The Gilmo Report

June 29, 2016

June 29, 2016

The week started out with a continuation of Friday’s brutal sell-off. While the indexes appeared to give up less ground on Monday relative to Friday, a number of individual stocks in fact were slammed even worse on Monday. But as I discussed over the weekend, I expected further downside on Monday or shortly thereafter that would undercut the prior May lows. Once a move below those lows was in place, as I pointed out, this could lead to a natural undercut & rally advance in the market.

Anyone who has been a Gilmo member for any length of time knows that this sort of stuff is pretty much standard fare. The general market indexes will often rally back to the upside after undercutting obvious support at a key price level. In this case, it was the May lows that served as the initial key level of support. Now, there is always a possibility that the market can just break support and keep going lower as it did in August of 2015. Or it might briefly rally and then quickly reverse back to the downside as it did in early January of this year.

We can see how these worked on this longer-term chart view of the NASDAQ Composite Index below. Last August the index just plummeted through its prior lows and didn’t look back until late August as the market split wide open.

In January of this year, the index undercut its prior lows, but the next day attempted to rally back to the upside. This was cut short very quickly as the index turned tail and closed down on the day. This led to a brutal ten-day sell-off from there.

 

GR062916-$COMPQ 2015-2016 Daily

 

In June of 2016, however, the market has chosen to take a different course. Over the past two days since undercutting its prior May lows, the NASDAQ Composite Index has rallied sharply back to the upside. This is a classic undercut and rally maneuver. Volume also came in slightly higher today as the index pushes up to its 10-day moving average as it moves closer to its 200-day moving average. The 200-day moving average at 4817.71 would be the next major area of overhead resistance.

If the index were to rally one more day into the moving average this would conform to the old “three-day rule” discussed in “How to Make Money Selling Stocks Short” by William J. O’Neil and Gil Morales. However, textbook moves in this market are rarely textbook!

 

GR062916-$COMPQ

 

In any case, all we know for sure is that the market has staged a typical undercut and rally back to the upside after getting quite ugly last Friday and this past Monday. The S&P 500 Index has been able to regain its 200-day moving average but the 50-day moving average at 2076.49 looms just ahead.

While today’s rally was certainly impressive and exceeded yesterday’s sharp upside jack, volume came in lighter. A critical juncture will be reached if the index can continue higher to the 50-day moving average. If either index can plow through its 50-day moving average, then it may be game on for the long side again. But the undercut and rally has already made it game on for some unorthodox long plays as I will discuss a bit later in this report.

 

GR062916-$SPX

 

If the market opens up again tomorrow morning, then that would constitute the third day of a rally attempt off of the Monday low. At that point we can keep a sharp eye out for a possible reversal to the downside. At the same time, any pullback must also be evaluated carefully for signs of positive consolidation of the prior two-day rally.

Precious metals and the precious metals stocks seem to love this market whether it goes up or it goes down. The precious metals ETFs, the iShares Silver Trust (SLV), shown below, and the SPDR Gold Shares ETF (GLD), not shown, have both continued to rally as they hold their prior gains.

The SLV in particular is showing relative strength over the GLD as it gapped to a higher high today on strong buying interest. Both the SLV and the GLD are things to buy on weakness rather than chasing this type of strength. So far that has been the correct approach.

And today the SLV closed in the lower part of its gap-up trading range on above-average volume. Therefore, chasing that strength today would likely not have ended up well for the chaser. But the market seems to be convinced that the Fed is now on hold through the summer, and what has so far been a long, hot summer could transform into the summer of love.

 

GR062916-SLV

 

Silver Wheaton (SLW), which is more exposed to silver than Agnico Eagle Mines (AEM), outperformed its precious metals cohort by a factor of more than 2 to 1 today. By the close, SLW had rallied 4.25% in comparison to AEM’s 1.22%, which I would credit to the bigger move in silver.

