The Gilmo Report

March 13, 2019

March 13, 2019

I wrote over the weekend that, “Friday’s action had the feel of a low-volume shakeout on the fifth day of a sell-off from the recent highs.” The action so far this week has confirmed that assessment. If there has been any wrinkle to the trading week it has been the fact that big-stock NASDAQ names have been surging, led by Apple (AAPL).

The stock was upgraded on Monday, leading to a gap-up move on average volume. This did not qualify as a buyable gap-up since volume was nowhere near where it needed to be for a BGU. Nvidia (NVDA) announced they were buying Mellanox Technologies (MLNX) for $125 a share, and it responded with a pocket pivot off the 50-dma and up through the 10-dma and 20-dema on Monday.

 

 

We can also see on the NASDAQ Big-Stock group chart, above, that Alphabet (GOOG) launched to higher highs on strong volume. The other names, like Amazon.com (AMZN) have regained the highs of not quite two weeks ago after pulling back last week during the five-day general market sell-off. None of these stocks, however, are currently in a buyable position, and some showed some stalling action today.

The action in big-stock NASDAQ names was instrumental in helping to propel the NASDAQ Composite Index back above its 200-dma. That occurred on Monday, and the index moved to higher highs today where it stalled and churned on higher volume. Near-term, the index looks vulnerable to a pullback from here, and the bottom line is that I don’t see a lot of fresh buy set-ups to jump on.

 

 

Most stocks were buyable on Friday when they tested support on pullbacks and are currently extended and out of buying position. So, the time to jump on stocks was on the pullback Friday. From there, most stocks that I follow have rallied in nearly identical fashion in little v-shaped moves with the bottom apex of the “V” occurring on Friday.

The S&P 500 Index, not shown, also regained its 200-dma on Monday and looks identical to the NASDAQ. It, too, stalled and churned today on higher volume. Meanwhile, the Russell 2000 Index remains the laggard still below its 200-dma, as shown by the daily chart of its proxy, the iShares Russell 2000 Index ETF (IWM), below.

The Russell stalled and churned today on higher volume, closing near the lows of its intraday price range. The action here is one reason why I think the market may be in position to pull back here, after throwing all the shorts off by rallying on Friday. But all I know for certain is that I don’t see much that I want to go long right here, right now.

 

 

Among our favorite longs since the market turn, Roku (ROKU) is finally running into some selling after announcing a $100 shelf filing to offer securities from time to time and two analyst downgrades. That has sent the stock selling down below its 10-dma, triggering a sell signal based on the Seven-Week Rule. Because ROKU obeyed the 10-dma by holding above it all the way up since late January, more than seven weeks, the 10-dma was your selling guide.

For those giving it more room, the 20-dema then became your maximum selling guide, and ROKU sliced right through that today like so much melted butter. I’ve been telling members for the past 2-3 weeks that ROKU was approaching the right side of a deep, v-shaped cup or punchbowl formation, and therefore we had to be on the lookout for signs of a Punchbowl of Death (POD) top.

It appears that ROKU is now a POD short-sale set-up in progress. However, that doesn’t mean it will keep plummeting from here necessarily. A test of the 200-dma and 50-dma, both around 50.44, is always possible. But I would view rallies back up into the 20-dema as potential short-sale entry opportunities.

That said, the stock is somewhat oversold near-term, so we could also see a bounce back up to the 10-dma, which is not uncommon for POD short-sale set-ups. Unless one acted on the stock as a short at the 10-dma, it is too risky to try and jump on it here. I would want to see how it acts in the coming days first.

 

 

Etsy (ETSY), not shown, has rallied off its 20-dema and back up to its prior highs above the $70 price level as it remains hot. It is, however, extended in this position, since the last lower-risk entry occurred on Friday when it bounced off the 20-dema. But it remains extended, but further pullbacks to the 20-dema might offer lower-risk entries

Planet Fitness (PLNT), also not shown, has been up ten days in a row since its re-breakout move two weeks ago. It is, quite obviously, way extended at this point.

