The Gilmo Report

August 25, 2013

August 24, 2013

When I started out in the business back at the beginning of the parabolic 1990’s, we used to write out buy or sell tickets whenever we wanted to place an order for a stock. Buy tickets had big green type on them, sell tickets were in red. We’d tear off a carbon copy for ourselves and then stuff the order ticket into a little capsule that was then placed into a pneumatic tube that fired the order ticket off to the wire room, located somewhere else in the building. The wire room operator would take your ticket as it came into the queue and then type out the order on a wire machine. Once the order was received and executed, the wire operator sent back through the pneumatic tube your order confirmation telling you at what price you had executed the order.

Generally this process took a few minutes, a far cry from the instant executions we all get these days with just a few taps of the keyboard and mouse. Back in those days I used to buy a lot of NASDAQ Exchange-traded stocks, and I recall many a time that one of the older brokers in the office would see me doing so and sneer, “Whaddaya buying that garbage for? You wanna stick to buying listed stocks!” In fact, a lot of the old-timers did exactly that, only choosing to put their clients into stocks that were listed on the NYSE, which was considered the only real place where stocks could be “listed.” The NASDAQ was still thought of as the dicey “over the counter” or “OTC” market, and given its relative youth at the time, was far less trusted than the NYSE when it came to both executions and the types of stocks that could be traded there. A “four-letter” stock symbol was almost as bad as a four-letter word.

This past Thursday’s “Flash Freeze” that saw the NASDAQ Exchange shut down for three hours due to a computer glitch, shutting traders out from being able to traffic fluidly in shares of their NASDAQ-listed stocks, made me think of those days when the NASDAQ was a far less trusted exchange. The NYSE continued operating through the NASDAQ’s “freeze,” and I’m sure floor traders (of whom there are very few these days as the NYSE floor more resembles a ghost town) had something to gloat about, at least for one day.

The whole thing seemed to cap off the odd morning gap-up in the futures that seemed to defy Wednesday’s higher-volume breakdown that in turn appeared to set the market up for lower lows. Throw in the sudden upside jack in the NASDAQ 100 futures Friday morning caused by an equally sudden jack in pre-open trading of Microsoft (MSFT) shares thanks to news of MSFT CEO Steve Ballmer would be retiring, as we can see on the 5-minute intra-day candlestick chart of MSFT, below, and the wackiness was on a roll. While Steve Ballmer got richer by the sudden rise of MSFT stock Friday morning, I wonder how he really felt about the announcement of his retirement sending the stock scooting higher. I’m sure if Steve Jobs had announced his retirement from Apple (AAPL) prior to his untimely death, AAPL stock would not have reacted the same way.

 

GR082513-MSFT

 

So far what we’ve got is a market still in a correction as the NASDAQ Composite Index, shown below on a daily candlestick chart, attempts to fill the gap from last Thursday’s gap-down break off the peak. The last two days have seen the index “melt up” with volume well below average, although Friday’s volume was higher thanks to three hours of missing NASDAQ volume. But the fact is that with 3 hours of volume missing from Thursday’s tally, nearly half the day, Friday’s volume only came in 63% higher. The NASDAQ also put in a “hanging man” on the candlestick chart, which can sometimes indicate a short-term top. Next week’s action should be interesting, since the NASDAQ is only about 1% off of its August peak, but it has been helped along by names like Facebook (FB), LinkedIn (LNKD), Netflix (NFLX), and Tesla Motors (TSLA), which have all acted strongly after last week’s gap-down break.

 

GR082513-NAZ

 

Meanwhile, the S&P 500 Index, shown below on a daily candlestick chart, isn’t getting the same sort of help as it lags and remains over 2% below its August peak. The index was able to poke back above its 50-day moving average today, but volume remained below average, in line with the “melt up” action we have seen since Wednesday’s weak action. While it has been possible to trade the strong rebounds in the big NASDAQ leaders such as FB, LNKD, NFLX, and TSLA, the action in other stocks has been spotty at best. With the market pricing in at least some QE tapering, the still open question of just how much and just when could create volatility in the market over the coming weeks. What if the market has priced in tapering that ultimately never occurs? Today’s weak housing starts number certainly gave the Fed pause, and Fed heads out today making the rounds voiced concerns about moving too fast with QE tapering.

