The Gilmo Report

July 14, 2019

July 13, 2019

The major market indexes have continued to reach for new highs. The S&P 500, Dow Jones Industrials and NASDAQ Composite Index all posted new closing highs. Volume was light, however, but with the perception that the Fed is set to ease and continue easing over the next 2-3 meetings, sellers do not seem inclined to swarm the market.

 

 

On Friday, the NASDAQ and the NASDAQ 100 nearly reversed into the red after an initial upside move. Well before that occurred, I was already picking up buy signals on the five-minute 620-chart of the ProShares UltraShort QQQ ETF (SQQQ). As I discussed in Thursday’s GVR, the low-volume breakouts to new highs in the indexes may imply some risk of a pullback, and one lower-risk way to play that, should it occur, is with the SQQQ or some other inverse index ETF using the 620-chart as a timing tool.

As I discussed in detail in Thursday’s GVR, I look for potential reversals on opening rallies. But if the signals do not hold up, then one can quickly and easily back away. It also gives some indication as to how well any rally is holding up on intraday pullbacks. As it turned out, the NASDAQ and the NASDAQ 100 Indexes held their ground near the UNCH line and rallied back to the upside as sellers failed to swarm the market.

Below you can see the five-minute 620 intraday chart, and the early long entry signal on the MACD cross about 40 minutes after the open. That led to a quick upside move that soon failed, so the trade was a quick in and out, perhaps with a small profit. A second MACD cross around mid-day did not lead to anything significant on the upside.

 

 

The message of the SQQQ is clear, and that is that this rally is not ready to give it up, low volume or not. It remains a ready vehicle in case of emergency, but for now it is a matter of simply taking set-ups as they occur in real-time and acting accordingly.

What fascinates me about this market, aside from the unprecedented paradox of a Fed looking to lower rates as the stock market makes all-time highs, is the way money pours relentlessly into certain stocks, often of the beaten-down variety. Such moves often start with a buyable gap-up, and I find that the ones that work best tend to be the ones of which I’m most suspicious.

Over time, I’ve come to recognize this, and am often willing to play something on its technical merits despite any other purely mental reservations I might have. Take Micron Technology (MU), for example. As I wrote in my June 26th report, the gap-up move on that day was technically a bottom-fishing buyable gap-up and could be treated as such. To quote, “Technically, MU’s gap move today was a bottom-fishing buyable gap-up using the 35.70 intraday low as a tight selling guide.”

Since then, the stock has not looked back. Note also the sling-shot action as it pulled right back into its 200-dma following the fourth day of the post-BFBGU (bottom fishing buyable gap up) rally. I discussed those very types of sling-shot set-ups in my video report of last weekend. In a QE-infused rally, with the promise of more to come, this is how they trade ‘em.

This is also where most of your biggest price moves come from. Beaten-down names suddenly springing to life and literally rocketing higher. From the buyable gap-up at the 50-dma to today’s peak, the stock has run 20.68% in a little over two weeks. Nice work if you can get it, but typical of how this market works.

 

 

By contrast, Advanced Micro Devices (AMD) is your standard base breakout where further upside progress beyond the breakout has been somewhat begrudging. New product news on Monday helped send the stock back to its prior high around 34, but no further. Since the base breakout of six weeks ago, AMD is up about 10%, and with a lot of volatility in-between that likely would have shaken out most.

In between, there has been one failed breakout and one failed re-breakout before the stock bounced off its 50-dma and caromed back into breakout territory. In this case, the third time was the charmer, and AMD has proceeded back up to its prior early June, post-breakout highs. Pullbacks to the 10-dma at 32.08 can be watched for as lower-risk entries from here, but keep in mind that AMD is expected to report earnings on July 24th.

 

 

Semiconductors coming off their lows have been some of the better performers as of late. That includes Ambarella (AMBA) which I first discussed along the 200-dma back in early June. Since then, it has regained its 50-dma, and this past week posted two five-day pocket pivots along its 10-dma.

