The Gilmo Report

January 26, 2020

January 25, 2020 2:15 pm ET

The market caught a base case of the coronavirus on Friday on a big outside reversal day to the downside for the NASDAQ Composite Index on heavy and higher volume. The S&P 500 also posted an outside reversal to the downside while the Dow held up only marginally better.

 

 

While the news-swirl regarding the coronavirus provided the alibi for Friday’s selling, the bottom line is that the market and leading stocks were well-extended already. A pullback was therefore not out of the realm of possibilities, and all the major market indexes were down less than 1%.

From that perspective, the selling wasn’t that bad, but within the context of the action among individual stocks it was not constructive. Investors should be alert to further downside this coming week. But the action will likely be colored by how earnings play out for a slew of big-stock names that are reporting this week, so the situation will be very fluid.

Precious metals glittered on Friday. The iShares Silver Trust (SLV) posted a strong-volume pocket pivot on Friday as it pushed up through its 20-dema and 10-dma. This was buyable along the 20-dema per my comments in Wednesday’s report, and I would not necessarily want to be chasing strength. However, an orderly pullback to the 10-dma would perhaps offer a lower-risk entry.

 

 

The SPDR Gold Shares (GLD) also moved higher on strong volume but did not post a standard ten-day pocket pivot as the SLV did. Instead, it finished the week by posting two five-day pocket pivots along its own 10-dma.

The action in both metals is very constructive. I have been bullish on the two since the lows of November and December, and we have had many opportunities to buy weakness on the way up. At this point, chasing strength is not advised, and I prefer to sit back and wait for pullbacks when and where I can get them.

 

 

My favored precious metals names also act well. Agnico-Eagle Mines (AEM), not shown, held support at its 20-dema on Friday, where it is buyable at the line. Otherwise the stock remains in a base ahead of its expected February 13th earnings report date.

Franco-Nevada (FNV), as a pure-play on gold since it owns gold production streams rather than mining the stuff itself, remains the strongest gold stock out there. It pushed above the $110 level on Friday on light volume. It was last buyable along the 20-dema two weeks ago per my comments at the time but illustrates the strength we are seeing overall in the precious metals and their related stocks.

 

 

My observation in the past two reports that I have not seen much to pound the table on the long side has been confirmed by the action on Friday. Most leading stocks had sharp pullbacks, and I think in every case it is a matter of letting the pullbacks run their course and then determining where the lower-risk entries, if at all, can be found on the pullbacks.

As I indicated above, we’ll see a slew of big-stock names reporting earnings this week. The real fun starts on Tuesday afternoon, when AMD, AAPL, IPHI, KLAC, MXIM, and XLNX, all names I’ve discussed in either the written or video reports, are expected to report. Wednesday morning we’re expecting to see BABA, MA, and MCD report, with FB, PYPL, MSFT, NOW, TSLA, and V expected to report in the afternoon.

We can therefore wait to see what sorts of actionable set-ups might appear after earnings in any of these stocks after earnings. That will be my primary focus this week, although if we see the market correct further it may open the short side to a broader number of stocks.

On the earnings front, Intel (INTC) beat on earnings when it reported Thursday after the close and launched higher on a buyable gap-up move. The stock opened at 66.57, set an intraday low at 66.46, and then marched about two points higher into the close. There has been some talk that Chinese telecom giant Huawei, which has been partially blacklisted by the U.S. has been stockpiling components, and this has spiked orders for semiconductor companies like INTC and others.

One analyst warned that the big numbers reported on Thursday could be short-lived, and actually put a sell rating on the stock, something that is rarely seen. INTC gapped up after earnings the last time it reported in October and showed very little additional upside thrust afterwards, so it will be interesting to see whether Friday’s gap-up move has any legs from here.

 

 

INTC didn’t interest me as a long or a short, since what I felt would be most playable on Friday would be shorts into sympathy gaps in other semiconductors where we would be looking for possible reversals. I discussed this idea in my Thursday video report, and we saw a number of other semis get smacked on Friday after initial gap-ups while INTC held up.

All four of the main semis I’ve discussed in recent reports, Applied Materials (AMAT), Advanced Micro Devices (AMD), which is expected to report Tuesday, KLA-Tencor (KLAC), and Micron Technologies (MU) did exactly that. And the moves were ugly, with outside reversal days in AMAT, AMD, and KLAC, while MU opened up just slightly to the upside before streaking down to its 10-dma.

So, in this case, the post-earnings action in INTC gave rise to some strong shorting possibilities in other semiconductors into their upside sympathy moves. This illustrates another way in which earnings reports can be used as sources for actionable set-ups as a result of sympathy moves in related names. This is in keeping with the creative aspects of the true OWL Trader.

