The Gilmo Report

February 24, 2019

February 23, 2019

Friday gave us six dovish Fed heads speaking, six “Memoranda of Understanding” resulting (from U.S.-China Trade talks), and the Trump Administration announcing (just about everything regarding the current U.S.-China trade talks except an actual trade agreement). All that was missing was a partridge in a pear tree, but it gave the market the fuel it needed to keep rallying.

The NASDAQ Composite Index regained its 200-dma on Friday after closing below the line on Thursday. Volume was higher, and overall the action was bullish. The underlying stock action was also very constructive, with some big movers among the stocks I’ve been following since early January.

 

 

The S&P 500 and Dow Jones Industrials Indexes both logged their highest highs since the late-December lows and remain well above their 200-dmas. Volume was light. As with the NASDAQ, the trend for both these indexes remains to the upside. The trend is your friend, until it bends at the end, as the great trader Ed Seykota used to say!

 

 

Small-caps are following in the footsteps of their bigger brethren, as the small-cap Russell 2000 Index, as represented by the daily chart of its proxy, the iShares Russell 2000 ETF (IWM), just cleared its 200-dma on Friday. Overall, the index action is beyond reproach

 

 

Earnings season has continued to provide high-velocity, high time-value moves in stocks after they report earnings. Focusing on earnings season as a potentially fertile field of opportunity has made the need to try and find newer or fresher set-ups somewhat moot.

The big movers in this regard on Friday included perhaps the first stock I suggested buying when the market turned back in late December and early January, Roku (ROKU). The stock gapped up after earnings, set a low of 54.50 right at the open, and then launched higher from there.

By the close, ROKU printed 64.47 for a final 25.2% total move on the day, and a 17.0% move from the opening price of 55.09. Obviously, at this point, it is way, way extended, but was playable as a BGU on Friday. The weekly chart below shows where I first suggested buying the stock based on a macro-U&R (undercut & rally) set-up near the prior $29 low.

 

 

If you thought ROKU’s move was a hot one, Trade Desk (TTD) had one that was even hotter. After getting blind-sided by an analyst who downgraded the stock on Tuesday, TTD reported earnings on Thursday after the close after finding support at its 20-dema. The company blew away estimates and gapped up on Friday, printing an even 175 at the opening bell.

TTD then briefly dropped to an intraday low at 173.50 and then never looked back from there. It eventually reached a peak of 200.15 before closing at 197.73. That was good for a 31.3% overall upside move and 12.9% from the $175 opening print. The stock is now way, way extended from the BGU intraday low of Friday.

However, note that it closed just below the $200 Century Mark, so that a move up through $200 would trigger a buy signal based on Jesse Livermore’s Century Mark Rule. Failure at the $200 level followed by a sharp move to the downside could, conversely, set-up a short-sale. For now, it’s just a matter of monitoring how it acts around the $200 Century Mark, where it technically ran into resistance intraday on Friday.

 

 

First Solar (FSLR) is a name I’ve been discussing consistently in my video reports since early January when it first cleared the 50-dma, and it was included in my earnings watch list spreadsheet posted over the weekend. The stock has zigged and zagged its way higher since, with several bouts of high-volume selling along the way. It reported earnings Thursday after the close and opened Friday right at its 200-dma.

This presented a contrarian opportunity for buyers at the 200-dma. The earnings report was quite strong, with FSLR reporting 296% earnings growth on 104% sales growth. This was a big turnaround from prior quarters where earnings and sales contractions were being reported.

Thus, a creative and courageous trader could have picked up shares at the 200-dma while using that as a very tight selling guide. By the close, FSLR pulled a big outside reversal to the upside on heavy volume. I’d look for any kind of pullback from here as an entry opportunity, using the 200-dma as a maximum downside selling guide.

 

 

Arista Networks (ANET) is also extended after last week’s buyable gap-up move through the 200-dma. For now, it is a matter of looking for a retest of the 154.80 BGU intraday low, which seems unlikely, or to simply wait for the 10-dma to catch up to the stock. At that point, we’ll get a clearer picture with respect to concrete levels of support on any pullback or consolidation that occurs from current, extended levels.

