The Gilmo Report

October 6, 2013

October 5, 2013

Despite a rocky start in the form of a big morning gap-down Monday, the NASDAQ Composite Index managed to finish the week higher, as we can see on the daily chart of the index below. Technically the index endured a couple of distribution days on Monday and Thursday, but this did not prevent the index from finishing near its peak for the week and right up against the 13-year high that was surprisingly achieved on Tuesday.

 

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The S&P 500 Index ended the week just a hair below where it started the week as it continued to find support along its 50-day moving average as we can see on its daily chart, below. For the most part, the entire week was characterized by back-and-forth action as the market continued to make up its mind over whether a government shutdown was a good thing or not. On Friday, Speaker of the House John Boehner came out and said that no “clean” resolution that did not include a one-year delay of the individual mandate portion of the Affordable Care Act would be forthcoming, and the market briefly pulled back before stabilizing to close up on the day. Thus the market expressed little concern over a continuation of what has so far been a proverbial “Mexican Stand-off.”

Volume on both the NYSE and NASDAQ exchanges was lighter, and while a rally on light volume keeps the situation somewhat unclear it may also be the case that anyone who was going to sell in fear of a government shutdown already has. With neither side willing to budge, the worst case scenario is starting to play out, and the market doesn’t seem to care all that much. This in turn creates a situation where the market is in a position to be “surprised” by some sort of resolution, and that may be why nobody seemed to be in a big hurry to dump stocks by Friday’s close.

 

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In fact, despite all the hand-wringing over the government shutdown, bears remained in relative hibernation, as we can see on the chart of the Investors Intelligence Advisor Sentiment survey, below (©2013 DecisionPoint.com, used by permission). The percentage of bearish advisors has dropped to a very low 18.6%. On the other hand bullish sentiment is not jumping off the charts as the percentage of bullish advisors comes in at a relatively muted 46.4%, and the trend of bullish advisor sentiment over the past two months has been to the downside. Short-term, all we know for sure is that while the market is bending a little here and there, it has not broken. In the meantime, few buy points or buyable set-ups are evident among leading stocks, a fact that necessitates more of a wait-and-see approach than anything else.

 

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Tracking the “Four Horsemen” we can get a sense of what is going on underneath the market’s “hood,” so to speak. Facebook (FB) remains the shining example of consistency as it continues to hold above its 10-day moving average, despite the occasional dip below the line which is then immediately rectified by a turn right back to the upside, as we can see on FB’s daily chart below. FB benefited from another buy recommendation with a $58 price target this time around. It is interesting to see all the analyst firms jumping on the FB bandwagon now that the stock has reached the $50 price level. FB is expected to announce earnings on October 30th.

 

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LinkedIn (LNKD) continues to see selling on increased volume, and the stock was pushed below its 20-day moving average on Thursday as volume came in higher but still below average, as we can see on its daily chart, below. Volume dried up a little bit on Friday, but the stock is just chopping back and forth here ahead of its expected earnings release on October 31st. While the stock remains within range of its continuation pocket pivot of September 5th, a full month ago, I have an issue with the fact that the stock has made absolutely no net progress since then. Continuation pocket pivots should be just that – buy signals that lead to continued upside in a leading stock, not a month of chop and slop.

 

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Netflix (NFLX) has now been following its 10-day moving average for more than seven weeks since its pocket pivot buy point of August 12th, which I discussed back in my report of August 14th. At this point one could use a violation of the 10-day moving average as a selling guide, as NFLX has shown a strong tendency to obey this moving average since coming up and off of its 10-day moving average back in the earlier part of August, as we can see on its daily chart, below. Thus I would expect the stock to hold above the 10-day line and the top of its prior range from which it broke out this past Tuesday. For the most part, the price action of the “Four Horsemen” doesn’t seem to be much influenced by the government-created crisis as they continue to operate in a world of their own.

