The Gilmo Report

September 22, 2013

September 21, 2013

After a sharp upside move on Wednesday following the Fed’s decision to “go taperless,” the markets spent Thursday consolidating their gains in what appeared to be constructive fashion. The NASDAQ Composite Index, shown below on a daily chart, stalled a little bit on volume that was above average Thursday which looked normal given the extent of Wednesday’s move. Friday’s action, however, was somewhat surprising as the market spun out after Fed heads gave conflicting views on the future course of QE. One Fed head also indicated that the Fed came within a hair of tapering in September and that a taper of some sort was likely in October. Thus the “Septaper” becomes the “Octaper” and the markets to some extent find themselves confused on the overall issue of tapering. Volume was obviously exacerbated by options expiration, but volume levels were still quite high, even for options expiration. The NASDAQ is still holding well above where it was before the Fed meeting on Wednesday, and it is just a matter of seeing how well it can weather any selling pressure that might continue into next week.

 

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The S&P 500, shown below on a daily chart, has pulled right back to the top of its breakout point from Wednesday. It remains to be seen whether this provides some support for the index as we move into the new trading week. The thing to keep in perspective here is that the market has been on a 2½ week rally off the lows of late August. As the indexes move into a state of “confirmed rally” the entire affair starts to become obvious to the crowd. As has been documented in my reports over the past three weeks, I felt that investors should be moving into selected stocks back then, before the market’s “confirmed rally” became an obvious and unavoidable fact.

Therefore one could say that the market is entitled to a little pullback here and perhaps even a period of backing-and-filling as it digests that 2½ week rally. Many leading stocks are also somewhat extended, and investors should not be piling into the market here but rather should be waiting for opportune pullbacks or proper buy points to emerge. In my report of this past Wednesday, I focused on actionable buy points in certain stocks that were occurring in real-time, and for the most part those buy points remain in effect with the appropriate downside stops in place.

 

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The confusion of the markets with respect to the path and trajectory of QE tapering was best illustrated by the action in the precious metals. I show a chart of the SPDR Gold Shares (GLD), below, and we can see the sharp pullback on Friday as the GLD dropped back below its 50-day moving average. The iShares Silver Trust (SLV), shown further below, has pulled right back to its 50-day moving average, which might seem constructive, but it has also given up all of the gains it achieved on Wednesday. Buying into Wednesday’s reversal “bottom-fishing” pocket pivots was only appropriate for anyone who can handle the volatility of the precious metals, and the action over the past two days illustrates this. Whether the pullbacks to their points of origination make the GLD or SLV buyable here depends on whether one is willing to use a very tight stop. I don’t really care for the heavy volume seen on the sell-off, and I think the uncertainty that has been re-injected into the QE tapering narrative is only likely to make the action in the precious metals ever more volatile.

 

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In the face of Friday’s heavy selling the “Four Horsemen” for the most part held their own. Following this past Tuesday’s continuation pocket pivot move, Facebook (FB) just kept on cruising higher on Friday on well above-average volume as it remained impervious to the general market action. Obviously, FB is well extended from Tuesday’s latest buy point, but the price/volume action in the stock remains quite impressive.

 

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LinkedIn (LNKD) was the only outlier among the four as it sold off on above-average volume to drop just below its 20-day exponential moving average, the green line on the daily chart, below. As I’ve written in recent reports, LNKD probably suffers from a near-term supply issue as the recent 5.38 million share secondary offering which was priced at 222, well below where the stock closed Friday, has likely soaked up short-term demand for the stock. I might look for the stock to find support somewhere around the 20-day line as it did in mid-August. The stock is also approaching its continuation pocket pivot of 12 days ago on the chart, which I would prefer to see it hold. If it fails to hold up then the next line of support becomes the 50-day moving average just under the 230 price level or the 10-week moving average on the weekly chart, not shown, at just above 233. My general view, however, is that the stock should find support somewhere around the 240 level.

