The Gilmo Report

February 20, 2019

February 20, 2019

The indexes started the week off with higher highs, as the NASDAQ Composite Index pushed just a bit further above its 200-dma. This keeps it in step with the other two Big-Three market indexes, both of which have pushed a reasonable distance beyond their own 200-dmas. Today, the NASDAQ churned along its 200-dma on slightly higher volume, but so far is holding tight along the line.

 

 

The S&P 500 and Dow Jones Industrials Indexes both remain well above their 200-dmas, logging higher highs on Tuesday as well. Volume was higher, but the action had a bit of a churning characteristic to it. Nevertheless, for now the uptrend remains intact from an index perspective.

 

 

The major indexes are now all at least more than 18% above their Christmas Eve lows, with the NASDAQ having the biggest move of nearly 21% off its late-2018 lows. The rally is now approaching eight weeks in duration, and, with only a couple of brief pauses along the way, has been a straight-up affair. With the indexes extended on the upside, so are most, if not all, of the stocks that have led the rally over the past seven weeks.

This creates an obvious situation where little in the way of lower-risk entries exist among leading, or would-be leading, names. Stocks overall simply reflect the index action, with most leaders trending higher as they become ever more extended. For that reason, I don’t see a lot that is new to do here, and in some cases profit-taking may be warranted, but I’ll get to that later.

This is one major reason why earnings season becomes an area of focus given that it presents actionable, high-velocity, and high time-value opportunities. And, as we have already seen, these can be on the long or short sides, or even both on the same day, as was the case on Friday with Arista Networks (ANET).

ANET went from a shortable gap-up to a buyable one, and from there has continued higher so far this week. It is now extended, but exemplary as the type of opportunity that can arise after earnings. In this position, it is extended and stalling as it pushes to higher highs and volume declines sharply. Look for a retest of the 154.80 intraday low of last Friday’s BGU price range.

 

 

Earnings season can produce some fresher set-ups that become actionable a few days after the initial gap-up. For example, CyberArk Software (CYBR), one of several cyber-security names that I’ve discussed in both my written and video reports, gapped up monstrously after earnings last Thursday.

While that presented a buyable gap-up move last Thursday once it set a low at 96.60, and could have been actionable on that basis alone, CYBR did set up in a different long configuration yesterday. That configuration was discussed as a possibility in my weekend video report, and it was quite simply the fact that CYBR was also triggering a long entry at the $100 Century Mark based on Jesse Livermore’s venerable Century Mark Rule on the long side.

Yesterday, CYBR drifted to an intraday low of 99.20 and then quickly rallied back above the $100 price level, where it could have been bought right there. One would then use the 100 level with or without an additional 1-3% of downside porosity as their selling guide. Easy enough. Now CYBR has pushed back up to the Thursday highs, but is technically within buying range of the Century Mark, using the selling guide I just prescribed.

 

 

One thing to watch for with CYBR, however, would be a clean failure back through the $100 price level. This would trigger a possible short-sale set-up at that point, based on Livermore’s Century Mark Rule in Reverse for the short side. If that occurred, then you would flip to using the $100 price level as a guide for an upside stop. For now, however, CYBR is playing out as a long set-up at the Century Mark.

And then there’s the opportunistic, Ugly Duckling-style set-up that occurs after a stock is slammed after earnings. Here’s an interesting situation and set-up in another small cyber-security name, Qualys (QLYS). The stock gapped down brutally after earnings last Wednesday, busting the 200-dma on huge selling volume.

But it found support along the 50-dma as volume declined over the next two days. Yesterday it finally found the wherewithal to bounce sharply off the 50-dma and back up through the 200-dma, triggering a moving-average undercut & rally set-up at the 200-dma. At that point, one then simply uses the 200-dma as their selling guide.

QLYS today pulled back down toward the 200-dma, offering another entry opportunity. This is a very fluid situation and buying here means keeping the 200-dma as a tight selling guide in case it doesn’t hold.

