The Gilmo Report

March 5, 2014

March 5, 2014

Monday’s sharp, news-related sell-off provided the market with exactly the pause it needed to refresh itself and move higher, as the daily chart of the NASDAQ Composite Index, shown below on a daily candlestick chart, shows. Leading stocks clued us in late last week as they began to correct, perhaps anticipating that something was up. When the futures opened up on Sunday afternoon we got to see for ourselves what the market was likely sensing before the weekend. Monday’s gap-down sell-off turned out to be a one-day wonder as news of Russia ending its military exercises in Crimea overnight sent the market on a sling-shot gap-up at the opening as it catapulted higher on Tuesday. The worst thing I can say about the Monday sell-off is that it provided some nice scoops in leading stocks as they pulled back into logical areas of resistance, some of which I outlined in my weekend report. And while most leading stocks did pull back on Monday, the pullbacks all appeared well-contained from my perspective and were probably necessary given how some of these leaders had run up. For now the market’s uptrend remains intact.




Gold got a boost as the so-called “fear bid” came into play, pushing the yellow metal right up to my first upside target at $1350, as we can see on the daily chart of the Gold Index ($GOLD), below. While the extra news boost was nice for those who are long gold, it was temporary as the metal found resistance right around the $1350 level before turning back, although it was able to hold above its 10-day moving average. The “Ukrainian Crisis” was not the reason why gold began its current uptrend back in January, and so I don’t consider the continuation of hostilities there a prerequisite for gold to remain in that uptrend. At this point the metal is doing what it probably needs to be doing given the sharp move since early February, and a little backing and filling here is simply normal action. As I’ve written in prior reports, as long as gold continues to hold above the 200-day moving average, now at 1303, the uptrend is holding.




I continue to find this market a “target-rich” environment on the long side, as set-up after set-up presents itself, and market pullbacks just bring leading stocks right into logical areas of support where they can be bought. Facebook (FB), for example, pulled right down to its 20-day exponential moving average on Monday’s big gap-down sell-off, found support, and then bounced to new highs, as we can see on the daily chart, below. In this case, the 20-day line would have served as a convenient entry point for the stock. Today FB followed through not only with a move to new highs but it also did so on action that constitutes another continuation pocket pivot buy point. This is again potentially buyable here with the idea that the stock will continue to hold the 20-day line on any further pullbacks, but I would prefer to see it just continuing moving higher from here.




Tesla Motors (TSLA) also provided investors with a nice pullback entry point on Monday as it came down as low as 234.99, right smack into the middle of the buy zone I discussed in my weekend report between the 240 level and the 228.45 intraday low of last Tuesday’s buyable gap-up move. This, however, didn’t even get it down as far as its 10-day moving average, and by the close TSLA was back in positive territory even as the general market remained down for the day. On Tuesday TSLA again ran up towards the 260 level, a level at which it has run into resistance twice before, but despite backing down slightly today it held up tight along the highs as volume dried up sharply. As the stock settles down and volume dries up, my tendency is to think it’s setting up to go higher.




iRobot (IRBT) also demonstrated strong support at its 20-day moving average and the top of the prior base, making Monday’s deep pullback quite buyable, as we can see on the daily chart, below. As I discussed over the weekend, the pullback to the top of the prior base provided an entry point which, as fate would have it, also coincided roughly with the 20-day moving average. The stock launched off of the 20-day line on Monday in the face of a general market sell-off, and that strength carried through to today when it logged an all-time closing high on a v-shaped pocket pivot buy signal coming up through the 10-day moving average. Given the v-shaped action on today’s pocket pivot, watch for a pullback to the 44-and-change level as the stock “corrects” the v-shaped move with a little backing and filling. In any case, the spot to be aggressive on the stock was on the pullback to the 40 level and the 20-day line on Monday, and today’s continuation type of pocket pivot move confirms strength in the stock such that I would be a buyer/adder on any pullback to the 44 price level.




