The Gilmo Report

August 24, 2014

August 23, 2014

The market can’t seem to find enough of a reason to sell off as the NASDAQ Composite Index daily chart, below, shows. After some initial morning selling festivities on Friday the NASDAQ found its feet and proceeded to move to a new 14-year high. This came on the heels of a quick morning sell-off on Thursday that also dissipated as the indexes recovered and moved higher. As far as I’m concerned, as long as the NASDAQ holds above its prior breakout level, as highlighted on the chart, there is no need for consternation. While some may fixate on the index’s lighter-volume move as a cautionary sign, in my view there is no reason to pay attention to the indexes in this manner. We’ve seen the indexes rally on putrid volume many times before in this market, so I don’t believe one can make any assumptions based solely on what the indexes are doing. Instead stay focused on the action of individual stocks. With big-stock NASDAQ names like Netflix (NFLX) and Apple (AAPL) pushing towards all-time highs, the strength shown by the leading NASDAQ is not surprising in spite of the “worrisome” low volume in the index itself.


GR082414- $COMPQ


The S&P 500 Index, shown below on a daily chart, is running into some resistance at the July highs as it tries to clear to all-time highs. Friday’s pullback came on lighter volume following the Thursday move and close at all-time highs. So far I don’t see anything wrong here as the S&P 500, like the NASDAQ, is entitled to consolidate the sharp move off of the early August lows.


GR082414- $SPX


A potentially constructive sign might be found in the action of the small-cap Russell 2000 Index, for which the daily chart of the iShares Russell 2000 ETF (IWM), below, serves as a close proxy. As we can see, the Russell has managed to get back above its 50-day moving average after falling below the 200-day moving average in early August. It will be interesting to see if the Russell can build on this recovery, because if it can, then we may get some upside juice in this current rally, which has so far been a little bit like riding on an inch-worm.


GR082414- IWM


To reiterate my discussion of this past Wednesday, my thinking here is that if we are going to be able to make big money in this rally, then we will need to see some juicy, new merchandise situations come into play. So far this week, we’ve seen nice upside moves in two such names, Arista Networks (ANET) and Grub Hub (GRUB). GRUB, shown below on a daily chart, had a nice move to the top of its range, and I tweeted on Friday that one might consider taking some profits into this move. The stock later reversed and closed down on Friday after finding some support at the 10-day moving average. Keep in mind that the slow money that bought the stock up in the 45 price area probably became “trapped longs” after the stock slid right back to the top of its prior base around the 41 price area. I like the pullback into the 10-day line as a re-entry point, so keep an eye out for any low-volume retest of the 10-day line next week.


GR082414- GRUB


ANET also found resistance near the top of its current range/base, as we can see on the daily chart, below. The push up into prior resistance struck me as something to sell into given the 10% or so move off the 10-day moving average, but it is quite constructive to see the stock pullback on Friday as volume dries up sharply. I like the stock on any pullbacks into the 10-day line, currently at 72.63.


GR082414- ANET


Twitter (TWTR) came through with the pocket pivot off of the 10-day moving average that I was looking for per my discussion of this past Wednesday, as we can see on the daily chart below. As noted in my last report, TWTR was holding excruciatingly tight along the 45 price level, more or less, and just above the 10-day moving average. On Friday TWTR came down just enough to meet up with the rising 10-day moving average, launch off the line, and flash a bona fide pocket pivot buy point. About mid-way through the day on Friday, TWTR was lifting off the 10-day line but was still running just slightly behind the rate necessary to meet the required pocket pivot volume signature. Volume kicked in towards the end of the day as the stock pushed back above the 46 price level and the 45.65 intraday low of its post-earnings gap-up move of July 30th. Hopefully, members bought the stock closer to the 45 level per my report of Wednesday. This latest pocket pivot buy point is actionable with the idea that the stock will hold the 10-day line at 44.76 on any pullback from here.


GR082414- TWTR


As Facebook (FB), not shown, continues to hang out along its 10-day moving average, TWTR and LinkedIn (LNKD) are playing catch-up within the social-networking space. Don’t look now, but LNKD, which had a massive-volume gap-up through its 200-day moving average after announcing earnings at the end of July, followed up with a continuation pocket pivot off the 10-day moving average on Friday, as we can see on the daily chart, below. It appears that among the big-stock social-networking names money is rotating into LNKD and TWTR as FB sits tight. FB, however, remains in position for a continuation pocket pivot of its own, which is something to watch for, but it is clear that more “juice” is offered by TWTR and LNKD, at least in the short-term. From my perspective, as an owner of TWTR, the strong action in LNKD is likely positive for the entire social-networking space.


