The Gilmo Report

May 15, 2016

May 15, 2016

Major market indexes that had found support at their 50-day moving averages early in the week finally busted through that key line on Friday. The S&P 500 Index, along with the Dow Jones Industrials and the small-cap Russell 2000, dropped below its 50-day line as the index finished off the week with a three-day sell-off.

Declining stocks well exceeded advancing stocks, and about the only good thing you could say about Friday’s action is that it came on lighter volume. But as I wrote in my Wednesday report, the market was already in what I felt to be a precarious position at that time.

 

GR051516-$SPX

 

To quote myself, “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.” I also concluded that “…today’s action may be portending lower lows to come.” That was my assessment on Wednesday.

Those lower lows became a reality as the NASDAQ and the rest of the market rolled lower on both Thursday and Friday. The NASDAQ is now testing the lows of the prior week on lighter volume. Whether the lower volume indicates a positive retest of the prior lows remains to be seen.

 

GR051516-$COMPQ

 

The lower volume on the two major exchanges, the NYSE and the NASDAQ, could, however, be a ruse for complacent investors. If we look at the SPDR S&P 500 Trust ETF (SPY), we can see that it actually broke its 50-day moving average on higher volume. This contrasts with the S&P 500 Index chart, above, where we see lower volume on Friday.

However, the SPY represents real money trading on the basis of its conviction with regard to where the S&P 500 is likely headed. So if I’m searching for clues that Friday’s lighter volume could be a ruse, this would be one piece of the puzzle.

 

GR051516-SPY

 

The excuse for Friday’s sell-off was found in stronger-than-expected retail sales numbers that were released before the open as well as a spike in Consumer Sentiment. The retail data didn’t do much for the retail sector, however, as it got pummeled again. The SPDR S&P Retail ETF (XRT), which has been under pressure for the past couple of weeks broke to lower lows as sellers swarmed the ETF. Of course, this is no surprise given how our retail short-sale targets Skechers (SKX) and Under Armour (UA) have performed over that same time period.

 

GR051516-XRT

 

The strong economic data was likely viewed as a negative because it again brings investors’ focus to the possibility of a Fed interest rate increase when they meet again in June. However, this didn’t seem to rankle the precious metals, which held their ground at support levels. The iShares Silver Trust (SLV) held its 20-day moving average on Friday, and closed slightly up on the day. Volume was quite light so it was clear that the economic news wasn’t enough to prompt sellers to dump the white metal.

 

GR051516-SLV

 

The SPDR Gold Shares (GLD) is similarly holding at support. The GLD held the 20-day moving average on Friday, making a higher low in comparison the prior low of four days ago on the chart. That prior low retested the initial trendline breakout of late April. Friday’s pullback into the 20-day line could also be viewed as a successful retest of that low. Technically both the SLV and the GLD look like they are setting up to go higher. Both sit at lower-risk entry points within their patterns currently, using tight stops of 2-3% on the downside.

 

GR051516-GLD

 

Silver Wheaton (SLW), which of course correlates to the precious metals, is basically the same story on a different day. It again tested the 20-day moving average on Friday and held. The best move occurred on the sharp rise to higher highs following the mid-April buyable gap-up. The slight pick-up in buying volume on Friday gives it the look of minor support at the 20-day line. However, if one chooses to buy into SLW here along the 20-day moving average, a logical lower-risk entry point, one is looking for another upside move to develop soon.

Otherwise, it could pull back and retest the Tuesday low at the 18 price level and just above the rising 50-day moving average. This would also coincide with the prior base breakout and buyable gap-up of mid-April.

 

GR051516-SLW

 

The current handful of big-stock leaders continues to hold up reasonably well, although I would watch for signs of failure as clues of a worsening general market situation. More big-stock names have come under pressure lately, while those that have already broken down have continued lower. Ultimately it is the action of individual stocks that guides my view of the market. This brings me to wonder whether we will see more big-stock names run into trouble, particularly among those that are acting well.

