Tuesday, November 11, 2014

Frothy Market Action Masks Major Warning Signs

The Nasdaq and the SP 500 have staged another impressive rally, just as they seemed to be on the verge of an overdue, prolonged, major correction. They are up over 10% in the last four weeks, distribution is low, bad news is ignored, good news is cheered, and volume, in general, has been above average. But, the underlying technicals have been deteriorating. 

The Nasdaq Advance Decline line is still in a major downtrend downtrend even as the Nasdaq continue to make new fifty two week highs, and volume has been drying up over the last few days as the market makes new and all time highs, a major sign of declining participation.

The NYSE, small/mid cap, European, and all of the Asian indices, except for China, have not been able to rally near new highs, and the Russian Stock Market is teetering on the verge of collapse. Stalling in an area where distribution would be expected to set up the next major leg down.

The VIX contracted quickly, but still maintains its uptrend since July, showing complacency sets in too quickly and nervousness is increasing with each additional rally attempt.

Value is outperforming growth, which initially led the market off the bottom, and long term interest rates are stalling at their respective fifty day moving averages and appear ready to roll over again, indicating a flight to safety. Interestingly, Gold (GLD) and Silver (SLV) are in free fall.

Leading growth stocks(click to review) have behaved extremely well since the market bottomed on October 15th. Breakouts have occurred almost daily, in heavy volume, and follow through strongly, in above average volume. But once again, just focusing on the surface is deceiving. 

While a strong follow through after a breakout is exciting, a strong follow through out of a late stage base could be a sign of climactic action, and nearly all of the early breakouts that followed through strongly, are out of late stage, wide and loose bases. 

More recently, a strong majority of the early breakouts have failed to follow through any further along with the market and volume has been deteriorating as just a handful of stocks continue to make further progress. Intraday volatility is extremely high, making handling positions much more difficult. An indication of potential exhaustion and waning participation.

Recent breakouts have failed quickly or failed to follow through, and have continued to come out of late stage, wide and loose, v-shaped bases, with lagging relative strength. To make matter's worse, a few bull market leaders imploded on earning's reports, Netflix (NFLX) and Salix Pharmaceuticals (SLXP). Biotech stocks, Gilead Sciences (GILD), Pacira Pharmaceuticals (PCRX), and Biogen (BIIB), one of the strongest groups in the market, have been stalling or breaking down. Even Apple (AAPL) has run out steam.

Short trading ideas(click to review) are almost completed with their setups. A majority could use the rest of this week and maybe next to tighten up before breaking down. Few sets up have fallen apart despite an impressive 10% run by the market, as institutions take advantage of market strength to distribute the weakest and strongest stocks in the market. Aggressive traders could consider a short or two, but patience may pay off in most other short setups.

Oil and gas stocks continue to act sloppy and drag down all related groups including the Solars. First Solar (FSLR) is breaking down and Sun Power (SPWR) is on the verge of joining. Gilead Sciences (GILD), Biogen (BIIB), and Facebook (FB), on the leading growth stocks analysis(click to review) list, appear to be setting up late stage base failure entries. Review the updated short trading ideas (click to review) list for more potential entries over the next few weeks. 

If most of this sounds familiar, it is. Almost every rally since 2013 has played out this way. Indices act strong while leading growth stocks drift lower, not appearing to suffer any damage with a few acting strongly, the "distractor" stocks, creating a mirage that everything is okay, when it is not. Within a few weeks the market rolls over into another pullback or correction, wiping out recent gains in a matter of days, if not hours, but before that, traders get ground up as the market tops.

It is a bad sign when leading growth stocks are consolidating, even tightly, while the market is essentially screaming higher. It is a sign of distribution, weakness, not accumulation, strength. This type of action leads to a market that rolls over and punishes traders that over stayed their welcome  and/or increased leverage, in fear of missing a big move.

Traders should clearly be out of any losing or lagging position, and extremely tight on stocks exhibiting climactic action. There are few breakouts in this rally that are out of first or second stage bases. 

There is little reason to give back hard earned profits in over extended positions, give back gains in lagging positions, and/or suffer greater losses in losing positions.

Wednesday, October 29, 2014

Will FED Extinguish Rally It Ignited

The market bottomed and has not looked back since October 16th, when St. Louis Fed President James Bullard, a non voting member, said the Fed should consider delaying the end of it Quantitative Easing Program. With the mid term elections so close and the economy not nearing a recession, this is wishful thinking. The Fed will end QE today as expected. The question is how will the market react over the next few days, not hours.

Price volume has been almost perfect with no distribution and several add on follow through days. Unfortunately, that is where the good news ends. 

The market has been extremely extended over the last few days, the VIX, a measure of day to day volatility, has contracted quickly, but is still making higher lows, and neither the NASDAQ or NYSE advance decline lines are nearing new highs, indicating a major contraction in the number of stocks participating in such a powerful price move by the indices, and increasing the odds of this rally being nothing more then another bull trap.

Leading growth stocks, that got out of the gate early as the market reversed two weeks ago, have behaved well and followed through in strong volume. Unfortunately, many of the breakouts are out of later stage bases and appear to be in the midst of their climax runs. Lannett (LCI), Apple (AAPL), Regeneron Pharmaceuticals (REGN), and Ilumina (ILMN), gapped out of later stage cup and handle bases, in heavy volume.

