The Gilmo Report

February 12, 2014

February 12, 2014

With the NASDAQ Composite Index bolting back up to its highs and the S&P 500 Index reclaiming its 50-day moving average, our favorite financial media threw in the towel and massaged a 1.1% move on the S&P 500 Index into an “all clear” sign and an allegedly “confirmed” market rally. To be quite frank, and as I wrote over the weekend, you do not want the indexes to be leading you around by the nose, reacting to index strength after the fact. When I start reading that the risk inherent in buying and owning stocks has “lessened considerably” based on some random massaging of a 1.1% upside move in the S&P 500 I have to feel somewhat cautious, particularly if I was buying stocks when the turn wasn’t so obvious last week.

I’m not necessarily saying that the market is in imminent danger of topping right here since its always in imminent danger of moving lower no matter where it might be at the moment, but I would rather have been in this rally earlier than having to chase it here on the basis of some allegedly all clear signal. Clearly the NASDAQ is now in a “happy place” as it runs into resistance near its prior highs, as we can see on the daily chart, below, but the fact is that leading stocks were already quite buyable last week and early this week, and that is when one should have been taking action, in my view. That way, at least if the market rally does fail here given that it has now become somewhat obvious, one is in at lower prices and may have some cushion here in an environment that will likely remain treacherous from time to time.




The bottom line from my perspective is that the real follow-through was last Friday, and the action of certain leading stocks was your first clue. Now the NASDAQ has rallied right up into resistance as it churned around today on heavier volume, as the chart above shows. The S&P 500, shown below on a daily chart, today managed to hold above its 50-day moving average on lighter volume after clambering back above the line yesterday on heavier volume. The S&P 500 has not cleared resistance along last month’s lows, so it remains in a somewhat weaker position relative to the NASDAQ.  In any case, given the rally off of last week’s lows, the market is now in a position where the rally will be tested as we get to see how it consolidates up its gains over the past few days now that the rally has become somewhat obvious.




As the dollar and bonds remain in short-term downtrends, gold has continued to rally, as the daily chart of Gold Spot Price shows below. Gold is knocking on the door of the $1300 level, which I have considered the high end of resistance for the yellow metal, but the 200-day moving average is just beyond that at $1311. That might be where the next test for gold will emerge. It appears, however, that with new Fed Chairperson Janet Yellen testifying yesterday that she loves QE and Congress voting yesterday to keep raising the debt ceiling, money-printing remains in style. If you have been holding the SPDR Gold Shares (GLD), not shown, it has not broken my stop at 119 as it continues higher towards the 200-day moving average.




Facebook (FB) remains a big-stock leader as it continues to trudge higher, as we can see on its daily chart, below. FB has continued to hold above its buyable gap-up move of two weeks ago and its 10-day moving average. Volume is drying up a bit here, however, so the stock may have to consolidate further as the 10-day line catches up.




Netflix (NFLX) is also holding up well as it tracks sideways so far this week after breaking out of a short seven-day flag formation last week on above-average volume, as we can see on the daily chart, below. The stock may hold tight here as it lets its 10-day moving average catch up again.




Expectations are growing for Tesla Motors (TSLA) to announce something spectacular when it reports earnings next week, and that is evident in its chart action, as we can see on the daily chart, below. TSLA followed up on last Friday’s pocket pivot by gapping up on Monday and breaking out to all-time highs as it pushes up against the $200 century mark. If one owns TSLA on the basis of the early January pocket pivot/low-handle breakout one could consider taking partial profits going into next week’s earnings announcement, although one could also just spin the earnings roulette wheel since that would also imply that one has a decent profit cushion in the stock.




The only one of the “Four Horsemen” to still remain a “headless” horseman is LinkedIn (LNKD), shown below on a daily chart that I’ve made larger so we can see the base that it formed last year below the 190 price area, for the most part. LNKD rallied up to its 200-day moving average on Monday as it rallied up to the 113 price level before turning tail and breaking down hard over the past three days. LNKD cleared the 198.60 low of early January and closed today at 192.34 as it approaches the top of this base that it formed from May to August of last year. LNKD’s rolling “mountain range” topping formation, which could also be seen as a head and shoulders “thingie” with multiple right shoulders in the pattern, has a “neckline” of sorts along the declining lows over the past six months, and LNKD is also just about meeting up with that.

I’m short the stock, and will be watching how it acts as it approaches these potential “bounce zones” as the selling picks up in intensity. There is the potential for LNKD to just slice through the 190 level and down further towards the lows of the previous base. In any case, LNKD shows that this remains a market of stocks, and that opportunities will arise on both sides of the market depending on which stock you’re looking at. It is clear to me that institutions have figured out that at 126 times forward estimates when the stock grew earnings by 11% in the most recent quarter and is estimated to grow them negative 19% in the next quarter, LNKD is a “sell.”




Michael Kors Holdings (KORS) has continued to move higher following last week’s buyable gap-up move following earnings, as we can see on the daily chart, below. KORS tried to push higher this morning but basically ran out of gas as it reversed and closed down on light volume. To me the stock looks primed to pull back and consolidate a bit here as it allows the 10-day moving average time to catch up. The time to be buying KORS was right after the BGU and around the 90 price level as it is well-extended from here but still acting fine as a current market leader.




