The Gilmo Report

June 18, 2014

June 18, 2014

The Fed policy announcement today turned out to be something of a non-event with no real surprises. Right after the announcement the indexes headed lower, but by the close all reversed to close much higher on heavier volume. The NASDAQ Composite Index, shown below on a daily chart, moved to a new 14-year high as it broke out from a 3½-month cup-with-handle consolidation. Meanwhile the Russell 2000 Index is flirting with all-time highs while the S&P 500 and the Dow already are in all-time high price territory. It was hard to be bearish coming into today’s Fed meeting as the first two days of the week were very user-friendly for the bulls, and a number of fresh buy signals and buyable gap-ups highlighted the constructive action. On the news front, the Iraqi Crisis so far has turned out to be the “Iraqi Crisis Lite” as I coined the phrase in my weekend report, despite the mainstream media’s attempts to ratchet up the drama factor in their reporting. We’ve also seen a pattern where the market opens down in the morning but closes up in the afternoon, action that is very typical of bull markets. Meanwhile, my favored names have acted very well. As a childhood friend’s grandmother was fond of saying, “What’s not to like?”




The big story among the big-stock leaders was Tesla Motors’ (TSLA) big-volume pocket pivot up and off of its 50-day moving average on Monday, as we can see on the daily chart, below. I wrote over the weekend that the stock looked like it was setting up for a pocket pivot so hopefully Gilmo Report members were on top of that early Monday morning. The stock shot up towards the 235 early March peak before backing off a bit, all of which looks normal to me. Today’s volume came in at just about average as the stock sold off just under 2% which, given the big 14%-plus upside move over the prior two days on huge volume, is pretty well contained. I don’t see this pulling back from here much more if TSLA is going to make an attempt at coming up the right side of a new base. I am happy to be long the stock at the 50-day moving average down around 206, but if you neglected to act on this signal Monday as I outlined it in my weekend report it seems to me that the best you could hope for is a pullback to the 220 level. It’s not clear, however, that the stock will pull back that far.




Yelp (YELP) has continued higher after last week’s buyable gap-up move, as we can see on the daily chart, below. You absolutely had to make use of the temporary pullback following the BGU that occurred on Monday of this week and provided a very nice entry point. A lot of “smart” commentators are calling the stock a short at these price levels, but in my view the buyout of OpenTable (OPEN) definitely changes the landscape for YELP and gives us a reference point for just what YELP’s business might be worth. As I wrote over the weekend, this puts the shorts in the position of having to re-think their thesis in the stock. In any case, YELP gave us a very nice entry point on Monday and as it moves to higher highs remains a hold as we see where the 10-day moving average finally catches up to the stock, or vice versa.




The sun has definitely been shining on the solar stocks so far this week. Sunpower (SPWR) followed through on Friday’s pocket pivot and trendline breakout, which I discussed in my weekend report, by launching to a new 52-week high and clearing the 40 price level, as we can see on the daily chart, below. SPWR is leading a resurgent U.S.-based solar rally as both First Solar (FSLR) and Solar City (SCTY), both not shown here on charts, flashed big-volume bottom-fishing pocket pivots through their 50-day and 200-day moving averages, respectively earlier in the week. FSLR’s Monday pocket pivot is more of a “roundabout” pocket pivot while SCTY’s Tuesday move is more of a “deep doo-doo” sort of pocket pivot coming up off the lows of its big, ugly base.

SCTY’s move, however, had much more thrust given that over a quarter of the float has been sold short. Both are extended from their moving averages currently, but a pullback to the 50-day line by FSLR or a pullback to the 200-day line, might be buyable. For now I am content to be with the leader, SPWR. The “House of Morgan” came out and panned the stock this morning before the open, lowering their rating on the stock to “neutral” from “outperform.” That didn’t seem to faze SPWR as it closed up on the day after spinning about 4% to the downside earlier in the morning. Obviously this is extended at current price levels, but SPWR certainly shows what kind of a cushion one can rapidly build up using early buy points in the pattern that showed up along the way and as I’ve discussed in previous reports (see June 1st and June 4th reports).




