The Gilmo Report

June 12, 2016

June 10, 2016

As I wrote in my Wednesday mid-week report, we stay the course until evidence to the contrary presents itself. On Thursday, I began to detect a faint odor in this market, and as I blogged later in the day, something did not feel quite right to me.

On top of that, I also noted that, “In most cases stocks are now out of buying range and we are left looking for the next pullbacks to provide lower-risk entry points.” Since we know that this is a market where stocks have contained moves that can be played on a swing-trading basis, we must also recognize that these moves don’t last forever.

As I blogged early on Thursday, one of the things I watch is the upside extension in the long ideas I’ve been making money with. Eventually, I am interested in selling into the upside extensions and locking in profits with the idea of perhaps re-entering on the next bout of constructive weakness.

However, we must also recognize that stocks don’t run straight up and then pull right back into an area of potential support before launching right back to the upside forever. This might occur once, maybe twice, during a sharp uptrend, but after a while the entire concept gets a bit long in the tooth and quite obvious.

At some point stocks that have been running up at a torrid pace will need to settle down and take some time to consolidate their gains. Or they might just top and roll over for good, as we saw the airline names do in mid-April after their sharp rallies off of the mid-February lows.

And so, when everything is looking quite rosy, and the indexes are right back at their highs for the year and near the top of the big price range they have formed since the middle of last year, the market flies into some turbulence. Whether the turbulence turns into something worse remains to be seen. The key point in this market was that favored long names got extended and were showing nice profits, and it was time to put those in the bank in most cases. Now we get to see how the market handles a pullback.

We might get some sense of how much further we could go before we see a bounce. The S&P 500 Index on Friday pitched back below its prior April highs after poking its head above those highs earlier in the week. The index is still above last week’s lows, so it’s not as if it has come completely apart, at least not yet. But a pullback to the 50-day moving average at 2076.37 would undercut the prior week’s lows and potentially set up some sort of bounce attempt.

 

GR061216-$SPX

 

The NASDAQ Composite Index was one of the weakest-performing indexes on Friday among the Big Three that also includes the Dow Jones Industrials and the S&P 500 Indexes. It was down -1.29% on Friday as compared to the S&P’s -0.92%. However, the broader New York Composite Index and the relatively broad small-cap Russell 2000 Index, both not shown here on charts, were the weakest, diving -1.36% and -1.46%, respectively. Volume was higher on both exchanges, which in my view points towards the likelihood of further downside next week.

The NASDAQ’s gap-down break off the peak on Friday is also a bearish development. Volume came in much higher in comparison to Thursday’s light volume. Friday’s action puts the NASDAQ in position for a possible test of its own 50-day moving average at 4858.26.

 

GR061216-$COMPQ

 

The market certainly had a lot of monsters lurking in its closet by the end of the week to scare it away from its highs. These included a looming Fed policy announcement next Wednesday, more QE from a desperate European Central Bank, warnings from ECB head Mario Draghi that the European economy risks suffering from permanent damage, falling oil prices, sell-offs in Asia over fears of a looming debt crisis, and a poll showing that 55% of United Kingdom citizens favor a “Brexit.”

Of course, by now everyone knows that the so-called Brexit refers to a British exit from the European Union. Many fear that such a move by the Brits would represent the beginning of the end for the EU. Throw in George Soros, Carl Icahn, and even Bill Gross warning of everything from a global debt crisis to negative interest rate-induced economic “supernovas” and you’ve got a nice brew of fear on tap.

The fear brew thus led to the fear trade as precious metals, the U.S. dollar, and U.S. Treasury bonds all found a bid on Friday amidst all the selling. All three are generally considered to be safe havens, and the fact that precious metals were rallying with the dollar and Treasuries on Friday provided some credibility to this.

Both of the precious metals ETFs, the iShares Silver Trust (SLV) and the SPDR Gold Shares ETF (GLD), pushed higher after gapping above their 50-day moving averages earlier in the weak. In the process, the GLD is well above its prior trendline breakout and pushing up towards its prior May high.

