The Gilmo Report

November 9, 2014

November 8, 2014

The market was given another reason to rally on Thursday when European Central Bank head Mario Draghi reaffirmed that the bank was “committed” to acting, but apparently the ECB doesn’t have as much pull as the Bank of Japan. The market’s upside reaction was somewhat muted, as we can see on the daily chart of the NASDAQ Composite Index, below. After a benign jobs report on Friday, the market just continued to bide its time as the major indexes essentially move sideways in a short, week-long flag formation. From the point of view of the indexes, all they appear to be doing presently is consolidating and digesting the amazingly sharp move off of the lows of mid-October.

The NASDAQ, like the other indexes, is holding up in new high ground, just above the September highs.




What is interesting to note is that since the market correction that began in March, NASDAQ breadth has been on a steady decline, as the chart of the NASDAQ Advance-Decline Line ($NAAD), below, shows. For the most part, the NASDAQ A-D line has tracked with the index over at least the past couple of years. Since March, though, breadth has steadily deteriorated, making a series of lower highs and lower lows as it forms a downside trend channel. This could be looked at in one of two ways. The first is that the underlying condition of the NASDAQ is not as healthy as the index itself might lead one to believe, and some of that is evident in the uneven action of leading stocks at this juncture.

The other way to look at this is that even with lousy breadth, the NASDAQ has managed to move to higher highs as it comes within 10.8% of its all-time high of 5132 reached in the year 2000. If breadth suddenly started to improve, then the NASDAQ might develop some upside velocity. Ultimately, when it comes to breadth, it is not always easy to determine which one is the cart and which one is the horse. Does weak breadth eventually drag down the index, or does the index eventually drag breadth to higher highs? Ultimately, I think it is simply a matter of treating the market as a market of stocks and not a stock market, focusing on individual set-ups and the profit potential they offer, whether that is a quick 15-20% “swing-trade” type of move or otherwise.




The S&P 500 Index, shown below on a daily candlestick chart, moved to a new closing high on Friday as it churned around in a little doji where the open and the close roughly coincided on higher volume. This is the second doji up here at the highs, with the second one occurring five days ago on the chart. Perhaps the indexes are ready for a more significant pullback here, but again it all boils down to what is happening with the individual stocks, which is something of a mixed bag here.




As I wrote in my Wednesday report, Alibaba (BABA) is your big-stock leader here. It has well demonstrated its mettle in a blistering move to new highs following the pocket pivot that occurred thirteen trading days ago on the daily chart, below. BABA is now up 15 out of 18 days in a row since putting in a low in its IPO U-Turn base in mid-October, triggering the black triangles or “ants” on my chart. Volume on Friday was the second-highest upside volume day (not counting the IPO day) in the pattern, which is quite impressive. At some point soon I would expect the stock to back off a bit here and give the 10-day moving average a chance to catch up to the stock.

So far it doesn’t seem interested in doing much more than continuing to move higher. If you are looking for an entry point here, patience is required as we await a second buy point to show up in the pattern.




CyberArk Software (CYBR) demonstrates why our first preference is to seek to buy stocks when they are quiet, preferably holding tight along a key moving average as volume dries up. We caught CYBR very nicely two weeks ago. The ensuing 20%-plus move was quite tradable, leaving the breakout for other, slower, investors to buy into. Now CYBR is pulling back into the meaty part of the prior flag formation as its expected earnings announcement approaches this coming Wednesday after the close. CYBR is expected to earn a penny, and it is now just a matter of seeing what it does after earnings.

If one traded the stock off the moving averages per my discussion of the stock two weeks ago and banked a nice 20% or so profit, one is in a position of considering that profit as a sort of cushion. This would apply if one wanted to buy a small position here on the pullback and hold into earnings. But this is dependent on one’s risk tolerance and preference. If CYBR were not announcing earnings this Wednesday, I would view this pullback down to the 20-day moving average as eminently buyable. Of course the approaching earnings announcement brings a little more risk into the equation.




ReWalk Robotics (RWLK) is expected to announce earnings this coming Thursday. After a quick 20%-plus move immediately following my discussion of the stock of exactly two weeks ago, it has settled down along its 10-day and 20-day moving averages on light volume, as we can see on the daily chart, below.

