The Gilmo Report

March 9, 2014

March 8, 2014

What was essentially a statistically insignificant jobs number on Friday turned out to be a non-event for the market, but a weakening NASDAQ Composite Index flashed its fifth distribution day as a number of leading stocks in the technology and bio-tech space came under pressure. Financials showed the greatest strength on Friday, but most of these stocks are merely bouncing within consolidations. Highlighting the manufactured, statistically insignificant essence of the jobs number is the fact that allegedly payrolls increased by 175,000 but the actual number employed rose a mere 42,000 while the unemployment rate rose from 6.6% in January to 6.7% in February. Only with highly-massaged, fictional government statistics can one get such inconsistencies. Surprisingly, pundits hailed the number as indicative of an economy that is allegedly ready to accelerate. This of course fed into the idea that QE tapering will continue apace, and an initial rally in the morning fizzled out as the NASDAQ reversed while the S&P 500 Index churned around and closed roughly flat on the day but still up 1.01, just enough to log another new all-time high.

As I’ve written before, leading stocks tell you what is going on before the indexes are, and what leading stocks are telling me is that the market is likely to pull back a little more here as extended leaders either take a break and consolidate recent gains or something worse starts to brew. The driving force behind my market view is that I really don’t see any stocks that get my blood boiling as far as actionable ideas are concerned. A number of leaders that looked like they would find support on this recent market pullback are now dropping back below that support, indicating that they either need more time to set up again, which I can then highlight in a later report, or we’re in for more of a pullback. The bottom line is, as always, to watch your stocks for violations of critical support levels as they pull back as one exercises normal, prudent risk management, end of story.




The “strong” jobs number sent gold moving to the downside as we can see on the daily chart of the SPDR Gold Shares (GLD), below. Despite the gap-down, the yellow metal ETF did find support off of the intraday lows on Friday and still managed to close just above its 10-day moving average. I continue to believe that the end of QE is mostly a myth, fostered by fantasies that the Fed can engineer a “soft landing” for what has been the most historically off-the-charts, massive monetary stimulus in the history of mankind. With an anemic economy and declarations from California’s Senator Barbara Boxer on Friday that there is “no way” that government spending will ever be cut, vividly expressing the politicians’ stubborn sense of entitlement when it comes to their self-perceived right to spend future taxpayers’ money today, I don’t see how the endless cycle of borrowing and spending ever ends. And thus, longer-term, I see no place for the dollar to go but down, which will in turn drive inflation and commodities prices higher, including gold. Meanwhile the uptrend in gold remains intact as long as it is able to remain above its 200-day moving average.




When the market comes off as it did earlier this week on Monday, you want to see leading stocks pull into logical areas of support in a constructive manner, which generally means on lighter volume. Facebook (FB) provides a reasonable example of a constructive pullback as it comes down into its 10-day moving average with selling volume drying up. That is what an orderly pullback into a logical area of support looks like, and on the basis of Wednesday’s continuation pocket pivot, looks potentially buyable with the idea that the stock will hold the 10-day line. Of course, should volume pick up and the stock break down through the 10-day line, then the next level of support becomes the 20-day moving average.




iRobot (IRBT) is a less clear example of a stock that held on the pullback to the top of the base earlier in the week when the market sold off hard on Monday. However, it has now failed to hold Wednesday’s pocket pivot buy point with a high-volume reversal and pullback over the past two days, as we can see on the daily chart, below. It appears that it is headed for a retest of Monday’s lows and the 20-day moving average, and will have to settle down a bit before we can start looking for another entry point. If one bought on the basis of Monday’s pullback to the top of the base, one is still sitting on a profit, but the other option would have been to sell into Thursday’s spike to new highs after a v-shaped bounce off the Monday lows. After Wednesday’s pocket pivot that took the stock back above the 10-day line I would have preferred to see the stock quiet down a bit and pull into the 10-day line in an orderly manner. The spike higher on Thursday followed by a high-volume reversal entirely changes the tone of the stock’s near-term price/volume action from constructive to unstable.




