The Gilmo Report

July 21, 2019

July 20, 2019

The Fed has now gone beyond the mere idea of monetary stimulus and is now invoking the concept of monetary “vaccination.” On Thursday, one Fedhead called for inoculating the economy against some as-yet unspecified disease with preventative interest rate cuts. In the Age of QE, just when we think we’ve seen everything, we now see the Fed expand the creative horizons of QE vernacular.

The market, which was feeling a bit hungover Thursday morning, thanks to a big dive in Netflix (NFLX) after earnings, took heart in the Fed rhetoric and rallied off its lows. Allegedly strong earnings from Microsoft (MSFT) on Thursday after the close sparked a gap-up open on Friday. All of the major indexes reversed into the red after an initial gap-up open, with volume higher on the NYSE and lighter on the NASDAQ.

The NASDAQ Composite Indexes closed below its 10-dma, and for now looks to be heading at least for the 20-dema or lower. The late-day weakness was ascribed to news that Iran had seized a British ship and that the Fed was only planning a 25 basis point rate cut at the end of July3. In my view, however, the technical action would have already had one on the right side before the news hit.

 

 

Proof that the technical action was already setting up bearishly ahead of this news is seen from the perspective of one of my little friends, the ProShares UltraShort QQQ ETF (SQQQ), which posted a long entry signal at 31.70 right at the open and held above that entry price all day before gaining traction into the close. Remember that when I am playing a signal like this my objective is to catch a decent downside inflection in the NASDAQ 100 Index. For that reason, I will tend to hold at least a core position until the SQQQ drops below my entry price.

You will notice on the five-minute 620-chart below that there was a clean MACD cross to the upside.  That was my first long entry signal, and once the six-period moving average crossed the 20-period moving average all systems were go. At that point, unless I see the six-period moving average cross below the 20-period, I’m going to try and sit.

Notice that when the six-period did cross below the 20-period, the MACD was simultaneously crossing to the upside. So that little divergence will keep me in the position. After consolidating for another hour, the SQQQ took off on a steady uptrend into the close. The whole move on Friday was relatively clean and simple, which for this market is saying a lot!

 

 

As I wrote on Wednesday, the current array of anecdotal and technical evidence mimics a pattern I’ve seen many times before when the indexes push into new-high price territory and then roll over. So far, the action this past week has done nothing to make me think that this time is any different, at least for now. Of course, I remain open to new evidence as it appears in real-time, and I do so as a way of remaining consistent with my advocated 360-degree approach to this market.

As the Fed expands its rhetorical reach with new and exciting ideas like monetary vaccinations, gold and silver continue to act well. But both metals got a little bit extended and were vulnerable to pullbacks. The talk of monetary vaccinations caused the SPDR Gold Shares (GLD) to break out to higher highs, but when the Fed walked those comments back as being more “academic” than policy-driven, profit-takers came in.

My view is that the Fed is going to be lowering rates more as the year progresses, and either they don’t know it, or they pretend that the economy is in a good place, all the while talking out the other side of their mouth about the need to lower rates pre-emptively. Therefore, the potential for gold and silver to move higher is real, and if I want to own either I would look to buy on pullbacks.

Here we see the GLD pulling into the 10-dma, so that the line can be used as a reference for near-term support if one wished to buy into this pullback. I would try to buy as close to the 10-dma as possible, but the difference between where the GLD closed Friday and the 10-dma is only 1%.

 

 

Netflix (NFLX) gapped down as expected on Thursday morning after reporting earnings on Wednesday after the close. My basic approach to the stock was encompassed to some extent by my statement on Wednesday that, “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…”

That is roughly what we saw on Thursday as the stock opened at 323.76 and began to bounce back up towards the 200-dma. The attempted bounce up towards the 200-dma fell way short, and I tweeted early in the day that the stock had set at least a temporary intraday high at 329.85. As it turned out that was the high of the day, and one could have taken a short position once the 329.85 high was set.

From there NFLX closed roughly where it opened, but with the stock closing well below the 329.85 intraday high, the shortable gap-down (SGD) remains in force. NFLX attempted to rally intraday on Friday but failed and posted a lower closing low. From here rallies up closer to the 329.85 price level would present lower-risk short-sale entries, but I wouldn’t bet on that happening.

