The Gilmo Report

May 1, 2019

May 1, 2019 3:31 pm ET

Earnings season continues to produce a mix of price gaps to the upside and the downside. The latest gap-up move in a leading stock, Apple (AAPL), helped fuel the indexes mostly to higher highs overnight given that it is a leading component of the Big Three major market indexes that are the Dow, the S&P 500, and the NASDAQ Composite.

AAPL’s move constituted a buyable gap-up at the open this morning. Interestingly, the move appeared to be fueled mostly by news of a 5% increase in the stock dividend and an additional $75 billion of intended stock buy backs. The fundamentals themselves left much to be desired, with the company posting a -10% earnings contraction on a -5% sales contraction.

If one had bought this at the open, which is a best-case scenario, in the interests of playing a BGU in the stock, one would not have realized any significant upside if they held the stock throughout the entire day. AAPL opened at 209.88, hit a peak of 215.31, and closed at 210.52 as sellers swarmed the stock into the close.



Unfortunately, even with a nearly 10-point gain, good for nearly 70 Dow points alone, AAPL couldn’t hold the market up on its shoulders all by itself. Once Fed Chairman Jerome Powell’s press conference was over, the indexes reversed in nasty fashion. The NASDAQ Composite Index led the market rally early in the day, but like the other major market indexes it reversed to close down on higher volume.



In my view, stocks mostly strike me as a form of alternative currencies, or alt-currencies as I like to put it. This is just the simple idea that in an environment where money is sloshing around in abundance, thanks to a dovish Fed, it has to go somewhere, and equities, any equities, seem to fit the bill.

This may be why you get stocks like AAPL gapping up when earnings and sales growth is negative. You can also take a situation like Advanced Micro Devices (AMD), which gapped up after reporting a -45% earnings contraction on a -23% sales contraction. In this market, what does that get you? A big gap-up open!

But, that gap-up open didn’t last long, and AMD headed lower right at the open. By the close it posted an ugly outside reversal on heavy selling volume. As I tweeted yesterday in the after-hours, the gap-up move would likely not hold up, and it did not.



Two weekends ago I started my report off with several charts of big-stock names that had been rallying madly recently despite weak, or at best, tepid fundamentals. This is one characteristic, which is perhaps better termed a conundrum, of this market that can make it difficult to find strong long candidates. The old rules of strong earnings and sales growth don’t seem to apply in many cases, especially among big index names that drive the indexes higher.

Look at a name like McDonald’s (MCD), as another example. This stock has pushed right up to the $200 Century Mark, where it ran into resistance yesterday. As I noted in my report of two weekends ago, in the most recent quarter the company reported a -1% earnings contraction on a -7% sales contraction.

Yet MCD has been in a steady rally since bottoming in mid-February. But Mickey D’s is a company that isn’t likely to go out of business any time soon, and so may be considered a stable, established big-cap name that serves as an alt-currency. And in this market, it seems that often that’s all you have to be to get big money flowing your way and driving your price higher (if you happen to be a stock, of course!)

But the rally got a bit long in the tooth by yesterday mid-day, and MCD reversed right at the $200 Century Mark as a short-sale target. It then headed lower today on heavy selling volume. If the Fed is no longer leaning toward another rate cut in 2019, the alt-currency theme that has been driving these weak-fundamental big-stock names higher may have run its course, at least in the near-term.



I wrote over the weekend that following a strong rally off the late-December lows I was not finding this market environment to be target-rich. By that, I mean one where I am seeing a lot of truly compelling long set-ups that have big-money potential. It just isn’t there, and where there is constructive action, it seems to come after a period of crazy, volatile, and jagged price action, like many cloud names over the past couple of weeks or longer.

Cloud Names

This market seems to have a love/hate relationship with cloud names. It loves them one week, hates them the next, and then loves them again the next. Perhaps we’re seeing this schizoid romance shift the other way this week. After gapping ServiceNow (NOW) higher after earnings last Friday (NOW is now extended, btw), the market decided it didn’t like the gap-up move in Twilio (TWLO) this morning after earnings.

And so, the fickle finger of market fate pointed downward for the stock once the opening bell rang. TWLO printed 142.20 at the open and never looked back, or rather up, for the rest of the day as it plummeted to the downside in a big-volume outside reversal. So, rather than a buyable gap-up, TWLO gave us a shortable gap-up, and the rest was history.



If I had to pick a cloud name that I thought was in the most buyable position, I might choose ZScaler (ZS) as it holds support along the 20-dema. But if the general market starts coming off here, I would not be surprised to see the stock breach the 20-dema and turn into a short-sale target at that point.



