The Gilmo Report

November 18, 2018

November 17, 2018

A nice downside break after the phony follow-through day of two Wednesdays ago has been followed by two days of a rally in the NYSE-based indexes. Overall, however, the market appears to be stuck in a chop-zone that lies well off the early-October highs and the late-October lows.

The Dow Jones Industrials is currently the leading index on a relative basis since it is the only major market index to sit above its 200-dma. Last week it was the only one to regain its 50-dma but has since given it up on a sharp downside break that carried below the 200-dma before the index regained the line on Thursday.

Friday’s rally occurred on higher options expiration volume, but only carried to the mid-point between the higher 50-dma and the lower 200-dma. Intraday volatility remained the rule of the day, as more comments from various members of the Trump Administration, including the President, regarding the trade war with China has sent the indexes flying to and fro over the past few days.

 

GR111818-$INDU

 

The S&P 500 has also rallied for two days straight but ran into resistance on the approach toward the 200-dma before stalling on higher options-expiration volume. It made a run for the 50-dma last week on the phony follow-through, but never quite made it. Instead, it ran into resistance right along the mid-October peak, and remains in a big chop zone between the early-October highs and the late-October lows.

 

GR111818-$SPX

 

The NASDAQ Composite Index only managed a rally on Thursday as it closed in the red on Friday. Volume was lighter, despite triple-witching options expiration. It remains well below its 50-dma, which it briefly regained two Wednesdays ago in conjunction with the phony follow-through. It remains the weakest of the major market indexes.

 

GR111818-$COMPQ

 

With the Thanksgiving holiday coming up this Thursday, it’s not clear if anything decisive will occur over the next three trading days. Two-day and one-day rallies after a sharp break from the prior week’s highs do not necessarily signify a low, but the market could still chop around here as it potentially builds a bear flag just above the prior October lows.

A so-called melt-up may also be possible. But in my view, this would most likely set up a more optimal short-sale entry position in the indexes and most broken formerly-leading stocks. Even the rally of the past two days can be seen to be potentially setting up a stock like Apple (AAPL) for short-sale entry at the 200-dma. The stock undercut some prior July lows on Wednesday, triggering an undercut & rally reaction.

That move has carried two days so far but stalled at the 200-dma as volume declined in a wedging type of move. While I suppose AAPL is far down enough in its pattern to spark a strong reaction rally from here, it would certainly need to clear the 200-dma first, and it wasn’t even able to do that on Friday. We can see how the stock failed on a late-stage breakout in early October and has since plummeted through the neckline of a fractal head-and-shoulders formation over the past couple of weeks.

The fractal H&S is subtle, but very real for the stock. We now hear a great deal about how cheap the stock is, yet the market doesn’t seem to think that AAPL is cheap, even at 14 times next year’s estimates. But, as I’ve said before, a P/E ratio, even a forward ratio, is merely an indicator of how much the market values a given company’s forward earnings stream. In this case, the low forward P/E for AAPL tells you that the market views its forward earnings stream as suspect.

 

GR111818-AAPL

 

The follow-through day of two Wednesdays ago only served to create a shortable rally in Netflix (NFLX), which was pretty much the case for most busted former leaders. It has since rolled over to test the prior late October lows, with nary a sign of a bounce. As with AAPL, however, NFLX is so far down in its pattern that a random reaction rally is always possible.

 

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On the other hand, just because a stock is sitting deep down in its chart pattern after a nasty break off the peak doesn’t mean it has a right to rally. Nvidia (NVDA) discovered this after disappointing on earnings Thursday after the close. Pundits were declaring that most of the bad news in the stock had already been priced in, so a rally after earnings might be in the cards given the stock’s oversold condition.

But oversold only became even more oversold as NVDA gapped down Friday morning and stayed down all day. This could be viewed as a shortable gap-down (SGD), using the 170.66 intraday high as a guide for an upside stop. The stock closed at 164.43 on Friday, so any rally up closer to 170.66 might present a lower-risk entry on the SGD.

