The Gilmo Report

August 4, 2013

August 3, 2013

A weak jobs number from the Bureau of Labor Statistics on Friday showing that the economy is doing a great job of producing mostly “McJobs” in the retail and service sectors didn’t do much to rock the market’s boat, as the indexes all moved higher on lighter volume. Last week’s churning, stalling and distribution was apparently well-absorbed by the indexes as sellers could not keep all of the major market indexes from moving to higher highs this week, as we see on the NASDAQ Composite Index daily chart, below.




Friday’s move higher by the NASDAQ Composite Index showed some divergence in that the index’s advance/decline line broke in favor of decliners, 1328 to 1123. Thus while you see some stocks going nuts to the upside in recent days, the action hasn’t been that broad, as the daily line chart of the NASDAQ’s cumulative advance/decline line shows below.




However, the NASDAQ advance/decline line, while not confirming the higher-highs, is pushing right up against its highs, so this is not necessarily reflective of deteriorating breadth. The NYSE advance/decline line, shown below on a daily cumulative line chart, is diverging, however, but again it is not clear to me that this is trouble in and of itself. The A/D lines could simply play “catch up” to the indexes over the next few weeks and perhaps are entitled to a rest given how sharply breadth move up and off of the late-June lows. For now, pending further and broader evidence to the contrary, the uptrend remains intact.




Among leading stocks that are surging to the upside, LinkedIn (LNKD) gave investors a bit of a scare after-hours on Thursday as it immediately sold off below the $200 price level, but within a short time recovered and took off for new highs. This resulted in a buyable gap-up on Friday, something I was looking for to buy into the stock. Once the stock turned positive after-hours, moving up into the mid-220 area, one could have also bought the stock right there if one has after-hours trading capability. In my view this latest buyable gap-up has the potential to take the stock a fair bit higher, particularly since the stock built a big base that enabled it to “reset” as a first-stage base. Generally, I like buyable gap-ups in stocks coming out of earlier stage bases, as these tend to be fresher and lead to better upside moves. We can see on the daily chart of LNKD, below, that the stock undercut the lows of its prior little flag formation from which it failed after gapping down following its April earnings announcement. It’s clear that even after its first buyable gap-up way back in January, LNKD has not really had a “runaway” type of move as it slowly edged up to the $200 price level before gapping down and correcting after its May earnings announcement. This latest buyable gap-up move is actionable using the 228.80 low, about 4% below its 235.58 close on Friday, as your selling guide.




In other buyable action, a couple of stocks we’ve been following for a while had pocket pivots over the past two days, including Cree (CREE), which broke out of a short flag on Thursday on a pocket pivot move. I have already discussed my view that CREE broke out of an ascending base several weeks ago, so this is constructive follow-up to that going into its earnings announcement next week. I would be looking for a strong earnings announcement from CREE when it reports on August 13th.




Splunk (SPLK), which I first indicated as buyable as it was flashing a couple of bottom-fishing pocket pivots in late June, flashed another one on Friday. SPLK announces earnings on August 29th. If one bought earlier off the 50-day line back in late June, this is a possible add point, although one could initiate a position here using the 20-day moving average, the green line on the chart, as your stop.




Bonanza Creek Energy (BCEI) tried to break out of an improper double-bottom base last week, but came back in and corrected down to its 20-day moving average, as we see on the daily chart below. The stock has now recovered and clambered back above its 10-day moving average, issuing a pocket pivot buy point on Thursday. A number of oil names have been acting well lately as the Oil & Gas – U.S. Exploration and Production group has moved from a ranking of 103 four weeks ago to #60 this past week. BCEI will announce earnings before the open this coming Friday, August 9th.




BCEI’s “cousin” U.S. Silica Holdings (SLCA) did not fare well after announcing earnings on Wednesday after the close, as I discussed in my report of that day. SLCA missed estimates and gapped down on Thursday morning on very heavy volume, as we see in the daily chart below. The stock did manage to hold its 50-day moving average, but it is going to have to set up again and show some type of recovery before I’m going to be interested in the stock again. The good news is that if you bought the pocket pivot in the low 23 price area, the damage was relatively slight.




As I discussed in my report of this past Wednesday, at which time Trulia (TRLA) had just announced earnings after the close on that day, the stock gapped up the next day in a buyable gap-up move on huge volume. The stock stalled on the day, however, closing in the lower half of its range but held reasonably above its intra-day low of 42.24 on the gap-up day. TRLA traded nearly 2.7 times average daily volume on Friday and closed mid-range after finding support at the 42.59 level. This remains within buyable range, using the 42.24 level as your selling guide.




