The Gilmo Report

March 31, 2019

March 30, 2019

It was a bouncy week for the market, but the major market indexes rode through it all by closing slightly positive for the week. After a sharp sell-off two Fridays ago, the market stabilized to end the current week above where it closed the Friday before. The NASDAQ Composite Index, along with the S&P 500, is holding support along its 20-dema, and remains well above its more critical 200-dma.

 

 

Friday’s action was helped along by quarter-end window dressing and positive headlines coming out of China as Treasury Secretary Stephen Mnuchin and U.S. Trade Representative Robert Lighthizer met with their Chinese counterparts. The meetings were hailed as constructive, but nothing concrete resulted, as has been the case since the talks began last year.

As the market has rallied off the Wednesday lows, so has Apple (AAPL). In my view, the stock is a barometer for this market rally, since it has been consistently leading the charge since it turned with the market in late December. The stock has slowly edged back up to its 200-dma following Tuesday’s high-volume break through the line.

In this position, AAPL is at a crossroads, where it can be viewed as a two-side situation that likely resolves in synchrony with the general market action. First, it can be viewed as a short here using the 200-dma as a guide for an upside stop. However, if it can quickly regain the 200-dma, then it becomes a moving-average undercut & rally long set-up at that point, using the line as a tight selling guide.

 

 

Netflix (NFLX) has managed nothing more than a weak-volume but still logical bounce off its 50-dma since hitting the line on Wednesday. The stock is a current base-failure following last week’s failed breakout attempt to higher highs. In this position, it has two potential set-ups occurring in either direction.

The first is based on the breakout-failure short-sale set-up that may be playing out here. Thus, the bounce off the 50-dma, which is occurring on weak volume, could become shortable at or near the 20-dema. Conversely, the stock has also undercut & rallied back above its 50-dma.

That, of course, sets up a possible moving-average undercut & rally (MAU&R) through the 50-dma. In that situation, one buys the stock here at the 50-dma and then uses it as a tight selling guide. There is also the possibility that if such a move fails, and NFLX decisively breaks below the 50-dma, then it becomes a short-sale entry at that point. As with AAPL, play it as it lies.

 

 

Amazon.com (AMZN) is one of the stronger big-stock NASDAQ names given that it is still holding above its 200-dma. The stock is churning along its rising 10-dma, but so far is just forming a small pennant formation over the past six days. The 20-dema has now risen just above the 200-day, so that pullbacks to the 20-dema from here represent the most opportunistic, and hence lower risk, entries.

 

 

If you compare the daily charts of AMZN, above, and Nvidia (NVDA), below, you will notice that they look almost identical since the first week of March. Even though they are in entirely different industries, both are major components of the NASDAQ 100 Index.

While NVDA has yet to reach its 200-dma, however, AMZN has cleared its 200-dma, but both stocks are hanging along their rising 10-dmas on light volume. So far, the action looks constructive, but the opportunistic approach with both stocks is to wait for any kind of pullback to the 20-dema, end of story.

Both stocks will likely go higher if the market goes higher, but the lower-risk entries have already occurred lower in the patterns. Thus, it’s best to lay back and look for opportunistic entries rather than chasing them up here.

 

 

One of the main issues I have with the market right now, which is not necessarily a fatal one, is that there are almost no long set-ups that get my blood boiling right here, right now. There were pullbacks to support levels that one could have bought into on Thursday, when the market reversed into the red from an upside gap opening. When the market then found its feet and rallied out of its intraday deficit, a lot of stocks turned off support.

The Weed Patch

Not all of this was that impressive, however. There were some interesting undercut & rally moves in the Weed Patch names after they got hit hard on Wednesday. For instance, Aurora Cannabis (ACB) undercut the 8.55 intraday low of its March 13th buyable gap-up (BGU) move on Thursday and rallied back above it, triggering an undercut & rally long set-up at that point.

ACB was discussed in my Thursday night video report, and it continued higher on Friday, closing at 9.06. In this position it is extended from the U&R long entry point at 8.55 but can be watched for constructive pullbacks to the 20-dema at 8.77, or the prior 8.55 low.

 

 

Canopy Growth (CGC) helps to demonstrate the wolf pack nature of the Weed Patch, as these stocks tend to move together. On Thursday, the stock undercut the prior 41.68 low in its pattern from February 12th and rallied back above it, triggering a U&R long entry at that point. This was also discussed in Thursday night’s GVR.

