The Gilmo Report

July 3, 2019

July 3, 2019

The gap-up in stocks seen as benefiting from the weekend trade news mostly turned in a shortable gap-up, or SGU, affair. This was the litmus test I was looking for that would determine how real the gap rally was, at least in the short run. Most of these stocks, however, opened high and finished low in reversals that looked rather bearish.

For example, one of the biggest upside streakers on Monday morning was Acacia Communications (ACIA). The stock opened at 50.71, and within the first ten minutes of trade reached a peak of 54.66 before reversing and steadily declining from there. It ended the day with a print of 50.44, below where it opened and back underneath the 50-dma.

 

 

Similar action was seen in semis and telecoms across the board, from AMAT to NVDA to XLNX. Even Broadcom (AVGO), which cited the Huawei ban as having a highly deleterious effect on its last earnings report, reversed all its gain and even more today as it burst below the 50-dma. This follows Monday’s gap-up on weekend news of the ban being lifted.

The action sends a strong message that weekend news regarding the Huawei ban was mostly fake news and typical of the Trump Administration’s tendency to say things in a broad way without specifying details. AVGO is telling us it doesn’t like the details, nor the prospects for a longer-term lifting of the Huawei ban.

 

 

Some of the action in these names was interesting today in that further downside was not seen. ACIA, as can be seen on its daily chart, above, found support near the 20-dema and rallied of the lows on light pre-holiday volume.  Also notice how Applied Materials (AMAT) held up today near its prior breakout point after reversing on Monday’s gap-up move and failing on a breakout attempt.

In this position, it may be sitting on the fence, and in some cases I must wonder whether these pullbacks represent sell-the-news moves back to the downside. In this manner, it’s possible that once the selling dissipates, the stocks, including ACIA and AVGO may attempt to move higher again.

 

 

One of the best-acting semis remains Advanced Micro Devices (AMD). It gapped up on Monday but has held up very tightly as it forms a miniature cup-with-handle formation. This remains within range of its recent base breakout and re-breakout, with the 10-dma serving as a reasonable selling guide.

 

 

All this funky action among news-affected semis and telecoms did not deter all the big-three major market indexes from posting new absolute and closing highs today. The S&P 500 Index posted a patriotic all-time high while the NASDAQ Composite Index broke out to higher highs and an all-time closing high.

 

 

Even with the indexes breaking out, the environment remains one without any strong trends. At least not yet. The best and sharpest moves occur in stocks coming off their lows. Meanwhile, I’m still waiting to see whether some sort of cash-is-trash move into stocks will transpire as the economic data continues to deteriorate. This puts the Fed in play, and the price of gold seems to imply more QE to come.

The idea that gold has been rallying as a so-called safe haven was not confirmed by the action of the yellow metal this week. An initial knee-jerk sell-off on Monday was quickly reversed yesterday as gold shot back up to its prior closing highs. If gold keeps rallying and stocks go with it, then this, plain and simple, is a QE play, and may be like what we saw from late 2009 to 2011 when gold and stocks rallied, thanks to QE.

 

 

Among recent IPOs, the pullbacks as of late provided some lower-risk entries. On Monday, the 50-dma showed up on the chart of Zoom Video Communications (ZM) just in time to provide support as the stock plumbed lower lows. As I noted in Tuesday’s GVR, the pullback, combined with the emergence of the 50-dma as a reference for a tight selling guide and a U&R, put the stock in a lower-risk entry position.

ZM popped higher today, and I would watch for any possible retests of the 50-dma or the U&R low at 84.61 as lower-risk entries if you can get ‘em. Otherwise, the stock is extended pending another set-up.

 

 

Tradeweb Markets (TW) broke out early today before stalling to close mid-range and back below the peak prices of the pattern. This was another illustration of why chasing breakouts through absolute peak prices of a base is generally a weaker strategy in this market. Note that the proper buy point occurred for opportunistic OWL-style buyers who might have acted in the U&R along the prior base lows last week.

Another entry could have been had on yesterday’s quick intraday pullback to the 10-dma, 20-dema and 50-dma. The evidence in favor of these types of opportunistic, OWL-style long entry techniques vs. buying new-high breakouts remains overwhelming. It is certainly characteristic of this market environment, where normal patterns of accumulation by, shall we say, non-machine institutional investors, are no longer a major factor.

