The Gilmo Report

May 22, 2016

May 21, 2016

The market has spent the past 2.3 trading days arguing with itself over what the Fed minutes meant, or did not mean. In the process the action has been quite confusing and volatile, to say the least. In purely technical terms I suppose we would have to conclude that the major market indexes have been able to hold along support and their recent lows of the past couple of months. On Thursday the S&P 500 Index undercut those lows and then lifted off of the intraday lows.

Within this context Thursday’s bounce followed by a move to the upside on Friday looks normal. The S&P 500 Index did run into resistance within a couple of points of its 50-day moving average on Friday. Volume was lighter as the index stalled a bit at the line.

 

GR052216-$SPX

 

The NASDAQ Composite Index also undercut its lows of the past two months on Thursday. This led to a similar undercut and rally maneuver as the index turned up and off of the intraday lows that day.

On Friday the index continued higher on increased trading volume, which at least looks more constructive even if it was an options expiration day. Unlike the S&P 500, it has more room to run before it reaches its 50-day and 200-day moving averages. A move back up to the moving averages would bring it up to the highs of what is now a roughly three-week price range.

 

GR052216-$COMPQ

 

As I pointed out in my “Market Wrap” blog post Thursday after the close, the NYSE Composite Index also helped to provide some context for Thursday’s bounce. It in fact pinged more or less right off of the 200-day line and then continued rallying on Friday. The Friday rally, however, looks much more like stalling and churning as the NYSE Composite closed roughly mid-range. This is not surprising since the broader market offered very little in the way of stocks moving higher on strong volume Friday.

 

GR052216-$NYA

 

We can see that since late April the NYSE Composite and the S&P 500 have been marching lower in neat little downward trend channels. Meanwhile the NASDAQ Composite is ever so slightly looking like it is at least making an attempt at rounding out some potential lows. Nevertheless, I would like to see the S&P 500 and the NASDAQ make strong moves up through their 50-day moving averages. This would likely show up in the form of more long set-ups showing up, and anyone using a bifurcated approach would naturally start to move in that direction.

And of course I would again assert that regardless of the lack of any real trend in the general market, it remains an issue of watching individual stocks. And in this regard there have been set-ups on both the long and short side of this market, although the ensuing movements have been measured. Before I get to that, I want to quickly cover the situation in the precious metals space.

Talk of an interest rate increase in June has sent the dollar rallying, which in turn has sent the precious metals careening to the downside. Both the iShares Silver Trust (SLV) and the SPDR Gold Shares (GLD) gapped down hard to their 50-day moving averages on Thursday. As we can see on the daily chart of the SLV, we can see that it, like the GLD, did its best to hold the 50-day moving average on Friday. But the bounce was slight and came on very light volume.

On balance, the action of precious metals seems to argue in favor of the Fed staying on course with respect to a summer rate hike. But if you believe in the metals, and as I wrote in my Wednesday mid-week report, a pullback to the 50-day moving average in the SLV and/or the GLD would be your most opportunistic “last stand” entry point on the long side.

 

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While the metals get slammed to their 50-day moving averages, an odd divergence is seen in precious metals stock Silver Wheaton (SLW). SLW wasn’t willing to take Thursday’s gap-down break to the 50-day moving average lying down. While the metals seem somewhat sluggish in the face of Wednesday’s Fed meeting minutes release, SLW posted a vigorous bounce off of its 50-day moving average on Thursday. This slowed up a bit on Friday as the stock pushed just above the confluence of its 10-day and 20-day moving averages.

So while Thursday’s bounce was impressive and constituted pocket pivot support at the 50-day line, SLW remains in a nearly month-long consolidation. It is therefore best bought on weakness at the 50-day line as was the case on Thursday. However, it’s not so clear that one would have been looking to do that given how the precious metals were acting on Thursday. I would expect that SLW’s action is either forecasting a rebound in the SLV and GLD. Otherwise, it may fail here and eventually bust the 50-day line.

