The Gilmo Report

June 16, 2019

June 15, 2019

The major market indexes tracked sideways all week long as they tread water ahead of this Wednesday’s Fed policy announcement. The NASDAQ Composite Index spent the entire week building a five-day flag formation just below its 50-dma after two unsuccessful attempts to retake the line on Monday and Tuesday. Meanwhile, the S&P 500 Index is holding tight sideways in an identical five-day flag formation that is above its own 50-dma.

 

 

The indexes may remain in a state of suspended animation until the Fed decision is known. There are some expectations of a possible rate cut, and it is not clear what the market will do in response. It could be seen as an admission that the economy is weakening (by some measures, such as the Morgan Stanley Business Conditions Index, it is collapsing). Individual stocks, for the most part, continue to bide their time.

In big-stock NASDAQ land we can see the action being mimicked by Amazon.com (AMZN). A short sideways pattern of five days in duration here differs from the NASDAQ Composite in that it, like the S&P 500, is holding above the 50-dma. Meanwhile, volume has been drying up, which may put AMZN in a lower-risk entry position right here, using the 50-dma as a tight selling guide.

A breach of the line would trigger AMZN as a short-sale at that point. It may be that resolution of this current consolidation will not be forthcoming until Wednesday’s Fed announcement.

 

 

Apple (AAPL) has failed to hold support at its own 50-dma, dipping below the line on Friday. However, it found support at the 20-dema. In this position, one thing to watch for would be a moving-average undercut & rally (MAU&R) coming back up through the 50-dma. Otherwise, a breach of the 200-dma triggers AAPL as a short-sale.

 

 

Netflix (NFLX) ended the week by revisiting its 200-dma after presenting an optimal short-sale entry at the 50-dma to start the week. Five-straight down days didn’t need much in the way of selling volume to take the stock down to the 200-dma. Now we might expect a reaction bounce off the 200-dma.

As with AAPL, a breach of the 200-dma by NFLX would trigger a new short-sale entry if it occurs. My guess is that this will be resolved likely based on what the market does after Wednesday’s Fed policy announcement.

 

 

Microsoft (MSFT) is going nowhere following its base breakout of two Friday’s ago. Note that while the breakout has not led to any decisive upside movement, the true high-velocity price move occurred off the lows. At that point, the stock was down big on volume, and the next day posted an undercut & rally (U&R) move back up through the prior 123.04 low of May 13th.

This sort of action is very typical for most leading stocks, and certainly not uncommon for the general market either since all the major market indexes have the same exact look. The sharpest price moves occurred right off the lows of two Mondays ago, leading to straight-up-from-the-bottom rallies of 5-6 days. Since then, most leading stocks have been chopping around, and MSFT’s action is typical of this.

 

 

With the market in a holding pattern, I’m building a watch list of stocks sitting at support, either on pullbacks or within tight consolidations. Several cloud names are showing some sharp pullbacks into support, which may put them in lower-risk entry positions.

Zendesk (ZEN) has been pushed back down to its 50-dma following a failed breakout attempt earlier in the week that was in fact shortable. Note that this breakout occurred after a sharp move off the lows of two Mondays ago when the stock was down big on volume. That led to a U&R back up through the prior April low and a very sharp five-day rally.

That rally ended on Monday, and the stock now sits at near-term support. Either it holds, putting it in a lower-risk long entry position right here in anticipation of a re-breakout attempt, or it fails. A failure at the 50-dma would trigger ZEN as a short-sale at that point.

 

 

Workday (WDAY) is very much like ZEN. It pulled an almost identical U&R move after being down big on volume two Mondays ago. That U&R through the prior May low led to a very rapid five-day move back up to the highs. That rally ended this past Monday as the stock has settled into the 10-dma and the 20-dema with volume drying up.

As with ZEN, this puts WDAY in a potentially lower-risk long entry position using the two short moving averages as tight selling guides. Otherwise, the lower 50-dma could be used as a wider selling guide. A breach of the 50-dma, however, could trigger this as a short-sale target at that point. Overall, however, the situation is identical to ZEN, more or less, and there are several other cloud names doing the same thing.

 

 

Twilio (TWLO) offers a variation on the general theme following the down-big-on-volume action two Mondays ago. In this case there was no U&R but notice that the stock briefly reversed back below its 50-dma following a supporting pocket pivot at the line the day before. This led to an MAU&R where the stock quickly regained the 50-dma, triggering a long entry at that point with the idea of using the 50-dma as a tight selling guide.

