As far as I’m concerned the market is in a correction, the duration of which is presently unknown. The Fed announcement on Wednesday brought on the massive-volume outside reversal day Wednesday, but the selling on Thursday and Friday was somewhat muted given that “Fedheads” and the “Chief Fedhead”, Ben Bernanke, came out with comments to the effect that even if the Fed decreased its QE activity based on stronger economic data, it could just as easily increase it in the event that the data subsequently started coming in weaker. Given that the market sold off hard on Wednesday when it was hinted that QE might begin to taper off as early as June, we know that the market is highly reliant upon and hence sensitive to the sustenance of QE. If this is true, then we might expect a more volatile environment going forward where the market starts to jerk around based on the economic news of the day. QE markets can go astray quickly, as the Japanese stock market demonstrated overnight Wednesday when it sold off 7.3%, as we can see on the daily chart of the iShares MSCI Japan Index Fund (EWJ), below. I’ve referred to Japan’s current QE program as “Kamikaze QE,” and Thursday’s move illustrates the “kamikaze” aspect of this desperate “all in” liquidity injection.
The NASDAQ Composite, shown below, is hanging in mid-air, like the other major market indexes, after three down days in a row. Thursday’s and Friday’s price bars are color-coded blue because the index gapped down both days but closed in the upper part of its intra-day range. It is evident that investors have become well-conditioned to the “buy the dip” mentality that has worked repeatedly in 2013. I tend to view Wednesday’s huge-volume outside reversal day and sell-off following the Fed’s policy announcement somewhat cautionary and certainly more serious than prior breaks off the peak we’ve seen so far in 2013. As well, Thursday and Friday, while showing some support off the lows of each day, didn’t see huge volume, so while there was some buying on the dip, it wasn’t heavy buying. This, however, could have been a function of the three-day Memorial Day holiday weekend, so we will have to wait until next week for more conclusive evidence as to where this market is headed. In the meantime, I would not be in a hurry to plunge into long positions on this three-day pullback as this could easily develop into something worse.
Tesla (TSLA) has bucked the market’s sell-off, turning up on a strong-volume outside reversal move Thursday and following through on Friday with a move to all-time highs, as we can see on its daily chart, below. Note that volume on Thursday did not exceed the large downside volume spike of nine days ago on the chart, and therefore that would not constitute a valid pocket pivot buy point. However, the outside reversal to the upside on Thursday that occurred on above-average volume could have been viewed as a playable buy signal for those who can handle the volatility and risk of buying TSLA up here. If TSLA were to pop through the $100 level this could set up a buy signal based on Livermore’s “Century Mark” rule. If there are still a large number of shorts still in the stock, and if the stock has drawn in more not-so-smart shorts as it has moved higher, this could spark a further short squeeze that propels the stock well past the $100 price level. However, as I said, if one can handle the volatility and risk inherent in buying the stock on such a move, it could prove rewarding for nimble traders. The one wild card is the general market, and if it shows further weakness next week this could complicate matters for buyers of TSLA.
Acadia Pharmaceuticals (ACAD) has been doing its best to hold up after a sharp pullback on Thursday that took it through its 10-day moving average and down to the 20-day moving average where it found support as it did earlier in May.
Three-D Systems (DDD) also held its 20-day moving average on Thursday, and while the volume levels were high enough for a pocket pivot volume signature, the stock was unable to get back above its 10-day moving average. In my view the stock needs more time to build a handle, and a market correction would give the stock a chance to complete a handle. I do not view this as a failed breakout unless one was to have bought the straight up move above 50 last week.
Salesforce.com (CRM) illustrates the concept that the best moves lately have occurred as stocks have rounded out the lows of new bases and then flashed bottom-fishing pocket pivots as they come up through their 50-day moving averages. Once CRM broke out from its cup base that was the end of the move, and the stock blew apart following earnings after the close on Thursday.
Bonanza Creek Energy (BCEI) has pulled back into its 50-day moving average. I’ve discussed watching for a pocket pivot move off of the 50-day line in previous reports, so this can be monitored here if the market correction turns out to be short-lived. If the market is able to recover, we might see a rotation into names that are currently trying to round out the lows of potential new bases.
U.S. Silica Holdings (SLCA) has also backed into its 50-day moving average on low volume after moving above the line following a pocket pivot off the 10-day line last week. This is another name set up in a “rounding out” position within a potential new base and it could move higher if the market regains its footing.
Long-time, bio-tech leader Pharmacyclics (PCYC) has spent the past 11 weeks building a new base, and consistent with this “base-rounding” type of action I’ve been looking for, we can see that the stock has flashed a couple of pocket pivot buy points along the 50-day moving average over the past couple of weeks.
