The Gilmo Report

April 30, 2014

April 30, 2014

While the Fed policy announcement today didn’t bring on anything we might consider decisive action, when I put the pieces of the puzzle together I get the sense that we are in a position to rally. The NASDAQ Composite Index, shown below on a daily chart, is knocking on the door of its current downtrend line, and a decisive breakout through this level could signal the start of a new rally phase. Over the weekend I surmised that we would likely see more downside in the market given the position of a number of leading stocks that were breaking down in the right shoulders or through the necklines of head and shoulders topping formation. The continuation of this downside action on Monday put a number of these stocks in an undercut and rally position, as I’ll show a little bit later. As I tweeted to members on Monday, with so many leading stocks getting extended to the downside after having come down 2, 3, 4 days in a row or more, we were setting up for a logical attempt at a bounce. Putting this together with the NASDAQ’s action on Monday where it closed in the upper half of the daily trading range on very heavy volume, we get the sense of some support on that retest of the lows at the 200-day moving average over two weeks ago.

 

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The S&P 500 Index, shown below on a daily chart, has been acting as if it is in a different world than the NASDAQ (which to some extent it is). It staged a little trendline breakout of its own today as it poked out of the handle of a little one-month cup and handle type of formation on increased volume. If the S&P 500 moves up another 7/10ths of a percent it will clear to a new all-time high, putting it into a de facto rally. With so many leading stocks having reached deep lows in their patterns, even a normal reaction rally in these names as they potentially build right shoulders or even more right shoulders in their patterns could add a fair bit of fuel to a rally despite the fact that it is difficult to find anything to buy.

 

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Let’s look at some of my short-sale targets to get a sense of where they are in their patterns as well as the fact that Monday’s action took us down to levels that represent logical downside targets. Starting with Netflix (NFLX), shown below on a daily chart, we can see that the stock undercut its 312.10 low from earlier in April. As I discussed in my weekend report, this was my downside target for the short position. I covered into that move on Monday and NFLX has tried to rebound from there. Notice however, that going into Monday the stock was already down four straight days, with Monday being the fifth straight day on the downside. That is what we might consider a bit frothy on the downside, hence time for a reaction rally. Such a rally could logically trade up to the 200-day moving average at 342.53. For those comfortable accepting the risk in this trade using, say, a 3% downside stop, this could be a tradable event on the upside.

 

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While I was looking for Facebook (FB) to potentially bounce off of its 200-day moving average on the daily chart, shown below, it actually bounced off of its 40-week moving average on the weekly, not shown, on Monday as it also undercut the 55.44 low of the past month’s range. This set up a logical rally up into the 10-day moving average, but it is not clear to me that I would look to short this just yet as the stock could rally all the way back up to its 50-day moving average and could even turn off of the lows of what could be a new base. In any case, FB’s action is consistent with a logical undercut & rally that occurs at the same time as a bounce off the 40-week moving average.

 

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Amazon.com (AMZN) gapped down last Friday on huge volume following earnings. That break continued into Monday as the stock carried below the 296.50 low of last September, setting up an undercut & rally situation (or “U&R” as I like to call it these days) that took the stock back above the 300 price level yesterday and today. From here AMZN could rally back up into the 10-day line, currently at 317.54. If it can clear that, however, a rally all the way back to the 50-day and 200-day moving averages up around 344 could occur. Notice that the 50-day line is just on the verge of crossing below the 200-day line for a bearish “black cross.” Thus watching AMZN’s rallies from here might set up a shorting opportunity at some point down the line. For now, however, AMZN’s action adds further circumstantial evidence of a low.

 

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Pandora Media (P) also undercut some key lows in its pattern, as we can see on the daily chart, below. P gapped down last Friday following earnings and then on Monday continued lower as it undercut the lows from last September/October following a buyable gap-up move back then. Longer-term I think the stock can get down as low as $19, but for now the undercut & rally position makes a move back up towards the 200-day moving average at 27.78 a distinct possibility.

 

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As Gilead Sciences (GILD), not shown, has blown right through its 50-day moving average, stopping out any attempt to short into the rally, Celgene (CELG) has remained stubborn as it tries to clear the 157 price level, an area that has presented stiff resistance for the stock three times before during the month of April. From here it is just another percent or two before the stock reaches the 50-day moving average, which has already crossed below the 200-day line. It looks to me as if CELG might clear the 147-148 price area and do just that. But if the market began to roll over again, this one would be one of my first short-sale choices given that it is in a reasonable position to short. The 50-day looming just above at the 149.37 provides a ready reference for an upside stop, while with most of my other short-sale targets the stocks are so far down in their patterns that they are nowhere near a low-risk entry point on the short side. On top of that, it is not clear to me that you want to be shorting this market unless we see this rally fail in short order.

 

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You can also see with Biogen Idec (BIIB), shown below on a daily chart, that selling volume has dried up somewhat as the stock tracks along its 50-day moving average on the daily while it finds clear support at the 40-week line on its weekly chart, not shown. Recall that over the weekend I discussed the fact that you want to be watching both daily and weekly moving averages to gauge when a short-sale target stock might find support and generate a logical reaction rally and bounce.

 

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Visa (V) is one short-sale target that could be considered to be in a low-risk short-sale entry point as it has stalled on a rally attempt up to its 200-day moving average, as we can see on the daily chart, below. However, its close cousin, MasterCard (MA), not shown, is expected to announce earnings tomorrow before the opening, and it is likely that MA’s earnings announcement will figure heavily in the resolution of V’s current bounce attempt into the 200-day line.

