The Gilmo Report

August 18, 2013

August 17, 2013

What started out as the quiet summer month of August ramped up its decibel level a bit noisily on Thursday when the indexes gapped down sharply at the open and stayed down all day with volume picking up strongly. This made for a big, ugly gap-down day off the peak on heavy volume, as we see on the NASDAQ Composite Index’s daily chart, below. As always, the pundits will trot out their “reasons” for the sharp gap-down and decline on Thursday, and I heard everything from strong jobs data making QE tapering more likely to weak earnings reports from Wal-Mart (WMT) and Cisco Systems (CSCO) as alibis for the decline.

QE tapering is, of course, looking possible as we go into September, and this coming week’s release of the latest Fed meeting’s minutes is likely to have some influence on the market’s interpretation of the immediate potential for Fed actions in this regard. I doubt, however, whether WMT and CSCO really have the kind of influence they may have had in markets past to cause, all on their own, such a sharp market break. It may simply be that the news in general gave the market the excuse to finally do what it wanted to do based on the increased distribution. Certainly, the early warning signals were there, as I’ve discussed in previous reports, but the situation also has to be looked at on a stock-by-stock basis, as some are still holding up better than others, but we’ll get to that a little later in this report.




The market breakdown on Thursday took the S&P 500 Index, shown below on a daily chart, right down to its 50-day moving average where it ended the week on Friday. Over the weekend I was looking for a bit more resolution to the market’s action before taking a strong stand, although the initial divergence in breadth, particularly as measured by the NYSE Advance-Decline line and the build-up of distribution days over the prior couple of weeks were hinting of something negative on the horizon. This week’s action provided that resolution, and thus the market appears to be starting some sort of correction, the duration and extent of which is currently unknown. The S&P 500 closed just below its 50-day line on Friday, and it remains to be seen whether that will provide the market with a logical area of support. Certainly, a short bounce would not surprise me, but this could just be precursor to further downside. There are, however, some interesting cross-currents.




One such cross-current is the action of precious metals, which in the face of potential QE tapering would be expected to sell off with stocks and bonds. Last weekend I observed that gold was beginning to perk up, and silver must have taken offense as it immediately gapped up above its 50-day moving average on Monday for a gap-up type of pocket pivot move, as we can see on the daily chart of the iShares Silver Trust (SLV), shown below. The SLV then showed strong follow-through on Thursday, and I definitely take note of the fact that the precious metals were moving fast and hard on Thursday as the stock market was getting shellacked. It seems that something more than just QE tapering is afoot here.




Last weekend I wrote “that gold is once again pushing up against its 50-day moving average, despite all the Fed tapering talk.” At the time that was not enough to get me interested in buying gold, but I did write that “for me to get interested in gold again I would need to see a fairly convincing, high-volume move up through the 50-day moving average in the form of a bottom-fishing type of pocket pivot.” Interestingly, gold did provide a bottom-fishing type of buy signal on Thursday with a strong pocket pivot range breakout that occurred from a point that was above both the 50-day and 10-day moving averages but coming up through the top of a short sideways range, which is sufficient to call a pocket pivot, as we see on the chart of the SPDR Gold Trust (GLD). But if the threat of QE tapering is causing harm to stocks, why are the precious metals jacking here?




The “fear bid” excuse doesn’t seem to hold water as bonds of all stripes got hit as well, with the iShares 20+ Year Treasury Bond ETF (TLT) shown below, moving to new lows on Friday. Perhaps the movement out of stocks and bonds and into precious metals is more indicative of movement away from dollar-denominated assets as the markets begin to expect the Fed to remove the prop that has held up U.S. asset prices for so long. Thus money moves out of stocks and bonds and into “hard currencies” like precious metals As well, big hedge funds that have been sellers of huge positions in gold and gold-mining stocks, such as Soros and Paulson, sold out in the second quarter and so their selling pressure is out of the market. If it is indeed true that most of the selling in gold and silver has been of the paper variety, then at some point a push back from the physical sides of these markets may have more leverage, leading to sharp price increases.




Tesla Motors (TSLA) has now violated the intra-day low of the prior week’s buyable gap-up move, as we can see on its daily chart, below. However, as I wrote last weekend, the stock was already 150% above its 200-day moving average and most buyable gap-ups were not seeing the usual sort of “after-burn” to the upside such as what we saw in TSLA back in May. In this case, perhaps, Cinderella only comes once, and it is now time for TSLA to engage in some sort of base-building process. In any case, if one bought or added shares on the basis of last week’s buyable gap-up, the stock has now issued a clear sell signal for those shares.




LinkedIn (LNKD) was a bit of a teaser this week as it seemed to react to my comments last week that it needed to get moving soon given that it was now five days into a sideways consolidation following the prior week’s buyable gap-up move. On Monday the stock jacked above the 142 price level, looking like it would gather some upside “after-burn,” but this did not last long as the stock broke down on Wednesday and then came crashing down through the intra-day low of the buyable gap-up day on Thursday when the market gapped down. We can see on the daily chart, below, that LNKD was able to find support at its 20-day moving average, but it is not clear to me that one can simply step in and buy the stock here on the pullback since I am not enamored by its failure to hold its move to new price highs early in the week. If one were to try and buy on a pullback to the 20-day line, then using the line as a selling guide would be the most prudent way to handle such a buying attempt.




