The Gilmo Report

November 19, 2014

November 19, 2014

The NASDAQ Composite Index pushed to higher highs yesterday before succumbing to a sharp pullback today on slightly lower volume, as we can see on the daily chart, below. Yesterday’s 14-year high came on increased but below-average volume as the indexes have continued to churn their way higher. On its face, the index action doesn’t look abnormal. But under the hood there have been some developments over the past few days that have me leaning towards the short side of the market on a stock-by-stock basis.

 

GR111914-$COMPQ

 

Alibaba (BABA) failed to hold its 10-day moving average yesterday, which put me in a position of simply selling off the stock I tried to buy back near the line on Friday. At that point, as I tweeted in real-time, my theory was that the breach of the 10-day line would lead to a test of the 20-day moving average. On that basis I entered the short side of BABA in a tactical move, using the 20-day moving average as my short-term downside price target. As we can see on the daily chart, below, BABA did in fact run right into its 20-day moving average before bouncing off the line today on heavy selling volume. I should point out that I am still short the stock.

The intraday bounce off of the 20-day line today ran out of gas just above the 110 level, bringing me back into the stock on the short side towards the end of the day on the basis of my 620 chart. Thus I tend to think that a retest of the 20-day line will occur. If the general market starts to get in trouble I would not be surprised to see the stock push all the way back towards the standard base breakout point at 99.80. BABA shows why you take 20-30% profits when you have them, instead of employing the 8-Week Rule.

In my view, and particularly in this market, it is far more prudent to sell into sharp upside moves and take at least partial profits, looking to re-enter on either a constructive pullback to a key short-term moving average such as the 10-day or 20-day lines or a continuation pocket pivot. It is my preference to operate in a more fluid manner because it still does not preclude me from playing a big winner by coming back into the stock at a new buy point.

Remember, pocket pivots give us a powerful weapon with which to discern buy points in leading stocks that the crowd does not see. BABA is also a test case for some of my latest research on the short side where I’ve been looking for ways of picking off a possible peak in a leading stock.

So far it is working well with BABA. That said, if it can hold the 20-day moving average on a retest, and the general market is not getting into trouble, it could be a strong long play again. For now, I tend to think the crowd is way too much in love with the stock and it needs time to create some doubters.

 

GR111914-BABA

 

CyberArk Software (CYBR) continues to hold above its buyable gap-up move of last Thursday as it drifts lower with volume drying up sharply. This gives the 10-day moving average some time to play catch up, as we can see on the daily chart, below. Assuming that the general market doesn’t get into trouble here, we are now waiting for the 10-day line to meet up with the stock. At that point we would begin looking for a possible continuation pocket pivot to set up.

 

GR111914-CYBR

 

GoPro (GPRO) finally revealed an 11.5 million share secondary on Monday after the close, which initially sent the stock to the downside and just under the 50-day moving average in the after-hours on Monday. It then recovered and rallied back towards the early October high in the 85-86 price level, as we can see on the daily chart, below. Frankly, that was the spot to take profits in the face of a secondary stock offering being announced.

It is somewhat odd for a stock to rally after the particulars of a secondary offering are released. The rally in GPRO over the prior days has worked out well for the underwriters, who could then short the stock into that move and seek to support the offering once the new shares are released, which is what they typically do. That’s why I was tweeting yesterday that the 85-86 area represented near-term resistance.

With the stock breaking back down to the 50-day moving average today, we can see that in fact yesterday’s stalling and churning move into the prior November highs was sold into. If one is long the stock, one can certainly sit with their position through the offering’s pricing while using the 50-day moving average as a nearby guide for a downside stop.

 

GR111914-GPRO

 

The entire social-networking space is looking weak these days, and the weakest among these is Twitter (TWTR), shown below on a daily chart. After the oh-so-shortable rally into the 20-day moving average last week, the stock has pulled back down to its November lows as it appears to be setting up for a bear flag breakout. I’ve been working this one on the short side since the big gap-down following earnings in late October.

The most recent optimal short-sale point came on the big-volume reversal at the 20-day moving average of last Thursday. This was tweeted to members in real-time as I observed the stock gap right into the 20-day line on that day. I’m looking for TWTR to break support here, and I would be using any little blip up towards the 20-day line as a shorting opportunity, using the line as my quick upside stop. My near-term price target for TWTR is the low of its prior base at 35.95.

