The Gilmo Report

May 4, 2016

May 4, 2016

Over the weekend I wrote that, given the downside extension in the general market indexes, some sort of reaction bounce would be logical. While the market did manage to bounce on Monday, the strength was short-lived.

Overnight Monday, The Chinese Caixin Manufacturing PMI fell to 49.4 from 49.7 in March, its 14th straight monthly decline, while the European Commission lowered its estimates for EU economic growth. Two more oil companies filed for Chapter 11 bankruptcy as well, bringing the total of bankruptcies among oil and gas concerns to 59. This brings the oil bust ever closer to the 68 total bankruptcies among telecom companies during the telecom bust of the early 2000’s.

Add to all of this the ADP jobs report this morning where we saw 156,000 jobs reported vs. estimates of 196,000. This sent the indexes gapping down again this morning in what looked like an instant replay of yesterday’s open. The net result was more or less the same. Stocks dropped at the open and then churned around for the rest of the day without rallying significantly off their lows.

The NASDAQ Composite Index gapped below its 50-day moving average yesterday as volume increased. Today the index drifted lower after the initial gap down move, but not by much before closing slightly off of its lows. Volume came in slightly lower as the dip failed to bring in any real buying interest.




With the NASDAQ now trading below its 50-day line, the S&P 500 Index sits at a critical point just a hair above its 50-day moving average. After moving lower yesterday on higher volume the index moved slightly lower towards the 50-day moving average as volume declined.

Essentially, the pullback in both the S&P 500 and the NASDAQ Composite had the feel of a buyer’s boycott more than anything else. Whether we see buyers step up here with the S&P 500 reaching critical support around the 50-day line remains to be seen.




The U.S. Dollar bounced yesterday from a deeply oversold position, sending precious metals back to the downside. However, as we can see on the daily chart of the iShares Silver Trust (SLV), below, the pullback wasn’t anything that I would consider abnormal. After three weeks of sharp upside movement following silver’s base breakout in the first half of April it is finally meeting up with its 10-day moving average. Rather, to be more accurate, we might consider that the 10-day line has huffed and puffed its way higher to finally catch up to the SLV.

This very well may bring the SLV into a lower-risk buy position. However, my preference would be to see a pullback into the 20-day line down at 16.01 as the most opportunistic entry.




Gold, which broke out last week, has pulled back as the dollar has reflexed back to the upside over the past couple of days. However, like the white metal, the yellow metal doesn’t look to be doing anything out of the ordinary. The SPDR Gold Shares (GLD) has edged lower over the past three days as it moves back down to the top of its prior base. The 10-day line at 120.66 more or less coincides with its trendline breakout of five days ago on the chart. This would constitute the most opportunistic potential entry point on any continued pullback.




As the metals come in so do the stocks, and we can see that Silver Wheaton (SLW) was no more immune to this than any other precious metals name was. My approach to handling the stock, however, has been to buy on weakness and then sell into a sharp upside move. This pullback over the past three days came after the stock had a roughly 17% percent move off the 10-day moving average. If I’m buying it at or near the 10-day line, then I’m looking to sell that move and then try to buy back on a constructive pullback.

This pullback has occurred on three days of above-average volume, although it has been declining along the way. Thus this would bring it into a lower-risk entry area, although the 17.77 intraday low of the mid-April buyable gap-up would probably be the lowest potential entry point should the stock continue to pull back from here. SLW is expected to announce earnings on April 9th, so it’s not clear whether one would want to hold through the report. However, I tend to think that the movements in the prices of gold and silver going forward are more important than the earnings report itself.




In my view, the most telling development in the market currently is what is going on with the individual stocks, specifically the Ugly Duckling type situations. Names that were some of the best long plays off of their deep February lows are now showing concrete signs of cracking.

The most objective evidence in this regard is that the best shorts so far this week have been the Ugly Duckling names that I discussed over the weekend. As I discussed, while the action on the daily charts has looked reasonably constructive, their weekly charts possessed some clear flaws. These made them vulnerable to failure.

