The Gilmo Report

August 21, 2016

August 20, 2016

The hot IPOs that have given the market some long-missing sizzle finally cooled off over the past few days as the market has taken a little bit of a break. The NASDAQ Composite Index has dropped back into its 10-day moving average after peaking earlier in the week on Monday. Volume, however, remained light on Friday even though it was an options expiration day.

On balance, the NASDAQ simply appears to be running into a little bit of high-altitude turbulence as it holds above its prior all-time highs from July of last year. And after an initial gap to higher highs early in August the index hasn’t really gone anywhere.




The weekly chart of the NASDAQ Composite reveals eight straight up weeks since the Brexit sell-off lows of late June. That’s a pretty impressive run, and we can see that this past week saw the index churn and stall a bit on higher weekly volume.

From this perspective, we can see that the index is starting to slow down as it consolidates those heady gains off of the Brexit sell-off lows. This is to be expected, however, and it remains a matter of watching the stocks first, and the indexes second. While the indexes have gone nowhere for most of August, a number of leading stocks have had very profitable moves, and that is always where we seek to focus our attention.


GR082116-$COMPQ Weekly


The S&P 500 Index remains in a tight sideways consolidation as it found support off of its intraday lows on both Wednesday and Friday, closing above its 10-day moving average on both days. Volume was significantly higher on Friday, most likely due to options expiration, as the index recovered from an early sell-off.




Fed heads have been out and about talking up a possible rate increase in September, which has kept the general market indexes in a state of suspended animation. This may continue for a while as the market sorts out the real probability of a Fed rate hike in September.

In addition, this on-again, off-again banter from various Fed heads regarding an interest rate hike in September is giving pause to the precious metals and their associated stocks. We’ve been following the metals and the metals stocks for some time in 2016 as they have trended higher throughout most of the year.

But as we have followed their action we are also aware that periods of uncertainty when it comes to what the Fed might or might not do have helped to create pullbacks and consolidations. In some cases, such pullbacks and consolidations have lasted for several weeks. If we look at the IShares Silver Trust (SLV) we can see that it basically remains in a somewhat choppy consolidation extending back to early July. There was a brief flirtation with higher highs in early August, but that has since failed.

The white metal ETF is now back at its 50-day moving average as it gapped down to the line on Friday as volume picked up but remained about average on the day. Note that as the SLV tests its 50-day moving average it is also testing the prior July lows. An undercut of both could set up an undercut & rally move from there, particularly if the market begins to figure out that the Fed heads are all just talking smack.




The situation with the SPDR Gold Shares ETF (GLD) is not all that different, although it is still holding about 1% above its 50-day moving average. Like the SLV, the GLD is trapped in a trading range that extends back to early July. On balance, the message from the precious metals appears to convey uncertainty about what the Fed will do next. That is not surprising, since Fed Chair Janet Yellen and her merry band of Fed heads have done little more than talk in circles for at least the past couple of months.

The GLD has not tested its 50-day line since late June, and at that point it gapped higher in a strong rebound off of the line. The two are once again headed on a collision course, although one far more benign than what we saw in the latter part of June. Thus we may not see any real resolution until as early as the next monthly jobs number or as late as the next Fed meeting in the latter part of September. As I’ve said many times before, I consider the trade in gold and silver to be one that is more fundamental than technical.

If you think the Fed is stuck between a rock and a hard place, then you buy the GLD and the SLV on weakness in the most opportunistic fashion. If you don’t, or are simply confused by the situation entirely, you stay away, end of story.




As the metals flounder about, so too do the metals stocks. Silver Wheaton (SLW), not shown here on a chart, is now testing its 20-day moving average at 29.01 and is still holding up reasonably well on a relative basis. Agnico Eagle Mines (AEM), also not shown, is heading for its 50-day moving average at 54.87. Both should be watched as they approach these lower support levels.

As the metals stocks continued to move down into lower-risk entry positions at areas of potential support, they have still not found any significant support just yet. In the case of First Majestic Silver (AG) it isn’t finding any support at all as it pushes below its 50-day moving average. This sets up a possible undercut of the prior July low, which could bring about a potential undercut & rally attempt. At this point that’s about all you are looking for if you are still bullish on the metals and the metals stocks.




