The Gilmo Report

June 29, 2014

June 28, 2014

I wrote in my Wednesday report that “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.”

The daily chart of the NASDAQ Composite, below, shows an index that continues to forge ahead at a pace that is now roughly equal to that of its now-rising 50-day moving average. The light gray line on the chart that measures the index’s relative strength vs. the S&P 500 Index on the chart also shows that the NASDAQ is now outperforming the S&P 500. Meanwhile the litmus test of the rally lies in what the leading issues of the day, as Jesse Livermore liked to say, are doing, and as I see it the leaders are acting just fine. Each time we’ve reached the upper part of this 5-6% upside band on the NASDAQ and it has actually gone into something deeper than just a short-term pullback, the first clue was to be found in the action of leading stocks. If they started breaking down then the indexes also began to correct. Right now, with the NASDAQ near the upper part of the band the action of leading stocks argues for a rally that remains quite intact.

In addition, the action all week long where we saw the indexes sell off in the early part of the trading day and then retrace back to the upside to close nearly unchanged or in positive territory as all the major indexes did on Friday speaks of a bullish tone to this market. The big volume on Friday was due to Russell index rebalancing, but the net effect was another day where an early sell-off turned into an afternoon rally. Meanwhile, the news flow out of Iraq and the Ukraine gives the market plenty to be nervous about, but so far the market has continued to shrug it off, another positive sign.


NAZ Daily


When it comes to leading stocks over the past few days, the action has been steady and constructive. Palo Alto Networks (PANW) provides a good example as it held tight on Friday following what I consider to be a second pocket pivot in the pattern on Thursday. As we can see on the daily chart, below, PANW had a larger pocket pivot volume signature on Wednesday, which I discussed as buyable in my report of that day despite closing 8 cents below the 10-day moving average. For a stock that is as volatile as PANW, I consider that close enough to the 10-day line to call Wednesday’s action a pocket pivot. The second pocket pivot on Thursday only adds weight to this as a buy, in my view, and I would expect the stock to get moving soon, unless something derails the general market rally over the next few days. After flashing a series of “ants,” those little black triangles that show up on my charts whenever a stock is up 12 out of 15 days in a row, PANW has consolidated normally along the 10-day moving average, and this week’s pocket pivots put it in a buyable position right here along the 10-day line.




Tesla Motors’ (TSLA) is drifting higher within a short ascending flag pattern that it has formed since its strong “roundabout” pocket pivot of two weeks ago, as we can see on the chart. The 10-day moving average is now approaching the stock price, which sets up the potential for a continuation type of pocket pivot off of the 10-day moving average. Keep an eye out for this. TSLA is expected to announce earnings in early August, so there is still plenty of time for the stock to move up higher within its pattern before then.




Yelp (YELP) is moving in a short flag pattern of its own, and has found support at the 10-day moving average on intraday pullbacks over the past two days, as we can see on the daily chart, below. With the stock sitting right on the 10-day moving average, it too is set up for a possible continuation type of pocket pivot off of the 10-day moving average. Members should keep a close eye out for this as well. YELP is expected to announce earnings at the end of July.




Sunpower (SPWR) doesn’t seem that interested in giving up any ground, despite remaining extended from its recent base breakout through the 36 price level, as we can see on the daily chart, below. SPWR briefly moved up through the 42 level on Friday before settling back a bit and closing in the lower part of its trading range on heavy volume that was likely due to the Russell index rebalancing. SPWR continues to hold above its 10-day moving average which provides a reference point for a possible continuation pocket pivot over the next few days. A number of leading stocks are in this type of position where they’ve moved higher and the 10-day line is now catching up to the stock price, setting up the potential for a continuation pocket pivot, and this is a theme that dominates how I am looking at my favored stocks right now. The solar energy group has moved up sharply from its #195 group ranking of seven weeks ago to #38 this week, and SPWR is the de facto group. SPWR is expected to announce earnings at the end of July.




