The Gilmo Report

December 31, 2013

December 31, 2013

The major market indexes closed at their peaks for the year, which probably doesn’t surprise anyone. As the daily chart of the NASDAQ Composite Index shows below, the index made a new 13-year high today with volume picking up slightly. While some are trying to anticipate what will happen next year and worrying that the market has gone “too far,” the objective reality is that all we have here going into year-end is a short two-day pullback followed by a breakout to new highs today. I suppose that with the champagne on ice for tonight’s New Year’s Eve celebrations, we can spend Wednesday nursing hangovers and pondering what 2014 will bring. While I am not one to make predictions, I will predict with 100% certainty that there will be plenty of opportunities to make money in 2014, and one must simply allow themselves to be open to such opportunities as they arise. All we know for certain as we move into the New Year is that the uptrend remains intact pending evidence to the contrary, end of story.




If the market continues its rally in fine form as we start out 2014, I’m not so sure we will be able to rely on the “Four Horsemen” to lead that charge. My expectation is that a continued market rally will likely see some new horses enter the race, and of course that means remaining on the lookout for new merchandise.

Meanwhile, I’ll start out my usual review of the Four Horsemen with Facebook (FB) which continued to flop out yesterday as it came right down to its 20-day exponential moving average, the green moving average on the daily chart, below, before logging a feeble, low-volume bounce today. After Friday’s pullback the stock failed to hold the top of the prior base and has now fallen back into its prior cup formation. I believe this sets up the possibility that it will continue to move sideways here as it tries to build a handle to its cup. I would like to see it continue to hold the 20-day moving average as it engages in such a handle-building process.




LinkedIn (LNKD) is stuck in no-man’s land as it again tested its 200-day moving average yesterday on a sharp pullback to the line early in the day before closing up near the peak of its daily range, as we can see on the daily chart below. LNKD has all of January to figure out what it wants to do from here as earnings are expected to be announced on February 7th. The stock sits right between its 50-day and 200-day moving averages, and I tend to see the 50-day moving average at 224.94 as near-term resistance, thus any rallies up to that level might be shortable depending on what the stock looks like if and when it gets there. Keep an eye on this one as a short-sale target, because I tend to think that LNKD will be one of the best short-sale targets of 2014.




Netflix (NFLX) also limped into year-end but was able to finish out the year by holding above its 20-day exponential moving average, as we can see on the daily chart below. In the context of the prior uptrend following NFLX’s huge reversal day in the latter part of October, this pullback over the past four days doesn’t look like much more than a normal bit of correcting off the peak. NFLX is expected to announce earnings after the close on January 22nd, and the stock’s future direction will likely be determined by this event.




Tesla Motors (TSLA) was also fairly non-descript in its year-end activity as it continues to flop around just above its 50-day moving average and the short-term uptrend line that I’ve drawn on the daily chart, below. Nothing decisive has occurred in the stock over the past couple of days and so my discussion of TSLA from this weekend still stands. Overall, the action of the Four Horsemen going into year-end and today’s New Year’s Eve trading session was nothing much to write home about. I’ve been following the Four Horsemen as a regular part of my reports for the last several months, and I would like to get some feedback from members as to whether this has been helpful in terms of following the course of big, leading stocks throughout a market uptrend.




After Twitter (TWTR) topped out in a fit of capitulation buying last Thursday, Monday was looking pretty grim for the stock as it gapped down and busted right through its 10-day moving average, as we can see on the daily chart below. TWTR did finally find support roughly around the top of the prior four-day flag formation. As I wrote over the weekend, I think the momentum is out of the stock for now, and it remains to be seen whether and how the stock builds a potential new base. Everyone talks about a bubble in TWTR, but the reality is that the stock has only recently broken out of an IPO U-Turn formation that I discussed in detail in my December 8th report and so I would expect the stock to take some time to digest its recent gains, set up again, and hopefully issue an actionable buy signal somewhere along the 10-day moving average. That’s what I’m waiting for with TWTR for the time being, and so it’s just a matter of being patient and letting that develop. Those who chased the stock and came piling in with everyone else last Thursday without waiting for a proper buy point are now left to hoping that the stock recovers. I prefer to be in a position where I’m ready to pounce on the next buy signal in the stock, should that occur.




