The Gilmo Report

August 27, 2017

August 27, 2017

The NASDAQ Composite and S&P 500 Indexes have both spent the past four days somersaulting around their 50-day moving averages without getting anywhere. This comes on the heels of this past Tuesday’s big gap-up move that was also a logical reaction rally after the undercut of the prior week’s lows, as discussed in my Wednesday, mid-week report.

The NASDAQ has been somersaulting around its 50-day moving average like a gymnast on the uneven bars. Within the context of strong but perhaps “phoneyed-up” (to use a favorite term of Bill O’Neil’s) futures-led gap-up rally that started the day on Friday, the negative close that ended the week was bearish on its face.

 

GR082717-$COMPQ

 

While the NASDAQ is now five weeks off its late July peak, the S&P 500 Index is only three weeks below its peak of early August. But both indexes closed the week below their 50-day moving averages as volume declined on Friday, indicating a lack of buying interest. After Tuesday’s big gap-up move, buyers haven’t seemed interested in creating any kind of strong follow-up move to the upside. In the process, the indexes look vulnerable to more downside from here. I suppose we’ll see what the robo-market has to say about that once the trading week starts!

 

GR082717-$SPX

 

When I see gold continuing to rally as the dollar keeps plumbing lower lows, which it has been doing all year long, I begin to sense a faint odor in the air. Something doesn’t seem quite right, and this adds to the uncertainty of the current market environment. Gold, as represented by the daily chart of its proxy, the SPDR Gold Shares ETF (GLD), is on the verge of breaking out from a roughly four-month price range. Interestingly, gold has outperformed the S&P 500 Index in 2017, a fact that is not widely known.

But the GLD has been rallying steadily since its undercut & rally move of early July, which was then followed by a bottom-fishing or roundabout type of pocket pivot at the 50-dma in late July. On Friday, the GLD found strong, volume support at the 20-dema as it looks poised for a four-month breakout. My guess is that if that happens, it will be accompanied by lower lows in the general market, but we won’t know for sure until we see it.

 

GR082717-GLD

 

Meanwhile, the financials are starting to look like late-stage base failures as they mimic the Financial Select Sector SPDR Fund (XLF). The XLF has made three attempts to break out to new highs in late July and then again in the first half of August, but all three have failed. Now the ETF is living below the 50-dma, wedging up to the line over the past week before reversing at the 20-dema and the 10-dma on Friday as volume picked up.

Technically, this looks more like a short than a long right here, and if the general market continues to get into trouble this coming week, that may turn out to be the case. As I see it, one can short the XLF here using Friday’s high as a guide for a tight upside stop.

 

GR082717-XLF

 

As the market starts to roll over, your best short-sale set-ups will of course occur in formerly leading stocks that have broken down. Initially, this will usually result in a late-stage type of situation where a prior breakout fails outright. As the breakdown progresses, the pattern is then generally identifiable as a late-stage failed-base (LSFB) formation.

We’ve already discussed a couple of names in recent reports and blog posts that have so far acted like LSFB short-sale set-ups. The first is Lumentum Holdings (LITE), which gave everyone a very juicy short-sale opportunity on Thursday when it opened for trading and ran straight up to its 50-day moving average. At that point, the stock was shortable at the line.

By the close, LITE pushed back to the downside and closed near its intraday lows. It ended up resting right near its 20-day exponential moving average. From here, watch for any move back up toward the 50-dma as a possible short-sale entry opportunity, but the time to hit LITE on the short side was Thursday at the 50-dma.

 

GR082717-LITE

 

Within what was once a very strong leadership group in the optical stocks, we also have Applied Optoelectronics (AAOI), which looks like it might be riding along the neckline of a possible head and shoulders in progress. I don’t show the chart here, but you can check for yourself that the only lower-risk short entry would be on any rally up to the 20-dema at 69.18 or the 50-dma at 73.41.

Meanwhile, Fabrinet (FN), was previously shortable on rallies up to its 200-dma per my discussion in Wednesday’s report. On Thursday and Friday, it ran up close to the 200-dma but ended up finding resistance closer to the closer 10-dma which just recently moved below the 200-dma. From there it then moved to the downside on light volume.

