The Gilmo Report

June 26, 2019

June 26, 2019

New highs for the indexes in this environment usually mean it’s time for a pullback. As I wrote over the weekend, “Despite the new highs, the market action has taken on a sluggish character with respect to individual stocks.” Some of that sluggishness turned into bearish action as a broad swath of leading and not-so-leading stocks have been hit with selling so far this week.

Yesterday’s sharp break off the highs took the NASDAQ Composite Index back down toward its 50-dma and right into its 10-week moving average on the weekly chart. This led to a logical bounce this morning that was likely based on Micron Technology (MU) gapping higher after beating lowered earnings estimates yesterday after the close, which in turn sent beaten-down semiconductors rallying as well.

By the close, the NASDAQ gave up the bulk of its intraday gains to end the day near the intraday lows and below where it started the day on a gap-up open. Volume was roughly even, reflecting the reluctance of buyers to come piling in on the MU news as well as well-spun, but meaningless, positive comments on U.S.-China trade from Treasury Secretary Stephen Mnuchin.

 

 

Following the gap-up open, the S&P 500 and Dow Indexes were both suitably unimpressed as well. Both indexes ended the day back in the red on slightly lighter volume. Again, buyers were not stampeding into the market after yesterday’s sharp sell-off. Following the sharp rally off the lows of early June, the market is now in a trendless state of affairs where it remains mostly a swing-trader’s environment.

I do not see any significant, thematic trends developing in individual stocks, and that is problematic for long-only players. There is certainly no glorious new rally phase that I see starting up here in the wake of the follow-through day of two Fridays ago, and, if anything, we may see a shortable decline develop from here. We shall see.

As I noted in my Monday GVR, the “cash is trash” move into bonds, gold, and even Bitcoin has not translated into a similar move into stocks. This is problematic, in my view, and it shows up in the action of individual stocks. Most of the rallies we are seeing are coming from beaten-down groups in the semiconductor, industrials, and oil sectors.

We’ve also seen cloud-related software names get slammed over the past several days, including such stalwarts as ZScaler (ZS), which failed on a breakout last week and has since dropped below its 20-dema. If the market is headed lower from here, then these names likely provide the best short-sale targets.

The approach is simple. From here, any rallies into the 20-dema would be treated as short-sale entry opportunities, using the line as a guide for a tight stop. Otherwise, one could simply short the stock here and use the 20-dema as a guide for an upside stop.

 

 

Zendesk (ZEN) is a little different, but the same late-stage breakout-failure concept applies here as well. It breached the 20-dema yesterday, failing for the second time on a breakout to new highs. This morning, it rallied up into the 10-dma and then rolled over from there, so in this case the rally into the 10-dma could have been shorted into, using the 10-dma as a tight stop.

In this position, with the stock sitting at its 50-dma, any rally into the 20-dema from here would be treated as a shortable one. The 20-dema or the 10-dma then become your guides for upside stops. If the stock simply busts through the 50-dma from here, then it becomes shortable at that point, using the 50-dma as your guide for an upside stop.

 

 

Workday (WDAY) is in the same exact technical situation as ZEN and can be treated the same way. Note that today it attempted to rally up into the area between its 10-dma and 20-dema, but buyers didn’t come flying in to drive it higher. It instead reversed to close near the lows of the day and right at its 50-dma.

Thus, any rally from here back up toward the 10-dma and 20-dema could be treated as a shortable one. Otherwise, a breach of the 50-dma triggers a new short-sale entry at that point.

 

 

From the failed breakouts and moves to new highs of last week to the current breaches of the 20-dema and tests of the 50-dma, you’ll notice that all these clouds look uncannily alike. Twilio (TWLO) is similar to ZEN and WDAY in that it also failed on a move to new highs last week and then breached its 20-dema on Monday.

A brief rally into the 20-dema reversed as buyers shunned the stock, and it duly reversed to close below its 50-dma. An alert short-seller might have come after this on the initial breach of the 10-dma, as would be the case with any of these names. Now the question is whether any further rallies will occur, and if so, will they present successful short-sale entries.

TWLO differs from ZEN and WDAY in one respect, which is that it closed below the 50-dma today. Thus, it can be considered a short here using the 50-dma as a guide for an upside stop. Otherwise, any move back up to the 20-dema can be viewed as a potentially more optimal short-sale entry.

 

 

Atlassian (TEAM) is also failing on a recent breakout to new highs, and it breached its 20-dema yesterday on increased selling volume. That was followed by a small, low-volume rally back up into the 20-dema, putting it in a lower-risk, short-sale entry position. Thus, it becomes shortable here while using the 20-dema or the 10-dma as guides for upside stops.

