The Gilmo Report

September 28, 2014

September 27, 2014

Wednesday’s rally attempt failed quickly on Thursday as all the major indexes took a dive to or through their respective 50-day moving averages. The daily chart of the NASDAQ Composite Index, below, shows Thursday’s sharp break to the downside on heavier volume as the index dove below its 50-day line. Friday saw the index edge above the 50-day moving average on lighter volume as the market received a nice “defibrillator” charge after getting pounded on Thursday. Both Wednesday’s and Friday’s attempts at a bounce were logical given the position of the index as it probes the 50-day moving average and the top of the prior double-bottom price range it formed in July and August, which I’ve highlighted on the chart.

 

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The S&P 500 Index, shown below on a daily chart, was looking like it wanted to put in a low on Wednesday when it bounced off of its 50-day moving average on increased volume, but it failed very quickly on Thursday as it, too, busted the 50-day line on heavier volume. Like the NASDAQ, the S&P 500 edged back above its 50-day moving average on light volume. Normally in this market, when the indexes have pulled down to an area where they might find support and begin rallying again I see a lot of stocks setting up, generally in roundabout pocket pivots or volume dry-ups along a key moving average, but right now none of this is evident. And even on a day like Friday where the indexes were bouncing sharply, running over late shorts, not much in the way of strong-volume action among leading and potentially leading stocks was coming through my screens.

As well, on a short-term basis the market is in a downtrend as it makes lower lows and lower highs over the past six days Thus I tend to think the market is in a cautionary position here and it remains to be seen whether the S&P 500 and the NASDAQ can hold their respective 50-day moving averages. On a stock-by-stock basis, my own experience is that I’ve been able to make progress operating on both the long and short sides of the market in September. However, as is clear from the index charts shown here, September is so far working out to be a choppy down month with two trading days left as we come to the end of the third quarter of 2014.

 

GR092814-SPX

 

As a change of pace, I’m going to begin the stock discussions in this report with my current short-sale ideas instead of the usual long set-ups. This reflects my general view that while I am open to playing the long side in a select few stocks that might be trying to set up here, I am also intent on stalking the short side as I see leading stocks begin to wobble and/or break down.

Tesla Motors (TSLA) remains on my short-sale hit list as it is stuck below its 50-day moving average within a short bear flag. As we can see on the daily chart, below, volume picked up on Thursday as the stock flashed an outside reversal day after trying to push above the 50-day moving average. Notice also that the stock is forming a little head and shoulders formation here where the big-volume breakdown ten days ago on the chart forms the right side of the “head” in the pattern. These sorts of “fractal” H&S formations on the daily chart can work, and within the context of the overall action as a potential late-stage failed-base (LSFB), provides additional evidence for the bear case on TSLA.

Although there is no guarantee that it will work, this is a pretty simple short trade where we are looking for confirmation of the LSFB short-sale set-up in the form of a clean violation of the 50-day moving average, which for now would require a move below 244.71. With the stock stuck about 2-3% below its 50-day line, it can be shorted here using the 50-day line as a very nearby stop on the upside. TSLA closed down on Friday as it failed to participate in the day’s rally in any meaningful way. While most beaten-down leaders were at least drifting to the upside, TSLA’s early morning upside blip was sold into.

 

GR092814-TSLA

 

Netflix (NFLX) is in a similar position to TSLA as it remains entrenched below its 50-day moving average and stuck in a short bear flag. Over the past couple of weeks we’ve seen above-average volume come in solely on the sell side ever since the stock busted through its 20-day moving average 10 trading days ago on the daily chart, below. As I’ve previously discussed, NFLX is a potential Punchbowl of Death or POD formation given the high-volume breakdown and failure at the 20-day moving average, which is how POD formations usually begin to break down from the right side peak of the pattern. NFLX is currently a little over 1% from its 50-day moving average at 454.56, and may be shortable here using the line as a very near upside stop.

