The Gilmo Report

May 11, 2016

May 11, 2016

The S&P 500 Index made a weak showing of itself on Monday following Friday’s successful test of the 50-day moving average. Volume was light as the index traded around in a tight range, giving the impression of a lack of conviction by investors. On Tuesday the index made up for it all by pushing higher with a little more price thrust but not as much volume, as NYSE volume declined from the prior day. A move to higher highs on lighter volume is perhaps not the most robust of rallies.

That idea came to fruition today as the S&P 500 reversed back to the downside with volume picking up relative to yesterday. From here a test of the 50-day line down at 2052.04 would not be an unlikely possibility.

 

GR051116-$SPX

 

The small-cap Russell 2000 Index, which had also found support at its 50-day moving average also ran into trouble today. As we can see on the daily chart of its proxy, the iShares Russell 2000 ETF (IWM), the index reversed back below its 200-day moving average as volume picked up. Clearly, the market is in a precarious position here, with lower lows certainly looming as a clear possibility.

 

GR051116-IWM

 

The precariousness of the market’s current position is brought further to light by the NASDAQ Composite Index. After rallying up into its 50-day moving average on increasing volume it reversed at the 50-day line. It ended the day down -0.81% on higher volume. The NASDAQ therefore remains below all of its major moving averages. The longer it remains in this position, unable to clear the confluence of the 50-day and/200-day moving averages on the upside, today’s action may be portending lower lows to come.

 

GR051116-$COMPQ

 

As I wrote over the weekend, “…the general oversold condition of the indexes as well as many of our short-sale target stocks, combined with the S&P 500 and the Russell 2000 meeting up with their 50-day moving average provided enough context for the small rally on Friday.” That rally lasted for the first two days of the week, but today things went the opposite way. It is still a matter of taking a bifurcated, opportunistic approach with the intention of playing shorter-term moves. I have repeated this basic theme endlessly over the past I-don’t-know-how-many reports.

The iShares Silver Trust (SLV) played out in the most opportunistic way as it gapped down to its 20-day moving average on Monday. As I wrote over the weekend, while one could try and take a position on the pullback to the 10-day line, “I would prefer to take a more opportunistic approach and hang back for any pullback into the 20-day moving average at 16.11, should that occur.”

Well, that’s precisely what did occur, and the white metal ETF then gapped back above the 10-day moving average today. Again, buying into weakness, generally when things look their bleakest, is the best way to try and come in on the precious metals ETFs on the long side.

 

GR051116-SLV

 

The SPDR Gold Shares (GLD) also found support at its 20-day moving average both Monday and yesterday. This also coincides with the prior trendline breakout of about two weeks ago. As with the SLV, the GLD is best bought on pullbacks in opportunistic fashion. One then has the option of selling into strength or trying to make use of an optimal entry by playing for a bigger move.

I believe that the precious metals have the potential for further upside, but there is one major caveat. And that is that if we get into a period of forced selling where stocks get hammered, the precious metals likely get hammered as well. So the trick is simply in keeping risk in check by knowing where your stop is, end of story.

 

GR051116-GLD

 

Silver Wheaton (SLW) came out with earnings Monday before the close and missed, sending the stock back down towards its initial buyable gap-up move of mid-April. That turned out to present a buying opportunity as the stock just barely undercut the late April low at 18.17 and then held yesterday as volume dried up sharply.

This led to a move back up towards the 10-day line today as volume picked up sharply. Again, as with the metals themselves, it is best to take a highly opportunistic approach to buying SLW. This means looking to buy on pullbacks rather than chasing strength. My approach to playing SLW has been to look at buying the stock on weakness, and the weaker the better, and then selling into strength. However, as with the SLV and the GLD, if the general market starts experiencing any kind of sustained, forced selling, it will come with everything else.

Therefore, if you choose to venture on the long side of SLW, as with the metals, you should simply know where your out point is. And the closer that out point is, the lower is your commensurate risk if the thing fails.

