The Gilmo Report

June 25, 2014

June 25, 2014

Since 2009, whenever the NASDAQ Composite Index has risen 5-6% above its 50-day moving average it has either paused to let the 50-day line catch up, or it has gone into a correction. In a sense, there has been something of a “reversion to the mean” type of phenomenon that governs this QE market. The “fat” part of the index’s recoveries, especially over the past couple of years, has occurred as they complete their lows and begin moving back to the upside. This action is then accompanied by a number of leading stocks rounding out the lows of corrections or new bases and then flashing “roundabout” or bottom-fishing pocket pivots as they begin coming up the right sides of their bases. By the time leading stocks get back up to the highs of their bases, the market rally has become somewhat obvious and the market pulls back in a manner that can range from a pause to an outright short-term correction.

This is why many investors who abide by standard base breakout buy points in this environment find that such a method doesn’t make much upside progress beyond the base breakout. If one uses early pocket pivot buy points as early entries, however, it is quite possible to make significantly more upside progress, from a profit standpoint, than if one were simply buying base breakouts. This is pretty much where we stand right now, in my view, and I am very interested to see if the market can get past this barrier it’s found every time it gets 5-6% beyond its 50-day moving average, as measured by the NASDAQ Composite Index. Today’s action was at least encouraging in this regard.

The chart of the NASDAQ Composite, below, shows a sharp outside reversal day yesterday on higher volume off the peak. The chart of the S&P 500 Index, not shown, has the same big outside reversal bar. Today the indexes rallied reasonably sharply after coming off early in the day after first quarter GDP was revised to a final number of -2.9%. In my view there was a subtle shift yesterday in the market’s previous pattern of simply shaking off news related to “Iraqi Crisis Lite.” Stocks came off sharply on increased volume after news of a Syrian jet strike in Iraq came out. Perhaps the market, which at first discounted the possibility that events in Iraq will remain somewhat contained, is now considering the uncertainty regarding the potentially growing intensity of the conflict now spreading in the Middle East. Therefore I think investors need to consider how much they want to be exposed to the market given the increased uncertainty. In this sort of news-oriented environment I tend to stay off margin, at least on an overnight basis, and take 10-20% profits in positions when I have them, at least on a partial basis.




Gold has continued to hold last week’s huge upside blast through the 50-day and 200-day moving averages, and has formed a tight little flag pattern here, as the daily chart of the SPDR Gold Shares (GLD) ETF shows below. Otherwise there isn’t much here in terms of actionable buy points as the 10-day moving average needs more time to catch up with the current price.




As the news coming out of Iraq had a more serious tone on Tuesday, oil stocks, which had previously thrived on bad news coming out of the region, finally got hit on heavy selling volume, which I found somewhat curious. While the selling looked bad, most oil stocks simply rallied back up to Tuesday’s levels, as the example of Matador Resources (MTDR), which I discussed in my report over the weekend, illustrates below. That could turn out to be a shakeout that helps the stock break out, so this might still be actionable here with the idea that it should hold the 20-day line on any pullback from here, which keeps risk under control. Most other oil names remain out of position in terms of actionable buy points/areas, but MTDR’s recovery today puts it back into a buyable position.




Tesla Motors’ (TSLA) tagged the 240 price level yesterday before reversing on above-average volume, as we can see on the daily chart, below. My thinking here is that the stock needs to pause for a bit as the 10-day moving average catches up to the stock. In the meantime, a pullback to the 10-day line would be a reasonable entry point, assuming that it occurs on light selling volume.




Yelp (YELP) finally did meet up with its 10-day moving average today as it started the day out by moving to the downside before turning back up after finding support at the 10-day line, as we can see on the daily chart, below. The stock looks okay here, and I would keep an eye out for any sort of continuation pocket pivot that could develop along the 10-day line.




Sunpower (SPWR) continues to hold tight along the 40 price level, as we can see on the daily chart below, giving the 10-day moving average a chance to catch up to the stock. While this is the sort of situation where I take partial profits if I bought the stock down around the 33-34 level, I am alert to the possibility of coming back in more aggressively on a potential continuation pocket pivot off the 10-day line. SPWR could also go tight sideways here to form a three-weeks-tight flag formation, a pattern that is often seen after a breakout, but it is still way too early to draw that conclusion. The easy part of this, however, is the fact that with the 10-day moving average just about to catch up with the stock, we have an easy reference point that helps in handling the stock up here.




