The Gilmo Report

February 19, 2014

February 19, 2014

New highs had been the order of the day for the NASDAQ Composite Index coming off the lows of two weeks ago as it rallied for eight straight days and straight up into new highs. That all ended today when the market finally ran into a distribution day, as we can see on the daily chart of the NASDAQ, below. In my view, and as I’ve discussed in previous reports over the past two weeks, you had to be in this market as it was turning off the lows and focusing on those stocks that were flashing buy signals at the time.

Chasing the strength by trying to get all hot, bothered, and long after our friendly financial media gave the “all clear” sign last week puts you in a higher risk position. Having bought earlier, from my perspective the pullback here should allow investors who were moving into the market nearly two weeks ago some chance to assess things and figure out how to handle existing long positions as they come in. For now all we know is that the indexes are coming in after a sharp move off the lows of two weeks ago, and leading stocks, which are mostly extended, can now show us what they are made of as they potentially pull into logical areas of support.   




Gold, as shown on the daily chart of the SPDR Gold Shares (GLD), below, pulled right back to its 200-day moving average today on above-average volume. This is the first down day for gold in the past eight trading days, so the pullback was to be expected. The release of the latest Fed meeting minutes indicated that tapering would continue for now, but the Fed remains in a position where they intend to adjust monetary policy as necessary should the economy fail to strengthen as they seem to believe it is. Thus, the yellow metal took a break today, and we’ll see whether this pullback turns into something sharper on the downside.




Over the weekend I pointed out that the strongest stocks were already extended given the market’s sharp rally off the lows of what is now three Mondays ago. With Facebook (FB), Netflix (NFLX), Workday (WDAY), Tableau Software (DATA), Michael Kors Holdings (KORS), Retailmenot (SALE), UnderArmour (UA), and Harman International (HAR), all of which I’ve discussed in recent reports since the market low, are simply in positions where you are looking for the 10-day moving average to catch up to the stock, providing an area of short-term support from which the stock could flash a continuation pocket pivot buy point.

To illustrate this we can see that while FB, shown below on a daily chart, has continued to trend higher, it has yet to issue a valid buy point on the way as the 10-day moving average huffs and puffs to catch up to the stock. Interestingly, after-hours as I write, FB is trading down to its 10-day line after announcing a $16 billion cash and stock buyout of WhatsApp. I see this as a possible buying opportunity after-hours, and I’m taking some shares here as the stock moves under 65 in after-hours trade as the purchase is not a stretch for FB, in my view, and may actually be quite constructive.




In the example of Tableau Software (DATA), shown below on a daily chart, we can see that the stock pulled back to its 10-day moving average today after a roughly 10% move higher since I discussed it as buyable over a week ago following its buyable gap-up move of ten days ago on the chart.




Yelp (YELP), on the other hand, is catching up to its 10-day moving average not by pulling back, as DATA is, but by moving tight sideways in a short seven-day flag formation, as we can see on the daily chart, below. However leading stocks are meeting up with their 10-day moving averages, whether on pullbacks or as they form tight sideways formations, one should be watching for continuation pocket pivots to potentially develop along the moving average as continuation buy points.




Over the weekend I mentioned the buyable gap-up in Ciena (CIEN) from last Friday following an announcement of a strategic partnership with Ericsson (ERIC). CIEN continued higher yesterday before pausing today, as we can see on the daily chart, below. As CIEN moves further up the right side of its base it is now a matter of watching to see how the stock consolidates this most recent sharp upside move.




Finisar Corp. (FNSR), which I also discussed in my report of this past weekend, has also continued to move higher off of its 50-day moving average, as we can see on the daily chart, below. While the stock is moving up to the top of its handle within an overall cup-with-handle formation, it has not issued any bona fide buy points along the way. I would be looking for the stock to pull back here and consolidate its recent gains as its earnings announcement approaches in the early part of March.




I wrote over the weekend that Global Eagle Entertainment (ENT) was holding tight along its 10-day and 50-day moving averages and this could set up a pocket pivot move off of the lines, and this is exactly what we saw yesterday as ENT came flying off of the 10-day/50-day moving average confluence to log a new closing high, as we can see on the daily chart, below. ENT was already starting to percolate higher right after the open, thanks to news that the company had scored a deal with China Air, so you had to move fast on this one before it launched beyond the 17 price level and into new-high price ground. The stock held tight today, which is constructive, but could pull back in if the general market weakens more. Given that this is a breakout on very strong trading volume, the breakout is theoretically buyable, using a standard downside stop of 6-7%.




