The Gilmo Report

April 20, 2016

April 20, 2016

While there doesn’t seem to be any shortage of opportunities for active traders on either side of the market, the indexes give the impression of a market that is somewhat tired.

The Dow Jones Industrials Index did manage to push above the 18,000 level yesterday, eliciting much hype and sensation from the financial media. This came after Monday’s bullish upside reversal in the face of an initial gap-down open. U.S. futures tanked overnight Sunday after OPEC nations couldn’t come to an agreement on freezing production over the weekend, but the market’s resilience in the face of this came off as quite bullish.

Crude oil prices, which were supposed to tank on the news, in fact held up and rallied to a higher high today, as the daily chart of the United States Oil Fund (USO), shows below. Proof that sometimes “conventional” wisdom isn’t so conventional.

 

GR042016-USO

 

From the market’s point of view, however, the move yesterday to new highs by the Dow and the S&P 500 Index was not accompanied by the NASDAQ Composite Index. Instead, the NASDAQ diverged by reversing to the downside on higher volume to post a clear distribution day on a reversal off of the peak.

Today the index stalled and churned around the peak as volume came in slightly lower. On balance, the index gives a sluggish impression, but doesn’t do much to change my continued method of operating in this market. Namely, that I look to buy favored long ideas on pullbacks into logical areas of resistance, while shunning the urge to chase strength. Meanwhile, I have no issues taking advantage of short-sale set-ups where and when I see them, and this market has had a few of those to offer as well.

 

GR042016-$COMPQ

 

The stalling and churning action is a bit more pronounced on the daily chart of the S&P 500 Index. Similar to the action in the Dow today, the S&P 500 closed roughly flat after attempting to go higher earlier in the day as volume picked up sharply. The Dow, which was up over 110 points as we went into the final hour of trade, gave up over half of its gains to close up 42.67, or 0.24%, on higher volume. The two indexes both have the look of stalling and churning off the peak on higher volume.

There are now a number of distribution days in the indexes at this stage of the rally that has carried from the February lows. However, I continue to think that investors can do much to mitigate their risk by following the prescribed methods of buying weakness and selling into strength when it becomes obvious.

 

GR042016-$SPX

 

While crude oil is defying the logic of the crowd, the real excitement in the market over the past two days has been in silver. The iShares Silver Trust (SLV) built on last week’s breakout by gapping up to a higher high yesterday on heavy volume. Note, however, that the white metal reversed off of today’s intraday peak to close right near the lows of the daily trading range on heavy, above-average volume. For now, I would want to see the SLV hold above the 16.04 intraday low of yesterday’s gap-up price range for this to remain viable.

 

GR042016-SLV

 

Gold gapped up along with silver yesterday, but the move only took the SPDR Gold Shares ETF (GLD) back up to the highs of its recent range. Today it fell back into its 10-day moving average as it failed to gain strength on the back of silver’s big gap up.

In my view this brings into question the viability of silver’s move over the past two days since I would expect to see more strength in gold. That isn’t happening, and it remains a question as to whether silver can drag gold into breakout territory, or whether gold acts as a drag on silver. Tough to call, but as I said, I would simply look for the SLV to hold the 16.04 intraday low of yesterday’s gap-up price range before coming to any firmer conclusions.

 

GR042016-GLD

 

The gap-up in the yellow and silver metals also produced gap-up moves among a broad number of precious metals stocks. Silver Wheaton (SLW), the one precious metals stock that I’ve favored given its exposure to both silver and gold production streams, gapped up sharply yesterday on heavy volume.

This is, as I blogged during the day yesterday, a buyable gap-up move using the 17.77 intraday low of yesterday’s price range as your selling guide. However, the stock is quite extended at this point, and that vulnerability showed up today as it churned and stalled off the peak on even higher volume than that seen on yesterday’s buyable gap-up move.

If one is not already long this from yesterday (and I should point out I would look to sell into sharp upside strength given the inherent volatility in the precious metals space), then chasing it here is not advisable. Instead, we would want to see an orderly pullback as close as possible to the 17.77 intraday low of yesterday’s BGU.

 

GR042016-SLW

 

The move in the precious metals has also been correlating to a junk-off-the-bottom rally in a number of other commodities-related names, including oils, railroads, truckers, agriculturals, steels, industrial metals, etc. Among these, I blogged about pocket pivots in Continental Resources (CLR) and Silica Holdings (SLCA) on Monday after the close, and these remained in buyable positions yesterday morning.