FN is best shorted on any rallies up into the 200-dma, if you can get them. Otherwise, it serves as a third LSFB model stock like its friends AAOI and LITE.

 

GR082717-FN

 

Another one has been JD.com (JD), which was quite shortable on this latest rally up into the 50-day moving average, as I discussed in Wednesday’s report. The stock has since careened back to the downside. Notice how it is so far acting in textbook LSFB fashion, with the initial warning sign coming on the breach of the 20-day exponential moving average and the prior late-stage base breakout point.

On Thursday, JD made a brief appearance above its 50-dma, whereupon it was eminently shortable. It then rolled to the downside, and on Friday made a brief blip to the upside in pre-open trade before rolling lower on a test of the prior week’s lows. Rallies up into the 50-dma at 42.64 remain your preferred entry opportunities from here.

 

GR082717-JD

 

Among our big-stock NASDAQ names, there are also several other LSFB situations in progress. These include Amazon.com (AMZN), Alphabet (GOOGL), Netflix (NFLX), Priceline Group (PCLN), and Tesla (TSLA).

Here’s AMZN on a weekly chart. From here, only rallies up into the 10-dma at 963.92, the 20-dema at 973.17, or the 50-dma at 991.04 would offer lower-risk entries. Notice how the failed breakout five weeks ago created a sort of “pinhead” to what is so far two left shoulders and a pinhead with a possible right should be in-the-making right now.

The stock is also resting along what would be the neckline of the H&S formation, but for now this is in-process. The set-up that is currently active would be the LSFB based on the initial breakout failure and the move below the 10-week moving average on the weekly chart and the 50-dma on the daily chart.

 

GR082717-AMZN

 

Alphabet (GOOGL), not shown on a chart, is another LSFB that has lived below its 50-dma for the past four weeks. Currently, rallies into the 20-dema at 940.18 have been shortable, and the stock has failed at the 20-dema over the past two trading days. We also have Priceline Group (PCLN), also not shown, which is way extended on the downside but it is another example of an LSFB short-sale set-up that started out as shortable gap-down after its early August earnings report. It made a lower closing low on Friday.

Other big-stock NASDAQ names I follow are showing signs of potential resolution as LSFB short-sale set-ups although some have yet to be fully confirmed. Tesla (TSLA) is an example of a possible failure-prone pattern as it swirls around its 50-day moving average. If you look at this on a weekly chart, not shown, you can see that it has the look of a big head and shoulders with a rising neckline that extends back to around mid-April.

In the daily chart, below, what we see is an area of price congestion formed during the month of June that forms the head of the H&S pattern. This most recent rally up above the 50-dma would form the right shoulder of the H&S. With TSLA having busted its 50-dma once, then rallying after undercutting its early August BGU intraday low, another breach of the 50-dma would trigger a short-sale entry.

On Friday, TSLA closed right on top of its 50-dma, and all we need to see from here is a break below the line to confirm it as a short-sale entry using the 50-dma as a guide for a tight upside stop. Note that TSLA was already stalling and reversing at the 10-dma on Thursday and Friday.

 

GR082717-TSLA

 

The interesting thing about the short side, and one which I’ve noted in my most recent book on the topic, Selling Short with the O’Neil Disciples: Turn to the Dark Side of Trading, (John Wiley & Sons, April 2014), is that short-sale patterns can morph into other patterns. TSLA illustrates this quite well.

Observe that the right side of the H&S formation (e.g., the head and the right shoulder) I discussed above can also be viewed as a potential cup-with-handle formation, as I’ve outlined in the chart below. Late week we had the breach of the 20-dema as an initial sign of trouble, followed by a tepid, weak-volume rally back above the 50-dma that ran into resistance along the 10-dma.