 

GR111914-TWTR

 

Facebook (FB), which has remained a fluid situation, finally resolved to the downside today on a bear flag breakout with volume picking up, as we can see on the daily chart, below. Interestingly, today’s bear flag breakout did not come on heavy, above-average selling volume, but it did occur on a pocket pivot volume signature. I have not spent much time studying “reverse” pocket pivots, e.g., movements like what FB did today with a pocket pivot to the downside, since I generally tend to short into rallies.

When a stock is in a bear flag such as FB is, I will look to short rallies into a moving average. More recently FB has been shortable at its 20-day moving average as it was on Monday. I have started to examine the concept of a reverse pocket pivot as something that could help on the short side and so we will get to see how this works out with FB in the coming days. I tend to think that if the general market pulls back here, FB will get dragged down to its 200-day moving average as its late-stage failed-base (LSFB) short-sale set-up plays out here.

So far, despite a continued rally to new highs in the major market indexes in November, FB has flat-lined here while only being able to muster one rally up as high as the 50-day moving average early in the month. I see the stock as shortable here using the 20-day line at 75.17 as a guide for an upside stop.

 

GR111914-FB

 

Tesla Motors (TSLA) is a good example of how a short-sale target stock can develop during a market rally. One thing you will always notice when you study examples of short-sale “model stocks,” as it were, is that the overall topping patterns are characterized by numerous reaction rallies. Generally such rallies will occur during a market bounce or rally phase, even as the stock itself remains in a weak technical position.

For the most part we can consider TSLA to be a late-stage breakout failure that is making an attempt to recover and “re-breakout,” something that is actually not uncommon for such set-ups. After breaking to the 200-day moving average in early November on reports of weak sales by an online magazine, TSLA then pulled an “endo” and bounce off of the line when TSLA CEO Elon Musk tweeted that such reports were misguided.

This created a “deep doo-doo,” or what I prefer to call a “Triple D” bottom-fishing pocket pivot coming up off of the 200-day moving average and up through the 10-day moving average, but below the 50-day line. The ensuing “momentum” push through the 50-day line finally ran out of gas yesterday on a low-volume stalling move near the peak of the right shoulder in the “fractal head and shoulders” that formed as a result of the cup-with-handle breakout failure.

As I see it, this latest rally was forming the peak of a possible second right shoulder in the fractal H&S and so yesterday I tested this theory by shorting the stock in the 259 price area based on the low-volume churning action. This resulted in a nice high-volume gap-down to the 50-day moving average today, but my guess is that TSLA is going to break down back through the line in the coming days. Short it here using today’s gap-down intraday high at 251.88 as a reference point for an upside stop.

 

GR111914-TSLA

 

Netflix (NFLX) broke through the lows of its recent flag formation today on heavy selling volume, as we can see on the daily chart, below. NFLX’s little post-disaster rebound flag formation ran right into the 20-day moving average where it had already found resistance on intraday rally attempts twice so far in November. Today was the third attempt at clearing the 20-day line, but the stock found resistance at the line for a third time and staged a big outside reversal to the downside.

If you’re short this around the 20-day line per my recent discussion of the stock as a short-sale target, your downside price target is the mid-October post-earnings gap-down low at 331.

 

GR111914-NFLX

 

U.S. Silica Holdings (SLCA) is another example of a short-sale target stock moving sideways before running into its 20-day moving average and finding resistance at that point, as we can see on the daily chart, below. If you study the chart carefully you will notice that it appears to be building a reverse cup-with-handle here where the top of the inverted cup is also the peak of the right shoulder in its overall head and shoulders top formation.

In my view this little bear flag it has been forming so far in November that also forms the handle in this inverted/reverse C&H formation will eventually resolve to the downside. And so I consider the stock shortable here using the 20-day line at 44.46 as your guide for a quick upside stop.

 

GR111914-SLCA

 

Amazon.com (AMZN) is so far running into solid resistance at the 200-day moving average. As I wrote over the weekend, I would only seek to short this after some signs of stalling at the line became apparent. So far AMZN has not been able to hold above the 200-day line as it wedges up into the line here on light volume, as we can see on the daily chart below.

Therefore we can conclude that the 200-day moving average represents near-term resistance and thus any rally up to the line becomes a potential short-sale point, especially when the upside volume is weak as it has been over the past two days. In addition, with AMZN within just a couple of percent of last Friday’s intraday high, that can be used as your guide for an upside stop if you are inclined to short the stock here.

