The Gilmo Report

May 7, 2014

May 7, 2014

The market engaged in what I consider a classic “Dow prop” today, with the Dow Jones Industrials rallying all day long to close up 0.72% on the day while the NASDAQ Composite Index, shown below on a daily chart, closed down on the day on heavy volume but found support off the lows of last week. NASDAQ names continue to get pounded, and while the index might be seen to have found volume support off the lows, it remains a “weak sister” as long as it cannot get back above the 65-day exponential moving average, at which point it might have a shot at getting back above the 50-day line. For now, this index remains deeply ensconced in a correction with no follow-through in what is technically a 16-day rally attempt off of the April 15th lows. The longer the rally attempt goes on without a follow-through day, the more prone it is to failing, and without the “Dow prop” today the NASDAQ might have not had the wherewithal to close in the upper part of its daily range. The NASDAQ may not fare so well tomorrow with Tesla Motors (TSLA) trading down about 7% so far after announcing earnings this afternoon.

 

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The S&P 500 Index illustrates the bifurcated market as big-cap and defensive names continue to be the beneficiaries of institutional money flow. In my view, this is not a function of rotation into glorious new big-cap leadership but rather still quite representative of the movement out of high-P/E high-flyers and into safe areas of the market. The S&P 500 held its 50-day moving average today on slightly heavier volume as it found ready support at the line.

 

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The Russell 2000 Index of small-cap stocks, for which the daily chart of the iShares Russell 2000 (IWM) ETF, shown below, serves as a proxy, dropped below its 200-day moving average today and remained there despite closing up off the lows. Like the NASDAQ, it has found support along its lows of the past three weeks, but absent any clear action that would signal a new market rally, either in the indexes or individual stocks, it remains in a deep correction as the weakest of the major market indexes.

 

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Among my short-sale targets that I considered actionable over the weekend Netflix (NFLX) worked on the downside if one shorted the stock on the rally up to the 200-day moving average. NFLX made a brief attempt to poke its head above the line yesterday, but if one was giving it 2-3% on the upside beyond the 200-day line it was in perfectly shortable position yesterday right at the opening and around the 344 price level. NFLX broke down yesterday and today as volume picked up both days but remained just about average. From here I would be looking for a retest of last week’s low at the 299.50 price level.

 

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I was pleased to see that all three of my latest and freshest short-sale ideas have worked out so far this week. Las Vegas Sands (LVS) was in shortable range just under its 50-day moving average on Monday and over the past two days has broken down below the 65-day exponential moving average, the black moving average on my charts, on heavy selling volume. Continuing to use the 50-day moving average as my maximum upside stop, I am now looking for the stock to test the lows in the pattern down at 71.09 and 73.01, as I’ve highlighted on the daily chart below. Notice that these lows coincide, roughly, with the 200-day moving average and so an undercut of one or the other of these lows might occur in tandem with a bounce off the 200-day line. For now the stock remains a short on any rallies back up towards the 50-day moving average, but one should already be short at this point, looking for a move down towards the target lows.

 

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Baidu (BIDU) also worked like a charm, reversing off of its 50-day moving average yesterday as volume picked up slightly and then breaking down hard to test last week’s lows on above-average selling volume, as we can see on the daily chart, below. This was a classic wedging rally right into the 50-day moving average as volume was extremely light on Friday, and all it took was a slight increase in selling interest to tip the stock back to the downside. BIDU held last week’s low on the breakdown today, but I would expect it to eventually test the 140.66 low of early April, which is where I have placed my downside price target using the 200-day moving average at 156.86 as a guide for an upside trailing stop. If BIDU were to rally right up to the 200-day line from here it would also become shortable at that point using the line as your guide for a stop.

 

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Trulia (TRLA) made it three-for-three among my new short-sale ideas discussed in my report of this past weekend. The stock found resistance up near the top of the range on Monday before busting the 50-day moving average yesterday on what was actually very light selling volume, as we can see on the daily chart, below. Volume picked up sharply today, however, as the stock continued down towards the 30 price area and the lows of its range over the past month on above-average selling volume. Notice that with TRLA now below the 50-day moving average, we would look to short the stock on any rally back up into the 50-day line at 32.71. Otherwise, if one is short the stock from Monday and above the 50-day line, then the 50-day line becomes the trailing stop on the upside for the position.

