The Gilmo Report

January 27, 2016

January 27, 2016

The Dow Jones Industrials posted a so-called “follow-through” day yesterday. In my view, the fact that this occurred in the narrowest of the major market indexes, the 30-stock Dow, perhaps speaks more to the movement towards a more defensive posture. As I’ve discussed in previous reports when the big NASDAQ 100 names were leading, in uncertain times institutions will gravitate towards larger, more-established companies where survivability becomes a desired investment characteristic. So for all we know the big follow-through in the Dow yesterday was caused by institutions moving into perceived safer large-cap names.


In any case, when it comes to this follow-through stuff I find the idea that the coast is clear and one can commence buying stocks in a “confirmed uptrend” is a bit too simplistic to be practical in this market. Instead I prefer to focus on the action of individual stocks, since this is what enabled us to catch some quick short-term long trades in names like First Solar (FSLR), SolarEdge (SEDG), and CyberArk Software (CYBR) last week, before the Dow allegedly followed through.


This is a far more concrete manner in which to operate, and one that offers better chances of actually making money on the long side of any market even if a general market reaction rally and bounce ends up giving way again to the downside as it did today.


The Fed came out today and did what everyone expected, which was nothing, while making the usual vague references to “balanced risks” and other parsed buzz phrases that regularly populate their statements. Reading through all the gibberish, it appeared to me that the Fed was somewhat confused but perhaps a bit dovish. This confused dovishness seems to acknowledge the fact that all things economic are rather soft out there in the real world. This strikes me as logical since, in my view, the driver behind the market sell-off in January of 2016 is an impending global recession.


Once the Fed announcement was released, the market took a few minutes to consider just what the Fed was saying, and then promptly sold off, taking the NASDAQ Composite Index down .18% on higher volume. So far it looks like the reaction rally off of the lows of last Tuesday is running into resistance along the summer of 2015 lows.




The S&P 500 Index also ran into resistance along the summer of 2015 lows as it too rolled over today on heavier volume. Today’s action in the index just missed qualifying as a complete outside reversal, although it was enough of a reversal to come across as fairly ugly-looking. Of course, it was the NASDAQ that was down fully twice as much today on a percentage basis. Therefore we might conclude that it was the uglier of the two indexes, led by its big-cap names as the NASDAQ 100 Index sold off 2.48%.




Two widely-anticipated earnings announcements this week are now out of the bag with mixed results.

Facebook (FB) has come out with earnings after the bell this afternoon as I write and is currently rebounding back up towards the $100 Century Mark price level. For the most part, as I watch it trade after-hours it looks to be mostly just retracing today’s 2.89 point decline in today’s regular session. The numbers are apparently being viewed as positive, but not positive enough to drive it significantly beyond the 100 price level. If the general market is going to roll over here and push to lower lows, then FB’s rally, if it holds by the open tomorrow, could present a short-sale opportunity. Admittedly, the situation is fluid, and I will be watching this closely tomorrow once it opens up.




Apple (AAPL) released earnings yesterday after the bell, and briefly jacked to a high of 103.50 in after-hours trade before turning tail and heading into the red. As I tweeted yesterday after earnings came out, the report did little more than confirm that the law of large numbers is now working firmly against the company. They are simply so big and have so efficiently saturated their markets that it is impossible to create the kind of growth that will spark a large P/E expansion in the stock price. AAPL is estimated to produce 3% annual earnings growth in 2016, and 10% growth in 2017. This is why it trades at 10 times forward estimates, and those who believe it represents some sort of “value” are sorely mistaken, as they have been over the past several months when the stock was trading at around 13 times forward estimates.

The stock’s only solace at this point is that it didn’t undercut the 192 low of August 24th, which occurred on the day that I like to refer to as “Capitulation Monday.” However, today’s action could be viewed as a shortable gap-down, using the 96.63 intraday high as a guide for an upside stop. Selling volume was huge, which implies to me that the stock is likely headed lower. If it blows through the 92 low then the next area of potential support lies down around 80. This is approximately where the top of a base the stock formed between December 2014 and April 2015 lies.




Getting back once more to this business of follow-through days, let me just say that the primary reason that follow-throughs mean little to me is that I can figure out what is going on in terms of potential long set-ups just by focusing on the action in individual stocks. Thus when the market reaches a point where at least a logical reaction rally and bounce becomes highly likely as I discussed in my report of last Wednesday when the S&P 500 undercut its October 2014 low, I can start looking for potential long trades based solely on the merits of the individual set-up in question.


The false allure of a follow-through day for most inexperienced investors is that it gives them a sense of psychological comfort to think that they now have a “green light” for buying stocks willy-nilly. However, in this market, one can gain an edge simply by focusing on the action of individual stocks, since most follow-throughs occur somewhat late in any rally off the lows.


