The Gilmo Report

January 12, 2014

January 11, 2014

A weak jobs number on Friday looked like it was going to derail the market early in the day, but by the close the NASDAQ Composite, the S&P 500, and the Russell 2000 Indexes all closed near the top of their ranges. As we see on the daily chart of the NASDAQ, below, it again led the pack as it closed at the peak of its range on above-average volume. Meanwhile, the Dow Jones Industrials, not shown, lags the other major indexes, but given that it is an index of 30 slow, big-cap and mostly older, established names its underperformance is likely just a sign of rotation into so-called “risk-on” names. Meanwhile the NASDAQ continues to truck higher as it gets ever closer to its March 2000 closing high of 5048.62, which is currently a mere 20.9% away from Friday’s 4174.66 close. Meanwhile, NASDAQ breadth, as measured by its advance/decline line, not shown, broke out to a new high this week.

 

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And as the Dow flounders, indicating, as I see it, movement out of these bigger, “safer” names, the daily chart of the Russell 2000 Index, below, reveals that the small-cap index closed at its peak on Friday and at a new closing high. So while some might want to fret over the extremely bullish sentiment, the “extended” nature of the market’s rally over the past four years plus, or an economy that may not necessarily be firing on all cylinders, it is still a matter of watching the stocks and focusing on individual stock set-ups. This has been well illustrated by the names I’ve been discussing in recent reports. So the trend remains to the upside, and investors are simply left to the task of finding the right vehicles with which to ride the trend.

 

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Most of the leaders I’ve discussed in recent reports, particularly right around New Year’s Day, are well-extended by this point, and so it is a matter of waiting for pullbacks that might provide a reasonable entry point if one is not already participating. Among the Chinese internets, YY, Inc. (YY), shown below on a daily chart, remains the strongest with a  nearly 25% romp in just seven days following the subtle pocket pivot I first discussed in my report of December 29th. From here I would watch for pullbacks to the 10-day moving average, currently in the 56-57 price area, for possible secondary buy points to emerge, most likely a continuation pocket pivot.

 

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Sina Corp. (SINA) is not showing the same kind of upside thrust to new highs that YY is, and is lagging somewhat as it pulls back down to its 10-day moving average following an attempt at new highs earlier in the week, as we see in the daily chart, below. Unlike YY, SINA has not cleared the top of its base after flashing a pocket pivot down at the 50-day moving average within the base, so it is clearly a slower stock. The stock managed to close within the 85-86 price area, which I discussed as a potential area of support in my last discussion of the stock, but with earnings coming up in mid-February, as I’ve highlighted in the chart, it remains to be seen whether SINA can conjure up a move like YY’s. YY is the leader, end of story.

 

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Qihoo 360 Technology (QIHU) illustrates why I prefer to anticipate moves in stocks by looking for pocket pivots and/or tight price areas within bases rather than reacting to strength. QIHU posted a huge-volume buyable gap-up move on Wednesday, on reports that leading Chinese internet company Alibaba had taken a stake in the company. On Thursday QIHU denied these reports and the stock dropped right back to where it started within its base and along the 65-day exponential moving average, the black moving average on the chart. As I discussed in my Wednesday report, I was looking at the stock on Tuesday night and had put it on my buy watch list given the extremely tight action within the base as it was tracking along the 65-day line, but never had a chance to get on board prior to those price levels since the stock gapped up on Wednesday. Now the stock has come right back to where it started with volume drying up on Friday, so I’m watching to see whether it can find support here and make another attempt at a pocket pivot move off the 65-day line and potentially up through the 50-day moving average. QIHU is still showing triple-digit earnings growth on accelerating triple-digit sales growth and may remain viable as a leader in this market if it can manage to come out of its current 12-week base. QIHU is not expected to announce earnings until early March.

 

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Among the solar stocks Canadian Solar (CSIQ) remains the strongest of the group, but it remains quite extended from its recent pocket pivot burst off of the 10-day and 20-day moving average confluence and the 30 price level. So far CSIQ remains in a three-day little flag on the daily chart, below, as it consolidates its recent breakout, and at this stage what you want to watch for is a pullback to the 10-day moving average or, conversely, the 10-day line catching up to the price, which may then set up a possible continuation pocket pivot. CSIQ is expected to announce earnings in early March.

