The Gilmo Report

June 23, 2019

June 22, 2019

The S&P 500 Index hit an all-time high on Thursday in a tribute to the Fed’s increasingly dovish tone. That new high was achieved by a margin of .05 S&P point over the prior 2953.13 high, and then quickly given up on Friday as the index stalled and reversed off the highs. Volume was heavy thanks to quadruple-witching options expiration.

 

 

As the S&P cleared to new highs, the NASDAQ Composite Index and the Dow remain below their all-time highs. The Dow has to clear last October’s peak of 26,951.81, while the NASDAQ has to clear 8176.08. That’s roughly 1% for the Dow and 2% for the NASDAQ below their respective highs.

 

 

Despite the new highs, the market action has taken on a sluggish character with respect to individual stocks. On Thursday, we had oils and metals leading the S&P higher, along with other beaten-down names like semiconductors and industrials like Caterpillar (CAT) and Boeing (BA) perking up off their lows.

But I’m seeing very little that is charging higher against the backdrop of global money-printing machines running at full tilt. There have been a handful of breakouts in stocks that have single-digit earnings and sales growth, along with the usual breakouts that fail. If I had to pick a leading group in this market it would be the recent crop of IPOs.

With the beaten-down semis rallying off their lows amidst hopes of a trade deal with China and a Fed gone dovish, one might expect the leading semiconductor in the group, Advanced Micro Devices (AMD), to be charging higher. Instead, it gapped up on Thursday with the market and then promptly reversed to the downside.

It briefly found support at its 20-dema on Thursday, but on Friday reversed yet again and posted its lowest closing low since its early-June base breakout. That triggered the stock as a short-sale target at that point based on the late-stage failed-base (LSFB) set-up that is now emerging. All of this has negated Tuesday’s pocket pivot at the 20-dema, and certainly doesn’t strike me as action we might expect in a leading stock as the S&P breaks to new highs.

 

 

Xilinx (XLNX) is one of these beaten-down semiconductors that is trying to perk up off its recent lows. The current move started with a bottom-fishing pocket pivot on Tuesday coming up through the 10-dma and 20-dema. That ran into resistance on Friday, however, as the stock reversed on higher selling volume.

The test of XLNX’s bottoming mettle is right here at the 50-dma, and it failed the first attempt at the 50-dma on Friday. For all we know, this is a short right here using the 50-dma as a guide for your upside stop. Otherwise, if it can clear the 50-dma it may be back in business with respect to trudging back up further toward its prior highs.

 

 

XLNX is one beaten-down former leader trying to resuscitate off its recent lows, and Applied Materials (AMAT) can be categorized as the same. Last year, AMAT was trading above $60 a share, and its fall from grace culminated with a more than 50% decline that finally bottomed in late December with the rest of the market.

Since then AMAT has been slowly working its way higher, but the move stalled in late April. Since then, it’s been in a very choppy price range between the 200-dma and the mid-40’s. The last three times it approached those highs it has been shortable. Thursday’s move to 43.99 on a three-day wedging rally was no different.

In this position I’m more inclined to view it as a short rather than a long. The only way that would change is if the stock were able to constructively set up along the 10-dma or the 50-dma. So far, however, the action has been toO erratic and playable only as a reversion-to-the-mean situation on each end of the current price range.

 

 

Keep a close eye on some of these key semiconductors rallying off their lows and into potential resistance. Another one, KLA-Tencor (KLAC), which has rallied right up into its 50-dma, can be investigated as a possible short here if it cannot clear the 50-dma.

My estimation is that if these semiconductors can plow higher, that will be positive for the market. But if they fail here at their first tests of major resistance at the 50-dma or other key moving average it could be problematic.

After the Fed all but threw in the towel on a July interest rate cut, I would have looked for more robust upside action in a few more stocks. While Thursday was a strong up day for the market indexes, not all stocks fared as well. AMD is but one example.

When the market catches its stride, you would expect to see a name like Twitter (TWTR) at least make a move back up to its 50-dma. I wrote on Wednesday that the stock was finding support at its 65-dema. In the heat of a general market rally after Wednesday’s Fed meeting, I surmised that the stock might rally off the line.

It did, but only slightly, on Thursday morning before reversing at the 10-dma and breaking to lower lows on heavy volume. It looks like it now wants to head for the 200-dma and the prior early-June low.

 

 

Facebook (FB) posted a higher closing high on Friday as volume picked up sharply, likely due to quadruple-witching. Aside from Tuesday’s tactical short-sale opportunity into the gap-up move, the stock has come straight up from the 200-dma where it landed on heavy selling in early June.

