The Gilmo Report

March 6, 2019

March 6, 2019

Leading cloud software names took some heat on Monday as the indexes sold off on higher volume. In the same way that these stocks have moved in lock-step higher since the Christmas Eve lows, they all sold off in lock-step on Monday, some more sharply than others. Here we see Workday (WDAY) start the week off with a two-day slide down to its 50-dma as a month’s worth of slow, plodding gains evaporate in two days.

 

 

Splunk (SPLK) also gave up a month’s gains in two days, illustrating the correlated sell-offs in the cloud group. The stock is now testing its 50-dma, which could set up a bounce from here. However, a month’s worth of gains, even more, are gone in four days.

 

 

Not all have been this brutal. However, we can see the general lock-step action among the cloud names in the chart mosaics below. This shows small charts of each of the cloud-related names I’ve discussed in reports since the market turn off the lows, and you can see the uniform look to their patterns.

In this first mosaic, note that only ServiceNow (NOW) remains above its 20-dema. It could, however, bust it soon enough. The others have all been knocked below their 20-demas, with Tableau Software (DATA) dropping below its 50-dma. It became a short-sale target on Monday as it busted the 20-dema.

Salesforce.com (CRM) and Coupa Software (COUP) both look like they could easily be shortable here along their 20-demas. Autodesk (ADSK) is sitting well below its 20-dema, such that rallies up into the line might be shortable. Notice how these have all changed character in meaningful fashion.

 

In the second chart mosaic, Atlassian (TEAM), Workday (WDAY), and Zendesk (ZEN) have dropped below their 20-demas. Trade Desk (TTD), and ZScaler (ZS) both sit well above their 20-demas, but they could end up testing those lines soon enough. Twilio (TWLO) sits right on top of its 20-dema, and a breach of the line could trigger it as a short-sale target at that point.

 

 

(Note: if you have trouble seeing these charts, just click on your browser page and press the “Control” and “+” keys at the same time to enlarge them. However, they should be readable, at least to the extent that one can see the montage of action here. Using these types of chart mosaics is perhaps a bit radical, but I use them often to get big picture overviews of how a group is acting. Group movements, one way or the other, can often provide useful clues.)

This breakdown in the clouds is what I’ve been discussing as a possibility to watch for and noted this in my Monday GVR. This would be the idea that all these leading cloud names, which have been moving together in one massive wolf pack since the market low, might eventually display a change of character. This change of character might then have implications for the general market.

The images are fascinating, save for a couple of outliers, and illustrate the lock-step action of this group as it has moved inexorably higher since bottoming in late December. While the change of character in these names can be observed objectively here on these charts, the clue they might offer with respect to the health of the current market environment is less clear-cut. It is a clue, however, and over the course of several days such clues can pile up.

This was the case back in September of last year, when I was beginning to pick up clues that the market rally was at least running out of momentum. Things, of course, turned out a lot worse than that, but the summation of clues that help us draw meaningful conclusions with respect to the state of the general market rally is useful.

In this case, the change of character in the primary leaders of this market rally off the Christmas Eve lows may indicate that a period of rotation into other areas of the market is at hand. It may also indicate that caution is warranted in a more general sense.

Meanwhile, if we’re looking for clues in the major market indexes themselves, both the Dow Jones Industrials and S&P 500 Indexes remain well above their 200-dmas, for now. I view this as critical support for both. The NASDAQ Composite Index is the closest to testing its 200-dma, trading down toward the line today on higher volume, thus logging a distribution day.

 

 

The risk-on area of the market, the small-cap Russell 2000 Index, however, is not faring so well this week. The index, as represented by its proxy, the iShares Russell 2000 ETF (IWM), failed at the 200-dma on Monday on higher volume. That was followed today by a break to lower lows on heavy selling volume. So, the Russell 2000, which was the last index to regain its 200-dma, is the first to give it up.

If we start seeing the Big-Three major market indexes start to bust their 200-dmas, then the market may have an issue. This will have to be watched closely in conjunction with individual stocks, many of which are wavering after strong runs from the late-December lows.