 

 

I believe the stage is set for a deeper NFLX decline, and the weekly chart helps provide some perspective in this regard. The current break looks like an initial failure from a late-stage cup-with-handle formation that is quite ugly. If I’m playing this for a decent short-sale trend, then it looks like the prior late-December low at 231.23 could easily come into play.

The move off that low in January was a straight-up affair that spent no time consolidating. This would imply that the likelihood of any serious price support between today’s close and the 231.23 look is muted. Technically, this looks like the death of NFLX, unless something in the chart changes drastically.

 

 

Wednesday’s earnings gap-down winner, or rather loser, CSX Corp. (CSX) provided short-sellers with another opportunity to hit the stock at the 200-dma on Friday. CSX rallied on Thursday and then Friday morning after the big gap-down break through the 200-dma.

This illustrates the types of second-chance short-selling opportunities that can crop up after an initial shortable gap-down. I would continue to view rallies up into the 200-dma as lower-risk short-sale entry opportunities, using the line as a guide for an upside stop.

 

 

Microsoft (MSFT) was a good part of why the SQQQ trade worked so well on Friday. The company reported earnings Thursday after the close and gapped up on Friday morning, printing 140.22 at the opening bell. After a brief bump up to 140.67 within five minutes of the open, the stock turned to the downside and closed right near its intraday lows.

That worked out to a nice, fat shortable gap-up (SGU) move. Now, MSFT is sitting right at its 20-dema, so that a breach of the 20-dema could trigger another short entry at the line. That works even better if one is campaigning the stock on the short side following Friday’s SGU reversal.

 

 

You will rarely, if ever, catch me buying a new-high breakout, unless it occurs on a buyable gap-up move. That’s why I would have found Tuesday’s big-volume breakout to new highs on news by Roku (ROKU) something to sell into rather than chase. And if I’m not long the stock ahead of that move, then I wouldn’t be looking to get long until I saw a lower-risk pullback.

As we can see, ROKU has pulled right back into the prior breakout point and the 10-dma as volume dried up on Friday. But I would caution that while one can theoretically test a long entry here while using the 10-dma as a tight selling guide, a breach of the 10-dma could trigger this as a tactical short-sale target.

With earnings expected on August 7th, playing this long or short without a prior profit cushion would imply that one is expecting a decent move before earnings. Otherwise, this could present a long or short swing-trade opportunity depending on how it and the general market set up this week.

 

 

Amazon.com (AMZN) and Facebook (FB) are expected to report this week on Thursday and Wednesday after the close, respectively. We will also hear from FB’s smaller cousins, Twitter (TWTR) and Snap (SNAP). SNAP is expected to report on Tuesday after the close, and TWTR on Friday before the open.  Apple (AAPL) is expected to report on July 30th.

As with CSX, NFLX and MSFT this week, we can look forward to whatever actionable set-ups occur once these companies report. I will emphasize, however, that figuring out how to handle a gap-down or gap-up move requires skill, awareness, and a very nimble ability to move in either direction as necessary.

Tesla (TSLA), not shown, is another big-stock NASDAQ names expected to report this week. The stock has been pushing higher towards its 200-dma since its little sling-shot long set-up of two weeks ago. Wednesday’s after-hours earnings report will likely cause some fireworks in the stock, and this may result in actionable set-ups.

Semiconductors have continued to act well. Micron Technology (MU) continues to push higher and on Friday posted a breakout on above-average volume. Note that this breakout has come after a very steep, sharp, and rapid move off the late June that the proper buy points occurred on the initial bottom-fishing buyable gap-up (BFBGU) that I discussed back at the end of June, and ensuing consolidation along the red 200-dma in early July.

Maybe some will try and tell you that this is a “leading stock breaking out,” but I would not be in the mood to chase MU here. It has come straight up from the bottom and is quite extended. Just because its clearing this cup-like base doesn’t make it subject to some magical support along the high just below 45. Caveat emptor!

