The Gilmo Report

May 17, 2017

May 17, 2017

Things became quite extended to the upside going into yesterday’s close as many of our favored long names have been jacking higher. But as is often the case in this market, just when things look about as good as they can get the market likes to pull the rug out on investors.

That’s what happened this morning as the indexes gapped down at the open and just kept moving lower all day, save for a couple of brief churning periods.  In the process, the NASDAQ Composite Index finally closed, no, make that “blew,” below its 10-day moving average on heavy selling volume.

The selling today struck me as forced selling or abnormal liquidation (choose one, or both) as money rushed for the exits. Leading stocks of all stripes and colors were summarily and indiscriminately shot.

 

GR051717-$COMPQ

 

The S&P 500 Index, which was never able to break out and follow the NASDAQ to new highs, blew right through its 50-day moving average on heavy selling volume. Charts of the Dow Jones Industrials, NYSE Composite, and Russell 2000 Indexes all look the same as they, too, busted their 50-day moving averages as well.

With the NASDAQ Composite yet to reach its 50-day moving average on the downside, this may provide a reference point for a possible attempt at a reaction bounce. The extent and downside thrust of today’s selling would seem to imply that tomorrow will see more selling. For that reason, any small bounce at the open could turn out to be a shortable affair.

 

GR051717-$SPX

 

I constantly talk about the idea of watching the stocks first, and the indexes second. With many stocks among our favored long ideas getting quite extended to the upside, that is when I choose to take profits given my swing-trading approach. For those who try to sit with positions more and swing-trade less, if at all, then knowing where your trailing stops are is critical on days like today. Just sitting there with no idea of how you will exit when the signals are there is just playing Humpty Dumpty setting himself up for a big fall.

Today saw many leading names bust through their 20-day moving averages, such as Netflix (NFLX) and Facebook (FB). FB blew right through its 20-day exponential moving average today and bee-lined right down near its 50-day line by the close. Selling volume was heavy. Most likely, tomorrow we will get to see whether the 50-day line serves as near-term support or just becomes another milestone to pass on the way down.

 

GR051717-FB

 

NFLX also busted its 20-day exponential moving average on heavy selling volume today. It, however, is not as close to its 50-day moving average as FB, which implies that more downside to the moving average is in store tomorrow.

 

GR051717-NFLX

 

When the market starts to get into a bit of trouble as it did today, the first place to look for short-sale targets, for those oriented toward short-selling, is the current leadership. FB and NFLX both serve as ready examples, and the first entry trigger always occurs on a volume breach of the 20-dema. In both cases, any rally back up to their 20-demas could present lower-risk short-sale entry opportunities.

Another example, and there are currently many in the market right now, would be Tesla (TSLA), which I tweeted about as being shortable yesterday as it reversed from the 320 price level. At the same time, I get a lecture from a member on the blog comments page about how TSLA shouldn’t be shorted because “[Elon] Musk is a master manipulator.” As I blogged earlier today, that is no secret, and everyone is by now quite familiar with the illustrious CEO’s tendency to spew hyperbole via Twitter.

But, as well-known info, it is irrelevant, and has nothing to do with approaching the stock as a short-sale based on the concrete price/volume action at hand in real-time. In this case, TSLA was looking like it had stalled up near the 320 price level, but only confirmed as a short-sale this morning when it busted the 20-dema on volume.

Notice how the last two up days in the pattern stalled on weak buying interest. That was the clue I was operating on yesterday, as the prior undercut & rally move doesn’t have to result in a longer-term upside move. Sometimes it can just be a short-term fake out that shakes up the shorts. From here, any rally back up into the 20-dema would offer a lower-risk short-sale entry using the line as a tight stop.

 

GR051717-TSLA

 

Notes on other big-stock NASDAQ names:

Apple (AAPL) blew through its 10-day moving average on heavy selling volume today but held at its 20-day exponential moving average. This is not really actionable in either direction, short or long, as I see it, currently. The 20-dema, however, should hold as near-term support, otherwise it’s a selling guide for those long AAPL currently.

Alphabet (GOOGL) also broke below its 10-day line on heavy selling volume and looks to be headed for a rendezvous with its 20-dema. That would represent a final selling guide for anyone still long the stock, in my view.

Amazon.com (AMZN) is like AAPL and GOOGL in that it broke below its 10-day line but is still trading above the 20-dema. Selling volume was heavy, so if long the stock one should consider the 20-dema as a possible selling guide if the situation deteriorates.

Nvidia (NVDA) is heading back to the downside on heavy selling volume but remains well above its prior 120.92 base breakout point. For now, it’s just a matter of seeing how this pullback plays out, and whether the stock busts below the breakout point and morphs into a late-stage failed-base short-sale set-up.

