The Gilmo Report

July 9, 2014

July 9, 2014

Exactly one week ago I wrote that, “As we move further into second-quarter earnings season I prefer to dial down my risk profile, nailing down some profits…and letting earnings season run its course.” With the NASDAQ Composite Index, shown below on a daily chart, running up 5-6% beyond its 50-day moving average and most leading stocks having had decent, profitable upside moves since the market turn in late May, we were able to get some sense that things were getting a bit “long in the tooth.” I would have to say, however, that what I find quite surprising is how quickly and suddenly things changed on Monday followed by mind-blowing downside velocity as a number of leading names were decimated on Tuesday. Today the indexes rallied, as we can see on the daily chart of the NASDAQ Composite Index, below, in what appears to be a typical reaction rally after stocks got slammed yesterday on heavy volume. At the very least I consider Tuesday’s action to be a serious warning shot across the market’s bow, particularly given the action of many leading stocks.




Hopefully, most members had lightened up on the basis of my discussion a week ago, as over the past two days the market has demonstrated the truth behind the axiom that there are only two types of investors in the stock market – the quick, and the dead. In my mind, the market’s action, which has resulted in some extreme selling in a broad swath of leading stocks, brings up the question of whether “oversold” can become a lot more oversold. Is the manner in which stocks were hurled out the window on Tuesday indicative of a short-term selling washout or something far more ominous? It certainly has the feel of forced selling, particularly in high-P/E high-flyers.

Ultimately, it boils down to the action of our stocks, and in my view final trailing stops should have been hit either Monday or Tuesday before things got out of hand. In the meantime, I cannot say that lightening up and nailing down some profits last week, as I discussed in my report of last Wednesday before the carnage of the past two days, was necessarily prophetic of the deleterious action so far this week. It is in reality just part of the typical pro-active approach I take in a QE market environment when it comes to recognizing and taking profits in stocks that I started buying many weeks ago when the rally was still fresh.

The Fed released its latest meeting minutes today, and it all boiled down to the same message, which is that the Fed, while able to engage in the symbolic action of “tapering,” is still maintaining an easy money policy, even with unemployment now at 6.1%, even further below its previous threshold of 6.5%. As I’ve written many times before, the Fed is stuck, and the U.S. is now Japan of the past 30 years as zero interest rate policy becomes the “new normal.” In response, gold, as represented by the SPDR Gold Shares (GLD), shown below on a daily chart, ticked back up to its recent highs. The GLD also flashed another pocket pivot buy point along its 10-day moving average, which of course is actionable using a tight stop at the 20-day exponential moving average at 126. Keep in mind, however, that if stocks get into more trouble it is likely that the GLD, along with gold mining stocks which have been acting well, could easily get sold off as well.




GT Advanced Technology (GTAT) was our first clue of impending market trouble when it gapped down on Monday morning after it was downgraded to “hold” by two major brokerage firms. As I tweeted on Monday, when a leading stock gaps down off of its peak on huge volume that is always a sell signal. In such cases, I sell such a move immediately and without hesitation. As well, the stock was down just about 8-9% right at the opening on Monday, which should have triggered the maximum downside sell-stop one should tolerate on any and all long positions. In this case, taking the quick loss rather than lingering around in the hope that somehow the stock will magically rally back to the upside prevented one from realizing a full 15.6% decline by the close on Monday.

Coming in on Monday morning and seeing GTAT gapping down about 8% struck me as something of the proverbial “canary in a coal mine,” and on this basis I unloaded whatever core long positions in other stocks that I was hanging onto at the time. I had already bagged most of my profits last week, but felt that loading up on dry powder was probably the smartest approach given my aggressive style. That turned out to be the right strategy after Tuesday’s debacle.




One of the major participants in the Tuesday debacle was one of my favorite stocks, Palo Alto Networks (PANW), shown below on a daily chart. As I wrote over the weekend, PANW needed to hold at the 10-day moving average, and when it failed to do so on Monday I considered it a sell, as I tweeted to members earlier that day. On Tuesday PANW was slammed down to its 65-day exponential moving average, the black moving average on the chart, on more heavy selling volume. This came on the heels of the gap-up failure of early last week. While the stock is still holding above its 50-day moving average, it is now flirting with the lows of its original buyable gap-up move back in late May. PANW moved up over 15% from that point over the next month before giving back all of that upside work in just a handful of days.

At this point we have to wait and see if and whether the stock can set up again. If one is still holding a position in the stock based on the late May BGU, then of course your stop is the 72.86 intraday low of that day. This also coincides with the 50-day moving average, more or less, which is currently running through the 72.35 price level.