The curious thing about the metals is that they are not weakening in the face of a stronger dollar. As we can see on the daily chart of the PowerShares DB US Dollar Index (UUP) ETF, the dollar has been in a consistent downtrend since its late July peak. So even with Fed heads paying lip service to a rate hike in September, the dollar doesn’t seem to be buying it. A small gap-up move on Friday did nothing to change the sharp downtrend since early August as buying interest in the UUP was fairly weak.

But as the dollar has fallen sharply over the past month, silver and gold have simply slumped within their two-month consolidations. Thus the inverse correlation we generally see between the action of the dollar and the action of precious metals has been broken in the near-term, adding to the confused state of affairs.




But, as I indicated last week, you can avoid all of this confusion simply by focusing on and choosing to play the best stocks in the market. This is a true stock-picker’s market, as one can only profit meaningfully by correctly choosing names with the most dynamic potential. One such stock, Twilio (TWLO) saw selling volume pick up sharply on Thursday as it took some serious heat, dropping -7.58% on the day. On Friday the stock opened down sharply where it finally met up with its 10-day moving average, but not before peeling off over -17% from its recent high of 66.40.

As I discussed in my Wednesday mid-week report, the rapidly rising 10-day line would be your next reference point for an opportunistic, lower-risk entry on any pullback. At that point, the 10-day line was at 48.99, but by Friday had risen to 51.81. TWLO reached a low of 51.85 on Friday right near the open, putting it in a lower-risk buy position.

TWLO is an apt demonstration of how what is quite hot one moment can cool off rather quickly in this market. It also shows why trying to derive any meaningful information from labeling its pattern a high, tight, flag does nothing to help you manage things on a granular level.

For the most part, I continue to abide by the approach of never chasing upside strength while looking to lighten up or sell into excessively extended upside movement. This would put one in the position of revisiting the stock in opportunistic fashion at the 10-day line on Friday. After all, a 58.4% gain in four days is nothing to sneeze at in this market, but it does seem to engender a rush of greed from late investors.




It is always interesting to witness how investors who missed the big move become desperate to enter on any little pullback. But the best way to deal with such an onrush of greed after the fact is to take a deep breath, relax, and wait for the next true entry point to show up. That occurred on Friday, at least short-term, although TWLO might need a little time to back and fill here along the 10-day line.

Square (SQ) is somewhat similar to TWLO solely in the fact that it is a recent cloud-related IPO, so is much more new-merchandise than some of the older, bigger cloud names like (CRM) and Workday (WDAY). Unlike the other, older-merchandise cloudies, SQ might be a bit earlier in its life-cycle. For now, I continue to view pullbacks into the 10-day line or near the 11 price level as lower-risk entry opportunities. Note how the stock picked up some strong above-average buying volume as it bounced right off of the 10-day line.

For now, I suppose whether one buys it at 11 or 11.70 isn’t all that relevant if the stock can get going as a more robust longer-term leader. That, however, isn’t so clear-cut, but the stock remains buyable in the spirit of letting that potentiality develop. Meanwhile, the 20-day line at 10.98 can offer a reasonable downside selling guide if SQ doesn’t fulfill that potential.




Speaking of extended upside movement, we might consider Acacia Communications (ACIA) a poster child for what is extremely rare action in this market. That would be a sharp upside follow-through to its movement above the $100 Century Mark this past movement that is very much in the spirit of Jesse Livermore’s Century Mark Rule.

As Livermore put it, “It was an old trading theory of mine that when a stock crosses 100 or 200 or 300 for the first time the price does not stop at the even figure but goes a good deal higher, so that if you buy it as soon as it crosses the line it is almost certain to show you a profit. Timid people don’t like to buy a stock at a new high record.” For newer members, a detailed discussion of this rule and how it works for both the long and short sides can be found in the October 17, 2010 report. This can be accessed in the Gilmo Report archives.

While TWLO’s 58% move in four days was impressive, ACIA posted an 84.5% move in just five days as measured from its 67.70 close the day before it announced earnings to the 124.90 peak of Thursday. This is obviously extended and getting more extended, but keep an eye on the rapidly rising 10-day moving average.

