The Gilmo Report

July 3, 2016

July 3, 2016

The past week has been an incredibly instructive display of an undercut and rally move in action by the major market indexes. This was given extra upside punch by the fact that it was accompanied by perfectly synchronized undercut and rally moves in a broad swath of stocks we’ve been following recently, both long and short.

If we go back to last weekend’s report, recall that I discussed that I was looking for a move like this based on the fact that I felt the Brexit news was really a net positive for the markets and the global financial system. As I wrote at the time, “Overall, the action on Friday was extremely weak and indicative of forced selling. Odds are that this will lead to more forced selling on Monday, which might bring about a short-term low.”

And so the set-up was there for anybody willing and able to see it. It also coincided with a number of short-sale target stocks undercutting prior lows or running into or just undercutting major moving averages. As we know, these are almost always cover points. That is what turned out to be the precise case as I discussed in my Wednesday mid-week report. We saw Facebook (FB) fill its prior gap and bounce off of the 40-week moving average on Monday. It rallied with the market over the next three days. 

The rally has taken the stock as far as the 20-day moving average (green line below), where it pulled back slightly on Friday as volume dried up. Is this a shortable rally? Well, if it can’t regain the 20-day line it very well may be. On other hand, the low-volume pullback at the 20-day line still leaves open the possibility of a move further up to the 50-day moving average at 116.21. If the general market keeps rallying, FB could continue higher with it. But this is one prime example of the type of action we saw occur in synchrony with the general market’s undercut and rally action this entire week.

 

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Other prime examples of the coincident action we saw in individual stocks as the market pulled its big undercut and rally can be seen in names like Alibaba (BABA) and Adobe Systems (ADBE). BABA undercut a prior May low in its pattern at the same time it was undercutting its 200-day moving average. And this was all occurring on Monday as the major market indexes were undercutting their May lows.

BABA then turned on its own undercut & rally move and rapidly regained its 50-day moving average, where it closed on Friday. Volume has been light on the way up, which can naturally attract one’s interest on the short side. However, this is a case where the stock just keeps going. Now if it pulls back in orderly fashion and retests the 50-day line on light volume, it could set up again a long idea. This would gain credibility, of course, if the general market is able to sustain this four-day rally off of the Monday lows.

 

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Adobe Systems (ADBE) is another example of a short-sale target stock undercutting prior lows in its pattern and simultaneously finding support at or near its 200-day moving average. ADBE bounced hard off the 200-day line, but ran into the 50-day moving average on Friday. In this case, ADBE was shortable on Friday’s reversal at the 50-day moving average, and this would have worked on the short side. That was not the case with BABA, but it does show what we might look for on the short side if this market rally turns out to have small legs.

Undercut & rally moves are a corollary to my work on the short side, and often they are just temporary rallies within an overall downtrend. While they can be played on the long side for the quick move, whether they develop into something more substantial is unclear.

 

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These three examples are fairly representative of the action we saw in individual stocks this past week. And within the context of the general market indexes’ undercut and rally action, it all made perfect sense. That context is seen more clearly on the daily chart of the NASDAQ Composite Index where we see that it undercut its May lows on Monday. This then led to a sharp three-day rally that was capped off by further upside today as we headed into the long July 4th Holiday weekend. It rallied sharply back to the upside. This was a classic undercut and rally maneuver.

The index is now back above its 50-day and 200-day moving averages. As long as it can hold the 50-day line on any pullback from current levels, I think that the undercut and rally move is in play as a wholesale rally may be taking hold. We certainly have to be open to this.

 

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This is also confirmed in the action of the S&P 500 Index which undercut its May lows on Monday and then rallied sharply to retake both its 200-day and 50-day moving averages as well. Note that Thursday’s move back up through the 50-day moving average came on heavy volume, although this could have been related to the end of the first half of the year.

But like the NASDAQ, if the S&P 500 can hold the 50-day line on any pullback from current levels, the rally remains in force. Of course, if you’re looking for standard base breakouts to buy here you may find yourself a little short on candidates. On the other hand, the less orthodox but just as valid long set-ups like Wyckoff’s Spring work well.

