The Gilmo Report

February 6, 2019

February 6, 2019

The Dow Jones Industrials Index has survived several tests of the 200-dma on pullbacks over the past week, but the Dow has been the only index to make it through its 200-dma. The other major and not-so-major market indexes have slowly trundled up closer to their 200-dmas, but no further. Meanwhile, the stocks that have been leading this market have continued to melt higher, with the number of breakouts from odd-looking bases increasing.

It’s been something of a staple of this market that when it rallies off the lows, the best moves occur in formerly leading names shooting up off those lows. Often, this results in numerous undercut & rally long set-ups, which is what we saw in late December and early January, as I discussed in my written and video reports at that time.

Those set-ups have resulted in a lot of upside off the lows and were fully actionable based on the initial U&R long set-ups and the subsequent voodoo action along the moving averages as these stocks moved higher. After 4-5 weeks, once you start seeing breakouts, these moves are getting long in the tooth, especially among names where you see steep moves that are straight-up-from-the-bottom. This is a major reason why breakouts tend to meet with less success in this market.

As discussed in the past two reports, as things get extended and obvious on the upside, I am not looking to be aggressive on the long side. In my view, we are reaching a higher-risk phase as stocks get extended. That in and of itself is not a bearish development, necessarily, but I do think it helps to consider where we are and how far we’ve come. In other words, the Piggy Principle comes into play, and at the very least it makes sense to be patient and cautious.

With the Dow the only major market index holding above its 200-dma, the potential for a pullback exists with the other major market indexes as they approach their 200-dmas. Here we see the S&P 500 Index running right into its 200-dma, where it stalled and churned on higher volume.

 

 

The NASDAQ Composite Index is within about one percent of its own 200-dma and sold off today on lighter volume. It’s not backing off much here as it approaches the 200-dma, but I am interested in seeing whether the index can clear the line any time soon. Both the NASDAQ and the S&P 500 spent the last half of January consolidating their gains along the 50-dma, so that may help them to clear the 200-dma soon.

Otherwise, the potential is always there for the 200-dma to serve as at least a short-term terminus for the current rally off the late-December lows. We won’t know for certain until we see it, but for now the index is not showing any serious signs of deterioration. Ultimately, it’s a matter of what the individual stocks are doing, and given the upside extension in many names, some sort of pullback would not be surprising.

 

 

As we get up there, so to speak, I notice that we’re starting to see some sloppy action as well. Among the high-relative-strength names I’ve been following as the FTD Four since November, Etsy (ETSY) looked like it was going to join the breakout party yesterday. The stock streaked over 10% higher early in the day before reversing course and retracing nearly all its prior intraday move. It ended the day up 70 cents, which was still up 1.28%, but just a sliver of what was at one time a 10.66% upside gain.

Today, ETSY broke further to the downside, breaching its 20-dema where it triggered as a late-stage failed-base (LSFB) short-sale target at that point. It ended the day just above the 50-dma. From here, any rally into the 20-dema would be shortable, with the idea of catching some downside before the company is expected to report earnings on February 21st.

 

 

Planet Fitness (PLNT), another member of the FTD Four, also flopped on a breakout attempt. It lacked the upside thrust of ETSY, rallying only 3% to new highs before reversing course and failing on the breakout attempt. It tested the 20-dema this morning but held and is back to where it started a week ago.

A breach of the 20-dema would trigger this as a short-sale target. The flip-side of this is that today’s pullback to the 20-dema held the line with volume receding sharply. If the selling has run its course, then this could also be viewed as a lower-risk entry spot, using the 20-dema as a tight selling guide. A breach of the line, however, would be a reason to exit the position and perhaps even flip to the short side.

In any case, taking any position in the stock now, long or short, would mean that one is looking for a decent price move ahead of earnings. PLNT is expected to report earnings on February 25th.

 

 

A third member of the FTD Four Tableau Software (DATA) attempted to break out over the past two trading days but failed miserably today after reporting earnings. Note that DATA did not show the same kind of upside thrust that other members of the cloud space have during earnings season last week, and perhaps that was a clue in advance of today’s gap-down break.

The stock gapped down to the 10-dma at the open and continued lower, breaching both its 20-dema and then its 50-dma early in the day before bouncing and regaining the 50-dma. Selling volume was heavy, so that any rally from here up into the 20-dema would bring this into short-sale range.