Cloud Names

In cloud land, Coupa Software (COUP) took a hit after earnings, gapping up and then reversing hard on heavy selling volume. It tried to rally today but never got past the 10-dma before reversing to close back below its 20-dema. This is looking like a short here, or as close to the 10-dma/20-dema confluence as possible, using the 10-dma as a guide for a tight upside stop.

 

 

The cloud group charts show stocks that have rallied off the Friday lows, but which are losing momentum. In the first group chart we can see that nearly all the names are showing stalling action. Some of the action even makes the patterns look like shortable rallies. And in some cases, taking that approach today would have been worthwhile.

Autodesk (ADSK) ran into resistance at its 20-dema, which puts it in a short-sale entry position using the 20-dema as a guide for a tight upside stop.  Salesforce.com (CRM) stalled and churned today on increased volume after bouncing sharply off its 50-dma on Friday. Tableau Software (DATA) has the exact same look, and I must wonder whether these aren’t shortable rallies.

ServiceNow (NOW) stalled a little bit around the $240 price level today as volume picked up slightly in comparison to yesterday. This looks like it’s losing some momentum here near the all-time highs. It held support at its 20-dema and posted a U&R move on Friday. Splunk (SPLK) is showing little life as the market rallies sharply, still sitting at its 50-dma as volume dries up.

Either this is a lower-risk entry for SPLK right here at the 50-dma, or a breach of the 50-dma is going to turn this thing into a short quickly. We’ll see how this plays out, and while it’s the only one of these clouds that looks like it might be at least partly in a lower-risk long entry position, it is a precarious one at best.

 

 

Atlassian (TEAM) moved to new highs early this morning but reversed in a big-volume outside reversal. This looks bearish to me. Trade Desk (TTD) cleared the $200 Century Mark with authority yesterday and then stalled near the $210 price level to close down on the day. If it reverses back below the $200 price level it could morph into a short-sale at that point, should that occur.

Twilio (TWLO) pulled a classic “LUie” maneuver by turning its L-shaped pattern into a U-shaped pattern to complete the LUie and move to new highs. It stalled today and closed near the intraday lows on lighter volume. Workday (WDAY) reversed off the highs today to close down on higher volume vs. yesterday. This makes the rally off the 50-dma that started Friday start to look like a shortable rally.

Meanwhile, Zendesk (ZEN) and ZScaler (ZS) both sit at new highs, but note the stalling action in each. ZEN stalled and churned today on heavy volume, while ZS is wedging into new-high price territory on light volume. Both may be vulnerable to pullbacks from here, but the bottom line for me is that neither of the two is in a buyable position as I see it.

 

 

I think the cloud-related names are an important leadership group in this current market rally. The action today struck me as a bit weak in the face of a big market rally day. It also comes after logical rebounds from support that began last Friday, and I wonder whether we are seeing some clues that these rebounds may be losing momentum.

Either way, what I know for certain is that none of these, except, perhaps for SPLK, are in a buyable position. Thus, I am very interested in seeing how these consolidate and pull back from here given the loss of momentum. Certainly, if they all start rolling over back toward Friday’s lows there may be an issue for the group and the market in general. We shall see.

Chinese Names

Chinese names that I follow have been notable lately because several have reported earnings over the past couple of weeks. But the action has not been pretty in some cases. Pinduoduo (PDD) was decimated today after reporting earnings, sending the stock in freefall right through its 50-dma. As I’ve been saying, I would not be looking to buy the stock up near the prior highs, waiting instead for the 50-dma to come into play.

Well, the 50-dma did come into play today, but not in a good way. PDD failed to hold support at the line and it plummeted lower. It eventually undercut the 25.50 February 8th low when it priced a 55 million share secondary offering at $25 a share but could not close above that low.

 

 

One of the primary reasons I was not keen on buying PDD up near its highs, aside from an impending earnings report, was its POD-like chart formation. This is something I’ve brought up in prior reports, and it certainly came into play today. PDD was a short as soon as it busted the 20-dema, which is your first sign of a right-side POD failure.

The wide, loose punchbowl-like structure never looked quite right to me. For this reason, the move back up to the prior September highs, which completed a very deep punchbowl formation, made me wary of trying to buy the stock too close to these highs. PDD is now a POD, such that rallies back up into the 50-dma might provide optimal short-sale entries from here, if you can borrow the stock!