Organovo Holdings (ONVO) has been a champ so far this week with a 19% rally in two days since I first discussed it in this past weekend’s report following last Thursday’s pocket pivot buy point, which we can see on the daily chart below. Today’s action constitutes a low-base breakout on a pocket pivot move as buying volume came rushing into the stock, allegedly on the heels of a positive blog mention. If one took a position yesterday near the open one could have added to that position this morning as the stock broke out through resistance just above the $10 price level, but for now the stock could only be bought on a constructive pullback towards that level. As I wrote over the weekend, I don’t concern myself with the debate over how many new products ONVO will be able to come out with in the near future and just how much in revenues those will bring, I just focus on the technical facts as revealed by the stock’s price/volume action, which cannot be debated, as it is what it is.

Thus last Thursday’s bottom-fishing pocket pivot was your initial buy signal, and the stock’s action so far this week has confirmed that buy signal, all of which can only be viewed as constructive at this juncture. We shall see how this pans out, but I have to think that the concept of 3-D printing with living tissue that could eventually enable the printing of human organs, a wild concept if there ever was one, is a compelling one. In the quarter ended in September, 74 institutional investors took new positions in the stock vs. a total of 12 institutional investors who owned the stock before then. Also, 16 mutual funds took new positions in ONVO during that quarter, so it seems to me that it has some decent initial sponsorship, and if the company continues to execute it can certainly go higher on a forward-looking basis.




Workday (WDAY) remains one of my favorite stocks for 2014, and it continues to move constructively tight sideways within the handle of a cup-with-handle base formation, as we can see on its daily chart, below. Today, in fact, the stock achieved an all-time closing high as volume edged just a bit higher than yesterday. In my view it’s just a matter of time before we see a convincing breakout in the stock, and this could gain some upside momentum given that over 4.9 million shares of a 12 million share float have been sold short. I still consider this buyable on the basis of last week’s pocket pivot buy point with the idea that it will continue to hold the 20-day moving average, currently at 80.91, on any pullback from here. Alert members might notice that as WDAY works its way through the handle of its current cup-with-handle base, the handle itself, extending back to the end of November, is itself a miniature cup-with-handle. In my view, the only thing that can derail WDAY at this point would be the announcement of a secondary offering given that the company has 174 million shares outstanding vs. a current float of 12 million, but I would look for something like this to occur at higher prices.




Gogo (GOGO) has spent the last two days retesting its 50-day moving average, as we can see below on the daily chart. Volume was light on the retest yesterday, but picked up today as insiders who have been able to sell stock following the IPO lock-up expiration two weeks ago likely came back to sell some shares into year-end. So far the stock is hanging along the 50-day line, but I would consider the 65-day exponential moving average, where it found support last week, as potential support. We’ll have to see how this holds up as we move into the New Year. I still consider it buyable off the 50-day moving average, using whatever stop one desires as long as it does not exceed 6-7% to the downside, as I see it.




Biogen Idec (BIIB) is still tracking tight sideways, as we can see on its daily chart, and I notice similar action also continuing in the other two of the “Three Caballeros,” Celgene (CELG) and Gilead Sciences (GILD), which I don’t show here on charts. All three of these big bio-tech stocks are holding in tight formations, and it’s not clear to me whether we will see any decisive action as they all move closer towards their earnings announcements in the latter half of January.




Acadia Pharmaceuticals (ACAD) pulled in to test the 20-day moving average today and found some volume support, as we can see on the daily chart below. ACAD bounced right off the 20-day line on above-average volume, closing at 24.99, right in the area of what I now consider support along the 25 price area. ACAD comes out with earnings in early March, so “earnings roulette” will not be a factor for the stock for at least the next two months. In the meantime it continues to set up constructively following the bottom-fishing pocket pivot of seven days ago on the chart.




Finisar (FNSR) continues to work on the right side of a potential new base, as we see on the daily chart below. Last week the stock peaked out on a run-up towards the 24 price level and logged 12 out of 15 days up in a row or better, as the little black triangular “ant” on the chart indicates. And now we’ve had four days of backing and filling as the 10-day and 20-day moving averages start to catch up to the stock. I would remain opportunistic here, waiting to buy on a pullback, which at this point would be down to the 10-day moving average at 23.27, should that occur. As I wrote over the weekend, I think the fiber-optic area could be a strong one in 2014, and as the stocks in this space continue to base-build, as FNSR is, I am looking to take positions in anticipation of potential breakouts further down the line. In the meantime, I prefer to be patient and remain in an opportunistic mode waiting for a buyable pullback.