For example, Amazon.com (AMZN) has been able to progress about 10% beyond its late April buyable gap-up move. In the process it has also pushed through the $700 Century Mark level, triggering Livermore’s Century Mark Rule on the long side. Buying at the $700 price level would have yielded 20 or so points of upside before the stock started pulling back on Friday. While it closed Friday a little over 12 points off of the Thursday peak of 722.45, keep in mind that it is still less than 2% off the highs.

The critical factor would be whether AMZN can hold a pullback to the $700 level, should that occur. A breach of the $700 level on the downside could bring the stock back into play as a short-sale target based on Livermore’s Century Mark Rule in Reverse.

Conversely, a constructive, low-volume retest of the $700 level could, however, present a lower-risk entry point on the long side. How AMZN plays out probably depends to some degree on what the general market does, but I think it is helpful to understand how this can play out. In this manner one can be prepared to act quickly on the basis of the real-time evidence and take advantage of whatever type of opportunity arises.

 

GR051516-AMZN

 

Facebook (FB) should also be watched closely for any signs of failure. Since its post-earnings buyable gap-up of late April, the stock has not really gone anywhere. After setting a high of 120.79 on the gap-up day 12 trading days ago on the chart, it has yet to clear that high on a closing basis. In addition, after closing near the lows of its gap-up price range 12 trading days ago, FB has wedged back up to the highs of what is a 2½ week price range. As you know, wedging action is defined by a price movement to the upside that occurs on light and declining volume.

The stock has mostly benefitted from the fact that sellers have not shown up in any size, allowing the stock to drift back up towards the 120 price level. A pullback from current levels to the 20-day moving average at 116.64 would be normal and could help to correct the wedging action. However, a volume breach of the 20-day line could indicate a potential late-stage base-failure. This is something to keep an eye out for. FB is a big-stock leader, and any faltering on its part could have negative implications for the market, as with AMZN.

 

GR051516-FB

 

In my Wednesday mid-week report I noted the very playable move by LinkedIn (LNKD) off of its 20-day moving average at the 120-121 price level up to a peak of 131.15 on Wednesday. As I noted at the time, “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.”

That turned out to be the case as the stock pulled right down to the 10-day line on Thursday on declining selling volume. On Friday LNKD attempted to move up off of the 10-day line but reversed to test the line again as volume continued to dry up. Technically this brings the stock into a lower-risk buy position at the 10-day line. The 10-day line would also serve as a nearby selling guide if the stock fails to hold. So far this looks like a normal pullback after the sharp 10% run from the 20-day line up to the 131.15 peak on Tuesday and Wednesday.

Given the current state of the general market, however, one should exercise caution trying to buy it here. Essentially, the phrase “exercise caution” means using a tight stop at the 10-day line at 125.65. Otherwise the 20-day line at 123.08 could come into play.

 

GR051516-LNKD

 

In most cases, I am viewing even my long ideas as potentially two-sided situations. In other words, while they may look constructive as long ideas at this precise moment in time, there are certain developments that could take place that would turn them back into short-sale targets. As a result I want to remain entirely open-minded and flexible in assessing these names in real-time.

In my Wednesday mid-week report I discussed this in relation to Acuity Brands (AYI) which has been flopping around its 20-day moving average since its buyable gap-up (BGU) of early April. That BGU was also a breakout from a big cup-with-handle formation, of which I only show the handle portion on the chart.

On Friday the stock closed just below the 20-day moving average, something I was looking for as a clue that AYI might become a late-stage failed-base short-sale set-up. I would have to say, however, that this is somewhat inconclusive since the stock did manage to close above its 10-day moving average, but not by much.

Selling volume picked up slightly on the break of the 20-day line, but was not decisive. This is a tough one to call, but if the general market gets into trouble to start the week off, this could potentially be viewed as a short using the 20-day line at 247.62 as a guide for a tight upside stop. I would have to say that one glaring issue with AYI is the fact that its recent BGU cup-with-handle breakout hasn’t gone anywhere for over a month. This increases the potential for failure. As well, if one looks at a weekly chart of AYI one can see that the stock has had a long upside price run.