The bottom line is that the situation remains uncertain, and this could simply result in some market gyrations that only serve to cross investors up. On the other hand, the NASDAQ Composite, which is not too far from its prior highs, could simply melt higher into new highs, creating a de facto resumption of the rally. In this case, investors might look to focus on the market not as a stock market but as a market of stocks, a concept I have reverted to several times during 2013. I think one has to be careful here, because the market could get into a whip-saw state where it starts to look good, drawing investors back in, before shaking out again to the downside.

 

GR082513-SPX

 

Precious metals continue to move higher, as gold is now flirting with the $1400 price level. Over the past week both gold and silver were forming short flag formations after jacking higher the week before with pocket pivot type moves, as I discussed in last weekend’s report. Friday saw both metals flash pocket pivot breakouts from these short flag ranges, as the daily chart of the SPDR Gold Shares (GLD), shows below. The metals are on the move, and so far last week’s bottom-fishing pocket pivot moves have turned out to be profitable. Again, the paradox of bonds and stocks appearing to discount some sort of QE tapering in the coming weeks while gold and silver cruise higher is an interesting divergence, and I suppose at some point we will gain a more definitive understanding of just what is driving it. For now, as far as the GLD and its white-metal cousin, the iShares Silver Trust (SLV), are concerned, the trend is your friend.

 

GR082513-GLD

 

Among stocks that have weathered the market’s “correction,” Tesla Motors (TSLA) remains a “big stock” leader despite having recently violated its post-earnings buyable gap-up move. As the daily chart below shows, TSLA found support at its 20-day moving average, a moving average that I have often used as a final line of support for stocks that have been acting very strong prior to a market correction and then begin to come off in conjunction with the market’s weakness. TSLA found low-volume support at the 20-day line, but given the general market weakness it is tough to stay with the stock if you stick your neck out and buy at the 20-day line. For the record, I use a 20-day exponential moving average, the green line on the chart, not a simple moving average.

The bottom line, however, is that even if you sold on the buyable gap-up violation last week, you have to consider re-entering the stock if it sets up again. If we look at the long trend channel that the stock has formed since the middle of May, it is a very sharp upside ascending pattern. Whether you want to call this an ascending base or not probably depends on your need to employ the use of labels to describe technical patterns. However, it does have three pullbacks, one in early June, one in mid-July, and one last week when the market got hit. I do like the fact that the stock broke out on Friday on volume that was 31% above average, as the stock’s move to new highs and subsequent pullback last week might have only served to draw in more of this “certain shorts” who are convinced that anyone who buys TSLA is delusional.

So far the technical action of the stock has only served to prove that it is the shorts that have been delusional. If the market begins a de facto rally resumption this week, I say TSLA goes higher, and would be potentially buyable at current levels using a standard stop – if the stock has a short pullback first, that would be even better.

 

GR082513-TSLA

 

LinkedIn (LNKD) also shook out buyers of its post-earnings buyable gap-up by violating the intra-day low of that gap-up day last week in the face of the market’s gap-down move, as we see on its daily chart, below. Again, if you followed the rules and sold on that breakdown, there is no shame in doing so as one must protect themselves when a trade does not initially pan out. The question is whether one is willing to put that behind them and be willing to buy the stock back, even at a higher price if necessary, in order to catch a sharper upside price move. LNKD is not showing any significant upside volume here as it moves back up to the highs of not quite two weeks ago, so it may need to back-and-fill a bit. I would look for a pullback to the 10-day moving average, currently running through the 234.08 price level, as a potential entry point with the idea that the stock could flash a pocket pivot buy point off the 10-day line over the next few days. Alternatively, a pocket pivot breakout through this short sideways formation the stock has formed over the past three weeks since gapping up after earnings would provide another entry signal, albeit at a higher price.

