The Gilmo Report

August 17, 2014

August 16, 2014

On a purely technical basis, the NASDAQ Composite Index ran into resistance at the upper end of its current sideways price channel on Friday, reversing and churning around all day before closing up 11.93, as we can see on the daily candlestick chart, below. The red candle “body” is due to the fact that the index closed lower than it opened, and indeed the market began the day with another gap-up opening. Soon thereafter news that the Ukrainian military had destroyed at least part of a Russian armored column as it was entering Ukrainian territory sent the market flying in the opposite direction, with the NASDAQ down as much as 25.87 points at one point. Later in the day, the market rallied sharply off the lows after the Russians denied the incident, declaring something to the effect of, “Armored column? What armored column?”

Friday’s action underscores the “no-man’s land” aspect of this market, the net effect of which is an uneven, choppy environment, even among leading or would-be leading stocks. At best, I would say that the market presents something of a mixed bag for investors. The market isn’t letting the horses out of the barn in wholesale fashion.




The S&P 500 Index, also on a strictly technical basis, ran into resistance of its own at 50-day moving average, which from a chartist’s perspective is perfectly “logical,” as we can see on the daily candlestick chart, below. While I’m am not a wild believer in candlestick signals, we can make note of the fact that the S&P 500’s peak on the breakout in late July was marked with a so-called bearish evening star formation. Some might argue that Friday’s action was a sort of “hanging man,” another bearish candlestick formation, but generally this type of pattern will show very little to no upper “shadow” or “wick” on the Friday candlestick. Given that volume was sharply higher on Friday and all major market indexes closed well off of their intraday lows, we can just as easily view the action as an indication of support off of the lows, although some may attribute the high volume to options expiration. The news flow of the day was also a factor, with “bad” news in the morning being mitigated by “not so bad” news in the afternoon that all served to create a quasi-shakeout.

Meanwhile, the simple fact is that both the NASDAQ and S&P 500 are pushing right up to their respective resistance levels at different positions within their charts. The NASDAQ resistance lies at the top of its current price channel or base, while the S&P’s lies at the 50-day moving average and the prior July lows. In my view, the determinant with respect to where one might be able to make some decent money, one way or the other, is going to depend on how the indexes resolve their current encounters with “logical” resistance. Meanwhile, I’m just watching the stocks, since they are always the source of your first clues, while keeping an entirely open mind. If there is a long side to this market, it is developing slowly, but I do see some areas worth keeping an eye on.




Tesla Motors (TSLA) appeared to shrug off most of the excitement on Friday, holding tight along the 260 price level while volume dries up and the 10-day moving average, now at 252.94, catches up, as we can see on the daily chart, below. TSLA is also showing “ants” on its chart, the little black triangles that show up whenever a stock is up 12 out of 15 days in a row or better. The stock feels to me like it wants to move higher, and I tend to think that it certainly will if the general market is able to push through near-term resistance and the NASDAQ clears to a higher high. If one is long this initially from the pocket pivot in late July or the recent breakout and small pullback last week, the 10-day line becomes your downside reference point. Meanwhile TSLA holds up well, and that has to be viewed as constructive action for the market.




Netflix (NFLX) pocket pivoted through the highs of its recent sideways price range on a trend line breakout move Friday, as we can see on the daily chart, below. This comes on the heels of last week’s pocket pivot move back up through the 50-day line, In addition, you now have all of its moving averages turning up in synchrony, and this is another big-stock NASDAQ name that is likely headed higher if the general market heads higher. The fact that it was able to do so on an otherwise shaky market day on Friday is certainly evidence of this.  My tendency is to think that one can buy this move based on the bona fide trend line/pocket pivot breakout move, and that it may be a clue as to where the market is headed from here.




Twitter (TWTR) continued to move higher on Thursday after finding support along its 10-day moving average earlier in the week, as we can see on the daily chart, below. The stock pulled in Friday on lighter volume, and remains in a position for a pocket pivot buy point to materialize off of the 10-day moving average. You are now looking at the stock needing to exceed 25,389,111 shares for a pocket pivot volume signature, which looks fairly attainable given that it represents volume that is well below daily average. This is something I would continue to watch for, although my expectation if the general market moves higher is that TWTR has a reasonable chance of establishing itself as a potential leader in any continued rally phase.




