The Gilmo Report

October 6, 2019

October 5, 2019

The technical context for a market rebound was already brewing by Wednesday, as I discussed in my report of that day. Most beaten-down former leaders and current short-sale targets were in what I call “undercut & rally” or U&R Land and in a logical position to bounce. And when the NASDAQ Composite and the Dow Indexes both tested and rebounded off their 200-dmas on Thursday, the oversold rally was on.

The week started out with a sharp decline caused by fears of recession, but Friday’s jobs number told a story of Goldilocks as the tepid 136,000 jobs created was seen as enough to stave of recession while weak enough to keep the Fed interested in lowering rates. The number didn’t even exceed the margin of error for this widely-watched Bureau of Labor Statistics number, so I find it easier to understand the rally over the past two days from a technical point of view.

A sharp two-day rally sent both the Dow and the S&P 500 back above their 50-dmas, albeit on light volume Friday, as both indexes filled the gap-down window from Wednesday’s action. The extreme v-shaped action with a big two-day sell-off followed by a two-day rally of nearly equal magnitude is a trademark for this market. But the technical context for such a rally was already there as I wrote on Wednesday before it began.

 

 

The NASDAQ’s move was perhaps more spectacular on Thursday as a big outside reversal to the upside. But it fell short of clearing its 50-dma on Friday as it rallied up to but still just below the line on light volume. Someone unfamiliar with the Great QE Market of the 2010’s might view the action as bizarre, but to me it’s just another day at the office following the oversold condition that was already taking hold by Wednesday.

 

 

Precious metals initially sold off in response to Friday’s jobs number but held their ground just above their 50-dmas. Both the SPDR Gold Shares (GLD) and the iShares Silver Trust (SLV) tested their 50-dmas on Friday and held support. In this position, both can be viewed as buyable along the 50-dma with the idea of using the line as a tight selling guide.

 

 

Financials rebounded as the Financial Select Sector SPDR Fund (XLF) bounced smartly off its 200-dma on Thursday and then kept on moving higher on Friday. As I wrote on Wednesday when the XLF had slashed lower, “The XLF is now looking to meet up with its 200-dma, and is extended on the downside, as are many of individual short-sale targets among big-stock financials like GS, JPM, BAC, etc.”

That led to a logical rebound off the 200-dma on Thursday and then a recovery on Friday back above the 50-dma. Volume was much lighter, and it’s not clear where the XLF will go from here. I’m looking for either a move up to the 20-dema as a potential short re-entry, or a reversal back below the 50-dma as a short-sale trigger if it can’t make it as far as the 20-dema.

That, however, is entirely dependent on market context. Financials broke with the market on Tuesday and rallied with it into week’s end. They have not recovered all the drop that occurred from Tuesday into early Thursday, and the 50-dma remains the critical demarcation for further upside or downside from here.

 

 

I noted in my Wednesday report that the market could be ready to bounce in typical oversold fashion based on the chart positions of individual stocks. This was the primary evidence for my view that we were ready for a possible oversold rally. For example, McDonald’s (MCD) had undercut its prior September low on Wednesday and was pulling a classic undercut & rally (U&R) move at that point.

That was a clear cover/profit-taking point for the short initiated near the 50-dma on Monday. While the U&R move could have been played as a short-term, swing-trading long opportunity, MCD ran into resistance at its 20-dema today, where it stalled on light volume. That brings it back into shortable range using the 20-dema as your covering guide.

 

 

Shake Shack (SHAK) was another busted leader plumbing lower lows, but in this case, it found support at the 50-dma on Thursday. However, the moving-average undercut & rally (MAU&R) move it pulled on Thursday hasn’t resulted in much of a rally. I would look for any move up closer to the 10-dma or 20-dema as potentially lower-risk, short-sale entries from here.

Note also, that in typical 360-degree fashion there is another way to look at this. Based on the MAU&R at the 50-dma, Friday’s action was also voodoo along the 50-dma as the stock held support at the line. Therefore, one could also go long the stock here in anticipation of playing any rally up to the 10-dma or 20-dema on the long side.