 

 

Advanced Micro Devices (AMD) is expected to report earnings this Tuesday, July 30th. The stock is a good example of how little upside thrust occurs after base breakouts in this market. Mostly, since breaking out, AMD has offered a nice swing-trading in both directions as its has broken out, failed, broken out again, failed again, and broken out just above the $34 price level on Monday.

Of course, Monday’s breakout has turned out to be more of a shortable affair than a buyable one. Ce la vie for this market. Now AMD is coming in to test the 20-dema after failing to hold Monday’s breakout, and I would suggest just sitting back and waiting to see what kind actionable set-up might present itself after earnings on Wednesday.

 

 

I see a lot of stocks that rally off their lows and keep going on very light volume the whole way. Ambarella (AMBA) which I first discussed as a long idea in my GVRs of early June when the stock was at its 200-dma, and which was more recently buy able along the 20-dema and 50-dma, one of those situations.

The move to higher highs over the past 2-3 weeks has come on very light volume that is well below average. This illustrates why often in this market volume, or the lack of it, means nothing. After all, how many big-volume breakouts have you seen that go nowhere? The so-called “rocket fuel” of big-volume breakouts as taught by Bill O’Neil just isn’t a big factor in this market.

AMBA is now stalling at higher highs, posting its first above-average volume day on Friday. There is nothing actionable here in either direction, but it does serve as a good example of a relentlessly rising semiconductor that does so on no real buying volume. Not unusual for this market.

 

 

Ciena Corp. (CIEN) is now testing its 20-dema as volume declines. This puts the stock in a lower-risk long entry position, but it has to hold support at the 20-dema. If it breaches the line, then it could trigger as a short-sale target at that point. How this plays out will likely depend on how the market plays out this coming week, so play it as it lies

 

 

Lyft (LYFT), not shown, posted a higher high on Friday, but is now extended on the upside. It was last buyable either along the 50-dma or the 10-dma/20-dema confluence days and weeks ago at lower prices. LYFT is expected to report earnings on August 7th.

Uber (UBER) is expected to report the day after LYFT, on August 8th but is not following its close cousin to higher highs. Instead, it keeps flopping around its 20-dema and closed below the line on Friday. Volume remains light, but as I wrote on Wednesday, this becomes a short on any breach of the 20-dema.

As I wrote on Wednesday, “…if the market comes in UBER is likely to move lower with it.” UBER opened positive on Friday and above the 20-dema, but once it broke below the line it came into play as a potential short-sale target and closed near its lows at 43.18. The 20-dema sits at 43.71, so weak rallies back up into the line could be shortable within the context of a weak general market.

 

 

IPOs can also be watched for actionable set-ups after they report earnings. One recent IPO that I’ve discussed in my video reports that reported earnings on Thursday after the close is cyber-security name CrowdStrike Holdings (CRWD). While this is a base breakout with an alleged “buy point” at 79.79, I would not treat it as such by using a 7-8% downside stop.

Instead, I would treat it as a buyable gap-up (BGU), using the 80.75 intraday low on Friday as your selling guide. This keeps risk to a minimum, because in a weak general market environment it could be quite easy for CRWD to come in and test the low of its gap-up rising window at 74.19 Remember that there is zero statistical evidence that would prove a 7-8% stop-loss is an optimal risk-management rule.

In fact, it is not. Thus, we can use the alternate approach of treating this as a BGU and keeping risk as tight as possible by using the intraday low of the BGU day as our selling guide. That is my preference, but if you believe in things like the Easter Bunny, Santa Claus, and the use of a 7-8% stop-loss policy as an optimal risk-management procedure, you can treat it as you see fit.

 

 

Zoom Video Communications (ZM) is testing its 20-dema as volume declines. This puts it in a lower-risk entry position using the 20-dema as a tight selling guide. That said, a breach of the 20-dema could also trigger this as a short-sale target, similar to what I discussed in CIEN.

 

 

Parsons Corp. (PSN) is holding support along its 20-dema. Theoretically, pullbacks into the line offer lower-risk long entry opportunities, but with earnings expected on August 13th PSN may just continue to base.

 

 

Tradeweb Markets (TW) made a move for new highs on Friday morning but failed to do so after reversing and closing down on a slight increase in volume vs. the prior day. The recent IPO continues to act well, but there is nothing here in the way of actionable entries with earnings expected on August 8th.

