The Gilmo Report

November 24, 2013

November 23, 2013

The market remains in a mixed state as the indexes battled back to retake their prior highs, as we can see in the daily chart of the NASDAQ Composite Index, but leading stocks are something of a hit-or-miss affair. The interesting aspect to this market is that over the past week or so, if you’ve owned certain stocks like the 3-D printers or some of the “Four Horsemen,” you’ve been stopped out of your positions and could very easily be back in cash or mostly in cash as a result. As the chart below shows, despite the uneven action in leading stocks, the NASDAQ has managed to make a higher closing high, although volume remains fairly light and may become even lighter as we approach next week’s Thanksgiving holiday. Meanwhile the NASDAQ remains in a choppy quasi-range while the S&P 500 Index, shown below the NASDAQ chart, also moved to an all-time high on light volume Friday.






There is some rotational shift going on as we saw bio-techs spring to life on Friday while media stocks like Time Warner Cable (TWC) and Comcast (CMCSA) broke out in heavy volume. There is also some movement in the semiconductor space as we’ve seen big, old and slow semis like Micron Technology (MU) and Texas Instruments (TXN) inch their respective ways higher, and financials continue to act well as the Select Sector Financial SPDR Fund (XLF) ETF continues to move higher, as we can see in its daily chart below. Not that any of these groups are known for their ability to produce fireworks, but they are figuring into the continuing upside of the major market indexes.




Before I delve further under the market’s hood, allow me to indulge in my usual review of the so-called The Four Horsemen, beginning with Facebook (FB), which I show below on a daily chart. FB has still holding above its 65-day exponential moving average, the black line on the chart. On Wednesday I discussed the fact that its current pattern on the daily chart reminds me of Apple (AAPL) back in September/October of 2012. While it does bear some resemblance to AAPL during that period, I would not get locked into a bearish point of view on FB. So far this is the stock’s first correction since the powerful gap-up move of late July, and for all we know the stock could simply be building a base and is in the process of forming a “roundabout” formation. Confirmation of this would obviously be found in some constructive price/volume action as it rounds out the lows, most likely in the form of a bottom-fishing type of pocket pivot buy point somewhere along here.

With the 10-day moving average now running through the 47.11 price point, it might be worthwhile to watch for some sort of pocket pivot move occurring as the stock moves up through the 10-day line. Otherwise, if the stock breaks down through the 65-dema on some heavy selling, it may be set to move further to the downside. Friday saw the stock reverse and close more or less right at the 65-day line. Note that selling volume was the lightest we’ve seen since the stock started correcting off of its mid-October peak of 54.83. FB is now down 15% from that high, so the pullback and correction is occurring within the normal range of parameters we might expect for the formation of a new base. So far I’m keeping an open mind with respect to FB, and I advise Gilmo members to do the same.




LinkedIn (LNKD) is continuing to flop around in what is either a new base or a topping formation. With the stock 14% off of its recent price peak of 257.56, one can argue that its correction is relatively well-contained. As I wrote last weekend, there is still a possibility that it is in the process of building a double-bottom type of base with a standard-issue base-breakout buy point of 253.66, the mid-point of the “W.” Speaking for myself, I’ve been short-term trading the stock back and forth, long and short, over the past several weeks. Studying the daily chart, below, very carefully, we can see that the initial move off the second low in the “base” ran up towards the 50-day and 65-day moving averages before rolling over this past week. Note, however, that selling volume dried up on this latest three-day pullback to the 10-day moving average, and on Friday the stock tried to break the 10-day line but found support along the line as volume picked up compared to Thursday. There is potential for a pocket pivot buy point to develop along the 10-day line here, so keep your mind open to that should it occur. If the general market refuses to break down, then some of these “headless” horsemen could find their heads once again.




Netflix (NFLX) continues to track along its 10-day and 20-day moving averages on light volume, as is quite apparent from the daily chart below. With media stocks like TWC and CMCSA breaking out on Friday, I have to wonder whether NFLX will find a reason to start rallying from here. So far all the stock is doing is slowly trending higher after the huge-volume, massive reversal following earnings in the latter half of October. This gives the pattern since then something of the look of a little cup-with-handle type of formation. Frankly, I’m quite tempted to buy the stock back using the 20-day exponential moving average, the green line on the chart at the 336-337 level, as my downside stop because it looks like it just wants to go higher from here.




