The Gilmo Report

November 17, 2013

November 16, 2013

The market spent the last two days of the week following through on its Wednesday breakout with more upside movement, as we can see on the daily chart of the NASDAQ Composite Index below. Volume came in lighter on the NASDAQ but was still above average on what was an options expiration day. There have been a number of pocket pivots and a buyable gap-up or two showing up in individual stocks as leadership perks up a bit. Confirmation hearings for Federal Reserve Board Chairman Nominee Janet Yellen on Thursday confirmed that she is a believer in QE, and that it would continue as long as the economy remained soft. This helped keep the market moving to the upside on higher volume.

 

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The S&P 500 Index matched the NASDAQ high for high as it pushed higher on heavier volume Friday following its Wednesday breakout. Nothing tricky here, just a market in a de facto confirmed uptrend as I hinted it might be in my report of exactly one week ago (see November 10th report). Hopefully, Wednesday’s breakout is setting up an end-of-the-year rally that will see some strong, playable upside movement in leading stocks.

 

GR111713-SPX

 

Among the “Four Horsemen,” Facebook (FB) bounced off of its 65-day exponential moving average earlier in the week, as I discussed in my report of this past Wednesday, and cleared its 50-day moving average on Thursday, as we can see on its daily chart below. At this point, the stock’s ability to regain the 50-day moving average is constructive but it likely needs a little more time to round out the lows. It appears to me to be a more substantial basing process compared to the short flags it formed on the way up following its July buyable gap-up move.

 

GR111713-FB

 

LinkedIn (LNKD) has continued to rally after finding support at its 150-day exponential moving average, the orange moving average on the chart, and the undercut of the prior 213.50 early October low, as we can see on its daily chart below. As an aside, I should point out that on the charts you will see occasional references to the 20-day, 65-day and 150-day exponential moving averages as “20-dema,” “65-dema,” and “150-dema,” respectively. What is interesting here is that two of the past three days on the rally off the 150-day line have come on above-average buying volume, which is a positive. As well, Friday’s action came on a pocket pivot volume signature as the stock climbed above the 65-day exponential moving average, the black moving average on the chart, and the green 20-day exponential moving average. Without getting fixated on LNKD as a short-sale target, which it was until it hit my downside price objective at the early October low of 213.50, we might consider the possibility that the stock may be in the process of forming a big double-bottom base as I’ve outlined on the chart, and this is something to keep an eye on.

 

GR111713-LNKD

 

Netflix (NFLX) moved up off of its 10-day moving average as I surmised it might in my last report, but no pocket pivot buy point emerged as volume remained below the level required on the move. This is a bit tricky since no discernible buy point has emerged on this move up and off of the 10-day line. Should volume come into the stock next week it could result in a pocket pivot where the stock is extended from the 10-day line. In any case, NFLX is one horseman that is hanging in there and holding above all of its key moving averages while FB and LNKD are trying to come up the right sides of potential new bases. Perhaps the horsemen have located their heads and are trying to refasten them as they go into potential recovery mode.

 

GR111713-NFLX

 

With three of the Four Horsemen trying to find their heads, we have to wonder whether Tesla Motors (TSLA) will be able to do the same. If I invoke a little bit of the “Ugly Duckling Theory,” TSLA is sitting right on top of its 150-day exponential moving average, as we can see on the daily chart below. If we use LNKD as a “model” for TSLA, we might consider that TSLA is getting short-term “sold out” as volume dries up on the retest of the 150-day line over the past week. The stock has also undercut a prior low in the pattern from mid-August. I also pointed out in my last report of November 13th that there are roughly three waves of selling in the stock off the peak, with the last wave on the gap-down move looking somewhat climactic, at least on a short-term basis. It may very well be possible to try and pick up shares of TSLA here just above the 150-day moving average and the recent 132.32 low of two Fridays ago. As of the end of October, TSLA still had over 21 million shares sold short, and that number may have increased as the shorts finally see “blood” in the stock’s price/volume action and begin foaming at the mouth. If the stock doesn’t break down here, a reaction rally may very well be in the cards based on the “Wyckoffian retest” of last week’s low and my “Ugly Duckling Theory.”

 

GR111713-TSLA

 

Gogo (GOGO) finally stopped its upside tear following Monday’s buyable gap-up, but it certainly made for a rewarding play this week before everyone else figured out that the market was in a “confirmed uptrend.” At this point I would be watching for the stock to build some sort of flag formation up here as it consolidates this week’s incredible price move in hopefully constructive fashion. This would give the 10-day moving average some time to catch up to the stock’s price and set up the potential for a continuation pocket pivot later on.

