The Gilmo Report

November 10, 2019

November 9, 2019 12:36 pm ET

Dueling U.S.-China trade news has been the order of the day, although the merit of various reports as actual news remains suspect. Reports of “agreements in principle,” comments from either side about what might or might not be included in a so-called Phase One trade deal and the like have moved the markets. The bottom line is that no trade deal has been inked.

All the hopeful musings about trade were quashed on Friday when President Trump told reporters that he has not yet agreed to roll back tariffs in any Phase One agreement. But then, he didn’t say that he couldn’t at some point. After spinning around, the indexes all ended the day up to maintain their hopeful tone.

All the Big Three major market indexes posted all-time closing highs.  The S&P 500 and the Dow look similar to the NASDAQ Composite Index as they closed higher but below Thursday’s intraday highs on much lighter volume. The Naz led the rally with a 0.48% move vs. the S&P’s 0.26% and the Dow’s 0.02%.

 

 

Precious metals have continued to take a hit, along with bonds, as various Fed heads roam on the speaking circuit talking about how the economy is in a good place, their work is done, and that no further rate cuts are necessary. All is well in the world, at least according to the Fed, and that has been enough to send the U.S. Dollar and interest rates higher, while bonds and precious metals took a tumble.

Both the SPDR Gold Shares (GLD) and the iShares Silver Trust (SLV) closed below their respective 137.80 low of October 1st and 15.83 low of September 30th on Friday. Selling volume receded from Thursday’s levels, but the bottom line with both the GLD and SLV is that only rallies back above those lows would trigger them as undercut & rally (U&R) long entries. Any higher entries have been stopped out, end of story.

 

 

Despite the noise of the news and fake news regarding the U.S.-China trade talks, the alt-currency trade has continued to hold up. Big-stock NASDAQ names refuse to break down, and constructive action was seen this past week in all those that I have favored and discussed in recent reports.

Apple (AAPL) posted an all-time closing high on very light volume Friday. The stock has been pushing higher over the past two trading days on below-average volume. The only way to see this as a problem would be for the stock to first bust the 10-dma on heavy selling volume. So far, that hasn’t happened.

In the meantime, constructive pullbacks to the 10-dma are the only references for lower-risk entries from here. AAPL strikes me as the ultimate alt-currency stock, and its trend over the past month or so despite tepid 4% earnings growth in the latest quarter seems to argue in favor of that.

 

 

Alphabet (GOOG) has continued to trundle higher, posting an all-time high on Thursday on well above-average volume. In this position only pullbacks to the 10-dma would be your nearest references for a lower-risk entry. GOOG was last buyable along the 10-dma per my initial comments on the stock in my report of two Wednesdays ago.

 

 

Amazon.com (AMZN) ran into resistance at its 200-dma on Thursday on higher but below-average volume and then found support at its 20-dema on Friday as volume contracted. It’s also on top of a prior area of price congestion from the second half of October. If the general market continues higher, then AMZN might very well be in a buyable position using the 20-dema as a tight selling guide.

 

 

Facebook (FB) is sliding into its 20-dema as volume declines. This comes after last week’s big-volume stalling pocket pivot. In this position FB is in a lower-risk entry spot using the 20-dema as a tight selling guide, or the 50-dma as a wider selling guide.

 

 

Netflix (NFLX) posted an odd-looking stalling pocket pivot on Thursday and then held support at its 10-dma on Friday as volume dried up. For now, this puts the stock in a buyable position using the 10-dma as a tight selling guide. NFLX would need to bust its 50-dma to morph back into a short-sale at this point, and so far, it continues to hold up.

 

 

Tesla (TSLA) has pushed up nicely off its 10-dma after being buyable along the line on both Monday and Wednesday of this past week. It tested its highs of two weeks ago on Thursday and stalled slightly on heavy volume. It then held tight on Friday as volume contracted sharply. That strikes me as constructive action.

As of the last reported date, October 15th, TSLA short interest was 37.1 million shares, still quite sizable. That was before earnings, however, so it will be interesting to see how much short interest remains in the stock once the October month-end short-interest is reported.

Meanwhile, TSLA continues to torture the shorts as it posts higher highs. From here, only constructive pullbacks into the 10-dma would offer lower-risk entries. Only a big-volume breach of the 10-dma and then the 20-dema would end the shorts’ misery, and that has yet to happen.

 

 

More evidence of the validity of my alt-currency theory is found in Microsoft (MSFT). The stock gapped out of a very choppy and sloppy base last week after earnings, and then held very tight until Friday when it bounced off the 10-dma and into new high price ground.

What’s interesting about MSFT is that its action over the past two weeks since it gapped up to new highs is the tightest seen in the stock for many months. MSFT has been one of those steady 15-20% earnings growers and at 33 times 2020 estimates it perhaps becomes an alt-currency as well.