As I discussed in recent reports, however, the stock was buyable on weakness into the 20-dema and 50-dma. Those lower-risk entry opportunities occurred at the start of the week, so one had to take advantage of them at that time. The stock is now slightly extended, such that I’d look for pullbacks to the 10-dma at 44.89 as lower-risk entries from here.

 

 

I don’t see a large number of stocks in buyable positions as the indexes streak to new highs. Most of the best buying opportunities occurred earlier in the week, and my favorite names among semiconductors and telecoms held up well. Ciena Corp. (CIEN) posted a five-day pocket pivot on Tuesday as it came up and off its 10-dma and 20-dema, where it was buyable, as I blogged at the time before it started moving that day.

The move on Tuesday might be viewed as a ten-day pocket pivot if we consider the fact that the big volume spike two weeks ago was due to Russell Index re-balancing. Of course, we will never know how much volume would have traded that day without the re-balancing, so we cannot know for sure. Nevertheless, the action was looking good along the 10-dma and 20-dema, and the stock popped anyway.

CIEN stalled near the prior base highs on Friday but was already extended at that point. Now look for pullbacks to the 10-dma at 42.80 potential lower-risk entries from here. Volume has not been heavy on the rally over the past four days, so a pullback seems likely, and would offer a better entry.

 

 

Viavi Solutions (VIAV) is another example of a stock having a sharp price move off its lows. The stock was a U&R long entry back in early June, as I discussed in my GVRs at the time. Since then, it has sling-shot its way to new highs, with the recent breakout occurring on just above-average volume.

Technically, this remains within buying range of the breakout, but the breakout did not meet the allegedly required volume increase of 50% above average. In this market, that doesn’t really matter to me, since I view the proper entries to have occurred lower in the pattern, with the first in early June on the initial U&R.

Also, if you adjust the skewed volume spike from Russell Index re-balancing at the end of June, you could call the breakout a pocket pivot breakout. To me, VIAV is now near-term extended. Therefore, I’d look for pullbacks to the 10-dma at 14.08 or the 20-dema at 13.78 as lower-risk entries.

 

 

Among the crop of recent IPOs, the more developed patterns seem to act better. Beyond Meat (BYND) has moved up from its 20-dema, where it was buyable per my comments last week, and has since become slightly extended. A sharp pullback on Friday is bringing this back down toward its 10-dma at 158.61.

I’d look for a low-volume test of the 10-dma as a potentially lower-risk entry from here. BYND was one stock that wasn’t moving higher on Friday as the indexes posted new highs, so it makes the point that it’s always about the stocks first, and the indexes second.

 

 

Lyft (LYFT) shook off an early sell-off on Friday and posted a big outside reversal to the upside on above-average volume. The move also qualified as a pocket pivot at the 10-dma and 20-dema. The stock was looking like it was set to retest its 50-dma not too long after the open, but a sharp turn off the lows sent it rocketing back the other way.

In this position, LYFT is slightly extended. I’d look for any pullback closer to the 10-dma and 20-dema at 61.81 and 61.83, respectively, as potentially lower-risk entries.

 

 

With LYFT getting some lift here, it’s possible that Uber (UBER) might decide to join the party. The stock has not been a smart buy every time it has broken out since each of the prior two breakout attempts have failed miserably. That may not come as much of a surprise given the success of breakouts in general in this market.

UBER posted a moving-average undercut & rally (MAU&R) on Tuesday and has flipped below the line twice over the past two days. Each time, however, it has rallied to close above the 20-dema. This puts it in a lower-risk entry right here using the 20-dema plus another 1-2% as a tight selling guide.

Long-time members might also notice that this is an L-formation with the potential to develop into a U-formation, thus completing the well-known LUie long move. Such moves usually start with some sort of U&R or voodoo action along a moving average like the 20-dema, as is the case with UBER.

 

 

Zoom Video Communications (ZM) continues to hold relatively tightly along its 10-dma and 20-dema. Two tests of the 10-dma and 20-dema on Tuesday and Thursday offered lower-risk entries, but the original Ugly Duckling entry came on the undercut & rally bounce off the 50-dma last week.

