The Gilmo Report

December 29, 2013

December 28, 2013

As we move into the final two trading days of the year, the last thing anyone expects is a sell-off. But the market’s extended position, as is evident in the daily candlestick chart of the NASDAQ Composite Index, below, certainly creates the possibility of a pullback, despite the generally positive seasonality. Friday saw the NASDAQ reverse on increased volume for a distribution day, while the S&P 500 Index, not shown, merely churned around at its peak on heavier volume while closing down slightly. While I would tend to think that there won’t be much in the way of decisive index action over the next couple of days leading into Wednesday’s New Year’s Day holiday, when the markets will again be closed, it remains a matter of just watching your stocks. My general view is that individual stocks will be a mixed bag going into year-end, and so if the market does jack to the upside right into year-end my tepid expectations have at least set me up to be pleasantly surprised.




Doing the usual survey of the “Four Horsemen,” a group of 2013 leaders that have certainly lost at least half of their luster in the latter part of the year, we can see that Facebook (FB) demonstrates that blindly assuming anything and everything you own will continue to go up in a straight line right into the New Year may not necessarily be a correct assumption. After Monday’s sharp upside move to new highs that looked like a decisive upside breakout from a cup base, FB has simply flopped right back into the top of the base. If you consider a pullback to the top of a base following a breakout a second chance to buy, well then this is that chance. As I wrote a week ago, if you’re going to buy FB on the cup breakout then the maximum stop you will use is the standard 6-7% used for standard base breakouts. FB’s pullback also took it to the 10-day moving average, as we can see on the daily chart below, on increased selling that was, however, still below-average. It will be interesting to see whether and just how hard FB can bounce off the top of the base and the 10-day line.




I wrote in my mid-week report of this past Tuesday that one might consider which stocks institutions are likely to support and window-dress higher going into year-end, and I would add that one might also consider those stocks that institutions might not want to be seen owning at year-end, at least not in size. LinkedIn (LNKD) strikes me as a stock that could be susceptible to selling into year-end, and we did see volume pick up slightly on Friday as the stock rolled over on increased, but below-average selling volume, following a five-day wedging rally off the 200-day moving average. Friday’s action looks like the start of a logical pullback and retest of the 200-day moving average, and I cannot assume that the stock is immediately headed for the 200-day line. As it turned out, LNKD was shortable up at the 20-day moving average and just below the 50-day moving average before the wedging rally gave way Friday and sent the stock to a lower low.

One thing to note on the daily chart below is that there are definitely three distinct waves of selling in the pattern off of the peak. The first wave off the peak ends in early October, the second wave ends in early November, and the third wave created last week’s low and bounce off the 200-day moving average. Thus if you are short the stock, as I am, then you should be aware of this as it could provide a foundation for a rally back up through the 50-day moving average and to a higher high, say in the 240 price area. I tend to think that LNKD is in an overall topping formation and the question is just how and when it breaks down for good. That may take more time, or it may take less time – it’s just a matter of watching how the stock acts from here. Between now and then, however, I would keep a strict maximum upside stop at the 20-day moving average, currently at 224.27, with the recent high of 222.50 representing an even tighter and logical stop, if I’m short the stock here.




Netflix (NFLX) is failing to follow through on last week’s continuation pocket pivot along the 10-day moving average, as we see on the daily chart below. On Friday NFLX backed down to the 20-day moving average on increased but still below-average volume. The 20-day line has been a key area of support since late October, and it should be interesting to see whether it continues to hold that line next week.




Tesla Motors (TSLA) has shown some promising action recently, with this past Tuesday’s action meeting the technical requirements for a pocket pivot, but there has been no follow-through to that pocket pivot. This makes sense since we can see on the daily chart below that the pocket pivot of three days ago on the chart stalled and closed at the lower end of the range, and then yesterday’s gap-up move also stalled out in similar fashion, so this is weak action. The pocket pivot also occurred in a v-shaped position, which is another strike against it. Notice also that TSLA’s rally off the late November lows has not seen any big volume buying since the huge volume spike and gap-up off the lows at the beginning of December, which likely got the copious shorts moving to cover. Finally, context is everything, and as I pointed out in my report of last weekend, TSLA can also be seen as forming a big head and shoulders top here, with the December rally constituting the formation of a possible right shoulder in the overall H&S formation. In my view, further downside in TSLA would be portended by a break below the near-term uptrend line I’ve drawn on the chart and the 50-day moving average, currently at 143.27.




