The Gilmo Report

February 9, 2020

February 8, 2020 3:10 pm ET

The market wedged four days of sharp upside in between two Friday sell-offs by selling off at the end of the week. The NASDAQ Composite Index, the leading major market index, is following up Wednesday’s higher-volume stall and churn with a small roll off the peak on Friday on lighter volume. From here, I would not be surprised to see at least a test of the 10-dma/20-dema confluence.

 

 

The S&P 500 Index, almost in lockstep with the Dow, gave up Thursday’s new highs, which occurred on lighter volume, on Friday. Volume was even lighter on Friday, but the double-top position here from a move that was straight-up-from-the-bottom in four days looks vulnerable to at least a retest of the 10-dma.

 

 

It was perhaps surprising to some market participants that the market sold off Friday on a “strong” jobs number that showed 225,000 new non-farm payrolls vs. expectations of 175,000. Interestingly, there was no mention of the Bureau of Labor Statistics’ February benchmark revision which magically erased 501,000 jobs from the April 2018 to March 2019 period.

The BLS’ jobs numbers are largely statistical gimmickry, so their ability to make half a million jobs disappear from their tallies without batting an eyelash is nothing new. How this all affects the numbers going forward is subject to some debate, but the bottom line is that year-over-year jobs growth is in fact declining.

The bullish jobs number did not do much to unseat precious metals. The iShares Silver Trust (SLV) backed off a bit on Friday as it ran into resistance along its 10-dma, but overall this week it held and bounced off key support at the 50-dma, where it was last buyable. Holding support at its 50-dma. Further pullbacks to the 50-dma would remain your best lower-risk entries.

 

 

The SPDR Gold Shares (GLD) rallied with the SLV on Wednesday and Thursday but diverged with a positive close. It did, however, run into intraday resistance along the 10-dma like the SLV. Watch for pullbacks to the 20-dema as potential lower-risk entries from here.

 

 

The big-stock alt-currency names that led the rally over the prior four days also pulled back with the market on Friday. Apple (AAPL) pulled into its 10-dma on Friday on higher volume. That would put it in a lower-risk entry position along the line while using it as a tight selling guide.

Otherwise, a breach of the 10-dma would trigger it as a short-sale, should it occur. Certainly, if Friday’s selling continues Monday (unlike the prior Friday’s selling), then AAPL might be expected to roll over as well.

 

 

Amazon.com (AMZN) is now 4% above the $2,000 Millennial Mark, which isn’t much, but the points sure look impressive! The stock pushed to new highs on Friday on strong volume, helping to limit the NASDAQ 100 Index’s sell-off on Friday to -0.47%.

Technically, AMZN is still within buying range of the prior Friday’s post-earnings buyable gap-up, using the $2,000 price level as a tight selling guide. If the market shrugs off Friday’s selling once again, I would expect the alt-currency stocks to lead, and AMZN certainly qualifies.

 

 

While Microsoft (MSFT) is quite extended, Alphabet (GOOG) might offer a lower-risk entry here just above its 10-dma. As another alt-currency name, it will likely rally with the market if we head higher this coming week.

Alternatively, as would be the case with AAPL, a breach of the 10-dma might bring this into play as a short depending on what the general market does this coming week. I believe the news regarding the coronavirus, particularly with respect to its economic effects, has not played out entirely, and could still trip up the market.

Therefore, while I would look for big-stock NASDAQ names to lead any continuing rally, they could also just as easily lead a market correction. So, we must maintain a 360-degree view here as we see how this all plays out.

 

 

I’ve heard some refer to the alt-currency stocks discussed above as the MAGA stocks for Microsoft, Apple, Google and Amazon, although Google is now Alphabet! Whatever works, I suppose, but this is intended to replace the old FANG moniker.

Facebook (FB) apparently doesn’t cut it anymore, but along with the MAGA names it now comprises nearly 1/5th of the S&P 500’s current weighting. In addition, if the general market keeps rallying it could easily continue to recover from its post-earnings sell-off of the prior week and head back for the prior highs. In this current position it has a distinct 360-degree flavor to it, however.

Tuesday’s move back above the 50-dma qualifies as a moving average undercut & rally (MAU&R) long set-up at the 50-dma. At the same time, Wednesday’s reversal at the 20-dema qualified as a short-sale entry. Now FB is back up to its 20-dema, but overall remains stuck between the 20-dema and the 50-dma.