A couple of weeks ago I noted that there was absolutely no technical basis for buying gold as the GLD sat at the 115 price level. That was a true statement, but as I also noted, at that point buying into the GLD as an Ugly Duckling situation would have to be done on the basis of one’s conviction that the Fed would remain on hold at its next meeting.

After last week’s poor jobs number and Fed head Janet Yellen’s dovish double-speak on Monday of this past week, that bet became a winning one. Given the underlying conditions of what is going on in the global economy and central banks around the globe, precious metals have become more of an event-driven trade rather than a technically-driven one.

 

GR061216-GLD

 

As I pointed out in my report of June 2nd, the action in precious metals names was perhaps a clue with respect to both the jobs number and the future direction of precious metals prices. As I noted at the time, Silver Wheaton’s (SLW) was posting a voodoo day right at its 50-day moving average, a key level of support. This was occurring as the SLV and GLD were running into trouble. Therefore one might have been able to extrapolate where the precious metals were likely to go based on the technical action we were seeing in the precious metals stocks.

 

GR061216-SLW

 

Agnico Eagle Mines (AEM) was also showing clues with respect to where the precious metals might be headed at the same time as SLW. Here we can see that on June 2nd AEM was showing a low-volume pullback as it held tight along its 10-day and 20-day moving averages. Volume came in at -34% below average, which was just 1% shy of what I would define as voodoo volume levels (a pullback including at least a day of volume being less than 35% below average). However, that’s just a label and the bottom line was that it was holding tight along two key moving averages as volume dried up meaningfully.

The one thing to keep in mind about the precious metals stocks is that they are still stocks. And if the general market starts to sell off even harder, they are not immune to selling off as well. Thus I would have to see how the general market and these stocks are acting should they pull into their 10-day or 20-day moving averages.

 

GR061216-AEM

 

ServiceNow (NOW) failed to hold Wednesday’s breakout attempt from a shallow cup formation. The stock reversed Thursday on volume that was light enough to qualify as a voodoo volume level. Unfortunately, the light volume turned out to be a ruse as the stock continued lower on Friday. Higher, but still below-average, volume on that day sent the stock down through and just below its 10-day moving average.

So while selling volume has remained below average over the past two days, it is showing a cascading pattern. I would watch for a test of the 20-day moving average at 72.59 or the 200-day moving average at 72.03. What is most interesting about NOW’s price/volume action is that it was showing very healthy upside volume levels as it trended higher over the past three weeks. This, however, did not preclude the stock from sliding about 5% off of its peak in two days and failing on a base breakout attempt.

A breach of the 20-day and 200-day moving averages would bring this back into play as a short-sale target. Conversely, if NOW is able to stabilize and hold above those moving averages with volume drying up or with a show of strong supporting volume at the lines it would present a lower-risk entry opportunity. I consider this to be a two-sided affair where either outcome could materialize. Thus it will be a matter of watching closely how this acts this coming week.

 

GR061216-NOW

 

Workday (WDAY) is also failing on a recent range breakout attempt. On Friday the stock dropped back below the trendline breakout of six trading days ago on the chart. Volume picked up from the prior day’s levels but still remained below average. Notice that while volume has remained below average it is showing a cascading pattern as it increases over the past two trading days. At the same time, WDAY has dropped back below its trendline breakout point and is now testing the 20-day moving average.

This could turn out to be an extremely opportunistic, lower-risk entry point. If the stock breaches the 20-day moving average, however, WDAY would then morph into a short-sale target. Like NOW, WDAY has slid about 5% below its recent peak of six trading days ago on light volume. Both stocks exhibit something of a buyers’ boycott as light selling volume is able to push the stocks meaningfully lower.