 

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Splunk (SPLK) is another good example of why anticipation is better than reaction in this market, as its buyable gap-up move of Tuesday failed on Friday when the stock broke down to its 10-day moving average. Buying the BGU on Tuesday would have put you underwater as the stock got as low as 71.52 intra-day on Friday. However, as we can see on the daily chart, the Ugly Duckling Theory was in force here as despite the stock moving below the 73 intra-day low of Tuesday’s gap-up move it managed to find support at the 10-day line and issue a pocket pivot buy point on Friday. Obviously, buying the initial pocket pivots within the base, in particular last week’s pocket pivot trendline breakout coming up through the 70 price level, were the best entry points. But if one had bought the BGU and allowed 2-3% below the 83 intra-day low of the BGU day for their stop they would still be in SPLK even after the pullback to the 10-day line. In general I think the pattern looks constructive here, and my guess is that SPLK will try and move higher this week. Earnings are expected to be out in late February, so there is no risk of having to play “earnings roulette,” at least in the short term. SPLK is expected to post its biggest profit ever at 5 cents a share representing growth of 67% over the same quarter last year.

 

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Yelp (YELP) continues to power higher despite the fact that the blogosphere seems to be going nuts with articles and comments about how ridiculously overvalued the stock is. Somebody has not realized the essential truth that stocks don’t read blogs, so YELP apparently has no idea that it is ridiculously overvalued and just keeps going higher following several quiet pocket pivot buy points that it issued within its base back in December and as I reported at that time. At this stage, and as is the case with several of these leading stocks we first identified as buyable within their bases, such as YY and Workday (WDAY), not shown, and which have launched higher since, one is simply waiting for the 10-day moving average to catch up to the stock and then looking for a continuation buy point, most likely in the form of a pocket pivot, to show up.

 

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Global Eagle Entertainment (ENT) remains a top pick of mine as it is still within buyable range of what is essentially a high, tight flag breakout on Wednesday, as I first discussed in my report of that day. Thursday the stock moved to new highs before reversing and pulling in a bit on that day and Friday morning, but in my view this was normal action as volume dropped a bit. I would expect a little overhead supply from the left side of the pattern to come into play as EN moved up to the 16 price level and above, but on Friday it shrugged off any early selling to close at its peak and a new all-time high.

 

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In my view ENT likely goes higher, and the weekly chart, shown below, confirms that the stock staged a nice, clean flag breakout this past week on the heaviest weekly volume in its pattern so far. Whether you want to call this a “high, tight” flag or not is up to you based on your need to slap labels on chart patterns. But for me the critical buy point occurred on Monday of this past week when the stock pocket-pivoted up through the 10-day moving average on the daily chart which coincided with a bounce off the 10-week moving average on the weekly chart. This helps to illustrate a key concept in so-called “bottom-fishing” pocket pivots since in a sense Monday’s pocket pivot was something of a bottom-fishing move as it came off the lows of the flag pattern.

When I see something like this on the daily chart coincide with a stock’s pullback to the 10-week line on the weekly chart, especially if it is the first pullback to the 10-week line since a prior first-stage breakout, I will often go in big. Not that this happens very often, but when it does, I admit to a sort of Pavlovian salivation response as I eagerly buy up shares on the initial buy signal. ENT is expected to announce earnings in mid-March, and remains within buyable range right here, although I’d like to think members used Friday’s pullback as an opportunity to take shares based on the fact that it was well within range of Wednesday’s flag breakout.

 

GR011214-ENTWeekly

 

In my report of this past Wednesday I showed charts of several airline stocks, making the case for a mass group phenomenon that includes companies that provide services to the airlines such as ENT, and one that I did not show was United Continental Holdings (UAL), shown below on a daily chart. UAL had two pocket pivots in its pattern leading up to Thursday’s buyable gap-up move that came on massive volume. UAL closed at the lows of the daily range on Thursday, but held those lows on Friday as it moved higher on well above-average volume. You may not believe it, but at one point way back in the 1960’s airline stocks were as hot of the dotcoms of the 1990’s.