Yelp (YELP), which also announced earnings after the close on Wednesday as I was writing my mid-week report of that day, also gapped up as I had discussed it would on Thursday morning. This was also a buyable gap-up move, using the 49.22 intra-day low of Thursday’s gap-up move as your selling guide. The stock is well-extended at this point and out of buying range. What I note about the moves in YELP and TRLA is that they appear tradable at their extremes, particularly with TRLA trading up nearly 29% on an intra-day basis Thursday before pulling down to close up just over 19%. These are crazy moves and serve to illustrate just how volatile these stocks are. Throw in the fact that YELP is selling at 223 times next year’s earnings as it will continue to lose money in 2013 while TRLA is selling at 260 times its forward 12-month earnings, and you get a sense of just how speculative these stocks are. Nevertheless, we saw that their moves over the past couple of days, even after the buyable gap-ups, have been very profitable. Nimble traders might look at taking some profits off the table as they let these things settle down a bit and perhaps set up again.




The action in contract 3-D printer/manufacturer Proto Labs (PRLB) after announcing earnings on Thursday before the open produced a big shakeout off of the 50-day and 10-week moving averages, as we can see on the weekly chart below. PRLB gapped down Thursday at the open and moved down to the 62 price level and just above the 10-week line before finding volume support at that level. This resulted in producing a breakout from a short, tight flag formation on the weekly chart, which in my view is buyable given that the stock made an all-time closing high on Friday. PRLB is a thinner name in the 3-D space, trading 443,000 shares a day on average. Seo it is generally not something I will play myself, but for those with smaller account sizes who would not anticipate building a position of more than 2-3,000 shares it is certainly playable.




In general the 3-D stocks, including names like Exone Company (XONE) and Stratasys (SSYS), are in the process of building bases, although they are a little volatile. Even Three-D Systems (DDD), after missing earnings on Tuesday morning as a result of a big increase in R&D spending and despite seeing a surge in sales, is trying to hold its 50-day moving average, as we see on its daily chart, below. The weekly chart, not shown, shows another tight close for the week, and in fact if one bought the stock two Fridays ago on the basis of the tight weekly action along the 10-week line, as I discussed in my report of last weekend, the stock has done nothing more than end the week pretty much where it started. Tuesday’s action closed well in the upper part of the daily trading range on massive volume, which has the appearance of some supporting action off the lows on that day. Now we see the stock “tucking” into its 50-day moving average here as volume dries up sharply. It is possible, in my view, to take a position in DDD here with the idea that it will attempt to recover off of the 50-day line. Over a quarter of the float, around 27 million shares, has been sold short, so if the stock doesn’t break down from here there could be a lot of disappointed shorts scrambling to cover.




Illumina (ILMN) is failing to hold its buyable gap-up move of last week. The beauty of any buyable gap-up move is that the intra-day low of the buyable gap-up day provides a very nearby selling guide for the purpose of keeping risk to a minimum. ILMN closed about 1.5% below the 77.78 intra-day low of the gap-up day, so is in a position where one might consider selling the stock and looking to move to a more promising situation, say LNKD, for example.




In contrast to ILMN, Under Armour (UA) is moving higher following its buyable gap-up move. UA logged an all-time weekly closing high on Friday, believe it or not, and the stock has just emerged from a big one-year cup-with-handle formation. This still looks fine and acts well.




Invensense (INVN) is holding its recent breakout relatively well. Following Wednesday’s very sharp upside move, the stock pulled below the 17 price level where I felt it could be bought per my comments in this past Wednesday’s report. INVN saw volume pick up on Friday as it found support off the intra-day low at 16.72 and finished the day at 17.16. This pullback looks orderly, and not atypical for the stock. In my view, INVN’s motion-sensor technology offers the best solution for a variety of applications in future waves of “smart” devices and so I think the stock’s best days are still ahead of it. The stock has spent nearly a year-and-a-half in a big, ranging consolidation as industry conditions have started to tilt in its favor. The next big wave in smart devices might be in the so-called “wearable” category, and these will likely make prolific use of motion- and gesture-sensing technology given that the smaller the devices the less practical a typical keyboard becomes for the purpose of entering commands. Thus INVN’s technology has the potential to become a major driver of future “killer app” technology, a phenomenon that drives most big, winning stocks. Obviously, this recent breakout is just that, a recent breakout. But the massive upside volume seen in the stock on Wednesday when it broke out may be the initial fuel for a sustained upside move.




