The Gilmo Report

August 31, 2014

August 30, 2014

Geo-political news hit the market on Thursday with reports of 1,000 Russian soldiers infiltrating Ukrainian territory to join forces with separatist rebels as Russian artillery and armor was shelling Ukrainian positions. The sell-off took the Dow down over 100 points in the morning, and after some spinning back and forth the indexes eventually settled down slightly on the day on lighter volume. Take away the news and the NASDAQ Composite Index, shown below on a daily chart, just looks like it’s consolidating the prior sharp gains off of the early-August lows and doing so in quite normal fashion. Thursday’s pullback came on lighter volume while Friday saw the index move to a new 15-year high on slightly higher volume.

 

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As the Russell 200 Index, not shown, continues to hold above its 50-day moving average and appears to be setting up for higher highs, the S&P 500 Index, shown below on a daily chart, simply pulled back Thursday on lighter volume while launching to an all-time closing high on Friday on slightly lighter volume. Roughly speaking, however, both the NASDAQ and the S&P 500 traded about even volume, with the NASDAQ’s 2% higher while the S&P’s was -1.71% lower than the prior day’s volume. If investors were nervous about holding stocks through a long, three-day Labor Day holiday weekend, they certainly didn’t show it given the light volume and upside bias in the indexes. As far as the indexes go, everything appears to be “full speed ahead” for now. Unless news on the geo-political front starts to deteriorate materially, the market probably continues to take things in stride as sellers fail to swarm the market despite a reasonable excuse to sell on Thursday and Friday.

 

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Twitter (TWTR) is finding resistance around the “round number” 50 price area, but is actually holding up pretty well following a strong move throughout this past week. As we can see on the daily chart, below, volume backed off slightly on Friday as very little selling came into the stock. While I had initially set an upside target of 50 for the stock based on my own concentrated position taken around the 10-day line last week, I decided to use the pullback on Friday to buy back some stock. There isn’t much resistance at the 50 price level, unless you see the support low from early February as a possible point of overhead resistance, as I’ve highlighted on the chart. You are now waiting for the 10-day line to catch up to the stock before another buy point can emerge in the likely form of a continuation pocket pivot. My view is that TWTR is the new FB, and as FB takes a rest, money seeking to invest in the social-networking space may very well favor a name like TWTR. So far that theory has proven out, and my guess is that if the market continues higher from here TWTR has the potential to blossom into a full-fledged big-stock leader. We shall see.

 

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LinkedIn (LNKD) backed into its 10-day moving average on Thursday as volume remained a fair bit below average and then rebounded off the line on Friday, as we can see on the daily chart, below. It remains in a buyable position on the basis of last week’s continuation pocket pivot off the 10-day moving average. In my view the action in LNKD and TWTR speaks of broadening money flows into other areas of the social-networking space sans FB.

 

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Tesla Motors (TSLA) gapped up on Friday on a pocket pivot volume signature, as we can see on the daily chart, below. This is what I was looking for in the stock as it tracked along the 10-day line earlier in the week with volume drying up. The stock closed mid-range, but still held on for an all-time price high. I would consider this a continuation pocket pivot of sorts, with the idea of using the 10-day moving average as a selling guide. I consider TSLA to be not only a play on electric cars but, more importantly, a play on fuel cell/battery technology. A lot of people like to get excited about junky little fuel cell stocks like Plug Power (PLUG), not shown, and I have to admit that pocket pivots in the stock have at times gotten my attention. But none of these have gone anywhere, and the PLUG merely confirms to me that it is low-quality garbage that attracts retail investors who fixate on cheap stocks and subsequently drive the stock up, but only temporarily.

However, as I tweeted earlier this week, I think TSLA is truly the big-stock fuel cell/battery play in this market, not the junky penny stocks. If they are able to develop and bring online their battery giga-factory as planned, they become a force to be reckoned with in the battery/fuel-cell space which is expected to be an area of strong future growth.

 

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GW Pharmaceuticals (GWPH) slid back below its 10-day moving average on light volume on Thursday and Friday, but managed to find support at its 50-day moving average to close the week a few cents below its 10-day line, as we can see on the daily chart, below. GWPH is acting pretty much as it did following its last pocket pivot in early August as it tried to move higher on Wednesday but drifted back into its 50-day moving average. In my view, buying the stock on strength is not the way to operate, as is the case with the way I tend to view most stocks in this market. However, with the stock pulling back into the 50-day line as volume dries up, it again comes into a low-risk entry point using the 50-day line as a selling guide.

 

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Taser International (TASR) is holding tight along its 10-day and 200-day moving averages as volume dries up sharply, as we can see on the daily chart, below. This actually looks very buyable right here, with the idea that it will continue to hold tight along the two moving averages after last week’s extended bottom-fishing pocket pivot coming up through the 200-day line. I laid out the fundamental side of this trade. Now it’s up to the price/volume action to come through for us. So far it looks like that is what it’s trying to do here with this extreme volume dry-up or “voodoo” day on Friday as the stock tucks into the two moving averages.

 

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If I were the type of person prone to kicking myself I would probably do so for missing the move in wearable video camera maker GoPro (GPRO), shown below on a daily chart. As we can see the stock flashed a five-day pocket pivot along the 10-day and 20-day moving averages about three weeks ago and has since moved to new highs as it came up the right side of a double-bottom base. Thursday of this week saw the stock flash a pocket pivot buy point off the 10-day moving average that became a trend line breakout from the double-bottom formation. Some might say this is an “improper” double-bottom given that the second low in the base does not undercut the first low, but so far nobody has bothered to tell the stock as it rips higher.

