The Gilmo Report

October 19, 2014

October 18, 2014

The market staged a very logical oversold reaction rally and bounce over the past two trading days, but, as the daily chart of the NASDAQ Composite Index shows below, the rally ran into equally logical resistance right at the 200-day moving average on lighter volume. I discussed the high probability of a bounce in my Wednesday report after what had appeared to be a big-volume washout day that started with a huge gap-down opening but ended bullishly with the indexes way up off of their intraday lows. With Wednesday’s action coming after a cascading descent over the prior 3½ weeks, the context of a sort of “exhaustion low” was also provided. But that was Wednesday, and if one had heeded the axiom, “expect the unexpected,” perhaps one could have anticipated an identical huge gap-down open on Thursday!

The first thing I remember seeing when I turned on my monitors on Thursday morning was the NASDAQ Mini-Futures Contract down 56 points, a big red “-56” blaring at me like the sun coming up over the San Gabriel Mountains.  Things were looking dire as the Dow plummeted over 300 points once the bell rang, and I actually put out a couple of short positions to test just how weak the market really was at that point.

As I tweeted early in the day, I felt the gap-down open provided short-sellers a last opportunity to use the downside crush of liquidity to cover remaining short positions in a stress-free environment. Testing the short side gave me a visceral sense of a lack of selling pressure at that point. This made sense to me given that a second fear-inducing gap-down morning in a row was only serving to contribute to the sheer “sold out” condition of the market. Over the prior week, most broken-down leading stocks had been pummeled with the market. And so, on Friday, the rubber band snapped back the other way and we had a 300+ point intraday rally in the Dow Jones Industrials, not shown.

 

GR101914-$COMPQ

 

The rally basically brings up two main questions: 1) if it has legs, are any leaders setting up in buyable areas of their charts, and 2) if it doesn’t, how are my short-sale targets acting as the market rallies here? On Friday, there was a lack of anything setting up on the long side, and most upside moves in stocks that were lifting strongly at the open fizzled out, resulting in stalling action on the charts.

Thus the answer to #1 is no. With respect to #2, a number of short-sale target stocks also continued to bounce and rally off of their own logical support areas, which I first discussed in my Wednesday report. These bounces also took place within the correlating context of the bounce in the general market indexes over the past two trading days. On Friday all came in off their highs and closed in the lower part of their daily trading ranges, mimicking the action of the indexes. Some even stalled and reversed fairly sharply, and this kind of action was seen in all of our short-sale target stocks. Let’s run through them.

Tesla Motors (TSLA), which had bounced clean off of its 200-day moving average on Wednesday and Thursday, rallied up near the October 1st low, the first level of potential resistance that I see on the chart. Volume picked up on the day as the stock reversed and closed right near the lows of the intraday trading range. Any bounces back up to that October 1st low at 235.65 can be tested on the short side, using a tight stop at that level. I shorted this on Friday but covered into the close and banked my profits for the day. With the indexes up big, most commentators in the media will likely trumpet “the low” in the market, and I am anticipating a slight up opening on Monday that might provide a better re-entry perhaps a little higher in the pattern. In any case, my approach here on the short side is mostly one of hit-and-run as the volatility is somewhat treacherous.

 

GR101914-TSLA

 

On Wednesday I discussed the possibility of Palo Alto Networks (PANW) shaking off its prior breakout and $100 century mark price level failure and trying to “re-breakout,” and that’s what the stock tried to do on Friday, as we see on the daily chart, below. That move fizzled out and the stock closed below the prior flag breakout point in the 99-100 price area. As well, it failed again at the $100 price level, which brings Livermore’s Century Mark Rule in reverse back into play.

This action comes after a four-day wedging rally up off the 50-day moving average. My inclination to attack the short side aggressively here, as with any rallying potential short-sale target stock, however, is dependent on what the market does over the next few days. If the rally fails completely after running into at least temporarily convincing resistance at the 200-day moving average, then something like PANW becomes a short-sale target using the $100 price level as a guide for an upside stop.

