The Gilmo Report

May 18, 2016

May 18, 2016

Monday’s rally was quite logical from the standpoint of the low-volume retest of the prior week’s lows that we saw on Friday. But it turned out to be little more than a one-day wonder rally as the indexes reversed course yesterday. The action sent the S&P 500, Dow Jones Industrials and the small-cap Russell 2000 Indexes all crashing back below their 50-day moving averages on a sharp increase in volume. But the fun wasn’t over at that point!

Today the market waited with bated breath for the release of the Fed meeting minutes, which seemed to confirm that the Fed is on track for a June or at least July interest rate hike. As I blogged after the minutes were released, I tend to think that any move towards normalizing interest rates is good for the markets.

The market spent the final two hours of the trading day milling this over as the indexes flew back and forth. As the close approached and the dust began to settle, the long side started to strike me as more appealing. We’ll find out tomorrow whether I’m right or wrong on that one. Basically, the S&P 500 tested and held support along the 2040 level as volume dries up sharply. However, I’m not so sure that the volume levels were reading correctly. There seemed to be some sort of data feed problem.

Volume was much higher on the SPDR S&P 500 ETF (SPY), however, so we could use that as a proxy and surmise that the S&P 500 found support on higher volume. Either way, the S&P 500 does remain underneath its 50-day moving average, and a strong move back above the line would put it firmly back into rally mode, as I see it.

 

GR051816-$SPX

 

It was clear to me, however, that interest-sensitive names and big-stock dividend-paying names were getting hit the hardest. This accounted for a divergence by the NASDAQ Composite Index as it closed up 0.5% vs. the S&P 500’s 0.02% upside move. The NASDAQ Composite still remains below its 50-day moving average, however. It was able to find support around the lows in the 4710 price region on higher volume. On its face this looks like at least an attempt at support along this confluence of recent lows.

 

GR051816-$COMPQ

 

There have been some interesting developments in big-stock leaders over the past three days. As I wrote over the weekend, I wanted to keep a close eye on three big-stock names that have been acting well. If they began to falter, that would likely be a negative for the market. The first was of course Amazon.com (AMZN) which broke below the key $700 Century Mark yesterday. What makes this difficult to call as an outright short-sale using Jesse Livermore’s Century Mark Rule in Reverse is the fact that the 10-day moving average lies just below the $700 price level.

AMZN could have been shorted at the $700 level yesterday, and that would have produced a nice 10-point profit by this morning. However, by the close today AMZN was able to hold the 10-day line as volume came in at about average. This was inconclusive action as I see it, but I would play the stock in synchrony with what the market does from here. If we are able to hold a rally, then I want to be long AMZN using the 10-day line and/or the $700 price level as my nearby selling guide.

If not, then it could remain in play if it holds below the $700 price level, using that level as a guide for an extremely tight upside stop. Play it as it lies!

 

GR051816-AMZN

 

More glaringly negative was the action in McDonald’s (MCD), which had been showing signs of failing on a recent breakout to new highs, as I discussed in my report of exactly one week ago. Yesterday MCD pulled a huge outside reversal to the downside that sent it pushing below its 20-day moving average. As I wrote a week ago, this would be a short-sale signal confirming the stock as a potential late-stage base-failure set-up. MCD then gapped down this morning and proceeded to bust its 50-day moving average, sealing the deal on the recent breakout failure.

While the stock was shortable yesterday at the 20-day line, one could theoretically be short the stock on this breach of the 50-day line today. In that case one would use the 50-day line at 126.60 as a guide for an upside stop.

 

GR051816-MCD

 

Finally, there is Facebook (FB), which has been retesting its 20-day moving average over the past two days. Yesterday’s move down to the line came on light volume. Today the stock tested the line once again and held, again on below-average volume. Recall over the weekend that I didn’t like the wedging action FB was showing four days ago on the chart. At that time it was pushing up to the highs of the range around the 120 price level on weak volume. This pullback to the 20-day line helps to correct that wedging action.

This pullback also brings the stock into a lower-risk buy position along the 20-day line, which would also serve as your guide for a very nearby downside stop.

 

GR051816-FB

 

I also like the pullback in LinkedIn (LNKD), which has tested the 10-day moving average several times over the past five trading days. It has also tested the highs of its recent price range just above the 131 price level. So far the action looks normal, particularly within the context of a general market that is certifiably nutty at times. The 10-day line has moved up to 126.45, which brings the stock into a lower-risk buy position here using the 10-day line as a guide for a very tight downside stop.

