The Gilmo Report

September 19, 2012

September 19, 2012

The market was primed for a pullback as I discussed in my weekend report of September 16th, and that’s what has transpired so far this week. As we can see on the daily chart of the NASDAQ Composite Index, below, the pullback has held in a very tight range so far this week. Within the context of the steepness of the prior upside move that got us to this point the action so far has to be considered constructive, in my view. The markets traded higher volume today and inched up as they again found support off of the intra-day lows seen on Monday and Tuesday. With QE3 out of the bag, investors may consider the market to be in a “sell the news” situation given its extended position here, well above the breakout we saw two Thursdays ago. Thus, at least from an index point of view, we could continue to move sideways here, and as the market consolidates we will get a sense of whether the action is constructive or not. So far it has been constructive, and the action of leading stocks has confirmed this as they either move higher or hold up in their own short-term consolidations as they mimic the market’s action.

 

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The precious metals, which got the biggest boost following the Fed’s QE3 announcement last Thursday, are also in mimic mode as they too consolidate their sharp gains from that day. This week has featured one decent pullback on Monday, as we see on the daily chart of the iShares Silver Trust (SLV), below. Gold, specifically the SPDR Gold Shares (GLD), is showing nearly identical action as both the yellow and white metals track sideways following a very impressive and manic rally to the upside that began in mid-August. I tend to want to use any pullbacks to the 10-day moving average as potential add/buy points for the metals, but so far neither gold or silver have come off enough to reach their 10-day lines on the downside. Hence the only thing to do is to sit and let them do their thing until another identifiable buy point, such as we saw last Thursday with the pocket pivot off the 10-day line (see September 16th report) comes into play.

 

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With Apple (AAPL) trading above the $700 price level, the question always arises as to whether this is the time to invoke Livermore’s Century Mark Rule given that this is the first time AAPL has ever traded above $700 in its history. Livermore’s rule was based on the idea that the first time a stock trades above a hundred-mark or “century mark,” such as 100, 200, 300, 400, etc. it will have a tendency to gather some upside momentum as it clears these century mark levels. Livermore would buy a stock on this basis, looking to catch a ride up another 5% or more beyond the level. So far AAPL has not been able to get very far above the 700 price level, and we can see on the daily chart below that buying interest appears to be waning at this price level. Perhaps the stock will eventually see some volume come in at some point and it will launch further above the 700 level, but AAPL is a pretty broadly-owned institutional stock by now as a long-time leader in the New Millennium, so the big buying demand as it crosses 700 has yet to materialize. For now, however, the stock is “holdable” although I would keep an eye on it as it floats around the 700 price level.

 

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LinkedIn (LNKD) remains one of my favorite stocks and it continues to act well here as it has pulled back with the market to a logical area of support at its 10-day moving average before bouncing back up towards its all-time highs today, as we see on the daily chart below. LNKD remains well above the 113 breakout level as I’ve drawn it with a dotted line on the chart, but so far has managed to remain above its 10-day moving average. At this point I would like to see some sort of continuation pocket pivot off of the 10-day line, but this would require the stock to either pull back to the 10-day line again or give the line some time to catch up to the stock up here in the 122-123 price level. So far, however, I like the way that sellers did not pound the stock as it tested the 10-day moving average yesterday as downside volume dried up. The stock has since drifted up on light volume as well, and it remains to be seen when the next burst of volume in the stock shows up.

 

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Last Wednesday, in my September 12th report, I discussed the huge-volume pocket pivot/gap-up move in Facebook (FB) and that I would expect the stock to move up to the 50-day moving average where logical resistance would likely be found. As we can see on the daily chart below FB did exactly that on Monday. Yesterday it found its low on that retreat from the 50-day line and today issued a new bottom-fishing pocket pivot buy point as it blasted up through the 50-day moving average on volume that was higher than any down-volume over the prior ten days. While I thought the first bottom-fishing pocket pivot/gap-up had a decent chance of working, I like today’s pocket pivot move up through the 50-day line better as it confirms the strength seen last Wednesday. This is buyable, in my view, with the idea that the stock should hold the 50-day line on any pullback, roughly the 22.45 level. Watching the stock trade today, each time it pulled back I was amazed to see how big chunks of stock were being bought as if Pac-Man was at work in FB. Let’s hope he keeps on munching away and sending the stock higher!