In this case, a breach of the 50-dma would also seal the deal for TSLA as a short-sale entry at that point. This is how patterns can be viewed in a variety of ways, and in the process, we get a sense of where the short-sale entries might lie. The flip-side of all this is that the stock does not break down, and instead sets up again and breaks out. That can happen, and it is why risk management combined with the proper timing of short-sales is critical in keeping losses to a minimum.

 

GR082717-TSLA Second Daily

 

Netflix (NFLX) closed below its 50-day moving average for the first time since its mid-July buyable gap-up and base breakout following earnings. Note that the stock is under the 50-dma but holding more or less right at the top of its prior base breakout point at the highs of the base.

In my view the close below the 50-dma triggers the stock as a short-sale here using the 50-dma or the 20-dema as guides for upside stops. However, in my Wednesday mid-week report I was ahead of the game when I pointed out that, “A weak rally into the 20-dema could also serve as a lower-risk short-sale entry point, so that is something to be alert to.”

Notice that on Thursday NFLX rallied right up into the 20-dema where it reversed to close down on increased selling volume. That was a sign of weakness at the 20-dema, and presaged Friday’s close below the 50-dma. Another big-stock NASDAQ LSFB that may be in progress right here, right now.

 

GR082717-NFLX

 

Nvidia (NVDA) is in fact a late-stage breakout failure after reversing to the downside following its early August base breakout. Volume was weak on the breakout, tipping investors off to the flawed nature of that move, and the stock then gapped down through the 20-dema after earnings.

Over the prior two trading days NVDA has rallied above the confluence of its 10-dma and 20-dema, but right into the prior base breakout point, which can also serve as a resistance level. As I wrote on Wednesday, the move back above the 10-dma/20-dema confluence put the stock in a position where it, “…could become shortable into this rally using the 170 price level as a tight upside stop if we see the general market roll over again.”

Near-term that has proven to be the case, and now a clean breach of the 20-dema followed by a breach of the 50-dma would confirm the stock as an LSFB. This is something to watch for, particularly since we are seeing other big-stock NASDAQ names begin to fall, one by one. More could soon join the party, including NVDA.

 

GR082717-NVDA

 

Facebook (FB) is another big-stock NASDAQ/tech leader that may be on the verge of failure as well. On Friday, it closed below its 20-dema with selling volume picking up slightly. As I wrote on Wednesday, “A breach of the 20-dema, however, would be bearish and could, I say could, trigger the stock as a short-sale at that point.”

Because selling volume on Thursday and Friday saw volume pick up on Thursday but still remained below average, the current action and move below the 20-dema is somewhat inconclusive. There are plenty of other stocks to focus on as potential LSFB short-sale targets, so I’d want to see more evidence here before I want to go after FB on the short side just yet. It is, however, a worthwhile market barometer to keep an eye on.

 

GR082717-FB

 

Notes on other big-stock NASDAQ names on my watch lists:

Apple (AAPL) is hanging along its 10-dma and near its all-time highs as it awaits some sort of resolution. Nothing to do here right now, but we’ll see how this plays out as we move into the new trading week.

Microsoft (MSFT) is hanging along its 20-dema and a prior breakout point, which puts it on LSFB watch. A clean breach of the 20-dema would bring this into play as an LSFB short at that point, although I tend to think there are other stocks with more potential downside velocity than MSFT and hence more worthwhile to monitor and act on as short-sale targets.

My China Five names discussed in recent reports has now been reduced to three, with Momo (MOMO), not shown, and JD.com (JD), discussed above, coming completely undone. In the meantime, among the other three, Alibaba (BABA) and Weibo (WB), both not shown, have continued to rise and are in extended positons to the upside.

If this market continues to deteriorate, investors have to be alert to any character in stocks they may currently be holding and which are continuing to act well. This is not a difficult thing to do, since it merely requires knowing where your out points are, either at a nearby moving average like the 10-dma or the 20-dema, or further down, perhaps at the 50-dma. The alternative, of course, is to use extended upside strength as an opportunity to lighten up by selling into strength if the general market is observed to be deteriorating.

WB’s majority holder, and the third member of the remaining China Three, Sina (SINA), illustrates the potential for a stock that has been acting well to begin changing character. Following Wednesday’s trendline base breakout that occurred on a five-day pocket pivot signature, the stock has pulled right back into the breakout point and the 10-dma.

