The Gilmo Report

May 26, 2019

May 25, 2019

The market remains a gap-up, gap-down affair with a large portion of each day’s index moves taking place overnight. The overnight moves tend to be sharp, with the ensuing regular-session trade mostly spinning around in circles. NASDAQ Composite illustrates this quite well with a number of spinning tops in the pattern over the past week.

That said, I blogged on Thursday as we headed into the final hour of trading that members should be on the alert for a possible reflex rally given that the NASDAQ Composite was undercutting its prior 7627.22 low of two Mondays ago. That turned out to be prophetic as the index rallied to close just above that low, printing 7628.28 at the closing bell.

On Friday, the index gapped up with the market on news that President Trump was softening his stance on the Huawei situation, and that he would meet with Chinese President Xi at the upcoming G-20 meeting. Reports from China allegedly indicated that there are no current plans for such a meeting. So, more of the same market-moving drivel comprised of unfounded suggestion, insinuation and allusion. 

The fake news meant that the gap-up, at least in the NASDAQ Composite and NASDAQ 100 Indexes, didn’t hold up. This resulted in a low-volume stalling and reversal day on light volume ahead of the three-day Memorial Day holiday.

 

 

The NASDAQ 100 also failed on its own U&R attempt by closing at 7300.96 on Friday, just below the prior 7303.64 low of two Mondays ago. Like the NASDAQ Composite, the NDX had undercut that prior low and rallied above it, but on Friday gave that up in bearish fashion as it fully reversed an upside opening gap.

 

 

The overall index action looked bearish on Friday, and we may soon see the NASDAQ Composite and the S&P 500 test their 200-dmas. The Dow tested its 200-dma on Thursday, coinciding with the NASDAQ’s undercut & rally move back up through the 7627.22 low of two Mondays ago. Depending on the news flow, we could be in for another raucous week when we open for trading again on Tuesday.

Roku (ROKU) looked as if it was ready for at least a pause on Wednesday when it churned around at new highs on light volume. It appears that something else may be going on with the stock. In other words, it trades like somebody knows something, as members in the blog comments room remarked on Friday.

That something may be a possible buyout, since ROKU has been discussed as a take-out target many times before. Or it could just be the recent analyst comments that the company is setting its sights on the $70 billion TV advertising market as it moves to Over-the-Top (OTT) from traditional linear TV. Whatever the reason, ROKU has ignored the market turmoil this past week and moves inexorably higher on a near-term approach to the $100 Century Mark.

 

 

My small, highly focused list of favorite cloud names also continues to largely ignore the spinning market. Coupa (COUP), Okta (OKTA), and Workday (WDAY) are all acting well as they sit near all-time highs, but all three are expected to report earnings next week. Therefore, they go onto my Earnings Watch List until then.

ZScaler (ZS) is expected to report the week after, and it also continues to act reasonably well. It has pulled into its 20-dema over the past week and remains above the line. It’s also one to toss on the Earnings Watch List. HubSpot (HUBS), which has already reported earnings, continues to hold support along its 20-dema. Volume dried up on Friday, but for the most part the stock spun around and went nowhere. If HUBS can hold support at the 20-dema with volume remaining low, this puts it in a lower-risk entry position.

If it breaks the 20-dema then it could very well morph into a short-sale target at that point. I would guess that if this occurs it would likely take place within the context of a market index move to lower lows and a deeper correction. Therefore, this has a two-side aspect to it depending on market context.

 

 

ServiceNow (NOW) is also holding support along its 20-dema. Volume declined Friday on a second test of the line. This puts NOW in a lower-risk entry position, but I would also caution that a breach of the 20-dema could quickly turn this into a short-sale target.

Note that NOW has gone nowhere since its late-April buyable gap-up (BGU) move after earnings. As with HUBS, a breach of the 20-dema might likely occur on a general market break to lower lows. Play it as it lies.

