The Gilmo Report

December 18, 2016

December 18, 2016

The race to Dow 20,000 has run into a bit of a yellow flag as the Dow Jones Industrial Index continues to run into resistance just below the 20,000 price level. Given that the index is less than 1% away from the magical 20,000 level, you would think the powers that be could somehow gas the right Dow stocks higher in order to help the Dow meet its alleged destiny.

So far that isn’t happening. And while the Dow steals all the headlines, some leading stocks are running into trouble. This in turn may be the initial sign that something isn’t quite right under the hood of the market.

 

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The NASDAQ Composite Index keeps chopping sideways along its highs as it logged several churning days on higher volume over this past week. Friday’s options expiration volume was quite heavy, but on its face the action still qualifies as a distribution day.

 

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The theory that I outlined in my Wednesday mid-week report regarding potential rotational distribution and the gaming of the Dow 20,000 hype by institutions looking to sell remains in play. However, I would still say that the evidence is not yet 100% conclusive, though it keeps building. What is more important, however, is the action of individual stocks since this is where the first hints of trouble in paradise will start to show up.

For example, we can look at the action in Qualcomm (QCOM) as indicative of a leading stock that is starting to break down. As I discussed in my Wednesday report, the stock looked like it might be headed for a breach of the 50-day line, and I indicated that members should be alert to this. As noted, ”As I pointed out in my blog, a clean breach of the 50-day line would confirm QCOM as a short-sale target at that point, using the 50-day line as a guide for a tight upside stop.” That was Wednesday.

On Friday, QCOM busted the 50-day line on heavy volume, but not before a shortable upside blip on Thursday. We can see that after Wednesday’s higher-volume selling where the stock found temporary support at the 50-day line, it bounced and stalled on Thursday.

This led to Friday’s clean breach of the 50-day line on heavy volume, and now the stock comes cleanly back into play as a short-sale target. The 50-day line at 57.31 would serve as a reference for a tight upside stop. As well, any weak rallies up to the line could present more optimal short-sale opportunities.

 

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You may notice that QCOM seems to have this Mobius Curve quality where it goes from looking ugly to positive and back to ugly again as it gives investors head fakes in both directions. This is characteristic of many names in this market.

Apple (AAPL) is folding back on its October-November decline down to its 200-day moving average in Mobian fashion as it tests the prior October highs. Notice, however, that the stock has stalled and churned over the past two days on heavy volume.

In my view, this may make the stock vulnerable to at least a pullback to the 50-day moving average. For this reason, I tend to view the stock as a potential short here using the 117.50 level as a guide for a tight upside stop. Where AAPL goes from here will likely depend a great deal on what the general market does as we move into year-end.

 

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Alphabet (GOOGL) shows similar action as it folds back on its prior November decline down to its 200-day moving average and is now back up near its prior failed breakout point. Notice how that late-October breakout attempt reversed on heavy volume and closed near the lows of the daily trading range.

That breakout then failed completely over the next few days as the stock dove toward its 200-day moving average. Now with GOOGL retesting the prior breakout point, it in fact moves into a potentially shortable position here as it runs into resistance around the 820 price level. Volume picked up on Friday as the stock reversed back to the downside.

The adventurous short-seller might consider hitting the stock here and using the 820 level or the prior Tuesday high at 824.30 as a reasonably tight upside stop. Confirmation of a failure back to the downside, however, would come on a full-blown breakdown back below the 50-day line. That is not too far-fetched, given that GOOGL is only 1% above the line as of Friday’s close.

 

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Amazon.com (AMZN) has failed to hold its 20-day moving average, closing below the line on Friday for the second day in a row as selling volume picked up and came in at above-average levels. This brings the stock into play as a short-sale here, using the 20-day line at 764.91 as a guide for a very tight upside stop.

 

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If we investigate AMZN’s weekly chart, we can see that the stock looks to be forming a possible head and shoulders top formation. While the stock didn’t quite reach the 50-day moving average on the rally earlier this past week, it did clear its 10-week moving average on the weekly chart.

This move, however, reversed on the week as the stock closed back below the 10-week line on much higher weekly volume. This could set up a retest of the 200-day and 40-week moving averages on the daily and weekly charts. AMZN closed Friday only 3% below its 10-week moving average. Given this, it could actually be considered to be within reasonable short-sale distance of the 10-week line given that upside risk could be contained to the 10-week line.

 

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Facebook (FB) is also showing signs of faltering as it closed back below its 200-day moving average on Friday with selling volume picking up to just above average. The stock actually closed 12 cents (about 1/8th of a point) below the 200-day line on Friday, but notice that it ran into resistance near the 50-day line and the prior November highs on Thursday as buying interest was light.

