The Gilmo Report

November 30, 2014

November 29, 2014

On an otherwise quiet and short post-Thanksgiving trading day the big story was the price of oil, shown below on a daily chart of its proxy, the U.S. Oil Fund (USO), which plummeted to lower lows after OPEC nations failed to reach an agreement on cutting production. While some might see this as a “positive” for the cash-strapped consumer who doesn’t have to pay so much to fill up his or her gas tank, the prices of plummeting oil and oil-related stocks of all stripes, from metals to transports and everything in between, speak of a story that is not so good for the general oil and oil-related sectors.

 

GR113014-USO

 

We can see this in the action of our fracking-sand short-sale target U.S. Silicon Holdings (SLCA), which gapped down to lower lows and through the neckline of its large head and shoulders formation, as we can see on the daily chart, below. We’ve been campaigning SLCA on the short side for some time now, and Friday’s gap-down neckline “breakout” was a very nice thing to see, even if one had jumped on the stock early Friday on the basis of the shortable gap-down move through the neckline.

SLCA opened up Friday at 38.10 and never moved back above that price point, making it a handy reference for an upside stop once the stock began to break down in earnest. From there SLCA dropped an additional 20% before bottoming out just above the 30 price level and closing at 31.42. In my view, SLCA offers more proof that both sides of this market can be very profitable when properly played. Anyone who sees the current market environment as simply a plain vanilla “market in uptrend” sort of thing may be missing the bigger picture.

 

GR113014-SLCA

 

My theory that the implications of diving oil prices likely spread beyond the “positive” aspects is supported to some extent by the action of the rails, such as Union Pacific (UNP), shown below on a daily chart. After all, one might expect lower fuel prices to be a positive for transports, but not if those transports move a lot of oil as the railroads do in the normal course of business.

The rails got clocked on what was expected to be a “quiet” Friday trading session, with UNP leading a literal train of railroad names on a big-volume gap-down that brought an abrupt end to the nice, coherent uptrends these names were seeing over recent weeks.

 

GR113014-UNP

 

Century Aluminum (CENX) was crushed on Friday even after Toyota announced it would be using more aluminum in its cars. But, of course, the oil and rail industries are also big users of aluminum, and BHP Billiton (BHP), an oil and energy name, is one of CENX’s biggest customers. Thus the decline in oil prices is not a “positive” for a company like CENX! From a purely technical standpoint, last Tuesday’s cup-with-handle breakout has now fared like many other standard-issue breakouts in this market.

What I find interesting with CENX is that it’s not as if the decline in oil prices was a big secret given that crude oil has been in a steady downtrend for several months. Thus the sudden and large outside reversal, given that CENX had actually opened up on Friday in contrast to oil-related names which all gapped down, is somewhat surprising and strikes me as something of a panic reaction.

The question here is whether this sharp pullback right into the handle of CENX’s prior base and roughly the 20-day moving average puts it in a lower-risk, buyable position. This might be something to watch for, as the 50-day moving average down at 26.14 provides a relatively nearby guide for a downside stop given CENX’s 27.65 close on Friday.

 

GR113014-CENX

 

In general, we might consider that the big boom in oil production over the past several years has driven a lot of new employment in an otherwise moribund economy. So crashing oil prices are probably not good for those with jobs in oil and oil-related industries. Lower gas prices don’t do one much good if one has no job to drive to.

There is a lot of talk about the decline in oil being entirely about manipulation by the Saudis who are flooding markets with supply in an effort to drive prices down and put the squeeze on higher-cost producers. The question is where prices eventually settle down to, or whether a big upside reversal as things get somewhat exhausted to the downside is coming. As we move into December, generally a favorable month for the market, it will be interesting to see how the general market sorts this out.

The S&P 500 Index, which is far more weighted in energy and energy-related names, reversed to the downside on Friday in the wake of Friday’s oil sector disaster, as we can see on the daily chart, below. Volume was lighter, but considering that Friday was a short trading day with the early close at 10:00 a.m. my time here in California, it was actually pretty decent. This makes sense given the massive-volume sell-offs we saw in a number of oil and oil-related names.

Some volume was also contributed on the upside, however, as airlines and truckers, for example, moved higher in response to the breakdown in oil prices.

 

GR113014-$SPX

 

The NASDAQ Composite Index also stalled off of its peak but held up on the day as volume declined. The NASDAQ managed to close at a new 14-year high, capping off what was essentially a wedging holiday rally for the week. Most of the outperformance in the NASDAQ is being driven by the NASDAQ 100 Index, not shown, which was up 19.79 points on Friday, far outstripping the NASDAQ’s 4.31 point move.

