The Gilmo Report

July 14, 2013

July 14, 2013

As I wrote in my report of last weekend, January 7th, it appeared to me that the market was already in a de facto uptrend based on the action of the Russell 2000 Index, which had made a new closing high on January 5th. And as I surmised might occur, the Russell was simply leading the other major market indexes to new highs of their own. This week we saw the NASDAQ Composite Index, shown below on a daily chart, gap up to its highest high so far since the market lows of 2009 as the appropriate financial publications finally conceded that the market was no longer in a “correction.” The S&P 500 Index, not shown, also cleared to a new closing high but remains at prior resistance right around the 1680 level. But as I’ve pointed out in previous reports over the past couple of weeks or so, there have been a number of buyable situations for those who were willing to employ somewhat less than orthodox “bottom-fishing” pocket pivots in leading stocks that were simply rounding out the lows of new bases. As well, there have been some new buyable gap-ups, another buy point we use that is not covered in the orthodox literature regarding acceptable buy points for speculators in high relative-strength stocks. Meanwhile, those who stick to standard “buy-the-breakout” stuff are now looking for actionable buy points, but we are already in a number of leaders well ahead of the crowd.




With the new uptrend now quite obvious to all, it would not surprise me to see the indexes pull back, although the market wasn’t having any of that on Friday. The NASDAQ chart shows the index closing at the peak of its range on both Thursday and Friday. While some might simply pass it all off to Fed Chief Ben Bernanke’s comments in a speech Wednesday after the market close, the bottom line is that we were seeing a number of leading stocks starting to flex their little stock muscles before the fact. Thus it may be that Bernanke’s comments simply gave the market license to do what it wanted to do anyway.




Perhaps one sign of a market on the verge of regaining its upside mojo was the action of my favorite stock and current market leader Tesla Motors (TSLA), which motored to all-time highs on Friday as it approaches the $130 price level. TSLA is being added to the NASDAQ 100 Index, effective Monday, so some of the buying on Friday could be due to this. However, I would expect the stock to hold the 10-day moving average, currently around 120.05, on any pullback from here. TSLA announces earnings on July 24th, and the shorts are probably hoping for something to save them from their current fate. As of the end of June, TSLA still had 19.8 million shares sold short, still about 2/3rd of the short interest that existed back in May when the stock began its steep ascent with a buyable gap-up. Interestingly, if one were sticking to standard “buy-the-breakout” rules, one would never have bought the stock beyond the 42 level, yet TSLA has offered investors one of the juiciest profit opportunities so far in 2013.




TSLA’s sibling, SolarCity (SCTY), also “fathered” by CEO Elon Musk, continues to work its way up the right side of a potential new base following the prior two “bottom-fishing” pocket pivots in the pattern. SCTY announces earnings on August 12th, so it still has plenty of time to get back to its prior high of 52.77. For now I would use pullbacks from here down to the 10-day line at 40.36 to buy shares.




With Sunpower (SPWR), not shown, continuing to power to new highs, the solar energy industry group is again ranked #1 in relative strength. First Solar (FSLR) is trying to join the party with a bottom-fishing pocket pivot of its own on Friday. This is coming from a position below the 50-day moving average, so watch for a confirming move back above the 50-day line, using the 10-day line at 45.79 as your guide for a stop.




It was somewhat ironic that the day after I pointed out in my report of this past Wednesday that prior short-sale target Celgene (CELG) was looking more like a possible long, the stock blasted higher on a buyable gap-up move following a positive announcement regarding its Revlimid product. This is potentially buyable using the 131.67 intra-day low of the gap-up day as your guide for a stop.




In my Wednesday report I also told members to watch for a possible pocket pivot developing along the 50-day moving average in former short-sale target Biogen Idec (BIIB). BIIB flashed pocket pivots on both Thursday and Friday, making the stock potentially buyable right here as it looks ready to make a run back up to its prior highs above the $240 price level.




Regeneron Pharmaceuticals (REGN) also sprung back to life with a move that I believe can be interpreted as a buyable gap-up using the 253 intra-day low of Friday as your selling guide or as a breakout from a double-bottom base, making it potentially buyable right here. Take your pick.




Acadia Pharmaceuticals (ACAD) continues to track tightly along its 10-day moving average and I tend to think this is just revving up for an eventual move to new highs. Watch for a pocket pivot to occur along the 10-day line in the next few days.




