The Gilmo Report

September 1, 2019

August 31, 2019

A Dow bounce off the 200-dma on Wednesday set the stage for a market rally, and all the major market indexes careened back up toward their 50-day moving averages and the highs of their current price ranges. The NASDAQ Composite Index gapped up Friday morning and fell just shy of its 50-dma before reversing to close near the lows of the day on lighter volume.

 

 

Unless something changes over the weekend, at the time of this writing new tariffs are scheduled to go into effect on Sunday. With the indexes sitting here at the highs of their current one-month range, things could go in either direction. My guess is that any resolution from here will likely depend on the news flow over the weekend and into next week.

That said, Friday’s early-morning rally saw the NASDAQ 100 Index kiss its 50-dma and reverse. As I blogged that morning, when the indexes were still trading well to the upside, the potential for a playable reversal could be at hand based on the positions of big-stock NASDAQ names.

For example, Amazon.com (AMZN) had opened just below its 20-dema, which represented near-term resistance, in my view. The stock did in fact reverse to the downside and closed negative. Thus, it was shortable at the 20-dema near the open.

 

 

Microsoft (MSFT) traded up to its August range highs and ran into resistance, stalling on Friday as selling volume picked up. With the stock near resistance at the range highs early this morning, that clued me into the potential for a possible reversal.

 

 

Alphabet (GOOG) was doing the exact same thing as it rallied up into its own August range highs early in the morning.

 

 

Nvidia (NVDA) also stalled around its prior range highs near the $170 price level early in the day. Note how it was able to rally off the 200-dma where it found support on Wednesday. But the rally may simply be setting it up as a short here using the prior highs around $170 as guides for an upside stop. That was certainly the case on Friday as it reversed around 170 to close near the lows of the day at 167.51.

 

 

Early in the day on Friday, Apple (AAPL) was also stalling around its prior base breakout point. The stock failed on that breakout attempt in early August and spent the remainder of the month bouncing its way back up toward the prior breakout point. It ended the stay in a stall pattern as buying interest failed to materialize.

 

 

With all these big-stock NASDAQ names pushing into resistance on Friday morning, my short-selling antennae were up right at the open. And, along with the clues provided by the chart positions of big-stock NASDAQ names like those above, the biggest clue came in the form of an early long entry signal in the five-minute 620-chart of the ProShares UltraPro Short QQQ ETF (SQQQ).

In Friday’s case, the signal was very strong. Just a few minutes before the open, the SQQQ 620-chart flashed both a MACD cross to the upside and a moving-average cross to the upside, resulting in a full 620-buy signal. Usually you don’t see the two cross simultaneously, but they did on Friday morning, and it was off to the races from there.

The SQQQ long entry signal occurred somewhere around 32.90 and led to a two-hour run to a peak of 34.28 before backing off and going sideways for the rest of the day. This also illustrates something I talk about a lot, which is that the fat part of the short-selling game on a reversal usually occurs within the first couple of hours of trading. After that, the market goes into mosh-pit mode as it flops to and fro.

This is a typical pattern for most days where the market reverses after an upside gap. Exceptions have occurred on occasion, however, and when they do the downside is often much more pronounced. Friday’s action fit the normal pattern and allowed for some reasonable short scalps within the first two hours of the day, after which one could have taken the rest of the day off.

 

 

The SQQQ example nicely illustrates the concept I’ve discussed before whereby I keep a close eye on the chart positions of big-stock NASDAQ names in order to anticipate possible entry signals in the SQQQ. I will tend to be more aggressive when I see both the NASDAQ 100 Index at a key potential resistance area like the 50-dma, which was the case Friday, while several big-stock NASDAQ names are also pushing into areas of potential resistance, as the examples above illustrate.

In any case, other similar signals could be found in the TZA, SPXU, and SDOW, all 3x leveraged inverse ETFs for the small-cap Russell 2000, the S&P 500, and the Dow. While I primarily discuss the SQQQ in my reports, I’m always open to trading any of these inverse ETFs on a market decline, and this remains one leg of my current approach to the market.