 

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As I wrote in my Wednesday mid-week report, wherever this current four-day rally leads, “…the undercut and rally has already made it “game on” for some unorthodox long plays…” Whether this can continue into next week is an open question, and it is simply a matter of seeing how things play out.

In my Wednesday report I observed, “But the market seems to be convinced that the Fed is now on hold through the summer, and what has so far been a long, hot summer could transform into the summer of love.” And indeed, there is evidence to support this idea that the Fed is on hold and QE will remain the order of the day.

The action in precious metals is one such piece of evidence, with gold and silver both bursting to roughly two-year highs. The iShares Silver Trust (SLV) blasted to its highest high since August of 2014, while the SPDR Gold Shares ETF (GLD), not shown, posted its highest high since July of 2014. Volume was heavy as the SLV approached the 19 price level on Friday. This was indicative of the market’s conviction that the further printing of fiat currencies is going to define the action of central banks for at least the foreseeable future.

 

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Both Silver Wheaton (SLW), not shown, and Agnico Eagle Mines (AEM) moved to new highs on Friday. As I wrote on Wednesday, if you are a base breakout buyer, SLW was right there to be bought. It is now about 8% past where it was on Wednesday. SLW has now achieved its highest high since September of 2014, while AEM has posted its highest high since December of 2012.

While precious metals and precious metals stocks would be vulnerable to selling in a market where forced selling becomes the dominant force in a wholesale asset sell-off, in a market where stocks are rallying the story is quite different. Particularly, when stocks are rallying on expectations of continued money-printing.

In this manner, as easy money policies remain in force, asset classes achieve a high degree of correlation, with stocks, bonds, and precious metals/commodities rallying while the dollar sells off. This is what we saw in 2010 and 2011 when the metals took off. We may be seeing it again.

 

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Tesla Motors (TSLA) did a fantastic job of keeping to its script this past week. After undercutting its August 2015 at 195 at the end of the prior week, the stock pulled a big outside reversal to the upside on strong volume this past Monday as the general market was getting pummeled.

It was as if the stock was living in a world of its own, but overall the action is consistent with the undercut & rally move I was looking for. After pushing right up into its 20-day moving average in the 211-212 level where profits could have been taken, TSLA got hit with some bad news that sent it down to its 10-day moving average.

The news was actually a month-old incident where a self-driving Tesla vehicle crashed into a trailer truck, killing its owner. Basically, the car didn’t see the truck and neither did the owner since he was allegedly more efficiently utilizing his time by watching a movie.

As I wrote in my Wednesday mid-week report, “At this point I would look for an orderly pullback to the 10-day line at 206.95 as a new entry possibility under the right conditions.” Well bad news creates the right conditions for such a pullback on Friday morning, creating an opportune long entry for those paying attention to the stock.

Interestingly, also written on Wednesday, “I might venture to guess that a move up to the 200-day line could occur if the general market rally is able to continue.” And by the end of the day on Friday, TSLA had come within a point or so of its 200-day moving average after bouncing hard off the 10-day line.

What surprised me most about TSLA’s action on Friday is that it proved true both of my Wednesday comments regarding the stock’s possibilities at that point. From here the next big move for TSLA would be a pocket pivot through the 200-day and/or 50-day moving averages. Pullbacks to the 20-day line at 211.89 might also provide new entry opportunities.

 

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Splunk (SPLK) has been able to hold most of its gains since the Monday/Tuesday undercut and rally reversal that produced a big-volume supporting pocket pivot on Tuesday. The rally has carried as far as the 20-day moving average, but over the past two trading days the stock has pulled into its 50-day moving average as volume dries up.

SPLK was doing pretty well as it pushed up against the $60 price level back before the whole Brexit panic sell-off hit the market. Two days of extreme downside velocity sent the stock down through its 200-day moving average and the 52 low of April 27th.

