The Gilmo Report

October 31, 2018

October 31, 2018

Lower lows on Monday kept an ominous Halloween glow hanging over the market. But once again the market’s tendency to act like a cheap drunk who remembers nothing about what they did and with whom the night before took effect. A small gap-up open blossomed into a rally early yesterday, but the market then began to waver again, looking like a replay of Monday’s ugly action was in store.

But the market held its ground even after dipping into the red and rallied in classic oversold melt-up fashion into the close. This was a notable difference given the prior melt-down-into-the-close type of moves we have seen in recent days. Thus, the oversold, v-squared condition took hold and the indexes continued higher today as beaten-down stocks of every stripe finally bounced off their extreme lows.

The Dow Jones Industrials Index was the out-performer today on a relative basis as it was the first of the major indexes to rally above its 200-dma. In fact, it was the only one, and the move didn’t even hold the 200-dma as the index churned around to close below the line on higher, heavy month-end volume. So far, the evidence is that this may just turn out to be a shortable bounce.

 

GR103118-$INDU

 

It wasn’t until these last two days of October that the S&P 500 Index was able to put together two rally days in a row all month. That’s how scary-bad things were by Monday’s close. Perhaps it is something of a consolation that things didn’t get scarier going into today’s Halloween trading session. However, it was not much consolation that the index stalled and closed near its intraday lows on heavy volume without making it to its own 200-dma.

 

GR103118-$SPX

 

Meanwhile, the NASDAQ Composite Index also ended the month with its only back-to-back up days throughout October. It also stalled and closed near the lows of its daily range, which has a bearish look on what so far just looks like a garden-variety, two-day oversold reaction rally. We shall see how this plays out in the next few days, but short-sellers should keep their antennae up here just in case we get a significant reversal.

 

GR103118-$COMPQ

 

I’ve discussed in recent reports the essential concept at this stage of the market’s correction that the fat part of the short-selling game was getting long in the tooth. This established a v-squared, or volatility with velocity, condition once the market became oversold, and the index charts well-illustrate the extreme volatility we’ve seen over the past several days along the near-term lows.

Thus, it is still not a market for investors, although it has been one for traders on both the long and short sides of the market, at least as the v-squared condition along the current lows has continued. Traders are faced with two basic options on a daily basis as the market swings to and fro:  a) short rallies when the indexes/formerly leading stocks run up into areas of potential resistance, or b) go dumpster-diving on the long side looking to catch a U&R long set-up for at least a trade, despite the poor track record of U&Rs throughout the October decline.

Undercut & rally, or U&R long set-ups, have in most cases not resulted in sustainable rallies as stocks have gone cliff-diving over the past month. A lot of two-day rallies on a U&R long set-up have occurred, but then stocks have simply rolled over and moved to lower lows. The bottom line is that in October, U&R long set-ups did not provide the kind of upside thrust we might otherwise be looking for.

We can see how this has worked in a big-stock former leader that has come completely undone over the past month, Amazon.com (AMZN). Undercuts of prior lows in late September, late July, and late June did not produce sustainable rallies.

The undercut this week of the short consolidation the stock formed back in May has produced a gap-up reaction to the upside, but it remains to be seen how well and how long this holds up. This may just end up being shortable as it approaches the 200-dma.

 

GR103118-AMZN

 

You can see how the same pattern of failed U&R attempts has plagued another busted big-stock former leader, Netflix (NFLX). U&R moves through prior lows on the way down produced some upside spasms, such as the one it had after earnings in mid-October (which turned out to be a shortable gap-up). On Monday, NFLX undercut the 271.22 low of April 4th, a deep low if there ever was one, and turned back to the upside.

Today, the stock gapped up with the market and rallied right into the 10-dma before turning tail and closing in the lower half of its daily trading range. Thus, NFLX was shortable at the 10-dma, and it is surprising that this was as far as it was able to get today after becoming so deeply oversold.

 

GR103118-NFLX

 

Nvidia (NVDA) is perhaps a more brutal example since it has come almost straight down in a massive cliff-dive from all-time highs that were achieved at the end of September. From there, all the areas of price congestion on the way down were like so much melted butter as the stock sliced right through all of it.

And on the way down, as it passed through the lows of these various areas of price congestion, it failed to produce anything significant in the way of a strong U&R move back to the upside. Not until it finally undercut the 180.56 of December 5, 2017 yesterday did NVDA rally for two days in a row for the first time in October.

Since then, the stock has been streaking sharply lower. And you must ask yourself whether this ugly pattern is simply going to build on this U&R and streak back up to the highs. I don’t think so. At best, it would need to stabilize and begin building the lows of a potential new base, and I use that term loosely.

