The Gilmo Report

April 5, 2017

April 5, 2017

So far, this week has brought us something I don’t think I’ve ever seen. Two big-stock NASDAQ names on my buy watch list, (AMZN) and Tesla (TSLA), posted simultaneous Jesse Livermore Century Mark Buy Rule signals. This occurred yesterday as AMZN catapulted through the $900 price level while TSLA finally cleared the $300 price level for the first time.

AMZN’s move came from a position where it was already extended from a base breakout point near the $800 price level. Yesterday’s move easily cleared and held the 900 price level, and this morning the stock was headed higher. By the close, however, it had reversed to close below its gap-up opening price on even heavier volume than that seen yesterday.




TSLA, on the other hand, cleared the $300 level in conjunction with a breakout from a three-year, wide-ranging consolidation. That breakout occurred on Monday on a high-volume gap to the upside that did not, however, qualify as a buyable gap-up. Nevertheless, the stock kept going yesterday and cleared the 300 price level on strong buying volume.

That move above 300 ended today as TSLA gave up the Century Mark and reversed back below it on volume that was well above average and therefore still heavy. What is interesting here is that the stock could morph into a short-sale target here using Livermore’s Century Mark Rule in Reverse.

Once the stock failed to hold 300, it was shortable at that point, using the 300 price level as an upside stop. Frankly, with TSLA breaking out of a long, three-year consolidation, the irony could be that this is a failure point, so one must be open to that possibility, particularly if the general market begins to correct in earnest at the same time.

That is because market tops over the past 10 years or so have coincided with big-stock leaders failing at Century Marks. Apple (AAPL) in 2007 is one notable example. This also means that we need to keep a close eye on AMZN, since a failure at the 900 price level could send it back into short-sale target land.




The action in AMZN and TSLA as they crossed their respective Century Marks had the market pundits all giddy, and early in the day today the indexes were helping to foment that sentiment as they marched ever higher. This was mostly and allegedly due to a strong March ADP Employment Report showing 263,000 new jobs vs. estimates of 175,000.

With everyone leaning to the right, it was obviously time for the market to throw investors a curve ball. Once the Fed minutes came out at 11:00 a.m. Pacific time here on the West Coast, however, things shifted quickly as sellers suddenly swarmed the market. This sent indexes on a big reversal to the downside on heavy and higher trading volume.

The S&P 500 Index was looking like it was set for a trendline breakout early in the day. By the close it had given up all its gains for the day and then some to close down -0.31%. Obviously, on its face, the action is quite bearish.




The NASDAQ Composite Index didn’t do anything to improve the picture, as it pulled a very bearish outside reversal to the downside on heavy selling volume. It and the Russell 2000 Index, not shown, led the reversal as the first two indexes to turn red after the Fed minutes were released. While the market was looking like it was trying to consolidate the gains it had achieved since the election and up to the end of February, today’s action puts this rally in severe jeopardy.




A strong ADP jobs report, combined with another strong jobs report from the Bureau of Labor Statistics on Friday, would add weight to the Fed raising rates at least two more times this year. The consensus has been that higher rates will be good for financials, but I noticed early in the day that the financials weren’t responding, and this didn’t smell quite right.

In fact, at the time I thought the daily chart of the SPDR Financial Select Sector ETF (XLF) looked more like a short than a long. And that turned out to be the case by the close as the XLF reversed at its 20-dema and turned to the downside in a big outside reversal of its own. A number of big-stock banks such as J.P. Morgan (JPM), Bank America (BAC), and Wells Fargo (WFC) all look just like the XLF. I see them all as shortable using their nearest upside moving average as a guide for an upside stop.




Today’s reversal may have found its initial clues, it’s first chinks in the armor, if you will, in the action of some leaders yesterday. For example, Nvidia (NVDA) gave up on the tight action it was exhibiting along the 50-day moving average and gapped through the line yesterday after an analyst’s downgrade.

