The Gilmo Report

February 23, 2014

February 22, 2014

The market is essentially consolidating sideways here as it digests the sharp gains off the lows of early February. The NASDAQ Composite Index, shown below on a daily chart, illustrates this as it holds up tightly against its recent highs. More backing-and-filling could see the index test the most current lows just above the 1820 level, possibly even a little lower, and still constitute normal consolidating action.  While the index was off one-tenth of a percent on Friday, that’s still pretty tight action given that it was options expiration which can generally cause a little intraday volatility on heavier volume. But the NASDAQ traded in a narrow range Friday as it held tight on the day. Thus, on a practical level it remains a matter of focusing on the stocks and operating on the basis of their unique price and volume action while placing less emphasis on what the indexes are doing. That has been the thrust of my approach to this market, as I’ve discussed frequently in recent reports, and it remains that way for now.

 

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Gold, as illustrated by the daily chart of the SPDR Gold Shares (GLD), below, held its 200-day moving average after pulling back to the line on Wednesday. Thursday’s bounce off the 200-day line resulted in another pocket pivot off the line followed by tight action on Friday as the yellow metal held its ground. The action in gold and other commodities like crude oil as well as the U.S. Dollar itself are pointing towards continued QE from the Fed, one way or another, a topic I touched upon in my report of last weekend. For now the trend in precious metals has shifted to the upside, and the consensus “target” for gold on this current up leg seems to be the $1350 level, and as long as gold and the GLD remain above their 200-day moving averages the yellow metal obviously has a shot at hitting that target.

 

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Leading stocks continue to act well, and I thought I would start out the stock ideas portion of this report by covering the “Four Horsemen” of FB, NFLX, LNKD, and TSLA, of which three out of four have been hitting all-time highs. 

In my report of this past Wednesday I wrote, “Interestingly, after-hours as I write Facebook (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.” Clearly the after-hours shakeout was exactly that, a spin-out below the 10-day moving average that shows up as a bounce off the 10-day line on Thursday, as we can see on the daily chart, below. The action on Thursday also constituted a continuation pocket pivot buy point, which we have been looking for in the stock since its buyable gap-up move of late January. Technically, this is an add point based on the Thursday continuation pocket pivot.

 

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Netflix (NFLX) is doing nothing more than hanging along its 10-day moving average, as we can see on the daily chart, below. The bottom line here is that you are simply waiting for a continuation pocket pivot to pop here, with the alternative of looking for an extreme volume dry-up (VDU or “voodoo” for added mysteriousness!) along the 10-day line and then buying into that sort of action.  Here we see NFLX meeting up with the 10-day line as it moves tight sideways over the past five days as volume remains low. It may be time for the stock to make another move to new highs.

 

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Tesla Motors (TSLA) gapped up as we knew it would following its earnings report after-hours on Wednesday as I was writing that day’s Gilmo Report. The stock posted a 206.27 intraday low on Thursday, which serves as your selling guide for the stock. Allow me to digress briefly here to explain that when I say “selling guide” I am implying that one could add 2-3% on the downside to account for volatility around that Thursday intraday low, but in my view the stock should continue to hold up above the $200 price level. Some might see this earnings BGU as an “exhaustion gap” of sorts, so some selling into the move is to be expected. Selling volume dried up sharply on Friday, however, as we can see on the daily chart, below, which is constructive. The stock may need to hang around here for a bit before moving higher, similar to buyable gap-ups in other stocks like FB, for example, which hung around for a day or two before moving higher.

 

GR022314-TSLA

 

Last year I hypothesized that TSLA was like General Motors (GM) in 1915 (see May 19, 2013 report) and my colleague Dr. K and I wrote an article for Forbes on the topic. The article can be found at: http://is.gd/8PEMHq. Below is the GM chart I made for that article to show the rough price movement of GM during that 1915 market period. The area of the chart that I’ve outlined in red represents a long base that GM formed after a 129% prior upside movement from around 34 up to around 80. While that first 129% to the upside was nothing to sneeze at, the fact is that the real price movement actually occurred after GM broke out in March of 1915 from the larger base that I’ve outlined on the chart. I view TSLA’s breakout from its current 19-week or roughly 4-month base as similar to GM’s breakout from its longer base in March of 1915. Translation: TSLA definitely has the potential to go much higher than most investors probably think it can. With the company expected to earn $3.55 a share in 2015, the earnings power to get it beyond $300 is certainly there.

