The Gilmo Report

July 24, 2013

July 24, 2013

The action around the peak on the NASDAQ Composite Index, shown below on a daily chart, is showing five days of distribution where the distribution five days ago and then again today came on churning and stalling type of action. Despite a 5% gap-up from Apple (AAPL), the NASDAQ was not able to hold much of a rally as the selling we saw last week which was concentrated in big-cap NASDAQ names has spread into other areas. That said, the action remains quite mixed as “earnings roulette” season produces it shares of gap-ups and blow-ups. After-hours I am seeing Baidu (BIDU), Facebook (FB), and F5 Networks gap up on positive earnings announcements, but in all three cases these gap-up moves in these stocks are coming from lower positions within their base, although FB might be viable. The amount of distribution in the NYSE-based indexes, such as the S&P 500 and the Dow is far less, but it is the NASDAQ and the Russell 2000, that have been leading this market over the past four weeks or so. If the distribution doesn’t bleed over into the NYSE-based indexes, it may simply mean that we will see some rotation as the S&P 500 plays catch up to the NASDAQ. In general, it is a matter of simply watching your stocks.




AAPL’s gap-up move today might be viewed as a “bottom-fishing” pocket pivot, but it comes after a wedging rally, and so it is not clear to me just how much further progress the stock can make from here given this type of set-up. It would have been better to see the stock build more of a rounded out low in its base in lieu of the jagged action apparent in the chart.




Lumber Liquidators (LL) announced earnings this morning and staged a buyable gap-up move today. This is technically buyable using the 91.53 intra-day low of today as your selling guide, with an additional 2-3% given its volatile nature.




Illumina (ILMN) was another buyable gap-up after beating handily on revenues last night when it announced earnings. The intra-day low today held at 78.78, so this becomes your downside guide for a stop.




Netflix (NFLX) illustrates why buying the pocket pivots along the lows of the base give one a huge advantage over standard-issue breakout buyers. As I wrote last week, with the stock up some 50 points or so from its pocket pivots, one could have taken profits into earnings or held if they had such a profit cushion going into earnings. After earnings on Monday, however, the stock is falling back into its base on heavy volume.




3-D printing stocks got hit today on news that 3-D printing is hazardous to your health if done in a poorly ventilated area. No kidding. In any case, it sent Three-D Systems (DDD) to a close below its 50-day moving average, but so far this is not a violation, and did occur on light volume.




Stratasys (SSYS), which I discussed over the weekend as acting somewhat erratically with heavy selling off the peak, also got tagged, meeting up with its 50-day moving average on light selling volume. It may simply be that the 3-D printers go nowhere until earnings, and then perhaps become buyable on gap-up moves. After all, LL and ILMN were going nowhere until their buyable gap-ups this morning.




The solar stocks, still ranked #2 among all industry groups, are also likely biding their time until earnings are announced later in the month and in early August. First Solar (FSLR), however, violated its 50-day moving average today, which in my view negates the pocket pivot of eight days ago. I would prefer to see what the stock does after announcing earnings than try to buy into this pullback.




The same goes for SolarCity (SCTY), which came down to its 50-day moving average today on increased selling volume. As I wrote over the weekend, I wanted to see more upside thrust towards the 50 price level if I was going to think about holding this into earnings, but it may be enough to just wait for the stock’s response once earnings come out. Frankly, I would prefer to buy a buyable gap-up than play earnings roulette, and the BGU technique is a concrete way to approach this in a low-risk manner.




Tomorrow we will see Celgene (CELG), Regeneron Pharmaceuticals (REGN) and Biogen Idec (BIIB) announce earnings, and while all three are holding their recent buy points as discussed in recent reports, they still appear to be “hanging out” as earnings approach. BGEN, shown below, flashed yet another pocket pivot along its 50-day moving average yesterday, but you can see that this led to no additional upside.




CELG (not shown) looks very much like REGN, shown below, as both stocks have pulled into their 10-day moving averages following buyable gap-up moves ten and nine days ago, respectively.




