The Gilmo Report

January 5, 2014

January 4, 2014

The NASDAQ Composite Index, along with the rest of the market, started out the New Year with a gap-down move on heavier volume on Thursday, as we can see on the daily chart, below. One might attribute the selling to left-over tax-selling as anyone who wanted to push out any tax liabilities into 2014 would have waited until the first trading day of the New Year to sell. That might be true, and then it might not be. I prefer to take the action on its face, and what we have so far to start the year off is a two-day sell-off in the NASDAQ with a distribution day occurring Thursday. This was followed by an attempt on Friday to mount a rally earlier in the day. By the close, however, the index had reversed to close lower, finding little in the way of buying support as volume came in below Thursday’s levels. The S&P 500 Index, not shown, has also started out the year with two straight down days, although Friday’s close was only fractionally lower.

 

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While I continue to adhere to a strategy that views the market as a market of stocks and not a stock market, there is one thing that has me hearing footsteps and constantly looking back over my shoulder. To wit, that is the fact that the crowd appears to be all bulled up for 2014. The chart of the Investors Intelligence survey of investment advisor sentiment (©Decisionpoint.com, used by permission), below, currently shows an extreme bull-to-bear ratio of 4.03. With everybody loaded up on stocks, the crowd may be set up for some short-term disappointment. Not that there haven’t been any places to make money in the first two days of the year, as we’ll see later in this report, but again that requires focusing on the action in individual stocks and being able to recognize and anticipate nascent opportunities as they arise.

As I did in 2013, I prefer to focus on being in the right individual stocks at the right time, and so far in 2014 this approach continues to work. Despite all the positive prognostications for the market in 2014, I continue to believe that an active, nimble, and opportunistic approach will be the way to go in the New Year. Meanwhile, with so many investors leaning to the bullish side of the boat, I would not be surprised to see a correction in the indexes at any point in January. In the meantime, however, I will focus on wherever I believe I can make money, whether that is long or short, or both at the same time.

 

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Facebook (FB) can’t seem to get much going in the New Year as it is teetering along the top of its prior cup base, but as I wrote in my last report the stock may simply need some time to build a proper handle. If that’s the case, then I would expect the stock to continue to hold the 20-day exponential moving average, the green one on the daily chart, below. Notice that the shorter-term indicator bars at the top of the chart are flashing red, which I would only view as cautionary but not necessarily outright negative. Other than that we will just have to wait and see how the stock acts from here, and whether some sort of new buy point/signal occurs down the line. However, “earnings roulette” season looms ahead later in the month, and this could keep most leading stocks in a holding pattern, at best.

 

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LinkedIn (LNKD) has now broken down through its 200-day moving average, as we can see on the daily chart below, but the stock managed to close tight on Friday with selling volume receding. This latest downside move over the past two days puts the stock at a lower low in the third wave of selling within an overall big, ugly, consolidation that has taken place over the past three months or so. In my report of this past Wednesday, I declared that LNKD would be the big short of 2014, and so far that is coming to pass, although it’s too soon to write the stock off for good with earnings coming up at the beginning of February. Sitting here just underneath the 200-day line as well as the prior lows in the pattern in October and November puts LNKD in a possible “undercut & rally” position given that Friday’s lower low creates a full third wave of selling off of the September price peak. Therefore, from here I would only be interested in shorting the stock into rallies back up through the 200-day moving average and preferably as close to the 10-day/20-day moving averages as possible between the 216-218 price areas.

 

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Netflix (NFLX) also does not inspire much confidence as we go into the New Year and its upcoming earnings announcement, which is expected later in the month. NFLX remains in a position just below its 20-day moving average, and my guess is that the next big move in the stock won’t occur until earnings are out. Meanwhile the daily chart below shows that the entire rally over the past 2½ months has not seen one single day where volume was above average, something that I find strangely suspicious. Going into earnings roulette season I don’t see any reason to be involved with the stock and might even consider taking any profits one might have in the stock before earnings, given that it is starting to flash more red in my indicator bars along the top of the chart.

 

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Tesla Motors (TSLA) is another stock I don’t care to be involved with going into earnings roulette season. As the weekly chart of the stock below shows, for all we know it is simply in the process of building a big right shoulder in an overall head & shoulders topping formation, and it will be the earnings announcement in early February that will finally resolve this to the downside. Even if this were a new base forming, the action over the past three weeks would constitute a very low handle in an improper cup-with-handle formation. My view is that the stock can be left alone for now pending its earnings announcement, which is expected in early February.