 

GR113014-$COMPQ

 

If we think about it, Friday’s gap-down in crude oil and oil-related names probably should not have come as a surprise. We had already been seeing a number of oil-related names under pressure for weeks, if not months, and the head and shoulders formations in stocks like SLCA were a clear tip-off. We can also see the completion of a fully-formed head and shoulders in railcar maker Greenbrier Companies (GBX), shown on a weekly chart, below.

Friday’s gap-down break through the 40-week moving average, corresponding to the 200-day moving average on the daily chart, completes the right side of the right shoulder in the H&S formation. With the stock just under the 40-week/200-day lines, this becomes shortable using those moving averages as a quick upside stop. GBX’s sibling, fellow railcar maker Trinity Industries (TRN), not shown, is also breaking down in the right shoulder of a head and shoulders top.

In fact, if one scrolls through the weekly charts of all oil and oil-related stocks, one can see head and shoulders breakdowns all over the place, and these patterns were clearly presaging Friday’s big bust in the oil patch.

 

GR113014-GBX

 

Because you won’t ever see jet airliners transporting oil, the drop in crude oil prices is seen as a big positive for airline stocks like my favorite in the group, Southwest Air (LUV), shown below on a daily chart. For the most part I look at airlines as “inch-worm” stocks that slowly inch their way higher, but on Friday we saw a broad number of these names gap up on strong volume. Given that Friday was a half-day, LUV’s volume probably qualifies as high enough for a buyable gap-up move when adjusted for the short trading day.

The enthusiasm here is somewhat tempered by the fact that names like SLCA traded way above-average volume on the downside Friday for any trading day, while LUV’s volume needs to be adjusted for the short trading day. The stock also stalled a bit and closed mid-way within its daily trading range. In any case, lower fuel prices over the longer-term are a positive for the airlines, and if one chooses to treat this as a buyable gap-up then the trade is quite simple given the tight risk-management that can be imposed here.

Using the 41.07 intraday low of Friday’s gap move as a very tight stop makes this a low-risk proposition.

 

GR113014-LUV

 

Alibaba (BABA) continues to work on a new base after bouncing off of its 20-day moving average last week, as we can see on the daily chart, below. A low-volume retest of the 20-day line would be the type of move I would consider buying into. However, with the stock dipping just below the 10-moving average I would also be keeping an eye out for a possible continuation pocket pivot to show up on a move back above the 10-day line.

 

GR113014-BABA

 

CyberArk Software (CYBR) looks to be headed for a test of its 20-day moving average, as we can see on the daily chart, below. After getting hit with three analyst downgrades in one day on Tuesday, the stock couldn’t hold the 10-day moving average on Friday, dropping below the line on very light volume. As with BABA, I would be interested in picking up shares into a low-volume retest of the 20-day moving average, if that should occur.

 

GR113014-CYBR

 

Palo Alto Networks (PANW) remains the cyber-security leader here as it pushed into new-high price ground on Friday. There’s nothing to do here but wait for the 10-day moving average to catch up to the price.

 

GR113014-PANW

 

Tesla Motors (TSLA) gapped down on Friday with volume picking up on the short trading day, as we can see on the daily chart, below. TSLA managed to hold above the 50-day moving average, but the bottom line is that it remains within what is so far a seven-day bear flag since gapping down last week from what may turn out to be the peak of a second right shoulder in a fractal head and shoulders formation.

At this point it’s just a question of when and whether TSLA busts the 50-day moving average. I still see the stock as a short using the 252.78 intraday high on last week’s gap-down day as my reference for an upside stop.

 

GR113014-TSLA

 

Twitter (TWTR) was able to push up through its 10-day and 20-day moving averages on Wednesday and Friday, as we can see on the daily chart, below. This occurred mostly on enthusiasm over its prospects for cashing in on the Christmas shopping season with a new coupon feature it is testing. In my view, this sort of news just sets up a shortable rally, although the stock did trip my trailing stop at the 10-day line on Wednesday.

My view at that time was the stock was on the brink of a downside breakout. And so as I would do if a stock were set up along the 10-day line in a bullish pattern on the upside, the breach of the 10-day line pushes me out quickly with the option of resetting on the short side into this rally. We can see that the upper part of TWTR’s current bear flag range is actually right along the descending 200-day moving average at 44.09.

Thus that would be the maximum point to which I think any continued rally would reach within the bear flag, although it could run out of gas right here. For now I’m just keeping an eye on this waiting for either a rally up to the 200-day line or some sort of failure along or at the 20-day line. Right here, right now, this remains a fluid situation, although I tend to think that TWTR is heading lower eventually – whether it rallies or bounces around for a period of time first is another matter.

The other issue here is that the stock did drop about 30% from its early October peak, and at this point needs some time to consolidate that initial breakdown. Therefore, the continued formation of a bear flag in service of this process would make sense.

