The Gilmo Report

November 2, 2014

November 1, 2014

U.S. investors awoke Friday to a massive upside futures jack after the Bank of Japan announced that it would be raising its monetary target to 80 trillion yen from 60-70 trillion. This sparked a 4.8% rally in the Nikkei that spilled into U.S. markets right at the open, taking the indexes to new highs, as we can see on the daily chart of the NASDAQ Composite Index, below. While admittedly quite impressive, this extremely sharp, v-shaped move to new highs certainly puts the indexes in a position to pull back sharply at any time. Members should continue to avoid getting sucked in by the movement of the indexes alone and simply focus on the action of individual stocks. The bottom line is that based on set-ups we saw last week, one should have already been long this market coming into Friday’s big gap-up move.

if one is looking to buy into the market now, then sticking to proper set-ups where risk can be managed in a very tight manner is the most prudent approach. Meanwhile, the look of Friday’s action is that of a big-volume churning “island” gap range. Because the NASDAQ opened higher than it closed on Friday, the price bar is color-coded red. The question now becomes whether Friday’s action represented an “exhaustion” type of month-end window dressing move or a breakout and the start of something about to go crazy on the upside.

 

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While the action of the NASDAQ might elicit a cautionary assessment, the action of the S&P 500 Index, shown below on a daily chart, helps to mitigate such an assessment as it made an all-time closing high on Friday as volume ballooned. The overall action is also associated with strong action in a number of rapidly emerging leading stocks. In my view it remains a matter of focusing on individual stock set-ups without getting too wrapped up in the precise action of the major market indexes on a day-to-day basis.

 

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Alibaba (BABA) continues to find resistance at the left side of its IPO U-Turn formation and the $100 century mark price level, as we can see on the daily chart, below. BABA is expected to announce earnings this coming Tuesday, November 4th, so it is primarily a matter of waiting and watching to see what the stock does after the report. If one bought on the pocket pivot nine days ago on the chart, which I discussed in my report of two Wednesday’s ago, then one might have enough cushion to sit through the report. Otherwise, I would be watching for something in the realm of a buyable gap-up move following earnings.

 

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CyberArk Software (CYBR) looks to be running into logical overhead resistance at the “mania high” it reached on its second day of trading in late September, as we can see on the daily chart below. Following Monday’s pocket pivot/flag breakout, the stock has tried to clear to new high price ground but has been turned back on successively lighter rounds of selling volume on Tuesday and Thursday. Volume dried up on Friday as the stock appears to be absorbing the selling reasonably well.

A pullback to the 10-day moving average at 31.97 such as we saw on Wednesday is the type of initial entry point one would like to see present itself. Earnings are expected on November 12th, two Wednesdays from now. Given that it is 17% extended from the last buy point around the 29 price area based on my discussion of the stock last weekend, there are no actionable buy points here for now.

 

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ReWalk Robotics (RWLK) is holding up near its highs of this past Tuesday and also flashed another stalling pocket pivot off of the 20-day moving average on Thursday, as we can see on the daily chart. I like the stock best on pullbacks to the 10-day line such as we saw on Wednesday and which I discussed in my report of that day. RWLK held the line as volume dried up sharply, setting up the rebound on Thursday.

The stock held tight on Friday as it tries to work up the right side of a new base following its mid-September IPO. Earnings are expected to be announced on November 13th. The stock acts like it wants to go higher, but we will have to see what it does before earnings arrive. If one owns the stock on the basis of my discussion in last weekend’s report, one has a reasonable cushion to sit tight for now.

 

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In my Wednesday report I talked about being opportunistic when it comes to finding an entry point for ServiceNow (NOW). Thursday’s snapback to the 10-day moving average and the top of the handle in its prior ladle-with-handle formation provided that opportunity. Sellers failed to materialize as the stock pulled down to the line on light volume. This led to a slingshot-type move to new highs on Friday. NOW is currently extended, and would only be buyable on an orderly pullback to the top of the handle and/or the 10-day moving average, such as you saw on Thursday.

 

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Trinet (TNET) also tested its 10-day moving average on Thursday, coming away with a nice pocket pivot rebound that led to new highs on Friday, as we can see on the daily chart, below. If one bought the stock closer to the pocket pivot of two Thursday’s ago, which I discussed in my report of last weekend, then one has some cushion if one decides to hold through earnings which are expected to be announced this Tuesday, November 4th.

