The Gilmo Report

July 28, 2013

July 27, 2013

The leading major market index, the NASDAQ Composite, has weathered several days of distribution, churning and stalling on heavier volume reasonably well as it builds what is so far a one-week consolidation of its prior sharp gains off of the June 24th lows. The S&P 500 Index, not shown, is doing the same thing, and has shown less distribution. Thursday’s action, which saw the NASDAQ Composite push higher on a material increase in volume, helps to stabilize the index and provide a counterweight to the distribution, churning, and stalling action over the last eight trading days on its daily chart, shown below. “Earnings roulette” season has so far produced its share of winners and losers, and over the past couple of days it has provided some interesting surprises. While online travel site TripAdvisor (TRIP) came out with earnings on Wednesday after the close and staged a buyable gap-up on Thursday, Thursday after the close one of the other major online travel website, Expedia (EXPE), blew to pieces after disappointing on earnings. Thus we can see that even within the same industry “space” divergent results are being achieved, as some companies handle a muted economic environment better than others. Amidst all of this, the market’s uptrend remains intact.




One member asked whether the NASDAQ’s “three weeks tight” action on its weekly chart is constructive. While this sort of pattern is applicable to stocks, it isn’t always applicable to the market indexes. One can go back and see many instances where such a 3WT did not necessarily lead to strong and sustainable upside. However, it certainly isn’t negative action.




What might also be a positive for the market is the action of gold and silver, which continue to make a series of higher highs and higher lows off of their late June lows, indicating that QE is still a big factor in this market.




The distribution in the NASDAQ over the past week or so was helped along by breakdowns in stocks like Google (GOOG), which has now violated its 50-day moving average, albeit just barely. Perhaps the stock takes a rest here, although I would keep an eye out for a late-stage, failed base situation developing here.




Meanwhile, (AMZN) offsets GOOG’s weakness with a big-volume continuation pocket pivot on Friday after “disappointing” on earnings. This is a buyable continuation pocket pivot move as well as an “ants” breakout. When a stock shows these little black triangles or “ants,” indicating that a stock is up 12 out of 15 days in a row or better, and then forms a range from which it breaks out, that breakout is buyable, and that’s exactly what AMZN did on Friday.


And while GOOG is violating its 50-day moving average, Apple (AAPL) is trying to hold what may be a “bottom-fishing” pocket pivot on its short gap-up move following earnings on Tuesday. As AAPL has bounced along its lows over the past few months, I have frequently been asked whether “it is time” to buy the stock, which I find to be an interesting question based on its tone. While I do not believe that every stock has a God-given right to recover from every sell-off or that there is always “a time” to buy a stock that has been in a long downtrend, I can only say with respect to AAPL that if it can continue to hold above the 50-day moving average, it might have a fighting chance to recover some of the lost ground between here and its all-time highs above the $700 level.


While AAPL has rounded out the lows of its pattern, it has been something of a jagged affair. But the daily chart below gives some indication that the stock is trying to round out its lows. Analysts are currently looking for AAPL to begin turning its earnings numbers back to the upside with estimates for next quarter coming in at $7.69 and then $13.44 in two quarters’ time. If AAPL is able to execute and achieve these numbers, it may be enough to at least drive something of a recovery rally in the stock over the next few months, and this will provide a boost to the NASDAQ Composite Index.




I still view the 3-D printing space as a nascent area of growth in its emergent stages, despite the fact that the basic technology has been around for a while. Among the 3-D names, while Stratasys (SSYS) has been a choppy affair, Three-D Systems (DDD), shown below on a weekly chart, is looking constructive here as it closes very tight over the past four weeks right along its 10-week moving average. DDD is expected to announce earnings on Tuesday before the open. Depending on which earnings estimates service one refers to, analysts are looking for 22 to 24 cents a share, or 33% earnings growth, to be reported. My guess is that it will take a very poor earnings number to knock the stock down significantly, given that the 3-D printing story is still very much a forward-looking one.


Another thing that might work in the stock’s favor is the fact that it currently has near-record short interest of 27,038,017 shares as of July 15th, just shy of its record short interest of 27,319,744 shares reported back on April 15th. This was when the stock had its last big price move coming up through the 50-day moving average after announcing earnings at the end of April (see May 1st report).




The action in the now-No. 1 ranked industry group, the solar stocks, has been somewhat mixed. I was surprised that the group moved from No. 2 to No. 1 over the past week despite most of these stocks pulling back and correcting a bit. First Solar (FSLR), not shown, now hangs out below its 50-day moving average. Of course, others, such as Canadian Solar (CSIQ), not shown, have been moving up strongly, and I actually like CSIQ here, as it is expected to grow earnings 114% to 44 cents a share in 2013 and then 409% in 2014 to $2.19. Meanwhile, SolarCity (SCTY) looks to be building a cup-with-handle as it goes into earnings on August 7th. So far the base looks okay, with the handle forming on either side of the half-way point of the pattern. The two-week handle shows volume declining, which is constructive, as it holds above its 10-week line, in contrast to FSLR. The two big-volume spikes along the lows of the base also indicate strong supporting action at that point. If SCTY can’t break out of this pattern before earnings, it might be risky to hold into the number. And so investors who like the stock can either play earnings roulette with a small position, or just wait to see if a buyable gap-up move ensues following earnings.