If the general market continues to get into trouble this coming week, then SINA is on failure watch. A breach of the 20-dema would be your first clue of impending trouble in the form of a potential late-stage breakout failure. This would set the stock up as an LSFB short-sale set-up at that point.

 

GR082717-SINA

 

These last three stocks, BABA, WB, and SINA, have been acting well. But with the recent breakdowns of JD and MOMO, as well as Baozun (BZUN), another Chinese leader,, the group is starting to fray a bit. JD has been an active LSFB, while MOMO has just become an LSFB where rallies into the 50-dma can be viewed as potentially shortable. The others could follow suit if the general market situation continues to deteriorate, so be alert to this.

Cloud names and video-gamers are two other leading groups that I have my eye on and am alert to any potential failures. Most of these names are in arguably late-stage formations, and these become vulnerable to failure in a deteriorating market environment. What is holding up well now may very well become the next shoe to fall in a continued market correction or even bear market. Both groups show similar characteristics of one strong leader and two lesser names that are struggling a bit. Let’s look at the clouds first.

Salesforce.com (CRM) reported earnings on Tuesday after the close, and was already breaking out of a three-month base at that time. On Wednesday, the stock swung around wildly on an intraday basis before settling just below the mid-point of its daily trading range on heavy volume. This massive churning on a breakout attempt indicates some indecision in the form of a titanic struggle between buyers and sellers of the breakout.

CRM tries to push higher on Friday but reversed on very light volume as buying interest appeared to peter out. I obviously would not look to buy this in such an extended position, but I am watching it for a possible breakout failure depending on how it acts on any retest of the breakout point, as I’ve highlighted on the chart.

 

GR082717-CRM

 

Workday (WDAY) acts a bit weaker since it has already failed on a breakout attempt the prior week. It is also in a late-stage type of formation, and on Friday pulled an outside reversal to the downside as volume increased slightly but remained well below average. It is now resting on its 10-dma, and a breach of the 20-dema, just below, would bring this into play as an LSFB short-sale at that point.

 

GR082717-WDAY

 

ServiceNow (NOW) is like WDAY in that it has also already failed on a late-stage breakout attempt, but has been hanging up along the highs of the pattern. On Friday, it attempted to push back above the prior failed breakout point but reversed on a relatively sharper increase in selling volume.

This is a good example of how the prior breakout point serves as a secondary reference for overhead resistance. As such it can be used as a possible short-sale entry point if the stock rallies up to the prior breakout point, and in this case NOW behaved by reversing at that point to close down on the day Friday. I tend to think the stock is shortable here using the 112-113 price area as a tight stop on the upside. However, one could simply wait for a breach of the 20-dema as a short-sale trigger at that point.

By observing these three cloud leaders, CRM, WDAY, and NOW, we can see how stocks of a feather do indeed move together in wolf pack style. Therefore, if we see any one of these start to break down, the chance that the others will follow suit in a group breakdown increases. This in turn can provide some juicy short-sale opportunities if one is alert to this.

 

GR082717-NOW

 

Now let’s look at the video-gamers, all of which are also in arguably later-stage formations. While CRM is the clear leader of the clouds, Take-Two Interactive (TTWO) is the clear leader of the video-gaming names. It acts very well as it continues to trek higher along its rising 10-dma following its early August buyable gap-up (BGU) after reporting earnings.

Currently this is nowhere near being a short, although one could watch for a breach of the 10-dma or even the 20-dema as a sign of initial weakness. If this occurred, however, it would cause me to look at the other names in the group which are in weaker positions within their charts.

 

GR082717-TTWO

 

Electronic Arts (EA), for example, is wobbling along its 10-dma and 20-dema after two failed breakouts over the past two weeks. Note that the stock did have a marginally successful breakout in late July, but this has had zero upside follow-through as the stock has spent the past month bouncing back and forth within a new base.

