The Gilmo Report

March 17, 2019

March 16, 2019

This market reminds me of late 1999 when stocks kept running straight up, defying gravity. In this market, however, there is no gravity, there is only QE. The flood of liquidity that remains in the system and which may be expanding again as central banks around the globe move to reverse their earlier gestures toward tightening continues to drive stocks ever higher.

After a brief pullback last week, the market has jacked back to the upside with a vengeance. Several upside days over the past week have seen advance-decline numbers in the 20 to 1 range, which gives testament to the veritable blizzard of upside movement among leading and not-so-leading stocks.

There are the rare exceptions, such as we saw this week in Roku (ROKU) and Pinduoduo (PDD). But both of those names were at the right-side peak of exceptionally deep punchbowl patterns, and I’ve already warned about their downside vulnerability based on these formations. All it took was a couple of downgrades and a secondary shelf-filing by ROKU and a bad earnings report from PDD to send them plummeting to the downside.

I recall that back in late 1999 when everything was running the old-timers could not believe their eyes. Being relatively new to investing (I started in 1991), the term froth was not in my vocabulary. So, I bought what looked good and let it ride until the trend started to bend at the end. This enabled me to participate fully in the tech boom of 1995 and the dot.com boom/bubble of 1999 into early 2000.

The dot.com bubble was driven by extreme liquidity coming from a variety of sources, including a strong, tech-driven economy that was spitting off cash like mad and the rapid movement of baby boomers into equities as they entered their prime retirement savings years. Today, the market is driven by QE and money-printing, the likes of which has never been seen in the history of humankind, and that, in my view, is all.

Sometimes, the movements in certain stocks these days reminds me of 1999. For those of you who weren’t around back then, you’re getting a small taste of what that was like today in terms of the breadth and velocity of the rally, so bask in it. Just remember to maintain your selling disciplines when they finally do become relevant, because they will, as holders of ROKU discovered this week.

One lesson I learned from 1999-2000 was that some people tended to get carried away with themselves when making money in the market became so easy. Ultimately, this led to their demise when the market changed. I’ve written many times before that we know nothing – it’s the market that knows. We are just surfers riding the wave, and our ability to make money is largely due to the size and extent of the wave, and not solely our own magical abilities.

The key is to maintain perspective and awareness. There’s a great line from my all-time favorite author John Steinbeck’s East of Eden, regarding droughts in California, but I think it applies equally to the stock market. It is this, “During the dry years, the people forgot about the rich years, and when the wet years returned, they lost all memory of the dry years. It was always that way.”

When this bull market ends, however, is anybody’s guess, and I find myself wondering whether we will see a blow-off upside move that makes late 1999/early 2000 look like child’s play before it all ends. But that’s just speculation on my part. For now, from the practical standpoint of real-time trading, I’m mostly left with trying to find new things to buy, as most stocks left the station long ago and are simply streaking higher.

There’s also the task of waiting for and acting upon opportunistic entries. The last perfectly opportunistic entry for most of my favored long ideas occurred two Fridays ago, after the market had sold down four days in a row. Last weekend, as I noted in my GVR at the time, most pundits and market commentators on the Internet were calling for a test of the November/December 2018 lows. But you can file that one under What the Crowd Knows, because the crowd got fooled.

The indexes just took that as a short-term shakeout and turned back to the upside, with the NASDAQ Composite Index pushing back above its 200-dma and making new highs again by the end of the week. Volume was heavy on Friday due to quadruple-witching options expiration, and this also shows up on the daily charts of many stocks.

 

 

Overall, the index action is not necessarily indicative of a blow-off move of any kind, but the trend is quite persistent as the major market indexes logged the 12th week of a straight-up-from-the-bottom rally off the Christmas Eve lows. The S&P 500 Index, not shown, is the mirror image of the NASDAQ, and the Dow Jones Industrials, also not shown, are still pushing back up toward last month’s highs. The Russell 2000 Index is huffing and puffing to catch up as it remains well below its 200-dma.

If the market seems a bit frothy in most areas, it is interesting that the pundits’ barometer of what they call a risk-on move by investors isn’t there. Small-caps lag their larger-cap brethren, which argues against a speculative fever among investors. The upside extension of leading names, however, speaks for itself. For now, however, the uptrend remains intact, end of story.