Thursday’s action in Twitter (TWTR) struck me as capitulation buying given the massive upside volume coming after a crazy upside run from 45, when I first discussed the stock in my December 8th report, to just shy of 75 in a mere 12 trading days. As we can see in the daily chart, below, everyone did not hesitate to jump into the pool Thursday as trading volume ballooned. 82,761,000 shares were gobbled up, the highest since the IPO day when it traded 117 million shares. Friday’s selling volume was the second-highest volume in the pattern since the stock’s first day of trading. I put something on TWTR’s chart, below, that I don’t normally show, an aqua-colored 5-day exponential moving average. When stocks begin streaking and rocketing to the upside, they will often follow the 5-day line, believe it or not. So with TWTR having broken down through that on Friday, combined with yesterday’s capitulation buying, I think the near-term upside momentum has been wrung out of the stock.

Maybe I’m wrong and TWTR just turns around and goes higher, but it certainly looks to me that at least a test of the 10-day moving average just above the 61 price level, is in the cards. It would take a pocket pivot off the 10-day line to get me interested in buying the stock again. TWTR’s sharp reversal on Friday was allegedly engendered by an analyst who declared that the stock has “gone too far too fast.” Someday I would love to hear an analyst declare that a stock has “gone too near too slow,” or “just enough, just right.” In any case, whatever the excuse, the stock is now doing what it probably needs to do, at least in the near-term. It was clearly the best-performing big stock in the market during the month of December and a nice Christmas present for anyone who participated in even part of its December price move, and I’m happy that I was able to identify it early in my December 8th report.




The $400 price level remains something of a barrier for (AMZN), as we can see on the daily chart, below. After last week’s move to all-time highs the stock has not been able to move convincingly through the $400 price level as it pulls in to test the 10-day moving average and the top of the prior little 14-day flag formation. AMZN is a stock I would expect to see supported going into year-end, so maybe all this floundering about is just setting up a bounce off the 10-day line going into New Year’s Eve, just as FB’s pullback to the top of its base and its 10-day line and NFLX’s pullback to its 20-day moving average are setting up similar bounces. We shall see.




Workday (WDAY) continues to track along the highs of its current base, as we can see on the daily chart below, and despite the intra-day pullbacks over the past three trading days the stock has managed to close in relatively tight fashion. Notice also that after Tuesday’s long intra-day price range that came right down to the 20-day moving average the stock has found support off the lows over the past two days and with a tighter daily price range. As I see it, WDAY is setting up to break out, and I would be looking for it to do so relatively soon. Meanwhile, 4,764,050 shares of WDAY have been sold short as of December 13th, a sizable increase over the 3,996,358 shares that were sold short as of the end of November. The December 13th reported short-interest in WDAY represents about 40% of the stock’s 12 million share float.




Gogo (GOGO) has so far successfully held its 50-day moving average on its first test of this key moving average since its buyable gap-up move in early November, as we can see on its daily chart, below. As I pointed out in my report of this past Tuesday, GOGO’s bounce off the 50-day line on that day came on nearly twice average daily volume despite the short Christmas Eve trading day. Strong volume yesterday helped propel the stock up into the confluence of its 10-day and 20-day moving averages where it has found short-term resistance. My view is that if one bought the pullback to the 50-day moving average and closer to the 24 price level, the jury is still out and the stock needs to maintain support at the line on any potential retest. I would expect that a little backing and filling here would be normal, and with lighter selling volume coming into play Friday the stock is more or less doing what it should. We will see how this plays out next week.




Biogen Idec (BIIB) continues to back and fill following last week’s two pocket pivot buy points, as we can see on the daily chart, below. BIIB pulled down to the 20-day moving average on Friday as volume continues to dry up, which is admittedly constructive. As with other stocks I’ve mentioned in this report, perhaps the weakness here on the pullback to the 20-day line is simply setting the stock up for a bounce off the line going into New Year’s Eve. BIIB has been a strong performer in 2013, and it would seem logical that the stock would find support going into year-end. As with the others, we shall see.