As I tweeted yesterday, this set the stock up as a shortable gap-down. In a situation like this, if I am long the stock based on the tight action at the 50-day line while using the line as a tight selling guide, I would simply reverse the position from short to long. NVDA then broke further to the $100 price level before settling at 100.03 by today’s close.  This probably goes lower from here, but if I can catch any kind of bounce up toward the 20-dema at 105.34 it would provide for a more comfortable entry opportunity on the short side.




Hopefully the myth of the “high, tight flag” (HTF) can finally be put to rest, thanks to the example of Applied Optoelectronics (AAOI).

AAOI broke out last week, prompting several to email and tweet me that the stock qualified as a HTF. Well, that didn’t last long as the stock has since failed on that breakout attempt, getting smashed today in the process on heavy selling volume. Put a fork in this one, it’s done, and if you were alert to this breakdown at the 20-dema, you could have shorted it right there!




And while you’re at it, the rest of the optical names I’ve discussed in recent reports as they were acting constructively can also have the proverbial fork stuck into them. Lumentum Holdings (LITE) and Ocular (OCLR), both not shown here, split wide open today on heavy volume. However, their failures to hold both their 10-day and 20-day moving averages over the past two days made them sells on the spot before today.

Netease (NTES), another big leader that was admittedly already on the rocks after failing to go anywhere after a buyable gap-up (BGU) in mid-February, was also flashing a bearish clue yesterday. This occurred as the stock busted its 50-day moving average badly on heavy selling volume.

This breakdown also took the stock below its 278.80 buyable gap-up (BGU) intraday low of February 16th. It attempted to rally back up to its 50-day line today but that just set the stock up as a short-sale target. It then duly reversed to close up only 3.37 after being up about twice that earlier in the day. In my view, this could very well remain a short here using the 50-day line as a guide for an upside stop.




NTES is starting to break down and has now joined Weibo (WB) on my short-sale watch list. WB failed on last week’s low-base range breakout and pocket pivot yesterday when it moved below its 50-day moving average. That set it off as a short-sale target this morning as it rallied up into the confluence of its 10-day, 20-day, and 50-day moving averages. WB then reversed to close down on the day on light volume as buyers simply evaporated. Optimally, a short reaction bounce back up into the moving averages would offer a lower-risk short-sale entry opportunity.




Other names in the China camp that I’ve discussed in recent reports mostly remain in holding patterns, per my notes below:

Alibaba (BABA) tested its 20-day exponential moving average yesterday and held, bouncing off the line on an intraday basis. This is typical for BABA, which has tended to find support along the 20-dema since its late-June buyable gap-up (BGU) move. A breach of the 20-dema would be a bearish development. (JD) is doing its best to tighten up along its 10-day and 20-day moving averages as volume declines. I’d like to see it take some more time setting up here after a decent price move off the $25 price level, where I first began discussing the stock back at the end of 2016. As with BABA, a high-volume breach of the 20-dema would be bearish here, and I would use that as a tight selling guide if long the stock.

Momo (MOMO) plunked down into its 20-dema line today on volume that was just above average. If long this, speaking for myself, I would sell here, but others desiring to give the stock more room can use the 50-day moving average as a maximum selling guide.

Keep in mind that these Chinese names could react in either direction depending on how tomorrow’s meeting between Trump and Xinping goes. And, of course, how that goes is anybody’s guess, although I tend to think that President Trump is a pragmatist who won’t rock the boat, at least not too much. The one area for potential controversy might be any disagreement over how to deal with an ever more truculent North Korea.

If the Chinese names that are currently in bearish positions rally into resistance, such as NTES and WB, they might become quite shortable. Meanwhile, watch BABA, JD, and MOMO carefully as the Trump/Xingping meeting news flow might create moves that could be faded in either direction.

This morning I posted onto the blog my SNAP Map for Snap (SNAP) showing the different outcomes I was mapping out for the stock last night. Right now, it looks like the stock is headed for outcome #2 or #3. These two outcomes entail either an undercut & rally move from the absolute 18.90 low in the pattern or a continued slide lower.

