The Gilmo Report

June 5, 2019

June 5, 2019

News flow continues to be a major driver of the market’s daily direction. The week got off to a rough start on Monday on news that the Federal Trade Commission and the Department of Justice were going to target big-stock NASDAQ names for potentially monopolistic practices. This sent stocks like Apple (AAPL), Amazon.com (AMZN), Facebook (FB), and Alphabet (GOOG) plummeting to the downside.

The NASDAQ Composite took the brunt of the selling on Monday with a -1.61% decline vs. the Dow’s slight upside close and the S&P 500’s -0.28% decline. But news again was the culprit in sending the indexes flying back to the upside yesterday after comments from Fed Chairman Jerome Powell. Those comments were perceived as indicating that the Fed was moving away from debating whether to raise or lower rates to now focusing on the need to lower rates.

That sent the NASDAQ Composite and S&P 500 Indexes back above their 200-dmas. This morning, the market again gapped up, but the ADP jobs number released before the open put the market in a position of wondering whether a Fed interest rate cut would trump an obviously weakening economy.

After spinning negative earlier in the day, the indexes closed up in a two-day rally off Monday’s lows. Volume was lighter, but both the NASDAQ and the S&P 500 held their 200-dmas while the Dow pushed just past its own 200-dma. So far, a two-day rally off the lows.

 

 

As I noted in my Sunday video report, our first target low for the NASDAQ was the early-March low down at 7332.92. That would be the first place to look for any possible undercut & rally move following an extreme oversold condition taking hold Monday. Sure enough, that’s what we had yesterday as the undercut of the prior low on Monday led to a rally from there in classic U&R fashion.

I’ve noted in the past couple of reports that things were indeed getting quite oversold. By Monday, even the perma-bulls who call every market decline a buying opportunity were getting nervous again. So, the bounce yesterday that continued into today was logical. Overall, however, the intraday action has been nutty, if not downright rude, and that was certainly the case today.

Trying to trade in this swirling dervish of a market is challenging because of the sharp movements in either direction. While the chart above might look coherent, what happens inside those price bars can be quite volatile. For example, today we started out with a bullish gap-up, which quickly turned into a bearish reversal, but the bearish reversal turned into a bullish reversal, and the indexes continued higher on the day.

Because of this, the action is very difficult to decipher in real-time with respect to determining whether one should be going long or short on the rally. The bearish reversal looks like a signal to get short, but the market whips the other way and the bullish reversal looks like a signal to get long. And regardless of what you do, the psychological challenge of wondering whether the market is going to suddenly and abruptly reverse in your face adds to the difficulty factor. This is all consistent, however, with my view that this is primarily a swing-trader’s market.

On an individual stock basis, the action has been mixed, with set-ups on both the long and short sides playing out over the past three days. But you often have to be ready to ride the white-knuckler. Sometimes the long and the short side play out meaningfully in the same stock on the same day.

Case in point would be Coupa Software (COUP), which reported earnings Monday after the close. It then gapped up yesterday at the open to a print of 110.49 and then moved to an intraday high of 114.00. At that point it swooned to the downside, reaching an intraday low of 100.52. IF one was lucky and brave enough to short into the opening move, it yielded a nearly 14% drop.

That low took the stock right into the 50-dma at mid-day, and COUP then turned back to the upside on a manic bounce off the line. It closed at 112.42, a better than 12% rebound off the 50-dma, making for a combined 26% worth of movement in both directions on the same day. Once the dust had settled, on the chart we have a huge-volume pocket pivot at the 50-dma, and COUP continued to all-time highs today.

 

 

COUP is a great example of the manic, whip-saw action seen in certain individual stocks. Other stocks are less manic. Roku (ROKU) found an excuse to head for the $100 Century Mark, as I indicated it could in my weekend report. I wrote over the weekend, “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.”

ROKU launched through the $100 Century Mark today on strong buying volume in the midst of a market bounce. It had to be bought along the 10-dma yesterday, in my view, as the gap-up move today seems a little bit exhaustive. In any case, if one is long the stock, then the $100 price level becomes a convenient trailing stop.

