The Gilmo Report

July 10, 2019

July 10, 2019

The pullback in the NASDAQ Composite Index on Monday ended midday yesterday as the index found support at its 10-dma and closed up for the day. This morning, the release of Fed Chair Jerome Powell’s prepared remarks to Congress gave the market what it wanted, and the futures were off and running pre-open.

This led to a big gap-up open that saw the S&P 500 and Dow Indexes post all-time highs not too long after the opening bell. But all of the Big Three market indexes stalled, with the Dow closing in the lower part of its daily trading range, the S&P 500 the mid-point of its trading range, and the NASDAQ Composite Index closed just above mid-range, all on higher volume.

 

 

Despite the new index highs, the S&P 500 fell short of clearing the 3,000 level, while it and the Dow both failed to hold their early-morning moves to new highs. The NASDAQ, however, held its breakout to all-time highs. If one wanted to be long stocks, the time to buy was on the pullbacks earlier in the week, as most of the charts below will show. Things are now a little extended, and I do not advocate chasing strength.

Listening to Powell’s testimony this morning as the indexes pushed into new high ground, I was struck by the bizarre irony that characterizes this market. In the old days, before QE, the Fed would usually be lowering rates after a market decline or bear market. But the stark difference of the QE Age is seen in the fact that today we have the major market indexes all making new highs, yet the Fed Chair is talking about the need to lower rates.

The drive to new highs this morning was led by the likes of Apple (AAPL), Amazon.com (AMZN), Facebook (FB), and Microsoft (MSFT), all of which are extended and not in buyable positions. These stocks will also begin to report earnings over the next couple of weeks, with Netflix (NFLX) scheduled to report next week. Thus, these are off the table for now ahead of earnings roulette.

 

 

One timely idea among big-stock NASDAQ names was discussed in my video report of last night. That would be Tesla (TSLA), which had gapped up last week when it reported record deliveries. That move, however, was sold into, but as I discussed in my GVR last night, the pullback into the 10-dma was filling the prior gap, putting the stock in one of these sling-shot types of long set-ups.

The fact that risk could be kept to a minimum by using the 10-dma as a tight selling guide helped matters. I have noted the exceptionally high short interest in TSLA, more than 41.4 million shares as of the last report date of June 28th. Shorts were no doubt licking their chops back in June when all seemed lost for the stock and appear to have piled on.

With TSLA dodging certain demise once again, the shorts are on the spot, and this move could carry higher. That said, the proper entry was along the 10-dma per my video report of last night and over the weekend. We’ll see how this sets up again from here, but so far, my theory is playing out, although it did take several days to ripen on the pullback to the 10-dma.

 

 

The big news of the week, at least from an individual stock perspective, was Cisco Systems’ (CSCO) buyout of Acacia Communications (ACIA) on Monday. I had previously discussed the ensuing pullback following the reversal off the intraday highs of two Mondays ago as a type of sling-shot long set-up. This came as the stock pulled back for several days as it settled down into potential support along the 10-dma and 20-dema.

There were a large number of other semiconductor and telecom stocks doing the same thing two Mondays ago after gapping up on the U.S.-China trade news two weekends ago. So, one could have picked any of these to buy, and those who picked ACIA won the lotto. But the set-up was there, and risk could be kept to a minimum by using the 10-dma as a tight selling guide.

As it turns out, I heard from several members who bought the stock based on my discussion and were long the stock ahead of the news. As is often the case, success in the market isn’t necessarily about being lucky per se, but rather putting yourself in a position to get lucky. Those who bought ACIA on the sling-shot pullback into the 10-dma and 20-dema as volume dried up sharply put themselves in position to get lucky yesterday.

 

 

Elsewhere in the land of good news, Advanced Micro Devices (AMD) announced several new products on Monday, triggering a gap-up opening that went nowhere. Later in the day, as I noted on the blog comments page at the time, the stock cleared intraday resistance at 31.80, making a long play at that time. As I wrote over the weekend, “If I was looking to get long a semiconductor in a strong market move, AMD would probably be my first choice.”

That was good for a nice move back up to the prior highs around 34 today. AMD stalled and churned today around those highs as volume remained below average. For now, AMD seems to be benefiting not so much from big buying interest, but rather a lack of selling interest as low volume pushes the stock higher in a slow-motion reaction to Monday’s product news. AMD is now extended.

 

 

Ambarella (AMBA) was also discussed as a favored semiconductor, and it did move up and off its 20-dema and 50-dma on Monday. But the move has only taken it back up to the highs of its current price range, where it stalled and reversed on light volume. For now, it would be considered buyable on pullbacks to what is the confluence of the 20-dema and the 50-dma.

 

 

I blogged yesterday morning that Ciena Corp. (CIEN) looked poised for a move as it came up and off the 10-amd and 20-dema. From there, the stock moved to a higher high as volume picked up on the day. It ran into resistance today near the prior June highs. From here, look for constructive pullbacks into the 10-dma/20-dema confluence as potential lower-risk entries.