Gigamon (GIMO) successfully tested its prior pocket pivot flag breakout, moving up and off of the 28 price level Friday on increased buying volume. For a small “hot” IPO tech name like GIMO, this sort of action is typical, and buying into such a pullback is often the best way to buy such a stock, because once it gets going it’s hard to avoid buying it too far up in the move.




Netflix (NFLX) has pulled back to the top of its prior base, perhaps dipping just a bit into it, but it seems to be holding the 240 level as selling volume dries up. This pullback might be buyable, actually, using the 50-day moving average as your maximum downside stop.




Facebook (FB) held up well after its buyable gap-up move on Thursday, something I discussed in advance in my report of this past Wednesday, July 24th. On Friday the stock hung out as volume began to dry up, and my view is that the stock will move higher once it is finished working off some selling. What impresses me most about this gap-up is the fact that volume on Thursday was absolutely massive and indicates that institutions were in there buying the stock with both hands. FB is a big-stock social-networking name, and in a continued market uptrend this could be a source of continued institutional buying. Despite having a 1.695 billion share float, FB saw 366 million shares trade on Thursday and another 136 million trade on Friday, as buyers sopped up over a quarter of the float. Big stocks with big floats and big market caps can have big price moves, as stocks like GOOG and AAPL have shown in the past. If FB holders are unwilling to part with their shares, regardless of the size of the float, demand for the stock, as evidenced by the huge buying on Thursday, should drive the stock higher. This buyable gap-up is actionable, in my view, using the intra-day low of the gap day at 32.75 as your selling guide.




Lumber Liquidators (LL) was mentioned in my report of this past Wednesday after its post-earnings buyable gap-up move, and despite dipping just below the intra-day low of that day remains in a buyable position.




Illumina (ILMN) is also holding up well following its buyable gap-up on Wednesday. So far it is mimicking its action after its April buyable gap-up where it went tight sideways for a few days before moving higher. This remains in a buyable position.




Big bio-techs provided something of a mixed bag on Thursday after announcing earnings. Celgene (CELG) backed and filled Thursday morning, first gapping up then pulling back into negative territory before closing up on the day and then moving to a new high on Friday.




Biogen Idec (BIIB) gapped up far more than CELG on Thursday morning after announcing earnings, but it stalled out and ended the week back down at its 50-day moving average. BIIB is waiting on a decision regarding one of its drugs, which appears to be putting a lid on the stock’s upside for now.




Last weekend I noted the “bottom-fishing” pocket pivot in Northstar Mortgage Holdings’ (NSM), not shown, and the constructive action in Ocwen Financial (OCN). OCN followed up on that constructive action with a pocket pivot buy point on Thursday and then a strong-volume breakout on Friday. Suddenly, the mortgage servicing stocks are back in play!




LinkedIn (LNKD) continues to flop around as its earnings date approaches, but it has flashed several pocket pivots over the past couple of weeks, as I’ve noted in recent reports. Thursday saw the stock pocket-pivot again and the move to new all-time highs on Friday on below-average volume.




Tesla Motors (TSLA) is also flexing its muscles as its earnings date approaches, gapping up on Friday after Deutsche Bank put a $160 price target on the stock. Volume was well below average, unfortunately, and for now I see nothing actionable in the stock, although it is holding up well.




Last weekend I discussed keeping an eye out for a possible pocket pivot buy point move coming up off the 10-day moving average in Fleetcor Technologies (FLT). We finally got that on Friday, although this came in the form of a pocket pivot breakout. Going into earnings on Thursday, I might have liked to see above-average volume coming into the stock as it broke out to all-time highs. If you want to hold this into earnings, you know the drill – position-size according to your risk tolerance.




Invensense (INVN) continues to track sideways after its pocket pivot of late June as it awaits its earnings announcement on Tuesday. On Monday the stock flashed a supporting type of pocket pivot as it closed just above the 10-day line. The action is constructive, but one has to decide how much, if any, of the stock to own going into Tuesday’s earnings number.




Last, but not least, video chip maker Ambarella (AMBA), a stock that seems to specialize in looking strong one day but going nowhere the next, has pulled right back into its 20-day exponential moving average, the green line on the chart, and near the intra-day lows of its pocket pivot buy point day of eight days ago on the chart. AMBA doesn’t announce earnings until September, but this pullback on light volume looks potentially buyable.




The “big scores” in the market with respect to individual stocks currently appear to be highly dependent on positive earnings announcements. Own a stock that gaps up following earnings and you are in the pink, while the opposite situation can put you in a lot of pain. For the most part, however, I’ve noticed that names I’ve discussed positively over the past couple of months have responded well to earnings, but this is always much easier to determine in hindsight.


It’s a lot easier to decide that you should have owned a big FB position going into earnings once earnings are out, but going into the number without benefit of hindsight it is much more difficult. Therefore, if you believe a stock is in a good position to react positively to its earnings announcement you can take a measured position as I’ve discussed extensively in recent reports. Otherwise, buyable gap-ups remain your most actionable entry points, and in my view this should be sufficient.


An example like FB, which is a first-stage breakout and buyable gap-up, has a good chance of working and providing decent gains in the coming weeks and months should the market rally continue. I tend to prefer buyable gap-ups in stocks coming out of first- or second-stage bases, as these tend to have the most upside “juice.” Thus, for the right stock, “earnings roulette” season can be a catalyst for a sustained upside price move and these are the opportunities you want to focus on.


Meanwhile, as the market consolidates its gains off of the June 24th lows, the uptrend remains intact 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 a position in DDD, GIMO, and INVN, though positions are subject to change at any time and without notice.


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