The Gilmo Report

November 29, 2017

November 29, 2017

Investors literally had the rug pulled out from underneath them today as big-stock techs and other leading names blew to pieces. This sent the NASDAQ Composite Index down -1.27% in a stark divergence to the Dow Jones Industrials and S&P 500 Indexes, which were mostly helped along by strength in financials.

When a break like this sees leading names bust through near-term support, investors likely find that their stops and trailing stops are hit in short order. Those that sell are naturally and mechanically pushed into cash, while those that hesitate might see their holdings plummet sharply. Good examples of this today would be leaders like Netflix (NFLX) or Nvidia (NVDA).

 

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The S&P 500 Index illustrates what was more or less the proverbial Mexican stand-off as strong-acting financials were countered by blow-ups in tech and other names. Financials are a large component of the S&P 500, as are techs and so-called information technology names, leading to a big churning day on heavy volume as the S&P 500 held roughly flat, down a mere -0.04% on the day.

Meanwhile, the Dow Jones Industrials Index, not shown, led all comers with a 0.44% gain on the day, reflecting strength in financials and what looks to me like defensive movement into bigger, more established Dow companies. The small-cap Russell 2000 Index, not shown, was also up on the day, thanks to the fact that it benefits from strength in small-cap financials which make up a large part of the index. It posted a 0.38% gain on the day.

 

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Leading stocks of all stripes were mostly smashed today. The selling had the feel of abnormal liquidation, which basically means that money looked to be in a big hurry to get out of Dodge. Some pundits spun the action as the great rotation out of leading tech and other growth names and into financials. I’m not sure I buy that.

Financials, which are seen as benefiting from tax reform and higher interest rates, did a good deal of the lifting as they held the Dow S&P 500 and small-cap Russell 2000 Index up all morning long. Those moves held into the close, and the strength in financials today shows up as a big gap-up move in the Financial Select Sector SPDR Fund (XLF).

If you really must own financials, my view is that the place to buy them was at the 50-dma last week. Otherwise, chasing this strength carries a bit of risk, although one could just use the 27.07 intraday low on the XLF as a reasonably tight selling guide. The same approach could be used for other financials that gapped up today, including names like Bank America (BAC) or J.P. Morgan (JPM).

 

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Gold exhibited its typical erratic behavior, which has been its trademark as of late. Today, the SPDR Gold Shares (GLD) gapped down to its 50-dma but held the line on higher but slightly below-average volume. Since gold has best been bought when it looks ugly rather than when it looks pretty, perhaps this represents a lower-risk entry spot for the GLD.

 

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Both of my favored gold stocks, Franco Nevada (FNV) and Kirkland Lake Gold (KL) sold off with most other stocks. FNV, however, broke near-term support at the 20-dema while KL held a pullback to its 10-dma. KL could be considered as being at a lower-risk entry point at the 10-dma, but FNV must be watched for a possible undercut and then a rally back up through the prior November low of 82.95.

 

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Big-Stocks:

From a concrete, practical standpoint, the bottom line today is that most names on my long watch list that I’ve covered in recent reports broke support today, triggering stops and selling guides. For that reason, investors long any of these names should be mostly or entirely in cash.

Sticking to your stops is critical on a day like today, because it mechanically forces you out of the market before things get out of hand. Big-stock names illustrated this quite well today.

And once one is forced out of a stock, one can then reassess things and see whether some sort of re-entry trigger on the long side shows up. If not, then it’s better to be out than in. Frankly, I think a lot more clearly with cash in my pocket. This can keep one open to possible opportunistic entries, should they occur in Ugly Duckling fashion.

Apple (AAPL) broke below its 20-dema but undercut the prior November low of 168.38 before closing at 169.48. This sets up a possible U&R here using the 168.38 prior low as a tight selling guide.

 

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This sort of action is what you are looking for in terms of finding U&R set-ups in the face of a sell-off, so stay alert to this. With this in mind, let’s look at some more big-stock names.

Amazon.com (AMZN) broke down to its 10-dma on heavy selling volume, which theoretically sets up a lower-risk entry here, using the 10-dma as a tight stop. The only caveat is that heavy selling volume isn’t necessarily what you want to see on a pullback to the 10-dma.

Alphabet’s (GOOGL) broke below its 20-dema today on heavy volume, but can be watched for a possible undercut & rally (U&R) at the prior November low of 1029.33.

Facebook (FB) busted its 50-dma on heavy selling volume, which looks quite ugly. I was using the 20-dema as a selling guide for the stock, so this would have been an early force-out before things got ugly.

Now, the only long entry signal would be a moving-average undercut & rally or a move back above the prior base lows along the 20-dema. But right now, FB is starting to morph into a late-stage failed-base short-sale set-up. Amazing to consider given that the stock was acting just fine a day earlier, but illustrative of how this market likes to pull the rug out on investors.

