The Gilmo Report

May 29, 2019

May 29, 2019

The sloppy market action continued right into the new trading week as an early gap-up open yesterday reversed into an ugly sell-off in the final two hours of trade. The Dow closed below its 200-dma for the second time in May. This all led to a gap-down open this morning, but the S&P 500 and the NASDAQ Composite Indexes eventually found and held support at their 200-dmas.

 

 

I would emphasize that I characterize today’s action as support at the 200-dmas, but not necessarily supporting action at the 200-dmas. We’ll see how this plays out in the coming days.

Every group in this market has been beaten-down as of late, and if one is looking for long ideas, it is now mostly a market of individual stocks. With most leading and formerly-leading names coming off some distance from their highs of a month ago, one also has to be selective in choosing short-sale targets. Names that are deeply extended on the downside are susceptible to sharp reflex rallies at this stage of the game.

A good example of this would be Applied Materials (AMAT), which has been on a steady descent since early last week. A 15% drop from its peak took it right down to its 200-dma, where it bounced today. Within the context of both the NASDAQ and the S&P 500 holding support at their 200-dmas today and then perhaps bouncing further in the coming days, AMAT could rally back to the upside from here.

My point is that if one is going to ponder taking the short side of this market at this stage, the odds of success decline unless we see the indexes bust their 200-dmas and streak lower. Therefore, remain opportunistic rather than simply chasing downside price action without a proper set-up and corresponding support/resistance references for keeping risk to a minimum.

 

 

And where there are rare bright spots on the long side, there is also the danger of getting caught in a sharp sell-off if one insists on chasing strength. Roku (ROKU) was on fire last Friday on some positive analyst comments, but the stock got hosed off good yesterday on an analyst downgrade. That led to a downside break that was greater than last Friday’s rocket ride to new highs.

ROKU dropped back down to its 10-dma in the process but found support at the line with a gap-up open this morning. That was, of course, brought on by another analyst comment, this time on an upgrade with a $120 price target. By the close, ROKU had churned and stalled to close up nearly three bucks.

In this position, only pullbacks to the 10-dma would be your first references for lower-risk entries. The 20-dema, as it continues rising, however, becomes the near-term support reference for more opportunistic entries, if you can get ‘em, and under the right general market conditions (e.g., a turn off lows).

 

 

Another bright spot was seen yesterday in Advanced Micro Devices (AMD), which pulled a big trendline breakout after announcing new products for graphics and networking (read: cloud). I was initially looking at this as a possible short-sale entry at the 50-dma, but the stock pushed right through early in the day and kept on going.

The move took the stock very close to its prior early April high of 29.95, reaching an intraday peak of 29.67 before backing off slightly. AMD then came right back into its trendline breakout point this morning as it sold off with the general market.

As I discussed in yesterday afternoon’s Gilmo Video Report (GVR), when resistance at a moving average is broken on the upside, you then look for price level resistance. In AMD’s case, this was up around the 29.50-30.00 level. That was good for a short-sale swing-trade today as the stock broke down with the general market.

Opportunistic short-selling is one of my favored approaches in this market, but I am also open to opportunistic long plays. In this case, with AMD coming right back into its prior trendline breakout point while holding well above the 50-dma, it can also be viewed as a potential long entry here that could work within the context of a market bounce. Play it as it lies.

 

 

With the general market deteriorating, so have the stronger-acting names. HubSpot (HUBS), which had been holding support at the 20-dema, broke below the line today. That triggered a short-sale entry at that point, and the stock continued lower from there. I wrote over the weekend that this was a two-side situation, where a breach of the 20-dema would bring this into play on the short side.

On Sunday, I wrote that, “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.” That is what we have seen – the deepening market correction eventually starts to drag the last of the stronger-acting leaders down with it. In this position we would watch for any rallies back up into the 20-dema as potential short-sale entries from here.

 

 

The same type of action is observed in Zendesk (ZEN), which also broke its 20-dema today. It did HUBS one better, however, by also breaching its 50-dma. Volume was not heavy at only about average, but it represented a sharp increase from yesterday’s volume levels.

Thus, ZEN triggered as a short-sale this morning when it breached the 20-dema, per my discussion of the stock over the weekend. There are now two ways to view this. It can be seen as shortable right here, using the 50-dma as a tight upside stop. In the event it is able to move back up through the 50-dma, then any rally that carries back up into the 20-dema would provide a potentially lower-risk entry at that point.