We can also look at Coupa (COUP) in a similar manner. It cleared the $100 Century Mark last Friday and has since moved about 5% higher before coming in today. It is now pushing down toward the $100 price level on light volume, which is initially constructive to see. An orderly pullback to the $100 level would offer a lower-risk entry, using that same price level as a tight selling guide.

What we should be on the lookout for, especially if the general market follows through on the downside to today’s ugly reversal, is a potential breach of the $100 price level by COUP. If that occurs, then it morphs into a short-sale target at that point.



Workday (WDAY) can be viewed almost identically, with the one difference that it has recently cleared the $200 Century Mark for the first time vs. COUP clearing the $100 level. Nevertheless, the set-ups are similar here as they are both recent base breakouts and Century Mark buy candidates.

WDAY saw increased but below-average selling volume today as it moved down toward the $200 price level. A low-volume pullback into $200 would offer a lower-risk entry using the same price level as a tight selling guide. But if it breaches the $200 price level, then it could easily morph into a short-sale target at that point.

ZS, COUP, and WDAY don’t report earnings until late May/early June, so a lot can happen before their respective expected earnings reports. COUP and WDAY, as recent base breakouts, could also be candidates for potential late-stage base failures if they breach their respective nearby Century Marks in combination with breakout failures.

Coincidentally, the Century Mark levels for both COUP and WDAY also represent their base breakout points. For COUP that is the $100 level, and for WDAY that is the $200 level. Those are your key reference points for support or failure, so watch them carefully within the context of what this market does over the next few days.



These are the types of scenarios and set-ups I’m watching very closely among cloud names that I follow. Most have yet to report earnings, which they are expected to do over the next 1-3 weeks. As I run through the charts on my cloud watch list, I can see others that could be in similar positions, but I prefer to focus on these three, which aren’t expected to report for at least a few weeks.

Clouds have been a leading group in this rally off the late-December lows, and if we head lower from here, assuming we do, then they will likely break down as well. And as has been the case in this market, when things look strong, that is the time to be cautious. Strength is always nice to see, but it is preferable to be in ahead of strength, rather than chasing it.



The buyable gap-ups in both Facebook (FB) and Twitter (TWTR) have not really gone much higher. I would expect both to test their recent BGU lows on any market pullback. That doesn’t give FB much room, which closed at 163.03 today, about a half percent above its 192.12 BGU price range low. The 10-dma likes at 187.08, so a test of the 10-dma is certainly not out of the question.

As far as TWTR is concerned, it is a bit further above its 36.91 intraday low posted on its buyable gap-up (BGU) day seven trading days ago on the chart. Notice that the 10-dma is pushing up and is now at 37.85, well above the 36.91 price level. The 10-dma would be your reference for near-term support, but a breach of that would likely bring a test of the 36.91 BGU low and/or the 20-dema, now down at 36.66.



Netflix (NFLX) has been buyable on pullbacks to the 20-dema following the failure of last week’s new-high breakout. Hopefully, by this time, members who’ve been around Gilmo Report for any length of time know better than to chase such extended breakouts. The pullback to the 20-dema over the past few days offered a much better, lower-risk entry vs. buying the so-called proper buy point at 379.09.

NFLX tried to break out again today, peaking at an intraday high of 385.99 before reversing to close at 378.81. Again, if you bought the move through 379.09, you got jerked around. I’d now watch this carefully as any breach of the 20-dema could trigger NFLX as a short-sale target following two fresh breakout failures over the past two weeks.




If you’ve been in the mood to bore yourself to death, buying the railroads after their respective post-earnings buyable gap-ups would have done the trick. Today I can use the chart of Union Pacific (UNP) to represent its own price/volume action and that of CSX Corp. (CSX).

We can see that UNP has gone straight sideways since its buyable gap-up move of two weeks ago following earnings. This BGU is also a base breakout, but I would watch for this to at least test the 20-dema on any continued market weakness. For that reason, UNP can easily become a short-sale target on any breakout failure.

A breach of the 20-dema would coincide with just such a breakout failure, so that is something to watch for. Those with more conviction right here, however, could short this on the breach of the 10-dma, using a tight 2-3% upside stop. CSX could be treated in a similar manner as it now tests its 10-dma.



To me, the railroads represent stocks that act more like alt-currencies. The earnings and sales are, for the most part, quite tepid. UNP posted a 15% earnings growth number on a -2% sales contraction but sells at 22 times trailing earnings and 18 times forward estimates. As I’ve noted in previous reports, railroads typically value at 6-8 times earnings, at least back in the old days (i.e., pre-QE) as I recall them.

P/E expansions have been the order of the day recently, and if the market begins to see that its expectations of a Fed rate cut are for naught, these P/Es could begin to contract. That goes for railroads, chocolatiers, and burger joints as much as it goes for infinite-P/E cloud names.