CGC closed Friday at 43.37, which keeps it in buying range of the 41.69 U&R long entry point. The closer to that point one can buy it, however, the better. U&R long entries are not guaranteed to work, but in this market, when they do, the price moves tend to be much stronger than the moves you’ll see from standard base breakouts.

 

 

While it isn’t in the same overall position within its chart as ACB and CGC, which are nearer to their highs, Tilray (TLRY), which is plumbing new lows, helped to round out what was a Wolf Pack U&R move in the Weed Patch on Thursday. Like ACB and CGC, TLRY undercut two prior lows in its pattern and rallied back above both. On the chart, I’ve added price labels showing the various highs and lows.

We can see that on Thursday TLRY got down to an intraday low of 62.65 before rallying to close positive. That move undercut the prior 64.06 and 64.45 lows, and the stock closed Friday at 65.52. That keeps it within buying range of the two prior lows, and one can use either as a selling guide, depending on how tight one wishes to keep things.

 

 

And with the cannabis growers all posting U&Rs on Thursday, Weed Patch pharmaceutical GW Pharmaceuticals (GWPH) decided to follow suit with its own U&R on Friday. The stock undercut the prior 165.02 low of two weeks ago and rallied to close at 168.57. That keeps it within buying range, using the 165.02 price point as a tight stop.

 

 

Social-Networking

Facebook (FB) remains on the bull side of the fence it has been crossing in both directions for the past two weeks. The stock tested the 200-dma and 20-dema on Friday and held as volume picked up but was still well below-average. Since the stock first cleared the 200-dma, it has had fits and starts that have resulted in forming what appears to be a fractal head and shoulders formation.

As FB has formed this fractal H&S, it has first found support along the 20-dema and then more recently along the 50-dma. Meanwhile, the 200-dma becomes a fence that the stock just keeps jumping over, back and forth, back and forth. Overall, the action lacks coherency, and the stock could just as easily fail from here as it could go higher.

One could certainly test this as a long here while using the 200-dma as a tight selling guide. The other approach would be to treat any breach of the 200-dma that is then confirmed by a breach of the 50-dma as a short-sale entry trigger. I find there are a number of patterns in this market currently that have this lack of clarity, as they hint at potential moves in either direction.

 

 

Snap (SNAP) rallied on Friday after successfully testing its 20-dema on Wednesday in a nice voodoo pullback. Meanwhile, Twitter (TWTR) is chopping back and forth on two unsuccessful attempts to approach and conquer the 200-dma. Those moves up to the 200-dma have proven to be profitable short-sale entries, but the downside has been limited as TWTR also continues to find support at the 50-dma.

So, we are left with a pattern that lacks clarity, with TWTR trapped in the no-man’s land bounded by the 200-dma on top and the 50-dma at the bottom. A decisive move will occur once the stock resolves through one moving average or the other, with the option of shorting moves into the 200-dma and buying moves back down to the 50-dma.

So, unless you’re going to day-trade or two-day swing-trade this thing, there isn’t much here to sink your teeth into. The action is erratic and choppy, but keep in mind that the macro head-and-shoulders formation extending back to February of last year is still there in plain view, as is the fractal head-and-shoulders pattern that forms the right shoulders of that larger H&S.

 

 

TWTR’s weekly chart, below, illustrates this fractal head and shoulders forming along the right side of a much larger head and shoulders extending back to early 2018. So, far all we know, this latest movement up to the 200-dma which keeps running into resistance, could be forming yet another right shoulder in the fractal H&S.

From a concrete standpoint, that is all I can see in the pattern at this point. Thus, I am more inclined to treat the stock as a short on rallies into the 200-dma, with the idea that it will eventually breach the 50-dma. Only a decisive move back up through the 200-dma would cause me to re-evaluate the situation.

 

 

Roku (ROKU) remains a potential Punchbowl of Death topping formation as it flops around its 20-dema. As the stock continued drift higher in the early part of March, I warned members to remain alert to a potential break off the peak. That occurred nearly three weeks ago, but the stock has slowly drifted up from there and along the 20-dema.