As we can see on both charts, the stocks continued higher yesterday, and CLR continued higher again today while SLCA took a break and held tight as volume declined. Both stocks are extended but help to illustrate the incredibly strong upside reaction these oil-related names had to “bad news” about oil over the weekend.
GR042016-CLR

 

GR042016-SLCA

 

As we see money rotate in commodities-related names, other leading groups start to falter, such as semiconductors. With respect to the semis, I wrote over the weekend that, “Given the rotational nature of this market, I begin to question how much higher they [the semiconductor stocks] can go.”

Yesterday we saw the smaller semiconductors that I’ve discussed in recent reports, MA-Com Technology Solutions (MTSI) and Maxlinear (MXL), not shown here on charts, get smashed. Today they tried to rally back in somewhat feeble fashion, but I don’t consider these names I want to be long currently.

Overall, their action over the past few days has simply helped to prove the case I made in my weekend report about avoiding these stocks. As I wrote, “With earnings coming up in the next couple of weeks it’s not clear to me that these are names I want to be trafficking in currently. As I wrote in my Wednesday mid-week report, neither stock has looked all that attractive to me, and that has remained the case over the past two trading days.”

Among these smaller semiconductors, Silicon Motion (SIMO) has continued to hold up as it just barely pushed to a higher high today. However, it did so on a pocket pivot move off of the 10-day moving average, which looks constructive.

One might consider buying this here if one is adding to an existing position originally taken near the 20-day moving average. However, the stock remains fairly extended from its original breakout down at the 34 price level, so I would use any breakout failure as a signal to take profits.

 

GR042016-SIMO

 

Even the bigger names like Broadcom (AVGO) have run into some selling pressure. AVGO broke down through its 20-day moving average yesterday as selling volume increased but still remained below average. However, consider that AVGO has held above the 10-day moving average for at least seven weeks coming into this week. Based on the Seven-Week Rule, whereby the 10-day moving average is used as a selling guide IF the stock has not violated the moving average for at least seven weeks, this current violation of the 10-day line would be considered a sell signal.

The initial entry for AVGO was around the 140 price level on the pullback following the March 4th gap-up move (see March 6th report). The stock has had about a 13% move from there, which in this market is generally something I will put in the bank. Of course, one could use the 50-day moving average as a maximum downside selling guide. However, that strikes me as giving the stock way too much room on the downside from current price levels and would give back too much of a hard-earned gain.

 

GR042016-AVGO

 

The weakness in AVGO over the past few days has correlated to the weakness in Apple (AAPL) given that AVGO is a supplier to AAPL. AAPL morphed back into a short-sale target on Friday when it reversed back below the 200-day moving average on heavy selling volume. That was followed by a gap-down move that carried below the 20-day moving average on even heavier selling volume Monday as AAPL failed to recover with the market. Since Monday, the 20-day moving average has served as consistent resistance for the stock.

AAPL is expected to announce earnings this coming Monday. However, if one is nimble enough and interested enough to attempt potential short-sale scalps before then, I would continue to use rallies into the 20-day line as short-sale entries with the idea of scalping a couple points, maybe more, before earnings on Tuesday (FYI – this afternoon AAPL announced a one-day delay of Monday’s originally scheduled report).

 

GR042016-AAPL

 

As some of these initial Ugly Duckling leaders start to get tired, we must keep a close eye on some of the Ugly Ducklings I’ve been following in recent reports. As I’ve pointed out in previous reports and blog posts, IF they begin to break support, most notably at their 20-day moving averages, on volume then this could signal a shift of trend for these names.

Other areas of support can come into play as well, and this all should be monitored closely for signs of potential failure. For example, Workday (WDAY) dipped below its 20-day moving average yesterday as selling volume picked up, but was able to hold its 200-day moving average today on weak volume.

In this case the breach of the 20-day line is an initial warning sign, while a full-blown breakdown through the 200-day line would pretty much cook the stock. This, of course, may not happen until the stock announces earnings in late May. However, I would still react to it on the short side if it did show such tell-tale action before then.

 

GR042016-WDAY

 

Meanwhile, WDAY’s Ugly Duckling “cousins,” Salesforce.com (CRM), Splunk (SPLK), and Ambarella (AMBA), all not shown here on charts, are all just tracking along their respective 10-day and 20-day moving averages. And as they do so they simply move from the lows of their current price ranges and back up to the highs of the range, and then back down to the lows of the range, over and over again, Lather, rinse, repeat.