 

GR101914-PANW

 

LinkedIn (LNKD) established a high on Thursday and retested that high on Friday before turning tail and closing down on the day, as we can see on the daily chart, below. As I saw it on Friday, the stock was shortable near that high which also coincides with the 65-day exponential moving average, the black moving average on the chart. Near-term this establishes an area of resistance, and with the 20-day moving average coming down into the 203 price level, that would also provide a reasonable guide for an upside stop. Ideally, you want to short this as close to the 65-day/20-day moving average confluence as possible.

 

GR101914-LNKD

 

Amazon.com (AMZN) was another reversal type of situation on Friday, as we can see on its daily chart, below. After putting in a low on Thursday, the stock rallied right back up into its 10-day moving average and the neckline of the secondary head and shoulders formation it has formed since early June. As I showed on AMZN’s weekly chart in last weekend’s report, this secondary H&S is forming in a position where the peak of the head in July coincides with the neckline of an H&S that AMZN formed from October 2013 to April 2014. Technically, Friday’s rally was one that could have been shorted into, using the neckline as your guide for an upside stop. AMZN is expected to announce earnings this coming week, so one has to contend with the prospect of playing “earnings roulette” with this one.

 

GR101914-AMZN

 

SolarCity (SCTY) undercut the lows of its big cup formation on Wednesday, as we can see on the daily chart, below, and has staged a sharp two-day bounce right back up into its 10-day moving average. Interestingly, the 10-day line continues to serve as firm upside resistance for the stock as it has descended in a steady downtrend since its breakout failure of roughly mid-September. Intraday SCTY moved a little bit above the 10-day line but a small area of overhead congestion from last week got in the way and turned the stock back below the 10-day line, where it closed very near the bottom of its intraday price range.

 

GR101914-SCTY

 

Apple (AAPL) is expected to come out with earnings on Monday, but for some reason investors didn’t seem intent on piling into the stock at “bargain” prices on Friday, even in the midst of a big index rally. As we can see on the daily chart, below, after undercutting its early September low on Wednesday, AAPL rallied back up close to the 20-day/50-day moving average confluence, but closed in the lower part of its daily price range.

I have speculated about AAPL being an “Elephant POD” topping formation, and the initial breakdown through and violation of the 50-day moving average earlier this past week confirms that theory. Now we get to see whether earnings on Monday provides some sort of decisive resolution to this pattern. Analysts are expecting big iPhone 6 sales, but if that generates an after-hours rally, it could turn out to be one to sell-short into, but we won’t know until we get there. In the meantime, the usual earnings roulette risk for anyone trying to hold a position in AAPL either way, to be frank.

 

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I have theorized that Netflix (NFLX) was a POD-in-process as it has started to break down over the past month, and Wednesday’s after-hours earnings report sealed the deal, as we can see on the daily chart, below. This is a massive-volume gap-down breakdown that has carried well beyond the 200-day moving average, leaving the stock “dangling” in “mid-air,” as it were. If one wanted to treat this as a shortable gap-down type of move, then using Thursday’s intraday high at 366.17 as a guide for an upside stop would be a reasonable way to handle the trade. NFLX has traded up off of its intraday lows to close near the peak of the daily trading range over the past two trading days.

The stock was buoyed on Friday by Dallas Mavericks owner and billionaire Mark Cuban tweeting that he was going long the stock on the basis of it becoming a takeover candidate. That assumes, of course, that it’s worth more to another company as an acquisition target than it currently is to investors. Cuban already owns 50,000 shares of the stock, apparently, but is primed up to buy more. Who knows where he bought it, but if he owned it before earnings he just took a nice haircut on the position’s value. For my money, I’ll stick with the guidance provided by the price/volume action of the stock. I’ve seen this sort of thing before in stocks that are touted as takeover candidates yet the prices continue to go lower, such as, for example, Yelp (YELP) and Pandora Media (P).

