The Gilmo Report

June 19, 2016

June 18, 2016

I wrote in my Wednesday mid-week report that the market looked like it was in store for more downside at that point, and that is precisely what we got on Thursday morning. Early in the day the NASDAQ Composite Index was busting through its 200-day moving average as things looked rather bleak. However, by the close the market pulled a classic “endo” as the index powered back above the line to finish in positive territory. Volume, however, came in lighter versus the prior day.

On Friday, the NASDAQ reversed back below the 200-day moving average on extremely heavy triple-witching options expiration volume. I suppose the weak action could be alibied away by saying the high-volume reversal was a function of options expiration. However, the action of a number of stocks I’ve been tracking on the long side was quite negative on Friday. As members know, it is the action of individual stocks that I rely on more relative to the index action when it comes to deciphering the general market’s message.

Based on what I’m seeing in this regard currently, I have to be extremely cautious at best, and at worst outright negative. But with the widely anticipated Brexit vote coming up this Thursday, there will likely be plenty of opportunity for more volatility.

 

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Unlike the NASDAQ Composite, the S&P 500 Index is still a long way away from its 200-day moving average. But over the past four days it has consistently found resistance at or around the 50-day moving average after initially busting the line on Tuesday.

Friday saw the index churn around just below the 50-day line on very heavy triple-witching options expiration volume. I think it is fairly intuitive to conclude that as long as the S&P 500 remains below its 50-day moving average while the NASDAQ remains below its 200-day moving average this market finds itself in a precarious position.

 

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Thursday’s intraday bounce seemed to find its cue in the action of the Russell 2000 Index, which is represented below by the daily chart of its proxy, the iShares Russell 2000 ETF (IWM). On Thursday the index ran right into its 50-day moving average, and was pretty much the only major market index in a position to find support on its chart.

The IWM traded big volume as it bounced off the line but still closed down on the day. Friday’s action saw the ETF find resistance around the 20-day moving average on above-average volume. If the other major indexes remain weak, then I would expect the Russell to eventually breach its own 50-day moving average.

 

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Precious metals have displayed the same type of volatility we saw in the indexes over the past two trading days. Both of the precious metals ETFs, the iShares Silver Trust (SLV) and the SPDR Gold Shares ETF (GLD) opened up strongly Thursday morning, but both reversed on heavy volume to close down on the day. The GLD was en route to a breakout to higher highs before getting hosed down with heavy selling volume on a big downside reversal. On Friday, however, both the GLD and the SLV stabilized on above-average volume.

Interestingly, the GLD ended the week with its highest weekly and daily close of the year. Overall, the message of the metals is decidedly mixed and volatile, if not outright schizophrenic. There are a number of big-name portfolio managers out there, most notably George Soros, who are long-term bullish on gold.

I suppose I could consider myself one of them as well, given that I’ve held a long-term position in gold that I initially entered in the year 2000. In the short-term however, the metals seem to be buffeted about the news of the day, and for this reason it is generally best to seek to buy them on weakness.

 

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This was my prescription 2-3 weeks ago for those who are longer-term bullish on gold as both the GLD and SLV had declined deep into the patterns. At that time the SLV, although sitting below its 50-day moving average, was right on top of its prior February-April price range.

This is likely the sort of pullback that one who has a bullish fundamental view of the metals should seek to take advantage of. It is somewhat technically based given that the SLV had pulled back to the top of this prior base. On the flip side, however, the SLV had in fact violated its 50-day moving average at that time as well.

In their current positions, both ETFs are probably best bought on pullbacks into their 10-day, 20-day, or 50-day moving averages, should these occur over the next few days. I tend to concur with the longer-term bullish view for the metals based on the fact that I believe central banks around the globe are trapped. But the path for precious metals will likely remain volatile.

 

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For this reason, I consider buying either the GLD or SLV into strength to be a risky proposition, preferring to sell the ETFs into such strength instead. Thursday’s action once again proved out the short-term soundness of that approach. While they may continue to rally on a fear bid ahead of Thursday’s Brexit vote, the potential for a general asset sell-off should the market move into a full-blown forced selling phase could easily drag them down. That is something of a wild card in the event of a general asset melt-down.

The same thing goes for the precious metals stocks; a theme I’ve already discussed at least a few times in recent reports. Both Silver Wheaton (SLW), not shown, and Agnico Eagle Mines (AEM) show the same sort of indecision that we see on the daily charts of the GLD and the SLV.