This most recent cup-with-handle breakout is coming from a 30% deep cup-with-handle where the handle was wedging slightly along the lows (drifting slightly to the upside instead of drifting downward as a proper handle should). So there is potential for a failure, but so far it hasn’t provided any decisive evidence for this. This should probably be watched closely to see how it develops in the coming days.

 

GR051516-AYI

 

On Thursday I blogged that Maxlinear (MXL) was pulling into a low-risk buy area right on top of its 50-day moving average. I had also pointed out in my Wednesday mid-week report that, “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.” Thursday’s “voodoo” pullback, with volume drying up to -49% below average, turned out to be a very opportunistic long entry point. On Friday the stock pushed back up to the highs of the four-day price range as buying volume picked up, but came in below average.

To review for new members, a voodoo pullback comes from the term “VDU pullback” where VDU stands for Volume Dry-Up. The word “voodoo” gives it a certain mystique, but the bottom line is that it is just a decline in volume that is at least -35% below average, and the more the better. Volume declines of 50% or more below average are considered extreme voodoo pullbacks.

In any case, I would hope some members took advantage of Thursday’s voodoo pullback per my real-time blog post on that day. Now the stock is extended from the 50-day line, and only a similar pullback into the line would bring the stock back into a lower-risk range.

 

GR051516-MXL

 

Activision Blizzard (ATVI) continued moving higher in sympathy with Electronic Arts (EA) as I discussed it might in a blog post Tuesday after the close. Both stocks have become extended to the upside however, and ATVI stalled on Friday as volume came in well above average. This looks to me like it could come in and perhaps test the 10-day line at 36.26. As I blogged on Friday, I flipped from playing this as a long to playing it as a tactical short-term short-sale target. This may sound odd, but in this market most stocks don’t move in one direction for very long.

On a macro-scale there is some justification for maintaining a two-sided view of ATVI.

 

GR051516-ATVI

 

If we look at ATVI’s weekly chart, below, we can see that the stock has already had a fairly decent upside price run. This most recent buyable gap-up move of six days ago on the daily chart, above, is also a cup-with-handle breakout. That much is clear on the weekly chart.

As the stock approaches the left side peak of its current cup-with-handle formation, the potential for resistance comes into play. We saw that on Friday as the stock reversed off the peak on above-average volume. Thus we have to be aware of the fact that this could turn into a possible late-stage base-failure.

For now, however, the technical evidence is inconclusive with respect to actually being able to call this as a late-stage failed-base (LSFB) short-sale set-up. Therefore, while I am willing to short this on a short-term basis, not unlike the way I shorted LNKD at the 131 price level (see discussion above), I would still look to buy AVTI on a constructive pullback down to the 10-day moving average at 36.26.

I do strongly believe, however, that one should maintain total awareness of how the stocks they are playing on the long side could morph into short-sale targets IF the general market continues to correct in a more substantial manner.

 

GR051516-ATVI Weekly

 

Electronic Arts (EA) has continued higher since its own buyable gap-up on Wednesday following a strong earnings report after-hours on Tuesday. EA was mentioned in a blog post that afternoon, and I advised members to watch for a possible buyable gap-up in the stock the next morning.

BGU was buyable on Wednesday morning, and the stock has continued substantially higher since then. However, notice that it is stalling in the 75-76 price area as buying volume begins to decline sharply. As I blogged on Friday, I have also flipped from viewing EA as a long idea to viewing it as a short-term short-sale play.

The stock is far above any of its major moving averages, at least among those that we track. A retest of the 70.24 BGU low of this past Wednesday is, however, not out of the question.

 

GR051516-EA

 

If we take a look at EA’s weekly chart, we can see that it is currently trying to break out of a long and sloppy-looking 41-week base. The stock has run into resistance right at the prior peak of this base, so some backing and filling would not be surprising to see.