 

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Netflix (NFLX) is another late-stage failed-base set-up in action as it busted its 50-dma today on heavy selling volume. And this comes after the stock posted a pocket pivot off the 50-dma and up through the 10-dma and 20-dema yesterday! But the rug gets pulled out, and poof, the stock is looking more like a short than a long.

There is, of course, the outside chance that the stock can rally back up the prior November low at 189.50, triggering a U&R long set-up. But a weak rally back up into the 50-dma could also bring the stock into play as a lower-risk short-sale entry near the line. Play it as it lies.

 

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Nvidia (NVDA) really had the rug pulled out on it as it busted nearly 20 points at one point during the day before rallying slightly off its lows to close down “only” -14.29 points, or -6.78%. This was the ugliest and deepest price break among the big-stock names I have discussed in recent reports. NVDA ended the day just below its 50-dma, but there is always the outside chance of a U&R move developing after the stock undercut and then rallied back above the prior 191.17 low of late October.

Otherwise, this could be viewed as a short here, using the 50-dma or the $200 Century Mark as an upside stop. Again, play it as it lies, and be ready to move in either direction with the stock depending on what the general market does from here.

 

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The tidal destruction of a big NASDAQ breakdown carried Tesla (TSLA) out to sea with it, causing the stock to break down from its 20-dema on heavy volume. Given the general market weakness, this could have been treated as a “go to” short, which would have worked.

In this position, the stock is most certainly not in a lower-risk entry position on the short side as it is slightly extended from the 20-dema. Remember that short-sale target stocks can become “go to” names on the short side if you can figure out that the general market is getting into trouble early in the day as was the case today.

 

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General Motors (GM) had the rug pulled out on it today after posting a strong-volume pocket pivot yesterday at the 10-dma and 20-dema. That looked good this morning as the stock opened above the 35 price level, but things took a big turn for the worse as the stock reversed.

By the close, GM posted an outside reversal to the downside on heavy selling volume. I suppose the one positive here is that the stock didn’t blow right through the 50-dma, which serves as maximum support. If we see things settle down tomorrow and the stock holds the 50-dma, this could put it in a lower-risk entry position. A breach of the 50-dma, however, means all long bets on GM are off.

 

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New Merchandise:

Roku (ROKU) pushed above the 50 price level yesterday on a buy recommendation and $50 price target from an analyst firm, but later in the day the infamous Citron Research tweeted that the stock’s move was “a joke.” This sent the stock into reversal mode as it sold off to close down on the day on heavy volume.

That led to another test of the 10-dma today, which, surprisingly, the stock pulled off in the face of some severe selling among tech names. If it settles into the 10-dma here and volumes dries up, this could put it in another lower-risk entry position along the line.

ROKU has benefited from high short interest since rocketing from the 18 price level after earnings. If the Citron comments brought in more short-sellers, then they could be set up for another squeeze on the upside. The key here is whether ROKU can hold the 10-dma, which I would use as a tight selling guide if I were to try and buy shares here along the 10-dma.

 

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MuleSoft (MULE) is getting tagged on heavy selling volume so I would leave this alone for now.

Switch (SWCH) failed on last week’s undercut & rally attempt and has since moved lower. Only a move back above 18 would bring me back into the stock.

 

Cloud Names:

ServiceNow (NOW) blew through its 50-dma on heavy volume and is off my long watch list for now.

Saleforce.com (CRM) broke below its 20-dema on heavy selling volume and is now trapped in “no-man’s land.” Not a buyer at these levels, and the stock is not in what I would consider to be a lower-risk short-sale entry position. Only a weak rally back up into the 20-dema would bring me into the stock on the short side as close to the 20-dema as possible.

Workday (WDAY) reported earnings after the close and is trading lower as I write this afternoon. The stock had already busted -8.22 points, or -7.16% today on heavy selling volume as it broke below its 50-dma. This is also off my long watch list for now.

Square (SQ) finally lived up to the Forrest Gumpian concept that a climax top is as a climax top does” by blowing apart on Monday, providing the required price/volume evidence needed to confirm its recent action as a climax top.

In fact, if one were alert to this, the ensuing rally back up into the 10-dma could have been treated as a short-sale entry opportunity, with the idea that the stock will continue moving lower and toward its 50-dma. Whether the stock has topped for good, or will end up building a whole new base, remains to be seen, and may likely be dependent on whether the general market gets into further trouble or not.

 

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Solar Names:

First Solar (FSLR) was perhaps one of the better-acting names today as it merely got knocked back down to its 20-dema on below-average volume and held support at the line. It also undercut & rallied back up through the prior 59.53 low in the current base, triggering a U&R long set-up using the 59.53 low as a tight stop.

