The Gilmo Report

October 29, 2014

October 29, 2014

QE officially ended today, and the world did not come to an end. Today’s Fed policy announcement contained no surprises. The market more or less did what it probably needs to do here, which is back up a little to the downside in some sort of attempt to consolidate the blistering gains it has had off of the lows of two weeks ago. The market was certainly in position for a good pullback today, but it gave up very little as the daily chart of the NASDAQ Composite Index shows below.  The S&P 500 Index, not shown, did roughly the same thing, but found intraday support right at its 50-day moving average while the NASDAQ found support well above its 50-day line and yesterday’s gap-up lows. Both indexes closed up nearer to the peak of their daily trading ranges on heavier volume, which looks constructive.

It is still a matter of focusing on the right stocks, and so far this week proves the point I made over the weekend, which is that focusing on “new-merchandise” plays is what you want to be doing here. Chasing more established and widely-owned names like Facebook (FB) on v-shaped breakouts to new highs isn’t going to get you anywhere, as owners of FB found out today after the stock gapped down over -6% on disappointing guidance.




Adding proof to my notion that new-merchandise stocks are the place to be in a nascent market rally, recent hot IPO Alibaba (BABA) has continued right up to the highs of its big IPO U-Turn formation, as we can see on the daily chart, below. Again, given the sharp rise up off the lows, this probably needs to build a handle of some sort as earnings approach in November.




Our new-merchandise cyber-security name CyberArk Software (CYBR) launched on Monday and Tuesday, jacking more than 20% in just two days, as we can see on the daily chart, below.  Monday’s move was good enough for a pocket pivot coming out of the high, tight flag formation the stock has built since coming public in late September. In my view the breakout on Tuesday was something to sell into and at least take partial profits on the position given that the move from Monday’s opening price to Tuesday’s intraday peak represented a 24.1% run.

As members are well aware, it has been my policy in this market to sell into moves of 15-20% when I have them, looking to buy the stock back on a pullback or a new buy set-up. However, if one bought near the 10-day moving average on Monday and prefers a less active style, the stock is acting fine on the pullback so far. However, keep in mind that CYBR is expected to report earnings on November 12th.




ReWalk Robotics (RWLK) also launched higher on Monday and Tuesday, flashing a pocket pivot move off the 20-day moving average that stalled and closed near the intraday lows, as we can see on the daily chart, below. However, had one bought the stock at Monday’s opening price of 25.74, Tuesday saw the stock hit an intraday peak of 32.41, a two-day gain of 25.9%. Having bought the stock Monday near the opening, I considered that move one to sell into, and the subsequent pullback into the 20-day line then becomes a point one can add or buy back depending on whether one sold into the insane two-day move and took at least partial profits.

Of course, as with CYBR, if one bought RWLK anywhere around 26 on Monday and prefers a less active approach, the stock is fine, and in my view probably becomes buyable on this pullback. Earnings are expected Nov. 13.




ServiceNow (NOW) had a little pullback on Monday as volume dried up, but the pullback held well within range of the peak of the handle in its ladle-with-handle formation at 64.98, as we can see on the daily chart, below. The stock moved back up to new highs on Tuesday, and technically remains within range of the L&H base breakout. The one thing NOW has going for it is that it has already announced earnings, so it is not necessary for buyers of NOW on this L&H base breakout to play “earnings roulette.” The optimal entry point would be on a pullback to the 62-63 area, if we can get it, given my distrust of obvious base breakouts in this market. But so far NOW looks fine and is technically within range of the L&H breakout last week.




Trinet (TNET) has continued to edge up after last Thursday’s pocket pivot, but became extended today as it approached the left side peak of what is now a cup formation, as we can see on the daily chart, below. This resulted in what looks to me to be a normal pullback on very light volume. Earnings are expected next week, so unless one is feeling lucky enough to play earnings roulette at that time, buying TNET here means you’re looking for a nice price pop before earnings arrive, as we have seen in names like CYBR and RWLK. TNET does provide us with another example of new merchandise that is working here so far.




