The Gilmo Report

September 8, 2019

September 7, 2019

News again kept the rally going on Thursday when it was reported that the U.S. and China would make yet another attempt at trade talks in the month of October. No mention was made of rescinding the current tariffs that are in effect, nor was there any mention of any major agreement or concessions ahead of these talks.

But it was enough to send the NASDAQ Composite, S&P 500, and Dow Indexes all gapping right through their 50-dmas on heavy volume Thursday. Like I wrote on Wednesday, with the worst of the trade news out, there was nothing to stop Wednesday’s rally, and Thursday’s rally was a variation on that theme.

The indexes ran out of gas on Friday as volume contracted and the market came in toward the close. For now, as long as the Big-Three major market indexes remain above their 50-dmas, the index action remains constructive. A reversal back through near-term support at the 50-dma would of course be a reference for a possible move back to the downside.

 

 

The market’s move in the middle of the week came on news, and whether it can continue may also depend on the news flow. Meanwhile, I’m not seeing a lot that I consider to be appetite-whetting action among individual stocks. In fact, some act more like shorts than longs, but I’ll get to that in a few paragraphs.

It may be that the rally is concentrated in larger-cap stocks that are simply moving up within their chart patterns, driving the Big-Three indexes higher. The action of the small-cap Russell 2000 Index is less bullish, to be sure. On Thursday it ran into resistance and stalled at its 50-dma and finally closed below its lower 200-dma on heavy volume.

A brief attempt to regain the 200-dma was rejected and sent back below the 200-dma. From the perspective of the small-cap names, allegedly the risk-on area of the market, this rally over the past three days has been less impressive, as can be seen on the daily chart of the Russell 2000’s proxy, the iShares Russell 2000 ETF (IWM) below.

The “good news” on trade sent interest rates higher, with the 30-Year Treasury Yield moving back above 2%, as it also sent precious metals lower. However, within their highly-extended rallies the pullback wasn’t unexpected, and the question now is whether this leads to a chance to add to precious metals positions at favorable prices.

The SPDR Gold Shares (GLD) is dipping below its 20-dema on contracting selling volume. I’m looking at the 50-dma as the most opportunistic entry point. I’ve been long gold throughout the rally, so I look at pullbacks as possible add points rather than initial entries.

I know that many get excited about something when they see it streaking higher in typical FOMO fashion, but when the metals pull back, that is when you look for your most opportunistic entries. In this case, watch the 50-dma on the GLD as a key area of support which I believe it is entitled to test given its strong prior upside move.

 

 

Meanwhile, the iShares Silver Trust (SLV), which has wildly outperformed gold over the past two weeks, is streaking toward its 20-dema on very heavy volume. This would be your first reference for support, with the 50-dma much lower. Unless the SLV bounces around its 20-dema for a little bit, giving the 50-dma time to catch up, I would not expect a move down to the 50-dma in the immediate future.

Therefore, one could test it on the long side at the 20-dema, with the idea of running for cover if it did not hold. Another possible area of support might like along the prior consolidation just above $16. Mostly, I tend to think that the GLD and SLV are in consolidation mode and need to settle down a bit before we can figure out the best, lower-risk entries on these pullbacks. Be patient!

 

 

Recently hot IPOs continue to come under pressure. The latest to blow up was CrowdStrike (CRWD) which reported earnings on Thursday after the close. The ensuing price was nothing short of horrendous. CRWD gapped down at the open through its 50-dma, instantly set an intraday high at 81.50 and slid lower all day before closing at 75.98, down 12.52% on the day.

Previously, CRWD was as short on moves into the 20-dema over the past few days, but now it would be shortable on any weak rallies back up into the 50-dma, so we can watch for that. Otherwise, the stock has worked overall as a nice short since failing at the $100 Century Mark in the latter part of August.

 

 

Zoom Video Communications (ZM) also reported Thursday after the close and it also suffered a brutal fate. It opened Friday down 69 cents at 92 before rallying up above 96 and then reversing hard to close down on the day. The big, nasty outside reversal came on very heavy volume.

Now it looks like it’s just heading lower from here. Any weak rallies back up toward the 50-dma, 20-dema, or 10-dma, all of which are in confluence, would perhaps offer secondary entries on the short side.

