The Gilmo Report

October 15, 2014

October 15, 2014

The market finally came unglued this week as the NASDAQ Composite Index plunged further below its 200-day moving average to test the area of congestion around the May lows, as we can see on the daily chart, below. The futures got things off to a rousing start this morning as they plunged sharply after a negative Producer Price Index raised the specter of deflation. Despite its spectacularly bearish tone, the big gap-down move at the open struck me as a crush of liquidity to take advantage of by covering my shorts into the dive. By the close that strategy proved to be the prudent one as the NASDAQ closed down only -11.85, about one-tenth of what it was at its intraday lows when it was down -111.17.  Given that the indexes are quite extended to the downside and lie just above support at around the May lows, an oversold reflex rally here would not surprise me, But after-hours the market isn’t getting much help from Netflix (NFLX) which has plunged over 100 points after the close after missing on earnings.

In my view investors should remain cautious here and wait to see if and when stocks begin to stabilize and some coherent buy set-ups appear before entertaining any idea of venturing onto the long side. For the most part, I would be watching any correcting leaders that are coming into a) the top of a prior base or consolidation or b) their 50-day moving averages, and this is where I would start to look if the market is able to find its feet in its current deep, down, and dirty chart position.

 

GR101514--$COMPQ

 

Meanwhile, as I tweeted earlier in the day today, I began to sense that the short side of the market was getting somewhat played out, based on the action of our short-sale target stocks. For example, Tesla Motors (TSLA) hit our near-term downside price target by undercutting its 200-day moving average today and rebounding back to the upside on heavy volume, as we can see on the daily chart. At this point the stock would only become shortable on a rally further up in the pattern. But with earnings coming up at the beginning of November, I’m probably happy to take what we’ve made in the stock so far on the downside and take a break, letting things develop into and after earnings.

 

GR101514-TSLA Daily

 

As I wrote above, Netflix (NFLX) is getting decimated after-hours after missing on earnings, and at last check was trading somewhere around the 330 price level as I write. In any case, anyone who held a position short in NFLX going into earnings is very happy, no doubt, and we’ll have to see how this acts tomorrow before we can determine any new short-sale entry points. For now this is going to be way too extended on the downside to mess with right away.

 

GR101514-NFLX

 

Palo Alto Networks (PANW) found support at its 50-day moving average over the past two days on above-average volume, as we can see on the daily chart, below. As I discussed over the weekend, PANW was shaping up into a late-stage breakout failure that would be shortable on rallies up into the 20-day moving average, which is exactly what it did today. The question of shorting it here will likely depend on what the general market does, but if it cannot clear the $100 price level and its prior breakout point, then it is shortable in here using the $100 level as an upside stop. Just to keep the discussion balanced, keep in mind also that PANW could resolve bullishly. In other words, given that it has found volume support at the 50-day moving average, it could simply be shaking out here and looking to “re-breakout” if the general market gets into an oversold upside “jack.” Thus you want to watch this one closely as it plays out in real-time and play it as it lies.

 

GR101514-PANW

 

LinkedIn (LNKD) is another short-sale target that reached our initial downside price target at the 200-day moving average, as we can see on the daily chart, below. LNKD actually “kissed” the 200-day line on Monday, and has not undercut that low since, even with the market getting shellacked today. Thus I think this can be left alone unless we see a rally up into the 20-day moving average, currently at 205.05, where I would be open to shorting the stock since I can use the 20-day line as a very nearby guide in order to keep things tight.

 

GR101514-LNKD

 

I discussed the fact that I think Amazon.com (AMZN) can eventually get down to the 285 level, but this may not occur until after the company announces earnings next week. In the short term AMZN has undercut the August 1st low and could be in a position to rally IF the general market is also able to generate some kind of reaction rally. For now, going into earnings, I would be taking profits on any AMZN short position here and waiting for the dust to settle once earnings come out.

 

GR101514-AMZN

 

SolarCity (SCTY) has moved lower this week to test the lows of its big cup formation, as we can see on the daily chart below. Notice that it has undercut some of the early June lows as it also tests the absolute low of May 7th at 45.79. SCTY got down as low as 45.91 today, which looks close enough to take profits in any remaining short-sale position in the stock.

