The Gilmo Report

January 29, 2020

January 29, 2020 3:32 pm ET

The market has packed at least one week’s worth of craziness into just three days, kicking the week off with a sharp gap-down break on Monday. The selling was blamed on the convenient alibi currently known as the coronavirus, but the indexes never went much further below the opening gap-down lows.

The market then decided, in its usual bi-polar manner, that the coronavirus wasn’t that big of a deal and began jacking back to the upside yesterday. The rally continued this morning until the Fed released its latest policy announcement, which said nothing new, at which point the NASDAQ Composite Index reversed off its 10-dma to the downside on higher volume.

 

 

Frankly, I see no reason to get more involved on the long side of this market, unless it’s for an opportunistic swing-trade. The action today struck me as bearish, and it comes on the heels of a typical alibi’ed selling rally. The coronavirus serves as a useful excuse and alibi for Monday’s gap-down, and then the mitigation of that news the next day sent the market back to the upside – typical alibi’ed selling type of action, which makes me wary.

Precious metals diverged sharply yesterday, with the iShares Silver Trust (SLV) dropping more than 3% to break below both its 10-dma and 20-dema before finding support at the 50-dma. The SPDR Gold Shares (GLD) was much stronger, holding above its 10-dma.

Both metals moved higher on lighter volume as sellers backed away, with the SLV coming up off its 50-dma, a key support level. This worked as an opportunistic add point or add-back point from my perspective, using the 50-dma as a tight selling guide.

 

 

Gold pure-play Franco-Nevada (FNV) continues to forge all-time highs. It did so again today on above-average volume and looks quite strong even as the yellow metal and its white metal little brother bounce around. FNV helps make the case that gold’s rally is still intact, and while silver is testing the 50-dma, it should not come off too much more if gold and FNV continue to hold up.

 

 

Apple (AAPL) is the first of the biggest big-stock NASDAQ names to report. It did so yesterday, beating estimates of $4.19 a share with $4.99 a share. That sent the stock gapping up from an already-extended position. Technically, if one wants to treat this as a buyable gap-up up, one can, using the 321.38 intraday low as your selling guide.

If it breaches 321.38, however, it morphs into a short at that point. Given the stalling action on very high volume, I would give this at least 50/50 odds of occurring, so play it as it lies!

 

 

Advanced Micro Devices (AMD) reported yesterday after the close and gapped down sharply through its 20-dema. The stock could have been treated as a shortable gap-down off the peak this morning, but quickly got extended to the downside. It eventually found intraday support to close back above the prior 27.14 low in the pattern.

This is technically a U&R long entry here since AMD closed today at 47.51. Thus, if one thinks AMD’s post-earnings breakdown is a one-off, this can be tested here on the long side using the 47.14 low as a tight selling guide. If that fails to hold, then AMD looks like it’s headed for a test of the 50-dma and one would stand aside until it does.

 

 

Meanwhile, semiconductors of all stripes sold off, continuing the breakdown that began last week after Intel’s (INTC) earnings. I follow 45 semiconductor names on my semi watch list, and today all but three were down. The group chart of other semiconductors I’ve discussed in recent reports shows the recent carnage among these names.

All four of the main semis I’ve discussed in recent reports, Applied Materials (AMAT), KLA-Tencor (KLAC), Micron Technologies (MU), Universal Display (OLED), Qualcomm (QCOM) and Texas Instruments (TXN) have busted in brutal fashion over the past week.

We can also see that KLAC was shortable this morning at its 20-dema while MU was shortable at its 10-dma. One could also argue that AMAT is shortable along its 50-dma after it reversed at the line today. Overall, weak action in what is considered a market barometer type of group.

 

 

Pundits like to tell us that when semiconductors are acting well, it is a good sign for the market. With the semis now getting tagged with sharp selling, what is that telling us? In any case, among these six semi names, AMAT is expected to report earnings on February 13th, KLAC on February 4th, MU on March 19th, OLED on February 20th, and QCOM on February 5th.

Maxim Integrated Products (MXIM) has been another semiconductor on my short-sale watch list heading into earnings yesterday. The stock beat estimates and then gapped above $64 this morning before reversing to close back below its 10-dma and 20-dema.

It is now a potential late-stage, failed-base type of situation, with the idea of finding the best entry since the most optimal entry occurred this morning at the highs. As I blogged this morning, this was pretty easy to pull off using the 620-chart.

