The Gilmo Report

September 15, 2013

September 14, 2013

The NASDAQ Composite Index, shown below on a daily chart, spent most of this past week consolidating its move up from its 50-day moving average and Monday’s breakout to new highs. On Monday the usual sources put the “market in confirmed rally” label back on, but in my reports before then I was already looking for the market to head back to the upside based on the action of leading stocks and the general “percolation” of constructive action in individual stocks overall. The NASDAQ tried to pull back a couple of times this week, including Friday morning when it briefly moved below the intra-day lows of Wednesday, but drifted back into positive ground by the close as volume declined. So far this is nothing more or less than a constructive consolidation of the prior gains coming up and off of the 50-day moving average.




Last weekend I pointed out that I would like to see the S&P 500 move back above its 50-day moving average as helpful confirmation of the NASDAQ’s strength, and that did occur on Monday. The S&P 500, shown below on a daily chart, built upon that initial move back over the 50-day line by moving up on Tuesday and Wednesday before spending Thursday and Friday moving sideways in a constructive consolidation of its gains off the lows of a little over two weeks ago. Going into the Fed meeting and the all-important policy announcement on Wednesday, the market appears to be in a wait-and-see mode as it looks for something definitive from the Fed with respect to QE tapering.




If there are any clues to be found in the markets regarding QE tapering, the sudden gap-down action in gold and silver this week, as illustrated by the daily chart of the SPDR Gold Shares (GLD), below, might offer one. With bonds holding tight and the dollar slumping slightly this week, the usual QE indicators, however, are not showing any sort of uniform action in anticipation of the initiation of QE tapering. Economists generally expect the Fed to move forward with incremental tapering, and based on what I’ve read it looks like expectations of a decrease in monthly bond purchases to $70 billion from $85 billion are already priced into the market. The “Goldilocks” scenario, of course, is that the Fed will now gradually decrease QE over the next year as the economy continues to grow and pull itself out of its mire.

As well, if one considers the old Wall Street adage and rule of thumb known as “three steps and a stumble,” whereby it usually took three interest rate tightenings by the Fed to trip up the market, an initial, incremental bout of QE tapering might be taken in stride by the market. So far, what seems to have already been discounted by the market is exactly this, an incremental decrease in monthly bond purchases to $70 billion. The action of leading stocks going into the Fed meeting, at least by Friday of this past week, continues to look constructive to me. With the market spending the last two weeks rallying into the Fed meeting, I would not be surprised to see a positive reaction by the market in the event of a definitive announcement by the Fed. Of course, as is always the case with the markets, anything could happen, but all we know for certain is what the market is doing right now, and right now the action appears constructive.




Checking in with the current market environment’s “Four Horsemen,” we can see that Facebook (FB) continues to maintain its uptrend as it holds well above its 10-day moving average. So far FB has escaped any heavy selling and two days of pullback have occurred on declining volume. The only thing for investors to do with the stock at this point is to be patient and wait for the next buy point to emerge, which could very well turn out to be a continuation type of pocket pivot coming off the 10-day moving average.




LinkedIn (LNKD) is pulling into its 10-day moving average with volume drying up, as we see on its daily chart, below. This pullback is occurring after Wednesday’s low-volume move to all-time highs and after its pocket pivot buy point which occurred two Thursdays ago following its $223 “sweetheart deal” pricing of a 5.38-million-share secondary offering. Based on the prior pocket pivot in the pattern and the fact that the stock has pulled down within range of this buy point right along its 10-day moving average, this pullback looks buyable to me. With 5.38 million new shares coming into the market, however, there is a possibility that any excess demand for the stock in the very short-term has been absorbed by the offering, and so the stock’s seemingly sluggish behavior following the pocket pivot move up through the 10-day moving average seven days ago on the chart seems like normal digestion to me.




In my report of this past Wednesday I theorized that Netflix’ (NFLX) gap-up move on Tuesday might have been a buyable gap-up, and one could test this theory out by buying the stock with the idea that it should hold the 296.81 intra-day low of that gap-up day. NFLX did pull back on Thursday, but it held this level and the 10-day moving average, as we can see on its daily chart, below, so the buyable gap-up theory remains viable here. Based on this idea then, this is a spot to add shares to an existing NFLX position initiated lower in the pattern.




