The Gilmo Report

November 6, 2013

November 6, 2013


The market comes off to me as being a bit incoherent beneath the surface as a lot of wild and erratic action in both directions characterizes the action in leading and would-be leading stocks even as the indexes push up near their recent highs. This morning the indexes gapped up after Fed head John Williams babbled something about stocks not being “overvalued,” as if a Fed head, none of whom were able to see the freight train of a financial crisis barreling down the tracks back in 2008, is the last word on the market’s valuation. Despite the gap-up open, the NASDAQ Composite Index, shown below on a daily chart, turned tail and closed down on the day as it churned and reversed on higher volume, the sixth time this has occurred over the last nine trading days. Frankly, I don’t like the looks of this, and right now I’m not too keen on being heavily invested in stocks as I alluded to in my report of this past weekend.




In contrast to the NASDAQ’s weak showing today, the NYSE-based indexes – the S&P 500, shown below on a daily chart, and the Dow Jones Industrials, not shown – were both up thanks to strong moves in high-priced Dow stocks as well as perennial big-cap laggard Microsoft (MSFT) which gapped and jacked higher, as we can see on its daily chart below. I’m not sure if MSFT represents rotation into new leadership or just the dogs barking given its “whopping” 17% earnings growth in the most recent quarter with expectations of negative 8% earnings growth for next quarter.




While the S&P 500 and the Dow both closed up on the day, the Transportation Index got smacked for a 0.77% loss as it dove 50.55 points and diverged from the apparent strength in the Dow Jones Industrials. The Dow actually made an all-time high today, closing at 15746.88, up 0.82%, although NYSE volume was lighter today in comparison to yesterday. The S&P 500 just missed an all-time high today by about a point, but despite the apparent strength advancers barely led decliners by roughly 16-14, while on the NASDAQ decliners came out ahead, 13 to 12.  Despite the strong action in the NYSE-based indexes, it’s not like it’s easy to make money, and the action in many leading stocks was not pretty.




The so-called “Four Horsemen” are continuing to look more like the “Four Headless Horsemen,” as I first dubbed them in my report of last Wednesday, exactly one week ago, just in time for Halloween. Looking through the charts of the Horsemen, we first come to Facebook (FB) which found some strong volume support at its 50-day moving average last week, as we can see on the daily chart below. That strong supporting move off the 50-day line did not lead to anything exciting as the stock has spent the last four days backing and filling as it retests the 50-day moving average. It will be interesting to see whether the stock can hold the 50-day moving average as it tries to set up again. As I wrote over the weekend, the pocket pivot type move five days ago on the chart came after a downtrend of several days, which is generally premature to buy. I would like to see FB settle down along the 50-day line and issue another pocket pivot as confirmation that it is in fact trying to set up again. This is something to keep in mind as we monitor FB’s action here on this latest pullback and correction.




LinkedIn (LNKD) has most certainly had its head lopped off as a “Headless Horseman” that can only be viewed as a late-stage failed-base (LSFB) short-sale set-up based on an objective reading of its current price volume action and chart pattern, as we can see in the daily chart below. The pattern extending back to LNKD’s early August gap-up move just has a big, rolling top look to it with some resemblance to a head and shoulders type of formation. The stock is testing the lows of early October, and so far is holding near-term support just around the 219-220 price level. You might notice, however, that since those early October lows LNKD has formed what you might call an inverted cup-with-handle type of pattern, and I might suggest that a breakout to the downside is imminent. Should the stock break down to lower lows, I would be looking for the 200-day moving average to come into play, currently down around 196.25.




Netflix (NFLX) is putting up a good effort here as it in fact holds up near its 52-week closing highs, as we can see on the daily chart below. We might consider that NFLX the Horseman had its head lopped off back in mid-October on the huge-volume outside-reversal it posted on the day after it announced earnings, giving up a massive upside gap-up move all in one day. Seven days ago, NFLX found support near its 50-day moving average but right at the 10-week moving average on the weekly chart, not shown. Since then it has rallied back above the 10-day moving average on a little wedging type of move that gave way today as selling volume picked up slightly and the stock reversed. Right now it’s difficult to figure out which way this thing wants to go. I still would not be surprised to see the stock at least test the 50-day moving average again as it may need to spend some time building a new base after that big, nasty reversal a couple of weeks ago.




I certainly didn’t think it was worth playing “earnings roulette” either way in Tesla Motors (TSLA) going into yesterday’s after-hours earnings announcement, although in hindsight I might say that I wish I had shorted the stock. After all, TSLA already has two prior gap-up moves in its pattern, and something I like to call the “Cinderella Principle” proves itself once again as TSLA got hammered after beating earnings yesterday after the close. Essentially, the idea is that a stock that has two buyable gap-up moves in its pattern on earnings will tend to fail on the third report. After all, Cinderella only has two glass slippers, and while she might be able to show up twice, she rarely shows up for a third time because by then she’s out of glass slippers! TSLA also did its best to fake bullish investors in the stock out by issuing a pocket pivot yesterday as it pushed above the 50-day moving average, as we can see on its daily chart below.

But similar to FB’s action last week, this pocket pivot came off of a v-shaped type of position, so in my view was most certainly not a sign to play earnings roulette going into yesterday’s after-hours earnings report. If you look at TSLA’s pattern it now confirms a sort of rolling top that also resembles a head and shoulders type of set-up. I actually considered this morning’s gap-down “breakout” to the downside to be a shortable gap-down move, but unfortunately I was unable to borrow the stock. In my view, TSLA is now a late-stage failed-base type of situation that should be monitored as a potential short-sale target, assuming one can borrow the stock.