Twitter (TWTR) continues to act well as another three “ants” have shown up on the chart so far this week, those little black triangles on the daily chart, below, that show up whenever the stock is up 12 out of 15 days in a row or better. TWTR closed right above the 65-day exponential moving average but earlier in the day bounced right off of the 10-day moving average on increased pocket-pivot signature volume. In the middle of the day you saw a large seller start hitting the stock, but as I’ve surmised previously, this is likely just a big block that insiders are selling, something that I think TWTR is susceptible to from time to time. There were a lot of shares released in the most recent IPO lock-up expiration, and I’m sure there are more than a few insiders and employees who would like to cash in some of those shares, especially in an economy like this one. The key is in how the stock weathers the selling and I have to admit I was impressed with how the stock handled the sudden mass of supply that hit it at around 11:45 a.m. my time here in California. This pocket pivot is potentially buyable, one of many that TWTR has flashed as it has come up off of the lows of its recent correction, using the 10-day line as a selling guide.




Facebook (FB) isn’t trading much in the way of heavy volume these days, and yesterday looked like it was primed to break out of the handle in its current cup-with-handle formation. That move fizzled as the stock dropped back into the handle, as we can see on the daily chart, below. But it was just enough to qualify as a pocket pivot buy point, despite the fact that the stock closed at the lows of its range. It still did close up in a weak tape, and held above the 10-day line for the day. Today the stock helped provide some evidence that yesterday’s pocket pivot was valid by reversing back to the upside and a higher high as it continues to come up the right side of a potential new base. My preference, however, has been to wait for a bout of weakness to come into the stock on the long side rather than chasing it on the upside. Handle this action over the past two days as you see fit based on your own risk preference and trading style.




GW Pharmaceuticals (GWPH) still continues to act reasonably well following last week’s buyable gap-up, which I first discussed in my report of exactly one week ago. GWPH pulled underneath the 90 price level this morning, but sellers failed to materialize and the stock drifted back to the upside on light volume, as we can see on the daily chart, below. GWPH continues to look fine here, and as it pauses for a little while here it gives the 10-day moving average a chance to catch up to the stock. I would view a constructive pullback to the 10-day line as a secondary entry point, with the idea that the stock will continue to hold the 10-day line. In addition, as the 10-day line catches up to the stock, it sets up the possibility of a continuation pocket pivot buy point.




Palo Alto Networks (PANW) announced a $500 million convertible debt offering on Monday, which softened the stock up a bit, sending it below its 10-day moving average earlier today. But as we can see on the daily chart, below, PANW rallied to close 8 cents below its 10-day moving average on a pocket pivot volume signature. I consider this a buy point with the idea that the stock should hold the 20-day moving average, the green moving average on the chart, on any further pullback from here. I want to see PANW show more strength here than, say, Cavium (CAVM), which over the past three days has dropped all the way back to the lows of its original BGU from late May.




Cavium (CAVM), as I mentioned above in my PANW discussion, has now retraced all the way back to its late May BGU, as we can see on the daily chart, below. While this isn’t what I would expect from a stock that was acting so well before this week, there is still the possibility of using this pullback as a lower-risk entry point given that the 47.29 BGU low provides a nearby selling guide that is less than 3% away from today’s close.




Verint Systems (VRNT) is still drifting along the 10-day moving average as it continues to absorb the 5 million share secondary offering that was priced at 47.75 two Fridays ago. While a pocket pivot off the 10-day line is a possibility here, I would note that today the stock found support at the 10-day line on volume that was 39% above average, which to me implies buyable support at the 10-day line. Theoretically the stock would need to exceed the 812,000 shares it traded on June 17th, seven days ago on the daily chart, below, but the above-average volume today is probably sufficient to take a position in VRNT right here, with the idea that it will at least hold the 48 price level on any pullback from here.




