The Gilmo Report

March 25, 2012

March 25, 2012


The biggest danger to investors here as we approach the end of the first quarter would be any tendency to try and overthink things. For the most part, the situation remains as it was when I wrote my mid-week report with the indexes continuing to track sideways while leading stocks continue to act well. Some have done better than that, but more on that later. The daily chart of the NASDAQ Composite Index, below, reveals a market where volume levels have remained muted during what is nothing more than a short consolidation. Friday’s action saw the index try to move to a lower low, but by the close it had reversed back to the upside, just narrowly missing an “outside reversal” to the upside and instead having to settle for a simple reversal back to the upside. Could the market indexes peel off more from here in a continued consolidation? Of course they could, but it all comes down to one thing, and that is watching your stocks first, and the indexes second. Meanwhile, as we approach the end of the first quarter of 2012, institutional money managers are not likely to start dumping stocks going into the end of March, but might instead seek to engage in end-of-quarter “window-dressing” as any money manager who has not been participating in this bull move that has gone on since the start of the year will not want to show evidence of their non-involvement. For now, all we need to know is that the indexes show little to no deleterious action and leading stocks act quite well.

NASDAQ Composite Index Gilmo Report Chart

If we check in with some of the big-stock leaders in this market, we find that they continue to provide the market with a strong big-cap leadership foundation. Apple, Inc. (AAPL), the biggest of the big-stock leadership in this market, may be finding temporary resistance at the $600 price level, but such resistance doesn’t seem to be bringing sellers in with force. As I’ve written before, given the growth rates and 14 forward P/E of AAPL currently, there isn’t a professional or institutional money manager who can justify dumping the stock here. And with AAPL declaring a dividend this past week, it has now brought income-oriented investors into the fray, adding more “cement” to the solid foundation of institutional sponsorship that AAPL enjoys. AAPL did suffer a brief sell-off with some trades printing erroneously at $540 early in the day on the BATS electtronic exchange, but these trades were deemed null and void and hence do not show up on the daily chart of AAPL below. What we do see on the chart is that AAPL pulls back here slightly as volume quickly dries up. Watch for the 10-day moving average to provide short-term support on this pullback if AAPL is to remain on its upside streak. I also would not be surprised to see the stock stop to form at least a short flag formation at some point in here.

Apple, Inc. (AAPL) Gilmo Report Chart

I’ve noted numerous times that one can easily handle a position in AAPL by operating on the basis of the Seven-Week Rule which states that if a stock follows or “obeys” its 10-day moving average for seven weeks or more from a valid pocket pivot or other technical buy point then one only sells that stock if it violates the 10-day moving average. AAPL has been “obeying” its 10-day moving average for a long while now, and it has been joined by other big-stock leaders like (PCLN). As we see on the daily chart, below, since its first pocket pivot move above the 50-day moving average, which I discussed in my report of January 18th, PCLN has held above the 10-day moving average and is now subject to the Seven-Week Rule. If you own PCLN you are now using the 10-day moving average as your selling guide. Otherwise, PCLN’s strong action, like AAPL’s, is a good sign for this market, from my perspective. (PCLN) Gilmo Report Chart

Intuitive Surgical, Inc. (ISRG) has also joined the list of big-stock leaders in this market that have obeyed their 10-day moving averages for seven weeks or more, as we see on the daily chart below. There is one move below the 10-day moving average, as I show on the chart, but this was not a violation since the stock never moved below the intra-day low of that first close below the 10-day line. The next day it gapped up slightly, and then the next day after that moved back up above the 10-day moving average as it quickly recovered. This is the action of a strong leader, in my view, and while it dropped below its 10-day line on a day when the general market gapped down, providing a logical context for the move, it showed its strength by holding and move back up to new highs within a few days. I discussed ISRG’s “ascending chain” on its weekly chart in my report of March 18th, and now that it has completed seven weeks in a row of following its 10-day moving average holders of the stock now have a ready selling guide. With the stock resting right on its 10-day line look for a possible continuation pocket pivot buy point to show up here.


Intuitive Surgical, Inc. (ISRG) Gilmo Report Chart

Another big-stock leader that has been holding up quite well is Mastercard, Inc. (MA), which I last discussed in my report of February 22nd as the stock was coming up and off of its 10-day moving average back then on what was a bona fide pocket pivot buy point. At that point the stock was still within range of its breakout through the 380 price level, roughly, so that the pocket pivot was quite buyable at the time. Since then the stock has followed its 10-day moving average, but not as obediently as AAPL, PCLN, and ISRG, above, have as it tends to act just a tiny bit sloppily around the 10-day line. Thus I would be more inclined to use the 50-day moving average as a selling guide for MA, at least for now. Overshadowing all of this, of course, is the fact that MA flashed a buyable pocket pivot off the 10-day moving average on Friday, so if you own a position in the stock from one of the earlier buy points down lower in the pattern, this is your signal to add on the basis of Friday’s continuation pocket pivot buy point.

Mastercard, Inc. (MA) Gilmo Report Chart

In my mid-week report of this past Wednesday I was quite happy to report the buyable gap-up move in LinkedIn, Inc. (LNKD) on that day. LNKD held the gap move on Thursday and Friday, and on Friday volume dried up quite sharply, which tells me that the stock may be preparing to launch and remain above the $100 price level, where it has found some slight resistance over the past couple of days. On the weekly chart, below, we can see that this past week’s action constitutes big upside weekly volume on a clean base-breakout and 95 resistance. We’ve been on this one for a while, ever since the buyable gap-up move from early February, and so far LNKD, while remaining a little squirrely, has held support at the 10-week moving average as it pushes to higher-highs. This buyable gap-up move remains potentially buyable right here, using the 97.10 intra-day low of the gap-up day on Wednesday as your selling guide, with another 2-3% on the downside to account for LNKD’s inherent volatility. All the big-volume spikes on the right side of this weekly chart may be just the “fuel” that LNKD needs to challenge and exceed its IPO highs, and if you didn’t buy the prior buyable gap-up or any of the prior pocket pivots in the pattern before this week, then this is another entry point, and in my opinion it may very well be the point at which LNKD can start a sustained, significant price move.

