The Gilmo Report

November 20, 2018

November 20, 2018

The market has finished on the upside every Thanksgiving holiday week since 2012. Because of this, I was eagerly awaiting a little melt-up move into the Thursday holiday as an opportunity to move in on the short side. As I wrote over the weekend, “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.”

In my weekend Gilmo Video Report (GVR), I pointed out that the likelihood was that we would see the indexes eventually break for the prior late-October lows, but that they could noodle around a bit during the holiday week. Wrong! But, fortunately, it was the type of wrong I can handle, since the signals to move to the short side came early in the day on Monday, as I blogged at that time.

With the news over the weekend that the U.S. and China were engaged in hostile rhetoric at the APEC meeting in Papua New Guinea, all the rear-portal rhetoric coming from the President and his minions about a trade deal with China last week went out the window. At least as far as the market was concerned, and the first sign, for me at least, was the MACD cross in the ProShares UltraPro Short QQQ ETF (SQQQ) 50 minute before the opening bell, shown on the five-minute, 620 intraday chart from yesterday.

 

GR112018-SQQQ Intraday

 

I am not averse to taking a position in any of these inverse ETFs if a signal occurs in pre-open trade, since they tend to be highly liquid in both the pre-open and after-hours trading sessions. The SQQQ seems to have the best liquidity with the narrowest spreads, usually a penny. In any case, after that MACD cross and the one just after it at the open, the SQQQ never looked back, and the SQQQ trended higher all day.

The 620-chart MACD buy signal in the SQQQ pre-open was a precursor to a sharp sell-off yesterday, and the carnage gained momentum today. The Dow Jones Industrials and the other major market indexes gapped down and broke furiously to the downside, with the Dow leading the way down on a -2.21% decline. Volume was heavier than yesterday. The index is now testing its prior October lows but has yet to breach their lows.

 

GR112018-$INDU

 

The S&P 500 also gapped down on a test of its prior October lows but did not reach those lows. Volume was higher, and the action sets up the possibility of a move below the October lows tomorrow, that could set up some sort of undercut & rally attempt. That assumes that sellers got out of Dodge today, leaving a cloud of dust that might drift higher on the pre-holiday breeze. We’ll know when we see tomorrow’s open.

 

GR112018-$SPX

 

The NASDAQ Composite Index is, as I wrote over the weekend, the de facto weakling among the three major market indexes. It also gapped down to lower lows this morning and then attempted to rally off the lows early in the day. Volume was heavy, and for a moment it looked like it might try and pull an undercut & rally move after dropping below the prior October lows.

However, the index couldn’t hold its intraday move back up through the October lows and slumped again into the close. The -1.7% decline came on higher volume, but today’s undercut of the October lows does set up the possibility of a rally tomorrow ahead of the Thursday holiday. This is, of course, mere speculation on my part, but the position of the index opens up this possibility, so we should be aware of it.

 

GR112018-$COMPQ

 

Recall what I wrote over the weekend with respect to what I refer to as the follow-through (FTD) breakout stocks, or more dynamically, “The FTD Four.” Those would be Twilio (TWLO), Tableau Software (DATA), Etsy (ETSY), and Planet Fitness (PLNT). As I pointed out, these were important stocks on my radar, and I added that “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.”

With all these names representing late-stage breakouts that occurred in synchrony with the follow-through day (FTD), their failure coincides with the failed FTD and the associated market break back toward the October lows. Yesterday, these came apart in the worst possible way as three of the four confirmed late-stage base-failures.

The first sign of a late-stage breakout failure is a breach of both the base breakout point and the 20-dema. This is then confirmed by a clean breach of the 50-dma, after which we may see a rally back up to the 50-dma or even as far as the 20-dema, depending on the general market context.

In the example of Twilio (TWLO) the initial short-sale entry point was in fact near the $100 Century Mark one day after the buyable gap-up (BGU) move that occurred on the FTD and after the company reported earnings. The stock has since chopped back and forth along the new-high breakout point, with no resolution until yesterday. At that point, it busted the 20-dema and the 50-dma on heavy selling volume.

I assessed the stock over the weekend as being on the fence, and technically in a lower-risk buy point right along the breakout point. But, this came with the proviso that, “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.” That’s what we saw yesterday, and the stock became a short-sale at that point.

