The Gilmo Report

December 3, 2014

December 3, 2014

Applying any kind of label to this market remains an utterly fruitless endeavor, and one that is most certainly not relevant to the task of making money. You can slap the label “confirmed uptrend” on this market, and while this might be true from an index point-of-view, there are plenty of former leaders that are in clear downtrends. You could say that we are in a “seasonally favorable” time of the year for the market, and therefore one must blindly adhere to the long side of the market, but so far in late November and early December a lot of stocks aren’t acting as if the season is particularly favorable to them.

The daily chart of the NASDAQ Composite Index, above, shows a picture of an index that has taken some heat off of the peak but which remains near those same highs. However, there are some chinks in the market’s armor, and these can be seen in the details. Friday’s post-Thanksgiving trading session showed churning at the peak on volume that was commensurate to about an average day’s trade given the shorter trading hours.

This was followed by Monday’s gap-down and break to the downside on higher volume. The past two days have resulted in a short, wedging rally as late money no doubt sees any dip as one to buy into. Nobody wants to lose their place in line to see Santa at the mall, but of course this assumes that Santa will show up. For the most part, the crowd continues to believe in Santa, and why shouldn’t they?

The bottom line, however, lies with the action of individual stocks based on their own long or short set-ups. All I know is that I continue to make progress taking such a bifurcated approach, and in my view this is consistent with the complexity and oddity of this current market environment. Those who wish to invoke investment bromides about “favorable seasonality” can do so, but it doesn’t change what is happening at the point of impact, e.g., the action of individual stocks.

 

GR120314-$COMPQ

 

Alibaba (BABA) has more or less mimicked the chart of the NASDAQ Composite so far this week, gapping down on Monday and then spending the past two days on a weak-volume reaction bounce back above the 10-day moving average. Monday’s gap-down break through the 20-day moving average took the stock to within 5% of the prior base breakout point at 99.80, and I’m sure buyers decided to move in at that point.

The bounce over the past two days is fairly unimpressive as it lacked any real volume. We can now see a 50-day moving average of volume showing up on the chart four days ago, and upside volume over the past two days has essentially been in “voodoo” territory. I would not be surprised to see the stock retest Monday’s low given the increased selling on that day relative to the past two days’ buying interest.

 

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CyberArk Software (CYBR) pulled down to the 20-day moving average and near the intraday low of last month’s buyable gap-up move before finding support and bouncing back above the 10-day line, as we can see on the daily chart, below. Any brave soul who bought into that dip has a small 5% profit or so on the position, but it’s not clear to me whether further upside is going to follow this two-day bounce off the line.

So far this all just strikes me as part of the process of CYBR building another base up here following the mid-November buyable gap-up move. As long as the stock can continue to hold within its current flag and avoid violating the 38.38 intraday low of the BGU day it remains on my buy watch lists and actionable at the prescribed points. Over the weekend I discussed the fact that CYBR looked to be on its way to testing the 20-day line and the BGU low at 38.38, and so far it has done that successfully this week.

 

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Palo Alto Networks (PANW) is pulling back toward its 10-day moving average as volume starts to dry up, as we can see on the daily chart, below. If I want to be long anything in this market, PANW on a light-volume pullback to the 10-day line would be a decent candidate. Unless the stock blows through the 20-day line at 113 and change one still has to look at this as a long-side candidate as one of the stronger stocks in this market.

A constructive pullback into the 10-day or 20-day moving averages would provide a reasonable entry point, keeping risk tight by using the 20-day line as a guide for a downside stop.

 

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Biogen Idec (BIIB) demonstrated the risk inherent in carrying short positions, or at least heavy short positions, overnight when it gapped up on Tuesday after positive news regarding trials for a new therapy. This put anyone sitting in the stock on the short side in a bit of a pickle Tuesday at the open, but as I tweeted early in the day, anyone who was short the stock from the 20-day moving average was down about 6-7% at that time, which is usually the most I will tolerate in terms of a stop-loss on a short position.

If one had started campaigning the stock on the short side near the 50-day moving average in early November then the loss is minor. With BIIB stalling pretty heavily yesterday, one could have tried to sit tight with the idea of using yesterday’s intraday high as a last-resort stop, but the stock pushed right through that today.

And while the point move might look huge keep in mind that BIIB’s move yesterday was like a $31 stock moving to $33 and has to be viewed within that perspective. In any case, this is a clear stop-out pending further developments, and demonstrates one big reason, e.g., a big news gap-up, why I generally do not hold heavy short positions overnight.

 

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Meanwhile, my favorite short-sale target, Tesla Motors (TSLA), paused briefly at its 50-day moving average last Friday before gapping below the line and pushing right on through the 200-day moving average where it has been spinning around for the past two days, as we can see on the daily chart, below.

This was a short up near 250 on the basis of the mid-November gap-down off the short-term peak near 260, was a short again as it sat on the 50-day moving average, and is still a short on any rallies back up into the 200-day line from here. Hopefully, anyone working TSLA on the short side here has some cushion in the position or the “campaign,” as it were, for those who short and cover on the way down without holding a lot overnight.

Short-term my downside target is the lows of the prior base at 217.32 which is only about 5% away from today’s close at 229.30. There is always the outside chance that the stock bounces back up close to the 50-day moving average, so I would look to use the 200-day line as a guide for a short-term trailing stop for those who are actively campaigning this on the short side.

 

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Twitter (TWTR) pulled what is in fact something of a normal kind of upside shakeout or “shake-up” into and just barely past the 20-day moving average before reversing back to the downside and breaking out through the lows of its current bear flag, as we can see on the daily chart, below. You can think of this as the inverse to a “shakeout and breakout” on the upside, except that this occurs on the downside.