Now one can short it here and use the 20-dema as a tight covering guide or look for a weak rally back up into the 10-dma given how extended it is on the downside from this morning’s high above $64. Another shortable breakout that helps makes my case that buying breakouts as an initial entry is a sub-optimal strategy in this market.

 

 

Lumentum Holdings (LITE) would also fall into the semiconductor category, and we can see that it was shortable at the current range highs along the $80 price level. The stock closed just below the 10-dma, which puts it in another short entry position using the 10-dma as a covering guide.  LITE is expected to report earnings on February 4th.

 

 

Another group that the pundits tell us is important as a barometer of the market’s health is financials. The group chart below shows five big-stock financials, all of which have been whacked over the past week or so. J.P. Morgan (JPM) looks shortable here using the 50-dma as your covering guide.

Goldman Sachs (GS) could be shorted here using the 20-dema as a very tight covering guide given today’s close below the line. As the pundits like to tell us, if the financials are healthy, the market is healthy. They don’t look so healthy right now – what does that mean for the market?

 

 

After the bell today, Facebook (FB) has reported earnings and is gapping down hard as I write this afternoon. Currently it’s flopping around the 50-dma, and we’ll see whether this turns into a shortable gap-down or a buyable gap-down depending on how it plays out tomorrow morning.

 

 

Tesla (TSLA) has also reported earnings after the bell and as I write is gapping well above the $600 price level. Depending on how far above the $600 price level it opens tomorrow (currently in the after-hours it’s around 615-620), it could represent another Livermore Century Mark Rule long entry using the $600 price level as your selling guide.

However, as I write this afternoon, the stock is printing above $645, so is well extended above the Century Mark, assuming it opens up here tomorrow. Either way, the shorts in TSLA, which were still at about 25 million shares as of the January 15th report date, have been reduced to a pasty mush.

 

 

Netflix (NFLX) is hovering along its 10-dma and today found support on a quick spin-out down to the 20-dema before closing above the 10-dma. Volume was slightly higher. This can be viewed in 360-degree fashion. It is buyable at support along the 20-dema, but a breach of the line would trigger this as a short-sale target at that point. Play it as it lies.

 

 

Money has continued to flow into cloud names. Atlassian (TEAM) is at the highs of last week’s buyable gap-up day’s trading range. It stalled there in a little double-top type of formation on above-average volume. If the market comes off tomorrow, then I would be interested in testing something like this on the short side, using today’s high at 151.52 as a maximum covering guide.

 

 

DocuSign (DOCU) pulled off its third breakout attempt in January today, but not until looking very ugly along the 50-dma on Monday. However, note that Monday’s action constituted an undercut & rally move at both the prior January low and the 50-dma.

Thus, we get a combination U&R and moving-average undercut & rally (MAU&R) long set-up in the midst of Monday’s brutal market gap-down break. And, as is typical, the U&Rs lead to a sharp price move off the lows. My approach would be to buy the U&R and sell into the breakout, but if you are the type who insists on buying breakouts, here’s one for you.

 

 

DataDog (DDOG) pulled a similar move as it bounced off its 50-dma on Monday while shaking out through the 20-dema. This triggered a MAU&R long entry along the 20-dema, which it held on a small pullback yesterday. Interestingly, I wrote over the weekend that, “The only thing that would appeal to me as an entry opportunity would be an opportunistic pullback to the 50-dma.”

As it turned out, that’s precisely what you got on Monday, but notice how this, along with the U&R in DOCU, above, occurs on a day when one might understandably be a bit wary of the general market action. This is not uncommon for most U&R entries, however, since by definition they will occur on days like Monday.

Like DOCU, DDOG’s action was a shakeout-and-breakout type of move to new highs today on above-average volume. But as with DOCU, my preference would be to buy DDOG on the MAU&R on Monday and then sell into the breakout. But if you like to buy breakouts…well, you know the story. DDOG is expected to report earnings on March 4th.

 

 

RingCentral (RNG) is expected to report earnings on February 10th, about two weeks from now. It finally cleared the $200 Century Mark yesterday after running into consistent resistance at that level last week. It took a good shakeout Monday at the 10-dma to slingshot the stock higher, apparently.

This is another 360-degree situation. It can be played as a Century Mark buy using $200 as your selling guide, first of all. But if it reverses back below $200, it returns back to short-sale target status. Play it as it lies.

 

 

Coupa Software (COUP) gapped below its 20-dema on Monday. However, since it gapped well below the line at the open, I would not have used it as a short-sale trigger since I want to enter as close to the 20-dema as possible. In any case, one would have been stopped out anyway since the stock rallied back above the 20-dema yesterday.

