The Gilmo Report

March 11, 2012

March 11, 2012

 

The market finished the week higher than where it left off last week, as we see in the weekly chart of the NASDAQ Composite Index, below, and continues its pattern of closing well in the upper part of its weekly trading range, which it has done over the past four weeks. Despite a sharp sell-off earlier in the wek, the market doesn’t seem to be deterred all that much, and the action in leading stocks confirms that. While laggards like DECK and GMCR got pounded, most leading stocks rebounded nicely on Thursday and Friday, and more than a few did so on better volume, but more on that later.

NASDAQ Composite Index Gilmo Report Chart

I suppose there might be some concern expressed in the fact that all the major market indexes drifted higher over the past three days on light volume as they recovered from Tuesday’s gap-down move, but that strikes me as more of an index problem as many leading stocks rebounded with more vigor than the indexes. If I were to see suspicious index action that was also being accompanied by weak action or breakdowns in leading stocks, then I might be concerned. So all we get, as we see on the NASDAQ Composite Index’s daily chart below, is a move that looks like somebody tried to “dunk” the market but it simply floated back to the surface, closing only a few cents below its peak of seven trading days ago.

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NASDAQ breadth, as shown by the line chart of its advance-decline line, below, also rebounded sharply. If the indexes were drifting higher on light volume and breadth was lagging then that would be less than positive.

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For those who seek comfort in having breadth as measured by the advance-decline line confirm “new highs,” then the NYSE advance-decline line, shown below, might serve that purpose as it has moved to a higher high, ahead of the NYSE-based market indexes which have not.

NYSE advance-decline line Gilmo Report Chart

Perhaps the market getting roughed up earlier this week was the start to more sideways action as the market gets into a concerted consolidation and digestion of its strong gains so far in 2012. Or maybe it was a shake-out that threw off all the weak hands, cleaned out the sellers, and has now drifted back towards the highs on weak volume, tantalizing short-sellers who see it as a wedging “double-top” that will no doubt fail. The problem with the short-selling theory is that there are very few short-selling set-ups, and almost no leading stocks breaking down sharply off of their peaks. Instead, most leading stocks took the selling in the early part of the week in stride and then turned right back to the upside. The problem therefore gets distilled down to the simple task of watching one’s stocks. Remember that I moved to cash over a week ago because I was very heavily weighted in the silver and gold ETFs, and when they began to break sharply I stepped aside. If this is just a short-term correction and nothing worse, then leading stocks will issue new buy points such as pocket pivot buy points.

An example of this is seen in that Invensense, Inc. (INVN) flashed a very buyable move on Wednesday with a pocket pivot move off the 50-day moving average that also constituted strong volume support on the stock’s first pullback to the 50-day line, as I discussed in my report of this past Wednesday. That buy point yielded not quite a 20% move off the $15 price level over the past three days, and if you were bold enough to take a big position, ignoring the action of the indexes alone, you were rewarded quite nicely by Friday as the stock pushed up into a declining tops trendline at around $18, as I’ve drawn on the daily chart below. The action in INVN makes it quite clear that this stock is a leader to be contended with, and if you missed the buy point off of the 50-day moving average then the good news is that the stock is still in a four-week base, and it is a simple matter to simply be patient and wait for the next proper buy point to show up. If the stock pulls back into the mid-16 price level it is likely buyable on such a pullback as a 50% retracement of the prior three-day upside move. INVN is certainly one leader that acts well, and with quantifiable volume vigor despite the wedging action in the market indexes. Proof that watching the stocks first and the indexes second will keep you on the right track.

Invensense, Inc. (INVN) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com)©2012 used by permission.

Not surprisingly, LinkedIn, Inc. (LNKD), which in my Wednesday report I told you I liked as it was drifting down towards that 82.10 low of the gap-up day in early February, flashed a big pocket pivot buy point as it rose up through its 10-day moving average on very strong upside volume this past Thursday, as we see on the daily chart below. Social-networking will be a strong investment theme, and with the May IPO of Facebook (FB) approaching, we can expect that interest in the goup will build as that IPO date approaches. LNKD doesn’t necessarily have to launch up and out of here right away, particularly if the general market flops around some more, and it may need to rest for a couple of days before making an attempt to clear its February highs. Thursday’s move occurred in the face of insiders filing their Form 144’s to sell stock on that day, so it doesn’t appear that the share lock-up expiration has much effect here. Short interest remains constant in the stock, but with big buyers driving a 202% volume increase in LNKD on Thursay, the short-selling thesis on such an “overvalued” stock isn’t holding up in real-time, at least not in the present moment.