In this position, FB is not buyable. The only logical set-up would have to occur on a pullback to one of the rising moving averages, including the 10-dma, the 50-dma, and the 20-dema, in that order. With the news and all the details regarding its Libra crypto-token out, it likely needs to digest the sharp price move off the early-January lows.

 

 

Snap (SNAP), not shown, is still in an extended position following a strong uptrend that started in early June. Now the 10-dma at 14.16 or the 20-dema at 13.47 would offer references for buyable pullbacks from here.

If I’m looking for interesting potential long set-ups, the action in Uber (UBER) looks a bit more appealing. Here we see it pulling into its 10-dma as volume dries up to -84.3% below average. That puts it in a lower-risk long entry position right here using either the 10-dma or 20-dema as tight selling guides.

 

 

Lyft (LYFT) is tracking tight sideways since Monday’s pocket pivot off the 10-dma. This acts well, so can either be bought right here or on any small pullback closer to the 10-dma while using it, and the 20-dema, as tight selling guides.

The constructive manner in which it is rounding out the lows and right side of a potential new base is favorable. If the general market goes higher, then I think LYFT is setting up to do the same.

 

 

Parsons Corp. (PSN) continues to go wild, streaking to another all-time high on Friday as volume picked up sharply. This was last buyable near the 10-dma and 20-dema on the pocket pivot/trendline breakout after earnings on Tuesday. Prior to that, PSN was buyable on the undercut & rally (U&R) move of two weeks ago.

However, one might have elected to stay out of the stock until earnings were out, and once Tuesday’s report was released it was buyable at the 10-dma/20-dema confluence. Now only pullbacks to the two short moving averages can be watched and waited for as potential lower-risk entries from here.

 

 

Pinterest (PINS) is now pulling into its 20-dema after pushing to higher highs earlier in the week. The stock has been making higher highs and higher lows since bottoming out in late May and then posting a Wyckoffian Retest of that low. Note how volume dried up on that retest, and the first blue upside day occurred when volume reached its low point on the pullback.

PINS then turned back to the upside for three days, and on the third day of the rally posted a pocket pivot as it cleared the 20-dema. From there, a test of the 20-dema provided a lower-risk entry and PINS then continued to higher highs this past Tuesday.

After all that, PINS is now back at the 20-dema where it hit a lower-risk entry spot at the line. It closed up and off the line on higher volume in a minor show of support at the 20-dema. This is in a lower-risk entry position here using the 20-dema as a tight selling guide.

 

 

By now its no secret that some of the better-looking patterns in this market can be found among recent IPOs. The situation is no different with Zoom Video Communications (ZM) as it continues building a little flag formation after its post-earnings buyable gap-up (BGU) in early June.

As I discussed in Wednesday’s report, one can take two approaches here – the aggressive or the opportunistic. The aggressive approach assumes the stock will continue to hang along its 10-dma and then attempt to move higher. This theory is boosted by the fact that it is also holding support along the $100 Century Mark, so we would keep looking for support within 2-3% below the $100 price point.

The key here is that one is looking for the market to move higher and allow ZM to do its thing on a Livermorian launch off the $100 Century Mark. Otherwise, the opportunistic approach comes into play, where one looks for a pullback closer to the 20-dema, now at 92.71 and just above the 92.50 BGU intraday low. Play it as it lies, and according to your aggressive/opportunistic psychology.

 

 

Tradeweb (TW) is looking a little less dull here thanks to a big-volume pocket pivot it posted at the 10-dma/20-dema confluence on Friday. However, the volume level might have been bolstered by quadruple-witching options expiration, so may be exaggerated. Nevertheless, one can simply take the action at face value and buy the stock on the basis of this pocket pivot while using the 10-dma as a tight selling guide.

While options expiration and month-end/quarter-end action can skew volume, I have seen pocket pivots that occur on such days work on the upside. So, one can certainly just play it as it lies. Using the 10-dma as a selling guide also helps keep risk within manageable levels.

 

 

Another recent IPO with some interesting roundabout type chart action, not unlike PINS or LYFT, is Jumia (JMIA). This company has been billed as the “Amazon.com of Africa,” but there have also been a few analysts who claim the company is a fraud, not the least of whom is the infamous Andrew Left of Citron Research. Given that JMIA has been accused of being a fraud, keep in mind that there may be some headline risk with this.

But big bear Citron Research is famous for making big calls that turn out to be very wrong. Among these, there is the bearish call on Roku (ROKU) where Left called the stock “un-investable” on January 8th when it was trading at $39, calling Tesla (TSLA) a short for two years before turning bullish in October of last year when the stock was above $300, or calling Beyond Meat (BYND) “beyond stupid” when  it was trading at $89 and slapping it with a $65 price target, long before it hit $200 this past week.

