The Gilmo Report

September 14, 2014

September 13, 2014

Regardless of what sort of label one wants to slap on this market, the bottom line is that it remains a market of stocks, and if one is going to make money in this market it is entirely about being in the right stocks at the right time. This week was no less the case as certain individual stocks did very well in the face of a continued general market consolidation and correction. In the case of the NASDAQ Composite Index, shown below on a daily chart, the index remains within its September price range despite all the volatility that is occurring within the price channel. Distribution days are starting to pile up in this current consolidation and pullback, so from an index point of view that might be considered a minor cautionary sign. Notice also that the daily price spreads are wider in September compared to the tighter ranges we saw on the way up in August. In my view this is indicative of a market going through a turbulent digestive phase, and it remains to be seen whether the prior upside move off the early August lows is digested in good form or whether it leads to the proverbial cookie toss.

I tend to think that focusing on the action of individual stocks in opportunistic fashion is the best way to handle this market, and for the most part this is a very concrete approach. If a leading stock is acting well and pulling back into a logical area of potential support in a constructive manner, it can often be bought, and we saw this play out well with several of the names I’ve been focused on in recent reports. As well, the closer one can buy a leading stock to a logical area of support, such as the 10-day, 20-day, or 50-day moving averages, the tighter one can keep their stops. I believe this is critical in an uncertain market.




The S&P 500 Index is taking some heat as it drifts down towards its 50-day moving average, as can be seen on the daily chart, below. Volume picked up on Friday for the index’s third distribution day in September, but with the NASDAQ suffering less in the way of distribution it’s not possible to draw any firm conclusions, at least based on the indexes. Again, my view is to focus on the individual stocks as this is where the rubber in fact meets the road when it comes to playing this market, and it is often their action that tells you everything you need to know anyway.




Palo Alto Networks (PANW) is holding up well after Wednesday’s buyable gap-up move, as we can see on the daily chart, below. PANW is doing its best to hold along the $100 “century mark” price level, and I would say that given the current correction and consolidation we are seeing in the indexes, it is doing a very decent job. The stock closed down today but in the upper part of its daily price range on above-average volume that declined sharply from the high volume levels seen over the prior two days. In my view PANW as a potential Livermore “Century Mark Rule” buy set-up is still in play, and I will continue to operate on that basis.




On Friday Twitter (TWTR) increased its secondary convertible-debt offering from $1.3 billion to $1.8 billion, a fairly substantial increase. While TWTR sold off in response, I would read this news as an indication of the strong institutional interest for TWTR paper. Thus as the stock absorbs all of this I would expect it to come down a bit going into the pricing of the offering, which I expect will happen in the next few days. I like the idea of using this pullback to pick up shares based on the Wednesday gap-up pocket pivot, using the 10-day moving average, currently at 51.13, as a selling guide. Volume declined on Friday as the stock pushed to the downside, but I see nothing wrong with TWTR’s price/volume action given the news context.




Elsewhere in the social-networking space, LinkedIn (LNKD) has dipped below its 10-day moving average, as we can see on the daily chart, below. The stock looked like it was about to violate the 10-day line on Friday, but instead it found support just above the 20-day moving average as trading volume dried up. Given the stock’s sharp run-up off of the July lows and through the month of August, the stock is probably entitled to consolidate here for a bit. I don’t really see enough selling interest here to make me think this is a short, but that could change. The flip side here is that the volume dry-up on the pullback to the 20-day line can also be a buyable dip. How this resolves itself will likely be dependent on the general market’s resolution to the current consolidation and correction so far in September. In the event of a positive resolution, then LNKD may simply bounce off of the 20-day line following a pullback on declining volume.