As well, EA had a long prior upside price move before forming this current 41-week base. Thus if it were to fail on this breakout attempt, it too could morph back into a short-sale target. So while I like the story behind both ATVI and EA as video-game/home entertainment names, there is a rationale for viewing them as potentially two-sided plays.

A nice low-volume retest of the 70.24 BGU low on a 50% or more retracement to the downside might put EA in a lower-risk buy position. In the short-term however, I am willing to bet that such a pullback might also present a reasonable short-term short-sale play that would be of a tactical nature only.

 

GR051516-EA Weekly

 

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

CyberArk Software (CYBR) is holding tight along the confluences of its 10-day, 20-day and 50-day moving averages. Volume picked up on Friday, however, as the stock stalled off of its highs, but held above the 20-day and 50-day moving averages. It’s not clear to me that the stock is necessarily setting up to move higher. As with any long idea mentioned in this report, what the general market does will determine whether I’m willing to stick my neck out on the long side, and the same goes for CYBR. Technically, the stock could be viewed as buyable here using the 50-day line at 40.21 as a guide for a very tight stop.

Fabrinet (FN) failed to hold its 10-day moving average and is now moving down towards its 20-day moving average at 33.34. Volume has remained quite light on the pullback, however, which can be considered constructive, at least for now. On Friday volume came in at -46 below average, which qualifies as a voodoo pullback.

Fortinet (FTNT) is holding tight along its 10-day and 20-day moving averages. Volume is drying up, which means the stock is in a lower-risk buy position here using the 20-day line at 31.77 as a very tight downside stop.

Silicon Motion (SIMO) continues to hold tight along its 10-day moving average as volume dries up. For this reason it sits in a lower-risk buy position using the 20-day line at 39.69 as a selling guide. Because SIMO tends to be a volatile, smaller name, one might give it 2-3% of downside “porosity” below the line when figuring a precise stop-out price.

I’ve been working GoDaddy (GDDY) as a “lather, rinse, repeat” short for quite some time now. As I discussed in my Wednesday mid-week report, the stock has been moving sideways for over a month now since failing on a recent cup-with-handle breakout attempt. Every time the stock rallies up to the 20-day or 50-day moving average it has been shortable, and then each time it has pushed down to the 30 price level or lower. If we look at GDDY’s weekly chart we get a better sense of how this might be developing as a short-sale target.

Following the breakout attempt from the third base GDDY has formed since coming public last April, the stock is locked in a five-week bear flag of sorts. The 10-week moving average has served as solid upside resistance.

Notice also that while the two prior bases were perhaps formed a little more constructively, this most recent Base #3 has a distinct V shape to it. That sort of eight-weeks-down followed by seven-weeks-up V shaped cup is failure-prone, and it has in fact failed. The question now is when and whether the stock eventually breaks to lower lows from here. I continue to view it as shortable on rallies up into the 31 price level in anticipation of lower lows to come.

One reason why the stock has been able to hold the 30 price level, more or less, is likely because its recent 16.5 million share secondary offering was priced at 30.25. Notice how over the past four weeks the stock has closed tightly around that 30.25 price point. Buyers of that secondary offering likely have little incentive to sell the stock below that price level, but if the general market starts getting into trouble, I would expect GDDY to break down in decisive fashion.

 

GR051516-GDDY

 

Panera Bread (PNRA) has been setting up as a potential late-stage failed-base (LSFB) short-sale set-up over the past several days, as I’ve discussed in recent reports. In fact, in my Wednesday mid-week report, I stated that Wednesday’s “break back below the 20-day line made the stock eminently shortable, and from here I would consider the stock to be shortable using the 20-day line at 212.83 as a guide for a tight upside stop.”

PNRA obliged by staging a quick rally up into its 20-day moving average on Thursday and then gapping and closing below its 50-day moving average on Friday. I continue to view this as a short using either the 50-day line at 210.87 or the 20-day line at 212.39 as guide for an upside stop. The reality is that the two moving averages are less than 1% away from each other, so using the 20-day line as a guide for a stop is about as tight as using the 50-day line.