 

GR111818-NVDA

 

Microsoft (MSFT) remains perhaps the best-acting of the big-stock NASDAQ 100 names, but it, too, is forming a fractal head and shoulders. We can see that the follow-through of two Wednesdays ago only helped create another right shoulder in the pattern and a shortable move as the stock poked back above the 50-dma.

As I wrote on Wednesday, rallies back up to the 20-dema, which is in confluence with the 10-dma, would present potential lower-risk short-sale entries. The stock pushed right up into the two short moving averages on Friday, where it stalled and closed 22 cents above the 10-dma. In this position, it could rally further to the 50-dma, which is less than 2% higher, so I’d remain fluid if attempting to short MSFT into this rally.

 

GR111818-MSFT

 

Amazon.com (AMZN) displays the same type of failed rally that occurred with the phony follow-through day the prior week. In this case, the rally carried up through the 200-dma but stopped about mid-way to the 50-dma before rolling back below the 200-dma. It found some decent volume support on Thursday as it tested the prior late-October lows, but could not manage much of a follow-through rally on Friday.

From here, I still view AMZN as a short-sale target. Thus, any rally up to the 200-dma would offer a more optimal short-sale entry, although it is possible that the most optimal short-sale entry already came and went when the stock pushed back up through the 200-dma in conjunction with the phony market follow-through.

 

GR111818-AMZN

 

I continue to monitor the action in the four breakouts that I discussed on the day of the follow-through, Twilio (TWLO), Tableau Software (DATA), Etsy (ETSY), and Planet Fitness (PLNT). All four of these breakouts occurred as buyable gap-up moves after their respective earnings reports were released and on the exact day of the now-failed market follow-through day.

The reason I keep these on my primary radar is because I believe how these recent breakouts fare will provide a clue as the eventual direction of the market heading into year-end. All four are in uncertain positions, although each has been tradeable both long and short on a short-term swing-trading basis over the past week-and-a-half. As I did this past Wednesday, let’s update things with a review where each of these is at currently.

Despite being quite shortable near the $100 Century Mark for a quick scalp following a buyable gap-up (BGU) breakout two Wednesdays ago, Twilio (TWLO) technically never broke below the intraday low of that BGU price range. This kept the BGU alive, and as I noted in my report of last weekend could have been buyable near the lows of the BGU price range at 80.70 three days later.

To some extent, the indecisive action of all four of these follow-through day breakouts reflects the same type of choppiness that we see in the general market. Meanwhile, TWLO found support near the 80.70 BGU low and its 10-dma, enabling it to attempt another breakout on Thursday. On Friday, the stock held relatively tight right at the breakout point as volume declined.

Technically, this is in a lower-risk buy position here right on top of the base. Only a breach of the 20-dema and the prior BGU intraday low at 80.70 would trigger this as a late-stage, failed-base, short-sale set-up. But, Friday’s close at 89.17, just above the 88.88 left-side peak of the base, keeps this alive as an actionable breakout and a buyable gap-up, although the lowest-risk entry occurred on the pullback this past Monday and again on Thursday when the stock hit intraday lows of 81.78 and 82.22, respectively.

In this position, TWLO looks like it wants to rally from here, with risk kept tight by using the 10-dma as a selling guide. How this plays out will likely depend on where the general market goes from here. So I would keep this in your back pocket as a possible long play if we see a melt-up into the Thanksgiving holiday. Otherwise, you know what to do if the stock breaches the 20-dema and the 80.70 BGU intraday low.

 

GR111818-TWLO

 

Tableau Software (DATA) broke below the 112.54 intraday low of its buyable gap-up move but held support at the 50-dma. It is now wedging up along the rising 10-dma and attempted to break out again on Friday before reversing and closing slightly lower on higher selling volume. This is now sitting just below the left-side peak of the base and on top of the 10-dma.

