The Gilmo Report

May 25, 2014

May 24, 2014

The NASDAQ Composite Index pulled off what I was looking for in my Wednesday report as it pushed above its 50-day moving average Thursday on a pick-up in trading volume, as we can see on its daily chart, below. The index then moved further above the 50-day line on Friday with volume coming in below Thursday’s levels. However, I would not characterize the lower volume on Friday as necessarily indicative of a lack of institutional interest. Going into the long, three-day Memorial Day holiday weekend it is quite normal for trading volumes to fade. With the NASDAQ now trading above its 50-day moving average, we now have a nice reference point for support on any pullbacks. As I wrote on Wednesday, I was not willing at that time to engage in short-selling any longer as the market looked to me like it was in the mood to drift higher. So far this is the case, and a significant breach of the 50-day line on the downside would be necessary for me to become bearish again.




The S&P 500 Index, shown below on a daily chart, moved to an all-time closing high on Friday which puts it in the position of being in a “de facto” rally resumption. While the S&P 500 matched the lighter volume seen on the NASDAQ on Friday, it did not match the NASDAQ’s increased volume on Thursday. This adds some evidence to support my theory that a market rally can be fueled by the simple action of a broad number of beaten-down former leaders engaging in sharp reaction rallies off of their lows, and the increased NASDAQ volume on Thursday vs. the lighter NYSE volume indicates that institutions may be allocating back into these names.

It is clear to me that a name like Netflix (NFLX), not shown here on a chart, is seeing institutional interest based on Tuesday’s strong-volume bottom-fishing pocket pivot in the stock (see this past Wednesday’s May 21st report) and the volume levels seen in the stock since then as it cleared the $400 price level on Friday. With the S&P 500 now on its third breakout attempt in the past month-and-a-half, does the Rule of Three tell us that it may have a shot at making it this time? That may be the case, and I’m perfectly willing to take my time and test the rally out by going long individual stocks without taking on too much exposure at this time. If the rally is real, it will pan out at its own pace, and buy set-ups will begin to flourish. In the meantime buyable set-ups are limited to a small handful of stocks, so it is in fact a matter of moving cautiously and letting things develop if the market’s latest attempt at a new rally phase is to have any chance of succeeding.




In my Wednesday report I only discussed two stocks on the long side, Illumina (ILMN) and Facebook (FB). The former had flashed a pocket pivot on a “roundabout” formation coming up through the 50-day moving average this past Tuesday. As for the latter, I had anticipated a possible “roundabout” bottom-fishing pocket pivot. We can see on the daily chart of ILMN, below, that the stock has continued higher in constructive fashion. This was buyable on a small opening pullback that occurred on Thursday morning but it is now extended, and one would be looking for a pullback closer to the 50-day line to enter a position in the stock.




FB continues to set up in what looks more like a “roundabout” than a right-shoulder-rally phase. On Friday the stock closed above its 50-day moving average, but volume was not sufficient for a pocket pivot, as we can see on the daily chart, below. With FB in this position right along its 50-day moving average, members should be on the alert for a possible pocket pivot developing here. My tendency is to think that given FB’s big-stock status and the fact that it is only 15% off of its all-time highs, the stock has a decent chance of participating in any continued market rally. In my view it is far better to try and enter the stock here on a pocket pivot buy point than to wait around for a base breakout that would have to occur 15% higher and which would be very obvious to the crowd. I prefer these quiet entries that are setting up in less obvious fashion.




My screens have picked up some other bottom-fishing pocket pivots in stocks that are trying to come up off their lows, such as Chipotle Mexican Grill (CMG), shown below on a daily chart. You can see the pocket pivot occurring as the stock comes up and off of the 200-day moving average on Thursday. This is an example of the types of buy points we have to be looking for in this odd environment. But I’m not sure CMG’s pattern is as healthy as I’d like it to be given the huge-volume reversal that occurred in mid-April. Not all bottom-fishing pocket pivots are created equal, but in this market environment and at this stage of the market’s rally attempt it appears to me that this is probably the most likely type of buyable set-up we are going to see until and unless things develop further.




