The Gilmo Report

August 3, 2014

August 2, 2014

My Wednesday mid-week report of July 30th proved prophetic, as the weakness in the Russell 2000 Index spread to the other major market indexes, sending them crashing to the downside on heavy selling volume on Thursday, as we can see on the daily chart of the NASDAQ Composite Index, below. The index continued lower Friday after an initial morning “faux rally” attempt in the futures after the Bureau of Labor Statistics came out with their usual monthly jobs creation fabrication. This time, however, the unemployment rate blipped up 0.1%, which makes me think they could have done a better job of fudging the data on that one. The NASDAQ undercut a series of lows from July and late June on Friday as well as the 50-day moving average, which is likely why it tried to hold on and close up off of the intraday lows. Volume was above average, but lower than Thursday’s selling. Yet that doesn’t do much to change my view that the long side of this market is busted as the short-sale set-ups I discussed in my mid-week report all produced quick profits.




The iShares Russell 2000 ETF (IWM), which serves as our proxy for the index itself, showed continued deterioration as it remains badly broken, a fact that is quite evident on its daily chart, below. One could say the index is undercutting the early June low in the pattern, setting up a possible bounce from here, but that remains to be seen.




Representing the NYSE-based indexes, the S&P 500 Index, shown below on a daily chart, has blown right through its own 50-day moving average, undercutting a low from around mid-June on Friday. All of these indexes, the NASDAQ, the Russell 2000, and the S&P 500, look to me to be in logical positions from which a bounce is possible. The NASDAQ and the S&P 500 could bounce back up to their 50-day lines, while the Russell could bounce back up to its 200-day line. If that were to occur, I would keep an eye on my short-sale target stocks for corresponding, shortable rallies into their own areas of resistance, whether that be at a major moving average or a prior area of overhead technical resistance.




If there was anything even remotely resembling a buyable set-up it was Tesla Motors (TSLA), which spewed forth a pocket pivot trendline breakout from the handle of its current cup-with-handle formation after announcing earnings Thursday after the close, as we can see on the daily chart, below. TSLA beat on earnings, coming in with 11 cents a share vs. estimates of 4 cents. So far the company is doing what it set out to do some time ago, and I do like this action so far. The real question is whether the general market is going to outweigh this positive action on TSLA’s chart.




Concerning some other names I’ve discussed in my reports as long ideas over the past couple of weeks, below are some excerpts from my trading diary as follow up. For the most part, anything on the long side is entirely off the table for now.

Baidu (BIDU) – has failed to hold the 217 intraday low of the buyable gap-up move posted two Fridays ago. Pulling into the 10-day moving  average as selling volume remains above-average on five straight days to the downside this  past week.

Biogen Idec (BIIB) – as I discussed on Wednesday, BIIB stalled out on a bid for new highs, losing upside momentum. The past two days have seen the stock get whacked, causing it to drop below the 331 intraday low of the buyable gap-up day.

Chipotle Mexican Grill (CMG) – holding above the 10-day moving average as it pulls back with the market. Surprisingly strong action here.

Facebook (FB) – trying to hold the 10-day line after its recent buyable gap-up failed once the stock violated the 74.51 intraday low of the BGU day that occurred seven trading days ago on June 24th.

Skyworks Solutions (SWKS) – has broken below the 10-day line but found support on Friday at the 20-day moving average and the 49.67 intraday low of the July 18th buyable gap-up day.

Greenbrier Companies (GBX) – barely holding above the 62.35 intraday low of the July 2nd buyable gap-up. Basically the stock has gone nowhere for an entire month following the buyable gap-up move, and with TRN and WAB acting poorly, this is not a place to be playing.

GoPro (GPRO) – another example of why taking a nice 10% profit into earnings and avoiding “earnings roulette” is the most prudent strategy. Pattern is completely busted at this point.

Qihoo 360 Technology (QIHU) – the stock’s latest rally and low-base breakout through the 100 price level has failed, and the stock now lies just under its 200-day moving average at 91.01. This could be seen as shortable using the 200-day line as a very quick upside stop.

The short side of this market was clearly the place to be over the past two days. In most cases, the set-ups I have discussed in the prior two reports were all shortable right at the open Thursday, and the ensuing downside moves from there leading into Friday were immediately profitable.

I can’t tell whether LinkedIn (LNKD) makes more sense as a long here or just something to keep an eye on as a potentially shortable rally. LNKD beat on earnings Thursday after the close and then gapped up through its 200-day moving average on Friday, as we can see on the daily chart, below. The chart gives us a wide perspective, which I think is necessary to understand where LNKD is exactly in its overall pattern. As it moves up through the 200-day line it is moving into a potential zone of highly-congested resistance from the left side of the chart. I tested this on the short side early in the day, but once I could feel a persistent bid I turned and went long for a quick day-trade. As I tweeted late in the day Friday, LNKD felt like it was just going to continue powering higher above its 200-day moving average, and it did close very near to its peak for the day at 201.78.




As I indicated in my Wednesday report, I viewed the gap-up move in Twitter (TWTR) following its “blowout” earnings report as more shortable than buyable, and that has so far turned out to be the case, as we can see on the daily chart, below. TWTR very quickly violated the 45.65 intraday low of the Wednesday morning gap-up day. Despite closing in the upper part of its daily range on Thursday, sellers came back and sent the stock to a lower post-gap-up low on above-average volume Friday, a day when the general market indexes were not down nearly as much as they were on Thursday. If you’re short this per my Wednesday report, keep a short leash on the position, perhaps using the 45.65 intraday low of the gap-up day as a stop.




