The Gilmo Report

November 9, 2013

November 9, 2013

A post-earnings jack in (PCLN) combined with oversold conditions in a number of former leaders and a Fed Permanent Open Market Operations (POMO) day gave the market the cover it needed for a nice upside QE “grinder” rally on Friday after taking it on the chin Thursday, as we can see on the daily chart of the NASDAQ Composite Index, below. As I wrote in my mid-week report of this past Wednesday, the NASDAQ was showing a large number of churning/stalling days on heavier volume over the prior couple of weeks or so, and this finally came to a head on Thursday. The interesting thing about Thursday’s break is that leading stocks had already been coming down for about the last week or two, and I became cautious well over a week ago, before the damage under the market’s hood became more obvious by Thursday.




The move in PCLN Friday, while looming large on a point basis with the stock up 50.31 points on the day, was only 4.9%, and on its daily chart, below, looks less exciting. However, it did constitute a pocket pivot buy point, albeit from a v-shaped position. PCLN was looking like death on Thursday as it ran straight down to its 50-day moving average, and after-hours sold off hard following its earnings announcement. But by Friday’s opening bell the stock had stabilized and was gapping higher. PCLN led a recovery in the NASDAQ, and with a number of NASDAQ names in oversold positions, it is still possible that the NASDAQ could regain its highs in the next few days.




In fact, the Dow actually made an all-time closing high on Friday, reversing all of its losses from Thursday, while the S&P 500 Index, shown below on a daily chart, also reversed its Thursday losses and remains within a hair’s breadth of its prior highs. The market looked like it was ready to sell off on Friday after the jobs number came in at 204,000, much higher than the 100,000 non-farm payrolls analysts were looking for given the expectation that the recent government shutdown had deleteriously affected the economy. Perhaps this is a strong argument for keeping the government in shutdown mode, and it at least proved that the government is not that critical to the more productive sectors of the economy.

The strong jobs number initially brought QE tapering back on the minds of investors, but as the morning progressed the idea of a stronger economy enabling an orderly exit from QE seemed to take over, but I would argue that many stocks were already in severely oversold positions and in a position to rally. As well, Thursday’s carnage set up the emergence of some new potential leadership, which I’ll get to a little bit later. In any case, with the Dow making a new all-time closing high, this puts the market, at least on the basis of the Dow’s action, in a de facto rally resumption, oddly enough. If the S&P 500 or the NASDAQ does the same this week, then the rally is on again. In the words of Gomer Pyle, “Surprazzzz, surprazzzz.”




The “Four Headless Horsemen” continue to flounder and all of them were already in the throes of pullbacks, corrections, and outright sell-offs well before Thursday’s market break made it obvious. Facebook (FB) continues to dip below its 50-day moving average, and even in the face of Friday’s general market strength is unable to mount any meaningful rally off this key moving average, as we see in its daily chart below. Volume was lighter on Friday as sellers failed to swarm the stock. However, it is possible that FB is suffering from a temporary case of “Twitteritis,” as the latest social-networking IPO, which trades under the symbol TWTR, does what every single other social-networking IPO has done after its IPO debut: Open up big and then sell-off straight down from there.

On Thursday TWTR opened up at 45.10, just under 19 points above its $26 offering price, ran up to an intra-day high of 50.09 and then reversed to close at 44.90. Thus just about anybody who was dumb enough to buy the stock on Thursday ended the day underwater with their position. The stock continued its Icarus-like plunge on Friday, dropping another 7.2% to end its second day of trading at 41.65. What possesses people to do something as silly as buy an overheated, money-losing IPO on its first day of trading can only be irrational and unbridled greed rooted in a complete loss of short-term memory.  And so history repeats itself with TWTR. Getting back to FB, I note that the daily chart has the look of a little head and shoulders type formation, but this is not that critical as the stock is still holding above last week’s lows despite dipping just below the 50-day moving average. With selling volume muted on Friday, there is still potential for the stock to bounce from here, but certainly a break below Friday’s low would confirm a 50-day moving average violation and a sell signal for the stock. This remains a fluid situation, and the outcome may depend on what the general market does this coming week.




