The Gilmo Report

December 10, 2014

December 10, 2014

I wrote over the weekend that the simple-minded idea of an always warm, cuddly and docile upside market in December doesn’t always hold up, and the action so far this week has proven my point. The weakness I was picking up last week came home to roost on Monday as the market began to roll over off the peak on higher volume, as the daily chart of the NASDAQ Composite Index shows below. Yesterday saw a brief respite as a short-term oversold condition led to a reversal back to the upside before heading lower again today. The NASDAQ traded less volume than it did yesterday, but volume picked up considerably into the last hour as things accelerated to the downside.

 

GR121014-$COMPQ

 

The S&P 500 Index, shown below on a daily chart, was hit much harder thanks to its great concentration of oil and oil-related names. Volume picked up sharply today as the index broke to a lower low and appears headed for its 50-day moving average just below the 2,000 price level. Like the NASDAQ, the S&P 500 is now making plain what I’ve been seeing underneath the hood of the market.

And we can study the daily charts of both indexes to discern several stalling, churning, and distribution days around the peak over the past couple of weeks. My conclusion right here, right now, is that a) the indexes are headed lower, and b) I don’t really want to be long anything here.

 

GR121014-$SPX

 

The market’s rebound yesterday didn’t strike me as all that surprising given my visceral experience with several short-sale targets I was campaigning. Over the weekend I was carrying decent-sized short positons in Tesla Motors (TSLA) and Twitter (TWTR), and both of those stocks undercut my near-term downside price targets on Tuesday.

 

Starting with TSLA, we can see that it blew through my near-term downside price target at the 117.32 early October low on Monday and Tuesday before finding a bid near 204, as we can see on the daily chart, below. The stock also undercut the 213.60 low of the handle in the prior, failed cup-with-handle base formation.

If we consider that Tuesday’s gap-down open and decline was somewhat of an exhaustion move given that the stock had been down seven days in a row prior to yesterday, then it made sense that this might be a short-term low to me. And so the stock could have been covered and a profit banked once the 620 intraday chart indicated a reversal off the lows at around 208. TSLA then rebounded all the way back up to the 117.32 level which now serves as near-term upside resistance.

Thus I saw the stock as re-shortable this morning at those levels, and it moved lower today to close under the 210 level. My longer-term (although on the short side, “longer-term” can be a few days in some cases) downside price target for TSLA is the 177.22 low of the prior cup-with-handle base from which the stock failed on its breakout attempt three months ago. TSLA is also just starting to break out through the neckline of the head and shoulders pattern I showed on the weekly chart in my report of this past weekend.

That neckline is around the 220 price level, so I would view that as absolute upside resistance for any rally from here, assuming the stock doesn’t just continue lower over the next few days.

 

GR121014-TSLA

 

Twitter (TWTR) undercut the 35.95 low of its prior base on Monday and then moved lower on Tuesday morning, as we can see on the daily chart, below. Since that low was my initial, near-term downside price target for the stock, it was a cover point for anyone looking to “campaign” the stock on the short side.

An ensuing two-day rally on low-volume, more like a “reverberation” rally than a wedging rally, failed today as the stock reversed at a point well below the prior bear flag breakout of last week. That allowed me to re-short the stock, looking for lower lows while using the high of today as a guide for a quick upside stop.

 

GR121014-TWTR

 

Netflix (NFLX) also undercut my near-term downside price target at 331 on Tuesday before staging a reflex undercut & rally move that stalled out at the 10-day moving average, as we can see on the daily chart, below. While the undercut of the 331 price level was my initial price target, re-shorting into the rally at the 10-day line would have been a reasonable move today, using the 10-day line as a guide for a quick upside stop. Ultimately I can see NFLX getting down as far as the 299.50 low of its prior POD-with-handle formation, which members can check on a weekly chart.

 

GR121014-NFLX

 

As the market sell-off began to accelerate today, I noticed that Facebook (FB) was the only thing still holding up, and I tweeted that I saw the stock as shortable around the 77 price level using the high of the day as a quick upside stop. As we can see on the daily chart, below, FB reversed near the November 28th stalling high and turned lower today on higher selling volume.

If you’re short the stock near the 77 price level, you are where you need to be here as the stock closed at 76.18 and may be headed lower. My general feeling has been that the stock still has the potential to eventually test the 200-day moving average, currently at 69.53, but probably only if the general market starts to get uglier over the next few days, which is a definite possibility.

 

GR121014-FB

 

Proving the futility of the so-called “Eight-Week Rule” whereby one is supposed to hold a stock that runs up 20% or more in 2-3 weeks after a breakout, Alibaba (BABA) completed a round-trip back to the top of its prior IPO U-Turn base and the 50-day moving average, as we can see on the daily chart, below. Right at the line, the stock became a relatively low-risk buy given the tight risk-management one could have employed by setting a stop at the prior 99.80 breakout point.

From my perspective, it’s much easier to take 20-30% profits (given that BABA’s initial entry point was a pocket pivot off the lows of the IPO U-Turn base at 91-92) and then look to re-enter on a logical pullback to a key moving average or a continuation pocket pivot, sometimes both if they occur simultaneously. This idea of “investing-by-numbers” with statistically flawed rules is not my cup of tea.

In any case, if one had the courage to buy the stock right at the 50-day line yesterday as things were looking pretty grim all around, one was rewarded by a nice rebound. However, there was no follow-through today as the stock came right back in as it looks set to retest the Tuesday low. Caution is advised here, and if one does try to buy the stock closer to the 50-day line and the top of the prior base at 99.80, then make sure your stop is set at the top of the base in order to keep risk to a minimum. Again, my general view here is that the long side is to be avoided for now.