 

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SolarEdge (SEDG) did not act well today as it broke below its 20-dema on heavy selling volume. It is now undercutting the prior 36.71 low of its November base formation. This could be watched for a move back above that low as a possible U&R long set-up.

 

Semiconductors:

Micron (MU) came apart on heavy volume today as it busted the 10-dma and 20-dema. It is now approaching the 50-dma at 42.21 where it could find support. Note that a bounce off the 50-dma could coincide with an undercut & rally move back up through the two prior November lows, as I point out on the chart. This could be something to watch for as a long-entry trading opportunity.

 

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Universal Display (OLED) found support today at its 20-dema but is not in what I would consider a lower-risk entry position.

 

Telecom-Related Names:

Arista Networks (ANET) found support at the 20-dema today and looks a lot like OLED. It bounced off the 20-dema, so if you were going to buy the stock the place to do so was right at the 20-dema today. Of course, this would have been tough to do given the brutal selling seen in tech names across the board.

Lumentum Holdings (LITE) has blown apart and is off my long watch list.

Chinese Names:

Alibaba (BABA) got smashed early in the day, down over ten points at one time. But after undercutting the prior 176.74 November low in the pattern it rallied back above it, triggering a U&R entry at that point. It then rallied up as far as its 50-dma, but ended the day just below the line.

Technically, I might be inclined to see this as a short-sale entry right here using the 50-dma as a tight stop. Otherwise, if BABA can regain the 50-dma, it could trigger another long entry as a moving-average undercut & rally (MAU&R). Play it as it lies.

 

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Weibo (WB) broke below its 20-dema early in the day but managed to rally off its intraday lows to close just above the 20-dema. Intraday support came in just above the 50-dma, so technically this does put the stock in a buyable position along the 20-dema while using the 20-dema as a tight selling guide if it can’t hold.

 

Internet Related:

Yelp (YELP) broke sharply to the downside and closed near the intraday lows but just above the 50-dma. Volume wasn’t heavy, but the price action was rather weak since the stock was unable to muster up any kind of intraday bounce off the 50-dma. That said, brave souls could try and buy the stock right here at the 50-dma while using it as a very tight selling guide.

 

Software:

Veeva Systems (VEEV) blew apart on heavy volume. It has been removed from my long watch list.

Nutanix (NTNX) is expected to report earnings after the close tomorrow. The stock broke hard to the downside today but found support at its 10-dma. That said, there’s nothing to do here ahead of earnings.

 

Video-gaming Names:

Take-Two Interactive (TTWO) went from sitting squeaky tight along its 10-dma to blowing completely apart today on heavy selling volume. The move took it below its 20-dema, but it found intraday support at the 50-dma, triggering a small intraday bounce.

This is stuck in no-man’s land here, and not actionable in either direction. It does represent, however, yet another strong-acting leader that has now gone schizoid after having the rug pulled out from underneath it.

 

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Activision Blizzard (ATVI) blew through its 50-dma on heavy selling volume today, so it has been removed from my long watch list.

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 sudden breakdown in so many leading names today is disconcerting to say the least. In many cases, stocks were acting fine, if not outright bullishly, yesterday, and then today suddenly changed character. In the “old days,” this was usually a very bearish sign for the market.

But as is often the case in this Ugly Duckling market, trading opportunities can emerge just when things look their ugliest. On a sharp sell-off, long opportunities generally emerge on undercut & rally (U&R) set-ups, which should be watched for. I’ve outlined several potential U&R scenarios in this report.

Of course, that doesn’t mean they have to work, and in some cases, U&R moves can just result in short rallies back up into resistance where the stock becomes a short-sale target. That could happen in cases where stocks have closed well below their 20-dema or 50-dma, and a rally back up to either of those moving averages could just bring them back into more optimal short-sale range, as could be the case with a NFLX or an NVDA.

I would tend to think, however, that anyone long stocks among today’s big price breakdowns has been stopped out, one way or another, and is now more in cash, or all in cash. That, in my view, is not necessarily a bad place to be. As they say, there are times when I’d rather be out of the market wishing I were in rather than in the market wishing I were out, and this may be one of them.

Meanwhile, for nimble traders, be alert to the potential for Ugly Duckling long set-ups, mostly in the form of U&Rs and MAU&Rs, as potentially profitable opportunities that may arise when things look most dire.

While I do intend to keep an open mind, I find the sudden and sharp breakdowns in so many leading stocks as highly cautionary. In addition, this is occurring when investors least expect it, right ahead of what is normally considered a “favorable” holiday season that features the proverbial “Santa Claus Rally.”

So, stay alert, and if you haven’t already been forced out of position based on your stops, trailing stops, and selling guides, be prepared to react as necessary, and to do so in a methodical manner. If the tide begins to move against you, your stops are your only defense, so do not fight the tide.

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. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.