The Gilmo Report

September 29, 2019

September 28, 2019

This remains the most bizarrely news-fixated market I’ve ever seen in my 28-year investment career. The past week’s trading was marked by a great deal of volatility, all due to news. Hints from the President that the U.S. and China were “closer to a [trade] deal than you think” had the indexes rallying earlier in the week.

This was countered by news about impeachment proceedings against the President. On Friday, the news flow became a tornado as initial cooing from the China Trade Minister had the indexes up early in the day, but this was instantly reversed by news that the Trump administration was considering limiting investor flows into China, including de-listing Chinese stocks from U.S. exchanges.

An attempt by the NASDAQ Composite Index to retake its 50-dma after dipping back below the line on Thursday failed miserably on Friday. The index reversed at the 50-dma on higher volume as it broke to a lower low. On its face, the action is bearish.

 

 

Meanwhile, the S&P 500 Index again tested support at its 50-dma on only slightly higher volume on Friday. Overall, it was techs and Chinese-related names that were hit the hardest, and the relative effect on the indexes is seen in the fact that the S&P 500 is still holding above its 50-dma while the NASDAQ is not.

The news drama-rama is not likely to end soon, and so this market remains one for nimble swing-traders as the market retains its generally incoherent character. On an individual stock basis, there are some nice trades to be had, but only if one can handle the extreme volatility and be able to act quickly when necessary.

 

 

The indexes were rallying happily on Friday early in the day when the news about curbing investments in China and delisting Chinese stocks hit. The turn in the markets was instantaneous, and the sell-off went on all day. It ended when the indexes ground their way a short distance off their intraday lows by the close. Crazy action, to be sure, but overall the week was very kind to short-sellers.

There was nothing in the news this week that causes me to veer from my longer-term view that a) interest rates are eventually headed lower as the Fed realizes it must cut again, and b) precious metals will go up as this realization sets in. For now, over the past few weeks, both gold and silver have been consolidating their sharp gains since May.

On Friday, both the SPDR Gold Shares (GLD) and the iShares Silver Trust (SLV) gapped down to their 50-dmas. The GLD found support at the 50-dma and closed off the line, while the SLV posted an undercut & rally (U&R) move at its 50-dma. It hit a low of 16.19 on Friday, undercutting the prior 16.28 low of September 13th.

The SLV then rallied to close at 16.36, triggering a U&R as it also found support at its 50-dma. As I discussed on Wednesday, those looking to own the GLD and/or the SLV should remain patient and opportunistic. With both now at their 50-dmas, this would be your opportunistic entry point, using the 50-dma as a tight selling guide for each.

 

 

Financials also seem to be losing conviction that interest rates are going to hold steady or go higher from here. The Financial Select Sector SPDR Fund (XLF) gave short-sellers a shot at the 10-dma on Friday as it reversed at the line to close mid-range on the day.

 

 

Below is the five-minute 620-chart for the Direxion Financial Bear ETF (FAZ), which I look to buy as a way of playing the short side of the XLF. You can see the MACD cross and entry signal at around 8:30 a.m. PDT my time. That led to a sharp spike to the upside, but the pullback to the orange six-period line could have been used as a later entry.

Notice that while the FAZ was pulling into the six-period line, the six-period line was just starting to cross above the blue 20-period line, creating a full 620 buy signal. Thus, one could have entered right there and then used a bearish moving-average cross as a selling guide. A final MACD cross to the downside provided a convenient signal to exit for the day, bagging your profit and being back in position to play again this week.

 

 

Incoherent action also dominates the big-stock NASDAQ names, but Apple (AAPL) bucks this trend by looking relatively coherent. After a recent failed breakout, the stock is now holding support along its 20-dema. Either it pops off the 20-dema and breaks out again (a typical re-breakout), or it breaks the 20-dema and triggers as a short-sale at that point.

One can simply play it as it lies, but if the market continues to weaken then I would lean toward the stock failing at the 20-dema. So far, however, this remains unresolved and I would simply key off the action in real-time. Meanwhile, if you love AAPL, then one could view this as a lower-risk entry using the 20-dema as a selling guide.

