The Gilmo Report

November 25, 2018

November 24, 2018

The market finished down for the week, the first time we’ve seen the market down during the Thanksgiving holiday week since 2011. A brief melt-up on Wednesday was met by selling, which brought the Dow Jones Industrials back to the flat line after it was up over 200 points earlier in the day. Another drop today sent the index to a lower closing low but held above its October intraday lows.

 

GR112518-$INDU

 

The S&P 500 Index held positive on Wednesday, but not before giving up most of its gains on the day by the time the closing bell rang. To some extent, the idea that most sellers had gotten out of Dodge on Tuesday, leaving a cloud of dust behind them that could rise in the breeze on Wednesday, was accurate, but there obviously wasn’t much of a breeze.

On Friday, the S&P closed at a lower closing low since its correction began back in early October, but like the Dow is holding above its intraday October lows. For now, the indexes remain in a downtrend, with the question of whether we see some sort of double-bottom low or a new leg to the downside still quite open.

 

GR112518-$SPX

 

The NASDAQ Composite Index also posted a new closing low on Friday after stalling on an early rally Wednesday. Volume was obviously light due to the half-day trading session, and the index held just above its prior October absolute lows. As with the other indexes, we are in position for at least two possible outcomes: a) a double-bottom type of undercut & rally reflex move back to the upside, or b) a sharp break to lower lows in a worsening correction.

In the meantime, there is nothing that I find tantalizing, much less compelling, on the long side outside of short-term swing-trades. Big-stock former leaders like Apple (AAPL), Facebook (FB), Netflix (NFLX), and Nvidia (NVDA), continue to forge lower lows, with no relief for anyone silly enough to still be long these names anywhere in sight.

 

GR112518-$COMPQ

 

With the NASDAQ leading the way down, and big-stock NASDAQ names across the board from Apple (AAPL) to Facebook (FB) to Nvidia (NVDA all getting pummeled, the easy way to play it has been with my favorite inverse ETF, the ProShares UltraPro Short QQQ ETF (SQQQ) using the 620-method. I’ve been discussing this for a long time based on the idea that the tech trade was overcrowded and many of these names were showing huge PE-expansions.

We can see that since the market topped in early October, the SQQQ is now up about 50%, far more than the NASDAQ Composite or the NASDAQ 100 Indexes are down since then. That’s the beauty of a 3-times leveraged index ETF. Note also, however, that the ride has been anything but a smooth one, with at least two major downside inflections and two major upside inflections along the way.

This is why I use an ETF like the SQQQ in conjunction with the five-minute 620-chart, which is reasonably good at getting me in at the right time, and out, even temporarily, when the indexes inflect back to the upside in a reaction rally.

 

GR112518-SQQQ

 

In my last report I noted the early-morning buy signal in the SQQQ 620 chart before the open on Monday, which was the first shot across the bow indicating that a Thanksgiving melt-up was not going to be in the cards. By the time we did get a small pre-holiday melt-up, it was time to start watching the SQQQ 620 chart for another entry. That occurred just as we moved into the final hour of trade on Wednesday, as the 620 chart below shows, with an entry around 15.80.

Note, however, that patience was required as the SQQQ chopped around with the indexes right after the open. If one was trying to buy the SQQQ during that period, one would have likely entered closer to the bottom of that choppy range, with little success. Once things settled down, and we went into the final hour of trade, a good MACD cross showed up and the action became more coherent. From there, the SQQQ rallied up to a close of 16.08.

 

GR112518-SQQQ Intraday

 

Generally, if I take a position in the SQQQ during the day and I end the day up on the position, I will hold it overnight, although generally not more than a 30-50% position. On Friday morning, after Thanksgiving, the SQQQ was trading as high as 16.70 in pre-open trade. Things were looking grim, but a MACD cross just before the open might have urged one to take profits in pre-open trade.

That led to a sharp break to the downside, after which the MACD stretched to the downside just below 7:00 a.m. PST my time here on the West Coast, half an hour after the open. That led to another MACD cross and another entry signal. That held up all day as the SQQQ never traded lower and eventually the 6-period exponential moving average crossed above the 20-period exponential moving average in a full 620 buy signal that held up all day, with the SQQQ closing at 16.45.

