The Gilmo Report

May 22, 2019

May 22, 2019

The market continues to live up to my expectations. The movement on any given day is dictated by the news flow, and as I’ve warned would likely be the case, we’ve seen the indexes gap down and gap up depending on the latest trade news. This makes for a whip-saw environment that does not necessarily lend itself to investing but can be exploited on a swing-trading basis.

Today’s action was no exception. The futures started down hard on the NASDAQ side of things on news that a U.S. District Judge had ruled Qualcomm’s (QCOM) practices violate anti-trust law. But a big morning break overnight largely dissipated once Treasury Secretary Steven Mnuchin made a comment during Congressional testimony that it was “likely” President Trump would meet with Chinese President Xi at the upcoming G-20 meeting.

The NASDAQ Composite headed straight back up toward the UNCH line in a flash type of move on the comment, which was mostly just an unfounded insinuation given the use of the word likely. That move, however, ran into resistance near the UNCH line and the indexes reversed back to the downside.

After one last attempt to move into positive territory, the NASDAQ reversed to close at its lows for the day. I show a candlestick chart below to illustrate the churning action that has characterized the past three days. We can see that a gap-down on Monday followed by a gap-up on Tuesday both resulted in what are known as Spinning Tops as the indexes churned around their opening levels.

In such a formation, the price bars show long tails in both directions but a small body, indicating that the open and close were relatively close today. It is essentially another way of determining churning action. We saw something similar today, except the open and close were both near the lows of the day with no real downside tail, forming what is known as a Dragonfly doji.

 

 

At the same time, this can also be considered something of a Shooting Star because it has a long upper tail and closes near the lows of the day. This looks bearish to me, and I might look for the index to post lower lows in the coming days. There’s your one-minute course in candlestick chart reading, but if you need more I would suggest searching on the internet on the term “candlestick chart patterns” for deeper explanations.

The action in Qualcomm (QCOM), which was blamed for the overnight futures break, is notable because it demonstrates that hot stocks in this market can cool down very quickly. And in this case, it wasn’t even trade news that torpedoed the stock. QCOM had previously rocketed higher on news that it had settled its suit with Apple (AAPL) back in mid-April.

If one happened to be lucky enough to catch the move in QCOM when it began a month ago, then there was in fact a sell signal that would have kept one out of trouble four days ago. That is, using the 20-dema as a trailing stop would have pushed one out of the stock on Monday.

So, if you are long anything that is still acting okay in this market, simply know where your trailing stops are. If this market continues to deteriorate, sticking to your stops can go a long way in mostly keeping one out of serious trouble.

 

 

Group weakness remains broad, but my small group of favorite cloud-related names continues to defy the general market. Coupa (COUP), HubSpot (HUBS), ServiceNow (NOW), Okta (OKTA), Workday (WDAY), Zendesk (ZEN), and ZScaler (ZS) broke out to new highs this week, as we can see on the group chart below.

All seven remain well above their 20-demas, but all are extended. COUP reversed today to close down on the day, while the other six closed up. Note that COUP, OKTA, WDAY, and ZS are all expected to report earnings within the next two weeks. I would be watching all of these very carefully for any breaks below the 20-dema which could trigger them as short-sale targets.

My guess is that IF we see the general market correct further, these names will eventually start to breach near-term support. They have served us well as a small focused list of strong-acting long names, but if the market worsens then it is likely that these will start to come in as well.

 

 

And then there’s Roku (ROKU). The stock has continued to move to new highs throughout the market turmoil of the past two weeks. But it is starting to get a bit long in the tooth here. Today it churned around at new highs on light volume, which causes me to think that a pullback is coming.

I don’t think the 10-dma will serve as a reasonable reference point for support on any pullback, however. It’s more likely that the 20-dema would come into play, and this is what I’d look for if trying to buy on a pullback. I prefer this as a much more opportunistic approach since the 10-dma can be breached too easily in this position.

 

 

Big-stock tech Apple (AAPL) remains trapped below its 200-dma. Yesterday’s gap-up move in the indexes didn’t do much more than help the stock fill Monday’s gap-down falling window. Volume was also weak on that move, so it was no surprise that AAPL rolled over today to a lower closing low on increased selling volume.

