The Gilmo Report

March 28, 2012

March 28, 2012


Fed Chairman Ben Bernanke got the market off to a rousing gap-up start to the week on Monday morning when he panned the economy, observing that job growth remains below normal for this stage of the economic cycle. Despite the downbeat assessment from the Fed Chairman, it was enough to fan the flames of QE anticipation, sending both stocks and commodities up, including gold and silver. But no real follow-through to Monday’s strong gap-up move was seen yesterday or today as the indexes stalled out yesterday and then picked up a little velocity to the downside today as volume picked up on both exchanges.The NASDAQ Composite Index, shown below on a daily chart, however, logged its second day of distribution off the peak as I see it, which is at least a cautionary sign in the short-term, although I did not care for the action in some of the leaders. Meanwhile the Supreme Court is hearing arguments as they prepare to render a decision on Obamacare, and Spain is lining up to be the next insolvency candidate in the Eurozone, thus there could always be a headline or two that causes a knee-jerk reaction in the market. One thing I would watch for here is any potential announcement that the Supreme Court strikes down Obamacare, which could lead to a bounce in the indexes. If the past two day’s action indicate that there is distribution in the air, then whether such a news bounce, should it occur, gets sold into will be something to keep an eye out for.

NASDAQ Composite Index Gilmo Report Chart

I had a couple of positions take some heat today, not the least of which is Alexion Pharmaceuticals (ALXN), shown below on a daily chart, ALXN got tagged today with no news behind the move, which I find to be something of a negative. If there was some reason such as an analyst’s downgrade that led to the stock getting smacked on very heavy volume, then I might look at this as a blip on the radar. What is troubling is the level of volume and the fact that such massive selling is not in character with the stock. ALXN did manage to hold above the green 20-day moving average, and we can see from the chart that it has tended to hold and obey the 20-day line since its breakout up through the 70 price level over three months ago. I would not be surprised to see the stock pull back into its 50-day moving average, however, if today’s huge selling isn’t just a one-day-wonder.

Alexion Pharmaceuticals (ALXN) Gilmo Report Chart

Invensense, Inc. (INVN) has also acted poorly over the past two days as it failed to hold its pocket pivot from last Friday and busted its 10-day moving average as it pulled right back to the top of its recent breakout move in the 18-19 price4 area. As we can see on the daily chart, volume was very heavy. At the very least I would cut back on any INVN shares purchased higher up on the basis of this weak action. If one owns it off the 50-day moving average then the 50-day moving average becomes your selling guide. I did not like the way the stock sliced through the 10-day moving average, although it does not show any tendency to hold the 10-day anyways, thus the 50-day is the key moving average. Nevertheless, you don’t want to be loaded up on shares purchased on the basis of Friday’s pocket pivot buy point, since that should have led to further upside. When the stock defies your expectations based on Friday’s positive technical action, that is a cautionary sign. Stick to your risk-management rules!

Invensense, Inc. (INVN) Gilmo Report Chart

LinkedIn, Inc. (LNKD) has held up much better over the past two days, although it did stall out and reverse yesterday after peaking out above 106, as we see on the daily chart below. LNKD was last buyable on the basis of the gap-up move six days ago on the chart, and any LNKD shares purchases on the basis of the buyable gap-up should, at a minimum, be using the intra-day low of the gap-up day at 97.10 as a selling guide. In the near-term there is some resistance in the 105 area from the far left side of the base, so some consolidation here is quite logical. Meanwhile, stick to your selling guides on LNKD as we do have two distribution days in a row on the NASDAQ here, and some leaders are faltering. Thus you want to keep your stocks on a short leash here. Also keep in mind that LNKD does not show a tendency to obey its 10-day moving average, so I would not be using the 50-day moving average as a selling guide since it is too far below where the stock is trading – use the 97.10 low on the gap-up day as your maximum downside selling guide, adding 2-3% porosity if you so desire.

LinkedIn, Inc. (LNKD) Gilmo Report Chart

Buffalo Wild Wings, Inc. (BWLD), which I first discussed in my report of February 8th as it posted a buyable gap-up move, as we see on the daily chart below, has pulled back with the market over the past two days. BWLD, in contrast to something like INVN, for example, has held above its 10-day moving average and the pocket pivot buy point of this past Monday as it has pulled back on light volume and managed to close about mid-range today. This is somewhat constructive and might be a pullback I’d be looking to buy into based on BWLD’s prior strength. While caution is warranted based on the general market environment, one could add to a BWLD position taken on the original buyable gap-up in February. In this case, one would expect the stock to hold the 10-day line and Monday’s breakout. If it fails, as INVN did, that would be problematic and a reason to lose any shares purchased here, above or at the 10-day line.

