The Gilmo Report

July 7, 2019

July 6, 2019

An allegedly strong jobs number on Friday sent the markets into a tantrum over the possibility that its expectations of a Fed rate cut in July won’t be met. The day started off to the downside, with the S&P 500 Index dropping nearly 1%. But after a brief bout of kicking and screaming, the market found its feet and rallied off the lows on higher volume.

The NASDAQ Composite Index closed slightly in the red but well off its intraday lows as volume increased over the prior day. However, the volume comparisons to Wednesday were obviously helped by the shortened trading session on Wednesday. While the trend remains intact, and the major market indexes are at or near all-time highs, volume is light overall and so the rally seems to lack conviction.

 

 

New highs for the indexes have not resulted in what I would call a target-rich environment for the long side. Most stocks continue to move around within their overall price structures, with very little in the way of strong, sustained trends. Opportunistic entries along the lows of patterns remain the most viable approach given the fact that chasing strength or chasing weakness is generally not rewarded.

The highest time-value trades this past week came on Monday, when the gap-up open in a broad number of semiconductors and telecoms turned to be a very shortable affair. As I noted, in Wednesday’s report, names ranging from ACIA to AMAT to NVDA to XLNX all made for nicely profitable gap-up short-sale set-ups as most of these names continued to move lower into Friday.

The Vaneck Vectors Semiconductor ETF (SMH) tells the story for the group. In the end, the market was not all that impressed with last weekend’s news that the U.S. and China would restart trade talks once it was revealed that the talks would constitute talks over the phone, like some sort of long-distance relationship.

 

 

I continue to advocate operating with a 360-degree approach where one maintains full awareness of individual stock set-ups and potential set-ups as they develop or may develop in real-time. It requires being aware of all the possibilities given a stock’s technical structure. In other words, being open to and ready for the real-time price/volume action as it plays out within the context of the overall chart pattern.

Taking this approach, in my view, doesn’t make this environment a breeze to play in, because it remains funky and subject to the at-times severe influences of news flow. But it does allow one to capitalize on the volatility that we continue to see in this market that tends to reward an opportunistic approach.

That said, there are a lot of patterns that look constructive. The only issue is the lack of any catalyst to drive sharp upside moves. Movements tend to be fleeting, as the chart of Advanced Micro Devices (AMD) shows. A rapid upside move following a base breakout quickly ended and reversed, causing the original breakout to fail.

Since then, AMD has recovered a bit, and continues to hold just above a prior base breakout point and the confluence of its 10-dma and 20-dema. If I was looking to get long a semiconductor in a strong market move, AMD would probably be my first choice. I would prefer to buy it on weakness coming into the 10-dma and 20-dema.

 

 

Also, in chip-land, Ambarella (AMBA) looks interesting here as it holds support along its 50-dma. The stock is more of an Ugly Duckling play as it recovers from a prior decline following the announcement of a ban on Chinese video companies AMBA supplies to. That breakdown set up an entry along the 200-dma, which I discussed back in early June in one of my video reports.

A steady uptrend since then has taken the stock up to its 50-dma, where I initially viewed it as a potential short-sale play. However, the stock has held a bid the whole time. AMBA tested the 20-dema on Friday and bounced off the line, keeping it in a buyable position, using the 20-dema as your selling guide.

 

 

If I’m looking to own a telecom, then my preference would be Ciena Corp. (CIEN). The stock posted a U&R move through the prior 42.18 low in the pattern on Wednesday and tested the 10-dma on Friday with volume picking up slightly. That represents minor support at the line and keeps the stock in a buyable position using the 10-dma or the prior 42.18 low as a selling guide.

 

 

Another telecom-related name that has acted well is one I started discussing in my written reports a few months ago: Viavi Solutions (VIAV). More recently, I began discussing the stock in my video reports as it was finding support near the 200-dma over a month ago. At that time, I pointed out the U&R move through two lows in the pattern, including the major low back in mid-March.

That led to a sharp upside move, which is typical of stocks in this market where the sharpest moves come off the lows of the pattern. That was followed by a pullback to the 50-dma, then a big-volume pocket pivot off the 50-dma and 10-dma. Note that you did not want to chase that strength, instead waiting for the pullback to the 20-dema that occurred last week.

From there, VIAV launched higher on a gap-up breakout Monday that was likely helped along by the trade news last weekend. However, unlike other names that gapped up on Monday in response to the news, VIAV has held its ground and its base breakout. Technically, this remains within buying range of the breakout, but I’d look for any pullback to the 10-dma as a more opportunistic entry, if I can get it.

 

 

Opportunism was rewarded for those who laid back and let Roku (ROKU) come right into its 50-dma, where it offered a lower-risk entry at the line. The stock posted three long entry signals in one on Tuesday when it posted a U&R, a 50-dma supporting bounce, and a pocket pivot at the 50-dma. You either took advantage of that pullback or you didn’t.

The ensuing move has been rather sharp, over 10% in three days off the 50-dma. Now the stock is extended, and we’ll have to see how it acts on any test of the 20-dema, which is the highest of the three nearest moving averages on its chart.