 

 

In my Tuesday GVR, I also noted the voodoo pullback in Beyond Meat (BYND) at its 20-dema looked interesting as a potential long entry spot. The stock rallied slightly today, but overall just held tight along the 20-dema as volume dried up even more, thanks to the short trading session. This remains in a buyable position here using the 20-dema as a tight selling guide.

 

 

Uber (UBER) provides another shining example of why chasing new-high breakouts is a fool’s game in this market. That breakout occurred on heavy volume but went nowhere. Instead, it immediately failed on Monday before finding support at the 20-dema.

With volume drying up at the 20-dema, however, this brings UBER into a lower-risk entry position using the 20-dema as a tight selling guide. This contrasts nicely with the higher-risk entry position on last Friday’s big-volume base breakout. Ah, the irony.

 

 

Lyft (LYFT) has been drifting south as it appears headed for a rendezvous with its 50-dma and the lows of its current rising trend channel. Volume has remained very low, so I’d watch this as it approaches the 50-dma where it could offer a lower-risk entry at that point.

 

 

Jumia (JMIA) can also be watched for any opportunistic entries as it tracks sideways along its 10-dma and 20-dema. It closed below both lines today, but volume was light, and I wouldn’t make too much out of the action. The stock tested its prior pocket pivot at the 10-dma, but I would look for a move back above the 10-dma and 20-dema as a long entry trigger.

 

 

Pinterest (PINS) has continued to hold above last week’s U&R move through the prior 26.16 low of June 11th. It’s sitting 1.31 above that price point as of today’s close, so could be viewed as remaining in a buyable position while using that prior low as a selling guide.

Notice also that PINS closed today just above its 50-dma, which showed up on Monday. It is also sitting just above the 10-dma and 20-dema, so another approach would be to use the lowest of the three moving averages as an alternate selling guide. Overall, as with JMIA, PINS continues to work on what could turn out to be the lows of a big IPO base.

 

 

If you look very closely at the daily chart of Slack Technologies (WORK), below, you will see a microscopic magenta dot that is the first day of the 10-dma. So instead of a moving-average line it’s more of a moving-average point at 36.68. That provides a reference for any possible move above the 10-dma that might post as a pocket pivot.

Meanwhile, I like the action here as WORK pulls in to retest the prior 34.81 low in the pattern as volume continues to dry up in the extreme. The most concrete entry signal would come on any potential undercut & rally set-up at that low. But this can also resolve as a Wyckoffian Retest where the stock tests the low but never quite makes it as selling volume dries up.

So, this can be viewed as buyable here, but look for the stock to hold up since a move below the prior 34.81 low is always a potentiality. That said, the stock closed today about 3% above the 34.81 price level, so it’s not too far to help keep risk under control if looking to enter on a possible Wyckoffian Retest right here.

 

 

Opportunism is the name of the game in this market, and this is no different with a strong leader as it corrects sharply, such as Roku (ROKU). In previous reports I discussed that a test of the 50-dma was likely, and in my weekend video report I outlined a strategy for an opportunistic long entry on a possible combination U&R and bounce off the 50-dma.

That occurred yesterday when ROKU undercut the prior 87.80 low in the pattern and then rallied back above that low in typical U&R fashion while at the same time bouncing right off the 50-dma. That was the perfect entry opportunity, and the stock is now extended. Watch for any low-volume retests of the 50-dma as additional entry opportunities while using the 50-dma as a tight selling guide.

 

 

In my weekend report I discussed watching Ciena Corp. (CIEN) for two possible long entry points, depending on how it played out. One was a test of the 40.93 buyable gap-up price range low, and the other was a U&R back up through the prior 42.18 low in the base.

The latter triggered today when CIEN decisively cleared that 42.18 low to close at 43.14. That puts it about 2.5% above the prior low, which could still be used as a selling guide if one elected to buy shares here. Another way of handling this is to use the 10-dma, which CIEN cleared today, as a selling guide, but the U&R was the first proper entry as I already discussed over the weekend.

 

 

I noted the pullback in ACIA that found support near the 20-dema today as a potential rebound point after sellers unloaded shares into Monday’s gap-up move. A similar move occurred in Finisar (FNSR), which pulled back near its 10-dma today. It’s possible that both ACIA and FNSR could rebound from here, and so either could be tested here using the 20-dema as a selling guide for ACIA and the 10-dma for FNSR.