Cree (CREE) is another example of a bottom-fishing pocket pivot that occurred on Thursday, as we can see on the daily chart, below. I actually bought a position in the stock on Wednesday right around the 46 price level, and the stock rewarded me with a quick three-point pop that I sold into. This is a true “deep doo-doo” pocket pivot. On Friday CREE held tight to close up 87 cents, so while Thursday’s pocket pivot stalled and closed at roughly mid-range, it may still have a decent shot at reaching the 50-day line which is currently at 52.58. I see a lot of stocks in this type of “ugly” position within their chart patterns, and in most cases where one flashes a bottom-fishing pocket pivot my best guess is that the stock may be able to rally up to the next point of upside resistance, which in CREE’s case would be the 50-day line. If I were going to take a shot here I would maintain a stop within a couple of percent of Friday’s intraday low at 47.32.




Bio-tech stocks were some of the first leaders to get smashed in March, partly with the help of news that the U.S. Congress was talking about “doing something” about the high prices of drugs such as Gilead Sciences’ (GILD) Sovaldi, which costs $84,000 a year. Alexion Pharmaceuticals (ALXN) also tanked on the news given that its own rare disease drug, Soliris, has a price tag of $400,000 a year. GILD, not shown, has since recovered back up to its old price highs, while ALXN is still trying to round out a new base, as we can see on its daily chart, below. On Thursday, ALXN flashed a bottom-fishing pocket pivot coming up and off of its 50-day moving average. The stock has made a series of higher highs and higher lows since bottoming out with the market in mid-April, so perhaps this latest pocket pivot coming out of a constructive, tight sideways formation is an indication that the stock will attempt to recover its highs as GILD has. This is buyable using the 50-day line at 155.78 as a selling guide.

Remember that when I refer to any price point, whether a moving average or otherwise, as a “selling guide,” I mean that one must decide whether they are going to use that price level as a hard stop or whether their risk tolerance and preference makes using a point 2-3% below that price level more suitable. With the stock now 4% above the 50-day line, adding another 2-3% on the downside gives one a total stop-loss of 6-7%, which is more than reasonable. Two weeks ago we saw Celgene (CELG), not shown, flash a pocket pivot along its 50-day moving average (see May 14th report), and I note that Biogen Idec (BIIB), also not shown here on a chart, is currently tracking tightly along its 50-day moving average. This sets up a potential bottom-fishing pocket pivot in BIIB, so that is something to keep a sharp eye out for.




Another bio-tech leader, Pacira Pharmaceuticals (PCRX), which makes Exparel, a non-opioid pain killer that avoids the addictive consequences of opioid pain killers such as hydrocodone, for example, is setting up in more traditional fashion, as we can see on its daily chart, below. There is a pocket pivot down along the lows of the base that occurred in early April, as I’ve indicated on the chart, but this came from a v-shaped position and so was premature. Since then PCRX has rounded out a nice-looking cup-with-handle base and is currently moving tight sideways in the handle area and along the 10-day line. PCRX is losing money currently, but that hasn’t prevented the stock from having a roughly six-fold price move since June of 2012. Meanwhile the company is expected to move into profitability three quarters out, finally earning $2.10 a share in 2015, $4.28 in 2016, $5.15 in 2017, and $6.83 by 2018. Obviously this has been a forward-looking situation for some time now, and the stock might be considered to be in something of a late-stage base at this point. For this reason I would be looking to act on a pocket pivot here along the 10-day line, and the more subtle the better, since this helps to mitigate the risk of buying into a potentially late-stage breakout at higher prices which then eventually fails.