In my Wednesday report I discussed the pullback in Santarus (SNTS) following its buyable gap-up move of this past Monday as being quite buyable. As it turned out, it was, and the stock moved to new highs on Thursday and Friday.




Valeant Pharmaceuticals (VRX) staged a pocket pivot range breakout from the short five-day handle it was building as it made a new all-time closing high on Friday. The bio-tech area is extremely resurgent here as we’ve seen a number of stocks in the group flash buy points of one type or another over the past couple of weeks – this is constructive for the market and provides us with a fertile group of new buy opportunities.




More proof that many leading stocks were in fact buyable two weeks ago is found in Yelp (YELP) as it continues to move higher. The stock was buyable on the breakout of two weeks ago in late June, well before the market was considered to be in a new uptrend.




Splunk (SPLK), was also moving higher well before the new uptrend was declared, and its recent move to all-time highs came after two pocket pivots in the pattern occurred in late June, as I’ve discussed in previous reports over the past two to three weeks. SPLK tested its 10-day moving average in orderly fashion on Tuesday before bouncing to new highs.




Netflix (NFLX) also began its current move with two “bottom-fishing” pocket pivots last week, as I discussed in previous reports. The stock continued up the right side of its base and into new 52-week highs with a valid base breakout on Friday. This offers another buy point, albeit one that is more orthodox and which the crowd clearly sees at this point.




I wrote in my June 30th report that LinkedIn (LNKD) was not showing any signs of weakness in its weekly chart. While it has continued to drift higher on light volume since then, it was not until Thursday that a pocket pivot trendline breakout occurred, making the stock buyable at that point as it has now moved right back up to the $200 price level.




The big 3-D printing stocks, Stratasys (SSYS), not shown, and Three-D Systems (DDD), shown below on a weekly chart, continue to hold up with SSYS holding above its trendline breakout of two Friday’s ago (see July 7th report). Meanwhile DDD continues to hold above its 50-day and 10-week moving averages, but with no real buy points showing up along these key moving averages. The stock has now completed what is so far an eight-week base. DDD announced on Thursday that it is entering an “exclusive alliance” with consulting firm Deloitte “to jointly assist companies and industries adopt and integrate 3D printing design and manufacturing systems and solutions into their business for sustainable competitive advantage.”




This is an example, in my view, of how 3-D printing is steadily becoming more broadly recognized as a game-changing technology, and this could drive another upside move in the 3-D stocks. DDD announces earnings on July 30th while SSYS announces on August 1st. While SSYS already flashed a trendline breakout two Fridays ago, my guess is that DDD will eventually break out of this current eight-week base, but it may take a strong earnings announcement to drive such a move. Meanwhile short interest has risen to 26.9 million shares as of the end of June, about 500,000 shares shy of its peak short interest of 27.3 million shares back in April when it began coming up the right side of its base, so the stage is set for a potential short squeeze.




In fact, SSYS and DDD were some of the earliest examples of “bottom-fishing” pocket pivots in 2013 back in April when they first moved back above their 50-day moving averages (see April 30th and May 1st reports). While the stocks tend to be volatile by nature, I still think that the 3-D printing industry’s best days are likely ahead of it, and these stocks need to be on your buy watch list.


For comments on other stocks I’ve discussed in recent reports, such as Cree (CREE) and Trulia (TRLA), for example, please refer to those recent reports as my thoughts on these stocks have not changed since my last comments.


The bottom line for me with this current market environment is that we’ve now seen the obvious confirmation of what I was sensing last weekend, namely that the market’s uptrend was on the verge of gaining steam on the basis of the Russell 2000 making the first move to a closing high ahead of the other larger-cap indexes. With Thursday’s action constituting a strong follow-through type of move, the momentum is now clearly to the upside, Gilmo members were likely already owning any number of stocks I’ve discussed in the past couple of weeks before this occurred. The signs were there in individual stocks, and it is now a matter of seeing how the market makes it through “earnings roulette” season as we move into the thick of things over the next couple of weeks. For now, we have several newly actionable buy points in stocks like CELG, BIIB, REGN, and possibly FSLR, while others appear to be acting constructively after flashing earlier buy points, either in the form of buyable gap-ups, such as SNTS, or bottom-fishing pocket pivots, such as SCTY, SPLK, TRLA, and others.


Thus the market’s message remains the same and exactly as I closed my report of this past Wednesday: the long side is the place to be until further notice.


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 ACAD,CELG, FSLR, SCTY, and TSLA, though positions are subject to change at any time and without notice.


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