 

GR052216-SLW

 

Amazon.com (AMZN) is flopping around both its 10-day moving average and the $700 Century mark level. A lack of selling volume has kept the stock from staying below the 700 price level, and it was able to edge back above that to close at 702.80. The situation with AMZN to some extent illustrates the difficulty in figuring out exactly where this market will go next. Had AMZN busted the 700 price level on huge volume and continued lower over the rest of this past week, I would have considered that decisive action that would bring the stock into play on the short side.

If one is a nimble trader looking to score a few points on a trade, the stock was shortable on the initial breach of the 700 level for a quick profit. Ultimately all it did was come down on top of the short five-day price range it formed during the first week of May before drifting back above the 10-day line, as I’ve highlighted on the chart.

For now I think that the highs of this range at around 685, followed by the 20-day moving average at 678.50, represent the most reliable areas for downside support on pullbacks. Given that the two are less than 1% away from each other, one could take an opportunistic view here and look to buy pullbacks into the 685 price level.

Whether AMZN becomes an outright short on another breach of the $700 Century mark likely depends on what the general market does from here. Therefore, I would only presume that the stock is a short if it were to do so as the general market breaks to lower lows.

 

GR052216-AMZN

 

Of course, it’s still possible to make money shorting big-stocks like McDonald’s (MCD). As I wrote last weekend, the stock was showing some signs of a potential downside failure, and that is precisely what we got earlier in the week when the stock busted the 20-day moving average on above-average volume.

That then led to a move below the 50-day moving average where the stock was shortable using the line as a guide for an upside stop, as I discussed in my Wednesday mid-week report. MCD has proceeded to come completely unglued since then, breaking sharply to the downside on Friday on heavy selling volume. My near-term downside price target is the 120 level which coincides with the top of a prior consolidation. Longer-term, the 200-day line at 114.23 would serve as my next downside target.

 

GR052216-MCD

 

As I discussed in my report of last weekend, MCD faces some serious headwinds, in my view, based on the trend towards higher minimum wage laws. So far that assessment is looking as if it is starting to play out, but the first signs were of a technical nature as I pointed out last weekend.

Facebook (FB) has spent the last two days debating whether it wanted to hold its 20-day moving average or not. On Thursday the stock dropped right through the line right after the open. It then spent the rest of the day struggling to nuzzle back up into the underside of the 20-day line, closing 13 cents below it.

From a purely technical perspective, the breach of the 20-day line could initially be seen as a clue of an impending late-stage failed-base move. But the flip-side of this analysis is that the stock essentially tested the 116.23 intraday low of its April 28th buyable gap-up and held, rallying back above the 20-day line Friday morning.

By Friday’s close the stock held a mere 37 cents above the line as volume remained light. It is clear that sellers aren’t exactly in the mood to unload shares in force just yet. However, the situation with FB is similar to that with AMZN. If FB fails decisively at the 20-day line, it likely morphs into a short-sale target at that point. This would set the stock up as a bona fide late-stage failed-base (LSFB) short-sale set-up. The only issue is that so far we have not seen any decisive selling that sends the stock through the 20-day line.

One could also view this pullback as bullish, since it represents a low-volume test of the 20-day line. How this plays out will likely also depend on what the general market does from here. Therefore I would keep an open mind with respect to how FB resolves its current action, and be ready to move in either direction with the stock as appropriate.

 

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While I liked the pullback in LinkedIn (LNKD) on Wednesday, perhaps the pullback on Thursday and Friday on was more likeable. That pullback came after news hit Thursday morning about a hacker selling information taken from the LNKD website four years ago. That news took the stock down to a low of 123.57 on Friday, just below the 20-day moving average. By the close, however, LNKD recovered to close back above the line on lighter volume. To me it is clear that sellers initially reacted to the news on Thursday, sending the stock right down to its 20-day line.

When sellers failed to follow through on Friday, and volume remained light, the stock was cleared for take-off and rose back above the 20-day line. Basically, what we’re seeing here is another low-volume retest of the 20-day line not too unlike what we saw earlier in May.