 

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For an idea of a stock that is way “down and dirty,” we can look at Cree’s (CREE) daily chart, below, and easily surmise that it has become quite extended to the downside. After last Wednesday’s shortable gap-down move, which I discussed in my report of last Wednesday as being shortable using the intraday of that day at 53.40 as an upside guide for a stop, CREE continued lower both yesterday and Monday. This made for a total of five straight down days, at which point the stock is probably done on the downside for now. Rallies back up into the 10-day moving average at 51.78 or the 20-day moving average at 52.95 could become shortable, but at this stage the stock is likely in a position where it needs to bounce around a bit.

 

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The essential picture that I am trying to paint is one of a market that is in a logical position to rally. The odd factor here that may help this along is that so many beaten-down leading stocks are so deep, down, and dirty in their patterns that simple and logical reaction rallies in these stocks could help to fuel an index rally to new highs. That is a distinct possibility, and one that I am looking for here. As I wrote over the weekend, “I won’t go so far as to label myself a bear or a bull, but simply a trader who is riding the dominant trend among individual stocks, which in my view continues to be on the downside.” As of Monday, that view changed based on the evidence that I’ve cited in this report, and while I wouldn’t call myself a roaring bull here, my best assessment is that we may be set for further upside here. Remember, we began playing the short side of this market in early March, and it has been quite profitable, at least from where I sit, and now the market is in a position where anything could happen. My view is that a rally is likely, but there is always and at all times the potential for the rally to fail. This, of course, would hopefully coincide with a number of short-sale targets rallying up into logical areas of resistance, providing some easy assistance for coming back on the attack on the short side.

In the meantime, should the market shift into a rally phase, what is there to play? Believe it or not there are some very concrete set-ups popping up out there, which gives me some confidence that we can in fact rally higher from here. One former leader that has made a decent comeback is Sunpower (SPWR), shown below on a daily chart. SPWR came out and beat earnings on Friday, guiding higher, and this resulted in a big pocket pivot jack on heavy volume within a v-shaped position. Initially this is right up off the bottom so risky to buy, but with the stock setting in for three days along the 50-day line with volume drying up, the stock may be ready to move higher. It’s a simple matter of taking a position here and using the 50-day line at 31.99 as a quick stop if the general market gets into trouble.

 

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Alliance Fiber Optic (AFOP) also announced earnings on Friday and after an initial sell-off the stock found support at its 20-day moving average before finishing up on the day and above the 10-day moving average, as we can see on the daily chart, below. AFOP has been charging up the right side of a potential new base and one could consider the move through the 17.81 price point as a breakout through the mid-point of a double-bottom base. On Friday AFOP posted its sixth straight quarter of triple-digit growth as sales growth jumped into triple digits at 105% for the first time. AFOP tested the 10-day moving average today on a pullback to the line, closing up on the day as selling volume failed to take hold. While it is a smaller-cap-name, I would expect the stock to continue holding the 20-day moving average on any pullbacks, using the line as a maximum selling guide.

 

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Drug maker Actavis Plc (ACT) qualifies as something of a “roundabout” formation as it tries to come back above the 200-day moving average on a pocket pivot move off the 10-day line, as we can see on the daily chart below. ACT came out with earnings today and beat estimates by 28 cents coming in with 75% earnings growth on a hard number of $3.49 a share. I view this as a bottom-fishing pocket pivot that is potentially buyable using the 10-day line as your selling guide.

 

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A small bio-tech that catches my eye is Anika Therapeutics (ANIK), shown below on a daily chart. ANIK came out with earnings today and blew out estimates, reporting 97 cents a share, 73 cents above analysts’ estimates of 24 cents. This produced quarterly earnings growth of 362% and sent the stock on a strong pocket pivot move off of its 10-day moving average. ANIK has been tracking sideways in a nine-week base and has actually held up very well throughout the March-April market correction compared to the rest of the bio-tech group which has been in wholesale breakdown mode.

 

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Keep an eye out for patterns like we see in Tesla Motors (TSLA), below. TSLA has been working on what is now a nine-week base that might be the left side of a potential cup formation, as we can see on the daily chart, below. One thing to look for in these types of patterns is the intensity of selling in the pullback, and as I’ve discussed in recent reports, TSLA hasn’t seen any huge selling in the pattern as it has corrected with the general market. As well, it isn’t forming anything that looks like a head and shoulders formation in the manner that NFLX has. Keep an eye out here for some sort of pocket pivot as TSLA rides along the 10-day moving average with volume. With the Force Indexes turning blue here I’m hoping a pop up towards the 50-day moving average at 221.98 might be in the cards as and if all the shorts in the stock decide they want to cover before the company is expected to announce earnings next Wednesday after the close. As of April 15th, there were still 25,075,345 shares reported short in the stock.

 

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As you can see, there are most definitely some buyable set-ups here, and today’s action helped bring some of these through my screens. Thus I will be selective with a few of what I consider to be sound long ideas while I perhaps look to get a little tricky with TSLA going into next week’s earnings report. The bottom line for me is that we are in a position to rally here and the index action over the past several days combined with the action in broken down former leading stocks provides the context for this rally. If it can develop into something more significant, then you want to go with the stocks that are showing us actionable buy points right now. By the weekend we will likely see things clarify further, one way or another. In the meantime, keep your short-sale targets in your back pocket for now, ready to deploy them should the market rally fail. Otherwise, I see nothing wrong with testing the waters on the long side here if one can in fact find concrete set-ups. As we’ve known for some time, the stocks always tell you what you need to know well before it becomes obvious in the indexes, and the “sold out” nature of our short-sale targets combined with some fresh set-ups may be pointing us in the right direction. 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 AFOP, SPWR, and TSLA, though positions are subject to change at any time and without notice.

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