 

GR061216-WDAY

 

Salesforce.com (CRM) is also testing its 20-day moving average, and stopped short of the line on Friday as selling volume picked up slightly but remained below average. By now you may be sensing a theme here, and that is that we are seeing stocks sell off on light volume as buyers sit on their hands. This pullback to the 20-day line, however, does bring the stock into a lower-risk buy area. On the other hand, as with WDAY, this is a meaningful line in the sand. Should CRM breach the 20-day moving average, it could easily morph into a short-sale target.

While the lack of above-average selling volume might have the appearance of constructive action, the ability of a few sellers to push these stocks lower might also indicate that there are no buyers left. If that turns out to be the case, then we could see selling volume begin to pick up next week as anyone holding these stocks looks to protect profits.

 

GR061216-CRM

 

Below are my current Trading Journal notes on other cloud names I’ve discussed in recent reports emphasizing the next area of potential support if and as they move lower:

Adobe Systems (ADBE) dipped below its 20-day moving average on Friday on increased but below-average volume. It appears to be set to test its 50-day moving average at 96.20.

Citrix Systems (CTXS) dropped below its 10-day moving average on Friday on lighter, below-average volume. The fact that volume was light on Friday in comparison to Thursday might be considered somewhat constructive. However, I would look for this to test the 20-day moving average at 85.15.

Splunk (SPLK) gapped and then dove through its 10-day moving average before pushing down as low as its 20-day moving average. That’s a pretty sharp drop, and it came on above-average volume. Volume also came in at above average on Thursday when the stock reversed off the 60 price level. With SPLK now testing its 20-day moving average on heavy selling volume, it runs the risk of failing altogether if it can’t hold the 20-day moving average.

Zendesk (ZEN) had been on an upside tear until it ran into the 28 price level on Wednesday, and then pulled back to its 10-day moving average. Its action on Friday was somewhat more constructive than what we saw in other cloud names, however.

In my view it would have made some sense to look at taking at least partial profits up near the 26 price level on Wednesday or Thursday. In this market it generally doesn’t pay to get too piggy. There are usually pullbacks that can be looked for as re-entry opportunities.

ZEN showed some supporting action near the 10-day moving average as it pulled back with the general market. I would watch to see how this acts next week and whether it can hold the 10-day line. Otherwise I would consider a pullback to the 20-day line at 25.41 as the most opportunistic potential entry point.

 

GR061216-ZEN

 

As I wrote in my Wednesday mid-week report, many of these cloud names were getting semi-euphoric on the upside and were likely due for a pullback. The problem here is that there is always a possibility that some of these could be topping. That is why my discussions of these stocks, above, takes a two-sided view of their current price/volume action. And the reason for the two-sided view is based on a more macro view of their current chart patterns.

If we look at the weekly charts of NOW, WDAY, and SPLK, for example, we can see that they are all coming up the right sides of some very v-shaped price moves off of their February lows. In the process, they are also running up into areas of potential overhead price congestion at the left sides of the charts.

Thus from the perspective of the weekly charts, these could become failure-prone in short order. And they would most likely do so when they start to look very good on the upside after an extended run. Certainly, with all three of these stocks streaking higher last week and early this week, they have been the picture of strength in this market. Until the past few days.

 

GR061216-NOW Weekly

 

GR061216-WDAY Weekly

 

GR061216-SPLK  Weekly

 

Recall that on Friday I put out a blog post where I compared the weekly chart of CRM to the weekly chart of Alaska Airlines (ALK) back when it topped from a big POD-like formation in early April. As I pointed out, there are some similarities, namely the v-shaped rally off the February lows. This type of v-shaped action is also seen in any of the cloud names, as the weekly charts of NOW, WDAY, and SPLK show above, and is one characteristic that could eventually resolve in negative fashion. So how do we know whether these names are going to fail as ALK-like POD topping formations?

