The Gilmo Report

June 16, 2013

June 16, 2013

The S&P 500 Index was able to avoid making a lower low on Thursday by in fact making a higher high and rallying 1.48% on heavier volume, as we can see on the daily chart of the index below. For now this puts on hold my view that the odds of further downside have increased for the market, as a higher low now brings a higher high into the realm of possibilities for the market currently. Was Thursday’s action good enough for a sixth-day follow-through in the S&P 500? Maybe it was, and maybe it wasn’t, but I can say with relative certainty that it was a rather weak follow-through given that the action among leading stocks was somewhat less than robust. If we can take out last Monday’s high at 1648.68 on the S&P 500 or if we see the NASDAQ Composite chime in with a follow-through day of its own then I might be more comfortable calling a resumption of the uptrend. The third scenario is that the action so far indicates that the market may very well be moving into a sideways range as we move firmly into the summer months. Because we are not in an outright bear trend, short-selling success is only tactical and short-term in nature, while I believe we must keep an eye on those stocks acting reasonably well given the market’s choppy mayhem over the past four weeks. In other words, let’s not get carried away one way or another just yet until we see a lower low or a higher high. In the meantime, we may see a market that is somewhat bifurcated with long and short opportunities in individual stocks cropping up along the way.

 

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Last weekend I pointed out the action in LinkedIn’s (LNKD) weekly chart as being not so negative, and that it was therefore not a short-sale target. If anybody saw me on Fox Business News this past Monday at the opening bell, I picked LNKD as my “trade of the week,” looking for the stock to get to 180 by Friday. It hit 179.90 intra-day on Friday; close enough to get me back on Fox this Monday morning for a victory lap. As the market was getting hit on Tuesday and Wednesday of this past week, we can see on LNKD’s daily chart, below, that the stock came down on extremely low selling volume, setting up the ensuing rally up through the 50-day moving average on a clear pocket pivot volume signature, making this a “bottom-fishing” pocket pivot buy point as the stock held to close 66 cents above the 50-day line even as the indexes sold off on the day. There is some overhead resistance above the 180 level, so while this is potentially buyable here I would not be surprised to see the stock briefly pull back to the 175 area. Remember that we’ve seen some of the best price moves occur from these “bottom-fishing” pockets, so I like LNKD here.

 

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Tesla Motors (TSLA) defied the naysayers and goofball writers for Barron’s magazine this week, even as the market was getting hit in the middle of the week, to continue working on what I see as a relatively tight flag formation on a closing basis, as we can see on TSLA’s weekly chart, below. While TSLA did reverse and stall three weeks ago after streaking to 114.90, this sort of action is not abnormal given the massive prior price run, and the stock did in fact close up for the week. This was followed by a big supporting week two weeks ago as the stock moved sharply off of its weekly lows to close at the peak of the weekly range on above-average weekly volume. Now this week the stock pulled down just a hair but closed in the upper part of its weekly range on much lighter weekly volume. So, if TSLA is nothing more than a “short-covering rally” as many pundits are babbling currently, why hasn’t it simply collapsed? As well, there remain 18.5 million TSLA shares still short as of May 31st, still significant short interest.

 

GR061613-TSLAWeekly

 

On the daily chart of TSLA, we get a more granular view of the action and what we see is a pullback to the 20-day exponential moving average with selling volume drying up on the second day down this past Tuesday. Volume also dropped to its lowest levels since it began its torrid upside run in early May. So, again, where are the sellers? TSLA is now bobbing around its 10-day moving average and it is now nine days beyond the relatively large above-average volume bar of ten days ago on the chart. By Tuesday of this week, TSLA will be more than ten days beyond that, and the only downside volume it will need to exceed in order to flash a pocket pivot buy point off of the 10-day moving average will be this past Tuesday’s downside volume of 1,533,500. TSLA’s 10-day moving average is currently running through 97.29 so a minor pullback to that level over the next few days might be a good thing to see in anticipation of a potential pocket pivot. The bottom line for me is that the stock is so far looking like a high, tight flag, but how much longer it needs to build this new base before issuing a bona fide buy point is something that needs to be watched for very closely.

