The Gilmo Report

June 11, 2017

June 10, 2017

Friday will go down as one of the strangest market days I’ve seen in a long time, if not ever. Around mid-day the NASDAQ Composite Index broke hard to the downside as leading stocks got pummeled. At the same time, the NASDAQ advance/decline numbers were still roughly 2 to 1 positive.

Meanwhile, the Dow Jones Industrials and the S&P 500 Index were still up, and the NYSE advance/decline numbers were also about 2 to 1 positive. This was an odd divergence with the NASDAQ busting hard off the peak Friday (after making a new all-time intraday high) on huge selling volume.


GR061117- $COMPQ


While the NASDAQ blew apart, the S&P 500 Index churned around wildly before closing only -0.08% to the downside on higher trading volume. At one point, it looked like the NYSE-based indexes were about the blow apart as the S&P 500 and the Dow both turned sharply lower just before the final hour of trade on Friday.

But as things got almost ridiculously oversold among the NASDAQ-based tech names, including all the big-stock NASDAQ leaders, the stage was set for an intraday bounce. This carried into the close, and the S&P 500 closed roughly flat while the Dow managed to close up 89.44 points, or 0.42%.


GR061117- $SPX


Adding to the intrigue was the divergence in the small-cap Russell 2000 Index, as the daily chart of its close proxy, the iShares Russell 2000 ETF (IWM), shows. The index made a new all-time intraday high early in the day on Friday, but ended up stalling and churning on heavy volume as it posted a 0.43% gain by the bell.


GR061117- IWM


The upside divergence in the S&P 500 and the Russell 2000 was mostly due to a mass jack in financials as well as an oversold bounce in oh-so-beaten-down oils. The mass move in financials, many of which comprise the Russell 2000, was also responsible for the positive divergence in that index, as I see it.

The SPDR Sector Select Financial ETF (XLF) illustrates the strength in financials, which were rallying smartly on news of impending House legislation rolling back Dodd-Frank. In my view, this provided convenient cover for institutional selling in other areas of the market, which was what we might call something of a chocolatey mess.


GR061117- XLF


Illustrative of this chocolatey mess is the action in (AMZN), which failed at the $1,000 Millennium Mark on Friday. By the close the stock was down -3.16%, or 31.96 points on huge volume. At one time AMZN was down as low as 927 before closing at 978.31 following a Flash Crash just before the final hour of trading.


GR061117- AMZN


This AMZN Flash Crash looked like this on the 5-minute 620 intraday chart that I have on my monitors. The times shown at the bottom of the chart correspond to my time here on the West Coast. This sudden break happened just before the noon hour, one hour before the close, Pacific Standard Time, as AMZN went from 962.61 to a low of 927 in just a few seconds.


GR061117- AMZN Intraday


This is the sort of thing that adds to the drama and intrigue of Friday’s overall market action. It certainly doesn’t add to my confidence levels right here because how do you know your stock won’t be the next to experience such a bizarre and sudden intraday price break?

More messiness was seen in big-stock leader Nvidia (NVDA). On Thursday and Friday, the stock was the beneficiary of three different analysts raising their price targets for the stock to between 180 and 185. That sent the stock gapping higher on Thursday, but a second gap-up open on Friday ended badly.

NVDA pulled a big outside reversal to the downside on huge selling volume, which looks like quite a bit more than just normal profit-taking. One has to wonder what the motives of those analysts were raising their price targets on the stock now. Nothing like being early! Where were they when the stock had its very buyable gap-up (BGU) move back in early May after earnings?


GR061117- NVDA


And this chocolatey mess was not limited to AMZN and NVDA, as it splattered indiscriminately over the rest of the big-stock NASDAQ names that I have followed in recent reports. When viewed within the context of the prior constructive price/volume action, these breaks looked abnormal and occurred on very heavy volume. Herewith my notes on each below:

Apple (AAPL) broke nearly 4% off its peak Friday on heavy volume after holding tight throughout most of late May into early June. It did, however, close and hold right at its 50-day moving average. This could present near-term support, but we’ll have to see what the stock does in the coming days to know for sure.

