The Gilmo Report

November 12, 2014

November 12, 2014

The NASDAQ Composite Index, shown on a daily chart, below, pushed to a new high today as trading volume picked up. Meanwhile the S&P 500, not shown, was down slightly but managed to close well off of its early morning lows. The market started the day off on the downside, looking as if it was about to go into the pullback that everyone seems to be expecting, but the indexes weren’t having any of that.

For the most part the indexes found support off of their intraday lows on increasing, albeit below-average, volume. Despite the persistent upside movement in the indexes, this remains something of a bifurcated market, with set-ups on both the long and the short side hitting my screens on a daily basis even as the market has continued higher. Thus, to further beat a dead horse, I’ll repeat that it all comes down to what individual stocks are doing.

 

GR111214-$COMPQ

 

Alibaba (BABA), or “BABA Big-Stock” as I like to call it, has continued to power high, but finally ran into some selling yesterday on very heavy volume, as we can see on the daily chart, below. One of the things that bothers me about BABA here is that everybody loves the stock. I’ve previously discussed how BABA reminds me of Google (GOOGL) in late 2004. One of the notable differences between the two from a psychological perspective is that back in 2004 the newly IPO-ed GOOGL had many doubters. After all, GOOGL’s business was “only” Internet search, and other companies like Yahoo! (YHOO) were already doing that. This, of course, ignored the dynamics inherent in a young, entrepreneurial company, and GOOGL’s price move since then is now legendary.

Fast-forward to 2014 and today BABA is widely loved and considered a near-perfect equity investment for those with a “long-term” view. Nobody said that about GOOGL when it came public in August of 2004. I even remember doing an interview with the San Jose Mercury News, a newspaper based in San Jose, a few days before GOOGL’s IPO date. If not the heart of Silicon Valley, then San Jose perhaps can qualify as one of its “lungs.” At that time most were very negative on the stock, and the reporter tried to steer me towards taking a negative view by asking, “Isn’t this IPO overpriced?” I responded that the market sets the price, and as a professional investor I would be watching to see how the stock acted after the IPO.

As I told the reporter, if it formed a base and then broke out, I would be interested in the stock at that time. Speculating what the “correct” price for the stock was before it came to market was futile. CNN opened an August 19, 2004 story on the IPO’s pricing with “Internet search engine Google has announced it will go public at $85 a share, paving the way for the widely awaited but troubled stock offering to finally stumble to market on Thursday.”  Meanwhile BABA has no doubters, and it seems that every talking head on financial cable TV considers the stock a “must own” situation.

Food for thought, perhaps, but the bottom line is to focus on BABA’s price/volume action, which so far has been impressive since the October 20th pocket pivot in the 91-92 price area. The only thing to do with the stock is simply wait for the 10-day moving average to catch up before a new entry point can show up, most likely in the form of a continuation pocket pivot. If one bought the stock lower, one most certainly has the option of just sitting tight in an attempt to be right.

As I have discussed many times, my method in this type of market is to go in heavy at the buy points and then scale out into sharp upside moves of 15-20% or more. Re-entry points can usually be found on low-volume pullbacks to the 10-day or 20-day lines, or one can choose to wait for a continuation pocket pivot. In the case of BABA, I would be using any pullbacks to the 10-day line as buying opportunities.

 

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CyberArk Software (CYBR) announced earnings today after the close and handily beat analysts’ 2 cent estimate by coming in with 20 cents. As I write after the close the stock is pushing above the 38 price level which will set up a gap-up open tomorrow. Members should watch for a buyable gap-up set-up once the stock puts in a firm intraday low which can then be used as a selling guide per the rules of handling BGU’s.

As I wrote over the weekend, had one built up a cushion by trading the stock previously per my discussions in prior reports, one could have sat with a “risk-tailored” position in anticipation of the earnings report, and if one did, one is very happy right now! However, waiting for earnings to come out and sitting with a profit in hand is fine, too, and my intention is to watch how this trades tomorrow on the open in anticipation of a BGU set-up.

 

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We will also want to keep an eye on ReWalk Robotics (RWLK) tomorrow morning when it is scheduled to announce earnings before the open. Analysts expect a 26-cent loss, but I think sales will be more critical. Everyone knows the company is expected to lose money for several quarters, but its exoskeleton product known as The ReWalk™ which enables paraplegics to sit, stand, and walk is a ground-breaking and compelling business theme that could drive further upside in the stock as it gains wider adoption.