Tableau Software (DATA) and Splunk (SPLK) announced a “strategic technology alliance” that is allegedly designed to “leverage the power of visual analytics and real-time machine data.” According to the press release, DATA’s software will include Splunk Enterprise as a native data source using SPLK’s recently launched ODBC driver. The news helped SPLK stabilize at its 10-day moving average after its big outside reversal last Friday, something I discussed in my report of this past weekend, but DATA pulled down again to retest its 20-day moving average. DATA recently found resistance at the $100 century mark level, and the pullback from there on heavy selling volume was helped along by news that the CFO was selling 297,500 shares as part of a 10b5-1 plan. As far as I’m concerned, that just put some shares on the market and brought the stock right into a logical potential area of support after a sharp run-up over the $100 price level. Watch for volume to dry up along the 20-day line as a potential set-up for a move back up towards the $100 level.




Workday (WDAY) is trying to settle down after two days of wild action last week following last Thursday’s buyable gap-up move, as we can see on the daily chart, below. WDAY completely reversed the BGU move on Friday, but never really violated the 105.28 intraday low of Thursday’s BGU as it meets up with the 10-day moving average. The stock may need to work sideways here along the 10-day moving average, but the fact is that it remains within buying range of last Thursday’s BGU, using the 105.28 low plus another 2-3% on the downside as a relatively quick stop.




Retailmenot (SALE) continues to hold the top of its prior base breakout through the 40 price level, but the ride strikes me as a bit wild for my taste. SALE broke down hard last Friday right to the top of the prior base, but on Monday dropped even further before finally finding support near the lows of the early February buyable gap-up, as we can see on the daily chart, below. But if one was either bold or crazy enough to buy into that drop with the idea of using the BGU low at 36.45 as a sort of “last stand” stop, one was rewarded by a rapid reversal to the upside that took the stock right back above the 40 price level and right against the 10-day moving average. A retest of the 40 price level or the 20-day moving average, currently at 41.26, on a nice volume dry-up might make me comfortable enough to buy the stock, but I have to admit a 23.5% peak-to-trough decline on Friday and Monday is not the sort of thing I would want to have to sit through!




Canadian Solar (CSIQ) illustrates why even one of the leading stocks in the #1-ranked industry group is still subject to “earnings roulette,” as we can see by the big price drop on its daily chart, below. CSIQ missed badly when it announced earnings this morning, sending the stock plummeting back into its base where it finally found support at the 50-day moving average. If one bought the stock last week on the basis of the trendline pocket pivot breakout of six days ago on the chart, I would say one should have sold it rather quickly this morning near the open, thus saving one the misery of sitting through further carnage. But as I’ve written frequently in my reports, playing earnings roulette is not something I favor, and my preference among solar stocks has been Sunpower (SPWR) which already played its own round of earnings roulette three weeks ago and ended up “winning.”




The way to play Sunpower Corp. (SPWR), however, was to buy into Monday’s pullback to the 50-day moving average that ended up finding support at the 20-day line, as we can see on the daily chart, below. This natural pullback led to yesterday’s big-volume breakout through the top of a somewhat choppy 19-week base, but CSIQ’s poor earnings report put a damper on the group, dragging SPWR back to its breakout point right above the $35 price level. In my view, this brings the stock back into a buyable spot, with the idea that it will at least hold the 10-day moving average at 34.22 on any further pullback.




Chinese solar name JKS Holding Company (JKS), which I discussed in my report of this past weekend prior to its Monday morning earnings report, looked to be moving higher Monday at the open following a favorable announcement, but the weight of the general  market dragged JKS back to the downside. This resulted in a huge-volume outside reversal to the downside, as we can see on the daily chart below. But by Tuesday the stock was gapping up again as it streaked back up towards the highs of its current two-month base on equally heavy volume. Nothing like a little schizoid behavior to start the week out! Today the stock pulled down on the CSIQ news, but managed to close in the upper part of its range on heavy volume.

The stock is extended from any proper buy point, but pullbacks to the 32-33 level look buyable. In general, however, the solars ran into selling today as a result of CSIQ’s poor earnings announcement, with SolarCity (SCTY), not shown, pulling back into the top of its prior base but still managing to hold its 20-day moving average at 77.77. While I don’t show the chart here, it is possible that SCTY is buyable on this pullback with the idea that it will continue to hold the 20-day line. Meanwhile, First Solar (FSLR), also not shown here on a chart, offered an entry point on Monday as it pulled down below the 56 price level, something I discussed in my weekend report, before rallying to close at 58.15 and back at a higher-high today.