 

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And while the Thursday rally fell short of the 50-day moving average on the daily chart, it actually pinged right off of the 10-week moving average on the weekly chart. Volume increased on the week as the stock continued lower and closed Friday below its 40-week moving average.

We can see that, as is the case with AMZN, FB appears to be forming a possible head and shoulders top formation as well. We can that the sharp break off the peak on heavy selling volume in early November helps to define the right side of the head in the pattern, which is a typical signature of an H&S formation.

The action over the past few weeks could be finishing out a possible right shoulder (or even two small right shoulders) in the pattern. With the stock trading below its 200-day and 40-week lines on the daily and weekly charts, respectively, it is technically in a shortable position using the two moving averages as guides for tight upside stops. Note, however, that an alert short-seller monitoring both the daily and weekly charts could have taken a shot at FB when it met up with the 10-week line on the weekly chart.

 

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Netflix (NFLX) continues to hold its own as it remains above its 10-day moving average. On Thursday, the stock was upgraded by an analyst firm that named the stock their “#1 Internet pick,” which strikes me as the usual nebulous analyst commentary. Does that #1 Internet status mean it is going up the most or down the least among all their lower-ranked Internet picks?

In any case, that upgrade caused NFLX to push higher on Thursday in a move toward its prior late-October highs. But the breakout attempt from what looks like a cup-with-handle type of formation did not hold and the stock closed in the lower half of its daily trading range. Another upside move on Friday was met with higher selling volume as the stock reversed to close down on the day.

Somehow, I smell the potential for a downside failure here, and this would come, as I’ve said before, on a breakdown through the 20-day moving average on heavy selling volume. This is something I would be watching for in the coming days IF we don’t see Santa Claus come to town and push the indexes higher going into the Christmas Holiday weekend.

 

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More failures among big-stock NASDAQ names can be seen in names like Priceline Group (PCLN), which looked to be in recovery mode last week. On Monday of this week, however, the stock reversed off of its peak and closed down on higher selling volume.

That led to an eventual breach of the 20-day moving average on Thursday as selling volume picked up sharply and came in at above average. At that point the stock morphed back into a short-sale target per my comments about the stock in my Wednesday mid-week report where I reiterated that, “I would watch this closely for any breach of the 20-day moving average that would bring the stock back into play as a late-stage, failed-base type of short-sale situation.”

On Friday, PCLN busted through its 50-day moving average as well on even heavier selling volume. This puts the stock in a slightly lower short-sale position now that it is below the 50-day line, using the line at 1494.44 as a tight selling guide less than 1% above Friday’s close.

 

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Tesla Motors (TSLA) is trying to move higher after Tuesday’s bottom-fishing type of pocket pivot, but was unable to clear Wednesday’s peak. If the general market gets into further trouble this coming week, I would not expect this push back above the 50-day line to last. However, the stock could push as high as the 200-day moving average at 214 where it would become even more optimally shortable, so that is something to watch for.

 

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I would continue to keep a close eye on Broadcom (AVGO) which, despite all the Dow 20,000 hype, hasn’t been able to progress much beyond the prior week’s gap-up breakout move after earnings. It has essentially been trapped within a six-day price range where it has been buyable at the lows and then sellable/shortable at the highs.

This is one of those channeling-stocks situations that has yet to resolve itself. But what I would be watching for here is a possible failure on this breakout attempt, which would bring the stock into play as a late-stage, failed-base (LSFB) short-sale set-up. The first sign would be a clean breach of the gap-up low at 176.90, and confirmation would be found in a breach of the 20-day line at 173.82.

 

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You may ask why I tend to think AVGO is failure-prone here, and I would refer you to the weekly chart. Here we can see that the stock spent this past week stalling and churning in a tight range on heavy weekly volume. To me, that implies that sellers have been more interested in selling into the prior gap-up breakout strength. Unless buyers step up to push the stock out of this current six-day range, I would not be surprised to see the stock roll over and fail.

 

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In my Wednesday mid-week report, I discussed Lumentum Holdings (LITE) as a short-sale target given that it had busted its 50-day moving average on heavy volume that day. The stock briefly attempted to rally back above the line, which in my view put it into an optimal short-sale position. On Friday, the stock broke back below its 50-day line to close at 39.04, confirming it again as a late-stage failed-base (LSFB) short-sale set-up. This also keeps it in a reasonably optimal short-sale position using the 50-day line at 39.52 as a guide for a reasonably tight upside stop.

