The Gilmo Report

May 19, 2013

May 19, 2013

While the NASDAQ Composite Index has been hit with a couple of higher-volume “stalling” days in its accelerated trend so far in May, this has done absolutely nothing to derail a rally that seems to get stronger by the day. In addition, the broadening leadership among individual stocks reflects a very healthy state of affairs “under the hood” of the market, so to speak, as actionable buy points continue to show up in a broadening variety of stocks. The other interesting phenomenon that I’ve observed and discussed frequently in recent reports has been this rounding out of bases by a number of leaders, from the 3-D stocks to the mortgage-servicing stocks to financials like Goldman Sachs (GS) and J.P. Morgan (JPM) to cloud stocks like (CRM) and others as they move up the right sides of new bases and break out or approach their 52-week highs. This is not the type of action you normally see when the market is approaching or forming a top, and thus those who continue to try and find a reason to imagine that the market is on the verge of a top or a major pullback remain frustrated. If the market is in an uptrend, and there are stocks flashing buy points, the proper course of action should not be too hard to figure out: You buy stocks.




Tesla Motors (TSLA), one of the hottest stories in the market right now, completed what turned out to be an increased 3.39 million share secondary offering that was priced at 92.25 on Friday. CEO and founder Elon Musk bought 1.08 million shares of the offering, leaving 2.31 million shares for the rest of the investors who participated. TSLA’s move over the past couple of months constitutes a massive first-stage breakout from a roughly 2.5 year consolidation. Some might wonder whether this is a “climax top,” but I tend to think not based on the fact that climax tops occur after a stock has had a long price move during which it has formed several bases on the way up. In a sense, TSLA could be seen as just getting going, perhaps starting an epic price rise that might be similar to General Motors (GM) in 1915, when it too staged a massive and steep upside breakout from a roughly 2.5 year base and rocketed 471% higher in 39 weeks. At current prices, TSLA is a mere double so far. The chart of GM in 1915 can be found on page 134 of the most recent edition of “How to Make Money in Stocks” (the one with the orange cover), by my old boss William J. O’Neil, and I think it is a fascinating chart to ponder. Overthinking this as a “climax top” might cause one to sell out too soon, in my view.


GR051913-TSLA Daily


So far the action and circumstances surrounding TSLA’s big price move over the past seven trading days, as we can see on the daily candlestick chart of the stock, below, make this a unique situation with more upside potential than most might want to give it credit for. While TSLA did show a 12 cent profit in the most recent quarter, the eye-popping number as I saw it was the 1,762% sales growth on $561.8 million in revenues. Like GM in 1915 when it came out with the ground-breaking V-8 engine, TSLA is breaking new ground in electric car technology, and this is borne out by the fact that its technology is being used by Mercedes-Benz in their new B-Class Electric Drive vehicle and by Toyota’s Rav4 EV car. The other unique dynamic here is that the CEO and founder of a company stepping up to buy over a million shares of his own company on a secondary offering demonstrates his faith in the longer-term potential of the company. Sure, the stock might need to build a base in here at some point, but it just as easily might go higher first given the strong pricing of the secondary stock offering very near to the stock’s all-time high of 97.12 achieved this past Tuesday. As far as I’m concerned, TSLA remains a stock to watch, and with the company expected to earn $1.06 in 2014, its forward P/E ratio is not out of line with other big leaders of the past.


GR051913-TSLA Weekly


The 3-D stocks remain an interesting group given their strong price moves up the right sides of bases and subsequent breakouts. The move in 3-D stocks is a group phenomenon and while Exone Company (XONE) has broken down following a weak earnings report but also after a short-term climactic double-gap streak to all-time highs, the others remain in healthy positions within their chart patterns. Three-D Systems (DDD), shown below, had a very sharp move that took the stock straight up for three weeks in a row, leading to this week’s breakout to all-time highs. Given the prior peak on the left side of the base, some overhead selling into this move is to be expected. The key is how the stock acts on this recent pullback to the 10-day line and what we can consider to be the top of this cup formation. Just because the base is 41.6% deep is not an issue in my view, as I can recall First Solar (FSLR) forming a v-shaped cup that was 39.6% deep and also lamented as “flawed” by the same newspaper source back in 2007, but FSLR went on to increase another couple of hundred percent from there. DDD may need some time to back and fill here, but if you got in on the lower “bottom-fishing” pocket pivots that I discussed in my April 5th and 12th reports, you are in a good position to let this develop from here as short interest in the stock remains high.





Stratasys (SSYS) has pulled back to the top of its base and the 10-day moving average as volume has receded, putting it in a very buyable position. SSYS issued a pocket pivot buy point five days ago on the chart after announcing earnings Monday morning, and this led to a clean base breakout on Tuesday.




Proto Labs (PRLB), one of the more volatile names in the 3-D printing space, has pulled back to the top of its prior base. Given the sharp move up off of the lows of the base from around 44 up to a high of 60, this pullback, which occurred after XONE missed on earnings, looks normal and buyable with the idea that it should hold support in the high 53 to low 54 price level.





Mercadolibre (MELI), which I discussed last weekend as holding up tight following its buyable gap-up move of nine days ago on the chart, broke out of its short flag formation on above-average volume. One of the things about MELI that I like is the fact that it is breaking out of a long, one-year base and its Relative Strength line is confirming the all-time highs.




Lions Gate Entertainment (LGF) continues to chug along, and as we’ve seen from the several times I’ve discussed it in previous reports, has flashed pocket pivot and continuation pocket pivot buy points the whole way up. After breaking out through the 24 price level (see April 21st and 24th reports) in late April the stock has continued higher. On Friday it flashed yet another pocket pivot buy point, this time of the continuation variety as it bounced off the 10-day line on volume that was also above-average.




