The Gilmo Report

December 22, 2013

December 22, 2013

The market hitched a ride on Santa’s sleigh and moved higher on Friday as the NASDAQ Composite Index, shown below on a daily chart, moved to a new 13-year high on what was some very heavy quadruple-witching options expiration volume. As I wrote in my report of this past Wednesday, the trend is up, and if you’re long this market the trend is clearly your friend. As we move into the next couple of days leading up to Christmas on Wednesday, when the market will be closed, I would consider the odds of the trend suddenly reversing to be quite remote, and this may hold true for the rest of the year, particularly since the last five trading days of the year and the first two trading days of the New Year tend to be quite strong.

With the Fed’s tapering move out of the way and, at least in the short-term, proving to be nothing of any real consequence, there is nothing standing in the way of the market at this time. While one might want to worry about the dearth of bears out there as measured by the Investor’s Intelligence survey of investment advisors, such conditions can persist for a while as the market simply continues to rally. Thus for me it becomes more a matter of looking around to see where the actionable opportunities are, and the fact is that the past few days have seen a number of such opportunities crop up. Therefore, at the present time, it is clear that the odds remain in favor of the long side of this market, and that is where I prefer to be at the present time.

 

GR122213-NAZ

 

Index funds finished up their required buying of Facebook (FB) shares on Friday, as the huge volume bar on the daily chart below, clearly shows. Quarterly options expiration also probably didn’t hurt in terms of adding plenty of volume to the mix. As FB continues to hold up in new-high price ground, it is moving tight sideways over the past couple of days. As I wrote in my report of this past Wednesday, while FB might continue to move sideways as it builds something of a handle to its cup formation, I would not be surprised to see it simply move higher. Friday after the close FB priced a 70 million share secondary offering at 55.05, which in my view is a pretty strong pricing considering that it is all of about 1% below the stock’s all-time high price that was achieved on Wednesday.

While the stock was readily absorbed by index funds and other buyers, it may in the short-term set a floor for the stock that could produce further upside from here considering that Wednesday was in fact a pocket pivot breakout from a cup formation, as I discussed in my report of that day. Sometimes stocks can just break out of cup formations without building a handle, and the easy way to test this would be to buy the stock on the basis of Wednesday’s action using a standard 6-7% downside stop.

 

GR122213-FB

 

LinkedIn (LNKD) has continued its bounce off the 200-day moving average after gapping down on Wednesday, as we can see on the daily chart below. In my view the stock has a decent chance of retesting the 200-day line, but the next few days will be critical in determining this. If LNKD can hold tight sideways around Friday’s close just above 218, it could make a run back up to the 50-day moving average. In any case, this is definitely not actionable as a long here, and whether one is going to be successful shorting the stock with the idea that it will soon break the 200-day line is an open question. Thus the stock remains in flux, but that is not a problem since there are plenty of other actionable ideas that one can profit from currently.

 

GR122213-LNKD

 

Netflix (NFLX) continues to slowly trek higher along its 10-day moving average, so Friday’s action was just a case of “same story, different day.” A couple of pocket pivots have shown up along the way over the past couple of weeks, as we can see on the daily chart, and one could certainly buy the stock on this basis alone. However, neither of these pocket pivots has led to any significant upside price movement outside of the continuing, shallow uptrend along the 10-day moving average.

 

GR122213-NFLX

 

Tesla Motors (TSLA) was not able to hold its 10-day moving average on Thursday as selling volume picked up again on Thursday, as we can see on the daily chart below.

 

GR122213-TSLA

 

The problem with TSLA can be seen on the weekly chart, below, where the pattern is looking more and more like a head and shoulders top. Volume as the stock bounced off of the red 40-week moving average was not very big, and the largest volume bar among the three blue bars that constitute the rally off the 40-week line shows some stalling action in the price bar. Last week’s volume was well below average for weekly volume, and this week the stock essentially stalled at the blue 10-week line on below-average volume. Given the large number of alternative ideas out there on the long side, I don’t think one needs to concern themselves with TSLA for now.