 

 

The same general idea goes for Zendesk (ZEN). It’s sitting along the highs of a prior base from which it has tried to break out at least three times in May and failed each time. The latest failure brought the stock into the 20-dema on Thursday, and ZEN held at the line. It held again on Friday as volume declined.

This puts the stock in a lower-risk entry position on the long side. But, as with the prior two cloud names discussed above, a breach of the 20-dema can flip this to the short side in a hurry. Another two-side situation that should be played as it lies, and likely within the context of a continued market bounce or a rollover to lower lows.

 

 

With the NASDAQ 100 reversing to close in the red on Friday, similarly sluggish action was seen in big-stock tech names. Amazon.com (AMZN), which had breached its 50-dma on Thursday, triggering the stock as a short-sale at that point, opened up with the market on Friday. It then ran into resistance near the 50-dma and rolled over to close near its intraday lows.

AMZN gets a lot of chatter from analyst and pundits lately ever since it was revealed that Warren Buffet’s Berkshire Hathaway (BRKA) had taken a position. That was in early May, and interestingly the stock has been in a downtrend since then. If you check a chart of BRKA, you will notice that it, too, has been in a downtrend since early May, but likely because that was when the current market correction began.

Regardless of who is buying it in what is a later rather than earlier visit to the party, AMZN keeps pulling lower, and Thursday’s move took it to its lowest lows since BRKA’s announced purchase. From a purely technical perspective, rallies up into the 50-dma would still offer your best short-sale entries from here.

 

 

Netflix (NFLX) is reflective of the gap-up, gap-down ride the market has been on over the past week with some gappy action of its own. Wednesday’s gap-up move that took it through the 50-dma turned south and closed near the intraday lows. A weaker attempt to rally on Friday only got as far as the 20-dema before the stock again reversed to close near the intraday lows.

One could have shorted the move into the 20-dema on Friday. The stock is now at its 10-dma, and in this position is not shortable. I would watch for further rallies that carry back up into the 20-dema, or even as high as the 5-dma, as your lower-risk short-sale entry opportunities from here.

 

 

Apple (AAPL) remains one of the weaker big-stock former leaders as it continues to post lower lows. On Friday it posted another lower closing low since peaking on the post-earnings gap-up of May 1st. On Friday, I also noted that Alphabet (GOOG) closed below its 200-dma while Nvidia (NVDA) posted another closing low, adding to the generally weak tone of the big-stock NASDAQ names.

 

 

After three failed attempts to clear its 50-dma. The Trade Desk (TTD) showed no impetus to test the line on Friday. Instead, an early rally got as far as the lower 20-dema, at which the stock turned tail and closed near its intraday lows. Rallies up to the 20-dema, or even as far as the 50-dma, remain potentially lower-risk entry opportunities from here.

 

 

Applied Materials (AMAT) edged closer to its 200-dma on Friday and remains out of shortable range given its downside extension from the 50-dma. Any rallies up toward the 50-dma can be watched for as potentially lower-risk short-entry opportunities.

Advanced Micro Devices (AMD) broke below its 50-dma on Thursday, triggering a short-sale entry at that point, as I discussed it would in my Wednesday report. The break took the stock down to its early-May low just above 26. This was followed by a move back up toward the 50-dma on Friday, where the stock offered a lower-risk entry opportunity.

In this position, AMD is starting to look more like a base-under­-a-base. The breach of the 50-dma puts it in play as a short-sale target, with the idea of using any further rallies as short-sale entries from here. For that assessment to change, it would obviously have to regain the 50-dma in short order.

 

 

Lam Research Corp. (LRCX) would be shortable near the 50-dma, if only it would rally that far. An early gap-up and rally on Friday led to an ugly outside reversal to the downside on slightly above-average and higher volume vs. the prior day. Semiconductors in general remain a disaster zone, and LRCX is no exception.

