The Gilmo Report

October 5, 2014

October 4, 2014

The market on Thursday gave an interesting demonstration of how it likes to throw investors a nice, looping curve ball every once in a while. With the NASDAQ Composite and the S&P 500 Indexes major indexes looking like they were going to bee-line for their 200-day moving averages early in the day as sellers took control, both appeared to bottom in “mid-air” before finding intraday support at the lows and closing up on the day on heavy volume, as the chart of the NASDAQ illustrates below. Aside for the whole world wanting to get short at that point, and the Put/Call ratio spiking above 1.0 for the fifth day in a row, the positions of the major indexes like the NASDAQ and the S&P 500 on their daily charts didn’t seem to be conducive to generating a short-term bottom and reaction rally. But the market provided alert investors with other clues that it was in a position for a potential rally.

 

GR100514-NAZ

 

The curveball that the market threw at investors on Thursday was that one had to be watching the action on the daily charts of the broad NYSE Composite Index and the small-cap Russell 2000 Index, shown below, for the proper clues. On Thursday, as we can see on the charts, both of these secondary indexes simultaneously undercut their August and/or May lows to set up a classic undercut & rally maneuver. I saw this occur in real-time Thursday mid-morning, and tweeted to members that the market looked ready for an oversold rally. This was not too far off the market’s lows that day. On that basis I covered my shorts and flipped into some long positions that were flashing pocket pivots at the time to see how far I could ride the bounce. Interestingly, a number of stocks we’ve been following in recent reports, both as long and short ideas, flashed pocket pivots on Thursday, so it was a simple matter of recognizing the moves in real-time and taking action quickly.

 

GR100514-$NYA

 

GR100514-$RUT

 

On Friday morning, a strong Bureau of Labor Statistics jobs number that also saw the unemployment rate drop from 6.1% to 5.9% sent the market and my long positions gapping higher, making for a propitious start to the day. As it turned out, I didn’t need to be scanning the entire market for buy ideas as the market turned on Thursday. The very small handful of stocks already on my buy watch list, consisting of nothing more at the time than the following ticker symbols: LOCO, MBLY, PANW, and TWTR all turned out to be more than sufficient to participate in the market’s rally off of the Thursday lows and up towards the 50-day moving averages on the NASDAQ and the S&P 500 on Friday. The bottom line so far is that we have a two-day rally off of the Thursday morning lows on declining volume, pretty much standard fare in this market. Where it goes from here is anybody’s guess, but the issue always comes back to what individual stocks are doing and looking for playable set-ups, long or short. For the most part I elected to sell into the strong moves exhibited by these stocks on Friday as is my custom in this market.

Let’s review some of these surprising pocket pivots that were seen on Thursday, starting with Tesla Motors (TSLA), shown below on a daily chart.  As we can see, the stock bounced off of the top of its prior cup-with-handle base on Thursday in a move that qualifies as a pocket pivot signal. However, we should note that the pocket pivot occurred after a short downtrend of several days and within a v-shaped position, so at best it would need to back and fill here if it is to lead to further upside in the stock. Meanwhile, the 50-day moving average at 256.05, in confluence with the 20-day moving average at 254.78, represents near-term resistance for the stock.

In fact, if the general market were to reverse course, TSLA could be considered shortable at the moving averages, using them plus another 2-3% as a guide for an upside stop. But the stock can also be assessed bullishly, particularly if the market bounce blossoms into something more substantial. Just to be objective, we could consider that the prior drop down to the top of the base was a normal pullback to primary support and the stock may have a shot at moving back up towards its high. For this to occur, however, I would expect some sort of pocket pivot coming up through the 50-day moving average which has so far served as resistance.

 

GR100514-TSLA

 

Netflix (NFLX) also flashed a pocket pivot buy point on Thursday, but as we can see on the daily chart, below, the move came out of a somewhat flat bear flag.  This is a fair bit more constructive than TSLA’s V-shaped pocket pivot coming after a prior downtrend, and so NFLX was able to carry further to the upside on Friday, clearing both its 20-day and 50-day moving averages. If one had been alert to NFLX’s shift in real-time on Thursday as it was setting up in pocket pivot land, one could have covered any short position in the stock and flipped to the long side on that basis. For now I don’t see that the stock can be shorted into this rally given that it is so far showing strong, above-average volume over the past two days on the bounce.

