The Gilmo Report

March 12, 2014

March 12, 2014

The market sell-off that started off the week wasn’t that hard to see coming. Over the weekend I wrote that leading stocks tell you what’s going on long before the indexes do, and last week we began to see a number of leading stocks weaken in earnest. Some have pulled back to retrace a good chunk of their gains so far in 2014, while others are outright failing. As I wrote over the weekend, “…leading stocks tell you what is going on before the indexes are, and what leading stocks are telling me is that the market is likely to pull back a little more here as extended leaders either take a break and consolidate recent gains or something worse starts to brew.” That’s how I saw things over the weekend, and the market has continued to drift lower.

Keeping in mind that markets can top even as they go higher, the sell-off of two Mondays ago, allegedly due to the Ukrainian Crisis, came the day after a heavy volume churning day two Fridays ago that also saw a lot of selling off the peak in leading stocks. Initially my reaction is to treat the sell-off in an opportunistic fashion, looking for leading stocks to hold logical support areas, such as the top of a prior base or a key moving average such as the 20-day exponential moving average which is often my “go to” moving average when strong-acting leading stocks start to pull back. However, for all we know, the initial selling two Mondays ago merely used the Ukrainian news as an “alibi” for the selling, and once the “all clear” signal is given, as is usually the case with such news, the market has the excuse it needs to rally sharply, as it did last Tuesday when we were treated to a huge gap-up move off of Monday’s downside gap. This “relief rally” is then sold into as a new wave of selling hits the market.

Some clues can be seen if we look at the daily chart of the NASDAQ Composite Index, below. We can see the large-volume churning two Fridays ago, then last Monday’s downside gap followed by a huge-volume gap-up to new highs last Tuesday. Notice that this big gap-up did not have any real upside follow-through as it stalled around the peak. Two more distribution days have shown up over the past four days as the index has come down off the peak. With the market moving to higher highs immediately after the Ukrainian “all clear” signal two Tuesdays ago it may be that smart money sold into the rally, manifesting again as heavy volume selling in the NASDAQ yesterday.




With leading stocks coming down deep into their patterns, an oversold bounce was logical today, and that was indeed what we got, albeit on lighter volume compared to yesterday. It is going to be interesting to see how this plays out, and for now, and as I indicated over the weekend, my preference is to lay back and see exactly how it does play out. If you are still long leading stocks that continue to act reasonably well, simply stick to whatever stops/trailing stops you have set for those positions. Speaking for myself, my preference is well-known. I will sell leading stocks into sharp upside rallies, preferring to take profits while the getting is good, and then let the stocks breathe a bit and look for new, low-risk set-ups whereupon I can re-enter the stock if I so choose. With the market pulling back I am of course keeping one opportunistic eye open in the event I see something that looks like it can be “scooped up” on a pullback, but I am not satisfied with what I’m seeing so far. Thus I take a cautious view, waiting to see if any new set-ups in leading stocks present themselves.

The U.S. Dollar matched its lowest low in 29 months today as the downtrend off the short-term peak of last July pushes the greenback lower. In perfectly and inversely correlating fashion, gold gapped up to a higher high today, as we can see in the daily chart of the SPDR Gold Shares (GLD), shown below. Since my report of January 18th when I indicated the GLD could be bought using the 119 price level as a downside stop, gold hasn’t looked back much as it has continued higher, with the GLD closing at 131.76 today, about 10% higher. The next point of resistance would be somewhere around the 137 level, coinciding with the $1400-an-ounce level in the yellow metal itself. Since gold trades continuously, today’s gap-up in the GLD actually shows up as a continuation pocket pivot on a daily chart of the Gold Index ($GOLD), not shown. While it has been pretty much a textbook exercise picking off the buy point in the GLD down around the 120 level, the precise reasons for the upside action remain mostly unclear.

While it is true that everyone hated gold a couple of months ago with many pundits calling for the yellow metal to “bottom” at around 800-900, negative sentiment alone cannot be the cause of this two-month rally. My view has been that QE is here to stay in some form or another as the Fed is essentially stuck given the fact that the U.S. government cannot pull itself away from the teat of massive deficit spending. Ultimately, it may be that the only outcome is a collapse of the dollar, which would send gold skyrocketing, in my view. For now all we know for sure is that the GLD was first buyable at around 120 and the trend continues to remain our friend.