 

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Twitter (TWTR) has started off the New Year with two days of upside to add to its New Year’s Eve bounce off of the prior mid-December flag formation, as we see on the daily chart, below. Friday’s gap-up move stalled out and closed at the lows of the intra-day price range with volume picking up, which looks a bit “exhaustion-like.” As I wrote in my last report, TWTR is in need of building a new base as it tries to consolidate the crazy upside move it had during the month of December. I don’t see TWTR as having had its “bubble” popped, and all the talk of this strikes me as similar to the “bubble” that TSLA was allegedly in when it was trading around $90 last May. Watch for TWTR to settle down somewhere in here between the $60 and $70 price areas, start to show some tight price/volume action in a more coherent sideways consolidation of its December gains, and then issue another actionable buy point at some point in the next few days or weeks.

 

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Organovo Holdings (ONVO) continued higher on Thursday, but at current price levels is likely running into some overhead supply from anyone who bought into its big November price run-up near the highs. ONVO is a volatile situation, no doubt about that, and last week’s pocket pivot buy point along the 10-day moving average, which I discussed in my report of last weekend, was your optimal low-risk entry point. If you’re suddenly all hot and bothered over the stock’s price action in the past three trading days you are late to the party, and as I discussed in my New Year’s Eve report, from here the only way to buy the stock is on pullbacks towards the $10 price level where I would expect the stock to find support, as I’ve highlighted on the chart. You absolutely do not want to buy this stock when it is up big – remain opportunistic and wait for pullbacks. In any case, I like the slight pullback on Friday as volume decline to just below-average. ONVO might need to spend at least a few days here building a little handle as it works off some of the overhead from the left side of the pattern. Meanwhile, I love the fact that ONVO is mentioned as a stock that “begs to be shorted” on certain investment blogs and websites, as this simply reminds me of those who thought TSLA and SCTY were begging to be shorted when they were trading around $40 and $19, respectively, last year.

 

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Workday (WDAY) proves that whenever you try and declare one or another stock to be your “favorite” idea it is usually a pointless exercise. As it turned out, the past couple of days have proven that in fact there were other stocks that should have been my “favorite” ideas, and in terms of where I was most aggressive on the long side over the past couple of days, they were. WDAY, meanwhile, continues to move sideways as it remains unresolved within the handle of a potential cup-with-handle base, as we can see on the daily chart, below. Following the pocket pivot of two weeks ago, the stock has basically gone nowhere, and if a breakout does not ensure soon I would not be surprised to see the stock back down to the lows of its handle and the 50-day moving average just under 80 given that it is wedging ever so slightly along the 20-day moving average.

 

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While WDAY is going nowhere, YY, Inc. (YY), which I discussed as buyable in my report of last weekend based on its subtle pocket pivot buy point of last Friday, launched and streaked to all-time highs to start out the New Year, as we can see on its daily chart, below. This is the kind of trade I like to be involved with, and I’m guessing that if I had declared YY to be my “favorite” stock in my last report it would not have had the two-day, 15% upside jack it has posted in the last two trading days. But as is my custom, when I get a rapid and sharp upside move after buying a stock exactly right when it is still “quiet” I will sell into the move and base breakout given that this is what I was looking for in the trade, and seek to re-enter on a pullback down to the 55 level and the top of the prior base. This is the way I operated in 2013 and it is how I will likely continue to operate in 2014 as I believe we will remain in a QE-distorted market for some time to come.

 

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Last weekend I discussed next-generation cyber-security leader FireEye (FEYE) and in no uncertain terms said that I considered the stock buyable on any pullback to 42 or better. Well, the stock did exactly that on Thursday, pulling right down into its 20-day moving average, as we can see on the daily chart, before gapping up and launching 38.63% on Friday. A couple of Gilmo members emailed me that they did indeed buy the stock on that Thursday pullback, and were quite giddy to see the stock’s amazing upside jack on Friday after the company announced that they were buying another security firm. Talk about fortuitous! FEYE’s move on Friday of course also constitutes a buyable gap-up move, but in this case the stock is now way too far extended from the 49.60 intra-day low of Friday’s BGU price range.