 

 

Atlassian (TEAM) is expected to report earnings next Thursday July 25th. The stock just barely breached its 20-dema on Friday as volume picked up slightly. This is one of the bearish signs I’ve discussed keeping an eye out for in leading stocks. There’s nothing to do with the stock given that earnings are expected shortly, but we shall see if the action portends something nasty when TEAM reports this week.

 

 

Zendesk (ZEN) is also breaching its 20-dema, and like TEAM did so on an outside reversal with volume picking up vs. the prior day. The company is expected to report earnings on July 30th, so could be considered a short-sale target right here while using the 20-dema as a guide for an upside stop.

The only issue here is that you’d be looking for a sharp downside break from here over the next week before earnings as a short-sale swing-trade. That is mostly likely to occur if we see the general market break down further this week.

 

 

MongoDB (MDB) has continued to rally off its 50-dma, and finished Friday up for a third day in a row as volume declined. The only entry was at the 50-dma, and the stock is extended at this point. That said, I would note that this is another one of those big-volume breakouts that ultimately go nowhere.

Overall, MDB has simply ranged back and forth following the big breakout, making it buyable along the lows around the 50-dma for swing-trades on the upside, but no more. Perhaps the wedging three-day rally will result in a retest of the 50-dma if the market has any difficulties this week, so is perhaps something to watch for.

 

 

ZScaler (ZS) attempted to clear to new highs on Friday, but like most other stocks, reversed to close in the lower part of its daily trading range. As I discussed in my Wednesday report, a breach of the 20-dema could cause ZS to morph into a short-sale target at that point. That is something to watch for here if the general market weakens further this coming week.

 

 

The intraday volatility in this market, which of course includes many individual stocks, offers a lot of intraday opportunities. One must be alert, nimble, and willing to shift as necessary to capitalize on these moves, however. Case in point: The Trade Desk (TTD), which breached its 20-dema on Thursday as sellers pelted the stock.

As soon as it busted the 20-dema early in the day, a short-sale entry was triggered at that point. As it approached the 50-dma, anyone monitoring the five-minute 620-chart would have noticed a MACD turn to the upside (similar to the MACD signal in the SQQQ that I show above). That was a sign to cover and take short profits.

From there, TTD kept on rolling back above the 20-dema and retraced almost all its prior decline. Theoretically, if one was keying off the five-minute 620-chart, this could have been played first as a short and then as a long. The time value of such a two-sided, or should I say 360-degree trade in both directions, would have been quite nice.

On Friday, the stock tried to push above its 10-dma but reversed back below it and the 20-dema on very light volume as buyers lost their enthusiasm. In this position one could look at any small move back up into the 20-dema as a potential short-sale entry, but we already know this stock is squirrely, so be nimble. TTD is expected to report earnings on August 8th.

 

 

The five-minute 620-chart below shows Thursday’s action in TTD. It nicely illustrates how quickly the short-selling opportunity came, ran its course in just 20 minutes, and then steadily retraced back to the upside for the rest of the day. Following a brief blip to the upside right after the opening bell, the stock plummeted from an intraday peak of 242.08 to an intraday low of 228.62 in just 20 minutes.

Notice the typical MACD stretch & cross, where we see the orange fast MACD line stretch away from the blue slow MACD line and then crossing back to the upside. When I’m working a stock like this short, I am always watching for a MACD stretch as a point at which at least take partial profits. At that point, I will then wait to see if the MACD crosses back to the upside or not.

If it does, then whatever is left of the position is covered. At that point, I might even think about flipping to the long side. The long side was a much slower move as the stock trudged back to the upside with far less velocity than it had on the way down right at the open.

 

 

The five-minute 620-chart is also invaluable in campaigning short-sale target stocks. We knew by Thursday that NFLX was a short-sale target on the potential, and while it was possible to hit the stock short on that day, the more coherent, steady downside move on the 620-chart occurred on Friday.

Usually, an initial gap-down break in a big household name type of stock brings in knee-jerk buyers who view it as suddenly cheap. That accounted for the gyrations seen in NFLX on Thursday. It was on Friday, however, that a quick upside blip at the open resulted in both a MACD cross to the downside and a moving-average cross where the orange 6-period line crossed below the 20-period line at roughly the same time.

