The Gilmo Report

February 5, 2012

February 5, 2012


Earlier in January many feared that the market was “overbought.” The daily chart of the NASDAQ Composite Index provides prima facie proof that “overbought” is a relative term, and that which is overbought can often get a lot more overbought. What is “overbought” anyway? Generally, that’s when I buy more stock than I have margin available for, the way I think about it. When a market gets “overbought,” particularly when it does so rather quickly, it is often a sign of upside power and strength, and in this case, the market’s “extreme overbought” state in early January was exactly that. The last time the NASDAQ saw these levels was December 2000, the difference being that it was reaching these levels in a macro downtrend back in 2000 whereas today the market is working its way up instead. Despite the fact that government jobs numbers are largely mythological thanks to several layers of “seasonal adjustments” (the unadjusted unemployment rate in January rose to 8.8% from 8.3% in December), it still gave the market a good excuse to do what it wants to do anyway, which is rally hard. Friday’s move is a good old-fashioned breakaway gap on strong volume, and confirms the market’s strength, particularly in tandem with the expanding number of breakouts we are seeing among leading stocks.

NASDAQ Composite Index Gilmo Report Chart

The “stronger” jobs situation also gave investors pause when considering the need for more quantitative easing, or QE, from the Fed. Obviously, if on the surface, the jobs number indicates an economy on the mend, the knee-jerk reaction is to consider that additional QE may not be needed after all. And so this gave investors an excuse to take profits in silver and gold following some sharp rallies up off of their late December 2011 lows, as the daily chart of the iShares Silver Trust (SLV), shows below. As I’ve been discussing in recent reports, the SLV and the GLD were running ahead of their 10-day moving averages and were in position to pause and allow their 10-day lines to catch up. This occurred on Friday, as despite heavy selling volume, both the SLV and the GLD (not shown) held their 10-day moving averages. Ultimately, I would use the 50-day moving average where the original buy signals on both SLV and GLD occurred in recent weeks as maximum downside stops. For now, within the context of the prior uptrends off the lows, both metals are entitled to pullbacks here, and so one cannot draw any firm conclusions based on one day’s action on Friday. For now, they remain holds.

iShares Silver Trust (SLV) Gilmo Report Chart

The main argument against the precious metals here might be the idea that stocks might offer “faster” upside vehicles. Maybe so, maybe not. But precious metals do have some overhead to work through in their chart patterns while big-stock leaders like Apple, Inc. (AAPL), shown below on a daily chart, have nothing but daylight above them. I got a good chuckle from an article I read on about a trader who was bullish on AAPL but sold his shares at 451 in order to “buy them back” when the stock got to “439” on a pullback. I thought to myself, “Wow, how does this guy know exactly where AAPL is going to pull back to before it goes higher? From my perspective, AAPL should hold the lows of its gap-up day eight days ago, so a pullback to 439 would stop me out of my AAPL position. As well, the stock doesn’t act like it wants to pull back as the two-day pause this week saw the lightest trading volume in AAPL since the last trading day of 2011. Holders of AAPL shares simply did not seem all that interested in unloading the stock, and so on Friday it simply picked up more buying volume and moved to a new all-time high. Lacking any evidence to the contrary, my only conclusion is that AAPL goes higher from here.

Apple, Inc. (AAPL) Gilmo Report Chart

Technology stocks remain among the leading groups, and among those that I’ve focused on, F5 Networks (FFIV) remains one of my top picks. Friday’s action, as we see on the daily chart, took the stock to a higher high as it came up and off of its 10-day moving average on increasing volume. Technically this was not a pocket pivot buy point off the 10-day line since there is higher downside volume within the pattern over the prior 10 trading days, specifically the volume six days ago. However, I’m not so sure that should be counted as “selling” volume since FFIV gapped down that morning on poor earnings news from another cloud networker, Riverbed
Technologies (RVBD). The market quickly realized that RVBD’s situation was not FFIV’s, and a big increase in volume saw the stock move up off the 10-day line and close almost unchanged on the day. To me, this looks more like a news-related pullback that investors used to BUY the stock, not sell it, so in this context I would view Friday’s action as a pocket pivot buy point. Thus, I would add to my position here, using the low of Friday as my quick downside stop for that additional portion of my position.

