The Gilmo Report

July 7, 2013

July 7, 2013

After gyrating throughout the day in the wake of Friday morning’s monthly jobs number, the NASDAQ Composite Index was able to eke out a declining tops trendline breakout, as we see on the daily chart below. Volume was relatively light due to the fact that Friday was wedged between the Thursday Fourth of July holiday and the weekend. Thus most of what was moving on Friday was not doing so on heavy volume.




While U3 unemployment remained at 7.6%, the broader U6 unemployment rate rose to 14.3% from 13.8% in May. While the allegedly 195,000 new jobs reported also saw a surge in part-time employment, the overall report, after some morning digestion, was viewed by the market as not much to worry about as stocks found their feet around mid-morning before steadily rallying higher all day and closing at their peak. Most economists now believe the Fed will announce a firm start to QE tapering in September. While hints of such tapering by Fed Chief Ben Bernanke in May and again in June were enough to send the market reeling, the actual economic data that apparently seals the deal was not enough to derail the stock market. As the NASDAQ pulled off a trendline breakout, the S&P 500 was able to close above its 50-day moving average on Friday, as the daily chart of that index shows below.




The most interesting thing about Friday’s action, however, was the gap-down crash in bonds, as we see below in the daily chart of the iShares Barclay’s 20-Year-Plus Treasury ETF (TLT), below. I wrote in my report of this past Wednesday that the bond market looked to be in a “dead cat” bounce, and this certainly turned out to be the case as the TLT made a new low. Is Friday’s action telling us that the beginning of the end of QE is good for stocks but bad for bonds? We’ll have to see, but Friday’s action was enough to get me to put a couple of toes back in the water.




Tesla Motors (TSLA), which remains my favorite stock in this market as I’ve written many times, weathered a minor pullback on Wednesday while volume picked up slightly on Friday as the stock held its recent breakout through the prior 114.90 high from late May. While the breakout on Monday came on just-about-average volume, Tuesday’s move above the 120 price level came on a pocket pivot volume signature. In a market where the obvious tends not to work, perhaps TSLA only needs to see pocket pivot volume levels in order to stage a valid breakout. The bottom line here is that I would expect the stock to hold the 10-day moving average, currently at 109.61. TSLA is currently amassing enough signatures on a petition that it intends to submit to the Obama Administration for the purpose of overriding individual state bans preventing TSLA from selling its cars directly to consumers. Should the petition result in this issue being resolved in TSLA’s favor, it could lead to a decent pop in the stock, and so as long as this breakout can hold I think I want to at least have a presence in the stock for now, even more so if the market follows through at any time over the next few days.




It may not seem like it, but the Energy-Solar group has been one of the top-performing groups in this market for some time now, ending the week at No. 2 among all industry groups. Leading the way currently is Sunpower (SPWR), which I first discussed in my report of June 30th as it was rounding out the lows of its current base. As I pointed out in that report, SPWR flashed a “bottom-fishing” pocket pivot as it came up through the 10-day moving average seven trading days ago on the daily chart, below. The stock is now up six days in a row since that pocket pivot and on Friday broke out to a 52-week high on volume that, while below average, qualifies as a pocket pivot volume signature. This serves to make SPWR’s move on Friday a pocket pivot type of breakout. This is often just as valid as an above-average volume breakout, particularly on a day where volume is light due to the holiday trading environment. Therefore what we have in SPWR is a breakout in a leading stock within a leading group before the market has resumed its uptrend. Should the market resume its uptrend, then I think this is where you want to be.




With SPWR moving to a 52-week high after rounding out the lows of the base, we might expect to see other names in the group follow suit. I discussed Solar City (SCTY) in my last two reports, as it also appears to be attempting to round out the lows of a potential new base. The first clue, of course, was the “bottom-fishing” pocket pivot seen seven days ago on the chart. This occurred with SPWR’s bottom-fishing pocket pivot of the same day. SCTY has moved higher since then as it follows its 10-day and 20-day moving averages higher, and my theory is that the stock could follow a path outlined by the green dotted arrow I’ve drawn on the daily chart, below. The stock saw some support on a pullback to the 10-day/20-day moving average confluence on Friday. I think this is the spot to buy into the pullback, with the idea that it should hold above the 10-day line. This is the “roundabout” set-up we’ve seen in a number of stocks that have performed well in recent months, so it will be interesting to see how this one develops over the coming days and weeks.




Another “roundabout” situation is, surprisingly enough, Netflix (NFLX), which failed on a buyable gap-up/flag breakout back in early May, as we see on the daily chart below. This failure in May, however, has so far only resulted in the stock building what is so far a seven-week base. If you consider the heady gains NFLX has made so far in 2013 since launching off the $100 price level back in January and rocketing about 140% over the next 3½ months, then perhaps it needed more time to digest these gains before launching from a short three-week flag it formed at the cusp of April and May. This new base may provide the time it needs to work out weak hands and bring in strong hands as it finds support along the 50-day moving average. The first clue that NFLX may indeed be rounding out a new base is the “bottom-fishing” pocket pivot move that it flashed on Monday of this past week. Thus I view NFLX as buyable here on this basis with the idea that it will hold above the 50-day moving average. With the market still in an alleged “correction,” NFLX’s pocket pivot this week might be an indication that it is ready to lead any potential resumption of the market’s uptrend. At the very least, it belongs on your buy watch list.




