The Gilmo Report

June 30, 2019

June 29, 2019

With the Fourth of July holiday coming up this Thursday, perhaps it is fitting that the market put on a little fireworks show of its own. That may be the case when we open on Monday after news Friday night that the U.S. and China agreed to resume trade talks and President Trump announced a lifting of the ban that prevents U.S. technology companies from selling to Chinese telecom giant Huawei.

The sudden shift in the market soap opera plot again brings home the point that I’ve made many times. This market is subject to sudden volatility and changes in direction courtesy of a constantly shifting news flow. But I was already picking up signs of this shift on Thursday as my blog posts of that day and my video report that afternoon indicated.

As I noted in those reports, the short side had been nicely profitable to start the week out but had gotten long in the tooth by Thursday. I also noted that on Thursday the market had a wonderful opportunity to sell off Thursday when Chinese President Xi issued a list of seemingly impossible conditions that must be met before the Chinese would return to the trade negotiating table.

This was shortly followed by Chief Economic Adviser Larry Kudlow coming out with comments that the new tranche of tariffs on Chinese goods was likely to be imposed. The indexes began to come off but quickly stabilized and held up on the day. In the end, the market was given the perfect excuse to break to the downside, but it did not.

In my view, that was telling, and so I emphasized long ideas in my blog posts and video report of Thursday. While Friday’s action was not necessarily meaningful either way, I could see that pullbacks in both the S&P 500 and Dow Indexes carried only as far as their 10-dmas as volume was drying up. This was constructive, as I noted.

But it will be the NASDAQ Composite Index that may have the biggest move on Monday since a broad number of technology stocks are viewed as beneficiaries of the weekend trade truce. As I discussed on Thursday, do not assume that the low-volume wedging action as the NASDAQ moved up along its 10-dma on Wednesday and Thursday is necessarily bearish.

Now, I’m looking for the NASDAQ to potentially break out this week. Some think the rally potential is limited, since this may now have the Fed backing away from its dovish tone. On the other hand, I tend to think that the economy is weakening for reasons beyond the U.S.-China trade war, so the Fed may stand pat.

 

 

The Russell 2000 Index was also showing bullish signs on Thursday and Friday. Whether the move was due to the index rebalancing on Friday or not, the bottom line is that a two-day upside price burst retraced all the prior four-day decline. Things were looking bearish for the small-cap index by Wednesday, but it came back with a vengeance and is now back above its 50-dma and 200-dma. Friday’s 1.28% move led all the major market indexes.

 

 

One of my main points in Thursday’s video report, which I also discussed Friday morning during my appearance on Benzinga.com’s Pre-Market Prep internet radio show, was this idea of a cash-is-trash move into stocks driving a sustained market rally. With central banks around the globe moving toward new rounds of QE, we have seen the cash-is-trash trade move bonds, gold, and even Bitcoin.

My theory has been that some sort of catalyst might shift the cash-is-trash trade into stocks, and this could drive a strong market trend from here. We’ll see whether this plays out, but the entire news orientation of this market has made it necessary for us to react to real-time information daily. This means that our trading plan must at all times encompass a 360-degree posture, a concept I discussed in my Thursday video report.

One might ask what a 360-degree posture is, exactly. The best way to illustrate the concept is with the example of Uber (UBER). The stock was added to the large-cap Russell 1000 Index on Friday, which may have accounted for its strong price move and breakout on Thursday and Friday. However, the amount of stock required for Russell 1000 Index funds to buy the appropriate weighting was relatively small, so it was actionable on its face.

As I discussed on Wednesday, the stock on that day appeared on the verge of morphing into a short-sale target as it breached the 20-dema. But a 360-degree trading posture means one must be open to changing information in real-time and react to it correctly using the known tools and techniques we have at our disposal.

So, while yes, on Wednesday UBER looked like it could be shortable on any weak move back up into the 20-dema, the real-time reality on Thursday was that it gapped up above its 20-dema at the open. This triggered a moving-average undercut & rally (MAU&R) situation at the 20-dema based on the shakeout around the moving average.

So, if one was alert to this and playing it precisely as it lies, then one could have theoretically gone long the stock early in the day on Thursday while using the 20-dema as a tight selling guide. But if it had reversed and broken back below the 20-dema, then it would trigger again as a short-sale target, but it did not. By the close on Thursday, UBER had posted a pocket pivot at both the 10-dma and 20-dema.

 

 

In this manner we remain open to all the possibilities and react to the set-ups as they occur in real-time. This requires flexibility and a willingness to dance with the market, as I’ve put it in recent reports. At the same time, one remains fully aware of and understands the possibilities based on potential set-ups, long or short, that may develop in any chart. Maintaining this type of awareness is what I mean by a 360-degree posture.

