The Gilmo Report

March 19, 2014

March 19, 2014

While the indexes looked rather bearish by last Friday’s close, they obviously didn’t have a mirror handy with which to view their bearish appearance and decided to rally sharply Monday and Tuesday. This rally was based on the alibi that the Ukrainian Crisis had worsened over the weekend, and by Tuesday the market was still rallying on news that Russian President Vladimir Putin had given assurances that he was not interested in splitting up the Ukraine. My initial thought was that this would be an entirely honest statement if Putin intended to take over all of the Ukraine instead!

The market’s upside impetus quickly lost its momentum today after the Fed policy announcement. After spinning around a bit right after the Fed communique, the market broke to the downside sharply just as we entered the final hour of trading. This was followed by a choppy recovery as the indexes recovered almost half of their losses, as the daily chart of the NASDAQ Composite Index shows below. We can also see that there is a fair bit of distribution around the peak and in my view investors need to continue to exercise caution. The S&P 500 Index, not shown, doesn’t look as weak as the NASDAQ, but it also did not move as far into new high territory as the NASDAQ did a couple of weeks ago when the NYSE-based indexes broke to all-time highs and the NASDAQ hit a 13-year high of its own.




The lessening of tensions in the Ukraine has given holders of gold an excuse to sell and take profits, and that excuse got even bigger as the Fed continued with its additional $10 billion in tapering. This makes their total monthly bond purchases $55 billion, down from the peak at $85 billion. The yellow metal, as represented by the SPDR Gold Shares (GLD), shown below on a daily chart, got clocked today on heavy selling volume as it broke below its 10-day and 20-day moving averages. In my view, this is a short-term sell signal for gold. The bottom line here is that the Fed is at an inflection point as it proceeds with its tapering activities, despite the fact that overall its monetary policy remains fairly accommodative. In the past the general rule has been that the market would not roll over until the third interest rate increase, but with QE replacing interest rate policy to a great extent, it could be that a few months of tapering is enough to tip the market and put an end to gold’s rally over the past couple of months. If you bought the GLD around the 120 level where I first began discussing it as buyable, taking some profits here is not a bad idea in my view given the price/volume action over the past three days.




Over the weekend I offered a few select long ideas in the event the market found its feet, and among these Finisar (FNSR) has performed the best, breaking out of a long “ladle-with-handle” formation today on strong volume, as we can see on the daily chart, below. On Monday FNSR pulled right back into its 10-day moving average before finding support and turning back to the upside yesterday on above-average volume. Although the stock is just breaking out of the handle in its ladle-with-handle formation, it could pull back below the 25 price area given the track record of most breakouts in this market. In fact, I sold my position in the stock into the breakout today given the weak general market action. From here I would look for a pullback to 25 or better as a more optimal entry or re-entry point.




I also mentioned Zulily (ZU) as a trade off the 10-day moving average given that the stock was holding very tight along the line as volume dried up in the extreme on Friday, as we can see on the daily chart, below. ZU launched higher yesterday on above-average volume, as I thought it might when I discussed it over the weekend, but I think it likely needs more time to work on its base, which so far is a 2½-week flag formation with no tight closes to speak of within the pattern. I tweeted to members yesterday near the highs of the day that taking some quick profits on this was not a bad idea. ZU pulled back in today on lighter volume but if the market remains in a sloppy state of affairs this will need some time to set up again. Meanwhile ZU was a nice two-day wonder trade, and that’s about it.




Tesla Motors (TSLA) held its “point of no return” on Monday when it was able to close up and off of its 20-day moving average and the 228.45 intraday low of its February 25th gap-up day. As we can see on the daily chart, below, the stock is again testing the 20-day line down in the 232-233 price area as volume remains well below-average. My guess is that where TSLA goes from here will have a fair bit to do with what the general market does. If the market rolls over again then TSLA may fill its gap down to the 218 level, roughly. Beyond that, I’m watching closely for a possible pocket pivot developing along the 10-day moving average. While there is no shortage of pundits who can trot out valuation analysis after valuation analysis, my view is that TSLA remains a big-stock leader that will likely continue its upside ways if the market rally is able to find its feet after today’s weak showing.




The names that I discussed over the weekend as decent candidates for my current buy watch list have acted reasonably well over the past three days, and in most cases did not move very much today despite the weak general market action. Among these Keurig Green Mountain (GMCR) is holding tight sideways after last Friday’s pocket pivot, as we can see on the daily chart, below. Based on the very tight price action with volume drying up sharply today as the stock held its ground well, this remains on my buy watch list, which means I’m only watching it for now, but if one still believes in the market’s uptrend then technically the stock is buyable on the basis of last Friday’s pocket pivot, using the 10-day moving average down at 109.79 as your selling guide.