 

 

Getting back to the cloud space, ZScaler (ZS) remains in an uncompromised position following last Friday’s buyable gap-up (BGU) after earnings. There has been no follow-through to the BGU, but the stock did successfully test the 55.30 intraday low of last Friday’s BGU price range and held. It attempted to rally further today, but stalled on higher, above-average volume.

The big test for ZS will be whether it can hold this BGU if the other cloud names also remain weak. On the other hand, it is one of the few that remains in a strong technical position, with the idea of pullbacks closer to the 55.30 BGU low as offering lower-risk entries. If the BGU fails, then it may very well become a short at that point.

 

 

Keeping a close eye on all these charts, which is why I show them, is important. Not only for watching for pullbacks to deeper support, but also because these stocks were the leaders off the Christmas Eve market lows. If the market gets into more trouble, the former leaders then become your primary short-sale targets.

If the clouds are coming loose here, at least to the extent that indicates some time is needed to consolidate the gains of the past two months, is it possible we could see rotation into other areas of the market? My answer is that there isn’t such an area that I see developing yet. Let’s look at some other groups among stocks I’ve been following in my reports to get a sense of this.


Cyber-Security Stocks

CyberArk Software (CYBR) has been the leader of the pack here, and it still holds above the $100 Century Mark and its 20-dema. The 20-dema is now tracking along the $100 Century Mark, so they both can be viewed as critical near-term support.

Others like Fortinet (FTNT) and Mimecast (MIME) are dipping below their 20-demas, which is not constructive. Palo Alto Networks (PANW) has failed on its buyable gap-up attempt and has now pulled all the way back to fill the gap as it tests its 20-dema. This, of course, is negative.

Also, negative: Qualys (QLYS) has failed to hold critical support at its 200-dma, while FireEye (FEYE) has broken below its 200-dma as well. Overall, only CYBR still looks healthy, and those that are testing their 20-demas need to be watched closely since they could morph into shorts on breaches of the 20-dema.

 


NASDAQ Big Stocks

Yesterday morning I was on the Benzinga.com Pre-Market Radio Show and was asked whether I thought that perhaps money was rotating into big-stock NASDAQ or so-called FANG names. My answer: maybe, but there’s not much that is all that special among these names.

Among the big-stock NASDAQ names, I show six of my favorites below. We can see immediately that Apple (AAPL) continues to hang tight along its 10-dma but has gone nowhere since its pocket pivot of last Wednesday. Technically, it remains in a lower-risk entry position here using the 10-dma or 20-dema as tight selling guides. Meanwhile, Amazon.com (AMZN) remains trapped below its 200-dma, while Cisco Systems (CSCO) has already had a big price run off the lows since early January.

Netflix (NFLX) is holding support at its 20-dema, which is constructive. Nvidia (NVDA), however, broke below its 20-dema today, but on light volume. The 50-dma would serve as the next reference for critical support from here.

The others have all had decent moves off the late December lows, but there is nothing among these names, Intel (INTC), Alphabet (GOOG), and Oracle (ORCL), that makes me want to come piling into these stocks now.

 


Semiconductors

I haven’t discussed many semiconductors in my written reports, but several names have been staples of the GVR. Advanced Micro Devices (AMD) has been a mainstay of the written reports, but it failed today at the 20-dema, triggering as a short-sale at that point. Notice also that others, like Applied Materials (AMAT), Broadcom (AVGO), and Micron (MU) are rolling over through their 20-demas. That’s negative.

The others are holding up but should be watched closely for possible breaches of their 20-dema lines. I included the Vaneck Vectors Semiconductor ETF (SMH) here as a proxy for the overall group. It is sitting right at its 20-dema and should be watched for a breach of the line as confirmation of weakness in the group. If the market gets into trouble, then semiconductors could become a group ripe for shorts.

 

Here’s a close-up of the action in Advanced Micro Devices (AMD). You can see the slashing move right through the 20-dema on higher selling volume that was about twice that seen yesterday. This is not constructive for the stock, and it now looks set for a test of the 50-dma.

 


Telecom-Related

Among telecoms I follow, there have been some strong performers. But these stocks have already had big moves and are now showing signs of wanting to pull back. Arista Networks (ANET) had a nice continuation uptrend after its post-earnings buyable gap-up back in mid-February. It is now rolling back toward its 20-dema.