 

 

In my weekend report I also noted that both of the ride-sharing IPOs, Uber (UBER) and Lyft (LYFT), had been acting well even amid the market shakedown. I noted that UBER was in fact still a live undercut & rally (U&R) long set-up based on the prior U&R move through the 39.46 low of May 20th.

After retesting the U&R low on Friday, UBER then held along the 10-dma on Monday and Tuesday morning before launching higher. It closed right at its IPO offering price on Friday at $45. In this position, it is extended.

 

 

Lyft (LYFT) is moving with its cousin after posting a pocket pivot at the 10-dma and 20-dema on Friday, as I noted in my weekend report. A brief test of the 10-dma yesterday as volume declined put the stock in a lower-risk entry position, as noted in yesterday’s video report after the close. LYFT is now extended, and the 10-dma is your reference for support on any pullbacks from here.

 

 

I noted in a blog post near the end of the day today that certain big-stock NASDAQ names were running into resistance. Apple (AAPL) plowed right into its 20-dema at the open today but reversed on slightly lighter volume. That put it in a lower-risk short-sale entry position at that point, and it may still be shortable on any further moves up closer to the 20-dema.

 

 

Amazon.com (AMZN) ran into resistance at its 200-dma today on the second day of a reaction rally after getting slammed through its 200-dma on Monday. Selling volume was huge on Monday, and this rally into the 200-dma makes AMZN shortable here, using the line as a guide for a tight upside stop.

 

 

Netflix (NFLX) was slammed on Monday as it broke below its 200-dma but closed just above the line. That represented an undercut of several prior lows in the pattern, and this led to a rally yesterday. The rally carried past the 20-dema today as the stock got to within less than 2% of its 50-dma.

If this market rally runs out of gas quickly, then NFLX, like AAPL and AMZN, could become shortable again here as it approaches the 50dma. I don’t consider the stock buyable in this position, so any further rally would only serve to bring it further into short-sale range, and we would look for this to coincide with any market rally failure.

 

 

Advanced Micro Devices (AMD) announced a partnership with Samsung on Monday, sending the stock back up toward its early-April highs near 30. That move did not hold up very long, however, and AMD reversed to the downside to close near its 50-dma. That was very bearish action, to say the least, but had you bought the stock at the 50-dma on Monday, you would have been greeted with a big upside move yesterday.

That’s what you call the popcorn machine, as AMD bounced sharply up and down over the past two days. It rallied with the market early today as it tested its prior highs around the $30 price area once again and stalled. Buyers don’t seem to be interested in the stock up here, but it certainly seems to find support along the 50-dma, no matter how ugly the action that got it there was.

In this position, AMD is extended to the upside and therefore not buyable. It may be shortable here at the highs of the range, but that would likely work best if we saw the current market rally fail and roll over from here. Otherwise, those eager to own the stock would be well advised to look for a pullback to the lower-risk position along the 50-dma to do so.

 

 

Cloud names that I have discussed in recent reports, got hit on Friday, as I noted over the weekend, but on Monday they were slaughtered. HubSpot (HUBS) was slammed further below its 50-dma on Monday as sellers swarmed the stock. HUBS was shortable at the 50-dma at the open on Monday per my discussion of the stock in my weekend report.

The big down-on-volume move Monday was, as we know, a buy signal, based on the by now well-known “new math” of this market whereby DBOV=BS. I tweeted about HUBS yesterday as being buyable on this basis, and the stock has since shot back up over nine points from Monday’s low near the $160 price level.

Technically, HUBS is a late-stage failed-base (LSFB) short-sale set-up. The idea here following Monday’s break would be to seek to short into the current rally as it potentially runs out of gas near the 50-dma. The 50-dma would then serve as a guide for an upside stop.

This is, of course predicated on the notion that the current market reflex rally will turn out to be just that – a short rally that eventually rolls over, just as every rally since the early-May highs has been. There is, of course, no guarantee of that, but while Monday’s DBOV move perhaps made HUBS buyable, it is now extended on the upside and possibly once again approaching shortable levels near the 50-dma.

 

 

Zendesk (ZEN) is another cloud name that was slaughtered on Monday after breaching its 50-dma last week. As I discussed over the weekend, ZEN was shortable just under the 50-dma while using it as a guide for a tight upside stop. From there, the stock broke sharply to the downside on heavy selling volume as it undercut a prior mid-April low.