 

GR082513-LNKD

 

Facebook (FB) gives us a good example of what such a breakout might look like as it popped out to new highs after pulling back with the general market last week. What the stock basically did was retrace about 50% of its prior upside move from the buyable gap-up of late July to a peak of 39.32 on August 5th. Now the stock has broken out of a short range on volume that was 52% above average, which qualifies as a pocket pivot breakout as well. A little pullback below 40 would be nice to buy into, but the stock is within buyable range of this pocket pivot breakout with the idea that it should hold above the prior 39.32 high. Should the market turn and engage in a resumption of its uptrend, stocks that are showing strength in advance of the turn and resumption are going to be your best candidates for purchase.

Do not be afraid to buy something at a higher price if you did sell at a lower price, as where a stock goes after you sell it is irrelevant – all that matters is where a stock goes after you buy it, which is preferably much higher. Do not forget this basic principle. I’ve seen Bill O’Neil himself get shaken out of a stock only to see it turn around and move higher, at which point he simply bought it back, and sometimes in greater size than he had when he first sold it, and the same has happened to me many times before.

 

GR082513-FB

 

Netflix (NFLX) completes what my colleague Kevin Marder has aptly dubbed “The Four Horsemen” of this market – big growth stocks that institutions are clearly seeking to put money into. This past Wednesday I suggested that in the face of general market weakness one could consider taking some profits in NFLX. But I have to correct this view as the stock doesn’t seem to want to come down, end of story. The daily chart below shows that the stock pulled in for two days on Wednesday and Thursday, yet selling volume was virtually non-existent. This was followed on Friday by a pocket pivot type of move to new highs. NFLX is currently flirting with its all-time highs just above the $300 price level. So far it acts like that’s where it wants to go, and if the general market resumes its rally I expect NFLX to help lead it there. The current pattern has the look of a base-on-base formation, but I would note that the second base is only four-weeks long. Thus I would operate on the basis of the stock’s initial pullback to the top of its base at around 240, a pullback I previously considered buyable (see July 28th report), and the subsequent pocket pivots seen along the 10-day and 20-day moving averages. I like the stock on pullbacks to the 270 level or lower.

 

GR082513-NFLX

 

Questcor Pharmaceuticals (QCOR) has taken some time to get moving since its buyable gap-up of late July, as we can see on the daily chart below. But it got moving on Wednesday of this past week with a very subtle pocket pivot move in the form of a small gap above its 10-day moving average. This was followed by another pocket pivot move, essentially a breakout from a short flag that saw the stock close tight for three weeks in a row. QCOR actually tried to get going last week, but the general market weakness put a lid on the move. One thing I have been looking for are stocks that were trying to go higher prior to the gap-down move of two Thursdays ago in the general market, but which have since shown some resilience. This are your “springier” names, and where you want to focus your attention in terms of buy list candidates. This move in QCOR is potentially buyable, with the idea that it will hold the 10-day line on any pullback.

 

GR082513-QCOR

 

Two Wednesdays ago, in the report that came out on the day I left the hospital following my surgery of not quite two weeks ago, it was noted that Fleetcor Technologies (FLT) was flashing a pocket pivot buy point along its 10-day moving average. However, the general market gap-down on Thursday took the stock down with it. It then held tight over the next five days before launching to new highs on Thursday of this past week on a pocket pivot flag breakout from a three-weeks-tight (3WT) formation. The stock held tight on Friday, but looks potentially buyable with the idea that it should hold the breakout through the prior 100.87 high in the flag. FLT took a while to get going following its late July buyable gap-up move. But it got going on Thursday in the midst of the “Flash Freeze’ shut-down of the NASDAQ Exchange on a strong volume spike that I found unusual given the circumstances of the day.

