The Gilmo Report

March 8, 2017

March 8, 2017

The indexes have spent the past few days chopping around without making any progress beyond last Wednesday’s big gap-up move to new highs. The Dow Jones Industrials Index was in a steady downside drip as it met up with its 10-day moving average yesterday with volume declining.

This looked like a constructive pullback but it all changed character today as the Dow broke lower to fill last Wednesday’s gap on higher trading volume. Whether the index can find support at the lows of last Wednesday’s “rising window” remains to be seen as today’s distribution day sends a warning shot across the market’s bow.

 

GR030517-$INDU

 

The NASDAQ Composite Index had already filled its gap of last Wednesday when it broke below the 10-day line last Friday. So far this week the index has been stuck below its 10-day moving average. An early rally today didn’t generate much buying enthusiasm in the way of volume, and the index reversed off its highs to close in the lower part of its daily trading range. the S&P 500 Index, not shown.

 

GR030517-$COMPQ

 

The S&P 500 Index, not shown, looks similar to the Dow as it moved lower on higher volume. The break down was attributable to oil stocks of all stripes getting pureed as crude oil dove back through its 2017 lows.

 

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Members might note that I blogged yesterday about Diamondback Energy (FANG) as a short-sale target to keep an eye on if it broke support. Well, it did that fairly quickly this morning as it plummeted through its 20-day, 50-day and then 10-day moving average. FANG had already been setting up as a late-stage failed-base short-sale set-up based on last month’s failed breakout, and the rally over the past few days was one to watch for potential failure, as I mentioned yesterday in my blog post.

 

GR030817-FANG

 

Two other oils names that I’ve discussed in recent reports as short-sale targets, Parsley Energy (PE) and Rowan Companies (RDC), were already showing signs of weakness last week. PE, not shown, ran into resistance at its 20-day moving average and then broke lower with the group today. RDC failed on its third attempt to clear the 50-day moving average last week, and then broke below its 10-day and 20-day moving averages last Friday. That sent the stock streaking lower through this week before it blew right through its 200-day line on heavy volume, without so much as a pause.

 

GR030817-RDC

 

So perhaps the weakness in oil stocks, made obvious today by the big break in crude oil, was already signaling that something was amiss. But with stocks like FANG, RDC, and PE already on our short watch list from earlier reports, actionable set-ups were already there in RDC and PE, while FANG became actionable today.

As I wrote over the weekend, one’s experience in the market is defined by what stock you are in and when you are in it. Owners of Applied Optoelectronics (AAOI) have been treated to continued new highs as the stock gets a bit parabolic. Bottom line here is that the stock is extended and way out of buying range. I might also consider that it is probably a sell for the purpose of locking in profits, although owners of the stock can use the 10-day line as a selling guide if they want to give it some room.

 

GR030517-AAOI

 

Momo (MOMO) also treated investors to a buyable gap-up move yesterday, even as other members of the Gilmo China Five flounder about. The stock traded in a very narrow range yesterday but burst another 14.0% higher today with no real let-up as it ignored the action in the indexes.

 

GR030817-MOMO

 

Aside from these two stocks going nuts on the upside, everything else has been a choppy, slushy affair more indicative of “algo ping-pong.” Consistent upside progress is hard to come by, and the potential to get sucked in on strength and shaken out on weakness becomes more commonplace for the unwary. In the process one can certainly get nickel & dimed to death!

In some cases, stocks are starting to wobble, as Netflix (NFLX) illustrates below. The stock posted a pocket pivot on Monday, but that was another pocket pivot to nowhere as the stock simply dipped back below the line today. I thought it was notable that NFLX went nowhere even as the NASDAQ was rallying. In my view NFLX may be slowly morphing into a short-sale target here given its sluggish action. I am willing to test that theory here by shorting the stock and then using the 20-dema at 141.26 as a guide for an upside stop.

 

GR030517-NFLX

 

Facebook (FB) keeps wedging higher on very light volume as it tracks along its 10-day moving average. There is no concrete evidence of an impending breakdown aside from this low-volume crawl to the upside. However, I would keep a close eye on FB in the event we see any breach of the 10-day line.

Note that since its early January move up through the 50-day moving average on a roundabout pocket pivot (RAPP) FB has strictly obeyed its 10-day moving average as it has trended higher. Therefore, the 10-day line can be treated as the primary selling guide for the stock based on the Seven-Week Rule, as discussed in the book I co-authored with my colleague Dr. Chris Kacher, “Trade Like an O’Neil Disciple.”