That pullback led to a quick two-day 10% upside pop, but did not come on news as this most recent pullback did. In my view, that accounts for the higher selling volume on Thursday, but remember that this occurred as a result of news. If the stock can continue to hold the 20-day line this coming week, then the stock is buyable here using the 123.57 low of Thursday as a tight stop.

 

GR052216-LNKD

 

In typical bifurcated fashion, in this market some stocks strike me as buyable while others strike me as shortable. Walt Disney (DIS) has been one of the shortable ones since its gap-down move following earnings last week. As I wrote at the time, DIS was a short using the 20-day line as a guide for an upside stop. Unfortunately, the stock has only been good for a scant few points of downside and is now trying to push back up into the 50-day moving average.

Volume picked slightly on Friday, so it may have a good chance at getting there this week. I would continue to watch this as a move into the 50-day moving average would bring DIS into optimal shorting range.

 

GR052216-DIS

 

Salesforce.com (CRM) gapped up on Thursday morning as we expected after it jacked to the upside in after-hours trade Wednesday afternoon after announcing earnings. The action following the initial gap was not all that powerful as the stock closed in the lower part of its intraday gap-up price range. However, on Friday CRM held tight and closed in the lower part of its range as volume declined sharply. As long as it can continue to hold above the 80.15 intraday low of Thursday’s BGU price range it remains viable as a long idea using the low as a very tight selling guide.

CRM closed Friday at 81.02, which puts it just over 1% away from the 80.15 BGU low. Thus risk can be controlled very tightly here, as is my preference in this market.

 

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The only thing that bothers me about CRM is its weekly chart. We can see that the action this past week constitutes a standard cup-with-handle base breakout. What is not so standard, perhaps, is the very deep, v-shaped cup formation from which it is emerging. This would tend to make it vulnerable to failure, but the bottom line is that failure is as failure does. Thus it must fail to hold the 80.15 price level, perhaps with a percent or two of allowable downside porosity, before it can be considered to have failed.

I did actually short the stock into Thursday’s gap-up, but that was based on the immediate 620 intraday chart sell signal that occurred right after the open. The stock later found its feet, setting the 80.15 intraday low and then flashing a 620 buy signal. That was a sign to cover any short on an intraday basis and think about maybe going long the stock at that point.

I’ve seen some stocks work after a cup-with-handle breakout where the cup is extremely v-shaped and deep, but I’ve also seen a lot fail. The critical factor in the failure is that it will tend to occur in synchrony with a general market break to the downside. Therefore, within the context of the current market action, CRM’s breakout will likely work IF the general market can rally from here. Otherwise, a major downside break in the market could drag CRM back into its prior base.

 

GR052216-CRM Weekly

 

CRM is without question the best-in-class play within the cloud/enterprise software space. For that reason I am willing to give it a chance on the long side as long as it holds Thursday’s BGU. ServiceNow (NOW) is perhaps not the best-in-class cloud/enterprise software company in its space, but its action this past week is nevertheless notable. On Thursday it gapped up in sympathy to CRM, as I discussed it might in my Wednesday mid-week report, and ran right up to its 200-day moving average.

I saw that move and noted that since CRM was flashing a 620 sell signal right off the open, NOW might also be shortable right at the 200-day line. Since I had come in long NOW that morning, I reversed my long and went short. That short worked beautifully for a couple of quick downside points on Thursday as the stock reversed off the 200-day line and headed to the downside on a reasonable increase in selling volume.

That reversal, along with CRM’s reversal off the peak in the 82.50 price area on Thursday morning was probably helped along by the general market, which sold off early in the day. Now that the dust over the past three days has settled somewhat, we can see that NOW actually flashed its second pocket pivot of the week on Friday.