Thus, if we see a coherent pullback to the 50-dma, that could present a lower-risk entry on the long side. And at the same time a stall right here at the 20-dema could also offer a short-sale entry using the 20-dema as a tight covering guide.

You can see how this will all depend on what the general market does. But if we wish to ride a continued rally from here, I think the set-ups in AAPL, GOOG, and FB offer some reasonable entry possibilities. Meanwhile the criteria for what would turn these into clear short-sale set-ups are very concrete.

One simply must assess these in real-time as we move into the new trading week and go from there. In other words, play them as they lie.

 

 

That brings us to Netflix (NFLX). The stock has acted strongly since selling off and then turning back to the upside after earnings in January. The last lower-risk entry for the stock occurred last Friday and this past Monday as it sat along its 10-dma.

It is now extended and stalled slightly on Friday along the recent highs as volume picked up only a small amount. I would like to see how NFLX handles any potential pullback to the 10-dma, which is the only thing that would create a lower-risk entry from here given the stock’s short-term extended state.

 

 

A big-stock alt-currency strategy here would likely work if the general market keeps rallying, so I want to keep things concrete here. If one can find proper lower-risk entries in these stocks, then I see no reason one cannot act on the long side as a way to ride a continuing alt-currency, QE-infused market rally to new highs.

If these stocks start to fail at key moving averages, then the story may play out differently. If we were to see a market correction led by these names on the downside, then the alternative way to play it would be through the ProShares UltraPro Short QQQ ETF (SQQQ). But all of this will depend entirely on what the general market does this week.

Finally, Tesla (TSLA) is now outside the realm of big-stock NASDAQ names since it is now in a world of its own based on its current technicals. Tuesday’s climax top amid the most media-hype and attention I’ve seen for the stock in a long time has resulted in a sharp compression to the prior parabolic uptrend.

TSLA tested the 10-dma on Thursday and held. It then held relatively tight in a sharply narrowing price range on Friday. At this point, my take is that the stock has topped. The only issue remaining is whether there will be a sharp retest of the prior high that might be playable for a long trade. The only way that can happen, however, is to find a lower-risk entry right at the 10-dma and then use that as your selling guide.

That’s more or less what happened on Thursday. TSLA hit a low of 687 that day, a little less than 3% above its 10-dma at 671.28. One could have stepped in at that point, and that might have been possible using the five-minute 620-chart. I’ll leave it up to the reader to investigate Thursday’s TSLA 620-chart on their own to see how that might have worked.

Now only a Wyckoffian type of retest of the 10-dma or something similar would bring it into buying range looking for a possible upside move toward the prior highs. This is all highly speculative stuff, however, and depends entirely on an astute ability to implement the 620-chart in an effort to take advantage of the stock’s current high volatility, which can just as easily work against you as for you. Be forewarned!

 

 

Meanwhile, among big-stock semiconductors, coronavirus uncertainty seemed to help fuel a continuation of selling off the peak. One of my current short-sale targets in the group, Maxim Integrated Products (MXIM) has sold off from a triple-top type of formation on its third failed breakout attempt in eleven trading days.

From the perspective of shorting breakouts, MXIM is the gift that has kept on giving. The prior two breakouts failed rather quickly on ugly reversals, but Wednesday’s breakout held up, the only issue being its light volume. It began to roll over on Thursday and gained momentum on the downside Friday as selling volume picked up slightly.

If the general market continues to sell off this coming week, then MXIM has a reasonable chance of becoming an initial, late-stage, failed-base (LSFB), short-sale set-up. For that to happen it would need to breach the 20-dema, which is running neck and neck with the 10-dma, at which point it would trigger as a short-sale at that point.

From my perspective, the first short-sale entry came on Wednesday’s breakout in what was at the time a triple-top. Now the key is whether it morphs into a full-blown LSFB, because everything so far has just been a series of short scalps. But this remains a favored semiconductor short-sale target given its exposure to a broadening economic slowdown.

 

 

Similar double-top action has been seen in Applied Materials (AMAT), Micron Technology (MU), both not shown. Both look to varying degrees like MXIM as they drop back toward their 20-demas following a little double-top set-up.

