The Gilmo Report

June 8, 2014

June 7, 2014

The indexes continue to move higher as Friday’s jobs number was a fairly benign event. New non-farm payrolls came in a little bit below expectations, but for the most part there were no big surprises with the number and the market took this as a green light to keep on rallying. Thursday’s action was more meaningful, as I see it, given the higher-volume breakout by the NASDAQ Composite Index, shown below on a daily chart. This looks very constructive and puts the index within spitting distance of its 13-year highs.




Another positive development is seen in the small-cap stocks, as represented by the iShares Russell 2000 (IWM) ETF, which serves as a convenient proxy for the Russell 2000 Index. One of my main concerns with the present rally was the lack of participation by the small-cap stocks. Thursday’s big-volume trendline breakout, which we can see on the daily chart of the IWM, below, puts the small-cap index back in uptrend mode. In my view this is highly constructive for the market in general.




My favored stocks have continued to do reasonably well. Palo Alto Networks (PANW), which is one of my favorite stocks, pushed to a higher closing high on Friday to cap off a four-day rally that shows decent follow-through to last week’s buyable gap-up/double-bottom breakout combo. If you’re not already long this on the pullback to the BGU intraday low at 72.86, the next buy point would likely be a pullback to the 10-day moving average, currently at 73.24. Otherwise we’ll have to wait for the 10-day line to catch up. PANW is also showing little black triangles on its daily price bars over the past two days, indicating that the stock is up 12 out of 15 days in a row or better. My guess is that we will see a small pullback to the 10-day line as the stock runs into just a little resistance from the left side of the base at around the 78-80 price level.




Cavium (CAVM) also moved to a new 52-week high after Wednesday’s continuation pocket pivot, as we can see on the daily chart, below. This is extended and only a constructive (e.g., low-volume) pullback to the 10-day line and the Wednesday pocket pivot would be buyable. Otherwise this is just a hold for now.




Sunpower (SPWR) is just consolidating Wednesday’s buyable gap-up/pocket pivot combo as it moves tight sideways for the past two days with volume drying up, as we can see on the daily chart, below. Based on its chart pattern, SPWR is the leading solar name, and its ace card is the fact that it has exposure to the international markets, particularly India where the government is looking at pushing the development of residential solar. The stock may track here for a while longer as its $400 million senior convertible debt offering gets priced, but I would look for the stock to eventually break out to new 52-week highs, using any pullbacks here to the 10-day line and the 33.27 BGU intra-day low.




Facebook (FB) turned out to be a “buy the dip sell the blip” trade on Thursday as the move off of the 10-day line on Wednesday never materialized into a pocket pivot. FB dropped below the 10-day line today, as we can see on the daily chart below, but for the most part all it is doing is moving tight sideways as it holds above its 20-day and 50-day moving averages with volume remaining quite below average. Buying the dip on FB closer to the 20-day line might be the way to buy into the stock if one so desires, otherwise one has to wait for an actual pocket pivot to materialize here along the 10-day or 50-day moving averages. That gives you two ways to buy the stock, but my preference is to use quiet (e.g., low-volume) weakness along the 20-day line to pick up shares.




Kate Spade (KATE) appears to find ready support along the 36 price level on pullbacks over the past couple of days, and Friday tried to move above the 37 price level. But it is still running into a little resistance at the peak of this handle area it is currently building within an overall cup-with-handle base. As we can see on the daily chart, below, volume remains light with the stock closing just above the 10-day moving average on Friday. It remains in position for a possible pocket pivot buy point, although I have used pullbacks to the 36 price level, more or less, to “buy it when it’s quiet.”




Illumina (ILMN) continues to come up the right side of a new base with another pocket pivot on Friday, as we can see on the daily chart, below. This comes after last month’s bottom-fishing pocket pivot coming up through the 50-day moving average, which I first discussed in my report of May 21st. The stock is buyable again on the basis of Thursday’s pocket pivot buy point, which could also be seen as a cup-with-handle breakout. Notice, however, that the bottom-fishing pocket pivot back in May got you in early, before the breakout.




