The Gilmo Report

November 4, 2018

November 3, 2018

The market remains in the fourth day of a nascent rally attempt off the lows of this past Monday. Friday’s action put an end to what was a three-day upside streak for the indexes, as an early-morning gap-up move reversed and sent all the major indexes into the red. The NASDAQ Composite Index stalled and reversed at its 20-dema on higher and heavy selling volume.

 

GR110418-$COMPQ

 

The action was not very encouraging, especially since it centered around a gap-down break in big-stock NASDAQ tech leader Apple (AAPL) after it disappointed on earnings Thursday after the close. This triggered sharp selling in the futures after-hours on Thursday and overnight. However, an unsourced report from Bloomberg News that President Trump had asked officials in his administration to begin drafting a trade agreement with China sent the futures rocketing back to the upside ahead of the open.

An allegedly strong October jobs report an hour before the open didn’t add to the inspiration, however, as it only served to reinforce the idea of an aggressive Fed. So, by the open, the futures had backed down, and the NASDAQ 100 future had gone slightly negative when the bell rang. The NASDAQ Composite spent a brief period trading above the flat-line before rolling over and reversing back to the downside, where it spent most of the day, logging a distribution day within a four-day rally attempt off the Monday lows.

The S&P 500 Index doesn’t look too much different from the NASDAQ as it also reversed an early rally to close in the red on Friday. Volume was lighter as the index seemed to lose momentum as it approached the 200-dma. Both the NASDAQ and the S&P 500 remain below their 200-dmas, which for now serves as significant resistance for both indexes.

 

GR110418-$SPX

 

The Dow Jones Industrials Index is perhaps the strongest of the major market indexes, but only because it has been able to hold above its 200-dma over the past two days. A big upside open that saw the Index cruise about 200 points higher early in the day flaked out and led to a more than 500-point reversal.

Later in the day a comment from President Trump stating that he and Chinese President Xi would be having dinner at the late-November G-20 helped send the indexes back to the upside, allowing the Dow to rally from over -300 points down to a close of -109.91 points. In the process it was able to regain and close just above its 200-dma.

As I wrote on Wednesday, the index action on this current rally attempt has struck me as mostly a potentially shortable bounce. But a full reversal is not yet at hand, and we could go anywhere from here based on any number of news- and other event-driven influences. But Friday’s action provided a nice inflection point for anyone shorting certain key names or working the inverse ETFs on the 620-charts intraday.

 

GR110418-$INDU

 

Friday’s jobs report, which came in at 250,000 new non-farm payrolls, was viewed as strong. Since President Trump came into office, the monthly Bureau of Labor Statistics job report has averaged less than 200,000, which is still rather tepid. When the margin of error is anywhere from 165,000 to 185,000 jobs, even 250,000 doesn’t strike me as all that impressive. A truly booming economy would see monthly jobs growth numbers of 400-500,000 or more, in my view.

But the perceived strength in the jobs number was enough to reinforce the Fed’s current interest-rate raising trajectory and send interest rates back to the upside. The 10-Year Treasury Yield pushed up to 3.214% on Friday as it approaches its prior, seven-year high of early October. Higher rates correlated with the start of the market-sell-off in early October, and with the 10-year yield approaching those highs, it could trigger a negative response in the market again at some point.

 

GR110418-$TNX

 

What may, however, serve as the more powerful catalyst for the market this week will be the mid-term elections, which will be held on Tuesday. Depending on whom and what polls you believe, the Democrats are expected to win back a majority in the House of Representatives, while the current status quo in the Senate, where the Republicans hold a majority, is expected to hold up.

Any result that differs from this may have an outsized effect on the market, but we won’t know for sure until we get there. The market overall remains in a high volatility state, and Friday’s action as no exception. October was clearly a month for short-sellers as the indexes broke down off their peaks. The October swoon was characterized by an incredibly broad swath of leading stocks that split wide open, with many pulling what amounted to straight-down cliff-dives.

As I’ve discussed in my reports over the past 1-2 weeks, the fat part of the October short-selling party has come and gone, and we are now left watching reaction rallies for potential secondary short-sale entries and re-entries. However, this does not preclude playing isolated breakdowns as they occur in real-time, especially when an earnings report creates a little shortable volatility for us to play.

Apple (AAPL) disappointed on earnings Thursday after the close and I discussed the potential for a shortable gap-down move in my Thursday afternoon video report. The stock was poised to open down around 206-207 on Friday morning, but gave potential short-sellers a gift by rallying back up to the $214 price level very quickly and then just as quickly reversed course and headed back to the downside.

