The Gilmo Report

January 18, 2014

January 18, 2014

The market ran into some distribution on Friday as the major market indexes came off on increased options expiration volume. Friday’s action served to create the second of a pair of what I might call “bookend” distribution days for the week. Monday’s big-volume sell-off started the week off with a distribution day while Friday’s less ugly sell-off ended the week with a distribution day, as we can see on the daily chart of the NASDAQ Composite Index, below. While the uptrend remains fully intact pending further evidence to the contrary, I still urge members to refrain from becoming too complacent, as it remains a market of stocks. There are plenty of fruitful opportunities out there, but danger also lurks.

 

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As a quick example, investors in NuSkin Enterprise (NUS), shown below on a weekly chart, saw the value of their shares get cut in half as the stock plummeted from an intra-day high of 140.50 on Monday to a low of 67.51 by Thursday on news that it is selling products in China illegally. Ouch! This example brings up a good question, which is how one knows to exit quickly when a stock that is acting fine one day as it pushes near all-time highs suddenly goes schizophrenic and begins plummeting to the downside. My general rule is that a stock that suddenly changes character and gaps down on heavy volume to start out the trading day is one that should be sold first, after which one can ask questions.

 

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NUS’ daily chart, below, shows the gap-down on Wednesday as volume ballooned to 693% above average. Had one acted quickly on Wednesday one would have only seen a few weeks’ worth of gains evaporate but if one sat there or even tried to play the hero by buying shares on the dip, thinking it was just a temporary blip, one was crushed. Members might notice that I haven’t been talking about NUS as a long idea in my reports over the past several months, mostly because I’ve never really trusted the company given that it is a multi-tiered marketer. These I believe are susceptible to being “outed” in some way or another. Bottom-line lesson here is that when you own a stock that has been acting just fine and it suddenly gaps down on huge volume and, even worse, cannot hold a key moving average like the 50-day line, do not hesitate to sell!

With the Fed set to initiate its first tapering maneuver in January, precious metals do not seem to be too concerned, as we can see in the daily chart of the SPDR Gold Shares (GLD), below. While gold broke down and gapped down in mid-December after the Fed announced its puny $10 billion taper, that selling turned out to be somewhat climactic as the yellow metal turned higher from that point in a four-week trend that has seen much stronger upside volume and several gap-up moves while selling has remained relatively low. Friday’s action in the GLD constituted a bottom-fishing pocket pivot as the gold ETF moved up and off of its 10-day moving average and up through the 50-day moving average. With all the pundits confidently predicting the final demise of the precious metals, sentiment for the metals is decidedly bearish currently, and this sets up a contrarian move that is playable on the basis of Friday’s pocket pivot using the 119 price level on the GLD as your stop. The metals have made several attempts at forming bottoms and reversing their nearly three-year long-term downtrends, and it will be interesting to see how this plays out.

 

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Among stocks that I have discussed in my report, Sina Corp. (SINA) is one that has failed quite completely, although nowhere nearly as badly as NUS, as we can see on its daily chart, below. Chasing SINA’s strength last week was not the proper approach here, but buying on the pocket pivot within the base kept one from taking a huge loss if one sold as soon as the stock failed to hold the 50-day moving average on Thursday. Speaking for myself, since the pocket pivot of December 27th occurred coming off of the 10-day and 20-day moving averages as well as the 50-day moving average, once it failed to hold the 20-day moving average on Thursday I would have sold it, especially on the heavy-volume gap-down of that day. Notice also that the indicator bars along the top of the daily chart were showing an inconsistent pattern which in my view made any break of the 10-day or 20-day line an instant sell. I would also say that the stock should have done a better job of holding the move up towards the $90 price level, and the gap-down move below the 50-day line now puts this in the position of being a late-stage failed-base (LSFB) and a possible short-sale target on any rallies back up into the 50-day moving average.

 

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If we look at our Chinese internet winner, YY, Inc. (YY), which I first discussed in my report of December 29th after its initial pocket pivot within the base, we can see on its daily chart that it never even came close to testing its 20-day moving average, much less the 10-day moving average. Other strong leaders that I’ve discussed in recent reports, such as SolarCity (SCTY), Canadian Solar (CSIQ), FireEye (FEYE), Splunk (SPLK), and Yelp (YELP), for example have all held their 10-day and 20-day moving averages on pullbacks, and this is the type of action you want to see.

 

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In my report of this past Wednesday I discussed Gilead Sciences (GILD) and the pocket pivot buy point that occurred within the base on Tuesday, as we can see on the daily chart. As I wrote in that report, I was looking for the stock to break out within a few days given the extremely tight price action, the pocket pivot, and the general positive blue color of my indicator bars across the top of the chart. GILD came through with a big-volume breakout on Thursday which is still within buyable range. The only caveat is that GILD announces earnings in two weeks, so hopefully this breakout will produce further upside and a potential cushion going into earnings for anyone who would choose to hold through the announcement.