SPLK then turned and rallied, posting a big-volume supporting pocket pivot at the 200-day moving average on Tuesday. The real question here is whether the undercut & rally move is over and the stock will simply roll over and morph back into a short-sale target. If it rolls over and busts its 50-day moving average on heavy selling volume, then we might conclude that it has.

Otherwise, we should keep a close eye on the stock here as it pulls into the 20-day moving average on light volume. This could be a type of “nip and tuck” pullback that sets up a move higher. As a short-seller, assuming that the stock will immediately break down can end up confounding you. This is the type of price/volume action that can do just that.

 

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Netflix (NFLX) deftly illustrates what can happen after a little nip and tuck into the 10-day moving average that comes on the heels of an undercut & rally move. NFLX undercut its prior May lows on Monday, and the next day gapped back to the upside as it began the rally segment of the undercut & rally move. On Thursday the stock paused at the 10-day moving average as volume dried up a bit. That led to a gap-up bottom-fishing pocket pivot coming straight up through the 50-day moving average on strong buying volume on Friday.

NFLX was the beneficiary of an analyst firm’s buy recommendation on Friday, and that helped catapult the stock through the 50-day line. Now it has become an undercut & rally move with legs. Technically, one could treat Friday’s gap-up move as a buyable gap-up (BGU) using the 94.80 intraday low as a selling guide.

 

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Not all undercut and rally moves and bounces off of major support that we’ve seen this week necessarily look like the start of something big on the upside. Salesforce.com (CRM) bounced off of its 40-week moving average on the weekly chart this past week, but the rally has stalled at the 20-day moving average. It has, however, been able to hold above the 50-day moving average as volume settled down on Friday. Note that it has also found resistance along the lows of the prior base it formed between mid-May and the latter part of June before it blew apart.

This could bring it into shortable position using the 20-day line or Friday’s high as a guide for an upside stop. Otherwise, if the stock is able to stabilize and hold the 50-day line, it could set up for a recovery of some sort.

 

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Workday (WDAY) is also looking less robust as it runs into resistance at its 50-day moving average. Thus the stock could have been shorted at the line on Friday and this would have yielded a couple of points of downside by the close. Now the stock is trapped between its 50-day and 200-day moving averages after finding support at the 200-day line on Friday. As was the case with ADBE, we can see that CRM and WDAY don’t necessarily look like anything more than typical oversold reaction rallies after a massive downside break.

For this reason, these rallies should continue to be monitored as they could simply be bringing these stocks back into shortable range. If the general market’s sharp, four-day rally starts to give way, these rallies in short-sale target stocks that have brought them into more optimal short-sale position make them your “go to” names on the short side.

 

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Other cloud names like Citrix Systems (CTXS) and ServiceNow (NOW), not shown, have not rallied far enough to meet up with any moving averages that might present reference points for overhead resistance. In each case the 20-day moving averages are the nearest lines currently above the stocks, with CTXS’ 20-day line at 82.69 and NOW’s at 69.94.

As the biggest big-stock cloud name, Amazon.com (AMZN) is still acting just fine. In my Wednesday mid-week report I theorized that the stock might be forming an “evening star” topping formation based on Wednesday’s gap-up move that formed a small “doji” or “star” on the candlestick chart. However, as I noted, the stock would need to gap down on Thursday to complete this pattern, and this is not what happened. Instead, AMZN opened up slightly and then tucked into its 20-day moving average as volume dried up.

This was in fact constructive action and helped to set up a move to a higher high since the stock found support at its 50-day moving average on Monday. This was another undercut & rally move that I discussed in my blog post of last weekend, titled “Dropping the Hammer.”

In fact, if you go back and reread that blog post, you will find that most of the scenarios I outlined for the stocks discussed in that post played out almost exactly as I described. AMZN was one of them as it undercut its mid-May low and the 50-day line on Monday. It then held the line by the close and turned higher.

 

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As I review the Gilmo Short 50 Index (published in Wednesday’s report, so please refer to it there), there are rallies everywhere. Most of these are typical undercut & rally moves. And as I’ve already discussed, these are natural reaction rallies that occur within downtrends. When a short-sale target stock undercuts a low after a downside break, that is usually where we look to take profits, at least on a short-term basis. We know to do this because we know that undercut & rally moves are typical things that we will see as a stock remains in an overall, longer-term downtrend.