 

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There have been some stocks on my long watch list that continue to act reasonably well. The Trade Desk (TTD), not shown here on a chart, is still holding above its 10-day moving average and not too far away from the $30 price level. This could still be considered buyable using the 10-day line at 28.26 as a tight selling guide.

Meanwhile, Everbridge (EVBG) has been the big surprise as it pushed to an all-time high on Friday on heavy buying volume, at least for this thinner, smaller name. This is now extended, but helps to illustrate that there are some pockets of strength to be found in this market. Whether they are able to make significant, further upside progress is likely going to depend on where the general market goes from here.

 

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Impinj (PI) is another smaller name attempting to hold its own. After the prior week’s huge upside jack, the stock has settled back into a short, seven-day flag formation. Pullbacks within this short flag have found support along the 10-day line. Technically this could be considered to be in a buyable position using the 10-day line at 32.50 as a tight selling guide.

 

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Square (SQ) is another small name showing strength in an otherwise uncertain market environment. In my Wednesday mid-week report, I discussed looking for pullbacks to the 10-day line as lower-risk entry opportunities, and that’s what we saw on Thursday.

SQ pulled right into the 10-day line early in the day but caromed off the line as volume picked up slightly in a minor show of support off the line. On Friday, SQ gapped up and churned around its highs on much heavier volume. I would certainly not chase this here, and continue to view constructive pullbacks to the 10-day line as your best, lower-risk entry opportunities if and when they occur.

 

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Silica Holdings (SLCA) was on the verge of a full-blown breakout failure earlier in the week after getting pummeled on heavy selling volume on Monday. My assessment of the stock at that time was as follows, “This may now be starting to set up as a late-stage failed-base short-sale set-up. It is possible to test this here using the 20-day line as a guide for a tight upside stop. Otherwise one would watch for a reaction bounce back up towards the 10-day line at 52.92.”

Interestingly, on Friday, Goldman Sachs (GS) came out and put a buy recommendation on the stock, sending it shooting back above the 54 price level. I am generally wary of buy recommendations from GS coming in a stock that has just seen heavy selling. My suspicions, which I blogged about early in the day on Friday, were confirmed when SLCA reversed off of its highs and closed back below its 10-day moving average on heavy volume.

I tend to think that SLCA is more prone to failure rather than further upside, and Friday’s action lends some weight to this view. For that reason, I look at the stock as a short here using the 10-day line at 53.02 as a guide for a tight upside stop.

 

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Continental Resources (CLR) is languishing in a zone between its 20-day and 50-day moving averages. It has already dropped below the 54.32 base breakout point, so can be considered a breakout failure in the making. As we already know, the first signs of a breakout failure are found in a move back below the original breakout point and/or the 20-day moving average.

With CLR sitting on top of its 50-day line and just below its 20-day line, I consider it to be in a potentially shortable position using the 20-day line at 53,25 as a guide for a tight upside stop. The other possibility, of course, would be a bounce up as high as the 10-day line at 54.58. Thus, I would remain flexible about shorting into any potential bounces/rallies from current price levels.

In any case, CLR is teetering on the brink of a full-blown failure which would be confirmed by a volume breach of the 50-day line. While oil stocks have received a lot of press and buying interest (that has really gone nowhere) on the basis of the recent OPEC oil production agreements, we should remember that most of these stocks have already had big rallies off of their absolute lows in January. Within that context, the recent move may be a bit late and a bit too obvious.

 

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Big-stock materials names continue to remain on the brink of potential failure as well, as I pointed out in my Wednesday mid-week report. Martin Marietta Materials (MLM) finally closed below its 20-day moving average on Friday as selling volume picked up on the day. Notice how it has stalled at the 10-day line each time it has bumped into the line over the past four days. This is starting to have the look of a tiny, four-day bear flag. This looks like it is in a shortable position here using the 10-day line at 225.01 (2% away) as a tight upside stop.

Optimally, I might look to short any upside bounce into the 10-day line from here, should that occur. But as more and more Trumpkin stocks run into trouble as the promise of wonderfully beneficial Trump policies starts to fade in the face of legislative and budgetary reality, materials names could fade as well.

 

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We can see that MLM’s cousin, Vulcan Materials (VMC) is already showing sign of fading as it long ago failed on the buyable gap-up move it had in early November following the election. Since then, the stock has gone nowhere, at least on the upside, as it has formed a steady downtrend since peaking in early October.

As I wrote in my Wednesday mid-week report, “Preferably, I’d like to see a quick bump back up into the 20-day line at 126.45 from here as a more optimal short-sale entry point.” That quick bump came on Thursday as the stock pushed up into the 20-day line early in the day and reversed to close at its lowest low since the early October gap-up.

