As I wrote over the weekend in my June 23rd report, the market was moving into a position where a logical oversold rally could occur. Monday’s wild gap-down occurred thanks to overnight turmoil in Asia after news of the Chinese central bank standing pat on interest rates. The market then began its oversold rally on Tuesday before gapping up today and stalling to form a tight little “doji,” as we see on the daily candlestick chart below. To me this implies that the rally may stall out here as it approaches its 50-day moving average, currently at 3395.45. A gap-down move tomorrow would complete a bearish “evening star” formation. Volume today on the NASDAQ was roughly even, coming in just below yesterday’s volume level. The NYSE traded nearly 5% lighter volume compared to yesterday, so from a textbook standpoint, the rally does not have legs. Of course, we know that in the Age of QE rallies like this can continue to “melt” higher, even without volume. Nevertheless the market is in a two-day rally attempt off of Monday’s low, and a follow-through cannot come into play until at least Friday. In the meantime, many beaten-down stocks have bounced over the past 3-4 days, including some of the short-term trading ideas I discussed over the weekend. For now, the market remains in a downtrend, so caution is advised.
Tesla Motors (TSLA) remains perhaps my favorite stock, and if the market follows through look for it to either flash a pocket pivot along the 10-day line, or even stage a high-volume breakout from its current base, which it has continued to build despite the market correction.
I mentioned Splunk (SPLK) and its very subtle pocket pivot of last Friday in my weekend report, and the stock flashed another pocket pivot buy point today as it vaulted off of its 10-day moving average. I would not buy it in this position, but if you bought on the basis of last Friday’s pocket pivot, you are making money on the trade. Watch for resistance at current levels.
Cree (CREE), which I highlighted over the weekend as a potential short-term trade off the 50-day line, did just that over the past two days, but it is now pushing up into resistance here around the 63 and change level. Given the three-weeks-tight breakout failure last week, I would not be surprised to see the stock retest the 50-day moving average again.
Another short-term trade idea discussed over the weekend, Fleetcor Technologies (FLT) was also able to come up off of its 50-day moving average on what is now a wedging rally back up towards its 10-day moving average. The stock is now hitting resistance at the 10-day/20-day moving average confluence, and stalled today on increased volume. This could be the extent of the bounce before it retests the 50-day line.
Angie’s List (ANGI) has held up well throughout the market’s correction, even counter-trending it as it has moved to all-time highs. After last Friday’s pocket pivot along the 10-day moving average, the stock is holding tight along the line. A market follow-through would make this a buy candidate based on its constructive action, in my view.
Invensense (INVN) has now clearly violated the intra-day low of the buyable gap-up day of June 14th, a clear signal despite Friday’s pocket pivot support move off of the 10-day moving average. The stock is trying to hold its 20-day moving average, so there is an off chance the stock could recover off of this line in the event of a market follow-through.
Three-D Systems (DDD) was another short-term “oversold rally trade” that found support around its 50-day moving average. DDD rallied up into its 10-day moving average today but reversed on increased volume. DDD is in danger of becoming a late-stage, failed-base, short-sale situation. If the market falters here, DDD could break down from its current position as well. I now see this as being a potentially shortable position using the 10-day moving average as an upside “hyper-stop.”
Stratasys (SSYS) is in a similar position after a recent base breakout failure, and it is now wedging up into its 50-day moving average after stalling and breaking down through the 50-day line last week. This may also be shortable using the 10-day line as a quick stop on the upside.
Another potential late-stage failed-base (LSFB) type of situation that I’m watching currently, Michael Kors (KORS), broke down to its 200-day moving average on Monday before bouncing on weak volume. This may push a little higher, but should be watched for signs of a breakdown. This may be another developing LSFB that would potentially pan out if the general market’s oversold rally runs into trouble.
Short-sale target Celgene (CELG) undercut its 111.50 low on Monday and is now staging a logical rally back up towards resistance between the 20-day and 50-day moving averages, roughly the 118.13 to 120.87 price zone. There, it would become shortable again using the 50-day line as your upside stop.
LinkedIn (LNKD), which blew all the way down below 170 on Friday, has rallied all the way up to the 180 area, closing about 1% above its 50-day moving average. Volume has been light on this three-day bounce, so the stock may become shortable in this area if the market’s bounce falters.
Despite last Friday’s pocket pivot action, as I discussed in my weekend report, Facebook (FB) is also floundering a bit as it finds resistance in the 25.65-25.75 area. Notice the 50-day crossing below the 200-day for a “Black Cross.” Thus I view FB as shortable using the 25.75 price level as an upside stop should the market’s oversold bounce run into trouble.
I have to admit I was wrong about Apple (AAPL) over the weekend when I stated that I thought it would rally with the market in the event of an oversold market bounce this week. While the market has bounced, AAPL has floundered. Instead, AAPL continues to move lower and appears to be a shoe-in to test the 185.10 low from April, as I see it. I no longer consider AAPL a leader, so the fact that it isn’t bouncing with the market is not necessarily a bearish “divergence” for the market in general. We’ve already seen AAPL flounder in the face of a strong market move back in January, so its correlation to the market is not a factor in terms of determining the market’s “tone.”
With the market in a two-day rally attempt, it remains to be seen whether a follow-through and resumption of the uptrend will be forthcoming. Weak economic data in the form of a 1.8% increase in first quarter GDP vs. estimates of 2.4% helped to sooth the market’s concerns over the Fed tapering off on QE. I tend to simply view the rally as a logical oversold bounce until proven otherwise.
Thus as the market bounces I prepare for a potential rally failure with some rallies in broken-down stocks that would potentially become shortable in such an event. At the same time, I maintain an even keel, so to speak, by having some long ideas and being open to trading certain stocks on potential bounces off of logical support areas. I covered this theme in my weekend report of January 23rd.
Beyond that, however, the long side remains unclear until and unless we see some kind of follow-through day sometime after Friday. Fed heads will be out in force tomorrow, so some cooing from them about continued easy money policies might give the rally enough impetus for a third day of upside. The bottom line, however, is that tomorrow’s action is largely irrelevant, unless the market reverses course on heavy volume. Short-sale ideas would come into play in this event, and I am not averse to testing out rallies in short-sale targets at logical areas of resistance, albeit in smaller size.
In any case, we should be ready for whatever the market throws at us. This includes remaining cognizant of those stocks holding up very well and exhibiting constructive action as “go to” names in the event of a market follow-through. For those who are keen on playing the short side should the oversold rally fail and roll over, I have covered some of the ideas I’m looking at currently. However, staying in cash during a period of uncertainty and potentially heightened danger is most certainly a viable strategy as well. Bottom line: Be ready to move with the market regardless of how this current oversold rally resolves itself.
CEO and Principal, Gil Morales & Company, LLC
Managing Director and Principal, MoKa Investors, LLC
Managing Director and Principal, Virtue of Selfish Investing, LLC