The Gilmo Report

January 8, 2014

January 8, 2014

After a three-day sell-off to celebrate the New Year, the market quickly found its footing and has turned higher over the past two days with the NASDAQ Composite Index, below, taking the lead as we see in its daily chart below. The growth-oriented index was up again today on higher volume as the S&P 500 Index, not shown, held tight to close virtually unchanged and the large-cap Dow Jones Industrials, also not shown, fell 68.20 points on the day, or -0.41%. As I wrote over the weekend, the index action is not all that relevant to making money in individual stocks as a broad swatch of names, including some newer merchandise, have been rocketing higher so far in 2014, and I tend to see the strength in the NASDAQ relative to the S&P and the Dow as a clue that a more pronounced shift towards growth names is likely in process here. However, a lot of names I’ve covered in the past handful of reports are extended to the upside, and may be primed for a little bit of pullback and consolidation. Let’s look at some of these strong growth names that have taken charge so far in 2014.

 

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Over the weekend I thought Workday (WDAY) might be susceptible to a pullback within the handle of its cup-with-handle base, but instead the stock broke out on Monday in a big-volume move after initially pulling down early in the day. It was buyable on that basis Monday, and the ensuing three-day move is quite satisfactory. It is extended now, however, and needs to pull back from here to be potentially buyable within 5% of the 83-84 breakout point, say down to 87 or better.

 

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YY, Inc. (YY), was buyable on the pullback to 55 or better Monday, something I discussed in my report of this past weekend, as we can see on the daily chart below. But the stock is up over 25% from the initial pocket pivot buy point down in the 50-51 price area and thus quite extended. From here a 50% retracement into the 57-58 area might be buyable, but we’ll have to follow YY from here to see just how and whether this occurs. For now the stock is well out of buyable range, but illustrates another powerful leader taking charge in 2014.

 

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Sina Corp. (SINA) also greeted the New Year with a bang as it broke out yesterday from the midpoint of a double-bottom type of base as we can see on the daily chart, below. I discussed SINA’s pocket pivot buy point within the base two weekends ago, and after a brief pullback last week the stock turned and lurched higher this week. At this point I would only be interested in potentially buying the stock on pullbacks into the double-bottom breakout point at around 85-86.

 

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Qihoo 360 Technology (QIHU) was tightening up in a manner similar to the way YY did prior to its big breakout in the New Year, and as we can see on the daily chart, below, the stock blasted out today on a huge-volume buyable gap-up move, using the intra-day low of today at 85 as your selling guide. Last night I had made notes to discuss QIHU today using a weekly chart which showed the extreme tightness along the lows of its current base that almost perfectly imitated YY’s action before it broke out last week, but QIHU beat me to the punch by jacking to the upside today. Notice, however, that the stock has still not broken out to new highs, so I would definitely try to use pullbacks near the 85-86 level to potentially get on board the stock here on the basis of today’s BGU. QIHU is another leader in the Chinese internet space that is now catching up to YY and SINA.

 

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FireEye (FEYE) finally pulled back today after last Friday’s huge-volume and massive gap-up move that was followed by an additional two days of upside movement, as we can see on the daily chart below. At this stage the stock is obviously wildly extended and I am watching to see whether the 10-day moving average has a chance to catch up to the stock on the pullback and set up some sort of secondary, continuation buy point. Otherwise, if you bought the stock on my recommendation exactly one week ago that it be bought on pullbacks to 42 or better, feel free to sing the “Happy Birthday” song to yourself because this was one heck of a trade to be riding as we started the New Year.

 

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SolarCity (SCTY) continues to power higher in the New Year with a massive-volume buyable gap-up and base breakout on Monday, as we can see on the daily chart, below. This came on the heels of three pocket pivot buy points within the base that I’ve discussed in recent reports in the latter half of December and so far in 2014, and while SCTY remains in new-high price ground following Monday’s BGU it has not made any progress beyond the intra-day high of that day. However, based on the parameters for buying a BGU, Monday’s move remains potentially buyable using the 63.04 low, plus another 2-3% given SCTY’s inherent volatility, as your selling guide.

 

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Canadian Solar (CSIQ) also continues to move higher, but is quite extended and in need of a rest, as we can see on the daily chart below. All the solar stocks, with the exception of First Solar (FSLR), not shown, and which is looking more like a short, have been acting well since the mass of pocket pivots within the group that we saw on the first trading day of the New Year, last Thursday. CSIQ acts very well here as today was the first down day since the big-volume breakout last week and the stock held relatively tightly as volume dried up sharply. Only a pullback to within 5% of the breakout from here would be potentially buyable, so we will continue to monitor the stock.

