The Gilmo Report

July 28, 2019

July 27, 2019

The market finished the week with a little bit of a Jekyll & Hyde act. The NASDAQ Composite Index flashed a sharp -1% distribution day on Thursday as volume picked up materially, but then found enough inspiration to turn right around and reverse that loss with a 1.11% upside move on Friday. The net result was a move to new highs on lighter volume to cap off the trading week.

 

 

On Thursday morning the European Central Bank stated that it is ready to cut interest rates for the first time since 2016. European Central Bank (ECB) President Mario Draghi justified this shift by stating the obvious, which is that the European economic outlook is “getting worse and worse.” The SPDR Gold Shares (GLD) sold off on that news, finding support at the 20-dema.

The sell-off in the face of the ECB news, however, is not surprising since the U.S. Dollar has continued to rally. With the rest of the world looking quite bleak, the tallest standing midget is a giant. Meanwhile, with the Fed making its latest policy announcement on Wednesday, gold may be in a holding pattern until then.

My expectation is that the Fed will cut rates 25 basis points. What the market does after that, however, may depend heavily on exactly what they say in their statement. If it indicates more rate cuts are likely to come, then gold and silver will likely rally, and this could also send stocks higher.

The GLD remains in a holding pattern along the top of a prior flag formation from which it attempted to break out last week. This strikes me as slightly positive given that the dollar has continued to rally to higher highs, In fact, gold has held its ground since late June, when the dollar started a sharp rally. We’ll see if the Fed meeting gets gold moving, one way or the other, again.

 

 

Earnings season continues to provide exceptional opportunities on moves following earnings. Twitter (TWTR) posted a nicely actionable buyable gap-up (BGU) on Friday after reporting earnings before the open. I discussed this one in my Thursday video report as one to watch for an actionable set-up to materialize after earnings. In this case, it was a BGU, much like Snap (SNAP) and the BGU it posted on Wednesday after reporting earnings on Tuesday.

I tweeted early in the day that TWTR has posted a firm low at an even $40, which could then have been used as a selling guide. The stock simply took off from there and is now extended. Pullbacks closer to the $40 price level would offer lower-risk entries.

 

 

Snap (SNAP) has acted strongly since posting its buyable gap-up on Wednesday. I discussed this as one to watch for an actionable BGU in my Tuesday video report, and it has done well since. It now looks like it’s losing momentum, so I’d watch for pullbacks closer to the 16.08 intraday low of the BGU day as lower-risk entry opportunities.

 

 

Where TWTR and SNAP offered buyable gap-ups this week, Facebook (FB) went the other way and became a small shortable gap-up. It only managed to rally about 2% on Thursday morning. From there, however, it was all downhill as the stock closed at its 20-dema.

FB busted the 20-dema on Friday but managed to rally back above the line where it closed. The stock made for a nice short scalp on Thursday, but the current chart position of the stock makes it a clear 360-degree situation. Because it undercut & then rallied back above the 20-dema on Friday, it is technically a moving-average undercut & rally (MAU&R) long set-up.

Thus, you would use the 20-dema or Friday’s low as a tight selling guide. If the stock decisively breaches the 20-dema, then it would flip to a short-sale target using the line as a guide for an upside stop. With the current strength in its cousins TWTR and SNAP, FB might find itself inspired to move higher. Just play it as it lies.

 

 

Earnings season is always a favorite time of the year for me, as you all know, because of the wonderful, actionable high-velocity moves that can ensue after a stock reports earnings and the fact that it comes four times a year. Another one I discussed watching after earnings in my Wednesday report was Atlassian (TEAM), which reported Thursday after the close.

The stock opened up slightly on Friday, where it was buyable along the 20-dema. It then shot higher on a big-volume breakout move to all-time highs on a big 8.57% move. This is the kind of stuff you want to be on the alert for as we keep moving through earnings season. I consider TEAM to be extended at this stage.

