The Gilmo Report

December 8, 2013

December 7, 2013

All of the major market indexes made a closing low for the week on Thursday before jacking to the upside on Friday following a strong jobs number that saw the unemployment rate drop to 7%. In my view, it was better to have already been long into Friday’s jobs report than to have to try and chase the strength on Friday. While a lot of stocks were moving to the upside, a lot of the higher-rated stocks provided a mixed bag of price/volume action. The tricky part of this market is figuring out which stocks are going to provide the upside “juice” that makes any market rally phase very profitable.

In a sense, when we look at stocks like Gogo (GOGO), we can consider that it’s not so much about what the indexes are doing but what the individual stocks are doing, as GOGO began its second move on Monday while the general market was starting the first of four days to the downside. The NASDAQ Composite Index, shown below on a daily chart, actually closed lower than it opened on Friday, as the red color-coded price bar on the chart indicates. On this particular chart, the color-coding is based on closing price vs. opening price instead of closing price vs. the prior day’s closing price. Thus while the NASDAQ was up nicely on the day, once the gap move occurred it spent most of the day swinging lower and then back up to close near the peak of the daily range.

 

GR120813-NAZ

 

The Dow Jones Industrials, not shown, and the S&P 500, shown below on a daily chart also spun about a little bit, but both ended the day up 1.26% and 1.12% compared to the NASDAQ’s weaker 0.73% move on the day. Volume was lower on both the NYSE and NASDAQ exchanges, so it was not as if the market greeted the jobs number with a massive amount of buying enthusiasm. The strong jobs report brought back images of QE tapering, but this didn’t seem to faze the market pre-open on Friday as the indexes first sold off to the flat line before rocketing higher, sending the NASDAQ futures up nearly 30 points before the opening bell.

 

GR120813-SPX

 

Longer-term bonds, gold, and the U.S. Dollar are all trending lower, with the Dollar joining gold and longer-term bonds in their downtrend party more recently. In the comparison line chart below, the red/black line is the Barclays 20+ Year Treasury (TLT) ETF, while the gold line represents the SPDR Gold Shares (GLD). It seems that the trends in bonds and gold are confirming the possibility of QE tapering, but the UUP’s continued slide, which has been admittedly shallow and which began near the beginning of November while the TLT and the GLD began their descents in October, is curious. While the markets don’t always operate on the basis of some neat logic, one would expect that any discounting of imminent QE tapering would see a rise in the dollar, not a decline. Something to ponder late at night, I suppose, but my take is that some sort of at least token QE tapering might be in the offing when the Fed meets later this month. Meanwhile, stocks, at least as measured by the major market indexes, don’t seem too concerned about the possibility.

 

GR120813-TLT

 

While the market was up big, not everything was jacking to the upside in knee-jerk fashion. Looking at the daily chart of the first of the “Four Horsemen,” we can see that Facebook (FB) reversed off of its 50-day moving average after a mini-gap-up move at the open with volume picking up on the day although it was below average. Last week FB felt to me like it was ready to turn, and we’ve seen that occur over the past few days. But the fact is that not a single bottom-fishing type of pocket pivot has been seen in the pattern as the stock tries to round out the possible lows of a new base. While I’d like to paint a bullish picture for FB, the bottom line is that this remains in flux. If FB is indeed the picture of upside strength and recovery in a “headless horsemen” that is trying to find its head again, then I would expect to see some stronger action here. FB could also still be in the process of building a head and shoulders type of formation and so one has to maintain an open mind here without necessarily taking a bullish or bearish stance on the stock. For me to become more convinced that FB is truly making a turn here, I need to see at least one pocket pivot here along either the 10-day or 50-day moving averages.

 

GR120813-FB

 

As I wrote in my report of this past weekend, I figured that if FB is going to try and rally from here, then we might expect LinkedIn (LNKD) to get dragged up along with it as a big social-networking name. While FB floundered and reversed at its 50-day line on Friday, LNKD actually powered up through its 50-day moving average on a pocket pivot buy point that I told members to be on the lookout for in my previous report. The one thing to keep in mind here is that this is coming after three days of upside in the stock, thus even while it is occurring as the stock comes up through the 50-day moving average, the stock is also in a slightly extended position, so a small pullback to the 50-day line around 229.68 might be expected from here.