LinkedIn (LNKD) undercut the 213.50 early-October low on both Thursday and Friday, and this was the price level I was using for my first downside price objective on the stock as a short-sale target, as I have discussed in the past two reports. With this undercut, which also filled the early August gap, LNKD is now in position to bounce a little bit here. Near-term resistance appears to be in the 219-220 price area.




Netflix (NFLX) continues to bide its time as it tracks along its 10-day and 20-day moving averages with volume remaining rather muted, as we can see on its daily chart, below. The interesting thing with NFLX, in my view, is that the market weakness on Thursday was not utilized by the stock to break to the downside and perhaps test its 50-day moving average as I’ve theorized in previous reports that it might. Take away the huge, ugly red reversal spike in the pattern and you have what looks like a mini-cup-with-handle thing going on here. The bottom line is that NFLX has not violated or even tested its 50-day moving average in any meaningful way despite some of the weakness in the other “Headless Horsemen.” If we were to see a pocket pivot buy point develop along the 10-day line here, it is quite possible that it would be a buyable situation, so investors should remain open to this without taking a bullish or bearish hard-line position on the stock.




Tesla Motors (TSLA) is the “Headless Horseman” that is now missing a leg, an arm, and perhaps another unmentionable appendage as it has gapped down three days in a row before bouncing on Friday. TSLA proves that things can change quickly in the market as it goes from dynamic leader to headless horseman in short order following Wednesday’s earnings report. While I do not have a 150-day exponential moving average drawn on the daily chart below it is interesting to note that while TSLA appears to be lost in “no-man’s land” between its 50-day and 200-day moving averages, it did actually bounce right off of the 150-day line on Friday. I have noticed that the 150-day exponential moving average is often a place where stocks bounce when their 200-day moving average is way, way down there as TSLA’s is. TSLA would have to get to 104 and change before meeting up with its 200-day moving average, which would almost cut the stock in half. In any case, the stock is now 29% below its all-time high, which is a brutal pullback for anyone not heeding the stock’s recent 50-day moving average violation and trying to sit through earnings.


GR111013-TSLA (AMZN) on Thursday violated the intra-day low of its buyable gap-up move of two weeks ago, as we see on its daily chart, below. It did, however, manage to find support at its 20-day exponential moving average, the green line that I use on my daily charts. I had already discussed the fact that I didn’t like the way the stock was forming its little flag formation following the buyable gap-up of a little over two weeks ago. Downside volume was above average in that short flag where you really want to see downside volume drying up in the flag. However, it is understandable that AMZN would fail on this latest BGU given that it already had a BGU several days earlier. This pullback to the 20-day moving average may help to correct that, and I would keep an eye on the possibility of buying AMZN shares on a low-volume retest of the 20-day moving average using the 20-day line as a reference for a quick downside stop.




I long ago advised taking profits in Yelp (YELP) when it was in the 70 price area, and the stock has floundered about in volatile fashion since then. Interestingly, despite this week’s sell-off through the 50-day line, YELP still did not violate its 50-day moving average on a closing basis as it found support along the lows of its recent pattern over the past two months or so, as I’ve highlighted on the daily chart below. YELP might be suffering from a little bit of “Twitteritis” itself, but at best I think the stock needs to form a whole new base before it can be considered a potential leader again.




On the short side, Trulia (TRLA) busted its 200-day moving average on Thursday, which made things a bit obvious on the downside at that point. As I discussed in my report of October 30th, TRLA was a short around the 42 price level, using the 200-day moving average as our downside price and profit objective. Thus this short-sale target play has achieved its short-term objectives, and I would like to see how it acts from here and whether any shortable rallies might present an opportunity to re-enter the stock on the short side. TRLA reflects the weakness that is plaguing the overall housing sector as building stocks have been raked over the past few days along with mortgage-servicers like Ocwen Financial (OCN) and Nationstar Mortgage Holdings (NSM) which were decimated following recent earnings announcements.