Twitter (TWTR) flashed a somewhat subtle bottom-fishing pocket pivot at its 50-day moving average yesterday and moved higher again today, as we can see on the daily chart, below. In general, the social-networking stocks are making a comeback, and TWTR’s pocket pivot is buyable here using the 50-day line at 36.87 as a selling guide.




Facebook (FB) has remained within buying range of last week’s pocket pivot on the light-volume pullback to the 10-day moving average over the past five days, as we see on the daily chart, below. The stock has remained buyable on the basis of that pocket pivot as it has come in just a bit, and the pullback to the 10-day line on light volume offered a convenient and “quiet” entry point. As I like to say, “Buy it when it’s quiet.” Volume picked up slightly today as the stock pushed back up towards last week’s pocket pivot high, and while it may not necessarily wow you with massive upside velocity, I will say it again – if the general market keeps moving higher, FB will likely do the same. The stock remains in a buyable position right here, using the 10-day moving average as your selling guide.




If you’re up for something that can provide that speculative rush all addicted traders yearn for, GW Pharmaceuticals (GWPH), just might tickle your fancy after it had a big-volume buyable gap-up yesterday, as we can see on the daily chart, below. I hear a lot about so-called marijuana stocks that sell for 7 cents on the pink sheets, all of which I consider junk, but GWPH is quite a bit different. The company develops cannabinoid-based drugs, and does well with its lead drug, Sativex, which is used to treat spasticity caused by multiple sclerosis. The drug has been launched in 11 countries so far. As the U.S. comes around to the use of cannabinoid-based therapies that have so far proven to be valid, the projected market for such drugs might prove to be very large. In my view, this means GWPH has the potential to become a real “big-stock” bio-tech leader. It is, however, still losing money so handle this one with care.

As I see it, the BGU gives you a very workable buy signal in the stock. The intraday low on yesterday’s BGU was 81.12, so the closer you can buy it to that price level the better, but the bottom line is that this is likely to be a volatile stock in any case. GWPH announced a 1.7 million secondary share offering this morning following yesterday’s BGU, but that didn’t seem to faze the stock all that much as it closed down a mere 3%, roughly. In my view 1.7 million shares is a speck of an offering for a stock that trades 1.1 million shares a day, and I wouldn’t be surprised if it is priced reasonably well given increasing institutional interest in the stock. In the last quarter, the number of mutual funds in the stock has increased from 19 in December of last year to 63 in March of this year. I have also noticed some smart funds, including Fidelity, have taken new positions in the stock. I could have been a little earlier on this one based on the buyable gap-up of nine days ago on the chart, to be frank, but yesterday’s BGU is sufficient as a workable buy signal in the stock, using the 81.12 BGU low as a reasonable downside selling guide if it fails.




Palo Alto Networks (PANW) continues to bide its time along the 80 price level as it works off a little resistance from the highs on the left side of its base, as I’ve highlighted on the daily chart, below. Notice also that the “ants,” those little black triangles that show up on my charts whenever the stock is up 12 out of 15 days or more in a row, appear to be “breeding” as their numbers continue to increase this week. We now have ten days in a row of ants showing up on the chart, which in my view has to be seen as strong action. Today’s pullback was very well contained right at the top of the cup formation as volume dried up. PANW remains one of my favorite stocks in this market, and in my view it is just a matter of time before it moves higher, assuming that the market rally stays intact.




Verint Systems (VRNT) has drifted higher along its 10-day moving average after last Friday’s pocket pivot buy point right at the line which I discussed in my weekend report. As we can see on the daily chart, VRNT is right at the lows of the gap-down “falling window” just above the 50 price level, as I’ve highlighted on the chart. I tend to think the stock is just buyable here using the lows of last week at around the 48 level as your selling guide. Obviously, an orderly pullback to the 48-49 level would be quite buyable in my view. The only thing holding the stock back is the additional 5 million shares dumped into the market by last week’s secondary offering. But it appears as if that has been absorbed well and the stock should eventually move back up towards its buyable gap-up highs of early June, in my opinion.