My comments on Tesla Motors (TSLA) over the weekend were somewhat prescient as I wrote that “…one possible scenario is that TSLA continues to pull back and undercuts the 134.99 low of this past Monday to meet up with the 228.45 BGU (buyable gap up) day low and the 20-day moving average.” The stock has done exactly that over the past two days. Coming into today’s trade, with the general market down three days in a row on the NASDAQ, TSLA helped to add a more positive tone to action earlier in the day, and the fact that it didn’t reverse probably kept the market in a hopeful state. With TSLA coming into the 20-day line that does represent a spot at which one can try to “scoop up” shares, that would have made for a decent trade on the day based on TSLA’s 241.49 close. Volume was only average, although it did come in higher than the downside volume over the prior three days. If the general market can hold together, and perhaps even if it can’t, TSLA may be trying to build a tight flag formation here as it settles down and tries to find its feet. The stock is roughly in a buyable position based on the buyable gap-up move of late February using the 20-day line as your selling guide.




Facebook (FB) continues to be one of the best-acting, big-stock names out there as it continues to correct last week’s v-shaped pocket pivot buy point. FB found support today along the lows and just above its 20-day moving average, the green line on the daily chart below. Since last week’s pocket pivot, FB has held above the 10-day line on a closing basis, and it is, believe it or not, within buyable range of last week’s pocket pivot buy point with the idea that it should continue to hold above the 20-day line on any further pullbacks.




iRobot (IRBT) continues to find support at the top of its prior long-term base extending all the way back to June of 2011. More recently, IRBT has emerged from a seven-month double-bottom sort of base, which we are not able to see in its entirety on the daily chart, below. IRBT weathered another pullback to the top of the prior base today as volume picked up slightly, giving the day’s action a bit of a supporting look. If you’re going to step in and buy pullbacks, my view is that the best kind of pullback is one right into the top of a prior base, particularly if it is a long-term base such as IRBT’s is. To me this is a little easier to buy than a pullback in a stock that is further “up in the air.”




In the case of Workday (WDAY), shown below on a daily chart, we can see that the stock has violated the intraday low of its buyable gap-up move of about two weeks ago but is doing its best to cling to its 20-day moving average. So far it has managed to do so, but with no real volume support coming in along the 20-day line it makes it tough to have any real conviction that the stock can be bought here. Certainly, one could test the stock’s ability to hold the 20-day line by buying shares along the line with the idea of unloading quickly should the stock fail to hold above the 20-day moving average. In my view, and particularly given the stock’s prior upside move, the stock is vulnerable to pulling back further into the 50-day moving average down closer to the 94-95 price level.




While DATA can be seen as being somewhat “up in the air,” then Tableau Software (DATA) can be seen as even more so. As we can see on the daily chart, below, DATA has not been able to hold above its 20-day moving average, but it has so far been able to hold the intraday low of its early February buyable gap-up move. However, there is still a chance that the stock could pull in further to test its 50-day moving average down around the 84 price level. If we look back to December we can see that DATA had some pocket pivots within the base in the latter part of that month and since then has “obeyed” its 10-day moving average rather nicely on the way up.

With the stock violating the 10-day moving average, in my view it has at least given a short-term sell signal, and it remains to be seen where and when it can issue a new buy signal. A pullback to the 50-day moving average in the next few days before it has a chance to catch up to the price would most certainly violate the intraday low of the early February BGU day. Thus as I see it one could look at buying the current pullback with the idea that the stock will hold above the BGU’s 89 intraday low. Should it fail to do so, then your next reference point on a pullback would be the 50-day line.