Examples of some of the erratic action in leaders can be seen in Regeneron Pharmaceuticals (REGN) which had a big reversal today after yesterday’s big pocket pivot move following earnings. However, you will note that REGN’s pocket pivot move came within a v-shaped formation after a prior downtrend of five days. Again, this buying into this type of pocket pivot is premature given the prior downtrend. Pocket pivots should occur when a stock is quietly moving sideways in a generally constructive manner, not out of an initial v-shaped bounce. Thus REGN’s strength yesterday was quickly negated today as the stock reversed and erased all of yesterday’s gains.




YY, Inc. (YY), which vies for special status as the market’s most erratic and volatile stock, came out with a favorable earnings report and looked to be moving to all-time highs from a v-shaped formation this morning before violently reversing to the downside on huge volume, as we can see on the daily chart below. YY represents another confused leading stock that swings sharply back and forth, and that type of action has become exacerbated over the past month or so. Ominously, today’s sell-off came on the heaviest downside volume in the pattern since the stock began its uptrend back in May of this year, and my view is that the stock has likely topped.




You might notice that Yelp (YELP) is also showing more volatility in its pattern over the past month as well, with the daily chart below looking like a mini-head & shoulders type of affair. YELP is back at its 50-day moving average as above-average selling volume sent the stock down 6.35% on the day, and I would not be surprised to see the stock break down through the 50-day moving average from here, although I can’t make any guarantees! Nevertheless, the last bounce off the 50-day line ended in weak upside volume yesterday as the wedging rally petered out. Although I repeatedly advised taking profits around the 70 price level, if you still own the stock be mindful of a 50-day moving average break here, should that occur, as a final sell signal for the stock.




In my report of this past weekend I pointed out the continuing weakness in Celgene (CELG) which had closed below its 50-day moving average last week. That weakness has developed further this week as the stock puked it up and violated its 50-day moving average today by moving below the intra-day low of last week’s close below the 50-day line on very heavy selling volume, as we can see on the daily chart below. CELG is now a sell based on today’s 50-day moving average violation.




Trulia (TRLA) hit my downside price target today as it bounced right off the 200-day moving average at 35.51 and undercut the 35.89 July 31st low, as we can see on its daily chart, below. The stock has had a nice downside move since I first discussed it as a short-sale target in my report of exactly one week ago when it was trading at 42.35. Since the 200-day moving average was my initial downside target, I consider it time to take profits and look for a possible bounce off the 200-day line to re-short the stock.

TRLA gave short-sellers a nice opportunity to scalp a trade this morning as it gapped up above 39 after its cousin stock, Zillow (Z), allegedly announced a strong earnings number after the close yesterday and gapped up this morning to open up at 37.75. If I would have been able to borrow Z this morning I would have gladly shorted that move once it began to fail, as Z sucked in buyers right off the open, moving to an intra-day high of 88.69 and right up to its 50-day moving average before reversing to close down at 78.81. TRLA turned tail much more quickly this morning, and today’s selling volume was quite heavy, which brings up the possibility that it just slices right through the 200-day line tomorrow.




Looking at Z’s daily chart, below, we can see that it bears a striking resemblance to TRLA’s pattern and price/volume action last week after it announced earnings. TRLA rallied right up to and just above its 50-day moving average after the earnings report before reversing and closing down on huge selling volume six days ago on its chart. Z perfectly imitated that action today by announcing earnings, rallying up to its 50-day moving average, and then reversing and closing down today on huge selling volume. If you can borrow the stock, I consider Z shortable here with a tight stop of 3% and the idea that it will continue to imitate its cousin-stock TRLA by heading for its 200-day moving average, currently down at 65.37.




While TRLA has been quite cooperative as a short-sale target, Arm Holdings (ARMH) continues to find support at its 50-day moving average yesterday, as we can see on the daily chart below. ARMH failed on a recent cup-with-handle breakout attempt, and we need to see a decisive breach of the 50-day moving average to confirm its status as a late-stage failed-base formation. Yesterday the stock found some above-average volume support off the line, and the stock continued to rally today on lighter volume that was about average. Tomorrow would be the third day of the bounce, and it may be possible to short the stock at that point, using the 48.79 intra-day high of six days ago on the chart as an upside stop. Keep in mind, however, that the failure of the recent breakout is not complete until we see a break of the 50-day line, so this remains a fluid situation, but one to keep an eye on as a potential short-sale target.




If there’s some sort of rotation into new leadership going on as existing leaders start to wobble or flame out, I have to say that I don’t see it. Even some of the oils that were recently showing strength have started to break down quite nastily, such as XEC, PXD CXO, CHK, etc. After-hours I am seeing SolarCity (SCTY), not shown, move nearly 10% lower after announcing earnings, which basically finishes off giving back all the gains it achieved on a huge upside move on Monday to a new closing high. Despite the indexes holding up near their recent highs, and the Dow making an all-time high today, I simply do not like the action in leading stocks.

Until I start to see some solid, buyable set-ups I am not inclined to do anything on the long side at the current time as I consider risk to be high right now. While the indexes may not show it, there are clear signs percolating underneath the surface of this market that I do not like. And until I get a better sense of where more solid upside opportunities, if any, might lie, caution reigns supreme. Meanwhile, I am quite willing to test out the short side of this market as I have with stocks like LNKD and TRLA. Stay alert and watch your stops!

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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