The Gilmo Report

January 6, 2019

January 5, 2019

News overnight on Thursday that China confirmed lower-level ministerial trade talks with the U.S. would be held next week, sent global markets and the U.S. futures jacking higher ahead of Friday’s open. When the jobs number was released an hour ahead of the opening bell and came in much stronger than anticipated at 312,000 new jobs allegedly created in December, the futures rolled around indecisively. By the opening bell, however, the Dow Jones Industrials Index started the day off up 208.70 points.

What initially looked like a normal reaction bounce following Thursday’s brutal, higher-volume 606-point Dow sell-off turned into an algo-fest after Fed Chairman Jerome Powell spoke at the American Economic Association’s annual meeting. While the strong jobs number earlier Friday morning might have been expected to keep the Fed on track to raise rates further this year, Powell toed a dovish line.

The dovish message came when the Fed Chairman signaled what looked to me like a major policy change. That was the idea that the Fed was going to continue its reduction of its balance sheet on an auto-pilot basis while using interest rate policy to respond to economic developments. The message seemed relatively clear and represented quite a turnaround from where the Fed stood a couple of months ago, even a couple of weeks ago. That message was that the Fed stands ready to re-liquify if necessary, and that could include reversing its balance sheet reductions.

That’s all the news that algos needed to hear, as the buy-switch was flipped, and the indexes launched on a 746.94-point Dow rally by day’s end. As might be expected, the beaten-down tech-heavy NASDAQ Composite and NASDAQ 100 Indexes led the charge with gains of 4.26% and 4.48%, respectively. While Thursday’s high-volume sell-off looked very bearish, the theme of the 2019 market so far has remained that if you don’t like what the market is doing today, just wait another day!

 

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Volume on the NASDAQ was lighter on Friday, so no seventh-day follow-through was to be had there. The S&P 500 Index, was a different story as volume increased on the day while the index posted a 3.43% upside move. Thus, Friday would technically qualify as a seventh-day follow-through, for those who pay attention to that sort of thing.

 

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My thinking the prior week, after the big bottom that occurred on the day after Christmas, as detailed in my video reports, was that we could rally at least as far as the December lows. This would also bring the declining 50-dma into play as potential overhead resistance, so we will see how things develop with respect to that possibility over the coming days, and as we head into earnings season.

But, for those who view follow-through days as the be-all, end-all of market lows, then you have what you’re looking for. Just remember that the last follow-through day type of move occurred on November 28th, also after supposedly dovish comments from the Fed Chairman, and that one failed badly three days later.

For me, a follow-through day is less meaningful as I prefer to operate based on what individual stocks are doing. If the market is rallying, and I can find a long trade set-up that makes sense, I will take it, follow-through day or no follow-through day.

Meanwhile, this market has become an incredibly volatile beast, and over the past two weeks. This has made it very difficult to handle on anything other than a day-trading basis. What adds to the confusion is that action on one day, whether bullish or bearish, offers absolutely no clue about what will happen the next. Thus, any brutally bearish action one day as we saw on Thursday can suddenly become “FOMOing at the mouth” bullish action the next, depending on what comes out of the mouth of the Fed heads, the President, Congress, a leading company like Apple (AAPL), the Chinese, or anything/anyone else hiding in the closet.

From a practical standpoint, as traders attempting to work out daily game plans and the associated stocks to focus on, our jobs can become nearly impossible, at least on a very near-term basis. This has necessitated an approach where one has no real idea what one will be doing, long or short, on any given day until the opening bell. Thus, I personally find myself developing my trading plans on the fly. But, overall, the action is consistent with what we saw after the late-February low in 2008, the chart of which I’ve shown in the past few written and video reports, where the market chops around and eventually sets up for a bear market rally.

The action is choppy, no doubt, and deeply oversold formerly leading stocks can bounce sharply just as easily as they can break lower. When I look at the charts of most of the stocks on my current watch lists, I see nice recoveries off the lows on Wednesday, followed by hard sell-offs on Thursday, and then strong rallies on Friday that negated or exceeded Thursday’s sell-offs. That kind of action is difficult to deal with, at least on a short-term basis, and we will see whether the action can develop a more consistent and coherent flavor going forward.