Stratasys (SSYS) held up reasonably well during the week’s weak spell, pulling back to the top of its prior base on average volume, as we see on the daily chart below. Obviously, this puts the stock back within buyable range of the initial breakout last week, and one would expect it to hold the top of the base on any continued pullbacks. I don’t think I would use the standard 7-8% stop-loss given the fact that the general market is not looking so hot. If I had bought this breakout I would sell on any breakout failure rather than giving the stock that much room, based on the general market context.




Last weekend I pointed out six weeks of tight closes on the weekly chart of Three-D Systems (DDD), shown below on a daily chart, and the stock did start the week out with a nice attempt at breaking out to all-time highs. Volume picked up nicely on Monday as the stock logged its third-highest daily close in its history. But this was short-lived as the general market weakness dragged the stock back below its 50-day moving average. Technically, because the stock first closed below the 50-day line on Thursday and then on Friday moved below Thursday’s intra-day low, it has violated the 50-day moving average on an intra-day basis. However, it did manage to close 3 cents above Thursday’s intra-day low as it hung on by a thread. I think the bottom line here is that you have a stock that still has work to do in the face of a weak general market, and to some extent bolsters the argument for not taking an aggressive stance on the long side given the current market context. I do believe, however, that if the market goes into a sustained correction, the 3-D printing stocks should remain on your buy watch list if and as they pull back and build new bases.




Last weekend I also pointed out that members should watch for a pocket pivot buy point developing along the 10-day moving average in Netflix (NFLX), shown below on a daily chart. Well, the stock did better than that, coming in with a pocket pivot on Monday, as was mentioned in this past Wednesday’s report by my colleague Kevin Marder per my “hospital notes” provided to him on that day, and then another pocket pivot on Friday on what was options expiration day. NFLX, having already pulled back to the top of its base where I had previously thought shares could have been purchased (see July 28th report), perhaps didn’t feel like pulling back any more in the face of this week’s market drop. On the contrary, the stock acts like it wants to go higher, but the general market action might put a lid on this if the indexes deteriorate further this coming week.




The move by Facebook (FB) following its buyable gap-up move of about three weeks ago was not bad, and represents the kind of upside thrust and “after-burn” that I like to see following a BGU. It makes sense to me, however, that the stock will find resistance around the 38 price level, which is where its history-making IPO flop was initially priced. A lot of investors were able to get shares of FB going into the IPO, which is often a warning sign. Shares in truly “hot” IPOs are generally very hard to come by, and it seemed that FB simply took advantage of its pre-ordained “hot” status to unload as many shares as possible on an unwary and naïve investing community.

Ultimately, however, the company has to be given some credit for making a comeback and working to prove its naysayers (of which I have been one at times based on the stock’s pathetic price/volume action following the IPO) wrong. In the context of a market correction, a pullback and base-building process in FB as it works off some of those weak hands who were silly enough to get sucked into the IPO back in May of 2012 is warranted and probably necessary if the stock is going to have a chance at making further highs. Thus the weekly chart below puts FB’s action in context as we can see a huge upside streak over the prior three weeks followed by this past week’s pullback on lighter weekly volume. This looks like the start of a new base-building process, and at this stage I would let the stock do what it needs to do. Last weekend we saw the stock holding tight along the 10-day moving average, which did set up the possibility of a continuation pocket pivot buy point developing along the 10-day line as an add point to the initial buyable gap-up. This did not pan out, however, so at this stage the stock is probably in need of building a new base.




Trulia (TRLA) has turned into something of a “range trader” as it found a low along the 10-day moving average last week and moved back to the highs achieved following its buyable gap-up move of two weeks ago. My inclination would still be to sell the stock into a move like this as it will likely continue to base-build, at best, given that the stock is swinging around in much more volatile fashion than we saw during the month of July when the price trend and action was fairly tight. Of course, if one owns the stock down around the 30 level where we first saw the stock flash a bottom-fishing pocket pivot buy point (see June 30th report), one could continue to try and hold the position, although in this market 20-30% gains are decent profit objectives. The bottom line is that the volatility here needs to settle down and the wide, loose action can be a short-term yellow flag, particularly if the general market weakens further.




Yelp (YELP) flirted with the lower end of its allowable range of “porosity” from the intra-day low of its buyable gap-up move following earnings in late July. On a closing basis the stock closed 2.98% below the 49.22 intra-day low of the gap-up day on Thursday during the market swoon, and then moved a little below that on Friday before rallying to close back above the 50 price level. I think that given YELP’s inherent volatility 2-3% maximum downside porosity beyond the 49.22 buyable gap-up day’s intra-day low is reasonable, but remember that I considered the stock a sell into the price spike of two weeks ago, per my August 4th report. At this point the stock looks like it needs time to base and give us another legitimate buy signal.




