The Gilmo Report

June 9, 2019

June 8, 2019

News remains the primary driver of this market, and we’ve seen all manner of headlines push the indexes to and fro this past week.  Tariffs on Mexico, tariffs on China, delayed tariffs on either, talk of the FTC and the DOJ coming down on big-stock tech “monopolists,” Fed heads cooing dovishly, and a weak jobs number on Friday were all elements of this basic equation regarding a news-driven market.

The rally over the past four days, however, has fed (no pun intended) on the idea that the Fed must begin lowering rates soon. Friday’s weak jobs number of 75,000 vs. estimates of 180,000 coming on the heels of Wednesday’s ADP report of a meager 27,000 new jobs all helped to reinforce this. Interestingly, however, the futures sold off following the release of Friday’s jobs number only to rally on news of a delay in tariffs on certain Chinese products.

Perhaps after further consideration, the market decided that it liked the possibility of easing trade tensions with China combined with a weak economy that could very well bring the Fed to lower rates. So, the indexes took off, with the NASDAQ Composite Index leading the way among the Big Three Indexes.

Big-stock NASDAQ tech led on the day, however, as the NASDAQ 100 Index led all comers with a 1.94% move. Despite the index strength, volume was lower on both the NYSE and a mere 0.17% higher on the NASDAQ. So, while some may want to call Friday’s action a so-called follow-through day it strikes me as a bit arbitrary.

 

 

With such a scant volume increase on the NASDAQ, one might wonder that If volume were 0.17% lower, would the market somehow know that it wasn’t a follow-through? Doubtful. But quibbling over a follow-through on Friday is not relevant to me, frankly.

The reality is that we already had some long ideas in our back pocket per my last two reports. The market rebound set these in motion, and most of these back-pocket long ideas were already working before Friday’s alleged follow-through. In the Age of QE, I find that turns in the market are best determined by the action of the indexes and individual stocks around prior lows

As far as I’m concerned, the market could keep rallying without a follow-through day, which it has done many times before. By the time you get a follow-through, the move in stocks off the lows has already gotten a bit frothy. We can also see that there were many concrete Ugly Duckling and not-so-Ugly Duckling set-ups to be had earlier in the week.

Roku (ROKU) was one such idea, and I wrote in my report of last weekend that if the stock found an excuse to head for the $100 Century Mark, it would. A market rebound off the lows provided that excuse early in the week, and ROKU pushed through the $100 Century Mark on Wednesday.

Notice, however, that it hasn’t made a huge amount of progress beyond the $100 price level. I’d like to see it settle in here, but those who like the stock and want to add could do so using the Century Mark as a tight selling guide for share purchases above 100.

 

 

The Trade Desk (TTD) was another long idea that triggered once the stock cleared the 50-dma on Tuesday. Note that the big pocket pivot move on Tuesday also occurred on the first day of the market’s rally attempt. In last weekend’s report, I wrote that members should watch for this as technical evidence of the stock morphing from a short-sale target to a long target.

As I noted last weekend, TTD was holding up in a tight flag formation just below the 50-dma as the general market was continuing to sell off. I therefore viewed this as contrarian strength, but we need to see the stock clear the 50-dma first, and that occurred on Tuesday. Bingo.

 

 

Uber (UBER) also worked well this past week, and you will note on the chart below that the stock was setting up as early as Monday. To review, this set-up went into play on the long side after the stock successfully tested the 39.46 low after earnings two Fridays ago. That was constructive action.

UBER then held along the 10-dma on Monday during the hairy market sell-off as volume declined. On Tuesday, it briefly tested the 10-dma and then launched higher, breaking out to new highs on Wednesday. Over the past two days it has consolidated that move, but on Friday after-hours the company announced the departure of its COO and marketing head.

That sent the stock to the downside Friday in after-hours trade, but that looked like a nice buy-back opportunity. UBER broke to an after-hours low of 43.15 before the company explained the departures as based on the fact that these positions were no longer relevant. That kept the after-hours pullback to a minimum. But it was clear, based on the action going into the close as UBER sold off while the market rallied, that the news was already known since it was first released in an email to the company’s employees.

I view any pullback in UBER down closer to the 10-dma as buyable from here. So, if the stock is still down from Friday’s 44.16 close when it opens for trading again on Monday, that may offer an opportunistic entry. The 10-dma then becomes your nearest support reference.

 

 

I prefer UBER over Lyft (LYFT) if forced to choose between the two, but in this market, I see nothing wrong with playing both. LYFT posted a pocket pivot along the 10-dma and 20-dema two Fridays ago, and has inched higher since then. On Tuesday it tested the 10-dma on light volume and then moved to higher highs on Wednesday.

