The Gilmo Report

March 23, 2016

March 23, 2016

In a macro sense the market doesn’t seem to be all that different so far in 2016 from what it was like in 2015. Big sell-offs followed by steady, perhaps unbelievable rallies back up towards the highs characterized the action in 2015. In 2016, we started January off with a big sell-off, but now the indexes have all come back to within spitting distance of their December highs.

As that occurs, the rally starts to sputter a bit, and I was getting some feel for this yesterday. Today, however, the sputtering got a bit louder as the selling broadened out. This was evident in the advance/decline figures which showed NYSE decliners outnumbering advancers by about 2.9 to 1 while NASDAQ decliners overwhelmed advancers by about 3.9 to 1.

The sell-off took the NASDAQ Composite Index right down to its 10-day moving average on higher volume for a clear distribution day. The rally over the past two weeks has been marked by low, below-average volume in the index, which makes it vulnerable to failure, in my view. For that reason, I believe investors should keep things on a tight leash. One way to do that is to buy weakness and sell into strength, a formula that has worked well in this market for some time now.

 

$COMPQ DailyGR032316-$COMPQ

The NASDAQ 100 Index of big-stock, big-cap NASDAQ names was able to clear its 200-day moving average yesterday, but reversed back below the line today on higher volume. This could be a key inflection point for the index, which would have broader implications for the general market.

 

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Of course, one day’s action does not kill the rally, although as I discussed in my weekend report and in my blog posts, the market is certainly vulnerable to a pullback as things get somewhat extended. The S&P 500 Index, which has been leading the rally as oil and commodity names have move up off of their February lows, is now approaching its prior December highs. The index has run into resistance near the December highs, coming off today on higher volume.

 

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It may be important to note that the market has rallied in correlation to the rally in crude oil. That rally has likely been a reaction rally in oil’s overall downtrend. With the oil rally starting to lose upside momentum, a move to lower lows in oil could drag the market down with it. Unless you believe that oil has bottomed for good, the rally back up above the 40 price level may have run its course for now.

 

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Despite the market sell-off, the Dow Jones Utilities Index ($UTIL) was higher today. However, precious metals did not correlate as the SPDR Gold Shares ETF (GLD) gapped below its 20-day moving average today on above-average volume. For me, the break below the 20-day line would stop me out of any GLD positions, but my approach has been to buy weakness and sell strength in the yellow metal. It’s not clear to me that I would necessarily want to step into this break, however.

Technically gold is still holding within the boundaries of what might be considered a consolidation extending back to the early part of February, so I might look at a pullback into the 50-day line at 113.99 as a possible lower-risk entry.

 

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While the GLD busted its 20-day line, Silver Wheaton (SLW) was able to hold its own 20-day line today on heavy selling volume. I can’t say I like this action on its face, but this isn’t the first time SLW has been hit with selling volume on the way up. Since I look to buy weakness and sell strength, last week’s pocket pivot was something to sell into while today’s pullback gets me at least looking at a potential entry here. This would obviously depend on how well gold is able to hold up after getting hit today.

Assuming the stock doesn’t bust the 20-day line at the open tomorrow, then an entry here using the 20-day line as a tight selling guide is a feasible strategy. Whether it leads to any upside success, however, remains to be seen. The key is simply looking at a possible entry on weakness while understanding where a very tight stop can be placed in order to keep risk at a minimum.

 

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Two of our best performers on the long side so far this week have been new mentions Square (SQ) and Vantiv (VNTV). In fact, a number of names in the Credit Card/Payment Processor group, including PayPal (PYPL), have moved higher. The winner for the week is SQ, however, which broke out Monday in rather robust fashion. The move sent the stock rocketing over 10% out of the handle of its cup-with-handle base on heavy buying volume. By this morning, the move was extended to a total of 14.6% from Monday’s opening price of 12.05.

Obviously, SQ was extended at that point, and as I have frequently advised, investors should think about taking 10%-plus profits in stocks when they have them. Doing so in SQ would have been quite fortuitous as the stock reversed today on heavier volume than that seen on Monday’s base breakout.

