The Gilmo Report

February 27, 2019

February 27, 2019

The NASDAQ Composite Index has closed higher for nine-straight weeks before running into two days of selling to start this week. The last time the NASDAQ had a streak like this was in the middle of 2016, when it ran up for eight-straight weeks. It then went sideways for the next eight weeks before breaking out and moving higher again.

The selling perhaps has been in response to the U.S.-China trade talks, which essentially concluded for now with one single area of “progress.” That would be that the U.S. has agreed to push back the March 1st deadline for raising existing tariffs on China from 10% to 25%. So, if the trade talks are going as well as the Trump Administration likes to hype it, then on a concrete basis they seem to be going better for China.

That has given the market reason to pause, and comments today from U.S. Trade Representative Robert Lighthizer. The USTR poured some water on the actual progress being made toward a comprehensive U.S.-China trade agreement in his testimony today in front of the House Ways and Means Committee.

This sent the indexes lower this morning, but eventually things stabilized and most of the lost ground was made up by the close. The net effect was a NASDAQ Composite bounce off the 200-dma on higher volume. So far, the 200-dma continues to act as solid support for the index, until evidence to the contrary shows up.



The Dow Jones Industrials Index has also posted nine-straight weeks to the upside, while the S&P 500 Index has been up eight out of nine weeks in a row. The last time the Dow had a run like this was in late 2017 into early 2018, when it was up nine out of ten weeks in a row, as can be seen on the weekly chart, below. That was just before it broke sharply to the downside over the next two weeks, giving up all those gains in rapid fashion over the course of two brutal downside weeks.



So, after nine-straight weeks of upside in the Dow and the NASDAQ, it would not be abnormal to see some sideways action dominate for a few weeks. It would also not be abnormal to see everything break down and correct, but that call cannot be made while the indexes hold above their 200-dmas.

The small-cap Russell 2000 Index, as represented by the daily chart of its proxy, the iShares Russell 2000 ETF (IWM), is struggling just a tad at its 200-dma. After regaining the line on Friday, it pushed a bit higher on Monday, but over the past two days has retreated below the line. With the other major market indexes holding above their own 200-dmas, then I don’t necessarily consider the action in the Russell 2000 a make-or-break proposition.



The best, playable moves in this market have continued to emanate from stocks that have just reported earnings. That’s where most of the big action has been, while most other stocks that have led the rally off the Christmas Eve lows remain extended and only buyable on pullbacks to support. The main-course recipe for now has been to play for big moves in stocks after earnings, as I’ve advocated since earnings season began. Otherwise, it has paid to buy leading names on pullbacks to support, with the 20-dema being my favorite moving average for such pullbacks.

In the post-earnings action arena this week, Etsy (ETSY) reported earnings after the close on Monday and gapped up at the open yesterday. It printed 65.22 at the bell, then ran up to 68.91 before reversing course sharply. It then bottomed at 65.40 before chopping its way back to the upside.

This is what yesterday’s action looked like on the five-minute 620-intraday chart. Notice that the reversal did not occur until we saw a MACD stretch, which is tricky to short into. Once the stock broke down over three points in about 15 minutes, the MACD crossed near the lows as ETSY came with 18 cents of its 65.22 low.



After failing to hold the $68 price level twice before during the day, ETSY finally cleared it for good with a little over two hours left in the trading day. It peaked at 69.50 before settling back to close at 68.65. This would have been a difficult one to handle on the 620 given the 2-3-point swings in either direction. In the end, the stock plowed through any selling to close near the highs of the day.

It continued higher again today and is well extended at this point. Only pullbacks closer to the BGU intraday low at 64.24 would offer lower-risk entries from here. Meanwhile, the 10-dma and 20-dema have a long way to go before they can even think about catching up to the current price.



Planet Fitness (PLNT) reported earnings after the close yesterday, and this morning gapped up to print 60.90 at the bell. It rallied a little further to 61.90, and then reversed very cleanly on the five-minute 620-intraday chart. The MACD cross occurred right before the opening bell, at 6:25 a.m. PST my time here on the West Coast, and the stock quickly peaked and rolled over.

From there, it was steady downside all day until we got to the half-way point of the trading day. That was when we saw a MACD cross to the upside. That market the start of three hours of choppy, sideways movement into the close.



The action on PLNT’s daily chart looks rather ugly, with a big reversal off the highs on heavy volume. The stock has several failed breakouts over the past two months, and this was just another one. Members may recall that in my weekend video report I discussed my bearish theory on PLNT and that a post-earnings gap-up could turn out to be a shortable affair.

That was certainly the case, and today’s breakout attempt lasted about as long as a New Year’s Resolution to start working out regularly! The only positive point here is that PLNT held support along its 10-dma and 20-dema, which always sets up the possibility of a re-breakout attempt. Otherwise, a breach of the 20-dema triggers this as a late-stage failed-base (LSFB) short-sale set-up.



