The Gilmo Report

March 24, 2013

March 24, 2013

The market ended down slightly for the week, masking the internal argument over just how important the Cypriot financial meltdown is that led to five days of wide trading ranges and retracements in both directions, as we can see on the daily chart of the S&P 500 Index. From an individual stock perspective, little was seen in the way of decisive action, and outside of the mortgage stocks like Nationstar Mortgage (NSM) and Ocwen Financial (OCN), which continued to get pummeled, and luxury retailer Lululemon Athletica (LULU) which discovered that its flagship yoga pants might lead to a Janet Jackson-like “oops” moment due to their excessive sheerness, not much was happening. The general consensus seems to be that the Cypriot crisis will eventually blow over as the European Union will simply respond to this crisis as it has to every other one, which is to print money as a way to literally paper over the problem. Cyprus has until Monday to come up with a workable proposal, and we may continue to see the market swing around as a result of this news flow. Meanwhile, the S&P 500 is showing three distribution days around the peak while the NASDAQ Composite Index, not shown, now has four, thanks to Thursday’s higher-volume gap-down led by a blow-up from Oracle Corp. (ORCL) after it posted a big earnings miss.




ORCL’s break was not your typical big-stock sell-off, as it came in the form of a massive gap-down move that took the stock right to the 200-day moving average. While it’s huge volume was cited as a reason for the NASDAQ’s higher volume on Thursday, as far as I’m concerned selling is selling, regardless of where it comes from or where it is focused.




Apple (AAPL) closed above its 50-day moving average for the first time in six months, but without a “bottom-fishing” pocket pivot buy point.




Gold reacted to the Cypriot crisis by gapping up on Monday and then flashing a pocket pivot buy point “signature” on Tuesday coming up and off of the 22-day exponential moving average, the green line on the daily chart of the SPDR Gold Shares (GLD) ETF, below. I’m not so sure, however, that this is a truly actionable buy point for the yellow metal since it is occurring from a point below both the 50-day and 200-day moving averages. The other issue I have is that silver did not confirm the move in gold as the iShares Silver Trust (SLV) in fact closed lower for the week with no reaction to the upside in response to the Cypriot crisis. With the GLD closing at 155.55 on Friday, if one were hell-bent on buying gold here on the basis of what is likely a marginal pocket pivot seen on Tuesday, then it would make sense to use the 10-day moving average at 154.71 as a selling guide should the GLD fail to hold up. While I’m skeptical of this new bottom-fishing buy point in the GLD, I still believe that the precious metals have to be watched carefully here as I expect the crisis in Cyprus to eventually be settled by either a) an exit by Cyprus from the EU, or b) more money-printing, either of which could be positive for the precious metals, thus we must continue to keep a close eye on them.




Among the few positive developments I saw in leading stocks that have dominated my discussions in The Gilmo Report over the past three months, LinkedIn (LNKD) picked up a buy rating from a brokerage firm on Friday. This set off enough buying to send the stock back up through its 10-day moving average on a continuation pocket pivot buy point, as we see on its daily chart, below. This is a proper add point for the stock, but it does not provide a fresh entry for one seeking to enter the stock for the first time, in my view. This is because it comes up off the lows of the stock’s three-week range without clearing last week’s intra-day high of 184.15. As well, on the weekly chart, not shown, one can see that the stock moved to a higher weekly close on lower weekly volume. The stock’s move did take its relative strength line to a new high, however, which in my mind cements LNKD’s status as a strong market leader despite the general market’s uneven action over the past week. Certainly, if one has an existing position in the stock, one can add to the position on the basis of this continuation pocket pivot buy point with the idea that the stock should hold the 10-day line at 176.82.




In this market, strong action on the part of leading stocks has not necessarily led to any kind of big upside follow-through. As one example, we can see that last week’s breakout in Commvault Systems (CVLT), shown below on a daily chart, did not engender any follow-through to the upside as the stock simply drifted back into its 10-day moving average. This seems fairly typical of CVLT’s breakouts and gap-up moves over the past few months as these strong, big-volume upside breakouts tend to fizzle out and the stock then simply drifts around for several weeks as it remains below the highs of the initial breakout or gap-up day. Last Thursday’s huge-volume breakout that sent the stock up 8.55% on the day has simply resulted in a pullback closer to the original 79.53 breakout point and within buyable range once again. With the stock resting upon its 10-day line, this sets up the possibility of some sort of pocket pivot move up and off of the line, but it would still be within the stock’s nature to simply hold the line and move higher without any appreciable volume showing up. Thus one could buy into this pullback, using the top of the prior base at 79.53 as a quick selling guide.




