The Gilmo Report

October 13, 2013

October 12, 2013

Two days of panic selling washed out sellers by Wednesday, setting up a two-day wedging jack to the upside on Thursday and Friday as volume declined. With both sides of the aisle engaging in mild cooing action but no real settlement to either the government shutdown or the impending budget-ceiling expiration date of Oct. 17, the NASDAQ Composite Index slashed its way back toward its highs, as the daily chart below shows.




The S&P 500 Index, still remains further away from its September highs, but did manage to break its prior downtrend, as the daily chart of the index below shows. It, too, rose on declining volume, setting up three days of a rally attempt for the index while the NASDAQ is engaged in a two-day rally attempt. Thus, if there were a follow-through day on Monday it would have to be on the S&P 500, which is in position for such an occurrence given that Monday would be the fourth day of its rally attempt. The prior sell-off, however, has left a number of chart patterns among leading stocks somewhat broken, although the rapid correction has in some ways done its job by sifting out the stronger names.

The situation remains fluid, however, as the market appears to have priced in a solution to the government shutdown and the debt-ceiling debate with the expectation that the cooing between the warring parties over the past few days will develop into something more concrete. Over the weekend, talk of a temporary agreement that re-opens the government for several weeks as well as a temporary acquiescence to raising the debt-ceiling seems to provide at least a short-term solution. In my view the short-term aspect of such agreements simply means that the can is being kicked down the road a few weeks, and the issues will re-emerge again before year-end.




After leading stocks were hit hard on Tuesday and Wednesday, most staged lower-volume rallies off of logical areas of support. For example, Facebook (FB) bounced off the short flag it formed in mid-September before going higher after flashing a continuation pocket pivot buy point. FB pulled right down on top of this level before bouncing on Thursday and Friday as volume declined. Going into earnings which are due to be reported on October 30th, the stock may simply back-and-fill in here, and I still believe that at least partial profits can be taken into this bounce given the extent of the stock’s move since its buyable gap-up move of late July.




LinkedIn (LNKD), which I was actually short to start the week out on Monday given my prior bearish discussions of the stock, broke down and violated its 50-day moving average on Tuesday. This led to an undercut of the August 16th low that also filled the prior gap-up move in early August buyable, as I’ve annotated on the daily chart, below. LNKD is potentially developing into a late-stage failed-based (LSFB) short-sale set-up given the sharp breakdown and failure through the 50-day moving average.

Typically, and the way most of these LSFB set-ups tend to work, the stock will have a rally back up to the 50-day moving average from here, which right now is running through the 140 level. Notice how LNKD has closed in the upper part of its daily range over the past two days as volume is drying up, which tells you that selling in the stock, at least short-term, is drying up. If one is nimble one can try and trade a potential move up to the 50-day moving average on the long side, using the 224 level as a reference for a downside stop should the stock roll over again. But note that LNKD’s bounce on Wednesday came from a logical point – both on an undercut of the August 16th low and the bottom of the early August gap move, the so-called “gap-fill.”




Netflix (NFLX) also found support at a logical point, namely its 50-day moving average, but could not sustain the rally on Friday even as the market moved higher, closing in the lower part of its daily range on light volume, as we can see on the daily chart below. Will NFLX immediately recover to its prior highs if the government shutdown and debt-ceiling issues are resolved, triggering a new market rally phase? Going into earnings which are expected to be announced on October 21st, the stock may simply back-and-fill in here. NFLX is looking to announce earnings growth of 277% on a hard number of 49 cents a share, and if one has a profit cushion in the stock one could hold into earnings or take partial profits based on the stock’s recent technical breakdown. NFLX had been holding above its 10-day moving average for at least seven weeks prior to Wednesday’s violation of that moving average. So based on the Seven Week Rule, one would be justified, I believe, in taking at least partial profits.




Tesla Motors (TSLA) also bounced off of its 50-day moving average on Wednesday, but the stock was already a sell after it violated its 10-day moving average six days ago on the daily chart, below. TSLA had been obeying the 10-day moving average all the way up since it bounced off of its 10-week line in early July. It is possible, however, that this current correction, which has taken the stock down -8% from its all-time high as of Friday’s close, is the start of a more prolonged basing period for the stock. This would be normal for a leader that has had such a huge upside move, such as TSLA. Earnings are expected to be announced on November 4th, so the stock may simply move sideways until then. Ultimately, however, any violation of the 50-day moving average would be your final sell signal.