 

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I first discussed my two favorite financials, Morgan Stanley (MS) and Charles Schwab Corp. (SCHW) back in my report of November 9th as financials were starting to look good. At the time, I chose both of these names based on their fundamentals despite the fact that most of the group, including money center and regional banks as well as brokers, was moving. At that time I flagged the pocket pivot action in both stocks, as we can see on their daily charts, below. MS flashed a couple of pocket pivots in November and December before testing its 50-day moving average on Tuesday of this past week going into earnings. On Wednesday MS broke out and then staged a buyable gap-up move on Friday, which is buyable using the 32.61 intra-day low of the gap-up day as your stop. SCHW also had a pocket pivot flag breakout on the same day as MS’ November pocket pivot, and has moved steadily higher since as well. This past week SCHW, staged a “shakeout & breakout” move around its own earnings announcement, and the stock remains within buyable range using the 26 price level as your primary support level on any pullbacks. As I wrote back on November 9th, these stocks may not knock your socks off with wild upside moves, but they are steady players in a decent group showing strong fundamentals.

 

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Amazon.com (AMZN) is expected to announce earnings on February 4th after the close, and the stock is acting very well in advance of the report as we can see on the weekly chart, below. In addition to the four weeks of tight closes and strong-volume support off the 10-week line you can see on the weekly chart, AMZN also flashed a pocket pivot buy point on its daily chart, not shown, on Friday. This is highly constructive in my view and indicates the stock can be bought here with the idea that it will start moving above the so-called “Livermore Century Mark” at $400 in short order. AMZN is expected to show its largest quarterly earnings increase in 10 years or longer with earnings growth of 214% based on First Call estimates and 238% based on HGS Investor’s estimates. I’ll take either since the main point here is that AMZN’s earnings growth, after remaining flat to negative for quite some time, is about to take off with next quarter’s estimates calling for roughly 200% earnings growth. The real kicker is that in the second quarter of 2014 AMZN is expected to post earnings growth of 2,250%. As I see it, AMZN is revving up for a possible run here based on the constructive technical action and the very strong forward earnings estimates. The stock is buyable on the basis of Friday’s pocket pivot with the idea that it will continue to hold above its 50-day and 10-week moving averages.

 

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The action in Global Eagle Entertainment (ENT) continues in a constructive manner as it held tight this week on declining volume after last week’s big-volume high, tight flag breakout, as we can see on the weekly chart, below. Some might ask whether ENT’s weekly chart is showing a “short-stroke” pattern but to me this is irrelevant since the stock was buyable on the pocket pivot just above the 15 price level two Mondays ago and then again at the 16 price level on the flag breakout. ENT might be considered just slightly extended with Friday’s close above the 17 level, so a pullback closer to 16 would certainly be buyable, although the stock doesn’t seem to want to pull back much, even on days where the general market has sold off.

 

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Organovo Holdings (ONVO) is holding tight as it forms the first week of a possible handle in a cup-with-handle formation, as we can see on the weekly chart, below. The stock appears to hold both the 10-day line on the daily chart, not shown, and the 10-week line on the weekly chart on any pullbacks as it holds tight in the mid-11 price area. ONVO is a volatile stock by nature, and while it may need to spend a couple of more weeks building a longer handle, with the 10-day moving average moving up on the daily chart it also sets up a possible continuation pocket pivot coming off of the 10-day line, which should be watched for, so this could resolve in a variety of ways. Friday saw the stock pull down into the 10-day line on very light volume, so we’ll have a chance to see how well it holds support at the line next week.

 

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Taser International (TASR) looks fine here as it pulls down into its 10-day moving average with volume drying up, as we can see on the daily chart below. While the 2-day Force Index has turned red, notice that the other indicator bars remain blue which tells you that this is likely just a temporary pullback. I would also consider it quite normal action since TASR’s buyable gap-up move eight days ago on the chart that came straight up off the bottom of the base, hence is susceptible to selling from overhead that exists on the left side of the base. In any case, TASR looks like it is setting up to move higher on a technical basis, despite the fact that analysts are looking for 0% earnings growth when the company announces earnings in the latter part of February. Obviously, this earnings non-growth is well-known by The Street, so it is clear that investors are looking for some sort of positive surprise when the company announces – the only question is whether TASR decisively clears its current base to the upside before then.