In this position the stock is too far below its 50-dma to be shortable, but still well above its 200-dma. This is what we would call “no-man’s land.” Note that it reversed from a point near the 10-dma, which is now just below the 50-dma. Therefore, that would be your nearest reference for shortable resistance on any rally from here.

 

 

Snap (SNAP) was able to post a pocket pivot breakout on Thursday on news that it was in talks with record labels discussing how the company could expand the way its users can include music in posts. The move also qualified as a trendline breakout, but overall it stalled badly with SNAP closing in the lower half of its daily trading range.

Note that it also ran into resistance along the early May highs. Since the move occurred on news of discussions and not anything concrete, I might view this as a shortable move, not unlike the way I viewed TWTR’s move on news earlier in the week. In this case, Friday’s intraday high at 11.81 would work a guide for an upside stop.

 

 

Twitter (TWTR) is wobbling here along its 20-dema after failing on a pocket pivot move that it posted on Wednesday on news that it was looking to increase the number of ads it would toss onto its users’ Twitter feeds. On Friday it attempted to rally higher and back above the confluence of the 10-dma and 20-dema but failed on light volume.

 

 

Facebook (FB) is retesting its 50-dma after failing at the 10-dma on Friday. The stock gapped up on news that it was going to launch its new crypto-currency, GlobalCoin, in early 2020. That took the stock as far as the 10-dma before it reversed to close near its intraday lows and the 50-dma.

Like other stocks discussed in this report which are pulling into support levels like the 50-dma or 20-dema, FB is in the same position. Either this pullback to the 50-dma offers a lower-risk entry on the long side, or a breach of the 50-dma triggers FB as a short-sale at that point. Again, a break or rally would likely occur within the context of a corresponding move by the general market.

 

 

Etsy (ETSY) broke down to its 10-dma on Thursday after running into resistance at the 10-week moving average on the weekly chart on Tuesday and Wednesday. It bounced off the 10-dma on Thursday and is now pushing back up toward the 10-week and 50-day moving averages.

A continued rally closer to the 50-dma might present a much lower-risk short-sale entry. Otherwise, the 10-week moving average on the weekly chart, not shown, lies at 65.69, and ETSY closed Friday at 64.71. This also brings it into shortable range using the 10-week line as an alternate reference for resistance.

At the same time, note that ETSY is holding above the prior mid-April low at 62.21. That keeps it in U&R land after successfully testing that low on Thursday. So, there are two ways to look at this, and I would keep this on tap as a two-sided idea depending on how the general market context plays in the coming days.

 

 

Most beaten-down stocks in this market are, well, quite beaten-down at this stage of the pullback off the market highs of early May. In most cases they are extended to the downside, as many of the examples discussed previously in this report show. If I was hard-pressed to find something at a shortable spot, it would have to be our old friend Arista Networks (ANET).

ANET had a very nice run after gapping up through its 200-dma and the $250 price level after reporting earnings back in February. That move carried to a peak of 331.27 in mid-April before the wheels came off on the company’s May earnings report. That report was greeted with a massive downside gap on huge volume.

On that gap-down day, ANET set an intraday low at 251, then rallied back above the 200-dma before breaking below the line again two weeks ago. It has since rallied above that prior 251.00 low but ran into resistance at the 200-dma on Friday. Therefore, one could view the stock as shortable here while using the 200-dma as a guide for a tight upside stop.

The flip-side of this is that ANET is also in U&R land after rallying back to the 251.00 price level. If it continues to hold above that low, it could continue to rally as a U&R long set-up. But resistance at the 200-dma is putting a lid on this for now and is more typical of how we treat U&Rs on the short side.

On the short side, the U&R is a cover point, and then one looks to re-short on the move up into resistance. That is how ANET has played out so far, and for now I would treat it as such unless it can clear the 200-dma.

 

 

Gilmo Special IPO Section

In the land of recent IPOs, the action has been either very frothy or very ugly, depending on which one you’re looking at. Perhaps the most constructive pattern is found in Tradeweb (TW), which came public on April 4th at an offering price of $27. It opened for trading at $34.26 and streaked higher from there.