They do not necessarily lead to significant upside, but sometimes they can. If you are trying to play any of these undercut & rally moves we’ve seen over this past week, then you have to decide whether you are playing them for a short-term trade or whether you are looking for something more to develop.

Logic would tell us that these undercut & rally moves will likely roll over again IF the general market also rolls over. Likewise, if the general market is able to sustain its current rally, then some of them may have a chance at going higher. AMZN, for example, is one stock showing this tendency. Among other names on my short-sale watch list, I note the action in Apple (AAPL), which has rallied up to its 20-day and 50-day moving averages. It stalled slightly at the 50-day line on Friday as volume declined. Basically, this is a wedging rally that may turn out to be a shortable one.

AAPL is unique in that it did not undercut its prior low at 89.47. It did, however, undercut the early May low at 91.85. It’s really more just a function of the general market action, and it has now carried to the 50-day line where it is in a lower-risk short-sale position. This is a simple trade from here. Assuming the stock opens around where it closed on Friday, one would short the stock and use the Friday high at 96.47 as a guide for a tight upside stop.

 

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Priceline Group (PCLN) is rallying back up into its 200-day moving average and so far has been unable to clear the line with any authority. Like just about every other stock in this market, PCLN undercut a prior low and made an immediate about face to the upside. The sharp, v-shaped rally ran into resistance at the 200-day line on both Thursday and Friday. Note that Thursday’s move was a reversal at the line with the stock closing in the lower part of its daily trading range on above-average volume.

Friday’s action took the stock back up into the 200-day line but it stalled slightly to close just below the line on light volume. So far the 1275-76 price level has served as resistance over the past two days. It would therefore serve as a reasonable guide for an upside stop if one chose to short the stock here.

I would also keep an eye on PCLN’s cousins, TripAdvisor (TRIP) and Expedia (EXPE), both not shown, which are also mired in ugly patterns. TRIP is running into resistance at its 50-day moving average while EXPE is approaching its own 50-day line. In each case the 50-day line could serve as a reference point for initiating a short in either stock.

 

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Notes on other names on the Gilmo Short 50 Index list that I think are notable:

Acuity Brands (AYI) announced earnings on Wednesday after the close. It beat slightly, sending the stock rallying up to its 50-day moving average. The stock stalled at its 50-day moving average on both Wednesday and Friday, which could bring it back into play on the short side here using the 253.78 intraday high of Friday as a guide for a tight upside stop.

Alphabet (GOOGL) has rallied right up to its 20-day moving average and just above the prior lows in its pattern from late April and late June just above the $700 price level. The 20-day line at 711.53 would serve as a guide for a very tight upside stop if on chose to short the stock here.

Checkpoint (CHKP) has rallied up near its 20-day moving average at 81.01. This is also near a confluence of lows along the underside of the prior bear flag/base extending back to mid-April in the 82 price area. Alternatively, the stock could continue rallying to its 50-day moving average around the 84 price level, but that would likely only occur if the general market is able to move higher as well.

Disney (DIS) has rallied nine cents beyond its 20-day moving average, which in my view brings it into a shortable position. It is also sitting around the lows of the bear flag it formed between early May and late June in the 86-88 price area.

Microsoft (MSFT) has rallied hard with the general market on clearly wedging volume. It reversed at its 200-day moving average on Friday to close down on the day. This is a short here using the 200-day line at 51.90 as a guide for a tight upside stop.

The long side of this market is an interesting proposition, to say the least. The best upside moves have occurred following undercut & rally moves in stocks that were mostly short-sale target stocks leading into Monday of this week. As my previous discussion illustrates, some of them still are short-sale targets. When I blogged on Monday about names I liked on the long side in the event of a market turn on Monday, I was mostly looking at names that looked to be setting up or pulling back within constructive consolidations.

