The Gilmo Report

September 21, 2014

September 20, 2014

In the face of my view as expressed in my Wednesday report that the indexes looked primed to test their 50-day moving average, the S&P 500 and Dow Jones Industrials Indexes both gapped up on Thursday and pushed to all-time highs, as the daily chart of the S&P 500, below, illustrates. On Friday the S&P reversed and closed slightly in the red on heavy triple-witching options expiration volume as it churned and stalled off its intraday high after gapping higher on the open. What one thinks about the indexes, however, is generally irrelevant since this market is entirely about being in the right stocks at the right time, and avoiding the wrong stocks at the wrong time. Even though all of the major indexes are right up near their highs, the action underneath the hood, so to speak, shows a great deal of mixed action. Friday’s action could be seen as a high-volume churn/reversal, and my tendency is to take the action at face value despite the fact that options expiration helped to jack volume sharply higher. Thus I have to remain cautious but opportunistic, while still viewing the market as a market of stocks and focusing on individual set-ups, long or short, rather than having to adhere to some pre-ordained “macro-view” of what the market is doing.




The NASDAQ Composite Index, shown below on a daily chart, also gapped up on Thursday, just missing a higher high. On Friday, however, the index was turned back as it pushed into new 14-year high price ground early in the day on a gap-up open. Instead of a new high, the index posted a massive-volume churning and reversal day on heavy options expiration volume. Meanwhile NASDAQ breadth remains weak as its advance/decline line, like the NYSE’s, neither of which I show here on charts, remains in a three-week downtrend. Thus while the indexes recover from this past Monday’s lows the broader market is having trouble.




And while the market may be in an uptrend, somebody forgot to tell the Russell 2000 Index, which is represented as usual by the daily chart of the iShares Russell 2000 Index ETF, below. While all of the major market indexes reversed on Friday, the Russell posted the worst performance as it staged a big-volume outside reversal day and busted through its 50-day moving average on the downside as it also dipped just below the 200-day moving average. Friday’s options expiration volume bubble notwithstanding, a face-value appraisal of the Russell’s action on Friday is that this is extremely ugly action. In the face of all of this uneven action under the market’s hood the only opportunities I see in this market are short-term hit-and-run trades on the long and short side. Until some sort of clear trend is illuminated, the choppy action necessitates an active and alert approach if one is going to try and play this market.




I started the day off on Friday short several names, and for the most part they all came in and provided some short-term short-sale profits, but by a little after mid-day I was shifting back to the upside as I saw movements develop on an intraday basis. One of these stocks was Twitter (TWTR), which I had actually tested on the short side early in the day, and after I covered the stock on the short side I flipped to the long side as the stock executed an upside outside reversal on heavy volume, as we can see on the daily chart, below.

I tweeted to members in real time when the stock was trading at around 51.50 that it was holding tight along the 10-day moving average, and by the close it jacked all the way up to 53. The pullback on Friday ended up as a “Wyckoffian re-test” where the stock pulls down to retest a prior low, in this case the Monday low, and holds up with volume either drying up on the pullback or picking up as the stock reverses off the intraday low and turns higher as TWTR did on Friday.




I’ve also been watching Palo Alto Networks (PANW) very closely as it tracks sideways over the past six days following its buyable gap-up move of last week. As we can see on the daily chart, PANW has held the 10-day moving average and moved back up towards the $100 century mark, closing just below at 99.28 on Friday. So far the price/volume action tells me that the stock wants to go higher, and so I will continue to operate on that basis.

I consider the stock buyable in here with the idea that it will continue to hold the 10-day line which is now at 97.11, only a hair over 2% below Friday’s close. The stock has formed a miniature cup-with-handle following last week’s move above the 102 price level and found volume support on Friday. In theory, the stock is also still buyable on the basis of the buyable gap-up move of eight days ago on the chart, using the 92.52 intraday low of the BGU day, which is about 7% away from Friday’s close, as a selling guide. As with TWTR, the odds of PANW moving higher from here probably depends on what the general market does from here.




A hot IPO that I completely missed coming out of the gate is Mobileye (MBLY), shown below on a daily chart. MBLY was a classic “IPO U-Turn” set-up as it broke out through the 40 price level in late August, and it is certainly one of those concept stocks that can catch the imagination of investors. MBLY makes software and related technologies for camera-based advanced driver assistance systems, or stuff that makes possible the self-driving cars that companies like Google (GOOGL) and Tesla Motors (TSLA) talk about. MBLY had a screaming upside move throughout most of August and early September before turning tail and dropping about 20% from its early September peak price of 58.61.