Mobileye (MBLY), as another one of these Ugly Duckling set-ups I’ve liked in recent reports, has trended a little more steadily to the upside than the rest. It is, however, getting a bit obvious and extended to the upside. This showed up today in a reversal off the peak as the stock attempted to make a higher high but was rejected on slightly higher volume. From here I would only consider pullbacks into the 20-day moving average at 38.07 as my most opportunistic entry points.

 

GR042016-MBLY

 

Notice how all of these names had their sharpest moves off of the February lows, and since then progress has been somewhat halting and uneven. Generally, I find that it is the junk-off-the-bottom or JOB names that are in the earlier stages of their junky jacks off the bottom that have the best moves. Once they become obvious, they do tend to slow down a bit.

Alibaba (BABA) is probably one you can put in the same category. It also had a sharp move off of its February lows, and since the latter part of March has held in a tight, slightly ascending range along its 10-day and 20-day moving averages. Buying at the 20-day line and then selling at the highs of the range has been the perfect “LRR” (Lather, Rinse, Repeat) strategy to use with BABA.

BABA is expected to announce earnings on May 5th, so my preferred way of playing the stock is to use the LRR strategy ahead of earnings. In addition to using this approach, I would not also intend to hold a position into earnings unless I had built up a decent profit cushion ahead of the number.

In the meantime, the stock continues to act well. Each time it has pulled back to the 20-day line it has pushed higher. Today it followed through to Tuesday’s bounce off the 20-day line with a pocket pivot breakout to higher highs. However, every time BABA has made a higher high it has pulled back. Therefore I would continue to view this as a stock with which to use the LRR strategy.

 

GR042016-BABA

 

Fitbit (FIT), which I discussed in a blog post this past Sunday independently of the weekend report, is certainly one of these off-the-wall Ugly Duckling set-ups that is actually working. The stock had a bottom-fishing sort of buyable gap-up six days ago on the chart, and while it has had a couple of small pullbacks over that time period, it has not really looked back.

A couple of themes have been driving the stock as of late, most notably rumors that perhaps Nike (NKE) will buy them out. The other is the realization that they still remain the #1 seller of these fitness-related “wearables.” The market for these devices is discovering that less is better, and some wearables, like the iWatch, for example, represent overkill for those who simply want a fitness-monitor sort of device.

Throw in a very high short interest and you have the elements for a short-squeeze/Ugly Duckling rally, and that’s what you’re getting. FIT was buyable on a small pullback this past Monday, and is slightly extended from the prior BGU of last week. A hairy pullback to the 10-day line would be your most opportunistic entry from here.

 

GR042016-FIT

 

FIT is expected to announce earnings on May 23rd, according to HGS Investors Software, but May 2nd is the date shown by Briefing.com.

Another name mentioned in the same blog post, GoPro (GPRO), is also in a severe Ugly Duckling position but had a huge-volume pocket pivot six days ago on the chart. This was followed by a nice, orderly, pullback to the confluence of the 10-day and 20-day moving averages as volume dried up sharply, dropping to -25% below average.

One interesting new, potentially thematic driving force for GPRO is its recent selection of Vuzix (VUZI) as one of the first developers to have access to GPRO’s Developer Program Toolkits. VUZI has technology that enables one to connect the soon-to-be-released M300 smart glasses with GPRO cameras to deliver complete hands-free viewing and control capability. Fascinating stuff.

Meanwhile, if we’re just focusing on the stock’s price/volume action, GPRO was buyable yesterday right at the 10-day moving average. It remains so on any similar pullbacks ahead of earnings which are expected to be announced on May 5th.

 

GR042016-GPRO

 

Facebook (FB) was starting to look like it was in trouble early yesterday, but a buy recommendation and $130 price target from brokerage firm Stifel sent the stock flying back above its 20-day moving average. After opening up with the market yesterday, FB reversed and made a move back to its 50-day moving average at 109.02.

I should point out that despite the reversal back to the upside later in the day, using the 620 intraday chart would have been helpful to anyone who had shorted the stock right at the open as I did. FB reversed very quickly right at the open and plummeted down to its 50-day line, getting within 14 cents before finding a low.

Notice on the five-minute 620 chart, below, that the MACD lines were getting to a position I refer to as a “MACD stretch” as they become stretched to the downside. At that precise time, FB was a mere 14 cents above its 50-day moving average. FB then rallied off of the 50-day moving average, fluttered around the 20-period line on the 620 chart, and then broke out to the upside, closing up on the day on increased, but average volume.

 

GR042016-FB Intraday

 

Whenever I am short a stock that is either approaching an area of potential support like a key moving average or undercutting a prior low, I keep my eye on the 620 chart. If I am getting some sort of bottoming or turning signal on the 620 at the same time that I see the stock reaching a key level of support or undercutting a prior low, I look to take profits at that point.

