The Gilmo Report

September 11, 2019

September 11, 2019

The daily chart of the NASDAQ Composite Index looks constructive as it successfully tested its 50-dma on an intraday shakeout yesterday and then moved higher today. But underneath the surface of this market, there has been a great deal of carnage in formerly leading groups. Meanwhile, financials and semiconductors, for the most part, keep the indexes buoyant as the market displays some obvious bifurcation.



The strength in financials helped take the small-cap Russell 2000 Index back up through its 50-dma, as we can see on the daily chart of its proxy, the iShares Russell 2000 ETF (IWM) below. You might notice some similarity between the IWM chart and that of the XLF, further below.



The move in financials is likely driven by the idea that the Fed will only lower rates 25 basis points at next week’s meeting. This is also evident in the action of precious metals which have been selling off. The Financial Select Sector SPDR Fund (XLF) shows a pattern that is representative of most big-stock financials as it rallies back up toward its prior late-July highs.

This could set up double tops among the individual financials and the XLF, but right now that isn’t clear. Suffice it to say that for now the market is again getting strong support from a group that is jerking up off its recent August lows. This has been typical action for a highly rotational market environment.



Both gold and silver have been correcting, which doesn’t surprise me given how extended they became on the upside. The SPDR Gold Shares (GLD), not shown, may be set for a test of its 50-dma at 138.53, which I would consider the best lower-risk entry spot if it comes down that far. Meanwhile, the Shares Silver Trust (SLV) is holding support along its 20-dema.

With the SLV holding support at its 20-dema, if it can continue to do so then it could provide the context for a bounce in the GLD as well. Volume is drying up nicely here, so this does become a lower-risk entry spot using the 20-dema as a tight selling guide. The situation remains fluid since it is likely going to be driven by the market’s sense of just how dovish or hawkish the Fed feels when it makes its latest policy announcement next week.



Carnage in the cloud stocks this week and last was joined by carnage in payments stocks like Global Payments (GPN), PayPal (PYPL), Paycom (PAYC), Mastercard (MA), and Visa (V). All these stocks correlate with sharp breaks off their recent highs over the past three trading days. The relevant question here is what, if anything, is this telling us about the economy and the future direction of the market?

All five of these stocks, with the exception of PYPL which was already busted, represent failed late-stage breakouts. And failed breakouts are not the sole property of payments stocks, but a number of other areas of the market. Again, it raises the question as to the underlying strength of this current market rally.



Obviously, investors long these stocks have not enjoyed the index rally over the past few days. The payments stocks also illustrate the danger that lurks in groups that are acting well one day, and then being sold in what has all the appearances of a panic as the market pulls the rug out on owners of GPN, MA, PAYC, and V.

Apple (AAPL) announced its new Apple+ streaming service yesterday, and its $4.99 monthly subscription price helped send its competitors careening to the downside, most notably Roku (ROKU). I wrote last week, however, that ROKU looked to be getting somewhat climactic and quite extended. The pullback is no surprise, therefore, but it was quite steep and sudden.

An alert short-seller could have hit the stock as it broke the 10-dma early in the day yesterday for a nice one-day swing-trade. ROKU found support today at its 20-dema as volume receded but still came in at above average. This can be viewed as a lower-risk entry position, but a breach of the 20-dema would trigger the stock as a short-sale again.



In my Tuesday video report, I said that perhaps we should just buy Apple (AAPL) since it had posted a re-breakout yesterday on strong, above-average volume. The stock led the market higher earlier in the day as streaked past the $220 price level again and closed at an all-time high of 223.59.

If you believe in buying new-high breakouts, then the stock is still within buying range of the right-side peak at 221.37. However, as I discussed in last night’s GVR, it could have been bought first thing this morning based on using the re-breakout point at around 213-214 as an earlier entry.



Other big-stock NASDAQ names didn’t seem to find as much inspiration from AAPL’s fortunes. In the group chart below we see a mixed bag. Intel (INTC) leads the pack of four big-stock NASDAQ names in the chart since it is a semiconductor and chip stocks have been leading the market as of late. (AMZN) is pulling into its 20-dema, which does put it in a lower-risk entry position. Alphabet (GOOG) has progressed a little further past its range breakout of last week. I noted in last night’s GVR that the stock was holding tight and looked constructive. Microsoft (MSFT) has sold off with the cloud software names and is back below its 50-dma.



Semiconductors have remained one area of leadership in the current index rally, but the action has not been all that uniform. Universal Display (OLED) added to the growing parade of recently failed breakouts that are occurring even as the Big-Three Indexes push toward their prior highs.

Anyone buying this breakout six trading days ago is certainly not having fun amid the current index rally. Now, any weak rallies back up into the 50-dma would put OLED in a lower-risk short-sale position.



Overall, however, big-stock techs are helping to drive this market higher, as the Vaneck Vectors Semiconductor ETF (SMH) shows below. Semiconductors as a group illustrate a highly rotational character where money has piled in and then out of the group twice over the past six months.



Among my four favorite chip names to play, Micron (MU) has benefited from three analyst upgrades over the past few days. The first set a price target of $50, the second a price target of $58, and the third, which came this morning, a price target of $66. This has kept the stock in rally mode as it pushes to higher highs.

On the group chart below we can see that MU stalled today on heavy volume. The stock has been extended for some time, and my only entry preference here would be on a pullback to the 10-dma.

