The Gilmo Report

June 1, 2014

May 31, 2014

The S&P 500 Index shrugged off early weakness to close at another all-time high on Friday with volume picking up slightly, as we can see on the daily chart, below. From the point of view of the major market indexes the market’s newfound uptrend remains intact, but the issue of how one makes money in this market is a more complex problem. 




The NASDAQ Composite Index, shown below on a daily chart, also tried to sell off early in the day Friday only to close near the highs of its daily trading range on slightly increased volume. The longer lower “tail” of the daily price range has the look of supporting action, and so from an index point of view has to be seen as constructive. But, to repeat, the issue of how one makes money is a more complex problem. It all boils down to two essential questions, the first of which is whether the market can sustain a rally without simply making a new marginal high and then rolling over again as it has in the past. The second and far more important question is that if we assume the rally is sustainable, then what stocks are going to provide us with strong, playable upside trends? Where are the Teslas and Solar Citys of May 2013? Where are the Yelps of August 2013? Where are the FireEyes of June 2014? In other words, where can we make big money?




My concern here is that despite seeing a number of bottom-fishing pocket pivots and “roundabout” formations, there is a distinct lack of upside thrust, as well as a general lack of “new merchandise” that might provide us with some strong and hence very profitable upside moves. I’ve pointed out many times that despite the fact that the Fed has flooded the financial system with off-the-charts liquidity and monetary stimulus far beyond that seen in the history of humankind it is still producing little to no traction in the economy.

This past week we saw revised first quarter GDP come in at negative 1%, which I suppose shows that massive QE in the end only gets you negative economic growth. Is this a sign that QE is rapidly losing its traction, and that this loss of traction, which has helped to propel stocks to all-time highs as measured by the S&P 500 and the Dow, could spread into the stock market? From my perspective, the market has a dull feel to it. In prior market turns after a correction, the action in potential leading stocks has been more robust, and there have been many newer, dynamic growth names present among the emerging leadership as the market turned back to new highs. This time around we are left to picking at the carcasses of busted former leaders as groups like the airlines and oil & gas pipeline operators take the pole position with respect to leadership.

Allow me to quickly run through some of the names that I have seen as potentially buyable in the past 3-4 reports:

ALXN – still holding above its roundabout pocket pivot of two Thursdays ago as it attempts to come up the right side of a potential new base. One major caveat is that the base is rather late-stage after the stock has had a huge price run since breaking out to all-time highs in early 2010 at around the $30 price level.

ANIK – stock flashed another pocket pivot on Thursday in an attempt to break out of its current three-week flag. But the move gave out on Friday as the stock dropped back into its 10-day and 20-day moving averages.

ACT – still holding along the 10-day moving average, but pulled back on Friday as selling volume picked up sharply. Theoretically this is buyable on a low-volume pullback to the 10-day moving average, but Friday’s pullback came on 16% above-average volume.

BIIB – had a nice bottom-fishing pocket pivot coming up through the 50-day moving average on Tuesday of this past week and is now pushing up into the 320 price level. This price level also represents the peak of the left shoulder in a possible head-and-shoulders formation that is still in the making. Certainly not buyable here given that it is extended 20 points to the upside from its 50-day line.

CELG – after a bottom-fishing pocket pivot coming up through its 50-day moving average three weeks ago, the stock flashed another bottom-fishing pocket pivot coming up through its higher 200-day moving average on Tuesday of this past week, but has since dropped below the 200-day line. The stock’s overall pattern still has the look of a head-and-shoulders formation where the current rally could simply be building a higher right shoulder in the pattern.

CREE – made a nice attempt at a “deep doo-doo” pocket pivot the week before last, but is having trouble getting above its 20-day moving average. I have abandoned CREE as a stock I am interested in buying at this time.

ENBL – continues to hold the 25 price level and the top of its recent little IPO flag formation. But every time it tries to move higher, such as it did on both Tuesday and Friday of this past week, it is pushed right back down, negating most of the gains for the day. This may simply be too slow as an oil & gas pipeline operator name despite the strong earnings numbers.

GMCR – an old name that is potentially in a late-stage base. This week it has been unable to hold its 10-day moving average, and while I was looking for some kind of pocket pivot coming off the 10-day line the stock appears to remain rather sluggish. Given that it is something of an “old merchandise” name, what are the chances that it has a big upside price move ahead of it? In my view very slim chances, if at all.

ILMN – after a nice bottom-fishing pocket pivot two Mondays ago as I wrote in my report of May 21st, the stock has moved up to the 160 level where it spent the last week moving tight sideways. This remains constructive, but over the past four days, selling volume, while still below average, has picked up on two of those four days. Finally, ILMN is also an “old merchandise” name that could conceivably be in a late-stage formation.

QIHU – had a buyable gap-up on Wednesday following a strong earnings report, but has since moved about 1% below the 92.80 intraday low of the BGU day as it tests the 50-day moving average. Volume picked up on Friday, and while the stock might be buyable on this pullback to the 50-day line, it should hold the line on the upside. If not, then this too could just be an H&S formation in the making.

