The Gilmo Report

June 2, 2019

June 1, 2019

The President helped to drive home my point that this remains a market plagued by an inordinate amount of news risk. This was demonstrated again Thursday in the after-hours when the President announced 5% tariffs on Mexico. These tariffs will go up by 5% every month that the Mexican government fails to act against the growing masses of illegal immigrants traveling to the U.S.-Mexico border through Mexican territory.

The futures immediately broke sharply to the downside, setting up a gap-down open on Friday morning. The NASDAQ Composite Index, along with the S&P 500 Index, gapped below its 200-dma. After a brief intraday rally where it attempted to rally back up to the 200-dma, the index closed near its lows for the day on heavy, month-end volume.

 

 

The Dow Jones Industrials broke to lower lows and further below its 200-dma on Friday. This came after it closed below the 200-dma on Tuesday, the second such close in May. Overall, the index action is very bearish, but news remains the primary driver.

A steady flow of negative trade news on all fronts, not just China, kept the indexes in a downtrend all month long. What started out as a month of all-time highs for the NASDAQ and the S&P turned into a four-week downtrend.  The NASDAQ is now -8.84% below its peak while the S&P has now corrected -6.08%. Where it ends may depend on the news flow from here and predicting that requires a crystal ball.

 

 

Most busted former leaders were very extended on the downside by the time I wrote my Wednesday report, but this didn’t keep them from getting more oversold by Friday morning. I don’t have enough fingers on my hands to count the number of pundits who’ve called Apple (AAPL) a screaming buy all during May.

The only screaming I’ve heard is the stock itself screaming lower. Some members may recall that I blogged about AAPL the day before its last earnings report. That was April 29th, and in that blog post I noted the punchbowl type of formation it was in at that time, and which we can see on the weekly chart below. That punchbowl was formed by a straight-down decline of 14 weeks followed by a straight-up rally of 17 weeks.

At that point, it was looking a bit like a punchbowl, which is of course the necessary precursor to any Punchbowl of Death short-sale pattern. I blogged at the time that, “I’m not going to take a direct position in AAPL either way ahead of earnings, but I think the punch bowl formation makes it vulnerable to a post-earnings sell-off.” That sell-off took exactly three days to start, and on the fifth day off the 215.31 high AAPL breached its 20-dema and never really looked back from there.

 

 

There are many patterns that look like AAPL’s, and that includes the major market indexes as well. Straight down, then straight up, and now back to the downside. It is interesting to note that while news regarding an all-out U.S.-China trade war in early May triggered the May sell-off for leading stocks and the indexes, the technicals were already showing that they were all vulnerable to just such a sell-off.

In a situation like Nvidia (NVDA), we can see that the rally off the late December lows never retraced as much as 50% of the prior steep downtrend off the October 2018 highs. This is more of a textbook decline and money flows out of a big leading stock, with a normal reaction rally from an oversold condition failing to get as far as the 40-week moving average before rolling over again.

 

 

We can see a similar type of punchbowl formation in Amazon.com (AMZN). The stock busted to the downside in the October-December 2018 time frame in a rapid straight-down decline of 12 weeks. That was followed by a 19-week rally back up near the highs that ended in late April.

As noted in recent reports, AMZN triggered as a short-sale on the breach of the 50-dma last week. It is now set for a test of its 200-dma and 40-week moving averages on the daily and weekly charts, respectively.

 

 

The weekly chart of Netflix (NFLX) also reveals a punchbowl-like formation, where most of the rally up the right side occurred in the first three weeks off the late-December lows. Consistent resistance has been found at the 10-week moving average, corresponding to the 50-dma on the daily chart. Technically, NFLX is a late-stage failed-base (LSFB) type of set-up in addition to being something of a POD-with-handle.

A test of the 200-dma/40-week lines looks imminent. NFLX was previously shortable on rallies up to the 50-dma, per my recent discussions of the stock. Now we can look for the stock to perhaps attempt to find near-term support at the 200-dma, but there is no guarantee that it won’t just bust through the line and head lower.