It now appears to be headed for a rendezvous with its 50-day moving average. Obviously, a volume breach of the 50-day line would confirm VMC as a late-stage, failed-base (LSFB) short-sale set-up. But the breakdown through the 20-day line has already provided the first clues and short-sale points.

 

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Trumpkin stocks that have taken a lot of heat lately have included both bio-techs and defense stocks. Defense stocks like Lockheed Martin (LMT), Raytheon (RTN), and Northrop Grumman (NOC) all gapped up on the promise of substantial new defense spending from an incoming Trump administration.

That enthusiasm faded rapidly, however, once the president-elect began publicly questioning the cost of the products provided to the U.S. military by the defense industry. While I only show NOC on a daily chart, below, all of these stocks look essentially the same with big-volume breaks off of their peaks followed by even-larger, volume gap-downs on Monday of this past week.

All three stocks have been hovering around their 50-day moving averages, with NOC being the weakest of the three as it has remained below its 50-day line. However, on Friday, LMT and RTN joined NOC below the line as they both broke down on heavy selling volume.

In my view, these all look shortable using either their 50-day lines or their recent highs over the past four days as guides for tight upside stops.

 

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I discussed what I was seeing in airline stocks like Delta Airlines (DAL) in detail in my Wednesday mid-week report. After stalling and reversing on a short flag breakout attempt from last week, DAL met up with its 10-day line on Wednesday.

This led to a bounce to the upside that I viewed as potentially shortable, using the 620 five-minute intraday chart as a guide for a short-sale entry. The stock then reversed to close near its lows for the day. On Thursday afternoon, the stock was pumped by a well-known, stock market faux-guru and opened up strongly on Friday morning.

As I saw it, that was a nice opportunity to hit the stock again on the short side, using my handy-dandy 620 intraday chart as a short-selling guide. The stock then dutifully reversed to close down on the day and right at its 10-day moving average.

AS I discussed on Wednesday, the extremely steep punchbowl-with-handle pattern DAL broke out of last week looks vulnerable to failure This is because the handle is only two weeks long. Within the context of the huge, straight-up price move over the past few weeks, it is likely too short to provide enough time for the stock to digest its prior gains leading up to the short handle. This is the sort of set-up where we often see a POD-with-handle breakdown occur.

For now, while I have been shorting the stock into this breakout and the subsequent bounces off the 10-day line, a full-blown POD-failure short-sale set-up would only be confirmed once the stock were to break below its 20-day moving average on heavy volume. That is something to keep a close eye out for.

 

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After the elections, we saw a number of construction-related names (along with their cousins in the materials and infrastructure groups) gap up on big price moves. Big Dow component Caterpillar (CAT) was one of them, but the stock is now showing signs of faltering as it breaks below its 20-day moving average on heavy selling volume.

This could be a clue that the whole Trump infrastructure spending move is a false one, and that we will see these stocks come back to earth once the legislative realities of such spending become more evident. CAT has been showing weak earnings and sales growth for some time now, and this current breach of the 20-day line perhaps is an initial clue of more weakness to come.

Based on this current action in CAT, I view the stock as a short here using the 20-day line at 94.04 as a guide for a tight upside stop. Preferably, I would like to see a rally back up into the 20-day line as a potentially more optimal short-sale entry opportunity.

 

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Like I stated at the conclusion of my Wednesday mid-week report, I’m not all that comfortable venturing too far out on the long side of this market currently. In fact, as I review the various set-ups coming through my screens this weekend, I note more that look like nascent short-sale set-ups than long set-ups.

As I wrote on Wednesday, “While I could be wrong, it seems to me that the set-ups are arguing for more downside.” In many cases, that assessment was dead-on based on the action over the past two trading days. The real question is where and whether any big money can be made before year-end and as we go into the holiday season over the next two weeks.

Dow 20,000 has remained elusive. Currently, if we ask ourselves what the crowd is thinking, my best guess would be that the crowd is looking for Dow 20,000 as a sure thing.

Maybe it is, and maybe it isn’t. But I think that if we focus on the individual stock set-ups, as is our practice, we should be able to remain on the right side of the market. For now, the set-ups continue to point to more downside potential. But as I pointed out at the outset of this report, Dow 20,000 is not that far away, so there is always the potential for a year-end melt-up to give the crowd what they expect to see in their Christmas stockings.

In fact, I could see a pullback over the next few days running its short-term course, allowing the market to drift back up to Dow 20,000 as we move into the lower-volume holiday environment. Ultimately, however, I think we just stick to the set-ups we see in real-time while remaining alert to any shifts as they occur.

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 a positions in DAL, 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.