UnderArmour (UA) has tracked sideways following last Friday’s move to new highs, as we can see on the daily chart, below. UA has slowed down just enough to allow its 10-day moving average time to catch up to the price as selling volume dries up here. This sets up a potential continuation pocket pivot move off the 10-day line so keep an eye out for this.




Harman International (HAR) is also holding tight along its own 10-day moving average, as we can see on the daily chart below. Like UA, it is in a position where it could flash a continuation pocket pivot off the 10-day line, although this would necessitate the stock pulling back just a hair from today’s close or the 10-day line catching up to the price. In any case, something to watch for with this market leader.




I tweeted to members yesterday that I would look to take some profits in Tableau Software (DATA) at the highs of the range, which in this case would be the peak of last week’s buyable gap-up day at around 95-96, as we can see on the daily chart. The stock was setting up nicely prior to yesterday’s move, but I would expect some overhead supply to show up around the 95-96 level as those who bought the stock too high on the BGU day last Wednesday might provide a little resistance selling at that level. That turned out to be the case, but in my view as the stock comes down into the 90-92 level it becomes buyable again while keeping the 89 intra-day low of last Wednesday’s buyable gap-up day as your selling guide.




Another strong leading stock that I have favored, Workday (WDAY), moved to all-time highs yesterday on increased volume that was well below levels one would prefer to see on such a move. In my view, the stock had to be bought along the 20-day moving average, as I discussed in my reports last week. As well, WDAY hasn’t flashed any continuation pocket pivots as it remains a fair bit above its 10-day moving average as it acts well in advance of its early March earnings report. Nothing to do here at the current time, but WDAY illustrates how the 20-day moving average can provide a decent reference point along which to buy leading stocks.




I discussed Retailmenot (SALE) in my report of this past weekend as a “new merchandise” situation and while I hoped the stock might back and fill a little bit underneath the 38 price level it simply gapped up and broke out of its cup base on Monday, as we can see on its daily chart, below. One could view the breakout as buyable with the idea that the stock should hold the top of the base at around the 38-40 level, as I’ve highlighted on the chart. The stock did give investors a shot at buying it yesterday early in the day as it sold off furiously right off the opening bell down towards the 38 price level before trading back up near the highs of its daily range on very heavy volume. That strikes me as constructive action, but I still tend to see the gap-up move last week that went up through the 36 price level as the optimal buy point, and the stock is a fair bit above that by now. At this point watch for the 10-day moving average to rise and play catch-up to the price, whereupon it could provide a decent reference point for another buy point.




Keep a close eye on 3-D “bio-printer” Organovo Holdings (ONVO) as it continues to work on a base following last week’s earnings announcement, as we can see on the daily chart, below. Last week ONVO beat estimates of a 9-cent loss by coming in with a 7-cent loss instead, helping to send the stock back above the $10 price level on Monday. This has been followed by a low-volume pullback into the 50-day moving average as well as the 20-day exponential moving average, the green line on the chart, which I see as buyable with the idea that the stock will hold the 10-day moving average at 9.45. With boring 3-D “object” printers getting smacked around later, maybe ONVO’s extremely forward-looking story will benefit from investors “jonesing” for a new kind of 3-D play. ONVO’s at-times volatile action has generated some sharp moves in both directions, but generally as it settles down it sets up to move higher, and I find its current action to be somewhat indicative of this type of “settling down” action.




Cree (CREE) should be watched here as this would-be short-sale target rallies up into its 50-day moving average on weak volume. If the general market gets into trouble here and the rally falters, CREE strikes me as a good “go to” name on the short side. It may even be a good short here if the general market doesn’t get into trouble, as this would fit in with our idea of approaching the market as a market of stocks and judging each potential trade on its own merits. One could test a short position in the stock here using the 200-day moving average at 62.21 as your “high” stop, although my approach would be to remain flexible and layer into a position as it rallies. I tried doing that today but didn’t really get anywhere with the position, so I covered with the idea of looking for another entry point tomorrow or over the next few days. This is typical of how I will handle these rallies, testing them until I start to get some downside traction as the stock potentially reverses and heads back for the lows. Keep CREE on your short-sale watch list.




The next few days will show us whether this market has any staying power as the indexes move up to resistance. Today’s action cannot be seen as negative on its face, as it can simply be viewed as a decent consolidation of the sharp upside move off of last week’s lows. In my view, the time to be buying stocks was last week, or Monday at the latest, at which point one has some cushion underneath them. Trying to chase yesterday’s strength is not my preferred way of operating, but if the market moves sideways here for a few days watch for leading stocks to provide entry points on logical pullbacks to areas of support.

Otherwise, it’s mostly a wait-and-see game at this precise moment as we remain open to opportunities as they arise on either side of the market. I have to admit to feeling somewhat less “controversial” based on my follow-through call on Friday given that others now recognize what I simply thought looked obvious last week. Whether this rally resumption gives us an opportunity to make some serious dough, however, remains to be seen. Speaking for myself, I remain active and flexible, and ready to do whatever the stocks tell me to do while paying less attention to the indexes. 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 DATA, LNKD, NFLX, and SALE, though positions are subject to change at any time and without notice.

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