If DATA can hold support here at the 50-dma, and selling volume dries up, then this could be considered a lower-risk long entry spot using the 50-dma as a tight selling guide. For now, however, the stock is a later-stage breakout failure, and thus may be setting up as a short. So, it’s a matter of seeing how this plays out from this position at the 50-dma.

 

 

The only member of the FTD Four that seems worthy right now is Twilio (TWLO). That may be because it has been up in the clouds so to speak, rallying with the rest of the group. The stock held a pullback close to the 10-dma today and held as volume dried up. That said, there’s nothing to do with the stock until its expected earnings report next week on February 12th.

 

 

In some respects, the clouds may be getting a bit long in the tooth, and as a group phenomenon perhaps a bit too obvious. We saw DATA fail today after earnings, and another cloud name that I’ve discussed in my GVRs but not my written reports, Zendesk (ZEN), displayed a different type of post-earnings weakness today.

ZEN gapped this morning after reporting earnings after the close yesterday and printed an even 78.00 at the bell. It rallied 85 cents higher over the next 15 minutes before reversing back to the downside as the buyable gap-up turned into a shortable gap-up. By the close, the stock gave up most of its move to close at 72.40.

Technically, this is still a buyable gap-up, although one could have shorted the open and made a nice profit by the close. ZEN did set a low of 71.01 today and closed just above that low. Therefore, this can be tested as a buyable gap-up here using 71.01 as a tight selling guide. Note also that the stock held right at the prior left-side base peak, so technically is within buying range of what is a base breakout, even with the weak stalling action.

 

 

Most of the other clouds I have discussed in recent reports are extended and way out of buying position in many cases. I show the nearest pullback level in my notes on each, below, with charts as necessary. I would also note that some of these may be reaching the ends of their moves or are at least in need of some pullbacks and consolidation, depending on their precise chart position.

However, more than a few of these patterns strike me as toppy-looking formations that have the old clowns’ feet look to them, which I’ve discussed in previous reports. For the uninitiated, this term refers to how stocks form these big, oversized chart patterns that look like clowns’ feet given how out of proportion they look relative to the previous weekly price action.

A good example would be Splunk (SPLK). The company isn’t expected to report earnings until February 28th, but it has been moving straight up off the lows of its pattern along with the other cloud names since early January. Note how its current base looks in proportion to the rest of the price action on the weekly chart, below.

Here we see SPLK’s seven-week rally straight up off the lows of the base and into new-high price territory. Note the slight stalling action at the peak so far this week with two days left to finish the weekly price bar, along with the wedging (declining) volume all the way up. This looks vulnerable to a pullback, even a possible double-top type of failure, which is something to watch for. None of this is clear just yet, but I know one thing for sure – I would not be looking to buy this stock at this point.

Overall, the big, out-of-proportion shape of this base gives it the look of clowns’ feet relative to the prior price action. This adds to the look of vulnerability it may have here ahead of and perhaps even after earnings, when they are reported at month-end.

 

 

Coupa Software (COUP) has broken out of a big cup formation as it came straight up from the lows without so much as building even a one-week handle. The stock closed today at 92.63 and the 10-dma way down at 85.38 is your first reference for near-term support on any pullback from here.

Salesforce.com (CRM) has formed a pattern that looks a little bit like SPLK on the weekly chart. It closed today at 158.13 and showed some supporting action off the intraday lows. The 10-dma down at 152.10 would be the first reference for near-term support on any pullback from here. The company is expected to post earnings on February 27.

ServiceNow (NOW) is extended from last week’s buyable gap-up move after earnings, closing today at 225.56. The 209.99 intraday low of the BGU price range and the 10-dma, now at 206.41 but rising fast, would serve as references for near-term support.

Atlassian (TEAM) is holding above the $100 Century Mark after regaining it on Monday. Technically it is still within buying range of the $100 price level, but I would look for a pullback to the $100 price level, such as we saw this morning, or deeper down to 10-dma, now at 97.80 as a lower-risk entry possibility.

