The Gilmo Report

September 5, 2012

September 5, 2012


European Central Bank chief Mario Draghi this morning announced his bond-buying proposal involving “unlimited purchases of government debt that will be sterilized to assuage concerns about printing money,” according to two central bank officials who were briefed on the plan. For those of you who ever doubted the financial genius of government bureaucrats, it now appears that Mario Draghi has discovered a way to print money without printing money! So there! It now remains for the European Parliament to approve Draghi’s proposal, and this will be announced tomorrow, probably before the U.S. markets open. The markets didn’t seem to know what to make of this today, and the NASDAQ Composite and the S&P 500 indexes sold off slightly on the day, as illustrated by the daily chart of the NASDAQ, below. For the most part, the market remains in a sideways handle-like consolidation as it likely waits on two things: 1) the Fed announcement on September 13th, next Wednesday and 2) some clue as to the outcome of the November election. The market has shown some resilience along the lows of its current price range as we see volume picking up slightly on Friday and Tuesday off the lows of the range, while today’s pullback occurred on lighter volume, at least for the NASDAQ. So far all appears normal as the market remains in its tight range.


But while the market marks time, some of the stocks within the select handful that I’ve been focusing on in this current market rally have gone on to make their own moves, such as LinkedIn (LNKD), which finally vindicated my persistence in following it in my reports by breaking out today on strong volume that came in at 96% above average. I had good reason to stick with LNKD, however, based on the accumulation I was seeing in the weekly chart, despite its oddly-shaped cup-with-handle base formation. I think, however, that it is more important to try and understand the stock’s weekly chart within the context of its character, and to focus on signs of accumulation rather than whether the stock fits some sort of base template as a well-formed cup-with-handle. If we take the 113 peak in the handle as our breakout buy point, then this breakout is actionable using the 110 area as a downside reference. LNKD had some help from several buy recommendations, the most recent one this morning putting a $142 price target on the stock. In any case, we will see if LNKD can finally follow through on this show of strength today, as prior breakouts in the pattern have met with disappointment. But so far so good for LNKD fans.

LinkedIn (LNKD) Gilmo Report Stock Chart

Over the weekend I discussed buying Nationstar Mortgage (NSM) after a light-volume pullback to the 10-day moving average at the end of last week followed a pocket pivot buy point from a slightly v-shaped position last Tuesday. Proving my point, the stock promptly took off yesterday morning and jammed about 10% in less than two days before reversing later in the trading day today on very heavy selling volume. NSM has almost made a practice out of this straight down and then straight up again action, but I’m beginning to think that it needs to build a base of longer duration given its total price move so far since coming public late last year. Speaking for myself, in this market, I’m not likely to look a 10% gift-horse in the mouth for too long before taking profits, but one can handle this as they see fit. However, if one bought right along the 10-day line around 27, I would not let this get too far below the 10-day moving average from here before unloading shares.

Nationstar Mortgage (NSM) Gilmo Report Stock Chart

Last Wednesday, in my August 29th report, I alerted members to be vigilant for a possible pocket pivot move in Solarwinds (SWI) as it was tracking tight sideways in a roughly four-week flag formation after a big-volume buyable gap-up move that occurred in late July. As we see on the daily chart, below, SWI was on the move early yesterday with volume levels early in the day putting the stock on track for at least a pocket pivot buy point. SWI was able to do better than that, however, by the close as it streaked higher and also logged a clean, high-volume breakout from the four-week flag formation. The peak of the flag is 56.94, and the stock closed at 57.89, less than 2% from the standard new-high breakout buy point, so it remains within range of this flag breakout as of today’s closing price. If you missed the pocket pivot early Tuesday morning, this is still in fact buyable with the idea that it should at least hold above the 55 price level, roughly where it began Tuesday’s move.

Solarwinds (SWI) Gilmo Report Stock Chart

Michael Kors Holdings (KORS) continues to consolidate its recent sharp gains after gapping up in the early part of August, as we see on the daily chart below. I don’t see anything too unusual so far about KORS’ behavior as it is simply continuing to work sideways in constructive fashion. Volume is drying up as the stock pulls back slightly. I would love to buy shares on a pullback to the 50.50 level, more or less, but it is not clear to me that this will necessarily occur. If we consider the 50.69 peak on the left side of the base to be the standard new-high buy point level, then in fact the stock remains within buying range of this breakout right where it closed today at 52.98. With the 50-day moving average far below at 44.90 and the stock not showing any tendency to follow its 10-day moving average, I can see the 20-day moving average acting as possible support on any sharp pullback, should that occur. KORS remains my retail favorite as a relatively liquid recent-IPO in the space, and I have noted my preference for KORS over other retail stocks like Francesca’s Holdings (FRAN), which got plastered today after earnings. A pullback for KORS, however, is not out of the question, and an orderly pullback would likely be a buying opportunity.

