The Gilmo Report

July 31, 2019

July 31, 2019

The Fed gave the market what it was looking for today in a 25-basis point Fed Funds rate cut, but the market responded with a big, fat sell-off. After some initial and very typical post-Fed spinning, the NASDAQ Composite Index bolted -163.59 points to the downside during Chief Fed Head Jerome Powell’s press conference. This produced a distribution day off the peak on heavy volume.

 

 

I already voiced my views on the absurdity of current Fed policy, if not Fed policy in general during the Age of QE, on Twitter today, so I won’t waste any time rehashing all that in this report. You can check my feed at @gilmoreport on Twitter to review this. Right now, I’m more interested in seeing how various asset classes, such as stocks, bonds, commodities, etc. respond to the latest Fed move.

Disappointed by Fed Chair Powell’s comment that this was not the start of a series of rate cuts, the dollar rallied, but so did bonds. The yield curve also flattened when it would normally be expected to steepen after a Fed rate cut, and precious metals sold off. While some of this was consistent with a Fed rate cut, such as the rally in bonds, the rest wasn’t. Thus, it will be interesting to see where all these go from here, since I believe the Fed will in fact be forced to ease again before the year is out.

The SPDR Gold Shares (GLD) broke just below its 20-dema on heavy selling volume today but remains within a consolidation extending back to late June. I could see this coming down further, with a possible test of the prior July lows and the rising 50-dma. Since I am opportunistic when it comes to buying precious metals, I might watch for a possible pullback entry to emerge from here.

 

 

Apple (AAPL) led the market charge this morning after reporting earnings yesterday in the after-hours. As I tweeted earlier in the day, the company did in fact surprise to the upside, coming in with earnings of $2.18 per share vs. estimates of $2.10. Better-than-expected revenues also whetted investors’ appetites for the stock, sending it gapping higher this morning.

After setting an intraday low of 216.32 early in the session, AAPL pushed higher, reaching an intraday peak of 221.37 before turning tail. It crashed right through the prior 216.32 intraday low and closed near its low for the day at 213.04. A buyable gap-up? I’m not so sure, but theoretically this could be tested as such using the 211.30 intraday low as a selling guide.

Don’t be surprised, however, if AAPL fails on this latest BGU attempt after earnings, just like it did the last time around on May 1st. In particular, I would look for a failure within the context of further market downside from here. Overall, a poor showing.

 

 

Advanced Micro Devices (AMD) also reported earnings yesterday after the close, but with the opposite result. It gapped down this morning and printed 32.08 at the bell, then set an intraday high of 32.30 and headed lower from there. That qualified it as a shortable gap-down, and by the close AMD had sliced through its 50-dma to print a final price of 30.45 for the day.

From here, it is possible that any small blip up into the 50-dma could offer another short-sale entry. However, the stock is quite extended to the downside from yesterday’s close, so it’s not clear to me how this would play out. We’ll know if and when we see it.

 

 

Elsewhere in earnings land, cloud software leader Zendesk (ZEN) blew apart after earnings, gapping down over six points at the open to print 86.70 at the bell. It then rallied to an intraday high of 88.62 before rolling lower and finishing the day at 83.56 and near the intraday lows.

 

 

In this market it’s all about being in the right stocks at the right time, even though that time may turn out to be quite short. For example, we can see the big move in Atlassian (TEAM) after it reported earnings last week but note how quickly it shot its wad and returned to the launch pad. At least if one was more opportunistic and looked for the pullback into the 10-dma and 20-dema, the entry was far more lower-risk than chasing a big-volume breakout.

But TEAM also shows how this market tends to treat breakouts. As I’ve said before, those who mindlessly parrot some book on the stock market that they read (you know which one I’m talking about) and pitch you on the idea that buying breakouts is a magical road to riches in this environment are leading you down a dangerous path.

 

 

The Trade Desk (TTD), which is expected to report earnings next week, is like TEAM in that it had a big upside jack on Friday, but since then has gone nowhere. Again, chasing strength on the big-volume breakout was a mistake. The stock came right back into its breakout point and the 10-dma, but those exercising opportunistic patience could have had a far lower-risk entry on the pullback to the line.