 

 

Netflix (NFLX) attempted to clear its 50-dma today but failed as it reversed to close back below the line. I wrote over the weekend that NFLX remains a short on rallies up into the 50-dma. But today’s move was a little bit trickier than one might have expected.

NFLX gapped up slightly this morning and then kept rallying until it got about 2% above its 50-dma. This is not unusual, since short-sale targets can often rally as much as 2-3% or more above a key moving average before rolling over. When it’s that extended, your short-selling antennae have to go up as you begin monitoring the five-minute 620 intraday chart.

 

 

About 50 minutes after the open, NFLX spiked on the five-minute price bar and quickly reversed off its lows. This formed a bearish Shooting Star candlestick formation and came just after a bearish MACD cross to the downside. If one was alert to this and also familiar with basic candlestick chart patterns, that would have been the signal to come in on the short side of the stock.

NFLX closed at 359.73, below its 50-dma and 20-dema. From here, I’d look for any small rally up into the 50-dma, now at 363.99, as another possible short-sale entry. However, it is imperative that one also monitor the 620 chart just in case such a rally carries beyond the 50-dma as it did today.

 

 

Amazon.com (AMZN) is retesting its 50-dma after bouncing off the line last Wednesday. It gapped down to the line on Monday with the market and has not been able to recreate last week’s sharp bounce. I would watch closely for a possible breach of the 50-dma as a short-sale trigger.

 

 

The Trade Desk (TTD) has made for a reasonable short-sale target along the 50-dma over the past week. Three out of five days in a row it has rallied above the 50-dma and then reversed, making for something of a wash-rinse-repeat type of short-sale target. As I’ve indicated in recent reports, rallies into the 50-dma from here remain shortable.

 

 

Applied Materials (AMAT) started out on Monday with a small rally, even after the Trump Administration said it would ban Chinese tech giant Huawei from doing business with U.S. companies. Semiconductors and telecoms, which were already quite weak before the news, were seen as being impacted most by this, so they all moved lower at the outset.

AMAT bucked the trend at the open, but this was short-lived. All the small rally on Monday morning did was bring the stock right up into the highs of a small gap-up rising window from last Friday. That served as ready resistance. Reality quickly set in, sending the stock plummeting below its 50-dma on heavy selling volume.

That made for a nice short-sale target on Monday morning, but the stock is now extended to the downside. From here, I’d watch for any possible rally back up to the 50-dma as a potentially lower-risk short-sale entry.

 

 

Advanced Micro Devices (AMD) continues to hold up in what is now a seven-week base. Several breakout attempts have fallen well short of higher highs, and AMD briefly dropped below its 50-dma on Monday. It is now churning along its 50-dma as upside volume dries up.

If the general market remains weak, I would tend to view this as a potential short-sale target here using the highs of today at 27.59 as my stop. The idea would then be to look for a breach of the 50-dma as confirmation. It seems to me that if the semiconductors remain weak it’s just a matter of time before AMD gets dragged down as well.

 

 

In my weekend report I discussed the broad and nearly complete carnage among semiconductors and noted that Lam Research Corp. (LRCX) was one of the few holding above its 50-dma. As I wrote, LRCX “hasn’t busted its 50-dma, but it looks like it could do so soon enough.” That bust of the 50-dma occurred even sooner than I thought as the stock gapped below the line on heavy selling volume Monday.

It’s spent the past two days holding in a tight, two-day bear flag as volume dries up sharply. This one is now on my short-sale watch list, with the idea of using any rally up closer to the 50-dma as a potentially lower-risk, short-sale entry opportunity.

And yes, I see the possible U&R here, but I think that any U&R may simply act more like a short-sale type of U&R rather than a long U&R. I discussed the difference in this past weekend’s report, so members can refer to that discussion if additional information is needed.

 

 

Snap (SNAP) is hanging along its 20-dema and 50-dma on the fourth day following a pocket pivot move up through the 50-dma last week. I see this as a two-side situation. If it can clear the declining tops trendline I’ve drawn on the chart, then it may be able to push higher.

At the same time, it has also not been able to clear the trendline, which serves as a reference for overhead resistance. In this position, SNAP can be viewed as a possible short on rallies up to the trendline. It certainly was today. An ensuing breach of the 20-dema and 50-dma would then confirm the stock as a short.

