The Gilmo Report

May 12, 2019

May 11, 2019 4:40 pm ET

The trade tariff increase threatened by President Trump last weekend went into effect Friday at midnight, although many pundits did not think he would make good on his threat. The general thinking was that this would be disastrous for the economy and therefore the President could not afford to raise tariffs given that he is supposedly sensitive to the stock market and his mythical, “booming” economy.

But he did, and those who believed such a move would immediately send the market into a tail-spin were looking at least partly right within the first two hours of the trading day on Friday. The Dow went down 348.50 points in the first 90 minutes of trade, while the NASDAQ Composite Index dove a total of 151.25 points. The market looked set for a disastrous day.

I blogged on Thursday afternoon, however, that we would want to at least be mindful of a third possible scenario. That was that the President would raise tariffs on Chinese goods, but the market would rally. Since the President went ahead and let the tariffs rise, the first scenario did not occur, but the second scenario was playing out in the first 90 minutes of trade on Friday.

By the close, the third scenario won out as the knee-jerk selling early in the day dissipated and the indexes began to rally. All the major indexes defied the consensus by turning positive on the day despite a mushy close. From a purely technical perspective, however, the intraday support was logical since the index held support at the 50-dma for the second day in a row.



Another element of technical logic was also at play when the Dow successfully tested, held, and bounced off deep support at its 200-dma. A very mixed day, but the oversold rally off the intraday lows struck me as logical given that the tariff news was out and known, the indexes had reached major moving averages at the 50-dma and 200-dma, and stocks and the indexes had become somewhat oversold after a prior seven-day decline from last week’s highs.



Big-Stock NASDAQ Names

I was able to gain some sense of a near-term oversold terminus on the downside on Friday by looking at big-stock leaders like Apple (AAPL). The stock found support at its 200-dma on Friday after coming down with the market for seven days in a row off the peak. It also held support at the 50-dma in the process on heavy volume.

Often, when the big-stock leaders that are correcting reach deep support in conjunction with the indexes doing the same, a short-term low, at least, is likely to occur. Since AAPL has been one of the strongest big-stock tech leaders as of late, its action on Friday was something of a tell, in my view, that we were reaching a potential short-term low.

AAPL won’t be affected by the first tranche of tariffs, which were raised to 25% from 10%. However, the President has now set the paperwork in motion to begin taxing (yes, it is a tax) all tariff-free goods as well, which would have an impact on AAPL. With the stock now holding critical, deep support, it faces a meaningful test.



We can also see a mini-U&R type of move in (AMZN) as it undercut and then rallied back above the prior 1881.87 low of the prior week. This occurred on both Thursday and Friday, but the stock remains below its 20-dema. A move back above the 20-dema would help to confirm a valid U&R move.



I also noticed other big-stocks like Alphabet (GOOG) reaching deep support at its own 200-dma, but Netflix (NFLX) still looks weak as it begins to live below its 50-dma. Technically, this could be considered a short here using the 50-dma as a tight upside stop.

That would be the orthodox way to look at it, but in this market it is the unorthodox that has become orthodox, and a move back above the 50-dma could occur if the market bounce extends on the upside. For now, NFLX is just a double breakout-failure.



In general, many leading stocks’ patterns are a mess. That is not the case with Roku (ROKU), however. The stock staged a clean buyable gap-up move on Thursday when it reported earnings and surprised with a nine-cent loss vs. estimates of a 16-cent loss. It also reported 29.1 million active accounts vs. estimates of 28.5 million and raised guidance.

As I wrote on Wednesday after ROKU had reported earnings in the after-hours, this was one to watch on Thursday. The stock opened at 70, dropped to a quick low of 69, and then turned sharply from there. I showed how the five-minute 620-chart played out that morning in a Thursday blog post. We can see how once the stock set an immediate intraday low at 69 within the first minute of trade, the MACD turned and the stock launched higher.



On the daily chart, this shows up as a streaker type of buyable gap-up (BGU) where the stock quickly sets a low and then streaks higher from there. This move also qualified as a base breakout but is now extended. The stock pulled in slightly on Friday after peaking at 86.50. At this point, only a pullback to 75 or lower would bring this back into buyable range.



Cloud Names

I highlighted the chart of ZScaler (ZS) in my Wednesday report, and it responded with a sharp upside move on Friday. This occurred in the middle of a crazy day, but the stock didn’t seem deterred much as it broke out on strong volume. If you like to buy breakouts, this is still within buying range, but one could have taken a more opportunistic approach by buying closer to the 50-dma earlier.

