The Gilmo Report

October 8, 2014

October 8, 2014

The NASDAQ Composite Index and the S&P 500 Index both ran into stiff resistance right at their 50-day moving averages on Monday in what seemed almost too “textbook” for a QE-distorted market.  On Tuesday, the indexes were pummeled on heavy volume as the daily chart of the NASDAQ illustrates below.  Today looked to be more of the same as the market sold off right after the open and pushed to lower lows, but once the NASDAQ and S&P 500 had undercut those lows of last Thursday the stage was set for at least a short “undercut & rally” attempt. Once the Fed meeting minutes were released, the market did more than just undercut & rally, it undercut & “rocketed,” pushing 1.9% higher on the NASDAQ in heavier trade.

While this might be seen by many as the first day of a rally attempt, I think the position of the index based on the double-bottom it has put in over the last five trading days on the chart, along with the strong technical action in a number of potential and actual leading stocks argues for a continuation of the rally.




During the day today I tweeted a vague reference to intraday buy signals that I was picking up in my Gilmo “Fab Four” just before the release of the Fed meeting minutes. As members know from my report over the weekend, these four stocks comprise the ticker symbols LOCO, MBLY, PANW, and TWTR. Combining that array of buy signals in individual stocks that I like on the long side with the index “undercut & rally” at last Thursday’s lows earlier in the day, I figured they were worth a shot. Given that we are only one day off the lows it is possible that some of these may be nothing more than short-term trades. But my general feeling here is that we are going to go higher from here, and I want to be positioned on the long side here, not the short side. Let’s first look at these four stocks to see what they did today.

Palo Alto Networks (PANW) violated the 101.22 intraday low of last Friday’s buyable gap-up move, but it found support today at the 20-day moving average after pulling back more than enough to fill the Friday gap, as we can see on the daily chart, below. Volume came in just above average which is what I want to see on a supporting day off the 20-day line. I think this is in buyable position using the 20-day line as your nearby downside stop.




Twitter (TWTR) held tight over the first two days of this week as the general market took some heat, but after testing the 10-day line this morning the stock flipped back to the upside on a big outside reversal that also qualified as a pocket pivot buy point. Even yesterday, when the market was getting clocked pretty nicely, TWTR still managed to close up on the day and hold tight after Friday’s flag breakout to higher highs. Today’s pocket pivot confirms the stock’s strength and was very constructive to see after I got an intraday buy signal on the stock around the 53.50 price level. My expectation is that the stock should head higher from here if the general market rally continues, so I would only give it 3-4% maximum on the downside from today’s close as I don’t believe it should test the 10-day line again.




El Pollo Loco (LOCO) was looking like it wanted to go higher last week, as I discussed in my report of this past weekend, based on the stalled pocket pivot that was likely premature given the general market situation. After a pullback below the 10-day/20-day moving average confluence, LOCO righted itself and flashed a trendline breakout on Monday on what was also a pocket pivot volume signature. LOCO tried to move higher yesterday on an intraday basis, but eventually succumbed to the general market pressure and closed only slightly down for the day, as we can see on the daily chart, below. Volume dried up sharply as LOCO held firm in the face of a general market sell-off early in the day today, closing back in positive territory and just above Monday’s trendline/pocket pivot breakout. I like the stock here using the 10-day line as a very tight stop.




Like PANW, Mobileye (MBLY) also failed on last Friday’s buyable gap-up and high, tight flag breakout, as we can see on the daily chart, below, but I would have to say that I’m not surprised given the rough time that some base breakouts have had in this market. MBLY found support at the 20-day moving average yesterday and closed up on the day in the face of a very weak tape, which looks constructive. The stock pulled back to test the 10-day moving average today and held the line, but looks like it may need to back-and-fill a little in here.

However, from my perspective, the stock could have been bought on the intraday buy signal when it was trading around 55.50 given the supporting action along the moving averages. This still looks okay, even after the busted BGU, but that was likely premature for such a volatile stock given the weak general market environment over the past couple of days. MBLY is one of those stocks that is probably best bought on weakness to the 10-day or 20-day moving averages rather than chasing it on strength. There has been some talk of MBLY’s driver-assistance technology as being involved in TSLA’s product announcement tomorrow, so this may be what is giving the stock some buoyancy going into that event.




Another leading stock that flashed a concrete buy signal today was Gilead Sciences (GILD) which posted a pocket pivot buy point coming up through its 10-day and 20-day moving averages, as we can see on the daily chart, below. GILD has been moving sideways for the past month, and today finally flashed a bona fide buy signal as it acts like it wants to push to new highs. In my view this is a simple trade – buy it here using the 10-day moving average at 106.46 as a tight downside stop.