Case in point is First Solar (FSLR), which was buyable last Wednesday per my report of that day, well before yesterday’s follow-through in the Dow. After its initial lower-risk entry along the 50-day moving average last Thursday, the stock pushed above its 20-day moving average and then pulled into the 20-day line on lighter volume. This brought it back into a lower-risk buy position along the 20-day line, resulting in a move to higher highs today. So in essence we can see how looking for at least a market bounce last Wednesday, combined with the objective set-up in FSLR at the time enables one to get long without relying on a follow-through day. At this point, FSLR is now 10% above its 50-day moving average. Therefore, mindlessly piling into the stock here based on some superficial “all clear” sign is a bit late. However, if one grabbed shares along the 50-day line one can bank a nice profit as the stock runs into resistance. This is how you play a general market reaction rally IF you are a nimble, short-term trader.




SolarEdge (SEDG) also regained its 10-day and 20-day moving averages last week after posting some pocket pivot support off of its 50-day moving average. That has led to a move back up to the 200-day moving average, but not before the stock provided a low-volume entry along its 10-day line on Monday of this week. This led to a big upside jack yesterday of about 8% which would have made for a nice one-day wonder trade. Today the stock actually held up well as it remained above its 200-day moving average. On the other hand, based on today’s general market action I would probably be inclined to take the profit. This then allows for watching the stock here to see how well it can hold along the 200-day moving average. If it can hold tight along the line with volume drying up sharply, then it may set up to move higher again.




Overall I like the way FSLR and SEDG have acted since bottoming with the market last week. If for any reason we see the general market recover and begin a more legitimate bull phase, these are names I want to keep an eye on. They could develop into something more substantial over time in a more favorable market environment. But if we continue to correct and the major market indexes move lower, the long side becomes a very low-probability proposition outside of attempting to catch short-term trades during general market bounces in an overall bear market.


CyberArk Software (CYBR) was another viable long trade after I first discussed it last Wednesday, but ultimately it suffered from the “Cinderella Principle.” Even a low-volume pullback after peaking near the 50 price level four trading days ago has failed to stop the stock as it slides below its 50-day moving average. While this was a nice long trade while it lasted, it helps to illustrate why one must absolutely have a concrete idea of where they will exit and take a profit if an initial long positions has a nice upside move and then starts to roll back in.




I mostly bring up CYBR as the third example of what I look for to catch a short-term trade that occurs at the same time that the general market stages a short reaction rally and bounce. If one can find trades like this before a phony follow-through shows up, then one is well ahead of the game and not coming in late on the long side. In this market, by the time a follow-through shows up, the bounce is over, as we’ve seen many times before.

Starbucks (SBUX) is flaking out on us after last Friday’s pocket pivot coming up through the 10-day and 20-day moving averages. That pocket pivot occurred as the stock recovered from an initial gap-down move following a disappointing earnings report. In my view the pocket pivot is now failing as the stock rolled back below both moving averages today on above-average selling volume. This makes sense, of course, given the weak general market action today.






Moving to the short side, I am mostly interested in fresher short-sale targets currently. If I can also find something that doesn’t have an impending earnings report coming out so much the better. Carnival Cruise Lines (CCL) has fit the bill as it isn’t expected to report earnings until late March. As I blogged last week, the stock was shortable on the move back above the 200-day moving average, and it has since reversed at the 200-day line twice over the past four trading days. Today’s reversal, however, was much more spectacular as it came on huge volume in what ended up as a big outside reversal day to the downside. Near-term my downside price target on CCL is the low of last week at 46.86.




Royal Caribbean Cruises (RCL) is the other cruise liner name that I mentioned in my blog post of last Thursday. I also discussed both RCL and CCL in greater detail in this past weekend’s report. RCL has actually been the weaker of the two as it has not retested its 200-day moving average since reversing at the line four trading days ago when I first blogged about it. It made an attempt to clear its 10-day moving average this morning, but by the closed had staged a big outside reversal to the downside, but on average volume. This contrasts with CCL outside reversal which came on huge volume. Either way, both stocks have made for profitable short-sale targets over the past few days.

The one wrinkle here is that RCL is expected to announce earnings next Tuesday, February 2nd. Therefore, I would like to see it undercut the 76.20 low of last week for an easy cover BEFORE earnings come out. Otherwise, if one has a profit in the stock and it hasn’t undercut the 76.20 by the time Tuesday rolls around, one might consider banking the profit and avoiding the need to play “earnings roulette.”




Over the weekend I wrote that Netflix (NFLX) was again shortable using the 200-day moving average as a guide for an upside stop. The stock has since dropped about 10%, ending today at 91.85. Near-term the 85.50 price low from August 24th would serve as a reasonable downside price target for any short position taken just above the 100 price level and just below the 200-day line. That would equate to about a 15% profit on the downside, which is quite satisfactory in this market.




McDonald’s (MCD) gapped up on Monday morning after announcing earnings on what looked like a nice buyable gap-up (BGU) breakout to all-time highs early in the day. By the close, however, the stock fell back into its prior consolidation to close near the lower end of its daily trading range. So what started out looking like a BGU in the morning eventually ended up filling the gap-up “rising window” to negate the gap-up move. By the close it was just a failed breakout on heavy volume.

