The Gilmo Report

June 15, 2014

June 15, 2014

Given that the indexes have been somewhat extended to the upside and most leading stocks were already in similar positions, the news coming out of Iraq gave the market the excuse it needed for a pullback. Exogenous events like these (think Syria, Libya, and Ukraine both recently and in recent years) have given the market an excuse to sell off for at least a few days, and it is not clear exactly what we might be looking at with the uncertainty coming out of Iraq. Recall that the Ukrainian Crisis was the catalyst that got the March-April correction going, so sometimes these events can be meaningful at least in terms of the market’s price/volume reaction. On Friday U.S. President Barack Obama said that he was going to think about what to do about Iraq, if anything. This could be seen as a “good” thing but the flip side is what kind of uncertainty is created here if a hostile government takes root in Iraq given that it is the country which has the fifth-largest amount of proven oil reserves in the world?

This obviously has the potential to throw a monkey wrench into what has been a decent rally, but the bottom line is that trying to buy stocks up here is much more risky than coming in earlier when things were just getting going once the NASDAQ broke out above its 50-day moving average. As I wrote in my report of May 25th, such a breakout by the NASDAQ was the heralding event of a stronger uptrend in the market, and so far that has been the case. So while the bad news might be that the market could pull back sharply here, the good news is that it might not pull back all that much as we end up with “Iraqi Crisis Lite.” If so, then the pullback provides us with less risky entry points in leading stocks as they come in with the market and find support at logical areas.

Pullbacks in some of my favorite names on Thursday and Friday gave some decent entry points, and I think one critical aspect of operating on the long side of this market is to avoid getting too “top heavy.” If the market starts coming in and you have bought stock too high and get underwater quickly, you can always consider “dialing down” your exposure as a matter of risk control and selling off some stock to reduce your top-heaviness. I avoid this by mostly seeking to buy stocks on weakness and not chasing strength.

In purely objective terms, what we are looking at here on the daily chart of the NASDAQ Composite Index, shown below, is a pullback to its 10-day moving average in what could be considered normal handle-building action as it pauses to consolidate along the highs at the left side of its big cup formation.




And since I’ve indicated previously that we should be keeping a close eye on the Russell 2000 Index, represented by a daily chart of the iShares Russell 2000 (IWM) ETF, below, we can see that the index has also found support at its own 10-day moving average. Volume was light, so for the most part the IWM appears to be consolidating the prior upside move through and beyond the 50-day moving average in normal fashion. There is nothing here at least from an index point of view that might be considered excessively negative, outside of one distribution day finally showing up on Thursday. That alone is not enough to derail the rally, and for the most part I try to use the pullback to identify the strongest leaders. Most leading stocks have barely paid notice to the pullback while a few have decided to flop out. Meanwhile I continue to see a large number of stocks that appear to be building bases as they set up for possible moves to the upside. Thus the underlying action of the market, for now, looks fine, and we will see how this all holds up in the coming days.




In the midst of “Iraqi Crisis Lite” there has been some impressive and strong action among leading and potential leading stocks. Anyone who bought Yelp (YELP) on the basis of its bottom-fishing pocket pivot that I’ve discussed in the last two reports was presented with a very nice surprise this morning when the stock gapped up to 73 this morning, as we can see on the daily chart, below. YELP gapped up in sympathy to the move in OpenTable (OPEN), not shown, which was bought out by (PCLN), also not shown, today for $103 a share. This is a de facto buyable gap-up using the 71.83 intraday low as your selling guide. Remember that YELP is a volatile stock, so adding 2-3% downside based on your own risk preference might make sense. At first I thought this gap-up might be shortable since it came on news related to OPEN, and I did test a short position, but that simply revealed a strong bid in the stock and so I flipped and went long the stock. The significant thing about the PCLN buyout of OPEN for $103 when it was closed yesterday at 70.43 is that it gives some idea as to the “enterprise value” of businesses like OPEN’s, which is a bit like YELP’s. Thus in a buyout, would YELP be worth more than $100 a share? If so, do the record number of shorts in the stock have to re-think their premise for being short the stock?




