The Gilmo Report

November 5, 2014

November 5, 2014

The Republicans regained control of the U.S. Senate in yesterday’s elections, and the market cheered by gapping up this morning at the open. But given the extended nature of the indexes it eventually became a matter of “sell the news,” as the indexes churned around and made little additional progress on the day. In addition, a broad number of leading stocks that rallied sharply with the market off the lows of two weeks were noticeably weak today as they sold off. I felt this was a cautionary sign, as I tweeted earlier in the day.

Generally, your first point of reference is the action of the individual stocks, and I found it interesting that a number of high-momentum names were off on the day. But this merely serves to highlight the fact that the time to be buying stocks was a week to a week-and-a-half ago when we were first seeing some set-ups forming, such as with CyberArk (CYBR) and ReWalk (RWLK), for example. Coming in late and thinking you have to start buying stock here as the market gets extended on favorable election news is merely a way of asking for trouble. Despite the fact that the NASDAQ Composite Index was only down 0.06% on the day, I would view today as distribution in that index, given that it could not hold the sharp early morning gap-up and instead reversed to close down on the day, as the daily chart below shows.




Meanwhile the S&P 500 Index, shown below on a daily chart, made a record closing high, albeit on lighter volume. Observing the extreme v-shaped nature of the rally off the lows of two weeks ago in all the indexes, the market appears in dire need of a digestive phase. With the NASDAQ diverging today as a number of leading stocks came in, perhaps that is what we are looking at in the coming days. Ultimately, however, it all boils down to what the stocks are doing, and in my view the message of individual stocks, at least the ones that I have favored on the long side, today was a cautionary one.




I would have to say that Alibaba (BABA) is likely going to be one of your biggest big-stock leaders in this market as long as the averages remain in a rally phase. BABA was buyable on yesterday’s pullback just below the $100 price level and the top of the prior “IPO U-Turn” base, as we can see on the daily chart, below. The top of that U-Turn formation is 99.70, and BABA pulled down to 99.51 yesterday on what started out looking like a big reversal.

After announcing earnings, BABA jacked up to about 106 in pre-open trade, only to reverse and dip below the $100 price level, but only briefly. As I tweeted early in the day when the stock was trading around 103, it was buyable on that pullback, and for now I would simply use the top of the U-Turn base at 99.70 as a selling guide. My guess is that BABA won’t be seeing $100 anytime soon if this market rally remains intact. Constructive pullbacks to 105 or better should be bought, but keep in mind that the original buy point was the pocket pivot around 91-92 back on October 21st, and the stock is quite extended from that point.




For your reference, below is the daily chart of Google (GOOGL) from late 2004 when it came public, formed an IPO U-Turn base which can also be seen as something of a “high, tight flag,” and launched on its now-legendary price run from there. Notice how GOOGL launches out of the base to new highs in mid-September 2004, runs up about 10% or so, and then backs and fills for about a week as it gave the 10-day moving average time to catch up before flashing what was a continuation pocket pivot on a slight gap-up off of the 10-day line.

If the general market pulls back in here constructively, then we might look for BABA to eventually meet up with its 10-day moving average, setting up a secondary buy point in the form of a continuation pocket pivot. Of course, that all remains to be seen, but my general view is that if the market continues higher, BABA will be one of its big leaders. If the market doesn’t continue higher, then it probably spends time building a base.


GR110514-GOOGL 2004


CyberArk Software (CYBR) took a little heat today along with Palo Alto Networks (PANW) after the big laggard and garbage stock of the security software group, FireEye (FEYE), blew up last night after missing on earnings. As we can see on the daily chart, the optimal buy point in CYBR occurred two Mondays ago when the stock was hanging around the 29-30 price level and moving along the 10-day and 20-day moving averages. As has been the case in this market, buying breakouts such as CYBR’s move to new highs on Monday or Tuesday of this week is not advisable. In this market we always seek an edge by looking for places to buy stocks while they are quiet and setting up constructively.

CYBR’s pullback to the 10-day moving average today came on higher selling volume, which is not as constructive as I might like to see, but given that we had numerous opportunities to take 15-20% profits in the stock from the 29-30 price area, one should have something in the bank here. Given that FEYE’s post-earnings blow-up perhaps shook up investors in cyber-security names, I don’t expect CYBR to do much of anything more than drift into its prior flag base and the 10-day and 20-day moving averages before earnings. I expect that PANW will act similarly as its earnings announcement approaches later in November.




