The Gilmo Report

January 15, 2014

January 15, 2014

The NASDAQ Composite Index hit a new 13-year high yesterday, as we can see on the daily chart below, and continued higher today in a very impressive recovery from Monday’s sharp selling. In many ways, Monday’s action seemed like a warning shot across the market’s bow, but by Tuesday the indexes shrugged it off and turned back to the upside. Today the NASDAQ pushed to a new 13-year high while the S&P 500, not shown, actually made an all-time closing high, exceeding the prior closing high of 1848.36 by .02 of a point to close at 1848.38. Volume was also higher on the NYSE. Overall one cannot fault the action of the general market indexes as the uptrend remains intact pending further evidence to the contrary.

 

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Most of the names I’ve discussed in reports over the past three weeks have shot much higher, including YY, Inc. (YY), Workday (WDAY), Splunk (SPLK), SolarCity (SCTY), and Yelp (YELP), have simply become more extended to the upside and are way out of buyable range. In some cases, I might even consider taking some profits, especially if the stock in question is coming up on its earnings announcement. With most of these stocks, as I discussed over the weekend, you’re looking for the 10-day moving average to catch up with the price at which point the possibility of a continuation pocket pivot comes into play, as Canadian Solar (CSIQ) illustrates on its daily chart, below. CSIQ pulled down right into the 10-day line before flashing a big-volume continuation pocket pivot off the line. The stock then jacked 15.8% from the 10-day line to today’s closing price of 41.97.

 

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Sometimes hot stocks will simply bounce off the 10-day line without issuing a bona fide continuation pocket pivot, as FireEye (FEYE) illustrates on its daily chart below. This is why I will sometimes buy a very hot stock the first time it comes back down near the 10-day line even if it isn’t showing the required pocket pivot volume. In this case FEYE produced a sharp 19.4% move in just two days from the 10-day line. It’s not like every stock is doing this, but we are definitely seeing many of the names I’ve discussed in recent reports showing what I might even consider to be “frothy” strength to the upside.

 

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Tesla Motors (TSLA) was looking like death yesterday early in the day before reversing and staging a huge-volume breakout from a cup-with-handle formation, as we can see on the daily chart, below. The key to making this trade yesterday was recognizing it as a bottom-fishing pocket pivot early in the day when volume was very heavy and easily enough for a pocket pivot volume signature but the price was still just above the 10-day and 20-day moving average confluence down around the 148-149 price area. Jumping on at that point gave you a nice 20-point plus trade to the upside this morning when the stock gapped up and ran just above the 170 price level before reversing to close at the bottom of its daily trading range, as we can see on the daily chart below. Yesterday I saw this occurring in real time, but really don’t consider it more than a two-day wonder trade, because the breakout is coming from a cup-with-handle where the handle is in the lower half of the trade, making it vulnerable to failure. And going into TSLA earnings at the beginning of February, this was a nice gift to take if you were aware of it while it was happening in real-time yesterday. A good illustration of why you want to have your buy watch list up on your quote screen with alerts at the relevant moving averages.

 

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In my report of exactly one week ago, January 8th, I mentioned that one should be on the lookout for a possible shakeout-plus-three move in Twitter (TWTR) as it was undercutting the 58.57 prior low in the base, which we can see on the daily chart below. TWTR fluttered around that low over the past week as selling volume dried up pretty sharply yesterday before moving higher today on what we might look at as a shakeout-plus-three buy point given that it closed at 61.57. I suppose one could get into a debate as to whether this should be a shakeout-plus-four or –five, but in my view you’re basically arguing over how close you have to be for horseshoes and hand grenades. It was probably constructive that TWTR was able to clear the 10-day line, even if by just two cents, but tomorrow I might look for a pocket pivot buy point emerging on a move off of the 10-day, using the 10-day line as a downside selling guide.

 

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After pulling back into its 10-day and 20-day moving averages and failing on last Wednesday’s buyable gap-up move, Qihoo 360 Technology (QIHU) was looking very much like an Ugly Duckling, as we can see on the daily chart. In my report over the weekend, I discussed the idea that this pullback to the 10-day and 20-day moving average confluence where the stock might be buyable. In this market I try to anticipate strength or use weakness as my rationale for buying a stock and then selling into any ensuing strength – reacting to strength is not always the best approach, and running into QIHU’s buyable gap-up last week would have put one underwater in a hurry. QIHU closed at a higher high, just clearing last week’s 89 high on the BGU by eight cents today. I would, however, not be buying it here.

