The Gilmo Report

April 23, 2014

April 23, 2014

The grinder rally has continued to press higher, and one has to admit that you couldn’t have scripted this one better. After seeing all of its leading names get decimated as they reached an extreme oversold condition (that kept getting even more oversold all the way down), the NASDAQ Composite Index, shown below on a daily chart, undercut its early February lows and bounced off of its 200-day moving average last week. As I discussed in my report of two weekends ago, a logical reaction rally in the general market indexes would help to form right shoulders in a number of former leading stocks that I identified in that report as potentially building the first two-thirds of head and shoulders tops, e.g., a left shoulder and a head. A rally failure in the indexes would help to confirm this, and we can see that the NASDAQ is still below its 50-day moving average as it found resistance at the 65-day exponential moving average for the second time in the past two weeks.

So while we haven’t seen any kind of follow-through in the indexes in what is so far a six-day rally off of last week’s lows for the NASDAQ and a seven-day rally for the S&P 500, the indexes themselves have yet to fail. My tendency is to expect this rally to fail at some point given the fact that there remains very little in the way of buyable set-ups, and in many cases the damage seen in the charts of a broad number of former leaders hasn’t even begun to heal. But I’ll let things develop as they may without getting locked into a rigid bearish or bullish frame of mind.




The S&P 500 Index, shown below on a daily chart, provides a sharp contrast to the NASDAQ in that it is holding above its 50-day moving average pretty well, and today pulled back only slightly as volume remained below average. After six straight days of upside in the S&P 500, this actually looks constructive, so far. The question is whether the S&P 500 will drag the NASDAQ back up or whether the NASDAQ will end up dragging the S&P 500 down. In any case, even without a follow-through, the S&P 500 is within spitting distance of its early April bull-trap high, and if it did clear that high the market would then be in another “de facto” rally. Based on the action of most leading stocks, I lean towards the side of caution when it comes to going long this market, although I have nothing against acting on a concrete buy signal where I can find it, while some opportunities can crop up on the short side, as I’ll discuss a little later in this report.




As far as the long side of this market is concerned, we’ve seen both Finisar (FNSR) and Diamondback Energy (FANG), both not shown, move higher since I discussed them in last Wednesday’s report. At this point they are extended from any low-risk buy points. My other higher-risk long idea, Plug Power (PLUG), had the plug pulled on it Monday when the stock came charging out of the gate right at the open and cleared the $8 price level on news of a collaboration in China before reversing hard on heavy volume and closing down on the day, as we can see on the daily chart, below. Volume was relatively heavy as the stock staged a big outside reversal day, and yesterday PLUG then sealed its fate by announcing a secondary stock offering after the close. As I tweeted to members yesterday, the play in PLUG was off based on the Monday reversal. For now this one is off the table as a long play, and I have to say that its failure here reminds me of Organovo Holdings (ONVO), not shown, another low-priced speculative hot “goodie” that did not pan out.




What is going on here in my view, and as I discussed over the weekend, is a natural reaction rally that is also evident in former leading stocks that were hit hard in March and early April. As these stocks bounce from deep, oversold positions, they rally with the market as earnings season provides them with a nice excuse to rally. A good example is Netflix (NFLX), shown below on a daily chart. As I’ve outlined on the chart, NFLX built a left shoulder and a head in a head & shoulders formation in-progress, and Monday’s earnings announcement gave it the impetus to gap up right into its 65-day exponential moving average and the peak of the left shoulder in the pattern. This looked shortable to me yesterday right around the 65-day line and the peak of the left shoulder, using a quick stop in case the stock continued higher. I tweeted to members yesterday just after the open that the NFLX gap-up looked like a possible right shoulder peak in-the-making. Today NFLX continued lower on more above-average selling volume, but I would expect it to “round out” the peak of a potential right shoulder, so I might look to short any rallies that come up close to the 65-day line up around 377-378.




Gilead Sciences (GILD) is another example of a stock potentially forming a second right shoulder in an overall head and shoulders formation after it rallied right up into its 50-day moving average and turned tail, closing right at the lows of the day on heavy volume, as we can see on the daily chart, below. From here I would look at any further rallies up towards the 50-day moving average up around 76.27 as potentially shortable, using the moving average as a guide for an upside stop. GILD actually closed about 3% below the 50-day line today, so it is still within shorting range if one doesn’t mind using a 3-5% upside stop. With another big-stock bio-tech short-sale target, Celgene (CELG), set to announce earnings tomorrow before the open, watch for similar action should the stock manage to rally on a “favorable” report.




Looking at CELG’s daily chart, below, we can set our strategy for tomorrow if the stock moves up on the earnings report. A logical area of resistance would be at the 200-day line, currently at around 152, or the 50-day line, currently at 150. Notice also that the 50-day line has moved below the 200-day moving average for a bearish “black cross.” Therefore this would be the area at which I would look to put out a short position into a rally. I also discussed last week how I would look for the 200-day line to constitute shortable resistance in CELG on any logical rally off of last week’s lows, and lo and behold we are faced with that possibility tomorrow. The other potential outcome is that the stock just gaps down on earnings, similar to what Amgen (AMGN) did today. Watch for my tweets in real-time depending on how CELG plays out tomorrow.