The Nevada State Legislature on Friday approved the various tax breaks and perks for Tesla Motors’ (TSLA) new giga-factory that will be built in that state. The stock responded by doing absolutely nothing as it closed down a 0.4% on Friday. This small downside close, however, is probably positive given that some investors might have otherwise taken a “sell the news” approach after Nevada approved their new giga-factory. Instead, what we have here on the daily chart, below, is a nice volume dry-up on a pullback to the 10-day moving average. I tend to see this as buyable, with the idea that the stock will at least hold the 20-day moving average at 270.30 on any further pullback from here. Looking at PANW, TWTR, LNKD, and TSLA, we get a sense that big-stock leaders aren’t getting pummeled here, which may be the clue underneath the market’s hood that things aren’t necessarily as evil as the indexes can at times make them appear. I say watch the stocks first, and the market second.




SolarCity (SCTY) finally popped up and off of its 10/20/50-day moving average confluence on Friday, as we see on the daily chart, below. The stock was setting up along the moving averages on Wednesday following a pocket pivot last week, as I discussed in my Wednesday report. As I wrote on Wednesday, SCTY is a “battery-charging” stock now, and is no longer just another boring solar stock. In any case, the stock is doing its best to prove that theory correct as Friday’s move constituted another pocket pivot, and I would use any pullback from here into the 73 price level to buy into this. I don’t like to chase strength in a stock like this, preferring to sell into it, while using short-term pullbacks to buy shares. I think if TSLA goes higher, so does SCTY. For now the 50-day moving average remains your selling guide if you bought closer to the moving averages on Thursday per my discussion of the stock in my Wednesday report.




El Pollo Loco (LOCO) continues to do the “LOCO-motion” as it chugged higher on Friday with volume picking up, as we can see on the daily chart below. LOCO’s action on Friday looks like a trendline breakout, so may be buyable on that basis using the Friday low at 36.60 as a quick downside exit point if it fails. My preference with LOCO is to dance with the stock, selling into the sharp upside moves and buying on pullbacks, but this trendline breakout might end up working and sending the stock higher. There probably isn’t much overhead resistance from the left side of the pattern remaining, so I would use any pullback here to enter the stock using the prescribed stop. The other idea is that the stock should be able to hold the trendline breakout at around the 37.88 level, which provides an even tighter stop.




Taser International (TASR) has bounced off of the 10-day moving average after pulling back this past Wednesday relatively lighter volume compared to the sharp jack last week off of the line, as we can, as we can see on the daily chart, below. Friday’s move came on well above-average volume as the stock “V’s” its way back up to a higher closing high. This looks pretty constructive here and I would use any pullbacks to the 10-day line, currently at 17.47, as a spot to buy shares. Otherwise there is no actionable buy point at these levels.




When I talk about a “constructive” pullback to a moving average that can be bought into, the type of action I have in mind is most definitely not what (CRM) did on Friday. As I’ve discussed in the past two reports, the stock looked like it might become buyable on pullbacks to the 10-day line, but Friday’s pullback was decidedly non-constructive, as we can see on the daily chart, below. Selling volume kicked in at above-average and sent the stock through the 10-day moving average. The only thing I can see happening here that might redeem the stock would be some support at the 20-day moving average, currently at 58.59. In the meantime, however, I think there are better stocks to be playing. CRM is somewhat of an “old merchandise” name, and as we’re seeing in this market the better moves are occurring in the new-merchandise situations. Thus I think CRM’s old-merchandise status tends to work against it.




As I discussed in my last report, members had to keep an eye on GrubHub (GRUB) as it continued to drop in its continuing battle to absorb a fairly large 10-million-share secondary offering that came to market last week. As we can see on the daily chart, below, GRUB found strong, above-average volume support at the 50-day moving average on Friday, and the stock was also able to find enough upside thrust to carry above the 10-day moving average. Since I believe one doesn’t need to count the heavy volume in the stock that occurred on the day that the 10-million-share offering was dumped into the after-market, I would look at Friday’s action as not only high-volume support at the 50-day line, but also a supporting pocket pivot. Thus I looked at the action as buyable and I believe it remains so using the 38 price level as a very quick downside stop.