Among the “Four Horsemen” of the short side, Workday (WDAY), not shown, has fallen back into its 50-day moving average after a sharp upside move on Wednesday thanks to an analyst’s buy recommendation and $93 price target. Splunk (SPLK), shown below on a daily chart, was pushing above its 50-day moving average on Wednesday but failed quickly, becoming shortable as it broke thru the 50-day moving average on Thursday. SPLK announces earnings at the end of the month, and its Wednesday move turned out to be an upside shakeout of sorts leading to a downside breakout on Friday on increased selling volume. The stock strikes me as somewhat extended to the downside from the 50-day line, so any rally up into the line, currently at 48.03, might be shortable with the understanding that earnings are approaching.




Tableau Software (DATA) picked up several tweets from me Friday morning as I saw the stock start to turn into the red on Friday after a cheesy earnings-related gap-up early in the day. By the end of the day the stock had reversed its 2.89 point upside gap on the open and added another 3.06 points to the downside for good measure. This makes for a second right shoulder in an overall head and shoulders topping formation for data, and I would use any weak rallies back up into the 50-day moving average at 63.87 as potential short-sale opportunities.




In my Wednesday report I discussed keeping an eye out for a reversal in Yelp (YELP) as a shortable event following its give-up of an after-hours earnings-related gap-up on Wednesday after the close as I was writing my report. The stock opened up just below its 200-day moving average where it was immediately shortable using the 200-day line as a tight upside stop, as we can see on the daily chart, below. YELP’s move is similar to DATA’s in the sense that it also represents an upside shakeout followed by a downside breakout from a bear flag formation.

YELP is extended from the 50-day moving average, currently at 70.27, so at this point I would be looking for weak rallies back up into the line as opportunities to lay out a short position in the stock. One thing to keep in mind is that there has been a lot of talk about someone coming in and buying out YELP, so I would tend to look at this as something I would trade on a daily basis with the idea of playing a continuous move to the downside day-by-day and avoiding any potential overnight headline risk. This is actually how I handle my short-selling operations anyway, choosing to hold very little in the way of short positions overnight as I come in every day and rebuild my positions at opportune intraday points.




Netflix (NFLX) reversed course quickly on Tuesday after bumping up into the 20-day moving average on Wednesday, as we can see on the daily chart below. NFLX continued lower into mid-day Friday before reversing to close up on increased buying volume. Short-term we can see that NFLX has undercut a confluence of lows in its short-term pattern of the past two months, which is also starting to look like a little head and shoulders of its own on the daily chart. I would continue to remain opportunistic on this one, using weak rallies up into the 50-day and/or 20-day lines as shortable moves. How a lot of these big-stocks play out over the coming days will obviously depend a lot on what the general market does. In some cases, as with NFLX, the stock is in a position to undercut & rally not unlike the way the NASDAQ Composite looks right now, if you take the time to refer to the daily chart of the NASDAQ shown at the outset of this report.


GR080314-NFLX (AMZN) held resistance at the lows of the prior flag it formed in the midst of June and early July, as we can see on the daily chart below, and has turned tail to lower lows. It looks to me like the stock wants to test the early May lows at 284-285 but there is one low from early June that could also come into play. Selling volume was very heavy on Friday as AMZN moved lower, so it appears as if there is enough downside thrust here to carry to the further low. At this point, if one is short the stock right around resistance in the 320 price area it’s a matter of letting this play out.




TripAdvisor (TRIP) broke down quickly on Thursday, dropping below the 65-day exponential moving average right at the open, as we can see on the daily chart, below. The past two trading days have seen the stock drop about 10% in a hurry before it found resistance just above the 200-day moving average but right at the 40-week moving average on the weekly chart, which I don’t show here. As short-sale targets come down to a major moving average, it is important to check both the daily and weekly moving averages as support can just as easily be found at the 40-week moving average on the weekly chart as it can at the corresponding 200-day moving average on the daily chart. This is an important point for one to keep in mind as a would-be short-seller.




Pandora Media (P) rolled over from its short wedging rally that extended into Wednesday before the stock got hit with the general market on Thursday. P is undercutting several lows along this current price level, so I don’t want to be shorting the stock here. Again, as in the other examples I’ve discussed so far in this report, shorting into weak rallies that carry up into a moving average is your most optimal short-sale entry point. Chasing downside is not recommended.




Illumina (ILMN), another one of these late-stage failed-base (LFSB) formations that I discussed in my reports of this past Wednesday and last weekend, broke down to lower lows on Thursday before finding support along the top of what I would call a low-base range. This range forms the lower reaches of the big cup-with-handle that extends back to early March and from which ILMN tried to break out of over a week ago. A rally from here up into the 65-day exponential moving average at 165.11 would be my first reference point for putting out a short-sale in the stock, with the 50-day line at 169.94 being my secondary short-sale point.




As I wrote in my report of this past Wednesday, “In this [Wednesday’s] report I have discussed a number of possible short-sale set-ups, which I think makes a strong statement about this current market environment “ As it turned out, that strong statement materialized even further on Thursday as so many stocks, both broken former leaders and current leaders alike, got slammed. I hope members have enjoyed my tweets, particularly my “artistic market commentary” series of approaching trains that were taken during my recent vacation in beautiful Bell Buckle, Tennessee. Hopefully members were able to get out of the way of Thursday’s train ahead of time as a result, or at least be ready to move quickly as things deteriorated early Thursday morning.

In the meantime, unless you feel quite brave and lucky enough to take a position in something like TSLA, I think cash is king. Otherwise, I continue to stalk the short side of this market, taking an opportunistic approach of shorting into weak rallies in already broken short-sale target stocks from AMZN to YELP.


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 AMZN, DATA and TWTR, though positions are subject to change at any time and without notice.

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