The Gilmo Report

June 15, 2016

June 15, 2016

The Fed did exactly what I expected it would do at the conclusion of its two-day policy meeting.  That, again, was nothing, while they sounded the usual mixed message about the alleged strength of the economy and the need to weigh it all against the growing array of risks that exist in the global and domestic economy. In the end, the markets didn’t seem to buy into the continued Fed confusion, which was evident by Fed Chief Janet Yellen’s press conference following the policy announcement.

After four days of downside, the NASDAQ Composite Index set the stage for an intraday bounce yesterday as it successfully tested and held its 200-day moving average. The bounce continued today right into the Fed policy announcement. But after some minor shifting to and fro following the announcement, the index ended the day by reversing back below its 50-day moving average on lighter volume. After yesterday’s higher-volume bounce off of the 200-day line, today’s action comes off as a bit of stalling at the 50-day moving average.

 

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The S&P 500 Index also ended the day back below its 50-day moving average on lighter volume. Yesterday’s intraday rally came on higher volume, but only carried as far as the underside of the 50-day moving average. Overall, after four prior down days, the indexes were in a logical position to bounce ahead of the Fed meeting. Today’s action certainly brings that bounce into question, and I would give the market meaningful odds of further downside from here if these indexes cannot regain their 50-day moving averages soon.

 

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The broader New York Composite Index, not shown, never got back above its 50-day moving average today and reversed back to the downside by the close. The small-cap Russell 2000 Index, as represented by the daily chart of its proxy, the iShares Russell 2000 ETF (IWM), is in a much better position well above its 50-day moving average. However, today’s reversal at the 20-day moving average does put it in the position of carrying further to the downside on a test of its 50-day moving average.

 

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Both of the precious metals ETFs, the iShares Silver Trust (SLV) and the SPDR Gold Shares ETF (GLD) pushed higher, with the GLD logging its highest closing high of the year. This was also its highest close since January of last year. With the Fed on hold, I don’t seem much to hold the precious metals back. Last week’s gap-up/pocket pivot move back above the 50-day moving average offered a low-risk entry point for those who wanted to spin the roulette wheel going into the Fed meeting.

However, as I tweeted this morning before the meeting, my view was that the Fed would remain on hold. Therefore, if one wanted to believe that the “almighty” Gilmo is never wrong (fat chance!) you could have bought the precious metals ETFs or either of the two precious metals stocks I’ve discussed in recent reports.

 

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And while the metals made a beeline for their prior highs, both Silver Wheaton (SLW), not shown, and Agnico Eagle Mines (AEM) merely bounce off of their 10-day moving averages on below-average volume. Both stocks are essentially consolidating prior gains. Both stocks can technically be considered to be buyable here using the 10-day moving averages as guides for tight downside stops. However, if we get into more of a general market correction, they may not hold up.

So there is some risk here given that they are still stocks, such that if everything starts getting sold, they will get sold as well. That might also apply to the precious metals as well. But if the market finds its feet and is able to rally, then a Fed on permanent hold may keep the precious metals complex in rally mode.

 

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There were two big stories this week on the social-networking front, the first being the buyout of LinkedIn (LNKD) by Microsoft (MSFT), a move that I have to admit I found somewhat surprising and unexpected. LNKD, not shown, was actually starting to look like a short, as I discussed over the weekend.

Fortunately, I never had time to try and implement such a short. But LNKD does illustrate why I tend to shy away from holding big short positions overnight. Fortunately, I’ve only been caught short on a buyout once in my entire 25-year-plus career.

It was back sometimes around 2001, if I recall correctly, and I was short the old internet stock known as Lycos (LCOS), which no longer exists. One day the stock was rallying on weak volume into resistance so I started shorting it, building up a large short position in my personal trading account.

Towards the end of the day, in the last few minutes before the closing bell, I noticed the stock suddenly trading a lot of volume and pushing up fast right into the close. I called my colleague, Dr. Chris Kacher and asked him if he saw any news out on the stock.