 

 

Momo (MOMO) reported earnings before the bell yesterday and gapped up, pushing above its 200-dma before reversing intraday and closing roughly even with its opening gap-up price. However, it held above its 35.52 intraday low, so remained an active BGU long set-up. This morning it then regained the 200-dma from there.

While the stock was actionable yesterday, despite the stall-out at the 200-dma, it is now slightly extended. However, if one is jonesing to own the stock, the alternative, but somewhat higher risk, route to take would be to buy the stock here and then use the 200-dma as a tight selling guide. Whether it moves substantially higher from here or not is questionable given the tepid 9% earnings growth it reported.

 

 

Iqiyi (IQ) has a couple of things going for it, despite the lack of movement after it blasted up through its 200-dma following earnings nearly three weeks ago. The stock has, to its credit, held support on each pullback to the 200-dma, Meanwhile, last Friday, it posted an undercut & rally (U&R) long set-up through the prior 25.38 low of February 26th.

IQ again tested the 200-dma today and bounced as volume increased slightly over yesterday’s levels. While pullbacks to the 200-dma remain the most optimal and opportunistic long entries, it is possible to buy the stock here and use the 200-dma as a tight selling guide.

 

 

Cyber-Security Stocks

Like everything else, cyber-security names have rallied off their lows of last Friday. CyberArk Software (CYBR), the de facto leader in the group, is extended here but note that it was quite buyable right at the 20-dema on Friday. This was also the case for Palo Alto Networks (PANW), but it is stalling slightly here after a four-day rally.

Of the six I show here, FireEye (FEYE) and Mimecast (MIME) appear to be the only ones in lower-risk entry positions. Note that FEYE posted a pocket pivot at the 200-dma on Monday on a bottom-fishing buyable gap-up (BFBGU) type of move. That puts it in a lower-risk entry here using the 200-dma as a tight selling guide.

MIME posted a pocket pivot on Monday along the 20-dema, but that didn’t hold up yesterday. Today, however, the stock regained the 20-dema and closed two cents above the line. That puts it in a lower-risk entry position using the 20-dema as a very tight selling guide.

Qualys (QLYS) regained the 200-dma on Monday on strong volume but has been unable to build on that move even as the general market has rallied higher. Today, it pulled back to close 21 cents above the 20-dema, which technically puts it in a lower-risk entry position using the 20-dema as a tight selling guide. The only caveat was that selling volume increased today, so it absolutely must hold support at the 20-dema. Play it as it lies.

 

 

Semiconductors

The semiconductors all look the same as they form v-shaped bounces off last Friday’s lows. The one that I’ve covered in my reports, Advanced Micro Devices (AMD), is reflective of the group at large and many other stocks in this market as well. As with just about everything else, your best lower-risk entry occurred on Friday on the opportunistic pullback to the 200-dma.

That was combined with an undercut and rally move through the prior buyable gap-up (BGU) low at 21.37. Today, the bounce off the 200-dma ran out of steam as AMD reversed to close down on the day. Volume was light, but notice that AMD’s trading volume has been light throughout most of February and all of March.

The bottom line for AMD is that it has shown little upside thrust since its post-earnings buyable gap-up move in late January. The stock rallied hard for two days and then lost momentum as it has drifted back and forth since early February. I would not be surprised to see the stock retest the 50-dma, at least, from here.

 

 

Telecom-Related

Arista Networks (ANET) pushed to higher highs today on strong volume after bouncing off the 20-dema on Friday. That was your last lower-risk entry opportunity.  Acacia Communications (ACIA) is holding tight after bouncing off its own 20-dema last Friday.

Note also that ACIA is an undercut & rally long set-up after pushing back up through the prior 52.34 low in the pattern from late February. It closed today at 53.68 so is still within buying range of that U&R long set-up using the 52.34 price level as a tight selling guide.

