The Gilmo Report

November 6, 2016

November 6, 2016

All of the major market indexes except for the Russell 2000 have now closed in the red for nine-straight days in a row. Many have noted that the market hasn’t had this many down days in a row since December of 1980. Others point out that the last time the market had a losing streak of seven days or more was in late 2008, conjuring up images of an impending market collapse.

The NASDAQ Composite is now at its lowest close since the middle July, with no visible means of support below. On Thursday the index undercut its lower September 12th low (note that the S&P 500’s September 12th low is higher than its October 13th low), bringing up the possibility of an undercut & rally type of maneuver. But no such maneuver on an oversold rally attempt was forthcoming as the indexes closed near the lows of the day.

Friday’s jobs number of 161,000 new jobs vs. expectations of 175,000 left the market numb as it started the day out to the downside, looking like it might split wide open. 

 

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With the NASDAQ dangling in mid-air, Friday’s small gap-down open did, however, bring the S&P 500 right down to its 200-day moving average. This set up the context for at least some sort of attempt at finding support. As I wrote in my Wednesday report, the index had been “on a steady diet of lower lows and lower highs since early September, and now appears set to rendezvous with its 200-day moving average. At that point, perhaps we will see some sort of reaction rally as the perceived need to sell reaches a potential crescendo soon.”

That’s precisely what we saw on Friday on an intraday basis as the S&P opened up more or less right at its 200-day moving average, triggering a logical reaction rally. But the rally lacked any real upside thrust, and gave out by the close as the S&P and the NASDAQ closed down for the ninth-straight day in a row.

 

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The S&P 500 ended the day right at its 200-day moving average and its intraday lows on higher trading volume. It is now below its pre-Brexit highs, but so far the consistent downside deterioration hasn’t triggered what I would consider to be capitulation selling. At least not yet.

Anybody working the short side of this market over the past nine days has been having fun, that’s for sure. But we know from experience that as we begin to feel fat and happy in the midst of a profitable short-selling expedition, that can often mean that a potentially blistering oversold bounce is about to show up.

The market, even after eight-straight down days and the S&P 500 running right into a logical level of support at its 200-day moving average, could not muster much of a bounce, much less a blistering one. If we don’t see a reaction rally from current levels soon, then it may be that we will see the S&P break below its 200-day moving average this coming week. By that time the NASDAQ might meet up with its own 200-day moving average, about another 2% lower from where it closed on Friday.

Of course, adding to the excitement this coming week will be Tuesday’s presidential election, which certainly has the ability to create some wild market volatility depending on the outcome. By the time the dust settles sometime in the wee hours on Wednesday morning, we will not only know who the next President is, but also which party holds majorities in the Senate and the House of Representatives.

In the face of this, it’s difficult to say whether it will be worthwhile to take on any new positions, long or short, before we know the election outcome. Given the potential for a violent move in either direction, it might make sense to just go flat, or at least go with smaller commitments. There is also the possibility that whatever move the market has after the election will be one to fade. In other words, a sell-off might be a buyable event, at least for a short-term reaction rally, maybe more. Conversely, a rally may be something to look to short into.

Ultimately, I tend to think that what ails this market is not just the uncertainty surrounding the election, but any number of other factors, including a weak global economy, or a financial crisis emanating from Europe or even China. Whoever the next president is may not be able to stop the inevitable when it comes to the next bubble bursting.

I would have to say that if indeed the market is about to have some sort of oversold reaction rally it isn’t showing up in the charts of individual stocks. Among the big-stock NASDAQ names that have provided ripe short-sale targets over the past week or so, Apple (AAPL) has continued lower with no signs of life just yet.

Since its initial failure through the 20-day moving average on a gap-down move after earnings eight days ago on the chart, AAPL has since moved further below its 50-day moving average. Friday’s action took it more or less to the top of the big shake-out flag pattern it broke out of in early September.

Whether this provides it with the support it needs to at least generate some sort of near-term oversold bounce or whether it will break for the 200-day line at 103.51 is an open question. Volume picked up on Friday’s sell-off, and for now only a weak rally back up into the 50-day line at 112.51 would set up a lower-risk short-sale entry opportunity from here.

 

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Amazon.com (AMZN) remains in a weak state of affairs. On Friday it undercut its 756 August low and attempted to rally from there on a typical undercut & rally type of move. Like the market, however, that rally failed and AMZN closed back below the 756 low on heavy selling volume.