 

 

In Thursday’s video report I discussed the fact that despite the huge index rally on that day, the most concrete, lower-risk set-ups were found on the short side. For example, Pinterest (PINS) opened Thursday right at its 20-dema, where it presented a lower-risk short-sale entry per my comments in Wednesday’s report.

From there, it ignored the index rally and simply careened to lower lows. On Friday it finally ran into its 50-dma, where it found at least temporary support.

PINS may now bounce off the 50-dma but rallies back up into the 20-dema might just produce lower-risk short-sale entries from here.

The bottom line is that PINS was down every day this week and was even shortable on its initial breaks and resistance along the 10-dma. A very nice short-sale set-up even amid a big index rally. Who would’ve thunk it?

 

 

Beyond Meat (BYND) rallied up into its 50-dma on Thursday where it reversed. One could therefore have shorted the stock on the move into the 50-dma, realizing a two-day gain as the stock pushed further to the downside and is now below its 20-dema.

BYND then gapped down Friday morning to close below all its current moving averages on heavy volume. Another hot IPO not feeling the heat of a big index rally over the past 2-3 days. The question is, what is the avoidance of hot IPOs when the market is supposedly in risk-on mode and rocketing higher telling us?

 

 

In the daily chart above I only show the right side of BYND’s entire pattern in order to make the scaling less compressed. If we look at its weekly chart, we can see that the stock is forming the old pinhead & shoulders formation where the head consists of one big week up and one big week straight down.

This is also what Bill O’Neil used to call railroad tracks, and when it occurs as part of the head of an overall H&S formation it is what I call a pin-head.

 

 

While the market hates recent IPOs, it has loved semiconductors. Semis have been some of the biggest movers on the trade news, and one of my four favorite semis to trade, Micron (MU), has continued to push higher. On Thursday it posted the proverbial “leading stock breaking out” move on strong volume.

However, my preference would be to view the MAU&R at the 50-dma seven trading days ago as the better, lower-risk entry for the stock. Even the small pullback four days ago just above the 10-dma and 20-dema would have suited me better. In this position, MU is coming straight up from the lows of its base and is extended.

Therefore, I would only be interested in buying this on a pullback to near-term support, which would most likely occur at the rising 10-dma. Otherwise, it could just as easily become an SBO, or shortable breakout, within the context of the major market indexes reversing back below their 50-dmas. That would be the 360-degree way to look at this at this juncture.

 

 

Advanced Micro Devices (AMD), however, acts more like a short every time it gets just above its 50-dma and right at the August price range highs. This was another stock that was flashing a proper short-sale entry set-up on Thursday during the big market rally.

It then broke lower on Friday, closing below its 10-dma and 20-dema. I’d watch for any rallies back up into the 50-dma as potential short-sale entries from here. Resistance may also come into play along the lower 20-dema, the green moving average on the chart.

 

 

Applied Materials (AMAT) tried to break out with MU on Thursday but failed and reversed to close near its lows. A move like that can present a quick tactical short on an intraday basis, maybe more if it heads lower in a hurry. Otherwise, I’m certainly not going to buy this here, and would not consider it buyable unless it pulled into its 10-dma or 20-dema, both of which are way down there, in constructive fashion.

 

 

KLA-Tencor (KLAC) also stalled and reversed off its intraday highs on Thursday, but it was already well extended to the upside. This is the same situation as MU and AMAT – I would not buy it until I saw it pull into the 10-dma or 20-dema in constructive fashion. Otherwise, these semis are too extended to buy.

 

 

Ambarella (AMBA), not shown, keeps pushing higher following last week’s buyable gap-up (BGU) move. In its current position it is way extended on the upside and out of buying range.

If the market is going to go higher from here, then there are some big-stock NASDAQ names that I’m guessing would move higher as well. One of those is Amazon.com (AMZN). It posted a range breakout on Thursday on increased volume and pulled back slightly on Friday as volume declined.

Note the undercut & rally type action along the lows and the 200-dma, which I pointed out in my reports last week. While those were slow in gaining traction, they eventually led to further upside and the higher highs we saw on Thursday.

 

 

Alphabet (GOOG) had an almost identical range breakout on Thursday as well. It also pulled in slightly on Friday as volume declined. So, technically, both AMZN and GOOG could be tested on the long side, using the current-range, high breakout point as a selling guide.