JMIA came public on April 12th at $14.50 a share, opened for trading at 18.95 and then launched to a peak of 49.77 over the next three days. One more run at the highs was met by a steady stream of selling, and JMIA quickly found itself back where it started when it finally bottomed out at 18.13. I’ve discussed this one in my video reports back when it was working on a Wyckoffian Retest of that 18.13 low.

Since then the stock has been rounding out the lows of what could be a potential new base. A concrete signal was seen on Friday when JMIA posted a roundabout type of pocket pivot at its 10-dma and 20-dema. Technically, this is actionable using either the 10-dma or 20-dema as a tight selling guide. It’s not clear to me that Friday’s pocket pivot volume was influenced by quadruple-witching, so one can choose to take the action at face value.

 

 

The lack of thrust in many leading names following the Fed meeting is evident in the chart of Apple (AAPL). The stock started moving ahead of the Fed with a gap-up pocket pivot through the 50-dma on Tuesday. Since then, it hasn’t gone anywhere and stalled on Friday as quadruple-witching volume no doubt came into play.

Technically, this is still actionable on the basis of Tuesday’s pocket pivot, using the 50-dma as a tight selling guide. I would also look at AAPL as a barometer for the market. If it breaches the 50-dma, then it would trigger as a short-sale at that point, and this in turn would likely have implications for the general market.

 

 

I wrote on Wednesday that one could treat Netflix (NFLX) as a long entry at the 50-dma as long as it held above the line. It pulled back slightly on Thursday to test the line and held, leading to a move higher on Friday. So, buying along the 50-dma would have been good for about 8-10 points of upside from there.

NFLX is now right at the peak of its range highs and of course out of buying range. The question now is whether the range highs represent meaningful resistance and we will see the stock turn back to the downside from here. While a pullback to the 50-dma that is constructive could provide a lower-risk entry point, a breach of the line must also be watched for as a short-sale trigger. Play it as it lies.

 

 

Amazon.com (AMZN) has streaked higher throughout the month of June after getting its head slammed through the 200-dma to start the month off with a bang. The extreme, v-shaped rally off those lows has come on below-average volume, however, so the possibility of a pullback to the 50-dma looms.

Obviously, in this position, AMZN is not actionable on the long side. Only a pullback to the 50-dma would offer a proper reference for a lower-risk entry opportunity from here. The question is whether the low-volume move back up to the highs is indicating that a double-top type of formation might be in the works here.

As a big market stock, my view is that AMZN’s fortunes will be tied to those of the general market. Therefore, how it acts on any pullback to the 50-dma is worth keeping an eye on as a potential market barometer.

 

 

While I like Zendesk (ZEN) better on pullbacks to the 20-dema, the fact is that the stock has posted a successful re-breakout move back up through the $90 breakout level. It remains within 3% of that breakout point, so is technically actionable as a base breakout. Otherwise one can take the opportunistic approach and look for a constructive test of the 10-dma as a lower-risk entry.

 

 

Workday (WDAY) displays a general lack of upside thrust following Thursday’s breakout to all-time highs on average volume. I tend to view the stock as best bought on weakness, and in this case, I would keep an eye on the 10-dma at 211.98 as a lower-risk entry spot on any pullback from here.

 

 

Twilio (TWLO) is similar to ZEN and WDAY in that you have a long, slightly ascending base that has yet to develop any serious upside momentum. Like WDAY, TWLO made a run for new highs on Thursday but pulled back in on Friday as volume picked up slightly. This pullback brings it into a lower-risk entry position at the 10-dma while using it as a tight selling guide.

But also notice that like ZEN and WDAY, every time TWLO has edged to a new high it has then pulled back to the 50-dma. This is where the lowest of the lower-risk entries have occurred. So, this brings up the possibility of another such pullback to the 50-dma, unless it can hold support at the 10-dma or 20-dema.

I find the action in TWLO, along with other basing leaders that look like they should be coiling up for a nice move to new highs, to be somewhat sluggish. Despite the dovish Fed, and the futures market assigning a 100% chance of a rate cut in July, the upside thrust you might expect is nowhere to be found. That, to me, is slightly perplexing, and may be cautionary.

 

 

You’re seeing a similar theme play out in Atlassian (TEAM). It looked primed for a re-breakout to all-time highs on Thursday, what with the futures up big at the open and all. But no such luck. Big buying volume never showed up, and TEAM then slumped back into its 10-dma on Friday.

Volume was light on Friday as well. This technically puts TEAM in a lower-risk entry position here while using the 10-dma as a tight selling guide.