I would view any sharp pullback to the line, as with TWLO on Friday, as your next reference for a lower-risk entry possibility. I would also expect the 10-day line to be closer to the 100 price level by the time that happens given how quickly it is rising to meet up with the stock.




While there are a fair number of stocks out there acting well, I believe that the real juice will be found in these newer IPOs, and that is where most of my attention is focused during the trading day. Keeping a close eye on a handful of these names, from ACIA to SQ, also makes it easy to spot buying opportunities. This simplifies matters, especially when I’m fishing in the Sierra Nevada Mountains and basically trading off of my iPhone!

Line Corp. (LN) is also part of my Mini-Focus List of new merchandise heat that took some selling heat of its own on Thursday. The stock got knocked back to the 45 price level and the top of its prior IPO U-Turn base formation. That pullback, however, brings it closer to lower-risk buy land, and the stock was able to hold and close above the mid-point of its daily trading range. Another move back up toward the highs around 48 ran into logical near-term resistance, and the stock backed down to close near the lows of its daily trading range on Friday.

I think LN has a lot of potential given the fact that it is a leader in its space, and the fact that it is a Korean/Japanese concern makes it even more unique. As the 10-day moving average moves up toward the top of the IPO U-Turn formation just under the 45 price level, it becomes your best reference point for a buyable pullback, should that occur.




I might point out that I don’t see any reason why a Korean/Japanese name can’t become a big-stock, new-merchandise leader given that we’ve seen many come out of China. And while Japan might not have the allegedly strong economic growth seen in China (at least according to the communist government of that country’s numbers), LN’s position in a unique cloud-oriented space provides the context for strong growth.

Among the Chinese new-merchandise plays, Weibo (WB) is holding near its highs and above its 10-day moving average in healthy fashion. On Thursday the stock posted a pocket pivot volume signature from a point that was about 4% above its 10-day moving average. The volume was, however, strongly above average.

I would tend to look at any pullback into the 10-day line at 42.95 as a reasonable entry/add point if one is into the stock from further below in the pattern. The 20-day line down at 39.43 would also offer a reference point for a more opportunistically buyable pullback, should that occur.




Yirendai (YRDis still trying to digest all the wild action it has had over the past couple of weeks. On Tuesday the stock tried to streak higher but was hit with heavy selling volume as it reversed to close down on the day. Interestingly, YRD was able to recover back to the upside on Wednesday and Thursday as volume came in well above average.

This clearly needs some time to settle down and set up again, and the 10-day moving average at 31.61 would be your first reference point for support on any pullback from current price levels. YRD has tended to be a volatile little stock, so a pullback of that magnitude is not out of the question, especially if the rapidly rising 10-day line moves closer to the current stock price.

However, don’t let the fact that the stock has more than tripled since I first began talking about it back in May cause you to expect that an instant replay of such performance is imminent. It may need some time to build a real base and consolidation after such heady, intermediate-term upside.




As I discussed in my last report, Alibaba (BABA), can be considered a new-merchandise play since it came public less than two years ago. It also has the additional distinction of being a Chinese big-stock name with a strong institutional following. The fact that it trades over 14 million shares a day is testament to this fact.

The stock has been holding squeaky tight sideways over the past four days after approaching the 100 Century Mark on Monday following its buyable gap-up (BGU) of two Fridays ago. Volume has dried up to about average, but it may need to dry up even more.

This might give the 10-day moving average, currently at 93.23, time to catch up to the stock and provide a more solid reference point for lower-risk entry opportunity. In this case a buying opportunity might materialize as a pullback into the 10-day line, or BABA might just keep holding tight sideways long enough for the 10-day line to catch up to the stock.




Nvidia (NVDA) has not been able to make any significant upside progress since its post-earnings buyable gap-up of two Fridays ago. Wednesday’s pullback into the 10-day moving average came on heavy selling volume. But it held the line and the 60.63 intraday low of the buyable gap-up day. NVDA got down as far as 60.66 on Wednesday, just three cents above the BGU intraday low, so that was your lowest-risk entry point for anyone interested in the stock. On Thursday, NVDA bounced off the 10-day line but still remains below the BGU high of two Fridays ago.