Frankly, if the market is going to tank from here, then I would prefer to be looking to short stocks rather than trying to go long precious metals or their associated stocks. As in 2008, metals and metals stocks could easily sell off with the market, but such a sell-off would likely produce optimal buying opportunities as was the case in October 2008.

 

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I would have to say that what bothers me most about this market is what I see developing in the action of individual stocks. As an example, we can revisit this idea I’ve discussed several times in recent reports with respect to the cloud wolf pack names potentially morphing back into short-sale targets. These names began to wobble a bit as of Wednesday, as I noted in my mid-week report of that day. On Friday a number of them began to come unglued.

I’ll start with one that is still holding up. Unlike several other names in the cloud wolf pack, Workday (WDAY) has been able to hold its 20-day moving average twice over the past six trading days. Notice, however, that it is having some trouble holding above its prior trendline breakout point. I tend to think that WDAY can be viewed in the same light as any other cloud name, or any other Ugly Duckling situation that has rallied up the right side of a v-shaped formation since the February lows.

And that is that a breach of the 20-day moving average would bring this back into play on the short side. That is something that should be watched for. My guess is that if the general market and the rest of the cloud stocks start to break down even more, it will do so as well.

 

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Splunk (SPLK) is also holding above its 20-day moving average, and on Wednesday picked up some supporting volume as it ran up to its 10-day moving average. However, as I noted in my mid-week report of that day, the stock stalled and closed just below the 10-day moving average. The 10-day line also acted as stiff resistance for the stock on both Thursday and Friday. So if this is going to break down through its 20-day moving average, then the 10-day line may actually present a short-sale entry point for those bold enough to do so.

While this is more of an anticipatory short-sale trade, it is a simple one to execute. One simply shorts the stock here and then uses the Wednesday intraday high at 58.90 as a guide for an upside stop. One should also look for the general market to remain weak as a go-ahead signal that might offer additional conviction and rationale for the trade.

 

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ServiceNow (NOW) looked to be testing the 20-day moving average yet again on Thursday as volume dried up to -56% below average. On Friday the stock opened up slightly, ran into its 10-day moving average, and promptly reversed to the downside. Volume came in at just about average on the day. However, Friday’s big outside reversal that carried back below the 20-day moving average and the 200-day moving average on increased selling volume brings this back into play as a short-sale target, in my view.

This can be tested on the short side, using the 20-day line at 72.82 as a guide for a relatively tight upside stop. Again, as with SPLK, continued general market weakness would add weight to the viability of the trade.

 

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Salesforce.com (CRM) looks even weaker than NOW after crashing back below its 20-day moving average on very heavy selling volume on Friday. Thursday’s reversal off the intraday lows that carried back up into the 20-day line merely brought the stock back into short-sale range. It continues to be shortable on any such rallies up into the 20-day line. The other option is to short it right here using the line at 81.38 as your guide for a tight upside stop.

In any case, I’ve discussed several times already that members who are keen on shorting stocks should be watching these names for short-sale entries along their 20-day moving averages. On Friday both NOW and CRM offered exactly these sort of short-sale entry points and remain more or less within shortable positions.

 

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Adobe Systems (ADBE) is another falling cloud name that reversed Friday at its 20-day moving average and broke below its 50-day moving average. Selling volume came in very heavy, but again we see a cloud name that gave initial short-sale signals once it broke below its 20-day moving average.

During this past week there were no less than three rallies back up into the 20-day moving average that offered optimal short-sale entry points. As I wrote in my Wednesday mid-week report, “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.”

This remains the case for ADBE, but the difference is that now the stock is below its 50-day moving average. Thus we would now look at rallies up to the line at 96.41 as the latest optimal short-sale opportunities. However, with earnings expected this coming Tuesday, I would wait to see what the stock does after the report is out.

 

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Citrix Systems (CTXS) has cleanly violated its 20-day moving average over the past three days but is still holding above its 50-day moving average. A bounce off the line might present a reasonable short-sale opportunity. As I wrote over the weekend, “…the stock could be considered shortable here using the 20-day line at 85.13 as a guide for a tight upside stop.” That approach might still work, except that the 20-day line is now at 84.94.

The flip side of this, as with WDAY or SPLK, for example, is that if the general market is able to stabilize and turn higher sometime this week, then pullbacks to support like the 20-day or 50-day lines have to considered as potential long entry points. In this manner, these names can remain a two-sided affair.

 

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But as I’ve discussed in prior reports (see the June 12th report as one example), the weekly charts of all of these cloud wolf pack names show deep v-shaped rallies off of their February lows. Thus from the perspective of the weekly charts they are in vulnerable positions, and there is therefore a context for potential failures.

