The Gilmo Report

June 22, 2014

June 21, 2014

A little softness in the market on Thursday after U.S. President Barack Obama provided details of U.S. assistance in the current “Iraqi Crisis Lite” didn’t do much to derail the current rally phase as the indexes have held up tight near their recent highs. The daily chart of the NASDAQ Composite Index, below, shows an index that has repeatedly tried to sell off on an intraday basis over the past week only to find support near the lows of the day and close near the peak of the daily trading range. Friday’s inflated options expiration volume did little to change the situation, and this market still remains a buy on weakness as leading stocks act well.




The move in the precious metals, gold and silver, on Thursday struck me as somewhat out of the ordinary. With Fed Chair Janet Yellen indicating that interest rates would remain near zero for a considerable period, leaving open exactly what the definition of “considerable” is, the precious metals may finally be seeing the forest for the trees, as it were. While the government pretends that inflation is under 2%, consumers know better as they see the price of everything from food to gas to health insurance rising far more than 2% per annum. As the daily chart of the SPDR Gold Shares (GLD) ETF shows below, the yellow metal spiked back above its 50-day and 200-day moving averages on huge buying volume. The magnitude of the buying was what struck me, and my view is that the GLD is buyable using the 50-day and 200-day moving averages, both of which are about 2% away from the GLD’s Friday closing price, as a selling guide.




Tesla Motors’ (TSLA) is settling down a bit after a sharp two-day upside move on Monday and Tuesday of this past week, and so far the action appears constructive and normal, as we can see on the daily chart. It is possible that the stock will continue to move sideways for a period of time. It does appear that sellers aren’t really all that interested in hitting the stock up here, whereas the buying volume on Monday and Tuesday was quite powerful and indicative of strong conviction among buyers. If you’re long the stock as of Monday per my discussion of the stock in last weekend’s report there isn’t much to do other than sit and wait for the 10-day and 20-day moving averages to catch up to the stock.




Despite a spin-out on Friday I don’t see anything really wrong with Yelp (YELP) as it pulls back slightly and consolidates the move to higher highs on Wednesday. Volume over the prior two days has been light on the pullback and Friday’s action saw volume pick up just a hair over Thursday’s levels as the stock closed mid-range. In my view this is a sign of support, as we can see on the daily chart, below. The intraday low of the buyable gap-up that occurred six days ago at  71.83 remains the primary selling guide for the stock, and I might add that pullbacks that approach within 2-3% of that low, as they did on Friday, become buyable given that the BGU low provides a nearby and hence low-risk selling guide.




When I first started buying Sunpower (SPWR) down closer to the 32-33 price level, I had initially set a near-term upside price target of $40 for the position. With the stock now holding above the 40 price level, a pullback I might expect as a normal reflex reaction to the sharp upside breakout hasn’t happened. The stock, quite simply, acts like it just wants to go higher, and selling the stock based on the fact that it had reached the near-term price objective I had set for the stock (keep in mind that depending on your position size and trading style you might operate on the basis of a longer-term objective) seems to put me more in danger of losing my position prematurely. A couple of facts regarding SPWR that I find interesting: 1) as of May 30th, short interest in the stock totaled just over 12 million shares, more than ¼ of SPWR’s 41 million share float; 2) SPWR’s return-on-equity in 2013 was 21.0%, its highest ROE since it came to market as a publicly-traded company in late 2005. At this point SPWR is simply a hold as we wait for the 10-day moving average to catch up with the stock.




Twitter (TWTR) continues to gather upside momentum, closing to the upside for the past nine days in a row, as we can see on the daily chart. Volume levels are also nothing to sneeze at with seven of those nine days seeing above-average volume, and we are now seeing “ants,” those little black triangles that show up on my charts whenever a stock is up 12 out of 15 days in a row or better. Friday’s volume qualified as a pocket pivot volume signature, and although the stock did not move down far enough to meet up with the 10-day moving average at 47.20, the fact that it got within 57 cents of the 10-day moving average indicates to me that it was too strong to drop all the way back to the 10-day line. Thus I view Friday’s action as a continuation “bottom-fishing” pocket pivot.

Meanwhile, TWTR’s social-networking peers, LinkedIn (LNKD) and Facebook (FB), both not shown, bounce around in uncertain fashion as they move more or less sideways. While FB did find support at its 20-day line on Friday and remains buyable on the basis of the pocket pivot of nine trading days ago, it appears too slow right now and may simply be too big and too over-owned at this point to have any significant upside thrust. At least for now, TWTR is showing far more upside tendencies, and for this reason I view TWTR as the social-networking leader right now, at least from a short-term perspective. I consider the stock buyable on the basis of Friday’s pocket pivot using a violation of the 10-day line as your selling guide.