 

GR112518-SQQQ Intraday Chart 2

 

Both the daily chart and the five-minute charts show quite plainly how volatile things can get on both time frames. But overall, if one is working the SQQQ using the 620 chart it was certainly possible to capture most of the 50% move since the October top. Even if one only caught half the move or slightly less, the position is up 20% or more, and that exceeds the magnitude of the NASDAQ and the NASDAQ 100’s corrections since early October.

Volatility and velocity is an inherent characteristic of this market, and, within the context of this v-squared condition, I find that one of the best ways to play the general and amazingly uniform breakdown in high-PE-expansion NASDAQ tech and growth names since early October is via the SQQQ. Meanwhile, one avoids the headline risk associated with shorting individual stocks, although this market has been filled with many that we’ve played, such as NVDA which triggered as an LSA-Method short-sale at the 20-dema in early October and has plummeted straight down from there.

So, while one is implementing the 620-method with an inverse ETF like the SQQQ, or any other inverse ETF, including the UVXY, one can also be working a stock or two. And not just on the short side. Even on days where the indexes are acting terribly, one can be working a long position or two.

In this spirit, the biggest excitement on Wednesday came from Bilibili (BILI), which reported earnings after the close on Tuesday and was trading slightly lower in pre-open trade early Wednesday morning. I blogged early in the morning when the stock was edging back into positive territory just before the bell that this was a mini-gap-up move that looked actionable. That turned out to be the case as the stock rocketed some 17% higher, clearing the $16 price level early in the day.

That represented near-term resistance for the stock, and I tweeted at the time asking rhetorically whether it was time to take that turkey out of the oven. It was, and the stock backed down into the close, but not before posting a big-volume pocket pivot and range breakout, albeit a stalling one.  That led to a downside open on Friday, but BILI found support near the 10-dma before closing near its intraday highs on light holiday volume.

Wednesday’s move qualifies as a pocket pivot on a mini-buyable-gap-up type of move, but the action has been a bit unsteady. Wednesday’s low-range breakout attempt failed to hold higher highs, and Friday’s breakdown to the 10-dma showed zero follow-through to Wednesday’s move. That said, pullbacks to the 10-dma remain lower-risk entry opportunities, and BILI may be one of the very few names that has interested me on the long side lately.

It is one of the few names that has been building a long base, which is essentially a slightly-ascending trend channel that extends back to August. With all my indicator bars turning a deep blue (what I like to dramatically refer to as Code Blue), my guess is that if the weight of the current market weakness lifted, this would charge higher. Meanwhile, it sits in a buyable position here, with pullbacks closer to the 10-dma being more optimal since that would also serve as a tight selling guide.

 

GR112518-BILI

 

The FTD Four remain on my radar as they rally up into areas of potential resistance as they again move toward sitting on the proverbial fence after breaking sharply to the downside on Monday and Tuesday. Twilio (TWLO) has edged back above its 50-dma after filling the prior gap-up window on Tuesday and rallying from there.

TWLO cleared the 50-dma on Friday and for good measure pushed higher and above the 20-dema as well. From here, we’d watch for a reversal back through the two moving averages as a short-sale trigger. If it can stabilize here along the 50-dma, however, it could attempt to move higher still in a possible re-breakout attempt.

 

GR112518-TWLO

 

Tableau Software (DATA) continues to follow along with TWLO, although unlike TWLO it failed to hold above the lows of its prior gap-up rising window (highlighted area). Instead of testing the lows of the rising window, it crashed through the low end of the gap and kept going before undercutting a prior November low and rallying after getting close to the 200-dma.

The jagged action makes the stock a very fast trade if one chooses to play in either direction. The mixture of volatility and velocity creates big price moves up and down in a hurry, which makes this a name well-suited for nimble short-term traders. And while there may be a discernible downtrend following the early-November breakout, the stock is still flopping around within the confines of a prior base.

Like TWLO, DATA is back above its 50-dma but unlike TWLO has not made it as far as the 20-dema, closing 31 cents below the line on Friday. Here I might think about shorting the stock while using the 20-dema as a guide for a tight upside stop. But it could also hang along the 50-dma and attempt a re-breakout. Thus, a breach of the 50-dma could also be watched for as a short-sale trigger, should that happen.

 

GR112518-DATA

 

Etsy (ETSY) is showing less resiliency here as it only rallied back as far as its 50-dma and stalled at the line on Friday. It had also filled its prior gap-up rising window on Tuesday and turned back to the upside following a prior failed buyable gap-up type of breakout in early November. Friday’s rally into the confluence of the 20-dema and the 50-dma puts it in a lower-risk short-sale entry point, using the 50-dma as a guide for a tight upside stop.