 

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The situation is similar for Tesla Motors (TSLA) despite the fact that it continued to get knocked down on Thursday as selling volume increased sharply, but the stock did find support roughly at the top of its prior three-week flag formation. On Friday buying volume was less intense but the stock managed to move back above its 20-day moving average, as we can see on the daily chart, below. Some have attributed TSLA’s sharp sell-off to a video showing a Tesla Model S burning to a crisp after its battery caught fire, but somehow I tend to think there is more to the selling than that. If the video somehow makes the point that a Tesla automobile can catch fire after an accident, I do not see how this makes it any more dangerous as a combustion bomb on wheels than a vehicle carrying a tank full of highly flammable liquid, otherwise known as gasoline. TSLA CEO Elon Musk came out and made this point on Friday.

This sell-off in TSLA looks different than the one we saw in mid-July when the stock saw a huge volume spike as the stock came off of its 10-week moving average. Volume on Friday, while above average, was not overwhelming. It will take a few days to get a bead on whether the sell-off is truly a temporary phenomenon caused by a bit of news sensationalism. This bit of technical chaos over the past three days may keep TSLA running in place, for the most part, as it approaches its expected earnings announcement in early November. In my view the stock was a nice trade off the top of the prior three-week flag formation, as I’ve highlighted on the daily chart below, and so far it has retraced just about 50% of that 26.5-point breakdown from the 194.50 peak to a low of 168. A low-volume retest of Thursday’s 168 low would be constructive, however, and if the stock is able to recover within a few days then we might conclude that the sell-off was a temporary news-related phenomenon.

 

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Yelp (YELP) has chopped its way to a new high, as we can see on its daily chart below, but the new high was achieved on below-average volume. YELP’s upside action has been helped along by several analysts coming in with buy ratings and price targets as high as $82 a share, As with FB, I am struck by the fact that so many are now jumping on the YELP bandwagon now that the stock is a double from where I first began discussing it at around the 35 price level. YELP releases earnings on October 31st, and I am still inclined to take at least partial profits as the stock edges higher going into earnings at the end of the month.

 

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After a sharp upside move on Wednesday that was accompanied by strong, above-average volume Trulia (TRLA) dropped back down to its 20-day moving average as volume declined. This brings the stock back into a buyable position along the 20-day line with the idea that it should at least hold the low of four days ago at 46.29. TRLA may have been moving in sympathy to its cousin stock, Zillow (Z), which was down about 8% over Thursday and Friday. Z has continued to break down off of its early September peak of 103 to close at 83.03 on Friday as selling volume remained heavy. TRLA held tight on Friday after selling off on Thursday, but I would want to see it recover quickly here if it is to remain viable. TRLA is expected to announce earnings in early November.

 

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YY, Inc. (YY) reversed hard on Thursday after a strong upside move on Wednesday. As with most of these stocks that are chopping back and forth over the past couple of weeks, taking an opportunistic stance and buying pullbacks to the lower end of the range and the trusty 20-day moving average has been the right strategy with YY. As well, there have been no bona fide buy points in the pattern in terms of pocket pivots or volume breakouts to speak of, so in fact all you are left with is buying into low-volume or otherwise constructive pullbacks into logical areas of support. YY is expected to announce earnings in late October.

 

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Netqin Mobile (NQ) is doing its best to hold the 20-day moving average, as we can see on its daily chart, below. As a smaller Chinese name, the action in NQ doesn’t surprise me, and my best guess is that unless the general market gets into trouble the stock should eventually move up and off of the 20-day line. The bottom line is that one is likely better off trying to buy shares here on the pullback down to 20-21 rather than diving into strength up closer to the 24 price level. With average daily volume rising to 3.2 million shares, the stock is now trading over $67 million in daily dollar volume which is well above what I would normally like to see. NQ is expected to announce earnings in mid-November.

 

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The Telecom – Fiber Optic group has dropped to an industry ranking of #2 as bio-techs move into #1, but overall the group continues to act well. Thin micro-cap Alliance Fiber Optic (AFOP) is, however, acting a little more like “a flop” as it continues to test the top of its prior flag breakout. If we study the daily chart, below, we can see that the stock has a tendency to pull back after exhibiting strength and generally looks “ugly” at the lows of such pullbacks before moving back to the upside. This may be due to the fact that it is a thin, micro-cap name. Between the March and June quarters the number of funds owning the stock went from 20 to 77, which is a significant increase. Of course, back at the end of June the stock was trading just over $10 a share, so it has more than doubled since then.