Acadia Pharmaceuticals (ACAD) priced an 8 million share secondary offering at $12.50 on Wednesday which was well-received. The stock is now setting up in a five-week flag type formation following its early April buyable gap-up move, and on the daily chart, below, we can see a tiny cup-with-handle type of formation taking shape here as the stock appears to be on the verge of a new-high breakout, which is something to watch for.




Valeant Pharmaceuticals (VRX), which I discussed last weekend after it flashed a pocket pivot buy point right at its 50-day moving average, has continued higher and on Friday broke out of a six-week base on a pocket pivot buy point, which overrides the standard-issue base-breakout rule that requires a 50% increase in volume on breakouts. Generally, in practice, a breakout on a pocket pivot is sufficient to buy the breakout.




LED-light leader Cree (CREE) got hit with an analyst’s downgrade to “hold” on Tuesday, sending the stock on a mini gap-down to its 10-day moving average. Further selling has not materialized as the stock holds tight along its 10-day moving average. This sets up the possibility of a pocket pivot buy point occurring along the 10-day line, so members should be alert to this.




U.S. Silica Holdings (SLCA) picked up some increased weekly volume that pushed the stock back above its 10-week moving average on the weekly chart below. It may be that this past Wednesday’s above-average volume pocket pivot off the 10-day line but still below the 50-day line was sufficient to signal a low for the stock within this 10-week base. On this basis I would look to buy a pullback to 22 or lower with the idea that it will hold above its 10-week line.




A sort of “cousin stock” to SLCA, Bonanza Creek Energy (BCEI) is shown below on a weekly chart. While SLCA is a fracking play, BCEI is an actual “fracker” that employs horizontal drilling and multi-stage fracking to extract oil and gas from reserves that are otherwise difficult to reach. The company operates in the Niobrara oil shale within the Wattenberg Field in the Rocky Mountains of Colorado and is estimated to grow quarterly earnings in the mid- to high-double-digits for the next 11 quarters. “Big fracker” Anadarko Petroleum (APC), which also operates in the same area, made an all-time high close on Friday while it grew earnings in the most recent quarter at 17%. BCEI is growing far more than 2-3 times faster, yet sells at 19 times forward estimates while APC sells at 21 times forward estimates. By comparison, BCEI is cheap! It also fits into my theme of leading stocks rounding out bases and coming back to life, as we’ve seen with so many newly re-emerging leaders as I listed at the outset of this report. BCEI saw some supporting action as it began forming its current base. Increased weekly volume that sent the stock back above the 50-day line this past week gives the turn some credibility A pullback into the 50-day line just under 37 would be very buyable, in my view, with the idea that it will find support at the line.




I’ve been pondering the situation with LinkedIn (LNKD) following its high-volume breakdown off the peak after announcing earnings three weeks ago. The interesting thing here is that on the weekly chart the stock is holding up within its prior consolidation, one that was really not a proper base when you examine it closely, and above the 10-week moving average. Weekly volume was above average this past week, and the stock closed in the upper part of its weekly price range. I’ve tried to look at this as a short more recently, and I have tested the stock on the short side a couple of times. I have to say that I don’t get the visceral sense that anyone is in a big hurry to sell LNKD right now. As Facebook (FB) has now violated its 50-day moving average and is out of the picture as a buy, LNKD remains the last “big social-networking” stock standing, although slightly bloodied. If the market trend continues, there is a decent possibility, in my view, that LNKD could become resurrected like many other leaders in this market have after breaking down and/or forming bases over the past several weeks.


GR051913-LNKD Weekly



LNKD’s daily chart, below, show a strong above-average move four days ago that took the stock back above the 50-day moving average, followed by a move higher that was sold into on about the same level of volume. Nevertheless, LNKD did close positive on the day, and the past two days have seen the stock just barely drift into its 50-day and 10-day lines as volume has dried up sharply. Thus the stage is set for the stock to flash a pocket pivot buy point if it can move up and off the two moving averages on volume that exceeds 2,973,100 shares, the highest down-volume in the pattern over the prior 10 days. If this happens, the stock may very well be in play again, despite the fact that analysts are looking for a sharp deceleration in earnings growth over the next four quarters. This would occur despite a sharp re-acceleration being expected to resume in five quarters. Meanwhile, LNKD bears are once again coming out of the woodwork, and we haven’t seen any around since before the stock’s January earnings announcement which ended up producing a very buyable gap-up move. This should be interesting to see how it plays out.


GR051913-LNKD Daily


If you get fixated on the “extended” state of the major market indexes, I can see how you could be afraid to buy stocks here. Sure, the market could pull back at any time, but the severity of such a pullback is not determinable in advance. It could very well turn out to be a reasonably well-contained digestion of strong prior gains. Meanwhile, focusing on stocks that are showing actionable buy signals keeps you on track, and from a practical standpoint this is really the only way to operate. We’ve discussed a number of stocks showing such actionable buy points over the past few weeks, and many of these stocks have continued higher. For now that’s all we need to know.


On an administrative note I would like to invite Gilmo members to visit our new Facebook page, which includes random chart commentary, updates, and links to interviews and articles by me and Kevin Marder. Just get on Facebook and search for “The Gilmo Report” to find us.


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 ACAD, CREE, DDD, LNKD, PRLB, SSYS, and TSLA though positions are subject to change at any time and without notice.


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