Alphabet (GOOGL) broke 3.4% in a change of character on Friday as it closed below its 20-dema for the first time since mid-April.

Facebook (FB) broke hard on heavy selling volume and undercut its 50-day moving average before closing above the line but still in the lower half of its daily trading range.

Microsoft (MSFT) broke hard on heavy volume and found support near its 50-day moving average before closing mid-range and roughly right at its 20-day exponential moving average.

Tesla (TSLA) pulled an outside reversal to the downside on very heavy selling volume, closing near the lows of its daily price range on heavy volume.

From my perspective, the entire big-stock NASDAQ and tech scene Friday was quite messy. It was as if you had gone on vacation and left your dog in the house, only to come home and see that the dog had defecated over every square foot of your house. At that point, do you really want to set foot back in the house?

That is my feeling as far as trying to use this big sell-off as a buying opportunity. The divergences on Friday were unlike anything I recall ever seeing in my 26-year career as a trader and investor. And the sudden pulling of the rug out from under big-stock NASDAQ and tech investors on Friday makes one very wary of buying into any strength in financials.

Could we see big-stock NASDAQ and tech names fall by the wayside as financials and beaten-down oil names take the leadership reigns? My prior experience tells me that Friday’s action is like a big warning shot across the bow.

In general, the Gilmo China Five got hit on Friday along with the rest of the current market leaders. Weibo (WB) might look a little bit more constructive here as it held above its 20-day exponential moving average and the intraday low of its mid-May buyable gap-up (BGU) move. If we want to view this as a lower-risk entry, we might also consider that volume should dry up here on the pullback. It did decline on Friday, but still came in above average, so I’d like to see further drying up along the line as a more constructive development.


GR061117- WB


Alibaba (BABA) got a big price target upgrade from an analyst Thursday morning, leading to a huge gap-up move on heavy buying volume. The stock closed near the intraday highs that day, which looked quite bullish. It then gapped higher on Friday, but eventually reversed hard off the intraday highs on heavy selling volume.

I suppose we could say there are two constructive factors here that could work in the stock’s favor. The first is that while volume was above average on Friday, it was lighter than Thursdays, and the second is that despite the sell-off it was able to hold above the 135.21 intraday low of Thursday’s BGU price range.

So, perhaps if we saw the stock hold the 135.21 price level as volume dries up here, it could present a lower-risk entry opportunity. But as with any pullback in any leading stock given Friday’s odd action, the idea of stepping into the doo-doo is not necessarily all that appetizing.


GR061117- BABA (JD) gapped up on Thursday in sympathy to BABA, but closed in the lower third of its daily price range in a big-volume stalling move. On Friday, it opened to the upside and then reversed hard on heavy selling volume, piercing through and closing below its 20-day exponential moving average. No matter how you slice it, this is bearish action.


GR061117- JD


Here are my notes on the rest of the China Five below:

Momo (MOMO) broke below its 50-day moving average on heavy selling volume. The only thing that would get me interested in this name again would be a move back above the 50-day line that might constitute some sort of moving average undercut & rally (MAU&R) set-up.

Netease (NTES) failed on Tuesday’s base breakout as it reversed on Friday on heavy selling volume. The stock closed down nearly 20 points off its intraday peak of 320.40 and did find support at the 10-day moving average. But it closed in the lower third of its daily trading range, and after a big-volume failed breakout, doesn’t instill much in the way of confidence.

Precious metals also got tagged in Friday’s sell-off, but the SPDR Gold Shares ETF (GLD) was already starting to show signs of flaking out after Tuesday’s gap-up move to higher highs. There’s nothing worse than strong action on one day that is then followed by three days of listless sliding back to the downside.

