The Gilmo Report

December 7, 2014

December 6, 2014

Friday’s jobs number got the Dow Jones Industrials, not shown, hot enough for a run at the 18,000 level as money piled into large-cap names. But the index came up short, peaking at 17,991.19 early in the day before spending the rest of the session sliding back down to its closing number of 17,958.59

Like the NASDAQ Composite Index, shown below on a daily chart, the Dow and the S&P 500 Index, not shown, posted a churning day on higher volume after wedging higher over the past three days following Monday’s higher-volume gap-down distribution day off the peak. While there are some names acting reasonably well, and breadth is cited as “improving” by those who speak for the crowd, I mostly see a lot of cheap stocks coming up off of their lows on my up-on-volume screens.

Meanwhile, the short side of the market has remained quite viable, and I tend to think the general market is vulnerable here to some downside off the peak. The idea that December is consistently a good month for the market does not hold true in all cases and certainly not throughout the month. For example, last year the market came in a couple of percent for a few days in the middle of December before grinding higher into New Year’s Eve.

In 2012 the market made a higher high in the middle of December before dropping below its 50-day and 200-day moving averages on a short 2-3% correction. In 2011 the NASDAQ posted a 5.9% correction in the middle of December. My point here is that a plain vanilla, bromide-based approach to the market based on the idea of “favorable seasonality” is not advisable, and anything can happen. Therefore, we simply keep a close eye on what the stocks are doing, without allowing some over-arching, rigid view to govern our thinking.

 

GR120714-$COMPQ

 

One area of the market that is showing broad strength here is the financials, which all rallied sharply on Friday on the jobs number and the idea that an improving economy will result in rising interest rates. Among these strong financial names that were seen on Friday, we might consider Charles Schwab (SCHW) as a possible buyable gap-up here using the 29.62 intraday low of Friday as a quick downside stop, as we can see on the daily chart, below.

SCHW isn’t showing huge earnings growth, and in fact earnings are expected to continue to decelerate next quarter as quarterly earnings growth slows to a 4% trickle, but like many other investment brokerages ranging from big-stock broker Goldman Sachs (GS) to electronic broker E-Trade (ETFC), for example, the stock launched higher on Friday. If one believes this is an actionable trade, and that the move in financials on Friday wasn’t a proverbial flash in the pan, then this is an easy trade using the BGU intraday low at 29.62 as a very tight stop.

 

GR120714-SCHW

 

Banks and other financials of all stripes followed suit with the brokers as big money center banks like Bank of America (BAC) and Wells Fargo (WFC), both not shown, broke out to higher highs. Smaller financials like insurance concern American Financial Trust (AFSI), shown below on a daily chart, might have more potential upside “juice” given that it posted triple-digit earnings growth in the most recent quarter.

After failing on a breakout attempt this past Thursday, AFSI reversed on Friday to close up in a big pocket pivot move that is buyable using the 20-day moving average at 51.50 as a relatively nearby and quick downside stop. This is another actionable trade within the financial space, and as long as Friday’s move doesn’t prove to be a quick flash in the pan, certainly has upside potential from here. The bottom line with any trade in this market is maintaining tight risk control, and given the proximity of AFSI to its breakout point and the 20-day line this may be worth a shot.

 

GR120714-AFSI

 

Tesla Motors (TSLA) spent three days bouncing around just beneath its 200-day moving average before moving lower on Friday on higher selling volume, as we can see on the daily chart, below. This brings the 217.32 low of mid-October into play as a short-term downside price target, although I think the stock can eventually go lower, beyond the $200 price level. TSLA is an interesting situation as it develops within its overall topping formation.

Notice how this second right shoulder in the fractal head and shoulders that sprung up as a result of TSLA’s base breakout failure in September also contains another, even smaller, fractal H&S within it, as I’ve outlined on the chart.