Taser International (TASR) was another small, “teenage” stock holding tight along its 10-day and 50-day moving averages when I discussed it in my report of this past weekend before launching higher on Monday and flashing what I see as a strong pocket pivot move back up to the top of its recent price range, as we can see on the daily chart, below. I tend to view the big-volume day eleven days ago on the chart as irrelevant since the stock was added to the S&P 600 Small-Cap Index on that day, and the next day was actually a supporting day. Throw in the fact that selling volume was drying up in the extreme, and you have a buyable set-up, even before the stock started to move on volume yesterday.

Generally, if I see a leading stock moving tight sideways, right at the point where I see selling volume begin drying up, I may take a position even before there is any discernible upside movement in the stock. TASR closed at a new high today on a bona fide base breakout, even in the face of a weak general market. TASR is expected to announce earnings next week, so if you bought it early yesterday near the 10-day/50-day moving average confluence, you can always think about taking at least partial profits before the actual earnings announcement.




Building on this idea of stocks like ENT and TASR holding tight along the 10-day or 50-day moving averages as volume dries up in the extreme, we can return to Organovo Holdings (ONVO), which I have discussed previously in recent reports and show below on a daily chart. The stock has continued to move very tight sideways along the 50-day line while volume has dried up in the extreme. This action is coming after a flawed buyable gap-up attempt in late January that came from a v-shaped position and after a sharp downtrend. Since this was an improper BGU but still strong technical action, it has needed to “heal itself” by thereafter setting up again in a mini-cup-with-handle and moving very tightly along the 50-day line in constructive fashion.

I think buying the stock right here can be done using a tight stop, but as I wrote earlier in this report, when I see this type of action in a stock that has been at least, let’s say, a “quasi-leader,” I have to take notice as it often presages a move to the upside. No guarantees, obviously, but trading is all about trying to put the odds in your favor, and that’s all this type of constructive sideways tightening in “voodoo” fashion does for you, so take it or leave it.




iRobot (IRBT) is a new name that I’m taking a hard look at here, and which I’ve actually traded on a short-term basis as it has flown out of a long-term base that is about two months short of being a three-year long basing formation, as we can see on the weekly chart, below. IRBT broke out last week after announcing a 1,000% increase in earnings over the same quarter a year ago, and this likely sent the 5.5 million shares that were sold short in the stock as of January 31st scurrying to cover.




Believe it or not, the Patent Board ranks IRBT’s patent portfolio in the top five of companies in the competitive electronics and instruments area. This huge patent portfolio, consisting of 238 in the United States and 400 worldwide, is what has given IRBT a leg up on its competition. This is why when James Dyson, inventor of the so-called revolutionary Dyson ball vacuum cleaner, says he wants to make a robotic version of his cyclonic vacuum cleaners. IRBT’s stock price pays no attention. While the stock is out of range of its roughly 40 breakout point, I would certainly be all over the stock on any pullback below the 42 price level, perhaps down to the 10-day moving average which is now pushing through the 40 “breakout zone” and up to the 40.67 price level as of today’s close.

What I like about IRBT is that it doesn’t exactly fit CAN SLIM fundamental characteristics, so it is not obvious to the crowd, but is in an area, namely robotics, that might provide a thematic sort of “sex appeal” that is quite forward-looking. With Google (GOOG) buying out a small robotics company and (AMZN) talking about using robotic drones to deliver goods to customers, robotics might be a hot theme for 2014. Another positive characteristic here is the fact that IRBT has really been dormant for the past three years, and its recent emergence from a long-term basing formation could help to set up a longer-term move to the upside. I say look for a constructive pullback to 42 or better to buy the stock.




Tesla Motors (TSLA) came out with earnings after the close today and beat estimates handily, posting a 33 cent profit vs. estimates of 21 cents. Prior to the earnings report TSLA was having trouble clearing the $200 price level, and this brought up memories in my mind of late December 2007 that Apple (AAPL) had trouble clearing the $200 century mark back then as it signaled the second leg off the peak in what would become the brutal bear market of 2008-2009. A lot of media hoopla surrounded AAPL’s quest to clear the $200 century mark, but its failure marked the start of a great short play in the stock as well as the second nail in the market’s coffin in early January 2008. That is not to be with TSLA, however, as the stock is trading between 215 and 220 in after-hours trade as I write.

Now, if the stock reverses tomorrow and moves back below the $200 price level, we might have a very bearish development on our hands similar to AAPL in late 2007, but for now watch tomorrow for a possible buyable gap-up set-up in TSLA once it is able to set an intra-day low. The stock is coming out of a decently long base and could gather upside momentum from here. Just to give you some perspective on how close this move actually is to the top of the base, I’ve highlighted where the stock is trading after-hours as I write this report Wednesday afternoon, and you can see that it really isn’t that far “out there.”