 

GR101514-SCTY

 

Apple (AAPL) broke down through its 50-day moving average on above-average volume yesterday, and today also busted through its 65-day exponential moving average, the black moving average on the daily chart, below. Interestingly, AAPL had been holding the 65-day line each time it pushed below the 50-day moving average, but that pattern was broken today when it proceeded lower before undercutting the early September low and coming up off the lows. As I see it, the break below the 50-day moving average confirms my theory on the stock as a potential “Elephant POD” type of topping formation, but with earnings expected next Monday, it was enough to take profits today and see how things play out after earnings.

 

GR101514-AAPL

 

As I’ve gained experience on the short side over the course of my trading career, paying my share of “tuition” along the way, it has become clear to me that risk-management is probably the most important component of the short side. But rather than using a rote system of percentage stops on my positions, I have learned to “work” the short side using a simple device that I call a “620” intraday chart. This is basically a 5-minute intraday chart that has a six-period and 20-period moving average with MACD lines and the MACD histogram along the bottom of the chart, as we can see in the 5-minute chart of TSLA, below.

Last Thursday, TSLA opened up above the 265 price level, but that move was short-lived as it began to reverse. At that point I was watching my 620 chart and noticed that the 6-period moving average had crossed below the 20-period moving average while at the same time the MACD lines, which I set at (6, 20, 10, C), are also crossing. This is an intraday short signal, and I will hit the stock short at that point. As the stock comes down and starts to get extended to the downside, I will look for the MACD histogram to start to “stretch” to the downside, and if this coincides with a cross of the MACD lines, I will generally cover at least part of my position.

 

GR101514-TSLA Intraday 1

 

Over the weekend I held a short position in TSLA, and on Monday we saw the stock open up just slightly at the bell before it immediately flashed simultaneous moving average and MACD crosses on the 620 chart that we see below.  At that point I will “load up” my existing short position in the stock and get heavy in anticipation of a sharp downside move. Over the next hour the stock dropped down to the 221 price level where I was seeing the MACD histogram bars “stretch” deeply to the downside. This was soon followed by an upside cross of the MACD lines, and since the stock was also very close to the 200-day moving average, which was my initial downside target for the stock. I covered and took profits. The stock then rallied from there and on Tuesday set up again above the 230 price level.

 

GR101514 TSLA Intraday 2

 

While this may generate questions from members who want to get anal retentive about the precise metrics of this chart, let me make it very clear that this is in no way, shape, or form intended as a “magic” trading system. Essentially, I use this chart as a device or tool that keeps me disciplined as I campaign stocks on the short side. It can be useful at inflection points on a daily chart such that, for example, when a short-sale target is rallying up into an area of potential resistance, such as TSLA did last Thursday when it was fluttering around its 50-day moving average, the 620 chart can provide me with a decent reference for timing my short-sale entry. If the 620 signal reverses and the 6-period moving average crosses above the 20-period moving average, then sometimes this allows me to stop myself out of the short position much more quickly than if I was using some rote percentage stop.

I’ve experimented with a lot of different charts like this, and I’ve found that for my aggressive style this one works quite well. For other investors with varying styles another type of set-up might work, and I would encourage those who are interested in doing so to play around with different configurations and see what works well for them. I’ve also noticed that I can sometimes use the 620 in reverse to buy into stocks that are on my buy watch list when they are pulling back into an area of potential support such as the top of a prior base or the 50-day or 20-day moving averages.

As the market gets deep down into its May lows, my feeling is that the short side is probably played out for now, unless one wants to play “earnings roulette” and hold short positions into earnings. Obviously, if one did so going into the NFLX earnings announcement today after the close, one did very well! As we progress through the “meat” of earnings season over these next 2-3 weeks, I’m inclined to enjoy the fruits of my short-selling labors and wait to see what this market offers me in terms of the next round of actionable set-ups, whether on the long or short side. That could occur tomorrow, or a few days from now. Stay tuned and follow me on Twitter for my real-time market observations.

 

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 no positions, though positions are subject to change at any time and without notice.

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