Tableau Software (DATA) is another example of a stock that I expected might hold the 20-day moving average on this recent pullback, but as we can see on the daily chart, below, DATA simply crashed through the 20-day line on Friday with volume coming in well above average. Now it is retesting the intraday low of its early February buyable gap-up, which might be trouble for the stock. It is this sort of action in the strong leaders that have carried the market higher in 2014 that makes me cautionary on the market as a whole. We need to see some stabilization and settling down of the price/volume action in DATA before we can consider it to be in a buyable state.




I tweeted on Thursday that it looked like Workday (WDAY) was not going to hold its 10-day moving average and the intraday low of last week’s buyable gap-up move, and that it would likely fill its gap and “kiss” the 20-day moving average. It did exactly that on Friday, as we can see on the daily chart, below, as selling volume expanded to reasonably above-average – not a good sign for the stock’s recent BGU. Obviously, the wild intraday action six days ago on the chart on the day immediately following the BGU day of two Thursdays ago was a clue that the stock was losing its stability. The action over the past couple of days in my view confirms this. I felt that if the stock was able to hold the 10-day line and the 105.28 intraday low of the BGU day it could set up again and move back towards its highs, but the current price/volume action leads me to believe the stock, at best, will need to take some time to form a new base here and then perhaps set up again.




In my report of this past Wednesday I pointed out the tight action in Tesla Motors (TSLA) as it held tight up along its recent highs with volume drying up sharply. Over the next two days, however, that constructive action deteriorated slightly. On Thursday the stock churned as volume picked up slightly but still managed to close slightly positive on the day and then on Friday slipped through its 10-day moving average with volume picking up slightly, as we can see on the daily chart, below. The Friday increase in volume was still below average and hence relatively light, but the way TSLA has gapped up on the open several times over the past couple of weeks and then reversed to either close down or flat tells me that there are steady sellers in the high 250’s, and this may need to be worked off before the stock has any chance of moving higher towards the 300 price level. Thus a retest of Monday’s low at 134.99 might be in the cards if the stock is not able to hold within range of the 10-day moving average.

All we are looking for now in the stock is some sort of continuation pocket pivot or other buy signal to occur within what is so far a very short eight-day flag following last week’s buyable gap-up. Meanwhile, we would not want to see the stock violate the 228.45 intraday low of last week’s BGU day. One thing to note on the chart is that the 20-day moving average is approaching that 228.45 low, so one possible scenario is that TSLA continues to pull back and undercuts the 134.99 low of this past Monday to meet up with the 228.45 BGU day low and the 20-day moving average. We’ll see how this develops over the next several days.




Not all leaders are showing cracks, however. Michael Kors Holdings (KORS) has formed a three-weeks-tight formation on its weekly chart, below, as it continues to move tight sideways and consolidate the prior buyable gap-up move of five weeks ago following its earnings report. On the daily chart, not shown here, KORS is holding very tight along its 10-day moving average but on Friday dipped just below the 10-day line on light volume. Thus it may not necessarily be ready to move higher just yet, but at least it is one leader trying to hang in there as other leading stocks pull in.




Finisar Corp. (FNSR) announced earnings Thursday after the close and met estimates with a 159% earnings increase on a hard number of 44 cents a share. FNSR initially sold off the next morning but managed to rally back up towards the 25 price level before settling in at right about mid-range for the day on volume that qualifies the move as a pocket pivot buy point, as we can see on the daily chart, below. The only issue I would have here is the fact that the pocket pivot occurred on a big churning day within a wide price range, reflecting some instability in the action. The prior day, FNSR’s cousin, Ciena (CIEN), not shown, came out with a strong earnings report and gapped up strongly on the open before giving it all up and reversing hard to the downside on heavy selling volume. Thus CIEN’s action was decidedly negative while FNSR’s was decidedly undecided! If you are adventurous enough to buy FNSR on the basis of Friday’s half-hearted pocket pivot, then the 50-day moving average has to be your quick stop on the downside.




Palo Alto Networks (PANW) is a close competitor to FireEye (FEYE), a stock that is one of this report’s biggest winners in 2014 after I initially recommended the stock at $42 in my report of December 29th.  I have not ventured to discuss PANW given that it has been in the midst of a patent infringement lawsuit with Juniper Networks (JNPR), and some analysts have been calling for investors to short PANW with the idea that it was about to lose the case. JNPR is accusing PANW of stealing their patents, but on Friday a mistrial in the case was declared, sending PANW rallying about 10% higher. Notice that on PANW’s weekly chart, below, the stock had actually pulled right back into its 10-week moving average as investors were awaiting a decision, and once the mistrial was declared the stock rallied sharply off the 10-week line on huge upside volume.