I don’t show the first day of trading on the chart since the high volume makes the other volume bars on the chart too small and difficult to see. I find the action in TW to be quite interesting since it illustrates quite well the folly in chasing new-high breakouts, especially when those breakouts are coming from a position straight up from the lows of a base.

In TW’s case, we can see that the proper buy point was on the undercut & rally (U&R) long set-up in early May. It then ran up and broke out through what some would advertise as a “proper buy point” at 44.25. But that breakout failed almost immediately, and TW tanked 10% from the 44.25. For those adhering to the arbitrary stop-loss policy of 6-8%, it would have meant an immediate stop-out.

But TW found support around the 20-dema and rallied right back up to the highs of the base. Now it is consolidating tightly along the 10-dma as volume declines, which puts it in a much better buy position now that it has settled down. Chasing the breakout coming straight up from the lows of the base is incorrect and improper, since it sets up the potential for a sharp pullback.

If one thinks about this in basic common sense terms, one realizes that after coming public at $27, a sharp move to new highs well above the $40 price level could easily trigger profit-taking in a shaky general market environment. In this position, I consider it relatively safer to buy TW here, or any little pullback to the 20-dema, where it held last time on a sharp pullback.

So, rather than engaging in the following of what are in my view arbitrary “rules” about where one buys stocks, think carefully about the overall pattern and where the potentially lower-risk and even opportunistic entries might lie.

 

 

I blogged on Monday afternoon that I liked the undercut & rally action I was seeing in recent IPO Lyft (LYFT). It had posted a U&R move back up through the prior 54.32 low two Wednesdays ago, and on Monday it pulled back in a Wyckoffian Retest of that low as volume dried up to what was the lowest daily trading volume in the stock’s short history.

It has since edged a little higher, regaining the 20-dema on Wednesday. On Friday, LYFT broke its lowest-volume-ever record for a single day by posting a mere 2,412,500 shares for the day. That was 79.6% below-average. This puts it in a lower-risk entry position, using either the 20-dema, the 10-dma at 54.53, or the prior 54.32 low as a selling guide.

Both LYFT, which has been hailed as the worst-performing IPO since Facebook (FB) back in 2012, and Uber (UBER) have earned the scorn of investors by trading below their IPO offering prices. When nobody loves stocks that were once viewed as hot IPOs, I start to get interested. Not that either will be rocketing higher within the context of a potentially deeper market correction to come.

However, if things settle down, I would certainly keep LYFT in my back pocket as a potential Ugly Duckling IPO long idea. Technically speaking, it is in fact a U&R long entry still in play given that it has yet to break below that 54.32 prior low. On Friday, LYFT closed at 57.10, less than 5% away from the 54.32 level, representing less risk than using the arbitrary 6-8% O’Neil style stop-loss rule.

 

 

Since we’ve mentioned it, I would note that Uber (UBER) is looking a little more interesting as its disastrous IPO debut drifts further back in time. The stock has the ignominious distinction of never trading above its $45 offering price in what was arguably one of the most hyped IPOs of the year. But I had to admit that I have a soft spot in my heart for once-hot IPOs with high expectations that have suddenly become universally hated.

UBER certainly fits that bill, but I’m noticing that its chart seems to be stabilizing a bit here as it finds a near-term equilibrium. We currently have two reference lows in the pattern, one at 36.08 and one at 39.48. Meanwhile, you’ll notice the stock has formed a jagged mini-cup with a six-day handle.

Ideally, I’d like to see some sort of U&R move develop along that 39.48 low. Otherwise, if it can hold the 10-dma and settle down with volume continuing to dry up, that would create an alternative lower-risk entry, using the 10-dma as a tight selling guide. The third possibility is that it just takes off from here and goes higher, so one could theoretically test it as a long right here, right now, using the 10-dma as a quick out-point if it fails.