As I survey my Ugly Duckling watch list from late February/early March, there are a number of Ugly Duckling groups that have already come apart. These include the airlines and the housing stocks, to name a couple. A number of the technology-related Ugly Ducklings I’ve been discussing in recent reports have started to suffer from the spreading weakness in these types of names.

As more of these come apart, the market’s weak underbelly is exposed. And there are plenty of new examples to review. In general, confirmation of the weakness on the weekly charts in any of these “Ugly Ducklings Gone Bad” is of course found in an initial breach of the 20-day moving average. This was the case with Adobe Systems (ADBE), which I discussed at length in the last report.

As I pointed out in that weekend report, “If the general market weakens early this coming week, then this rally back up into the 20-day moving average might just be a short-sale point, so keep an eye out for that.” That turned out to be somewhat prescient.

On Monday ADBE pushed up into the 20-day line, bringing it into an optimal short-sale position. On Tuesday the stock gapped down as it pushed back to the downside, and continued slightly lower today. If one had shorted the rally on Monday, it was good for a quick scalp, but I would watch for any future rallies up into the 20-day line at 94.29 as a potential short-sale opportunity.




I also discussed Workday (WDAY) as being in a similar position as a prior Ugly Duckling long set-up off of the February lows that was beginning to run into some trouble. WDAY’s flaws were exposed on Tuesday as the stock busted its 200-day moving average on increased selling volume. Since the initial decline below the 20-day moving average was your first clue that the pattern was weakening, Monday’s rally right up into the 20-day moving average (and roughly the 10-day line as well) presented an optimal short-sale point.

However, one didn’t necessarily have to short the stock there as it became shortable on the breach of the 200-day line early Tuesday morning. In that case one could have used the high of the day or even the 200-day line as a guide for an upside stop. WDAY ended the day underneath its 50-day moving average for the first time since its post-earnings gap-up move of March 1st.

Today the stock moved lower, causing a technical violation of the 50-day moving average that makes the stock a sell. However, I would look at rallies up into the 50-day line at 73.42 as potential short-sale entry points. Earnings are expected on May 24th.


GR050416-WDAY (CRM) was a little different from ADBE and WDAY, which both rallied up into their 20-day moving averages on Monday. CRM instead rallied up to the highs of its recent price range in what looked like a constructive upside move.

Yesterday it gapped down and pushed below both its 10-day and 20-day moving averages. Today’s move to a lower low constituted a technical violation of the 20-day moving average. Remember that a technical violation of a moving average occurs when a stock moves below the low of the first day it closes underneath the moving average.

CRM did find support at the confluence of its 50-day and 200-day moving averages, which theoretically would bring it into a low-risk entry position. If we get a bounce in the general market, then it would be possible to try and trade this off of the moving average confluence. Otherwise, a weak rally back up into the 20-day line at 75.37 would present a potential short-sale entry point. CRM is expected to announce earnings on May 18th.




ServiceNow (NOW) is another one, and it helps to illustrate that these things can flip from long ideas to short ideas fairly quickly. Over the weekend I discussed NOW’s failing pattern in simple terms: “…if one had bought the stock above the 200-day line on the basis of the BGU of two Thursdays ago, NOW is a sell. This also brings into play the possibility of using a weak rally back up into the 200-day line at 72.86 as a short-selling opportunity.”

NOW feebly pushed back up towards the 200-day line on Monday as volume came in very light. The next day it gapped below the 10-day line and today continued further as it pushed through the 20-day line on increased selling volume. From here I would only look at a rally back up towards the 70 price level as a potential short-sale entry point. Enterprising and alert short-sellers would have had to hit the stock short on Monday.




Another Ugly Duckling situation that I’ve discussed repeatedly in recent reports since February as a long situation is Splunk (SPLK). We can also view the stock as being more or less a cousin to WDAY, CRM, and NOW as a cloud-related name. SPLK approached its 200-day moving average without actually touching it last Thursday. However, if one was paying attention to the weekly chart, the stock ran right into the 40-week moving average on the weekly and then turned to the downside.

