The Gilmo Report

July 6, 2014

July 4, 2014

Fulfilling its patriotic duty, the Dow ended the week by convincingly pushing up through 17,000 to close at 17,068.26 ahead of the July 4th holiday. Meanwhile the S&P 500 Index, shown below on a daily chart, headed for all-time highs of its own. The S&P’s 1985.44 close on Thursday leaves it less than a stone’s throw away from the 2,000 level and gives the media fodder for a new millennial index fixation.




The NASDAQ Composite Index, shown below on a monthly chart, made another 14-year high on Thursday, and is a mere 14.4% away from its all-time high of 5132.52 achieved on March 10, 2000, the day that the dot-com bubble finally popped. It is easy to consider the 2007-2009 bear market and the massive final leg down that came at the height of the great financial crisis in late 2008 to early 2009 as an extremely “brutal” period for the market. But the monthly chart of the NASDAQ, below, clearly illustrates how the bursting of the dot-com bubble resulted in a bear market that was far more brutal. With the NASDAQ again approaching that once magical 5,000 level, does this make it official in terms of the Fed successfully inflating the bubble back to its prior glory? And with so much more liquidity in the system today compared to the dot-com era, does the NASDAQ have the fuel it needs to make up the final 14.4% back up to 5132.52? Or is this simply the Mother of All PODs? (See Chapter 6 of “Trade like an O’Neil Disciple” for a discussion of PODs) In the Age of QE, I say anything is possible, and the best way to keep yourself on the high probability side of any possibility is to just keep watching your stocks.




Thursday’s strong jobs number which saw the unemployment rate drop to 6.1% sent the precious metals gapping to the downside, as we can see on the daily chart of the SPDR Gold Shares (GLD) shown below, but the yellow metal ETF was able to close back above the 10-day line. The iShares Silver Trust (SLV), not shown, also gapped down but never broke through its 10-day moving average, bouncing off the line to close little changed on the day Thursday. Short-term the SLV is outperforming the GLD, but both the GLD and the SLV remain in buyable range on the basis of their prior pocket pivots of four days ago on the charts.




Only one day has elapsed since my last report so not a whole lot has changed since then with respect to my favored stocks. Palo Alto Networks (PANW) was able to hold its 10-day moving average on Thursday after dipping below the line briefly early in the day, and I think taking a look at the weekly chart gives us a better perspective on where the stock is. PANW has closed up each week over the past eight weeks since bottoming at around the 57 price level in mid-May. Given the extent of this price move it is not surprising to see some overhead resistance come into play from the left side of the chart. Thus I tend to think that PANW is entitled to some backing and filling here. If it continues to hold above the 10-day line around the 80 price level, it may set up to move higher before it is expected to announce earnings in early September.




Verint Systems (VRNT) is building a tight, four-week flag formation on top of its prior base, as we can see on the weekly chart below. As we already know, VRNT had gapped up five weeks ago in a buyable gap-up move but the announcement of a 5 million share secondary offering in tandem with a $400 million convertible debt offering sent the stock gapping back to the downside. Yet it still held up above the top of the prior base. The secondary offering was priced at 47.75 on June 13th, generating a pocket pivot buy point along the 10-day line as I discussed in my June 15th report. Since then the stock has drifted slightly higher along the 10-day line, and in my view is revving up to move higher. The stock remains buyable on the basis of the June 13th pocket pivot, and I would look to buy the stock here before it has a chance to generate a second pocket pivot off the 10-day line as it eventually fully absorbs the 5 million shares of new supply as a result of the secondary offering.




Yelp (YELP) found support at its 10-day moving average on Thursday after what was looking like a powerful pocket pivot move off the 10-day line early in the day on Wednesday fizzled out, as we can see on the daily chart, below. YELP remains buyable on the basis of Wednesday’s pocket pivot which still remains in force as long as the stock can continue to hold above the 10-day line. Despite all the gyrations YELP did end up closing higher for the week, and it remains to be seen whether it can move higher before it is expected to announce earnings at the end of July.