 

GR120813-LNKD

 

Netflix (NFLX) has meanwhile dipped below its 10-day moving average while remaining above its 20-day moving average, which is neither here nor there in terms of determining just how buyable the stock might be on the pullback. As I’ve written in previous reports, despite NFLX’s slow grind to the upside over the prior month before it began to pullback this week, there have been absolutely no pocket pivot buy points along the 10-day line, thus no actionable reason to buy NFLX shares. It’s possible that the massive-volume reversal in October the day after the company announced earnings served the purpose of squeezing a lot of sellers out of the stock, enabling it to drift higher even as buyers show no great enthusiasm for gobbling up shares. NFLX remains a wait-and-see situation.

 

GR120813-NFLX

 

Tesla Motors (TSLA) is attempting to consolidate this past Tuesday’s big-volume upside move off the lows as it pulls back to the 20-day moving average, as we can see on its daily chart, below. On Tuesday Morgan Stanley came out and made the stock its “top pick,” helping to send the stock on a 20-point jaunt to the upside. Now we see the stock pulling back to form what is so far a three-day flag with volume drying up, and it is possible that the stock could be setting up to move higher. As I wrote on Wednesday, the one way to test this theory is to buy shares as close to the 20-day moving average, currently at 136.45, and then use that as a downside selling guide, perhaps allowing for another 2-3% below the line depending on your risk preference and taste. But, like NFLX and FB, TSLA was another of the headless horsemen that was not rallying with the strong upside move in the indexes on Friday. If there was a tailwind provided by the strong index action, it wasn’t evident in FB, NFLX, or TSLA.

 

GR120813-TSLA

 

Amazon.com (AMZN) is one of the newer groups of Four Horsemen that includes Google (GOOG), Priceline.com (PCLN), and Apple (AAPL), all of which have been helping the NASDAQ to outperform over the past couple of weeks. As we can see on the daily chart below, AMZN has pulled back to its 10-day moving average, similar to PCLN, not shown, as it consolidates its prior upside move. What you are watching for here is some sort of continuation pocket pivot off the 10-day line.

 

GR120813-AMZN

 

Google (GOOG) responded to the big index move on Friday by logging another all-time high on a below-average volume increase, as we see on its daily chart, below. After breaking out at the end of November, GOOG pulled into its 10-day moving average in constructive fashion before pushing higher on Friday. However, volume was not sufficient for a continuation pocket pivot buy point.

 

GR120813-GOOG

 

Apple (AAPL), which I last discussed a week ago in my December 1st report after it broke out from its recent four-week flag and pushed higher for three straight days, continued to push higher this week before reversing on Thursday and Friday on above-average volume. This looks like a normal pullback after a sharp move to the upside, and I would watch to see how the stock acts once it gets to the 10-day moving average, currently at 548.94.

 

GR120813-AAPL

 

Gogo (GOGO) is resting again following a sharp move earlier in the week that started out with a pocket pivot launch through the 10-day moving average on Monday. As I wrote at the outset of this report GOGO launched on Monday as the general market was engaged in a four-day pullback, roughly, confirming the concept that in this market it’s more about finding the precise stocks to play rather than worrying so much about what the indexes are doing on a day-to-day basis. The only thing that keeps me looking over my shoulder with GOGO is the fact that it isn’t making money and isn’t expected to turn a profit until it earns an estimated nickel in the first quarter of 2015. Nevertheless, the technical action in the stock remains sound, so far, as we can see on the daily chart below. After the Monday thru Tuesday run-up, the stock has pulled back slightly over the past couple of days as volume declines. The stock may continue to pause here as the 10-day moving average perhaps is able to catch up to the price, but for now I would view any pullback towards the 30-31 area as potentially buyable.

 

GR120813-GOGO

 

Taser International (TASR) has pulled back to its 10-week line for the first time since breaking out in August and nearly doubling. On the daily chart, not shown, the stock did not pick up any high-volume support of the 50-day moving average, but on the weekly chart, below, we can see that some supporting action was seen at the 10-week line as the stock closed in the upper part of its weekly price range. However, given the lack of thrust off the 50-day moving average, I might expect the stock to continue to base here before something more concrete in the form of a pocket pivot buy point or an outright base breakout shows up.

 

GR120813-TASR

 

When I speak of FB trying to round out the lows of a possible base but not showing any strong price/volume action to help confirm that, I think that something like Acadia Pharmaceuticals (ACAD), shown below on a daily chart, provides a contrasting situation. ACAD flashed a pocket pivot buy point as it came up through the 50-day moving average on Monday of this past week, and while it continues to find some resistance in the 25 area at the top of its nearly two-month range it is also holding above the 50-day line as Monday’s pocket pivot buy point remains in force. Volume dried up on Friday as the stock held right, which I consider constructive. ACAD remains buyable with the idea that it will continue to hold the 50-day moving average on the downside.