This, therefore, becomes a two-sided situation. If it can hold the 10-dma, then it sits in a lower-risk entry position using the 10-dma as a selling guide. A breach of the 10-dma followed by a breach of the 20-dema would then trigger the stock as a late-stage failed-base (LSFB) short-sale set-up.

 

GR111818-DATA

 

Etsy (ETSY) had a nice two-day rally that began with a buyable gap-up after earnings. That made for a decent swing-trade on the long side before it reversed on the second day after the BGU day. I played this as a short above the $55 price level and was quickly rewarded as the stock reversed and then headed lower before finally finding support along its 50-dma.

I wrote on Wednesday that rallies up into the 52 level and the left-side peak of the base could offer lower-risk short-sale entries. The flip-side here is that with the stock showing some supporting action at the 50-dma on Friday, it becomes a lower-risk long entry using the 50-dma as a tight selling guide. Should it breach the 50-dma, it would then trigger as a short-sale at that point.

You can see so far that all three of the names I’ve discussed, TWLO, DATA, and ETSY, are acting indecisively. As a result, they’ve been playable both long and short over the past week-and-a-half as they show no desire to trend strongly one way or the other. Therefore, handling these requires some flexibility and the ability to sniff things out as the stocks approach potential resistance or support.

 

GR111818-ETSY

 

The fourth member of this quartet, Planet Fitness (PLNT), is no different. It’s a buyable gap-up, while very playable as a long swing-trade, didn’t hold up very long as the associated base breakout failed two days later. But the stock found support at the 50-dma and has since bounced, edging up along its rising 10-dma as volume declines.

PLNT then stalled right near the breakout point at the left-side peak of the base on Friday and closed in the red. This is a little bit like DATA, which sits in a similar position along its 10-dma, such that it could be considered buyable here with the idea of using the 10-dma as a tight selling guide. A breach of the 20-dema would then trigger the stock as a late-stage, failed-base short-sale at that point.

 

GR111818-PLNT

 

For good measure, we can throw Canada Goose Holdings (GOOS) in with these other four stocks as a buyable gap-up and base breakout that occurred after earnings more than a week after the failed market follow-through day. As I discussed in Wednesday’s report, the gap-up move started the day out on Wednesday as a buyable gap-up before morphing into a shortable gap-up as it peaked above the $72 price level and then reversed to close down at 64.45.

That was more than a 10% swing off the intraday high of 72.27, and even more when measured against the intraday low of 61.76, which was posted after the 72.27 intraday high was put in. Now that’s some crazy volatility for one stock, and offered playable intraday moves on both the long and the short side on the same day.

GOOS regained its momentum on Thursday, however, and broke out again. It then pushed higher on Friday to close at 70.05, two points below Wednesdays BGU intraday high. The question now is whether the fireworks are over, and GOOS will drop back toward the breakout point at around 65, possibly even failing again on a breakout attempt.

The situation here remains fluid but is entirely representative of the types of swing-trades we’re seeing as these breakouts fly back and forth around their breakout points. I tend to think that how each of these five names plays out from here will coincide with the impending action of the general market. Therefore, these remain two-side situations that could resolve in either direction, and traders must be alert to the proper intraday cues, when they occur.

Right here, GOOS looks a little bit extended as it runs up to the highs of Wednesday’s BGU price range and could turn out to be shortable near the $72 price level if it rallies that far this coming week. That said, some sort of consolidation along the breakout point and the $65 price level could set this up for a bigger upside move. That may seem to be a bit of a stretch in this market, but stranger things have happened.

 

GR111818-GOOS

 

In this market I don’t have enough fingers to count the number of apparently orthodox short-sale set-ups that don’t play out as short-sale set-ups. Shopify (SHOP) was looking like a short as it ran up into resistance around its 50-dma and 200-dma on Wednesday, but it just kept on rallying right through both moving averages. Note also that Thursday’s action constituted a pocket pivot move through the 50-dma.