The stock blew through its 20-day moving average today as volume picked up sharply but found support at the 50-day moving average. SPLK is expected to announce earnings tomorrow but it is currently registering as another Ugly Duckling teetering on the edge of failure.




On Monday I also identified another one of these Ugly Ducklings Gone Bad in Verisign (VRSN), which had pulled a big, ugly outside reversal to the downside last week. The rally back up into the 50-day line on Monday presented an optimal short-sale entry point and the stock has since reversed to lower lows. Unless one got short this one on the basis of my timely blog post on Monday, it is extended to the downside at this point. Only a rally back up towards the 50-day line at 88.30 would present the most optimal short-sale entry point.




We can also see that Tesla Motors (TSLA) morphed back into a short when it breached the 20-day moving average last Tuesday. The stock had a blistering run off of its February lows of over 120%, but like these other Ugly Ducklings the pattern was extremely deep and v-shaped.

This steep rise was not sustainable, as is often the case with this type of v-shaped rally, and the first sign of trouble was last Friday’s breach of the 20-day moving average on increased selling volume. This sent the stock lower through today’s trade as it blew through both its 50-day and 200-day moving averages.

TSLA came out with earnings today after the close, and as I write has rallied up to the 234-235 price area in after-hours trade. Keep an eye on your 620 charts as this could set up a shortable gap-up move, depending on how it opens up. In any case, it is a nice example of another Ugly Duckling Gone Bad.




Over the weekend I discussed Under Armour (UA) as a potential short when I noted that, “One could try and short the stock here using the 200-day line at 44.17 as a guide for a stop. Alternatively, one could look for a rally up to the 10-day line at 45.23 as a higher entry point.” UA tucked up into its 20-day and 20-day moving averages on Monday where it was shortable at that point. It then gapped lower yesterday but was able to hold at its 50-day moving average. Today UA gapped down through the 50-day moving average on heavy selling volume.

So there you have it. Another Ugly Duckling Gone Bad and a stock that turned out to be a very shortable gap-up when it announced earnings two weeks ago.




UA’s blow-up brings up the question as to whether other sport-retail names I’ve discussed in recent reports will also see a similar demise any time soon. Nike (NKE) is one that remains in a shortable position, and I’ve considered it to be shortable on any rallies into the 20-day moving average.

Today NKE rallied just above the 20-day line, but it reversed around mid-day to close slightly lower as buying interest could not keep the stock afloat. This remains a short either on rallies back up into the 20-day line or right here if one doesn’t have a problem using the 20-day line at 59.57, less than 1% away, as a guide for a very tight stop.




Like UA, Skechers (SKX) also gapped up after earnings a couple of weeks ago. However, it has been unable to clear resistance around the prior early March high in the 34 price area. On this basis I have viewed it as a short on rallies into the 34 price level. On Monday the stock rallied right up into the 34 price level on light volume, and then reversed back to the downside on increased selling volume yesterday. This sent the stock just below the 10-day moving average, where it remained today as volume declined slightly.

I would continue to view rallies up into or near the 34 price area as the most optimal short-sale entry points. However, one could also try shorting the stock here and then use either the 10-day line at 33.07, less than 1% away, or today’s intraday high at 33.21 as a wider stop.




The breakdown in Ugly Ducklings has been broadening significantly over the past couple of weeks. While I only show of them here on charts, we can take note of Ugly Ducklings Gone Bad in the housing stocks like D.R. Horton (DHI) and Lennar (LEN). DHI, not shown here on a chart, has pulled down to the confluence of its 50-day and 200-day moving averages, so I would watch for a rally and bounce up to its 20-day moving average at 30.59 as a potentially optimal short-sale entry point.

Meanwhile, LEN, shown below on a daily chart, can be watched for any rallies up into the 50-day at 46.30 as a potentially optimal short-sale point.




The airline names have also been fantastic examples of Ugly Ducklings Gone Bad, and we’ve caught these rather nicely on the short side over the past couple of weeks. All of the names I have discussed as shorts in the group, Alaska Airlines (ALK), Delta Air Lines (DAL), Hawaiian Holdings (HA), and Southwest Airlines (LUV), have moved significantly lower since I first discussed them as shorts.

