The Gilmo Report

August 11, 2013

August 10, 2013

So far August is starting out relatively quietly as the market moves into the final month of summer. While distribution days have piled up, the market still does little more than meander about here as it holds above the top of its prior July consolidation (please refer to the daily chart of the NASDAQ Composite Index, below). While the S&P 500 has given up on last week’s attempt at higher highs, the NASDAQ is holding its own flag breakout from last week as it finds support along the lows of this initial pullback off the peak. Should the index continue to meander sideways without busting below the 3620-3630 area, it will succeed in building a sort of base-on-base formation. This might give enough time for potential leaders to consolidate recent price/volume action, whether positive or negative, and come on again.


For the most part, outside of the handful of daily “earnings roulette” gaps, things are relatively quiet. With a number of Fed heads, doves and hawks alike, chiming in unison that QE tapering is justified, the market seems to be pondering just what that means for the major market indexes and leading stocks. In general, the action, outside of all the distribution days, seems to imply a market that is not so much “under pressure” as it is under sedation. After all, the S&P 500 is just about 1% off of its recent highs while the NASDAQ is off less than that. Perhaps the pressure will be turned up as we move closer to September, but for now that is mostly hypothetical. That said, one can decide to take profits or dial down their risk by raising cash if one considers the preponderance of distribution days to have some serious predictive value.




One observation I find notable is the fact that SPDR Gold Trust (GLD) is once again pushing up against its 50-day moving average, despite all the Fed tapering talk. Some have asked me whether I think this is a “good place” to step in and start buying gold, and the short answer to that is “no.” While stocks have gone slightly soft, gold has been rallying over the past three days. But the 50-day moving average has served as a persistent area of resistance for the yellow metal since it broke down through the 50-day line last October.


For me to get interested in gold again, I would need to see a fairly convincing, high-volume move up through the 50-day moving average in the form of a bottom-fishing type of pocket pivot. Both gold and silver, however, have been in pretty sharp and sustained downtrends, and right now I see little evidence of them “rounding out” any lows here. That doesn’t mean they won’t continue to do so. But it is not clear to me how the metals will react if and when the Fed gets more specific about QE tapering and actually takes some sort of concrete action. At that point we will likely get a clearer picture with respect to the markets’ reaction, from stocks to commodities to bonds.




Tesla Motors (TSLA) had its big gap up following earnings on Wednesday, and as I discussed in my report of that day, the stock did pop up through the top of its recent upside trend channel., as we see on its daily chart below. One thing to be cognizant of here is the fact that the stock is 150% above its 200-day moving average, and it is not clear to me that the stock will have the same kind of upside thrust and “after-burn” following this most recent buyable gap-up as it did in May. While the stock did stall a bit on the gap-up day, closing in the bottom half of the range, it did hold in a tight range on Friday as volume dried up, as we can see on the daily chart below. The intra-day low of Thursday’s gap-up day is 150.46, so that serves as a current downside stop if one is intent on buying this latest gap-up move.




Stratasys (SSYS) came out with earnings on Thursday morning and proved that the 3-D printing stocks are not quite dead yet, raising revenue guidance as it gets set to close its acquisition of personal 3-D printer maker MarketBot and attack the retail 3-D printing market in full force. SSYS also disclosed some positive developments such as a multi-million dollar contract from a Fortune 500 company for several of its Fortus 3D production systems. This represents one of the largest orders in the company’s history. While the breakout was impressive, it came straight up from the bottom of the handle. This resulted in some volume selling on Friday as it pulled back down and gave back about a quarter of Friday’s gains. SSYS tends to be a volatile name, so I would not be surprised to see it back in a little more, although I might expect it to hold the 93-94 level. Certainly, the stock is within buyable range right here.