Today we don’t think much of the airlines as they generally represent bigger, slower, more established companies in an industry that is more known for its problems than its successes. But a number of these might be considered turnaround situations, including the names I discussed in my January 8th report. Investor’s Business Daily followed my lead by publishing a comprehensive overview of the airline industry and its component stocks in this weekend’s edition of the paper after I was picking pocket pivots in a number of names in the group. My view is that the group represents a group turnaround situation as most of these airline names are looking to show strong growth in the next quarter. UAL, for example, is looking for a 175% increase when it announces earnings in late January. American Airlines (AAL) is looking for 85% growth, Delta Airlines (DAL) 125%, and Southwest Airlines (LUV) 211%. LUV’s strong forward estimates also come on the heels of 162% earnings growth in the most recently reported quarter.

All of these stocks had gap-up moves on Thursday, with UAL’s coming on the biggest volume increase, as the daily chart below shows. All are expected to report earnings towards the end of January as they have all been showing strong technical action in recent days.  The Transportation – Airline group is now ranked #42, and while we might downplay their significance as growth stocks, it is clear that something is going on here. Thus, if one were so inclined, UAL’s buyable gap-up can be considered just that, buyable, using the 43.71 intra-day low of Thursday’s BGU as a stop.

 

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Organovo Holdings (ONVO) continues to take heat from blog writers who consider themselves to be graduates of the University of I-am-Smarter-than-the-Market, but it doesn’t seem like they can do much to knock it down through its 10-day moving average, which keeps rising along with the stock price, as we can see on the daily chart, below. More negative babble was making the rounds in the blogosphere on Friday, and the stock dipped below the 11 price level initially but turned to move back into positive territory and match it highest daily close since November 14th, when it was in the middle of a huge upside streak.

To me it looks like the stock is set up for a trendline breakout, and I’ve taken the liberty of drawing said trendline on the chart. Maybe it goes sideways here a little longer, maybe it doesn’t, but with a number of no-earnings bio-techs moving over the past few days, I’m thinking ONVO has a shot at a breakout soon enough. I still marvel how blog-writers keep babbling about how the stock doesn’t have earnings and its products are still in development and its mother wears army boots as if they are the only ones who know this. For me, price/volume action rules all, and as long as the stock refuses to break down in the face of massive criticism the next big move might just be to the upside. Again, I see the stock as buyable on constructive pullbacks to the 10-day line.

 

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Finisar (FNSR) announced after the close on Wednesday that they are buying a small fiber-optic company, u2t Photonics AG, for $20 million in cash, and this led to a reversal that took the stock down below its 10-day moving average on an intra-day basis on Friday, as we can see on the daily chart, below. FNSR was able to rally by day’s end and closed positive as it held above the 10-day line. You have to consider that FNSR has rallied over 20% off of its lows so far over the past month or so, and as it approaches the former 52-week highs on the left side of the pattern it is going to run into some selling. My view is that it is simply taking its time working through this, and we’ve seen three pullbacks to the 10-day line over the past seven days on the chart, with the heaviest volume pullback occurring on Thursday. On balance, upside volume has been stronger over the past few days, and this is reflected by the strong band of blue shown in the 13 DEMA Force Index bar along the top of the chart.

Back in November FNSR failed on a prior breakout after Cisco Systems (CSCO), seen as a bellwether for the fiber-optic group, announced weak earnings growth. But the fact that the stock has been able to work its way back up the right side of a potential new base on strong upside volume figures speaks in its favor. CSCO is expected to announce earnings on February 12th while FNSR is expected to announce on March 6th. For those of you who notice the two gray vertical bands on the chart around the November lows I will tell you now, before the email questions start coming in, that they show up whenever a stock meets certain “oversold” conditions and are another indicator I use as part of my Ugly Duckling Theory.

