The Gilmo Report

September 25, 2013

September 25, 2013

The market’s action since the big rally it had exactly one week ago after the Fed announced that it was going “taperless” in September has been something of a chop and slop affair. This lack of follow-through after the Fed announcement, supposedly a big positive for the market at the time, also shows some chinks in the market’s armor. Looking at the daily chart of the NASDAQ Composite Index, below, we can see that after an ugly-looking index sell-off on Friday’s triple-witching options expiration, the market sold off again on Monday as it stalled around, closing mid-range on the day but still down. The past two days have seen the index try to recover into positive ground early in the day, only to reverse and give up its gains as volume picked up each day.

 

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The S&P 500 Index, shown below on a daily chart, looks even less constructive as it has failed to hold the top of its prior cup breakout which occurred exactly one week ago. The S&P 500 has also tried to rally over the past two days after sharp sell-offs on Friday and Monday, but both yesterday and today the index gave up early gains to close in the lower part of its daily range. It may simply be that the market was looking just too good by last Wednesday, and in this QE environment we know that the market tends to correct when everyone wants to fall in love with it. And as soon as the action starts to turn a little bit ugly it finds its feet and turns back to the upside.

We should remember that the market has been rallying since late August, so at this point you are just a little bit long in the tooth, so to speak. Thus the question returns to one of watching your stocks and focusing on the market not as a stock market ruled by the indexes but as a market of stocks ruled by the action of individual stocks. Thus I might look to be opportunistic here if certain stocks pull back in constructive fashion. Not that all of them will, but in my view that is the beauty of any market pullback as it helps to flesh out the stronger-acting names from the not-so-strongly-acting names.

 

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Some of the leaders are acting well, and for now half of the so-called “Four Horsemen” have bucked the past four days of weak action in the indexes. Facebook (FB), shown below on a daily chart, gapped up yesterday after Citigroup came out with a buy recommendation on the stock, changing their rating from “neutral” to “buy.” Nothing like being early! FB sold off into the close yesterday to close at the lower end of its trading range, as we can see in the daily chart below. Today, however, another brokerage firm put a buy recommendation on the stock with a $54 price target, and it gapped up again, holding most of its gains this time around. If the general market is starting to get into trouble, this action could end up becoming something of an exhaustion gap, so investors should watch out for this. At the very least I would not be buying into this move. We were on to the stock way back in late July when it first gapped up after earnings, and any analysts or brokerage firms who are now telling investors to buy are late to the party.

 

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LinkedIn (LNKD) is also having some problems as it failed to hold the pocket pivot buy point of September 5th, 14 days ago on the daily chart, below. The stock was able to bounce off of its 10-week moving average on the weekly chart, not shown, which corresponded to a point about 1% or so above its daily chart. The ensuing bounce has taken the stock roughly back up into its 10-day moving average on a two-day wedging rally where volume has declined each day. I would not be surprised to see LNKD retest the 50-day moving average from here. As I wrote over the weekend, the 5.38 million share “sweetheart deal” secondary offering that was priced at 222 may have saturated near-term demand for the stock, and so it may at the very least have to do some more work here. Frankly, I do not like the way it has fizzled out following the powerful pocket pivot move of September 5th as I would have expected that to lead to more upside in the stock.

 

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Netflix (NFLX) started out the week with a big gap-up move over the 320 price level on Monday morning after a couple of its shows won Emmy awards the night before, apparently. But this didn’t last long as the stock promptly reversed and sold off on huge volume that was also higher than Friday’s pocket pivot buy point, which I discussed in my weekend report. NFLX is continuing to hold its 10-day moving average, but after Monday’s big-volume outside reversal, the past two days have merely seen the stock bounce in reflexive fashion as volume has diminished. In other words, this is a short wedging type of bounce. If one had added shares based on Friday’s pocket pivot, then that part of one’s position should be sold based on the immediate failure. With the stock up some 20-25% beyond its breakout point of early July, one might also consider taking profits in the stock.

 

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Tesla Motors (TSLA), like FB, has bucked the market’s weakness over the past four days as it closed at an all-time high today with volume picking up, albeit remaining below average, as we see on the daily chart below. As I wrote over the weekend, chasing the stock was not prudent, and one should wait for a pullback below the 180 level. The stock did pull back below the 180 level on both Monday and Tuesday, giving investors that opportunity, as selling volume dried up. As of the most recent short-interest report date, September 13th, TSLA has 21,021,797 shares sold short, so I’m guessing there are still a number of shorts needing to change their shorts as they hope for the stock to decline.