The expectation now is that JNPR and PANW will reach some sort of settlement agreement that is likely to include some sort of cross-selling deal. If we view this purely on a technical basis, using only the chart to assess the stock’s action, we can say that I broke out of a big base five weeks ago, ran up, and then had its first pullback to both the 10-week moving average and the top of the prior base. The base is also a first-stage base, and with FEYE now running out of gas as it reversed hard on Friday on massive selling volume, maybe it’s time for PANW to have a move. It’s tough to buy PANW after an 11.05% move on Friday off the 10-week line, but a retracement of that move down to 73-74 might be buyable given that such a pullback would bring it close to the 10-day moving average which is currently running through the 72.58 price point.




Sunpower (SPWR) is still hanging in there after failing to hold a breakout to new highs on Tuesday. Of course, we can see on SPWR’s daily chart, below, that the stock tends to be volatile within this current five-month base, and this is a major reason why I never buy this stock on strength. Friday’s pullback took the stock back to the 10-day moving average, something I was looking for per my discussion of the stock in my report of this past Wednesday. While the stock did trade down to the 10-day line, no support was evident but one could still try to buy the stock here with the idea that it would at least hold the 50-day moving average at 32.40. The only issue I have is that the bigger solar stocks have run into some trouble lately, with Canadian Solar (CSIQ), not shown, getting smashed after earnings, SolarCity (SCTY), not shown, falling back into its prior base and below the 20-day moving average, and First Solar (FSLR), also not shown, rolling over on above-average volume Friday. I had hoped to see some of these big solar names take over a leadership role as they began to emerge from multi-month bases as a sign of some healthy rotation, but so far that is not panning out.




Smaller Chinese solar names like JKS Holding Company (JKS),j shown below on a daily chart, and Trina Solar (TSL), not shown, are providing some counterweight to the slushy action in the rest of the group as they both made moves pulling back into the top of their prior basing formations with TSL making a marginal new high on Friday. Both of these names are extended from any logical buy points, but I have to say I’m not that enamored with the solar group currently given the uneven action among its most prominent names.




My fracking-related oil names have continued to hold up reasonably well, with Silica Holdings (SLCA), not shown, moving up to the top of its five-month base. SLCA will likely need to move sideways for a period of time now that it has moved up from the bottom-fishing pocket pivot buy point I discussed in last weekend’s report when the stock was trading around 33. SLCA closed at 35.28 on Friday. Bonanza Creek Energy (BCEI), also not shown, remains within range of last Friday’s buyable gap-up which I discussed in last weekend’s report. With the stock moving up the right side of a base it may need to move sideways here for a while as well. The third name, Diamondback Energy (FANG), which I do show below on a daily chart, is trying to build a short flag formation as it has closed tightly over the past three weeks. Right now I’m just keeping an eye on the stock for some sort of buyable pullback or a new buy point emerging along the 10-day moving average. FANG closed just below its 10-day moving average on Friday, and I might consider a pullback closer to the 60 price level and the 20-day moving average, currently at 61.40, as something to buy into should it occur in constructive fashion.




Organovo Holdings (ONVO) is still trying to work sideways here as it continues to work on what is so far a sixteen-week base, as we can see on the daily chart, below. In my Wednesday report I noted the extreme volume dry-up along the 50-day line as signaling a potential resolution to the upside, but that did not happen as volume picked up slightly and the stock actually violated its 50-day moving average. While the action isn’t exactly disastrous for the stock, I still would have preferred to see volume pick up on a move to the upside rather than volume picking up on a move to the downside that also represents a violation of the 50-day line. My guess is that ONVO is going to need more time to set up, and right now I prefer to be out of the stock waiting to see if it can muster up more constructive price/volume action.