As we can see on the daily chart, below. RWLK has been moving tight sideways after jacking above the 20-day moving average the day after I first discussed it in my October 26th report. I’m looking for a favorable report tomorrow morning, and perhaps a buyable gap-up move at the open. So far the stock has built a constructive base going into tomorrow morning’s earnings announcement. Now let’s see if that provides the foundation for a move higher tomorrow.

 

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ServiceNow (NOW) pulled back into its 10-day moving average today on less than average volume, as we can see on the daily chart, below. This brings it within range of last Thursday’s continuation pocket pivot off of the 10-day line. This is an add point if one bought lower in the pattern, and for those who might want to use this as an initial entry point, you are also within 5% of the prior ladle-with-handle breakout point at 64.98.

 

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GoPro (GPRO) tried to shoot itself in the foot Monday morning when it announced an $800 million mixed securities shelf offering. Surprisingly, the ensuing dive through the 50-day moving average Monday and Tuesday found support along the line today, as we can see on the daily chart, below, as well as the 10-day and 20-day moving averages. The action here looks okay, and I think it is to GPRO’s credit that it has not come completely undone on the announcement of the secondary.

The stock may be buyable here along the 50-day moving average, using today’s intraday low at 74.08 as a quick downside stop. One can also just wait for the secondary to be priced, at which point the stock may be cleared for take-off. A lot of shorts still live in this stock, and if the secondary is priced well and the stock continues to hold up, I would not be surprised to see the stock make a run for its prior highs.

 

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Taser International (TASR) bounced nicely off of the 10-day moving average last week where I thought it was buyable, as I discussed in my weekend report. Yesterday the stock broke out of its cup-with-handle type base to new highs, as we can see on the daily chart, below. TASR’s breakout came on volume that was only 14% above average, so I would be more inclined to watch for a pullback to the 10-day line as a more opportunistic entry point. If you’re already in the stock on last week’s pullback to the 10-day line, there isn’t too much to do here, as I would still look to add on a pullback vs. buying into or adding on upside strength.

 

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Tesla Motors (TSLA) has moved higher up into its pattern, making last Thursday’s move look like something of a “deep doo-doo” bottom-fishing pocket pivot, as we can see on the daily chart, below. This move has given TSLA enough juice to propel it up into the 50-day moving average, which represents a logical area of potential upside resistance. It is now a matter of watching how the stock handles itself here, and I would not assume that it is necessarily a short here.

As I wrote over the weekend, my view of TSLA could change from bearish to bullish based on specific technical action, and so far the stock is holding tight along the 50-day line as volume has declined. A strong-volume move up and off of the 50-day line, perhaps in the form of a pocket pivot, would be very constructive. Alternatively, continued tight action along the line with volume drying up would also be constructive.

Watch for my tweets on TSLA as things progress and resolve along the 50-day line. The bottom line is that if the general market continues higher, then TSLA has a good chance of doing the same.

 

GR111214-TSLA

 

I was short Facebook (FB) this morning as the stock plumbed lower lows, but my 620 chart caused me to cover and bank my profits after the stock pulled off what looks like a bit of a “Wyckoffian Retest” today. As we can see on the daily chart, below, FB, has been drifting downward to retest its late October lows when it gapped down after earnings. Over the past couple of days selling volume has been very light on the retest, and today FB reversed back to the upside with volume picking up.

After failing on a late-stage breakout attempt in late October, it is possible that FB is trying to find its feet here and make an attempt at a “re-breakout” once it has finished correcting the extreme v-shaped action that preceded the initial failed breakout. Based on the feedback I got from being short the stock (and making some money), I decided to go long the stock here with the idea of using today’s 73.54 intraday low as a quick stop.

While I understand that this is somewhat unorthodox, a Wyckoffian Retest, particularly when it occurs on very light selling volume, is one of the things I look for in a possible “Ugly Duckling” buy candidate. With Twitter (TWTR), not shown, also rallying from an oversold position, FB may itself be impelled to move higher from here. And as a big-stock social-networking name, it could easily find institutional buying interest at current price levels.

 

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Biogen Idec (BIIB) rallied past its 50-day moving average on Monday and then reversed right at the prior late-October high at 330.50 to close at the 50-day moving average yesterday, as we can see on the daily chart, below. This led to a breakdown back below the 50-day line today as the stock retested the 200-day moving average. The rally that BIIB had earlier this week was not uncommon for this type of short-sale set-up. Sometimes a stock will rally right up to or beneath a moving average and sometimes it will rally a few percent past the moving average.

