The Gilmo Report

February 9, 2014

February 8, 2014


After undercutting their December and November lows, respectively, the NASDAQ Composite Index and the S&P 500 Index, both shown below on daily charts, have now gone into undercut & rally mode, emphasis on the word “rally” as the NASDAQ put in what I see as a possible fourth-day follow-through on Friday. Volume was higher than Thursday’s while the NASDAQ logged a 1.69% gain on the day, which I believe more than satisfies whatever percentage threshold anyone has decided to use to define a follow-through day, but given that other sources have not called a similar follow-through, my call here is likely to be controversial in this regard. Pre-open, a weak Bureau of Labor Statistics jobs number that showed a paltry 113,000 new jobs vs. estimates of 175,000 gave the market something to chew on as it couldn’t make up its mind whether it wants a growing economy or more QE. Futures, which had been up about 22 points on the NASDAQ before the release of the jobs number, quickly plummeted to about -7 and change before turning back to the upside and getting to somewhere around +25 by the opening bell, setting off Friday’s rally from the get-go. So after the initial ordeal of making up its mind about economic growth vs. more QE, the market seems to like the idea of sustainable QE.




Friday’s volume was also lightly higher on the NYSE, but the S&P 500 was up only 1.33%, which most will say is not sufficient for a follow-through, assuming one is interpreting Friday’s action as the fourth day of a rally attempt. My view, and this is one that has helped me call bottoms in market pullbacks back in my reports of November 10th and September 4th before others were engaging in “observations of the obvious” once the uptrend’s resumption became clear, is that one should treat the market as a market of stocks and less as a stock market. If there are leading stocks issuing bona fide buy points, and this action begins to spread and broaden, you may be seeing the first signs of a possible market turn.




The tricky aspect of this follow-through is that one could argue that Friday was only the second day of a rally attempt. But if you study the charts of both the NASDAQ and the S&P 500 closely you will notice that the market attempted to rally on Tuesday, and then after briefly undercutting the Monday lows on Wednesday closed near the peak of the daily trading range. Thus, in a sense, both Tuesday and Wednesday were rally-attempt days, and therefore one could argue that Friday was the fourth day of a rally attempt. In the end, however, it’s all just so much semantics as I see it. Last weekend I wrote that it makes more sense to watch the stocks, since leading and newly-emerging leading stocks will tell you what’s going on well before the indexes will. In my view, if one bases their decision-making on what the indexes are doing, then all one is doing is allowing themselves to be led around by the nose as the indexes zip back and forth.

Clearly, some leading stocks have experienced severe pain as they fall by the wayside, such as (AMZN) and Three-D Systems (DDD). But every time the market has pulled back over the past year there have been a number of leaders that don’t make it out of the fire and so go up in flames as the market rotates into a different set of leaders that will also include a decent handful of sustaining leaders as well. The key, just as it was in 2013, is to make sure you are identifying the right stocks to be in, and of course that is what this report is all about in the first place.

Before I go into my discussion of individual stocks, I would like to take a quick detour and look at gold as represented by the SPDR Gold Shares (GLD), shown on a daily chart, below. While it isn’t going anywhere, the GLD continues to track sideways and has regained its 10-day moving average over the past week. While many might fantasize about an orderly exit from QE by the Fed, my view is that the economy and the financial system have become so addicted to their QE fix that there is no “soft landing” that can be executed. Thus while the Fed may be tapering their monthly bond purchases, they expect to keep interest rates low which they must do in order to facilitate the government’s continual need to raise the debt limit and get further and further into debt in order to meet its obligations as our free-spending politicians like to invoke.

In the short-term, I have considered the recent movement in gold to be primarily related to the global currency crisis of the past few weeks, but longer-term I would still be interested to see whether gold can get above the $1300 price level which might indicate a final bottom in the yellow metal and the necessary continuation of QE indefinitely as we become like Japan since the 1980’s.

As you can see in the GLD’s daily chart, below, all the indicators at the top of the chart are turning blue, or as I like to say (drawing from my two-day hospital stay in August 2013) have gone to “Code Blue.” While “Code Blue” in medical parlance is not a good thing, indicating that a patient is undergoing a potentially life-threatening situation, when it comes to the market it is a positive development. While I have to admit I am not an active participant in the GLD currently, I do still own a substantial position in the precious metals that was purchased back in Year 2000 near the lows when gold was trading under $300-an-ounce, so I am quite interested to see whether the yellow metal’s recent action will lead to a breakout through the $1300-an-ounce level.