 

GR101914-NFLX

 

Speaking of Pandora Media (P), I tweeted to members that the “620” chart was revealing something about the stock intraday on Friday, namely an intraday sell signal. Looking at the action on a daily chart, below, we can see that P rallied right up into the 20-day moving average before reversing on heavy volume and closing near the lows of the intraday price range.

If one goes back to my September 28th report they will find a weekly chart of P showing a neckline to a very large H&S formation coming through the 20 price level. P bounced right off of that neckline, but in my view could easily retest it if the general market rolls over anytime soon. P is expected to announce earnings this coming Thursday after the close, so if one wants to short it here using the 20-day moving average then one has four days to make that trade work before they will be put into a position of having to play earnings roulette.

 

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If we look at the 5-minute intraday “620” chart, of P from Friday, below, we can see when the sell signal hit. At around 8:00 a.m. Pacific Time, the chart flashed a MACD line cross, as the stock was forming an intraday flag formation. As the stock broke down from this flag formation the chart then flashed a 6-period moving average cross over the 20-period moving average to the downside. This confirmed the MACD cross and was an intraday short point.

Contextually, if we put this together with the action on the daily chart, at the time P was forming the highs of this flag roughly between 8:00 and 9:00 a.m. Pacific Time, it was also bumping into its 20-day moving average. If I see something like this, then the MACD line cross is enough to get me to begin putting out a position on the short side. In this manner I use the chart in conjunction with what I am seeing on the daily chart so that the rally up into the 20-day line, a potential area of upside resistance coinciding with certain action on the 620 chart, will get me short the stock.

 

GR101914-P Intraday

 

We can also see how TSLA’s gap-up rally on Friday played out on the 5-minute intraday 620 chart, below. As TSLA was rallying up into the October 1st low as I discussed earlier in this report, it was breaking out of an intraday flag. This breakout failed however as TSLA found resistance near the early October low and the stock quickly flashed both a 6-period over 20-period moving average cross and a MACD line cross. That was the point at which to go after TSLA on the short side. After that it was smooth sailing as the stock failed to get close to the 20-period line as it trended smoothly to the downside throughout the day before trying to bump up into the 20-period line into the close.

 

GR101914-TSLA Intraday

 

LNKD, which on Friday found resistance at its Thursday high and the 65-day exponential moving average on its daily chart, shown further above, also had the correct context to bring the 620 chart into play as it failed right at the open. The 5-minute intraday 620 chart below shows the 6-period over 20-period moving average cross occurring more or less at the same time as the MACD line cross, and this is an intraday short-sale point. As the stock trended lower throughout the day the 20-period line served as solid upside resistance.

These are very neat and tidy examples of how the market’s rally into the 200-day moving average today combined with rallies by P, TSLA, and LNKD into logical areas of potential overhead resistance on their respective daily charts provided the perfect context for employing 620 chart sell signals to enter short positions in these stocks on an intraday basis. The fact that this worked so well on Friday tells you something about the credibility of the big index rally of that day.

 

GR101914-LNKD Intraday

 

So now we have seen the short-term exhaustion low and the first day of a huge rally that carried the NASDAQ Composite Index right into its 200-day moving average. As I wrote earlier in this report, I tend to think that positive media coverage of Friday’s rally and the number of talking heads on financial cable TV calling for a market bottom will lead to a continued bounce on the open Monday morning. Where we go from there is an open question, but armed with my 620 charts and other short-selling “devices” and “tools” that I use, I am well-prepared to do battle. For now I would need to see things set up further on the long side before I can entertain any serious long trades/purchases given the dearth of long set-ups I’m seeing right now.

Overall, the action of short-sale target stocks on Friday where most, if not all, were stalling severely even in the face of a sharp index rally may be giving us a clue as to the sustainability of this current one-day rally attempt. Thus for now my tendency is to look to be opportunistic on the short side into any upside move we might see on Monday. But, as always, there is the matter of expecting the unexpected! 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 no positions, though positions are subject to change at any time and without notice.

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