We also see a pullback in Acadia Pharmaceuticals (ACAD) following last week’s bottom-fishing pullback and subsequent breakout through resistance at around the 25 price level. Note that ACAD’s pullback on Friday closed above the 25 price level with selling volume drying up sharply, which I consider constructive. This looks like a normal retracement of the prior three day upside move through resistance at the 25 level which started with last Friday’s bottom-fishing pocket pivot move up and off of the 50-day moving average, as we can see on the daily chart below.




Finisar (FNSR) is pulling back on light volume following Tuesday’s move to higher highs that also generated an “ants” indicator on the daily chart, below, the small black triangle that shows up whenever a stock is up 12 out of 15 days in a row or better. The pullback tucks the stock back down into the 20-day moving average, which so far looks constructive. The other big-stock fiber-optic name, Ciena (CIEN), shown below FNSR’s chart, is acting similarly to FNSR as it pulls down into its 50-day moving average. FNSR is further above its 50-day line and is the stronger of the two. One might ask why I’m focused on these stocks, and the primary reason with FNSR is its strong turnaround fundamentals.

As well, high-speed internet usage is going through the roof, and the infrastructure to support this usage in the form of 100 gigabit-per-second (gbps) circuits as well as the continuing transition from copper wire to fiber-optic lines, at least in the U.S., is likely to drive a new wave of growth in these areas. With FNSR, earnings are expected to exceed those seen in 2011, when the stock reached a high of 46.09. Coming off the lows of its long-term pattern in June of this year, the stock proceeded to double over the next five months. I think it is entitled to build a new base here as it sets up for potential further upside, and I will continue to follow the stock as long as it continues to engage in what I consider to be constructive base-building.






For those of you follow me on Twitter, you might remember when I tweeted on October 17th that Organovo Holdings (ONVO) was flashing a pocket pivot buy point just above the $6 price level. The stock then proceeded to rocket up to the $14 price level in five weeks, driven by the sudden interest in its technology, which is essentially three-dimensional “bio-printing.” With 3-D printing in general being a hot topic in 2013, 3-D bio-printing was sure to be an even hotter topic, and ONVO’s huge upside price run in October and November was evidence of this. ONVO came down faster than it went up, however, plummeting back to the $8 price level in all of two days in the middle of November, as we can see on its daily chart, below.

Since then the stock has been moving sideways between the $8 and $10 price levels as it hammers out what might be the lows of a new base. Selling volume has been drying up steadily, and last Friday there was a small bottom-fishing pocket pivot coming up and off of the 50-day moving average. In some ways this pattern reminds me of ACAD, shown further above in this report, when it was forming the lows of what is now looking like a valid new base. My view is that despite the straight-up-and-straight-down action in November, ONVO still bears watching. As well, if one wanted to buy some shares here on the basis of last week’s pocket pivot, that is certainly viable with the idea that the stock should continue to hold support at around the $8 level and its 65-day exponential moving average, the black moving average on the chart. Currently ONVO is the subject of intense debate in the blogosphere regarding its revenues from what will be its first product to be released in 2014, bio-printed liver tissue assays that will be used by drug developers to test for liver-toxicity.

There is always debate over companies that have no earnings, and might not for a long time to come, such as say, ACAD, WDAY, and SolarCity (SCTY), to name three. But this did not stop these stocks from having decent price runs. As well, over-thinking ONVO when it had its first pocket pivot on October 17th would have meant missing a nice price move. Thus I prefer to focus on the price/volume action alone, and leave the arguments over profitability horizons and market-size to those more knowledgeable than me. For now, all I see is a technical fact, and that is ONVO’s bottom-fishing pocket pivot of two Friday’s ago, which is potentially buyable with the proviso that it should continue to hold near-term support at the $8 price level.




FireEye (FEYE) is an interesting recent IPO that bills itself as a next-generation cyber-security firm that is a “leader in stopping the new generation of cyber-attacks such as advanced malware that easily bypass traditional signature-based defenses and compromise over 95% of enterprise networks.” I’ve been following this since it came public at $20 a share and rocketed up to 44.89 on its first day of trading. However, as we should all know by now, letting a hot IPO settle down and build its first base is the best way to handle such a stock, and FEYE has now had three months to build that initial base. FEYE actually had a very subtle bottom-fishing pocket pivot seven days ago on the daily chart below, but at the time I thought it would need to work through overhead resistance from the left side of the pattern.