By Friday, UBER had broken out of a short flag formation, but the move stalled. My view is that if one was going to play this on the long side, then the MAU&R at the 20-dema was the proper entry. Otherwise, I would not necessarily want to jump on a breakout that may have likely been due to Russell Index rebalancing.

Lyft (LYFT) also benefited from being added to the Russell 3000 Index. It finished the week by posting two strong pocket pivots in a row at the 10-dma. This is slightly extended in this position, so I would look for any pullbacks to the 10-dma, or even deeper and more opportunistically to the 20-dema, as lower-risk entry possibilities from here.

 

 

To my knowledge, Jumia (JMIA) was not added to any indexes on Friday, but it had a sharp upside move on Thursday that ran right into the newly-appeared 50-dma. It then reversed to close near its intraday range lows, but still up for the day. Friday’s action saw the stock trade down to its 10-dma and 20-dema on a 20-minute downside streak right at the open.

It briefly undercut the two short moving averages and then reversed, scooting back to the upside to close in positive territory. The whole move qualified as a pocket pivot off the 10-dma/20-dema confluence. Pullbacks to the two moving averages would remain your lower-risk entry opportunities from here.

 

 

Whenever a stock is trundling down along the lows of its pattern one should always be on the lookout for any potential undercut & rally (U&R) moves that might develop. An otherwise bearish-looking drop below support can quickly turn into a long entry opportunity – part and parcel of a 360-degree approach to stocks. Pinterest (PINS) was stuck below its 20-dema as of Wednesday, trying to hold a marginal U&R attempt.

On Thursday, however, it picked up some momentum and moved decisively higher to clear the 20-dema. Another pullback on Friday held up as PINS closed along the 20-dema in a show of minor supporting action at the line. This would therefore be in a lower-risk entry position using the prior 26.16 low of June 11th as a selling guide. The closer to that low your entry is, the better.

 

 

Another recent IPO that was trundling along its base lows as of Wednesday was Tradeweb Markets (TW). It also held a U&R move from Wednesday and cleared the 20-dema Friday on a pocket pivot move. While the U&R move was tradeable, the overall pattern remains as it is with most of these IPOs as the stock stays within a base.

The action over the past several days can also be viewed as a moving-average undercut & rally (MAU&R) through the 20-dema. In this case, with the stock in an extended position above the 20-dema, pullbacks to the line would offer the lower-risk entries from here.

 

 

Zoom Video Communications (ZM) failed to hold its prior 92.50 intraday low from its early-June buyable gap-up (BGU) move after earnings on Monday. From there, it breached the 20-dema and then rallied back up into the 20-dema where it reversed back to the downside on increased selling volume on Friday.

If one had tried to buy the stock at the 20-dema on Monday, they would have been quickly stopped out. With the stock now stuck below its 20-dema, the thing to watch for here would be either a MAU&R move back above the 20-dema or a gap-fill down to the lows of the prior BGU rising window at 79.75. That’s more than 10% below Friday’s close, and with the market potentially rallying at the open on Monday, the MAU&R at the 20-dema may be more likely. Play it as it lies.

 

 

One of the more compelling situations among the new crop of recent IPOs, in my view, is Slack Technologies (WORK). This is still very fresh after coming public seven trading days ago, and there are some interesting dynamics here given that this is not an Initial Public Offering or IPO, but a Direct Listing, or DPO.

In this case, insiders can sell stock as soon as the thing starts trading, and the opening price is determined by how much buyers want to buy relative to what insiders and early investors in the company want to sell. The initial opening price was at 38.50, and WORK has declined only slightly below that opening price, hitting a low of 34.81 on Tuesday. This sets it apart from its cohorts like LYFT and UBER.

Some have asked me whether this direct listing causes me to have concerns about the stock. My answer is “Why?” The total amount of outstanding stock that exists is 504 million shares, and the float is determined by how much more that insiders and early investors in the company want to sell into the market at any given time, as I understand it.

So, the forces of supply and demand remain in force here, and even if we considered the total amount of stock outstanding as the potential float, it is still far below UBER’s 1.67 billion share float. In my view, therefore, the supply/demand characteristics are not necessarily skewed one way or the other. If insiders and early investors don’t want to sell all their shares, it’s the same as existing shareholders of any stock doing the same thing.

In any case, the existing low in the pattern is now at 34.81. I watched this come down after the first day of trading and figured that insiders would be selling on the first few days, after which this would dissipate and become evident in the trading volume. Volume dried up sharply on Tuesday, and WORK then popped back to the upside from there.

In my Thursday video report, I discussed the stock as one to watch as it was again pulling back that day on light volume. That set up a buyable Wyckoffian Retest that resulted in an upside move on Friday. From here its difficult to determine a lower-risk entry position, but I would keep a close eye on the 34.81 low as a potential reference point for any U&R that might develop if the stock retests that low.

