The Gilmo Report

October 1, 2014

October 1, 2014

The NASDAQ Composite Index did its best to hold the top of the double-bottom price range and consolidation it formed in July and August, but as we can see on the daily chart, below, that support was slowly eaten away and today the index burst through it to lower lows. This is ugly action, and it appears that the 200-day moving average and the lows of the July/August double-bottom, the lower yellow band on the chart may come into play soon.




The S&P 500 Index traded above its 50-day moving average on Monday and opened up above the line on Tuesday before reversing and breaking to lower lows today, as we can see on the daily chart, below. Volume was heavy on the sell-side, and the area around the August lows and the 200-day moving average, which I’ve highlighted on the chart, looks like a reasonable downside target from here. While we can always expect the unexpected, all I know is that for now the long side of this market is entirely out of play until we start to see something that might resemble a worthwhile long set–up.




Over the weekend I highlighted the short side of the market by discussing my current short-sale ideas first, and for the most part this week the short side has been the place to be in a broader sense. We did see some catapult moves in stocks like Mobileye (MBLY) and Arista Networks (ANET) on Monday, but those gains and more were given up in rapid fashion on Tuesday and Wednesday as the short side of the market moved sharply into focus.

Tesla Motors (TSLA) simply could not find the energy to participate in Monday’s rally, stalling out at its 50-day moving average and drifting lower on Tuesday, as we can see on the daily chart, below. TSLA found some support along the highs of the cup-shaped handle of its prior cup-with-handle base from which it broke out in early August. The stock has now retraced all the way back to that breakout point and then some, and from here I would look to initiate a short as somewhere between the 65-day exponential moving average at around 248-49 up to the 50-day line at 254-255. Not that it has to get there, because if the general market keeps coming off it will likely head lower and for that possibility I am looking at the 200-day moving average at 215-216 as my initial downside target.




Netflix (NFLX) broke out of its bear flag by staging a quick “shake-up,” the inverse of a “shakeout, to its 20-day moving average on Tuesday where it churned around on increased volume before promptly reversing and moving lower today, as we can see on the daily chart, below. This shakeout to the upside turned into a downside breakout today through the lows of NFLX’s bear flag lows at the 438.88 price level. Short-term I still see the 50-day line at 254.81 as upside resistance while the 200-day moving average and an undercut of the August 1st low at 412.51 is a reasonable downside target. If that seems a long way down there, just think of it in terms of NFLX being a 43.88 stock going to 41.25, and you can quickly see that it really isn’t a lot of ground for the stock to cover if it heads lower from here. Meanwhile, if you at least entered a short-sale position in NFLX around the 20-day/50-day moving average confluence in the mid-450’s, you are good to go if the downtrend continues.




LinkedIn (LNKD) also broke out of its own short bear flag today after breaching its 50-day moving average on Tuesday, as we can see on the daily chart, below. Just like NFLX, LNKD had a “shake-up” to its 20-day moving average last week on an analyst upgrade to “market outperform.” As I wrote over the weekend, that was a short-sale point, and the stock got down as low as 201 today before closing at 203.08, still below the bear flag “breakout” point at 204.29. I see that as short-term upside resistance, but I would view any continued rally back up towards the 50-day moving average, which LNKD breached yesterday, as a shortable one. Meanwhile, the 200-day moving average at 190.44 and the 192.56 intraday low of the August 1st gap-up day serve as downside targets in a continued downtrend. Investors should be locked and loaded in the stock near the 20-day line, giving them enough cushion to see how this plays out. Interestingly, LNKD closed right at its 65-day exponential moving average, which offers some near-term support, although I would not expect that to last long in a continued market break.


GR100114-LNKD (AMZN) finally broke support at the lows of its current bear flag and staged a “bear flag breakout, as we can see on the daily chart, below. Today’s move took the stock below support along the lows of the prior early August gap-up move that led to a rally which ended up forming the right shoulder of a small secondary head and shoulders formation to the primary one that formed between September of 2013 and March of 2014. In fact, the peak of AMZN’s current H&S formation rallied right up to the neckline of the primary head and shoulders which you cannot see on the chart below. For now I see the 304.58 August 1st low as a reasonable downside target for the stock if its downtrend continues.




SolarCity (SCTY) remained weak as it simply followed its 10-day moving average to the downside and plunged to lower lows today, as we can see on the daily chart, below. The stock is basically in free-fall here, and the rapid downside break after the failed cup-with-handle breakout reminds a little bit of Sunpower’s (SPWR) big blow-up after a failed cup-with-handle breakout attempt back in September of 2008. SCTY’s downside velocity here implies to me that it has enough “juice” to make it somewhere down to the lows of the prior cup formation in the 45.79 up to 48.13 price zone. Meanwhile I would use the 10-day line at 61.60 as a trailing stop if you are short the stock (as you should be!) at either Point 1 or Point 2 as shown on the chart.




Most investors consider Apple (AAPL) a “safe” stock, mainly because it is considered a large, technology juggernaut that pays a “healthy” dividend. With all the good news and not so good news regarding the iPhone 6 and its record sales, the stock still isn’t able to hold above the $100 “century mark” level. This brings to mind a possible invocation of Jesse Livermore’s “Century Mark Rule in Reverse” as a short-sale rationale for AAPL. Currently it pays a 1.9% dividend and offers investors “dynamic” 9% earnings growth in the next quarter at a “bargain” P/E of 14 times 12-month forward estimates. If we look at 2017 projections, the stock currently sells at 12.7 times those numbers. The one thing I can tell you with any certainty is that as far as being a dynamic growth stock, AAPL doesn’t really fit the bill. And the more investors that own it on the basis of its “safe” dividend and industry position, the more there are to sell it if it starts to wobble.