In my Wednesday report earlier this past week I discussed my short list of buy ideas that I was keeping in my back pocket just in case the market decided to turn. The list included Facebook (FB), Netflix (NFLX) Harman International (HAR), Michael Kors Holdings (KORS), UnderArmour (UA), and Tableau Software (DATA). We can cycle through the daily charts of each of these names, starting with FB, to see how they’ve fared as the market plumbed new lows earlier this week.


Facebook (FB) has had to contend with two bad earnings reports from two other social-networking favorites, LinkedIn (LNKD) and Twitter (TWTR), but the stock has remained unflappable in the face of group weakness as it held tight in a short five-day flag that formed after its buyable gap-up of last week, as we can see on its daily chart, below. Friday’s move saw FB break out of this small flag formation on increased, albeit just below-average, volume, but a new high is a new high, and FB has done this in the face of a sharp market correction over the past two weeks. It remains a big-stock leader.




Netflix (NFLX) is another big-stock leader as it also spent the week moving tight sideways with volume drying up. Once the market decided to turn back to the upside in earnest on Friday, the stock promptly broke out of the short seven-day flag formation it had formed following its buyable gap-up move of over two weeks ago, as we can see on the daily chart, below. As I have written in previous reports recently, NFLX has been able to hold the $400 price level without ever getting as much as half a percent below 400 throughout the market’s correction over the past couple of weeks. On Thursday, NFLX met up with its 10-day moving average with volume drying up which looked like a good spot to take a position in the stock given that the market looked like it was at least going to make an earnest attempt at a sharp reaction bounce on an undercut & rally move. The next day, Friday, NFLX launched higher in a 5.4% move and flag breakout that looks to me like it wants to go higher. The place to buy the stock, however, was near the 400 level on the basis of the Livermore Century Mark Rule, which I have discussed several times in recent reports once NFLX reached its 4th century mark price level.




Michael Kors Holdings (KORS) also gave investors a couple of chances to buy the stock near the 89.22 intra-day low of Tuesday’s before making new all-time highs on Friday, as we can see on the daily chart below. KORS is moving higher on light volume, but from here all you are doing is operating with a stop at the intra-day low of Tuesday’s buyable gap-up move at 89.22 plus 2-3% on the downside to allow for some volatility. Personally, while I looked at taking a position on Wednesday’s pullback, I decide doing so would just lead to nightmares of KORS announcing yet another secondary stock offering that would send the stock careening 10% to the downside. With other options available in terms of buyable stocks, I decided to test other waters, although one cannot fault the action of KORS since this past Tuesday’s buyable gap-up move. KORS is also a great illustration of how things can change very quickly given that it was starting to look like a late-stage failed-base short-sale set-up, even as late as the day before earnings on Monday when it moved to a lower low on above-average volume.




UnderArmour (UA) also held tight in a four-day flag before moving to a new high Friday on above-average volume that also showed an increase from Thursday’s above-average volume. This is extended from the BGU (buyable gap-up) at this point, but is acting just fine and illustrates that what acts well in the face of a market correction is likely to act even better once the market begins a rally attempt.




Harman International (HAR) is holding tight in a six-day flag that it has formed after last week’s buyable gap-up move following earnings. Volume is drying up here as the 10-day moving average starts to catch up to the stock. HAR is best known for making audio equipment, but they are also a key player in the areas of “safety, cyber-security, and rapid app development for in-car systems,” according to their CEO Dinesh Paliwal. HAR came in with big 86% earnings growth last week and is also seeing what is now a four-quarter acceleration in earnings growth from -6% to -3% to 8%, 17%, and now 26% in the most recent quarter. If you look at a weekly chart of HAR, not shown, you will notice that it also closed tight with last week’s close and has the look of a so-called short stroke pattern although volume remained above average as the stock found support along the weekly lows. The stock may continue to hold tight here as it moves sideways, but I would look at any pullback below 100 as potentially buyable within the flag.




Tableau Software (DATA), the last name on my short list of buy ideas, was also potentially buyable on the two-day pullback following Tuesday’s buyable gap-up move, which I had discussed in my report of this past Wednesday. DATA got as low as 86.90 on Friday, but this was well within 2-3% of the 89 intra-day low of Wednesday’s buyable gap-up move. DATA is interesting to me primarily because this week’s buyable gap-up is coming out of at most a second-stage base, but given the length of the base at 21 weeks I look at it as more of a first-stage base. It also has a broad base of quality institutional sponsorship with 17 A- or higher-rated mutual funds adding to their positions and 18 A- or higher-rated funds taking initial positions in the stock during the quarter ended in December 2013.