I like the pullback in Yelp (YELP) in the face of the market’s correction and consolidation. As we can see in the daily chart, below, the stock is pulling back following a sharp move off of the early August lows that was sparked by a bottom-fishing pocket pivot coming up through the 50-day and 200-day moving averages. This is the type of pullback I’m looking to buy in this market, and the way YELP held in very tight with volume drying up in “voodoo” fashion on Friday as the market was getting pushed around struck me as constructive. As I see it this is an easy trade. Buy it here on the voodoo pullback to the 20-day line using the 20-day line as your quick selling guide.




Railroad car maker Greenbrier Companies (GBX), after trying to break out in mid-August has now pulled back and flashed a pocket pivot buy point coming off of the 20-day moving average and up through the 10-day moving average, as we can see on the daily chart, below. The stock held very tight and above the 10-day line on Friday in the face of the index weakness with volume coming in right at about average on the day. The stock is buyable on the basis of the Thursday pocket pivot with the idea that it must at least hold the 20-day line, currently at 70.40, on any pullback from here.




We’ve already seen how (PCLN), not shown, has worked out as a short-sale target stock over the near-term since I first discussed it over a week ago in my report of September 3rd. To some extent it provides further testimony to the fact that this market is currently a market of stocks, and that one should assess the profit-potential of any set-up, whether long or short, on its own merits without necessarily fretting over whether the market is in an uptrend, downtrend, or “on vacation.” As always, the bottom line is always about what individual stocks are doing, and operating on this basis saves one from the mind-numbing and seemingly pointless activity of trying to label the general market trend.

Adding to the argument of this market as one of individual stock set-ups is (AMZN), shown below on a daily chart. AMZN was looking a bit more constructive in August as it rallied through its 50-day moving average but last week it ran into its 200-day moving average, whereupon it turned tail and broke below its 50-day moving average, as we can see on the daily chart, below. The stock is now in a short bear flag that is tucked just underneath the 50-day moving average and may be setting up to move lower. While it would have been preferable to short the stock right at the 200-day line last week using 20/20 hindsight, the break below the 50-day line and the formation of a short bear flag is still negative action that could be completing the right side of a “macro-shoulder” in a very big head and shoulders formation that shows up on a weekly chart, not shown.

If we consider the action from June up through the present as forming one big shoulder, we might also notice that within this right shoulder there is a “fractal,” or smaller head and shoulders within the right shoulder, as I’ve outlined on the chart. This is actually very common, as large topping formations can also contain smaller, “fractal” topping formations within their overall structure. I also have a lot of moving averages drawn on this chart, and you can see that the 10-day, 20-day, 50-day, and 65-day lines are all relatively closer together with the 200-day line holding up further above. You will notice from the chart, however, that all of these moving averages are starting to turn down in concert, which puts the odds of further downside in short-sellers’ favor. AMZN can be tested here on the short side, in my view, using the 50-day line at 334.51 as an upside guide for a stop.




The market’s action so far in September has brought us back to a familiar place, which is this idea of treating the market not as a stock market but as a market of stocks and focusing on the merits of individual stock set-ups, whether long or short. In my view this is the only way to operate. With reference to the long side, it is imperative that one seek to use pocket pivots and other buy points that are beyond standard O’Neil methods like buying obvious base breakouts. Anticipating movements and buying the stocks while they are “quiet,” such as has worked well with stocks like LOCO and SCTY over the past two days is the most efficacious approach, and the empirical evidence is there to prove it.

With the Fed meeting coming up on Wednesday, I don’t think the market expects any surprises. A sluggish economy that appears to be weakening again based on the latest readings of economic indicators will likely keep the Fed on the sidelines when it comes to raising rates. And while we can fret over what the market’s reaction will be to the Fed’s utterings on Wednesday, the market puzzle remains all about watching the stocks while keeping an even psychology. 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 had positions in GRUB, PANW, TSLA, TWTR, and YELP, though positions are subject to change at any time and without notice.

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