Volume was higher on Friday’s second pocket pivot off of the confluence of the 10-day and 20-day moving averages. It was also higher than the volume seen on Thursday’s reversal at the 200-day moving average. This looks to me like it wants to go higher. Certainly, if CRM can hold its current BGU, then NOW may have a shot at pushing through its 200-day line in any continued market bounce. For now, on the basis of the twin pocket pivots we saw this past week, NOW can be considered buyable here using the 20-day line at 68.78 as a selling guide.

 

GR052216-NOW

 

Over the next two weeks we will see two other cloud/enterprise software names, Workday (WDAY) and Splunk (SPLK), announce earnings. It will be interesting to see how their reports affect the group, and in particular CRM and NOW. Currently both CRM and NOW are showing me buy set-ups, so I would look to play them as they lie. Citrix Systems (CTXS) is another cloud/enterprise software name that flashed two pocket pivots this past week. Interestingly these are identical to NOW’s pocket pivots, and occurred on the same days.

In my view, CTXS is buyable here using the 50-day line at 80.12 as a maximum downside selling guide. Otherwise, a tighter stop can be used along the 20-day line.

 

GR052216-CTXS

 

Both Activision (ATVI) and Electronic Arts (EA) are in pullback mode after some strong upside price movement following their respective buyable gap-ups of 2-3 weeks ago. ATVI is pushing below its 10-day line, but I would keep a close eye on this as it approaches the 20-day line at 36.73. It does, however, prove my point that you play these on the upside for a bit and then sell into the upside extension. The idea then becomes one of buying the pullback into a logical area of support. The 20-day moving average is of course one of my favorite reference points in this regard.

 

GR052216-ATVI

 

Electronic Arts (EA) is showing more of a tendency to hold tight as it pulls into its 10-day moving average. Volume is still coming in at about average, however, and I would like to see some drying up of selling volume as the stock tests the 10-day line. But if we count the initial buyable gap-up move, EA is up over 20% in the past eight trading days, so it remains a bit extended. And as I discussed in Wednesday mid-week report it likely needs more time to digest and consolidate this big upside move.

While one could test a long position at the 10-day line and use it as a tight stop, I would like to see the 20-day moving average, down at 69.75, move up further. This would constitute a more reliable level of potential support as the stock consolidates. Of course, we know that in high-momentum markets a continuation pocket pivot along the 10-day line is also something to watch out for. Therefore as we watch EA pull back here we should remain aware of the various ways this can play out and be ready to act appropriately at the correct time.

 

GR052216-EA

 

CyberArk Software (CYBR) and Fortinet (FTNT) both moved higher over the past two days, essentially ignoring the general market volatility. I discussed both in my Wednesday mid-week report as being buyable along their moving averages. I only show CYBR on a chart here, primarily because its upside action over the prior two days has shown more strength. While FTNT, not shown, has pushed higher on light volume, CYBR did in fact flash a pocket pivot trendline breakout on Thursday.

This is now slightly extended, and the 200-day moving average looms just above Friday’s close. With Palo Alto Networks (PANW) expected to announce earnings on Thursday, one could sell into this move or look to hold CYBR for a sympathy play if PANW reacts positively to its earnings report.

 

GR052216-CYBR

 

Silicon Motion (SIMO) flashed another pocket pivot on Friday after settling into its 10-day moving average on Thursday. Note that volume came in at -64% below average on Thursday, one reason why I mentioned it in my Thursday “Market Wrap” blog post. SIMO’s pocket pivot on Friday took the stock to new highs, so it is now extended. However, it provides a great example of a classic “voodoo” pullback to the 10-day line where the volume dries up in the most extreme of extremes!

 

GR052216-SIMO

 

I blogged on Thursday after the close that members should keep a close eye on Tesla Motors (TSLA) once its then-pending secondary stock offering was priced. As I wrote in that Thursday “Market Wrap” blog post:

 “I noticed that TSLA reversed early to the downside but then rallied off the 10-day moving average, just missing a standard 10-day pocket pivot. The past two days, however, have been five-day pocket pivots, and sometimes I like to see clusters of five-day pocket pivots as an alternative to a single 10-day pocket pivot. If the secondary offering prices well, this could rally in an oversold bounce…”

That turned out to be somewhat prescient when TSLA priced its 10.7 million share secondary stock offering at 215 on Friday morning and then proceeded to push higher throughout the day. It eventually closed just below its 20-day moving average on strong volume. If the TSLA had closed above the 20-day line it would have qualified as a bottom-fishing pocket pivot.

