In my report of this past Wednesday I expressed my view that the indexes were likely headed lower, and the daily candlestick chart of the NASDAQ Composite Index illustrates the ugly action over the past two days that has confirmed that view. Of course, Friday’s lower lows did not come without a little bit of what seemed like an almost too-typical market jack at the open on Thursday.
But this gap-up open reversed to close near the intraday lows on higher volume as sellers took advantage of the move to unload stock. Friday’s break to lower lows came on higher volume, and so the NASDAQ appears headed for its 50-day moving average down at 4576 and change after getting hit with two more days of distribution on Thursday and Friday. A break to the 50-day line might also coincide with an undercut of the early November lows, so this is something to keep an eye out for.
The daily candlestick chart of the S&P 500 Index, below, shows the index within a hair’s breadth of its 50-day moving averages, and from this perspective we can see that it is doing considerably worse than the NASDAQ currently. This makes sense give the index’s concentration of oil and oil-related names, all of which continue to get pounded as the price of crude oil continues to plummet.
A number of commentators and pundits thought the sell-off in crude had become fairly “overdone” two weeks ago, and crude did make a fleeting attempt at finding a bottom, but over the past two weeks it has continued to slide ever lower. A number of other commentators and pundits also saw the decline in crude oil as akin to a “tax cut” for the citizenry who would be free of having to pour their entire wallet into their gas tank every time they filled it up.
However, as I wrote in my report of exactly two weeks ago, the decline in oil prices could instead have deleterious effects, and so far that thesis has proven out. Collapsing oil prices also squeeze oil-related names that borrowed heavily during the oil boom for the purpose of expansion but which suddenly find themselves producing a product that cannot be sold at a price that covers the cost of production.
Thus, in addition to putting a damper on a major source of job creation, we could also be looking at a sort of mini-debt-crisis within the industry. Finally, we have to ask ourselves to what extent the collapse in oil prices is presaging a slowing global economy. Certainly, the action of the general market over the past week confirms that declining oil prices are more troublesome than beneficial.
With the S&P 500 more or less at the 50-day line, the potential for a bounce in the index from here is always a possibility, but I tend to think that the S&P 500 could also undercut the 50-day line in a move that coincides with the NASDAQ actually reaching its own 50-day line on the downside. Such a short-term low might also occur in synchrony with the Fed policy announcement on Wednesday where we may very well see the Fed soft-pedal their language regarding allegedly pending interest rate increases.
No stock exemplifies the utter destruction in the oil patch better than U.S. Silica Holdings (SLCA), one of our most successful short-sale target stocks in 2014. The weekly chart below shows the head and shoulders formation that the stock carved out from July through November before gapping down three weeks ago in what did turn out to be a shortable gap-down and neckline breakout.
SLCA is now 67% below its early September 2014 price peak as it undercuts the low of the last real base the stock formed on the way up way back in late 2013 and early 2014. In my view this is the ultimate cover point, and for anyone who is still short this one you can congratulate yourself for playing it out to the bitter end.
Not that the stock can’t go lower from here, but we might surmise that a more than 50% downside move from the initial short-sale point up around the 50 price level is more than enough. SLCA also illustrates how I’ve been able to push over 100% year-to-date in my own account by primarily being short individual stocks, even in the face of indexes that have continued to grind higher. I’ll say it again: Making money in this market is all about the stocks, period.
Tesla Motors (TSLA) has continued to move lower since Monday’s neckline breakout, as we can see on the daily chart, below. In my report of one week ago we saw that TSLA was forming an easily discernible head and shoulder formation on the weekly chart, and I outline that big H&S formation here on the daily chart. Notice how the head and the right shoulder of this large H&S each contain a smaller, “fractal” H&S formation.
TSLA made a lower closing low on Friday as it sputters about following Monday’s neckline breakout. From here a rally back up towards the neckline would provide a lower-risk entry point for someone trying to get short the stock now. But as I see it the time to get short the stock was up around the 50-day moving average, and the stock is now some 20% down from there.
For now the question is whether TSLA will break through the $200 price level and undercut the minor low at 199.25 that can be seen on the left side of the chart or whether it will continue to flop around as it builds a possible bear flag. Otherwise I continue to look for the stock to eventually reach my longer-tem downside target at 177.22 and the low of the prior cup base.
In my report of last weekend, December 7th, I also showed a weekly chart of Twitter (TWTR) and the head and shoulders formation it has formed as part of the right side of a big “Punchbowl of Death,” or POD topping formation. As I’ve discussed many times before, it is not uncommon for the right side of a big POD formation to evolve into an H&S or late-stage failed-base (LSFB) set-up, and TWTR is a good example of a POD that has evolved into an H&S.
On the daily chart, below, I’ve outlined this H&S formation, and from this we can discern that, like TSLA, TWTR also broke out through its neckline on the downside on Monday. This neckline breakout also coincided with an undercut of the prior 35.95 base low, which we can see way on the left side of the chart, leading to a logical undercut & rally move over the past couple of days. That rally ran into resistance at the 10-day moving average on Friday which more or less coincides with the descending neckline of the H&S formation.
