The Gilmo Report

August 10, 2014

August 9, 2014

The market looked to be en route to another up opening that was destined to fizzle out on Friday, but news that Russia had ended its military exercises along the Ukrainian border set the market off on a sharp rally. Sellers held off and shorts were forced to cover as the major market indexes all closed near the peak of their daily trading ranges. As we can see on the daily chart of the NASDAQ Composite Index, below, the rally came on lighter volume and carried right up into the underside of the 50-day moving average. While the rally might continue into next week if the news flow remains benign, the bottom line is that the low volume rally on Friday that failed to carry beyond the 50-day line as the NASDAQ remains trapped within a short bear flag is inconclusive at best. As well there is very little that I would consider playable on the long side, but that can change quickly, so one should not get locked into a rigid, bearish frame of mind. The other thing to take note of is that the NASDAQ has undercut its July lows and come down right on top of the big cup it formed between early March and early June. In simple terms, the index is trying to hold support along and around the 4350 level, as I’ve highlighted on the chart.




The S&P 500 Index’s rally on Friday came off an extreme low, and the index remains well below its 50-day moving average, as we can see on the daily chart, below. The fact that it is so far below its 50-day line indicates that it is the weaker index right now, but thinking about this within the context of a QE-driven market also means that it has some room to rally on the upside if it wanted to. As well, and like the NASDAQ, the S&P 500 has pulled down to the 1900 level and the top of the eight-week cup-with-handle sort of consolidation it formed between early April and late May where it found support on Thursday before rallying Friday on lighter volume.




Meanwhile, the Russell 2000 Index remains flat on its back, as we can see on its daily chart, below. The Russell has given back a big chunk of its gains off of the May lows, and from this position so far below its 200-day and 50-day moving averages it also has some room to rally if it wanted to. Thus I would be careful on the short side of this market, making sure that any short-sale positions are initiated at the most optimal short-sale points into rallies that are showing signs of giving way. A number of my short-sale target stocks are below recent areas of resistance, so if the market can build on Friday’s bounce I will be watching very carefully to see how these stocks rally back up into areas of potential resistance.




Tesla Motors (TSLA) pulled back slightly on Friday following its cup-with-handle base breakout on Wednesday, as we can see on the daily chart, below. The pullback looks normal following its pocket pivot of last week that was within the handle and which I discussed in my report of last weekend. Breakouts haven’t fared very well in this market, which of course brings up the question as to whether TSLA’s will. The stock closed a little more than 1% above the 244-245 breakout level, so buying into the stock here gives one a low-risk entry if the breakout does in fact end up failing. So many standard-issue base breakouts have failed in this market recently that perhaps it’s finally time for one to work.

I view TSLA as one of the few stocks I would be interested in laying into on the long side if the market is able to build upon Friday’s bounce, and the idea of being able to buy the stock near its breakout point makes that a little more palatable given the theoretically lower-risk entry at current prices.




Netflix (NFLX) looked like a short as it stalled out at the 50-day moving average this past Wednesday, but it came through with a pocket pivot buy point on Thursday coming up through the 50-day moving average, as we can see on the daily chart, below. NFLX CEO Reed Hastings posted on his Facebook (FB) page that NFLX’s revenues now exceeded that of Time Warner’s (TWX) HBO network, which he claimed put the company in the “big time.” This post got the stock moving sharply on Thursday, and on Friday it pulled back less than 1% as volume dried up a bit. The 50-day moving average lies at 436.94, so I would expect that if this pocket pivot is going to work it must at least hold the 50-day line on any pullback. For now, all I know is that I’m not going to attempt to short the stock into this pocket pivot as I would need to see it break down back below the 50-day line before I would consider the pattern to be bearish again.

There is a possibility that NFLX is just building a longer handle to its big cup formation following a premature breakout attempt on July 1st. That breakout attempt occurred from a handle that was barely a week in duration and therefore probably too short to properly consolidate the prior move from the 299.50 lows of the big cup formation. This is an objective assessment of the stock in real-time, without adhering to a rigid view that this must absolutely be a POD topping formation and nothing else. I would let the pattern decide for itself what it wants to become, and the bottom line is that if the general market is able to build on Friday’s rally then NFLX’s Thursday pocket pivot puts it in play as a big-stock long idea, end of story.




LinkedIn (LNKD) defied its “bearish harami” formation of this past Wednesday, something I discussed in my report of that day, and decided to just keep moving higher, as we can see on the daily chart, below. I can tell you from testing small short positions in the stock into this rally above the 200-day moving average that I don’t get a strong sense that anyone is all that interested in selling LNKD at this point. There is a lot of overhead congestion from the left side of the pattern, but so far the stock acts like it is all sold out. Friday’s rally came on very light volume, and my guess is that LNKD will only reverse to the downside in the event that the general market does the same.