The trick is in finding the right set-ups to act on, and to simply move forward with a long trade as long as you know where your out points and these same out points are relatively near to your entry point. This keeps risk to a minimum if one remains disciplined. As I’ve written repeatedly recently, the process is simplified by working on a select few stocks culled from my broader long and short watch lists. Trades can be had, you just have to be nimble, alert, and flexible enough to catch them.

In this spirit, I find it interesting, that in order to participate in today’s fun and games, you really only needed one stock. That stock was one I featured in Wednesday’s report, as well as in my last two video reports. That would of course be Roku (ROKU). After testing the $29 macro-low on the weekly chart from April of 2018 early in the morning on Wednesday, the stock rallied nicely to post a pocket pivot on that day.

Premium members will also recall that in my New Year’s Day video report I indicated that if one is interested in ROKU then one could look to key on the action of Netflix (NFLX) as a cousin stock. On Friday, Goldman Sachs (GS) added NFLX to its Conviction Buy List and that set alight not only NFLX, but also its cousin, ROKU. Thus, the little cousin followed the big cousin, and the set-up I saw on New Year’s Day was able to play out decisively.

The ROKU trade is interesting enough to elaborate on. I wrote in my Wednesday report that, “…for the more opportunistic, pullbacks closer to the 10-dma would offer alternative, but potentially lower-risk entries from here.” During the market sell-off on Thursday, that pullback came, but volume was quite heavy, and not the constructive lighter volume we would normally want to see. But we know that Ugly Duckling set-ups often become buyable when things look their most ugly.

Frankly, based on Thursday’s action, I did not think I would be looking at the stock on the long side by the time the market opened on Friday morning. But I was, and I did. At the open Friday, ROKU was offered at 30.60-30.70, keeping it within buying range of the 10-dma, which could then be used as a tight selling guide in case things went awry.

Any doubts about the trade quickly dissipated, as it was immediately profitable, and ROKU, like the market, just kept rallying from its opening levels to post a 12.06% gain on strong volume by the closing bell. The move also qualified as the second pocket pivot in three days, with one high-volume sell-off into the 10-dma in between. Amazingly, ROKU was by far the top-performing name on Friday when compared to any others I posted on both my Busted Stocks and Buy lists on Wednesday in the Premium Member Profile section of the website.

 

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From here, pullbacks in ROKU to the 10-dma would continue to offer lower-risk entry opportunities. But the stock exemplifies the type of fake-out action that tends to occur in Ugly Duckling situations. Both Thursday’s general market action and the action in ROKU looked bearish, but one had to be open to a major change, even if unbelievable on its face, if one was going to capitalize on Friday’s move. ROKU proves that when the market rallies like it did on Friday, all one needs is one good trade.

ROKU’s bigger cousin, Netflix (NFLX) led big-stock NASDAQ leaders higher as well, gaining 9.72% on a strong-volume, five-day pocket pivot move through the 50-dma. It is interesting to note that Thursday’s action, which cleared the 20-dema, was also a five-day pocket pivot. I generally like to see clusters of five-day pocket pivots in lieu of a single ten-day pocket pivot.

Now it’s a question of whether NFLX can hold this move and remain above the 50-dma on any pullbacks from here. Low-volume pullbacks to the 50-dma would offer lower-risk entries from here. Admittedly, the stock did look like a short on Thursday when it ran into resistance at the 10-week moving average on its weekly chart, not shown.

But Friday’s gap-up move through the 50-dma on heavy volume changed everything in a flash, and once the stock cleared the 50-dma it could have been played long at that point, using the 50-dma as a tight selling guide. Keep in mind, however, that NFLX is expected to report earnings on January 17th, and this may figure strongly into how this latest rally through the 50-dma ultimately turns out.