Viavi Solutions (VIAV) is meeting up with its 20-dema here which could bring it into a lower-risk entry position, so it should be watched carefully here to see if it can hold support at the line. Acacia Communications (ACIA) was one I discussed in the GVR, and it has acted well since breaking out in concert with earnings about two weeks ago. It needs to build a base and should be watched for a test of the 20-dema.

Notice Ciena (CIEN), which I’ve discussed in the GVR and which has been a strong telecom leader since early January. It reported earnings Tuesday before the open, gapped up, and reversed in brutally ugly fashion. Ouch!

 

 

 The telecoms that I watch are all pulling in, and they confirm the selling we’re seeing in other groups. By now you may have noticed that these charts only show the 20-dema, 50-dma, and 200-dma. That’s because I don’t view the 10-dma as all that reliable a level of support after stocks have already had big price moves.

The 20-dema becomes more important to me, and what we’re seeing here in many cases are breaches of the 20-dema. This is not good, and the stocks that are testing their 20-demas need to be watched closely here because these pullbacks either present lower-risk entry opportunities if they hold or short-sale entry points if they don’t.

Social-Networking

I only have three stocks that I consider to be in the social-networking group. They present a mixed bag. My instincts over the weekend were correct on Facebook (FB) as far as being buyable on the voodoo action along the 20-dema. The stock cleared the 200-dma on Monday on a pocket pivot and then posted another pocket pivot at the 200-dma yesterday. FB ran out of gas today and stalled a little.

Snap (SNAP) was one I blogged about as a buyable gap-up when it reported earnings way back in early February and it has slogged higher from there. It is extended, with the 200-dma serving as near-term support. Twitter (TWTR), meanwhile, remains trapped in the right shoulder of both a fractal H&S and a larger H&S that stretches all the way back to February of last year. It was again shortable today when it rallied into the 50-dma, after which it reversed to close in the red.

 

The Weed Patch has been acting well as of late, but today several of the names in the patch that I follow acted poorly. Strong action yesterday in several of these names ran into higher-volume reversals today.

Aurora Cannabis (ACB) posted a pocket pivot yesterday but reversed off its highs today on heavy selling volume. It was last buyable along the 200-dma, which is the lower-risk area to get excited about the stock, not up here.

Canopy Growth (CGC) reversed off its highs on increased volume and is now testing its 10-dma and 20-dema. Tilray (TLRY) broke below its 50-dma on light volume, but the fact that it couldn’t hold the 50-dma on a day that it traded very light volume makes it suspect.

New Age Beverages (NBEV), which makes CBD-infused drinks, is a complete bust, and has been for a while. I generally do not mention it in my reports, but I do keep an eye on it. GW Pharmaceuticals (GWPH), which makes helpful drugs derived from the venerable cannabis plant, is failing to hold last week’s buyable gap-up (BGU) after earnings. A test of the 20-dema looks to be in store.

 

Chinese Names 

Rotation into Chinese names, which was brought up in my interview yesterday on Benzinga.com’s Pre-Market Radio Show, doesn’t strike me as a possibility simply because these names have already been rallying since the market low.

Among those discussed in the written report, Pinduoduo (PDD) keeps failing at new highs, and I still believe the 50-dma is likely to come into play at some point on a pullback. Huya (HUYA) had a strong move yesterday after earnings, but as is so often the case in this market, one day of strength is followed by weakness. If you wanted to buy HUYA, you had to buy it when it was down yesterday at the open when it tested the 10-dma and 200-dma.

Iqiyi is holding tight in a nice little flag but is only buyable on tests of the 200-dma, while using that as a selling guide. Momo (MOMO) is well-extended, as is Tencent Music Holdings (TME). Qutoutiao (QTT), which has been discussed in the GVR, gapped down today after earnings. It closed just below the 20-dema, which could bring the 50-dma into play as critical support.

 


Miscellaneous
 

First Solar (FSLR) is failing to hold support at the 10-dma but did close right at the 20-dema today. Selling volume increased vs. yesterday’s levels, so a test of the 200-dma at 49.78 could be in the cards for the stock. I’m not a buyer until it gets to the 200-dma, and only if it holds. Otherwise, this could easily morph into a short-sale target if it fails at the 200-dma. 