 

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Netflix (NFLX) closed at an all-time high on Friday on volume that was well above average, as we can see on the daily chart below. Referring back to my report of September 11th, I theorized back then that the gap-up move that NFLX staged the day before on September 10th might be considered a buyable gap-up move. While the stock did pull back to test the 10-day moving average, it never dropped below the 296.81 intra-day low of that BGU day. Thus the stock was buyable on an opportunistic basis when it pulled into the 10-day line, but Friday’s move also qualifies as a pocket  pivot buy point coming off the 10-day line, surprisingly enough.

 

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In my Wednesday report of this past week I pointed out the tight price action in Tesla Motors (TSLA) as volume was drying up and wrote that the stock “is likely setting up to move higher.” On Thursday the stock gapped up and out of what was essentially a three-weeks-tight sort of formation on heavy volume, and on Friday closed in a slightly extended position. I would look for any pullback below 180 as a buyable event. The stock was helped along by an analyst’s upgrade and price target increase to $200 on Thursday, and it was interesting to see rumors of an impending secondary offering surface later in the day, a common tactic of short-sellers in TSLA who are again getting their heads handed to them. As I wrote last weekend, TSLA now has nearly 22 million shares sold short as of the end of August, and it will be interesting to see what the September 15th short interest looks like when it is released in a few days.

 

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For the most part, stocks I’ve discussed on the long side in recent reports remain in healthy uptrends or near actionable buy points per those recent reports. Members should review the last 2-3 reports for my comments on any of those names as nothing has really changed since then. In this report I will review any situations that have changed as well as any new names I have my eye on.

 

First up is the action in teen-target retailer Five Below (FIVE), shown below on a daily chart, which was trying to hold its 10-day moving average after announcing a 7.1 million share secondary offering by insiders and from which the company will receive no proceeds. As I wrote in my report on Wednesday of this past week, this is not the type of secondary I would like to see. Given that FIVE is a relatively thin stock, trading about 767,000 shares a day on average, it will tend to be quite volatile, and dumping another 7.1 million shares, not quite an additional 15% on the existing float of a little over 50 million shares, is clearly taking its toll. Obviously, the buyable gap-up move of was out the window on Thursday when the stock violated the intra-day low of the BGU day. In my view this is mostly a supply issue for a thin stock.

For a stock this size, the 7.1 million share secondary offering is a decent-sized chunk of stock to dump into the market, and it is likely going to be priced somewhere in the low 40’s. As the stock moves back to the top of its prior base it starts to fill the gap from the BGU day of nine days ago on the daily chart, below, where I would watch closely to see how the stock acts once the secondary is priced. Clearly the announcement of the secondary offering is an exogenous event that is severely affecting the stock’s price here, but it could set up an opportunity if the stock can hold the top of its prior base. I’ll be keeping a close eye on this.

 

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The action in recent IPO Noodles (NDLS) on Friday was more than bizarre, below. NDLS, which we first identified as buyable on the basis of its pocket pivot buy point within the base, as I’ve annotated on the daily chart, below, came flying out of its base on Friday morning as volume suddenly surged and the stock rocketed 9% on an intra-day basis, touching the 49.45 price point before reversing and selling off for the rest of the day to close down 3.49% on very heavy volume. Fortunately, we were into the stock in the 45-46 price area. One is in a better position buying the pocket pivot and not acting on the breakout, which in my view got very extended very fast.

It is quite possible that Friday’s strange action was options-related, and I consider it somewhat constructive that the stock did hold the 50-day moving average and the lows of its recent three-week range. If the move sucked in a lot of breakout buyers, its reversal would likely have led to many of them rushing to blow out their positions and exacerbating the downside movement in the stock. Given that NDLS is a thinner, recent IPO that trades 511,000 shares a day on average, this is a plausible explanation, and I would watch the 50-day line as a selling guide if the stock gets into further trouble. To some extent NDLS points out the advantage gained by buying pocket pivots within a base rather than rushing to buy a breakout with the crowd.