 

 

We can also see how big-stock NASDAQ tech Nvidia (NVDA) played out nicely as a shortable gap-up on Friday. But as I told members to watch out for, the stock’s pullback that nearly filled the gap on Friday could set up an opportunistic long entry. That turned out to be the case as the stock rallied back to the upside today.

Note that NVDA didn’t look all that appetizing after yesterday’s reversal where the stock also tried to rally but reversed to close in the red. Volume was light, however, and the stock closed above the 156.42 intraday low of Friday’s gap-up price range. Thus, an opportunistic trader could have entered the stock there, using the 156.42 price level as a tight selling guide.

That would have been good for a few points on the upside today, but NVDA stalled to close near the intraday lows on lighter volume. This could easily morph into a short-sale here, and I would watch for a failure through the 156.42 price level as your first indication of this.

 

 

We also know that Viavi Solutions (VIAV) provided a more coherent delayed buyable gap-up entry after stalling badly on its buyable gap-up move of two weeks ago on February 6th. In this case, we get a big, stalling buyable gap-up move, but note that resistance was found near the prior peak on the left side of the big cup formation. Therefore, the resistance was logical.

VIAV then pulled in with volume declining sharply to test the 11.70 low of the buyable gap-up range and launched higher from there last Monday. I discussed the stock in detail in my weekend video report dated February 9th. The pullback near the BGU low was a prime lower-risk entry spot, and the stock has launched higher from there, even breaking out to 52-week highs. It is now extended, in my book, since I don’t consider an obvious straight-up type of breakout move an optimal entry. That occurred around 11.80 last Monday. VIAV is, however, another example of a post-BGU long entry opportunity gained as a result of picking the right time and place to act.

 

 

With the cloud names I follow all extended, we are left to trying to capitalize on moves that transpire after earnings. Twilio (TWLO) was one I discussed in the weekend report as one to watch for a move back above the 20-dema, triggering a moving-average undercut & rally (MAU&R) long entry at that point. That’s precisely what we saw yesterday, and the stock is now back up to its pre-earnings highs.

After earnings, TWLO offered an interesting short-sale set-up good for the scalp down to the top of the prior base and just below the 20-dema. In this manner we see how the stock materializes as first a short and then a long play. It is also a good example of the types of opportunities we must look for in extended names. This is the essence of an opportunistic approach.

 

 

And, with some of these clouds so extended on the upside, you always run the risk of having your stock downgraded. That happened today with Trade Desk (TTD) just ahead of tomorrow’s expected earnings report after the close. Obviously, with the stock already quite extended, there was no need to be long the name, necessarily, ahead of earnings, but anyone owning the stock today got smacked up-side the head on this one.

With earnings coming up, however, taking at least partial profits on the move to new highs yesterday would have been a prudent move. In any case, TTD again found support at its 20-dema as it did nearly two weeks ago, pending tomorrow’s expected earnings report.

 

 

Tableau Software (DATA) is the only cloud name that remains within a long base. Its current base extends back to mid-December and includes a failed breakout, but one that we can allow for given that it occurred just before earnings were reported. DATA then gapped down after earnings, undercut its 50-dma, and is now back above that key moving average, along with its 10-dma and 20-dema.

DATA found support at the confluence of its 10-dma and 20-dema today as volume came in well above average for a second day of supporting action along those two short moving averages. Thus, the stock is in a lower-risk entry position here, using the 10-dma, the lower of the two, as a tight selling guide. Alternatively, one could use the 50-dma as a wider selling guide.

 

 

Below is the current list of cloud names discussed in recent reports. The grid, or Warehouse View as it is known on HGS Investor Software, where it was generated, shows the stocks with the price levels of their various moving averages. I have highlighted the moving average price levels that now serve as the current reference for support. Whereas last week all these names were holding above their 10-dmas, note that TTD, WDAY, CRM, COUP, TEAM, and NOW are all trading below their 10-dmas.

In those cases, I have highlighted the 20-dma and the 22-dema lines which now represent your references for the next lines of near-term support. You can click on the list to make it larger.