TSLA – trying to hold tight along its 50-day moving average, but volume picked up on Friday on a price reversal after the stock tried to move to a higher high on the after-glow of news that its sister company, SpaceX, had shown off its new space taxi the night before. Would need to flash a strong pocket pivot off the 50-day line for me to get excited about the stock.

TWTR – had a strong move off of its lows on Wednesday as volume picked up considerably, but was unable to hold its 20-day moving average after gap-up move on Thursday was sold into on heavy, above-average volume. I would have expected a more robust move towards the 50-day moving average, currently at around the 40 price level, but the above-average selling volume tells me that there are still sellers who are quite interested in unloading stock. For now I am abandoning TWTR as a buy idea – it may need more time to fully form a bottom to any potential new base. Stock closed slightly above its 10-day moving average, and the only thing that would get me excited about the stock now would be a very strong volume move up and off of the 10-day moving average.

Let’s take a look at Workday (WDAY), which in my Wednesday report  of this past week I thought was flashing a nice bottom-fishing pocket pivot after a gap-up move following earnings on Tuesday after the close. That pocket pivot failed in rapid order as the stock quickly moved below its 200-day moving average on Thursday, which I would have expected the stock to hold above. Instead, we can see on the weekly chart how the stock reversed for the week on huge volume as it formed what looks very much to me like the right shoulder of a massive head-and-shoulders formation. This stock is probably a short, and if I had been thinking clearly I might have shorted the stock into Wednesday’s gap-up move. But the market is supposedly in an uptrend, and during an uptrend I tend to give less weight to the short side. In this case, I would look at any rally by WDAY back up towards the 200-day moving average, currently at around 83.02, as a shortable rally based on the objective evidence of the weekly chart, below.




Yelp (YELP) actually flashed a bottom-fishing pocket pivot coming up through its 50-day moving average on the daily chart, not shown, on Thursday, but above-average selling volume on Friday kept the stock locked in place. While this might look good on the daily chart, the weekly chart, below, reveals a low-volume, three-week rally up to the area between the 10-week and 40-week moving averages where the 10-week line has already crossed below the 40-week line in a bearish black cross. YELP also stalled out underneath the 40-week line this week on below-average weekly volume. Is YELP on the verge of a glorious turnaround back up to new highs? While I am normally somewhat enthusiastic about bottom-fishing pocket pivots as early buy points, there is something notable about most of them, and that is that they are mostly coming from a position deep down in the bases of a broad number of former broken-down leaders. On top of that, if we also examine the weekly charts, such as with WDAY, above, and here with YELP, we can see that their patterns still have the look of H&S formations that are still in-process.




Netflix (NFLX) has bucked the trend of most bottom-fishing pocket pivots by pushing well past the pocket pivot of two Mondays ago and cruising back above the $400 price level as it comes up the right side of a big cup, as we can see on its weekly chart, below. This is nowhere near any discernible buy point, but what I find interesting is that the entire move appears to have been given impetus by NFLX’s announcement that it will be expanding its service into six European countries. The cost of this expansion will likely decrease their earnings growth, and I have to ask myself whether NFLX may not simply be forming a sort of “punchbowl of death” (POD) topping formation. Usually, big cup and other large, deep formations like this coming after a long upside price run do not resolve themselves favorably. Thus I have on eye on the possibility that NFLX is forming a POD here, and will wait to see how this develops. For those needing a detailed explanation of POD formations, please read Chapter 6 of my and my colleague Dr. Chris Kacher’s book, “Trade Like an O’Neil Disciple: How We Made 18,000% in the Stock Market.”




Now let’s look at Chipotle Mexican Grill (CMG) on a weekly chart, below. CMG had a bottom-fishing pocket pivot off of its 200-day moving average two Mondays ago as I wrote in my report of May 21st, and this was followed up by two more bottom-fishing pocket pivots higher up in the pattern as it pushed up and through its 50-day moving average on both Tuesday and Wednesday of this past week. While that action on the daily chart, not shown, looks constructive, what we see on the weekly chart is a two-week rally coming on below-average weekly volume. Thus there is no real volume thrust here as the stock rallies up into an area that could become the peak of a right shoulder in an overall H&S formation, as I’ve outlined on the chart. For me, the odd paradox of this current market environment and the broad number of bottom-fishing pocket pivots is that they are all occurring in patterns that STILL look like they are simply H&S formations in-the-making.




To hammer my point just a little bit more, let me throw one more chart at you. Las Vegas Sands (LVS), which we played down to its 200-day moving average in early May as a short-sale target, has now rallied for two weeks back up to its  10-week moving average, as we can see on the weekly chart, below. LVS has been tracing out an H&S formation since last December, and so can still be considered an H&S in the making. The past two weeks of upside off the 40-week moving average have produced a low-volume, wedging rally up into the 10-week line which for all practical purposes is shortable using the 50-day moving average on the daily chart, not shown, of 77.26 as a guide for a quick upside stop. Thus the paradox of this market is that while there is some strong action on the daily charts of some of these stocks, the action on the weekly charts doesn’t strike me as being so bullish as much as it does bearish. The bottom line for me is that all this may just be a primary clue that if you elect to go long this market, keep tight stops and be very selective.