News that Microsoft (MSFT) is engaging in a “push out” of 3-D printer technology by including a native API for 3-D printers in its upcoming Windows 8.1 update sent 3-D stocks moving to the upside on Friday. Stratasys (SSYS) staged a trendline breakout on Friday on a big volume increase, which looks buyable on any pullback towards the trendline.




Three-D Systems (DDD) also moved higher on increasing volume. This is constructive following the stock’s tight movement along the 50-day moving average.




Angie’s List (ANGI) gapped up on Friday to an all-time high as it moved up from the tight range I’ve been pointing out in my recent reports. This gap-up was not buyable given the light volume, but it is constructive coming on the heels of the prior pocket pivots in the pattern.




ANGI’s “cousin” Yelp (YELP) is also acting well as it holds up in a tight range with volume drying up following last week’s base breakout. While I think the stock is buyable here, I would certainly love to buy into any pullback below 34 as an optimal entry point. As I discussed last weekend in my June 30th report, I like the fact that both ANGI and YELP are emerging from long-term consolidations that they formed after coming public in 2011 and 2012, respectively.




I wrote last weekend that I didn’t see any real flaws in the weekly base of LinkedIn (LNKD), and so far this has been borne out by the price action of the stock. LNKD has continued to move up the right side of a potential new base, but volume has been lacking.




Splunk (SPLK) is another one of these “roundabout” situations as it came up off the lows of its recent base on a pair of pocket pivots (say that 10 times fast!) and has continued to make all-time highs. The high of this base is 47.21, so the stock could be considered to be in buyable range of the breakout. At this stage, however, I would prefer to buy into a pullback under 48, should that occur.




Cree (CREE) has also continued to move higher after last Friday’s pocket pivot, which I discussed in my report of last weekend. I thought the stock might spend more time tightening up along its 10-day moving average, but instead it has continued to move to new highs. The stock has formed what looks to me to be an ascending base, with Tuesday’s above-average volume move representing a breakout from the top of the ascending base.




CREE’s weekly chart below shows three pullbacks within its thirteen-week ascension, with the latter part of the pattern occurring during a market correction. Remember that ascending bases do not occur during market uptrends, they occur during market corrections when the general market weakness puts a lid on a stock that really wants to move higher. This is what creates the uniqueness and power of the pattern.




Trulia (TRLA) continues to operate in “roundabout” fashion as it has moved higher following last week’s “bottom-fishing” pocket pivot which I discussed in my report of last weekend, June 30th. For a more detailed discussion of the stock, refer to my June 30th report.




Acadia Pharmaceuticals (ACAD) has held up well since I discussed its buyable gap-up move in my June 9th report. After moving up to the 20 price level the stock has moved tight sideways and has closed tightly on a weekly basis over the past three weeks, making for a nice little 3WT formation here along the 18 price level. I think this is buyable right here. I pointed out two prior launch points in the stock before they occurred, as you can verify by referring to my April 21st and June 12th reports, and this looks like another one in the making.




A new IPO that has attracted my attention recently is Gigamon (GIMO), and not only because its stock symbol is just one “L” short of spelling out “Gilmo.” GIMO is pushing the envelope on network traffic management with what its website calls “Traffic Visibility Fabric. This “fabric” consists of distributed network appliances that enable an advanced level of visibility, modification, and control of network traffic traversing both physical and virtual networks, to paraphrase the company’s website. In the Age of the Cloud, this is critical technology, and GIMO operates at the leading edge. GIMO came public at $19 in June, and has formed a reasonably tight “IPO flag” formation which has a little bit of the old “IPO U-Turn” thing going on with a four-day handle. Friday saw the stock break out of this short IPO flag formation on a pocket pivot volume signature, which I consider a valid breakout. The stock is now about two bucks past what I would consider a low-risk buy point, but I think any pullback down towards 29 would be very buyable. This is an interesting situation both as an IPO breakout during a market “correction” as well as promising new merchandise for any potential resumption of the market’s rally. To me, GIMO’s action is another subtle sign that the market may find a way to turn back to the upside in a meaningful way in July.




While I’ve discussed a small handful of short-sale ideas during the market’s six-week correction, the bottom line is that most of these have produced short-term, tactical profits at best. Meanwhile, the long ideas I’ve discussed in recent reports, particularly a number of these “roundabout” situations, have moved higher. As well, emerging breakouts in emerging names like ANGI, YELP, and GIMO give the market a constructive undertone, despite the major market indexes remaining in a correction.


Is the “crash” in bonds that we are seeing something that will spill over into stocks? I tend to think not, since if it were going to happen, in my view, the steep two-month breakdown in bonds would have already dragged stocks down to new lows, and that has not happened.


But before I sign off on this weekend report let me show very one surprising chart that nobody seems to be talking about but which in my view is a major clue that the general market will likely resume its uptrend by either a) staging some sort of follow-through-like action or b) doing so in de facto fashion by simply moving to a higher high this week. Thus, if we want to rely on the action of the Russell 2000 Index, shown below on a daily chart sans volume, we would have to conclude that the market is already in a new, de facto uptrend based on the fact that the Russell 2000 made a new daily closing high on Friday.




If the market is in bad shape, and hence likely to remain in “correction” mode, why then are small-cap stocks, an area that is considered a “risk-on” play for the market, doing so well? I suppose we’ll get a definitive answer in the coming days, but to the extent that I operate with the benefit of a “crystal ball,” I think I already know what that answer will be. Take it from there.


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 DDD,GIMO, SCTY, and TSLA, though positions are subject to change at any time and without notice.


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