Today COUP rallied up through its 10-dma and then reversed to close back below the line. I’m looking at playing this as a possible late-stage failure if it breaches the 20-dema from here. Otherwise, if I’m interested in this as a potential long idea, I’d prefer to wait for an opportunistic pullback to the 50-dma. COUP is expected to report earnings on March 9th.

 

 

I don’t make it a secret that I often prefer to short breakouts than buy them. That was certainly the case with Nutanix (NTNX), which failed on a breakout last week and morphed into a short-sale target. As I wrote, “I have liked the it as a short around and just above the $36 price level where it has found consistent resistance over the past week.”

After the breakout last week, I noticed a distinct dry-up in buying. And over the weekend I also wrote, “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.” NTNX gapped thru the 10-dma on Monday and closed below the 20-dema, where it has found resistance yesterday and today.

NTNX lingered at the 20-dema this morning, where it was quite shortable, and then broke to the downside and through the 50-dma. Volume was again light as buyers avoided the stock. Rallies back up into the 50-dma from here would offer potentially lower-risk short-sale entries from here. NTNX is expected to report earnings on February 27th.

 

 

Clouds have rallied in unison since the start of January, something I’ve noted in both my written and video reports. The rallies have in many cases become what I call “streakers,” which are essentially stocks engaged in impetuous and rapid upside moves. Workday (WDAY) started out that way in early January but lost momentum as the month progressed.

WDAY has finally reached its 200-dma, which provides a convenient reference for a short-sale entry, using the 200-dma as a covering guide. I would watch this for any potential blips back up toward the 200-dma as that type of optimal short-sale entry.

WDAY will likely rally in sympathy to ServiceNow (NOW), which reported earnings after the close and is gapping up big in the after-hours. So be prepared to dance with WDAY if it is unable to hold up on any sympathy rally, in the same way that the semiconductors failed to hold up when they all sympathy-rallied with INTC.

 

 

Arista Networks (ANET) isn’t a cloud, but it has shown the same type of streaker rally that began in early January. As I noted in my weekend report, there has been a number of stocks that have had almost identical rallies to the cloud names since the start of January, and this is one of them.

ANET is now running into resistance at the 200-dma, so naturally this becomes a reference point for a lower-risk, short-sale entry. The 200-dma is used for your covering guide. My guess is that if we see the general market correct further, both ANET and WDAY will peel away from their 200-dmas on the downside.

ANET is expected to report earnings on February 13th, while WDAY is expected to report on February 27th.

 

 

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.

Crocs (CROX) is continuing to play out more as a short-sale target here as it forms a short bear flag just below its 20-dema. It was shortable this morning on a small rally into the 20-dema, and it then reversed to close near its intraday lows.

Watch for any similar rallies back up into the 20-dema as potential short-sale entries, using the 20-dema or 10-dma as your covering guides. CROX is not expected to report earnings until February 27th.

 

 

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.

Monday’s gap-down open created a tactical opportunity on the long side. As I discussed in my video report late Sunday afternoon after the futures had opened, there was certainly no way one could chase the downside open on the short side. One had to be short coming into Monday’s open.

If one was brave and perhaps even a little crazy, the Monday gap-down did provide at least a short-term long entry opportunity in the right stocks. The ensuing bounces yesterday and today were not spectacular in every case, so stock selection was key Monday morning, as well as a large dose of courage.

Like I said earlier, the action on Monday didn’t really do a lot to instill confidence in the long side of this market, especially within the context of how extended things have become on the upside. The way things dropped out at the open looked quite ominous, objectively speaking, and thus one might have been pressed to err more on the side of caution rather than gun-slinging their way into long positions into the sell-off.

But the action strikes me as typical alibi’ed selling, where the market sells off on an allegedly negative news item, and then rallies when that negative news item is proven to be not so negative. The ensuing rally is then sold into. So far, the market’s action fits into that theory with today’s rally getting sold into following the Fed announcement.

At the very least, my orientation on the long side is to seek to enter positions into weakness using OWL-style Ugly Duckling long entry set-ups like the U&R and her sister, the MAU&R. In this market, I have found that resisting the urge to buy into strength, even on breakouts, is well-rewarded.

Short-sale set-ups that are working continue to pile up in this market as it wobbles around its recent highs. Meanwhile, the breakdowns in key leadership groups like semiconductors and financials appears cautionary at best.  Therefore, remain alert to changes in your stocks. If your trailing stops are broken, do not hesitate to act, as a strong defense is always advisable when things begin to wobble at the highs.

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.

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.