The Gilmo Report

May 29, 2013

May 29, 2013

The market was far from out of the woods following yesterday’s cathartic opening gap-up move that stalled out on heavy volume. Today’s gap-down move on even heavier volume confirmed this fact, as we can see on the daily chart of the NASDAQ Composite Index, below. Yesterday’s gap-up open struck me as a rather cathartic affair coming after the long Memorial Day holiday weekend, and a number of leading stocks that gapped up with the market early in the day succumbed to stalling and reversing, all of which did not make for a very constructive tone to the gap-up day. Today’s action saw more volume trade as the indexes gapped down and then churned about, but as I see it you are looking at three distribution days over the last five trading days. In my view this warrants caution on the part of investors, and as I indicated over the weekend, I don’t think the current market action is something I want to jump into on the long side as far as taking new positions is concerned. If you own stocks and have a comfortable profit cushion, then it is certainly possible to try and hang in there as the market goes through a bit of corrective action, but I would keep my trailing stops clearly in mind.




The hot stock story of May, Tesla Motors (TSLA) gapped up through the $100 price level yesterday, putting into play Jesse Livermore’s “Century Mark” rule whereby one could buy the move through the $100 century mark for a quick upside trade, as I discussed in my weekend report. TSLA obliged by moving just a hair less than 15% past the $100 price level to an intra-day high of 114.90 this morning before reversing and closing down at 104.62 on very heavy volume. In my view, the hot money has been made in TSLA and now the stock needs to form a base. Certainly, a market correction would provide the right environment for such a correction and base-building process to occur. For now, the trade is off on TSLA as far as I’m concerned, but it has been a rewarding move for traders who were able to stomach the risk and volatility inherent in playing such a hot stock. Even those who came in late on Tuesday, buying the stock at around the 102 level near the open were able to cash in on a quick 10% upside move in the stock by the time it opened up this morning.




Netflix (NFLX) took a big hit yesterday after it released new episodes of its hit series “Arrested Development.” Investors were not impressed, as they pounded the stock, sending it into a big-volume outside reversal to the downside yesterday. This puts the stock’s early May breakout in serious jeopardy, and I consider this current action as a reason to sell the stock.




In contrast, Michael Kors Holdings (KORS) represents a former leader resurrected as it broke out of a cup-with-handle type of formation on very heavy volume after announcing earnings this morning before the open. Technically, this is a buyable move, but I would keep a very tight stop on this at the 10-day moving average currently running through the 60.84 level, if I were going to take a position in KORS here.




Cree (CREE) had a strong move today thanks to an analyst’s upgrade and new price target of $72, but volume was not high enough to qualify as a pocket pivot volume signature and a valid pocket pivot buy point.





Fleetcor Technologies (FLT) was able to clear the top of a short three-week flag formation on decent volume after a hedge fund disclosed a 5.3% passive stake in the company. The move stalled a bit as the stock closed mid-range, but if this is going to work the stock should hold above today’s intra-day low 84.05.




Of course, the way this market has gone, I’m wary of buying breakouts. Nationstar Mortgage Holdings (NSM) illustrates this as it has given back all of the gains it made following its early May buyable gap-up move and subsequent base breakout.




Three-D Systems (DDD) is working on a handle to its prior deep cup formation after failing on a breakout attempt two weeks ago. The stock is holding tight along its 10-day moving average, so we will want to watch this closely in case the market is able to regain its footing and DDD flashes some sort of pocket pivot buy point here along the 10-day line. This still acts well and so remains on my buy watch list after producing some nice gains after pocket pivoting off of its 50-day moving average in late April.




Mercadolibre (MELI)
is another one of these promising situations that tried to break out to new highs but faltered as it came back in to test its 20-day moving average. The stock is now trying to stabilize somewhat as it is still holding above the 111.35 intra-day low of its buyable gap-up move from early May.




Pharmacyclics (PCYC) which flashed a pocket pivot at its 50-day moving average last Thursday as it tries to round out the right side of a base, as I discussed in my report of this past weekend. The stock is pulling in on light volume and needs to hold above the 50-day line to remain viable.





Short-sale target stock LinkedIn (LNKD) has “broken out” to the downside, pushing through its prior lows in the 171 price area yesterday on heavy selling volume. Today the stock undercut the early April low at 165.01 to set up a logical “undercut & rally” situation. However, I view any rallies up towards the 170-171 area as potentially           shortable using the 171 price level as your upside guide for a stop.




Apple (AAPL) remains a stubborn beast as it continues to hold above its 50-day moving average. I’m still keeping this on my short-sale target watch list as a break of the 50-day moving average would likely confirm a test of the April lows. For now, however, this is only a possibility that I’m keeping an eye out for. Otherwise, the stock has shown no weakness so far since climbing back above the 50-day line in mid-May.




The market turbulence of the past few days has put me in a cautionary mood, but I’m still open to the possibility of the market stabilizing and resuming its uptrend. The only issue is that I’m looking for some rotation to show up here, and so far I’m not picking this type of action up in my daily screens. I can see a few leaders, some of which I’ve mentioned in this report, that are pulling back with the market in orderly fashion, but I’ve yet to see any actionable buy signals that I’m comfortable sinking my teeth into, so to speak. KORS and FLT had some nice breakouts today, and those may be actionable with the idea that a) the market will stabilize and resume its uptrend in the next few days and b) they will also hold above today’s breakout levels. I might also like to see a pocket pivot move by DDD as a reason to re-enter the stock, and while CREE continues to hold up very well, its action remains mixed with respect to any proper volume signatures. TSLA has had its run, for now, as I see it, and with it simmering down I think a lot of the “mo-mo” action in this market has dried up.


A correction, however, is just what we would need to allow some of these stocks to set up again and some new ones to come on. So I think it is simply a matter of steering clear of any stocks that aren’t acting right, such as NFLX, for example, and allowing the situation to develop while keeping your powder dry. 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 LNKD, though positions are subject to change at any time and without notice.


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