The Gilmo Report

April 27, 2016

April 27, 2016

The Fed came out with their monthly policy announcement today, and it more or less consisted of the same old hemming and hawing that has characterized their prior announcements over recent months. While much is made of the precise language and just what it means in terms of the possibility of if and when another rate hike may come, I tend to think that the market is really trying to figure out whether economic weakness is a bigger issue. The Fed’s uncertainty is obvious, and this leaves the market to its own devices, to some extent.

After all, the past two weeks has seen a number of big-stock growth names get smashed after earnings. This brings into focus the idea that the drivers of economic growth are perhaps absent or in the process of taking the next train out of town. Thus what the Fed will or won’t do about it becomes less of an issue since QE has already been shown to be losing its traction with respect to generating meaningful economic growth.

Certainly the big break in a number of big-stock NASDAQ names has been entirely due to an economic factor, a.k.a. earnings and sales. This has sent the large-cap NASDAQ 100 Index (NDX) spinning to the downside as it broke below its 200-day moving average, but was able to hold above its 50-day moving average on higher volume.




However, the broader market has been able to hold up somewhat better, as the NASDAQ Composite Index was able to hold its 200-day moving average today on heavier volume. Given the extent of the rally off the February lows, this pullback does not appear all that out of context. The main point has been to be in the right names going the right way at the right time. The market has continued to show set-ups on both the long and short sides, and I find that taking a bifurcated approach here is still the best way to go.




Without any big-cap NASDAQ names to drag it down, the S&P 500 Index looks far more constructive as it holds tight sideways over the past couple of weeks. Today it found support off the lows to close up on higher volume. Thus the divergence between the big-cap NASDAQ names and the rest of the market becomes quite evident on the index charts. The further away from big-cap NASDAQ names, the better it looks!




The Dow Jones Utility average also reflects some confusion as to the future direction of interest rates as it regained its 50-day moving average today on increased volume. Last week the index busted the 50-day line on increased volume, arguing for possible Fed action this week. But so far the index does little more than express the confused state of affairs as the market is left to guessing what the Fed will do next, if anything.




As the pundits pondered whether the Fed was dovish, hawkish, dovishly hawkish, or hawkishly dovish, silver seemed to know what it was doing. The iShares Silver Trust (SLV) took its cue from the Fed and made a higher closing high today on heavy buying volume. Thus the buyable gap-up move of seven trading days ago remains in force, despite a couple of brief dips below the 16.04 intraday low of the BGU day. As the 10-day line catches up and hits the 15.97 price level that becomes a tighter guide for a downside stop.




Gold remains in the confused camp, however, as it continues to hold up within its roughly two-month price consolidation extending back to mid-February. The SPDR Gold Shares (GLD) did manage to close right along the confluence of its 10-day, 20-day, and 50-day moving averages today on lighter volume. This keeps it in play for a possible breakout if silver continues to hold up at its highs. My assumption would be that if silver continues to act well, gold eventually will move to join it at higher highs.




With the precious metals holding up reasonably well as the Fed remains on hold, Silver Wheaton (SLW) comes into play as it pulls down into its 10-day moving average on light volume. SLW has also held well above the 17.77 intraday low of last Tuesday’s buyable gap-up move. As long as the metals hold up, SLW has a reasonable chance of moving higher. Using pullbacks into the 10-day line or simply buying here using the 10-day line at 18.16 as a reasonably tight selling guide for a “teen-aged” stock remains a viable approach.




The big story yesterday was the after-hours earnings announcement from Apple (AAPL) which pretty much came in as bad as everyone was expecting. This sent the stock gapping down through its 50-day moving average today in after-hours trade, and it opened this morning at 96.

AAPL was initially shortable last week when it failed at its 200-day and 20-day moving averages as it adds to the weakness among big-stock NASDAQ names. The stock appears to be headed for the neckline of the large head and shoulders formation it has been forming since late 2014. The neckline appears to be somewhere around the 88-90 level, but your most optimal short-sale entry from here would be a rally up to the 40-week line at 104-105.




Despite the big bust in AAPL, the NASDAQ 100 might find its salvation in Facebook (FB), which announced earnings after the close and as I write is gapping up to new highs. FB was getting hit hard earlier in the day today as it undercut the prior April low at 106.52 but managed to reverse and close up 13 cents on the day. This needs to be watched as a possible buyable gap-up tomorrow, depending on how it opens. So whip out that 620 chart in the morning and get ready to find a possible entry point on the long side here once we open up tomorrow.