Even 3D Systems (DDD) is regrouping and trying to set up again as it closed tight for the sixth week in a row. I don’t know if this becomes a new pattern known as a “6WT,” but my tendency is to view this as more constructive than anything else given the general tightness on the weekly chart, below, despite getting knocked around a bit after earnings last week. DDD broke down sharply below its 50-day moving average on Wednesday; something I noted in my report of that day as not being too positive. However, by Friday DDD was able to drift back above the line on light volume.




DDD’s daily chart, below, shows the drift back above the 50-day line, and while the buying volume wasn’t exactly huge I would note that on the other hand it was not as if sellers were intent on running out of the stock in wholesale fashion. Thus, in general I tend to see the action by week’s end as being mostly indicative of a stock that is trying to stabilize in here. Most of that stabilization is evident in the tight action we see in the weekly chart, above. If DDD pulls into its 50-day line, right now down around 46.48, with volume drying up, then shares could be bought right there with the idea that the stock will a) not violate its 50-day moving average, and b) eventually flash some sort of more concrete buy signal coming up and off of the 50-day line. In my view, this is a fluid, developing situation, but one that certainly bears watching. Meanwhile, the 3-D printing company that is leading the pack, at least on a relative strength basis, is Exone Company (XONE), not shown, the only one not making money as it is expected to continue to post losses when it is expected to report on Wednesday.




Netflix (NFLX) has moved up through the top of its prior range and is holding above its 10-day moving average. This creates a situation where a pocket pivot along the 10-day moving average could occur. In my July 28th report I noted that it had pulled back to the top of its prior base and was in a potential position to be bought on the basis that often times a leading stock will break out and have one pullback to its prior breakout point at the top of the prior base. So far, NFLX was able to hold the 240 price level and had one little shakeout down to the bottom of its prior range following the pullback to the top of the base before moving back above the 10-day line. As I wrote in my July 28th report, one could have purchased shares while the stock was within that range, and at this point we simply look for a pocket pivot to develop along the 10-day line.




Fleetcor Technologies (FLT) had been flashing pocket pivots as it rose up and off of its 10-week moving average, as we can see on the weekly chart below. FLT then broke out last week after announcing earnings. This week the stock held in a tight range all week long and looks like it wants to move higher. Another week of tight closes would set up a 3WT situation, and at that point the stock’s 10-day moving average would have time to catch up to the price, setting up a potential continuation pocket pivot, which is something to keep an eye out for.




LinkedIn (LNKD) is doing the same thing on its weekly chart, below, as it holds tight after last Friday’s buyable gap-up move. The stock could continue to move tight sideways, but generally once you get to the fifth day following a buyable gap-up you want to see the stock start to move higher since buyable gap-ups that take more than six days to move beyond the intra-day high of the gap-up day have a  higher probability of failure. As well, and as I mentioned above, in this environment, buyable gap-ups occurring as a result of earnings in July and August have not had the same “after burn” to the upside that we saw in many stocks earlier in the year when they announced earnings in January and May. What LNKD does have going for it is that we can consider this latest gap-up to have occurred coming out of a first-stage base.




Facebook (FB) took the week off by pausing long enough to allow its 10-day moving average to catch up to the stock, as we can see on its daily chart, below. This does set up the potential for a continuation pocket pivot, so it is something to keep an eye out for. Volume would have to exceed the 154,828,700 shares traded on July 31st, eight trading days ago on the chart, which is the highest down-volume in the chart over the prior 10 days. However, after Wednesday this day will drop off the count and the highest down-volume in the pattern will then become the 63,950,700 shares traded on August 6th, so keep this in mind.




We saw mortgage-servicer Ocwen Financial (OCN), not shown, move higher this week following its earnings announcement last week and its previous breakout from a short cup-with-handle formation (see July 28th report). Even before that, we saw Nationstar Mortgage Holdings (NSM) flash a bottom-fishing pocket pivot back in mid-July (see July 17th report) as it signaled its own resurgence. This continued with a pocket pivot breakout last week, as we see on the daily chart below. On Tuesday, NSM came out with earnings and flashed another pocket pivot buy point that actually started out as a potential buyable gap-up.


