The Gilmo Report

August 27, 2014

August 27, 2014

With the NASDAQ Composite and S&P 500 Indexes both moving to higher highs, the market is entitled to a little backing and filling as the indexes become extended from recent breakout levels. The NASDAQ is actually set up for its third-highest monthly close in its entire history, but if it can clear 4572.79 and stay there until the end of the month it will post its second-highest monthly close. That 4572.79 monthly close occurred in March of 2000, and the NASDAQ remains a little over 10% away from its all-time high of 5132 set in February 2000. This is all quite amazing stuff when you think about how far our beloved “Naz” has come since the absolute low of 1031 which was hit in October 2002, the absolute low of the brutal 2000-2002 post bubble bear market. Today the NASDAQ just settled in a bit as volume came in lighter than yesterday, which seems like normal consolidation so far.




The S&P 500 Index, not shown, has cleared out to an all-time high again while finally closing above the 2000 price level for the first time in its history. Now its recent breakout level at around the 1980-1990 level can serve as a reference point for support on any pullback from current levels. Keep in mind that the indexes have come up in a fairly sharp uptrend off of their early August lows, so they would be entitled to some backing and filling here. The big story, however, is what I discussed over the weekend, in that the small-cap Russell 2000 Index continues to move further above its 50-day moving average, as we can see on the daily chart of its proxy, the iShares Russell 2000 ETF (IWM), below. If the small-caps can continue to recover, then this rally remains one in which I want to remain long.




Grub Hub (GRUB) pretty well demonstrates why I tend to sell into sharp upside moves in stocks, as we can see on its daily chart, below. The reality, however, is that the stock was simply blindsided by the announcement of a 10-million share secondary offering on Monday. I was watching the stock test the 10-day moving average on Monday morning but still had not bought any shares when it was halted and the announcement made. My guess is this will take some time to work off 10 million shares in new supply unless the offering is sucked up by strong institutional demand. I would watch to see how this prices in the secondary market and how the stock acts after it is released into the market.




Twitter (TWTR) followed through on Friday’s pocket pivot by running up just past its 48 buyable gap-up intraday high from late July before backing and filling a little bit today, as we can see on the daily chart, below. TWTR got hit with a lot of selling volume this morning but that sort of thing strikes me more as blocks of insiders and employees of the company selling out some stock and converting it into cold, hard cash. TWTR also came under some pressure from an analyst’s downgrade of Facebook (FB), not shown. This sent FB down towards its 10-day moving average, and while I tend to agree with the idea that the stock is probably over-owned and that names like TWTR have better upside potential as social-networking plays, FB probably just moves sideways for a while here.

The bottom line is that I’m focused on TWTR here, and so far it is tracking higher as it now remains extended from the 10-day line and any low-risk entry points. The stock took some selling heat this morning, but recovered to close down eleven cents on about average volume, which struck me as supporting action. My “happy thought” for the day: Perhaps institutional money coming out of FB will try and find a home in TWTR, pushing it through the 50 price level again.




LinkedIn (LNKD) is tracking just above its 10-day moving average after last Friday’s continuation pocket pivot move, and volume is drying up here on the pullback, as we can see on the daily chart, below. While I understand that LNKD looks a bit “up there,” it’s still potentially buyable on the basis of last Friday’s continuation pocket pivot, using the 10-day line as a selling guide. With volume drying up quite sharply on this pullback it looks like it wants to move higher.




Tesla Motors (TSLA) has formed a miniature cup-with-handle pattern as it moves back up towards its all-time high of 267.28 set last week, as we can see on the daily chart below. The stock clambered back above its 10-day moving average on Monday and has remained there as volume dries up just a little bit. The stock still looks to me like it wants to go higher.




The idea of “buy it while it’s quiet” proved its validity once again, this time in GW Pharmaceuticals (GWPH) which I’ve been discussing in recent reports as being buyable on the pullback and volume dry-up along the 10/20/50-day moving average confluence.  The stock popped higher on Tuesday, flashing its second pocket pivot of the month, as we can see on the daily chart, below… This remains buyable on pullbacks to the 93-94 level, but I would hope that members are long this one from before yesterday’s pocket pivot on the basis of my recent discussions of the stock.