If this happens, as was the case with BIIB, then a prior price peak in the pattern, such as the late October high at 30.50, can provide a reference point for resistance and a possible short-sale entry point. I still consider the stock shortable in here, using the 50-day moving average at 322.48 as a tight upside stop, although one could also use the 330.50 high as an alternative stop given that the stock is within about 3% of that price level.

 

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Gilead Sciences (GILD) is so far acting in line with a typical late-stage failed-base (LSFB) short-sale set-up, although one must keep in mind that this is a fluid situation in real-time. Not all LSFBs break down immediately. Some will bounce around the 50-day or 20-day moving average for a period of time before breaking down. Others may simply set up along one of the moving averages and then turn back to new highs.

This is the reality of short-selling, and one must remain highly flexible if one intends to survive and prosper on the short side of the market. As we can see on the daily chart, below, GILD looked like it was headed through the 50-day line earlier today. But it found some support along the line as it closed in the upper half of its daily price range with volume picking up slightly. My general feeling here is that this will only work as an LSFB if the general market corrects. If the general market doesn’t correct and keeps going higher, GILD could very well move up and off of the 50-day moving average in a “re-breakout” attempt.

Thus we could say that GILD has both short and long potential, depending on how this current consolidation along the 50-day moving average resolves. If you’re a believer in GILD, then one could try taking a long positon here using the 50-day line as a quick stop.

 

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Netflix (NFLX) tagged its 20-day moving average yesterday, giving short-sellers an optimal entry point at the line before the stock reversed and closed down on the day, as we can see on the daily chart, below. Today NFLX held along the lows of the short flag formation it has been forming so far in November as sellers failed to materialize.

While the stock did find resistance at the 20-day line, the bottom line is that it remains in a flag formation as it holds above the mid-October post-earnings gap-down lows. Rallies into the 20-day line can theoretically be shorted into, but a tight stop should be kept there as I still believe this has the potential to continue rallying up into the 200-day moving average at 416.

 

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Some notes from my trading diary regarding stocks discussed in recent reports are below. If a stock is not mentioned, then my view is essentially unchanged from the last time it was discussed in the report.

Amazon.com (AMZN) – stock has cleared its 20-day moving average and is now headed for the 50-day line. It may be shortable there, but near-term one would be stopped out on a short-sale trade based on the move back up through the 20-day line.

Trinet (TNET) – moving to new highs on light volume. Stock continues to be buyable on weakness, but I would avoid buying into strength.

Twitter (TWTR) – company held its Analyst Day event today which helped to trigger a nice oversold rally in the stock. Keep an eye on this as it rallies up into the 20-day moving average at 43.75 for a possible short-sale entry point.

U.S. Silica Holdings (SLCA) – continues to find resistance at its 10-day moving average. As long as the price of oil continues lower, SLCA probably does likewise. Rallies into the 10-day line can be shorted, with a secondary short-sale point coming into play at the 20-day line up at 45.52.

Yelp (YELP) – stock continues to find resistance at its 20-day moving average, and rallies up into the line are shortable using the 20-day line as a tight stop. At this stage I would expect YELP to remain in a downtrend so long as it remains below the 20-day moving average.

The market looked like it wanted to sell off this morning, but as has been the case throughout this rally off of the mid-October lows, it just wants to keep moving higher. As I wrote over the weekend, while many fret over the weak market breadth as represented by the NASDAQ Advance-Decline line, not shown, I tend to look at it as more an issue of which is the cart and which is the horse. If the indexes continue higher, then they will likely start bringing more stocks to the upside and breadth could start following the market to new highs rather than dragging it down.

In this case the market is the horse and breadth is the cart. So far that seems to be the case, and the key to making money in this market lies in being opportunistic, buying on constructive weakness, and jumping on stocks as their set-ups are just starting to “ripen.” This is still a very tricky market, and I think members have to be resourceful and anticipatory rather than acting on a situation after the fact, once it is already in motion. 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 a held a position in FB and TSLA, though positions are subject to change at any time and without notice.

Gil Morales & Company, LLC (“GMC”), 8033 Sunset Boulevard, Suite 830, Los Angeles, California, 90046. GMC is a Registered Investment Adviser. This information is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to GMC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Gil Morales & Company, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.