The Gilmo Report

December 1, 2013

November 30, 2013

 

As expected, the market’s upside bias persisted into Friday’s half-day trading session, with the usual suspects helping to lead the indexes to new highs, as we see on the daily candlestick chart of the NASDAQ Composite Index, below. The indexes began the day with a gap-up move at the open, thanks to an overnight futures jack. With the day after Thanksgiving’s short trading session combining with what was also the last trading day of the month, the upside drift came as no surprise to me. However, the NASDAQ went absolutely nowhere following the morning gap as it closed flat from there to form a little “doji star” on a half-day’s obviously light trading volume.

 

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The S&P 500 Index, shown below on a daily candlestick chart, seemed less interested in closing the month at the highs as it sold off into the early Friday bell to close down on the day. Interestingly, volume was actually about 4% higher compared to Wednesday as of the 10:00 a.m. Pacific Standard Time close, so the action could be construed as another stalling day for the S&P 500.

 

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With the indexes moving higher on the backs of big-cap names, and many assuming we will have the “usual” December “Santa Claus rally,” complacency seems rather entrenched in the market currently. The Investor’s Intelligence bullish/bearish survey of investment advisors currently shows a level of 14.4% of investment advisors bearish, the least since the 1987 crash. This strikes me as a bit cautionary, particularly since most leading stocks, aside from the big NASDAQ names, have been in correction mode. The other key point to keep in mind here is that the Santa Claus rally is something of a myth as December does not outperform the average for all months, and eight months of the year average better upside than December does. However, the last five trading days of December and the first two of January do have a more statistically significant upside bias, and this would seem to make sense given that this period surrounds the low-volume, feel-good environment of the Christmas and New Year’s holidays. In any case, don’t assume anything.

 

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The big-cap NASDAQ names continued their upside treks, as we can see in the charts of what are currently the new “Four Horsemen” in Apple (AAPL), Amazon.com (AMZN), Google (GOOG), and Priceline.com (PCLN), all shown below. AAPL has put in a very strong three-day rally since this past Tuesday’s pocket pivot buy point from a four-week flag formation. AAPL may be seen as something of a safe haven for underinvested money managers to throw money at, and it is interesting that on the last day of the month AAPL traded about average daily volume on a half-day, which can be extrapolated to well above-average for a normal trading day. Clearly, money was intent on moving into AAPL on the last trading day of November.

 

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Since finding support at the 20-day exponential moving average earlier in the month, Amazon.com (AMZN) has continued to move higher, and was up every day this week, closing at the peak of both the daily and weekly price ranges by the end of the week.

 

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Google (GOOG) pulled back slightly on Friday following its breakout to all-time highs on Tuesday of this past week, as we can see on its daily chart below. GOOG should continue to hold the Tuesday breakout if it is to remain a viable big-cap NASDAQ leader.

 

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Priceline.com (PCLN) has been up 12 out of 15 days in a row, finishing the week at an all-time high, as we can see on its daily chart below. With three out of four of these big-cap NASDAQ names pushing to all-time highs, it is no surprise that the NASDAQ Composite is leading its NYSE-based brethren, the S&P 500 and the Dow, both of which closed down on Friday.

 

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Netflix (NFLX) remains the “Lone Ranger” among the former Four Horsemen as it continues to move further above its 10-day moving average. As we can see on the daily chart below NFLX is now about 4% above the 10-day line but still has not flashed any sort of actionable buy point. This may put it in the position of having to retest the 10-day line.

 

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Facebook (FB) undercut the 65-day exponential moving average on Monday before recovering back above the line on Tuesday, as we can see on the daily chart below. FB has spent the last two days moving further above the 65-day line, but this simply has the look of a weak-volume wedging rally as the stock remains in a downtrend. As I wrote in my mid-week report of this past Wednesday, FB needs some constructive action to show up here if we are to conclude that it is indeed building a new base. Last weekend, I discussed the fact that FB’s chart reminds me of AAPL’s daily chart back in September/October of last year, when it topped and broke down severely (see November 24th report).

