The Gilmo Report

September 24, 2014

September 24, 2014

Things turned a little messy for the general market as all the major market indexes were turned back on their bids for higher-highs as the daily chart of the NASDAQ Composite Index shows below. The first two days of the week saw the NASDAQ and its NYSE-counterpart, the S&P 500 Index, not shown, drop to test their lows of last week but still remain above their respective 50-day moving averages. I’ve been looking for the indexes to at least test the 50-day lines, but as we can see on the NASDAQ chart the pullback came within about 2% of the line as volume declined from the prior day.

With a number of stocks in oversold positions, the bounce today was logical, and it is a matter of seeing whether this turns into another spinout where the market comes off hard for a few days before finding a floor and turning back to new highs. If that is going to be the case, then the main issue is finding stocks that are sitting at buyable positions within their charts. The NYSE traded higher volume today with the S&P 500 coming within about 2 points of its own 50-day, which would qualify as support off the line. Thus the stage is set for perhaps a continuation of the bounce, but a reversal that breaks down through the 50-day line would be a clear sign that further trouble is brewing for the market. For now I think it’s mostly a matter of keeping an open mind and seeing what the market serves up in terms of profit opportunities, either long or short.




The Russell 2000 Index, represented by the daily chart of its proxy, the iShares Russell 2000 Index ETF, below, gives one a sense of how oversold the market has become, at least from the perspective of smaller-cap names. The index was in the process of making a lower low in what was looking like a four-day decimation, but reversed to close up on the day as selling volume declined. In this position, a rally back up towards the 200-day moving average would be logical as the Russell tries to pull off a successful “Wyckoffian Retest” of its early August lows.




Twitter (TWTR) shrugged off the market’s sell-off yesterday as it held the 10-day moving average and moved higher on the day, as we can see on the daily chart, below. Volume is quite light on this move so I don’t consider it buyable, and the stock is nowhere near a logical buy point. Meanwhile Facebook (FB), not shown, made a new all-time high today on below-average volume. Recall, however, that over the weekend I discussed the pocket pivot buy point in FB on Friday, and the stock has in fact moved higher from there. So far it, along with TWTR, is hanging in there just fine.




Palo Alto Networks (PANW) continues to track tight sideways along its 10-day moving average, as we can see on the daily chart, below. The stock took some selling heat on Monday on an outside reversal day on above-average volume, but has been able to hold up around the 10-day line. My guess is that the stock probably wants to go higher, but the general market is putting a lid on this short-term. Monday’s reversal was making PANW look like a possible short-sale target based on using Livermore’s Century Mark Rule in reverse, such that a failure to hold the $100 price level followed by a pick-up in selling pressure would likely make the stock shortable. That interpretation, however, has not been resolved, and so the stock continues to work on what is now a nine-day flag formation. Sitting at and along the 10-day line, keep an open mind to the fact that it is in position for a possible continuation pocket pivot, and that is something to keep a close eye out for here.




Over the weekend I discussed buying Mobileye (MBLY) off of the 20-day moving average, and the trade worked out as the stock ignored the market’s sell-off on Monday and Tuesday and continued higher before pulling back today, as we can see on the daily chart below. Yesterday’s move could be considered a pocket pivot at the 10-day line coming within a V-shaped move off of the 20-day moving average. I would expect the stock to back-and-fill a bit here along the 10-day line if it is to remain viable on the long side. Today’s pullback held the 10-day line in constructive fashion, and this helps to “correct” the pocket pivot occurring from a V-shaped position. If the market is able to continue its bouncing ways, I would look for MBLY to continue higher from here.




Railcar maker Greenbrier Companies (GBX) held its 10-day moving average today when selling volume failed to materialize on a small pullback, as we can see on the daily chart, below. I discussed GBX’s pocket pivot coming up through the 10-day line in my report of exactly one week ago, and the stock followed through with a stalling sort of buyable gap-up that I didn’t think should be bought into. GBX ignored my thought and moved higher last Thursday before pulling back on Friday and the beginning of this week and finding support along its 10-day moving average. This looks okay here in a buyable position along the 10-day line with the idea that it will continue to hold the line, currently running through the 73.74 price level.




Tesla Motors (TSLA) has avoided violating its 50-day moving average over the past two days by holding up above the intraday low of Monday’s first close below the line, as we can see on the daily chart, below. On the weekly chart, not shown, TSLA is about 2% below the 10-week line, so it is in a do-or-die position. On the daily chart we can see that the stock essentially wedged up into the 50-day line today as volume declined. I was short the stock earlier in the day but covered as it is not clear to me whether the decline in volume represents a dearth of buyers or sellers. This remains in flux here, but any reversal along the 50-day moving average likely indicates the stock is headed lower. Otherwise the potential for the stock to recover and regain the 50-day line remains a possibility, particularly if the general market continues to bounce.




SolarCity (SCTY) has been my best short-sale idea over the past week or so since it confirmed as a late-stage failed-base (LSFB) short-sale set-up eight days ago on the daily chart, below. That breakout failure took the stock more or less straight down through the 200-day line, and today SCTY attempted to regain the red moving average but stalled out and closed below the line and in the lower half of its daily trading range on heavy volume. I consider the stock shortable on rallies up to and just beyond the 200-day line, using today’s high at 65.60 as your guide for an upside stop.




