The Gilmo Report

August 13, 2014

August 13, 2014

When I was younger and my time was all my own, I used to spend many afternoons surfing the waves along the Santa Monica Bay and the Malibu coastline. For those of you who have ever surfed, you know that it can become quite an addiction. In addition to the adrenaline rush, there was also the joyful experience of being “in the zone” where time stands still and you are entirely in the present, focused on the wave you were riding and nothing else. Surfers will tell you that this “one-pointedness” is nothing short of a spiritual experience, and it is why surfing is in many ways a religion for those who practice it regularly. In this manner surfing transcends an addiction and attains the status of a type of nourishment that is craved in the most persistent manner. Along the “Queen’s Necklace,” where I live, even on days where the swell is 1-2 feet at best, the waves are totally blown out and nothing is setting up except for flurries of “chop” moving in one direction and then the other, you will find surfers paddling around in the water, searching for something, anything that will provide this nourishment.

In many ways the market isn’t all that different, and I have often talked about the analogy of surfing as it relates to the concept that traders and investors essentially ride the market’s “waves.” The basic idea of this analogy is based on the fact that one’s ability to make money in the market is highly dependent on a) the presence of waves and b) the size of the waves. When these conditions do not exist, and the market instead chops back and forth, traders and investors become like surfers in a different way, paddling to and fro as they try to catch a wave, any wave, despite the “blown-out” conditions. This market is a little bit like that. I can see small waves materialize, and if I paddle fast enough, I can catch a small ride, maybe something just a little bigger. Meanwhile, stocks go up sharply one day, then down sharply the next, and the basic picture is one of a market that has been rolling to and fro in a broadening range over the past 5½ weeks, as we can see on the daily chart of the NASDAQ Composite Index, below. The NASDAQ has managed to chop its way back above the 50-day moving average, holding up well enough on Tuesday to remain on top of the line despite a morning gap-up that failed. The NASDAQ is being pushed along by its larger components, while smaller-cap names continue to languish with the Russell 2000, not shown, still stuck below its 50-day and 200-day moving averages.




The S&P 500 Index, meanwhile remains below its own 50-day moving average as the NASDAQ assumes the leadership role in the market’s recovery attempt. The bottom line as far as I’m concerned is that we’re still more or less in “no-man’s land” and the current environment strikes me as more of a day-trader’s market where one is trying to catch small waves amidst all the chop.




Tesla Motors (TSLA) has been one of the leaders in the market’s bounce off of last week’s support levels, but it is running into some selling here as it moves further above its recent breakout, as we can see on the daily chart below.  Basically the stock is finding some overhead from the left side of the pattern where TSLA reached an intraday high of 265 back on February 26th, so I would not be surprised to see it pause long enough for the 10-day moving average, currently at 246.26, to catch up.




Netflix (NFLX) is finding resistance along prior highs in the pattern around the 457 price level, as we can see on the daily chart, but so far is holding above last Thursday’s pocket pivot buy point coming up through the 50-day moving average. Today’s upside move came on lighter volume even on a day when the NASDAQ was up 1.02%, so NFLX may simply continue to back and fill just above the 50-day moving average and the 457 price area. If you think the market is going higher, then look to buy NFLX on pullbacks down towards the 50-day line, currently at 438.78.




Twitter (TWTR) found a short-term low last week along its 10-day moving average and the prior July 1st peak, as we can see on the daily chart. It has spent the last four days sliding up along the 10-day line with no real volume to speak of outside of yesterday’s higher-volume reversal that closed near the lows of the day. TWTR is basically sitting here along the 10-day line, “in the pocket,” so to speak, waiting for a pivot move off the 10-day line. The trick here is that volume would have to exceed 25,389,111 shares to qualify as a pocket pivot, but that volume bar of July 3rd will drop off the count in two more days. If TWTR can hold along the 10-day line then a pocket pivot becomes more feasible, so this is something to keep an eye out for.




With the NASDAQ taking the lead as the market bounces off of last week’s lows, I would expect the big-stock names in that index to act well in any continuing rally, including NFLX, TWTR, TSLA, and Facebook (FB), which I show below on a daily chart. As we can see the stock is still moving tight along its 10-day moving average following the late July buyable gap-up move that has since failed. It remains in position for a possible pocket pivot, and volume would only have to be just above average for it to qualify as a bona fide pocket pivot volume signature. Volume picked up slightly today as the stock moved up and off the 10-day line, but FB closed about mid-range for some minor stalling action. This remains inconclusive, but as I said, if the market is going to go higher, expect FB to be one of the names that participates on the upside.




Some of our favored names have been flashing buy signals as they make constructive bids at a comeback, such as GW Pharmaceuticals (GWPH), which flashed a pocket pivot buy point off of its 50-day moving average on Monday, as we can see on the daily chart, below. GWPH illustrates the type of volatility we see in individual stocks, however, as it tried to follow through on Monday’s pocket pivot by moving higher early in the day on Tuesday before reversing and dropping right back into its 50-day moving average. That support held today as the stock bounced off the line on light volume. If one chose to act on Monday’s pocket pivot, then buying into pullbacks to the 50-day moving average at around 86.63 would be optimal, but today’s close at 89.55 is only 3% above the 50-day line, which makes this a relatively low-risk entry point using the line as your selling guide.




