The indexes ran into resistance on Thursday as they came within a wiggle of their all-time highs. But a higher-volume reversal from the Dow and stalling moves in the S&P 500 and NASDAQ Composite Indexes set the technical stage for a news-driven sell-off on Friday.
News that a Chinese delegation had cancelled its scheduled meeting with farmers in Montana sent the market off the edge. From a purely technical vantage point, we have a stalling day on Thursday as volume declined sharply followed by a break to the 50-dma on Friday on heavy quadruple-witching options expiration volume.
Both the Dow and the S&P 500 have double-top looks to their charts, not unlike the small-cap Russell 2000 Index, which has been down four days in a row. The uneven action is consistent with my assessment in recent reports that this is still not a roaring bull market, and the action under the hood remains mixed.
Financials have also reversed off their recent peaks, something I’ve been waiting and watching for. Friday’s news perhaps helped to emphasize the idea that the Fed will indeed be lowering rates again soon, sending the Financial Select Sector SPDR Fund (XLF) down on a two-day break off Wednesday’s peak. Thursday’s stalling action after an attempt to break out to new highs was the first clue of an impending pullback.
Friday’s action saw the XLF pierce the 10-dma, which triggered a short-sale entry at that point. As I’ve discussed in recent blog posts, this can be played by shorting the XLF, shorting individual financials, or going big with the 3-times leveraged Direxion Financial Bear ETF (FAZ) and timing entries on the five-minute 620-chart on Thursday and Friday.
Precious metals and bonds interpreted the news similarly, and the SPDR Gold Shares (GLD) and Shares Silver Trust (SLV) both rallied Thursday and Friday with volume picking up on Friday. The GLD moved convincingly back above its 10-dma and 20-dema while the SLV is holding support along the 20-dema.
As I wrote on Wednesday, I viewed the pullback in the GLD to the 50-dma as an initial lower-risk entry given that the 50-dma served as a tight selling guide if gold kept declining. But as I saw it, the pullback to the 50-dma was the first point of reference for the most opportunistic entry on the chart, and that worked, so far.
Semiconductors, which have benefited from perceived positive trade news over the past few weeks, also did not take kindly to the news. Applied Materials (AMAT) and Micron (MU) dipped below their 10-dmas. In a steep double-top type of position, I will use this as a short trigger with the idea of cutting the trade if the stock(s) regains the 10-dma.
KLA-Tencor (KLAC) is still sitting above its 10-dma, so a breach of the 10-dma can be watched as a possible short trigger if we see the general market and the semis as a group start to come off. Certainly, if the upcoming mid-October trade talks resumption goes bad, semis will likely suffer a fate like what they suffered in August.
Advanced Micro Devices (AMD) remains in a bear flag, with rallies into the 20-dema first and the 50-dma second serving as potential, lower-risk, short-sale entries.
Roku (ROKU) has gone from Stock of the Year to Disaster of the Week, plummeting through its 20-dema and 50-dma over the past three trading days. The stock couldn’t muster anything better than a one-day wonder bounce off the 50-dma on Thursday before slicing right through the line on Friday with the help of an analyst’s sell recommendation and $60 price target.
Can it go that low? Well, keep in mind that ROKU does not produce content, it only facilitates access to other streaming services. If a content war heats up, and streaming services decide to become more proprietary, then ROKU could be in for a sustained downtrend, and it did start the year at $30.
After all, it is another infinite-PE stock that traded on potential rather than fundamental reality. Conceptually and thematically, it had its day in the sun, as a phenomenal long that started when I first discussed this stock as a buy in early January as the market turned off its late-2018 lows. As is often the case with big-stock leaders that have huge price runs, the situation eventually tops and reverses with brutal effect.
ROKU may find more solid support down here as it approaches the $100 Century Mark and a major area of price congestion at the prior base. Weak rallies into the 50-dma from here would be your only potential short-sale entries following two prior short-sale entry triggers at the 20-dema and the 50-dma over the past three days.
As I’ve discussed in prior reports, I will key off Apple (AAPL) when looking for inflection points in the market that can then be played using the ProShares UltraShort QQQ (SQQQ). AAPL is the market in many ways, as I noted in my last report. When it comes off, the market is likely doing the same as was the case on Friday.
Now I’m watching for a possible breach of the 20-dema as a short-sale trigger and a potential late-stage failed-base (LSFB) short-sale set-up to come into play. With AAPL now failing on the latest new-high breakout and dropping below the 10-dma, this becomes a real possibility that must be watched for.
The case for an SQQQ entry was also bolstered by a high-volume breakout failure from Microsoft (MSFT). Now, a breach of the confluence of the 10-dma, 20-dema, and 50-dma would trigger this as a potential late-stage, failed-base, short-sale set-up.