As with CYBR, if one traded RWLK for a quick 20%-plus profit this can be viewed as a profit cushion that one might make use of by taking a small position in the stock going into earnings. The key metric for RWLK will be its unit sales. A number that comes in higher than expected will probably cause the stock to gap higher. In any case, the stock has had plenty of time to digest its initial rocket ride to the upside after coming public in early September, and this flag formation looks quite healthy to me.




ServiceNow (NOW) flashed a continuation pocket pivot at its 10-day moving average on Thursday, as we can see on the daily chart, below. This is a second buy point in the pattern as the stock continues to hold above the prior ladle-with-handle buy point. A quick retest of the 10-day line on Friday led to an all-time high close by the end of the day. NOW still remains within buying range of Thursday’s pocket pivot.




Trinet (TNET) has remained something of a volatile affair after announcing earnings this past week, as we can see on the daily chart, below. As a smaller stock, and given the fact that it had a very nice upside move from the pocket pivot of October 23rd, I’m not surprised by TNET’s volatility. However, notice that on Wednesday of this past week the stock found support at the 20-day moving average and bounced on heavy volume, closing in the upper half of its daily trading range and roughly unchanged from Tuesday’s close.

Another pullback on Friday met with buying support again at the 20-day line as volume came in above average. This helped to further build what is so far a one-week handle in a little cup formation. This looks buyable here, using the 20-day line as your stop. But with strong support showing up at the line on Wednesday and Friday, I would not expect the stock to test those levels again.




In my Wednesday report I discussed waiting for a pullback to the 10-day moving average as an opportunistic entry point in Taser International (TASR). That’s exactly what happened on Friday, as we can see on the daily chart. Selling volume was drying up quite nicely on Thursday, and the intraday pullback to the 10-day line was met with an increase in buying interest as the stock recovered to close slightly up on the day. This action is building what is probably a necessary handle to TASR’s cup base formation from which it tried to break out earlier this past week. But as we know, breakouts are not our first preference in the current market, and taking an opportunistic stance on TASR as it came into the 10-day line on Friday is the more rewarding entry point.

I see the stock as buyable here using the 10-day line and Friday’s low at 17.73 as a selling guide, although the 20-day line at 16.96 could come into play if the general market had something of a sharp pullback here. For now, however, I like the stock at the 10-day line, and would be watching for a possible pocket pivot off the line as the stock appears to act well here. My view is that if the general market continues to rally into year-end, TASR will move into the mid-20 price range.




GoPro (GPRO) got panned again by the infamous Citron Research group which believes the stock is worth $30. This led to some selling on Wednesday on volume that was only slightly above average, as we can see on the daily chart, below. As I wrote on Wednesday, taking a profit at resistance around the 85 price level was reasonable as we let the stock settle down here. Despite the negative blather, GPRO was able to hold the 20-day moving average on Wednesday’s pullback. However, the bounce off the line is showing some slight wedging as it occurs on very light volume.

On the other hand, sellers did not swarm the stock after Citron reiterated their $30 price target for the stock on Wednesday. Thus what we probably have here is a simple pullback to the 20-day line where we see volume drying up as sellers disappear. If one is up to the risk, buying the stock here and using the 20-day line as a quick selling guide is a reasonable trade, in my view.




I still consider Tesla Motors (TSLA) to be a short, and I have to admit that I’ve made a little money after shorting the stock into its post-earnings, gap-up move on Wednesday after the close. The stock got hit with a load of pre-market selling that took it negative right after the bell. But it turned around and closed up on the day on heavy volume, as we can see on the daily chart, below. Objectively, TSLA remains below the 65-day exponential moving average which has served as upside resistance for the stock over the past couple of weeks.

It is also running into resistance at around the neckline of the fractal head and shoulders pattern it formed from August to October before gapping through the neckline in the early part of October. Finally, TSLA also remains below the 244.49 cup-with-handle breakout point from early August. In this position, and with all these overhead resistance reference points in the chart, I see the stock as a short, using the 65-day line as a reference point for a quick upside stop.

Conversely, a pocket pivot move up through the 65-day and 50-day lines would negate my bearish thesis on the stock and shift it to a bullish one. Hence I believe maintaining a flexible, even keel here and simply playing the stock as it lies is the best approach for now. Anecdotally, I find it interesting that analysts and mutual fund managers are starting to call the stock a “long-term investment,” which is usually the bane of hot growth names. After all, where were all these “long-term” investors in May of 2013 when the stock began its big move?




