The Gilmo Report

November 16, 2014

November 15, 2014

The market action over the past couple of days hasn’t changed my approach and basic view that this is a bifurcated market, and one can make money on both the long and short sides depending on the specific individual stock set-up. The reality “on the ground,” as it were, is that I don’t really need to pay all that much attention to the indexes. And while some may worry that the market is “too extended” and hence too vulnerable to a sharp pullback to make “buying into this rally” prudent, that approach simply misses the forest for the trees.

In the face of bifurcated action among individual stocks, the NASDAQ Composite Index, shown below on a daily chart, continues to grind its way higher. It made a new 14-year closing high on slightly lighter volume on Friday. Meanwhile, the S&P 500 Index, not shown, spent all of this past week moving tight sideways while also managing to eke out a new all-time closing high on Friday. While both indexes have shown some stalling and churning days on the way up, such as the NASDAQ did on Thursday, the bottom line is that making money in this market remains all about one thing: the stocks.

If the market did start to pull back in earnest, or even correct 5% from here, I would probably find myself naturally moving more towards the short side. But in this current environment I can pretty much be long and short different stocks at the same time and make progress. We will see this later on in this report. In the meantime, while the market trend remains up, our focus is on individual stock set-ups.

 

GR111614-$COMPQ

 

Alibaba (BABA) pulled down and tested its 10-day moving average on Friday as sellers failed to show up, as we can see on the daily chart, below. As I have written in my last two reports, I was looking for BABA to pull back towards the 10-day moving average. It came to within about 1% of the line today, which I considered close enough to pick up some shares and return to the long side of the stock. We can probably look for BABA to build some sort of flag formation here. If it is able to track well along the 10-day moving average, that would be very constructive action to see.

“BABA Big-Stock” remains one of my focal points on the long side of this market. So far the action looks fine, even after a blistering upside run from the initial pocket pivot at the lows of the IPO U-Turn base on October 21st. BABA is also showing “ants” here, the little black triangles that show up on my daily charts when a stock is up 12 out of 15 days in a row. In the old days at O’Neil, we used to use this indicator to identify a powerful stock, and then seek to use constructive pullbacks to start buying into the stock and then coming in heavy on a breakout to new highs, what I have referred to as an “ants breakout.”

In the past this indicator used to work well, but in this environment less so. The bottom line here is that, with the 10-day line moving up rapidly to meet up with the stock, that becomes my nearest reference point for buying into pullbacks as BABA forms what is likely to become a flag-like base.

 

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CyberArk Software (CYBR) gapped up after earnings, something we discussed in the Wednesday report, and cleared into new-high price ground Thursday on a clear buyable gap-up move, as we can see on the daily chart, below. The intraday low on the BGU is 38.38, and the stock held well above that on Friday’s early morning pullback. The Friday pullback, however, came within 5% of the 38.38 low. In my view, this puts it back within reasonable buying range.

So for now, all you are doing here is sitting, using the 38.38 price level as your trailing stop. Members who got in earlier when the stock was showing a “voodoo” buy point along the 10-day and 20-day moving averages and the 29 price level (in my October 26th report), and held through earnings, or even those who traded the stock by selling into the 36-37 highs on the breakout attempts in late October and then re-entered on Thursday’s BGU, are sitting pretty in the stock. In some ways this reminds me of another cyber-security name, FireEye (FEYE), which had a huge buyable gap-up back in January of this year and then went on a wild upside price romp before blowing up and falling back to earth later in the year.

 

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It’s instructive to look at FEYE’s buyable gap-up back at the start of the 2014 New Year on a daily chart, below. FEYE came public in late September 2013. It then went sideways in its IPO base for the next three months before the massive-volume BGU on January 3rd, the first day of trading in 2014. It then ran up for another two days before forming a short one-week flag formation that pulled into the 10-day moving average as selling volume declined sharply.

The stock then launched off of the 10-day line and broke out again to new highs. It eventually topped at a high of 97.35 in early March, a mere two weeks after the initial January BGU. That was a huge opportunity. Had one simply bought on the BGU day or the day after the BGU, one still made a ton of money. So as you evaluate what CYBR is doing here, keep FEYE’s precedent in mind. Not that it has to do the same thing, but so far you have three elements that are exactly the same in both stocks. Both were recent IPO’s, both gapped out of their initial IPO base, and both were in the cyber-security space.

 

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ReWalk Robotics (RWLK) was actually flashing a pocket pivot buy point Thursday after missing on its earnings announcement. Frankly, I was somewhat surprised given that they had missed on both earnings and revenue. But with the stock moving to the highs of its prior price range above the 30 level, I did not think it should be bought, and tweeted as much Thursday morning. Unless one had bought it immediately on the opening around the 30 price level, I saw no reason to chase it up around 32.

