The Gilmo Report

February 16, 2011

February 16, 2011

Yet another higher high for the major market indexes brings them all face-to-face with the apex of the “dreaded ascending wedge,” a formation that has been cited more than a few times as the market has gone about its business of moving ever higher since early September 2010. But I suppose the one thing that this market is certainly teaching chartists and technical analysts everywhere is that the “ascending wedge” formation is not a predictor of tops. In fact, not much really is. If anything, we can see that the market has been in a sharp move to the upside following the late-January lows, and would certainly be entitled to take a break for a few days. But the market hasn’t really seemed that interested in taking a break, as it again ignored “bad news” in the form of reports that Iranian “warships” were heading for the Suez Canal bound for Syria. This sent the market spinning downward about midway through the morning before it found “the bid” again and turned back to the upside. So we are left with a nice, continuing uptrend in the markets, as we see in the NASDAQ Composite Index, shown below on a daily chart.

NASDAQ Composite Index Gilmo Report Chart

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Most of the stocks I’ve been looking at recently are up from optimal buy points, and in the case of Netflix, Inc. (NFLX), for example, the stock is pulling back in what appears to be a normal manner following a sharp upside gap on Monday of this past week. As we can see in the daily chart of NFLX below, volume has been above average over the past two days, but some of this has been helped along by analyst downgrades citing the usual “valuation issues.” NFLX, of course, has had “valuation issues” since it was trading in the low 100’s, and while it will go down in history as another short-killing model stock winner based on its performance already in the 2009-2011 market rally, it may still have further to go. This current pullback could carry down towards the 10-day moving average at 226.98, but that might offer an add point on the heels of the stock’s late-January buyable gap-up which I have discussed in my last several reports. For now NFLX is in pullback mode, and I would watch for volume to continue to decline if the stock continues to pull back here.

Netflix, Inc. (NFLX) Gilmo Report Chart

Precious metals, both gold and silver, have been rallying over recent weeks, and for all we know they were sensing President Obama’s “Budget of Denial,” which was announced on Monday and which calls for over $3.5 trillion in government spending in 2011 that includes a deficit of $1.6 trillion, an all-time record, and about four times the highest budget deficit of his predecessor. Apparently, the President has no problem with doubling the U.S. national debt in the next five years and tripling it in the next ten. How this can be good for the U.S. Dollar, I cannot tell you, but the action of the iShares Silver Trust (SLV), a proxy for silver itself, tells you that it probably isn’t. Silver looks ready to break out of this little cup formation after recovering from a nice 14.5% correction off of its year-end 2010 peak of 30.44. The SLV may track sideways for a bit more here, but my bet is that silver is going higher, and in addition to the SLV I also like the ProShares Ultra Silver ETF (AGQ), which is a 2x leveraged silver ETF, and would use the 50-day moving average at 28.43 for the SLV and 140.31 for the AGQ as a downside selling guide.

iShares Silver Trust (SLV) Gilmo Report Chart

Oil stocks have continued to act well, particularly with today’s news about Iranian warships in the Suez Canal, a major shipping route for oil. In my report of January 26th I discussed Halliburton Company (HAL), which I don’t show here but which continues to act well, and mentioned Baker Hughes, Inc. (BHI), another oil services leader making new highs at the time, as we see on its daily chart below. You might also notice that BHI came through with a continuation pocket pivot buy point today as it moved up through its 10-day moving average on volume that is higher than any down-volume in the pattern over the prior ten trading days. BHI also broke out of this short little three-weeks-tight (3WT) flag formation, so today’s simultaneous pocket pivot buy point gives additional weight to the 3WT
flag
breakout. Like HAL, BHI is a big stock oil services turnaround with earnings up 13%, 127%, and 100% over the past three quarters, respectively, and estimates for 100% earnings growth in the next quarter.

Baker Hughes, Inc. (BHI) Gilmo Report Chart

Tractor Supply Company (TSCO), shown below on a daily chart. TSCO is something of a “Home Depot for Farmers,” and it has continued to do well as agricultural-related “stuff stocks” have continued to lead this market. TSCO’s most recent quarterly earnings growth of 29%, the lowest over the past eight quarters, is not likely to knock your sox off, but its technical action has remained surprisingly strong. TSCO gapped up in late January, and since then has held the intra-day low of that gap-up day very well, even flashing some “ants” on its chart which indicate the stock has been up 12 out of 15 days in a row at that point. Today TSCO logged a pocket pivot buy point as it sold off in the morning only to reverse and close back above its 10-day moving average on strong, above-average volume that was also a pocket pivot buy point. This is buyable using the gap-up day’s low of 50.31 as your lowest stop-loss level, although you could use one higher up in the pattern, such as today’s intra-day low, with the idea that today’s pocket pivot buy point should lead to some upside from here.