CyberArk Software (CYBR) tested its $100 Century Mark level on Thursday morning, getting as low as 100.36 before rallying higher from there. This was a nice entry opportunity based on Jesse Livermore’s Century Mark Rule for the long side for anyone who did not act on the buyable gap-up move of two Thursday’s ago.

CYBR is now extended. Only pullbacks closer to the $100 Century Mark level would offer lower-risk entries from here. CYBR is a good example of the opportunities that can occur the first trading day following an earnings release as well as those that can occur a few days afterward.

 

 

Qualys (QLYS) is holding squeaky tight just below its 20-dema, but mostly in the region between that and the 200-dma. For now, it can be played as a moving-average undercut & rally (MAU&R) after regaining the 200-dma, while using the 200-dma as a tight selling guide.

Volume has been drying up sharply as the stock has held tight. This is either going to resolve with a move up through the 20-dema, which would trigger another MAU&R at that point, or it will fail at the 200-dma. For now, QLYS is a long trade, as long as it continues to hold the 200-dma.

 

 

Traditionally, something like QLYS would appear to be a late-stage base-failure. But in this market, the Flying V formation, which includes sharp recoveries after a big downside break, seems to be a common occurrence. For example, look at our old friend Canada Goose Holdings (GOOS), which got slaughtered after reporting a strong quarter and strong forward guidance.

I know at least one member has been on to the idea of GOOS as a potential recovery play after the slash-and-burn sell-off that pushed it below the 200-dma. It eventually found support at the lower 50-dma, and bounced off the line two days later, retaking both the 200-dma and the 20-dema. Technically, this could be viewed as an MAU&R at the 20-dema, which it held over the next two days in very tight fashion.

GOOS then goosed itself back up through the 200-dma and the 10-dma, triggering another MAU&R at the 200-dma on Friday. I would not be surprised if the stock just kept pushing back to the highs from here, so that any small pullback into the 200-dma would offer another lower-risk entry from here, using the 200-dma as a tight selling guide.

You might notice that QLYS bears some resemblance to GOOS. The fact is, these types of Flying V moves after a sharp downside break are quite common in this market. And I’m not citing some historical precedent baloney from 1986; this is what is going on in real-time, in this market, right here, right now. And when you observe this pattern occurring repeatedly, like the venerable U&R long set-up, you go with it because it is de facto “how the market really works” right here and now, end of story.

 

 

In this vein of thought, let me throw another one at you in Wix.com (WIX), which got slammed after earnings on Wednesday, gapping below its 20-dema on massive selling volume. The company reported a 163% increase in earnings on 39% sales growth. But guidance was not up to par, even though the company is making a strategic shift in its business which it claims is seeing early success.

All that is well and good, but I will just focus on the technicals here. On Friday, WIX regained its 20-dema on above-average volume as selling interest dissipated. While only a fool would have bought the breakout ahead of earnings on Tuesday, in my humble opinion, it may be more interesting here now that it looks so ugly.

So, there’s a simple way to play this. Buy it here and use the 20-dema as the tightest of selling guides, or use the lows of the past two days, around 108, as 3% stops from Friday’s close. At the very least, risk here is much tighter than buying a breakout and then mindlessly using an arbitrary 7-8% stop.

 

 

GoDaddy (GDDY) is a cousin-stock to WIX. It reported earnings Wednesday after the close and posted a buyable gap-up move on Thursday. It pushed below the 74.46 intraday low of Thursday’s BGU price range on Friday but closed back above it at an even $76. This keeps it within buying range of Thursday’s BGU, using the 74.46 price range, plus another 1-3% of downside porosity, as a tight selling guide.

 

 

Technically, Nvidia (NVDA) had a buyable gap-up (BGU) move after earnings two Fridays ago since the initial gap-up move did exceed 0.75 times the stock’s 40-day Average True Range. But it gave most of that up on the gap-up day but still just barely closed above its intraday low of 156.42. On Thursday, the stock closed below that low, looking like a possible BGU failure, but volume was light.