The answer to that is simple. We simply watch for a breach of the 20-day moving average, since we know that this is usually the first clue of a possible late-stage base failure (a POD is form of late-stage base). We may be seeing exactly that here in Mobileye (MBLY), which has slid right through its 10-day and 20-day moving averages. Note what I call the voodoo trap where volume starts to show up as very light as the stock pulls into the 10-day line but begins to cascade as the stock simply moves lower.

Volume has in fact been below average for the past four days, but in the process has steadily increased in cascading fashion as the stock busts the 10-day and 20-day lines. For all practical purposes, MBLY has failed, and now becomes a short on the breach of the 20-day moving average.

 

GR061216-MBLY

 

In the cyber-security wolfpack, CyberArk Software (CYBR) got clipped pretty nicely over the past three days as it slid back nearly 10% and all the way down to its 20-day moving average. Let’s face it, if one had bought this along the 20-day moving average back in mid-May, when I discussed it as buyable at that point, the upside move was well in excess of 15%. Once you get to that point you can start thinking about taking profits based on the fact that this remains a short-term trading environment, and not your standard trend-following bull market.

Now with the stock showing some support at the 20-day moving average as volume comes in at about average or higher over the past two days, one might wonder whether this is a lower-risk buy position.

I would have to say that this is not entirely clear. It all depends on what the general market does next week, and if it sells off further, CYBR could easily bust the 20-day line. Bottom line: If you test a long position in this, or anything sitting right at a moving average that represents a potential area of support, you simply set your stop at that moving average and be ready to run fast if the stock doesn’t hold up.

 

GR061216-CYBR

 

Other cyber-security names were hit over the past two days as well, with Fortinet (FTNT), not shown, pushing below its 10-day and 20-day moving averages before running into and holding the 200-day moving average. In my view the stock should have held along the 10-day moving average with volume remaining light. Since selling volume picked up on Friday I would need to see the stock hold the 200-day line with volume drying up sharply before I would venture to buy the stock on this pullback.

FireEye (FEYE), also not shown, has dropped below its 10-day, 20-day, and 50-day moving averages, which takes it out of contention as a long idea. Facebook (FB) is showing signs of morphing into a possible late-stage failed-base short-sale set-up as it drops through its 20-day moving average on increased selling volume. I have maintained a two-side view of FB as a barometer stock, such that its fate may ultimately be closely intertwined with that of the general market.

Now the stock appears set to test its 50-day moving average at 115.69 or its 10-week moving average at 115.95. A breach of those moving averages would seal the deal as a late-stage failed-base (LSFB) short-sale set-up. Otherwise, we could look for FB to find support at or around the line as it would also represent an undercut of the prior mid- to late-May lows just under 116. This could set up a lower-risk long entry opportunity.

The stock is, however, a highly-fluid situation and will likely remain so as we move into this coming trading week. The breach of the 20-day line is an initial sign of weakness, but selling volume was heavy. If we see selling volume increase on a breach of the 50-day line, then the jig is up for FB.

 

GR061216-FB

 

In my Wednesday mid-week report I noted that LinkedIn (LNKD) had pulled into its 10-day moving average on a voodoo volume signature. This led to a sharp upside move and intraday breakout to higher highs on Thursday. However, the stock reversed off of those highs on above-average volume and closed in the lower part of its daily trading range. On Friday volume declined and came in just below average as the stock dipped just below its 20-day moving average.

This would be the third time (labeled on the chart) that the stock has tested the 20-day line since its post-earnings breakout move of April 29th. The prior two times it held and pushed higher off the line. The Rule of Three, however, might indicate that this current test of the 20-day line may be too obvious now and therefore may not hold up.

Therefore we have to be open to the fact that LNKD may be morphing into a short-sale target right before our eyes here. The stock closed 30 cents below the 20-day line, currently at 131.38, which could put it in a shortable position using the 20-day line as a guide for a very tight stop.

