The Gilmo Report

October 27, 2019

October 26, 2019

Earnings season has been quite the ride as stocks respond to positive and negative reports, but it was news that the U.S. and China were closed to finalizing “parts” of a possible Phase 1 trade deal that sent the S&P 500 Index to all-time highs on Friday on an intraday basis. By the close, however, the S&P fell just short of all-time highs as buying interest remained light.

 

 

The NASDAQ Composite Index shook off three distribution days over the prior seven trading days to post a higher high on Friday on lighter volume. It remains just below its all-time highs. Big news this week, including earnings from Apple (AAPL) and a Fed policy announcement, have the potential to squash this rally or bolster it, so the situation remains fluid.

 

 

Financials have continued to rally, and the Friday trade news perhaps helps to reinforce the idea of a Fed on hold this week when they release their latest policy announcement. The Financial Select Sector SPDR Fund (XLF) made a move for higher highs on Friday on weak volume. This will be an area of the market to watch closely once the Fed policy announcement is released on Wednesday.

 

 

One can also expect that precious metals will react to the Fed policy announcement on Wednesday. Both the SPDR Gold Shares (GLD) and the iShares Silver Trust (SLV) gapped up on Friday but stalled above their 50-dmas. The SLV’s move was much more impressive, as it posted a pocket pivot off the 50-dma on strong volume.

As I noted on Wednesday, both the GLD and the SLV remain in bases for now, ahead of the Fed meeting, but the action is constructive. Whether something opportunistically actionable occurs after the Fed meeting in precious metals and financials remains to be seen. But I believe these will be interesting areas to watch once the policy announcement has been made.

 

 

Semiconductors have sprung to life on strong earnings reports from semiconductor equipment maker Lam Research (LRCX) on Wednesday after the close and Intel (INTC) on Thursday after the close. Of the names that I watch closely as trading vehicles long or short, Applied Materials (AMAT) broke out Thursday on a gap-up move.

The volume on that move was good enough for a buyable gap-up on Thursday, and AMAT found additional impetus from INTC to push higher on Friday. One could have chosen to go long on Thursday’s move with the idea of bailing out quickly if the stock broke below its 52.75 intraday low, but the complete about-face from Thursday’s very weak-looking, gap-down break on heavy volume would justifiably have caused one to hesitate.

In this position, AMAT is now extended.

 

 

Micron Technology (MU) just missed posting a pocket pivot at its 50-dma on Thursday as volume fell short of last Friday’s levels, the highest down volume in the pattern over the prior ten days. But it was above-average, triggering a type of moving-average undercut & rally (MAU&R) move. MU then found inspiration from INTC on Friday and continued rallying.

It has now filled the prior gap-down falling window that it formed in late September after earnings. This could represent an area of potential resistance, so depending on market context, could be watched as a possible short-sale zone. How this plays out, however, could be highly dependent on news this coming week, including the Fed meeting.

 

 

Advanced Micro Devices (AMD) has rallied with its peers as it clears the $32 price level. The stock had a low-volume pullback on Wednesday, which set up the move to higher highs on Friday. Note that this entire move all began with an undercut & rally (U&R) long set-up off the lows in early October!

AMD is expected to report earnings this Tuesday after the close. Therefore, the stock is on the Earnings Watch List for now as we await any potentially actionable moves following earnings.

 

 

Tesla (TSLA) gapped up after earnings on Wednesday, as I noted in my report of that day it was trading above the $300 price level in after-hours trade and opened right at the $300 level on Thursday. It pulled in to post an intraday low at 289.20 and then pushed back up toward the $300 level.

As I discussed in my video report of Thursday evening, I would not be looking to automatically short the stock into the buyable gap-up (BGU) move because the stock felt to me like it wanted to go higher. That turned out to be the case on Friday as TSLA streaked another 28 points to the upside, nearly 10%, on very heavy volume.

As of the last reported period, TSLA has short interest of over 36 million shares, and a surprise profit on Wednesday had the shorts on the run. Based on the volume over the past two days, just shy of 60 million shares in two days, there are a lot more buyers than just those scampering to cover their shorts. Thus, while it is extended, it could go higher.

 

 

Amazon.com (AMZN) reported earnings Thursday after the close and missed, dropping to a low of 1618 in after-hours trade. It opened Friday at 1697.55 and then rallied steadily higher from there. By the close, it came within 28 cents of its 20-dema on huge volume.

There are two ways to look at this. The first is that it’s a short right here using the 20-dema as a very tight covering guide. If it clears the 20-dema, then it triggers as a moving-average undercut & rally long entry using the 20-dema as a selling guide.

The huge volume off the lows on Friday smells of big supporting action, so I would lean toward this triggering as a MAU&R on the long side, assuming the market doesn’t go haywire.