ReWalk Robotics (RWLK) is also expected to announce earnings next week, and so far is holding tight along its 10-day and 20-day moving averages, as we can see on the daily chart. If one had bought on the basis of my discussion in the October 26th report, then one is still sitting on a 15% or greater profit. With RWLK expected to announce on November 13th, once then has to decide whether a profit in hand is worth a round of earnings roulette or not!




ServiceNow (NOW) pulled into its 10-day moving average today as volume picked up slightly but remained below average, as we can see on the daily chart below. In my view a pullback to the 20-day moving average at 63.32 is your best entry point, assuming the general market is holding up as well. Given the squirrely nature of NOW’s price/volume action, it is best to take an opportunistic approach here and look to buy into constructive pullbacks.




Trinet (TNET) came out with earnings yesterday after the close and the stock flew all over the place this morning before settling in to close in the upper half of its daily trading range and the 10-day and 20-day moving averages, as we can see on the daily chart, below. The bottom line here is that TNET never broke below the pocket pivot day of two weeks ago as it was rounding out the lows of a new base and starting to come up through the 50-day moving average.

Thus while the stock is very squirrely here after earnings, it is still holding up, and perhaps is showing a little overhead selling given how extended it is off the lows of the base. This probably needs some time to consolidate the move up the right side of the base, with pullbacks to the 20-day moving average representing a potential, low-risk entry point.




To get an idea of how some nascent leaders were punished today, we need only look at LinkedIn (LNKD), which announced a $1.15 billion convertible note offering yesterday after the close. The stock effectively shot itself in the foot, as the daily chart below shows. LNKD was cruising to new highs after last Friday’s buyable gap-up before the announcement of the convertible bond offering gave investors the excuse they need to dump the stock. And dump it they did, as LNKD busted the 222.73 intraday low of the buyable gap-up day on heavy selling volume. LNKD’s BGU has failed, and the stock is off the table as a long idea, end of story.




GoPro (GPRO) also turned into a two-day wonder trade as it reversed near the prior October peak on heavy selling volume yesterday, as we can see on the daily chart, below. I tweeted on Monday morning that the 85 price level was a good place to take profits if one had bought closer to the mid-70 price range per my discussion of the stock over the weekend. This pullback to the 10-day and 20-day moving average today came on lighter volume, but volume was still above average.

I would be looking for a retest of the 50-day moving average here on light volume, but it is possible that GPRO has some issues here and may not cooperate in this regard. For now I would leave this alone unless selling volume starts to recede on a pullback to the 50-day line.




Tesla Motors (TSLA) has gapped up after announcing earnings this afternoon as I write, and the stock is currently trading around the 243-244 price level. If we look at the daily chart, below, we can see that this coincides with the 65-day exponential moving average, the black moving average on my charts, which is also roughly around where the neckline of TSLA’s prior fractal head and shoulders formation is.

My view is that the stock might become shortable on this gap-up move, and I would be watching this closely tomorrow for a possible reversal. Given the position of the stock within its chart pattern, a rally up to 243-244 isn’t doing much more than moving up into overhead resistance. In fact, this is tempting to short after-hours at these price levels!




Facebook (FB) looks to me as if it is primed to test its 200-day moving average after reversing at the 50-day moving average today in an allegedly positive tape. FB failed on last week’s breakout attempt to all-time highs when it gapped down through the 50-day line after earnings on huge selling volume. That breakdown led to a rally back up into the 50-day line today as the general market gapped to the upside right at the open, but FB, like the NASDAQ, reversed to close down on the day.

Using the 50-day line as a guide for an upside stop, my downside target for a short sale of FB is the area between its 200-day moving average, currently at 68.10 and the prior 70.32 October low. An undercut of the 70.32 low could carry to the 200-day line, so that is what I’m looking for here.