My basic strategy with any stock going into earnings is that unless I have what I feel is a decent profit cushion as the earnings announcement date approaches I will operate as follows: a) take a measured position, e.g, 10% to 20% of total account equity and let the chips fall where they may or b) simply stay out and wait to act on any potential buyable gap-up move that may ensue once earnings are announced. If a) works, however, and the stock you hold into earnings gaps up, then you are obviously ahead of the game since you can add to that initial 10-20% position on the buyable gap-up. It all really just boils down to a matter of assessing how much risk you are willing to take and how much damage to your portfolio, percentage-wise, you are willing to tolerate if a worst case scenario unfolds.


Another thing to keep in mind, as we can see with the daily chart of Chipotle Mexican Grill (CMG), below, is that you don’t always have to act on the day of the buyable gap-up. Sometimes a stock will pause for a few days to build a short flag and pull in a bit closer to the intra-day low of the gap-up day. In CMG’s case, today you could have bought the stock within $1.70 of the 395.02 intra-day low of the gap-up day, less than ½% away, and thereby minimize your risk should the gap-up move fail. In cases where a stock has a huge amount of short interest, such as Tesla Motors (TSLA) back in May, the buyable gap-up move can lead to a furious upside move if there is a huge amount of short interest in the stock when the gap occurs.




The most recent short interest numbers can be found at the NASDAQ home site: Today is the report date for short interest as of July 15th, so the data is as fresh as it can be right now. Among the stock that I’m following, TSLA and DDD have very high short interest currently, such that if they have buyable gap-ups after earnings they may very well go on a tear as shorts get caught in a massive squeeze. Meanwhile, FB has less than one day’s average volume worth of short interest, about 35 million shares sold short on a 1.747 billion share float, so it may be possible to watch and see how tomorrow gap-up move plays out as the stock could build a short flag before trying to go higher.


For the most part, stocks I’ve discussed in recent reports and which are not covered in this report are acting as they should as they remain in various states of waiting for in anticipation of upcoming earnings announcements. One that has reached a point of no return, so to speak, is Gigamon (GIMO), which has pulled right back to its prior pocket pivot flag breakout point of about three weeks ago at the 28 price area. Earnings come out on Monday after the close, and I suppose if one is interested in owning a small position (10% of account equity, for example) into earnings then this may be the place to buy it, but I would not want to see it move any lower from here.




As we have watched fracking play U.S. Silica Holdings (SLCA) move up from its bottom-fishing pocket pivot of six days ago (see  I should note that its move was preceded by another fracking play that I have discussed in previous reports, Bonanza Creek Energy (BCEI), shown below on a weekly chart. While the stock has not flashed any pocket pivots as it has come up the right side of its base and make a new closing high yesterday, it did pull back today. What I note in BCEI however is that it has formed a double-bottom base where the second low does not undercut the first low as it should in a proper double-bottom. While this is not the end of the world for BCEI, I would have to say that if I have a choice between SLCA and BCEI, I prefer the SLCA’s base which show better accumulation along the lows of the base, as I discussed in my report over the weekend.




I distinctly recall trying to buy eBay (EBAY)  in October of 2003 as it was breaking out of an improper double-bottom base with the second low in the base forming above the first low in the base. The stock started to break out but quickly failed and built a new base that turned out to be a proper double-bottom base with the second low undercutting the first low. The weekly chart of EBAY, below, from that period illustrates this concept. Of course, I have seen “improper” double-bottom bases work from time to time, and it may be that in a QE-driven market such as this one a less-than-perfect double-bottom base in BCEI ends up working. However, the devil is often in the details, and if BCEI’s base is sub-optimal, then I would have to say that SLCA becomes more attractive as a fracking play given that is base looks much better.




As we continue to plow through earnings season, I will reiterate what I’ve already said in this report as well as my report of this past weekend: in the uncertainty of earnings, the buyable gap-up remains your most potent buying weapon. Therefore, don’t be afraid to use it, and don’t get hung up on “missing” a gap-up move, because we have way too many examples of stocks that have had just such a gap-up following a positive earnings announcement and which have gone on to have huge upside moves from there. 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

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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 a position in GIMO and SLCA, though positions are subject to change at any time and without notice.


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