Two Thursdays ago we saw a strong pocket pivot move in SolarCity (SCTY) that came on the heels of a more subtle pocket pivot two days earlier, as the daily chart, below, shows. I discussed that initial, subtle pocket pivot, which occurred on December 17th, in my report of December 18th, and the stock followed up with the much stronger and of course more obvious pocket pivot the next day, the 19th. Since then, the stock has built what looks like a little handle as it pulls back down into its 10-day moving average as volume dries up. This looks constructive and potentially buyable with the idea that the stock will continue to hold the 54-55 price level, roughly around the green 20-day moving average, from here. SCTY doesn’t announce earnings until early March, so it has plenty of time to break out if it wants to.




Looking around for other solar stocks that might be trying to set up in the manner that SCTY is, I find Canadian Solar (CSIQ) moving tight sideways along its 10-day and 20-day moving averages, as we can see in its daily chart below. So far there have not been any actionable buy signals in the form of a pocket pivot or otherwise as the stock works on what is so far a little seven-week cup-with-handle formation. CSIQ doesn’t announce earnings until March, so members should just keep a close eye out for any possible pocket pivot move that might develop along the 10-day and 20-day moving average confluence.




While (SINA), not shown, has moved higher following last Friday’s pocket pivot buy point which I discussed in my report of this past weekend, YY, Inc. (YY), which was also discussed in that same report, has continued to move tight sideways along its 50-day moving average, as we can see on its daily chart, below. YY was up slightly on light volume today, but looks like it is in a strong position to make a move higher based on last Friday’s pocket pivot buy point.




YY has closed very tight each week for the past six weeks along the 10-week moving average as it works on a seventh tight week so far this week, as we can see on the weekly chart, shown below. This certainly makes it appear as if the stock is steadily coiling up for a move higher, and with the stock not expected to announce earnings until March, “earnings roulette” remains out of the picture, for now. I still consider the stock potentially buyable on the basis of last week’s pocket pivot with the idea that it will continue to hold along the 10-day moving average.




Yelp (YELP) hasn’t gone anywhere since I discussed its pocket pivot buy point of last week, which we can see on the daily chart, below. Yesterday YELP flipped out and shook out down to the 65-day exponential moving average before moving to a higher closing higher as it tries to come up the right side of a potential new base with volume picking up on the day. In my view, given the volatile manner in which YELP acts, one should likely maintain an opportunistic stance towards the stock, looking to buy into pullbacks. While yesterday’s pullback to the 65-day line might not have looked so good early in the day as the stock dropped down towards the line, note that over the past three weeks the 65-day line has provided ready support for the stock. YELP is expected to announce earnings in early February.




As I close out this report, I wish Gilmo members everywhere a very Happy & Extremely Prosperous and Safe New Year and offer some final food for thought. If I had to isolate the factors that were helpful in having a successful 2013, I would distill it down to four primary concepts: 1) be open to “roundabout” situations where stocks are coming up off the lows of potential new bases and flashing constructive pocket pivot or other action along the lows; 2) do not assume that just because a leading stock has a big market-cap that it cannot have a big price run (e.g., FB, GOOG, AMZN, PCLN); and 3) be open to buying stocks that may not have earnings and which thereby do not fit the cookie-cutter CAN SLIM® earnings and sales “requirements” but which have overriding and compelling fundamental themes (e.g., TSLA, SCTY, YELP, GOGO), and 4) be willing to take a more active approach. My general view is that despite the Fed’s token tapering announcement a couple of weeks ago, QE will remain in force for the most part, and it is likely that the approach that worked in 2013 will work again in 2014. While buying breakouts is nice, in 2013 that method seemed less effective and using alternative buy points as detailed in this report is where the real edge was achieved, as I see it. I look forward to continuing in a similar vein as the New Year begins. Stay excited!


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, ONVO, SCTY, WDAY, and YY, though positions are subject to change at any time and without notice.

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