 

 

Atlassian (TEAM) offers yet another variation on the same thing. A big break on heavy selling volume two Mondays ago ran right into the 50-dma, which then acted like a trampoline, sending the stock on a sharp five-day rally to new highs. But that breakout failed.

TEAM is now pulling back in to test its 10-dma as volume dries up sharply. This is one to watch for a smaller pullback perhaps closer to the 10-dma as the lower-risk entry possibility.

 

 

ZScaler (ZS) is also on my long watch list here heading into the Fed meeting as it pulls in for a possible test of the 10-dma. The stock, like everything else, was hit with heavy selling on a DBOV day two Mondays ago. That led to a moving-average undercut & rally (MAU&R) through the 50-dma, and five-day rally back up to the highs.

ZS made another breakout attempt on Thursday, but that fell short. It is now pulling closer to the 10-dma, such that the closer it comes to the 10-dma with volume declining, the better any potential lower-risk entry opportunity. One to watch this week.

 

 

Another “cloudie” that I haven’t discussed in my written reports, but which has been discussed many times in my video reports is Avalara (AVLR). The company has a compelling software product that helps companies track and pay state taxes automatically, and I believe that is a major reason why it has held up so well, even after building what looked like a big punchbowl formation.

It came out of that formation on a buyable gap-up move back in early May and has been building a base ever since. It came off with the market two Mondays ago. But that only led to a U&R move back up through two prior lows as well as the intraday low of the buyable gap-up day. AVLR is again testing those lows, the lowest of which is 65.80, which brings it into a lower-risk entry position using that low as a tight selling guide.

 

 

Lastly, I’ve got Ringcentral (RNG) on my radar here as it pulls into its 50-dma with volume drying up nicely. It has roughly the same pattern as other clouds I’ve discussed above where a DBOV move two Mondays ago is followed by a concrete move back to the upside. In RNG’s case, this came on a U&R bounce off the 50-dma.

That led to a five-day rally to new highs, but the breakout attempt on Monday failed. RNG reversed back into its base and met up with its 50-dma on Thursday. Volume picked up sharply in a show of support that also resulted in a supporting pocket pivot at the 50-dma. A small retest of the 50-dma came on light volume, putting the stock in a lower-risk entry position using the 50-dma as a tight selling guide.

 

 

All these clouds I’ve discussed here have been doing their best to hold up in bases. The general market action, however, has only enabled them to snap back to the upside following some serious DBOV moves two Mondays ago in all these names. But, if by some chance, the market can regain its feet and resume its rallying ways, I think these offer some lower-risk entry opportunities in leading names.

In addition, keeping a close eye on these stocks will also clue one into the go-to areas of this market if the indexes break back to the downside. These names will likely break support at their 20-dema or 50-dma, triggering them as short-sale targets should that occur. Therefore, these are all two-sided situations depending on what the general market does, most likely after Wednesday’s Fed meeting.

I don’t have much to say about Roku (ROKU) since it just keeps moving higher in a very well-defined upside trend channel and remains above the $100 Century Mark. For now, pending any new buy points, the 10-dma would serve as your selling guide, with the 20-dema down below as an alternate for those who might wish to give the stock more room.

 

 

Semiconductors in general are ugly things to look at, and the situation didn’t improve after Broadcom (AVGO) reported earnings Thursday after the close and got smashed. The company cited a loss of over $2 billion in sales due to the Huawei ban, and this had a deleterious effect on the semi group.

Even Advanced Micro Devices (AMD), the only semiconductor worth looking at on the long side over the past several weeks, was dragged down in the fray. The stock also provides an ample illustration of why it is not necessary to chase new-high breakouts, at least not in this market.

AMD spent the week losing momentum as it has now drifted right back to its original breakout point which also coincides with the 20-dema. Volume picked up slightly on Friday as AMD met up with the 20-dema, whereas I would prefer to see volume dry up on a test like this.

Nevertheless, one can view this as a lower-risk entry since one can simply use the 20-dema as a tight selling guide if it fails. That said, a breach of the 20-dema could bring AMD into play as a short-sale target at that point. A two-side play as the leading semiconductor name (the only one) pulls into critical support.

 

 

Uber (UBER) is something of an erratic beast as it flops around following a failed breakout attempt through an “IPO base” last week. I will say it again – it is suicidal to buy new-high breakouts when a stock is coming straight up from the lows of a pattern. UBER is no different in this regard, and only the ensuing pullback to the 20-dema on Wednesday offered a lower-risk entry.

That led to a gap-up move on Thursday that saw the stock clear the 10-dma again. But this failed to hold, and UBER reversed back below the 10-dma on Friday. Volume has remained light. In this position, there is no coherent, lower-risk long entry point, so it’s a matter of seeing how and whether the stock can hold support on any potential retest of the 20-dema.