 

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Time Warner (TWC) continues to track tight sideways following last Tuesday’s pocket pivot and trendline breakout as it awaits a better buyout offer from Charter Communications (CHTR) and its earnings announcement which is expected on January 30th. On Tuesday CHTR made a $132.50 bid for TWC which was rejected as “woefully inadequate.” As I wrote in my report on Wednesday, reports indicate that the two big cable outfits will likely settle for a price closer to the $160 that TWC claims it is worth, perhaps somewhere around $150. Thus I think if one is so inclined one simply buys shares of TWC on the basis of the pocket pivot and trendline breakout and then waits as my best guess is that something will happen prior to earnings at the end of January 30th. As we can see on the daily chart, everything is flashing blue for TWC at the present time.

 

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Following Twitter’s (TWTR) shakeout-plus-three buy signal on Wednesday the stock has managed to move slightly higher after pulling back into the 10-day line on Thursday with volume drying up, as we can see on its daily chart, below. TWTR is expected to announce earnings two Wednesday’s from now, and that will likely provide some sort of resolution to the stock’s current action. While the shakeout-plus-three buy point provides a low-base entry point for an initial position it is also possible to hang back and wait for the earnings announcement before getting more aggressive. Despite all the volatility and the negative babble regarding the stock’s overvalued state over the past month TWTR remains in a short flag formation and base-building process as it approaches earnings. The next concrete buy point that could emerge before earnings come out in early February would be a pocket pivot along the 10-day moving average as the stock potentially backs-and-fills in here for a bit, and that is something to watch for.

 

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NQ Mobile (NQ) is an interesting “roundabout” formation that is coming back to life after the stock took a brutal pounding as a result of a negative Muddy Waters report claiming the company is a fraud. After the stock broke hard in late October, getting cut nearly in half, it found a low just under the $10 price level and began moving tight sideways. In late December NQ staged a bottom-fishing pocket pivot after several hedge funds and brokerages disclosed taking a large stake in the company. The stock then backed down into its 10-day moving average, as we can see on the daily chart below, and then on Wednesday staged a buyable gap-up move on another big-volume spike. This has been followed by two more days of tight sideways action with volume drying up sharply on Friday. While NQ’s legitimacy as a “real company” was called into question by the Muddy Waters report, the fact that several large institutional investors saw fit to take positions after the big sell-off speaks in favor of the company. As well, Wednesday’s gap-up move was a result of wireless telecom giant Sprint (S) announcing it had signed an agreement with NQ to collaborate and deliver the next generation of Sprint ID, powered by NQ Live, on all new Sprint Android-powered smartphones in the U.S. market later in 2014. Again, if NQ is a “fraud,” it seems odd to me that such a large and legitimate telecom concern like Sprint would be interested in choosing the company for a partner in such an undertaking.  Frankly, I like the technical action in NQ here, and I’m willing to take a small position on the basis of Tuesday’s buyable gap-up move to see just where it goes from here.

 

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I’ve written previously about LinkedIn (LNKD) and the three waves of selling in its pattern that I felt 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,” as I put it in my report of December 29th. As we can see in the daily chart below, this did in fact lead to a rally in LNKD up through the 50-day line, although only as far as the 234.48 price level, about 2% short of the 240 level. Thursday’s move up through the 50-day line was also a pocket pivot, but there are some issues with this since it occurred after a wedging rally, as I have outlined on the daily chart below. As well, LNKD doesn’t really qualify in my eyes as a “roundabout” type of formation since it is more like a “chop-about” formation given the jagged action as it supposedly tries to round out the lows of a potential new base. Thursday’s pocket pivot turned out to be a pocket pivot to nowhere as the stock came right back into its 50-day moving average on above-average selling volume in a schizophrenic sell-off following Thursday’s one-day wonder show of strength. We’ll see how LNKD sets up from here, but I think it’s a good example of an improper pocket pivot combined with a pattern that is not quite a constructive roundabout where you would want to see tight sideways and “quiet” price action leading up to the pocket pivot.

 

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For stocks I’ve discussed in prior reports and which are not discussed in this report, members should refer to those prior reports as my views have not changed. Most of the stocks I’ve discussed since mid-December have done well, and in most cases it is a matter of watching for continuation pocket pivot buy points to emerge on pullbacks to or “meet-ups” with the 10-day moving average on the daily charts. Thus this is something for members to monitor in real-time if they own any of these stocks. In the meantime, some set-ups are out there, and I’ve covered them in this report. I would expect that winning stocks will continue to act well until and unless the market starts to get into serious trouble, which so far hasn’t happened outside of a few distribution days here and there. But as we already know, the proper approach is to take things on a stock-by-stock basis without getting excessively focused on the action of the indexes. In the meantime, the uptrend remains intact as we move into the thick of “earnings roulette” season, so watch your 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 positions in ENT, NQ, 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.