 

GR061216-LNKD

 

Tesla Motors (TSLA) had a nice move earlier in the week as it blasted through all of its major moving averages and above the 240 price level. However, as I wrote in my Wednesday mid-week report, “I would have considered the stock’s move over the past two days as a nice swing-trade type of move.” When I say swing-trade I mean selling into that move and taking a nice two-day profit. After that, as I discussed at the time, I would watch to see how the stock pulls into the 50-day line. A low-volume reset along the line might have produced another lower-risk entry point.

Alas, that was not to happen as the stock failed at the 50-day moving average on Thursday. The move came on light volume, but once the stock breached the 50-day line it actually came back into play on the short side. For that reason, it was most definitely not a buy on Friday as it came back down into the 10-day, 20-day, and 200-day moving average confluence. For this to remain viable as a long play, it would have had to hold the 50-day line.

Instead, TSLA is now below its lowest moving average, the 200-day line, which brings it into play as a short right here using the line, now at 221.45, as a guide for an upside stop. A nice illustration of how swing-trading means exactly that: trading the swings, not some non-existent trend!

 

GR061216-TSLA

 

Ambarella (AMBA), which had a stellar price move following its post-earnings buyable gap-up move of six days ago on the chart, is pulling back somewhat constructively. And I mean constructive in the way it has not come completely apart after a sharp, nearly 20% upside run from this past Monday’s price levels. On Friday, AMBA pulled down a mere 88 cents in the face of a sharp sell-off in the NASDAQ Composite Index and held the 200-day moving average. Volume declined sharply but still came in a bit above average.

If AMBA can hold the 200-day line it may set up for another run. However, if one bought the stock on Monday, I don’t think it is wise to look a 20% gift horse in the mouth, especially in this market. Selling into that run now puts one in the enviable position of considering whether a re-entry along the 200-day line is feasible should the general market stabilize this coming week. Otherwise, if it blows back down through the 200-day moving average, then we might consider that Cinderella has left the ball.

 

GR061216-AMBA

 

Yirendai Ltd. (YRD) had a very nice one-day rally of 12.39% on Wednesday after pulling into its 10-day moving average on Tuesday. As was noted in a Tuesday blog post, that pullback was occurring on a voodoo volume signature. But, in this market a 12.39% gain in a single day represents time value that should not be passed up! Selling at the prior high in the 17 price area on Thursday was the correct approach for smart swing-traders.

When assessing when to take profits in a strong upside move, it is very important to consider where the stock is in relation to where it came from. On Thursday, YRD was again 70% above where it was trading three-and-a-half weeks ago. Anyone expecting the stock to fly even higher from Thursday’s highs was probably awash in a thick, intoxicating elixir of greed.

YRD tested the 15 price level just under the 10-day line on very light volume that was -50% below average on Friday. Would I be willing to step in here and buy shares again on the basis of the voodoo pullback? I suppose that all depends on whether I think Cinderella can show up at the ball twice in the span of one week. Something tells me probably not.

 

GR061216-YRD

 

The solar names that started out the week showing up on my bottom-fishing screens all flamed out on Friday in miserable fashion. First Solar (FSLR), SolarEdge (SEDG), and SolarCity (SCTY) all came completely unglued as they blew through support along their 10-day and 20-day moving averages. I’ll let FSLR do the representing for this solar trio here on its daily chart. Granted, I was still uncommitted and looking for any one of these names to potentially flash a pocket pivot off of their moving averages in a continued market rally.

However, the manner in which these stocks gave up the ghost on Friday indicates that these bottom-fish are more likely to continue lurking on the ocean floor. For now it is best to leave them there.

 

GR061216-FSLR

 

Below are my current trading journal notes regarding other long ideas discussed in recent reports emphasizing their nearest level of potential support where relevant:

Activision (ATVI) dropped back below its 20-day moving average on above-average volume. With a 171.9 million share secondary shelf offering lurking in the background, I see no reason to mess with this right now.