 

 

Apple (AAPL) continues to hang right at its prior new-high breakout point. Its action over the past two trading days correlates to the action in AMZN and GOOG, but its chart position is much different. If the market goes higher, then perhaps AAPL can pull off a full re-breakout maneuver.

On the other hand, a 360-degree approach would dictate being aware of any potential downside inflection at the prior new-high breakout point in AAPL if it occurs while, say, both AMZN and GOOG also fail on their recent range breakouts. My guess is that if this current rally fails, then you will see all these names reverse in correlating fashion.

This might also occur in conjunction with a buy signal on the 620-chart of the SQQQ. So, while I’m open to these names going higher in any continued market rally, I’m also watching their action in conjunction with what I’m seeing in the SQQQ 620-chart in order to determine whether any failure might be forthcoming.

 

 

This is all tricky stuff and requires being totally aware and open to the action in real-time. Sometimes, however, it is much simpler than that. In the case of Facebook (FB), its recent rally carried it right into the 50-dma, where it morphed back into a short-sale target as I noted it might in my Wednesday report.

 

 

Twitter (TWTR) came to life on Thursday with the market and posted a strong-volume re-breakout. I’ve said in previous reports that it is one stock I would consider a go-to long idea in any market rally. It has held up well throughout August, and with the market wind in its favor, has been able to post higher highs.

In this position it is clearly extended, as I see it, so I’d need to see a pullback again to the 10-dma and 20-dema, such as we saw on Tuesday, as a possible lower-risk entry.

 

 

Snap (SNAP) also found inspiration in the market rally and launched off its 50-dma on Friday. It looked weak to me previously, but I’m not one to adhere to rigid views. As I discussed in my video report of Thursday evening, the stock looked better at that time as a long idea using the 50-dma as a tight selling guide.

Context is everything, and within the context of a big market rally on Thursday, SNAP was able to post its second five-day pocket pivot in a row along the 50-dma. The stock is extended at this point, but any small retracement of Friday’s move might offer a lower-risk entry using the 50-dma as your selling guide.

 

 

Shake Shack (SHAK) is holding just above the $100 Century Mark as volume comes in at about average. This is interesting here since a breach of the $100 Century Mark would also take it below the 10-dma. It’s clear the stock is running into some selling up here, so there is always a chance of failure at the Century Mark.

That said, if we saw volume dry up further as the stock holds tight along the 10-dma and the $100 Century Mark, it could move higher in defiance of the shorts. Play it as it lies.

 

 

Coupa (COUP) has been a wild mover over the past three days since it reported earnings. The original buyable gap-up that never panned out on Wednesday was a shortable one, and the ensuing breakout failure that took the stock back to the 10-dma then became buyable at that point.

That would have been good for a move back up to the BGU highs before the stock rolled back on Friday. Volume has been above average for the past three days as COUP has sloshed around like a tsunami in a bath tub. Now the question is whether this a pullback following a base breakout that can be bought right here at the prior breakout point

My view would be that the safest place to try and buy this would be at the 10-dma, which is what happened Thursday morning. Is this a breakout in a “leading stock” that will lead to substantial upside and riches beyond your imagination? Somehow, I’m doubtful.

Technically, COUP is within buying range of the breakout, but I’m not one to buy breakouts. Again, I’d want to see how it looks on any pullback to the 10-dma. It could set up as a long at that point, or it could bust right through that and the 20-dema and trigger as a short-sale. With the cloud group already weak, what is the likely outcome with COUP?

 

 

MongoDB (MDB) was one to watch after earnings as I indicated in my Wednesday report. The company had reported at that time in the after-hours and was trading roughly flat. It opened the same way on Thursday morning, and then very rapidly broke to the downside within the first half-hour of trade.

I discussed this in detail in my Thursday GVR, and the 620-chart was very clear right at the open. Once MDB bottomed out intraday at 142.35 it then churned its way higher from there to close just above its 50-dma. On Friday, an immediate breach of the 50-dma triggered the stock as a short-sale at that point, as I discussed it would in Thursday’s GVR.

MDB moved lower on Friday and is now testing its mid-August lows. Another cloud in trouble, despite the big market rally on Thursday.