Chinese names for the most part have been on fire recently, at least until today. Yesterday we saw Weibo (WB) blast off in a buyable gap-up (BGU type of move following earnings that got extended rather quickly. The intraday low here is 69.54, which puts the stock way out of buying range at this point.

Not that one would necessarily want to step in here, given the state of the general market. But if the general market selling subsides then we want to be aware of any possible lower-risk entry on a pullback closer to the BGU intraday low, should it occur constructively. However, there is one major caveat here, and that is that WB may have posted a climax type of top on this latest BGU. The stock was already in a well-entrenched and sharp uptrend since posting a roundabout pocket pivot (RAPP) down near the 50-day moving average last month, as I discussed in my reports at that time.

Yesterday’s BGU occurred as the eighth up day out of nine straight days. It was also the largest one-day point move in the stock’s entire history as a publicly-traded company. This therefore has the look of a climax top type of situation, and so should be handled with caution. It could even turn out to be a shortable situation, depending on how it plays out from here.

 

GR051717-WB

 

Over the weekend I told members to be on the lookout for a possible moving average undercut and rally move (MAU&R) by Netease (NTES) back up through the 50-day line. Interestingly, that’s precisely what we’ve seen over the prior two days. Despite today’s brutal market sell-off, the stock found intraday support near its 50-day moving average, which struck me as a bit odd.

I would watch for a breach of the 50-day line, however, as a short-sale trigger if the general market remains weak. I would not try and buy this here unless I saw the general market selling subside. In that case, it might be a “go to” long idea, but right now this is all unconfirmed. The situation with NTES, as I see it, remains in flux by virtue of the decidedly negative general market action today.

 

GR051717-NTES

 

Notes on other Chinese names discussed in recent reports:

Alibaba (BABA) is expected to report tomorrow before the open, so we shall see what transpires after the report.

JD.com (JD) remains extended, but I must admit I got away with shorting the stock off the intraday peak today as a test of the 10-day moving average within the context of more general market selling is not out of the question.

Momo (MOMO) had a nice move off the 20-dema last Friday and then broke out to all-time highs yesterday on heavy volume, mainly thanks to WB’s strong earnings report and BGU move.

This isn’t going to be a very long report for one simple reason, which is that I don’t see much I want to step in and try to buy right now. And that’s fine, since I would need to see the market stabilize and some set-ups, most likely in the form of low-volume pullbacks to or supporting type action at key support levels. So far I’m not seeing that, and my notes (some with charts, some without) on my current crop of long ideas discussed in recent reports reads like a wartime casualty list:

Activision Blizzard (ATVI) broke below its 10-day line and is headed toward its 20-dema on heavy selling volume.

Applied Optoelectronics (AAOI) was able to hold support at its 10-day moving average and above the 60 price level breakout point. It needs to hold here to remain viable as a long idea, and could morph into a short-sale target if it cannot hold the 60 price level.

 

GR051717-AAOI

 

Arista Networks (ANET) is holding right at its 20-dema on selling volume that was slightly above-average today. It needs to hold the 20-dema to remain viable, otherwise a test of the 50-day moving average may be next.

Cavium (CAVM) was up about three bucks yesterday, but completely flamed out today as it busted below the 50-day moving average on heavy selling volume as it gave up all of yesterday’s three-point gain and another two points for good measure. Now this looks like a short here using the 50-day line as a tight stop.

Citigroup (C) was moving higher in robust fashion yesterday following last week’s pocket pivots at the 10-day line, as discussed in the weekend report. Today it gave up all the past five days’ gains and then some as it broke right down to the 50-day moving average. A breach of the 50-day line could trigger this as a short-sale, using the line as a tight upside stop.

CSX Corp. (CSX) broke below its 10-day moving average yesterday on above-average selling volume and then gapped below its 20-dema today on heavy selling volume. It stopped short of the 50-day moving average, which is the next level of support for the stock. However, CSX did close below the 49.36 intraday low of its April 20th buyable gap-up move, which is enough to be selling the stock, if anyone owning it was too slow to sell it yesterday.

Edwards Lifesciences (EW) finally broke out of its extremely tight flag formation on Monday, but reversed off the highs yesterday on heavy volume. It is now heading back toward the 10-day line and the top of the prior flag base. The 10-day line should serve as near-term support, but if it can’t it should be summarily tossed if anyone is still long the stock.

Electronic Arts (EA) is closing in on the 104.76 intraday low of last week’s buyable gap-up move. However, selling volume was very heavy today, implying that further downside is likely from here. I might be more inclined to short the stock on a move below the 104.76 price level and then used that as a tight upside stop.