 

 

Meanwhile, the interesting paradox of this strong market rally in 2019 is the fact that breakouts still aren’t producing huge upside moves. All the sharply profitable upside moves have been coming from stocks rallying briskly off their prior lows. Some have broken out, but most of those breakouts don’t have the same velocity that we saw in the earlier part of January.

Big-stock NASDAQ names, most of which are also coming up off their lows without breaking out yet, are adding their weight to this rally, and I had already theorized a couple of weeks ago that a market move higher could be urged along by these names coming back to life. That has certainly been the case with Apple (AAPL), which is fast approaching the underside of its 200-dma. Amazon.com (AMZN) is doing the same. The question is whether the 200-dmas will present meaningful resistance as they move higher.

Nvidia (NVDA) is still extended after posting a pocket pivot on Monday and moving higher since. Microsoft (MSFT), which I am adding to replace Facebook (FB) in this group since it’s already a social-networking member, just broke out. Netflix (NFLX) is just tracking quietly along its 10-dma. But perhaps the most interesting of the big-stock NASDAQ names, at least on Friday, was Oracle (ORCL).

Once again, opportunism came a-calling when the stock gapped down Friday morning after reporting earnings Thursday after the close. ORCL bounced right off its 10-week moving average on its weekly chart, not shown, which corresponded to a point on the daily chart that was just slightly above the 50-dma. That bounce on Friday also included an undercut and rally (U&R) move up through the 51.57 low of March 4th.

That sent the stock right up near its Thursday closing price, falling shy of the UNCH line by a mere eleven cents. I suppose you could call this a big-volume supporting pocket pivot, and if you did, then you would probably be using the 20-dema as a tight selling guide. However, the best entry occurred on the bounce off the 10-week line.

 

 

As a side note, I would remind members that one must watch for moving average support on the daily and the weekly charts. Sometimes a move that doesn’t quite make it to the 50-dma on the daily chart will in fact show a move right to the 10-week moving average on the weekly chart. Both charts should always be referenced when determining support and resistance levels in real-time.

Netflix (NFLX) posted a pocket pivot on Friday, but this may have been due to the quadruple-witching options expiration volume we saw that day. In most of the bigger index names, the volume is distorted somewhat by quadruple witching. The bottom line is that NFLX continues to track along its 10-dma as it works on a base, but still without breaking out to new highs.

 

 

I blogged on Friday in the pre-open about the situation with Boeing (BA), as I saw it, which triggered an interesting, short discussion on the blog comments page. When you have Gilmo members who have in fact piloted the Boeing 737 Max jets, you get some interesting insights from those who are on the ground, or rather, in the air. So, a big shout out and thank you to Gilmo member Michael P., who had some interesting things to say on the topic.

My own assessment is that all the negative news about these new jets based on two recent crashes is overblown. The issue will eventually be resolved, and the stock then stands a good chance of rebounding sharply. From a purely technical perspective, we can set the news aside and take in the stock’s macro-picture on the weekly chart below.

What we see is that BA has dropped right back into its prior base and is holding on top of the primary area of price congestion. The left side peak of the cup formation the stock has formed since October of last year is not relevant, in my view, although some call this the “proper buy point.” I do not. But we can see that BA is sitting right on top of a major area of support and its 40-week moving average.

 

 

If we segue to the daily chart, we can get a more granular view of the current technical action. There are some concrete things going on here. As I blogged this morning to Premium Members:

“If we view this from a purely technical perspective, we can see that BA shares have filled the prior buyable gap-up move that occurred after earnings. I discussed that move in my written reports a day or two after it occurred, and the stock moved higher from there as it broke out of a long base. The low point of the rising window of that gap-up move is 365.94.

“On Wednesday, BA hit a low of 363.33 and bounced to close positive for the day, its only positive close since the news of the second 737 Max crash in Ethiopia. My take is that technically the stock is in position for a low to set in, and buying the stock in here, as close to the 365.94 price level as possible, is a feasible trade. As long as there aren’t any further big gap-down opens for the stock, then support becomes the 363.33 low up to the 365.94 low point of the gap-up rising window.

“The other option is to use the 200-dma at 355.72 as maximum support and a wider selling guide. Keep in mind that buying BA at 373.30, where it closed yesterday, and using 355.72 as a selling guide is akin to buying a stock at 37.30 and using 35.57 as your maximum stop.”

 

 

One other point I would make is that Wednesday’s action was what I call a quickie U&R where it briefly undercut a very nearby low. That was the low on the gap-down day, where the stock found strong support to close near the highs of the daily price range on Monday. But subsequent news and the steady drumbeat of negativity from stern-faced newscasters and news anchors has weighed on BA shares.