New setups are now lagging the market, as recent breakout attempts out of these new setups have been failing more often and are becoming extremely volatile, making them difficult to handle. Baidu (BIDU),  Phillips 66 Partners (PSXP), and Cousins Properties (CUZ) are setup ahead of tonight's earning's reports.

Stocks should not be consolidating while the market is charging higher in heavier volume. It is a sign of short term weakness and are prone to heavy selling during even a minor pullback. These setups must first prove they can withstand a minor market shakeout before being considered on a breakout attempt.

Short trading ideas should have been long covered. I warned traders on Tuesday, October 14th in, Now That The Correction Is In Full Swing What To Expect Next:


"With the market and most short trading ideas over extended, short traders cannot get too complacent. Traders need to start reducing recent positions that have failed to follow through and tightening stops on positions with significant profits. While it may be tempting to ride through the first market test of the fifty day moving average, it could be extremely painful, especially if the market doesn't stop and attempts to test new highs."


And tweeted the morning of October 15th: 

"Consider taking profits in short positions or at a minimum tightening stop significantly. Consider a long or two."


With so few short setups, they are probably best avoided for the next few days while the market digests recent gains. Continue to track them as most are digesting the recent selling in a very orderly fashion and could be setting up for another round of breakdowns in the next few weeks. Avon Products (AVP) and Peabody Energy (BTU) appear ready to roll over at their respective twenty day moving averages.

All signs point to the rally being another short lived rally within this latter part of the the bull market, in which a handful of leading growth stocks make progress and climax, while the rest stall and roll back over. Rewarding early longs and frustrating everyone else jumping on the bandwagon.

There is no reason to be 100% in cash. Traders should be holding a few strong long positions, and tightening stops on the rest. Only very aggressive traders should consider being heavily margined at this juncture. 

Tuesday, October 14, 2014

Now That The Correction Is In Full Swing What To Expect Next

After warning for weeks, and several attempts over the last year, the market is finally in its first real correction since 2012. Any attempt to rally or reverse intra-day losses, has been quickly met with more selling the very next day or closes near the lows of the day. 

Volume has clearly favored the downside and the NYSE and NASDAQ advance declines lines are leading their respective markets to new lows. But, the market is now getting over extended, and based on historical studies, closer to a multi-week rally attempt to test the their respective fifty day moving averages before resuming the downtrend. Ideally, the NASDAQ will test the 3,900 - 4,000 range to shakeout enough investors and setup the last major leg of the bull market.

The majority of leading growth stocks have suffered significant damage over the last couple of weeks, but not to the extent they couldn't repair themselves over the next few weeks or months. Biotech's, Celgene (CELG), Gilead Sciences (GILD), and Biogen Idec (BIIB), and semiconductor stocks, Avago (AVGO) and Skyworks Solutions (SWKS), which appeared to be weathering the correction so well, succumbed to heavy selling over the last few days.

As the correction progresses, not all leading growth stocks will follow the market lower. Some will tighten, finish up consolidations, and be ready to breakout before the market bottoms. Apple (AAPL) has been forming a flat base ahead of its Ipad Event Thursday, October 16th, and earning's report Monday, October 20th. Medivation (MDVN) has been pulling pack to the fifty day moving average in low volume, digesting a 30% gain since breaking out of a first stage cup and handle base on August 7th, in volume 350% above average. The stock was a featured trading idea on July 28th, Biotech Company Ready To Explode on Earnings. EPAM Systems (EPAM) has formed a second stage cup and handle base.

Short trading ideas have performed exceptionally well, breaking down and following through, but are now over extended from proper entry points. While the original group of stocks have followed through, recent setups have not been as profitable, trading wildly. While new setups appear tempting, most are now considered to be lagging the market and much more prone to failure. Gulfport Energy (GPOR), Pentair  (PNR), Covance (CVD), and UBS AG (UBS) continue lower.

With the market and most short trading ideas over extended, short traders cannot get too complacent. Traders need to start reducing recent positions that have failed to follow through and tightening stops on positions with significant profits. While it may be tempting to ride through the first market test of the fifty day moving average, it could be extremely painful, especially if the market doesn't stop and attempts to test new highs. If the market correction is going to deepen after the test of the fifty day moving average, most current positions will offer better short entry opportunities.

Friday, October 10, 2014

Apple Flat Base Ready To Breakout Ahead of Earnings

Apple (AAPL) has spent the last six weeks forming a tight, second stage flat base along its fifty day moving average, despite the market's correction and ahead of its October 20th earning's report, with its relative strength line leading into new high ground. The stock advanced 38% since gapping out of a deep, first stage cup and handle base April 24th, in volume 190% heavier then its fifty day average, on a strong earning's report.

The stock can be bought anywhere between the upper trend line of the consolidation around $102, all the way up to the flat base high of around $105. Protective stops should be place at the consolidation low of around $97.50, and tightened up if the stock fails to make progress.