Basically, we can view PNRA as a late-stage failed-base set-up given that the breakout attempt of five days ago on the chart from a somewhat box-shaped cup-with-handle has technically failed.

 

GR051516-PNRA

 

I briefly mentioned Walt Disney (DIS) as a short-sale target in a “Market Wrap” blog post I put up Thursday after the close. On the weekly chart, shown below, the stock is a fascinating example of a short-sale set-up that has evolved over a long period of time. It has even, at one time, taken on somewhat bullish characteristics.

Back in October of last year DIS looked to be setting up for a great fall as it formed what appeared to be a big head and shoulders top. The massive-volume break down the right side of the head was textbook in every sense of the word. But the stock held up in the right shoulder and turned back to the upside.

From there it ran up to its old highs, forming a deep cup formation. This formation had somewhat POD-like characteristics, and a breakout attempt in mid-November 2015 ended up failing. The first sign of the failure was a gap down below the 20-day moving average on November 27, 2015. That led to a sustained decline into the February lows where DIS undercut the prior low from late August of 2015. That led to a textbook undercut & rally move that took the stock all the way back above the 40-week moving average over the past couple of weeks.

 

GR051516-DIS Weekly

 

This past week DIS gapped below the 40-week moving average, which shows up as a big-volume reversal at the 40-week moving average on the weekly chart. Drilling down on the daily chart, below, we can see that this was a shortable gap-down move. This becomes a shortable set-up using the high of the gap-down day at 102.50 or the 20-day moving average at 102.85 as a guide for a tight upside stop. With the stock sitting right on top of its 50-day moving average, I would be on the lookout for any kind of blip back up into the 20-day line as an optimal short-sale opportunity.

Otherwise a breach of the 50-day line would bring the stock into play as a short right there, using the 50-day line as your new guide for an upside stop. However, given that the 20-day line lies 2-3% above the 50-day, that could also be used as an alternative guide for an upside stop for those who would wish to give the stock more room.

 

GR051516-DIS

 

Below are my current trading journal notes on short-sale ideas discussed in recent reports as well as my Gilmo Short 50 Index, which now numbers more than 50 stocks:

Adobe Systems (ADBE) – some are claiming that the stock is building a flat base and may be on the verge of a breakout. While this might occur, I think we have to take a two-sided view of the stock in order to remain entirely objective and open to whatever opportunities might arise. ADBE has been forming a very v-shaped sort of cup-with-handle that is a bit POD-like. Earnings are expected out in mid-June, so the stock may not resolve itself until then. In the short-term this has been shortable at the highs of the range, and then buyable at the lows of the range. My guess is that waiting around for a breakout, assuming that is to occur in the first place, is not going to be the big- money move to play.

Alaska Airlines (ALK) – extended to the downside.

Alphabet (GOOGL) – pulling back to its 200-day moving average as volume declines. The stock was shortable earlier this week around the 20-day moving average, now at 732.66, and ended the week at 723.24. Watch for bounces back up into the 20-day line as potentially optimal short-sale opportunities. Otherwise, a breach of the 200-day line on heavy volume would bring the stock into play as a short right at that point using the 200-day line at 721.72 as a guide for a very tight stop.

Amgen (AMGN) – shortable here using the 50-day line as at 153.57 as a guide for an upside stop. I might also look at any rally back up through the 50-day line and up to the 200-day moving average at 154.54 as an even more opportunistic short-sale point given that the stock is somewhat extended to the downside.

Apple (AAPL) – in my Wednesday mid-week report I wrote at the time that “one option is to short this here using the 10-day line at 93.63 as a tight upside stop.” That would have worked on a short-term basis as AAPL broke support around the 92 price level and closed the week at 90.52. From here, if one is already short the stock, I would use the 10-day line as a trailing stop just in case the stock gets a bounce. Many are citing AAPL’s valuation (otherwise known as its P/E ratio) as the lowest in a decade. But of course we know that a P/E ratio is not a measure of absolute value, but rather of the market’s current demand for the company’s futures earnings stream. Therefore, AAPL’s current forward P/E ratio of 11 tells you that the market is placing less and less value on its forward earnings stream, end of story.

