The Gilmo Report

May 25, 2016

May 25, 2016

Both the S&P 500 and the NASDAQ Composite Indexes pushed up through their 50-day moving averages yesterday on increased volume. This is something we were looking out for per my weekend report and it is sufficient for the purpose of calling a resumption of the market uptrend. Those who abide by the old follow-through day rule might consider this a 4th day or 13th day follow-through. This would depend on whether you wish to call May 6th or May 19th the first day of a rally attempt.

For my purposes, however, it was enough to observe that there were more long set-ups developing than short set-ups over the weekend as I noted in my weekend report. That at least made the case for being long yesterday near the open as the rallied carried through today. Yesterday’s move carried the S&P 500 up through the 50-day line on higher, but below-average volume. Today it approached the prior April highs on lower volume.




The NASDAQ Composite Index has quickly become somewhat extended above its 50-day moving average after pushing above the line yesterday. As I noted over the weekend, it was still well below the 50-day line, but made up a lot of ground yesterday as it blasted exactly 2% higher on higher volume. Today’s action saw a narrower price range as the index pushed higher on lower volume. So far a reasonable follow-through to yesterday’s follow-through, but I find some aspects of this rally to be somewhat suspect.




One notable characteristic of this current two-day jack back above the 50-day moving averages is that very few stocks are rallying on heavy volume. My “Up on Volume” screens have been picking up very few names relative to the 300-400 I would generally see when the market is rallying as strongly as it did yesterday and today. A number of stocks, however, have been able to keep rallying on low volume, which is not unusual for this market. However, keep in mind that whenever the market has looked irresistible on the long side, it at least takes a brief pause.

So the bottom line remains as it has. Seek to enter the long side of anything at the lowest-risk entry point without getting chasing upside. Avoid acting like the proverbial moth being drawn into the light of a high-voltage bug zapper! Precious metals have been body slammed as both the iShares Silver Trust (SLV) and the SPDR Gold Shares (GLD) have broken below their 50-day moving averages. The GLD, which I show here on a daily, has broken the furthest below its 50-day moving average.

Technically, it has failed on its recent trendline breakout attempt. Unless we see some sort of recovery here soon, the SLV, not shown here on a chart, may not be too far behind. For now the SLV continues to hold above the highs of its prior early February to early April price range and has yet to violate its 50-day moving average. The GLD, on the other hand, has.




So is it curtains for the precious metals? Well, if one believes that the Fed is certain to raise rates in June or July, then perhaps it is. Certainly the 50-day moving average violation by the GLD doesn’t bode well for the metals. Silver Wheaton (SLW) doesn’t seem to want to give up the ghost, however. The stock has been under pressure as of late, but today managed to hold along its 50-day moving average and rally off the line.

Volume picked up ever so slightly but came in below average. Nevertheless it has the look of slight supporting action. If you believe the Fed will remain on hold, SLW may be the last bet you can make with the idea that it will continue to hold the 50-day line. Otherwise you can try your luck with the SLV and the GLD which dangle beneath their 50-day moving averages. Perhaps the Ugly Duckling will take a fancy to all that glitters and revive the metals and their associated stocks.




I still consider Facebook (FB) to be a market stock in the sense that where it goes from here likely will depend on where the general market goes. A continued general market rally likely sees FB push to new highs. On the other hand, a general market failure could very well see FB decisively break below its 20-day moving average and become a full-blown late-stage failed-base (LSFB) short-sale set-up.

So far, while it has shown a tendency to dip below the 20-day line, selling volume has failed to increase each time and the stock has been able to hold above and along the line. Despite today’s big index rally, however, FB didn’t seem to find much favor among buyers. It essentially churned and stalled around its 10-day moving average on light volume. It remains within a four-week flag formation following its late-April buyable gap-up move.


GR052516-FB (AMZN), which I don’t show here on a chart, is another market stock type of big-cap leader that may also serve as a bellwether for the market. So far AMZN has been able to hold above the $700 Century Mark and its 10-day moving average. Today it closed right at the 10-day line, and so remains in a buyable position using the 20-day moving average at 684.98 as a maximum downside selling guide. Otherwise, if one wanted to keep things tighter, the 700 price level could be implemented as a selling guide.