Back in the land of precious metals, comments from a member of the European Central Banks that additional QE measures were “not necessary” sent gold sliding slightly to the downside on Thursday while silver held its ground. The uptrend in the yellow metal and the SPDR Gold Shares (GLD) remains quite intact, however. The GLD is merely pulling back to its 10-dma as volume declines.

This puts it in a buyable position using the 10-dma or 20-dema as tight selling guides. Neither the ECB member’s comments nor the President’s vague insinuations of U.S. China trade talks “at another level” were able to derail the uptrend in the precious metals. As I’ve said before, the move in the metals is not a safety trade. It is a move into hard currency in anticipation of lower rates and more QE to come, regardless of what emanates from the two-sided mouths of central bankers.

 

 

Silver continues to outperform gold as the gold-to-silver ratio has now dropped below its 50-day moving average and is now trading at around 83. The iShares Silver Trust (SLV) handily outperformed the GLD this past week and is currently holding tight right at its recent highs. If you can get it, get it. A pullback to the 10-dma at 16.51 would be your first reference for support on any constructive pullback from here.

 

 

When it comes to individual stocks, the volatile index action has helped produce similar volatility. A lot of stocks can be longs one day and then shorts the next in bi-polar fashion. MongoDB (MDB) is a nice example. It gapped up on big volume Tuesday, but that was a shortable gap-up as it closed back below its 50-dma.

It then gapped up again on Wednesday, and was again shortable, closing lower below the 50-dma. On Thursday it forgot to take its medication and promptly rallied back above the 50-dma. It then reversed again on Friday, but managed to close above the 50-dma. Figuring out where the stock goes from here looks more like a crapshoot than anything at this point.

 

 

A number of cloud-related software names came under pressure this week, which speaks of some rotation out of the group. I discussed Shopify (SHOP) as a potential short-sale set-up based on Jesse Livermore’s Century Mark Rule in Reverse. It had already reversed once on Wednesday, as I discussed in my report of that day, and on Thursday it again opened above the $400 Century Mark and reversed.

That led to more pronounced downside this morning as SHOP burst through its 10-dma and went straight down to its 20-dema. But this also illustrates the 360-degree nature of most of the action in this market. If one tried to get too piggy on the short side with SHOP on Friday, then they would have missed the logical cover point at the 20-dema.

The 360-degree approach might also have dictated that one consider going long the stock at the 20-dema. The 20-dema is my favorite moving average when looking to buy into deep pullbacks, and it would have worked with SHOP on Friday. Most of the action in this market is, as I alluded to in my discussion of MDB, of a 360-degree nature where the long and the short side can come into play in quick succession.

 

 

Okta (OKTA) had a rough end to the week after reporting earnings on Wednesday after the close. But note the 360-degree action following the very shortable breakdown on Thursday when the stock was just above the 10-dma, 20-dema, and 50-dma. Once the stock broke through the lows of its pattern from the earlier part of August, it then rallied to post a quick undercut & rally move.

Unfortunately, that didn’t last long as the stock opened Friday roughly flat and then proceeded to dive back down to Thursday’s intraday lows. But again, it was able to fight its way back to another U&R, finishing the day at 126.50, well above the 124.15 low of its August price range. Where it goes from here is hard to determine, but I might view any weak rally up into the three moving averages as a potentially lower-risk short-sale entry within the proper market context.

 

 

Wix.com (WIX) is another busted cloud, in fact a cousin to SHOP, that would be shortable on weak rallies up into the trio of moving-averages up around the $144 price area. Note the undercut-and-rally attempts over the past couple of trading days. We could postulate that these will help produce a shortable rally back up to the moving averages, where the stock could become shortable again.

 

 

Big-stock cloud name Workday (WDAY) added to the carnage in the cloud space on Friday. It reported what seemed like a favorable earnings report on Thursday after the close and started the day on Friday just below its 200-dma. It then rallied back above the line and into positive territory before reversing hard and slashing back below its 200-dma.

In the process, it broke out to the downside from a classic bear flag formation. In this market, bear flags don’t often work out as they used to, sometimes turning into the classic LUie turnaround, but this one worked in textbook fashion. Now, weak rallies back up into the 200-dma could present lower-risk entries on the short side.