In this position, pullbacks to the 10-dma/20-dema confluence, between 90.22 and 90.89, can be watched for lower-risk entry opportunities from here. On the other hand, if one is truly enamored with the stock right here, one could then just use the two moving averages as a tight selling guide.

 

 

Parsons Corp. (PSN) came within 1% of its 20-dema on Thursday before rallying back up toward the highs of its current three-week base. That brought it within buying range of the line. Further pullbacks to the 10-dma at 36.80 or the 20-dema at 34.92 can be watched for potentially lower-risk entries.

PSN was first discussed in detail in my report of June 2nd, when the stock was trading under 32. It is expected to report earnings on August 13th.

 

 

Notes on other recent IPOs discussed in recent reports:

Jumia (JMIA) closed at lower lows on Friday, and just below its prior 24.60 low of both June 28th and July 3rd. That’s six cents above Friday’s closing print of 24.54. So watch for any possible U&R that might develop if the stock quickly comes back up through the 24.60 low. This can be viewed as a lower-risk entry using the 10-dma or the 20-dema as tight selling guides.

Pinterest (PINS) just missed dropping below its prior 25.82 low of June 25th on Thursday, hitting an intraday low of 25.87. A small rally on Friday stalled and I would continue watching PINS for any potential U&R long set-up that might materialize along the 25.82 low. For that to happen, the stock must drop below that low and then rally back above it to trigger the U&R long entry signal.

Tradeweb Markets (TW) pulled back on Friday as volume picked up. The 10-dma at 46.30, about two points below Friday’s close, is your reference for support and a possible lower-risk entry on any pullback to the line.

Slack Technologies (WORK) has slashed to lower lows, closing at 33.73 on Friday, well below the 34.81 low of late June. Only an undercut & rally (U&R) move back above that low would make the stock buyable again.

Big-stock NASDAQ names Apple (AAPL), Amazon.com (AMZN), Facebook (FB), and Microsoft (MSFT) are all sitting around higher highs ahead of their earnings reports within the next two weeks. I don’t see much to do with these stocks ahead of their reports.

Netflix (NFLX) is expected to report next week on Wednesday after the close. Investors may be somewhat apprehensive about the upcoming earnings reports since they sold it through the 10-dma on Friday. With the market up big that day, this breakdown stuck out like a sore thumb, and was actionable as a short on the breach of the 10-dma for those who look for such things. I know I do.

The stock may just test and hold the 20-dema ahead of earnings, but it will be interesting to see how far sellers take it down before it reports. Other than that, I may scalp a short in the stock ahead of earnings but would have no intention of holding through the report, end of story.

 

 

The sling-shot set-up was evident in Nvidia (NVDA) last week. You may recall that in last weekend’s report I discussed the stock as potentially buyable along its 50-dma. The stock gapped up with every other semiconductor two Mondays ago and then slid all the way back to the 50-dma as volume declined.

It took the stock a couple of days to rev itself up, but it eventually moved up and off the 50-dma in a sharp four-day rally. The rally ran into resistance near the 200-dma on Friday but offers an apt illustration of the sling-shot set-up, which is really a corollary to the LUie formation. A sling-shot formation looks like a badly sagging L-formation, and the same concepts of volume dry-ups in the lows of the formation apply.

 

 

Tesla (TSLA) is another sling-shot type of move. These types of pullbacks tend to occur after gap-up moves that are sold into. The stock then slides back to the downside and finds support somewhere in the pattern. TSLA found support both at its 10-dma and the lows of the prior gap-up rising window of early July.

You can call these little technical set-ups like the sling-shot or the LUie or the U&R whatever labels you want, but the basic concepts are the same since there is always some concrete technical signal that clues one into the long entry. With a U&R it’s simple – all you need is a move back up through the prior low – but with LUies and sling-shots you’re usually looking for voodoo pullbacks or gap-fills, although U&Rs and MAU&Rs can also come into play.

TSLA is now moving to higher highs and may have the 41.6 million shares of short-interest on the run or at least seriously eyeing the exit door on their short positions. Notice that the initial news of record deliveries gapped the stock up, but it wasn’t enough to bring in buyers and short-covering en masse. That took a little more time, which is typical for this market where one often has to dance with stocks and the market, as I like to say, before catching a move.