While YY, Inc. (YY), not shown, has lifted up slightly off of its 10-day moving average over the past three days, something I was looking for in my discussion of the stock over the weekend, the other Chinese internet name that we’ve been tracking, Qihoo 360 Technology (QIHU), keeps flashing bottom-fishing pocket pivots along its confluence of moving averages that includes the 10-day, 20-day, 50-day and 200-day lines, all of which are trying to turn up. Tuesday and today saw QIHU flash two more pocket pivots in a row, as we can see on its daily chart, below. This is still quite buyable here with the idea that it will continue to hold the confluence of moving averages which should, in my view, provide a decent “zone” of support for the stock if it is to remain viable. So far it is hanging in there and continuing to act in a manner that would lead me to conclude that it is setting up to go higher.




Finally (JD) has moved into a position along its 10-day moving average where it is starting to look somewhat coherent as it builds a short flag formation of 10 days in duration, as we can see on the daily chart, below. If the stock can come up off the 10-day line on volume that is greater than 9,165,623 shares, the highest down-volume in the pattern over the past 10 days, then we will have our first actionable, bona fide buy point in the stock. With volume drying up sharply on this morning’s pullback as the stock dipped just below the 10-day line but reversed to close back above it and in positive territory for the day, I decided to anticipate this by taking an initial position right here. Otherwise one can wait for an actual pocket pivot to materialize before taking action.




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

ACT – stock is back at the left side peak of what is now a cup base. Is it setting up to break out? My view is that it was better to buy the stock on weakness along the 50-day moving average a couple of weeks ago.

ALXN – stock has failed on last week’s pocket pivot off the 50-day moving average and violated the 50-day line today. Ironically, had it closed above the 50-day line today it would have had another pocket pivot buy point. So far the stock is just slopping around and going nowhere on a net basis. Speaking for myself, I leave this in pursuit of more fertile situations.

BIIB – no follow-through on last week’s pocket pivot on the rebound up through the 50-day line. However, BIIB is still consolidating that v-shaped pocket pivot from last week and remains within buyable range of that pocket pivot.

CELG – so far holding tight up along the 170 area and just a little bit higher after last week’s gap-up pocket pivot off the 10-day moving average.

CREE – stock has violated its 50-day moving average, so I have removed it from my buy watch list.

FSL – stock is acting poorly when it should have held up tight over the past three days. This one is now off of my watch list.

HZNP – stock shows why it is best bought on weakness. After breaking out last week and up through the 16 price level it falls right back into its base near the 15 price level.

GMCR – holding very tight along the 10-day line and the prior breakout point in the low 120 price area. Buyable here using the 120 price level as a quick selling guide.

ILMN – still acting well as it tracks along the 10-day moving average and continues working on a handle within a potential cup-with-handle base.

INXN – Forming a tiny cup-with-handle as it consolidates last week’s “re-breakout.”

KATE – still just holding up above its recent handle breakout from a cup-with-handle base, but as with most leading stocks I preferred to be buying this one on weakness into the 50-day moving average based on the pocket pivot of May 14th.

PCRX – holding above the 10-day line after last week’s continuation pocket pivot, but not much else. Remember that PCRX also just recently broke out of a cup base.

RH – still holding up very nicely but far extended from the buyable gap-up of two weeks ago.

VIPS – not finding much upside thrust following its standard-issue base breakout in early June. Nevertheless, still sitting in a buyable positon right on top of its prior cup-with-handle base and the 175.16 base breakout buy point of not quite three weeks ago.

While Tuesday’s outside reversal day on heavier volume in both the NASDAQ and the S&P 500 looks funny, and might be a warning shot across the bow for the general market, remember that it is only one day. And more evidence will have to present itself before one can say that the current rally phase has ended.  In the meantime I would not be surprised to see the indexes slow down a little bit here as the situation in Iraq gains some clarity. Most leading stocks act okay, and there are a number that are starting to set up either again or for the first time. As long as we don’t see more days like Tuesday, there remain buyable set-ups out there that are playable. While the news out of Iraq could produce another day like Tuesday, some sort of clarification could send the market moving higher.

The question, again, is figuring out what kind of exposure you want to have, e.g., how close to the vest you want to play it,  and where you want to have that exposure based on your own risk preference and trading style. When the market pulls back, some useful feedback is provided in that we can see which of our stocks are the strongest, and look to force feed in that direction if the market does start to take off again. 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 GWPH, JD, PANW, TWTR, SPWR, and YELP, though positions are subject to change at any time and without notice.

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