 

GR092814-NFLX

 

LinkedIn (LNKD) rallied on Friday to the top of its recent bear flag range after an analyst upgraded the stock to “market outperform” from “market perform,” which, if we were to go into a bear market, is another way of saying that if the market is down 20%, LNKD will be down 18%. As I tweeted on Friday, I saw the rally up into the 20-day moving average as shortable, using the line as a guide for an upside stop. This remains in position here to be shorted, and we can see that LNKD stalled at the moving average and closed not quite mid-range on heavier, just about average, volume. The flip side to this set-up is that the stock is also finding support at the 50-day moving average, and could push higher if the 50-day line holds. This is why the 20-day line is your best guide for a tight upside stop should this fail to pan out as a short-sale target.

 

GR092814-LNKD

 

SolarCity (SCTY) is working on a little bear flag below its 200-day moving average, as we can see on the daily chart, below. For now if one is short the stock based on my discussion of the stock as a short following the late-stage breakout failure ten days ago on the chart, the 200-day line makes a convenient trailing stop if one wants to try and play this out for a potentially larger downside gain. SCTY, like its Elon Musk-fathered sibling TSLA, failed to rally with the market on Friday and closed slightly down as buying interest failed to materialize. I see this as shortable on rallies up to or around the 200-day moving average at 64.93, although the opportunity to short the stock at the 200-day line may very well have come and gone on Wednesday, three days ago on the chart, when the stock reversed at the line and closed in the bottom half of its daily trading range on heavy volume.

 

GR092814-SCTY

 

Amazon.com (AMZN) continues to find support along its recent lows over the past two weeks and the bottom of the gap from early August as I’ve highlighted on the daily chart, below. The stock looked like it was going to bust through to lower lows on Friday, but it fed off of the buoyancy in the indexes to close slightly up on the day. I continue to view AMZN as shortable on rallies into the top of the current ten-day bear flag range with the 20-day moving average at 328.79 coming into play as my first line of upside resistance. We can see that six days ago on the chart the stock found resistance at the 20-day moving average, defining the top of its current bear flag formation.

 

GR092814-AMZN

 

In terms of macro set-ups on the short side, there are a couple of interesting examples in the current market, Pandora Media (P), an old short-sale “flame” of ours back in March, and Three D Systems (DDD), both shown below on weekly charts. Both stocks broke down from initial head and shoulders formations in late February and March of this year, and have since rallied with the market. The “head” in P’s overall head and shoulders formation actually had a smaller H&S formation within it, but it is not evident on the weekly chart. Members can go back to my reports in March when we were playing the stock on the short side in real-time to see how that all worked out. After rallying with the market after the April lows, P has since formed a big right shoulder that has within it a smaller, “fractal” H&S formation.

The highs of this formation find resistance along the 40-week moving average the red line in the chart, and there are a number of stalling weeks at the line where volume picks up. The peak of the “head” in this fractal H&S formation, also the peak of the right shoulder in P’s larger H&S pattern, occurred on a very low weekly volume bar as it stalled right at the 40-week line. Now P is breaking for the neckline of this smaller H&S formation and looks poised to breakdown further, something that would likely happen on a general market break. Keep an eye on P here, as I would watch for a rally up towards the 10-week line at 26.27 or the 50-day line at 26.46 as potentially shortable.

 

GR092814-P

 

DDD’s wild H&S formation finally broke down in early March as it rolled over after rallying right up into the 10-week line in February on a right-shoulder rally. This wedging rally failed right at the 10-week moving average and sent the stock back down towards the neckline at around the 40-week moving average, as can be seen on the chart below.  Once DDD bottomed in late March it also rallied with the market and made it all the way up to the 40-week line where it reversed on very heavy volume. This move formed the peak of the “head” in a secondary H&S pattern that has formed to the right of the primary H&S that formed earlier in the year.

The stock looks like it wants to move lower from here, and the RS line is making lower lows here ahead of the stock. I would keep an eye out for rallies into the 50-day or 20-day moving averages, currently at 50.84 and 49.98, respectively, as potential shorting opportunities in DDD. Members should also check P and DDD on their daily charts to get a sense of the “lay of the land” with respect to the more granular current daily technical action.