The fourth “horseman,” Tesla Motors (TSLA), which I show below on both daily and weekly charts, is starting to get interesting. To begin with, the latest NASDAQ short interest reports as of August 31st show that short interest in TSLA has continued to increase and is now at 21,557,853 shares. Clearly, the shorts are gluttons for punishment because the stock has not shown any sign of breaking down as it remains in an easily definable uptrend. With some professors assigning the stock a $67 “fair value,” perhaps the shorts have been emboldened. As well, TSLA CEO Elon Musk’s teased short-sellers on Wednesday after the close by stating, “In the past, I said it’s really crazy to short Tesla, Is it so crazy to short Tesla now? I mean, it’s not as crazy, but I still think it’s probably not a good idea.” While craziness might be in the eyes of the beholder, all we have to guide us with respect to the potential future moves in TSLA shares is the price/volume action. So far, TSLA appears to be consolidating along the 20-day moving average as volume dries up and it holds above the 158-159 breakout level of over two weeks ago.




If we shift to a weekly chart, we can see that TSLA’s move out of a four-week flag formation has seen the stock pull back three times now in an ascending pattern. I had been looking at the breakout two weeks ago through the 158-159 area as being a breakout through the top of a potential ascending base, and that may not be entirely correct. But of course this all just serves to point out the difficulties in ascribing labels to technical action. The pullback over the past two weeks has been relatively well contained in comparison to the prior two pullbacks that took place after the breakout from the high, tight flag. The two-week pullback we are seeing currently might be the third pullback in an ascending base, and it also looks like a three-weeks-tight (3WT) formation as well. Notice also that each pullback over the past nine weeks has been shallower than the prior pullback. One way or another, TSLA looks to me like it wants to go higher.




Yelp (YELP) is finally pulling back down towards the 60 price level and its “cup” breakout, as we see on the daily chart below. The stock saw a low of 61.62 on Friday, which looked close enough to me, although it is still possible that the stock could pull back closer to the 60 level. That would probably be more a function of what the general market does this week, but so far YELP has acted well and I would continue to use pullbacks in the stock to buy the stock. We were on to this much earlier as it flashed pocket pivots along the 10-day moving average in the 53-54 price area, and I viewed the move up through that price range as a trendline breakout from a high, tight flag formation.




Trulia (TRLA) has been showing some very volatile intra-day price action, as we can see by the wide price ranges over the past two days. On Thursday the stock opened down on some very heavy, even abnormal, selling and pushed down near the 10-day moving average, hitting an intra-day low of 44.80. However, it found support roughly off of the 10-day line on volume that would qualify the move as a pocket pivot buy point, surprisingly enough. The stock’s relative strength line is confirming the move to new highs, but I would still be more comfortable looking to buy the stock on a pullback towards the 10-day moving average. I would not call Thursday morning’s early morning slam down to the 10-day line as the type of “orderly” selling and pullback I would like to buy into, but the stock is by nature a volatile animal, which can work both for and against you, depending on the price direction at the time!




Yy, Inc. (YY) pulled right back into its 10-day moving average on Friday, which I saw as quite buyable, and I think the stock remains buyable here with the idea that it will continue to hold above the 10-day line and its prior trendline breakout. Notice that one could have viewed Tuesday’s action as a “base breakout,” but in my view this is a late buy point. The pocket pivot of seven days ago on the daily chart, below, was the place to be buying shares in this smaller, volatile Chinese social-networking stock, but this pullback provides a second chance. YY is another volatile stock, so be prepared for a bit of a wild ride.




Splunk (SPLK) has acted very well since its buyable gap-up move following earnings two weeks ago, as we can see on its daily chart, below. As I pointed out in my report of this past Wednesday, the stock was making higher highs as volume was diminishing, a sign that it likely needed to pull back and rest a bit. The past two days have seen the stock come in, and I would sit back and wait to see if it comes into the 10-day line, currently running through the 57.86 price point as of Friday’s close. You can see that volume picked up on Thursday as the stock cruised up through the 62 price level for a new all-time high before reversing and closing down slightly on the day. Friday’s action saw the stock come in a little more, but volume diminished to just about average. I would love to see it come in and “kiss” the 10-day line as a spot to add shares. I myself sold shares into Thursday’s rise with the idea of buying back on a pullback into the 10-day line, so we’ll see if that opportunity arises this week.




The mortgage-servicing stocks continue to act well, although both Nationstar Mortgage (NSM), not shown, and Ocwen Financial (OCN), shown below on a daily chart, have pulled back over the past couple of days. Interestingly, OCN flashed a pocket pivot volume signature on Friday as it found solid above-average volume support well above its 10-day moving average. Both stocks continue to act well following recent breakouts that were preceded by pocket pivot buy points within the base. Their current action is illustrative of the constructive pullbacks we’ve seen in leading stocks as the general market indexes have consolidated their prior gains in orderly fashion.