 

 

Viavi Solutions (VIAV), not shown, remains extended. Watch for pullbacks into the 10-dma at 13.84 as potential lower-risk entry opportunities from here.

Roku (ROKU) powered right back up through the $100 Century Mark on Monday and is now testing its prior highs. Volume has been no better than average on its best days. But following the proper buy point down at the 50-dma when ROKU posted an undercut & rally (U&R) move through the prior early-June low, as I discussed at the time, the stock has been on a tear.

Six-straight up days now find ROKU within spitting distance of new highs. That said, there is no lower-risk entry spot up here, since the last one occurred at the 50-dma last week. It does show how one must maintain an opportunistic 360-degree approach to buying stocks in this market, especially when a big leader like ROKU comes trundling into major support at its 50-dma.

 

 

Beyond Meat (BYND) has continued to track higher along its 10-dma and off the 20-dema, where it found support last week. The correct entry was along the 20-dema, and with the stock just above its 10-dma I would consider it to be slightly extended. Another way to treat this would be as being buyable here using the 10-dma as your new selling guide. And, if long the stock near the 20-dma, the 10-dma can be used as a guide for a trailing stop.

 

 

Zoom Video Communications (ZM) nestled into its 10-dma yesterday, which I blogged about at the time as a lower-risk entry position. The stock got a little bounce from there that continued into today, but it stalled slightly as it tried to push to higher highs. Low-volume pullbacks into the 10-dma from here would offer your best lower-risk entries and can be watched for.

 

 

I blogged yesterday that Slack Technologies (WORK) had pulled an undercut & rally (U&R) move through the prior 34.81 low in the pattern. I was looking for this, based on my comments in the weekend report, “…we may need to see a breach of the 34.81 low occur before any kind of concrete long set-up along the lows will show up.”

By the end of the day, the stock had turned positive and closed at 35.65. A brief continuation this morning to a peak of 36.44 ended quickly and the stock reversed to close back in the red. Not much a U&R move, but a tradeable one at least. Just another two-day wonder trade.

Now the stock is headed back toward its 34.81 low where it could become buyable, but most certainly not in a big market break to the downside. Therefore, market context will be very important in determining whether any retest of the 34.81 low is in fact buyable. Play this one close to the vest.

 

 

Uber (UBER) posted a moving-average undercut & rally (MAU&R) yesterday when it rallied back above the 20-dema after dipping below the line on Monday. The quick shakeout through the moving-average and then back above is the type of action I look for in a MAU&R. But the stock was unable to catch any further upside momentum today as it gapped up and then reversed to close right at the 20-dema.

Volume was slightly higher vs. the prior day, but still relatively light. I treat this as a 360-degree situation. If it can hold the 20-dema, then this pullback into the line puts it in a lower-risk long entry position using the 20-dema as a tight selling guide. If it busts the 20-dema then it becomes a short-sale at that point. Play it as it lies.

 

 

If you wanted to own shares of Lyft (LYFT), then you had your chance to buy them at the 50-dma on Monday morning, as I prescribed in my weekend report. The stock has since recovered back above its 10-dma and 20-dema and is now out of buying position. Watch for any tight consolidation along the confluence of the 10-dma and 20-dema, or the more opportunistic pullback to the 50-dma as lower-risk entry opportunities.

 

 

Notes on other recent IPOs discussed in recent reports:

Jumia (JMIA) ran into resistance at its 50-dma and reversed back below the line to close right at its 10-dma. This can be viewed as a lower-risk entry using the 10-dma or the 20-dema as tight selling guides.

Parsons Corp. (PSN) has been basing for the past two weeks following a sharp breakout in the latter part of June. I began discussing the stock back when it was trading in the 30-32 price level. Look for pullbacks to the 20-dema at 35.56 as potential lower-risk entreis.

Pinterest (PINS) has dropped back below its 10-dma and 20-dema after briefly clearing the 50-dma this morning. Given the indecisive action of the stock, I would take the opportunistic route and look for any pullback that results in a U&R move through the 25.82 low of June 25th.

Tradeweb Markets (TW) posted another new high today and remains extended after a recent breakout.

Snap (SNAP) illustrates the virtues of remaining opportunistic and patient following a show of strength. The stock had posted a pocket pivot breakout on Friday, but as I indicated I would look for a lower-risk entry on any pullbacks instead of chasing strength. That pullback came yesterday as SNAP successfully tested the 10-dma and then bounced to post a second pocket pivot in three days.

While this is within buyable range, I still prefer buying on pullbacks into the 10-dma as more opportunistic entries. That all said, we must also remember that SNAP is expected to report earnings on July 23rd, a little more than two weeks from now.

 

 

MongoDB (MDB) still remains within technical buying range of its early-June base breakout. In my view, however, the stock is near-term extended following the prior bounce off the 50-dma last week. That was your best, lower-risk entry, and the stock is now bouncing along its 20-dema.

MDB reversed today off the intraday highs to close in the red as selling volume picks up, but it still managed to hold near-term support at the 20-dema. I prefer taking the opportunistic route and watching for any retests of the 50-dma as lower-risk entries.