 

 

Among IPOs covered in recent reports, Beyond Meat (BYND) continues to track tightly along its 20-dema. This keeps it in a lower-risk entry position using the 20-dema as a tight selling guide.

 

 

I’d like to see BYND pull off something at its 20-dema that is similar to what Zoom Video Communications (ZM) did as it bounced nicely off its 50-dma. I discussed ZM as a long entry at the 50-dma in my Tuesday video report, and it has since pushed back above the 10-dma and 20-dema. Now we’re back at the highs of the prior week.

In this position, we might see the stock attempt to set up again along the 10-dma and 20-dema, or we might see a retest of the 50-dma. At this juncture, any new entries are unclear following Tuesday’s and Wednesday’s entry opportunities at the 50-dma, so it’s a matter of waiting to see how things develop from here.

 

 

If you like to buy breakouts then you can still buy the one in Tradeweb Markets (TW), although it did close Friday one penny below the new-high price point on the left side of the base. I’m not one to chase this type of move coming straight up from the lows of the base. For that reason, I’d wait for something in the way of a pullback closer to the rising 10-dma and 20-dema.

 

 

Uber (UBER) keeps moving lower following its failed Monday breakout. That move looked strong, but in this market all a strong move in one direction does, most of the time, is set up a reversion-to-the-mean move back the other way. Now UBER is sitting just below its 20-dema and looks considerably less appetizing to scorned breakout buyers.

In this position, I’d watch for a moving-average undercut & rally (MAU&R) to set up a long entry like it did the prior week, well before Monday’s failed breakout attempt. That’s about the only potential long set-up for now, but a breach of the lows around the 42 price level can also be watched for in case a U&R were to develop lower in the pattern.

 

 

Lyft (LYFT) has plopped right back into its 50-dma, where it held support on Friday. Volume was higher, but we have to remember that Wednesday was a half-day session, so in any case where a stock is showing slightly higher volume it is likely due to that. In this position, one can look to take a last-stand entry here at the 50-dma while using the line as a tight selling guide.

 

 

The situation with Jumia (JMIA) has not changed since my last report. It can still be watched for any opportunistic entries as it tracks sideways along its 10-dma and 20-dema. Friday’s move back above the 10-dma and 20-dema could have been seen as a long entry trigger, but overall the stock is still just tracking tight sideways with no decisive resolution.

Any meaningful move from here would likely push through the 50-dma, now at 27.53. In the meantime, your most opportunistic entries would occur on pullbacks to the lows of the current range just under 25.

 

 

Pinterest (PINS) closed tight along its 10-dma and 20-dema on Friday as volume dried up sharply. This puts it in a lower-risk entry position using the two short moving averages or the prior 26.16 U&R low of June 11th as a selling guide.

 

 

Slack Technologies (WORK) has so far shown no propensity to put in a Wyckoffian Retest low here as it keeps sliding lower. At this point I’m more inclined to look for a breach of the prior 34.81 low to set up a possible U&R long entry if it can rally back up through that low.

The issue for WORK currently may be that following its direct listing, where the supply of shares is determined by how much insiders and early investors want to sell, supply remains fluid. Insiders can sell what they want whenever they want, and so far, it appears that they continue to sell as buyers stand aside. Therefore, we may need to see a breach of the 34.81 low occur before any kind of concrete long set-up along the lows will show up.

 

 

Big-stock NASDAQ names continue to drift higher for the most part, as the group chart below shows. Of the nine that I show below, only Nvidia (NVDA) could be considered to be in a lower-risk long entry position. It was one semiconductor name that gapped up on Monday but has since reversed, sliding lower all week long and into its 50-dma on Friday.

That can be considered as a lower-risk long entry since one can simply use the 50-dma as a tight selling guide. Like most of these semiconductors, NVDA rallied throughout June, so that Monday’s gap-up move was somewhat exhaustive. This pullback could set up a “sling-shot” type of move back to the highs IF the general market rally continues.

 

 

As I noted in my Wednesday report, Facebook (FB) also typifies the low-volume rallies seen in big-stock NASDAQ names. The stock is now pressing against its prior late-April highs as it drifts higher on light volume. In this position, I would only view opportunistic pullbacks to the 10-dma as preferred long entries, if you can get ‘em.

Otherwise, it’s hard to envision a big-volume breakout transpiring here, but you never know. That said, I prefer, as always, to take the opportunistic route and look for pullbacks such as the one seen last week when FB tucked into its 10-dma with volume drying up nicely.

 

 

Snap (SNAP) remains the social-networking leader in this market as it breaks out to higher highs on a pocket pivot move. The lower-risk buy point, however, occurred on the pullback to the 20-dema on Tuesday and Wednesday. This was discussed as the preferred entry in prior reports, and in this position, I consider the stock extended.

 

 

MongoDB (MDB) remains within buying range of its prior base breakout. After bouncing off the 50-dma on Tuesday, the stock retested the 50-dma on Friday and did so successfully. Volume was light as sellers failed to show up. I would prefer to buy shares closer to the 50-dma, since risk can be kept to a bare minimum by using the line as a tight selling guide.