 

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Splunk (SPLK) followed through on the trendline breakout and pocket pivot which were the main points in my discussion of the stock over the weekend by blasting to the upside yesterday in a buyable gap-up move as we can see on the daily chart, below. SPLK is notorious for going nowhere after buyable gap-ups, and this one so far appears no different as the stock held tight today with volume drying up. It remains in buyable range of the BGU using the 73 intra-day low of yesterday as your selling guide. The way I see it, I would rather have been in the stock on the basis of the two pocket pivot buy points within the base over the prior 2-3 weeks, as we can see in the daily chart, below. But this BGU move yesterday remains potentially buyable nevertheless.

 

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Yelp (YELP) followed up on its prior pocket pivots within its prior base and broke out yesterday on heavy volume. This is now extended from my perspective and we’ll have to see going forward just how and when a new buy point emerges in the pattern.

 

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Gogo (GOGO) was looking grim on Monday as it reversed off of the 50-day moving average and moved lower on heavier, above-average selling volume, but it came back with a bottom-fishing pocket pivot yesterday on strong, above-average volume. Unfortunately, as we can see on the daily chart, below, insiders likely came back after the stock and sold into that move today as the stock reversed on heavy volume to close back at the 65-day exponential moving average. In my view, and as I wrote over the weekend, GOGO is likely still a viable leader, but it is going to have to work through supply issues following the IPO lock-up expiration in mid-December. What I would be looking for from here is more “rounding out” action along the lows, preferably such that the stock is able to flash another pocket pivot going forward that is able to clear the top of the current downtrend channel. Pocket pivots occurring after a sharp downtrend usually have less probability of working as one would prefer to see the stock spend more time “hammering out” the lows of the base. For now I’m happy to play ENT as we let GOGO work through its supply issues with the idea of potentially coming back to the stock at some point in the near or not-so-near future.

 

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Global Eagle Entertainment (ENT) is a GOGO competitor. Like GOGO, ENT is poised to benefit from the installation of in-flight internet and media services as the airlines upgrade their jet fleets. Monday’s pocket pivot off the lows of of a three-week flag formation presaged today’s breakout to new highs for ENT on above-average volume. This breakout is itself potentially buyable, even better if the stock pulls below 16 on a small consolidation of the three-day move.

 

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Interestingly, the recent and current movement in GOGO and ENT has been accompanied by strong action in the airlines over the past few days, which brings up the idea of a “cousin” group phenomenon here. If the airlines are doing well, then this would appear to bode well for the businesses of those who supply various services and products to the airlines. I show the charts of four airlines, American Airlines Group (AAL), Delta Airlines (DAL), Southwest (LUV), and Spirit Airlines (SAVE), below, and the constructive action in each is fairly obvious. Throw in the action of Boeing (BA), not shown, lately as it makes all-time highs here and you can see what I’m getting at here. An interesting group phenomenon which seems to argue for strong action going forward for the airline industry and its “cousin” stocks like GOGO, ENT, and BA.

 

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Organovo Holdings (ONVO) continues to work on a handle within what is starting to look like a cup-with-handle formation, as we can see on the daily chart, below. As I wrote over the weekend, you want to use pullbacks down in the $10 price area to buy the stock while avoiding getting sucked in on strength. ONVO remains a volatile stock, although it trades well over $72 million a day in average daily dollar volume, which I find to be quite constructive for a $10 stock. Monday’s pullback right to the $10 price level coincided with the 10-day moving average, and that provided a nice entry point on temporary weakness. Over the past two days ONVO has moved higher with volume picking up slightly today. So far so good, and the stock remains potentially buyable on pullbacks to the 10-day line from here.

 

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Finisar (FNSR) has been buyable on pullbacks down into its 10-day and 20-day moving averages, a concept I’ve discussed several times in recent reports, and this week has proven no differently. Yesterday’s move down to the 10-day line, as we can see on the daily chart below, resulted in a very subtle pocket pivot right along the 10-day line, and although the stock closed 3 cents below the moving average, in my view it was close enough for horseshoes, hand grenades, and FNSR shares. This subtle pocket pivot resulted in a more pronounced pocket pivot and trendline breakout to a higher high as the stock starts to emerge from a 13-week base. This is potentially buyable with the idea that the stock will continue to hold above the 10-day line on any pullbacks from here. I should also mention that FNSR’s cousin, Ciena Corp. (CIEN), not shown here on a chart, also flashed a bottom-fishing pocket pivot today as it came up and off of its 20-day moving average and through its 10-day moving average. CIEN is in a lower position within its base, while FNSR is higher up in its base, so I go with the one that looks stronger here, which is FNSR.