Biogen Idec (BIIB) – shortable here using the 50-day moving average at 265.41 as a guide for an upside stop. One could also look for a rally back up into the line as an optimal short entry point.

Carnival Cruise Line (CCL) ­– shortable here using the 50-day moving average at 49.69 as a guide for a tight upside stop. Could also use the recent highs around 51 as an alternative, looser guide for an upside stop.

D.R. Horton (DHI) – still in shortable range using the 200-day moving average at 29.75 as a guide for an upside stop.

Delta Air Lines (DAL) – extended to the downside. Potentially shortable here right at the 10-day line at 42.06 but would prefer a rally up to the 20-day line at 43.25 as a more optimal short-sale entry. The stock is over 15% extended to the downside from its original short-sale point at the confluence of the 50-day and 200-day moving averages in mid-April per my reports back then.

Hawaiian Holdings (HA) – stock was last shortable at the 20-day moving average on Wednesday of this past week and ended the week lower. Would continue to view rallies up into the 20-day moving average at 43.55 as potential short-sale entry points.

Las Vegas Sands (LVS) – looking for rallies into the 200-day line at 46.60 or the 20-day line at 46.55 as optimal short-sale opportunities.

Lennar (LEN) – as I wrote on Wednesday, LEN was “probably shortable here using the 10-day line at 44.64 as a guide for an upside stop.” The stock has moved lower since then, and I would continue to view rallies into the 10-day line, now at 44.26, as potentially shortable.

Microsoft (MSFT) – remains shortable on rallies up into the 20-day line and the 52 price level. Stock has failed to hold the 20-day line over the past three days and is now sitting on top of the 200-day moving average. A breach of the 200-day line would bring the stock into play as a short-sale at that point using the line at 50.85 as a guide for a tight upside stop.

Mobileye (MBLY) – shortable here using the 50-day moving average at 36.98 as a guide for a tight upside stop.

Netflix (NFLX) – as I wrote Wednesday, NFLX, “Could be shorted here using the 10-day line at 90.94 as a tight stop.” I would continue to view rallies into the 10-day line as potential short-sale entry points.

Nike (NKE) – looking for rallies into the 20-day line at 58.80 as potential short-sale opportunities from here. Stock was previously shortable around the 60 price level per my prior discussions of the stock, but has come down a few percent since then. I’m hearing that IBD has a front-page article touting NKE’s large number of patents which could help drive a shortable rally on Monday. Keep an eye on this.

Priceline.com (PCLN) – sitting about 1% above its 200-day moving average which means that a breach of the line would bring it into play as a short-sale using the line at 1268 as your guide for an upside stop. Otherwise, a rally into the 20-day line at 1293.28 might present the most optimal short-sale entry point. In my view this thing is eventually headed lower, it’s just a matter of when. A breach of the 200-day line would seal the deal, as I see it.

Royal Caribbean Cruise Lines (RCL) – shortable here using the 50-day moving average at 76.95 as a guide for a stop. Of course, rallies back up into the 50-day line would be considered the most optimal short-sale entry opportunities.

Salesforce.com (CRM) – company is expected to announce earnings this Wednesday. Nothing to do here until we see what the stock does after earnings.

ServiceNow (NOW) – still holding below its 20-day moving average at 68.05. I view this as shortable here using the 20-day line as a guide for a very tight upside stop. Otherwise the 10-day line at 68.40 can serve as an alternate stop. Keep in mind that NOW could have a sympathy move to CRM’s earnings announcement on Wednesday. Be alert to any opportunities this might create in NOW.

Skechers (SKX) – tried to bounce back up through the 50-day line over the past two days but failed at the 10-day line on Friday. This sent the stock back below the 50-day line. Stock looks shortable anywhere around here with the idea of using the Friday high at 32.23 as a guide for a reasonably tight upside stop.

Southwest Airlines (LUV) – shortable here using the 200-day moving average at 41.87 as a guide for a tight upside stop.

