The Gilmo Report

April 12, 2017

April 12, 2017

The market remains somewhat sluggish as it flops around in what is so far a sloppy six-week consolidation. Over the weekend the S&P 500 and NASDAQ Composite Indexes were each about 2% and 1% down from their recent highs, respectively.

So far this week the market has been airing successive episodes of As the Market Turns. Each day seems to bring with it a new story line of rallies and breaks, rallies and breaks, and anything else that adds a touch of swirly excitement and confusion to the action.

The Dow Jones Industrials Index, not shown, rallied 94.23 points on Monday, then fizzled out to close relatively unchanged. Yesterday the index sold off 145.46 points but then rallied to close down -6.72 points. Today the index flopped around in the red, selling off nearly 100 points at one time before closing down 59.44.

So, on balance, the action over the past few days has seen a fair amount of intraday volatility. We can see this only on the daily chart of the S&P 500 Index, which broke below its 50-day moving average yesterday but regained the line on increased volume, giving the day the look of supporting action.

Today the index failed to hold above the 50-day line and slid lower as volume came in slightly lighter. We can now view the 50-day line as short-term resistance.

 

GR041217-$SPX

 

The NASDAQ Composite Index also showed supporting action at the 50-day moving average yesterday, but today flopped back down to the line on lighter volume. Thus, there was no upside follow-through to yesterday’s support at the line, and the index should now be watched for any breach of the 50-day line on increased selling volume.

 

GR041217-$COMPQ

 

When it comes to dealing with individual stocks, my prior advice still stands. Simply stick to your trailing and absolute stops, and if they are hit then act decisively. Remember that a long position can start to top and roll over even when the general market is acting well. In that case if your stop on the position was hit, you would sell, regardless of the state of the general market.

The same thing goes for market sell-offs. Certainly, you always have the option of taking profits and moving to cash based on an upside price objective being reached or a simple desire to move to cash as you observe the general market starting to get a bit wobbly.

But for those who like to give things more room, selling when your stops are hit is a prudent approach as well. You might give up more in the way of larger losses or lost profits, but it is a way of giving things more room if that is consistent with your own trading psychology.

Meanwhile, the current action of individual stocks, combined with the wobbly action of the general market, is flashing a cautionary sign as I see it. In general, I don’t like to see so many leaders starting to break down through near-term support.

This week has seen two big-stock NASDAQ leaders get knocked off their respective perches. Both Apple (AAPL) and Facebook (FB), which had been trudging higher along their 10-day moving averages, finally broke lower. Both stocks closed below their 20-day exponential moving averages yesterday, and today both stocks ran into resistance at the 20-day lines.

AAPL closed below its 20-dema yesterday on heavy selling volume. Today the stock closed up on the day but was unable to regain the 20-dema on weak volume. This could be a short here using the 20-dema as a guide for a tight upside stop.

 

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Facebook (FB) sold off below its 20-dema yesterday on volume that was just about average, but still significantly higher than Monday’s small upside volume. Today the stock ran into resistance at the 20-day line and reversed on weak volume as buyers took the day off. As with AAPL, the question here is whether these fresh breaches of the 20-dema are a cautionary sign. One way to test that theory would be to short either of these here and then use the 20-dema as an uber-tight stop on the upside.

While the probability of success shorting AAPL or FB here is subject to debate, I do consider these breaches of the 20-dema a short-term sell signal if long the stock. For others who might want to give them more room, then the lower 50-day moving average can also serve as a much wider selling guide.

 

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As AAPL and FB weaken a bit, Tesla (TSLA) moves back below the $300 Century Mark on about average volume but volume that is higher than yesterday as selling picks up. The stock ended today just below the 10-day moving average.

If you’re feeling real lucky, and IF the general market starts to get into more trouble, TSLA could be treated as a Livermore Century Mark Rule in Reverse short-sale set-up here using either the 10-day line as a hyper-stop or the $300 price level as a wider stop on the upside.