Roku (ROKU) was last week’s star on the post-earnings buyable gap-up, and it has rapidly gotten quite extended from the 54.50 intraday low of last Friday’s BGU. Meanwhile, the 10-dma is moving up fast and is the nearest point of reference for support on pullbacks from current levels.



Meanwhile, I noted that the weekly chart of ROKU shows a stock that is forming a deep punchbowl formation. Now, just because a stock forms a pattern like this does not mean it is going to top. A punchbowl pattern does not become a Punchbowl of Death (POD) short-sale formation until we see it breach the 20-dema.

For now, I would maintain awareness of this macro formation, and what it could be telling us if we start to see the action on the daily chart begin to change character. Once a stock has come up this far from the lows of a deep cup or punchbowl type of formation, it is vulnerable to at least sharp pullbacks.

The lack of time spent consolidating prior sharp gains, in this case more than 100% off the late-December low is what can cause this. Once a pullback sets in, it is then a question of how well the stock holds near-term support, and whether it can establish a new consolidation at higher prices to set up the potential for higher highs.



Trade Desk (TTD) was another buyable gap-up star last Friday but has so far continued to run into resistance along the $200 Century Mark. Thus, one could be looking at this as a short around the 200 level, which so far over the past three days would have provided some small short-sale scalps, but no more.

I wrote over the weekend that “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.” So far that resistance has held up. But given the magnitude of last Friday’s move, I would expect the stock to at least pause for a few days.

Only a clean break above the $200 level would trigger a new long entry point. Otherwise, we are left to watching the 10-dma as it rises rapidly to serve as the next reference for support on any pullback from here.



First Solar (FSLR) demonstrates why we never chase strength. After Friday’s big-volume pocket pivot reversal off the 200-dma, the stock ran up again on Monday but reversed sharply on heavy selling volume. It is currently holding along the 10-dma with volume drying up. This technically puts it in a lower-risk entry position, using the 10-dma as a tight selling guide, or the 200-dma as a wider one.



GoDaddy (GDDY) priced an 8.55 million share secondary offering yesterday at 75.35 a share. Despite the extra supply, the stock again held a test of the 74.46 intraday low of last Thursday’s buyable gap-up (BGU) price range. This remains within buying range of the BGU, using the 74.46 price level, plus an additional 1-3% of downside porosity, as desired, for a tight selling guide. (WIX) is trying to hold support at the 20-dema and did a reasonably good job of that today, bouncing off the line to close just above mid-range on the daily price bar. Volume dried up to -45% below average today, setting up a nice voodoo pullback to the 20-dema. This puts WIX in a lower-risk entry position using the 20-dema as a tight selling guide.



Arista Networks (ANET) remains extended, and the 10-dma, now way down at 267.07 vs. today’s closing price of 283.99, would serve as a reference for support on pullbacks from current levels. However, the 10-dma is rising rapidly, and should soon close in on the current stock price.

CyberArk Software (CYBR) is extended from the $100 Century Mark where it was last buyable five trading days ago. I commented on this last Wednesday and two weekends ago as being buyable on any pullbacks to the $100 price level. We saw two of those last week before the stock rallied higher to close at 109.59 today. The 10-dma at 102.86 now serves as a reference for support on any pullbacks from current levels.

Palo Alto Networks (PANW) posted a buyable gap-up and base breakout today after reporting earnings yesterday after the close. The stock stalled and churned but held above its intraday low of 250.60 today. Therefore, it can be considered actionable as a buyable gap-up using the 250.60 low as a tight selling guide.



Qualys (QLYS) found support at its 200-dma yesterday as it tested the line and bounced to close just above mid-range on the daily price bar. That led to another test of the 200-dma this morning, but the stock never quite got there and turned back to the upside to clear the 20-dema. That triggered a moving-average undercut & rally move (MAU&R) at the 20-dema, using it as a tight selling guide.

QLYS was previously buyable along the 200-dma, per my prior comments on the stock. This latest move above the 20-dema is constructive, although volume was tepid. However, it does not appear that sellers are intent on coming after the stock again, so a re-breakout remains a possibility after the post-earnings gap-down break two weeks ago. That remains the case until and unless support at the 200-dma is broken.



Most big-stock NASDAQ names that I follow are tracking sideways and remain quite uninspired. (AMZN) continues to hold along its 50-dma in what is now a nearly two-month sideways consolidation. Netflix (NFLX) has again pulled into its 10-dma, where it can be bought using the line as a tight selling guide, but overall is going nowhere fast.