In the spirit of being selective, I would have to say this isn’t exactly that difficult, since buy signals in stocks that I consider to have the potential for big upside moves given their new-merchandise status as dynamic, new companies or turnarounds in the present environment are relatively few in number. One that strikes me as quite interesting is Palo Alto Networks (PANW), which had a big buyable gap-up move on Thursday following earnings on Wednesday after the close. As we can see on the daily chart, this BGU is also occurring on a breakout from a double-bottom base, so I do consider it buyable using the 72.86 intra-day low of the BGU day as your selling guide.




What adds to the attractiveness is the action on the weekly chart of PANW, below, which shows three big, blue upside volume spikes in the pattern within the double-bottom formation. The other major consideration is that PANW came public in July of 2012 at $42 and is just barely coming out of a huge, first-stage, 17-month IPO base. PANW tried to break out of this big formation earlier this year but dropped back into that long-term consolidation when the market corrected in March. Now it is re-emerging from this big base while at the same time staging a double-bottom breakout. So perhaps if anything has a chance at a decent upside price move in this market, PANW is it.


GR060114-PANW Weekly


Cavium (CAVM) continues to hold its buyable gap-up of this past Monday, as we can see on the daily chart, below. CAVM has held tight over the past three days as volume has remained relatively light, and I observed it try to sell off on an intra-day basis on Wednesday and Friday only to find support and close above the mid-point of its daily price range. This continues to look fine to me, and the closer one can buy it to the BGU intraday low at 47.29, the better, although the stock closed a mere 3% or so above that on Friday. I consider CAVM to be a sort of “new merchandise” play based on the fact that it is a recent turnaround situation that had previously been dormant for the past three years as it ranged around within a big three-year consolidation.




I continue to like the action in Sunpower (SPWR), and the stock gave investors a chance to buy into the pullback to the 20-day moving average on Friday, as we can see on the daily chart, below. This remains in a buyable position with the idea that it will continue to hold the 20-day line on any further pullbacks. SPWR is in my view the leading solar name, currently, although we have seen some of the Chinese solars like Trina Solar (TSL), and JA Solar (JASO) try to pull off some bottom-fishing pocket pivots within their current bases. SPWR is still contending with resistance along the 34-35 price area, but this past Wednesday’s pocket pivot within the base may be a clue that the stock has a shot at making new highs in the very near future.




Facebook (FB) has held tight following its move back above its 50-day moving average, as we can see on the daily chart, below. The only issue I have with the stock is that it never flashed a pocket pivot coming up through the 50-day line and so far volume has remained quite light, reflecting a lack of buying conviction. With no sellers coming into the stock and the major market indexes drifting back up to new highs, the stock has drifted higher as well. The fact is that there have been no concrete buy signals in FB as it has come up through the 50-day moving average, so the best one can say about the stock is that it is still trying to work on a potential new base. One thing to keep in mind about FB is that currently all the analysts love the stock and it is working on what might be considered a later-stage base in its price move which began down around the 35 price level when the stock gapped up on a BGU move in July of last year.




Michael Kors Holdings (KORS) is another later-stage “old-merchandise” name that had a big reversal pocket pivot buy point on Wednesday that immediately ran into trouble on Thursday as the stock got hit with some very heavy selling volume. The stock then drifted back up on Friday on lighter volume, but I would have to say I don’t care much for this action. In fact, if KORS busts the 50-day moving average on strong selling volume again that would constitute a clear late-stage failed-base short-sale set-up that I might be interested in hitting, assuming I can borrow the stock. KORS has gone from looking very strong on Wednesday to looking somewhat questionable by the end of the week. While some might cling to the idea that the stock is still working on a new base, I would note that weekly selling volume has clearly exceeded upside volume within the base, and this is somewhat suspect. In any case, I don’t give KORS much of a chance of having a massive, glorious upside price run from here.




As I’ve written many times before, the stocks tell you far more before the indexes do in this market, and what I have to say is that I’m getting mixed messages from individual stocks. While the S&P 500 continues to move to all-time highs and the NASDAQ moves further above its 50-day moving average, the indexes are in a clear uptrend. But the task of finding names that would provide strong upside profit potential in the event of a continued market rally are not so easy to find. So I reduce my task to sticking with names that are a little bit fresher as potential “new merchandise” situations or turnarounds. This admittedly leaves me with very few names that I like here, but I’ll go with what the market gives me for now. I maintain that while I have a limited long strategy here, I am also keeping a short strategy in my back pocket just in case, particularly with all the patterns that still look like H&S formations.

I am not necessarily convinced that we are in a new roaring bull market phase based on the action of individual stocks, although the market could continue to muddle along throughout the summer. Meanwhile, if the rally were to fail I know exactly where to go. Those prior short-sale targets that are rallying up into resistance, and which I’ve mentioned in this report, become my first go-to names on the short side. For now I’m okay going with the market trend with a small handful of names, but remain flexible and ready to move the other way if necessary. 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

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 a position In CAVM, PANW, and SPWR, though positions are subject to change at any time and without notice.

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