My view is that the stock should have been bought per my comments of last weekend on the expected pullback below 42, and with the stock up 38.63% on Friday, one could consider taking at least partial profits on the position. We haven’t seen many buyable gap-up moves produce much in the way of big upside follow-through following the initial gap-up, which is why I’m inclined to sell into the strength and then wait around to see what happens from here. Of course, if you own the stock and are up nicely on the position, you can handle it as you see fit. The major positive for FEYE is that this gap-up move is coming out of a first-stage IPO base, and while I expect the stock to try and build some sort of flag formation here, at least, this could signal the start of a significant upside price move if the general market rally remains intact in 2014.

 

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SolarCity (SCTY) came up off of its 10-day moving average on Thursday for another pocket pivot buy point, the third on in the pattern over the last three weeks, as we can see on the daily chart below. SCTY backed off on Friday to retest the 10-day line, which it did successfully, and at this point I would be looking to buy the stock on pullbacks to the 10-day line. There is probably some resistance from the left side of the base, which might slow the stock up here along the 60 price level. SCTY is not the only solar stock on the move, however.

 

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In fact, the first trading day of the year on Thursday saw just about every solar stock in the group flashing bottom-fishing pocket pivots, including names like Sunpower (SPWR), First Solar (FSLR), Trina Solar (TSL), Jinko Solar (JKS), etc., all of which I do not show here but which were moving allegedly on news that China is looking to increase solar production to 14 gigawatts, which is a lot of wattage. This was an interesting group phenomenon to watch on Thursday, but with my prior discussions of SCTY in recent reports and Canadian Solar (CSIQ) in my New Year’s Eve report, my extreme modesty prevents me from pointing out that I saw this before it happened. But wait, I just did!

In any case, I consider these all to be constructive for the group at large, but as we can see on the daily chart below, CSIQ’s move was the most powerful of the group as it led Thursday’s solar charge (pun intended) with a 9.2% jack to the upside. CSIQ pocket pivoted on Thursday in a big price move that took the stock to new 52-week highs and a high-volume base breakout, with a little more upside added on Friday. Pullbacks down towards the 33 price level at the top of the prior base would be buyable from here, but hopefully members were alert to it on Thursday early in the day as it began its price move given that I had discussed the stock in detail in Tuesday’s New Year’s Eve report.

 

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Splunk (SPLK), which has been floundering along its 10-day and 20-day moving averages, finally came through with some positive action on Thursday as it flashed a pocket pivot buy point coming up through its 10-day moving average, as we see on the daily chart, below. Last week I pointed out the more subtle pocket pivot in SPLK along the 10-day line, but Thursday’s was much more pronounced and can also be looked at as a trendline breakout within a six-week base.

 

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Gogo (GOGO) is seeing increased selling here as it violates the 50-day moving average and tries to hold at the 65-day exponential moving average, as we can see on the daily chart below. Because the stock has not adhered to my scenario for trading it off the 50-day moving average, where I was expecting a more powerful bounce and recovery off the 50-day line, it is now off the table as a long idea here, at least in the short-term. Keep in mind, however, that it may simply need more time to continue working out the lows of a possible new base and “roundabout” formation. With all the red flashing on the indicator bars at the top of the chart, the stock is simply telling me that now is not the time to be aggressive with the stock on the long side, and so I am perfectly content to back off and give it some more time to round out the lows of a possible new base and perhaps flash some constructive bottom-fishing pocket pivots.

I believe GOGO’s fundamental concept is still compelling, but it is clear it has some supply issues to work out before it will be able to recover. This might happen sooner, or it might happen later, but in either case it is simply a matter of continuing to watch the stock from here for the proper signals and price/volume action to materialize. As far as I’m concerned, I took a shot, it didn’t pan out as I thought it would, so I cut it for a tiny loss or less and moved on, with the idea that I will not be afraid to buy it back if the proper price/volume action tells me to buy it back, even if it is trading at a higher price from where I sold it. Remember, it is not where you bought and sold a stock previously that matters, but where it goes from wherever you buy it after that.

 

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Acadia Pharmaceuticals (ACAD) continues to consolidate nicely as it finds support along the 10-day/20-day moving average confluence, as we can see on its daily chart, below. The stock probably remains buyable here with the idea that it will at least continue to hold the 20-day line down at 24.45 as it has done over the prior three trading days. There is some volume support evident off the 20-day line, but the action is still slightly wedging over the past couple of days as the stock builds what looks like a little one-week handle to a cup formation extending back to early October.