DATA strikes me as a dynamic “cloud” company similar to Workday (WDAY), and being a smaller cloud concern it will display similar volatility. Despite the pullback following Wednesday’s BGU I still see the action as constructive. This is based on the fact that the stock endured some above-average volume selling on Thursday and then again early in the day on Friday before seeing a pocket pivot volume signature develop as the stock moved back above the 89 intra-day low of the buyable gap-up day. This looks fine to me, and I would be using a stop at 3% below the 89 price level which would give you an 86.33 stop-out level for those of you who like precision.




Speaking of Workday (WDAY), we can see on its daily chart below that the stock has been able to hold up at the 20-day exponential moving average, the green moving average on the chart, and then make a move back up towards its highs. WDAY pulled back to test the top of its prior base last week, and another pullback that occurred while the general market got whacked this past Monday held above that and closed right at the 20-day line. Like most leaders that have broken out just prior to a market pullback or correction, all that happens is that it pulls back with the market, but right back to the top of its prior base. This is typical action for a leading stock of this nature. I still like the stock on pullbacks to the 20-day line from here, but keep in mind that the company is expected to announce earnings in early March, so earnings roulette still lies ahead of the stock.




Tesla Motors (TSLA) is third of three out of four resurgent “Four Horsemen” that keeps showing strength as it approaches its earnings announcement in less than two weeks from now. Friday saw the stock flash a pocket pivot buy point as it forms a second handle in its big cup formation. Obviously, one has to decide whether one would want to play earnings roulette going into earnings, but TSLA has been quite resilient as it has pushed to within 4% of its all-time high. With three of the Four Horsemen acting well again, is this telling us something about the market that may not be obvious in the index action? I have to admit that throughout the past two weeks as the general market has been whacked on the downside I’ve marveled at the fact that FB, NFLX, and TSLA continue to act just fine. Again, the stocks might be telling you what you need to know before the market does.




Yelp (YELP), a name I’ve discussed in previous reports as it was issuing pocket pivots within its base back in December, is another post-earnings buyable gap-up as it came flying out to new highs on Thursday following its Wednesday after-hours earnings report. Surprisingly, YELP simply met earnings expectations, but this was enough to send the stock higher. It is extended from the intra-day low of Thursday’s BGU day at 82.38. One can watch to see if the stock forms a flag here over the next few days and issues a second opportunity to buy into a tight formation with volume drying up or whether it gives the 10-day moving average some time to catch up to the price and then flash a secondary buy point in the form of a continuation pocket pivot.




While we’ve seen solar names like First Solar (FSLR) and Sunpower (SPWR) fall by the wayside, Canadian Solar (CSIQ) and SolarCity (SCTY) continue to hold their recent breakouts and track sideways despite the market correction over the past two weeks. CSIQ, shown below on a daily chart, actually flashed a pocket pivot buy point off of its 50-day moving average this past Wednesday as it pulled back to the top of its prior base. CSIQ is expected to announce earnings in the first week of March and appears to be biding its time leading up to the announcement.




SolarCity (SCTY) is also holding up just fine during the market’s correction over the past two weeks, although it has pulled back with the market to test the top of its prior base, as we can see on its daily chart, below. As I discussed previously with WDAY and which is also evident with CSIQ, leading stocks that pull back to the tops of the prior base breakouts during a market correction are acting normally and constructively, and so far SCTY is doing exactly this. Of course, earnings are expected to be announced on February 24th, so the stock may simply bide its time until then. However, any of these leading stocks that act constructively as WDAY, CSIQ and SCTY have over the past two weeks during the market correction should remain on your buy watch list.




Retailmenot (SALE) is an interesting piece of “new merchandise” that I think bears looking at here. As we can see on the daily chart, below, SALE came barreling out of a 19-week cup base on Thursday with a big-volume buyable gap-up move using the intra-day low of 36.45 plus 2-3% on the downside as your selling guide. Although SALE closed near the lows of the trading range on Thursday, it recovered strongly on more than three times average volume on Friday to come within 42 cents of its all-time closing high on the left side of the cup base. SALE showed a big 73% jump in earnings growth on a hard number of 26 cents a share in the most recent quarter and gapped up on the announcement on Thursday.

