The Gilmo Report

October 2, 2013

October 2, 2013

Volatility rules the day as the market tries to make up its mind about the government shutdown that went into effect Monday at midnight on the East Coast. The NASDAQ Composite Index spent the day today trading inside yesterday’s range as it settled down somewhat after gapping up and breaking out to a 13-year high yesterday on lighter, but still above-average volume, as we can see on the daily chart below. The NASDAQ also managed to close near its peak for the day for the second day in a row today, but the action among leading stocks is not entirely rosy.

Yet if one takes an opportunistic view of things, looking to buy on weakness and particularly at areas of support such as the 20-day exponential moving average, what has become my “trusty moving average,” you are okay. Buying strength is not advised, in my view, because risk still exists in this market. With the debt-ceiling debate yet to be fought as the White House and Congress wrangle over the current government shutdown, there is always the potential for getting trapped if one chases stocks by buying into strength, and I’ll discuss some examples in a bit. For now, the NASDAQ is trying to hold a breakout to 13-year highs, and should it fail on heavy selling volume, then we might have more reason to be worried. For now it is still a matter of watching your stocks.




As the NASDAQ breaks out to new highs, the S&P 500 Index, shown below on a daily chart, continues to lag and diverge. It is, however, holding support at its 50-day moving average, so far, but volume support is nowhere to be seen given that volume has remained below average over the past two days. The question remains as to which side of the market wins out: the NASDAQ and the small-cap Russell 2000, both of which are making new highs, or the S&P 500 and the Dow, both of which have diverged to the downside.




To some extent the action in the “Four Horsemen” imitates that of the market, with movement back and forth as stocks try to sort out the government shutdown as well. Facebook (FB) continues to hold up well as it has pulled back over the past three days as selling volume dried up today. So far there is not much to think about here since the continuation pocket pivot of twelve days ago on the chart.




LinkedIn (LNKD) has been taking some selling volume lately as it tries to build what is so far a little less than a four-week base, as we can see on its daily chart below. The rally over the past two days has come on light volume as the stock stalled out a bit today at the upper end of its current price range. My view is that the stock will not go anywhere prior to earnings, and might retest the lows of last Monday.

A couple of things bother me with the stock, and the first is that I have to wonder about the pricing of their recent 5.38 million share secondary offering. With earnings coming up, why did they have to price that many shares down there? And since they likely have a good insider’s idea of how earnings are going to turn out, why didn’t they wait for earnings to come out before coming out with the secondary? If the earnings were stellar, why not wait for a potentially higher stock price?

Secondly, earnings are expected to come in at 54% above the same quarter last year, which is a sharp deceleration from the past four quarters of very healthy triple-digit earnings growth. Thirdly, and finally, 969 mutual funds now own 51 million shares of LNKD stock. Exactly two years ago, 202 funds owned 7.28 million shares of the stock. I’m not saying the stock is in imminent danger, but I know for certain that I won’t be buying any shares going into earnings. I might be all wet, but in my view the risk isn’t worth it.




Netflix (NFLX), which had been setting up again at its 10-day moving average, as I discussed in my report over the weekend, gapped up and launched higher yesterday on above-average volume, as we can see on the daily chart, below. NFLX built upon that move with more upside today on above-average volume. The last place one could have bought NFLX was along the 10-day line on Monday, being opportunistic on the pullback, I suppose, but for now there isn’t much to think about here.




Tesla Motors (TSLA) is finally looking dicey here as it busts through its 10-day moving average on very heavy selling volume. The stock did get downgraded today to hold from buy by regional broker Robert W. Baird, and allegedly the infamous Citron Research group released a YouTube® video of an old TSLA roadster catching on fire, so I suppose there was an “excuse” for the selling. In any case, you might notice that the stock held the 20-day exponential moving average today, but I wouldn’t expect the stock to instantly bounce back from today’s sell-off given that this is the third pullback to the 20-day line in the past two months, as we can see on the daily chart, below. A breakdown below today’s intra-day low would constitute a violation of the 10-day moving average, but my view is if TSLA can’t hold the 20-day line it is likely headed for another test of the 10-week moving average, currently at 165.16.




Yelp (YELP) was a great scoop on Monday when it traded down towards the 65 price level, but it seems to me like little more than a nice trade off the lows as it reversed on just above-average volume today after breaking out to new highs earlier in the day. I wrote over the weekend, that a pullback in YELP to the trusty 20-day line would be buyable, and indeed it was. However, the stock hasn’t flashed any bona fide buy signals and should only be bought on pullbacks to logical areas of support (such as the 20-day line and the lows of its current two-week range, for example), for now, pending the emergence of any new buy points/signals in the stock.




Trulia (TRLA) was another stock I considered buyable on its low-volume pullback to the 20-day moving average last week. This worked out well as the stock moved higher yesterday and today, as we see on the daily chart below. Today’s move came on above-average volume, but did not qualify as a pocket pivot buy point since volume needed to exceed the downside volume bar that we see eight days ago on the chart. Again, using pullbacks in opportunistic fashion is the way to operate here.




YY, Inc. (YY) has acted very much like TRLA over the past couple of days. Over the weekend I also considered the pullback to the 20-day moving average and the lower reaches of its current three-week price range as buyable, and this worked well as the stock actually moved to an all-time closing high today on volume that was 34% above average.