After failing on its gap-up move following earnings last week, Twitter (TWTR) has drifted all the way back to its 10-day moving average and the early June peak just below the 43 price level. This was my initial downside price target for the stock when I first shorted it into the post-earnings gap-up move. Volume is drying up here as the stock pulls into the 10-day moving average, so it is in a position to try and rally from here. A pocket pivot off the 10-day line would be a bona fide buy point in the stock, but for now it is mostly a wait-and-see situation unless one is feeling quite lucky and wants to try and buy the stock here at the 10-day moving average if the general market is able to build on Friday’s rally.




Keep a close eye on Facebook (FB), which is holding tight along its 10-day moving average as volume dries up. Despite failing on its recent buyable gap-up move following a blowout earnings announcement, the stock hasn’t broken down and remains above its recent cup-with-handle breakout point. With the stock holding along the 10-day line this sets up the possibility of a pocket pivot and is therefore something to keep an eye on. As a big-stock leader, FB might also serve as a barometer for where this market is likely to go from here. A breakout failure that sees FB fall back into its base would likely be a bad omen for the general market as well.




Hopefully members saw my tweet on Thursday with respect to the late-stage failed-base short-sale set-up in Keurig Green Mountain (GMCR) which was rallying into its 50-day moving average at the time after announcing earnings Wednesday after the close. As we can see on the daily chart, below, GMCR reversed right at the 50-day moving average and closed down on Thursday on very heavy selling volume. The selling continued into Friday and for now I would place a short-term downside target on the stock at the prior 111.09 May low, as I’ve highlighted on the chart.




Most of my short-sale target stocks continue to look weak on their charts with the sole exception of Workday (WDAY) which is holding tight along its 50-day moving average with volume drying up, as we can see on the daily chart, below. WDAY is expected to announce earnings at the end of the month, and last week the stock was upgraded with a $93 price target. That analyst’s buy recommendation eight days ago on the chart caused the stock to flash a pocket pivot, and while it looked like the stock might fail right away it has instead managed to hold tight along the 50-day line, which is objectively quite constructive. The surprising fact is that if the general market were acting better I would be inclined to take a long position in WDAY right here on the basis of that prior pocket pivot and the tight “voodoo” action along the 50-day line, using the 50-day line as a quick selling guide.




Below is a list of the rest of my current short-sale targets showing price levels at which I view potential resistance to exist, and which could become optimal short-sale points on weak rallies into these same potential resistance levels:

Splunk (SPLK) – First level of resistance at the 20-day moving average is 45.80, second level of resistance at the 50-day moving average is 47.54

Tableau Software (DATA) – Look for resistance at the 50-day moving average at 63.93.

(Yelp (YELP) – Look for resistance at the 50-day moving average at 70.74. (AMZN) – First level of resistance at the 20-day moving average is 325.32, second level of resistance at the 50-day moving average is 329.64

TripAdvisor (TRIP) – First level of resistance at the 20-day moving average is 98.47, second level of resistance at the 50-day moving average is at 102.28

Pandora Media (P) – Resistance is at the 50-day moving average at 26.61

Illumina (ILMN) – Stock actually had a pocket pivot coming up through the 10-day moving average on Friday, but from a position below the 50-day moving average, which represents upside resistance at its current level of 170.22.

The market currently has the feel of being in “no-man’s land” after the major market indexes have all broken down below their 50-day moving averages. With everything down as much as it is, the potential for the market to build on Friday’s rally certainly exists. On the other hand, there isn’t a lot that looks buyable here in order to participate on the long side of any such rally other than a small handful of ideas that I’m seeing currently. Often, however, that’s all you really need if the market is able to snap out of a short, sharp correction. Meanwhile, the potential for the indexes to bounce off support around the 4350 level for the NASDAQ and the 1900 level for the S&P 500 remains a distinct possibility.

The best approach here in my view is to maintain an even psychology while avoiding a rigid bearish or bullish view. Focus on the action of individual stocks. On the one hand, keep tabs on short-sale target stocks as and if they rally into resistance and reach or approach optimal short-sale entry points; on the other hand, maintain awareness of which stocks are in buyable positions and showing strength in the face of a dicey general market environment. These would be your “go to” stocks in the event of a market recovery. As we move through the last days of summer, things might remain inconclusive for some time, so pick your spots carefully, either long or short, and tread lightly until things become more definitive. Stay tuned.


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 had a position in GMCR and TSLA, though positions are subject to change at any time and without notice.

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