There is still some resistance from the left side of the chart above the $60 price level. So, the pullback over the last two days is not surprising. Friday saw the second test of the 10-dma of the week on a nice voodoo volume decline to -63.4% below-average. This puts LYFT in a lower-risk entry at the 10-dma, using it or the 20-dema as tight selling guides.

 

 

If one likes big-stock breakouts, then I suppose Friday’s big-volume breakout in Microsoft (MSFT) is the ticket. Note, however, that Monday’s big down day on huge volume was a buy signal based on the new math of down-big-on-volume = buy-signal (DBOV=BS) that is characteristic of this market.

Of course, Friday’s dull but orthodox, standard-issue base-breakout can also be considered actionable for those who like that sort of thing. Speaking for myself, going with the DBOV=BS signal was decidedly before-the-fact, and certainly quite profitable over the week, before the new-high breakout.

 

 

Other big-stock NASDAQ names are less convincing on the upside. For example, Apple (AAPL) ran into its 200-dma on Friday and closed just below the line on above-average volume. While it looked like a short at the 20-dema on Wednesday, as I noted in my report of that day, remember that I warned that the short side would only come into play if the general market rally failed.

And since we’re on the topic, I would note that for the most part the short side was not in play based on the fact that the proper market context of a rally failure was never present after Monday. Certainly, we can have a short-selling plan ready if this occurs, but this quite obviously did not come into play based on the lack of a rally failure.

That can change, so it behooves us to have at least some short ideas in our back pocket in case the rally does fail. AAPL at the 200-dma could be viewed as a short-sale target, therefore, within the appropriate context of any general market rally failure. It would be a bullish development if it can clear resistance, however, so it is something to watch for.

 

 

Netflix (NFLX) also kept rallying within the general market context of a four-day rally off the Monday lows, which was also the case with AAPL. Its rally took it into its 50-dma on Friday, where it stalled and spun around before closing just below the moving average. If the market rally fails, this could also be in an optimal short-sale position.

I tend to think, however, that if the general market keeps rallying, stocks like AAPL, NFLX, and others will just keep moving right through near-term resistance. Therefore, they have to remain non-actionable short-sale ideas pending the appearance of a market rally failure.

 

 

In cases, where a stock shakes out below a moving average and then moves back above it, we have the typical moving-average undercut & rally long set-up. Amazon.com (AMZN) would qualify as a moving-average undercut & rally (MAU&R) long set-up by virtue of moving above its 200-dma. MAU&Rs work for the same reason that U&Rs can work. That would be the way they fake out the crowd that views the breach of support at a prior low or a moving average by shaking out and turning back to the upside.

So, AMZN breaking below its 200-dma on a DBOV=BS move on Monday looked like a serious breach of support at the line. But after shaking out below the 200-dma, AMZN cleared it on Thursday and continued higher on Friday. That set up an actionable MAU&R, which is a very simple set-up where risk can be kept to a bare minimum by using the moving average as a tight selling guide.

AMZN is now testing resistance at its 20-dma and the prior lows along the neckline of the fractal head & shoulders it formed in April and May. This should get interesting here. If the market keeps rallying, then I would expect AMZN to continue up toward its 50-dma. Otherwise, resistance here at the 20-dema could come into play within the relevant context, which by now you should know.

 

 

Cloud names discussed in recent reports help to illustrate the new math of DBOV=BS. All of these stocks in the group chart below got slammed on Monday. But that was it. Down big on volume, so just buy it if the market turns. In several cases there were concrete entries on the pullbacks that could have been acted on as typical Ugly Duckling set-ups.

Coupa (COUP) was a big-volume pocket pivot off the 50-dma on Tuesday but worked out as first a short near the open and then a long at the 50-dma. The end result as it shows on the chart, without revealing the nutty intraday volatility, was a pocket pivot. COUP has since continued to new highs. It finished the day as a pocket pivot and has since continued to new highs.

HubSpot (HUBS) was just a DBOV=BS buy on the market turn Tuesday, as I tweeted in real-time that day. You either acted on the basis of my tweet or you didn’t. ServiceNow (NOW) filled its prior buyable gap-up rising window on Monday on the DBOV breakdown and has now V’d its way back up to its recent highs.

