The Gilmo Report

November 20, 2013

November 20, 2013

The market sold off unexpectedly on Monday, with the reason for the sell-off ascribed to comments from market mogul Carl Icahn at a Reuters conference. Icahn’s main point was that strong company earnings were largely a function of interest rates and hence all smoke and mirrors. Thus, he claimed, the market is subject to a “big drop.” It would have helped if he had given us all an exact date, but investors took the comments to mean “right now” and sent the NASDAQ skidding the most, down 0.93% on the day on lighter volume. The lighter volume might be considered constructive, but the essence of Monday’s action was a breakout failure as the NASDAQ Composite Index, shown below on a daily chart, fell back into its short, roughly four-week consolidation. This has been followed by stalling action on lighter volume over the past two days as the NASDAQ closed in the lower reaches of its daily trading range for three days in a row now. While selling volume isn’t exactly heavy, the fact that the index has broken down through last week’s breakout, as buying volume has not materialized, isn’t exactly what you would like to see, particularly with the ugly action seen in a lot of leading stocks over the past three days.




One would expect that if the market sell-off on Monday was in fact an overreaction to comments from one individual, albeit a very wealthy market player like Icahn, it would quickly recover within a day or two. That’s what it looked like it was going to try and do this morning when the European Central Bank disclosed that it is considering lowering the deposit rate to -0.1% (that’s right, a negative interest rate) if current stimulus isn’t working. Frankly, I don’t see how this is good news, and eventually the markets figured that out once the Fed meeting minutes came out and discussions of QE tapering were put back on the table. Deflation in a failing Europe, and a Fed that is looking to taper were not what the market wanted to see. The S&P 500 Index, shown below on a daily chart, is still holding above last week’s new-high breakout, but a big outside reversal day today puts that breakout in jeopardy. Volume over the past three days has not been heavy, but like the NASDAQ, the S&P 500 has closed at the lows of its daily price range as buyers have failed to materialize following last Wednesday’s strong breakout action. The thing to keep in mind here is that selling off the peak does not always have to be heavy when the market starts to roll over. The key clue here might be the action of leading stocks, which is quite ugly in many cases.




Deflation is not a good thing for commodities, and QE tapering is likely just as bad, if not worse. Thus gold began selling off at the open today and broke to lower lows on heavy selling volume, as the daily chart of the SPDR Gold Shares (GLD) illustrates below. Weak action is being seen in a range of other commodities, including oil, for example.




The “Four Horsemen” are returning to their headless states as Facebook (FB) tested its 65-day exponential moving average yesterday and barely hung on, rallying into the close to hold above the line, as we see on its daily chart, below. FB followed that up with a rally again this morning, but it looked more like a reaction bounce after getting hit hard on heavy selling volume on Monday. Volume was weak today and I would not be surprised to see the stock break to new lows if the general market remains weak. If you look closely at the daily chart you can see a two-month head and shoulders formation.




In fact, FB’s daily chart reminds me a little bit of Apple’s (AAPL) daily chart back in September/October of 2012 when it topped. I show the daily chart of AAPL from that period, below, and you can see how the stock formed a little two-month head and shoulders formation before violating its 50-day moving average and going on a steep decline from there. Not that FB is going to do the same thing, but based on this precedent, I wouldn’t be surprised if it did.




LinkedIn (LNKD) gave up on its attempt to reach the 50-day moving average as it reversed after reaching the low 230’s and moved down to its 10-day moving average, as we see on the daily chart below.




Netflix (NFLX) continues to hold along its 10-day moving average, but as I wrote last Wednesday in my November 13th report, I was looking for the stock to flash a pocket pivot along the 10-day line, which it has not done. The daily chart below shows the stock stalling on light volume over the past three days as it closes in the lower part of its daily trading range each day. So far I’m not seeing what I was looking for in the stock as of last Wednesday’s report, although it continues to hold above the 10-day moving average.




