The Gilmo Report

March 10, 2019

March 9, 2019

The major market indexes spent the week selling off. A steady slide for four-straight days was capped off on Friday with a weak 20,000 jobs number and overnight news of plunging Chinese exports. The Chinese markets were also roiled by news that the U.S. and China are still far from a trade agreement.

This sent the S&P 500, the NASDAQ Composite Index, and the small-cap Russell 2000 Indexes further below their 200-dmas, all of which had already been breached earlier in the week. But Friday’s gap-down open turned out to be of the exhaustion type after four prior days to the downside.

The Dow Jones Industrials, which remains the only major market index that is still above its 200-dma, pulled in to test the line but never quite got there, rallying off the lows as volume declined. Friday’s action had the feel of a low-volume shakeout on the fifth day of a sell-off from the recent highs.

 

 

The NASDAQ Composite and S&P 500 both closed below their 200-day moving averages for the second day in a row on Friday. But, like the Dow, the action was constructive in that both indexes also gapped down and set their intraday lows right at the outset without any further, substantial downside. From there it was all up. By the close, the NASDAQ, which had sold off over -1% at the open, closed negative by a scant -0.18% on Friday.

 

 

The Russell 2000 Index had already been floundering along its 200-dma last week. After regaining the line last two weeks ago, it gave it up by Tuesday of last week before regaining it again two Fridays ago. It then promptly slashed back below the 200-dma this past Monday. However, it found support off the Friday intraday lows as well, and closed just a hair in the red at -0.11%

 

 

I’ve said it many times before, but in this market an opportunistic approach seems to work best. Even when things seem to get away from you, it is always best to remain patient and wait for the opportunities to come bounding your way. Chasing things on the upside or the downside, is not consistent with the way this market acts.

So, we knew we were in a position where we could pull back, and the possibility of that picked up some clues early in the week. The weak showing for the market this past week was initially signaled by the change in character of leading stocks, notably cloud-related names and others, on Monday. I noted that both in my Monday GVR and my Wednesday written report.

This was why I turned cautious early in the week. So, in addition to picking off some short-sale opportunities during the week on earnings-related gap-ups or otherwise, it was necessary to keep an even psychological keel and remain on the lookout for opportunistic long entries, if you could get ‘em.

Etsy (ETSY) shows how my favorite moving average, the 20-day exponential moving average, otherwise known as the 20-dema, often serves as opportunistic support for the best stocks. It gapped down on Friday and moved a little lower, through the line, which set up either a possible gap-fill of the prior buyable gap-up after earnings, or a moving-average undercut & rally set-up at the 20-dema.

The latter won out, as ETSY quickly regained the 20-dema and headed higher from there. It also moved back above the prior, buyable gap-up day intraday low at 64.25. That could also have been played as a straight price undercut & rally or U&R once the stock pushed back up through the 64.25 low.

So, there were a variety of ways to look at ETSY on the long side, despite Friday’s gap-down open. In fact, it was the gap-down open that produced the opportunity, for those who are opportunistic. But it’s not as if one is trying to catch a falling knife, because there are specific Ugly Duckling long set-ups at play here.

The gap-fill was a possibility at the open, but that did not play out. The 20-dema MAU&R (moving average undercut & rally) and the 64.24 price U&R long entry did, however. And in both cases risk can be controlled by using the 20-dema as a selling guide in the former case, and the 64.24 price low in the latter. At the close, ETSY printed 67.77. Bingo.

 

 

Even more interesting, I viewed ETSY as a short on Thursday when it rallied back above 70-71 on the day of its Investor Day conference. Eventually, the stock topped out at 71.90 on a 620-chart MACD Cross, and then it was straight down from there, as the five-minute 620-intraday chart from Thursday, below, shows.

 

 

Workday (WDAY) could have easily slashed through its 50-dma on Friday after bouncing off the line on Monday. It looked as if it was going to roll right through the 50-dma early on Friday, but selling volume never showed up. Instead, all you got was a test for supply at the 200-dma and supply never showed up. The 50-day line therefore offered a lower-risk, opportunistic entry on Friday.

We’ll now see whether this pullback to the 50-dma, the first since the late January breakout, offers a lower-risk entry. We’ve seen many big-volume sell-offs where stocks find their feet and then move back to the upside.

 

 

Splunk (SPLK) is showing a little less spunk, closing below the 50-dma on Friday. One might think this is a short here, using the 50-dma as a guide for an upside stop, but the real short-sale points came on the gap-up move after earnings and the ensuing breach of the 20-dema.

