The Gilmo Report

July 17, 2019

July 17, 2019

The market  melted to all-time highs on Monday, setting up a distribution day off the peak yesterday. This resulted in another down day today, but on lighter volume. The S&P 500 and NASDAQ Composite Indexes closed below their 10-dma. That equates to two days off the peak for the S&P and the NASDAQ, and tomorrow looks to be a rough open with futures down after-hours thanks to weak Netflix (NFLX) earnings.

 

 

The way things played out today, I was able to act on a long entry signal for the ProShares UltraShort QQQ ETF (SQQQ) at 31.70 this morning, and it held above that entry all day before gaining traction into the close. After the close, the SQQQ is trading at around 32.73, thanks to NFLX and its associated downside break in the NASDAQ futures.

 

 

The action of gold and silver has been very telling with respect to where the Fed is headed. We’re now living in this upside-down world where the stock market is at all-time highs, we’re told that the economy is in a boom phase, but everyone, his brother, and the Fed seems to think that interest rates need to be cut. I’ve personally never seen this in my 28 years as a trader and investor, but these days nothing surprises me.

The SPDR Gold Shares (GLD) is hanging tight along its 10-dma after posting a pocket pivot last Wednesday. It has been in a steady uptrend since late May. Those of you who follow me on Twitter know that I became very bullish on gold when it gapped up through its 50-dma back on May 31st. That gap-up move, unlike the others in the pattern, showed a lot more conviction with respect to the volume.

Today gold broke out to a higher closing high on strong volume, which is a buyable move using the 20-dema at 131.79 as a selling guide. While most view the move into gold as a safe haven trade, I tend to think it is based on the coming new wave of QE. And if central banks around the globe, including the Fed, need to engage in another round of QE, then investors are right to ask, “What’s wrong with this picture?”

 

 

Silver, which has been lagging badly, is now starting to pay less attention to its status as an industrial metal subject to economic pressures and more to its status as the poor man’s gold. Yesterday it posted a pocket pivot breakout, which I tweeted about at the time. Today the SLV just kept on going, closing near its highs, and I would not be surprised to see it and gold continue higher from here.

 

 

The market seems to be struggling with the idea of a favorable Fed interest rate cut in a couple of weeks while at the same time pondering whether the paradox of a Fed set to lower rates when the market is at an all-time high and the economy is allegedly booming (so they say, but the data tells me otherwise) means something isn’t quite right. This results in a mosh-pit of choppy movement among leading and not-so-leading stocks, with a good trade thrown in here and there to keep things spicy.

Case in point: the hot stock of the week has been Roku (ROKU) which rocketed to new highs yesterday on news that its streaming devices were one of the top sellers during Amazon.com ‘s (AMZN) Prime Day. I am not, however, inclined to buy this breakout since it a) came on news and b) there were already two better buy points in the pattern at much lower prices.

The first of these was, of course, on the undercut & rally bounce off the 50-dma two weeks ago. The second came on the pullback to the 20-dema a pullback that I was looking for as your next potential entry for the stock per my discussion in my weekend report. Obviously, ROKU is not in an optimal long entry point right here with earnings expected on August 7th.

 

 

Aside from stuff like ROKU, most stocks are waiting for their upcoming earnings reports. I’m not inclined to do anything with big-stock NASDAQ names ahead of earnings. Tomorrow we’re expecting a report from Microsoft (MSFT), with Apple (AAPL), Amazon.com (AMZN), and Facebook (FB), all expected to come in within the next two weeks. All four stocks remain in little consolidations.

As we move into the thick of earnings season, one of my primary swing-trading strategies is to simply wait for actionable moves to occur after a stock reports earnings. Long-time members know how this works. Buyable gap-ups, shortable gap-ups, and every permutation in-between after earnings can provide high time-value trade material for those who are alert and nimble.

Although it would require some experience and expertise, railroader CSX Corp. (CSX) provides an example of what I’m talking about. It gave short-sellers an actionable shortable gap-down (SGD) this morning after coming apart following its earnings report yesterday after the close. Like a runaway train, it gapped down at the open and printed 73.34, set an intraday high at 73.65, and then headed right through its 200-dma.

 

 

Just yesterday, CSX was billed by some as a leading stock “approaching a buy point,” but as it turned out, it was more of a shorting point. It also helps to illustrate the dangers of playing earnings roulette, and also the types of opportunities that can crop up after earnings for those who know how to work ‘em.

In that spirit, Netflix (NFLX) was the big earnings reporter today after the close, and as I write it is gapping down well below the 200-dma and around the 320-325 price area. This puts it in the yellow-highlighted area on the chart, below. As you can see, within the context of the stock’s rally off the late-December lows, the price break so far isn’t much.

Therefore, I think there is potentially more downside here. I’ll be looking for a shortable gap-down set-up tomorrow morning, but how that plays out exactly remains to be seen. I could see a gap-down open followed by an attempt to bounce up closer to the 200-dma at 338 as one shortable scenario, but we won’t know for sure until tomorrow.

