The Gilmo Report

May 14, 2014

May 14, 2014

The continuation of Friday’s bounce that I was looking for in my report of this past weekend came on Monday as the Dow Jones Industrials Index, not shown, made an all-time high while the S&P 500 Index, shown below on a daily chart, made an all-time closing high but came within a point of making an outright all-time high. With the two big NYSE-based indexes making new highs, the market looked to be in an another de facto rally resumption. But there was little follow-through yesterday as the indexes started up in the morning but gave up most of their gains to close roughly flat on the day, although both the Dow and the S&P 500 again made an all-time high and an all-time closing high, respectively. With the lack of conviction as the two indexes stalled around the peak on Tuesday, the situation coming into today remained quite muddy, and by the close the S&P 500 had traded slightly heavier volume for a distribution day right off the peak.




Meanwhile, the NASDAQ Composite Index tried to make it a three-day bounce yesterday morning but ran into resistance at the 65-day exponential moving average on slightly higher volume, as we can see on the daily chart, below. The NASDAQ basically remains trapped in a big sideways range that looks somewhat like the right shoulder of a big head and shoulders top, and a number of former leading stocks continue to mimic this behavior as they look to working on right shoulder rallies of their own. That all came to a head today as the NASDAQ rolled off the 65-day line and pushed lower today. The lack of volume over the past four days shows that investors lack any real conviction one way or another, at least as it pertains to the NASDAQ. With the S&P 500 in position for a possible “bull trap” on the move to new highs, the stage is set here for the market to roll over.




The main issue with this market if one wants to consider it to be in a rally resumption is that there is very little, if anything, in position to buy. As well, there is absolutely nothing in the way of “fresh merchandise,” those newer, more dynamic and entrepreneurial situations that serve as a barometer of the market’s health. The new highs in the NYSE-based indexes look more like bull traps than anything else.

With most fallen former leaders mimicking the NASDAQ as they engage in “right shoulder rallies” that help to fill out and complete broader head and shoulders formations, the short side remains in play here as we seek to use the rallies in our favor, entering short-sale positions at optimal points. Let’s run through my current crop of short-sale targets to see where they are all at in this regard.

In my weekend report I noted that Netflix (NFLX) was not getting much in the way of further heavy-volume selling along the lows last week, leading me to conclude,”…another test of the 200-day moving average seems like a distinct possibility. NFLX could even rally past the 200-day line and up towards the 50-day moving average which would be consistent with the formation of additional right shoulders in an expanding head and shoulders formation.” This is exactly what happened Monday and Tuesday as the stock again pushed up to the 200-day moving average, as we see on the daily chart below, before finding some resistance as it stalled on Tuesday but managed to close just above the 200-day line. The stock kept finding support along the line all day today and actually closed just above it, but I consider the stock shortable here using the highs of the past two days in the 355 price area as your guides for upside stops. Note that the 50-day moving average is currently diving down towards the 200-day line, and there is still the possibility that NFLX could rally as far as the 50-day line. That, of course, will likely depend on what the general market does. If the indexes roll over here and now, then this bump just above the 200-day line is probably as far as NFLX will get. If the indexes continue to drift higher, then the 50-day line may come into play.




Las Vegas Sands (LVS) looks set to test its 200-day moving average, and if you are short that name then you might consider covering part of your position at the 200-day line. There is potential for the stock to undercut the 69.15 low from early February, and that might coincide with a breach of the 200-day moving average.




Baidu (BIDU) is still working on the right shoulder in its head and shoulders formation, as we can see on the daily chart, below. So far the stock hasn’t been able to get above the 50-day moving average, and over the past two days has actually reversed to close at the lows of its daily trading ranges and below the 200-day moving average each day. I still see BIDU as a short here using the 50-day line at 158.92, plus another 2-3% maximum, as your upside guide for a stop.




Trulia (TRLA) is another short-sale target that is bouncing along the neckline of a large head and shoulders formation that is situated along the 30 price level, more or less. So far the stock is unable to get above the 10-day moving average, as we can see on the daily chart below, and I would certainly look to short the stock on any bump up towards the 32 price level where the 10-day line is at currently. The action over the past four days looks more like a short bear flag type of consolidation as the stock prepares to “break out” to the downside from here.




Pandora Media (P) is acting true to form so far as it continues to find resistance at the 25 price level, as we can see on the daily chart, below. For now rallies up to the 25 level are shortable keeping a tight stop at that level.




The bio-tech names were among the first to get pounded right off the bat back in early March when I first went bearish on the market, and after taking some heavy selling pressure throughout March and the first half of April, most of the names in this group have spent some time rallying back up in their patterns where they become shortable. Celgene (CELG) has shown a fair bit of upside persistence over the past month as it has rallied right past the 50-day moving average, and actually did so on Monday on a bottom-fishing pocket pivot, as we can see on the daily chart, below. CELG continued higher today as volume picked up slightly, getting as far as its 200-day moving average before slowing down a hair. While CELG has been able to rally through resistance levels at the 50-day moving average, volume overall has still remained below average, so if the general market starts to weaken from here I would be willing to test a short position in CELG right here at the 200-day line. At the very least this allows one to maintain a very tight stop on the upside.