Now, with the stock sitting below the 50-dma, the stage is set for a MAU&R back up through the line. This doesn’t have to happen, but it is something to watch for. My tendency is to think that SPLK as a short is a bit obvious now, and at least some sort of reaction rally, perhaps up to the 20-dema is likely from here.

 

 

Looking at the groups charts of cloud-related names I’ve discussed in recent written reports we can see the Coupa Software (COUP) found deep support at its 50-dma on Friday. It did not close back above the 20-dema, however, but a long trade off the intraday lows on Friday was possible.

Autodesk (ADSK) is dangling above its 50-dma, while Salesforce.com (CRM) bounced off its 50-dma on Friday. Now it’s in no-man’s land. Tableau Software (DATA) pulled a U&R type of move on Friday but is running into resistance at its 20-dema. ServiceNow (NOW), is holding support at its 20-dema and posted a U&R move on Friday.

Among all of these in the first cloud group chart, NOW seems to be in the lowest-risk entry position, with the idea of using the 20-dema or the prior low at 228.67 as reasonably tight selling guides. With COUP and CRM, the bounces off the 50-dmas were constructive, but one would have had to enter at the 50-dmas on Friday. Now they’re out of position.

 

 

In the second cloud group chart, we see Atlassian (TEAM) dangling just below its 20-dema, so the position is unclear. Trade Desk (TTD), however had a nice bounce from a point near its 20-dema. Notice the similarity between TEAM and Twilio (TWLO), with the sole difference that TWLO is above its 20-dema, while Team is not.

Zendesk (ZEN) is in turn a bit like TWLO, as it is holding its 20-dema and pulled a U&R through the Monday low at 74.61. The stock seems a little bit out of position here, although one could look at this as an MAU&R at the 20-dema and go long here with the idea of using the 20-dema as a tight selling guide.

ZScaler (ZS) is holding up just fine after its post-earnings buyable gap-up (BGU) and sits in a short flag formation. It was buyable on the pullback closer to the 55.30 intraday low of the BGU day 2when it pulled back on Monday. It is now extended on the upside from the BGU low.

The main question with DATA, TEAM, TWLO, WDAY, and ZEN is whether they are forming short little bear flags that will flop around for a while before heading lower. This is unclear, but those that have regained the 20-dema can be tested on the long side, but one must use the 20-dema as a tight selling guide to keep risk at a minimum.

 

 

All of this presupposes, of course, that the general market has made a short-term low. If it hasn’t, then any of these could play out as short-sale targets depending on the action over the coming days. So, one must be flexible here, and open to new, real-time information as it occurs.

Cyber-Security Stocks

Over in Cyber-Security Land, we can conclude that FireEye (FEYE) and Fortinet (FTNT) are out of the running for now. But Palo Alto Networks (PANW) could be a different situation despite failing on its post-earnings buyable gap-up (BGU). It failed below the BGU intraday low of 250.60 very quickly after the BGU day and never looked back.

But it could find new life in the fact that it has now filled the prior gap and is finding support at the 20-dema. This puts it in a position where it can be tested on the long side, using the 20-dema as a tight selling guide. If PANW fails to hold the 20-dema, then it could quickly morph into a short-sale target at that point. Be open to either possibility.

CyberArk Software (CYBR) found support near the 20-dema on Friday where it was buyable in opportunistic fashion and remains well above critical support at the $100 Century Mark. Mimecast (MIME) is dangling just below its 20-dema, but one can watch for a move above the 20-dema as a moving-average undercut & rally type of move, using the 20-dema as a tight selling guide. 

Qualys (QLYS) is bouncing along support at the 50-dma and closed just below the 200-dma on Friday. This is still in flux, but a move back up through the 200-dma would trigger a possible MAU&R long entry using the 200-dma as a tight selling guide, so is something to watch for.

 

 

NASDAQ Big Stocks

Friday was all about opportunism on the long side, and the charts of the Big-Stock NASDAQ names that I follow are no different. Facebook (FB), Alphabet (GOOG), and Netflix (NFLX) all found support at or near their 200-dmas and bounced. Obviously, buying near the 200-dma was the proper entry Friday, and if one did not step in at that point the opportunity has now passed.

Apple (AAPL) posted an MAU&R at the 20-dema on Friday, which is buyable using the 20-dema as a tight selling guide. Meanwhile, Intel (INTC) bounced off its 20-dema on Friday, and Nvidia (NVDA) posted a MAU&R at the 50-dma. This puts NFLX in a buyable position using the 50-dma as a tight selling guide.

Finally, Amazon.com (AMZN) posted an undercut & rally (U&R) long set-up after undercutting the prior 1600.56 low of February 18th and rallying back above it on Friday. Note that in most cases, these big-stock NASDAQ names sold off with the market over the past five days, some harder than others, before finding support on Friday, which is logical.