GR082414- LNKD


Tesla Motors (TSLA) is holding tight just below its 10-day moving average with volume drying up, as we can see on the daily chart, below. It is in a position from which it could flash a continuation pocket pivot coming up through the 10-day moving average, so members should keep an eye out for this. The 20-day moving average looms just below at 248.80, and a pullback to the line would provide another possible entry point, should that occur. I don’t see much wrong with TSLA’s pullback here. It has not held above its 10-day moving average long enough for it to be used as a selling guide, and in its current position merely looks ready to give us another entry point. This could occur on a pullback to the 20-day line or a pocket pivot coming up through the 10-day line.


GR082414- TSLA


GW Pharmaceuticals (GWPH) is still hanging out along the confluence of its 10-day, 20-day, and 50-day moving averages, as we can see on the daily chart, below. Volume remains quite light, and my view is that this is just setting up to move higher as long as it holds along current support. GWPH dipped just below the 50-day line on Thursday but recovered nicely as sellers didn’t materialize in force. If you can pick up shares of GWPH on these little dips into support along the 50-day and the 20-day moving average, I consider that optimal, but either way I feel it’s just a matter of having some patience as the stock sets up to go higher. The beauty of buying the stock here is that the 20-day moving average at 88.27 provides a very close reference point for a stop.


GR082414- GWPH


Palo Alto Networks (PANW) keeps bouncing along the top of its prior base breakout, as we can see on the daily chart below. For the most part it continues to hold that breakout constructively. We should keep in mind that the 20-day moving average is often a reasonable reference point for support, and that turned out to be the case on Friday as PANW traded down through the 10-day line before finding support at the 20-day line. It then closed back up through the 10-day moving average and in the “blue” for the day with volume picking up somewhat over Thursday, indicating that buyers were somewhat interested in taking shares at the 20-day line. Again, earnings are expected to be announced on September 9th, so it remains to be seen whether PANW can generate any meaningful upside before then.


GR082414- PANW


Skyworks Solutions (SWKS) gave investors a chance to buy the stock on Friday morning when it pulled down to the 10-day moving average, as we can see on the daily chart, below. SWKS managed to close nearly unchanged as volume picked up, indicating support at the 10-day line. SWKS, like PANW, shows that one has to keep an eye out for these constructive pullbacks as they can often provide an opportunistic, optimal entry point.


GR082414- SWKS (JD) continues to hold its recent new-high breakout, as we can see on the daily chart, and volume is drying up here. The dearth of volume on Friday might be seen as indicating the stock is ready to move higher, assuming that low volume was more a function of sellers drying up after Tuesday’s breakout attempt. Meanwhile the 10-day moving average continues to rise and is now right at the 30 price level, which should serve as support for the stock on any pullback from here, if not a selling guide should the stock fail.


GR082414- JD


The smaller Chinese stocks tend to offer wild rides, sometimes to the upside, sometimes to the downside, sometimes in equal, alternating doses of either direction. This is evident by looking at the daily charts of any number of these, such as WUBA, JMEI, LEJU, CMCM, or ATHM, for example. One that catches my eye, real-estate e-commerce company Leju Holdings (LEJU) rocketed 13.29% to a new high on Friday, capping off a 35.7% upside move for the week. LEJU, which I don’t show here on a daily chart, is expected to earn 76 cents this year and $1.05 in 2015.

The key point here is that LEJU is a subsidiary of Chinese real estate broker E-House China Holding (EJ), shown below on a daily chart. EJ is expected to earn a penny more than LEJU in 2014 and 2015, respectively. The stock has flashed two pocket pivots over the past two days as it tries to come up the right side of a big cup base. My theory here is that instead of chasing LEJU it might be possible to keep risk more tightly under control with a somewhat less volatile name in EJ, which seems to trade reasonably well. The pocket pivot is occurring at the confluence of the 10-day, 20-day, and 200-day moving averages, all between 11.34 and 11.79. Thus you have your choice of stops on this one. Good luck!


GR082414- EJ


It quickly becomes quite obvious that the short side of the market is not really the place to be when short-sale target stocks begin to flash buy signals. Case in point would be TripAdvisor (TRIP), shown below on a daily chart. TRIP had previously failed on a big cup-with-handle breakout attempt in late July, and after bouncing off of its 40-week moving average on the weekly chart, not shown, at the end of July, it had slowly wedged its way up to the area between the 10-day and 20-day moving averages, just below the 65-day exponential moving average. On Friday TRIP jacked up off of the 10-day line and up through the 50-day moving average on a sort of “roundabout” pocket pivot buy signal. This could result in further upside, which is why it is now one less stock to keep on my short watch list! But this sort of action in short-sale targets is becoming more the norm, and it was becoming somewhat evident last weekend, as I noted in my report at that time.


