The Gilmo Report

March 27, 2019

March 27, 2019

The market spent the first two days of the week flopping around, with a logical bounce off the 50-dma from the Dow Jones Industrials Index providing the context for a rally off the early-morning lows on Monday. That led to a big gap-up move on Tuesday, for reasons that seemed unclear to me. As I noted in yesterday’s GVR, the un-inverting of the yield curve was cited as one reason, and Fed heads talking about lowering interest rates as another.

The net effect was a big gap-up rally that fizzled, with the indexes giving up a large chunk of their intraday gains. The NASDAQ 100 Index kissed negative territory as the closing bell approached, but a burst of buying in the last few minutes pushed the indexes back up off their intraday lows. Nevertheless, the stalling action on higher volume struck me as somewhat bearish.

That was confirmed to some degree today as the NASDAQ Composite Index, along with the S&P 500 Index, posted a distribution day today, selling off -0.63% on higher volume. Tech names took a lot of heat today, and many clouds, semiconductors, and others on my long watch list were down sharply on heavy selling volume.

 

 

The Dow avoided a distribution day by lapsing only -0.13% as it again found support along its 50-dma. That was the second time it found support along its 50-dma this week. Unlike the S&P and the NASDAQ, we can see that the Dow has been consolidating sideways over the past month, but a breach of the 50-dma and 200-dma would be a bearish development to watch for.

 

 

Apple (AAPL) broke below its 200-dma on Monday following its new product event, where it announced new streaming and news services. Ironically, Google had exited the streaming movie and entertainment business on Monday, which in my view confirmed that AAPL’s new services likely won’t be a big counter-boost to the company’s sagging iPhone sales. The stock seemed to agree, closing below the 200-dma on Monday.

A brief rally back up through the 200-dma yesterday, coinciding with a market rally in the first half or so of the trading day, also gave way, producing a near outside reversal to the downside. The stock then closed below its 200-dma and its 10-dma on heavy selling volume.

I wrote over the weekend that, “…if AAPL fails at the 200-dma, then the market sell-off will likely be worsening.” That has been the case, although the situation is still in flux. Technically, AAPL might be considered a short here using the 200-dma as a guide for an upside stop.

 

 

The AAPL event on Monday helped set up one of the more profitable shorts this week in Roku (ROKU). On Monday morning I blogged that members should watch the rally in the stock that day as stories of a possible ROKU app for the iPhone circulated. As the weekly chart below shows, the stock was already a potential Punchbowl of Death or POD topping formation.

This was based on the extremely deep and steep cup formation it had formed since the market top back in October. The break off the right-side peak two weeks ago was the first sign of a potential POD in process. From there it was a matter of monitoring the stock for any shortable rally.

 

 

Monday’s AAPL event provided that opportunistic rally to short into, and one could have entered the short around 68 on Monday during the event, or again on Tuesday when ROKU opened above 68 and then tanked from there. ROKU then confirmed the POD in progress today by breaking below its 20-dema early in the day.

Volume was light, so I would look for a weak rally back up into the 20-dema as a potential short-sale entry point. However, taking advantage of the opportunistic entry into the rally that resulted from the AAPL event was the first optimal entry that enabled one to capitalize on the breakdown from there over the past two days.

 

 

Overall, stocks are dropping like flies, including Netflix (NFLX). The stock busted its 50-dma today and triggered as a short once it failed at the 20-dema earlier today. That’s because it is a late-stage, failed-base type of set-up here after failing on last week’s breakout attempt. A rally from here back up into the 20-dema would offer a lower-risk short entry.

 

 

Cloud Stocks

Cloud names in general have been slammed lately. Coupa Software (COUP) rallied up into its 20-dema yesterday and acted like a textbook late-stage failed-base (LSFB) short-sale set-up from there. It ran right into resistance at the line and then reversed on a big churn, breaking below its 50-dma today on increased selling volume.

Technically, this puts COUP in a short-sale entry position right here just below the 50-dma. The 50-dma then becomes your guide for an upside stop. However, more opportunistic short-sellers should have taken advantage of yesterday’s rally up into the 20-dema for the more optimal short-sale entry.

But, if the market breaks down further, I would expect the stock to push further below its 50-dma from here. So, remain flexible and be prepared to dance with the stock if looking to short it now that it’s below the 50-dma. Otherwise, any further rallies up into the 20-dema would be the most opportunistic entries if you can get them.

