The Gilmo Report

July 2, 2014

July 2, 2014

The Dow just missed clearing the 17,000 mark on Tuesday, a potentiality that at least appears to be useful in the sense that it gives financial cable TV something to sensationalize over. The reality of the market so far is that we’ve come a ways from the market turn back in mid-May, and a number of stocks that we’ve looked at as long situations as they were flashing bottom-fishing pocket pivots (BFPPs) and roundabout pocket pivots (RAPPs) have had very nice moves so far.

While certain people will advise taking 20-25% profits in positions when you have them, the fact is that at this stage of the market’s rally the chance that you might have such profits by buying BFPPs and RAPPs several weeks ago is much higher than if you simply adhere to buying standard-issue base breakouts. As we move further into second-quarter earnings season I prefer to “dial down” my risk profile, nailing down some profits, as I tweeted on Tuesday, and letting earnings season run its course.

On Tuesday, the NASDAQ Composite Index, shown below on a daily chart, reached a point where it is more than 6% above its 50-day moving average, another reason I would look for a pause as earnings season provides clarification to the leaders. While I might expect that tomorrow’s action will likely be somewhat dull given the upcoming three-day July 4th holiday, we do have the Bureau of Labor Statistics’ monthly jobs number coming out before the open, which may or may not provide some appropriate fireworks. The bottom line remains, however, to just watch your stocks and be mindful of taking profits when appropriate.

 

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Both gold and silver continue to look good here as they flash continuation pocket pivots. The daily chart of the SPDR Gold Shares (GLD) is shown below, on top of the daily chart of the iShares Silver Trust (SLV). From the charts we can see that both of the yellow and white metal ETFs had pocket pivots coming off of their 10-day moving averages following similar gap-up pocket pivot moves coming up through their 200-day moving averages a couple of weeks ago. These both remain in a buyable position with the idea that they will hold the 200-day moving averages on any pullbacks from here, although one could insist that they hold the 10-day line if one wants to maintain more onerous stops. With the metals acting well here, I consider this a positive sign for stocks, although the GLD and the SLV are certainly playable in their own right on the basis of their objective price/volume action.

 

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Palo Alto Networks (PANW) gapped up Monday and looked to be gathering some upside steam on a run to new highs, only to flash a big outside reversal day on heavy selling volume, as we can see on the daily chart, below. This is not the sort of action I prefer to see when one of my positions is clearing the top of a somewhat large double-bottom cup base. If we study the chart we might consider the fact that the stock has had quite an upside run since the market bottomed in mid-May, so the stock may not exactly be ripe to run just yet. PANW pulled down to fill its Monday gap but couldn’t get any bounce going from there as it closed down slightly on the day. My guess is you will see the stock test the 10-day moving average at 80.94 as volume dries up here. Despite all the spinning around in the stock so far this week, it is still up for the week, and I would watch carefully for a buyable pullback into the 10-day line. Otherwise if PANW busts through the 10-day line on increased volume it may turn into another Cavium (CAVM), not shown, which after acting quite strongly following its own BGU around the time of PANW’s came all the way back in to test its BGU low. Hopefully PANW will not suffer a similar fate.

 

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Yelp (YELP) finally caught some air today as it launched above the $80 price level for the first time since the first days of April, as we can see on the daily chart, below. Despite closing in the lower part of its daily range, the move does qualify for a pocket pivot, but in general this action shows why I tend to pare back or sell into sharp upside moves like this. YELP was up around 4 points early today, the sharpest upside move it’s had since its buyable gap-up move of June 13th. Theoretically this is a buyable pocket pivot, but I would not give the stock much room on the downside if it goes through the 10-day line from here.

 

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Sunpower (SPWR), not shown here on a chart, continues to hold up along the 40-42 price area and its 10-day moving average. So far there’s nothing to do here with SPWR but wait for a continuation pocket pivot to show up along the 10-day line. However, given that this position is up about 30% for me, I do elect to bank profits here and let the stock set up again. Meanwhile, a new name in the solar group that has caught my eye in recent weeks is GT Advanced Technology (GTAT), a maker of polysilicon, photovoltaics, and sapphire that is primarily used in the manufacture of solar cells.