We both agreed that the action going into the close seemed to indicate that some news was out. Needless to say I was not feeling very good about the situation given my position size. The next morning news did come out that the company was in talks to be bought out by Telefonica de Espana (TEF).

To my amazement, the stock opened up about three bucks, and I immediately covered the position, taking about a 3-4% or so hit to my portfolio. I was more than happy to take that hit, because the stock eventually ran up another 30-40 points! When it comes to shorting, this is one of the risks that you face. The only way to combat it is to carefully assess whether the stock you are shorting has any chance of being bought out. Of course, similar risk does exist on the downside for long positions, and I’ve seen many a stock crater on bad news.

In this environment, it is probably wise to try and figure out whether the stock you are shorting could be a buyout candidate. I could imagine LNKD becoming such a candidate, but I never would have figured that MSFT would be the suitor. So, as they say, go figure. Perhaps one stock that doesn’t have much of a chance of being bought out is Facebook (FB), which has been the other big social-networking story this week. On Monday morning a report out of Citron Research came out panning FB’s mature business and growing lack of relevance.

This sent FB crashing through its 50-day moving average, but the stock had already pushed below the 20-day line on Friday, which brought it into play as a short-sale target at that time. The breach of the 50-day line on Monday meant that any weak-volume rally back up into the line could be treated as a short-sale opportunity, as I blogged this morning.

That turned out to be the case as the stock ran up near to the line before reversing and closing down on the day on a slight increase in selling volume. I view the stock as a short anywhere between today’s close and the 50-day line at 115.75, using the line as a guide for a tight upside stop.

 

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In my view, FB’s breakdown through the 50-day line likely has negative implications for the general market. I also view Apple (AAPL) as a short here following the breach of the 20-day moving average on Monday as selling volume increased sharply. As I blogged over the weekend, the stock is rolling over from what looks to be the peak of a right shoulder within a secondary head and shoulders formation.

Members can refer to my blog post over the weekend where I discussed several big-stock names as potential shorts based on the macro-patterns on their weekly charts. I view AAPL as a short here using the 10-day or 20-day moving averages at 98.27 and 97.92, respectively as guides for upside stops. The one nice thing about shorting AAPL is that there isn’t much chance of anybody buying them out. At least not yet. In any case, my near-term downside target would be the 89.47 low of May 12th.

 

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Alphabet (GOOGL) also remains in a shortable position following April’s late-stage base-failure on a massive-volume gap-down move. Since then the stock has formed a roughly six- to seven-week bear flag where the 50-day moving average has generally served as an area of logical overhead resistance.

If the general market starts to sell off again, then the stock may likely be headed for its late April lows just above the 700 price level. Thus it would be treated as a short here using the 50-day moving average at 739.16, about 1% above today’s close, as a guide for a tight upside stop.

 

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Netflix (NFLX) was discussed as a macro-short-sale set-up in my weekend blog post following last Friday’s higher-volume gap-down break below the 20-day moving average. NFLX rallied on Monday most likely on the LNKD buyout news since it was also touted as a potential takeover target when rumors surface that Apple (AAPL) was looking to buy another media company.

The stock rallied up to its 20-day moving average on Monday but reversed to close near its intraday lows. That was a clear short-sale point, and the stock has since moved tight sideways in what is now a three-day bear flag as volume dries up. This looks like it is setting up to move lower from here. Optimally I would like to short a rally up to the 20-day line at 96.45, but one could short the stock here and use the 20-day line as a guide for a tight upside stop.

Keep in mind that NFLX is one stock that could be a takeover target, so for that reason I might focus on this as a possible intraday short-sale target. It certainly offered that type of play on Monday when it rallied into and reversed at the 20-day line.

