The Gilmo Report

May 28, 2014

May 28, 2014

The NASDAQ Composite Index has continued further beyond its 50-day moving average, finally running into a little selling this morning before closing tight on the day, as we can see on its daily chart, below. As I wrote last Wednesday, I would consider the market to be back in an uptrend if the NASDAQ Composite was able to break out above its 50-day moving average, and that occurred on Thursday of last week (see May 21st report). Now, others chime in with “market in confirmed rally” as yesterday’s 1.22% move in the NASDAQ on increased volume was massaged into a new follow-through day. However, we have again seen how the stocks tell you what is happening before the indexes, and my shift away from the short side and towards the long side last Wednesday was based primarily on the action of individual stocks. In that report and over the weekend we discussed some new buy ideas and those have worked reasonably well over the past few days as the NASDAQ “followed-through” and the S&P 500 Index, not shown, rallies to all-time highs.




Facebook (FB) has rallied up to prior resistance right through and beyond its 50-day moving average without flashing a pocket pivot, as we can see on its daily chart, below. However, it did issue a five-day pocket pivot, which is something I’ve seen work with big-stock leaders that are rounding out their lows. FB is running into near-term resistance at around the 64 price area, and from here I would use any pullbacks into the 50-day moving average, currently around 60.57, as an entry point on weakness. FB didn’t seem to be in the mood to give up its gains today, however, as it pulled back on an intraday basis only to close the day just barely in the black and roughly even with yesterday’s close.




Twitter (TWTR) is doing its best to follow FB’s lead and give the social-networking space some respect. After gapping down hard in early May following a huge IPO lock-up expiration that made some 400-odd million shares available for insiders to sell, the stock found a low and then retested that low over most of May before turning today and flashing a big-volume “deep doo-doo” pocket pivot buy point, as we can see on the daily chart, below. In my view there is a good chance that TWTR has finally found a low, and with the stock closing at the peak of its range today on huge buying volume, a rally up to the 50-day moving average is not out of the question, using the 10-day line at 31.97 as a downside selling guide.




Sunpower (SPWR), which I had first discussed back at the end of April (see April 30th report) after it flashed a big pocket pivot buy point coming up off the lows of its pattern, has backed and filled for about a month, even dipping below its 50-day moving average last week. However, my view is that this was mostly due to the general market sloppiness we’ve seen since then. Today the stock showed some life with a pocket pivot buy point coming up and off of its 10-day moving average, as we see on the daily chart below. There is a little resistance from the left side of the chart which I would expect the stock to work through if the general market rally is sustained. While the stock is buyable right here, as I see it, one could try to pick off a small pullback towards the 10-day line, currently down at 31.98, a little less than 4% from where the stock closed today.




I liked the huge-volume gap-up in fabless semiconductor name Cavium (CAVM), shown below on a daily chart. The semiconductor groups have been relatively strong throughout the market’s correction over the past 2-3 months, and I’ve been wondering whether we would see something with some “juice” show up among the stocks in the group. CAVM is a relatively old name that came public in May of 2007 and the company designs so-called “system-on-a-chip” semiconductors for a broad range of uses in networking, telecommunications, wireless, security, and video, all of which are hot areas currently. Cisco Systems (CSCO) is one of CAVM’s biggest customers, and represents about 19% of their sales.

CSCO, not shown here on a chart, gapped up a little less than two weeks ago after a positive earnings release that had the company sounding rather optimistic about their business prospects going forward. Like a number of other semiconductors, CAVM is a turnaround story of sorts, but with more impressive numbers. Over the past five quarters it has posted earnings growth of 850%, 229%, 93%, 55%, and 58%, sequentially, with next quarter’s estimate looking for 43% growth on a hard number of 33 cents a share. Sales are growing at a healthy 20% clip and its return-on-equity is a healthy 21.2%. This gap-up in CAVM is buyable using the 47.29 intraday low of yesterday’s BGU price range as your selling guide, and the stock is less than 4% above that price level after today’s 49.20 close.




