The Gilmo Report

December 11, 2013

December 11, 2013


The market has been looking suspect over the past three days, with much of the action in the market indexes being characterized by stalling and churning. However, this was something that I had discussed in my weekend report. Friday’s big move in the indexes following the strong jobs report came on weak volume, and volume was again absent as the indexes tried to make new highs on Monday, as we can see in the daily chart of the NASDAQ Composite Index, below. The S&P 500 Index, not shown, looks much like the NASDAQ as all of the major market indexes came down today on increased volume. With the indexes already having several distribution days under their belts, today’s action sends the signal that you probably don’t want to be long stocks up to your eyeballs.






As I wrote over the weekend, this market has been more a matter of finding that one good trade that gives you a quick burst of upside “juice,” because the bottom line is that breadth has been lagging as of late. The chart of the NASDAQ Advance/Decline line, shown below, tells the story as we can that NASDAQ breadth peaked in late November, even as the index pushed to higher highs. The NYSE Advance/Decline line, not shown, tells the same story. In my view this was an advance clue telling you that the market’s recent move to new highs was suspect, and I think action like we saw today confirms this. Throw in the fact that bears have been in full hibernation, setting up a bullish crowd to be fooled, and you’ve got yourself a possible market correction here, just in time for Christmas. Thus, given the risk based on the current evidence, I am not inclined to get long anything here. If you own any stocks showing decent profits, then  keep your trailing stops clearly in mind here, and if you own any stocks that you are underwater on, consider at least paring back, if not selling outright.




Over the weekend I said that the only thing I wanted for Christmas was another Gogo (GOGO), and then at the end of this weekend’s report I speculated that it might be Twitter (TWTR). Over the past three day’s TWTR has turned into the perfect holiday gift with a nice jack above the 50 price level on huge buying volume, as we can see on the daily chart below. The only imperfection is that TWTR is still a very young IPO, having traded less than the required 30 days in order for it to become marginable. For someone who likes to traffic in large positions, e.g., greater than 100%, TWTR’s non-margin-ability can wreak havoc on one’s buying power. As they say, be careful what you wish for. In any case, TWTR has had a very sharp move and in my view it is time to take at least some off the table here.




The strong action in TWTR bled over into other social-networking names, including Facebook (FB), shown below on a daily chart. TWTR helped FB clamber back above its 50-day moving average yesterday, but the action was not sufficient for a bottom-fishing pocket pivot buy point. In fact, since the bounce off the 50-day moving average way back in the earlier half of November there have been no bona fide buy points in the stock. FB decoupled from TWTR today and turned back down, but was able to hold above the 50-day moving average. If the stock busts the 50-day line on some volume than this could easily morph back into a short – keep an eye on it. After hours as I write Standard & Poor’s has announced that FB will be added to the S&P 100 Index, and the stock has moved above the 51 price level in after-hours trade. My first reaction is to think this may set up a short-sale opportunity tomorrow morning given that FB is an extremely liquid stock, and if there are any index funds that have to add FB to their portfolio, it shouldn’t be too hard to get shares. In any case, we’ll have to see how this acts at the open although I may put some shares out in the after-hours today. Follow me on Twitter for real-time comments on FB and other stocks discussed in The Gilmo Report.




Another beneficiary of TWTR-mania was LinkedIn (LNKD), which has been able to hold above its 50-day moving average following last week’s pocket pivot coming up through the line, as we can see on its daily chart below. LNKD pulled back to the 50-day moving average today on fairly light volume, which was constructive, but sellers may not have been eager to part with their shares given the TWTR buzz. If TWTR rolls over hard here it may have the counter-effect of dragging LNKD and FB down, so that is one possibility that I am watching for. Of course, a sharp volume breakdown through the 50-day line on LNKD, as with FB, might be reason to consider the stock a short again.




Netflix (NFLX) made a run for its highs today but reversed on the general market weakness with volume picking up, as we can see on the daily chart below. NFLX is still stuck in a narrow uptrend channel that began about a week after its massive-volume reversal back in mid-October. Despite that, there have been absolutely no bona fide buy signals in the stock, despite the steady drift to the upside.




Tesla Motors (TSLA) is the only one other member of the former “Four Horsemen” besides LNKD that has flashed anything close to a price/volume buy signal with its massive-volume extreme bottom-fishing pocket pivot gap move of seven days ago, which we can see on the daily chart, below. Despite the market’s hard sell-off on heavier volume today, TSLA came off less than a couple of percent today on lighter volume as it pulled back to its 20-day exponential moving average, which it has held since the pocket pivot gap-up day. So among these Four Horsemen, we have seen FB and LNKD back into their 50-day lines on light volume while TSLA backs into its 20-day moving average on light volume, action which on its face looks constructive, at least for today. Heavy volume breakdowns from here that take the stocks below the moving averages where they have found support over recent days would be negative. But here’s a thought for you – if the market yanks to the downside quickly here and then turns back to the upside in an attempt at a year-end rally, watch for the constructive action in FB, LNKD, and TSLA to resolve in a potentially bullish manner. In other words, be ready for anything.