Over the weekend I mentioned keeping an eye on El Pollo Loco (LOCO) as it was moving tight along the confluence of its 10-day, 20-day, and 50-day moving averages. LOCO showed that this tight action along the moving average confluence was constructive by flashing a pocket pivot buy point yesterday, as we can see on the daily chart, below. LOCO is expected to announce earnings next week, which is probably why the pocket pivot was sold into today. Thus if one wants to buy into this here based on yesterday’s pocket pivot, one has to consider how much upside it can produce before earnings come out or whether one really wishes to play earnings roulette with the stock. Being a recent IPO in July of this year, LOCO still qualifies as very new merchandise in this market, which I think tends to work in its favor.




As a company that came public only 2½ months ago, Mobileye (MBLY) still has to be viewed as an up-and-coming new merchandise play. MBLY got hit after a flag breakout attempt earlier in October, but that move to new highs was caused by the expectation that Tesla Motors’ (TSLA) big “D” announcement was going to have something significant to do with MBLY. Since it didn’t, the air came out of that move very quickly given that the general market was also coming unglued at the time. So as things got very ugly exactly two weeks ago today, MBLY undercut the prior September low at 45.65, as we can see on the daily chart.

Technically, the move back above the 48.65 price level constitutes a “shakeout-plus-three” situation, but no real volume has been seen on the drift back above all three moving averages. In my view, that probably indicates that sellers were washed out on the shakeout. Now the stock is in fact holding very tight its 20-day moving average as volume, both up and down, dries up. MBLY is expected to announce earnings next week, so it will be interesting to see if it has a pocket pivot before then. I tend to like that proposition, so see the stock as buyable here while it’s quiet. If it doesn’t have a move before earnings next week, then one can decide if one wishes to hold a measured position (say 10%) into earnings.

Just to remain objective, it is also possible to view MBLY’s pattern as a possible head and shoulders, and I think how it resolves this current tight action along the 20-day line will be critical in this regard. If it doesn’t resolve before earnings, keep this in mind if you try and hold a position through earnings. A big gap-down move could trigger a neckline breakout through the lows of two weeks ago.




Tesla Motors (TSLA) has had a wild week, breaking through its 200-day moving average on Monday after a report from online magazine WardsAuto indicated that the company’s sales had declined 26% year-over-year in September. That sent the stock flying to the downside on heavy selling volume, as we can see on the daily chart. On Tuesday, there was news of an Elon Musk tweet claiming that TSLA sales were up 65% year-over-year in September, allegedly a record month for the company. That, of course, sent the stock gapping up and off of the 200-day moving average on Tuesday before it ran into resistance at the 65-day exponential moving average and reversed course today.

Tuesday’s move was technically a pocket pivot, but given that there are two prior gap-downs in the pattern I’m not convinced that it is a sign of a big move ahead of earnings. What I think caused Tuesday’s big move was a massive squeezing of shorts who piled on the basis of the news from WardsAuto and a Wall Street Journal article discussing TSLA’s shuttering of its Fremont, California plant. It’s tough to play stocks either way when you have erroneous journalism affecting the stock on the one hand, and another one of these mad, tweeting CEOs in Elon Musk doing his best to affect it in the opposite direction. In essence, my view is that rallies up into resistance in TSLA remain shortable, but with earnings expected next week, one can probably just wait and see what happens after earnings.




Twitter (TWTR) blew up on earnings Monday after the close, but we’ve already observed the big clue in the stock’s fractal head and shoulders formation that was already well in the works before earnings were announced, as we can see on the daily chart, below. I consider Tuesday’s gap-down to be a shortable gap-down in a failed Punchbowl of Death (POD) topping formation. I discussed TWTR’s potential POD in my weekend report, and Tuesday’s gap-down break can be seen as confirmation of that. TWTR is a short using the 44.58 high of Tuesday as your upside guide for a stop.




With stocks like Facebook (FB) and Twitter (TWTR) blowing up on earnings, I don’t see why LinkedIn (LNKD) won’t face a similar fate when it is expected to announce earnings next week. I tweeted that thought earlier today as the stock gapped below its 20-day moving average and peeled away to the downside as volume picked up to just above average, as we can see on the daily chart, below. LNKD has been shortable at resistance around the 20-day line, and today’s break below the line puts it back in play as a primary short-sale target. My thinking is that investors who have already seen FB and TWTR get smashed after earnings won’t want to stick around for the same possibility with LNKD, which is expected to announce earnings tomorrow after the close. Hence I would look for continued downside from here, at least to the 200-day line at 189.01.




