The Gilmo Report

February 17, 2019

February 17, 2019

More trade hype from the Trump Administration on Friday as it hailed an agreement on an alleged Memorandum of Understanding between the U.S. and China on trade sent the market higher again. This time, the NASDAQ Composite Index finally cleared its 200-dma, thanks to a burst of late-day buying. It now joins the other two Big-Three major market indexes above its 200-dma.

Despite the strength, there was a noticeable absence of participation by several big-stock NASDAQ names. Apple (AAPL), (AMZN), Alphabet (GOOG), Facebook (FB), and Netflix (NFLX) all sold off on Friday as the NASDAQ 100 Index lagged noticeably.



The S&P 500 Index pushed to higher highs on about even volume, as did the Dow Jones Industrials. The Dow led the rally with a 1.74% move vs. the S&P’s 1.09% and the NASDAQ’s 0.61%. From an index point of view, the rally remains intact, and the 200-dma now serves as a reference for near-term support for all the major market indexes.



Meanwhile, small-caps rush to play catch up. The Russell 2000 Index remains below its 200-dma, as the daily chart of its proxy, the iShares Russell 2000 ETF (IWM), shows below.



I wrote in Wednesday’s report that continued news regarding any U.S.-China trade agreement could keep the market rallying. That’s what we saw to end the week, although reports that the two sides were finalizing a Memorandum of Understanding didn’t strike me as much of a final agreement. Nevertheless, it was spun positively.  Meanwhile, there remains no concrete, final agreement that comes anywhere close to what the President boasts will be the “greatest deal ever” with China.

Wading through all the innuendos, promises, good vibes, and any other way the talks are spun can keep one’s head spinning as well. Whether its all intended to goose the market or not is debatable, and it was interesting to note that on Friday, despite the hype over the talks, Chinese names were not rallying en masse. Fortunately, we can simply fix our attention on individual stocks, where trading reality lies, and mostly ignore the trade sideshow.

In this vein, the earnings action over the past two trading days has been ripe, to say the least. First, a big buyable gap-up move in Yeti (YETI) materialized after the company reported on Thursday before the open. That was a tricky one to buy, however, and one could have easily gotten crossed up.

The stock printed 20.90 at the opening bell, and then immediately tanked to 19.86, looking like a failed buyable gap-up (BGU) right off the bat. It then stabilized and took off, closing just below 22 on the day. Another spike higher on Friday was met with some selling as YETI stalled and backed off to close mid-range.

Obviously, from here, only pullbacks closer to the 19.86 intraday low of the BGU day price range would offer lower-risk entries from here. I’ve noticed that the stock will swing 5-7% quite readily on an intraday basis, so chasing this is a dangerous proposition.



Canada Goose Holdings (GOOS), which I’ve been following since it bottomed back in early January, reported some strong earnings and guidance on Thursday before the open. It began trading to the upside in the pre-open session but ran out of gas and by the open was up only slightly, printing 59.76 at the bell. It briefly ran up to a peak of 59.94 and plummeted straight down from there.

A fast and fearless short-seller could have hit the stock right at the open on the bearish moving average and MACD crosses on the five-minute 620-chart that both occurred just before the open. But you had to be fast because the stock broke from a peak of 59.95 to a low of 53.51 within the first ten minutes of trade. That was the poster child for a high time-value short-sale trade, to be sure.

GOOS couldn’t even catch a break when it finally hit the 200-dma in the first two hours of trading, slicing right through the line. It closed well below the 200-dma, and on Friday briefly rallied up into the 200-dma, where it could have been shorted again. It then broke to lower lows and down through the 50-dma, where it ended the week. Overall, a brutal post-earnings episode for GOOS.



Nvidia (NVDA) reported earnings on Thursday after the close, and the report was initially viewed as positive in the sense of not as bad as previously thought. The stock quickly gapped up to a peak of 168.88 in the after-hours trading session and bounced around a bit before steadily drifting lower from there. It ended the after-hours trading session on Thursday at 161.62.