 

GR100514-NFLX

 

NFLX and TSLA represent two pocket pivots I saw in short-sale target stocks on Thursday. In real-time, such action triggers my cover rule whereby I back away from shorting the stock (and may even go long!) until such time as I can determine that the pocket pivot has failed.  When it comes to the pocket pivots in long ideas we’ve discussed in recent reports, two occurred in the four stocks that comprise my current buy watch list. The first occurred in Palo Alto Networks (PANW) which shook out on Wednesday and then pushed back up above its 10-day moving average in a pocket pivot move on Thursday, as we can see on the daily chart, below. This led to a gap-up flag breakout on Friday from a three-weeks-tight formation which I had discussed in my report of last weekend. One had to be alert to the action in PANW on Thursday, as the stock quickly moved through its buy point on Friday.

If someone had been watching PANW in real-time on Wednesday, that above-average sell-off could have easily triggered a tight stop, but the move on Thursday set the stock up again, resulting in Friday’s sharp move to all-time highs and the $100 century mark. PANW’s action on Thursday shows why one has to remain flexible and open-minded enough to identify signals of a shift as it occurs in real-time, regardless of how ugly the stock might have looked on Wednesday. Friday’s move could be seen as a buyable gap-up from a 3WT flag formation using the 101.22 intraday low on Friday as a selling guide. My preference, however, would be to see if the stock pulls back closer to the 101.22 level and gives one a lower-risk entry point.

 

GR100514-PANW

 

Twitter (TWTR) also had a pocket pivot on Thursday following a shakeout down to its 20-day moving average on Wednesday, as we can see on the daily chart, below. On Thursday TWTR did not want to give up any ground as the market sold off early in the day, and by the close the stock was flashing a pocket pivot as it edged just above the 10-day moving average. This led to a shakeout & breakout move to higher highs on Friday on volume that was 17% above average. Frankly, coming in long the stock Friday I saw this move as something to sell into, and from here I would prefer to see a pullback to the 10-day line at 51.95 as a more optimal entry point vs. chasing the breakout.

 

GR100514-TWTR

 

Among the other names on my very short buy watch list, Mobileye (MBLY) bounced off of its 10-day moving average on Thursday, as we can see on the daily chart, below, and this led to a big-volume gap-up move on Friday on what could be considered a high, tight flag breakout. MBLY traded volume that was 71% above-average so it could also be considered a buyable gap-up using the 56.54 intraday low as a selling guide.

While I considered the stock a sell into the sharp upside move that carried above 60 early in the day Friday, in my view it can be bought back here where it closed the day at 57.70 given that this is about 2% away from the BGU intraday low. As the market was turning on Thursday, MBLY was bouncing off of its 10-day moving average on slightly increasing volume, which spoke to me of supporting action, and so I considered the stock buyable at that point. Doing so was fortuitous given Friday’s big upside jack, and so for now I see this as a buyable gap-up and/or high, tight, flag breakout that should hold the lows of the gap at around 55 if it is to remain viable.

 

GR100514-MBLY

 

The fourth stock on my short buy watch list is El Pollo Loco (LOCO), which continues to work on a handle to its post-IPO cup formation, as can be seen on the weekly chart, below. On the daily chart, shown further below, LOCO continues to drift along its 10-day and 20-day moving averages, but the weekly chart probably gives us a better idea of what the stock is doing here in terms of setting up for a potential move higher. The prior two weeks LOCO closed tight along the lows of the handle and in the low 55 price zone, while this past week the stock pulled back on an intra-week basis but closed in the upper part of its price range on increasing volume. This can be seen as supporting action along the lows of the handle, and my expectation is that LOCO will probably try to break out of this formation at some point IF the general market is able to build on this current two-day reaction rally and bounce.

