The Gilmo Report

August 7, 2013

August 7, 2013

Distribution days are building in the major market indexes, and despite finding support off the top of its prior July range, the NASDAQ Composite Index, shown below on a daily chart, still logged its second distribution day of the week today and its seventh overall. Meanwhile, leading stocks are all over the place, and my tendency here is to take a cautious stance and keep a close eye on long positions.




Over the weekend I discussed the divergence in the advance/decline lines of both the NASDAQ and NYSE exchanges. So far this week we’ve seen this deteriorate further as we can see in the cumulative line chart of NASDAQ Advance/Decline, below, which has turned down with the index to make a lower low today. As we saw in late May, breadth began to flatten out as the market’s momentum waned and this led to a roughly four-week correction. Thus I am inclined to view this latest divergence in breadth as a yellow flag, particularly in light of the action in some leading stocks.




The NYSE Advance-Decline Line, shown below on a cumulative line chart, has turned more sharply to the downside, as the NASDAQ has been where most of the strong upside action has been centered. Even as the S&P 500 Index was making a higher high last week, breadth was making a lower-low, a clue that the market is losing momentum here.




After-hours, Tesla Motors (TSLA), as one of the latest additions to the NASDAQ 100 Index, is doing its best to maintain the NASDAQ’s outperformance, as it moves above the 150 price level after announcing earnings today just after the close. Assuming this gap move holds into tomorrow’s open, it will take TSLA through the top of its recent trend channel, as we can see on the daily chart below. Depending on how things shape up tomorrow at the open, it could represent a buyable gap-up move once the stock puts in a discernible intra-day low. This is tricky, however, since this would be the second buyable gap-up in TSLA pattern since breaking out earlier this year.




Of course, not all is turning up roses in Tesla CEO Elon Musk’s world. His other public company, SolarCity (SCTY), shown below on a daily chart, also came out with earnings today after the close and it is currently trading down below the 39 price level. SCTY came in and “beat” estimates by posting a less-than-expected loss, but the stock rolled over after initially reacting to the upside. Perhaps a sign that all was not right with the stock was the immediate “give-up” following Monday’s huge-volume breakout from a cup-with-handle formation. Over the weekend I discussed the tightness in SCTY’s weekly chart, and this did lead to Monday’s breakout. But the stock’s inability to hold this breakout yesterday and today did not bode well, in my view. After-hours the stock is down nearly 10% as I write.




Solar stocks in general have lost their luster, with First Solar (FSLR), shown below on a daily chart, blowing apart and gapping down today after announcing earnings; Sunpower (SPWR), not shown, giving up almost all of its gains since we first started following the stock after its buyable gap-up move in late June; and Canadian Solar (CSIQ), also not shown, running up 10% on Monday before giving all of that back over the past two days. I will be following FSLR from here, however, as it has morphed into a short-sale situation that could have been viewed as a shortable gap-down move this morning. It is now extended to the downside, but I am monitoring any rallies from here as potential short-sale opportunities should the stock rally back up from here. Note that it undercut the late June lows, setting up a short-term undercut & rally situation, which I might be looking to short into if the general market starts to weaken here.




Over the weekend I discussed the possibility of taking profits in Trulia (TRLA) and Yelp (YELP), given their volatile nature and huge price run-ups, and this was confirmed by both of them staging sharp pullbacks over the past couple of days. TRLA, shown below on a daily chart, dropped below the intra-day low of last Thursday’s buyable gap-up move, but it was able to hold its 10-day moving average. On Monday, a big move back up to the 48 price area provided a nice opportunity to take profits in the stock. Given the fact that it had such a monstrous move following last Thursday’s buyable gap-up move, this made sense in my view. One could attempt to buy the stock back here with the idea that it should hold its 10-day moving average, but keep in mind that this is somewhat risky given the stock’s inability to hold in tight following its buyable gap-up.




Yelp (YELP) also could have been trimmed on Monday, but it is acting relatively better as it pulls back and tests the intra-day low of last Thursday’s buyable gap-up move. If one took profits on Monday per my discussion of this past weekend, the stock is now about 10% below that point and offers a reasonable spot to re-enter while continuing to use the 49.22 intra-day low of last Thursday’s buyable gap-up day as your stop. We were initially on to YELP back in late June as the stock was breaking out of a big base, and in this market when you have profits like that it generally pays to take them. At this point one doesn’t even have to try and buy back into the stock if one has already taken profits, as I tend to think it will spend some time building a new base, at the very least.




