The Gilmo Report

March 24, 2019

March 23, 2019

The action after the Fed policy announcement on Wednesday, where we saw the indexes initially rally and then reverse to give up most or all their gains, looked cautionary, as I noted in my report of that day. But that came with a one-day delay, as the indexes rallied sharply on Thursday. The NASDAQ 100 Index led the charge as money poured into big-stock NASDAQ names.

I also noted in the same report, that “In the past, when money has started to pile into NDX names as everything gets extended, it has marked at least a short-term peak {for the market].” One more day of piling into the big-stock NASDAQ names dragged everything higher on Thursday. The move was provided a strong impetus by a positively perceived earnings report from Micron Technology (MU), which is also a major NASDAQ 100 component.

This sent the semiconductors rocketing, which added even more fuel to Thursday’s big rally in the NASDAQ 100 and in turn the NASDAQ Composite Index. The indexes bolted to higher highs on increasing volume, looking as if a major upside move was in store. But the popcorn machine effect, as I call it, came into play on Friday.

The popcorn machine effect refers to the up and down nature of this market, where a pop to the upside one day can quickly reverse the next, or a sharp breakdown to the downside can do the same in equally rapid fashion.  We see the popcorn machine effect frequently in individual stocks, and it occurred with great effect in the indexes as well over the past three trading days.

The scary sight of an inverted yield curve, raising the specter of a slowing economy, sent stocks sharply lower on Friday. Notably, this occurred with much more thrust and velocity than Thursday’s impressive rally. Thus, the NASDAQ posted a sharp price break off the highs on much higher volume Friday.

 

 

The Dow Jones Industrials and S&P 500 Indexes both look identical to the NASDAQ, with rallies on Thursday being entirely negated, and more, on Friday. But the NASDAQ, which led the rally on Thursday, led the market even further down on Friday, posting a -2.5% declined to the Dow’s -1.77% and the S&P’s -1.90%.

Leading stocks were slammed across the board, which was most notable in the advance-decline numbers. On the NYSE, decliners led 2300 to 583 over advancers. On the NASDAQ, it was worse, with 2523 declines vs. 524 advances. That’s nearly 40-to-1 negative on the NYSE and over 48-to-1 on the NASDAQ. Now that’s a spicy meatball!

The ugliness of Friday’s action, coming on the heels of Thursday’s upside romp in big-stock NASDAQ names, is apparent on the group chart, below. If a picture is worth a thousand words, then the group chart below illustrates the extended upside moves in big-stock NASDAQ names that finally got whacked on Friday. Some of these price breaks came on heavy volume as the pile-in turned into a pile-out.

 

 

Apple (AAPL), the biggest of the big-stock NASDAQ names, looked quite powerful on Thursday as it rammed right through its 200-dma on a strong-volume pocket pivot move. But that move reversed in its entirety on Friday as selling volume came in at well above average.

If the market sell-off worsens this week, AAPL may very well fail at the 200-dma. And if AAPL fails at the 200-dma, then the market sell-off may likely be worsening.

 

 

The critical tests for most of these big-stock NASDAQ names has yet to occur, since they are all trading above key moving averages. This will have to be monitored over the coming week for any potential, further deterioration.

Boeing (BA) has had enough on its hands lately with a steady stream of bad news regarding its 737 MAX 8/9 jets. That has been enough to keep the stock on its back, yet still above its prior base and the 200-dma. But with the weight of the market now adding to its stress, BA broke to lower lows and closed just above its 200-dma on Friday.

This looks like trouble, and if I’m long this name I don’t want to be in it if the general market is going to sell off further this week. And a breach of the 200-dma would certainly seal the deal. In my view, Friday’s inability to hold the prior U&R lows as BA sold off on higher, above-average volume, makes it a sell. Unless it bounces vigorously off the 200-dma, it won’t do anybody any good, at least for now.

 

 

Cloud Names

It goes without saying that everything got pummeled on Friday, including the cloud names. Coupa Software (COUP) encapsulates so many things about this market that make it so random and difficult to deal with at times. On Wednesday, I discussed it as one of a handful of stocks overall that I felt were in reasonable lower-risk entry positions.