 

GR022314-GM 1915

 

The weekly chart of TSLA below gives some perspective when compared to the GM chart from 1915 above. As well, the breakout through the top of this big cup base doesn’t look as extended as it might on a shorter time-frame chart. For now I’m using the $200 price level as a reference point for any further pullback, should that occur, and I would certainly look at that as a potential spot to pick up shares, although one can certainly do so at Friday’s closing price given that it is well within range of Thursday’s buyable gap-up low at 206.27. Buyable gap-ups have been working like a charm in this market, so I would expect TSLA’s to work as well.

Aside from those that I have discussed in detail in recent reports, I note that a slew of other stocks, some of which don’t necessarily have strong earnings growth, have gapped up recently following earnings and moved higher like ACT, AKAM, ALXN, ARII, AZPN, DIS (!!!), CBS, EXPE, TRIP, GMCR, TRMB, TRN, ATHN, FSL, etc. For those of you who are HGS Investor software users, you can simply run the pre-set buyable gap-up screen and see for yourself all the buyable gap-ups that are working. On top of the buyable gap-up, TSLA also benefits from the fact that shorts still love to swarm this stock, and at the end of January short interest in TSLA came in at 29,639,877 shares, not too far off the peak of 31,648,868 we saw at the end of December 2013.

 

GR022314-TSLA Weekly

 

LinkedIn (LNKD) is the remaining “headless” horseman as it remains below its 200-day and 50-day moving averages, as we can see on the daily chart below. I tend to think, however, that as a prime short-sale target LNKD is played out for now, and that we might see a more concerted bounce back up to the 200 price level, perhaps even as high as the 200-day or 50-day moving averages, which are currently in confluence as the 50-day line crossed below the 200-day line in a so-called “Black Cross.” Over the past week LNKD bottomed out and bounced for two days before pulling in on Thursday and Friday as selling volume dried up, which has the look of a possible “Wyckoffian” low. If I were looking to short this, this is not the optimal spot to do so, and given how oversold the stock is at this point, the fact that selling volume is drying up here leads me to think that a rally back up towards the 50-day/200-day moving average confluence is the higher probability, particularly if the general market remains strong.

 

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Workday (WDAY) and Tableau Software (DATA) both cleared the $100 century mark on Friday, as their daily charts show, below. Neither move was what I would call decisively above the $100 price level, but both stocks did push higher on strong, above-average volume. The only problem with both stocks is that neither has flashed a bona fide buy signal prior to these moves to new highs and the first century mark. As well, it is not clear to me that one would want to buy them here solely on the basis of Livermore’s Century Mark Rule, but if one wanted to do so then giving the stocks a 1-2% downside leeway from the $100 price level might be one way to handle it as the trade can only be made with the expectation that these stocks will quickly move materially higher above the $100 century mark per Livermore’s rule. For those of you who need a refresher on the Livermore Century Mark Rule it is interesting to note that there is now a citation on a website that looks like it was inspired by my report since I was the first to refer to it as a “century mark” rule: http://tcmllc.blogspot.com/2011/04/livermore-on-century-marks.html. Of course, I can’t claim credit for the citation since I quoted it directly from the investment bible known as “Reminiscences of a Stock Operator,” by Edwin Lefevre.

 

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Michael Kors Holdings (KORS) and Yelp (YELP), meanwhile, remain within spitting distance of their first century mark achievement, as we can see in their daily charts, below. Both stocks have met up with their 10-day moving averages and both are therefore in position for a continuation pocket pivot. One could also take positions along the 10-day line if the volume is drying up in “voodoo” fashion, as KORS is on this current pullback to the line. YELP is not showing the same type of sharp volume dry-up, but volume has remained low as the stock has moved tight sideways following its buyable gap-up move of early February on the heels of its strong earnings announcement at that time.

 

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Harman International (HAR) is in a similar positions as it tracks sideways along its 10-day moving average following its buyable gap-up move after announcing earnings in late January. HAR has the added feature of having moved above the $100 century mark level back in late January on the BGU, and since then has been able to hold above the century mark as it tracks tight sideways. Again, one can take the same approach as they might with KORS and YELP by waiting for a continuation pocket pivot to form before buying or adding to an existing position. The riskier approach, although one that I tend to prefer in this market, would be to take initial positions along the 10-day line as volume dries up. HAR is actually showing some slight volume increases along the 10-day line which looks quite constructive to me. I would not be surprised if the stock moved higher next week.  

