The Gilmo Report

December 28, 2016

December 28, 2016

The Dow Jones Industrial Index again came within a hair’s breadth of the 20,000 level this morning, peaking out at 19,981.11 before turning to the downside on heavier trading volume. The index had been looking somewhat bullish over recent days, but in this market that and $6.50 will get you an expensive cup of coffee at Starbucks (SBUX).

Today’s reversal near the 20,000 level came on higher selling volume, and now puts any idea of Dow 20,000 on the back-burner. This means that for now a lot of newly-minted Dow 20,000 baseball caps are going unused as we head into the New Year.

 

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The NASDAQ Composite Index hasn’t fared all that much better after posting a new all-time high yesterday as it cleared its own milestone of sorts at the 5,500 price level. The move came on the backs of a number of big-stock tech names, but the moves in these stocks were mostly tradeable on a short-term basis and not much else.

This was exemplified by the fact that today the index broke to the downside as the new-high breakout failed on higher selling volume. This came after yesterday’s new-high breakout showed up mostly as a churning day with the index closing just below mid-range on higher volume.

 

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The S&P 500 Index also rolled over today as selling volume increased. Note as well that yesterday’s action showed churning along the recent highs on increased selling volume.

 

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As I indicated above, the big-stock names that led the charge yesterday ran out of gas today, with many reversing to the downside. In some cases, the rallies simply brought stocks into more optimal short-sale zones within their patterns. Among these, Amazon.com (AMZN) has been rallying on news of strong holiday sales for the e-commerce giant, but that rally ran out of steam today just above the 50-day moving average. I mentioned the stock in an early-morning blog post when the stock was still trading above the 50-day line.

By the close, AMZN was back below the 50-day line, but did manage to close up 73 cents, or about 0.09%, on the day. In my view this becomes shortable here, using either today’s high at 780 or the 50-day moving average at 773.80 as upside stops. The 780 price level is barely 1% above today’s close, while the 50-day line would serve an excruciatingly tight guide for an upside stop by contrast.

 

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Yesterday I tweeted a weekly chart of Facebook (FB) and noted that despite trying to pick up a little support over the past couple of days the stock still looks like it is trapped within a bear flag. In addition, over the past several days the stock has descended back below the 10-day moving average, which is now serving as near-term resistance.

Your most optimal short-sale entries would occur on any possible rallies back up to the 200-day moving average at 120.34, but for now the 10-day line at 118.76 looks like solid upside resistance. Therefore, any rallies back up into the 10-day line would be your first references for potentially shortable rallies.

If the general market were able to move higher into year-end, I might have expected FB to get some support as institutions come in to prop up their holdings. But the weak action so far might indicate that they are more interested in trimming their positions ahead of year-end and next month’s earnings report.

 

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Over the weekend, Netflix (NFLX) was looking squeaky tight as it pulled into its 10-day moving average on an extreme volume dry-up (“VDU” or “Voodoo”). This made it buyable at that point, and the stock did start the week off yesterday with a nice upside breakout to all-time closing highs.

That did not last long, however, as NFLX reversed back to the downside today after opening up at the bell. Volume came in relatively light, but this is part of the problem for NFLX. This is because you will note that throughout December the stock has drifted higher on light and lighter buying volume, which eventually becomes problematic as it indicates a lack of buying demand.

Therefore, I think one has to be cautious here if trying to get long the stock by using the 10-day line as a tight selling guide. And as many names have done over the past couple of days, NFLX could also be prone to a breach of its 20-day moving average. If that occurs, it would immediately morph back into a short-sale target.

 

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Qualcomm (QCOM) stalled yesterday on an attempt to clear its 50-day moving average, putting it in prime short-sale position. This morning the stock gapped down back below the 67 price level on news that the Korea Fair Trade Commission was levying an $865 million fine on the company for violations of competition standards.

While the news helped bring down the stock, the fact is that it was right in short-sale position yesterday at the 50-day line. It has now undercut the prior lows of the past week or so, which could put it in position for a reflex rally back up toward the 50-day line. I would view such a rally as potentially shortable, using the 50-day line at 67.38 as a guide for an upside stop.

 

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The smaller new-merchandise names I’ve been discussing in recent reports and which have been acting well came under severe fire today. For example,

The Trade Desk (TTD), not shown, blew right through its 10-day and 20-day moving averages and the prior base breakout point around the 30 price area. That move would have taken anyone long the stock right out, in my view, or at least it should have.

Impinj (PI) exhibited similar action as it pushed below its 10-day moving average and the prior base breakout point at around 37.70 on heavy selling volume. This action serves to demonstrate why I never chase strength but rather seek to enter on constructive weakness. Obviously, this current action does not qualify as constructive by any stretch of the imagination, and anyone trying to pick up shares at the 10-day line would likely have abandoned such attempts as the stock moved lower throughout the day.

 

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The same goes for Everbridge (EVBG) and Myovant Sciences (MYOV), both not shown here on charts, both of which have failed to hold near-term support. The main issue for all of these smaller stocks is the action in the general market, since smaller, thinner names will tend to be beaten to a pulp if the market starts to get into serious trouble.