 

GR112518-ETSY

 

The similarity among the FTD Four is uncanny, frankly. Planet Fitness (PLNT) displays many of the same basic characteristics as the prior three, such as a prior buyable gap-up breakout move after earnings that occurred on the same day as the follow-through day (FTD). Each of these stocks has also failed on those FTD breakouts, and on Tuesday all four filled or retraced past those gap-up rising windows and then rallied from there into the end of the holiday week.

What makes PLNT different is the fact that it cleared its 50-dma on Tuesday as it filled its prior gap-up rising window and rallied not only above its 20-dema, but its 10-dma as well. It has now rallied back up to the highs of the prior week on wedging volume but sits right along its 10-dma and just below the prior new-high breakout point.

This could be a shortable position here along the prior week’s highs and the prior new-high breakout zone, which I’ve highlighted on the chart. It’s not uncommon for potential late-staged failed-base (LSFB) short-sale set-ups to briefly rally above their 50-dmas or 20-demas and then fail. The FTD Four are all potential LSFBs-in-process, and how they play out from here will likely depend on what the general market does from here.

 

GR112518-PLNT

 

If the general market rallies, then these may all try to re-breakout, making them primary long targets given their higher relative strength. Currently, with the major indexes hanging along their respective October lows, a double-bottom type of rally is possible. On the other hand, a general market break to new lows that signals the start of another major leg to the downside would likely see these nascent LSFBs begin to produce fruit as short-sale targets.

Therefore, I like these stocks as vehicles that could serve me well on either the long or the short side, depending on what the general market does from here. Not that it’s all that cut and dried, because handling these stocks requires that one maintain a flexible and nimble approach. You can short ‘em where they are shortable, but if they hold up and push against you, then you must be open to the possibility of flipping and going long.

And that, my friends, is why for now, at least, this is a trader’s market and not an investor’s market. But that doesn’t mean the situation is static in this regard. There are any number of catalysts that could get this market trending higher again, including dovish talk from the Fed or a bona fide trade agreement between the U.S. and China.

One of the better recent buyable gap-up breakouts that has occurred after earnings and since the FTD is Canada Goose Holdings (GOOS). While the stock was good for a quick short scalp on the rally up to the highs of the prior buyable gap-up (BGU) price range on Monday, it has since settled down and is still holding above the base breakout point.

It’s also holding above the intraday low of the BGU day’s price range at 61.76, which keeps the BGU alive. Buying it as close to the 61.76 low as possible, or as close as possible to the 10-dma now that it has caught up to the stock, would be the preferred approach. On Friday, GOOS traded higher volume on a half-day trading session in a show of support at the 10-dma, which is impressive.

As I wrote in my Tuesday mid-week report, GOOS remains a fluid situation, and one should be ready to play it in either direction, depending on how it acts. GOOS also closed above the 65.82 new-high breakout point and closed above it on Friday at 68.04. Thus, another way to handle this is to buy as close to the 65.82 price level as possible, and then use the 10-dma as a de minimus selling guide.

 

GR112518-GOOS

 

If the general market, and in particular the NASDAQ Composite, can rally from a double-bottom type of set-up on this latest test of the late-October lows, then watch for big-stock NASDAQ names that are in similar chart positions to act in similar fashion. Amazon.com (AMZN) is retesting its late-October low and is still holding above the prior low of a U&R long set-up that developed on Tuesday.

It is pulling in slightly off Wednesday’s peak, but holiday volume was obviously light. The U&R set-up is still in force since AMZN hasn’t broken below the prior late-October low. So, if the market starts to rally next week, one could hop on board AMZN as a way to ride any reflex move back to the upside off a double-bottom/U&R set-up.

 

GR112518-AMZN

 

The same goes for Microsoft (MSFT), which posted a similar U&R move on Tuesday and then regained its 200-dma. On Friday it tested the 200-dma and held the line as a short trading session kept volume quite low. Technically the U&R back up through the prior 100.11 late-October low remains in force. Near-term, the 200-dma serves as support, but a volume breach of the line would trigger the stock as a short-sale target.

