The Gilmo Report

May 23, 2012

May 23, 2012

 

The market staged a bit of a “Wyckoffian re-test” today as it pulled back on lighter volume and held well above the 2774.45 low put in this past Friday, as we see on the daily chart of the NASDAQ Composite Index, below. So far the NASDAQ and S&P 500 are still holding above their 200-day lines while the Russell 2000 is trying to bounce off of its own 200-day moving average. The NYSE Composite Index, the weakest of the four, is living under its 200-day moving average.

NASDAQ Gilmo Report Stock Chart

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With the indexes down seven out of eight days in a row, at least by mid-day today as the indexes all traded in the red for the most of the day, the need to sell becomes, at least in the short-term, fairly obvious to the crowd. The fact that selling volume did not pick up on today’s retest of last Friday’s low means a further reaction rally is the greater probability, in my view. Today saw a pick-up in volume going into the latter part of the day as the NASDAQ, S&P 500, Russell 2000, and NYSE Composite Index all finished up on the day. Of course, the market is highly news-oriented with the situation in Europe, so volatility may rule the day here. While I could be wrong, I tend to think that the streak of selling we saw last week and then again over the past two days is due to investors and institutions getting into position to deal with a Greek exit from the Euro, so at some point the news is already in the market and everyone who is going to sell has already done so in anticipation of the worst case scenario. This sets up a reaction rally.

You might also notice from the NASDAQ Composite Index daily chart, above, that it has now completed the third day of a rally attempt off of the Friday lows, putting it in position for a follow-through day as early as tomorrow, which would of course be a fourth-day follow-through. It’s not as if there’s a lot of potential leadership waiting in the wings and setting up in constructive basing formations, however, although if we did get a follow-through I have a couple of ideas up my sleeve, which I’ll get to a little further along in this report. The bottom line for me is that initiating shorts right here carries higher risk with the market down as much as it is, and so short-sellers should be aware of the potential for a follow-through day that would put the short side on hold, at least temporarily. If you are not actively taking profits as you have them, then at least be ready to turn with the market.

Usually you can get a sense of when the market is starting to get short-term sold out. With volume remaining light this morning on the “Wycoffian re-test,” it looked like the market might make a stand, and that turned out to be the case. This break off the peak, however, has been a profitable one for us, as a number of stocks, from CF to RAX to VRX broke down nicely and offered short-term short-sale profits. The question now becomes whether a rally in the market becomes shortable if the market begins to lose upside momentum and rolls over again. Should that occur, I would prefer to short stocks further up in their patterns, leaving the stocks that have hit their downside price targets, such as CF and VRX, for example, alone for now.

Over the weekend I discussed Salesforce.com’s (CRM) rally up towards its 50-day moving average as being potentially shortable, and the stock did move up far enough to “kiss” the moving average yesterday before backing down slightly. Overall, as we can see on the daily chart below, the stock has engaged in a wedging rally up into the 50-day line, and could potentially fail right here. That might take a few days to develop, however, if the market is able to rally a bit further to the upside, so I would keep an eye on CRM as it flirts with the 50-day moving average. The breakdown through the 50-day moving average three weeks ago carried just about to the 200-day line, which is normal for a possible late-stage failed-base set-up that also has the look of a POD on the weekly chart. This then led to a bounce and gap-up following earnings last Thursday, and the bounce is starting to look like it is running out of steam here. If the general market begins to weaken again quickly over the coming days, CRM might be a very actionable short-sale target if it is sitting near its 50-day line.

Salesforce.com's (CRM) Gilmo Report Stock Chart

In a similar vein to CRM is LinkedIn (LNKD), shown below on a daily chart. LNKD looks like a big IPO “punchbowl of death” or POD short-sale formation. Last week’s bust through the 50-day moving average that occurred in concert with the feeble “Fakebook” (FB) IPO puts the stock squarely in my short-sale target sights. Near-term I see the 105 area as upside resistance, which is right at yesterday’s intra-day high, but depending on how much further the market is able to rally here, it could get as high as the 20-day moving average at 107.92. Thus LNKD becomes another stock to put on our short-sale target list if the general market begins to weaken given that it is in the earlier stages of its break down, if indeed that is what is going on here in the chart. So far the bounce back up into the 50-day moving average has occurred on weaker volume, giving a little bit of a wedging look. Keep in mind that LNKD, like CRM, doesn’t have to instantly break down here as it could simply continue bouncing up into and around its 50-day moving average. As with all short-sale set-ups, how LNKD’s pattern resolves here will be highly dependent on the general market. As well, keep an eye on FB since LNKD appears to have something of a sympathy correlation to it.

