Talk about no visible means of support! Even all the Black Friday shopping hype and hoopla couldn’t get the market to rally on a truncated Friday trading session, and by the close all the early morning green on my screen wilted to red. As I’ve written in my past two reports, expect anything but “quiet holiday trade” this Thanksgiving week, and in fact this is the worst Thanksgiving week for the since 1942. The market remains in a visual “free fall” after a heavy-volume rejection at the 200-day moving average last week. The 50-day moving average did briefly slow the market’s descent at the end of last week, but a big gap-down on Monday followed by a continuous drift lower into Friday has resulted in seven straight down days. It is difficult to see where a major level of support might lie, but one might look for “weakish” support possibilities at the 2400 level, roughly a zone where we see three lows in September, as I’ve highlighted on the chart. Based on the action of a number of big leading stocks, I would surmise that the market is ultimately heading for the early October lows down around 2300. Whether we see a short bounce between here and there remains to be seen. The market isn’t waiting around for QE, either Euro-QE or a Fed version of QE(n) to come in and save the day, and it will be interesting to see which side the volume starts to come in on next week.
The argument for “non-QE” is found, I believe, in the action of precious metals, namely gold, as illustrated by the daily chart of its proxy, the SPDR Gold Shares ETF (GLD), below. The GLD has now spent the past four trading days below its 50-day moving average without yet issuing a technical violation of that line. I have very small positions in the AGQ and DGP 2x silver and gold ETFs purchased in my “slow” account on the basis of the October 25th pocket pivot buy point, but these are close to being sold. What I don’t like here is the fact that the GLD is starting to “live” underneath its 50-day moving average and is showing little impetus to move back above that line. That, for me, is a problem, and if GLD were a stock I might be inclined to look at this pattern as being shortable as a type of base-failure situation using the 50-day moving average as an upside stop. At best it looks to me that gold has some work to do in this three-month consolidation it has been locked in, and a test of the 200-day moving average and the September/October lows is possible. In my view, I tend to ask why should I own GLD as it does nothing when I could be making money shorting stocks like Amazon.com (AMZN)? If you own any gold you can ask yourself the same question, but remember that a violation of the 50-dma is a sell signal, end of story, as far as I’m concerned.
I’ve written repeatedly in this report that any breakdown in the general market will likely coincide with further breakdowns in the weakening chart patterns of several big-stock former leaders. Among them, of course, is Apple, Inc. (AAPL), shown below on a daily chart, and my negative views on AAPL have been based on the “two-down-and-one-up” sell signal on the weekly chart back in late September/early October. AAPL bounced off of its 200-day moving average four trading days ago and has now closed below the red line for the first time since June of this year. My expectation is that AAPL will move further below the 200-day line and test the confluence of three lows along the 353-354 price level, as I’ve outlined on the chart. The key here is likely where we see volume come in here, as it is always possible that institutions might support the stock off the 200-day line. But for now AAPL remains a short-sale target, and theoretically one could initiate a short position here using a very tight stop 33 cents higher at the 200-day moving average if one were so inclined.
Studying the charts of Amazon.com, Inc. (AMZN) Tuesday night after I had written my report on that day, it suddenly struck me that the stock is rolling over from a right shoulder in what clearly looks like a head and shoulders type of topping pattern, as I’ve outlined on the daily chart below. I wrote in my report of this past Tuesday that I might look to short a rally by AMZN into the 197-200 price zone between the 200-day moving average and the top of this past Monday’s gap-down move or “falling window.” Notice, however, that AMZN did not rally much at all for the remainder of this past week because it was running into resistance at the neckline of this H&S formation. Duh! On Wednesday I tested AMZN’s upside potential by actually going long the stock with the idea of quickly flipping out of a long trade up to the 200-day moving average for a fast profit, but the stock immediately felt weak (most of you know that I like to get a “visceral” feel for things like this by actually taking a position to test my theory). With this visceral information in hand, I quickly flipped out of my long position and went short big-time in what I like to think of as classic Livermorian fashion. AMZN looks primed to test the 177.10 low from mid-August.