 

GR052216-TSLA

 

The action in TSLA is actually quite fascinating when you consider the context in which it occurred. On Wednesday Goldman Sachs (GS) came out and recommended the stock sending it up slightly. After the close, however, TSLA announced the secondary stock and convertible debt offering, for which Goldman was listed as one of the lead underwriters!

Were they propping the offering with their buy recommendation? Was it a case of the right hand not knowing what the left hand was doing? As I see it, while this makes for juicy conspiracy theories, the bottom line is what the stock actually does and whether we can make money as a result. TSLA was certainly good for a trade on Friday per my Thursday after-hours blog post. The real question is whether it runs into resistance as it approaches its 200-day moving average. As I wrote on Thursday, the stock was already showing two five-day pocket pivots along the 10-day line.

Friday’s action actually constituted a third pocket pivot signature, but was extended from the 10-day line. What I want to see is whether the stock can clear the 20-day and 200-day moving averages, which would indicate whether this current move has legs.

There are still some 28 million shares of the stock sold short as of the last reported short interest numbers on the NASDAQ website. If shorts were hoping for the secondary offering to kill the stock, they didn’t get their wish. TSLA should be watched closely this coming week as I believe it could continue to rally as the general market rallies.

Below are my current trading journal notes regarding other long ideas discussed in recent reports:

Fabrinet (FN) is sitting right at its 50-day moving average as it traded 71% above-average volume on Friday. If you like to buy extreme pullbacks in thin stocks as a preferred entry point, this one might be for you. My own view, as I’ve discussed in recent reports, is that it is just too squirrely for me to deal with. So the ball is in your court.

Maxlinear (MXL) is tracking tight sideways after breaking out to new highs on Monday. Technically this remains in a buyable position on the basis of the base breakout through the 19.10 “buy point.” If you haven’t noticed already, there is a “wolfpack” theme making itself apparent in the stocks I’ve discussed in this report so far. Stocks often move in groups, or packs, and I am fond of using the wolfpack term that my friend Ian Woodward of HGS Investor fame has come up with.

Currently we are seeing a number of constructive set-ups among cloud/enterprise software names. This may be a clue that this group is going to move higher IF the general market can find its feet for a summer rally. I would even include AMZN in this category since its AWS (Amazon Web Services) business is the real growth story behind the stock’s recent breakout to all-time highs.

Other names that fit the bill are CRM, NOW, and CTXS. WDAY, SPLK, DATA, and even ADBE might also be worth keeping an eye on. Workday (WDAY) did in fact flash a stalling sort of pocket pivot on Thursday off of its 20-day moving average. It then moved above its 50-day and 200-day moving averages on a five-day pocket pivot.

WDAY is expected to announce earnings on May 31st, but I have to wonder whether it won’t try and move higher as long as it can hold above the 50-day and 200-day moving average confluence. In any case it provides another example of constructive action among this developing wolfpack of cloud/enterprise software names.

 

GR052216-WDAY

 

If you run through the group you can also see constructive action among names like EBIX (pulling into the 50-day line), MANH, PAYC, TSS, N, ZEN, MKTO, and RNG, for example. I prefer to play within the more liquid big-stock names in the group, however, and those I’ve discussed in this report remain my favorites in this regard.

Among the names on my short-sale watch list, I’ve culled out what I think are in the best positions for shorting. A number of names on the Gilmo Short 50 Index are way extended to the downside, and some have been removed from the list, like CRM, for example.