Last week’s Apple Event, where a ROKU app for the iPhone was rumored to be announced but wasn’t, set up a short-sale entry around 68-69, as I blogged at that time. That produced a nice break from there, and now ROKU is again sitting just above its 20-dema. The pattern looks like a sloppy L-formation, which of course brings up the possibility of a LUie type of resolution on the upside.

That is certainly a possibility, and we know that the LUie resolution where an L-formation turns into a U-formation as the stock simply turns back to the upside, is a common one in this market. So far, there have been no concrete triggers for an upside move, and I am still inclined to short the stock here on any near-term breach of the 20-dema. At the same time, I would remain open to any concrete long trigger that might turn this L-formation into a full-blown LUie.

 

 

Cloud Stocks

As with most areas of this current market environment, I don’t see a lot in the cloud space that I find compelling on the long side. Some stocks look more shortable than buyable, but nothing decisive has yet occurred. We can see that while Coupa Software (COUP) is looking very much like a later-stage failed-base (LSFB) short-sale set-up, nothing decisive on the downside has yet occurred.

Absent a general market breakdown, that may remain the case. However, with the stock moving just above the 50-dma and right up into the 20-dema, it becomes shortable here. The 20-dema then serves as a guide for a tight upside stop. So far, the pattern is textbook, since after the initial breakout failure, breaks below the 50-dma can often result in wedging moves back above the 50-dma and into the 20-dema.

Of course, this is not a textbook market, and many times we’ve seen a stock fail badly on a breakout attempt only to find its feet once again and re-breakout. Thus, the re-breakout has been a common phenomenon in this market. One thing we know for sure with respect to COUP is that those who only buy breakouts were served up a nasty dish when it failed miserably the prior week.

 

 

The daily chart of Tableau Software (DATA) is something to behold.  Note that since last November, the stock has tested and dipped below the 50-dma five times after sharp price breaks off the prior highs. Each time, it has then done a complete about-face and pushed right back to new highs.

But each time it logs new highs, it immediately reverses back to the downside. The most recent breakdown occurred last week, leading to a decline below the 50-dma that approached the early March, early February, and early January lows. So, can we surmise that DATA reinforces the entire idea of buying breakouts to new highs? I don’t think so.

On the other hand, it does reinforce the idea of just buying stocks when they look their ugliest. As I’ve joked on Twitter, in this market, down big on volume is a buy signal, while breakouts to new highs become sell signals, DATA makes this point emphatically, and the fact is that it’s not a joke – it’s what works in this market, at least with respect to DATA.

So, as the stock pushes up into its 50-dma, do we assume that it will continue trudging back up to its prior highs? Note how each rally off the lows takes at least two weeks, while the breakdowns off the peak take a week or less. Escalator up, elevator down. If the pattern breaks, then look for DATA to fail here at the 50-dma and head lower.

 

 

Trade Desk (TTD) was pummeled early in the week and became a short-sale target on Tuesday when it busted the $200 Century Mark and the 20-dema. That led to a sharp downside break that took the stock below the prior 180.50 low of March 8th. As I noted in Thursday night’s video report, the stock was posting a U&R long entry at that point and was actionable as a long.

That worked out well as TTD rammed 11.4 points back to the upside, a one-day move of 6.13%. It closed just eleven cents shy of the 10-dma but if it were to fail here then you might notice that this would result in the early formation of a possible fractal H&S. Overall, TTD hasn’t made much progress since its buyable gap-up (BGU) of late February after earnings.

Note also the re-breakout phenomenon at work with TTD. There were two failed breakouts in February that both failed. It wasn’t until the company reported earnings that we got an actionable BGU that moved right up into the $200 Century Mark before rolling over and bouncing off the 20-dema and off to new highs.

TTD is a great example of how breakouts are often misleading in this market, as well as the fact that once stocks get extended they can become vulnerable to sharp pullbacks. That is why averaging up in an aggressive manner is not advisable in this market.

 

 

Notice how Salesforce.com (CRM) has broken out to new highs twice over the past month and failed back to the downside each time. This is very choppy and sloppy action, such that anyone trying to play this thing on the long side, at least in any orthodox O’Neil-style fashion, is getting whip-sawed but good.

But notice how the U&R comes into play at the lows. The break down to the 50-dma in early March undercut a prior low from early February, which you can see if you study the chart below. That led to a rally back to new highs at which point CRM promptly rolled over and broke below the 50-dma! The action can be a nightmare for those who only like to buy breakouts, but the pullbacks are gold for those who understand Wyckoffian techniques.

