The Gilmo Report

February 13, 2019

February 13, 2019

The S&P 500 Index became the second of the big-three major market indexes to clear its 200-dma, doing so yesterday by the razor-thin margin of 1.36 points. The market was helped along yesterday by the announcement of a budget deal that will avoid a government shutdown at 12:01 a.m. this Saturday morning and continued hopes of a U.S.-China trade deal.

A benign but in my view mythical and contrived flat CPI report this morning that purported to show an inflation rate of 0% added weight to the idea of the Fed remaining in a holding pattern. This triggered a big move at the open, sending the S&P further above its 200-dma.

 

 

The NASDAQ Composite Indexes, meanwhile, is stalling and churning at its 200-dma on light volume. The index remains below the line. Tech names have led the rally off the late-December lows, and if the NASDAQ cannot clear the 200-dma, we could see some inflection to the downside from here.

If it clears the 200-dma and joins the S&P 500 and Dow, then that would be a bullish development. However, a failure here at the 200-dma that also sees the S&P 500 and the Dow break back below their own 200-dma lines would be a bearish development and should be watched for. Most of the stocks that have led off the lows are quite extended here, so I do see the market as vulnerable to a pullback.

 

 

With news of a possible U.S.-China trade deal peppering the market, but with nothing truly concrete occurring just yet, there is, I suppose, a chance that some sort of deal, no matter how shallow, will be made. While the President claims he is not interested in a “cosmetic” deal, I would not put it past him to come up with something as meaningless as the USMCA agreement which replaced NAFTA.

If we do see some sort of agreement come out of these recent talks, which are currently being hyped by the administration as “going very well,” then a market rally could easily ensue. Whether that turns into something to sell into remains to be seen, however. Meanwhile, I note that individual stocks have gotten quite extended, and without some positive news on the trade front, could be vulnerable to a pullback, as noted above.

My theory that a continued market rally phase will likely have to see some of these big-stock NASDAQ names come to life has played out a bit, but only slightly. For example, the undercut & rally (U&R) move that I told members to watch for in my weekend report in Amazon.com (AMZN) came to pass on Monday as the stock pushed up through the prior 1590.72 low in its pattern.

However, that hasn’t resulted in any major upside thrust as AMZN has crawled slightly higher on weak volume. It stalled at its 10-dma and 20-dema today on very weak volume, despite the market rally, but closed above the two short moving averages. Should it breach the 50-dma again, it would then trigger as a short-sale target, but the U&R on Monday was buyable for at least a swing-trade. We’ll see where this goes from here, but the action strikes me as uninspired.

 

 

Netflix (NFLX) has continued to hold solid support along the 200-dma, and yesterday went so far as to post a pocket pivot at the 10-dma. That brought it right up to the top of its current four-week price range where it immediately ran into resistance today and pinged right back to the 10-dma on volume that was about even with yesterday’s.

Since regaining its 200-dma in late January, NFLX has been able to survive one test of the line last Friday. But it is not showing any strong upside thrust – all of that came off the lows when it pulled a big undercut & rally back in late December. If you like the stock, then this pullback to the 10-dma is buyable, although my preference is to look at it on pullbacks to the 200-dma given my opportunistic bias.

 

 

Facebook (FB) keeps hanging along its 200-dma but has been living below the line for the past three days. It pushed to a lower low today on light volume, but overall the action here has been very uninspired as well. In fact, this is again looking like a short here using the 200-dma as a guide for a tight upside stop, although I would keep things tighter and use today’s high at 166.22 as a tighter stop.

 

 

In my weekend video report, I discussed watching for a possible undercut & rally set-up to emerge in Twitter (TWTR) on any move up through the prior 30.72 low in the pattern. That occurred today as TWTR opened at 30.57 and streaked right up through the 30.72 price level, triggering the U&R at that point.

However, that was only good for a nice day-trade, as TWTR ran into stiff resistance at its 50-dma. I’ve discussed the stock in recent GVRs as forming a fractal head-and-shoulder formation with the last move above the 200-dma last week forming the right shoulder in the pattern. The entire fractal H&S in turn forms the right shoulder of a much larger head and shoulders extending back to February 2018.

You can see this massive H&S formation on the weekly chart, not shown. In my view, TWTR is also trading in rather uninspired fashion. The stock has benefited over the past couple of days from recent filings showing various hedge funds and asset management wings of major brokerages taking big positions in the stock. The only problem is that these filings are for Q4 of 2018, so the stock was bought last year.

