The Gilmo Report

February 26, 2014

February 26, 2014

Corrections and recoveries in this market over the past year have pretty much followed the same script. The market comes off 5-7%, maybe a little more, and as soon as it begins to look quite ugly, e.g. as in an “ugly duckling,” it finds its feet and turns to the upside. One of the major clues that a low is in the making, aside from the utter ugliness of it all from an index perspective, is that there will usually be some leading stocks setting up and/or issuing buy signals as they hold up reasonably well during the correction and certain “authorities” proclaim the obvious “market in correction.”

Once the market clears to new highs and the recovery and rally becomes obvious to everyone as the same “authorities” pronounce the market to be in a “confirmed uptrend” once again, leading stocks start to get a little extended and the potential for a pullback increases. In that sort of movement my modus operandi has been to buy leading stocks showing constructive action as the correction in the indexes becomes obvious, work them in size on the ensuing rallies, and then sell into the spikes, raise some cash, and wait for the next buy signals/set-ups in my favorite stocks to appear. That strategy continues to work well.

With the market now making marginal new highs on the NASDAQ Composite Index (shown below), while the NYSE-based indexes such as the S&P 500 (shown further below), and the NYSE Composite (not shown), lag slightly behind as they trade right at their former highs, and hence resistance, we are seeing both the NASDAQ and the S&P 500 form “spinning tops” on their daily candlestick charts below. Given the sharp rally off the lows of early February this is not really surprising action as profit-takers move in. As well, the extended nature of most leaders makes some consolidation and backing-and-filling normal, if not necessary. The main issue for investors is to watch their stocks, end of story. Meanwhile, my tendency here is to use pullbacks in opportunistic fashion.

 

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As the stock market indexes pause, gold engaged in a little backing-and-filling, as we can see on the daily chart of the SPDR Gold Shares (GLD), below. The GLD pulled down into its 10-day moving average on below-average volume, but the slight increase in volume over yesterday combined with the mid-range close off of the 10-day moving average implies some minor supporting action. So far the GLD remains in its uptrend off of the late December lows.

 

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Among the “Four Horsemen,” Facebook (FB), not shown, has continued to make new highs following last week’s continuation pocket pivot buy point off the 10-day moving average. Meanwhile, not to be outdone, Netflix (NFLX) chimed in with a continuation pocket pivot of its own on Monday, as we can see on the daily chart, below. I wrote over the weekend that “It may be time for the stock to make another move to new highs,” and NFLX proceeded to make me look smart by doing just that with Monday’s continuation pocket pivot. The stock sits within range of Monday’s pocket pivot with the idea that it will continue to hold the 10-day moving average if you are using the pocket pivot as a signal upon which to add to an existing position.

 

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I’d like to think that my detailed discussion of Tesla Motors (TSLA) and its comparison to General Motors (GM) in March or 1915 helped to spark another gap-up move in an ongoing “gap-fest.” But alas, it was merely due to a Morgan Stanley buy recommendation and doubling of their upside target for TSLA to $320. I wrote over the weekend that I figured the stock has enough going for it to get above the $300 level, so I suppose I can’t really disagree with that particular analyst. In any case, over the weekend, using a Point & Figure price target I was expecting that the stock would have a move to at least the $242 level before pausing, and it certainly exceeded my expectations over the past couple of days as it has motored another 20% higher.

Obviously, at this point, the stock is quite extended, but TSLA certainly serves to illustrate the value of using buyable gap-ups in stocks that others will tell you are “extended” from recent “proper buy points” at the tops of prior bases. At this point it’s a matter of waiting for the stock to perhaps form a short flag formation of several days or less duration, let its 10-day moving average catch up to it, and then see what happens from there.