 

GR120714-TSLA

 

This second right shoulder is also the first right shoulder in a larger head and shoulders formation that can now be seen on the weekly chart, shown below. Notice how the initial fractal H&S that formed during August, September, and the early part of October makes up the head of this larger head and shoulders formation which we might consider a “normal-sized” H&S.

The weekly chart shows the May 177.22 low of the prior cup-with-handle base from which TSLA broke out in early August, which I consider my “longer-term” downside target for the stock while the 217.32 low serves as a short-term downside price target.

 

GR120714-TSLA Weekly

 

Twitter (TWTR) continues to hang just below the lows of its prior bear flag, spending most of this past week consolidating in a four-day bear flag, as we can see on the daily chart, below. TWTR remains a short using the 20-day moving average at 40.51 as a guide for an upside stop. Meanwhile, TWTR’s relative strength line is making a lower low as the RS rating drops to a putrid 21. One way or another, this stock is heading lower.

 

GR120714-TWTR

 

TWTR’s weekly chart, shown below, reveals the macro-pattern at play here. Once the stock broke through the 10-week moving average in October, it failed from the right side of a large post-IPO “Punchbowl of Death” or POD topping formation. That peak in early October also formed the head of a small, fractal head and shoulders that is visible on the daily chart, above, but not on the weekly chart.

However, we can now see that the post-earnings gap-down move in late October has formed the right side of a head in what is now a larger H&S pattern that is now quite visible on the weekly chart, as I’ve outlined. The smaller, fractal H&S that occurred around the October peak on the daily chart also makes up the head of the larger H&S. The five-week bear flag that TWTR has formed in November and so far in December appears to be presaging a move lower from here, and on this basis the stock remains my #1 short-sale target among the big-stock social-networking names.

Its price/volume action separates it somewhat from the other social-networking leaders as the weakest name in the group, and when it comes to shorting I prefer to attack the weakest stock in size.

 

GR120714-TWTR Weekly

 

We can see that Facebook (FB), as the biggest of the big-stock social-networking names continues to find buyers, most likely as investors see the indexes inch higher and are forced to find something, anything to plow into. After breaking back below the 50-day moving average on Monday, FB was able to poke its head back above the line on Friday in a move that was probably fostered along in a big way by the general market action.

As the preferred big-stock name among the social-networkers, FB finds a bid here as money seeks to find places where it can gain entry into the market without chasing something on the upside, and this seems quite logical to me. This is why I have focused on TWTR as my primary social-networking short-sale target currently as names like FB still feel the upside pull of the general market. My guess is that FB, as an institutional social-networking favorite, will eventually break down if and when we see the general market come in.

 

GR120714-FB

 

While the action on the daily chart as the stock flips back and forth through its 50-day moving average is somewhat unclear, FB’s weekly chart, shown below, might give us more insight into what is going on here with the stock on a broader basis. What we can see forming here is a potential “pinhead & shoulders” type of formation where the right side of the “pinhead” forms on the high-volume gap-down and downside break that occurred after earnings in late October.

Since then it appears that the action over the past three weeks may be forming a possible right shoulder in this pattern. Again, I would be watching for any high-volume breakdown through the 50-day line as a sign that the stock is ready to be shorted, and this probably (although it doesn’t have to) occurs in synchrony with some sort of general market pullback that might occur in December or perhaps not until the New Year begins. This is one to keep an eye on.

 

GR120714-FB Weekly

 

As I surmised it would in my report of this past Wednesday, Alibaba (BABA) has moved back below its 20-day moving average with volume picking up in a bid to retest its Monday low, as we can see on the daily chart, below. On a retest of a prior low you want to see volume drying up, and while it does remain well below average it did pick up slightly on Friday.

Notice that the 50-day moving average has now shown up on the chart, and it lies just above the 99.80 breakout point in the prior IPO U-Turn base. I would watch how this pullback unfolds as the closer it gets to the top of the prior base and the 50-day moving average the better the potential for a low-risk entry point on the long side emerging on this pullback.

