The Gilmo Report

October 17, 2018

October 17, 2018

I wrote over the weekend that the fat part of the short-selling game was likely over with, at least for the near-term. Thus, there was no point in pressing the short side coming into the new trading week. Given that the indexes and many busted formerly leading stocks became wildly oversold by the time last Friday’s closing bell sounded, we have been treated to a normal, natural oversold reaction rally so far this week. I suppose, however, that this depends on what one chooses to call normal and natural.

The Dow Jones Industrials Average led the way by first holding above its 200-dma on Monday’s small pullback, and then launching 547.87 points higher yesterday. The move was strong, but not atypical for a furious oversold bounce, and it certainly helped the perma-bulls breathe a little easier.

Today’s action was less consistent, with the Dow initially breaking over 300 points to the downside, and then making that all up to test the unchanged line before rolling over again into the close. Volume was lighter. So far, all we know for sure is that the index is now in the fourth day of a rally off the lows which came on an undercut & rally move through the prior August low and from a deeply oversold position.

 

GR101718-$INDU

 

The S&P 500 Index regained its 200-dma yesterday on a gap-up opening after running into resistance at the line on Monday. It then retraced most of that move this morning before recovering to close almost unchanged on the day. It is now sitting just below its 10-dma, although I would not assume that the 10-dma necessarily represents solid resistance. Ultimately, the 50-dma would represent the most significant level of resistance on any continued rally from here.

 

GR101718-$SPX

 

The NASDAQ Composite Index is matching the S&P 500 step for step as it ran into resistance at the 200-dma on Monday and then gapped above the line yesterday. It also spent most of the morning retracing a good chunk of yesterday’s move before rallying to close down just a hair on lighter volume. As with the other indexes, it is currently in a four-day rally off the lows of last Thursday.

 

GR101718-$COMPQ

 

The Fed released its latest meeting minutes today and there were no real surprises. The Fed is intent on continuing along its path of steady interest rate increases as it “manages” the economy and believes it will engineer the elusive “soft landing.” Frankly, that’s not something I would bet on.

The 10-Year Treasury Yield ($TNX) responded by edging back up slightly as it tries to stabilize following last Thursday’s pullback. This should be watched carefully since I tend to think that a retest of the market lows would coincide with the $TNX retesting last week’s highs.

 

GR101718-$TNX

 

Gold has continued to trend higher after last week’s bottom-fishing buyable gap-up (BFBGU) in the SPDR Gold Shares (GLD). The GLD has held those gains reasonably well, pulling back slightly as volume declines. For the current rally to remain in force, it must continue to hold above the 114.09 intraday low of last Thursday’s gap-up price range. Technically, the GLD remains within buying range of the BFBGU, using 114.09 as a tight selling guide.

 

GR101718-GLD

 

Kirkland Lake Gold Ltd.  (KL) is holding up as well as gold itself, maybe even a little better. It has moved higher since posting a strong pocket pivot coming up through the 50-dma last Thursday when gold gapped up through its own 50-dma. Volume dried up today to -56% below average as sellers didn’t see fit to dump shares. From here, only a pullback closer to the 10-dma at 20.13 would offer a lower-risk entry opportunity.

 

GR101718-KL

 

Canada’s nationwide legalization of recreational cannabis went into effect today. In anticipation, the week started off with some big moves in the weed patch stocks. These were probably the most coherent long set-ups as of the end of last week, and as early as Thursday when I first blogged about them. Leading the pack was Cronos (CRON), which had posted an undercut & rally long set-up on Friday.

That led to a more than 40% move higher over the next two days. On Tuesday I tweeted and answered a member’s comment on the blog that owners of CRON and other cannabis stocks should take at least ½ their profits. As I noted at the time, these stocks still have a fair amount of overhead in their patterns after the sharp run-ups in September, so were vulnerable to sell-the-news profit-taking.

Thus, CRON reversed hard yesterday on very heavy selling volume. This brought the stock right back into its 50-dma today, where it found support and bounced. This does put the stock in a lower-risk entry position using the 10-dma at 10.14 or the 50-dma at 10.00 as a reasonably tight selling guide.

 

GR101718-CRON

 

Canopy Growth (CGC) also moved higher on Monday in a breakout attempt, but we all know what buying breakouts gets you in this market. The move off the 10-dma was decent, however, and the stock moved about 20% higher from there. It then ran into heavy selling yesterday and reversed before finding support along the confluence of the 10-dma and 20-dema this morning.

This technically puts the stock back in a lower-risk entry position along the confluence of the 10-dma and 20-dema. The two moving averages can then serve as tight selling guides or one could use today’s intraday low at 48.30 as a slightly wider selling guide.