 

 

On the big-stock NASDAQ group chart below, we can see that Amazon.com (AMZN) remains weak as it breaks to lower lows. As I wrote on Wednesday, “AMZN closed just below its 200-dma today, so can be viewed as a short here using the 200-dma as a covering guide.” Rallies up into the 200-dma would provide lower-risk entries from here now that the stock is extended from the 200-dma.

Alphabet (GOOG) has pulled into its 10-dma which theoretically puts it in a lower-risk entry position within the handle of a cup-with-handle formation it is currently working on. A breach of the 10-dma and then the 20-dema would, however, trigger this as a short-sale.

Netflix (NFLX) is forming a short bear flag but remains too extended to the downside to be considered a short right here, right now. Look for rallies into the rapidly descending 10-dma or 20-dema as better secondary short-sale entries from here. Microsoft (MSFT) closed lower and right at its 50-dma on Friday. Look for a breach of the 50-dma as a potential short-sale entry trigger.

 

 

One of the primary reasons the NASDAQ Composite has busted its 50-dma again was the action of semiconductors on Friday. Micron (MU) reported earnings on Thursday after the close and cracked over 11.09% on a big gap-down move. The stock opened Friday just below the 50-dma, so a knowledgeable short-seller could have entered right there using the 50-dma as a covering guide.

MU then plummeted straight down from there. Other semis moved lower in sympathy, most notably Applied Materials (AMAT) which gapped just below its 10-dma at the open and was slammed down to its 50-dma. As I wrote on Wednesday, a breach of the 10-dma in either MU or AMAT would trigger them as short-sales at that point. MU played out differently, however, but was most definitely a shortable gap-down (SGU) that worked well.

KLA-Tencor (KLAC) held up relatively well as it only pulled back to its 10-dma. But as with the other semis I follow, a breach of the 10-dma would trigger it as a short-sale target at that time. Meanwhile, Advanced Micro Devices (AMD) rallied right back up to Wednesday’s bear flag breakout point on Thursday and then came apart on Friday to close at a lower low.

 

 

As I theorized could happen in prior reports, we are once again seeing semiconductors break down from double-top types of positions like what occurred in late July. The chart of the Vaneck Vectors Semiconductor ETF (SMH) illustrates this, where a breakout in late July lasted all of one day before the SMH plummeted to the downside.

Now, the SMH is wavering at its prior highs after a sharp rally off the lows in September. Many semis, like MU and AMAT, for example, broke out as the SMH approached its recent highs. And like so many other breakouts, both breakouts have now failed badly as the stocks morph into short-sale targets, something I was playing for, per my recent reports.

 

 

Three of the four payments stocks I’ve covered in recent reports again rallied into resistance at their 20-dema and/or 50-dma on Friday. Those were Mastercard (MA), Pagseguro (PAGS) and Visa (V), and they were all shortable at their respective moving averages on Friday per my discussion of the stocks in my Wednesday report.

Global Payments (GPN) just kept going lower on Friday. It was last shortable on the rally into the 50-dma Tuesday.

 

 

Social-networkers have also been a fruitful area of concentration for short-sellers. Facebook (FB) has been diving lower since it reversed at its 50-dma on Monday and has now reached its 200-dma. This could engender a bounce, such that any rally that carried as far as the descending 10-dma or 20-dema might present a lower-risk secondary short-sale entry opportunity.

In my last two reports I discussed Twitter (TWTR) as a short at its 20-dema. Last weekend, when the stock was above the 20-dema, I indicated that a breach of the 20-dema would trigger the stock as a short at that point. That occurred on Monday, and then subsequent rallies into the 20-dema have offered shorts more entries before it broke below its 50-dma on Friday.