I’m not sure what to think of Invensense (INVN), which hit my stop today after it burst right through what I saw as its buy point around the 16 price level. It is somewhat troublesome to me that the stock has continued to come in with selling volume well above average, and while today’s action did manage to close in the upper part of its range, I would prefer to see the stock hold in much more tightly following last week’s massive upside volume breakout. This is tentative action and I would watch to see how the stock acts from here. If it can settle down, then it may again be buyable along current levels, but I find it difficult to hold onto a stock that acts in such a manner. To some extent this reminds me of Ambarella (AMBA), not shown, which continued to edge higher before finally breaking down below its 50-day moving average last week, as I discussed in my report of last Wednesday, August 1st.




Three-D Systems (DDD) violated its 50-day moving average today on an intra-day basis, but managed to close at the peak of its range and slightly up on the day, although it remains below its 50-day moving average. The entire 3-D printing space has come under pressure lately, and with several of these stocks coming undone over the past couple of days this is one area of potential leadership that is clearly falling by the wayside.




Stratasys (SSYS), another 3-D printing name, dipped below its 50-day moving average today and closed just below it, setting up the potential for a moving average violation. SSYS has yet to announce earnings, which it will do tomorrow before the open. I would certainly not be willing, however, to play “earnings roulette” with SSYS going into tomorrow morning’s earnings number.




Among stocks in the 3-D printing space, the most bizarre action has to be that of Proto Labs (PRLB), shown below on a daily chart. Over the weekend we looked at the constructive action in the weekly chart of PRLB as it was breakout out of a flat base. On Monday PRLB streaked to all-time highs on well above-average volume, but mysteriously gapped down 5% at the open yesterday morning and closed at the lows of its daily trading range on very heavy selling volume. Today PRLB continued lower as it moved down to its 50-day moving average. Obviously, this breakout has failed, and as PRLB was the best-acting stock among the 3-D printing names, this is not a good sign for the group in general. Even Exone Company (XONE), not shown, which flashed a pocket pivot buy point yesterday, gave it up today as it broke down 6.35% on volume that was below average.




Regeneron Pharmaceuticals (REGN), which had been building a cup-with handle base going into earnings yesterday, gapped down following earnings and ran into its 50-day moving average, which appears to be supporting the stock in the short term. However, this is looking like a late-stage base-failure, and a breach of the 50-day line would confirm this. Again we have a name that shows strength for a period of time but comes undone following earnings.




Acadia Pharmaceuticals (ACAD) also came out with earnings yesterday and came back down after moving to all-time highs on Monday. The stock was able to hold the 10-day moving average so it looks okay for now and could be viewed as potentially buyable along the 10-day line with the idea of selling it on a violation of that same moving average.




Santarus (SNTS) was a bright spot among the pharmaceuticals today as it gapped up following earnings for a buyable gap-up move, as we see on its daily chart below. This is actually the fourth buyable gap-up in the stock’s pattern so far in 2013, and the third in the past three months, so I do have to wonder whether this is getting a bit obvious. Yesterday’s intra-day low was 26.25, so the stock is within buyable range here with a reasonably tight stop.




Valeant Pharmaceuticals (VRX) also acted well following earnings, although the action did not provide a lot of fireworks. Instead the stock simply trudged to a new high on a pocket pivot volume signature, which came on the heels of last week’s pocket pivot breakout from a cup-with-handle formation.




With distribution days piling up in the NASDAQ, the odds of a market pullback or correction increase. The behavior of leading stocks offers somewhat of a mixed bag, so that if you own stocks that continue to act well you need only keep an eye on your stops and selling guides. On the other hand, we are seeing a number of stocks flip out to the downside, in many cases right after showing very strong upside price action. This makes life difficult for those trying to pyramid positions.

My general approach here is to cut out stocks where I’ve taken a recent new position and am not showing a profit on that position, as I see no reason to take on additional risk given the action of the major market indexes. If you do elect to take any new positions, insist that they show at least some upside progress after you purchase shares, particularly in the case of buyable gap-up moves.

And don’t be afraid to bank some profits if you have a situation that is rocketing to the upside, as we saw with last week’s buyable gap-ups in TRLA and YELP. Even in the case of SCTY, had one bought the stock Monday morning and experienced the “love” of Monday’s sharp upside move, one could have banked a quick profit instead of trying to play “earnings roulette” this afternoon after the close, something that would have been quite painful based on the stock’s after-hours action.

Meanwhile, most of the other names I’ve discussed on the long side in recent reports appear to be acting okay. Again, I would keep initial positions where you are not showing a profit on a short leash. 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 no positions, though positions are subject to change at any time and without notice.


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