Full Disclosure: No Position



Wednesday, October 08, 2014

Largest Price Swings Occur During Corrections

The market gapped down Wednesday but found support at last week's correction lows and started to rally around 11:15 am. Volume was running heavy to the downside in the morning and accelerated as the market exploded higher after the FED minutes were released at 2:00 pm. By the close, all three major indices were up over 1.5% in the second heaviest trade since the end of June. If all three indices had not taken out last week's correction  lows earlier in the day, today would've have been considered a fifth day follow through.

The FED knows that any hint of an accelerated time table for raising rates would spook the markets and would lead to an irrational downside reaction. So they will try, for as long as possible, to keep the bears at bay, even though their time tables have not changed.

China has continued its strong uptrend, but the rest of the world, especially Europe, have continued their corrections, and need time to digest recent losses before firming up for a rally, which could take weeks with further downside.

The VIX marked new correction highs but reversed significantly as the market rallied. The NYSE and NASDAQ advance decline lines and the fifty two week high low ratio marked new lows for the correction and barely bounced with the strong afternoon rally.

Keep an eye on interest rates, they are near recent support levels. If these levels hold, there could be a significant spike in interest rates over the next few weeks despite the FED's apparent dovish stance, which could put further pressure on the stock market. 

Leading growth stocks still need time to setup. There are very few stocks that are ready to breakout, and most are from late stage consolidations, but in strong industry groups. Biotech stocks Gilead Sciences (GILD) and Celgene (CELG) are ready to breakout of flat bases, and Medivation (MDVN) and United Therapeutics (UTHR) are bouncing off their respective twenty day moving averages.

Short trading ideas squeezed along with the market, but most did not experience any unusual trading activities associated with a bottom. Recent breakdowns 3D Systems (DDD), UBS AG (UBS), and Avon Products (AVP) held up well and digested their recent gains.

The market was over-extended at the lows of the day and bulls took solace in its ability to hold support, a continued dovish stance by the FED, and a lack of bad news. As impressive as the day appeared, traders have to keep in mind that the biggest percent moves tend to occur during corrections and are nothing to get excited about initially.

There's little reason to cover most short positions or rush into long positions, but traders need to keep an eye on the action over the next few days to decide how tight to tighten stops to protect profits. The market may follow through today's gains as earning's season gets underway, but it will be important to see if volume continues to confirm the move or the market begins to stall around moving averages. Stay patient and do not panic.

Monday, October 06, 2014

Market Rally Attempt Nothing More Then A Mirage

The indices have swung wildly from day to day over the last two weeks. Each time the market sells off, it seems to get bought back up just as strongly. This is unusual action for a rally, but not for a correction. Most of the biggest up and down days in market history have been during corrections. But the one constant, volume, has never confirmed the strong up days. As we've experience over the last three months, volume continues to trade higher on down days, and lower on strong up days.

Outside of a handful of speculative names, GoPro (GPRO), Palo Alto Networks (PANW), Vimicro International (VIMC), and Mobileye (MBLY), the bulk of leading growth stocks remain in consolidations and need at least a few more weeks to complete. The few stocks that are ready to breakout, tend to be sloppier, later stage consolidations, with lagging relative strength.

Short trading ideas have continued to follow through and have been quietly digesting their recent gains during the last three days. Most are extended from low risk entry points, but could provide some quick trading opportunities over the next day or two as the market squeeze runs its course.

The market is indicating further downside, even though another rally attempt is to be expected as we approach the official start of earning's season. Markets rarely sell off straight down without a one to two week, or more, rally attempt after the initial sell off from the top. Short traders need to be patient with their positions and prepared to start tightening stops to protect profits with the next wave of selling.

Monday, September 29, 2014

Bulls Hold On To Hope When They Should Fear

Bulls continue to hope this market will not correct and continue to rally. They point to the few positives in the market as a sign of strength and ignore the growing list of red flags that are signalling a deepening correction. Sure the market has ignored the growing number of geopolitical conflicts, but have they really?

Since the beginning of July when the market ended its last strong rally, distribution, stalling, and churning, have increased dramatically. Rally days and weeks have come on anemic, below average trading, and when volume has spiked to above average levels, rarely was it ever higher then the preceding down days.

The NYSE advance decline line lagged the most recent rally into new highs, and the NASDAQ advance decline line never even came close to new highs. Both advance decline lines have been on a steady decline into new lows despite several strong price days in the market.

Volatility has increased significantly over the last few days with no end in sight. Despite several rally attempts, the VIX has been on a steady uptrend for several months. While some consider this a sign of capitulation, price has not confirmed. Capitulation occurs after several weeks of selling and a steady decline in volatility as a new rally is attempted.

Leading growth stocks have completely ignored any strength in the market. The majority have sliced through their fifty day moving averages in heavy volume, recent breakouts have failed, and the one's that can be characterized as holding up, are wide and loose. Few are in bearish formations indicating a major bear market is around the corner, but that takes months to take shape. There are a few stocks that continue to defy the heavy market distribution, but I call those distractor stocks that give bulls hope to hold on. GoPro (GPRO), a recent hot IPO, continues to make new highs in heavy volume.