Splunk (SPLK) – as I wrote on Wednesday, the stock was “shortable here using the 50-day line at 48.67 as a guide for a tight upside stop.” On Thursday it gave short-sellers a nice window of opportunity when it briefly opened higher at 48.63 and then proceeded to move to a low of 46.37 by the close. Would continue to view rallies into the 20-day moving average at 48.91 or the 50-day moving average at 48.72 as the most optimal short-sale opportunities. Keep in mind that SPLK could also have some sort of sympathy reaction to CRM’s earnings announcement on Wednesday.

Starbucks (SBUX) – rallies into the 20-day line at 57.31 would be your best short-sale opportunities.

Tesla Motors (TSLA) – holding in a short, five-day bear flag and remains shortable on rallies to the most recent highs of that flag at around the 211-212 price area.

Under Armour (UA) – stock remains in tatters and is extended to the downside.

Verisign (VRSN) – sitting in a short six-day day bear flag. The most optimal short-sale entries would be on any rally up to the 20-day moving average at 86.53.

Workday (WDAY) – the nearest moving average is the 20-day line at 73.16. With the stock closing at 70.65 on Friday, rallies up into the line would present the best short-sale entry points. WDAY is another stock that could have a sympathy reaction to CRM’s earnings report on Wednesday. So you have three stocks on our short-sale watch list, WDAY, SPLK, and NOW, that could present some juicy opportunities depending on how they react to CRM’s earnings report. You can throw CRM into that category as well.

Its seems fairly clear to me that underneath the market’s hood there are a lot of stocks panning out or setting up as worthwhile short-sale targets. This naturally will lead anyone who is operating on a bifurcated approach more towards the short side of the market. So many of the names on the Gilmo Short 50 Index list are coming down or setting up at logical short-sale points that I’m going to have to figure out some way to automate or at least simplify my notes on each that I include in each report. Below is the current list for your reference.

 

GR051516-GilmoShort 50 Index

 

Notice that we are also seeing financials like Wells Fargo (WFC), J.P. Morgan (JPM), Goldman Sachs (GS), U.S. Bank (USB), and Morgan Stanley (MS), among others, start to come unglued. I pointed out in my market wrap blog post of this past Thursday afternoon that these were looking wobbly.

On Friday the financials all sold off, which was somewhat odd since the “strong” economic data that morning was allegedly arguing for a coming Fed interest rate increase. This would actually be a positive for financials, but instead they all sold off on Friday. That does not appear to bode well for the general market.

One stock on the short list that may not necessarily look like a short, at least not yet, is McDonald’s (MCD). The stock recently broke out to new highs and has kept moving higher on light volume. However, one reason I’ve been keeping an eye on this as a potential short-sale target is due to what I consider to be a potential problem for the company looming on the horizon.

The movement towards raising minimum wages across the country is going to take its toll on fast-food outlets like MCD, but you wouldn’t know from the recent breakout. However, as it is a big-stock leader, I am attuned to any potential failure that might arise as a sign for the general market.

Note that selling volume has come in strongly over the past three days as the stock has moved back below the 129.80 breakout point and down to its 20-day moving average. Since the first sign of any potential late-stage base-failure is a breach of the 20-day line, this is something to watch for.

In my view, if MCD breaks the 20-day line it becomes a short at that point, using the line at 128.68 as a guide for an upside stop. Keep an eye on this in the coming week.

 

GR051516-MCD

 

The underlying action of the market appears to be providing some clues as to where this market might be headed as we begin the new trading week. There are some decent upside trades if one buys at the right spot, as was the case with MXL over the past couple of days. I think caution is warranted on the long side.

Meanwhile, Friday’s low-volume retest of the prior week’s lows could set up a bounce on Monday, or not. In any case, I think we have to view any upside bounces in the general market as potential short-sale opportunities as we keep the Gilmo Short 50 Index list handy as a reference for such opportunities as they arise 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 a position in ATVI, EA, and GDDY, 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.