Tesla Motors (TSLA) could not hold the 150-day exponential moving average, as we can see on its daily chart, below, which quickly put to rest any thoughts of a bottom-fishing expedition in the stock as I had discussed over the weekend. One of the ways I use the market as a feedback system is when it immediately stuffs and disproves a bullish or bearish theory I might have on an individual stock or the general market. In my view, if the market was truly raring to go after last Wednesday’s breakout to new highs, then stocks like TSLA should have had reaction rallies off of logical support areas, in this case the 150-day exponential moving average on TSLA. We saw this moving average hold in LNKD, but not so in TSLA, and while I might be willing to buy some shares along the 150-day line to test my theory, once the stock fails to hold the line, with perhaps another 2-3% allowance on the downside, it is gone, no questions asked. In the meantime, weak action in FB, LNKD, and TSLA likely indicates that the market’s breakout last Wednesday isn’t as powerful and positive as it might have seemed at the time.




Proof that things can change very quickly in the market is provided by the 3-D printing stocks which had been on fire to the upside over the past couple of weeks or so. This week they’ve been “on fire” in a different way as they have all flamed out and blown up over the past couple of days. Just look at the daily charts of each of these – an amazing sight to be sure!  Proto Labs (PRLB), which looked constructive over the weekend, has been crushed over the past two days as it violates its 50-day moving average.




Stratasys (SSYS) gave up all of its gains since breaking out in early October in just two days, and is now flirting with its 50-day moving average after violating the 113.49 peak of the prior base.




Three-D Systems (DDD) has also skidded 18% below its intra-day peak on Monday, but it was able to hold up better than the rest as it found support at its 20-day exponential moving average.




Voxeljet (VJET) had the most spectacular blow up of the group as it went on a 43% cliff-dive from its intra-day high of 70 on Monday in just two days! VJET was more or less living up to jets name as of Monday as it streaked higher, but it proved itself to be a thin, risky “spec” name as it returned to earth in rapid fashion. The action in all of these high-flying 3-D printing stocks just goes to show how challenging this market is. If you owned the 3-D stocks on Monday you were singing and dancing a festive tune. But if you were carried away with your giddiness and failed to pay attention, you were rapidly machine-gunned in a mere two days’ time as you watched all of your amazing gains go “poof!”




And then there’s Exone Company (XONE), which I thought might have a chance of issuing a pocket pivot off the 10-day moving average, where it closed on Friday of last week. This actually happened on Monday, as we can see on the daily chart below, but the Monday pocket pivot did not hold as the stock broke down through its 10-day moving average on Tuesday, negating Monday’s positive action. XONE has suffered less than its 3-D printing peers over the past two days, but that is likely because it had not run up so wildly beforehand. In any case, 3-D printing stocks were a group that was on fire, but which also points out the dangers when one plays with fire a bit too long!




Other stocks that looked constructive to me over the weekend and which broke down through key moving averages were Sunpower (SPWR), Groupon (GRPN), Bonanza Creek Energy (BCEI), and SolarCity (SCTY). I was looking for possible pocket pivots off of their 10-day moving averages in all of these stocks, but every single one failed and rolled over as they failed to hold their 10-day moving averages. BCEI’s daily chart can represent the group here as we can see the stock blow right down through its 10-day moving average on Monday after holding tight along the line for the prior two days as volume dried up. As I wrote in my weekend report, the action along the 10-day line with selling volume drying up was constructive, but that constructive action did not resolve in a pocket pivot buy point. Instead, it resolved in destructive fashion, sending the stock on a violation of its 50-day moving average.




Acadia Pharmaceuticals (ACAD) was another stock that looked like a possible “roundabout” formation as it held tight along its 10-day moving average with volume drying up, as we can see on the daily chart below. But no pocket pivot presented itself as Monday’s action in the stock saw selling volume pick up while the stock broke below its 10-day line. Now ACAD is starting to look like some sort of head and shoulders top, and it could be possible to short the stock using the 10-day line at 21.98 as a quick upside stop. Today saw the stock bounce on weak upside volume, but a breach of the 20 price area would certainly be a negative for the stock.




Align Technology (ALGN) did not act as I would have expected it to, breaking below the buyable gap-up low yesterday on above-average selling volume, as we see on the daily chart below. As I wrote over the weekend, if the stock was not able to recover quickly after the arranged sale of 4.6 million shares last Thursday by Danaher Corp. (DH) and broke down through the intra-day low of the buyable gap-up day of about a month ago, it should be sold.