Lately the “outlier” stocks in the social-networking space, Twitter (TWTR) and LinkedIn (LNKD), seem to have more upside thrust than the big-stock leader in the group Facebook (FB). I show the daily charts of all three below, stacked up on top of each other for easy comparison. We can see that TWTR, on top, has pushed up right into its 50-day moving average, where it might look shortable to some. The only problem with such a theory is that the stock is moving higher on above-average volume and did not want to sell-off on Friday after a strong pocket pivot volume signature that was also about twice average daily volume drove the stock into the 50-day line on Thursday. It seems to me that the balance of buyers and sellers has shifted in favor of the buyers, and a pocket pivot move through the 50-day moving average might confirm this. From here it appears that pullbacks to the 35-36 area in TWTR remain buyable since the stock seems to find support at the 35 level.

LNKD, meanwhile, has followed through on Tuesday’s bottom-fishing pocket pivot, which I discussed in my report of this past Wednesday. The stock is extended from there but looks like it wants to push higher as it traded up again on increased buying interest. FB, meanwhile, has flopped out following its own pocket pivot on Tuesday, but the pullback to the 10-day moving average looks normal to me given the index action on Thursday. Buying FB here lowers your risk by putting you closer to the 10-day line with the idea that the stock will continue to hold the 10-day line, more or less. It’s also logical that the stock might run into some resistance from the left side of the pattern as it moves into the 66-67 price area. All of three of the big-stock social-networkers are acting like they want to go higher, and if the general market can make it through the “Iraqi Crisis” they have a good chance of doing so, in my view.








Cree (CREE) is another one of these bottom-fishing stocks that set up again and flashed another big bottom-fishing pocket pivot on Friday, as we can see on its daily chart, below. I had pretty much given up on the stock as a long idea, and on Friday morning I decided to test the stock on the short side. I got off a short position at around 47.77 and the stock immediately turned lower, dropping down to a low of 47.22. At that point, however, the stock seemed to find support, and suddenly it started pushing against me on strong buying volume. At that point, somewhere around the low 48 area, I covered my short and went heavy long. I have done this a few times in the past where I initially short a stock but use the “market feedback” gained when I can feel the stock getting a strong bid to flip and go long. Many times in the past the feedback gained from being short has helped me to make some strong gains by flipping to the long side once I can sense that the stock has a strong bid underneath it. So I went long CREE at that point and was rewarded for remaining objective and in tune with what the stock was telling me. By the close the stock finished up at 49.66. CREE appears to be trying to make a turn here, and this latest pocket pivot is potentially buyable using the 50-day moving average as your selling guide. I notice that after-hours on Friday the stock continued higher, moving above the 50 price level.




In my report of this past Wednesday I discussed the fact that Palo Alto Networks (PANW), which had been holding up very tight just under the 79 price level, looked ripe to move. As we can see on the daily chart, below, that prediction became fact on Thursday as the stock jacked all the way up to an intra-day high of 82 before reversing with the general market to close basically flat for the day.  If we consider this very carefully based on what we can see on the chart, the stock was essentially trying to come out of this big cup-type formation after building a flag of five days. With the weak general market on Thursday combined with PANW’s inherently volatile nature, the position was likely premature to sustain a new-high breakout. If the market firms up, however, I think PANW will make another run for the highs. For now we can see that the 10-day moving average is moving up to catch up with the stock, putting it in prime position for a continuation pocket pivot.




Sunpower (SPWR) continues to prove my point when it comes to buying on weakness rather than chasing strength. The stock held tight for five days following last week’s buyable gap-up move, and was buyable at the 10-day line as the moving average came up to meet with the stock price. On Thursday SPWR ignored the weak general market to press higher on a pocket pivot buy point coming up and off of the 10-day moving average on a breakout from the short six-day price range. SPWR shrugged off early weakness again today as it pushes right up to its 52-week closing high of 35.90. Friday’s close at 49.66 can also be seen as a trendline breakout, although I think the stock simply remains buyable within range of Thursday’s pocket pivot. Thursday’s pocket pivot stalled a bit based on the weak general market, but overall SPWR’s strong action in the face of an uncertain and/or weak tape is impressive.




