The Gilmo Report

October 2, 2019

October 2, 2019

Friday’s news regarding the de-listing of Chinese stocks from U.S. exchanges by the Trump Administration hit the market hard that day. As expected, however, the Treasury Department and the Administration walked that back over the weekend, leading to a small rally on Monday. In my GVR and blog posts on Monday, I noted that this smelled of a classic alibied selling situation.

This is something Bill O’Neil told me about long ago, and I have discussed it in many past reports. When institutions and big money want out of the market, they will participate on the sell-side when negative news hits. Once the original news is mitigated or shown to be less serious than originally thought, the market can then rally, at which point the big money comes in and sells again.

In this manner, the original news becomes an alibi for a big round of selling. But institutions cannot conduct all their necessary selling operations at once. Thus, if the news is sketchy enough, as it was on Friday (I noted in my weekend report that the chance of de-listing was slim to none), then a rally is triggered as gullible buyers consider the ensuing mitigation of the original news to be an all-clear sign.

That certainly appeared to be the case yesterday as sellers seized upon the weakest ISM number since June 2009 to come back in and sell into the rally, hammering stocks in the process. The selling continued today far more energetically as all the major indexes continued their declines today as the S&P 500 and Dow Indexes joined the NASDAQ Composite Index below the 50-dma.



The NASDAQ is the weakest of the Big Three indexes, and it came the closest to its 200-dma before finding intraday support and closing off the lows. In their current positions, all of the indexes are in no-man’s land between their 50-dmas and 200-dmas. We could see more downside, or a reaction move back up toward the 50-dma, so if you are a short-seller be aware of your profit objectives and trailing stops.



News that commercials (this would include gold miners) had taken record short positions in gold sent the precious metals down hard on Monday. That sent both SPDR Gold Shares (GLD) and the iShares Silver Trust (SLV) gapping below their 50-dmas. As I blogged on Monday, the smart thing was to back away from anything bought at the 50-dmas and then sit back and wait for a potential undercut & rally move to materialize as a fresh entry signal.

That occurred yesterday when the GLD rallied back above the 139.35 low of early August 13th. It closed today at just above the 50-dma. Therefore, if one bought the U&R yesterday, then one can use the prior 139.35 low as their selling guide or keep things tighter by using the 50-dma as a selling guide.



The SLV today joined the GLD in the U&R festivities, albeit a day later, by rallying back above its 16.28 low of September 13th. It also cleared the 50-dma and if one bought it on the U&R through 16.28 then one can take the same approach as with the GLD. Use the 16.28 low as your selling guide or take the tighter route of using the 50-dma.



The double-top I believed I was seeing in the financials over the past 2-3 weeks has now come to full fruition. Financials were hit hard yesterday on the weak ISM number, bolstering the case for lower rates, and news that Charles Schwab (SCHW) was now offering zero commissions. Getting into position by shorting the Financial Select Sector SPDR Fund (XLF) (or going long the Direxion Financial Bear ETF (FAZ) would have put one in the enviable position of getting lucky yesterday.

As I’ve written in recent reports, this market is all about putting oneself into position to get lucky by going with the set-ups at hand. And in this market, the double-top has become a valid anticipatory short-sale set-up. And over the past couple of weeks it had worked very well in both the financials and the semiconductors.

The XLF is now looking to meet up with its 200-dma, and is extended on the downside, as are many individual short-sale targets among big-stock financials like GS, JPM, BAC, etc.



The daily chart of the Vaneck Vectors Semiconductor ETF (SMH) reveals the double-top in the group, with the breakdown off the peak starting two Fridays ago when the SMH first breached the 10-dma. It reversed hard at the 10-dma yesterday and closed today right at the 50-dma.



With respect to individual semis that I follow, Micron (MU) is far extended on the downside after last Friday’s gap-down through the 50-dma after earnings. It is now approaching a prior late-August low.

Applied Materials (AMAT) looks more like the SMH as it holds support at its 50-dma, but the 10-dma served as stiff resistance yesterday as the stock reversed off the line on higher volume.

KLA-Tencor (KLAC) finally breached its 10-dma yesterday, closing six cents below the line. That would have triggered the opportunistic short-sale entry at that point and again this morning. KLAC then closed today right at the 20-dema where it held near-term support, but a breach of the 20-dema would confirm a potential uptrend failure.

Advanced Micro Devices (AMD) meanwhile continues to plumb lower lows after running into its 10-dma yesterday where it was last shortable. It is now slightly extended on the downside.