Tesla Motors (TSLA) remains the “problem child” among the Four Horsemen as its chart pattern just keeps getting uglier and uglier. Last weekend I theorized that the stock might try and stage some sort of reaction rally off of its 150-day exponential moving average (see November 17th report). But that theory was immediately and roundly smashed to smithereens when the stock blew through the 150-day line on the downside. Looking at TSLA’s weekly chart, below, we can see volume picking up sharply this past week as the stock bee-lines for its 40-week moving average, which of course corresponds to the 200-day moving average on the daily chart, which is not shown here. Anybody who bought the stock on the basis of the high, tight flag formation back in June and held the stock has just about completed a nice round-trip.




What helped to drive the NASDAQ higher on Friday were gap-ups in three big-stock bio-tech names, the most impressive of which was Biogen Idec (BIIB), shown below on a daily chart. BIIB, along with Celgene (CELG) and Gilead Sciences (GILD), all received favorable news from the European Union’s Committee for Medicinal Products for Human Use (CHMP) on Friday. This led to buyable gap-ups in all three. While I don’t show their charts here, one could buy CELG on the basis of its BGU using the intra-day low on Friday of 160.46 as your stop. GILD’s BGU could be bought using the 72.85 intra-day low of Friday as your stop.

Of the three, however, I was most impressed by BIIB’s gap-up move, as it showed the most power. If we look at BIIB’s pattern from late May until now, it has formed what has the look of a choppy base-on-base affair, which means it has spent a lot of time really going nowhere. In my view, this is potentially buyable using the 274.98 intra-day low of Friday as your stop. For all three of these bio-tech companies, BIIB, CELG, and GILD, Friday’s news was significant, and so I would expect that these BGU’s have a reasonable chance of working from here. If not, I think the stops are relatively nearby, keeping risk to a minimum. Maybe this stock trio will become the “Three Caballeros” that replace the Four Horsemen.




Another impressive buyable gap-up on Friday was seen in Splunk (SPLK), which launched higher after surprising investors with a one-cent profit vs. expectations of a one-cent loss. SPLK has been chopping around for about the last ten weeks as it has built a base with successively and slightly higher highs, but each time it moved to a marginal new high the stock came right back into the base. On a weekly chart, not shown, one could argue that the stock formed a six-week flat base before launching higher on Friday, which looks good to me. I consider the stock potentially buyable using the 69.01 intra-day low of Friday as your stop.




Taser International (TASR) has continued to move sideways along its 20-day exponential moving average as it builds a new base here, and Friday saw about 200,000 shares trade suddenly as the closing bell approached. With the stock up on the day, this served to create a pocket pivot buy point on the daily chart, below.




Some might think that TASR’s formation is a three-weeks-tight flag, but the weekly chart, below, reveals that this is not so since the stock has closed up each week over the past three weeks. Generally, a 3WT formation should show some downward drift with volume drying up, but TASR’s weekly chart reveals some wedging along the weekly lows of the pattern over the past three weeks. I suppose one could buy the stock on the basis of Friday’s pocket pivot on the daily chart using the 20-day line as your downside selling guide, but this subtle wedging action on the weekly chart makes me just a hair skeptical.




Big-stock NASDAQ names like (AMZN) and (PCLN) have continued to act well, with both stocks moving to new highs this week in spite of the market’s choppiness. I don’t show charts of either here since they are not currently showing any actionable buy points, but I am keeping an eye on another constructive big-stock NASDAQ name in Google (GOOG), shown below on the daily HGS Investor chart format that I like to use. Notice that the 2-dema Force Index has turned blue again while the 13-dema Force Index remains a nice bright blue color here, and a “baby Kahuna” has shown up this week in the lighter blue bar shown in the middle of these five indicators running along the top of the price chart. This puts me on alert for a possible pocket pivot off the 10-day line as GOOG tracks tightly along that key moving average while forming a fairly tight base following its mid-October buyable gap-up move. If you like big-cap NASDAQ names, some of which are admittedly outperforming the market and a great many other leading stocks currently, then this is something to watch for.