 

 

ServiceNow (NOW) joined ZEN and HUBS with its own breach of the 20-dema. The move was less severe, however, and came on light volume. So, this isn’t coming apart like the other two. That doesn’t mean it won’t. In this position, it can be viewed as shortable, using the 20-dema as a guide for an upside stop.

 

 

I wrote over the weekend that all three of these names, HUBS, ZEN, and NOW, should be watched carefully. Support at the 20-dema would have kept them in play as long entries, but today’s breaches of the 20-dema put them in play as short-sale targets. These made for handy short-sale targets today, if you paid careful attention to my discussion of these names over the weekend.

Workday (WDAY) blew up after earnings, becoming shortable on the gap-down break at the open today, or on either of the breaches of the 10-dma and 20-dema. The company reported earnings yesterday after the close and rallied to an after-hours peak of 219.90. That didn’t hold up and the stock reversed in after-hours trade to end the session at 213.

It opened this morning at 209.85, quickly hit an intraday high at 210, and went straight down from there. It ended the day at 203.23, just below its 20-dema. It can be viewed as shortable here using the 20-dema as a guide for an upside stop.

 

 

Coupa (COUP) is expected to report next week. Okta (OKTA), and ZScaler (ZS) are expected to report tomorrow after the close.

The Trade Desk (TTD) is the archetypal wash-rinse-repeat short-sale target every time it pushes up to or just above the 50-dma. Today marked the fourth day in the past two weeks that the stock has poked its head above the 50-dma, only to have it pushed back below the 50-dma whack-a-mole style.

This remains shortable on these moves above the 50-dma, using the price highs between 205 and 210 as your references for setting an upside stop. The stock has been stubborn on the downside as well, however, so set your stop and abide by it since TTD could decide to make a move through the 50-dma within the context of a general market bounce.

 

 

Etsy (ETSY) was a fairly textbook short at the 50-dma yesterday, and it broke further to the downside today. As I discussed over the weekend, we were looking for this to potentially rally further up toward the 50-dma and providing us with a juicy short-sale entry. That worked out in textbook fashion.

ETSY is now back below the 62.21 low through which it rallied several days ago on a U&R type of move. In this position, we would look at any further moves up toward the 20-dema as potential lower-risk short-sale entries from here. Otherwise, should the stock maintain a more vigorous rally from here, the 50-dma would then come into play as potential resistance.

 

 

Snap (SNAP) surprisingly acts better than most stocks out there as it holds support along three moving averages. Yesterday, despite the weak market reversal into the red, the stock held support along the 10-dma, 20-dema, and 50-dma and posted a pocket pivot on strong volume.

Today, SNAP tested support along the three moving averages and held. It ended the day in positive territory, up eleven cents in the face of a general market sell-off. If the general market is able to bounce here, assuming the NASDAQ and S&P can hold support at their 200-dmas, then I’d want to have at least a handful of potential long ideas in my back pocket. SNAP qualifies as one of them, with the idea of using the moving averages as tight selling guides.

 

 

Twitter (TWTR) might also see its way to a bounce as it approaches the 50-dma and the prior 36.37 prior low in the pattern. I’d watch this for any meet-up with the 50-dma that produces an undercut & rally (U&R) move back up through that low as a potential long trigger within the context of a general market bounce.

 

 

Facebook (FB) continues to ping-pong between its 20-dema and 50-dma. Support at the 50-dma has held on the downside, while resistance at the 20-dema has held on the upside. Volume remains relatively light and declined today amid the general market sell-off. This may put FB in a lower-risk entry position here, using the 50-dma as a tight selling guide.

If FB breaches the 50-dma, then the two-sided approach dictates that this would then trigger it as a short-sale target at that point. How this plays out will no doubt be heavily influenced by what the general market does from here.

 

 

Big-stock NASDAQ names remain sluggish, but out of shortable position. Amazon.com (AMZN) needs to rally up toward the 50-dma at 1854.93 to come into shortable range. Netflix (NFLX) would have to rally up into its 20-dema at 357.83, or higher up into its 50-dma at 363.30 to be in shortable range again.

Alphabet (GOOG) closed further below its 200-dma, while Nvidia (NVDA) continues to post lower low after lower low in what is now a consistent five-week downtrend. Apple (AAPL) is also in a moribund state, down five days in a row within an overall four-week downtrend. The only thing even remotely bullish about any of these names is that they have been down so far for so long that maybe some oversold bounces are in order.