As per our usual approach with the precious metals and their associated stocks, buying SLW or AEM on strength is not advisable. These were both last buyable at their 20-day moving averages last week. From here only pullbacks back into the 20-day lines would present the proper, opportunistic, and lower-risk entry points. However, technically speaking, today’s move did constitute a standard-issue base breakout on volume 37.4% above average. So for those of you who like to buy breakouts and use the standard 6-7% stop-loss rule, there it is!

 

GR062916-SLW

 

The market’s undercut & rally yesterday and today provided some short-term swing trades on the long side if one was alert to them.  Over the weekend I discussed the potential set-up I saw developing in Tesla Motors (TSLA), which had undercut its August 2015 low at 195.

As I discussed over the weekend, the stock had been drifting lower on declining selling volume. In addition, there was the potential for a news catalyst regarding TSLA’s proposed buyout of SolarCity (SCTY). News that shareholders were not keen on the idea and hence not likely to vote for the buyout helped set up a rally over the past three days.

Note, however, that the technical set-up was there, and the news merely serves to facilitate that. As I discussed in the swing-trading video I posted a couple of weeks ago, buying this type of undercut & rally move is fairly simple. You just wait for the stock to push up through the prior low, in this case at 195, and go long there using that low as a guide for a downside stop.

TSLA traded back up through the 195 price level yesterday and did not look back from there. By it has now had a very nice two-day move from there, getting as high as 211.78 today, just above the 20-day moving average at 211.31. However, that was my upside price target, and a place to bank profits on the trade.

TSLA then drifted back below the 20-day line by the bell to close at 210.19. Where it goes from here is not clear, but I might venture to guess that a move up to the 200-day line could occur if the general market rally is able to continue. At this point I would look for an orderly pullback to the 10-day line at 206.95 as a new entry possibility under the right conditions.

 

GR062916-TSLA

 

Hopefully all of you follow me on Twitter, where yesterday I discussed the undercut & rally move I saw developing in Splunk (SPLK). All of the cloud names were obliterated on Monday, but this should have come as no surprise since I discussed over the weekend the fact that they were all just starting to break down from the right sides of potential POD formations.

The interesting thing here is that I began the day shorting SPLK on the rally and bounce that occurred at the open. That actually worked, producing a pullback that dipped below the 52 price level. However, shortly thereafter the stock issued a buy signal on the 620 intraday chart. That was the final signal to cover any short position and bank profits, at least on a short-term basis.

But I also noticed that at the same time SPLK was starting to pull off an undercut & rally move from the 52 price level. That was in fact the intraday low of May 27th. In addition, the stock had busted through and undercut its 200-day moving average after a two-day decline of nearly 20%.

Thus I went long the stock yesterday and sold into today’s move, catching a nice little profit on the upside. In this manner we can see how I maintain total awareness with respect to where the downside terminus of such price breaks might be. At that point I can use my swing-trading techniques to go long the stock using an undercut and rally (also known as a Wyckoffian Spring) type of set-up.

And as the general market stages a natural undercut & rally move, the stock follows right along. This is how swing-trading is done when done correctly and while using all the tools we have at our disposal.

 

GR062916-SPLK

 

Notice also that the price moves on these two undercut and rally long set-ups were reasonably substantial off the lows. This would enable one to use the upside acceleration to their advantage in order to implement the equation Force = Mass x Acceleration which we apply to the stock market as Profit = Position Size x Upside Price Acceleration.

I blogged about this in detail on Monday, and we now see how the moves in TSLA and SPLK could have been played with smaller position sizes. This exploits the upside acceleration to our advantage, while lowering risk with a smaller position size. This is important when buying into these undercut & rally set-ups.

Another important concept here is that I’m implementing these set-ups while the general market is doing the same thing. These were successful because the general market also rallied sharply on an undercut and rally move after undercutting the prior May lows. Had the general market quickly reversed, these would have likely done so as well.

But this is how we play market turns based on an undercut and rally theme like we’ve seen so far this week. Where the market goes from here I’m not sure. For that reason, I also want to keep a close eye on many of these v-shaped rallies as they could bring short-sale target stocks back into lower-risk shortable range.