Now, any blip up into the 50-dma could be used as a short-sale entry while maintaining the 50-dma as a covering guide. The gift to short-sellers on Tuesday in Snap (SNAP) when an analyst gave the stock a $24 price target turned out to be the gift that keeps on giving. After reversing around the $18 price level on Tuesday, SNAP then busted the 50-dma on Friday on heavy volume. So much for the prescience of analysts!

As I wrote on Wednesday, after the shortable gap-up move on Tuesday courtesy of the hapless analyst, the next short-sale trigger would occur on a breach of the 20-dema. We got that on Friday, and at this point with the close below the 50-dma, any blip up into the line would offer another short entry spot using the 50-dma as a covering guide.

 

 

We can see that the handful of stocks I’ve been discussing as shorts in recent reports have been more than enough to capitalize on the market’s recent weakness. That’s more than evident just from the examples above. However, as they say on those infomercials, “But wait, there’s more!!!”

In the Land of the Clouds, the beat has gone on as these stocks continue to slide. Coupa Software (COUP) reversed on a failed re-breakout attempt on Tuesday, as I noted in Wednesday’s report, and then busted the 50-dma on Wednesday. A brief rally into the moving averages on Thursday brought the stock into shortable range and it then dutifully broke lower on Friday as selling volume picked up sharply.

It is now undercutting the early September low, so there is a possibility that shorts will get another chance to hit this one if it can muster a move back up toward the 10-dma, 20-dema, or 50-dma. All three moving averages are running near to each other, so I’d start with the lowest one and work my way up from there if the stock keeps edging higher.

 

 

Salesforce.com (CRM) was again a short at the range highs on Monday, as I discussed in my Wednesday report. I also noted in that report that, “A reversal back below the 200-dma and then the 50-dma could trigger this as a short-sale from here.” That’s what we saw on Friday as the stock reversed and broke sharply lower.

From here I’d watch for weak rallies back up into the 50-dma, perhaps even the 200-dma, as potential secondary short-sale entries. As I’ve discussed before many times, CRM is another one of these cloud names selling as an extreme PE-expansion. If the market continues to weaken, it, too, is likely to succumb to a PE-contraction as so many other cloud names already have.

 

 

Overall, I’d have to say that this was also a brutal week for the cloud names I’ve been discussing as shorts in recent reports. The group chart below of GoDaddy (GDDY), ServiceNow (NOW), Ring Central (RNG), Splunk (SPLK) and Atlassian (TEAM) is a picture of ugliness as these names all broke sharply to the downside this past week.

Note, however, that NOW and RNG are undercutting prior lows in their patterns, which could trigger undercut & rally moves back up into resistance as they rolled over in nearly identical fashion. NOW has the added feature of having dropped down to its 200-dma, which could provide enough support for a reflex bounce.

Otherwise, all these names remain extended on the downside, and were last shortable earlier in the week at their 50-dmas as I discussed in last weekend’s report. I’m often fond of saying that when short-selling works the easiest, it works best. And with so many of my short-sale targets coming apart after running into resistance or busting key moving averages, successful short-selling over the past two weeks has been perhaps too easy.

 

 

Helping to demonstrate just how easy short-selling was this past week, Shake Shack (SHAK) triggered as a short-sale target along the 20-dema and the $100 Century Mark yet again on Thursday. From there it broke lower and now appears headed for a test of the 50-dma. While not likely, in my view, rallies back up into the 20-dema can be watched for secondary short-sale entries from here.

 

 

Beyond Meat (BYND) gapped up on Thursday after McDonald’s (MCD) announced that it would be conducting a 12-week test of a new plant-based burger that they are dubbing the “PLT,” which stands for “Plant, Lettuce, and Tomato.” The gap-up move took the stock right up to the prior week’s highs where it ran into resistance and reversed to close down at its 10-dma and 20-dema.

While the media made much of the fact that the move “crushed the shorts,” the reality that can be seen on the chart is that this move was not all that much within the broader context of the overall chart and may only serve to form another right shoulder in a possible H&S formation. If the shorts were “crushed” by Thursday’s move, then fools who bought the stock at the intraday peak were crushed just as much, since the stock closed mid-way between Wednesday’s intraday low and Thursday’s high.