But we can see that the relevant areas of support are, so far, holding up. That is why I consider the stock a lower-risk entry here as close to the lows of the gap-up rising window and/or the 200-day and 40-week moving averages on the daily and weekly charts, respectively. At least your references for support, and thus your selling guides, are concrete and nearby. Play it as it lies.

In this report, instead of focusing on group charts as I have in recent reports, I’m going to focus on what I see as the most buyable names within each of those groups. I will instead cover the group charts in this weekend’s Gilmo Video Report.

Cloud Names

Coupa Software (COUP) is yet another example of a stock that takes a hit on earnings. The downside move on heavy volume is not a sell signal, but rather a buy signal. The stock looked like it was having trouble on a big-volume outside reversal on Tuesday after reporting on Monday afternoon, but it recovered immediately. So, what looked like a possible short-sale set-up has returned to the long side.

COUP is holding tight along the prior highs and just above the 10-dma. Pullbacks to the 10-dma would offer lower-risk entries, of course, but the stock is still in a buyable position here using the 10-dma or 20-dema as your selling guides. The stock has been a strong leader off the lows, and while it hasn’t made huge progress since breaking out to new highs back in late January, it has been building a decent base which could set up a move higher from here.

 

 

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.

Workday (WDAY) is not giving up its 20-dema after bouncing off the 50-dma the prior week. The quadruple-witching volume gives Friday’s action the look of support, so technically this now looks more like a long here, using the 20-dema or 10-dma as tight selling guides.

Salesforce.com (CRM), not shown, looks like WDAY but with only one bounce off the 50-dma two Fridays ago. It is buyable based on the same exact parameters as WDAY with respect to its 10-dma and 20-dema lines.

 

 

Splunk (SPLK) continues to drift higher along its rising 50-dma. Since its post-earnings breakdown, upside volume has come in better-than-downside volume, which looks constructive. The quiet action along the 50-dma could present a lower-risk entry here using the 50-dma as a tight selling guide.

A breach of the 50-dma, however, could trigger this as a short-sale, but I’m guessing that would only occur if the general market pulls back. Finally, note the L-formation that SPLK is currently forming. The possibility of a LUie type of resolution emerging out of this as we have seen in names like Twilio (TWLO) when it got clocked after earnings is real, in my view.

 

 

Autodesk (ADSK) has a similar shape to the clouds discussed above, but its orientation to its 20-dema and 50-dma are different. It is sitting just below its 20-dema in a short bear flag, but still well above its 50-dma. So far, the 20-dema has served as near-term resistance, but I might watch for a move above the 20-dema as a long entry trigger.

Again, we see an L-formation here, and the persistence of the general market rally keeps the possibility of the L becoming a U and hence a LUie formation alive here.  A U&R and bounce off the 50-dma could also set that up, so is something to watch for.

 

 

ServiceNow (NOW), Tableau Software (DATA), Atlassian (TEAM), Trade Desk (TTD), Twilio (TWLO), Zendesk (ZEN), and ZScaler (ZS) are extended to various degrees from their 10-dmas and 20-demas. Only pullbacks into these moving averages, preferably the 20-demas, would offer lower-risk entries in my view.

Cyber-Security

FireEye (FEYE) regained its 200-dma, along with its 10-dma, 20-dema and 50-dma, on Monday when it gapped up on a combination pocket pivot and buyable gap-up move. It has since tracked tightly sideways along the 20-dema, 50-dma, and 200-dma. On Friday it picked up a little support at the moving averages and is in a buyable position here using the 20-dema as a maximum, but tight, selling guide.

 

 

Mimecast (MIME) is still dragging its feet following the buyable gap-up it posted after earnings in the early part of February. The BGU itself has now failed since the stock is now living below the intraday low of the BGU price range. But, it is still clinging to its 20-dema, which keeps it in a buyable position using the 20-dema as a tight selling guide.

One major reason why MIME has been sluggish after its BGU in early February is likely because of the sharp upside move coming straight up from the lows of its base. That was a rapid move, and typical of how most stocks acted in January as they rocketed off their lows. That may be too much too fast, and the stock may just be spending some time consolidating that sharp move before it tries to move higher.

 

 

Qualys (QLYS) is steadily improving here after finding support along its 50-dma the prior week. This looks like a nice L-formation with the potential to become a full-blown LUie. In this position, the stock is buyable using the 200-dma as a tight selling guide, while any small pullback to the line would of course offer a lower-risk entry possibility.