 

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In my December 31st report I wrote that in my view “the only thing that can derail Workday (WDAY) at this point would be the announcement of a secondary offering.” I could not have been more wrong – even a 6-million-share secondary offering could not send the stock lower as we can see on the daily chart. Last night’s pricing of the WDAY secondary at $89 a share simply led to higher highs as demand for the stock quickly absorbed the shares and closed today at 90.84. WDAY came to within 1% of its 10-day moving average yesterday at the lows before turning and moving higher on a pocket pivot volume signature. While WDAY did not exactly touch the 10-day line on yesterday’s pullback, I tend to think that 1% is close enough to the 10-day line to qualify as a continuation pocket pivot. Volume was heavy today as the stock came in slightly, but at this point it is extended from yesterday’s buy point near the 10-day line.

 

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Global Eagle Entertainment (ENT) continues to hold last week’s high, tight flag breakout as it made a new all-time closing high today with volume drying up, as we can see on the daily chart below. I would be very happy to use a pullback closer to the 16 price level and the top of the flag, which I’ve highlighted in yellow, to buy more shares of ENT should that occur. Otherwise we can wait for the 10-day moving average to catch up to the stock and look for some sort of secondary buy point to emerge along the line, preferably on a continuation pocket pivot move, but a pullback to the 10-day line here would take it right back to the top of the flag and the 16 price level, more or less.

 

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Organovo Holdings (ONVO) made an attempt at a trendline breakout on Monday, something I had discussed in my report of this past weekend, but couldn’t hold the higher high as it reversed on heavy selling volume on a day when the general market also got hit on heavy selling volume. But ONVO held the 10-day moving average as it tracked higher today to make a higher closing high today which was also its third-highest daily closing high in its history. The stock is wedging up along the 10-day line, however, which makes me think it is vulnerable to a pullback here, but it does keep testing the 10-day line and bouncing off of it as it inches higher. It’s possible that ONVO continues to build a handle here, although on the weekly chart, not shown here, it has yet to post a down week over the past four weeks. Thus the “handle” is only visible on the daily chart. Notice that Monday’s sell-off, while closing above the 10-day moving average, bounced off of the 20-day moving average, the green line on the chart, so I tend to view that as ultimate intra-day support and would look to buy the stock on pullbacks to the 20-day line, currently running through the 10.44 price point.

 

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Keeping an eye on fiber-optic leader Finisar (FNSR) I note that the stock has been closing fairly tight over the past three weeks and this week is on track to do so again, but it continues to find resistance near the peak each week, as we can see on the weekly chart, below. FNSR doesn’t announce earnings until March, which gives it plenty of time to complete a handle, but it has not had a down week yet as it moves sideways here, so the handle is only visible on the daily chart, not shown here. This likely needs more time to work on the handle and drift slightly downward, which would be preferable to see rather than this slight wedging up along the weekly lows that we are seeing over the past four weeks. I still like FNSR, but only on pullbacks to the 20-day moving average, which is now running through the 23.40 price point.

 

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Taser International (TASR) remains in a buyable position after two failed attempts at making and holding a new 52-week high, as we can see on the daily chart, below. The stock is hovering right along the top of its base, and is not acting poorly, despite Monday’s breakdown and reversal that took away last Friday’s base-breakout. However, TASR is a smaller stock, and with the market down sharply on Monday it is not surprising that TASR also gave up the ghost on its breakout attempt on the same day. With the stock nudging back into the top of its base today with volume drying up in the extreme, the stock moves into buyable range. I would expect any further pullbacks from here to hold the 10-day/20-day moving average confluence at around 17.05.

 

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Biogen Idec (BIIB) reversed hard on Monday as selling volume sent the stock into reverse after it broke out to a new all-time high early in the day. As we can see on the daily chart, below, the stock came right back into the 10-day moving average and bounced hard yesterday, retaking its Monday breakout and holding tight today along the top of the base. BIIB illustrates some of the funky action investors have had to contend with this week as several leaders got hit hard on Monday but were able to bounce back over the past two days. BIIB announces earnings at the end of January, so it’s not clear if I want to own the stock going into that announcement. Trying to play “earnings roulette” remains a risky proposition and one must weigh the risk of a negative announcement in relation to the size position one is willing to hold into the earnings announcement of any stock.