 

GR122213-TSLA Weekly

 

Twitter (TWTR) ran away from its rising 10-day moving average over the past two days after I discussed it in my report of this past Wednesday and jacked to an all-time closing high on Friday on decent volume. Technically there were no concrete, actionable buy points that showed up over the past two days, although my view was that the three-day pullback was an opportunity for me to re-enter the stock. The v-shaped move to new highs, however, looked like something to sell into, as I still believe the stock needs to settle back a bit and meet up with the 10-day line in order to set up a more sustainable upside move from current price levels. On the other hand, maybe it just keeps going higher, but as I have said previously in this report, there are plenty of other stocks out there to buy that are in far less risky positions.

 

GR122213-TWTR

 

SolarCity (SCTY) jacked to the upside on Thursday in a big pocket pivot move that I saw coming before it happened as I discussed in my report of this past Wednesday. As we can see on the daily chart below, the tight action along the 10-day, 20-day, and 50-day moving average confluence combined with the very subtle pocket pivot along that moving average confluence on Tuesday was the tip-off that a potential breakout was coming. Solar stocks in general were soft Friday, including SCTY which pulled back a bit after Thursday’s strong move, on reports that Japan is allegedly mulling over an 11% increase on solar tariffs. All the solar stocks, including SCTY are in the midst of trying to build new bases. As I discussed on Wednesday, SCTY is the only to show any concrete buy signals so far. I like the stock on a pullback here below 55 with the idea that it will hold the top of the prior two week range at 54, roughly.

 

GR122213-SCTY

 

In my Wednesday report I discussed the fact that Gogo (GOGO) looked to be making a move for its 50-day moving average on the heels of Wednesday’s IPO lock-up expiration. This allowed insiders, including several private equity firms, to sell shares. My initial understanding was that nearly 74 million shares were now able to be sold, but more recent reports put that number closer to 55 million shares. Over the last three days sellers have dumped nearly 20 million shares as the stock pulled right into its 50-day moving average on Friday, as we can see on the daily chart below. This also undercuts the 24.24 low of mid-October which sets up the potential for a rebound, unless insiders are intent on selling a lot more stock, which is, of course, a possibility.

I do think, however, that at some point they have to let up because dumping all of their shares and driving the price ever lower may not be in their best interests. Since this is the first pullback to the 50-day/10-week moving averages on the daily and weekly charts, respectively, since the stock broke out in early November on a big buyable gap-up move, I am willing to nibble on a few shares here at the 50-day line to see if the stock is able to rebound off the line. As of the end of the September quarter, 68 mutual funds owned 5.7 million shares, and 54 of those funds took new positions during that quarter. Thus this pullback gives them a chance to add to their positions under conditions of enhanced liquidity and lower prices. The big test for GOGO is at hand, and it will be interesting to see what happens from here now that the stock is at the 50-day line.

 

GR122213-GOGO

 

A Gilmo member recently asked me to rank my stock ideas in each report in order of how “good” I thought they were. It’s a good idea, but I don’t think it works so well in practice. Generally, if I see five stocks I think look good, I might buy an initial position in one of them to start the day, and if it begins to work I will lay into it quite heavily. That was the case for TWTR and SCTY on Wednesday. I can see the set-ups beforehand, but I can’t tell you which one is going to work the best – only the market can do that, and so it’s often just a matter of taking an initial position in a few names and then letting the market tell you where to go.

I suppose if I had to pick what I consider to be one of my better ideas, and which I think may have some longer-term trending potential, then Workday (WDAY) would fit the bill. WDAY gets lumped into the cloud-computing space, and it, along with Salesforce.com (CRM) and Amazon.com (AMZN), is considered one of the top three cloud companies that are rapidly taking market share. Throughout 2009 and 2010 CRM had a huge upside price move, during which it was showing big sales growth but wasn’t showing big earnings growth along the way. AMZN has had a big price run as it continues to make new all-time highs, and it hasn’t shown much in the way of absolute profits along the way.