Notice again how the DBOV=BS new math comes into play here in conjunction with a U&R move back up through the prior mid-April low. If one were short the stock on Monday near the 50-dma, then this move below the mid-April low was a short-term cover signal. Now, ZEN is pushing sharply back to the upside as it approaches its 50-dma with volume declining sharply.

This is a late-stage failed-base (LSFB) short-sale set-up, so this rally back up into the 50-dma has to be watched for a potential short-sale entry near the line. Keep in mind, as I’ve noted above, that you would want to time your short-sale entries on any stocks running into logical resistance with a similar reversal in the general market.

 

 

ZScaler (ZS) is another late-stage failed-base type of set-up, but it is in a much less-distressed position on its chart compared to HUBS and ZEN. It had already broken below its 20-dema and 50-dma last Friday, leading to a reaction move back up through the 50-dma yesterday that carried back up to the prior base breakout point today.

Within the context of a market rally failure, we can look for ZS to fail right here at the prior breakout point, while setting a tight stop just above our entry. Now, let me make it very plain that if the market keeps rallying, then these LSFB short-sale set-ups may continue rallying as well. We’ve seen that happen many times before in this market, which has given rise to the phenomenon of the re-breakout as a common occurrence.

 

 

ServiceNow (NOW) is another variation on the brutal selling we saw in cloud names on Monday. Its move through the 50-dma came on heavy selling volume, but at the same time it also filled the prior gap-up rising window from late April. That led to a rally from there that has carried back up through the 50-dma and into the 20-dema.

In many ways, the rallies we’re seeing in individual stocks that were hammered on Monday are not out of character with the Ugly Duckling nature of this market. Things start looking about as ugly as they can, but that is just when a low is put in and we reverse back to the upside. And, in most cases, the upside reversals occur after an Ugly Duckling entry shows up, such as a U&R set-up, a gap-fill, or a moving-average undercut & rally move.

We could presume that NOW is a short here as it comes back up into the 20-dema, but keep in mind that this is technically NOT a late-stage failed-base short-sale set-up. That’s because it is still holding above the buyable gap-up breakout it posted in late April. As with other stocks in similar positions. after a sharp breakdown on Monday, failure will likely have to coincide with a market rally failure.

 

 

Okta (OKTA) failed on its Friday buyable gap-up attempt after reporting earnings. But notice how this just resulted in a gap fill where the stock pulled in on Monday to fill Friday’s gap-up rising window. At the same time, it successfully tested and held support at the 20-dema.

From there, OKTA turned with the market and posted an all-time closing high today on strong volume. I wrote over the weekend that one could have treated OKTA as a buyable gap-up using the 110.51 intraday low of Friday as a selling guide. But once the stock broke below that price level on Monday, the BGU was out the window.

However, that’s where the gap-fill occurred, and OKTA was able to recover and rally from there. So, we see how an orthodox BGU fails but then works out after a less orthodox gap-fill occurs in the pattern. These are the types of things one has to be alert to when navigating this market as a swing-trader.

 

 

The Trade Desk (TTD) blasted through its 50-dma on the upside yesterday on a big-volume, streaking pocket pivot. Recall that over the weekend I wrote that members should “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.”

That discussion turned out to be prophetic as TTD cleared the 50-dma yesterday and today posted an all-time closing high. Now, of course, the stock is extended, but the idea was a good one to keep an eye out for per my discussion of the stock over the weekend.

 

 

Etsy (ETSY) remains a late-stage, failed-base, short-sale set-up in process. It was last and most optimally shorted at the 50-dma last week per my discussion of the stock in my report of two weekends ago. The stock has since been drifting around in a slightly descending, six-day bear flag as it remains below the 10-dma and 20-dema.

In this position, I view ETSY as shortable on rallies up into the 20-dema. Should it continue past the 20-dema, then the 50-dma may come into play as more significant resistance at that point. Where and how it fails, assuming it does, will likely depend on the state of the general market as it approaches resistance at the 20-dema or 50-dma.

 

 

The crazy, at times misleading, action in individual stocks is quite evident in the chart of Snap (SNAP). I viewed the stock as potentially shortable near the highs of its current base/price range, and that view worked out wonderfully on Monday. SNAP rallied up toward its range highs near the $12.50 price level that day and reversed badly on heavy selling volume.