But of course, we also know that in this market standard-issue base breakouts tend to lead to limited upside. Such was the case with SQ as sellers took a “sell the news” view here after the New York Times reported today that SQ and Facebook (FB) were partnering on target advertising.

 

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So, as I blogged earlier today, we now know what caused Monday’s torrid upside rally. That rally was also likely fueled by a short-squeeze as about 30% of the stock’s float had been sold short as of March 1st. From here I would expect support to come in at around the 10-day line, which is what we saw today. However, it’s not clear to me that the stock will necessarily blast to new highs after today’s reversal. It is possible that Cinderella has come and gone and the ball is over for SQ, at least for now.

Vantiv (VNTV) also popped on Monday as it gapped up through its 10-day moving average on increasing but just above average volume. This just barely missed qualifying as a 10-day pocket pivot but the move was fairly impressive anyway.

VNTV continued higher yesterday in the face of the news out of Belgium on lighter volume, taking it back up to the late February high in its current base. Selling volume was low today as the stock backed away from resistance around the 54 price level. From here I would watch for constructive pullbacks into the 10-day moving average at 51.90 as potential lower-risk entries.

 

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Facebook (FB) has continued to edge to higher highs, but volume has remained very light so far this week. FB today notched its highest closing high since early February, but it strikes me as vulnerable to a potential sell-off from here given the subtle wedging action. I would prefer to see the stock hold tight and drift slightly downward to meet up with its 10-day line, currently at 110.98, as a low-risk entry opportunity. Today FB made repeated attempts to clear the 113 price level but eventually stalled to close at 112.54.

If one is looking to buy FB then I would suggest waiting for a pullback to the 10-day line or even the 20-day line at 109.48. Either moving average would represent a relatively contained pullback from current levels. And with the stock wedging slightly, a pullback might also serve to “correct” the wedging action.

 

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Smith & Wesson Holdings (SWHC) was a sell last week based on my original $30 price target for the stock as discussed in my reports over the past few weeks. The stock cleared the 30 price level last Friday before reversing and closing lower on above-average selling volume. The stock has since held just above the 10-day moving average as volume dries up. SWHC has “obeyed” the 10-day line all the way up since popping up through its 50-day moving average back in February, as I first discussed in my report of February 14th.

The stock looks to me like it needs some time to settle into a consolidation following the reasonably strong move it has had since mid-February. In my view, the most opportunistic entry point would be the 20-day moving average at 27.39. Otherwise I think we can give this some time to hang out for a while and see how it consolidates its recent gains.

 

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First Solar (FSLR) appeared to be pulling back normally yesterday as tested both the 10-day and 20-day moving averages on light volume. It ended the day in positive territory just above the 10-day line. Today, however, it was a different story as the stock broke down through both of the short moving averages on volume that was higher but still below average. Regardless, this is starting to look troublesome, particularly with solar names across the board getting hit today.

Had I bought the stock along the 10-day line yesterday on what looked like a constructive pullback, the break below the 20-day line would have been an immediate stop-out. Now it’s a matter of seeing how well this can hold another test of the 50-day line, if at all.

 

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FSLR’s weakness today is probably not surprising given that solars were weak across the board. Yesterday SolarEdge (SEDG), not shown here on a chart, broke through the 25.40 low of last week on increased volume, which was a clear sell signal at that point. As I discussed over the weekend, it was probably a good idea to take profits in Mobileye (MBLY) after its sharp upside move last week. That turned out to be somewhat prescient as the stock has since broken down.

Of course, the signs were there by Friday as the stock was stalling after a three-day wedging rally. This was more or less textbook type topping action, at least on a short-term basis. And, as I wrote in my weekend report, the stock could easily morph back into a short-sale target on any failure back to the downside. The stock broke down to its 20-day moving average today on light volume as buyers went on strike. The question is whether this pullback is buyable or whether we should be watching for a bounce off the line as a potential shorting opportunity.

None of that is clear to me currently, and I would have to see how this acts in the coming days. However, it does illustrate the fact that most of these Ugly Duckling set-ups are tradeable moves at best. Only in rare instances can they blossom into something more significant. So when you have a big profit in a set-up like this over a three-day span, it is wise to bag it and tag it!