Luxury retailer Michael Kors Holdings (KORS) announced earnings this morning before the open and responded with a sharp sell-off down to a low of 91.80 before it found what turned out to be huge-volume support off the 50-day moving average, as we can see on the daily chart, below. Today’s action also qualifies as a big pocket pivot buy point coming up through both the 10-day and 50-day lines, and is therefore buyable using the 10-day line at 93.85 as a selling guide. KORS closed about 3% above the 10-day line and not too far from the peak of its daily trading range.




Chipotle Mexican Grill (CMG), shown below on a daily chart has rallied just past its 50-day moving average after its bottom-fishing pocket pivot buy point of last Thursday, which I discussed in this past weekend’s report. I figured that this was good for at least a rally to the 50-day moving average, and CMG is now trading above the 50-day moving average, as we can see on the daily chart, below. Interestingly, the 50-day line doesn’t seem to represent insurmountable resistance for the stock so far given that the past two days have seen the stock post two more back-to-back bottom-fishing pocket pivot moves coming up through the 50-day line. This makes things somewhat convenient in that we can now use the 50-day moving average and/or today’s intraday low at 529.08 as a downside selling guide. I would expect CMG to hold tight along the 50-day line and set up for further upside if in fact it has more upside left in it.




I also discussed Cree’s (CREE) “deep doo-doo” bottom-fishing pocket pivot of last Thursday in my weekend report, and so far that is holding up fairly well, as we can see on the daily chart below. Following the Thursday pocket pivot, CREE is holding tight along the 20-day exponential moving average, the green moving average on the chart, with volume drying up sharply. In my view this is buyable using the 20-day line as your selling guide, with the idea that the stock can rally up to the 50-day moving average, currently at 52.12.




Alexion Pharmaceuticals (ALXN), not shown here on a chart, has moved up from last Thursday’s pocket pivot buy point, which I discussed in my report over the weekend. I also discussed watching for similar action in other big-stock bio-techs, and yesterday we saw Celgene (CELG) post another bottom-fishing pocket pivot buy point, this time as it came up through the 200-day moving average. CELG had flashed a prior pocket pivot coming up through the 50-day moving average, which I discussed in my May 13th report. Yesterday’s pocket pivot coming up through the 200-day moving average now makes the stock buyable along the 200-day line, using that as a convenient downside selling guide.




I also discussed keeping an eye out for a pocket pivot in Biogen Idec (BIIB), shown below on a daily chart, which turned out to be somewhat prescient as the stock flashed a bottom-fishing pocket pivot coming up through its 50-day moving average yesterday, as we can see on the daily chart, below. BIIB tried to follow up on that move this morning but ran into short-term resistance at around the 315-316 price area, as I’ve highlighted on the daily chart below.




Anika Pharmaceuticals (ANIK), shown below on a daily chart, continues to track along its 10-day moving average. Over the weekend I discussed watching for a pocket pivot buy point emerging along the 10-day line, and yesterday the stock flashed a pocket pivot that ended up stalling slightly. Today the stock pulled back but, as I see it, continues to act okay. You will notice that ANIK has held the 20-day moving average on pullbacks over the past couple of weeks, and it did so again today. I would expect that the stock should continue to hold tight along both the 10-day and 20-day moving average, and yesterday’s pocket pivot is still buyable, in my view, with the idea that the stock can continue to hold above the 45 price level, just to give it a little “porosity” beneath the 20-day line.




Enable Midstream Partners L.P. (ENBL) gapped up yesterday morning after my discussion of the stock in my weekend report. As it turned out, Investor’s Business Daily also mentioned the stock in its weekend edition, and I’m not sure if this is what sparked the big gap-up move at the open yesterday. The stock opened up at 25.88 and quickly traded up to 26.93 before reversing on heavy volume but still managing to close up 29 cents on the day. This funky reversal is not necessarily unusual behavior for a thinner stock like ENBL. If you take away the 18.3 million shares it traded on the day it came public, the stock has averaged less than 500,000 shares a day in trading volume, and so remains a relatively thinner name. The stock may need more time to set up further and attempt a “re-breakout,” and as long as it can hold the 10-day moving average, currently at 24.51, it remains viable. Last week’s pocket pivot buy point came off the 10-day line at around the 24 price level, so that buy signal remains in effect.