 

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Taser International (TASR) paused for one day as it consolidated Wednesday’s buyable gap-up move straight up from the lows of the base before breaking out on Friday, as we can see on the daily chart. Thursday’s small pullback was well-contained and offered a coherent entry point on the basis of Wednesday’s BGU. With Friday’s breakout coming on well above-average volume, the stock is showing some spunk here and I think this breakout can also be bought using the standard 6-7% stop for standard-issue base breakouts. TASR pretty much doubled from its original mid-August breakout down around the $9 price level up to its $18.52 peak in late October before spending the next ten weeks consolidating those gains, so it looks to me like this current base provides a decent launching pad for another leg up.

 

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Twitter (TWTR) is looking very much like the ugly duckling as it continues lower after undercutting the prior 58.57 low from late December, as we see on the daily chart, below. Analysts, most of whom in their prescience never told us to buy the stock when it was trading at around $44 and forming the right side of a classic “IPO U-Turn” flag formation before it ran up to a high of 74.73, are now hitting the stock with sell ratings and price targets, the most recent of which “values” the stock at $32 a share. Where were these geniuses when the stock was at $44 in December? Heck, if they had bestowed their valuation wisdom upon us at that time we would have known that the stock is really worth $32 and we could have saved ourselves the trouble of buying it at 44-45 and then watching it rocket over $74 in a little more than two weeks!

In any case, with the analysts piling in here I’m beginning to think we’re getting near the lows of a potential new base for TWTR somewhere in here, and the stock did hold tight on Friday as selling volume diminished a bit. I’m watching for some sort of shakeout-plus-three situation here if the stock is able to gather some momentum and push up through the prior 58.57 low from December as I show on the chart. TWTR is expected to announce earnings on February 5th. We’ll keep watching and waiting.

 

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Facebook (FB) is still holding up near its highs as it held the 20-day moving average on its recent pullback to the top of the prior cup base. As we can see on the daily chart, below, the stock is forming a mini-cup-with-handle as it holds up tight and above its 10-day moving average. The next buy point in the stock would likely have to be a continuation pocket pivot along the 10-day line. Meanwhile, FB is expected to announce earnings at the end of January.

 

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While I do not plan to beat the “Four Horsemen” to death in 2014 the way I did in 2013 by including every one of them in every report, I will continue to discuss them whenever I see something notable in their action. In this regard, LinkedIn (LNKD) remains an instructive example of why you don’t jump all over a stock on the short side when it breaks the 200-day moving average after showing three waves of selling in the pattern. I first discussed this three waves of selling in my report of December 29th, and if you go back and read that it was fairly prescient in determining that “it could provide a foundation for a rally back up through the 50-day moving average and to a higher-high, say in the 240 price area.” While LNKD hasn’t gotten that high, it has rallied nearly 10% off of the intra-day lows of four days ago on the daily chart, below, before reversing on heavy volume and pushing up near the 50-day line, where it is right now.

 

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Biogen Idec (BIIB) has followed through on Wednesday’s third pocket pivot within its base with a standard-issue base breakout on Friday, as we can see on the daily chart below. Being a standard-issue base-breakout, this is buyable per the usual rules using the standard 6-7% downside stop. Of course, you’re much happier if you bought any of the three prior pocket pivots within the base, although they did not lead to any immediate upside in the stock. Sometimes with these bigger names you need to exercise patience, but with other stocks moving elsewhere in this market my tendency is almost always to go somewhere else in search of faster-moving merchandise. This, however, does not negate the constructive action within BIIB’s base before the breakout, and the fact is that no stop-out levels were ever hit following any of those pocket pivots given that BIIB never even dropped more than 2% below the 274.98 intra-day low of the buyable gap-up day back in November

 

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Looking around for some possible “Ugly Duckling” set-ups I might consider something like Proto Labs (PRLB) as an interesting situation here. As we can see on the daily chart, below, PRLB was looking quite ugly until mid-December when it flashed a pocket pivot off the lows of its base after a prolonged downtrend. Normally this type of pocket pivot coming after a prolonged downtrend is not really actionable, but notice that after that the stock moves up one more day before forming a short six-day flag with selling volume drying up sharply. This is then followed by a second, more actionable bottom-fishing pocket pivot off the 10-day line six days ago on the chart. Now we see PRLB pulling back in towards its 10-day line after finding resistance at the 50-day moving average three days ago. My Force indicators along the top of the chart are all flashing blue, and so this is where I might consider taking a position with the idea that the stock will continue to hold the 10-day and 20-day moving average confluence (a moving average “confluence” is where two or more moving averages are tracking together).