LinkedIn (LNKD) once again rallied after a “voodoo” pullback to its 20-day moving average. This maintains its status as a “Lather, Rinse, Repeat” or “LRR” play that becomes quite tradable on both sides as it swings back and forth within the nearly one-month price range it has formed since announcing earnings in late April.

The stock is now approaching the highs of this price range. Volume is still very light, coming in today at -36.2% below average. So while the stock has been buyable on the low-volume pullbacks, it could very well become an LRR short if it continues pushing right into the highs of the range on weak volume.


GR052516-LNKD (CRM) has moved to all-time highs over the past couple of days as volume has remained strong and well above average. Last week the stock posted a buyable gap-up following earnings on very heavy buying volume. As I wrote over the weekend, the stock was quite buyable based on the fact that it, “closed Friday at 81.02, which puts it just over 1% away from the 80.15 BGU low. Thus risk can be controlled very tightly here, as is my preference in this market.”

That has led to a whopping 3.18% additional upside, but upside nevertheless. The stock is now extended and it is now a matter of seeing what sort of pullbacks develop from here as the 10-day moving average has some time to catch up to the stock.




Not all strong price/volume action among cloud/enterprise software-related names is as consistent as CRM’s has been, however. Citrix Systems (CTXS) was looking quite strong yesterday as it broke out of its current price range on a pair of pocket pivot volume signatures on Monday and Tuesday.

This excitement was short-lived as CTXS was nailed today on heavy selling volume. The only news I saw that might have brought this on was a report about heavy insider selling in the stock. The breakdown seemed somewhat excessive since the selling didn’t seem all that heavy as reported in the news story. This brought it right back into its 10-day moving average and the point at which I considered it buyable per my report of this past weekend. If the selling dissipates and the stock can hold the 20-day line at 82.58, then it might be buyable at that point.

But I would want to see it stabilize somewhere in here and find support preferably along or near the 20-day line. In addition, I would like to find some further clarification for the high-volume selling that hit the stock today.




ServiceNow (NOW) has been able to edge back up to its 200-day moving average following last Friday’s pocket pivot off of the confluence of the 10-day and 20-day moving averages. As I wrote over the weekend, the stock was in a buyable position using the moving average confluence as a tight selling guide. On Monday NOW pulled into the 10-day line right at the open and then turned higher. Yesterday it ran up near to the 200-day moving average where it stalled and churned a bit on increased but below-average buying volume.

Today NOW pulled in slightly as volume dried up to 42.8% below average, which would qualify as a voodoo pullback. However, NOW closed today at 70.76 and the 10-day line is about a point lower at 69.65. I would like to see it pull back just a little more with volume remaining low as a lower-risk entry opportunity. However, one could still consider the stock to be buyable here using the 10-day line or the 20-day line at 69.27 as nearby selling guides.




Activision (ATVI) was able to hold the pullback towards its 20-day moving average on Monday and retake the 10-day moving average on increased buying interest yesterday. Today ATVI ran into resistance near the prior highs in the 39.50 price area on above-average selling volume. While I consider the stock buyable on pullbacks to the 20-day line, it is extended up here along the prior highs. I would want to see a nice low-volume pullback into the 10-day or 20-day moving average from here to help set up an ensuing lower-risk entry point.

Otherwise, I’m not averse to shorting the stock on a short-term basis near the highs in a “Lather, Rinse, Repeat” manner since the current highs also coincide with the left side peak of a big cup formation. Members should review my detailed discussion of ATVI in the May 15th report.




Electronic Arts (EA) strikes me as a little more constructive in terms of being in a potentially buyable position. Like its close cousin ATVI, EA was able to regain its 10-day moving average yesterday on increased buying volume. Volume came in at about average, so it was not blistering buying interest. However, today’s pullback into the 10-day line came on a voodoo volume signature that was 45% below average. That would put it in a lower-risk entry position here at the 10-day line, using it as a tight selling guide just in case it is unable to hold.

Otherwise, I like pullbacks to the 20-day moving average at an even 71. Currently EA remains in a short, tight two-week flag along the highs of a base that extends back to July of last year. As with ATVI, members can refer to my report of May 15th for more detail on EA’s weekly chart.




Weibo (WB) is a name I’ve mentioned in recent blog posts as one that has been holding tight along its 10-day moving average as volume has dried up significantly. I first noticed this when Dr. Chris Kacher and I put this out as a real-time pocket pivot alert on April 6th on the website we co-author. Some Gilmo members had also commented on the stock in the blog around that time as well, so a lot of us saw it. The stock has had a 20% move since then and since late April has gone sideways in a consolidative range.

