The Gilmo Report

March 27, 2013

March 27, 2013

The market keeps moving sideways within a roughly three-week range with nothing much going on in the way of upside or downside follow-through as it swings to and fro. The daily chart of the NASDAQ Composite Index below shows that the pattern of up days coming on lighter volume continues. While it cannot be described as constructive strength, it’s not as if the market is showing any desire to make a break for the downside. As we move into the end of the first quarter and a long Easter weekend, tomorrow’s action is likely to be the same mush that we’ve seen for the past three weeks as the indexes continue to make relatively little progress after the early March follow-through day. At this point the market could resolve its current range-bound activity in either direction, so it is just a matter of seeing which way the worm turns with respect to any sort of decisive move one way or the other. In the meantime, there remains very little in the way of actionable buy points in potential leading stocks, and in some cases we are seeing leading stocks show little follow-through on the heels of strong upside action or even break down entirely, as I’ll get to in the remainder of this report.




LinkedIn’s (LNKD) pocket pivot of this past Friday didn’t go anywhere as the stock pushed right back below the 180 level on Monday where it has so far found support in the mid-170’s. Nevertheless, the stock continues to hold right here as it looks to build another base, hopefully.




In my weekend report I discussed looking for some sort of pocket pivot buy point in Splunk (SPLK), and the stock broke out on Monday on a pocket pivot move. It gapped down and reversed on Tuesday on heavy selling volume that matched the equally heavy buying volume on Monday. Today the stock stabilized to some degree as it lifted off of yesterday’s lows on light volume to hold the Monday breakout. This is within buyable range.




Netflix (NFLX) flashed another pocket pivot buy point yesterday similar to the one it pulled off two weeks ago on March 13. But the stock ran into resistance at the top of its current five-week consolidation range in the mid-190’s again, although it did manage to close roughly flat on the day.




Lennar (LEN) remains down for the count after getting pushed right back into its breakout point following what was originally a rather strong-volume breakout last week. So far this week, the stock has drifted below last week’s breakout buy point at the 42 price level, not what you necessarily want to see after such a strong move six days ago on the chart.




LEN’s weakness, however, is probably not unexpected given that we are also seeing the building materials stocks take some heat, such as U.S. Gypsum (USG), which got whacked on Monday and today undercut support at around the 27 price level.




The breakdown in USG as well as Eagle Materials (EXP), not shown, comes on the heels of last week’s breakdown in another housing-related group, the mortgage-servicing stocks. Nationstar Mortgage Holdings (NSM) is now trying to recover from last week’s debacle as it rallies for the third day in a row, but it could be shortable if it continues to move up into its 50-day moving average 37.33.




Apple (AAPL) rallied to a point about 3% above its 50-day moving average before gapping down today on volume that I would characterize as indecisive, although one has to wonder where all the bargain-hunters were today.




Google (GOOG) joined in AAPL’s gap-down game today by staging a little gap-down of its own as volume picked up. GOOG, however, had already hit one trailing stop after moving below the 828.90 intra-day low of its gap-up day of March 5th, as I discussed in my March 6th report, and then more recently failing to hold up along the 10-day moving average.




Another example of a faltering leader is teen-oriented discount retailer Five Below (FIVE), which took all of three trading days to give up a month’s worth of gains. Today’s action took the stock right down to its 50-day moving average, but after-hours FIVE announced earnings and is currently trading below 36.50 as I write. Let’s change that from “faltering” leader to “busted” leader.




One bright spot has been Semtech Corp. (SMTC), which I first discussed in my report of March 10th following its buyable gap-up of March 7th. SMTC broke out of its tight little flag formation to make a new multi-year high on Monday on volume that was 28% above average.




With Cypriot banks slated to re-open tomorrow, it will be interesting to see how crazy things get as depositors try to get their money out. With Italy moving to the forefront again today after its Democratic Party Leader Luigi Bersani was quoted as saying “Only an insane person would want to govern this country,” investors may again consider the value of alternative currencies such as the precious metals. As gold, shown below on a daily chart of the SPDR Gold Shares (GLD), and silver, shown further below on a daily chart of the iShares Silver Trust (SLV), move along the lows of their roughly 1½- and 2-year consolidations, respectively, they are starting to show some signs of a potential turn off the lows.


The GLD, shown below, issued a pocket pivot buy point coming up and off of its 22-day exponential moving average seven days ago on the chart, but with the stock holding up in a constructive, little bottoming “frying pan-with-handle” type of formation, this pullback over the past few days puts the stock in a better position for a possible “bottom-fishing” pocket pivot move. I would still like to see such a move lead to some upside follow-through that takes the GLD back above the 50-day moving average. I would expect the GLD to hold up here above the 154 level if this current price/volume results in a bona fide bottom and turn in the yellow metal.




The SLV is also interesting here as it has gone tight sideways over the past month or so, and today staged a little undercut of the prior lows along the low 27 price level before managing to close roughly unchanged on the day. I like this sort of shakeout action, particularly since it came on a pocket pivot volume signature. Since the SLV closed down by all of 2 pennies, it is still not a pocket pivot buy point, but it does hint at a possible low for the white metal. Certainly, if one chose to stick a toe in the water here and buy the SLV on the basis of today’s action, the intra-day low of the day at 27.13 provides a reasonably tight downside stop. As well, the fact that the metals are terribly unloved at the current time may be another sign that a turn is in just around the corner, although additional confirmation is necessary before we can know for certain. Since September of last year, the SLV has sold off in three little waves, with the last one taking it down to the lower lows where it has been holding up all month. If this month-long consolidation does not turn out to be a “bear flag,” it could very well provide a springboard for a turn on the basis of three prior little selling waves in the pattern.




A Gilmo member emailed in asking me to discuss Pharmacyclics (PCYC), shown below on a daily chart, and I’d have to say this is a pretty cut-and-dried situation here. PCYC closed below its 50-day moving average four days ago on the chart, so that a move below the intra-day low of that day would constitute a 50-day moving average violation and sell signal. So far, the stock has managed to hold above the level. However, PCYC did violate its 10-day moving average about two weeks ago, which could have been used as a sell signal given that PCYC had shown a strong tendency to obey the 10-day line so far this year. Thus a violation of the 50-day moving average any time over the next several days would be your final sell signal.




As this report illustrates, the market action is producing some uneven action among leading stocks where strong moves one day have seen little to no follow-through in ensuing days, and in some cases have been followed by reversals and breakdowns, as we saw with FIVE over the past week. For me, this is problematic, and at best simply leaves us in a wait-and-see mode. Stay tuned.


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 positions in SLV and SPLK, though positions are subject to change at any time and without notice.

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.