 

GR110418-AAPL

 

We can see this on AAPL’s five-minute 620-intraday chart, where there is a very rapid run-up just before the opening bell and into the first 15 minutes of the trading day. At that point, the fast MACD line (orange) had stretched to the upside and away from the blue slow line. That constituted what I refer to as a MACD stretch, and brave short-sellers could have tested a short position into that move.

The fast MACD line then crossed below the slow line, which triggered a full MACD cross around 210, which would have offered another short-sale entry point using a cross back to the upside as a signal to cover in case the stock reversed course again. That was not the case and AAPL then trended lower from there before settling into the 205-207 price zone for the rest of the day.

Whenever I decide to work a stock short and I see it rally the way AAPL did, I will watch for a MACD stretch as a possible short-sale entry. This is tricky, however, and one must be nimble to avoid getting caught if the stock just keeps streaking higher. The thing about AAPL on Friday, however, is that the daily price range once the stock had gapped down was only about 5%. We’ll see where it goes from here.

 

GR110418-AAPL Intraday

 

Fortinet (FTNT) was another one that reported earnings after the close on Thursday and gapped down in after-hours trade. I also discussed the stock in my Thursday afternoon video report as one to watch when the market opened on Friday as a potential shortable gap-down (SGU) short-sale set-up. This was much easier to handle, however, since the stock opened at 81.68, quickly peaked at 81.72, four cents higher, and then rolled over from there.

 

GR110418-FTNT

 

FTNT’s five-minute, 620-intraday chart is an example of this. Short-sellers could have just hit the stock right at the open or shortly thereafter as the MACD stretch and cross occurred ten minutes into the new trading day. From there it was a straight-down move that didn’t see the fast MACD line (orange) cross above the slow MACD line (blue) until the stock was down to 76.

One could have covered and bagged a profit there. The other option, for someone wanting to play it out further, would have been to wait for a confirming signal from the moving averages, where the 6-period exponential moving average (orange) moves back above the 20-period exponential moving average (blue).

By the close, FTNT printed 72.56 to log a whopping -11.13% decline on the day on huge selling volume. While AAPL’s short-sale set-up on Friday was good for maybe 3-4%, FTNT’s was good for a lot more than that, and illustrates how we can take advantage of post-earnings volatility on the short side when appropriate. You didn’t have to be short much more than these two stocks on Friday to make decent money on the short side, and they were discussed in my Thursday afternoon video report.

 

GR110418-FTNT Intraday

 

We’re also seeing some short-sale target stocks run into potential resistance, where they can be tested on the short side if one keeps a tight stop. An example would be Amazon.com (AMZN), which poked its head above the 200-dma on Friday but then reversed to close back below the line. Volume continued to decline in what has been a wedging rally into the 200-dma.

The stock is still in a shortable position here, using the 200-dma or Friday’s intraday high as a guide for a tight upside stop. My best guess, however, is that AMZN will roll over and head back to the lows only if the NASDAQ Composite does something similar. Thus, this would be one go-to stock on the short side if we see a rally failure this coming week.

 

GR110418-AMZN

 

Netflix (NFLX) also gave short-sellers something to bite on Friday as it rallied up into its 20-dema early in the day. It then reversed on lighter but still above-average volume to close negative on the day. Note that the rally off the Tuesday lows has been a wedging rally like AMZN’s, where volume declines each day as the stock rallies into resistance.

Depending on what the market does this coming week, I would continue to view the 20-dema as near-term resistance. The 200-dma looms just a little bit further above. So if we see the market rally this week, then I would look for the 200-dma to possibly come into play as another short-sale entry point.

 

GR110418-NFLX

 

Mostly, however, we are looking at quick, tactical short-sale scalping opportunities among some of my short-sale watch list names. One example is PayPal (PYPL), which has proven to be shortable each time it rallies into the 50-dma. As I wrote on Wednesday after it rallied back above the 200-dma, “Now I’m inclined to short the stock on any further rally back up to the 50-dma.”

That would have worked for a nice short-sale scalp on Friday. PYPL rallied right up into the line early in the day and then turned tail. It then ran right into its 200-dma where it found intraday support to close slightly up from the intraday lows but down on the day. This is the sort of thing you’re watching for on the short side. But keep in mind that scalps will probably be the order of the day until and unless we see the current four-day market rally attempt fail outright, assuming that even occurs.

 

GR110418-PYPL

 

Boeing (BA) has followed what might be called a schizophrenic path over the past few days since it reported earnings over a week ago. It tends to be sensitive to news about the U.S.-China trade war. And so it was able to push beyond its 20-dema after reports on Thursday that President Trump had an allegedly constructive phone call with President Xi, and then Friday morning that the administration was working up a draft trade agreement.