 

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Aside from NFLX, the action in most beaten-down, big-stock NASDAQ names is mixed.  Microsoft (MSFT) and Amazon.com (AMZN) remain below their 50-dma and 200-dma lines, with AMZN running right into its 50-dma on Friday and then stalling slightly. If the FTD fails, this could become shortable here using the 50-dma as a tight stop with the idea of flipping long if it can push above the line a la NFLX.

 

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Meanwhile, Alphabet (GOOG) cleared its 50-dma on Friday on about average volume, while Facebook (FB) is attempting to get back to the underbelly of its own 50-dma. Note that it has posted two five-day pocket pivots along the 20-dema over the past three days, so it could be revving up for a move through its 50-dma. This is something to watch for, unless one wants to go long FB here and then use the 20-dema as a tight selling guide, which seems like a reasonable trade.

 

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Apple (AAPL) is going to be interesting to watch if this current market rally attempt and follow-through day doesn’t fail outright. Note that it pushed above last week’s 146.59 low on Friday, which can be viewed as a possible U&R long entry point using that low as a tight selling guide. The stock closed Friday at 148.26, just over 1% above the U&R trigger point at 146.59.

 

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Another way to look at this is on the weekly chart. Here we can see several lows in the pattern from the first half of 2018 and the latter part of 2017. For me, the major shakeout low of 159.10 back in early February 2018 looks significant. The other low from late September 2017 at 149.16 may also be relevant, and AAPL is hovering below both.

So, if one thinks AAPL is oversold enough to generate a decently tradeable oversold bounce from here, the triggers are there, along with the stop-out levels that would keep risk tight. As I wrote in my Wednesday report, the weak sales guidance from AAPL was likely something the market already saw coming, and it is possible that Thursday’s big-volume gap-down move to lower lows was something of a near-term exhaustion low.

One thing I know for certain, and that is that I would not be looking to short AAPL here given how oversold it is. The time to start thinking about shorting AAPL was when we were first starting to look at shorting many other leading stocks as they started to fail from late-stage breakouts and bases, and that was in early October.

 

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One final point I would make about AAPL has to do with the anecdotal comparison between AAPL’s 2018 peak and its 2007-2008 peak. Back in 2007, AAPL’s move above $200 for the first time came with much media hype and fanfare. In 2018, the company achieved a $1 trillion market-cap, the first in market history, and that also came with much media hype and fanfare. Both events also marked peaks in the stocks followed by sharp declines.

If you believe in FTDs, then you might start watching for new-high breakouts in the FTD Four, Twilio (TWLO), Tableau Software (DATA), Etsy (ETSY), and Planet Fitness (PLNT). I’ve stacked all four charts on top of each other to show the almost exact same moves as each pushed above various combinations of their 10-dma, 20-dema, and 50-dma.

 

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All but TWLO posted strong-volume, five-day pocket pivot moves to higher highs as they cleared their 10-dmas, 20-demas, and/or 50-dmas on strong volume. Only TWLO traded light volume, but what’s light volume when you could catch most of an 8.98% upside price move to play on Friday as soon as the stock cleared the 50-dma? In fact, all these also turned into moving-average undercut & rally (MAU&R) long set-ups on Friday as they pushed up through their 50-dmas, with the idea of simply using the 50-dmas as tight selling guides.

The only hitch to buying these would have been psychological. It’s hard to trust a morning rally in this market given how volatile things have been on an intraday and day-to-day basis. Because of this, some might even be highly distrustful of Friday’s follow-through day. But all I know is that the individual stock action looked good in a lot of names I’m watching, and this is where I prefer to focus until this rally fails, whether that’s immediately or over a longer time frame.

Workday (WDAY) resembles the FTD four with its own strong-volume move on Friday right off the 20-dema. If you were looking to get long something, the stock pulled into the 20-dema early, then turned back to the upside, so that the pullback to the 20-dema was buyable, if one was in the right frame of mind to do so.

In my Wednesday report, I discussed that the action on Wednesday “…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.” After Thursday’s brutal market sell-off, however, one can be excused if one didn’t have the stomach to step in on Friday morning.

