The Gilmo Report

September 4, 2019

September 4, 2019

News out of Hong Kong overnight and a 4% rally in the Hang Seng Index had the U.S. futures champing at the bit this morning. While the morning rally embellished the open with a nice shade of green on my quote screen, it was difficult to go with the idea that the situation in Hong Kong was the be-all-end-all influence on the current market environment.

But when news algos are afoot, and they certainly have their influence on this market, impetuous and seemingly random buying becomes a regular occurrence. That is what we saw today, and with all the worst trade news out of the way, for now, there was nothing to stop the rally.

By the close, NASDAQ Composite Index logged a lighter-volume rebound back up toward its 50-dma. This comes after yesterday’s higher-volume distribution day. Overall, the indexes merely remain within a choppy, one-month range with no resolution yet in sight.

 

 

Pullbacks in precious metals over the past month have been eagerly bought into, keeping them firmly ensconced in their uptrends. In fact, the most definitive trends in this market are seen in silver and gold. The SPDR Gold Shares (GLD) found support at the 10-dma on Friday as volume dried up, and that set up a move to a new six-year high today as gold futures cleared $1,565 an ounce.

 

 

Silver is now sharply outperforming gold as the iShares Silver Trust (SLV) streaked through the $18 price level today on heavy buying interest. As I wrote the weekend before last, I was looking for precisely this sort of outperformance by silver given the extreme in the gold-to-silver ratio, which is rapidly declining.

With the 10-Year Treasury Yield now at 1.459% and the 30-Year Treasury Yield holding below 2%, the runway remains clear for precious metals. The only way to get in at this point is to hope for a sharp, brief pullback to the 10-dma with either. In this regard, the GLD is perhaps closer to support at the 10-dma and hence in a position where risk can be controlled while the SLV is now wildly extended.

 

 

I’m always amused and bemused by the way buyers (whether algo or human) come screaming into stocks on the mere word of an analyst. An analyst will say, “Buy!” and the buyers scream back, “How high?!?!?” This morning an analyst from Mizuho raised his price target on Micron (MU) to $50 a share, sending the stock screaming higher.

It gapped up to 46.45 from a prior close of 44.99, and then kept right on going to an intraday peak of 47.50. MU is an interesting market animal from a fundamental perspective. It is estimated to report $6.22 in earnings for the total of 2019, and then $2.48 in all of 2020 for a decline of 60%. So, currently buyers are paying 18-19 times forward earnings for an earnings decline of 60% in 2020.

Nevertheless, this doesn’t prevent MU from having some sharp price moves in either direction. The last long entry point occurred on the moving-average undercut & rally move along the 50-dma last week. Now, MU has gapped up near its prior late-July highs and stalled today on sharply higher volume. Thus, this is where I’m more inclined to probe MU as a short than a long, using my five-minute 620 intraday chart to do so.

Where MU goes from here will likely depend on what the general market does from here. But the bottom line is that, in this position, my main point is that the stock is likely more of a short than a long. But we’ll see. Meanwhile, the stock illustrates the type of go-nowhere volatility that produces very short-term swing-trading opportunities for nimble traders who know what to look for.

 

 

I have four favorite chip names that I like to trade in this market in either direction depending on the set-up. MU is one of them, and the rest are Applied Materials (AMAT), Advanced Micro Devices (AMD), and KLA-Tencor (KLAC). I will trade these long or short but will never buy strength or short weakness. What I do is look for rallies to short into and pullbacks to buy into in contrarian, even Ugly Duckling fashion.

We can see that AMAT was the strongest-acting of the group as it closed near its intraday highs. As it gets closer to its late-July highs, it may become a short-sale target, so I will be watching it on this basis. AMD ran into resistance at its 50-dma today and reversed, so offered short-sellers a nice trade today on the short side.

KLAC is in new-high price territory and stalled today on heavy volume. In this position, it too looks like it could present an opportunistic short into the rally. In general, how names like this plays out, and how I play them, depends on what I’m seeing on the 620-charts within the context of what the general market is doing. Another variation on the 360-degree approach for you.

