The Gilmo Report

April 15, 2014

April 15, 2014

As the old saying goes, you either scare them out or wear them out, After Friday’s weak showing, the market managed to put together a short reflex rally on Monday that looked like it was going to carry into today right as we opened up for trading. That early morning rally didn’t last long as the indexes reversed and careened to the downside before getting to a point where the selling began to feel somewhat “worn out.” At the same time, the NASDAQ Composite Index traded right down to its 200-day moving average today as it undercut the early February low, as we can see on the daily chart of the index, below, which is exactly what I was looking for per my discussion in this past weekend’s report. The index bounced off the 200-day moving average on much heavier volume compared to yesterday, which qualifies as the first day of a rally attempt, but no more or no less.




My tendency is to think that short-term the heart is more or less out of the artichoke on the short side. The market needs some time to digest the prior leg down and perhaps build a bear flag as we move into what are likely to be a quiet two days of trading going into the long holiday weekend. The thinner trade going into the holiday weekend probably results in a slow, grinding move to the upside, maybe faster if there are a bunch of late, trapped short-sellers in this market currently. By the time we start out fresh next week, the market might be in a position for some kind of follow-through day or simply weak, indecisive action that turns out to be the natural building of a bear flag.

We can’t know for sure, but it feels to me like the short side is somewhat played out at this point. It has been a nice 6-7 weeks of shortable downside action but it may not pay to overstay one’s welcome. So with the market in the first day of a rally attempt, as I see it, one can simply lie low here and see how things develop. If you were following me on Twitter today I saw this rally coming much earlier in the trading day at around 9:35 a.m. Pacific Time this morning, less than half-way through the day, when I tweeted, “Looking for sellers to finish their business today before the long weekend.” With the market now closed that appears to be exactly what happened.

Meanwhile, the S&P 500 Index, shown below on a daily chart, is looking at near-term resistance as it approaches the 50-day moving average from underneath the line. Volume was higher today on the NYSE as well, and in fact the S&P 500 is in the second day of a rally attempt. Theoretically, it could put in a follow-through on Thursday at the earliest, but the 50-day line still remains as potential resistance. So we’ll just have to watch and see whether the overall action keys on the NASDAQ’s undercutting of either the early February lows and high-volume bounce off the 200-day moving average, or the resistance at the 50-day line for the S&P 500.

Gold gapped back down to its 200-day moving average as we can see on the daily chart of the SPDR Gold Shares (GLD) ETF. This action confirms my view that there really isn’t much of a trade in the yellow metal currently, given that there is the inherent conflict of gold as an alternative currency in a crisis as well as the fact that it also constitutes an asset class that can be sold off like any other asset class if the overall selling pressure in the markets is strong. Right now I think that stocks provide more consistent and coherent vehicles, on either the downside or the upside, for my own operations.




LinkedIn (LNKD) is engaging in a little “Wyckoffian Low” type of action here as it pulled in to retest the lows of last week under the 160 price level and then turned higher today. I would recommend that everyone read anything and everything written by Richard D. Wyckoff, who founded the Magazine of Wall Street in 1907. It was in this magazine that Wyckoff first chronicled the activities of one Jesse Livermore. The basic idea of a Wyckoffian Low is a pullback to a prior low or just above that low in volume that is drying up relative to the original low. LNKD has done that so far this week after finding resistance at the 10-day moving average last Thursday, as we can see on the daily chart, below. Our initial downside price target was 160, and the stock undercut that level last week. This current action leads me to believe that the stock is going to try and bounce from here, and by the close today it was up 5.12 on the day to close at 170.90 after bottoming at 160.92 earlier in the day. It also closed just above its 10-day moving average, which is my trailing stop for the short in LNKD.




Cree (CREE) keeps finding support around the 54-55 price level which is also the neckline of a big two-headed “hydra & shoulders” topping formation as I discussed in my report of this past weekend. The stock has so far not been able to “break out” to the downside of this formation, and with earnings coming up next week there may not be any resolution of the pattern until then. Thus I don’t think one needs to hold a short position in the stock going into earnings.