GTAT’s sapphire products are also used by Apple (AAPL), and with the company building a new plant in Arizona for the purpose of producing more sapphire materials there is strong potential for the company to move into other markets. Consider GTAT a solar energy-related stock with a kicker. I’ve been watching the stock since it had a roundabout pocket pivot back on June 10th, and on Tuesday the stock broke out of what we might consider a cup-with-handle type of base. GTAT is losing money currently but is expected to turn to profitability two quarters out with 16 cents a share in earnings. Annual earnings are estimated to hit 8 cents in 2014, but expand rapidly to 78 cents in 2015 and then $1.57 in 2016. The breakout point here is 19.20, so the stock remains within range of this standard buy point, but just barely.

 

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Twitter (TWTR) announced the hiring of a new CFO, a gentleman by the name of Anthony Noto, and launched higher on Tuesday on the news. Mr. Noto formerly served as the CFO of the National Football League and was a Managing Director of the Technology, Media and Telecom Investment Banking Group at Goldman Sachs where he appropriately worked on the TWTR IPO. TWTR gapped up yesterday but closed at the lows of its daily trading range, as we can see on the daily chart, below. It is currently extended somewhat from the 10-day moving average at 40.29, so a pullback to that level would not be out of the realm of possibility. Facebook (FB), not shown, got hit today after announcing that it is buying yet another company, this time digital advertising company LiveRail. This comes on the heels of the company revealing that it has manipulated the “emotional content” of users’ news feeds which has served to create a near-term controversy. Volume was below average, however, and the stock held its 10-day moving average and the top of its cup-with-handle breakout of last week.

 

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Qihoo 360 Technology (QIHU) got going on Monday after last week’s buyable pullback to the 10-day moving average which I discussed in my report of this past weekend. QIHU today pushed through the 96.49 peak of the failed buyable gap-up that occurred on May 28th. Volume was strong and one could consider this a low-range breakout on a pocket pivot, although my preference, as with more stocks in this market, is to buy on quiet weakness as QIHU displayed last week on the pullback to the 10-day line. The fact that QIHU stalled a bit today and closed in the lower part of the range gives credence to my preference of buying on weakness rather than chasing strength. Today’s action in QIHU was not unlike that seen in other stocks as the market slows down a bit after getting somewhat extended on the upside in recent days.

 

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JD.com (JD) broke out to new highs yesterday, but this was a little premature coming out of a short v-shaped little flag formation, as we can see on the daily chart, below. While I had purchased shares of JD along the 10-day line and the 27 price level, I sold into yesterday’s move above the 30 price level given the v-shaped breakout. This little pullback today helps to correct the v-shaped move straight up to new highs as the 10-day moving average gets more time to catch up to the stock’s price. I am watching very closely here to re-enter the stock on a constructive pullback or “meet-up” with the 10-day line as the stock pulls back from yesterday’s short-lived move into new high price territory.

 

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I wrote over the weekend that Salesforce.com (CRM) was setting up along its 10-day moving average, and on Monday the stock moved up and off of the 10-day line and to a higher high, as we can see on the daily chart, below. Unfortunately volume remained well below average and was not sufficient for a bona fide pocket pivot buy point. If one bought the stock at the 10-day line on Monday, so far it’s a nice trade, but without a pocket pivot volume signature I am only comfortable buying this on a pullback to the 10-day line.

 

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As we progress through earnings season, I would expect to see actionable buyable gap-ups in stocks moving higher after a favorable earnings report. One such BGU was seen today in Greenbrier Companies (GBX), a maker of rail cars. GBX’s hot new product is a “Tank Car of the Future” for which it currently has 3,500 new orders. GBX is something of a “cousin” play on the oil and gas boom, and the 106% earnings growth the company announced today attests to the fact that it is benefiting quite nicely from the boom so far. GBX has been trending higher for several months, which is something to keep in mind. Today’s BGU could accelerate that trend if it doesn’t fail. This is buyable using the 62.35 intraday low of today’s price range as your selling guide.