 

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El Pollo Loco (LOCO) is expected to come out with earnings this Thursday, and that is probably why buyers were hesitant about jumping all over Wednesday’s pocket pivot off of the 10-day, 20-day, and 50-day moving average confluence. As we can see on the daily chart, below, LOCO pulled back to the moving average confluence on Friday on very light volume as buyers didn’t appear eager to step into the stock. LOCO appears to be setting up constructively in the base it has formed since the post-IPO rocket ride it had in late August. I would prefer to see what it does after earnings.

 

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Tesla Motors (TSLA) is expected to announce earnings this coming Wednesday, November 5th, after the close. This will be a highly anticipated event, no doubt, and there isn’t much of a “read” being provided with the stock. After the sales number drama earlier in the week, TSLA has moved up into the neckline area of the prior fractal head and shoulders formation. The neckline, in this case, is not necessarily a rigid line as I’ve drawn it on the daily chart, below. It could probably be drawn as a zone between the neckline I’ve drawn and the 65-day exponential moving average. This is where the stock has run into resistance over the past four days.

Since anything can happen after an earnings announcement, I see no reason to play earnings roulette with this going into Wednesday’s expected report.

 

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Proof that indeed anything can and does happen after an earnings announcement is LinkedIn (LNKD). LNKD immediately sold off well below its 200-day moving average at around 189 in after-hours trade on Thursday after announcing earnings. It then recovered and turned back to the upside as the after-hours session wore on. This led to a 10% gap-up to 224.24 at the bell Friday morning. In my view one can treat this as a buyable gap-up, using the 222.73 low of Friday’s intraday price range as your selling guide. LNDK closed about 3% above that low on Friday, which puts it within buyable range.

I might also mention that the Rule of Three appears to have worked in LNKD’s favor. Prior to its earnings report, the other two big-stock social-networking plays, Twitter (TWTR) and Facebook (FB), had been hammered after earnings. LNKD was the third to announce, and the Rule of Three faked the crowd out as the stock bucked the trend in big-stock social-networkers and went higher.

With LNKD’s earnings report obviously being viewed positively by the market, all that money that came out of FB and TWTR this week might be looking to find a home in LNKD. In my view this is a pretty simple trade: Buy it at Friday’s close or better using the 222.78 level as a very quick downside selling guide.

 

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We saw Visa (V) and MasterCard (MA) have big buyable gap-up moves on Thursday. It seems that this has made obvious the group move going on in the Finance – Credit Card/Payment Processing stocks. While the moves in V and MA this week were quite dynamic, the idea of finding smaller names in the group with the potential to be even more dynamic is intriguing, in my view.

And so my screens have picked up a couple of strongly acting smaller names in the group, starting with Green Dot (GDOT), shown below on a daily chart. GDOT pioneered the concept of prepaid debit cards, and came public back in July of 2010. GDOT gapped up on Friday in a buyable gap-up move using the 22.93 intraday low as a selling guide.

GDOT had two previous gap-ups in the pattern, one on August 1st and the other on September 24th, and each time it drifted back in, spending several weeks consolidating each of those gap-up moves. It could do the same here, but my inclination would be to use any pullbacks near to the 23 price level as buying opportunities.

 

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Blackhawk Network (HAWK) is another name in the group that is a spin-off of Safeway, providing prepaid gift, telecom, and debit cards. The interesting thing with the credit card/payment processing group is that while the big stocks in the group, V and MA, have just launched out of long bases, these smaller names in the group have already been on the move for some time. HAWK has been moving higher since it had a buyable gap-up move in late September. This was followed by another gap-up move in early October, as we can see on the daily chart, below.

That early October gap-up move did not go anywhere. But the resulting flag formation flashed a pocket pivot buy point four days ago as the stock came up and off of the 20-day moving average and up through the 10-day line. The ensuing pullback was very slight on Wednesday and Thursday as volume dried up. This looks like it wants to move higher. I consider this buyable using the 10-day line at 33.61 as a downside selling guide, with the 20-day line at 33.22 providing a secondary selling guide if one wants to give the stock more room.

Optimally, I would like to see a light-volume pullback to the 10-day or 20-day lines as buying opportunities. GDOT announced earnings on Thursday after the close while HAWK recently announced earnings over three weeks ago. This saves anyone who wants to buy these stocks from having to play earnings roulette. Between the two, HAWK might be considered the newer-merchandise play given that it came public in April of 2013.

Other less new names that are confirming the group strength include Fleetcor Technologies (FLT), not shown, which gapped up and broke out of a base on Friday. It closed at 150.56 and held right above the left side peak of the base which is at 149.92. Thus it technically remains within buying range of that breakout. My preference, however, is to go after the newer-merchandise names in the group.

