The Gilmo Report

October 9, 2019

October 9, 2019

A textbook failure at the 50-day moving average on Monday by the NASDAQ Composite and the S&P 500 Indexes resulted in a gap-down and break lower yesterday, but not without some wild and crazy intraday volatility. More news on the trade front combined with comments from Fed Head Jerome Powell about the need to start growing the Fed’s balance sent the market flying in both directions. But in the end, the NASDAQ closed at its intraday lows on higher volume.

This morning we were treated to a futures gap-up driven by news that China was allegedly open to a narrower trade deal whereby they would agree to buy more agricultural products if the U.S., agrees to hold off on more tariffs. That doesn’t sound like much of a deal to me, but it was enough to spark a gap-up move in seeming contradiction to yesterday’s ugly sell-off.

The move finally ran out of gas late in the day on news that the Chinese were lowering their expectations for a trade deal. But even with the rally today, the NASDAQ remained well below its 50-dma and merely churned and stalled at the 10-dma on weak buying volume.

 

 

Both the S&P 500 and Dow Indexes gave up their 50-dmas on Monday as well, with each closing just below the line that day. Yesterday, both gapped down and broke lower, but volume was light. Today the indexes rallied but could not quite make it back to their 50-dmas as the S&P stalled on weak buying interest right at the line.

 

 

Overall, the general market action looks suspect, and the primary underlying factors remain the same. You have a highly news-oriented, highly-volatile environment that is only suited to short-term swing-traders who are nimble, alert, resourceful, fearless, and maybe a little crazy. In my view, these types of traders have the best chance of capitalizing on the crazy volatility, while all other trend-following investors should simply remain on the sidelines.

Fed Chair Powell’s comments over the past two days confirm that the Fed remains in QE mode, regardless of whether the Chairman wants to call it that or not. That has kept a bid under precious metals as both the SPDR Gold Shares (GLD) and the iShares Silver Trust (SLV) continue to consolidate their summer gains.

The weekly chart of the GLD reveals a big-volume supporting week at the 10-dma last week. The weekly chart of the SLV, not shown, does not show the same type of supporting action, but remains above its 10-week and 50-day moving averages as well. So far, the action looks constructive and I’m looking for this to eventually resolve to the upside.

So far, we’ve seen $1480/oz. serve as rough support for gold, and I would view any pullbacks in gold down to that level as potentially lower-risk entries as it translates to the GLD. That said, with both GLD and SLV sitting at their 50-dmas, they are also in buy zones using the 50-dma as a tight selling guide.

 

 

Financials have been tagged with selling so far this week after a sharp rally into Friday last week. The Financial Select Sector SPDR Fund (XLF) then reversed at its 20-dema on Monday, which would have presented a lower-risk, short-sale entry point. From here, any rally up into the 50-dma can be watched for as a potential secondary short-sale entry opportunity.

 

 

Before I discuss any individual stocks in this report, I want to reiterate the basic idea driving my reports currently. The first thing to note is that there is no uptrend, whether confirmed, “under pressure,” or otherwise. Therefore, I have nothing for trend-following investors to do. All I can do is discuss certain target stocks and how they can be handled in 360-degree fashion.

And when I say 360-degrees, I mean according to the various permutations of tradeable, real-time set-ups that may occur in any of your target stocks from time to time, long or short, and mostly on a swing-trading basis. In the process, one might be able to put themselves in the position to get lucky, as the one member who bought RingCentral (RNG) on the U&R last week did after the stock gapped and ran over 50 points higher from there. That is all this market is giving us right now – tradeable volatility.

 

 

Thus, when the market is just giving us lemons, the best we can do is to try and make lemonade, or maybe even a festive lemon meringue pie, as one member who obviously has a clear grasp of the 360-degree approach did with RNG. At some point a more-discernible trend will develop. I have found that such trends can often appear when they seem most unlikely to do so.

So, even if there is nothing to do in a trendless environment for trend-following investors, one should still keep their head in the game and remain aware of the various potential set-ups that could lead to a more persistent trend at some point. But, clearly, this is one of the most bizarre environments I’ve seen in my 28-year plus career, and it’s not clear to me when it will change. Now let’s look at some stocks.

Aside from Apple (AAPL) big-stock NASDAQ names remain a mostly incoherent bunch, much like the market itself. AAPL, on the other hand, keeps benefiting from analyst upgrades as The Street moves to raise their price targets on the stock. The latest to chime in was Cannacord Genuity which slapped a $260 price target on the stock.

This drove a small rally in AAPL shares, but it lacked any real upside thrust. It is interesting to note that even with all the analyst upgrades, the stock hasn’t been able to decisively clear even the $230 price level. That said, it remains well within buying range of last Friday’s re-breakout move.

 

 

The group chart of big-stock NASDAQ names below reveals the moribund, incoherent action in this area of the market. Amazon.com (AMZN) remains at its recent lows. It tried to pull off a U&R type of move on Monday but reversed at its 10-dma. It then rallied back into the 10-dma today, with little upside thrust.

