The Gilmo Report

May 8, 2019

May 8, 2019 3:34 pm ET

After taking the market down in volatile fashion over the past two days, investors mostly sat on their hands as volume declined and the indexes held steady. By now, members are well aware of the news that sent the market into a tail-spin Monday morning, so I needn’t go into great detail about this. The bottom line is that we have seen some heavy-volume selling off the peak as the U.S.-China trade dispute moves back into the forefront.

At this point, I see nothing to do until the situation is resolved and we know for certain whether a U.S.-China trade deal is on or off, and whether the situation escalates. That can easily be the case if increased tariffs on Chinese goods go through Friday at midnight, even if the talks are called off entirely.

Monday’s severe gap-down open was an unusual affair. As it turned out, and as I noted in my Monday evening GVR, most stocks printed their absolute lows right at the open, and everything steadily moved higher from there. By the close, the indexes had made up most of their losses, giving the appearance that all was well again.

That ended yesterday when the indexes reversed course and headed to lower lows, with the Dow Jones Industrials busting its 50-dma on heavy volume. Today the Dow attempted to regain its 50-dma but was turned back in ugly fashion in the final half-hour of trade.



The NASDAQ Composite and S&P 500 Indexes remain well above their 50-dmas, with the S&P finding support yesterday as it approached its 50-dma. A flurry of buying into the close brought the indexes back up off their lows, but the end result was still an ugly distribution day on heavy selling. In my view, the pressure will remain on this market as long as the overhang of a potential all-out trade war between the U.S. and China remains in place.

At the very least, the news flow on trade creates enough turbulence and uncertainty to make this market unbuyable, at least in the short-term. For that reason, I do not advise trying to buy anything for much more than a swing-trade, maybe even a day-trade.

That certainly turned out to be the case on Monday as one could have bought stocks near the open and picked up some nice moves. But today’s action underscores how buyers can be lured into this market and then suddenly find the rug pulled out on them, as we saw in the last half-hour of trade. The environment is just too slippery.

The break in the Dow yesterday was led by Boeing (BA), among others, as it slashed through its 200-dma. Obviously, the news of increased tariffs on Chinese goods was a big negative for the stock, and while it seemed to be working through the issues with the 737 Max 8/9 this new stream of negative news was too much.

BA has now broken key support as the stock now falls back into its prior base. Resistance now lies at the 200-dma, but whether BA can recover or not is going to depend on how the current U.S.-China trade turmoil resolves. BA was looking like it might be ready for a move back up through the 50-dma when I discussed it over the weekend, but we can see how the random factor of trade turmoil put the kibosh on that.



Big-Stock NASDAQ

Apple (AAPL) has pulled down into its 20-dema but is holding just above the $200 price level, while (AMZN) holds tight along its 20-dema. Nvidia (NVDA) is now sitting below its 50-dma ahead of next week’s expected earnings report, while Netflix (NFLX) is flirting with its own 50-dma but is now mostly a failed breakout.

In fact, it is now two failed breakouts, demonstrating once again the futility of buying only breakouts in this market. The stock is now back to its 50-dma today as volume declines. Optimistic buyers might consider this a lower-risk entry since one can just cut and run if its busts the 50-dma.



After-hours, as I write, NFLX’s little cousin, Roku (ROKU), has reported earnings and surprised with a nine-cent loss vs. estimates of a 16-cent loss. It also reported 29.1 million active accounts vs. estimates of 28.5 million and raised guidance. Right now, as I write, the stock is trading up above 68, but has traded as high as 70.88 in the after-hours.

If the after-hours gap-up move holds into tomorrow’s open, watch for this to develop into a buyable or shortable gap-up, depending on how things play out. Based on where it is trading as I write, it will open up near the highs of its current base without breaking out, so this could go either way. Just play it as it lies tomorrow morning.



Cloud Names

Right now, I’m focused on six cloud names in order to keep things simple in case I need some “go to” names on either side, depending on how the current market situation plays out. We can see them all on the group chart below. The first is Coupa (COUP), which is hanging along its recent base breakout and the $100 Century Mark level.

This is pretty simple in terms of what I’m watching for. A breach of the $100 level and the prior breakout point within the context of a continued market decline (that’s the important context to remember) would make it a short target. Meanwhile, if it can continue to hold support at the $100 level, then it can also serve as a long target if the market finds its feet.