As we’ve already seen in this report, some are starting to show these precise cracks in the patterns. We might also consider that Amazon.com (AMZN), which has become more of a big-stock cloud play these days based on the success of Amazon Web Services, is also showing some cracks in its chart.

AMZN has been bouncing along its 20-day moving average for the past several days, and on Friday it finally busted the line on heavy selling volume. In most cases where we are seeing this type of heavy-volume break of the 20-day line, such as with CRM, ADBE, NOW, and CTXS, for example, one could argue that this was a function of Friday’s triple-witching options expiration.

That may be the case, but I tend to take price/volume action at face value based on my experience with such occurrences. Therefore, we want to see how these act this coming week as this will confirm these moves as either bona fide breakdowns or just possible shakeouts below the 20-day lines.

While AMZN did break below its 20-day moving average and close there on Friday, it was able to hold the $700 Century Mark price level. This is the key secondary area of support I would expect to see come into play on a deeper pullback. The next area would of course be the 50-day line down at 678.59. If the general market sells off further this week, then AMZN could turn out to be a short here using the 20-day line at 711.86 as a guide for a tight upside stop.

 

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Adding weight to the negative action seen in leading stocks this past week is Facebook (FB). The stock pushed to a lower closing low on Friday as selling volume picked up but remained more or less average for the day. FB was already a short last week once it busted the 20-day moving average. Anyone working this on the short side should have started their campaign at that time. From here I view any rallies up into the 50-day moving average at 115.75 as the most optimal short entry opportunities.

 

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I discussed Apple (AAPL) as a short in my Wednesday mid-week report, and the stock provided an optimal short-sale entry on Thursday as it pushed up into the 20-day moving average. On Friday the stock gapped down as it peeled away from the 20-day line on heavy selling volume.

News of Chinese regulators halting sales of the iPhone 6 due to a patent dispute caused the sell-off, but the action is consistent with what the stock was already showing on its chart. By the time the news hit, the stock was already dipping below and finding resistance at its 20-day moving average.

So while the news led to the downside gap, it was the technical action that would have brought one into the stock on the short side at the right place and right time, ahead of the news. Sometimes, that’s how the short side works out. I still view this as shortable on any rallies back up into the 20-day line.

 

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Alphabet (GOOGL) was another big-stock NASDAQ name finding resistance along its 20-day moving average as I discussed in my Wednesday mid-week report. As I wrote at the time, “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.”

The next day GOOGL gapped down slightly and breached its 200-day moving average, which put it in a new short-sale position using the 200-day line as guide for a tight upside stop. On Friday GOOGL broke even harder to the downside and is now undercutting its prior late-April/early May lows. This might put it in position for an undercut & rally type of move. Should this occur, we would want to see whether this might provide a new short-sale entry point as it pushes back up towards the 200-day line.

 

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Netflix (NFLX) is yet another big-stock NASDAQ name finding resistance at its 20-day moving average after breaching the line last week on a higher-volume gap-down move. The 20-day line is running right along with the 50-day moving average, so both lines are serving as resistance. Add to this the descending 10-day line which is also coming into the fray in what is now a three moving-average confluence of resistance.

NFLX has had a couple of rallies back up into the 20-day and 50-day lines this past week, both of which served as near-term short-sale entry points. My general approach here has been to view the rallies into the 20-day as shortable, with the idea of campaigning this on the short each day without holding much, if any, of a position overnight.

I tend to think that NFLX is one of the more likely buy-out candidates among big-stock names, although what one thinks is likely in this regard often is not. After all, I did not see the MSFT buy-out of LNKD coming at all, and there are plenty of analysts and pundits who are somewhat puzzled by the move.

 

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You might notice that AAPL, GOOGL, and NFLX all look very similar on their daily charts. Each rallied with the market in the latter half of May and then began to roll over just before the NASDAQ Composite did. The NASDAQ actually pushed to a higher closing high in early May, but the action of these big-stock names was perhaps a clue that things were not as copacetic as they might have seemed at the time.

I blogged about Checkpoint Software (CHKP) as a short-sale candidate on Wednesday at 7:12 am PDT, and the stock ended the day just below its 20-day moving average. On Thursday the stock blew apart on a gap-down move that eventually slid below the 200-day moving average on heavy selling volume.

With the stock now below the 200-day line it is in a new short-sale position based on the idea of Thursday’s move representing a shortable gap-down (SGD). Thus it can be viewed as a short on any bump back up into the 200-day line at 82.17, using Thursday’s intraday high at 82.93 as a maximum upside stop.

