The Gilmo Report

January 29, 2012

January 29, 2012


The market’s steady escalator ride to the upside continues, despite a sole distribution day on Thursday as investors likely “sold into the news” after the initial burst of enthusiasm that followed the Fed’s announcement on Wednesday that easy money policies would persist for the forseeable future. Thursday’s selling did not lead to any increased selliing pressure on Friday as volume remained muted during the morning sell-off. The pre-open release of GDP data showing the economy did not grow as fast as originally estimated provided the impetus for short-term profit-taking. Ho-hum. The NASDAQ Composite Index recovered most robustly from its slight morning sell-off to end the day slightly up on above-average volume, as we see in the daily chart. In general, the market’s pattern has been one of holding tight and then moving higher in successive stair-steps that have taken the market right up to its early 2011 highs. While investors might seek to become concerned that the indexes are pushing right up to their old highs where resistance could be encountered, my view is that resistance levels are less likely something to be concerned about and more likely something for the market to break through given that its tendency over the past couple of months to do just that each time it has encountered resistance at the 50-day moving average, the 200-day moving average, and each area of overhead resistance on the way up.

NASDAQ Composite Index Gilmo Report Chart

Now that the Fed has made it clear that they stand at the ready, one hand firmly planted on the QE spigot ready to open it up at a moment’s notice, the barometer for continued upside in stocks is likely the action in gold. We saw gold begin to show signs of coming to life a couple of weeks ago when I began to discern that the long side of the market was quickly coming into focus. As we see in the daily chart of the SPDR Gold Trust (GLD), below, the big pocket pivot buy point and trendline breakout on Wednesday as the GLD came up through its 50-day moving average and its declining tops trend line has led to further upside. The next major buy point for the GLD would be a breakout up through the mid-point of the “W” in its big double-bottom base. I also note that I am picking up a number of bottom-fishing type pocket pivots in mining stocks like Randgold Resources (GOLD) and First Majestic Silver (AG) that are coming up through their 50-day moving averages on huge volume. However, the GLD and SLV are my preferred vehicles for attempting to to play any developing trend in the precious metals and for now the two are clear holds.

Randgold Resources (GOLD) Gilmo Report Chart

I speculated in my mid-week report of this past weekend that the buyable gap-up move in Apple (AAPL) following its massive blow-out earnings announcement on Tuesday and the Rule of Three may do something that the immediately prior two earnings-related gap-up moves did not, and that is lead to higher highs for the stock. On the AAPL daily chart, below, we can see the October earnings gap-up that failed, and this came on the heels of a similar gap-up in July of last year that also failed. In both of those cases, the earnings gap-up came after the stock had been in an extended upside move, as was the case in October. As well, that gap-up came on below-average volume, and so it had more the look and feel of an “exhaustion” gap. Tuesday’s earnings related gap-up came out of a tight flag formation that AAPL was forming prior to earnings, and the stock is holding the gap-up quite well as volume dries up here. The gap-up day’s intra-day low at 443.75 remains a tight stop for any AAPL position taken on the basis of Wednesday’s buyable gap-up move. With technology stocks taking the lead here, AAPL must be expected to play a key role in leading the market higher as a leading technology issue of the day – also known as a “big stock.” I like AAPL here, and I think it goes higher as long as this market trend remains intact.

Apple (AAPL) Gilmo Report Chart

F5 Networks (FFIV) also had a buyable gap-up the prior week after announcing earnings, and so far, as we see on the daily chart below, the stock has held the intra-day low of the gap-up day, despite Friday’s early-morning gap-down thanks to weak earnings from Riverbed Technologies (RVBD). RVBD’s business model in my view is rapidly becoming obsolescent, and so I don’t consider it relevant to FFIV’s situation. And of course the market’s verdict confirmed my view when FFIV picked up some nice volume support off of the 10-day moving average and the intra-day low of seven trading days ago. In the late 1990’s this type of intra-day pullback on volume that closes near the peak of the daily range as FFIV did on Friday was something I termed a “slingshot” since in the late 1990’s this often led to a stock “slingshotting” to new highs. In any case, I believe FFIV remains very buyable at current price levels, using the 116.49 as a ready guide for a downside stop, allowing perhaps for a couple of percent of downside “porosity” to 114.90 if one so chooses.