Case in point is Facebook (FB) which has now posted a wedging two-day rally back up towards its 20-day moving average. Here again we see a clear cover point for an FB short position taken up higher in the pattern. Notice how the stock broke down to a low of 108.23 on Monday, filling the prior gap-up “rising window.” Generally, the lows of a rising window can serve as support as a stock fills the gap. That was the case with FB, which then turned back to the upside on what is so far a two-day rally.

The observant reader will also note that FB just touched its 40-week moving average on the weekly chart, not shown, as well on Monday. Putting that together with the gap-fill on the daily chart, it’s not that hard to figure out that any FB short position could have and should have been covered at that point. Now with the stock back up near the 20-day line at 114.52, it is coming back into potential shorting range again. Notice also that it is moving into the prior bear flag from which it broke out of to the downside last Friday.

While it could continue rallying to the 50-day line at 116.16 if the general market is able to continue rallying, this is the first level of potential overhead resistance.

 

GR062916-FB

 

All of the cloud names burst open like a wild summer thunderstorm on Monday, plunging precipitously to logical levels of potential support. For example, here we see Salesforce.com (CRM) bouncing off of its 40-week moving average on the daily chart. This served as a logical point of support for the stock and therefore a logical cover point for any short position held in the stock at that time.

 

GR062916-CRM Weekly

 

We can see how relying solely on the daily chart one might have missed the support at the 40-week moving average. But within the context of being down over 10% in just two days the odds of a bounce from a point anywhere around the 200-day or 40-week moving averages were high. Usually, the best way to handle this is to watch the 620 intraday chart for any sign of an intraday turn to the upside. Barring that, if the stock gaps up the next day then one needs to keep in mind a clear trailing stop on the upside.

 

GR062916-CRM

 

Several other cloud names found support at logical areas of potential support and have also bounced over the past two days. Below are my current Trading Journal notes on these stocks:

Adobe Systems (ADBE) bounced off of its 200-day moving average on Monday, now in a two-day rally. 20-day moving average is at 95.72, 50-day moving average is at 96.42.

Citrix Systems (CTXS) bounced off of its 200-day moving average on Monday, now in a two-day rally. 20-day moving average is at 83.24, 50-day moving average is at 83.52

ServiceNow (NOW) undercut prior early May low at 65.83 on Monday and rallied from there. Now in a two-day rally. Overhead resistance is around 67.50 while the 20-day moving average is at 70.74 and the 50-day moving average is at 71.10

Workday (WDAY) undercut a mid-May low and held an early May low on Monday and is now in a two-day rally. Stock closed just below its 200-day moving average at 74.11 on light volume. 50-day moving average is about 3% higher at 75.85.

Our big-stock cloud name, Amazon.com (AMZN), also came apart on Monday but found support off of the intraday lows as it undercut its May low. It then managed to rally from there and close just above its 50-day moving average. That, of course, was a logical area of potential support for the stock as I discussed it would be in my Saturday blog post where I reviewed the candlestick charts of a number of busted names.

AMZN pretty much followed the script as it undercut the low and support at the 50-day line on the same day that the major market indexes were undercutting their May lows. As the market pulled an undercut and rally, AMZN also bounced off of its 50-day moving average. It has now rallied over the past two days with the general market. No surprise there for anyone who read my weekend blog post.

Note that today it gapped above its 10-day moving average where it stalled and churned a bit. I’m using a daily candlestick chart again here, and you see this as a tiny little cross just above the 10-day line. If AMZN were to gap down slightly tomorrow morning, that would set up a possible evening star formation and become shortable at that point. Also, given that the stock churned today on low volume makes me think it is vulnerable to at least a pullback here. How much is anyone’s guess however.

 

GR062916-AMZN

 

Below is the current Gilmo Short 50 Index list using the HGS Investor Software warehouse view that shows all the major moving averages for each. I would suggest reviewing the daily and weekly charts for potential short-sale points at the nearest moving averages or overhead price resistance/congestion.