Thus that point can be seen as a short-sale entry point, using the 10-day line as a guide for a quick upside stop for anyone looking to enter the stock on the short side for the first time. If one has been campaigning the stock after shorting into the two prior rallies up into the 20-day moving average that occurred in November, one has some cushion to work with here as the stock bounces around a bit in anticipation of lower lows to come.
Facebook (FB) continues to wield its status as the biggest of the big-stock social-networking names, and money keeps flowing into the stock as institutions likely have to show they are in the stock going into year-end. In my view, while this makes for a difficult stock to short in the near-term, it may eventually set up a very nice shorting opportunity as it rallies into the prior late-stage base breakout point, as we can see on the daily chart, below.
The past two days have seen the stock stall around this area, which in my view becomes a last-stand short-sale zone with the idea that the stock will not push back above the yellow highlighted area on the chart. If we operate on the basis that the gap-down base breakout failure in late October following earnings is indicative of a late-stage failed-base short-sale set-up, then it becomes a matter of when the stock finally loses its grip and pushes lower.
In most LSFB situations that I’ve studied, and I’ve studied hundreds if not thousands of these types of set-ups, a stock can hover around its 20-day and 50-day moving averages and the prior breakout point from which it previously failed to initiate the LSFB. Some break down sooner, some later, and in FB’s case my thinking here is that its big-stock status within the social-networking space means that money continues to come into the stock as it sees these initial pull backs following the late-stage breakout failure as buying opportunities.
This is actually quite normal for a stock of FB’s stature – they simply take a while to break down. In the meantime, short-sellers should seek out the “soft” targets such as TWTR, which does not benefit from any status as a dominant player in the social-networking space.
I’ve also got my eye on the third big-stock social-networking name in the group, LinkedIn (LNKD), which recently failed on a gap-up breakout attempt in late October. On the daily chart, below, we can see that the stock has since trended lower in a well-formed downtrend channel (dotted lines), and on Friday the stock bucked the market sell-off and rallied up to the top of this downtrend channel and to a point that is just above the 20-day moving average.
In an LSFB set-up a stock will frequently break down to the 50-day line after the initial breakout failure and then bounce from there. At this point, the 20-day moving average, if it is above the 50-day line, can serve as a point of potential upside resistance, and it is not uncommon to see a stock move just a hair past the line as LNKD did on Friday. However, if we consider the possibility that it has simply rallied into the top of its downtrend channel, this would be a reasonable spot to test a short position in the stock using a tight 2-3% stop on the upside.
Netflix (NFLX) undercut the prior 331 low on Tuesday, as we can see on the daily chart, triggering a short undercut and rally move that did not get any further than the 10-day moving average. The stock looks primed to move lower from here. And if one is short the stock from higher up in the pattern near the 20-day moving average (where it was eminently shortable back in mid-November), using the 10-day or the 20-day moving averages as trailing stops is a reasonable strategy.
My general view is that any rally up into the 20-day moving average would offer a very nice short-sale point to move in on the stock, but for now NFLX remains very weak as it tries to cling to that prior 331 low.
After providing would-be short-sellers with a very opportune and optimal short-sale entry point on Monday on an early-morning rally that quickly reversed hard to the downside on heavy selling volume, Splunk (SPLK) has busted through its 200-day moving average, as we can see on the daily chart, below. The 200-day line was my initial downside target for the stock, and I would use any small blip up over the line as an opportunity to short the stock.
If one shorted the stock in the 67 price area on Monday, using the 620 intraday chart to time such a short-sale, one has nearly a 20% profit in the position based on Friday’s close. That’s not bad, but my feeling is that SPLK is headed a lot lower from here, and so any rallies from here up into or just above the 200-day line should be viewed as short-sale opportunities.
I have previously discussed the similarities in the patterns of SPLK, Workday (WDAY), and Tableau Data (DATA) as being similar to the POD breakdown that we’ve seen in Yelp (YELP), not shown, before YELP actually broke down. Now as with SPLK, we are starting to see these stocks imitate YELP as they begin to break down from the right sides of POD-like patterns of their own.
We can see that DATA is starting to shows signs of failing on a breakout attempt from a base that is near the right side peak of a potential POD formation, as the daily chart below shows. On Friday DATA dipped below its 20-day moving average after a failed breakout attempt on Wednesday, and I consider the stock a short here using the 20-day line at 81-82 as your guide for an upside stop.
And here we can see a similar breakdown on the daily chart of WDAY, below. WDAY initially broke down and failed off of its right side POD peak on a massive-volume gap-down following earnings. This led to push below the 200-day moving average, and on Thursday WDAY rallied right up into the line before reversing and closing near the lows of the day. At this point I would be using any rallies up into the 200-day moving average as short-sale opportunities in the stock while setting the usual tight stop using the moving average as your upside reference point.
Late-stage breakout failures are becoming pretty common in this market, and I’ve seen a number occur in names ranging from Salesforce.com (CRM) to Century Aluminum (CENX) to Fleetcor Technologies (FLT). As well, I see some stocks that appear to on the verge of completing potential LSFBs such as Baidu (BIDU), shown below on a daily chart.