Ambarella (AMBA) has bounced a couple of points off its Monday lows but it still holding in a position between its 10-day and 20-day moving averages. Volume has been drying up but it’s not necessarily clear to me that this wants to launch higher right away. If you look at the daily chart since early June very carefully, you might discern a very small, “fractal” head and shoulders formation. I don’t know if this is a problem for the stock, but my guess is that this needs more time to consolidate the huge gains it had in early June.

Optimally, I’d like to see the stock pull into the 20-day moving average again with volume drying up nicely as a lower-risk entry opportunity.

 

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Mobileye (MBLYis the hands down winner among the names I discussed on Monday, jacking some 20% above its 200-day moving average over the past four trading days. The move was helped along by a big buyable gap-up move on Thursday as a result of news that Intel (INTC) and Bayerische Motoren Werke Aktiengesellschaft (BMW.DE) (I can see why they call it “BMW” instead! ;-p) are collaborating with the company to develop a fully self-driving car by 2021.

That gap-up move could have been treated as a buyable gap-up using the 45.29 low as a selling guide. However, from my perspective, had one bought the stock nearer to the 200-day line around 39-40 on Tuesday, that could have been sold into with the idea of watching how the stock tests the 45.29 BGU low. On Thursday after the close MBLY traded down on the same news that hit TSLA that day, and traded down below the 45.29 intraday low of Thursday’s regular session. The stock got down as low as 43.55 in after-hours trade on Thursday.

By Friday’s open it was back at around 45.50, putting it in a very low-risk entry point. It immediately began trading back to the upside and ended the day at 47.11. This remains buyable on pullbacks closer to the 45.29 BGU low, as I see it. If the general market keeps going this current buyable gap-up could be the start of something more significant for the stock, so we want to be open to that. In this manner, the set-up here is fairly straightforward, although buying near the 200-day line earlier in the week was certainly preferable!

 

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Nvidia (NVDA) is another play on the whole self-driving car theme, and it was interesting to note that it did not respond much to the news of Tesla self-driving car fatality. After all, TSLA uses NVDA’s chips in its cars. NVDA traded down to around 46.58 just before the open on Friday, about half a point below where it closed the previous day. It then pushed back above 47 and settled in by the bell to close at 46.66.

This resulted in a small move back into its 10-day and 20-day moving averages with volume declining. I think any low-volume pullback to the 20-day line at 46.26 can be viewed as a potential entry opportunity from here.

 

GR070316-NVDA

 

Twitter (TWTR) has traded up four days in a row after running into its 20-day moving average on Monday. By Friday TWTR closed at its highest high since bottoming out in late May. This is obviously extended from any lower-risk entry point, but pullbacks to the 10-day moving average at 16.55 might be seen as potential entry opportunities.

 

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Weibo (WB) moved higher after showing a bit of “voodoo” action along its 10-day and 20-day moving averages on Wednesday, which I noted in my mid-week report of that day. It is now back at the highs of its current four-week price range. WB looks quite favorable for the simple reason that it held up in its base during the market’s rough sell-off two Fridays ago and on this past Monday. The lows of the base run along the 26 price level while the highs run along the 29 price level.

Therefore, given that the stock remains within its base, we would prefer to buy it on pullbacks within the base. For this, I would look for a pullback to the 10-day line at 27.50 or the 20-day line at 27.16 to offer the best opportunity for a lower-risk entry.

 

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One constructive feature of WB’s current position as seen on its weekly chart is the fact that it only recently emerged from a very long, two-year base. The 10-week moving average on the weekly chart is roughly where the top of the base is.

Given that this should serve as a major area of support, it can be used as a maximum downside selling guide for anyone who might still be holding a position from late May when I first identified the buyable voodoo action along the 10-day and 20-day moving averages. Despite all the crazy market action since then, the stock has continued to hold that late May breakout.

 

GR070316-WB Weekly

 

WB makes me think of Baidu (BIDU) back when it first emerged from a two-year base after its much-hyped IPO in the summer of 2005. It was August 5, 2005, to be exact, and I remember the date quite well since I was vacationing in Maui, Hawaii at the time.