On Friday the stock got as high as 164.80 in pre-open trade, but by the time the opening bell sounded it was down to 162.95. It briefly rallied as high as 163.87 before rolling over from there and closing at 157.34. That reversal gave up all but 2.81 points of the rally.

Today was a shortable gap-up move for NVDA that could have been exploited by alert short-sellers using the 620 intraday chart. I would now watch to see whether it can stabilize in here somewhere. As we have seen with several other stocks during earnings season, failed gap-up moves can find support somewhere in the prior base and emerge again. A couple of good examples would be Zendesk (ZEN), and (MTCH). We’ll see where NVDA goes from here, and whether that produces any opportunities long or short going forward.



Another name on my earnings watch list for the week that I posted in the Premium section of the website last weekend, was Arista Networks (ANET). As far as intraday volatility following an earnings-induced buyable gap-up (BGU) move, the stock may have taken the prize. The company also reported earnings Thursday after the close, and quickly launched from a closing price of 240.78 to over 260 in after-hours trade.

ANET printed 259.75 at the open on Friday and cruised to an intraday peak of 268.61 by the time less than an hour of the trading day had gone by. From there, it faltered rapidly and broke to an intraday low of 254.80. Interestingly, both the opening gap-up rally was buyable on the 620-chart, while the ensuing decline was shortable on the 620-chart, based on the separate signals at either end of the range.

The rally off the lows at that point, however, became buyable, based on the 620-chart signal. ANET then retraced as high as 264.55 as we went into the last hour of trade to close at 263.95.



All this spinning back and forth shows up on the daily chart of ANET as, what else, a big spinner BGU that ended the day about 1% above where it started. On a closing basis, the stock showed little net progress from the opening gap-up price. In between, however, on an intraday basis, the stock was quite the rollercoaster ride, and a very tradeable one at that.

Meanwhile, ANET remains active as a buyable gap-up move, using the 254.80 intraday low as your selling guide. Obviously, the proper long entry was on the turn off the lows on Friday, as shown on the 620-chart above. Now, I’d prefer to see a pullback closer to that low as a lower-risk entry, although the stock remains within 4% of that low so is still within actionable range.



I wrote in my Wednesday report that the big-stock NASDAQ names I follow were looking rather uninspired. And that lack of inspiration made itself quite plain on Friday when all these names sold off amid a big market rally on Friday. Here’s Apple (AAPL) slumping back below its 10-dma on slightly higher selling volume after news that Warren Buffet had cut back his position in the stock.



Next, we see (AMZN) plop right into its 50-dma on Friday as selling volume increased. A breach of the 50-dma would trigger this as a short-sale, should that occur. Otherwise, if the market rally continues then perhaps the stock has a shot at holding support at the 50-dma and bouncing from here. Play it as it lies.



Netflix (NFLX) has gone nowhere since Tuesday’s pocket pivot at the 10-dma. It remains within a roughly four-week price range after peaking into earnings in mid-January. On Friday, the stock stalled on light volume as buyers weren’t all that interested. I think NFLX could go either way here, and another test of the 200-dma might be the deciding clue.

That said, if NFLX can hold the 10-dma here as volume dries up, it could set up for a move to higher highs. Anything below that brings the 20-dema and 200-dma into play, at which point it’ll be interesting to see how it resolves such a test of those key moving averages.



I wrote on Wednesday that Facebook (FB) looked like an actionable short given its inability to hold above the 200-dma. That turned out to be somewhat prophetic as the stock has since drifted lower into its 20-dema as selling volume picked up slightly on Friday. It’s now slightly extended to the downside but rallies up into the 200-dma could present lower-risk short-sale entries from here.



The main takeaway from the weakness in these names is that they represent some divergence here. Whether that is the subtlest of bearish clues remains to be seen. They could right themselves and rally from here, carrying the indexes even higher, or they could all roll over, perhaps helping to send the NASDAQ Composite and the other indexes back below their 200-dmas.