Therefore, I view any further rallies up closer to the 50-dma as potential short-sale entry points, using the 50-dma as a guide for a tight upside stop. TWTR reported earnings last week and gapped down hard, beating estimates but at the same time offering lower forward guidance. That’s what killed the stock, and what may continue to weigh on it going forward.

 

 

Nvidia (NVDA) is expected to report earnings tomorrow after the close, and so remains on earnings watch for now.

The cloud names I’ve been following in recent written and video reports have continued to hold up in most cases. Of those that remain quite extended on the upside, the 10-dmas don’t strike me as the most optimal support levels in terms of providing lower-risk entries on pullbacks. I would prefer to use the 20-demas rather than the 10-dmas as references for buyable pullbacks as most of these clouds look like they need some deeper consolidation.

Herewith my notes on the group, with charts as necessary:

Atlassian (TEAM) found support today at its 10-dma at 102.85 and closed at 105.25. That remains your near-term reference for support on buyable pullbacks, but I like the $100 Century Mark or the 20-dema at 99.30 as more opportunistic references for pullbacks.

Coupa Software (COUP) found support today at its 10-dma at 92.75, closing at 94.72. I like the 20-dema at 85.61 as a reference for a more opportunistic entry on any pullback from here, however. Earnings are expected on March 11th.

Salesforce.com (CRM) posted an all-time high yesterday and remains extended, although it did pull back slightly today. The 10-dma at 157.74 is your reference for near-term support. Earnings are expected on February 27th.

ServiceNow (NOW) remains extended, and also pulled back slightly today. The 10-dma at 227.17 is your reference for near-term support, with the 20-dema at 212.72 down below.

Splunk (SPLK) remains extended, and the 10-dma at 129.68 is your reference for near-term support, with the 20-dema just below at 125.09. Earnings are expected on February 28th.

Tableau Software (DATA) regained its 50-dma yesterday on strong volume, which I discussed as something to watch for as a long trigger, per my comments in the weekend report. The stock found support this morning at the 50-dma and then ran into resistance at its 10-dma.

This is in no-man’s land, as it could go either way from here. A breach of the 50-dma would trigger this as a short-sale target from here, however, while any constructive pullback to the 50-dma on low volume could present a lower-risk entry from here. Overall, however, DATA represents another breakout to nowhere after failing on its latest breakout attempt after earnings last week.

 

 

DATA represents some deleterious action among the overall strongly-trending cloud names, but it’s not alone. The Trade Desk (TTD) has pulled a little double-top type of move after a re-breakout on Monday. Again, here we have a breakout that fails, followed by a re-breakout that then formed a little double-top type of formation.

TTD then rolled back from there today on higher volume but held support at the 10-dma. This could set up the stock as a lower-risk entry right here using the 10-dma as a tight selling guide, but the higher selling volume is not necessarily all that constructive. Therefore, a breach of the 10-dma followed by a confirming breach of the 20-dema would trigger this as a possible short-sale target at that point.

I’d be prepared to play this in either direction, so it’s all just a matter of playing it as it lies, in real-time. And if we start to see these clouds that have been trying to break out over the past couple of weeks run into trouble and begin busting their 20-demas, we may have some very actionable short-sale set-ups begin to emerge amid this market rally.

 

 

Twilio (TWLO) is also showing signs of faltering after reporting earnings last night, opening to the upside this morning, and then reversing hard on heavy selling volume. The stock ended the day just below the 20-dema, which technically puts it in play as a possible late-stage failed-base short-sale set-up using the 20-dema as a guide for a tight upside stop.

TWLO is also representative of tepid action following what was a slow-motion type of breakout on weak volume back in January. In this position, while just below the 20-dema, it is sitting on top of the prior base structure, so a bounce is possible, However, that, too, could turn out to be shortable closer to the 10-dma, should that occur.

 

 

Workday (WDAY) tested the 10-dma today and closed just above it. Volume was light, but earnings are expected on February 28th. For that reason, I don’t see a lot to do with the stock, unless we saw a pullback down to the 20-dema at 180.30 where it could be good for a swing-trade bounce ahead of earnings. That’s perhaps asking for too much, however.

Zendesk (ZEN) is very extended here as it pushes to all-time highs in a steep little v-shaped formation. The stock has had a wild ride since gapping up after earnings last week and then reversing hard as the buyable gap-up (BGU attempt failed badly. This is starting to look very vulnerable to a pullback here as it is quite extended from the 10-dma down at 72.90 after closing at 77.49 today.