Technically speaking, NVDA is still only 2.6% above the BGU intraday low, so it remains within low-risk buyable range of the BGU using the 60.63 price point as a selling guide. Keep in mind that the stock has had a long price run prior to the buyable gap-up, so may not necessarily launch out of here right away. But as long as it remains above 60.63, it is still viable as a BGU.




The big-stock NASDAQ names I’ve been discussing in recent reports have remained one big bed full of snoozers as they mostly go nowhere. This is why the NASDAQ Composite Index has also remained in a state of suspended animation for the past few weeks. As an example, we can see that (AMZN) can’t seem to get anything going here as it now dips just below its 20-day moving average. Volume picked up slightly on Friday but remained below average.

While the stock is still holding above its prior July consolidation range, it has not shown any upside momentum following the gap-up move that occurred after earnings were announced. To me, AMZN looks like it is losing momentum, and like the rest of these big-stock NASDAQ names, doesn’t strike me as a place where you’re going to make big money.




In fact, I view most of these big-stock NASDAQ names I’ve discussed in recent reports as places where big money is not likely to be made. As we already know, the big money has been in the more dynamic, new-merchandise names. Among these big-stock names I’ve been tracking, perhaps Apple (AAPL) has done the best as it has continued to move higher following its post-earnings buyable gap-up move after earnings in late July. However, it is only about 5-6% higher since it gapped through the 200-day line. Pass the No-Doze® please!

Among the big-stock NASDAQ names I’ve been following more as market barometers than actual big-money profit opportunities, AAPL might be considered more of an Ugly Duckling play off the recent lows. Others, like Alphabet (GOOGL), Microsoft (MSFT), and Priceline Group (PCLN), not shown here on charts, are more recent buyable gap-ups that have moved no more than 2-3% since their BGUs.

As long as these names remain in a tepid torpor, I would not expect to see the NASDAQ Composite make much headway either. This is why we would prefer to focus on some of the more dynamic names in the market where significant upside progress has been achieved more recently.




Netflix (NFLX) is another big-stock NASDAQ name that might give us a little more upside price dynamism, but it is still stuck in neutral along its 10-day moving average. The stock has benefited from recent news of big insider buying, but so far that hasn’t produced any big upside price momentum. My guess is that if this particular insider is buying because they know something then NFLX will simply gap up big one day on whatever it is that the insider knows. Maybe they don’t know anything.

Meanwhile, NFLX remains in a technically buyable position along its 10-day moving average as volume dried up to -43.1% below average on Friday. The stock has been showing voodoo volume signatures for the past eight trading days, but so far the stock hasn’t shown any inclination to move significantly higher. For now, I view the 20-day moving average as a maximum downside selling guide. Keep in mind as well that a high-volume breach of the line could morph the stock back into a short-sale target.

(A voodoo (Gilmo slang for VDU, or volume dry-up) pullback occurs in a leading stock that is pulling into a logical area of support, either at a key moving average like the 10-day, 20-day, or 50-day moving average, or the top of a prior base. Generally, volume on a voodoo day is less than -45% below-average, although it can also be measured contextually relatively to the volume seen on preceding days on the chart.)




Facebook (FB) is also suffering from a bad case of the blahs as it continues to track sideways in a small price region between its 10-day and 20-day moving averages. One thing to watch for would be a high-volume breach of the 20-day line which could set up a test of the 50-day moving average down at 119.08.

In addition, we should remain mindful of the fact that if we see any of these big-stock NASDAQ/growth names like AAPL, AMZN, FB, MSFT, NFLX, or PCLN start to break down on heavy volume then it could have negative implications for the general market. That is why I am watching all of them closely.

Meanwhile, one could view this pullback to the 20-day moving average as a potentially lower-risk entry spot for FB, but my guess is that we won’t see the stock make significant upside progress any time soon. It seems to suffer from both over-ownership and news overhang since it disclosed the receipt of an IRS Notice of Deficiency that could cost it $3-5 billion in additional taxes.




Mobileye (MBLY) successfully held the move down to its 50-day moving average on Wednesday, which also coincided with an undercut of the prior 44.52 low of August 2nd. That move was playable as an undercut and rally set-up using the 44.52 low as a guide for a tight stop, as I discussed in my Wednesday mid-week report.