WDAY, meanwhile, is in the same boat. Sales are going through the roof but it continues to show losses, but in my view CRM and AMZN provide reasonable precedents for WDAY. The recent buyable gap-up in late November was a strong upside move, but coming straight up from the bottom it wasn’t going to work right away, which is why I shorted the stock into that with the idea of taking a quick downside scalp. Once the stock came back down to the 50-day line, I shifted towards thinking of it in more positive, long-side terms. You can review the last eight reports to see how my view of the stock has evolved. Most recently, in my report of this past Wednesday, I pointed out the tight action in the stock along the 10-day and 20-day moving averages, and this tightness was maintained through Thursday before the stock flashed a pocket  pivot buy point that I would also consider a trendline breakout in the handle of a cup-with-handle formation.

 

GR122213-WDAY

 

If we take a look at the weekly chart of WDAY, we can see how the stock has spent the past three weeks digesting the strong gap-up move off the lows. We can also see the supporting action at the lows where the stock undercut the prior August low, which for those of you who are obsessed with “counting” bases might serve to “reset” the count (although I consider this type of thing utterly pointless since I’ve seen many leaders form 5, 6, 7 or more bases during their price runs). In addition, over the past four weeks we have seen the stock close at or near the peak of the weekly price range, despite some of the choppy action in the general market over the past month that even caused some to consider the market rally to be “under pressure.” In my view, Friday’s pocket pivot likely presages a clean breakout to new highs over the next few days, and so I consider WDAY buyable using the 50-day moving average at 78.17 as a reasonable downside selling guide that is only about 5% below where the stock closed on Friday.

 

GR122213-WDAY Weekly

 

Yelp (YELP) has been a bit choppy around its 50-day moving average over the past four days, but still has managed to flash two pocket pivots at the line over that time period, as we can see on the daily chart below. After Tuesday’s pocket pivot buy point the stock spent the next two days looking like it was on the verge of breaking the 50-day line and heading lower, only to come back with another pocket pivot on Friday. This one came on heavier volume, but YELP’s weekly chart, as I discussed last weekend, still looks a bit loose to me. Perhaps the stock just needs more time to move sideways along the 50-day line. In any case, while it looks okay, it isn’t something I would consider a “top idea” at this time. Having said that, the stock will probably launch 5 points higher on Monday! :)

 

GR122213-YELP

 

Biogen Idec (BIIB) followed up on Wednesday’s pocket pivot off the lows of its recent pullback following its late November buyable gap-up move by flashing another pocket pivot on Friday, as we can see on the daily chart below. While Wednesday’s pocket pivot just barely cleared the 10-day moving average, Friday’s pocket pivot took the stock decisively above the 10-day line, and on more volume, although the huge volume was likely due, at least in part, to options expiration. In any case, BIIB is moving in sync with the theory I discussed in my report of this past Wednesday whereby I consider that the stock will likely do what AMZN did back in early November when it had a buyable gap-up to nowhere followed by a pullback to the 20-day moving average, just as BIIB did this past week. AMZN then turned and moved to all-time highs, so I’m looking for BIIB to do the same from here, with the idea that it will hold the 10-day moving average on any potential, quick pullback. The stock remains buyable on this basis.