HubSpot (HUBS) is a similar situation, but without the Century Mark in play. Its recent breakout was tested today after it reported earnings after the close yesterday. But it held and closed above the 20-dema. So, this remains a viable long target as long as it can hold the prior breakout point and the 20-dema. If not, then it becomes a short target within the proper context (see above).

ServiceNow (NOW) continues to hold its recent buyable gap-up, but it has not made any real upside progress since. In essence, it is floundering after the BGU, but given the market context that is not surprising. If it holds the 158.18 intraday low of its BGU day, then it remains a long target, but a breach of the 20-dema within the proper market context makes it a short target.

Okta (OKTA) is holding above the $100 Century Mark, such that pullbacks to that price level might offer lower-risk entry opportunities. If it busts the Century Mark, then I’m looking at it as a potential short-sale target within the proper market context.

Workday (WDAY) is looking more like a short-sale target here as it ran into resistance at the $200 Century Mark and turned tail on heavy volume. That makes it a short-sale target on any further rallies up into 200, under the proper market context. One could have scalped it for three points today if shorting it at the $200 Century Mark.

If WDAY can regain the $200 Century Mark in conjunction with the market finding its feet and resuming its rally, then it’s a long again. Zendesk (ZEN) has failed on a prior breakout attempt after gapping down following last week’s earnings report. It is, however, holding support at the 20-dema which brings up the possibility of a re-breakout within the context of a market rally resumption.

Otherwise, a breach of the 20-dema can turn this into a short-sale target. This all gives you some idea of how I’m looking at stocks from both side and have an idea of how I will handle them depending on how the current general market situation plays out.



If I were going to throw a seventh name onto my little watch list of clouds, I might also include ZScaler (ZS). The stock is holding up in a six-week base and maintaining support along its 50-dma. Volume dried up to -48% below-average. In this case, the 50-dma is the lower-risk long entry spot, while a breach of the 50-dma could bring this into play as a short-sale target.

Note that among all these names, COUP, ZS, and OKTA are all expected to report earnings in early June. WDAY is expected to report earnings on May 28th. You might find that there are other clouds that you might want to watch. B  ut my suggestion is to create short, focused watch lists because it will assist in keeping things manageable in what may become a fast market in the face of the current trade turmoil.




Semis have also been a bust on the China news. The only one I am watching right now that has not broken down is Advanced Micro Devices (AMD), which is currently stuck between its 20-dema and 50-dma. This is another two-sided situation.

If the market finds its feet and the stock continues to hold the 50-dma, then I might consider this a lower-risk entry position. If not, then a breach of the 50-dma makes this puppy a short-sale target.



Xilinx (XLNX) has been a big-stock semiconductor leader in this market, but it is now a busted former leader. I have been entertaining the possibility of playing this as an undercut & rally long set-up as long as it holds above the prior 116.57 low in the pattern. However, if we see a market correction this could easily become an old-fashioned bear flag preceding a move lower.

If the market cannot find its feet, and the current trade turmoil resolves into a worst-case scenario, then the L-formation can simply become a good old-fashioned bear flag, and the short trigger would occur on a failure through the 116.57 low in the pattern.

As we know, L-formations can also lead to rallies that resolve in U-formations. This, of course, leads to the revered LUie pattern, a typical Ugly Duckling pattern that we see often enough in this market to understand that what looks like a bear flag sometimes isn’t. Play it as it lies.



Telecom Related

Every one of the telecom-related names I’ve discussed in recent reports has busted, except for Viavi Solutions (VIAV). The group chart below shows the carnage in vivid black and red! I’ve circled the price action in the four busted names.



Meanwhile, VIAV is holding last week’s breakout following earnings. That was an interesting move last Friday as the stock initially gapped up, then reversed into the red and traded down to its 20-dema. From there it found its feet and turned back to the upside for a big-volume breakout.

Since last Friday VIAV has traded tight sideways with volume declining. The stock tucked into its 10-dma today as volume declined to -18% below average, not enough to call it an extreme volume dry-up or voodoo day. It is, however, in a lower-risk entry position, which can be buyable within the proper market context, a.k.a. a rally resumption.




Social-networking names have also come under pressure this week, along with everything else, as the group chart below shows. Facebook (FB) is now failing on its prior buyable gap-up (BGU) and looks set to test the 20-dema.

Twitter (TWTR) remains above its own BGU intraday low at 36.91 but is trading down toward the 20-dema. With both FB and TWTR, the 20-dema would represent the preferred lower-risk entry spot, but only if they tested the line in conjunction with a market turn back to the upside.