 

GR120813-ACAD

 

In my Wednesday report I discussed buying Alexion Pharmaceuticals (ALXN) on the pullbacks to the 20-day moving average, and this tactic would have worked well as the stock pocket-pivoted and broke out of its little cup-with-handle formation on Friday, as we see on the daily chart below. ALXN also illustrates how buying into strength is less preferable to buying into logical and constructive pullbacks. While ALXN did close positive on Friday, it closed in the lower half of its daily price range on average trading volume. While this is a valid pocket pivot breakout, the lack of a big increase in trading volume likely hampered the stock in its attempt at a clean breakout. However, I still believe the stock is a reasonable buy with the idea that it will continue to hold above the 20-day line, currently at 121.39, which provides a very close downside selling guide for the stock, helping to minimize risk.

 

GR120813-ALXN

 

Biogen Idec (BIIB) continues to track along its 10-day moving average, as we see on the daily chart below, without flashing any continuation pocket pivot buy points, which is what I would like to see here. One could buy the stock in anticipation of such a move, using the intra-day low of the gap-up day back in late November as your stop. In my view, if BIIB is going higher from here, it will at least hold that 274.98 low, but of course the closer to that level one can buy the stock the better.

 

GR120813-BIIB

 

The second member of the “Three Caballeros” that includes BIIB and Gilead Sciences (GILD), Celgene (CELG) popped to an all-time high on Friday following a pocket pivot on Thursday, as we can see on the daily chart below. Again we can see how buying into weakness as the stock pulled into the green 20-day exponential moving average was the optimal way to handle this, even though CELG was dipping below the intra-day low of the buyable gap-up day it had ten days ago on the chart. Thursday’s pocket pivot came on a gap-up move that gives it a bit of a V-shaped look, but the stock was able to move higher on Friday, albeit on below-average volume. GILD, not shown, also recovered off of its 20-day moving average in a very similar move to CELG’s action, but it remains off of its recent 75.43 high. On Friday, the FDA approved Sovaldi, GILD’s drug to treat Hepatitis C, and it is expected to be a blockbuster drug. Therefore, keep your eyes peeled on Monday for a potential buyable gap-up move in the stock. All in all, the Three Caballeros continue to act well.

 

GR120813-CELG

 

Splunk (SPLK) was able to bounce off of its 10-day moving average on Thursday, as we see in the daily chart, below, but no buying volume was forthcoming on that day. On Friday, volume continued to dry up but buyers avoided the stock even in the midst of a big upside index rally. It has now been eight days since the buyable gap-up move of nearly two weeks ago, and the stock has shown absolutely no follow-through to that initial BGU. That is a problem for me, and what I want to see here soon is some sort of continuation pocket pivot coming up through or off of the 10-day moving average. The only constructive thing about the pattern right now is that the pullback is not showing above-average volume. But a buyable gap-up move should produce strength within a reasonable period of time, and so SPLK needs to get going soon, otherwise I’m not interested in the stock for now.

 

GR120813-SPLK

 

Workday (WDAY) was very buyable on its pullback following the buyable gap-up of eight days ago on the daily chart, below, as it bounced off the confluence of the 10-day, 20-day, and 50-day moving averages to challenge its prior highs. WDAY found resistance at those highs on Friday on volume that was 25% above average, so it is clear that there is some selling interest at the prior highs in the 82-83 price area. My approach to the stock was to take a big position as it came up and off of the 65-day exponential moving average on Wednesday, and then to trade it up to the prior highs. At this point I’m out of the stock waiting to see if it is able to set up again.

 

GR120813-WDAY

 

Las Vegas Sands (LVS) followed through on Wednesday’s breakout by moving slightly higher as buying volume declines, as we see on its daily chart, below. So far this looks fine, and one could only consider buying the stock on a pullback to the breakout point, say in the 73-74 price range.

 

GR120813-LVS

 

The gaming group as a whole was strong over the past few days, with Melco Crown Entertainment Ltd. (MPEL), following through slightly on its Wednesday pocket pivot by moving to all-time highs on Thursday, as we see in its daily chart below. MPEL’s base here looks to me to be no more than a second-stage situation, so I would use pullbacks to 36 or better to buy the stock.