 

GR122213-BIIB

 

As I theorized it might in my report of this past Wednesday, Amazon.com (AMZN) cleared the $400 price level on big volume Friday after Wednesday’s pocket pivot buy point, as we can see on the daily chart below. As I wrote on Wednesday, “In my view, however, today’s action should produce further upside in AMZN, possibly taking it through the $400 price level for the first time and invoking the “Livermore Century-Mark Rule.”  On Thursday, AMZN paused for a day as volume dried up, giving us all a chance to get on board the stock before Friday’s strong move above the latest “century mark” for the stock. With the Livermore Century Mark Rule now in force (see the sixth paragraph of my October 17, 2010 report for a detailed discussion of this rule) we might expect AMZN to move higher from here with the idea that it should hold near to the 400 price level on any temporary pullback. AMZN closed about 0.5% above the $400 level on Friday, so it is well within range. One way I might approach this is that if I had bought a position on Thursday on the basis of Wednesday’s pocket pivot then I might get more aggressive and add to the position here with the idea that it should continue higher into year-end per Livermore’s rule.

 

GR122213-AMZN

 

I’ve still got my eye on Finisar (FNSR) here as it was able to creep back above the 50-day moving average on light volume, as we see on the daily chart below. I would not consider this one of my “best” ideas, but I think the stock bears watching as it is now in position for a pocket pivot buy point off of the 50-day moving average. The stock may continue to move sideways here and one could even test a long position here along the 50-day moving average based on the huge buying volume off of the lows. While other stocks in the group, such as Ciena (CIEN) and Allied Fiber-Optics (AFOP) have floundered, FNSR appears to be fundamentally stronger, and this shows up in its improving technical picture as a potential “roundabout” situation.

 

GR122213-FNSR

 

Taser International (TASR) was one stock I took a position in on Wednesday, but decided to toss it on Thursday in favor of plowing into TWTR and SCTY, both of which were moving sharply to the upside. As it turned out, TASR continued to lag as it turned red on the day, and on Friday sat there as it tries to find support at the prior November/December lows and the top of the prior flag formation. There’s a lot I find compelling about TASR’s fundamental story, but the stock just hasn’t been able to get anything going, even after Monday’s pocket pivot move. A look at the weekly chart, however, might shed some light on the stock’s current action, however.

 

GR122213-TASR

 

If we examine TASR’s weekly chart, below, we can see that it began a big price move, at least percentage-wise, after breaking out of a roughly six-month cup-with-handle formation at about the $9 price level and then doubled over the next 12 weeks. That’s a strong move for any stock. In October the stock formed a little flag that looks fairly coherent on the daily chart, above, but in fact there is very little tightness in the pattern on the weekly chart. The stock tried to break out from that flag pattern, but has gone nowhere as it wedged up slightly along the lows in the first three weeks of November, something I pointed out in my report of November 24th. Now the stock is in fact working on what is so far a four-week base as it dips below the 10-week line. The next four quarters are expected to see the stock produce 0% earnings growth at best and -17% growth at worst. Not until the fourth quarter of next year is TASR expected to post strong earnings growth again at +70%. After that, strong growth is expected to ensue for the next several quarters. Thus it appears that TASR simply needs more time to build this current base, and at some point in the perhaps near or not-too-distant future, could re-emerge with more upside vigor. For now I would like to see the stock hold above the 15-16 price area as it continues to work on a potential new base.

 

GR122213-TASR Weekly

 

Acadia Pharmaceuticals (ACAD) remains one of those stocks that just can’t figure out whether it wants to be a long or a short. The stock was looking weak to me a couple of weeks ago, but has since stabilized as we see the Force Indexes turn blue again on my handy HGS Investor daily chart view, below. Friday saw the stock flash a pocket pivot buy point, but it stalled slightly, as is evident on the chart. ACAD is another one of those on-the-come hot or once-hot bio-techs that doesn’t make money yet, and isn’t expected to until 2016, when analysts believe it will earn 30 cents. In 2017, analysts are looking for $1.28, but for the next two years ACAD will continue to lose money. I still think the stock remains an open question as it needs to clear the $25 price level which has present stiff resistance for the stock each time it rears its head. If I’m interested in bio-techs, I prefer BIIB or even Gilead Sciences (GILD), not shown, which is expected to see very strong earnings growth over the next four years as earnings jump from an estimated $2.00 in 2013 to $7.66 in 2017.