Studying the daily chart of Kate Spade (KATE) I started to realize why this past Tuesday’s attempt at a breakout to new highs didn’t pan out. Looking at this objectively, I can see that the rally off the lows of the handle formed in late May was wedging all the way as the stock drifted higher on light volume. This pullback over the past three days down to the 50-day moving average may help to “correct the wedge,” as I like to say, so I would look to be opportunistic here by buying shares along the 50-day line. This provides us with a low-risk entry point that is really just where the stock was when I started talking about it last week. After Lululemon Athletica (LULU) got shellacked Thursday after guiding lower, most retailers have been a little soft, and Michael Kors Holdings (KORS), not shown here on a chart, has also pulled back into its 10-day moving average where it too might become buyable as the stock remains in a lower-risk position within range of its May 28th pocket pivot. Both stocks, however, simply appear to be continuing to work on their bases.




On Wednesday I discussed the potential for Keurig Green Mountain (GMCR) to attempt a “re-breakout” after the flop-out on Monday following the pocket pivot cup-with-handle breakout the prior Friday. GMCR did exactly this by flashing another pocket pivot on Thursday as it makes another run at the highs here. What was even more impressive was the fact that GMCR did this on a day when the general market was getting whacked on Iraqi Crisis Lite fears. The stock still looks buyable with the idea that it will continue to hold above the 10-day line which is now moving through the 116.05 price level, a mere 3% away from Friday’s close at 119.80.




On Thursday Tesla Motors (TSLA) CEO Elon Musk announced that the company was opening up its patent portfolio to other auto-makers in a gesture of altruism made necessary by the urgency of the alleged “carbon crisis.” I won’t pass judgment on this “P.C.” sort of move by the company as I will just let the chart tell me what is going on here. Frankly I was surprised that the stock didn’t just sell off after that announcement, but maybe there’s more here than meets the eye. By dangling their patents in front of other car-makers, Tesla may indirectly be recruiting help/demand that will ultimately assist them in their move to build a giga-factory for the manufacture of enough car batteries to sell 400,000-500,000 cars a year.

As well, it could do the same for the building of more Supercharger sites given Tesla’s savvy recognition of the fact that building the infrastructure to facilitate the charging of electric cars is part of building the overall market for electric vehicles. The stock itself continues to hang along the confluence of its 10-day, 20-day, and 50-day moving averages in very tight fashion as volume remains relatively low, as we see in the daily chart, below. There was an initial pick-up in selling volume on Thursday after the news, but the stock stabilized on Friday and remains “in play” as a stock to watch closely for a pocket pivot off the 10-day/50-day moving average.  Other big-stock leaders are rising up off the lows of their chart patterns with bottom-fishing pocket pivots, I don’t see why TSLA couldn’t do the same if the market rally remains intact.




A new name that has caught my eye here is Verint Systems (VRNT) which priced a 5 million share secondary offering at 47.75 on Friday, resulting in a pocket pivot at its 10-day moving average as we can see on the daily chart, below. VRNT is in the same industry group as PANW, which as you know is one of my favorite stocks in the current market environment. VRNT was holding up tight after a buyable gap-up move after it announced earnings last week on June 5th. The secondary offering of stock, which also included a $300 million convertible debt offering, was announced on June 10th, which promptly tanked the stock as such announcements often can. The secondary was completed on Friday, and the stock might be poised to retake its gap-up price levels given the action on Friday.

I understand that the huge volume increase was due to the secondary offering, but I still consider it valid in that it indicates that the market vacuumed up the 5 million share offering and what appears to be another 3 million shares in the aftermarket. In any case, I think the stock is worth a shot here at the 10-day line with the idea that it will hold the top of the prior base right around the 48 price level. Other names in the Computer Software – Security group are perking up as well, including Fortinet (FTNT) and Vasco Security Systems (VDSI), both not shown here on daily charts. When you see stocks from a particular group or sector of the market starting to move in packs, that is usually a good sign. VRNT is a thinner name, and while PANW remains one of my favorite stocks in this market, VRNT might prove that when a particular industry group gets hot you will invariably see 2-3 other leaders in the group join the initial leader, which in this case is PANW.