Since peaking in 2012, AAPL has built a massive two-year Punchbowl of Death or POD formation that I refer to as an “Elephant POD.” In my mind the POD represents AAPL’s shifting status as a growth name to a value name that trades at a “low” P/E, pays a dividend, and is seen as a safe big-cap name in which to park cash in an interest rate friendly environment. When AAPL first declared a dividend it was hailed as a move that would attract dividend investors, and to some extent this was what helped to propel the stock up the right side of this giant POD. It even has a handle about half-way up the right side, making it a POD-with-handle. As the stock falters around the $100 century mark, putting this together with my Elephant POD theory makes me wonder if AAPL can’t be shorted here.


GR100114-AAPL Weekly


If we take a more granular view on the daily chart, below, and look at the right side peak of the Elephant POD, we can see how the stock is having discernible trouble around the $100 price level. Notice the heavy selling off the peak in early September and then the big outside reversal five days later off of the same peak on even heavier selling volume. Last Friday AAPL finally closed below its 50-day moving average, but so far has not officially “violated” it. That set off a short rebound just above the 20-day moving average yesterday that stalled on below-average, but increasing, upside volume. Today the stock returned to the 50-day line and looks to me like it could continue lower if the NASDAQ heads closer to its 200-day moving average.

In fact, it would probably help to cause that sort of move in the index, along with other stocks like NFLX, AMZN, LNKD, etc. also moving towards their downside price targets as discussed previously in this report. I saw the stock as shortable yesterday at the 20-day line, but another way to look at this is to use Livermore’s Century Mark Rule in Reverse and short it here using the $100 price level, maybe up as far as the 20-day line at 100.39, a little over 1% from today’s close, as a very tight stop. Food for thought, perhaps, but I’m willing to test this out myself given the tight parameters of the trade.


GR100114-AAPL Daily


Over the weekend I discussed both Pandora Media (P) and Three D Systems (DDD) as very nice head and shoulders set-ups looking for a rally to short into, but neither stock was able to muster any kind of rally this week as they both just pushed lower. I don’t show either of the stocks on charts here, but will keep an eye on them in case a reasonable short-sale point shows up. Meanwhile, Twitter (TWTR) busted its 20-day moving average on increased selling volume, as we can see on the daily chart, below. Over the weekend I wrote that, “The action has become a little sloppy in September, and so short-term I’m looking for a pullback in the stock up here as it goes about the process of building a potential new base. That remains the case with the stock and so for now there is nothing to do with this as I am, for the most part, shunning the long side of this market, at least so far this week.




Following are some notes regarding recent long ideas that have been on my watch list: Palo Alto Networks (PANW) pulled back below its 20-day moving average today and closed just below the line on above-average selling. This is not in a buyable position as it tests the 92.52 intraday low of its buyable gap-up that occurred on September 10th. There is nothing actionable here. Mobileye (MBLY) was good for a quick pop on Monday and early Tuesday before it reversed and gave up all of its gains. I would still watch to see how and whether the stock can build a base somewhere in here as the market corrects.

Greenbrier Companies (GBX) blew to pieces today, down 10% on huge selling volume. Once the stock could not hold the 20-day moving average, one should have maintained a tight stop and unloaded any shares there. El Pollo Loco (LOCO) was good for a quick pop yesterday as it actually flashed a pocket pivot buy point before giving up on that ghost today and moving to lower lows. At best this still needs time to set up but remains a risky stock to hold if the general market situation worsens. Arista Networks (ANET) had an amazing blast to all-time closing highs on Monday, but gave all of that back and then some on Tuesday and today on heavy selling volume. The moves over the past three days in stocks like MBLY, LOCO, and ANET show why a wild market environment requires one to sell into strength and not wait to get slapped around before unloading shares in these types of fast-movers.

I don’t see how one can interpret the current market action as anything but bearish. Stocks are getting slammed and short-sale targets are performing well. Thus one can tell a lot just by the amount of “love” we are getting on the short side here, and as long as that love continues to flow I’m going to be there to gather as much of it as I can! J The trick to shorting in a market like this, however, is in being more anticipatory and shorting into rallies that carry up into potential resistance, such as TSLA above and around the 250 level or LNKD and NFLX at their 20-day moving averages. If you start feeling the “need of greed” to start getting heavy short after the market is splitting wide open you must realize that risk is higher based on a later entry, as is the chance that one can be easily shaken out on a quick blip to the upside.

Hopefully members have been campaigning some of these big-stock NASDAQ short-sale targets and have some cushion here that allows them to operate a little more freely since we have been discussing them for at least the past couple of weeks. Anticipate, anticipate! If you suddenly think you’re going to turn into a short-selling hero plunging in here, you might be successful, but consider yourself warned! Remember to watch for possible “undercut & rally” moves around key lows on the left sides of the charts, and watch where and how the market comes down and undercuts the August lows or the 200-day moving averages on both or either of the NASDAQ and the S&P 500 Indexes as possible short-term cover points. That is all.


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, LNKD and TSLA, though positions are subject to change at any time and without notice.

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