The Gilmo Report

January 18, 2012

January 18, 2012


The scent of game on the long side was in the air over the weekend, as I discussed in my report of this past weekend dated January 15th, and while it still strikes me as an environment in which one should proceed cautiously, but most certainly deliberately, progress can be made on the long side. This is always the first test of the viability of any market rally, and so far the market seems to be passing the test. As we see on the broad NYSE Composite Index daily chart, below, the broader market is now joining the other, less broad indexes back above its own 200-day moving average with slightly higher NYSE volume today.

NYSE Composite Index Gilmo Report Chart

The star today, however, was the NASDAQ Composite Index which had the biggest move on the day, sending the index to higher highs on expanding volume, what some might like to call an “accumulation day,” as we see on the daily chart below. Whatever you think of all the “bad news” surrounding this market, you cannot argue with the strength of the NASDAQ chart, and the action in stocks is confirming all of this, in my view.

NASDAQ Composite Index Gilmo Report Chart

Another positive for the market is the action in gold, and I note that gold futures actually flashed a pocket pivot buy point yesterday and today, as we see in the daily chart of the nearest gold futures contract, below. The SPDR Gold Shares (GLD), however, did not put in the same type of action, although the GLD does continue to hold above its 200-day moving average. It’s possible that gold is forming a big double-bottom formation after undercutting its September 2011 low in late December.

SPDR Gold Shares (GLD) Gilmo Report Chart

Much is being made of the move in the semiconductor stocks, and on the surface I would have to agree that strength in the semis at this juncture can be considered as a potentially constructive sign for the general market, especially within the context of this idea that I presented over the weekend that this market is essentially in the process of brewing up a move here. The Philly Semiconductor Index ETF (SOXX), shown below on a daily chart, has broken out to higher highs. Semiconductors in general, however, are still mostly laggard stocks, and if I screen all semiconductor groups for stocks with their relative strength line and 50-day moving average line both in uptrends also trading over 350,000 shares a day on average and with a price greater than 10, I come up with 15 names. Therefore it is something of a problem to try and buy just any old semiconductor since the technicals and the fundamentals don’t line up. Thus one might also argue that the action in the semiconductors represents the “dogs barking.” However, with the group coming on as it is currently, it can be viewed as a positive for the general market environment as long as we can find leadership within the semiconductor group.

Philly Semiconductor Index ETF (SOXX) Gilmo Report Chart

Qualifying as “new merchandise” leadership among semiconductors, albeit in a relatively small stock, is Invensense (INVN), shown on a daily chart below. We first picked up INVN in my report of January 4th, after it had flashed a pocket pivot buy point on the previous Friday, and on a percentage basis it has had a powerful move since then. INVN has also be quite begrudging about pulling back, as it has held its gains quite well and essentially “pinned” itself to the 14 price level, more or less. The thing about a stock like INVN is that you will find yourself wanting to take profits here around the 14 level thinking that the stock just “has to” pull back. The problem is that it doesn’t have to, and sometimes these little stocks start out very well amidst a great deal of skepticism, and they keep going. One of the main issues facing INVN is the fact that Nintendo and its Wii platform constituted 85% of revenues in 2009, and that remained high in 2011 at around 73%. But the company has made inroads with companies like Samsung to increase the non-Nintendo portion of their business to 35% of revenues so far in fiscal 2012.

Invensense (INVN) Gilmo Report Chart

Over the weekend I discussed Monster Beverage (MNST) and its pocket pivot buy point on Friday, and on Monday morning the stock gapped up and out of its current consolidation and the $100 price level, thanks to a buy recommendation from the always-illustrious Goldman Sachs (GS). Monday’s move was in fact a buyable gap-up coming on volume that was 117% above average, and the stock remains within buyable range up to the 103 level. Goldman came out with a strong buy on the stock and a $125 price target, which I have to admit I like since we could also consider MNST’s move up through the “century mark” of $100 as enough to invoke the Livermore rule. Livermore was always aggressive in buying a stock the first time it went up through the 100, 200, 300 “century mark” price levels. However, it is much simpler to buy this on the basis of the buyable gap-up, using the intra-day low of 99.25 as a rough downside guide for a stop. MNST is a bit of a squirrely stock, so one could also and easily use the 97.14 bottom of the “rising window” upside gap move which is also the top of the prior base given that it is less than 3% from the $100 level.

Monster Beverage (MNST) Gilmo Report Chart

I discussed over the weekend so-called bottom-fishing, pocket pivot moves I was seeing in a number of formerly beaten down leaders, a list of stocks that includes NFLX, SODA, ACOM, FOSL, ROVI, and LNKD, among others. Piling on top of this type of action is a similar off-the-lows pocket pivot buy point in (PCLN) as it came up through its 50-day moving average yesterday on more than adequate volume to qualify as a pocket pivot signature. While PCLN is under its 200-day moving average, the 200-day line is relatively close to the stock’s 52-week highs, as we see in the daily chart below, so I don’t see this as a problem. And among the recent bottom-fishing pocket pivots this one seems to be working quite well. PCLN announces earnings in late February, so this move could be presaging a positive earnings announcement, depending on how it pans out, but we know for sure is that this is a lot of big money moving into PCLN here, and that likely bodes well for the general market. (PCLN) Gilmo Report Chart