LUV, which is the only one I show on a chart, is probably the least extended to the downside, although it has broken all the way down to its 200-day moving average. If, for any reason, we saw a bounce back up towards or near the 50-day moving average at 44.16, then I would consider this a very juicy short.

However, with the stock sitting right on its 200-day line, a breach of the line would bring it into play as a short at that point using the 200-day line as a guide for a very tight stop. The way HA, ALK, and DAL have completely blown apart and continued to slide lower perhaps implies that LUV is ultimately headed for lower lows.




Las Vegas Sands (LVS) was mentioned Monday in a blog post as a decent short-sale target given that it was rallying right up into its 200-day moving average. This was also bringing up near the highs of a shortable gap-down the stock had two weeks ago. The stock has moved lower since stalling at the 200-day line on Monday, but I would continue to be on the lookout for any rallies back up into the line at 46.93 as a potentially optimal short-sale entry point.




Below are my journal notes on other names I’ve discussed as short-sale targets in recent reports:

Alphabet (GOOGL) is now living below its 200-day moving average. Rallies up into the moving average, currently at 719.76 would offer your most optimal short-sale entry points.

Apple (AAPL) is trying to hold support along the prior January/February lows just above the 92 price level. As it does, so the 10-day and 20-day moving averages are moving lower to catch up to the stock. I would remain opportunistic and not chase this thing on the downside by looking for any kind of rally up into the 10-day line at 99.05 or the 20-day line at 101.57 as the juiciest of short-sale entry points.

Microsoft (MSFT) is now living below its 200-day moving average, and rallies up into the line at 50.68 would constitute the most optimal short-sale entry opportunities.

Netflix (NFLX) has run into resistance at its 10-day moving average over the past couple of days, but I would look for a rally back up into the 20-day moving average at 96.12 as a more optimal short-sale entry point should that occur.

Starbucks (SBUX) is well-extended below its 200-day moving average where it was shortable last Tuesday per my blog post of that day. The 10-day and 20-day moving averages have now moved below the 200-day line, so they would be your next reference points for shortable rallies. The 10-day is the closest at 57.34 while the 20-day looms just above at 58.23.

Frankly, the long side has me skeptical here, and I’m leaning towards viewing any rallies as more shortable than buyable. However, given that the market is extended to the downside, if there is any kind of playable rally on the long side of stocks I would focus on big-stock names. These names give you better liquidity in case you have to move fast, and my general feeling is that they will tend to attract institutional buying. We’ve seen with Facebook (FB) which has held tight over the past two days even as the general market indexes have moved lower.

FB is holding in a tight little flag following last week’s buyable gap-up move that was also a base breakout following earnings. The stock has held the 116.23 intraday low of last week’s BGU day, and that would be your selling guide if you looked to buy shares here. What you’re obviously looking for is a rally that would carry into the mid-120 price area, at least. Whether FB has potential for further upside from there is likely dependent on what the general market does from here.




LinkedIn (LNKD) might also present some long-side opportunity as a cousin-stock to FB. Like FB, LNKD stalled sharply on its buyable gap-up of last Friday following earnings, which were reported Thursday after the close. It has so far held above the 123.86 intraday low of Friday’s BGU day.

Since then, however, LNKD has steadily drifted down towards that low and its 10-day moving average, which is currently at 122.84. Volume has dried up to “voodoo” levels, coming in today at -45.6% below average. Therefore this could be considered to be in a lower-risk buy position using the 123.86 low or the 10-day line at 122.84 as your guide for a relatively tight (less than 2%) downside stop.




Below are my current Trading Journal notes regarding other long ideas I’ve discussed in recent reports:

Acuity Brands (AYI) is holding right at the 239.08 intraday low of the April 6th buyable gap-up. This is a very low-risk buy point but consider also that the stock has been living below its 20-day moving average for the past four trading days. Thus trying to go long here would only likely work within the context of a general market rally. Otherwise, this could start looking like a short at the 20-day line if it can’t get back above the line soon. (AMZN) is slightly extended from last Friday’s buyable gap-up, but could be considered buyable as close to the 654 intraday low of the BGU day. That would, of course, also serve as your guide for a tight downside stop.