 

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LinkedIn (LNKD) has wedged back up into its own 65-day exponential moving average, as we see on the daily chart below, and appears to have stalled out at the level. Even for a half day on Friday, volume was extremely tepid, so I still view this as a wedging rally despite the truncated trading day on Friday. In the absence of any constructive action to the upside, I tend to think the stock is more likely to test its 200-day moving average over the next few days. Meanwhile, the 50-day moving average is rolling over in earnest and is coming down to meet up with the stock’s price, and that could create an added area of resistance above the 65-day line.

 

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Tesla Motors (TSLA) attempted to rally on Friday but stalled out on volume that could be seen as reasonably high for a half-day of trading. Interestingly, TSLA found resistance right at the 150-day exponential moving average, the orange line on the chart, before turning down and closing at the intra-day lows. I know there are some who want to be in love with TSLA here, especially after missing the big upside move, but given that it could not hold the 150-day line a couple of weeks ago, I would not be surprised to see the stock eventually test the 200-day moving average, currently at 110.72. At the very least, nobody should even be thinking about buying the stock absent any evidence of strong support at these price levels.

 

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Among the “Three Caballeros” in the bio-tech space that I discussed last weekend, Biogen Idec (BIIB) strikes me as having the strongest upside thrust, and I think if I were going to play any of these BIIB would be the one. Following last Friday’s buyable gap-up move, the stock has edged up a little further to the upside as it holds tight along the 290 area. The intra-day low of the BGU day is 274.98, and as we see the 10-day moving average move up to meet up with the stock, I would expect any pullback from here to be contained by those two price points. I would prefer to buy the stock on a pullback into the rising 10-day moving average, currently at 268 and change.

 

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In my November 17th report I discussed the pocket pivot buy point that we can see in the daily chart of Alexion Pharmaceuticals (ALXN), below, advising members to look for a little back-and-fill action that would create a pullback into the 10-day moving average before considering buying the stock. That did occur at the end of last week, and the stock has since recovered as it nears the top of its current base. From here one is watching for a possible volume breakout. ALXN currently sports a 76 relative strength rating, but in this market it is not unusual to see lower relative strength stocks act well. In fact, with the bio-tech stocks forming bases en masse and the “Three Caballeros” gapping up out of bases last week, this could be the next area of strong movement in the market if the general market uptrend continues. Thus I have my eye on these stocks as I watch them carefully.

 

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Regeneron Pharmaceuticals (REGN) is another basing bio-tech, as we can see in its daily chart, below. REGN flashed a pocket pivot from a v-shaped position three weeks ago as it popped above the 50-day moving average, but that failed as v-shaped pocket pivots are prone to do. After a period of backing-and-filling, the stock is now back at the 50-day moving average where it has moved tight sideways over the past four days. This sets up the potential for a more constructive pocket pivot off of the 50-day moving average, so members should keep an eye out for this.

 

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Acadia Pharmaceuticals (ACAD), which I discussed last weekend as a possible short-sale target, pushed up into its 50-day moving average on Friday before finding resistance and turning lower to close near the lows of the day, as we can see on the daily chart below. With ACAD trading to the top of this range it has been trapped in since the high-volume break off the peak in early October. I have considered the possibility that it may be shortable here using the high of Friday as a quick stop, but the other aspect here is whether ACAD is trying to form a constructive “roundabout” formation. That high-volume break off the peak in early October was pretty brutal, which would necessitate a decent period of time for it to heal from such deleterious action. Thus in my view the jury is still out on ACAD. If it is indeed a short here on this bump up into the 50-day moving average, then it should eventually break down through support. As well, with my observation that a number of bio-techs are in basing patterns currently, ACAD could simply just be another one engaging in the same type of action. Thus, if this doesn’t break down from here, something that would likely coincide with general market weakness, then the flip side of this is that it could turn into a buyable situation should a pocket pivot buy point emerge as the stock comes back up through the 50-day moving average.

 

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The other major piece of the puzzle with ACAD is the action on the weekly chart, below, which has to be taken into account when interpreting the action on the daily chart. Note the supporting action on two and four weeks ago on the chart, where volume increased but the stock closed in the upper half of the weekly trading range. And while the stock has been “living” below its 50-day and 10-week moving averages for the past five weeks, it is holding up above the prior breakout from an ascending base in the 21-22 price area. ACAD also continues to hold a 99 relative strength and a B+ accumulation/distribution rating, so I believe one needs to keep an open mind about the stock’s potential from here as this could easily morph into a buyable situation.