Now EA is sitting right at the confluence of its 10-dma and 20-dema following the two more-recent breakout attempts that have failed. So, we now watch for a possible breach of the 20-dema which would bring EA into play as a possible LSFB short-sale at that point.

 

GR082717-EA

 

Activision Blizzard (ATVI) is similar to EA in that it too is sitting within a long base formation extending back to early July, and this in turn has formed more or less on top of a prior base that formed before July. It has had two very strong-volume breakout attempts in August that both failed. Now it is sitting on top of the confluence of its 10-dma and 20-dema.

In my view, ATVI is the weakest of the three stocks based on the fact that these two August breakouts had a lot of volume behind them, but both failed. Therefore, the high volume implies that the breakouts were sold into. ATVI is also the weakest fundamentally since it reported negative earnings growth of -19% in the most recent quarter.

In any continued market weakness, ATVI remains on failure watch, and a breach of the 20-dema would trigger a short-sale entry at that point. I understand, however, that one can also argue that both EA and ATVI are forming base-on-base formations, which could be bullish in a continuing market uptrend.

This is something to take into account, no doubt, but I am looking at these as two-sided situations, in anticipatory fashion. That way I’m ready for anything, and have a reasonable idea of what to do in either direction, depending on how things play out.

 

GR082717-ATVI

 

Remember that IF the general market gets into a serious correction or bear market, the best short-sale targets will start coming off your current long or buy watch list or lists. We’ve seen how that works with names like AMZN, PCLN, AAOI, LITE, etc. Once former leaders start breaking down, they become your primary short-sale targets based on the old pile-in-pile-out principle I discuss in both How to Make Money Selling Stocks Short, (John Wiley & Sons, 2004) which I co-authored with Bill O’Neil, and the more current Short-Selling with the O’Neil Disciples, published in 2014.

The defining characteristic of any topping leader is generally an initial late-stage breakout failure. This can often form the top of the head in what eventually becomes a head and shoulders top. But, usually an H&S top will start out as an LSFB set-up. So being aware of leaders in potentially late-stage positions where base-failure is a possibility as the market may be starting to top is step 1 of the short-selling game.

What you’re on the lookout for as you look at the charts of the clouds and the video-gamers, and other groups, is what you’re now seeing in names like Broadcom (AVGO). The company reported earnings Thursday after the close and broke down Friday on heavy selling volume.

That took the stock below the 20-dema and the 50-dma, which serves as a reference for a short-sale entry here while using either moving average as a guide for an upside stop. It doesn’t have to work, but this is the set-up in real-time and it is actionable on the basis of the only information we have to act on at this point in time, end of story.

While I haven’t marked them all up on the chart, if you study it carefully you will notice that over the past month or so it has had several breakout attempts that have failed. We can also see how the first breakout attempt in late July failed before the general market indexes started to roll over. Now we have another breakout attempt that has failed, and this is actionable as an LSFB.

One last point, however, to consider here is the fact that while Friday’s close below the 50-dma “confirmed” the potential LSFB, note that it did undercut the lows of the prior week. This could set up an undercut & rally move that might carry up into the 20-dema one more time. At that point a better short-sale entry opportunity might occur. Several ricochets between the 20-dema and 50-dma in an LSFB that is in progress are not unusual to see before the stock blows apart. Study the daily chart of LITE to get a sense of how this works out once the failed breakout is posted.

Now, if we want to look for a group theme here we might also consider that AVGO is a supplier to Apple (AAPL), as is Skyworks Solutions (SWKS), below. We can see that SWKS is starting to set up here as a potential late-stage failed cup-with-handle base. The stock has already broken below the 20-dema and out of the bottom of the handle, increasing the probability that we’re looking at an LSFB in progress.

While I would certainly welcome a potentially juicy short-sale entry on a move back up near the handle lows and above the confluence of the 10-dma, 20-dma, and 50-dma, this could be considered actionable here while using the moving averages as a tight stop. One may have to short, cover, re-short, cover, and re-short the stock a few times before it finally breaks. So far, however, shorting near the highs of the declining price channel extending back to the highs of the handle area has been a successful way to swing-short this.