 

 

I would emphasize that any short-seller who is truly on top of their game would have been looking to short these earlier in the week. As I discussed in Monday’s GVR, several of these looked quite shortable at that time as they were just starting to show signs of failure. Optimally, after 3-4 days of downside, I’d like to remain opportunistic and short into any rallies from current levels, if I can get ‘em.

However, within the context of a further market decline, where we see, for example, the NASDAQ Composite breach its 50-dma, then we might expect some of these faltering clouds to do the same. My expectation is that even if the market does head lower from here, the short side will remain very tricky. Thus, it is only suitable for those who are nimble and experienced short-sellers, and anyone else can just sit in cash for now.

The rally in Micron Technology (MU) sparked big rallies in most semiconductor names. Some of the action was shortable, however. Advanced Micro Devices (AMD) gapped up through its 20-dema and 10-dma on increased but below-average volume. This is sitting at the cusp of its recent base breakout and right on top of the 20-dema.

It may still be vulnerable to a complete breakout failure, however. I would watch for a breach of the 20-dema from here which would trigger it as a short-sale at that point on the basis of a late-stage failed-base (LSFB) type of set-up.

 

 

For me, the question is whether an earnings report from MU that was simply not as ugly as expected doesn’t just bring beaten-down semiconductors into shortable range. For example, I look at something like Applied Materials (AMAT), which is rallying up into prior resistance around the $44 price level as approaching shortable range again.

 

 

We might also note that despite the big post-earnings move, MU itself was unable to clear its 50-dma. It stalled at the line today, bringing into play the possibility of the stock becoming a short-sale target here into this rally.

That said, today’s move started out at 35.87, set a low early in the day at 35.70, and kept up a brisk pace to close at 37.04, just below the 50-dma. Technically, MU’s gap move today was a bottom-fishing buyable gap-up using the 35.70 intraday low as a tight selling guide. We’ll see what kind of legs this has from here, but be alert to any potential failure at the 50-dma.

 

 

Xilinx (XLNX) has poked its head above its declining 50-dma but is still only at the highs of its current five-day price range. It didn’t need to go anywhere to finally get back above the declining 50-dma, frankly, so this could put it in a shortable position. The trigger here would be a move back below the 50-dma.

 

 

The same approach would apply to KLA-Tencor (KLAC) which also cleared its 50-dma today in sympathy to MU’s move. As with XLNX, a reversal back below the 50-dma would trigger this as a short-sale at that point. Note that while KLAC did clear to higher highs, volume was light.

 

 

If you have a smaller account, and don’t need to take positions of more than 2,500 shares to have a decent position size, another interesting semiconductor short here might be Ambarella (AMBA), which trades 687,000 shares a day on average. That’s below my preferred minimum of one million shares a day in average trading volume for short-sale targets.

However, I shorted this one into rallies both yesterday and today, covering into the close, and I found that it is actually fairly liquid on a price-point basis. That means that it doesn’t move easily when hit with an order size of 2,500 shares. So, I can easily run a larger position size if I so desire, which I have.

AMBA has rallied a long way over the past month. I originally discussed it as a            long when it first regained the 200-dma around 39-40, and it has moved higher since then. Today it reversed at the 50-dma, and is still in a shortable position here, using the 50-dma or today’s high as guides for upside stops.

 

 

In Monday’s video report, I discussed Facebook (FB) as a double-top short-sale target based on the low-volume churning action seen that day. That led to a two-day decline that took the stock right into the 10-dma today. In this position, I would look to short the stock on any bounce off the 10-dma. Otherwise, a breach of the 10-dma would act as a fresh short-sale trigger.

That said, we should also note that today’s pullback into the 10-dma came on much lighter volume. Therefore, this could easily be seen as a long entry spot. However, if the general market continues to sell off, and we see the NASDAQ Composite breach its 50-dma, then I would expect FB to become a more solid short-sale target. Play it as it lies.

 

 

In big-stock NASDAQ land, Apple (AAPL) was up today, perhaps on the meaningless but “positive” comments about U.S.-China trade talks from Treasury Secretary Mnuchin this morning. The stock rallied on increased, but below-average, volume to move back to the highs of its current six-day price range formed following last week’s pocket pivot through the 50-dma.

I don’t see AAPL as a stock I want to buy, frankly, but I do keep on it solely as a market barometer. I think if we were to see the NASDAQ Composite breach its 50-dma, then AAPL would likely accompany it on a similar move.

 

 

Netflix (NFLX), on the other hand, remains a ripe short-sale target whenever it strays too far above its 50-dma and its recent range highs. Once again, NFLX ran up to and just above the $170 price level and failed to hold the rally. It then broke sharply back down to its 50-dma yesterday, fulfilling its promise as a ripe short-sale target on Monday.

Today, NFLX attempted to rally off the 50-dma with the general market but ran into resistance near its early-June peak around 367 and reversed to close near the intraday lows. In this position, a breach of the 50-dma would trigger a fresh short-sale entry from here.