 

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Checkpoint Software (CHKP) is a member of the cyber-security group, but has recently failed on a late-stage breakout attempt. That occurred in mid-April when the stock gapped below its 20-day moving average on huge selling volume. Since then the stock has attempted to rally back above its 50-day moving average several times. Each time it has met resistance along the 86 price level and the lows of the gap-down “falling window,” as I’ve highlighted on the chart.

I view this as shortable here using the 10-day moving average at 84.90 as a guide for a tight upside stop. I also continue to view Palo Alto Networks (PANW), not shown, as shortable on any rallies back up into its 10-day moving average at 135.33. I would expect that if PANW busts to lower lows, CHKP will not be too far behind, and vice versa.

 

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Alibaba (BABA) continues to have its issues, and over the past couple of days has been rallying on the good vibes emanating from its investor conference. The rally has brought the stock back up into its 50-day moving average, where it ran out of gas and stalled today on light volume. BABA was looking rather positive in late May, but since then things have changed considerably. I’ve been watching the stock closely, looking for any signs that it might convincingly get back above its 50-day moving average, but so far the line has served as clear overhead resistance in June.

Add to this the a) prior high-volume breaches of the 50-day line on heavy selling volume and b) the placement of some 100 million shares with willing buyers by Softbank Group (SFTBY) which likely just helps to absorb near-term buying demand. Putting it all together leads me to view BABA as a short right here using today’s high at 78.77 as a guide for a tight upside stop.

 

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I continue to view Tesla Motors (TSLA) as a short here after its reversal at the 50-day moving average last week that then led to a breach of the 200-day moving average as well. Over the past three days the stock has tried to get back above the 200-day line, which is running along the same levels, more or less, as the 10-day and 20-day moving average.

On Monday TSLA rallied above the 200-day line but reversed to close back below the line as buyers failed to show up. Both yesterday and today it again rallied back up to the line in much weaker fashion, and both times closed back below the line and near the intraday lows. TSLA remains a short here, using Monday’s high at 225.77, about 3% above today’s close, as a guide for a maximum upside stop. Those wishing to implement a tighter stop can opt for the 10-day line at 222.52

 

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In my blog post discussion of macro-short-sale set-ups I discussed Priceline Group (PCLN) as showing consistent resistance along the highs of the price range it has formed over the past three months. On Monday PCLN briefly rallied to fill the gap-down “falling window” of this past Friday before reversing to close below its 10-day moving average. Both yesterday and today PCLN attempted to rally back up to the 10-day line, but failed both times to close lower within its daily price range. The stock is now perched right on top of its 50-day moving average.

A breach of the 50-day line on volume would serve as a clear short-sale signal using the 50-day line at 1305.42 as a guide for a tight upside stop. An alternative in advance of such a breakdown would be to short the stock on bounces up towards the 10-day line at 1323.96, should that occur.

 

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The only way to catch any air on the long side over the past three days would have been to buy long ideas coming into areas of support yesterday and Monday. That would have put you in position to catch a ride on the rally this morning. But most of these rallies were of a questionable nature.

One standout in this regard was Workday (WDAY) which posted two five-day pocket pivots on a bounce off of its 20-day moving average. The stock might have gotten some lift from the MSFT buyout of LNKD, since it has been bandied about as a potential buyout candidate by another, larger company.

The action alone is constructive, but merely took the stock back up to its prior June highs. Today’s pullback brought it into the 10-day moving average on lighter volume, but I would only be interested in taking shares on the long side on a retest of the 20-day line and the bottom of the current two-week range. If the general market starts to get into more serious trouble, WDAY should probably be watched for a possible breakout failure. This would likely be confirmed by a breach of the 20-day line on heavy selling volume.

 

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ServiceNow (NOW) made the top of the voodoo screen list I put out in my blog post of yesterday afternoon. At that time the stock was pulling into its 20-day moving average on a nice voodoo volume signature. That led to a nice pop today on the early general market rally, and the stock was able to hold up in positive territory by the close. However, the move came on light volume and ran into resistance at the 10-day moving average.