I wrote over the weekend that Yelp (YELP) also needed to hold its 10-day moving average to remain viable, and on Monday I tweeted that YELP, along with names like Workday (WDAY), Tableau Software (DATA), and Splunk (SPLK) were looking like right-shoulder rallies within possible head and shoulders formations that were beginning to roll over. This turned out to be far more prophetic than I thought at the time, as YELP, gave up its 10-day moving average and plummeted over 10% in two days’ time, as we can see on the daily chart, below.




Even big-stock, social-networking leader Facebook (FB) took a hit as it was body-slammed down to its 50-day moving average, as we can see on the daily chart, below. With FB now breaking below the breakout point of its prior cup-with-handle base at around 65.80, it begins to look like a failed-base situation. A violation of the 50-day moving average would of course confirm this, but this may not happen until FB announces earnings towards the end of the month. Of course, the only fly in the ointment here is the fact that FB announces earnings in about two weeks’ time. I would prefer to see how this plays out after earnings before making a decision to short it beyond a quick “tactical” trade.




Twitter (TWTR) is another favored stock of mine that failed to holds its 10-day moving average on Monday, which in my view made the stock a sell if one were still long from further below in the pattern. I haven’t owned TWTR recently after it hit my profit objectives, and as I have discussed in recent reports the stock should continue to act well by holding above the 10-day moving average. When that doesn’t happen, and the stock drops back below the line, then investors need to take action. As we can see on the daily chart, below, TWTR got slammed on Tuesday on heavy selling volume, proving that when a stock fails to hold your trailing stop it should be sold, no questions asked. In general, however, I avoid this problem by selling into upside moves and taking 10-20% profit in stocks when I have them. TWTR had a nice 15-20% move from its original buy point before starting to roll over last week. In this market you absolutely have to take these kinds of profits when you have them.




GW Pharmaceuticals (GWPH) is pulling back to the top of its prior base breakout, as we can see on its weekly chart, below. GWPH’s chart also shows why I do not pay attention to the so-called Eight Week Rule where if one has a stock that rallies more than 20% in the first 2-3 weeks after breaking out you must absolutely hold it for eight weeks. I wrote last Wednesday that I sold into the stock’s move above the $110 price level on the basis that it had achieved a 20%-plus profit. In fact, the stock moved over 30% beyond its cup-with-handle breakout point at around 80.

As I discussed over the weekend, I wanted to see the stock hold the $100 price level in order to keep the Livermore Century Mark Rule in force. That didn’t happen, and if you sat there like Humpty Dumpty on the basis of the Eight Week Rule you now get to see most of your profits in the stock disappear. GWPH may still have great upside potential in a continued market rally. But with the market under pressure here, one can only watch now to see if the stock finds support at or near its 10-week moving average, currently around the 80.62 price level and the top of the prior base. One caveat here, however, is the fact that the stock has had a pretty massive price run already from around $9 a share back in July of 2013 to over $110 just last week. Given the risk of failure, buying into a pullback to the 10-week line would provide a low-risk entry point, and so is something to keep firmly in the back of your mind if and as the market continues to pull back.




Greenbrier Companies (GBX), something of a “fresher” long idea that gapped up after announcing strong earnings last week, as I discussed in my report of last Wednesday, continues to hold up far better than most leading stocks. The stock probably benefits from the fact that it is somewhat more in the clear now that its earnings announcement is out of the way. It is, however, extended from the buyable gap-up of five days ago on the chart and hence not buyable here. I bought a position in the stock on the BGU day but sold into the subsequent move on Monday, based on the reasons I mentioned in my discussion of GTAT, further above. It might turn out that a pullback to a rising 10-day moving average or a retest of the 62.35 BGU intraday low during a market pullback will provide a better entry point from here.




The action of Netflix (NFLX) over the past week brings up the fair question as to whether this is a possible “Punchbowl of Death” or “POD” topping formation that was discussed in Chapter 6 of “Trade like an O’Neil Disciple: How We Made 18,000% in the Stock Market.” As we can see on the daily chart, below, NFLX broke out last Tuesday on what looked like a big buyable gap-up after Goldman Sachs came out and upgraded the stock to buy. This BGU and cup-with-handle breakout failed in short order as the stock broke back below the intraday low of last Tuesday’s BGU as well as the peak of the short handle in the pattern. NFLX announces earnings in less than two weeks’ time, so it may turn out that this resolves itself after earnings. I’m not looking to short NFLX right here, but once the dust clears after earnings it may turn out to be something to keep an eye out for as a possible short-sale target in the making.




