The Gilmo Report

August 6, 2014

August 6, 2014

The NASDAQ Composite Index, shown below on a daily candlestick chart, pretty much sums up the current general market situation. After the break off the peak, the index attempted to regain its 50-day moving average, but that effort failed yesterday as the index was smacked back below the line on heavier volume. Today’s action saw the index make another attempt to clear the 50-day line but the index instead stalled and closed in the middle of its daily trading range on light volume. In my view, the index is simply setting up in a bear flag with the next move likely to be to the downside. The only thing that I can see sparking some sort of upside jack would be news that Russia is pulling its troops back away from the Ukrainian border, but somehow I consider that more of a long shot. For the most part, if you aren’t keen on the shorting game, cash is king here.




Surprisingly, the NASDAQ is so far holding up better than the S&P 500 Index. As we can see on the S&P daily chart, below, the index is much further below its 50-day moving average and today spun its wheels as it tried to move higher earlier in the day but ended up closing pretty much flat on the day. While a reflex rally back up to the 50-day line is always a possibility per the conditions I discussed above in reference to the NASDAQ, this is a weak formation, and what we certainly know for sure is that the market remains in a correction, end of story.




Tesla Motors (TSLA) broke out of a cup-with-handle base today on heavy volume, as we can see on its daily chart. As I wrote over the weekend, this is probably the only stock that looks worth buying. TSLA broke out to an all-time closing high today, which looks quite lovely on the chart, but this is another breakout in a market that has not been kind to breakouts. Will TSLA fare any better? My inclination here is to just sell into the breakout, but if one bought the stock on the basis of Friday’s pocket pivot I would say that it is quite feasible to sit with the stock and just use the breakout point at around 244-245 as a tight trailing stop.




Most of my time during the trading day is spent monitoring my short-sale target stocks, many of which have been in position to rally since last Friday. In some cases, the rallies have continued, in others they haven’t. Let’s run through these current short-sale targets using daily candlestick charts which give us a somewhat different perspective.

LinkedIn (LNKD) has been able to push further above its 200-day moving average, as we can see on the daily chart, below, but this rally is beginning to run out of upside steam. Over the weekend I surmised that the stock could continue higher through its 200-day moving average similar to how Netflix (NFLX) moved past its own 50-day line in mid-May. However, but one major difference between the two is that LNKD’s 200-day line is far above its 50-day line while NFLX’s 50-day line was far above its 200-day line in mid-May. Thus on a comparative basis we would have to say LNKD is in a somewhat weaker position here than NFLX was in mid-May. That said, today’s action flashed a “bearish harami” formation on the candlestick at the peak of a three-day wedging rally beyond the 50-day line. I am willing to test a short position in LNKD here using the 205.72 intraday high of Tuesday as a reference point for a quick upside stop.




Twitter (TWTR) has remained a short so far this week. As I wrote over the weekend and last Wednesday, I tend to see the stock as a short-sale on the gap-up and I did in fact short it on that day. So far the stock has continued to slide back below the 45.65 intraday low, reaching an intraday low of 42.75 this morning, right at the prior peak, as we can see on the daily chart, below. TWTR is approaching its 10-day moving average, but selling volume dried up today as it formed a “dragonfly” doji, indicating that the stock will try and pop to the upside from here. I don’t know if that is going to happen with 100% certainty, but if it does, I would tend to look at any upside moves from here as potentially shortable.




Earnings roulette day is rapidly approaching for Workday (WDAY), and the stock has spent the past six days gyrating around its 50-day moving average, but closed below the line today on light volume, as we can see on the daily chart, below. Last week’s analyst buy recommendation and $93 upside price target so far doesn’t seem to appear all that prophetic. I tend to look at WDAY as potentially shortable at the peak of this current six-day range in the 85-86 price area. The stock hasn’t really shown any impetus to move beyond that high so far, and one could potentially make some money on the short side with WDAY before earnings hit at the end of the month. With the stock below its 50-day moving average, one could actually try and short the stock here using the 50-day line at 82.81 as a quick upside stop. The trick here is that the stock needs to have a decently profitable break between now and earnings, and that remains a distinct possibility if the general market remains weak and WDAY keeps trading as it has following the attempted upside “pump” from the previously referenced analyst.




Splunk (SPLK) is also going to see earnings at the end of the month, and so far nobody seems too excited about the prospect for a big earnings beat, as is evident on the daily chart, below. SPLK broke below the 50-day moving average last week, and then spent Monday and yesterday moving in a short bear flag before gapping down today on increased selling volume. This is not in a position to short here, but it most certainly looks quite ugly and might serve as a “model” for the other two members of the short-side “Four Horsemen.”




Here we see Tableau Software (DATA) failing to impress after announcing earnings last week and breaking below its 50-day moving average on the daily chart, below. The past three days have seen the stock form a short bear flag which I consider shortable using the 50-day moving average at 63.98 as your guide for an upside stop. Notice how DATA formed a bearish “hammer” formation today, closing near the lows of its daily trading range after trying to rally earlier in the day. With earnings out of the way, I think DATA is headed lower from here, so this remains a primary short-sale target, particularly on any rallies from here up to the 50-day moving average at 63.98.