Amazon.com (AMZN) chimed in with its own breakdown on Friday in support of the SQQQ long entry. The stock triggered a short-sale entry once it breached the 20-dema. It then broke down to a point near the 200-dma on heavy volume.
The 200-dma might serve as near-term support, but if the market rolls over here then look for a breach of the 200-dma to occur. If that happens, then that would trigger another short-sale entry at the line. Otherwise, it may continue to be shortable on weak rallies into the 20-dema.
Netflix (NFLX) perhaps looked “too low to short” at the 20-dema on Wednesday, but as I wrote that day, “…the 20-dema is back in play as near-term resistance so that rallies back up into the 20-dema line would be your initial potential short-sale entry spots.” NFLX offered one last short-sale entry at the 20-dema on Thursday. The stock then broke out through the lows of a bear flag to lower lows on Friday.
Volume was, of course, heavy as a result of quadruple-witching options expiration, which is the case for all these big-stock NASDAQ names. NFLX’s inability to make a run for its 50-dma in a reaction rally from an oversold position tells you just how weak it is. This is another reason why I still believe it is headed for its late-December low.
I laid out the simple plan for shorting the payments stocks discussed in recent reports, and both Mastercard (MA), and Visa (V) worked as shorts at their 50-dma. They both reversed at the line on heavy volume Friday in a textbook breakdown. Rallies into the 50-dma would continue to offer lower-risk short entries if you can get ‘em.
Global Payments (GPN) busted its 50-dma on Friday, triggering a short-sale entry as a potential late-stage, failed-base (LSFB) set-up. The selling is not surprising since it was booted out of the S&P 500 Index earlier in the week. Now rallies back up into the 50-dma would offer lower-risk short-sale entries from here.
Pagseguro (PAGS) was discussed in my Thursday video report as running into an area of overhead price congestion which put it in a potentially shortable position. It then broke below its 20-dema on Friday but closed 14 cents above its 50-dma where it held support. Watch for a breach of the 50-dma to trigger another short-sale entry at the line.
Social-networkers also weakened on Friday with the market. Facebook (FB) and Twitter (TWTR) both had short upside moves off their 20-dema on Thursday and into early Friday. That was a possibility I discussed in my last report. But the 360-degree theme came into play with both as they morphed into short-sale targets later in the session on Friday.
FB reversed badly at its 50-dma on heavy volume, which would have triggered a short-sale on the reversal through the 50-dma for anyone watching for that. TWTR reversed at its 10-dma, so looks less ugly unless we note that it also reversed at its prior breakout point.
Thus, TWTR should be watched for a breach of its 20-dema since this would trigger the stock as a short at that point. It then brings into play the potential for an LSFB type of short-sale set-up to come into play.
Snap (SNAP), meanwhile, stalled in a tight price range on Friday. It is sitting at the highs of its current price range after a straight-up-from-the-bottom move on news. News was responsible for the biggest one-day move in the stock off the 50-dma on Tuesday.
But I am skeptical of this SUFB move at this point. The news on Tuesday, as I noted on Wednesday, was that SNAP was in early talks with media companies about powering a dedicated news section inside the Snapchat App. If I may engage in a bit of simplistic fundamental analysis: news-feed schnews-feed!
Is a news-feed the be-all-end-all of SNAP’s future? I don’t think so. I may be wrong, but I know one thing: I would not be looking to buy the stock up here. In fact, I may be more inclined to view it as a potential short-sale at what is potential price resistance along its current price-range highs.
In Cloud Land we are seeing some rallies from oversold positions in certain names within this beaten-down group that may be working their way into shortable positions. These will, as with any other short-sale entry opportunity discussed in this report, work best if we see the general market continue to pull down this coming week.
Coupa Software (COUP) has rallied just above its 50-dma and closed at its highs from the prior week. This could put it in a shortable position using the prior high as a stop for the more opportunistic short-seller, or one could wait for a breach of the 50-dma as a short-sale trigger.
Notice that I’ve exaggerated the vertical scaling of COUP’s price chart to enable a more detailed examination of the price action. Otherwise, it might not be easy to see that while COUP has cleared the 50-dma, it ran into some resistance at the prior high. In this market, as I’ve noted before, sometimes moving-average resistance is less significant than price resistance, and that could be the case here.
Atlassian (TEAM) does not require any finagling with the price scaling on its chart to see that it stalled and closed below its 50-dma on Friday on heavy volume. This puts it in a lower-risk short-sale entry position using either the 50-dma or Friday’s high as your guide for an upside stop.
Ring Central (RNG) is in a similar position as it stalls around its 50-dma. The stock was able to rally later in the day to close seven cents above its 50-dma. In this case I would simply look for a reversal back below the 50-dma as a short-sale trigger.
Below is a quick group chart glance at three beaten-down cloud names that are rallying into areas of potential resistance. The first is GoDaddy (GDDY) which reversed at its 50-dma on Friday, triggering it as a short-sale right here using the 50-dma as a guide for an upside stop.
