The Gilmo Report

September 7, 2014

September 6, 2014

Things were not looking good for the indexes on Thursday, as we can see on the daily chart of the S&P 500 Index, below, which failed to hold an early-morning gap-up move before flipping to the downside on higher volume for a big fat outside reversal day. On Friday the S&P 500 again looked to be in trouble early in the day as a weak jobs number sent the market lower, but selling volume failed to materialize and the index closed at an all-time high.

So far the S&P has been able to take a licking as it did on Wednesday and Thursday, but it just keeps on ticking to all-time highs, setting a new closing high on Friday. While the indexes look somewhat cautionary, all we can conclude so far is that the market is running into a little turbulence as it tries to consolidate the prior gains off of the early August lows.

On Friday the market seemed to be debating the implications of a weak 142,000 new jobs in August as reported by the Bureau of Labor Statistics. While it likely means that interest rate increases are probably on hold for now, the flip side is that even with all the liquidity that continues to slosh about in the system, the economy remains sluggish at best. Meanwhile, the European Central Bank on Thursday morning announced more interest-rate decreases as well as an even more negative depositary rate of -0.2%. In addition, the ECB is now looking to imitate the U.S. as it goes all in and, for the first time, commences with purchases of asset-backed securities. Meanwhile, European economies continue to languish.

 

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The NASDAQ Composite Index avoided an outside reversal day on Thursday mainly because it didn’t gap up high enough to clear Wednesday’s intraday peak, as we can see on the daily chart, below. It did reverse to close down on the day Thursday, however, but note that volume came in lighter compared to the prior day. On Friday the index shook out on lighter volume along with the S&P 500 and managed to close above its 10-day moving average.

As I discussed in my Wednesday report, I want to remain cautious but opportunistic as the market comes in, and with selling volume failing to pick up on Friday as the indexes looked like they were going to breakdown further early in the day it appears that the market is trying to stabilize here. This does not mean, however, that one can jump in and buy any stock. Stock selection is key in this market, because not everything is working out on the upside, and at times the action has been uneven and erratic. My solution has been to exercise very little patience with my positions when it comes to bad behavior! If something isn’t working or acting as I expect it to, it is summarily tossed aside so that precious capital can be focused on the stronger names in this market that are working. This has enabled me to get off to a strong start in the first week of September while side-stepping trouble.

 

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Twitter (TWTR) is holding in fairly well after Wednesday’s big-volume outside reversal day. The stock dipped below the 50 level but held well above the 10-day moving average, as we can see on the daily chart below. A lack of selling interest on Friday kept the stock buoyant as it closed up and within a percent of Tuesday’s higher close, the highest close it has achieved since launching off of the 10-day moving average a couple of weeks ago. When you look at the daily charts of big leading stocks from the past, you can find more than a few “ugly” sell-offs within the overall uptrend, including big-volume outside reversal days.

One day’s action is just that, and what is more important is how the action fits within the context of the overall pattern. After a sharp 15% upside move from the 10-day line two weeks ago up to an intraday peak of 51.85 on Wednesday, some selling pressure is probably something to be expected. This is why on such a move I will sell all or part of my position with the idea of buying back on a natural pullback. The 10-day line is now closing in on the stock as it continues to rise, now up to the 48.88 price level. I would use pullbacks close to the line to buy shares, although I consider anywhere approaching the 49 price level as a buyable zone for TWTR as it was on Thursday.

 

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Tesla Motors (TSLA) rallied up above the 290 price level on Thursday, pulling back in the 20%-above-the-breakout zone which I consider a good spot to sell the stock, looking to buy it back on a pullback. I also tweeted this in real-time as the stock cleared the 290 level on Thursday. CEO Elon Musk came out Friday morning and babbled something about being concerned with the “near-term valuation” of his company’s stock, and that sent TSLA flying back towards it 10-day moving average, as we can see on the daily chart, below. TSLA hit an intraday low of 272.51, within 1% of the 10-day moving average, which I consider close enough for hand grenades, horseshoes and buying the stock back. After gapping down at the open, TSLA managed to close mid-range on about twice normal volume. This can be viewed as supporting action off the 10-day line, with the idea that the stock will continue to hold the line, currently at the 270.66 price level.