 

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Breakouts in this market remain problematic for the most part, and it seems that the best price moves come from bottom-fishing pocket pivots off the 50-day moving average as a stock rounds out the lows of a pullback and consolidation and then begins to turn back to the upside in what I like to refer as “roundabout” action. An example is Trulia (TRLA), which had a nice bottom-fishing pocket pivot off the 50-day line back in early September which led to a nice upside move in the stock from there. TRLA has since spent the last couple of weeks trying to stage a standard-issue base breakout, but so far has been unable to gain any real traction, as we can see on the daily chart below. The stock got hit with some heavy selling on Monday, and this was followed by a feeble bounce. As far as I’m concerned this needs to hold the 20-day moving average to remain viable, but I’d have to say that from a bottom-line perspective I don’t like the sloppy action here on the obvious base breakout that isn’t working out.

 

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We see the same thing with Chinese social-networker YY, Inc. (YY) which had a nice move following its early September bottom-fishing pocket pivot but since then has had a tough time holding a base breakout, as we can see on the daily chart below. Like TRLA, YY has been able to hold its 20-day moving average over the past couple of days, but it should continue to hold the line. If it can, then it might be at an opportunistic buy point on this pullback as volume has dried up as the stock has tested the 20-day line. If I were going to try and buy shares here along the 20-day line, then I would certainly want to see it hold the line, which I would then use as a quick downside stop.

 

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Yelp (YELP) has been one of the more successful stocks as it broke out following its late August bottom-fishing pocket pivot, something we were on to well before it happened, and the stock has launched quite a bit higher. From that original pocket pivot along the 50-day line and in the low-50 price area, YELP has had a nice 30% move, and so I would not be averse to taking profits here and letting the stock rest. Monday saw some heavy selling in the stock, and this has been followed by two days of a weak-volume wedging rally. The stock may need more time to back-and-fill, at the very least.

 

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Splunk (SPLK) is doing its best to hang onto the 10-day moving average, as we can see on the daily chart, below. Volume has been declining as the stock has managed to come up off the intra-day lows over the past three days and close mid-range. Today was the only day it closed positive, however, and it is not clear to me whether this is pulling back constructively or simply forming a reverse bear flag type of set-up from which it is going to move higher. So far the only buy point in the stock was its buyable gap-up following earnings in late August, so the stock still remains well above that initial buy point. It’s possible that SPLK will need to move sideways here for a while, perhaps meeting up with its 20-day moving average, the green line on the chart, first.

 

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InfoBlox (BLOX) has not held up as well as SPLK following its buyable gap-up move after earnings in early September. As I speculate it might in my report of this past weekend, BLOX has moved down to its 20-day moving average. What I don’t like to see here are the above-average selling volume days as the stock tries to hold the 20-day line. The only buy point in the stock during September was the buyable gap-up move, and for now the intra-day low of that day at 37.69 remains your last line of defense as a selling guide.

 

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Sunpower (SPWR) flipped below its 50-day moving average on Monday but came back today to flash a pocket pivot buy point as it popped back above its 50-day and 10-day moving averages. However, this is occurring from a short, four-day v-shaped pattern, so I am a bit suspicious of the move. Some of the cheaply-priced Chinese solars like Trina Solar Ltd. (TSL) and Yingli Green Energy (YGE) were up today on news, so that helped to drive SPWR’s upside move today.

 

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First Solar (FSLR) also benefitted and staged a bottom-fishing pocket pivot buy point of its own, as we see in the daily chart, below. This is coming from a very weak position, however, off of the 200-day and 10-day moving averages but still below the 50-day moving average. Normally I would say this has a snowball’s chance in hell of working, but in this market who knows.

 

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My theory regarding the turnaround in solar stocks which I first discussed a couple of reports ago, has had a small hole blown into it, however, by SolarCity (SCTY). SCTY looked pretty good last Thursday as it flashed a big-volume bottom-fishing pocket pivot coming up through the 50-day moving average. But since then the stock has been hit with some heavy selling volume, as we can see on the daily chart below. Maybe this is to be expected given the overhead in the pattern, and the stock closed today right at the lows of the short flag formation it formed along the 20-day moving average over a week ago. If SPWR and FSLR are able to hold up, and the general market stops selling off, can SCTY hold this near-term support level and rally from here? I suppose if one wishes to test that theory by buying the stock here, then today’s intra-day low at 34.41 might be a decent guide for a downside “hyper-stop.”

