The Gilmo Report

September 17, 2014

September 17, 2014

The market entered a strange divergent space on Monday as a number of leading growth stocks were slammed, sending the NASDAQ Composite Index on a sharp dive towards its 50-day moving average, as we can see on the daily chart, below. At the same time the Dow Jones Industrials, not shown, made an all-time closing high on Monday while the S&P 500, also not shown, closed down along the lows of the prior three days but little changed from Friday. On Tuesday, the NASDAQ regained its composure as a number of these big NASDAQ growth stocks that were hit on Monday bounced off of their 50-day moving averages, taking the index back to the upside as the Dow pushed above the 17,100 level and an all-time high while the S&P 500 pushed back up towards the 2000 level. Today the Fed came out with their monthly policy announcement, which for the most part came across as fairly dovish but with the usual language that, while trying to sound constructive, merely translates as the usual Orwellian logic, e.g., the economy is making so much progress that interest rates must still stay near zero. The market engaged in its usual post-Fed announcement gyrations before settling on a small upside close on lighter volume. In essence the indexes overall just churned on lighter volume today in what is so far a two-day bounce off of the Tuesday intraday lows. The action overall, however, looks somewhat suspect and I have to admit that for the short-term, at least I have taken a more bearish posture as I look to operate on the short side.




With NASDAQ growth names getting hit in what looked like a rotation into safer big-cap names on Monday, the Russell 2000 Index, as represented by the daily chart of the iShares Russell 2000 Index ETF, below, dipped below its 50-day moving average but was able to recover on Tuesday and regain the line. Today the Russell churned around the 50-day line but managed to hang on and close above the line. To some extent the Russell illustrates that the market is “on the fence” here, and my guess is that we will at least see the indexes find their 50-day moving averages on the downside. The S&P 500 remains well above its 50-day moving average, closing today at 2001.57 vs. the 50-day line at 1973.74, while the NASDAQ closed at 4562.19, well above its own 50-day line at 4478.14. Given the weak action in some of the leaders and what I see as a potentially defensive move towards more stable big-cap names based on the current divergence of the Dow moving to all-time highs as the NASDAQ and S&P 500 churn about, I consider the probability of the indexes testing their 50-day lines to be increasing.




Some of the names that bounced off of their 50-day moving averages included big-stock social-networker Facebook (FB), shown below on a daily chart. FB slammed into its 50-day moving average as the market gapped down on Tuesday morning, but this led to some quick downside exhaustion right at the 50-day moving average and the stock bounced right off the line. Investors could have bought the stock on that pullback right at the line, using the 50-day moving average as a quick downside guide for a stop. If one has the courage to do so, I don’t necessarily see anything wrong with this, but with distribution piling up in the indexes and the bizarre divergence we saw on Monday, it is imperative that investors keep long positions on a very tight leash. I admit to buying some stocks on Tuesday on the pullbacks, but for the most part I tend to view these as short-term trades or even day-trades as circumstances dictate.




Tesla Motors (TSLA), after getting hit with a downgrade from broker Morgan Stanley (MS) on Monday, gapped down and plummeted -9.08% where it found support at its 50-day moving average, as we can see on the daily chart, below. The bounce from there was somewhat academic as investors saw this as the stock’s first pullback to the 50-day line since it broke out of a cup-with-handle base in early August. Again, if one used that pullback to buy the stock, the bounce has worked, and the 50-day moving average must be adhered to as a downside guide for a stop. However, note that the two-day bounce is showing some wedging and stalling action as the stock pushes up towards the 20-day moving average. I actually think TSLA is a short here with the idea that it will retest that 50-day moving average, believe it or not.




On Monday I tweeted to members that Netflix (NFLX) had broken the short-sale trigger at the 20-day moving average early in the day, and the stock broke down hard, undercutting its 50-day moving average on Tuesday before stabilizing above the line, as we can see on the daily chart, below. Buyers failed to show up today as the stock just sat on its 50-day moving average, closing pretty much right at the line. The stock appears to be trapped in a short one-day bear flag, and it remains to be seen whether it can muster any kind of meaningful bounce off the 50-day line or whether it simply continues on through and below the line. I view NFLX as a short coming down through the 20-day line, and it may be shortable here with the idea of using today’s intraday high at 458.86 as a quick stop. This remains tricky, however, as a rally back up to the 20-day moving could always occur, particularly if the general market attempts to bounce higher. After today’s churning and stalling in the indexes, that doesn’t seem likely, and if the indexes move lower from here they probably take NFLX down with them.