Fleetcor Technologies (FLT) continues to hold up in a flag formation following its early May buyable gap-up. FLT really hasn’t gone anywhere, but it did hold well quite well during the market’s sell-off over the past three days. Small pullbacks to the 80 level have held, and that could be a spot to try and pick up shares. Otherwise, look for a pocket pivot buy point developing along the 10-day moving average over the next several days.
On the short side, LinkedIn (LNKD), which I discussed in my mid-week report of this past Wednesday, broke down on Thursday and undercut its 180.87 low from May 5th, before rallying back up towards its 50-day moving average. The undercut of the 180.87 low was a logical short-term cover point, but I still consider this a viable short-sale target on rallies that carry up to the 50-day moving average at 179 and change.
Apple (AAPL) refuses to break down as it clings tenaciously to the top side of its 50-day moving average. On Thursday morning it gapped down and bounced right off of the 50-day line, but is in a position where we want to monitor the stock for a possible volume breakdown through the 50-day line as a short-sale signal. So far the stock has failed to get above Wednesday’s 448.35 high as volume starts to wane.
Facebook (FB) is breaking down through the neckline of an odd-looking head and shoulders type of formation, which also coincides with its 200-day moving average. This becomes shortable into any rallies back up to the 200-day line, just under the $25 price level. FB’s new “HTC First” smartphone had a short half-life, getting pulled from AT&T’s shelves and banished to the Land of Discontinued Smartphones rather quickly.
So far in May it is clear to me that the best moves in stocks have occurred from pocket pivot buy points and “bottom-fishing” pocket pivot buy points as stocks are rounding out the lows of a potential new base and starting to come up the right side. I’ve covered numerous examples of these in recent reports, including stocks like DDD, SSYS, CRM, GS, NSM, etc. and a number of these have worked well. Once these names “break out” and become obvious to the crowd, they begin to slow down or falter.
Buyable gap-ups have also worked well in this market, as examples like Ilumina (ILMN) and Lumber Liquidators (LL) have shown, yet these are simply labeled as “extended” by certain financial publications, thus the crowd does not see them as buyable. But they are. In my view, this market loves to sucker in standard base-breakout buyers and therefore it is necessary to think somewhat outside the box in this regard. That is why I’m interested in names like BCEI, SLCA, and PCYC as perhaps more attractive potential long targets should the market find its footing and move higher in a manner similar to what it has done three times before in 2013. And now that IBD laments the failure of DDD’s “breakout” that I see more as a necessary pullback following a nearly straight-up move from the initial pocket pivots along the 50-day moving average and the 37 price area, perhaps the stock will issue a valid pocket pivot move here within the handle that provides a ready re-entry point. It may even be possible that Thursday’s bounce off the 20-day moving average on a pocket pivot volume signature was a variation on the standard pocket pivot that normally occurs off the 10-day or 50-day moving averages. I can recall in 2011 that the iShares Silver Trust (SLV) issued a couple of pocket pivot moves off of its 20-day moving average that worked, so perhaps DDD could be re-entered with the idea of using its 20-day moving average as a final downside selling guide.
In view of all this, the correction and pullback over the past three days causes me to think in terms of a potential rotational move here. This may occur as the obvious names take a back seat and we see the reassertion of this theme that I have identified previously. This is where dormant, base-building leaders rounding out the lows of their bases rise up to offer us lower entry points that the crowd does not see if the market is able to continue its rally.
The bottom line is that I don’t think investors need to take a rigid bullish or bearish stand in this market currently. While the market is pulling back, and there is always potential for further downside, I would still maintain an even psychology and seek to be opportunistic should I see buy signals occur in stocks from positions within their chart patterns that are not obvious to the crowd.
Meanwhile, on the short side, I do not see a large number of breakdowns in stocks that I would consider shortable. Yes, the social-networking leaders LNKD and FB are faltering here, and when the two biggest names in a formerly big leading group are looking weak, they do offer strong potential short-sale targets if the market’s correction deepens. Thus they should remain on your short-sale target list. AAPL is less clear, although I do believe that longer term the stock is headed lower, but further evidence is needed before we can draw any firm conclusions just yet.
As I said at the outset of this report, there is no hurry to plunge headlong into this market solely on the basis of another market pullback, the likes of which have simply led to a market recovery and move to new highs so far in 2013. Instead, let the situation develop and look for the less obvious situations that we are able to identify using pocket pivots, “bottom-fishing” pocket pivots, and buyable gap-ups, all tools that the crowd does not employ. Stay tuned.
CEO and Principal, Gil Morales & Company, LLC
Managing Director and Principal, MoKa Investors, LLC
Managing Director and Principal, Virtue of Selfish Investing, LLC