 

 

Tesla (TSLA) was destroyed after reporting earnings Wednesday after the close. As I noted in my report that day, the stock was trading below the $240 price level. It opened Thursday at 233.50, posted an intraday high at 234.50, and then headed lower from there. It finally ran into the 50-dma on Friday, causing a reaction rally back up into Thursday’s close.

Volume was quite tepid, however, and it may be trapped longs who are on the run now. The shorts were put in the vise since early June, but the latest earnings report reveals that the TSLA business model is even more flawed than was apparent previously. However, based on the short-interest in the stock as of the last reported date, many have felt it was flawed long before that.

I would love to see a bounce up to the 20-dema as the most opportunistic of short-selling entry opportunities, but it’s not clear that will happen. The only alternative would be a clean breach of the 50-dma that would trigger a new short-sale entry point. It all depends on how desperate sellers are to get out of the proverbial Dodge.

 

 

Netflix (NFLX) has continued its reaction bounce over the past three days, with some reasonable buying interest coming into play as each day showed above-average volume. I noted on Wednesday that we could watch for a rally up toward the 329.85 intraday high of last Thursday’s SGD price range and the 200-dma, where it could become shortable again.

NFLX closed Friday just below the 200-dma, so we can watch for any kind of reversal at or around the line. Take heed, however, that if the general market keeps posting new highs, then it could continue dragging NFLX right through the 200-dma. Therefore, if you decide to short the stock around the 200-dma, know where your stop is.

 

 

Texas Instruments (TXN) is still within buyable range of Wednesday’s buyable gap-up move. The intraday low is 125.96, so that would serve as a tight selling guide if one decided to go long the stock here on the BGU. So far, TXN hasn’t shown any additional upside thrust, but that can change.

As a side note, I would also point out that we have seen other buyable gap-up type moves in names like Alphabet (GOOG), Starbucks (SBUX), Hasbro (HAS), and others. We also saw Intel (INTC) gap up after earnings and reverse as shortable gap-up (SGU). But if one wishes to test any post-earnings gap-up move as a BGU, one can certainly do that by sticking to the rules of BGUs.

A BGU is a very simple set-up, in fact. Once a firm intraday low is set following a gap-up move, then one goes long while using that low as a selling guide. If the stock drops back below that low, one can then back away and wait to see if another lower low holds and allows for a re-entry. Flexibility is always key, as well as being open to the fact that some gap-up moves that start out looking like BGUs can reverse course and become SGUs.

 

 

As Micron Technology (MU) and Ambarella (AMBA), both not shown, have paused for a couple of days and remain extended, we can look forward to keeping a close eye on Advanced Micro Devices (AMD) this coming week. The company is expected to report earnings on Tuesday after the close, which could produce a high-velocity, actionable set-up.

Of course, we won’t know until we see what happens after earnings. Right now, AMD sits right around its recent highs in the $34 price area and stalled at last week’s highs on Friday as volume increased slightly. For now, just one for your earnings watch list this week.

 

 

Three five-day pocket pivots in Ciena Corp. (CIEN) to start out the week sent the stock into a low-range base breakout on Thursday. Volume was 12% above average. While the low-range base breakout is constructive, as I’ve highlighted on the chart, I would prefer to look for any pullbacks into the 10-dma at 44.30 as more opportunistic entries from here. After all, the best entry came when the stock pulled right into the 50-dma last week.

 

 

In IPO Land, I gave you a couple of very nice long ideas I felt strongly about in Wednesday’s report in CrowdStrike (CRWD) and Zoom Video Communications (ZM). CRWD was already a buyable gap-up per last weekend’s report when it briefly tested the 80.75 intraday low of its BGU day on Monday and then ripped higher from there.

As I wrote on Wednesday, the tight action with volume drying up sharply looked like a tantalizing second entry point, or even an initial entry for nimble traders who missed the BGU test on Monday. That worked almost as well as the BGU, with CRWD streaking to new highs on Friday. It is now clearly extended to the upside, pending the next potential long entry set-up.