 

 

I would emphasize, however, that I would prefer to take a more opportunistic approach to any of these extended cloud names. That would be by looking for deeper pullbacks rather than buying them above or at their 10-dma, for example. In the case of Zendesk (ZEN), for example, we can see that while it did hold at the 10-dma today, selling volume was heavy.

This looks like it may be harkening a pullback closer to the 20-dema given how extended the stock is on the re-breakout attempt that formed the Flying V look to the pattern. In this position, I view ZEN as extended, therefore the 20-dema becomes my opportunistic reference for a buyable pullback. This is how I view the cloud names in general at this juncture.

 

 

Yeti (YETI), not shown, has continued to trend higher following last Thursday’s buyable gap-up (BGU) move. It moved over 20% higher in just two days from the BGU intraday low at 19.86 as it became quite extended. In my view, that’s when the Piggy Principle comes into play, and today’s move to higher highs was an opportune moment to take some profits, as I see it.

YETI then reversed hard to close in the red on heavy selling volume. Because it is out of buying position after getting a bit piggy on the upside, there is no long set-up here. Therefore, all we can do now is sit back and see where the next actionable entry sets up, assuming the stock settles down and tries to build another base formation up here.

 

 

Roku (ROKU) is expected to report earnings tomorrow after the close. The stock has been strong on the upside, thanks to a positive article in Barron’s Magazine over the weekend. I’ll be watching this one closely tomorrow for any actionable moves that might ensue following earnings.

The action in big-stock NASDAQ names like Apple (AAPL) and Amazon.com (AMZN) don’t have much appeal to me. Perhaps Netflix (NFLX) looks a little better but its progress has been slow and begrudging. The stock posted a higher high today on an intraday basis but could not follow-through as volume remains low.

Technically one could view this as buyable here using the 10-dma as a tight selling guide based on last week’s pocket pivot at the 10-dma. I’d be ready to play this in either direction, however, since a breach of the 10-dma would set up a test of the 20-dema and 200-dma as more reliable support.

 

 

Facebook (FB) still looks like social-media flotsam as it drifts below its 200-dma but is still holding above the 20-dema. The company continues to come under fire for its abuse of user data, with the government of the United Kingdom recently accusing it of being a “digital gangster.” I expect that this is a trend that will continue, as the company’s questionable business practices and handling of user data come under increased scrutiny.

For that reason, I view any rallies up into or close to the 200-dma as likely to be actionable on the short side. Secondly, a clean breach of the 20-dema would also trigger a short-sale entry at that point, so can be watched for going forward.

 

 

It could be argued that Twitter (TWTR), as the other publicly-trade big-stock social-media name, gets something of a negative halo effect from FB’s travails. The pattern alone looks ugly enough. The stock has made several attempts at retaking its 50-dma, but so far has been unsuccessful. Over the past five trading days, it has stalled at the 50-dma four of those days.

Today, TWTR again ran just above the 50-dma, but reversed as selling picked up slightly. It’s clear that the battle line has been drawn at the 50-dma, and unless TWTR can eventually regain the line, it remains clear resistance for the stock. Therefore, until proven otherwise, rallies up into the 50-dma remain optimal short-sale entry opportunities.

 

 

Advanced Micro Devices (AMD) has trundled back up toward its prior highs, but volume has been unimpressive. Nevertheless, it remains in a three-week consolidation following its late-January buyable gap-up (BGU) move after earnings. Pullbacks to the rising 20-dema, now at 22.66, remain your lower-risk entry opportunities from here.

 

 

Etsy (ETSY) is expected to report earnings next Monday, and the stock continues to hang along its 10-dma and 20-dema. Technically, this puts it in a lower-risk entry position using the two short moving averages as tight selling guides. However, I’m more interested in seeing what this does after earnings, which is only three trading days away, so I’m willing to hang until then.

 

 

Planet Fitness (PLNT) attempted another breakout attempt yesterday, but like all the others this one failed as well. To its credit, it did hold the 20-dema today as volume declined. The company is expected to report earnings next Tuesday, so with just four trading days left before earnings are reported, this one goes on the Earnings Watch List along with ETSY.

