The Gilmo Report

July 24, 2019

July 24, 2019

News has been a factor in creating market volatility this week. Word that U.S trade representatives would leave for talks in China next week got the market off its rear end and rallying sharply. After-hours yesterday, however, news again came into play when the Department of Justice announced it was beginning a review of the alleged monopolistic practices of big techs like Facebook (FB), Alphabet (GOOG), and others.

That sent the futures skidding to the downside at the open this morning, but the market rallied off the lows and the NASDAQ Composite Index posted an all-time high today on higher volume. Hopefully, this is indicative of gathering upside momentum, but the only way to participate is to simply act on the basis of the set-ups at hand. If a strong trend is at hand, that is how you put yourself in the position to get lucky.

 

Adding to the bullish argument is the fact that small-caps are suddenly springing to life. The small-cap Russell 2000 Index, as represented by the daily chart of the iShares Russell 2000 ETF (IWM), posted a strong upside move today on heavy volume.

 

Central banks standing ready to initiate a new wave of QE has continued to keep a bid under precious metals. Tomorrow, European Central Bank (ECB) Chair Mario Draghi is expected to announce more easing in Euroland as the QE beat goes on. As silver pushes to higher highs and is now extended on the upside, the SPDR Gold Shares (GLD) continues to idle along its 10-dma.

With the SLV extended and out of buying range, the GLD is sitting right at its 10-dma with volume declining today. This puts it in a lower-risk entry position right here using the 10-dma or 20-dema as selling guides. However, I would be looking for a rally in the GLD tomorrow on the ECB news.

 

 

This has been a difficult market. News remain a heavy influence. Yesterday, the indexes were wobbling at the flat line when the news regarding U.S. trade representatives traveling to China next week hit. That sent the indexes flying to the upside. Next week we’ll get the Fed rate decision, and that will likely have a big effect on where this market goes from here.

Perhaps we’re setting up for a better-trending move in the market. Of course, we don’t necessarily have to have a rigid opinion about the market’s trend or ability to gather momentum in a more pronounced trend. You simply go with the set-ups at hand. As I wrote above, that then puts you in a position to get lucky.

As is typical for earnings season, I’ve found that some of the higher time-value trades can be found in stocks right after they report earnings. As we move through the thick of earnings season, this is where I’m focusing my attention and this report reflects that.

Yesterday after the close, Snap (SNAP) reported earnings after the close and gapped up through the $16 price level. I discussed it as a possible buyable gap-up in my video report of yesterday afternoon. The stock opened at 16.22 this morning, quickly set an intraday low at 16.08, and launched higher from there.

 

 

This afternoon, as I write, SNAP big cousin Facebook (FB) has reported earnings and is currently trading on either side of its 204.66 closing price. This comes after an initial gap-up move above the $210 price level. I’m not sure how this will open tomorrow morning, but I’ll be watching closely for anything actionable once we see how things look at the opening bell.

 

 

Tesla (TSLA) reported earnings after the close today and as I write is trading below the $240 price level. This puts the stock down in the highlighted region of the chart, below. I’ll be watching this one tomorrow for a possible shortable gap-down (SGD) move.

 

 

After-hours I’m also seeing leaders like Citrix Systems (CTXS), PayPal (PYPL), ServiceNow (NOW) and Xilinx (XLNX) gapping down after their respective reports. Both of these will be on my earnings watch list for tomorrow morning in case something actionable develops. If things aren’t moving too fast tomorrow, I will try and comment on all of these names that have reported earnings this afternoon on my live blog.

Netflix (NFLX) worked well as a shortable gap-down (SGD) set-up last week after earnings. With the market pushing higher, however, the stock is attempting a reaction rally back to the upside. This can be watched as it approaches the 329.85 intraday high of last Thursday’s SGD price range and the 200-dma, where it could become shortable again.

 

 

The movement of money into semiconductors has been unrelenting and a large part of the NASDAQ’s move to new highs. It was given additional impetus today from a gap-up breakout in Texas Instruments (TXN) after earnings. I discussed the after-hours action yesterday in my GVR.