Tractor Supply Company (TSCO) Gilmo Report Chart

TSCO’s action perhaps was not entirely unrelated to tractor-maker John Deere & Company’s (DE) move today after it announced 111% earnings growth in the most recent quarter, following up on last quarter’s 365% earnings growth. DE gapped up in the morning after announcing earnings but sold off hard before finding support around the 94 area and turning back to the upside on a big pocket-pivot volume signature, as we see on the daily chart below. This was also a continuation pocket pivot buy point as the stock came up off the 10-day moving average in what has been a very persistent upside trend over the past 2½ months. DE did stall however, and close just above the mid-range of today’s price bar. If I were going to buy this I would do so only with the idea that the stock should hold the 10-day moving average roughly, or at the very least the 20-day moving average at 92.46, which it has tended to hold over the past 2½ months.

John Deere & Company's (DE) Gilmo Report Chart

Whole Foods Market (WFMI), the world’s most expensive grocery store, has logged seven quarters of strong earnings growth (59% in the most recent quarter) on sales growth that has averaged in the mid-teens, which I have not been that impressed with. Fortunately for the stock, it doesn’t listen to me, so it has just continued to mover higher in recent weeks, even gapping up on massive volume five days ago, as we see on its daily chart below.That was in fact a buyable gap-up move, and over the past four days since that move WFMI has remained well within range of this buyable gap-up, making the stock buyable right here using the intra-day low of the gap-up day as your downside stop-loss guide. Remember, you don’t have to use the exact low of 58.49, as the stock is barely 2.74% beyond that price point and you might want to give it 4-5% to a point just below the intra-day low, depending on your own risk tolerance. If you like to keep your stops razor-thin, then the 58.49 low might be your thing.

Whole Foods Market (WFMI) Gilmo Report Chart

NXP Semiconductors, N.V. (NXPI) has been an interesting bit of pseudo-new merchandise in the market as an IPO spin-off of Phillips Electronics, N.V. The company came public as a stand-alone company in August of last year, and spent about 4½ months building a long base before a pocket pivot buy point got the ball rolling in the 13 price area, as we see on the daily chart below. Since then the stock has moved higher in a relentless uptrend, and today flashed what is a pocket pivot buy point coming up off the 20-day moving average and up through the 10-day line. Today’s action was interesting given that NXPI announced earnings yesterday and missed analysts’ earnings estimates by 12 cents while also coming in a bit shy of analysts’ estimates for revenues of $1.21 billion. Still, NXPI logged earnings growth of 276% on paltry sales growth of 1%, and earnings estimates for the next quarter are looking for 47 cents, or 124% earnings growth. This has been a hot stock, and while today’s pocket pivot stalled a bit, it perhaps could be bought with the idea that it should hold the 20-day moving average at 25.49.

NXP Semiconductors, N.V. (NXPI) Gilmo Report Chart

Rovi Corp. (ROVI), which has been consolidating normally going into yesterday’s earnings report after the market close, came in a bit light, and the market punished the stock by hitting it with the heaviest one-day selling volume since October 2009 as it split wide open through the 50-day moving average. Technically, a “violation” of the 50-day moving average would be sealed if the stock moves below today’s intra-day low. This doesn’t seem too difficult to do given that the stock closed pretty much right at the lows of the day. The stock fluttered around the 61-62 area this morning before giving way, so there was plenty of time to get out of the way. ROVI’s story is one that is “on the come,” as they say, given that its latest business strategy creates a big opportunity for the company, but with more uncertainty, which the market doesn’t like. At best, ROVI would need to build a base as it comes down and corrects, and perhaps bide its time as the company attempts to execute its forward-looking strategy.

Rovi Corp. (ROVI) Gilmo Report Chart

For the most part, many of the leaders I have been discussing in recent reports continue to hold up, and members can refer to the past three weeks’ worth of reports as their recent discussions remain in force, from BIDU to CAT to FTNT to NFLX, all of which continue to act just fine. This report features current actionable ideas, of which a handful seem to pop up from report to report, but I focus on those I consider most worthwhile. The market remains in a strong uptrend, as the charts clearly show, and a pullback here would be well-deserved, should it occur. Unless we begin to see some deleterious action in the market, such as one or more high-volume sell-off days, pullbacks represent buy opportunities. If we do get into any correction here I would be watching carefully for stocks to pull back into logical support areas, which can range from 10-day moving averages to 50-day moving averages to tops of prior consolidations and breakouts. In the meantime, staying with what’s working keeps one firmly “saddled up” in a continuing market rally.

Gil Morales

CEO & Principal, Gil Morales & Company, LLC

Principal and Managing Director, MoKa Investors, LLC

At the time of this writing, of the stocks mentioned in this report, Gil Morales, MoKa Investors, LLC, and/or Gil Morales & Company, LLC held positions in AGQ, ,BIDU, FTNT, and NFLX, 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, 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. ©2010 Gil Morales & Company, LLC. All rights reserved.

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.