The Gilmo Report

November 3, 2013

November 2, 2013

The market continues to churn around as it moves in what is more or less a two-week, slightly ascending range, as we can see on the daily chart of the NASDAQ Composite Index, below. From my own observation of the tape, it seems that upside moves in most leading stocks get sold into, with a few breaking through and showing better strength. The bottom line is that for the most part leadership in this market is an uneven affair. Even as the major market indexes avoided a reversal day, which they looked to be working on early Friday morning, and closed up to end the week, Friday saw declining stocks leading advancing stocks in a clear divergence. NYSE decliners led advancers by 1666 to 1359 while on the NASDAQ decliners were further ahead of advancers by 1494 to 1044. Objectively, you are looking at three churning/stalling days in a row for the NASDAQ as it closed roughly mid-range on Friday, but all three days featured the index moving higher earlier in the day only to give up those gains as the day progressed.




The S&P 500 Index looks a little better as it closed in the upper part of its range on Friday on above-average volume. Relative to the NASDAQ, the S&P 500 held up better on Friday thanks to strong movement in transportation stocks as three of the top ten moving groups on Friday were transportation-related. Some will tell you that the odds of the market moving higher over the next two months are very good, and historically this is true as the end of the year and the holiday onslaught tends to create a positive seasonal influence on the indexes. But operating on the basis of such bromides is not recommended. In 2011, the market had a very sharp downside break from the end of October to the end of November before limping higher into the end of the year.

Then 2012 saw the indexes sell off from mid-October into mid-November before essentially moving sideways into the end of the year. Thus the idea that the last two months of the year are going to represent some great money-making opportunity on a seasonal basis is simplistic on its face. Again, it all comes down to individual stocks. Last year, if you owned Apple (AAPL) going into the “seasonally favorable” last two months of the year, you saw your stock go from a high of 614 down to a low of 501.23, and if you held it for another month you would have had the privilege of watching your stock plummet even further to a low of 435. So much for favorable seasonality – watch your stocks instead!




While the NASDAQ and the S&P 500 don’t have the look of death to them just yet, the Russell 2000 Index, which is represented by the daily chart of the iShares Russell 2000 Index ETF (IWM), below, has come down three days in a row, with a lot of selling coming into the IWM on Friday. Thus the “risk-on” component of the market, the small-cap stocks, is showing a bit of “risk-off” sentiment here as investors toss smaller-cap stocks. Notice, however, that we saw a similar three-day break in the Russell back in early October just as the market was finding its feet and getting ready to move back to higher highs. But again, I would say that it comes down to watching the action of individual stocks and taking advantage of potential opportunities on a stock by stock basis. From a practical standpoint, I have found it quite possible to make progress on both the long and short sides of this market on a swing-trading basis, but this has typified my approach in 2013 as a pyramiding style doesn’t tend to pan out in this environment. Stocks tend to have nice upside moves, particularly from “roundabout” positions where “bottom-fishing” pocket pivots come into play and then they either slow up or blow up.




With the Fed reaffirming its commitment to QE, I noted in my Wednesday report of this past week that silver, in the form of the iShares Silver Trust (SLV), not shown, had flashed a pocket pivot buy point along its 50-day moving average (see October 30th report). On that day, however, both of the metals churned around, with the SPDR Gold Shares (GLD), shown below on a daily chart, closing down on the day but still holding along its 50-day moving average. My thinking here was that with the Fed still on full-tilt QE and the U.S. government now able to raise the debt-ceiling at will, thanks to the recent passage of the Default Prevention Act of 2013, the dollar-devaluation game was on and the metals stood a decent chance of pushing higher. That assessment turned out to be wrong, as we can see in the two days of gap-down action in the GLD. This takes the metals off the table in terms of potential buy signals, but the negative action in gold and silver combined with a strong upside move in the dollar is a curious phenomenon in the face of what appears to be continued money-printing. If this action in the metals and the dollar continues, then it is clear that the markets see something else on the horizon.