We can certainly see on the weekly chart that there is plenty of room for NFLX to move lower from here. If we get into a deeper correction, then I would expect that to be the case. For now, rallies up into the 20-dema or 50-dma would be potentially shortable moves.

 

 

We can see that these big-stock NASDAQ names were looking a bit toppy some time ago, when they first triggered as short-sales. In some cases, as with NFLX, the weekly chart reveals the potential for more downside in any continued market correction or outright bear market.

Advanced Micro Devices (AMD) is sitting at a major crossroads here as it tests the 50-dma. I discussed the move up toward the $30 price level as shortable in my GVR of this past Tuesday, and the stock has run into resistance in the 29-30 price area. But it has yet to turn into a full-fledged short.

That would require a breach of the 50-dma, which would trigger a short-sale entry at that point. At the same time, if AMD can hold support at the 50-dma, and we see the general market selling let up, even if only for a couple of days, a long trade might be a possibility.

This is perhaps the best-acting semiconductor in the market currently, since the entire group has been decimated. It either joins its semiconductor brethren or it holds up and makes another attempt at new highs. For now, this a two-side situation depending on how and whether it holds support at the 50-dma. Play it as it lies.

 

 

My small focus group of cloud names which had previously been holding up well is now breaking down in earnest. We saw HubSpot (HUBS), Zendesk (ZEN), and ServiceNow (NOW) breach their 20-demas earlier in the week, triggering them all as short-sales.

ZScaler (ZS) became the latest one to break down after reporting earnings Thursday after the close. The stock opened flat on Friday just below its 20-dema and then split wide open as it blew through the 50-dma. The stock closed just below the 50-dma, which puts it in a fresh short-sale entry position using the 50-dma as your guide for an upside stop.

That said, any rally that continues back up toward the 20-dema would offer a much more opportunistic short-sale entry point if you can get it. ZS is now a late-stage failed-base (LSFB) short-sale set-up unless it can regain its 20-dema and the prior base breakout point.

 

 

Okta (OKTA) also reported earnings Thursday after the close, but it gapped up on Friday. After opening at 114.50 it rallied to an intraday peak of 119.96 before reversing to close near the intraday lows and below its opening price. This was one I decided to short into on Friday, but I had to wait for the five-minute 620 chart to issue the proper signal.

 

 

You can see that the rally was pretty clean until we approached 9:00 a.m. PDT, my time. There was one MACD cross to the downside at around 118 about an hour after the open, but the cross was tentative. OKTA then continued to rally up to 119.96 before a more decisive MACD cross occurred.

In this example, it’s possible that one could have shorted the stock somewhere between 118 and 119.96. The final confirmation came when the six-period moving average crossed below the 20-period moving average just after the second, more decisive, bearish MACD cross. It was all downhill from there.

 

 

Technically, OKTA’s move on Friday can still be treated as a buyable gap-up (BGU), using the intraday low at 110.51 as a tight selling guide. Shorting into the rally worked on Friday because it was undertaken in the right general market context, namely a big sell-off. If the market finds its feet this coming week and OKTA holds above that 110.51 low, it could still work as a BGU, but the odds decrease if the general market continues lower from here.

HubSpot (HUBS) continues to weaken after busting the 20-dema on Wednesday. It closed Friday just below the 50-dma and the prior May lows. This sets up a possible U&R type of rally, but it must also clear resistance at the 50-dma. Ideally, I’d look to short this on any rally up into the 20-dema as the lower-risk option.

 

 

Zendesk (ZEN) breached its 20-dema on Wednesday as it failed on a recent base breakout. It has now closed three days in a row below the 50-dma. Technically, we can view this as a short-sale right here while using the 50-dma as a guide for a tight upside stop. If it clears the 50-dma, then we look for a rally into the 20-dema as a higher short-sale entry opportunity, if we can get it.