Buffalo Wild Wings, Inc. (BWLD) Gilmo Report Chart

Tangoe, Inc. (TNGO) also held up fairly well today, despite selling off earlier in the day before finding support at around the $18 price level, as we see on the daily chart. TNGO reversed yesterday on heavy volume after printing all-time highs just above the $20 price level, but today found support at the 10-day and 20-day moving averages on above-average volume. TNGO has yet to price its 8-million-share secondary offering, yet it continues to act well despite the new supply of stock slated to come onto the open market. Meanwhile, the blue 50-day moving average is steadily catching up to TNGO’s current price, and at the very least I would look for the 50-day line to provide support for the stock on a more severe pullback. Note how TNGO found solid support at the 50-day line in January and February before breaking out and launching to all-time highs.

Tangoe, Inc. (TNGO) Gilmo Report Chart

Silicon Motion Tech (SIMO) has recently popped back above its 50-day moving average, and it did so with a pocket pivot buy point as it came up through the 50-day line, as we see on the daily chart below. SIMO is a steady triple-digit earnings grower that has seen a pick-up in sponsorship in the last reported period, and next quarter is looking for 83% earnings growth on 33 cents a share. As a Taiwanese maker of flash memory SIMO is one of the leaders in the group, and the stock shows decent profitability with a 24.4% return on equity. This one is on my watch list as it comes up the right side of a potential base, and after last week’s pocket pivot coming up through the 50-day moving average the stock has pulled back down and “tucked” into its 50-day line on relatively light volume. Today it found support a hair above the 50-day moving average and as long as it can hold it on any pullback it remains viable, as long as the general market does not get into too much trouble in the coming days.

Silicon Motion Tech (SIMO) Gilmo Report Chart

Some notes from my trading diary on other names discussed in recent reports:

ABMD – pulling back on below-average volume after last week’s pocket pivot move off the 10-day moving average. Looks like it is trying to build a handle after moving up off the 19.32 price level at the lows of this little cup base.

AAPL – still needs to violate the 10-day moving average before it becomes a sell.

BIIB – broke out and made an all time high on Monday. So far the stock is pulling back on lighter volume and looks okay as long as it holds Monday’s breakout.

CF – sloppy action following last Friday’s pocket pivot makes me want to leave this one alone for now.

CAT – getting smoked! Not a good sign for the market, however, and one reason to add to a cautionary overall stance here.

CMG – still holding the 10-day line – only a sell if it violates the 10-day moving average.

CLR – closed below the 50-day moving average, Watch for a 50-day moving average violation as a reason to sell the stock.

FFIV – continues to hold up fine. Use the 50-day moving average as your selling guide. For now the stock remains above its 10-day moving average as it holds in relatively tight.

GNC – still holding its buyable gap-up move of two weeks ago. Use the 33 level as your sellng guide.

ISRG – big-stock medical leader continues to hold its 10-day moving average. A violation of the 10-day moving average would be your signal to sell.

MA – holding above last Friday’s pocket pivot buy point, which I discussed in my report of this past weekend, March 25th.

MNST – continues to hold its 10-day moving average. Only a violation of the 10-day line is a sell signal at this point as the stock has obeyed the 10-day moving average for the past 11 weeks.

PCLN – use a violation of the 10-day moving average as your sellng guide.

RAX – holding its recent breakout above the 57 price area. Would hold the stock with the idea that it should continue to hold above this breakout level.

SLXP – still holding above its breakout through the 50 price level from two weeks ago. Expect it to hold this breakout level, otherwise it’s a sell.

SWI – sloppy action over the past two days, but just barely holding its breakout of six trading days ago. This one is on the fence – either it rallies from here or it’s a sell.

TIBX – holding right near all-time highs. Expect the stock to hold the 29-30 level on any pullback as the 50-day moving average starts to catch up with the stock.

TSCO – nice breakout from an ascending range on Monday. This also qualifies as a pocket pivot buy point, and the stock has held up well over the past three days. The 50-day moving average is coming up fast here just above the 84 price level and I would use that as my ultimate selling guide on the downside.

UNP – like CAT, the stock is coming under pressure. Initially, strength in the rails appeared to be a positive for the market, but now with big industrials like CAT and UNP getting smacked, this is a cautionary sign.

A couple of distribution days in the general market indexes is not the end of the world, and the issue becomes one of watching your stocks. Stick to your risk management rules, and the use of the 10-day and 50-day moving averages in conjunction with the Seven-Week Rule to determine your selling points on various leading stocks. In some cases, as with AAPL, PCLN, MNST, and ISRG, for example, it is a matter of waiting for a 10-day moving average violation. Other stocks that do not show a tendency to follow the 10-day moving average should use the 50-day line as a selling guide, at a minimum. Again, risk-tolerance and risk-preference are key in determining exactly how you should handle your selling guides, as there there is no “one-size-fits-all” rule in this regard. However, in most cases, a violation of the 10-day or 50-day moving average is always a sound reason to sell and cut losses or take profits on stocks that have had profitable moves. 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

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 BIIB, INVN, LNKD, MNST, and TNGO ,though positions are subject to change at any time and without notice.

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