 

 

Social-networking names are acting better than most stocks, but I wouldn’t expect this to last IF the general market weakens further. Today, Twitter (TWTR) posted a strong-volume pocket pivot coming up through its 10-dma and 20-dema. This came on news that the company was experimenting with what they call “ad load.”

This means they intend to show more ads on users’ Twitter feeds. TWTR has been suffering from a decline in monthly active users, so this is an attempt to short up ad revenues by simply increasing the number of ads it shows. Whether this solves their problem remains to be seen, and I am skeptical of today’s pocket pivot move.

Note that the move stalled to close about 1/3rd of the way from the intraday high. I tend to view this as a shortable move, using the high of today at 39.32 as a guide for an upside stop. That said, if it can consolidate constructively along the moving averages, it may remain viable as along. This will likely all depend on what the general market does from here, so I’d keep this in your back pocket as a two-sided, opportunistic play.

 

 

Facebook (FB) is stalling and churning along its 10-dma and 20-dema. This comes after a successful test of the 50-dma last week followed by a Wyckoffian type of retest on Monday. However, its inability to clear the 20-dema may keep it in line as a short-sale target right here, using the 20-dema or today’s intraday high at 186.74 as a guide for a tight upside stop.

 

 

CyberArk Software (CYBR) is the proverbial last man standing in the cyber-security area. It bucked the market sell-off today by posting an all-time high on slightly above-average volume. I note that it is now back at the highs of its current uptrend channel, which could act as near-term resistance.

 

 

I’m watching our old friend Etsy (ETSY) here as it rallies back up toward its 50-dma on the daily chart. If you look at the weekly chart, not shown here, you will notice that the 10-week moving average, which would correspond to the 50-dma on the daily, is at 65.62. Yesterday, ETSY traded up to a high of 65.61, getting to within a single penny of the 10-week line.

When watching for support or resistance at key moving averages, it is important to monitor both the daily and weekly moving averages. I have discussed this many times before, and it is relevant to the short side as much as it is to the long side. So, in this position, I view ETSY as a short using the 10-week line at 65.62 as a guide for a tight upside stop.

Should the stock rally further, then I would watch for resistance to perhaps come into play at the 50-dma on the daily chart. ETSY closed just below its 20-dema today on very light volume, so it’s possible it could attempt another move toward the 10-week or 50-day moving averages. In theory, the closer to either moving average one can short the stock, the better, although it could just roll over to lower lows from here IF the general market continues to weaken.

 

 

In my video report of two weekends ago, I pointed out that I would look at any post-earnings rallies in Chinese names that reported earnings last week as short-sale opportunities.  Alibaba Group (BABA) rallied on Wednesday after reporting earnings, and that quickly morphed into a short-sale opportunity as it approached its 50-dma. It is now making lower lows on heavy selling volume as it goes into free fall.

 

 

I also pointed out in my report of this past weekend that, “Even JD.com (JD), which looks relatively better as it pulls into its 50-dma, could easily become a short-sale target on a breach of the 50-dma.” On Monday, JD did just that, gapping below its 50-dma on about average daily trading volume.

Short-sellers got a chance to hit the stock on Tuesday, however, when it rallied back up into the 50-dma on very light volume. Today, JD rolled over to make a lower closing low since breaching its 50-dma. I would continue to view rallies up into the 50-dma as potentially lower-risk, short-sale entries from here.

 

 

Chinese names as a group offer little more than a landscape littered with death and carnage. That’s no surprise given the recent escalation in the U.S.-China trade war (yes, it’s a trade war now).

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 I’ve been saying for the past 2-3 weeks, this has become a messy market. And the fact that it can move sharply in either direction based on a news headline, a tweet, or some sort of unsubstantiated insinuation from a member of the Trump Administration makes it that much messier.

I continue to view this as a market mostly for nimble, opportunistic swing-traders. Those seeking to play longer-term trends should simply sit the market out for now. If one still owns long positions that continue to act well, and which have not breached trailing stops, then there is no issue with sitting on such positions. However, know where your out points are, and stick to them, as the example of QCOM demonstrates.

Right now, I’m leaning toward the possibility of lower lows for the major market indexes before we see higher highs. Of course, such lower lows might occur within the context of crazy volatility, such as we’ve already seen this week, which makes things difficult. 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.

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.