Following the so-called Four Horsemen in my reports over the past few months is probably going to turn out as a good exercise in observing how leading stocks go through their life-cycle during a market uptrend, as there are clearly negative developments in the price/volume action of most of these names. Facebook (FB) continues to be the best-acting of the group as it is now “only” 9% off of its 52-week high, while LinkedIn (LNKD) and Netflix (NFLX) are 15% off of their 52-week highs and Tesla Motors (TSLA) is bringing up the rear as it has dropped 16% from its 52-week high. As we can see on the daily chart of FB, below, the stock found support at its 50-day moving average on Thursday after a wild after-hours reversal on Wednesday following its earnings announcement that saw the stock run up to 57.44 before reversing to close the after-hours session right near where it started at around the 49 level. FB looked to be on death watch early in the day before managing to close up about a buck at 50.21.

Investors apparently still want to be in love with the stock after hating it when it was down below 30 a few months ago. Thursday’s action did constitute a pocket pivot move off the 50-day line, but remember that this is coming after a four day downtrend, and pocket pivots occurring from a position like this generally need more time to settle down. Thus we might see the stock move sideways here along the 50-day line before issuing another pocket pivot from a more constructive, sideways formation. Friday saw FB reverse to close slightly down on the day, and this is consistent with my current view of Thursday’s pocket pivot.




While Friday’s move was the stock’s first visit to the 50-day moving average, FB’s weekly chart, shown below, reveals that this is the second trip to the 10-week line for the stock, and all within the span of four weeks. Maybe what we are looking at is the second pullback in a possible ascending base that would need to see one more higher high followed by another pullback and then a final breakout from what would be a fully-formed ascending base. Of course, this is all hypothetical at this stage, but perhaps something to watch for as FB has shown strong acceleration in earnings (58% and then 108%) and sales growth (53% and then 60%) over the past two quarters. FB’s softness after earnings was likely due to comments by the company that the growth in usage among the younger set is diminishing. As the father of two teenagers, I can tell you anecdotally that neither one uses FB, as they consider such usage to be indicative of those who “don’t have a life.” In any case, I think it all boils down to watching the stock, as a breakdown through the 50-day moving average would be your final selling guide.




I wrote in my report of this past Wednesday that I continued to view any bounces in LinkedIn (LNKD) as shortable given the stock’s current status as a developing late-stage failed-base short-sale set-up. LNKD has found resistance in the 226-227 area over the prior two trading days, as we can see on its daily chart below, and is currently flirting with the early October lows. It has already undercut these lows on a closing price basis, but the intra-day low of 213.50 achieved on October 9th is my short-term downside target for the stock on the short side.




Netflix (NFLX) gapped up into the 330-plus price area on Friday on the heels of an astute analyst’s buy recommendation that gave the stock a $420 upside price target and declared that the stock has “room to run.” The big buy recommendation had the net effect of sending the stock up on the day on a volume increase that was still below-average while the stock made zero net progress from the morning gap-up, as we can see on the daily chart below. Objectively, all the stock did was churn and stall at the 10-day moving average as it remains 90.73 points away from that $420 upside price target. Meanwhile, NFLX’s 50-day moving average has moved up to 309.81, and I continue to think that the stock will be at least testing that moving average for the next few days.




Tesla Motors (TSLA), a stock that is probably over-loved at this point, remains the worst-performing of the “Four Horsemen” as it remains in a pretty solid downtrend channel over the past 2-3 weeks, as we can see on the daily chart below. Like LNKD, TSLA has already violated its 50-day moving average, and despite a bounce attempt on Thursday, the stock stalled out and closed at the lower end of its trading range on Friday as buying interest petered out. TLSA is expected to announce earnings on Thursday of this week, and it may be the catalyst that seals its fate one way or another. In the meantime, I am not a buyer of the stock going into earnings, and on the basis of the 50-day moving average I tend to think that holders of the stock should at least be taking partial profits, but that is up to each individual investor in the stock based on their position size and profit cushion.




As of Tuesday of this week (AMZN) was holding up in a tight two-day flag with volume drying up following last Friday’s buyable gap-up move. However, providing proof that the market remains fluid and one must adjust and react to new, real-time information, by my report of this past Wednesday I noted that I did not like the increased selling volume we were seeing in what was at that time a three-day flag. In such a flag formation you want to see volume drying up as the stock moves tight sideways, and by Wednesday we were seeing two above-average selling days in the pattern. Friday saw another above-average downside volume day in the stock as it closed down on the day. Perhaps the stock needs more time to settle down and move sideways, but I still do not like the fact that selling volume within this now five-day flag is picking up while buying volume diminishes. The downside stop for this buyable gap-up is 352.62, so keep an eye on that level if you own the stock.