 

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Alibaba (BABA) was also mentioned in the same blog post as CHKP as it hung along its 50-day moving average. The stock then broke to the downside on Thursday, but reversed to come right back up to the 50-day moving average. I was short the stock going into Thursday and used my 620 intraday chart to cover the position earlier in the day, before it turned sharply back to the upside with the general market. This then allows for a re-entry on the short side right back at the 50-day line, producing something of a lather, rinse, repeat trade on the short side of BABA.

On Friday BABA hovered around the 50-day line briefly before plummeting back to the downside on increased selling volume. Rallies back up into the 20-day moving average at 77.78 or the 50-day line at 78.36 would provide potentially optimal short-sale entries from here.

 

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Tesla Motors (TSLA) is floundering just below the confluence of its 10-day, 20-day, and 200-day moving averages, which have served as solid overhead resistance over the past week. This remains a stock to short on any rallies into the moving average confluence, currently between the 220.59 and 222.06 price levels. TSLA did actually find resistance at the lowest of the three moving averages, the 20-day line, on Friday as selling volume picked up slightly. It certainly looks as if it wants to test the mid-May lows down near the 200 price level.

 

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Priceline Group (PCLN) continues to find resistance at its 10-day moving average as it tested the line on the upside twice on Thursday and Friday. On Thursday the stock gapped up to around 1335 before settling back down and closing just below the 10-day line. On Friday, another small upside bump up towards the line met with firmer resistance as the stock reversed to close down on the day. Near-term the 10-day line appears to offer the best potential entry area for shorting the stock into any rallies.

Meanwhile, a breach of the 50-day moving average at 1301.67 would confirm the stock as a short-sale target. This would also bring it into play as an actionable short at that point with the idea of using the 50-day line as a guide for a tight upside stop.

 

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In my Trading Journal Notes I wrote that 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.” That remains the case for the stock as it moved to a lower low on Friday with volume picking up somewhat on the day. Optimally, however, I would prefer to see a rally back up towards the confluence of the 10-day, 20-day, and 50-day moving averages 251.41 and 251.92 as potentially shortable moves.

Just another market leader showing signs of a breakdown after what may turn out to be a late-stage failed-base short-sale set-up. Critical support does lie near the 240 level and the 239.08 intraday low of the April 6th buyable gap-up move.

 

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Broadcom Ltd. (AVGO) is now a failed buyable gap-up base breakout from a late-stage base as it pushed below its 20-day moving average on heavy selling volume. This is another example of the futility of buying base breakouts, with few exceptions to be found, in this market. I thought this was a short last weekend when I thought the stock could be treated “as a possible short with the idea of using the 10-day line at 161.12 as a guide for a tight upsides top.” That approach would have worked as the stock has pushed lower from there.

Note, however, that it has now filled the prior June 3rd gap-up “rising window,” which could trigger a rally from here. If this occurs, I would look for the 10-day moving average to offer a potentially optimal short-sale point into any such rally. Chalk up another failing leader for this market.

 

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On Thursday I could see the market turn, and it began to show up on my 5-minute 620 intraday charts. In this market I am quite used to having to deal with sharp, sudden rallies back to the upside even as the market starts to look terribly weak. That was the case on Thursday, but it highlights a major difference in the way I handle the short side of this market in 2016 vs. how I used to handle it previously.

In the past, if I were short a name like say BABA or CHKP as they were getting slammed on Thursday, my approach would have been to pile on in the face of such weakness. I would start to increase my short positions in anticipation of an even more serious breakdown.

To some extent this is not unlike what I will tend to do on the long side. I don’t start averaging up on strength. Instead, I start looking to sell into the strength. The short side isn’t all that much different. When things start looking very weak, I start looking to cover, at least on an intraday basis.

That’s what I ended up doing on Thursday. Generally, at the same time that I am covering shorts and looking to bag those profits on an intraday basis, I will as a matter of course look to go long a couple of things that might stand a good chance of bouncing or rallying with the general market.

On Thursday one of those names was cyber-security company FireEye (FEYE), which had flashed a stalling, big-volume picket pivot at its 20-day moving average on Wednesday. It had pulled in with the market early in the day but found support around the 20-day and 50-day moving averages to post another, more convincing pocket pivot.

That made for a very nice day-trade, and carried into the next day as the stock moved slightly higher before stalling out near the prior week’s highs. This is just one example of an Ugly Duckling trade I might make on the long side while trying to capitalize on a market bounce.

Where this goes from here, however, I could not say. FEYE has benefited lately from news that it has turned down several buyout offers. The company is allegedly holding out for $30 a share, but my guess is that if it were to be bought out it would have to occur at a price lower than that. After all, it isn’t selling at $16-17 a share for no reason. That is what the market thinks it is worth right here.