This looks more like a short here to me than a long, with the idea of catching at least a normal pullback to the 10-dma. The overall pattern, however, is suspect to my eye since it’s another one of these big clown’s feet formations where the stock came straight up off the bottom on the weekly chart and broke out.

 

 

ZScaler (ZS) is slightly extended here but pulled into the 10-dma at 48.60 today on light volume. Technically this brings it into a lower-risk entry positions, but I like pullbacks to the 20-dema at 46.98 as lower-risk and much more opportunistic entries, if I can get ‘em. Meanwhile, earnings expected on March 4th.

Roku (ROKU) is expected to report earnings next week, on February 20th. That, however, hasn’t kept it from posting higher closing highs since I first called it buyable down around the $30 price level in early January. Lately it’s been able to hold pullbacks to the 10-dma and 20-dema while pirouetting around the 200-dma. With earnings coming up, I would not be surprised to see some profit-taking ahead of the number.

That said, if one has a position first taken down near the $30 price level when the stock posted a macro-U&R after undercutting and rallying back up through the 29 low of April 2018, one has a decent profit cushion in the stock. Therefore, one can afford to sit through the report and play earnings roulette if they so desire.

 

 

Etsy (ETSY) and Planet Fitness (PLNT) are like the breakout-failure twins lately. Both stocks have attempted to break out twice over the past couple of weeks and failed both times. In fact, both stocks have tried to break out on the exact same days and failed in similar fashion, although with varying degrees of ugliness.

First, we can see that ETSY failed on a big breakout attempt last week but reversed on heavy volume to close back within its base. Another breakout attempt today went nowhere as buyers failed to show any real interest in the stock. So, it closed down for the day but held along the 10-dma and 20-dema. Earnings are expected next week on the 21st, so there’s not a lot to do with the stock right here, right now.

However, I’m interested to see what it does after earnings, since I might see a gap-up move after earnings as something to short rather than buy. The company is expected to report decent numbers, thanks to an allegedly strong holiday season, but that could just set it up for failure. This is just speculation on my part, and we won’t know for sure until earnings are reported.

 

 

Planet Fitness (PLNT) failed on a breakout attempt seven trading days ago, on the exact same day that ETSY failed on its first breakout attempt, and today, like ETSY, failed on another breakout attempt. Also, like ETSY, PLNT didn’t get much interest from buyers on the breakout attempt today, even though the market was moving sharply higher, at least early in the day.

I’ve discussed previously this idea that PLNT has benefited from the whole New Year’s resolution thing, where people resolve to get in shape and lose weight. This is, of course, achieved by the token act of getting a PLNT membership. How long that membership is maintained, given the track record of New Year’s resolution sustainability in general, is another question.

So PLNT may be one of those pop-and-drop situations after it reports earnings, which are expected on February 25th. With either ETSY or PLNT, if they decided to breach their 20-demas in the next day or two, I might be inclined to try and scalp a short trade ahead of earnings, should that occur. Both stocks are going nowhere during a strong market rally, and may be setting up for failure after earnings, if not sooner.

 

 

Advanced Micro Devices (AMD) is still floating between its 10-dma and 20-dema. Volume has remained light, and the stock doesn’t seem to respond to strong general market action. For that reason, I would stay opportunistic here and look for pullbacks into the 20-dema as the better choice for a possible lower-risk entry.

Overall, however, AMD’s action following the buyable gap-up move two weeks ago after earnings has been uninspiring as well. Two days of strong movement around the BGU has only met with a tepid drift back to the downside as a big chunk of the move gets retraced. If AMD fails to hold the 20-dema, there’s always the possibility that it morphs into a short-sale target at that point, so that should be kept in mind as it pulls back here.

 

 

Yeti (YETI), not shown here on a chart, is expected to report earnings tomorrow after the close, so it remains on earnings watch for now. Meanwhile, the stock has been able to trade slightly higher so far this week, pushing up near its January peak.

Aurora Cannabis (ACB) reported earnings on Monday and posted a six-cent loss same quarter a year ago. This sent the stock down to the 200-dma where it found support and bounced, but in this position is not in a lower-risk entry spot. I’d want to see it settle in along the 20-dema or possibly retest the 200-dma before stepping in again.

 

 

Cronos (CRON) and Tilray (TLRY) were both expected to report earnings after the close this afternoon, and as I write I have seen no earnings releases yet. However, there is one report that TLRY will be scheduling its earnings report for release on another date, so all of this is up in the air as I write this afternoon. Canopy Growth (CGC) is expected to report tomorrow after the close.