Twitter (TWTR) continues to hold Thursday’s pocket pivot breakout from the short five-day flag it formed along its 65-day exponential moving average. It weathered some selling on Friday before closing near the top of its small gap-down range, as we can see on the daily chart below. Meanwhile, the stock is up 13 out of the past 15 days in a row as the “ants” start to breed on the chart. TWTR’s cousin, Facebook (FB), which I don’t show here on a chart, also continues to hold up well after this past week’s low-volume cup-with-handle breakout.

TWTR came under some selling pressure on Friday which looked to me like it was either part of the Russell index rebalancing or simply insiders looking to unload stock before the end of the quarter, or both. With 83% of the stock’s 389 million share float eligible to be sold by insiders after its IPO lock-up period expired on May 6th, I would expect that some insider selling will show up from time to time, and it is a matter of seeing how the stock weathers such activity. So far, since hitting a low right at the time of the lock-up expiration, we would have to say that the stock has absorbed all that supply rather well given that it is up about 30% from there as we move into July. I consider the stock buyable on pullbacks to the 40 price level with the idea that it will continue to hold above the 10-day moving average. TWTR is expected to announce earnings at the end of July.




Keurig Green Mountain (GMCR) had yet another pocket pivot on Friday, as we can see on the daily chart, below. GMCR got hit with a downgrade on Thursday but as has been the case with this stock time and time again, the best way to buy it is on weakness. GMCR popped right back up the next day on strong buying volume and remains buyable with the idea that it will continue to hold the top of its recent cup-with-handle breakout and the 120 price level which has served as support over the past several days since the breakout.




Qihoo 360 Technology (QIHU) is pulling back in orderly fashion after its pocket pivot buy point of this past Wednesday, as we can see on the daily chart, below. As I see it, the stock is just continuing to round out the lows of a potential new base and this pullback provides a low-risk entry point using the 10-day moving average at 90.19 as a nearby selling guide. Most Chinese internet-related names have been acting well lately, including big-stock Chinese internet Baidu (BIDU), not shown here on a chart, which broke out of a cup base this past week. QIHU does not announce earnings until late August, so it has plenty of time to move up further in its pattern before then, which is what it looks like it wants to do based on the recent, constructive price/volume action.


GR062914-QIHU (JD) is a good example of why, when it comes to some hot stocks, I will just buy the thing right at the 10-day moving average rather than waiting for a bona fide pocket pivot to develop. As I discussed in my report of this past Wednesday I felt that taking a position at the 10-day line made sense, and this paid off as the stock moved up beyond the 28 price level on Thursday. As you can see on the daily chart, below, the stock is formiing a tiny cup-with-handle here which so far shows up as a two-week flag formation on the weekly chart, not shown. JD announces earnings at the end of July.




Big-stock cloud name (CRM) is showing up as a “Code Blue” situation on my daily chart, below, and I have to admit I find the pattern to be somewhat constructive here as it builds a tight sideways flag formation after flashing a big-volume bottom-fishing/roundabout pocket pivot two weeks ago. This tight eight-day formation has now met up with the 10-day moving average, putting the stock in position for a continuation type of pocket pivot. You might also notice that all five moving averages that I show on the chart are starting to turn up. CRM doesn’t announce earnings until early September, so that is not a factor going forward if one wanted to take a position here.

What I also find interesting with CRM is that its erratic pattern of showing positive and then negative earnings growth from quarter to quarter is now starting to change into one where steady upside earnings growth will rule for the next 11 quarters for which analysts are making estimates. The next three quarters are estimated to come in with 33%, 44%, and 114% earnings growth in succession, which would add up to a four-quarter earnings acceleration coming on the heels of the 10% earnings growth the company announced in May. This looks buyable to me right here but one could also wait for a pocket pivot to show up here as the stock runs into the 10-day moving average.




Below are some updated notes from my trading diary regarding stocks that have been discussed in recent reports. If there is a stock that is not mentioned please refer to prior reports as that likely means my view has not changed:

ACT – stock is back at the left side peak of what is now a cup base. Probably needs to spend some time building a handle along the 220 price area.

BIIB – tracking tight here just above the 10-day line after last Friday’s pocket pivot. Still within buying range.