SHOP briefly tested the 50-dma on Friday as it printed a high above 151 early in the day and then backed down below 147 before turning back to the upside and rallying to close up on the day and right near the peak of the prior week. I shorted the stock early in the day at around 151 and then covered when the stock dropped below 147, but if I was as shrewd as I like to think I am I should have gone long at that point!

But the way this market and individual stocks slosh around on an intraday basis keeps investors on their toes, and I’m generally happy to catch a good move in one direction, assuming I can catch it at all. That’s how crazy this market is, and I’m sure any of you who are trading it currently will agree.

So, what do we do with SHOP now? Well, the first possibility that comes to mind is that it will find resistance here along the prior week’s highs and roll over. But that is most likely to occur if we see the general market roll over. Going into the Thanksgiving holiday we could just as well see a melt-up type of rally.

 

GR111818-SHOP

 

Another stock that can’t seem to decide whether it wants to be a short or a long is Twitter (TWTR). The stock failed to hold its 200-dma last Friday and broke below the line on Monday as the market came apart that day. Now we see it rallying back up to the 200-dma on light volume. This of course suggests the idea of shorting the stock here while using the 200-dma as a guide for a tight upside stop.

If we back away a bit here and forget about the moving averages, what we see is a bottom-fishing buyable gap-up (BFBGU) move at the end of October that carried higher until it ran into trouble this past Monday when the general market rolled over in earnest. Overall, TWTR remains within the 3- to 4-week price range it has formed since the BFBGU.

The pullback earlier this past week didn’t drop below the BFBGU intraday low and the stock is now wedged between the 20-dema and the 200-dma. This is how I approach TWTR at this point: If it busts the 20-dema it triggers as a short, and if it breaks above the 200-dma it triggers as a long. One could also test it as a short right here at the 200-dma, but with the idea of flipping long if it clears the 200-dma.

 

GR111818-TWTR

 

Following up on the railroaders that I discussed in Wednesday’s report, they strike me as simply sitting on the fence here, so to speak, as the market chops around. CSX Corp. (CSX) pushed past the 50-dma on Thursday, defying short-sellers as it pushed even further above the 50-dma on Friday. The stock then stalled off the intraday highs to close in the lower half of its daily trading range on lighter volume. Note also that the stock is trading up to the area of overhead supply defined by the base that it formed throughout August and September.

So, is this a long or a short? My tendency is to think that this is a short using the high of Friday as a tight stop. Better yet, I would want to see the stock break back below the 50-dma as confirmation, so the other option is to wait for that as a short-sale trigger. Otherwise, it could set up along the 50-dma in anticipation of another move to the prior highs, which do not lie too far off from Friday’s close.

 

GR111818-CSX

 

The other two railroaders I discussed in Wednesdays’ report also lie on the cusp of failure or success. Union Pacific (UNP) has rallied back up to its prior follow-through day highs but reversed back to the downside on Friday as volume waned. It 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.

 

GR111818-UNP

 

Norfolk Southern (NSC) in fact posted a pocket pivot move through its 50-dma on Thursday in a show of nascent strength. There was no follow-through to this on Friday as the stock stalled and reversed at its 50-dma, which would represent near-term resistance and therefore a short-sale point. Overall, however, the action in all these rails is indecisive as they remain in choppy uptrends off their late October lows.

Those prior sell-offs in the middle of October were brutal across the board as the group literally came off the rails. What drives my thinking here with respect to these as short-sale plays is their large PE-expansions. These stocks all sell for more than 20 times earnings when, historically, the norm for railroaders has been anywhere from 6-10 times earnings.

In this sense, therefore, they are vulnerable to PE-contractions in the same way that I felt Intel (INTC) and other big-stock semiconductors selling at 30-40 times earnings were vulnerable over a month ago, and now INTC sells at an 11 PE.

