The Gilmo Report

May 5, 2019

May 4, 2019 5:10 pm ET

The market ended the week pretty much where it started after some mid-week volatility centered around the Fed meeting. The NASDAQ Composite Index was hit with distribution on Wednesday and followed up with more selling on Thursday before finding its feet near its 20-dema on an intraday basis.

A jobs number of 250,000, beating expectations of 190,000, got things heated up on Friday as the indexes melted back up to their Monday highs on lighter volume across the board. Underneath the surface, volatile price swings, gaps, and the conundrum of weak-fundamental stocks continuing to push higher in alt-currency (see the Wednesday report for a definition of this) fashion continued to dominate the action.



While the Big Three major market indexes, the NASDAQ Composite, the S&P 500, and the Dow all remain within short, choppy ranges, the NASDAQ did manage to post an all-time closing high on Friday. Meanwhile, it was the small-cap Russell 2000 Index that stole the show with a new-high range breakout. It remains well below its all-time highs, however.



The alt-currency remains a potent force in this market, as big-cap stocks with tepid fundamentals continue to rally. This in turn helps drive the indexes higher. A couple of examples include Visa (V), which sports decelerating earnings and sales growth with earnings growth of 18% on sales growth of 8% reported in the most recent quarter.



Dow stocks in general show weak earnings and sales growth, but this doesn’t keep them from making new highs, as American Express (AXP) illustrates below. The stock came in with whopping 8% earnings growth on sizzling sales growth of 7% when it reported earnings a couple of weeks ago. So far, that has been good for consistent new highs, even as volume dries up.



I don’t view this conundrum as necessarily bearish or something to be concerned about. It is simply telling you something about this market which is useful to understand. Technicals rule, while fundamentals drool, to paraphrase the old schoolyard insult.

Among these big Dow stocks that keep moving higher, we might look at the situation with Boeing (BA) as a more opportunistic one. After the initial gap-down following the news of problems with the 737 Max 8 and 9 aircraft, the stock has not declined any further. It has simply held support along the 200-dma since late March.

Over the past three weeks the action has tightened up considerably while volume over the past several days has dried up sharply, down to -65.2% below-average on Friday. This action is all occurring in a big, long L-formation. Meanwhile, BA has two potential catalysts that could work in its favor.

The first is the potential U.S.-China trade agreement that reports say could come as early as this Friday. The second is news that the FAA expects to clear the 737 Max 8 and 9 for flight by late May. Currently, the technicals argue for some sort of upside resolution to the pattern based on the tight action and several five- and ten-day pocket pivots within the tight area of the pattern.

Most, if not all, of the bad news appears to be out of the stock. In addition, the company provided insight into the precise business effect of the current grounding of the aircraft in question. And while BA’s fundamentals are expected to suffer in the short-term, we are looking at 47% annual earnings growth in 2020, which is what the stock could begin to trade on once the 737 Max 8/9 issue is finally resolved.



Big-Stock NASDAQ


The group chart of big-stock NASDAQ names that I follow illustrates the extremely mixed nature of this current market environment. Apple (AAPL) gapped up after earnings in a buyable gap-up move that is actionable using the 209.23 low of the BGU day as a selling guide. (AMZN) gapped up to higher highs on Friday on heavy volume thanks to news that Warren Buffet’s firm, Berkshire Hathaway, had recently bought some of the stock.

Netflix (NFLX) is attempting a re-breakout maneuver, but volume is weak. Meanwhile, Microsoft (MSFT) is acting a little skittish as it fails to make any significant progress following its BGU after earnings last week. Alphabet (GOOG) and Intel (INTC) remain in busted positions after gapping down on earnings last week.

Everything else on the chart is floundering about, with little in the way of actionable entries. Nvidia (NVDA), which has filled last weeks gap and has rallied up into the 20-dema, is expected to report earnings on May 16th.



Cloud Names

We did not see severe breakdowns in the cloud stocks following Wednesday’s big market reversal. Most of these carried to the downside until Thursday morning where they found logical support and then bounced. For example, Coupa (COUP) broke down but held support at the $100 Century Mark, putting it in a lower-risk entry position.

As I wrote on Wednesday, that would initially be the case, but if it busted the Century Mark it could morph into a short-sale target at that point. It did not and rebounded back up to its prior highs on Friday. A good example of how one maintains a two-sided approach while being open to the real-time evidence as it unfolds.