If I’m going to stick my neck out on the long side of anything in this current environment, then I am only going to do so on these types of voodoo pullbacks. I will not chase a name like NOW on any strength, especially when it comes on light volume.

I would most likely end up letting it run up a bit and then selling into the move with the idea of taking a quick profit, especially in the face of today’s market reversal. In the meantime, NOW needs to continue holding both the 20-day and 200-day moving averages, as a breach of these key areas of support could bring it into play on the short side.

 

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Salesforce.com (CRM) started the day out Monday with a nice rally thanks to the LNKD buyout news. CRM has reportedly been in talks to be bought out by MSFT as well, but wanted a higher price than MSFT was willing to play. Thus it is not surprising that the stock would rally on news that MSFT was buying out another company. But in my view the fact that MSFT bought LNKD instead of CRM likely means that it won’t be buying out CRM any time soon.

That became apparent to investors who sold the stock at the 10-day moving average and sent it reversing back to the downside on Monday on heavy selling volume. It then dipped below the 20-day line yesterday, and staged a somewhat tepid rally back up into the 10-day line where it again reversed to close in the lower part of its daily trading range.

While I suppose someone could eventually buy CRM, that doesn’t seem to be in the cards in the near-term.  With the stock fluttering above its 20-day moving average, a breach of the line on heavy volume would bring it back into play as a POD/LSFB short-sale target.

 

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I wrote over the weekend that most of my cloud “wolfpack” names consist of stocks that have rallied in deep v-shaped patterns off of their February lows. If they begin to show signs of failure, as I noted, they could easily morph back into short-sale targets. WDAY, NOW, and CRM area doing their best to hold up here, but they should be watched closely IF the general market gets into further trouble. Below area my notes on other cloud wolfpack names discussed in recent reports. Some are already starting to show signs of possible failure:

Adobe Systems (ADBE) dipped below its 20-day moving average last Friday and today reversed at the line as volume came in at above average. This is starting to show signs of a POD-like failure, and might be viewed as a short here using the 20-day line at 97.72 as a guide for a tight upside stop.

Citrix Systems (CTXS) dropped below its 20-day moving average today as selling picked up. A test of its 50-day moving average at 82.86 looks possible. Thus the stock could be considered shortable here using the 20-day line at 85.13 as a guide for a tight upside stop.

Splunk (SPLK) is similar to NOW and CRM in that it bounced off of its 20-day moving average yesterday and pushed up into its 10-day moving average today. It stalled significantly at the line, closing today just about mid-range on above-average volume. This looks suspicious, and so we should keep a close eye on this for a possible breach of the 20-day moving average which could bring it into play as a short-sale target once again.

Zendesk (ZEN) is holding up quite well just above its 10-day moving average. It is, however, not something I would consider buying unless I saw a constructive and highly opportunistic pullback into its 20-day moving average at 25.87.

Below are my current trading journal notes regarding other long ideas discussed in recent reports:

Activision (ATVI) posted a pocket pivot yesterday along its 10-day and 20-day moving averages.  This was the second pocket pivot in the past five days, neither of which has led to additional upside. I would remain cautious here given that a 171.9 million share secondary shelf offering is still yet to be forthcoming.

Acuity Brands (AYI) has morphed into a short-sale target after breaching its 50-day moving average. I would view this as shortable here using the 50-day line at 252.05 as a guide for a tight upside stop.

Amazon.com (AMZN) continues to hold along its 20-day moving average after dropping below its 10-day moving average last Friday. This should be watched closely as a breach of the 20-day line could send it down on a test of its 50-day line at 673.99. Thus I might consider a breach of the 20-day line as a short-sale signal, using the line as a guide for a very tight upside stop.

Ambarella (AMBA) has been able to hold its 200-day moving average following last week’s powerful gap-up-and-go move above the line. It has bounced off of the line both yesterday and today, but volume has been light.  In my view this is not likely to go anywhere any time soon, and likely needs some time to consolidate along the 200-day line.

