The Gilmo Report

July 13, 2014

July 12, 2014

Thursday morning provided something of an answer to the unusually aggressive selling we saw on Tuesday when the indexes broke sharply off of their recent peaks on heavy selling volume, as we can see on the daily chart of the NASDAQ Composite Index, below. As I wrote on Wednesday, the main problem with the Tuesday sell-off was the manner in which leading stocks got whacked. This determined selling broke the previously orderly patterns of a large swath of market leadership, and the effect was similar to what we might witness if we saw a bus drive through a marching band. Order turned into disorder in rapid fashion.

After several days of sharp downside in many leading names, the market gapped down big on Thursday morning after news of a possible default by Portugal’s largest bank sent everyone running for cover. It seems that somebody knew something on Tuesday, and by the time of the Thursday opening gap-down most of the selling in individual stocks had already occurred. Because of this, Thursday’s gap-down move at the open turned out to be a case of downside exhaustion, as the indexes bottomed early in the day and recovered a good chunk of the prior downside by the close. The NASDAQ, like the S&P 500 Index, not shown, is holding up at its 20-day moving average and the top of a prior short consolidation from mid-June. Whether this resolves itself as a short bear flag or a rebound off of the 20-day line remains to be seen, but investors need only pay attention to individual stocks, and currently few are in constructive positions within their chart patterns. For this reason I tend to think that raising cash is the prudent course at this time.




Trouble in Portugal led to a strong upside move in precious metals on Thursday, which shows up as a gap-up move on slightly better than average volume on the daily chart of the SPDR Gold Shares (GLD), below. The iShares Silver Trust, not shown, had a pocket pivot on Thursday as it gapped up and off of its 10-day moving average. The GLD, on the other hand, did not trade enough volume on Thursday to qualify as a pocket pivot buy point, but the gap-up move held tight on Friday as volume declined. Precious metals are now counter-trending the market, at least over the past few days, and it is not clear to me just how long this action would persist if stocks began to get hit more severely. Meanwhile the previous buy signals in the GLD and Thursday’s pocket pivot in the SLV remain in force, but I would tighten up my stops on any such positions to the 20-day moving average, currently at 126.49 on the GLD and 19.94 on the SLV.




In most cases, the action in the early part of the week week had already more or less “bombed” leading stocks back to major areas of support such as prior breakout areas, prior buyable gap-up lows, and major moving averages like the 50-day as short-term uptrends in leading stocks split wide open. By Thursday morning everything was on a short-term basis pretty much all sold out. As I tweeted on Thursday morning, a gap-down move after so much carnage over the prior days is usually where I would look to cover short positions, so in my view it wasn’t a place for anyone to go hog wild on the short side. Thus we saw big-stock leaders like Facebook (FB) rebound off of areas of deep support, which in FB’s case was the 50-day moving average, as we can see on the daily chart, below. There isn’t much volume on this bounce, but the stock has made it right up to its prior breakout point as earnings approach next week. In my view there is nothing to do here, as I see no reason to buy the stock as it continues to sit within a pattern that could just as easily resolve to the downside as the upside. And it is likely that earnings, which are expected on July 23rd, will be the deciding factor.




Palo Alto Networks (PANW) saw its nice, orderly, and coherent uptrend totally upended this week as it busted through its 10-day moving average on Monday and slammed into the 50-day line on Tuesday, as we can see on the daily chart, below. While the stock has found support just above the 50-day moving average and pretty much right at the 65-day exponential moving average, the bounce has been rather tepid. We can see on the chart that Friday’s continuation of the bounce came on light volume and stalled out at the 20-day moving average. The fact that PANW has come all the way back to its huge-volume buyable gap-up move of late May, negating a month’s worth of gains in just a few days, indicates that at best it needs to put in more work. At worst it might be on the verge of failing at the 50-day moving average if some buying interest doesn’t come into the stock. For now this is a broken pattern, and I would need to see some sort of new buy point show up to become constructive on the stock again. Obviously, if one wants to try and enter the stock here, that is certainly a possibility, but the Thursday low would have to be your downside stop. For my money, I prefer to leave things like PANW alone for now.




Sunpower (SPWR) came all the way back to the top of its prior base as it was hit hard on very heavy volume Tuesday. As we can see on the daily chart, below, SPWR’s round trip has led to a short bounce off of the top of the prior base, but as is the case with most of the bounces we’ve seen in leading stocks over the past couple of days, volume is lacking as the stock stalled around its 20-day moving average on Friday. Earnings are expected to be announced on July 30th, and my view is that there is no reason to be doing anything with the stock between now and then. Had the stock held up tight above the 40 price level, and if one had bought the pocket pivots and the buyable gap-up within the base that occurred back in late May and early June, it might be a different story. But now the profit cushion has been reduced, and unless the stock is going to retake its highs before earnings come out, there is no reason to hold through the report, in my view.