 

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InfoBlox (BLOX) continues to correct after its buyable gap-up move of early September and subsequent price run-up. The pullback over the past week or so hasn’t held the 10-day line, and the stock moved lower on above-average volume on Friday. Since there have been no further buy points in the pattern since the buyable gap-up move, unless one wanted to try and buy into the pullback to the 10-day line, the 20-day moving average comes into play as a potential area of support, and I would not expect any further correction in the stock to carry beyond that point.

 

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I first discussed Sprouts Farmers Market (SFM) in my report of September 8th when the stock was pushing back above its 10-day moving average after hammering out the lows of a potential new base. Since then the stock has held subsequent pullbacks to the 10-day line and finally broke out of a six-week base on Thursday. Since SFM hasn’t traded long enough to have a 50-day moving average or a 50-day moving average of volume, one cannot determine whether Thursday’s breakout occurred on the requisite volume increase IF one is relying on standard base-breakout signals. What we do know for certain is that the stock did break out through the 41.85 peak in the base on a pocket pivot volume signature, as I show on the daily chart below. The breakout is occurring after coming straight up off the lows of the base, more or less, so I would look for a pullback to 42 or better as an opportunity to pick up shares.

 

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On SFM’s weekly chart, below, we can see the six-week base breakout and the increase in weekly volume that accompanied it. SFM did charge up towards the 45 price level before reversing on Friday to close near its lows for the day, so I would prefer to buy into a constructive pullback from here given its volatility.

 

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Alliance Fiber Optic (AFOP) has the highest Composite Rating of any stock in the Telecom-Fiber Optics group, a group that is currently ranked #1. Thus if we assume that AFOP is the top-rated stock in the top-rated group, it warrants at least some consideration. AFOP provides the usual mix of fiber optic component and modules to the telecom industry, and earnings and sales growth have been on a tear in recent quarters. AFOP raised guidance on Wednesday, triggering a buyable gap-up move on huge volume from an ascending type of formation, as we can see on the daily chart below.

The stock has pulled back down towards the intra-day low of Wednesday’s buyable gap-up day at 21.30, closing Friday at 22.23. Trading 904,000 shares a day, the stock trades about $20 million a day in average daily dollar volume, which is fairly puny. However, it is an emerging name in the telecom area and mutual fund sponsorship over the last reported period leapt to 76 funds from a previous 20. Earnings growth has been up triple-digits for the past three quarters and next quarter the company is looking for 173% earnings growth (estimates data shown on the chart have not been updated). I think one can buy into this pullback using the 21.30 low, plus an additional 2-3% on the downside, as an easy stop.

 

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I’ve been watching Groupon (GRPN) ever since it had a buyable gap-up back in early August that quickly failed following the appointment of a new CEO. GRPN has since backed up and held along its 20-day moving average to build a short flag formation from which it broke out of a couple of weeks ago. Another pullback to the 10-day moving average earlier this past week was followed by a buyable gap-up move on Thursday, as we can see on the daily chart below. At that time GRPN’s 40-day Average True Range was 44 cents and the gap-up move took the stock from a close on Wednesday of 11.55 to an opening price on Thursday of 12.03, a move of 48 cents.

Since a buyable gap-up day must be at least 0.75 times the 40-day ATR, GRPN more than exceeded this requirement. Thursday’s intra-day low was 11.91, so that becomes your stop if you feel compelled to buy the stock. GRPN’s earnings and sales have been weak lately, with sales growth decelerating to a feeble 7% in the most recent quarter. Next quarter’s estimates call for more negative growth, but after that First Call estimates are looking for growth of 700%, 133%, 250%, and 200% over the next four quarters, so this is apparently a forward-looking story.

 

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3-D printing stocks remain a starkly mixed bag, with Exone Company (XONE) and Stratasys (SSYS) getting plastered recently after completing weak secondary offerings. One of the other major players in the group, Three-D Systems (DDD), has refused to die after retesting its prior breakout level around the 50+ price level. DDD flashed a pocket pivot buy point on Tuesday of this past week and is now pulling back into that buy point on roughly average volume. What probably works in DDD’s favor right now is the fact that as of the end of August there were 27,790,984 shares of the stock sold short, or roughly 27% of the 102 million share float. Friday’s pullback held the 10-day line, as we can see on the daily chart below, and put it within range of Tuesday’s pocket pivot buy point.