Note the pocket pivot on Monday. However, this was followed by an above-average volume reversal the very next day, but ZS held support at the 50-dma. Volume then dried up sharply on Wednesday, creating a lower-risk entry position at that point. That is why I highlighted the stock in my Wednesday report.



ZS is expected to report earnings in the first week of June, so there is still time for it to build upon Friday’s breakout, assuming it holds. Coupa (COUP), is also expected to report around the same time, and notice how it has held support along the $100 Century Mark level and the top of its prior base.

Things were a bit shaky all week long as COUP repeatedly tested support every day of the week but held each time. It accented this support with a pocket pivot off the 20-dema on Thursday and closed near the highs of its current two-week range that it has formed since breaking out in late April.

This remains within buying range of the breakout and the $100 Century Mark. My preference, however, has been to look for pullbacks down to the Century Mark and/or the 20-dema as more opportunistic entries. Amid this past week’s craziness, it is encouraging to see that there are some stocks acting quite well.



I highlighted seven cloud names in my last report as names I believed were holding up well, and which I was interested in on the long side if the general market was able to find a way out of the tariff mess. All week long these stocks tested support and held, including HubSpot (HUBS), which reported earnings the prior work.

The stock had already broken out in late April, and, like COUP, held repeated tests of its 20-dema and the top of the prior base. Note that I show what I view as the true buy point along the highs of its low-range base where the main price congestion lies in the pattern. The false buy point is the absolute peak on the left side.

My view is that if one is looking for breakouts to buy, it is far better to look for low-range breakouts and/or trendline breakouts before the stock clears an absolute left-side peak. Usually, by that time, the stock is extended from an area of prior price congestion, and failure becomes more likely.

The nearer one buys to an area of price support, namely an area of price congestion that characterizes a base range, the better. HUBS remains within buying range of its recent breakout, but I like taking the opportunistic approach here and looking to buy on pullbacks to the 20-dema and the top of the prior low-base range.



The other cloud names I discussed in Wednesday’s report are also holding up well. ServiceNow (NOW) has remained in a short range since its buyable gap-up of two weeks ago after earnings and pushed to a marginal new high on Friday. Several pullbacks during the past week closer to the BGU intraday low at 158.18 offered lower-risk entry opportunities and the stock is again extended.

Okta (OKTA) has held on multiple pullbacks toward the $100 Century Mark over the past week, such that further pullbacks to that price level would offer lower-risk entries. The company is expected to report earnings in early June at around the same time as COUP and ZS.

Workday (WDAY) is expected to report earnings at the end of month. It offers more evidence of the disutility of buying breakouts after failing on a prior breakout attempt last week. As we know, however, when a breakout fails, the smarter, opportunistic approach is to look for a pullback into logical support that is often followed by a re-breakout.

This is precisely what occurred with WDAY, as it pulled into its 50-dma on Thursday and bounced nicely. Taking an opportunistic approach whereby one avoids chasing strength and instead is alert to buying into pullbacks is far more efficient than buying breakouts in this market. That is why I did not take an entirely bearish view of things in my Wednesday report.



When the market gets into trouble as it did this past week, and the pundits are all certain that the market is doomed, that is when my antennae go up, and I begin looking for opportunistic long ideas. This is why I posted additional long action watch lists on my blog page Wednesday and Thursday evening.

My intent was to keep members’ psychologies on an even keel, and hopefully open to at least remaining open to the long side in opportunistic fashion. And taking just such an approach was somewhat useful this past week as swing-trading opportunities off logical support in a number of names, as these cloud names above prove, was a rewarding strategy.



Semiconductor stocks are said to have the most sensitivity to a trade war with China, and that has been obvious in the charts of most semis as they have broken down sharply over the past week or so.  One that has held up reasonably well, as defined by its ability to hold up within a current base, is Advanced Micro Devices (AMD).

As I wrote on Wednesday, the pullback into the 50-dma offered a potential lower-risk entry with the idea of cutting things quickly if it failed to hold the line. Despite the tariff increase going through on Friday at midnight, AMD was unperturbed, which I find to be a very positive development. Instead, the stock bounced nicely off the 50-dma on Thursday and then pushed above the 10-dma and 20-dema on Friday while it posted a single five-day pocket pivot.

Remember that I like to see a cluster of at least 2-3 five-day pocket pivots in lieu of a single ten-day pocket pivot as a constructive technical development. Note that AMD can also be viewed as an undercut & rally (U&R) long set-up through the prior lows in the pattern: the 26.95 low of April 15th and the 26.61 low of May 2nd.