 

GR101718-CGC

 

The move over the past couple of days in the weed patch was a classic wolfpack affair. Tilray (TLRY) joined the others with a 37% move off its 20-dema, where it was sitting on Thursday when I first blogged about the weed patch names. TLRY probably has the most overhead supply however, given the prior near-term climactic run it had back in September, and it’s not clear how long it will take to work through this.

Meanwhile, all we can do is focus on the technical action. Last Thursday’s voodoo pullback to the 20-dema represented a nice voodoo entry, leading to a strong gain. Selling into that yesterday as I tweeted early in the day was the smart thing to do as things got a bit piggy on the upside. Again, this was the optimal approach, and the subsequent pullback yesterday and today has brought TLRY back into its 10-dma and 20-dema.

Volume dried up today to -58.4% below average, creating another voodoo entry here along the 20-dema, although at a slightly higher price than last Thursday’s voodoo entry point. As per usual, the 20-dema becomes your new selling guide for any shares bought on this current voodoo pullback to the line.

 

GR101718-TLRY

 

Outside of the weed patch, the action in most broken-down former leaders is mostly a mosh-pit following last week’s sharp sell-offs. Netflix (NFLX) was the first big tech name to report earnings last night after the close. After missing badly on subscriber numbers last time around, the company reported better-than-expected subscriber growth last night, sending the stock gapping higher this morning.

After trading up as high as 405 in after-hours trading yesterday, NFLX opened this morning much lower, at 378.33. It then slid lower all morning to reach an intraday low of 356.50 before closing at 364.70. If one was alert to it, shorting the stock near the prior highs and the $380 price level was a good strategy.

In this position, the stock is a bit in no-man’s land, although one could technically treat this as a buyable gap-up move using the 356.50 intraday low as a tight selling guide. Overall, from a bullish standpoint, the action today was pretty feeble and shows that sellers are more than willing to hit the stock on any move back up to the prior late-August and September highs.

 

GR101718-NFLX

 

With NFLX at least as much like a shortable gap-up as a buyable gap-up, we may find that a reasonable strategy during earnings season in October is to look to short stocks gapping up on earnings. I saw this work very nicely today in big-stock railroader CSX Corp. (CSX), which I mentioned as a short-sale target in my video report of last Tuesday before it busted the 20-dema last Wednesday.

CSX also chimed in with an allegedly strong earnings report yesterday after the close, leading to a gap-up open this morning. The stock opened at 73 and then rallied slightly higher before reversing and breaking back below the 20-dema. That would have offered a clean short-sale entry as it reversed and broke sharply to the downside on heavy volume.

CSX had already identified itself as a late-stage, failed-base (LSFB), short-sale set-up when it broke down last week. Today’s rally was a textbook short-sale entry into the rally, which is something I haven’t seen happen very often recently.

We might consider that NFLX and CSX are good examples of how we might approach any other earnings gap-up moves in busted former leaders. LSFBs typically will see one rally back up to their 50-dma, the prior base breakout point, or the lows of the prior base as a secondary short-sale entry point. This is textbook stuff, and so we might look for more such situations as we progress through earnings season.

 

GR101718-CSX

 

Aside from NFLX’s move, which was in fact shortable at the open rather than buyable, big-stock NASDAQ names are just rallying up into areas of potential resistance. Some are showing less upside spunk than the rest, however, such as Nvidia (NVDA). The stock blew straight to the downside last week and slashed through its 200-dma before stabilizing after undercutting the prior 238.72 low of August 20th.

However, since then, and despite the strong general market reaction rally, NVDA hasn’t been able to get very far. In fact, two attempts at regaining the 200-dma have failed. Maybe this is just going to bust lower from here, but I’m not necessarily all that enamored with shorting something that is obviously so oversold. It does, however, illustrate how weak many names remain in this current four-day rally attempt.

 

GR101718-NVDA

 

Amazon.com (AMZN), which is expected to report earnings next week on October 25th, has had a better go of it as it pushes up closer to its 20-dema.  This has occurred after posting a near-term undercut & rally last Thursday as it rallied back above the prior 1739.32 low of July 31st. This all occurred as a logical oversold bounce following a sharp price break off the highs that violated the 50-dma two Fridays ago.

So, a little bounce over the past four days is to be expected, as is the case with so many of these broken former leaders. In this position, I think it’s best to wait and see what transpires after AMZN reports earnings next week, although nimble traders could always try and short into a low-volume rally up into the 20-dema, assuming the stock can make it up that far.