 

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I have spent some time in previous reports analyzing the weekly chart and sponsorship of Zillow (Z) and discussing my thoughts with respect to how the evidence argues for material institutional accumulation within the stock’s somewhat volatile base. While Z’s price action remains a volatile affair, I have approached the stock with the idea of buying the stock on weakness over the past couple of weeks, and so far that strategy has paid off. We can see on the daily chart, below, that last week’s breakout up through the 44 price level got pushed right back into the 10-day moving average, and then this week Z did something it is not really known for, which is hold the 10-day line on the pullback as volume dried up. Today we saw Z break out on about twice average volume and clear to an all-time high daily closing price. Given that the standard-issue breakout buy point is roughly 44, the stock remains within range of that pivot point given its close at 45.55, well within 5% of the 44 price level. I would expect Z to hold the 44 price level on any pullbacks from here.

 

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Splunk (SPLK) is known as the “Google for Businesses” but after coming public in April of this year the stock ran into a market correction and ended up building a base throughout the late spring and summer, as we see on its daily chart. At the end of August SPLK staged a big-volume gap-up after announcing earnings, and I have to admit that I was skeptical of this move given that it occurred from the lows of a base in a thin stock. However, that gap-up was in fact a buyable gap-up, as hindsight enables us to see, and the stock has since broken out to all-time highs. Here we see SPLK pulling back to the top of its base and the 10-day moving average. I think the stock may have some upside potential on this breakout, and what I would keep a close eye out for here as the stock rests upon its 10-day line is a continuation pocket pivot off the line in the next few days. Given that the 10-day line also coincides with the top of SPLK’s base, this low-volume pullback may also be buyable with the idea of getting heavier in the stock if a continuation pocket pivot occurs off the 10-day line.

 

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Yesterday I noticed two obesity-drug bio-techs, Arena Pharmaceuticals (ARNA) and Vivus (VVUS), flashing pocket pivots, but ARNA’s appears to be in a better position as the stock rounds out and starts up the right side of a potential new base. VVUS, not shown, is less developed in this regard, but both stocks are issuing what we can consider “bottom-fishing” pocket pivot buy points off of the lows in their current bases. I suppose if one likes the stories behind these stocks as they begin marketing their drugs to anyone who considers themselves “fat,” then one can certainly take a shot at these bottom-fishing pocket pivots as long as a clear downside stop is kept in mind when one initiates the trade. In the case of ARNA, as well as VVUS for that matter, I would use the 50-day moving averages as my selling guide if I were to act on these bottom-fishing buy signals. The bottom line is that one can buy any stock if they have a reasonable technical basis to do so as long as one has a clear out point in mind when making the trade. So if you think “fat drugs” are going to be big business, knock yourself out with ARNA or VVUS.

 

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Onyx Pharmaceuticals (ONXX) gets honors as the “bio-tech of the week” with its sharp three-day move so far following my discussion of the stock in my weekend report of September 16th. Back in my August 29th report I identified the very subtle pocket pivot buy point off the 50-day and 10-day moving averages, and Monday’s standard-issue base breakout was another point to add to or even initiate a position in ONXX. Monday’s base breakout was also occurred on a pocket pivot volume signature, which added to its constructive nature, and the proof in the pudding here is the ensuing two days of sharp upside price movement on strong volume. At this point ONXX is extended from the 78.78 buy point at the peak of the handle in the base, so is only buyable on pullbacks to 83 or below. Meanwhile we’ve seen other bio-techs I’ve discussed in recent reports such as Regeneron Pharmaceuticals (REGN) and Biogen Idec (BIIB) hold above their recent base breakout levels, so the group remains robust with its #2 industry group ranking.

 

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For the most part I’ve focused on actionable ideas in this report as most of the other leading stocks I’ve discussed in previous reports are consolidating recent gains. The action on a broad scale remains relatively constructive, and so it is a simple matter of continuing to watch your stocks as we wait to see how long and whether the market continues to move sideways in a constructive manner before moving higher again. Currently there is not a shred of evidence to argue for any kind of market top, and I would not pay attention to anything other than the action of my stocks.

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, FB, LNKD, SPLK, ONXX, and Z, though positions are subject to change at any time and without notice.
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