A gap-down open this morning filled the prior gap-up rising window, leading to a rally off the intraday lows and into the 50-dma. Note that the gap-fill at the open was a logical place to cover any short position taken yesterday. Now, with the rally off the intraday lows into the 50-dma, we would look to short this again here using the 50-dma as a tight upside stop.

 

GR112018-TWLO

 

Tableau Software (DATA) was in a similar position as TWLO over the weekend, sitting right at its prior base-breakout point and along the 10-dma. I noted in my weekend report that, “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.” That occurred yesterday, and the stock busted the 50-dma on heavy selling volume.

It then gapped down this morning and rallied back up through a prior early-November low before running into intraday resistance at its 50-dma. This has some similarities to TWLO, since it is now technically shortable at the 50-dma on this rally off the lows today. As with TWLO, the 50-dma serves as a guide for a tight upside stop.

For the record, I would emphasize that these names are very volatile both on a daily and intraday basis. Therefore, trafficking in these names often means you’re going in either direction on different days, or even the same day, if you’re using the five-minute 620-intraday chart to guide you. Note that with both TWLO and DATA one could have shorted them as soon as they broke the 10-dma, especially within the context of the general market sell-off at the open yesterday.

 

GR112018-DATA

 

Etsy (ETSY) has been in a slow slide after failing on a breakout and reversing eight trading days ago. It briefly held along the 50-dma for the past three days before breaching and closing below the line yesterday. That triggered a short-sale at that point, as I discussed it would in my weekend report, and the stock gapped lower this morning.

Not too long after the opening bell, ETSY filled its prior, gap-up rising window and bounced off the intraday lows. It then closed mid-range in a big churning type of day. From here, rallies into the 50-dma at 46 would offer lower-risk short-sale entries.

 

GR112018-ETSY

 

The final member of the FTD Four, Planet Fitness (PLNT), has a little bit of all the other three in it, and then some. First, it also failed on a prior gap-up breakout attempt and was holding along the 10-dma on Monday morning. Once it broke the 10-dma within the context of the market rolling lower, it could have been shorted at that point, but the breach of the 20-dema was the initial trigger at a minimum.

Like TWLO and ETSY, PLNT then filled the gap-up rising window of its prior post-earnings buyable gap-up before rallying sharply to close above its 50-dma. It is the only one of the FTD Four to accomplish that. Make note of the volatility in this name and its FTD Four cohorts, because this is what makes them so fascinating to focus on as playable names in both directions, sometimes on the same day.

With PLNT holding above its 50-dma but just under its 20-dema, it may become shortable again using the 20-dema as a guide for a tight upside stop. As I wrote over the weekend, however, what these stocks end up doing will likely be tied to what the general market does, and the breakdown over the past two days is what made them shorts, as least as of Monday morning. In this position, PLNT could try to push higher if the general market tries to bottom and melt up tomorrow ahead of the Thursday holiday. So, if you try and play it here, stay nimble and open to whatever real-time evidence you see, not what you want to see.

 

GR112018-PLNT

 

The example of the “FTD Four,” shows how all we need to do right now is focus on a select handful of names during the day as trading vehicles. As I see it, the fact that all four of these are recent breakouts means they are less oversold within their overall chart patterns. In addition, the fact that they all still maintain reasonably stretched PE-expansions makes me think that they are vulnerable to the sharpest sell-offs based on my PE-Expansion Short-Sale Theory as explained in reports during late September and throughout October.

Thus, they make great short-sale targets, and sometimes they can also serve as quickie long positions. The action of these names over the past several days provides hard evidence of this defining characteristic. If the market finds its feet and rallies, these names could just as easily push higher in classic re-breakout attempts.

Canada Goose Holdings (GOOS) isn’t part of the FTD Four primarily because it didn’t gap up and break out until one week after the follow-through day, and well after that FTD had failed. Over the weekend I wrote that, “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.”

The stock gapped down today, then rallied off the lows to approach the unchanged line before rolling over again back to the opening lows. It did, however, hold near-term support at the 10-dma and the 61.76 intraday low of last Wednesday’s buyable gap-up (BGU) breakout. It’s possible that the stock could rally from here if we see the general market stabilize.