For now, TSLA has made for a very nice couple of days from my perspective, and I hope the same is true for most members. We came, we saw, we said “buy.” That was the time to act. In any case, the one caveat I would point out about the comparison to GM in 1915 is that GM broke out in March of 1915 just as the market had followed through and was starting a brand-new bull market. Arguably, TSLA’s recent breakout through the top of its prior base has occurred in a market where the bull has been running for some time now. Thus judge TSLA, first and foremost, on its real-time price/volume action. After-hours TSLA announced a $1.6 billion convertible bond offering, which initially sent the stock lower, but at the time of this writing the stock has launched over the $260 price level in after-hours trade. Earlier today I Tweeted to members that I would look to buy TSLA on pullbacks below 250 or better, and we got that opportunity just as we started the last hour of trading today at noon Pacific Time. We’ll see how that opportunistic call pans out tomorrow.

 

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Over the weekend I wrote about LinkedIn (LNKD) as follows, “…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.” I was wrong on one count, however, and that is that LNKD was oversold enough, and attracting enough buying interest as the volume on the daily chart shows below, to push past the 50-day and 200-day lines. This actually made for a nice trade, which I went for on Monday as the stock appeared to find a low just above the $190 price level.

Selling into the move up to the 50-day moving average, the stock taunted me just a bit by rallying beyond the 200-day moving average on what has turned out to be a three-day gap-fest with the stock gapping higher both yesterday and today. LNKD is now in an area of congestion, but I am keeping it on my ugly duckling buy watch list as it may back-and-fill constructively along the 50-day/200-day moving average confluence if it can hold somewhere along either line. Today’s action has the look of a “shooting star” as the stock reversed off the highs on above-average volume, so from my perspective it’s a matter of seeing how this thing acts from here since it could easily become a short-sale target again. In any case, LNKD is an instructive example of a “Wyckoffian” low, which is what I pointed out over the weekend, before the last three days of torrid upside.

 

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FireEye (FEYE) gave us a nice three-day rally after the “voodoo” volume dry-up along the 10-day moving average that I discussed in my report of this past weekend. The stock is now at the upper end of its upside trend channel in the ascending flag type of formation I pointed out over the weekend. This is the type of move I will take at least partial profits into, looking to re-enter or re-build my position on a pullback to the 80 price level or better that makes sense to me. FEYE is a squirrely stock, and if I can get a 10% move out of a decent-sized position in three days that is usually worth banking at least part of, particularly in this market. Now that it is at the top of its upside trend channel, we will get see if it has the wherewithal to push even higher.

 

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Workday (WDAY) appears to be running into resistance at the $100 century mark, and after-hours as I write the stock is down a couple of bucks as it tests the 10-day moving average. WDAY came out with a loss of 13 cents vs. estimates of a 16 cent loss. So far there have been no secondary buy points in the stock although it looks like today’s action constituted a pocket pivot buy point based on what looks like a move off the 10-day line on strong volume. However, today’s volume bar on the daily chart, below, is exaggerated by the after-hours volume in the stock, so was not due to a proper pocket pivot. However, should the stock hold the 10-day moving average at around 98.30 tomorrow and rally up and off of the line on strong volume, we could see a continuation pocket pivot. After-hours I can’t make a solid determination, so we will just have to see how it opens up and acts tomorrow.

 

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Tableau Software (DATA) is also running into resistance at its $100 century mark level, but the fact is that the stock has already had a nice run since its buyable gap-up move of early February so I figure its entitled to back-and-fill a little bit here, using the $100 level as an excuse to “sell at the figure,” which can be considered a “psychological” level, at least until the stock moves through it. There is an old adage of certain “round” numbers being psychological resistance levels, and perhaps that is why Livermore’s Century Mark Rule works the way it does, since the crowd might think that the century mark level represents a selling point.

Thus once the stock decisively pierces said big, round century mark level the crowd is fooled, and shorts might be scrambling to cover as others who sold their position scramble to buy back shares. DATA may simply need some time to work tight sideways along the 10-day moving average which is down closer to the 97 price level before flashing a secondary buy point such as a continuation pocket pivot along the 10-day line. DATA pulled down into the 10-day line today on above-average selling volume, as we can see on the daily chart, below. I would prefer to see the stock pulling back on lighter volume, but the bottom line is that we are simply waiting to see if and when DATA flashes a secondary buy point.