Also boding well for the general market is the action in (AMZN) off its recent lows, as we see in the daily chart below. While very subtle, there was a bottom-fishing pocket pivot detected by my screens yesterday in AMZN, shown below on a daily chart. As I discussed in my report of December 26th, on the weekly chart (not shown) AMZN was exhibiting a “Three Waves Down” look to the chart after breaking down some 32% from its all-time high of October 2011. Unless you think AMZN has topped for good, and since most big leading stocks will have normal corrections of as much as 30% or more as they build potential new bases, it was clear that AMZN was getting “played out” on the downside. Combine that analysis with yesterday’s minor and almost unnoticeable pocket pivot buy point, and you have the ingredients for a rally today as the stock streaked up toward its 50-day moving average and flashed a second bottom-fishing pocket pivot today on not-so-subtle buying volume that took it right up into its 50-day moving average, where the first test of resistance lies. Unless you were quick on the draw yesterday or this morning, this is somewhat extended here, but likely a good omen for the general market. (AMZN) Gilmo Report Chart

The stable of bio-techs we’ve been monitoring in recent reports over the last several weeks have all continued to act well, and the one that stood out today was Viropharma (VPHM), shown below on a daily chart. It was a simple matter to take Friday’s pocket pivot buy signal in VPHM as a reason to simply buy shares on Tuesday morning, yesterday, with the idea that the stock should hold the 10-day moving average, roughly if Friday’s pocket pivot was indeed going to work. VPHM shows how despite two attempts at new highs that were rebuffed on heavier volume, one must stay with a stock since it may simply be a matter of time for overhead supply and a mushy general market to get out of the way in order for the stock to launch to new highs. VPHM also illustrates the Rule of Three on a relatively small scale with the third attempt at new highs working, thus faking out the crowd that may have sold into it on the basis of the prior two failures and minor reversals. Over the weekend I said that VPHM reminded me a little bit of JVA back in July of last year, and the action over the past three days, with the stock moving up sharply following Friday’s pocket pivot, it is at least off to a good start here. For now all you can do here is buy pullbacks under 30 pending the appearance of a second buy point, should that occur.

Viropharma (VPHM) Gilmo Report Chart (STMP) was another stock that flashed a pocket pivot buy point last Friday, along with VPHM, as it came up through its 50-day moving average, as we see on the daily chart below. The stock held tight in the first two trading days of this week before launching higher today on strong volume. Not too shabby, but STMP is clearly a bit extended here unless you want to view the two-day pullback this week as a two-week handle, something that was common to see in “dot-com” stocks during the 1990’s. STMP is a “dot-com” stock to be sure, both in name and in the fact that it was a high-flyer back in the dot-com bubble of 1999, crashing from a high of 170.90 in November to a low of $3.64, about the cost of eight first-class stamps today, in September 2001. STMP has two prior closing highs to clear before making a 12-year price high, and if today’s action is any indication coming on the heels of last Friday’s big-volume pocket pivot, it looks primed to do so. (STMP) Gilmo Report Chart

After-hours F5 Networks (FFIV) is gapping up after announcing earnings, and perhaps members might want to check that out in the morning as a possible buyable gap-up. It may also be indicating a resurgence in the cloud-computing stocks, almost all of which would have to be coming up off the lows or middle areas of potential bases. One such situation I’ve been watching carefully simply because I like their technology as well as their strong sales and earnings growth is Tibco Software, Inc. (TIBX). On the surface, TIBX looks like a late-stage base-failure, even a bit POD-like. If we were in a new leg down in a continuing bear market I might tend to agree, but patterns generally tend to resolve themselves in favor of the general market trend. What is notable here is the series of excruciatingly tight weekly closes over the past six weeks in conjunction with the massive weekly volume off the lows five weeks ago which is clear supporting action. TIBX is tracking along its 10-day moving average, so I would watch this carefully for a bottom-fishing type of pocket pivot off the 10-day line and up out of this tight six-week range. A bit of a different type of play here for us, but potentially viable given the weekly action which I see not as a downside bear flag but as supporting action followed by tight closes. An upside pocket pivot would be your buy signal from here.

Tibco Software, Inc. (TIBX) Gilmo Report Chart

The market environment is slowly improving, and individual stocks are allowing for progress to be made on the upside, and aside from that there is not too much else to say. In addition to those stocks discussed in this report, following are some notes from my trading diary on stocks discussed in recent reports:

AAPL – new all-time highs, but earnings due on Thursday.

ALXN – continues to move higher following breakout through 69-70 level. Currently extended.

CF – pullback to 10-day moving average here may be buyable using the 10-day line as a quick stop. Stock had a sharp move up off its lows so is entitled to a pullback here after testing resistance in the mid 170 price area.

FOSL – after stopping us out on the short side last week at 81.65, stock has flashed a bottom-fishing pocket pivot and moved higher again today. Definitely not a short, but may be a bottom-fish long using the 50-day moving average as a stopon the downside.

ISRG – pulled back normally to top of prior base at around 449-450 and has pushed back up towards its recent highs. Acting fine.

SLXP – remains slightly extended but pulling back to 10-day moving average where it may be buyable.

SPPI – pulled back to 10-day moving average, looks fine.

Please refer to previous reports in early January and late December for discussions and strategies regarding any other long ideas discussed.

Gil Morales

CEO & Principal, Gil Morales & Company, LLC

Principal and Managing Director, MoKa Investors, LLC
Principal and Managing Director, Virtue of Selfish Investing, LLC

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