Given that AMD is now extended from the 50-dma, where it found above-average volume support on Thursday, I want to see how it acts along the 10-dma/20-dema confluence in the coming days, and whether another lower-risk entry point develops. Alternatively, low-volume retests of the 26.96 or 26.61 lows would offer lower-risk entries while using those price levels as tight selling guides.



Beyond something like AMD, one is left trying to find Ugly Duckling set-ups among semis that are mostly busted. I still have an eye on Xilinx (XLNX) which has held up in an L-formation or bear flag, depending on whether you want to take a bullish or bearish view of the pattern, throughout the past week’s turmoil.

Throughout it all, XLNX remains above the 116.57 low of March 7th, closing Friday at 116.92. A very tentative set-up at best, and one that remains decidedly two-sided. At 34 times earnings and roughly the same with respect to forward estimates, XLNX may have experienced a PE-expansion that is now untenable, so this could resolve in a bear flag breakout to the downside.

A tricky situation, at best, but that is mostly what you’re left with when it comes to semiconductors. Perhaps the group will show signs of life if Applied Materials (AMAT) pulls a rabbit out of its hat when it reports earnings as expected this Thursday after the close.



Telecom Related

Telecoms, like semiconductors, remain a mostly busted group. As AMD is the Long Ranger among semis holding up well, then we might consider Viavi Solutions (VIAV) to be the Lone Ranger among the telecom-related stocks. After breaking out two Fridays ago following its earnings report, the stock has held up well throughout the turmoil of the past week. As I’ve discussed in previous reports, the correct approach here was to look for pullbacks to the 20-dema as lower-risk entry opportunities.

VIAV held the line twice on Thursday and Friday. Pullbacks to the 20-dema remain lower-risk entries, although one could buy the stock right here and then use the 20-dema as a tight selling guide. Whether it can move significantly higher or not will likely depend on where the general market goes from here.




Facebook (FB) failed on its prior BGU a few days ago, and on Friday filled the gap-up window from that BGU day. It found support along the lows of that rising window and rallied, however, to close above its 20-dema. The gap-fill buy point is another Ugly Duckling type of long entry that can occur after a stock fails from a prior BGU attempt.

FB’s gap-fill and rally, perhaps something we could shorten to the acronym GF&R, was successful, but the stock remains under pressure. Some have been calling for the break-up of the company, citing its monopolistic control over the flow of speech on its platform.

If one truly likes the stock, then perhaps this GF&R move is buyable here, using the low of the gap-up rising window at 185.14 or the 20-dema as a selling guide. People can talk about a break-up of the company all they want, but if that were to occur it’s not clear whether that would be a blatant negative for the company as its separate businesses would likely remain going concerns regardless.



Twitter (TWTR) has held its own BGU that occurred after earnings but continues to go absolutely nowhere. I’ve been discussing the idea of waiting for pullbacks to the 20-dema as your lowest lower-risk entries, and TWTR has held pullbacks to the line over the past two days.

This puts the stock in a lower-risk entry position using the 20-dema as a tight selling guide. It has been symptomatic of this market environment, however, that most BGUs don’t have much upside velocity outside of the BGU itself, and TWTR is no different in this regard.




The railroaders I’ve discussed in recent reports offer more examples of buyable gap-ups that go nowhere. Both CSX Corp. (CSX) and Union Pacific (UNP) gapped up after earnings in BGU style but have now both failed on those BGUs.

But, as I discussed above, when a BGU fails it sets up another Ugly Duckling type of entry possibility, which is the gap-fill & rally, or GF&R. Just when you thought I couldn’t come up with more acronyms for long set-ups in this market!



Cyber-Security Names

As with most areas of the market, there is little I find interesting in the Cyber-Security space. CyberArk Software (CYBR) and Mimecast (MIME) are expected to report earnings this week. CYBR is expected to report Tuesday before the open, while MIME is expected to do so on Monday after the close.

Meanwhile, the only thing I see that looks even remotely interesting, and with the added luxury of having already reported earnings, is Qualys (QLYS). I discussed this in my Wednesday report as it pulled into the 20-dema, but it failed to hold support at that level and instead dropped down to the 50-dma.

Two tests of the line on Thursday and then again on Friday both held up, with the stock rallying more vigorously off the 50-dma on Friday. In this position it is extended from the 50-dma. Note, however, that the strongest move in QLYS occurred after the U&R set-up in mid-April, something that is typical for stocks in this market.