 

GR051116-SLW

 

Over the weekend I tried to distill things down to a workable approach for the long side of this market by advising, “I would look to keep things simple by focusing on big-stock names that act normally and might be in lower-risk buy positions. In addition, I prefer to look at names that have already announced earnings.”

Facebook (FB) has remained in position as a buyable gap-up following earnings two weeks ago. It has run into some selling around the $120 price area, but finally cleared to an all-time closing high yesterday on a slight increase in volume. However, volume declined as buying interest wasn’t strong enough to push the stock entirely out of the current price range. It essentially ran into resistance at the highs of the range on weak volume. From here I would watch for a possible retest of the 116.25 BGU low.

Given that the stock remains about 3% above the 116.25 intraday low of the BGU day of April 28th, this I technically feel is still in effect as an actionable BGU on the long side. However, one should seek to buy the stock as close to the 116.25 level as possible. This allows for a squeaky tight stop, with the understanding that if FB blows through that 116.25 low it could be headed lower. This would also be a bad sign for the general market and so is certainly something to watch for even if one doesn’t want to try and play FB, long or short.

 

GR051116-FB

 

LinkedIn (LNKD) gave opportunistic buyers a couple of shots to pick up shares on Monday as it backed and filled along the 10-day and 20-day moving averages. Intraday on Monday, the stock got as low as 119.80 but managed to hold above the 20-day line by the close. As I wrote over the weekend, LNKD was one stock “I tend to favor on the long side of any oversold bounce with the idea that it may have further upside to 130 or better if the oversold bounce has any short-term legs at all.”

Those legs showed up yesterday with a very nice-looking pocket pivot off of the 20-day line and up through the 10-day line on slightly above-average volume. Buyers swarmed the stock into the close, helping to push beyond the necessary 2,777,000 million shares in the final hour of trade.

However, as I wrote over the weekend, I felt the stock was good for a trade to 130, which would have taken it to the highs of the gap-up move of nine trading days ago on the chart. That’s a swing trade and believe it or not is roughly equivalent to the same move AMZN has had since its buyable gap-up of ten days ago.

As a swing-trader, I look to take profits at the highs of the range, and if the intraday chart tells me to do so, I will reverse and go short the stock. That’s what I did today. Whether this comes completely apart or not I think is highly dependent on the general market, but I would not be surprised to see the stock at least pull back into the 10-day moving average at 125.09 from here.

 

GR051116-LNKD

 

Amazon.com (AMZN) is another big-stock long idea that has continued to work. It was previously buyable on the pullback to 656.01 two Fridays ago. More recently, yesterday in fact, the stock pushed through the $700 price level, triggering Livermore’s Century Mark Rule at that point. When a stock clears a Century Mark level, your first instinct should not be to short it, but to see how it plays out on the long side. In general, if I were going to try and short such a move I would wait until it actually fails back below the Century Mark level, whatever that may be.

I also think that investors are overly fixated on AMZN’s allegedly weak fundamentals. The reality is that institutions are buying this on the basis of the forward-looking story, not the past, not even the present. AMZN is estimated to earn over $29 a share in 2020, and that is what the institutions are looking at. If you try and short a stock solely on the basis of what you think are weak current fundamentals, you are a fool and you deserve what you get. Especially if the technical action is completely contradicting your short thesis!

At this point I would need to see the stock fail at the $700 level in order to bring it into play as a short-sale target again. Since its BGU of ten days ago on the chart, it has remained a buy, but there is always the possibility of a breakout failure if the general market gets into trouble. We’ve seen most breakouts fail in this market, and there is always a chance that AMZN could turn out similarly. But it hasn’t failed until it actually does! By that time there will probably be a number of other short-sale target stocks to go after if the market starts to come apart.

If one is long the stock from the BGU and/or the breakout through the $700 Century Mark, then the $700 level is your most practical trailing stop.

