The Gilmo Report

January 22, 2020

January 22, 2020 4:10 pm ET

You can’t keep a good trend down. That’s the motto of this market, as a one-day sell-off yesterday, good for a distribution day, was met with a sharp rally this morning. However, today’s bid for yet more new highs was turned back as the NASDAQ Composite Index stalled and closed below its opening gap-up levels on lighter but above-average volume.

 

 

The S&P 500 and Dow indexes also stalled off their opening highs, with the Dow closing down -9.77 points. Of the two, only the S&P was turned back on a bid for new highs.

To understand why this market doesn’t quit, or at least hasn’t quite yet, one only needs to understand the chart below showing the changes in the level of the Fed’s balance sheet. The Fed began expanding its balance sheet, effectively pumping liquidity into the system starting back in September. You’ll notice that the balance sheet expansion perfectly correlates to the current market rally.

While the Fed claims to be providing temporary liquidity to the overnight repo market, the fact is that they are buying Treasuries and keeping them. Thus, the expanded balance sheet represents liquidity that then piles into stocks, as I see it. So, while the pundits may try to ascribe fundamental reasons for the rally, as I see it there is only one source, and that is the newly opened QE spigots.

 

 

The Fed long ago stated that one of its primary goals with QE was to inflate asset values. This was viewed as helping to create a wealth effect, thus bolstering the economy following the 2008 Financial Crisis. With respect to inflating assets, there is no doubt that they’ve been wildly successful.

And as QE is good for stocks, it should also be good for precious metals, which continue to consolidate their prior gains off the lows of early December. As the metals consolidate, precious metals stocks have been acting very well.

Agnico-Eagle Mines (AEM) followed through nicely on last week’s undercut & rally and the moving-average undercut & rally/pocket pivot at the 50-dma that occurred the day after. After running up to the prior range highs near 63, AEM pulled back today where it may offer a lower-risk entry as it approaches the 10-dma and 20-dema.

 

 

Franco-Nevada (FNV) acts strongly as it pushed to new highs yesterday on heavy volume. Today’s pullback came on lighter volume, but overall the stock remains extended. Only pullbacks to the 10-dma at 104.09 would offer lower-risk entries from here. The strong action in FNV would seem to bode well for the metals.

 

 

The SPDR Gold Shares (GLD) is holding tight along its 10-dma as volume dries up. This looks like the yellow metal is revving up to move higher. I would consider this an add point using the 20-dema as a maximum selling guide.

 

 

The iShares Silver Trust (SLV) has posted a couple of “mini-U&Rs” along its recent lows. The latest one occurred yesterday and sent it back above the 20-dema. The SLV held tight along the 20-dema as volume dried up today, so this could be considered an add point using the 20-dema as a tight selling guide.

 

 

I don’t see much to pound the table on the long side, as I consider the general market rally to be somewhat long in the tooth while the best leading stocks are quite extended. Thus, the freshest set-ups will be in those stocks reporting earnings, and as is usually the case I look for high-velocity trade opportunities to arise in these.

In this vein, this morning Netflix (NFLX) looked to be opening up somewhere around 344 in pre-open trade after reporting earnings yesterday after the close. Supposedly the company blew out numbers, but the reaction was tepid with the stock looking to open up 2-3% in pre-open trade.

But as soon as the pre-open session got underway, the stock immediately flashed a MACD cross to the downside. This was followed by a bearish moving-average cross about an hour later, when most retail investors are able to trade, resulting in a full 620 sell signal. That was it for the stock as it close 18 points below where it started the day in the wee hours of the morning.

 

 

NFLX ended the day near its intraday lows after finding support right at the 200-dma, but not by much. If the stock busts the 200-dma and then the 50-dma, then it’s likely headed much lower. If it can hold the 200-dma and turn, then perhaps you have a long entry situation.

The bottom line for today was that the reversal off the pre-open highs offered a very nice, high-velocity, high time-value trade for brave short-sellers. Note that in a situation like this, I will view the move to the 200-dma as a near-term cover point, and then wait to see how it proceeds from here. That is the best way to ensure that short-term profits are kept!