While it has been a great short-sale target since busting its 20-day moving average on heavy selling volume two Mondays ago, Netflix (NFLX) still hasn’t officially violated its 50-day moving average. Note that the daily chart, below, clearly shows this past Monday as the first close below the line, and so far the stock hasn’t moved below Monday’s intraday low. Instead, the stock is wedging back up towards the 50-day moving average on weak volume, and depending on the state of the general market I would watch for a possible short-sale point emerging on a continued weak bounce up into the line, currently running through the 454.30 price level.




LinkedIn (LNKD) continues to hold within a short bear flag along its 50-day moving average following its high-volume breakdown through the 20-day moving average two Mondays ago, as we can see on the daily chart, below. LNKD has so far been able to hold above the 50-day line and today moved to the top of the bear flag price range near the 10-day and 20-day moving averages. A move to the 20-day line at 215.11 might put the stock in an optimal short-sale position, using the line as a guide for an upside stop. Objectively, at least for now, LNKD is consolidating the prior breakdown last week and moves to the top of the bear flag range can be seen as possible short-sale points, particularly if they coincide with a move into the 20-day moving. My studies have found that the 20-day moving average is a critical breakdown point for POD short-sale set-ups, and we have seen both LNKD and NFLX bust their 20-day lines within formations that could be seen as potential PODs that are still in process.


GR092414-LNKD (AMZN) broke down from a point near its 50-day moving average on Monday as the warm after-glow that it received from the Alibaba (BABA) IPO last Friday wore off. AMZN was able to find support today along last week’s lows near the bottom of the early August gap again, and the stock staged an outside reversal to the upside on weak volume. I still look at this as shortable on rallies up towards the 50-day moving average, which is now around the 332.50 price level. While the stock can move 10 points up and down as it forms what appears to be a short bear flag, as I’ve highlighted on the chart, keep in mind that this is about a 3-4% range so while the price moves appear large, the percentage moves are not much to sneeze at.




One of the peculiar characteristics of this market is that stocks can get hammered for a period of time before they begin looking rather ugly, at which point they often-times find a floor and zip back to the upside, so keeping an even keel is critical. Look at a daily chart of Biogen Idec (BIIB), for example, as a stock that looked quite dead after violating its 50-day moving average a couple of weeks ago, as we can see below. BIIB quite nicely illustrates the Ugly Duckling Theory, to wit, that once a stock looks about as ugly as it possibly can it will turn right around and head back to the upside. Even trickier, note that BIIB had no bona fide buy points as it came back up through and set up along the 50-day line over the past several days. If one owned BIIB and didn’t sell into strength as it came up into the 347-348 level back in August, one might have very well been shaken out of the stock on September 12th when it “officially” violated the 50-day moving average only to see it stop going down the next day and then head back to the highs. Exhibit A of why a QE market can cause you to tear your hair out!




In the spirit of BIIB and the Ugly Duckling Theory, take a look at El Pollo Loco (LOCO) as it continues to pull back and hold along its 20-day moving average, as we can see on the daily chart below. Over the weekend I theorized that LOCO could simply be working on a necessary handle to its prior cup formation that saw the stock retest the prior highs above the 40 price level following a pocket pivot off the 10-day moving average and up through the 20-day line on September 2nd as I predicted in my report of August 31st. Objectively, with LOCO hanging along the 20-day line and just below the 10-day line it is in a position for a pocket pivot coming up through the 10-day line which should be watched for if the market is able to build on today’s bounce.




Also keep an eye on Arista Networks (ANET), which I first discussed as buyable in my report of August 17th as the stock pulled back and formed the lows of a handle along the 20-day moving average. If you compare ANET at that point in mid-August to LOCO, above, in real-time, you will see that LOCO’s position today looks exactly like what ANET was doing in mid-August as it was finishing off a cup-with-handle base. After moving to new highs in early September ANET has spent the past three weeks building a little secondary base as it backs and fills along the 20-day moving average. This one looks buyable on pullbacks close to the 20-day line, but sitting here along the 10-day moving average ANET is in position for a pocket pivot, so keep an eye out for that.




I continue to treat the market as a market of stocks and remain open to set-ups on the long or short side as they appear in real-time. In my view this takes out entirely any fixation on what the indexes may or may not be doing. But in any case the S&P 500’s bounce off of its 50-day moving average on increased volume can be seen as support that puts it and the NASDAQ in position to continue bouncing in a typical recovery attempt. I was testing the short side rather aggressively today, but my intraday stops were hit as further selling pressure failed to materialize.

Meanwhile I can thumb through charts of my current long and short watch lists and come up with several intriguing ideas on either side of the market, which in my mind argues for the continued approach of treating the market as a market of stocks and focusing on individual set-ups, long or short, as they occur in real-time. If the general market bounce today pans out, play it as it lies and look for long ideas setting up at proper buy points. And if the bounce fails and gives way, be ready to shift to the short side and go after some of the short-sale targets I’ve discussed in this report. Bottom line: Remain flexible.


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 GBX and MBLY, though positions are subject to change at any time and without notice.

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