Okta (OKTA) failed briefly on a buyable gap-up move from two Fridays ago after earnings but substituted the BGU with a simple gap-fill down to the 20-dema. It then bounced off the 20-dema and is now extended in new-high territory. Zendesk (ZEN) undercut its prior April low on Monday on a DBOV type of move that was also an undercut & rally (U&R) move.

ZEN has now V’d right back up to its prior highs. Finally, ZScaler (ZS) has pulled a classic re-breakout move following its initial failed breakout attempt in May. Technically, the re-breakout becomes actionable using the 72-73 price level as your selling guide. Otherwise, a constructive pullback to the 10-dma offers a potentially lower-risk entry, should it occur.

 

 

Snap (SNAP), not shown here on a chart, is further extended from its breakout earlier in the week. I would watch for pullbacks to the 10-dma, currently at 12.40, as potentially lower-risk entries. Meanwhile, Twitter (TWTR) cleared its 50-dma on Friday on a typical MAU&R type of move.

The big-volume break on Monday was another DBOV move, something that was seen in a wide swatch of stocks that day. TWTR was just one of many. The MAU&R was technically actionable on Friday, but the stock is extended so that only pullbacks to the 50-dma (which is in confluence with the 10-dma and 20-dema) would offer lower-risk entries from here.

 

 

Facebook (FB) continues to rally with the market following Monday’s DBOV breakdown. Support at the 200-dma has held, so far, and it’s now a matter of seeing how the stock acts as it approaches its 10-dma, 20-dema, and 50-dma.

Talk of breaking up the company has plagued the stock, but it’s not clear how easy that would be to do from a regulatory standpoint. That said, I don’t see any actionable entries on the chart in either direction. The only one would have been the DBOV=BS breakdown on Monday, and that is long past at this point.

One new development at FB that I find intriguing as something new is its proposed crypto-currency, GlobalCoin. If FB can avoid or mollify the wrath of those who want to break up and regulate the company, then this may be something that can add something to the “N” in CAN SLIM™ and drive a new cycle of growth. We shall see.

 

 

Advanced Micro Devices (AMD) cleared the left-side peak of its current base, but in my view, one had to be bravely buying the stock near the 10-dma, 20-dema, and 50-dma earlier in the week. When the market turned on Tuesday, it was possible to pick up shares near the 10-dma early in the day.

In this position, AMD is extended, so it would be a matter of seeing how any potential pullbacks develop from here. The $30 price level would be one point of reference for support, although I might look for the rapidly rising 10-dma to provide a more solid reference for support on any pullback.

 

 

Etsy (ETSY) worked well as a short last week but is again rallying up to its 10-dma. It along with many other names, exemplifies why I have viewed this market as a swing-trader’s market even on the short side. Monday’s severe breaks in so many stocks were one-day wonders, and good for short-side swing-trades and nothing more (see cloud stocks above).

The question here is whether ETSY is once again a short here as it bumps up into the 50-dma, where it stalled on Friday on lighter volume. As I wrote on Wednesday, how far ETSY rallies from the lows earlier in the week will depend on what the general market does. And so the four-day market rally has led the stock back up to the 50-dma.

This could be interesting here, since a continued market rally might trigger a move through the 50-dma. I would note that this would not be viewed as an MAU&R since ETSY has been living below the 50-dma since early May. An MAU&R should act more like a U&R, where the stock briefly shakes out for one to several days before moving back up through the moving average (see my discussion of MAU&Rs above).

 

 

Tradeweb (TW) is still setting up as it builds a base-on-base type of formation following its mid-May breakout. The stock posted a U&R through the prior 42.33 low on Tuesday. It is now pulling back to test that low as volume declined. This becomes buyable here using the 42.33 low as a tight selling guide.

 

 

Zoom Video Communications (ZM) reported earnings after the close on Thursday and gapped up Friday morning. I was watching the stock after-hours on Thursday and noted that the best entries occurred right after the report as the stock briefly hovered around the 85-87 price area. The next morning it opened at 93.66, then ran up to a peak of 98.89 within the first 15 minutes of trade.

That was the high of the day, and ZM then slowly rolled down to an intraday low of 92.50 before closing at 94.05. Technically, this remains buyable as a BGU, using the 92.50 low as a selling guide. Overall, however, Friday’s action was a big stall and reversal off the highs. I suppose one could fantasize about a possible gap-fill down to the 10-dma as a more opportunistic entry, but for now the BGU remains in force.

 

 

Sciplay Corporation (SCPL) moved back up to the highs of its current price range or base around 16 after posting an undercut & rally (U&R) through the prior 14.74 low on Wednesday. It is now pulling in to test that low again. As it approaches that low, it gets closer to a lower-risk entry that would then use the 14.75 level as a selling guide in standard U&R fashion.