I understand this might be crazy looking at these leaders as potential shorts. But it is important to understand how these leaders could evolve into short-sale targets in synchrony with a weakening market situation. Keep in mind that we would look for these to potentially pan out as short-sale targets IF we get more selling in the general market. In fact, they would probably lead the selling.

This is how one maintains a two-sided view of these big-stocks stocks within the context of what is going on in the general market. And, based on how these names are acting right now, we could view the general market with a very cautious eye.

 

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Amazon.com (AMZN) cleared its own Century Mark, the $900 price level, at the same time TSLA cleared its $300 Century Mark, and coincidentally, it also moved back below its Century Mark today on light volume. The stock also closed just below its 10-day moving average, like TSLA.

It is interesting to see how AAPL and FB look similar, while AMZN and TSLA share some similar features on their own charts. Now, again, for the bold and the brave who are also oriented toward the short side, the idea of looking at AMZN as a Livermore Century Mark Rule in Reverse short-sale set-up based on the breach of the $900 level is certainly a feasible one.

How this plays out, of course, depends on the overall context of the general market. But as I wrote above, it is useful to understand how these leading stocks could evolve into short-sale targets. As well, the current price/volume action in all four of these big-stock names, AAPL, AMZN, FB, and TSLA, hints at that.

 

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If the general market gets into further trouble, a lot of these big-stock leaders are going to start morphing into short-sale targets. We’ve already seen a couple in NTES and NVDA, as examples.

Another one that should be watched here is Netflix (NFLX). The stock found pocket pivot support at its 50-day moving average on Monday. But that only led to a three-day wedging rally that reversed today at the 10-day moving average. NFLX is expected to report earnings next week, so it’s not clear to me whether the stock will have a significant move one way or the other before then. However, it should be watched closely as it starts to wobble around here, as a decisive breach of the 50-day moving average may be in the offing here.

 

GR041217-NFLX

 

Priceline Group (PCLN), not shown, is also breaching near-term support at its 20-dema as volume came in slightly higher on the day. This could put the stock in a shortable position using the 20-dema as a guide for a tight upside stop.

Nvidia (NVDA), also not shown here on a chart, has continued to log lower lows as it approaches the late February and early March lows. After becoming shortable last Tuesday based on the shortable gap-down move through the 50-day line, it is now extended on the downside. From here, we will want to watch for an y rallies up towards the 10-day or 20-day lines as potentially more optimal short-sale entry opportunities.

So far Netease (NTES) is working out as a late-stage failed-base (LSFB) short-sale target. The stock was last shortable on the moves back up into the 50-day or 10-day lines over the past few days following last week’s volume breach of the 50-day moving average.

That breach of the 50-day line also broke below the 278.80 intraday low of the mid-February buyable gap-up (BGU), which was a clear sell signal for the stock if one was long it. At that point it morphed into an LSFB short-sale set-up at the 50-day line and has since moved lower. For anyone campaigning this on the short side as I have been, your downside target near-term is the bottom of the “rising window” on a gap-fill down to 260 or so as I’ve highlighted on the chart.

 

GR041217-NTES

 

Weibo (WB), not shown, is another late-stage failed-base short-sale target that is shortable right here based on today’s closing price of 50.38, using the 20-dema at 50.61 as a guide for an upside top. Yet another former long idea that has flipped into a short-sale target!

I suppose now the only question to ask is whether the other three names among my former China Five favorites, Alibaba (BABA). JD.com (JD), and Momo (MOMO), will begin to top as well. So far this week all three names have been moving higher on news of no trade war between the U.S. and China, but this news didn’t seem to help NTES or WB much.

I don’t show BABA, JD, or MOMO here on charts, but all three are currently holding above their 10-day moving averages. Watch for breaches of the 10-day lines or the 20-demas as initial signs of weakness should they occur, as these would remain your nearest selling guides. After that the 50-day moving averages would provide wider selling guides for those who desire to play things loose.