Google (GOOG) is probably more representative of the type of action you’d prefer to see following a buyable gap-up. GOOG has edged higher since its gap move of 12 days ago on the daily chart, below. In GOOG’s example you can see how it pulled in for two days as volume dried up following the BGU day before moving to higher highs. AMZN, on the other hand, has moved sideways for five days with selling volume picking up, but it is also hampered somewhat by the fact that its buyable gap-up of one week ago followed another buyable gap up two weeks ago, which might be a few too many buyable gap-ups for the market to digest all at once. GOOG’s buyable gap-up occurred as it came out of a long, first-stage base, which generally means it will tend to work better. In the meantime, the stock has slowed down enough to allow its 10-day moving average enough time to catch up to the price, setting up the potential for a continuation pocket pivot off the 10-day line. Members should keep an eye out for this as a second buy point in the pattern.




Solar stocks have taken back the #1 group ranking over the past two weeks, with First Solar (FSLR) becoming the latest to rise up from the dead in a manner not unlike SolarCity (SCTY) a couple of weeks ago. I first picked up and discussed the bottom-fishing pocket pivots in FSLR on September 25th and October 1st (see September 29th and October 2nd reports) that occurred along the 200-day and then 50-day moving averages, respectively. Since then we saw a buyable gap-up in FSLR that was also a double-bottom breakout in mid-October, but this all failed within a few days. This Friday we see a cup-with-handle breakout on the daily chart that was also a buyable gap-up move following the company’s spectacularly strong earnings announcement Thursday after-hours. In my view it’s tough to buy FSLR on strength, and acting on the bottom-fishing pocket pivots of September 25th and October 1st were much less stressful entry points. With FSLR breaking out to new 52-week highs, it will be interesting to see how well it holds the breakout. Currently the stock is too extended to be actionable, but one might consider a pullback to 52-53 that occurs on constructively lighter volume as potentially buyable, but we won’t know for sure until we see what that looks like precisely.




We can see some of the similarities to SolarCity (SCTY) that FSLR has in SCTY’s daily chart below. Like FSLR, SCTY broke out from a double-bottom formation in a move that was also a buyable gap-up, the only difference being that FSLR’s double-bottom buyable gap-up breakout failed within a few days while SCTY went soaring some 40% higher in about a week. SCTY didn’t pull back until it had made a new all-time high, confirming the tendency of leading stocks to slow down once they breakout to new highs. Now we see SCTY pulling in to form what might be termed a “high handle” as it approaches its earnings announcement this week, which is expected to be released Wednesday after the close. We’ll see what sorts of fireworks ensue from this week’s earnings report.




U.S. Silica Holdings (SLCA) is another of these bottom-fishing pocket pivot plays that had a great move following the two pocket pivots in early September and then again in early October. Since breaking out to all-time highs the stock has slowed down and built a short two-week flag formation within which it flashed a continuation pocket pivot buy point on Thursday coming up off of the 20-day moving average and through the 10-day moving average, as we can see on its daily chart, below. SLCA announces earnings this week, so if you bought the stock down in the mid-20’s on the basis of those prior bottom-fishing pocket pivots you still have a decent profit cushion in the stock and could potentially sit through the earnings announcement, which is expected to come out Thursday after the close.




Align Technology (ALGN) is another one of these slow-motion non-movers following its buyable gap-up move of two weeks ago, as we can see on its daily chart. The stock is still holding along its 10-day moving average, so I have to give it credit for that, and it may be that a 26% upside price move on that buyable gap-up day is a little much for the stock to digest in just a few days. As it moves along the 10-day moving average, this sets up the possibility of a continuation pocket pivot or the possibility of just buying the stock along the 10-day line if volume continues to dry up and reach extremely low levels, resulting in the classic “voodoo” day.




Most bio-techs have gone flat lately, as the group has dropped from its #1 group ranking four weeks ago to #4 this week. One of the holdouts on the upside, however, is Alexion Pharmaceuticals (ALXN), which rose up from the dead two Fridays ago to emerge from a big, wide-ranging base after violation its 50-day moving average about a month ago. As I wrote last weekend, I would not buy into the big breakout move of six days ago on the daily chart, below, preferring instead to wait for a pullback in the stock or some other constructive action. For now I might consider a constructive, low-volume pullback to the 10-day moving average as buyable, but it may turn out that the stock just moves tight sideways here for a while as it allows the 10-day line time to catch up.