Advanced Micro Devices (AMD) continues to live below its 50-dma where it was last shortable on Thursday. It continued its descent from the 50-dma today. Both Applied Materials (AMAT) and KLA-Tencor (KLAC) are holding up near their recent highs, and only KLAC could have been viewed as buyable today when it pulled into its 10-dma.



Cloud names have been a disaster lately, but to short-sellers the experience has been nothing short of orgasmic. The two group charts below tell the story. All of these stocks are quite busted and arguably deeply oversold. Note that COUP was shortable at the 50-dma earlier today however, and it then closed back in negative territory.




Notable breakdowns not shown above include Alteryx (AYX), a name I discussed in my weekend report as one likely to break down given that it was one of the last holdouts in the group. Note how a very orderly and well-contained uptrend suddenly and without any prior notice becomes disorderly in the extreme.

Anyone long the stock and lingering too long got hit with a 15.2% downside break that became closer to 20% by today’s close. Whether this continues lower from here or attempts to stage an oversold rally, perhaps back up into its 50-dma remains to be seen. I would tend to view weak rallies back up into the 50-dma, however, as potentially lower-risk short-sale entry spots.



Shopify (SHOP), the imperturbable leader of the clouds in 2019, has also come apart, busting its 50-dma on heavy selling volume yesterday. Anyone watching the stock on Monday would have come in on the short side at the open near the 10-dma or at least on the breach of the 20-dema.

Now, with the stock rallying back up into the 50-dma, this could present another lower-risk entry position. However, note that SHOP is fairly oversold at this point, so it could always pull a temporary moving-average undercut & rally move back up through the 50-dma.



Who or what sells these things off with such furious impetuousness, as if in an extreme panic to exit all of these stocks at the same time? What triggers such selling, and why does it occur in such a disorderly fashion?

Social-networkers have weakened over the past few days. Facebook (FB), which was a short last week when it rallied into its 50-dma, has now pulled into its 20-dema. It bounced off support at the 20-dema, but volume was light. This is in an unclear position, but a breach of the 20-dema would trigger the stock as a short, should that occur.

Snap (SNAP) has come apart completely, busting below its 50-dma on heavy selling Monday after Friday’s upside move. It did, however, post an undercut & rally (U&R) move through its prior 15.03 low. Adventurous and brave buyers could attempt to play this as a long using the 15.03 low as a tight selling guide.

Twitter (TWTR), meanwhile, looks like it wants to become another failed breakout among leading stocks in this market. The stock broke out strongly last Thursday but was slammed right back into its 20-dema yesterday. It held the line today but is just below its prior breakout point. If the general market keeps rallying, then TWTR might be in a lower-risk entry position right here. But a breach of the 20-dma would trigger this as a potential LSFB short-sale play.



IPOs have been slaughtered over the past couple of weeks, and the carnage continued right into this week. The group chart of the four names I’ve discussed in recent reports reveals just how bad things have become for these once-hot IPOs.

Beyond Meat (BYND) was a short last week when it rallied into its blue 50-dma and rolled over. Now we would watch for any weak rally back up into the 10-dma/20-dema confluence as a potentially lower-risk, short-sale entry opportunity. Otherwise, the 50-dma would remain in force if BYND clears the two short moving averages.

CrowdStrike (CRWD), Pinterest (PINS), and Zoom Video Communications (ZM) are all deeply oversold. PINS is the closest to its 50-dma, so can be watched for a possible move up into the 50-dma on light volume that might then render the stock as a lower-risk short-sale entry at that point. How quickly do hot IPOs cool off!



Shake Shack (SHAK) broke below its 10-dma and the $100 Century Mark yesterday on heavy volume. Today it rallied back up near the $100 price level on light volume. This puts it in a lower-risk short-sale position here using the $100 Century Mark as a guide for a tight upside stop.



One of the more coherent patterns in this market is Keysight Technologies (KEYS), which I discussed a couple of weeks ago when it was testing the intraday lows of its prior buyable gap-up (BGU) price range. It has since slashed its way higher, and today found support at its 10-dma as volume dries up.

This therefore can be viewed as a lower-risk entry here using the 10-dma as a tight selling guide. My own preference, however, would be to take a more opportunistic approach by looking for a pullback to the 20-dema at 94.84 as a deeper, lower-risk entry.



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.

My weekend video report turned out to be timely as I covered several cloud names that were still hanging near their highs, such as AYX, and were therefore vulnerable to playing downside catch-up with the group. They then blew apart this week. What makes it all the more interesting is that this group destruction occurred in what otherwise looks like constructive index action.

It’s clear to me that despite the alleged market uptrend we are looking at a very bifurcated market where the short side has objectively been more profitable than the long side over the past few days. This represents something of a paradox, but paradoxes are part and parcel of how this market operates. This is why I continue to view this as mostly a swing-trading market where either side, long or short, can come into play in a meaningful way at any time.

This is also what makes it a confusing and difficult environment. Often, what you see is not what you’re looking at!  Can we make a new bull market out of AAPL with its -7% earnings “growth” and 1% sales growth in the most recent quarter? Somehow I doubt it, but it’s clear that money is suddenly pouring into the stock in what may very likely be more of a defensive move.

Inspired by AAPL and news that China was going to hold off on tariffs on U.S. goods like whey, “some lubricants,” and fish meal kept the index rally going today. That was not the case for many busted, formerly leading groups. Whether this is a problem for the market is unclear, so the simple solution is to continue to play according to the set-ups at hand, long or short. 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

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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