The Gilmo Report

May 15, 2019

May 15, 2019 3:48 pm ET

I discussed over the weekend the basic idea that the news flows surrounding the current trade war between the U.S. and China would create some crazy volatility. A ratcheting-up of tensions over the weekend sent the indexes gapping down and selling off big on Monday. China imposed more tariffs on U.S. goods while the U.S. sought to accelerate the addition of additional tariffs on the remainder of Chinese goods coming out of China.

For short-sellers, this would have been a difficult situation to handle. The big gap-down at the open was certainly not something one would have expected after Friday’s upside reversal and positive index close. But this is something I warned could happen as the news flow creates gaps both to the downside and the upside.

Monday’s gap-down was followed by a gap to the upside yesterday, as the NASDAQ Composite and S&P 500 Indexes sought to retrace some of Monday’s downside break. This in turn led to a gap-down open this morning, and the indexes looked primed for a break to lower lows. Not too long after the open, however, the indexes quickly found their feet and began marching toward the UNCH line.

And then, the news hit. A report that the President was going to delay auto tariffs by six months sent the indexes ripping higher, and off we went. This is the precise situation I’ve been discussing in recent reports: the news of the day regarding the trade war has the potential to dominate the market action, sending the indexes flying this way and that depending on the nature of the headlines.

On a purely technical basis, what we have on the chart of the NASDAQ Composite Index is a move back up into the 50-dma today on lighter volume. This comes after a six-day decline off the peak of early May and represents a two-day oversold bounce on much lighter volume. At this point, failure at the 50-dma is a distinct possibility, but we can only watch to see how this plays out in the coming days.



Big-Stock NASDAQ Names

Given the chart positions of most big-stock names in this market, one might expect that reaction bounces are in order given how oversold these stocks have become. But one cannot make pat assumptions. Apple (AAPL) looked set for a bounce after finding support at its 50-dma on Friday.

But investors were fooled when the stock gapped below the 200-dma on Monday, throwing the pattern into complete disarray again. Fuel was added to the price break’s fire by news that the Supreme Court ruled against the company in an App Store antitrust ruling on Monday.

The rally off of Monday’s lows has merely taken the stock back up into the 200-dma on a wedging rally. At this point, AAPL looks like a short right here near the 200-dma while using the line as a guide for a tight upside stop. (AMZN) also looked like it might try and rally after posting an undercut & rally move on Friday. But the stock also gapped down on Monday and ran into its 50-dma, where it is now trying to hold support. AMZN bounced off the 50-dma today in a logical move but is not in what I would consider a buyable position as one would have had to step into the stock at the 50-dma this morning.



Netflix (NFLX) looked like a short on Friday as it ran into resistance at its 50-dma, but to capitalize on this one would have had to short the stock near Friday’s close. That’s because the stock also gapped down hard on Monday before undercutting its mid-April low at 342.27. That set up a U&R move over the past couple of days that didn’t get any real traction until the tariff news hit today.

NFLX is now rebounding back up toward its 50-dma. While volume increased today, it came in below average. A wedging rally that continues closer to the 50-dma may simply become shortable at that point, so that can be watched for. Otherwise, if one was alert enough to catch the U&R move today, your near-term upside target would be the 50-dma.



Cloud Names

Not surprisingly, the cloud names I’ve highlighted in recent reports have been holding up, but not without some volatility. ZScaler (ZS) broke out on Friday, but that breakout got stuffed on Monday as the stock came right back in on above-average selling volume. Chalk up another failed breakout attempt in this market.

ZS did hold support at its 20-dema, and then gapped up off the line yesterday. That led to a re-breakout and the stock cleared to all-time highs today. Erratic action, to be sure, but not atypical for this market given the current tendency toward volatility.



Coupa (COUP) has also held up in the face of market weakness and repeated tests of its own 20-dema. Like ZS, it pushed to all-time highs today as well, but volume was light, and the stock is extended in any case. While the net action is positive, it does not come without a lot of volatility that could easily shake one out of the stock within the context of the deleterious action we’ve seen in the general market.



HubSpot (HUBS) is equally volatile within the three-week price range it has formed since breaking out in late April. Pullbacks to the 20-dema have been something I’ve considered to be buyable but note that the stock doesn’t necessarily hold its 20-dema on an intraday basis.

And on Monday, HUBS in fact closed below the 20-dema, which brought up the possibility of a late-stage base failure. But the sell-off stopped right on top of the prior area of price congestion that defines the prior base, and HUBS is now back near the highs of its current price range.



Meanwhile, ServiceNow (NOW) has held support at its 20-dema over the past few days, Okta (OKTA) has held support at the $100 Century Mark and is back at the highs of its own three-week price range, and Workday (WDAY) today posted its third re-breakout since initially breaking out to new highs in late April. It, too, is back near its recent highs.