LinkedIn (LNKD) Gilmo Report Stock Chart

Some quick notes from my trading diary regarding short-sale ideas discussed in recent reports:

CF – the downside objective here was the 200-day moving average, and as I indicated over the weekend, profits should be taken at current price levels. The stock is currently trying to rally back up into its 200-day moving average at 167.87, closing today at 167.32, and I would continue watching this one for a second short-sale entry point along or just above the 200-day line.

CMG – acting more like it wants to build a base here, so not yet in a shortable position.

FFIV – has undercut a number of lows in its pattern, most recently the late January lows of 116.49. Would look to short FFIV on a rally up to near-term resistance at around 120.

GOOG – trapped between the 200-day and 50-day moving averages. Would be potentially shortable on a weak rally up to the 50-day at 620.97, or on a high-volume breach of the 200-day moving average at 593.42.

RAX – first discussed as a short-sale target in the 53-54 price area, the stock has broken down and undercut the early March low at 49.04. Over the past three days it has rallied back up into the 200-day moving average at 49.04. Might look for another rally into the 53-54 price level to short into.

 

VRX – hit our price objective at the 200-day moving average today, so profits should be taken.

I want to emphasize that while some of these stocks remain on my short-sale target list, I am not leaning hard on the short side right now. Today’s market action seemed to indicate a short-term low, and I would prefer to see how any rally develops and then gives way, should that occur. Otherwise, if we see a follow-through day in the coming days then I might consider taking a couple of long positions as short-term trades if nothing else.

Gilmo members have been asking about Mellanox Technologies (MLNX), which gapped up hard after earnings in roughly mid-April, as we see on its daily chart below. And they should be since the stock actually flashed a pocket pivot buy point as it briefly broke below its 10-day moving average for two days last week before quickly scooting back up above the line on Monday. MLNX wanted to go higher yesterday on heavier volume, but the weight of the general market as it came in yesterday towards the end of the day put the brakes on that move. Israel-based MLNX makes products that enable different brands and makes of servers and data-storages devices to work together smoothly, and earnings are in a rapid acceleration over the past five quarters as growth has moved from -25% to +112%. Next quarter the company is looking for 170% earnings growth on 73 cents-a-share. I like this pattern, and view Monday’s pocket pivot as potentially buyable with the idea that the stock can hold today’s intra-day low at 57.01. In the event of a follow-through day in the market I would be willing to get more aggressive, but in any case would intend on maintaining a quick exit point if the general market fails to the downside again.

Mellanox Technologies (MLNX) Gilmo Report Stock Chart

Keep an eye on Apple (AAPL) here as well as it undercut its mid-April low at 555 last week, setting up a possible “shakeout-plus-N” buy point where the “N” equals a certain number of points above the 555 April low in the pattern. With a $570 stock, it isn’t necessarily clear what the “N” should be – 10, 20, 30 points – but for me I would simply be interested in taking an initial position here with the idea that the stock will hold the 555 level. If the stock is able to get through the 575-576 level on some volume then I might consider the “shakeout-plus-N” to be valid, using a 20-point “N” in the equation. AAPL did pull out of its nose-dive when it hit the 100-day moving average, the orange line on the chart, last Friday. But while many traders do use this moving average it is not one that we commonly use, preferring to use the 50-day and 200-day moving averages. For my work, the undercut of the 555 level provides a reference point to try and initiate a position here, with the idea that AAPL could continue building its base on a constructive manner if the general market pulls out of this correction. Obviously, this is mostly speculation at this point, but I at least have a technical basis for entering a position in AAPL here on the long side.

Apple (AAPL) Gilmo Report Stock Chart

Short-term I think we have to let the market breathe a little bit here, and while I have my short-sale and my long targets ready to go, after today’s action I’m looking for a further bounce in the general market. How this develops is unknown, but we do know that the market is in a position for a follow-through day as early as tomorrow. Therefore I do not think that one needs to have any particularly bearish or bullish orientation right here, right now. This is why I am very specific in this report regarding the names I’m willing to play on either side, short or long, depending on how the market moves from here, and right now that list of actionable ideas is justifiably very short. It may turn out as well that we are in store for a few days of bouncing around with no discernible trend developing, which would be normal given the extent of the market’s prior downside move off the peak. Keep an open mind here, and stay light on your feet.

Gil Morales

CEO & Principal, Gil Morales & Company, LLC
Principal and Managing Director, MoKa Investors, LLC
Principal and Managing Director, Virtue of Selfish Investing, LLC

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