 

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Another example of an opportunistic trade would be Twitter (TWTR), which is of course getting some investors excited over the possibility that it too might get bought out like its fellow social-networker, LNKD. Given that the two company’s businesses are entirely unrelated I question the certainty of such a proposition for TWTR.

It does, however, make for some decent short-term trading opportunities on the long side. On Thursday, TWTR was pulling right into its 50-day line after flashing a couple of big-volume pocket pivot signatures over the prior two days. The second of these came on a gap-up off of the 50-day line but stalled severely. On the basis of this action, the pullback into the 50-day line looked reasonable as a long entry point, particularly since the 50-day line could be used as a tight downside stop if the trade didn’t work.

While I don’t see either TWTR or FEYE, or even Three D Systems (DDD), not shown, another name I traded over the past couple of days, as having much longer-term potential in a weak general market environment. They do, however, illustrate the sort of off-beat thinking I employ when looking for Ugly Duckling plays on the long side that may also benefit from a general market reaction bounce/rally. In this regard, take them for what they are worth.

 

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The bottom line is that currently I don’t see much that whets my appetite for the long side, whereas I am seeing much that does so on the short side. In some cases, short-sale targets I’m looking at would best be shorted into rallies, and there may be enough news flow this week to help bring that about. In the meantime, I would remain an advocate of extreme opportunism on the long side if we get some deep pullbacks in names I’ve liked on the long side in recent reports.

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

Activision (ATVI) reversed back below its 20-day moving average on Friday on heavy selling volume. With a 171.9 million share secondary shelf filing still looming in the background, my fear is that the stock will end up failing at the 20-day line and heading lower, perhaps down to the 50-day moving average at 36.77.

Ambarella (AMBA) is extended from the 200-day moving average and back up at the highs of last week in the 52-53 price area. Pullbacks to the 10-day moving average at 51.10, or even deeper to the 200-day line at 49.23 would be preferable as possible opportunistic entry points.

Electronic Arts (EA) is continuing to hold along its 20-day moving average as its daily trading ranges widen a bit. Selling volume was heavy on Friday, and I would prefer to see volume drying up at the 20-day line as more constructive action. Otherwise, this is starting to look like it wants to breach the 20-day line and make a move down towards the 50-day moving average at 70.19.

Fabrinet (FN) posted a pocket pivot off of its 20-day moving average on Friday. I would not be interested in chasing the stock here, however.

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) is starting to fail at the 20-day moving average. Doesn’t look too promising here, but might be viable closer to the 50-day moving average at 18.61.

Silicon Motion (SIMO) is starting to run into some selling here off the peak after breaking out to new highs on Wednesday. Not interested in this currently, but might watch for a steeper pullback into the top of its prior base and the 50-day moving average at 41.79.

Weibo (WB) is again pulling into its 20-day moving average, but selling volume picked up on Thursday and came in at above average. Friday saw volume settle down, but it was more a lack of buying demand as the stock tried to rally early in the day but found resistance at the 10-day moving average and reversed to the downside. I wouldn’t be surprised if this eventually breaches the 20-day line, and if it did so I might be interested in a pullback that carries further down towards the prior breakout point and the 50-day moving average down at 24.29.

Yirendai Ltd. (YRD) is trying to hold its 20-day moving average after bouncing off of its 10-week moving average on the weekly chart on Tuesday. This strikes me as something of a long shot on the long side as it probably needs more time to set up again, assuming that it will.

Zendesk (ZEN) is a thin cloud-related name that had a very nice move from the very subtle pocket pivot of May 31st, which I blogged about on that very day. That move was best sold into, allowing for the stock to settle in and perhaps set up again. I do not trust it here along the 10-day line at 27.01, however, and would prefer more of an opportunistic pullback to the 20-day line at 26.10 as a lower-risk entry.

As I wrote in my Wednesday mid-week report, “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.”

That was somewhat prophetic as many of these cracks got a little wider on Thursday and Friday. I’m still leaning towards the short side of this market, but since it is and has been a market for short-term traders we must remain aware of where long opportunities on pullbacks might lie if the market is able to find its feet at some point this week or next.

One scenario that could trigger a sharp upside market reaction might be the Brexit vote on Thursday. An outcome that is seen as benign could certainly send stocks careening back to the upside, and after several days of downside off of the early June highs that would have some technical, oversold logic behind it.

Stay alert, stay flexible, and above all, keep an open mind.

 

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.

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.