 

 

And then there’s Ambarella (AMBA). Over the weekend I wrote that the buyable gap-up of last Friday could continue moving higher, and that was the case yesterday and today. AMBA posted its highest close since January of last year. Volume has declined sharply, so I would not be surprised to see AMBA pull back in here, but it was good for a nice, two-day long trade yesterday and today.

 

 

Speaking of stocks that refused to give it up after a big gap-up, Shake Shack (SHAK) pushed right through the $100 price level today, but only after a shakeout below the 10-dma yesterday. I noted over the weekend that, “It could also turn into a long play if it can finally clear $100 with conviction, so play it as it lies.” And that’s what we saw today as the stock powered to a close of 104.61.

Here are some interesting points about SHAK’s action to note, I think, that may have been a clue that this was coming. When the market has sold off over the past month, SHAK has not sold off with it. More recently, when the market was slammed eight trading days ago, SHAK just ran into some minor resistance along its $100 Century Mark level, and that did not result in a full downside reversal.

That market break turned out to be a one-day wonder, and as the market turned back to the upside, SHAK continued to run into resistance along $100, but it backed down. In fact, I shorted the stock yesterday and made a couple of bucks on it, but today you could feel the persistent buying as it cleared $100 following what was a clear moving-average undercut & rally move through the 10-day line.

So, when a stock is this persistent on the upside, the odds of a Century Mark buy signal increase.  That was the case with SHAK today, and a smart, 360-degree trader would have recognized this and flipped to the long side once it cleared $100 and showed no inclination to reverse on the 620-chart.

 

 

In big-stock NASDAQ 100 Land, the situation with most of these names remains unresolved. Like the market, all we’re seeing for the most part are back-and-forth moves within three- to four-week price ranges. Amazon.com (AMZN) continues to hold support along its 200-dma, but resistance has remained consistent around the 20-dema on any bounces.

It was the same story today as AMZN stalled and churned around its 20-dema before closing below the line. Volume was light, indicating that buyers weren’t all that hot for shares even in the midst of a big index rally today.

 

 

Alphabet (GOOG) continues to flop around its 10-dma and 20-dema but keeps finding support at its 50-dma. Like AMZN, it’s not really going anywhere, not unlike the market in general. I view rallies up to the highs of the one-month trend channel around 1200 as areas where I’m looking to short rallies.

 

 

A lot of pundits like to yack about how Apple (AAPL) is a stock to buy, or that it is building a new base with a new “buy point,” no doubt at the absolute peak around 221.37. But the current reality for the stock is that it is a failed base-breakout attempt that continues to run into resistance around the prior breakout point.

Meanwhile, the stock is in the middle of a very wide pennant formation that is either a bear flag or a future LUie formation. Right now, there is no way to know for certain, but at either end of the pennant I’m always watching for inflections in the other direction. If such an inflection is forthcoming, such as to the downside, then that is where I begin watching for a corresponding long signal in the ProShares UltraPro Short QQQ ETF (SQQQ).

 

 

For now, these big-stock NASDAQ names mostly strike me as being similar to the general market as shown on the NASDAQ Composite daily chart. They’re all just stuck in big price ranges but look like they may be headed for a more decisive resolution soon enough.

Cloud stocks have continued to be mistreated and abused for the most part, but today we saw Coupa (COUP) gap up after earnings and cruise higher early in the day. It opened at 149.49, rallied to an intraday peak of 155.45, and then rolled lower from there. It hit an intraday low of 142.80, nearly 13 points of downside from the highs, as it failed on a breakout attempt.

 

 

Below is the 620-chart of COUP, and you can see that the short was fairly academic. The MACD crossed to the downside about 45 minutes after the open as the stock chopped back and forth. One last bit of resistance on the bar at precisely 8:00 a.m. PDT was seen in a long upper tail on the candlestick, and it was all downhill from there.