Short trading ideas have started to break down, but have been tough to hold during the recent increase in volatility. Traders need to stay patient with these positions as few have given any reason to panic or triggered protective stops. Many new setups continue to tighten within consolidations and secondary entry points. 3D Systems (DDD), Pentair (PNR), Gulfport Energy (GPOR), Covance (CVD), Avon Products (AVP), and Arch Coal (ACI), are following through on recent breakdowns off their respective fifty day moving averages.

There is no indication of impending bear market, but a major correction is clearly in the cards. Long only traders should be in cash and looking for a place to vacation, but not forget to keep up with their research, just in case. Aggressive traders should be holding several short positions looking to add or initiate additional positions.

Full Disclosure: Positions in DDD, PNR, GPOR, CVD, AVP


Friday, September 26, 2014

Industrial Manufacturing Company on Verge of Another Breakdown - Pentair $PNR

Pentair (PNR) broke down from a bearish head and shoulder pattern, July 31, 2014, on a poor earning's report. The company missed both sales and earning's estimate and guided lower. Since then, the stock has attempted to rally back to the fifty day moving average and head and shoulder neckline two times, but both attempts were in low volume.

Accelerating margins over the last four quarters are about the only thing good going for the coming, but revenue misses have led to decelerating earnings growth. Ruining the potential of accelerating margins. The company has missed analysts estimates for two straight quarters and estimates have been coming down significantly ever since. Three year sales growth is expected to decelerate from 35% to 1% and earnings growth is expected to stay steady at around 16%, but decelerate over at least another quarter to 9% from 83% three quarters ago.

The stock can be shorted as it breaks below the recent range between $66.00 and $66.25 with a tight stop just above recent highs around $67.30.

Full Disclosure: Hold Position


Tuesday, September 23, 2014

Chinese Discount Retailer Could Defy Market Downtrend - Vipshop Holdings $VIPS

Vipshop Holdings (VIPS) has been one of the market's biggest winners, advancing almost 3,500%, since breaking out of it first stage, cup shaped based the week of September 21, 2012. Since topping the week of August 15, 2014, the stock has pulled back to the fifty day moving average, closing tight over the last three weeks along the fifty day moving average with a high volume positive reversal last week. The current consolidation is a later stage base and carries a higher risk of failure. But, despite the market's three day sell off, the stock has held up quite well, rallying over four percent in higher volume today.

From a fundamental perspective there is very little to dislike. Margins have improved from -1.4% to 3.5% over the last seven quarters and return on equity is a solid 40% and rising. The company has beaten analyst's estimates over the last four quarters by 23.8%, 19.5%, 31.3%, and 12.5%, respectively, and analyst continue to raise quarterly and annual estimates. Sales and earnings are expected to grow by 65% and 105% over the next three years, respectively, after growing well over 200% over the previous three years.

Based on current valuations and expected growth rates, the stock could trade up to $300 by the end of the year, and more then double to $500 over the next twelve to eighteen months. Traders should consider entering the stock as it breaks out above the current downtrend line around $211. Protective stops should be placed at $195 initially, and tightened as the stock follows through. Keep in mind, the late stage nature of the base and current market correction could throw cold water on any breakout attempt.

Full Disclosure: No Current Position


The Greatest Trick The "Bear" Ever Pulled Was Convincing The "Markets" It Didn't Exist

The market sold off for a second straight day yesterday after marking new highs last Thursday, but volume was lower. This was little consolation as comparisons to Friday's quadruple witching volume were difficult and volume was still higher then almost every other up day during the rally except for one, continuing the trend of higher volume down days and lower volume rally days. Even though the day wouldn't officially be considered a distribution day, over the last twenty trading days the Nasdaq, SP 500, and Dow, have registered six, eight, and seven distribution or stalling/churning days, respectively.

The NYSE and NASDAQ advance decline lines failed to confirm the indices new highs and have been leading them lower. While the NYSE advance decline line did manage to make new highs during the rally, the NASDAQ advance decline line did not, and is on the verge of confirming a second leg down. 

The small cap indices which led the market lower during the last correction, failed to follow the larger cap indices into new high ground during the recent rally, and are now rolling over near their fifty and two hundred day moving averages for a second leg lower.

The majority of leading growth stocks lagged during the rally and are now breaking down below their fifty day moving averages in above average volume. It is very important to keep in mind that leading growth stocks should not be holding tight or bouncing off their longer term moving averages while the market rallies higher. Even though it seems constructive, it is not and a sign of underlying distribution. Baidu (BIDU), Netflix (NFLX), Tesla Motors (TSLA), and Under Armour (UA) are all starting to break their fifty day moving averages and falling below recent pivot points in above average volume.

Recent short trading ideas 3D Systems (DDD) and Gulfport Energy (GPOR) rolled over at their fifty day moving averages, while Altisource Portfolio Solutions (ASPS) continues to consolidate around its fifty day moving average. Even Yahoo (YHOO), as expected, sold off hard after the Ali Baba (BABA) IPO opened for trading. Review the updated list of short trading ideas to prepare for further downside.

The Capitalist Bull has warned over the last few weeks that traders need to protect their profits and cut out all lagging, especially losing, positions. The market's move into new high ground was the final bull trap frustrating the bears and keeping the bulls complacent. By now, most traders should be in cash with a short position or two as the trend turns lower and a correction takes hold. Few stocks are worth holding through a correction. The only stocks a trader should consider holding through a correction are those that were bought out of first or second stage consolidations and have signifcant gains that can withstand a correction. 