Sometimes it is possible to act after an earnings report, as was the case with Amgen (AMGN), shown below on a daily chart. AMGN had rallied up into its 65-day exponential moving average, the black moving average on my daily charts, yesterday where it stalled out in advance of yesterday’s after-hours earnings announcement. When the stock gapped down to the 116 level this morning, I considered it worth taking a shot at on the short side with the idea of using yesterday’s intraday low at 117.05 as a sort of “fill-the-gap” stop. AMGN continued lower throughout the day, however, breaking below its 200-day moving average on very heavy volume. AMGN tested last week’s lows where it found intraday support, closing within 2% of the 200-day line. I consider the stock shortable using the 200-day line as a quick upside stop, and optimally I would like to enter a short-sale (again, since I played it on the downside today on a day-trading basis) on a rally up into the 115 price level, should that occur. We can see, however, that AMGN may very well have formed the peak of a right shoulder in an overall head and shoulders formation when it bumped into the 65-day line yesterday.




I’ve been looking for Cree (CREE) to breakout on the downside through its long, two-headed “hydra & shoulders” topping formation that I’ve discussed many times in recent reports, and it finally took a bad earnings report to make that happen. As we can see on the daily chart, below, CREE busted right through the 54 price level, roughly where the nine-month long neckline of the H&S pattern had formed. If you were alert this morning, CREE could have been viewed as a shortable gap-down, using the intraday high at 53.40 as your quick upside stop. At this point I would only be willing to short the stock on any short-lived rally up near that price level, as it is currently extended to the downside.




After-hours Facebook (FB) is rallying up above the 64 price level as I write this afternoon following its earnings report, but we can see from the daily chart, below, within range of today’s intraday high at 63.48. We’ll see where the stock opens up tomorrow, but the basic issue here is that FB is stuck in “no-man’s land” above the 10-day moving average but below the 50-day moving average. Based on what the chart is showing us, the stock also isn’t in any kind of position for a pocket pivot or some other discernible buy signal, so the flip side is to wonder whether this gap-up, earnings-related move will turn out as another right shoulder rally. Right now that isn’t clear but I’ll be watching this closely tomorrow, so be sure to follow my tweets as the action in FB unfolds either way.




FB’s earnings announcement and after-hours rally is helping to push Twitter (TWTR) above the 46 price level. As you all know, I’ve been watching TWTR closely since its “deep doo-doo” bottom-fishing pocket pivot of last week, as we can see on the daily chart below. So far TWTR has been moving relatively tight sideways as it tracks along the 20-day moving average, but no big surge towards the 50-day line, currently at 50.11, hasn’t occurred just yet.




After-hours Apple (AAPL) is rallying up towards the highs of its current consolidation extending back to December of last year. AAPL did everything right in its earnings report this afternoon, beating estimates by $1.42, announcing record iPhone sales for March, increasing its dividend by 8%, and upping its stock buyback program by 50% to $90 billion. With the stock set to gap up tomorrow morning, it is not clear to me whether we could consider this a buyable gap-up, but I will be watching this closely tomorrow as a resurgent AAPL can certainly figure greatly in helping the NASDAQ continue its recovery and potentially move higher.




With the market continuing to rally off of last week’s very logical lows after the NASDAQ undercut its early February lows and bounced off of its 200-day moving average, the situation remains fluid. There have been opportunities to short earnings-related rallies in NFLX and GILD, for example, but overall the situation is far from clear. If the S&P 500 is able to push to a higher high, which it is certainly within range of doing, then a de facto rally resumption will help to obfuscate things even further.

The easy solution remains focusing on the action of individual stocks if and as they show actionable set-ups long or short. As the index reaction rally pushes higher, I’ve got one eye on these short-sale set-ups that could be forming right shoulders within potential head and shoulders set-ups while at the same time I’m keeping an eye out for any actionable buy signals in resurgent leaders or even former leaders, such as FB or AAPL. Thus I think it is a matter, once again, of treating the market not as a stock market, but as a market of stocks, looking to move either way as opportunities in individual stocks crop up long or short. On the short side, I am steering clear of any short-sale targets I’ve discussed in recent reports as earnings approach, but once earnings are out, such as with NFLX and GILD, for example, the way is clear to re-visit such short-sale targets as they engage in logical earnings-related rallies and approach potential areas of resistance.

The basic theme here, as I’ve already discussed, is to look for right shoulders to form on these rallies. Remember, these are strange times given the immense QE backdrop, so remain opportunistic and expect the unexpected! 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 had positions in GILD and NFLX, though positions are subject to change at any time and without notice.

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