The Gilmo Report

September 16, 2012

September 16, 2012

The Fed came through on Thursday with its new motto of “All the Money That’s Fit to Print!” and announced an MBS purchasing program that will continue until employment has turned around. The Fed also indicated that monetary policy would remain accommodative even if the economy begins to turn around in more robust fashion. As I view it, this is all a roundabout way of saying that the QE spigot is wide open, and will remain open for as long as is necessary. This sent stocks flying higher on Thursday, as we see on the daily chart of the S&P 500 Index, below, but Friday’s action showed the index stalling a bit as volume picked up again. The stalling was less evident in the NASDAQ, thanks to some strong moves in the big NASDAQ 100 stocks, including laggards like Priceline.com (PCLN) and Intuitive Surgical (ISRG). Taking things in context, the Fed news is now out, and Friday saw some of the proverbial selling into the news as the indexes did not rise nearly as much as they did on Thursday while volume picked up sharply. With the market rallying steeply to the upside over the past seven days a pullback here would not be out of order, but for now the market’s rally remains well-intact until further evidence proves otherwise.

GR091612-SPX

 

Both gold and silver found support at their 10-day moving averages and flashed massive-volume pocket pivot buy points on Thursday, with the iShares Silver Trust (SLV) finding support at its 10-day line for the second day in a row, as we see on its daily chart below. While QE3 provided the impetus for Thursday’s big move in the precious metals, the reality is that they, along with the rapidly slumping U.S. dollar, were already beginning to discount the Fed’s move when they began their current sharp upside trends in mid-August. Thursday’s buy signal is now the third buy signal for the precious metals ETFs since they first came up off the lows of their more than year-long consolidations in mid-August, and for now they show no sign of slowing. With the Fed promising to buy some $40 billion worth of MBS securities every month until unemployment begins to turn around, I don’t see how the precious metals trend ends any time soon. Sure, we might take a few days, maybe even longer, now and then to pause and consolidate prior gains, but as I see it, with the precious metals the trend remains our friend, and I would look at any pullback in the SLV to 32-33 as a buying opportunity in the short-term, should that happen. Otherwise, gold and silver remain a hold until further notice.

 

GR091612-SLV

 

The big NASDAQ 100 stocks took the driver’s seat on Friday, helping to keep the NASDAQ Composite relatively more buoyant than its S&P 500 counterpart. While Apple (AAPL) and Amazon.com (AMZN), not shown, continued to forge all-time highs, even laggards like Priceline.com (PCLN) were trying to make comebacks on Friday. As we can see on PCLN’s daily chart, the stock flashed a bottom-fishing pocket pivot buy point as pushed above its 50-day moving average on Friday. We can easily surmise from looking at the chart that it may have considerable overhead lurking around the 650 price level and higher, and so it is not clear how far this rally off the August lows will carry. While I myself am not a buyer of PCLN on this move, I do think it exemplifies the broad move in big NASDAQ stocks, which adds to the positive tone underlying the action in this market. But in choosing stocks to buy, while “buying cheap” might seem attractive, it is always better to buy those stocks that are clearing to new highs as overhead supply within the pattern is not a factor.

 

GR091612-PCLN

 

In my Wednesday report of September 12th, I discussed the gap-up and “bottom-fishing” type of pocket pivot move in Facebook (FB), shown below on a daily chart. FB followed through on that with another one-point-plus move to the upside on Friday as it pushes towards its 50-day moving average, now running through the 23.03 price point. This would be the first point of resistance, and anyone playing this off of the Wednesday pocket pivot buy point might consider that a 10% move up to the 50-day moving average might be a point at which to take short-term profit, instead waiting to see whether FB can produce another pocket pivot buy point on a big-volume move above the 50-day moving average. If that were to occur then I would consider the trend to be intact. FB is a good example, in my mind, of a “big stock” where the crowd is leaning way over to one side on the assumption that every FB insider is going to dump every last one of their shares. And with all the natural sellers out already, there may not be anyone left to push it down for all the short-sellers. Beyond the 50-day line, FB could also fill the July 27th gap, taking it up to the 26.73 price level.

 

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LinkedIn (LNKD) finally cleared the intra-day high of 122.70 that it saw on its first day of trading on May 19, 2011 by closing in all-time high price ground at 123.23 on Friday. This also represents the first close above the intra-day high of 120.63 on the left side of the cup, as we see on LNKD’s daily chart, below. LNKD remains my biggest stock position, and with all the talk of the stock being grossly “overvalued,” even to the point where some pundits are writing that the stock will soon receive its “comeuppance” (I’ve got to get myself one of those crystal balls!), it’s easy to forget that LNKD is expected to grow earnings in 2011 by 77% to 62 cents a share and then by 110% in 2013 to $1.30 a share. Meanwhile, institutions continue to move into the stock, with 566 mutual funds owning the stock as of June vs. 418 owning the stock back in March. The September institutional ownership numbers will be coming out soon and it will be interesting to see whether such ownership has increased. LNKD is expanding internationally, and its professional focus is seen as being more serious and less “voyeuristic” and “exhibitionist” than Facebook. LNKD remains a hold, using any pullbacks to the 10-day line to add shares.