 

GR030517-BABA

 

Notes on other big-stock names discussed in recent reports:

Apple (AAPL) is holding near its highs but should be watched for a breach of its 10-day moving average.

Alphabet (GOOGL) is back above its 10-day moving average, but volume came in today on the light side. It should be watched for any breach of the 10-day line.

Amazon.com (AMZN) is basically the same story sitting here right on top of its base and the 10-day line. This another big-stock NASDAQ name that should be watched closely for any breach of support at the 20-dema at 842.35 which also coincides with the recent base breakout point.

Priceline Group (PCLN) moved to a new closing high today but remains within the six-day price range it has formed since its buyable gap-up move following earnings on the last day of February.

AAOI has been the de facto leader of the optical names, as noted previously in this report, but the reality is that it is also the only one that has been showing any coherent price movement to the upside. Lumentum Holdings (LITE) has had its moments, but it is now starting to wobble along its 20-day moving average and the top of the prior base breakout.

Over the weekend I was looking at this as a possible lower-risk entry spot, but the stock slid below its 20-dema today on weak volume. This could be turning into a short-sale target as it begins to flirt with a possible late-stage breakout failure. If the stock looks weak tomorrow, then it could be shorted here using the 20-dema at 46.24 as a guide for an upside stop.

 

GR030517-LITE

 

Notes on other optical names discussed in recent reports, at least two of which are also showing signs of wobbling currently:

Arista Networks (ANET) posted a pocket pivot at its 10-day line today, which looks strong, but the stock was better bought at the 10-day line earlier this week, as I discussed in my weekend report.

Ciena (CIEN) got bombed today after missing on earnings, so this is another one that has bitten the dust and has been booted off my buy watch list.

Finisar (FNSR) is expected to report earnings tomorrow, and after CIEN’s fiasco today I wouldn’t be in the mood to play earnings roulette here, frankly. Watch for a potential failure here through the 20-dema if the report is negative.

Juniper Networks (JNPR) broke support at the 50-day line today in sympathy to CIEN, and is also off the buy watch list and back on my short-sale watch list with the idea of using the 50-day moving average as a guide for an upside.

So as optical names present a mixed bag, so do the Gilmo “China Five” names, which should now be more accurately referred to as the “China Four” now that Weibo (WB) has turned into a late-stage failed-base short-sale target.  The question is whether we see any others start to break down IF the general market corrects further.

Netease (NTES) is showing some sloppy action here as it finds resistance at the 10-day moving average and runs out of gas today on light volume. Apparently, MOMO’s upside madness failed to inspire NTES, which looks like it is forming a “fractal” head and shoulders type of formation. Fractal patterns are discussed in my latest book on short-selling, Short-Selling with the O’Neil Disciples: Turn to the Dark Side of Trading.

A breach of the 20-dema could turn NTES into a short-sale target, and should be watched for. The stock has already failed to hold the $300 Century Mark, and could have been shorted near 300 based on Jesse Livermore’s Century Mark Rule in Reverse. Technically the stock is also within short-sale range of the $300 price level given today’s 291.44 close.

NTES has been a big leader among the former China Five, but was probably best buyable on its roundabout pocket pivot through the 50-day line back in early January. In this market, it’s the not-so-obvious buy points within the base that generally work better than the all-too-obvious base breakouts. This will be interesting to watch over the next few days.

 

GR030517-NVDA

 

Alibaba (BABA), not shown, mains within its five-week-plus base with no sustainable upside showing up just yet. It has been tracking along its rising 20-day moving average, however, which can be used as a tighter selling guide if one so desires. Otherwise, the 99.94 intraday low of its late January buyable gap-up (BGU) move remains your maximum selling guide.

JD.com (JD), also not shown, bounced hard off its 20-dayi moving average yesterday and continued back up toward last week’s intraday highs today. While I think the stock could be sold up here as it gets a little bit volatile, those wishing to give the stock more room could use the 20-dema at 30.17 as a maximum selling guide.

For newer members: Please note that when I use the term “20-day moving average,” “20-day line,” or “20-dema” I am referring to the 20-day exponential moving average. I use four primary moving averages on my daily charts: a 10-day simple, 20-day exponential, 50-day simple and 200-day simple moving average.

