The Gilmo Report

June 11, 2014

June 11, 2014

Despite the Dow Jones Industrials coming off -101.91 points today, the NASDAQ Composite Index, shown below on a daily chart, held in pretty well as it closed down only -0.14% or -6.07 points. For the most part, the NASDAQ looks like it is trying to build a handle of sorts as it moves tight sideways as it snuggles up to its prior March highs over the past three days. As always it boils down to what individual stocks are doing, and while a number might be considered out of buying position, we are seeing constructive action among a number of leading stocks. Volume was slightly lower on the day on both exchanges, so the selling lacked intensity. As well, the indexes are extended from their recent “breakout” points where the S&P 500 moved to all-time highs three weeks ago as the NASDAQ pulled off a trendline breakout that also carried it through its 50-day moving average,. Pullbacks can be expected, and if the market can work off some of its overbought condition in low-volume pullbacks like today’s then the action has to be seen as constructive.




With the Dow coming off as it did and the NASDAQ holding up much better, the action smelled a little bit rotational. The key will be to keep an eye on the Russell 2000 Index, for which the iShares Russell 2000 (IWM) ETF, shown below on a daily chart, serves as a proxy. The Russell 200 staged its own trendline breakout when the NASDAQ did in the latter part of May, and just five days ago was able to blast above its 50-day moving average. This provides us with a clue that money is moving back into the smaller, high-growth names, otherwise known as the “risk-on” area of the market. The IWM pulled back today in what looks like a normal reaction and consolidation of the prior sharp, three-day upside move through and above the 50-day moving average.




My favored stocks have continued to hang in quite well. I’ve been reminding members to watch for a pocket pivot in Facebook (FB) as it moves tight sideways above its 50-day and 20-day moving averages. As we can see on the daily chart, below, that pocket pivot materialized yesterday as FB pushed to a higher-high after gapping up to its 10-day moving average at the open. Volume picked up to a point that is just a hair above average, and while others might tell you that the stock is “still building a base,” if you were on it yesterday the stock could have been bought more or less right at the open, although today’s pullback to the 65 price level offered another reasonable entry point as I tweeted earlier today. FB closed very tight today and slightly positive in a down tape, which I consider to be very constructive. It remains within buyable range of the pocket pivot, using the 10-day moving average as a selling guide.




While I consider FB to be the “big-stock” social-networking leader, it is interesting to see the other social-networking stocks like LinkedIn (LNKD) try to move in sympathy to FB’s strength. Interestingly, as we can see on the daily chart, below, LNKD flashed a very deep bottom-fishing pocket pivot (BFPP) yesterday right along with FB as if it had no intention of being outdone. Like FB, LNKD held tight today despite the weak index action, and with yesterday’s pocket pivot perhaps the stock has a chance to rally up closer to its 200-day moving average. I would note that (AMZN), not shown here on a chart, had a similar deep bottom-fishing pocket pivot five days ago and has since continued higher before finding a little resistance today at its 200-day moving average. If one wanted to play LNKD on the basis of this BFPP then one should do so with the idea that the stock will hold the 50-day moving average on any pullback. That strategy would have worked with the AMZN BFPP, and I also noticed that UnderArmour (UA), also not shown here on a chart, pulled off a similar BFPP.




Palo Alto Networks (PANW) is holding very tight here as the “ants” start to swarm on its daily chart, below. As I’ve explained before, the little black triangles, which are affectionately known as “ants,” have shown up at the top of each daily price bar for the past five days. They indicate that the stock has been up 12 out of 15 days in a row or better. That’s a decent show of strength, in my view, and the context of the overall chart action confirms this. The tight action in this little bullish flag is pushing right up against the highs from the left side of the pattern as PANW appears to be setting up for a new-high breakout soon. The stock could be seen as buyable here with the idea that it should move up and out of here fairly quickly. A reasonable selling guide in this case would be the 10-day moving average. However, I’ve been highlighting PANW as one of my favorite stocks in this current market rally, and for the most part members should have been in the stock down closer to the buyable gap-up of two weeks ago (see June 1st report) and the 73 price level.