LinkedIn, Inc. (LNKD) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com)©2012 used by permission.

With LNKD flashing a pocket pivot buy point on Thursday, I’m keeping a close eye on its social-networking cousin, Zynga, Inc. (ZNGA), shown below on a daily chart. ZNGA tried to break out of its short, four-week flag formation last week, but the move was premature given the prior wedging rally in the stock leading up to that new-high breakout (see my Wednesday, March 7th report for details on this). Thus the pullback to the 10-day moving average serves to “correct the wedge” and set up the possibility of a pocket pivot move up and off of the 10-day line in the coming days. Note that volume has dried up sharply over the past few days, and with very little in the way of serious selling volume coming into the stock, it does not appear that sellers are ready to take control here. Interestingly, ZNGA has a higher 95 Relative Strength rating than LNKD, which has a 79 RS rating. But LNKD’s has improved in recent days, so I might expect its RS rating to push above 80 if the market continues to correct and it continues to hold up after Thursday’s strong pocket pivot move. Meanwhile both stocks seem to act constructively.

Zynga, Inc. (ZNGA) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com)©2012 used by permission.

The weekly charts of the social-networkers add to this conclusion, with LNKD showing the three biggest upside volume weeks since its IPO week occurring in the pattern over the last five weeks.

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ZNGA shows supporting weeks within the flag, and this past week closed in the upper part of its weekly range with volume drying up.

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Biogen-Idec(BIIB) has been very quiet over the past couple of months, doing its best to bore to death anyone who holds the shares, as we see in its daily chart below. Despite the dull action, the stock continues to build a very tight base on the weekly chart, not shown, and in fact flashed a pocket pivot buy point on Thursday as it pushed back above the 120 price level. We might consider that BIIB is slowly coiling up as its continues to tighten up and move as it prepares for another attempt at new highs. This is constructive action here, and after some selling coming into the stock during the month of February, the stock is showing its mettle by recovering nicely up and off of the 50-day moving average. BIIB has a tendency to obey its 50-day moving average, so the downside here is relatively well-contained by that key moving average – one would only sell the stock if it violates the 50-day line, although I must confess to selling the stock mainly out of boredom. However, what we are really interested in here is if and when BIIB starts another concerted upside price move. The stock has been building a tight “saucer-with-handle” formation over the past four-and-a-half months, and perhaps this latest pocket pivot within the handle is a sign of further upside to come, and hopefully sooner than later.

Biogen-Idec (BIIB) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com)©2012 used by permission.

In my report of March 4th I discussed what at the time was classified as a “continuation” pocket pivot buy point in Alexion Pharmaceuticals(ALXN), but a week later the pattern as we see it on the stock’s weekly chart, below, shows that it was actually a pocket pivot within a “three-weeks-tight” formation. Volume dried up sharply this past week as the stock held tight within the 3WT pattern, and I don’t think it is necessary to have to wait for a breakout from this pattern since it can be bought on the basis of the pocket pivot buy point from two Fridays ago. Thus I am a buyer of ALXN right here in this 3WT formation with the idea of getting bigger in the position if it confirms with a breakout to new highs on strong volume. This is one example of how pocket pivots allow one to gain an edge on the crowd which is sitting around here waiting for the stock to break out of the 3WT. The pocket pivot allows one to buy the stock here with confidence, using a violation of the 10-day moving average as your selling guide.

Alexion Pharmaceuticals (ALXN) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com)©2012 used by permission.

Another leader, this time in the retail group, Tractor Supply Company(TSCO), also held up well in the face of the market’s sell-off earlier in the week and rebounded on Wednesday with its own pocket pivot buy point occurring within the third “step” in this little stair-step pattern it has built over the past two months since staging a buyable gap-up move back in early January. TSCO also has tried to bore investors to death by inching higher, but underneath the surface the stock continues to post constructive price/volume action. I see the January gap-up and breakout as the first breakout from a first-stage base given that the stock corrected all the way down to 49.02 during last year’s hectic August sell-off, undercutting the lows of two prior consolidations in the pattern. Thus this certainly served to “clear the decks” and create this latest breakout which has been followed up by a steady, albeit unspectacular, ascent in TSCO’s price.