In general, I find that most stocks on my long watch list are acting in mushy fashion, and in some cases these stocks are morphing into possible short-sale targets. Here are my notes on other long ideas discussed in recent reports:

Activision (ATVI) is strong here as it moves to new highs on light volume. I would use the 10-day line at 46.68 as my selling guide.

Carnival Cruise Lines (CCL) is wobbling along its 20-dema, and closed below the line on a small reversal as volume picked up on the day. This could be a short here using the 20-dema as a guide for an upside stop, and a breach of the 50-day moving average at 54.85 would confirm.

Charles Schwab (SCHW) is sitting on top of its 10-day moving average, but closed near its intraday lows today on a small reversal off the peak. This needs to be watched closely as a breach of the 20-dema at 41.55 could bring this into play as a short-sale target.

Checkpoint Software (CHKP) is holding along its 20-dema and found some minor volume support at the line today. Any volume breach of the line would be bearish, and could turn the stock into a short-sale target.

Electronic Arts (EA) acts well along with its other video-gaming cousins, making a new high today. The 20-dema at 86.47 serves as your selling guide here.

Incyte Pharmaceuticals (INCY) is holding near its highs and above the 10-day moving average. This acts well, and the 10-day line at 132.70 should be used as a reference for a selling guide. Remember that INCY has been moving higher over the past several days since it was announced that it would be added to the S&P 500 Index.

Goldman Sachs (GS) reversed today after an initial upside move to close in the red and below its 10-day moving average on increased selling volume. This could easily morph into a short-sale target if it breaks the 20-dema at 248.26. Financials should be watched closely here as they have been a leading group in this market – if they begin to break down en masse then this could be a bearish sign for the overall market.

Royal Caribbean Cruise Lines (RCL) is wobbling in a manner similar to its cousin, CCL. After moving below its 20-dema on Monday, the stock bounces back up to its 10-day line today but ran into resistance to close in the lower half of its daily trading range. This could be morphing into a short-sale target as well, and one could test that theory by shorting the stock here and using the 10-day line as a guide for a tight upside stop.

Salesforce.com (CRM) is still holding up after last week’s pocket pivot breakout, but it hasn’t gone any higher since. This should be watched for any breach of the 10-day and 20-day moving averages at 82.44 and 81.60, respectively.

Symantec (SYMC) move to a higher high today on an increase in volume. For now the 20-dema at 28.74 would serve as your reference for a selling guide.

Take-Two Interactive (TTWO) is not acting as robustly as its two cousins, ATVI and EA. It has run into resistance along its prior highs from mid-February on light volume, so a test of either the 10-day line at 58.19 or the 20-dema at 57.64 may be coming. The 20-dema would serve as the selling guide in this case.

Square (SQ) has dipped below its 10-day moving average, but is holding above the 16.32 BGU low of February 23rd. That remains your maximum selling guide for the stock.

Veeva Systems (VEEV) is sitting tight along its 10-day and 20-day moving averages, but no upside progress has been made since last week’s massive-volume shakeout and rally that also produced a pocket pivot. While I can’t say that I’m enamored with the stock’s lack of follow-through to last week’s shakeout pocket pivot, the 50-day line at 43.20 remains your maximum selling guide for the stock.

We can see that several stocks discussed above in my notes could potentially turn into short-sale targets, and in some cases, they have. This is problematic for me, and one reason why I want to be very selective about anything I do on the long side of this market. In the meantime, some actionable shorts have popped up, and I discussed several of these earlier in this report.

Splunk (SPLK) is another name that may be morphing into a short-sale target, and one I noted in my blog post of yesterday afternoon. Over the weekend this look buyable on the low-volume test of the 20-day moving average, but that all changed yesterday when the stock broke below the line on above-average selling volume.

This turns the stock into a short-sale target here using the 20-dema at 61.80 as a guide for an upside stop.

GR030517-SYMC

SPLK is now starting to act more like fellow cloud name Workday (WDAY) now that it has broken below its 20-day moving average, so if we think in terms of group weakness, it may be that both stocks are shifting into short-sale mode here. WDAY was technically already shortable on the high-volume breach of the 20-day line after earnings last week.