 

GR091612-LNKD

 

Whenever the bio-techs have orderly pullbacks following upside moves, I generally find that this is a good spot to pick up shares, and this is the case with Onyx Pharmaceuticals (ONXX), shown below on a daily chart. As members may recall, I identified the very subtle pocket pivot buy point at the 50-day moving average right at the end of August, and the stock moved up to form the right side of a short cup formation. Now the stock is working on the handle as it drifts down in orderly fashion on light volume. Friday morning the stock spun out just a bit down to the 74 price level, but volume picked up slightly as the stock found support just above the 20-day moving average, the green moving average on the chart, and closed up on the day. This is constructive action, and I would even be inclined to pick up shares here with the idea that it should hold above the 74 intra-day low from Friday. An ensuing breakout or pocket pivot move up through the 10-day moving average would then be a reason to double-up the position. So far, I like the way ONXX’s base is shaping up here, which is so far a six-week cup with a one-week handle.

 

GR091612-ONXX

 

In my report of last weekend, I noted the standard-issue base-breakout in Biogen Idec (BIIB), shown below on a weekly chart. BIIB has held the breakout very well over this past week, and built upon that constructive action with a strong continuation pocket pivot on Friday. If one bought shares on the basis of the prior week’s breakout from a five-week flat base, then this continuation pocket pivot is a signal to add shares. Speaking for myself, I do not subscribe to this idea of adding to one’s position every time it moves up 2% following a breakout. In many cases this just gets you into a heavy position when the stock moves up 4% from the breakout point, and a normal but sharp pullback, say 5% back down, gets you underwater fast. Using continuation pocket pivots is a much safe and saner way to add shares once one has bought a breakout, and BIIB illustrates how this works given that we would use the 10-day moving average as a selling guide for any shares bought on the basis of Friday’s continuation pocket pivot move. The key here is that confirming volume is seen here along the 10-day line as compared to simply adding on the basis of a 2% move higher which may or may not come on strong volume.

 

GR091612-BIIB

 

We have been following Lumber Liquidators (LL) in my reports over the past month since it began building its short, tight flag formation at the cusp of July-August. This has since been followed up with several pocket pivot buy points in the pattern, as I’ve noted in several reports throughout August and September. With housing and building-related stocks acting well, LL has been my preferred vehicle for playing the move, and in fact it has been one of the strongest-moving stocks in the sector. Thursday saw the stock issue another continuation pocket pivot buy point along the 10-day moving average, and the stock added to that with very strong gains on Friday. If one is long this stock and has been building a position over the past month on the basis of several pocket pivot buy signals, this is a hold for now as the stock is getting fairly extended as it has now broken out of the ascending trend channel it began forming in early August. LL has also been following its 10-day moving average for seven weeks now, so we will now use a violation of the 10-day line as your selling guide from here based on the Seven-Week Rule. For those unfamiliar with this method, please refer to “Trade Like an O’Neil Disciple: How We Made 18,000% in the Stock Market,” which I co-authored with Dr. Chris Kacher.

 

GR091612-LL

 

In recent reports I have discussed Zillow (Z) and the base it has been building on its weekly chart, which I show below. As I’ve discussed previously, Z has seen increased sponsorship over the past few months, and last week’s secondary offering of 4 million shares priced well at $43, indicating that institutional interest in the stock likely remains strong. Z, however, has been fairly erratic on its daily chart, not shown, and the past couple of week’s action was typical of this behavior. Z first sold off when the offering was announced and then rallied back up into positive territory. Once the secondary was priced at 43 the stock then sold off down to a low of 48.37, but held above its 50-day moving average. On Thursday the stock sold back down to the 50-day line below the 40 price level, only to turn around and rally back above the 44 price level by the close, making for a 10%-plus swing on the day! Friday Z tried to break out of a cup-with-handle formation but reversed to close down nearly 4%. The weekly chart, however, helps to distill out this daily price volatility, and we can see that despite all this noise the stock has managed to close tight over the past two weeks. I would like to see the stock build on this tightness, but for now I am inclined to use weakness in the stock to nibble on shares with the idea that it will continue to hold the 50-day/10-week moving averages.