Over the past two weeks, I’ve played UBER as a swing-trading long and short given the sweeping moves up and down. One thing to keep an eye out for would be a breach of the 20-dema, which could bring the stock into play as a short-sale target. Buy recommendations from a swarm of analysts over the past two weeks haven’t done much to catapult the stock beyond its $45 IPO price.

 

 

Lyft (LYFT) looks much better than UBER since it is forming a very nice-looking base as it rounds out the lows. The stock pushed up through the 50-dma on Thursday, and on Friday held tight along the 10-dma as volume declined to -73.4% below average. This puts it in a lower-risk entry here, using the 10-dma as a tight selling guide.

 

 

Twitter (TWTR) went from interesting as a long to interesting as a short in one day once it busted the 50-dma on Thursday morning. This may still be a short on any rallies into the 50-dma from here, and that’s about the only potential set-up I see in the stock for now. a lower-risk entry position here, using the 50-dma as a tight selling guide.

 

 

Facebook (FB) made the run to the 50-dma that I was looking for, per my comments in the last report. Now that it has reached the 50-dma, however, the news regarding its new crypto-currency may start to wear off a bit. On Friday, several companies, including Visa (V), MasterCard (MA), PayPal (PYPL), and Uber (UBER) said they would invest in the new project, but it’s not clear at this time what their roles would be.

Given the current view of FB as a personal data tyrant, the private-sector version of the proverbial big brother, there is an argument to be made against the potential widespread adoption of an FB crypto-currency. Something to consider, but, concretely, in this position, FB could retrace some of its prior move off the lows of two Mondays ago. Therefore, it could offer a tactical shorting opportunity here near the 50-dma while using the line as a guide for a tight upside stop.

 

 

Adding to the IPO discussion in my reports, on June 4th I blogged about Pinterest (PINS), as it was making the low of a Wyckoffian Retest. As is typical of this type of set-up, the stock pulls in to retest a recent low as volume dries up. That turned out to be the low day of the pullback and the stock has since pushed higher and above its 10-dma/20-dema confluence.

On Wednesday, I blogged about the ensuing constructive action in PINS along the 10-dma and 20-dema, making it buyable on any tests of the two moving averages. We saw such tests on Thursday and Friday, but Friday’s was the most opportunistic of the two. PINS then rallied back up to the highs of its current price range.

If the general market does not come apart either heading into or after Wednesday’s Fed policy meeting, I would watch for any further constructive pullbacks into the 10-dma and 20-dema as tight selling guides.

 

 

Notes on other stocks discussed in recent reports:

GW Pharmaceuticals (GWPH) broke support at its 50-dma on Friday. That triggers the stock as a short-sale target using the 50-dma as a guide for a tight upside stop.

Stich Fix (SFIX) is extended from its 200-dma as it approaches the $30 price level, and only pullbacks to the line from here would offer lower-risk long entries.

Parsons Corp. (PSN) continues to work on its first IPO base. It’s U&R from Monday where it undercut and rallied back above the prior 30.88 low in the pattern remains in force given Friday’s close at 31.65. This keeps it in actionable range using the 31.65 price level as a tight selling guide.

Tradeweb (TW) has been quite uninspiring as it slumps to lower lows and is now living below its 20-dema. Not seeing much here on the actionable side given that it has failed to hold its prior U&R attempt which was discussed in Wednesday’s report.

Zoom Video Communications (ZM) is extended on the upside. Only pullbacks closer to the 92.50 intraday low of its buyable gap-up move of two Fridays ago would bring it into a lower-risk entry position from 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.

In terms of index movement, this was a quiet week. But things will likely heat up this week after the Fed meeting. In the meantime, there have been some opportunistic swing-trades to be had, but not much else. In general, this is not what I would call a target-rich environment.

Hopefully, some clarity will be gained after Wednesday. Of course, there is always the possibility that the Fed will do something indecisive that only muddles the situation. We might also consider that while all eyes may indeed be on the Fed this week, there is always the potential for random news to come out of the blue and create some volatility in one direction or the other.

Despite the follow-through day two Fridays ago, there is no rip-roaring uptrend to be had. That all occurred before the follow-through, immediately after the market bottomed two Mondays ago and it was the days leading up to and into the follow-through that saw the highest velocity price action, as the stock charts in this report show.

With a handful of ideas at the ready, as discussed in this report, we will see whether any of them can be put to use once the Fed meeting is behind us. Until then, we may simply continue to chop around over the next two days or so as we did the entire last week. Stay tuned.

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.