 

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Given the level of interest in GoPro (GPRO), I wanted to comment on its action Friday after blowing out earnings estimates Thursday after the close. On Thursday I tweeted that GPRO was pushing through a “shakeout-plus-five” buy point at 73.38 in after-hours trade. It was quite possible to buy shares at that point based on the SO+5 set-up. I use five points in this case since it is roughly equal to 8-10% of the stock’s price at the time, although I would emphasize that SO+N set-ups are not precise, mechanical buy points,

I know everybody loves to think that investing is all about mechanistic determinism, but unfortunately that isn’t the case. I might also view Friday’s move as a pocket pivot coming up through 10-day and 50-day lines. Hence, using the 10-day line at 73.55 as a downside selling guide if one was interested in picking up GPRO shares here would be a prudent way to handle such a purchase.

Most commentators continue to pan GPRO’s business as having few barriers to entry, but I’ve heard that argument before with other big, winning stocks in the past. My view is to just operate on the basis of what GPRO’s chart is telling you, using the 10-day line as a downside selling guide.

 

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Meanwhile, GPRO’s “second cousin” Taser International (TASR) broke out of a cup base formation on Friday after a post-earnings gap-up move on Thursday, as we can see on the daily chart, below. This breakout through the top of a two-month cup formation also looks like a breakout from a giant cup-with-handle extending back to May of this year. That cup is 49.8% deep, quite deep for your average cup-with-handle formation, while the handle is 28.6% deep.

Buying volume has been huge over the past two days. Since volume is fuel, there is a reasonable chance that TASR will continue higher, perhaps into the mid-20’s, from here. The sharp move up off the lows of the handle might engender some kind of pullback here. I would consider anything down towards the 17 price level as buyable.

 

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Amazon.com (AMZN) – has rallied beyond initial resistance at the 10-day line and closed Friday right at the 20-day moving average. This is in a shortable position, but I would only be interested in shorting the stock if the market were to pullback or start to roll over from current levels.

Biogen Idec (BIIB) – reversed Friday at the 50-day moving average on heavy volume. This would appear to be a short-sale point using the 50-day line as a guide for an upside stop. Probably works best, however, if the market pulls back.

Netflix (NFLX) – gapped up on Friday to make a higher high since its gap-down break on October 16th after earnings. Volume came in at above average on Friday, and the stock looks like it wants to push towards the 200-day moving average, currently at 415.42.

Mobileye (MBLY) – still holding along the moving average confluence that includes the 10-day, 20-day, and 50-day lines as volume remains very light.

Palo Alto Networks (PANW) – stock has been unable to hold new highs above the $100 price level as it keeps getting smacked down to its 20-day moving average at 101.33.

Twitter (TWTR) – TWTR has now undercut its August 8th low at 42.51 where it is also right on top of a short five-week flag it formed in July. It is thus in a position to bounce. While that doesn’t have to happen, any such bounce would probably find resistance at the gap-down day high at 44.58 or the 200-day moving average at 45.95.

U.S. Silica Holdings (SLCA) – I discussed watching SLCA on Thursday after it had announced earnings on Wednesday after the close and was rallying as a result of a “positive” report. SLCA rallied right up into its 20-day line on Thursday before reversing hard and closing down at 43.02, more than 15% off of Thursday’s intraday high of 50.95. That was a nice one-day short-sale profit in the stock, and for now the stock is out of shorting range.

Yelp (YELP) – After attempting to break out to the downside of a short bear flag on Wednesday, the breakout turned into a fake out and YELP actually made its highest close since gapping down seven trading days ago. Resistance lies at the intraday high of the gap-down day at 62.26.

I continue to operate solely on the basis of what individual stocks are doing. In the past few days we have seen the balance of set-ups shift more towards the long side as the major market indexes move to new highs. Thus the action of individual stocks appears to confirm what we are seeing in the indexes. Therefore I am happy to be long where it counts. Meanwhile, short-sale set-ups, outside of SLCA’s perfect move into the 20-day line that reversed in brutal fashion Thursday, are less common.

Thus, given that I focus on what individual stocks are doing, this naturally brings me more onto the long side of the market, at least until and unless I start to see deterioration on the long side. Sure we’ve seen some big leaders like Facebook (FB), Twitter (TWTR), and Netflix (NFLX) take some big hits recently. But new ones are stepping up to take their place, and this is the lifeblood of any continuing rally. The set-ups are there, so go with the set-ups.

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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 positions in CYBR, LNKD, and RWLK, though positions are subject to change at any time and without notice.

 

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