 

GR103118-NVDA

 

And a former leader that is perhaps less broken-down, PayPal (PYPL), doesn’t strike me as a screaming long here. All its been doing has been to swing up and down over the past few days. It spent most of last week bouncing between its 50-dma and 200-dma before busting the 200-dma on Monday.

That breakdown below the 200-dma filled the upside gap rising-window of nearly two weeks ago. This then triggered a somewhat random gap move today that cleared the 200-dma and held, on declining but still above-average volume. While one might have gotten away with a two-point move off the 200-dma this morning, buying it yesterday after Monday’s sharp breakdown would have taken a leap of faith.

Now I’m inclined to short the stock on any further rally back up to the 50-dma. But you can certainly get a sense of how the v-squared condition of the market is reflected to some extent in certain stocks, PYPL of course being a prime example.

 

GR103118-PYPL

 

Tractor Supply Co. (TSCO) looked interesting over the weekend after posting two pocket pivots in a row along its 10-dma, 20-dema, and 50-dma last Thursday. This led to a standard-issue base breakout on Monday on above-average volume. The last two days have seen the breakout go nowhere as it dipped back below the breakout point today on higher volume.

That’s not impressive action for a breakout that took place just as the market was staging a strong oversold reaction rally. This of course brings up the question as to whether one should buy the breakout or short the breakout. Given the track record of breakouts in this market, I’m inclined to fade this thing.

However, if one is to assume that this is going to turn into a failed breakout and therefore a late-stage failed-base (LSFB) short-sale set-up, then we need to see TSCO bust its 20-dema. This would likely include a breach of the 10-dma and the 50-dma given their current proximity to each other and the 20-dema.

Otherwise, if you think this current general market bounce is going places, then perhaps you could think about buying this as a standard-issue breakout. I’m open to playing this however it lies but I would rather look for a pullback to the higher 10-dma at 89.27 as a lower-risk entry given that the breakout occurred from a move straight up from the lows of the base.

 

GR103118-TSCO

 

Over the weekend I discussed Boeing (BA) as follows, “If the market rolls lower, then the stock remains a short here using the 20-dema as a guide for an upside stop.” When the market opened higher on Monday, and then rolled over on a break to lower lows, BA became quite shortable at the 20-dema. With the Dow breaking over 500 points to the downside on an intraday basis, BA played a key role in that, busting to an intraday low of 328.63.

At that point, BA was undercutting the prior September lows as it came within 60 cents of its August low way down at 328.03. That triggered a classic undercut & rally move that, over the past two days, completely retraced Monday’s cliff dive. But the stock again ran into resistance along the confluence of the 20-dema and 50-dma and reversed to close near its lows for the day.

Volume declined sharply as buyers disappeared, and BA’s fade at the end of the day coincided with the Dow’s (and the market in general) fade below the 200-dma going into the close. For now, BA has been consistently shortable on rallies up to the 20-dema, which is now below the 50-dma, and that remains the case as far as I’m concerned, pending further evidence to the contrary.

 

GR103118-BA

 

Twitter (TWTR) has been up four days in a row since last Thursday’s bottom-fishing buyable gap-up (BFBGU) move after earnings. That was buyable on pullbacks closer to the 50-dma over the past couple of days but until yesterday the 200-dma had served as near-term overhead resistance. Not to worry, however, since TWTR simply plowed right through the 200-dma yesterday on a pocket pivot move.

That led to a move higher today in sync with the general market pop, but TWTR also stalled off the highs in manner that mimicked the late-day stall by the general market. Nevertheless, the stock is holding up, and the 200-dma now becomes near-term support. Therefore, pullbacks to the 200-dma from here would be your reference for possible lower-risk entry opportunities.

 

GR103118-TWTR

 

Tesla (TSLA) is holding up well after the sharp move off the lows over the past week or so. That move has included two pocket pivots on the way up, one at the 50-dma last Tuesday and the second at the 200-dma last Friday.

In this position the stock is extended, such that only pullbacks to the 200-dma at 311.19 would provide lower-risk entry opportunities from here.

 

GR103118-TSLA

 

Viomi Technology (VIOT) has edged higher this week, closing tight along the $9 price level over the past two days as volume dries up sharply. Monday’s pullback closer to the 20-dema was in my view a better entry opportunity vs. chasing it up here. While one can certainly take a position here and use the 10-dma or 20-dema as selling guides, I would prefer to come in on a pullback to the higher 20-dema, at least.