Tractor Supply Company (TSCO) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com)©2012 used by permission.

In early February Apple, Inc. (AAPL) led investors to wonder whether it had put in a final “climax top” only to find support at its 10-day moving average, turn around, and move to new highs again. This week we see on AAPL’s weekly chart what some might see as the proverbial “railroad tracks” where the stock shows to long weekly ranges side-by-side that close at the peak each week on heavy weekly volume. Again, the answer to the question here is just where AAPL is in its price move. If it is only a few weeks out of a first-stage base then I would not classify this action over the past two weeks as railroad tracks indicating an imminent top in the stock any more than the “climax top” in early February was. But we can dispense with all this need to label chart patterns as this or that – the bottom line, and as I’ve discussed repeatedly, is that owners of AAPL shares can simply use a violation of the 10-day moving average on the daily chart, not shown, as their selling guide for the stock. This eliminates the need for operating on the basis of opinionated interpretations of “climax tops” or “railroad tracks.”

 

Apple, Inc. (AAPL) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com)©2012 used by permission.

As I discussed in my report of this past Wednesday, when the market gets into a corrective mode, my preferred mode of operation is to treat the market as a market of stocks, not a stock market. This worked well in identifying DECK as a nascent short-sale target when it decided to break down further on Wednesday despite the general market’s attempt at upside recovery. The daily chart of DECK, below, shows that the stock has not been able to bounce much since the high-volume sell-off on Wednesday as it forms a bearish flag formation here. The stock may go sideways for a bit longer, but I would see it as potentially shortable on any rallies above the 70 level up to 72. The downside breakout occurred on Wednesday when the stock broke down through the 72-75 level which had served as support on the underside of its big head and shoulders formation, so rallies up above 70 and towards the 72-75 level are, in my opinion, very shortable using 75 as a maximum upside stop.

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Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com)©2012 used by permission


Amazon.com(AMZN) another would-be short-sale set-up (see March 7th report for details) is not cooperating in the manner as DECK. As we see on AMZN’s daily chart, below, the stock stubbornly moved back above its 50-day moving average going into the end of the week, but reversed and held just above the line on Friday with volume picking up. At this point I’m looking for a high-volume break of the 50-day moving average as a signal to re-initiate a short position in AMZN. But for now, sellers as well as buyers have been reticent about coming into the stock given the low volume levels seen over the past month, more or less. One could also make the argument that AMZN is seeing some supporting action along the lows of this pattern. So I think one has to sit back and wait to see how the pattern eventually resolves itself. Nevertheless, AMZN will remain on my list of short-sale targets until it shows a little more “spunk” in the form of strong buying volume coming up and off the 50-day moving average.

Amazon.com (AMZN) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com)©2012 used by permission

As this report illustrates, following the quick gap-down “correction” this past week that comes on the heels of a massive-volume breakdown in the precious metals the prior week, I am operating on a stock-by-stock basis as I focus on actionable price/volume signals in individual stocks, both long and short. Thus strong pocket pivot buy signals in recent days in stocks like INVN and LNKD provide areas of “daylight” to run to on the long side while a situation like DECK provides a gratifying short-sale experience. As well, if one is, say, buying INVN off the 50-day moving average while simultaneously shorting a weak stock like DECK as it breaks support at the neckline of an H&S pattern, then one is in fact treating the market as a market of stocks and can operate comfortably on this basis without getting overly perplexed by the action of the general market indexes. If the market corrects and then comes out of the correction, then those stocks flashing pocket pivot or other buy points in the midst of such corrective uncertainty may be the first ones to move when the market gathers some upside momentum again, and that is where I will tend to focus my buying, as was the case with INVN and LNKD this week.

So the message remains the same: Just watch your stocks, and let the situation clarify itself over the coming days. Maybe the market is topping, maybe it is just correcting, but if you have a leading stock that continues to forge its way higher or otherwise acts constructively you can just take the Alfred E. Neumann approach (of Mad Magazine fame) and repeat in mantric fashion the phrase, “What, me worry?’

Gil Morales

CEO & Principal, Gil Morales & Company, LLC
Principal and Managing Director, MoKa Investors, LLC
Principal and Managing Director, Virtue of Selfish Investing, LLC

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.