Yelp (YELP) broke out of a short three-day bear flag today after last week’s shortable gap-down through the neckline of a fractal head and shoulders formation, as we can see on the daily chart, below. Members should look at a weekly chart of YELP on their own to see that this fractal H&S is actually contained within the right shoulder complex of a much larger H&S formation extending back to early September of last year. Theoretically, downside breakouts from short bear flags can be treated in the same manner as an upside breakout from a bear flag. If you short the breakout, than the lows of the bear flag serve as your guide for a quick stop. As I tweeted last Thursday, using the 62.25 intraday high of the gap-down day as a stop could have gotten you short the stock back then, and after the three-day bear flag resolves to the downside, YELP’s downtrend is firmly intact.


GR102914-YELP (AMZN) is wedging right up into resistance around the 300 price level following last week’s earnings-related gap-down/blow-up. As I wrote over the weekend, the after-hours undercut of the prior 284.38 May low was a short-term cover point, and the ensuing undercut and rally move has taken the stock right up into a logical area of resistance around the low of October 16th and the 10-day moving average up at 302.09. AMZN didn’t get quite that high today, however, topping out at an intraday peak of 299.61, within 1% of the 10-day line, before reversing to close down at 194.12.

My view is that AMZN is heading lower and back through the May low under 285, so I would continue to look at shorting the stock on rallies. For now, the 10-day line serves as my first resistance reference level, and so rallies up to that moving average should be watched. Our 620 intraday chart can assist in helping to gauge when a potential intraday short-sale point may be appearing as AMZN (or any short-sale target stock, for that matter) rallies into a logical area of resistance.




We can see on AMZN’s 620 chart, below, that it peaked right at the opening, printing 299.11 at the bell, bumped 50 cents higher, and then flashed a sell signal as the 6-period moving average crossed below the 20-period moving average. The MACD lines had already crossed during pre-market trading, confirming the moving average cross a little later, and the stock headed lower from there. Later on around 8:00 a.m. my time here on the West Coast, the 6-period crossed above the 20-period while the MACD also crossed to the upside.

Normally, if this happens well below my initial entry point, I don’t do anything. Usually I will simply use my initial entry as my stop, so if the stock remains well below that, even on a 620 buy signal, I generally don’t do anything, UNLESS the general market is rushing back to the upside. Later on, just before 11:00 a.m. my time, AMZN flashes another 620 sell signal with both the moving averages and the MACD lines crossing almost simultaneously. AMZN then continued lower from there, closing down on the day.


GR102914-AMZN Intraday


Biogen Idec (BIIB) – continues to find resistance around its 200-day moving average and the 65-day exponential moving average (see this past weekend’s report), but I would still expect that BIIB will continue lower on either market weakness or weak action from its big-stock bio-tech NASDAQ cohorts.

Netflix (NFLX) – stock is in a short flag formation around the 10-day moving average, but with lighter-volume selling today the action is inconclusive. I would still prefer to short the stock into a rally into the 200-day moving average, currently at 414.86.

Palo Alto Networks (PANW) – stock has been unable to hold new highs above the $100 price level as it keeps getting smacked down to its 20-day moving average down at 101.33.

U.S. Silica Holdings (SLCA) – stock has continued to find resistance at its 20-day moving average and reversed off the line today on higher volume. SLCA has come out with earnings after-hours today as I write and is trading up slightly. I would watch any further rallies into the 20-day line as being shortable tomorrow should that occur, using the 20-day line as your upside guide for a quick stop.

On a practical level, this remains more a market of stocks rather than a stock market. Despite the continued strong action of the major market indexes, a number of big-name leading stocks have blown up over the past couple of weeks, but most of these are names that are already well-established in this market. My view is that one should simply continue to focus on individual stock set-ups on the long or short side as they present themselves in real-time, focusing on new-merchandise when it comes to long set-ups.

I sat through the Fed policy announcement today with long and short positions, and both sides did reasonably well for me on the day, as I simply focused on the action of these stocks and not so much on what the indexes are doing. We’ve been fortunate to catch some runners early this week in CYBR and RWLK, and I tend to think that if we focus on new-merchandise situations on the long side our chances are better in what is still a difficult and tricky market environment than if we step into doo-doo by trying to buy into an FB or TWTR into earnings. Success in this market appears to require a shrewd approach rather than one that is decidedly more sheep-like. Stay tuned.


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 AMZN, CYBR, LNKD, MBLY, RWLK, and TWTR, though positions are subject to change at any time and without notice.

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