Ultimately, the technical action rules all, and so we can only monitor these as potential short-sale targets as they flirt with overhead resistance. If the general market rolls over and potentially breaks to lower lows, the railroaders may become vulnerable to further downside, making them strong short-sale candidates. When and whether that happens, however, is something we can only watch for and react to if and when the time is right.

 

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Intraday volatility in the market has been exacerbated by the flow of comments coming out of the Trump Administration as the President comments that China “wants a deal badly” and then other administration officials come in and say not to read too much into those comments. Meanwhile, one day U.S. Trade Rep Robert Lighthizer says that additional tariffs on China are “on hold” and then a little later Commerce Secretary Wilbur Ross says that 25% tariffs are set to go into effect on January 1st.

If something materially positive did in fact develop, beyond all the hints and innuendos coming out of the President’s “rear portal,” as I like to say, this would likely send Chinese names shooting higher. However, I tend to think that what has ailed the Chinese stocks is more the economic situation in China than the direct and material effects of tariffs. Nevertheless, I am always on the lookout for anything that might be brewing in the space, and I remain positive on Viomi Technology (VIOT), which I have discussed at length in numerous prior reports.

VIOT is expected to report earnings some time in December and appears to be content to remain in its current IPO base until then. Meanwhile, among the stocks I follow in the space, which is essentially all of them, Bilibili (BILI) continues to show up as one of the steadier names. Unlike other Chinese names which have been in steep downtrends with sharp bounces along the way, BILI bottomed back in mid-August.

Since then, BILI has slowly and steadily moved higher within a shallow uptrend channel. Along the way there have been several “blue spikes,” or high-volume up days, many of which constituted strong-volume pocket pivots. More recently, the stock has posted two pocket pivots in a row along the 10-dma as the indicator bars along the top of the chart start to show more blue color, which is positive.

All of this speaks to steady accumulation of the stock ahead of its expected earnings report this Tuesday after the close. Therefore, I would watch for something to develop around earnings. Perhaps a buyable gap-up, or even a move down to the lows of the ascending trend channel that then holds and reverses. Who knows, but I think this is one to watch on earnings Tuesday.

 

GR111818-BILI

 

I’ll be discussing Chinese names and other ideas on my plate currently in this weekend’s Gilmo Video Report, or the GVR as some of our more creative members have recently dubbed it. There are some interesting bottoming formations, but not necessarily what you would expect.

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 market sits in no-man’s land, with numerous stocks sitting on their various fences, either bullish or bearish or even a two-side combination of both. This therefore strikes me more as a trader’s market and much less of an investor’s market, although one can always try out long positions if and when appropriate, with the idea of cutting and running quickly if things don’t work out.

I am open to the idea of a choppy, range-bound market that does little to resolve itself after the steep decline we saw in October. What this does, however, is set up opportunistic swing-trades in either direction, depending on the available real-time evidence. Therefore, adopting a strict, rigid bearish position is not necessarily advisable. We must allow ourselves to be open to whatever evidence presents itself at the point of impact and go from there.

To help keep you all in a balanced state of mind, I give you my current working long watch list for this weekend below. This may change by the time Monday’s open rolls around, and I will discuss some of these names and anything new added to the list in my weekend GVR.

 

GR111818-Watch_List

 

On an administrative note, please note that because of the shortened Thanksgiving holiday weekend we will be publishing the mid-week written Gilmo Report on Tuesday instead of the usual Wednesday. Finally, I would like to thank all those members who have upgraded to the new Premium Gilmo Report plan. My honest view is that the pilot program for the video reports proved to be quite successful in its ability to add significant value to our members’ respective investment processes.

For that reason, I believe strongly that the additional, minor cost of upgrading is far out-weighed by the profit potential of GVR ideas that are presented, and I intend to do my part to ensure it stays that way. Again, thank you for your support, as it is much appreciated by both myself and my staff, all of whom work hard to produce what we believe is still the best stock market commentary on the Internet at a very reasonable cost.

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.

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.