Where this goes from here is anybody’s guess, but the way some of these leaders have been trading in this market, I wouldn’t be surprised if it failed on this breakout. TTD is expected to report earnings next week, on August 8th.

 

 

What all this points to is the fact that in this market the lowest-risk way to buy stocks is opportunistically when they pull back. Chasing strength is a dangerous game and sitting too long in a stock that has had a strong move, especially through earnings, also has its risks. Beyond Meat (BYND), for example, had a phenomenal three-day move since closing just above the $200 Century Mark for the first time last Wednesday.

But that move ran into trouble once earnings were released on Monday after the close, and the stock gapped down hard yesterday, right through the $200 price level. But opportunism reared its beautiful head at the 20-dema, where brave and opportunistic traders could have stepped in and picked up some shares with the idea of using the 20-dema as a tight selling guide if the stock failed to hold up.

That resulted in a nice move in excess of 20 points, or about 10%, in short order before BYND ran out of gas around the 212-213 price area and broke back below the $200 Century Mark. BYND again failed to hold the $200 price level today and may be starting to set up as a short. While the stock could be shorted here using 200 as a guide for an upside stop, a breakout failure would likely be confirmed on a clean breach of the 20-dema.

 

 

Once can also experience the opportunism of CrowdStrike (CRWD), which had been on a tear since its buyable gap-up of nearly two weeks ago, on the chart below. A pullback to the 10-dma on Monday and Tuesday did provide an opportunistic entry for brave buyers willing to test the waters.

That led to a sharp bounce yesterday to new closing highs. That didn’t last long as CRWD is now back at the 10-dma with volume declining today. If Cinderella does indeed come to the ball twice, then one can consider this a lower-risk entry with the idea of exiting quickly should CRWD fail to hold the 10-dma.

 

 

If one does buy a stock pulling into any of its primary moving averages, then the whole point of doing so is that risk can be kept to minimum by using the moving average as a tight selling guide. There is nothing magical about the entry, since you cannot know ahead of time whether the stock will hold support at the line or not.

MongoDB (MDB) illustrates this quite well. As I wrote over the weekend, the stock was hanging along its 50-dma as volume was drying up. This put it in a potentially lower-risk long entry position using the 50-dma as a selling guide.

But MDB busted the line on Monday and burst to the downside as volume ballooned. In this manner the big-volume breakout of early June has now failed in the most miserable way. But, since I don’t get all that excited about breakouts and chase them, I can continue to implement an opportunistic approach.

MDB closed today at 143.22, just below the prior early-July low at 143.85. That could set up an undercut & rally move back up toward the 50-dma, which would be tradeable for nimble swing-traders. That said, I would also watch for any weak rally up into the 50-dma as a lower-risk short-sale entry from here.

 

 

Twitter (TWTR) was blasting higher today on heavy volume in a move that looked like there were perhaps buy-out rumors afoot. The stock was buyable yesterday when it sold down to 40.82, about 2% away from the $40 intraday low of last Friday’s buyable gap-up (BGU) price range.

This is now extended, but if the market keeps selling off, expect this to pull back as well. Whether that provides an opportunistic entry on such a pullback, however, remains to be seen.

 

 

Snap (SNAP) is pulling back after last week’s buyable gap-up (BGU) move. This becomes buyable the closer to the 16.08 price level it gets. That is, of course, the intraday low of last Wednesday’s BGU price range. The stock got down as low as 16.48 today, which brings it closer to the prior 16.08 price level.

Meanwhile, the 10-dma has been rising rapidly and is now at 16.20. Any pullbacks to the line, in lieu of the 16.08 low, might also offer lower-risk entries. One can then use either the 10-dma itself or the 16.08 BGU low as their selling guide. If it breaches the 20-dema, however, all bets are off and SNAP could easily morph into a short-sale target at that point.

