The Gilmo Report

January 2, 2019

January 2, 2019

A four-day rally attempt looked doomed this morning when the major market indexes gapped down sharply at the open. A 398.87-point decline in the Dow Jones Industrials Index at the intraday lows early in the morning looked scary after news of weak economic data coming out of China sent global markets down sharply overnight. The Caixin Media and HIS Markit PMI fell to 49.4 in December, its lowest level since 2016.

But the indexes quickly found their feet and began a relentless climb back to the unchanged line and beyond before staving off a late-day sell-off to close positive by the bell. The NASDAQ Composite Index led the charge among the big-three market indexes with a 0.44% rise on higher volume. It was boosted by a strong showing in the NASDAQ 100 Index, which posted a 0.49% gain.

 

GR010219-$COMPQ

 

The S&P 500 Index, like the Dow, also closed up on the day, but by only a small margin. Nevertheless, following the grim-looking opening sell-off, the recovery off the intraday lows was impressive and came on slightly higher volume. The action in the major market indexes remains constructive in what is now a five-day rally off the lows of Christmas Eve, but negative after-hours news (details further below) from Apple (AAPL) will put the rally to the test tomorrow.

 

GR010219-$SPX

 

In both my written and video reports, I’ve been staying with the concept of this comparison between the market top in late 2007 leading into 2008 and late 2018. The chart below of the NASDAQ Composite Index points out the recent inflection points and how they correspond to the current NASDAQ since the early-October top. The comparison is eerily similar and has played out almost exactly since I first discussed it in my December 5th report.

An argument can be made that after this second leg down in an ongoing bear phase, we will go into a longer period of choppy action than we saw in December 2018 before the second leg down. We can see that after the second leg down in the 2007-2009 bear market, the NASDAQ briefly undercut its February low, and then triggered an undercut & rally move that carried all the way into early June.

That undercut low in March of 2008 centered around the collapse of major brokerage firm Bear Stearns, Inc. When J.P. Morgan (JPM) stepped in to buy the company as a bargain-basement $4 a share, the market breathed a sigh of relief and began to rally for the next 2-3 months.

 

GR010219-NASDAQ 2007-2008

 

That move off the March 2008 lows into June was a typical bear market rally phase, which can produce decent swing-trading opportunities on the long side. Sometimes there are even some new-merchandise situations that provide investors with something fresh in an otherwise stale and beaten-down market.

One such example of this occurred in mid-March 2008 when Visa (V) came public on March 19th at $44 a share. The daily chart below shows the first IPO flag formation that featured a pocket pivot breakout in early April followed by some very light, voodoo-volume pullbacks into the top of the flag and around the 10-dma and the 20-dema at that time. From there, V romped 35% higher over the next 16 trading days before rolling over and correcting.

V serves to illustrate that even during bear market rally periods, even the one that failed miserably in September 2008, leading to the third leg down in the brutal Financial Crisis Bear Market of 2007-2009, strong long opportunities can arise. If, and I emphasize the word if, 2019 plays out similarly to the first half of 2008, then this is the type of thing we want to focus on. We will also see Ugly Duckling long set-ups move to the fore as well, and we can incorporate these set-ups into our approach.

 

GR010219-V 2008 Daily

 

One example of a potential, current Ugly Duckling set-up is one I covered at length in my New Year’s Day video report of only yesterday. That was our old friend Roku (ROKU). The thing that caught my eye on New Year’s Day morning as I was watching the Rose Parade and going through my market screens was the weekly chart. Note that the stock recently undercut the prior $29 low in the pattern from early April and rallied back above it last week, triggering an undercut & rally long signal on the move back up through $29.

 

GR010219-ROKU Weekly

 

Taking a closer look at the daily chart, we notice also that this weekly U&R move coincides with a big bottom-fishing pocket pivot occurring at the 10-dma last Thursday. The stock, however, closed just below the 10-dma, but drifted back above the line on Monday as volume dried up. It then retested the $29 price level today as it sold down to an intraday low of 29.29, presenting a lower-risk entry opportunity only 29 cents above the early April low.

By today’s close, ROKU posted a strong-volume pocket pivot at the 10-dma for a clean and clear bottom-fishing pocket pivot (BFPP). Note also on the daily chart below that there are three distinct “Bingo” oversold indicator bars, with the third and final one being extremely fat. I generally look for three distinct bars, or three distinct clusters of these bars as a stock comes down as a potential near-term bottoming indicator.

 

GR010219-ROKU Daily

Right now, all these factors, including the U&R on the weekly chart, are lining up for the stock, such that the stock is in a buy position using the 10-dma at 30.02 as a selling guide. Also, for the more opportunistic, pullbacks closer to the 10-dma would offer alternative, but potentially lower-risk entries from here.

Most stocks remain somewhat in the proverbial no-man’s land. For example, Microsoft (MSFT) looks like it could easily rally as far as its 200-dma, maybe even its 50-dma, where it might become shortable at that point. Aside from that it has so far held above the U&R trigger low at 99.35. The pullback this morning brought it into buyable range, but by the close you could only pat yourself on the back for a whopping 1-point gain or so.