 

GR111713-GOGO

 

Yelp (YELP) is another recovering leader as it regained its 50-day moving average on Thursday and then moved higher on increased, albeit below-average volume, on Friday. As we can see on the daily chart, below, YELP still hasn’t issued any buy points on this latest four-day rally off of the 65-day exponential moving average. Recall that in my report of last weekend, November 10th, I noted the stock had undercut the prior lows in the pattern and was finding support along the 65-day line, not unlike FB did earlier this week. I’d like to see the stock back-and-fill here along the 50-day line before issuing an actionable buy signal.

 

GR111713-YELP

 

Taser International (TASR) is tucking back into its 10-day moving average on light volume following Wednesday’s short trendline breakout as we can see on its daily chart, below. The low-volume movement back into the 10-day line looks constructive and I believe the stock is simply spending a little time setting up for a move to new highs. With the stock holding along the 10-day line, this puts the stock in position to flash a pocket pivot buy point here over the next few days, which is something to watch for. However, I believe the stock is buyable on the basis of the pullback to the 20-day exponential moving average, which I discussed in my report of last weekend, and Wednesday’s trendline breakout, which I discussed in my report of this past Wednesday, November 13th.

 

GR111713-TASR

 

Continuing my discussion of SolarCity (SCTY) from my prior two reports, we can see that it has moved above its 10-day moving average on the daily chart, below, after initially finding support at the top of its prior base. SCTY gapped up on Thursday on heavy volume but closed at the low end of its price range. However, after a sharp bounce off the top of its prior base over the prior five days, a little bit of a pullback here is to be expected. With selling volume receding here, I would look for the stock to continue to hold along the 10-day line or the green 20-day line if it continues to pull back on lighter volume, perhaps setting up a pocket pivot that would either come up through or off of the 10-day line. As of the end of October SCTY had 8,475,020 shares sold short, about a third of its 27 million share float, and when the November 15th short-interest numbers are released in about a week from now we’ll get to see whether shorts were emboldened to add to their shorts when the stock sold off after earnings.

 

GR111713-SCTY

 

Solar stocks have held the #1 industry group ranking in the market for four weeks straight now. Among the solars, Sunpower (SPWR) has remained a solid leader as it works on what is so far a four-week base following a nice run-up from the 50-day moving average in late September and the first half of October. As you may recall, that price move and subsequent base breakout through the 28 price level began with several bottom-fishing pocket pivots along the 50-day line (see September 29th report). As we can see on the daily chart, below, SPWR had a “mini” buyable gap-up on Thursday as it gapped up on volume that was 48% above average, just 2% shy of the 50% increase you normally want to see in buyable gap-ups. That gap-up move also missed being a pocket pivot by one day, but in my view it is a constructive move, and Friday’s pullback on lighter volume looks normal to me given the fact that SPWR has some overhead from the right side of the four-week base to contend with. I consider it buyable here with the idea that it will continue to hold the 10-day line and the bottom of Thursday’s gap-up move.

 

GR111713-SPWR

 

While solars are #1, the #2 industry group is Machinery-Materials Handling/Automation, which is where the 3-D printing stocks live. In my report of this past Wednesday I discussed Exone Company (XONE) which was pulling back in after-hours trade that day after announcing earnings. The stock did have a “mini” gap-up on Thursday, as we can see on the daily chart, below, but it ran into some selling as the stock closed in the lower part of its daily price range. The stock pulled down to test its 10-day moving average and the 59.50 intra-day low of the buyable gap-up day. You can see on the chart that as the stock runs up into the mid-60’s it encounters some overhead supply from the left side of the pattern. Thus some selling into the rally that has taken hold since the bottom-fishing pocket pivot of nine days ago on the chart is to be expected. What I’m looking for now is some sort of pocket pivot buy point developing off of the 10-day line here if and as the stock stabilizes. Interestingly, at the end of October, short-interest in XONE was at an all-time peak of 3,853,637 shares, nearly half its current 8 million share float. The situation with XONE is still in flux here so we’ll have to see how it develops, keeping an eye out for a possible pocket pivot buy point along the 10-day line.

 

GR111713-XONE

 

You might also keep an eye on Proto Labs (PRLB), shown below on a daily chart. PRLB sold off hard after announcing earnings but found huge volume support off the lows of that day as it broke down through the 50-day moving average before flying back above the line. Since then the stock has successfully retested the 50-day line once before clambering back above the 10-day moving average where it has spent the last four days. Note that selling volume has dried up, setting up the possibility of a pocket pivot buy point developing along the 10-day line, so keep an eye out for this. The other option is to take a position right along the 10-day line with the idea that the stock will continue to hold tight at that price level and eventually move to the upside.

 

GR111713-PRLB

 

Last weekend I discussed the positive action seen in a number of financial names where I decided to focus on two names in the group, Charles Schwab & Co. (SCHW) and Morgan Stanley (MS), given their strong fundamentals. Both stocks, which I show below on daily charts, have moved up since their pocket pivots of two Fridays ago. Both stocks look quite similar as they push to 52-week highs this week. Not much to say here except that they are working well following last week’s pocket pivot buy points and steadily moving higher.

