The Gilmo Report

June 12, 2013

June 12, 2013


Well the market’s correction has had its pockets of strength, a topic I covered in my weekend report (June 9th), but it doesn’t look to me like anyone is going to be making any big money on the long side for at least a little while. The two-day rally of last week stalled out on Monday with a “spinning top” formation on the daily candlestick chart of the S&P 500 Index below. Tuesday morning opened up with a big gap to the downside following an overnight sell-off in Asia and Europe. But the market in classic QE-fashion turned back into positive territory by lunch time on the East Coast (mid-morning my time) before rolling over again and selling off hard into the close. The NYSE traded lighter volume on Tuesday, while the NASDAQ logged a 5th distribution day around the peak as it was down on heavier volume. Today’s action featured a quick morning gap-up before the indexes all reversed and closed lower, with the S&P 500 closing right on top of its 50-day moving average. Obviously, this puts the S&P 500 on the verge of breaking the 50-day line and moving to a lower low, while the NASDAQ, not shown, remains above its 50-day line but made its lowest closing low since the peak in late May. Based on the market action so far this week, there is no reason to be long this market, as far as I’m concerned.









Among the stocks I discussed over the weekend as showing some constructive action, Angie’s List (ANGI) has continued higher since the weekend. Today, however, it ran into resistance at the top of its price range on heavy selling volume, a cautionary sign.



Infoblox (BLOX) has also moved higher and even flashed a continuation pocket pivot yesterday as it found support a hair above the 10-day moving average. I’m not in the mood, however, to buy something like this based on the general market action.





CF Industries (CF) ran into resistance at the top of its recent price range (see June 5th report) and today broke down on heavy volume to undercut its late May low. This could be interpreted as a short-term cover point, looking to re-enter on any bounce from here, but the 170.53 low of mid-April is the ultimate downside price objective.




Apple (AAPL) finally closed below its 50-day moving average since doing so in mid-May, but volume was light. I would look for volume to pick up tomorrow to confirm the weak close, using the 50-day line at 434.64 as a quick upside guide for a stop.




Facebook (FB) provided short-sellers with another opportunity to enter the stock on the short side on Monday when it gapped up and stalled right at its 20-day moving average, thanks to an analyst’s big buy recommendation. Given that FB had gapped up through the 10-day line on Monday, the next area of resistance would have been the 20-day moving average, which I might now use as my guide for an upside stop, while the 19-20 price area remains the downside price target.




GR061213-fb (CRM) ran right up to the 40-41 price area on Monday before reversing on heavy volume, the move I was looking for as a rally to short into per my report of last Wednesday, June 5th. There is some support out way to the left and out of view on the chart at the 37 area, but if this is breached then the 34-35 becomes the next downside target.





I am keeping an eye out for potential late-stage, failed-base situations, and as I’ve discussed in recent previous reports Michael Kors (KORS) might be one in the making. KORS dropped below the 20-day line on a volume increase today which in my view makes it shortable using the 20-day line as a quick upside stop, looking for a move to the 50-day moving average.




Three D Systems (DDD) is still holding its 20-day moving average, but I would keep an eye out for a pick-up in downside volume if the stock breaks down through the 20-day line.








Buying stocks off the 50-day moving average is not without risk, as Biogen Idec (BIIB) shows, below. No support was forthcoming at the line as sellers drove it right through the 50-day line for the first time since January. Notice the “mini-head & shoulders” look of BIIB’s daily chart. This may begin to set up as a short-sale target on any rallies back up into the 50-day line.








Celgene (CELG) serves as an example of this as it has also formed a “mini-H&S” on its daily chart, below, following a break down through its 50-day moving average last week. This was in turn followed by a bounce back up into the 50-day line this week. Given today’s ugly reversal back down through the 50-day line on heavy volume I consider this a short using the 50-day line at 121.29 or perhaps today’s intra-day high at 123.44 as your upside stop. CELG looks to be headed for last week’s 111.50 low, perhaps even a little further down to the 110 area, so I would use 110-111 as my downside price target zone.






The interesting thing is that all of the big bio-techs are looking like they are in break-down mode, as Gilead Sciences (GILD), shows below. Its pattern is very similar to BIIB and CELG, although it was not hit with any huge selling volume today the way those two stocks were. It did, however, roll off of its 50-day moving average on a volume increase that was still well below-average and confirms the group weakness.




After bouncing off of its 50-day moving average last week (see June 5th report), Regeneron Pharmaceuticals (REGN) round-tripped right back to the line today. We saw that BIIB could not hold a retest of its 50-day moving average today, so this brings up the question as to whether REGN will be able to hold its own. Given that the bounce off the 50-day line did not occur on any heavy buying, only a pocket pivot volume signature, it’s not clear to me that it will be able to hold the 50-day line this time around without any apparent volume support showing up here. If this broke down through the line I might expect a move down towards the 220 level at the top of its previous flag formation formed in the latter half of April.








The potential for the market to find support in this “Age of QE” notwithstanding, I’d have to say the market has some serious problems here. There are actionable short-sale set-ups as well as potential short-sale set-ups that I’ve described in this report and which members should monitor for potential downside breaks, such as DDD and REGN, for example. As well, if bio-techs, as one of the very best acting groups in 2013, are starting to falter, they become ripe short-sale targets given the group movement and break down. With the S&P 500 sitting right at its 50-day moving average, I would look for an upside bounce tomorrow morning as a potential short-sale opportunity in any of the actionable names I’ve discussed, although any such short-sale target remains actionable as long as it is within range of a nearby upside stop.




The real question is whether we are on the verge of a more significant downside break in the market than we’ve seen previously in 2013, and my guess is we’ll have our answer in the next few days or less. With more distribution showing up in the major market indexes and more leading stocks getting clocked, the odds of further downside have increased, in my view. Therefore I play the odds by engaging the market on the short side while keeping my upside stops clearly in mind. 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 AAPL, CELG, and KORS, though positions are subject to change at any time and without notice.


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