Twilio (TWLO), not shown here on a chart, also failed badly as it broke down -7.27% on the day, crashing right through its 20-day moving average early in the day.  As I wrote over the weekend, this thing needed to hold at the 20-day line if it was to be viable on the basis of the prior pocket pivot action. When it did not, there were no questions to ask, other than “How fast can I sell this piece of garbage?”

If you were in a more coherent market environment, perhaps one of those reminiscent of the “old days,” breakouts in all these names discussed above would be working well. As well, we might see more bottom-fishing and roundabout pocket pivots produce more sustained upside, but that has also not been the case, as TWLO has demonstrated.

If the market is indeed in a confirmed uptrend, then breakouts should be working, and this is not the case right now. Therefore, we have to take a cautious view of the market based on current, real-time developments and shifts we are seeing in individual stocks. One of the first things I look for in this regard are key support levels being held or broken.

In this regard we might consider that among all of these smaller new-merchandise names Square (SQ) has probably held up the best. In the face of today’s general market sell-off, the stock held in tight, declining all of a nickel on the day on volume that was 60% below average. SQ also held above its 20-day moving average, which I consider a critical support level. Therefore, we should keep in mind that the 20-day line serves as a critical and necessary level of support for the stock if it is to remain viable.

 

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Among some of the bigger stocks I’ve been following in recent reports, Martin Marietta Materials (MLM) was discussed in my weekend report as being buyable along its 10-day moving average based on the voodoo type action at that point. That actually led to a tradeable rally yesterday and early this morning before the stock reversed on increased selling volume.

That reversal came near the highs of the current base and constituted a full outside reversal to the downside. While volume increased over yesterday’s levels, it was still well below average, which I suppose is slightly constructive. However, if MLM cannot hold the 20-day moving average on any further pullback, it may morph into a short-sale target.

In essence, the stock only provided trades with a nice quickie on the upside before giving it up today. This speaks to the inconsistent action we are seeing in a number of previously well-acting names currently. And since I operate on the basis of watching what the stocks do, this can quickly send me back to the short side of some of these names.

 

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In recent reports I’ve been discussing Delta Airlines (DAL) as a dynamic situation that has been showing alternately bullish and bearish price/volume action over the past few weeks. Most recently it was holding along its 10-day and 20-day moving averages as volume declined. But as I’ve discussed in recent reports DAL has the potential to morph into a POD-failure type of situation.

Of course, it isn’t a confirmed POD-failure until it breaks below the 20-day line, and today it finally closed just below the line on increased selling volume. This is the first sub-20-day moving average close we’ve seen in the stock since it cleared the 200-day moving average in early November.

DAL represents another situation that I felt could rally if we saw a strong year-end move higher that also involved the Dow finally clearing the 20,000 level, no doubt to much fanfare. However, if the general market starts to get into trouble as we move into the New Year (and, I might add, as it has over the past two Januarys), then DAL could turn out as a POD-failure short-sale set-up.

 

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Other names I’ve discussed in recent reports also remain in positions where they could become prime short-sale targets in a flash. One of these is Continental Resources (CLR), not shown here on a chart, as it sits right on top of its 50-day moving average following a recent base breakout failure. I would watch for a breach of the 50-day line at 51.45 as a short-sale signal, using the line as a guide for an upside stop.

Steel Dynamics (STLD) is another “stuff stock” that has been trying to set up along its 20-day moving average, but so far has been unable to get going on the upside. Today it closed four cents below its 20-day line on light volume, which looks constructive. If the stock cannot hold or regain the line here, then it may be headed for the 50-day moving average down at 32.90.

Believe it or not, I would even consider shorting the stock here using the 10-day line at 36.99 as a tight upside stop.  This, of course, would have to occur within the context of the general market running into more trouble as we head into the New Year.

 

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Ciena (CIEN) has run into selling near its prior highs around the 25 price level after being buyable along the 10-day moving average per my discussion of the stock in my weekend report. The stock, however, would not have been buyable yesterday morning as it gapped up to the 25 price level and churned around on increased volume.

That smacked of distribution near the highs, and today the stock broke back down to its 10-day moving average on a sharp increase in selling volume. Today CIEN closed three cents below the 10-day moving average, but could easily test the 20-day line at 23.61 on any further pullback. Whether I would want to buy such a pullback would depend on the general market action at the time. I might also take my cue from what is going on with CIEN’s cousin stocks.

 

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And with respect to its cousins, we can see that Finisar (FNSR) has morphed back into a short-sale target after busting the 50-day moving average today on increased selling volume. This was the flip side of the stock that I discussed over the weekend when I wrote that such a breach of the 50-day line “would cause the stock to morph into a short-sale target.”

As with most of these names I’m discussing in today’s report, I initially took a two-sided view of each. This meant that I was on the lookout and open to either bullish or bearish resolutions to their current price/volume action and would act on the stocks accordingly. With FNSR, the stalling action we saw yesterday at the 20-day moving average was a clue that a bearish resolution may be at hand.