In my view the stock is buyable on any pullbacks that approach the 36.45 price level, although to be more precise I would see any pullback below 38 as buyable since that would be within 5% of the 36.55 BGU intra-day low. The stock could form a handle here since it has not technically broken out to new highs and through the left-side peak of the cup, but I don’t think one has to wait for an obvious breakout to buy the stock. If it does form a handle in the 36-39 price area I would use pullbacks to buy shares. While many are familiar with coupon website Groupon (GRPN), SALE is in fact the largest online coupon site in the world with about three to six times the number of unique visitors as most of its competitors. The coupon industry, as it is called, is expected to be the fastest growing area of e-commerce, as coupons move to the mobile commerce arena where they can be stored on smartphones and tablets. According to market research firm International Data Corp., the number of mobile online shoppers in the U.S. is estimated to grow from 52 million to 189 million in 2017, so SALE would appear to be in a sweet spot with their business model.




LinkedIn (LNKD) faked everyone out by flashing a big pocket-pivot buy point on Thursday before it was to announce earnings after the close. Given that I prefer to avoid playing earnings roulette on either side, I was not one to take the bait, and was happy that I didn’t since LNKD got nailed after announcing a weak number. Of course, with the stock now selling at “only” 120 times forward estimates while sporting “blistering” earnings growth of 11% in this most recent quarter with even more blistering growth of 2% expected for the next quarter, LNKD was able to trade off its lows and finish roughly mid-range, as we can see on the daily chart. In my view, the general market’s rush to the upside is what helped buoy LNKD, and it may continue to do so. LNKD traded the largest amount of downside volume in its pattern since May of last year, but was able to hold the $200 price level, so from a technical standpoint the stock hasn’t broken down completely.

It would be ironic if LNKD were somehow able, despite weak earnings growth, to make a comeback and complete the total resurrection of all of the Four Horsemen that includes FB, NFLX, and TSLA. If the market were to go into a deeper correction from here, however, LNKD would remain a primary short-sale target until and unless it showed more concrete technical strength.




Last weekend I discussed the fact that I didn’t think one was going to make a ton of money on the short side, and so as I discussed in my report of this past Wednesday, my previously favorite short-sale target, Cree (CREE), was coverable along Wednesday’s lows. The stock is now rallying up towards the 50-day moving average, and I would simply keep it on my short-sale target list as a rally up to the 50-day line, currently at 60.43, that fails might occur in sync with a market rally failure, if that were to occur. Short-selling gets put on the back-burner here until and unless the market rally fails, but CREE and LNKD, along with Align Technology (ALGN) remain on my short-sale watch list for now.




The tone of the market, at least under the surface, appears to show some improvement, and one notable characteristic of the action over the past couple of weeks has been the broadening number of buyable gap-up moves coming in stocks from DATA to YELP to Chipotle Mexican Grill (CMG) to Green Mountain Coffee (GMCR) and everything in-between. Even CMG and GMCR, which I do not show here on charts, represent clear buyable gap-up moves that have held within 3% of the intra-day lows of their respective BGUs. CMG has held tight over the past five days while GMCR just gapped up on Thursday, but has held within close range of its 99.57 BGU intra-day low.

I would say that, in general, members should be on the lookout for buyable gap-ups occurring during earnings roulette season, because many of these are actionable. I try to discuss them when I see them in each report, but often these occur in between reports and I don’t have a chance to catch them as they are occurring in most cases. Thus members should review the rules for buyable gap-ups and be prepared to exercise their own judgment in assessing whether any single BGU is a buyable situation, because many are, and many have been. If the general market were in an overall topping phase I would not expect to see such broadly constructive action among leading and newly-emerging leading stocks.

Was Friday a follow-through day? While I have to admit I might spark some controversy by explaining my interpretation of the action as I did at the outset of this report, the bottom line is that the market doesn’t know what a follow-through day is, and whether Wednesday’s brief, utterly miniscule undercut of the Monday lows is something the market pays strict attention to as something that negates the rally attempt and restarts the count of rally days off the lows is fairly moot to me. Just show me the stocks to buy, and I’ll buy them, because I don’t need to buy them all, I only need to buy the right ones. The truth is that if one has owned names like FB and NFLX throughout this current market correction, you haven’t experienced a “smidgen” of pain.

If the current market rally attempt off the lows fails, then it is a simple matter to jettison initial positions and move back into a defensive cash position. But so far the market is following its pattern of correcting 5-7% off the peak and then turning back to the upside, usually for several days before the rally resumption becomes obvious to those who need the security blanket of a follow-through day. I say: just watch the stocks.


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 and NFLX, 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.