Taser International (TASR) perhaps is holding up better than most as it pulls back into its 20-day moving average on light volume. However, as we can see on the daily chart, below, TASR has failed to follow-through on last week’s trendline breakout, and so my tendency here is to think that the stock probably, at best, needs more time to work on a base here. Should it break down through the 20-day line then the 50-day moving average at 15.54 comes into play. While I was long the stock earlier in the week, I decided to unload my shares and wait for the stock to set up again as I do not care to sit through a move to the 50-day line, should that occur.




With the sudden weakness in a number of leaders showing up Monday, I felt at that time that the short side of the market could be revisited, and hopefully members are able to follow my comments on Twitter at @gilmoreport in real-time. At that time I tweeted that Trulia (TRLA) had rallied back up into the neckline of its head and shoulders formation before selling off again, as we can see on the daily chart below. This put the stock back in play as a short-sale target given the weak action of the general market as the NASDAQ failed on its breakout of last Wednesday. Volume picked up yesterday as the stock turned tail to the downside, and today TRLA broke through its 200-day moving average once again with volume picking up slightly on the day. This might have a quick bump back above the 200-day line, but I might consider using that as an opportunity to short the stock, using a 3% maximum upside stop. Initially I’m looking at the 33.43 low of two weeks ago as a downside target, but ultimately I can see the stock moving below 30 at some point if we were to get a more significant market sell-off from here.




TRLA’s cousin, Zillow (Z) also ran into resistance within its head and shoulders formation, but in this case it was at the 50-day moving average, as we can see on the daily chart, below. Z has broken down from there over the past three days with heavy selling volume both yesterday and today as it comes right down to the neckline in its H&S formation. The stock has also just barely breached its 150-day exponential moving average, and it seems to me that any bounce from here into the 10-day moving average at 78.56 would be a shortable move, using a 3% maximum upside stop.




Housing and REIT (Real Estate Investment Trust) stocks have been weak for some time, and it seems to me that the weakness in TRLA and its cousin, Z, is simply follow-on weakness in the overall sector. Another related area of sector weakness is also showing up in the mortgage-servicing stocks, Ocwen Financial (OCN) and Northstar Mortgage Holdings (NSM), both of which blew up after announcing earnings recently. Starting with OCN, which I show below on a daily chart, we can see the massive-volume break off the peak which defines the right side of the “head” in the head and shoulders formation. This latest eight-day rally off the early November lows has taken the stock up towards the 50-day moving average where it may be forming the peak of a possible right shoulder. The stock stalled today just above the 65-day exponential moving average which makes it shortable here, in my view, using the high of today at 54.12 as a maximum upside stop. OCN could conceivably rally further to the 50-day moving average up at 54.90, and the bottom line is that the stock is within about 2% of that based on today’s close, so even a maximum 3% upside stop would be more than reasonable.




NSM, shown below on a daily chart, is in a much different position here as gapped down severely two weeks ago after announcing earnings. Volume was massive on that gap-down move, and since then the stock has built a short “bear flag” as it has wedged slightly higher over the past few days in a sort of “dead cat splat” maneuver. Today NSM stalled at the top of the bear flag range, and my guess is that it will break down through the short trendline I’ve drawn along the lows of the little rally over the past eight days on the chart. The best way to hit this one would be to short it here with the idea of seeing this break materialize shortly while using the high of today at 39.78 as a relatively quick stop of less than 3%.




I have to admit that over the weekend I thought some stocks offered upside promise, but the action I was looking for in every case has not materialized, and instead we have seen the stocks get hit with some serious selling volume. Some, however, like financials Morgan Stanley (MS) and Charles Schwab (SCHW), both not shown here on charts, have held up over the past three days as the high-flyers have been kicked around. However, I don’t care much for the action in names like Sandisk (SNDK) and Microchip Technology (MCHP), not shown, which I’ve discussed as long ideas in previous reports. It’s not as if they are breaking down in ugly fashion, but if I put out a long idea and it begins to falter my view is that the stock should be sold. If you have taken any recent long positions and find yourself underwater, even slightly, it  may be prudent to back away by selling the stock or stocks in question and raising your cash levels. Speaking for myself, I have abandoned the long side of this market in favor of the short side given the terrible action in most of the long ideas I was interested in over the weekend as well as a broad swath of market leaders. Bottom line: This market looks dangerous to me, so play it safe. 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 FB and LNKD, though positions are subject to change at any time and without notice.

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