Noodles (NDLS) continues to work on its first post-IPO base, as we see on its weekly chart, below. NDLS has now traded long enough to have a 10-week moving average on its weekly chart, and I note that the stock has found support along this 10-week line over the past three weeks as it has also formed a three-weeks-tight (3WT) handle type of formation. Volume is drying up but the stock is wedging along the intra-week lows whereas one might prefer to see it drifting slightly lower along the lows as it shakes out weak hands. NDLS did drift up off of the 43.47 close of this past Wednesday to end the week at 45.72, but I would look for a retest of this low as an entry point if one wants to gain an early entry on the basis of the tight action we are seeing in NDLS’ weekly chart.




In my report of this past Wednesday I discussed the potentially “improper” double-bottom patterns in both Biogen Idec (BIIB), not shown, and Regeneron Pharmaceuticals (REGN), shown below on a daily chart, following BIIB’s breakout on Wednesday. REGN has now followed suit with a breakout of its own. Again, we are beset with the issue of trying to label bases as this or that type of base, but the bottom line here is that if these are indeed “improper” double-bottoms then they will fail soon enough, and if one chooses to buy these breakouts then one can simply use the breakout point as a quick downside stop. As well, in prior reports over the past 2-3 weeks I’ve discussed much earlier pocket pivot buy points as both BIIB and REGN came up through their 50-day moving averages, and much of the problem of buying into a base-breakout from a “flawed” double-bottom base is defused by simply buying much earlier within the base when a “bottom-fishing” pocket pivot buy point emerges as was the case with both REGN and BIIB. Thus pocket pivots distinguish themselves as useful buy points given that they focus on specific price/volume action rather than the idea that one must label a base as “proper” or “improper.” I’ve seen plenty of “improper” bases work, and mostly because they were showing a lot of constructive action within the base in the form of pocket pivots.




Teen-targeted discount retailer Five Below (FIVE) has reemerged after failing on a cup-with-handle breakout back in March of this year. The stock, which is a thinner name trading 626,000 shares a day, although not excessively thin for an IPO, gapped up and out of a five-month base on Tuesday after coming in with a big earnings surprise. The daily chart below shows this as a buyable gap-up move using the 46.01 intra-day low of Tuesday’s BGU as your guide for a stop. FIVE pulled back in on Thursday and Friday as volume dried up, so in my view this pullback gives one a low-risk entry point on the initial BGU. Friday was the third day following FIVE’s BGU, and I would expect the stock to turn around from here if the BGU is to remain viable. FIVE is expected to produce earnings growth over the next ten quarters of 33%, 31%, 40%, 27%, 75%, 31%, 57%, 21%, 71%, and 28% in sequence, and institutional sponsorship in the stock increased to 270 mutual funds owning the stock at the end of June from 228 at the end of March.




Based on the number of questions I’ve received about Chinese mobile phone company NQ Mobile Ads (NQ) I decided to comment on the stock. Apparently, Investors Business Daily discussed the stock in the Wednesday edition of the paper as being a high, tight flag, and that such “HTF” formations can lead to moves in excess of 200%. Okay, I can go with that, I’m just not sure I can go with the idea that NQ’s base was a high, tight flag given that its peak in the flag was 19.98 and the low was 15.36. That’s a 23% deep flag from peak to trough, which doesn’t really seem to fit the idea of “tight” price action to me, although IBD claims it fits the “definition” of a high, tight flag.

In my view, at the very least, even with the price range volatility on the weekly chart, I would look for some tight weekly closes in the pattern to compensate for the wide price ranges, somewhat similar to what we saw in YELP’s pattern before it launched higher (see discussion of YELP’s weekly chart in the August 28th report). NQ’s pattern looks a bit sloppy to me, but again we can move away from trying to slap a label on something and view the price/volume action at a granular level on the daily chart, shown below. What we see in the daily chart of NQ is a concrete pocket pivot style breakout on Thursday, followed by a buyable gap-up move on massive volume Friday. Technically, that would be a BGU using the 20.76 intra-day low on Friday as a selling guide. NQ is a relatively small, Chinese name with relatively little mutual fund sponsorship (not unlike YY, actually), but it has great earnings numbers and has produced triple-digit sales growth for the past ten quarters since it came public in early May of 2011.




