The Gilmo Report

December 4, 2013

December 4, 2013


Three days of a market pullback might give the market what it needs right now, which is a bunch of shorts to squeeze during December that can help drive a year-end rally in December. Today looked like an ugly day in the making as the indexes reversed off of an initial morning rally before finding support as things got ugly around mid-day. But support came in off the lows, as the sell-off seemed just bad enough to draw in shorts and perhaps help skim some of the froth off of things. Then the indexes made a run for the flat line once the “lunch time lull” ended after 10:00 a.m. Pacific time. Only the NASDAQ Composite Index was able to hold up in the green at the close on higher volume, as we can see on its daily chart below. This has the look of decent support of the lows, and is bullish in my view following what is actually a 2½-day sell-off.




The Dow Jones Industrials, not shown, and the S&P 500, shown below on a daily chart, both managed to turn into positive territory in the last half-hour before backing off a bit to close down slightly on the day. Volume was heavier on the day but has the look of support off the lows. As well, the index closed well in the upper half of its daily trading range. My approach here is to look at leading stocks that are pulling back and then invoke my Ugly Duckling Theory by taking positions at potentially logical areas of support.




As is typical of this market, despite the index rise, you have to be in the right stocks if you’re “really gonna score this time,” to quote the great Beavis & Butthead. Over the weekend I wrote that members should be on the lookout for a pocket pivot buy point emerging on a move up through the 10-day moving average on Gogo (GOGO). That’s exactly what we got on Monday, as we can see on the daily chart below. On Monday GOGO announced that it had received a Supplemental Type Certificate for Ku-satellite connectivity service on Boeing 747-400 aircraft and expects to launch the new service in the first quarter of 2014. This got the stock moving at the start of the day, and once it got above the 10-day moving average on heavy volume early in the day, in my view the pocket pivot buy point was on. Of course, one could have waited until the end of the day as the stock continued about another 10% higher from Monday’s close. At this point any pullback to 30 or below on light volume would be a possible late-entry point. Regardless of what the indexes have done so far this week, just focusing on the action in GOGO would have made your week, at least for the past three days.




Facebook (FB) is starting to look like it wants to make a turn on a “roundabout” type of set-up here as it bounces more vigorously off of its 65-day exponential moving average. Yesterday just before the close I tweeted that it felt like FB wanted to turn off the 65-day exponential moving average, and today it did exactly that as there was talk of the company being added to the S&P 500 Index. FB long ago violated its 50-day moving average, but as I’ve written in recent reports, the 50-day line seems less relevant these days as I find the 65-day line to be where stocks will generally find support after a 50-day violation. After selling volume dried up sharply yesterday, FB was able to move up and off the 65-day line on a volume increase.

I’m looking for the stock to flash a “bottom-fishing” pocket pivot through the 50-day moving average in the coming days if the general market is able to continue its current rally. After hours as I write I’m noticing FB trading down about 60 cents or so on the basis that it won’t be added to the S&P 500, but this could set up a decent entry point on a pullback. My view is that the stock will turn and rally with the market, so that is what I’m looking for here as opposed to just having the stock pop a buck or so on news alone. Watch and see how it acts tomorrow.




If FB is going to try and rally from here, then I think we might expect LinkedIn (LNKD) to get dragged up along with it as a big-stock social-networking name. Selling volume is drying up along the 10-day moving average, and the stock has made a higher low each time it has pulled down from the 10-day line to test the early November lows around the 110 level, as we see on the daily chart below. I’d be looking for the stock to flash some sort of pocket pivot buy point from here coming up through the10-day moving average if the general market continues to rally.




Netflix (NFLX) reversed today to test its 10-day moving average, something I thought was likely per my last discussion of the stock in this past weekend’s report. As we can see on its daily chart, below, NFLX hasn’t issued any bona fide buy signals off the 10-day moving average and so it’s still a matter of waiting to see if and when the stock does so. Otherwise if you buy into the stock here along the 10-day moving average you are doing so on the assumption that it will continue to find support at the 10-day or 20-day lines as it has done over the past month or so.




Tesla Motors (TSLA) benefited from a major brokerage firm recommending shares as its “top stock” on Tuesday, and this triggered a huge-volume reaction move off the lows that took the stock back above its 20-day moving average, as we can see on the daily chart below. It is possible that given the large short interest still in the stock, the rally could continue up into the 50-day moving average, currently around the 158-159 area. TSLA pulled back to test the 20-day line today on lighter volume, so one way to test this trade would be to buy the stock here using the 20-day line at 136.90 as a quick downside selling guide.




Last Wednesday I discussed the need for Taser International (TASR) to correct the prior wedging action along the lows on the weekly chart (see November 27th report for more detail) by pulling back to its 50-day moving average. We can see on the daily chart that the stock has done exactly that so far this week as it came right down to the 50-day line today on below-average volume. This also tested the prior 15.80 low in the current base as well as the top of the prior flag formation. In my view, this is where you step in and buy shares with the idea that the stock will continue to hold the 15.80 level and the top of the prior base.