GR121113- TSLA


Now that TWTR has become the hot stock du jour, Gogo (GOGO) falls by the wayside as it pulls back into the top of its prior flag base on light volume as we see on the daily chart, below. Allegedly, nearly 74 million shares of GOGO stock will be free to sell in the open market next week after the stock’s IPO lock-up period expires on December 17th, and it will be interesting to see just how this affects GOGO’s price. It may be that the general market environment will do its own job of keeping the stock down, but in my view the hot money has been made in GOGO for now, and it is a matter of seeing how this weathers any continued market weakness. Like I said, in this market, you have to get when the getting is good, and leave the party before the police arrive!




Most pocket pivots and buyable gap-ups in recent days have resulted in either tepid upside action or outright failure. We can look at the daily chart of Acadia Pharmaceuticals (ACAD), below, to see how its pocket pivot coming up through the 50-day moving average has rolled over and breached the 50-day line today on a volume increase. I’m able to look at ACAD in a fluid manner, and when it could not hold the 50-day moving average in my view the stock became a short-sale target. If the general market continues lower, then my guess is that ACAD will breach the 20 price level.




Disappointing action has characterized the “Three Caballeros” over recent days as Biogen Idec (BIIB), not shown, is on the verge of moving below the intra-day low of its buyable gap-up day of over two weeks ago, and Celgene (CELG), also not shown, falling back below the low of Monday’s gap-up move. Gilead Sciences (GILD), which I do show on a daily chart below, had a huge announcement on Friday after the close when the FDA approved its big Hepatitis C drug, Sovaldi, and this led to a gap-up move on Monday that quickly failed. The past two days have seen a clear “sell the news” response to the approval of this allegedly “blockbuster” drug. This is disappointing if not outright negative action in GILD on what might have been expected to be very positive news for the company. Perhaps this is a clue that things in bio-tech land aren’t all what they seem to be.




Cree (CREE) is one of the more interesting short-sale set-ups I’ve seen in a while given that it has two huge-volume gap-downs in the pattern, each one occurring after an earnings announcement. CREE found resistance just under the 200-day moving average on Monday and reversed to close at the lower end of the daily price range, as we see on the daily chart below. I look at this as a short here using the 20-day line at 57.83 as a quick upside stop. The initial downside price objective would be the recent lows down in the high 53 price area although 48.40 seems like a more likely downside price objective.




The weekly chart of CREE shows the two-headed “Hydra” & Shoulders formation with two huge-volume price breaks off the peak of each head defining the right side of each. It is impossible to look at this pattern as anything but extremely flawed and vulnerable to further downside. You can also see the blue 10-week line just barely starting to cross the red 40-week line, forming the early beginnings of a potential “black cross.” CREE’s Relative Strength line has also made a new low, which is always a primary clue in my book regarding the potential for a stock to move lower in price. It’s possible CREE could rally back up to the 40-week line, currently at around 60.82, but in my view that would likely be an optimal short-sale point.




Another stock forming what I see as a potential major top is Lululemon Athletica (LULU), shown below on a daily chart. While one can easily discern a head and shoulders formation in this daily chart alone, it is actually part of a much larger head and shoulders “complex” that extends back to September of 2012. On the daily chart we can see that LULU ran into big selling volume yesterday as it reversed off of its 200-day and 50-day moving averages on heavy trade. The stock was actually shortable once it failed at the 200-day line, in my view, but it remains in play as a short-sale target from here, particularly on any rallies back up into the 69-70 price area. LULU gapped up yesterday on news that the company had found a new CEO, and is expected to announce earnings tomorrow before the open. Watch for any gap-up moves that might turn out to be shortable.




We can see the head and shoulders complex that extends back to September 2012 quite clearly on the weekly chart of LULU, below. The massive-volume price break off the peak defines the right side of the head in the big H&S formation. LULU’s Relative Strength rating is a very weak 32 and has made its lowest low since December of 2011. This confirms my view that the pattern has been weak and getting weaker for a long time and perhaps tomorrow will seal LULU’s final demise should it gap down after earnings in the morning pre-open.




The weakness in the market has been building for the past couple of weeks with small clues here and there. In my view, today’s action sends out a loud and clear warning shot across the bow. Should the market weakness become exacerbated, I have a couple of short-sale ideas on tap if I feel like trying to make some money on the downside. However, keep in mind that if in fact we are looking at a possible market top, something that can’t be known for certain just yet, it will take some time to evolve, and short-sale targets will crop up along the way. Meanwhile, don’t get caught flat-footed if you are heavily long this market. Remember, bulls make money, bears make money, and deer-in-headlights get slaughtered.


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 ACAD, CREE, FB, and LULU, though positions are subject to change at any time and without notice.


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