The Gilmo Report

April 21, 2013

April 21, 2013

A week’s worth of downside took the indexes down into logical areas for a rally attempt. In the case of the NASDAQ Composite Index, shown below on a daily chart, it undercut its prior low from early April on Thursday, setting up a logical rally back up towards its 50-day moving average on Friday. Volume came in lighter, but when the market bottomed and stabilized off the lows on the other two sell-offs we’ve seen in 2013, this low volume on the first couple of days of the recovery was not a factor. Instead of the light-volume bounces signaling a lack of conviction by buyers in February and April when the NASDAQ pulled back to its 50-day moving average, they instead led to recoveries that saw volume pick up later in the rally as the index moved to higher highs. One notable difference this time around is that the NASDAQ’s was not able to find support at its 50-day moving average. It is in the position of having to rally back up above into the 50-day line if it is going to retake its highs once again. The NASDAQ 100 Index led the way on Friday, fueled by Google’s (GOOG) relatively large upside romp following its earnings report Thursday after the close.




The S&P 500 index, shown below on a daily chart, looked a bit more convincing as it was able to quite logically bounce off of its 50-day moving average, but on increasing volume which looks far more constructive than the NASDAQ. Volume on the NYSE might have been helped along a bit by General Electric (GE) and its 107,903,000 shares traded Friday on a big gap-down blow-up move following earnings. International Business Machines (IBM), the largest component of the price-weighted Dow Industrials Index, not shown, given its $190-per-share price tag, also contributed its own volume surge, although that was a relatively paltry 18.6 million shares. It did, however, have the effect of keeping the Dow in the red for most of the day on Friday as the NASDAQ and S&P 500 were green all day. The Dow, though, was able to push back into positive territory by the close, making it an up day across the board. The key factor, however, remains the state of the market’s leadership, and outside of the bio-tech sector which has barely pulled back over the past week, the pickings are rather slim. I will run through the handful of decent charts I see over the next few pages of this report.




Google (GOOG) is once again resurgent as a big-stock NASDAQ leader, and Friday’s move constituted a trendline breakout on huge volume that would qualify as a very large pocket pivot volume signature. GOOG just barely missed clearing its 50-day moving average, however, but this may not impede the stock from moving higher on what is a basic trendline breakout on huge volume.




Gilead Sciences (GILD) flashed a continuation pocket pivot on Friday on its highest volume since last November. Similar continuation pocket pivot buy points were also seen in Amgen (AMGN) and Celgene (CELG), not shown.




Onyx Pharmaceuticals (ONXX) broke out of a six-month base last week. It then followed up with a continuation pocket pivot buy point on Friday as it demonstrates a tendency, along with other bio-techs, to buck the market’s palpitations and move higher.




Acadia Pharmaceuticals (ACAD) is making strong progress on a drug for Parkinson’s disease psychosis, for which there is currently no treatment. Last week it flashed a huge-volume buyable gap-up and is now settling into a very tight little flag formation from which it should move higher if the BGU is going to prove legitimate.




Drug company Valeant Pharmaceuticals (VRX) came back from an early April drubbing on heavy volume by firming up and staging a pocket pivot buy point on Friday. This occurred as a block of volume right at the close sent the day’s total volume high enough for a legitimate pocket pivot volume signature. This increase in volume right at the closing bell may have been due to options expiration on Friday.




Lions Gate Entertainment (LGF) is attempting to move out of a three-weeks-tight flag formation with a legitimate pocket pivot buy point on Friday. Media and media content companies have been strong lately, and LGF, which I first discussed in my report of February 2nd, has been among the leaders in this area.




Krispy Kreme Doughnuts (KKD), in the midst of forming a constructive base as I discussed last week, succumbed to an analyst downgrade to “neutral” by closing below its 50-day line on Thursday, and a move below Thursday’s intra-day low would constitute a 50-day moving average violation sell signal.




Splunk (SPLK) also pulled back in the face of market pressure, but the stock merely pulled back to the 40 price level and the top of its prior short sideways range as it continues to show a tendency to hold the 20-day moving average, a logical place at which to try and buy pullbacks.