 

 

Avalara (AVLR) posted a U&R along the lows of its pattern as I discussed in Wednesday’s report. But the bottom line is that one would have had to buy this on Wednesday in order to participate in Thursday’s rally. That rally was a short one, as the stock reversed to close back below the 10-dma.

This is starting to falter, and given the weakness in the cloud space, it could begin to falter more decisively. Thus, in 360-degree fashion, it could turn out to be shortable right here, using the 20-dema or the 10-dma as guides for upside stops. AVLR has had a big price move and could easily be setting up in a late-stage situation that is vulnerable to failure.

 

 

In my Wednesday report I noted that Atlassian (TEAM)triggered as a short at the 20-dema today, a possibility I discussed in my weekend report.” On Thursday the stock once again tested the 20-dema but backed down to closed right at its 50-dma. On Friday, its failure became complete as it slashed through the 50-dma on heavy volume.

Note that Friday’s move did undercut some prior lows in the pattern, triggering an intraday U&R that saw the stock close above the prior late July and early August lows. Theoretically, one could have traded this as first a short and then a long scalp on Friday once the U&R move set in. From here, weak rallies back up into the 50-dma can be watched for potential lower-risk short-sale entries.

 

 

Manhattan Associates (MANH) is almost identical to AVLR and may be setting up as a short right here below the 20-dema in similar fashion. However, it is a much thinner name that trades 490,000 shares a day, thus not an attractive short-sale target relative to AVLR.

A U&R move on Wednesday, which I discussed in my report of that day, led to a weak rally on Thursday that also petered out like AVLR’s U&R and rally of the same two days. Just more back-and-forth action that creates nothing more than very short-term trading opportunities. If the general market corrects further, however, look for these names to start breaking down with the rest of the cloud group.

 

 

I noted in my Wednesday report that Salesforce.com (CRM) was sitting “in an interesting position here as it tucks into its 50-dma and 200-dma with volume drying up…With volume drying up here at support, it could rally, presenting an actionable long entry here using the two moving averages as selling guides.”

That is precisely what we saw on Thursday as the stock gapped up slightly and moved higher from there. On Friday, CRM ran into resistance along last week’s highs around the $158 level and stalled a bit to close at 156.07. I might still view this as a short here using the 158.50 level as a guide for an upside stop.

 

 

It’s clear that things are getting messy in the clouds. Some members have asked whether this represents a rotation out of the group and into some other area of the market. My view, and this is one that I’ve discussed in recent video reports, is that the clouds in general have experienced sharp PE-expansions over the past several months.

As I’ve noted in recent video reports, if the general market starts to get into trouble, professional money managers will move away from high-beta high-PE stocks and into lower-beta, lower-PE names. This, in my view, is what drives the current weakness in the group, and may continue to do so if the market remains in correction mode.

Meanwhile, it’s not clear to me that money is rotating into other areas as it comes out of clouds. In this market, the tendency has been for a group to get beaten to a pulp, at which point it suddenly and disbelievingly rises again from the grave. So, for now, all I know is that the breakdown in clouds is what it is, and has provided some excellent swing-trading short-sale opportunities if one is alert to the breakdowns.

All week long, CrowdStrike (CRWD) has been the short-selling gift that keeps on giving every time it ran into its 20-dema. It posted one final rally into the 20-dema on Thursday where it became very shortable after bouncing off its 10-week moving average on Wednesday. It then broke below the 50-dma on Friday.

CRWD closed the day below the 50-dma but above the prior 80.75 intraday low of its July 19th buyable gap-up (BGU) day. In this position, you would want to see the stock quickly regain the 50-dma in order to confirm the U&R through the 80.75 low. If it can’t, then it may become shortable right here using the 50-dma as a guide for an upside stop.

CRWD has actually been quite the short-sale target in the latter part of August. It initially failed at the $100 Century Mark last week, triggering a short-sale based on Livermore’s Century Mark Rule in Reverse at that point. The subsequent breach of the 20-dema triggered another short-sale entry, and we are now below the 50-dma.

We’ll see how much more CRWD has to give on the short side going forward, but it’s been very good to shorts in the latter part of August. The company is expected to report earnings this Thursday after the close.