This illustrates quite nicely how the 620 chart is used to protect profits and stay out of trouble on the short side. This is the primary reason I developed the use of this chart in my short-selling, and I have learned several different ways of interpreting its message in real-time as an aid and adjunct to my short-selling operations.

On FB’s daily chart, below, we can see the bounce off the 50-day line on increased buying interest, no doubt generated by Stifel’s buy recommendation. Today the stock stalled a bit just above the 20-day moving average as buying interest dissipated following yesterday’s analyst buy recommendation. A break back below the 20-day line could bring this back into play on the short side, however, so this is something to keep an eye out for. Keep in mind also that FB is expected to announce earnings next Wednesday, April 27th.

 

GR042016-FB

 

Square (SQ) has continued to pull back and consolidate its prior very strong gains since its original cup-with-handle breakout from the 12.05 price point back in late March. Over the weekend I brought up the possibility of the stock not being able to hold its 20-day moving average given its volatile nature as well as the 32% it had from the base breakout point to the 15.91 peak of March 31st.

As I wrote, “…the other possibility given that it is a smaller, more volatile recent IPO name would be an undercut of the 20-day line that also undercuts the 13.74 low of April 4th. That would represent my most shrewdly opportunistic entry point on a pullback.”

That is precisely what we are seeing here as the stock undercuts that April 4th low. My only issue with this is that volume is not drying up it is increasing rather sharply. Increased volume would be okay IF the stock closed in the upper part of its daily trading range today, but it did not do that. Instead, it closed in the lower third of the trading range.

I would want to see how this acts over the next couple of days before taking any action on the long side. Given that SQ is a volatile little stock and the fact that it has already had a big price move of 32% from the initial 12.05 buy point, it would not surprise me if it decided to retest that buy point and/or the 50-day moving average at 12.30.

 

GR042016-SQ

 

Tesla Motors (TSLA) is doing its best to hold the 20-day moving average after failing to do so at the 10-day moving average on Monday. Something to keep in mind is that when a stock has a sharp price run-up as TSLA did from its February lows, the 10-day line is a less-reliable support line. 10-day moving averages tend to work better as support while a stock is within a base or a very shallow uptrend channel. Otherwise, the 20-day moving average can provide a somewhat more reliable support line.

In TSLA’s case we see the line serving as support both yesterday and today, where the stock was buyable on an opportunistic basis. However, notice that today’s volume was lighter, while yesterday’s selling volume was heavier and the stock closed in the lower half of its trading range. I’m not sure if this is an indication of some weakness as it pulls back, but for now one can test the stock by buying it at the 20-day line (not chasing it off the line) and then using the line at 243.45 as a guide for a tight downside stop.

 

GR042016-TSLA

 

J.P. Morgan (JPM) never really pulled back much following last Wednesday’s big-volume bottom-fishing buyable gap-up and has now cleared the 200-day moving average. However, volume is light here, and the stock just missed posting a pocket pivot as it came up through the 200-day line yesterday.

Nevertheless, it has continued to follow through on last week’s BGU as financials, including Goldman Sachs (GS), which I also discussed a week ago as a potentially buyable situation, have continued higher. This continued upside has occurred even as the banks and brokers all announced big slowdowns in their business. However, the reports have all come in not as bad as expected, and in this market that’s all the beaten-down financials need to rally!

 

GR042016-JPM

 

Delta Air Lines (DAL) remains as a current short-sale target that I have favored hitting every time it rallies up to the 20-day moving average. I did it again today, and the stock dutifully dropped back below the 200-day moving average as it continues to find resistance around what is actually a big confluence of its 10-day, 20-day, 50-day, and 200-day moving averages.

I continue to view this as shortable on any rallies into the 20-day line currently at 47.35, using the line as a guide for an upside stop. Keep in mind that tomorrow we will see several airlines announce earnings, and this could set up a shortable rally in DAL. This is something to watch for tomorrow.

 

GR042016-DAL

 

I covered Netflix (NFLX) in detail Monday after the close and Tuesday morning before the opening in a pair of blog posts discussing the possibilities surrounding the stock’s gap-down move following earnings Monday after the close. As I discussed Tuesday morning before the bell, a failure at the $100 price level would bring me in on the short side of NFLX immediately. That was the case on Tuesday, and the stock plummeted through its 50-day moving average on very heavy selling volume.