My fear is that the latter outcome will be the more likely one, but we’ll just have to let the stock do whatever it’s going to do. For now, all I know is that the stock failed to hold the 10-day and 20-day moving averages yesterday. In my book that means sell and wait for a better entry opportunity lower in the pattern, assuming one emerges at all.




Currently, unless I see the market stabilize rather quickly, I’m not looking to enter anything on the long side just yet. I see that among cyber-security names discussed in recent reports, Fortinet (FTNT) is testing its 10-day moving average. That would be one to watch as a long idea IF it can hold the 10-day line.

The big-stock cyber-security names Checkpoint Software (CHKP) and Symantec (SYMC) are both holding at their 20-demas, so if they can continue to do so they should be watched as long entries IF the general market stabilizes.

Among the bio-tech names discussed in reports since January, Clovis Oncology (CLVS), not shown, has issued a final sell signal, in my view, by breaking below the 50-day moving average. The stock has had a big move since I first began discussing it in early January, and at this stage I would simply back away and let the stock try and build a new base, assuming it hasn’t topped altogether.

Glaukos (GKOS), also not shown, broke below its 10-day moving average after trundling to all-time high closing prices over the past three weeks. From here I would use the 20-dema as a maximum downside selling guide.

Unlike CLVS, Incyte Pharmaceuticals (INCY) was able to hold its own pullback to the 50-day moving average last week. While the pullback didn’t quite reach the 50-day line on the daily chart, it did touch the 10-week moving average on the weekly chart, not shown. At that point the stock bounced on a pocket pivot volume signature.

That brought INCY back above the 10-day and 20-day moving averages yesterday, but the stock reversed back below the lines today. In my view, this can be sold here, although one could use the 50-day line as a maximum downside selling guide if they want to give it more room.




Bioverative (BIVV), not shown, broke out on Friday on below-average volume, and over the past three days has more or less been able to hold this breakout. However, if the general market gets into more trouble it could spin back to the downside. For that reason, I would use the 10-day moving average or the 20-dema as a maximum downside selling guide for any position taken at the moving averages early last week.

Besides AMZN and TSLA, which were discussed at the outset of this report, the rest of the big-stock NASDAQ names need to be watched carefully here. My notes herewith:

Apple (AAPL) remains above its 10-day moving average. So far it acts well, but the 20-dema looks like it should act as support on any pullback from here.

Netflix (NFLX) made a break for its 50-day moving average today on slightly higher but below-average volume. A breach of the 50-day line would trigger this as a short-sale at that point. Keep in mind that earnings are expected in a couple of weeks.

Facebook (FB) is similar to AAPL in that it continues to hold above its 10-day moving average, which it has done all year long. Therefore, a violation of the 10-day moving average would constitute a sell signal per the Seven Week Rule as discussed in the book, Trade Like an O’Neil Disciple.

Priceline Group (PCLN) reversed at its 10-day moving average but closed just above its 20-dema. The 20-dema has served as reliable support for the tock since early January, so it can be used as a selling guide for the stock.

For newer members: Please note that when I use the term “20-day moving average,” “20-day line,” or “20-dema” I am referring to the 20-day exponential moving average. I use four primary moving averages on my daily charts: a 10-day simple, 20-day exponential, 50-day simple and 200-day simple moving average.

Notes on other long ideas discussed in recent reports:

Activision (ATVI) is holding at its 20-dema, which can serve as a selling guide for the stock given that it has held the line throughout 2017.

Arista Networks (ANET) is holding above its 10-day moving average and right at its highs. The 20-dema at 129.09 would serve as a logical selling guide from here.

Carnival Cruise Lines (CCL) is holding above its 20-dema, which serves as a selling guide.

Electronic Arts (EA) breached its 20-dema, which makes it a sell, no questions asked. If it sets up again one can look at it closer to the 50-day moving average, which is down at 87.