 

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GR111713-MS

 

Acadia Pharmaceuticals (ACAD) continues to hang along its 10-day moving average without any pocket pivot volume signature showing up just yet as we can see on its daily chart, below. ACAD is setting up as a possible “roundabout” formation where it is trying to form the lows of a potential new base. ACAD tried to move up on Thursday before encountering resistance at the 50-day moving average, but volume was still quite light. The stock held tight on Friday as volume dried up in the extreme. It looks to me like this is still setting up to move higher, but so far it still  hasn’t flashed the bottom-fishing pocket pivot I’m looking for. Keep this on your radar as it continues to move tight sideways along the 10-day moving average.

 

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Another roundabout that I discussed in my last report is Groupon (GRPN), which has moved higher since then, as we can see on its daily chart below. Two Fridays ago GRPN flashed a bottom-fishing pocket pivot as it came up through its 10-day moving average, and on Thursday it gapped up slightly before running into resistance at its 50-day moving average. From here I would use any pullbacks towards the $10 price level to buy the stock, with the idea that the stock will continue to hold the 10-day line.

 

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Yet another roundabout type of set-up is seen in the oil-fracking concern known as Bonanza Creek Energy (BCEI), shown below on a daily chart. BCEI actually had a bottom-fishing pocket pivot from a V-shaped formation six days ago on the chart as it came up off of its 50-day moving average and up through its 10-day moving average. Over the past five days the stock has held tight along the 10-day line with volume drying up sharply. BCEI posted 200% earnings growth in the most recent quarter with accelerating sales growth of 116%. I consider the stock buyable here with the idea that it will continue to hold above the 10-day moving average.

 

GR111713-BCEI

 

InfoBlox (BLOX), shown below on a daily chart, is another roundabout type of situation as it has pulled into its 50-day moving average in the process of building a short four-week base. On Friday, BLOX just barely cleared enough volume to flash a pocket pivot buy point, exceeding the largest down-volume in the pattern over the prior 10 trading days by a mere 2,700 shares. BLOX is expected to announce earnings on November 26th.

 

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After making a trip all the way back to its 50-day moving average, Alexion Pharmaceuticals (ALXN) has recovered quickly on a move back up towards its recent all-time highs. While one could have tried to buy the stock at the 50-day line, the confirming signal of the stock’s recovery was seen on Friday as it flashed a pocket pivot buy point coming off of the 10-day moving average. My guess is that it will back-and-fill a little bit here, so I would prefer to buy it, if possible, on a pullback closer to the 10-day moving average.

 

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Don’t look now, but Apple (AAPL) flashed a pocket pivot buy point on Thursday, as we can see on its daily chart, below. If you are an AAPL lover, perhaps you can consider this actionable, but notice how volume increased on Friday as the stock came in a bit. AAPL may continue higher in a continued market rally, but I’d have to say it’s not among my Top 10 long ideas given the fact that it is something of a has-been with negative earnings growth.

 

GR111713-AAPL

 

Last weekend I discussed the support Amazon.com (AMZN) was finding at its 20-day exponential moving average, and that support held very well as the stock bounced off the green line and pushed to a new all-time high on Friday, as we can see on its daily chart below. Volume has come in above average over the past two days as the stock moved to new highs, which could be seen as a three-weeks-tight sort of breakout. Volume came in at 46% and 58% above average on Thursday and Friday, respectively, which for a stock of AMZN’s size is nothing to sneeze at. Once again, we see how the 20-day exponential moving average has served as a key line of support for leading stocks when they pull back. As I discussed last weekend, given that AMZN had two buyable gap-ups within a week in late October, the second one was a bit too obvious and so the pullback to the 20-day line was normal within the context of the overall pattern. Among other big-stock NASDAQ names, both Google (GOOG), which is forming a tight four-week flag, and Priceline.com (PCLN), which made a new all-time high on Friday, both continue to act well, although I don’t show them on charts here.

 

GR111713-AMZN

 

Align Technology (ALGN) was acting quite well as it built a short three-week flag before gapping down on Thursday on an arranged inside sale of 4.6 million shares. The seller was another company, Danaher (DH), which acquired the stock as part of a 2009 patent litigation settlement in which ALGN paid DH $13 million in cash and 7.6 million shares of its stock. At the time of the settlement, ALGN stock was trading at $10.13 a share, so DH has made out quite well on the stock they received back then given that they sold 4.6 million shares, well over half, at 54.60 for a nice “five-bagger.” The fact that a big holder of shares unloaded 4.6 million of them and still has 3 million shares left probably spooks investors. But I would point out that somebody agreed to buy that 4.6 million share block, and clearly if a major shareholder is looking to quickly unload a large block of stock then short-term the situation becomes something of a “buyer’s market.” Whoever bought the stock didn’t do so because they think it’s going lower from here. In my view this could turn out to be a shakeout based on the big placement of insider stock at a below-market price, setting up a buying opportunity in the stock. One could step in and buy shares here using the intra-day low of  the buyable gap-up day in mid-October at 53.15 as your stop or the intra-day low of Thursday at 54.05 as an even tighter stop.