Speaking in its favor, the GLD did hold at its 20-day exponential moving average, but not before breaking below its 10-day moving average. Volume came in below average, but it is not clear to me that this is a buyable pullback. Gold-related stocks like Franco Nevada (FNV) and Agnico Eagle Mines (AEM), not shown, broke down through near-term support and are not in any logical lower-risk entry position. Just more ugliness to feast your chart-watching eyes upon, as I see ‘em.


GR061117- GLD


Lumentum Holdings (LITE) went from hot stock of the week to severe chocolatey mess on Friday, pulling a big outside reversal to the downside on heavy selling volume. Relative to Tuesday’s big price move, volume came in lower on Friday, but the fact that it didn’t take much to drop the stock -7.07% in one fell swoop is not a confidence-builder. For me, a break of the 10-day moving average triggers a trailing stop.


GR061117- LITE


Applied Optoelectronics (AAOI) was looking very constructive on Thursday as it settled down along its 10-day moving average with volume drying up to -38% below average. This was typical “voodoo” action as the stock set up along the line and looked quite buyable at that point. I actually bought some shares myself.

But on Friday the stock opened up slightly and then reversed, and by the time it was down about a buck or so I was gone in a flash. Thankfully, I reacted quickly, because by the close AAOI was down -8.43 points, or -11.53%. Given the size of that position, that would have been a very painful thing to sit through, although I’m not dumb or slow enough to ever let that happen.

AAOI’s sell-off began slowly enough on Friday, but I could see the NASDAQ moving into the red in what was a clear divergence as other tech names started coming off at the same time. When I see that, I know a wave is coming, and that was enough to push me out of the stock pronto. At this point, the stock is not in any kind of logical, lower-risk entry position.


GR061117- AAOI


When I survey the stocks in which I was long over the weekend last Monday, I can quickly surmise that the week could have been a very bad one for me had I not reacted quickly to my selling guides. I had a decent-sized position in Snap (SNAP) and Twitter (TWTR) coming into the week, but those were stopped out very quickly. SNAP when it busted the 20-dema on Monday, and TWTR when it did the same on Wednesday.

Nutanix (NTNX) was another stock I owned during the week, and it was acting reasonably well by Wednesday as it held tight at the 10-day moving average with volume drying up sharply. That all changed on Thursday when the stock gapped below the 10-day line coming into Monday.

As soon as the opening bell went off the stock began to plummet, the sell-off accelerated very quickly and would also qualify as a flash crash like what AMZN saw on Friday. Within the first five minutes of trading on Thursday NTNX went from 18.23 to 16.64. Talk about unnerving.

Even worse, by the close, NTNX shook out hard and closed at 17.88. Allegedly, the sell-off was caused by news that two big insiders had sold stock. This truck me as a bit specious, however, and the rapid, five-minute breakdown is cause to lose confidence in the stock.

On Friday, the stock looked like it might try to set up again at the 20-day exponential moving average, as I noted in an early morning blog post that day, but with all hell breaking loose in the tech sector, it did not hold. By the close, NTNX did hold above the 50-day line with volume drying up. But, as with other tech names in this market, do we really want to step into this doo-doo? I suppose that depends on how thick your boots are.


GR061117- NTNX


Notes on other long ideas discussed in recent reports, detailing Friday’s weak price action, which in just about all cases has the look of a significant change of character in these stocks:

Activision Blizzard (ATVI) – big price break on huge selling volume.

Arista Networks (ANET) – big price break on above-average selling volume.

Cavium (CAVM) – big outside reversal to the downside on heavy selling volume.

Edwards Lifesciences (EW) – sharp downside break and close below the 10-day moving average on higher but below-average selling volume. As a medical name, it did not suffer as badly as the tech names.

Electronic Arts (EA) – big price break on heavy selling volume, but stock managed to close off the lows and back above the 20-dema.