From here there are no lower-risk short-sale entry points, and for anyone who shorted the stock at the 50-day line on Tuesday this undercut could be considered a short-term cover point. In that case, one would be looking to re-short into any rally that runs up into the 50-day moving average. More likely, however, would be a rally up into the now-lower and rapidly descending 10-day and 20-day moving averages.

 

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Alphabet (GOOGL) has undercut the lows of its prior base, but so far, like AMZN, has been unable to generate any kind of meaningful rally. The stock was able to push up off of its intraday lows on Friday, but still closed down for the day and below the prior 783.50 September low, resulting in an undercut but no rally. As with AMZN, if one shorted the stock near the 50-day moving average on Tuesday or Wednesday, or, preferably, on the breach of the 20-day line on Monday, this could be considered a short-term cover point.

If the stock can’t rally from here, then the 200-day moving average down at 759.46 could come into play. Otherwise, a weak rally back up into the 50-day moving average at 804.97 would present a lower-risk short-sale entry opportunity from here.

Notice that with names like AAPL, AMZN, and GOOGL, the potential for more downside that takes them to their 200-day moving averages exists alongside the potential for possible shortable rallies back up into their 200-day moving averages. My guess is that how these play out in the coming days will have a lot to do with what the market does, particularly once the election results are out.

 

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Facebook (FB) gapped down hard on Thursday after missing revenue expectations in its Wednesday after-hours earnings report. As I blogged on Thursday morning, once it set an intraday high at 123.38 it could be treated as a shortable gap-down (SGD).

FB had already become a confirmed late-stage failed-base (LSFB) short-sale set-up on Wednesday, ahead of earnings, when it busted its 50-day moving average on heavy selling volume. You have to wonder whether any big institutional owners of the stock got wind of the revenue concerns and unloaded on Wednesday before the report.

Now there are two ways to treat this on the short side. Rallies up to the 123.38 high of Thursday’s gap-down price range can be considered possible short-sale entries. If the stock is able to move above that high, then we have to keep an eye on the 20-day moving average as a reference point for upside resistance now that it is below the 50-day moving average.

The 50-day average line is way up at 128.47, so it’s not clear to me that the stock would be able to rally that high. Of course, his could happen within the context of some nutty upside rally that might occur as a result of the election news. Of course, that is mere speculation, and we will just have to see how things play out in the coming days. In the meantime, FB is just another one to add to the growing list of big-stock leaders that have failed as they drop like flies.

 

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That list would also include Priceline Group (PCLN). The stock gave short-sellers an opportunity to hit the stock on Thursday when it briefly rallied up into the 50-day moving average. From there it quickly reversed to close down on the day on below-average trading volume as buyers failed to show up.

On Friday PCLN continued lower as selling volume increased to above average. Notice, however, that it is now undercutting the prior 1429.58 of mid-October. That could trigger a short undercut and rally attempt, and in that case I would look to short the stock on any weak rallies up into the 50-day line at 1453.30. The next low that would come into play if the stock simply continues lower from here would be the early September low at 1402.67.

 

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In my Wednesday mid-week report I discussed watching Qualcomm (QCOM) for a possible breakout failure at the 20-day moving average. On Thursday the stock briefly ran up into its 10-day moving average before reversing and closing below the 20-day line on heavy selling volume. This was as I prescribe in my mid-week report on the gap-up move following earnings.

I have to admit that I take a two-side view of QCOM here. If the general market is somehow able to rally, I would tend to like the stock on the long side. This would be if it is in a constructive position along its 50-day line or posted a strong move back up through the 20-day line. On Friday the stock pulled down near the 50-day line as selling volume remained light, closing near the highs of the daily price range but still failing to clear the 20-day line.

This looks like a more constructive pullback relative to other big-stock NASDAQ names we are currently monitoring. But within the context of the prior failed gap-up breakout of eight days ago on the daily chart, it presents a double-edged sword, to be sure. It is still possible that the stock will eventually breach its 50-day moving average, confirming that the initial breakout back in late September has also failed.

In fact, the recent breakout failure remains in play based on the fact that it is currently finding resistance at the 20-day line. Thus it becomes shortable at the 20-day line, using that as a guide for a very tight upside stop in anticipation of an eventual breach of the 50-day line.