 

 

Proof that the clouds have been whacked over the past few days is seen in the group charts. The first of these, below, shows Salesforce.com (CRM), Tableau Software (DATA), and Splunk (SPLK) splitting wide open. Meanwhile, ServiceNow (NOW), which failed on a breakout attempt five days ago, is sitting right at its green 20-dema, so that a breach of the 20-dema would trigger this as a short-sale from here.

 

 

The second Cloud Group Chart shows more of the same type of carnage, with Atlassian (TEAM) and Trade Desk (TTD) slashing below their 20-demas. In these cases, rallies back up into the 20-dema would offer potential lower-risk short-sale entries from here.

The others are wavering at their 20-demas, aside from ZScaler (ZS), which continues to hold up above its 10-dma. That may not last for long, however, if the general market and the cloud group continue to weaken. As I wrote over a week ago, the cloud group is a critical one to watch.

Since this group comprised the top three ranked groups during the market rally off the Christmas Eve lows, it is a critical barometer of the market’s health. Once these names begin to break down, as I’ve previously written, they then become your best short-sale targets. That has proven out over the past few days as these names begin to break near-term support.

For those names still holding near-term support, then breaches of the 20-dema would trigger them as short-sale targets, using the 20-dema as a guide for a tight upside stop. Play them as they lie!

 

 

Cyber-Security

The cyber-security stocks that I follow are a mess, except for CyberArk Software (CYBR), which is still holding near-term support at its 20-dema. It bounced off the line today as selling volume ballooned, but I would be alert to any breach of the 20-dema as a short-selling trigger.

Also, if the general market starts to weaken further, then it may turn out to be shortable right here just below the 10-dma, while using that moving average as a tight upside stop. That all depends on how the stock and the market play out from here. But leading stocks hanging along their 20-dema can always be viewed as potential short-sale targets if they fail at the 20-dema.

That’s what we saw in early October of last year as the correction got under way, and my guess is that if, with emphasis on if, that occurs again you will likely see it unfold in a similar manner as leading stocks start to break their 20-demas. To some extent, we’re already starting to see that.

 

 

Semiconductors

Semiconductors have also been hit over the past few days. Names that I’ve discussed in recent reports, such as Advanced Micro Devices (AMD), Applied Materials (AMAT), and Skyworks Solutions (SWKS) have all broken down in earnest. AMD illustrates why buying breakouts as an initial entry is not an advisable practice, despite the O’Neil-style dogma.

Note that the true, lower-risk entry, and therefore in my mind the proper initial entry for the stock occurred on the bounce off the 200-dma three weeks ago. This coincided with an undercut & rally back up through the low of the prior late-January buyable gap-up (BGU) price range, and the stock then launched to higher highs from there.

Last week’s breakout has now failed, although AMD did hold support today at its 20-dema. That could be viewed as a lower-risk entry point, but selling volume was heavy today. The flip side here is that a breach of the 20-dema would trigger the stock as a short-sale target at that point.

 

 

One semiconductor that I follow is very interesting as a potential opportunistic short-sale set-up, even as it looks bullish. That would be Broadcom (AVGO), which in fact looks very constructive right here as it holds in a tight flag formation after gapping up after earnings two weeks ago. No doubt some will think I’m nuts, but often what you don’t expect in a stock in this market is exactly what happens.

AVGO may be one of those cases, since it has gone nowhere after the BGU, and is now in its eighth day of building a flag instead of moving sharply higher. At the same time, it keeps bumping up against and failing at the $300 Century Mark. Therefore, if the general market remains weak, this could end up being a short based on Jesse Livermore’s Century Mark Rule in Reverse for the short side.

So, while if one is an AVGO bull and thinks it’s buyable here along the 10-dma, that is certainly a trade that can be tested. However, if it again rallies up to the $300 Century Mark and fails, it could very well become a short right there, using the $300 price level as a guide for a tight stop. This is more of an opportunistic short-sale set-up that relies on a) the $300 Century Mark serving as material resistance and b) the general market remaining weak.