 

GR051116-AMZN

 

Acuity Brands (AYI) was able to clear its 20-day moving average on Monday, a constructive move within the context of what I wrote about the stock in my weekend report. At that time, I pointed out that it was a two-sided situation that could resolve either bullishly or bearishly. As I wrote, “This could theoretically be played as a short here using the 20-day line as a guide for an extremely tight upside stop. But it could also be played on the long side with the idea that it must hold the 239.08 BGU intraday low and the top of the prior base which is roughly at the same price level.”

In my view once the stock moved above the 20-day line on Monday, one could have gone long at that point. The idea would then be to use the top of the prior base at around 240 as a reasonably tight guide for a downside stop. From here I might consider any low-volume pullbacks into the 20-day line as potentially buyable.

However, I would also emphasize that this could easily turn into a late-stage base-failure. And the first sign in this case would be a breach of the 20-day moving average. Therefore, if the stock busts the 20-day line it could easily morph back into a short-sale target using the 20-day line as an upside stop. What looks suspicious here is the move higher today that stalled out as volume has remained quite low. In fact, today’s volume came in at a clear “voodoo” level of -50.9% below-average.

 

GR051116-AYI

 

I blogged this morning about Maxlinear (MXL) as it was pulling back following yesterday’s post-earnings buyable gap-up move. In my view the stock is buyable on pullbacks with the idea of using the 50-day moving average at 17.55 as a selling guide.

The intraday low of yesterday’s BGU lies at 17.32, which could be used as a much looser selling guide. My thinking is that it should hold the 50-day line, at the very least. While MXL is a smaller stock, and I tend not to like smaller stocks, it has a big-stock story as a wireless player. If the general market is able to hold its current rally attempt, this is one to have in your back pocket as an actionable long idea.

 

GR051116-MXL

 

In the same blog post I mentioned Silicon Motion (SIMO) which, surprisingly, didn’t blow up after earnings. It also didn’t really go anywhere but the stock has held tight along its 10-day moving average. SIMO was sitting right at its 10-day moving average when I blogged about it this morning. It managed to move higher intraday but by the close stalled a bit as the general market rolled over. As long as this can continue holding the 10-day line it might present a potential long idea to have in your quiver in case the general market holds up.

Otherwise, if you study the daily, below, very carefully, you might discern something of a small, “fractal” head and shoulders formation that extends back to early April. The big-volume break to the downside after earnings, which amounted to a big spin-out, would form the right side of the head in this fractal formation. For more about fractal short-selling patterns please refer to my latest book on the topic, Short-Selling with the O’Neil Disciples by yours truly (John Wiley & Sons, April 2015).

 

GR051116-SIMO

 

I blogged about Activision Blizzard (ATVI) yesterday after the close as a stock to consider on the long side in anticipation of a sympathy move to its video-game cousin, Electronic Arts (EA). EA was gapping up at the time in response to a strong earnings report, and I expected ATVI to follow suit.

ATVI actually had its own buyable gap-up four days ago after announcing earnings, and has held within a short three-day flag since then. The stock rallied today with ATVI and worked out as a good trade, if nothing else. If the general market holds up, I do like the stock on the long side using the 36 price level as a guide for a stop.

 

GR051116-ATVI

 

Electronic Arts (EA) was also quite playable this morning as a buyable gap-up. The stock opened at 70.43, set an intraday low of 70.24, and then closed at 73.38. Not a bad move for a day’s work, but one had to be alert to it, and hopefully my blog post yesterday afternoon was helpful in this regard. I think the video-game names might be worth considering here on these BGUs, and of course that includes ATVI. With the economy remaining quite soft, young people actually find video games to be a form of social-interaction.

I often observe my teenage son playing video games with his friends, who are flung about all along the Santa Monica Bay where we live, and it is as if they are all in the same room together. This saves anyone from having to travel anywhere to get to a friend’s house. But they still are able to experience the same type of social-gathering and interaction that might be typical of any common activity teenagers might engage in.