 

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If the general market rally fails, we certainly keep an eye on any number of these Ugly Duckling rallies that could fail in conjunction with the market. I’ve been watching Salesforce.com (CRM) very closely here as it continues to find resistance along its 200-day moving average. Today the stock closed below its 10-day line for the first time since mid-February, but selling volume was very light. This is still in “no-man’s land” to some extent, but I would consider CRM to be a “go to” short if the general market continues to sell off.

In this case, the 200-day line at 72.69 would provide a very convenient and nearby guide for a tight upside stop.

 

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Among the other Ugly Ducklings that I would consider to be in the same category as CRM and which I have discussed in recent reports, below are my current notes on these names:

Workday (WDAY) should be watched for a break of the 20-day line at 69.34. The stock has been moving tight sideways along the 10-day line as volume continues to decline, but buying interest in the stock appears to be waning.

Splunk (SPLK) looks more vulnerable than WDAY as I slowly wedges higher along its 10-day moving average. A breach of the 20-day line at 45.63 would bring this into play on the short side. In both cases, the 20-day line would then serve as your guide for an upside stop.

Amazon.com (AMZN) recovered sharply after reports that Apple (AAPL) is “years away” from leaving its cloud vendors. It was news that AAPL would be transitioning to Google’s (GOOGL) Cloud Platform service and away from Amazon Web Services that initially sent AMZN careening through both its 50-day and 200-day moving averages on the downside last week.

From a practical standpoint, shorting AMZN on the break last week was a reasonable trade. It also provided a concrete cover point when it undercut the prior March 10th low. In a case like this where the stock reverses back to the upside as it did on Monday, the 620 intraday chart becomes a valuable tool in signaling a cover point in conjunction with the undercut of a prior low in the pattern.

Whenever you are short a stock that is moving briskly to the downside and approaching a potential area of support or undercutting a prior low, you want to keep a close eye on the 620 intraday chart for any cover signals. I’ve discussed this many times as a way to avoid getting caught in reversals back to the upside that occur at logical points within the chart.

 

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Now that AMZN is back above its 50-day moving average, it’s not clear whether it is again shortable on this rally. What I would need to see is some sort of reversal back down through the 50-day line at 558.79 as a signal that the stock is back in play as a short-sale target. Based on my blog post this past Monday afternoon regarding Apple’s (AAPL) macro chart position, I consider the stock a short-sale target that remains stuck in no-man’s land. That basically means that determining a precise entry on the short side isn’t so simple given the lack of any solid reference points.

Certainly, a news-related rally up to the 200-day line at 112 might present a very optimal short-sale opportunity. However, the stock strikes me as wedging just a bit as it has drifted higher over the past week. Near-term I think the stock can be tested on the short side using the 108 price level as a guide for a tight upside stop. Otherwise, a high-volume breach of the 10-day line at 104.70 might offer your first concrete signal that the stock is headed back to the downside. As a big-stock market name, AAPL should be kept on your short-sale watch list.

 

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Netflix (NFLX) is another one of these big-stock Ugly Ducklings that is stuck in no-man’s land. However, it has so far been able to hold along its 10-day moving average as volume dries up. Today NFLX closed just below the 100 price level but right on top of its 10-day moving average. Ideally, I would like to see some sort of weak rally up to the 200-day line at 105.90 as an optimal short-sale entry point.

An alternative would be a high-volume breach of the 10-day and 20-day moving averages as signs of a rally failure at current levels. At this time however, none of this is clear, and objectively the stock looks like it could try and move higher. So this could be played either way, depending on how the general market acts over the coming days. I consider NFLX to be one of those names on my “bifurcated plays list.”

 

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For those of you who follow me on Twitter at @gilmoreport, you may recall that I pointed out in a Monday tweet that Tesla Motors (TSLA) had rallied right up to its prior December highs. This occurred as the stock was sliding just past its 200-day moving average on a buy recommendation from an analyst who was arguably late. After all, the stock was up 67.9% from its February lows at that point.