Today that bearish resolution came into full force when the stock dropped below the 50-day line on a fairly substantial increase in selling volume as compared to yesterday. This put the stock into play as a short-sale target at that point, although one could view the stock as shortable here (albeit perhaps not as optimally as I would like) while using the 50-day line at 30.88 as a guide for an upside stop. Optimally, we might look for a rally back up to the line as a lower-risk short-sale opportunity, should that occur.

 

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Lumentum Holdings (LITE) is another one of CIEN’s cousin, and has been acting more like FNSR as it sits along its 50-day moving average following a prior base breakout failure. Yesterday LITE actually started to look like it might head back up to the prior highs as it moved to a near-term higher high on a five-day pocket pivot volume signature.

But that move failed miserably today on a big outside reversal to the downside on increased selling volume. LITE was able to hold right at its 50-day moving average today, but a breach of the line would confirm the stock as a late-stage failed-base (LSFB) short-sale set-up. I might also be inclined to anticipate such a failure by just shorting the stock where it lies and using the 20-day line at 40.11 as a guide for a reasonably tight upside stop.

 

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Over the weekend I had considered that if the Dow were able to plow its way up through the 20,000 price level then something like Caterpillar (CAT) might provide some assistance by moving up and off of its 20-day moving average. It was certainly hugging the line very tightly over the weekend as volume dried up.

But, alas, with the Dow unable to make it to the magical 20,000 number and rolling over today, it took CAT down with it. Consequently, CAT dropped below its 20-day moving average on an outside reversal with volume picking up slightly on the day.

This is another two-sided situation where the ultimate resolution of the current price/volume action would serve as my guide with respect to whether to handle the stock as a long or a short. If the general market starts getting into more trouble as we move into the New Year, look for CAT to test the 50-day moving average. In this case, I would look at any quick upside blip into the 10-day line at 93.79 or the 20-day line at 93.96 as potentially more optimal short-sale entry opportunities. Just keep in mind that as the Dow goes, so probably goes CAT.

 

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Tesla Motors (TSLA) is sending shorts scrambling as it posted another roundabout type of pocket pivot coming up through its 200-day moving average yesterday on strong volume. Despite the fact that I don’t have any long-term aspirations for TSLA, I do pay attention to the real-time price/volume action, which is far more important than any predictions I might like to make.

As I wrote over the weekend, following the prior bottom-fishing pocket pivot (BFPP) two weeks ago when it cleared the 50-daymoving average, “if [TSLA] can clear the 200-day moving average it could send the shorts scrambling.” That’s pretty much what we saw yesterday and today, although both days are showing some stalling action on decent volume. What I would watch for here is how the stock acts on any pullback to the 200-day line. A low-volume test and hold of the line would be constructive, but a volume reversal back down through the 200-day would bring this into play as a short-sale target once again.

 

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One potential clue as to what stage of the market’s confirmed rally we are at currently might be provided by the recent action in what is invariably 2016’s “Stock of the Year,” Nvidia (NVDA). While I have tweeted about the stock frequently, I have not discussed it in recent reports since before its big buyable gap-up move of early November.

The reason for that is because NVDA has been the flagship stock of the Focus List put out by another website of mine since its original pocket pivot of April 6, 2016, when the stock was trading at 35.80. I also discussed that pocket pivot in my reports back at that time. More recently, as the stock has become extended, I have left it alone in the Gilmo Report.

But regardless, I think that experienced Gilmo members would have figured out how to handle this wild stock on their own with respect to both the buyable gap-up (BGU) of early November, and the recent move above the $100 Century Mark. In fact, members who follow me on Twitter (my Twitter posts are also shown on the Gilmo Report website as well) will note that I pointed out the move up through the $100 price level seven days ago as a buyable situation according to Livermore’s Century Mark Buy Rule.

The stock then ran up about 19% from there in just six days, and by yesterday had been up 10 days in a row. Given NVDA’s extended state, and the frenzy of greed surrounding the latest price move, I tweeted yesterday that I was looking for a possible climax top in the stock. Today that was confirmed to a fair extent by a massive-volume outside reversal to the down side off the 120 price level.

 

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When markets top, big leaders often top with them, and NVDA, as a big leader, could be telling us where this market is headed as we move into the New Year if it begins to show more evidence of topping. Throw in an expanding number of breakdowns in other leading names, and we could certainly be looking at a decent market correction to start off the New Year.

But as I wrote over the weekend, as we moved into the last trading week of the year, we had to see how things played out based on what we’ve seen transpire over the past three year-ends. Because of this, I made the important point that, in the stock market, sometimes what you don’t do is far more important that what you do. I think to some extent, this week’s action, at least all two days’ worth of it, makes that point for me.

So as we move into the final two trading days of 2016, I think the “song remains the same,” to steal a line from the legendary rock band Led Zeppelin. Happy New Year!

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.

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