The Gilmo Report

January 22, 2014

January 22, 2014

After a sell-off last Friday the market quickly found its feet and moved back up towards its highs, with the NASDAQ Composite Index leading the way, as we can see on its daily chart below, as it pushed to higher highs today on above-average volume. I know that some members like to get nervous when they see an index make a new high on volume that is lighter than the previous day, but remember that not every day in an uptrend needs to show higher volume than the prior day. The fact that volume today was above average for the NASDAQ makes the move constructive. The NASDAQ will likely continue its winning ways tomorrow morning as Netflix (NFLX) is up huge in after-hours trade at the time of this writing, following its earnings announcement.

 

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The Dow Jones Industrials, not shown, however, closed down by a quarter of a percent today, thanks to a weak action in big Dow names like International Business Machines (IBM), not shown. In my view, this just continues to confirm the rotation out of big blah names and into growth names. The S&P 500, shown below on a daily chart, moved lower early in the day under the hypnotic influence of the Dow but was able to claw its way back into positive territory by the close. So as the NASDAQ moves to higher highs, the S&P 500 is moving tight sideways in a constructive manner as volume declined today, which leads me to conclude that we are headed higher.

 

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NQ Mobile (NQ) is the week’s big winner so far after my discussion of the stock over the weekend in my report of January 19th. Last Wednesday, NQ posted a strong buyable gap-up move and then spent the next two days holding very tight along the 15.60 price level, more or less, as volume dried up sharply. This led to a nice low-base breakout yesterday that would also qualify as a pocket pivot buy point. The stock is somewhat extended at this point, and I would be using pullbacks to the 17 price area to buy the stock. Counting today’s 5.3% move, the stock is up 14.7% in two days – not bad to start off a short trading week.

 

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While the move in NFLX is nice to see, it would be tough to play going into earnings unless one is playing “earnings roulette.” Where I can find actionable price/volume action following a strong earnings announcement that effectively puts the earnings roulette factor behind it, I am happy to take aggressive action, as was the case today with Cree (CREE), shown below on a daily chart. CREE beat earnings expectations last night after the close but did not trade up very much at all on the open today, coming right down into yesterday’s closing price just under the 63 price level. At that point, however, big buying volume came into the stock and propelled it back above its 10-day moving average for a very large volume pocket pivot move that I believe is buyable with the idea that it will hold the 10-day line on any pullback from here.

 

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If we look at CREE’s weekly chart, below, we can see that today’s action might also constitute a breakout from the handle of a cup-with-handle formation. This sort of pattern was once dubbed a “Double-D Cup” formation by one of the institutional salesmen I managed back at O’Neil in the late 90’s, and I think the rationale for this label is obvious from the chart without me having to get into any details! ;-) In any case, the last two times CREE announced earnings it gapped down big, accounting for the two massive-volume moves that constitute the left sides of the two large cups we see in the chart. I tend to see these as perhaps useful “washouts” that clear the decks for CREE to start another move to new highs. Let’s see if that prognosis holds up over the next few days.

 

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YY, Inc. (YY) is another example of a high-flying stock finally “catching up” to its 10-day moving average, as we can see on the daily chart, below. YY did not issue a pocket pivot off the 10-day line, but notice that it did find support around the moving average on above-average volume. As I’ve discussed previously, it is not always necessary to see a continuation pocket pivot off the 10-day line as strong stocks can often just pullback to the 10-day line and then head higher from there without issuing a pocket pivot. If you’re alert to this during the trading day and already have a position from down lower closer to the original pocket pivot within the base and around the 50 price level, the pullback can give you a chance to add a few shares to your position.

 

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I like the action in Twitter (TWTR) as it continues to work on what is essentially a flag formation following the strong run-up to the 75 price level in December. After last Wednesday’s shakeout-plus-three buy point, as I discussed in my report of that day, TWTR has held its ground and pushed slightly higher as it tracks tight sideways so far this week with volume drying up. The company is expected to announce earnings on February 5th, two weeks from today, and it will be interesting to see if the stock can muster a move back up to the 70 price area before earnings are announced.

 

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TWTR’s weekly chart eliminates a lot of the noise surrounding the stock’s volatile action, and shows that the first down week in the pattern was three weeks ago. This means that TWTR is in fact in a three-week flag formation here, although if you wanted to count the intra-week high of five weeks ago you could say it is a four-week flag. In any case, the stock is doing nothing more or less than building a new base following its breakout from the IPO U-Turn formation in early December. So while analysts come out with their late calls on the stock and serve to create consternation among investors with their low price targets, the stock isn’t doing anything that I would consider to be abnormal.

 

GR012214-TWTRWeekly

 

Amazon.com (AMZN) remains in a buyable position after last Friday’s pocket pivot move as I discussed in my weekend report of January 19th. AMZN started out this week with an above-average volume breakout from its current four-week flag formation and today the stock tucked in just a bit on below-average volume. AMZN is expected to announce earnings next week, and my guess is that the stock will go higher following earnings. Based on the constructive action over the past three days one could buy the stock and take a measured position going into earnings, in my view.