The main reason to have a list of potential short-sale candidates is if you are a) one who likes to sell short in down markets and b) we actually get a significant downside move in the market from current levels. Otherwise, a lot of these simply turn into short-term short-sale trades, although the airlines like ALK, DAL, and HA and retailers like UA have been great intermediate shorts.

If the general market is going to come apart, you will see some big-stock leaders go down with it. Among these, Apple (AAPL) is one to keep an eye on. AAPL benefited from news that Warren Buffet’s outfit, Berkshire Hathaway, bought a 9.5 million share stake in the company. However, it wasn’t “Uncle Warren” who made the decision, it was his new hires who have come on board as part of the company’s secession plan.

They also bought shares of Yahoo! (YHOO), which doesn’t strike me as anything brilliant. It is clearly based on the idea that YHOO will be sold off in whole or in little pieces at a value that exceeds its current market capitalization. On Friday, bidders appeared to be valuing the pieces at lower prices than the current share price would imply, but YHOO did hold the 50-day line.

Anyway, back to AAPL. Here we see the stock pushing up into the 20-day moving average on below-average volume. I would watch to see how a rally up closer to the 20-day line at 95.81 plays out as a potential short-sale opportunity.

 

GR052216-AAPL

 

Alphabet (GOOGL) is still mostly moving around within a bear flag that it has been forming since its post-earnings shortable gap-down of late April. This is nearly a month long, and so far rallies into the 20-day moving average have served as short-term short-sale opportunities. GOOGL again pushed up into the 20-day moving average on Friday, but this now coincides with the 200-day moving average. The stock then stalled at the two moving averages on higher volume.

Technically GOOGL remains in a shortable position using either the 200-day line at 723.16 or the 20-day line at 728.24 as your guide for a tight upside stop. My preference would of course be to use the tighter of the two, the 200-day line.

 

GR052216-GOOGL

 

The action in the financials over the past few days has been somewhat wild and woolly. This has encompassed some sharp upside moves and then equally sharp reversals seen in names like Goldman Sachs (GS), for example, which I discuss in my Trading Journal notes further below. The main thrust behind the action in the financials is obviously the specter of a Fed rate increase. Higher rates are considered to be a positive for banks. This accounted for the sharp upside moves we saw in the entire group on Wednesday once the Fed minutes were released.

I’m keeping an eye on all the financials here since some of them are sitting in potentially shortable positions. Wells Fargo & Company (WFC) is one as it rallied up into its 50-day moving average on Friday, where it reversed to close in the lower part of its daily trading range.

This could have been shorted at the line on Friday, which would have yielded some tiny profits by the close. If one believes that the Fed will remain on hold, or that a June rate increase isn’t that big of a deal, then shorting WFC here using the 50-day line at 25.14 as a guide for a tight upside stop can be considered.

 

GR052216-WFC

 

Trading Journal Notes regarding other stocks on the Gilmo Short 50 Index that I feel are in potentially actionable chart positions:

Biogen Idec (BIIB) is nudging right up against its 50-day moving average at 265.69. This brings it into shortable range using the line as a guide for a tight upside stop.

Carnival Cruise Lines (CCL) is just below its 200-day moving average at 50.24. This brings it into shortable range using the line as a guide for a tight upside stop.

Caterpillar (CAT) ran into resistance Friday at its 200-day moving average. This brings it into play as a short using the line at 70.76 as a guide for a tight upside stop.

Celgene (CELG) stalled at its 20-day moving average on Friday. This is in a 2-3 week bear flag where the 20-day and 50-day lines at 102.30 and 103.03, respectively, have served as resistance. The stock closed at 101.46, which puts it in shortable range using either moving average as a guide for an upside stop. However, one could also wait to see if the stock gets closer to the moving averages before unleashing a short position.

CSX Corporation (CSX) is sitting just below its 20-day and 50-day moving averages at 25.94 and 26.08, respectively. This puts it in a shortable position using either line as a guide for an upside stop.