Meanwhile, there was a ray of hope in Apple (AAPL) today. The stock has been moving tight sideways since retaking its 50-dma after earnings at the end of January. Finally, today it showed some signs of life by posting a pocket pivot at the 10-dma. This is buyable here using the 10-dma as a tight selling guide. We’ll see if the stock can gather any momentum from here.



Technically, Nvidia (NVDA) is looking a bit shaky here as it retests the 20-dema. The stock bounced hard off the line today as volume came in very light and closed about mid-range on the day. So far, the stock just remains in a very choppy range following a gap-up move two Fridays ago after earnings.

I suppose if you are jonesing to own shares of NVDA, this puts it in a lower-risk entry position using the 20-dema as a tight selling guide. At least this pullback creates a more opportunistic entry where risk can be managed very tightly.



Tableau Software (DATA) ran out of gas on another re-breakout attempt that occurred on Monday. Yesterday the stock broke back below the top of the base on heavy selling volume but found support at the confluence of the 10-dma and 20-dema today as volume declined. The action remains choppy and unresolved, yet the stock is still trending higher since breaking below its 50-dma after earnings three weeks ago.



Below is my list of cloud names discussed in recent reports. The list is sorted by nearest earnings date first, so we can see that SPLK, WDAY, and ZS are all expected to report earnings tomorrow after the close. Thus, all three are on Earnings Watch as we wait to see whether anything actionable, long or short, transpires in any of these after they report.



In most cases I’m looking for pullbacks to the 20-dema as the most opportunistic entries for any of these cloud names. Some of these are, however, holding very tight along their 10-dmas following a prior test of the 20-dema. Atlassian Corp. (TEAM) is one of these as it holds tightly along the 10-dma with volume drying up. One could test this here using the 10-dma as a tight selling guide.



Zendesk (ZEN) is doing the same thing, following a little dropout and undercut & rally move last Thursday. The stock dropped below the 10-dma and the prior 76.14 low of February 14th at that time and then closed above the 76.14 price level. That was something of a mini-U&R move along the lows of the current consolidation.

With the stock holding tight along the 10-dma as volume dries up sharply here, it becomes buyable using the 10-dma as a tight selling guide. Alternatively, one can always wait to see if a break to the 20-dema ever occurs, which in my view would offer a more opportunistic pullback to buy into, which is usually my preference. Play it as you like.



Yeti (YETI) is acting well as it maintains its recent gains following the post-earnings buyable gap-up (BGU) move it had on Valentine’s Day. The rapidly rising 10-dma has now caught up to the stock. This provides a ready reference for add points along the line as the stock settles in up here.

That said, my own preference would be to hold out for a pullback to the 20-dema, which is also rising rapidly and should be much closer to the stock in a few days. One can play this as they choose, but the stock has had a torrid run over the past two weeks and may need a longer period of consolidation before moving higher.



Advanced Micro Devices (AMD) serves as a nice illustration of the benefits of patience and opportunism in this market. Pullbacks to the 20-dema, and not necessarily the 10-dma, in any leading stock have remained my preferred opportunistic entries, when I can get them. AMD yanked back to the 20-dema today where it found support and closed just above the line.

Selling volume was higher, but still below average. Therefore, if you are looking to own shares of AMD, this is the spot to buy it. Just use the 20-dema as a tight selling guide to keep risk to a minimum.



Twitter (TWTR) gapped up through its 50-dma on Monday, but the move was eminently shortable. I’ve considered the stock more of a short than a long based on my discussions of the stock’s macro- and fractal head-and-shoulders formations, as discussed in detail a week ago. The stock reversed off the highs Monday, and then yesterday slashed right through the 50-dma.

If one did not short the stock on Monday into the rally using the 620-chart, then yesterday’s break below the 50-dma was a short-sale trigger. TWTR then moved lower as it tested its early-February lows. I continue to view rallies into the 50-dma as short-sale entry opportunities.



I have viewed the social-networking stocks as being a bit poisoned these days given the current government scrutiny of their business practices and handling of user data. That is why I have discussed Facebook (FB) as being shortable on rallies into the 200-dma. We got another one yesterday, and the stock broke right back to the downside before bouncing off the 20-dema today.

So far, resistance at the 200-dma has only resulted in quick, short-term, short-sale trades down to the 20-dema. A clean break of the 20-dema before any retest of the 200-dma on the upside would trigger this as a more decisive short-sale target at that point.



Aurora Cannabis (ACB), not shown, posted a pocket pivot at the 10-dma yesterday, but that was a show of strength, and I don’t buy on strength. ACB pulled back today as it looks to retest the 10-dma at 7.20. The place to buy the stock was along the 200-dma last week, before the pocket pivot. That is as I stipulated in my weekend report of exactly one week ago.