Kate Spade (KATE) corrected the prior “wedge” in the handle by pulling back to its 50-day moving average last week, something it probably needed to do as I discussed in my report over the weekend. This correcting of the wedge helped set the stock up for yesterday’s pocket pivot buy point coming back up through the 10-day moving average, as we can see on the daily chart below. Volume, while sufficient for a pocket pivot, is not coming in very heavy here, so I would not be surprised to see the stock dip back into the 10-day moving average, currently at 37, where I would consider it buyable. The best entry point was around the 50-day moving average last week as the stock pulled in on light volume to correct the prior wedge.




Keurig Green Mountain (GMCR) pulled off its “re-breakout” attempt as I suggested it might in my report over the weekend, this time with a flourish as volume levels spike to about twice normal in a pocket pivot/base breakout combo, as we can see on the daily chart, below. I liked buying the stock along the 10-day line on weakness earlier in the week, but the fact is that the stock is buyable on the basis of this breakout from a cup-with-handle formation into all-time high price ground. The 10-day moving average, besides providing the launching point for all of the prior pocket pivots in the pattern in June, also provides a handy selling guide if the breakout fails.




I wrote over the weekend that Horizon Pharmaceutical (HZNP) was still viable on the pullback to the 50-day moving average last week, and the stock responded vigorously by moving up and off the 50-day line with a strong pocket pivot buy point yesterday, as we can see on the daily chart, below. This is the third pocket pivot in the pattern over the past three weeks or so, and it looks like the best way to handle HZNP is to ignore the pocket pivot itself but buy the ensuing pullback. The prior two pocket pivots led to orderly pullbacks that were quite buyable, as I’ve discussed in previous reports, and we have yet to see whether this third pocket pivot leads to another small, buyable pullback. But after three of these, the Rule of Three might indicate that this one will lead to new highs. In any case, HZNP is acting well on the basis of its continued demonstrations of strength within its base and remains buyable with the idea that it will continue to hold above the 50-day moving average.




We’ve been watching for a pocket pivot in Pacira Pharmaceuticals (PCRX), as I’ve discussed in recent reports, and the stock came through with a pocket pivot buy signal on Tuesday as it moved up and off of its 10-day moving average, as we can see on the daily chart. PCRX found support at the 20-day moving average last Friday, and as has been the case with a number of strong leaders, buying orderly pullbacks in these stocks has been rewarded as we’ve seen in stocks like HZNP, YELP, KATE, FB, SPWR, etc. This latest pocket pivot in PCRX is buyable using the 10-day moving average as your selling guide.




Here’s something that I’m sure you weren’t expecting. Yesterday Netflix (NFLX) had a pocket pivot gap-up move coming up and off the 10-day moving average, as we can see on the daily chart, below. Of course, this is now a cup-with-handle base breakout which everyone sees, but it remains buyable using the 10-day moving average as a selling guide. I like to think that NFLX looks like what TSLA will be looking like a few weeks from now, so I’m happy to own TSLA on its roundabout pocket pivot of this past Monday. In hindsight, though, I have to say I should have been pounding the table more forcefully and buying the NFLX bottom-fishing pocket pivot at the 50-day moving average in mid-May. That has led to a nice move in the stock from there, but I wouldn’t assume that the stock can’t go higher from here, especially with so many “short NFLX” articles.




I think the past few weeks since the NASDAQ moved back up through its 50-day moving average has shown that “bottom-fishing” and “roundabout” pocket pivots are your best weapons on the buy side when most investors are scratching their heads looking for obvious base-breakouts once the market has been declared to be in a “confirmed uptrend” by those who claim to know. While not all work, the fact is that on a practical level some very nice price moves ensue and allow one to enter early as former leading stocks go through a correction and new base-building process and begin to come up the right side. Pocket pivots, both “BFPPs” and “RAPPs,” give you a material edge in this market, and I say make judicious and opportunistic use of them.