Biogen Idec (BIIB) has busted its 50-day moving average as selling volume picked up today. It and other bio-techs have not panned out as potential Ugly Duckling long situations. It has been removed from my buy watch list.

Fabrinet (FN) had a buyable gap-up yesterday after earnings. If you’re long the stock from before then I would simply use the BGU intraday low at 34.79 as a selling guide. One could also theoretically buy it here on the basis of the BGU using the same selling guide.

Fitbit (FIT) is expected to announce earnings on Wednesday. It did manage to hold a pullback to the 10-day line twice this past week, but with earnings coming up there is nothing to do here until then, as I see it.

Fortinet (FTNT) missed earnings this afternoon and is gapping down sharply. It was not something to own through earnings roulette as I’ve discussed in recent reports, and for now has been removed from my buy watch list. Another Ugly Duckling Gone Bad!

GoDaddy (GDDY) was been good for a short-sale scalp when it rallied up into the 50-day moving average on Monday but I would have covered any short position today since earnings were announced after the close. GDDY failed to impress, and the stock is currently trading below the 30 price level with a bid showing at 26.50 and an offer at 29.70. I would watch this tomorrow for a possible shortable gap-down move.

Panera Bread (PNRA) held another pullback to the 50-day moving average today, but I would view it as a short if it can’t hold the 20-day line at 212.47.

Square (SQ) is sitting right at its 50-day ahead of earnings tomorrow. No need to play earnings roulette with this ahead of earnings.

My conclusion: Continue to maintain a bifurcated approach and just play it as lies. If you remain open and opportunistic to the set-ups that the market shows you without having to be a strict bull or bear, you probably stand a better chance of being in the right place at the right time. In the end, that is mostly what good trading and investing is all about.

With the S&P 500 Index sitting just a hair above its 50-day moving average it is in a logical position from which to help foster a general market bounce after a steady two-week slide to the downside. This would also be consistent with the fact that most of our short-sale target stocks are well extended to the downside.

Obviously, if the S&P 500 fails to hold the 50-day moving average, then all bets are off. But if the market can bounce, I would keep it simple by focusing on the big-stock leaders that have shown strength recently, like FB, AMZN, and LNKD. Otherwise you can try your luck with names that are on your buy watch list and which have pulled back over the past few days into possible areas of support.

Looking over my own buy watch list I don’t see much that is all that appetizing although there might be some lower-risk pullbacks that can be bought in names like Fortinet (FTNT), Vasco Data Security (VDSI), and Bunge (BG).  I discussed VDSI and BG in a blog post on Tuesday, while FTNT is a name we have been following in recent reports and which has found support along its 10-day moving average.

I leave it up to you to investigate the charts of VDSI and BG, but we can see that FTNT did find some support along its 10-day and 20-day moving averages.  While the buyable gap-up failed once the stock dropped below the 32.42 intraday low of the BGU day, the pullback into the 10-day and 20-day lines looks somewhat orderly.




Otherwise it’s slim pickings on the long side, and my tendency is to view any general market bounce or reaction rally as something to short into. This remains a trader’s market, and as I’ve said many times before, anyone who thinks they are going to ride a big, glorious upside trend in anything is probably hoping for too much at this stage of the cycle.

For now, a bifurcated approach has likely and naturally led us more to the short side over the past three days. And there has been some positive feedback for the short side as well during that time. A number of newer, profitable short-sale set-ups have worked since Monday, such as those in names like WDAY, VRSN, etc., and this is concrete evidence of the underlying state of the market.

Based on this evidence, I would view rallies as potentially shortable events, while looking to play more liquid, big-stock leaders as a way of taking advantage of any potential long-side opportunities that may arise. Friday’s jobs number  may figure heavily in the mix as well, so 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 a position in NKE, though positions are subject to change at any time and without notice.

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