Some of the selling could be due to funds paring back on their positions, but I would expect that as the stock pulls into the 20 price area some support should become evident. AFOP is expected to post a 173% earnings increase on a hard number of 30 cents per share when it is expected to release earnings on October 22nd. In the short-term, institutions may be giving more emphasis to AFOP’s larger-cap brethren, as we’ll see in the next two examples, while AFOP takes a break.

 

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Fellow fiber-optic name Finisar (FNSR) which I discussed in detail last weekend, is doing its best to shore up the group as it moved up and off of its 20-day moving average on Friday as volume picked up to slightly above average. On the weekly chart, not shown, FNSR has formed a very tight flag formation with tight closes over the past four weeks. In my view, the stock looks like it wants to break out of this tight four-week flag formation and I would certainly look at any pullback from Friday’s close as a very buyable event, although I considered it quite buyable along the 20-day moving average per my report of this past Wednesday.

 

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Helping to lend “cred” to the Fiber Optic group is Ciena (CIEN) which broke out of a short little flag formation on a 71% increase in volume Friday. CIEN recently won a contract with Verizon Communications (VZ) as their top provider of 100 gigabit-per-second circuits. After pulling back to its 20-day moving average on Monday, CIEN set up in a tight range over the next three days and on Friday launched higher on heavy volume. This could also be seen as a pocket pivot breakout from the short two-week range, but unless I’m already in the stock I would prefer to buy into a pullback under 27, should that occur. CIEN posted materially stronger earnings in September with 675% earnings growth on a hard number of 23 cents, and is expected to grow earnings by 442% on 24 cents a share when it next announces in December. Overall I have to say that I like the group move in the fiber optic stocks, as I believe it bodes well for the future health and potential of the group.

 

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InfoBlox (BLOX) remains in a buyable position following last Friday’s pocket pivot buy point coming off the 20-day moving average and up through the 10-day moving average six days ago on the daily chart, below. BLOX retested the 20-day line on Thursday but found support there to close back above the 10-day line on Friday. Perhaps we can look for another pocket pivot to materialize as the stock holds along the 10-day moving average, but I would be inclined to buy shares here with the idea that the stock will continue to hold its recent lows along the 39-40 price area.

 

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Looking at the weekly chart of BLOX, below, we can see that the stock is working on a short flag type of formation with tight closes this week and last. I first discussed BLOX in my report of June 9th as it was coming up and out of its prior multi-month base at around the 25 level, and since that breakout the stock hasn’t formed another base on the way up. Thus this may be its second-stage base, and last week’s pocket pivot was an early entry point within this base which is so far all of three weeks in duration. BLOX doesn’t announce earnings until late November, so it has plenty of time to tighten up here and break out again before earnings.

 

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While the bio-tech group remains strong in the aggregate, moving to the #1 industry group ranking this past week, big-stock bio-tech Biogen Idec (BIIB) took some serious selling heat for the first time in about two months when it got hit with some heavy selling volume on Thursday. BIIB released some positive test results for its multiple-sclerosis drug Tysabri on Thursday, so it is not clear to me what caused the sharp sell-off.

 

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On BIIB’s weekly chart, however, a price recovery on Friday creates supporting action as the stock closed about mid-range on heavier volume. Thus this looks like little more than a two week pullback as the stock consolidates the prior five-week rally off the lows of its prior base.

 

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I was looking for Splunk (SPLK) to finish out a three-week-tight flag formation this week as it was moving straight sideways in what was so far a two-week flag formation, as we can see on the daily chart. The stock had been holding nicely along its 20-day moving average and decided to break out to new highs on Friday on volume that was 25% above average. The volume increase was moot as it did not exceed the biggest down-volume bar in the pattern over the prior 10 days and therefore was too early to be a pocket pivot break out. The stock ran into resistance at its current price level a little over two weeks ago on heavy volume, so it’s not clear to me that I would want to buy into this lower volume move. I would have preferred that the stock pull down a bit and finish the week out in a 3WT formation, setting up for a more optimal breakout.