Canopy Growth (CGC) is forming a pennant type of formation here as it pirouettes around its 10-dma and 20-dema lines. Instead of undercutting the prior 41.68 low of February 12th, the stock has instead put in a Wyckoffian Retest of that low.

When a stock does not undercut a prior low, usually a recent one, and instead pulls down toward that low without quite reaching it while volume dries up sharply, that is a Wyckoffian Retest. This is also known as a test for supply.

Volume declined today to -52% below average on that test for supply and CGC held support at the 20-dema. That qualifies as a voodoo pullback to the 20-dema. CGC is therefore buyable here using the 20-dema as a tight selling guide.



Tilray (TLRY) remains in a lower-risk entry position here along the confluence of its 10-dma, 20-dema, and 50-dma lines. This comes after last week’s pocket pivot coming up through the 50-dma. Earnings are not expected until March 18th, so it’s a question of whether the stock can get something going before then.

In any case, the volume dried up in the extreme today, down to -67.4% below average as TLRY held along its three moving averages. This qualifies as a voodoo pullback and is actionable on the long side. One would then keep risk to a minimum by using any of the three nearby moving averages as tight selling guides.



Chinese names for the most part have been rallying with the market since the late-December lows. More recently, some have gathered additional momentum which was probably enhanced by the delay of the March 1st deadline for increasing tariffs on Chinese goods and services. You could almost throw darts at any of these a week or so ago and made money.

Momo (MOMO) is one that I’ve liked since I pegged the pocket pivot coming up through the 50-dma back in early June. Since then, I’ve advised buying the stock on weakness rather than chasing strength. Like most Chinese names, the stock is up there, and I’m certainly not about to chase the stock at this point.

It is representative, however, of most Chinese stocks that have been successful in moving up off their prior December lows. It continues to forge higher as it gets closer to its 200-dma. Earnings are expected on March 7th.



Pinduoduo (PDD) made an attempt at new highs on Monday but reversed badly on heavy selling volume. This is not surprising given the additional 55-million shares of supply that hit the market nearly three weeks ago when a secondary offering of these shares was priced at $25. The stock did a fine job of absorbing that extra supply initially, but I still think it needs more time to set up again following its prior cup-with-handle breakout.

As members know, I pegged the pocket pivot within the handle back in early January as the initial buy point in the pattern. The stock has come a long way since then. I tend to believe that at this point exercising patience and waiting for a pullback to the 50-dma, which has now risen to 25.86, makes more sense. This is a more opportunistic entry point, if you can get it, and I myself would choose to take this approach.



Taking the opportunistic approach is critical in this market. We often see sharp pullbacks in stocks, and I believe that lying in wait for such pullbacks is the lower-risk route to take. Note that an opportunistic approach with Iqiyi (IQ) would have dictated looking for a pullback to the 200-dma as a lower-risk entry spot following last Friday’s big post-earnings move.

IQ came right into the line yesterday and bounced sharply, closing near the highs of its daily trading range. The stock may spend more time consolidating the post-earnings move, so I would continue to look for pullbacks into the 200-dma as your best lower-risk entry opportunities.



For newer members: Please note that when I use the term “20-day moving average,” “20-day line,” or “20-dema” I am referring to the 20-day exponential moving average. I use four primary moving averages on my daily charts: a 10-day simple (the magenta line), 20-day exponential (the green line), 50-day simple (the blue line) and 200-day simple moving average (the red line). On rare occasions, I will also employ a 65-day exponential moving average (thin black line). In all cases I will mostly use the shorthand version of “10-dma,” “50-dma,” etc.

The easy thing to be here is roaringly bullish. If you turn on the TV, everyone is bullish, and they all have fists full of reasons why they are bullish. But after nine-straight up weeks we may be due for a pause, at least in the indexes, and this might be a good thing for a longer-term rally to take hold.

That said, it’s always all about the stocks, and we have again seen that the best high time-value, high-velocity opportunities occur after earnings. In some cases, they are buyable gap-ups, and in others such gap-ups turn out to be shortable. This was the case today with PLNT and also Veeva Systems (VEEV), a stock I played on the short side today as well.

And when you can catch a strong buyable gap-up, such as with ROKU, ETSY, or TTD, those are also high time-value trades. Meanwhile, most everything else tends to bob up and down, with lower-risk entries in the leading stocks occurring on pullbacks to areas of support. As I’ve already said numerous times, the 20-dema remains my favorite moving average to use for buyable pullbacks, and I prefer to wait for these to occur rather than chasing stocks when they are already extended on the upside.

As this report shows, there are some actionable situations to be found currently. Meanwhile, it is a matter of sitting back and waiting for the best entries among favored leading stocks as they continue in their uptrends off the late-December/early January lows. For now, it’s not much more complicated than that, until and unless we begin to see a change in the character of this market.

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.