Sunpower (SPWR) is just tracking sideways after last week’s buyable gap-up, as we see on the daily chart below. This also looks to be revving up for a breakout, and so far my approach to buying the stock has been to jump in on weakness, particularly on pullbacks to the 10-day moving average that have occurred over the past few days, as we see on the daily chart, below. Volume picked up slightly today, indicating a bit of supporting action off the 10-day line. SPWR remains buyable on the basis of last week’s BGU, with the idea of using the 33.27 intraday low of the BGU day as your selling guide.




Kate Spade (KATE) looks fine, in my view, despite yesterday’s reversal after an intra-day attempt to break out of this current cup-with-handle base it is still working on. KATE is a smaller stock, and so the fact that it couldn’t clear the peak of its current handle isn’t an issue given the very light volume. In fact, I consider this light-volume pullback to the 10-day moving average as buyable. Like so many other stocks in this market, KATE looks like it is simply setting up to move higher, and as long as the general market doesn’t get into any trouble, I suspect we will see that eventually. Meanwhile, the basic idea here is that KATE is still within buyable range of the pocket pivot gap-up move it had in mid-May and which marks the start of the handle area of the cup-with-handle base.




Over the weekend I wrote that I would prefer to buy into a constructive pullback to its 10-day moving average in Pacira Pharmaceuticals (PCRX), shown below on a daily chart, and the past two days have given would-be buyers that opportunity. I think if you like the stock this is where you look to buy shares, with the idea that the stock will hold the 10-day moving average, plus another 2-3%. This is roughly in line with the left-side peak of its cup-with-handle base.



I’d have to say, however, that in the bio-tech area I like Horizon Pharmaceuticals (HZNP) better. Over the weekend I pointed out that the stock was setting up to move higher as it tracked tightly along its 10-day and 50-day moving averages. That move higher materialized on Monday as the stock pushed out of its two-month range on another pocket pivot buy point. This was giving me some strong “Code Blue” signals on my HGS Investor software “Secret Weapon” chart over the weekend, and sure enough strength materialized in the stock as it pocket-pivoted out of its current low-base range and to a higher high, as we can see on the daily chart below. HZNP has pulled in slightly over the past two days as it tucks into its 10-day moving average, but so far it is holding above the low-base range rather well as volume dries up.




Another victory for my “Code Blue” indicator is being scored with Interxion Holdings (INXN). As I wrote over the weekend, the stock was moving tight sideways in a nice-looking base as my indicator bars went “code blue.” This preceded Monday’s pocket pivot buy point within the base which in turn preceded yesterday’s base-breakout on above-average volume, as we can see on the daily chart below. If you wanted to buy this one, then you had your chance on Monday morning per my discussion of the stock over the weekend. Closing at 27, the stock is still within 5% of the 26.50 breakout point so it remains in buyable range. I would rather be more anticipatory by buying it Monday within the base or on the basis of Monday’s pocket pivot. This gives you an earlier entry as the crowd no doubt sees yesterday’s obvious breakout.




Showing why buying base breakouts is not necessarily the most expedient way to buy stocks, Keurig Green Mountain (GMCR), which I discussed over the weekend after its cup-with-handle breakout, gave up on the breakout attempt and flopped right back into its 10-day moving average as volume dries up here, as we can see on the daily chart, below. I wrote in my reports prior to this weekend’s report that members should watch for a pocket pivot in GMCR coming up through or off of the 10-day moving average. Therefore the optimal entry point was near the 10-day line last Friday as the stock was showing a strong pocket pivot volume signature early in the day. Again, I have to stress that members are much better off seeking to buy stocks on pocket pivots within their base and/or before they begin to launch and their action quickly becomes obvious to the crowd. While the flop back into the 10-day line is disappointing, it may set up another buying opportunity right here at the line with the idea that it will continue to hold that 114.36 price point.