Alphabet (GOOG) had rallied back into its 20-dema last Friday, and I wrote over the weekend that, “It may be in a shortable position at the 20-dema, using the line as a covering guide.” That turned out to be the case, but it was only good for a two-day downside move before the stock gapped back above its 50-dma and back up into the 20-dema again today.

Microsoft (MSFT) also rolled over along the confluence of its 10-dma, 20-dema, and 50-dma on Monday, but the two-day sell-off ended today as the stock regained its 50-dma. The bottom line with MSFT is that it remains in a choppy trendless range as it goes nowhere, not unlike this market.

 Netflix (NFLX) has perhaps been the most actionable among these names. Thanks to a few analyst upgrades, it rallied right into its 20-dema on Monday and Tuesday before reversing and then breaking lower today. As I wrote over the weekend, the stock “…stalled slightly at its 20-dema, where I view it as shortable using the 20-dema as a tight covering guide.” NFLX is expected to report earnings next week.

 

 

Tesla (TSLA) played out the bullish scenario I outlined over the weekend as it cleared the 50-dma early on Monday and kept going, reaching its prior September highs today. A fairly typical 360-degree situation in this market, where a short-term trader is required to move with the real-time signals.

The bearish scenario I also outlined looked to be materializing on Monday morning when TSLA gapped further below its 50-dma. But from there, it turned on the five-minute 620-chart and went on a three-day rally. Now that it is testing the prior September highs, it is of course extended, but could reset as a short at potential resistance along those highs.

 

 

McDonald’s (MCD) pushed right past its 20-dema today after reversing at the line yesterday. As it rallies here, it comes to closer to an optimal short-sale entry point, in my view. Therefore, one could short the stock anywhere between here and the 50-dma and then use the 50-dma as a tight covering guide.

 

 

Shake Shack (SHAK) is now living below its 50-dma. This of course brings up the question as to whether the stock is in a shortable position, and technically speaking I would have to say yes. In that case, you’d want to short it as close to the 50-dma as possible and then use the line as a covering guide.

SHAK has been a successful short for us since it failed at the $100 Century Mark nearly three weeks ago. It may make more sense at this point to take the opportunistic approach and look for any move that might temporarily carry back above the 50-dma, but one can simply play it as it lies and see where it goes from here.

 

 

Beyond Meat (BYND) has continued to move lower following the gap-up move that occurred two weeks ago after MCD announced they were testing a plant-based burger made with BYND’s product and dubbed the PLT. As I wrote over the weekend, “This may therefore become a short right here using the 10-dma as a covering guide.”

So far, that would have worked as the stock is now six points below its 10-dma. It seems to me that if BYND can get a big move going on news that MCD is using their stuff, it may be cooked for good as another formerly hot IPO gone cold.

 

 

Coupa Software (COUP) is back at its prior highs following the extreme v-shaped U&R move it started last week. I often wonder what drives this stock, because it seems that it swings from a state of sellers not being able to sell enough of it fast enough to a state of buyers not being able to buy enough fast enough. A sort of bizarre “he loves me, he loves me not” love/hate relationship with investors.

And all this in a stock that is expected to earn a grand total of 18 cents a share in 2019 and then a whopping 16 cents in 2020. Go figure. Nevertheless, COUP is back at its prior highs on its fourth re-breakout attempt. My own tendency here would be to look for an inflection back to the downside on another failed breakout move, but right here that is not clear.

One can stalk this using the five-minute 620-chart to look for a possible reversal back to the downside. My guess is that such a reversal would occur within the context of a market break lower. Otherwise, COUP could just as easily keep rallying, so play it as it lies.

 

 

Among the focused handful of cloud stocks that I’ve been discussing in recent reports, we can see on the group chart below that Salesforce.com (CRM), GoDaddy (GDDY), ServiceNow (NOW), Splunk (SPLK) and Atlassian (TEAM) all rolled over after rallying into resistance on Monday. These rallies all came after each undercut prior lows last week and then rallied in typical U&R fashion.

This is the more traditional way U&Rs work on the short side. The initial U&Rs at prior lows after a downside break constitute short-term short-covering points. Then one waits for the rally to play out with the idea of re-entering a short position at resistance. In each case, these stocks rallied into resistance and then rolled over this week.

Thus, from a strict swing-trading perspective, we can see how these went from shorts early last week to longs by mid-week once the U&Rs all set in, and then back to shorts on Monday when they ran into resistance. This is the 360-degree approach in action. This is the type of textbook action you’re looking for when it comes to re-entering short positions after covering on prior U&R moves.

I would continue to focus on these cloud names as potential short-sale targets on any further rallies up into resistance.

 

 

The semiconductors are of interest to me primarily because I consider them to be most sensitive to the current U.S.-China trade dispute. If there is no agreement forthcoming, then I think they become short-sale targets. Most are still sitting around their highs, but this is not the case with every semi.

Note that Micron (MU) blew right through its 50-dma nearly two weeks ago after a weak earnings and so far, has not been able to retake even its 10-dma. On Monday, it stalled and reversed at the 10-dma, creating a secondary short-sale entry point and has drifted lower since. From here, I’d take the opportunistic approach of looking for rallies back up closer to the 50-dma and Monday’s high as lower-risk short-sale entries.