 

GR122213-ACAD

 

If we look at GILD’s daily price chart, below, we can see that following big news that its new Hepatitis C drug, Sovaldi, had been approved by the FDA, 10 days ago on the chart, the stock immediately moved lower the next day on heavy volume, but closed mid-range for some supporting action off the lows. A retest of the 50-day moving average came five days later, and then on Wednesday CELG gapped up off of the 50-day line on strong volume that also produced a bright blue “Kahuna” in the middle bar of indicators along the top of the chart. To me it looks like GILD is setting up to break out here, but the question for me is why didn’t GILD just launch higher on the news of Sovaldi’s approval?

 

GR122213-GILD

 

The answer to that is seen in the daily chart of GILD’s big Hepatitis C drug competitor, Abbvie (ABBV), which has actually been acting much stronger than GILD so far in December. ABBV is still working on their Hepatitis C drug and is allegedly not far behind GILD. There are also many issues with insurance coverage for the new drug as well as the relative pricing. Thus despite the big news for GILD, the situation remains very much in flux. ABBV on the other hand has shown strength on a recent big-volume gap-up breakout, as we can see on the daily chart below. On Wednesday, ABBV flashed a strong continuation pocket pivot buy point coming off of the 10-day moving average, but the next day the stock gapped back down to the 10-day line on above-average volume, and held the line on Friday as quadruple-witching options expiration volume probably came into play. Thus we can see that ABBV’s action, while stronger than GILD’s, can be inconsistent, and this may persist as the big race for a reasonably priced Hepatitis C drug rages. What are investors to do then? Buy BIIB and avoid all of this!

 

GR122213-ABBV

 

Splunk (SPLK) has been a topic of discussion in my reports ever since it had the big buyable gap-up move in November, as we see on the daily chart below, but that was essentially a “gap-up to nowhere” as the stock has simply drifted sideways to slightly down over the past month. We finally saw what looks like a pocket pivot buy point emerge along the 10-day line this past Friday, but with quadruple-witching options expiration  helping to boost volume with little upside price movement, it’s not clear to me whether this is in fact a strong, actionable buy signal. It is still possible however that SPLK could muster up enough energy to push to new highs.

 

GR122213-SPLK

 

SPLK’s weekly chart, shown below, provides a more coherent view of the stock, as we can see below. Following the big gap-up breakout, SPLK has pulled in over the past four weeks with volume drying up last week. Volume picked up this past week as the stock found support at the 10-week line on the weekly chart, despite the fact that the daily chart, above, shows the stock still hovering about 7% above its 50-day moving average. To me, the weekly chart looks very constructive, and in this case I might take Friday’s pocket pivot at face value and look to take a position in the stock. This would be with the idea that tit will hold the recent lows in what is so far a four-week flag formation following the buyable gap-up move in late November. Keep in mind that SPLK’s November gap-up move was the second in its pattern, with the first one occurring back in late August, which you can see in the daily chart, above. Thus this latest BGU might need more time to work, and so far the weekly chart indicates a constructive consolidation of that move. Like WDAY, SPLK may simply need this extra time before it can get going again to the upside.

 

GR122213-SPLK Weekly

 

As I have advocated for some time now, remaining flexible and active as one treats the market more as a market of stocks, rather than a stock market, without necessarily having to take a rigidly bullish or bearish stance has proven to be the best approach to this market in 2013. It was interesting to note that over the weekend Investor’s Business Daily opined that “The prudent stance isn’t to set your feet bullishly or bearishly in concrete, but to stay flexible and light-footed,” to which, paraphrasing the words of the great Gordon Gecko of Wall Street fame, I would respond, “Tell me something I don’t already know, pal, it’s Christmas!” My expectation is that the market will remain positive through year-end, at which point we will get to see how it greets the New Year. Stay tuned.

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 AMZN, BIIB, GOGO, and WDAY, 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. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.