Some of the shine came out of solar stocks this week as the group dropped a notch from #1 to #2. Helping to drive this has been sputtering action in First Solar (FSLR), not shown, and more importantly, leading solar Sunpower (SPWR), which broke down on heavy volume Thursday after announcing earnings on Wednesday after the close. What this bodes for the solar group remains to be seen as most of the other solars have yet to announce earnings. Canadian Solar (CSIQ), not shown, which I discussed as having a pocket pivot buy point on Wednesday in my report of that day, pulled back within buyable range down near the $14 price level in sympathy to SPWR, where it looks buyable. I would like to see some of these bigger solars, however, show some muscle here, and perhaps that will have to be left to the other larger names in the group.




One of these bigger names is SolarCity (SCTY), which appeared to shrug off SPWR’s weakness by moving higher on Friday as it remains in a tight range along its 10-week and 50-day moving averages. The weekly chart below, in fact, shows a three-weeks-tight (3WT) formation along the 10-week line as the stock builds a three-week handle within a 10-week cup-with handle formation as volume dries up. SCTY is, of course, losing money, and announces earnings on Wednesday. However, it is possible that, like YELP, which is also losing money, SCTY somehow surprises on the upside and breaks out of this current cup-with-handle formation. One obviously could take a measured position going into earnings, or one could simply wait to see if a buyable gap-up move materializes on Thursday morning following earnings. Looking at the base, as I pointed out last weekend, the weekly volume bars look favorable with larger, blue, upside volume bars showing up along the lows of the cup while red, downside volume bars are smaller by comparison. The other thing going for SCTY compared to a stock like CSIQ, which has very little institutional sponsorship (although more funds have been coming into the stock over the last quarter), is the fact that 59 funds took new positions in the stock in the most recently report quarter as of the end of June, increasing the number of funds in the stock from 19 to 76. SCTY announces earnings Wednesday after the close.




In my report of this past Wednesday I discussed the failure of (AMZN) to follow-up on its “ants” breakout and big-volume pocket pivot move of last Friday and the fact that I would want to see it hold the 20-day line, the green line on the daily chart, below. AMZN did hold the line on Thursday, picking up a little bit of above-average buying volume in the process. The fact that AMZN did not blow apart after announcing a loss of 2 cents per share last Thursday vs. expectations of a nickel profit was probably constructive. Obviously, the big buying volume on that day implies that institutions stepped up to support the stock. If we go back to June we can see on the chart that the stock also had a couple of false starts back then before continuing higher and clearing the $300 price level for the first time in its history. So perhaps this latest five-day pullback is well within the stock’s character and it will set up for another attempt to clear the recent highs. Thus I believe that if one is so inclined, shares could be purchased here using the 20-day line as a selling guide. While some make a big deal about AMZN having no free cash flow, the fact is that two quarters out analysts are looking for anywhere from 77 to 82 cents a share, depending on which earnings estimates source you refer to. This is a big number, and it is no doubt what institutions are looking forward to when they step in to buy the stock here.




Finally, allow me to quickly comment on Apple (AAPL), which I have predicted will test its 200-day moving average, currently at around the 477 price area. One twist here, however, is that the weekly chart below shows the stock pushing very near to its 40-week moving average. Now, we know that stocks can find resistance or support at their daily moving averages just as easily as they can at their weekly moving averages, so this is something to keep in mind if you’ve bottom-fished on AAPL on the basis of my bottom-fishing pocket pivot call of two weeks ago. Notice that weekly volume on AAPL over the past five weeks has been quite light, something that implies to me that the stock is all “sold out.” It could consolidate somewhere along its 40-week or 200-day moving averages, but I think if the market’s uptrend continues, AAPL could continue to participate.




With actionable price/volume action popping up on a regular basis in this market, there is not really any shortage of things to buy. As we have seen with stocks like YELP and TRLA, some profitable trading opportunities can occur even after a stock gaps up wildly following an earnings surprise. And with LNKD resurgent on another buyable gap-up, these stocks continue to prove my point that it is not necessary to play “earnings roulette” as one need only play it safe by waiting for a buyable gap-up move to emerge following earnings. This week we will see Tesla Motors (TSLA) and Solar City (SCTY), two names we’ve been following closely in my reports over the past 2-3 months, announce earnings. How one chooses to play these depends on their profit cushion in the stocks, although I would still view a big gap-up move in either stock following earnings as likely playable.


In the meantime, as the pundits fret over whether QE tapering is set to begin in September, stocks continue to move higher, and that is the way you have to play this market.


Gil Morales


CEO and Principal, Gil Morales & Company, LLC
anaging 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 DDD, INVN, LNKD and UA, though positions are subject to change at any time and without notice.


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