TRLA’s cousin, Zillow (Z), is rallying back up into resistance at around the 80 level after finding support at the neckline of its current head and shoulders formation, as I’ve drawn on the daily chart below. Z is still in position as a short-sale target, but it is not clear whether the stock needs to put in more right shoulders before finally breaking down through the neckline of this H&S pattern. This will probably only work to the downside if the general market continues to weaken, otherwise a market rally resumption could bring the stock back up to its 50-day moving average somewhere in the mid-80’s. Thus if one wanted to try and short into Friday’s rally, should it continue into this coming week, one should probably use a tight stop at the 80-81 price area.




Arm Holdings (ARMH) finally confirmed its late-stage failed-base status by breaking below its 50-day moving average on Thursday, as we can see on the daily chart, below. This was followed by a small bounce as the stock was lifted by the hurricane force winds created by Friday’s oversold rally. This may continue to rally back up to the 50-day moving average, but for now if I were short this one I’d use the 50-day moving average as a trailing stop. Semiconductors as a whole have actually been one of the stronger areas of the market, believe it or not, so one thing ARMH does not have going for it that TRLA and Z do is the general breakdown in their related industry group or groups.




Friday saw one major group phenomenon develop as financials all rallied and many individual names among small and large banks as well as the big brokers flashed pocket pivot buy points. This is seen in the SPDR Select Financials (XLF) ETF, which reflected this group action by having a pocket pivot of its own, as we see on the daily chart below. As far as individual financial stocks go, if one felt such a broad move in the financials was attractive enough to buy into, it is probably best to focus on those with the best chart patterns and fundamentals.




Goldman Sachs (GS) was one big broker flashing a pocket pivot on Friday, as we can see on its daily chart, below, and it is one of the major components of the XLF. Its earnings and sales however, leave much to be desired as it posted 1% earnings growth on -18% sales growth this most recent quarter, with estimates for -25% earnings growth next quarter. Meanwhile its relative strength comes in at a weak 60, so I’m not so sure GS fits the bill here.




On the other hand, Morgan Stanley (MS), which you generally don’t hear about as a leading financial stock, also had a pocket pivot on Friday, and I think that members would agree its chart pattern looks a fair bit more coherent than GS’ chart pattern. MS has also posted sequential earnings growth over the past three quarters of 940%, 82%, and 180% on accelerating sequential sales growth of 10%, 15%, and 34%. Meanwhile its relative strength comes in at 83 while its accumulation/distribution rating is B+. Earnings estimates for the next quarter call for 79% growth on a hard number of 50 cents a share. Thus, MS qualifies as a leader in the financial sector, and while we might think of it as a broker, it is part of the money center banks industry group.




Big banks like Wells Fargo (WFC) and Bank America (BAC) also had pocket pivots, but I consider these to be lower quality situations given their weak earnings and/or sales growth.  WFC posted 13% earnings growth in the most recent quarter on sales growth of -4% while BAC seems somewhat better with a 1900% earnings growth number and 1% sales growth. Both stocks have weak relative strength numbers at 60 and 68, respectively.






I suppose if I were going to take a shot at buying financials, I’d go with MS, the one showing the strongest fundamentals and a very coherent chart pattern. Another one among the brokers that I like is Schwab (SCHW), which (no surprise here) also flashed a pocket pivot buy point on Friday. SCHW is starting to turn things around with earnings growth of 0%, 6%, and 22% in the most recent quarters, while sales growth comes in at 8%, 4%, and 15% over the same period. Next quarter SCHW is estimated to post 40% earnings growth on a hard number of 21 cents a share. Overall, financials probably will be slow movers, but in some environments the slow movers are one place where progress can be made. SCHW or GS may not be TSLA or FB, but it is possible that a rotation into financials is playable here. At least where the patterns are coherent you have a decent idea of where your downside stops are and therefore risk can be reasonably well contained compared to the “mo-mo” names which have broken down recently.