This is precisely what has made this market so challenging. But I say if you see a set-up in real-time, such that a stock on your watch lists is pulling into a possible actionable long entry point, you can pull the trigger as long as you can keep risk to a minimum. That’s the main point I would make if one is trying to find the courage to take a shot. If you can keep risk tight, and you can remain disciplined, I say why not?

 

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Splunk (SPLK) finally showed some strong action on Friday as it pushed up through its 200-dma on a five-day pocket pivot. This would also qualify as a moving-average undercut & rally (MAU&R) type of move, using the 200-dma as a tight selling guide.

 

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Salesforce.com (CRM) had a nearly identical move but without a five-day pocket pivot. It did, however, hold above the 200-dma on Friday like SPLK, so could be considered an MAU&R (moving average undercut & rally) long set-up using the 200-dma as a tight selling guide. Remember that there are no volume requirements for an MAU&R or a U&R – all you need to do is move up through the designated price level, in this case the 200-dma, and use that as your selling guide.

If this general market rally and follow-through day is truly going to work, then I would expect both CRM and SPLK to hold these moves through the 200-dma. That said, should they fail and reverse back below their 200-dmas, they could re-trigger as short-sale targets at that point. This would likely occur in the event of a follow-through day failure.

 

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Surprisingly, a fair number of cloud-related names have been acting reasonably well beyond those I’ve discussed in recent reports. Here we see Atlassian Corp. (TEAM) setting up in a cup-with-handle base. It hasn’t broken out cleanly yet, and this is one of the glaring omissions about this latest follow-through day – there are zero breakouts in so-called leading names.

However, we can see that TEAM did make an attempt at a trendline breakout on Monday as volume picked up nicely. The initial move out of the handle stalled and the stock closed positive on the day but just below the high of the handle. Note, however, that two out of the past three days have qualified as five-day pocket pivot moves off the 10-day line.

So, if one is jonesing for a breakout to buy, this might qualify as a trendline breakout from the handle of a cup-with-handle formation. Risk can be controlled tightly by using the 10-dma as a tight selling guide, or the 50-dma as a wider selling guide. Be aware this this is a later-stage formation, so any failure through the moving averages would likely trigger this as a short-sale target, as would be the case with any of these cloud and other names trading above their 50-dmas and within bases, such as TWLO, DATA, WDAY, etc.

 

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Canada Goose Holdings (GOOS) has had some fits and starts over the past trading week, including two strong-volume moves to the upside. The first, on Monday, stalled at the 10-dma to close in the lower part of the trading range, while the second, on Friday, qualified as a five-day pocket pivot at the 10-dma.

Perhaps if GOOS can hang tight along the 10-dma, maybe even posting another five-day pocket pivot, it can make a run for the prior 46.24 low in the pattern from late October. That would trigger an undercut & rally move that would become actionable at that point. However, one could take an anticipatory approach here by looking at any low-volume retests of the 10-dma from here as possible lower-risk entry opportunities going forward.

 

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Tesla (TSLA) continues to trade erratically, but that’s not surprising given how erratic the general market has been. In many ways, the stock is simply a microcosm of the general market. After busting the 200-dma on Wednesday, the stock regained the 50-dma on Friday, but volume was weak. Either this triggers again as a short on any reversal back below the 200-dma, or it is buyable here using the 200-dma as a tight selling guide.

I suppose if this latest market rally attempt has legs, then TSLA has the potential to slash its way back up toward the 50-dma as it did the prior week. Short interest remains high at just over 27 million shares, so a continued general market rally could always get the shorts scrambling to cover. Play it as it lies.

 

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Shopify (SHOP) is once again bumping into its 50-dma, doing so again on Friday after initially failing at the 50-dma on Monday over this past week. Depending on how this current market rally turns out, the stock could be a short right here using the 50-dma as a guide for a tight upside stop. Volume was quite weak on the Friday move toward the 50-dma, which of course makes it suspect.

But SHOP is one of those stocks that can move farther than you think on less volume than you think it should. Look at the rally from late November into early December (big green arrow). There was no volume on that rally the whole way, and it only finally failed when the stock approached the prior late September highs.

