The Gilmo Report

August 20, 2014

August 20, 2014

Over the weekend I mentioned the concept that in the absence of bad news, the market felt like it wanted to go higher, and so far this week that has turned out to be the case, as the daily chart of the NASDAQ Composite Index shows below. Resistance at the prior highs melted away on Monday as the Naz cruised to a 14-year high. Today the Fed released its recent meeting minutes, but the song essentially remained the same, with apologies to Led Zeppelin. After churning around and shaking everyone out, the market then proceeded to close not too far off its highs, with the NASDAQ closing tight on the day with volume coming in just a hair lighter.

I understand that many might want to be influenced by the index’s move to new highs on light volume over the past three days, but we’ve seen this occur many times before. What I think helps us out here, however, is that you have a clear line of demarcation at the prior highs, which I’ve highlighted in yellow. If the NASDAQ cannot hold above that highlighted zone, then perhaps you have a problem. Until then, feel free to act on long set-ups when you see them.

 

GR082014-$COMPQ

 

Meanwhile, the S&P 500 Index, shown below on a daily chart, has cleared its own resistance at the 50-day moving average and is within a handful of points of its prior all-time high. All of this week’s upside action has occurred on lighter volume, but my advice would be, as usual, to avoid fixating on the indexes as a blanket indicator for how you handle individual stocks, and instead deal with individual stocks on their own merits. I’ve frequently discussed the overriding theme, and that is that individual stocks tell you what you need to know well before the indexes do.

 

GR082014-$SPX

 

My feeling here is that if the market is going to continue rallying, then we should see some more “new merchandise” plays begin to crop up. Suffice it to say that this is what I am starting to see in my daily screens, and it includes a number of the stocks I’ve already been following in recent reports. As I wrote over the weekend, the market felt like it wanted to go higher, and combined with the fact that I was seeing very little traction on the short side, the long side was starting to look better. Part of this improved outlook with respect to long-side set-ups includes the idea of more new merchandise appearing on the scene. In my view, new merchandise, e.g., recent IPOs with a compelling business theme or concept, is the lifeblood of any decent upside leg in the general market. Generally it is where the more dynamic action occurs, and this suits my taste for high-performance vehicles, as it were.

Tesla Motors (TSLA) might be considered relatively more new than old merchandise, but it is in a position where it has already had a long price run and could be in a later-stage phase. However, you cannot know that with any certainty, as the best leading stocks with the most compelling fundamental and business themes can surprise everyone by having 4, 5, 6 or more bases on the way up. In the process they also tend to grind up a lot of “valuation shorts” that come after the stock.

TSLA’s recent breakout has held up so far in a market environment where standard base breakouts have been less successful buy points as I see it. After peaking at an all-time high, TSLA has pulled back to a point just below its 10-day moving average. Over the weekend I theorized that the stock could pause to let its 10-day line catch up, and what we now see on the daily chart, below, is the 10-day line more than just catching up. With TSLA just below the line, however, this sets up a very real possibility of a continuation pocket pivot coming up through the 10-day moving average. The pullback so far this week is coming in to fill the gap-up move of eight days ago on the chart, and selling volume dried up today, which looks constructive. My guess is that this pullback will offer a lower-risk entry point, but you are still a little over 3% above the 20-day line at 247.29 where TSLA could continue to pull back to. So one has to decide whether today’s close at 255.71 is close enough for their own risk-tolerance should the stock drift another 3% lower before hopefully finding support around the 20-day line.

 

GR082014-TSLA

 

Meanwhile big-stock, “ancient merchandise” plays like Netflix (NFLX), not shown, and Apple (AAPL), shown below on a daily chart, continue to make higher highs. NFLX and AAPL are both trading right up to their old all-time highs, NFLX after last week’s trendline breakout which I discussed in my report over the weekend, and AAPL as it tries to clear the $100 “century mark.” However, since AAPL has previously traded above the $100 level, which was actually the $700 level before its June 7-for-1 stock split, this cannot be seen as a move where one would invoke Jesse Livermore’s “Century Mark Rule.” In general, however, the strength in big-stock, older NASDAQ names is likely constructive for the general market.