GT Advanced Technology (GTAT) pulled off a clean cup-with-handle breakout this week, as we can see on the weekly chart, below. Despite Thursday’s small pullback after the stock pushed above the $20 price level, it remains well within buying range of the 19.20 buy point at the peak of the handle. Thursday’s pullback occurred on light volume, and was not unexpected given the prior 10% move that occurred on an intraday basis Tuesday and Wednesday.




The weekly chart of Twitter (TWTR), shown below, gives us some perspective on where it is at after moving up sharply off of its mid-May lows in the 30 price area. Prior to this past week TWTR closed near the peak of its weekly price range for three weeks in a row in what is now six straight up weeks in the pattern coming off the mid-May lows. TWTR did slow down this week, but all it is doing is consolidating along the 10-day moving average on the daily chart, not shown. There is some congestion to the left, as I’ve highlighted on the chart. But it is not clear to me that this will present significant resistance as we approach TWTR’s earnings announcement in a little over two weeks’ time. This is in light of the prior huge-volume “washout’ that occurred in early May after the stock’s IPO lock-up period expired. I consider TWTR to be buyable on pullbacks to the 10-day line in the 40-41 price area.




Diamondback Energy (FANG) is consolidating its recent move to all-time highs by moving tight sideways in what is now a very tight three-week flag formation, as we can see on the weekly chart, below. Among the oil names that I have favored, FANG is holding up the best following its base breakout of five weeks ago, even in the face of a 2 million share secondary offering that was priced at 90.04 on June 24th. I think the stock has the potential to move above the $100 price level. I am not averse to buying it right here as it tracks just under the 10-day moving average on the daily chart, not shown. Alternatively one could wait for a bona fide pocket pivot occurring here along the 10-day line, but I prefer to “buy it when it’s quiet.” FANG is not expected to announce earnings until early August.


GR070614-FANG (CRM) had a constructive, low-volume pullback to its 10-day moving average on Thursday where it was quite buyable per my discussion of the stock in my Wednesday report. As I wrote in that report, given that CRM had moved up and off of the 10-day line without a pocket pivot volume signature, I was only comfortable buying the stock on a constructive pullback to the 10-day line, which is exactly what we got on Thursday. Such pullbacks in CRM to the 10-day line remain buyable in my view, with the idea that the stock can move higher before it is expected to announce earnings in early September.




After its huge-volume buyable gap-up on Wednesday, as I discussed in my report of that day, Greenbrier Companies (GBX) kept trucking higher on Thursday, as we can see on the daily chart, below. This is now extended, but doing exactly what I thought it would do given the strong buyable gap-up and close near the peak of the daily range on Wednesday. As I wrote on Wednesday, GBX has already been trending higher for some time, but this latest buyable gap-up could give it some upside acceleration.




GW Pharmaceuticals (GWPH) is holding up well on pullbacks close to the $100 century mark as it consolidates Tuesday’s big-volume gap-up move, as we can see on the daily chart, below. Meanwhile the 10-day moving average has moved up to 98.41. I consider the stock buyable on pullbacks that preferably hold at the $100 price level with the idea of using the 10-day line as a selling guide for any stock bought at the price level. GWPH has had three buyable gap-ups in June, and in the process has moved 32.6% above the prior cup-with-handle buy point of 78.08 in only three weeks. In most cases I would be inclined to sell a stock on the basis of a 32.6% profit from the initial buy point. However, so far this is a powerful breakout, and on that basis I think the stock has the potential to move higher from here as earnings approach in early August.




Organovo Holdings (ONVO) is rising up from the dead once again, this  time after a “key opinion leader” announced positive test results from a collaborative study conducted with ONVO scientists using the company’s 3D Human Liver Tissues. This news fueled a buyable gap-up type of move two Thursday’s ago followed by a pocket pivot buy signal as the stock came up through the 200-day moving average the next day. ONVO has had many fits and starts over the past eight months, and the stock has had no luck following through on prior buy signals within its pattern over that time period. The move back above the 200-day line two Friday’s ago came on big volume, and the stock is holding up tight here as volume dries up in the extreme. For those of you who like to dabble in cheap bio-tech stocks with allegedly compelling stories, ONVO is buyable here using the 200-day moving average as a downside selling guide. I have to admit that it is hard for me to get excited about ONVO’s current action, no matter how impressive it might look, based on its prior track record of going nowhere after strong buy signals within the pattern. On the other hand, now that I have become skeptical of the stock’s ability to move higher, this might be the time that it actually works on the upside. Therefore, there is nothing wrong with taking a position here on the basis of the strong buy signal along the 200-day moving average.