 

 

Arista Networks (ANET) gave swing-trading short-sellers a little over 10 points of downside after running into resistance at its 200-dma and reversing yesterday. The stock continued lower today as it now tests the prior week’s lows. From here, only rallies into the 200-dma would offer lower-risk short-sale entries, using the 200-dma, of course, as your guide for an upside stop.

 

 

The Weed Patch is a mess, but the only pharmaceutical cannabis name on my long watch list, GW Pharmaceuticals (GWPH), continues to weather the current market sell-off. It remains above a prior base breakout point, which I view as a low-base breakout point around the $175 price level. It also held support today at its 20-dema as volume picked up.

Opportunistic entries would occur on any pullback closer to the $175 level. However, if the market starts to rally more vigorously from here, it could be potentially buyable using the 20-dema as a tight selling guide. Another one to slip into your long side back pocket.

 

 

IPO Follow-Up

Recent IPO Tradeweb (TW), first discussed in this past weekend’s written report, held support today at its 20-dema. Volume dried up nicely, putting the stock in a lower-risk entry position here while using the 20-dema as a tight selling guide. TW is one of my back pocket long ideas here in the event of a general market bounce from here.

 

 

Uber (UBER) is expected to report earnings tomorrow after the close, so it remains on earnings watch for now. As I blogged this morning, the stock had pulled a U&R move back up through the prior 39.46 low and closed above it at 39.94 today. I discussed that possibility in the weekend report, but I would not look to hold such a position through tomorrow’s earnings report.

No doubt, UBER’s earnings report tomorrow will have some effect on Lyft (LYFT). While it remains a little volatile on an intraday basis, the stock held its ground today despite the general market sell-off. After a skid down to 54.05 early in the morning as the major market indexes hit their intraday lows, it managed to close above the 10-dma in tight fashion.

Volume was very light today at -73.1% below average. The stock continues to try and build a bottom here, and as long as it holds above the 54.32 prior low in the pattern it remains viable as a long idea. I would prefer, however, to wait and see how it reacts to UBER’s expected earnings report tomorrow and operate on the basis of whatever set-up presents itself in real-time as a result.

 

 

I’ve still got my eye on Zoom Video Communications (ZM). But as I discussed over the weekend, I’m taking an opportunistic approach here and waiting for any possible test of the prior 70.60 low in the pattern. As I wrote over the weekend, a U&R move through this low is something to watch for in opportunistic fashion.

 

 

I’m very interested in watching how all these IPOs I’ve been discussing in this and the last report continue to act during market down days. I notice that for the most part there is a general tone of resilience, which is constructive. If they were blowing apart on down market days, I’d view that as very weak and non-constructive action.

Sciplay Corporation (SCPL) is another one holding its ground. It remains in a four-week flag formation after coming public less than a month ago. Today it held support along the rising trendline that I’ve drawn on the chart. Volume was -60.6% below average and lighter than the day before.

This looks like it’s most buyable along the lows of the range near 15. Otherwise, some sort of more definitive move, such as a pocket pivot through the 10-dma, might be something to buy into provided one can catch it as close to the 10-dma as possible. I do not like to buy anything, even a pocket pivot, when it’s sticking straight up in the air – catch it early or not at all.

 

 

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 current position of the NASDAQ Composite and the S&P 500 Indexes makes a potential reaction rally logical, and therefore possible. Not that any rally would last, since it could just bring some of these short-sale targets I’ve discussed up into more optimal short-sale range. At the same time, I want to be ready for any prolonged bounce, as it could bring into play some decent swing-trading opportunities on the long side.

The recipe remains the same. This is mostly a swing-trader’s market. Investors and those looking to play intermediate trends on the long side should simply lay back for now. News-risk remains high, since a tweet or headline can easily send things gapping up or down, depending on the news.

That makes holding heavy long or short positions risky, in my view. In the meantime, look to maintain a long and a short plan, and react to what the market and individual stocks are doing in real-time. Alert short-sellers have profited over the past two days. But a reaction bounce from here could bring some opportunistic longs into play.

If a more vigorous market rally ensues, then those seeking intermediate-term moves should have a shopping list prepared. I have left my long watch list from two weeks ago up on the premium section of the website, and members can review that list to look for stocks they may be interested in and which may be pulling into deeper, viable areas of support.

As I look at all the charts I can see the potential for some sharp oversold rallies to develop. I can also see where nascent weakness is starting to show up, and such situations provide somewhat fresher potential short-sale set-ups. Bottom line: have your plans and watch lists ready and be prepared to execute as necessary.

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 positions in AMD, 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.