The Gilmo Report

February 12, 2012

February 12, 2012

 

With everybody becoming ebullient earlier in the week you knew a pullback was coming, as I discussed in my report of this past Wednesday. Friday saw the pullback finally arrive, and from my perspective it had the feel of a pause that refreshes more than anything else. As early as Friday afternoon the pundits suddenly all became bearish, calling for a possible market pullback, particularly if Greece leaves the Euro zone. I suppose the theory here is that somehow flushing another $120 billion Euros down the toilet bowl that is Greece, and which Greece has about a snowball’s chance in Hades of ever paying back, is better than saving the money for something more fruitful. If the market were truly fearful of a Greek departure from the Euro, then I think we might have seen something more severe than a lighter-volume pullback on Friday that found some support off the lows and failed to even test the top of the gap-up move to 11-year highs by the NASDAQ Composite Index, as we see in the daily chart below. The NASDAQ has all of one distribution day since clearing its 200-day moving average five weeks ago. As I wrote on Wednesday, the market is in a position for a pullback here. But if everyone expects it, it may not happen.

NASDAQ Composite Index Gilmo Report Chart

As I noted on Wednesday, the key here is to simply watch your stocks, and the bottom line is that this past week has not seen any deleterious action on the part of bona fide leaders. As far as I’m concerned, the biggest big-stock leader in this market right now is Apple, Inc. (AAPL), shown below on a daily chart. If Friday’s sell-off was so bad, you wouldn’t know it from AAPL’s action, as it closed at a new all-time high and moved closer towards the $500 price level. Friday afternoon, I inadverdently turned on one of the financial news channels only to hear some trader who had shorted LinkedIn (LNKD) in late December telling everyone that AAPL would “print $500″ this coming week and then top, so he was recommending that investors buy puts on AAPL. Sure. He sounds a lot like the guy who wrote on SeekingAlpha.com two weeks ago that he was selling his AAPL at 451 with the idea of buying back his positon at 439 or better. It doesn’t appear that he got his chance. In any case, many are wondering whether this is a climax top in AAPL. My short, sharp answer is a resounding, “No!” It is simply too early in this move since AAPL has just broken out of its base. I tend to see this breakout and sharp move higher as indicative of upside power and strength, not a climactic top, end of story.

Apple, Inc. (AAPL) Gilmo Report Chart

Before I look at a couple of other big-stock NASDAQ names, allow me to briefly check in with the precious metals. Both of the metals, silver and gold, simply appear to be consolidating their very-sharp moves up and off of their late December lows, as we see in the daily chart of the SPDR Gold Shares (GLD), shown below. Remember that I am using the 50-day moving average on both the SLV and GLD as downside selling guides, so right now they have plenty of room to maneuver about as they consolidated their prior gains in January. The GLD is running below its 10-day moving average, but this is not a problem since the 10-day line is not relevant yet. Based on the 7-week rule, it has not shown a tendency to “obey” the 10-day line for at least seven weeks yet. Friday’s action almost resulted in a violation of the 10-day line, but the GLD closed up off its lows and above the intra-day low of five days ago when it first closed below the 10-day line. So far this all looks normal to me and so GLD, SLV and their related leveraged ETFs are all holds currently as I call ’em.

SPDR Gold Shares (GLD) Gilmo Report Chart


Priceline.com (PCLN) certainly qualifies as a big-stock NASDAQ leader, but in this current environment it hasn’t done much in the way of leading as it is still in the midst of this big base it’s been building since last April. As we’ve discussed in previous reports, PCLN has shown some pocket pivot type of action off the lows of this base (see January 18th report), so it has been building its base in constructive fashion. With earnings coming up, additional, constructive clues are always sought, and on Friday PCLN flashed a quiet pocket pivot buy point on a day when the markets were supposedly ready to go into the tank because of the ancient news of Greece potentially leaving the euro zone. This is nice action to see on a weak general market day, and argues for a strong earnings report from PCLN, but keep in mind that a number of pre-earnings pocket pivots, such as with Nuance Communications (NUAN), not shown, this past week, have failed, so one cannot assume too much on the basis of pocket pivot alone. Actually, I might prefer to see PCLN gap up and out of this base on massive volume following earnings, since a similar occurrence with AAPL resulted in further upside for that stock. So in my view, it’s better to be in a stock when the move starts, without necessarily having to be in “early.”