 

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Global Eagle Entertainment (ENT) also remains within buyable range of its high, tight flag breakout of two weeks ago. As we can see on the daily chart below, ENT has pulled down into the top of the flag and its 10-day moving average on declining volume which I see as normal and buyable action on the pullback. As I see it, while holding the 10-day moving average is constructive for ENT, it is not really necessary as long as it holds above the $16 price level which was its flag breakout buy point.

 

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With ENT acting well, its close cousin Gogo (GOGO) is looking like it wants to finish rounding out the lows of a potential new base as it comes back up through the 65-day exponential moving average in a set-up that I call a “five-day” pocket pivot. In stocks that move below both their 50-day and 65-dema lines I’ve noticed that a subsequent move back above one or the other of these lines and off the 10-day moving average where volume is higher than any down-volume over the prior five days, the stock can be bought. Intrexon Pharmaceuticals (XON) had a move like this back on December 23rd and Facebook (FB) had a similar move on December 4th. My view is that GOGO is buyable on pullbacks down towards the 24 price level with the idea that it will hold the 10-day moving average at 23.57.

 

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Here is the daily chart of XON showing the five-day pocket pivot as the stock comes up through the 65-day exponential moving average, the black moving average on the chart, as it rounds out its last base. Note that other five-day pocket pivots that preceded this did not come up through either the 65-dema or the 50-day line

 

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The daily chart of Facebook (FB) below shows its five-day pocket pivot as it came up and off of the 65-dema as it was rounding out the lows of its base. I’ve studied a number of examples of this type of set-up, and I am willing to test them out in real-time going forward as I believe the concept is likely sound. I suppose XON and FB provide examples of five-day pocket pivots that work and it remains to be seen whether GOGO will provide another example for my “model book” of five-day pocket pivots occurring in previously strong leading stocks as they correct and roundabout along the lows of a potential new base.

 

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As long as we’re on this five-day pocket pivot thing, let’s look at another former leader that has been rounding out a base in Alliance Fiber Optic Products (AFOP), shown below on a daily chart. Last week AFOP had a big-volume bottom-fishing pocket pivot as it finally burst up through its 50-day moving average. But, interestingly, note that AFOP actually had a five-day pocket pivot the day before the large-volume standard 10-day pocket pivot. AFOP is expected to announce earnings on February 3rd. At this point, I would only be interested in the stock on a pullback down to the 16 price area. Other stocks in the group like Finisar (FNSR) and Ciena (CIEN), not shown, continue to build bases with FNSR looking to be the strongest of the group, so it wouldn’t surprise me to see AFOP also try to come up the right side of a potential new base.

 

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Organovo Holdings (ONVO) gave up on its 10-day moving average “hug” and decided to take a dive to the 50-day moving average, as we see on its daily chart, below. If this is just a shakeout to the 50-day line then I would like to see some volume support off the line, and that wasn’t forthcoming today as the stock just sat there. I had a position in the stock, but I was using the 10-day moving average as my tight trailing stop, so once it broke that line yesterday I dumped the stock in search of more fertile hunting grounds in stocks like CREE, NQ, and GOGO, for example.

 

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So far I don’t see anything wrong with Taser International (TASR) as it continues to move sideways here. Over the weekend I considered the stock buyable off the 10-day line and it did attempt to move higher and break out yesterday but in my view the move was likely premature. In the meantime, however, I consider pullbacks below the 17.50 price level to be buyable and I would prefer to look at buying the stock into weakness. Notice how the green 20-day exponential moving average is moving up to meet with the stock and in my view will likely provide an area of support for the stock on future pullbacks from here, should they occur..

 

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LinkedIn (LNKD) may be setting up for another move back to the upside following last Thursday’s improper bottom-fishing pocket pivot coming up through the 50-day moving average, as we can see on the daily chart, below. As I discussed in my report of this past weekend, January 19th, LNKD’s pocket pivot of four days ago on the chart came after a wedging rally off the lows and up through the 200-day moving average, so it was somewhat flawed. As I’ve noted in previous reports, LNKD has had three major waves of selling in the big jagged, ragged base it has formed over the past 20 weeks. In the daily chart below I focus on the right half of the base to show better detail, but you are able to see the last two selling waves in the pattern. Now with the stock tucking right back into its 50-day moving average as volume dries up sharply I see this action as helping to “correct” the wedging rally that occurred prior to last Thursday’s pocket pivot. Throw in an invocation of the “Ugly Duckling Theory” and I believe one can take a position in LNKD here with the idea that it will hold the 50-day line and attempt to bounce in the next day or two.

 

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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. In my view there remains plenty of merchandise out there that is actionable, and I’ve discussed a few of these in this report. In the meantime the market trend remains to the upside, and that remains the most effective way to play it. 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 CREE, ENT, GOGO, LNKD, NQ, and TWTR, though positions are subject to change at any time and without notice.

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