Texas Instruments (TXN) also sits in the double-top camp, failing on another breakout attempt and streaking back toward its 20-dema on Friday. It is now sitting right on top of its 20-dema, and a breach of the line triggers this puppy as a short-sale target at that point, just like the others.

 

 

Western Digital (WDC) is another one to keep a close eye on. It has now closed one cent below its 20-dema with volume picking up ever so slightly on Friday. Thus, this is playable as a short-sale entry right here using the 20-dema or 10-dma as very tight covering guides.

 

 

KLA-Tencor (KLAC) is now a full-blown LSFB short-sale situation but is extended on the downside. It undercut its low of two Fridays ago, but it’s not clear if this will necessarily trigger a rally in U&R style. However, if it did, I’d watch for a move back up toward the rapidly falling 10-dma and the flat 50-dma as potential short-sale entries into rallies.

 

 

One of the few semiconductors that held up on Friday was Advanced Micro Devices (AMD) which closed positive as it held near-term support along its 10-dma and 20-dema. If it can hold tight along the two moving averages, then this keeps it in a buyable position using those same two moving averages as tight selling guides.

But if we start seeing all these other big-stock semiconductors breach their own 10-dmas and 20-dmas, watch for AMD to potentially do the same. If that were to occur, then it morphs into a short-sale target at that point. Play it as it lies.

 

 

Qualcomm (QCOM) gapped down to its 50-dma on Thursday after reporting earnings Wednesday after the close. It broke to a low of 86.19 before reversing course and closing roughly flat with the prior day. That looked like a big volume supporting pocket pivot, but it was a pocket pivot to nowhere.

On Friday QCOM gapped down slightly at the open and then broke below the 20-dema, triggering as a short-sale at that point. It then streaked lower to close below its 50-dma. The stock is still just a late-stage, failed-base situation, but a volatile one.

In this position, just below the 50-dma, it becomes shortable using the 50-dma as a quick covering guide. This likely will work as a short if the general market continues lower this week. If the market does continue lower this week, then semiconductors seem to provide a number of potential short-sale targets, including QCOM.

 

 

There are a lot of what I would call tentative patterns in this market. Snap (SNAP) blew up on Wednesday after earnings, but short-term that just turned in a Down on Big Volume (DBOV) move. While the stock was a fantastic short-sale target on Wednesday morning right at the 20-dema, the DBOV breakdown has led to a moving-average undercut & rally through the 50-dma.

That occurred on Thursday and SNAP has continued edging higher. I think eventually it becomes shortable again, despite the MAU&R at the 50-dma. This could happen one of two ways. First, if the stock continues to rally, it may eventually run into its 20-dema where the most optimal and opportunistic potential short-sale entry would lie.

Otherwise it could simply roll over back through the 50-dma, triggering as a short-sale at that point. If trying to play this as a long based on Thursday’s MAU&R, then your upside price target would have to be the 20-dema while using the 50-dma as a selling guide. A 360-degree assessment following a DBOV short-term low.

 

 

SNAP’s cousin, Twitter (TWTR), also exhibits some tentative action. The stock was entirely playable as a bottom-fishing type of buyable gap-up as it opened right at its 200-dma and ran up from there. It stalled a bit off the intraday highs as it ran into some price congestion over on the left side of the chart.

On Friday, TWTR pulled right back into its 200-dma as volume receded. This represents something of a 360-degree situation since the lower-volume pullback to the 200-dma could offer a lower-risk entry position using the 200-day line as a tight selling guide. Otherwise, a breach of the 200-dma turns TWTR into a potential short-sale target.

The company reported a -19% earnings contraction but beat on advertising sales revenue, which in this market is enough of a surprise to launch a stock higher. In any case, I like this as a potential 360-degree play here based on what it does in the coming days.

 

 

In the Land of the Clouds, Twilio (TWLO) is another tentative pattern. It was DBOV on Thursday after earnings, closing just below its 200-dma. A rally back above the 200-dma on Friday triggered this as a MAU&R long entry on decent volume. However, remember that volume is not a factor for any type of U&R – the price movement alone is enough to trigger it.

So, one can play it as a MAU&R here using the 200-dma as a selling guide. Otherwise, a breach of the 200-dma would trigger it as a short-sale.

 

 

There is a lot of interesting action among the cloud names, and I will go into more detail on a lot more names in my weekend video report. One example is The Trade Desk (TTD) which broke out on big volume Tuesday, also clearing the $300 Century Mark for the first time.