 

 

We see money continue to flow into other names I have discussed as alt-currency candidates during my video reports. Cisco Systems (CSCO), Intel (INTC), and Oracle (ORCL) have all moved higher this past week. CSCO is expected to report earnings next week, so there may be something to trade there once earnings are out. Alt-currencies live!

The action of semiconductors on Friday was interesting, since the group held up in the face of Trump’s comments about not agreeing to a tariff rollback. The group tends to be sensitive to the trade news, and most of these names held in there as volume declined.

Applied Materials (AMAT) dipped below the 10-dma on Friday morning on the latest trade news but pulled itself together enough to close above the 10-dma and up for the day. Volume dried up sharply as sellers failed to swarm the stock. AMAT is expected to report earnings next Thursday, so for now this one is on the Earnings Watch List.

 

 

A semiconductor equipment-maker cousin to AMAT, KLA-Tencor (KLAC) reported earnings last week, and missed. It broke lower two Thursdays ago in response to earnings but found support roughly on top of its prior base and bounced sharply on heavy volume. Despite a miss and initial sell-off in response to earnings, the stock recovered to close back above its 10-dma on big volume.

It has since backed and filled along the 10-dma and 20-dema, and held up on Friday at the 10-dma as volume dried up sharply, almost identical to AMAT. This may offer a clue as to what to expect from AMAT when it reports earnings, and we might also expect that KLAC will move in sympathy to AMAT, so this is something to watch next Thursday.

 

 

Micron Technology (MU) appeared to have more trouble with the trade news, gapping down on Friday and making a break toward its 50-dma. Volume was below average however, and the stock held the 50-dma. This can therefore be viewed as a lower-risk entry here using the 50-dma as a tight selling guide.

 

 

Advanced Micro Devices (AMD) weathered the heavy selling off the peak that we saw on Tuesday. The stock is technically still within range of Monday’s breakout. A pullback to the 10-dma would offer the lower-risk entry, which I would prefer, but so far AMD refuses to give up much ground following the Monday breakout.

 

 

One of my go-to longs, Guidewire Software (GWRE) gave buyers an entry opportunity earlier in the week, as I discussed in Wednesday’s report, when it pulled into the 10-dma. It then followed that up with a subtle pocket pivot at the 10-dma on Thursday before launching higher on Friday. It is now extended, but an example of something more high-octane that is working in this market.

 

 

Keysight Technologies (KEYS) posted a new closing high on Friday but for the most part remains within a three-week range it has formed since breakout in mid-October. It remains within range of that breakout. Earnings are expected on November 26th, so buying it now implies that one is looking for a sharp move ahead of earnings.

Unlike GWRE, however, KEYS is not showing any pocket pivots as it pushes higher on weak volume. I would still look for pullbacks to the 10-dma as the better, lower-risk entries, with the most opportunistic approach being to look for any pullback to the 20-dema.

 

 

RingCentral (RNG) is testing its prior early-October highs as it moves higher following the double pocket pivots at the 10-dma that we saw on Tuesday and Wednesday. I’d like to see how RNG acts on a retest and pullback to the 10-dma from here. A constructive pullback could put it in a lower-risk entry position, while a breach of the 10-dma and 20-dema would turn the pattern bearish. Play it as it lies.

 

 

DocuSign (DOCU) can’t quite make up its mind as to whether it wants to be a long or a short here as it swings around its 10-dma and 20-dema. Monday’s failed breakout led to a breach of the 10-dma and 20-dema on Wednesday, but the stock reversed to close back above the line. This triggered a moving-average undercut & rally (MAU&R) long entry as I discussed on Wednesday.

DOCU then rallied back up through the 10-dma early on Thursday before reversing to close back below the line. On Friday, the inconclusive action continued as the stock found support at the 20-dema and then closed just above the 10-dma.

The reality of DOCU’s technical situation is that it remains within a shallow uptrend channel where it has been a short at the highs of the channel and a buy at the lows of the channel. Aside from that, it doesn’t seem to obey the moving averages much. In this position, and if the general market continues higher, it can be treated as a long here as an MAU&R at the 20-dema until and if it breaches the 20-dema.

 

 

It’s very rare in this market to see a stock develop a lot of upside momentum after a pocket pivot, but that is exactly what Momo (MOMO) has done over the past week. I discussed the pocket pivot in last weekend’s report, and the stock has streaked to higher highs from there. Note the range breakout to higher highs on Monday that was not buyable as it quickly pulled right back below the breakout point.

The ensuing pullback over the next two days offered a more opportunistic entry, and MOMO pushed higher into the end of the week. Among the four Chinese names I’ve discussed in recent reports, it has been the best performer by a wide margin. It is now extended.