 

 

This sort of thing remains my primary focus as we progress through earnings season. As NFLX demonstrates, high-velocity high time-value trading opportunities tend to occur after an earnings report. As far as I’m concerned, this is the main course, so to speak, during earnings season.

After the close today, among the names on my current Earnings Watch List, Citrix Systems (CTXS) and Texas Instruments (TXN) have reported. As I write, CTXS systems is trading somewhere around 123-124, which puts it in new-high price territory. This can be watched on the 620-chart tomorrow morning to see whether it develops as a buyable or shortable gap-up.

 

 

Meanwhile, Texas Instruments (TXN) has reported and is trading down slightly as I write. The stock actually broke out today but is trading down at around 131 in the after-hours. Watch for a possible late-stage breakout failure to develop if the after-hours gap-down move holds.

 

 

Tomorrow we’re expecting to see earnings from Intel (INTC) and cloud leader Atlassian (TEAM) after the close. INTC almost broke out to new highs yesterday but still posted a pocket pivot at its 10-dma. I discussed it in my weekend report as it was holding tight along the 20-dema. Obviously, one is not going to buy this breakout just ahead of earnings tomorrow, but we’ll see what sort of actionable set-up might occur once earnings are out.

 

 

Atlassian (TEAM) is also expected to report tomorrow after the close, and it remains within a six-month base. Like almost every other cloud name, the stock had a sharp move off the lows of its pattern that began in early January. I discussed TEAM as a long entry idea when it posted a bottom-fishing pocket pivot along its 50-dma back at that time in my video reports.

TEAM then ran up to the $140 price level where it ran into resistance at an area of overhead price congestion last week. It’s now back below its 10-dma and above the 20-dema. There’s nothing terribly meaningful in the chart ahead of tomorrow’s earnings report, so all we’re doing now is maintaining awareness of the overall pattern and how things could set up once earnings are out tomorrow after the close.

 

 

Tesla (TSLA) defied the “rules” for a climax top and decided to make some of its own rules after finding support at the 10-dma at the end of last week. The stock launched nearly 100 points higher over the past two days as it came within 1% of the $600 Century Mark. Had it cleared it, that would have been its third Century Mark in roughly a month!

It finally ran into resistance at 594.50 before turning tail and stalling on very heavy volume to close at 569.56. All I have to say is that with earnings coming up next week, this looks like the rally to sell into. Of course, I thought that when it peaked out last week, but TSLA never violated the 10-dma which it simply used as a springboard to push for the $600 level. Play it as you see fit, since one can also use the 10-dma as a final selling guide based on the Seven-Week Rule.

 

 

Qualcomm (QCOM) broke out last week to new highs but the breakout has since failed on a short-term basis. The stock fell below the prior high today on lighter volume. Frankly, I prefer to buy pullbacks after breakouts rather than breakouts themselves, so this may offer a lower-risk entry as it comes into the 10-dma while using the 10-dma as a selling guide.

Keep in mind that the company is expected to report earnings on February 4th, so buying it now means you’re looking for a strong move higher ahead of earnings.

 

 

DocuSign (DOCU) is still acting quite sloppily after failing on two breakout attempts in early January. The stock bounced off the 50-dma yesterday on an intraday basis and pushed above its 10-dma and 20-dema today. I would watch for any reversal back through the 10-dma as a short-sale trigger based on the idea that this is a potential late-stage breakout-failure situation.

 

 

Despite the persistent market rally, I have no issues taking an opportunistic short trade if the market wants to hand me one. Lumentum Holdings (LITE) rallied back above the 10-dma today, which looked like a normal pull-up on the way down after it rallied yesterday.

LITE reversed on above-average volume to close back below its 10-dma. This may therefore be shortable right here using the 10-dma or today’s high at 80.52 as a tight covering guide.