The interesting thing here is that BYND was technically set up for a rally before the news hit on Thursday morning. That was because it posted an undercut & rally move on Thursday after it undercut and rallied back above its 136.27 low of August 16th. Thus, if one were short the stock, that would have been a point to cover and take near-term profits.

The stock is now sitting just below its 10-dma and 20-dema, which could be viewed as a short-sale entry point using the two moving averages as cover guides. If it moves higher from here, watch for the 50-dma to come into play as a potentially more optimal short-sale entry point.

 

 

McDonald’s (MCD) gapped up to its 50-dma on the news, and I blogged early in the day on Thursday that the stock looked like a short at the 50-dma. It then reversed and closed lower from there. It then held support at its 20-dema on Friday as volume dried up. Burger King has a meatless burger, too, so I don’t see this as a major game-changing event for MCD’s, frankly.

From here, I’d watch for any further, weak rallies up into the 50-dma as potential lower-risk short-sale entries. Otherwise, a breach of the 20-dema triggers a secondary entry for the stock. Note that MCD also appears to be forming the right shoulder of a possible head-and-shoulders top.

 

 

Tesla (TSLA) was splitting wide open on Tuesday as it slashed through the 50-dma on heavy selling volume. It then found its feet and turned back to the upside courtesy of a “leaked” email from CEO Elon Musk stating that the company “has a shot” at delivering 100,000 vehicles in the current quarter.

This is another variation on the way Musk has used tweets to rally his stock when things looked dire. This time it comes in the form of a “leaked” email that uses hypothetical language, to wit, the phrase “has a shot.” Analysts are already estimating 98,000 vehicles sold when TSLA reports its sales numbers later this coming week.

The last time TSLA reported these numbers, the stock rallied sharply back in July. But it then rolled over once it was revealed that the company posted a loss in excess of $400 million. The lower-priced Model 3 is where increased sales are coming while sales of the higher-priced Model S and Model X have declined.

To me, the stock was shortable on Friday as it approached the prior September range highs. Unfortunately, I couldn’t borrow the stock when it was up early in the day. I think TSLA can be watched for any opportunistic, shortable move (e.g., a rally) following the release of the sales numbers when they finally come out later this week.

 

 

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 wrote on Wednesday that the best set-ups to be had in the first three days of this past week were on the short side. That continued to be the case right into Friday. In many cases, stocks have been slammed to the point of being quite oversold.

That doesn’t mean that oversold can’t become more oversold. Just ask a stock like CrowdStrike (CRWD), which logged another lower low on Friday, closing at 53.46, nearly 50% below its August peak just above the $100 Century mark.

Circling back to the news that caused Friday’s mayhem, I doubt very much if the Trump Administration would de-list Chinese stocks from U.S. exchanges. That would wreak a tremendous amount of havoc in the portfolios of millions of individual and institutional investors. If everybody were forced to the exit door on these stocks all at once, it could turn into a very ugly scene.

As it was, the news on Friday slammed Chinese stocks of all stripes. Alibaba (BABA) broke sharply to the downside, but note that the stock was already a short on the recent failed breakout move. This was one discussed in a GVR earlier in the week, and it set up again on the bounce off the 50-dma that carried right into the 10-dma and near the prior breakout point.

 

 

Thus, one could have put themselves in position to get lucky on Friday simply by playing the short-sale set-up that materialized several days before BABA split wide open on news. In this market, this is the type of set-up you are looking for. So, technically, one didn’t have to know Friday’s news was coming, because BABA was already setting up as a short before the news hit.

So, the message remains the same. Go with the set-ups you see develop in real-time, long or short, and put yourself in the position to get lucky. That is the essence of how this market can work for nimble swing-traders as news-induced volatility continues to be a deciding factor in another wise crazy market, no doubt the craziest and most bizarre I’ve seen in my 28-year investment career.

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. ©2008-2019 Gil Morales & Company, LLC. All rights reserved.