Snap (SNAP) is moving lower as volume dries up in the extreme, but so far buyers don’t seem to be all that enthusiastic about picking up shares here. The general market environment likely has something to do with that, I would imagine. So, if we see more selling in the indexes, SNAP is virtually guaranteed, at least in my view, to test either last week’s 20.03 low or the absolute low in the pattern at 18.90. Frankly, I’m putting my money on a test of the 18.90 low.

So far this pullback can be viewed as a Wyckoffian Retest as the stock approaches the 20.03 low on very light volume. This can be watched in case the general market finds its feet, but the Wyckoffian Retest won’t hold up if we see the general market weaken further.

 

GR041217-SNAP

 

Square (SQ) was definitely an outlier today as it posted a strong-volume pocket pivot coming back up through the 10-day and 20-day exponential moving averages. It did come up just a bit short on a trendline breakout attempt, but the bottom line is that I would not be buying this up here. The place to take shares was down around the 20-dema or 10-day lines.

Meanwhile, SQ should hold above the 10-day and 20-dema lines following this strong pocket pivot in order to remain viable. If it fails, then that may be telling you something if you’re long the stock currently. Set your trailing stops, and stick to them!

 

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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, 20-day exponential, 50-day simple and 200-day simple moving average.

I don’t like the look of a lot of stocks on my long watch list currently, and this leads me toward a more cautionary stance on the long side. The bottom line is that I don’t see all that much that I think I need to be long right now. And when that happens I simply stand aside, or move to the short side as more short-sale set-ups like NTES, for example, start to work.

Last week I wrote that playing the short side means being alert to sudden changes in stocks, and no stock likes to change direction faster than U.S. Steel (X). Last Friday the stock flashed a bottom-fishing pocket pivot, which technically made the stock buyable at that point.

But today the stock gapped below the 20-day exponential moving average and broke sharply lower on huge selling volume. By the close, X had given up nearly 10% and was back below last week’s lows. If you are watching X closely, it would have been possible to jump on the stock on the short side near the 20-dema. Of course, that implies that one is not only alert to this, but also able to recognize when last week’s strong upside action is suddenly shifting into failure mode.

That certainly didn’t take long, and the action over the past four trading days illustrates why I like to refer to X as a “psycho-stock.”

 

GR041217-X

 

Notes on other long ideas discussed in recent reports:

Activision (ATVI) is breaching support at the 20-dema on light volume.

Arista Networks (ANET) is the last of the optical names still on my long watch list as the others have all come apart with AAOI being the most conspicuous on a high, tight flag breakout failure. ANET is sitting right at its 20-dema, but a breach of the line should be watched for.

Bioverative (BIVV) is holding above its recent base breakout point, but for my money if one bought the stock nearer to the 50-52 price area, taking profits here might not be such a bad idea. Otherwise the 10-dma or 20-dema can serve as tight selling guides.

Carnival Cruise Lines (CCL) and Royal Caribbean Cruise Lines (RCL) have broken down and have been removed from my buy watch list.

Checkpoint Software (CHKP) broke out and posted a new closing high today, but it stalled and churned on higher volume. For now, I’m just watching for any breach of the 20-dema as a final selling guide.

Electronic Arts (EA) has regained its 20-dema and 10-day moving average, but is not in what I would consider a buyable position. The 50-day moving average would serve as a maximum selling guide for the stock.

Fortinet (FTNT) has failed on its recent gap-up base breakout, but yesterday and Monday held support at the 50-day moving average. In my view, this should be watched for a possible breakout failure and short-sale set-up.

Glaukos (GKOS) broke below its 20-dema on Monday, and along with CLVS has been removed from my buy watch list. At best, it probably needs time to base here after a nice upside move since I first discussed the stock near the 35-36 price level back in early January.

Incyte Pharmaceuticals (INCY) is attempting to find support at its 50-day moving average, and that should be used as a maximum selling guide.