As I discussed over the weekend, VIOT has a compelling thematic drive and is also showing strong earnings and sales growth, including strong forward estimates of 71 cents a share for 2019. It goes without saying, however, that the stock has the best chance to move higher if the general market stabilizes and if we see some relief come to Chinese stocks in general, most likely in the form of a cooling-off of the current high-heat trade war between the U.S.  and China.

 

GR103118-VIOT

 

This morning I blogged several stocks as potential U&R set-ups that one could consider, including some of the weed patch names. Here we see Aurora Cannabis (ACB) post a clean U&R back up through the prior 5.89 September low and rally yesterday. That rally continued today before the stock closed at 6.80, up another 11.66%. It is now extended.

 

GR103118-ACB

 

Premium Gilmo Report members currently have access to my short-sale watch list, which at this point is essentially a compilation of busted leaders. Almost all these stocks, except for a few “fresher” set-ups, are deep down in their patterns. Over the past two days most of them look a lot like Square (SQ), which undercut its prior October low yesterday and then rallied.

That rally continued today as the stock pushed through the 10-dma on above-average volume. Along with names like Okta (OKTA) and Momo (MOMO), which I mentioned in my blog post this morning, SQ’s move was one of the strongest on the list, and it did not stall like most of the other names on my short-sale watch list.

SQ is expected to report earnings next week, so I would not necessarily be looking to short the stock ahead of earnings unless I thought I could get a quick, decent-sized scalp and get out of Dodge before earnings. That said, the stock is currently in an active U&R long set-up using the 65 prior low as a selling guide, if any of you were alert enough to catch it yesterday.

 

GR103118-SQ

 

Most of the movements in stocks over the past few days have been tailor-made for short-term swing-traders and day-traders. It has also been possible to trade inverse index ETFs using the 620-method so far this week, but mostly as a day-trading activity if one wants to try and capture 30-40 cent moves.

For my money, I trade leveraged inverse ETFs like the ProShares UltraPro Short QQQ ETF (SQQQ) with the idea of catching a significant intraday breakdown, such as we saw on Monday. That’s generally how I approach this, and I will give the SQQQ, or whatever other inverse ETF I’m using, a little room just to give it a chance to score big for me. When it doesn’t, it’s generally a case of nothing ventured, nothing gained.

Here we can see that the SQQQ went straight down at the open and didn’t stop until it dropped below 13.60. It then began to turn as the MACD crossed bullishly, signaling an entry at 13.68. It then proceeded to trend above 14.10, a 42 cent move or so, and then gave way to the downside as it trended lower all day until the final hour began.

At that point, the MACD lines began to flatten and swirl around each other before the orange fast MACD line broke away from the blue slow line, triggering another entry at around 13.60-13.65. The SQQQ then rallied right into the close as the indexes faded, closing at 13.88. So, two small moves during the day, but not really what I look for when trading these ETFs. Optimally, what I’d like to do is catch an inflection point on this current market bounce that then sends the SQQQ back up near 17 as the indexes perhaps retest their lows.

Not that this must happen, but as the market rally reaches potential inflection points on any reaction rally (such as it did today when the Dow stalled at its 200-dma), I will test positions in the SQQQ with the idea of keeping my risk very tight. This is one strategy that I have found useful as the market has broken down all throughout October, and even at points where volatility with high-velocity sets in.

 

GR103118-SQQQ Intraday

 

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 market is currently in a two-day rally attempt off the Monday lows. In conjunction with this we have seen many brutally busted former leaders that have dived deep into the depths of their patterns attempt to rally off their lows. Where this ends up is unknown currently, but the stalling action we saw today was not all that encouraging for those wanting to take a rigidly bullish stance right here, right now.

What we know for sure is that the market is currently not in a position where intermediate-term investors can think about building positions in an effort to ride an impending bull trend. Right now, we are in the Land of V-Square, and only nimble short-term traders need apply. That is simply the reality of the market’s current condition as it attempts to reflex-rally off Monday’s lows.

All we can do is watch things closely and seek to take advantage of set-ups as they emerge in real-time. In many cases, today’s rally led to some shortable moves in busted former leaders, like NFLX or BA, for example. Meanwhile, U&Rs popped up in a few names yesterday, which are conversely playable on the long side.

Lacking any clear trend, at least right now, this is what we have to work with. Not that I’m complaining, because the bottom line is that October was extremely profitable on the short side, as members who’ve at least been around for all of October can attest. Now we are waiting to see what sort of trend develops from here, whether that is another leg to the downside in an ongoing correction, or a more coherent bottom and rally after a month of sheer selling brutality. Play it as it lies, but only if you’re a nimble trader, until further notice.

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.