The bottom line is that despite all the love/hate schizophrenia surrounding the stock, and all the negative commentary about how the company will never be profitable, UBER is starting to settle down. In the process, I am starting to see some technical reference points that are useful and quite relevant for my OWL methods starting to develop on the chart here. Play it as it lies.

Keep in mind that UBER is expected to report earnings on May 30th, this Thursday. That may create some actionable volatility in the stock depending on any surprises in the report.

 

 

Zoom Video Communications (ZM) is certainly one of the hottest of the 2019 IPOs, coming out at an offering price of $36 and opening at $62 on its first day of trading. It has since rocketed to a peak of 91.46 before finally descending, Icarus-like, to the downside over the past week. It closed just below its 20-dema on Friday as volume picked up vs. the prior day.

Note the failed “IPO-base” breakout point at the left-side peak of the short flag ZM formed in the first half of May. In my view, buying new-high breakouts from short bases that are only several days long is problematic, and not the way to go. You can see that ZM in fact posted a much more proper U&R long set-up along the lows of this short flag, while the breakout has now failed.

Either way, given the upside extension that represented a near three-fold move from the initial IPO offering price of $32, buying up here is likely just a swing trade at best. So far, that is what it has turned out to be as the stock now heads back to the downside. The question is where it stabilizes.

The first reference low that I’ve got my eyes on is the 70.60 low of the short flag formation from the first half of May. U&R through that low would be my most optimal entry and certainly the most opportunistic. So, for now, I can lay in wait for that to see if and how the stock sets up again given the current identifiable reference low in the pattern. ZM is expected to report earnings on June 6th.

 

 

Here’s one you probably haven’t heard of, since it isn’t much of a media darling currently. But it is setting up, even though it is trading below its IPO offering price. Sciplay Corporation (SCPL) is a developer of digital games for mobile and web platforms that was spun off as an IPO from Scientific Games (SGMS).

The stock was offered at $16 on the IPO, ran up to a high of 18.75 on the first day of trading, and then dropped like a rock. It finally bottomed out at 14.01 two days later and has since spent time stabilizing and building a very short, tight base that is now three weeks in duration.

Note that there are three five-day pocket pivot signatures in the pattern, as shown by the blue-highlighted volume bars on the chart. On Wednesday, SCPL posted an extreme volume dry-up (VDU or Voodoo) pullback into the 10-dma and held. This puts it in a lower-risk entry here along the 10-dma, while using the line as a tight selling guide.

My preference would be to try and buy it as close to the 10-dma as possible to keep risk to a minimum. SCPL is a little different from most of the new IPOs selling at ridiculous valuations since it is expected to grow earnings by 167% in 2019 to 80 cents a share and then 30% in 2020 to $1.04 a share. A refreshing concept for IPOs in this market: profitability!

 

 

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.

In my Wednesday report I wrote that, “Right now, I’m leaning toward the possibility of lower lows for the major market indexes before we see higher highs.” I did not necessarily expect them to come so soon, since all the major market indexes moved to lower lows on an intraday basis the very next day.

We could see lower lows this week, but I still consider it mostly a swing-trader’s environment. Even the short side has been difficult to play since the biggest part of any downside move on any given day has occurred over the previous night. It has been more a matter of looking for opportunistic plays, such as NFLX along the 50-dma early in the week, which require a bit more finesse.

Because of this, I have pointed out that from a practical standpoint, trading in this market is more of an ad hoc affair. That means “as necessary,” depending on the set-ups at hand and what the market is doing on any given day. But if the market is headed for a deeper correction, then be ready to pounce on stocks that are holding along their 20-demas as we could see more names fail.

For most investors who aren’t die-hard short-sellers, this is a time to lay low. If you’re not a nimble trader, spend your time developing an exit plan for current long positions that are still holding up and refining your watch lists. It is not likely that the market volatility will end any time soon, which makes things treacherous no matter what side you play at any given time. Take it from there.

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.