Symantec (SYMC) has violated its 20-dema on increased selling volume. That is a near-term sell signal.

Take-Two Interactive (TTWO) closed one penny below its 50-day moving average. The 50-day line would serve as a maximum selling guide for the stock, so a move lower tomorrow would constitute a violation of the 50-day line, hence a sell signal.

Veeva Systems (VEEV) is still holding above its 20-dema, which I would use as a nearby selling guide, while those wishing to give the stock more room can utilize the 50-day line as a wider selling guide.

In the case of a stock that has breached near-term support, generally at the 20-day exponential moving average (20-dema or 20-day line, as I refer to it) I consider that to be a sell signal. In the case of a stock that is showing a decent profit for anyone currently long the thing, I personally lean toward taking profits in stocks that have done well. The idea is to let the general market situation settle out before determining a new, potentially safe entry.

Over the weekend I pointed out that “GrubHub (GRUB) is showing signs of wanting to rally, which is not necessarily all that surprising given how far it has declined from its early February peak. On Friday, the stock flashed a bottom-fishing pocket pivot at the 10-day and 20-day moving averages, closing one penny above the 20-day line. This might imply that a move back up toward the 50-day moving average is likely here…”

On Monday, I tweeted that GRUB certainly felt like it wanted to push higher on a test of the 50-day moving average. Today that’s what we saw as the stock pushed through the 50-day line earlier in the day, hitting a peak of 36.34 right at the open before slowly moving lower from there all day long.

Anybody watching the five-minute “620” intraday chart would have noticed a “MACD stretch and cross” early in the day, which would have triggered a short-sale at around 35.40-35.50. But GRUB didn’t break down much from there as it flopped around all day before drifting lower to a closing price of 35.05.

However, with the 50-day line at 35.58, the stock is back in a more optimal short-sale point here using the 50-day line as a tight upside stop.

 

GR041217-GRUB

 

Splunk (SPLK), not shown, is still hovering just below the confluence of its 10-day, 20-day, and 50-day moving averages. It’s been good for a short scalp on every rally up into the 50-day line over the past week, but what short-sellers really want to see is a big downside bust from here.

So far that hasn’t happened, but the SPLK isn’t expected to report earnings until late May, so there is still plenty of time for something to happen here. Shorting the stock as close to the 50-day line as possible is my preferred entry strategy, but it can be considered within shorting range using the 50-day line as a guide for a tight upside stop.

If you take the time to look at a weekly chart of SPLK (your homework assignment for tonight), you will notice that it has formed a big, v-shaped punchbowl type of formation, and has spent a lot of time bouncing around the right-side peak. It began to fail below its 20-dema back in early March, morphing into a possible right-side POD-failure and short-sale set-up.

Thus, we have a macro-basis for shorting the stock, but keep in mind there is always the possibility that the stock will post one more rally back up to the mid-63 price level. That is why the 50-day line can be used as a tight stop.

But the prior March peaks all represent areas of overhead resistance, so a flexible approach may be necessary as you feel out where true resistance lies at this stage. It could be the prior highs, or it could be the nearby moving average confluence.

As an exercise, you might also want to investigate and study the daily and weekly charts of Workday (WDAY) and ServiceNow (NOW) as other faltering cloud names in similar POD-like failure positions. I’ll discuss these in more detail in this weekend’s report.

 

GR041217-SPLK

 

Over the weekend I noted that “Longs in this market still need to remain on high alert…” That has turned out to be somewhat prophetic, as we’ve seen so far this week with a number of stocks breaching support levels.

And, as I also pointed out over the weekend, sometimes playing a strong defense is more important than playing an aggressive offense. I remain cautionary here, but the most concrete way of handling the current market action is to simply adhere to your trailing and absolute stops in any current long positions you are holding.

Meanwhile, leading stocks that are beginning to break down may begin to present viable short-sale set-ups that can be targeted for actionable entry points. I’ve discussed several examples in this report. Add salt to taste!

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. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.