 

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Over the past two years I’ve been interested in Invensense (INVN) off and on, but the stock has never realized the potential that I thought it would. Sometimes these things take a while to develop, however, and it may be that INVN is finally showing the first rumblings of a more significant price move. INVN has allegedly secured the Gyroscope/Accelerometer design for Google’s 7-inch tablet refresh, a follow-on to the Nexus 7. There are also reports that INVN will soon boast an iPhone 5S design win, as well, given that the company “holds a cost advantage and a clearer roadmap for advanced products” when compared to the motion sensors made by its chief rival, STM Microelectronics (STM). Gaining AAPL as a customer would be big for INVN, and perhaps the technical action is your biggest clue here. Following a couple of stalling “bottom-fishing” pocket pivots along the 200-day line in early May, INVN has since chopped its way higher in an upside trend channel culminating with a big-volume buyable gap-up move, as I see it, on Friday. This is potentially buyable using the 14.05 intra-day low of Friday’s gap move as your guide for a stop. By now INVN has had so many false starts that perhaps the crowd has given up on the stock, but this might be precisely where it starts a decent, sustained uptrend.

 

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Last weekend I pointed out the pocket pivot buy point in Fleetcor Technologies (FLT) coming off the 10-day moving average seven days ago on the daily chart, below. This has led to a constructive move to an all-time closing high this past Monday followed by four days of moving very tight sideways along the 10-day moving average. While FLT has not made huge progress since its buyable gap-up move back in early May, the stock is slowly trudging higher in stair-step fashion, and for me the question is whether we will see another big upside leg in the stock from here. Based on last week’s pocket pivot, FLT remains within buyable range here in anticipation of another move off the 10-day line with the idea that it should hold above the 10-day line from here. I have to admit I’ve been in and out of the stock over recent weeks, but I’m still open to a more significant price move developing from here should the market continue higher.

 

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I have looked at Three-D Systems (DDD) from multiple angles over the past couple of weeks, wondering if the stock is forming some sort of late-stage “punchbowl of death” (POD) topping formation. The stock has been somewhat volatile over the past five weeks after pushing to all-time highs, but it still has not shown any willingness to break down in wholesale fashion. DDD still has 23.4 million shares sold short against a float of 80 million, over 25% short interest, so this may be providing a floor for the stock. The weekly chart helps to look beyond the noise on the stock’s daily chart, and what we see is a four-week base that might be considered a “high” handle to a cup-with-handle formation. Amazon.com (AMZN) has now created a retail section on its website for 3-D printers. If the consumer 3-D printer market begins to inflect to the upside, this could fuel another upside move in the stock. DDD’s 10-day moving average is currently at 45.80, so a pullback to the line over the next few days could set up a possible pocket pivot off the 10-day line, so I think this bears watching. That said, there is no real short-sale play here, in my view, as the stock appears to be acting more constructively than negatively.

 

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Regeneron Pharmaceuticals (REGN) closed below its 50-day moving average on Friday, something I was looking for per my comments in my Wednesday report of this past week, but no selling volume has materialized as the stock closed mid-range. I would be open to REGN holding the 50-day line on this retest and then moving higher. This would make it a long idea here with the idea that it should hold above Friday’s intra-day low of 232.88. Of course, a move below 232.88 would constitute a 50-day moving average violation. Another pocket pivot such as it had last week off the 50-day line would offer a fresh buy point, so REGN remains a fluid, two-sided situation that should be watched closely.

 

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Celgene (CELG), on the other hand, violated its 50-day moving average last week, thus it remains potentially shortable on rallies into and around the 50-day line, currently at 121.30.

 

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Michael Kors Holdings (KORS) moved down to its 50-day moving average on rumors of yet another secondary offering, but that as our short-term short-sale profit target, so it was coverable at that point. The selling on Thursday may have washed out sellers in the near-term; therefore this is off the table as a short-sale target as we give the situation more time to develop.

 

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Apple (AAPL) has now violated its 50-day moving average since it moved below the intra-day low of this past Wednesday’s close below the 50-day line. Selling volume has not materialized in the stock, so despite the price weakness I’m still not seeing any confirmation on the volume side. If you’re short, the Thursday high at 137.14 makes for a good trailing stop.