If you recall my discussion of GW Pharmaceuticals (GWPH) in my report of this past Wednesday, I made the observation that the stock could be in a later-stage position within its overall uptrend that began last year at around the $9 price level. As I saw it, GWPH was a sell into the third buyable gap-up in the pattern as the stock went above the $110 level in a move that well-exceeded 20% from the original buy point at the mid-June buyable gap-up. Since then GWPH has failed to maintain its viability based on Livermore’s Century Mark Rule by falling below the $100 price level. As we can see on the daily chart, below, the stock looks to me to be building a short bear flag here, and I would not touch this until it gets closer to its 50-day moving average down closer to 80. Since I do think there is a reasonable chance that the stock could fail on this breakout from a 51.6% deep cup-with-handle, I would want to see some volume support come into the stock at the 50-day line. If it can’t hold the 50-day line then the potential for a late-stage, failed-base type of situation becomes kinetic.




Greenbrier Companies (GBX), which has already made it through its second quarter earnings announcement with flying colors, as we can see on the daily chart below, continues to hold up well following its buyable gap-up move of last week. This still looks okay to me, and I would like to see how it acts once the 10-day moving average catches up to the price. If the market is able to snap out of its short pullback and break off the peak, GBX would remain a viable buy candidate with the idea that it should hold above the 10-day line where the potential for a continuation pocket pivot would come into play. If I’m going to buy into this market should the indexes recover from this week’s downside move, situations like GBX are what I’m looking for.




In the face of an uncertain general market, (AMZN) came flying up off of its 10-day moving average on Friday in a big-volume “roundabout” pocket pivot move, as we can see on the daily chart, below. This was sparked by a buy recommendation and $455 upside price target coming from a major brokerage house that cited a number of alleged positives gleaned from the Amazon Web Services Summit in New York. The strong upside move took the stock up close to its 200-day moving average, but I do not see this as a point at which one should try and short the stock. Buying here puts one in a position of needing the stock to rally further over the next week to create enough of a profit cushion that would make holding through earnings less like playing “earnings roulette.”




In my Wednesday report I showed weekly charts of four stocks, Workday (WDAY), Splunk (SPLK), Tableau Software (DATA), and Yelp (YELP), which all looked quite similar as right shoulder rallies and rollovers within larger head and shoulders formations. We can get a more granular look at this on the daily charts, below, where we can see that all of these, in almost identical fashion, rolled over this week to complete what now look like right shoulders within head and shoulders topping formations. The first, WDAY, is sitting right on top of its 50-day moving average as it forms a short bear flag right along the line. WDAY doesn’t announce earnings until the end of August, which would make this viable as a short on any rally up to the 200-day moving average at 84.14. Otherwise, one could try and anticipate a downside “breakout” through the 50-day moving average by taking a position here with a very tight stop at the highs of the past two days at the 81.50-81.65 price area.




SPLK also doesn’t announce earnings until late August, and it is in a slight different position in its pattern although it is forming what looks like a short bear flag in the manner of WDAY, above. As we can see on SPLK’s daily chart, however, the difference here is that the stock is underneath the 50-day moving average, which in theory makes the stock shortable here using the 50-day line at 48.20 as a very quick stop. The 200-day moving average is way up at 65.43, so I doubt very much if the stock has much of a chance of rallying up that far, thus the 50-day moving average remains your only upside reference point down here. It is, however, a very convenient reference point since it can be used as a very nice “hyper-stop.”




DATA is expected to announce earnings on August 8th, in about three weeks’ time. As we can see on its daily chart, below, it is building a short bear flag right underneath its 50-day moving average in a manner that is identical to SPLK’s, above. As well, the 50-day line can be used as a quick hyper-stop if one wanted to short the stock right here underneath the line. The six-day break off the peak of the right shoulder at 72.29 took the stock down over 19%, which is a very brutal price break no matter how you slice it. Thus these short bear flags may need to consolidate their prior downside moves for more than just a few days, even if they are sitting just below their 50-day moving averages.




YELP announces earnings at the end of July, and as we can see on its daily chart, below, the stock is in a short bear flag that is forming underneath its 200-day moving average. Theoretically, one could also short this one right here using the 200-day line at 71.79 as a quick upside stop. The other significant negative here is the fact that the stock has broken down below the intraday low of the mid-May buyable gap-up move. That intraday low more or less coincides with the 200-day moving average.