Acuity Brands (AYI) busted its 20-day moving average on Friday and pushed down to its 50-day moving average at 250.47. Volume came in at -62.75% which is quite light. It would have to hold the 50-day line to remain viable as a long play here. However, this does represent a potential lower-risk entry as long as one uses the 50-day line as a guide for a very tight stop.

Alibaba (BABA) failed at its 50-day moving average and has moved lower. I was looking for a possible move back above the 50-day line as a constructive development, but the failure at the lower 20-day moving average on Thursday brought this into play as a short-sale target again.

Amazon.com (AMZN) dropped below its 10-day moving average on Friday as selling volume picked up significantly but remained below average. It looks set to test its 20-day moving average at 710.39.

Broadcom Ltd. (AVGO) closed Friday below the 161.20 intraday low of last week’s buyable gap-up move. The stock did manage to hold at the 10-day moving average, but if one bought the stock on the basis of last week’s BGU the 10-day line would represent the maximum allowable downside porosity. Thus if it busts the 10-day line it is entirely off the table as a long idea.

Electronic Arts (EA) is pulling into its 20-day moving average at 74.50, closing a little less than one point above the line on Friday. Volume picked up slightly but remained below average.

Fabrinet (FN) was quite extended on Wednesday as I noted at that time. It has since dropped below the 10-day line on light volume. The next point of support would be the 20-day moving average at 35.69.

Maxlinear (MXL) pulled down toward its 20-day moving average at 19.91 on Friday as selling volume increased but remained below average. That would represent the lowest-risk entry point using the 20-day line as a guide for a very tight stop.

Silicon Motion (SIMO) fell below its 10-day moving average on Friday as selling volume picked up but remained below average. The 20-day moving average at 43.61 would represent your next area of potential support.

Weibo (WB) was another one of these semi-euphoric long ideas we’ve been playing recently that became quite extended. At that point, you want to look at taking at least partial profits. On Friday WB slid below its 10-day moving average as selling volume came in above average, certainly not the stuff of a constructive pullback. The next level of potential support would be at the 20-day moving average at 25.94.

In most cases, the pullbacks into potential areas of support or deeper support in any of our current long ideas might develop as buyable entry opportunities. On the other hand, if we see selling volume begin to cascade as was the case with MBLY, for example, then some of these stocks may be in for some serious trouble.

So while we want to watch our long ideas as they pull into areas of logical support, we also want to ensure that we set tight stops at those areas of logical support if we decide to step in and buy shares. This is the only recipe for survival as we cannot know precisely how or how long this current bout of general market weakness will play out.

And while the pullbacks might present lower-risk entry opportunities on the long side, we should also be aware of long ideas morphing into short-sale targets. This is the case for the cloud names as well as some of the cyber-security names. Breaches of the 20-day moving average on any of these can bring this into play on the short side right at the point of impact, so this should be watched for.

Basically, what I’m looking for as potential short-sale targets in the event of further general market weakness are the same Ugly Duckling set-ups I’ve been playing on the long side. Any failure on their part brings them back into play as short-sale targets. Again, refer to the example of ALK in my Friday blog post as a prime example of how an Ugly Duckling long idea off the lows eventually morphs back into a short-sale target. These sorts of set-ups would probably be your best short-sale plays IF the general market action gets any uglier.

Most of the trouble in the indexes this past week was easily side-stepped by adhering to the simple advice offered in my Wednesday mid-week report as well as my blog posts on Thursday morning. As I wrote, “Therefore we simply remain focused on the individual stock set-ups, looking to sell or lighten up on extended strength while buying or adding to positions on constructive weakness. So far, however, the weakness has not struck me as constructive. I consider it to be more one part negative and one part puzzling given the low-volume but still sustained selling.”

Maybe this is just setting up a nice buying opportunity, and then maybe it isn’t. I think we’ll get a much clearer picture this coming week. Wednesday’s Fed policy announcement may also serve to provide some clarity for the market. For this reason I think we need to be ready for anything while keeping an open mind as we see how things play out this coming week. 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 held no positions, 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.