 

 

Zoom Video Communications (ZM) is perhaps less spectacular but has remained buyable along the 10-dma and 20-dema. As I wrote on Wednesday, it was buyable along the two moving averages again, and it has since broken out to its highest close since bouncing off the 50-dma on July 1st.

However, Friday’s move constituted a pocket pivot trendline breakout that also cleared and closed above the $100 Century Mark. Note that there have been five prior attempts to clear the Century Mark, and all have failed. Six is considered a lucky number in certain Asian cultures, so perhaps this works, even though ZM is not an American company. At least this isn’t the 666th attempt to clear the Century Mark! 😉

Ways to play this include just buying it here and using the $100 price level as your selling guide with the expectation that this Century Mark attempt results in a more decisive price move. Otherwise, pullbacks to the Century Mark itself, or the 10-dma at 97.45, would be more opportunistic entries, using the 10-dma as a tight selling guide.

 

 

I’m curious to know whether any members acted on the first close above the $200 Century Mark by Beyond Meat (BYND) on Wednesday. That occurred just below a new-high breakout point, which I would mostly ignore. What I did like was the close above 200, which put it in play as a Jesse Livermore Century Mark Rule buy right there while using the $200 price level as a tight selling guide.

That would have been very playable, because BYND never dipped back below the $200 price level after that first close above it. Otherwise, with earnings coming up this Tuesday, I consider it preferable to have started working the stock on the lower-risk entries along the 20-dema much earlier when I discussed them in prior reports.

With three days left until it reports earnings, I didn’t think it was worth discussing in my last report. But this Century Mark Rule buy worked well enough to make Jesse Livermore proud. BYND closed the week at 234.90, a very “Livermorian” move from the $200 Century Mark, to be sure.

Hopefully, some members saw this and perhaps acted on it with the idea of catching a quick move. In other words, putting themselves in a position to get lucky.  Because my objective is to teach investors how to think for themselves, I’d love to hear whether anyone recognized the set-up and pulled this trade off. Now, we’ll see what transpired after earnings, which are expected on Monday after the close.

 

 

On Friday, it was Uber (UBER) that was in the driver’s seat on the upside as it streaked up through the 20-dema and right back up toward the highs of its current July price range. As I wrote on Wednesday, “one could attempt to go long the stock here while using the recent lows around the $43 price level as a selling guide.”

That would have worked as a way of participating in today’s move, which turned out to be a clean pocket pivot at the 10-dma/20-dema confluence. The stock did run into some resistance along the prior range highs at 45, so look for any pullback closer to the 10-dma at 43.79 as a lower-risk entry. We’ll see if it can then press higher before it is expected to report earnings on August 8th.

 

 

Lyft (LYFT) is expected to report earnings on August 7th and is in what I would consider to be an overall extended position in its pattern. It was best bought along the 50-dma in late June, as I discussed in my reports at that time. The stock stalled along the 10-dma on Friday as volume picked up vs. the prior day.

With earnings coming up in less than two weeks, only an opportunistic pullback into the 20-dema would get me interested in this for a swing-trade ahead of earnings. Right now, UBER is in the better lower-risk entry position if I had to choose between the two right here, right now.

 

 

Parsons Corp. (PSN) is still holding support along its 20-dema as volume remains very low. As I wrote on Wednesday, 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) found support at its prior base breakout point, as I theorized it might in my Wednesday report. That entry resulted in a bounce higher over the past two days. To me, that looks like a good swing-trade, but one could give it a chance to move higher using the 20-dema at 47.19 as a tight selling guide. Remember that TW is expected to report earnings on August 8th

 

 

Slack Technologies (WORK) posted another undercut & rally move, this time through the prior 33.37 low. Note that the stock moved relatively deeply before this low prior to pushing back above it, so has logically consolidated that move by holding tight along the 10-dma. Volume dried up to -68% below average on Friday, putting this in a lower-risk entry position using the 10-dma or the prior 33.37 low as a selling guide.