Thus teenagers and young adults may choose to spend more on video games and less on social activities that require spending more money as well as having to travel, which of course involves gas money. Just a theory, and I’ll let the technical action of these names rule my thinking here. In any case, both ATVI and EA are showing current buyable gap-ups, and both are actionable on the long side as long as the general market doesn’t get into any trouble. For this reason, we simply set our stop on ATVI at 36 and our stop on EA at 70.24 if we want to play these on the long side.

 

GR051116-EA

 

Below are my current trading journal notes regarding other long ideas discussed in recent reports:

CyberArk Software (CYBR) is holding tight at its 50-day moving average as volume dries up.  Still a possible long idea if it can continue to hold the 50-day line at 40.12, which would also serve as a tight downside stop.

Fabrinet (FN) has continued to hold its 10-day moving average at 33.99 as volume continues to dry up. This could be considered actionable here using the 10-day line as a tight selling guide. Otherwise, the 20-day line at 33.20 would offer the most opportunistic dip to buy into, should it occur.

Fortinet (FTNT) was able to rally off of its 20-day moving average earlier in the week, but is somewhat extended from the line right here. I would look for any pullback into the 31.65 as a possible lower-risk entry point using the 20-day line as a guide for a tight downside stop.

Lumentum Holdings (LITE) is a cousin-stock to FN, but is showing no impetus to recover from current levels after pushing to lowers low yesterday. For that reason I would leave it alone.

Because of the market’s precarious position, which certainly brings up the possibility of lower lows, those who are inclined to play the short side can also act on set-ups where they see them. Short-selling Gilmo members should therefore be keeping a close eye on the list of short-sale targets I included in the weekend report.

GoDaddy (GDDY) came into a prime short-sale position this morning as it rallied up into its 50-day moving average on weak volume. Remember that this is a base-failure type of short-sale set-up, and is more typical of a post-IPO base failure rather than a late-stage one. GDDY hasn’t had much of an upside run since its IPO date of April 1, 2015, so it can’t really be considered late-stage. It is, however, a base-failure type of short-sale set-up, and we would be looking for rallies up into the 20-day or 50-day moving averages as short-sale points.

Which one ends up working depends on the state of the general market, and so today’s move into the 50-day moving average was actionable on this basis. This still looks shortable using the 50-day line at 31.23 or the intraday high of today at 31.54 as a guide for an upside stop.

 

GR051116-GDDY

 

Panera Bread (PNRA) gave it up today and finally closed below its 50-day moving average by a small margin. As I’ve been writing in recent reports, this looks more like a short than a long. Today’s break back below the 20-day line made the stock eminently shortable, and from here I would consider the stock to be shortable here using the 20-day line at 212.83 as a guide for a tight upside stop.

 

GR051116-PNRA

 

Below are my current trading journal notes on short-sale ideas discussed in recent reports. Note that a number of these became actionable today for those who were alert to the intraday signals:

Adobe Systems (ADBE) pushed through its 20-day moving average as I discussed it might in my weekend report. It did, however, find resistance at the highs of its recent price range in the 96-97 price area. This may be shortable here using the 97.26 intraday high of today as a guide for a tight upside stop.

Alaska Airlines (ALK) reversed at the 10-day line today. As I wrote over the weekend I’m “looking for a rally into the 10-day line at 71.25 or the 20-day line at 74.17 as potential short-sale entries.” There it was, and there it went as the stock made a lower closing low today.

Alphabet (GOOGL) reversed back below its 20-day moving average today and is in position for a short using today’s 740.80 intraday high as a maximum upside stop. Alternatively, if one wants to keep things tighter, the 20-day line at 734.05 offers a closer reference point for a hyper-stop.