Otherwise, a breach of the 10-dma followed by a breach of the 61.76 BGU low would trigger this as a short-sale. We would then look for a break below the 20-dema as the first sign of a potential late-stage, failed-base, short-sale set-up. This remains a fluid situation, so be ready to play it in either direction, depending on where it goes from here.

 

GR112018-GOOS

 

Big-stock NASDAQ names that I’ve discussed in recent reports remain under pressure. Apple (AAPL) posted a lower low today and now sits move than -24% below its early October peak. Netflix (NFLX) posted lower lows today but rallied smartly off its intraday lows. It still sits nearly -37% below its mid-summer highs. Nvidia (NVDA) has moved lower from last Friday’s shortable gap-down (SGD) move after earnings but rallied off its intraday lows to close slightly up on the day.

All three stocks remain in no-man’s land and deep down in their patterns. This opens up the possibility of reflex rallies from current levels given their deeply oversold conditions. I would watch NFLX first since it sits just below its late October low at 271.21. A move above that low would trigger an undercut & rally long set-up that might result in a tradeable rally up to resistance.

 

GR112018-NFLX

 

Amazon.com (AMZN) could almost pass for NFLX’s twin here as it undercut its prior 1476.36 late-October low in its pattern and rallied to close just above it. Volume was heavy, indicating some supporting action off the intraday lows. The stock closed at 1495.46, triggering an undercut & rally (U&R) long set-up at that point, using the 1476.36 low as a tight selling guide. Play it as it lies.

 

GR112018-AMZN

 

Microsoft (MSFT) was a no-brainer short yesterday right at the 20-dema yesterday, as it reversed back through the line early in the day and broke to the downside. This morning it gapped just below the 200-dma and then moved lower before finding support off the lows and rallying to close just below the 200-dma.

This looks quite ugly, and with the index sitting just below the 200-dma the first thought that comes to mind is that this is a short right here, using the 200-dma as a guide for a tight upside stop. The other, perhaps subtler, thing going on here is that MSFT undercut its prior 100.11 low of late October and then rally to close above it. That triggers a U&R long set-up using the 100.11 price level as a tight selling guide.

Therefore, there are two ways to look at this right here, right now. How this plays out, and whether resistance at the 200-dma holds sway or the U&R long set-up holds sway here is yet to be determined. Watch this closely here, and play it as it lies, but only from a trader’s perspective. This is not a market for investors, at least not yet.

 

GR112018-MSFT

 

If you’re an investor, cash is the place for you to be in this current market environment. If you’re a trader, then you must always maintain a two-sided view of things, even when the market is getting slammed. The volatility is what creates trading opportunities, some of which may be of a day-trading duration, some maybe slightly longer.

It’s one of the main reasons why I advocate watching a small handful of names each day, so that you can keep track of and hopefully capitalize on the volatility. Things move fast in this market, and it’s very difficult for most people to keep track of it if they are trying to monitor a large number of stocks intraday. That’s why I’ve mostly stuck with the names discussed in recent reports, with outliers here and there that are discussed in the GVRs.

Depending on what these stocks are doing, I may be long or short or both any of them at any time, depending on what they and the general market are doing. This may keep most traders’ heads spinning, but it is possible to make sense of what things are doing, and I hope that my discussions focusing on these volatile, two-sided names helps clarify the process. A basic knowledge of all the potential set-ups, long or short, as things fly back and forth is critical for successfully navigating this current environment.

Flexibility and persistence is also key to the process, as Shopify (SHOP) shows. The stock was a puzzler over the weekend, since it had a two-sided character. On the one hand, it had posted a pocket pivot at the 50-dma on Thursday, but on the other it was rallying into the highs of the past week or so in an overall head-and-shoulders formation.

As I discuss in the book Short-Selling with the O’Neil Disciples (John Wiley & Sons, 2015), it is not uncommon for stocks to rally just past a key moving average, say 3-5% or even slightly more, before rolling over again. While my objective discussion of the stock over the weekend was two-sided, I suppose I gave in to my sub-conscious a bit with this comment in the weekend report: “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.”

The market context of a retest of the lows over the past two days set this in motion as a short-sale once it busted the 50-dma, or one could have taken the bold route of just shorting it near the Monday highs, where it briefly sat before splitting wide open. The breakdown was severe, gapping down to its prior-October lows before undercutting the prior 122.05 low and rallying on heavy volume.