Expect the indices to gyrate wildly as they approach and undercut their respective fifty day moving average and recent consolidation lows. Long only traders can go on vacation for at least the next week or two to avoid being trapped into the market on false rally attempts.

Thursday, September 18, 2014

High Yielding Fertilizer Stock Readies New Uptrend - Potash Corporation of Saskatchewan $POT

Potash Corporation of Saskatchewan (POT) advanced over 2,200% from its first stage breakout the week of July 25, 2003 to its peak the week of June 20, 2008 and crashed along with the market during the financial crisis. The stock ran up 400% from its financial crisis low, only to sell off over 50%, but in a more orderly fashion, forming a multi-year bullish descending wedge. Potash has managed to breakout above the descending wedge and is currently forming a tight cup shaped base with plenty of accumulation just above the descending wedge.

Industrial companies like Potash tend to see their stock prices advance ahead of good fundamentals, but there are usually clues. The company has significantly beaten analysts estimates the last two quarters by 14.3% and 21.7%, respectively, and analyst have been raising estimates. Margins have shrunk for two straight years, but return on equity is a respectable 19%. Sales and earnings growth have been negative, but are expected to turn positive over the next few quarters and years. The dividend has increased for the last five years and now yields approximately 4.1%.

If Potash can improve pricing power, which will lead to higher margins, it can continue to delivering earning's surprises that will carry the stock higher. Investors and traders have to be patient over the next few days and allow the stock to digest the recent multi-day spurt, and consider entering the stock as it breaks above the recent high of $36.67, with a initial protective stop at recent lows around $33.42. Depending on the pullback, the stock could produce a tighter entry on the pullback. There is a lot of overhead supply for the stock to work through, but the stock should be able to run to the high of the cup shaped base of around $38 over the near term, and into the $45 - 60 range over the long term. Tighter stops can be used once the stock breaks out.

Full Disclosure: No Current Position


Tuesday, September 16, 2014

Financial Services Stock Susceptible to Further Downside on Fed Announcement - Altisource Portfolio Solutions (ASPS)

Altisource Portfolio Solutions (ASPS) broke out of a cup and handle base the week of October 28, 2011 and advanced 550% to its peak the week of December 6, 2013. The company benefited tremendously from lower rates and quantitative easing. Now that the easy money era is coming to a close, institutions have been busy selling off the stock.

Despite continued strong quarterly/annual sales and earnings growth, significantly beating analyst's estimates for three straight quarters, and higher analyst revisions, the stock was down over 50% from its peak after breaking down below it bearish head and shoulder neckline the week of August 8, 2014, but rallied back in below average volume to test its fifty day moving average and bearish head and should neckline along with the market the last few weeks. Keep in mind, historically, big winners like Altisource Portfolio Solutions (ASPS), tend to sell off well ahead of any major signs of growth problems become obvious to the general public and even the majority of analysts.

The stock can be shorted as it stalls at these levels and breaks below the neckline at around $97.44 in heavy volume, with protective stops initially just above $106. Conservative short sellers should wait to see how the stock reacts to tomorrow's Fed announcement before attempting a short position. Initial expected downside target would be $80 just below the fifty week low, and potentially as low $60 - 67, the next major support area.

Full Disclosure: No Current Position



Friday, September 12, 2014

Oil/Gas Exploration/Production Company Poised For Further Downside - Gulfport Energy (GPOR)

Gulfport Energy (GPOR), an oil and gas exploration and production company, advanced over 5,000% from its 2009 Financial Crisis low of $1.50, and almost 500% from its 2012 low of $15.79. The stock peaked on April 4th, 2014 at $75.75 and sold off off 32% to its August 1st, 2014 low of $51.59. It has spent the past six weeks pulling back to the fifty day moving average on diminishing, below average volume. A similar consolidation to the July 2014 roll over at the fifty day moving average that saw the stock fall just over 20% as it broke through the neckline of its bearish head shoulders consolidation in increasing volume.

The company is expected to grow sales and earnings by around 60% over the next three years, but has significantly missed analyst's estimates for three straight quarters by 72%, 5%, and 53%, respectively. Analysts have continuously lowered their estimates over the last ninety days, throwing doubt on those expected growth rates. Operating margins and return on equity have fallen for six straight quarters.

The stock can be shorted over the next few days as it continues to stall at the fifty day moving average around $57.56, or as it breaks the $55.50 - 56.00 range. Protective stops should be placed just above $59 initially. Our downside target is in the range of $46 - 50 (13 - 20%).

Full Disclore: No Current Position


Wednesday, September 10, 2014

3D Printer Maker on Verge of Breakdown - 3D Systems (DDD)

3D Systems (DDD), one of the bull market's biggest winners, advanced over 2,700% after breaking out of a first stage cup and handle base the week of December 4th, 2009. The stock topped at $97.28 the week of January 3rd, 2014 and has been in the process of forming a head and shoulder top. The stock had a false breakdown below the neckline the week of April 11th, 2014, and has spent the past nine months testing the neckline as the market has rallied higher. Each attempt over the neckline and fifty day moving average has come in below average volume (weeks May 30th, 2014, September 5th, 2014, and currently) or stalled (week of July 4th, 2014).