 

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Splunk (SPLK) is back-tracking a little bit following its buyable gap-up move of last Friday, as we can see on the daily chart. However, it is doing so in constructive fashion as it moves sideways over the past four days. The stock closed Friday a little over three points from the 69.01 intra-day low of the BGU day, so it remains within buyable range. The only question is whether the stock is going to move higher in the next few days or flame out as some buyable gap-ups have done in recent weeks. If this thing is going to get moving I would expect it to do so in the next few days, otherwise the 69.01 price point becomes a hard downside stop.

 

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After flashing a pocket pivot buy point as I discussed in my report of this past Wednesday, NXP Semiconductors (NXPI) found some resistance at the prior highs of this short four-week flag formation, which appears normal to me. The stock remains within buying range of Wednesday’s pocket pivot buy point with the idea that it will continue to hold the recent lows just above the 40 price level.

 

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Gogo (GOGO) continues to drift lower as it works on what is now a two-week flag formation that did not see the stock close tight with the prior weekly close. You still want to keep an eye out for a possible pocket pivot move coming up through the 10-day moving average here. But I would not get carried away by jumping the gun here and buying the stock in its current chart position. This thing may need more time to base, and at least set up in something that is of more duration than a two-week flag. If the stock pulled back further from here, I might look for the 20-day exponential moving average at around the 25 price level as a potential area of support.

 

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In my report of this past Wednesday I discussed the fact that I did not think Taser International’s (TASR) flag formation on the weekly chart was setting up properly given that it was wedging along the lows. Members can refer to that report for a more detailed discussion, but we can see only the daily chart below that the stock certainly doesn’t seem to be able to carry through on last week’s attempt to push through the 18 price level. As the stock pulls back slightly here, the 50-day moving average has now moved up to the 16 price level, and I would prefer to see the stock pull into the 50-day line to help correct the prior wedging action. This might set up a more optimal buy point along the 50-day line, so we’ll keep an eye on this in the coming days.

 

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The mortgage-servicing stocks, which remain on my short-sale radar, continue to hold up in their patterns with Ocwen Financial (OCN), shown below on a daily chart, pushing above its 50-day moving average, which is not unusual given the continued upside push in the general market indexes. As the stock moves about 4% above the 50-day line, it approaches potential resistance at the prior breakout point in the 57-58 price area. I still need to see this start to give way on the downside before getting aggressive with the stock as a short-sale play.

 

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Meanwhile, Nationstar Mortgage Holdings (NSM) is trying to consolidate its recent bounce off the early November lows, and I would prefer to short this into a possible rally into the 200-day moving average at 43.72. As we can see on the daily chart, below, the stock is still below the intra-day high of the gap-down day of 16 days ago on the chart, so it remains below the bottom of the “falling window” created by the gap-down day. This so far has served as upside resistance, but given that the stock is 31% off of its all-time high set in September, it may need more of a reaction rally from here. The 200-day moving averages become a likely upside resistance level on that basis. So far, the action in NSM is inconclusive.

 

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With the low-volume upside drift surrounding the Thanksgiving holiday week and the end of the November trading month now past us, we get to see whether Santa is going to take charge here and drive a December rally into year-end. I have to admit I’m not seeing a large number of buyable set-ups here although I do find the action in some of the bio-techs to be intriguing. As I discussed in my report of this past weekend, I don’t see anything that warrants aggressive action on the long side, but I remain open to buyable situations as they emerge in real-time.

However, with so much complacency in this market as the bears go into deep hibernation, and as the historical low percentage of investment advisors who are bearish in the latest Investor’s Intelligence survey shows, perhaps the crowd is set up for a visit from the Christmas Grinch. In the meantime, if something looks compelling, I wouldn’t be afraid to take a shot, but I would certainly implement clear, tight stops in the event things don’t work out. 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 held a position in LNKD, though positions are subject to change at any time and without notice.

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