The Gilmo Report

January 22, 2012

January 22, 2012

 

The shortened trading week turned out to be a Big Tech Party with the SOX breaking out on Wednesday, while on Friday Microsoft (MSFT), Intel (INTC), and International Business Machines (IBM) all moved higher on strong earnings announcements. I have to admit, I love technology stocks, since they have been the fertile field from which I have almost always picked the winners that have made me big money. So when I see technology stocks moving up on big volume it certainly gets my blood boiling. Not unlike Pavlov’s dog, I’ve been conditioned to begin foaming at the mouth whenever I see tech stocks gapping up on big volume and the SOX is rocking. On the other hand, maybe that means this rally is getting a bit on the “overbought” side. That’s been the “call of the crowd” for the past few days, but the market continues to hold the rally, and even the NASDAQ Composite Index, the only one of the three major market indexes to trade lighter volume on an expiration day, came up nicely off of its intra-day lows and closed down a mere 0.06%, which as I see it represents a bit of supporting action off the lows. Meanwhile, the S&P 500 and the Dow launched to higher highs as the Dow approaches to within 12% or so of its all-time highs.

NASDAQ Composite Index Gilmo Report Chart

The popular view is that the market is “overbought.” That may be true, but we also know that the market can stay overbought a lot longer than most investors think. Inch-by-inch, however, professional investors are being forced to deploy into this rally. The National Association of Active Investment Managers (NAAIM) survey, below, shows that these active managers are now 52.5% invested after spending the past few weeks nursing a certain reticence about buying into this rally off the November lows. For the most part, the NAAIM survey respondents remained less than 40% invested throughout most of the prior quarter, and now they may find themselves in a position of having to deploy into the rally. I would certainly love to see a pullback, but the market’s day-to-day action is showing more stocks breaking out and/or hitting correct buy spots such as pocket pivots that make the actual position of the indexes or the extent of the rally off of the November lows less important, frankly. For now we can simply take the general market’s persistent movement upward as a sign that it remains in an uptrend, and then operate on the basis of buying individual stocks as they issue proper buy signals/buy points. That simplifies the issue, and I would not waste time fretting about whether the market is “overbought” or not. If a stock is staging a buyable gap-up and is in a reasonably controlled-risk spot to buy it, for example, then I’ll buy it, regardless of where the general market is trading or whether it is “overbought” or not.

National Association of Active Investment Managers (NAAIM) survey Gilmo Report Chart

In my Wednesday mid-week report, I discussed the pair of pocket pivots seen in the nearest gold futures contract on Tuesday and Wednesday, and noted that while gold futures were showing pocket pivots the SPDR Gold Shares ETF (GLD) was not. That situation has changed with the GLD picking up volume today as it moved up and away from its 200-day moving average on a pocket pivot volume signature. This is a bottom-fishing type of pocket pivot, but keep in mind that the 50-day moving average looms right above the GLD, and it will be interesting to see how it handles this potential line of resistance, or whether it moves sharply up through it. At the very least, the GLD is acting like it is trying to come up the right side of a big double-bottom base, as I’ve outlined on the daily chart below, and today’s action adds to the series of constructive clues that have been showing up in gold over the past couple of weeks, starting with its ability to clamber back above the 200-day moving average. For now, if you choose to buy this bottom-fisher pocket, the 200-day line is your stop.

SPDR Gold Shares ETF (GLD) Gilmo Report Chart

Helping to confirm the constructive action in gold is silver, as its proxy, the iShares Silver Trust (SLV), illustrates in the daily chart below. As the GLD starts to look like it wants to form a big double-bottom base, the SLV is rounding out a big corrective consolidation that has “three waves down.” After three selling waves the sellers are likely all wrung out of the white metal, and this is confirmed by the fact that each successive selling wave occurred on less and less red volume. SLV flashed a bottom-fishing pocket pivot buy point today as it traded above-average volume and popped up through its 50-day moving average. SLV is in a very different position in its chart pattern than GLD is, and it is possible that less overhead supply exists in the pattern in that the three waves of selling may have served to better “clear the decks” and shake out weak hands in the white metal. SLV’s volume was better today relative to average daily volume than the GLD as well, and so maybe a run to the 200-day moving average is in the cards. Buying this bottom-fisher pocket means using the 50-day moving average at 30.14 as your guide for a downside stop.

iShares Silver Trust (SLV) Gilmo Report Chart

In my mid-week report of this past Wednesday I indicated to members that F5 Networks, Inc. (FFIV) was gapping up after-hours at the time on a strong earnings announcement, and that you should be alert for a buyable gap-up move in the stock the next morning. As was easily expected, FFIV gapped up the next morning on huge volume, as we see on the daily chart below, and this is potentially buyable using the 116.49 intra-day low of Thursday, the gap-up day, as your guide for a downside stop.