That morning the phone in my suite at the Grand Wailea rudely rang at 2:30 in the morning Hawaii time. I answer the phone, still half asleep, and it was Bill O’Neil on the line. it was 5:30 a.m. in California, so not an unusual time for Bill to be up. However, I distinctly remember being quite irritated about being rousted out of my slumber at such an ungodly hour. After all, when I’m in Hawaii I don’t get up until 3:15 a.m., just in time for the market open at 3:30 a.m.! ;-p

Bill immediately asked me, “What do you know about this Baidu IPO thing?” My first response was a rankled, “Have you heard of the internet? Try searching there.” But Bill pressed me, so I gave him the scoop, at least what I knew about it. The stock, which had been priced at $27 on the IPO, opened up at 66 and then proceeded to rocket to a peak of 153.98. But from there it was straight down, and BIDU eventually bottomed out at 44.44 on an unadjusted split basis.

BIDU has actually only split its stock once since its 2005 IPO. That was a 10-for-1 split in 2010. The weekly chart below shows a split-adjusted price although the actual nominal prices were 10 times higher. In any case, the big IPO hype in BIDU faded rather quickly and the stock set about building a long two-year base. It finally emerged from that base in June of 2007 and never looked back.

So with WB finally emerging from a two-year base following its 2014 IPO, we can only speculate as to whether it has the same or similar potential. My guess is that it may have some reasonable, further upside potential, but even the similarities to BIDU in 2007 don’t guarantee anything. They are interesting to note, however.

 

GR070316-BIDU Weekly

 

The long side of this market, outside of a large number of undercut & rally trading opportunities, doesn’t have a lot of what I would consider “juicy” set-ups currently. In most cases we have to apply our usual unorthodox but proven methods in order to find suitable long candidates to play in the event that this rally turns out to have legs.

FireEye (FEYE) is back on my radar after flashing a big-volume pocket pivot on Thursday. The stock is currently trying to round out and up from its recent lows of early May. The big gray oversold “Bingo” bar at that time highlights what looks like a big selling washout at that time.

Since then the stock has slowly been working its way up and off of those lows, spending most of June in a relatively tight consolidation. You can see that it also worked as an undercut & rally situation after undercutting its mid-June low on Monday of this past week. That led to a rally back to the highs of the June price range.

That rally was capped off with a nice pocket pivot move on Thursday coming up through the 10-day, 20-day, and 50-day moving averages. On Friday the stock settled back into the 10-day line as volume declined. This puts the stock in a lower-risk buy position at the 10-day line on the basis of Thursday’s pocket pivot show of strength. The 50-day line at 15.73 serves as a reasonable selling guide.

 

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You will most definitely not see a lot in the way of base breakouts given that those who claim to know have now declared the market to be back in a “confirmed rally.” Perhaps one of the few that I saw came in Activision Blizzard (ATVI), a name we’ve been following for some time since its buyable gap-up move of early May.

ATVI got slammed with everything else on Monday, undercutting a prior base low as well as the low that occurred two days after its May gap-up day. That undercut set up a rally that ultimately turned into a big “shakeout and breakout” type of move with the stock breaking out to new highs. Volume was very strong on Thursday as the stock broke out to all-time highs. I find the action somewhat surprising given that ATVI filed an “automatic shelf registration statement” with the SEC on June 3rd for 171.9 million shares that will be offered “from time to time.”

But it is what it is, although not something I would have expected. That just goes to show what happens when you “expect” anything in the stock market. In any case, the stock tried to move higher on Friday but reversed to close slightly down on the day. I would call this a trendline breakout, as I’ve drawn it on the chart. The price at the breakout point is right around the 39 price level, so a low-volume pullback to that point might present a lower-risk entry for those who like to buy standard-issue base breakouts.

 

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With ATVI acting well, my attention naturally turns to its big cousin-stock, Electronic Arts (EA). It certainly comes as no surprise to see that the stock is in fact another one of these undercut & rally situations that have developed over this past week. In addition, on the undercut EA also found support right at its 50-day moving average. Believe it or not, I actually closed my eyes and bought shares right at the line on Tuesday, but sold into the ensuing bounce. I did not think it had a snowball’s chance in hell of getting back above the 20-day line.