Workday (WDAY) continues to work on a six-week base where it appears to be finding support at the top of its prior 19-week IPO base, which has the appearance of a “ladle-with-handle,” as we can see on its weekly chart, below. The manner in which the stock handled last week’s 63-million-share IPO lock-up expiration was quite impressive, as this resulted in a strong, supporting weekly bar on huge volume. With the general market under some corrective pressure, the stock will obviously have a tendency to back-and-fill a bit. This past week the stock was able to close roughly mid-range, but was unable to move back above its 10-week moving average on the weekly chart. On the daily chart, however, WDAY did close above its 50-day moving average on Friday on a slight increase in volume over Thursday. The key here is that the stock showed what I consider to be very strong institutional accumulation last week when a large amount of supply was dumped into the market, and thus the stock should remain on your buy watch list as it could potentially continue to build another base on top of its prior ladle-with-handle type of formation in the process of setting up for further upside at some point. Also keep an eye out for any pocket pivot moves developing along the 50-day moving average at the lows of its current base.




Keep in mind that we are in the midst of earnings season, and with respect to the names discussed in this report, the following earnings announcement dates should be noted: May 2nd – GILD, VRX; May 7th – ONXX; and May 30th – LGF, SPLK, WDAY (these dates are subject to change). As well, earnings season makes playing either side of the market more risky as one is subject to potential gap moves in either direction. I know some were keen on shorting GOOG into its earnings announcement on Thursday given the prior weak action as the stock violated its 50-day moving average two weeks ago. But as Friday’s move demonstrated, this is not necessarily a good idea. We are still in an environment that remains heavily QE-laden, and this past week another Fed head was quoted as saying the Fed has the capacity to increase its monthly bond-buying activities if necessary. Thus we can expect that the Fed will continue to react to weak economic data and any further crises at home or abroad, particularly in Euro land, by running the money printing-press even faster. Gold’s recovery back above the $1400 level may imply that last week’s sell-off was somewhat climactic to the downside as bearish sentiment towards the precious metals remains at record highs and everyone is piling in on the short side.




I found it interesting that on April 17th the U.S. Mint sold more physical gold in one day than it had in the prior two months as buyers scrambled for the real stuff even as paper gold and silver sold off hard. Note also that the chart of the nearest gold futures contract, above, shows volume buying on Tuesday that far exceeded Monday’s panic selling. I’ve heard from various sources that for every ounce of physical gold that exists there is anywhere from 20 to 100 ounces of “paper gold” written against that single ounce, and so logically one would assume that at some point, should everyone who owns paper gold suddenly demand delivery at the same time, there simply won’t be enough gold to cover all those contracts and other securitized paper versions of gold, such as the SPDR Gold Shares (GLD). Meanwhile as the spot price of silver, the “poor man’s gold,” is at $23.36 an ounce as of the time of this writing, a 1 oz. silver American Eagle coin will cost you $28.89. 1 oz. “rounds,” which are simply silver coins in “drag” that have not been produced by a legitimate mint and which therefore might be considered less “accepted,” are going for $25.64. Overall, I find the developments in the precious metals markets to be fascinating, although at the current time I am not able to make a bottom call on the metals just yet. I do continue to believe, however, that it is simply prudent for investors to consider placing some percentage of their investable assets, say 5% to 10%, in physical metals, and this seems to be what is on the minds of many as they jump at the chance to buy physical metals “on the cheap,” if the U.S. Mint’s sales on April 17th are any indication.


Meanwhile, stocks remain a dicey affair, and my view is that investors who choose to buy stocks should take an active approach and be willing to take profits of 10-20% when they have them. Some of the ideas I’ve discussed in this report may be actionable on a short-term basis if the market tries to bounce as it has after previous sell-offs in 2013. Also note that most of the actionable stuff I’m seeing is occurring in the strongest area of the market, the bio-techs and medicals, and so far there is not a concerted breakdown in the group.


The short side of the market currently strikes me as more of a hit-and-run affair, particularly going into earnings, and the daily chart of Netflix (NFLX), shown below, illustrates the types of hit-and-run trades I’m willing to take on the short side. NFLX broke down and failed from its recent “high, tight” flag formation last week, and this was followed by a nice reaction rally back up into its 50-day moving average at the 180 price level which could have been shorted into. The stock reversed on heavy volume from the 50-day line and then broke down over the past week to the low 160’s where it appears on the verge of moving lower. However, NFLX reports earnings this week after the close on Monday and with a decent 10% downside move from the 50-day line this hit-and-run short-sale trade gets banked as anything could happen following Monday’s earnings announcement, and there is no reason to try to be a hero going into earnings, as I see it.




If you can find short-term set-ups like this, perhaps they are playable on a short-term, “hit-and-run” basis. But eventually, if I’m going to play the short-side on a longer time horizon, I need to see more set-ups like we did with Apple (AAPL) last year. So far that isn’t happening just yet. Thus the current environment dictates that one take a cautious stance and avoid doing too much as the situation develops.


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 ACAD, though positions are subject to change at any time and without notice.

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