 

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Michael Kors Holdings (KORS) is in a similar position to DATA in that it has had a nice upside move since its own buyable gap-up move from early February and is now holding tight along the 10-day moving average, as we can see on its daily chart, below. Nothing abnormal going on here, but a continuation pocket pivot is something to watch for in KORS as well. I should also point out that Yelp (YELP), not shown, is another stock acting in similar fashion to KORS and DATA following its own recent buyable gap-up following earnings in early January. Taking in summation, all of these stocks are something of a “BGU Wolf pack!”

 

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Global Eagle Entertainment (ENT) also continues to move higher following last week’s pocket pivot and the subsequent breakout to new highs last Friday on above-average volume, as we can see on the daily chart, below. Earnings are expected sometime in mid-March, and the stock continues to act well as it pushed to an all-time high today on a 38% increase in volume over average.

 

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Organovo Holdings (ONVO) continues to track along its 10-day and 50-day moving average confluence, as we can see on the daily chart, below. I wrote over the weekend that I would look to be buying this thing within 2-3% of the 50-day line, currently at 9.88. Yesterday the stock pulled down to 10.02 on an intraday basis which brought it to within 1-2% of its 50-day line. So far there is nothing decisive going on with the stock, but my general view is that the stock is simply working sideways here and working off some of the overhead that exists between here and the $12 price level. Pending some sort of pocket pivot action that might occur here along the 50-day line, my method of buying shares on ONVO remains the idea of buying into pullbacks that approach and get close to the 50-day moving average.

 

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iRobot (IRBT) flashed a quick pullback to the 10-day moving average this morning, where it found some support before attempting to bounce off the line, as we see in the daily chart, below. The action remains somewhat indecisive which is normal given the sharp move up thru the $35 price level over the past 2-3 weeks. As the stock tracks sideways here I’m looking for some sort of volume dry-up along either the 10-day or 20-day moving averages, the magenta and green lines, respectively, on the chart, or, alternatively, a continuation pocket pivot off the 10-day line as it has now managed to catch up to the price. Today’s action saw volume continue to dry up, but the stock couldn’t hold a rally earlier in the day and closed near the lows of the daily range. This is probably going to spend a little more time setting up here, and remains one to keep an eye on.

 

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Pharmacyclics (PCYC), while volatile, is holding within range of last Friday’s buyable gap-up move, as we can see on its daily chart, below. The intraday low of that BGU day was 148, and the stock closed at 146.19, a little over 1% below that low. Even if PCYC filled its buyable gap-up move and traded down to about 143 it would still be roughly within the range of allowable “porosity” of 2-3% below the 148 BGU intraday low. I’m watching this to see how it continues to act as the pullback seems normal for a stock of PCYC’s volatile nature and is also occurring as volume dries up. This may become quite buyable on this pullback, using the 143 price level as a selling guide.

 

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SolarCity (SCTY) came out with earnings on Monday after the close, sort of, as they released some numbers regarding installations and then delayed the rest of their earnings report until next Monday. Apparently the limited information that they did release was good enough, and the stock broke out to new highs yesterday on very strong, above-average volume, as we can see on the daily chart, below. If one bought yesterday’s move then they are now faced with playing “earnings roulette” next week when the company releases the rest of its truncated earnings report. If the stock keeps moving as it has over the past two days, then it may have plenty of upside cushion built in before it announces earnings next week.

On Monday after the close I Tweeted to members that the stock was holding the 20-day exponential moving average down below 64 on the initial sell-off reaction to Monday’s after-hours “now you see it, now you don’t” earnings report. Canadian Solar (CSIQ), shown further below, also made a strong move up towards the highs of its recent base on what turned out to be an above-average volume trendline breakout. This could also be considered a low-range pocket pivot breakout as well since the stock was slightly extended from the 10-day moving average.