ServiceNow (NOW) has rallied just beyond its 50-dma, but is at a point where it is testing its prior range highs. This could set up a reversal back below the 50-dma which can be watched for as a potential short-sale trigger.
Splunk (SPLK) is bumping up against its 200-dma as its 50-dma slopes down toward the 200-dma in an impending Black Cross. I’m watching this for weak rallies right up into the 200-dma and the 50-dma as potential short-sale entries.
Salesforce.com (CRM) worked out as a long trade at the 50-dma on Wednesday as it continued rallying into Friday. But it then ran into resistance along its prior range highs in the 156-158 price area and stalled on heavy volume. It has previously worked as a short along these highs, and so far, it gives no indication that this has changed based on Friday’s action.
CRM illustrates the 360-degree nature of this market where serious trends are nowhere to be found (unless it’s something like ROKU or SHOP on the downside) and most of the action consists of two-side chop within a relatively well-defined price range.
In this position, we would look for the stock to remain a short along the range highs. I still tend to think that in a weak market CRM is another high-PE/high PE-expansion name ripe to fall. Thus, while it remains shortable along the current one-month range highs, watch for an eventual and potential downside resolution on a breach of the 50-dma.
Neither one of the IPO long ideas I discussed in Wednesday’s report, Corteva (CTVA) and Fastly (FSLY) worked, and in fact both worked better as shorts once they breach support at their 50-dma and 20-dema, respectively. Both therefore triggered as short-sales at that point, and both demonstrate how unconvincing this market is on the long side.
With a market that is looking quite dicey under the hood, I’m frankly not surprised that these failed to hold support. Most recent, hot IPOs have been decimated, and if we can consider IPOs as a group, the weight of the group is making its presence felt in these two recent IPOs as well.
I did get Zoom Video Communications (ZM) right, however. I discussed this as a short at the 20-dema in my last report and it dutifully reversed at the line on Friday. For now, it remains shortable on weak rallies back up into the 20-dema.
Pinterest (PINS) is rallying along the underside of its rising 50-dma and keeps stalling at the line as it does so. Again, note that the original short-sale entry occurred on the breach of the 20-dema back in early September, which I was looking for at the time, per my report discussions.
As PINS keeps rallying, short-sellers trying to hit it at the 50-dma has so far been frustrated. However, we now see the 20-dema coming down to meet up with the 50-dma, and at this point the stock may have ripened enough where it now has a higher probability of breaking to the downside.
Within the context of further market weakness this coming week, the odds of that occurring are also bolstered significantly. So, if you’re a short-seller, keep this on your action list as it may come to fruition within the context of more market weakness.
I warned in my Wednesday report that members should not be surprised if Shake Shack (SHAK) keeps rallying unless and until we see a clean breach of the 10-dma and the $100 Century Mark again. It has successfully tested the 10-dma over the past two trading days.
In this position, of course, it is extended after posting a single five-day pocket pivot on Friday. Remember that we want to see a cluster of five-day pocket pivots in lieu of a single ten-day pocket pivot, so one pocket pivot is most definitely not a cluster. This one remains on my watch list as a 360-degree situation depending on how it pans out from here within the market context.
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.
In my last report, I noted that I see very little that is compelling on the long side despite the major market indexes pushing toward all-time highs. The pundits and commentators have all been focused on the hype of a possible breakout, but so far, the concrete evidence isn’t there. Certainly, that can change, but for now I continue to find that the short side is more profitable than the long side.
The current move toward new highs was jump-started by the renewal of U.S.-China trade talks in three weeks. The Chinese want to separate trade issues as they pertain to the U.S. trade deficit with China on the one hand, the intellectual property theft and market restrictions on the other. If the upcoming talks produce nothing fruitful, then the band-aid that has held this market up may come off in a hurry.
Friday’s news was a hint that perhaps there remains far too wide of a divide between the U.S. and China for a real deal to be made. Meanwhile, there are rumblings in the overnight repo market that started this past week when overnight lending rates were bid up to as high as 10%, forcing the Fed to come in and add liquidity each time. The Fed has stated that they will continue to do so through at least October 10th.
I’ve been asked whether this is a significant event with respect to presaging a financial crisis. I do not think one can know for sure or jump to any firm conclusions. This has happened before, and it has not always led to a crisis of any kind. That said, if something is afoot, I think you will see it in the action of the market and individual stocks.
Therefore, this remains a nimble swing-trader’s market, as it remains highly news-oriented and prone to quick reversals in either direction. Swing-traders who choose to participate should simply continue to focus on the set-ups at hand and go with them. If a larger trend develops, then the set-ups should push you in the right direction. Play them as they lie.
CEO and Principal, Gil Morales & Company, LLC
Managing Director and Principal, MoKa Investors, LLC
Managing Director and Principal, Virtue of Selfish Investing, LLC