This is nothing concrete, per se, but just something to keep in the back of your mind if these stocks remain weak. That said, the lack of participation from these names has not prevented the NASDAQ Composite and the NASDAQ 100 from clearing their respective 200-dmas on Friday. That’s because other areas of the market are much stronger, and that’s where our attention should be focused.

Advanced Micro Devices (AMD) successfully tested the 20-dema on Thursday, pulling down close to the line without quite touching it. Friday’s action constituted a five-day pocket pivot, but as most members know, I want to see a cluster of these in lieu of a single 10-day pocket pivot. Pullbacks to the 20-dema remain your lower-risk entry opportunities in AMD from here.



Twitter (TWTR) looked like a shortable stock on any rallies up into the 50-dma as I wrote in Wednesday’s report. That turned out to be the case again on Friday when the stock pushed right into the 50-dma (along with his friends, the 10-dma and the 20-dema) and rolled over from there. Volume was lighter than Wednesday’s reversal at the 50-dma.

I saw that one member commented on the Gilmo blog page that they expected TWTR to eventually break through, but so far, the technical evidence argues more in favor of a break down than a break through on the upside. The stock remains in a fractal head and shoulders formation, which forms the right shoulders of a much larger head-and-shoulders formation extending way back to February of last year.



This is the weekly chart of TWTR, below, and you can see this massive head-and-shoulders formation that is now over a year in duration, with the fractal H&S that forms its right shoulders. For that reason, until I see evidence to the contrary in the form of a strong move up through the 50-dma, near-term rallies back up into the 50-dma from here would constitute potentially lower-risk short-sale entries from here.



Below is a handy table of cloud names I’ve discussed in recent reports. The list is sorted by expected Earnings Due Date, with the nearest earnings due date at the top. You can see that Trade Desk (TTD), is expected to report earnings this week, on Thursday.

The list also shows the major moving averages with the 20-day simple and 22-day exponential showing instead of the 20-day exponential. The two moving averages create a zone of support that I find useful for setting alerts. In any of these names where the stock is trading above the 10-dma, that would serve as your first reference for any buyable pullbacks, but I favor using the 20-day and 22-day lines as more opportunistic references.



Almost all these names are quite extended on the upside, except for Tableau Software (DATA) and Twilio (TWLO). All the other names on this list are either hanging along their 10-dmas or extended from their 10-dmas, so that pullbacks to the 10-dma or, even better, the 20-dema would constitute potentially lower-risk entries. That’s really all you need to keep in mind with these stocks for now.

As for Tableau Software (DATA), things are going as I expected. Once the stock breached the 50-dma, all that did was set up the potential for a moving-average undercut & rally MA&UR long set-up coming up through the 50-dma. Since the stock pulled that off on Tuesday it has not looked back, save for a brief test of the 50-dma on Wednesday before moving higher.

Now DATA is in position for a possible re-breakout attempt. The stock pulled back on Friday and tested the 10-dma without quite touching it and then closed tight as volume dried up. This looks buyable here or as close to the 10-dma as you can get it, with the idea that it will soon re-breakout after the initial failed breakout just before earnings.



In the same way that DATA is recovering after a bad break following its earnings report, we could see the same thing occur with Twilio (TWLO). While the set-up could be viewed as bearish and a potential late-stage breakout failure, the reality is that the prior breakout hasn’t quite failed. Instead, the stock is hanging along the top of its prior base as volume declines.

The fake-out here is that the stock is currently tracking just below its 20-dema. However, a move back up through the 20-dema would trigger a MAU&R long set-up at that point, so that is something to watch for. Volume dried up nicely on Friday as the stock held tight and near its highs for the day, which looks to me like a precursor to a move back above the 20-dema. Watch for it.



The Trade Desk (TTD) is expected to report earnings this Thursday, after the close. It initially failed after a breakout attempt nearly two weeks ago, but that breakdown found support at the 20-dema and the stock rebounded from there. Again, as is so common in this market, we have a breakout that fails, followed by a re-breakout that then runs up to the prior highs.