On a weekly chart of AMZN below we can see what is a rather compact head and shoulders formation, something I find unusual given AMZN’s status as a big-stock NASDAQ leader. Usually big stocks like this take longer to form their topping patterns, but it can happen. Research in Motion (RIMM) formed a very short, 15-week “pinhead and shoulders” topping pattern back in the latter part of 2008 before blowing to pieces (see page 2 of my October 8, 2008 report regarding RIMM). AMZN, as we already know, became a primary short-sale target based on its own “two-weeks-up-and-two-weeks-down” sell signal just before it blew up on earnings six weeks ago, and this sell signal has been validated by the ensuing action in the stock. Volume this past week matched last week’s downside volume in what was a much shorter trading week, so we could argue that selling pressure on the weekly chart was greater this past week. This “breakout” through the neckline is potentially shortable using the neckline at around 190-191 as a 5% upside stop, roughly, based on Friday’s close. Watch for any “undercut & rally” around the 177.10 low.
Since splitting wide open after announcing earnings over a week ago, Salesforce.com (CRM) has closed lower every day, as we see on its daily chart, below. Even a one-day wonder-reversal back to the upside this past Monday as it staged a typical “undercut & rally” after moving below the early October and late August lows at around the 110 price level did not hold, and the stock closed at a lower low on Friday. As I wrote in my report of this past Tuesday, the 110 level can now be viewed as upside resistance, and I would use that as a stop for any short position in CRM from here. If your entry point was actually somewhere above the 110 level then one could allow for a little more upside “porosity” around the 110 level, but my view is that the massive-volume gap-down on earnings indicates that further downside is in the cards for CRM over time as this pattern develops. Given the declining selling volume here as the stock has come down seven days in a row, one might try and “guess” that a rally is in the cards here, but I would not jump to any conclusions just yet as the selling has been above average all the way down, save for this past Friday, a short post-holiday trading day.
We have previously targeted Baidu, Inc. (BIDU) on the short side, and for the most part I’ve made money shorting BIDU over the past 2-3 months from time to time, but the stock has yet to stage any kind of major breakdown outside of the sharp break we saw in the latter half of September, as we see on the weekly chart below. As BIDU’s pattern continues to evolve we can see that a much clearer and larger head and shoulders type of formation is beginning to take shape as the stock rolls over in what looks like a potential right shoulder within the pattern. Note also that the 10-week/50-day moving average has formed a “black cross” by moving below the 40-week/200-day moving average seven weeks ago. Now we are able to identify some of the more salient aspects of this pattern, even being able to discern a neckline in the pattern down around the 98-99 price level. If BIDU continues to roll over here then clearly that price level comes into play on the downside as it also would coincide with an undercut of the late September lows just above the $100 price level.
The daily chart of BIDU helps us understand some of the details in the pattern and allows us to develop a plan towards approaching the stock on the short side. Notice that after a couple of strong-volume moves up to the peak of this right shoulder back in late October, very little upside volume came into BIDU from that point, and the next significant increases in volume have occurred over the past week or so as the stock has broken down through its 50-day and 200-day moving averages. BIDU has now found support along the October low at 119.58, but already staged an “undercut & rally” four days ago which rallied right into the top of the “falling window” on the Monday gap-down day around 126 before turning back to the downside. For this reason I think it is possible to enter a short position in BIDU using the 126 level as an upside stop, about 5% from Friday’s close. Ultimately, any rally that carried further than that would bring the 50-day moving average into play at around 130 as the most optimal short-sale point, but it is not clear to me just yet whether this will happen. The general market action this coming week will likely determine BIDU’s fate with respect to whether it holds short-term support at the 119.58 level and attempts to bounce or simply continues lower from here.
The lack of any kind of capitulation selling on this recent market slip-and-slide over the past seven days seems to argue for some degree of complacency on the part of investors, and the breakdown in a number of leading stocks is certainly not constructive. In my view further downside is the higher of the probabilities, although a reaction bounce at any point is always possible, and would likely be generated by some “positive on the margin” news out of Europe – you know, something significant like French leader Sarkozy and German leader Merkel announcing that they are now forming a rock band to write songs about how they will solve the European sovereign debt crisis. This week may be critical as several European countries, including Italy on Monday, and Belgium, France, and Spain later in the week, will conduct debt auctions. When one considers that Germany’s 10-year bund auction on Wednesday failed, with only 60% of the bunds being purchased, and Germany is also allegedly the most fiscally sound of the European Monetary Union countries, this doesn’t exactly bode well for the various debt auctions set to be conducted this week by other EMU members. Thus we avoid the long side of this market like the plague and focus on “campaigning” our short-sale targets.
CEO & Principal, Gil Morales & Company, LLC
Principal and Managing Director, MoKa Investors, LLC
Principal and Managing Director, 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 AGQ, AMZN, CRM, and DGP, though positions are subject to change at any time and without notice.