 

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Over the weekend I discussed the action in Alliance Fiber Products (AFOP) following its buyable gap-up move of six days ago on the daily chart shown below. As I saw it at the time, you were probably better off looking to buy this one on a pullback, and the stock obliged on Monday by yanking back to its 10-day moving average on above-average selling volume. Today saw the stock pull back again on lighter volume, so the stock could be buyable here with the idea that it will hold the 10-day line on any further pullback, down to 21.18.

 

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U.S. Silica Holdings (SLCA), which has flashed a couple of pocket pivots over the past couple of weeks, is pulling back to what I see as an area of support along the 24 price level and its prior pocket pivot of September 6th. I would watch for the stock to find support along this price level given that it coincides with the highs all along the lows of SLCA’s base over the past six months and is a logical spot for the stock to find support.

 

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Two more examples of stocks that have better moves from bottom-fishing pocket pivots than they do once they start flirting with new-high price ground are Celgene (CELG) and Gilead Sciences (GILD), both shown below on daily charts. CELG had a nice bottom-fishing pocket pivot back in late August which led to further upside, but more recently its pocket pivot buy point of six days ago on the chart hasn’t had the same success. This just goes to prove, I suppose, a general axiom in this market that once things start to look too good they are likely obvious to the crowd.

 

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The action in GILD pretty much mirrors that of CELG with its pocket pivot buy points in late August and early September and then the failed attempt at moving into new-high price ground five days ago on the chart. Like CELG, GILD is getting hit with selling volume as its bid for new highs is soundly rejected. Perhaps both stocks will find support somewhere in here either along their 20-day moving averages or on top of prior price ranges. For example, we can see on GILD’s chart that it has pulled back to the price range from which its early September pocket pivot emerged, as I’ve highlighted on the chart. This might provide an area of support from which the stock could try and bounce. In this market, when stocks look too good, they are obvious, and sometimes they need to put a little bit of an “ugly face” on before they can set up again.

 

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Google (GOOG), which had flashed a pocket pivot buy point as I was pointing out in my report of exactly one week ago, has put its “ugly face” back on by promptly moving back below its 50-day moving average. I also pointed out constructive action in Amazon.com (AMZN) and Priceline.com (PCLN) at that time (see September 18th report), and those two stocks continue to hold up just fine. If you go back and look at that report and the charts of the three stocks, you will quickly notice that the difference is that AMZN and PCLN had already moved to new highs, while GOOG is still trapped in its base and likely has overhead supply in the pattern. That’s likely why AMZN and PCLN are holding up better than GOOG here, despite the constructive action in all three stocks a week ago. This is perhaps a meaningful detail to note when distinguishing between stronger and weaker stocks.

 

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While the index action, taken on its face, looks marginal, we have to keep in mind that it is occurring after a prior rally off of the late August lows and following a major “good news” event that likely made the good times a bit too obvious. Thus we go through some pullback here, and in the process I would remain open-minded and opportunistic here. Stocks which have shown constructive action more recently and which are now pulling back on below-average volume might provide some decent buying opportunities. In some cases, of course, such as with Green Mountain Coffee Growers (GMCR), the breakdowns are more than just a normal pullback, and it is important that one distinguishes between this type of action and a constructive pullback.

 

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GMCR is clearly “old merchandise” that has now failed on an attempted breakout from a later-stage base, providing an example of why I generally like to go after newer merchandise most of the time. Other types of situations that I favor are stocks which have been correcting and consolidating and which are attempting to form “roundabout” formations as they round out the lows of news bases and begin to come up the right sides. These are setups to look for, and among these I would include a stock like SLCA, for example. Looking for constructive pullbacks in stocks like these as well as stocks that have shown recent strength is the best way to handle things when the market pulls back as it has over the past four days.

Meanwhile, if you do buy anything on a pullback, your risk can be reasonably well contained by using the nearest support level or moving average as your quick selling guide. To some extent this has been an “ugly duckling” market such that when things start to look a little less than perfect and beautiful, opportunities arise, the market finds its feet, and stocks move up again. Obviously, the situation remains fluid here, but for now I remain more opportunistic than bearish as we pull down here. 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 TSLA, though positions are subject to change at any time and without notice.

 

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