Facebook (FB) ran into a little selling on Friday as well, but it was able to close off of its lows and above the 10-day moving average, as we can see on the daily chart, below. Volume was quite a bit higher on Friday compared to Thursday’s levels. I can’t say that FB excites me all that much as a long opportunity, but as a big-stock leader it is one to watch for clues that might be useful in determining how the general market resolves its current state of affairs. My guess is that if FB doesn’t bust, the market won’t. I tend to consider it somewhat of an “over owned” stock, so I don’t expect it to be a faster move in a continued market uptrend. I do consider it an important barometer, however. Meanwhile, those who think the stock has substantial upside potential can keep an eye out for a continuation pocket pivot given that FB is in position for one here based on its continued hugging of the 10-day moving average.




GW Pharmaceuticals (GWPH) remains a stock I prefer to buy on pullbacks following this past Monday’s pocket pivot move off of the 50-day moving average. As we can see on the daily chart, below, GWPH is sliding around with the market, but has remained buyable on pullbacks to the 50-day line, not at 87.51.  I noticed that Biogen Idec (BIIB) is recovering from its recent sell-off with a couple of pocket pivots while Gilead Sciences (GILD) gapped up to a new high on news Friday. GWPH is another “ignitable” bio-tech name and so I think it is worth looking at here based on this past Monday’s pocket pivot given that the 50-day moving average offers a very nearby stop.

The action in GWPH strikes me as somewhat constructive, and it is one of those names that has the capacity to capture the imagination, and hence the investment dollars, of investors if it can get going. GWPH’s pocket pivot on Monday was fueled by news that institutional investor Capital Research Global Investors had taken a 10.4% “passive” stake in the company, according to its latest 13G filing. While we have to remember that “Cap Re” has already bought their stake, it does indicate strong institutional interest for the name and to some extent helps mitigate any fears that this is just another fly-by-night “pot stock.”




Palo Alto Networks (PANW) proves the axiom in this market that buying breakouts is generally not the thing to do. Wednesday’s breakout and Thursday’s moves to new highs both stalled on high volume, and the stock took advantage of today’s Ukrainian news to back down into its base. It did hold the intraday low of Wednesday’s breakout, and it remains within range of that price level at 82.50. The stock pulled down to 83.10 on Friday, a low-risk entry point if one was bold enough to do so in the face of the early-morning news flow, but a close at 84.63 puts it within buying range on the pullback and keeps your stop within very reasonable range. In this market it is preferable to buy strongly-acting stocks on constructive weakness, and PANW’s pullback on Friday looks normal to me. PANW is expected to announce earnings early in September so it is not clear how much of a cushion one can develop in the stock between now and then if it is able to move higher from here.




Skyworks Solutions (SWKS) pulled back following Wednesday’s pocket pivot buy point, as we can see on the daily chart, below, but the stock recovered on Friday with a move towards its prior all-time highs at 54.50, closing at 54.39. This is probably best bought on pullbacks closer to the 10-day line at 52.50. While the stock seems cheap relative to its P/E-ratio, currently at 14 times forward earnings estimates, it is a semiconductor stock that reminds me to some extent of names like MCHP, NXPI, FSL, CAVM, etc. that look good for a brief period of time but never have any significant price runs. Admittedly, SWKS looks “good” right now, but at 14 times estimates for a stock growing earnings at 54% in the most recently reported quarter, I have to wonder why investors place such a low value on the company’s future earnings stream.




Greenbrier Companies (GBX), a name that was looking good before the market broke down from its late July highs, has found support at its 50-day moving average and is currently back on top of its 10-day moving average, as we can see on the daily chart, below. This puts the stock in position for a pocket pivot off of the 10-day line. So far the recovery off of the 50-day line has been tepid with respect to buying volume, but I would be interested to see GBX continue to move tightly along the 10-day line as more of my indicator bars at the top of the chart turn blue.




I’m watching recent hot networking IPO Arista Networks (ANET) here as it settles down following a wild, failed buyable gap-up six days ago on the daily chart, shown below, that closed down and sent the stock back down towards the lows of its cup base. In my view, the buyable gap-up move two Fridays ago had a couple of factors working against it. The first was that it had come straight up off the lows of its current cup base at 62.51 and opened up that day at 79.25, way extended and right into overhead resistance from the left side of the pattern.

That gap was sold into furiously, and now the stock has settled back in to build something of a handle to its prior cup formation along the 20-day moving average, as we can see on the daily chart, below. Volume is starting to dry up, and I’m keeping an eye on this for some sort of extreme volume dry-up on this pullback as something that might be bought into along the 10-day or 20-day lines. Of course, if volume picks up and the stock goes crashing through the 20-day line, all bets are off, but as a hot new IPO name in the cloud space, this is worth keeping an eye on for now, in my view.