 

GR120813-MPEL

 

In my Wednesday report I covered the strength in LVS and MPEL, but was remiss in not discussing Wynn’s Resorts (WYNN), which also flashed a pocket pivot buy point on Wednesday, as we can see on its daily chart, below. WYNN managed to achieve an all-time closing high on Friday, although buying volume was waning by the third day of the rally up through the 50-day line. With the gaming stocks looking good in a group move, this might be one area to look at on pullbacks in all three of these stocks: LVS, MPEL, and WYNN.

 

GR120813-WYNN

 

Looking around for possible long set-ups that have yet to run, I like the action in Wageworks (WAGE), shown below on a daily chart. WAGE isn’t going to knock your socks off with 29% earnings growth and 26% sales growth in the most recent quarter combined with a 15% earnings growth estimate on a hard number of 15 cents a share for next quarter, but it is showing steady technical action here as it moves tight sideways following a pocket pivot buy point two weeks ago. Friday’s action also constituted another pocket pivot buy point as the stock hugged its 10-day moving average. WAGE has also seen a strong increase in sponsorship over the most recent quarter, with 311 funds owning the stock in the most recent reporting period compared to 240 back in June. Also, a large number of A-rated and A+-rated funds have taken new positions in the stock. Thus I would consider WAGE buyable here on the basis of Friday’s pocket pivot buy point with the idea that it will hold the 20-day moving average, currently at 56.39, on any pullback from here. In other words, the right action of the past several days should result in upside from here, as I see it, otherwise I’m not interested.

 

GR120813-WAGE

 

It was interesting to see that solar stocks failed to participate in the big Friday rally. Names like Canadian Solar (CSIQ), Sunpower (SPWR) (not shown), and First Solar (FSLR), shown below on a daily chart, sold off on the day. CSIQ showed above-average volume on the sell-off while SPWR and FSLR came down on below-average volume as buyers avoided the stocks. Solar stocks remain the #1 ranked group among all industry groups, and it is interesting to note that on a day when the major market indexes were rocking to the upside, the #1 group sold off. This is one reason why this market is not all that easy to play, and being able to find those few stocks with the wherewithal to produce some upside “juice” is critical to making money.

 

GR120813-FSLR

 

Every social-networking stock that has come public in the past few years has started out its trading life with a big downtrend after sucking in hapless buyers who just have to let their greed overcome them as they rush in to buy an allegedly “hot” IPO on the first day of trading. LNKD, FB, and Groupon (GRPN), for example, were all “hot” social-networking stocks that blew up after their first day of trading. GRPN actually managed a “U-Turn” sort of breakout after coming public at $10, trading up to 11.50 on its first day of trading and then down to 8 before u-turning to the upside and running to a high of 15.91 before plummeting to a low of $2.09.

The latest social-networking IPO, Twitter (TWTR), has actually held up better than its predecessors, despite the fact that it doesn’t make a profit and isn’t expected to until the fourth quarter of 2014 when it will flash a penny profit, according to analysts’ estimates. TWTR will not turn an annual profit until 2015, when it is expected to earn 11 cents a share, with that ramping up to 49 cents a share in 2016 and finally $1.01 in 2017. Of course, we’ve seen a stock like Yelp (YELP) have a big price move even as it has lost money, but by 2017 YELP is expected to earn $2.52 a share. What is clear to me is that trying to hash over forward earnings and valuations likely won’t get you anywhere with the stock.

As the daily chart below shows, TWTR finds ready support along the 39-40 price level in what can be viewed as something of a high, tight flag formation given that the stock’s IPO was priced at $26 a share and it opened up its life as a publicly traded stock at 45.10. On Wednesday and Thursday the stock had a sharp two-day move to the upside on increasing volume, and what obscures the situation a bit here is that there is no 50-day moving average of volume yet since the stock has only traded for 21 days now. However, we can see that the stock pushed above the 10-day line on Wednesday in a move that was not technically a pocket pivot buy point since there is a higher down-volume day in the pattern on November 25th, five days prior. However, I think that the stock could be buyable if it drifts back in to the 43-44 price area on light volume. If one is more willing to take on additional risk, shares could be purchased at current levels, giving the stock a little bit of room to the downside at around 42 where the 10-day and 20-day moving averages are.