Global Eagle Entertainment (ENT) came out with earnings on Friday and reversed to the downside on above-average volume, as we can see on the daily chart, below. The stock did find support at the top of its prior base and the 20-day moving average, so it did not fail completely. However, in my view ENT needs to continue holding the top of its prior base, and any further sell-off from here would be decidedly negative for the stock. I own a small position in the stock and my intention is to sell it if it cannot hold Friday’s intraday low at 16.98. Meanwhile, Gogo (GOGO), not shown, continues to hold up after this past week’s bottom-fishing pocket pivot move as I discussed in my report of this past Wednesday. But with earnings coming up this week in GOGO, one has to decide whether it is worth playing “earnings roulette” with the stock. I might be more willing to buy a buyable gap-up move following earnings rather than take my chances going into earnings.




LinkedIn (LNKD) still can’t make up its mind as to which direction it wants to move as it swings around here just underneath its 50-day moving average, as we can see on the daily chart, below. In January I declared LNKD to be my “Short-Sale Target of 2014,” and the stock did move to lower lows in February, but since then has had two rallies back up into the 50-day moving average. On a short-term basis, both moves have been shortable, and with the stock pinching up into the 50-day line here I would view it as a short using the 50-day line as a guide for an upside stop if the general market starts to pull back more. I have noted in previous reports that the 50-day line crossed below the 200-day moving average last week, a proverbial negative “black cross” that is actually something we usually see in a short-sale set-up formation just before a stock is about to break to the downside. Perhaps that will be the case with LNKD, and the trade here is pretty simple using the 50-day moving average as your stop.




Cree (CREE) is another one of those stocks like LNKD that also can’t seem to make up its mind about which way it wants to move. As we can see  on the weekly chart, the stock was holding tight along 10-week and 40-week moving averages, but the fact is that for the past four weeks the stock has closed below its 10-week/50-day and it is starting to look like it wants to shake loose to the downside here. Volume picked up on Friday as well as for the week as the stock started to peel away from its 10-week line on the downside. I have to admit I’ve been back and forth on the stock as it did flash a bottom-fishing pocket pivot that I discussed in my report of February 26th, but that pocket pivot failed immediately – not a good sign for the stock.

Now we’re actually seeing some “reverse” pocket pivot type action, and while the stock was able to find support along the lows of this past Monday, its relative strength line is making lower lows ahead of the stock. Looking at the weekly chart we can also identify a “hydra-and-shoulders” pattern which is essentially a big head and shoulders complex with two big “heads” in the middle of the pattern. I’m also thinking that CREE’s inability to rally decisively with the market in 2014 also diminishes its chances of re-emerging as an “ugly duckling” play on the upside. Certainly, LED lighting may be the future of lighting, but CREE does face significant competition from other players, including Philips Lighting, a subsidiary of Koninklijke Philips Adr (PHG), which is in fact the world leader in LED lighting. There has been some talk of General Electric (GE) buying out CREE, but it’s not clear to me whether this would ever actually happen. However, if one does decide to short CREE, one must realize that this is always a potential headline risk as is always the case with any short positions since any company can be bought out at any time by any other company.




The bottom line for me right now is that my watch list of leading stocks is showing relative weakness right now, and the breakdown in bio-tech stocks is perhaps a clue that the market needs to pull back here. That simply puts me in the position of laying back and seeing how things pan out here with the idea of remaining opportunistic if and as leading stocks pull back in constructive fashion. As we’ve seen with stocks like DATA and WDAY, for example, constructive pullbacks are not always what you get whenever a leading stock starts to lose its upside momentum. If current leaders start to break down in wholesale fashion, as we are seeing in some of the bio-tech names, then of course we would want to see some rotation in newer, fresher leadership that can help to sustain the general market rally. Perhaps oil names offer that possibility, perhaps not, or maybe we see something like PANW pick up the slack for something like FEYE.

As I stated at the outset of this report, I’m not seeing a lot here that gets my blood boiling on the long side, but that’s okay since it simply means that one can just hang back, hang loose, and wait for the next round of set ups to emerge, if and when they do. Meanwhile, if the general market gets into more serious trouble beyond a normal and necessary pullback, there are always potential short-sale targets in stocks like CREE and LNKD. Stay tuned and be sure to follow me on Twitter in between reports.


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 a position in ENT, though positions are subject to change at any time and without notice.

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