Speaking of “mo-mo” names, I thought I’d revisit SolarCity (SCTY) which has retraced its recent breakout, proving once again that buying breakouts is not as effective in this market as buying bottom-fishing pocket pivots in “roundabout” type formations as stocks start to come up the right sides of potential new bases after a period of correcting. I took profits in my SCTY position somewhere as it streaked higher based on my preferred method of taking profits in stocks when they have sharp upside moves. Watching the stock pull back here after gapping down following its earnings announcement, I note that it is still holding its recent double-bottom breakout, SCTY actually posted a profit of 4 cents on sales growth of 52%.

Based on my “Ugly Duckling Theory” and the fact that the solar group continues to rank #1 among all industry groups, I toy with the idea of buying some SCTY shares on this pullback with the idea that it can hold the 48 price level. Other solar names like Sunpower (SPWR), First Solar (FSLR), and Canadian Solar (CSIQ) (not shown) among the names I’ve discussed in prior reports as well as a number of other solars are all continuing to act fine and are holding recent breakouts and/or uptrends. Should the market resume its rally I would expect these names to continue to lead as long as they are able to hold up and display strong relative strength in the midst of a market pullback.




I noted earlier in this report that I’ve seen some strength in certain semiconductor names recently, and of course we are already familiar with NXP Semiconductors (NXPI) from my prior discussion of the stocks both before and after its recent buyable gap-up move, which we see on the daily chart below. NXPI is still holding its buyable gap-up following earnings a little over two weeks ago. The stock pulled down with the market on Thursday but found support at its 20-day moving average on selling volume that was below average. This still looks okay, and I would be looking for a retest of the 20-day line or a new pocket pivot as secondary entry points going forward.




Sandisk (SNDK) is a big-cap semiconductor name that is acting well following a buyable gap-up move of three weeks ago, as we can see on the daily chart below. SNDK is something of a big, slow semiconductor in the midst of a turnaround as it moves towards becoming a “solutions-oriented” company within the flash memory space where it lives. SNDK produces flash memory products that are used in cellphones, tablets, and digital cameras, all of which are the devices of choice in the era of mobile computing. SNDK came in with 231% earnings growth in the most recent quarter, its second triple-digit earnings growth number in a row after posting 476% earnings growth in the prior quarter. SNDK has pulled back to the 20-day moving average, and while it is likely to be a slower name, it looks okay on this pullback as it builds a three-weeks-tight formation on the weekly chart, which I do not show here.




Microchip Tech (MCHP) is another semiconductor turnaround situation moving sideways after a buyable gap-up following its most recent earnings announcement. Again, an older, slower name but holding up well in the midst of the market’s weakness in recent days. With the intra-day low of the buyable gap-up day at 41.81, Friday’s closing price of 42.89 puts it within 2.5% of that low which makes for a low-risk entry here as it moves tight sideways for one week. One caveat: MCHP makes analog chips which are considered to be at a late stage in their business cycles, thus I would simply use the 41.81 intra-day low of the BGU day as a quick stop if this doesn’t work.




Another name that I’ve discussed in recent reports and which continues to hold up in very constructive fashion is Align Technology (ALGN), shown below on a daily chart. Admittedly, the stock has gone absolutely nowhere since its buyable gap-up move of about three weeks ago following earnings. But I’d have to say that the price/volume action remains positive as the stock finishes out a three-weeks-tight formation on its weekly chart, not shown, while selling volume dries up nicely. As well, the stock confirmed its constructive nature by flashing a pocket pivot buy point along the 10-day line, but with the market remaining wobbly the stock did not have the impetus to move higher. The subsequent small pullback over the past few days following the pocket pivot has seen selling volume dry up sharply, and I would characterize the low volume on Thursday indicative of a “voodoo” day that is even more constructive considering that sellers weren’t willing to hit the stock hard even with the general market getting smacked. This remains in a buyable position, right here, with the idea that it will continue to hold the 10-day line and the 56 price level from here.