The market has definitely taken on a bifurcated nature, with mostly big-stock NASDAQ names providing some nice short-sale targets to shoot at. I blogged yesterday not too long after the open about shorting into rallies in short-sale target stocks. Among these, Microsoft (MSFT) rallied right back up into the highs of shortable gap-down price range of four days ago on the chart and reversed to the downside.

Today MSFT ran right into the 200-day line, which could have been viewed as a short-term cover point. From here rallies back up into the shortable gap up (SGU) day’s intraday high at 52.43 would present potential short-sale entry points. However, if the stock pushes up through there then the 50-day line at 53.51 becomes a higher, secondary reference for a short-sale entry.




I also mentioned Starbucks (SBUX), a name I didn’t discuss in my weekend report but which also had a shortable gap-down move on Friday following earnings after the close on Thursday. That gap-down move took the stock through its 50-day moving average and below the 200-day moving average by the close on that day. Yesterday SBUX gave short-sellers a nice opportunity to hit the stock as it rallied right back up into its 200-day moving average yesterday and then promptly reversed. Today it came within a nickel of the March 11th low at 56.57.

This could serve as near-term support, particularly if the stock actually undercuts that level tomorrow. Otherwise, any rallies back up into the 200-day moving average at 58.70 would provide subsequent and potential entries on the short side.




Alphabet (GOOGL) also gave short-sellers a nice opportunity to hit the stock on the short side with a quick push up towards the 50-day moving average that actually ran right into the 10-week moving average on the weekly chart. I use the GOOGL chart instead of the GOOG chart because I have been unable to borrow GOOG shares when I want to short the stock, but GOOGL shares have been readily available. This is probably due to the different class of share.

After reversing near the 50-day and 10-week lines yesterday, GOOGL dropped right down to the 200-day and 40-week moving averages today where it found support and closed above the 200-day line on the daily chart below. For me, this represents a near-term cover point, looking for any subsequent rallies back up into the 50-day line at 748.30 as potential short-sale opportunities. As with MSFT, this is a quick hit-and-run short-sale trade looking for a bounce off the 200-day line to set up a possible re-entry.




Netflix (NFLX) has continued to drift lower after last week’s shortable gap-down that sent it flying through its 50-day moving average. Volume is drying up on this drift lower, which brings up the possibility that selling pressure is diminishing. For this reason I would be looking for a rally from here that could potentially even be played for a long trade. A rally back up to the 50-day moving average would not only provide such a short-term trading opportunity, it would also bring the stock back into a more optimal short-sale point.

One way to handle this would be to try and pick up shares here near today’s close and then use the 90.21 intraday as a guide for a tight stop. Generally, after a stock gets extended to the downside, a dry-up in volume can indicate that at least some sort of reaction rally is possible.




Southwest Airlines (LUV) bucked the carnage in airline stocks last week, but so far this week it has succumbed to the group weakness by breaking below its 20-day moving average today on heavy selling volume. I see this as a short based on the group weakness. LUV is within 3% of its 10-day moving average at 46.86. Therefore shorting it here and using the 10-day line as a guide for a reasonably tight stop is feasible. Otherwise, one could use the 20-day line at 45.77, a mere 20 cents above where the stock closed today, as an extremely tight hyper-stop.




As with most leaders that break out and push 10-20% higher, sometimes more, the gains do not last. Hawaiian Holdings (HA) proved that last Friday when it busted its 50-day moving average on huge selling volume after announcing earnings last Thursday after the close.

The break below the 50-day line now brings the stock into play as a short-sale target. In this case, we would want to use any little blips back to the upside and into the 50-day line at 45.69 as short-sale entries. An alternative is to simply short the stock here and then use the 50-day line as a guide for an upside stop.




Among the other airlines that I’ve been looking to short recently, Alaska Airlines (ALK) and Delta Air Lines (DAL), both not shown here on charts, are extended to the downside. Therefore for ALK I would look for any rallies into the 200-day line at 77.17 as potential short-sale entries/re-entries. With DAL I would look for rallies into the 20-day line at 46.07 as potential short-sale entries/re-entries.

