The Gilmo Report

July 30, 2014

July 30, 2014

The Fed announcement today came with the usual market volatility as the indexes swung about, but the Fed’s message remains pretty much the same. When distilled down to their basic meaning, the Fed’s words essentially encompass the same paradoxical mantra, “The economy is doing great; interest rates will remain near 0% for the foreseeable future.” While the current state of the economy vis-à-vis alleged “growth” in the economy vs. the interest rate environment can leave many an investor scratching their head, the essential message of the market also remains somewhat paradoxical and mixed, in my view.  And so the world becomes more and more Orwellian by the day. You can’t say we don’t live in fascinating times!

And while the backdrop against which this current market environment plays out may cause your head to spin, the market itself can also make you feel like “Alice in Algoland” as things whip back and forth. On its face the NASDAQ Composite Index has continued to pull back after peaking on Thursday of last week, and the pullback is showing several distribution and stalling/churning days on heavier volume over the last week or so, as we can see on the daily chart of the index, below. Today the index was up, thanks to strong action in some of its larger components, but volume was lighter. The S&P 500 Index, not shown, meanwhile stalled and churned to close just below the mid-point of its daily trading range on lighter volume. With the index action so uneven it remains a matter of focusing on the action of individual stocks.




The iShares Russell 2000 ETF (IWM), which serves as our proxy for the Russell 2000 Index itself and is shown below on a daily chart, continues to lag. The small-cap index is well below its 50-day moving average and stalling on this two-day rally back above the 200-day moving average. This looks fairly tenuous, and while I theorized over the weekend that the larger-cap indexes might be able to drag the Russell out of its funk, with so much distribution and choppiness in the larger indexes over the past several days this isn’t happening so far.




The last time I remember seeing the Russell break down through its 50-day and 200-day moving averages while the other indexes moved to higher highs was in late 2007, right around the October market top that began the brutal bear market of 2007-2009. The general market did have a pullback in mid-October, but the Russell 2000, which I show below on a daily chart from that period, cracked its 50-day and 200-day lines as the other indexes held above their own. The Russell then tried to rally above the moving averages but did not make much progress before rolling over again with the general market.




Looking at a daily chart of the NASDAQ in 2007, we can see how it pulled back in mid-October but remained well above its 50-day moving average. It then recovered and turned right back up to new highs before rolling over and breaking hard to the downside. This marked the peak for the NASDAQ at that point as a two-year bear market ensued from there. Back then, of course, we didn’t have QE, so it’s not clear to me whether we can make an apples-to-apples comparison, but this divergence we are seeing currently between the Russell and the rest of the market demonstrates the mixed action that characterizes the current market environment.




Despite the uneven action in the indexes, it has been possible to make at least a little money so far this week, as the chart of GoPro (GPRO), shows below. I discussed this as being buyable at the 10-day moving average in my report of this past weekend. GPRO pretty much ignored the indexes as it moved higher and through the 46 price area today, as we can see on the daily chart, below. With earnings expected to come out tomorrow after the close, I might prefer to take profits up here before earnings tomorrow, but one could theoretically play “earnings roulette” and hold a partial positon into the earnings announcement given the roughly 10% profit in the position. For my money, I don’t find it necessary to game earnings in this manner, but such a choice depends on one’s personal risk preferences. All we know so far is that the stock has acted well since setting up along the 10-day line last week, but without any bona fide pocket pivots or other actionable buy signals showing up in the process.




RF Micro Devices (RFMD) has also had a nice move over the past three days, pushing up another 6% or so from last Friday’s buyable gap move, as we can see on its daily chart below. It was interesting to note that volume yesterday was even higher than the big volume seen on the buyable gap-up move of last Friday. RFMD ignored the market’s gyrations today as it just kept on trucking higher all day long, closing only two cents from the peak of its daily trading range. Regardless of what the general market is doing, this still looks fine, and I would be looking for some kind of consolidation that gives the 10-day moving average time to catch up to the stock before a secondary buy point might present itself.




Biogen Idec (BIIB) has also continued higher after last week’s orderly pullback and consolidation of the prior buyable gap-up from last Wednesday, as we can see on the daily chart, below. Resistance from the left side of the pattern appears to be in force as the stock stalled out on the move up towards the 350 price level, closing at 344.52. While the BGU is still in force, it’s a matter of seeing how much more progress BIIB can make from here.