Not only does the market like to spray water all over what you “expect,” it can also spray water all over what you “think.” The market lives to fool most investors most of the time, and with that in mind EA simply pushed above its 50-day moving average on Thursday on about average volume. That did not, however, qualify as a pocket pivot, but the pullback to the 50-day line was pretty standard O’Neil-type stuff. One, of course, had to deal with the carnage in the general market, which would have made buying anything on Monday psychologically difficult, at best.

But in any case where you have a nearby point of reference, and a major one like the 50-day moving average, for an area of potential support, you can keep risk to a minimum. The 50-day line serves as a tight selling guide, and you can take it from there. But buying on a day when the market is getting ripped apart isn’t so easy. However, in this market, we know that the Ugly Duckling prefers to come a-calling when things look their bleakest. This is one reason why I’ve advocated paying more attention to the precise action of individual stocks.

Perhaps if one were anticipating a possible undercut and rally by the general market indexes one might have conjured up more psychological strength to go long EA at the 50-day line. But that was the thing to do, and the stock is pushing against the highs of its current four-week base. From here we should keep an eye out for constructive pullbacks into the 10-day and 20-day moving averages which are both sitting firmly within the 74.40-74.50 price area.

 

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This was an interesting week, to say the least. The whole undercut and rally move I was discussing in my report of exactly one week ago as a possibility once the indexes undercut their May lows played out almost according to script. But so far that’s what it is from the perspective of most individual stocks. And some of these undercut & rally moves in weaker names could simply fail and reverse back to the downside. After all, it was from my research of the short side of the market that I derived the whole undercut & rally thing in the first place.

But we also have to understand that with the S&P 500 and NASDAQ Composite back above their 50-day lines, the market rally over the past four days has shown some legs. In addition, the 50-day line now serves as a reasonable point of reference in judging the constructiveness of any pullback we might see in the coming days.

If the market were to reverse and break down, we can clearly see where short-sale targets might come into play as they rally into areas of potential overhead resistance. On the other hand, if the rally continues, we are dealing with a smaller handful of actionable situations. That can change, however, and I would expect it to in the event of a continued market rally. For now, however, I would look at pullbacks in selected long ideas discussed in this report and recent blog posts occurring in synchrony with a possible pullback in the indexes.

Low-volume tests of moving averages and other areas of support by individual stocks by coincide with the same types of tests of the 50-day line by the S&P 500 and NASDAQ Composite Indexes. This could provide the context for buyable pullbacks in selected long ideas. In fact, some of them are already extended from their Monday lows and could use some small pullbacks as a way of testing their true viability on the long side.

The bottom line is that we are currently in a somewhat bifurcated environment here where short-sale targets could become actionable in the face of the market rally. But, a case can also be made for the long side remaining actionable as their associated set-ups emerge in real-time. In this sense then we might see a bifurcated market play out in bifurcated fashion, with profitable trades emerging on both the long and short side. We did see some reversals in short-sale targets like ADBE and WDAY on Friday that were quite actionable, if not only for a quick scalp.

So we can ask ourselves whether the Brexit just create a big shakeout? Will this shakeout lead to substantial upside as the market begins to discount the potential for constructive change not only in the European Union but also in the upcoming U.S. presidential elections? Or is the Brexit more symptomatic of a coming cleansing process that could lead to more market downside? The easy way to answer any of these question is to continue to just focus on the precise price/volume action at hand in individual stocks and the general market.

By doing just that, we were able to have a reasonable sense of what happened this past week post-Brexit. Objectively, we saw the market and individual stocks pull off a big undercut & rally move. And we could see it coming. So we can conclude that if we continue to focus on the precise set-ups as they unfold in real-time, we stand a good chance of being on the right side of this market at the right time. Take it from there.

 

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 positions in AAPL FEYE, and SPLK, though positions are subject to change at any time and without notice.

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