Biogen Idec (BIIB) appears to be working on a second right shoulder within a potential head and shoulders top, as we can see on the daily chart, below. So far the stock has been held up at the 65-day exponential moving average, but selling volume hasn’t come in heavy at these levels. Optimally I’d like to short BIIB on a rally into the 50-day moving average, currently at 305.65, but the bottom line is that this is about 3% beyond where the stock closed today. Thus one could test a short position in the stock right here, using the 50-day line as your upside guide for a stop. How this plays out will likely depend on the general market action over the next few days. Remember that most short-sale set-ups will react in synchrony with the market, and we’ve seen how this has worked over the past four weeks as stocks like BIIB have engaged in a series of right shoulder rallies as the NASDAQ Composite does the same.




I’ve been watching Pharmacyclics (PCYC) for a right shoulder rally that would help to complete a formation where we have a left shoulder and a head. As we can see on the daily chart, below, the stock is moving right up to the 50-day moving average, but the one issue I have with this as a shortable rally is the fact that volume is coming in above average and has picked up each of the past two days. Generally I want to short wedging rallies as the stock moves up to a key moving average like the 50-day or 200-day line or other area of logical resistance in the pattern and volume steadily declines on the way up. For now I’m just watching and waiting to see how this rally plays out.




Facebook (FB) continues to find resistance at its 65-day moving average, as we can see on the daily chart below. The stock has had three upside moves up to or just above the 65-day line over the past month, with each rally showing diminished upside thrust. The latest rally up to the 65-day line occurred on what is the lightest volume in the right shoulder area of the pattern, a “voodoo” type of day where we see buying volume dry up. The blue 50-day moving average is starting to roll over here right at the 62 price level, so I would look for the 50-day moving average to provide an upside guide for a stop. So far the 65-day line is where I short the stock as I continue to play for a breakdown through support at the 55 price area and the 200-day moving average. You might note that FB’s right shoulder, should it prove to be a right shoulder in an overall head and shoulders top, is above the left shoulder, but I would note that there are many examples of stocks where the right shoulder has formed slightly above the left shoulder.

The other argument that can be made here is that the rally that peaked in late February, just before the ultimate peak in early March, could be seen as the left shoulder, and this is well above where FB is currently working on a hypothetical right shoulder. I would note that in every case where a stock is potentially working on a right shoulder as it builds a potential H&S top the action is “hypothetical” until it actually fails and breaks down through the neckline. H&S formations that are in their right shoulder rally phases are still in-process, which is why we maintain stops at logical areas where we would expect to see resistance in the pattern.




LinkedIn (LNKD) is currently in “no-man’s land” as it flounders about its 10-day moving average. Over the past week or so I’ve noticed that the 152-153 price level seems to act as upside resistance, and that was certainly the case yesterday as the stock rolled over from that price level, as we can see on the daily chart below. Volume has died down over the past four days, with neither buyers nor sellers being motivated to act in decisive fashion. I don’t see any logical areas to short LNKD currently unless one wants to act on a rally up to the 152-153 price level should that occur. Otherwise, if one is already short the stock I continue to look for an eventual test of the 125-130 price area, particularly if the general market weakens.




Goldman Sachs (GS) has zig-zagged in volatile fashion over the past month, as we can see on the daily chart below, and it is back up at resistance at around the 160 price level which constitutes the neckline of a head and shoulders formation. The 50-day moving average is well below the 200-day moving average now in a bearish “black cross,” so I view GS as being in an optimal short-sale position right here using the 50-day line at 162 as your upside guide for a stop. This is another situation where each of the rallies over the past month up into neckline resistance at the 160 price area has had diminishing upside thrust, which in my view argues for a likely failure here and an eventual move to lower lows.




The market is most definitely in a “funky” place here with the NYSE-based indexes pushing to all-time highs while the NASDAQ languishes below its 50-day moving average. The problem here is that even with the S&P 500 and the Dow moving to new highs this week I can’t find anything that I consider a “juicy” long set-up. I find myself hunting around for “shakeout-plus-N” type situations, but if this is the best that we can find on the long side of this market, it doesn’t argue for much in the way of sustainability as far as the NYSE-based indexes’ moves to new highs. Based on the evidence, I have to operate on the basis that this market rally off the April 15th lows will fail, and so for now I choose to play it that way. This means looking to hit weak rallies in short-sale target stocks as they come up into logical areas of resistance. In the report I have several concrete ideas for short-sale targets that have “assumed the position,” so to speak. Therefore, if you are inclined to engage in the short side of this market, have at it. Otherwise, cash is king.


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 had positions In FB, LVS, and NFLX, though positions are subject to change at any time and without notice.

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