 

GR101718-AMZN

 

Apple (AAPL) appears to be at a point of no return as it wedges back above its 50-dma following a U&R move last Friday after undercutting a prior base low last Thursday.  Note that as with AMZN, the rally following the undercut of the prior low occurred on a gap-up move last Friday. Thus, one would not have been able to gain a low-risk entry right at the prior low.

I’ve seen a few U&R type moves do exactly this, which makes them less actionable given the higher risk. The further away from the prior low one buys the stock, the less tight one’s stop is. With AAPL now sitting in the tiny space between its 20-dema and 50-dma, a breach of the 50-dma would trigger this as a short-sale at that point.

 

GR101718-AAPL

 

A simple exercise that I think everyone should engage in is to go through your long watch list of 3-4 weeks ago. When I do this, almost all the stocks on my long watch list of just a few weeks ago are busted and quite oversold. As I run through this list, these names begin to populate a brand-new short-sale watch list. As these stocks rally, I begin to look for potential short-sale entry points as they run into areas of potential resistance.

A good example is Roku (ROKU). The stock initially triggered as an LSA short-sale when it busted the 20-dema nearly two weeks ago.  From there, it was slammed lower and violated its 50-dma last Thursday. At that point, an oversold condition set in as the general market also reached a near-term low and the stock has since rallied.

The rally, however, took the stock right into its 20-dema and 50-dma today, where it reversed on higher and above-average volume. This is the precise type of set-up you’re looking to short when monitoring a busted former leader like ROKU. Not that they’re necessarily guaranteed to work as well as ROKU did today. But if one took a position near the 20-dema, then simply using the line as your guide for a tight upside stop keeps risk in check.

 

GR101718-ROKU

 

Keeping ROKU in mind as an example of the type of rally we’re looking to short into, we can evaluate Square (SQ) in a similarly. As I discussed in my report of two weekends ago, SQ would trigger as a short-sale on any breach of the 20-dema at that time, and it cooperated by doing so on Monday of last week.

Like ROKU, SQ then blew apart and violated its 50-dma before rallying with the market over the past four days in a natural oversold bounce. Today, the stock didn’t quite make it up to its 10-dma as it stalled a bit on lighter but above-average volume. While one could look at this as a short right here using the 10-dma as a guide for a tight upside stop, I personally would like to see a move higher to the confluence of the 20-dema and 50-dma.

In most cases, the 10-dma doesn’t represent a stiff enough line of resistance. After all, it only represents 10 days’ worth of data points, so is not representative of price congestion. If you think about the 50-dma, that has 50 data points, hence the moving average represents a thicker level of price congestion at any point. For that reason, I prefer to try and short weak rallies into at least the 20-dema, but most often around the 50-dma.

 

GR101718-SQ

 

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.

Stocks on my short watch list (which has been populated by recently busted leaders that were previously on my long watch list) that are currently rallying into areas of potential resistance and which should be watched for reversals include: ATVI, DATA, DDD, DXCM, FTNT, GDDY, ISRG, LITE, MSFT, NOW, NTAP, OKTA, PLNT, TTD, TTWO, V, VEEV, VMW, WDAY, and ZBRA.

Study the charts of these stocks as a possible starting point for building a short-sale watch list. Now, one thing to keep in mind is that during prior market breaks we’ve seen stocks bust hard only to come right back to the upside in steep, v-shaped moves. It is possible that any of these names I’ve discussed in this report as being in oversold reaction rallies just keeps rallying.

The deciding factor will no doubt be how far this current reaction rally in the market and busted formerly leading stocks carries. So, this is not all as cut and dried as we might like to think, based on a prior experience during either of the sharp sell-offs we’ve seen this year. What I’m watching for is whether this latest sell-off from the recent market highs weakens quickly, resulting in at least a retest of last week’s lows, or whether it turns out be another one of these resets like we saw earlier in the year and during the summer.

Meanwhile, the extreme intraday volatility we’re seeing as the market engages in what is now a four-day rally attempt off last Thursday’s lows makes it very difficult to navigate. And this applies to either side, whether one is looking to short rallies, trade U&R set-ups on the long side for a swing-trade or more, or both.

For those who are neither nimble or bold, then sitting on the sidelines and doing nothing as you let things settle down is the recommended approach. Most long positions that most of you have held have probably all hit their maximum selling guides, so I would expect that most members are mostly, if not entirely, in cash.

I’ll do my best to offer guidance in the form of blog posts and video reports as necessary, but we are in a difficult phase right here, right now. This is logical, however, as the market begins to slosh around after getting extremely oversold last week. But we nailed the short side by leaning that way well over a week or so ago. We can now afford to take things one day at a time, knowing what to look for in terms of real-time price/volume evidence that will point the way forward. Take it from there.

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.