 

GR082717-SWKS

 

It also helps to check the longer-term position of the stock on a weekly chart. In this case, we can see that SWKS has rallied all the way off the lows of 2016 and up to the right side of a big, fat punchbowl formation that is about 9 months in duration. The current cup-with-handle is a narrow, short affair, and we can see how the stock has recently moved below the 10-week moving average.

So, as I see it, SWKS is in a failure-prone position within its weekly chart, and complete failure could occur within the context of a general market correction or bear market. That would turn the current punchbowl into a “punchbowl of death,” or POD short-sale formation.

Note how the prior downtrend that forms the left side of the punchbowl formation provided a great short-selling opportunity in late summer of 2015. That breakdown occurred in sync with a brutal market sell-off in August of that year, culminating with the mini-Flash Crash of August 24, 2015.

I did pretty well shorting SWKS at that time, and you can read my discussions of the stock at that time in archived reports from late July and all of August 2015. I was on top of that one at the time, and part of the process is studying these formations to see how they might play out, and then having a strategy ready if and when they do.

Now SWKS has moved all the way back up to those 2015 highs. Is this a case of wash, rinse, repeat on a longer-term basis? We shall see, and I would expect that a downside resolution would be forthcoming within the context of another market correction that has been deeper and steeper than anything we’ve seen so far in the bull robo-market of 2017.

 

GR082717-SWKS Weekly

 

One point about short-selling that makes it similar to the long side. That is that when you start to see groups of stocks setting up a certain way, either bullishly or bearishly, then the wolf pack principle can come into play as a confirming indicator. Once one breaks down, they all can break down together as a group.

Speaking of wolf packs, one of the weakest groups in this market has been the cyber-security stocks. This is a bit surprising given how much publicity hack attacks, worms, and viruses get in the media. You’d think all this cyber-trouble would be sending cyber-stocks to new highs. But that has not been the case.

Palo Alto Networks (PANW), is one stock I’ve viewed as a two-sided situation at various times, most recently as a short. Prior to that back in June I also looked at it as a possible Ugly Duckling situation. The long-term weekly chart reveals that the stock has been in a long downtrend channel extending back to early July 2015.

It has had some big breaks and big rallies all the way down, all of which were probably playable one way or another as nice swing trades. More recently we can see that PANW is forming what looks to be a fractal head and shoulders formation near the highs of the descending trend channel.

On Friday, PANW blew below its 200-dma on heavy selling volume, which would have triggered a short-sale at that point. This shows up as a move below the 40-week moving average on the weekly chart. The company is expected to report earnings on Thursday, August 31st, after the close, so I’m not willing to play earnings roulette with this.

It will be interesting to see what sorts of opportunities transpire once earnings are reported, but for now, if one shorted the breach at the 200-dma on Friday, which produced a little bit of profit cushion, one can hang on and perhaps play it for some potential further downside and then covering before earnings.

 

GR082717-PANW

 

It’s pretty clear where I stand on this market currently based on my various analyses above. Right now, I tend to view this market as a trader’s market and not an investor’s market. And this means that if I am going to play the long side of this market, the indexes will have to find their feet and start rallying again.

In this case, most of my long trades could easily be short-sale targets that are in position to rally back up into resistance, such as Applied Optoelectronics (AAOI), for example. The stock topped four weeks ago and is now working on an area where it looks like we see one small right shoulder in an H&S formation as the stock rests along the neckline.

It may need to form more right shoulders, and I know from my studies of the short side, extending back some 19 years now, that right shoulders form in conjunction with general market rallies. In some cases, the stock and the market rally in similar fashion within similar formations. The main point is, however, that if we see the market rally from here, then a logical rally back up to the 50-day/10-week moving averages by AAOI could occur. And that would serve as a decent long swing-trade.

 

GR082717-AAOI

 

Other things we might see would be NFLX rallying furiously off of its 50-dma, or FB pitching back to new highs after undercutting the lows of its current base and the 20-dema. The trick is looking at all of the charts on your long and short watch lists and working through how any or all of them might play out under various general market conditions.