 

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As I approach the end of this report I will seek to mess with your mind even further, and show a daily chart of Sprouts Farmers Market (SFM), below, which any O’Neil-style trader/investor supposedly worth their salt would tell you is a stock to be avoided at all costs. My response: well yes, and no. SFM was a hot IPO leader back in the September/October time frame before dying a grizzly death in November. The stock has had plenty of time to sit in the corner and ponder its bad behavior since then. This starts to hit my radar as it tries to hammer out the lows of a possible “roundabout” formation following a massive-volume burst of buying right along the lows.

This was then followed by a bit of backing and filling and an undercut of that late November low right around the second gray vertical “secret oversold indicator” bar and then a “deep doo-doo” (as I like to call them in this type of situation) pocket pivot three days later. Now SFM is running along the 10-day and 20-day moving average confluence and some of my indicator bars are starting to turn blue. In this particular situation I might look at buying shares of SFM here with the idea that it should continue to track along the 10-day/20-day confluence before staging a rapid track back to the upside. Unorthodox, yes, but in this market such unorthodox thinking was the hallmark of my success in 2013.

 

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Below I show a couple of “model stock” Ugly Ducklings in Cree (CREE) and recent bio-tech IPO Intrexon Corporation (XON), both shown below on daily charts. Notice that CREE’s double gap-downs following its last two earnings reports have both led to comeback rallies off the lows with this most recent push back to the upside coming after a “deep doo-doo” pocket pivot coming back on December 20th, as I’ve indicated on the chart. That has since led to a more legitimate bottom-fishing pocket pivot on Tuesday of this past week and further upside from there. CREE looks to me like its headed back for its highs, just in time for its earnings announcement, which is expected on January 21st. Does it gap down after earnings for a third time? If so, it would truly be an unusual pattern and one that I don’t think I’ve ever seen in any stock anywhere. You might notice that the indicator bars along the top of the CREE chart look a little more “blue” around the lows of the turn this time around than they did back in the August/September turn. It will be interesting to see where CREE goes from here, but I’m guessing it doesn’t gap down again when it announces earnings in the latter part of this month.

 

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I first became aware of Intrexon Corporation (XON) courtesy of my urologist when I was in the hospital back in August having a lovely 7-centimeter wide, and fortunately benign, tumor removed from between my bladder and prostate. As I was sitting in my hospital bed with my laptop looking at charts, my urologist came in to check up on my post-surgery condition and saw what was on my screen, at which point he began babbling about several bio-tech stocks he was interested in. At that time, as can be gleaned from the daily chart, below, the stock was a hot IPO that was coming down fast and my assessment was that this thing would need some time to form a base and would probably undercut the $20 level before bottoming.

Not being closed-minded, I checked into all the bio-tech stocks he mentioned, and I did find XON to be an interesting story. Finally, XON hit my radar when an oversold bar near the lows of the downtrend showed up and was immediately followed by a “deep doo-doo” pocket pivot, which I show on the chart. In December I went back to see my urologist for a post-surgical follow-up visit, and of course the topic of XON came up again. I told him that the stock had likely bottomed and he could load the boat. As it turned out, that was the bottom, and we can see that over the past couple of weeks the stock has streaked back up to its prior highs as it forms a big cup formation. Now I’m looking for a handle to form here as this thing shows tremendous power coming up the right side of the cup, and my guess is we will see a pullback as late buyers back in August provide some overhead supply. I’m also hoping my urologist will “comp” those surgical fees he charged back in August when I see him again in March!

 

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The market remains in an uptrend and there are still stocks in buyable positions here, several of which I’ve outlined in this report. There isn’t much else to say, but stay focused on the action of individual stocks as I try to guide you through the process of thinking outside the box in what remains and is likely to remain an unorthodox, QE-driven market in 2014. 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 positions in ENT and ONVO, 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.