 

 

Spotify (SPOT) was another short-sale target discussed in my weekend report that gave shorts a nice opportunity to short it again at the confluences of the 10-dma/20-dema this morning. The stock ran up to the 10-dma and reversed on heavy volume and closed at the 50-dma.

Again, this was in your face this morning on the rally, and it was easily shorted using the 620-chart to time your entry. Now it’s back at the 50-dma, which could trigger another reaction bounce. Therefore, watch for rallies into the 20-dema as lower-risk entries from here, otherwise a breach of the 50-dma would trigger a fresh short-sale entry at that point.

 

 

I often refer to the fact that when short-selling feels easy it often works best. That was the case on the 620-chart of SPOT today. The stock rallied for the first 90 minutes of the day before running into resistance at the 10-dema, which coincided with a downside MACD cross on the five-minute 620-chart, below at around 8:00 a.m. PST my time.

From there it just kept dropping, triggering a bearish moving-average cross about 40 minutes later to confirm a full 620 sell signal. I don’t wait for the moving averages to cross however, I simply act on the MACD cross which generally occurs well before a moving-average confirmation shows up. For alert short-sellers, this was a bit like taking candy from a baby on the 620-chart.

 

 

Roku (ROKU) looked like it was going to try and rally off its current lows around the $130 price level per my comments over the weekend. We did get a nice two-day move from the stock before it ran into resistance this morning near its 50-dma, but right at its 10-week moving average on the weekly chart.

Remember that when watching potential short-sale targets rally into potential resistance, we want to monitor key moving averages on both the daily and weekly chart. That brought ROKU right into shortable range again, and the stock promptly reversed. ROKU is not expected to report earnings until February 20th.

 

 

Universal Display (OLED) remains in a buyable position along its 20-dema while using the line as a tight selling guide. Also be aware that if the stock were to breach its 20-dema it could also morph into a short-sale target at that point.

OLED broke out in late December, but has not really gone anywhere since then, despite all the big volume on the breakout. So, there is always the possibility of a base-failure setting in here, and the first sign of that would be a clean breach of the 20-dema. Earnings are not expected until February 20th.

 

 

Disney (DIS) has been a short-sale target at the 50-dma over the past week, but today it became a short at the lower 20-dema. It’s not clear to me if we’ll see a big price break in the stock ahead of its expected February 4th earnings report, however. Shorting it here essentially means that’s what you’re playing for – a tactical short ahead of earnings.

 

 

Nowhere has the action been as impetuous as it has been in cloud names coming up off the lows of their patterns. ZScaler (ZS) illustrates the straight-up move typical of many cloud names doing roughly the same thing. However, as I indicated in my last report, as these clouds get extended on the upside, I’m looking for possible areas of resistance as potential short-sale entries.

ZS has provided two short-sale entries at the 200-dma over the past three trading days, doing so again on above-average volume. I think this remains a short on any further rallies into the 200-dma while using the line as a tight covering guide. This is one, however, that members who are facile on the short side should have been able to recognize as a short-sale target on the approach to the 200-dma.

 

 

As it has become more extended following a breakout in early January, RingCentral (RNG) has approached the $200 Century Mark, where it has run into solid intraday resistance both yesterday and today. This morning, the stock was in fact very shortable at the $200 level as it briefly poked its head above 200 and then backed down to close negative.

Being alert to the $200 Century Mark as a potential area of resistance if it could not hold up would have brought one in on the short side once it failed. Of course, had RNG moved decisively through $200, then it would have become a Livermore Century Mark Rule long entry at that point.

I would watch for further rallies into the $200 level as potential short-sale entries. It’s possible that these have come and gone over the past two days, but we shall see. Keep in mind that RNG is expected to report earnings on February 10th.

 

 

Coupa Software (COUP) has dipped below its 10-dma after a breakout in early January. Today’s move was an outside reversal to the downside on heavy selling volume, so it looks to me like the stock is going to come in for a test of the 20-dema.

Thus, I would watch for a pullback to the 20-dema as a lower-risk entry possibility. However, a breach of the 20-dema could trigger this as a possible late-stage breakout failure short-sale set-up. Play it as it lies.