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:

ACT – still working on a cup base as earnings approach in late July.

CAVM – stock has crawled back above its 10-day moving average after successfully testing the lows of its buyable gap-up move from May 27th. Watch for a possible pocket pivot off the 10-day line from here.

CLR – holding tight along the 10-day line. Watch for a continuation pocket pivot developing here.

FB – still holding just above the handle of its prior cup-with-handle base breakout as volume declines. This sets up the possibility of a pocket pivot along the 10-day line as the stock approaches its earnings announcement in late July.

HZNP – holding tight along the 10-day line here as it builds a handle within an overall cup-with-handle base. Stock looks buyable here with the idea that it will move up and out of its base before earnings are to be announced in early August.

ILMN – After Monday’s cup-with-handle breakout, the stock is holding up above the 180 price level and remains within buying range of Monday’s buy point.

JD – Stock has dropped 10% from its intraday high of this past Tuesday, but as it comes into the 10-day moving average at 27.72 I consider it buyable IF volume continues to dry up on the pullback.

KATE – sitting around the top of its prior cup-with-handle breakout point at 38.02. Stock closed just under that at 37.86 on Thursday, putting it in a low-risk buy area using the 50-day moving average at 36.53 as a nearby selling guide.

MTDR – holding along the 10-day line and is still buyable on the basis of Monday’s pocket pivot buy point.

QIHU – after a strong showing early in the week QIHU is flaking out a bit as it moves back down toward its 10-day moving average. As I’ve discussed previously, I prefer to buy this one on constructive pullbacks to the 10-day line rather than chasing strength, and the stock continues to demonstrate the soundness of this approach.

SPWR – stock has had a nice move since breaking out through the 35 price level three weeks ago and is now in consolidation mode as earnings approach at the end of July. Watch for a secondary buy point in the form of a possible continuation pocket pivot occurring along the 10-day moving average as the stock backs and fills here.

TSLA – stock found support at the 20-day moving average on Thursday as it retraced roughly half of its prior upside move off of the 50-day moving average three Mondays ago.

A number of names among the stocks that I have favored appear to be in the process of consolidating prior gains achieved since the mid-May market lows. In these cases my approach is to take profits, either partial or full, and look for new buy points to show up as these stocks consolidate along a key moving average. These new buy points would include the 10-day line, or simply tight price action that coincides with a volume dry-up along a key moving average. As well, as we move through earnings season there will likely be some new buy signals generated in certain stocks in response to positive earnings reports, as we’ve seen with GBX. When this occurs, one has the option of taking any dry powder they might have lying around and rotating into these fresh, post-earnings buy signals. The added benefit of moving into these names as they pop up is that the overhang of an impending earnings announcement is no longer a factor.

It is interesting to note that despite a market rally that is now 12 weeks off the April lows and roughly six weeks from the point at which I considered the market to be in a new rally phase when the NASDAQ Composite Index moved back above the 50-day moving average, I continue to receive emails and tweets from those who still want to short stocks. While things can change quickly when it comes to the stock market, I can only say that for now the short side of the market is not in play. The additional reality is that attempting to short stocks here would only serve to misallocate your capital. It is far more efficient to stay on the long side of this market rally phase. Once again, the market has proven the old adage of “Sell in May and go away” to be a foolish and irrelevant bromide. Until the market shows me some evidence of a top, I continue to operate in the spirit of the more relevant and current idea of “Buy in May and go away.”


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 GBX, GWPH, GTAT, and PANW, though positions are subject to change at any time and without notice.

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