The Gilmo Report

November 27, 2013

November 27, 2013


The major market indexes continue to trek higher, but the action underneath the market’s hood remains somewhat erratic and uneven. Big-stock NASDAQ names like Apple (AAPL), (AMZN), Google (GOOG), and (PCLN) have helped to propel the NASDAQ Composite Index, shown below on a daily chart, higher over the past five days in a row. With the market trading a half day on Friday to end the month, don’t expect too much excitement. Consequently, I don’t consider this a time to be making any big moves, as the action in individual stocks is far from consistent.




The place to be in this market has been in the big-cap NASDAQ names. Over the weekend I discussed Google (GOOG) as looking primed to break out of its short flag formation and the stock has spent the week so far doing exactly that as it makes new all-time highs, as we can see on the daily chart below. There was no pocket pivot along the 10-day line, but yesterday’s breakout to new highs on above-average volume was a strong move for GOOG. It is important however, to keep in mind that despite the stock’s 32-point move so far this week it still only amounts to about 3% of upside.




Apple (AAPL) has also helped to push the NASDAQ along with a breakout from a roughly four-week flag type of consolidation along its 10-day and 20-day moving averages, as we can see on its daily chart, below. Ten days ago on the chart AAPL flashed a pocket pivot buy point, as I discussed in my report of November 17th, but that didn’t go anywhere as the stock pulled back into the lows of the four-week flag. Yesterday, however, it helped to confirm the run into big-cap NASDAQ stocks by flashing another, more decisive pocket pivot as it came up and off of its 10-day line on fairly strong volume, at least for AAPL. Today’s action saw the stock follow through further on yesterday’s pocket pivot buy point to log its highest price level since early January of this year. Meanwhile, AMZN and PCLN, not shown, both moved to all-time highs today.




I’m starting out my discussion of the “Four Horsemen” today with Netflix (NFLX) because it has become something of an isolated case among these four stocks. As I see it, NFLX has now gone from being one of the Four Horsemen to becoming the “Lone Ranger.” NFLX is the only one of the four that has managed to move higher, while the rest flounder. Over the weekend I surmised that the stock looked like it wanted to go higher, and so far this week it has managed to move 4% above its 10-day moving average, as we see on its daily chart, below. So far NFLX has not flashed any volume signature sufficient for a pocket pivot, so despite the fact that it made an all-time closing high today, there have been no concrete, actionable buy points outside of just buying it along the 10-day moving average with the idea that it would continue higher without breaking below the 10-day line.




Facebook’s (FB) continuing downtrend sent the stock below its 65-day exponential moving average on Monday, as we can see on the daily chart below. It did manage to clamber back above the 65-day line on light volume, but the stock remains within a correction. Some will tell you that FB’s sell-off has been “orderly,” but it brings to mind an old joke that goes something like, “the bad news is that your stock is down 50% over the past month, but the good news is that the sell-off has been orderly!” As I wrote over the weekend, if FB is going to form a new base here, it needs to show some constructive price-volume action. So far all we’ve seen is the pocket pivot bounce off the 50-day moving average on October 31st, an entire month ago, which failed to hold. I’m certainly open to any buy signals in FB. The only problem is that so far they aren’t happening as the stock merely continues lower. In any case, assuming this isn’t headed a lot lower, I would expect to see some sort of “rounding” action along the lows that would begin to contrast with the action that so far is a well-contained downtrend channel.




LinkedIn (LNKD) continues to hover about its 10-day moving average with no clear direction. On Monday the stock looked like it was headed for a test of the early November lows but it was able to hold up and bounce back above the 10-day moving average today on weak buying volume. At best LNKD probably has some overhead to work through if it is in fact building a new base, but as a “horseman” it is somewhat headless right now as it flops around on either side of the 220 price level.




Tesla Motors (TSLA) remains the most headless of horsemen as it probes new lows and its 200-day moving average as it pulls down into the 220 price level. As we can see on the daily chart below, TSLA has come down close to the top of its prior high, tight flag formation and very near to its 200-day moving average as it attempts an oversold bounce here. For such a powerful leader from May to October of this year, it is surprising how brutal the sell-off from the peak has been. It does serve to illustrate how even with the most revered leading stocks one has to have some selling rules. Otherwise it is easy to get stuck in a bad situation, which is what TSLA has become for anyone who bought closer to the top and did not heed the 50-day moving average violation that occurred in late October or at least the huge-volume, gap-down following earnings in early November. The signs were there, but if you fell in love with the stock, which I’m guessing a fair number of investors probably did, it was most definitely unrequited love.




Over the weekend I discussed NXP Semiconductors (NXPI) as being buyable on the pullback to the 20-day moving average based on the look of its weekly chart, and it came through yesterday with a breakout to new highs yesterday on heavy volume, as we can see on its daily chart below. This was also a pocket pivot buy point, but the stock came up from the lows of the flag formation and moved off of the 20-day moving average and up through the 10-day line, so it caught some resistance up at the highs around 43. Unlike the other semiconductor stocks I’ve discussed in recent reports, Microchip Technology (MCHP) and Sandisk (SNDK), NXPI has shown the most strength as both of the others remain stuck in sideways ranges with no new buy points emerging. NXPI’s show of strength yesterday is more constructive.