Just before 9:00 a.m. a full 620 sell signal eventually set in as the 6-period moving-average crossed below the 20-period moving-average. In general, clouds have been weak, even after supposedly strong earnings reports, and I think a smart trader would have therefore been very open to this initial BGU failing as it did.

 

 

I wrote over the weekend that Okta (OKTA) was setting up as a late-stage failed-base (LSFB) short-sale set-up and that, “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.”

As it turned out, even a market rally couldn’t keep OKTA from reversing at the 50-dma and closing negative on the day. I continue to view any rallies up into the 50-dma as potential short-sale entries for the stock, using the 50-dma as a guide for an upside stop.

 

 

After-hours today MongoDB (MDB), not shown, reported earnings and as I write this afternoon it is trading roughly flat. I would watch this tomorrow morning for anything actionable.

Shopify (SHOP) bounced off its 20-dema last Friday, but resistance at the 10-dma has been the order of the day so far this week. This brings up the possibility of a new short-sale entry spot along the 10-dma, while using the line as a guide for an upside stop.

Another possibility is that the market keeps rallying, and within that context SHOP is able to push above the 10-dma in MAU&R fashion, becoming a long again. As with most stocks, given the volatile general market action, one must be aware of how things might play out in either direction and under what conditions, therefore, that one might treat any particular stock as a long or a short at any given point in time.

 

 

The group chart of selected, cloud-related software names I’ve discussed in recent reports illustrates quite well the dicey action in these names. And that’s without even including busted names like Workday (WDAY), Zendesk (ZEN), and ZScaler (ZS)!

Avalara (AVLR) closed below its 50-dma today and began looking like a short yesterday as it failed at the 20-dema and also closed below the 20-dema. Today’s early rally back up into the 20-dema offered another short-sale entry, and the stock again reversed back below the 50-day line.

Salesforce.com (CRM) continues to hold support at its 200-dma, which perhaps puts it in a lower-risk long entry position using the line as a selling guide. However, a breach of the line would trigger the stock as a short-sale entry at that point. The other four names shown in the chart all reflect the busted nature of many cloud stocks.

Members may recall that I discussed keeping a close eye on the clouds as they hung along their highs and above their 20-demas. At that time, I was looking for any breaches of the 20-dema as the initial signs that these names could be morphing into late-stage failures.

The past month has seen the dismantling of many clouds, and this may continue, especially in any further market correction. Last week we saw Veeva Systems (VEEV) waver and then bust after earnings. Watch for MDB to pull something similar, perhaps tomorrow.

 

 

Twitter (TWTR) illustrates the short-sale set-up that in this market has worked too often to be a joke, although it started out that way. It is what I refer to as a shortable breakout, or an SBO. Shorting yesterday’s breakout would have worked out well for a one-day short trade.

TWTR found its feet again today with the help of the general market rally to post a low-volume re-breakout. Technically, it did not clear to a new high, so there is a possibility this re-breakout will fail as well. Play it as it lies.

 

 

Snap (SNAP) got an upgrade from an analyst with a $20 price target yesterday, resulting in a big, stalling move on about average volume. The stock couldn’t rally even with the market pushing higher today, but it did manage to hold above its 50-dma on light volume.

This feels weak to me, so I’m looking for the stock to bust the 50-dma, which would trigger it as a short-sale at that point. I might also look at any potential rallies, such as we saw this morning, as short-sale opportunities into strength. That said, those who have amorous feelings for SNAP as a long play can buy it right here and then use the 50-dma as an uber-tight selling guide.

 

 

Facebook (FB) continues to build on last week’s U&R move back up through its early-August low. I tend to view FB more as a short-sale target than a long target, but so far the U&R long trade is working. If you like the stock as a long, then any low-volume test of the 20-dema would be positive action that would perhaps offer a lower-risk entry.

I can see FB at least making it to the 50-dma in any continued market rally, so that’s something that can be traded long. Once it gets to the 50-dma, then it may morph back into a short-sale target at that point. 360-degrees, please.