 

GR120714-BABA

 

CyberArk Software (CYBR) is steadily consolidating the sharp upside move it had after its November post-earnings buyable gap-up move as it settles into its 20-day moving average with volume continuing to dry up, as we can see on the daily chart, below. CYBR was knocked off of its peak the prior week after three brokerage firms downgraded the stock and so far appears to be digesting that bout of selling fairly well.

This pullback and retest of the 20-day line looks buyable to me, using the 20-day line as your reference point for a quick downside stop. With the stock sitting here on the 20-day line and reasonably close to the 38.38 intraday low of the BGU day, investors have been presented with a reasonably low-risk entry point here.

 

GR120714-CYBR

 

Palo Alto Networks (PANW) has finally allowed its 10-day moving average to catch up with the stock following the prior week’s buyable gap-up move, as we can see on the daily chart, below. Volume is drying up very nicely as the stock pulls into the 10-day moving average, which is exactly what I want to see here, so I consider the stock buyable here with the idea of using the 10-day line as a reference point for a nearby selling guide.

Alternatively, if the 10-day line doesn’t hold, then the 20-day line at 114.08, about 4% lower, becomes our secondary reference for a selling guide. My guess is that if the general market does continue to trundle higher into year-end, cyber-security names will find support, and of course my two favorite names in the group are CYBR and PANW, both of which are sitting at potential pullback buy points.

 

GR120714-PANW

 

Even as the airline stocks move higher I have to admit that I tend to not get all that excited by the group because so much consists of “old merchandise” names. However, a “new merchandise” play in the group has emerged in recent airline IPO, Virgin America (VA). VA catches my eye here as it forms a post-IPO flag pattern here and pulls down into its 10-day moving average with volume drying up.

The stock has held tight along the 10-day line over the past four days, and this looks like a spot where a long positon could be taken, using the lows just above the 35 price level as a very quick downside selling guide. VA, of course, is backed by the Virgin Group and its swashbuckling leader, Richard Branson, which gives it a certain sort of dynamism that is not found in other airline names. That, and the airline’s trademark purple on-board lighting surely provide enough excitement for any investor looking to buy into the airline stock move! ;-)

 

GR120714-VA

 

The bio-techs have all gotten some upside play this past week, as we saw with Biogen Idec (BIIB), perhaps due to the American Society of Hematology’s 56th Annual Meeting and conference that was held during the week. In addition to BIIB’s presentation, Gilead Sciences (GILD) also presented at the conference, and this helped to drive a move back up to the 50-day moving average, as we can see on the daily chart, below.

The 50-day line clearly represents a major point of upside resistance, and so if one tries to short into this rally then the line becomes your very nearby reference point for an upside stop. Otherwise, we have to consider the possibility that the stock will start to move with the other big-stock names in the group which are all pushing to the upside. So if you’re going to come after this on the short side make sure you play it tight and keep your risk to a minimum if it continues to rally.

 

GR120714-GILD

 

I discussed Bitauto Holdings (BITA) as a late-stage failed-base (LSFB) short-sale set-up in my report of this past Wednesday as the stock’s prior cup-with-handle breakout failed miserably on Friday of the prior week, as we can see on the daily chart.

BITA had one small upside bump on Thursday morning before reversing back to the downside and then busting through the 50-day moving average on increased selling volume. If one was able to enter a short position in the stock on Thursday into the small upside move right at the open, your downside target here is the cup-with-handle base low at 62.90.

 

GR120714-BITA

 

SolarCity (SCTY) is back up at its 50-day moving average, as we can see on the daily chart, below, and this presents would-be short-sellers with another entry point. Using the 50-day moving average and the Friday intraday high at 54.38 provides a convenient, nearby reference point for an upside stop.

While I have not outlined it on the chart, if one studies it carefully one night notice that the action since mid-October has seen the stock form something of a fractal head and shoulders pattern where the huge-volume breakdown off the peak in early November represents the right side of the “head” in the formation. In my view SCTY can go a lot lower from here over time given its huge prior price run. After all, how much upside can there be in a stock that is expected to see losses over the next two years increase from (-$3.77) in 2014 to (-$4.63) in 2015 and then (-$5.53) in 2016?