Chinese Stocks

The trade turmoil this past week has put a fork into Chinese stocks, and I see nothing that looks constructive. At best, one might be looking for undercut & rally set-ups to develop over the next several days or weeks, but the situation regarding additional tariffs on additional tranches of goods remains fluid. This requires a broader discussion, which I will conduct in this weekend’s Gilmo Video Report.


The Weed Patch

Canopy Growth (CGC) did not hold support at its 20-dema but is now sitting along its 50-dma. Volume picked up slightly on Friday as it bounced off the 50-dma, putting it in a lower-risk entry position using the 50-dma as a tight selling guide. Because selling volume did not pick up substantially on the breach of the 20-dema, I would not view it as a short-sale target.

The pullback here seems to be more of a reaction move that helps to consolidate the sharp move up off the lows that we saw in late April. The stock broke out two weeks ago, but that was a move coming straight up from the bottom, hence was prone to failure. And fail it did.

In this position, it has a better shot at attempting a re-breakout, and this may occur within the context of the market extending Friday’s bounce from a short-term oversold condition. Certainly, CGC’s decline since the breakout failure correlates to the general market sell-off from the recent highs.



Away from CGC, cannabis growers continue to flounder. That may be because CGC has taken steps to establish a presence in the U.S. in anticipation of federal legalization of cannabis by recently buying a New York-based cannabis grower. Ultimately, the U.S. Is a far larger market than Canada, and the ability to develop a stronger presence there will determine who wins and who loses in the space.

Away from the farming aspect of the cannabis plant, pharmaceutical applications will no doubt expand in the U.S. This was confirmed by a sharp increase in sales for GW Pharmaceuticals (GWPH) when it reported earnings on Monday after the close.

Sales of its recently launched drug, Epidiolex, came in at $33.5 million vs. estimates of $15 million. The news sent GWPH gapping up at the open on Tuesday. It printed 195.75 at the open, immediately peaked at 196, and then slid straight downward to close near the low of the day on heavy volume.

So, what started out as a buyable gap-up failed. GWPH has since dropped down to its 10-dma, where it found some support on Friday. I would look for the stock to hold support at the 10-dma/20-dema confluence, which puts it in a lower-risk entry position, using the 20-dema as a tight selling guide.



Recent IPOs

Lyft (LYFT) looked like it might pull off another U&R move, this time as it moved above the prior 54.32 low on Thursday. No doubt, the stock was getting something of a halo effect from Friday’s Uber (UBER) IPO hoopla. But UBER’s IPO was a flop, and this weighed on LYFT.

UBER priced their IPO at $45 a share, and the stock ended trading on Friday at $41.57. LYFT, meanwhile, rolled over on heavy volume to close at a new low. I tweeted early in the day the stock’s failure to hold the 54.32 level looked to make the stock a short, and it ended the day at 51.09 (Note: members can follow me on Twitter at @gilmoreport).

If UBER continues to sell off, not unlike the way LYFT sold off following its own IPO, then LYFT may continue lower. So, for now its hands off, until further evidence of a potential low shows up.



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 gauntlet has been thrown down, and we will now see how any potential and additional escalation of this past week’s trade turmoil plays out. We could see the Chinese retaliate, although they have far less to retaliate on since they import far less from the U.S. than they export. We could also see the U.S. continue to move forward with additional tariffs since the President is now threatening to tariff all $500 billion-plus of Chinese exports to the U.S.

This adds an element of uncertainty to the market that has the potential to create crazy volatility, including overnight gaps on both the upside and the downside. Meanwhile, there is a lot of technical damage in this market, and therefore the potential for a deeper and more prolonged correction. At the same time, if all of this starts to weigh on what I believe is a lukewarm U.S. economy, the Fed may step in and lower rates.

This adds another wild card to the current market environment. So, we could find ourselves stuck in a tug-of-war between trade turmoil that begins to take an economic toll and the potential for the Fed to combat this with interest rate cuts. This may create more of a swing-trader’s environment than an investor’s market, and this should be considered by those wondering just how much market exposure they want to maintain and for how long.

For now, keep risk to a minimum by sticking to an opportunistic approach where one seeks to buy stocks on pullbacks to logical areas of support while refraining from chasing upside strength. At the same time, use logical areas of support as selling guides, rather than employing what I consider a rather mindless 7-8% stop-loss policy.

The tighter one can keep entries by buying very near logical areas of support on pullbacks, the less risk one is exposed to if the market deteriorates further. Review your trailing and absolute stops and know your exit plan well before you are forced to implement it. 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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