This doesn’t mean, however, that they are all destined to roar back to new or higher highs. It does mean that the opportunistic entries were there on Friday to those who were alert to them and helps bolster the argument that an opportunistic approach to this market is often an effective one.

 

 

Semiconductors

We can also see that semiconductors acted the same way as everything else did on Friday, finding support or deep support at key moving averages. So here we see I haven’t discussed many semiconductors in my written reports, but several names have been staples of the GVR. Advanced Micro Devices (AMD), Applied Materials (AMAT), Broadcom (AVGO), and Micron (MU) all bounce off their 50-dmas on Friday after previously breaking below their 20-demas.

KLA-Tencor (KLAC) held support at its 20-dema, while Xilinx (XLNX) closed just below its 20-dema. Texas Instruments (TXN) bounced off deep support at its 200-dma. As did the Vaneck Vectors Semiconductor ETF (SMH), which represents the broader semiconductor group.

As with everything else, we have stocks that have broken down off their recent highs and sold down all week with the market. Finally, they found support on Friday when the market bounced sharply off its intraday lows. Again, we cannot conclude that these will all jump right back up to their prior highs.

 

 

In general, I think these bounces must be watched, since they could lose momentum and roll over again. This would likely coincide with a general market move to lower lows, so it must be watched for. It is also clear that in most cases trying to buy into these pullbacks reached its maximum effectiveness on Friday, and the opportunities for opportunistic entries have now passed.

Advanced Micro Devices (AMD) does not look that impressive on its daily chart, despite Friday’s bounce off the 200-dma. The action since the post-earnings buyable gap-up back in late January has been feeble. A move to higher highs two weeks ago stalled and reversed, and it has been straight down for the stock since then.

Friday’s action undercut the BGU day’s intraday low at 21.37, and AMD rallied back above the line to trigger a U&R long set-up at that point. It closed at 22.01, and volume was light. This could end up triggering a little more upside toward the 20-dema, say, but the action overall is sloppy.

Nevertheless, if one wanted to own AMD shares, then Friday’s opportunistic entry on the bounce off the 200-dma and the U&R through the prior BGU low was the best place to step up and take them. Whether it produces big gains from here or just a trade up to the 20-dema that then becomes shortable remains to be seen. But at least you know where your stop is!

 

 

Telecom-Related

Looking at the group charts in this report so far, it’s easy to see that just about everything pulled back over the past week. Some pullbacks were worse than others, but all could very well end up producing opportunistic entries in the process. Note that both Arista Networks (ANET) and Acacia Communications (ACIA) have pulled back into my favorite moving average, the 20-dema, where they offered lower-risk entries on Friday. Both can still be viewed as buyable if they are still hanging around the 20-demas this week, using the 20-demas as tight selling guides.

Ciena (CIEN), the biggest telecom leader since the late-December market lows, was the biggest goat this weekend as it was crushed following a shortable gap-up after earnings. An ugly three-day sell-off has now taken it all the way down to its 50-dma, where it is also testing the prior January and February lows.

Technically, Friday’s move would qualify CIEN as an MAU&R long set-up here, using the 50-dma as a tight selling guide. Both Finisar (FNSR) and Viavi Solutions (VIAV) look almost identical as they pull back just below their 20-dema lines. Note, however, that both are pulling into the tops of short consolidation areas in their patterns, which also brings them into buyable range.

In either case, the alternative is to wait for a move back up through the 20-dema. This would set up an MAU&R long set-up using the 20-dema as a tight selling guide. After strong runs throughout January and February, most of the pullbacks, save for CIEN, look somewhat normal. I would not automatically conclude that these pullbacks, like any others we’ve looked at above, automatically mean a severe market correction is at hand.

 

 

Social-Networking

Both Facebook (FB) and Snap (SNAP) pulled into their 200-dmas on Friday, offering lower-risk entries at that point. If they are trading near the 200-dmas this week then they remain actionable, using the 200-dma as a tight selling guide for each.

Twitter (TWTR) looks ugly here, but we know that when something looks ugly it can often mean the Ugly Duckling is going to pay a visit. That was true on Friday when the stock pulled an undercut & rally long set-up through two prior lows in the pattern at 29.42 and 29.90. That sets up a clear U&R entry here, using either the 29.42 or 29.90 lows as selling guides. A simple Ugly Duckling entry, with highly manageable risk.

 

 

The Weed Patch is a mixed bag here. Aurora Cannabis (ACB) pulled back into its 20-dema on Friday, where a lower-risk entry was offered to those who were smart enough to avoid chasing Wednesday’s pocket pivot. While the pocket pivot was a constructive thing to see, we always look to enter on pullbacks, and Friday’s move fit the bill, with ACB showing a nice bounce off the 20-dema on strong volume.