At that time, COUP had shaken out down to its 50-dma after earnings on heavy volume, and then set up tightly along its 10-dma and 20-dema on Wednesday. Volume was drying up nicely at that point, and on Thursday it dutifully broke out on strong volume.

But, as is often the case in this market, it was another breakout to nowhere, and COUP ran into logical resistance at the $100 Century Mark on Thursday. From there it broke hard on Friday, negating the breakout on selling volume that was even higher than the prior day’s buying volume. Pile in, pile out.

The pattern was very constructive on Wednesday, and the Thursday breakout looked just great. But it failed immediately in a bearish reversal Friday where it also set up as a short-sale near the $100 price level per Jesse Livermore’s Century Mark Rule in Reverse for the short side.  As the old blues song, so famously covered by guitarist Pat Travers, goes, Boom, Boom! Out go the lights!

Now this looks like a late-stage failed-base (LSFB) short-sale set-up on the breach of the 20-dema on Friday. The question is whether you can trust it as such. The popcorn machine effect, which is evident in the action of COUP over the past two trading days, makes it difficult to believe the price/volume action you are seeing on any given day – what is extremely bullish one day is extremely bearish the other.

This is what makes operating in this market difficult, but this face alone may indicate that more turmoil is ahead for this market.

 

 

The group chart of the first six of the twelve cloud names I’ve discussed in recent reports paints an ugly picture. Everything was slammed on higher or heavy selling volume on Friday, with breakout failures seen in COUP, Salesforce.com (CRM), Tableau Software (DATA), and ServiceNow (NOW) on the chart below.

 

 

Tableau Software (DATA) has one of the uglier looks among these six charts. Friday’s break came off another new-high and represented the third such high-volume breakdown off a new-high peak since January. Notice also that each move to new highs was a base breakout or re-breakout, and those who only buy breakouts are now likely completely bald from tearing their hair out on this one.

It also points out the unreliability of buying breakouts, which presents a serious issue for investors. This is not your normal O’Neil-style bull phase, such that when you see a breakout it can be hard to trust. At the same time, extreme weakness cannot be trusted to produce more weakness, and is often a buy signal!

Note that the first two of DATA’s big-volume price breaks following a breakout were in fact buy points. After suffering big-volume declines off those two peaks, the stock quickly stabilized and went higher. This is not unusual for a market where up is down, and down is up.

 

 

Cyber-Security

Cyber-security names took it on the chin on Friday, after all the names that I follow, shown in the group chart below, were looking quite positive on Thursday. Three have broken near-term support, FireEye (FEYE), Mimecast (MIME), and Qualys (QLYS), while the other three, CyberArk Software (CYBR), Fortinet (FTNT), and Palo Alto Networks are still holding above their 20-day exponential moving averages.

While the last three can be watched to see whether and how well they are able to hold near-term support at their 20-demas, the first three all turned into short-sale targets on Friday once they breached support. FEYE, MIME, and QLYS all appear to be short-sale targets on any rallies back up into their nearest moving averages.

 

 

Semiconductors

Chip stocks were the stars on Thursday, but the group also took a big hit on Friday, with many of Thursday’s moves completely reversing. Advanced Micro Devices (AMD) had been a strong mover this past week on news that its chips would be used to power Google’s new online-streaming gaming platform, Stadia, and it got extended quickly, as noted in Wednesday’s report.

It is now streaking back in the other direction, with near-term support at its rapidly rising 10-dma, now at 24.51, looming below. If one was long the stock at least along the 20-dema on Monday where it was last buyable, per my comments in last weekend’s report, selling into the move might have made sense given that it represented move than a 20% upside jaunt in just three days.

From here, it’s now a matter of seeing whether and where AMD can hold support as it potentially pulls back further with the market. The 10-dma is very close to the Tuesday breakout point at around 25, so that will be critical support to watch this week.

 

 

Applied Materials (AMAT) was buyable on Thursday morning per my comments in Wednesday’s report as it held support at the 20-dema that day. It launched in sympathy to the MU earnings news in a strong pocket pivot range breakout off the 200-dma. That was an impressive move, to be sure.