GW Pharmaceuticals (GWPH) moved to an all-time high on Friday on strong above-average volume following Tuesday’s buyable gap-up move, as we can see on the daily chart, below. GWPH priced their 1.7 million share secondary offering (keep in mind these are American Depository Shares representing 20.4 million ordinary shares of the UK-based company) Thursday morning at 86.83 per ADS. At this point the stock is fairly extended from the BGU intraday low of four days ago, and it is a matter of waiting for the 10-day moving average to catch up to the stock in order for a new entry point to emerge. Barring that, any constructive pullback to the 10-day line would be buyable, in my view.




Palo Alto Networks (PANW) tested its 10-day moving average on Friday after an orderly pullback that served to bring the stock into a buyable position. In fact, that pullback was so buyable that the stock flashed a pocket pivot buy point at the 10-day line on Friday, as we can see on the daily chart, below. PANW has been sitting right on top of its prior base at around the 80 price level as it revs up for new highs, as I see it. I consider this pocket pivot as another continuation buy point following on the heels of its late May buyable gap-up. So for those who bought the stock initially closer to the BGU low and the 74-75 price area this is a bona fide add point. PANW remains one of my favorite stocks in this market and I expect that higher highs will be coming soon.




Last weekend I discussed the pocket pivot along the 10-day moving average in PANW cousin stock, Verint Systems (VRNT), shown below on a daily chart. As we can see, VRNT has trudged higher from that roughly $49 buy point over the past five days to land back above the 50 price level on above-average volume this past Friday. As I’ve written in the past two reports, I expect the stock to retake the BGU highs in the 51-53 price level as it absorbs the 5 million share offering that was priced last Friday.




Another of my favored stocks that has moved higher after a late May buyable gap-up is Cavium (CAVM), shown below on a daily chart. The big volume on Friday is most definitely a pocket pivot volume signature, and in my view this pullback can be viewed as buyable using the 20-day exponential moving average at 50.08. Since its continuation pocket pivot of June 4th CAVM has moved above the 50 price level which has served as solid support over the past two weeks, so my expectation is that this will continue to be the case from here.




Freescale Semiconductor (FSL) makes chips that are used in the automotive, networking, industrial and consumer markets, making it something of a jack-of-all-trades semiconductor stock. The stock got hit in late April after announcing 1,033% earnings growth which apparently just wasn’t enough to keep FSL investors happy. The company also lost 20 employees in the March mystery disappearance of a Malaysian Airlines jet, but despite these two adverse events the stock has marched right back up to its prior highs as it forms a cup-with-handle base, as we can see on the daily chart, below. As you can see on my HGS Investor software chart view, the stock is going “Code Blue” as my indicator bars at the top of the chart all line up very nicely here as the stock holds tight along its 10-day moving average. FSL is expected to announce 300% earnings growth on a hard number of 36 cents a share when it reports in late July. After that, two more quarters of triple-digit earnings growth are expected. FSL is expected to grow annual earnings 224% in 2014 to $1.46 a share vs. the 45 cents it earned in 2013.

This looks to me like it wants to break out or at least flash a pocket pivot along the 10-day line, so for those willing to take a shot here I think the stock is buyable in anticipation of such a move given that my indicator bars have gone Code Blue. Not that its guaranteed to work, but with the semiconductors in general doing well and FSL still showing strong current and forward fundamentals it may be worth a shot.




After Tuesday’s pocket pivot buy point Kate Spade (KATE) followed up with a clean, 68% above-average volume breakout from its current cup-with-handle base, as we can see on the daily chart, below. While I have advocated buying the stock on weakness within the handle following the mid-May pocket pivot this standard base-breakout is theoretically buyable using the standard 7-8% downside stop, although I would expect the stock to hold the top of the handle at around 38 from here.




Keurig Green Mountain (GMCR) got hit on a downgrade on Thursday, sending the stock back down to its prior breakout point at around the 120 price level, as we can see on the daily chart, below. As I’ve discussed in recent reports, it is much better to buy GMCR on weakness rather than chase its intermittent but steady upside strength. With this pullback right back to the top of the prior cup-with-handle base and breakout point as well as the 10-day moving average, investors who like the stock are now being presented with a low-risk entry point. My preference has been to focus on “new merchandise” type stocks, as I’ve said many times before, so GMCR doesn’t exactly wet my whistle. But that doesn’t mean it can’t go higher. If you like the stock, this is your entry point, using the 10-day line as a selling guide if it doesn’t hold up.




I showed a daily chart of Chinese internet leader Qihoo 360 Technology (QIHU) in my report of this past Wednesday after the stock flashed a pocket pivot on Monday. QIHU, which I don’t show here, pulled back into its 50-day moving average, something I was looking for per my discussion of the stock. As I wrote, I would prefer to buy the stock on a pullback into the 88-89 price area, and QIHU closed Friday at 88.66. The stock is buyable using the 50-day line at 87.02 as a selling guide.