 

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UnderArmour (UA) is the model for KORS, YELP, and HAR as it finally flashed a strong-volume continuation pocket pivot on Friday, as we can see on the daily chart, below. You can see a couple of features on the chart before Friday’s pocket pivot that were helpful in setting up the move, and which I think one needs to watch for in anticipation of breakouts from these post-BGU flag formations in stocks like KORS, YELP, and HAR, for example. The first is the shakeout that occurred four and five days ago on the chart. This was followed by two days of very tight price action with the volume drying up very sharply, a “voodoo” signature, before Friday’s continuation pocket pivot and flag breakout. This is an add point for UA, although I’d prefer to be buying shares under $110 should a small pullback arise next week.

 

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Global Eagle Entertainment (ENT) has continued to hold its Monday pocket pivot breakout, which I discussed in my report of this past Wednesday, and technically remains within buying range of a flag breakout through the prior 17.37 high on the left side of its current deep flag formation. As I discussed last weekend, before Monday’s pocket pivot, ENT was setting up very tightly along its 50-day moving average as volume dried up sharply, the clues that preceded Monday’s upside move. While the Monday price move could be attributed to news that the company had struck a deal to provide their services to China, notice how the price/volume action was giving us buying clues last weekend, before the news actually hit. In a sense, the stock “knew” the news was coming beforehand.  When I compare ENT to Gogo (GOGO), not shown, the charts are obviously night vs. day, but it is also a fact that ENT’s technology is superior to GOGO’s, and with a number of GOGO’s customer contracts coming up for renewal within the next two years, ENT has an opportunity to steal business from GOGO. And in my view the charts of each stock confirm this potentiality. ENT is expected to announce earnings sometime in mid-March, so hopefully it can develop more upside cushion going into the report.

 

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Organovo Holdings (ONVO), which had been holding tight along its 10-day and 50-day moving averages, as we can see on the daily chart below, pushed up and off the moving average confluence on Thursday and Friday. While Thursday’s action saw a slight pick-up in upside volume on the initial lift off the moving averages, it wasn’t until Friday that we got a bona fide pocket pivot volume signature on a low-range breakout. While ONVO cleared the highs of the range it has formed since the v-shaped buyable gap-up move on January 29th, it has a little overhead resistance to contend with from the left side of the pattern. In my view the stock would be in a buyable position if it pulls back to within 2-3% of its 50-day moving average.

 

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iRobot (IRBT) continues to hold up well after last week’s three-year base breakout, the right side of which is visible on the weekly chart, below. As I wrote in my report of this past Wednesday, I would love to see the stock drop into the 42 price level or better, but the best that the stock has given me over the past few days has been brief dips just below the 43 price level. This action shows up on the weekly chart as a weekly close that is very tight with last week’s close as the stock closed pretty much mid-range for the week. While IRBT is expected to post negative 28% earnings growth in the next quarter, the next three quarters are all expected to show positive and accelerating earnings growth at 10%, 42%, and 218%.

 

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While I sold my Retailmenot (SALE) into the spike last week, the stock has not given me a chance to buy it back on a nice pullback as it holds tight sideways here, giving the 10-day moving average a chance to catch up to the stock. It appears that SALE’s online coupon site model is winning the battle against rivals like Groupon (GRPN), not shown, which fall by the wayside. GRPN came out with its earnings report Thursday after the close and the stock gapped down over 20% on Friday. Meanwhile, SALE has held well above its buyable gap-up of two weeks ago and as it sets up here along the 10-day line I’m looking for another buy point in the form of a continuation pocket pivot to show up. On the other hand, it may simply act like DATA and continue higher from the 10-day moving average without flashing any bona fide or actionable buy points. The other alternative here is to take a position along the 10-day line, which is currently running through the 41.60 price point, so a small pullback from Friday’s close could easily get you there. I would love to see a nice intraday shakeout to buy into similar to the one the stock had eight days ago on the chart last week, but the stock may not give us that chance.