 

 

Within my food/restaurant short-sale plays group, Beyond Meat (BYND) was also in a third type of position where a rally became likely. Instead of an undercut & rally like MCD, or a moving-average undercut & rally like SHAK, BYND filled its prior gap and rallied from there. The three stocks very nicely illustrate three standard Ugly Duckling/OWL long set-ups that we look to use when the market engages in oversold rallies.

While BYND has rallied from that gap-fill down to 142.90, it hasn’t gone very far. The move stalled on Friday at the 10-dma, even during a big index rally as buyers lacked enthusiasm for the stock. This may therefore become a short right here using the 10-dma as a covering guide. If it keeps rallying, then look to the 20-dema and then the 50-dma as your next areas of potential resistance.

I think one should remain open to BYND as a 360-degree situation, however, since the current pattern has the slingshot look to it. A big gap-up move last week sputters and pulls back on low volume as the slingshot gets pulled back and stretched. This can then lead to a move higher, a phenomenon I discussed in my GVRs in relation to the semis when they were rallying in August.

 

 

These undercuts of prior lows and sharp breaks to moving averages or the lows of prior gap-up windows become cover points for the disciplined short-seller. I certainly hope members listened to me regarding this basic concept when it came to RingCentral (RNG). I wrote on Wednesday that the stock was at a cover point based on the U&R move off the lows that day.

Staying disciplined and taking profits when things get a big piggy on the downside is how you stay out of trouble on the short side. RNG illustrates this all too well. If one did not cover and take their profits, looking to perhaps re-enter on a weak rally into resistance, one got caught on today’s big gap-up after RNG and Avaya Holdings (AVYA) announced a strategic partnership.

That led to a move that played out as a buyable gap-up (BGU) as the stock opened at 145.29, quickly posted a firm low at 145.01, and took off from there. If one was still short the stock from the 50-dma, then one could have quickly made up their loss by covering and going long on the BGU. Now RNG is very extended, and we’ll see how this plays out from here, maybe even as an extended short, but that is too early to determine.

 

 

A beautiful picture of v-shaped madness is found in the chart of Coupa Software (COUP). On Wednesday I noted that it had “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 which could have also served as a U&R long entry trigger for the brave and nimble trader.

As it did in mid-September, COUP pushed right through the 50-dma on Thursday in a wild and steep v-shaped maneuver. It is now attempting to break out for the third time in a month! This is crazy action, but certainly in keeping with COUP’s personality.

Now that it sits right at its prior breakout point, I might watch for a reversal that would trigger a short-sale entry. That said, I have to wonder who or what causes this sort of price action, because it strikes me as random and machine-like. Certainly not what you might expect from humans.

 

 

Other rallies among cloud names have been less manic. For example, Salesforce.com (CRM) has rallied from an oversold position but only today cleared back up through a prior low in the pattern. It then stalled on the approach to the 10-dma as buying volume failed to materialize.

In this position, I’d look to short the stock as close to the confluence of the 10-dma, 20-dema and 50-dma, depending on how far it can rally from here. The other aspect to keep in mind here is that CRM is also in a U&R position where the prior low at 147.74 would serve as a selling guide if one chose to play this as U&R in 360-degree style.

 

 

GoDaddy (GDDY), ServiceNow (NOW), Splunk (SPLK) and Atlassian (TEAM) got extended to the downside as short-sale targets earlier in the week. The first three all had clear U&R moves after undercutting lows in their patterns from at least a few weeks ago. TEAM, however, undercut its Monday low and rallied.

As I wrote on Wednesday, the short-selling party in all these names had ended in the near-term once the U&Rs were in place. If one didn’t flip long on any of these U&Rs, something that was quite possible for an alert, nimble and fearless swing-trader, now one is looking for these rallies to carry up into potential resistance.

At that point they may become shortable again, depending on the general market context. GDDY is at its 10-dma, which would be your first reference for resistance, with the 50-dma just above. NOW has cleared its 50-dma and is headed for its prior highs in the $270 price area where it could encounter resistance again.

SPLK has cleared its 50-dma and is now headed for its 200-dma where it could run into resistance. TEAM is heading for its 50-dma after clearing the 10-dma/20-dema confluence. Note the furious rallies off the lows in all these names, something that is a trademark for this market. As I’ve noted many times in my reports, the sharpest, most high-velocity price moves occur off the lows of patterns on U&R moves, which makes the U&R not only a beautiful short-covering signal, but also a long entry signal that can lead to fast profits on the upside for the alert swing trader.

