The Gilmo Report

July 2, 2013

July 2, 2013

The market has continued to “melt” higher over the past two days, something I was looking for, per my report of this past weekend. The NASDAQ Composite Index daily chart, below, shows that most of the index’s upside progress over the past over the past five days has occurred on three gap-up moves where the index gapped up and then traded around in a narrow range while making very little, if any, additional upside progress. Today the market churned around in a relatively wide range to close slightly down on the day across the board. The NASDAQ was able to hold its 50-day moving average but the S&P 500 Index continues to find resistance at the 50-day line, thus it is a question over which index will win out. Which will prevail: NASDAQ support at the 50-day line or S&P 500 resistance at the 50-day line?








With the Bureau of Labor Statistics’ monthly jobs report due out Friday before the open, the crowd expects a “Goldilocks” number of about 175,000 new jobs, at least the way government number massagers figure it, after which the need for continued QE will be confirmed and the market can merrily continue along on its way higher. Given that the indexes are in a five-day rally attempt with no follow-through yet, the crowd might be in a position to be fooled here. Many have hailed the bounce in the bond market over the past week, illustrated by the daily chart of the iShares Barclay’s 20+ Year Treasury ETF (TLT) below, but within the context of the May/June swoon in bonds this has the appearance of little more than a dead cat bounce.




A number of the oversold long trade ideas I’ve discussed in recent reports have had some decent upside moves, but at this stage I’m more interested in taking profits than trying to sit and play for an extended trend. Right here the market is just as vulnerable to rolling over as it is a follow-through. A bird in the hand is worth two in the bush, particularly with the higher-volume churning action we’re seeing in the indexes.




I wrote over the weekend that Tesla Motors (TSLA) looked as if it wanted to move higher, and it did exactly that on Monday as it broke out to all-time highs. Since I am skeptical of breakouts in this environment, I saw the move as more of something to sell into, especially since the breakout occurred on barely average volume.




Valeant Pharmaceuticals (VRX), which I discussed over the weekend as setting up along its 10-day moving average, did move higher over the past two days and into what could be short-term resistance at the 90 price area. Without a general market follow-through, I tend to look at this as a short-term trade up to resistance with the idea that the stock would have to build a handle here in anticipation of a later move to new highs.




After last week’s subtle pocket pivot, which I discussed in my report of this past weekend, Solar City (SCTY) led the solar stocks higher on Monday, but reversed course today on slightly above-average volume to test its 10-day and 20-day moving average confluence. This pullback may offer a buying opportunity if the general market follows through before the weekend.




Sunpower (SPWR) also continues to drift higher, closing just shy of a new 52-week high. Obviously, I’m not a buyer up here, but might look to be opportunistic on a pullback into the 20-21 price area. Whether I would want to buy in on such a pullback, as with any other long situation, is going to depend heavily on the market’s ability to sustain its current five-day rally attempt.




Yelp (YELP) and Angie’s List (ANGI), both of which I discussed in my weekend report, continued to hold up well with YELP trying to move higher over the past four days but stalling out. This probably needs to move sideways for a while, but pullbacks down into the breakout level at around 33 might be buyable under the right general market conditions.




ANGI continues to move in tight fashion along its 10-day moving average. It is finding support along its 20-day moving average, and under the right general market conditions would be buyable right here. As I wrote over the weekend, should the market somehow find a way to resume its uptrend, YELP and ANGI look like decent buy candidates within this emergent bulletin board/consumer review website space.




Last week I pointed out in both my weekend and mid-week reports the pocket pivots in Splunk (SPLK) and we can see below that these led to a breakout to all-time highs for the stock. SPLK ran into some selling today as it churned around on higher volume. Any pullback from here should hold the 45-46 price area.




Infoblox (BLOX), which I first discussed in my report of June 9th following its initial buyable gap-up move, has continued to move higher since the subsequent continuation pocket pivot back in early June despite the market’s difficulties. The stock continues to hold up along the 10-day moving average with no new buy points yet in the pattern.