Priceline.com (PCLN) Gilmo Report Chart

While PCLN’s action is constructive within its base, Intuitive Surgical’s (ISRG) recovery after news from Japan regarding reimbursement for da Vinci prostate procedures resulted in more constructive action, as we see in its daily chart, below. Like AAPL, ISRG is perched beneath its own $500 price level, and to me it appears like it is preparing to make a run for and through the 500 level given its very tight price/volume action here. We’ve seen the stock try to sell down three out of five days this past week. But each time it sold off, it found support with volume picking up, as I’ve pointed out on the chart below. In fact, all five days this past week show long lower “tails” so each day has signs of accumulation. Remember that ISRG is coming out of a long, multi-year consolidation, as I discussed and showed a chart of in my November 13, 2011 report. ISRG has been chopping its way higher since breaking out on a buyable gap-up in mid-October 2011, as we see in the daily chart below. It looks like it may be on the verge of accelerating its move to the upside. For now, if I’m long the stock my expectation is that it should hold above the 470-480 area.

Intuitive Surgical's (ISRG) Gilmo Report Chart

The upcoming Facebook (FB) IPO brings the social-media phenomenon into focus as a compelling investment theme in 2012, something I’ve discussed before in previous reports. LinkedIn (LNKD) helped the cause on Thursday after the close this past week when it blew out earnings estimates and gapped up on huge volume. Short interest in LNKD as of the last reported period at the end of January amounted to some 7,366,000 shares sold short on a float of 11 mllion shares. Note also that LNKD’s rocket ride occurred on a weak market day, and the stock never looked back after gapping up to the 83 price level at the open, closing right near its peak for the day. I can see some resistance perhaps showing up at the 95 price level, the mid-point of this big double-bottom base that it is working up the right side of, but I like this gap-up as a potentially buyable move using the 83 low as a maximum stop. LNKD reminds me a bit of Baidu, Inc. (BIDU) after it came public to much fanfare in 2005, tanked and built a big base before it broke out to new highs in 2007. Sometimes a hot IPO takes time to set up for its real move, and LNKD has already flashed several bottom-fishing pocket pivots off the lows of this base, as I first discussed in my January reports.

LinkedIn (LNKD) Gilmo Report Chart


Tractor Supply Co. (TSCO) attempted to break out of a four-weeks-tight (4WT) flag formation on Tuesday of this past week, but that move ran out of steam, as we see on the daily chart below. In fact, Tuesday’s move was also a pocket pivot buy point on very strong volume. It is curious, but not atypical of TSCO, how it followed up such strong upside momentum with a slow, very low-volume drift right back to the original pocket pivot point at the 82-83 price level and the 10-day moving average. TSCO, on the fundamental data portion of the chart below, is showing accelerating earnings and sales growth, so the stock remains fundamentally sound. As well, this last breakout occurred on the heels of a buyable gap-up move in early January, so perhaps nervous sellers hit the stock as it streaked to all-time highs on Tuesday. In any case, the almost excruciatingly low volume on this pullback is quite buyable, in my view, using the 10-day moving average as an ultra-quick downside stop, although if I’m able to buy the stock at 83, say, I might be willing to give it a little “porosity” down to 80 on a pullback.

Tractor Supply Co. (TSCO) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com), ©2012, used by permission.


Alexion Pharmaceuticals (ALXN) remains a champ, as we see on the daily chart below, running to all-time highs this week on the heels of its own earnings announcement on Thursday. The last time I considered ALXN buyable was off of its 20-day moving average in mid- to late-January, as I discussed in my report of January 25th. The latest buy point, however, occurred on Thursday as the stock flashed a pocket pivot buy point off the 10-day moving average. If you didn’t add to a position in ALXN on Thursday, then I would look for a pullback to the 80 level, roughly, to try and do so. ALXN has held the 10-day moving average for eight weeks now, so the seven-week rule is in force, using a violation of the 10-day line as a selling guide for part or all of the position. This would depend upon one’s cost basis if one also purchased stock closer to the breakout point down in the low 70’s. The market’s verdict appears to weigh in on the idea that the company’s drug, Soliris, which is used to treat a rare blood disease known as paroxysmal nocturnal hemoglobinura is likely to find new growth in newly approved European markets.

Alexion Pharmaceuticals (ALXN) Gilmo Report Chart


Biogen Idec (BIIB) appears to be faltering on its breakout attempt of last week following its earnings announcement, as we see on the weekly chart below. What is notable about the action on the weekly chart, however, is the fact that BIIB pulled down a bit but held well above its 10-week moving average and closed tight, with the two weeks prior to last week’s breakout right along the 119 price level. My view is that as long as it holds this level the stock is fine, and looking at the macro-view on the weekly chart helps understand the action. BIIB is still consolidating its huge gap-up from last April, from which it built an eight-week flag formation and broke out. This breakout failed and BIIB undercut the lows of that flag formation before turning and breaking out again from a loose-looking cup-with-handle pattern in late October 2011. Since then, all that loose price action has tightened up considerably, which seems to argue for further upside in the stock further down the line. It is not necessary to run for the hills on BIIB here as this looks normal so far. But certainly if the stock is a slow performer and you also own, for example, AAPL, then you know in which direction you want to be pyramiding.