 

 

As I’ve already indicated in this report, chasing strength today was not advisable. The proper long entries for most stocks I follow, if one wanted to be long stocks, occurred last week on constructive weakness. One example is Atlassian (TEAM), which found support last Friday at its 20-dema as volume remained low.

That was the proper entry point, and TEAM has since broken out to new highs, albeit on very light volume. Today, the stock reversed on a failed bid at new highs but remains extended and out of buying position. It mostly helps to illustrate the fact that most leading stocks are extended.

 

 

I blogged yesterday morning about Zendesk (ZEN) looking ready to move after dipping slightly into the red at the open. It did finally catch a bid and rallied to a new closing high on volume that was only 11% above average. Typically, that isn’t enough to declare a classic O’Neil-style breakout, but it was enough volume to declare a pocket pivot breakout.

ZEN pushed a little higher today but stalled as buyers failed to show any real enthusiasm, despite the new-index highs early in the day. In this position, I’m looking for any pullbacks to the 10-dma at 90.74 as potential, lower-risk entries from here. Note that ZEN is expected to report earnings on July 30th, so it’s not clear whether one would want to play in the stock right here on anything more than a swing-trading basis.

 

 

I also blogged yesterday morning that ZScaler (ZS) looked buyable as it sat in negative territory early in the day. It, too, caught a bid and turned back to the upside to post a new closing high. Volume was light, so buyers were not clamoring to get into the stock, and that was telling today as ZS made another bid for new highs but reversed into the red on higher selling volume vs. the prior day.

I view ZS as slightly extended, and not necessarily in the most optimal buy position right here. Given the lack of volume on this move to new highs, I would take the opportunistic route and look for any constructive pullbacks into the 10-dma at 79.91 as potential lower-risk entries. ZS is not expected to report earnings until August 29th.

 

 

The Trade Desk (TTD) continued this pattern seen today in these clouds I’m discussing in this report by reversing off the intraday highs to close in the red. This comes after a successful undercut & rally (U&R) last Friday coming up through the prior 231.65 low of June 12th.

TTD held along its 10-dma and 20-dema on Monday and Tuesday in constructive fashion, so I’d look for any constructive test of the 20-dema at 234.91 as a potential lower-risk entry point. TTD is not expected to report earnings until August 8th.

 

 

Avalara (AVLR) remains extended from a recent low-volume base breakout. The lack of volume of course makes it tough to buy, but I’m not a fan of chasing breakouts to begin with. Note that over the past seven trading days, including the low-volume breakout day, AVLR has posted higher, above-average volume on days where it stalled around the highs.

For that reason, I am not interested in chasing the stock up here. Instead, watch for any constructive pullback to the 10-dma at 76.68, or the 20-dema at 74.87 as potential lower-risk entries. AVLR is expected to report earnings on August 8th.

 

 

While all these cloud names are considered to be leading stocks that are forming bases, they seem to be somewhat tentative here as the major market indexes flirt with all-time highs. That seems a bit odd to me, since with the indexes posting new highs I would expect the best leaders to come flying out of their bases, but so far buying interest has been tepid, at best.

Stitch Fix (SFIX) demonstrates a very practical application of the 360-degree trading posture. While I viewed the stock as potentially buyable as it pulled into its 20-dema last week on light volume, the situation changed yesterday when the stock breached its 20-dema on increased selling volume.

If one was aware of how this set-up was playing out, then a short-sale entry opportunity based on the prior breach of the 20-dema occurred today when SFIX opened right at its 20-dema. This presented a short-sale entry opportunity right at the line, and the stock then rolled over to lower lows from there as selling volume came in well above average.

SFIX now looks like it’s set to test its 50-dma, but it served up a nice short-selling opportunity at the 20-dema today for those who were aware of the set-up as it unfolded this morning. That is the essence of maintaining the 360-degree trading posture in this market at all times.

 

 

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.

For me, the great paradox of this market is that while the indexes flirt with all-time highs, there is very little in the way of strong upside trends. Today’s open was a much better short-selling opportunity than a long-entry opportunity based on the fact that so many stocks gapped up at the open and then flopped out.

In some cases, the reversals were very sharp, while in others the action was more characteristic of churning and stalling, as many of the examples in this report show. Meanwhile, the market seems to expect at least a 25-basis point rate cut when the Fed meets on July 30-31, right at the end of the month.

Perhaps we’ll continue to see more flopping around until then. I still tend to see this market as more of an opportunistic swing-trading environment rather than a strongly-trending one where big money can be made. When this changes I don’t know for sure, but I do know that I don’t see any evidence for such a change at this precise moment in time. When it does, the first place you’ll see it is on my live blog.

In the meantime, we’ll just keep taking the set-ups we see in real-time and then see what we can get out of them. That is the only way we can put ourselves in a position to get lucky in case something substantial occurs, as those who were long ACIA before yesterday’s open have already discovered. Play them as they lie!

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.

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.