 

GR120714-SCTY

 

Splunk (SPLK) is still playing out as a possible right-side peak in a POD type of formation, as we can see on its weekly chart, below. I initially looked at SPLK as a short-sale target into the post-earnings gap-up of three weeks ago that sent the stock above the 70 price level. That short-sale worked out well as a short-term move, covering into the downside move as it dropped into the 10-week moving average.

We can see that prior to the huge-volume stall off the peak three weeks ago the stock was making higher highs as it came up the right side of a potential POD on lighter and lighter volume. Over the past three days the stock has moved slightly to the upside as it bounces off the 10-week line on the weekly chart, and so far no wholesale breakdown on heavy volume has occurred.

This is what I’m looking for as confirmation of the stock’s weakness, since it could also be argued that the stock is consolidating here above the 10-week line.

 

GR120714-SPLK Weekly

 

The basic idea with SPLK is similar to what we have already seen in Yelp (YELP), shown below on a weekly chart. YELP formed a big, POD-like, late-stage cup-with-handle base from which it failed in early September. Notice how YELP’s move up the right side of the POD–with-handle as it tried to break out came on very light weekly volume, essentially wedging to higher highs.

After stalling at the right side peak on weak volume the stock then broke to the downside and has been on a steady downtrend since then. A quick view of the weekly chart also gives you some idea of how much downside may still exist in this overall topping formation. On a macro-scale, YELP has built this giant head and shoulders formation that extends all the way back to September of 2013, and it remains well above the neckline of this very large H&S.

I can see YELP eventually getting all the way back to its first-stage breakout point in the low 30’s if this downtrend persists, and for now I see  no reason why it shouldn’t. The stock also provides something of a “model” for what might happen with stocks like SPLK and which is probably already starting to occur in a name like Workday (WDAY), not shown.

While I will leave the reader to investigate the chart of WDAY on their own, I should point out that the sharp breakdown off the peak over the past 2-3 weeks is now in a position to bounce, and I would view WDAY, which closed Friday at 83.36, as shortable on rallies into the 50-day moving average around the 37-38 price level.

 

GR120714-YELP Weekly

 

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

Amazon.com (AMZN) – back below the 50-day moving average. Theoretically, one could short the stock here using the 50-day moving average as a quick upside stop, but keep in mind that the stock is well extended from its peak of exactly one week ago

Blackhawk Network Holdings (HAWK) – still sitting along the 10-day moving average, within buyable range of this past Monday’s continuation pocket pivot.

Netflix (NFLX) – holding along the 10-day moving average on this latest bounce. Reversed at the line on Thursday, but still unresolved on a short-term basis. Still looking for the stock to undercut the October low at 331. 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.

U.S. Silica Holdings (SLCA) – holding in a deep bear flag, almost the inverse of a “high, tight flag” on the upside, but also consider that the stock is down some 40% or more from our original short-sale point near the 50 price level. Remember, bulls make money, bears make money, pigs get…

As recent reports demonstrate, this is a market that defies labeling or the application of useless bromides regarding “seasonality.” It remains a market of stocks, and the proof in the pudding is the continued appearance of ripe technical set-ups on both sides of the market. As far as I’m concerned, the indexes can continue doing whatever they want to do, whether that means a short-term correction or this continued “inch-worming” to the upside.

Essentially, based on my own visceral experience as I continue to make steady, upside progress in my own account, the market continues to provide me with positive feedback regarding the effectiveness of a bifurcated approach where it is treated as a market of stocks and not a stock market. Of course, not every trade, long or short, is going to work, but striving to pick your spots carefully and acting opportunistically on very low-risk entry points when they show up tends to work well in this market. Enough said.

 

Gil Morales

CEO and Principal, Gil Morales & Company, LLC
M
anaging 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 SPLK, 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.