 

GR082513-FLT

 

I still believe that the 3-D printing stocks remain an area to keep an eye on, and of course the action in Stratasys (SSYS), the group’s current leader as it makes new highs, helps to confirm this. Last weekend I discussed the potential for buying into the stock’s pullback right into the top of its prior base. This retest of the prior breakout point was successful, as we can see on the daily chart below. SSYS continues to hold tight, and the question for me is whether its strength will begin to spread into other names in the group.

 

GR082513-SSYS

 

Obviously, to consider the potential of the 3-D printing group we have to take a look at some of the other names in the space such as Three-D Systems (DDD). DDD has continued to track along its 50-day moving average, as we see on the daily chart below, as well as hold up relatively tightly along its 10-week moving average on the weekly chart, not shown. What catches my eye on DDD’s daily chart is the fact that it has been able to hold the 50-day line on recent pullbacks and this past week was able to get back above the 10-day moving average. Thursday and Friday saw the stock pull in and “tuck” into the 10-day line as volume dried up. Friday’s volume was the lightest in the pattern since it began building its current base back in the earlier half of May.

My view is that the stock is buyable right here, although one could wait for the stock to flash a pocket pivot buy point off of the 10-day line, which it is in position to do. DDD is sitting right on top of its 10-day and 20-day moving averages with volume drying up in the extreme, which is usually a set-up I will buy into in advance, with the idea of adding to my position should the stock show strength in the form of a pocket pivot. DDD still has huge short interest, and with the new short-interest numbers due out Monday, we will get a sense of whether the recent general market gap-down last week brought in any more shorts who think they smell blood – although in the end it could simply turn out to be their own if the market is able to find its footing and move higher.

 

GR082513-DDD

 

Another 3-D printing leader, Exone Company (XONE) was hit on earnings last week but found some support off the lows of the day, as we can see on the daily chart, below. The stock came off further the next day as the general market gapped down, but was able to find its footing and push back above the 20-day moving average the next day, where it has remained over the past week. On Wednesday of this past week, XONE filed for a secondary stock offering of 2.656 million shares, and the stock didn’t budge, which I consider to be a good sign. XONE has also intimated that some of its foreign customers have had trouble funding purchases of their machines, which has put some sales off until next year.

Despite this, the stock still has not blown apart as it basically continues to base here. While I like the position and action of DDD better, XONE is a smaller stock in the space, so I am looking for some sort of pocket pivot move here off of the 10-day/20-day moving average confluence or perhaps a “re-breakout,” and this might occur once XONE prices its secondary offering. The fact remains that despite some recent weakness, neither DDD or XONE have shown any willingness to break down in wholesale fashion, despite last week’s general market weakness, therefore one should keep an open mind here and be alert to any potential new buy signals in these stocks if they suddenly appear to want to catch up to SSYS.

 

GR082513-XONE

 

Valeant Pharmaceuticals (VRX) is staging an orderly pullback to its 20-day moving average and just above the prior base breakout point, which looks buyable to me with the idea that the stock will hold the prior breakout at 96.25. Of course, I would prefer to see it hold the 20-day line and move higher from here, but that will likely depend on what the general market does over the next several days.

 

GR082513-VRX

 

Restoration Hardware (RH) is an interesting “roundabout” situation that held up well on Friday despite weak new home sales numbers. Those same numbers hit Lumber Liquidators (LL), shown below RH’s daily chart, pretty hard price-wise, but volume was relatively low for LL as it pulled back to its 10-day moving average. While I like the action in RH better, it is possible that the pullback in LL to its 10-day line is a buying opportunity based on the light volume seen on the pullback and the pocket pivot buy point it had on Tuesday of this past week.

