The Gilmo Report

May 9, 2012

May 9, 2012


Things were looking grim Sunday night as the futures took a long swim off of a short pier of weekend illiquidity and plummeted on the news of socialist election victories in France and Greece. However, this news was perhaps already afoot in the market action on Friday when the indexes came off very hard and precious metals rallied. Monday’s big gap-down did not come with any accompanying high-volume panic-selling because the news was likely already priced in. Two days later, however, and we find the major market indexes all in a tug of war at logical support. The NASDAQ Composite Index is tugging for support at its 2900 level, as the daily chart below shows, while the S&P 500 and Russell 2000 indexes, not shown, are holding support at around the 1340 and 780-785 levels, respectively. In my April 15th report, I discussed the potential for this level to come into play, and so it has. What looks obvious, perhaps, to the crowd, is that the indexes are so far holding support, but that is all, as all of the major market indexes have logged distribution days over the past two days regardless of “holding support.” While the indexes have a little bit of spring in their step so to speak today, they may not have much bounce.

NASDAQ Gilmo Report Stock Chart

Over the weekend I discussed several possible short-sale situations, which I will review in order. CF Industries (CF), shown below on a daily chart, provided a perfect short-sale entry point on Monday when it bumped right into its 50-day moving average. If you shorted this one, then your initial downside target is the 200-day moving average and the prior 168.35 low in the base. Volume picked up sharply today and it looks like the 200-day moving average is likely to be tested. CF is a late-stage failed-base (LSFB) set-up coming off an ugly improper double-bottom-with-handle formation which is somewhat POD-like, as I discussed in my weekend report.

CF Industries (CF) Gilmo Report Stock Chart (CRM) was flagged in my weekend report as being a potential POD type of formation if we saw the stock bust the 50-day moving average, which it obligingly did on Monday, as we see on the daily chart below. Yesterday constituted a violation of the 50-day moving average, hence a sell signal if one were long the stock. I however, am interested in the stock as a short. With today’s light-volume rally pushing up towards yesterday’s intra-day high at 150.88, I would look for this to provide near-term upside resistance if the stock is shorted at today’s close. Otherwise, there is potential for further rally up into the 50-day moving average at 152.85. Either is within a 3-5% maximum upside stop. (CRM) Gilmo Report Stock Chart

Valeant Pharmaceuticals (VRX) had a brutal massive-volume reversal last week followed by this nice bear flag formation as the stock engages in a wedging dead-cat bounce. So far resistance seems to hold at the 53.10 level, so it could potentially be shorted here using that as a very tight upside stop.

Valeant Pharmaceuticals (VRX) Gilmo Report Stock Chart

SodaStream (SODA) was flagged as a possible short-sale target if the stock rallied up into the 34-35 area. That occurred on earnings today, and the stock pushed much further beyond the 50-day moving average up to the 200-day line, as we see on the daily chart below. The reason for the huge 20%-plus gap-up was clear – the stock had 6.8 days of short interest in it, amounting to 9.52 million shares of a 16 million share float. Now that’s one spicy short-squeeze! The gap-up and ensuing rally took the stock right up into the 200-day line on volume of 12,816,169 shares. I’m not sure if that cleans out all 9.52 million shares worth of short-sellers, but I would keep a close eye on this to see if it gives out somewhere at or perhaps even just above the 200-day moving average. The stock was not borrowable where I trade, which is probably testament to the huge short interest in the stock. I’ll be following this as it develops here, but right now it is not clear to me that I necessarily want to be shorting this right here and now given the upside velocity and huge buying volume. It needs to settle down first and then reverse on some volume.

SodaStream (SODA) Gilmo Report Stock Chart

OpenTable (OPEN) gapped down hard on earnings last week, and as we see on the daily chart the stock is simply building an inverse bear flag formation. I would look for the stock to fail before clearing the intra-day high of the gap-down day at 37.99. Ultimately, however, I can’t see the stock getting past the 10-day moving average at 39.73 and the lows of the prior base on either side of the 39 price level. Thus I find this very shortable right here, using those levels as your guides for upside stops on any OPEN short-sale position.

OpenTable (OPEN) Gilmo Report Stock Chart

I discussed (CRM) and its potential POD-like breakdown, and it always helps to see a cousin-stock breaking down in similar fashion, which is what I see F5 Networks (FFIV) doing currently, as we see on its weekly chart below. Interestingly, VMware (VMW), not shown, is also looking very similar as well, and the three of these big cloud names, CRM, FFIV, and VMW constitute the original “Power Trio” of cloud leaders. All three have formed giant punchbowl-like formations and look weak, but for now I am focusing on CRM and FFIV as short-sale targets, although VMW is starting to look like one as well. As we see in the weekly chart of FFIV the stock broke the 10-week moving average on heavy weekly volume four weeks ago and three weeks ago churned around the 10-week line on even heavier volume, which I see as churning at the peak.

F5 Networks (FFIV) Gilmo Report Stock Chart

If we switch our view to the daily chart of FFIV, below, we can see the breaches of the 50-day moving average corresponding to the breaches of the 10-week line on the weekly chart, above. Yesterday saw the stock break the 50-day moving average again, albeit on about average volume. I tend to see the stock as potentially shortable here as it nudges up into its 50-day moving average. Rackspace Holdings (RAX), which is allied with FFIV, got plastered yesterday on earnings, and we should also note that FFIV’s own earnings are continuing to decelerate, despite the gap-up move on earnings about three weeks ago, a gap-up move that was dutifully sold into as the stock failed on that gap-up move rather quickly. Earnings growth is expected to come in at 18% next quarter, according to analysts’ estimates, and I would not be surprised if RAX’s numbers presage a similar slow-down for FFIV in their next earnings report. With all the big clouds wavering here, the big upside group move that they all staged off the market lows of March 2009 up until recently might turn into a big group breakdown. This would lend confirmation to the idea of shorting these names. Right now I prefer CRM and FFIV as short-sale targets with VMW also viable using a similar stop at its 50-day moving average given that it is in a similar position to FFIV and CRM. Perhaps what we need is an inverse cloud-computing group ETF!


After-hours as I write, I note that the futures are losing more ground along with (PCLN) which announced earnings after the close, and this does not bode well for tomorrow. It appears that the major market indexes are set to fool the crowd which today probably sees the indexes’ ability to hold their current support levels, such as the NASDAQ at 2900 and the S&P 500 at 1340, as constructive. But as far as I’m concerned the market remains in a correction, and as long as that is the case then support levels are made to be broken, and that may be the case tomorrow. All I know is that for now my money is on the short side of this market until further notice, and for now, at best, all we are in is a two-day rally attempt off of yesterday’s lows with tenuous support just below.

Again, let me emphasize that while I discuss the short side of this market and focus on my short-sale targets in the present, Gilmo members should not feel like they have to go short if they are not so inclined. It takes a particular psychology to deal with the short side, and not everyone is up to it – often the stress is not worth it. Therefore, cash is also a great place to be right now, and hopefully everyone has raised some cash over the past few days as the market continues to break down. Stay tuned.

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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