 

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El Pollo Loco (LOCO) came out with earnings Thursday after the close, as it turned out, and the company reported in-line with analysts’ estimates. This generated a gap-up move on Friday’s open, but the stock backed down and turned negative earlier in the day before finding support above the 20-day moving average and closing up on the day, as we can see on the daily chart, below. I like the strong buying volume in the stock which is also a pocket pivot volume signature. The stock is slightly extended from both its 10-day and 20-day moving averages for a bona fide pocket pivot, but after the real pocket pivot move on Tuesday the action on Friday was very constructive. With earnings out of the way, the stock looks like it wants to go higher from here. I would look for any small pullback to buy into with the idea that the stock will continue to hold the 20-day line from here.

 

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LinkedIn (LNKD) continues to crawl higher along its 10-day moving average, as we can see on the daily chart below. Volume remains below average, but so far nobody seems all that interested in selling the stock here. The stock remains within range of the pocket pivot of ten trading days ago on the chart, and for now based on my “tape-watching” of the stock it feels like it wants to go higher from here. With the other social-networking stocks acting well here the group appears to remain sound.

 

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The biggest social-network name, Facebook (FB), made another new all-time closing high on Friday yesterday but as the stock moves higher volume has remained below average, as we can see on the daily chart, below. While nobody seems all that hot to buy the stock, there seems to be even fewer investors hot to sell the stock, and hence the stock moves higher. For now FB appears to at least hold above the 20-day moving average on any pullbacks, and I would say that the uptrend for the stock remains intact as long as it continues to do so. Finding an actionable buy point here is another matter, but as I’ve discussed in previous reports, TWTR is my preferred social-networking play currently, as FB might simply be over-owned. Nevertheless, if one owns the stock, it has certainly not given one any reason to sell it.

 

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On the short side, recall that I discussed Netflix (NFLX) as a possible target in the event of a breakdown below the 10-day moving average violation, which is what we’ve seen over the past two days. But as we can see on the daily chart, below, the move below the 10-day line has not occurred on heavy selling volume, so for now the stock just looks to be moving sideways along the 10-day line. For all we know the stock may simply try and head higher given that it is still in a position for a possible pocket pivot coming up through the10-day moving average.

 

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On the hunt for fresh set-ups, Salesforce.com (CRM) catches my eye here as it runs into its 10-day moving average with volume drying up following a big-volume buyable gap-up move of ten days ago on the daily chart, below. CRM gapped up in August after it announced earnings, but it hasn’t been able to get anything going beyond the gap-up day. My guess is that if the stock is going to move higher it will likely do it on a move off the 10-day line, and here we have the typical “Code Blue” set-up as volume evaporates. Thus I might take a position right here with the idea that the stock will continue to hold the 10-day line in anticipation of a possible continuation pocket pivot.

 

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Taser International (TASR) gapped up on Thursday and Friday, with Friday’s move occurring on news that the venerable NYPD would be giving wearable cameras a try. This is all well and good for the company, but near-term the stock is very extended to the upside, and I actually made a little money shorting TASR on the gap up above the 19 price level on Friday. As we can see from the daily chart, Friday’s move was sold into on the highest volume in the stock’s move since it started up through the $12 price level back in August. My current view of the stock is that it needs to do a little backing-and-filling, perhaps allowing some time for the 10-day moving average to catch up to the stock. In any case, the stock has been a stellar performer after the tight “voodoo” action at the 200-day and 10-day moving average confluence two Fridays ago.

 

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JD.com (JD) is coming apart as it failed to hold its 20-day moving average on Thursday, which was my “line in the sand” for the stock as it pulled back to the line on Wednesday with volume drying up. Selling volume picked up on Thursday and Friday as the stock broke down to its 50-day moving average and closed just below the line, as we can see on the daily chart, below. The stock has held the 50-day line on prior pullbacks in August, but it is not clear whether it can do so here. In any case, by virtue of the fact that it could not hold the 20-day moving average on the pullback earlier in the week I don’t see anything here that indicates the stock is buyable.

A couple of weeks ago I thought constructive action in big-stock Chinese internet name Baidu (BIDU), not shown here on a chart, was likely good for the group, but that didn’t turn out to be the case for JD. At that time I pointed out the constructive action in BIDU and wrote that members should keep an eye out for a pocket pivot in the stock coming up through the 10-day moving average, and BIDU did just that on Tuesday of this past week. The stock pulled back slightly over the remainder of the week, which brings it into a buyable position following the Tuesday pocket pivot, but in my view it was more efficient to react to the pocket pivot on Tuesday as it was occurring in real-time and closer to the 10-day/20-day moving averages. So, for now, all I know is “BIDU good, JD bad.”