If one was short the stock overnight after hitting it near the $150 price level and had a clear understanding of all the various set-ups that can occur in real-time in this market, the U&R through the prior 122.05 low was a long trigger! Surprise. SHOP then rallied hard and back up through yesterday’s lows. If you weren’t alert you ended up losing a sizable chunk of your gains over the past two days.

SHOP, along with other examples discussed above in this report, shows why things can go from one extreme to another, regardless of the action of the general market. The indexes got slammed today, but that did not deter SHOP from posting a U&R long entry at 122.05, most likely when it was least expected. Such is the nature of this market with respect to the action of individual stocks.

 

GR112018-SHOP

 

Interestingly, there was a lot of U&R action to be found today, along with gap-fill rallies, despite the ugly index action. While this makes the market tough for those looking for sustained trends, open-minded, nimble short-term traders can often have a field day.

Another case in point is Twitter (TWTR). The stock reversed near its 200-dma yesterday, making it a short-sale within the context of a declining general market. It then gapped below its 50-dma this morning at the open as it also broke below the prior 30.76 intraday low of its late-October bottom-fishing, buyable gap-up (BFBGU) before rallying back above both!

That triggered a U&R long set-up at 30.76, and TWTR held up well to close at 31.06 and above the 50-dma. This puts it in a long entry position right here, using the 30.76 price level as a tight selling guide. Surprise again.

 

GR112018-TWTR

 

Over the weekend, I discussed my general PE-Expansion short-sale theory as it related to the railroads. In my view these were go-to shorts in the event of a market break. As I wrote, “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.”

Well, the right time has been over the past 2-3 days, and yesterday’s action made this more than obvious, in my view. CSX Corp. (CSX) triggered as a short-sale this morning as it busted its 50-dma, although it was shortable yesterday as it ran into resistance along its prior highs and the underside of its prior failed base. From here, only rallies into the 50-dma at 71.32 would present potentially lower-risk short-sale entries.

 

GR112018-CSX

 

CSX’s other two railroading cousins, Norfolk Southern (NSC) and Union Pacific (UNP) both rolled over in synchrony with CSX, with UNP getting hit the hardest.  Both NSC and UNP gapped below their 20-demas at the open today, triggering them as short-sales at that point, although I considered them better shorts near their 50-dmas and the prior November highs in the pattern.

UNP was the only one of the three to slash through its 200-dma and close below the line on heavy selling volume. We were looking at these as shorts over the past week, so in my view trying to short them now is a bit on the late side. Now all we can do is watch and see whether and how they rally up into potential resistance and whether those rallies present lower-risk, short-sale entries from here.

 

GR112018-UNP

 

As I write this afternoon I have not seen any earnings report yet from Bilibili (BILI). It is scheduled to be released today, but since the company is in China it will come out later this afternoon. Keep a close eye on this tomorrow morning once the report is out.

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.

With the market rolling over this week, the string of consecutive upside weeks during Thanksgiving week since 2012 is in jeopardy. Given the magnitude of the decline over the past two days, I’m not sure I’d give the market much chance of keeping the streak alive. But no worries, we simply play the action as it lies.

With so many pundits talking about the market now in official bear market territory, perhaps the near-term need to sell has become obvious. All I know for sure is that short-sale entries yesterday turned into long entries on an intraday basis as a number of the stocks I’ve been playing gapped down, undercut a prior low or filled a prior gap-up rising window, and then rallied back to the upside.

Even in the middle of a sharp two-day sell-off, swing-trading opportunities crop up on both the long and short side. A trader can only capitalize on these if properly armed with a strong working knowledge of all the available long and short set-ups we have in our arsenal. Right here, right now, the market could do anything, but as the need to sell becomes obvious, I would stay alert to potential reaction rallies.

We certainly saw a fair number of such reaction rallies in individual stocks occur today, so this might be providing some sort of advance clue as to where the market is likely to move ahead of the Thanksgiving holiday and into Friday’s short trading session. Therefore, do not allow yourself to be pushed into a rigid bearish posture here, and maintain awareness of and openness to all the possibilities. In other words, just watch the stocks!  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.

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.