Greenbrier Companies (GBX) received a boost from Trinity Industries (TRN), which announced a strong earnings number yesterday after the close, but it seems that the primary beneficiary of the strong number was more GBX than TRN. TRN, not shown here on a chart, jacked up to 47.83 after announcing earnings, but by the close reversed back to the downside to close up 70 cents but near the lows of the daily trading range. GBX, on the other hand, popped to a new high, as we can see on the daily chart, below, but volume wasn’t even enough for a pocket pivot buy signal as the stock came up and off of the 10-day moving average. While I’m okay with buying the stock on light-volume pullbacks to the 10-day line, It would be preferable to see volume at least be enough to qualify as a pocket pivot volume signature on these upside moves. GBX therefore remains something of a waiting game at this juncture,




Twitter (TWTR) was the big story of the day as well as last night after it “blew away” earnings estimates and sent shorts in the stock scrambling, gapping up to the 52 price level last night and then opening up this morning at 48. As we can see on the daily chart, below, TWTR ended the day at 46.30. I’m not sure if I consider this gap-up move a buyable gap-up, as I consider the stock riskier at current price levels. If we compare TWTR to Facebook (FB), not shown, FB sells at 45 times forward estimates while TWTR sells at close to 1,000 times forward estimates. Does this mean that FB should now move 20 times higher in price, or does this put something of a lid on TWTR’s upside from here? I’m not sure, but I would at least like to see how this plays out from here before committing any capital to a long position in TWTR. As well, it may turn out that TWTR is a short more than it is a long here.




Apple (AAPL) came close to the $100 century mark price level but turned back down, as we can see on the daily chart, below. For me this was close enough to my $100 upside target for the trade and a reasonable place to take some gains in the stock. While I think the stock does provide institutions with a relatively safe parking place in this current market environment, it may be that the $100 level presents some resistance for the stock, at least in the short term. Remember that as AAPL comes up to these current price levels it is meeting up with its prior highs from 2012 when the stock moved just above the $700 price level (pre-split) and topped at that point. Thus I might expect the stock to track sideways here for a bit as the 10-day moving average catches up with the stock.




Tesla Motors (TSLA) is showing some life before it announces earnings next week by flashing a couple of pocket pivots off of its 10-day moving average, as we can see on the daily chart, below. TSLA is actually holding up within what might be considered a handle within an overall cup-with-handle, the left side of which is not visible on the chart. The two pocket pivots over the past three days differ in that Monday’s closed in the lower part of the daily trading range while today’s was much more constructive with the stock closing near the peak of the range. TSLA is expected to announce earnings tomorrow after the close and there is still a little over 24 million shares of short interest in the stock as of the last reporting date on July 15th. It’s not clear that one would want to take a position here going into earnings, but it has been a good trade off the 10-day line, and we’ll see if they can push it any further before the closing bell tomorrow. This is one to keep an eye on after earnings as a gap-up move here could represent a BGU breakout from a cup-with-handle base.




Concerning some other names I’ve discussed in my reports as long ideas over the past couple of weeks, below are some excerpts from my trading diary.

Chipotle Mexican Grill (CMG) – continuing to move higher following last week’s buyable gap-up move after earnings. Nothing to do here but insist that the gap-up move continue to hold up as it has.

Facebook (FB) – tracking in a short four-day flag following last week’s buyable gap-up move, but overall going nowhere on a move that might be too obvious for a stock that might also be quite over-owned at this point.

Skyworks Solutions (SWKS) – has been able to hold on the pullback to the 10-day moving average, but it is now eight trading days after the buyable gap-up move of July 18th and the stock is not really going anywhere. Watch for a possible continuation pocket pivot off of the 10-day line as confirmation that the stock still has its mojo.

The “Four Horsemen” of the short side, Workday (WDAY), Splunk (SPLK), Tableau Software (DATA), and Yelp (YELP), were all moving energetically to the upside today, but as I wrote over the weekend, “Watching these stocks trade I get the sense that sellers aren’t present in force at these price levels and no further downside resolution will be forthcoming until these stocks all announce earnings.” Thus it was prudent to just leave them alone this week, letting them rally to see where they might become actionable short-sale targets. I only show the daily chart of WDAY, below, which was moving sharply today on an upgrade to a buy recommendation with a $93 price target this morning by a smaller brokerage. After hours YELP is up a couple of bucks from its 75.60 close after announcing earnings, but I would watch this tomorrow for a possible short-sale opportunity on the gap-up. I have already initiated a small short position in after-hours trade this afternoon as I write and the stock gaps over the 80 price level.