Biogen Idec (BIIB) Gilmo Report Chart


Questcor Pharmaceuticals (QCOR) is disappointing me following its bottom-fishing pocket pivot two Fridays ago, as we see on the daily chart below. My view, however, is that the stock should have held the 10-day moving average and at least move sideways along the line as it digested the sharp move up off the lows. I also don’t like the fact that the stock picked up above-average selling volume as it broke the 10-day line. QCOR announces earnings towards the end of the month, so the stock is likely to be stuck in limbo until that time. As well, the weekly chart has lost the tightness it showed along the lows as I discussed on page 12 in my report of February 5th, at the time of the bottom-fishing pocket pivot. This past week shows the stock turning lower on higher volume. My thesis on this is busted, end of story, so I am avoiding this for now.

<em#### “Questcor Pharmaceuticals (QCOR) Gilmo Report Chart” title=”Questcor Pharmaceuticals (QCOR) ” />

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com), ©2012, used by permission.


Monster Beverage (MNST) continues to act well after Wednesday’s stalled-out pocket pivot buy point, as we see on the daily chart below. Keep in mind that the pocket pivot buy point is still valid as the stock has not violated its 10-day moving average. In fact, despite the weakness in the general market on Friday, MNST closed at the top of its range, as selling volume never really materialized. I think MNST goes higher, so it is still a hold at the very least, and possibly in a very good add/buy position here at the 10-day moving average on the basis of Wednesday’s pocket pivot buy point. It some ways, for a stock like MNST, it might have been uncharacteristically premature for it to launch higher after digesting its prior 10% upside move for two weeks. Perhaps at the very least it needs another week to complete a three-weeks-tight formation (3WT), and so far the price/volume action doesn’t seem to argue for anything less than that. Certainly, I would not be selling a MNST core position out here on the basis of any weakness, as there really is nothing that weak on the chart so far.

Monster Beverage (MNST) Gilmo Report Chart

Since I first alerted you to the bottom-fishing pocket pivot up through the 50-day moving average in Stamps.com (STMP) back in my report of January 15th, the stock has moved up towards its highs on the left side of a cup formation. After reaching the highs two weeks ago, the stock has now backed off to build what is so far a two-week handle to its previous cup formation, as we see on the weekly chart below. STMP announced earnings on Thursday and gapped down slightly on Friday along with the market, but found some support at the lows of the day. I don’t care much for the high-volume week trading down in the handle, but it was able to hold above the 10-week moving average on Friday. If one owns the stock on the basis of the pocket pivot move up through the 10-week/50-day moving average five weeks ago on the chart, then one could see if selling volume subsides and STMP continues to build a constructive handle before breaking out again. Otherwise 10-week line is your maximum selling guide.

Stamps.com (STMP) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com), ©2012, used by permission.

While I could see that the market was in position to pull back earlier this past week, the way it has occurred so far appears benign, at least when it comes to the action of leading stocks. In my mind, the Greek crisis is a pretty binary affair, with Greece either qualifying for more bailout money as the Europeans elect to flush more Euros down the toilet; or alternatively with Greece leaving the Euro zone. Both events are likely mostly discounted in the markets, since this has been all over the news for weeks now and, well, the market isn’t stupid. Fretting about this or that only serves to build a wall of worry, as I see it, and I would simply encourage you to watch your stocks and pay less attention to the daily news-related fluctuations in the indexes.

Obviously, if you are long stocks that continue to act quite well, particularly in the face of “scariness” on Friday, the market is helping you to separate the wheat from the chaff. The past few weeks for me have been mostly a process of jockeying around as I try to figure out where the big themes and big price moves are. AAPL may be in the midst of the early part of a major price move, and a number of other stocks continue to set up after initially positive action in the form of breakouts, buyable gap-ups, etc. Thus you want to use any market weakness here as feedback to determine where your best stocks are. The other potentiality is that the rally dies and the market tops in the coming days or weeks, but right here, right now, there is zero technical evidence to support such a thesis, unless one wishes to rely on Greek nightmares or a market that has come “too far, too fast” as a lame reason to run for the hills. Show me more distribution in the indexes and in leading stocks, and then I will be willing to reassess, but for now I remain long this market, looking to use any weakness in opportunistic fashion to build up and pyramid my better positions.

Please refer to earlier reports for discussions of any stocks not mentioned in this report, and, as always feel free to send in your questions to info@gilmoreport.com.

Gil Morales

CEO & Principal, Gil Morales & Company, LLC
Principal and Managing Director, MoKa Investors, LLC
Principal and Managing Director, Virtue of Selfish Investing, LLC

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