It gave up most of Thursday’s move on Friday, but volume declined to below average. This brings into play a critical test of support at the 200-dma and should be watched for a possible opportunistic entry or a bearish breach of support. How this plays out will no doubt depend on what the general market does from here, so play it as it lies.

 

 

Skyworks Solutions (SWKS) was another lower-risk entry among chip stocks on Thursday morning at its 20-dema, as discussed in Wednesday’s report. It then launched right through its 200-dma on strong volume, posting a pocket pivot range breakout on strong volume. On Friday, like everything else in the market, SWKS gave up that move in its entirety, breaking back below its 200-dma in a complete negation of Thursday’s strong move.

It is now back to the 20-dema, but Friday’s volume came in at above average. This puts it in a critical position at the 20-dema, which would offer a lower-risk entry if the stock can hold support. A breach of the 20-dema, however, would have bearish consequences.

 

 

Telecom-Related

Only two of the five telecom names I follow, Acacia Communications (ACIA) and Arista Networks (ANET), remain above their 200-dmas. The other three have broken support, with Ciena (CIEN) and Finisar (FNSR) as they both break support at their 50-dmas. Viavi Solutions (VIAV), meanwhile, is in a critical test of its 50-dma, which could present a lower-risk entry if and only if it can hold support at the 50-dma.

 

 

But even Acacia Communications (ACIA), is showing weakness of a different kind here after a powerful-looking flag breakout on Thursday. The stock was buyable along its 10-dma as I discussed in Wednesday’s report, and it launched to higher highs on Thursday. Volume was strong.

That move completely reversed, and more, on heavy selling volume Friday, bringing ACIA right back into its 10-dma. Technically, this is now a failed breakout attempt, and the 10-dma serves as crucial near-term support for the stock. Otherwise, a test of the 20-dema may be in store.

 

 

Arista Networks (ANET) posted an impressive gap-up move on Thursday on heavy volume. Some might argue that the move was somewhat of an exhaustion gap, since the stock is much extended from its original, buyable gap-up after earnings back in January, as I discussed in my reports at that time.

If you check a weekly chart of ANET, not shown here, you will notice that Thursday’s move was a breakout attempt to new highs. But the breakout has failed around the $300 Century Mark. Thus, we can view the combination of Thursday’s and Friday’s moves as a breakout failure. With the stock closing at $300.16 on Friday, we might also be on the lookout for a break below the $300 Century Mark as a potential short-sale trigger.

This does have a two-sided aspect to it, however, since if the $300 level holds, ANET might also play out as a long using Jesse Livermore’s Century Mark Rule for the long side. However, the breakout would be occurring after a steep ascent up the right side of a big cup formation, which could make it failure-prone. Play it as it lies.

 

 

Social-Networking

Facebook (FB) acted like a short at its 20-dema on Friday after it reversed at the line and then moved lower to close just below its 200-dma. This brings it into play as a short-sale target, using either the 200-dma, which is only 16 cents away, or the 20-dema, which is less than 1% away, as guides for an upside stop.

Snap (SNAP) reversed on Friday after another attempt at higher highs and is now testing the 10-dma and the 10.55 intraday low of the prior week’s buyable gap-up move. If it can hold here, then it may be in a lower-risk entry position.

Ironically, I tweeted on Friday morning that Twitter (TWTR) looked like a short at the 200-dma as it rallied sharply following an analyst’s upgrade regarding the company’s forward ad sales. When I want to get an idea out fast, I will tweet it, although I know that there are some followers of mine on Twitter who are not members.

My main objective, however, is to get the message out to members quickly when I want to move fast as a blog post can take me much longer to prepare and post. It is a rare occurrence, but regardless, the tweet was timely. TWTR backed off from the 200-dma and the $34 price level to close Friday at 33.02, and I would continue to view moves back up to the 200-dma as potentially lower-risk short entries from here.

 

 

The Weed Patch

The weed patch, which has looked promising as of late, is starting to wilt in the hot sun of a general market sell-off. Aurora Cannabis (ACB) has been the leader of the group more recently, but it is now heading for a test of its 20-dema. Watch this carefully as it could present a lower-risk entry opportunity if it can hold.