Michael Kors Holdings (KORS) has turned out to be buyable on this pullback to the 50-day moving average following a failed breakout attempt two weeks ago after the company announced earnings. KORS is actually trying to come out of this short, tight eight-day price range after the up-and-down fireworks that followed the earnings report. Perhaps, like GMCR, it is regrouping for another breakout attempt. Of course, KORS and GMCR are, to some extent, “old merchandise” plays, but that doesn’t necessarily mean they can’t work. The critical factor is that if one cares to put on a position in either of these stocks, then have a reasonable stop in mind if they don’t work out.




Despite the down market a number of oil names were acting very well. Diamondback Energy (FANG) and Bonanza Creek Energy (BCEI), both not shown here on charts, made new all-time highs today while Sanchez Energy (SN) recovered this morning from a sharp spinout down towards its 20-day moving average, as we can see on the daily chart, below. The stock is a bit volatile, but I have to admit I’ve had some intra-day fun buying the stock on sharp pullbacks and then selling into the ensuing bounces over the past three weeks since the stock’s buyable gap-up in late May. Today’s action struck me as a decent shakeout, with volume coming in at 26% above average. While I would certainly continue to use pullbacks down to 33-34 to buy the stock, today’s shakeout may put the stock in position for some sort of continuation pocket pivot coming off the 10-day line, so keep an eye out for this. BCEI has been able to move higher on lighter volume over the past three weeks since its buyable gap-up that occurred on the same day as SN’s, and I might look for SN to follow BCEI into new high price ground shortly.




Below are my updated trading diary notes on selected stocks from recent reports:

ACT – finds support off the 50-day moving average, but as far as bio-techs and medicals go I still prefer HZNP. Stock is still okay as long as it holds its 50-day line.

ANIK – another example of why buying base breakouts isn’t necessarily the best way to enter a stock on the buy side. ANIK failed on a breakout attempt on Monday and has since drifted back into its 10-day moving average where it is buyable with the idea that it will continue to hold the 10-day/20-day moving averages.

ALXN – still holding tight along its rising 10-day moving average after flashing a small pocket pivot last Wednesday. Stock is buyable here.

CAVM – Stock is extended from last week’s continuation pocket pivot. Look to buy on constructive pullbacks to the 10-day moving average, currently at 50.23.

BIIB – after moving higher following its May 27th pocket pivot at the 300 price level, the stock has pulled back to its 20-day moving average around the 310 price level. With a 78 RS rating and a D accumulation/distribution rating this is not one of my favorite names. As I wrote earlier, I prefer HZNP in the bio-tech medical area.

ILMN – continues to forge higher as it approaches the 183.30 peak on the left side of its current cup formation. ILMN was one of the first stocks to turn off the lows of its base when it pocket pivoted back on May 19th. It was first discussed in my May 21st report.

TSLA – continues to hold tight along its 50-day moving average. As I wrote over the weekend, TSLA may be building the right side of a new base, and confirmation would come in the form of a bottom-fishing pocket pivot off of the 50-day line. Keep a close eye out for this.

VIPS – pulling back within close range of last week’s base breakout with a buy point at 175.16. Stock closed today at 180.91. A pullback to the 10-day line, however, at 172.62, would also be a possibility.

YELP – moving in a tight sideways range for the past nine days as it holds above its 10-day and 50-day moving averages following the BFPP of ten days ago. Buy on weakness down towards the 62-64 price area with the idea that it will hold the 50-day moving average.

As long as we don’t see the NASDAQ and the Russell 2000 come apart, I would consider a pullback here to be normal and probably necessary if the market is to continue higher. The trick is to remain steadfast and methodical, seeking to buy previously strong-acting stocks on constructive pullbacks. This morning a number of names came down with the market right at the open, but in most cases these pullbacks were quite buyable and the stocks either finished in the green, as FB did after pulling back below 65, or they close off just a small amount, as KATE did after pulling back to an intraday low of 36.73 and closing at 37.23, down 16 cents on the day. I continue to advocate an opportunistic approach in this manner, as progress can be made if one does not get carried away and tries to chase everything on the upside. For now, the long side of this market remains in force pending new evidence to the contrary.


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 had a position In CAVM, FB, HZNP, KATE, PANW, and SPWR, though positions are subject to change at any time and without notice.

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