 

GR082014-AAPL

 

Greenbrier Companies (GBX), is another name that has been around for a long time, but perhaps with a new merchandise concept in fire-proof railroad tanker cars. Over the weekend we could see that the stock was holding tight along its 10-day moving average, and that was good enough for a new-high breakout on Monday on a 17% increase in volume over average, as we can see on the daily chart, below. I would be looking for pullbacks to the 70 level or better as an entry point for the stock given that it is short-term extended from the 10-day moving average.

 

GR082014-GBX

 

I tend to think that Twitter (TWTR) has some new merchandise characteristics given that it has only been public since last November. While Facebook (FB), not shown here on a chart, continues to hold up, it has not made much progress beyond its recently failed buyable gap-up move. TWTR, on the other hand, has the look of setting up here as it tightens up considerably with volume drying up in a miniature cup-with-handle formation, as we can see on its daily chart, below. Although I thought the stock was buyable at the 10-day line last week and at a slightly lower price, it is once again looking quite buyable here with the idea that it will continued to hold the 10-day line at 44.27 on any pullback.

However, given the right action and the “voodoo” action on today’s pullback, I would be looking for the stock to get moving to the upside soon from current price levels. To me it made perfect sense that the buyable gap-up in late July following its earnings announcement would fail, which is why I initially considered it shortable. That gap-up move occurred way below the former 74.73 high, so it likely needed to consolidate for a bit. Assuming that has been the case, then if this consolidation is going to result in further upside for TWTR, it should happen relatively soon given how tight the pattern has become. We’ll see how this plays out from here.

 

GR082014-TWTR

 

GW Pharmaceuticals (GWPH) also continues set up nicely along the 90 price level, just above its 10-day, 20-day, and 50-day moving averages, as we can see on the daily chart, below. Volume dried up sharply today as the stock closed tight, and this looks ready to move if the general market doesn’t get in its way. GWPH has already announced earnings, so this looks very buyable right here with the idea that it will continue to hold above the 50-day line at 88.54. Because GWPH came public in May of last year, it of course qualifies as new merchandise.

 

GR082014-GWPH

 

Palo Alto Networks (PANW), as an IPO from July 2012, also qualifies as newer merchandise. Today saw the stock drift in on an extreme volume dry-up this morning, and this is all coming within a pullback after last week’s stalling breakout move. PANW is still holding above its breakout point, as we can see on the daily chart, and the pullback is basically coming right back on top of the prior base. The 10-day line sits down around 83.43, but the stock showed no inclination to get there today as sellers basically vanished. This may be ready to move as well, but keep in mind earnings are expected to be announced on September 9th.

 

GR082014-PANW

 

Skyworks Solutions (SWKS), which I do not consider a new-merchandise play, continues to trundle higher, as we can see on its daily chart, below, and at this point only a pullback closer to the 10-day moving average at 53.40 would provide an optimal entry point. SWKS made a new high today on lighter volume, so a pullback here in the face of this short-term wedging action seems quite possible.

 

GR082014-SWKS

 

June 2014 IPO Arista Networks (ANET) held on the pullback to the 20-day moving average last week and decided to pocket pivot early on what might be considered a five-day pocket pivot, something that I’ve seen work in this market, as the daily chart shows below. Notice that GBX’s action (see chart above) on Monday could also be construed as a five-day pocket pivot. And no, before I start getting emails on this, I have not “back-tested” a five-day pocket pivot. A lot of so-called “back-testing” is better termed “back-fitting,” in my view, and for me has less predictive value than my own real-time judgment as operating in the present. I prefer to develop a feel for how something is acting and make my decisions around that, using some simple concepts like voodoo pullbacks, tight action along a moving average or within a flag/consolidation, etc. to buy stocks when they are quiet.