Also in the new merchandise department is (JD), a stock I’ve discussed in previous reports. JD is considered to be the “Chinese” which is nice, I suppose, but I’m more interested in how the stock might be trying to set up here. JD was attempting to break out on Wednesday going into its earnings announcement of Friday morning, as we can see on the daily chart, below, and the stock did beat earnings estimates by 9 cents, but apparently offered “light” third-quarter revenue guidance. The stock sold off hard at the open but recovered off of the 50-day moving average for a sort of supporting pocket pivot type of move. Notice also that JD barely held above the Wednesday trend line breakout, which looks constructive. With the much anticipated IPO of Alibaba coming up in September, JD might have the potential to bask in the expected warm glow of the Alibaba offering and “re-breakout” from its current six-week base. Interestingly, the stock made an all-time weekly high on Friday as its Relative Strength line also moved to a new high. My thinking here is that in order for JD to remain viable it should hold above the 10-day line at 28.56 at best, and the 50-day line at 28.01 at worst. The stock closed 6% above the 50-day line on Friday, which makes that a reasonable downside stop.




A number of members enjoyed my surfing analogy in the Wednesday report, and it appears that we do have several members who ride ocean waves as well as market waves. Here’s another analogy that might give one some insight into the art of short-selling as I practice it. The other day I saw a program on cable TV that was about these guys who “harvest” ice from icebergs. They go out in their boats and find an iceberg and start shooting at it with a high-powered rifle. The idea is to knock off a big chunk of ice, haul it back to land, and sell it to purveyors of “pure” iceberg water that is bottled under such creative labels as “Berg.” What struck me about the process of iceberg harvesting is that these guys have to be pretty persistent. They take a shot at a fairly large iceberg and a tiny chip comes off. They shoot again and the iceberg doesn’t budge. They shoot again and a tiny chip comes. Another shot, another chip, and then finally one shot “takes,” and a large chunk of the iceberg is knocked into the ocean. The iceberg harvesters happily gather up their “catch” in the form of a rather substantial chunk of icy blue “goodness” and head back to shore. In many ways, this struck me as a great analogy for short-selling.

With this analogy in mind, we can look at a concrete real-time example of a stock offering short-sale potential, currently, but not much else. Keurig Green Mountain (GMCR), shown below on a daily chart, remains in a short bear flag, and Thursday’s rally attempt to clear the top of this range ran into resistance at the 20-day and 65-day exponential moving averages. The stock reversed back to the downside and closed near the lows of its intraday trading range. On Friday GMCR found support along the lows of its bear flag, and within the context of Friday’s gyrating general market action remains inconclusive. When the stock rallies up to the top of the range, that’s where I start taking potshots at it on the short side, but so far I’m only getting small chips to come off as the stock drops a couple of points back to the downside each time.




Among other short-sale target stocks, TripAdvisor (TRIP), not shown here on a chart, is also finding resistance at its 65-day exponential moving average similar to GMCR, but so far no further breakdown in the pattern has been forthcoming. While I’m still watching short-sale target stocks as they rally into potential areas of resistance, I don’t get a sense that there is much traction on the downside in most of these names currently. Even Friday’s sell-off didn’t see all that much in the way of volume selling in these stocks, so, believe it or not, my tendency is to think that better luck might be found on the long side here given that I am finding more nascent set-ups on the long side than I am on the short side, and that is often a clue of where the market might be headed. That is not to say that I am not keeping an eye on my short-sale watch list. If the market weakens and I see something sitting at or near an optimal short-sale point, I am more than willing to strike. Members should review my list of short-sale targets and their associated entry points in my report of last weekend.

As I noted at the conclusion of my report of this past Wednesday, this market requires some nimble footwork, and that has certainly turned out to be the case over the past couple of days. As we move through the middle of August, an allegedly “slow” period for the market, things may remain choppy. There is also the news flow of the day to contend with, and while things in the Ukraine have the potential to get out of hand, what started out looking like some serious news on Friday turned relatively benign quite quickly. In fact, the main takeaway from Friday’s action as I saw it is that the market seemed to show that in the absence of terrible news it wants to go higher.

For now it’s a matter of seeing how the indexes contend with resistance that is right here, right now, over the next few days. While I could certainly be wrong, I get the sense that unless we see some deleterious news next week, the market will move higher. That said, whether big money can be made in this environment remains an open question, but one that can be tested if one sees an appropriate and optimal set-up while maintaining tight risk control. 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 GWPH, JD, TSLA, and TWTR, though positions are subject to change at any time and without notice.

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