I also tweeted on Monday morning that LinkedIn (LNKD) had also broken its 20-day moving average short-sale trigger, and it also broke down towards its 50-day moving average, as we can see on the daily chart, below. It didn’t quite make it to the 50-day line, but it is important that investors remain cognizant of the action on the weekly as well as the daily charts in real time since LNKD did find support right at its 10-week moving average. The stock attempt to bounce higher today but fell well short of its 20-day moving average. I tend to view LNKD as a short using the 20-day moving average at 218.93 as an upside stop, although this presumes that one can enter the stock as close to the 20-day line as possible. Otherwise, moves up near today’s intraday high just above 215 might be shortable if the stock is going to simply roll over from here and retest the 50-day line.




On Tuesday morning I tweeted that

Palo Alto Networks (PANW) looked good for a trade up to the $100 price level, and the stock didn’t let me down as it cruised back above the century mark this morning. Given that the stock had held up well on Monday and found support at its 10-day line on Tuesday this looked like a logical short-term trade. Keep in mind that the operative word here is “short-term trade.” PANW closed near the lows of its trading range as it failed to hold the century mark, and a major wrinkle here is that the stock could just as easily morph into a short-sale set-up on the basis of any century mark failure. This is based on using Livermore’s Century Mark Rule in reverse to short stocks that fail at a century mark price level and reverse, usually heading lower in a market correction. We saw this sort of action in stocks like WDAY, SPLK, DATA, and YELP back in March, and I would stress that investors should be ready to read PANW with an open mind and be ready for anything. Meanwhile, relatively to a number of other leaders in this market, PANW is for now holding up reasonably well.




Twitter (TWTR) was smashed on Monday as well, but it appeared to find support in “mid-air” early in the day and managed to close just above its 20-day moving average, as we can see on the daily chart, below. The problem here is that the stock has lost its coherency, not unlike a number of other leading stocks in this market, and has gone from what could be considered a state of “low entropy” where the action is orderly and coherent to a state of “high entropy” where the action has suddenly gone a bit chaotic on us. TWTR has now bounced in a two-day wedging rally as it stalled today on light volume at the 10-day moving average. If one is still long this from lower in the pattern, using the 50-day moving average as a selling guide means you will give up any profits gained if the stock was bought around 45 on the basis of prior pocket pivots along the 10-day line. Therefore using the 20-day line as an ultimate selling guide is advisable, although investors can handle their positions as they see fit based on their own risk preferences and tolerance.




After a one-day wonder trade, SolarCity (SCTY) turned into a complete bust on Monday, crashing through its 50-day moving average and closing well below the line, as we can see on the daily chart, below. SCTY illustrates how if one is able to buy the stock when it is quiet along a key support level like the 10-day, 20-day, or 50-day moving average and then use those levels as quick downside stops, one can minimize downside risk. In my view, once something like SCTY drops below the 50-day line it is a sell, although I would have simply sold into last Friday’s strong move as has been my general modus operandi in this nutty QE market and as members know quite well from numerous discussions of my approach to the market in prior reports. Yelp (YELP), not shown, was another “quiet” buy idea that failed rather quickly as the stock plummeted through the 10-day moving average on heavy volume Monday. Getting back to SCTY, I would note that after Monday’s breakdown following Friday’s one-day wonder rally, the stock has now morphed into a clear late-stage failed-base short-sale set-up. We can consider Monday’s breakdown to be a failed breakout attempt from a short “ladle-with-handle” formation, but this shorter ladle-with-handle also forms the handle to a larger cup-with-handle formation that is somewhat POD-like as well.