All I know is that I look at what probably adds up to several thousands of charts every few days and I can often pick up patterns that I am seeing develop in individual stocks that offer subtle clues as to their future direction. As well, most of the time it is enough for a stock to pull back to the 10-day or 20-day moving average and hold tight as selling volume dries up to get me interested in taking a position right at the line. ANET would qualify as one of those situations. The stock is now recovering strongly on heavy volume and held up quite well today after an early morning pullback, missing an all-time daily closing high by a mere penny.

 

GR082014-ANET

 

JD.com (JD) sucked in base-breakout buyers on Tuesday before reversing to close near the lows of the daily trading range, as we can see on the daily chart, below. As I tweeted yesterday, I thought the pullback on the breakout fake-out probably gave one another chance to buy into the stock with the idea of it staging a “re-breakout.” The stock did pull back close to the 30 area before finding support today and closing near its intraday highs on below-average volume. This might need to do a little more work, but I consider it to have decent upside potential given that a number of Chinese names, many recent new issues and hence new-merchandise situations, have been acting well lately, such as CMCM, WUBA, KNDI, BITA, LEJU, etc. Many of these names are relatively thin. JD trades roughly 4.7 million shares a day and has the kind of liquidity I like to see. Personally, I’d like to see a yank into the 10-day line down at 29.40, not that far away, as a possible spot to load up on the stock, but so far we might consider an entry on Monday around the 30 price level, based on discussion of the stock in my weekend report, as sufficient for now.

 

GR082014-JD

 

The decent action seen in smaller Chinese stocks is backed up by continued constructive action in the biggest of the big Chinese internets, Baidu (BIDU), shown below on a daily chart. BIDU is holding tight along its 10-day moving average and is in position for a possible continuation pocket pivot. Note that BIDU had a buyable gap-up in late July, but being a very large-cap old merchandise leader, this did not ignite further upside given how far the stock had already come by that time. Perhaps with some time to consolidate that gap-up move following a strong earnings report, BIDU goes higher, which probably bodes well for related names like JD, for example.

 

GR082014-BIDU

 

Recent new issue Grub Hub (GRUB) is an interesting play on what I remember as the old “Meals on Wheels” service concept where you ordered food from restaurants that offered the service and they would deliver it to your location. GRUB’s model is, of course, internet-based, and they seem to be able to make money at it. The stock broke out of a base last Wednesday but rapidly became extended, as we can see on the daily chart, but this pullback to the top of the base as volume dries up looks buyable to me assuming it will hold the 40 level and/or the 10-day moving average, currently at 40.52, on any further pullback.

Notice that the late July breakout attempt occurred as the stock was coming out of a faulty double-bottom with the second low above the first low. Once that breakout failed, it set up the formation of a “corrective” handle. Therefore I might expect that last week’s breakout might have a better chance of working.  In my view it is better to buy prior strength on current weakness if that weakness occurs on light volume and GRUB more or less fits the bill here.

 

GR082014-GRUB

 

What is likely a favorable development for the market is the fact that there is a lot of new-merchandise situations that are setting up or that have set up over the past three days and are now moving higher. As I wrote over the weekend, there’s no problem with taking a long position where you see a proper set-up and you are near a logical stop-out point so that risk can be kept well under control. The market gave us some subtle and perhaps useful feedback on Friday when the “Ukrainian-news-that-wasn’t” hit.

While we see that news might be able to shake the market up, unless it develops into something materially serious the market simply shrugs it off and moves higher. This of course does not preclude more news hitting the market as we move forward, so the idea of keeping risk well under control sits well with me in an environment where things have an added dimension of uncertainty. At least until we see evidence to the contrary and based on the actionable set-ups that exist currently, there is good reason to stay in synchrony with the market, and that means in a long frame of mind.

 

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 had a position in ANET, GRUB, GWPH, JD, PANW, and TWTR, though positions are subject to change at any time and without notice.

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