While I am loathe to buy standard base breakouts, the one exception is when it occurs on a buyable gap-up move. That’s because risk can be kept very tight by using the intraday low as your selling guide instead of an automatic 7-8% stop-loss. TXN set a low of 125.96 today and would therefore be an actionable BGU using that price level as your selling guide.

 

 

I have discussed a laundry list of semiconductors in the past few video reports, but the movement in the stocks has been relatively uniform and broad. For that reason, it has only been necessary to track the biggest semiconductor names, such as Micron Technology (MU). It was possible to buy the stock when it posted a bottom-fishing buyable gap-up in late June, as I discussed at the time.

The second entry opportunity occurred on a sling-shot set-up on a pullback to the 200-dma in early July, which I also discussed in my GVR at that time. MU continues to push higher in what strikes me as a “cash is trash” type of move into semis. Fascinating stuff, but the reality is that the proper buy points occurred much lower in the pattern, leading to what has been a surprisingly strong move.

 

 

Advanced Micro Devices (AMD), not shown, is expected to report earnings next Tuesday after the close. The stock has been edging back up toward its prior highs around the $34 price level. I would not be looking to do anything with the stock ahead of earnings.

To ride the semiconductor wave, you also haven’t had to go beyond just playing something like Ambarella (AMBA) which I first discussed down along its 200-dma in my GVR at that time, and then most recently discussed it in my written reports as buyable along the 20-dema and 50-dma in early July. Like most semis, however, it is quite extended.

 

 

Historically, strength in semiconductors is generally considered a positive for the market. And indeed, the market has rallied off the late-May lows in conjunction with every semiconductor on the planet doing the same thing. So, as semiconductors get extended on the upside, the potential for a pullback increases. The simple solution is don’t chase these on the upside.

Ciena Corp. (CIEN) remains one of the best, if not the best-acting telecom name now. It is extended from the 20-dema, where it was last buyable per my comments on the stock over the weekend. Notice that all three days this week have been five-day pocket pivots along the 20-dema and 10-dma.

I look for clusters of five-day pocket pivots in lieu of a single ten-day pocket pivot as bullish signals. In this case, two five-day pocket pivots on Monday and Tuesday led to a third today as CIEN posted a trendline breakout. Pullbacks closer to the 10-dma at 43.95 would offer lower-risk entries from here.

 

 

Among recent IPOs, CrowdStrike (CRWD), which I discussed over the weekend as a buyable gap-up, pulled in to test the 80.75 intraday low of Friday’s gap-up price range on Monday. That set up a lower-risk entry and the stock rallied from there.

It is still holding up as volume dries up, which may mean that sellers aren’t interested in dumping shares just yet. That said, any pullbacks closer to the 80.75 BGU intraday low would be your best, lower-risk entries from here if you can get ‘em.

 

 

Lyft (LYFT) and Uber (UBER) are expected to report earnings on August 7th and 8th, respectively, which gives them perhaps a little time to post some upside from current levels. LYFT, not shown, pulled into its 10-dma and 20-dema today on light volume, which puts it in a lower-risk long entry position using the 20-dema at 63.90 as a maximum selling guide.

UBER, meanwhile, continues to flop around its 20-dema. Today it closed seven cents above the line as volume dried up to -74.5% below average. I’ve played it both long and short as it moves along the 20-dema and in this current L-formation, and there doesn’t seem to be much impetus in either direction.

That said, one could attempt to go long the stock here while using the recent lows around the $43 price level as a selling guide. If the general market keeps rallying, then we could see the stock push out of this L-formation and post a classic LUie resolution.

 

 

I must say that if I’m looking to play one of these hot IPOs that is setting up properly, I prefer to pick something like CRWD, which has already reported, or Zoom Video Communications (ZM), which isn’t expected to report until September.