However, the bottom line is that MSFT held the 99.35 prior low and the 10-dma as volume declined. This gives today’s pullback the look of a Wyckoffian Retest, where the stock pulls back only slightly as volume, or supply, dries up. Thus, this looks more like it wants to move higher rather than lower, but the situation still remains quite fluid.

 

GR010219-MSFT

 

Amazon.com (AMZN) is in a similar position. I do not show it here on a chart, but it also held a pullback to the 10-dma today and closed back above its higher 20-dema on higher volume This action comes after an undercut & rally (U&R) move through its prior 1420 November 20th low last week, so is constructive. The stock is of course extended in this position but should be watched to see if and how it holds along the 10-dma and 20-dema from here.

Alphabet (GOOG), also not shown, continues to bump up against its 50-dma without clearing the line. Technically, this keeps it in a shortable position here at the 50-dma while using the line as a guide for a tight upside stop. If it can clear the 50-dma in convincing fashion, then this would be constructive and likely would occur in synchrony with continued upside in the NASDAQ.

Facebook (FB), also not shown, continues to rally after its own undercut & rally move last week when it broke below the 126.85 November 20th low and rallied. It is now approaching its 50-dma. It closed today right at its 20-dema, printing 135.68 at the bell. It remains below its 50-dma, but the bottom line is that it has so far held that U&R trigger from last week and could continue to build on this from here.

As some of the higher relative strength names in this current market environment, members of the FTD Four that have not broken down need to be watched or acted upon as potential long plays if this current reaction rally is more than just a fleeting event. I like the action in Twilio (TWLO) as it holds up in a nine-week base.

Today TWLO again pulled in to test the 10-dma, which lies just above the more important 50-dma as volume continues to dry up. This certainly doesn’t look like shortable action to me, and in fact any further such retests of the 10-dma/50-dma confluence on light volume can be viewed as lower-risk entry opportunities.

A clean breach of the 50-dma, of course, would bring this back into focus as a short-sale target. But so far, TWLO doesn’t seem to show any willingness to bust back below its 50-dma, even in the fact of last week’s wild action. Play it as it lies!

 

GR010219-TWLO

 

Tableau Software (DATA) also held a pullback to its 50-dma today on slightly higher volume. This can be viewed as minor supporting action at the line. The set-up here is like TWLO. Constructive pullbacks to the 50-dma present lower-risk long entry opportunities, while a clean breach of the 50-dma would trigger the stock as a short-sale target.

 

GR010219-DATA

 

Etsy (ETSY) continued the low-volume rally into its 50-dma on Monday, reversing at the line on higher volume. Today, the stock pulled back with the market early in the day but closed near the top of its trading range. Is this a fractal head and shoulders, as I noted it might be in my weekend report, or is it revving up for a move up through the 50-dma?

There is no way to know for certain until we see it occur or simply roll back to the downside in a failed attempt. In its favor, ETSY has continued to hold above last week’s undercut & rally move through the prior November 20th low, so that U&R remains in force. At this point the situation remains fluid, not unlike the market in general, as we await further evidence.

 

GR010219-ETSY

 

Planet Fitness (PLNT) is very much like TWLO and DATA in that it regained its 50-dma last week and has held above the line since. Likewise, it is similar to ETSY in that it posted a U&R move last week on the same day as it undercut and rallied back above its own November 20th low. That U&R move remains in force.

Today the stock tested the 50-dma again on slightly above-average volume and held, rallying off the line in a minor show of supporting action. That is constructive, so that any further test of the 50-dma that occur constructively could be utilized as lower-risk entry opportunities. On the flip-side, a clean breach of the 50-dma would trigger this as a short-sale target at that point.

 

GR010219-PLNT

 

As I noted over the weekend, all the FTD Four stocks, TWLO, DATA, ETSY, and PLNT, do have the look of fractal head-and-shoulders formations where the latest rally forms the right shoulder in the patterns. The alternative view is that TWLO, DATA, and PLNT are still sitting within bases, which could resolve in either direction, while PLNT and ETSY are still active U&R long set-ups that remain well above their November 20th lows.

These set-ups therefore remain two-sided. We can only keep a close eye on these stocks to see how they resolve their current chart action. My general thinking is that if we start a bear market rally that lasts for more than a few days, these will likely resolve to the upside. If the market rolls over to lower lows and this current general market rally attempt fails, they could easily resolve to the downside.

There’s also the situation with Workday (WDAY), which has regained its base breakout point and looks rather constructive right here, right now. Today WDAY bounced off the confluence of the 10-dma and 20-dema as volume picked up slightly. This looks like a show of supporting action, such that any further constructive pullbacks to the 10-dma/20-dema confluence would offer potentially lower-risk entry opportunities from here.