BIDU broke out of a base in late October and proceeded to move to all-time highs in November before topping out and rolling back towards the prior breakout point. Here we can see the standard breakdown to the 50-day moving average where the stock finds some support and then bounces up into the 20-day moving average on Thursday and Friday.
As I discussed earlier in the example of LNKD, this is very typical action for a potential LSFB as it just starts to emerge. BIDU has now stalled at the 20-day line and along the 50-day line over the past two days as buying volume appears to wane. In my view this has to be looked at as a possible short-sale right here, using the 20-day line at 233.91 as a quick upside stop. Any rally from Friday’s close at 229.32 up into the 20-day line would certainly offer a more opportune short-sale entry point, but at current prices we are close enough to take a shot here.
Perhaps BIDU’s outcome will coincide with a similar outcome in Alibaba (BABA), which is not seeing much upside thrust after bouncing off of its 50-day moving average Tuesday on fairly weak volume, as we can see on the daily chart, below. My general view has been that if we see the market rally strongly into year-end in a sort of Santa Claus rally, names like BABA will move higher.
So far, BABA is floundering just above its 50-day moving average, and in my view is still an open question. It suffers a bit, I think, from the fact that it is so broadly over loved by many who believe the stock to be a bullet-proof “sure thing” on the upside. But in my quarter-century of investment experience I cannot think of a single example of a stock that had a big upside price run when everyone considered it a “sure thing.”
How many investors considered TSLA a “sure thing” back in early 2013 when it was trading in the 40’s? How many considered Google (GOOGL) or Apple (AAPL) to be “sure things” when they began their meteoric price runs in late 2004? The answer is a big, fat goose egg. If the market gets into further trouble from here, don’t be surprised if BABA drops below the 100 price level.
Palo Alto Networks (PANW) continues to hold up reasonably well in the face of the past week’s general market action, tracking tightly along its 10-day moving average, as we can see on the daily chart. Of course, if the general market continues to sell off, then anything that is still acting well and holding up simply becomes the next shoe to drop.
CyberArk (CYBR), not shown, the other cyber-security name I have liked recently, has completely failed as it fades and drifts back down to the top of its prior base. At best, CYBR probably needs time to settle down and set up again if it is to have a chance at moving higher in the future. For now, however, while these names remain on my buy watch list, I am avoiding the long side of the market.
Below are some notes from my trading diary regarding stocks discussed in recent reports:
Amazon.com (AMZN) – moving in a short five-day bear flag just under the 50-day moving average at 313.01. Would seek to use any rallies up into the 50-day line as short-selling opportunities, using the line as your guide for a quick upside stop.
American Financial Trust (AFSI) – holding up in an extended position from last Friday’s pocket pivot buy point, but not anywhere near a buyable spot on the chart.
Bitauto Holdings (BITA) – in a short five-day bear flag as it trends lower. Continue to use the 62.90 low of the prior base and the 200-day moving average just under the 60 price level, as my downside price target on the stock.
Blackhawk Network Holdings (HAWK) – starting to show signs of breaking down along the 10-day line. As with any other long situation in this market, I am not interested in playing.
Charles Schwab (SCHW) – has failed on last week’s buyable gap-up move along with the rest of the financial group which was hit hard at the end of this past week.
Gilead Sciences (GILD) – has dipped back below the 50-day moving average in what is starting to look like the peak of a right shoulder in a potential head and shoulders top. I see this as shortable using the Friday high at 106.40 as a quick upside stop.
SolarCity (SCTY) – just starting to drift below the early November lows under the 50 price level. Currently using the 45.91 low of mid-October as my downside price target for the stock while the 20-day line at 52.54 as an upside trailing stop.
As members should be well aware of by now, I have not shared the complacency that has ruled the crowd’s thinking in December of 2014. Earlier this week many were citing the strength in financials as a sign of a “healthy” market, but anyone looking below the surface on a broader basis could see far more numerous signs that such was not necessarily the case.
By Friday, the financials all broke down hard, erasing three weeks’ worth of gains in the SPDR Sector Financial ETF (XLF), not shown, in rapid fashion. Such is the nature of this market. Where strength appears it tends to not show up for very long. Thus chasing strength and buying breakouts proves to be a flawed strategy, although one that continues to be promoted and popularized by those who should know better.
With the Fed meeting coming up on Wednesday, the market may continue to sell off into the policy announcement, and then where we go from there may figure heavily on the exact working of said announcement. In the meantime, all we know for certain is that the short side of the market was the place to be this past week, and as long as I continue to see proper short-sale set-ups flowing through my screens I will remain active on the short side as I have throughout late November and so far in December.
On an administrative note, members should keep in mind that they can follow my real-time comments and observations on Twitter at @gilmoreport. On a more exciting administrative note, my newest book, “Short-Selling with the O’Neil Disciples,” is now up for pre-sale on Amazon.com at the following link: http://goo.gl/cXZgyJ. The book is currently in production as I await the final manuscript proofs and remains on schedule for a late April 2015 publication date.
CEO and Principal, Gil Morales & Company, LLC
Managing Director and Principal, MoKa Investors, LLC
Managing Director and Principal, Virtue of Selfish Investing, LLC