 

 

ServiceNow (NOW) differs from ZEN and HUBS in that it is still holding support at its 50-dma. At the same time, the 20-dema has served as near-term resistance over the past several days. Note that it is holding above the buyable gap-up move and base breakout it posted in late April.

Overall, NOW is still holding up given that it hasn’t failed through the intraday low of the BGU day at 269.26 or the 50-dma. However, a breach of the 50-dma would trigger this as a short-sale at that point.

 

 

Workday (WDAY) is sitting on the fence here as it hovers along the 20-dema. The highs and lows of the pattern over the past 2-3 months form a very slightly ascending channel. The stock tested the lows of that ascending channel on Wednesday as it also found support near the 50-dma.

Over the past three days, WDAY has been stuck between the 20-dema and the 50-dma and has not broken down in wholesale fashion despite the recent market turmoil. It doesn’t strike me as a strong long or short right here, given the indecisiveness of the pattern. A breach of the 50-dma that occurs within the context of a continued market correction could trigger the stock as a short-sale target, so may be something to watch for.

 

 

The Trade Desk (TTD) continues to obey resistance at the 50-dma. On the other hand, it isn’t splitting wide open on the downside. However, it does remain shortable on moves up into the 50-dma. I would expect that eventually, if the general market continues lower, it will do likewise.

However, be alert to any change where the stock clears the 50-dma and keeps moving, which is also possible given the stock’s reluctance to break down with the market. Friday’s small pullback came on volume that was -41% below average, so it’s not as if sellers are eager to dump shares here, at least not yet.

 

 

It’s hard to believe that Roku (ROKU) has tripled since I first discussed it as buyable in the 29-30 price area back in late December/early January. I suppose if we all had crystal balls we could have just loaded up the stock on full margin at that point and gone to sleep. The stock certainly doesn’t seem to want to sell off now at these lofty price levels, even during a rough market month.

On Friday, ROKU held near-term support at the 10-dma as volume declined to -27.9% below average. If you think this has more upside momentum left in it, then this might be a spot to take shares if we see the general market finds its feet next week. I tend to think that if ROKU finds an excuse to get to the $100 Century Mark, it will, and a market bounce might be that excuse.

Otherwise, I might be inclined to short any breach of the 10-dma. This would also depend on market context, and the stock is quite extended to the upside as a 200% move since early January. Play it as it lies.

 

 

Etsy (ETSY) was first discussed as a short-sale idea on rallies into the 50-dma in last weekend’s report. On Tuesday, it started the trading week out with a rally right up into the line, at which point it reversed and broke to the downside. As I discussed in Wednesday’s report, at that point any rallies up into the 20-dema would offer secondary short-sale entry points.

Over the past two days ETSY has rallied into the 20-dema twice. Each time it has been turned back. Therefore, rallies up into the 20-dema remain as short-sale entry opportunities. If the stock can clear the 20-dema on a more vigorous bounce, then we simply cover and look for a move up closer to the 50-dma as a more optimal short-sale entry.

Since breaking down in early May after earnings, ETSY has so far acted like a textbook late-stage failed-base (LSFB) short-sale set-up. The rally back up into the 50-dma was textbook, offering an optimal short-sale entry at that point. At this point, we are now looking for secondary entries, which first occur at the 20-dema as noted above.

 

 

Snap (SNAP) remains the strongest-acting among the big social-networking names. After Tuesday’s pocket pivot, the stock has pushed back up closer to the April highs. The question is whether this represents a price-point resistance level that will see the stock head back to the downside.

SNAP has been moving higher on positive news lately, but if we see the general market turn lower I would not be surprised to see it dragged back to the downside. We’ve already seen the other two social-networkers, Facebook (FB) and Twitter (TWTR) push to lower lows this week, so it’s a matter of whether weakness in the group spreads to SNAP.