Thus, I think that if one is going to work a stock like BA on the short side, then one must be alert to any news that may influence the short-term or even the intraday price trajectory. Friday morning, after Bloomberg News reported the alleged draft trade agreement activity by the administration, the Dow futures were up sharply. BA, which was also gapping up, figured heavily in this move in the Dow future.

But, as it turned out, the gap-up move gave short-sellers a new entry point near the prior high of October 16th. That is now your new reference for upside resistance, and BA reversed from there to close in the red on Friday and back below its 20-dema and 50-dma. This illustrates how the news flow with respect to certain stocks can create price volatility that can then be capitalized on by alert short-sellers.

 

GR110418-BA

 

BA also serves as a good example of why I do not hold large positions overnight, long or short, in this current market environment. Instead, I will work positions one way or the other while seeking to exploit price movements, especially gaps, in a contrarian way on the short side. My approach is to put together lists of 5-15 stocks for both the short and the long side each evening, and then watch them like a hawk the next day for possible entries, long or short.

This is more of a day-trading/swing-trading approach to this market currently. As I’ve written repeatedly over the past week or so, this is a market for nimble, short-term traders, not investors. Those who play the long side only, and who seek to capitalize primarily on intermediate trends, should have been in cash a long time ago, and for now that remains the case.

On the long side, this week has also given us some opportunities with the typical undercut & rally moves in individual stocks that are often seen in conjunction with a short-term market low. Thus, Monday’s low combined with Tuesday’s turn to the upside produced U&R long set-ups in a number of stocks, including names like Square (SQ), which I discussed in my Wednesday report.

I tend to think that these U&R long set-ups that appeared earlier in the week are more short-term swing-trading types of set-ups rather than investable set-ups. We’ll see how things pan out, but generally if a stock posts a U&R long set-up at its lows after undercutting another prior major low in the pattern, it will set up again as it tries to round out the lows of a potential new base.

On Tuesday I posted to my blog some comments regarding names I was watching and/or playing for U&R moves, such as CRON, ACB, FNKO, HEAR MOMO, BILI, and OKTA. Because some of these had already posted U&R moves on Monday when the market hit bottom, despite looking rather ugly, the most actionable among them was Turtle Beach Corp. (HEAR).

It waited until Wednesday to move back up through the prior 17.10 low of early October, triggering an undercut & rally, or U&R, long entry signal at that point. Once it triggers, the 17.10 price level becomes your stop, with an additional 2-3% of downside porosity that can be added for those who might wish to give it more room. That led to a nice move up to the 50-dma by Friday.

 

GR110418-HEAR

 

And here’s another one that was actionable on Tuesday per my blog post at the time, Aurora Cannabis (ACB). It was right in the middle of a U&R long trigger as it pushed above the prior 5.89 low of September 14th. Most of these U&R set-ups have come and gone, and have been primarily actionable on Monday or Tuesday, with the outliers like HEAR occurring on Wednesday. This is mostly what you’ll see in the way of long set-ups when the market bottoms, whether temporarily or in advance of something more substantial on the upside.

OKTA and MOMO were also actionable on Tuesday and have both rallied higher since then. But the real question is whether these initial U&Rs result in something greater on the upside. As I wrote earlier in this report, after an initial U&R low sets in, if the stock doesn’t roll over to new lows as U&Rs did all throughout October, they will attempt to set up again.

So, while the initial U&R is always a nice thing to grab for a quick long trade, those looking for a more intermediate move to develop are not necessarily late to the party. Generally, a U&R that leads to more significant upside will move up off the lows and then move sideways somewhere along a moving average, generating pocket pivots or voodoo set-ups along the way as it rounds out the lows of a potential new base.

 

GR110418-ACB

 

Of course, if you like the more orthodox stuff you can always take a look at Tractor Supply Co. (TSCO) which continues to hold its base breakout of this past Monday and remains within buying range. As I’ve discussed in previous reports, I’m treating this as a two-side situation. While it is a long set-up right here right now that is best bought on tests of the 10-dma as we saw on Thursday, keep in mind that a wholesale breach of the 20-dema would trigger this as a potential late-stage failed-base (LSFB) short-sale set-up. Play it as it lies.

 

GR110418-TSCO

 

Elsewhere on the long-side front, Twitter (TWTR) is now hanging along and just above its 200-dma, following the prior week’s bottom-fishing buyable gap-up (BFBGU) move after earnings. Given the sharp move off the lows of October, I would look for the stock to spend more time along the 200-dma consolidating those gains if it is to remain viable. Thus, pullbacks on light volume to the 200-dma would offer lower-risk entry opportunities from here.