The question here is whether the shorts know something or whether the huge short interest is going to spark a short squeeze. So far, despite flashes of technical strength, no such short squeeze has materialized, and it may be that the stock goes nowhere until it announces earnings in late October. Frankly, I’m not sure what to make of the stock right now, but if one wants to test a position in the stock then the pocket pivot buy point of this past Tuesday gives one a rationale to do so, with the idea that the stock must hold the 52 level on any pullback. In my view the stock has been a bit volatile and flakey, and I would not give it much room on this basis.

 

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Sunpower (SPWR) is pulling back into its 50-day moving average following Monday’s bottom-fishing pocket pivot buy point as it tries to work its way up and around the right side of a potential new base, as we see on the daily chart below. I discussed SPWR last week before it moved above the 50-day line, and so far this week it has held above the line following Monday’s pocket pivot. As it pulls into the 50-day line it becomes very buyable, in my view, with the idea that it should continue to hold the 50-day moving average. The stock may need some time to continue consolidating along the 50-day line, but so far it is acting constructively as it perhaps works off some overhead from the left side of the pattern.

 

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In my report of this past Wednesday I also discussed a possible turnaround in SolarCity (SCTY) and indicated that members should watch for a possible “bottom-fishing” pocket pivot coming up through the 50-day moving average. This was based on how the stock was acting over the prior six days following the massive-volume move up off the lows of its recent price decline, as we can see on the daily chart below. SCTY did in fact come through with a pocket pivot move on Thursday as it popped above the 50-day line on the requisite volume signature. On Friday SCTY pulled back down to the 50-day line and closed a few cents below it on heavy volume. I would think that if SCTY can hold the intra-day lows of Friday, roughly the top of the prior short six-day flag it formed before Thursday’s move, then this pullback might be buyable. This is still a bit tricky given that the stock has some overhead in the pattern around the 40 price level which might come into play.

 

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U.S. Silica Holdings (SLCA) continues to flash pocket pivot buy points within its base as it comes up the right side, and the stock did flash one on Friday which comes on the heels of the pocket pivot buy point it flashed on Wednesday, as I discussed in my report of that day. If we take a broader look at the stock on a weekly chart, below, we can see that it is essentially in the process of building what is so far a 28-week base. The base itself looks constructive with support action along the June lows followed by some tight closes along the 10-week line in August. With the recent pocket pivots on Wednesday and Friday of this week, the stock remains potentially buyable with the idea that it should hold the 24 price level, roughly, on any pullback.

 

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While big-stock NASDAQ names like Priceline.com (PCLN), Amazon.com (AMZN), and Google (GOOG) are showing strength (GOOG flashed another pocket pivot buy point on Friday, by the way) Apple (AAPL) remains a drag on the group as it continues to act weakly following last week’s gap-down move to the 50-day moving average. AAPL staged an outside reversal on Friday on volume that was nearly twice average. Despite the love of AAPL expressed by activist investor Carl Icahn, sellers have been hitting the stock and making it look like it wants to make another run for the 450 level on the downside. It appears that Mr. Icahn’s tweeting prowess is losing its edge.

 

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Friday’s heavy selling notwithstanding, the market remains in an uptrend, and leading stocks are either holding up in their patterns or pulling back in normal fashion. Overall, the action in leading stocks doesn’t cause me any consternation at present. Whether Friday’s index action is an initial shot across the bow remains to be seen, and members should simply keep an eye on their stocks. A pullback here would not surprise me given that the market’s “confirmed uptrend” is now obvious to all, and could create some buying opportunities in leading stocks that stage constructive pullbacks to logical areas of support. So this is something to watch for in leading names. 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 LNKD, SPWR ,and NDLS, 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.