F5 Networks (FFIV) Gilmo Report Chart

I like FFIV, obviously, but the cloud group in general has caught my interest presently. Another cloud name we’ve been following is Tibco Software (TIBX), even before it flashed an initial pocket pivot buy point off of its 10-day moving average seven trading days ago, as we see on the daily chart below. Resistance at the 26 level and the 200-day moving average has been a factor over the past six trading days, but a sign that TIBX may be ready to push higher is potentially offered by Friday’s pocket buy point off the 50-day moving average. If members are so inclined they can review my previous discussions on TIBX, beginning with my initial identification of tightness in the weekly pattern in my report of January 18th. TIBX is potentially buyable here using the 50-day moving average as your guide for a downside stop, or the 10-day moving average down closer to 25. Obviously, given its position within its chart pattern and powerful earnings gap-up, I prefer FFIV but TIBX is also playable here.

Tibco Software (TIBX) Gilmo Report Chart

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

Supporting the resurgence in cloud names is the action of VMware (VMW), shown below on a daily chart. VMW looked like death at the end of December as it plummeted to new lows and undercut the lows in its base, but that was the end of the selling for the stock as it has since recovered and pushed back above its 50-day moving average. Note that Tuesday’s action flashed a pocket pivot buy point coming up through the 50-day and 200-day moving averages. Technically this is potentially buyable using the 50-day moving average as your downside guide for a stop, but I still would prefer FFIV or TIBX for now. I do think, however, that the positive technical action in VMW is another feather in the cap of cloud-related names as they attempt to rise up from the grave in a resurgent attempt to lead the market again.


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

The big news over the weekend emanates from reports by the Wall Street Journal that Facebook will file for an Initial Public Offering this coming Wednesday. Perhaps the earliest rumblings of this were seen when I first discussed the very subtle bottom-fishing pocket pivot in LinkedIn (LNKD) two weeks ago in my reports of January 15th and 22nd as it formed a “Wyckoffian Retest” low and then came up through its 50-day moving average for the first time since October of last year. On Friday, LNKD issued yet another bottom-fishing pocket pivot buy point off of its 10-day moving average on very nice volume, as we see in the daily chart below. LNKD comes out with earnings on February 9th, but for now it appears that the stock is gaining favor in sympathy with the projected IPO filing by Facebook. LNKD is potentially buyable on the basis of Friday’s pocket pivot, using the 10-day moving average as a downside guide for a stop.

LinkedIn (LNKD) Gilmo Report Chart

Charts courtesy of HighGrowthStock Investor (, ©2012 used by permission. (STMP) is normally not the type of stock that I favor given its thin trading volume of 362,000 shares a day on average which makes holding a 10-20,000 share position difficult for someone with a large account. Nevertheless, in the hopes that some Gilmo member with a smaller account might be able to play a smaller name, I mentioned it in my report of January 15th when it flashed a big bottom-fishing pocket pivot buy point since I was struck by the power of such a move. When STMP gets going the volume pours into this stock, and that is evident on the daily chart below. STMP flashed another pocket pivot buy point on Thursday of this past week as it came up and off of its 10-day moving average and followed up on Friday with a six-year closing high. You could also consider Friday’s move to be a buyable base breakout, and for now I would expect the stock to hold the 30-31 level on any pullback from here. (STMP) Gilmo Report Chart

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

Over the past week bio-techs have been pulling back as technology stocks moved to the forefront, but Friday saw some recovery in some of the better names. Jazz Pharmaceuticals (JAZZ), a stock that we initially identified as a buyable gap-up way back in November 2010 when the stock was trading at around $11-a-share, is back with a buyable gap-up move in early January that has led to the formation of a tight flag formation over the past three weeks as we see in the daily chart below. Friday’s action featured a pocket pivot buy point within this short flag formation that is potentially buyable using the 10-day moving average as your downside guide for a stop. Forward earnings estimates remain robust, and JAZZ is trading at about 12 times forward earnings, a likely reason why it is attracting what strikes me as clear institutional buying.