GR082414- TRIP


Another short-sale target turned buy target is Keurig Green Mountain (GMCR), which, like TRIP, was another failed cup-with-handle breakout that saw the stock violate its 50-day moving average. Friday morning, news of a big licensing deal with Kraft Foods (KRFT) sent GMCR gapping to the upside on a big buyable gap-up breakout move, as we can see on the daily chart, below. The intraday low of this BGU trading range is 125.40, but if this is going to have any real velocity to the upside I would expect it to hold the prior 128.50 peak from early July on any pullback from here. The interesting side note here is that I actually shorted GMCR on Thursday and squeezed no more than a point profit out of it, but as is my custom, I do not carry much in the way of short positions overnight. In particular, I always consider GMCR to carry some overnight headline risk, including the usual talk of Coca-Cola (KO) buying them out.


GR082414- GMCR


I have been asked about Taser International (TASR), which as we can see from the daily chart, below, had a sharp upside move this past week based on the events in Ferguson, Missouri where a police officer allegedly shot an unarmed black man, sparking looting and rioting in addition to peaceable, lawful protest. The events there have brought into focus the utility of outfitting police officers with wearable video cameras. Such cameras provide documented evidence that eliminates a lot of the hearsay flying back and forth when situations like the one in Missouri arise. TASR makes these cameras. While they aren’t cheap, the claim is that they pay for themselves many times over by providing hard evidence that would eliminate a lot of excessive-force cases brought against police, many of which rely on hearsay evidence.

I would certainly agree with the idea that these cameras can in fact offer serious cost-benefits to any police department, and studies also show that police officers wearing such cameras tend to use violence less often. These are all positive reasons for buying TASR’s wearable video camera. If every police department in the country suddenly began buying these cameras, it might figure into some strong sales increases for TASR. I don’t think it’s hard to make this case, and perhaps that is the wildcard that could lead to further upside. Technically, however, the stock is finding resistance right at and around its 200-day moving average, as the daily chart below shows. Tuesday’s action constituted an extended pocket pivot move up through the 200-day line, but the stock strikes me as being too extended here to buy. I would be interested in seeing if and how it consolidates along the 200-day line. Frankly, over the past four days I have considered the stock as more of a short when it rises over the 16 price level, and it has come in each time, but I’m willing to keep an open mind here.


GR082414- TASR


TASR’s weekly chart, below, shows the stock stalling right at the 40-week moving average on huge volume. The 40-week line also coincides with an area of overhead resistance, as I’ve highlighted on the chart. Up until five weeks ago TASR was a textbook head and shoulders top formation, which I think members can recognize for themselves without me having to outline it. Is this latest weekly gap-up move to the 40-week line just a right-shoulder rally? Personally, I’d like to see how the stock acts on its first real pullback from here, perhaps testing the 10-day line at 14.12, or whether it can simply hold tight along the 200-day line, as it has been trying to do over the past three trading days. I’m keeping this on my radar, so watch for my tweets on the stock as I note my observations in real-time.


GR082414- TASR Weekly


What I’m fairly certain of right now is that a) the short side of this market offers little to no opportunity, and b) as long as the NASDAQ holds its recent breakout we can still consider pullbacks to be buyable if and as individual long ideas come into logical areas of support on light volume. I prefer to buy prior strength on current (constructive) weakness, and sell into strength when I get a stock moving sharply to the upside, say 5-10%. ANET and GRUB shows that this can be a reasonable way of handling a stock, looking to re-enter on a constructive pullback. This is not necessarily everyone’s cup of tea, however, so if one buys a stock properly and has a decent profit in it fairly quickly, one can handle the position however they feel is appropriate for them. But this market hasn’t necessarily been the perfect environment for the “uncommon man,” as Jesse Livermore put it, who can “sit tight and be right.”

While not every name I like is rocketing to the upside, there is some “love” to be had. GRUB and ANET prove that. Meanwhile, those stocks that continue to act fine as they hold tight along a key moving average may simply require a little patience with the idea that such patience will be rewarded soon enough. I like the way TWTR followed through Friday on my hypothesis as discussed in my report of this past Wednesday, and it certainly has big-stock upside potential. Perhaps more love is coming our way on that name. Latch on to two or three big-stock winners and you might have some decent profit potential in your trading account, and I think this pretty much frames the essential problem that needs to be solved by investors currently.

As things continue to bubble and brew, the solution in terms of which stocks will offer significant upside potential becomes more evident. Meanwhile, barring evidence to the contrary, we remain focused on the long side of this market for now.


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 had a position in EJ, GWPH, JD, and TWTR, though positions are subject to change at any time and without notice.

Gil Morales & Company, LLC (“GMC”), 8033 Sunset Boulevard, Suite 830, Los Angeles, California, 90046. GMC is a Registered Investment Adviser. This information is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to GMC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Gil Morales & Company, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.