Over the weekend I talked about buying a pullback down to 73-74 and near the 10-day moving average in Palo Alto Networks (PANW), and we got that opportunity today as can be seen on the daily chart, below. PANW flipped out to the downside this morning before finding support at the 10-day moving average, and if one was brave enough one could have stepped in to buy shares right there in the 73-74 price area. The stock found support at the 10-day line and closed up on the day, but buying volume was rather scarce. I would have preferred to see some decent buying interest come into the stock off the 10-day line, but for now the stock is holding up along last week’s peak, which is good enough for now. In the meantime, the only way I can see buying shares of PANW is on any further pullbacks to the 10-day moving average, should that occur.




All of the solar stocks I have discussed in recent reports have fizzled after recently strong price/volume action. Jinko Solar Holdings (JKS) and Trina Solar (TSL), both not shown, have pulled back into their 20-day moving averages where they might be buyable if they can at least hold above that key moving average. Canadian Solar (CSIQ), not shown, has dropped below its 50-day moving average while SolarCity (SCTY), also not shown, has fallen back into its prior base but bounced off of its 50-day moving average today.  First Solar (FSLR), not shown, has also pulled back into its 50-day moving average. Sunpower (SPWR), which I do show on a daily chart, below, typifies what most of these stocks’ chart patterns look like with a prior display of strong upside action that has since failed over the past several days as the stock pulls into a key moving average. In SPWR’s case, this would be the 50-day moving average, where it was able to hold above today, but buying interest is rather scarce here.

Last week I had hoped that the solars might start emerging from their bases and thereby provide the market with a fresh set of new leaders to help drive the rally, but so far that has not materialized. As well, the way most of these stocks have failed to hold prior base breakouts and/or pocket pivots doesn’t strike me as constructive, and it remains to be seen whether these current pullbacks in what remains the market’s #1-ranked industry groups are buyable. If one does choose to test the waters by buying shares in any of these solar stock pullbacks, just make sure you keep a tight stop. As well, I would have to say that with the stocks right at their 20-day or 50-day moving averages, each one has a very near reference point to use as a quick downside “hyper-stop.”




Bonanza Creek Energy (BCEI), not shown, has blown chunks and failed on its recent buyable gap-up move, so as a potential oil play it has been summarily tossed off of my buy watch list. Diamondback Energy (FANG), also not shown, has pulled back to its 20-day moving average, where it might be buyable with the idea that it should continue to hold the 20-day line. U.S. Silica Holdings (SLCA) continues to act well after the bottom-fishing pocket pivot of two weeks ago, as we can see on the daily chart below. SLCA has moved right up to the top of its prior base where it found logical resistance yesterday, and has since pulled back towards the 10-day moving average on light volume. I would be looking to buy the stock on a pullback into the 10-day line at around 34.42.




Among my short-sale targets, LinkedIn (LNKD) remains in play as a short every time it rallies up into its 50-day moving average. As we can see on the daily chart, below, the stock has run into solid resistance at the line every time. I would continue to use rallies up into the 50-day line, currently at 208.58, as short-selling opportunities using the 50-day line as my reference for an upside stop. Volume on both the upside and the downside over the past week or so has dried up as the stock remains somewhat in “no-man’s land” here just under the 20-day moving average. Cree (CREE), which I don’t show here on a daily chart, was a short on Monday at the 20-day moving average (at around 60.50) as I discussed in my weekend report, and the stock has since dropped a couple of bucks but is out of shortable range given today’s close at 58.70.

Rallies into the 20-day line and further towards the 65-day exponential moving average at 60.76 remains shortable, in my view. If the general market continues to sell off, I expect that both of these stocks will head lower. Just keep in mind that short-sale targets work best when the market is going down, and should the market find its feet here along with the large swatch of leading stocks that have pulled back along with it, it makes more sense to take the long side of the market instead.




With the market and leading stocks pulling back in expected fashion, I remain focused on the possibility of buying into constructive pullbacks. However, based on my discussion on the outset of this report, I remain somewhat cautious as I prefer to give the market some time to work things out. It may be that more time is required for the market to consolidate the sharp gains off the early February lows. We could also see the market correct further, which I tend to see currently as the higher probability. At the very least I see no reason to engage in aggressive action on the long side until I start to see more concrete set-ups showing up in my daily screens. I expect that by the time I write my weekend report, the situation will have clarified somewhat, so 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 held a position in PANW, though positions are subject to change at any time and without notice.

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