Ciena (CIEN) is still dead meat, and its bounce off the 50-dma turned out to be a shortable one yesterday. It is now heading back toward the 50-dma on heavy selling volume. Its close cousin, Finisar (FNSR), is holding tight along its 20-dema which puts it in a lower-risk entry position using the 20-dema as a tight selling guide. 

Viavi Solutions (VIAV) is holding tight just underneath its 20-dema but has been getting some volume support on two of the past three trading days. What I would watch for here is a move back up through the 20-dema as a moving-average undercut & rally long set-up from here.

 

 

Social-Networking

Both Facebook (FB) and Snap (SNAP) were both buyable at their 200-dmas on Friday, but both have moved higher since. Only SNAP remains in a position along its 10-dma where it could be considered buyable, using the 10-dma as a tight selling guide. However, I would prefer to stay opportunistic here and look for pullbacks to the 200-dma.

Twitter (TWTR) has rallied into its 50-dma, where it has stalled over the past two days. I view this as a short right here, using the 50-dma as a guide for a tight upside stop. So, of the three, only TWTR is in an actionable position, and that’s as a short-sale target.

 

 

The Weed Patch

None of the Weed Patch names look all that interesting to me here. The stocks tend to have moves related to some news development, and that was the case with Aurora Cannabis (ACB) today. The company announced that it was hiring hedge fund manager Nelson Peltz as an advisor, and the stock gapped up on heavy volume.

The only other weed patch names that look like they might be in buyable positions are Canopy Growth (CGC) and Cronos (CRON). Both stocks are sitting at or around their 20-dema lines, but today both reversed into the red after opening to the upside in sympathy to the ACB news.

 

 

Yeti (YETI) put in a strong showing today by posting a big-volume pocket pivot and flag breakout to new highs. The action is impressive, but as with most leading stocks that I follow, the preferred, opportunistic entry came last Thursday and Friday when YETI pulled into the 20-dema. It is now extended – again.

 

 

Wix.com (WIX) doesn’t look all that inspiring here as it fails to rally with the market. Instead, the stock is tracking along the 50-dma as volume dries up in the extreme. Volume levels dropped down to -54% below average today. In my view, if this has any life in it, then this is the spot to pick up shares, with the idea of using the 50-dma as a tight selling guide.

 

 

Notes on other stocks discussed in recent reports:

First Solar (FSLR) is extended after bouncing sharply off its 200-dma last Friday. It posted its highest closing high since rallying off the late-December lows.

GoDaddy (GDDY) stalled today on weak volume after bouncing off its 200-dma last Friday. It is extended from the line and thus not in a buyable position.

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 weekend video report, I made note of the fact that one could find plenty of market analysis calling for a test of the November/December lows. As I pointed out, I didn’t see that as a given, because most of the leading stocks I’ve been following bounced off support on Friday. These all presented the opportunistic entries and buy points that I was looking for, and the crowd consensus that we were on the verge of a move lower was, as usual, wrong.

And so, Friday’s low-volume shakeout has come to pass, and the indexes have moved to higher highs. But leading stocks are, in most cases, getting extended again, and I see only a handful of names that look to be in actionable long positions. No worries, because when there isn’t a lot to do on the long side, then you don’t do much on the long side.

Meanwhile, I am watching some of these bounces off the lows of last Friday as they start to stall and lose momentum. This is and of itself is not a problem, but if it develops into what I call rollover action then we could see things pull back again. I think it’s mostly a matter of setting your trailing stops and working things from there.

Certainly, I hope that anyone still long ROKU or PDD knew where their exit points were, because both stocks were slaughtered today.  This illustrates that no matter how strong the market may look, extended stocks, especially wildly extended ones, can be vulnerable to sharp price breaks. I’ve discussed more than a few times the deep punchbowl-like patterns that each stock was forming, and that members should be alert to the potential for these to produce such downside breaks off the right-side peak of the punchbowl.

So, as the market rally continues, remain vigilant with respect to trailing stops and avoid chasing strength. Instead, seek the opportunistic approach of waiting for pullbacks. That’s what we got last Friday, and so far, that’s working out well for most stocks. As we get near-term extended from Friday’s bounce, however, we’ll get a better sense of how sustainable these bounces are. 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.