Solar stocks came apart back in August, and among the group First Solar (FSLR) and SolarCity (SCTY), both not shown here on charts, have been the weaker-acting names. In my September 4th report I pointed out that SCTY was likely in a position to bounce, and we saw a very sharp bounce occur in the stock on Tuesday of this past week. Maybe SCTY is going to try and build a whole new base, but for now I would not touch FSLR or SCTY on the long side. The strongest-acting stock in the group since it came undone in late July/early August is Sunpower (SPWR), which appears to be trying to round out the lows of a new base, as we can see on its daily chart, below. SPWR is currently 16% below its 52-week high, while FSLR and SCTY both lie 35% below their own 52-week highs. SPWR corrected a total of 26.9% within its current base, which is normal for a leading stock, particularly if we consider that SPWR more than doubled from its April breakout point.

All of this makes sense since its earnings growth numbers are far superior to SCTY’s or FSLR’s. Over the past three quarters SPWR has grown earnings by 350%, 283%, and 500%, respectively, while earnings next quarter are expected to increase by 667%. What threw the stock for a loop following its early August earnings announcement was a 3% decline in sales growth (Note: These numbers differ from those shown on the chart, below, as they come from a different source). If SPWR can get its revenues back on track it may have a chance to break out again. With the stock potentially rounding out the lows of a possible new base in “roundabout” fashion, we might be alert to a possible “bottom-fishing” pocket pivot buy point developing here. This occurs as the stock tracks tightly along its 10-day and 20-day moving averages and just below its 50-day moving average as volume dries up sharply. One might even consider buying an initial position here with the idea that the stock will hold the 10-day/20-day moving average confluence on any pullback. This is not unlike what we saw in YELP and TRLA back a couple of weeks ago before they launched to new highs.




Another stock in the “roundabout” category is Sodastream International (SODA), shown below on a daily chart. SODA beat lowered estimates when it announced earnings in late July and gapped up to its 50-day moving average, as we can see on its daily chart, below. While estimates for next quarter’s earnings show expected growth of anywhere from -6% to -15%, depending on the source, SODA is expected to mount a substantial earnings turnaround in the ensuing quarters. Interestingly, analysts look for the company to build on 2013’s annual per-share earnings estimate of $2.57 over the next four years, in sequence, to $3.33, $4.53, $6.87, and $7.59.

Those are some scarily strong annual earnings estimates, although admittedly trying to look out four years into the future is not always that easy and should be viewed with at least a tiny grain of salt. Nevertheless, two quarters out, earnings growth will turn sharply back to the upside, and as the stock works off some overhead in the pattern from June when it achieved an all-time high of 77.80, it has been bouncing along its 50-day moving average. On Tuesday of this past week, SODA flashed a bottom-fishing pocket pivot move along its 50-day line which has led to a move to higher highs going into the end of this past week. I’d watch for any constructive (e.g. low volume) pullbacks into the 65-66 area to buy into this recent, constructive action as SODA appears to be attempting to round out the lows of a new base.




In my report of this past Wednesday I discussed my distaste for the 3-D printing stocks given their recent price/volume action. Exone Company (XONE) was slammed and is coming unraveled after a weak secondary pricing last week. Stratasys (SSYS) followed suit with a weak secondary pricing of its own this week which has had the net effect of negating the stock’s recent base breakout, as we can see on its daily chart below. SSYS now morphs into a late-stage failed-base short-sale set-up, although in a market rally phase short-selling is generally not as productive as going long strong leading names. Nevertheless, I think the action in XONE and SSYS over the past week is telling you that the group is starting to get sick, and this puts stocks like Three-D Systems (DDD) and Proto Labs (PRLB) on notice. At the very least I would continue to avoid the group.




So far the market appears to be consolidating its prior gains off the lows of a couple of weeks ago in constructive fashion. This week’s Fed meeting has the potential to turn things upside-down if some surprise comes up, but my guess is that the Fed will not do anything that is not already priced into the market. The market expects the Fed to announce a definitive tapering move, cutting monthly bond purchases to $70 billion from the current $85 billion. If this is what they announce, then the market may not find much to become distressed over. If the Fed announces more tapering than is expected, or no tapering, then things could get interesting. For now, I am simply focused on the action of leading stocks as my primary guide, and for the most part that has remained constructive. 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 position in FIVE, LNKD, TSLA,YELP, and YY, 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.