Unfortunately, the stock sold off from its initial morning gap-up levels and moved lower to fill the gap, effectively negating the buyable gap-up. However, after looking like it was going to reverse to the downside, NSM recovered and closed mid-range and up for the day on what morphed into a pocket pivot buy point on the bounce off the 10-day moving average. The stock remained within range of this buy point for the rest of the week as it held the 10-day line fairly well. In my view, as long as the stock can hold the 47 price level, the intra-day low of Tuesday’s crazy swing fest, it has a good shot at moving higher, particularly when the other big stock in the group, OCN, also moved to a new high this past week.




I initially saw Under Armour (UA) as buyable following its buyable gap-up following earnings on July 25th after it had tracked tight sideways for four days with volume drying up, as we can see on the daily chart below (see July 27th report). UA has moved higher from there as volume has remained strong. On Thursday UA just missed flashing a continuation pocket pivot as volume did not exceed the 2,191,900 shares traded on July 26th. However, volume did come in at 63% above average. If you look at UA right after the buyable gap-up as it was moving tight for four days, you might note that LNKD and FLT, which I discussed further above, also have this look. UA, however, got moving after the fourth day, while LNKD and FLT have spent the past five days moving tight sideways – they need to get moving in the next couple of days, in my view, in the manner that UA got moving on the fifth day following its buyable gap-up move. Among recent buyable gap-ups, UA has had better “after burn” as it moves out of what I see as a first-stage base.




On Wednesday I discussed in my report of that day the possibility of re-entering Yelp (YELP) on this pullback if one took profits into the sharp upside move following its buyable gap-up of last week. The last three days of this week YELP held very tightly above the 50.55 price level, and this action is giving its 10-day moving average a chance to catch up to the stock, which went on a mad tear to the upside following the buyable gap-up of August 1st. The intra-day low of that gap-up day is 49.22, while the 10-day moving average is now up to 49.54. This puts the stock within 5% of the 10-day line and just over 5% above the 49.22 intra-day low of the gap-up day, so buying it here is a reasonable risk-reward proposition. The stock could continue to flat-line here as the 10-day moving average continues to catch up to the current price, so one could also wait to see if that happens at which point it could set up a continuation pocket pivot move off the 10-day line. This might also allow the general market to resolve the recent build-up of distribution days and make one more comfortable in buying YELP shares if the market resolves back to the upside.




Bonanza Creek Energy (BCEI) came out with earnings on Thursday and missed on both earnings and revenues, but interestingly the stock did not sell off any more than it already had at the beginning of the week. The stock found support at the 50-day moving average on Friday, as we see on the daily chart, which I suppose is constructive. What is not constructive, however, is a -16% earnings growth number posted on Thursday in the face of a 64% rise in sales. After-tax quarterly profit margins also were cut roughly in half to 12.8% from 24.4% in the same quarter a year ago. I had previously discussed BCEI’s improper double-bottom (see July 24th report). It may take the stock some time to build a new base as it attempts to rectify its fundamental situation and get back to positive earnings growth. In any case, it is a good example of an improper base not panning out.




Biogen Idec (BIIB) is now violating its 50-day moving average after faltering two weeks ago after announcing earnings. On that day of earnings BIIB gapped back above the 230 level and stalled out. Since then it has flopped around the 50-day line and then spent the past five days drifting below the 50-day line and violating it, albeit on low volume. While BIIB is acting weak here, it’s not clear to me that it is a big short-sale, either. BIIB is awaiting a key announcement/approval regarding one of its drugs, and this is considered to be a “binary” event in the sense that, if the news is good the stock could jack to the upside, but if the news is bad the opposite might occur. Thus I think the lack of downside volume as the stock drifts lower is more a sign of the market’s lack of interest in the stock in the face of such a future binary news event. In light of this, my view is to just be out of the stock, either way.