Today it attempted to recover a bit, which was not surprising given that it had declined over 15% in three days. Now we see a lower-volume rally back up towards the 50-day line where the stock could become shortable again. NFLX closed today at 96.77 and the 50-day line currently lies at 98.42. Since volume did come in above average today, I would definitely want to see volume dry up as the stock gets closer to the 50-day line, so this is something to watch for in the next couple of days.

 

GR042016-NFLX

 

Nike (NKE) is similar to DAL in that it has consistently found resistance along its 20-day moving average. As we can see from the chart, however, it is actually finding resistance along the confluence of its 20-day, 50-day, and 200-day moving averages. Something to keep in mind here is that Under Armour (UA), another sports retailer I have been hitting short over the past few days as it finds resistance along its 200-day moving average, is expected to announce earnings tomorrow before the open.

I would watch for any opportunities that might arise in either NKE or UA following the report. This might come in the form of a shortable rally or a shortable gap-down, depending on how the report plays out tomorrow morning. Something to keep on your watch list for the next market open.

 

GR042016-NKE

 

GoDaddy (GDDY) looks very much like your typical failed base-breakout type of short-sale set-up as it remains well below its prior breakout point and its 20-day moving average. In the short-term it just doesn’t seem to be able to make up its mind about where it wants to go from here.

Resistance at the 20-day line has held, but so has support at the 50-day moving average. Thus the action is inconclusive. My best approach here would be to try shorting the rallies into the 20-day moving average using that as your guide for a very tight stop. And my best guess is that GDDY is most likely to break below the 50-day line IF the general market has any kind of significant pullback from current levels.

Whether I would want to go long the stock here off the 50-day line is another question to consider. However, based on the prior breakout failure, I have to lean towards the short side of GDDY until further evidence to the contrary becomes evident. GDDY is expected to announce earnings on May 5th.

 

GR042016-GDDY

 

Below are my current Trading Journal notes on other names I’ve discussed in recent reports:

Acuity Brands (AYI) remains extended from its recent buyable gap-up. The stock is holding very tight as it forges new highs, but only a pullback to the 10-day line at 154.16 would afford your best entry point after the early April buyable gap-up move.

Adobe Systems (ADBE) bounced off of its 10-day moving average on Tuesday and has held tight along its prior highs above the 96 price level. Pullbacks into the 10-day line at 94.78 would present your most opportunistic entry points.

Alaska Airlines (ALK) is expected to announce earnings tomorrow. Nothing to do until then.

Amazon.com (AMZN) is still extended with earnings expected out at the end of the month.

D.R. Horton (DHI) holding tight along the 10-day line with earnings expected to be announced tomorrow.

Fabrinet (FN) pulled into its 20-day moving average this morning and held the line as volume dried up. Earnings are expected on May 2nd.

Hawaiian Holdings (HA) is expected to announce earnings tomorrow. Nothing to do until then.

Mobileye (MBLY) is extended to the upside and only a pullback into the 10-day moving average, now at 39.35, would offer a lower-risk entry opportunity from here.

Nvidia (NVDA) continues to track along its 10-day moving average. This strikes me as somewhat extended and not something I’d necessarily want to be buying here ahead of earnings which are expected on April 5th.

Panera Bread (PNRA) fooled me by looking somewhat tepid last week about getting back above its 20-day moving average but then gapping right back above the line yesterday on heavy volume. Technically, yesterday’s move can be considered a buyable gap-up using the intraday low of 214.23 as a selling guide. Of course, buying the stock now becomes problematic as earnings approach, and they are expected to be announced on April 26th.

Southwest Airlines (LUV) is expected to announce earnings tomorrow. Nothing to do until then.

Vantiv (VNTV) continues to hold along its recent highs. Pullbacks into the 20-day line remain your most opportunistic entry points. Earnings are expected on April 26th, which is next Tuesday.

Over the weekend I laid out a concrete approach to playing stocks on the long side. Essentially, this approach is designed to take advantage of the market’s inherent character by buying weakness while avoiding the urge to chase strength. That approach still holds, in my view. Currently, however, the indexes strike me as showing some signs of tiring, but on a stock-by-stock basis that may not be as relevant, particularly given our preference to buy on weakness.

I think one simply continues to stick to acting on the set-ups they see in real-time, long or short. And the fact is that we have also seen some very actionable short-sale set-ups present themselves, such as NFLX, which occurred as a result of its earnings announcement on Monday. So, with NFLX’s example we can get a good sense of how actionable opportunities can arise during earnings season. As we continue through the heart of “earnings roulette” season we want to stay attuned to these opportunities as they arise as we continue to operate as we have.

 

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 FB, though positions are subject to change at any time and without notice.

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