Going through my screens this week I saw a lot of gap-up breakout moves that fit the parameters for a buyable gap-up. These have occurred in names ranging from old tech giants like Intel (INTC) and Analog Devices (ADI) to smaller names like Synaptics (SYNA), Eagle Materials (EXP) and Restoration Hardware (RH). The bottom line with any of these is that if you see a potential BGU occurring in real-time and you think it’s worth playing then simply implement the rules for buying BGU’s. You don’t necessarily need me to “bless” it first. Once an intra-day low can be determined on the BGU day you have your reference point for a selling guide, and as long as you do not buy the stock too extended from the intra-day low of the BGU day, you are fine. I have noticed that some BGU’s where the stock itself may not look so sexy and exciting have worked.

For the most part, I tend to like BGU’s coming out of first-stage or at least earlier stage bases, which is why I’ve favored BGU’s in names like PANW, CAVM, and SN, for example. One that caught my eye on Thursday was the BGU in RH, which I show below on a daily chart. The company came in on Thursday morning and beat earnings estimates by 7 cents, beat revenue estimates and guided their second quarter earnings higher. They also raised their guidance for fiscal year 2015. The main reason why I like RH on this BGU is the fact that it is just coming out of an 11-month base that is most certainly first-stage. Thus this becomes an easy trade. Buy the stock here using the BGU day intraday low of 78.75 as your stop. Depending on your risk preference, you could add 2-3% below that to allow for some downside porosity.




Below are some updated notes from my trading diary regarding stocks discussed in recent reports:

ACT – still holding the 50-day moving average.

ALXN – a little soft as it moves bellows the 20-day moving average on increased selling volume that was below-average. This may be too much of an “old merchandise” play but the bottom line is that it must hold the 50-day moving average on any further pullback from here.

ANIK – unable to hold 10-day moving average as the stock broke down to the 50-day line on Friday. As I wrote on Wednesday, the stock was buyable with the idea that it would hold the 10-day/20-day moving averages, which it did not. Therefore this stock is removed from my buy watch list.

CELG – pulling back to the 10-day moving average. Watch for a continuation pocket pivot off the 10-day line.

CAVM – Stock remains extended from last week’s continuation pocket pivot. Look to buy on constructive pullbacks to the 10-day moving average, currently at 50.80.

BIIB – not much after-burner here as the stock drifts down to the 20-day moving average. Would look for the 20-day line to provide support.

HZNP – still holding along the 10-day moving average, but was not able to hold up following Monday’s pocket pivot buy point and range breakout. May need more time, and as long as it holds above the 50-day line at 13.88 it remains viable.

ILMN – Pulling back normally after a strong move back up to the left-side peak of its current cup formation. Probably needs to take some time to build a handle here as it consolidates prior gains and sets up for a possible base breakout at some point.

INXN – Tuesday’s pocket pivot base breakout was a one-day wonder as the stock sat there for two days before giving up the breakout on Friday on light volume. Perhaps it sets up for a “re-breakout” as long as it can hold above the 50-day moving average, currently at 25.92.

NFLX – holding at the 10-day moving average and looks to be building a handle to go with its current deep cup formation.

PCRX – pull back to the top of the base and the 20-day moving average found support on Friday. Looks okay and buyable on the pullback, but should continue to hold the top of the base at around 80-81. Has been a little sluggish over the past few days along with the other bio-tech/drug names.

SN – just keeps moving higher with the rest of the oil stocks. CLR, BCEI and FANG, all other oil names I’ve discussed, also continue to move higher. All are extended currently.

VIPS – has pulled back right to its 10-day moving average and the top of the prior cup-with-handle breakout. This is buyable right here with the idea that the stock will hold the prior breakout point at 175.16.

Despite the onset of the “Iraqi Crisis Lite” the market hasn’t blown apart as it merely looks to be consolidating its prior gains in normal fashion. The key factor, as always, is the action of individual leading stocks, most of which continue to act constructively. We also continue to see a number of buyable gap-ups and strong upside action in stocks even in the face of the news flow out of Iraq that weighed on the market towards the end of the week. On that basis, I believe the long side of the market remains in force until further notice, and investors should continue to maintain an opportunistic stance, seeking to buy into leading stocks on constructive pullbacks.


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 CREE, FB, PANW, TSLA, TWTR, SPWR and YELP, though positions are subject to change at any time and without notice.

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