Canada Goose Holdings (GOOS) is expected to report earnings tomorrow after the close. It has been consistently goosed higher since posting a big shakeout in late January after some dumb (as the stock’s movement since proves) analyst at Wells Fargo downgraded the stock, stating that it was “not as compelling” as they previously thought. Brilliant analysis!

In any case, the stock has kept marching higher ever since, clearing all its moving averages in the process. It traded the heaviest daily volume since the shakeout today as it continued higher right into tomorrow’s expected earnings report. Obviously, with earnings expected tomorrow after the close, there’s nothing to do with the stock now, but this should be interesting to check out after earnings are reported tomorrow.

 

 

Momo (MOMO) popped to higher highs today after finding support along the 20-dema last Friday. As I wrote last week, pullbacks to the 20-dema would be my preferred, more opportunistic approach to buying into the stock. MOMO also posted a U&R long set-up on Friday, as I discussed over the weekend.

However, that move ended badly as MOMO reversed to close near the lows of the daily trading range on higher volume. This is why we do not chase strength in anything in this market. The proper buy point for MOMO occurred last Friday on the U&R move through the prior late-January low, end of story. MOMO is expected to report earnings on March 7th.

Chinese names in general are finding a bid off their extreme lows lately as hopes of a U.S.-China trade deal spring eternal. However, with nothing concrete occurring yet, these are mostly just speculative trades, and therefore not chasing strength and instead buying on weakness is the prescribed approach to limit risk in case no trade agreement is forthcoming.

 

 

I don’t care much for the look of Pinduoduo (PDD) as it stalls along its 20-dema for the past three days. This comes after the stock broke down sharply off the right-side peak of what is turning out to be a punchbowl formation of sorts, and the failure to hold the 20-dema could confirm this as a Punchbowl of Death short-sale set-up.

It appears that for now, the 20-dema has served as near-term resistance, making PDD shortable here with the idea of catching a breakdown to the 50-dma in the near-term. That’s certainly one way to look at it, and if one is jonesing to own this thing, then I certainly wouldn’t be willing to step in unless it was able to constructively pull back to the 50-dma.

After dumping a 55 million share secondary offering into the market last Friday at a price of $25 a share, buying interest may have been absorbed in the near-term. Therefore, I think PDD looks primed to at least test the 50-dma, or worse. So, buyers should probably step aside, while short-sellers can consider this as a short-sale target. PDD is expected to report earnings on March 20th.

 

 

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.

Despite the continued index rally, most of the stocks that led the rally off the Xmas Eve lows are quite extended. Meanwhile, any breakouts aren’t seeing much upside thrust, and things are feeling a bit long in the tooth currently. However, a U.S.-China trade agreement before month-end could spruce things up, and keep the rally going. Some pundits even go so far as to predict a 1,000-point Dow move in response to a trade deal, but I’ll believe that when I see it. I’m just as open to the idea that any trade deal-related rally might be something to sell into.

For now, I think it’s a matter of remaining in sync with the set-ups that you see in real-time. I have no problem going after a short-sale target like TWLO when it fails and reverses as it did today, if that’s the best thing the market is giving me in real-time. As I’ve stated before, by just going with the set-ups, long or short, as I see them, one will naturally be pushed more toward the short or long side of the market.

Meanwhile, high-velocity trades can be found after earnings, as was the case with TWLO today, and Shopify (SHOP) yesterday. In fact, SHOP was downright nutty. The stock got plastered on a big gap-down open yesterday after missing on earnings after reporting before the open. That took it right down to the top of its prior trendline breakout, where it bounced furiously.

It was possible to buy into this if one was aware of where the trendline breakout was at the top of its large clown’s foot base formation extending back to late August. That was not a simple trade, and the stock was quite volatile, but it does demonstrate the crazy opportunities that can arise after earnings.

 

 

Note that SHOP made another run at the $180 price level and Wednesday’s all-time intraday high today before reversing on heavy volume. That move, for those paying attention, was shortable right at the open as the 620-chart broke down immediately at the bell. Now I’d be watching for more downside from here, using any bounce as a potential short-sale entry opportunity.

As we continue to move through earnings season, this and today’s action in TWLO is the type of stuff I’m looking for. High-velocity, high time-value trades that occur after earnings. It certainly beats messing around with breakouts to nowhere!

In the meantime, look to buy into constructive weakness while avoiding the urge to chase strength. That should keep one out of trouble if the market decides to inflect back to the downside. There is some action among individual stocks that I find troublesome, and which could be providing the earliest clues of an impending market pullback. For now, however, I just play the set-ups as I see them, and take what the market’s giving, when it is giving it. That is all.

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.