The company missed analysts earnings and sales estimates for the recent quarter and guided lower. Margins have contracted for six straight quarters from 11.2% to 6.1% and return on equity has fallen below 10%.

Traders could attempt to start shorting the stock as it starts stalling around the fifty day moving average around $52.94 and breaks back down below the moving average. Protective stops should be placed just above the thirty day high, currently $54.24, or whatever high the recent multi-day rally establishes. Downside target range is between $36 - 40 (24 - 35% approximately), which also coincides the average big winners fall after topping.




Poor Price Volume Action Plagues Market and Leading Growth Stocks

As the end of July approached, the market, finally, seemed to be headed for an overdue correction. Instead, it found support at or near the 50 day moving average the first week of August and began to rally. Unfortunately, volume failed to materialize as the indices climbed and broke out to new fifty two week and all time highs. This could easily have been forgiven as August rallies tend to be on low volume and have worked in the past, but as traders returned from summer vacations and volume picked up, the indices began to churn, get distributed, and stall. The NASDAQ, the lead index has suffered two, well above average and the highest volume since the rally began, distribution days in the last five days, while the DOW and SP 500 have suffered four and five distribution days, respectively, in the last ten days. The small caps which led the market to the downside, failed to follow the other indices into new highs and quickly came under distribution as it squeezed back above its fifty and two hundred day moving averages, potentially setting up a second leg lower.

Large cap growth stocks, Facebook (FB), Chipotle Mexican Grill (CMG), Baidu (BIDU), Biogen Idec (BIIB), Under Armour (UA), and Polaris Industries (PII), gapped out of bases, in well above average volume, on strong earning's reports ahead of the market's rally attempt. Exactly the type of action expected ahead of a strong rally and it appeared that another round of growth stocks were readying to finish up consolidations and breakout soon after. Unfortunately none of these stocks were able to follow through and started to stall or run out of steam (low volume) almost immediately after their respective gap ups. The handful of stocks that did manage to follow through, Bitauto (BITA), Avago Technologies (AVGO), Silica Holdings (SLCA), Emerge Energy Services (EMES), Gilead Sciences (GILD), and Pacira Pharmaceuticals (PCRX), went into climax runs and are starting to break from those highs in heavy volume. The majority of recent breakouts, Navigator Holdings (NVGS), Autohome (ATHM), G-III Apparel Group (GIII), Hi-Crush Partners, LP (HCLP), Gramercy Property Trust (GPT), Netflix (NFLX), and The Priceline Group (PCLN), either failed to follow through, failed, or are on the verge of failing within days of breaking out. Any remaining consolidations are too wide and loose and have lagging relative strength lines.

Two NASDAQ distribution days could be forgiven if it were not for the poor price volume action of the early leaders and recent breakouts, and the growing distribution count for the DOW and SP 500. Traders should have been stopped out of at least some of their bigger winners and ALL of their lagging positions. Any remaining positions should have stops tightened further. As every other short rally this past year, by the time leading growth stocks start to show real damage and market distribution reached dangerous levels, portfolios as a whole give up most, if not all of their gains within the first few distributions days even though traders were able to catch one or two of the bigger winners. 

Stay long at your own risk. There are too many major red flags in the market to ignore. At a minimum, get off margin. Conservative investors are better off in cash.

PS

Read the past few market updates for more red flags. http://capitalistbull.blogspot.com/search/label/Market

Monday, September 08, 2014

Bitauto Holding's (BITA) Climax Run Ready for Final Spike Higher

Bitauto (BITA) has advanced over 1,800% since breaking out of a first stage cup and handle base the week of November 2nd, 2012 and over 100% since breaking out of the most recent, later stage, cup and handle base the week of June 20th, 2014. By all measures, the stock is in the midst of a climax run and has pulled back on lower volume to the ten day moving average and formed an inside week setting up one more spike higher on a breakout above $98.28. 

Traders can start entering the stock between current levels and $95 with a protective stop no lower then $89, aggressively, or $91 - 92, conservatively. Consider taking profits between $100 - 120 as it starts to stall or has its biggest daily gain in the last year (approx 10%+). This position should be taken as a trade only and not as an investment. It will most likely last no more then a few days as the the Ali Baba (BABA) IPO hype builds.

Full Disclosure: Hold Position




Friday, September 05, 2014

Yahoo's (YHOO) Bearish Head and Shoulder's Base Ahead of Ali Baba (BABA) IPO

Yahoo (YHOO), originally featured in Short Trading Idea: Yahoo (YHOO) Reminiscent of 3COM (COMS), continues to form the right shoulder of a bearish head and shoulder pattern ahead of Ali Baba's (BABA) IPO. Currently expected sometime early this month. The consolidation could be viewed as a bullish cup and handle base, but the pattern is a later stage base, wider and looser then any other consolidation in its entire run, and each rally attempt over the fifty day moving average has either stalled or been in below average trade. Increasing the likelihood of a rollover.