We can see that Autodesk (ADSK), (CRM), and Splunk (SPLK) all found support on Thursday at their 20-demas. Tableau Software (DATA), which reported earnings Thursday after the close, gapped up but stalled badly to close just below the 50-dma on heavy volume. While it was certainly a shortable gap-up on Friday, it’s not clear where it will go from here.

One could treat it as a short here using the 50-dma as a tight selling guide. But if, for whatever reason, it regained its 50-dma and turned back to the upside, it could become buyable at that point, using the 50-dma as a tight selling guide.

ServiceNow (NOW) is still extended from its buyable gap-up (BGU) low of 258.18, but got close on Friday as it tested that low and the 10-dma successfully. It is now again out of buying range. Notice, however, that there is not a tremendous amount of upside thrust following the BGU, at least not yet.



Atlassian (TEAM) illustrates the new math in this market whereby down-big-on-volume = buy signal (DBOV=BS). It got slammed after earnings two weeks ago but has since slowly drifted higher as volume dries up. Now it’s sitting above its 50-dma looking like it might be in a shortable position, but it could simply continue tracking around the 50-dma as it potentially sets up to move higher – a decisive breach of the 50-dma would likely be the necessary short-sale trigger.

Trade Desk (TTD) is expected to report earnings next week, while Twilio (TWLO) reported earnings Tuesday after the close and reversed hard on heavy volume after initially gapping up. Another shortable gap-up in this market, a set-up that hasn’t been too hard to find in this market during the ongoing earnings season.

TWLO might be buyable here at the 20-dema since it is holding support there, with the idea that a breach of the 20-dema would trigger this as a short-sale. Wednesday’s ugly reversal was also a failed breakout attempt, so the possibility of the venerable old re-breakout maneuver happening here remains a possibility.

Workday (WDAY) failed on its previous breakout on Thursday, dipping below its $200 Century Mark as well. But it found support at (where else?) the 20-dema and bounced back above the $200 price level on Friday. In this case, the opportunistic entry was on Thursday at the 20-dema.

ZenDesk (ZEN) reported earnings on Wednesday after the close and gapped down, holding support at its 20-dema. This looked like a potentially lower-risk entry position, as I noted in Wednesday’s GVR, but it broke lower on Thursday before finally finding support near its 50-dma. It continued to rally above the 20-dema on Friday, putting it in an extended position.

ZScaler (ZS) is hanging along its 20-dema but came to close to the 50-dma on Thursday. It remains a bit unstable here, but one possibility is to look at this as a lower-risk entry position here using either the 20-dema or the 50-dma as tight selling guides.



In discussing COUP and WDAY in my Wednesday report, I noted that support around their Century Mark levels was to be watched closely. As I wrote, “Those are your key reference points for support or failure, so watch them carefully within the context of what this market does over the next few days.”

Sometimes the market context is difficult to figure out, since we’ve seen erratic moves in either direction over the past week. But in the case of most of these cloud names shown above, support was found at some logical support level on Thursday, coinciding with the market finding support that morning and rallying off its intraday lows.

The patterns are jagged, no doubt, and illustrate the choppy, head-faking type of action we see as things swing to-and-fro. The key with any of these names is that if you’re going to buy into any of them, you must do so on opportunistic weakness, and sometimes that means coming in at a time when things don’t look so good, as was the case Thursday morning.

All of this just underscores the difficulty of this market, which I believe is driven mostly by machines. When the evidence of patterns where stocks break out and fail consistently at the highs, or where we see the new math equation of DBOV=BS come into play all too often to be a mere coincidence, it suggests that reversion-to-the-mean forces may be at work.

To some extent, one must think like a machine, a.k.a. the algos, I suppose, and with the same emotionless demeanor, which for humans is easier said than done! Certainly, the market looked vulnerable on Wednesday and then on Thursday morning, which would naturally make one lean more toward the cautious side of things.



Speaking of reversions to the mean, Advanced Micro Devices (AMD) does a great job illustrating the concept. A gap-up move on Wednesday following earnings was met with heavy selling as the stock reversed in ugly fashion. But on Thursday the stock undercut the 26.96 prior low of its current base and then rallied, triggering a U&R long entry at that point.

It spun around a bit on Thursday before closing above the 10-dma, and then held support along the 10-dma and at the 20-dema on Friday. So, we can see that it sold off at the highs and was bought at the lows of this current price range, closing right in the middle, or at the mean. Thus, a reversion to the mean in action!