 

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Netflix (NFLX) still looks like it is headed for a test of its 20-day moving average based on the fact that it is sitting in a short three-day bear flag after moving below its 10-day moving average four days ago on the chart. Notice also that the stock has closed near the lows of its daily price range each day in bearish fashion.

As I wrote in my Wednesday mid-week report, I’m looking for a test of the 20-day moving average in any continued market pullback. Otherwise I’d need to see some sort of continuation pocket pivot back up through the 10-day line or off of the 20-day line to consider it to be an actionable long set-up.

And, as I also wrote in my mid-week report, we should remain mindful of the fact that NFLX does have the look of a big flat-bottomed POD formation. For that reason, we also need to be alert to any potential signs of failure, which would first come in the form of a volume breach of the 20-day moving average on the downside.

 

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In my Wednesday mid-week report I described the action in Microsoft (MSFT) in simple terms, writing at the time, “At best it looks wobbly, and I wouldn’t be surprised if it failed outright like its other big-stock NASDAQ brethren.” And so we can see that the stock has now entirely failed on its prior late-October buyable gap-up (BGU) move.

In addition, the first clue of an impending late-stage breakout failure occurred on Friday when MSFT broke below its 20-day moving average on above-average selling volume. So over the past three days the stock has had “failure” written all over it. It is likely headed for a rendezvous with its 50-day moving average at 57.96.

An outright breakdown through the 50-day line would, of course, confirm MSFT as a late-stage breakout failure. Whether that occurs will likely be a function of where the general market goes from here, and I’m sure that more downside for the general market means more downside in MSFT.

 

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Tesla Motors (TSLA) has now undercut its prior September and October lows, but so far those prior lows have only served as overhead resistance on any undercut & rally attempts. For now, it appears that those lows in the 193-194 price area provide references for shortable rallies from here.

Alternatively, should TSLA be able to push back above those lows, then the 10-day moving average at 196.58 or the 20-day moving average at 197.45 would be your next references for overhead resistance. In the meantime, unless TSLA is able to regain its 50-day moving average in convincing fashion, I maintain my longer-term downside target of 141.05 for the stock as a short-sale target.

 

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Alibaba (BABA) has been hovering below its prior 99.00 October low after breaking back below the 50-day line on Wednesday in a very bearish, high-volume reversal.  So far the stock has been unable to rally back above that low, closing below 99 for the past three days. In this position the stock is well below the 50-day moving average as it dangles below the October low, but far above the 200-day moving average down at 84.02. The stock is less than 4% below its 10-day moving average at 101.25 and just about 4% below its 20-day moving average at 101.88.

Rallies up into either of those moving averages might provide more optimal short-sale entry opportunities, so should be watched for.

 

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Before moving on, one major point I’d like to make about any of these big-stock breakdown situations that have just undercut prior lows in their patterns, like AMZN, BABA, GOOGL, TSLA, and PCLN, for example. And that is that the undercuts do create the context for rally attempts in typical U&R fashion. The key is in watching how this all synchronizes, or syncs up, with the general market.

The big indexes have all been down nine straight days, and at this stage the idea of a possible oversold reaction rally can seem logical. Of course, it doesn’t have to happen; the indexes could simply head lower next week. But, if there is such a rally, then I would look to swing-trade it using these same short-sale targets IF they can pull off undercut & rally moves.

The way to execute an undercut & rally long trade is simple as The Gilmo practices it. In the case of how we would do this with BABA and its October low at 99 as an example, once the stock pushes back above the prior reference low at 99 one can go long at that point. At the same time the 99 low, plus 1-3% of downside porosity depending on one’s risk preference, can be used as a tight stop.

Pulling this type of trade off, however, also requires that one be very nimble and very alert. But if I’m already working a stock on the short side, I can generally get a feel for when the stock is likely to turn and head off on what turns out to be at least a short-term rally of a few days. In that case, I’m often just flipping from the short side to the long side in classic swing-trader style.

And, once the rally is over, I have no problem flipping back to the short side. Right now this is what it looks like the market is going to give you in terms of profitable trading opportunities. Frankly, I don’t see any major upside trends developing just yet, and all we know right now is that we’re looking at the worst losing streak for the market since December of 1980.

If you’re looking for something that so far appears to be impervious to the market carnage, Gigamon (GIMO) certainly fits the bill. I have considered that the stock is a candidate for my Failure Watch list, but so far the only thing to watch has been its constructive price/volume action.