 

GR100514-LOCO Weekly

 

LOCO did have a stalling pocket pivot on Tuesday of this past week, but that went nowhere on Wednesday as the stock plumbed to lower lows within the handle. Obviously, the general market had something to do with Wednesday’s sell-off, but note that volume on that sell-off was lighter than Tuesday’s pocket pivot volume signature. So it may be that LOCO really does want to go higher, but the general market action put a lid on Tuesday’s pocket pivot. Meanwhile, the stock has been able to hold along the 10-day/20-day moving average confluence.

 

GR100514-LOCO Daily

 

LinkedIn (LNKD) rallied with the market on Thursday and Friday once it found a low just above the $200 price level, as we can see on the daily chart, below. The stock has now rallied back up to the 20-day/50-day moving average confluence on weak volume, where it is in shortable range using the two moving averages as your guide for an upside stop.

 

GR100514-LNKD

 

Amazon.com (AMZN) has also rallied with the market after pushing to a lower low on Wednesday, but this rally stalled on Friday at the 20-day moving average, as we can see on the daily chart. Short-term I see the 20-day line as the optimal spot to lay out a short position in the stock, using the moving average as a tight stop.

 

GR100514-AMZN

 

SolarCity (SCTY) has also bounced with the market, but so far remains below its 10-day moving average. In my report of this past Wednesday, I suggested using the 10-day as a trailing upside stop for any short position taken further up in the pattern. The 10-day line also coincides with the lows of SCTY’s prior bear flag or “pennant” as I’ve outlined on the chart, which serves as additional near-term resistance. While SCTY probably goes lower from here, I would not entertain a short entry down here given that the stock is somewhat extended to the downside. If one is already short further up in the pattern from my original discussion of the stock closer to the 50-day moving average the parameters for a trailing stop here are clear.

 

GR100514-SCTY

 

Apple (AAPL) sat out Friday’s big index rally, which I find quite surprising, closing down on the day but holding its 50-day moving average on light volume, as we can see on the daily chart, below. AAPL remains below the $100 century mark and as I suggested in my Wednesday report, is a potential short using Jesse Livermore’s Century Mark Rule in reverse and the 20-day moving average, currently at 100.27, as a very tight upside stop. I discussed my “macro-theory” regarding AAPL as a possible short-sale set-up in the making, and so far it has not been conclusive either way. As I wrote at that time, the direction of the general market from here will likely figure heavily in its resolution, although a big market rally today didn’t do much for the stock on the upside. Perhaps this is a useful clue.

 

GR100514-AAPL

 

With respect to other short-sale ideas I’ve discussed in recent reports, watch for resistance to come into play on Pandora Media (P) as it pushes up towards overhead supply at around the 25.00-25.31 price area. Another day of a small rally would put it into optimal short-selling position. Three D Systems (DDD) made a lower closing low on Friday despite the big market rally and would only be shortable on a rally up to the 10-day line around 46.73. Remember that our current short-sale target stocks, including TSLA, NFLX, LNKD, AMZN, P and DDD, only become actionable if a) they are in an optimal short-selling position within their charts and b) the general market’s current two-day rally starts to fail.

This market remains tricky, and even in the face of a strong bounce on Friday, not a lot of stocks are set up in buyable positions save for the few that I’ve discussed here. That situation could improve, but for now I remain focused on my very short list of long ideas if I want to play a continued upside rally in the general market. Otherwise, I will seek to short my short-sale target stocks as they come up into logical areas of resistance should things roll over. Again, it remains a matter of treating the market as a market of stocks and not just a stock market. As well, I’m glad that I took the time in my Wednesday report to point out the danger to those who might have suddenly decided they needed to get heavy short this market as a result of Wednesday’s putrid action. Hopefully that saved a number of you from sticking your necks out on the short side Thursday or perhaps got some thinking about taking some profits if one had some short positions from higher up in the patterns that were working.

The question to be answered is whether nascent breakouts in stocks like TWTR, MBLY, and PANW on Friday represent the initial sprouts of a market turn back to the upside. If they are, then we should begin to see more stocks sprouting similar buy points, most likely in the form of pocket pivots, so this should be watched for closely. Otherwise, as the NASDAQ and S&P 500 push back up off of Thursday’s lows, potential resistance at their 50-day moving averages loom above. 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 a position in MBLY, 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. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.