Taser International (TASR) is so far acting in a constructive manner following last week’s extended pocket pivot move up through the 200-day moving average, as we can see on the daily chart, below. As I wrote over the weekend, we wanted to see how TASR handles this extended pocket pivot on any pullback, and so far I would have to say that objectively it is doing rather well. After giving up on a higher high Monday, the stock pulled down to the 200-day line in a critical test on Tuesday, and it held the line as volume backed down a bit. Today the stock came up and off of the 200-day line with volume picking up, which is quite constructive. Meanwhile we can see the 10-day line catching up to the stock as it has now reached the 15.20 price point. So far so good, and my feeling is that as long as the stock can hold the 10-day line on any constructive pullback, it is still good to go.




Arista Networks (ANET) gave its 10-day moving average just enough time to catch up before launching to all-time highs today on strong upside volume, as we can see on the daily chart, below. At this point, the only thing I can see screwing things up would be the announcement by ANET of a secondary offering in the style of GRUB! As we can see, the stock got very quiet as it came down into its 10-day moving average on three days of bona fide “voodoo” action where the volume dried up in the extreme. This set up today’s pocket pivot breakout to all-time highs. It was a nice demonstration of how the initial breakout attempt coming straight up off the lows in early August was premature, not giving the stock enough time to work out weaker hands. As it has had a chance to do that, it now spins back to the upside. I look at the top of this current base to be just above the 78 level, so at this point pullbacks to the top of the base would be potentially buyable.


GR082714-ANET (JD) continues to move higher in what looks like a breakout from an ascending type of formation, as we can see on the daily chart, below. I tweeted on Monday that of my two Chinese “picks” over the weekend, I felt that JD was the higher quality play, and that has so far turned out to be the case. E House China Holdings (EJ), not shown here on a chart, quickly failed on its two pocket pivots by dropping below the 10-day moving average today. JD is clearly more of an institutional type of name in the China internet space as the so-called “ of China.” Volume picked up on Friday as the stock emerged from the ascending channel it has been in since the earlier part of June, and so far this thing just feels like it wants to go higher still. As I’ve written in recent reports, I felt the stock was buyable around the 30 price level, even after the breakout fake out seven days ago on the chart. JD is currently extended from any buy point, so it is now a matter of seeing when the 10-day moving average catches up to the stock, or if the stock pulls back into the 10-day line in a constructive manner.




Among other names I’ve discussed recently on the long side, Keurig Green Mountain (GMCR) continues to hold above last week’s buyable gap-up move, but it isn’t clear to me that this will have a lot of upside juice from here. TripAdvisor (TRIP) is extended from last week’s bottom-fishing/roundabout type of pocket pivot, while Netflix (NFLX) is now dipping back towards its 10-day moving average where it should be watched for support and/or a possible continuation pocket pivot. Palo Alto Networks (PANW) dropped below its 20-day moving average today, which is not what you want to see, but with earnings coming up on September 9th I prefer to leave it alone for now.

Biogen Idec (BIIB) is setting up along its 10-day moving average and flashed a pocket pivot today, as we can see on its daily chart, below. The two other members of what I have in the past referred to as the “Three Caballeros” of the bio-tech space, Celgene (CELG) and Gilead Sciences (GILD) have continued to forge higher, and it would not surprise me if BIIB did the same. Of course, I would have to say that my favorite bio-tech play currently is GWPH as a smaller name with the potential for more upside juice. But BIIB’s pocket pivot, which is in fact its second in a row over the past two days if you study the chart carefully, puts it in a nice buy position right here, right now.




If I want to wax poetic about the market, I could say that I view its current possibilities within the context of “Fire & Ice,” the Robert Frost poem in which the author speculates over the final demise of the world. In a way, I see the market the same way. Does this big bull phase since the lows of 2009 finally come to an end in fire, or does it come to an end in ice? Does all the liquidity still in the system suddenly ignite into a flaming climax run like we saw at the end of 1999 and early 2000? Or does it just freeze up and stall out, embarking on a steady descent to the downside from there? And so the second part of the market “problem” to work out, for me at least, is how well I am able to maintain enough of an open mind to bask in the warmth of fire, should that occur, while avoiding a big slip on the ice, should that occur.

When one is done waxing poetic, a more concrete method is to be found in just watching the stocks. So far I’ve been able to latch on to a few that are acting well as the general market indexes move to new highs, and this is good enough for now. As well, most are “new merchandise” plays, for the most part, and this remains a driving theme in my current stock selection. And while it’s not as if every stock in the market is ripping to the upside, at this stage my names are working well enough to enable reasonable upside progress, and that is the ultimate measure of this market rally’s viability on the long side. 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 had a position in ANET, GWPH, JD, TASR, TSLA, and TWTR, though positions are subject to change at any time and without notice.

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