Buying breakouts in this market still comes with its risks, as SolarCity (SCTY) illustrates quite stunningly in its daily chart, below. SCTY popped out of a nice flag formation yesterday on heavy buying volume, but promptly reversed today on equally heavy selling volume to negate the breakout. The reality is that, with most of these stocks, buying the pullbacks to the 10-day, 20-day, or 50-day moving averages seem to carry less risk on a practical level than buying breakouts. As I wrote over the weekend, trying to buy into any buy point in any stock that is going to be announcing earnings in the next week or two is problematic as it necessitates playing “earnings roulette.” This is the main reason I focused on Sunpower (SPWR), not shown here, in my weekend report – it had already announced earnings last Thursday, flashing a big-volume reversal pocket pivot. For now I remain focused on SPWR as my primary buy candidate in the solar group, and I like the stock on pullbacks below 33 and closer to last Thursday’s pocket pivot buy point.




FireEye (FEYE) remains in a high, tight flag after failing to hold its pre-earnings breakout and then reversing after the announcement. As I pointed out over the weekend, the sell-the-news reaction in the stock following last Wednesday’s earnings announcement did not completely bust the pattern, and selling volume is starting to dry up sharply as the stock pulls just below its 10-day moving average with the 20-day line looming just below at the 69.24 price level, as we can see on the daily chart, below. FEYE’s breakout was a bit premature, but this extra work it is putting in here as it settles down and volume dries up might be just what it needs to attempt a “re-breakout,” something that is not uncommon in this market. If volume continues to dry up in the extreme and the stock remains above or runs along the 20-day or 10-day moving averages, the stock could be buyable, so keep an eye out for this type of action. You would not, however, want to see the stock bust the 20-day line on increased selling volume.




As I sensed it would in my discussion over the weekend, Cree (CREE) launched off of its 50-day average yesterday, as we can see on the daily chart, below, and pushed past its 200-day moving average both yesterday and today before pulling back into the 50-day line by today’s close. While upside volume hasn’t been huge as the stock moved up to the 200-day line, today’s selling volume was even lighter. CREE represents a former short-sale target that I am now viewing as a potential “ugly duckling” play as I continue to look for a more concrete buy signal, namely a bottom-fishing pocket pivot, to develop along either the 50-day or 200-day moving averages.




LinkedIn (LNKD), which remains a short-sale target, is staging a little oversold bounce here as I surmised it might in my last two reports given that the stock was trading down on top of a prior base from May/June of last year. This is so far a logical oversold rally, as I see it, of only two days’ duration so I think it needs another day or two to get up to the $200 price level where I would look at re-entering a short position in the stock.




Trulia (TRLA), another short-sale target I discussed in my weekend report, continues to hold tight sideways following Friday’s shortable gap-down move. For now I prefer to try and short the stock on rallies up as close to the 32 intra-day high of Friday’s gap-down day as possible. But if you can get a short off above the 31 price level that is within 3-4% of the 32 price level, it is a reasonable entry with the idea of using the 32 price level as your covering guide. TRLA’s cousin, Zillow (Z), not shown here on a chart, is hovering around its 50-day moving average but does not seem to be in any move to break down. Remember that short positions are more likely to be successful if we get a continued market pullback, which is not necessarily clear at this time, but it is good to have a couple in your pocket just in case, as I see it.




With the market up at higher highs the way it is, my view remains that you wanted to be in this market over a week ago as certain leading stocks were flashing buy signals but which are now extended. Currently I prefer to have some positions with not necessarily huge but adequate profit cushions and some dry powder in my pocket as I take an opportunistic view towards any pullback in the general market and leading stocks. One distribution day today does not make for a market top, but that said, I am also prepared to deploy at least some capital on the short side of this market if the price (and the stock) is right, such as might be the case with LNKD into a rally.

Meanwhile, I am on the hunt for buyable set-ups that are not extended and which are consolidating in constructive but not necessarily obvious areas. This would include avoiding buying breakouts or extended stocks, except in the case of a BGU, which is by its very nature not “obvious,” as big price gap-ups are always seen as “too high” to buy by the crowd, hence have a contrarian “thang” working in their favor. This market is not a slam dunk by any stretch, but there are opportunities to make money, and as long as I can continue to find opportunities that work I’m not going to get hung up on what the indexes are doing, a point I have belabored continuously over the past 2-3 weeks. 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 ENT, FB, and ONVO, though positions are subject to change at any time and without notice.

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