It has since been able to hold tight sideways as volume declines, which looks constructive. If the stock doesn’t want to give it up on the downside, then we can play it as a long here, using the 156.42 price level as a tight selling guide. If it busts that low on volume, then one flips to the short side, so just play it according to the real-time action as it plays out from here.

 

 

Twilio (TWLO) worked well this past week as an MAU&R at the 20-dema on Tuesday morning to start the week out. The ensuing two-day move took it above the 10-dma, and Thursday’s pullback to the 10-dma on lighter volume provided a secondary entry opportunity. I’d look for this to continue moving along the 10-dma, with pullbacks to the line remaining lower-risk entries, if you can get ‘em.

 

 

Tableau Software (DATA) was buyable along the confluence of the 10-dma and 20-dema as I discussed in Wednesday’s report. That was an opportune, lower-risk entry spot, and the stock then pushed higher from there. The move off the two short moving averages extended into Friday as the stock posted a re-breakout after failing on a prior breakout attempt in early February.

This sort of re-breakout move is very typical for this market, as anyone who has been following my reports for at least the past several months knows. And, often, these re-breakouts occur on light volume, as DATA’s did on Friday. Since I don’t buy breakouts as an initial entry, in my view the proper buy point was at the 10-dma/20-dema confluence on Thursday morning.

 

 

Below is the usual watch list of cloud names discussed in recent reports. Note that three are expected to report this coming week, all on February 28th, which would be Thursday. Those are the three at the top of the list, SPLK, WDAY, and ZS, which is sorted by nearest earnings date first.

Also note that all but one, DATA, are trading above their 10-dmas. DATA has the slightly unique feature of having its 20-dma running just above its 10-dma. This is because it has been sitting in a base since November. Perhaps now it starts to move higher in earnest. With any of these names, given their overall extended nature, I would prefer to look at pullbacks to the 20-dma, 22-dema, and 20-dema as the most opportunistic entries, if and when I can get ‘em.

 

 

Yeti (YETI) remains extended from the prior week’s buyable gap-up move after earnings. I thought it was somewhat notable that the stock posted an all-time closing high on Friday. Volume was very light, which would imply that a test of the rapidly rising 10-dma, now at 21.28, could be in the cards over the coming days.

This is something to watch for since the 10-dma is ascending rapidly. This means it will continue to move higher over the next few days as it catches up to the stock. The 10-dma is now above the 19.86 intraday low of last week’s BGU price range, and so provides a better reference for support on any pullbacks from current levels.

Netflix (NFLX) continues to trudge along its 10-dma following the pocket pivot it posted at the line eight trading days ago on the chart. The voodoo pullback on Thursday, where volume declined to -49% below average, was a lower-risk entry opportunity, as would any future pullbacks like this be as well.

 

 

Facebook (FB) continues to sit along its 20-dema as volume remains light. It picked up a little support at the line on Friday but isn’t going anywhere just yet. I continue to view this mostly as a short on weak rallies up into the 200-dma, now at 166.55. Meanwhile, its smaller social-networking cousin, Twitter (TWTR), continues to run up to its 50-dma without being able to break through.

I have viewed this as a short on such rallies into the 50-dma, using it as a guide for a tight upside stop. Volume on Friday was light as TWTR closed just two cents below the 50-dma. If the stock convincingly cleared the 50-dma, then I would simply switch my view to the long side while using the line as a tight selling guide. Play it as it lies.

 

 

Advanced Micro Devices (AMD) tracked tight sideways all week long as volume never got higher than -42% below average. If it was sitting along the 10-dma, this would be buyable voodoo action using the 10-dma as a tight selling guide. Unfortunately, the stock is sitting just above the 10-dma.

Therefore, any opportunistic pullback closer to the 10-dma at 23.47 from here would provide a nice lower-risk entry, if you can get it. Barring that, one could also buy AMD right here based on the tight sideways action while using the 10-dma as a tight selling guide.

 

 

Don’t look now, but Etsy (ETSY) posted a pocket pivot on Friday as it popped off the 50-dma and up through the 10-dma and 20-dema. Volume was strong, and the move is also another attempt at a re-breakout following several prior failed breakouts. The only fly in the ointment here is that the company is expected to report earnings on Monday, after the close.