You will note that a number of these are sitting right at potential resistance, such as BABA, BIDU, CRM, EXPE, FB, GILD, HA, MSFT, PAYC, PNRA, PYPL, TRIP, VRSN, and WDAY, for example. Others have slid just past their nearest moving averages on the upside, so these should be watched for potential reversals back below key moving averages. In general, the short side is in flux right now as we watch to see how this current rally plays out. In any case, I would suggest being ready for anything and with a game plan in hand if you are the short-selling type.

 

GR062916-Gilmo Short 50 Index List

 

While the market was getting pummeled on Monday, I was still maintaining an open mind and awareness of where things were on the long side of the market. Obviously, being short on Monday was the place to be, but over the past two days the market has rallied sharply. This could be a shortable rally or it could turn out to be a massive news-oriented shakeout of historic proportions.

Early in the morning on Monday (6:50 am Pacific Time, to be precise!), I blogged that my favorite names on the longs die in the event of a market turn were: Ambarella (AMBA), Mobileye (MBLY), Nvidia (NVDA), Twitter (TWTR), and Weibo (WB). While one perhaps needed some courage to step up to the plate here, for the most part these names have bounced hard with the general market. I had to admit, however, that from my perspective it was easier to buy the undercut & rally set-ups in SPLK and TSLA!

Most of these names made worthwhile long plays over the past two days, and I wanted to review my reasons for liking them if we saw a market turn after Monday’s undercut of the May lows by the indexes.

Ambarella (AMBA) has been the weakest of the bunch, and has spent the past three days bouncing along its 20-day moving average. Today the stock was somewhat soft because of a downgrade and speculation that the company is losing some of its GoPro (GPRO) business to Qualcomm (QCOM).

As I see it, GPRO is already a known no-growth situation, and AMBA’s future is likely more dependent on just that: the future. Usually the best indicator of future potential comes from the market mind which in turn is expressed through a stock’s price/volume action.

I’ve already discussed the fact that AMBA’s big bottom-fishing buyable gap-up move above the 200-day moving average two weeks ago was quite a Cinderella move. Given the magnitude of that move, and the fact that Cinderella wasn’t likely to return to the ball right away, it certainly needs some time to consolidate. Watch this closely as I would be looking for volume to dry up in the extreme here along the 20-day line if this has any chance of going higher from here.

 

GR062916-AMBA

 

Mobileye (MBLY) has been back on my long radar since it was able to post a roundabout sort of pocket pivot coming back up through its 200-day moving average last week. The opportunity to buy shares came on Monday as the stock pitched into its 20-day and 200-day moving averages. By the close MBLY managed to end the day just below the mid-point of its daily trading range. From there it has managed to rally with the market over the past two days in a v-shaped move back up towards last week’s highs.

Volume has come in at above average on the rally as well, which looks constructive. This may need to retest the 20-day line again given the v-shaped move off of support over the past two days. So it would be preferable to see it pull into the 10-day or 20-day lines with volume drying up.

 

GR062916-MBLY

 

Nvidia (NVDA) is a stock I first discussed way back in March when it posted a pocket pivot at around the 33 price level. The stock has since had a buyable gap-up move, which you may have noticed I never discussed in the report! Surprise. I deliberately refrained from discussing since I felt it was an obvious buyable gap-up move and let you all figure it out for yourselves.

The stock was also mentioned on the other website I author with my colleague Dr. Chris Kacher. Thus I avoided the overkill here and left it for members to figure out. Hopefully, some of you did, and I would like to hear from those of you who did.

Remember, the objective of this website is to educate members and teach them how to fish, not make them dependent on my handing them a fish. Once in a while, I don’t think it’s too much for me to ask members to flex their muscles and see something for themselves! Anyway, getting back to the subject at hand, what has made NVDA so special is that it is involved in the whole driverless car theme. This of course would make it something of a cousin stock to MBLY. A number of companies use their products, including TSLA.