That was a short-sale entry signal, and I know that at least one member caught this signal just right. Notice that about an hour after the first MACD downside cross there was an upside cross, but the fast line never really stretched that far below the slow line. One could have partially covered at this point, but the 6-period line never crossed back above the 20-period line.

Since the moving average cross never changed, one could have elected to just sit tight and wait for a moving-average cross to cover and get out of the way. Depending on how much conviction I have based on the set-up, which in this case was a shortable gap-down (SGU) on Thursday, this would also influence whether I might opt to sit tight.

That would have been the right thing to do, since NFLX just kept drifting lower all day and closed at 315.10. In my view, NFLX is likely just getting going on what could be an intermediate-term downtrend, but on a granular level, the 620-chart is useful in helping to manage and campaign such a potential move.

 

 

Finally, let’s look at what happened to MSFT on Friday after it gapped up following Thursday afternoon’s earnings report. Right before the open, it was trading as high as 140.67, but the 6-period moving average had already crossed below the 20-period moving average well before the opening bell. At the bell, however, the MACD confirmed by quickly posting a bearish cross.

From there, MSFT kept losing air as it descended back to the downside all day long. Note that there were several back and forth moves in the MACD throughout the trading day, but the 6-period line never crossed back above the 20-period. Thus, one could have simply keyed on this as a signal to simply sit tight and hold the position short all day.

 

 

The short side of the market is far more complicated than the long side, and in this market leading stocks may break down for a short period of time and then stage a sharp upside move even in the middle of a multi-day decline. TTD illustrates this concept quite well on its 620-chart shown above. Sometimes the intraday trends are much smoother, as NFLX and MSFT show.

Hopefully, this short discussion gives those of you well-versed in short-selling technique a better idea of how one can use the five-minute 620-chart in pursuit of short-sale profits. The use of recent, real-time examples also brings home the point that this market is at least as good to short-sellers as it is to the long side on a day-to-day basis.

As well, in this market, using the 620-chart has been crucial in keeping me out of trouble on the short side while allowing me to profit from sharp downside breaks and steady intraday downtrends. With more big-stock earnings reports due this week, I have no doubt that my trusty 620-chart will likely help navigate the sharp moves that will no doubt ensue after key market names report earnings.

Members who are interested in the short side of this market should carefully study 620-charts for various stocks. This will also add to one’s knowledge base with respect to understanding how MACD and moving-average crosses can be used to enter, exit, and hold short positions during the day.

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.

This week will be one of the biggest of earnings season as a slew of names I follow will be reporting. This includes several big-stock NASDAQ names. Therefore, we can expect at least some of the market’s movement to be affected on a day-to-day basis depending on what stocks like AMZN, AMD, FB, and others do after their respective earnings reports.

As I wrote in my Wednesday report, given the highly fluid and often news-dependent environment we find ourselves in, it is difficult for me to pound the table on anything on the long side, at least with respect to playing more intermediate trends. The constantly shifting news flow, combined with earnings season, requires one to be ready for just about anything.

The volatility that results from such an environment means that swing trades on both the long and short sides of this market are quite viable on a day-to-day basis, and that has been my focus as of late. This is not a market where one can allow themselves to become complacent and sanguine.

I tend to think that anyone trying to sell you a bill of goods that all you need to do is buy some allegedly leading stock when it breaks out to a peak high price is leading you down a primrose path that is fraught with danger. I also believe quite strongly that anyone pitching the premise that this is a market where one can nurture expectations of glorious upside profits simply by buying breakouts is irresponsible, plain and simple.

This is a complicated market, and we are beset with one of the strangest paradoxes I’ve seen in 28 years as a trader and investor in the form of a Fed that is looking to lower rates when market indexes are at or near all-time highs. Until further notice, this remains what I believe is primarily an opportunistic swing-trader’s market, while those seeking more intermediate-term trends should consider holding more cash.

This is likely to be an exciting week with plenty of post-earnings price movement. In this spirit, I will cover some key names to watch after earnings this week in my weekend video report, or GVR. Stay tuned.

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.

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