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Taking the usual opportunistic approach to Finisar (FNSR) would have paid off if one bought the pullback to the 10-day moving average on Thursday, as we can see on the daily chart, below. After the Thursday pullback FNSR gapped up on Friday on above-average volume but closed at the lows of the daily price range, which I found a bit curious given the rip-roaring gap-up right at the opening. This probably demonstrates that some overhead supply from the left side of the base is still a factor. As well, this is why I prefer to buy the stock on pullbacks to logical areas of support rather than chasing strength, an approach that pretty much governs my long-side buying in most cases anyway these days.

 

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The “Three Caballeros,” otherwise known as Celgene (CELG), Gilead Sciences (GILD), and Biogen Idec (BIIB) continue to move sideways here, likely in anticipation of their respective earnings announcements in the latter part of January as we begin to move into earnings roulette season. BIIB, which is the only one I show on a chart, continues to meander around its 10-day and 20-day moving averages as it remains reluctant to show any follow-through move to the upside after the two pocket pivots of about two weeks ago, which I’ve indicated on the daily chart, below. So far these are just “pocket pivots to nowhere,” and I have to say I would have expected some stronger follow-through given the heavy volume seen on both of these pocket pivots. Buying into either of those pocket pivots has so far yielded nothing, and I have to say I prefer optimizing my use of precious investment capital in names that act more like CSIQ, SCTY, FEYE or YY did this past week. If you don’t mind sitting, I suppose one could continue to hold BIIB on the basis of the pocket-pivots-to-nowhere, but with earnings looming in a couple of weeks, it is not clear that any resolution to the current consolidations in any of the Three Caballeros will be forthcoming.

 

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I continue to like the way Interactive Corp. (IACI) is moving tight sideways over the past couple of weeks following its big buyable gap-up move of December 19th, as we see in the daily chart below. IACI may be one of those stocks you would think of as big and lumbering, but it does have a Composite Rating of 97 and an SMR Rating of A while being exposed to a variety of internet businesses, from search to social-networking to multimedia content and everything in between. My approach here would be to take a position here using the 10-day line at around 67 as a very tight stop, with the idea that the stock will get moving pretty quickly.

 

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Gaming resort stocks that I first mentioned back in my report of December 4th continue to do well, as the daily chart of Melco Crown Entertainment Ltd. (MPEL) shows below. I also discussed Las Vegas Sands (LVS) at that time, not shown, and both stocks remain up from their initial early December pocket pivots. So far there have been no new actionable buy points in the stock since then, as they remain in decent, but shallow uptrends, but we will continue to watch for any such signals if and as they occur in real-time.

 

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While a two-day pullback to start the New Year off with a thud and extremely high bullish sentiment might seem somewhat cautionary, 2014 is starting out as pretty much the same market it was in 2013. Focusing on individual stock set-ups, maintaining an active and flexible posture, and thinking in terms of the “Ugly Duckling Theory” might be the same set of keys to success that worked in 2013, and this will likewise remain the focus of my reports. In the meantime, more evidence in the form of concrete, negative price/volume behavior will have to be forthcoming to confirm the potentially cautionary preponderance of bullish sentiment going into 2014.

Even as the market has moved higher over the last two weeks surrounding the start of the New Year, breadth as measured by both the NASDAQ and NYSE Advance/Decline lines has been roughly flat, indicating that it remains a matter of being in the right stocks. Investor’s Business Daily, in this weekend’s edition, points out that the IBD 50 Index of top growth stocks has performed in-line with the S&P 500 as its Relative Strength line has gone flat over the past three months, which, according to the article, is an unusual condition in a market uptrend. And this makes sense in that some of the biggest winners I’ve discussed in the Gilmo Report over the past 2-3 months have been stocks that don’t fit the normal CAN SLIM® earnings and sales parameters, such as GOGO, TWTR, SCTY and FEYE, for example, none of which are showing positive earnings.

Of course, this doesn’t mean you should throw up your hands and scream “OMG, I can’t make money in this market!” It does, however, mean that one can make money by thinking outside of the usual box, and for now that is where I remain, for the most part: outside of the box as I persist with the methods that helped me achieve a successful 2013. 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 no positions, 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.