 

 

Roku (ROKU) may be approaching a climactic top, at least on a near-term basis, but it remains the Gilmo Stock of the Year for 2019. The stock rocketed another 11 pints higher today after it announced two new premium audio products, the Roku Smart Soundbar and the Roku Smart Subwoofer.

That sent the stock up on its biggest one-day price move, up 12.03 points, on very heavy buying volume. The stock has been up 8 out of the last 10 days, and at the very least it is not buyable in this extended state.

 

 

CrowdStrike (CRWD) is expected to report earnings tomorrow after the close, and here we see it rallying back up into its 20-dema. I’m not going to do anything outside of a quick day-trade with the stock ahead of earnings tomorrow. However, I think is one to watch for something actionable to show up once the earnings report is out tomorrow afternoon.

 

 

Remember that Zoom Video Communications (ZM) is also expected to report earnings tomorrow after the close with CRWD. It rallied back to the top of its one-month price range today, which put it in a shortable position on a near-term basis. Shorting near the range highs would have yielded a nice short-scalp today as the stock reversed to close near its intraday lows on heavy volume.

However, as with CRWD, I’m not inclined to do anything with this aside from a day-trade ahead of earnings tomorrow, similar to what today’s action offered the shorts.

 

 

Pinterest (PINS) has finally closed below its 20-dema. It looked like a short yesterday at the 10-dma, so I decided to treat it that way. That outlook was rewarded today when the stock busted the 20-dema on higher volume that was still below average. Despite the market rally, buyers weren’t interested in PINS, that much I know for sure.

In this position, I would view any weak rallies back up into the 20-dema at 33.29 as potentially lower-risk short-sale entries. A lot of these infinite-PE IPOs are starting to feel the heat, with Lyft (LYFT) and Uber (UBER) getting slammed for a solid month. This afternoon, Slack Technologies (WORK) is getting pummeled after reporting earnings, so the IPO outlook has turned decidedly dark!

We’ll see if CRWD and ZM can reverse this trend tomorrow after the close. Personally, I’m not holding out much hope for infinite-PE, recent IPOs given the recent action. But we’ll simply look to play these as they lie, in full 360-degree style, once we can see what they do after earnings tomorrow.

 

 

Meanwhile, Beyond Meat (BYND) tantalizes both shorts and longs as it either a) works on the right shoulder of a possible head-and-shoulders top, or b) is setting up along its 20-dema with volume drying up sharply as it prepares for another run that carries it right through and above its 50-dma.

Short interest in the stock is currently at 4.5 million shares as of the last reported date, or 13.3%, which doesn’t necessarily strike me as excessive. However, the action today must first be viewed as constructive since the stock held tight along the 20-dema with volume drying up to -64% below average.

Therefore, we can view this as a possible long set-up here using the 20-dema as a tight selling guide. A breach of the 20-dema, or another reversal at the 50-dma like we saw last Friday, could bring this into play as a short-sale target. Play it as it lies.

 

 

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.

If I wanted to spend an additional six hours to produce 50 more pages for any of my reports, I could easily show 50-100 stocks and go through the various moves they might pull. Stocks can set up as long or shorts, sometimes both in the same day. The basic 360-approach dictates that one be fully aware in 360-degrees how any of these set-ups might suddenly appear on the chart in real-time.

For those who want to play this market in swing-trading style, then the way to distill things down to a manageable level is to focus on a small list of stocks that is in turn culled from a larger list. My long watch list, posted in the Premium Members’ Section of the website, is a good starting point. Then focus on these names on an intraday basis as you look to act on any set-ups, long or short, that may materialize in real-time.

As the market continues to flop around within its large, wide, one-month price range, the first sign of an upside resolution would be a move above the 50-dma by the NASDAQ Composite or the S&P 500. Otherwise, we could remain in a volatile, swing-trading range for some time. Thus, the situation remains the same, which is to treat stocks and the market with a 360-degree approach for the purpose of utilization of volatility on a swing-trading basis. 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.

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.