Apple (AAPL) is again failing on another breakout attempt, this one helped along by a big upgrade from J.P. Morgan (JPM) with a $265 price target on Monday. But all that was short-lived as AAPL breached its 10-dma today on heavy volume, closing right above its 20-dema.

A breach of the 20-dema would confirm the stock as a potential late-stage failed-base (LSFB) short-sale target. Remember that instead of shorting AAPL shares, one can take the proxy approach by using a long position in the ProShares UltraPro Short QQQ ETF (SQQQ). This is my preferred way of playing any AAPL reversal since it tends to have a strong effect on the NASDAQ 100 Index at large.



Alphabet (GOOG) is also looking like a late-stage, failed-base situation in progress as it breaks below its 50-dma. The stock had been within the handle of a larger, cup-with-handle formation and then breached the 20-dema yesterday on an initial indication of a possible base-failure.

That was confirmed today when GOOG sliced right through its 50-dma on heavy selling volume. From here, rallies back up into the 50-dma would offer lower-risk short-sale entries on the premise of an LSFB short-sale set-up in progress.

As with AAPL, GOOG can be monitored in conjunction with the SQQQ to determine when a long entry signal for the SQQQ might have the best chance of working. Notice how the SQQQ was up 5.17% today as both AAPL and GOOG posted initial base-failure types of moves.



In the group chart below we can see that (AMZN), remains weak as it breaks to lower lows. It is currently extended from its 200-dma on the downside and rallies up into the 200-dma might offer lower-risk, short-sale entries from here.

Microsoft (MSFT) gapped below its 200-dma on heavy selling volume, another big-stock NASDAQ name that figured nicely into today’s strong move in the SQQQ. In this position, rallies up into the 50-dma would offer lower-risk short-sale entries.

Netflix (NFLX), also not shown, has rallied back up into its 10-dma where it could offer a lower-risk short-sale entry using the 10-dma as a covering guide. Otherwise, my preference would be to take the more opportunistic approach of looking for any kind of rally up to the 20-dema at 277.47 as a potentially lower-risk short-sale entry.



You didn’t have to go too far to find actionable shorts ahead of yesterday’s and today’s big sell-offs. The payments stocks we’ve been campaigning on the short side in recent weeks offered some excellent short-sales entries yesterday early in the day.

Global Payments (GPN), Mastercard (MA), and Visa (V) all reversed yesterday from either their 10-dma or 20-demas and broke to lower lows. There are all now quite extended on the downside.



Pagseguro (PAGS) set up beautifully on a reversal at its 50-dma yesterday and broke down to its prior, early-September lows today. It undercut the prior 43.13 low of September 10th and rallied to close just above it at 43.48. This creates a U&R and therefore would constitute a near-term cover point.

Also, one could treat this as a potential long swing-trading set-up using the 43.13 low as a tight selling guide. In this case, we would then look for a rally back up toward the 10-dma/20-dema as a long swing-trading objective. This could then become a potentially shortable re-entry rally into resistance.



Social-networkers also broke lower with the market over the past few days as they have also been a fruitful area of concentration for short-sellers. Facebook (FB) dipped below its 200-dma, where it could be considered shortable again using the 200-dma as a covering guide, but it is extended to the downside since failing at its 50-dma nearly two weeks ago.

Twitter (TWTR) was last shortable on the initial breach of the 20-dema seven trading days ago and then again on the rally back into the 20-dema and 10-dma last Friday. It has since moved further below its 50-dma and is extended on the downside as it tests prior lows in the pattern where a U&R move is always a possibility.

Snap (SNAP) was the only one of the three that presented an actionable short-sale setup yesterday when it reversed at its 50-dma and closer lower. The short-sale set-ups have been there for the taking, from financials to semis to payments names and the social-networkers as well. It’s just a matter of knowing where to come in and having the courage to pull the trigger.



In Cloud Land, Coupa Software (COUP) undercut its prior September low on Monday after a sharp downside break that occurred on a breakout failure last week. That triggered a cover point as the stock now rallies in U&R fashion back up toward its moving averages. I would watch as it gets closer to the 10-dma, 20-dema and 50-dma for a potential short-sale entry spot to materialize on the rally. (CRM) gave short-sellers a nice entry opportunity yesterday when it rallied right up into the 50-dma. As I wrote over the weekend, such rallies into the 50-dma were your best lower-risk short-sale entries, and the stock moved lower today on higher selling volume.

In this position, CRM is extended to the downside such that only rallies back up into the 50-dma would offer lower-risk short-sale entries from here.