Over the past few days it has been hitting my “voodoo” screen as it has held tight along the 10-day and 20-day moving averages with volume coming in extremely low. On Monday volume came in at -50% below average, at which point I considered it buyable per my blog posts over the prior two days.

Today WB popped up and off of the two moving averages as volume came in quite strong. This did not constitute a range breakout or a ten-day pocket pivot, however. It did qualify as a five-day pocket pivot, but recall that I like to see clusters of five-day pocket pivots in lieu of a single ten-day pocket pivot. In any case, buying it on the basis of Monday’s extreme voodoo pullback into the 10-day line was enough to get long the stock. From here, only similar pullbacks into the 10-day line at 23.29 would constitute lower-risk entry opportunities.




One member commented not too long ago that WB looked like Vipshops (VIPS) just before it began a big price run back in 2012. For illustration purposes, I show a weekly chart of VIPS back when it broke out from its first post-IPO base and launched on a massive upside run. In this case, one member was trying to make a comparison between WB and VIPS for the purpose of determining that WB is destined to have a big price run. Apparently, this member is trying to apply some sort of precedent analysis to WB by using VIPS as some sort of model.

Personally, I don’t see the comparison. In addition, it is quite dangerous to assume that something will act like something from the past just because the patterns might look similar. I see people trying to do this all the time, and it is simply not useful.




To me, the idea that simply because one chart in the present looks like another chart from the past means it will duplicate the same price action and big price move is so simplistic as to border on being silly.

On top of all that, the application of true precedent analysis in this case seems incomplete. First of all VIPS is a Chinese online retail or e-commerce outfit, while WB is the Chinese version of Twitter (TWTR). We might hope that it doesn’t end up like the American version, but we’ll let the price/volume action tell the story.

The more glaring difference is that VIPS broke out of a 26-week base, while WB is still within the confines of what is now a 111-week base. Anyone who thinks these bases look alike needs to have their eyesight checked, as I see it, no pun intended! ;-) I want to make it clear that my intention is not to put anyone down or make light of someone’s investment abilities. This is an isolated case and I have chosen to seize on this example as a very nice “teaching moment.”


GR052516-WB Weekly


If WB looks like any Chinese internet stock from the past, it perhaps more resembles Baidu (BIDU) in 2007. BIDU came public in the summer of 2005, and then ranged around for nearly two years before finally breaking out of a 94-week long base. In the sense that BIDU was a Chinese internet content name, as WB is, then a comparison might be likely. But in my view, operating on the basis of a blind comparison is still foolish. Simply let the current price/volume action guide you.


GR052516-BIDU Weekly


I understand the attraction of applying such simplistic analysis to determining whether a stock has big upside potential. The idea of some holy grail of  stock investing that involves simply looking around for charts of today that look like big-winning charts of the past certainly seems alluring.

But it is bunk, and true precedent analysis is much deeper than the idea of comparing charts. The last time I embarked on any serious precedent analysis was back in 2013 when my colleague Dr. Chris Kacher and I wrote an article for Forbes magazine discussing General Motors (GM) in 1915 as providing something of a precedent and illustration for the price potential of Tesla Motors (TSLA).

That article can be found here.

Our comparison of GM in 1915 to TSLA in 2013 was based on far more than some idea that their charts looked alike. While the fact that each launched on a big price move after building a very long post-IPO base was one notable, our analysis was based more on contextual and thematic arguments. Both stocks were in the same industry, and both were innovators at a time when the American automobile industry was at a major crossroads in its development and innovation.

Speaking of Tesla Motors (TSLA), I noted in my weekend report that the stock was flashing a series of five-day pocket pivot volume signatures as it pushed up and off of its 10-day moving average last week. Here, see the stock holding tight along its 20-day moving average as it consolidates that prior move off of the 10-day line. This is more or less sitting on the fence here. On the one hand TSLA could find resistance here at the 200-day moving average and break back to the downside. On the other, it could flash a pocket pivot coming up through the 200-day line.

On the plus side, TSLA is consolidating the prior gains seen last week on declining volume, but for the most part I would consider this pattern to be unresolved. Therefore all we can do is watch to see what the stock tells us from here and react accordingly. Ultimately, where TSLA goes from here may depend on where the general market goes from here. So stay alert and be ready to dance with the stock whether it’s a waltz, a polka, or a limbo!