F5 Networks, Inc. (FFIV) Gilmo Report Chart

The weekly chart of FFIV below shows that the stock was flashing some clues with the series of tight weekly closes occurring in this recent five-week base. FFIV is attempting to come out of this big ugly base structure with three waves of selling in the pattern, so Thursday’s buyable gap-up comes at a constructive point in the base, making it potentially more viable. I show Tibco Software’s
(TIBX) weeky chart below it, so one can see that FFIV’s tightness in the weekly chart was quite similar to TIBX’s.

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The tightness in TIBX’s weekly chart over the prior five weeks was something I discussed in my mid-week report this past Wednesday, and with cloud-networker FFIV popping on Thursday it seemed reasonable that the cloud-software player would perhaps go along with it. On Wednesday, I pointed out to members to be alert for a possible pocket pivot move up off the 10-day moving average in TIBX. On Thursday the stock quickly obliged by doing exactly that, giving a nice bottom-fishing pocket pivot buy signal on Thursday that led to continued upside on Friday, as we see in TIBX’s daily chart below. Now how the volume on Wednesday, three trading days ago on the chart, dried up severely as the stock closed well up off its lows of the day before launching on Thursday on a clean pocket pivot move off the 10-day moving average. TIBX is now trading above both the 50-day and 200-day moving averages, and if you were on this, at or around the open on Thursday morning, you have some cushion here. With TIBX now above the 50-day and 200-day moving averages, I would hope to see it hold the 26 level begrudgingly on any pullback.

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In my report of last weekend I pointed out the subtle “bottom-fishing” pocket pivot buy point in LinkedIn (LNKD), and the stock followed up with a big-volume move up through the 50-day moving average on Thursday, as we see on the daily chart below. While Thursday’s move had a big-volume move that would also qualify as a pocket pivot volume signature, the stock was extended from the 50-day moving average where the first, subtle pocket pivot occurred. If you think you can buy pocket pivots that occur off the 65-day exponential moving average, the black line on the chart, then perhaps Thursday’s move was a buyable bottom-fishing pocket pivot. LNKD is trying to push up and take on a fair bit of overhead resistance in the 72-74 price area. LNKD comes in with earnings after the close on February 9th, so this move off the bottom is occurring well before earnings are announced. I’m not really interested in buying LNKD here, but I think this action off the lows of the base is part of the general improving tone that underlies the current market environment.

LinkedIn (LNKD) Gilmo Report Chart

Bio-techs have been pulling back over the past few days, and this strikes me as a rotational phenomenon as money moves into technology stocks while some profit-taking occurs in bio-techs that have been in uptrends for some time. Biogen Idec (BIIB), which I featured in my report of January 1st as it was sitting right on top of its prior base at around the 100 price level. Interestingly, at the time, I preferred some of the “hotter” smaller bio-techs like Alexion Pharmaceuticals (ALXP) or Salix Pharmaceuticals (SLXP), those two have faltered while BIIB has continued to issue pocket pivot buy signals and move up towards the top of its base in the 118 price area, as we see in the daily chart below. In my report of January 4th I discussed the pocket pivot buy point as the stock came up and off of its 50-day moving average, and since then the stock has steadily moved higher. On Friday, BIIB issued another pocket pivot buy point, and this came on the heels of a very subtle pocket pivot three days earlier. This is potentially buyable here, keeping in mind that BIIB announces earnings on January 31st. If you own the stock from one of the earlier pocket pivots, you are ahead of the game here, and the stock continues to act well.

Biogen Idec (BIIB) Gilmo Report Chart


Viropharma (VPHM) has been the strongest-acting among the smaller bio-techs lately. The big pocket pivot buy point as the stock moved to new highs on Wednesday resulted in two days of light-volume, pulling back on Thursday and Friday. I thought VPHM’s action was actually pretty constructive given that stocks like ALXN or SLXP were getting hit harder. As I wrote in my mid-week report of January 18th, the stock was likely buyable on pullbacks below $30 as many textbook technicians would sell the stock as it emerges from its “trend channel,” as I’ve drawn on the daily chart below, but I can tell you flat out that a stock that begins to accelerate its trend after forming a gently upsloping trend channel can often begin to move higher, faster. Look at stocks like Apple (AAPL) in October 2004 or Chipotle Mexican Grill (CMG) in late October 2010. You can see that the pullback on Friday took the stock down to the top of the prior trend channel from which VPHM broke out, so I would expect that this might function as near-term support. At the very least I would expect VPHM to hold its 10-day moving average at around 28.93.

Viropharma (VPHM) Gilmo Report Chart

Last week I discussed the buyable gap-up in Lululemon Athletica (LULU), shown below on a daily chart, but recall that I felt it might take some time to work off a bit of overhead resistance from the left side of the chart. So far that thesis has held true, and here we see the stock pulling down into the 10-day moving average as selling volume subsides. I think if you like LULU and you like last week’s buyable gap-up as a clear signal to buy the stock, then this is your spot right here at the 10-day line, with the idea that the stock should hold the intra-day low of the gap-up day at 59.15. With the stock closing Friday at 60.12, this becomes a low-risk proposition. When it comes to entry points in favored long ideas, we are looking first and foremost for a low-risk entry point where the stop is not too far away based on the parameters of the buyable gap-up.