One advantage we have is our arsenal of Ugly Duckling long set-ups, which occur when most investors are still guessing whether the market has bottomed and gone into a so-called confirmed rally. In a market where things can change quickly, keeping the set-ups concrete while at the same time seeking to enter stocks long or short at the lowest-risk points in the patterns is the best way to operate. In short, be ready for anything.

Tight action in conjunction with a 10-day pocket pivot (a “10-D PP”) on Friday following one prior 10-D PP and two 5-D PPs over the past several days makes Nutanix (NTNX) look somewhat juicy here as a long idea. This is perhaps Ugly Duckling-like, but it is still more of a rounding-out formation where our brand of buy points are showing up well ahead of any potential breakout from what is now a five-week base.

Within the context of a general market rally, I would expect that NTNX would make some kind of attempt to rally back up to its prior July highs near the 200-dma. So, this remains on my long watch list, and could be considered actionable here as a long with the idea of using the 10-dma and 20-dema as tight selling guides, or the 50-dma as a wider selling guide.

 

GR082717-NTNX

 

Herewith my notes on other stocks that remain on my long watch list:

Alteryx (AYX) is holding tight at its 10-dma as volume dries up, Relative volume has been more positive over the past week, although volume in general has remained very light and more than -50% below average all week long. This puts it in a potentially lower-risk entry position, using the 20-dema as a maximum downside selling guide. As a thinner, smaller name, AYX presents more downside risk in the event of further general market weakness, so stay nimble with this one.

Appian (APPN) posted three pocket pivot volume signatures over the past three trading days in a row, with only Wednesday’s being a valid 10-day pocket pivot. Thursday and Friday saw the stock post five-day pocket pivot volume signatures with Thursday’s being close enough to the 10-dma to be a valid 5-day pocket pivot. The stock is still best bought as close to the 10-dma as possible, while using the 20-dema as a maximum selling guide given that this is a thinner, newer name vulnerable to sharp downside in a strong market sell-off. As with AYX, you want to stay nimble here.

First Solar (FSLR) is trying to hold up along its 10-dma and 20-dema after undercutting and rallying back above the prior August low at 46.45. It closed Friday at 47.42, which puts it in a buyable position based on the U&R set-up while using the 46.45 price point as a tight stop.

GrubHub (GRUB) is holding tight in a three-weeks-tight (3WT) flag formation. In my view the most opportunistic entry would occur on a pullback to the rising 20-dema, now at 52.78, which could set up an undercut of the lows of the 3WT formation.

SolarEdge Technologies (SEDG) held support at the 20-dema this past week but ran into resistance at the 10-dma on the bounce Friday. It seems that an opportunistic approach where one attempts to buy the stock closer to the 20-dema is best, using the moving average as a tight selling guide.

Yelp (YELP) is holding up in a three-weeks-tight (3WT) formation here as it tracks tightly along the 10-dma with volume drying up to -50% on Friday. Volume has remained below “voodoo” levels for the past eight trading days as the stock holds squeaky tight. A pullback to the 20-dema would be your most opportunistic entry, should that occur.

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).

With the NASDAQ Composite and the S&P 500 Indexes closing the week below their 50-day moving averages, we now have a simple reference point with which to evaluate the current state of the market. If the indexes cannot regain their 50-day lines, then the situation will likely become more bearish, particularly if we also see the Dow Jones Industrials Index break below its 50-day line.

 

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The rally earlier in the week was associated with the Dow bouncing off of its 50-day line. On Friday, the Dow ran into resistance at its 20-dema, where it reversed on Friday to close near its intraday lows and below the line. A retest of the 50-dma could be in the cards this week, but we won’t know for sure until we see it.

While I’m currently seeing more bearish evidence piling up in this market relative to bullish evidence, I have a plan for either side of the market, depending on how things play out in the coming days and weeks. As I’ve already said, I think this is more of a trader’s market, and those not oriented toward a shorter time frame should consider raising cash and lowering their long risk-profile. 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 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.