 

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Sunpower (SPWR) remains in a buyable position as it pulls into its 10-day moving average on above-average volume, as we can see on its daily chart. While today was a down day for the stock on above-average volume, it did manage to bounce off the 10-day moving average which is slightly constructive. Given the sharp move up off the lows of early February, including the pocket pivot buy point of nine days ago on the chart, SPWR is entitled to back-and-fill a little bit here as it digests that move and tries to set up along the highs of its current four-month base. I would continue to use any pullbacks down towards the 33 price level as buying opportunities given the strength in the other leading names in the group.

 

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Zulily (ZU) is the latest of the hot, “new merchandise” buyable gap-ups to enter the fray, as we can see on its daily chart, below. The gap-up move was an insane 36% launch to the upside that closed well-extended from the intraday low down at 51.08. ZU is a unique e-commerce site that targets the Moms of the world with so-called “flash sales” on a massive range of products. The term “flash sale” refers to a sale of very limited duration, perhaps lasting only up to 72 hours before the sale item is no longer available. Prior to yesterday’s buyable gap-up following a very strong earnings announcement of 233% earnings growth on a hard number of 10 cents a share along with a 100% sales growth number on $257 million in sales, ZU was working on a nine-week double-bottom base, as I’ve outlined on the chart, below. With ZU being far extended from the 51.08 BGU intraday low, we will have to keep tabs on the stock and look for a short flag of at least a few days to form that might offer a decent entry point following what was a massive-volume, buyable gap-up yesterday. The huge strength on the gap-up breakout from a first-stage IPO base tells me that ZU is a serious contender, and so it behooves us to find a secondary entry point as the stock consolidates this latest BGU.

 

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Cree (CREE) showed a little strength on the upside as it fought off all of my red indicators to flash a bottom-fishing pocket pivot today as it came up and off of the 50-day moving average and up through the 200-day moving, as we can see on the daily chart, below. Despite messing with my mind and looking rather feeble over the weekend, as I discussed in my weekend report, the action in CREE has to be looked at as a fluid situation, and today’s bottom-fishing pocket pivot puts the stock in an entirely different light. I’ve theorized that CREE could be a decent “ugly duckling” play as it tries to round out the lows of a possible new base, and today’s pocket pivot helps to put some weight behind that theory. While the stock did clear the 200-day line, I would consider it buyable as long as it can hold the 50-day line at 61.31 on any pullback from here. It may need more time to gather some upside momentum, and today’s action may be the first clue of a potential comeback move by what is the leading name in LED-lighting.

 

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Providing a nice example of extreme intraday volatility is Taser International (TASR), which came out and beat earnings estimates this morning before the open, sending the stock up on what appeared to be about a 10% upside gap move to the $20 price level at the open. TASR immediately ran into trouble and sold off down into the 10-day moving average, as we see on the daily chart below. Opportunistic, if not gutsy, buyers stepped in at the 10-day line and helped the stock close just below mid-range on the day. Throughout all the volatility, TASR still managed to end the day at 18.93, nearly unchanged on the day and just above the top of its prior base. I liked the stock when it was trading tight along the 50-day moving average back at around 17, as I wrote in my report of February 16th. If TASR can continue to hold the top of its prior base it may be actionable right here with the idea that it will continue to hold the 10-day line on any further pullbacks.

 

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As the indexes run out of upside steam most of the individual stock set-ups I’ve been trading have done quite well. As long as I can continue to find set-ups that are profitable on the upside (or even the downside, for that matter), what the indexes do is less of a concern to me. The opportunities are there when they are there, and one simply has to pull the trigger. Meanwhile I remain vigilant for new set-ups as they emerge, and hopefully can keep members apprised of these before they start to move, as we have done recently with a number of stocks, including most recently TSLA, FEYE, and ENT, for example. Make certain that you stay tuned.

On an administrative note, members can listen to the audio of my interview with Benzinga.com from yesterday before the open at: http://is.gd/Fou0ex.

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 CREE, ENT, 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. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.