The stock has now regained its 10-day and 20-day moving averages, but volume has remained quite light. In fact, on Friday, it came in at -50.4% below average. And if we study the daily chart carefully we can also see that such voodoo volume signatures have been the norm throughout August.

So while nobody seems all that interested in selling the stock, nobody seems all that interested in buying it either. What I would like to see is some sort of pocket pivot off the 10-day moving average, which would not be too hard to achieve given how light volume has been for the last three weeks. That is something to keep a close eye out for here as we move into the end of summer.




In early August, Zayo Group Holdings (ZAYO) pulled all the way back to the top of its prior early-July base breakout point and the 50-day moving average on relatively light volume. What made this somewhat odd to my eye is the fact that the stock looked to be gathering some upside momentum as it headed for the 30 price level on big buying volume.

That big buying volume price movement fizzled out and the stock unceremoniously slid all the way back down below the 28 price level. However, it held the 50-day moving average on a closing basis as volume dried and then trickled higher from there.

But, maintaining its odd, somewhat volatile nature, ZAYO again tested the 50-day moving average on Wednesday of this past week (as I noted in my mid-week report) and held, posting a pocket pivot off of the line. On Thursday ZAYO again tested the 50-day line but held well above it on an intraday basis and regained the 10-day and 20-day moving averages on another pocket pivot.

On Friday ZAYO pulled back into the 10-day/20-day moving average confluence and found some volume support, closing near the peak of its daily trading range. I’m not sure ZAYO has significant upside potential from here, but one could still view the stock as buyable here using the 50-day line at 28.16 as a maximum downside selling guide.




Below are Notes from my Trading Journal regarding other long ideas discussed in recent reports. For the most part I am focusing, however, on the recent IPOs discussed at the beginning of the report, including ACIA, BABA, TWLO, LN, SQ, WB, and YRD as I believe these will play a significant role in any continued general market rally. Meanwhile, this is what I think of everything else:

Adobe Systems (ADBE) – sitting right at the 10-day line as volume declined to -40% below average on Friday. In a buyable position using the 10-day line as a tight selling guide. So far this has been able to cling to the $100 Century Mark, so it remains viable heading into earnings in mid-September.

Ambarella (AMBA) – stock has had a nice run since I first discussed this as an Ugly Duckling bottom-fishing buyable gap-up back on June 3rd. Earnings are expected to be announced on September 1st, so I see no reason to get aggressive with the stock right here. Either look to take profits ahead of earnings or fasten your seatbelt if you feel you have enough of a profit cushion to sit through the report.

Atlassian Corp. PLC (TEAM) – acting sloppy as it can’t hold the 20-day moving average. In my view this should have lifted off the line by now, so I prefer to leave this alone until something more concretely positive develops.

Barracuda Networks (CUDA) – volume remains in voodoo land as it again dried up to -70% below average, or less, as the stock tracks tightly along the 10-day line. In a buyable position using the 20-day line at 21.36 as a tight selling guide.

Electronic Arts (EA) – broke out on strong volume this past Thursday. If you like to buy breakouts, then this is still within buying range with the idea that it will continue to hold above the breakout point at 79.99.

Energy Recovery (ERII) – settling in along the 10-day line. Posted a pocket pivot volume signature on Friday but failed to hold above the 10-day line. Still looking at this as one to buy on a pullback to the 20-day line, now at 11.92.

Fitbit (FIT) – making a last stand at the 20-day moving average. Volume is extremely light here along the line, but the real question is whether the post-earnings move in early August was fueled by short-covering alone. If no natural buyers step up to the plate, then this may end up failing here.

Gigamon (GIMO) – holding along the 20-day line as volume continues to dry up. In a buyable position using the 20-day line at 44.36 as a selling guide.

GrubHub (GRUB) – was able to post a stalling pocket pivot move off the 20-day line on Friday, but in my view that was a bit after the fact. If you were going to try and trade this thing for a pop, you had to come into it at the 20-day line. GRUB did manage to hold three cents above its 10-day line on Friday, so if you think this pocket pivot is viable then you would buy it with the idea that it should continue to hold above the 10-day line at 38.