GPRO has been moving on news that they intend to “monetize” the content that users of their cameras produce, and of course this taps into the social-networking “thing” that is currently showing in strength in stocks like TWTR and LNKD. GPRO can also be seen as a cousin play to TASR, and it may be that both stocks offer good prospects going forward. For now GPRO is somewhat extended but I would be watching for a pullback into the 48 price level as a possible entry point.

 

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Arista Networks (ANET) continued to move higher into the end of the week, but remains out of buying range in my view. Looking at its daily chart, below, we can determine that a constructive pullback to the 80 price area and the top of the prior base would offer a reasonable entry point.

 

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JD.com (JD) tested its 10-day moving average on Friday, and I would say it did so successfully, as we can see on its daily chart, below. That pullback offered a proper entry point for anyone who missed the stock at around the 30 price level or better, per my discussion of the stock in this past Wednesday’s report. Volume was not heavy as the stock came up and off of the 10-day line, but to me that speaks more of a dearth of sellers more than anything else. I would continue to use low-volume pullbacks into the 10-day line as buying opportunities.

 

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Delving into the universe of extremely fresh new-merchandise plays, I like the action in recent hot IPO El Pollo Loco (LOCO), shown below on a daily chart. Besides having a great stock symbol, LOCO has been working on a big flag formation following a sharp run-up to 41.70 after coming public at $15 a share in late July. LOCO probably doesn’t make it onto “Mama Morales’ List of Approved Mexican Restaurants,” but as far as fast food goes it strikes me as a little better than the usual greasy fare you get at most places, and it must be working since next quarter’s earnings estimates look for 1500% growth on 16 cents a share.

After that sharp post-IPO run-up, LOCO broke down hard off the peak, undercutting the 30 price level and bottoming out at an intraday low of 28.99 on August 12th. Last week the stock undercut this low, bottoming out at 28.56. This set up a shakeout-plus-three situation this week as the stock came up through the 31.99 price point on Tuesday, as I tweeted at that time. LOCO pulled back into the 10-day moving average from there and has held tight along the line for the past four days with volume drying up. In my view, this is a buy point on the basis of the SO+3 (shakeout + 3) set-up. We can look for a pocket pivot off the 10-day line as a second, confirming buy point should that occur in the coming days.

 

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Oil stocks are making a comeback as some of them round out the lows of potential new bases and start flashing pocket pivots as they come up the right sides. One example that I like very much is Diamondback Energy (FANG), shown on a daily chart, below. FANG flashed a nice roundabout pocket pivot (RAPP) on Friday, which puts it in an actionable, buyable position, particularly if there is any kind of small pullback in the coming days. The recovery attempt by the oils proves that the Ugly Duckling remains alive and well in this market.

 

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I’d also keep an eye on another one of my favorite oil names, Bonanza Creek Energy (BCEI), which is looking like it wants to break out again. I would be looking for a pullback to the 10-day line or thereabouts as a decent entry point, but as you can see on the daily chart, below, the stock has gone “Code Blue” which has all of my indicator bars turning shades of blue. The oil stocks led the market out of the March/April correction, and after moving higher the group has been pulling back and correcting. We can see that both FANG and BCEI violated their 50-day moving averages in the process, but these violations only served to fake investors out as the stocks are now trying to finish off the right sides of new bases and make a run for their recent highs.

 

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Some notes from my trading diary regarding other long ideas I’ve discussed in recent reports:

Biogen Idec (BIIB) continues to set up along its 10-day moving average following Wednesday’s subtle pocket pivot, as I discussed in my Wednesday report. Keurig Green Mountain (GMCR) continues to hold its recent buyable gap-up, but so far is not generating any further upside thrust. Theoretically, the closer one can buy this to the 128-129 area the better, but I see a lot of other names in this market that I prefer at this time.

Netflix (NFLX) is finding support along its 10-day moving average, and a continuation pocket pivot along the line becomes a possibility here. Keep an eye out for this. Palo Alto Networks (PANW) dipped below its 50-day moving average on Thursday as its breakout of over two weeks ago falters, but it was able to recover back above its breakout point on Friday on just about average volume. Earnings are expected to be announced on September 9th, so it is not clear that one needs to go long the stock right here just before earnings. TripAdvisor (TRIP) failed on its roundabout pocket pivot of two Fridays ago by dropping back below the 50-day moving average. I’m not interested in this name, quite frankly, because there are just too many other great new-merchandise situations to feast on out there. With nothing really new going on with TRIP, it remains more an old-merchandise name.

The action following the news out of the Ukraine on Wednesday demonstrates the axiom that the same type of news will tend to have less and less of an effect on the market each time it comes out. This week’s news of Russian involvement in the Ukrainian civil war probably did not come as a big surprise to the market since it has been well known for some time that, despite what they say, the Russians are attempting to put their fingers on the scale in order tip the balance of the fighting in favor of the pro-Russian rebels. Sellers certainly had an excuse to sell the market down hard on Thursday and Friday in advance of a long holiday weekend, but they failed to materialize as the indexes just drifted to new highs. Meanwhile there is enough “juice” in this market on the long side, particularly with new-merchandise situations, to keep things rolling along when it comes to making money. For now, that’s all we need to know.

 

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 JD, LOCO, TASR, TSLA, and TWTR, though positions are subject to change at any time and without notice.

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