 

GR091612-Z

 

Michael Kors Holdings (KORS) continues to bide its time as it awaits the pricing of a 20-million-share secondary offering. The stock has been sliding around on either side of its 10-day moving average over the past week since announcing the secondary filing, but has held above its 20-day moving average, as we see on its daily chart below. I will go out on a limb here and predict that the secondary will price somewhere around 52-53, and on that basis continue to hold my core position in the stock. As is evident on the chart, sellers have not been in a big hurry to sell the stock and it has held tight after the initial, and expected, gap-down move on Monday morning following the announcement of the secondary one week ago on Friday. What I am watching for here is a possible pocket pivot type of move up through or off of the 10-day moving average as a new buy signal for the stock. Prior buy signals in KORS occurred on the buyable gap-up on August 14th around 48, and then on the standard-issue breakout through the 50.69 high of the base on August 17th.  Since then the stock has remained well above that level, only 5% off of its recent all-time price high. On the fundamental side, KORS has all the requisite earnings and sales growth numbers, including a 56.2% ROE, which in my experience is a decent predictor of further upside price movement for recent IPOs.

 

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As always, with respect to any stocks that members are interested in and which I have discussed in previous reports but which I have not discussed in this report, members should simply refer to those prior reports using the symbol search function in order to review my most current thoughts on such names.

 

Meanwhile, with the market in an extended position following the breakout to four-year highs two Thursdays ago, a pullback here would not be out of the ordinary, and could provide buying opportunities in leading stocks that are for now somewhat extended on the upside. The bottom line is that the market’s uptrend remains quite intact, and it would require far more technical evidence of a top to cause me to be anything but bullish here given that I am not a graduate of the University of I Am Smarter Than The Market, and hence do not try to predict a change of trend until the market says so.

 

On an administrative note, the new book that I have co-authored with my colleague Dr. Chris Kacher, titled, “In the Trading Cockpit with the O’Neil Disciples,” is expected to be out within the next few days, and members can pre-order the book here. The book is a follow-up to our 2010 book, “Trade Like an O’Neil Disciple,” and is based on the immense feedback and questions we have received from readers of the book as well as our base of followers which numbers 30,000+ these days. Much of this feedback and associated questions are addressed directly in the book, which also contains numerous exercises that reinforce the material and put the reader “in the cockpit,” so to speak. Dr. K and I will also soon begin writing our next book, a treatise that will cover short-selling and the updated techniques that we have both been working on since we published our first book in August 2010 that included a single chapter on short-selling.

 

Dr. K and I will also be presenting twice at the upcoming Trader’s Expo to be held at Caesar’s Palace in Las Vegas on November 14-17. Dr. K and I will give a free one-hour primer on pocket pivots, buyable gap-ups, and the Seven-Week Rule at 8:00 a.m. on Friday, November 16, and later that afternoon will conduct an intensive, four-hour paid workshop from 1:30 to 5:30 p.m. Last time Dr. K and I were presenting in Las Vegas at the MoneyShow in May of this year, we had some time to have dinner at the outstanding, Three-Michelin-Star restaurant Joel Robuchon. As it turned out, our waiter at dinner, whom we shall only identify as Andrew, also happened to be a subscriber to our website who had made 78% in 2011 in his own account, and he was very humble in telling us that it was largely due to the methods he had learned from us. When the check arrived for a meal that came to over $1,000 for the two of us, Andrew graciously covered the check for us as an expression of his gratitude for how we have helped him succeed during 2011, a year that confounded many.

 

I can only say that Andrew must take the credit for his performance, as we can only teach – we didn’t pull any triggers for him. This was one of the most gratifying experiences I have ever had in this regard, and ranks up there with the fellow who saw me make a short-selling presentation at the New York IBD meet-up in July 2008 where I discussed a short-sale set-up I saw developing in First Solar (FSLR) at the time. This fellow later emailed me in 2009 to tell me he had bought $40,000 worth of puts in FSLR on the basis of my discussion at that meet-up, and the puts were worth $1.4 million after the stock plummeted over 100 points.

 

Being in the public eye, I realize that it is simply part of the “heat in the kitchen” to run into bitter, envious, and hateful people out there. But it is the positive experiences that make my day and keep me going. Everything else is best ignored, in my view. And in the process I have noticed that those who approach trading with bitterness and envy tend to never achieve success in the markets and never recover from their mistakes or trading slumps – only those who keep an open and positive mind do. As Kevin Marder likes to say, attitude is its own reward. In this regard I thank people like Andrew and Mr. FSLR-killer for making it all worthwhile as a teacher of trading methods and, more importantly, for helping to keep me positive and on track as nothing more than an ongoing student of the market in my own right.

 

Finally, I am scheduled to appear on Fox Business News’ Stuart Varney & Company show sometime around the opening bell on Tuesday, September 18th to discuss my current views on silver and gold as well as the markets. It should be an interesting discussion, and I will post a link to the video of my appearance in my report of this coming Wednesday for those who can’t catch it live.

 

Gil Morales

CEO & Principal, Gil Morales & Company, LLC
Principal and Managing Director, MoKa Investors, LLC
Principal and Managing Director, 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 AGQ, KORS, LNKD, ONXX, and Z, though positions are subject to change at any time and without notice.
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