 66.64, that was good for an 18% upside move in just one day off the lows. This is the type of opportunity that only the most nimble and fearless traders can take advantage of, but it is firmly rooted in OWL™ methods that I teach.

You could probably put together a good model book of examples from this current earnings season, showing all the high-beta (as in high-volatility) moves that occurred after earnings reports in individual stocks. Getting a sense of what can happen through such study is a useful exercise. There are so many ways these things can play out, and they can start out one way but quickly shift in the other direction, as GRUB illustrates.

 

 

As we progress through earnings season again this week, look for more such opportunities to arise. Study the examples of those stocks that have already gone nuts after earnings, one way or another, such as NOW, TEAM, XLNX, BA, ZEN, and others, and see if you can prepare yourself to take advantage of anything that occurs during the rest of earnings season. There are still many more high-profile names yet to report.

This market presents a lot of opportunity, but not always of the most orthodox O’Neil-style variety. Breakouts are nice, but if you compare a move in something like ROKU vs. any breakout we’ve seen since the early-January follow-through, there is no comparison. Armed with what we know, we should be able to continue to take advantage of this market’s moves, no matter where they lead.

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.

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