Canopy Growth (CGC) and Cronos (CRON) were both forming constructive bases, but both have now breached their 50-dmas. This is bearish for both stocks, and they would have to regain their 50-dmas to become viable as long candidates again. Meanwhile, Tilray (TLRY) rolled over on increased but below-average selling volume, which is not constructive in my view.

Overall, the change in the character of the weed patch is bearish, at least in the near-term. This indicates that we must lay back and let these do their thing before we can determine whether they become viable as long candidates again.

 

 

Chinese Names

Chinese names, which have been rallying with the general market since Christmas Eve and in fact have roughly correlated to the 2019 bull phase, also were hit on Friday. Additional news that the much-ballyhooed summit between President Trump and Chinese President Xi has been pushed back to June also didn’t help their cause. I myself remain skeptical that a truly material and ground-breaking trade agreement between the two countries is not likely.

That, however, has not prevented me from playing some nice moves in several Chinese names since the market bottom nearly three months ago. I show all the Chinese names I follow currently below in three separate group charts. This creates an overall view of deterioration for most of these names, coincident with the deleterious market action seen this past week.

Autohome (ATHM) may be one of the better names among the group as it holds support at its 20-dema. A breach of the line, however, would be bearish. The other three shown in the chart below are all breaching near-term support, which is bearish.

 

 

In the next chart, we see that Iqiyi (IQ) failed to hold support at its 200-dma on Friday, a change in the way it has acted more recently where support at the 200-dma has held each time. However, make note of the prior low in the base, here a possible undercut & rally is always possible if the stock finds its feet in the coming days. That, however, seems unlikely.

JD.com (JD) has closed just below its 200-dma, and a test of the 20-dema will likely determine how viable this name remains. Momo (MOMO) has pulled back to its 200-dma, which brings it into a potentially lower-risk entry position as volume dries up sharply. A breach of the 200-dma would be bearish, however, and potentially trigger the stock as a short-sale target at that point.

Our old friend Pinduoduo (PDD), which served us well from early January into late February before topping in a POD-like chart formation, continues to plummet lower. It is, of course, off the table as a long candidate at this point and has been since it gapped down though its 50-dma two weeks ago after earnings.

 

 

Qutoutiao (QTT) looked like it might hold near-term support at its 20-dema on Thursday as it tucked into the line with volume drying up sharply. It even tried to move higher on Friday morning but reversed to close back below the line on higher selling volume. It appears as if a test of the 50-dma is coming next.

Tencent Music Entertainment (TME), which gapped down hard after earnings, is still holding above the 16.65 low of its low of two weeks ago, as can be seen on the chart. It may try to hold support here along the 50-dma, but the stock is technically broken, and the undercut & rally move at the 16.65 low on Wednesday and Thursday may not hold up.

All these Chinese names, save for ATHM, need to find support and reset before I would be willing to start buying them again. However, as with anything else in this market, further general market weakness will keep any buying on hold, regardless of the group or sector.

 

 

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.

After noting the cautionary action of the market on Wednesday, I wrote in my report that members should, “Meanwhile, review your selling guides and trailing stops for existing positions, and be ready to act in case the market decides it wants to pull back and correct for a little while. It’s always helpful to have some dry powder in your pocket when this happens, so keeping some on hand, perhaps selling into extended moves, and maintaining an opportunistic approach is prudent.”

That remains the case after Friday’s bearish action across all sectors of the market. If the market pulls back in a short-term correction, having some dry powder in your pocket is obviously going to be useful. Buy-and-hold types on financial cable TV will always tell you that a market sell-off is just another buying opportunity, but how does one take advantage of that if they never sell anything to raise some cash?

That is why knowing where your profit objectives and your trailing stops are becomes critical during a market sell-off. It will ensure that downside risk is contained, and that one is in a position to take advantage of pullbacks in leading stocks on the long side, if the general market finds its feet again.

Friday’s action was just one day, so it could be a one-off (which I think is unlikely but still a possibility), or it could be the start of something worse. At best, the market action this week just shows how investors can be thrown by head fakes and the popcorn machine effect that is characteristic of this market environment.

We’ll be watching stocks closely as they approach or breach near-term support this week, as formerly long ideas may morph into short-sale targets. Given the skittish nature of this market, the short side is tricky, and so I will cover this in my weekend GVR. Stay tuned.

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.

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