 

GR121014-BABA

 

CyberArk Software (CYBR) is a bit of a wild ride here as it crashed through its 20-day moving average on Monday before sliding all the way back to the top of its prior base and the bottom of the buyable gap-up’s “rising window”. As we can see on the daily chart, below, CYBR also found support at a point just above the 50-day moving average.

My general view here is if one had tried to take a position in the stock at the 20-day line, the fact that it could not hold would have been an immediate sell signal. Yesterday’s bounce off the top of the prior base came on a slight increase in volume that was still quite unimpressive as I saw it. Perhaps a great one-day wonder trade for those with the courage to step in and buy the stock right at the top of the prior base Tuesday, but where it goes from here is questionable at best.

 

GR121014-CYBR

 

Palo Alto Networks (PANW) had a similar wild move on Tuesday, pushing below its 20-day moving average before finding support in the 112-113 price area and the top of the ascending trend channel that was formed just prior to the post-earnings gap-up, as we can see on the daily chart, below. As I discussed in my report of November 26th that was as far as it should go on the downside, and that turned out to be the case, at least on Tuesday.

PANW picked up some support off the lows as volume picked up slightly on the day. With the stock at the 10-day moving average, there is certainly the potential for a continuation pocket pivot to show up. But with the general market in a weak state of affairs, it is not likely that this will happen, and a retest of the Tuesday lows might be in the cards should the general market continue lower from here over the next few days.

 

GR121014-PANW

 

Notes from my trading diary regarding stocks discussed in recent reports:

Amazon.com (AMZN) – stock has continued further below the 50-day moving average, so shorting near the 50-day moving average while using that as your stop would have worked so far this week. The stock ran into resistance at the 50-day line this morning before reversing and closing down on the day.

American Financial Trust (AFSI) – has continued to move higher and was buyable on Monday around the 10-day line and Friday’s pocket pivot buy point, although again the general issue of going long in this market given the current action is an overriding concern.

Bitauto Holdings (BITA) – undercut the lows of the handle in the cup-with-handle base from which it attempted to break out and gave up on the undercut and rally attempt by reversing back to the downside today. Still using the 62.90 low of the prior cup formation and the 200-day moving average, now approaching the 60 price level, as my downside price target on the stock.

Blackhawk Network Holdings (HAWK) – still sitting along the 10-day moving average, within buyable range of this past Monday’s continuation pocket pivot. Not sure I want to be buying anything in this market, however. Prefer to be opportunistic on a pullback to the 50-day line, depending on how that played out in real-time.

Charles Schwab (SCHW) – trying to hold the Friday gap-up move, but just barely. The assumption that interest rates will be rising is what has fueled the movement in financials, however, and with global economic turmoil and issue, the Fed may tone down their language in next week’s policy announcement.

Gilead Sciences (GILD) – stalling out just above the 50-day moving average at 104.73, and would need to see a volume breakdown through the line to confirm this as a short-sale target once again. If the general market deteriorates further, then that is a definite possibility.

SolarCity (SCTY) – stock was perfectly shortable right at the open Monday as it cuddled up against the 50-day moving average before turning lower each of the past three days. At this point the 50-day line is your upside trailing stop while our first downside target is the October low at 45.91.

Splunk (SPLK) – a big outside reversal day on Monday sent the stock lower yesterday and today as it looks like it’s headed for an encounter with its 200-day moving average at 57.70. That might be a short-term cover point, but on the other hand this thing might just be developing some serious downside momentum from here. Watch how it acts once it reaches the 200-day line.

Virgin American (VA) – outside reversal to the downside on higher volume today, even in the face of lower oil prices, takes this one off the table as a buy candidate for now. This would need to set up along the 10-day moving average or flash a pocket pivot off of or up through the 10-day line for me to get interested again. The weakness in VA, however, speaks to the weakness of the long side of this market in general.

I don’t think we should find the market’s break off of the peak this week to be that much of a surprise. The fact that the short side of the market was already working well before the week began was one clue, while the struggling nature of the long side and the assorted distribution, stalling, and churning days seen around the peak in the indexes were the other two.

Hopefully, members have already been working the short side in names like TSLA, TWTR, SPLK, SLCA, SCTY, etc. for a while now and have some decent short-sale profit cushions built up. This allows for a bit of leeway and freedom in continuing to campaign these stocks on the short side, and I tend to think the entry on FB today was perhaps the last real “juicy” short-sale entry point for now.

Everything else is already in play, and one should already be short any number of these names. When it comes to shorting, I always prefer to anticipate rather than react to weakness, so if you’re suddenly all hot to get heavy short here be advised that the lower these names go the higher the risk in just starting to short them now. At this point I think a lot of these names are headed lower, but I prefer to be in a position of having a profit cushion that allows me to sit through and or handle the zigs and zags that these short-sale targets will inevitably have as they work lower in their patterns.

The expectation currently seems to be that the U.S. economy is strong enough such that the Fed can get a little more aggressive in their language regarding future rate hikes when they come out with their latest policy announcement next week. But with some turmoil starting to develop on the global economic front, they may have to soft-pedal the interest rate increases.

The fact that gold and silver are rallying speaks to this possibility, although there is something of a fear bid in both that also helps to account for their current strength. In the meantime, the short side of the market is clearly where the love has been so far this week, and I expect this will continue, at least until the Fed meeting next week.

As we move into the last 15 trading days of the year, I find myself up triple-digits for the year for the first time since 2004. I consider this confirmation of the soundness of my methods, as well as a function of returning to my roots as a proprietary trader, and I’ll be happy if I can keep things rolling into New Year’s Eve. 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 a held a position in FB, TWTR, and TSLA, 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. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.