These types of wild jacks off the lows are a major reason why I look to take profits on undercuts of prior lows or other moves down to support, before they occur. Often this will coincide with things getting a bit piggy (remember the Piggy Principle) from a profit standpoint as my short-sale positions blow apart. One is then free to decide whether a U&R can then be played on the long side.

 

 

Semiconductors have also rallied with the market over the past two days. Micron (MU) did not undercut its prior August low on Wednesday or Thursday, but the retest was successful as the stock rebounded from there.  It is now moving back up toward its 50-dma on volume that is about average to slightly below average, where it could run into resistance once it gets there, thus serving as a potential short-sale re-entry spot.

 

 

Applied Materials (AMAT) pulled a U&R move on Thursday as it also bounced off its 50-dma. This has taken the stock back up through the 10-dma and near its prior highs on weak volume. A reversal back below the 10-dma could be used as a trigger to come back after this on the short side.

 

 

KLA-Tencor (KLAC) triggered as a short-sale on Wednesday when it breached its 10-dma. However, no confirmation was forthcoming as the stock held the 20-dema and then rallied on Thursday. It moved higher and closer to new highs on Friday as volume declined.

KLAC could continue to rally if the market keeps moving higher. In the meantime, I’m interested in seeing whether another breach of the 10-dma triggers the stock as a short-sale if this occurs within the context of the two-day market rally running out of gas and rolling over.

 

 

Advanced Micro Devices (AMD) undercuts its early-August low on Thursday and bounced off a point very near to the 200-dma. That was a valid U&R long set-up and the stock continued right up into its 10-dma on Friday. Volume was light, so this could offer a short-sale entry at the 10-dma while using it as a covering guide.

Should the market and AMD continue to rally, then look for the 20-dema or even the 50-dma to come into play as secondary areas of potential upside resistance. For now, however, you have a U&R in progress, so I would be open to this rallying further than one might expect given how deep down it is in its pattern.

 

 

Apple (AAPL) continues its habit of failing on breakouts only to re-breakout again. It did this once more on Friday on a big-volume gap-up move on news from the Nikkei Asian Review that the company had asked suppliers to increase production for the iPhone 11 by up to 10%. This sent AAPL to an all-time closing high on Friday.

Note that AAPL had already posted a U&R move on Thursday as it undercut both the prior lows of the flag formation that extends back to early September and the 20-dema. This made for a combination U&R and MAU&R type of set-up leading up to Friday’s gap-up move.

If one was going to buy the stock, then Thursday’s U&R move was the time and place. In this position I now consider the stock to be extended on the upside since Friday’s move does not qualify as a buyable gap-up given the small 16% increase in volume. It is technically within so-called buying range of the breakout. But you all know how I feel about that sort of thing.

 

 

In the group chart of big-stock NASDAQ names below, we can see Amazon.com (AMZN) attempting a U&R through the lows of late August, while Alphabet (GOOG) has rallied back above its 50-dma and up to its 20-dema.  It may be in a shortable position at the 20-dema, using the line as a covering guide.

Microsoft (MSFT) undercut a prior low from early September and has slashed its way back above all its moving averages. This remains an erratic stock that seems to be shortable at the highs and buyable at the lows in contrarian fashion.

Netflix (NFLX) stalled slightly at its 20-dema, where I view it as shortable using the 20-dema as a tight covering guide. I suppose there is always the outside chance that it could rally as far as the 50-dma. But for now I’ll operate on the basis of the 20-dema as a near-term short-sale entry point while keeping my stop tight.

 

 

Here come all the payments stocks I’ve been discussing in recent reports as they pull various U&R moves on Thursday and streak back up to their various overhead moving averages. These all made for fantastic shorts early in the week, but after two days of sharp downside price breaks, they all turned back to the upside with the general market.

Now each is either at or approaching a potential area of resistance where it could offer a short-sale re-entry point. Global Payments (GPN) is right at its 20-dema with the 50-dma just above. Mastercard (MA) is right at its 50-dma.

Pagseguro (PAGS) is right at its 10-dma with the 20-dema and 50-dma up a little higher. Visa (V) has cleared its 10-dma and 20-dema and is now approaching its 50-dma. It’s possible that any of these could become shortable again at their various moving averages, but this would likely have to occur within the context of a general market rally failure.