I can’t say I much like the action of Mobileye (MBLY) here as it rolls over and breaks below its 10-day, 20-day, and 50-day moving averages with volume picking up, as we can see on the daily chart, below. MBLY is expected to announce earnings sometime this week or next. Prior to this week it was trying to hold up along the moving average confluence as volume was drying up. However, as I wrote in my report of this past weekend, MBLY could have also been seen at the time as a fractal head-and-shoulders in the making.

With the stock rolling over today it is starting to look more like an H&S than a constructive new base. This is definitely not a stock I need to own here, particularly going into earnings. If I can get a borrow, MBLY might just be shortable here, using the 50-day line at 50.18 as an upside stop.


GR110514-MBLY (AMZN) – ran into resistance at the 20-day moving average on Monday, our second level of potential resistance and a short-sale entry point. Look for AMZN to retest the late October low below 285.

Biogen Idec (BIIB) – continues to find resistance at the 50-day moving average. BIIB rallied back up to the line earlier today but gave up on the rally and turned lower to close right on top of its 200-day moving average at 319.55. My view is that BIIB remains shortable, using the 50-day line at 324.44, about 2% higher, as your guide for an upside stop.

Blackhawk Network (HAWK) has moved to new highs on light volume and remains extended from last week’s pocket pivot. The move to new highs on light volume, however, would imply that HAWK needs to pull in. I would watch for pullbacks to the 10-day moving average at 34.33 as potential entry points if the general market doesn’t get into trouble.

Green Dot (GDOT) failed on its buyable gap-up of last Friday, dropping below the 22.94 intraday low of the gap-up day. That is a clear failed BGU that should have been sold yesterday, and thus takes it off the table as a long idea.

Netflix (NFLX) – stock continues to hover around its 10-day moving average, closing just under the line today as selling volume picked up slightly. Optimally, I would like to short a rally into the 200-day moving average up around 416, but that doesn’t have to happen just to suit me. With the 20-day line coming down to 396.53, rallies into that moving average would be shortable, in my view. One could also short the stock here using the 10-day line at 383.51 as a hyper-stop on the upside.

Taser International (TASR) – needs to build a handle after forming a cup formation. Would give it time to do so, using pullbacks to the 10-day line, currently at 17.18, as possible entry opportunities.

Twitter (TWTR) – would short this into any rallies up into the 42.51 low of the prior flag base the stock formed back in August, with the idea that the stock will eventually undercut the 35.95 low of mid-July.

U.S. Silica Holdings (SLCA) – stock came back into shorting range on Monday as it ran into the 10-day moving average at 45.96 and reversed. Continue to use any rallies into the 10-day line as short-selling opportunities.

Yelp (YELP) – another short-sale target that found resistance right at its 20-day moving average. After last week’s bear flag breakout and fake out, YELP turned and rallied back up into the 20-day moving average on Monday for an upside shakeout, or “shake-up,” move before reversing and moving lower yesterday and today. Stock remains shortable on rallies into the 20-day line, currently at 62.66.

The action among individual stocks has gone spotty on us as the NYSE-based indexes rallied today to all-time closing highs or better while the NASDAQ diverged as many high-momentum leaders were sold off in the midst of a positive news day. For most of these names that have rallied sharply with the market since the lows of two weeks ago, “sell the news” was the rule of the day, and I have to say that I am skeptical of this market to continue higher from here without at least some attempt at a consolidative pullback.

The action of individual stocks seems to argue for this, and so I am content to lay back and see what shakes out, so to speak. Meanwhile, the market is showing some bifurcation in that short-sale set-ups have also been showing up in the midst of the market’s rally, including several of our short-sale target names that found resistance at their 20-day moving averages, such as AMZN and YELP, for example. To this list I add FB, looking for more downside from here if the general market starts to pull back.

Thus, despite the sharp, v-shaped rally over the past couple of weeks, this remains a market of stocks, with opportunities on both the long and short side. For me, the rules remain the same: Wait for the proper set-ups so that you can buy leading stocks when they are quiet, and look to sell when you have 15-20% profits from the entry point, regardless of the position of the stock within the base.

Buying breakouts remains the riskier strategy in this market. Meanwhile, if your psychology can handle short-selling, don’t be afraid to take a shot if you see a short-sale target stock rally right into a logical area of potential upside resistance. 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 held positions in FB and TSLA, though positions are subject to change at any time and without notice.

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