Meanwhile, we’ve still got three days to go before the 10-dma shows up on the chart, which would then provide another reference for determining a potential lower-risk entry. Of all the recent IPOs, I like the thematic story of WORK the most, so it’s now a matter of trying to find your best entries. This is one I’ll be blogging about in real-time as I work through that process.

 

 

With the market likely set to gap up on Monday, then we can expect that Apple (AAPL) will gap-up and potentially break out from its little cup-with-handle formation. The action over the past two weeks since the stock posted a pocket pivot move coming up through its 50-dma line hasn’t gone anywhere, but the steady sideways action has built a handle from which the stock may break out.

I would watch for a buyable gap-up type of move to develop here on Monday. Once an intraday low is established, it is up to the stock to hold above that low if the BGU is going to work. Keep this on your watch list for Monday.

 

 

Amazon.com (AMZN) is also sitting in a little cup-with-handle formation and has spent the better part of the last two weeks forming the short handle to this v-shaped cup formation. Nevertheless, watch for a similar BGU type of breakout in AMZN on Monday that could be actionable on the long side.

While the weekend pundits may tell us that the rally might be short-lived, I would simply go with a simple litmus test. If we see these big-stock techs gap up on Monday, then the rally remains in force unless and until the BGU intraday lows are violated, period.

 

 

Netflix (NFLX) can also be watched for a possible buyable gap-up type of breakout. It’s not a direct beneficiary or victim of the U.S.-China trade war, but it has been moving back and forth in a well-defined range for some time. This has formed a possible handle to a big, ugly cup-with-handle formation.

If the NASDAQ Composite moves higher, NFLX is likely to move with it. So, we simply watch for a possible buyable gap up or other type of breakout from this formation as the potential starting point for a sustained upside move.

 

 

Cloud software names have proven to be relatively invulnerable to the shifting winds and news flows of the U.S.-China trade war. We might, however, expect them to rally with the market. Among six that I’ve focused on in recent reports, I noted that the patterns all have distinct similarities.

As the group chart below shows, all these attempted to break out to new highs the prior week but failed miserably. The ensuing price breaks, many of which I found to be actionable on the short side on a swing-trading basis, have taken them all down to regions defined by their 20-dema and 50-dma.

Atlassian (TEAM) has been running into resistance at its 10-dema but remains above its 20-dema and 50-dma. The Trade Desk (TTD) has also run into resistance at its 20-dema lately but remains above its 50-dma. In addition, it is also sitting right on top of a prior base breakout.

Twilio (TWLO) and Workday (WDAY) are both holding near-term support at their 50-dma but the 20-dema has served as near-term resistance. They are, however, in position for possible moving-average undercut & rally (MAU&R) long entries if they can regain their 20-demas.

Zendesk (ZEN) and ZScaler (ZS) have both found support at their 50-dmas and both are back above their 20-demas. Therefore, within a market rally context, they can be treated as MAU&Rs through the 20-dema while using the line as a tight selling guide.

 

 

My guess is that since these names all act similarly and look similar on their charts, they will all move together. We can also surmise that something like MongoDB (MDB), which has pulled right back to the top of its prior base, will rally with its cloud cohorts. It is also in a lower-risk entry position here along the 50-dma, where it posted a supporting pocket pivot on Friday.

 

 

The areas that will likely be seen as primary beneficiaries of the weekend trade truce and lifting of the Huawei ban will be semiconductors and telecoms. I viewed some of these rallies off the lows in the semis as potentially shortable, but only if we saw the general market roll lower. With the news flow now making a major shift, all that is out the window.

The real question is where we can find coherent long entry set-ups within the group since most of these names are extended off their lows. The first name that comes to mind, and one which will be a major beneficiary of the weekend trade truce is Advanced Micro Devices (AMD).

 

 

Something like Micron Technology (MU) is extended from its lows, but I did note in my Wednesday report that the move on that day could be treated as a bottom-fishing buyable gap-up (BFBGU). The stock has since cleared the 200-dma but stalled and reversed at the line on Friday. So, this is not in the best of long entry positions.

 

 

Other semiconductors that will likely pop on Monday include Broadcom (AVGO), Nvidia (NVDA), Qualcomm (QCOM), and Xilinx (XLNX). Aside from AVGO, these are not in coherent, buyable positions. Nevertheless, we will likely see all these gap-up on Monday, and it then becomes a matter of potentially treating them as buyable gap-ups, depending on how they play out.

Applied Materials (AMAT) and KLA-Tencor (KLAC) are also both wildly extended on the upside. Their rallies looked shortable as of Friday, but they will likely rally on Monday as well. We can see that the chart of AMAT shows the stock stalling and reversing slightly at its prior highs on heavy volume that was likely due to Friday’s Russell Index rebalancing.