Today’s reversal following the Fed Chairman’s press conference didn’t really surprise. I was already finding short-sale set-ups on post-earnings gap-ups that were working, such as AMD and TWLO, which was one clue that not all was right with the market. Another was Tandem Diabetes Care (TNDM), which gapped up this morning after earnings to print 67.78 at the opening bell.

It then rallied another 32 cents higher before reversing hard to the downside. The collapse on the five-minute 620-chart right at the open was not hard to see. TNDM ended the day at 59.64, clinging to support at its 10-dma. From here, I’d watch for any rallies up to the 50-dma at 62.86 as potential lower-risk short-sale entries.



Roku (ROKU) is expected to report earnings a week from today after the close. Today it rallied further above its 50-dma after an analyst firm by the name of Vertical Growth raised their rating on the stock to Mixed from Negative. Personally, I have no idea what Mixed means, but it struck me as somewhat inane, although inanity is often the norm for analyst-speak.

All I know for sure is that it took the stock above 65 where it later reversed with the market to make for a nice short-sale scalp on the day. In this position, however, I might be willing to play this out a little further if it breaches the 50-dma. I would then use the 50-dma as my guide for a tight upside stop. The idea would then be to catch a nice short-scalp before earnings, without looking to hold through the report next week.



Chinese Stocks

Chinese stocks are no different to me than any other group in this market currently. I’m not all that interested in going long any of them, at least not in a meaningful way. There is simply nothing that I find all that compelling, and even a stalling breakout in Alibaba (BABA) just doesn’t set my blood to boiling.

I’m not sure what caused the breakout. It might have been news yesterday that the company was paying $250 million to resolve complaints over pre-IPO counterfeiting claims. It might also have been alleged reports that the U.S. and China could unveil a final trade deal as early as next Friday.

Call me a cynic, but my view is that any such trade agreement will be less of an agreement and more of a cease-fire. If that’s good enough to rally the market if it is indeed announced as early as next Friday, then it may just be the mother of all rallies to short into.

All that said, technically, BABA is in a buyable breakout position right here for those inclined to fool with such things. With earnings expected on May 15th, it’s not clear how much upside progress this can make before then, if at all. For all we know, this breakout will fail miserably and turn BABA into a short-sale target, especially if we see the market correct from here.



Recent IPOs

Lyft (LYFT) has worked out well as an undercut & rally long play after breaking below and then rallying above its prior 55.56 low of April 15th. That has led to a roughly 10% or so move to the upside as the stock has cleared the 10-dma. I noted in a tweet on Monday that one could at that point use the 10-dma as a trailing stop.

Of course, that’s just one way to play it. The other one is to let it ride as long as it holds above the 55.56 low. LYFT tested that low on Monday, but only briefly as it gave buyers of the U&R a chance to take shares, and then launched higher from there. But with LYFT expected to report earnings on May 7th, next Tuesday, the idea of bagging profits here on its failure to hold support at the 10-dma appeals to me.

Of course, members are free to play it as they see fit, but that’s just my take with earnings just around the corner. I don’t see anything wrong with a roughly 10% swing-trade in the stock in just a couple of days that can be put in the bank. That at least avoids having to play earnings roulette, which as you know I am not fond of doing.



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 of the post-earnings action this week that has led to high time-value trades has been on the short side. Buyable gap-ups tend to have less upside velocity in this market, but the downside velocity in shortable gap-ups in names like AMD, TWLO, and TNDM today, and Spotify (SPOT) on Monday has been far greater.

That alone may be telling us something about this market right now. What I do know for sure is that I still do not find much that whets my appetite on the long side. It may be that the rally off the late-December lows has run its course, and the market will now correct. I don’t know for sure, but I do know that the short side has been as productive as the long side lately, maybe even more so.

I just go with the set-ups, and I again find myself pushed more toward the short side on the basis of the individual stock set-ups. So, if that’s where the daylight is, I run to the daylight. At the same time, it provides some clues as to the potential short-term trend and the possibility of a market pullback, at the very least.

The last time I found myself being pushed to the short side was just before the market pullback we saw during the first week of March. That resulted in nothing more than a one-week, short-term correction with little downside extension, although individual stocks, like the clouds, took a decent beating. Perhaps the action now is arguing for another, similar correction again, or maybe something worse.

This market can be tricky, however, and when things have gotten ugly in the near-term, the market and individual stocks have bottomed and turned to the upside. That is the source of my joking about the new math whereby DBOV = BS (down-big-on-volume = buy signal) If that pattern changes, and we do not see the market and individual stocks quickly recover from breakdowns, then that may be meaningful.

For example, big breaks in AMD, TWLO, and TNDM that we saw today would signal a change of market character if they simply continued lower. That is something to watch for. Meanwhile, review your long positions and your out points, and have an exit plan ready before any trouble starts. That is all.

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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