Among the sports retailers I discussed over the weekend, Under Armour (UA) turned out to be the shortable gap-down, while Skechers (SKX), not shown here on a chart, turned out to be the buyable gap-up, at least for now. UA did show some signs of faltering near the 48 price level as it stalled three out of the four prior trading days. Today the stock failed on the BGU by busting through the 46.15 intraday low of the BGU day on above-average selling volume.

UA did find support along the 200-day moving average and held and essentially filled the gap of last Thursday. Today’s break did come on news related to one of their spokespersons, basketball star Steph Curry. It does seem like a fairly odd reason for the stock to come off so hard, so I would watch to see if the news dissipates and the stock is able to rally after filling the prior gap on the BGU.




Nike (NKE), not shown, the third sports retailer I discussed in my weekend report, continues to find resistance along its 20-day moving average. This therefore can continue to be used as a reference point for shortable rallies. Should NKE clear above its 20-day line then the confluence of the 50-day and 200-day moving averages at 60.61 and 60.62, respectively, would be your next reference points for shortable rallies.

ServiceNow (NOW) is another one of these bottom-fishing buyable gap-ups that still can’t make up its mind as to whether it wants to morph into a shortable gap-up instead. I’ve been playing the stock on both sides over the past few days, as it bounces back and forth between the 71-72 and 74-75 price areas.

Today NOW was able to close just above the 200-day moving average but just below the 73.21 intraday low of last Thursday’s BGU price range. Given that NOW can be a volatile name, allowing for 2-3% of downside porosity from the 73.21 price point is feasible. Despite the wiggling back and forth, this is probably still playable as a long idea using the 71.80 low of last Friday as a reasonably tight selling guide. That said, I would want to see this pick up some upside momentum relatively soon.




If you’re looking for a good example of another confused stock look no further than Panera Bread (PNRA) which gapped up this morning after beating on earnings yesterday after the close. The move initially failed as the stock careened lower and just undercut its 50-day moving average right at the open. This took it down to a low of 208.02 before it reversed back to the upside and then spun around before closing mid-range on the day. This looks like a big-volume, stalling pocket pivot off of the 50-day moving average. Where the stock goes from here is anyone’s guess.

However, if you think this is bullish action, then a simple trade on the long side can be made here using the 20-day moving average at 211.78 as a guide for a very tight downside stop.




As we move through the heart of earnings roulette season, I’m mostly focused on finding long or short set-ups in stocks that have already announced earnings. This simplifies the process considerably, and reduces the risk inherent in playing earnings roulette. As I’ve discussed frequently in recent reports, we have to look for opportunities occurring after earnings. While these can be shortable gap-downs as we have seen with names like MSFT, NFLX, and GOOGL, for example, there are also the buyable gap-ups to keep an eye out for.

Today we saw former cyber-security leader Fortinet (FTNT) gap up after beating on earnings yesterday after the close. This struck me as a potentially buyable gap-up once it set an intraday low of 32.42. With the stock closing within 3% of this low it remains in a buyable position using the 32.42 BGU intraday low as a reasonably tight selling guide.




Cyber-security names have been a beaten-down group, and several other names in the group moved higher in sympathy moves to FTNT’s gap-up. Among these were Palo Alto Networks (PANW), not shown, and CyberArk Security (CYBR), shown below on a daily chart.

While PANW is not really in a buyable position, CYBR did flash a bottom-fishing pocket pivot today on strong volume. My only issue here is that CYBR is expected to announce earnings next Thursday, and I would prefer to avoid having to play earnings roulette with the stock. For that reason, FTNT gets the nod given that its earnings announcement is now history.




Adobe Systems (ADBE) remains one of these “LRR” (lather, rinse, repeat) stocks as it moves back and forth within what is now a month-long range since its buyable gap-up move of mid-March. Earnings aren’t expected until June 21st, so I would continue to look at pullbacks into the 20-day moving average as your most opportunistic, lower-risk entry points.




As I blogged over the weekend, if I’m going to try and mess around with beaten-down bio-techs that might be trying to come back to life, I’m going to stick with the big-stock names wherever possible. In this case, I like this pullback in Biogen Idec (BIIB) with volume drying up sharply.