 

 

If there’s any area of the market that is looking interesting right here, right now, I would have to say it’s the weed patch. Patience once again proved its worth with Aurora Cannabis (ACB) as it finally ran into its 200-dma today where it found some slight support. Volume picked up slightly vs. yesterday as the stock pinged right off the line. This puts it in a lower-risk entry position using the 200-dma as a tight selling guide.

 

 

Canopy Growth (CGC) is also interesting as it settles along its 10-dma with volume drying up to -40% below-average today. This puts the stock in a lower-risk entry position using the 10-dma as a tight selling guide. Alternatively, one could lay back for a slightly deeper pullback to the 20-dema as another lower-risk entry spot.

Keep in mind, however, that CGC must absolutely hold at the 20-dema, otherwise a test of last week’s low at 41.68 might be in the cards. If it did bust the 20-dema and headed for that low, I would then be on the lookout for a possible U&R long set-up possibly occurring at that point. This remains highly fluid, and trafficking in CGC will require being both nimble and flexible as one assesses its action in real-time.

 

 

Tilray (TLRY) was supposed to report earnings on Wednesday of this week, but the company revised its report date to “mid-March,” without giving any specific date. That at least takes earnings roulette off the table. It also makes the stock tradeable for some kind of move ahead of earnings.

In my weekend video report, I discussed the stock as buyable along the tight lows it formed last week. I noted that one could take a position along these tight lows, using the lowest point of the five-day sideways formation at 75.25 as a tight selling guide. That would have worked out well today as TLRY flashed a bottom-fishing pocket pivot (BFPP) at the 50-dma on strong volume.

The 50-dma is at 78.84, and TLRY closed today at 81.10, which keeps it within buying range while using the 50-dma as a tight selling guide.  That said, any pullback closer to the 50-dma from here would obviously help to provide a lower-risk entry opportunity.

 

 

As the March 2nd deadline for raising tariffs on Chinese goods approaches, Chinese names have been all over the place. Pinduoduo (PDD), not shown, decided to make me look silly by rallying off its 20-dema to test the $30 price level and its recent highs once again. I considered that an unlikely move per my discussion over the weekend, but stocks often like to prove one wrong.

In the meantime, I would still wait to see how PDD is able to consolidate here as its expected March 20th earnings report date approaches. Meanwhile, Momo (MOMO) posted a pocket pivot off its 10-dma yesterday. That, of course, didn’t go any further today as the stock reversed and closed in the red on about even volume.

Nevertheless, MOMO remains a stock for the opportunistic, since buying this one is best done when it comes into support. It did that Friday as it dipped just below the 10-dma and near the 20-dema, which has served as support for the stock over the past month. Therefore, pullbacks to the 10-dma and 20-dema remain your best, lower-risk entries for MOMO as its expected March 7th earnings report date approaches.

 

 

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.

While the Big-Three major market indexes remain above their 200-dmas, I don’t see a lot that makes me want to pound the table on the long side. The set-ups in the weed patch are interesting, but other areas of the market that have led the rally off the Christmas Eve lows, such as the clouds, are looking a bit strained and in need of some consolidation and rest.

For that reason, I’m inclined to let them do so, unless I see something that has some potential, as TWLO did yesterday morning as it pushed up through the 20-dema. It may be that this is the point to take some profits on that trade. Meanwhile, in general, I prefer to remain opportunistic here, waiting to see how things develop as the market gets extended to the upside.

The potential for some sort of U.S.-China trade agreement, no matter how shallow or meaningless, always sets up the possibility of a big market rally in response. The question is whether such a rally would prove to be one to sell or even short into. We won’t know until we get there. And if we don’t see something come out of these current, much-hyped trade talks, perhaps the market will sell off anyway. A good pullback would be useful, perhaps, in helping to create some lower-risk long entries, or even sound the horn for some short-side action.

So, I try not to get wrapped up in all the news, preferring to just watch the stocks. Right now, as I said, I don’t see a lot that looks all that juicy, a term I am fond of using when I see a set-up, long or short, that just begs to be taken. So, armed with a few actionable set-ups, we tarry forward as we see where the market goes from here. 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.