F5 Networks (FFIV) Gilmo Report Chart

The strength in cloud stocks is building here, and we have seen (CRM) and VMWare, Inc. (VMW) issue bottom-fishing pocket pivots as they work their way up off their respective lows in their bases. However, I prefer cloud stocks closer to their highs or which are showing better technical action within their patterns. Ever since I first discussed Tibco Software (TIBX) as it was resting along the 24 price level in a very tight formation (see my January 18th report), the stock has shown plenty of “love” by marching higher and issuing pocket pivot buy points along the way. On Wednesday of this past week, as I discussed in my report of that day, TIBX issued yet another pocket pivot buy point coming up off the 10-day moving average, and this led to a strong two-day upsurge on Thursday and Friday, as we see in the daily chart below. At this point if you are long TIBX there is nothing to think about as long as the stock holds the 10-day line, in my view. As it moves up the right side of what looks to be a cup formation, expect that it will have to pause for a few weeks to build a proper handle, but for now TIBX is a nice hold if you own it.

Tibco Software (TIBX) Gilmo Report Chart

I’ve never previously discussed another cloud software company, Solarwinds, Inc. (SWI) mainly because I was more interested in TIBX which already had reported earnings in December whereas SWI will report this week. In general, I prefer to go after stocks that have already announced earnings just to take that bit of risk and distraction out of the equation. SWI, however, flashed a pocket pivot in mid-January as it came up off the lows of its base, and on Friday blasted to new highs on a buyable base breakout pivot point, as we see on the daily chart. SWI releases earnings on Tuesday of this week before the open, and analysts are looking for 25 cents a share. I tend to think that Friday’s big-volume breakout is a clue that earnings will be decent and so I would not be averse to taking a measured position in SWI going into earnings, possibly even using a lower-risk options strategy by buying calls if I were so inclined. Remember, however, that if you take a 10% position going into earnings and the stock tanks 20%, that’s a 2% total hit to your portfolio, so measure position-size and risk on the basis of such worst-case scenarios and the total damage to your portfolio that such a scenario might cause.


Solarwinds, Inc. (SWI) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (, ©2012 used by permission.

In my January 18th report I noted the strength in the Philly Semiconductor Index, the venerable “SOX,” as a constructive sign for the general market. That comment turned out to be inadverdently prophetic as we have seen a number of semiconductor stocks launch higher since then. However, I remain focused on what I consider the strongest semiconductor play in the market, Invensense (INVN), which I first alerted Gilmo Members to as it pocket-pivoted up through the 10-11 price area, long before the new-high breakout through the 12 price level, as we see on the daily chart below. INVN represents a strong “new-merchandise” play in the semiconductor area, and generally the biggest price moves within a group occur with stocks that are newer, younger growth situations. INVN is some 70% beyond the original pocket pivot buy point, but that doesn’t keep it from making new highs. As I discussed in my report of this past Wednesday, INVN had flashed a continuation pocket pivot buy point off the 10-day moving average five days ago, and the low-volume pullback into the 10-day line on Wednesday was a good shot to pick up some shares. At this point I would like to see INVN form some sort of base, even a three-weeks-tight flag, in order to set up for a solid move higher. Nintendo has accounted for about 73% of the company’s sales, and the price/volume action of the stock appears to be indicating that some new, major customers may possibly be coming online soon, including Samsung, according to some sources.