Note on the weekly chart, below, that TEAM broke out of a cup-with-handle formation six weeks ago. Following a big downside reversal four weeks ago on heavy volume, it has managed to work its way higher on declining volume. The action has been a little wide and loose

 

 

The Trade Desk (TTD) demonstrated what buying breakouts can get you in this market today when it broke down after a breakout to new highs yesterday. The proper buy points, at least from an OWL™ perspective, were much lower in the pattern, with the first being along the 50-dma back in mid-January, per my reports at that time. Earnings are expected on February 21st.

 

 

Workday (WDAY) is extended and the 10-dma down at 179.07 would serve as a near-term support reference, with the 20-dema down at 174.81 as a more opportunistic reference. Earnings are expected on February 28th.

ZScaler (ZS) has broken out and today pulled into its 10-dma, where it found support. On the weekly chart, the current base looks quite bizarre, to say the least. Technically, this is still within buying range of the recent base breakout, but I am not comfortable buying a breakout from a base like this. That said, pullbacks to the 10-dma at 46.91 offer lower-risk entries with the idea of using the 10-dma as a tight selling guide. Earnings are not expected until March 4th.

 

 

Among the big-stock NASDAQ names, Apple (AAPL) has gotten further extended above its 50-dma and was last buyable near the line last week when it flashed a bottom-fishing pocket pivot after earnings. Pullbacks closer to the 50-dma would be the only lower-risk entries from here until the stock sets up again, perhaps along the 10-dma or 20-dema lines which have just crossed back up through the 50-dma.

Nvidia (NVDA) is now expected to report earnings on February 14th, according to the latest press release. I had previously shown it as today, but that date was incorrect. That said, I see nothing to do with the stock now ahead of earnings, looking for something that was not disclosed over a week ago when NVDA pre-announced a weak report.

Netflix (NFLX) was in a buyable position using the 200-dma as I discussed in my weekend report, and the stock has been able to move higher from there so far this week. It ran into resistance today, however, at the prior January highs, which it posted just before reporting earnings and then selling off below the 200-dma.

From here, pullbacks to the 10-dma at 340.86 would offer your best lower-risk entries.as a tight selling guide. Again, a breach of the 200-dma would turn this back into a short, so simply play it as it lies. Today’s pullback occurred on much lighter volume that was -49% below average, so it was constructive. The lowest-risk option, in my view, is to let the 10-dma catch up to the stock and then look for a pullback to the line at that point.

 

 

Facebook (FB) pushed back up through its 200-dma, so any short position placed near the line would have been stopped out. However, I would still be on the alert for a break back below the 200-dma as a new short-sale trigger. The buyable gap-up last Thursday traded heavy volume, but the stock stalled to close below its 200-dma. Since then, upside volume has been tepid.

For this reason, I think that the stock has a reasonable chance of breaking back below the 200-dma, and that is what I would be watching for here with the stock. I fail to see how the stock is attractive when it is growing earnings at 8% in the most recent quarter and is estimated to grow earnings 0%, or not at all, in 2019.

Otherwise, I am willing to give FB a chance on the long side if it can constructively hold the 200-dma. Some tight sideways action along the line with volume drying up could set up further upside potential, so that is something to look out for here.

 

 

Amazon.com (AMZN) continues to hold above the 50-dma after getting tagged with some heavy selling on Friday after reporting earnings Thursday after the close. It closed today just above the 20-dema with volume drying up to -44% below average. Along with NFLX and FB, AMZN seems to be on the fence here.

We haven’t seen big-stock NASDAQ names really surge to the forefront the way we’ve seen other areas, like the cloud-related names, for example. If AMZN can hold above the 50-dma and then regain the 200-dma, it could spring back to life as a long play. But a breach of the 50-dma brings it into play as a short-sale target at that point, using the 50-dma as a guide for a tight upside stop.

It’s certainly a matter of just playing it as it lies, once it resolves. I tend to think that however these big-stock NASDAQ names in general act going forward is going to have a lot to do with whether the current market rally phase has more legs to the upside. If these big-stock names can kick into gear on the upside, that is certainly a possibility, and something to be aware of going forward. Otherwise, if they all break down again, the bearish consequences would be obvious.

 

 

Advanced Micro Devices (AMD), not shown, is starting to roll back to the downside after a nice move on Wednesday and Thursday of last week after it gapped up following earnings. The stock closed today at 23.26, and I would look for the 10-dma at 22.49 to serve as near-term support and a reference for a lower-risk long entry.