As far as long targets go, these few cloud names have provided ready vehicles with which to swing-trade the volatility in this current market. On balance, they aren’t really going anywhere, but the moves down to support become buyable and then yield upside moves from there. In a sense, they are what we might call range-trading vehicles. Given the crazy, sometimes fast-moving volatility, I find it easier to focus on a small number of well-acting names for swing-trading purposes.


Semiconductor stocks are a beaten-down group in general, and most had a little bit of a reaction bounce today in conjunction with the index rally. In almost every case, semiconductor stocks are simply bouncing within well-defined uptrends. A rare exception remains Advanced Micro Devices (AMD), which continues to hang in a base as it finds support along its 50-dma.

This typifies the action in most of the names that continue to hold up in this market. AMD is building a base, and while the stock has been buyable along the 50-dma, there has been no net progress up and out of the current base. It is just another range trader, but can perhaps be bought on pullbacks to the 50-dma while they continue to hold.



Xilinx (XLNX) triggered as a short-sale on Monday when it gapped down and broke below the prior 116.57 low in the pattern. That was good for a one-day wonder trade on the short side. XLNX is now heading back up toward the prior 116.57 low, closing today at 116.41.

To my eye, the pattern looks too sloppy right here to do anything with. However, if the general market continued lower, and XLNX cannot clear the prior 116.57 low, it could be back in short-sale range right here with the idea of using the 116.57 price level as a tight upside stop.



Telecom Related

Telecoms that I’ve discussed in recent reports remain a mess, and Viavi Solutions (VIAV) is starting to show some cracks in its armor. Its prior base breakout of two weeks ago on heavy volume has now failed. On Monday, the stock breached the 20-dema on heavy selling volume.

Over the past two days, VIAV has tried to recover but has stalled out at its 10-dma as volume declines in a wedging rally off Monday’s low. It mostly helps to illustrate how the better-acting stocks are stuck in trading ranges, at best, but in VIAV’s case we are seeing some deterioration following a failed breakout.



Roku (ROKU) has done an impressive job of holding up near its current highs throughout the market turmoil over the past four days since its post-earnings buyable gap-up move and base breakout. The action over the past two days, however, is showing weak buying volume as the stock moves up near its prior highs.

In this position, I would not be looking to purchase the stock. With the 10-dma rising rapidly and now reaching 73.60, it becomes your first reference for support on any pullback from current levels, and thus a lower-risk potential entry point.




More fake-out type action can be seen in Facebook (FB), which looked like it was holding a gap-fill on Friday along its 20-dema. But it broke down with the market on Monday and finally found support at its 50-dma yesterday. One of the issues I have with the market currently is that even opportunistic entries that look reasonable are not working.

FB’s gap-fill & rally (GF&R) attempt failed miserably, leaving an even more opportunistic (as in lower) entry available yesterday at the 50-dma. That pullback held, and FB rebounded today on below-average volume. Overall, the stock has exhibited absolutely no strength following its post-earnings buyable gap-up in late April.



Twitter (TWTR) continues to cling to its prior buyable gap-up low at 36.91 after closing below it on Monday. Note that yesterday’s action brought the stock back up through that low and it closed at 36.93, two cents above the BGU intraday low.

That, my friends, was an undercut & rally long set-up at that point, but TWTR looked like it was going to fail this morning as it came off with the general market at the open. Once the market turned, however, TWTR was able to turn back to the upside and clear its 20-dema. This was an opportunistic entry, but you can see that this came only after TWTR failed on the last opportunistic entry at the 20-dema on Friday.

My point with TWTR, as with most stocks, is that the first levels of support that help define opportunistic entry levels are not holding. In the process, the stocks then fall to a secondary, lower level of support where they finally are able to rally. But, we might argue that this was only the case today because of the market turn on what was viewed as positive trade news.



So, essentially, what we’re seeing is the following: if trade news is good, then opportunistic entries will work, but if trade news is negative, they don’t work. And that makes my general point that we are stuck in a market where movements are highly dependent on the news flow, and this makes the situation difficult for anyone but the nimblest of swing-traders.

Cyber-Security Names

Mimecast (MIME) reported earnings on Monday before the open and promptly blew up, while CyberArk Software (CYBR) reported earnings yesterday before the open and initially gapped up before reversing to close near its lows for the day. It looked set for a breach of the 50-dma this morning, but once the market turned on trade news the stock turned as well.

CYBR ended the day just below its 10-dma and is not in what I would consider a lower-risk entry position here. That was to be found this morning when the stock met up with the 50-dma and then turned with the market. However, in that case, the rebound was given a big assist by the trade news.