LinkedIn, Inc. (LNKD) Gilmo Report Chart

LNKD’s social-networking cousin, Zynga, Inc. (ZNGA) fared less well this past week, as we see on its daily chart, below. This breakdown from Wednesday’s stalling pocket pivot buy point came on news that the company will be offering some 48 million shares in its upcoming secondary offering designed to help clean out insiders who want to unload stock, including the CEO who is looking to dump 16 million shares. Ka-ching! Unfortunately, while ZNGA insiders will ring their cash registers, investors were less impressed and the stock slumped as buyers went on strike. Personally, I unloaded my own small position in ZNGA in order to force-feed into my other stronger-acting names such as LNKD and Invensense, Inc. (INVN), but will keep an eye on ZNGA to see how it acts once the secondary offering is out of the way. ZNGA did hold support just under the $13 level, so it remains in a base here. As well, since ZNGA held onto the 10-day moving average, Wednesday’s pocket pivot buy point was not altogether negated – so this is still one to watch, but for now give me LNKD!

Zynga, Inc. (ZNGA) Gilmo Report Chart

As early as my report of January 11, 2012, I have compared Invensense, Inc. (INVN) to Omnivision Technologies (OVTI) from 2003 on the basis that it will benefit from the secular “build-out” of motion sensor/detector chip technology as standard equipment on smartphones, tablets, etc., in the same manner that OVTI did with its own camera chip technology as it benefitted from the secular “build-out” of cameras as standard equipment on smartphones, PCs, etc. Thus there has been a strong thematic basis to my interest in INVN from the start, and only recently have we seen articles in Investors Business Daily and other publications recognizing this potential. As well, we were onto the stock right at the $11 price level on its initial pocket pivot buy point which preceded the standard new-high base breakout buy point. So when I see advertisements touting, “Got INVN?” my only answer is “You’re damn right we’ve got INVN!” Since then we’ve tracked several other pocket pivot buy points in the stock, and in my mid-week report of this past Wednesday I quite clearly discussed that members should watch for another pocket pivot as the 10-day line has caught up to INVN. On Friday we got exactly this, as INVN flashed a continuation type of buy point as it launched off of its 10-day moving average on very strong volume.

Invensense, Inc. (INVN) Gilmo Report Chart

For the record, I thought I would include an historical weekly chart of Omnivision Technologies (OVTI), below, to give members an idea of what this stock actually did at the time. We can see that from a split-adjusted breakout point of around $10 (there were pocket pivot buy points in the base before it broke out, by the way) the stock went up three-and-a-half times before it finally topped out. That was a decent move, and by properly pyramiding and concentrating in OVTI one could have made very decent profits. Camera-chip technology, however, was pretty basic, and the one dynamic difference for INVN is the move in motion-sensor/detector technology from 3-axis to more complex 6-axis and 9-axis capability. Thus not only do you have a technology that is changing the functionality of smartphones, tablets and the like, but the technology itself remains dynamic and changing. Thus INVN is a compelling “new merchandise” leader in this market in many ways.

Omnivision Technologies (OVTI) Gilmo Report Chart

In both my March 14th and 18th reports, I discussed watching for a pocket pivot buy point to show up in Tangoe, Inc. (TNGO) as it built a tight little base around the $18 price level in anticipation of its upcoming 8-million-share secondary offering. However, despite the fact that the secondary offering has not yet been priced and released into the after-market, TNGO decided to go ahead and flash a huge-volume pocket pivot buy point as it launched up through its 50-day moving average, as we see on its daily chart, below. Volume receded on Friday as the stock held Thursday’s move quite well, in my view. The bottom line is that TNGO has three massive, blue upside volume spikes in its pattern, with the most recent one coming on Thursday, and to me this implies that somebody with a lot of buying power is coming in and sucking up shares. Meanwhile, we continue to wait for the secondary offering to show up, and it will be interesting to see how the stock acts at that time given that it is already showing strength before the secondary offering.

Tangoe, Inc. (TNGO) Gilmo Report Chart

Fertilizer stocks got a boost on Friday thanks to reports of firming demand for nitrogen. One big fertilizer stock that we’ve been following for some time ever since it flashed a bottom-fishing pocket pivot buy point as it came up through its 50-day moving average in early January is CF Industries, Inc. (CF). As we see on the daily chart, CF has endured a couple of bouts of heavy selling off the peak, but we have to remember that the stock has come straight up off the lows near the 130 level and pushed to all-time highs above the 195 price level. The stock was entitled to pull back after a strong surge like that, and it did not violate its 50-day moving average in the process. The sharp big-volume sell-off that coincided with the general market’s sell-off at the time, and that brief move below the 50-day moving average without actually violating it, turned into a nice shakeout through the prior mid-February low. On Friday, CF flashed a pocket pivot buy point off the 10-day moving average which is potentially buyable using the 50-day moving average as your selling guide.

CF Industries, Inc. (CF) Gilmo Report Chart

The market’s uptrend remains intact and leading stocks continue to lead with some making new highs or higher highs in the process. At the current time there is zero evidence that would compel us to change course, so we simply stay the course and stay tuned.

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. ©2008-2019 Gil Morales & Company, LLC. All rights reserved.