 

 

Semiconductors

Advanced Micro Devices (AMD) is another one of these stocks that had a sharp move in January but has just drifted around since then. It is, however, building a base. The most opportunistic entry occurred two Fridays ago when it pulled into the 200-dma and posted a U&R move back up through the BGU low of late January.

While that pullback was the best and most opportunistic entry, the stock is now trying to settle in along its 10-dma and 20-dema. This might take a few more days to settle in, which would be constructive, and put the stock in a secondary buy position along the two moving averages.

 

 

On Friday we saw Broadcom (AVGO), not shown, gap up after earnings in a buyable gap -up type of move. While it stalled badly, it did hold above its 283.50 intraday low of Friday to close at 290.29. I might be interested in this if it pulled in a little closer to the BGU day’s intraday low at 283.50. Note that this is also a nascent base breakout, and the stock is within buying range of the breakout.

The main point is that AVGO’s move inspired moves in other stocks, some related to AVGO than others. For example, Applied Materials (AMAT), which makes semiconductor equipment, posted a pocket pivot coming up through its 200-dma on Friday, which makes it buyable here using the 200-dma as a tight selling guide,

 

 

Skyworks Solutions (SWKS), not shown, which is more related to AVGO, posted a similar pocket pivot move, but stalled to close below its 200-dma. Nevertheless, this qualified as a pocket pivot at the 10-dma, which is buyable using the 10-dma as a tight selling guide.

I’ve discussed SWKS in my video reports as one name to watch as a potential beneficiary of the new 5G technology. Note, however, that the most opportune, and in my view best, entry, came two Fridays ago when the stock posted an undercut & rally (U&R) long entry at the prior 79.74 low of February 17th.

In general, semiconductor names had strong moves in January, but most have since slowed down considerably or just gone sideways as they build new bases. Perhaps they’re ready to move again.

 

 

Telecom-Related

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 retesting its 50-dma, but volume is declining. It held the line on Friday as volume picked up. The stock got nailed badly after earnings on a massive outside reversal to the downside, but it had already posted a big move off the early-January lows. The action now is starting to look like an L-formation of sorts. If it can hold the 50-dma, we could see it try to pull off a LUie type of resolution.

That is unclear, however, but the pattern is interesting to me as it could present something within the realm of an opportunistic entry at the lows of its current L-formation. Whether those lows materialize here along the 50-dma, or perhaps on an undercut of the low of two Fridays ago, is still to be determined, but certainly something to watch for.

 

 

Social-Networking

Facebook (FB) remains something of a tough customer for the longs since it continues to be buffeted by bad news. The latest has been the potential for criminal charges to be filed against the company and the departure of key executives from the company. That news sent FB below its 200-dma early on Friday, but the stock recovered to close back above the line.

If you’re an FB bull, then I suppose this presents an opportunistic entry right here. Risk can be controlled by using the 200-dma s a tight selling guide. However, there is still potentially more headline risk in FB, which must be accounted for. Ironically the reliable name in the group lately has been Snap (SNAP), not shown, which gapped again on Friday. Surprise!

 

 

If FB continues to flounder and SNAP rises from the ashes, will we see Twitter (TWTR) do the same? The stock is essentially trapped within a range extending back to early February when it bombed out after reporting earnings. Notice, however, that all that volume selling at that time never sent the stock much lower from there.

More recently, TWTR posted a U&R move coming back up through the lows of this five-week price range two Fridays ago. It is now trying to hold along its 10-dma and 20-dema. Friday’s action qualified as a pocket pivot at the 10-dma, although it’s difficult to judge how much of the volume increase was due to quadruple-witching.

I suppose what makes TWTR interesting to me now as a long, and not a short, is the long-bottomed L-formation extending back to early February. Is this a LUie-to-be crystallizing before our eyes? If it can clear the 50-dma, then perhaps so. But if you are a TWTR bull, you can take Friday’s pocket pivot at face value and buy it here, using the 10-dma as a tight selling guide. Play it as it lies!

 

 

The Weed Patch

Aurora Cannabis (ACB) is now extended following Wednesday’s buyable gap-up (BGU) move as I discussed in my report of that day. As I noted on Wednesday, the company announced that it was hiring hedge fund manager Nelson Peltz as an advisor, and the stock gapped up on heavy volume, producing an actionable BGU.