 

 

Nutanix (NTNX) gave buyers a lower-risk entry opportunity yesterday when it briefly kissed the 10-dma. This led to a little cup-with-handle type of trendline breakout on a pocket pivot off the 10-dma, but I would not necessarily be looking to chase this as an initial entry.

The initial entry was at the 10-dma yesterday, and at best this would be an add point using the 10-dma as a selling guide. The proper OWL entry was on the voodoo pullback yesterday at the 10-dma when volume dried up to -52% below-average. NTNX is expected to report earnings on February 27th.

 

 

DataDog (DDOG) continues to wedge higher along its 10-dma and is again testing its highs. I like this best on pullbacks to the 20-dema as the more opportunistic entries to look for. DDOG is expected to report earnings on March 4th.

 

 

CloudFlare (NET) is back at its 20-dema, which puts it in a lower-risk entry position using the 20-dema or the 50-dma as your selling guide. Volume dried up to -42% below average. As usual, I tend to like it better on pullbacks to the 50-dma as the more opportunistic approach, but this pullback to the 20-dema is actionable. NET is expected to report earnings on February 13th.

 

 

Here comes Peloton (PTON) on a sharp move down to its 10-dma, 20-dema, and 50-dma. Volume was about average on the sharp pullback today. We now want to watch to see how it holds support at the three moving averages, if at all, while using those moving averages as your selling guide.

 

 

If Zumiez (ZUMZ) weren’t such a thin stock trading 521,000 shares a day, I’d have been all over this over the past two days, not as a long but as a short. The stock has gone nowhere since its early-December breakout, although it did provide a swing-trading long opportunity off the lows in mid-December.

Yesterday it breached the 20-dema on higher volume and then today found resistance at the 20-dema before getting body-slammed to the 50-dma on higher selling volume. It did manage to hold support at the 50-dma. But rallies into the 20-dema could bring this into shortable range for accounts that don’t need to own 5,000-10,000 shares or more for a meaningful position.

Unless ZUMZ can get something more sustainable going here, a breach of the line would make this one a full-blown, later-stage, failed-breakout situation. All we know for certain, however, is that this has been a big-volume breakout to nowhere over the past two months.

 

 

Crocs (CROX) pulled a classic Ugly Duckling maneuver yesterday when it breaches the 20-dema at the open and continued lower. At that point it looked like it was headed for the 50-dma when the Ugly Duckling snatched it out of mid-air and pushed it back above last week’s 42.38 low. That constituted an undercut & rally (U&R) long entry at that point, using the 42.38 low as a selling guide.

Today CROX continued a little higher but ran into resistance at its 10-dma on very light volume. It’s obviously not within buying range, but I would be alert to any failure/reversal here at the 10-dma as a possible short-sale trigger in 360-degree style.

 

 

Snap (SNAP) is stalling here at higher highs, but last Friday’s buyable gap-up (BGU) is holding, so far. Nevertheless, the stock needs to do some something substantial before February 4th when it is expected to report earnings. Also, a breach of the 18.76 BGU low could bring it into play as a short-sale target.

 

 

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.

Despite the market index rally, I find that there are set-ups on both the long and short sides, and this report provides concrete evidence. I pay close attention to where short-sale set-ups might be showing up as stocks get extended on the upside. If the general market does correct, I am confident that these will naturally push me more to the short side.

So, for now, I simply act on the best set-ups I see in real-time, and it just so happened that many of these turned out to be on the short side today. Whether that’s telling us something about this market or not remains to be seen. But I didn’t need that information to capitalize on short-sale set-ups in stocks like NFLX, RNG, ROKU, or SPOT today.

Instead of fretting over whether this market rally is getting tired or long in the tooth, it’s probably more than sufficient to simply remain open to the set-ups you see in real-time and then going with the flow in this regard. My conclusion after today’s action is that this remains a 360-degree market, and that’s all I need to know. Take it from there.

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 CTXS 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.