The stock first tries to shake out shorts on the upside by jacking up to the 20-day moving average, but then gaps down the next day on Monday and breaks out to lower lows at the bottom of its current bear flag range. The past two days have seen the stock hold along the underside of the bear flag, similar to the way a stock might on the upside when it breaks out of a bull flag and pulls back to the top of the pattern.

Thus TWTR is pulling back up into the downside bear flag breakout point on light volume, which in my view is setting up further downside from here. For now I would short this thing using the 20-day line as your guide for an upside stop.

 

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After stalling and churning on Friday at a point just above the 50-day moving average and near the prior failed breakout point, Facebook (FB) dove back below the line on Monday, as we can see on the daily chart, below. This put the stock back into play as a short-sale target, and we can now see the stock’s action over the past several days as another type of upside shakeout of “shake-up” not unlike what we have seen in TWTR over the same last few days.

Once the stock reversed back down through the 50-day line the short bounce back up into the line yesterday was quite shortable, and FB broke to a lower low today. I see it as shortable here using the 50-day line at 76.02 as a tight upside stop. My downside target for the stock remains the 200-day moving average, now down at 69.36.

 

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Gilead Sciences (GILD) tried to rally in sympathy with BIIB, but ran into resistance right at its 65-day exponential moving average along which the top of the stock’s current bear flag range has formed. As we can see on the daily chart, below, GILD reversed off of the line today on above-average selling volume. I continue to view the stock as shortable using the 65-day line as your guide for a tight upside stop.

I actually shorted the stock myself at the line but covered near the close with the idea of shorting the stock again tomorrow. The stock did bounce off the lows near the 100 price level to close at 100.88 by the bell today. But in my view this just puts it back into shortable range, and I will be watching this one closely in the morning tomorrow.

 

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Adhering to the idea that “late-stage is as late-stage does,” we can now look at Bitauto Holdings (BITA) as a bona fide, late-stage, failed-base, short-sale set-up, and a relatively “fresh” one at that. As we can see on the daily chart, below, BITA broke out of an “eight-stage,” cup-with-handle formation and was initially playable on the long side using the breakout point as a very quick downside stop.

Now that the long-side proposition in BITA has been decisively thrown out the window, the stock is shortable here along the 50-day moving average up to the 20-day moving average at around 84.03. I would prefer to see a rally up into the 20-day line to short into, but so far the stock is merely clinging to the 50-day moving average on weak volume and could simply break from here.

Alternatively, given that yesterday was something of a reversal day one could use the Tuesday intraday high at 82.80 as a tighter stop, but the bottom line here is that I would prefer to see some sort of bounce from the 50-day moving average to short into.

 

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Amazon.com (AMZN) finally ripened up again when it broke down through the 200-day moving average on heavy volume Monday, as we can see on the daily chart. AMZN had been pushing higher in a big wedging rally off of the late October lows in a bid to frustrate short-sellers, of which I should say it did a very good job.

However, once the stock reversed off of the 360 price level on heavy volume and broke below the 200-day line, one could have looked at the stock as shortable yesterday on the bump back up into the line on weak volume, using the 200-day line as a guide for a quick upside stop. The stock blew further to the downside today on heavy selling volume before finding some support along the 50-day moving average.

This is a good example of how one has to be patient and wait for a rallying short-sale target to “ripen” again. Then one must be willing to pull the trigger when it shows weakness as it did on Monday and then set up perfectly at the 200-day line on Tuesday. At this point, watch for any rallies that bounce back up towards the 200-day line at 227.21.

 

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

Blackhawk Network Holdings (HAWK) – sitting along the 10-day line as volume dries up following another continuation pocket pivot on Monday. Theoretically, this remains actionable on the basis of Monday’s continuation pocket pivot and the constructive, low-volume pullback to the 10-day line over the past two days.

Netflix (NFLX) – rallying back up into the 10-day moving average. 20-day line at 366.06 remains a guide for a trailing stop.

ServiceNow (NOW) – stock has dropped below its 50-day moving average, although it now sits right at the late October breakout’s starting point around the 62 price level. Not clear to me that this has the potential to hold up given its weak and non-existent follow-through to the late October base breakout attempt.

SolarCity (SCTY) – broke to lower lows on Monday and has since bounced in a short two-day wedging rally. Only shortable on rallies into the 20-day moving average at 53.81.

Splunk (SPLK) – confirmed its right shoulder rally failure status on Monday by busting through the 20-day line on increased selling volume. Use rallies up into the 20-day moving average at 64.90 as short-sale opportunities using the moving average as your guide for an upside stop.

Trinet (TNET) – stock broke down hard on Monday and has been removed from my buy watch list. A good example of a stock that inched higher along the 10-day line and then gave it all up in one day – not unusual for leaders in this market.

U.S. Silica Holdings (SLCA) – so far this week it has built a short bear flag following last Friday’s gap-down blow-up. Looking for the prior base low at 24.28 as a possible downside target from here. But keep in mind the stock is down about 41% from where we first started campaigning it on the short side in mid-October as it was forming a possible right shoulder peak in an overall head and shoulders top (see October 22nd report).

The short side of the market has remained the more profitable side in terms of my own visceral experience, and I continue to take a bifurcated approach on the long or short side as individual stock set-ups present themselves in real-time. It’s an old story, I know, but one that continues to work, and we continue to play them as they lie, even as the Dow and the S&P 500 close at new highs today.

The interesting phenomenon that I am seeing is that there appear to be more short-sale set-ups coming through my screens than long set-ups, and even with the general market indexes pushing to new highs this strikes me as a cautionary note, although it does not affect how I deal with individual stocks on a practical basis. A paradox perhaps, but one that fits the strange beast that we call a QE market. 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 BABA, CYBR, TWTR, and TSLA, though positions are subject to change at any time and without notice.

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