Parsley Energy (PE) reversed at its 200-day moving average today. For now, I would leave this alone.

Royal Caribbean Cruise Lines (RCL) is holding at its 20-dema, but this would be your selling guide if the stock starts to come off in any continued market correction.

Splunk (SPLK) reversed below its 50-day moving average today on increased volume, which morphs this into a short-sale target right here using the 50-day line as a tight upside stop.

Square (SQ) has dipped below its 20-dema on below-average selling volume. If the general market continues lower from here, expect this to test its 50-day moving average down at 16.01. For my money, I would just sell the stock here and see whether a more opportunistic entry might appear, if at all.

Take-Two Interactive (TTWO) closed below its 20-dema today on light volume. For now, the 50-day moving average at 57.43 would serve as a maximum downside selling guide.

Veeva Systems (VEEV) closed below its 10-day moving average for the first time since breaking out in early March. Given that the stock is more than 15% extended from the buy point along the 10-day and 20-day moving averages in early March, one could consider taking profits here and waiting to see if the stock sets up again. For now, pending a better long entry set-up, watch for any pullbacks down to the 20-dema, now at 48.68, as potentially opportunistic entries should they occur.

For anyone holding long positions, vigilance will be critical. Know where your stops are, and adhere to them if they are hit, because in this market there are only two types of investors, the quick and the dead. Avoid becoming the latter!

Today’s action obviously brings the short side of the market into play. In most cases, recent leaders (think NTES, WB, and NVDA) that are breaking down again become your first candidates on the short side. Often I find myself going short something I was just long, as a bona fide market correction will begin dragging leading stocks off their perches.

Thus, we must keep an eye on names like AMZN, TSLA, and NFLX as potentially ripe short-sale targets if they pan out as failure patterns. In addition, watch all of these longs I discussed in my notes above for breaches of near-term support, usually at the 20-day exponential moving average.

In this market, playing the short side often means maintaining an open mind as some set-ups can be two-sided, and acting quickly when the signs of weakness begin to surface. An example of this would be U.S. Steel (X), which I discussed as a two-sided affair over the weekend.

While X has been in a downtrend since peaking in late February, there was also the outside chance that it was in the process of rounding out the lows of a potential base. However, this rounding-out process will only have a chance of working IF the general market rally holds. If the market begins to weaken, then X can be looked at more as a short-sale target instead of a “roundabout” long.

So, if you were watching X today you would have seen it run into its 20-day moving average and then reverse. If you time a short-sale in conjunction with the market reversing, you would have had a relatively quick profit by the close.




GrubHub (GRUB) remains a thematic short per my blog post of February 23rd. After the upside shakeout at the 20-day moving average on February 21st that reversed to the downside on heavy selling volume, the stock has steadily trended lower.

As I wrote over the weekend, “If one is looking to short this, then waiting for rallies up into the 10-day or 20-dema lines is your best bet for a lower-risk short-sale entry opportunity.” Today we got a nice push right up into the 20-dema as the market was rallying in all its glory early in the day.

I did notice that GRUB was trading light volume at the time, and as it pinged right into the 20-dema that was the optimal short-sale entry point. By the close the stock had slipped below its 10-day moving average where it ended the day. This could be considered shortable here using the 10-day line as a guide for a tight upside stop. However, the 20-dema is only about 2% away and would work just as well for a reasonably tight stop.




Over the weekend, the market tone as it related to individual stocks was looking reasonably healthy. And the action in stocks like AMZN and TSLA over the past three days before the mid-day reversal today was testament to this. But as I’ve discussed many times before, things can change quickly in this market. And today they did. So now longs must be on high alert and ready to act if and when their stops are hit. Do not get complacent in this regard!

Because we watch our stocks first, and the indexes second, acting decisively on what your stocks are showing you should keep you out of trouble if the general market situation starts to worsen. Consider yourself forewarned.

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

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