 

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Some of our prior short-sale targets also found resistance at their 10-day moving averages and rolled over, as was the case with Amazon.com (AMZN), shown below on a daily chart. AMZN undercut last week’s 288 low before rallying up off of today’s intraday lows and closing in the upper part of its daily trading range. I would continue to look at any rallies up to the 10-day moving average, now at 305.81, as shortable, using the 10-day line as a guide for a quick upside stop.

 

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Pandora Media (P) also found resistance at its 10-day moving average and the 25 price level, which I discussed over the weekend as the first point of resistance in the pattern. As we can see on the daily chart, below, the stock remains quite weak as it plumbs along last week’s lows in the 22 price area, and from here any rallies back up into the 10-day line, now at 24.03, would be shortable. We’ve gotten a lot of “mileage” out of P since I first discussed it as a short in my March 19th report when it was in the 35-36 price area, and from here it looks like it should rest for a while before it can get to my ultimate downside price target for the stock at 19.

 

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Celgene (CELG) remains in play here along the 50-day moving average where it has found consistent resistance over the past five days. I would continue to use rallies up into the 50-day line, currently at 147.78, as opportunities to short the stock. Based on the weakness of the weekly chart, which I discussed in detail in my April 27th report, I tend to think the stock has more downside in it. Thus shorting here at the 50-day moving average, while not necessarily guaranteed to reward us with immediate success, appears to be the proper strategy for now in anticipation of the stock rolling over again.

 

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I last discussed Pharmacyclics (PCYC) as a short-sale target in my report of April 27th, and back then I talked about looking for the stock to potentially rally up into its 50-day moving average following earnings as a possible “right shoulder rally” that one might be able to short into. Well, PCYC came out with earnings and the stock instead sold off four days ago on the daily chart, below. Thus the right shoulder of what looks like a big, ugly head and shoulders topping pattern is relegated to something of a bear flag with the 20-day moving average so far serving as upside resistance.

While the stock could always muster up a rally to the 50-day moving average, it is shortable here within the bear flag using the 20-day line and/or the top of the flag as your guide for an upside stop. The 20-day line is currently at 95.20, so any rally right up to the level would be your optimal short-sale set-up, but the stock could be shorted right here using the line as your guide for an upside stop. This is somewhat tricky since one cannot know for sure how this current bear flag will resolve itself, but barring any rally that carries the stock up through the 20-day line we would look for a downside “breakout” as the most immediate potential resolution to the pattern. If the stock is able to rally from current price levels, then we might be looking at the 65-day exponential moving average or the 50-day moving average, both around the 109 price level, as the next points of resistance in the pattern. PCYC is therefore a short-sale set-up that has to be approached with some flexibility in mind. It might work right here, resolving to the downside, or it might set-up higher in the pattern closer to the 65-day and 50-day moving averages.

 

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Visa (V) continues to find support along its 200-day moving average, as we can see on the daily chart, below. Note how volume, while remaining below-average, has picked up each time it has bounced off the 200-day line. Today V was able to push higher above the 200-day line, but it appears to me that the stock gets support from institutions moving into bigger-cap names. V was one of several high-priced Dow stocks that were being bought today, so I have to assume that the fact that it really isn’t a high-P/E high-flyer exempts it from getting hit with sellers the way other big-stock growth names have over the past couple of months. Therefore I can leave this one alone as I pursue more fruitful shorts in stocks like BIDU, LVS, and TRLA, among others.

 

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LinkedIn’s (LNKD) continues to plumb the lows of its pattern, undercutting last week’s low before rallying up off the intraday lows today on heavy, above-average volume. The stock may have another rally up into the 10-day line, currently at 153, up its sleeve, and so I might look to short the stock on such a rally. For now there are no logical entry points for a LNKD short at current prices. Ultimately I see LNKD heading for the 125 price area and the top of the huge base it built after it went public.

 

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After hours TSLA continues to get pounded as it moves down to the 186 price level as I write. As a big-stock NASDAQ name, it likely does not bode well for the NASDAQ tomorrow morning, but we will have to see how things pan out over the next few days as we move into the weekend. My view remains as it was over the weekend – I am cautious on the long side and more inclined to play the short side of this market until evidence to the contrary presents itself.

Meanwhile, as long as I can find fresh short-sale set-ups that work, such as the way BIDU, LVS, and TRLA have worked so far this week, while being able to re-enter short-sale targets like NFLX on a logical rally into resistance (in this case the 200-day moving average) that produces immediate downside “love,” I see no reason to end my short-sale operations just yet. For comments regarding any other short-sale targets that I have not discussed in this report please refer to prior, recent reports. 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 had positions In BIDU, NFLX, and LVS, though positions are subject to change at any time and without notice.

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