NFLX reported 2.7 million new subscribers, only half its projections, which indicates that subscriber growth may be hitting a ceiling. If this is the case, and the company’s future growth potential becomes muted, then the stock’s high P/E will come into play. And when I say this, I mean a likely PE-contraction and a corresponding and potentially brutal price decline even further below this afternoon’s gap-down.

 

 

Tesla (TSLA), not shown, continues to trudge higher towards its 200-dma. As I discussed in this weekend’s video report, I would not be surprised to see it press for the 200-dma given the near-record short interest in the stock, especially with next week’s expected Wednesday July 24th earnings report. I’m sure the report will provide some kind of actionable move in the stock, so I’ll be looking forward to that.

A comment from President Trump on Tuesday that there is still a “long way to go” before a trade deal with China is reached sent trade-dependent techs to the downside. Most were already extended on the upside, so were looking for a reason to sell off.  Micron Technology (MU) pulled in off its Monday peak and tested the 10-dma today as volume declined.

With a deal with China anytime soon becoming very unlikely, can stocks like MU hold up? You can see that the stock has rallied sharply off its lows and is now back at its April highs. It is possible that if the general market rolls over here, that a breach of the 10-dma could trigger a short-sale entry in MU, so is something to watch for.

 

 

Advanced Micro Devices (AMD) remains near its recent highs, but will also be reporting earnings next Wednesday, July 24th. I don’t see much to do there ahead of earnings. Ambarella (AMBA) doesn’t report until near the end of August, and it also continues to act well.

The stock has been buyable along support at the 20-dema and 50-dma, so in this position is extended. I would expect a pullback here given that the stock has continued to make higher highs on lighter, wedging volume. That, in my view, makes it vulnerable to a pullback within a possible market gap-down tomorrow morning.

 

 

Earnings are not a factor for Ciena Corp. (CIEN), which was last buyable along the 10-dma and 20-dema last week, as I blogged at the time. It has since rallied to the highs of its base and is slightly extended. Constructive pullbacks into the 10-dma at 43.54 or the 20-dema at 42.92 can be watched for.

 

 

Viavi Solutions (VIAV) not shown, is expected to report on August 15th. It is now pulling into its 10-dma at 14.32, which may offer a lower-risk entry spot. I’d prefer to be more opportunistic and look for a pullback into the 20-dema at 13.97 as a more opportunistic entry, especially if the market is going to gap down tomorrow at the open. Either way, buying shares up here means that the stock must generate a reasonable profit cushion ahead of earnings if one intends to hold through the report.

Beyond Meat (BYND) is expected to report earnings on July 28th, so I don’t see much to do with the stock before then. If one can catch an opportunistic entry on any pullback into support, then perhaps a swing trade can be executed ahead of earnings. Otherwise, I tend to think that there is too much risk holding through an earnings report unless one has a significant profit cushion in the stock.

 

 

Lyft (LYFT) is expected to report on August 7th. The last lowest-risk entry was at the 50-dma two weeks ago, as I discussed at that time. If one entered a position there and the stock holds up into earnings, then one might be able to hold the stock through earnings. Otherwise, we might watch for any constructive pullback into the 10-dma or 20-dema as potentially lower-risk entries from here.

 

 

Uber (UBER) is expected to report the day after LYFT, on August 8th. In the meantime, the stock is stuck in an ever-growing L-formation with little impetus to pull a LUie type move to the upside. Rallies off the 10-dma and 20-dema have been sold into over the past few days, and the stock feels weak to me viscerally since I’ve been trading it over the past week.

In this position, with the stock closing just below the 20-dema today, I view this as a short-sale right here using the 20-dema as a guide for an upside stop. As well, if the market comes in, UBER is likely to move lower with it.

 

 

IPOs like BYND and Zoom Video Communications (ZM) have been on fire, but if the general market starts to correct it likely won’t last long. Both stocks are rallying back up toward their prior highs, but I would certainly not be looking to buy these on breakouts through their absolute price peaks, as some advocate. ZM has already had two proper buy points, according to prescribed OWL™ methods.

One occurred on the undercut & rally (U&R) bounce off the 50-dma over two weeks ago, and the other occurred on the voodoo pullbacks to the 10-dma seven trading days ago on the chart. The stock is now extended, and it’s a matter of seeing how well this acts on any pullback to the 10-dma and 20-dema, both down below the $94 price level.

In a very weak market, if ZM were to bust its 10-dma and 20-dema, and I could borrow the stock, I would have no problem changing to a bearish view of the stock. As far as I know, it was not borrowable the last time it failed at the $100 Century mark in late June. Either way, a 360-degree approach with ZM as well as any other leader in a declining market can easily bring the short side into play depending on how things set up from here.