Over the past two days, however, MCD has managed to drift higher on declining volume. This is likely due to institutions seeing this as somewhat defensive, so they have been busy parking money in the stock. While this may sound radical, I would watch the stock for a possible complete breakout failure that would first see the stock bust the 20-day line at 117.84. As members know, I am not a fan of buying breakouts, and most recently we’ve seen breakouts fail in big-stock names like (AMZN) and Alphabet (GOOGL). If the general market pushes to lower lows, I would not be surprised to see MCD fail from this current chart position, so that is something to keep an eye out for.




Over the weekend I discussed Nike (NKE) and the fact that it looked like it was in a shortable position as it drifted along its 20-day moving average. NKE successfully held and found support at its 200-day moving average last week, setting up the shortable bounce back up to the 20-day line. This action actually reminded me of what Under Armour (UA) did back in late November of last year.

Like NKE, UA was a late-stage failed-base short-sale set-up that was initially shortable along its 20-day and 50-day moving averages before it broke down and tested its 200-day moving average. Back in November, UA undercut its 200-day line but found support at that point and rallied back up to the 20-day line, where it hung out for a few days before peeling away from the line and moving back towards the 200-day line. NKE reminded me of UA as it was drifting along the 20-day line over the past few days, and it appears headed for its 200-day line at 57.97. This would serve as my near-term downside price target for the stock. If it breaks through the 200-day line, it might set up again just under the line as UA did in December before breaking lower.






Both Microchip Technology (MCHP) and Linear Technology (LLTC) are old, boring semiconductor names that have gone nowhere for the past two years. I blogged about both of these names last Thursday as they were rallying up into their 20-day moving averages. Both came in a bit, but the big event I’ve been waiting for was today’s after-hours earnings announcement from Texas Instruments (TXN), which I was hoping might push a rally in both of these names up towards their 50-day moving averages.

After-hours TXN is up a little over a buck after a favorable earnings announcement, and both MCHP and LLTC are up slightly in sympathy. Whether this brings them into an optimal short-sale point near the 50-day line remains to be seen. So far MCHP has found resistance near the 45 price level while LLTC found resistance last week as it came close to the 50-day line. These are stocks to watch on a rally as I would expect continued general market weakness to eventually drag these stocks lower.






Alphabet (GOOGL) – stock rolled over today after finding resistance at the 20-day line, making for a nice short-term short-sale scalp, but the company is expected to announce earnings next Monday after the close. (AMZN) – stock rolled over today after finding resistance at the 20-day line, making for a nice short-term short-sale scalp, but the company is expected to announce earnings next Monday after the close.

Amgen (AMGN) – nice short-sale scalp at the 20-day moving average today, but expected to announce earnings tomorrow after the close

Celgene (CELG) – also a nice short-sale scalp at the 20-day moving average, but like the rest of the names shown here so far, is expected to announce earnings tomorrow after the close.

Electronic Arts (EA) –expected to announce earnings tomorrow after the close.

Expedia (EXPE) – a nice short-sale scalp off the 10-day moving average so far this week, but expected to announce earnings next Thursday.

LinkedIn (LNKD) – stock has been a nice short-sale scalp along the 10-day line all week long so far, but is now deep down in its pattern awaiting earnings which are expected next Thursday.

Microsoft (MSFT) – similar to AMZN and GOOGL as it found resistance at its 20-day moving average this week but is expected to announce earnings tomorrow after the close.

Palo Alto Networks (PANW) – next reasonable short-sale point would be on a rally up to the 20-day moving average at (PCLN) – deep down in its pattern awaiting earnings which are expected on February 18th.

Tesla Motors (TSLA) – has deeply undercut the 195 low of August 24th, which remains a short-term cover point ahead of earnings which are expected on February 10th. (CRM) – has undercut the 97.71 low of September 29th which is a cover point for any short in the stock. From here rallies into the 20-day line at 72.59 or the 200-day line at 73.56 would offer the most optimal short-sale entry points.

Southwest Airlines (LUV) – has already announce earnings and would look to be shortable on a rally up to the 200-day moving average at 40.05.

Workday (WDAY) – stock was shortable on Monday at its 10-day moving average and is back at its lows of last week. Would need to rally back up to last Friday’s high, which roughly coincides with the 20-day moving average at 70.93 to present an optimal short-sale entry.

With so many broken-down leaders deep down in their patterns one has to be fairly selective in what they try to short as the market appears to weaken again. NFLX is one name that set up nicely this week, as did CCL and RCL. Otherwise my primary strategy on the short side as we move through the heart of earnings season is to look for rallies that occur after a perceived favorable earnings report. In some cases these can help to bring a stock into a more shortable price area. Below is my current short-sale watch list showing moving average levels for each target stock. Use it wisely!


GR012716-Moving Average Table


After-hours I’m seeing FB trade up above the 106 price level, which might spark an upside move in the general market at the opening bell. It’s not clear to me whether this will result in bringing FB into a nice shortable range, but it may do so with other names we’ve been tracking on the short side. Therefore we want to maintain an opportunistic posture, looking to hit rallies in short-sale target stocks as they approach or reach optimal short-sale points. If you play the short side, remain highly alert since the market tends to show a great deal of volatility. Therefore, a strong defense in the form of sound and tight risk-management on the short-side is especially critical. In the meantime, for those who don’t have the stomach and nimble feet to short this market, cash is king until further notice.


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


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