 

GR051717-EA

 

First Solar (FSLR) gapped lower and is now approaching its 200-day moving average on increased selling volume that was at least below average. A breach of the 200-day line on volume, however, would trigger this as a short-sale target at that point, using the line as a tight upside stop.

Impinj (PI) gave us a nice 10%-plus trade on Monday and Tuesday, but as I tweeted at the time, selling into the move made sense, at least to me. It did find support off the lows today and managed to close positive and back above its 10-day moving average. But given the volatile nature of this stock I would not care to be long the thing in a continued general market sell-off.

iRobot (IRBT) is still way extended after its late April buyable gap-up move, but is holding above its 10-day moving average despite today’s market carnage. There is nothing to do with the stock for now, but if long the stock I would use the 10-day line as a tight selling guide to ensure I keep the excellent profits it has generated since I first discussed it at the end of April.

ServiceNow (NOW) failed to hold the $100 Century Mark after moving just above it yesterday. It gapped down today back below the 100 price level but held its ground, for the most part, by remaining above its 10-day moving average. Selling volume was heavy, and I would look to use the 10-day line as a tight selling guide from here

Snap (SNAP) looked to run out of momentum yesterday following its prior undercut & rally move over the prior two days. To its credit, selling volume was not extremely heavy as it rolled back to the downside today. I would watch this for a possible low-volume retest of last week’s low, otherwise known as a Wyckoffian Retest.

 

GR051717-SNAP

 

Square (SQ) was smacked back below its 10-day moving average on heavy selling volume today. The 19.18 BGU low from two weeks ago serves as a maximum downside selling guide.

Take-Two Interactive (TTWO) busted below its 10-day moving average today on heavy selling volume. The 20-dema at 65.28 needs to hold up as near-term support from here.

Twitter (TWTR) failed on a breakout from a short flag as it gapped down and busted below its 10-day moving average today on heavy selling volume. As far as tangible support levels go, the 20-dema at 17.66 and the 200-day line at 17.58 would be the next reference levels.

 

GR051717-TWTR

 

Veeva Systems (VEEV) was going parabolic yesterday and sold off today on heavy volume in the midst of the general market turmoil. However, it managed to close mid-range in a show of support at the 10-day moving average. With earnings expected next week, however, there is absolutely nothing to do here. In the meantime, if long the stock, then use the 10-day line as a tight selling guide or the 20-dema as a wider selling guide depending on your risk preference.

Western Digital (WDC) cracked below its 20-dema today on increased but below-average selling volume. Nevertheless, this is a pretty severe price break, and a test of the 50-day line looks likely from here.

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.

While I’m currently not looking to go long anything until I see signs of stabilization among leading stocks and the general market, the short side does come back into play to some extent. As I’ve discussed before, in this case your best short-sale targets will likely be leading stocks that start to break down.

Today we saw just that in names like FB, NFLX, TSLA, and many others. For those oriented toward the short side, these became actionable as soon as they breached their 20-day exponential moving averages. So, for the purposes of shorting this market with the idea of perhaps sustained downside from here, this small handful of targets taken from my long watch list will suffice.

In most cases, where a leading stock has busted its 20-dema, as many mentioned in my notes above did today, we would look for weak rallies back up to the 20-dema as potential, lower-risk short-sale entry points. However, with this being the first serious break off the peak in the general market indexes, we should understand that if there is a short side to be played, it is just getting started.

For that reason, we can let things develop here and see what emerges in the days ahead. In the meantime, if you are still long anything, simply have a firm idea of where your exit points are, and stick to them. This sell-off could be temporary, or it could be the start of something much worse. But the tone of the action today clearly had the feeling of forced selling or abnormal liquidation, as I noted at the outset of this report.

As Bill O’Neil was fond of saying, in the stock market there are two kinds of investors: the quick and the dead. Don’t let yourself become the latter, as my sense is that right here a strong defense will become critical as the market sorts things out, and even more critical if this turns into a full-blown correction.

 

Gil Morales

CEO and Principal, Gil Morales & Company, LLC
Managing Director and Principal, MoKa Investors, LLC
Managing Director and Principal, Virtue of Selfish Investing, LLC

At the time of this writing, of the stocks mentioned in this report, Gil Morales, MoKa Investors, LLC, Virtue of Selfish Investing, LLC, and/or Gil Morales & Company, LLC held no positions, though positions are subject to change at any time and without notice.

Gil Morales & Company, LLC (“GMC”), 8033 Sunset Boulevard, Suite 830, Los Angeles, California, 90046. GMC is a Registered Investment Adviser. This information is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to GMC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Gil Morales & Company, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.