 

 

Parsons Corp. (PSN) is expected to report earnings on August 13th. It is pulling into its 10-dma as volume dries up. This represents a lower-risk entry position using the 10-dma or the 20-dema as selling guides. Keep in mind that buying constructive weakness must also consider the general market context, so exercise caution in any continued market decline.

 

 

Like PSN, Tradeweb Markets (TW) is holding near-term support at its 10-dma. This follows a prior base breakout that has seen the stock rally about 10% past the breakout point but no further. I would prefer to see what any potential pullback to the 20-dema at 45.89 and the top of the base looks like as the more opportunistic entry. Earnings are expected on August 8th.

 

 

Slack Technologies (WORK), not shown, has failed on two undercut & rally attempts through the prior 34.81 low of late June. Today it posted an all-time closing low at 33.46, and for now looks like a hot potato that is headed lower.

Jumia (JMIA) and Pinterest (PINS), both not shown, continue to flounder along their recent lows. There are no long entry signals in either currently, and if the general market continues lower I would expect these to lose any traction they currently have and proceed to the downside.

Money came into a number of cloud names today, even as the indexes sold off. One such beneficiary of the buying was MongoDB (MDB). The stock looked like it couldn’t hold its 50-dma yesterday as it dipped below the line early in the day. That move turned out as a moving-average undercut & rally (MAU&R) long entry, however, and the stock continued higher today in a strong pocket pivot move.

MDB is now extended, but we can watch for any constructive pullbacks into the 10-dma, 20-dema, or 50-dma from here. MDB also has the luxury of not reporting earnings until early September, so earnings roulette is not a factor.

 

 

Atlassian (TEAM) is expected to report earnings next Thursday, on July 25th. Zendesk (ZEN) is expected to report earnings on July 30th. Therefore, there isn’t much to do with these names ahead of earnings.

ZScaler (ZS) remains playable since it isn’t expected to report earnings until August 29th. This is, however, a situation that I would consider a 360-degree trade, depending on how it and the general market play out from here. A constructive pullback to the 20-dema puts this in a lower-risk long entry position in a stabilizing market.

A breach of the 20-dema, however, could trigger this as a short-sale target at that point, and is something to be alert to. This would be the case for any cloud-related name that is in a similar position. ZS has made begrudging progress off its early-June lows as it has chopped back and forth and is in a position where it could easily morph into a late-stage failed-base situation.

 

 

The Trade Desk (TTD) is a little bit like ZS in that it is pulling into buyable support along its 10-dma and 20-dema as volume remains very light. In the same way as ZS, however, a breach of the 20-dema could trigger this as a short-sale target within the context of a continued market correction. TTD is expected to report earnings on August 8th.

Other cloud names like ZEN, WDAY, TWLO, NOW, and TEAM, among others, are in similar positions just above their 10-dmas and 20-demas. While money came into these names today, it could be a different story in any market break, so remain alert to set-ups as they evolve in real-time in either direction.

 

 

The rote movement into cloud names was also evident in Avalara (AVLR), which had broken out on light volume back in early July. Today it posted a very low-volume continuation pocket pivot off the 10-dma.  I would certainly not buy the stock in this extended position, but the move is interesting within the context of today’s market pullback.

AVLR is expected to report earnings on August 8th, and for now, sellers don’t seem too interested in unloading shares. We’ll see if that changes as earnings approaches and if we see the general market correct further off its recent peak.

 

 

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.

The current market situation reminds me of other times we’ve pushed into or near to all-time highs in the major market indexes. Following a correction, in this case during May, the market has rallied off those lows and pushed into new-high price ground. At the same time, beaten-down stocks tend to lead the rally, such as the way semiconductors have acted since June after the market bottomed in late May.

In the meantime, a small number of breakouts have gone slightly higher or, in some cases nowhere, while other leading names are just chopping around. The stocks that came up off their lows of late May are now back near prior highs, evoking many emails in my inbox from a certain newspaper telling me that “leading stock XYZ is approaching a buy point.”

I don’t mean this in a negative way, it’s just part of the overall pattern that has led to a market rollover each time we’ve pushed into new-high ground. Things rally off their lows and begin to look like they’re going to break out, and then that’s all she wrote. This is entirely consistent with the basic reality in this market that the best moves in stocks tend to come off the lows, and once stocks approach their prior highs the moves lose momentum.

I’m seeing all the elements of this pattern, both technical and anecdotal, once again, and the question is whether it’s different this time. All I know is that I’m seeing very little that strikes me as something that can be played for anything more than a swing trade. Tomorrow morning it looks like we’ll be gapping down, courtesy of NFLX’s earnings report.

Therefore, we want to be entirely open to the real-time evidence tomorrow, however things play out. Given the highly fluid situation, it’s difficult for me to pound the table on anything on the long side, at least not until we see how things play out tomorrow. At the same time, we may see things develop on the short side. Bottom line: stay tuned to my live blog page tomorrow for any potentially actionable real-time ideas. Get ready.

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 SQQQ, 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.