Broadcom Ltd. (AVGO) has broken below its 10-day moving average. As I wrote over the weekend, if the stock “busts the 10-day line it is entirely off the table as a long idea.” Selling volume came in higher and above average today, which brings this into play as a possible short with the idea of using the 10-day line at 161.12 as a guide for a tight upside stop.

Electronic Arts (EA) is holding along its 20-day moving average but today closed back below the line as selling volume picked up slightly. This may be headed lower from here if it can’t hold the 20-day line.  If it can’t then I would consider the stock a possible short with the idea that it will test the 50-day moving average at 69.80 or the prior buyable gap-up low at 70.24.

Fabrinet (FN) is holding along its 20-day moving average as volume dries up but appears to be in a precarious position. The pullback into the 20-day line of course brings it into a lower-risk long entry position, but a breach of the 20-day line would be cause for exiting the stock in rapid fashion.

Fortinet (FTNT) is finding upside resistance at its 10-day moving average, but continues to hold along and above the 20-day and 200-day moving averages. This looks a bit dicey, and a breach of the 200-day moving average would take it off the table as a long idea.

Maxlinear (MXL) has managed to hold along its 20-day moving average over the past two days, but didn’t display a lot of vigor in terms of buying volume on today’s bounce off of the line.  Watch for a test of the 50-day line down at 18.57.

Silicon Motion (SIMO) broke out to new highs today on below-average volume. I’m most definitely not going to chase a move like this. It is also possible that a low-volume breakout is the precursor to a move back to the downside. Thus I would only be interested in buying the stock on a low-volume retest of its 20-day moving average at 44.10.

Weibo (WB) had a nice two-day bounce off of its 20-day moving average as it reversed off the highs on increased selling volume. At best this needs more time to consolidate, such that I would only be interested in looking at buying shares on a low-volume retest of the 20-day line at 26.37.

Yirendai Ltd. (YRD) couldn’t hold its 10-day moving average on Monday as I surmised it probably wouldn’t in my notes on the stock from this past weekend’s report. The stock came all the way down to the top of its prior base and near the 50-day line yesterday, leading to a nice bounce today on below-average volume. As I wrote over the weekend, Cinderella may have already come and gone on this one, and at best it needs time to set up again.

It might become somewhat obvious from these notes that a number of our long ideas are showing some cracks. That may have implications for the general market, but I would still maintain a short list of potential long ideas if and as they pull into potential areas of support. However, because I operate first and foremost on the action of individual stocks, I have to say that I am getting the sense that the market stands a reasonable chance of moving lower from here. We shall see how this plays out over the coming days.

As I wrote over the weekend, “…we should also be aware of long ideas morphing into short-sale targets. For this reason, I think we need to be ready for anything while keeping an open mind as we see how things play out this coming week.” I think in several cases we are seeing long ideas potentially starting to morph into short-sale targets, as my notes above indicate.

As I blogged last Thursday morning, members needed to start thinking about taking at least partial profits in semi-euphoric long ideas that had logged some pretty decent gains at that point. Since then, things have become a bit less euphoric. My preference is always to sell into such strength so that I have a pocket full of cash and a completely open and clear mind with which to operate when the market starts to pull back. And, of course, keeping an open and clear mind also means being willing to jump on the short side of things if the individual stock set-ups start telling me to do so.

This is part of the natural process of letting the individual stock set-ups move you more to the long or short side depending on the real-time evidence. Right now, the market has me leaning towards the short side. Take it from there.

 

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 positions in BABA and FB, though positions are subject to change at any time and without notice.

Gil Morales & Company, LLC (“GMC”), 8033 Sunset Boulevard, Suite 830, Los Angeles, California, 90046. GMC is a Registered Investment Adviser. This information is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to GMC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Gil Morales & Company, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.