After posting a pocket pivot coming back up through the 10-day and 20-day moving averages two Fridays ago, GIMO has successfully held up on a constructive, low-volume pullback to the 10-day and 20-day lines. On Thursday, volume dried up to -48% below average. Friday saw an increase in buying volume, albeit still below average, as the stock pushed off of the two moving averages.

To paraphrase Forrest Gump, failure is as failure does, and so far GIMO isn’t failing. In fact, it almost looks like its setting up to go higher. And so it remains one of the last few names on my buy watch list that continues to act well. If the market turns, perhaps it has a chance of pushing higher. If the market fails, then maybe my fantasy of the stock morphing into a possible breakout-failure type of short-sale set-up will become a reality. But for now it’s hard not to admire GIMO’s constructive action in an otherwise dicey market environment.

 

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Perhaps ServiceNow (NOW) has a better chance of fulfilling one’s fantasies of a late-stage failed-base short-sale set-up as it breaches its 10-day moving average and the prior 84.56 intraday low of last week’s buyable gap-up (BGU) move. I actually tested this out on the long side on Friday when the S&P 500 ran into its 200-day moving average.

At the time, NOW was at its 10-day line, but by the close broke lower, triggering a tight stop. Based on that action, I am looking for the stock to fill the prior gap on the downside and test its 20-day moving average at 81.69. A breach of the 20-day line would bring NOW into play as a breakout failure candidate. We should also note that NOW is at the right-side peak of a large, 49.6% deep punchbowl type of formation. Thus a breakout failure here would trigger this as a POD-failure short-sale set-up as well.

 

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Electronic Arts (EA) has been all over the place since trying to rally Wednesday after announcing a strong earnings report. That move on Wednesday took it up to its 20-day moving average where it reversed to close in the lower 1/3rd of its daily trading range.

The next day, the stock rallied again in sympathy to a strong earnings report and gap-up move in one of its cousin-stocks, Take-Two Interactive (TTWO). That move on Thursday pushed EA a little bit above Wednesday’s intraday high and the 20-day moving average, but again the stock reversed and closed in the lower part of its daily trading range.

On Friday, EA again tried to move back up above its 20-day line but failed for the third time in three days as it closed down and in the lower half of its daily trading range. On an intraday basis, one could have shorted this three times over the past three days on each rally up to and just above the 20-day line and made money day-trading the stock.

To me this still looks like a late-stage base failure, and so I would continue to look at rallies up into the 20-day and 50-day moving averages as potential short-sale opportunities. In this case, the 50-day line at 82.61 would serve as a guide for a tight upside stop.

 

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On Thursday, EA’s action was inspired by sympathy to TTWO, while on Friday some of the movement might be attributed to a somewhat confused sympathy move to another cousin-stock, Activision Blizzard (ATVI). ATVI announced earnings after the close on Thursday and gapped down in after-hours trade. On Friday ATVI opened down in a big gap-down move, but quickly rallied all the way back up toward its 50-day moving average. That move, however, eventually failed as the stock reversed to close in the lower 1/3rd of its daily price range.

ATVI is now a confirmed late-stage failed-base short-sale set-up, but the point to short it at was on Friday when it rallied up to the 50-day line right after the close. Now I would simply look to use rallies up into the 50-day line as potentially lower-risk short-sale entry opportunities.

 

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Among other short-sale target stocks, here are my current notes:

GrubHub (GRUB) continues to move lower, and only rallies up to the 10-day line at 38.76 would offer lower-risk opportunities.

Salesforce.com (CRM) is stuck between its 200-day moving average on the upside and its 50-day moving average on the downside. We can still view moves up into the 200-day line as optimal short-sale opportunities, but with the stock a mere 54 cents below its 200-day line it is within shorting range with the idea that a breach below the 50-day line at 73.80 would help to confirm potentially worsening downside for the stock. Earnings are expected to be reported on November 17th.

Smith & Wesson (SWHC) posted a roundabout type of pocket pivot coming up through its 50-day moving average on Friday. As a short-sale target, SWHC was a cover when it reached the 200-day line in early October as I wrote at that time. Now I’d need to see a break back below the 50-day line in a pocket pivot failure type of move to bring me back on the short side of this. It does help to illustrate why one doesn’t get a lot of juice focusing on short-sale targets that are “much further along in the topping process,” as opposed to recent LSFB set-ups.