 

 

Shopify (SHOP) is no doubt the strongest cloud software name in this market currently. But will that last? As I’ve noted in recent reports. SHOP ran into resistance and failed at the $400 Century Mark after clearing two other Century Marks at $200 and $300 in 2019. In this case, the third time may not be the charmer.

The bounce off the 20-dema on Monday has resulted in four rallies up into the 10-dma that have not been able to clear the 10-dma. Friday’s action saw the stock reverse at the 10-dma as volume declined. While I continue to view rallies into the 10-dma as potentially lower-risk short-sale entries, a clean breach of the 20-dema would also trigger the stock as a short-sale at that point.

 

 

Ringcentral (RNG) is another cloud software name that is faltering. It busted the 20-dema on Friday on higher trading volume, triggering as a short-sale at the 20-dema. In this position, we would now look for weak rallies into the 20-dema as short-sale entries from here.

RNG was recently touted by Investor’s Business Daily as a three-weeks-tight (3WT) formation. I’ve discussed in my GVRs why this was not a 3WT based on a proper reading of the technicals on the weekly chart.

 

 

Two weeks ago, when this claim of a 3WT in RNG was made, note that the stock was in fact drifting upward and volume increased on the third week of the 3WT. As Bill O’Neil once explained it to me, the stock should be drifting slightly downward in the 3WT as volume dries up. In this case, the stock is drifting higher with volume increasing on the third week. This was NOT a 3WT.

 

 

The clouds as a group have remained under pressure, and even those charts that were trying to set up during Thursday’s rally could not hold up on Friday. Avalara (AVLR) reversed at its 10-dma to close below its 50-dma on heavy selling volume.

Salesforce.com (CRM) broke below both its 50-dma and 200-dma on Friday to close below both. Volume was light and roughly even with Thursday’s levels. So, if there is buyable strength in this market, it isn’t the clouds that are providing it.

 

 

If you need more proof, look at the next two charts. Okta (OKTA) was a short three days ago on the rally into the 50-dma. It has not rallied since, despite the big move in the indexes on Thursday. Atlassian (TEAM) pulled a little U&R move on Thursday as the market rallied but ran into its 50-dma on Friday where it became a short.

Those of you who are also VoSI members will note that I shorted the stock in real-time during our live webinar Friday morning when TEAM was at the 10-dma/20-dema/50-dma moving-average confluence. It then broke nicely from there and closed near its lows for the day.

 

 

The Trade Desk (TTD) and Veeva Systems (VEEV) were also weak on Friday. Both were trying to pull off quasi-U&R moves on Thursday, but each ran into resistance along its 10-dma and/or 20-dema and reverse to close down on slightly higher volume.

So, like I said, if this is a rip-roaring new bull market, then previously leading cloud names don’t seem interested in participating. The ironic thing here is that as I’ve written in recent reports and discussed in recent GVRs, I expected money to move out of high-PE and infinite-PE cloud names in conjunction with a market decline.

Instead, we have a rally and money is coming out of this high- and infinite-PE area of the market anyway. Is this another clue as to the viability of this rally? Hard to say for certain, but at the very least indicative of how odd this market is nearly all the time.

 

 

I will re-post my current cloud watch list this weekend so Premium Members can review it to see just how bad things are in this key area of the market.

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.

Even though the Big-Three major market indexes, the NASDAQ Composite, the S&P 500, and the Dow, have catapulted through their 50-dmas, I’m not getting a convincing message from individual stocks. I can find at least as many that work well as shorts as I can longs.

In fact, most of the shorts have worked far better than the longs. Such is the nature of a market that perhaps not of this world but of a QE world where the action is dictated by what algos awash in liquidity choose to do at any given point in time.

I’ve said it before, and I’ll say it again – this market is not driven by the traditional concept of institutional accumulation. It is driven by the capricious nature of machines that are in turn driven by the vagaries of news and a persistent stream of liquidity from the Fed.

The action may be puzzling, but if we act simply based on the set-ups at hand, long or short, without taking a necessarily rigid bullish or bearish posture, then perhaps some sense and progress can be made from it all. The rally on Thursday may have been bullish, but under the surface there was plenty of bearish action.

I’ll cover more of the madness in this weekend’s GVR, focusing on a short list of 360-degree ideas. Until then, tread carefully as I still consider this a market for swing-traders and not for trend-following investors.

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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