If you’re looking for a “go-go” name then I suppose nothing fits the bill better than Gogo, Inc. (GOGO) which represents some “new merchandise” as a recent IPO with an interesting product/service angle. The company bills itself as a provider of in-flight internet connectivity, wireless digital entertainment, and portal-based solutions for commercial and business aviation markets. In other words, if you’re using Wi-Fi on the next commercial or private jet flight you find yourself on, then GOGO is probably the company that enabled it. GOGO continues to lose money hand over first, but is expected to post its first positive earnings numbers in 2015, and then earn $1.03 in 2016 and $1.86 in 2017. However, losing money in the near-term hasn’t prevented hot stocks like SCTY from going higher if they have a compelling underlying product/service theme.

The market for GOGO’s products is potentially huge, while in-flight internet speeds tend to be excruciatingly slow. GOGO is rolling out their newest product which will enable speeds of 60 Mbps with Virgin Atlantic, arguably the trendiest and hippest airline on the planet. After dying a slow death following its IPO back in June, GOGO has built a whole new base and over the past seven weeks has formed a little cup-with-handle formation from which it has not broken out just yet. However, Friday saw the stock push up through its 10-day moving average with a pocket pivot buy point, which makes it buyable with the idea that it will hold the 50-day moving average, currently at 16.37, on any pullback. As a smaller name, it will likely be more volatile, so my preference would be to own this thing in the event of a market upturn and rally resumption, which as I discussed at the outset of this report, remains a distinct possibility. GOGO is expected to announce earnings before the open on Monday, so watch for a possible buyable gap-up to emerge should the report be positive.




In terms of “new merchandise,” I still like the story that is currently driving Taser, Inc. (TASR) with its latest Axon flex police “body cameras” and overall movement into cloud computing for the police/security industry. As TASR CEO Rick Smith put it during the company’s recent earnings call, “our long-term business strategy is now intersecting several trends which we believe have hit a tipping point, namely officer-worn video and cloud computing.” Technically TASR’s buyable gap-up move following earnings did not result in a further upside beyond the single-day gap move, but it is a volatile stock and as such is trying to hold its prior buyable gap-up move after moving down to fill the gap and “kiss” its 20-day moving average, as we can see on the daily chart below. The stock managed to close Friday above the 16.31 intra-day low of the October 30th buyable gap-up. While this puts the stock back in play on the basis of the BGU, I would certainly be interested in buying the stock on any retest and pullback to the 20-day moving average.




Does the Dow’s move to an all-time closing high on Friday portend a resumption of the market’s rally on a “de facto” basis? I suppose this week will give us a clearer picture, but the essence of the market’s recent action is that a number of leading stocks have gone into corrections, sell-offs, or downright blow-ups. This was the case with the mortgage-servicers, OCN and NSM, this past week. With the “Four Horsemen” seeing at least two of their group go “headless” in LNKD and TSLA, FB teetering along its 50-day moving average, and NFLX trying to stabilize after getting chopped on a post-earnings gap-up attempt, we are certainly witnessing a breakdown in leadership. Some areas of leadership, like the solars, remain fairly intact, and there are some other areas that could, I say could, be stepping up to take up some of the slack in leadership. As well, there remain some newer merchandise situations that I currently like on the long side should the market resume its rally.

Meanwhile, my short-sale targets in LNKD and TRLA have played out in the short-term as they have reached their current downside price objectives. ARMH and Z remain somewhat in play, but their success on the downside will largely depend on the general market action. Thus the situation remains fluid, and I will make no assumptions about where we go from here. Instead, I prefer to avoid a rigid bullish or bearish posture and go about my trading business by viewing the market in my usual manner as a market of stocks and not a stock market, looking for opportunities on the long or short side as they emerge in real-time. If you are in the right stocks currently, you are holding up okay. If you are in the wrong stocks, you are experiencing some significant pain, especially if you fell in love with TSLA at the wrong time or held names like NSM or OCN too long. Armed with some new ideas, we move forward into what could be a telling week for the market. 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 a position in GOGO, though positions are subject to change at any time and without notice.

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