Fundamentally, outside of the cash the company will receive from the Ali Baba (BABA) IPO, already priced in, sales and earning's growth are projected to be negative over the next three years. Even with the new cash pile from the IPO, the company has failed to prove that any of its recent acquisitions will contribute to the companies top and bottom line growth in any significant way. Margins have been shrinking and returns on equity is a poultry 10%...very low in comparison to the stronger internet companies.

Yahoo (YHOO) has lost its 1990's glory of being the internet king to the likes of Google (GOOG), Facebook (FB), Twitter (TWTR), and even Microsoft (MSFT). Without any real growth, Yahoo (YHOO) will rollover from these levels and ultimately retrace most, if not all, of the stocks 254% advance over the last two years on the Ali Baba (BABA) hype. Aggressive traders could begin shorting the stock up at these levels with conservative investors waiting for the day of the Ali Baba (BABA) IPO opens for trading. Protective stops should be placed near recent highs around $39.60. The biggest risk to shorts is the uncertain timing of the Ali Baba (BABA) IPO. But like 3COM's (COMS) last hurrah before the Palm (PALM) spin off, Yahoo's (YHOO) days are numbered.



Wednesday, September 03, 2014

Leading Growth Stocks Stagnant and Wild Despite Relentless Market Up Trend

While the market has persistently risen over the last four weeks, the majority of breakouts have stagnated, and the handful that have followed through are exhibiting climactic, wild, or stalling action. Intra-day trade is extremely volatile among leading growth stocks, with major retracements of strong opening moves more then a few times a week, and almost every new base is a late stage, wide and loose consolidation with a lagging relative strength line.

During strong rallies, at least one out of every three positions makes significant enough progress to wash out the small losses incurred on the positions that do not. In today's market, it has been difficult to contain losses, with slippage, to under two to three percent, and only a handful of breakouts have been able to follow through, even five percent, with gains being wiped out in a day or two on pullbacks or trade failures.

The growing danger for traders is a death by a thousand cuts. If the market begins registering more stalling and distribution days, sell offs in profitable positions could lead portfolios into the red quickly with so many small losses and little profit cushion up to this point. Traders have no choice but to limit any new positions and consider tightening stops, to protect profits and minimize losses, with so many setups failing to follow through and leading to a greater number of failures and small losses, wiping out even a decent move by one or two stocks. More risk averse traders could even consider moving to mostly cash. I know this is beginning to sound like a broken record opinion, but the reality on the ground is, unless traders have been long just the indices or were near perfect in their stock selections, few have made any progress in the last four weeks holding positions longer then a day.

The trading action exhibited by leading growth stocks is more indicative of underlying distribution and an intermediate top, then a setup for a strong continuation higher. It appears for now that the market and a handful of stocks may have some room to follow through higher despite all the red flags. Do not overstay the welcome. Better to be the first one out, then be trampled over running for the exit.

Lululemon Athletica (LULU) Poised For Further Downside

Lululemon Athletica (LULU), once a Wall Street darling and high flier, advanced over 3,800% from it 2009 lows, but has traded down over 55% since peaking at 82.50 in June of 2013. Margins have decelerated for five straight quarters, and sales and earnings growth which averaged over 30% consistently, are now expected to barely average 10% growth over the next three years. The company has beaten significantly downward revised estimates in each of the past four quarters, but analyst continue to revise future estimates lower despite those beats.

The stock is fairly valued at these levels if the company can slow down the deceleration of growth. If not, the stock could trade down to the mid 20's on another poor earning's report. A breakdown below the fifty day moving average around $39.50 - 40.00, in heavy volume, could signal another wave down for the stock. Protective stops should be placed around $42. Keep in mind, the stock is already down significantly and is susceptible to a major squeeze on news of better margins or a pick up in sales or earning growth.

Full Disclosure: No Current Position


Monday, September 01, 2014

Biogen Idec (BIIB) Cup and Handle Sets Up Possible Climax Run

Biogen Idec (BIIB) has advanced over 600% since breaking out of a first stage cup and handle base the week of 10/29/2010. The stocks is currently forming a wide and loose, fifth stage (higher probability of failure), cup and handle base with tighter trading in the handle, in diminishing volume. 

Sales growth has accelerated from 6% to 41%, and earnings from 21% to 52%, over the last eight quarters. Over the last three years, sales and earnings growth have averaged 14% and 21%, respectively, and are expected to average 20% and 31% over the next three, respectively. Return on equity has averaged 23%+. The company has beaten analyst's estimates three out of the last four quarters, and by 23% in the last quarter. Year over year sales are expected to decelerate to 9% over the next three years and margins have contracted in the last two quarters, year over year. Possibly two early signs of potential earnings problems to come.

The stock reached its PE expansion price target range of $170 - 200 in early 2013 and has advanced another 100% since. Stocks that exhibit such power have a higher probability of experiencing one final climax run. Based on current valuations, the stock could advance another 20% ($420) in the short run on a breakout above $349, and 40 to 50% ($489 to $525) in a climactic move by year end. Protective stops should be placed around $317 initially, and tightened to $337 if the stock exhibits poor price volume action after the breakout.

The late stage base, decelerating margins and estimated year over year sales growth, significantly increases the risk of failure. Treat the position as a trade, not a long term investment.