I noted in my report of this past Wednesday that we should be continuing to watch for a possible pocket pivot coming up through the 10-day moving average in Keurig Green Mountain (GMCR), and that’s exactly what happened on Friday as the stock began launching through its 10-day moving average and triggering my pocket pivot volume alert early in the day. As we can see on the daily chart, what started out as a pocket pivot buy point early in the day ended the day as a bona fide, cup-with-handle base breakout on volume that was 122% above average. Apparently my comments about GMCR being an “old merchandise” play offended the stock, and it responded with the strong 8.4% breakout move.




In my May 24th report I discussed the constructive technical action in Pacira Pharmaceuticals (PCRX), shown below on a daily chart. At that time the stock was going “Code Blue” with all my indicator bars at the top of the chart turning blue just before the stock came up and off of the 10-day moving average. The only issue here is that the only way to buy this would have been to “buy it when it’s quiet” as it was sitting on the 10-day line since there have been no pocket pivots occurring close to the line. Over the past few days the stock has broken out to all-time highs on pocket pivot breakouts, however, which are theoretically buyable. I would prefer a pullback to the 10-day line, however.




Perhaps another name in the bio-tech space, Horizon Pharmaceuticals (HZNP), is setting up to move higher, as we can see on the daily chart, below. HZNP is a specialty pharmaceutical company with products that address therapeutic needs in arthritis, pain, and inflammatory diseases, areas of focus for aging baby boomers. The company has been losing money but has made some acquisitions that will help push it back into the black. This past quarter HZNP came out with an 8 cent profit, and this is expected to grow to 13, 18, 24, 28, 33, and 38 cents over the next six quarters, respectively. Each of these hard number estimates over the next six quarters is associated with strong triple-digit earnings growth of 128%, 263%, 112%, 108%, 250%, 154%, and 111%, respectively. The stock is holding very tight here along the 10-day moving average as volume dries up, and we have seen two light-blue Kahunas show up as the stock moved back above the 50-day moving average. I’m willing to buy this one right here with the idea that it will continue to hold the 50-day line. Otherwise watch for a pocket pivot to develop with the stock in this position.




Interxion Holdings (INXN) is a Dutch company that provides data-center services where customers house their own computer servers. Their business is similar to Equinix (EQIX), which I’ve discussed in previous reports a couple of years back. EQIX has tried to convert their business into a Real Estate Investment Trust, or REIT, since like INXN they basically provide “real estate” with existing cooling systems, power, and high-speed internet lines where customers can simply plug in their own equipment without having to build the infrastructure themselves. It’s basically a form of cloud outsourcing, and in the age of the cloud we might expect these businesses to do well. INXN has decent earnings growth, coming in with 62% growth in the most recent quarter and 73% in the prior quarter. Sales are growing at 16%, and overall I would have to say there is nothing exceptionally spectacular about the stock’s fundamentals. They are what I would term “decent.”

INXN came out as an IPO in January 2011 at $13 a share, and hasn’t ever had much of a big upside price move. What catches my eye here is the extreme tightness in the pattern as it moves along the 26 price level and its 10-day moving average, as we can see on the daily chart, below. On the weekly chart, which I don’t show here, the action for the past six weeks is characterized by excruciatingly tight ranges and closes that are unusual for its price/volume action since it came public. There have also been two pocket pivots within the base over the past two weeks, and the indicator bars on the top of my chart have gone “Code Blue.” The stock just misses trading 300,000 shares a day on average, so it is relatively thin, but a number of institutional investors have started taking significant positions in the stock in the past couple of months. For example, Blue Harbor, one of the top 50 performing hedge funds in 2013 revealed in a May filing that they had increased their position in the stock to 2.5 million shares from 116,000 shares. In early April, another investment firm, Eminence Capital, reported a 5.6% passive stake in the company, which by my math would be somewhere around 3.86 million shares.