 

 

Telecom-Related

Telecom names that I follow are a mixed bag. Ciena (CIEN) has been thrown out of my long watch list as it continues to move further below its 50-dma. Meanwhile, Acacia Communications (ACIA) is a failed breakout that found support around its 20-dema on heavy volume. Given that this is a thin name, I’m not inclined to buy it during a weak general market.

Arista Networks (ANET) is holding tight nearly 4% above the $300 Century Mark level. This brings up the possibility of an eventual breach of the $300 price level, which would trigger the stock as a short-sale target at that point. From a long perspective, it acts very well, however, but I tend to think that would change if the general market continues to weaken.

Finisar (FNSR) stalled today at its 20-dema after bouncing off the 50-dma on Monday. In this position, I can’t say it makes me salivate as either a long or a short. On the other hand, if the market were to improve and move higher again, then Viavi Solutions (VIAV) might be something to look at on the long side as it pulls into the 50-dma with volume drying up sharply today.

 

 

Social-Networking

Social-networking names have been slumping along with everything else. Facebook (FB) is pulling back into its 200-dma here on light volume, but a breach of the 200-dma would trigger the stock as a short-sale target, should that occur. Otherwise, if you’re an FB bull, this could be viewed as a lower-risk entry here using the 200-dma as a flipper fence. If it busts the 200-dma, you sell the long and flip short.

Meanwhile, Snap (SNAP) is testing its 20-dema as volume dried up to -62% below average. If the market were in better shape, this would be buyable here using the 20-dema as a tight selling guide.

Twitter (TWTR) has been the most gratifying among the three social-networking names I follow. That has been as a short at the 200-dma, which it was last Friday as I tweeted at the time. It was again a short at the line yesterday, and then once again today on the approach to the 200-dma that fell short and reversed. I would continue to view moves back up to the 200-dma as potentially lower-risk short entries from here.

 

 

The Weed Patch

A week ago, the cannabis names, also known as the Weed Patch, that I follow, were looking bullish. Today, they all look like someone sprayed them with a heavy and toxic dose of the infamous weed-killer, Roundup®. A week ago, I liked the action in names like Aphria (APHA), Canopy Growth (CGC), and Cronos (CRON), but all that is out the window now.

And since I haven’t been able to borrow any of these stocks, I haven’t been able to take advantage of their current breakdowns. The only exception is GW Pharmaceuticals (GWPH), which makes cannabidiol-based pharmaceuticals. The stock dipped below its 20-dema today, triggering it as a short sale while using the 20-dema as a guide for a tight upside stop.

Notice also that GWPH is failing on its prior buyable gap-up (BGU) move after earnings. That low is right at 166.00 even, and today GWPH rallied as high as 168.20 before turning tail and reversing back through the 20-dema to close at 163.72. From here, any rallies up into the 20-dema would potentially offer lower-risk short-sale entries from here.

 

 

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 many cases, leading stocks look like they’ve had the rug pulled out from underneath over the past few days. As I wrote over the weekend, it made sense to raise some cash and be prepared for potential continued weakness. While we haven’t seen a wholesale breakdown in the major market indexes, the action in individual stocks has been quite negative.

Since we operate based on what the stocks are doing first and foremost, knowing where trailing stops and absolute stops, or in many cases were, is the best way to avoid getting into serious trouble. At the same time, those who have viewed my last two GVRs and recent blogs posts may have been able to capitalize on some short-selling action over the past four trading days.

I’m not sure where the market is going form here, but I do know that the short side has been very rewarding over the past few days, especially in situations like ROKU and COUP, for example. Financials were also a great group short as I blogged two Tuesdays ago right when they all topped and broke down sharply.

If things continue to deteriorate, more set-ups will show up, mostly in the form of 20-dema breaks, which we’ve already seen occur in a broad swath of other leaders. And as leading names begin to break down, it is these names that we use to begin to build our short-sale watch list. How that pans out over the next few days remains to be seen, so remain flexible and alert to opportunities as they arise in real-time.

I warned members of a possible breakdown in the market over a week ago when money began piling willy-nilly into big-stock NASDAQ names at that time. Prior such movements into these names have marked at least short-term market peaks, and that has been the case this time around as well.

Meanwhile, I’m watching stocks that have broken down sharply over the past few days for any rallies that might present lower-risk entries from here as they run into potential resistance. Members can refer to my watch list spreadsheets posted in the Premium section of the website. 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.

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.