 

 

Facebook (FB) keeps failing on its attempts to get back above the 20-dema. Doing so would trigger a possible moving-average undercut & rally (MAU&R) long set-up using the 20-dema as your selling guide. But so far, FB has set up more as a short along the 20-dema than a long.

Today the stock tried to clear the 20-dema early in the day, getting close to the 10-dma before it reversed back to the downside. Volume was higher vs. the prior day. Thus, this is a 360-degree situation, where any rallies back up toward the 20-dema could bring the stock into shortable range.

Tricky stuff, but I’m noticing a lot of leading stocks starting to look like they may be moving into the realm of the short side. FB, as a big leader with slowing revenue growth, may be one of them.

 

 

Tesla (TSLA) has confounded the shorts by continuing to rally off the 50-dma on weak volume, but it finally ran into some resistance today along the 10-dma. Given that it held support at the 20-dema today, I would be more inclined to look for any small move back up into the 10-dma as a potentially lower-risk short-sale entry.

That said, a breach of the 20-dema on heavy selling would bring this into play as a short-sale entry at that point. One would then have the option of using the 20-dema or the higher 10-dma as a guide for an upside stop. We’ll see what the stock gives short-sellers in any continued market sell-off.

 

 

Netflix (NFLX) rallied up to its 200-dma last Friday, putting it in a lower-risk short-sale position. It then reversed back to the downside on Monday and continued lower today. If one is short the stock into this rally, then the 200-dma is your guide for an upside stop, end of story, and any further rallies into the 200-dma would offer lower-risk entries from here.

One member asked me today to discuss swing-trading on the short-side instead of day-trading on the short side, but this is a pointless question to ask. The only difference between day-trading, swing-trading, intermediate-term trading, or even long-term trading is your time-frame. The techniques we use for entering short-sales trades in each time-frame are exactly the same.

What changes is your profit objective within the context of a time-frame. So, if you wanted to treat NFLX more as a swing-trade, or even an intermediate-term short-sale, you would simply short it at the 200-dma and use that as your stop regardless of your time-frame. Longer-term, and within the context of a sustained bear market or market correction, I think NFLX could eventually test the 231.23 low of late December 2018.

So, as a more active short-seller, I could “campaign” NFLX all the way down to the longer-term price target of 231.23. Or, if one chose more of a short- and-hold approach, one would go short at the 200-dma and stay short until a) they were stopped out of the stock or b) it reached the longer-term price objective.

Aside from this, there is no difference between short-selling on any time-frame. You do not change your methods based on your time-frame – a short-sale position is entered at the proper point regardless. But, as I discussed in Short-Selling with the O’Neil Disciples, downtrends in stocks tend to have a lot of sharp rallies, so a more active approach is often necessary since you never know when a sharp bounce turns into a new market uptrend.

 

 

Texas Instruments (TXN) failed on its recent BGU today, busting below the prior 125.96 BGU intraday low and slashing through its 10-dma on an intraday basis. It rallied off the intraday lows, however, to close back above the 10-dma. I was never all that excited by this name, but the BGU was a concrete long set-up and therefore actionable.

My skepticism, as with most breakouts, is that such moves to new highs are generally mistreated by this market.  In this position, anyone in love with TXN could view this as a lower-risk entry at the 10-dma. That said, I tend to view this more as a short-sale on any moves up closer to the 125.96 price level.

 

 

While AMD got slaughtered today, Micron Technology (MU) also got hit with some selling volume. This took it right down to its prior breakout point and the 20-dema. So, this is either a lower-risk long entry position, or the stock is about to bust the 20-dema and become a short-sale target.

That is likely going to depend on what the general market does from here, so a 360-degree approach is always in force. This action looks ugly, as does most of the action today, but we must keep an open mind and be ready to play things as they lie. Obviously, if one elected to buy MU (assuming it doesn’t gap lower tomorrow) here at the 20-dema, then the line would also serve as a tight selling guide.