Taser International (TASR) has finally closed below its 200-day moving average for two days in a row, but is expected to announce earnings this coming Wednesday. If earnings weren’t about to come out, I would view this as a short right here using the 200-day line as a guide for a tight upside stop.

Workday (WDAY) has continued lower since finding resistance at its 50-day moving average on Tuesday where it was last in an optimal, short-sale entry position. Right now only rallies up into the 10-day line at 85.54 would present lower-risk short-sale entry opportunities.

Citrix Systems (CTXS) has slid lower over the past three days since running into resistance at its 50-day moving average on Wednesday. I blogged about CTXS as a short-sale target on Tuesday at 9:24 a.m. PDT as it rallied into the 50-day line. That was timely, as the stock turned back to the downside on Wednesday and has been down every day since then.

CTXS now appears to be headed for its 200-day moving average at 81.18. If one began working a short position close to the 50-day line, then that can serve as your trailing upside stop, using the 200-day line as your near-term downside price target.

 

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On Thursday I blogged about another cloud-stock favorite, Adobe Systems (ADBE), as it rallied up into its 10-day and 20-day moving averages. At that point the stock looked quite shortable based on the prior flag base breakout failure of two weeks ago.

ADBE then turned back to the downside on Friday, but found support at the 50-day moving average. Notice also that it is wobbling around the low of its late September buyable gap-up move at 105.80. This initial breakdown below the 20-day line puts us on alert for a possible failure through the 50-day line, so that is something to watch for in the coming days. In the meantime, I would look to short ADBE into any rallies up toward the 10-day and 20-day moving averages at 108.61 and 108.41, respectively.

 

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As far as alerting members to imminent short-sale opportunities, the best source has probably been the live Gilmo Blog. This allows me to discuss short-sale opportunities as they crop up in real time. The report, on the other hand, is more useful in terms of outlining general strategies for handling short-sale target stocks based on different scenarios.

Therefore, members who are oriented toward the short side of the market should pay close attention to the live blog for potentially actionable, real-time short-sale sets-ups. With the market down nine days in a row, of course the possibility of a reaction rally increases by default. As I already discussed, Tuesday’s election is a big deal, and it is probably a big deal for the market as well. It has the potential to generate a lot of volatility. So taking aggressive positions ahead of the election is probably not advisable.

Speaking for myself, I added a nice chunk of cushion to my profits this year over the past five days or so, but I am not willing to roll the dice with that on Election Day. Profits in 2016 have been fought for tooth and nail in what has been a tricky environment., and as far as I’m concerned they must be jealously guarded! I pride myself on minimizing my drawdowns to 3-4% maximum while steadily moving higher throughout the year.

Of course, there are also more practical considerations from more of a trading standpoint. When it comes to the short side, you’re going to make big money by campaigning big downside moves in former leaders, end of story. Otherwise you’re just chipping wood, and all you’ll end up with is a neat little pile of sawdust. On the short-side you want to fell big trees! And for that reason, a highly profitable short-sale expedition isn’t all about one day.

My intention is to sit back and look to capitalize on whatever move develops after the election. A significant trend isn’t going to develop on a single day that happens to fall after the election. Any number of possibilities might present themselves as a result of a sharp move one way or the other, as I mentioned earlier in this report.

A big gap-up rally might be something to fade, depending on whether this brings short-sale target stocks up into areas of overhead resistance where they would present lower-risk short-sale opportunities. If a big rally starts showing us a lot of set-ups on the long side, then it might be the flow to go with by buying with the rally.

A big sell-off might be something to fade, particularly if it has an exhaustive feel to it. Like the post-Brexit sell-off, once the last of the chicken littlles jumps out the window then the market may be free to rally. And there is always the possibility that the market just sits there for a moment after the election, and then begins to slide in one direction or the other as the true trend takes hold again.

The trick is to assess the action in real-time with a completely open mind, a firm trading plan for both the long and short sides, and a tight risk-management scheme in mind. In this sense, Wednesday might be a fun day as an exercise in keeping an entirely open mind as one decides what trades to take and, perhaps more importantly, not take, without allowing any pre-determined, rigid bias to distort one’s judgement.

As a trader, I welcome such a challenge, particularly when I have the tools and methods on both the long and short sides to deal with whatever the market throws at us after the election. I’m looking forward to it.

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 AAPL, 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.