 

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Among the big-cap bio-tech “Three Caballeros,” which includes BIIB and Celgene (CELG), not shown, Gilead Sciences (GILD)  is moving very tight sideways along its 10-day and 20-day moving averages, as we can see on the daily chart, below. Yesterday GILD flashed a pocket pivot buy point which may presage a breakout to all-time highs. GILD is holding up tight while its Hepatitis C competitor Abbvie (ABBV), not shown, has been selling off since I discussed the two companies and their quest to bring Hepatitis C drugs to market in my report of December 22nd. GILD is expected to announce earnings in the first week of February, so perhaps it is setting up to break out before then. This can be considered buyable using the 50-day moving average at 72.34 as your ultimate selling guide, although I would like to see yesterday’s pocket pivot within a tight range lead to a breakout within the next couple of days or so.

 

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3-D printing names have gotten into trouble lately, with both Stratasys (SSYS) and Exone Company (XONE), both not shown here on charts, blowing up after guiding earnings, in the case of SSYS, and revenues, in the case of XONE, lower. After some strong run-ups, the big 3-D names have taken some heat over the past couple of days, including Three-D Systems (DDD), not shown, which has also sold off in sympathy to the negative pre-announcements of its peers SSYS and XONE. Proto Labs (PRLB), which I discussed in my report of this past weekend, has not reacted as badly, pulling down just a bit on Monday and Tuesday but still managing to hold above its prior pocket pivot of two Fridays ago and the 10-day/20-day moving average confluence, as we can see in the daily chart below. From here, confirmation of PRLB’s resistance would come in the form of another bottom-fishing pocket pivot that is able to clear the 50-day moving average. PRLB closed right underneath its 50-day moving average today, setting up this possibility. PRLB’s better action as other 3-D printing stocks have been hit is likely due to the fact that is not really in the same category as a so-called 3-D printing stock, since their business is somewhat different. This is why PRLB is in the Electronic – Parts industry group while the other names, DDD, SSYS, VJET, and XONE are in the Machinery – Materials Handling/Automation group.

 

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Time Warner Cable (TWC), which I last discussed in my December 31st report as it was working on a flag formation, has now flashed a trendline breakout from this flag formation, as we can see on the daily chart, below. TWC is still being wooed by Charter Communications (CHTR), which made a $132.50-a-share offer to buy TWC yesterday. TWC has come out saying that the offer is woefully inadequate as reports circulate that TWC has already told CHTR that they would only agree to be bought out at $160. My guess is that CHTR will come up with something closer to $150, which means I’m not averse to buying this trendline breakout, which can also be viewed as a pocket pivot buy point. TWC pulled in a hair today, but if it dropped down to the 10-day line it would be eminently buyable, in my view, although technically it remains within buyable range of yesterday’s pocket pivot and trendline breakout.

 

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I last discussed Interactive Corp. (IACI) in my January 5th report as it sat right on its 10-day moving average eight days ago on the daily chart, below. Since then the stock has trundled higher along the 10-day moving average, and appears to be buyable on pullbacks to the 10-day line. IACI just missed flashing a continuation pocket pivot yesterday by a mere 15,700 shares, about 1.1% of its average daily volume. Nevertheless, the move did come on above-average volume and is constructive. So far IACI looks like it wants to move higher as an unexpected big-cap leader.

 

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As we move further into earnings roulette season, some of the moves in stocks I’ve discussed in recent reports have become downright frothy, and it remains a matter of being in the right stock at the right time. The sharp daily moves in certain leading stocks make them a sort of day-trader’s heaven. Thus the task remains trying to find strong set-ups in their formative stages and then being alert to secondary buy points as they occur in strong leaders, such as we’ve seen with CSIQ, for example. As well, remaining opportunistic on pullbacks has been a sound strategy so far, and will likely remain so until the market has some sort of serious correction, which could happen at any time. Monday’s sell-off came on heavy volume, and while the market has turned back to the upside and made higher highs, do not become complacent. 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, ONVO, and TWTR, though positions are subject to change at any time and without notice.

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