As members are well aware by now, I do not advocate buying strength in this market, but waiting for strong stocks to pull back on constructive weakness. The final verdict for RWLK on Thursday was a big-volume outside reversal to the downside, as we can see on the daily chart, below. With the stock underneath its 10-day and 20-day moving averages, it perhaps bears watching. This is still very much a forward-looking story, and the reversal after a disappointing earnings report seems somewhat normal. The question is whether the selling turns into something more severe.

The good news for RWLK is that selling volume dried up on Friday. This might be an indication that it will try and set up again as it remains within its IPO base. In fact, members who bought the stock on the basis of my initial discussion in the October 26th report when it was around 25, are still up on the position, believe it or not! This speaks to the value of being early and looking for voodoo buy points instead of chasing strength like we saw on Friday. RWLK should stay on your buy watch list in case it finds its feet and decides to make another attempt at pushing above its moving average confluence.

 

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GoPro (GPRO) has not yet priced any part of its recent $800 million mixed securities shelf offering, but the stock continues to hold up tightly along its 10-day, 20-day, and 50-day moving averages as volume essentially goes into “voodoo” mode. Just to review, a voodoo volume signature is an extreme volume dry-up, or VDU for short and “voodoo” for exotic! This looks to me like it’s just setting up to move higher. With volume drying up here the stage is set for such a move.

I noted today that a brand-new 13F filing from Tiger Global, a manager of hedge and private equity funds, revealed that the firm had taken a new position of approximately half a million shares in the stock. This is interesting given the general view that GPRO is played out and simply too “overvalued.”

Meanwhile, remember that a shelf offering is defined as “a type of public offering where certain issuers are allowed to offer and sell securities to the public without a separate prospectus for each act of offering. Instead, there is a single prospectus for multiple, undefined future offerings.”

Thus nothing has to happen right away in this regard. In the meantime I would just play the stock as it lies.

 

GR111614-GPRO

 

Twitter (TWTR) gapped up right into its 20-day moving average on Thursday, an observation I tweeted to members early in the day. TWTR’s Analyst Day event helped to bring this move about, but it turned out to be a prime short-sale point as the stock reversed to close way down on the day on heavy volume. As I wrote on Wednesday, “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.”

That entry point resulted in a quick dive back to the lows around the 40 price level, at which point one could have covered all or part of the position as the stock rallied back to the upside today. Basically, TWTR is bouncing along its recent lows, and may do so for a while if the general market continues in an uptrend. If the market goes into a correction, then I think TWTR will break out through the lows of what is essentially a short “bear flag” that it has formed over the past 14 trading days.

Again, rallies into the 20-day line at 43.25 can for now be used as short-sale entries, although I would not expect the stock to push up that high from here.

 

GR111614-TWTR

 

Facebook (FB) is similar to TWTR only in the sense that it is moving sideways in what looks like a short bear flag pattern that has formed since it gapped down after earnings at about the same time as TWTR. As we can see on the daily chart, below, FB is tracking below its 65-day exponential moving average as volume dries up. So far it has managed one rally up into the 50-day moving average in early November that reversed and failed.

As I see it, FB’s current situation remains unresolved, and I would probably only seek to short the stock on a weak rally up into the 50-day moving average. However, the tricky part here is that FB is also a big-stock leader As I wrote in my Wednesday report, this pullback may be necessary corrective action following a v-shaped breakout to new highs in late October. As a big-stock institutional favorite, FB will likely find support if the general market continues higher into year-end, so it could recover and attempt to “re-breakout.”

This is one of those situations that could go either way, and is probably highly dependent on what the general market does. I’ll be following this closely in real-time so watch for my real-time observational tweets on the stock this coming week.

 

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Tesla Motors (TSLA) pushed further beyond its 50-day moving average on Friday on below-average volume, as we can see on the daily chart, below. I thought the stock was acting well on Wednesday per my report of that day as it held along the 50-day moving average with volume drying up. That constructive action has led to further upside over the past two days. What I would like to see, however, is some sort of pocket pivot volume signature here along the 50-day line.

Not that the stock has to flash big volume in here as it moves higher. It can certainly continue to move higher without it, and so far it has over the past two days. If one bought the stock on the basis of my discussion in my Wednesday report, then using the 50-day moving average as your downside stop is a reasonable risk-management measure to take here. Otherwise, if TSLA broke back below the 50-day line on heavy selling volume, it would come back into play as a short-sale target. But for now, it appears that the path of least resistance is to the upside.

 

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From the offices of Captain Obvious comes Chinese online auto-related listing, advertising, and review concern Bitauto Holdings (BITA), which flew out of a cup-with-handle type formation on a huge-volume pocket pivot/trendline breakout move, as we can see on the daily chart, below. BITA launched after announcing earnings on Friday morning without gapping up, clearing the 85.66 peak on the handle and closing more than 5% above that at 91.91.