Meanwhile, RH has flashed two “bottom-fishing” pocket pivots as it has come up through, first, its 10-day moving average and then its 50-day moving average this past week. Friday’s pocket pivot also occurred on a “bad news day” given the weak new home sales numbers. However, I don’t think either RH’s or LL’s businesses depend so much on new home sales as much as the trend towards remodeling and fixing up existing homes, with or without the idea of selling them. Thus RH’s strength in the face of this news, and the light volume of LL’s sell-off in the face of this news, may be confirmation of this. In my view, RH is buyable here with the idea that it will hold the 50-day moving average or at least the 10-day moving average on any pullbacks as it continues to try and round out the lows of this new base it is trying to form.

 

GR082513-RH

 

GR082513-LL

 

Looking for tight patterns elsewhere in this market, my eye is drawn towards Nationstar Mortgage (NSM) and Ocwen Financial (OCN), both of which are forming tight little flags that can be seen as three-weeks-tight set-ups. 3WTs are often continuation types of patterns following a base breakout, and we are in fact seeing this 3WT action occurring right after recent base breakouts. On the daily charts of each, which I don’t show here, the stocks are both tracking tightly along their 10-day moving averages, which I see as constructive in the face of recent general market weakness. So I would keep an eye out for any pocket pivot buy points that might occur in the coming days should the general market find its feet.

 

GR082513-NSM

 

GR082513-OCN

 

Among my short-sale targets, First Solar (FSLR) tried to rally on Friday following an analyst upgrade to “market perform,” but this ran right into what I saw as resistance around the 40 price level per my report of this past Wednesday. Intra-day, this set-up is a potential short-sale opportunity and the stock may be heading for its 200-day moving average once again. The 40 level should remain a trailing stop on this as a short position.

 

GR082513-FSLR

 

SolarCity (SCTY) remains in a bear flag as it holds along support at the lows of its prior cup-with-handle formation, as we see on the daily chart below. I’m looking for a break to the downside from here, but for now I would use the top of this current range as a quick trailing stop. As such, a breakdown would likely have to have some cooperation from the general market. If the general market is able to resume its uptrend this week on a de facto basis (e.g., by simply moving to higher highs on the NASDAQ, not necessarily with a follow-through day) then the odds of success in general on the short side diminish.

 

GR082513-SCTY

 

Cree (CREE) also remains stuck in a short bear flag, and it also failed to hold an early rally on Friday as it reversed and closed down on the day with volume picking up. I would still use the top of the current range at around 58 up to 58.45 as a quick upside stop, and if the general market begins to show strength I would de-emphasize the short side and look to focus on the long side instead.

 

GR082513-CREE

 

Regeneron Pharmaceuticals (REGN) continues to find resistance at around the 240 price level, but a rally back into the 50-day moving average at 247.08 is always a possibility, so using the 240 level as a trailing stop would make sense. The stock has come down a fair bit from its recent peak around 280, so is entitled to bounce here, which it has done over the past four days. As is always the case with short-sale targets/positions, the general market action will always be an underlying influence, so this should always be monitored in conjunction with the action of short-sale targets/positions.

 

GR082513-REGN

 

The rally over the past two days can for now mostly be seen as a short-term oversold bounce, but there still remains the possibility of the market simply staging a de facto resumption of the rally by having the NASDAQ Composite Index move to a higher high. Given that it remains within 1% or so of its recent peak, that remains a distinct possibility.

My view is that one should have a ready list of buy candidates in case this occurs, and I think sticking with those stocks that have shown the most resilience in the face of this recent bout of general market weakness is your best shot. Breadth remains weak here on both the NYSE and NASDAQ exchanges, however, so it is not as if the two-day move is showing broad strength. As the NASDAQ moves to fill its gap or “falling window” from two Thursdays ago, this could pose short-term resistance, and things could turn decidedly negative again should volume pick up and the indexes begin to roll over. The situation remains fluid, and the debate over the when and how much of QE tapering also has the potential to cause some volatility as a tug-o’-war ensues. Bottom line: keep an open mind and be ready for anything.

 

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 no positions, 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.