Palo Alto Networks (PANW) also flashed a buy signal today with a breakout from a short base, as we can see on the daily chart, below. Volume was 84% above average but the stock closed just below its all-time intraday high of 85.78 achieved on June 30th. If this is a sign of strength for the stock, then I would prefer to buy it on any pullbacks from here, using the 82.15 intraday low of today as a quick downside stop.




Skyworks Solutions (SWKS) also had a pocket pivot today as it popped up and off of its 10-day moving average, as we can see on the daily chart, below. SWKS had a buyable gap-up way back in mid-July and has made little progress since then, but of course the general market has also been sloshing around over the past 5½ weeks. Ultimately the stock held above the 20-day moving average and this pocket pivot becomes buyable with the idea that it will hold the 10-day moving average at 51.99 on any pullbacks.




On the short side, I’m only willing to take a shot at something if it reaches a pre-determined area of potential resistance, and over the weekend I listed the resistance levels I’m watching if and as any of my short-sale target stocks rally. In the case of (AMZN), news about a new product this morning sent the stock gapping up to its 50-day moving average, but the stock closed near the lows of its daily trading range on above-average volume, as we can see on the daily chart, below. For me this was the second level of resistance I was looking for in the stock, and so I decided to take a shot at the line, using the 50-day line at 330.34 as a very quick upside stop. So far the stock is coming in, but whether this continues lower from here will likely depend on whether the general market is able to sustain the current rally attempt.




Short-sale target stocks that don’t rally with the market also stay on my radar, like Keurig Green Mountain (GMCR), shown below on a daily chart. If the market fails on this current rally attempt, you will see more leading stocks fall by the wayside, and the most likely candidates for significant downside moves would be those that have just recently failed on late-stage breakout attempts as GMCR recently did. Using the 65-day exponential moving average at 116.48 as my guide for a tight upside stop, this may be setting up to move lower on a possible downside “breakout” from its current short bear flag.




The one thing that short-sellers have to guard against when shorting into rallies up to potential areas of resistance is when the stock just blasts right through said resistance level and keeps going.  Yelp (YELP) illustrates quite nicely why a short position taken at or near the 50-day moving average in the 71.11 price area had to be covered quickly when it blasted up through the line this morning with volume picking up, as we can see on its daily chart, below. YELP rallied right back up near the prior late July peak at 76.49, reaching a high of 75.87 today before backing down to a closing price of 74.46. YELP has been the subject of buyout rumors after OpenTable (OPEN) was taken out by (PCLN) last month, and today’s action was fairly furious to the upside. It did not, however, qualify as a pocket pivot so it is not clear to me where the stock goes from here.




Another stock that has benefited from buyout rumors is Pandora Media (P), and on Monday I tweeted that the stock was clearing enough volume for a pocket pivot buy signal off of its 10-day moving average, but from a position below the 50-day moving average, as we can see on the daily chart, below. P retested the 10-day line on Tuesday before blasting through the 50-day moving average today on another pocket pivot move which I tweeted just as the stock was clearing the 50-day moving average at around 26.75. P jacked another couple of points from there before the close where it settled down to end the day at 28.35, a couple of percent off of its 28.96 intraday high. I played this as a short-term trade over the past three days, and it worked out well with a 10.31% upside move from open to close today. Not wanting to look a gift horse in the mouth given that P’s move was one of the best of the day among stocks moving to the upside, I sold into the move as P approached its 200-day moving average late in the day. As I tweeted on Monday, P was not a short on the rally up to the 50-day line, and that certainly turned out to be the case so far this week.




With respect to other short-sale target stocks, members should refer to my report of this past weekend where I listed each target stock and its associated levels of potential resistance on any rallies. It’s not clear to me, however, whether the short side will yield significant downside unless the general market breaks down and fails on this current rally attempt. Therefore one has to remain fluid if they are going to try and test any of these short-sale target stock rallies into resistance.

The key point to remember is that you want to short at points where your upside risk is minimal and you can set a very tight stop just above the short-sale point in the event the stock just keeps on going. A second key point to remember is that short-selling can also provide valuable market feedback. If a short-sale target stock rallies up into resistance and I can feel a strong bid in the name, frequently I will cover my short and flip to the long side, especially if I see potential for a bottom-fishing pocket pivot to materialize.  Such was the case with P this week. The beauty of the market is that it is like a friend that doesn’t lie to you. If your trade isn’t working, it will be sure to let you know. Use that information to your advantage.

Right now the market seems to be trying to repeat the same pattern whereby it starts to break down as certain leading stocks get hammered, and just as it reaches a point of maximum ugliness and the “market in correction” alarm is sounded by those who claim to know, some leading stocks come back and start to turn, flashing pocket pivots here and there as they do so. This time around it isn’t as broad as it was, say, back in mid-May, but there are some actionable long ideas showing up here. If one can find a low-risk entry point there is nothing wrong, in my view, with trying out a position. In the meantime, keeping an eye on short-sale target stocks in case things go awry makes sense. This market is tricky, and for all we know we continue to chop around throughout the rest of August as we move into the generally more decisive month of September.

Therefore my approach remains opportunistic on both sides of the market if I see a viable set-up that I like. Generally, this requires being nimble and somewhat creative, as was the case with P. On the other hand, and in the spirit of the late, great Johnny Cochran, if you can’t be nimble, and you can’t be quick, then maybe cash is where you should stick! Stay tuned.


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 a position in AMZN, GMCR, GWPH, and TWTR, though positions are subject to change at any time and without notice.

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