Another stock that showed promise as it rallied off of its early May lows, Qihoo 360 Technology (QIHU), has also faltered in a manner not unlike WDAY, SPLK, DATA, and YELP. As we can see on its weekly chart, below QIHU has stalled at the peak of two right shoulders formed since the stock bottomed in early May. The second peak occurred on much weaker upside volume than the first, and this past week volume picked up sharply as the stock dropped down below its 40-week moving average and right to the 10-week moving average, corresponding to the 200-day and 50-day moving averages, respectively on the daily chart. It’s not hard to see that QIHU has morphed back into a head and shoulders topping formation, and the price/volume action over the past couple of weeks argues for further downside.


GR071314-QIHU Weekly


The daily chart of QIHU, below, shows the reversal off the peak that occurred over a week ago, and while the stock did drift back into its 10-day moving average on Monday on below-average volume, downside volume picked up sharply as the stock broke down through the 10-day and 200-day lines. The stock tried to bounce off of the 50-day moving average on Friday but stalled at the line and closed in the lower part of the daily trading range. I see this as shortable using the 200-day line at 90.29 as a tight upside stop. QIHU is not expected to announce earnings until late August.


GR071314-QIHU Daily


In all of these short-sale set-ups I’m showing, above, members should understand that we’ve already seen reasonably sharp declines from the peaks of what are now right shoulders within head and shoulders formations, and as the stocks come down to areas of support shorting them is a little bit tricky. Notice, however, that as these stocks hold in short little bear flags the indexes are as well, so how these play out will likely be highly dependent on where the market goes from here. Members should follow me on Twitter at @gilmoreport as I post my observations of these stocks during the trading day.

My guess is if the market gets into more trouble this week these stocks will come down with the market. If the market is able to recover and rally, these stocks will likely try to push up into areas of resistance on their chart patterns. Some of these stocks I was able to react quickly to and short on Monday and Tuesday, but one had to move fast as everything came apart in short order. Regardless of what they do in the short-term, these stocks are now primary, short-sale targets on my short watch list, and I will be following them closely as we progress through earnings season.

If the market finds its feet, I remain open to taking long positions wherever I see buyable set-ups. But as we move through earnings season the question of buying into stocks before they report becomes an issue. The way to avoid the issue altogether is to lay back and watch for buyable gap-ups to materialize on strong earnings reports as earnings season progresses. These represent concrete new buy points with well-defined risk, such as in the case of GBX, and it is these types of buy points I will be looking for if I want to come back into this market aggressively.

If the market is just in a short-term downside “funk,” then I would expect support along the lows of the past few days to hold. The only thing I know for sure is that once again we see the indexes get 5-6% beyond their 50-day moving averages as leading stocks that have already been trending higher since the late May market turn have rallied 15-20% or more. Things start to come in, sometimes breaking down quite sharply. This is what happened around the peak in early March.

As it turns out, the biggest moves in leading stocks so far in this market uptrend have occurred after they flashed bottom-fishing or roundabout pocket pivots within potential new bases as the stocks start to turn up and off of the lows of the base and attempt to climb up the right side. We’ve seen a number of names do this, including ILMN, NFLX, CMG, SPWR, and TWTR, for example. Even DATA, WDAY, and YELP had tradable moves after flashing pocket pivots along the lows of their prior deep downtrends. And if you’re attuned to those types of buy points, rather than relying on standard-issue and obvious base breakouts where stocks often stall out or fail, you can make money in this QE-distorted market. GWPH is one exception where a cup-with-handle breakout produced a quick, 20%-plus gain within a couple of weeks, but that was a move that was best sold into. Sticking to the old rule of holding a stock that gains 20% in 2-3 weeks or less for at least eight weeks often assists you in giving back most of your profit.

While these have been strange times for the markets and subsequently investors as well, by now the strangeness has become familiar. So far, the market and leading stocks are following the same pattern that has been typical of this QE market since at least early last year. With the market showing some cracks after a decent and playable rally off of the mid-May lows, assuming one was playing bottom-fishing and roundabout pocket pivots, investors should take a cautious stance here and let things play out before committing heavily to the market again. With more short-sale set-ups making their presence obvious as rallies up the right side of potential new bases morph back into failed right shoulder rallies within big H&S patterns, I also have some idea of where I want to go on the short if the market gets into further trouble. 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 had no positions, though positions are subject to change at any time and without notice.

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