The interesting thing here is that a trader looking for a pop off the 50-dma could have bought it there on Thursday as it found support at the line. Then one could have participated in the move on Friday, with the idea of selling into it ahead of Monday’s expected earnings report. As always, 20/20 trading hindsight is always a nice thing to have!

 

 

Planet Fitness (PLNT), which I have dubbed ETSY’s breakout-failure twin, couldn’t keep up on Friday. It tried, with a big breakout move early in the day that started out as a gap-up but ended as a big, butt-ugly reversal on heavy volume. The stock opened at 61.51 and did not trade a penny higher as it immediately broke to the downside.

This is only one of several failed breakouts in PLNT’s pattern, but it is by far the most spectacular. Indeed, it rivals ETSY’s big failed breakout in early February that reversed in similar fashion. PLNT is expected to report earnings Tuesday after the close, so in my view this was certainly not buyable Friday at the open, but it was certainly shortable for a quick one-day short scalp if one was alert to it.

 

 

In the sacred Weed Patch, Aurora Cannabis (ACB), not shown, continues to pullback into its 200-dma, currently at 6.76. I view pullbacks as close to the line as possible as being your lower-risk entry opportunities, while using the line as a tight selling guide. Given that ACB closed Friday at 6.96, just twenty cents above the 200-dma, it is within buying range.

Canopy Growth (CGC) is unable to hold near-term support at its 20-dema, dropping below the line Friday on increased, but still light, selling volume. At this point, all I’m doing here is laying back to see if the stock undercuts the prior 41.68 low in the pattern. This could coincide with a move down to the rising 50-dma, so for now this is a set-up-in-waiting, so to speak.

 

 

Tilray (TLRY) is now expected to report earnings on March 18th, which is over three weeks away, so it is still viable as a long ahead of earnings. After Wednesday’s pocket pivot at the 50-dma, which has met up with the 10-dma and 20-dema, the stock has pulled back into the three moving averages. Trading volume dried up to -58% below average on Friday.

TLRY is therefore buyable as a voodoo pullback at the 50-dma, using it or Friday’s low at 77.26 as a tight selling guide. Note also that the Force and Bongo Daily indicator bars have improved lately. Ultimately, I’d like to see the Bongo Weekly indicator bar turn blue, but that may not occur until the stock moves higher in its pattern as it tends to lag the other indicators.

 

 

Pinduoduo (PDD) has acted surprisingly well since pricing a 55-million secondary stock offering two weeks ago at $25 a share. Given the large amount of new supply that the offering represented, it struck me as reasonable to assume that the stock would need some time to digest and absorb that extra supply. So far, the stock has performed far better than I would have expected following the secondary.

On Tuesday, it posted a single five-day pocket pivot, which is not in and of itself that meaningful unless it occurs with at least one other five-day pocket pivot. Nevertheless, PDD has traded back up near its all-time highs without flinching. Upside volume has come in above-average, while Thursday’s pullback came on lighter volume.

Given this constructive action, I’d look for pullbacks to the 20-dema as lower-risk entries from here. PDD has done well since I first discussed it as a pocket pivot within the handle way back in early January and was in fact one of the first long ideas I came up with when the market bottomed at that time. It has since broken out of a cup-with-handle formation and remains extended from that breakout point pending its next lower-risk entry.

 

 

Chinese names in general are continuing to sprout off their lows in anticipation of a U.S.-China trade deal. This creates some inherent headline risk in the event that no trade deal is forthcoming. I tend to think, however, that even a watered-down trade deal would benefit Chinese names in general. In my reports, both written and video, I have focused on Chinese names that seem to move independently of the tariff talk news.

These have included PDD, discussed in the written reports, as well as Tencent Music Entertainment Group (TME), discussed in the GVR. It has done quite well since I first mentioned it in the GVR in late January when it posted a very opportunistic undercut & rally move. It posted another all-time high on Friday in a relentless upside move since then.