 

 

Roku (ROKU) seems to always work well when one buys the stock on weakness. The last major entry occurred on the undercut & rally (U&R) move at the 50-dma at the start of July. Since then it has rallied over 20% higher, with two pullbacks into the 20-dema offering more buy points along the way.

Note that the new-high breakout failed, so was clearly not an optimal long entry point. ROKU is expected to report earnings on August 7th, and it appears that for now the best, lower-risk entries have come and gone ahead of earnings.

 

 

With TEAM having reported earnings and subsequently providing a very actionable long entry on Friday, we can look forward to another cloud software name reporting this week. That would be, of course, Zendesk (ZEN), which is expected to report next Tuesday, July 30th. Please make a note of it.

ZScaler (ZS) posted a new high on Friday after a five-day pocket pivot at the 10-dma on Wednesday. One five-day pocket pivot is not enough to get me long the stock, however, and I continue to view pullbacks to the 10-dma as lower-risk entry opportunities.

 

 

The Trade Desk (TTD) surprised me with a strong breakout on Friday. The stock has been buyable along its 10-dma and 20-dema, but until Friday the action mostly consisted of pirouettes around the moving averages. As is often the case, however, what you think doesn’t have much chance of moving ends us going nuts on the upside.

This move was certainly good enough for a swing-trade ahead of earnings, which are expected on August 8th. That said, I would not be interested in chasing this breakout. One had to buy it along the 10-dma/20-dema confluence and then look to get lucky, which one would have today. In turn, this at least provides some cushion ahead of TTD’s upcoming earnings report.

 

 

MongoDB (MDB) is showing some voodoo action along the 50-dma with volume drying up to -42.7% below average on Friday. As was the case in my last report, the stock remains buyable here along the 50-dma while using the line at 154.68 as a tight selling guide. Perhaps it is revving up for a move here, so worth testing on the long side given the ability to keep risk tight.

 

 

ServiceNow (NOW) reported earnings on Wednesday after the close and gapped down at the open on Thursday. It then dropped all the way down to its 50-dma where it bounced sharply. Volume was very heavy. The close well off the lows, however, constituted supporting action at the 50-dma, and the stock closed Friday just below the 20-dema.

In this position, assuming one didn’t buy the stock right at the 50-dma in opportunistic fashion on Thursday, one can watch for a possible move back up through the 20-dema. That would result in a moving-average undercut & rally (MAU&R) move that would become actionable at that point while using the 20-dema as a tight selling guide.

Since NOW has spent only two days below the 20-dema, any move back up through the line would have the shakeout type of feel I like to see with an MAU&R long set-up. NOW posted strong earnings and sales growth, but the initial reaction focused on weak billings growth for the next quarter. Ultimately, however, price/volume action gives us the final verdict. Play it as it lies.

 

 

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.

Despite all the crazy action, I’ve still been able to come up with some decent, actionable ideas on both the long and short side. Whatever one’s views about the profit potential for any set-up and the sustainability of the market trend, the fact is that an actionable set-up is an actionable set-up. And while the market action is schizoid at times, clarity can always be found by focusing on the set-ups at hand.

I’m finding that a lot of those set-ups occur after earnings, with the occasional straight set-up, as it were, where earnings are not a factor, working as well. We’ll have more earnings reports this week, including Apple (AAPL), which will no doubt produce some fireworks. Even more importantly, the Fed will be coming out with its latest policy statement on Wednesday, which is likely to produce some additional fireworks of its own.

As I already discussed, I’m looking for a 25-basis point rate cut, and then we’ll see how the market parses out the Fed’s language as it tries to assess the odds of more easy money to come. In the meantime, I continue to maintain a 360-degree posture as I seek to 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 a position in WORK, 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.