 

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Fabless Dutch semiconductor maker NXP Semiconductors (NXPI) staged a little trend line breakout Friday on a decent 36% increase in volume. The stock is trying to come up and out of a short four-week pattern as it just barely starts to emerge from a 2½-year base. As we can see on the daily chart, below, volume also qualified as a pocket pivot volume signature, so we could consider this a pocket pivot range breakout as the stock emerged from the short sideways price range it has formed over the prior 2½ weeks. According to those who have torn down the new Apple (AAPL) iPhone 5S, NXPI is likely producing the M7 motion coprocessor used in the phone as well as the new fingerprint recognition sensor using a design and technology from Apple.

NXPI recently priced a 25-million-share offering at 37.65 a share on September 20th, and that rather large offering was absorbed reasonably well. The stock looks buyable here with the idea that it should hold above the lows of its current short base at around 37. NXPI is expected to announce earnings before the open on October 24th, and is expected to grow earnings at a 34% clip on a hard number of 82 cents a share.

 

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I’ve been asked whether Santarus (SNTS) is shaping up as a “roundabout” type of situation as it tries to round out the lows of a potential new base, as we can see on the daily chart below. SNTS failed after a buyable gap-up move back in early August and trended lower over the next several weeks before bottoming out around the 21 price level and flashing a bottom-fishing pocket pivot move last week, seven days ago on the daily chart below. The big volume spike you see on the chart four days ago was due to the stock being added to the S&P 600 Small-Cap Index on that day, October 1st, and the pocket pivot that occurred on September 26th was likely due to the announcement that SNTS would be added to the index. The stock is tracking tightly along its 10-day and 20-day moving averages, and before declaring this a roundabout type of set-up I would like to see volume dry up along the lows of the base.

What is typical of the roundabout set-up is that you will see downside volume dry up sharply along the lows of the base, and you are still seeing some above-average selling volume in the pattern over the last couple of weeks. However, it might pay to keep a close eye on SNTS as its does show strong earnings and sales growth over the past several quarters and strong estimates for the next two. If one wishes to give legitimacy to last week’s pocket pivot, and one feels lucky, then buying the stock here along the 10-day line with the idea that it will continue to hold the line is perhaps a possibility. However, I would want to see some strong upside action occur relatively soon. SNTS is expected to announce earnings in early November.

 

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Solars continue to act well, and we’ve seen Canadian Solar (CSIQ), First Solar (FSLR), and Sunpower (SPWR) move higher as names I’ve discussed in previous reports. Another solar name I’ve discussed in previous reports is SolarCity (SCTY), which was exhibiting signs of life a little over two weeks ago as it pocket pivoted back above its 50-day moving average, as we see in the daily chart, below. SCTY could not hold that move as overhead supply in the pattern from July likely came into play. SCTY backed down below the 50-day line after that pocket pivot attempt, but notice how selling volume dried up sharply three days ago on the chart as the stock held right along the 10-day moving average.

Friday saw volume pick up to above average as the stock cleared the 50-day line once again. While there have been some big red downside volume bars in the pattern over the past three weeks, none of this has led to further downside outside of Monday’s shakeout down to the low 32 price level. It’s possible, in my view, to take a stab at this with the idea that it will hold the 50-day moving average this time around. Others might just prefer to wait and see if the stock breaks out through the 45.60 mid-point of the double-bottom pattern it currently appears to be trying to form.

 

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Most leading stocks continue to try and hang in there although we’ve seen a handful get hit with some selling this past week, such as BIIB and Amazon.com (AMZN). AMZN is getting the bearish treatment from Barron’s magazine this weekend, but we know how that story usually goes. TSLA got the bearish treatment from this investment rag back when it was below $100, so for all you know it merely sets up a buying opportunity in AMZN, which has been a strong big-stock NASDAQ leader as of late.

There will be plenty coming down the pipeline in October to feed market volatility beyond the current government shutdown. The debt-ceiling comes into play on October 17th, and I’m sure we’ll be able to expect some histrionics over that. Fall earnings season is also approaching, and then there’s the delayed September jobs number which will come out as soon as the government re-opens. In the meantime, just watch your stocks and maintain an opportunistic posture, seeking to use constructive pullbacks in leading names as buying opportunities.

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, CIEN, FNSR, SPLK, 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. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.