I note a BFPP showing up yesterday in Qihoo 360 Technology (QIHU), which actually failed in late May on a buyable gap-up attempt. If one bought that move one was forced out rather quickly as the BGU failed within a couple of days. However, we all know that stocks can sometimes resurrect themselves following such a failed display of strength as QIHU had in late May. Since then the stock has backed down on selling volume that has remained well below average throughout June. This has led to a BFPP in the stock yesterday coming up through the 50-day moving average. While I might prefer buying this on a pullback to the 50-day line, say in the 88-89 price area, it is potentially buyable right here using the line as your selling guide.




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

ACT – another example of how buying weakness is rewarded in this market. The stock pulled back to the 50-day moving average last week on light volume and has now vaulted off the 50-day line to a higher high within a cup-with-handle base.

ALXN – Right at the 50-day moving average on this pullback. The stock in fact found pocket pivot support right at the 50-day line so this is actually buyable using the 50-day moving average as a selling guide.

CELG – still moving tight along its 10-day moving average. Watch for a continuation pocket pivot off the 10-day line.

CAVM – stock has dipped below its 10-day moving average but still buyable on pullbacks to the 50.80 level or just below as I discussed in my report of this past weekend. Stock closed mid-range today on strong volume so I see this as buyable using the 20-day moving average at 49.88 as a convenient selling guide.

CREE – ran into resistance at the 65-day exponential moving average. Buyable on pullbacks closer to the 50-day line at 49.13.

CLR – stock had a continuation pocket pivot today as it remains in a strong uptrend. Add to positions here using the 10-day line as a selling guide.

INXN – stock pulled back into its base after last week’s pocket pivot breakout, but found support today off the 50-day line to flash another pocket pivot buy point. Buying the pullback to the 50-day moving average was the way to go on this one.

KORS – stock has now violated its 50-day moving average on what looks like a possible late-stage failed-base situation. This one is moved off of my buy watch list and onto my short watch list. Rallies into the 50-day line would be shortable ONLY in conjunction with a general market breakdown. Keep this on your short-sale watch list, for now, but that’s it. The long side is the better place to be currently.

LNKD – continues higher after last week’s bottom-fishing pocket pivot. Stock is extended from the 50-day moving average currently.

RH – the buyable gap-up of last week that I discussed in my report of this past weekend continues to work as the stock provided a buying opportunity near the BGU low on Monday before launching to all-time highs this week. Now extended from the BGU.

VIPS – as I wrote over the weekend, VIPS pulled back right to its 10-day moving average and the top of the prior cup-with-handle breakout where it was buyable. The stock has now moved back to all-time highs after finding support at the 10-day line. Again, buying orderly weakness in a stock that has shown prior strength is rewarded.

This market has rapidly become a “target-rich” environment with so many stocks flashing pocket pivots, buyable gap-ups, and even obvious base breakouts. Of course, it is not necessary for me to “kiss all the babies,” and I have been happy to focus on a strong handful of names over the past 3-4 weeks that have done very well. In the end, it is the material result that matters, as Bill O’Neil used to say to me, since this is a reflection of not just finding stocks to buy but buying them AND then handling them properly.

As I wrote at the end of last year, 2013 was my best year since 2004, performance-wise. But I have already exceeded my 2013 performance so far in 2014, and we aren’t even half way through the year. If you are finding yourself in a similar position, don’t get giddy, but remain focused on the task at hand because this market demands a serious approach! If you’re not, then I think there is still plenty of time to play catch up as long as this market rally remains intact, which for now appears to be the case. Therefore the long side remains the place to be until unless evidence to the contrary presents itself.


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

Gil Morales & Company, LLC (“GMC”), 8033 Sunset Boulevard, Suite 830, Los Angeles, California, 90046. GMC is a Registered Investment Adviser. This information is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to GMC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Gil Morales & Company, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.