Imperva (IMPV) – still holding along the 10-day line, but volume is drying up even more extremely, coming in at -65% below average on Friday. Again, this is in a buyable position using the 10-day line at 46.59 as a selling guide.

ServiceNow (NOW) – previous tight action seen last week has gone a bit sloppy here, but with the stock pulling into the 50-day moving average this becomes a last-stand sort of entry point using the moving average at 71.88 as a selling guide.

Silicon Motion (SIMO) – has kept edging higher on light volume, which translates into wedging action along the 10-day line. Given that there has been no strong-volume push off of the 10-day or 20-day moving averages, I am wary that the potential for a pullback down towards the 50-day moving average is growing.

Splunk (SPLK) – pullback on Wednesday and Thursday into the 10-day line put the stock in a buyable position. But earnings are expected next Thursday, and I see no reason to play earnings roulette with the stock, especially if one does not have a decent profit cushion.

Workday (WDAY) – earnings are expected this coming Wednesday. Nothing to do with the stock until then.

Zendesk (ZEN) – has remained buyable along the 20-day line, and some supporting action was seen off of the line on Thursday. The 20-day line at 29.71 remains a nearby selling guide, while the 50-day line at 28.33 could be used if one wishes to give the stock more room.

Note that with cloud names like CRM, SPLK, and WDAY expected to announce earnings in the next several days, this could have a sympathy effect on other cloud-related names that we’ve been watching. This includes NOW, ZEN, and TEAM, for example.

If the short side begins to take on a more actionable shape in the coming days, I would be on the lookout for situations similar to Activision Blizzard (ATVI), where a late-stage failed-base (LSFB) situation may be developing. I discussed this in detail in my Wednesday mid-week report, and I see a number of names that could become susceptible to morphing into similar set-ups

In LSFB short-sale set-ups, there are two primary components. The first is, of course, a late-stage base, generally consisting of a big, wide loose base from which the stock has recently tried to break out. The initial failure sign is a breach of the 20-day moving average on high volume, followed by a similar breach through the 50-day line.

We can see that ATVI has had both of these recently. Now it will try and rally back up to the 50-day line or just beyond to the 20-day line, whereupon it can be considered to be in a more or less optimal short-sale position. Currently ATVI has rallied back up to the 50-day line where it has been stalling as volume dries up.

Keep in mind that these types of set-ups can also turn into undercut & rally moves that shake everyone out before turning higher. This is what must be guarded against if one chooses to venture onto the short side of something like ATVI. Normally, an undercut & rally move like what ATVI has done over the past four trading days is just a shortable type of rally.

The simple way to guard against it becoming a big double-bottom type of shakeout on an undercut & rally move is to simply abide by your upside stop. In this case, the 20-day line up at 40.54 would serve as such a guide.




When looking for these types of set-ups in a weakening general market you can generally refer to names that have recently been on your buy watch list. Names like CRM, for example, which was on our long watch list for some time, serve as a good example of how a prior long idea turns into a short-sale set-up.

Dycom Industries (DY) and Vulcan Materials (VMC), both not shown here on charts, are a couple of other stocks that were acting like leaders until 2-3 weeks ago but which have now morphed into potential LSFB set-ups. This is what you want to keep an eye out for among leading stocks. We might even see something like FB turn into an LSFB in the event of a general market correction.

And, of course, if we see the balance of long and short-sale set-ups start shifting more toward the short side, we can draw some conclusions about the health of the general market without fixating on the indexes themselves. For now, the general market uptrend remains intact as the indexes continue to track sideways. I myself am moving more toward what I call a basketball team approach vs. a football team approach. This is where I look to focus on a smaller group of leaders with which to operate during a continued market uptrend.

Think of it this way. A basketball team has five players who play most of the game. A football team has 22 players that play most of the game. Right here, I’m looking to focus on a smaller group of stocks that includes names like ACIA, TWLO, LN, SQ, and WB, for example.

As I discussed earlier, if the general market rally continues, these names are likely to play a significant role. At the same time, I will be on the lookout for new-merchandise names coming to market. Some recent names that catch my eye, for example, are Impinj (PI), not shown here on a chart, which is still relatively thin but interesting as a recent IPO.

Take it from there.

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 positions in SQ and TWLO, though positions are subject to change at any time and without notice.

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