 

 

And if you were buying Qualcomm (QCOM) at the 10-dma on Thursday and looking for a strong move higher ahead of its expected February 4th earnings report, you got a nice strong move lower instead! As it turned out, the stock just became another sympathy short to the INTC post-earnings gap-up.

The stock gapped up in sympathy to INTC on Friday morning, but only slightly, and then promptly and sharply reversed to the downside. By the close, it had busted both the 10-dma and the 20-dema in an ugly outside reversal. Another example of why buying breakouts is not my favored way of operating as an OWL trader.

 

 

The strength in INTC Friday did little to inspire similar strength in other semiconductors, as we can see. This was also the case with Universal Display (OLED). It wasn’t even really moving that much at the open on Friday in sympathy to INTC. That was not all that surprising since its business isn’t related to INTC’s.

OLED opened up slightly on Friday and promptly streaked below the 20-dema, something I discussed watching out for in my Wednesday report. I wrote, “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.” That’s precisely what happened on Friday.

Note that OLED’s strong-volume breakout in late December went nowhere. A small move to marginal higher highs was all it could muster in early January and now it is heading back to the 50-dma and the prior breakout point. This is typical of most breakouts that show initial strength but little else, and in my view is symptomatic of a market where there is no actual accumulation.

 

 

Atlassian (TEAM) was another post-earnings gapper on Friday. The company reported Thursday after the close and gapped up to an even 145 at the bell on Friday. But the stock was a very volatile affair early in the day. Within the first five minutes of trade, it immediately broke to the downside before setting a low at 140.65.

From there it rallied just above $150 within the first 30 minutes of trade and then rolled over. It kept rolling lower over the next two hours or so until it hit 141.65, one point above the initial intraday low at 140.65. That put it in a lower-risk entry near that intraday low. Sure enough, TEAM turned back to the upside and chopped its way higher for the rest of the day to close at 146.79.

 

 

On the 620-chart, we can see that it was possible to jump in on the long side within the first five minutes and catch the ride up to 150. But from a practical perspective, that would likely have been hard to do. When the stock is that volatile within the first five minutes of the day, it’s hard to assess where it may or may not be finding support as it pulls the old “Rock Lobster” and plummets downward very quickly immediately after the opening bell.

In some sense, that is like trying to catch a falling intraday knife. However, the next set-up on the 620 was the short-sale entry around 148 on the MACD cross to the downside, and it was very concrete. There was no guarantee it would work, of course, but objectively it was an actionable MACD signal on the 620.

From there the stock went lower as it tested the prior 140.65 intraday low. That test was confirmed as successful when the MACD then turned back to the upside right around 9:30 am PST, my time here in L.A. One could have then flipped to the long side for the ride back above $148, but it was a choppy affair with one head fake just after 11:00 am my time.

The move above 148 occurred on an upside burst in the final ten minutes of the day but note the long upper tail or “wick” on the last five-minute candle indicating that sellers came in and hit the stock to drive it back to a close of 146.79. 620 action at its best!

 

 

TEAM is a great example of the wild intraday action that can often accompany the post-earnings action of any stock. To the extent that it is coherent, it can be played using the 620-chart for those who are oriented toward this kind of thing. TEAM could potentially become buyable on any further tests of the 140.65 BGU low, but a breach of that low could also trigger it as a short-sale at that point.

There’s no other way to put it, but Tesla (TSLA) is simply a beast as it defies the laws of climax tops. After running into resistance at the $600 Century Mark on Wednesday, it has held tight. Meanwhile, volume is declining as the 10-dma rushes higher to serve as a near-term selling guide.

I suspect there may be some rolling up of the shorts going on here, where squeezed old shorts scrambling to cover are replaced by newer, smarter shorts who came in at, say $500. This creates a rolling group of shorts that is successively squeezed on the way up.

For now, the 10-dma is your selling guide, but perhaps TLSA will clear the $600 Century Mark and shoot higher again. If it did, I normally wouldn’t have an issue testing it as a long based on Livermore’s rule, but the stock is on Earnings Watch for now since it is expected to report earnings this Wednesday.

Recent reports have indicated a sharp drop in registrations for new TSLA vehicles in California and in Europe, where registrations have dropped over 60%. This may not bode well for TSLA’s earnings report, and I might suggest selling into the current rise ahead of earnings and then waiting to see what transpires after earnings in terms of actionable set-ups.

 

 

Netflix (NFLX) illustrates the necessity of a 360-degree approach to this market. We know from countless examples in this current market environment that big down days on heavy volume can often turn into long entries. In this case, NFLX held support at the 200-dma despite being body slammed to the line on Wednesday after reporting earnings Tuesday after the close.

As I wrote on Wednesday, if the stock held support at the 200-dma, it was in fact in a lower-risk entry position, simply because the 200-dma provided a very tight selling guide. This allowed one to keep risk relatively tight in order to take advantage of the less obvious long set-up at the 200-dma.