Lululemon Athletica (LULU) Gilmo Report Chart

Some notes from my trading diary on other long ideas I’ve discussed in recent reports:

Bio-techs:

ALXN – pullback after running up to 77-78 from 70 buy point. Stock held the 20-day moving average on Friday as it comes back within buyable range at and around the 73.50 price level, using the 70 level as a downside guide for a stop.

CBST
– got hit on volume Friday after announcing earnings. The stock had broken out of a base on no volume, so that breakout was suspect. Currently I’m not interested in CBST based on the weak breakout and the even weaker reaction to weak earnings growth of 5% announced on Friday.

SLXP – was downgraded on Friday by a brokerage analyst who said that the heart is essentially out of the watermelon when it comes to forward earnings growth for SLXP. The stock gapped down on above-average volume, and I must say I do not like gap-downs on heavy volume. For now SLXP needs to remain above the 45.35 intra-day low of its buyable gap-up day on December 20th to remain viable.

SPPI
– a smaller, thinner bio-tech that has pulled back to the top of its recent flag breakout just above the 15 price level. Potentially buyable here using the 50-dma at 15 or so as your downside guide for a stop.

Other stocks:

AAPL – stock has been on a steady upside move since the lows of late November but got hit on volume Friday in sympathy to Google’s post-earnings gap-down. I’m not a buyer of AAPL going into earnings on Tuesday, but it has acted well. With big-techs like INTC leading a charge in semiconductors, I don’t think it is necessary that AAPL come in with a big earnings surprise to lead the market higher, but we’ll see.

AMZN – the “bottom-fishing” pocket pivot buy point of four trading days has taken the stock above its 50-day moving average, and on Friday it pulled back to the 50-day line on light volume, which looks constructive. Earnings are expected to come out on January 31st, so the stock could continue to move higher from here going into earnings if the market is beginning to see some strong numbers from AMZN at month-end.

CF – Found support again at the 10-day moving average this past week just as it did the week prior, but at 175 and change is now at resistance. At this point looking for a breakout through this resistance level.

INVN
– continues to make new highs, and those of you who think it needs to be sold because it is “too high” since launching on a pocket pivot at the 10-11 price level on January 4th, are risking getting left behind. As I’ve written in previous reports, INVN reminds me of camera chip-maker OVTI given that it has a new application, motion sensing, in a chip for mobile computing devices and smartphones. If you own this, the smart thing to do is to JUST SIT and wait for the next buy point. Pehaps INVN proves the old adage that one never knows just how poor they are until they start making a little money. INVN runs up 50% from a perfect $10 pocket pivot buy point, 30% from a standard new-high breakout at $12 and now everyone wants to sell it! Go figure…

ISRG – a big gap-down on earnings Friday looks like it received support as the stock just barely held above its 50-day moving average, but my view is that the gap-down on heavy volume puts the stock in question. As well, with the rotation into technology occurring here, medical stocks may find less favor in the near-term, so my inclination would be to let ISRG go and move on to a better-acting stock to play. The last buy point in ISRG was the pocket pivot coming up off the lows of the base in the 435 price area, so if one bought the stock on that basis there is little to no damage on this gap-down. Nevertheless, if you still hold the stock, you can hold out to see if the stock can rally up off the 50-day moving average.

MNST – Buyable gap-up remained in force on Thursday and Friday before launching higher and closing at its peak on Friday on strong, above-average volume. MNST is slightly extended here but looks like it definitely wants to go higher. One of the best stocks in the market right now, in my view.

STMP – Following the pocket pivot buy point of six trading days ago as I pointed out in my report of last weekend, July 15th, the stock has moved higher and is holding tight along the 30 price level. A hold for now, pending the appearance of a new buy point.

Any stocks that I haven’t mentioned here should be referenced in the archives section of the website to view any relevant discussions. Otherwise, the market remains in an uptrend, and I have found many profitable situations to buy into. It is clear to me that there is a bit of a rotation occurring here in the market, and this has affected some of our favored bio-tech names. Unless such pullbacks in names like VPHM or ALXN are occurring in more blatantly negative fashion such as the gap-down in SLXP, I would tend to view such pullbacks in these names during a normal rotational shift as potentially buyable. However, I do think that investors should be deploying into tech names that are acting strongly here, and I provided you a good early-mover call on TIBX to act on in this regard. I would expect that if this market move is for real, we will see more tech names pop up and into buyable positions. So far so good. If you own a stock like, say, MNST, and it is acting well, just sit tight and don’t try to overthink things as the pundits all fret over how “overbought” the market is. Just watch your stocks. That is all!

Gil Morales

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

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