 

 

Roku (ROKU) pulled back slightly from its recent highs on Friday as volume receded. I’m watching for a test of the 10-dma/20-dema confluence as a potentially lower-risk entry opportunity. The first correct entry occurred down at the 50-dma on the U&R move, which I’ve already discussed at length in previous reports on either side of that move.

ROKU doesn’t report earnings until August, but it may catch a sympathy move to NFLX’s earnings report on Wednesday. If NFLX sells off after earnings, and this drags down ROKU, I’d look to that as a possible opportunistic entry if it occurred. We won’t know until we get there, but for now the only long entries would be on pullbacks to the 10-dma/20-dema from here.

 

 

MongoDB (MDB) is retesting its 50-dma as selling volume increases. It remains the big-volume big-price-move breakout to nowhere, as it again sits right back at its prior base breakout point. That said, it is possible that this pullback to the 50-dma presents an opportunistic entry using the 50-dma as a tight selling guide.

 

 

Cloud names in general were not on fire on Thursday and Friday as the indexes pushed to new highs. But the pullbacks could offer lower-risk entries. Atlassian (TEAM) is pulling back to its 10-dma and got a little closer on Friday as selling volume picked up slightly.

This offers a potentially lower-risk entry along the 10-dma, and the closer to the 10-dma you can pick it off the better. The 10-dma then becomes one potential selling guide, while the 20-dema at 134.16 can be used as a wider selling guide. Keep in mind that TEAM is expected to report earnings on July 25th, so you’re looking for a strong move to develop before then.

 

 

The same exact set-up applies to Zendesk (ZEN). The stock found support along its 10-dma on Friday as selling volume dried up to -53% below average. This puts it in a lower-risk entry position using the 10-dma at 92.01 or the 20-dema at 90.82 as selling guides.

ZEN is expected to report earnings on July 30th, so we’d want to see a strong upside move develop before then. Otherwise, I’m not inclined to play earnings roulette with ZEN any more than I am with any other stock.

 

 

Since ZScaler (ZS) isn’t expected to report earnings until August 29th, it has a little more time on its hands. The pullback here is textbook. Volume dried up to -58% below average on Friday as the stock held at the 10-dma. This puts it in a lower-risk entry position right here, using the 10-dma at 80.71 as your selling guide, or the 20-dema at 79.47 as a wider selling guide.

 

 

The Trade Desk (TTD) offered would-be buyers an entry opportunity on Friday as it successfully tested its 10-dma and 20-dema. Volume picked up slightly as the stock lifted off the moving averages and closed positive. Pullbacks into the 10-dma/20-dema confluence remain your lower-risk entry opportunities. TTD is expected to report earnings on August 8th.

 

 

Avalara (AVLR), not shown, remains extended from a recent low-volume base breakout, as I wrote in my last report. Pullbacks to the 10-dma at 79.43 or the 20-dema at 76.43 would be your references for potentially lower-risk pullbacks from here. AVLR is expected to report earnings on August 8th.

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.

New highs in the major market indexes are not a sole reason to pile into stocks. Maintaining discipline is always critical in this market, and when it comes to the long side we seek to enter on constructive weakness rather than chase strength. To that end, if one was looking for lower-risk entries on the long side, they had already occurred earlier in the week or the prior week, as was the case with something like ROKU or ZM, for example.

As we can see in this report, there are some long set-ups brewing out there, and I’ll cover some other ideas in my weekend video report. The issue of long entries, however, is complicated by the fact that we are now moving into the thick of earnings season. As is my custom, I look forward to earnings season because it has the capability of producing gap moves that become very actionable, one way or the other, and with some decent price velocity.

Earnings season may also figure heavily into whether the market continues to melt higher. Low volume as the indexes push into all-time high price ground can be problematic, but it’s not clear whether this will lead to a pullback or whether we will see volume come piling in as buyers capitulate in a cash-is-trash move into stocks. Until then, just keep playing 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 a position in UBER, 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.