The stock is in a buyable position right here along its 10-dma and 20-dema as volume dried up to -53.9% below average. One could then use the 20-dema as a tight selling guide.

 

 

Parsons Corp. (PSN) is holding support along its 20-dema as volume dried up to -77.5% below average today. If you think this can post a nice upside move before it reports earnings as expected on August 13th, then this does offer a lower-risk entry here using the 20-dema as a tight selling guide.

 

 

Tradeweb Markets (TW) got hit off the peak today on heavy selling volume. I didn’t see any news that would account for the move, but it does illustrate why you never need to buy stocks when they are extended. TW looks like it’s headed for a test of its 50-dma and the top of its prior base. One could watch for a possible lower-risk entry near the 50-dma on this pullback.

The closer to the 50-dma you can pick it off, the better, since you can then use the 50-dma as a tight selling guide. TW is expected to report earnings on August 8th.

 

 

I’m curious as to whether any members acted on the undercut & rally move that Pinterest (PINS) posted on Monday. The stock was looking very much down in the dumps that morning but found its feet and turned back above the 25.87 prior low in the base.

That led to a nice three-day move that resulted in a pocket pivot off the 50-dma today. PINS is extended now, and is expected to report earnings next Thursday. Therefore, if I did buy the U&R on Monday, I might be inclined to take my profits ahead of earnings.

 

 

Roku (ROKU) is expected to report earnings on August 7th and is currently finding support along its 20-dema as volume dried up to -43.7% below average today. Note that the prior strong-volume breakout went nowhere, but with ROKU tucking back into its 20-dema and the prior breakout point, one could test a long here with the idea of a) looking for a sharp upside move before earnings, and b) using the 20-dema as a tight selling guide.

 

 

Atlassian (TEAM) is expected to report tomorrow after the close. This is one to keep an eye on for anything actionable that might develop after the report is out, so put it on your earnings watch list.

Zendesk (ZEN) is expected to report next Tuesday, July 30th, so is another one to put on your earnings watch list.  Meanwhile, ZScaler (ZS) broke out, but volume was not enough for a ten-day pocket pivot. It was, however, good enough for a five-day pocket pivot, but I’d want to see a cluster of these, not just one.

I think this is best bought on any pullbacks to the 10-dma from here. ZS isn’t expected to report earnings until the end of August, so earnings roulette is not a factor.

 

 

Cloud names in general have not been pushing higher with the market. I wrote over the weekend that MongoDB (MDB) might be susceptible to a retest of the 50-dma given the wedging rally to higher highs. That is exactly what we saw over the past three days as the stock dropped right back into and just below its 50-dma this morning.

Volume picked up sharply, however, resulting in pocket pivot support at the 50-dma. Thus, this is in a lower-risk entry position here using the 50-dma as a tight selling guide. Earnings aren’t expected until September, so aren’t a factor for the stock currently.

 

 

The Trade Desk (TTD) is expected to report earnings on August 8th, and it continues to flop around its 10-dma and 20-dema. I noted over the weekend that the stock tends to be squirrelly, and that has certainly remained the case this week. I don’t see any lower-risk entries in the stock right now, but it is holding up well in a base ahead of earnings.

Opportunistic entries along the 20-dema on pullbacks seem to be the lower-risk route if one is interested in buying shares ahead of earnings. It’s not clear, however, whether TTD will get moving until it reports earnings. However, it does appear that looking for opportunistic entries in the stock when it pulls back is the better way to go here.

 

 

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.

Based on the after-hours action this afternoon as I write, it’s clear that this remains an uneven market. We’re seeing gaps to the upside and downside after earnings, and the question then becomes whether these produce actionable set-ups. That can only be determined by monitoring the stocks you are interested in after they report earnings, obviously.

This market is likely to remain a bit on the wild side on an individual stock basis on both the upside and downside. The only way to counter this is to keep risk low by looking to pick off stocks, long or short, that are in lower-risk entry positions, and then look to put yourself in a position to get lucky. Take it from there.

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 FB, SNAP and CRWD, 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.