Canopy Growth (CGC) is moving back and forth around its 20-dema but notice how the action is tightening up nicely as it forms a triangle, or pennant pattern. In fact, as this pennant-like formation tightens up we might consider the lows around 44 as lower-risk entry points. The 50-dma is steadily catching up to the stock, so that may come into play soon enough.

Cronos (CRON) had a climatic type of top in early February after a climactic move. I was discussing the stock in my video reports back when it was under 10 in January. The climactic top is not necessarily a final top, I would note. Full-on climactic tops that are final generally occur after a stock has had a huge price run.

In many ways, CRON can be viewed as just getting going after having its first real leg to the upside in January. The climactic move into early February has resulted in an orderly basing period, with a pocket pivot on Tuesday that led to a buyable pullback to the 20-dema on Friday. This puts the stock in a lower-risk entry here, using the 20-dema as a tight selling guide.

Tilray (TLRY) looked suspect to me as I wrote in my Wednesday report after failing to hold its 50-dma. That led to a sharp downside break on Friday. Earnings are expected on March 18th, so I’d be inclined to leave this alone for now. Other weed patch names look more constructive.

New Age Beverages (NBEV) is also a dog here, and as I wrote in my last report, I don’t find anything about it to be actionable. GW Pharmaceuticals (GWPH) failed on its recent buyable gap-up (BGU) after earnings but is now pulling into the 20-dema. This gives the stock a second chance, since it becomes buyable here at the 20-dema using the moving average as a tight selling guide.

 

 

Amongst the weed patch, both Canopy Growth (CGC) and Cronos (CRON) seem like the strongest leaders. Here are some alternate views here, with a close-up daily of CRON first. We can see the pocket pivot breakout attempt on Tuesday that was also a trendline breakout. However, the best approach here was an opportunistic one, and waiting for the voodoo pullback on Friday, with volume declining to -51%, as a lower-risk entry.

 

 

CGC looks interesting here on the weekly, which confirms the constructive, tightening action we’re seeing on the daily chart. I have previously discussed the deep (over 50%) cup that CGC has formed since mid-December, and how this could set up a punchbowl of death short-sale formation. However, the stock is building a nice handle here as it consolidates the sharp gains up the right side of the punchbowl, which alleviates the failure-prone aspects of such a sharp upside move.

Notice also that while the 50-dma on the daily chart is still below the current stock price, the 10-week moving average on the weekly has already met up with the stock. CGC in fact found support at the 10-week line on Friday, so another way to look at this is as a buyable pullback using the 10-week line at 43.74 as your selling guide.

 

 

Chinese Names

News that the U.S. and China are still far away from a tangible agreement, along with news of weak exports sent Chinese stocks down on Friday. However, as the charts below show, they were already coming down with the market all week long. The question is whether any of these charts present opportunistic entries on these deep pullbacks.

If I’m going to be opportunistic here, and not fear treading in the valley of the shadow of death because the Ugly Duckling is by my side, then Huya (HUYA) looks interesting here at the 20-dema, which provides a strong reference for a tight selling guide. Note also that the stock undercut the 23.68 low of this past Monday, setting up a U&R long entry at that point, using either the 20-dema or the 23.68 price level as a tight selling guide.

Iqiyi undercut its 200-dma on Friday and bounced off the 20-dema, closing above the 200-dma. This puts it in a lower-risk and very opportunistic entry position using the 200-dma or the lower 20-dema as tight selling guides. JD.com (JD) is right at its 20-dema, putting it in a lower-risk entry position using (what else?) the 20-dema as a tight selling guide.

Pinduoduo (PDD) has pulled back sharply but posted an undercut & rally (U&R) long set-up on Friday. At that point the stock undercut the prior 28.15 low of February 26th and rallied back above to close at 28.46. However, PDD is expected to report earnings on Wednesday before the open, although some sources say March 20th. I’ll err on the side of caution and go with the March 13th date.

The rest are less well-defined, but keep in mind that Momo (MOMO) is expected to report earnings on Tuesday before the open. It therefore remains on Earnings Watch for now. With the others, I’m just watching for moves back up through their 20-dema lines, which would trigger MAU&R entries at that point.

Tencent Music Holdings (TME) is the one that gets most of my focus in this regard, although Qutoutiao (QTT) also gets my attention here as it tests the February lows. TME seems a bit more extended, however, so a little further pullback toward the $15 price level might be an even more opportunistic event to watch for.