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

CyberArk Software (CYBR) cleared its 200-day moving average today on a roundabout pocket pivot move. Its close cousin PANW is expected to announce earnings on Thursday. If one bought CYBR anywhere along the 10-day line per my prior reports, one could consider taking partial or full profits ahead of PANW’s earnings announcement.

Fabrinet (FN) has managed to bounce off of its 50-day moving average and move back above its 10-day and 20-day moving averages on decent volume so far this week. As I noted in my weekend report, FN was “sitting right at its 50-day moving average as it traded 71% above-average volume on Friday. If you like to buy extreme pullbacks in thin stocks as a preferred entry point, this one might be for you.” The stock is now sitting on its 20-day moving average, which puts it in a buyable position using the line as a guide for a tight downside stop.

Fortinet (FTNT) has continued to trek higher with its cousin, CYBR, and is now above its 200-day line. However, unlike CYBR, FTNT has not traded heavy volume but has represented a nice long trade off the 10-day line last week as discussed in my prior reports. With PANW expected to announce earnings on Thursday, one could consider taking partial or full profits on this one ahead of the announcement.

Maxlinear (MXL) continues to edge higher but still remains within range of its recent breakout through the 19 price level. I would prefer to take advantage of any low-volume pullback into the 10-day line, now at 19.22, as a lower-risk entry opportunity.

Silicon Motion (SIMO) was last buyable five trading days ago when it flashed a voodoo pullback to the 10-day line. From here I would view pullbacks into the rising 10-day line, now at 41.38, as potential lower-risk entry opportunities.

Some stocks on my short-sale watch list began to falter a bit today, but Apple (AAPL) is not one of them. However, as I’ve discussed in recent reports, it was set up for a typical undercut & rally move after undercutting all of the prior lows extending back to January of this year.

I figured it would be logical for AAPL to rally as far as the 20-day moving average, at which point I would watch for any signs of a reversal at that point. The stock has found some news-oriented support after it was revealed that Warren Buffett’s Berkshire Hathaway Holdings (BRK.A) had taken a 9.5 million share position.

As I pointed out over the weekend, it was not “Uncle Warren” who made that decision, it was his future successors who are currently “in training.” In any case, AAPL has pushed past the 20-day line which brings the 50-day moving average at 102.18 as the net reference point for overhead resistance.

So far volume has remained below average, but with the Buffett news blowing in, AAPL has still managed to move higher as sellers see no reason to bail out now. As it approaches the 50-day moving average, however, I remain alert to any signs of a reversal, which would likely first show up on an intraday 620 chart.

I don’t see AAPL resurging as the leader it once was, so ultimately I consider it a matter of when and how it eventually runs into resistance. In the meantime, it hasn’t been a bad long trade on the basis of the undercut & rally set-up, which is similar to Wyckoff’s “spring” and Livermore’s “Shakeout-Plus-3” bottom-fishing buy set-ups.




As I noted in a Market Wrap blog post yesterday after the close, several of the names on my short-sale watch list flashed pocket pivots yesterday. In some cases, as with Mobileye (MBLY), for example, the pocket pivot can be considered a roundabout pocket pivot. This is also known, of course, by the acronym RAPP.

MBLY flashed another pocket pivot today off of the 50-day moving average. This puts the stock in a buyable position using the 50-day line at 37.40 as a guide for a very tight downside stop.




Alphabet (GOOGL) is another short-sale target stock that flashed a pocket pivot yesterday as well. This led to additional upside today. If I’m looking to short a stock at resistance, which might be the case with GOOGL yesterday at the 200-day line early in the day, a move through that level always stops me out. In addition, if the move occurs on a pocket pivot, even a bottom-fishing pocket pivot, I will simply stand aside and let the rally play out.

Pocket pivots can fail, and with a stock like GOOGL such a failure would most likely be associated with a general market failure. And while GOOGL’s price/volume action tells us to stand aside for now, short-sellers should remain aware of where the stock is currently headed. We can see that currently GOOGL is pushing right up into its prior highs from late April and early May and the 50-day moving average. Watch for a possible reversal somewhere between those highs and the 50-day line IF the general market starts to run into any trouble.