 

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FireEye (FEYE) continues to consolidate last week’s price swing following its earnings announcement and subsequent flag breakout failure, as we can see in its daily chart, below. I’ve discussed the stock in my last two reports as it works off some of that post-earnings volatility and settles down a bit. You now have the stock holding tight along the 10-day line as volume dries up sharply, which in my view is setting up the potential for “re-breakout.” I view the action in the stock since the week ended January 17th as a five-week, slightly ascending flag formation that would certainly qualify as the proverbial “high, tight flag” on a weekly chart, which I show below FEYE’s daily chart.

 

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GR022314-FEYE Weekly

 

Bio-tech leader Pharmacyclics (PCYC) finally made good on a breakout through a 19-week base by staging a buyable gap-up on Friday after announcing favorable earnings on Thursday after the close. This BGU is pretty simple to play here as the stock closed at 151.61 and the intraday low of Friday’s gap-up range is 148, a little over 2% from the Friday close. Given that PCYC is a bio-tech and can be somewhat volatile, one should allow another 2-3% below the 148 price level. PCYC posted record revenue in the most recent quarter of $123.6 million. It is interesting to note that while analysts see annual earnings of 37 cents a share for PCYC in 2014, by 2018 the company is expected to earn $11.61 a share, a massive earnings increase. If all that is true, then this current buyable gap-up should lead to further upside, as I see it.

 

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With the leading solars Canadian Solar (CSIQ), SolarCity (SCTY), and Sunpower (SPWR) all acting reasonably well as they continue to work on their current bases, I note that SCTY along with the lagging big solar name in the group, First Solar (FSLR), shown below on a daily chart, are expected to announce earnings this week. SCTY’s earnings are expected on Monday while FSLR is expected to post earnings on Tuesday. It’s interesting to see that going into this week’s earnings report FSLR is trying to play catch up with the rest of this #1-ranked industry group. On Tuesday of this past week, FSLR popped back above its 50-day moving average on a bottom-fishing pocket pivot and has moved tight sideways since then.

I’m not expecting much else to happen going into earnings, but it will be interesting to see how the stock reacts once earnings are out. Expectations are low as analysts see negative 50% earnings growth on a hard number of 99 cents a share. But with the rest of the group continuing to act well, this is one to keep an eye on. Meanwhile, SCTY, not shown here on a chart, continues to move sideways in a short base after last week’s failed base breakout attempt, but as with FSLR I prefer to wait and see what happens after earnings rather than attempting to play earnings roulette. As with many other leaders in the market, just being patient and only buying into a post-earnings buyable gap-up seems to work just fine.

 

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Cree (CREE) is likely going to need some time to set up here as it must contend with overhead supply and congestion at around the 200-day moving average, which so far has acted like a strong point of resistance for the stock. Volume picked up slightly on Friday, sending the stock back below its 50-day moving average. This brings up the obvious question as to whether my ugly duckling theory regarding the stock is all wet and whether the stock might be rolling over here as it sets out on a potential retest of the February lows.

From a trading perspective I would say that’s a definite possibility, and one could think about shorting the stock here with the idea of using the 50-day line as a quick upside stop and the 56 price level as a short-term downside price objective. So far there has been no price/volume action to confirm the ugly duckling thesis given that there have been no pocket pivots in the pattern as the stock rallied above the 50-day line earlier in the week. Thus this may at least need more time, and this sets up the possibility of the short trade to 56 using the stop-loss parameters I already discussed above. Of course, my view is that as long as the general market remains strong and leading stocks are moving higher in droves, why waste your capital on the short side?

 

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More earnings, more buyable gap-ups. That seems to be the tone of this market as we move through earnings roulette season, and the best feature of the current environment is that most of these buyable gap-ups are working quite well. As I noted earlier in this report, even stocks with less-than-stellar earnings growth, such as TripAdvisor (TRIP), not shown, which gapped up after announcing negative 28% earnings growth last week, has continued higher since its buyable gap-up of eight trading days ago. Meanwhile, one can fret over index-related minutiae or one can just watch the stocks. I’m sure you all know my answer to that one.

The market’s uptrend remains intact, and, more importantly, the uptrends in any number of leading stocks also remain intact. More leaders add to the favorable tone of the market by flashing new buy signals, and that’s all you need to know for now. Just go with the flow.

 

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, IRBT, ONVO, and TSLA, though positions are subject to change at any time and without notice.

Gil Morales & Company, LLC (“GMC”), 8033 Sunset Boulevard, Suite 830, Los Angeles, California, 90046. GMC is a Registered Investment Adviser. This information is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to GMC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Gil Morales & Company, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.