Today’s gap-down on heavier volume has the look of a breakdown through the lower trend line of a so-called “ascending wedge,” as I’ve outlined on the daily chart of the NASDAQ Composite Index below. Technical Analysis 101 tells us this is bearish, but we might surmise the market’s bearish demeanor simply from the way stocks are getting knocked around. With a pick-up in selling volume today, the odds of a true test of the 200-day moving average increases. Whether or not some massive plan to manufacture liquidity in Europe or some indication of QE from the Fed will have the ability to suddenly turn things around is another question, but certainly a major exogenous factor to consider given the current news flow. The situation in Europe is bad, make no mistake about that, and the addition of Spain to the critical care unit ups the ante. From here a mini-break to the 200-day moving average would likely make the short side a profitable proposition from here, with the idea of looking to cover and book profits once the 200-day line is reached. The flip side of that argument is that the indexes remain in a position where they are still in a six-day rally attempt off the lows of two Fridays ago, and a follow-through day remains a possibility at any time.
I have to admit that the technical facts regarding the charts of the general indexes such as the NASDAQ make me feel as if playing the short side here is a bit like dancing on the edge of a knife blade. As I’ve been discussing in recent reports, I don’t like carrying heavy short positions over night, and for the most part prefer to day-trade a small handful of short-sale targets, rotating around as each one bounces or sets up at an optimal short-sale position, most of which I have discussed in this report. I frankly do not see a way out of the current severe liquidity crisis in Europe that does not involve more fiat money-printing, and I suppose my first clue in this regard might be the action of gold, which today rallied in the face of stocks getting tossed out the window, as we see in the daily chart of the SPDR Gold Shares (GLD), below. As I wrote over the weekend and discussed on Fox Business News today, gold is at a point where buying into the dip here carries a decent risk/reward profile in that a breach of support at approximately $1,526-an-ounce for gold itself provides a ready and nearby reference for getting stopped out of the trade if one is wrong. A weak jobs number on Friday may bring the Fed in, or at least the perception that some sort of QE is likely, and that alone could spark a follow-through day. Keep an eye on gold here.
Over the weekend I kept my discussion of short-sale targets short and specific, choosing to focus on LinkedIn (LNKD) and Salesforce.com (CRM) as potentially the next pieces of “rotting fruit” to fall from the tree on the short side. LNKD, shown below on a daily chart, was a bit of a no-brainer this morning when it gapped up on a buy rating and price target of $125 courtesy of a Citigroup analyst. I tend to see this kind of upgrade as simply an “investment banking service” whereby a big brokerage puts out a buy rating in order to provide cover for a big client looking to unload LNKD shares. Call me cynical, but with the stock opening up at 101.78 at the bell, the invitation to short the news-induced gap-up move was sent out Special Delivery. Over the weekend I noted that we might look for some sort of jerk to the upside in LNKD that took the stock up closer to its 50-day line at 103.72 as a shortable opportunity. And with the stock opening up within 2% of the 50-day line, it was certainly in play on the short side for those bold enough or crazy enough to do so right off the open. I decided to take advantage of the move myself, and we’ll see how this pans out, but for now it appears to be in a reverse bear flag type of formation with a downside “breakout” potentially bringing the 200-day moving average into play as an initial downside target, using the 50-day line as your guide for a stop.
Salesforce.com (CRM) pulled its own weak but very brief upside move on Tuesday morning but like LNKD it never got within more than about 2% of its 50-day moving average at 151.76 as it put in a high at 148.72 and never looked back as it turned tail to the downside. You can see on the daily chart of CRM below that the stock found some support today along the 141 level and the top of the short sideways consolidation that formed 2-3 weeks ago before the stock gapped up on an earnings “surprise.” This might cause a further bounce up into the 144-145 price area, but I would tend to look at this as a potentially shortable bounce depending on the volume as well as the action of the general market. Remember, we are in a position to have a follow-through day in the major market indexes at any time, so this must figure into any and all short-selling operations. You don’t want to get caught in a blistering upside jack based on some news or rumor of a massive new liquidity plan, a.k.a. money-printing on steroids, in Europe. What you want to see in CRM here is either more downside or a bounce coming on very feeble buying volume, which as I already indicated I would see as potentially shortable up in the 144-145 price area.
Over the weekend we also looked at the breakdown in Google (GOOG) as it finally pierced the 200-day moving average this past Friday on above-average volume, as we see on the daily chart below. Also, as I discussed over the weekend, the rally yesterday morning up into the 600 price level was a reasonable spot to short the stock, and it did stall on that rally attempt as volume never got above average. GOOG tried to push lower today, but selling volume never came into the stock and it held at around mid-range on the day. Currently I would see any rally up into the yellow-highlighted area between the 200-day moving average and the 600 price level as potentially shortable if it occurs on weak buying volume. Keep in mind that the 600 level is only 2% above where GOOG closed today, so it does remain shortable even at current levels since the entire zone from today’s close up to the 600 level is well within the maximum 3-5% upside stop we want to use on all short-sale positions. Of course we always prefer tighter stops if we had the proper reference points available to do so, and as near-term resistance the 600 level serves well in this regard, but as always, you can set your stops looser or tighter depending on your own risk preference.
With the possibility of a follow-through day still in existence, I have discussed a few long ideas I might look to act on should we get a follow-through, but this had included a short list of Mellanox Technologies (MLNX), Monster Beverage (MNST), and Apple (AAPL). All three of these stocks continue to hold up well with MLNX and MNST holding above recent pocket pivots while AAPL remains above what I consider to be the key 555 price level. Meanwhile, I note that Chipotle Mexican Grill (CMG) flashed a pocket pivot buy point yesterday off the lows of a potential base as it came up off the 10-day moving average and up through the 50-day line, as we see on its daily chart below. CMG was not able to hold above the 50-day line today, but considering yesterday’s upside move and the general market action today, the pullback was very well contained. This is interesting action to see in a stock that has been a big leader off the market lows of early 2009, and so this one gets added to my buy watch list given this constructive action. Of course, that makes my buy watch list a four-stock list for now, which speaks to the weak state of the leadership in this current market environment.
Right now I am leaning towards the probability that the general market indexes, namely the NASDAQ Composite and the S&P 500, will soon test their 200-day moving averages. Focusing on a couple of short-sale targets such as LNKD and CRM with the idea that either or both have the potential to test their 200-day moving averages in synchrony with the NASDAQ Composite and S&P 500 Indexes also testing their 200-day moving averages is one way to play further weakness at this juncture. We’ve seen other short-sale targets like CF, VRX, and FFIV break down through their 200-day moving averages, and if CRM and LNKD are likely to follow suit it will probably take, as I wrote over the weekend, another downside leg in the general market that carries down to the 200-day moving average or slightly further. At this precise instant I think that is the higher probability right now, subject to change at any moment given the potential for a surprise news event coming out of Europe that could generate a follow-through day in the short-term. Therefore be nimble if you choose to play the short side, or keep matters simple by staying in cash!
CEO & Principal, Gil Morales & Company, LLC
Principal and Managing Director, MoKa Investors, LLC
Principal and Managing Director, Virtue of Selfish Investing, LLC