Thus, one would want to remain flexible, as would be the case with any of these prior short-sale targets, from clouds to restaurants and everything in between, as they engage in oversold rebounds. Just be aware of where resistance lies and be ready to act within the proper market context, as was the case on Tuesday. At the same time, be open to the possibility that they could just keep rallying.

 

 

Social-networkers have also all rallied with the market over the past two days after getting quite oversold. Both Facebook (FB) and Twitter (TWTR) posted undercut & rally moves through prior lows in their pattern. FB did so after finding support around the 200-dma, while TWTR undercut an early-August low to set up its own U&R move.

FB and TWTR could offer short-sale re-entry points as they approach their 20-demas, so that can be watched for. Meanwhile, Snap (SNAP), which has been brutalized since its big reversal two weeks ago following an analyst’s buy recommendation and $24 price target, failed on a U&R attempt on Friday. Rallies into the 20-dema can also be watched for in SNAP as potential short-sale entries although it’s not clear to me it has the ability to do so.

 

 

As I discussed in Wednesday’s report, Tesla (TSLA) reported its quarterly sales numbers that day after the close and looked to be gapping down on the Thursday open. That’s what happened, and initially the stock looked like it was triggering as a shortable gap-down when it broke below the 50-dma.

But within the context of the general market rebound as the NASDAQ bounced off its 200-dma, TSLA was able to regain its 50-dma by the close. It churned around the line on Friday and closed just below it as volume declined. I would have to call this a short right here, using the 50-dma as a tight covering guide.

Alternatively, one could use the 234.78 intraday high of Friday as an alternative, wider covering guide. However, I would be open to the stock quickly retaking the 50-dma and turning higher from here as well. So, this is a 360-degree situation, depending on how it plays out from here.

 

 

The latest round of trade talks between the U.S. and China are scheduled to take place late this coming week starting on Thursday, October 10th. This may be the next big piece of news that moves the market one way or the other. Frankly, I’m not sold on the idea that an agreement of any kind will be reached, but on the other hand I’m not assuming anything.

In the meantime, from a purely technical standpoint, I’m picking up some rallies into resistance among Chinese names that may put them in shortable positions. Momo (MOMO) is one as it pushes right into its 50-dma on weak volume, where it stalled on Friday and presents a potential lower-risk short-sale entry right here at the line.

 

 

Alibaba (BABA) is in a similar position as it pushes just above its 200-dma and right into the 50-dma. Volume has been declining over the past three days which constitutes wedging action into the 50-dma. With both MOMO and BABA, one would use the 50-dma as a tight covering guide.

 

 

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 short-sale window came and went this week as target stocks broke hard early in the week and then rallied sharply into the end of the week. As I wrote on Wednesday, all of our short-sale target stocks were quite oversold at that time and also in positions for potential U&R and other types of oversold rallies. Thus, it was time to take short-term short-sale profits.

That turned out to be prescient as the market found its feet and turned on Thursday, sparking a two-day rally that was almost as furious as the prior sell-off. If anything, the action confirms that this is a market for nimble, opportunistic, and courageous short-term traders and certainly not one for investors looking for more intermediate-term trends.

Unfortunately, I don’t see the volatility ending any time soon. But at the same time, the volatility creates opportunities for those swing-traders who understand the proper set-ups to use on both the long and short sides of the market. This is why I continue to focus on a specific list of names in my written reports, since this is a more than sufficient number of trading vehicles with which to play the volatility in 360-degree style. At the same time, the smaller list of names is much easier to monitor amid such volatility.

This is what the market is giving us right now. Unless one is oriented toward such rapid-fire short-term swing-trading in either direction, I believe it is best to sit on the sidelines. As the market now rallies, we can wait and watch to see if we get another shot at the short side as our target stocks rally into potential resistance.

If you choose to play, be fearless, be opportunistic, and be patient as you wait for the right set-ups to show up in real-time, and do not overplay your hand. Aside from AAPL, there is virtually nothing on the long side that looks coherent from a traditional technical standpoint, but U&Rs are prevalent. Thus, expect the OWL and the Ugly Duckling to remain our friends if this market rally continues.

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.

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