Today we saw bottom-fishing pocket pivots in Workday (WDAY) and Qihoo 360 Technology (QIHU), both shown below on daily charts. WDAY started out the day with a big gap-up move to around 86.04 after closing at 82.13 yesterday, stalled out to turn negative but recovered by the close to end the day just above its 200-day moving average on a bottom-fishing pocket pivot that came up through both the 200-day and 50-day lines. This is potentially buyable using today’s intraday low at 80.52 as a selling guide, although one could insist that the stock hold above the 200-day moving average, currently at 82.97. WDAY closed 1% above the 200-day line today. QIHU also gapped up this morning, and you will notice that the stock’s chart pattern is very similar to WDAY’s. Like WDAY, QIHU pushed up through its 50-day moving average on big-volume gap-up move that qualifies this not only as a bottom-fishing pocket pivot, but also as a buyable gap-up. This means that one can use the 92.80 intraday low of today’s BGU price range as a convenient selling guide, given that the stock closed only a little over 2% above that level today.

As I discussed over the weekend, and as I have tweeted repeatedly over the past few days, the most actionable buy set-up in this current market environment remains the “roundabout” type of bottom-fishing pocket pivots that occur as a former leading stock attempts to build and “round out” a potential new base after a corrective phase. With examples like WDAY, QIHU, CMG, CELG, BIIB, etc. we are seeing how this is playing out in real-time. Meanwhile, the crowd is sitting around waiting for obvious base breakouts that are still far away for most former leading stocks that are trying to round out new bases. This is the advantage that pocket pivots give us in an environment where base breakouts are far and few between.






With bottom-fishing pocket pivots providing us with a nice theme for the long side, we might consider keeping a close eye on Tesla Motors (TSLA), shown below on a daily chart. TSLA has had three selling waves in this latest base with the low occurring the day after it announced earnings and gapped down in a climactic sort of sell-off right down to the 200-day moving average. TSLA has quietly clambered back above its 50-day moving average over the past three weeks without showing much in the way of big buying volume. This is not surprising given the climactic nature of the post-earnings sell-off that pretty much washed out any sellers that were left in the stock.

With the stock sitting on its 50-day line, it is now in position for a possible bottom-fishing pocket pivot coming up and off of the line. The highest downside volume over the prior ten days is the 6,046,100 traded on May 15th, nine trading days ago on the chart if you include today’s price/volume bar in the count. If the stock continues to track sideways for two more days then the highest downside volume bar becomes the 5,553,800 shares traded on May 20th, six days ago on the chart. Thus we can be armed and ready should TSLA flash a pocket pivot here along the 50-day line.




Over the past two weeks the NASDAQ Composite has outperformed the S&P 500 as formerly beaten-down big-stock NASDAQ leaders turn sharply up and off of the deep-dungeon lows of their chart patterns. This is the scenario I’ve been watching for and expecting as I’ve discussed in my most recent reports, and it is steadily playing out thus far. If the general market rally continues then these stocks should continue to move up the right sides of their potentially new bases, and one can gain an early edge by buying into bottom-fishing pocket pivots rather than sitting around waiting for the obvious base breakouts that may or may not come down the line. By the time most of these stocks begin to reach price points where base breakouts are even possible, the indexes may be much higher and extended to the upside in a position of increased risk.

I say better to test the waters here and now if concrete buy set-ups present themselves. In my view these “roundabout” and bottom-fishing pocket pivots are exactly what we are looking for. Throw in a buyable gap-up like CAVM’s, which the base-breakout-buying crowd sees as “extended,” and we remain several steps ahead of the herd. 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 CAVM, CREE, TWTR, and SPWR, though positions are subject to change at any time and without notice.

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