First Solar (FSLR) – outside reversal to the downside on Friday closed just below the 20-dema. Volume was below-average and fairly light.

GrubHub (GRUB) – Outside reversal to the downside after an initially strong upside move at the open on about average volume.

Impinj (PI) – massive price break on heavy selling volume as the stock busted through the 10-day and 20-day lines. Looking somewhat cooked after Friday’s deleterious price/volume action.

iRobot (IRBT) – heavy-volume break off the $100 price level on heavy selling volume. Could be viewed as a Century Mark failure based on Jesse Livermore’s Century Mark Rule in Reverse.

Line Corp. (LN) – gap-down on heavy volume. Closed at the 10-day moving average but looking sketchy at best.

Palo Alto Networks (PANW) – broke back below the 200-day moving average, which was our maximum trailing stop for the stock. We’re out. (CRM) – sharp downside break on heavy selling volume but found support at the 50-day moving average.

ServiceNow (NOW) – heavy-volume breakdown on Friday but stock held support at the 20-dema.

SolarEdge Technologies (SEDG) – posted a nice pocket pivot on Thursday, but reversed off the peak on Friday on heavier volume. Not in a lower-risk entry position here

Square (SQ) – sharp -7.06% price break off the peak on huge selling volume. Gave up about half of the gains it has made since breaking out through the 20 price level in mid-May.

Sunpower (SPWR) – not acting as badly as most other stocks as it remains in a roughly two-week price range and above its 20-dema and 200-dma.

Take-Two Interactive (TTWO) – sharp price break off the peak on heavy selling volume but stock found support at the 20-dema.

Universal Display (OLED) reversed to the downside on Friday on heavy selling volume but still held above Monday’s flag breakout point at 117.85.

Veeva Systems (VEEV) – stock split wide open on Friday on heavy selling volume, closing just below its 20-dema.

Western Digital (WDC) – broke down through its 50-day moving average on heavy selling volume.

Workday (WDAY) – busted its 20-dema and closed below the $100 Century Mark on heavy selling volume. This might bring the stock into play as a short based on Jesse Livermore’s Century Mark Rule in Reverse.

Zillow (Z) – sold off hard on Friday on heavy selling volume but found support at the 20-dema and the top of its prior flag breakout through 44.49 price level.

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 (the magenta line), 20-day exponential (the green line), 50-day simple (the blue line) and 200-day simple moving average (the red line). On rare occasions, I will also employ a 65-day exponential moving average (thin black line).

It is clear that just about all of the stocks we’ve favored on the long side of this market experienced a severe change of character on Friday. This is problematic, and at best means we would have to see how and whether things settle down and set up again.

It is somewhat ironic that in my prior Wednesday mid-week report I mentioned that I get nervous when things start looking “too good.” As well, I tweeted earlier in the week that this market has a way of pulling the rug out on investors just when everything is rosy. That’s precisely what we saw on Friday as the rug was pulled out on a large number of market leaders.

In most cases I would think that members’ trailing stops on long positions were triggered on Friday as many names broke through near-term support.  This would have naturally forced one out of stocks as the selling intensified on Friday. An example from my own experience is AAOI, which was bought near the 10-day line, but when it could not hold the line I was forced out of the stock.

This was also the case with names like SNAP and TWTR, which I was stopped out of earlier in the week. In this manner, I was forced more into cash before Friday’s big downside break in so many leading stocks.

For now, we can see the big cracks in a broad swath of leading names. Whether the financials (and oils, I suppose) can step and provide the kind of leadership that can drive a continued bull phase is questionable, in my view. The action struck me more like providing convenient cover for institutions dumping stock in other areas of the market, as I wrote earlier in this report.

At this point, for anyone still owning stocks, that is what you’re looking at. Just stick to your selling guides and let the market force you out. Other than that, I prefer cash or even the short side as it potentially develops in any continuing market pullback or correction.


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 no positions, though positions are subject to change at any time and without notice.

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