This sets up what I call a Flying V formation, where the stock runs up to the prior highs in a double-top type of move, pulls back, as TTD did three days ago on the chart. That looks potentially bearish, but it is just a fake-out. TTD’s pullback held support at the 10-dma and is now at an all-time closing high heading into this week’s expected earnings report.



Zendesk (ZEN) is another kind of Flying V formation, and another example of what is becoming the standard breakout failure followed by a successful re-breakout. The failed breakout combined with the re-breakout forms a V-shaped formation, hence the term Flying V. I want to make it very clear, however, that this is just what I call it – it has no predictive value.

That said, notice the way ZEN is hanging very tight along the prior highs, giving the appearance of a double-toppy type of formation. The thing looks like it needs to pull back, yet it may not. It may just keep going higher. That said, a pullback to the 10-dma would certainly offer a more opportunistic entry, if you can get it, but so far ZEN doesn’t seem to want to give up much on the downside.

The key point here is that the proper entry was on the pullback down to the top of the base that almost filled the prior gap before the stock bounced hard. The move is almost hard to believe when you see it happen, and probably the last thing anyone looking at this chart would expect ZEN to do is move higher. The Flying V in action.



Roku (ROKU) is expected to report earnings this Wednesday. The stock has continued to post higher highs, but on light volume. Because earnings are expected in two trading days from the date of this report, ROKU is now officially on Earnings Watch, with nothing to do in the stock until the report is out. February 25th.

I’m finding that I am forced to keep re-thinking both Etsy (ETSY) and Planet Fitness (PLNT), which I previously referred to as the failed breakout twins in my Wednesday report. These stocks act so similarly it’s uncanny, from their failed breakouts to their pocket pivots to their tight action throughout most of January and so far into February. In my Wednesday report, I discussed them most as possible short-sale targets and hypothesized about what they might do after earnings.

After another two days’ worth of technical evidence on their charts, I’m not so sure about my prior thesis. Here’s Etsy (ETSY) which is recovering back up through its 50-dma after breaking below the line last week. That move below the 50-dma followed by the move back above the 50-dma is…you guessed it, a MAU&R through the 50-dma!

For the record, one can refer to a MAU&R as the more easily pronounced single word, mower. Imagine how mystified your friends will be when you tell them, “Oh yeah, ETSY was a buy when it had a mower.” Notice also that the mower was also an undercut & rally (U&R) move back up through the prior late-January lows.

Also note that the day before the early February failed breakout (that looked quite ugly, I might add) and the failed breakout itself both qualify as pocket pivots at the 10-dma. After Wednesday’s second failed breakout, the stock posted a low-volume pullback to the 10-dma/20-dema confluence on Thursday. This was followed by a five-day pocket pivot on Friday.

Bottom line: ETSY isn’t rolling over and playing dead just yet. Earnings are expected on February 25th, so the question is when we’ll see some kind of move develop. The action is interesting, if not tantalizing.



Planet Fitness (PLNT) also has failed breakouts and unimpressive pocket pivots within its pattern as it continues moving in an excruciatingly tight sideways pattern that is now five weeks long. The expected earnings release date has been updated to February 26th, one day after ETSY reports. Meanwhile, the pattern is so tight on the weekly char that it squeaks.

The question with both PLNT and ETSY is whether anything can develop ahead of earnings. At least enough so the trade is worth one’s while. Otherwise, we’re just sitting waiting for earnings to be released so we can figure out something more definitive. That said, if these stocks were not looking at earnings coming within the next two weeks, I would have to view them as buyable in anticipation of breakouts to come.



Aurora Cannabis (ACB) continues to drift lower after finding support at its 200-dma on Monday following its earnings report of that day. The pullback is currently holding at the 20-dema and so far, has the characteristics of a Wyckoffian Retest, where the stock is pulling down toward the 200-dma as volume dries up without quite getting down as far as the 200-dma.