 

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GrubHub (GRUB) completed its 10-million-share secondary offering on Thursday. The offering was priced at $40.25 a share, but the stock has since dipped below the offering price, as we can see on a daily chart. For a stock like GRUB that trades about half a million shares a day, leaning to the thin side in my book, 10 million shares is a lot of stock to dump in the market, so I am keenly observing how it acts as it absorbs that additional supply. Friday saw the stock hold the 10-day moving average on above-average volume, which looks fairly constructive following the secondary offering. Short-term the Force indicator bars at the top of the chart have been skewed red based on the heavy volume that occurred on Thursday as a result of the secondary being released into the after-market. If I account for this, the stock looks like it might be quite buyable here along the 10-day/20-day moving average confluence.

 

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Oil stocks continued to get pounded, as the daily chart of Diamondback Energy (FANG) shows below. With a number of these stocks looking like they wanted to round out the right sides of potential new bases after leading the market higher off the May lows and then correcting over recent weeks, this struck me as the initial rumblings of another move by the group. This would have also been very positive for the market as healthy rotation is one of the hallmarks of a strong, robust market rally. The fact that they all tossed their cookies after looking like they wanted to go higher, as FANG did last Friday on a roundabout type of pocket pivot move, is somewhat disappointing, Perhaps this is not the end of the world for the market as there is enough nascent leadership in other areas of the market.

 

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I discussed the breakdown in Priceline.com (PCLN) in my report of this past Wednesday, and on Thursday the stock briefly bounced up towards the 50-day moving average before reversing and closing down at its 200-day moving average, as we can see on the daily chart below. On Friday huge-volume selling took PCLN through its 200-day moving average, pretty much sealing its status as a late-stage failed-base short-sale set-up. If one was able to get a short off on the bounce up to the 50-day line on Thursday, this might be a good place to bag the profit with the idea of looking to re-enter on a bounce up into the 200-day line.

 

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Biogen Idec (BIIB) is another example of a stock that just doesn’t act right after a quiet pocket pivot along its 10-day moving average last week. As we can see on the daily chart, below, BIIB busted through its 10-day, 20-day, and then 50-day moving averages on Thursday and Friday before being able to clamber back above the 50-day line. I’m not really sure what to make of this, other than the fact that BIIB doesn’t act in a way that makes me want to own it. The other two members of the bio-tech “Three Caballeros,” Celgene (CELG) and Gilead Sciences (GILD), not shown, were also hit over the past two trading days. On Friday both stocks appeared to be in freefall mid-day but managed to close near the peaks of their daily trading ranges. GILD experienced the most volatility as it dropped to a low of 97.54 intraday before rallying to 105.36, down 1.50 on the day. We’ve seen other big stocks get hit such as Apple (AAPL) and of course PCLN, shown above, and the action strikes me as somewhat curious in terms of whether it has broader implications for the market.

 

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Despite the market’s ability to stabilize on Friday as the S&P 500 made a new all-time closing high, I believe investors should remain cautious and vigilant. If one was in the right names this past week one had a fun time, but if one was in the wrong names the story would be quite different. If, for example, one had owned and held onto stocks like BIIB and JD instead of stocks like TWTR, TSLA, TASR and LOCO, this first week of September would not have been much of an enjoyable experience. Recognizing this, I think it’s a matter of trying to find viable set-ups, preferably in newer-merchandise situations, take positions when the stocks are quiet, and run a tight ship by immediately selling any stock that isn’t acting in accordance with your expectations for the trade. I try to establish an idea of what I expect a particular stock to do when I buy it, and if it doesn’t conform to that I will generally just unload the thing and move on to greener pastures.

This remains a difficult market, and we may be moving into a phase where I will look to play the market both ways, long or short, based on the individual set-ups. PCLN worked as a nice short over the prior two trading days, and if other stocks begin to show shortable action then I see no reason why one cannot revert back to treating the market as a market of stocks instead of a stock market, focusing on long or short opportunities in individual stocks based on their own merits.

Meanwhile I believe an active approach is necessary in this market, acting quickly to cut out stocks that aren’t working, and looking to take profits in stocks that have sharp upside moves. For now, given the S&P 500’s new all-time closing high on Friday, the uptrend remains intact, if not somewhat wobbly, but all that means is that members must simply remain on high alert and pay close attention to the action of their stocks.

 

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 had positions in LOCO, TSLA, and TWTR, 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.