Back in my April 30th report I discussed small bio-tech firm Anika Pharmaceuticals (ANIK) when it flashed a pocket pivot as it was rounding out a potential new base, as we can see on the daily chart, below. Since then the stock has moved higher to test the intra-day high that was reached at the end of February on a buyable gap-up move. Back then the BGU failed rather quickly which is understandable given the fact that the market began to falter at that point and a number of bio-techs were coming under pressure. Throughout the market correction, and particularly as bio-tech stocks were getting smacked around, ANIK held up in a two-month base before pocket-pivoting higher in late April. Now the stock is hanging tight along the 10-day moving average where it may be on the verge of flashing another pocket pivot. This would provide a second entry point for anyone who courageously bought the stock on the late April pocket pivot during a period when the general market was flopping around. So far just one to keep an eye on pending a potential new pocket pivot.




Actavis (ACT) was also mentioned in my April 30th report when it flashed a pocket pivot on the same day as ANIK, but the stock has flopped around a bit since then without issuing any new buy signals, as we can see on the daily chart, below. Look for a pullback into the 10-day line at 207.85 as a possible entry point with the idea of using a violation of the 50-day moving average at 203.96 as a downside stop. ACT is currently 5% above the 50-day line, so this is a reasonable place to set a downside stop if in fact the stock does pull back and allow for an entry point closer to the 10-day line.




Believe it or not the Oil & Gas-Transport/Pipeline is currently the market’s #1-ranked industry group. I’ve sat around and watched one of the leaders in the group, Magellan Midstream Partners (MMP), not shown, continue to trend higher throughout the market’s correction as the stock has moved from a price of 68.15 at the start of March to a close of 80.71 this past Friday, 1% off of its all-time high of 81.47 which was reached the day before. Based on its Composite Rating, MMP is the #2-ranked stock in the Oil & Gas-Transport/Pipeline group, but a smaller, recent IPO in the group, Enable Midstream Partners L.P. (ENBL) is in fact the top-ranked stock in the group. ENBL interests me based on the fact that MMP has had a decent move, so there is something to the group’s leadership, as well as the fact that ENBL is growing earnings at a healthy triple-digit clip and has a 99 EPS rating, the highest in the group. In the most recent quarter earnings grew 157% while sales grew at a record 248% to reach an all-time high of just over $1 billion.

Looking at ENBL’s daily chart, below, we can see that the stock flashed a pocket pivot buy point coming up and off of its 10-day moving average this past Wednesday, and has pulled back over the past two days on light volume. The stock is a recent IPO, having come public in the early part of April, and is currently building a short flag formation that looks like a classic “IPO U-Turn” type of formation. ENBL represents a “new merchandise” play in what is currently the #1-ranked group in the market, so it may work out. I consider the stock buyable on the basis of Wednesday’s pocket pivot with the idea that it will continue to hold up above the 10-day moving average, currently at 24.27.




To repeat what I wrote in my Wednesday report, “The one factor that might work in favor of the market here is the fact that many former NASDAQ big-stock leaders have been crushed and lie deep down in the dungeons of their chart patterns. I haven’t seen such oversold action in such a broad number of former leaders in a long time. Given how oversold many of them are, logical and normal reaction rallies off the lows which can often be quite sharp would give the NASDAQ the impetus it needs to move higher and play catch-up to the S&P 500. Basically, an extreme oversold condition in so many former leaders makes this a possible scenario for further upside.” So far this seems to be what is going on with the market currently, and you can get a sense of this by the fact that trying to find “juicy” buy set-ups requires a bit of creativity and the use of unorthodox buy points such as bottom-fishing pocket pivots in stocks showing “roundabout” types of formation as they attempt to round out the lows of potential new bases.

Although the indexes certainly act like they are making a reasonable attempt to engage in a rally phase, what is going on underneath the hood with respect to the action in individual stocks does not argue for a robust market rally as far as making money is concerned. There are a few things to nibble on, and perhaps a “new merchandise” situation like ENBL might provide some “juice” on the long side, but that is the extent of long-side opportunities in this market as I see it. If one can catch a couple of stocks with sustainable moves one way or another, some progress might be made on the long side. Thus I think one can act on buy points where they occur without getting carried away just in case this attempt at a new rally ends up failing. When the waters are muddy, move slowly, because you can’t see what lurks underneath the surface! 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 had a position In FB, though positions are subject to change at any time and without notice.

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