Regeneron Pharmaceuticals (REGN), which I discussed as a possible late-stage failed-base type of short-sale set-up in my report of this past Wednesday, bears some watching here as it drifts down towards its 50-day moving average on light volume. What I note over the past few days as this develops is the lack of volume as the stock has tried to rally on an intra-day basis but drifted back into negative territory on both Thursday and Friday. Volume also picked up slightly on Friday, although it remained below average. A break through the 50-day moving average would be a short-sale signal, in my view, using the line as your upside stop, should that occur. This may all depend on whether the general market weakens as well, so the situation remains fluid.




Another former buy idea that has morphed into a short-sale target is SolarCity (SCTY). As we can see on the daily chart below, the stock has broken down hard through the 50-day moving average on huge selling volume after it announced earnings. This is a late-stage failed-base (LSFB) situation which reminds me a bit of Sunpower Corp. (SPWR) back in early 2008.




Below is a daily chart of SPWR from that time period, and we can see the similarity of the late-stage cup-with-handle formation that it formed back then to the one SCTY has recently formed. Back in 2007-2008, solar stocks were a hot area of the market. When they broke down, a number became decent short-sale targets, including First Solar. I have found it difficult to borrow SCTY shares for the purpose of selling the stock short, but if you are able to do so then I consider the stock shortable here using the 50-day moving average and 2-3% as your upside stop. I think that if this is going to work it should work relatively quickly as the reality of a company that will be losing money well into the foreseeable future catches up to the stock’s price. As well, SCTY might have had something of a climax top back in May when it ran up from 24 to 52 in nine days and was up 8 out of 9 days in a row in the process. The 8th day of the move represented the largest one-day point move in the pattern. Normally climax tops occur much later in a stock’s run, but in this case the current action of SCTY could confirm that May’s rapid run-up was indeed a “flame-out” sort of climax top.




With the solar stocks breaking down together, their viability as short-sale targets increases. As we know, stocks tend to move in packs, and when a formerly hot group begins to break down, it can often represent fertile ground from which to harvest potential new short-sale ideas that can then be played in the event of a general market break down. First Solar (FSLR), shown below on a daily chart, remains a short-sale target here as a shortable gap-down type of situation, using the 42.25 intra-day high of the gap-down day as your stop. Now the stock could conceivably bounce from here to try and fill part of the gap from this past Thursday, which is why you want to use the 42.25 level as your guide for an upside stop.




As breadth remains tepid and distribution days build up, one could certainly take a cautious view here and refrain from making any aggressive moves. I still tend to think that the situation has yet to be resolved, and no clear evidence of a wholesale market breakdown is necessarily at hand. Just as easily as one could say that the preponderance of distribution days are a negative, one could also say that despite the preponderance of distribution days, the indexes remain within 1% of their recent peaks. So as I wrote at the outset of this report, the market looks to me to perhaps be less “under pressure” and more “under sedation.” Obviously, we are seeing some leaders break down, such as the solar group and some bio-tech names like BIIB and REGN, so danger is present, depending on which stocks one owns. The bottom line may be that we will not see anything definitive in the market until the Fed finally becomes more definitive with respect to QE tapering, and so August may remain a quiet month for the market.


On an administrative note, and speaking of sedation, I will be spending a few days in the hospital starting this Monday for some minor surgery. While I do expect to be functional by Tuesday, my esteemed colleague Kevin Marder will be filling in for me to write this Wednesday’s Gilmo Report. Kevin and I will be communicating on Wednesday so he will have my latest thoughts at that time, but to preserve my energy right after surgery we both feel it is best if he steps in to help out. As I’m sure you all know by now, he is quite capable of doing so as the author of The Marder Report, a co-founder of, and a speculator and trader for 23 years. I expect to be back “online” with next weekend’s Gilmo Report.


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GR081113-Editors Note


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 a position in UA, 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. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.