On an intraday basis, Tesla (TSLA) has been all over the place over the past few days but has still managed to clamber back above its 200-dma. Volume has been light on the move back above the line, but today it held above the line with selling volume declining to -34% below average. Technically, this puts the stock in a lower-risk long entry position using the 200-dma as a tight selling guide.

That said, it could easily return to the status of a short-sale target if it were to breach the 200-dma. The rally over the past four days has occurred on weak volume, and there is plenty of overhead price congestion on the left side of the chart at these levels to present some formidable resistance for the stock. Play it as it lies.

 

 

ROKU (ROKU) benefited from what turned out to be a fake news story on Monday when it was reported that Comcast (CMCSA) was going to use a ROKU set-top device instead of an AAPL set-top device for its cable TV service. That sent the stock on a tear on Monday where it jacked 12% to the upside before peaking at 50.70. Later in the day, CMCSA denied the report, and the stock broke sharply back to the 200-dma, giving up over half of its gains in the process.

Despite the stall off the highs, the move still qualified as a pocket pivot at the 200-dma. However, because it was caused by news, and specifically fake news, I give it less credence. Apparently, however, ROKU could care less what I think since it has been able to hold tight along the 200-dma after Monday’s pocket pivot.

Volume dried up sharply today as it held the line, down to -44% below average. Technically, this puts ROKU in a lower-risk entry/add position using the 200-dma as a tight selling guide. Earnings are expected on February 20th, which isn’t long from now, so if buying shares here for the first time, you’re looking for some decent price movement ahead of the report to make it worth your while.

 

 

Yeti (YETI) is expected to report earnings next week, and it remains within a cup-with-handle formation. The two pullbacks to the 50-dma last Wednesday and Friday were buyable as the stock showed some minor supporting action near the line. The stock then bounced sharply over the prior two days before running into resistance at the highs of the declining tops trend channel that forms the handle area.

Today, YETI held constructively along the 10-dma and 20-dema as volume dried up to an extreme of -65% below average. When I look around for stocks setting up constructively, YETI certainly fits the bill. Earnings are expected next Thursday, February 14th, but the company already pre-announced in early January.

The stock is in a buyable position here, using the 20-dema as a tight selling guide. The question is whether earnings will be a non-event given that the company has already pre-announced, and the stock is immune to any surprises once the report is out. Otherwise, one can just wait for a cup-with-handle breakout to materialize, while pullbacks closer to the 50-dma would offer the more opportunistic entries from here.

 

 

The weed patch is set to report earnings across the board next week, but some of the action is starting to strike me as a bit frothy. For example, Canopy Growth (CGC), is looking very much like a big punchbowl formation on its weekly chart. The pattern possesses many of the characteristics of a Punchbowl of Death (POD) topping formation. The first thing to notice is the huge upside run when the weed patch names suddenly caught a large amount of speculative interest – that defined it as a hot-stock, which is the first necessary condition for a POD.

CGC then formed what some might want to tell you is a high, tight flag formation, but a breakout from that mythical flag pattern failed quickly. The stock then broke straight to the downside for the next ten weeks before bottoming and streaking right back up near its prior highs in just six weeks. This rapid down and then up movement follows a massive, extremely rapid four-week price run from mid-August to early September 2018.

 

 

The problem with the current six-week move to the upside is that it retraced a prior rapid decline that took ten weeks without consolidating at all. This creates a typical POD situation where the rally is so rapid that it simply cannot be sustained. So, as I discussed in my weekend and last night’s GVRs, a breach of the 20-dma would be your trigger for a POD short-sale entry.

Today, on CGC’s daily chart, we can see the breach of the 10-dma, but the stock found intraday support near its 20-dema as volume came in well above average. With earnings expected next week, this is not actionable one way or the other at this point, so it will be interesting to see how this plays out given the potential for a POD to be developing right here, right now.

 

 

Note also that another big-mover in the group that I’ve liked for a while, Cronos Group (CRON), has formed what looks like a climax top, at least on a near-term basis. I tweeted on Monday that the stock was looking climactic, having been up seven out of eight days in a row with Monday’s price move being the largest one-day point move in the entire upside run.