If the general market continues to weaken, then I would look for this to occur. At the very least, I’d be looking for a retest of the three moving averages just below.

 

 

Facebook (FB) breached the 50-dma on Friday as selling volume picked up sharply from Thursday’s levels. That triggered the stock as a short-sale at that point, as I discussed it would in Wednesday’s report. Any small rally back up into the 50-dma would bring it back into optimal short-sale range, with the idea of using the 50-dma as a guide for a tight upside stop.

 

 

Twitter (TWTR) has pulled right into its 50-dma with volume drying up sharply to -47.1% below average. If you compare this chart to FB’s chart, you’ll notice that the two stocks look almost identical since each gapped up after earnings in late April. Since then, both have slumped to the downside, but FB became the first to breach its 50-dma on Friday.

TWTR is now knocking on the 50-dma’s door, and a breach of the line would trigger it as a short-sale at that point. That said, the flip-side of this two-side situation is that the voodoo pullback into the 50-dma also brings the stock into a lower-risk long entry position. So, it could be tested on the long side here, with the idea of being ready to flip to the short side if it breaks below the 50-dma.

 

 

Arista Networks (ANET), not shown here on a chart, has continued lower since presenting a short-sale entry opportunity on Tuesday when it rallied up into the 200-dma. Any further rallies from here into the 200-dma would provide lower-risk short-sale entries.

GW Pharmaceuticals (GWPH) was unable to hold support at its 20-dema on Thursday, which is probably more a testament to the general market weakness more than anything. It is now testing the 50-dma, which would serve as last-stand support for the stock. It is also now starting to border on becoming a late-stage failed-base situation.

In this position, I would look for a breach of the 50-dma as a short-sale trigger. If GWPH can hold support at the 50-dma, however, then within the context of any market bounce, it could be in a lower-risk long entry position. A two-side situation that is now at a critical crossroads, so play it as it lies.

 

 

Recent IPOs

My small stable of recent IPOs is showing some interesting action amid the current market turmoil. Among the five that I’ve discussed in recent reports, no less than three of them posted pocket pivots on Friday. Surprise.

Tradeweb (TW) defied the market sell-off on Friday to post a pocket pivot at the 10-dma. In my view, however, this is extended, and the best lower-risk, opportunistic entry occurred at the 20-dema on Wednesday. In this position, look for any pullbacks to the 10-dma or 20-dema as your more opportunistic entries since I do not favor chasing strength in this market.

 

 

Uber (UBER) reported earnings Thursday after the close and gapped up in after-hours trade. This led to a small gap-up on Friday morning which I suggested might offer a shortable gap-up opportunity in a Thursday evening tweet. It was, but only for a small scalp. By the close, UBER finished up 61 cents in a big churning move that stalled at the 10-dma.

Some might want to consider this a big short right here, considering that UBER announced a $1 billion loss in the most recent quarter. However, I would have expected the stock to come apart during Friday’s market sell-off, and it did not. Instead, it successfully tested the 39.46 prior low in the pattern and held, keeping a U&R long set-up that it posted on Wednesday alive.

Allegedly, short interest has jumped to 36 million shares, but this is a small percentage of the 1.2 billion share float. Nevertheless, an objective analysis, devoid of any bullish or bearish bias, would simply assess this as a U&R long set-up that remains active until the 39.46 low is breached for good.

 

 

Lyft (LYFT) moved in sympathy to UBER, but we might say it was far more sympathetic than might be expected. The stock jacked 2.79 points on a pocket pivot volume signature coming up through the 10-dma and 20-dema. I’ve been discussing the fact that it appears to be trying to round out the bottom of a potential base over the past couple of weeks, and Friday’s move lends credence to this hypothesis.

In this position we can either buy the stock right here and use the highest moving average, the 20-dema, as a tight selling guide. If the market remains weak, then it might just hang tight along the two moving averages as it sets up, offering a potentially lower-risk entry. Bottom line: Despite the market turmoil, this looks more like a long than a short here, and if it holds up then UBER may do likewise.