Right now the short side appears to be ripest among recent earnings roulette losers such as Netflix (NFLX), a sort of combination POD and LSFB, which is rallying back up through its 50-day moving average and into the 20-day line, where it can be tested on the short side. As we can see on the daily chart, below, volume was well below average on the rally, and while the stock could continue to rally a percent or two past the 20-day line, it is possible to try and work your way into a short position here, layering shares into the rally using a reasonable stop of 3-5% maximum on the upside. My view, however, is that if this is going to work it shouldn’t get too far past the 20-day line.


GR073014-NFLX (AMZN) also remains on my short-sale watch list as a recent earnings roulette loser that gapped down on a bad number, as we can see on the daily chart, below. AMZN is stuck in a short three-day bear flag about 2% below its 50-day moving average and resistance along the lows of the prior flag it formed throughout June and part of early July. While a rally up into the 50-day line at about 329 would certainly be an optimal short-sale point, the fact is that right here along the low 320’s the stock is trapped under overhead resistance, so it is not clear whether AMZN can rally that far. In any case, with the stock within 2% of the 50-day line, it is well within range of a short-sale entry point right here, using the 50-day line as your guide for an upside stop.




Yet another earnings roulette loser, TripAdvisor (TRIP) is holding in a short four-day bear flag after an earnings-related gap-down as we can see on the daily chart, below. TRIP, like AMZN, is within about 2% of its 50-day moving average and in position for a short-sale entry point using the line, currently at 102.02 as your guide for an upside stop. I would love to see TRIP bump up towards that 102 price level as an optimal entry point, but it is within short-sale range right here along the $100 price level given the nearby stop.




Pandora Media (P) has been wedging back up towards its 50-day moving average, as we can see on the daily chart, below, after getting pounded last Friday on a poor earnings announcement Thursday after the close. That gap-down move has led to a short wedging rally back up towards the 50-day moving average at 26.63. This morning there was news of a rumor that AT&T (T) might make a bid for P, but this seems a bit far-fetched. The market didn’t seem to put much stock in the rumor either as the stock hardly budged on the news. I would prefer to short P on a continued move up closer to the 50-day moving average, but it remains within range here using the 50-day line as a guide for an upside stop.




Illumina (ILMN), which was previously a long situation after the roundabout pocket pivot of May 19th, failed on its recent breakout in a brilliant demonstration of why you want to buy roundabout and bottom-fishing pocket pivots (RAAPs and BFPPs) when the market turns rather follow the herd and mindlessly buy into a standard-issue base breakout when the move becomes obvious. As we can see on the daily chart, below, ILMN tried to break out on earnings last Thursday but reversed on very heavy volume, and the stock is now sitting in a short bear flag underneath its 50-day moving average. ILMN now becomes a late-stage failed-base (LSFB) short-sale set-up. I would now be looking to use any rallies up to the 50-day line at around 169-170, perhaps a little higher up to the 20-day moving average at around 171-172 to short the stock, using those moving averages as my references for an upside stop.




In this report I have discussed a number of possible short-sale set-ups, which I think makes a strong statement about this current market environment. Sure, money can be made long stocks like GPRO and RFMD, but money can also be made shorting stocks as well. As I write this, I notice that YELP, which I had shorted on the after-hours earnings gap-up above the 80 price level, is now floundering back below its 75.60 close. Thus my after-hours short-sale position, discussed earlier in this report, is yielding some fruit already. The fact that a number of short-sale set-ups are showing up in leading stocks that have been earnings-roulette losers might be a clue as to where this market is headed. But as I wrote over the weekend, show me some daylight and I will run for it, long or short.

The bottom line is that this remains a very challenging environment as we prepare to move into the last month of summer. Frankly, it is difficult for me to discern any real trends at this point, and I have to admit that most of my current activity in the market amounts to little more than short-term swing-trading as I remain in a nimble and opportunistic posture. For those of you seeking a trend to play that might allow you to sit more and think less, good luck. In the meantime, be ready for anything.


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 a position in GPRO, RFMD, TSLA, and YELP, though positions are subject to change at any time and without notice.

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