Pandora Media (P) has blown further below its 200-day moving average, as we can see on the daily chart, below. This move, however, has taken the stock on an undercut of the prior lows of a base it formed back in November and December of last year. Thus I tend to think that P is in a position for an “undercut & rally” move from here, but would watch how it rallies up into the 200-day moving average, currently at 27.43. On the weekly chart that we looked at over the weekend, P looks to have completed a left shoulder and now the “head” of a big head and shoulders that is still in process. It would be logical for the stock to rally from here to form a proper right shoulder in an overall head and shoulders formation.




Celgene (CELG) has been shortable on rallies up to the 10-day moving average over the prior three days, but it is in a position way below its 200-day moving average and the neckline of its original head and shoulders pattern, as we can see on the daily chart, below. I would wait and see if CELG can rally up closer to its 200-day moving average and the neckline where the short-sale entry carries far less risk. Shorting it down here, particularly with the NASDAQ bouncing off of its 200-day moving average, is likely not optimal even though the weekly chart, as I discussed in my report of this past weekend, is still very negative.




Stratasys (SSYS) “broke out” through its original flat neckline last week, as we can see on the daily chart, but as this overall head and shoulders develops I can now draw a second, descending neckline where the stock has been finding support so far this week. Thus the stock is in a position where it could form another right shoulder in the process of building a more complex head and shoulders formation. Thus there is no point in trying to short the stock here, but rather looking for some sort of rally that might carry back up to the original flat neckline near the 110 price area.




If we somehow get a follow-through on the S&P 500 on Thursday of this week, it will be difficult to find much that is in a buyable position and not simply coming off the lows of a deep, down and dirty low following a brutal downtrend over the past several weeks. In some ways figuring out what, if anything, to buy if we get a follow-through on Friday, or even sometime next week, requires some creativity, in my view. Of course, one could stick to buying a recent breakout that has held up throughout the market’s sell-off, such as Diamondback Energy (FANG), shown below on a daily chart, I’ve discussed FANG in previous reports over the past month, and the stock has held up well during the market correction, even trying to break out on a pocket pivot move back in late March. FANG had a big, wide, stalling pocket pivot on Monday, and today held the 10-day moving average with some volume coming into the stock. This is in a buyable position if the general market trend shifts.




Finisar Corp. (FNSR) is another potential buy candidate given that it has held its prior base breakout from mid-March quite well during the general market correction, as we can see on the daily chart. With the stock finding support along the 50-day moving average as well over the past three days, one has a nearby reference point as a quick sell stop down around 24.62, about 4% below where the stock closed today. I have discussed FNSR previously in my report over the past month. Both FNSR and FANG represent more conventional buy set-ups that have held recent breakouts during the market correction, and so the theory is that these stocks have held up well during the general market pullback because they really want to go higher. Should the weight of the general market be lifted from their shoulders, they would then be free to do what they have wanted to do all long.




On the other hand, given the sharp sell-offs in so many leading stocks, the idea of looking for “bottom-fishing” pocket pivots within roundabout formations as well as keeping a keen eye out for the revered “shakeout-plus-X” buy set-up, where X is the number of points one uses to determine the buy point, becomes a viable alternative strategy. I discussed last Wednesday the possibility of Facebook (FB) flashing a shakeout-plus-4 or 5 buy point after it rallied back above its late March low at 57.98 and then rallied up to 63.18 before failing with the market on Friday. FB might still try and set up again, and as a big-stock leader I would keep an eye on the stock for something like this in real-time.




One of the things working against FB is the relatively short duration of its base, and the fact that it isn’t as well “rounded” going into earnings at the end of the month. We might consider something like Twitter (TWTR), however, to be better-rounded with three waves of selling in the pattern so far, as we can see on the daily chart, below. Interestingly, TWTR hit my radar today as a bottom-fishing pocket pivot buy point as it jacked up through the 10-day moving average on strong buying volume. This is coming from a position below the 50-day moving average, and TWTR is expected to announce earnings on April 29th, so with so many presumably fat and happy shorts in the stock, a rush to cover before earnings could push a rally in the stock until then.