 

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Despite move to a higher high on Monday, Tesla Motors (TSLA) was not getting the kind of buying volume necessary to sustain a move higher from its short ascending flag pattern, and its wedging action finally caught up with it today, as we can see on the daily chart, below. TSLA yanked down to its 20-day moving average on above-average selling volume, and while I was looking for a pullback in the stock I was rather expecting it to test the 10-day line. Instead it blew right through it and moved lower to the 20-day line. Overall this can be seen as part of the process of building the right side of a potential new base, and with the stock only 13% off of its all-time high, sellers probably see this as a reasonable place to take some off the table. Assuming that TSLA holds up here, the only real buy point in the pattern so far has been the pocket pivot off the 10-day, 20-day, and 50-day moving average confluence three Mondays ago. From here the only new buy point could come in the form of a pocket pivot coming back up through the 10-day line, which is something to watch for. Meanwhile I am happy to rotate into other names as TSLA’s rally off of the 50-day moving average loses some steam here.

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GW Pharmaceuticals (GWPH) started the week off with its third buyable gap-up move in June, as we can see on the daily chart, below. With this being the third such BGU in the pattern within a month, my view is that this is getting a bit obvious and so I actually sold into the move on Tuesday. GWPH pulled back today to test the 99.50 intraday low of Monday’s BGU, but I would look for the stock to pull down a bit further to meet up with the 10-day moving average where a possible continuation pocket pivot could develop. The 10-day line is now running through the 96.86 price point, so I would look for a pullback between there and the $100 price level as a decent entry point. With the stock gapping up through the $100 price level, however, GWPH of course brings up the invocation of the Livermore Century Mark Rule, so perhaps the stock will hold above the 100 level as the 10-day line catches up to the stock price if we assume that the stock should hold the 100 level in order for Livermore’s rule to remain in force. Therefore one could consider pullbacks to the $100 price level as an entry point using the 10-day line as a nearby downside selling guide.

 

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Below are some updated notes from my trading diary regarding stocks that have been discussed in recent reports. If there is a stock that is not mentioned please refer to prior reports as that likely means my view has not changed:

BIIB – As I wrote over the weekend, BIIB was holding tight along the 10-day moving average following its pocket pivot of nine days ago, and yesterday it flashed another pocket pivot buy point off of the 10-day moving average.

HZNP – back up to the highs of the base, continuing the theme of recovering from temporary weakness following prior strength. This stock remains one to try and buy on weakness while avoiding chasing strength.

GMCR – stalled on a move to all-time highs Tuesday, closing at the lows of its intraday trading range. Stock remains within buyable range of its cup-with-handle breakout, but as I’ve discussed before, I prefer to buy the stock on weakness coming into the 10-day line.

ILMN – stock had a pocket pivot buy point off of the 10-day moving average on Monday, which is something we were looking for. This could also be considered a pocket pivot breakout from a cup-with-handle base.

INXN – pulling back to the 10-day line here where it is buyable using the 50-day line as your selling guide.

KATE – unable to hold the 10-day or 20-day moving averages as it pulls right back to the top of the handle in its cup-with-handle base.

MTDR – stock moved to new highs on Tuesday but reversed to test its 10-day moving average. Oil stocks in general look like they need some time to pause and catch their breath, so this is not an area to which I’m looking to commit new capital currently.

NFLX – broke out yesterday from a cup-with-handle base. The buy point in the handle is 250, so theoretically the stock is within range of that breakout point.

RH – after making a new high on Monday, stock is now pulling back after running up about 17-18% from its buyable gap-up of January 12th. When stocks are running this fast I generally will use the 10-day moving average as a selling guide, looking to use a secondary buy point along the 10-day line to re-enter later on.

VRNT – still tracking along the 10-day moving average but has dipped below the line to find actual support at the 20-day moving average. Still watching for a pocket pivot off the 10-day line, although the stock is still within range of the prior pocket pivot it flashed at the 10-day moving average on June 13th.

One might get the sense that some leading stocks are getting a little tired here and that strikes me as something to be expected given the extended state of the indexes and leading stocks in general. The objective reality is that we are now about six to seven weeks into the market’s rally phase that began in mid-May, and so some backing-and-filling action here is most certainly not out of the question.

My approach here is to take profits of anywhere from 10-20% where I have them, maintain a store of dry powder, and wait for leading stocks that are consolidating prior upside moves to flash new buy points. As well, there is also the option of looking to rotate into other names that are issuing fresh buy points, particularly if such buy points occur after a positive earnings announcement, such as in the case of GBX. Otherwise, the market rally remains in force 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 had positions In GTAT and GBX, 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. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.