Cree (CREE) followed up on last Friday’s pocket pivot move, which I discussed in my weekend report, to complete a v-shaped rally off last week’s lows and right back into new high price ground. Volume was decent today as one analyst came out with a comment regarding strong sales of CREE’s LED lighting products at Home Depot (HD).




Trulia (TRLA) was also discussed in my weekend report as another pocket pivot occurring on Friday’s Russell Index rebalancing, and while I was not entirely sure whether the volume could be seen as legitimate or not, both it and CREE have been able to move higher so far over the past two trading days of this week.




Three-D Systems (DDD) remains on the fence here as it holds just above its 50-day moving average, and I still can’t make up my mind as to whether this is a long or a short here. It is probably more of a market question, as a rally failure over the next couple of days would likely drag DDD below its 50-day moving average where it could then be interpreted as a late-stage failed-based short-sale set-up.




Among my short-sale targets, I note that Celgene (CELG) has continued to find resistance along its 50-day moving average. This may set up as a second right shoulder in the stock’s three-month-old head and shoulders formation and is shortable at current levels using the 50-day moving average plus another 2-3% as your upside guide for a stop.




Like CELG, Biogen Idec (BIIB) may also be forming a right shoulder in its own compact little head and shoulders pattern. BIIB is another one of my “go to” short-sale targets should the general market weaken and fail on its current rally attempt over the next few days. BIIB has reversed course after moving higher two out of the past three days, which tells me that sellers are quite interested in taking advantage of any upside move in the stock from here to unload shares. The only caveats with any short-sale targets is that we are now moving into earnings, and most of these big bio-techs will announce earnings sometime at the end of July. Thus if I decided to short either CELG or BIIB in the event of a general market breakdown, I would be looking to take any profits ahead of earnings as I am generally not in the mood to engage in “earnings roulette.”




I should also emphasize that I would NOT try and short a small bio-tech like Pharmacyclics (PCYC), which I did discuss as a possible short-sale target in my report of this past weekend but which is now off the table as a short-sale idea. The risk of a buyout with a smaller bio-tech is too great in my view, as Onyxx Pharmaceuticals (ONXX) demonstrated this week when they rejected a buyout offer from Amgen (AMGN). Big bio-techs remain fair game, however, as short-sale targets given the fact that they are not likely to be bought out. I also favor the bio-tech group as a short-sale target area given the fact that a number of the big-stock leaders in the group have begun to falter as of late, making the weakness a group phenomenon which I think helps to confirm the short-sale thesis in bio-techs.


Apple (AAPL) has continued to rally up towards its 50-day moving average, but ran into resistance at its 20-day line, as we see in the daily chart below. AAPL announces earnings towards the end of July, and so I am not inclined to be doing anything with the stock going into earnings.




Tomorrow will be a half-day as the closing bell will ring three hours earlier at 10:00 a.m. Pacific time. I don’t expect much to happen tomorrow, but Friday could be a different story. The expectation of a jobs number that is neither “too hot” nor “too cold” seems to be built into the market here, which is otherwise in “no man’s land” given the fact that we have not seen any kind of follow-through in the market so far. The last few days have seen some higher-volume stalling in the indexes and so it is simply a matter of waiting to see how this current rally attempt finally resolves. A number of the long ideas I’ve discussed in recent reports as “oversold rally trades” have moved higher, and one must now decide whether it is worth it to hang on going into Friday’s likely pivotal jobs number or to take profits and seek to re-enter if the market is able to resume its rally. The beauty in either case is that if you do have a stock that has moved up sharply over the past few days, such as SPLK or TSLA, you have some profit cushion underneath you and so are slightly ahead of the game should the market rally resume. Until then it’s a matter of waiting and watching. 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 no positions, though positions are subject to change at any time and without notice.


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