 

GR110418-TWTR

 

Tesla (TSLA) continues to edge higher after last being buyable along the 200-dma the prior week. In this position it is extended, such that pullbacks to the rising 10-dma at 318.21 would be your only references for lower-risk entries from here. Both TSLA and TWTR bottomed before the market, and if the market is setting up to move higher from here I would look for these stocks to move higher as well.

 

GR110418-TSLA

 

All the tweeting, hinting and reporting of alleged cooing noises between the U.S. and China with respect to the current trade dispute between the two countries has sent most Chinese stocks bouncing sharply off their deep October lows. Not so with Viomi Technology (VIOT), however, which has spent October building its first IPO base. I first discussed this one closer to the $8 price level about two weeks ago and it has pushed about 10% higher since.

As I wrote in last weekend’s report, this is a compelling thematic play with strong current earnings and sales growth and strong forward earnings estimates. Over the past two days, VIOT has added two more pocket pivots at the confluence of its 10-dma and 20-dema. As I’ve discussed previously, my tendency here is to look to buy into pullbacks to the two moving averages.

On Thursday and Friday, VIOT did exactly that, pushing down to the 10-dma and 20-dema on an intraday basis before bouncing strongly for back-to-back pocket pivots. With the 10-dma at 8.80, two cents above the 20-dema, I think pullbacks to the $9 price level down to the 10-dma are buyable, although one could simply buy it here and use the 10-dma as a tight selling guide.

 

GR110418-VIOT

 

The intraday volatility in the indexes has created some profitable day-trading moves in the inverse ETFs using my 620-Method for trading these in anticipation of a market inflection point to the downside. We got this exact type of move on Friday when the futures were up in pre-open action, leading to a big gap-up move in the Dow and S&P 500, and a roughly flat open for the NASDAQ.

The ProShares UltraPro Short QQQ ETF (SQQQ) flashed a MACD cross and long entry signal about ten minutes after the open. The 6-period exponential moving average was already above the 20-period, so all systems were go at that point. Notice that even though the MACD crossed over just before 8:00 AM PDT, the 6-period line remained above the 20-period line until we approached the noon hour, triggering a final sell signal on a nicely profitable trade for the day.

 

GR110418-SQQQ Intraday

 

We can see an identical set-up in the ProShares UltraPro Short Dow30 ETF (SDOW). The difference here is that the Dow futures were up big at the open while the NASDAQ 100 futures were roughly flat, with a slight upside move occurring just after the opening bell. The SDOW generated a MACD cross about a half-hour after the open.

Once the entry signal triggered, the 6-period line was already above the 20-period line and it held that way throughout the day until we came into the last hour of trading just before noon my time here on the West Coast. One could have then bagged their profits for the day and gone home a little plumper and happier for the weekend.

 

GR110418-SDOW Intraday

 

With the market still in something of a v-squared condition where we see a lot of volatility that comes with a lot of velocity, in other words sharp price moves in a short amount of time, trading the SQQQ, SDOW, and any other inverse ETF can be a profitable day-trading or swing-trading affair. With the market rallying off Monday’s lows, we might also stay alert for a more decisive inflection point to the downside that sees the indexes potentially retest the Monday lows.

With the market in a state of flux, and the news flow picking up with respect to the U.S.-China trade war and Tuesday’s mid-term elections, the 620-Method using inverse ETFs may come into sharper focus as we progress through the trading week. At the very least, I find it to be a formidable arrow to have in my quiver of methods and techniques that enabled me to capitalize handily on the October swoon as well as the ensuing v-squared condition we’ve seen this past week.

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.

To sum up, technically, the market is in a four-day rally attempt off the Monday lows after the major indexes have posted declines off their late September and early October peaks that would qualify as intermediate corrections. This first break off the peak has provided short-sellers with a bonanza of sorts, but things are starting to get choppy outside of the isolated opportunities that crop up after earnings, such as we saw Friday with AAPL and FTNT.

For now, my approach is two-pronged. I have one eye on potential bottoming set-ups such as U&Rs and their follow-up set-ups like bottom-fishing and roundabout pocket pivots (BFPPs and RAPPs) while the other watches these reflex rallies in short-sale target stocks for potential short-sale entries and re-entries. The failure of reflex rallies in individual short-sale target stocks, however, will likely be highly dependent on where the general market goes from here.

Lower lows in the indexes will no doubt result in lower lows for these busted former leaders that currently litter the market landscape. Therefore, as we move into what is likely to be a news-laden week in a market that is also still in a technical correction, this remains a market for traders, not investors. So, we look to move forward with an open mind that allows us to remain alert and open to whatever set-ups show up in real-time. In other words, as I like to say, play it as it lies!

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.