Over the weekend I offered a detailed analysis of Acadia Pharmaceuticals (ACAD) using both its daily and weekly charts in my discussion to suggest that the stock might be in position to stage a bottom-fishing type of pocket pivot buy point coming up through the 50-day moving average. ACAD did just that on Monday, as we can see on the daily chart below, and it looks buyable with the idea that it should continue to hold above the blue 50-day moving average.




I also suggested that members should watch for a pocket pivot off the 50-day line in Regeneron Pharmaceuticals (REGN), shown below on a daily chart, but the stock has not done so just yet. The last couple of days have seen REGN pull down into its 65-dema on below-average volume and one could buy shares here using the 65-day line as your quick selling guide, or one could simply wait to see if the stock flashes a pocket pivot coming up through the 50-day moving average. REGN is still in flux, but still in play.




Alexion Pharmaceuticals (ALXN) is another one to watch for a breakout from this midget of a cup-with-handle formation it’s formed over the last month-and-a-half, roughly. As we can see on its daily chart below, ALXN pulled down to the 20-day moving average today on below-average volume and was able to come back up for air, finishing the day back in the positive. I still think this looks buyable using the 20-day line as your quick selling guide.




Biogen Idec (BIIB) is pulling down into a potentially buyable position at the 10-day moving average following its buyable gap-up of two Fridays ago, as we can see on the daily chart below. Volume is drying up on the pullback, which puts it in a lower-risk position relative to the intra-day low of the BGU day at 274.96, which would be your selling guide. I’d have to say that among the “Three Caballeros” as I referred to them over a week ago, I prefer BIIB to Celgene (CELG) or Gilead Sciences (GILD) based on its prior upside thrust and ability to hold its prior BGU.




Another similar pullback to the 10-day line following a prior buyable gap-up is seen in the daily chart of Splunk (SPLK), below. SPLK has pulled right down to the 10-day line as it closed just above the 69 intra-day low of the BGU day. This becomes buyable here, in my view with the idea that it will hold within 2-3% of that 69 BGU day intra-day low.




Workday (WDAY) is probably the best illustration of how I handle stocks these days on a short-term basis. Last week I shorted WDAY into its supposedly buyable gap-up, and I went into detail over this in my report of this past weekend. That short was coverable on the pullback to the 50-day moving average, at which point I start looking at the stock as a possible long. In my view, today was the day to switch from a WDAY bear to a WDAY bull on the basis of the supporting action along the 10-day, 20-day, 50-day, and 65-day that also took the stock back above the 78.50 intra-day low of the BGU day. This move to the downside over the past three days serves to correct some of the defective aspects of WDAY’s chart, mostly due to the fact that it came straight up off the lows of the pattern and ran into resistance right at the prior highs in the 82-83 price area.




If you don’t like buying into ugly ducklings, then I suppose the chart of Las Vegas Sands (LVS), below, would appeal to those who like to buy standard base-breakouts. LVS popped out of a six-week flat base today on strong buying volume, as we can see on the daily chart below. I would put the buy point at 72.79, roughly, so the stock is within range of that breakout level. Obviously, I’d prefer to buy it closer to that level if I was interested in the stock, but it is technically within range of the buy point, using the standard 7-8% downside stop. LVS is a strong turnaround situation in the gaming group, as earnings growth over the past three quarters has accelerated from 1% to 48% to 70% sequentially while sales growth has also accelerated at 20%, 26%, and 32% sequentially.




Helping to confirm LVS’ strength today was a pocket pivot breakout in another member of the Leisure – Gaming/Equipment group, Melco Crown Entertainment Ltd. (MPEL), shown below on a daily chart. MPEL popped out of a similar base to LVS today, but on volume that was only 12% above average.  However, today’s move did qualify as a pocket pivot breakout, which is buyable with the idea, in my view, that it will hold the 10-day moving average, currently at 35.02. MPEL operates casinos in Macau, and is showing a strong turn in earnings over the past four quarters, going from 0% four quarters ago to 4%, 119%, and 70% sequentially over the past three quarters. Sales growth is also picking up at 11%, 38%, and 24% sequentially, while earnings estimates for next quarter are looking for 80% growth on a hard number of 36 cents a share.




As the market moves headlong into the merry month of December, I’m seeing some actionable trades I want to be a part of given the constructive action of the indexes today on what was initially shaping up to be the third day of a pullback. As a stock like WDAY illustrates, I prefer to invoke the Ugly Duckling Theory here and buy stocks that exhibited prior strength when they are exhibiting what is hopefully short-term weakness, using tight stops on the downside. Buying into strength in this market is not necessarily the most optimal way to operate, and my discussions in this report are largely based on the idea of buying weakness that follows prior strength. We’ll see how that strategy pans out from here. 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 held a position in FB, GOGO, LNKD, SPLK, TASR, and WDAY, though positions are subject to change at any time and without notice.


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