Jazz Pharmaceuticals (JAZZ) Gilmo Report Chart

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

Biogen Idec (BIIB) continues to come up the right side of its base, issuing pocket pivots all along the way, as we see in the daily chart below. Tuesday and Wednesday of this past week featured two more “tiny” pocket pivots up through and off of the 10-day moving average, and going into earnings on Tuesday pre-open I’m willing to hold a 10% position in the stock with the idea that a worst-case 20% drop on a bad earnings announcement will lead to 2% net damage to my portfolio. If BIIB comes out with a strong report that sends the stock gapping to the upside, then it becomes a perfect add point allowing one to pyramid an early position in BIIB taken down within the base on any of the previous pocket pivot buy points. BIIB has not seen much selling, even on the weakest of general market days, and the continuing stream of small pocket pivots within the base seems to argue for a decent earnings report on Tuesday.

Biogen Idec (BIIB) Gilmo Report Chart

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

We’ve looked at a number of bio-techs over the past couple of months as the group has distinguished itself, and it has become more a matter of weeding out the best situations. Of course this is easier said than done, but in general I tend to favor the higher-priced bio-techs such as BIIB, ALXN (not shown but which remains buyable), JAZZ. In previous reports I’ve also cited the strength in big-stock bio-techs like Amgen (AMGN) and Celgene (CELG), both of which have trekked higher. Viropharma (VPHM), more a bio-tech “on the come” as earnings growth is expected to pick up again, going from -3% in 2011 to +6% in 2012 and then 24% in 2013, is something more akin to a turnaround situation, and of course the market already knows that the company has been posting negative earnings growth as of late, so I don’t view this as an issue since the technical action of the stock remains strong. VPHM pulled back to is 10-day moving average, as we see on the daily chart below, and is holding well. Watch for a pocket pivot buy point coming up off the 10-day line here.

Viropharma (VPHM) Gilmo Report Chart

Consumers and retail names continue to act well, and Monster Beverage (MNST) remains one of my top picks in this market as it holds very tight after gapping above the $100 price level and holding for two more days before launching higher, as we see on the daily chart below. So far so good, and MNST has held in very tight over the past couple of days as it likely prepares to move higher. Frankly, if MNST is as strong a stock as I think it is, we should see it move into the 110-120 price area before it builds another base. For now, however, if you bought the buyable gap-up move nine trading days ago there is nothing to do but sit for now, pending the next buy point. Perhaps the stock will give the 10-day moving average, currently moving through the 104 price area, time to catch up so it can then give us another secondary pocket pivot buy point off the 10-day line before it gets into the 110-120 price level, although admittedly this is nothing more than wishful thinking for now. I would, however, use any pullback to the 10-day line as a buying opportunity in MNST.

Monster Beverage (MNST) Gilmo Report Chart

In my mid-week report of this past Wednesday I discussed the very tight action in Tractor Supply Company (TSCO) in the daily chart following a buyable gap-up move two weeks ago. Now this tight, constructive price/volume action is evident on the weekly chart, which I show below. TSCO is in the midst of building a very tight flag formation as it begrudgingly holds the gains from the big gap-up breakout. Given that TSCO broke down sharply in July and August of last year, undercutting the lows of a couple of prior bases, I would consider this new breakout a first-stage breakout for those who like to waste time worrying about whether a stock’s action is “late-stage,” a concept that is statistically bereft as I see it. My suggestion is to focus on real-time price/volume action, not labels regarding what a base is or isn’t, since in all cases determining whether a base is “late-stage” or not is best done in hindsight. In my view, TSCO remains quite buyable here using the 77.40 intra-day low of the gap-up day as your stop.


Every market day my screens pick up increasing constructive technical action in a broadening swath of potential leaders, and if I were to include all these charts in one report it would likely total 40-50 pages. Thus I am left to the task of trying to whittle down to those stocks I feel are the best leaders currently. Of course, the market provides the ultimate feedback system for honing your picks down to the best stocks, and that process is ongoing. If you have been following these reports closely over the past 2-3 weeks you should be long some profitable positions and in position to potentially pyramid these stocks into big-gainers should this market trend continue and potentially gain momentum. All we know for sure now is that positions are starting to “show some love” by rewarding us with initial upside paper profits, and this is the way you want any nascent process of getting invested into and pyramiding leading stocks to start. Therefore, we can conclude, “so far so good.”

Sure, the uptrend could end tomorrow, or next week, or next month. But as I’ve written in previous reports, do not be swayed by “concerns” about this or that market statistic or news event. Focus on the price/volume action of your stocks first, and unless the market forces you out by hitting your stops, all systems remain go.

Gil Morales

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

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.