CAVM – stock has risen over the past two days after testing the lows of its May 27th buyable gap-up move on Wednesday. As I wrote in my report of that day, such a pullback does provide a lower-risk entry point with the idea that the stock will hold above the 47.29 BGU low.

CELG – split 2-for-1 on Friday. Extended from last week’s pocket pivot gap move but acting very well.

HZNP – stock had another pocket pivot coming up and off of the 15 price level. Again, this stock is best bought on weakness down to the 15 price level, should that occur.

GLD – holding up in a tight flag following the prior week’s huge-volume pocket pivot and gap-up move up through the 50-day and 200-day moving averages. Now it’s just a matter of waiting for the 10-day line to catch up to the yellow metal ETF whereupon we might see a continuation pocket pivot.

GWPH – made an all-time closing high on Friday. Would consider the stock buyable on any constructive pullback to the 10-day moving average at 90.29.

ILMN – still working on the handle of a possible cup-with-handle base. May not go anywhere until it announces earnings in about three weeks from now.

INXN – made a new high on Friday after consolidating near the highs for most of this week. Extended from the prior buy points discussed in previous reports.

KATE – this pullback to the 10-day and 20-day moving averages is probably what you want to look at buying into following prior pocket pivots in the stock. The pullback has also taken the stock right back on top of its prior handle within a cup-with-handle base, and KATE is one of those stocks that I believe is best bought on weakness following prior strength.

MTDR – stock had a pocket pivot buy point along the 10-day line on Friday and remains the only oil name that I like (others include SN, CLR, FANG, ATHL, and BCEI) that is also in a buyable position. Oil stocks, however, may take a break here as the NASDAQ starts to outperform and tech stocks take on more of a leadership role.

NFLX – holding tight along its 10-day moving average. Probably just biding its time ahead of earnings at the end of July as it forms a cup-with-handle base.

PCRX – moved to new highs on Friday on a pocket pivot volume signature. Stock was slightly extended from the 10-day moving average, however. Was in a better buy position on the low-volume pullback to the 10-day moving average earlier in the week per my discussion in this past Wednesday’s report.

RH – now up about 15% from its buyable gap-up of June 12th which I discussed in my report of June 15th. It’s interesting to note that I’m starting to see more “short RH” articles out there. Probably means the stock just keeps going higher.

VIPS – the pullback to the top of the base earlier this past week turned out to be quite buyable given that it was a low-risk entry point, and the stock moved higher from there on Friday, just missing an all-time high. Theoretically still within buying range of the prior base breakout at around 175.

VRNT – still tracking along the 10-day moving average. My guess is this will move up and off of the 10-day line soon, so I consider it buyable right here along the 10-day line with the idea that it will hold above near-term support at the 48 price level.

YY – stock is holding along the 10-day moving average after a buyable pullback at the 10-day moving average two Fridays ago as I discussed in my report of June 22nd. Buyable on pullbacks to the 10-day line, now at 72.86.

A broadening number of stocks have been flashing buy signals in the form of pocket pivots recently, and these have made for a very “target rich” environment. As we approach the heart of second quarter earnings season, however, it’s a little more difficult to take initial positions in new situations so close to earnings, unless you believe they might have a shot at making a decent upside move prior to announcing earnings. In most cases, such as with QIHU and CRM, for example, the fact that earnings are not due until late August or early September makes this less of a factor.

On the other hand, if you have some positions that are up a fair bit from your entry point, then you have a decent profit cushion to work with as you decide how much of a particular stock, if any, you will hold going into earnings. Recall that most of these stocks that I’ve been discussing over the past month or so are up nicely from bottom-fishing and roundabout pocket pivots and not standard-issue base breakouts. In my view, understanding pocket pivots and buyable gap-ups and the strong edge they give you in a QE-driven market is essential for investment success as those who rely on the “old ways” will continue to run at the tail end of the herd.

Otherwise, I think we are at a point where one might be trying to sit more and think less, at least until an upcoming earnings report is staring you in the face. In the meantime, I remain long this market, and, until further notice, so should you.


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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