Had the general market continued lower, my bet would be that CYBR would have breached the 50-dma and gone lower. If the market doesn’t reverse back to the upside, then it remains to be seen how and if the stock can set up again. Meanwhile, the rest of the cyber-security group is having a difficult time, with Palo Alto Networks (PANW), not shown, breaking to lower lows today on heavy selling volume as it approaches its 200-dma.



The Weed Patch

One primary reason why I’ve liked certain cloud names as long targets in this current market environment when appropriate is because I’ve considered names like COUP, ZS, ZEN, OKTA, WDAY, and NOW to be unrelated to anything China. Thus, I tend to view that as at least somewhat insulated from the current trade war. I might say the same thing about the Weed Patch names.

However, most of these stocks have been under pressure lately. This of course means that only Ugly Duckling set-ups need apply, and we’re seeing some of that with at least three names in the Patch that I follow. Tilray (TLRY) and Aurora Cannabis (ACB) both reported earnings yesterday after the close, and both were up today.

TLRY gapped up slightly at the open this morning, but immediately reversed, making the gap-up move a shortable gap-up (SGU) at the outset of trading. This stock is impossible to borrow, and my attempts to short it early in the day were in vain since I couldn’t borrow the stock.

However, had I been able to short the stock, I would have ended up covering at some point after the stock reversed to as low as 46.05 after opening at 50.05. By the close, the big surprise with TLRY is that it posted a bottom-fishing pocket pivot at the 10-dma on huge volume. Not only that, but today’s pocket pivot was the third such bottom-fishing pocket pivot in the past four days.



ACB initially gapped down this morning but turned back to the upside on an undercut & rally move back up through three prior lows in its base. The stock printed 8.02 at the open, taking it below the three prior lows. It declined one more penny before turning back to the upside.

Once it cleared the lowest of those lows at 8.15, the first U&R trigger was on. It later cleared the prior 8.38 and 8.45 lows from March 28th and April 15th, respectively. Volume was 14% above average, but the close at 8.68 was good enough for a three-low U&R trigger, using any of those three prior lows at 8.15, 8.38, and 8.45 as your selling guides.



Amid these earnings reports from its close cousins in the Weed Patch, Canopy Growth (CGC) has been trying to regain its 50-dma after busting the line on Monday. On Friday, it looked like it might hold support at the 50-dma, but like so many other stocks in the market broke down when the general market got slammed on Monday.

It ended the day on Monday below the prior 44.16 low of its stalling buyable gap-up move back on March 18th. That gap-up move occurred when CGC announced that it was buying a New York-based cannabis grower, a move to establish operations in the U.S. ahead and in anticipation of Federal legalization.

The rally back above the 44.16 low over the past two days has run into resistance at the 50-dma, and volume has been weak. I would like to see CGC clear the 50-dma as confirmation of the U&R move, which it continues to hold. If the action in ACB and TLRY holds up, then perhaps we can see the Weed Patch perk up again as these stocks attempt to pull off Ugly Duckling long set-ups.



It’s probably not too much of a stretch to consider that GW Pharmaceuticals (GWPH) is insulated from the U.S.-China trade war as well. As the lone pharmaceutical growing in the Weed Patch, GWPH is certainly the strongest name in the group.

While the buyable gap-up base breakout after earnings that stalled and reversed badly off the intraday highs has failed, it has still pulled back in orderly fashion. Smarter breakout buyers look to be opportunistic, however, when a breakout fails. This is because support is often found somewhere within or on top of the prior area of price congestion or a moving average.

In GWPH’s case, it found support at its 20-dema and the top of the area of price congestion it has formed since early March. Yesterday’s test of the 20-dema occurred on light volume and offered a lower-risk entry at that point. If GWPH can continue to hold support at the 20-dema and the top of its base, it remains viable as a long idea, particularly if the market is able to sustain the current oversold bounce.



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.

I wrote over the weekend that the current trade war (we’ll call it that for now, because that’s what it has degenerated into), “…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.” So far this week we’ve seen three such gaps, two to the downside on Monday and this morning, and one to the upside yesterday.

Today’s action underscored the ability of random trade-war news to trigger market moves in either direction. In the case of today’s action, that move was to the upside, just when the indexes looked to be in trouble. That creates risk on both sides of the market, not to mention random volatility that can come out of nowhere.

This is why I view the current market environment as one more for swing-traders and less for investors. Things could get worse before they get better, or they could get better before they get worse. If that sounds confusing, that’s because it’s supposed to! I find it impossible to pound the table on anything, long or short, currently, and mostly approach the market on an ad hoc basis.

If a trade presents itself, I’ll take it, but mostly with the idea of taking it as a swing-trade first and foremost. The bottom line for me currently is to keep risk at a minimum and avoid making big bets because danger still lurks in this market. It’s a messy market, so be cautious, be prudent, be nimble, and most of all, watch your back.

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 ACB, though positions are subject to change at any time and without notice.

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