I did have some prescience in last weekend’s report to provide some short-sale ideas given that we were seeing clues of possible trouble on the horizon for the general market. Among these, Regeneron Pharmaceuticals (REGN) was setting up and resting on top of its 50-day moving average and then this week dropped below the line on Monday where it became shortable. The stock has now moved lower and I would be looking for an undercut of the 206.30 low from late June that might also coincide with a move into the 200-day moving average, currently at around 204.43. Meanwhile, if you are short the stock at around the 50-day line you can continue to use that as your ultimate upside stop although one is always free to implement one’s own trailing-stop techniques. Keep in mind as well that the lows in the 224-226 area could also come into play as areas for the stock to “undercut & rally,” so handle this with care. So far, however, it is working.




Another former buy idea that has morphed into a short-sale target and which I discussed last weekend as reminding me of Sunpower (SPWR) from 2007-2008 (see August 11th report) is SolarCity (SCTY). If one refers to the chart of SPWR in 2007-2008 from last weekend’s report, one can see that SPWR came apart rather quickly. This coincided with a sharp general market break at that time that saw the NASDAQ blow from a January 2008 high of 2668.60 all the way down to a low of 2202.50 before the month was over. This was the beginning of the market top that eventually extended into the big break later on in 2008. My point is that what will likely be the catalyst for an SCTY breakdown that occurs as rapidly in similar fashion to SPWR in January 2008 will be a market break of similar magnitude. History may not always repeat, but it often rhymes. For now SCTY is simply a late-stage, failed-base, short-sale set-up using the 50-day moving average as an upside guide for a stop. This assumes one was able to short the stock earlier this week as it bumped up against the 50-day line before breaking down on Thursday.




First Solar (FSLR), also discussed in last weekend’s report as a short-sale target following its shortable gap-down move following earnings last week, has continued to move lower and is now flirting with its 200-day moving average, as we see on the daily chart, below. It is still 4% above the 200-day line, but I would look for this to breach the line and perhaps undercut the lows of the flag formation from April way on the left side of the daily chart below. That might take the stock down to the 35 level, at which point the 200-day line becomes upside resistance.




In general I find Thursday’s higher-volume gap-down move in the major market indexes followed by a lack of any ability to bounce back on Friday as decidedly negative. Some individual stocks were able to bounce back, as we have seen in some of the charts of leading stocks I’ve discussed in this report. But the yellow flag is out, and the only prudent course of action is to heed the yellow flag. Look at the action in Google (GOOG) or (AMZN), where the wheels are starting to come off, or the pullback in Celgene (CELG), which has given up all of its gains since its buyable gap-up move of July 11th and is almost back to its 50-day moving average, or even (PCLN), which gapped up two Fridays ago after announcing earnings two Thursdays ago after the close and hasn’t “looked up” since, coming straight back in to fill that gap, and then some, by Thursday of this past week.

Apple (AAPL), meanwhile, isn’t offering much support to the NASDAQ Composite despite moving above the $500 price level for the first time since January. This occurred as a bottom-fishing pocket pivot type of gap-up move (see July 28th report) set the stock off on a run that has now carried well above the 200-day moving average. As was discussed in this week’s Wednesday report, AAPL also flashed another bottom-fishing pocket pivot as it came up through the 200-day line. At this points it is well extended. The stock has some resistance to contend with at current levels, as we see on the daily chart below. This is not the place to be trying to jump on AAPL in light of the latest Apple product to drive the stock higher, known jokingly as the “iCahn” after Tweets from well-known activist investor Carl Icahn that he had taken a billion dollar position.

This looks somewhere north of a couple of million shares to me. Icahn is apparently taking a stance similar to hedge fund manager David Einhorn who had previously bought the stock in late 2012 with the idea that he was somehow going to sue AAPL into creating “shareholder value.” Icahn apparently is looking for the company to increase its current stock buyback program as a way to push the value of his own stake even higher, and in a BusinessWeek article is quoted as saying “Those Apple guys must be idiots” as he considers a share buyback to be a “no-brainer.” If only we could all use Twitter to drive the prices of our stock holdings higher. It is times like these where one has to realize that the rules for some investors are not the same as for the rest of us. That includes others who can go on or into the media and pump their positions, from Daniel Loeb to Warren Buffett and everyone in between.




Meanwhile, I like cash here, while remaining opportunistic in terms of looking to short weak rallies or even short-term trade possible bounces in stocks that have pulled back into potential, logical areas of support. The bottom line, however, is that with the general market starting to show some big cracks here, I would not be looking to linger on the long side. Be safe.

Finally, I’d like to thank all of you who sent your positive sentiments and encouragement prior to my surgery of this past Monday. I am happy to say all went well and I was out of the hospital within 42 hours of the procedure and am now quite firmly back “In the Cockpit” even as I spend the next 2-3 weeks “taking it easy” en route to a full and complete recovery. It’s been 33 years since my last encounter with a hospital, and one thing that struck me is how incredibly far medical technology has advanced since then. I know that in the end doctors are only human. But I was lucky enough to be treated by physicians and other surgical staff who so skillfully wielded the latest medical technology as to create the appearance of being wizards. I come away from this experience both humbled and in awe, and I believe it has already enhanced and broadened my perspective as a trader, an investor and a human being.


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 no positions, though positions are subject to change at any time and without notice.


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