This is how this market surprises you, because very bad technical action on one day often means nothing the next. I have joked many times about the DBOV buy signal (Down Big on Volume) in this market, and NFLX’s DBOV on Wednesday was exactly that. Surprise!

 

 

If we look at the weekly chart of NFLX, we can see a strong-volume weekly move off the 40-week moving average, corresponding to the 200-dma on the daily chart. It is, however, running up into a large area of overhead price congestion which may have figured into at least part of Friday’s stalling action.

Currently the stock is not in an actionable position either way, but it does demonstrate the playability of volatile movements in both directions after earnings. It typifies that which I love so much about earnings season.

 

 

INTC earnings gave the market a sense of ebullience Friday morning as most stocks gapped up, some more than others. It also didn’t matter necessarily whether it was a semiconductor or not. DocuSign (DOCU) gapped up slightly and looked headed for another breakout attempt after two prior failed breakouts.

But buying interest failed to show up, and it simply became a short near the prior range highs, something that is not unusual to see in this market. DOCU held above the 20-dema, but I would view any breach of the 20-dema as a short-sale trigger from here.

 

 

Lumentum Holdings (LITE) also set up as a short on Wednesday when it gapped up to the prior Wednesday high. This also corresponds to the resistance the stock saw at the 10-dma not quite two weeks ago. LITE is expected to report earnings on February 4th.

 

 

The opportunistic approach works well on the short side, as we can see from numerous examples in this report so far. The reversals in stocks were broad and not limited to semiconductors alone. Spotify (SPOT) has been one of my main short-sale targets and it offered another entry on Friday when it rallied into the 10-dma and 20-dema.

It then reversed on slightly higher volume to close below its 50-dma for the first time since its December pocket pivot breakout. The stock is now a confirmed, late-stage, failed-base, short-sale target, such that rallies into the 50-dma would offer fresh short-sale entries from here. SPOT is expected to report earnings on February 5th.

 

 

Most of my short-sale targets were actionable on Friday. For example, while I don’t show them on charts here, Roku (ROKU) ran into its 20-dema and reversed on light volume, while Disney (DIS) has broken lower as it peels away from the 50-dma on the downside and is now approaching its 200-dma. One main reason for the decline is likely the temporary closing of Disneyland in Shanghai.

ZScaler (ZS) was last shortable at the 200-dma on Wednesday per my prior comments on the stock. It triggered a second short-sale entry on Friday when it opened up slightly and then reversed to close back below the 10-dma. That short-sale signal occurred right at the 10-dma, so the stock is now extended on the downside.

Watch for rallies back up into the 10-dma as possible lower-risk short-sale entries from here while using the line as a covering guide.

 

 

I’m inclined to continue treating RingCentral (RNG) as a short-sale target any time it approaches the $200 Century Mark and fails. It again pushed just above the $200 level on Friday, thanks to the market’s ebullient, INTC-fueled upside open, but reversed on expanding selling volume.

Further rallies into $200 can be shorted, using it as a tight selling guide. Expect, however, that this will likely tend to work better if the market continues to correct his week. RNG is expected to report earnings on February 10th.

 

 

Coupa Software (COUP) looked like it was headed for the 20-dema, per my comments on Wednesday, “Today’s [Wednesday’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.” A brief rally above the 10-dma on Friday did not generate any significant buying interest and the stock reversed to close right at the 20-dema.

Volume dried up, so it’s possible this could serve as a lower-risk entry for the stock on the long side. However, a break below the 20-dema would trigger this as a possible late-stage, failed-base (LSFB), short-sale situation, so be alert to the 360-degree aspects of COUP’s chart.

 

 

Nutanix (NTNX) provides yet another example in this market of why chasing strength is not advisable in this market. The stock’s pocket pivot breakout on Wednesday looked impressive, but as I wrote at the time the proper buy point occurred on the very low-volume voodoo pullback to the 10-dma on Tuesday.

NTNX is now sitting right at its 10-dma after reversing on Friday. This could easily fail right here, and a breach of the 10-dma followed by the 20-dema would trigger this as a short-sale at that point. Personally speaking, I have liked it as a short around and just above the $36 price level where it has found consistent resistance over the past week. NTNX is expected to report earnings on February 27th.

 

 

DataDog (DDOG) reversed at the $44 level on Friday where it has run into resistance each time it has tested new highs over the past two months. There is no trend here, just choppy action back and forth within the base. The only thing that would appeal to me as an entry opportunity would be an opportunistic pullback to the 50-dma.

DDOG is expected to report earnings on March 4th.

