The Gilmo Report

November 14, 2018

November 14, 2018

The so-called follow-through day of exactly one week ago did what most follow-through days do – it failed. For the bulls this creates more of a mess of this market, while opportunistic shorts have prospered over the past few trading days since the FTD. In the process, both the Dow Jones Industrials and the S&P 500 Indexes broke near-term support, with the Dow dropping below its 50-dma while the S&P gave up the ghost at its 200-dma on Monday.

Both indexes dropped further yesterday and today, with the Dow closing below its 200-dma today on heavy selling volume. Volatility was crazy today, however, as the Dow plummeted over 350 points, then rallied back near the unchanged line as we moved into the final hour of trade. The index could not hold the late-day rally and slid back to the downside, ending the day just below the 200-dma as it appears headed for a retest of the late-October low.

 

GR111418-$INDU

 

The S&P 500, which busted its 200-dma on Monday, attempted to rally back up toward the line both yesterday and today, but closed at lower lows each time. Today, the index peeled further away from the 200-dma on the downside on heavy volume. Like the Dow, it looks sets to test the October low, with the 200-dma now serving as solid upside resistance.

 

GR111418-$SPX

 

The NASDAQ Composite Index is the ugliest of the three big-stock market indexes. It had already given up near-term support at its 200-dma last Friday and has since plummeted deeper into its pattern as it heads for the late-October low. Volume was higher today as the index now sits deep down in no-man’s land.

 

GR111418-$COMPQ

 

Given the phony follow-through, which I dub a phollow-through, the breakouts that occurred at the same time last Wednesday also proved to be just as phony. In this environment, I am always on the lookout for possible late-stage failed base (LSFB) and LSA-type set-ups as highly opportunistic short-sale plays.

The four breakouts, Twilio (TWLO), Tableau Software (DATA), Etsy (ETSY), and Planet Fitness (PLNT), that I discussed last Wednesday have all panned out as late-stage breakout failures and thus worked famously over the past 4-5 days as short-sale targets. Let’s review where they are at now. Once the follow-through day failed, these became shorts as well.

Twilio (TWLO) tested the low of its Wednesday buyable gap-up price range, as I thought it might per my weekend comments. As I wrote, “A pullback closer to the intraday low of Wednesday’s BGU price range would be optimal but would also set up an opportunistic short-sale swing-trade if the stock breaks below the 88.88 new-high breakout point.” We saw that on Monday as the stock broke hard to the downside on heavy volume in a typical late-stage breakout failure.

That break took TWLO right down near the 10-dma, but it never managed much of a bounce from there. This morning it rallied up to a high of 87.45, a little over 1% shy of its prior 88.88 breakout point and reversed. At that point a short-seller well-versed in the methods used to short breakout failures, the move back into the breakout point constituted a potential short-sale entry.

From here, rallies up to 88.88, even slightly beyond to 90, could be considered optimal short-sale entries, if you can get ‘em. The time to act, however, was on the breach of the 88.88 price point on Monday. With the stock sitting at its 10-dma, a breach of the 50-dma would trigger this as a confirmed LSFB short-sale set-up.

 

GR111418-TWLO

 

Tableau Software (DATA) also busted a new-high breakout on Friday, and it pushed lower on Monday before finding support along its 50-dma. With the breakout now failed, rallies up into the breakout point can be viewed as potential short-sale entries. Note how that would have worked today as the stock reversed near the left-side peak of the base at 118.08, closing at 112.46.

DATA is another failed breakout that occurred in synchrony with the failed follow-through day. It looks much like TWLO as it sits along its 10-dma with volume declining. A clean breach of the 50-dma would trigger this as a confirmed LSFB at that point. Until then, look for any rallies back up to the left-side peak in the base as potentially opportunistic short-sale entries.

 

GR111418-DATA

 

Etsy (ETSY) briefly rallied above the left-side peak of its current base on Monday and then proceeded to roll lower from there. On Tuesday it busted apart and headed straight down to its 10-dma. The most optimal short-sale entry occurred on Friday, as I tweeted at the time.

From here, rallies into the $52 price level would offer short-sale entries from here. Otherwise, a full breach of the 50-dma would trigger this as a short at that point, using the 50-dma as your guide for an upside stop.

 

GR111418-ETSY

 

Planet Fitness (PLNT) failed on its breakout attempt on Friday, although marginally, before gapping down hard on Monday and busting through two prior new-high breakout points in the pattern on heavy selling volume. It appears that resistance lies closer to the first breakout point just below 54. For now, I’d look at rallies up into 54 as potential short-sale entries.

Otherwise, as with the prior three stocks I’ve discussed here, a breach of the 50-dma would trigger this as a confirmed LSFB short-sale set-up. Last Wednesday I noted that it was interesting to see these four stocks all breakout on buyable gap-up moves after earnings that coincided with the follow-through day.