 

 

Apple (AAPL) is expected to report this Wednesday after the close. This is the biggest of the big stocks and the strongest big-stock leader in this market currently, if not the only one. Its earnings report, of course, has the potential to move the market, so it will be a big one to watch.

Netflix (NFLX) rallied up into its 20-dema on Friday and closed just below the line. Volume was weak, so initially this puts the stock in a shortable position using the 20-dema as a covering guide. Alternatively, depending on how the general market acts this week, one could also take the more opportunistic approach of waiting for a rally up to the 50-dma instead. Play it as it lies.

 

 

With cloud names having been beaten to a pasty pulp over the prior couple of weeks, they were getting oversold to the point of where U&R types of moves can occur quite easily. We see this in Coupa Software (COUP), which broke to lower lows earlier this week and then on Thursday gapped up through its prior late-September low, triggering a U&R.

It continued higher on Friday as volume contracted rather sharply. This may be approaching a lower-risk, short-sale entry point near the 10-dma, 20-dema, and 50-dma, so it can be watched for that. However, note that COUP has shown a tendency to just V its way back up to its prior highs, so we’ll see if this time is any different as it approaches overhead resistance at these key moving averages.

 

 

Wix.com (WIX) has posted a textbook wedging rally up into its 10-dma and 20-dema, without undercutting any significant lows in the pattern. This would technically put it in a short-sale entry position using the 20-dema as a covering guide. WIX is a thinner stock that trades 472,000 shares a day on average, so is more appropriate for smaller accounts.

 

 

Is DocuSign (DOCU) starting to waver or is it just basing? That’s a tough question to ask, but it is perhaps the only cloud-related software name with a near infinite-PE that remains within spitting distance of its highs. After the initial breach of the 10-dma and 20-dema over the past week, it has again rallied up into its 10-dma on light volume.

Within the context of the market rolling back from here, I might look at DOCU as a go-to short-sale target here at the 10-dma. The 10-dma would then have to serve as a tight covering guide. I would also not overlook the possibility that it simply continues to base along these highs or even break out in the event the market continues higher

 

 

For the most part, I’m not seeing anything very compelling among the cloud names, either long or short. Some of these names, like Salesforce.com (CRM) or Splunk (SPLK), are pushing through moving averages like the 50-dma. If the general market continues higher this week, look for these names to rally further up in their patterns, such that they could become buyable using their 50-day lines as selling guides.

 

 

My short focus list of Chinese names that includes Alibaba (BABA), Baozun (BZUN), JD.com (JD), and Momo (MOMO), shows what on the surface appears to be a lot of choppy action over the past few days. However, note that over the past 1-2 days some identifiable long entry signals have occurred in the form of pocket pivots.

BZUN posted a pocket pivot on Friday as it slashed above its 200-dma, while JD posted a pocket pivot on Friday at its 50-dma. MOMO posted a pocket pivot on Thursday as it rallied off its 200-dma and back above its 50-dma. It’s possible these are all actionable using their 50-dma or 200-dma as a selling guide. These three names all do not report earnings until well into November.

 

 

The main caveat with Chinese stocks, however, remains the same. That is that any shift in the news regarding the U.S.-China trade talks as they allegedly work toward a final Phase 1 agreement can send these things flying in one direction or the other. Whether that is an appetizing prospect for investors or not is something to be considered.

While the indexes flirt with new-high price territory, it was a very bad week for my three food-related stocks, Beyond Meat (BYND), McDonald’s (MCD), and Shake Shack (SHAK). All three stocks headed lower this week, and aptly illustrate how bifurcated this market can be as they live in their own little bear market.

BYND has trended lower since breaching the neckline of a big H&S formation two weeks ago (see my report of two weekends ago) and is now flirting with the $100 price level. MCD breached its 200-dma in an oversold position on Thursday and became even more oversold from there. SHAK has continued to move lower from its last short-sale point at the 20-dema on Tuesday.

 

 

Payments stocks that I’ve been following in recent reports are on the rebound after getting quite oversold earlier in the week. Two of them, PayPal (PYPL) and Visa (V) were helped along by earnings reports, sending both stocks back above their 50-dmas on strong volume. V initially moved in sympathy to PYPL, which reported on Wednesday after the close. It then cleared its 50-dma on Friday after it reported on Thursday.

PYPL continued higher on Friday after finding support at the 50-dma. Both stocks could continue higher, such that one could use the 200-dma on PYPL as a selling guide while the 50-dma would serve as a selling guide for V. If either stock breaches these moving averages, they could trigger as short-sales again.

 

 

Global Payments (GPN) is expected to report Thursday before the open, so it goes on my Earnings Watch List for now. Here we can see that the stock is wedging up into its 50-dma. With both PYPL and V rallying after earnings, can we extrapolate a similar outcome for GPN?