Monday’s action was a sure sign of a near-term climactic top, and the stock has sold off hard over the past two days on heavy volume. Today, CRON met up with the 10-dma, but it’s not clear to me that this puts it in a buyable position. Given the climax top type action, it at least needs more time to set up again, particularly with earnings expected next week.

 

 

With this speculative blow-off type of action in these two weed patch names, I am inclined to sit back and take profits in Aurora Cannabis (ACB) ahead of its expected February 11th earnings report. Tilray (TLRY) has been good for some trading action off the recent lows per my GVR of two weekends ago, but I would leave it alone now ahead of its expected February 13th earnings report.

Pinduoduo (PDD) is looking a little POD-like here as it rallies straight up and just past its prior mid-September highs.  One member correctly identified this as a possible pod in the blog comments section of the website. Note that it has become quite extended on the upside. After a sharp move off the lows into mid-September, the stock topped and broke sharply to the downside in just four weeks.

It then sputtered around for a couple of weeks, broke to lower lows and then rallied three weeks later, triggering a 13-week rally back to the prior September highs. The one thing PDD has going for it is the consolidation it formed between late November and early January as it built a cup-with-handle type of pattern. Overall, however, the move from the lows near $16 to the recent peak was relatively rapid and could be failure-prone.

 

 

On the daily chart, this is proving to be true. PDD gapped below the rising 10-dma today on heavy volume but remains above the 20-dema. Note that yesterday’s move to new highs occurred on very light volume, which was suspect. A breach of the 20-dema would trigger this as a possible POD short-sale target, so is something to watch for. If the stock is not available to borrow, then put options might be one way to play this.

If one is long the stock from the original buy points down in the handle and the 23-24 level on the mid-January pullbacks to the 20-dema, then the 20-dema should serve as a maximum selling guide from here. I think, however, that savvy traders would have recognized the low-volume move to all-time highs yesterday as a nice move to sell into.

 

 

Momo (MOMO), not shown, is still hanging along its 10-dma and 20-dema but going nowhere. The pattern doesn’t look all that much different from the chart I showed in the weekend report., but it looks to me like taking the opportunistic approach and looking for pullbacks to the 20-dema would make the most sense if one is jonesing to own shares. I, personally, am not. MOMO is expected to report earnings on March 7th.

Notes on some other stocks discussed in the last report:

Boeing (BA) has continued to make new highs and is extended, in my view, since it was buyable near the 380.50 intraday low of last Wednesday’s buyable gap-up move.

Canada Goose Holdings (GOOS) is expected to report earnings on February 14th, although Briefing.com shows February 7th. I believe the 14th is the correct date. The stock cleared its 200-dma on Monday as it continues to rally off the late-December lows. With earnings expected next week there is not much to do with the stock until then.

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.

Last week, everything was beautiful, but we’re starting to see some less-than-beautiful action in certain leading stocks. ETSY is a great example of a long idea that has since morphed into a short-sale target. Weak action in names like PLNT and DATA make them suspect as potential short-sale targets. ZEN acted like a shortable gap-up today. We’ll see how this plays out going forward, and whether it can hold this current breakout or whether it becomes a late-stage breakout failure like ETSY and DATA.

In addition, we’re seeing some warning signs in the weed patch, which has been on a wild speculative run in January and into early February. With earnings for most of these names coming up next week, and the technical action showing some cracks in the armor, these may have run their course, at least in the near-term.

So, what I’m seeing right now is some bifurcation, and instances where one can act on short-sale set-ups as certain stocks fail on earnings. That gives the market a bit of a two-sided flavor here and could be the first subtle clue of an impending market pullback. In the meantime, I will simply play long or short set-ups as I see them in real-time and leave the big picture stuff to others.

If the market starts to roll over, it will become evident in some of these extended names that have led the rally off the late-December lows. In this manner, if I simply stick to the set-ups I see and act accordingly, the set-ups will likely naturally push me more toward the short side if that becomes the right side to be on. This is what happened in early October and again in mid-December of last year on each of the down legs within the prior correction into the late-December lows.

As I wrote over the weekend, most of the long side fruit has ripened considerably, and in some cases may be over-ripe, as perhaps is the case with something like ETSY over the past two days. Therefore, we want to be alert to what individual stocks are telling us, and what that may mean with respect to any changes in the current market trend to something less than beautiful, or even downright ugly, or whether this rally keeps its legs on. Stay tuned.

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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