As it turned out, FEYE was able to push through that overhead in short order, moving to a new all-time closing high on Thursday on a pocket pivot type of breakout move. 181 mutual funds have bought up 6.3 million shares, which I’m assuming were taken on the IPO, so the stock has a solid foundation of sponsorship. Thursday’s move could be viewed as a buyable pocket pivot breakout since the downside volume seen five days ago on the chart was more supporting action than outright selling, but I think I’d be more interested in catching a pullback to 42 or better as a lower-risk entry point. FEYE is expected to turn a profit in 2017, and is probably trading on the basis of taking large market-share going forward, not unlike WDAY which is expected to turn a profit in 2018,




Interactive Corp. (IACI) is an old, boring Internet content company that is mostly known for never having had a big price run. But last week IACI announced a reorganization of its business that includes the creation of Match Group consisting of,, DailyBurn, and IACI’s investment in Skyllzone. This has spurred rumors of a possible spin-off and fueled a big buyable gap-up move in the stock last week, as we can see in IACI’s daily chart, below. Since then the stock has traded tight sideways over the past few days as volume has dried up sharply, and so I look at this as a possible upside trade with the idea that the stock will soon launch to new highs. IACI’s sales growth of 6% in the most recent quarter isn’t going to set any analysts’ spreadsheets on fire, but the company has shown steadily improving profitability with a peak in after-tax quarterly profit margins of 14.7% and peak annual return-on-equity of 14.8%.

IACI might be similar to the cable companies I discussed back in November that included Comcast (CMCSA), Time Warner Cable (TWC), and Discovery Communications (DISCA), all not shown. CMCSA and DISCA have moved higher while TWC is still holding up in a flag formation that remains above its November buyable gap-up move. The technical thrust of IACI seems to argue for further upside, so my approach here would be to buy the stock with the idea that it will continue to hold up tight and get moving to the upside very quickly.




A broad number of Chinese stocks have been moving lately, but most of these, like Home Inns & Hotels Management (HMIN), not shown, are thinner names. Baidu (BIDU) and (CTRP), also not shown, were also moving Friday but did not have bona fide buy signals, missing pocket pivots by a day or two. I did notice, however, that (SINA) and YY, Inc. (YY), both shown below on daily charts, had actionable, bona fide pocket pivots as they try to form the bottoms of potential new bases. Both stocks had bottom-fishing pockets on Friday as they poked up above their 50-day moving averages. Their patterns certainly qualify as “roundabout” types of formations, and these are likely worth a shot with the idea that they will continue to hold above their 50-day moving averages from here.






In general, the last five trading days of the old year and the first two of the New Year tend to be a strong period for the market, and so far I’d have to say that has been the case as 2013 winds down to a close. With that in mind, there are some actionable buy points out there that include pocket pivots and perhaps a pullback or two to logical support areas in big-stock leaders. TWTR has likely run its course for now, but I would have to say that its price move in December was nothing short of orgasmic and a nice Christmas present for anyone who participated in even part of the move. And, of course, TWTR was a no-earnings stock that did not fit the standard “CAN SLIM®” formula. But then a number of names that had big moves in 2013 did not fit that formula, including names like TSLA, SCTY, YELP, WDAY, and a whole raft of money-losing bio-techs including ACAD.

The QE-distorted markets that characterize these times for investors require thinking that is sometimes outside of the box, and that is what I have strived to do in 2013. Those who follow rote formulas may have experienced mixed success, and I note contact with a number of investors who lost money in 2013 as well as those who made money in 2013, highlighting the challenging environment. Speaking for my own style of trading in 2013, which was quite different from the style I have employed in previous years, this outside-the-box approach was successful given that I enjoyed my best year in the markets in nine years. For that I am grateful, but I will be even happier and grateful if I can impart more of this success to my members in 2014.

Please review my previous comments regarding stocks mentioned in recent reports that were not discussed in this report as my views on those stocks remain unchanged. Also, please be advised that this week’s mid-week report will come out on Tuesday afternoon, New Year’s Eve, given the holiday on Wednesday when the markets will be closed. I will be spending New Year’s Day watching my alma mater, Stanford University, currently ranked #5 in the nation, hopefully give a good showing against #4 ranked Michigan State in Wednesday’s Rose Bowl which promises to be an exciting game. Go Trees!

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 a position in BIIB, GOGO, LNKD, and WDAY, though positions are subject to change at any time and without notice.

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