Where does it go from here? Well, if it can continue to hold support at the 20-dema, then technically the U&R through the 26.96 price level is still in play. But it is now a little bit extended from there after closing at 28.22 on Friday. Thus, any pullback to the 20-dema or the 26.96 price level that holds might bring it into a lower-risk entry position. But this could go either way, so simply play it as it lies and know where your stops are.



This market has some cracks in its armor, which is one reason why I’m watching things as potential two-sided plays. With the indexes and most leading stocks that are still leading extended on the upside, a correction could come at any time, and it looked like it might, based on the action that we saw on Wednesday.

What gives this market cracks in its armor is the action in former leaders like Xilinx (XLNX). But the paradox of this market is that technical action that looks bad and would normally indicate that something should be sold, turns out to be good. And so, as I noted in my last report, XLNX may have busted on huge volume after earnings, but this is just down-big-on-volume, right?

So, if we invoke the new math equation of DBOV=BS, we then look for a concrete long entry signal that might confirm this. And, as I wrote on Wednesday, we have it here following the undercut & rally back up through the prior 116.87 low. XLNX has since moved tight sideways as volume declines while holding above that low and closing at 119.02 on Friday.

That keeps the U&R alive, using the 116.87 price level as a tight selling guide. If this market just keeps rolling higher, then I would not be surprised to see XLNX at least rally back up to the 50-dma.




The group chart below tells the tale of the three main social-networking names in this market. Facebook (FB) is tracking sideways following its buyable gap-up after earnings the week before, while Twitter (TWTR) posted a higher high on Friday as it edges higher following its own buyable gap-up after earnings last week.

The real surprise among the three is Snap (SNAP). It worked out as a very nice shortable gap-up after earnings last week when it reported on the same day as TWTR and the day before FB. The stock gapped up and reversed hard as it got slammed right into its 50-dma.



The railroad stocks I follow all pushed higher on Friday. Both CSX Corp. (CSX) and Union Pacific (UNP) posted all-time highs on Friday, but on weak volume. CSX posted an absolute high while UNP posted an all-time closing high. The chart of CSX, below, well represents the action in both stocks.

Obviously, both are extended from their recent buyable gap-up moves after earnings nearly three weeks ago. Again, we have the situation of big-cap names with mediocre fundamentals pushing higher on no volume. Would I buy them here? No, and if one did truly want to own these stocks, the proper buy points were on the pullbacks closer to the BGU lows.

As I wrote on Wednesday, and as I indicated in the examples of V and AXP above, these stocks act more like alt-currencies. Money has to come into something, anything, and these stocks, as big-cap, established companies fit the bill, end of story. In terms of blistering CAN SLIM™ or other strong, thematic growth fundamentals, they just aren’t there.



Telecom Related

Acacia Communications (ACIA) and Arista Networks (ANET) reported earnings after the close on Thursday, with negative implications. Both stocks gapped down on Friday morning, but ANET was hit harder as it plummeted below its 200-dma, By the close, however, it regained the 200-dma which is perhaps somewhat constructive.

We’ll see how ANET acts in the coming days since we now have a DBOV situation. ACIA did not break as much and eventually found logical support at its 50-dma. Volume was heavy, and the move has the look of a supporting pocket pivot at the 50-dma. I want to see how well ACIA can hold up on any retest of the line since it is now extended from the 50-dma.

Ciena (CIEN) posted a supporting pocket pivot on Friday at the 10-dma and 20-dema. Volume was heavy as it found support at the 20-dema, so this is actionable here using the 20-dema as a tight selling guide. Finisar (FNSR) posted a pocket pivot at its 50-dma on the rebound, so I’d watch for any retest of the 50-dma as a lower-risk entry.

Viavi Solutions (VIAV) also reported earnings on Thursday after the close, and after wobbling right at the open on Friday it found its feet and launched to higher highs. The move constituted a base breakout from a cup-like formation and is still within buying range of the breakout.



A more detailed view of ACIA shows the nice support at the 50-dma on Friday after a post-earnings gap-down move. Overall, we can see that the stock is forming something of a base-on-base type of formation. The earnings report didn’t strike me as all that bad, with earnings growth of 270% coming on sales growth of 44%.

This represents at least a three-quarter earnings and sales growth acceleration for ACIA. It seemed that the only reason for selling the stock off at the open on Friday perhaps had to do with the company’s in-line forward guidance. Big deal. I like this here using the 50-dma as a tight selling guide.