Now, with the follow-through day a failure, it is equally interesting to see how these also failed in similar synchrony. All three represent the types of short-sale set-ups I look for when the market posts a phony follow-through because they become a matter of up-with-the-market-down-with-the-market.

 

GR111418-PLNT

 

Now that all four have failed on these breakouts of one week ago, it may take some time for them to break key support at the 50-dmas. As I’ve already noted, these would trigger any of them as confirmed LSFB short-sale plays. And, just to keep things two-sided, if the general market were for some reason able to find its feet and turn back to the upside, they could also pan out as re-breakouts.

The failed follow-through has also coincided with continued breakdowns in big-stock NASDAQ former leaders like Apple (AAPL). This gives a pretty good indication of just how bad things are getting when Warren Buffet’s favorite tech stock can’t hold its 200-dma. The stock sliced back below the line today on heavy selling volume as it undercuts a prior area of price congestion from July.

 

GR111418-AAPL

 

Netflix (NFLX) was a short on Thursday when it rallied up near its 200-dma and then reversed. This was the first day after the follow-through day and shows just how feeble individual stocks were looking even with a follow-through. It all just serves to confirm and build my case as to why I consider follow-through days entirely useless in this market.

All this latest follow-through day did was to suck in hapless base-breakout buyers and set up broken-down leaders as shorts again. The past five days have been very rewarding for the shorts, and the follow-through day did a lot to help set this up.

 

GR111418-NFLX

 

Big-stock NASDAQ former leaders have all remained weak, and there were absolutely none setting up in actionable long positions at the time of the follow-through. All remained deep down in their patterns and far away from any thoughts of getting through near-term resistance, much less breaking out.

Microsoft (MSFT) has been holding up the closest to its prior highs, rallying up to 112 on last week’s follow-through day. If any of these big-stock NASDAQ names had any chance of breaking out in support of the follow-through day, MSFT was it. But the move back up through the 50-dma lasted all of two days before the stock broke back below the line on increased selling volume.

The move up to 112 only served to create the peak of a second right shoulder in what is a fractal head and shoulders formation. Today’s break further below the 50-dma and through the 10-dma and 20-dema now puts the stock in position of testing its 200-dma once again. From here I’d look at rallies back up to the 20-dema just below 108 as potential short-sale entries.

 

GR111418-MSFT

 

In the realm of more orthodox short-sale patterns, like the venerable old head-and-shoulders top, we can see Shopify (SHOP) running up into resistance around its 50-dma and 200-dma. This brings the stock into shortable range using the 200-dma or 50-dma as guides for reasonably tight upside stops.

Note that SHOP is forming a secondary, fractal head-and-shoulders formation that occurs after the LSFB failure from a prior choppy double-bottom formation. In this position it has come off the peak of a second right shoulder and the low-volume rally into the 50-dma and 200-dma puts it in a potentially lower-risk short-sale position.

 

GR111418-SHOP

 

SHOP’s weekly chart helps to clarify what I mean by a secondary, fractal head-and-shoulders formation, which is a concept discussed in my last book on shorting, Short-Selling with the O’Neil Disciples (John Wiley & Sons, 2015). Here we see a very choppy and sloppy double-bottom formation around the peak that eventually fails in early October. That creates what later becomes the head of a fractal H&S formation that is attached to the right side of the prior double-bottom.

This illustrates how patterns can overlap in hybrid fashion as short-sale set-ups evolve over weeks and sometimes months. The bottom line here is that if SHOP is shortable, it is shortable here and/or as close to the 200-dma and 50-dma as possible, while using these as your guides for upside stops.

 

GR111418-SHOP Weekly

 

Twitter (TWTR) failed to hold its 200-dma on Monday, despite holding at the line nicely last Friday as volume dried up. Had the follow-through day of last Wednesday been more than just a phony, perhaps TWTR might have rallied off the line. Instead, as the market and the follow-through failed, so did the stock.

I tweeted this morning, for the benefit of non-premium Gilmo members, that TWTR was a short as it rallied into the 200-dma this morning. It then broke to the downside on higher volume. In this position, it remains shortable on any rallies back up to the 200-dma, while using it as a guide for an upside stop.

 

GR111418-TWTR

 

We can also see that TWTR’s pattern had to be watched for a possible failure at the 200-dma, as I discussed in my Sunday video report for premium members. The reason for this becomes obvious on the weekly chart, where TWTR can be seen to be forming what looks like a big head-and-shoulders formation. Thus, the rally back above the 200-dma has now helped create the peak of a second right shoulder in the pattern.

Now that we are some six weeks off the late September/early October peak, I am seeing more of these traditional short-sale patterns begin to show up. Whether these indicate more downside for the general market remains to be seen, but they become actionable based on the real-time price/volume action. And TWTR was quite shortable today at the 200-dma, about a buck higher from where it closed.