My thinking here is that I’m willing to take a shot at TWTR here using the 10-day moving average at 42.74 as a reasonably quick downside stop. TWTR also has the potential to become a shakeout-plus-three buy situation based on the undercut of the 43.31 low of late March, which I’ve pointed out on the chart. This makes 46.31 the potential buy point of such a set-up, although today’s pocket pivot is actually all you need for a buy point as a sort of “deep doo-doo” type of set-up given the three vertical gray oversold bars in the pattern. A move to just above 50 and the 50-day moving average is what I’m looking for here.




Another “tricky” set-up might be something like we see in the recently hot cheap-stock fuel cell maker known as Plug Power (PLUG), a stock that my colleague Kevin Marder recently touched upon on the Gilmo Report Facebook page. PLUG “fever” hit the market in early March, just as the correction was getting going in a number of leading stocks, as we can see on the daily chart, when the stock jacked 163% in a matter of one week before peaking at 11.72 and retracing a huge chunk of its move in one day. PLUG’s products, namely fuel cells that use a chemical reaction to produce energy, are more or less in the “hot zone” with Tesla Motors (TSLA) recently hyped “giga-factory.”

And while this creates big upside volatility in the stock as a tsunami of investors suddenly consider the stock a “must have,” buying in droves right at the peak of a short-term move, what I am more interested in is the general pattern of institutional interest in a stock. PLUG has also been panned, and one notable report on the stock declared that it was only worth 50 cents, resulting in the huge downside drop after the big run-up, which is quite evident in the stock. The interesting aspect of the PLUG “story,” as it were, is that the recently released March 2014 institutional ownership data for the stock shows that 53 funds now own 17.5 million shares vs. 52 funds that owned 8.2 million shares back in the December 2013 report. This shows, to some extent, that the upside movement in the stock wasn’t necessarily all “dumb retail money.”

More institutions are coming into the stock as they perform their due diligence. Meanwhile the stock has settled down in a month-long flag pattern as volume dries up. PLUG pulled down today but closed above mid-range and the 20-day moving average on a volume increase. This looks like it has a reasonable chance of launching out of here given that it has quietly gone about the business of building a tight flag formation on the daily chart while the general market has corrected sharply off the peak. Note also that the Bongo Weekly and 13-DEMA Force Index, the longer-term indicators, have maintained their healthy blue complexion. The intra-day lows around 6.50 serve as a reasonable downside guide for a stop.




With the market moving into a long holiday weekend at the same time that the NASDAQ hits its 200-day moving average after undercutting its early February lows, I consider my posture to be “opportunistic” with a short-term bias to the upside. Bottom-line: I consider the short side of this market to be somewhat played out here, and with earnings season coming into full swing I am not willing to misstep and overstay my welcome. In the meantime, I might be willing to try some long side trades in small size, but the essential issue for the long side of this market currently is that there are virtually no solid buy set-ups out there.

Sure, there are a handful, but most former leading stocks have been decimated, and this may only leave one with creative alternatives such as bottom-fishing pocket pivots and shakeout-plus-X type situations. To some extent, one has to be alert to these possibilities in real-time. Nevertheless, whether I am willing to test what may turn out to be fleeting, short-term upside flips on the long side remains outside the overriding fact that the market has yet to prove that it is ready to begin any kind of uptrend. Hence there is no reason to make any uber-aggressive moves here, just let things play out and develop as they will, without getting locked into a bullish or bearish frame of mind.

On an administrative note, I’m pleased to announce that my colleague Dr. Chris Kacher and I have signed a contract with John Wiley & Sons to publish what will be our third book and my fourth book on the markets. The working titled of the new book is, “Turn to the Dark Side with the O’Neil Disciples – A Treatise on Short-Selling and Contra-O’Neil Methods.” We expect to have the book out sometime near year-end.


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 PLUG and TWTR, though positions are subject to change at any time and without notice.

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