Goldman Sachs (GS) rallied above its 50-day moving average on the Wednesday release of the Fed minutes but reversed hard on Thursday. That rally was of course shortable if one had reacted to the reversal back below the 50-day line. Now I would watch for rallies into the 50-day line at 158.01 as potential short-sale entry points.

Hawaiian Holdings (HA) is moving sideways in a short three-week bear flag. So far it has found resistance on rallies into the 20-day moving average, which I would continue to use for potential short-sale opportunities. The 20-day line at 42.82 would then serve as a guide for a tight upside stop.

International Business Machines (IBM) broke below its 50-day moving average on Thursday and then rallied back up to the line, now at 147.98, on Friday on lighter volume. This might bring it into a more shortable position using the 50-day line as a guide for a tight upside stop.

Overall, I would have to say that I’m seeing more that is set up on the long side than on the short side. But the general situation remains quite mushy and unclear. Obviously, the volatility we saw in the market over this past week is testament to that. As I wrote in my Wednesday mid-week approach, my advice is to continue taking a bifurcated if that is an approach that works for you. Otherwise long-only players should look to buy the best long set-ups at the lowest-risk point possible while maintaining a swing-trader’s mentality, and then see how things pan out.

That has actually been an effective strategy with a number of names I’ve discussed in recent reports. If I had to measure my own sentiment based on what I’m seeing over this weekend, I would have to say I might favor the long side here from an objective standpoint.

The general market indexes themselves clearly point to a mixed message, but ultimately I think we have to go with the set-ups as we see them in real-time. I’ve discussed many times the idea of simply operating on the basis of the set-ups you are seeing without paying as much attention to what the indexes are doing.

In this manner, you might sometimes find yourself buying a stock in the midst of a market sell-off solely on the basis of a constructive low-volume or even voodoo pullback to a key moving average or other potential level of support. I’ve seen this work a few times. An off-beat example of this is Yirendai Ltd. (YRD), a tiny little Chinese online consumer finance company that matches borrowers to lenders/investors. YRD came out with earnings last week and looked to be gapping higher, but the stock reversed hard on extremely huge volume.

The stock then dipped just below its 50-day moving average but held along the lows of its current base just above the $10 price level. Volume dried up to -65% below-average four days ago on the chart, and the stock pushed up nearly 20% over the next two days. I saw this pullback but did not act on it, since I was busy hunting “big game” that day. Now that it’s up about 20% in two days I’m not so sure I would want to chase this, but it is an interesting example of how these pullbacks can work.

Certainly, the huge selling on the reversal of six and seven trading days ago on the chart might scare one off. That is entirely understandable. But sometimes, maybe more often, what looks ugly is just an Ugly Duckling waiting to turn into a beautiful swan.

 

GR052216-YRD

 

This brings me to what is going on with Energy Recovery (ERII), a stock that rallied over 50% from the time I first discussed it in an early March blog post. ERII makes special pumps for the fracking industry as well as for desalinization plants. Its earnings and sales are primarily derived from the fracking pumps, but at some point you have to wonder whether desalinization plants will ever catch fire as an investment theme. If so, ERII might be a major beneficiary.

In the meantime, I notice the stock finally working on a base, now four weeks long, as it pulls into its 50-day moving average. Volume dried up to -45% below-average on Friday, which makes it something of a voodoo pullback. The lows of the base are actually at 10.53, so there is the possibility that it could dip just a bit further below the 50-day line as volume dries up further. This might be something to watch for those of you who like to play these smaller names.

 

GR052216-ERII

 

In my view this remains a market for opportunistic and active traders. There are set-ups to be found, long or short. Therefore I would continue taking a bifurcated approach in pursuit of, as one member put it in a recent blog comment, pushing your account equity line to the “north.” 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 CRM, though positions are subject to change at any time and without notice.

Gil Morales & Company, LLC (“GMC”), 8033 Sunset Boulevard, Suite 830, Los Angeles, California, 90046. GMC is a Registered Investment Adviser. This information is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to GMC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Gil Morales & Company, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.