The main idea with both AMZN and MSFT is that with the stocks mimicking the chart of the NASDAQ Composite, they will likely continue to do so from here. Thus, if the NASDAQ rallies from here, both stocks are likely to move higher as well. A break lower, however, would probably see both stocks fail on these current live U&R long set-ups. Play ‘em as they lie.

 

GR112518-MSFT

 

Shopify (SHOP) might be considered a swing-trader’s delight given its strong tendency toward what I call the v-squared condition, which is the combination of extreme price volatility and extreme price velocity. The set-ups in either direction, long or short, are quite concrete, however, at the points of inflection.

The first occurred when the stock rallied up to the prior highs above the 50-dma. This represented the peak of the right shoulder area of a head-and-shoulders formation, of which only the head and the right shoulders are shown in the chart below. SHOP then broke lower before undercutting the prior 120.05 low of late October, triggering a U&R long set-up at that point.

SHOP then rallied up to the 20-dema on Wednesday, where it reversed back to the downside. The 20-dema would have been your reference for a shortable rally following the U&R move off the lows on Tuesday. The stock is now out of position for an entry on either side, and it’s a matter of seeing where it goes and how it sets up from here. Otherwise, it’s a nice example of how volatility and velocity can work together to produce strong swing-trade opportunities in either direction in this market.

 

GR112518-SHOP

 

Twitter (TWTR) posted a U&R long set-up on Tuesday as it regained its 50-dma and the low of the buyable gap-up move it had in late October after earnings. Previously, the stock was a short at the 200-dma as I discussed in earlier reports. Overall, however, it remains within a choppy range, where the 20-dema has now become overhead resistance. The stock ran into resistance near the line on Wednesday and Friday before turning lower.

We are now looking at a retest of the 50-dma, and my guess is that if the general market continues lower so will TWTR. That said, a successful retest of the 50-dma that holds the line with volume drying up could set up a move back up towards resistance, which might be tradeable. So, these are permutations to watch out for as we head into the new trading week.

 

GR112518-TWTR

 

Railroaders have continued to act weakly, but all three of my short-sale targets in this area have become somewhat extended on the downside. Remember that my PE-Expansion Theory is in effect here, as these stocks sell for greater than 20-times forward earnings estimates, which in my view represents an historically high PE-expansion for these types of industrial names.

CSX Corp. (CSX) was last shortable above 72 as it moved into the underside of its previous base (see discussion in the Tuesday report), and then triggered a clean short-sale entry on Tuesday when it busted the 50-dma. It is now sitting below the 20-dema at 70.37, which serves as overhead resistance and a new reference point for short-sale entries on any rallies from current levels.

Norfolk Southern (NSC) ran into resistance at its 50-dma two Fridays ago and has since moved lower. On Thursday it ran into resistance along the confluence of its 10-dma and 20-dema, which now serve as reference points for short-sale entries on any rallies from here.

 

GR112518-NSC

 

Union Pacific (UNP) is the weakest of the three and is now in a very short bear flag just below its 200-dma. Note that it never even made it as far as its 50-dma last week, instead running into resistance right along the prior early-November high before turning tail and rolling over. This could be considered shortable here using the 200-dma as a guide for a tight upside stop, but the stock has already broken hard off the peak of the prior week near 153, so it may need to consolidate a little longer underneath the 200-dma.

 

GR112518-UNP

 

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 major market indexes now testing their late October lows, the market sits in an interesting, two-sided position. The retest could result in a logical reaction rally, or it could lead to a break to lower lows in a continuing second leg of a market correction that began in early October. So, we still need to maintain an even psychology here, and just allow ourselves to flow with the real-time evidence as it plays out.

To this end, I see stocks that look like shorts and some that look like longs, and others that could go either way. That seems to be consistent with where the general market is at right now. The inability of the market to stage any kind of consistent melt-up during the Thanksgiving trading week, closing down for the week for the first time since 2011, strikes me as a sign of weakness.

Therefore, while we could certainly see an upside reaction rally from here, it may only set up the next round of short sales. Whether that occurs before the end of November, or the end of December, or not until early 2019 is another question, however. But I think what we can count on is a continuing v-squared condition where we see volatility and velocity combine to produce a very ripe trader’s market.

Meanwhile, long-side investors seeking intermediate trends are advised to remain on the sidelines. However, we must also be prepared for things to evolve and change quickly, as I noted earlier in this report. So, prepare your watch lists and keep them to 5-10 names to simplify and facilitate the need to watch things closely and carefully. 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.