 

 

I thought I’d throw up a group chart of the solar names that I follow. These were all going like gangbusters in January and into February, but we can see how the group has been broken over the past week or so. This may be due to the realization that there is no U.S.-China trade agreement on the table over the past week.

Among these, I’ve favored First Solar (FSLR). We can see that the stock tested deep support at the 200-dma on Friday and bounced on decent volume. That was very buyable at that point, but you had to be watching the stock closely to catch it. In this position, it is extended from the 200-dma.

 

 

Notes on other stocks discussed in recent reports:

GoDaddy (GDDY) has pulled into its 200-dma and 20-dema where it is resting at final support. So, if you like the stock, then this is the lowest of the lower-risk entries right here using the 200-dma, about a buck below Friday’s close, as your selling guide.

Roku (ROKU) made another weekly high this past week, its eleventh in a row since I first discussed the stock as buyable back in early January when it was down around $29-30 a share. In fact, ROKU was the first stock on my buy list when the market turned. It remains extended for now, although the 10-dma has now caught up to the stock.

Planet Fitness (PLNT) remains extended from its recent re-breakout move. Note how it doesn’t seem to want to give up much on the downside even as the general market came down all week. Instead, PLNT posted positive closes all week long. Pullbacks to the 10-dma at 60.91 would be your references for lower-risk entries if you’re interested in the stock.

Wix.com (WIX) has met up with its 50-dma, which is last-stand support for the stock at this point. So, if one likes the stock, then you have two approaches here. The first, and most obvious one, is to buy it here at the 50-dma and then use the 50-dma as a tight selling guide. The second is to wait for a possible move back above the 107.70 low of February 21st, which would trigger a U&R long entry at that point.

Yeti (YETI), not shown, found support at its 20-dema on Friday and bounced nicely off the line. As I wrote on Wednesday, “…I would prefer to look at a pullback to the 20-dema, now at 22.29, as a more opportunistic and lower-risk entry spot.” That was the ticket, proving that once again the 20-dema and the opportunistic approach rule 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.

It’s been obvious to many that the market was in need of a pullback for some time now. My view is that markets which have rallied sharply can just as easily go sideways as they can pull back when consolidating prior sharp gains. Currently, however, we are getting a shallow correction in the major market indexes, which has also seen many leading stocks pull into areas of potential support, some more deeply than others.

This is where we begin to take an opportunistic view of the long side, looking to buy our favorite names on pullbacks. Sometimes, the deeper the better, especially if we can pick them off at points where risk can be kept at a minimum, such as a major moving average. As you all know, the 20-dema is one of my favorites when it comes to looking for opportunistic entries on pullbacks, but it’s not the only one that comes into play.

The change of character in leading names on Monday in the clouds and others was the first clue of an impending market pullback. That’s what I was looking for per my comments in Monday’s GVR, and that’s what we got. Friday’s action had the feel of a near-term shakeout, so I’m not afraid to step up and look at buying some stocks on pullbacks, even if they’re only good for swing-trades.

There is, of course, the very real possibility that we are moving into a more extended period of choppy sideways action that may even result in a deeper pullback. We could also just top and head lower. Therefore, I think it’s mostly a matter of remaining nimble and opportunistic.

Have the courage to take shots when you see the pullbacks and U&R set-ups you’re looking for but have the sense to know where your exit points are in case things don’t work out. And if you’re oriented toward the short side of the market as well, then be open to being opportunistic on the short side if conditions change and the proper short set-ups start to appear.

Back in October of last year, when stocks started to pull down, there were logical bounces at areas of near-term support. But those quickly rolled over and the market continued much lower from there. So, we cannot assume that pullbacks will always end up with everyone living happily ever after.

However, I continue to believe, even strongly so, that the time to be looking at the long side of stocks that have become well-extended to the upside is on pullbacks. I buy weakness. I do not chase strength. I also do not chase weakness on the downside. The time to start testing the short side was two Fridays ago and then early in the week on Monday.

The pullback this week gives us the opportunities we have been waiting for, and there are many concrete set-ups to be found in the stocks I’ve discussed in this report. Choose wisely but know where your exit points are in case this market pullback gets worse, because if we learned anything from October, we know that it can.

Finally, while a case can be made for a bullish continuation to the current action, I would emphasize that Friday’s bounce made complete sense within the context of what was at the time a four-day market decline off the recent highs and the positions of many leading stocks within their charts.

But Friday’s bounces at support, some of it deep support, can also lose momentum and roll over en masse. So, there is also a case that could be building on the short side. This will be the topic of this weekend’s Gilmo Video Report, or GVR. In the meantime, play it as it lies and stay disciplined.

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.