Time Warner Cable (TWC) continues to be buoyed by talk of an impending buyout by Charter Communications (CHTR) and Comcast (CMCSA). TWC followed-through on last week’s rumor-fueled, buyable gap-up to move higher yesterday. As we can see on the daily chart, below, TWC picked up some strong buying interest in the form of big-volume and today held tight as volume receded. It would appear that some sort of buyout is going to happen here, the only question is at what price. In the meantime, the risk is that such a buyout would be deemed to be in violation of anti-trust law.




Discovery Communications (DISCA) continues to feed on the good vibes permeating the media/cable stocks thanks to the TWC buyout rumors, flashing a second pocket pivot buy point along the 10-day moving average within the past four days, as we can see on its daily chart below. DISCA might strike one as a boring stock of sorts, but it is showing far more robust sales growth in the most recent two quarters relative to its historical norm. Sales growth in the past two quarters came in at 30% and 28%, respectively, while historically its sales growth has been mostly in the single-digit and very low double-digit range. Meanwhile earnings growth in the last quarter came in at 25%, and estimates for next quarter call for earnings growth of 49% on a hard number of 91 cents a share.




Splunk (SPLK) is back-tracking a bit here following last Friday’s buyable gap-up move with volume drying up, as we can see on the daily chart below. I would prefer to see the stock holding tight sideways or drifting slightly downward with volume drying up, so this current action over the past three days strikes me as a bit on the “wedgy” side. A low-volume pullback to the 70 price area would serve to correct this. But if you own the stock on the basis of the BGU, you are still using the 69.01 intra-day low of last Friday’s BGU day as your downside selling guide.




InfoBlox (BLOX) helped illustrate the dangers of holding stocks through “earnings roulette” announcements, as the stock gapped-down and blew apart on a brutal -28.7% swan-dive, as is quite evident from the daily chart below. BLOX actually flashed a pocket pivot buy point yesterday before the earnings announcement, but while in the past pocket pivots before earnings announcements were often positive clues, there was no such luck this time around for BLOX. Just another example of the treacherous environment this market still poses on a stock-by-stock basis even as the indexes go higher.




No doubt most Gilmo members saw the big gap-up move in Workday (WDAY) yesterday, but I have to say I have a couple of issues with this action. First of all, as we can see on the daily chart below, WDAY’s gap-up came from a position right off the lows of the base. While volume was huge, it wasn’t enough to propel the stock to the prior highs which provided some stiff resistance for the stock today as well. I would have preferred to see WDAY gap up and clear out to new highs, because in its current position it looks like it will need to work sideways here for a bit before  breaking out to new highs, assuming the BGU (buyable gap up) doesn’t fail. WDAY allegedly is doing a great job growing their sales. The only problem is that they aren’t expected to make a profit until 2018 when analysts look for the company to earn 60 cents a share. Thus WDAY is currently selling at 136.7 times 2018 earnings. Most likely, the move was fueled by massive short-covering as the stock was showing short interest of 3,837,543 shares as of November 15th, just over 38% of its 10 million share float.




I haven’t discussed Gogo (GOGO) since I last felt the strong upside move could be sold into as one waited for the stock to set up again. Catching up with the stock’s current action, we can see that it looks to be building a flag formation here as things simmer down a bit and volume dries up in the extreme, as we can see on the HGS Investor daily chart below. There is also potential for the stock to close Friday in such a manner that it forms a three-weeks-tight formation on the weekly chart, not shown. GOGO is tracking right near the 10-day moving average which sets up the possibility of a pocket pivot buy point somewhere in here, so keep an eye peeled for that should it occur.




Among short-sale targets, Trulia (TRLA) undercut its prior 33.43 low yesterday, as we can see on its daily chart below. Selling volume in the stock seems to be waning, so I would not be surprised to see another rally back up to the neckline of the head and shoulders formation. With the undercut of the prior 33.43, the stock has reached my downside price objective on this latest downside move from the neckline over the past eight days.




The market remains something of an odd affair as a lot of leading stocks remain in corrections, sell-offs, or potential base-building activity. Former leaders like Yelp (YELP) and Qihoo 360 Technology (QIHU) illustrated this on Monday when both got whacked on heavy selling volume as they either move to lower lows (YELP) or test prior lows (QIHU). A few actionable buy points have emerged in a handful of stocks recently, but I have to wonder what the mixed action under the market’s hood might be telling us. For now I continue to take things on a stock-by-stock basis and will reassess in my upcoming weekend report given that we only have the short trading day on Friday to get through before then. 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 held a position in NFLX , though positions are subject to change at any time and without notice.

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