Intrexon Corp. (XON) continues to hover above its 50-day moving average as volume dries up a bit, as we can see on the daily chart. Last Wednesday XON flashed a bottom-fishing pocket pivot buy signal, and over the weekend I discussed the positive price/volume characteristics of the stock’s chart as it tries to round out the lows of a new base. The stock could spend more time working sideways as it continues to work on its “roundabout” formation and the right side of a potential new base. For now it appears that pullbacks into the 29 price level find support, so if I were interested in buying the stock I would likely look for a pullback of this nature to do so. For now XON remains on my buy watch list as a stock that is acting constructively.




In my report of this past weekend I also discussed the constructive action in Michael Kors Holdings (KORS) which almost looked like it was going to fall out of bed yesterday when it gapped down on increased, but only average, selling volume. As we can see on the daily chart, below, KORS recovered today in the face of a weak general market to flash a continuation pocket pivot buy point as it came up through the 10-day moving average on volume that is higher than any down-volume in the pattern over the prior 10 days. Theoretically, this pocket pivot is buyable using the 20-day moving average as your selling guide. KORS remains in a very tight formation, and while today’s pocket pivot has to be seen as constructive given that it occurred after a gap-down yesterday and a general market sell-off today, the stock still has not resolved its current tight flag formation one way or the other.




iRobot (IRBT) continues to hold the top of its prior base quite tenaciously, as we can see on the daily chart, below. IRBT closed at the 50-day moving average and the top of the prior base on Friday, and on Monday gapped up on above-average volume that also qualifies as a marginal pocket pivot move. IRBT stalled out around its 10-day moving average but has held above the line over the past two days. I would have to say that IRBT acts constructively as it continues to show decent support on pullbacks to the top of its prior base, and ultimately the 50-day moving average. That said, the stock likely needs to put in more work, and my preference here is to use pullbacks to the 40 level and the 50-day/10-week moving averages in opportunistic fashion rather than chasing the stock after it has had a strong upside bounce.




LinkedIn (LNKD) got within 1% of its 50-day moving average today whereupon it stalled out and closed off its highs on increased volume, as we can see on the daily chart, below. As I have written in recent reports, I view the stock as potentially shortable on rallies into the 50-day moving average, and today’s move to within 1% of the line qualified as a shortable rally, in my view. The stock looked like it was headed for the February low down at 185.03 as it broke lower on Monday, but the stock magically levitated on no volume yesterday, leading into today’s gap-up move that took it up near the 50-day line. My view is that the stock remains potentially shortable on rallies up to the 50-day line at 207.29, using that as your guide for an upside stop.




Last Thursday I had some success shorting Gilead Sciences (GILD), not shown, just before it broke down below its 50-day moving average over the next two days. This breakdown occurred after the stock formed a short bear flag along its 50-day line after failing on a bid for new highs in late February and coming back into its prior base. Another leading stock that is showing a similar pattern now is Pandora Media (P), shown below on a daily chart. Note that P showed very weak upside volume as it moved to new highs in early March before gapping down off the peak on heavy volume. This led to a four-day downside move that took the stock to its 50-day moving average where it has since built a short bear flag along the 50-day line This is very similar to what GILD was doing last week before it broke down. Note also that downside volume dominates the pattern, and my view is that the stock is on the verge of breaking the 50-day line. On that basis, I consider the stock potentially shortable here using today’s intraday high at 36.34 as an upside stop.




Members may recall that I recommended purchase of Time Warner Cable (TWC) back in January and February while it was flashing pocket pivots within a tight base with the idea that the stock would get some sort of buyout offer after Charter Communications (CHTR) began wooing TWC. That is exactly what happened in mid-February when Comcast (CMCSA) stepped over CHTR’s bid and came in with a higher bid of its own, driving TWC up above the 145 price level. I then wrote in my February 16th report that members who bought the stock in the base down around 135 should consider taking profits. Proving that bulls make money, bears make money, and pigs get slaughtered, those who did not heed my advice right at the peak around 147 have now officially kissed their profit goodbye as TWC has round-tripped back to where it started in early February at around the 135 price level. Hopefully a lesson learned. In this market, a profit in hand is always worth two in the bush!




While there are a handful of stocks acting okay, my general preference currently is to avoid the long side of this market and not get sucked into the rally over the past couple of days beyond taking a few quick trades on the bounce such as, for example, one might have done with FNSR and ZU over the past couple of days. Other than that, I don’t see anything screaming at me to buy it as most leading stocks are pulling back and flopping around as they do so. Therefore I have no problem sitting back and seeing if any really juicy set-ups start showing up in here if the market can settle down and find its feet again. Otherwise, I’m quite open to going after short-sale targets if they are in the right position, such as with LNKD today when it came within 1% of its 50-day moving average, or P as it staged a little fake out rally off of its 50-day moving average today before reversing and closing down on above-average volume. For now I still consider it more likely that the market will push lower towards the 50-day moving average on the NASDAQ, and the next few days should be telling in this regard, so watch your stops and 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 positions in LNKD and P, though positions are subject to change at any time and without notice.

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