You might notice further that Lumentum Holdings (LITE), not shown, looks very much like ACIA and FNSR. That said, CIEN is the strongest-acting telecom in a concrete long entry position. One last point I’d make is that if you study the FNSR chart you’ll see a U&R long entry at the beginning of June. There is a similar U&R in the chart of Viavi Solutions (VIAV) (which is now extended) at the same time, which I discussed in video reports back in early June. I invite you to investigate and study those charts on your own.

 

 

Apple (AAPL) has moved higher this week but notice that Monday’s gap-up move stalled on below-average volume. There was no buyable gap-up since volume was so weak. This looks a bit suspect, but the bottom line is that the stock is not buyable in this position.

 

 

The same goes for Amazon.com (AMZN) as it approaches its prior highs. Volume has been light, so the move, like AAPL’s, is largely due to a lack of sellers. And Monday’s gap-up move occurred on weak volume as well. Uninspired action, to be sure, but these upward drifts in big-stock names like AAPL and AMZN is helping the NASDAQ to forge new highs.

 

 

Netflix (NFLX) is also drifting higher on light volume. The only possible long entry here would have been on the sharp break to the 50-dma last week. From there, NFLX has continued to push higher and is currently nowhere near a lower-risk entry point.

 

 

The no-volume rallies are a staple of big-stock NASDAQ names. This includes Facebook (FB), which has also continued to drift higher on light volume. It was last buyable on the voodoo pullback to the 10-dma last week, which I discussed in my GVR of last Thursday.

 

 

While big-stock NASDAQ names help drive the index higher as they rally on weak volume, most everything else is a mixed bag. Even the IPOs I’ve discussed in this report might be showing constructive action in some cases, but the overall gist of things is that we are in a trendless market. In the cloud space, that also remains the case. MongoDB (MDB) may have had a big-volume base breakout back in early June, but that move has gone nowhere.

At least the test of the 50-dma over the past few days has held up, but the ensuing rally over the past two days has run into resistance at the 10-dma and 20-dema. This could still fail through the 50-dma and completely morph into a late-stage failed-base (LSFB) short-sale situation, but for now one could look to buy shares near the 50-dma.

Otherwise, this is just a big breakout to nowhere, and underscores that even the strongest technical action in this market, such as MDB’s big breakout in June, doesn’t produce anything in the way of a serious trend. The strongest and sharpest moves tend to occur in stocks coming off their lows.

 

 

The cloud names I’ve discussed in recent reports also help underscore the general lack of strong trends among individual stocks in this market. All six, Atlassian (TEAM), The Trade Desk (TTD), Twilio (TWLO), Workday (WDAY), Zendesk (ZEN), and ZScaler (ZS) are all just cases of buy on weakness and sell on strength as they chop back and forth.

In their current chart positions, all have formed v-shaped rallies off last week’s lows and are not in buying position. The only one that might be close is TTD which is trying to pull a U&R coming back up through the prior 231.65 low from early June. Thus, this can be viewed as buyable based on Friday’s close at 233.83, using the 231.65 price level as a tight selling guide.

 

 

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.

While I can find set-ups here and there, the bottom line is that most of the movement this week was a function of the weekend trade news. That news, while viewed as positive, only serves to bring uncertainty back into the mix. If the U.S. and China would simply admit they cannot come to a real trade agreement that accommodates the wishes of both sides and just commence with the trade war, perhaps the market would just sell off and give us a sustained bear trend to play!

But this return to talks that produce nothing, and the limited removal of the ban on Huawei that now only creates the possibility of the ban being reinstated, only serves to create more uncertainty. And, for the most part, the action reflects this, even with the major market indexes moving to new highs.

So, as I see it, we’re still in this position of being able to act on long or even short set-ups, but at the same time understanding that we may only get a swing-trading move, and little more. The only way that can change is if we see the Fed open the QE spigots, which could then set off a cash-is-trash move into stocks.

That, however, is still unclear. In the meantime, all we can do is play things as they lie and try to be in position for the next real trend, whether bull or bear. With all the buyable gap-ups on Monday turning into shortable gap-ups on the same day, that initial litmus test of just what the market thinks of the weekend trade news has failed. In the end it may be more of the same, and for who knows how long. Not an appetizing way to spend the summer.

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 positions in UBER and WORK, though positions are subject to change at any time and without notice.

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