I discussed at the outset of this report that some semiconductors were acting reasonably well, despite their plodding tendencies. Among these, however, NXP Semiconductors N.V. (NXPI) is perhaps a more dynamic name in the group that is building a base here, as we can see on its weekly chart, below. So far the action looks okay as the stock pulls down towards the 10-week moving average and this week found some support off the line as it closed just over 43% above the intra-week low while volume picked up slightly. On the daily chart, not shown, the stock has also pulled back to its 20-day moving average where it is finding ready support. I would consider this potentially buyable on the pullback here with the idea that it will hold the 50-day moving average at 39.22 on any further pullback.




Among other semis that I’ve discussed in recent reports, Microchip Technology (MCHP) continues to hold up in a choppy range since its buyable gap-up move of not quite four weeks ago. This still looks okay, and it was able to hold above the 20-day moving average earlier this week on a pullback, which I consider to be constructive. It is, however, likely to be a bit slow. In this market perhaps slow is better if one does not have to deal with a lot of volatility.




Sandisk (SNDK) is another recent BGU in a semiconductor stock that has chopped around since the gap-up move in the latter part of October, as we see on its daily chart below. But progress has been rather slow for the stock, as we can see on its daily chart below. It did, however, find pocket pivot support off the 50-day moving average this past Thursday on the pullback. This could be considered constructive and buyable with the idea that it will hold the 50-day moving average. Speaking for myself, however, SNDK is just a bit too slow for my tastes, and I probably would prefer something like NXPI if I want to have exposure to the group.




With the financials and the XLF continuing to act well, names that I discussed in my November 13th report continue to push higher, such as Morgan Stanley (MS), shown below on a daily chart. Nothing terribly exciting here, just a slow steady move to the upside following the pocket pivot buy point of November 11th, which I’ve indicated on the chart.




Charles Schwab (SCHW) also continues to move higher after its flag breakout/pocket pivot combination move of November 11th, as we can see on its daily chart below. The stock is up all of 90 cents from its closing price of that day, so while it is making progress to the upside it is most definitely the proverbial “slow boat to China.”




I also mentioned at the outset of this report that media stocks, specifically cable names, emerged as an area of strength on Friday. This was driven, however, by news that Comcast (CMCSA) and Charter Communications (CHTR) would be making a bid for Time Warner Cable (TWC), shown below on a daily chart. TWC responded by staging a buyable gap-up move on huge volume which, taken on its face, looks quite actionable. The only issue here is whether such a buy-out/merger between cable giants would be seen as an anti-trust issue, and thus the stocks could be subject to some price volatility based on developing news. The cable stocks were acting quite well before all this news hit on Friday, so it is not clear how much risk there is in buying into this move.




Friday’s news also had the effect of sending Comcast (CMCSA) higher on a breakout from a short three-week flag type of formation, as we can see on its daily chart, below. While both CMCSA and TWC don’t have huge sales growth, they do appear to be exploiting their revenue streams far more efficiently as CMCSA earnings growth came in at 41% in the most recent quarter while TWC is showing re-accelerating growth recently with earnings up 20% in the most recent quarter.




Meanwhile, another cable content provider, Discovery Communications (DISCA), has flashed a couple of pocket pivots over the past three days, as we can see on the daily chart, below. DISCA is showing decent earnings and sales growth in the most recent quarter of 25% and 28%, respectively, with earnings estimates for next quarter expected to kick up 51%, according to First Call. The Reuters estimates shown on the daily chart below also show decent earnings growth going forward, although the numbers differ somewhat from First Call’s. In any case, cable names tend to be slow movers, but as the hot names have mostly cooled off lately, from the 3-D stocks to the solars to the Four Horsemen, money is finding other places to go, at least for now.




Following up on the Fleetmatics (FLT) chart I showed last week, we can see on the daily chart below that the stock has spent the last week pulling back down to its 10-day moving average. This has had the effect of sending the 2-dema Force Index into the red while the 13-dema has remained positive. I would expect that the stock should hold the 10-day line on this pullback and possibly flash another pocket pivot off the line if it is to remain viable.