Technically we can see that this pullback has taken the stock all the way back to its 20-day moving average where it held on Tuesday and then again on Friday of this past week. The stock has also retraced well over 50% of its prior upside move from the 40 breakout level and so strikes me as being in a position for a possible bounce from here. The critical aspect of this trade is that the 20-day moving average has served as de facto support for the trade and therefore must also serve as a guide for a very tight downside stop. In this manner risk is controlled and the potential for loss minimized as much as possible. If MBLY cannot hold the 20-day line, the trade is off, end of story.




El Pollo Loco (LOCO) is looking quite ugly here as it backs down below the 20-day moving average, as we see on the daily chart, below.  LOCO has come all the way down to the 34 price level, which is roughly the level at which we saw the pocket pivot of three weeks ago occur after I discussed buying the stock right at the 10-day moving average in my weekend report of August 31st. LOCO is something of an IPO U-Turn formation, but this past week now makes it a short cup-with-handle formation where the handle is now one week in duration. Perhaps this is what the stock needs to do if it is ever going to have a chance at making new highs. The very choppy and erratic move back up to the prior highs that took place over the prior two weeks before the stock pulled back this week probably needs some corrective action for the stock to set up properly.

This trade is one that I would classify as an “Ugly Duckling” trade, a concept that has worked in this QE market. When something looks rather ugly, but the action can still be understood within the technical context of trying to consolidate and “correct” prior price movements, it sometimes has a shot at making a comeback. Therefore, if I choose to invoke the Ugly Duckling principle then LOCO might be seen as buyable here, using the Friday low at 34 as a quick downside stop.




Facebook (FB) pulled an about-face on Friday after getting body-slammed to the 50-day moving average on Monday, as we can see on the daily chart, below. The V-shaped recovery off of the Monday lows took the stock back above both the 50-day and 10-day moving averages where it just missed matching its all-time closing high by a single penny, and Friday’s action qualifies as a pocket pivot buy point. The major caveat here, of course, is that this pocket pivot is occurring from a V-shaped position, and these types of pocket pivots have a lower probability of working. If the stock were able to back-and-fill constructively along the 10-day line then this would help to “correct” the V-shaped pocket pivot and perhaps set it up for further upside, so this is something to watch for.




I’ve actually been making money shorting Tesla Motors (TSLA) this past week after being long the stock on the way up from the base breakout that occurred in early August. I find it humorous that TSLA-haters who just have to be shorting the stock all the way up accuse me of being a TSLA “pumper” on Twitter without understanding that I have no ego stake in the stock. These TSLA-haters remain short the stock on the basis of what is nothing more or less than a massive ego trade, insisting that their opinion and (undemonstrated) ability to be “smarter than the market” gives them some sort of morally correct superiority. In my view, TSLA is just another stock; a vehicle with which to make profits as one is able to discern its short-term and long-term trends. Short-term, TSLA is having some problems, and I view its recovery attempt after bouncing off the 50-day moving average on Monday as being somewhat weak here.

Friday saw the stock gap-down again on more analyst’s “concerns,” but it is not clear to me that this isn’t just some sort of Wyckoffian retest as the stock tests the Monday low. TSLA was able to close near the peak of its daily trading range on Friday, as we can see on the daily chart below, and at this point where it goes from here is not necessarily clear to me at this time, which is why I currently have no position, long or short, in the stock.

For now all we know for certain is that the stock has found support at the 50-day line, and Monday’s pullback is indeed the first pullback to the line since the early August base breakout, which is generally considered buyable according to standard O’Neil methods. A breakdown through the 50-day line, however, would put this into play as a possible late-stage failed-base (LSFB) short-sale set-up. Thus if one thinks this pullback to the 50-day line is buyable, one can certainly test that theory using the 50-day line at 250.50, only 4% below Friday’s close, as your quick downside guide for a stop.