 

 

The same standard would apply to Ciena Corp. (CIEN), which held support at its 10-dma today. Volume dried up to -46.5% below average, which is constructive in the face of today’s market sell-off. One can view this as a lower-risk entry spot using the 10-dma at 44.71 as a tight selling guide.

A breach of the 10-dma and the 20-dema, however, within the context of more general market downside might turn this into a short-sale target. That would be the case with any leading stock holding support at its 10-dma and 20-dema. And if we see more leading stocks do this, then we can surmise that the market environment is worsening after today’s sell-off.

 

 

ZScaler (ZS) can be watched here for a breach of the 20-dema as a short-sale trigger. That would likely occur in any continued market sell-off, so it keeps this stock in play as a 360-degree situations. That is because the pullback into the 20-dema may also provide a lower-risk long entry position if the general market sell-off today turns out to be a one-off, with the idea of using the line as a tight selling guide. Play it as it lies.

 

 

If Zoom Video Communications (ZM) can hold support at its 20-dema, as it did today, then it could remain viable as a long idea if the general market action today turns out to be a one-off. Volume remained very low today as the stock held just above its 20-dema, resisting any temptation to bust to the downside during today’s weak general market action.

At the same time, ZM could also become a ripe short-sale target here if it busts the 20-dema. It was already shortable on the breach of the $100 Century Mark on heavy volume Monday. That was a very poor showing and could indicate that the stock is vulnerable to further downside.

Rallies back up closer to the $100 price level might also offer lower-risk short-sale entries as well, using the 100 level as a guide for an upside stop. Play it as it lies.

 

 

Uber (UBER) may have posted a pocket pivot on Friday as it rallied off its 50-dma, but like most shows of strength in this market, that quickly failed. On Monday, the stock attempted to move higher, but reversed sharply to close back at its 10-dma and 20-dema. Volume was higher.

Yesterday, UBER broke support at the 10-dma, 20-dema and 50-dma and today continued lower as volume declined. Basically, buyers are stepping aside here, and it may be that everyone who wants to own the stock is already in it, leaving nobody else to buy it.  With earnings expected next week, I see no reason to buy it either.

 

 

Lyft (LYFT), not shown, is expected to report earnings next week on August 7th, one day before UBER. It broke below its 50-dma today on weak volume and is not in any long entry position. With earnings coming up next week, this can be left alone for now.

One of the things about this market that makes it so interesting, if not treacherous, is the way stocks that look to be acting very coherently for a period of time can suddenly go berserk. Here we see Parsons Corp. (PSN) posting a huge spinout today on heavy selling volume after breaking out to new highs earlier in the day.

The intraday price range is about 10% wide and the stock closed right in the middle but just below its 20-dema. So, what you have now is a breakout failure with a close under the 20-dema, which puts this in play as a short-sale target. But with earnings expected on August 13th, and the stock showing erratic action, it’s not clear to me that this thing can be trusted in either direction!

 

 

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.

So, the Fed lowered rates as expected, but the lack of any certainty regarding future rate cuts sent the market and many leading stocks lower. In general, the action strikes me as merely more proof of how I’ve felt about this market for some time. It’s a difficult environment where strong trends are hard to find.

You take what the market gives you, long or short, and if you linger too long you may end up paying a price for your piggishness. Meanwhile, the opportunistic approach of looking to buy into weakness is far more effective, and safer, than chasing strength. By now, that should be obvious to anyone who has been paying attention to how this market really works.

We may be seeing the start of a market top. Confirmation would be seen in more leading stocks busting their 10-dmas and 20-demas on heavy selling volume. Those would also be my first choices when looking for short-sale targets. If you’re the short-selling type, I would suggest making a list of potential candidates (ZS would be one example of such a candidate) and then being ready to act if they breach support.

At the same time, maintain a 360-degree approach and be ready to move with the market as necessary while maintaining your selling discipline with respect to existing long positions if things continue to deteriorate. The one thing we know for certain about this market is that you can never truly tell what it will do one day based on what it did the day before. It remains a swing-trader’s environment until further notice. That is all.

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 no positions, 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.