 

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Taser International (TASR) confirms that the “Ugly Duckling Theory” is alive and well in this market as it achieved resurrection today on a huge-volume buyable gap-up move, as we can see on the daily chart below. TASR had long ago violated its 50-day moving average but never actually violated its 65-day exponential moving average, the black line on the chart, before vaulting back to the top of its current six- to nine-week base, depending on whether you’re looking at the weekly or daily charts. With resistance up around the 18 area and the top of the prior base, this may need to move sideways for a bit before making an attempt at new highs.

 

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Twitter (TWTR) undercut the 58.57 low of seven days ago on the daily chart, below, and today tried to hold the 20-day moving average before rolling over and tanking. One way to handle this is to take an initial position on the undercut of the 58.57 low and then look for some sort of shakeout-plus-three buy point at 61.57 to come into play to add to the position with the idea that it will continue to hold the 58.57 low. I still think TWTR is viable as a longer-term leader if the general market rally holds up into 2014, and it is simply a matter of finding buy points within a possible new base. For those who wish to keep it even simpler, one could just wait for the stock to form a new base and then issue a coherent buy point. Speaking for myself, now that we are developing some high and low reference points in a possible new base I can start figuring out where I might like to test a long position given that I am, at least to some extent, a follower of the Ugly Duckling Theory. I notice that Fidelity ContraFund bought over a million shares last quarter based on the most recent filings and I doubt very much if they took the position as a short-term trade. Thus I would expect some support to come in somewhere on this pullback, so we will just have to see where the stock goes from here.

 

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Facebook (FB) found strong support at the 20-day moving average, which I was looking for per my report of this past weekend. That move on Monday was also a pocket pivot buy point off the 20-day line and up through the 10-day moving average, surprisingly enough, and the past two days have seen the stock hold tight as it forms a tiny cup-with-handle-like formation here. Monday’s move would be seen as a pocket pivot within the handle of what looks to be shaping up as a cup-with-handle formation for FB.

 

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LinkedIn (LNKD) was downgraded by an analyst on Monday, sending the stock further below the 200-day moving average, but as I’ve been discussing in the last two reports, you are in an area where the stock is making a lower low in the third wave of selling off the peak. As we can see on the daily chart, below, this third wave of selling resulted in a reversal back to the upside on heavy, above-average volume as the stock bumped back above the 200-day line. This is definitely not a position I want to be shorting the stock in, at least for an expected break that takes the stock further to the downside. It may take the earnings announcement in early February to do that.

 

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In my report of this past weekend I discussed Netflix (NFLX) with the conclusion that “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.” NFLX has since proceeded to bust the 50-day moving average, as we see on the daily chart, below, and is on the verge of issuing a bona fide violation of the 50-day line. I will reiterate what I said over the weekend, which is that with earnings coming up at the end of the month, there is no reason to own NFLX.

 

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After boring me to death by floundering along its 10-day and 20-day moving averages, Biogen Idec (BIIB) finally came back to life today on a pocket pivot move within a month-long flag formation. There were obviously better stocks to be involved with over the past week or so, so dumping BIIB in favor of something else, like a YY, SPLK, YELP, FNSR, WDAY, etc., wasn’t necessarily a bad idea. However, today’s action does constitute an actionable buy point, but I must admit I remain skeptical as to whether BIIB can launch higher from here as we go into earnings in the next two weeks. I suppose if one were so inclined one could take a position on the basis of today’s buy signal and see what happens.

 

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Acadia Pharmaceuticals (ACAD) was not looking too happy yesterday on a day when the major market indexes were up strongly, making a break to the downside and its 50-day moving average, as we can see on the daily chart below. I suppose one might try to buy the stock here with the idea that it will find support off of the 50-day line, but overall I just do not like the action which has been a poor follow-up to the bottom-fishing pocket pivots of two weeks ago. In my view there are better stocks to own here.

 

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2014 has most certainly started out as a market of stocks given that the initial three-day sell-off in the indexes that greeted the New Year was counteracted by strong action in a number of leaders that I’ve been discussing in recent reports. Focusing on individual stock set-ups has been the key here, but with the NASDAQ moving into the lead here and a number of growth names showing strong price/volume action in recent days, we are well set up for a continued market rally.

The Fed released its most recent policy meeting minutes where it was revealed that several members wanted to increase the amount of January’s QE taper, which sent the indexes to the downside in reaction. However, by the close, the market had moved up off of its lows to close reasonably well. Overall in the New Year, the indexes simply appear to remain in five-day consolidations following the year-end move to new highs. Meanwhile, it is clear what stocks were the ones to be in as we start the New Year, with others moving into position, such as ENT. As Darth Vader told his minions as they pursued Luke Skywalker and his fellow rebel X-Wing pilots in the final Scene of Star Wars IV, “Stay on the leaders!”

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, FNSR, ONVO, and TWTR, 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.