The Gilmo Report

September 15, 2019

September 14, 2019 5:45 pm ET

The market finds itself in a familiar position. The Big Three major market indexes are all sitting right up near their prior highs, but the situation under the hood is less sanguine. Financials and semiconductors have led the market’s latest bid for new highs while other formerly leading areas of the market have been beaten senseless.

The NASDAQ Composite Index looks constructive as it pulls in on declining volume while remaining well above its 50-dma. From a purely index point of view, the action is certainly not bearish. How bullish it is, however, at least from an individual stock perspective, is less clear.



As I wrote on Wednesday, 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 has been fed by relatively positive economic data, and recent comments from Fed Head Jerome Powell that he did not see a recession in the U.S. as likely.

The Financial Select Sector SPDR Fund (XLF) has subsequently launched off its recent August lows in a ferocious move to the upside. It has now carried as far as the late-July highs. As I’ve discussed in recent GVRs and blog posts, this move by the financials is predicated on a less-dovish Fed. I tend to think that the Fed may be slow to lower rates as much as the market wants in the short-term, but longer-term this may not be the case.

So, as we see the XLF rally back up to its highs, the idea of a double-top short-sale set-up comes into play based on the theory that interest rates are likely to continue to come down even after an expected ¼-point rate cut when the Fed meets next week. Perhaps clarification in this regard may not be forthcoming until the Fed policy announcement is in fact released next week.



But as the XLF and its major components, shown below in a group chart, scream straight up off their July lows and up the right side of very steep cup formations, they have been better longs than shorts. At least this has been the case over the past two weeks or so. The action so far is typical of what we’ve seen for the past six months: Money piles in and then piles out of the group based on the latest Fed utterances.

The rally in financials is premised on the belief that the Fed may be “one and done” after its next meeting. If that is not the case, then look for an inflection point back to the downside to potentially materialize. I find it difficult to be long financials when it is so dependent on the near-term direction of interest rates and when I tend to think that the longer-term outlook for rates is lower.



As financials rally on the belief of steady rates to come, the SPDR Gold Shares (GLD) and Shares Silver Trust (SLV) continue to sell off as well. No surprise there as their upside moves became extended. The GLD ran into resistance at its 20-dema on Thursday while the SLV broke near-term support at its own 20-dema.

When it comes to buying the metals, I lean toward the idea of wanting to use deep pullbacks in opportunistic fashion. As I’ve said many times before, when everybody loves precious metals, that is generally not the time to buy them. When everybody hates them, then I get interested.

After sharp run-ups, sharp pullbacks can often ensue, and we can now watch for the 50-dma in both the GLD and SLV to serve as potential support. If they can hold their 50-dmas, then that may offer the most opportunistic entry point we can look for at this stage. As with financials, I have no doubt the Fed policy statement this Wednesday will figure heavily into the future direction of bonds, which have also been selling off, and precious metals.



Apple (AAPL) illustrates why you never want to use a right-side peak price as a buy point. The proper buy point occurred earlier in the week when the stock posted a re-breakout through the far left-side peak of the prior base. Buying on Wednesday’s breakout through the so-called buy point on the right-side peak of the most recent base structure extending back to early August was not optimal.

That would have simply put one in the position of immediately being underwater after the stock gapped down and closed below the 221.37 new-high buy point on Friday. Now AAPL is sitting closer to Tuesday’s re-breakout move and the 10-dma. If one were looking to get long the stock, then the 10-dma at 214.65 strikes me as the best lower-risk entry spot.

Otherwise, watch for a breach of the 10-dma and 20-dema which would turn AAPL into another failed-base situation as it was in early August. Where the stock goes from here will likely depend on whether the current general market rally is for real or not. At the same time, where AAPL goes from here may also figure into where the market goes as well, so play it as it lies.



Among big-stock NASDAQ names, AAPL is the leader currently. Below I show four big-stock NASDAQ names like I showed in Wednesday’s report, except that I swapped out Intel (INTC) for Netflix (NFLX).

Among these four, Alphabet (GOOG) is in the most bullish position. It is rallying back up toward the highs of a big, loopy handle to a big cup-with-handle type of formation that extends back to late April. All you see here is the right side of the cup and the handle that has formed over the past six weeks.

As I discussed in prior reports this past week, GOOG looked buyable along the 10-dma. At that time, (AMZN) was pulling into its 20-dema and it has edged higher since. It is now approaching its 50-dma, where it could become shortable, so that would be something to watch for.