 

GR113014-TWTR

 

Facebook (FB) followed through rather well on its bottom-fishing pocket pivot of last Tuesday, as I discussed it might in my report of that day. FB also flashed a second BFPP coming up through its 50-day moving average on Wednesday before finally stalling out on Friday on light volume, as we can see on the daily chart, below.

This rally has now carried up near the prior base breakout point and it is now a matter of seeing how the stock pulls back here, most likely on a test of the 50-day moving average. Here you can see how using a quick stop along the 65-day or 20-day moving averages would push you out of a short position in FB rather quickly, and with the stock flashing a pocket pivot on Tuesday one could have easily flipped to the long side in an attempt at playing for a short-term trade.

So far that strategy would have worked well, and illustrates the flexible approach I take towards any stock I’m “campaigning,” long or short.

 

GR113014-FB

 

SolarCity (SCTY) ran right into its 65-day exponential moving average, the black moving average on the daily chart, below, before running out of gas and dipping back below the 50-day moving average on Friday Volume picked up on the short trading day vs. Wednesday, as we can see on the daily chart, below. As I wrote in my report of this past Tuesday, the rally into the 65-day line was a shortable one, and with the stock dropping below the 50-day moving average that can become a trailing stop on the upside for any short position taken near the 65-day line.

 

GR113014-SCTY

 

Biogen Idec (BIIB) executed what might be considered a “textbook” rally up into its 20-day moving average within a developing bear flag, as we can see on the daily chart, below. As I’ve discussed in recent reports, this is generally a rally that can be shorted into at the 20-day line, using the moving average as a guide for a quick upside stop. So far this is what I would expect to see after the severe breakdown through the 200-day line two weeks ago, and we might take note of the fact that the 50-day moving average is now just starting to dip below the 200-day moving average in a “black cross.”

 

GR113014-BIIB

 

Notes from my trading diary regarding stocks discussed in recent reports are below:

Bitauto Holdings (BITA) – stock had a nice bounce off the 10-day moving average and the top of the handle in its prior cup-with-handle base. BITA basically demonstrated the advantage of being patient and waiting for an opportunistic pullback before chasing an otherwise strong breakout in the stock last week. BITA tried to push closer to the $100 century mark on Friday but reversed to close down on the day.

Blackhawk Network Holdings (HAWK) – just a little higher from this past Tuesday’s continuation pocket pivot and still within buying range given its proximity to the 10-day moving average.

Gilead Sciences (GILD) – holding within a two-week bear flag with support along the 100 price level. Shortable using the 20-day moving average at 103.31 as a guide for a tight upside stop.

Netflix (NFLX) – interesting outside reversal to the downside on Friday sets the stock up for a test of the 331 October low.

ServiceNow (NOW) – found support at the 50-day moving average on Friday on an intraday basis, so continues to look buyable at the line, using that as a tight stop. Otherwise the action is disappointing since the stock moved to new highs early in November but has not been able to hold those highs.

Splunk (SPLK) – holding above the 10-day moving average after the prior Friday’s reversal after an earnings-related gap-up. Still looking for confirmation of further potential downside with a breakdown below the 10-day and 20-day moving averages. If one wanted to try and short the stock here, then using the 69 price area as an upside stop would make sense. This is still a fluid situation so stay flexible here.

Taser International (TASR) – after a big gap-up move on Wednesday on news of an order for 675 AXON body-worn video cameras from the Winston-Salem Police Department the stock dropped 39 cents on Friday on volume that was above average despite the short trading day. There is also talk within the Missouri legislature about legislation requiring that law enforcement use the camera for its wearable camera. While it is understandable that one order from one police department is probably nothing to get overly excited about, the idea of a mass of orders coming as a result of legislation is.

Trinet (TNET) – tracking sideways along the 10-day moving average following this past Monday’s continuation pocket pivot buy point. TNET remains well within buying range of that pocket pivot with the idea that it should continue to hold along the 10-day line.

As we move into December, investors will be searching the skies for signs of Santa Claus’ sleigh and continued movement to higher highs as we approach New Year’s Eve. A Santa Claus rally might be something for the pundits to ponder, but from my perspective this remains a mixed market, with strong profit potential on the short side as much as on the long side, and names like SLCA prove this.

I always see my task in the market as one of trying to discern where the next big “juice” is going to come from. While some might prefer inch-worm stocks I find that making big money and doing as well as I have so far in 2014 is primarily a matter of finding big stocks that have the potential for big and relatively rapid price moves, and then seeking to catch the meaty part of those moves.

Right now I’m having trouble finding those on the long side, while the short side was actually a more profitable place to be this past week. It’s a strange market out there, and I don’t imagine that it will get any less strange as we progress through the final month of the year. Stay tuned.

 

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 a held a position in SLCA and TSLA,  though positions are subject to change at any time and without notice.

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