It found support at the 200-day line last Wednesday before running into volume resistance at the 20-day line on Thursday. Since then it has been floating around in the region between the two moving averages and may be set to break below its 200-day and 50-day moving averages, both of which are just below the current price. While I might consider that any rally up to the 20-dema at 84.76 would offer a more optimal short-sale point, technically WDAY is shortable here using the line as a guide for an upside stop.

My guess is that if we see a breakdown in WDAY and SPLK (note that we’ve already seen a breakdown in Tableau Software (DATA)), then it might be associated with a breakdown in Salesforce.com (CRM). So, keep an eye on these cloud names as confirming evidence of a potential group breakdown.

Weibo (WB) is unfortunately still a short-sale target as a recent late-stage failed-base (LSFB) set-up. The stock has been unable to regain its 20-day moving average, and so has remained shortable on moves up into the line. Today WB ran into resistance as its 10-day moving average before reversing to close near its intraday lows on higher volume.

I view this as shortable here using the 20-dema at 51.17 as a guide for an upside stop. I would like to see WB bust the 50-day line at some point as confirmation of a complete and total late-stage failed-base short-sale set-up.

 

GR030517-WB

 

Nvidia (NVDA) is still in force as a late-stage failed-base short-sale target. The stock has been bouncing around support along the prior base lows, but today ran into resistance right at the 10-day moving average. It then reversed to close down on the day on increased selling volume.

While I would love to see a rally further up into the 20-day or 50-day moving averages as more optimal short-sale points, the fact is that “optimal is as optimal does.” If the stock runs into the nearest point of resistance at the 10-day line and fails here in grand fashion, then shorting the stock here is as optimal as you’re going to get!

Also, if it can’t even regain its 10-day line how strong is it? Not very. So, for now I consider the stock a short here using the 10-day line at 100.30 or today’s intraday high at 100.70 as a guide for a tight stop.

 

GR030517-NVDA

 

Tesla (TSLA) is another busted leader that can’t even muster enough mojo to rally back up to its 20-day moving average after a natural reflex bounce off its 50-day moving average last week. Since breaking down hard off the peak two weeks ago on huge selling volume following earnings, TSLA has merely formed a short bear flag.

It looks to me like the stock is setting up to breakout to the downside. Today’s close below the 50-day moving average (for the first time in 2017, I might add) puts this possibility into play. In my view the stock is a short here using the 10-day line at 250.79 as a guide for an upside stop.

 

GR030517-TSLA

 

I would note that GrubHub (GRUB), not shown here on a chart, as it continued to move lower since failing at the 200-day moving average last week, as I discussed in my weekend report. Obviously, the stock is now extended to the downside, and rallies up into the 10-day line at 35.04 would represent your next opportunities for a potentially lower-risk short entry point.

Steel stocks of all stripes have been getting smacked hard over the past few days, including names that I’ve previously discussed in the report like Steel Dynamics (STLD) and Allegheny Technologies (ATI), both not shown here on charts. Here we see another group break down, and this includes big-stock steel U.S. Steel (X), shown below.

X has had two failed breakout attempts, and I suppose if it had a third one it would be “three and out,” but it may not get the chance. The stock dropped below the 20-day moving average yesterday on what was essentially a buyers’ strike. Today it reversed an initial upside move to close down on a sharp, but below-average, increase in selling volume.

While I do consider the stock shortable here using the 20-dema at 51.17 as a guide for an upside stop, a big-volume breach of the 50-day moving average would seal the deal in my view.

This market remains all about what is going on with individual stocks. And the reality is that while names like MOMO and AAOI have performed very well over the past few days and beyond, most of my long ideas are at best showing signs of sluggishness. In my view this is problematic, and serves as a cautionary sign.

Meanwhile, I can find plenty of nascent short-sale set-ups that are starting to work. Maybe the market finds its feet soon and resumes its rallying ways, but I prefer to simply focus on the individual stock set-ups at hand. Right now, most of those happen to be on the short side. So, I must abide by the fact that this may be telling us something about this current market environment, and it may not be good.

So, unless you find yourself already stopped out of all your long positions, simply maintain those stops for any remaining long positions that continue to act and/or hold up reasonably well. If you find that your remaining positions start to come under pressure, then we are probably moving into a more significant correction.

So, stay alert, and keep things tight. Meanwhile, those who are experienced on the short side can consider acting upon short-sale set-ups as they present themselves in real-time. 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 positions in FANG, NVDA, and X, though positions are subject to change at any time and without notice.
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