 

 

Amazon.com (AMZN) is another barometer stock to keep an eye on. Over the weekend I noted that, “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.” We saw that expected pullback to the 50-dma occur yesterday on increased selling volume.

AMZN then bounced slightly in a narrow, stalling range that held along the 10-dma. As I noted over the weekend, a breach of the 50-dma can be watched for since if it occurred, it might very likely to occur in conjunction with the NASDAQ Composite breaching its own 50-dma.

 

 

The recent IPOs that I’ve discussed in recent reports have all come under pressure. As I saw it, the action in these names is indicative of one of two things. The first is their status as new-merchandise plays that could help drive a market rally to higher highs. The second is that they represent a type of speculative froth that is cautionary for the general market.

In this vein of thought, therefore, I didn’t care much for the severe breakdown seen in Zoom Video Communications (ZM), which has now breached its 20-dema on heavy selling volume. As well, Pinterest (PINS) failed to hold support along its 20-dema and is now trading below the line. Tradeweb Markets (TW) also failed to hold near-term support along its 10-dma, 20-dema, and 50-dma, and it now sits along the lows of its current base.

If the market starts to get into trouble, then these IPOs may suffer more, so I would stand clear of any that stop you out at near-term support.

Uber (UBER) is another recent IPO discussed in my latest reports that is breaking near-term support. In this case, we see the stock breaching the 20-dema today on increased selling volume. Because UBER is easy to borrow, I viewed today’s action as a short-sale trigger once it breached the 20-dema.

Like I said, if the general market gets into further trouble, these recent IPOs are very vulnerable in my view. Therefore, where I can borrow stock, I will act on potential short-sale set-ups in these IPOs when I see them. So far, I’ve noted that UBER is very easy to borrow for the purpose of shorting, and in this position any small blip back up into the 20-dema brings it right into shortable range, as I see it.

 

 

Lyft (LYFT) is one IPO I am unable to borrow, but that’s fine since it is not in a shortable position here. Instead, it continues to track sideways along its 10-dma and 20-dema in what is now a seven-day price range following its prior pocket pivot at the 10-dma.

If LYFT continues to hold up, then it can be viewed as a potential go-to long if the general market rally resumes. Otherwise, watch for any breach of support at the 20-dema as a tight selling guide if long the stock.

 

 

Jumia (JMIA) is also continuing to act well as it tracks tight along its 10-dma and 20-dema. This comes after last Friday’s pocket pivot at the two moving averages, and volume has remained low as the stock tracks tight sideways. This can also be treated as a potential go-to long in any market rally resumption while using the 10-dma as a maximum downside selling guide.

Keep in mind, however, that if the general market continues to weaken, then I don’t want to be long any of these IPOs, even if they are still holding up. Eventually, these will come off with everything else, and their status as recent IPOs can potentially make them more vulnerable on the downside in any extended sell-off.

 

 

Roku (ROKU) has been one of the strongest stocks this year, but when your biggest leaders start to crack you’d better take notice. I’ve previously prescribed the 20-dema as a selling guide and trailing stop for ROKU positions. The stock breached the 20-dema yesterday on a sharp increase in trading volume.

The stock was already looking like it was in trouble on Monday when it started to waver at the $100 Century Mark. That was a much tighter, alternative selling guide if one wanted to employ that as a trailing stop instead. And opportunistic short-sellers could have hit the stock yesterday when it cleanly breached the $100 price level and the 20-dema. Now, if one is still long the stock, brace yourself for a test of the 50-dma.

 

 

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.

Bottom line for me right now is that the short side of this market is working, and it is working better than the long side. To me, that is the first sign of change, follow-through day or no follow-through day. There is no glorious new market rally, period, and anyone who tries to tell you there is, and that you should be buying stocks when they break out through prior peak highs is leading you down a dangerous path.

In the meantime, we may be in a serious chop zone where opportunistic swing-trades dominate the action. What that means for those seeking intermediate-term trends is that the sidelines are much more attractive than beating your brains to a pulp trying to buy breakouts in so-called leading stocks.

If the market depends solely on the sugar high of an increasingly accommodative Fed, then why isn’t it shooting higher? Is the Fed dovish enough, or is too dovish? Will further rate cuts really provide the panacea that this market needs to rally higher? And is a “possible” U.S.-China trade agreement by year-end, as Treasury Secretary Mnuchin intimated today, really a positive, or is just indicative of how little progress is being made in the trade talks?

There’s a lot of noise out there, and when the noise gets too loud, I just focus on the action of individual stocks. And that action is turning bearish, as I see it. For now, that’s all I need to know. So, unless you’re a swing-trader who can play a full 360-degrees, long and short as necessary, then be stingy with your cash. Take it from there.

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.