That does put it in a buyable position here, although the more opportunistic approach would be to wait for it to get closer to the 200-dma. The only problem with that is that it may not happen. ACB closed one penny below the 20-dema on Friday, so continues to move into a more buyable position, with the 200-dma serving as ultimate support.



Cronos (CRON) and Tilray (TLRY) were both expected to report earnings after the close on Wednesday, but this never happened. TLRY announced that it would report in “mid-March” without giving a specific date. CRON’s expected earnings report date has also been changed. It says it will now report on April Fool’s Day.

Amid this earnings report shell game taking place in the weed patch, at least Canopy Growth (CGC) reported as it was expected to, on Thursday after the close. The report came out later in the evening, but it did come out. CGC reported a loss of 38 Canadian cents per share, but revenue growth skyrocketed to 282.5% on sales of $83 million Canadian dollars or $62.8 U.S. dollars.

The loss was 13 cents more than expected, missing estimates, but revenue was higher than expected. What puzzles me is that MarketSmith reports the quarter as showing 22 cents in earnings, a 999% increase. It also shows sales of $97.7 million, an increase of 350% (see chart below). These differ starkly with the company’s actual earnings release.

Based on my own experience having worked for William O’Neil + Co., Inc. which runs the research department that MarketSmith and IBD use, this could be due to internal adjustments made by the O’Neil organization to reflect extraordinary items. It is not clear to me, however, what calculations might have resulted in such discrepant earnings and sales numbers.

Numbers aside, CGC attempted to gap higher on the news, but ran into selling resistance near the $50 price level. This is also just below the area of price congestion I’ve highlighted on the left side of the chart, where the mythical “high, tight flag” formation occurred. That would present logical overhead resistance for the stock.

Last week I discussed CGC as being a possible Punchbowl of Death (POD) short-sale formation, looking for a breach of the 20-dema as confirmation. We started to see that earlier this past week, but the stock regained the moving average ahead of Thursday’s earnings report. Technically, Friday’s action, despite the stalling, would qualify as a pocket pivot at the 10-dma.

The one point I would emphasize about POD formations is that they generally fail within the context of a market decline. Last year we saw ROKU break out of a POD-like cup formation, but it kept going higher, and did not finally split wide open until the market topped and rolled over in October.

Therefore, there is still a chance that CGC could set up here in a big, admittedly ugly, cup-with-handle formation and continue higher. That means we could see some other buy set-ups occur within what is currently a handle area. Technically, one could test Friday’s stalling pocket pivot here using the 10-dma as a tight selling guide. Alternatively, and more opportunistically, an undercut of this week’s low at 41.68 could set up a U&R move at that point.



The weekly chart of CGC, below, shows the ten weeks straight down and six weeks straight up punchbowl like formation. Generally, such rapid movement down and then straight back up does not allow enough time for the stock to consolidate the sharp gains off the lows. This is what leads to the eventual failure and breakdown from the right-side peak of the POD.

But as I said, such POD breakdowns tend to occur during market corrections or bear phases. That’s where this current handle comes into play in terms of potentially setting up further highs if the market rally remains intact. This is what must be monitored closely, using any potentially opportunistic entries within the handle to one’s advantage.



As I said earlier in this report, all the hype and bluster over a Memorandum of Understanding on U.S.-China trade didn’t set the Chinese stocks on fire. Pinduoduo (PDD) is still hanging along its 20-dema, and I’m still watching this for a more opportunistic test of the 50-dma, while Momo (MOMO) is just floundering around its own 20-dema. MOMO is expected to report earnings on March 7th, while PDD is expected to report earnings on March 20th.

One of the better-performing Chinese names lately has been one I’ve discussed in my video reports, a.k.a. The GVR. That would be recent IPO Tencent Music Entertainment Group (TME), which I began discussing in the GVR about a month ago. Note that this is a volatile stock and can slide back and forth as much as 10% in a single day.

When something is this volatile, the only approach that makes any sense is an opportunistic one. Chasing strength is not rewarded, as Friday’s pullback following Thursday’s big breakout move proves. The key is to understand where the opportunistic entries lie, and I show two such entries on the chart below.