So, do we assume that CRM will simply trudge back to the upside in a slow grind to new highs? Notice how the upside moves are slow, baby-step affairs while the breaks to the downside are much more rapid. This instills an element of danger to the pattern for aggressive longs who buy strength. Again, we have the escalator up, but the elevator down.

 

 

Splunk (SPLK) is a beautiful example of a stock that turned off the lows with the market back in late December/early January and marched straight up from there. After marching straight up for seven weeks in a row, the stock broke out, paused one week, and then moved higher for one more week.

At that point, the breakout had progressed all of 10% higher before SPLK rolled over and failed on the breakout. Yet another example of the muted (at best) effectiveness of only buying breakouts while ignoring other concrete long triggers much deeper in the pattern. Since reversing badly off the peak, a month ago, SPLK has since broken below its 50-dma.

Note, however, that Thursday produced a U&R long set-up after undercutting the prior 119.51 low from early March. That has triggered a rally back up toward the 10-dma, 20-dema, and 50-dma. This can be watched for possible resistance at the 50-dma, where the stock could become a short-sale target at that point.

 

 

Here’s the weekly chart of SPLK to help illustrate the macro-action since the late-December low. The sharpest part of the move occurred at the very beginning, right off the lows, and once the stock broke out it lost a great deal of upside velocity. After moving 10% higher from the so-called proper buy point when SPLK broke out to new highs, it then rolled back below that buy point.

We can argue that the base SPLK broke out of wasn’t proper to begin with. But the move off the lows was more than proper, it was quite profitable. Overall, however, the base has that clown’s foot look that I talk about, and which often characterizes a failure-prone base. So far, that has been the case with SPLK as a near-term failed base breakout, and potential LSFB short-sale set-up.

 

 

Cyber-Security

The cyber-security group presents a decidedly mixed bag. The de facto leader in the group is 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. Meanwhile, there are no lower-risk long entries to be found at current levels.

Palo Alto Networks (PANW) is forming a long L-formation after failing from a prior buyable gap-up and base breakout a month ago. Technically, the stock is holding just above the prior breakout point as it dips and dives along its 20-dema. It is currently working on a slow-motion type of U&R long set-up at the 20-dema after undercutting the 238.29 low of March 18th earlier this past week and then rallying above it.

On Wednesday and Thursday, PANW only rallied marginally above that low, closing below its 20-dema. That made it look like a possible short at that point, but a more decisive move higher kicked in on Friday as the stock regained the 20-dema and closed six cents above the 10-dma. Aside from CYBR, PANW is the strongest-acting cyber-security name that I follow, so if it can hold this U&R move it may be able to move higher if the general market holds together.

 

 

The weekly chart of PANW reveals a four-week base forming right on top of a big, deep cup formation. So far, the stock has remained above the breakout point and its 10-week moving average, so despite its failed BGU it is still holding up constructively. A volume breach of the 20-dema on the daily chart might trigger this as a short-sale target, but that will likely depend on what the general market does going forward.

Downside volume has dominated the pattern on the daily chart, but not on the weekly chart, where the stock has closed tight over the past two weeks. The four-week base following ten weeks of straight upside off the late-December lows is probably necessary to consolidate the prior gains, and the stock may continue to base.

For that reason, if one is interested in owning PANW, then remaining opportunistic is likely the best approach. As the 50-dma/10-week lines keep rising, they may soon provide a more solid reference for support as the stock potentially continues to base.

 

 

Semiconductors

Semiconductors have endured some heavy selling over the past week. Many pundits like to cite strength in the semiconductors as a positive sign for the market. This of course brings up the question whether a bearish divergence in the semis over the past week is a negative sign for the general market. I suppose we’ll find out at some point.

Advanced Micro Devices (AMD) illustrates the weakness in the semis over the past week with a steady downside slide to its 20-dema after streaking higher the week before. This is also illustrative of the popcorn machine effect, where strength one day as the kernels pop to the upside is met with an immediate drop.

AMD held support at the 20-dema and bounced on Thursday and Friday but stalled at the 10-dma as volume declined. The stock popped to the upside on a big-volume breakout last week caused by news that Google was going to use the company’s chips for its new online gaming platform, Stadia. Second thoughts as to just how big this is for AMD apparently weighed on the stock this past week, however.