Apple (AAPL) is unable to rally as it tests support along the 92 price level. If the general market continues to weaken, one option is to short this here using the 10-day line at 93.63 as a tight upside stop. Otherwise, I would love to see a rally up into the 20-day line at 98.16 as an even more opportunistic short-sale entry point. It may not happen, however, if the general market continues lower from here.

D.R. Horton (DHI) was, as I wrote over the weekend, shortable using the 50-day line at 29.89 as a guide for a tight upside stop. The stock has moved lower and is now shortable using the 200-day line at 29.74 as a guide for an upside stop.

Delta Air Lines (DAL) is not currently in a good position for shorting, although one could have hit the stock today as it approached its 20-day line at 43.67 and then reversed.

Hawaiian Holdings (HA) was shortable today at its 20-day moving average. The stock reversed lower from there, but rallies up into the line at 43.99 would constitute short-sale entries, should they occur.

Las Vegas Sands (LVS) is shortable here using the 200-day line at 46.69 as a guide for an upside stop. Rallies closer to the 200-day line would provide your most optimal short-sale entry points.

Lennar (LEN) probably shortable here using the 10-day line at 44.64 as a guide for an upside stop.

Microsoft (MSFT) was shortable today at the 20-day moving average at 51.65. Any rally back up into the line would present a more optimal short-sale opportunity.

Netflix (NFLX) below the 10-day line today as selling volume picked up. Could be shorted here using the 10-day line at 90.94 as a tight stop.

Nike (NKE) completely blew up today and is extended to the downside. Was last shortable at the 20-day line yesterday.

Priceline.com (PCLN) has rallied right up into its 200-day moving average where it sits in a prime shortable position using today’s high at 1274.14 as a guide for a tight upside stop. Otherwise one could use the 200-day moving average at 1268.71, about one point above today’s close, as an even tighter stop.

Salesforce.com (CRM) rallied to the top of its range around the 77 price level and reversed today on light volume. This could be shorted here using the intraday high of today at 76.92.

ServiceNow (NOW) reversed today at its 10-day moving average as volume picked up. I like this as a short using the 10-day line at 69.20 as a guide for a tight upside stop. Otherwise, today’s high at 70.12 offers a somewhat looser stop.

Skechers (SKX) is shortable here using the 50-day line at 31.10 as a guide for a tight upside stop.

Southwest Airlines (LUV) reversed today at the 20-day line where it was shortable. Now it’s sitting on top of the 200-day moving average. A breach of the 200-day line would make it shortable at that point using the line at 42.11 as a guide for an upside stop.

Splunk (SPLK) announces earnings on May 26th, but is shortable here using the 50-day line at 48.67 as a guide for a tight upside stop. Hopefully we see a sharp breakdown before earnings.

Starbucks (SBUX) was shortable today at the 20-day moving average. Stock reversed and headed lower from there and is now extended to  the downside.

Tesla Motors (TSLA) is unable to rally back up anywhere close to its 200- day moving average at 224.64 after undercutting a prior low from late March. From here the stock looks like a short using the 215-216 level as a guide for an upside stop. Rallies back up into that price level would be your best short-sale entries, should they occur. Otherwise this thing looks like it wants to head lower from here.

Under Armour (UA) has blown to pieces and is extended to the downside.

Verisign (VRSN) rallied as far as its 10-day moving average today before reversing to close down on lighter volume. Would still look for a rally into the 20-day moving average at 86.91 as a more optimal short-sale entry point.

Workday (WDAY) is shortable here using the 10-day line at 72.62 as a guide for a tight stop.

The examples in this report show that a bifurcated approach is quite workable in this current market. However, we saw a number of short-sale target stocks reverse today, some at logical points of resistance within their patterns. In my view, this brings the short side into play on any of these. If we see the short side begin to pan out, then we can be pretty sure that the market is headed for lower lows. In the meantime, maintain an open mind and have your ideas ready for either side of the market, depending on where we go from here.

 

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 a position in GDDY, LNKD, and NOW, 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. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.