 

 

Aside from ZM, most of these recent IPOs I’ve discussed in recent reports remain within short bases. Parsons Corp. (PSN) is doing the same as it moved back to the highs of its price range on Friday. I’ve got my eye on the 30.88 low in the base as a possible opportunistic U&R entry should that occur.

However, PSN may also set up along the 10-dma, holding tight sideways as volume declines. That would offer another way of looking at this depending on how it plays out. For now, the IPO base is constructive, and it is now mostly a matter of determining the best entries based on the real-time action going forward.

 

 

I would also note that there were some breakouts on Friday in names I’ve discussed in my Gilmo Video Reports (GVR) over the past week or so. For example, we saw a nice upside move in recent IPO Shockwave (SWAV) after it pulled into and held tight along the 10-dma. Mongodb (MDB) also broke out on Friday, along with Monster Beverage (MNST).

However, as you know, I am not a big fan of chasing breakouts. But those who like this sort of thing can certainly act on those in the usual manner but tend to favor a more opportunistic approach to buying stocks. One example might be GW Pharmaceutical (GWPH), which did not rally with the market on Friday and instead sold off -2.3% on above-average volume.

That looks pretty ugly but note that the stock is undercutting the prior 171.71 low in the pattern as it also runs into the 65-dema where it found support on Friday. As I’ve discussed in prior GVRs, the 65-dema often comes into play when a stock drops below the 50-dma. Also, we have the additional factor of Friday’s action being a down move on high, but not heavy, volume.

In my view, GWPH can simply be watched for a possible U&R move back up through the 171.71 low as an opportunistic entry. This keeps risk to a minimum and avoids the need to guess at a low, unless one wishes to scoop shares here using the 65-dema as a tight selling guide. Friday’s action was likely a function of FDA hearings the day before regarding the use and marketing of CBD, but I fail to see how this has a significant impact on GWPH.

 

 

Another interesting idea here is Stitch Fix (SFIX), which gapped up after earnings on Thursday. The gap-up move initially turned out to be shortable for a quick scalp on the reversal off the highs. But notice how the stock tested the 50-dma on Friday and closed back above the 26.50 intraday low of Thursday’s buyable gap-up price range.

It ended the day at 27.97, just above the 200-dma. This will be interesting to see if it can hold the 200-dma, or whether it retests the 26.50 BGU low. BGUs don’t necessarily have to work right away, or even at all. Sometimes, a BGU failure and move lower just ends up producing another type of entry on a gap fill (see OKTA) or rebound off a moving average lower in the pattern (see COUP).

SFIX beat estimates and raised forward guidance while posting a 29.1% YoY increase in revenue while active clients grew 17% YoY. The stock also had 10 million shares of its 44 million share float sold short as of the last reported date, but traded 21,763,000 shares on Thursday, which tells me that there was more than just short-covering that day.

There are two ways to handle this. Either wait for another test of the 26.50 BGU low or buy it here and use the 200-dma as a tight selling guide. My guess is if the market goes higher, SFIX may likely do the same, and it is still about half-way down from its prior 52.44 high of last year.

 

 

I’ll have some more orthodox and unorthodox Ugly Duckling ideas to show you in this weekend’s GVR.

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 Friday’s marginal follow-through day in the NASDAQ only is intriguing, it is not the be-all-end-all signal that tells me to start piling into this market on the long side. The reality is that the best set-ups, many of them of the Ugly Duckling variety off the lows earlier in the week, were already there before the follow-through.

I would just remain focused on the action of individual stocks. This market is still one that is highly, if not excessively influenced by news, and no doubt there will be more market-moving news to come. On Friday evening, the President announced a trade deal with Mexico that would avoid the previously threatened tariffs, so we might expect a gap-up open on Monday.

Most stocks have been rallying off their lows for the past four days and are out of optimal buying range in most cases. Therefore, I don’t see that one necessarily has to pile into just anything without paying close attention to where the lower-risk entry points are in the pattern.

My basic take on the market can be summed up as follows. The four-day rally saw a large number of Ugly Duckling set-ups, along with other more orthodox set-ups, start moving earlier in the week, before the follow-through. With the market now up four days, a pullback is possible. At that point we’ll get a chance to see whether the market rally has legs.

It may be that all the bad news is out, and the worst case scenarios are now known. Meanwhile, the Fed is ready to lower rates as needed, and that may put some wind in the market’s sails. Play it as it lies.

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 a position in UBER, 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.