This past Wednesday, in my report of March 20th, I discussed the action in homebuilding stocks, including Lennar Corp. (LEN), which on Wednesday had staged a huge-volume breakout through the roughly 42 price peak of a short handle within an equally short cup-with-handle that has formed on the daily chart, shown below. I would note, however, that the stock is only forming a cup pattern on its weekly chart, not shown. This is because the past four weeks have all been up weeks, therefore there has been no pullback within the right side of the cup on the weekly chart that would constitute a proper handle. That may be the problem with this past Wednesday’s breakout, since we can see that it promptly pulled right back to the breakout point just around the 42 price level. Housing is getting a lot of positive air play these days, and most recently I heard analysts talking about how the homebuilders are, in several cases, set to announce strong earnings and sales numbers over the next 10 quarters. If that’s true, then I suppose this pullback in LEN is one to buy into, since buying on the breakout would have set you back a quick 5%. A lot of these homebuilders’ chart patterns, however, strike me as later-stage, so watch your stops on these carefully.




I’ve received some emails asking me about Netflix’s (NFLX) status as a “high, tight flag” formation, which I think is relevant given that I’ve previously discussed the stock over the past couple of weeks. Recall, however, that in my report of March 13th I identified a pocket pivot buy point coming out of this so-called “high, tight flag” formation which immediately turned tail to the downside. The weekly chart, below, shows this in the form of last week’s longer upper “tail” on the price bar. As I discussed back then, I consider NFLX to be a possible turnaround situation as its earnings growth is expected to return to the positive side with estimates of 18 cents and an absolute growth number of 324%, reversing the prior six quarters of negative earnings growth and decelerating sales growth. If NFLX were a newer, fresher situation I might be more upbeat on its status as a “high, tight flag,” given that institutional sponsorship has not been increasing all that much. Of course, we’ll have to see how the Q1 2013 sponsorship numbers start to look after this month. On the constructive side, the stock is near the lows of a five-week flag formation as weekly volume dries up, but there is always the possibility that the stock could pull back to test its 10-week moving average at 172.41, so that would probably be your safest point to try and enter the stock if you are a fan.




I’ve previously discussed Splunk (SPLK) as it moves tight sideways here and builds something of a three-week handle to what is now a 27-week cup-with handle formation, as we can see on the weekly chart, below. This one is a little unclear to me in that the four weeks of tight closes and the long “tails” on the last three weekly price bars look constructive. If this were more of a flag formation as opposed to a cup-with-handle in the making, I might consider this imminently positive. On the other hand, when a stock is forming a handle you would prefer to see it drifting down slightly as volume dries up, setting up a potential breakout. The key here may be to move away from trying to attach a label to the pattern and instead focus on the action in the daily chart, not shown, as the stock moves along either side of its 10-day moving average. Thus I would consider the stock to be more actionable if we saw a pocket pivot buy point develop here along the 10-day line, which is currently running through the 38.55 price level. This would need to occur on volume that exceeds 1,635,100 shares, the highest down-volume in the pattern over the prior 10 trading days. Meanwhile SPLK’s Relative Strength rating has risen to 80, which is very constructive in my view given that when I first started discussing the stock a few weeks ago the RS was a deficient 73. I still believe the stock has the potential to go higher, but it is just a matter of buying right, and not necessarily buying low.




Admittedly I am having a hard time finding a lot of price/volume movement in individual stocks that I consider actionable at the current time, outside of what I’ve discussed in the most recent reports. But in most cases, actionable buy points have not led to any significant follow-through on the upside, if at all, and as we’ve seen with situations like CVLT and LEN, above, strong breakouts can fizzle out, resulting in lower volume pullbacks that are still constructive but somewhat disappointing given the prior strong, big-volume upside action. Does all this mean that the market is primed for a pullback? This past week the market consistently found a bid around its lows, and until this pattern breaks the market’s uptrend, while unexciting, remains intact, but that can change quickly, thus I believe investors should keep a close eye on their stops and remain alert to any changes in the market action as it occurs.


Gil Morales

CEO, Gil Morales & Company, LLC
Managing Director & Principal, MoKa Investors, LLC
Managing Director & 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 no positions, though positions are subject to change at any time and without notice.

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