 

 

GoDaddy (GDDY) has broken down below its buyable gap-up low of 74.29 and the 10-dma. It is now closing in on the 20-dema as volume dries up. One could try buying it here with the idea that it must hold support at the 20-dema. However, I don’t like the lack of thrust following the post-earnings BGU. But one can play this as they wish by playing it as it lies.

 

 

GDDY’s cousin-stock, Wix.com (WIX) failed to hold support near the gap-down lows of two weeks ago. It is now drifting down toward the 50-dma as volume dries up sharply. This could attempt to rally from here, and the most concrete way to test this would be to a) buy it right at the 50-dma if the pullback continues, using that as your selling guide, or b) look for an undercut & rally move back up through the 107.70 low rolling back below.

 

 

Yeti (YETI), not shown, is holding tight along the 10-dma, but I would prefer to look at a pullback to the 20-dema, now at 22.29, as a more opportunistic and lower-risk entry spot.

Etsy (ETSY), not shown, remains extended following last week’s post-earnings buyable gap-up (BGU) move. The 10-dma, now at 66.28, is catching up to the stock and serves as a guide for near-term support. Meanwhile, the 20-dema is still way down at 62.65, so is not in play yet, at least not until it gets closer to the stock price, or vice versa!

Roku (ROKU) keeps powering higher as it approaches its prior October 2018 high of 77.57. Another analyst jumped on the ROKU bull bandwagon today, but you must wonder where these analysts all were back in late December and early January, when I first discussed the stock as buyable around 29-30. At this point, their bullishness strikes me as a bit late as the stock gets quite extended on the upside.

As I’ve noted in recent reports, we must also be aware of the deep, sharp punchbowl formation it has formed with twelve weeks down the left side and eleven weeks straight up the right side. This pattern inevitably will lead to a period of consolidation up here along the highs, or it could fail. For now, given how extended ROKU is at this point, one can use the 10-dma or 20-dema as trailing stops.

 

 

Planet Fitness (PLNT) has worked on the re-breakout attempt, which I pointed out in my report of this past weekend. This is classic action for this market, where several failed breakouts and a big reversal off the highs after earnings make the stock look sickly and ready to break further to the downside.

But the stock fakes everyone out and breaks out again, this time with authority, and continues to new highs. PLNT is now extended and may be ready for a pullback to the breakout point here after churning at the highs today on heavy volume.

 

 

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.

The group chart mosaics I’ve shown in this report are something new, obviously, and I’d like to get member feedback regarding these. I look at these types of charts often, to get a sense of how a group is moving. Also, note that many of these groups are showing negative action over the past few days, even longer, which may offer a clue that the market is ready to spend some time consolidating.

There is also the outside chance of a deeper pullback and correction. In general, I find these charts to be issuing a cautionary message, and that is why I’m not pounding the table on the buy side right now. In fact, there have been some opportunistic short-sale opportunities in names I’ve been following for those who are alert and attuned to them when they occur in real-time.

Last week, it was ADSK, SPLK, and WDAY, shorting into earnings gap-ups. This week CIEN was a very successful shortable gap-up as it reversed brutally and broke down hard on heavy selling volume after a prior, big, upside run off the Christmas Eve lows. With so many names having gotten rather extended on the upside, we may see more of this type of action.

So, objectively, what I’m seeing right now is some bifurcated action, where short-sale set-ups are coming into play. Meanwhile, the past three days have provided little to sink my teeth into on the long side, which makes sense given how extended things were.

Now it’s a matter of seeing how these pullbacks hold up, and the charts I’ve shown paint a picture of many coming into support at their 20-demas or 50-dmas. If these pullbacks hold support, then they provide opportunistic long entries. If they fail, then the moves can indicate a short-sale target coming into play.

We’ve had a big run off the lows, and things are starting to show some cracks here and there. Things could start to get interesting here, either on the basis of opportunistic pullbacks, or a shift to a market correction, which is not entirely clear right now. In the meantime, I am cautious here on the long side as I see how things play out in the coming days. 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 a position in PLNT, 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.