While this is a bit thin for me, one could take a position here in the stock on the basis of the two pocket pivots within the base in anticipation of a breakout, using the 50-day moving average at 25.63 as a selling guide. I have to admit that INXN doesn’t get me all that excited, but sometimes the stocks you have the least regard for have the best price moves.




Chinese online discount retailer Vipshops Holdings (VIPS) broke out from a cup-with-handle base on Thursday, as we can see on the daily chart, below, and there may be some sympathy aspect to this given the strong action we saw over the past two days in fresh IPO (JD), dubbed the “ of China” by some, which I discussed in my report of this past Wednesday.  This is a standard, clean base breakout that is well within buyable range right here, right now, as we can see on the daily chart below, so have at it.





Michael Kors Holdings (KORS) has at times over the past few days since it announced earnings looked as if it were on the verge of a late-stage base-failure. But the stock has been able to hold above its 50-day moving average after briefly dipping below it on an intraday basis last week. Upscale retailers like KATE and even upscale retail chain Nordstrom (JWN), not shown, have been doing well with JWN flashing a big-volume buyable gap-up three weeks ago which I found interesting given JWN’s typical status as a bigger, slower retail name. Perhaps KORS is setting up to move higher here, the odds of which improve as the general market rally continues to gather steam. The pocket pivot buy point that I discussed in my report of May 28th in fact still remains actionable as the stock holds above the intraday low of that pocket pivot day’s trading range. If one buys into the stock here, then that intraday low and/or the 50-day moving average at 92.14 becomes your selling guide.




I have been pondering the daily chart of Yelp (YELP) lately, and it’s not clear whether it is building a right shoulder in a head and shoulders formation or trying to round out a new base. One of my short-selling rules is to leave a stock alone once it flashes a pocket pivot buy point, and YELP had a bottom-fishing pocket pivot last week coming up through the 50-day moving average, as we can see on the daily chart, below. The stock has held tight within range of last week’s pocket pivot, which brings up the possibility of a move higher from here. As of May 15th, YELP had a peak short interest of 9,276,847 shares, or just over 15% of the float. This is decent short interest, and could help fuel a move higher from here. Even if one were to assume that the stock is still building an overall head and shoulders formation, the left shoulder peak is up at 83.95, which leaves plenty of room for a rally from here. If you like living dangerously, perhaps this is playable as a bottom-fishing pocket pivot, or “BFPP” as I like to abbreviate, using the 50-day moving average as a selling guide.




Below are my updated trading diary notes on selected stocks from recent reports:

ACT – still within buyable range of the May 22nd pocket pivot as the stock pulls back here with volume diminishing somewhat.

ANIK – still buyable on the basis of prior pocket pivots within its current base along the 10-day moving average.

ALXN – still holding tight along its rising 10-day moving average after flashing a small pocket pivot on Wednesday. Stock is buyable here.

BIIB – after moving higher following its May 27th pocket pivot at the 300 price level, the stock is consolidating just under the 320 price level as the 10-day moving average catches up to the stock. Watch for a pocket pivot developing off the 10-day line.

SN – stock is testing its all-time highs as it zig-zags higher. Prefer to buy this on pullbacks to the 10-day moving average.

TSLA – holding tight just a hair above its 50-day moving average. TSLA may be building the right side of a new base, and confirmation would come in the form of a bottom-fishing pocket pivot off of the 50-day line. Keep a close eye out for this.

The European Central Bank lowered interest rates into negative territory on Thursday, something that strikes me as a milestone of sorts and makes me wonder whether the Fed is not that far behind in going the same route. Despite total employment exceeding the peak of 2008, most of the new jobs are lower-wage service sector positions, and the economy remains weak. Thus I don’t see the Fed doing much to change its free money policies any time soon, and as long as the market remains in an uptrend and I am able to make progress on the upside, then the long side remains the right side of this market until further notice.


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, GMCR, HZNP, PANW, KATE, and SPWR, though positions are subject to change at any time and without notice.

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