It appears to be a reasonable short-sale trade here, given the tight risk-management that can be employed based on the proximity of the 200-day line. And if the general market starts to correct, this has a good probability of moving lower from here.

 

GR111914-AMZN

 

After smashing through its 200-day moving average last Friday, Biogen Idec (BIIB) has spent the past three days moving tight sideways in a very short bear flag, as we can see on the daily chart, below. I know some might be excited by the big price break in the stock last week and perhaps want to get short the stock right here, right now. In my view one should probably only be trying to short this bear flag if they are already short the stock from up higher, above the 200-day line.

There is always risk that the stock bumps up through the highs of this three-day bear flag given the lack of reference points in terms of potential upside resistance. For now we continue to use the 290.85 October 22nd low as our downside price target.

 

GR111914-BIIB

 

Gilead Sciences (GILD) is acting similarly to BIIB in that it is building a short bear flag here just under the 65-day exponential moving average after blowing through its 50-day moving average last week on heavy volume, as we can see on the daily chart, below. Notice how GILD is in a slightly different position relative to BIIB as it forms this bear flag given that the highs of this flag are finding resistance at the 65-day exponential moving average, the black moving average on my daily charts.

This means one could attempt to short GILD here using the 65-day line as a quick upside guide for a stop, looking for a downside breakout from here that would send the stock further towards our current downside price target at the 91.73 mid-October low and the 200-day moving average, currently at 89.48. The other option is to pray for a rally back up to the 50-day moving average, currently at 105.74, as an opportunity to short the stock higher up in the pattern. Take your pick, but remember where your stops are.

 

GR111914-GILD

 

Some might think about going after Celgene (CELG) on the short side based on the action of these other two big-stock bio-techs, GILD and BIIB. I have to admit I admire the creativity behind such thinking, given that if the group is starting to break down, and by “group” I mean these big-stock, well-established bio-tech names, then there is a good chance that others will follow suit.

Normally I would stay focused on the weaker stocks in the group that have already failed in their patterns. But based on my most current short-selling research, CELG does fit the profile for a short off the peak here. First, we see a very large volume breakdown last Friday that held the 20-day moving average. This led to a wedging rally back up to the 10-day line so far this week, and my proposal is to short the stock using the 10-day lines as your guide for an upside stop and based on the premise that the weak action in BIIB and GILD could drag this otherwise stronger name in the group.

Radical, I know. But that is only because you are not familiar with the entire body of my work on the short side in recent years. It is extensive, to say the least, and includes a lot of new “wrinkles.” In any case, this short-sale set-up is just another trade where the risk proposition is well under control. It will be interesting to see how CELG plays out from here.

 

GR111914-CELG

 

Some notes from my trading diary regarding stocks discussed in recent reports are below. If a stock is not mentioned, then my view is essentially unchanged from the last time it was discussed in the report. I should also add that in general I consider the long side of the market to be more risky at this point.

Bitauto Holdings (BITA) – holding above last week’s breakout point. The pullback below 90 and within range of the prior breakout offered a reasonable entry point.

ServiceNow (NOW) – has pulled all the way back into the top of its prior base and then some. This puts it in a low-risk buy position using the 50-dma at 62.05 as your ultimate downside stop.

Taser International (TASR) – has continued to hold above the 10-day moving average on pullbacks, thus I would continue to use those pullbacks as buying opportunities while avoiding buying on strength.

Trinet (TNET) – holding pullbacks to the 10-day moving average, otherwise this is extended pending another buy signal, most likely in the form of a continuation pocket pivot off of the 10-day line.

While it might be hard picking a top in the major market indexes, I’m finding it easier on a visceral level to pick tops or at least points of upside resistance in short-sale target stocks right now. Meanwhile I find very little hitting my screens with respect to long ideas, and that has been a warning sign in the past. As I’ve said repeatedly throughout the past couple of years, watch the stocks first, and it appears that the stocks are indicating a market correction is becoming more likely.

Today and over recent days there has been plenty of love to be found on the short side, certainly more than on the long side, and so I have naturally shifted back to the short side of the market based on the individual stock set-ups that I’m seeing. In this manner my process is naturally pushing me towards the areas of least resistance, so to speak, and that has worked well for me this year as I forge ever closer to making triple-digits on the year.

For those who might be nursing profits in any long positions they have currently, make sure you protect those profits as well, keeping your selling guides clearly in mind should things begin to deteriorate in a meaningful 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 a held a position in BABA, FB, TSLA, and TWTR, 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.