Full Disclosure: No Current Position



Monday, August 25, 2014

Traders Remain Frustrated Despite Record All Time Market Highs

Leading growth stocks as a group continue to lag the general market even though growth stocks are outperforming value stocks. Everyday a new growth stock or two breaks out in well above average volume, and this would normally be good news, unfortunately, literally, only a handful of all strong breakouts have made any progress passed their first day. This would be a positive if the markets were moving sideways or pulling back, showing relative strength, but the markets have been making new fifty two week and all time highs, while moving higher almost everyday for the last three weeks.

Autohome (ATHM) broke out of a cup shaped base and Emerge Energy Services (EMES) finally cleared a flat base in well above average volume. JD.com (JD), Priceline Group (PCLN), Facebook (FB), and Bidu (BIDU), continue to try and break free of their respective breakout areas. Bitauto (BITA), Gilead Sciences (GILD), and Salix Pharmaceuticals (SLXP), are historically over extended and due for a consolidation. Intermune (ITMN), a regular on the leading growth stocks analysis, has doubled in price since its May 19th breakout from a cup and handle base, being bought out for $74/share by Roche (RHHBY).

The number of proper short setups has diminished but not disappeared. Many need some time to setup in lower risk areas to breakdown. Almost no recent setup has been able to follow through for longer then a day. Better to wait for some distribution to hit the market before venturing into these waters.

Traders remain frustrated. Even with a decent gain on a leading growth stock or two, it is not enough to offset the small losses that have been taken to protect from larger losses on positions that haven't made progress and are falling back below breakout levels. Traders should remain very tight with protecting profits and minimizing losses. If the past few short rallies were any indication, profits will vanish very, very quickly when distribution hits the market. Is it vacation time yet?

Fracking Material Producer and Supplier Bouncing- Hi-Crush Partners LP (HCLP)

Hi-Crush Partners LP (HCLP) advanced 343% since breaking out of a first stage cup and handle base on May 31, 2013 and is currently forming a late stage pullback to the fifty day moving average. Price volume has been positive with two shakeouts, August 1st and August 22nd, holding the fifty day moving average in heavy volume.

The companies sales and earnings are expected to grow 27 and 56% over the next three years, respectively, but that's slower then the current triple digit pace. Analyst have been revising estimates higher over the last ninety days despite the companies inconsistency in beating them. Margins have been decelerating for the last few quarters, year over year and quarter over quarter, and quarterly sales and earnings growth are expected to decelerate under 20% over the next six quarters. Return on equity has been north of 40% for the last two years. 

Considering the stock reached its pe expansion target already, the expected growth slow down over the next two years, and the late stage nature of the current base, this should only be considered for a quick trade, not an investment at this time. Based on current valuations and strong technicals, the stock could trade north of $80 (approximately 30% higher) and as high as $90 on a climactic move on a breakout above the current range of $62.50 - 63.50. Protective stops should be place just under $61.

Full Disclosure: Hold Position



Thursday, August 21, 2014

JD.com (JD) Attempts IPO Base Breakout Ahead of Ali Baba (BABA) IPO

JD.com (JD), considered the Amazon (AMZN) of China, has grown annual sales by 85% over the last three years and is expected to grow annual sales by 47% over the next three. Earnings are not expected to turn positive for at least another year and a half, but could grow at a triple digit rate once the company turns profitable.

The stock attempted to breakout out of an IPO base on August 19th in volume 121% above average. But the stock reversed and closed at the lows of the day below the $30.80 breakout (not unusual action for a volatile stock). The stock has spent the last two days consolidating around the breakout level and could be in a position to run another 20 - 30% in anticipation of the Ali Baba (BABA) IPO. Traders can attempt to take positions in the current range with tight stops just below $30. 


Full Disclosure: Hold Position


Wednesday, August 20, 2014

Priceline Group (PCLN) Prepares Third Breakout Attempt out of Cup and Handle Base

The Priceline Group (PCLN) advanced over 80% since breaking out of a fifteen month cup and handle based in May 2013 and over 1,000% since the bear market bottom in 2009. The stock broke out of a later stage cup and handle base on August 4th in volume 88% above average and again on August 11th in volume 174% above average. The left side of the base is a bit wild and the relative strength line is in a downtrend, but there are several signs of support on the daily and weekly chart (high volume reversals, reverse churning, and tight closes). The stock has pulled back to the breakout level again and should be considered on a new breakout attempt.

Quarterly and annual sales and earnings growth are expected to grow 22%+ for at least the next three years, and have grown over 25% over the last three. Margins are at their highest levels historically and expanding, and return on equity has been consistently north of 30%. Expanding margins and strong sales growth have helped the company beat earnings by an average of 7.7% over the last four quarters.

Positions can be initiated anywhere between here and the $1,300 handle high breakout. Protective stops should be placed below $1,250. Take the wild and loose, potentially late stage consolidation into account when managing the trade. Limit losses and expect improvement in price volume action as the stock advances or consider quick profit taking.

Our valuation model prices the stock around $1,591 over the next few months, and between $1,800 - 1,916 (39 - 50%) over the next twelve to eighteen months if the company delivers steady growth with expanding margins.

Full Disclosure: No Position