Carnival Cruise Lines (CCL) failed today at its 50-day and 200-day moving averages as selling volume picked up sharply, coming in at above-average levels. I find myself looking mostly at consumer-type stocks as short-sale targets here, and CCL certainly qualifies to some extent. This break brings the stock into play as a short right here, using the 200-day line at 50.08 as a nearby guide for an upside stop. Its cousin, Royal Caribbean Cruises (RCL), not shown here on a chart, also dipped below its 50-day moving average today on a pick-up in selling volume.

Both stocks look shortable here using the 200-day line as a stop for CCL and the 50-day line at 77.87 as a stop for RCL.




As a big-stock consumer name in the leisure category similar to CCL and RCL, Walt Disney Co. (DIS) remains at the top of my short-sale watch list. Today DIS reversed at its 50-day moving average as volume picked up slightly. This remains a short here using the 20-day line at 101 as your guide for a maximum upside stop. Risk is fairly low considering that DIS closed a little over 1% below the 20-day line today.




Home Depot (HD) is another big-stock consumer name in a different category that looks to be in trouble here. Back in the early part of May it attempted to breakout on weak volume, but that breakout attempt failed the very next day on heavy selling volume. Since then the stock has fluttered around its 20-day moving average, and then broke below the 50-day moving average last week. The market rally over the past two days has helped bring the stock back up into the 50-day moving average where it sits in an optimal position for a short-sale entry.

HD reversed today at the line as selling volume came in above average on a day when the general market was rallying sharply. Probably not a good sign for the stock, and objectively it is in a shortable position using today’s high at 134.52 as a guide for a tight upside stop.




Trading Journal Notes regarding other stocks on the Gilmo Short 50 Index that I feel are in or approaching potentially actionable chart positions:

Biogen Idec (BIIB) flashed a bottom-fishing pocket pivot yesterday coming up through its 50-day moving average and today rallied right up to the 200-day line. This could serve as a point of resistance, and the stock should be watched for any reversal that might develop here at current levels.

CSX Corporation (CSX) has rallied right up into its 50-day moving average on weak volume. Thus it becomes shortable here using the 50-day line at 26.05 as a guide for a tight upside stop.

Hawaiian Holdings (HA) reversed at its 20-day moving average today as selling volume picked up slightly. I would consider this shortable on any rallies back up into the 20-day line at 42.52, using the line as a guide for an upside stop. HA remains in a nearly one-month bear flag.

McDonald’s (MCD) is in a short three-day bear flag as it veered back to the downside today on a slight increase in selling volume. Optimally, I would like to see a rally up to at least the 10-day moving average at 126.04 as a potential short-sale entry point.

Microsoft (MSFT) flashed a bottom-fishing pocket pivot yesterday, and today stalled near the intraday high of its April 22nd shortable gap-down (SGD). This might serve as resistance using today’s high at 52.49 as a guide for a tight upside stop. Otherwise, a weak rally into the 50-day line at 52.91 might provide a more optimal short-sale entry point.

Union Pacific (UNP) has rallied up into the confluence of its 20-day, 50-day, and 200-day moving averages on light volume. This brings the stock into a shortable position using the 20-day line at 83.24 as a guide for a tight upside stop.

If this rally is going to continue, then I would expect our long ideas to continue to be workable as long ideas. In the meantime, I would maintain awareness of where short-sale target stocks are within their patterns. Many have staged sharp rallies over the past couple of days as the market has come back. By monitoring these rallying short-sale targets we can likely gain some insight as to where the general market might be headed. If we begin to see these fail and reverse at logical areas of overhead resistance, then the short side may come into sharper focus.

Meanwhile, many long ideas are working as well, although in some cases, as with CTXS, for example, the positive action is short-lived. Again, it is simply a matter of keeping an open mind and watching to see which way the set-ups begin to lean. For now I see some short-sale set-ups that are actionable, but far fewer than I saw 2-3 weeks ago. This can change. For now the bottom line remains the fact that the two key indexes we track, the S&P 500 and the NASDAQ Composite, have both cleared their 50-day moving averages.

A pullback into the 50-day moving averages by each would not be unexpected given the slight extension in the indexes after two days of sharp upside. How that pullback plays out will be useful in determining just what sort of legs this current rally attempt has. So stay alert and in synch with the price/volume action as it unfolds in individual stock set-ups and you should be fine. 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 and DIS, though positions are subject to change at any time and without notice.

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