Invensense (INVN) Gilmo Report Chart

Sometimes a stock that acts poorly one week will surge back when a materially positive development occurs in its business. A week or so ago I did not like Intuitive Surgical (ISRG), certainly the biggest of the big-stock medical names in this market after it gapped down hard following a weak earnings report. But on Thursday a new development (think “N” in CAN SLIM) gave ISRG new life when the Japanese Ministry of Health indicated that ISRG’s da Vinci prostatectomy (“dVP”) is scheduled to be reimbursed beginning in April, 2012. As the news blurb stated, “…management indicated that this would represent widespread reimbursement for dVP and is not restricted to just the 5 centers currently obtaining reimbursement. This is good news for ISRG, and the stock promptly broke out to new highs on strong volume. On ISRG’s daily chart we can see that the gap-down day on earnings found support as the daily range shows a “long tail” which was followed up two days later by a classic “Wyckoffian Retest” as the stock pulled back slightly and volume dried up. Thursday’s breakout is buyable, in my view, with the idea that the stock should hold the 475-480 level. To paraphrase the line from the movie “Wall Street,” “Alright buddy-buddy, we are back in business on Blue Star Airlines (ISRG)!”

Intuitive Surgical (ISRG) Gilmo Report Chart

A week or so ago, bio-techs, for the most part, bided their time as technology stocks hogged the spotlight, and in the past few days of this week have become resurgent again. With Biogen Idec (BIIB) breaking out earlier in the week, more bio-techs showed their mettle, such as Abiomed (ABMD), shown below on a daily chart. ABMD wasn’t looking so hot in mid-December as it broke down, but the stock held its lows in the 17-18 price area. Earlier this past week, the stock came up through the 50-day moving average on two pocket pivot buy points, one coming up through the 10-day moving average and the second coming up through the 50-day moving average on the very next day. This led to a big-volume breakout on Friday after earnings were announced. This breakout is buyable, using the standard, new-high, base-breakout stop-loss of 7-8% on the downside. ABMD makes a heart-pump that does the pumping work for the heart while it is recovering from injury, trauma or disease, and recently unveiled a new product called “Symphony.” ABMD stomped analysts’ estimates of 4 cents a share by coming in with 10, confirming that the company is on its way to profitability in fiscal 2013.

Abiomed (ABMD) Gilmo Report Chart

I’ve been watching the developments in Questcor Pharmaceuticals (QCOR) over the past month, roughly, after it got slammed by what I call “short-selling artistes.” Some website that calls itself “StreetSweeper” went out and shorted 80,000 shares of QCOR around 44-45, and then issued a news release stating that they would soon release an “exposé” detailing compliance issues with the way QCOR markets its drug, Acthar, for multiple sclerosis. Talk about a racket! First short a position in a stock then release a news blurb talking about how you will release an article later discussing how awful the company is. When the article is finally released, you then disclose that you have covered half of your 80,000 short position as well as nothing of any material merit with respect to the alleged “compliance violatons.” Where is the SEC when you need them? QCOR has been a big bio-tech leader in this market over the past year, marching higher even when the market was choppy and sloppy. A good correction is probably what it needed, and so the faux-scandal provides sellers with the impetus to take profits. In my view, this may all serve to set up a new upside move in the stock, and recent technical evidence as the stock has staged a “shakeout-plus-three” move after undercutting its early January low, as well as a pocket pivot buy point on Friday, helps to build this case.

Questcor Pharmaceuticals (QCOR) Gilmo Report Chart

Combine the pocket pivot and “SO+3″ action on QCOR’s daily chart with the price/volume evidence on the weekly chart, shown below, and the case can be built up even further. Note how QCOR has closed very tightly along the 36 price level, more or less, over the past four weeks as it has pulled back and bounced off the top of its prior double-bottom base formed back in August/September of last year. If you go back and look at the chart of TIBX a month ago, it also showed this type of tight action along the lows of its base, including a “long-tailed” week along the lows. This past week’s action in QCOR took the stock on a shakeout that comes out looking like a long tail on the weekly range as the stock bounced right off the 33 price level. QCOR still has robust growth estimates going forward, and this hit-job on the stock may only serve to set up a technically definable buying opportunity. The action off the lows here is typical of what we might look for in a stock that is trying to form the bottom of a base and turn back to the upside. I think QCOR can be bought here using a 6-7% stop for safety, but after Friday’s action I would expect the stock to move up from here fairly quickly.