Another breach of the 20-dema, however, brings this into play as a short-sale target based on the evolving, late-stage, breakout failure that it would represent. As a high relative-strength name in this market, along with the FTD Four, that has not blown apart in what has been a very deleterious market break off the October peak, WDAY remains a similar two-sided situation that can only be deciphered pending further market evidence.

 

GR010219-WDAY

 

I’ve still got my eye on Canada Goose Holdings (GOOS) as I watch for any potential rally back up through the late October 47.42 low in the pattern. This would trigger a U&R long set-up, should it occur, but for now is only something to watch for, if still something of a long shot.

 

GR010219-GOOS

 

Tesla (TSLA) is one of the messier patterns in this market as it flops around. Its latest expedition took it back up to the 50-dma on Monday where it ran into resistance and stalled on light volume.  Technically, that would have worked as a short-sale entry point at the 50-dma, which would have rewarded the fortunate, if not the prescient, when the stock gapped down through its 200-dma.

Although it rallied off the intraday lows, it closed below the line on heavy selling volume.  This puts it in a new shortable position here using the 200-dma as a guide for a tight upside stop.

 

GR010219-TSLA

 

Salesforce.com (CRM) is wedged between its 50-dma and 200-dma, trying to decide whether it wants to be a short or a long. The long argument would say buy the stock here while using the 50-dma as a tight selling guide. The short argument would be to short the stock here and use the 200-dma as a guide for a tight upside stop.

The chart can be viewed in both ways, so that the final verdict is a big unknown. I think that’s the situation with every stock I’ve discussed so far in this report, where we can see positives and negatives in each chart. That keeps this market off limits for everyone but the most nimble and adaptive of swing-traders.

 

GR010219-CRM

 

Splunk (SPLK), not shown, is also stuck between its 50-dma and 200-dma but closed today right on top of its 20-dema, which lies between the two. Another uncertain, inconclusive pattern that can simply be ignored for now.

Shopify (SHOP) remains an erratic stock, but today’s action has me leaning more toward the idea of shorting the stock as close to the 50-dma at 140.06 as possible. The stock did gap down this morning and found support at its 10-dma, but volume was weak, so it was just being dragged around by the general market, as I see it.

As I wrote over the weekend when the stock was just barely clearing its 10-dma, “Right now, I’m just watching this rally unfold as it approaches these three moving averages. The very light volume on the three-day rally makes this suspect, but it is still a matter of finding the right short-sale entry point without getting overeager.”

I think that remains the case with SHOP, where shorting the stock near the 50-dma makes sense if the general market starts to falter. If it clears the 50-dma, then the next reference for overhead resistance would be the 200-dma at 244.53, so one should remain flexible. My general view is that this is a go-to stock on the short side if this current rally attempt fails.

 

GR010219-SHOP

 

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.

After hours as I write this afternoon, Apple (AAPL) just released lower guidance, blaming the situation with China. That is sending the stock down to last week’s lows in the 146-147 price area in after-hours trade, and this is also having an obvious effect on the futures, which are getting hit as well. No surprise there.

I also don’t view the fact that AAPL is guiding lower as much of a surprise either. The stock price has been in a sharp decline since the October highs and the ephemeral but much-hyped $1 trillion market cap level that it achieved at that time. But the continuous and steep decline since then, which saw the forward PE contract to about 12 times next year’s estimates, was already discounting this.

That’s why AAPL became so “cheap,” because the market saw the “E” in “PE” was about to shrink, making the stock not as cheap as one might think based on a measure of 12 times forward earnings estimates that were about to undergo a big revision! This is how PE contractions work, and now we see why AAPL’s PE contracted so severely since the October highs.

 

GR010219-AAPL Weekly

 

So, it looks like we’ll be seeing another gap-down open tomorrow, which may set up some opportunistic opportunities, if you know what I mean. It may be that the worst of the news on AAPL is now all out, and in fact it was the prior decline before the news came out today that was already telling the story. If so, then perhaps we see another day like today, where a gap-down open turns into something less grim, or even a rally.

For that reason, keep a close eye on support levels for stocks I’ve discussed in this report. If stocks can hold support early in the day, then we may be looking at opportunities for long entries. If we begin to see support levels breached on heavy selling, then lower lows may be coming. All we can do is wait for the real-time information to present itself, and then act accordingly.

Meanwhile, as I’ve repeated frequently, this remains a market for swing-traders and day-traders on both the long and short sides of the market, depending on what set-ups present themselves in real-time. To help with this, in addition to my Big List of Busted Stocks that was posted to the website yesterday, I will be adding a second page to the same spreadsheet showing my current long watch list.

The AAPL news is obviously going to affect anything tech-related tomorrow, screwing up some of the technical action we saw today. Such is the way of this market. But, we won’t know for sure what opportunities will result from this until trade begins tomorrow.  So, do your best to keep your head on straight, as Bill O’Neil used to tell me, avoid whiplash, and, as always, just play it as it lies!

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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