 

 

CloudFlare (NET) is also going nowhere as it chops around within its base as well. The stock ran into resistance at the prior highs last week, which I called as a sell point for shares bought down around the 50-dma. Now the stock is right back at the 50-dma. Selling volume picked up on Friday, so I would not be surprised if the stock broke below the 50-dma in any continued market pullback this week.

Otherwise, one could always try to buy it here, one penny above the 50-dma, with the idea of running for cover quickly if it fails to hold the line. With NET expected to report earnings on February 13th it becomes less attractive given its inability to mount any kind of significant rally outside of the choppy action within its base.

 

 

Peloton (PTON) is expected to report earnings on February 5th, so it becomes less interesting as we await earnings. My guess is that the earnings report will make or break the shorts’ case against the stock, as short interest remains high in PTON.

However, Friday’s move constitutes a shakeout at the 50-dma. This could be played as a moving-average undercut & rally (MAU&R) long set-up using the 50-dma as a tight selling guide. That might be good for a swing-trade ahead of earnings, but not much more than that, in my view.

 

 

Zumiez (ZUMZ) is a big, late-stage, base failure now that it is back below its 50-dma. The bottom line for me on this one is that the early December breakout on huge volume, which was very impressive, has gone absolutely nowhere. In the old days, up on big volume was a bullish sign. O’Neil style traders would call this the rocket fuel for a big move.

In ZUMZ’s case, as is the case for so many other examples in this market, the rocket has blown up on the launch pad, and Houston, we do not have lift-off. Instead, all we have is a choppy go-nowhere pattern where the prior breakout has failed.

 

 

Crocs (CROX) played out as a short at the 10-dma, which was something I discussed on Wednesday when I wrote, “I would be alert to any failure/reversal here at the 10-dma as a possible short-sale trigger in 360-degree style.” The stock reversed at the 10-dma on Friday and then closed below the 20-dema.

That creates a new short-sale entry using the 20-dema as a covering guide. Notice how CROX’s new-high breakout back in mid-December never resulted in any significant upside. The proper buy point was the voodoo pullback to the 50-dma a few days before. That would have allowed for greater profit potential, but CROX is now back near that new-high breakout point and teetering on failure.

 

 

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 video reports I’ve discussed the fact that I currently have no significant short-sale watch list because I believe in any market correction your best short candidates will come from your long watch list. That is because a basic principle of this market that I have observed is that in the same manner that the sharpest upside moves occur from the lows of stocks’ patterns, the sharpest downside moves tend to occur from the highs of patterns on late-stage failures or double-top type set-ups.

In this market, short-selling has been mostly a tactical affair given the impetuous QE-fueled rally we’ve seen since early October. More recently we’ve seen that rally gain momentum as a broad number of stocks have had sharp upside moves that began in early January, many coming up off the lows of their patterns.

The group chart below shows six stocks in disparate industry groups having similar moves in January. GOOG and V are stocks that have been forging new highs, but both represent what I would consider to be alt-currency situations in that they are established large-cap companies.

 

 

These are playable rallies on the long side (which may become shortable rallies as they become extended into resistance, like ANET), to be sure. The source of these rallies is, in my view, the sharp expansion in the Fed’s balance sheet that we’ve seen since mid-September and which accelerated in mid-October. The impetus for the expanding balance sheet, a.k.a. stealth QE, has been concerns over illiquidity in the overnight repo market.

Concerns that there would be a possible year-end repo market melt-down resulted in a lot of liquidity being pumped into the system. And that, in my view, is what has fueled sharp moves in so many stocks with lacking fundamentals, what I call the Parabolic Pump. This is like what the Fed did in late 1999 when it feared a melt-down resulting from the famed Y2K Crisis that never happened.

Instead, what we got was the rapid, parabolic move into the March 2000 top followed by a long-term bear market. What the current QE situation tells me is that the fuel has been there for a rally, so there’s been no sense in denying it. But the set-ups that have worked best are those that have occurred near the lows of stocks’ chart patterns – 2x and 3x moves after breakouts are nowhere to be seen.

Bubbles like this will always end badly, but the question is when. In any case, I continue to hold the view that the Fed will be lowering rates before it raises rates, and sooner than it thinks. It’s already been pumping liquidity into the system at a furious pace, annualizing at over $1 trillion, which is tantamount to lowering rates while it mouths the assertion that rates are “in a good place.”

This will all be positive for gold and silver longer than it will for stocks, in my view, but all of that is just speculation. What happens in the future will remain a function of what is happening right now. And this brings us back to the place where we’ve been for a while now.

That is to remain open to the set-ups you see in real-time and then going with the flow, letting the market push you in the right direction naturally, long or short. It’s still a 360-degree market, and the action over the past few days proves that. Play it as it lies and be ready for anything.

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 a position in SLV, though positions are subject to change at any time and without notice.

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