 

GR051816-LNKD

 

Pushing through my array of big-stock names to discuss, we come to Walt Disney (DIS), which I’ve discussed as a short-sale idea in recent reports. DIS reversed at its 50-day moving average yesterday, sending it further below the line today as selling volume increased. Note, however, that the stock closed near mid-range for the day, which gives it the look of an attempt at supporting action given the increased volume. It is also moving into the highs of a base it formed between early March and mid-April of this year.

DIS will probably work best as a nice short if the general market really starts to come apart. Thus I would not be chasing on the downside here. Instead, look for a rally up to the 50-day line at 100.42 as a potentially lower-risk short-sale entry.

 

GR051816-DIS

 

The action in these big-caps argues for a market that remains somewhat bifurcated. If interest rates are indeed going to rise again, then a move back to growth names could occur. But more on that in a bit. The excuse for the market’s change of heart on Tuesday was CPI data that showed a pick-up in inflation. This also prompted comments from several Fed heads indicating that they would support an interest rate increase in June and/or July.

Based on what today’s Fed meeting minutes revealed today, these Fed heads were probably talking tough because they knew what the minutes would show. In this manner the market probably already had discounted the information yesterday. That’s why it didn’t blow apart today. Talk of interest rate increases that in turn sparked a rally in the dollar didn’t seem to faze the precious metals yesterday, at least not initially. Today was a different story, however.

Both the iShares Silver Trust (SLV) and the SPDR Gold Shares (GLD) , not shown here on charts, broke hard to the downside today as both look poised to test their 50-day moving averages. However, Silver Wheaton (SLW) responded more vigorously yesterday as it jacked back up near to its recent highs. But, as with the metals themselves, this move was short-lived as SLW busted hard to the downside today on increased selling volume.

As I wrote over the weekend, “…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.” That move did come yesterday as SLW pushed above the 20 level on an increase in volume. However, that move did not hold, and, frankly if I had bought SLW along the 20-day moving average on Monday, as an example, I would have sold into the move yesterday. Somehow it didn’t seem to make sense.

At this point SLW also looks poised to test its 50-day moving average at 17.98. If you believe that the Fed will still remain on hold through June and July, then such a pullback could present the most opportunistic entry point for you gold and silver bugs! At least the 50-day line would provide a guide for a very tight and reasonable stop.

 

GR051816-SLW

 

Salesforce.com (CRM) is gapping higher in after-hours trade as I write this afternoon. The company beat on earnings and is currently trading around the 82-83 price level. This would set up a potential buyable gap-up move tomorrow morning. That is something I will definitely be keeping a close eye on tomorrow morning. Members might recall that I pointed out a pocket pivot in CRM’s pattern Monday in an after-hours blog post. While I would not consider that to have been actionable ahead of earnings, tomorrow’s gap-up move may be.

 

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Another cloud software name that flashed a pocket pivot on Monday was ServiceNow (NOW), as it popped up through its 10-day and 20-day moving averages. NOW will likely move in sympathy to CRM tomorrow, and I would watch for a move back up through the 200-day moving average on this basis. Note that NOW’s pocket pivot is somewhat logical following its move to fill the gap nine days ago on the daily chart. It then pulled back four and five days ago on below-average volume for a sort of Wyckoffian Retest of that gap-filling low.

 

GR051816-NOW

 

Watch for other names in the space, like Workday (WDAY), Splunk (SPLK), Tableau Software (DATA), and even Citrix Systems (CTXS), for potentially playable sympathy moves. In my Monday blog post where I mentioned the pocket pivots in NOW and CRM, I also noted that CTXS had flashed a pocket pivot as well. This pocket pivot occurred as a standard ten-day pocket pivot on Monday. Note also that there are two more five-day pocket pivots in recent days as the stock has moved tight sideways along the confluence of its 10-day and 20-day moving averages.

 

GR051816-CTXS

 

Both Activision (ATVI) and Electronic Arts (EA) have had nice upside moves since their respective buyable gap-ups following their recent earnings reports. Both also ran out of upside momentum in tandem yesterday, bringing into play much-needed pullbacks, in my view.

ATVI has pulled down towards its 10-day moving average, but in my view I would prefer to see it meet up with the line, which is currently at 37.56. Otherwise, if one owns the stock from lower in the pattern per my discussions of the stock in prior blog posts, the 20-day line at 36.53 would be your maximum downside selling guide.

 

GR051816-ATVI

 

Electronic Arts (EA) more or less did exactly what I was looking for it to do based on my discussion of the stock over the weekend. As I wrote at the time, I was looking for a 50% retracement off the peak. Thus the high over the past six days is 77.15, and the low is 70.24. A 50% retracement would take the stock down to 73.69.