The only way to buy this now is on a pullback below 90. Interestingly, I also notice in Tiger Global’s 13F filing, mentioned in the GPRO discussion, above, that the firm also initiated a new position in BITA in the last quarter with a purchase of approximately 6.6 million shares. Now you know who creates the lows of new bases!

This latest breakout is being characterized as “late-stage” by those who claim to know, but in my view late-stage is as late-stage does, and a base isn’t late-stage until a stock fails from it. For that to happen here, BITA would have to reverse and fail on this otherwise obvious breakout. Some sources might see this as an eighth stage base, but calling it this is prima facie confirmation that no useful information is gleaned from trying to count bases within a stock’s uptrend in the first place.

All one has to watch for here is a failed breakout which would facilitate a quick exit. Play it as it lies!

 

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Amazon.com (AMZN) is probably making short-sellers ears ring here as it continues to move higher following its massive-volume, gap-down move after earnings in late October, as we can see on the daily chart, below. After cruising right through the 50-day line on Thursday, AMZN jacked up above its 200-day moving average Friday on huge volume. But it closed below the line as it stalled a bit on the move. One could try and short the stock here using the 200-day line as a quick stop. However, the huge buying Friday struck me as somewhat puzzling and not something that I would want to try and stand in front of, at least until it shows some signs of slowing down and reversing.

 

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Biogen Idec (BIIB) finally blew through its 200-day moving average on Thursday with selling volume picking up sharply, as we can see on the daily chart, below. I discussed this as an actionable short-sale target in my report of this past Wednesday and the stock provided members who shorted the stock on Thursday with what I like to call “instant love.” This big-volume price break now brings the late October low at 290.85 into play as a downside price target. So far so good.

 

GR111614-BIIB

 

Gilead Sciences (GILD) acted in tandem with its big-stock, bio-tech sister BIIB on Thursday, breaking through its 50-day moving average on heavy selling volume, as we can see on the daily char, below. This move continued into Friday as selling volume picked up and GILD pushed below its 65-day exponential moving average. This now-confirmed LSFB breakdown brings the October low at 91.73 into play as a downside price target for the stock.

Note that this low lies just above the 200-day moving average, so a move to the downside that undercut the low and hits the 200-day moving average could be one scenario here. In any case, the 50-day line remains your upside trailing stop on GILD for now.

 

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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.

Netflix (NFLX) – still moving sideways in a tight flag formation that it has formed after bouncing up off the gap-down lows of mid-October following a disappointing earnings announcement. 20-day moving average may still be viewed as a short-sale point using the line as a quick “hyper-stop.”

ServiceNow (NOW) – tracking along the 10-day moving average as it remains within range of the prior week’s continuation pocket pivot.

Taser International (TASR) – made a new closing high on Friday, but would still look to use any pullback to the 10-day line, currently at 19.12, to buy into the stock.

Trinet (TNET) – pulled back Friday on light volume but still remains well above the 10-day moving average at 30.42. Would use pullbacks to the 10-day line as a possible secondary entry point.

U.S. Silica Holdings (SLCA) – continue to use rallies into the 20-day line, currently at 44.99 as short-sale points, employing a tight stop just above the moving average.

Yelp (YELP) – broke down from resistance at the 20-day moving average, which I was looking for per my notes on the stock in this past Wednesday’s report. Remains shortable on rallies into the 20-day line at 61.13, using the line as a reference for a tight stop on the upside.

Anyone trying to pick a top here is having a tough time doing so. And it’s not like there aren’t signs such as weak breadth, the bearish megaphone pattern that the S&P 500 is allegedly forming, or a four-year high among individual investors as measured by the American Association of Individual Investors’ weekly sentiment survey. I might also throw in that the Investors Intelligence survey of investment advisers also shows high levels of bullishness.

For all we know, however, this bullishness will persist until year-end, driving the market higher. In the meantime all I know is that in order to make money in this market, I don’t really have to watch what the indexes are doing. I only have to focus on individual stocks. But by now that should be an old story. Friday saw some great short-sale explosions in BIIB and GILD, while TWTR’s reversal off the 20-day line on Thursday was a great short-sale pick-off.

Meanwhile CYBR’s buyable gap-up on Thursday has resulted in another 10%-plus in upside beyond the gap-up day, and BABA pulls into its 10-day moving average in normal fashion as sellers disappear. I’m sure the market will top at some point. Whether that is in 2014 or 2015 is anybody’s guess, and that’s fine with me. One only need take a bullish or bearish stance when it comes to making a trade in an individual stock, and in this market either side can work at any time, depending on the stock in question. So we just keep doing what we’ve been doing, which is playing each individual stock set-up, long or short, as it lies but with the same objective in mind: profits.

Best

Gil Morales

Editor’s note: Some members have inquired as to the 620 chart setup sometimes referred to by Gil. Please note that this is discussed in the October 15 and 19 reports. These can be found in the report archives.

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 BABA, BITA, and CYBR, 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.