I discussed the tight action in Melco Crown Entertainment (MPEL) in my weekend report as the stock was moving right along the 10-day moving average following last week’s quiet pocket pivot, which we can see on the daily chart below. As I wrote over the weekend, the stock looked set up to move higher and play some catch up with other leading stocks in the casino/gaming group, and it came through with a three-day rally over the past three days. MPEL pretty much ignored Monday’s market sell-off as it came down briefly to test the 20-day line on an intraday basis before bouncing and moving higher on the day. Tuesday’s market gap-up caused MPEL to gap up as well, and by today the stock was back at new highs just above the left side of its current base. MPEL is now extended pending any new buy points.




The fracking-related stocks I discussed over the weekend have performed reasonably well this week, including Silica Holdings (SLCA), not shown here on a chart, which has moved higher all three days this week as it pushes up towards the highs of its current base near the 36 price level. Bonanza Creek Energy (BCEI), also not shown here on a chart, which had a buyable gap-up move as I discussed in my report over the weekend, offered a brief chance to buy into the stock on Monday morning as it tested the 48.63 intraday low of Friday’s BGU before turning higher. BCEI closed at 51.30 today and is extended from the Friday BGU.

The third name I discussed this weekend, Diamondback Energy (FANG) is in pullback mode, as we can see on its daily chart, below. You may notice that there is a swarm of “ants” on the chart, those little black triangles that show up on my daily charts whenever a stock is up 12 out of 15 days in a row or better. FANG is now in a short seven-day flag formation following a breakout and strong move higher in February. Today’s action took the stock right back to the 10-day moving average on light selling volume, and my tendency is to consider the stock buyable on these pullbacks with the idea that it will continue to hold along the 10-day line as it continues building its flag formation as a prelude to a move to new price highs at some point.




Organovo Holdings (ONVO) is showing some extreme “voodoo” action here as volume dries up sharply while the stock is moving tight sideways along its 50-day moving average, as we can see on the daily chart below. As I wrote last Wednesday, the stock appears to be working its way sideways as it works off some of the overhead from the left side of the pattern. In my view ONVO is setting up to move higher, and as long as it can hold pullbacks the way it did on Monday as it bounced off the black 65-day exponential moving average, it is looking ever more ready for a move higher.




While I have more recently favored Global Eagle Entertainment (ENT), not shown, in the airline Wi-Fi space as ENT holds above its recent breakout, rival Gogo (GOGO) has been making a comeback of sorts as it approaches earnings next week. As we can see on the daily chart, below, GOGO has spent a great deal of time trying to round out the lows of a potential new base and over the past two days it has finally shown some signs of life. Yesterday the stock flashed a “deep doo-doo” pocket pivot off of its 10-day moving average but from a position below the 50-day line, and today cleared the 50-day line on much stronger volume to confirm a second bottom-fishing pocket pivot buy point.

GOGO is expected to announce earnings next week, and it is encouraging to see the stock flash some strong bottom-fishing pocket pivots as it tries to come up the right side of what would turn out to be a very deep cup base. Right here in the 24-25 price area there is some resistance from the left side of the pattern, so pullbacks towards the 50-day line might offer a better entry point. In any case, remember that if you decided to buy GOGO you are opting to sit through earnings roulette next week when the company announces earnings.




The market pullback came and went on Monday, and I dare say that the “Ukrainian Crisis” sell-off offered the opportunistic investor, such as myself, some nice opportunities to pick up leading stocks on the pullbacks, most of which were well-contained. With the NASDAQ at a new 13-year high and the S&P 500 at all-time highs, most of the commentary that I see appears to fixate on how “expensive” the market is, which I suppose is a good thing from a contrarian standpoint. If you think about it, all the market did today was digest the huge gap-up and rebound it had yesterday as it held tight with volume coming in lighter on both the NYSE and NASDAQ exchanges. This can only be construed as constructive action, pending further evidence to the contrary. As always, my cue remains the action of leading stocks, and all they have done this week is give me some nice entry and re-entry points as we look for the market to move higher. 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 positions in DATA, ENT, IRBT, ONVO, and TSLA, though positions are subject to change at any time and without notice.

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