KLAC has also been stalling in an extended move off its recent lows, so it, too, is not in a lower-risk long entry position. If the general market were to weaken and reverse for some reason, these would likely be primary short-sale candidates.

 

 

Telecoms will also likely benefit from the weekend trade truce. The current leader in the group is Ciena Corp. (CIEN), which has gone nowhere since its early-June buyable gap-up (BGU). It has since drifted lower in a short base and is now testing the 40.93 intraday low of the BGU day while dropping below the 20-dema and the prior 42.18 low.

In this position, the closer to the 40.93 price level it gets, the lower the entry risk if one uses the 40.93 price point as a selling guide. Otherwise, one can watch for the stock to post a move back up through the 20-dema and/or the 41.18 prior low in the base which would of course trigger a U&R long entry at that point.

 

 

Acacia Communications (ACIA) has been directly affected by the Huawei ban, so will also be seen as a primary beneficiary of the weekend trade truce. It has been hanging along the 200-dma in a formation that is either a bear flag or the lows of a potential new base. On Friday, the stock posted a pocket pivot at the 10-dma, 20-dema, and 200-dma on heavy volume that was likely influenced by Russell Index rebalancing.

I would be looking for some sort of bottom-fishing buyable gap-up (BFBGU) to emerge on Monday. The rules for handling a BFBGU are no different than those for a standard BGU. Once an intraday low can be determined, that then becomes your selling guide.

 

 

Arista Networks (ANET) may also see a pop on Monday as a big-stock telecom name. Like ACIA, it has been flopping around and just below its 200-dma. On Wednesday the stock posted a pocket pivot at its 200-dma and then retested the line on Friday as volume dried up.

As with ACIA, keep an eye out for a similar sort of bottom-fishing buyable gap-up (BFBGU) move to develop in ANET on Monday. I would also watch for similar moves in other telecom-related names like Finisar (FNSR), Lumentum Holdings (LITE), and Viavi Solutions (VIAV).

FNSR and LITE are just starting to move above their 50-dmas, while VIAV is sitting right at support along its 20-dema. All should be on your BGU watch list for Monday.

 

 

In Thursday’s video report, I noted that Facebook (FB) was pulling into its 10-dma as volume declined sharply. This came after an initial double-top type of break off the peak on Tuesday. Since the stock held support at the 10-dma, there is no short-sale set-up here. Instead, this was a long entry at the 10-dma, as noted in my Thursday video report.

We may see a gap-up breakout in FB on Monday. So, any kind of BGU that develops may become actionable. Play it as it lies.

 

 

Roku (ROKU) continues to move lower and closer to its 50-dma. As I wrote on Wednesday, a test of the 50-dma looks likely, and it is getting closer to the line as it posted a lower low on Friday. Keep an eye on both the 50-dma at 85.13 on the daily chart and the 10-week moving average at 87.85 on the weekly chart as potential support levels.

 

 

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 my view, the uncertainty regarding the weekend trade war news made it virtually impossible to take an aggressive stance long or short heading into the weekend. At least that would the case for prudent traders, while those with more of a gambler’s mentality could have placed binary bets on the weekend news flow. That is not my taste, however.

Without the weekend trade truce between the U.S. and China, it is likely the market would be heading lower this week, and perhaps sharply so. But shifting news flow is the wild card that often gets played in this market. In turn, this has created a mostly trendless, volatile environment among individual stocks mostly suited to swing traders.

The weekend trade truce only returns us to the status quo that failed to produce a trade agreement in the first place. While the President touts the idea that the Chinese economy and stock market have been beaten down so badly that the Chinese have no choice but to make a deal, it looks more like he’s the one providing major concessions by lifting the Huawei ban.

Meanwhile, how will the Fed view this? Does this take the pressure off with respect to having to lower rates at their next meeting? As I wrote above, I still believe the economy is weakening for reasons that are beyond the trade war, and the Fed seems to be aware of this. Fed Chair Jerome Powell stated in his last press conference that the Fed is more concerned with the global economic situation than it is with the trade war.

If we put a Fed that remains dovish together with some temporary relief in the U.S.-China trade war, then we might see a cash-is-trash move into stocks. My strategy here is simple. I expect we will see some gap-up moves in the market and individual stocks, especially those more directly affected by the Huawei ban, and these will offer actionable set-ups.

Buyable gap-ups have a certain beauty to them in that a) they can often produce sustainable moves of at least 2-3 days or more that are very sharp on the upside and b) risk is well-defined by using the intraday low of the gap-up price range as a tight selling guide.

If we see a bunch of buyable gap-up type of moves on Monday morning, and they all quickly fail, then we know that the initial upside reaction is in trouble. It’s that simple, and I have a very specific list of names as discussed in this report that I can play with this strategy in mind. I will expand on this in my weekend GVR. 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.