Canopy Growth (CGC) and Cronos (CRON), two of the higher-priced leaders in the group, are both working on similar-looking bases. CGC closed Friday right at its 20-dema as volume dried up to -60% below average. This creates a voodoo entry position here using the 20-dema or the 50-dma as your selling guides.

 

 

Cronos (CRON) saw its trading volume dry up even more to -68.4% below average on Friday, but it closed 15 cents below its 20-dema. I don’t consider that a problem since it is still holding price support along the lows of the past three weeks. I like the stock here, along these lows, while using them as a tight selling guide.

 

 

And for those who want to believe in the mythology of the so-called high, tight flag base formation, notice that CRON is forming one itself. To me, however, this is a five-week flag base, with some reasonably tight closes over the past four weeks, and that is all. I don’t allow myself to salivate over the myth of the HTF as something that leads to imminent 100% gains in a flash. I simply play it as it lies on the daily chart and take whatever it’s willing to give me.

 

 

Tilray (TLRY) is expected to report earnings Monday after the close, and the stock does look like it’s revving up for a move. It posted an undercut & rally move through several prior lows in its pattern two Fridays ago, when most leading stocks rebounded with the market. This will be interesting to watch once earnings are out, but for now remains on Earnings Watch.

 

 

Chinese Names

Chinese stocks overall continue to be buffeted about daily by news regarding the U.S.-China trade talks, but in some cases, there is some technical coherency to be found. Iqiyi (IQ) is still working on a nice-looking base along its 200-dma. Pullbacks to the line have continued to offer lower-risk entries when they occur, which seems to be every other day, at least.

I continue to look for pullbacks to the line as opportunistic entries. The fact that IQ is taking some time to build a base along the 200-dma seems constructive to me based on the sharp upside move off the January lows. The big spike after earnings in late February was a bit frothy, and it looks normal for the stock to spend some time consolidating and digesting that move.

 

 

Opportunism in this market also seems to apply to Chinese names on a regular basis. Certainly, buying the big-volume strength in Huya (HUYA) two weeks ago would have had disastrous consequences. Instead of building on what appeared to be overwhelming strength, the stock immediately broke down to lower lows over the next three days.

This is very typical action for this market, which has a certain contrarian flavor to it. But in the same way that overwhelming upside strength often leads to a selling opportunity, the ensuing ugly sell-off can lead to a buying opportunity. That was the case with HUYA after it undercut and rallied back above its March 4th low two Fridays ago.

The low-volume pullback and support at the 20-dema on Thursday offered another opportunistic entry. That led to a nice upside move on Friday as volume surged. From here, however, I would look at further pullbacks to the 20-dema as your lower-risk entries since the prior, opportunistic entries over the past week or so have already come and gone.

 

 

Tencent Music Entertainment (TME) is expected to report earnings Tuesday after the close. While I’m not going to do anything with the stock just before earnings, note that it posted a moving-average undercut & rally (MAU&R) at the 20-dema two Fridays ago, and is now sitting in a nice little flag formation on the daily chart. We’ll see what it does after earnings.

 

 

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.

Most stocks that have led this market off the January lows have been extended. Some have been building bases, as has been the case with selected semiconductors, clouds and the venerable Weed Patch, which is constructive. This could be setting up a new wave of upside movement in names that have been biding their time over the past month or so.

I’ll be covering the group charts as well as any further set-ups I’m seeing currently in this weekend’s Gilmo Video Report, better-known among Gilmo denizens as the GVR. I enjoy the video format as it allows me to cover more ground in less time, and I am working on bringing the length of the videos down to make them even more concise.

Meanwhile, I continue to see some irony in the fact that breakouts in this market, despite the torrid index rally off the lows, haven’t produced huge upside. In the old days, when the market had a follow-through day, as it did in early January, you would see all sorts of leading stocks start to break out from bases right at the get-go. Today, you see things just launch off their lows, and unless you have methods to identify long entry signals near those lows, you end up missing out on the fattest parts of the moves.

We, of course, do. That doesn’t mean that current breakouts can’t go higher, just that they haven’t, yet. But if they are, then I believe that implies that the indexes will have to break out to new highs and embark on a glorious new up leg in what the pundits say is the longest bull market in history.

Personally, I’m just content to play things as they lie, and let them play out as they will. I’m a trader, so I live in the present. That is good enough for me.

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 CGC, though positions are subject to change at any time and without notice.

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