The last member of the short-side Four Horsemen, (Yelp (YELP) remains a primary short-sale target stock as it acts similarly to DATA and builds a short, four-day bear flag after plopping below its 50-day moving average last week following earnings. I would like to see the stock move up towards its 50-day moving average at 70.65 to offer me a much more optimal short-sale entry point, but so far all it looks like it wants to do is stay in this little bear flag as it potentially revs up for another break to the downside. We can see how the stock undercut the prior July low, which then set up this small “undercut & rally” move so far this week. The emphasis here, however, has been more on “undercut” and less on “rally” as the stock’s move so far this week has been rather tepid. The only thing that is keeping YELP alive is the potential for someone to buy them out, although it’s not clear to me that anyone would in fact want to buy them. For now, while a rally to the 50-day line would be a preferable short-sale opportunity, its current feebleness might indicate that one may have to short it here and use either today’s high at 68.81 as a very quick stop or the 50-day line at 70.65 as a somewhat slower stop.




Netflix (NFLX) is back up at its 50-day moving average, running right into the line this morning before closing just below it, as we can see on the daily chart, below. NFLX is in a clearly shortable position using the 50-day moving average at 435.36 as your guide for an upside stop.


GR080614-NFLX (AMZN) is drifting higher after breaking to a lower low last Friday, as we can see on the daily chart, below. The slight drift to the upside is occurring as a short, wedging rally with volume remaining quite low. This looks failure prone right here as the stock pulls up within what is really a three-day bear flag. Shortable here using Monday’s intraday high at 316.18 as a tight “hyper-stop.” Alternatively, the 10-day moving average at 320.54 provides a somewhat “looser” stop for those who prefer to give the stock more room.




TripAdvisor (TRIP) broke down sharply last Thursday after I discussed it as a late-stage failed-base short-sale set-up in my report of exactly one week ago. As we can see on the daily chart, below, that downside break has resulted in a four-day bear flag with the stock finding resistance at the top of the range in the 95.40 to 95.75 area. Volume is drying up in the bear flag, and in the same manner that a volume dry-up in a bullish flag can signal an impending upside breakout, the reverse might be true here. I would use rallies above 95 as opportunities to short TRIP although a move up into the 99-100 area would be optimal.




Pandora Media (P) is another one of these bear flag situations, and it continues to track more or less sideways since its massive-volume gap-down two Friday’s ago following earnings, as we can see on the daily chart, below. P is a regular recipient of buy-out chatter, and last week recall that we saw rumors of AT&T (T) buying P surface. The rumors turned out to be nothing, but today we saw a stronger reaction early in the day when buy-out rumors again began to circulate. This sent P right up to the top of its current bear flag range where it ran into stiff resistance on heavier trading volume. This looks to me like an upside “shakeout” that might lead to a downside breakout here, so I’m not averse to shorting the stock here with a stop at today’s intraday high at 25.93. One might consider setting a buy-stop order at a nearby stop as a precaution against more rumors that turn out to have more substance than the last two. Otherwise, if one does not want to take on the headline-risk of shorting P, there are plenty of other targets to choose from.




Illumina (ILMN) continues drifting lower on light volume, as we can see on the daily chart, below. In its current chart position the stock is not near an optimal short-sale point. For now I would look to use any rally up to resistance around the 165-166 price level along the lows of the prior handle as I’ve highlighted on the chart. Late-stage failed-base situations like ILMN will generally have one decent break through the 50-day line, sometimes making it as far down as the 200-day moving average. ILMN is quite a distance from its 200-day line currently at 141.21. So far all the stock is doing is forming a short four-day bear as volume declines, appearing as if it may very well be setting up to “break out” to the downside. Alert members might also notice that this particular bear flag type of set-up is a recurring theme among many of these short-sale target stocks I’m discussing in this report. The question that comes to mind is whether the fact that so many of these short-sale targets are setting up in what appear to be short, bear flags is a clue of impending downside for the market as a whole.




We’ve seen the market break down rather quickly over the past week or so, but it was not like one could not see it coming. I know that I did, and my reports (if not my train photo tweets) over the past week or so document that fact. Where do we go from here? With the indexes down sharply there is always a possibility of a sharp reaction bounce or rally, and in both the NASDAQ and the S&P 500 the logical upside target would be their respective 50-day moving averages. The NASDAQ failed to clear its own 50-day line today, while the S&P remains far below its own 50-day line. The easiest way to operate, assuming one wishes to short this market, is to focus on the individual short-sale set-ups and the position of the stocks with respect to potential areas of resistance within their charts. If one is already short a particular name that I’ve discussed and is making profits so far, then it is a simple matter of one remaining true to one’s stops. Other than that, and outside of a name like TSLA, cash remains king.


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

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