Microsoft (MSFT) is perched right at the confluence of its 10-dma, 20-dema, and 50-dma and in the precise middle of a rising but very choppy upside trend channel extending back to the early August lows. I watch this for a breach of the moving averages as a short-sale trigger.

Netflix (NFLX) got a boost on Friday from a Piper Jaffray analyst who reiterated a $440 price target for the stock. I don’t understand the logic behind this, quite frankly, but it pushed the stock right up into its 20-dema. This does put it in an initial potential short-sale entry position, but if it should clear the 20-day line then I would love to see the 50-dma come into play.



I continue to maintain my own longer-term downside price target at 231.23, NFLX’s late-December 2018 low. Meanwhile, the action in other big-stock NASDAQ names remains a mixed bag and relatively tepid considering that the NASDAQ Composite is making a run at all-time highs.

Among the payments stocks I discussed in my Wednesday report, carnage in the cloud stocks this week and last was joined by carnage in payments stocks like Global Payments (GPN)Mastercard (MA), and Visa (V). These are all up in areas where they present lower-risk short-sale entry opportunities.

All three ran up into areas of resistance on Thursday and reversed to close below their 50-dmas. These remain in shortable positions, with GPN being shortable as close to its 10-dma as possible, while MA and V are most optimally shorted at their 20-dema/50-dma confluences.

All of these are late-stage, failed-base (LSFB) short-sale set-ups at this point, and it will be interesting to see whether these play out as full-blown, LSFB short-sale set-ups from here.



Semiconductors continue to do their part to keep this market buoyant. Among my four favorite chip names to play, Micron (MU) and Applied Materials (AMAT) are in extended positions. Only pullbacks to the 10-dma would offer lower-risk entries from here for both stocks.

KLA-Tencor (KLAC) posted a pocket pivot at its 10-dma on Wednesday, but that didn’t lead to any further upside for the rest of the week. Instead, KLAC is still sitting along its 10-dma with volume declining, which puts it in a lower-risk entry position right here using the 10-dma as selling guide.

Advanced Micro Devices (AMD) is the laggard among the group and the one that is more fun to pick on as a short-sale target every time it rallies up to the 50-dma. Right here, however, it is pushing up into the 20-dema as volume declines, which can perhaps be viewed as a possible short-sale entry spot. On the other hand, another rally back up toward the 50-dma would make for a more optimal short-sale entry, so one might prefer to wait for that.



The cloud software space is an amazing thing to behold. The group has so completely been smashed with little sign of relief. Most of these names can’t even muster a reaction bounce even after reaching what are arguably extremely oversold positions. The eight charts below illustrate what I mean, with only Coupa Software (COUP) offering shorts another entry at the 50-dma earlier in the week.




Alteryx (AYX) demonstrates just how bad things are for beaten-down clouds. The stock is the current poster-child for out-of-the-blue sell-offs that are notable for their utter brutality. Note how the stock has been down all week long as every attempt at an oversold reflex bounce gets sold into on heavy volume. A hot stock that has now turned into a hot potato.



Shopify (SHOP) gave short-sellers another shot when it briefly rallied above the 50-dma on Thursday but stalled. It then reversed back below the 50-dma, triggering as a short once again. Notice that the undercut & rally move from earlier in the week was only good for a brief upside move before SHOP rolled over again. From here, rallies into the 50-dma would offer better short entries now that the stock is back below the 50-dma. (CRM) is perhaps holding up better than most of these high-PE cloud names as it continues to feed off an allegedly strong earnings report from late August. That said, the stock hasn’t made much progress since, as it trundles back and forth within a three-week price range.

Resistance has been clearly defined along the range highs, so my tendency would be to look to short CRM on rallies up to those highs around 157. That approach would have worked well on Thursday as the stock reversed on a weak-volume rally attempt. It is now back down to the confluence of four moving averages, most notably the 50-dma and 200-dma, as volume dries up.

This may set it up for another move back up toward the prior range highs, where it might become shortable again. I’d also watch for a breach of the 50-dma/200-dma confluence as a short-sale trigger, should that occur. CRM is no different than the cloud software names in general – it is a high-PE stock that sells at 49 times next year’s earnings of $3.10, representing 9% annual earnings growth. This makes it vulnerable to a PE-contraction, in my view.



Social-networkers remain unimpressive as well. Facebook (FB) keeps running into resistance at the 50-dma, where it has been a short twice over the past seven trading days. That remains the case for now, and any additional rallies into the 50-dma can be treated the same way until and unless FB is able to clear the 50-dma.