If the stock can constructively retest the 20-dema on light volume, that would present a lower-risk entry. AMD tends to be most buyable on an opportunistic basis, as chasing strength and base breakouts in the stock tend to be futile affairs. Thus, the pullback to the 20-dema presents a better, lower-risk entry possibility.

 

 

Broadcom (AVGO) is still pushing up against the $300 Century Mark without decisively clearing it. It ended the week at 300.71 at an all-time closing high. Weekly volume has been wedging as the stock moves higher and up to the highs of its current up-trending price channel that it has formed since the December lows.

AVGO bucked the weakness in semiconductors this past week but is extended from the base breakout point around 270. Note how volatile the weekly ranges have been for the stock, which gives it an unstable look on the weekly chart. To be sure, there are no tight weekly closes to be found all the way up since late December.

In this position I’m not interested in buying the stock since it is extended from the top of the prior, extremely loose base. However, with the wedging weekly volume and the stock sitting along the $300 Century Mark, it could easily become a tactical. I don’t see the stock gaining big upside momentum right here, so I’m leaning toward a pullback in the stock from here.

 

 

Telecom-Related

Acacia Communications (ACIA) illustrates the concept of re-breakouts as a common occurrence in this market. The stock attempted a flag breakout two Fridays ago, but that failed miserably until the stock found support along its 20-dema. If one was interested in owning the stock, that pullback was the opportunistic entry, and the breakout is just a sucker move.

And, after I declared in my Wednesday report that I was not inclined to buy the stock after Wednesday’s support at the 20-dema, it simply decided to re-breakout on Thursday. The only news I could find on Thursday to account for the move was an analyst’s downgrade of the stock while the analyst also raised his price target to $44, even though ACIA closed the week at 57.35.

The logic of all this, from the analyst’s price target being raised to a price that is 13.35 points below where the stock is currently trading, to the stock’s reaction, escapes me. The only thing I know for sure is that ACIA is extended here, but the action is notable nevertheless.

 

 

Financials

While semis provided something of a bearish group divergence to the market action over the past week, financials have provided perhaps an even more bearish divergence. The Tuesday before the Fed meeting, I discussed the financials as potential shorts in both my live blog and my Tuesday evening GVR. The thematic basis for this was found in the fact that I expected the Fed to remain dovish, and this was backed by a technical rationale as well.

The Fed in fact turned more dovish when it released its policy announcement two Wednesdays ago, sending the financials on a sharp decline from there. Below I show a group chart of seven big-stock financials and the chart of the SPDR Select Financials ETF (XLF). Note that they all look identical, but their precise technical positions differed at the peak two Tuesdays ago.

The first three of the top four were all breaking out two Tuesdays ago, but those breakouts all failed (no surprise there). The fourth, J.P. Morgan (JPM), was also breaking out but ran into resistance around its 200-dma, which provided a more concrete reference for resistance. The bottom three all ran into resistance at moving averages, with Morgan Stanley (MS), and Wells Fargo (WFC) running into resistance at the 200-dma and Charles Schwab Corp. (SCHW) failing at its 50-dma.

The XLF, which is the last chart on the bottom row, shows a failed breakout as well. Interestingly, the breakouts in the financials two weeks ago were being hailed by the pundits as positive for the market. So, with the financials now showing a very bearish divergence, like the semis, does this have broader implications for the general 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.

As the indexes move sideways currently, there are several cross-currents developing underneath the surface. Bearish divergences in semis and financials, breakdowns in certain leaders, and a general loss of momentum elsewhere. Does this argue for a market correction? It can, but we can also just keep chopping sideways for a while as new bases form and the prior gains off the Christmas Eve lows are digested.

The bottom line for me is that there is very little that I find compelling on the long side of this market. Meanwhile, there have been areas of the market that were profitably attacked on the short side over the past two weeks, such as the financials.

So, the fact is that we are seeing some actionable short-sale set-ups, and some that may even be in process ahead of further declines. There are also some leaders just basing. The key is to simply go with the set-ups you see in real-time. I generally find that if I can remain objective in this regard, the market will naturally push me more in one direction or the other based on the incoming, real-time evidence. Right now, that is my primary objective – 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.

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