Checking in with Viropharma (VPHM), which we have been following for some time, we can see on the daily chart below that the stock has been tracking steadily along its 10-day moving average for some time. While the stock looked powerful in the middle part of January, it has since seen this momentum dissipate, but I don’t see this as a problem for the stock as it tracks along the 10-day. If you look at the flag formation it formed prior to breaking out in mid-January, the stock was just ever-so-slightly wedging as it drifted higher on light volume. The breakout from the flag occurred on strong volume, but the wedge prior to the breakout might indicate that the stock needed to pause for a bit in order to correct the wedge. Given that VPHM has followed its 10-day moving average for more than seven weeks, I am using a violation of the 10-day line as a convenient and quick stop on the stock for now. Friday’s action was a subtle but stallng pocket pivot move, and the stalling may not be a problem as the stock bumps up against its prior high where it might find some overhead resistance. As well, VPHM is a smaller stock, so it is entitled to some volatility, but as long as it does not violate its 10-day line I’m a holder of the stock.


The positive action in the market is broad, and even housing-related groups are showing strength with builders like Ryland (RYL), building materials stocks like Fastenal (FAST) and Owens-Corning (OC), and cement stocks like Vulcan Materials (VMC) and Eagle Materials (EXP) flashing pocket pivot buy points within their chart patterns. I could probably inundate this report with all the good-looking charts in this market, but if that’s what you want I might suggest you open the pages of Investor’s Business Daily to see all the breakouts, from Rackspace Holdings (RAX) to (now) Spirit Airlines (SAVE). My job is to focus on where the early opportunities are, and even with SAVE Gilmo Members saw the pocket pivot BEFORE the new-high breakout, and that stock has continued to streak higher after staging a standard new-high breakout through 17 and moving quickly beyond the 19 price level on Friday, as we see in the daily chart below. Now that the stock has staged a standard new-high breakout, everybody knows about it, which is exactly what I want after purchasing shares in the 16 price area on the pocket pivot before the herd came running in on Friday. SAVE is a hold.

Spirit Airlines (SAVE) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (, ©2012 used by permission.

With so many stocks acting well, the temptation might be to try and “kiss all the babies,” so to speak, but that is not possible. In order to make big money, one must try and focus on what one perceives, based on the objective evidence, are the biggest potential leaders as the market gets going here. Thus if I have a good position at a good price in a new, emerging leader that has some aspects of “new” in it, like INVN or SAVE, for example, there is no need to tamper with it or sell off a position that might be consolidating recent, strong gains in favor of something that is “moving” today. For example, Monster Beverage did not move much on Thursday and Friday when the market was up, but that is fine. Since it is often the characteristic of a leading stock to move up on days when the general market may be flat or even down, one should not be surprised if such leaders “rest” on a day when the market is up. As long as the stock is resting normally, there is nothing to do, and chances are if you bought something like MNST at around 100 and sell it here after a 5-6% gain, the stock will then just move higher without you later on. Even looking at the daily chart of MNST we can see that the stock is perched along its 10-day moving average, and a continuation pocket pivot buy point could emerge at any time, perhaps even on a day when the market is going down, so for now that is all you need to focus on with MNST: the next buy point.


Chart courtesy of HighGrowthStock Investor (, ©2012 used by permission.

The market looks to be in good shape here, and Friday’s gap-up in the NASDAQ Composite continues the upside trend in style. Without trying to kiss all the babies, I’m focused on the stocks I’ve discussed in these reports as well as those discussed in reports throughout late December and January, so please refer to those for discussion on any stocks I have not discussed herein. For now, all systems are go.

On an administrative note, I will be appearing on Fox Business News at 10:00 a.m. Pacific, 1:00 p.m. Eastern, this Monday to discuss some of the stocks I like in this market.

Gil Morales

CEO & Principal, Gil Morales & Company, LLC
Principal and Managing Director, MoKa Investors, LLC
Principal and Managing Director, Virtue of Selfish Investing, LLC

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