Michael Kors Holdings (KORS) Gilmo Report Stock Chart

Over the weekend I discussed Onyx Pharmaceuticals (ONXX) and its very subtle but clear pocket pivot buy point this past Friday, which we can see on the daily chart below. ONXX got busy right away on the heels of Friday’s pocket pivot by launching higher on Tuesday, although volume was not exceptional, coming in at 7% below average. Not that this is a problem given the positive action displayed in the form of Friday’s pocket pivot that led up to Tuesday’s move. Today ONXX pulled back slightly on slightly more volume, but did manage to hold tight in the face of a slightly slushier market environment today. The stock remains in a buyable position using the 50-day line at 70.93 as your ultimate stop, although I would expect it to hold above the 74.39 peak in the little range leading up to last Friday’s pocket pivot move. Bio-techs remain a clear area of strength in this market, and my other favorite name in the group Regeneron Pharmaceuticals (REGN), not shown, has continued to make new highs.

Onyx Pharmaceuticals (ONXX) Gilmo Report Stock Chart

Even Seattle Genetics (SGEN), which I have discussed several times over the summer, has sprung back to life after enduring a sharp correction following its August earnings announcement that caused it to violate its 50-day moving average. As we see on the daily chart, SGEN has recovered in fine style, flashing a pocket pivot buy point yesterday off the short handle in its mini-cup-with-handle formation before clearing to new highs today on very heavy buying volume. Over the next couple of weeks SGEN will be presenting at several healthcare conferences, and it appears that investors are expecting something wonderful from SGEN. This move is extended here, but I would look at a pullback to the 28 level or just below as being buyable. SGEN is unusual in that it has a high level of short interest at 24.5 days, equivalent to a little over 20 million shares sold short against a float of 92 million shares as of August 15th, the date of the last report. If shorts have suddenly become inspired to cover, then there are certainly enough of them to create a decent short squeeze in SGEN, but we can simply rely on the technical action to determine our entry.

Seattle Genetics (SGEN) Gilmo Report Stock Chart

In mid-August we witnessed a couple of continuation pocket pivots in Mellanox Technologies (MLNX), as we see in the daily chart, below. Since then, MLNX has worked its way higher along the 10-day moving average, and while it has dipped below that line a couple of times it has still not technically violated the 10-day line given that each time it has closed under the 10-day line it has never moved below the intra-day low of the first day that it closed below the line, which, of course, would constitute a technical violation of the 10-day moving average. Instead, MLNX has moved back above the 10-day line each time and Tuesday made a show of strength with another, higher-volume continuation pocket pivot move off the 10-day moving average. This continuation pocket pivot remains buyable with the idea of selling on a 10-day moving average violation, the same selling strategy we used for the initial pocket pivots in mid-August. MLNX remains in a tight uptrend channel, and I would not be surprised to see it soon break out of this channel to the upside given the strong technical action.

Mellanox Technologies (MLNX) Gilmo Report Stock Chart

Over the weekend I discussed Lumber Liquidators (LL) and its two-day pullback following last Wednesday’s pocket pivot buy point within a slightly v-shaped formation. The two-day pullback, as we see on the daily chart below, occurred on light volume and served to “correct” the v-shaped formation, and therefore was buyable Tuesday morning on the basis of my discussion over the weekend. LL promptly launched higher on Tuesday as it flashed another pocket pivot buy point on a decent pick-up in volume. So far, LL has continued to move higher without any above-average volume in the pattern, but the pocket pivot buy point action has given the stock enough impetus to continue making higher highs as the housing-related stocks retain their mojo. I even noticed Pulte Home (PHM) flashing a pocket pivot buy point today as it and the other big home-builders that include names like Toll Brothers (TOL) and DR Horton (DHI) all slowly move higher. I would look for this most recent pocket pivot in LL to hold the 10-day moving average at 46.64, which would be my hard selling guide and stop-loss point.

Lumber Liquidators (LL) Gilmo Report Stock Chart

I suppose if ECB chief Mario Draghi has indeed figured out a way to print money without printing money, using “sterilized” bond purchases instead, whatever that means, then all our troubles about devaluing fiat currencies have been magically solved! This, of course, should show up in the form of a big precious metals sell-off, or so one would think. Maybe this will have to wait until tomorrow, when we see if the European Parliament is “down” with Draghi’s sterilization techniques, but for now both the SPDR Gold Shares (GLD) and the iShares Silver Trust (SLV), shown below, are holding very tightly to their gains over the prior two days after last Friday’s massive-volume pocket pivot move off the 10-day and 200-day moving averages. For now, the gold and silver ETFs remain a hold.

iShares Silver Trust (SLV) Gilmo Report Stock Chart

We cannot predict what the news relating to the European Parliament and its decision to approve Draghi’s sterilized bond-buying proposal will be, so as always we only seek to rely on watching our stocks. While the market moves sideways, those leaders that have had prior upside price moves, such as KORS, for example, are moving in sync with the market as they themselves also move sideways and consolidate their gains from August. Meanwhile, other potential leaders that we have been following are diverging from the market in a positive manner by moving higher, such as LNKD and SWI, for example. If it all comes down to watching one’s stocks, then we might consider that this strong action under the hood of the market is at least constructive, and so we remain long the market until further notice.

Gil Morales
CEO & Principal, Gil Morales & Company, LLC
Principal and Managing Director, MoKa Investors, LLC
Principal and Managing Director, Virtue of Selfish Investing, LLC

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. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.