One aspect of the market here that seems somewhat obvious to me is that one wants to step away from the short side for now based on the general market action, the action of leading stocks, and, on top of all that, the action in short-sale target stocks. For example, Tesla Motors (TSLA) has pushed through its 50-day moving average as I theorized it might over the weekend, thanks to tweets from CEO Elon Musk making vague references to “something D” that will be part of some product announcements the company is planning for tomorrow. Most believe this is a new “Model D” that the company will unveil, and the conventional wisdom might be to “sell the news.”

While this might be the correct thing to do, one should probably consider the technical position of the stock currently as it holds along its 20-day and 50-day moving averages. This morning it looked like TSLA was headed for an outside reversal to the downside, but by the end of the day it showed decent supporting action off the lows as volume picked up and the stock closed more or less unchanged.

Depending on how the stock acts tomorrow, it could very well re-emerge as a buyable situation, thus I am only willing to interpret the price/volume action as I see it, without trying to impose a rigidly bearish or bullish view on it. I have made some money shorting the stock over the past four weeks, but I am quite willing to make money being long the stock if the technical action tells me to do so. My call: Buy TSLA here using the 50-day line at 258.18, maybe a percent lower, as a very tight stop.




Another short-sale target, Netflix (NFLX), has also shown some concrete price/volume action that tells us it may be morphing back into a long situation instead of a short-selling vehicle. As I wrote over the weekend, NFLX flashed a pocket pivot coming up through the 10-day line last Thursday when the market made a temporary low, and then pushed back above its 50-day moving average on Friday, as we can see on the daily chart, below. Monday saw the stock move a little higher in a wedging rally, and this morning NFLX pulled back below the 50-day line, perhaps helping to “correct” that wedging action. It then pulled off a huge outside reversal day to the upside on above-average volume today, which in my view puts it back on the table as a long idea, using the 50-day line at 458.25 as a tight downside stop.




LinkedIn (LNKD) broke down this morning and dropped near its 200-day moving average, getting within 1% of the line before reversing back to the upside in a big pocket pivot move off of the 200-day line, as we can see on the daily chart, below. Given that LNKD came close enough to my downside target for the stock, and putting that together with today’s pocket pivot bounce off the 200-day line, this should probably be left alone for now. The stock is still below its 10-day, 20-day, and 50-day moving averages, and if it was able to surmount these on a pocket pivot volume signature, LNKD would be back in play as a long side situation. Again, another short-sale target that is showing specific price/volume action that tells us it is likely played out on the downside for now, and perhaps add strength to the bullish general market argument from here.


GR100814-LNKD (AMZN) hasn’t been able to make it past its 20-day moving average as it stalled along the lower 10-day moving average before moving lower over the past four days, as we can see on the daily chart, below, but what changed today was its pocket pivot move up through the 10-day moving average. If you study the volume bars along the lows throughout October and September, you will notice that upside volume has shown a pattern of being higher than downside volume, and combined with today’s pocket pivot perhaps argues for an upside reaction move from here. Thus my tendency is to leave the stock alone on the short side for now based on its and the general market’s action today.




SolarCity (SCTY) found resistance at its 10-day moving average on Monday before turning back to the downside and making lower-lows yesterday as the general market got pummeled, as we can see on the daily chart, below. While I had thought that the stock might undercut the lows of its big cup-with-handle base from which it failed a month ago, what appears to be going on here is that it is finding support along the top of the low-base consolidation that makes up the bottom area of the big cup. This area of congestion has held so far, and with the general market turning it is time to take profits on any existing SCTY short position.




As I am fond of saying, in this market one should always expect the unexpected, and I can firmly admit that within about an hour or so after the open today the last thing I would have expected was how powerfully the market rallied today. But I saw the turn come just before the Fed minutes were released, as is documented by my tweet regarding intraday buy signals in my favored names at that time, and I simply went with the flow in real-time. As well, we are quite familiar with the fact that when the market turns, the best moves tend to occur in those leaders that flash buy points within their base formations as the market turns, and it is generally more than sufficient to act on that basis alone. Waiting around for a follow-through day three days or even more off the lows can often put you slightly behind the curve.

Today was a crazy day, to be sure, but don’t let the craziness distract you from recognizing concrete, actionable buy points that may help to get you in right at the market’s inflection point. 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 GILD, LOCO, MBLY, PANW, and TWTR, though positions are subject to change at any time and without notice.

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