 

 

Although there isn’t much in the way of sustained trends, many of my other favored cloud names continue to build bases. Buy points in these have occurred along the lows of the formations, and the theme is usually the same: U&R. Here we see Atlassian (TEAM) find ready support on Friday at its 20-dema as volume remained low.

While the opening gap-down after the jobs number on Friday morning took TEAM lower in the morning, ultimately sellers failed to show up. This allowed the stock to rebound off the 20-dema, bringing it back up to its range highs. Note that the proper buy point was on the U&R move the week before.

 

 

The U&R theme is playing out almost identically in Zendesk (ZEN). The stock posted a U&R long entry two Friday’s ago and has since rallied six days straight. It is now back above the 10-dma and near the highs of its current price range. Again, the lower-risk entries occur on the lows of the base, and ZEN also had a low-volume pullback on Friday that held support on light volume.

 

 

ZScaler (ZS) has the same type of U&R in its pattern as seen in TEAM and ZEN, but it broke out to new highs on Friday on about average volume. Some might try to label this a so-called ascending base, but it looks more like a typical re-breakout attempt after the first one failed about two weeks ago.

Ascending bases are slow uptrend channels that occur during market declines. ZS looks more like a base-on-base formation that has occurred during a market uptrend. The question is when will a decisive move to the upside occur in the stock, as well as its cohorts TEAM and ZEN.

I see similar base-building action in Workday (WDAY), not shown. Meanwhile, others have rolled to new highs, like Coupa Software (COUP) and ServiceNow (NOW). The moves, however, have come on light volume.

 

 

Another one that has rolled to higher highs, even breaking out, is Avalara (AVLR). I discussed this as a pocket pivot last weekend when it posted big volume coming up through the 10-dma two Fridays ago. That volume could have been exaggerated by Russell Index re-balancing, but as I noted in that report, sometimes pocket pivots that occur on days where the volume is allegedly exaggerated can be taken at face value.

That is what AVLR turned out to be, a pocket pivot to take at face value. That would be considered the lower-risk entry along the 10-dma, making the low-volume breakout moot.

 

 

The Trade Desk (TTD) can also be viewed as building a base on top of another base. It posted a decisive U&R move through the prior 231.65 low of early June on Friday. There have been at least two prior attempts to decisively clear that low, but all backed down. This is what I call a slow-motion U&R, as it takes several days for the move to unfold.

Ideally, I like to see a U&R look a little more like a quick shakeout through the prior low. Slower U&Rs can work, however, and TTD is now back up through its 20-dema and 10-dma. I would look for the 20-dema to act as support on any buyable pullbacks from here.

 

 

One thing you’ll likely notice that is obvious in all of these cloud stocks’ charts is that over the past few days they’ve ignored all of the index volatility over the past week and simply trudged higher.

Stitch Fix (SFIX) has been consolidating the move it had off the 200-dma, where it was first discussed the stock as being buyable. It’s now tracking along the 10-dma and 20-dema and posted two pocket pivots this past week along the 10-dma. The second of these was also a supporting pocket pivot at the 20-dema and a U&R long entry coming back up through the prior 30.35 low.

SFIX closed Friday at 31.01 and just below the 10-dma. It looks buyable here using the 30.35 prior low as a selling guide. Any deeper pullback to the 20-dema would offer a more opportunistic entry if the initial U&R through 30.35 does not hold. In that case, the 20-dema would serve as your 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.

The Friday jobs number, while hyped by some as “spectacular” and a “blowout number,” had some mitigating data that came with it. The unemployment rate rose, and annual payroll growth continued its decline, coming in at 1.5%, the lowest since January 2018. While hopes of a 50-basis point rate cut in July were probably dashed, the market may still be holding out for a 25-basis point cut, and the action on Friday reflected this to some extent.

Gold, which I view as a barometer of the potential for a new wave of QE, initially sold off hard on the jobs news but rallied off its lows to close near its intraday high. Overall, the uptrend remains intact as the SPDR Gold Shares (GLD) held within a short flag formation and above its 20-dema.

 

 

Despite new highs in the indexes, the market still demonstrates a strong dependence on news whether related to trade or the economy. Economic data must be weak enough to keep the Fed dovish, but not so weak as to imply an impending recession, and certainly not so strong as to keep the Fed on hold.

Meanwhile, as the U.S. and China keep their long-distance relationship going by telephone, the market will no doubt find reasons to react to any developments, positive or negative, that emanate from such talks. At some point, however, a strong trend will develop, and investors should focus on jockeying for the proper position to capitalize on any such trend, once it does occur.

As far as I know, the only way to do that is to let the market push you in the right direction by going with the set-ups at hand and letting them play out as they will.  Things can change fast, and I’ve seen it happen many times in my 28 years as a trader and investor. The most glaring example is October of 1999, when Bill O’Neil, after a bout of weak market action, told me “this market is through.”

A few days later the market turned, I bought the long set-ups that I saw, and over the next two months I went from being up 32% to being up over 1,000% for the year. So, the moral of the story is this: Be open to changes as they occur without developing a rigid bullish or bearish stance, because something big will often happen when you least expect it, and do not take your eye off the ball. 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.