Snap (SNAP) came unglued earlier in the week, but I noted on Wednesday that it was posting a U&R move at that time which could be traded as a swing trade on the long side. Now that U&R move has carried right back up into the 50-dma, where I would now view SNAP as a short, using the high of Friday at 16.13 as a selling guide.



In my Wednesday report I noted that Twitter (TWTR) “…looks like it wants to become another failed breakout among leading stocks in this market.” It moved further in that direction on Friday when it dipped just below its 20-dema on light volume. After piling in on the prior week’s breakout, buyers don’t seem interested in the stock even as the major market indexes make a bid for new highs.

This could be viewed as a short right here using the 20-dema as a guide for an upside stop. The other option is to take a more opportunistic approach and look for a rally back up into the 10-dma if it can clear the 20-dema.



Previously hot IPOs also remain flat on their backs. Only Beyond Meat (BYND) has pushed up into a potentially shortable position at its 10-dma and 20-dema using those moving averages as a guide for an upside stop. Otherwise, I would continue to view rallies up into the 50-dma as the more optimal and opportunistic short-sale entries if you can get ‘em.

CrowdStrike (CRWD), Pinterest (PINS), and Zoom Video Communications (ZM) are meanwhile doing the old bump-and-roll. All three stocks were brutalized last week and earlier this past week but managed to bounce off their Monday lows before rolling over again on Friday. The selling in these names may be shocking to some, but in my view, it is what happens when stocks trade like the worthless pieces of paper (in modern times digital paper) that they really are.



Shake Shack (SHAK) ended the week six cents below the $100 Century Mark and 75 cents below its 10-dma. For now, the 10-dma seems to present solid resistance for the stock. In combination with its potential failure at the Century Mark, it is left in a shortable position using the 10-dma as a guide for an upside stop.

The situation here is very fluid, however, as the stock is essentially sitting on the fence and could go either way. However, I would note that this market has seen a mass movement out of higher-PE or high PE-expansion names. With SHAK looking to earn 65 cents in 2019, it sells at 153 times forward earnings. If we get generous and use 2020 estimates of 78 cents, then it sells at a “bargain” forward-PE of 128.



Keysight Technologies (KEYS) looked like it might want to move higher based on my assessment in my Wednesday report, and it did retest the highs of its buyable gap-up price range of late August, but stalled, on Friday. It could break out, but I still would take an opportunistic approach here and look for pullbacks to the 20-dema as lower-risk entries.



Sharp selling in Roku (ROKU), which started before AAPL announced their new Apple+ streaming service, is starting to subside as volume dries up. At the same time, the stock is holding support at the 20-dema, which may put it in a lower-risk entry position looking for a swing trade back up toward the 10-dma. This action has the look of a Wyckoffian Retest where the stock sets a low four days ago, rallies, and then holds up on a retest of that low as volume dries up.

ROKU corrected 21% in just two days, which is quite a bite, and may be forming a longer-term top. In this position it looks like it wants to rally, but a decisive breach of the 20-dema would trigger it as a short-sale at that point, should that occur. 360-degrees, please.



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 see the major market indexes pushing toward their all-time highs and I hear the pundits emphasizing the excitement of it all. The big problem is that at the same time I’m seeing almost nothing coming through my screens that looks all that enticing on the long side. The mind-bender here is that despite the index move toward all-time highs, this was a week for short-sellers, as so many formerly leading stocks blew apart.

This all adds up to a strange paradox. Unless one pulled off a reflex buy of financials two weeks or so ago on the premise that the Fed would not be lowering rates as fast as the market previously believed, or bought certain semiconductors on the premise of an impending U.S.-China trade deal, even an interim one, there is not a lot of steamy love flowing on the long side of this market.

And where there has been some upside love to be found, a sudden shift in the news regarding the Fed’s mood or the continued lack of progress in the U.S.-China trade talks could send things in the opposite direction. This is still a news-driven market, and the moves in financials and semis have certainly been news-driven.

No doubt the Fed meeting this week will create more news-driven price movement, and that may be the event to key off on Wednesday. What they say or don’t say may drive some tradeable volatility, which is what I’ll be watching for come Wednesday. It may also set up reversals in financials, precious metals, and bonds, depending on what the Fed says.

I’ll be generous and concede that we could see things set up on the long side again as the current index rally develops, but it is simply not happening right now. Instead, we see leading groups blow apart, which may be a cautionary sign, and beaten-down groups rise rapidly off their lows on news. That, my friends, is a rotational market at work. For now, as I see it, this remains a swing-trader’s market on either side, long or short, based on the set-ups at hand, and not much else.

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.

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