 

GR111713-ALGN

 

While the market is now back in a so-called confirmed uptrend the bottom line is that money-making opportunities have shown up on a stock-by-stock basis. Over the past month, for example, two of the biggest gainers I’ve discussed in my reports have been SCTY and GOGO, and these stocks had huge price runs in just about one week. GOGO began its run this past Monday, after I discussed in last weekend’s report that members should keep an eye out for a buyable gap-up on Monday given that the stock was going to announce earnings. And this opportunity showed up during a period where the market was allegedly “under pressure” and thus presented a “risky” environment where new long positions supposedly should not be taken. From my perspective, the “opportunity of a lifetime” can occur in the stock market every few weeks, and being locked into one point of view or another can blind you to such opportunities.

On the other hand, more recently, the market’s short breakdown offered a couple of great “tactical” (e.g., short-term) short-sale targets in LNKD, ARMH, and TRLA which produced some decent profits on the short side, with LNKD and TRLA perfectly hitting their downside price targets and profit objectives. But with the market now in clear rally mode your focus needs to remain on the long side, at least until evidence to the contrary presents itself.

Last weekend it was already becoming apparent that the market was going to turn based on the Dow’s move to all-time highs two Fridays ago and the fact that most leaders were already selling off sharply prior to the sharp downside break in the indexes two Thursdays ago on November 7th. This was “confirmed” on Wednesday as the NASDAQ and the S&P 500 joined the party, but the opportunities were already there in stocks like GOGO and TASR, for example. Also, we saw stocks like FB and YELP violate their 50-day simple moving averages only to find support at their 65-day exponential moving average. This is a phenomenon I’ve seen in a number of leading stocks that violate their 50-day moving averages, whereupon the 65-dema becomes the moving average at which support actually materializes. It may be that the 50-day simple moving average is so widely used that it has become less useful as an area of support, particularly during corrections when things start to get ugly. Support at the 65-dema is one component of my “Ugly Duckling Theory,” as is support at the 150-dema. Such is life in the Age of QE.

Another component of this theory is the “roundabout” formation and the bottom-fishing pocket pivot, which I believe has been proven to be a viable strategy in this QE-driven market.

To finish out this report, I’ll let you in on one of my “secret weapons” in the chart of Fleetmatics Group (FLTX), which I show below on a HGS Investor software daily chart with Force Indexes and my friend Ian Woodward’s indicators known as Bongo, Eureka, and Kahuna, which are quite colorful in name as well as useful in a QE-driven market. The Force Index is a product of Dr. Alexander Elder, author of the seminal work “Trading for a Living.” If you need to see the definitions of these indicators I would suggest going to the HGS Investor website.

I use six indicators on this chart, with the Kahuna and Eureka shown in the same bar. As I’m watching a stock come down and round out a base I start looking for at least four of these to start turning blue, which is the color I use for positive indications in conjunction with volume drying up on the downside and/or a subsequent bottom-fishing pocket pivot. Notice that as FLTX is coming down it hits the 200-day moving average around the 30 price level and bounces once, then heads back down to retest that prior low and the 200-day moving average as selling volume is drying up. That second test of the 200-day line also undercuts the early October low on a closing basis as the stock trades very tight sideways right along the 200-day line.

At that point we begin to see the Force Indexes turn blue, and this is accompanied by a bottom-fishing pocket pivot off the 200-day line. The next day the stock gaps on what could be construed as a pocket pivot gap-up move that finds resistance at around the 50-day moving average. This is then followed by a three-day pullback as volume dries up in the extreme 3-6 days ago on the chart. During this pullback the Force Indexes remain blue, and the daily Bongo has turned blue as well. Over the past three days the stock has regained the 50-day line with Friday’s action constituting a very actionable bottom-fishing/roundabout pocket pivot as the stock moved up and off the 50-day moving average. I’ve also noticed that Fidelity Contrafund took a big 1.2 million initial share position in the stock along with several other highly-rated funds in the most recent quarter ended September 2013. FLTX therefore becomes buyable on this bottom-fishing pocket pivot with the idea that it will hold the 50-day moving average on any pullback from here.

 

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This is how I put all the pieces together, and I’ve found it has been one way to gain an edge in what has been a difficult environment for standard-issue breakout buyers.

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 a position in BCEI, SCTY, TASR, TSLA and XONE, 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.