Therefore, looking to potentially take advantage of any pullback in the stock has been on my mind for some time. On Monday I saw the deep undercut of the early June low, which looked like a good spot for a potential undercut and rally move. I was, of course, looking for this within the overall context of a similar undercut and rally move in the general market. This is what occurred, and the stock has since rallied back up to its 10-day moving average. From here it needs to hold the 20-day line on any pullbacks.

A small back-and-fill move on very light volume would be constructive and potentially set the stock up for a move back to its prior highs. This, of course, would only likely occur if the general market is able to sustain its two-day rally.

 

GR062916-NVDA

 

Twitter (TWTR) was testing its 20-day and 50-day moving averages on Monday where it came into a lower-risk buy position. Of course, this was not obvious, at least not on an emotional level, since the general market got pounded on that day. But this market requires that one maintain a balanced, open-minded approach that keeps all possibilities in play.

But basically we can see why I thought TWTR, like any other of these names I’m discussing here on the long side, was potentially buyable on Monday. It was coming right into an area of support at the 20-day and 50-day lines. In typical Ugly Duckling fashion, it wasn’t looking so hot early in the day. But by the end of the day the stock was able to hold the 20-day line on about average volume. This also represented a significant decline in volume relative to the heavy selling that was seen on Friday.

With the stock back at last week’s highs, it is a bit extended. However, we should keep a close eye on any pullbacks into the 10-day line where it could pause to consolidate this short two-day rally.

 

GR062916-TWTR

 

Weibo (WB) is the last name I mentioned in my Monday blog post regarding potential long ideas in the event of a market turn on an undercut and rally move. Like the others it was in a logical area of potential support after just barely undercutting a prior low within the flag base it has formed so far in June. That led to a bit of upside yesterday as the stock regained the 20-day moving average on strong, above-average volume. Today the stock held tight along the 10-day and 20-day moving averages as volume dried up to -49.5% below average.

That would qualify as voodoo type action, but you can see from the chart that it is not as tight as the prior voodoo buy point back in late May. This may need to consolidate a little more, so we can watch for that to form here if this is to have a shot at new highs once again.

 

GR062916-WB

 

I think one can see unorthodox, undercut and rally buy points in a broad number of stocks over the past three days. This is all in keeping with my theory that such action could be seen if the general market indexes undercut their May lows. Short positions could be covered on Monday at logical areas of potential support. At that point one can decide on whether they want to try and capitalize on undercut and rally moves in stocks like TSLA or SPLK, or buy logical pullbacks into areas of support in stocks like AMBA, MBLY, NVDA, TWTR, and/or MB.

Not that this is easy to do, but in this market anyone taking a swing-trading approach needs to practice what I call “shrewd opportunism.” That requires some skill, in my view, and so some may not be able to pull this type of stuff off.

Certainly, buying Wyckoffian Springs (what I call undercut & rally moves) is generally not in the DNA of those raised (do I dare say “brainwashed?”) to buy only standard-issue base breakouts. But as I pointed out in the recently-completed swing-trading video, swing-trading requires that one be willing to use a variety of set-ups at their disposal.

So far we have a very sharp two-day bounce in the general market after the indexes undercut their May lows. That was what we were looking for, barring a wholesale breakdown to lower lows like we saw in August of last year and January of this year.

As the S&P 500 and NASDAQ Composite Index approach their 50-day moving averages, short-sellers should be ready to spring into action if warranted. Otherwise, some sort of constructive pullback and/or consolidation of this blistering two-day rally could set up further upside, and perhaps bring into play some of these long ideas.

The bottom line is that the situation remains fluid. Obviously, one would not want to chase the long side now, so we need to see how the market pulls back once this rally runs out of short-term momentum. If it reverses we could be back in business on the short side, but if it is able to stabilize then the long side comes back into focus. We should make sure we have a plan either way.

 

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 AAPL, AMZN, 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.