 

GR092814-DDD

 

Twitter (TWTR) remains near the highs of a short V-shaped formation, as we can see on the daily chart, below. TWTR did not rally strongly with the market, however, and closed near the lows of its daily price range after gapping up 52 cents on the open Friday. Short-term I don’t see anything that makes me think the stock is buyable. It is in position for a possible pocket pivot off the 10-day line, but so far has essentially held pullbacks to the 20-day moving average, instead. My view is that TWTR needs to put more time in after a great run up from the early June lows where I was first buying it in the low 30’s. 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.

 

GR092814-TWTR

 

Palo Alto Networks (PANW) is now in a three-weeks-tight, or 3WT, formation, as we can see on the weekly chart, below. My guess is if the market goes higher PANW will come out of this short flag formation, and given its position under the 10-day moving average it is in position for a possible continuation pocket pivot off or up through the line.

It will be interesting to see how PANW holds up if the general market moves to lower lows next week. So far it has done well in the face of selling over the past six days but has failed on several attempts to push above the $100 century mark. It is possible that the general market has been putting a lid on this, so one should keep an open mind regarding PANW’s potential. I’ve discussed the stock as a possible Century Mark Rule in Reverse short-sale play similar to what happened to Yelp (YELP) in March, but there has been no confirmation of this potentiality as of yet.

 

GR092814-PANW

 

Mobileye (MBLY) continues to move along its 10-day moving average after reversing off of its Thursday highs and closing down, as we can see on the daily chart below. On Friday MBLY moved slightly up and off of the 10-day line, but volume was low as it dries up in the extreme. On a weekly chart, which I don’t show here, MBLY is in a two-week flag formation that could be considered something of a “high, tight” flag, so it is continuing to set up here. It may need more time, however, to do so, but I think it should be on your buy watch list in case the market is able to find its feet and do the boogie to higher highs.

 

GR092814-MBLY

 

Greenbrier Companies (GBX) also held its 10-day moving average after getting hit on Thursday with the general market, but it still continues to hold up as we can see on the daily chart, below. I tend to think that one should be opportunistic here and use pullbacks to the 10-day line to buy the stock since it does not tend to hold up after exhibiting short-term strength. That said, the more pressing issue here is whether the stock has the potential to stage a sharp upside price move. Personally speaking, I like a lot of the proverbial “bang” for my buck, and while GBX is a steady name, to be sure, it may not prove to be all that dynamic of a leader. Nevertheless, it remains in position near its 10-day line for a possible continuation pocket pivot off the line, should that occur. Meanwhile other rail-related names, all of which are likely slower situations, continue to exhibit similar steadiness in their price/volume action.

 

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El Pollo Loco (LOCO) is still holding tight just below its 20-day moving average, and the question to be answered here is whether this action over the past six trading days on the daily chart, below, is a bear flag of just tight action along the lows of a potential handle to the stock’s prior cup formation. If there were a 50-day moving average on the chart it might give a better perspective as to where support lies here, but LOCO has only been trading for 45 days since its IPO in late July.  Five more days and we will start to see the 50-day line show up on the chart, which will be useful when it occurs. I would also like to see more blue in my indicator bars along the top of the chart, although a pocket pivot coming up through the 10-day line could easily remedy that. My guess is that the state of the general market will determine how LOCO pans out from here, but it also belongs on your buy watch list in case the market is able to regain its “rally mojo.”

 

GR092814-LOCO

 

Arista Networks (ANET) is doing a little better than LOCO and actually holds above its 20-day moving average, as we can see on the daily chart, below. However, I would not consider this to be all that “ripe” yet based on the uneven indicator bars at the top of the chart. These are mostly Code Red which is not what I look for when trying to determine whether a stock is setting up to move. As ANET continues to work on this new base it gives the stock some time to set-up and improve its technical “color,” so to speak.

This market remains tricky and difficult at best, and making money, long or short, is not necessarily as cut and dried as I would like to see.  A lot of back and forth movement is evident on the charts of individual stocks, but the bottom line is that action in September has remained a choppy, trendless affair. With the indexes in a critical position here along their 50-day moving averages we will likely see some resolution this coming week. Thus the only way I find that it can be played is, again, on a stock-by-stock basis, and trading the long or short set-ups as they occur in real-time. The best approach as I see it is to remain flexible, and play a good defense by keeping stops tight wherever you choose to tread, long or short.

 

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

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