 

 

Applied Materials (AMAT) is holding up in what appears to be a cup-with-handle base. It has been shortable each time it has run up to the $52 price area, but it has yet to breach its 50-dma where it has found support several times over the past two weeks.

Today, AMAT rallied back up through its 10-dma on higher but well below-average volume. I’m tempted to view this as a short right here, using the $52 price level as a tight 2% stop. Alternatively, a reversal back through the 10-dma could also be used as a short-sale trigger while using the line as a tight covering guide.

 

 

KLA-Tencor (KLAC) has been squirrelly around its 10-dma over the past week after finally breaching the line last Wednesday. It rallied with the market and stalled on Monday near its prior highs before busting the 10-dma and then the 20-dema yesterday on higher volume.

Today, KLAC rallied back up into its 10-dma but stalled on weak buying volume. Depending on what the market does over the next couple of days, I would look at this as a potential short right here while using the 10-dma as a tight covering guide. As with AMAT, I’d be looking for something decisive to occur if the general market rolls lower from here.

 

 

Advanced Micro Devices (AMD) is a textbook U&R situation that ended up giving short-sellers a convenient short re-entry opportunity at the 20-dema on Monday. Another little rally this morning carried into the 10-dma where the stock reversed on weak buying interest. This offered a second short-sale re-entry point, and AMD now looks primed to test its 200-dma once again.

Last Thursday’s U&R move from a point near the 200-dma could have traded on the long side, but only briefly. AMD has acted more like a traditional U&R in that the move signaled a short-term cover point, and the ensuing rally then resulted in an optimal short-sale re-entry at resistance along the 20-dema.

 

 

Payments stocks mostly continue to rally up into resistance, with the exception of Pagseguro (PAGS) which rallied into its 20-dema on Monday and rolled over. Another example of an initial U&R move from last week that has simply rallied up into a short re-entry position. It stalled today at the 10-dma, but my preference would be to look for rallies into the 20-dema as better short entries.

In the meantime, I can focus on Global Payments (GPN) which rallied right into its 50-dma today on weak volume. This is therefore shortable right here using the 50-dma as a tight covering guide.

Both Mastercard (MA) and Visa (V) look roughly the same as they push up toward their 50-dmas. However, V stalled today at its 20-dema on higher volume, so can be viewed as shortable here using the 20-dema as a tight covering guide. MA, meanwhile, closed just above the 20-dema, so can be shorted here on the approach toward the 50-dma while using the line as your maximum covering guide.

 

 

Among social-networkers, both Twitter (TWTR) and Snap (SNAP) have failed on U&R attempts, acting more like traditional short-sale re-entry set-ups. TWTR ran into resistance at its 10-dma on Monday and rolled lower from there.

Snap (SNAP), meanwhile, attempted to pull a U&R move last Friday but reversed to close near its intraday lows. It is now extended to the downside.

Facebook (FB) is holding up after last week’s U&R move along the prior August low and off the 200-dma. It is now moving sideways along its 10-dma as volume declines.  This looks like it may want to make a move for its 50-dma, which is where I would look for a possible short-sale re-entry to develop.

 

 

Momo (MOMO) and Alibaba (BABA) were discussed as short-sale ideas as they ran up into their 50-dmas in my weekend report. Both broke to the downside and moved below their 200-dmas from there. BABA is much further below its 200-dma at this point, such that weak rallies up into the 200-dma from here would offer lower-risk short-sale entries.

MOMO rallied back up into its own 200-dma today, where it offered a second short-sale entry point. One would then use the 200-dma as a covering guide where one would use the line as a covering guide for shares shorted at the line.

 

 

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.

I think it’s important for members, especially new members, to understand that this is a market for 360-degree traders. I had one new member complain on Twitter that my reports have been “wishy-washy,” but I think this stems from a basic misunderstanding of the 360-degree concept.

Within the context of a 360-degree approach, one recognizes that this is a market for swing-traders looking to play things long or short depending on how the set-ups develop in real-time. I suppose this could seem “wishy-washy” to the unschooled, but the fact is that this has been a wishy-washy market. Thus, one’s approach always considers the potential for a tradeable move in either direction, depending on the set-up that appears in real-time.

For this reason, that is why I have focused on a select group of stocks in my reports to use as trading vehicles on both sides of the market, depending on the set-ups in real-time. Thus, a prior short-sale target can immediately morph into a long trade on a U&R move, and a long target can morph into a short-sale play if it stalls and reverses at logical resistance.

The basic reality of the current market, however, is that the indexes have been in a downtrend since mid- to late-September, and so most of the juicy action has been on the short side. That may continue to be the case, but I am always open to a quick scalp on the long side if a U&R or some other long set-up presents itself.

My overall impression of this market is that we are likely headed lower from here. How that plays out, however, is another matter altogether, because even though we’ve been in a downtrend since mid- to late-September, the path has been very choppy.

For now, therefore, if we are nimble swing-traders, we remain cognizant of a 360-degree approach to this market as an effective way to navigate the crazy volatility (just look at an example like COUP, for instance!), while everyone else should simply remain in cash. 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. ©2008-2020 Gil Morales & Company, LLC. All rights reserved.