But while the market kept rallying on Wednesday, TTD decided to post an even larger-volume reversal that day as it dropped back below the $300 Century Mark. It stalled again at the $300 level on Friday as volume picked up.

Earnings are expected on February 27th, so we’ll see whether this can muster a decisive move in either direction before then. Nevertheless, an interesting 360-degree set-up where Livermore’s Century Mark Rules both long and short might apply depending on how it plays out from here.

 

 

Pinterest (PINS) reported earnings on Thursday after the close and gapped up sharply Friday morning. It opened at 26.99, posted a high of 27.19, and then headed straight down from there to play out as a shortable gap-up. The stock ended the day just below the 200-dma.

This looks pretty weak, but there are two ways to play this. First, one can treat it as a short if it opens Monday just below the 200-dma. One would then use the 200-dma as a tight covering guide. If it clears the 200-dma and holds, then it could become a MAU&R type of long set-up. Play it as it lies.

 

 

If I were a betting man, which I suppose I am in a certain way, I would bet that private space travel is more than likely to be a compelling future investment theme in the not too distant future, perhaps sooner than we think. In recent tweets and video reports I’ve discussed the only real current pure-play on the theme, entrepreneur-adventurer Richard Branson’s Virgin Galactic (SPCE).

I’ve been following this for a while, but only recently have I become more convinced that this is more than just a bottom-fishing spec-play. One member mentioned this on my Twitter page, at which point I decided it was time to come out on the stock, so to speak, and give it a thorough Gilmo analysis.

On Friday I blogged the following news item: “SpaceX is likely to spin off its satellite-based broadband business and pursue an IPO, according to COO Gwynne Shotwell. The company has been launching Starlink satellites in batches of 60 since May (there’s currently 240 orbiting Earth) and aims to make its broadband internet service operational by the end of 2020. Last year, Morgan Stanley set a bull case valuation of $120B on SpaceX (Starlink satellite and rocket business), which could also give a boost to Virgin Galactic (SPCE).”

To me, this is the sort of thematically compelling situation that can create moves reminiscent of Beyond Meat (BYND) which was considered the next big thing as part of a new wave of save-the-planet businesses that were going to wean us all off of red meat in favor of fake meat made of  so-called vegetable-based ingredients  like not-so-healthy canola oil and processed pea meal fake meat.

Another example of a thematically urgent price run-up was seen in Tilray (TLRY) when investors decided that the legalization of cannabis was the next big thing. If we’re thinking about the next big thing, then I think private space travel is certainly something to consider.

Recently SPCE announced that it expects its first commercial flight by year-end. It has also built the world’s first purpose-built spaceport in New Mexico, known as Spaceport America. The excitement is just getting started, and a SpaceX spin-off IPO would likely stoke interest in the sector, which is still in its infancy.

The question then becomes where one looks to buy this thing. After a big shakeout in late November the stock recovered and went on a cheap-stock tear before going on a climactic run into the $20 price level. The climactic move does not represent a final top in my view since the stock only recently came out of a long consolidation extending back to September 2017 when it first came public.

That’s probably the longest IPO base I’ve ever seen. Now, SPCE is working on a short flag formation with a low at 15.61. I would love to see a market correction that brings the stock down towards that low, perhaps creating a U&R type of set-up should it undercut that low. Another possibility is a more opportunistic test of the 20-dema, so all are things to watch for.

This is all of course quite hypothetical, but my basic view is that the sharp initial price run-up is a good thing. Now the stock needs to consolidate that move in proper fashion. While SPCE could launch from here after finding support Friday at the 10-dma during a market sell-off, that would most likely occur in a continuing market rally, and it is technically buyable here at the 10-dma using it as a tight selling guide.

 

 

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.

In my last report I expressed my suspicions that we could enter a phase where a more significant market correction becomes more likely. The evidence for this is mixed, but I do note that I am seeing at least as many, if not more, short-sale set-ups than long set-ups.

This remains mostly a 360-degree market with a lot of volatility. This coming week may be more telling with respect to any impending correction, but for now I find it enough to focus on the set-ups themselves, as usual, and let the market push me in the right direction. 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 positions in SPCE and SLV, 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. ©2008-2020 Gil Morales & Company, LLC. All rights reserved.