Netqin Mobile (NQ) is holding support at the 20-day moving average after a heavy-volume spinout yesterday, as we can see on the daily chart below. The stock had a buyable gap-up move about three weeks ago, but is right back to the intra-day lows of the gap day here as it tests the 20-day line. Some volume came in today to provide some support at the line, but the breakout from an alleged “high, tight flag” hasn’t shown as much power as some might advertise. As I wrote a couple of weeks ago, the flag formation that YELP formed along the low 50’s in late August was a more constructive high, tight flag formation as I saw it. NQ, while still having some upside potential if it can hold this current pullback, is a smaller Chinese stock subject to greater volatility. If you like the stock, then this pullback is the lower-risk place to step in and buy shares with the idea that it should continue to hold the 20-day line on this pullback. If it can’t, then all bets are off.




Alliance Fiber Optic (AFOP) is another small stock that so far has failed on its buyable gap-up move of about two weeks ago as we can see on its daily chart, below. Given the stock’s innate volatility and thin trading volume, the pullback and failure after the buyable gap-up is probably not unexpected. The question of course is whether the stock can hold this current pullback to the 20-day moving average. As is the case with any of these stocks that pull into their 20-day lines, buying here is a lower-risk proposition if one operates on the principle that the stock must hold the 20-day line on any further pullback, perhaps allowing for a maximum of 2-3% more on the downside. We’ve seen this approach work with a number of other stocks in this market, and so I feel it is a viable way to try and buy leading stocks into weakness.




Finisar (FNSR), which I discussed in detail over the weekend as a close cousin stock to AFOP and the #2 member of the #1 ranked Telecom – Fiber Optic group, is also pulling back here and testing its 20-day moving average. As you can see on the daily chart, below, FNSR has also moved back to the top of its prior flag breakout, so it is pulling down to an area of logical support. Again, buying shares here represents a low-risk proposition, although there is of course no guarantee of success every time. However, I think it is a better way to buy leading stocks in this environment in contrast to moving with the herd and buying into strength.




InfoBlox (BLOX) continues to hold its 10-day moving average after flashing a pocket pivot buy point last Friday, as we see on its daily chart, below. Given the steepness of the prior pullback before last Friday’s pocket pivot buy point, this pause to consolidate and catch its breath looks normal for BLOX. I would consider this buyable here with the idea that it should continue to hold above the 10-day line or, at the very least if one wants to give it more room, the 20-day line down at 40.43.




First Solar (FSLR) defied the odds of flashing a pocket pivot from a weak position at the 200-day moving average last week to follow through yesterday with a bottom-fishing pocket pivot coming up through its 50-day moving average, as we see on the daily chart below. Over the weekend I mused over the possibility that it could be shortable at the 50-day line given that it had stalled badly and on heavy volume both Thursday and Friday of last week, but the stock is obviously proving me wrong. The stock did pull back slightly on Monday, but it held the 200-day line on the pullback and proceeded to flash another bottom-fishing pocket pivot buy point on Tuesday.

This, however, comes from a stronger position above the 50-day moving average, so was more buyable then the prior bottom-fishing pocket pivot coming up through the 200-day moving average. Solar stocks have remained on fire lately, with stocks I’ve discussed in previous reports, Sunpower (SPWR) and Canadian Solar (CSIQ), both not shown, both moving up to or beyond 52-week highs today. Remember that SPWR’s move began with a bottom-fishing pocket pivot along the 50-day moving average a couple of weeks ago at around (see September 18th report)




U.S. Silica Holdings (SLCA) continues to work its way up higher as it flashed another pocket pivot buy point yesterday as it came up and off of its 10-day moving average. Believe it or not, the stock has now worked its way up to the top of its seven-month base and today closed at 26.22, a mere 31 cents below its all-time daily closing high of 26.53. The pattern on the weekly chart, shown below the daily chart, also below, is starting to look like a big cup and the stock is now in position to form a handle here, although one could consider the sideways movement just under the 24 price area as a possible “handle.” In any case, operating on the basis of the pocket pivots in the pattern, of which there have been several over the past few weeks, is much more efficient than trying to label the base and its components with respect to where the handle is or isn’t.






Another interesting example of a stock holding the “trusty” 20-day exponential moving average on a pullback is Five Below (FIVE), which got nailed after announcing a 7.1 million share secondary offering. This ended up sending the stock into a violation of its buyable gap-up move of early September as it blew below the intra-day low of that day, but the stock found support at (where else?), its 20-day line, as we can see on the daily chart below. The action along the 20-day line is somewhat instructive in that we can see the selling volume dry up sharply on the retest of the 20-day line on Monday of this week. The stock followed through with a two-day rally off of the 20-day line yesterday and today, with today’s move coming on volume that was 47% above average. The stock is now back above the 46.01 intra-day low of the September 10th buyable gap-up day. FIVE has yet to price its 7.1 million share secondary offering, and I would prefer to see how this extra supply is handled by the market before making any commitments in the stock.




Most leading stocks continue to act okay. With the exception of some, such as TSLA, we are seeing some decent action as well as rebounds from areas of logical support in a number of stocks I’ve discussed recently. All of the bio-techs I’ve discussed in recent reports, from Acadia Pharmaceuticals (ACAD) to Regeneron Pharmaceuticals (REGN), and everything in-between, the group remains one of the mainstays of the NASDAQ Composite, and has played a strong role in that index’s outperformance.

Meanwhile, I think it makes sense to remain in an opportunistic mode here, looking to buy pullbacks in leading stocks down to logical areas of resistance, and we have seen how this plays out well in a number of stocks I’ve discussed recently. Whether the NASDAQ’s strength eventually drags up the S&P 500, or whether the breakout yesterday to a 13-year high turns out to be a bull trap, remains to be seen. Otherwise, operating in an opportunistic manner, as opposing to buying into strength, remains the low-risk way to operate in this current uncertain environment.


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 AFOP, LNKD, and SLCA though positions are subject to change at any time and without notice.


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