For that reason, this would remain a go-to short if the general market rally fails, but I would keep the 50-day in mind as a guide for an upside stop to keep risk to a minimum. Any sane person looking at this chart would conclude that it has no chance of clearing the 50-dma, but with SHOP you must be ready for low-volume floater moves to higher highs to occur at any time.

 

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With mid-level ministerial U.S.-China trade talks commencing on Monday, beaten-down Chinese stocks could quickly come into focus. Most of these all look the same: Beaten-down trash that raises its ugly head from time to time but simply continues to move lower. Scouting around for something that diverges from this general malaise, I find recent IPO Pinduoduo (PDD).

The stock came public in late July 2018 at $19 a share and is currently trading just above the IPO offering price. On Friday it posted a stalling pocket pivot move within the handle area of a cup-with-handle formation it has been building since the earlier part of September. Note the stall occurred along a declining-tops trendline on the chart.

Technically, this pocket pivot could be viewed as actionable, with the idea of using the 10-dma as a tight selling guide. Otherwise, more opportunistic traders might look for any retest of the 50-dma as an even lower-risk entry possibility, assuming that were to occur. PDD is the only Chinese name with any semblance of a base among the extensive list of those that I follow.

Otherwise, you’re just looking at possible U&R set-ups in names like BABA, JD, MOMO, WB, SINA, HUYA, etc. that have been in extended downtrends for many weeks. Of course, any kind of U.S.-China trade agreement would likely send most of these names higher anyway. So, I would make a very concise list of five of your favorite names in the group and be ready to act in case something positive comes out of these talks before the March 1st deadline.

 

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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 potential for something positive, we might consider that next week’s meeting between mid-level ministerial types trying to come up with some sort of trade agreement between the U.S. and China could also turn into a big nothing-burger. Meanwhile, Fed Chairman Powell’s comments on Friday didn’t strike me as anything all that earth-shattering, despite signaling a potential policy shift whereby the Fed would be open to reversing its balance sheet reductions if the economy weakened sharply.

But is that really a surprise? After all, if the economy were to go into a tail-spin, it seems obvious that the Fed would of course act to address the situation. I would not expect them to remain blind to such developments. On the other hand, if the Fed is now going to respond to the stock market first and the economy second, then the “Powell Put” may indeed be in place.

I blogged on Wednesday morning that what makes this market funky is that any of these crisis news events that we’ve seen crop up during the breakdown from the October peak has within it the seeds of a favorable outcome that can trigger a market rally. Thus, a hawkish Fed leaves open the possibility of the Fed turning dovish, which is what we saw Friday. A government shut-down leaves open the possibility of a positive resolution and re-opening, which could trigger a rally. Any progress on the upcoming mid-level trade talks between the U.S. and China could do the same.

This all adds an element of two-side news certainty, which in turn can create a great deal of intraday and day-to-day volatility, since we can never know for sure what sort of news will appear on the market horizon at any given time. However, we can view this positively by considering that such volatility can and does create opportunities, if one remains flexible, nimble, and open to new, market-changing information.

What we do know with more certainty, and as I’ve discussed in recent reports, is that we are in a position where an extended period of chopping around may be in store after the second leg down in a bear phase. This can include a bear market rally, and we also must be open to the possibility that a market correction has run its course, and the market is now in a re-building phase.

Another key development is that the NASDAQ has undercut & rallied back up through its February 2018 lows while the brutally beaten-down Russell 2000 Index has undercut & rallied above the lows of a long consolidation that it formed through the first eight months of 2017. I discuss this in more detail in this weekend’s GVR, as it could be a significant development, at least with respect to the implications for a bear market rally, or even a market low.

If that’s the case, then we will see more set-ups arise, most of which will likely involve Ugly Duckling types of set-ups initially, and more orthodox set-ups later on, so there is no rush. ROKU is obviously one such set-up that is already working, and for now that’s all one really needs – one good trade. In the meantime, we have a decent list of candidates to watch for lower-risk entries should this market rally continue.

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 ROKU, 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. ©2008-2019 Gil Morales & Company, LLC. All rights reserved.