 

 

Momo (MOMO) is more like the other Chinese names that have slowly been rising off their deep lows since the market bottomed in late December. We can see that the stock bottomed at the same time as the general market. And became buyable once it posted a bottom-fishing pocket pivot coming up through the 50-dma back in mid-January.

Since then, I have advised buying the stock on weakness rather than chasing strength. Pullbacks along the way into the 10-dma and 20-dema have offered the lower-risk, opportunistic entries. 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.

 

 

In my video reports I’ve also mentioned Iqiyi (IQ) and Huya (HUYA). IQ reported earnings on Thursday after the close and was included on my earnings watch list spreadsheet posted last weekend. Members interested in the stock could have then monitored the action after the report to capitalize on what was a very strong buyable gap-up move on Friday that streaked right through the 200-dma.

IQ opened Friday at 23.52, set an intraday right away at 23.50, two cents lower, and shot higher from there. With the stock now sitting above the 200-dma, we can watch for pullbacks to the line as potentially lower-risk entries from here. HUYA is expected to report on March 5th, a little over a week from now, so put that on your earnings watch list.

 

 

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.

I wrote in Wednesday’s report that I wasn’t seen a lot of truly juicy long set-ups at the time, although I did have a handful to discuss. That said, the real opportunities this week, as has been the case throughout earnings season, have occurred with individual stocks after they report. High-velocity, high time-value trades offered by post-earnings moves have been a strong area to focus on in this market throughout earnings season, as I have advised since earnings season began.

Meanwhile, I haven’t seen any breakouts that have produced the types of gains we have seen in a name like ROKU since it made the turn off the lows in early January. The whole business of buying breakouts and nothing else strikes me as rather limiting, and certainly not in step with how this market really works in terms of producing strong, actionable opportunities well before any new-high breakouts occur.

As we get to the tail end of earnings season, there are still many more names I’m interested in that are expected to report over the next two weeks. And I believe many of these will continue to provide opportunities and price moves like we’ve already seen in many of the names we’ve been following. I will discuss these as well as other non-earnings-related ideas in this weekend’s GVR.

Thus, it is mostly a matter of maintaining an opportunistic approach that seeks to buy on weakness while avoiding the urge to chase strength. As well, I tend to think that if this market rally phase continues, we will continue to see formerly broken-down leaders march up the right sides of new bases.

Fortunately, we are equipped to capitalize on such moves, well before the crowd sees the obvious new-high breakouts. This, combined with seeking to capitalize on high-velocity moves in stocks after they report earnings, comprises the thrust of my current approach.

Easy money continues to be the driver of this current rally, with the turning point occurring when the Fed finally threw in the towel in at the cusp of the New Year. On Friday, I found it a little bizarre, at least in my experience, to hear Fed Board Member Bullard refer to a 2.25% Fed Funds Rate as “slightly restrictive.”

We’ve come a long way from the days of Paul Volcker, the Fed Chairman under President Ronald Reagan, who raised interest rates to 20% in June of 1981 to combat runaway inflation that peaked at 14.8% the year before. Now that was restrictive monetary policy. Now the Fed is even below where it would be at the low point of prior easing cycles.

In recent pre-QE cycles, the Fed would be done lowering rates somewhere around 3% or more, after raising rates to 5-6% or higher. Now the Fed is done at 0.25% on the downside and considers the high end of the interest rate raising cycle to be 2.25%. The new normal continues to take hold, and it is this easy money policy that will continue to drive stocks and other assets higher. In the process, I believe a bubble is formed, but the Fed seems to know that it cannot afford to pop this bubble, so the beat goes on.

Also consider that prior to this week we’ve seen 11 straight weeks of stock mutual fund outflows. If that outflow reverses, then it may add its influence as a force for more upside. While the indexes can pull back at any time given their extended state, every time I’ve perceived a possible pullback the market has come down for a day or two and then proceeded higher.

Pullbacks, so far, have been fleeting as the market continues to move higher, fueled mostly by stocks coming off their lows and up the right sides of new bases. And while seeing more breakouts is a positive sign for the market, there have been numerous lower-risk entries long before any breakouts occurred. This we know firsthand. And so, the uptrend continues until further notice.

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 a position in ROKU, 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.