That outside reversal to the downside looked quite bearish, and one could have easily concluded that the stock was headed lower. Wrong! Instead, SNAP pretended that Monday never happened and proceeded to blast to higher highs on big buying volume in what was an impressive base breakout.

Based on Monday’s action, one would never have expected this. In any case, SNAP is now extended on the upside. But if the general market rally runs into trouble in the next few days perhaps it becomes another short at the highs. And I only say that because it doesn’t look like it should be shortable given the seemingly bullish base breakout seen yesterday.

 

 

As SNAP breaks out, Facebook (FB) breaks down, or, more accurately, blows up. As I indicated in my report of last Wednesday, a breach of the 50-dma would trigger the stock as a short-sale at that point. That breach occurred on Friday, and on Monday a gap-down open got ugly as the stock streaked all the way down to its 200-dma on massive volume.

The ensuing two-day bounce with the market looks a bit like the old rebote del gato muerto, or for those of you who are English-only, a dead cat bounce. Volume has declined sharply on the bounce, but in this position, there are no lower-risk short-sale entries given the severe downside extension. We can only watch for the declining 10-dma and 20-dema to come into range before determining where a new short-sale entry point might occur.

 

 

While FB isn’t in a lower-risk short-sale entry position, perhaps Twitter (TWTR) is. The stock blew through its 50-dma on Monday and has since wedged back up into its 50-dma where it stalled today. In my view, this puts TWTR in a lower-risk short-sale entry position here, using the 20-dema, for example, as your upside stop.

 

 

Besides UBER and LYFT, the other recent IPOs I’ve discussed in the past three reports continue to act reasonably well. Tradeweb (TW) continues to hold tight along its 20-dema after posting a pocket pivot at the 10-dma on Friday. I would remain opportunistic here, looking to buy on pullbacks to the 20-dema while using the line as a tight selling guide in case things go bad.

 

 

Zoom Video Communications (ZM) continues to hold up well along its 20-dema as volume remains light. Unfortunately, there is nothing to do here right now given that the company is expected to report earnings tomorrow after the close. So, put this on your earnings watch list and we’ll see if anything actionable transpires after earnings.

 

 

The Ugly Duckling paid a visit to Sciplay Corporation (SCPL) today on an undercut & rally move through the prior May 20th low at 14.74. That worked out well as the stock closed in positive territory today but is now out of range of the U&R entry point at 14.74. Watch for any constructive retests of the 14.74 level as potentially opportunistic, lower-risk entries on any pullback from here.

 

 

Parsons Corp. (PSN) is also working on a base, and we now have a new reference low in the pattern. That would be the 30.88 low of last Friday, which can be used as a reference for an undercut & rally move, should that occur, or a Wyckoffian Retest of that low. I would maintain an opportunistic approach here, seeking to enter along the lows on one of these two concrete set-ups.

I like these IPO ideas as names to keep in my back pocket just in case the market comes out of this current correction and resumes its uptrend. So far, these names, especially UBER and LYFT, are holding their own in a nutty and volatile environment. If the market finds its feet, I think they stand a reasonable chance of providing some upside alpha, as UBER and LYFT already have.

 

 

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.

I’m sure I won’t get many arguments over just how difficult this market is. But this is expected. I’ve been writing throughout May that the state of this current market correction is determined on a daily basis by the news flow.

As I’ve said, the news flow has the potential to create overnight gaps in either direction. This is combined with hairy sell-offs, streaking rallies, and neck-snapping intraday reversals depending on what the headlines are saying on any given day.

If one was looking to play a bounce on the long side, that time came yesterday and today. I noted several potential set-ups in last night’s Gilmo Video Report (GVR), and these offered some reasonable swing-trading opportunities this morning. It’s not easy to step in on the long side with conviction, especially when the market gaps up at the open and then reverses in short order.

So, one is always caught looking over their shoulder. I know I am. I’ve seen things look one way only to quickly change their appearance one too many times. Therefore, this remains a market mostly for swing-trades who are resourceful, alert, and well-versed in the often contrarian set-ups that provide opportunity long or short in an otherwise volatile market. 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.