Allow me to circle back to something I discussed earlier in this report, which was my tweet to members on Monday morning regarding the potential for failed right-shoulder rallies in WDAY, DATA, YELP, and SPLK, all four of which I show below on weekly charts. What were previously rallies from bottom-fishing pocket pivots started to morph back into head and shoulders formations on Monday as the stocks began to wobble. Early in the day I began to sense via my usual tape-watching activities that they were on the verge of rolling over to the downside and I tweeted that to members at that time. Each of these charts below shows a stock that is clearly appearing to roll over off the peak of a right shoulder in a big H&S formation.

In my view this is significant as it may be portending a deeper market correction should these patterns continue to play out to the downside. The first three, WDAY, DATA, and YELP, have all broken down below their 40-week/200-day moving averages. In each of these cases the stock would be considered shortable on a rally up into the 200-day line using it as a quick upside stop. DATA is also just below its 50-day moving average, and given that it is so far below its 200-day line relative to WDAY and YELP, one could short that here using the 50-day line as a hyper-stop on the upside. The fourth one, SPLK, is certainly the weakest given that it has hardly retraced any of its prior downside break from late February into late May. We’ll see how these play out as we progress through earnings season, but for now all four are on my short-sale watch list.






GR070914-YELP Weelkly




Below are some updated notes from my trading diary regarding stocks that have been discussed in recent reports. If there is a stock that is not mentioned, please refer to prior reports as that likely means my view has not changed:

BIIB – stock came in hard yesterday after moving higher following a pocket pivot buy point last week that was also a low-volume, cup-with-handle breakout. Unless I have a big profit cushion in this one, I’m not willing to hold it after yesterday’s action going into earnings in a couple of weeks.

CLR – holding tight along the 10-day line. Watch for a continuation pocket pivot developing here.

CRM – stock failed to hold the 10-day moving average on Monday where it was a sell and then on Tuesday was summarily slammed down below its 200-day moving average on heavy volume.

FANG – still holding in a tight flag formation but no actionable buy point in the form of a pocket pivot has shown up yet.

GMCR – no follow-through on its recent breakout. With the stock going nowhere fast as earnings approach in early August, I would not look to hold this into earnings unless it generates more of a profit cushion between now and then. Keep in mind that this could also turn into a late-stage failed-base (LSFB) situation should the recent breakout fail.

HZNP – stock isn’t going anywhere as it remains trapped within its base. I see no reason to stay in this for now.

ILMN – Stock failed on last week’s cup-with-handle breakout, proving that getting into this market on bottom-fishing and roundabout pocket pivots is far superior to buying into breakouts with the rest of the herd.

JD – no support at the 10-day moving average. Stock is currently out of play with no discernible, potential buy points in the pattern currently.

KATE – has failed on the recent cup-with-handle breakout but did find support at its 50-day moving average yesterday. Nevertheless, this stock is going nowhere fast despite a number of actionable buy signals within the base.

MTDR – failed on last week’s breakout attempt. Stock has dropped all the way back to its 50-day moving average. This one is off my buy watch list until further notice.

PCRX – stock got slammed right back to the top of its prior base after moving up over 15% from the breakout point. Another example of why taking profits is critical in this market.

QIHU – broke down through its 10-day moving average on Tuesday. This has been removed from my buy watch list on that basis.

SPWR – another one that failed to holds its 10-day moving average. I had, however, previously considered this one as a sell above the 40 price level on the basis of the stock having achieved my upside price objective.

TSLA – failed to hold the 20-day moving average and dropped back down below the 220 price level. Stock is bouncing off of the 65-day exponential moving average but I see no reason to be buying the stock here.

VIPS – still going nowhere after a cup-with-handle breakout in early June. Perhaps the stock would be buyable on a pullback to the top of the prior base and the 50-day moving average in the 170 price area, but given its inability to generate further upside momentum I’m far from enthusiastic about such a prospect.

The action of leading stocks again shows why one should be looking to take 10-20% profits in long positions when they have them. This is the approach that I have been using since early last year and which I have discussed repeatedly in my reports over that time. As well, we see the futility of buying into breakouts which in turn confirms the utility of bottom-fishing and roundabout pocket pivots as early buy points that get you in long before the crowd sees the obvious breakout. In my experience, the best gains in most leading stocks occur from these early buy points, and once they begin to become obvious as they break out of so-called proper bases they lose their momentum.

Currently I am flush with dry powder as we see how this warning shot across the market’s bow plays out. I would emphasize that what concerns me here is the action of the leaders which were all slammed yesterday in unison. The indexes do what the indexes do, but in my view leading stocks tell you the real story before the indexes. While the pullback over the last two days appears somewhat contained on the index charts, that is most definitely not the case when it comes to individual leading stocks. As far as I’m concerned, that is a warning that should be heeded. 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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