Otherwise, breaches of the 20-dema could bring either or both into play as short-sale targets. Meanwhile, Snap (SNAP) has busted its 50-dma on higher selling volume. This looks like a short right here, using the 50-dma as a guide for a tight upside stop.




If the general market corrects further from here on a negative resolution to the current U.S.-China trade turmoil, then I would expect the railroads to fail on their recent buyable gap-up (BGU) breakouts. Both CSX Corp. (CSX) and Union Pacific (UNP) are currently testing their 20-demas after going nowhere following their respective BGUs.

The chart of CSX serves as the representative for both. My inclination is to view either as a short if the general market continues to correct, and I would even be willing to short either or both, right here. In that case I would simply use their respective 10-dmas, only a buck higher from today’s close in each, as a guide for a tight upside stop.



Cyber-Security Names

The scene in cyber-security land has been no different than most other areas of the market. Among those I’ve discussed in recent reports, CyberArk Software (CYBR) can be considered to be the last man standing ahead of next week’s expected earnings report.

Aside from CYBR, these names all look like garbage, although something like Qualys (QLYS) might be interesting if it can hold the pullback into deep support at its 20-dema and the general market finds its feet. This pullback has also brought QLYS down right on top of its prior base range from which it emerged over two weeks ago.



Chinese Stocks

Needless to say, the trade turmoil has decimated most Chinese names. Alibaba (BABA) can serve as the poster child for the group, given its status as the biggest of the big-stock Chinese names. It also serves as a stark example of yet another failed breakout, and one more reason why I avoid buying breakouts as an initial entry.



Speaking of breakouts, I noted a few today that occurred after earnings reports. Here is my breakout group chart for the day, below, but all of these are quite extended. I might add these to your long watch list, however, just in case any of them has a constructive pullback closer to their precise breakout points.



The Weed Patch

Everything in the Weed Patch looks quite wilted, aside from Canopy Growth (CGC), which is the lone cannabis grower still holding up in its pattern. However, a breakout last week did what most breakouts do in this market, it failed. The stock has since slid back down to its 20-dema.

Throughout the market turmoil of the past three days, however, CGC has held support at the 20-dema while volume is drying up, reaching -48% below average today. This puts CGC in a lower-risk entry spot using the 20-dema as a tight selling guide. If it breaches the 20-dema, then it may become a short-sale target within the proper market context of a continued correction.



Recent IPOs

Lyft (LYFT) attempted to rally this morning after reporting earnings yesterday after the close. But the rally fell apart in the worst possible way as the stock broke to lower lows on heavy selling volume. While anyone who bought the U&R long set-up near the 55.56 prior low from mid-April was doing okay early this morning, the break below 55.56 was your final signal to exit.

For my money, taking profits before the earnings report was the preferred way to go. This left open the possibility of shorting LYFT (yes, shares can be borrowed, at least at one of my brokers) today when it couldn’t hold up near the 20-dema. The stock is now finished as a long play, unless it can rally back above the 54.32 low of two weeks ago.



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, “I expect this market will remain tricky.” The action so far this week makes that point, and poignantly so. One tweet from the President on Sunday sent the bulls’ world spinning out of control. It definitely puts the fear of God into the hearts of bulls, to be sure.

Meanwhile, the bottom line for this market is all about risk vs. reward. With the news flow becoming skittish, the market may easily sell-off further depending on how the current trade turmoil resolves. Certainly, after a strong rally off the late-December lows that saw the indexes making new highs last week, any excuse to sell and take profits might get things spinning on the downside.

Thus, with so much uncertainty flooding into the equation, the risk doesn’t make any potential rewards worth the trouble. Especially since a tweet here, a tweet there, an off-hand comment from the Trump Administration’s minions, or comments from Chinese officials can bring into play a significant element of randomness. If you like taking big risk and making binary bets, then I suppose this is the market for you!

If you believe that China will bow to the will of the great and powerful President Trump, then I suppose you load up long in expectation of a favorable resolution. If the resolution is negative, then you risk getting caught in a big gap-down open.

If you think that the Chinese have been pushed into a corner where they cannot be seen to be losing face, then I suppose you load up on the short side. If the resolution is positive, then you risk getting your head ripped off if the market rallies sharply in response.

Those are not odds that I like to play with, frankly. Thus, I am content to lay back, perhaps take some swing-trades or day-trades if I can get ‘em, as was the case on the long side Monday morning, and let things sort themselves out. 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.

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