Volume levels got down to -38% below-average today as the stock pulled back within range of last week’s bottom-fishing pocket pivot that occurred after BIIB announced earnings. Tomorrow morning we will see Celgene (CELG), not shown, announce earnings before the open, and then Amgen (AMGN) and Gilead Sciences (GILD) after the close. While BIIB has already announced earnings, it will likely react to earnings from these three other big-stock bio-techs. Therefore I would keep an eye out for any opportunities this might present to pick up shares of BIIB on any pullback.




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

Acuity Brands (AYI) is still probably best treated in an opportunistic way by simply waiting to see if a pullback to the 20-day line occurs at some point. The 20-day line continues to move higher and is now at 247.82. As it does, it moves further above the 239.08 intraday low of the April 6th buyable gap-up. This makes it a much more attainable lower-risk entry point on such a pullback should it occur.

Alibaba (BABA) is not holding up well as earnings are expected to be announced next Thursday, May 5th. For both of these reasons it should be left alone for now. (AMZN) dipped below its 20-day moving average today on increased selling volume, but there is nothing to do here as AMZN is expected to announce earnings tomorrow after the close.

Ambarella (AMBA) has busted its 50-day moving average and has been removed from my long watch list ahead of next week’s expected earnings announcement.

Continental Resources (CLR) is expected to announce earnings May 4th.

Fabrinet (FN) had a nice pocket pivot off of its 20-day and 10-day moving averages on Monday. With earnings expected on May 2nd, which would be this coming Monday, I would be inclined to hang loose until then.

Fitbit (FIT) has been a nice stock to trade on the long side every time it comes down to the 17 price level or thereabouts. The stock opened up this morning in the low 17s and proceeded to rally as high as 17.95. Other than that type of opportunistic trade there’s not much to do ahead of earnings which are expected next Wednesday.

GoDaddy (GDDY) hasn’t moved much over the past three weeks since pricing its 16.5 million share secondary offering. Earnings are due next Wednesday, May 4th, so there is nothing to do here either long or short until then.

GoPro (GPRO) is expected to announce earnings next Thursday, May 5th. Nothing to do here until then.

J.P. Morgan (JPM) is holding tight along its 10-day moving average. Mobileye (MBLY) has pulled back to its 20-day moving average on light volume, but there is nothing to do here ahead of its expected earnings announcement on May 5th.

Nvidia (NVDA) is holding tight along its 10-day moving average, but there is also nothing to do here with earnings expected on May 5th. (CRM) continues to hold pullbacks to its 20-day moving average, and today’s pullback obviously brings it into a lower-risk buy point using the 20-day line at 75.37 as a selling guide.

Silica Holdings (SLCA) came out with earnings yesterday after the close. The stock had a v-shaped pocket pivot today off of its 10-day moving average, but I would look to buy shares on any pullback into the line at 24.94.

Silicon Motion (SIMO) is expected to announce earnings tomorrow before the open

Splunk (SPLK) has been able to build on last week’s buyable gap-up move in sympathy to NOW’s earnings. It is now extended from that BGU.

Square (SQ) has actually been able to rally after undercutting its prior 13.74 low of April 4th. The rally has occurred on low volume, however, but one could have gotten away with buying the stock on the undercut. Earnings are expected next Thursday, May 5th, after the close.

Tesla Motors (TSLA) is still holding support at the 20-day moving average. Earnings are expected on May 4th, next Wednesday, after the close.

Vantiv (VNTV) announced earnings yesterday after the close and gapped up this morning. The move did not qualify as a buyable gap-up, however, and the stock closed in the lower half of its daily trading range. Technically one could treat this as a buyable move using the 10-day line at 54.98 as a selling guide.

Workday (WDAY) is tracking along its 200-day moving average, which puts it in a lower-risk buy position using the 200-day line at 74.76 as a tight selling guide.

From my perspective the market has taken on a very clear, bifurcated character. The real question, however, is where one can make big money. Short-sale set-ups I’ve discussed over the past couple of weeks have been good for some decent gains, but with the general market failing to come apart, many of these may simply be good for short-term trades and little more.

No matter how you slice it, this is still a challenging market. With the indexes extended from the February lows, continued backing-and-filling that is also associated with back-and-forth movement among individual stocks that is also trade-able, long or short, might be expected.

For now, I continue to look for set-ups on both the long and short sides as I maintain an active trading approach in the pursuit of making upside progress in my portfolio. So far that has been effective, but it is generally slow going and requires persistence and patience, as well as an opportunistic eye. Take it from there.

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

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