 

GR120813-TWTR

 

The weekly chart of TWTR shows something of the “IPO U-Turn” pattern I discussed in the book I wrote with Dr. Chris Kacher, “Trade Like an O’Neil Disciple: How We Made 18,000% in the Stock Market.” As we wrote in the book, Google (GOOG) and eBay (EBAY) were initial IPOs that showed this type of formation. When I worked for Bill O’Neil I maintained a rather meticulous trading diary that included a mass of notes I took during my daily conversations with him. On Sunday nights I would have a prolonged discussion with O’Neil, going over stock and market ideas gleaned during our extensive weekend work where we went through WONDA screens, the big maroon institutional charting books, and other custom chart books we had produced for us at the end of each week.

As my diary shows, I mentioned GOOG to him on September 12, 2004 as an IPO U-Turn formation similar to EBAY in 1998. At first, O’Neil replied with “An IPO-Turn, what’s that? That’s not a base, that’s a nothing.” When I explained to him the idea that with GOOG pricing its IPO at $85 and the stock opening above $100 and then forming a little four-week U-Turn it was really like a high, tight flag formation if you extrapolated and drew a long “flag pole” down to $85 on the chart. Once I put it in those terms, he was less averse to the idea, but he did not agree to put the stock on our institutional buy list at that point.

The next morning, however, Bill apparently reassessed the situation and the stock went on our institutional buy list. While Bill didn’t always have to agree with you, one of the positives of working with him on the market and individual stocks is that while he might initially reject one of your ideas, if there was a  kernel of validity in your idea he would remain open-minded and look further into it and then reassess as necessary. One thing about O’Neil was that he never let his initial opinions get in the way of making big money. Because there was a 48 hour period during which we could not act on initial client recommendations, I was not able to finally purchase GOOG shares until Wednesday, September 15, 2004. The second that GOOG came off of that restriction I purchased 30,000 shares at 112.09, which, along with AAPL which was purchased in size a month later, helped me have a pretty good 2004 by year-end, ending up around 70% on the year, which was a tepid year for the market until the last quarter kicked in.

Unfortunately, just comparing charts and trying to place apples with apples and oranges with oranges isn’t going to do the job alone. You have to be able to assess other factors, including whether a compelling theme overrides perhaps otherwise-deficient fundamentals, as was the case with, say, TASR, SCTY, or YELP earlier this year. TWTR was likely aided this week by the ending of the post-IPO “quiet period” during which the underwriters’ and other analysts can’t say anything about the stock. However, I can’t say that the initiation of analyst coverage by “the Street” was filled with irrational exuberance. Among the analysts who came out and initiated coverage of TWTR, Deutsche Bank put a $50 price target on the stock, Bernstein a $40 target, J.P. Morgan a $40 target, Goldman an outright buy rating, Morgan Stanley an “equal-weight” rating and Bank of America/Merrill Lynch a $36 price target.

The soft-pedaling evident in these calls strikes me as fairly positive. Expectations were not high for GOOG when it started trading back in August of 2004, and TWTR’s price action appears more coherent than, say, LNKD or FB’s right after their respective IPOs. Thus the TWTR weekly chart, below, has a tidy look to it, and I believe the weekly bar can be interpreted as a breakout from a three-week high, tight flag type of formation. Therefore, one could take a position in the stock here with the assumption that it will be able to hold the 10-day or 20-day moving average on the daily chart, shown above, on any pullback from here.

 

GR120813-TWTR Weekly

 

With the market posting a strong close to the week following an allegedly positive jobs report, the situation among individual stock was less clear-cut. My tactic of buying previously strong-acting stocks on what is hopefully temporary weakness as they might pull into logical areas of support tends to work well in this environment, and it worked well this week, but what I really want for Christmas is another GOGO. In my view, if there is to be another GOGO, as opposed say to another Ulta Salon (ULTA), which absolutely cratered on Friday, or Veeva Systems (VEEV), a promising IPO that looked to be staging a buyable gap-up on Friday that ended up failing and reversing horribly, it’s likely going to be something that reflects the concept of “new merchandise.” Maybe TWTR is the answer. Maybe it isn’t. The only way to test that theory is by putting your hard-earned dollars at risk in the stock (using a clear and reasonable stop-loss in the process)!

As we approach the final Fed meeting of the year, the idea of QE tapering might produce some volatility in the indexes, and I think the underlying action might be a clue in this regard, as individual stocks have been a mixed affair. If the market is to continue its rally into year-end and one is going to profit in the process, stock selection will be critical. 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 GOGO, LNKD, and TASR, though positions are subject to change at any time and without notice.

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