Meanwhile another Chinese internet leader, YY, Inc. (YY) is quietly coming up the right side of its base and showing strong price/volume action as it does so, as we can see on the daily chart, below. YY snapped out of its downtrend in late May with a big bottom-fishing pocket pivot coming up through its 200-day moving average. The stock flashed another strong-volume pocket pivot type move on Tuesday, although this was extended somewhat from the 10-day moving average. YY has since pulled into its 10-day moving average on light volume where it looks buyable to me using the 10-day line as a selling guide. My guess is that if QIHU is able to continue working up the right side of a potential new base, YY is likely to do so as well, and I might consider that the technical action of YY looks stronger. Buy this pullback with the idea that the stock should quickly come up and off of the 10-day moving average following an orderly, lower-volume pullback.




Oil stocks have remained very strong, with all of the names I’ve previously discussed from the group just continuing to move higher. With most of the oil names extended it is hard to find anything in the group that might be setting up in a buyable positon. Matador Resources (MTDR) is one such oil stock that has moved up over the past month along with the group, so it is correlating to its peers, but its position within the chart is much different. On the daily chart, below, we can see the stock moving tight sideways in the handle area of a cup-with-handle as it flashes a pocket pivot buy point on Friday, ahead of any potential breakout to new highs. MTDR is like all the other oil stocks in that it also shows strong forward estimates over the next several years with a 57% annual increase to $1.21 a share estimated for 2014 and another 32% increase to $1.60 a share in 2015. If you’re looking for an oil name that has moved higher with the group over the last month but which remains in a prime buying position, MTDR may be it with the idea of using the 10-day line as a selling guide.




Below are some updated notes from my trading diary regarding stocks that have been discussed in recent reports:

ACT – stock is trying to break out of its current handle within an overall cup-with-handle formation on pocket pivot volume signatures that occurred on Wednesday and Friday. Stock was quite buyable on weakness at the 50-day moving average last week, but it is also buyable in this current position with the idea that it will continue to hold the 215 price level and the top of the handle.

ALXN – As I wrote this past Wednesday, “The stock in fact found pocket pivot support right at the 50-day line so this is actually buyable using the 50-day moving average as a selling guide.” That quiet pocket pivot off the 50-day line on Wednesday turned into a very loud pocket pivot on Friday as the stock launched off of its 50-day moving average on volume that was 50% above average. Still buyable using the 50-day line as a selling guide.

BIIB – stock flashed a pocket pivot buy point on Friday off of its 10-day moving average which is buyable using the 10-day line as a selling guide.

CELG – stock gapped up on Thursday on a pocket pivot move. Now extended but there were several pocket pivot buy points in the stock in late May and again in early June at the 50-day and then the 200-day moving average that I discussed previously.

CREE – has pulled back into the 50-day moving average where it might be buyable, but it is essentially right on the cusp of failing, so if one buys into this pullback right to the 50-day line risk can be controlled by using the 50-day line as a quick stop, allowing for another 2-3% porosity on the downside..

CLR – continues to make new highs after Wednesday’s continuation pocket pivot which I discussed in my report of this past Wednesday.

HZNP – still holding above the 16 price level and this past Tuesday’s pocket pivot buy point. Watch for any pullback to the 10-day line at 15.43 as a lower-risk entry point if not already long the stock closer to the 14 price level per my discussion of the stock in recent reports.

INXN – As I wrote in my report of this past Wednesday after INXN fell back into its base, “Buying the pullback to the 50-day moving average was the way to go on this one.” That turned out to be the case on Thursday and Friday as the stock staged a classic “re-breakout” after bouncing off the 50-day line on a pocket pivot buy point Wednesday.

LNKD – losing momentum after the bottom-fishing pocket pivot coming up through the 50-day moving average a little less than two weeks ago. I prefer TWTR over LNKD at this point.

PCRX – continues to move higher after Wednesday’s continuation pocket pivot as I discussed in my report of that day.

RH – continues moving higher following the BGU of seven trading days ago and is now over 10% higher, closing above the 90 price level on Friday. Hopefully members got on board right around the 80 price level as the stock is now way extended to the upside.

VIPS – stock found support at the 10-day line and the top of its prior base last week, but after a brief blip to the upside from there it has again pulled back to the top of its prior base. If you like the stock this is a buyable pullback with the idea that the stock will continue to hold the top of the prior base at around the 175 price level. One caveat: VIPS could be in a later-stage base, so it might be a bit obvious here on the base breakout. However, if one is so inclined, it is worth a shot given its position right on top of the base which helps to keep risk under tight control.

Despite a few nervous downside blips on an intraday basis over the past week, the market indexes have shown a tendency to answer any intraday pullback with a recovery of any lost ground and then some. This is constructive action. Meanwhile, leading stocks act well and my favored names continue to do well. While I haven’t seen any reason to try and “kiss all the babies,” I have discussed a couple of new situations in this report.

The reality is that I have not found it necessary to venture very far outside the realm of the names I first began discussing when the market began its current rally phase. This was in the latter part of May when the NASDAQ cleared its 50-day moving average. Meanwhile the NASDAQ closed at a 14-year high on Friday while the S&P 500 closed at an all-time high. Bottom line: The uptrend remains intact, so play it that way.


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, GWPH, PANW, TSLA, TWTR, SPWR, VRNT, and YELP, though positions are subject to change at any time and without notice.

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