That turned out to be at least a short-term peak for TSLA as it reversed back to the downside yesterday and then today blew through its 200-day moving average on higher selling volume.

This brings the stock back into play as a short-sale target using the 200-day line at 228.62 as a guide for an upside stop. Optimally, a bounce from here back up closer to the line would present a better entry, but with the stock only 3% below the 20-day line, it is within range for those who can tolerate 3% upside risk.

 

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Semiconductor names have continued to act well, and  a few are starting to pull back into areas where one can consider buying them. In some cases, this is not so clear cut, however. For example, M/A-Com Technology Solutions (MTSI) is pulling into its 20-day moving average today as selling volume picks up. In my view, buying here at the 20-day line presents a lower-risk entry point, but the stock could move lower to test the 41.32 double-bottom breakout point.

If anything, I consider the stock’s behavior to be consistent with the type of follow-through we see after a standard-issue base breakout. The stock breaks out and moves higher, maybe 10% at most, but then it begins to falter and the action begins to look questionable. Certainly, one can take an opportunistic view of this pullback and buy into it here with the idea that it should at least hold the prior 41.32 breakout point if it cannot hold the 20-day line.

 

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Below are my current notes on other semiconductor names I’ve discussed in recent reports:

Broadcom (AVGO) – still extended from the 10-day line. Watch for pullbacks into the line at 150.32 as potential lower-risk entries.

Maxlinear (MXL) – ran into some selling volume today but held the 10-day line. In my view the lowest-risk entry point from here would occur on a pullback into the 20-day moving average at 17.33.

Silicon Motion (SIMO) – moved to a higher high today on heavy volume. The stock is way too extended at this point.

Nvidia (NVDA) – extended from its recent breakout at the 33 price level. Pullbacks into the 10-day line at 33.03 would offer your best lower-risk entry opportunities.

Some notes on other names discussed in recent reports:

Alaska Air Group (ALK) – pulled into its 10-day moving average today on increased selling volume. This brings it into a buyable positon at the line, but keep in mind this stock has had a long run from its early February lows.

D.R. Horton (DHI) – pulling back into the 200-day moving average at 29.35. This could be considered aw lower-risk entry point, with the idea of using the line as a very tight guide for a downside stop.

GoDaddy (GDDY) – still holding tight along its 10-day and 20-day moving averages as volume dried up sharply today. This puts it in a buyable position using the 20-day line at 31.33 as a guide for a tight downside stop.

Hawaiian Holdings (HA) – stock had a stalling pocket pivot off the 10-day moving average today. This could be considered buyable using the 10-day line at 45.86 as a tight selling guide.

Priceline.com (PCLN) – sold off on Belgian terror attacks, gapping below its 10-day moving average. As I wrote over the weekend, I would not be surprised to see the stock pull in to retest the 10-day line at 1318, but it is now down to the 20-day moving average at 1297.24. A breach of the 20-day line brings it back into play on the short side using the line as a guide for an upside stop.

Southwest Airlines (LUV) – similar to ALK in that it also pulled into its 10-day line today, but on lighter volume. Overall, however, these Ugly Duckling airlines like LUV and ALK strike me as somewhat extended. In other words, they are somewhat obvious at this point and it is unclear whether significant upside exists from current levels, at least without some time taken to consolidate the gains off of the February lows.

From a visceral perspective, the market strikes me as getting a bit sloppy here. Of course, this is not necessarily unexpected given the extended condition of the major market indexes and many of the stocks that have led the chart off of the February lows. As the S&P 500 approaches its December highs, it may be that the rally is starting to become somewhat obvious. We have seen some breakouts in potential, nascent leaders, but the fact is that these haven’t really produced any robust upside follow-through.

Therefore, I have to say that I’m somewhat cautious here. The obvious solution, in my view, is to maintain a bifurcated approach that continues to take an opportunistic view of the market on both the long and short side. If the market begins to fail in earnest, then the first sign will likely be a number of these recent base-breakouts failing as well. Otherwise, know what you like (or don’t like, on the short side!), and know where it becomes actionable based on the real-time price/volume action. That is all.

 

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.

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