Facebook (FB) remains a late-stage failed-base (LSFB) short-sale set-up following its post-earnings gap-down breakout failure on heavy volume, as we can see on the daily chart, below. Since then, FB has managed to wedge back up towards its 50-day moving average, running into resistance at the line on Wednesday.

Now the 20-day and 10-day moving averages have crossed below the 50-day line, and so the 20-day line at 76.21 becomes my lowest point of reference in terms of upside resistance. FB rallied with the market on Thursday and Friday, but volume was weak. I’m still looking for the stock to undercut the 70.32 mid-October low and perhaps test the 200-day moving average. The 50-day moving average remains my guide for an upside stop.




Biogen Idec (BIIB) continues to wedge up into its declining 50-day moving average, as we can see on the daily chart, below, and so remains a short-sale target for now. In previous discussions of BIIB as a short-sale target in recent reports, I’ve mentioned that if we are looking to short BIIB then we should also look at the other big-stock bio-techs for clues that the group is weakening.

For example, Gilead Sciences (GILD), shown on a daily chart underneath BIIB’s chart, has dropped below its 110.59 base breakout point. It closed Friday at 106.45 where it is sitting right on top of its 50-day moving average. If GILD breaks through the 50-day line, it becomes a late-stage failed-base short-sale set-up. My guess is that BIIB would weaken as well and break away from its 50-day line to the downside.






Netflix (NFLX) may finally be moving into a shortable position here as it tucks just below its 10-day moving average, as we can see on the daily chart, below. Buying interest among those who somehow think NFLX is a bargain following its 100-point blow-up after earnings in mid-October has started to wane. I would view any rally into the 20-day moving average at around 394 as potentially shortable.




U.S. Silica Holdings (SLCA) is now finding resistance along its 10-day moving average as it finishes forming the right shoulder in a sort of “twin peaks” head and shoulders formation, as we can see on the daily chart, below. This thing looks like it wants to move lower from here, and I consider SLCA shortable using the 10-day moving average at 44.34 as an upside guide for a stop. Generally, the 20-day moving average is more reliable than the 10-day as an upside resistance reference point, so any rally up to the line at 46.59 would be an even more optimal short-sale entry point. Either way, with oil-fracking companies starting to scale back, SLCA could easily move lower from here.




Some notes from my trading diary concerning other stocks discussed in recent reports: (AMZN) – rallying back up to the 20-day line over the past two days on weak volume. The 20-day line at 303.75 remains a short-sale point.

Blackhawk Network (HAWK) – continues to make new highs on below-average volume. Wait for the 10-day moving average to catch up to the stock where a new actionable buy point has a chance at forming.

Mobileye (MBLY) – still not clear on when the company announces earnings, but it continues to move lower on well below-average volume. Would prefer to see what the stock does after earnings.

Palo Alto Networks (PANW) – still holding above the $100 century mark price level, but nothing significant is occurring as PANW’s earnings report approaches at the end of the month.

Twitter (TWTR) – would continue to short this into any rallies up into the 42.51 low of the prior flag base the stock formed back in August, with the idea that the stock will eventually undercut the 35.95 low of mid-July.

Yelp (YELP) – stock remains a short into any rallies that carry up as far as the 20-day moving average, currently at 61.93, but it looks like it is setting up for a downside “breakout” to lower lows.

I continue to view the market as a market of stocks, acting on set-ups on the long or short side as they present themselves in real-time. The fact that I continue to improve my performance in 2014 (now over +80% YTD) using a combination of long and short trades bears out the validity of this approach. As well, this approach puts investors in a position of worrying less about what the major market indexes are doing, while remaining focused on the point at which the rubber meets the road, so to speak, with individual stocks.

As long as the indexes remain in an uptrend, BABA will be my preferred long position as I believe this is one of those situations where you can be heavily weighted in a liquid, big-stock leader that has the clear support of institutional money. If the market keeps going higher it should go higher. Meanwhile, other set-ups on the long or short side remain actionable in real-time on an opportunistic basis, and I believe that investors should continue to operate in this manner.


Gil Morales

CEO and Principal, Gil Morales & Company, LLC
Managing Director and Principal, MoKa Investors, LLC
Managing Director and Principal, Virtue of Selfish Investing, LLC

At the time of this writing, of the stocks mentioned in this report, Gil Morales, MoKa Investors, LLC, Virtue of Selfish Investing, LLC, and/or Gil Morales & Company, LLC held positions in BABA, FB, TASR, and TSLA, 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.