Despite the fact that most of the cloud short-sale targets I’ve discussed in recent reports are extended on the downside, we can see that CRM worked as a short yesterday and COUP may be setting up again.

We can also see that GoDaddy (GDDY) provided a nice short-sale entry yesterday as it rallied just beyond and then reversed at its 50-dma on heavy selling volume. That was a very rewarding short-sale set-up as the stock then broke sharply lower and then again to lower lows today. Today’s move took it through a series of lows from August and early September where GDDY posted a U&R type of move back up through those lows.

This could set up a rally back up into the 20-dema where the stock could again offer a lower-risk short-sale entry. For now, today’s U&R would serve as a near-term cover point, looking to re-enter on a rally up into resistance. As with CRM, when a stock like GDDY is in a prime short-sale position at its 50-dma, you can take the shot and look to get lucky.



ServiceNow (NOW), Ring Central (RNG), Splunk (SPLK) and Atlassian (TEAM) are all extended to the downside, as the group chart below shows. All but TEAM may be in position for some sort of U&R type of rally, but so far that is unclear.

The bottom line is that if one is looking to short these, you will need to see such rallies, preferably into logical resistance, in order to bring these back into a lower-risk short-sale position. In the meantime, over the past few weeks, shorting the clouds has been a veritable party for those able to pick their spots correctly.



My restaurant-related shorts have also worked well over the past few days. McDonald’s (MCD) rallied right into its 50-dma on Monday, offering an optimal short-sale entry opportunity at that point. It then gapped away from the 50-dma on the downside and kept on going, finally undercutting its prior mid-September low today.

This can be used as a short-term cover point based on the undercut of the prior low. In that case, one would be looking for a rally up to the 10-dma first as a possible short-sale re-entry point. Another nice short-sale set-up among the names I’ve been covering in recent reports.



Shake Shack (SHAK) also gave short-sellers an opportunity to get short at the 20-dema both Monday and yesterday. It then reversed hard at the line and closed right at its 50-dma on higher selling volume. From here, any further rallies back up into the 20-dema can be watched for possible short-sale entries.



Beyond Meat (BYND) has continued to edge lower since it gapped up in response to news that MCD was testing a new plant-based burger using BYND’s fake meat. The opportunistic short-sale entry came on the gap-up that carried as high as the prior September low before the stock stalled to close mid-range.

Now, you might notice that it has drifted in to fill that prior gap. The gap-up window has a low of 142.90 and BYND closed today at 143.30. That creates a gap-fill type of Ugly Duckling long entry in classic 360-degree style using the 142.90 price level as a selling guide. Any rally from here might carry as far as the 10-dma or 20-dema, maybe further.



Tesla (TSLA) after the close today announced that they delivered 97,000 new vehicles in the latest quarter, missing analysts estimates of 98,000. This also missed the 100,000 number that a purportedly leaked Elon Musk email said the company had “a shot at” achieving. No such luck.

After hours, TSLA is trading down about ten points at 233.03 as I write. It’s not clear whether this becomes a shortable gap-down or a possible opportunistic long entry if the stock holds the 50-dma at 232.53. This could be an interesting play for nimble traders who are able to interpret real-time price action and respond in 360-degree style depending on how this plays 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.

If the market and many of my short-sale target stocks weren’t oversold enough over the weekend, we may be getting to a point where they could be now, based on the objective technical evidence. As some of the charts above show, many of these names are at or approaching undercut & rally (U&R) territory. This would logically argue for a possible rally from current levels in these individual names.

That said, it has not been necessary for members to go far beyond the finite number of stocks I’ve discussed in recent reports to find and capitalize on nice short-sale moves so far this week. There have also been fresher set-ups that I’ve discussed in recent GVRs, such as Norfolk Southern (NSC), which reversed at its 200-dma yesterday and streaked to lower lows today.

So, once again, we can take a victory lap on the short side, but the market remains a volatile and tricky affair. As we’ve seen, the best way to handle this is to simply go with the set-ups you see in real-time. That can put you in the right position to get lucky, and those who shorted moves into resistance over the prior two days were rewarded.

Currently, I’m not seeing anything I consider to be in an optimal short-sale position. On the other hand, some of these U&R moves in beaten-down short-sale targets could offer some long-side swing-trading opportunities for nimble traders as long as one keeps their stops tight. Again, those looking for longer-term trends on the long side should remain in cash.

For now, that’s about it as we approach Friday’s jobs number, which could move the market. Until then, just wait for the proper set-ups to occur in real-time and be ready to take your shots depending on how things play out from here. 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.