The first of these is an undercut and rally move that occurred ten trading days ago on the chart as TME pulled down into the short IPO base it formed during the prior market correction. That was actionable at the 14.20 price point, and the stock never looked back. The second occurred on the volume dry-up that occurred on the volume dry-up near the 20-dema six days ago on the chart.

From here, TME could pull in to test the 10-dma, or maybe even the 20-dema. If volume dries up on that kind of move, it would create a fresh, opportunistic entry at that point. TME is currently sporting at least four quarters of triple-digit earnings growth with strong sales growth, and if this is the “Spotify of China” it certainly has a large, addressable market, as I’ve noted in my previous GVRs.



Looking around for fresher ideas with compelling thematic underpinnings, last weekend I discussed Viavi Solutions (VIAV) in last weekend’s GVR. At that time the stock had posted a buyable gap-up (BGU) after earnings two Wednesday’s ago, but stalled badly near the prior left-side peak of the cup formation.

It then spent the last two days of the previous week pulling in to test the 11.70 low of the BGU day’s price range, bringing it into a very low-risk entry position, as I noted in last weekend’s GVR. This past week VIAV recovered and posted a type of Flying V (there it is again!) move as it broke out to new 52-week highs on strong volume.

VIAV is a maker of VCSEL devices, also known as 3-D or optical sensors. A couple of weeks ago, I listened to the earnings conference call from Lumentum Holdings (LITE). In it, LITE’s CEO emphasized that the 3-D sensor business was set to grow rapidly over the next five years, with Android phones providing a good deal of this future growth.

VIAV strikes me as more of a pure-play in 3-D sensors, so the BGU last week looked interesting to me, and that was why I discussed it in the GVR. It has now broken out, so you breakout buyers can step in here, although I’d look for any small pullback as a more opportunistic entry, if I can get it.

VIAV is also showing strong earnings growth of 50% and 120% over the last two quarters with a three-quarter acceleration in sales growth of 12%, 33%, 41%, and 49%, sequentially. We’ll see if it can build on this latest breakout attempt. But note that it has come straight up to the left-side peak of a cup formation, so could spend some time building a handle.



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.

With the Big-Three major market indexes now all trading above their 200-dmas, we now have a convenient reference for any potential market rally failure. If these indexes start dropping back below their 200-dmas, then the rally may be in trouble. Until then, the rally remains in force.

My view is that it is being driven by the forced continuation of easy-money policy from the Fed going forward. With the U.S. national debt clearing the $22 trillion threshold this past week, the need for low interest rates simply as a matter of budgetary survival becomes paramount. I think the Fed knows this, and it is why I believe that there is a very good chance the Fed will be lowering rates later in the year.

Meanwhile, the strongest moves over the past month have come from stocks launching straight up off their late-December and early-January lows. If we think about it, ROKU has been one of the biggest gainers in this market, nearly doubling in about six weeks’ time. Other names, like COUP, which was first discussed in the GVR in early January, has also nearly doubled off its December lows near $50.

Also note that ROKU is nowhere near breaking out, as it would need to clear 77.57 to do so, and closed Friday at 52.08. COUP broke out a couple of weeks ago and is about 20% above its breakout point but more than 50% above where I first discussed it in my GVR at around 63-64 in early January.

I am starting to see other areas of the market round the bend, so to speak, and am interested in names in the telecom and bio-tech space, as well as additional opportunities within the cloud space. In some cases, there are overlaps between the cloud and telecom spaces, I will begin to touch on some of these in this weekend’s GVR, so I’ll see you all there.

Meanwhile, we continue to focus on opportunities created by sharp moves in earnings season, which can emerge on the long or the short side, or even both, as ANET illustrated on Friday. This week will be chock full of more earnings reports from companies I’m interested in, which will also be covered in this weekend’s GVR. So, as always, just watch the stocks, and play them as they lie.

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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