 

GR111418-TWTR Weekly

 

The market rally also brought railroader CSX Corp. (CSX) back up to the 50-dma where it became shortable again following the early October base-failure. That breakdown came on huge selling volume, and the stock has again come into shortable position at the 50-dma. Today, CSX, ran right into the line and reversed on higher volume.

This remains shortable on any rallies up closer to the 50-dma, although the stock closed just about 2% below the line. I would also look at the other names in the group, as both Union Pacific (UNP) and Norfolk Southern (NSC) flounder.

 

GR111418-CSX

 

Union Pacific (UNP) has been weaker than CSX as it has been unable to get up as far as its 50-dma. It reversed today at the confluence of the 10-dma and 20-dema on higher selling volume. Any rallies back up near today’s intraday highs might present lower-risk short-sale entries from here.

 

GR111418-UNP

 

Norfolk Southern (NSC) is slightly stronger than UNP but weaker than CSX as it rallied up near its 50-dma on the day of the phony follow-through, and then headed lower over the next four trading days. It also reversed at the confluence of the 10-dma and 20-dema today on lighter volume as buyers shunned the stock.

 

GR111418-NSC

 

Of these three railroads, CSX appears to be in the most optimal short-sale position given its proximity to the 50-dma. However, I would watch all three names together since any reversal by CSX at the 50-dma would likely coincide with NSC and UNP both moving lower as well.

This morning I blogged to premium members that Canada Goose Holdings (GOOS) was gapping up after reporting earnings this morning before the open. It started the day out at an opening price of 67.15 and then ran higher to an intraday peak of 72.27. At that point, the stock reversed on the five-minute 620 intraday chart as it morphed from a buyable gap-up (BGU) to a shortable gap-up (SGU). Here’s the 620 chart first:

 

GR111418-GOOS Intraday

 

We can see that the stock ran out of gas near the $72 price level, at which point the MACD lines crossed bearishly to the downside as the stock traded down to 70. That would have been a spot at which to test a short, using the highs of the day or a MACD cross back to the upside as a guide to stop the position out.

Fortunately, the stock kept moving lower and never regained the $70 price level, ending the day at 64.30, as we can see on the daily chart, below. Note that GOOS is another one of these gap-up breakout moves after earnings similar to TWLO, DATA, ETSY and PLNT last week. It is now sitting just below the two highs in the pattern, either of which could be considered a new-high breakout buy point by orthodox breakout buyers.

To me, however, this is looking like a potential late-stage base-failure, but it is still sitting more or less on the fence here. I would certainly look at taking advantage of any rallies back up closer to the $70 price level as potentially shortable moves. In this position, however, the first point of reference for overhead resistance would be the late-September peak at 65.82. The second point of reference for overhead resistance would be the late-July peak at 68.75.

Therefore, we might look for rallies first into the 65.82 price point as potential short-sale entries, with the 68.75 price point as a secondary entry area, depending on how the stock plays out from here. I would play this by trying to short as close to 65.82 as possible, and then use the 620- intraday chart to determine a stop-out point if it doesn’t work.

Otherwise, any move further to the upside would bring the 68.75 price point into play in the same manner. Ultimately, however, we would want to see a complete breach of the 20-dema and 50-dma as confirmation of a bona fide, late-stage, failed-base (LSFB), short-sale set-up.

 

GR111418-GOOS

 

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 follow-through day concept as an all-clear green light to just start buying breakouts wherever you see them has once again proven to be ill-advised. That is the nature of this market, and with so many busted leaders failing to recover in conjunction with last Wednesday’s follow-through, it was suspect from the start.

Thus, opportunistic short-sellers have had an enjoyable time over the past five days as weak former leaders rolled over and so-called fresh breakouts in so-called top-rated stocks blew up, creating short-sale opportunities for those who know what to look for using the LSA-method.

At this point, the indexes are in no-man’s land, and it is not advisable to try and chase anything on the downside. We could continue lower from here, but I would prefer to see some sort of bounce tomorrow morning which might open up the possibility of hitting stocks on the short side into such a bounce.

It would also bring into play our 620-Method for playing the leverage inverse ETFs that I am so fond of. That has certainly worked out well over the past three days as the indexes have continued lower. This morning, with the futures up sharply, a very nice opportunity was to be had playing my little friends the SQQQ, SPXU, and SDOW when everything rolled over.

This would remain the case on any rally at the open tomorrow. Otherwise, I’m only interested in taking shots at stocks sitting in reasonably lower-risk short-sale entry positions, such as SHOP, for example. For now, the follow-through is dead, and the market is back in a downtrend. There is nothing to buy, and those who do not play the short side should remain in cash. 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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