Acadia Pharmaceuticals (ACAD) was discussed as a possible short-sale target in my last report, but as we can see from the daily chart the stock isn’t quite willing to give it up just yet. A rally on Friday ended up reversing back to the downside as the stock appears to be tightening up in a pennant type of formation. Frankly, I can’t tell you for certain how this will resolve itself, as it could also be forming a “roundabout” type of formation. Hence I would leave this alone until something more definitive emerges.




Trulia (TRLA) continues to follow through on the downside after finding resistance at the neckline of its prior head & shoulders formation, as I discussed in my report of this past Wednesday. The daily chart below shows the stock breaking down through the 200-day moving average with selling volume picking up and coming in at above-average levels. This looks like it’s going to undercut the 33.43 low of two weeks ago, so that remains my short-term downside price objective on the stock.




Zillow (Z) also ran into resistance last week, but at its 50-day moving average, as we can see on the daily chart below. Z is still finding support at the neckline of its head and shoulders formation, but overall selling volume is declining. Thus Z is only shortable on rallies up into the 50-day moving average from here, with the idea that it will eventually break down through the neckline and head lower. A lot of this will likely depend on the action of the general market as well.




Ocwen Financial (OCN) was discussed in my report of this past Wednesday as a short-sale target as it builds what may be the right shoulder of a head and shoulders formation. As we can see on the daily chart, below, the stock has pushed right up into the 50-day moving average, but so far no selling has emerged to send the stock back to the downside. I’m watching to see how this rally develops, as volume did pick up slightly on Friday and the stock may push further above the 50-day line. If I were going to short into this rally with any conviction, I would need to see some signs of faltering and selling volume picking up as it fails at or around the 50-day line.




Northstar Mortgage Holdings (NSM) is also continuing to rally, pushing up higher within an overall bear flag formation. OCN and NSM might have benefited from news on Friday that mortgage delinquencies were declining, and since they make their money from servicing mortgages this is seen as good news for their businesses. I would expect resistance to show up at the high of the early November gap-down day at 41.90 or the 200-day moving average at 43.72. Again, any short-sale operations are going to be dependent on the state of the general market, and a continued general market move to the upside as we push into a light-volume holiday week on Monday might end up pinching short-sellers.




With hot names in a variety of areas cooling off, and some turning downright “icy” such as Voxeljet (VJET), which ended Friday at 35.86, 48% down from its intra-day peak of 70 just five days ago, the market’s character has changed somewhat. Slower-moving names appear to be helping to lead the market indexes higher, while the big bio-techs BIIB, CELG, and GILD emerge as the latest hot group in the market thanks to Friday’s buyable gap-up en masse action. If you’re looking for some heat to play, perhaps these are the names to jump on, along with SPLK, which also staged a powerful buyable gap-up on Friday.

Depending on which names you own, the market still has an element of danger to it, and one must be nimble to rotate quickly into names that are suddenly emerging as potential new leaders. BIIB, CELG, and GILD have been relatively quiet over recent months as they have ranged around in big basing formations, so maybe they will be able to produce some strong upside legs here that are playable and profitable for nimble traders. NFLX also looks like it wants to move higher, while LNKD and FB might be able to complete new bases and come out of their current pullbacks/corrections.

While the Fed talks about QE tapering, I have to question whether this is even possible given the upside effect this would have on interest rates and the consequent amount of interest the U.S. government would have to pay on new debt issuance to finance its grossly profligate spending habits that have sent the national debt to over $17 trillion. QE is also what seems to keep the bears from getting any gratification in this market, but I would also argue that the bulls are not having an easy time of it either.

So while I consider this market to have an element of danger to it, I am still on the lookout for opportunity on a stock-by-stock basis, whether short or long. As we get closer to December, the prospect of the proverbial Santa Claus rally is always a possibility, but then so is the possibility of Santa running into a SAM missile, given the uneven action among individual stocks. Thus I tend to think that a cautious approach which also expresses a willingness to take a shot (maintain tight stops, of course) when an actionable opportunity emerges on the long or short side is the only sensible way to approach this market.

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 a position in SPLK, though positions are subject to change at any time and without notice.

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