 

 

ZScaler (ZS) is similar to TEAM in that it looks like a base-on-base formation ready to launch higher. But an early-morning breakout to new highs on Thursday failed and reversed to close down on heavy selling volume. When leading stocks don’t want to rip and snort their way to new highs and instead turn tail, that doesn’t strike me as bullish action.

So, within this context, things need to firm up and show some spunk this coming week. Otherwise, the S&P’s move to new highs may turn out like other breakouts to new highs over the past couple of years and lead to inflection points back to the downside. That has been the way of things in this market, and the action of leading stocks is often your first clue that things are entirely right.

 

 

Avalara (AVLR) also failed to produce a strong breakout. Instead, it posted an all-time closing high on Thursday on average volume and then turned tail on Friday as volume came in heavy. That may set up a pullback and test of the 10-dma and 20-dema, which can be watched for a potential lower-risk entry along the moving averages.

 

 

And then there’s Ringcentral (RNG). This one made a brief attempt at clearing the $120 price level on Thursday but reversed to close back at its 10-dma/20-dema confluence. It then gave it up on a breach of the 50-dma as selling volume picked up sharply.

That triggered the stock as a short-sale at that point. As I wrote on Wednesday, “…any breach of the 50-dma could flip this into play as a short-sale target, should that occur.” That’s what we got on Friday, so this was actionable as a short that day. Whether this continues lower may depend on what the general market does this coming week.

 

 

The aggressive approach would not have worked with The Trade Desk (TTD) as it breached the 10-dma on Friday on a pick-up in selling volume. Notice how it also tried to push to new highs on Thursday but reversed as selling volume increased vs. the prior day. Now TTD looks set for a test of the 20-dema, which coincides with its prior base breakout point.

The stock has been a strong leader as of late, and its inability to gain momentum following the dovish Fed announcement is also problematic, in my view. If it can hold the 20-dema, however, then it would be in your best, lower-risk entry position while using the line as a tight selling guide.

 

 

I wrote on Wednesday that the tight, slowly ascending and constructive technical action in Roku (ROKU) might very well lead to a sharp upside move if the general market starts rocking higher. Thursday morning, from the look of the futures, that seemed to be in the cards. But ROKU, like many other constructive-looking leading stocks on Thursday, made a brief attempt at new highs before turning tail to close in the red.

On Friday, ROKU closed just below its 10-dma for only the second time since mid-April. Volume was very light, however, and the stock did manage to hold above the critical $100 Century Mark. Perhaps a test of the 20-dema is in store. But the bottom line is that the market isn’t providing the context for these stocks to romp higher, and that may be telling us something.

 

 

I suppose we might have expected that GW Pharmaceuticals (GWPH) would simply run into resistance around the highs of its current descending trend channel and turn back to the downside. That’s what it did on Thursday after briefly poking its head above the highs of the trend channel. It then turned negative and kept going on Friday as it again dropped below its 50-dma.

It may now be headed for a move to lower lows, which might then result in a U&R type of move back up toward the highs of the trend channel. Bottom line – GWPH is going nowhere fast, and despite building what looks like a decent base, cannot develop any upside momentum as its sluggishness mimics that of many other stocks in this market.

 

 

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.

Despite the idea that the Fed has given the market a green light to move higher, the action remains sluggish. Yes, the S&P 500 has moved to all-time highs, but it’s not clear to me that this is a precursor to a glorious new breakout and big leg up to S&P 3500 as many pundits are declaring.

Ironically, two of the better-performing ideas of mine came from my Thursday afternoon video report where I went over a list of names that looked more shortable than buyable. Among these, DocuSign (DOCU) had rallied just above its 50-dma, where it looked shortable on any breach of the 50-dma. It then busted the line on Friday on heavy selling volume.

 

 

Another one in a similar position was Pluralsight (PS), which had also rallied just above its 50-dma, putting it in a shortable position on any breach of the 50-dma. The stock was slammed through the line on Friday on heavy selling volume.

 

 

Another odd observation from my visceral experience is that I was short the market on Thursday as I put positions out into the morning rally, and I ended up making money that day. If this is such a rip-roaring market, even vibrant as one financial cable TV talking head put it, why am I finding some juicy short-sale set-ups that are working while the long set-ups don’t pan out?

Maybe the market is just messing with my head, but I would imagine that it is likely doing the same to most other traders and investors. Things are not quite what they seem. Either that’s a problem, or this market is going to take its time percolating a little bit more before some upside momentum develops.

Until then, I am open to looking at this market form whichever side is relevant based on the individual stock set-up and the prevailing real-time technical evidence. In essence, I think we have to be prepared to dance with this market. That means having a plan for both bullish and bearish outcomes, and I will discuss this topic in this weekend’s GVR. 

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.