We can see this much better on the weekly chart of SCTY, below, which reveals the much larger, late-stage cup-with-handle base that extends back to late February. The handle of this larger cup consists of he smaller ladle-with-handle I outlined in the daily chart, above. Since the week is just a little more than half over, I would expect that this week’s volume will likely exceed last week’s volume leading to a higher-volume breakout failure from a late-stage C&H formation that is 48.2% deep and 28 weeks in duration so far. The weekly chart also shows the entire move since the stock came public in late 2012, and this further illustrates the late-stage potential here. I think SCTY is shortable as an LSFB set-up using the 50-day moving average at 69.93 as a quick upside stop.


GR091714-SCTY Weekly


El Pollo Loco (LOCO) ignored the market sell-off early in the day Monday as it did the “LOCO-motion” and chugged up towards its prior all-time highs before finally succumbing to the general market pressure and reversing on heavy volume, as we can see on the daily chart, below. This took the stock right back into its 10-day moving average with volume drying up over the past two days, but notice that the stock actually stalled today and closed at the lower part of its daily trading range as volume picked up just slightly. If one has recently purchased the stock based on the prior pocket pivot at around 32 right at the beginning of September, then I would advise not letting the stock get too far below the 10-day line before cutting the position. My preference, as is well known, has been to sell LOCO into its upside jacks, but with the stock now sitting at its 10-day line it remains to be seen how and whether it is able to hold the line if and as volume dries up. Increased selling volume that takes the stock through the 10-day moving average would not be what we want to see here.




Among the leading stocks that I have liked, Taser International (TASR) acted a bit more coherently on Monday and merely pulled back to its 10-day moving average. However, that didn’t hold as the stock pushed lower this morning and drifted below its 10-day moving average as it did on Tuesday, but this time it didn’t find support and closed below the Tuesday low but just above last week’s pullback low. At best, TASR looks like it need some time to consolidate here, and in my view the “fat” part of its move is likely over for now.




GrubHub (GRUB) tried to get things going on Tuesday as it lifted off of its 10-day/20-day moving average confluence where it had been hanging out most of the week, but to no avail as it reversed and closed slightly lower on heavy volume. As we can see on the daily chart, below, GRUB was trying to hold tight along the moving averages but gave it up today as it moved lower on slightly above-average volume. This is not setting up the way I think it should, and therefore it gets tossed aside, end of story.




Railroad car maker Greenbrier Companies (GBX) pulled back to its 50-day moving average on Monday where it found support and actually flashed a pocket pivot off the line on Tuesday, as we can see on the daily chart, below. Today GBX gapped up to a new high, but churned around and closed below the mid-point of its daily price range on heavy volume. Railroads like Union Pacific (UNP), not shown, and other cousin stocks like Trinity Industries (TRN) have been acting well lately, so the short-term strength has been a group activity, at least for now. I would not buy into this move, however, given the stock’s nature to move up strongly and then spend a period of time backing-and-filling. As well, if the general market weakens further this will likely come in with the market as it has done before.


GR091714-GBX (AMZN) worked as a short-sale target on Monday morning, quickly dropping down to fill its prior gap move from August 13th, as I’ve highlighted on the daily chart, below. AMZN rallied in logical fashion after filling the gap, but appears to run into resistance just below the 330 price level, which I’ve also highlighted on the chart. The daily price range is tightening up here as the stock remains within a short bear flag or pennant type of formation, and in my view it is likely setting up to move lower here. I would use any rallies up into the 227-230 price areas as opportunities to short the stock, although today’s close puts it just outside of 2% below the 230 level, which is probably close enough if one is using 230 as a guide for an upside stop.




The market has clearly reached a cautionary state, in my view, despite the media trumpeting new highs in the Dow. In some ways, this seems to provide excellent cover for the institutional selling that appears to be going on in growth names, and serves to keep the public in sucker mode. My approach remains the same as I seek to capitalize on the set-ups I am seeing occur in real-time, whether long or short. This does require something of a short-term view, but this is entirely in sync with the way I handle this interest-rate driven market. I certainly don’t think this is a market for so-called “position-building,” that much is certain! Short-term I think we’re probably headed lower, with a test of the 50-day moving average in store for both the NASDAQ and the S&P 500, and I definitely think situations like AMZN and SCTY are worth taking a look at from a short-selling perspective. As they say in the great but frustrating game of golf, “Play it as it lies!”


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 AMZN, LNKD, NFLX, and TSLA, though positions are subject to change at any time and without notice.

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