 

 

Twitter (TWTR) is holding near-term support at its 10-dma after last being buyable along its 20-dema. Nothing decisive has happened here, and volume was weak on Friday’s close near the highs of the current base. The only action that would get me interested in the stock either way would be a test of the 20-dema that holds or fails.

If it holds, as it did on Wednesday, and the general market is moving higher, then the stock is a buy. If it breaks the 20-dema, however, within the context of a market that keeps correcting, then it’s a short. Play it as it lies in 360-degree fashion.

 

 

Invitae (NVTA) is wavering here but continues to maintain its U&R status along the prior lows in its pattern at 23.68 and 23.88. It closed Friday at 24.26, so remains in a buyable position, but near-term resistance lies at the 50-dma. This one remains on my long action list in the event the general market resolves to the upside.

NVTA announced a 3.8 million share secondary offering in early August, but so far there has been no news of the offering being priced and completed. That may also be something to watch for since it could catalyze a possible rally in the stock within the context of a general market rally.

 

 

Shake Shack (SHAK) continues to find resistance at the $100 Century Mark. That said, it still hasn’t broken down as it holds tight along the 10-dma. This could clear the Century Mark and move higher, so I would not get complacent about shorting it around the $100 price level. It could also turn into a long play if it can finally clear $100 with conviction, so play it as it lies.

 

 

Advanced Micro Devices (AMD) has rallied back up to its 50-dma, where it stalled and churned on Friday on weak buying interest. This is a short right here at the 50-dma, using the line or the $32 price level as a guide for a tight upside stop.

 

 

Applied Materials (AMAT) has pushed further beyond its 50-dma than AMD has, but is now back at the highs of its August price range. Volume levels picked up on Friday, so its not clear to me whether it will reverse here at the prior August highs. That’s a possibility, and one I’m watching for if it occurs within the context of the general market rolling over from here as a possible short-sale entry.

 

 

If you’re in a bullish mood, then perhaps Ambarella (AMBA) has some interest as a buyable gap-up (BGU) after it reported earnings on Thursday afternoon. AMBA opened Friday at 55.94 and then came in with the market before reaching a low of 54.04. It then turned and rallied to reach an intraday peak of 56.90 before settling in to close at 55.87.

AMBA has been a turnaround story for a while now, and I first discussed it much earlier in the year when it was trending smoothly to the upside. Since then it has had one serious gap-down break from which it recovered into late July before rolling over again in August.

These types of buyable gap-ups have had a habit of running further than one might think, so it’s possible this could keep going. I would prefer to buy it as close to the 54.04 Friday intraday low as possible. If the NASDAQ is able to clear its 50-dma soon, then AMBA may indeed have legs.

 

 

Pinterest (PINS) has been in an erratic pattern throughout August and since its buyable gap-up move after earnings at the start of the month. The pattern is essentially a choppy, rising trend channel where the stock is now testing the lows of the channel and the 20-dema.

One can view this in typical 360-degree fashion. Along the 20-dema and the lows of the trend channel, it offers a lower-risk entry possibility. If it breaches the 20-dema within the context of a general market that rolls back to its lows, then it triggers as a short-sale target at that point.

 

 

Zoom Video Communications (ZM) is clinging to the U&R it posted on Wednesday as it moved back up through the prior 89.69 low in the pattern. However, at the same time, the 50-dma remains as formidable upside resistance. Essentially, ZM is like a lot of other stocks in this market that just can’t figure out what it wants to do.

My approach is based on the 360-degree concept. The U&R within the context of a rallying market makes the stock actionable on the long side, but within the context of a market correction, rallies into the 50-dma then become short-sale entries. Other than that, it’s obvious that no clear trend exists in ZM for now. But something may materialize once the company reports earnings, which it is expected to do this Thursday after the close.

 

 

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.

“360-degrees, please,” remains my watch phrase for this market. The sloppy volatility keeps this a market where stocks fly in different directions, creating opportunities for short-term traders willing to put in the time and effort to find and act on these rapid-fire set-ups. But it’s mostly all seat-of-the-pants, on-the-fly stuff, and little more.

At some point, likely when we least expect it, a strong trend will take hold of this market. Until then, investors looking for longer-term trends can continue to stay on the sidelines, free of the crazy news-driven volatility that is this current market environment. 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

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.