Cyber-Security Names

CyberArk Software (CYBR) is expected to report earnings on May 14th and is currently extended. FireEye (FEYE) reported earnings Monday after the close and has rallied back above its 50-dma after a weak report. It’s not in a position I consider optimal as a long entry.

Fortinet (FTNT) reported earnings Thursday after the close and gapped down big on Friday morning. Volume was heavy as it rallied off its intraday lows but still closed below its 50-dma. There is no clear set-up here on the long side, while on the short side I’d want to see how it acts once it gets up to its 50-dma up at 87.21. Mimecast (MIME) is extended and is expected to report earnings on May 13th.

Palo Alto Networks (PANW) and Qualys (QLYS) are both extended, but note how both stocks, along with MIME, were previous undercut & rally (U&R) long entries over the past few weeks. Overall, the Cyber-Security group is decidedly mixed, but Ugly Duckling long entries dominate as proper lower-risk buy points in these stocks.



As I already wrote, finding shortable gap-ups (SGU) in this market during earnings season has not been difficult. There have been many cooperative names in this regard, including Tandem Diabetes Care (TNDM). But in many cases these shortable gap-ups turn out to be one or two-day affairs.

In TNDM’s case, it was a one-day wonder trade on the short side, but a very profitable, high time-value one at that. Once again, the new math of DBOV=BS came into play. TNDM quickly ended its decline, despite the ugly reversal. It declined no further and has since spent the past two days pushing right back above its 50-dma and up to the prior SGU highs.

I wrote on Wednesday that a weak rally up into the 50-dm might serve as a lower-risk entry for a short-sale, but that was not to be. Silly me! The new math has taken hold again and, frankly, I should have figured this out. TNDM was good for a one-day wonder trade on the short side, but good for a one-day SGU and nothing more.

Now it’s not clear what can be done with the stock, although Friday’s move up through the 50-dma could have been treated as a moving average undercut & rally long entry at the line, using it as a tight selling guide. It would not be extended from the 50-dma, hence out of range, but a great example of the new math at work in this market, again.



Chinese Stocks

Another characteristic of this market is that initial breakouts are often fake outs. But such fake outs and failed breakout attempts often just set up the potential for a re-breakout. That was the case for Alibaba (BABA) following Wednesday’s stalling breakout. That quickly came in on Thursday, but the stock found ready support at (what else?) the 20-dema.

It then pulled a re-breakout out later on Thursday as it rebounded off the 20-dema and then continued higher on Friday. Buying off the 20-dema was the opportunistic way to play this, but it is now extended. In addition, BABA is expected to report earnings on May 15th.



Recent IPOs

Lyft (LYFT) has done a good job of holding above the prior 55.56 low in its pattern since undercutting and rallying back up through its 10-dma five days ago on the chart. It dipped below the 10-dma on Wednesday, but quickly regained it on Thursday. It then went on to post two five-day pocket pivots along the 10-dma on both Thursday and Friday.

Personally, I found this to be a very nice swing-trade. With earnings expected this Tuesday after the close, I’m not inclined to play earnings roulette, although members owning the stock on the basis of last week’s U&R long set-up are free to handle their position as they see fit.



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 did not care much for the action on Wednesday, which I made clear in my report of that day. Thursday morning, however, many leading stocks found support at logical points and rebounded. This was entirely consistent with my view at the time, even though I found Wednesday’s action to be highly cautionary. After all, the hard evidence was found in the fact that short-sale set-ups, mostly shortable gap-ups, were working well.

But as I closed in my last report, “This market can be tricky, however, and when things have gotten ugly in the near-term, the market and individual stocks have bottomed and turned to the upside. That is the source of my joking about the new math whereby DBOV = BS (down-big-on-volume = buy signal) If that pattern changes, and we do not see the market and individual stocks quickly recover from breakdowns, then that may be meaningful.”

I expect this market will remain tricky. It is still a truism, however, that the best way to handle the long side is to remain opportunistic on weakness rather than chasing strength. Often, when I am working the short side as I was early Thursday morning I can start to sense when things have played out to the downside.

When that happens, I will take my profits and back away, or flip to the long side IF I can see things pulling into lower-risk areas of support. That is part of a flexible two-sided approach that takes trades as they come. I discussed this in detail, as well as the changes I saw on Thursday, in my Thursday evening video report.

We will see another big wave of earnings reports on the docket this week, and I will post my Earnings Watch List on the website later this weekend. I will also highlight some of the names on this list in my weekend GVR, as well as some other ad hoc ideas that I’m seeing currently. Stay tuned.

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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