 

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Other short-sale targets that I’ve discussed recently, such as CF Industries (CF) and Salesforce.com (CRM), both not shown, are played out to the downside in the short-term, as I see it, and I would only look at shorting CF on a rally into the 50-day line at 187.78 and CRM on a rally back up into 40-41 resistance and the 200-day moving average, currently at 40.89. Facebook (FB), not shown, is also hanging in mid-air after pulling down to fill this past Monday’s upside gap. From here I would only view FB as potentially shortable into rallies that carry up to the 25 price area and the 200-day moving average. I often get questions about shorting homebuilders, as many of these have in fact failed on recent breakout attempts, such as Lennar Corp. (LEN), shown below on a daily chart. The thing about homebuilders is that each time they have looked like death warmed over, they immediately tear back to the upside, and LEN has been no different. Of course, now LEN is sputtering around its 200-day moving average, which it has now violated. This latest move back up to the 200-day line that stalled out on Friday might be considered shortable, but I would keep a tight leash on this, using the intra-day high of Friday at 39.64 as a guide for an upside stop. LEN also announces earnings at the end of June, which places added risk on a short position here if the stock does not break down right away. It is interesting to note, however, that with all the talk of an improving and “bottomed” housing industry, the homebuilding stocks do not seem to be sharing this optimism as all of the former leading homebuilders are now living beneath their 50-day moving averages, and some beneath their 200-day moving averages.

 

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Here’s a quick review of some other long ideas I’ve discussed in recent reports and which should be monitored for possible entry points if the market is able to sustain its current bounce and move to higher highs:

 

ANGI – holding in a tight range over the past five days after a pocket pivot buy point coming up and off of the 10-day moving average as I discussed in last weekend’s June 9th report.

AMZN – pulled right back into its trendline breakout which I discussed in last weekend’s June 9th report and remains in a potentially buyable position.

BCEI – still sputtering along its 50-day moving average as we wait to see whether this produces any kind of actionable buy point along the 50-day line.

BLOX – holding up after this past Tuesday’s continuation pocket pivot buy point as I discussed in my June 12th report.

CREE – has now formed a three-weeks-tight formation on its weekly chart. Last Friday’s pocket pivot buy point as discussed in my June 9th report of last weekend might be a clue that this can be bought into now without waiting for an obvious breakout from the 3WT formation.

GOOG – backing and filling a bit after last Friday’s pocket pivot move as discussed in my June 9th report. GOOG appears to be trying to build a new base.

GS – just moving sideways following last Friday’s pocket pivot buy point as discussed in my June 9th report.

MYGN – an amazingly volatile blow-up following news regarding whether the government considers DNA to be “ownable.” Once the stock reversed on Thursday after streaking above 38, about 20% above last Friday’s pocket pivot buy point, it was a sell. It does point out the risk in owning and trafficking in bio-tech stocks.

SLCA – like BCEI, another fracking-related play, SLCA is still moving along its 50-day moving average as it continues to build a base.

VRTX – not going anywhere after last Friday’s pocket pivot buy point as discussed in my June 9th report, but still just continuing to work on its base. As a bio-tech that is still not showing earnings, VRTX carries added risk, and investors should be aware of this.

 

The recent spike in the VIX to the highs it saw in February and April of this year attests to the volatility in the market as we chop around here in what is now, in the absence of lower lows or higher highs, likely to develop into a possible summer trading range. In some ways the added volatility is helpful in that it helps to provide a certain contrast to stocks that are acting in much calmer fashion, making them easier to spot. These are the stocks I’m interested in having on my buy watch list. As well, I am very interested in “bottom-fishing” pocket pivots or even buyable gap-ups as in the case of INVN in stocks as they are rounding out or coming up the right sides of potential new bases. These have produced some of the best upside price moves as we’ve witnessed in several leaders over recent weeks and months (think DDD, SSYS, GS, NSM, CRM, etc. during the April/May time frame). Thus I am interested in LNKD as the latest incarnation of such a move.

 

As well, TSLA bears watching closely as despite all the disbelieving and bearish commentary surrounding the stock it continues to hold up. And with wrong-way pundits trying to make a connection between how easy it now is to borrow TSLA shares for the purpose of shorting the stock and its lack of upside potential (don’t ask me how this connection works, exactly), perhaps more “smart” shorts see an “opportunity” to go short an “obviously overvalued” stock. This in turn could set up another big leg up in the stock once the shorts all pile in again during what turns out to be a base-building period.

 

Despite what some see as a choppy, correcting market, I see an environment with a lot of dynamism in both directions, and in my view this is where trading opportunities can be found. Thus I tend to go back to my idea, which I’ve discussed many times before, of taking neither a rigid bullish or bearish posture and instead treating the market as a market of stocks and not a stock market. By now I think you all know what that means.

 

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

 

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