 

 

Mastercard (MA) is expected to report Tuesday before the open, so it too goes on the Earnings Watch List. Like GPN it is wedging up toward its 50-dma but stopped short of the 10-dma and 20-dema on Friday.

 

 

Facebook (FB) is expected to report earnings on Wednesday after the close, not Tuesday as I indicated in my last report. This will be a big one but must go on the Earnings Watch List for now as we await an actionable move after earnings. Meanwhile, its smaller cousins, Snap (SNAP) and Twitter (TWTR), reported earnings this past week with disastrous results.

TWTR was perhaps the ugliest with a massive gap-down on Thursday after it reported before the bell. That’s a good 20% plus of downside in two days, and the stock is now flirting with some major lows in the pattern. Those lows would be from the first week of February and the first week of March at 29.42 and 29.41, respectively.

The weekly chart gives us a nice perspective on where these lows are as TWTR approaches them. If the stock undercut these lows and then rallied, it would certainly trigger a U&R long entry at that point. However, keep in mind that the company reported -19% earnings growth on sharply decelerating sales growth of only 9%, so I would expect that any such U&R would only be good for a short-term oversold swing-trade.

 

 

SNAP looks about as hopeless as TWTR, but it is trying to rally back above some prior lows in its pattern. That would be the 13.42 low of last Friday, which the stock cleared on Friday, and the 13.96 low of late July, which the stock closed right at on Friday.

The two-day bounce is logical off the 200-dma, but volume declined sharply on Friday. If one is really trying to bottom-fish on this one, I’d look for a constructive retest of the low near the 200-dma. But the group is weak, and unless FB comes through with a favorable report on Wednesday, it could remain weak or become even weaker.

 

 

I’ve always been a big fan of tight, basing action, at least until the U&R long set-up entered my life a couple of years ago. Traditionally, this was the classic tight O’Neil-style action I would look for in anticipation of a breakout. There are currently two names on my long watch list (a new spreadsheet was posted to the website yesterday) that would fit this type of action.

The first is Guidewire Software (GWRE), which had a huge price move on heavy volume after reporting a -25% earnings contraction on a -13% sales contraction in early September. Go figure. In any case, that qualified the stock for a big breakout move that has so far gone nowhere. But the stock is now tightening up along its 20-dema as volume declines, which puts it in a long entry position using the 20-dema as a tight selling guide.

Opportunistic traders might prefer to see if another pullback to the 20-dema occurs, as the stock has shown a tendency to hold support at the 20-dema on several pullbacks over the past week or two. This supporting action has occurred as the market has been kicked around at times, and during a period where cloud names in general have been decimated.

 

 

The second is a name I’ve discussed in recent reports over the past couple of months, Keysight Technologies (KEYS). Back at the time I first discussed it, the stock was noodling along its 10-dma and 20-dema, but then broke down with the market in late September and early October. At that point, it pulled a U&R move through the prior, late-August BGU low and rallied from there.

It broke out on Monday on strong volume and has held tight throughout the market mayhem all week long. Friday’s action took the stock down on a voodoo pullback to the 10-dma and the breakout point as volume dried up to -48.4% below average. That puts it in a lower-risk entry position using the 10-dma.

KEYS has better fundamentals than GWRE, having posted 40% earnings growth on 8% sales growth in the last reported quarter. Alert members will also notice that it is trying to clear the $100 Century Mark for the first time in its existence, so it either pushes through or tops right here.

 

 

I view GWRE and KEYS as potential go-to names on the long side if the market continues rallying this week, and they aren’t expected to report earnings until December 3rd and November 20th, respectively. As I’ve said before, there is not a lot of stuff I find compelling on the long side of this market. If anything fits that bill, however, it would be these two names. Play them as they lie.

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.

What remains problematic for investors seeking more coherent trends is that while the indexes are flirting with new highs, most former leaders continued to get beaten down early in the week and then rallied from oversold positions into the end of the week. As I wrote on Wednesday, the short side has been very profitable, and that could remain the case after a brief period of rallying.

With the indexes near all-time highs, you’d expect to see more coherent basing patterns among potential leaders, but that is not the case. The underlying status of individual stocks remains a mixed, incoherent state of affairs more suited to short-term swing-traders than trend-following investors, but by now this is old news.

There are enough potential catalysts coming up this week that could move the market. This includes greater clarity regarding this Phase 1 trade agreement between the U.S. and China, the Fed policy announcement on Wednesday, and more earnings reports from big stocks like AAPL, BABA, FB, GOOG, MA, KLAC, LSCC, and X, for example. And with the Fed, AAPL and FB all coming out with news on Wednesday, that could be a particularly interesting day – fasten your seatbelts.

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 a position in TSLA, though positions are subject to change at any time and without notice.

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