Big bio-tech name Celgene (CELG) is somewhat representative of the malaise in bio-tech stocks as it drops below its recent short cup-with-handle breakout point and closes below its 50-day moving average for the first time since late June, as we can see on its daily chart, below. Last weekend I pointed out the weak reaction the stock had after announcing a lackluster earnings number on October 24th. If CELG moves below Thursday’s intra-day low of 147.23 that would constitute a 50-day moving average violation. For my money, I would have already sold CELG based on the fact that it was unable to hold the breakout level a couple of points higher.




I’ve been discussing the tight action in Taser International (TASR) in prior reports, and that constructive price/volume presaged a strong earnings report on Wednesday before the open, as we can see on the daily chart, below. TASR then gapped up on Wednesday, but by close was nearly 14% extended from the 10-day moving average where the stock was when I first discussed it in my October 16th report. TASR was one situation where I decided to hold a position going into earnings, and that paid off with what turned out to be a buyable gap-up move on Wednesday. However, with a nearly 20% profit in the stock I sold into that move above 18 and that turned out to be the smart thing to do. In this market, 15-20% gains are nothing to sneeze at, and I felt comfortable taking the short-term profit on that basis.

TASR has pulled back over the past two days as it comes in to test the 16.31 intra-day low of Wednesday’s buyable gap-up move, closing at 16.86 on Friday. If it comes in a little bit closer to the 16.31 level I might be inclined to buy back into the stock, assuming that occurs on a continuing pattern of decreasing selling volume. TASR has had a big move since mid-August, and this selling is not abnormal given that some investors will be inclined to take profits, but as I discussed in my October 16th report, I think the stock has the potential for a longer-term move.




Lumber Liquidators (LL) is another buyable gap-up move that isn’t showing much in the way of further upside impetus. Given that it has now moved sideways for seven days following the buyable gap-up move, as we can see on the daily chart below. I would not give it much room below the 111.76 intra-day low of the BGU day before unloading shares and getting rid of the stock. If you own the stock, or bought it on the basis of the buyable gap-up of two Thursdays ago, keep this stop-out level in mind as your selling guide. It could pull down to fill the gap at 108.99 or so, but it if this is going to work it will probably need to at least hold that downside level.




In my report of this past Wednesday I threw out a couple of short-sale ideas, among which was Trulia (TRLA), shown below on a daily chart. On Wednesday the stock was flirting with the neckline of a head and shoulders type of formation, and I pointed out that I expected the stock to move lower from there. Over the past two days TRLA has moved through the neckline and looks to me like it wants to test the prior late July low at 35.89 which coincides with the 200-day moving average. For now this is my downside target on this short-sale position. In the meantime I would view any rallies back up into the neckline in the 40-41 area as potentially shortable.




Arm Holdings (ARMH) was another short-sale set-up I discussed I this past Wednesday’s report as a late-stage failed-base situation following its failed up-with-handle breakout two weeks ago, as we can see on its daily chart, below. ARMH found resistance at its 10-day moving average on Wednesday and has since headed slightly lower to rest right on top of its 50-day moving average. I’m still looking for a break of the 50-day moving average on some heavy selling volume to confirm the LSFB set-up, using the 10-day moving average at 47.87 as my guide for an upside stop.




The market indexes and leading stocks, for the most part, continue to slow down a bit, and the question remains as to whether this is a healthy pullback and retrenchment after the sharp upside move off of the early October moves or whether we will see some November downside, not unlike that which we’ve seen in 2011 and 2012. I would not maintain some sort of sanguine happy-faced attitude towards the market based on some simplistic concept that the last two months of the year are usually positive ones for the market. Watch your stocks.

Meanwhile, I have taken a “bi-polar” view towards the market as I am willing to look at things from both a short- and long-side perspective, choosing once again to take an opportunistic view that looks at the market not as a stock market, but as a market of stocks. Stay alert!

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 ARMH, LNKD and TRLA, though positions are subject to change at any time and without notice.

Gil Morales & Company, LLC (“GMC”), 8033 Sunset Boulevard, Suite 830, Los Angeles, California, 90046. GMC is a Registered Investment Adviser. This information is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to GMC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Gil Morales & Company, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.