 

 

Meanwhile, Alibaba (BABA) and JD.com (JD) continue to edge higher as they push beyond prior highs. Both are extended, but note the two pocket pivots in JD’s move over the past two weeks. I discussed the idea of stalking BABA on the short side into this rally on Wednesday. But the fact that Chinese stocks didn’t reverse to the downside on the President’s statement on tariff rollbacks negates this idea, at least for now.

 

 

The fourth of the Chinese names I’ve discussed in recent reports, Baozun (BZUN) is clearly the weakest. It is now back below its 200-dma, but notice that on Wednesday it pulled a U&R move along the prior October lows at 40.56 and 40.50. This might pull in to test those lows, which could put it in a better U&R entry.

Note that BZUN is expected to report earnings on November 21, while MOMO is expected to report on November 26th. How much mo-mo either can develop ahead of earnings, if at all, is certainly something to watch for.

 

 

Netease (NTES) has been a volatile Chinese name as of late. Note the breakout in mid-October that quickly failed, but the stock then found support near its 50-dma and has rallied from there. The company is expected to report earnings on November 20th, but I’m seeing a possible long trade ahead of earnings here as the stock pulls into the low of its buyable gap-up (BGU) price range.

The BGU of this past Monday posted an intraday low of 298.23 and NTES closed just above that on Friday. Thus, this could be treated as a long trade right here, using the 298.23 price level as a tight selling guide. Note how the BGU move streaked higher but on Tuesday failed completely – this is typical action for a market that displays unstable action at times but serves as a strong argument for always taking the opportunistic approach rather than chasing strength in most cases.

 

 

Payments stocks have been all over the place lately, offering swing-trades in either direction. Global Payments (GPN) is perhaps the most constructive of these stocks.  but note that the initial gap-up move after earnings failed near the prior highs in double-top fashion. This created a quick swing-trade short down to the 20-dema, which runs just above the 50-dma.

At that point the stock filled the prior gap-up rising window, a typical gap-fill, and then bounced. This sort of action is not unusual in this market, which often has a contrarian sort of tone to it – when something rallies sharply within the confines of a pattern it often becomes a short. And when it breaks down, it can often turn into a long. GPN illustrates this.

 

 

One point I might make about the big-stock payments names, namely MasterCard (MA) and Visa (V), is that they can be viewed as alt-currencies given the steady-state nature of their business. In the group chart below, which also includes PayPal (PYPL) and Paycom (PAYC), we can see that MA and V more or less act like technical twins as they pirouette around their 50-dmas.

MA looks like it could trigger as a short if it reversed back below its 50-dma, while V maintains support at its 50-dma. PYPL is deep down in its pattern, so looks like it could reflex rally back up toward its 50-dma, while PAYC, one I’ve added to the mix here, is clearing its 50-dma on expanding volume.

These are 360-degree situations, in my view, that could resolve in either direction depending on what the general market does from here. In addition, I see some potential for MA and V to function as alt-currency type plays given their big-stock payments status and established, reliable business models.

 

 

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.

There is no disputing the fact that the major market indexes are in an uptrend that extends from the late-September/early-October lows. During that uptrend, however, I’ve found many set-ups on both sides of the market that have worked well. In most cases, these are high time-value swing-trades, and not much more.

This is why I call this a 360-degree market, where set-ups in both directions show up, and where stocks can act like short-sale targets for a few days and then long targets for a subsequent few days. While difficult, it is a very fascinating market environment from my perspective.

The paradox that makes it difficult to determine what exactly is driving this market is that if we assume three rate cuts from the Fed have increased liquidity, then we would expect that not only would stocks rally, but so would bonds and precious metals. But that has not been the case this past week. The expected linkages and correlations are not playing out as one might assume.

All we can do is go with what works and be alert to potential changes as this rally gets extended. Does it peter out, or do we see an expansion into other areas of the market. In my view, the alternative-currency, or alt-currency as I abbreviate it, theme is a valid one and will remain so until it ends. Focusing on big-stock names as they come into lower-risk entry spots on pullbacks has worked reasonably well.

The question is whether this expands to other dormant areas of the market (e.g., big-stock payments names). I see a lot of other areas of the market where Ugly Duckling set-ups may be popping up, and this will be the main topic of this weekend’s Gilmo Video Report (GVR).

Meanwhile, earnings season continues, and this has provided a fertile field of high time-value trades long and short for those nimble and flexible enough to capitalize on them once a report is out. For now, my approach incorporates three basic ideas: 1) how does the alt-currency theme play out, 2) does this spread into other stocks and how do I identify these candidates, and 3) where can I find high time-value swing-trades after earnings reports, A 360-degree strategy for an unusual environment – 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.

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