 

 

Zoom Video Communications (ZM) rallied back above its 20-dema on Thursday, but the position is currently unclear. If it can hold tight along the 20-dema as volume declines, then it could set up in a lower-risk entry spot right here. Barring that, I’m still waiting and watching for a possible U&R long set-up developing along the prior 70.60 low as a more opportunistic entry on a deeper pullback.

 

 

Sciplay Corporation (SCPL) is the third Friday pocket pivot among these five recent IPOs. I wrote on Wednesday that it was either buyable along the lows of the current price range near 15, or that one could try and catch a pocket pivot right as it comes up through the 10-dma.

While it didn’t exactly play out that way, SCPL did post a pocket pivot along the 10-dma. However, in this case, the pullback to the 10-dma on Friday morning was the proper entry, but this would have been difficult to pull the trigger on during a big market sell-off.

Nevertheless, SCPL continues to set up constructively in an IPO base. In this position, my preference would be to try and pick up shares on any further pullbacks to the 10-dma from here.

 

 

Another recent IPO that is on my radar is Parsons Corp. (PSN), a 75-year-old defense company that came public at an offering price of $27 on May 8th. It has since traded higher and is now in a seven-day pullback off the recent 33.67 high. Compared to recent IPOs like UBER, LYFT, or ZM, its action is fairly well-contained.

On the weekly chart, not shown, the current action shows up as a relatively tight two-week flag formation. On the daily, there are no concrete long entry positions, but we can watch for any undercut & rally (U&R) long set-up that might occur on any test of the 30.63 low in the pattern. That low strikes me as more definitive vs. the low of three days ago.

PSN also has the distinction of posting big revenue and profits, growing earnings at 153% for four quarters in a row while sales have grown by 18% in each of those same quarters. The company is a strong player in what is known as the cyber-physical space, offering engineering and technology for highly-complex, large physical and digital systems. I would suggest learning more about the company by visiting its website: www.parsons.com.

The post-IPO quiet period, during which analysts are not allowed to issue comments, reports, or recommendations, ends Monday, June 3rd. This may trigger some movement in the stock. A pocket pivot through the 10-dma may be something to watch for, otherwise any successful test of the U&R move around the 30.63 low could present a lower-risk entry opportunity.

 

 

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 the market was pummeled by the news flow over the past week, not to mention the past month, it remains an environment where anything can happen at any time. Change the news, change the market direction – that is the paradigm we are dealing with. For that reason, it is difficult to lean too hard in either direction, even the short side during what has been a very steady downtrend throughout May.

Technically, the indexes looked like they might attempt at least some sort of reaction bounce off the 200-dmas in the NASDAQ Composite and the S&P 500. But the news on Thursday evening opening a new front in the tariff war, this time on Mexico, was a bolt from the blue with a material effect on the market, sending those same two indexes gapping below their 200-dmas.

This, of course, should all be no secret to members, since I have noted the heavy news-influenced environment we are in, and the special challenges it presents on both the long and short side. For all we know, this week could bring a change in the weather, so to speak. The President may decide to delay the threatened tariffs on Mexico, or some other positive development may arise, no matter how marginal, on the China trade front.

For these reasons, this remains, as I have repeatedly stated before, a market mostly for swing-traders on the long and short sides. In the meantime, it is useful to continue doing your homework and maintaining awareness of potential opportunities that could come into focus depending on how this market turmoil plays out, and I will cover more of these in this weekend’s GVR.

Personally, I don’t recall a screwier environment. Thursday’s sudden tariff news that seemingly came out of nowhere and Friday’s sharp sell-off bring that point home. If anything, the volatility can create some interesting trading opportunities on a shorter-term basis, which has held true mostly for the short side. For those who do not take such an approach, then cash remains a good place to be, for now.

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.