The Gilmo Report

June 5, 2013

June 5, 2013

After a May that wasn’t quite the time to “sell and go away,” investors are being treated to a “June swoon,” something I thought looked like a reasonable possibility given the market’s recent price/volume action, as I discussed over the weekend in my June 2nd report. With the market indexes all moving to lower lows today after posting lower highs last week, the short-term trend, at least for now, is clearly to the downside. While the NASDAQ Composite, not shown, has made a lower low, it is still well above its 50-day moving average which is currently down around 3346. The NASDAQ closed today at 3401.48. Meanwhile, both the Dow Jones Industrials and the S&P 500 Index have bee-lined straight for their 50-day moving averages where they could find near-term support, although that has not been confirmed as of yet. The NYSE-based indexes could just as easily slice through their 50-day lines, as even though volume was lighter today compared to yesterday, this could just as easily be seen as an ominous lack of buying interest. The bottom line is that one does not want to be buying stocks, and in most cases one probably wants to be taking profits, assuming one has any to take. A large swath of leading stocks has been getting pummeled, and unless one is skilled in the art of catching falling knives cash is not a bad place to be.



Some examples of how ugly things have gotten: Three-D Systems (DDD) has now broken below its 20-day moving average and looks to be on the verge of breaking its prior 42.63 low from a couple of weeks ago.




Stratasys (SSYS) has completely blown apart, and officially violated its 50-day moving average today. SSYS has been so thoroughly pounded and flattened that we might as well call it a “2-D stock” now! The thing to keep an eye on now is that both SSYS and DDD are developing into late-stage failed-based (LSFB) short-sale set-ups with DDD just starting to wobble while SSYS has now confirmed its base failure. A rally into the 50-day line is likely shortable using the line as your stop.


Splunk (SPLK), which had been one of the few stocks showing promise last Friday as it executed a reversal pocket pivot, couldn’t even hold that for one day as it has spewed lower over the past three days and closed under its 50-day moving average for the first time in 2013. A move below today’s intra-day low would constitute a violation of the 50-day moving average and a therefore a final sell signal.




Another leading stock that has been a mainstay of this market, Celgene (CELG), violated its 50-day moving average today for a clear sell signal. In my May 22nd report I indicated that CELG could have been sold earlier on the basis of the heavier selling volume around the peak.





Among the short-sale targets that I discussed in my report of this past weekend, we can see that (CRM) was the biggest loser as it slammed right through its 200-day moving average to undercut the prior 39.75 mid-April low. The stock could be covered here and profits taken, but CRM is acting very weak and could go lower. In any case, I would view any rally up back up into the 200-day moving average and the 40-41 price area as shortable, in my view.




Facebook (FB) continues lower, and as I wrote over the weekend we are looking for the stock to penetrate the $20 price level as we continue to use the 200-day moving average at around 25 as our maximum upside trailing stop, although one could also use the 10-day moving average just above 24 as a tighter upside stop.




LinkedIn (LNKD) continues to test the lows around 160-161 which also coincides with the short flag that the stock formed in February. This is not a big area of support, so I would expect this bounce to be short-lived. In the near-term I view any rallies up towards the 10-day moving average at around 169.22 as shortable, using the 171 level as an upside stop.




I’m still on Apple (AAPL) watch as the stock continues to drift just above its 50-day moving average. If the market breaks down further tomorrow or over the next few days, I would not be surprised to see AAPL accompany the NASDAQ Composite on a move down towards its 50-day moving average by moving towards its own 50-day line currently just above 435. A breach of the 50-day line would, of course, be a clear short-sale point.




Over the weekend I discussed the potential for Michael Kors Holdings (KORS), shown below on a daily chart, to potentially morph into a late-stage failed-base type of short-sale set-up. Its action so far this week strikes me as similar to DDD and SSYS, which I discussed further above, as it is failing to hold its cup-with-handle breakout from last week following its earnings announcement. Note that over the past two days the stock has tried to rally above its 10-day moving average on an intra-day basis but closed lower each time. Today the stock was not able to rally as high as it did yesterday intra-day, and selling volume picked up slightly. I’m getting a jump on this by shorting the rallies up into the 10-day line with the idea of using yesterday’s high at 62.65 as a maximum upside stop. This is a little bit tricky here, because it also looks like KORS is pulling back to its 20-day moving average on light volume. The idea here if one is not stopped out, a breakdown through the 20-day moving average could easily carry down to the 50-day line at 57.71 given KORS volatile nature, particularly if the market continues to weaken.




A number of potential late-stage, failed-base, short-sale set-ups are starting to hit my screens, and in the case of big fertilizer stock CF Industries (CF) we can see how a late-stage base-failure in February has now morphed into a head & shoulders topping formation, as I’ve outlined on the daily chart below. Notice how the breakout attempt in February came out of an improper double-bottom formation where the second low does not “shake out” below the first low of the “W” as it should in a proper double-bottom base. The high-volume breakdown through the 50-day moving average in February formed the right side of the “head” in the H&S formation, and CF’s recent rally back above the 50-day moving average in May forms the right shoulder. The stock was trying to move higher earlier this week, but buying volume was weak, and today the stock got hit with a big-volume outside reversal to the downside. In my view, this is shortable right here using today’s high at 195.76 as your guide for an upside stop. Other names in the group, including Agrium (AGU) and Monsanto (MON), are also breaking down, confirming the weakness in the group.




There has been no shortage of ugly action in both the major market indexes and leading stocks over the past several days, and as far as I’m concerned this makes cash king. Meanwhile, the short side has already proven to be a profitable undertaking if one reviews the short-sale ideas I’ve covered in recent reports. With the S&P 500 and Dow Indexes getting close to their 50-day moving averages, this does set up a logical area from which these indexes could bounce and stage a reaction rally. However, the NASDAQ remains well above its 50-day moving average, so another scenario could see the S&P 500 and the Dow break down through their 50-day lines while the NASDAQ moves closer to its own 50-day line. This would be the opposite of what occurred in early April when the NASDAQ broke down below its 50-day moving average first and it wasn’t until the S&P 500 met up with its own 50-day moving average that a bounce occurred in the general market and the NASDAQ was able to recover and get back above its 50-day moving average. This time around, in June, the NASDAQ is the index that still remains above its 50-day moving average so it may have to get there before a general market bounce will be seen.


Otherwise, watch to see how the S&P 500 acts tomorrow as it potentially moves to or below its 50-day moving average. Either scenario seems plausible to me, therefore it simply remains a matter of watching how the market acts in real time. In the meantime, there is no reason to be long this market, while those daring enough to go short stocks per my previous reports are starting to see some decent progress on the downside. 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 KORS and LNKD, though positions are subject to change at any time and without notice.


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