The Gilmo Report

May 22, 2013

May 22, 2013

Today’s action was something that market participants had been trying to anticipate for some time, but the accelerating upside trend in May put the bears very much on the defensive. Until today, that is, as a huge-volume outside reversal day puts the rally in serious jeopardy, and certainly enough, in my view, to cash in any profits in long positions and move to cash. Early in the day, comments from Fed Chief Ben Bernanke to the effect that premature tightening would carry “substantial risk,” essentially, as I heard it, that QE must continue because it isn’t working, sent the market and gold and silver rocketing higher this morning. Later on, gold and silver began to reverse sharply, a warning sign as I saw it, and the indexes began to swing in volatile fashion going into the 11:00 a.m. Pacific Time Fed announcement. When it was revealed that more Fed heads want to start paring back on QE as early as June, the market broke sharply to the downside, resulting in a rather ugly outside reversal day, as we see on the daily chart of the NASDAQ Composite Index. Back in the “old days,” before the Age of QE, this type of action was a certain death knell for the markets, but I think if you were watching your stocks the sharp selling in a broad swath of leading names was an additional warning shot across the bow.




So what does one look for in a sell signal? Let’s look at Three-D Systems (DDD) first. DDD pulled down to its 10-day moving average on above-average selling volume. The stock needs to build a handle here if it is going to eventually go higher, so one could sell here and look to buy back on either a pocket pivot buy point within the handle or on a new base breakout, taking the profits one made by buying on the “bottom-fishing” pocket pivots much lower in the pattern.




Stratasys (SSYS), on the other hand, broke down below its prior base breakout point. If a stock can’t hold a breakout in this market, I’m not going to sit around and wait for it to push lower – I just punt it.




Some of the bio-techs that have represented an area of strength in the market are starting to show cracks. Celgene (CELG) has been getting “wobbly” around its peak with several selling spikes in the pattern. One might sell on the basis of this action, or just wait for a violation of the 50-day moving average, which you would be using as your selling guide based on the Seven-Week Rule.




Regeneron Pharmaceuticals (REGN), on the other hand, has obeyed its 10-day moving average for more than seven weeks since the initial pocket pivot buy point, so a violation of the 10-day moving average is your selling guide. This is a lot tighter than using the 50-day line that is way down at 215.61, which is a lot of profit to have to give up before selling.





Tesla Motors (TSLA) is doing a decent job of holding up and trying to build a flag formation here as it holds its 10-day moving average. Unfortunately, because of the big downside volume spike seven days ago in the pattern, it likely needs more time if it is going to issue a pocket pivot buy point along the 10-day moving average.




In my weekend report I discussed watching for a pocket pivot move in Cree (CREE), but I’d have to say this is marginal given that the stock actually gapped up at the open and cleared the 63 price level before reversing and closing at the lows of the day on heavy, pocket pivot volume. If it holds up from here, maybe it remains viable, but the market’s action today probably means it is unwise to take any new long positions here.




Proto Design Labs (PRLB) was another stock that couldn’t hold its recent breakout as it beelines for the 50-day moving average. My view is that if it could not hold the recent lows along the 54 level which was also the base breakout point it was not viable.




Workday (WDAY), on the other hand, pulled back sharply today but held the top of its prior base and breakout point. After-hours the stock is up a couple of points on its earnings announcement. A breakdown through the roughly 65 breakout level would be sufficient reason to sell the stock, in my view, should that occur. In general I think investors should not be looking to add to long positions currently based on the market’s action today, while playing defense and not letting any positions get out of hand on the downside. Figure out where your stops are and stick to them.




Just in case things start to get worse to the downside, I am looking at LinkedIn (LNKD) and Apple (AAPL) as weak patterns to short. LNKD broke back down below its 50-day moving average today with volume picking up, and with any pocket pivot hopes out the window, I consider this potentially shortable using the 50-day line at 179.40 as a guide for an upside stop.




Apple (AAPL) rallied back above its 50-day moving average and has retraced about half of the break down through the 50-day line last week coming off the peak above the 460 level. AAPL is supposedly working on an “iWatch,” but I tend to think that the law of diminishing returns is likely to come into play on any new i-prefaced products. Consider shorting into this rally using today’s high at 448.34 as your stop or wait for the stock to break the 50-day moving average again on volume.




While I’m not certain that one is going to make a killing on the short side here, at the very least I don’t think one wants to be taking new long positions in the face of today’s massive-volume outside reversal. I would let things settle down and then see what, if anything, finds decent support at a logical area, such as a key moving average or the top of a prior base, before coming in on the long side in opportunistic fashion.


In my view, the reality of QE’s utter ineffectiveness in jump-starting the U.S. economy likely means that the Fed will have to keep the spigots open, at least to some degree, for some time. The economy is simply in no condition to take the hand-off as the Fed seeks to turn over the economic baton in the process of engineering a “soft landing.” To my knowledge, the Fed doesn’t have a very good track record in engineering soft landings, and today’s action may provide some idea of what the market thinks about that possibility. If further market weakness, watch your stocks and stick to your stops! Hopefully I’ve given some idea in this report of what I consider good examples of what to look for in selling signals. 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 positions in AAPL and LNKD, though positions are subject to change at any time and without notice.


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