After turning into a short-sale target on Monday as it breached its 20-day moving average on heavy volume, Netflix (NFLX) has been bouncing softly back above is 50-day moving average, as we can see on the daily chart, below. To me this looks more like a “pull up” within a short bear flag that is working in reverse to how a pull back within a short bull flag would work. The light volume pull-up consolidates the prior downside move and sets up the potential for further downside, so I still see NFLX as shortable into any rallies up to the 20-day moving average, currently at 466.28. If, and of course this is a big if right now, NFLX is starting to form the right side of a POD topping formation, then the first break will occur through the 20-day moving average as is common among POD formations that I’ve studied. Thus the 20-day line becomes a clear line of demarcation between the bullish and bearish cases for NFLX at this time. If the general market weakens, then I view NFLX as shortable right here using the Friday high at around 461-462 as a quick upside stop.




LinkedIn (LNKD) is acting similarly to NFLX after breaking down through its 20-day moving average on heavy selling volume, as we can see on the daily chart, below. LNKD looks a little more constructive however, as it seems to get some support off the lows of this current four-day bear flag it has formed. The 20-day line lies at 217.47, about 3% above Friday’s close, and I would certainly view any rally up to that level as being shortable, using the 20-day line as a guide for a quick upside stop.




Although I was looking for (AMZN) to resolve to the downside from its prior three-day bear pennant, the stock basked in the glow of Friday’s Alibaba (BABA) IPO as investor excitement over BABA, the “” of China bubbled over into AMZN shares. Objectively, however, the rally is quite logical given the fact that AMZN filled the prior August gap on Monday, as I’ve highlighted on the daily chart, below, after breaking down from the 200-day moving average two weeks ago. I wrote on Wednesday that rallies up into the 50-day line would likely be shortable events, and AMZN fell about 1% short of the 50-day line on Friday. The 50-day line currently lies at 334.10, so I would watch how this bounce develops around the line this week.




I discussed SolarCity (SCTY) in detail in my Wednesday report as a clear LSFB short-sale set-up, which we can see on the daily chart below. SCTY was quite shortable on a brief upside move early Thursday morning into the 68.72 intraday peak before reversing and breaking down below the 200-day moving average on Friday for a quick 10% gain. Notice that SCTY also undercut the early July lows which set up the small intraday bounce and mid-range close on Friday. SCTY closed just a few cents below its 200-day moving average, and I still view this as a short in here, using the 200-day line plus another 2-3% on the upside as a quick stop. (PCLN), not shown, another LSFB that I first discussed in my report of September 3rd, rallied back up towards its 200-day moving average on Friday before reversing and closing down on above-average volume. Alert investors could have hit the stock on the Friday rally as it came within 1% of the 200-day line, At the very least, SCTY and PCLN show that this is indeed a two-sided market, with opportunities on the short side despite the indexes’ all moving back up towards their highs.




I wrote in my Wednesday report that Taser International (TASR) had probably seen the best of its price run, and so far that has turned out to be true as the stock got “tazed” further below its 20-day moving average on Friday, as we can see on the daily chart, below. As it comes down the 200-day moving average now comes into play as a possible area of support. This would also take the stock all the way back to the point at which I discussed it as imminently buyable in my August 31st report. The sharp 20% move from there was one to sell into, as is generally the case with stocks that have strong upside jacks in this market, and anyone who was slow to do so now gets to ponder the reality of losing all of those profits.




While I continue to view this market opportunistically, taking advantage of set-ups on the long or short side as they show up to put on short-term trades, I still see things as being in a cautionary state. The clue here is that while the indexes have recovered from Monday’s lows, breadth has remained in a downtrend, which confirms what most investors probably already know at a granular level, that the action among individual stocks is not so cut and dried, and opportunities to make money riding longer-term trends are few and far between, if not entirely extinct in this nutty market.

While I may be long some stocks over the weekend, my positions are small, and for all I know I will be shifting again to the short side if the general market starts to get into trouble. Meanwhile, while there is some evidence the uptrend is intact, the more important fact is whether one’s stock portfolio is in an uptrend, because in the end that’s all that matters. Bottom line: I remain cautious and opportunistic as I take a short-term view of individual opportunities and set-ups on either the long or short side as they present themselves, as this is mostly what this market is serving up currently. In my view, this is not a position trader’s market, and those who believe they can build long-term positions have discovered the folly of such an approach time and time again in this market. As I wrote on Wednesday, play it as it lies!


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 LOCO, MBLY, PANW, and TWTR, though positions are subject to change at any time and without notice.

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