EA got down as far as 73.26, making for a 56% retracement, but still enough to fit what the doctor ordered. This could be bought on this basis, but I would like to see the 10-day line catch up to the stock as a more reliable reference point for a buyable pullback.

In the meantime, I think ATVI and EA probably need some time to further consolidate their recent gains.

 

GR051816-EA

 

Among other names I’ve discussed on the long side in recent reports, CyberArk Software (CYBR) continues to hold very tight along the confluence of its 10-day, 20-day and 50-day moving averages. Today CYBR flashed a very subtle standard ten-day pocket pivot along the moving average confluence. This comes after a big-volume pocket pivot along the moving averages about two weeks ago. Since then CYBR has flashed a few five-day pocket pivots as it has held very tight sideways.

As I wrote over the weekend, technically speaking the stock can be viewed as buyable here using the 50-day line at 40.36 as a guide for a very tight downside stop.

 

GR051816-CYBR

 

Fortinet (FTNT) can be considered as a cousin to CYBR as it continues to hold tight along its 10-day moving average. It has not budged over the past several days even as the general market has flipped back and forth in volatile fashion. Volume dried up sharply today to -44.5% below-average, which qualifies as “voodoo” volume levels. The stock’s tight action, like CYBR’s, gives it a reasonable shot at moving higher if the general market can get its mojo back.

 

GR051816-FTNT

 

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

Fabrinet (FN) pulled a big spin-out all the way down to its 50-day moving average today as volume came in very light. That sort of move would be tough to buy into, but the stock was able to regain the 20-day moving average by the close. This might put it in a lower-risk buy position using the 20-day line at 33.42 as a guide for a very tight stop. A stock that acts like this, however, can be very tough to play. Therefore I might consider other names that don’t act as squirrely.

Maxlinear (MXL) broke out to new highs on Monday and then retested the top of its base today before turning back to the upside. Technically this remains in a buyable position based on Monday’s breakout through the 19 price level and today’s close at 19.50. Otherwise one can hope to catch a pullback to the top of the base as a more opportunistic entry point.

Silicon Motion (SIMO) flashed a pocket pivot on Monday as it moved up and off of its 10-day moving average. Over the weekend I discussed this as buyable along the 10-day/20-day moving average confluence using the 20-day line at 40.05 as a selling guide.

In order to simplify my coverage of the short side, I’m going to start by showing our current Gilmo Short 50 Index list of short-sale targets.

Obviously, the short side only comes into play if the general market continues to weaken. As well, you want to pick stocks that are near areas of potential overhead resistance. In order to aid you in this regard, I have highlighted the nearest moving average that is still above the stock on the list. Remember that you can click on it to make it larger.

 

GR051816-Gilmo Short 50 Index List

 

Note that some names that I’ve discussed on the long side in this report, such as NOW, WDAY, SPLK, and DATA, are on this list. Also note that JPM and MS had big pocket pivot moves today, so their viability as short-sale targets is questionable as they may very well be buyable. CME group also had a pocket pivot.

Stocks that remain in potentially shortable areas near or at overhead resistance along a moving average such as the 10-day, 20-day, or 50-day include: AVGO, BIIB, CAT, CCL, CELG, CSX, DHI, GDDY, GOOGL, HA, IBM, ILMN, LEN, LVS, MBLY, MCD, NFLX, PANW (earnings due next week), PYPL, SWKS, and V.

AAPL and DAL look to be stalling on rally attempts, while several other names on the list got hit today, some quite hard. These included AGU, SKX, WYNN, WMT, TSLA (after-hours) and LVS.

If you are a short-seller, I would strongly suggest going through each of these charts and having a game plan just in case the short side comes back into play. While I have several long ideas that I think are worthwhile, I believe those who play the long and the short side in bifurcated fashion should be ready to go either way.

In some cases, one could be long certain names while short others given that we’ve seen some short-sale targets simply continue lower so far this week. That is the ultimate bifurcated approach. However, I still tend to think that more certainty from the Fed is probably a good thing for the market. There is also the old rule that it usually takes a third interest rate increase to finally kill the market. Whether that old axiom holds up in today’s QE markets remains to be seen.

My advice: Take a bifurcated approach if it suits you, and be open to either side of the market depending on how things play out here as the indexes hold key support. In this regard, this report has something for both sides, so keep an entirely open mind and play it as it lies!

 

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 FB, LNKD, and NOW, though positions are subject to change at any time and without notice.

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