Yelp (YELP) is also wedging on its bounce off the 10-week moving average on its weekly chart, not shown here. This also coincides with its prior mid-September low and the top of its prior base, as we can see on the daily chart, below. YELP bounced off logical support at its prior low along the 61-62 price area and near the top of its prior base. But we can see that the ensuing two-day bounce off the lows has occurred on declining, or “wedging,” volume as the stock moves back up into its 10-day moving average. From here I would not be surprised to see the stock retest the 50-day moving average and the lows along the 61-62 level, particularly if the general market weakens again.




Trulia (TRLA) is another one of these failed-base types of situations following its breakdown through the 50-day moving average, as we see on the daily chart below. TRLA briefly violated the 50-day moving average on Wednesday before finding logical support along the lows of its prior base and the 40 price area. This was followed by a wedging rally back up toward its 50-day moving average that stalled Friday on light volume. This could be seen as shortable on rallies into the 50-day moving average, currently running through the 45.32 price level, but I would not expect any huge success unless you see the general market come off again. Interestingly, mutual fund ownership in the September quarter for TRLA jumped to 194 funds from 159 in the June quarter, so it remains to be seen whether this results in any support for the stock. Those 194 funds allegedly own 15 million shares of TRLA, which would be almost the entire 17 million share float and a little less than half of the 33 million total shares outstanding. TRLA is expected to announce earnings on November 7th.




YY, Inc. (YY) is an interesting exception here, and its strong recovery back up to its highs on Thursday and Friday is even more amazing considering that it had the worst sell-off of any stock on my watch list on Tuesday. As we can see on the daily chart, below, YY was decimated Tuesday on huge volume as it sold off a whopping 15% in one day! Intuitively, one might conclude that the stock would have some serious issues after a one-day sell-off of such incredible magnitude, but by Friday YY was able to recover back to its prior highs on strong volume. Thus this starts to look like an incredibly massive shake-out.

YY is expected to announce earnings on November 7th, and analysts are looking for growth of 82% on a hard number of 31 cents, according to First Call. The fundamental data on the chart below comes from a different source, and you can see that it is calling for 27 cents a share. The interesting thing about YY, and perhaps one reason why it is susceptible to a 15% sell-off in one day is that with the September quarter’s institutional sponsorship numbers now in we can see that the number of mutual funds owning the stock has only increased to 32 funds from 28 in the June quarter. Thus without much in the way of big institutional sponsorship, there is no big money there to support the stock when it starts to spiral to the downside as it did on Tuesday of this past week. In this manner YY provides a good example of why institutional sponsorship is often a key supporting component for any leading stock.




The best potential leaders following a market correction are usually the ones flashing buy signals before a market turn. In this regard InfoBlox (BLOX) has looked very good since finding support at its 50-day moving average this past Wednesday, as we can see on the daily chart, below. BLOX just touched the 50-day line and floated up to its 10-day moving average on lighter volume. It is looking a little bit “wedgy” in the process, but Friday it was able to launch higher on what was both a trend line “shakeout and breakout” situation as well as a pocket pivot buy signal as the stock gapped up slightly from its 10-day line at the open on Friday. Depending on the action of the general market, this looks very buyable, and even more so should it have any kind of pullback towards the 10-day line from here.




SolarCity (SCTY) held its 50-day moving average during this week’s volatility and had two actionable buy signals on Friday. The first, of course, was the buyable gap-up with the stock opening up around the 42 price level on huge volume, and the second was the upside follow-through as the day progresses with the stock closing above the mid-point of its double-bottom base, as I’ve highlighted on the daily chart below. I’ve been discussing some of the positive features of SCTY’s chart in recent reports, and what we see now is bona fide evidence of technical strength that is also quite actionable. While the stock is extended on the buyable gap-up, it is not extended from the mid-point of the double-bottom breakout level at 45.60 and is therefore within buyable range of that breakout price point.

I would therefore see any pullback from Friday’s close towards that level, even slightly below it, as buyable. Of course, buying SCTY here leaves one with the problem of deciding whether to hold it into earnings at the beginning of November. But that is still about three weeks away, so the stock may have further upside thrust from here, particularly when we consider the magnitude of buying on Friday with such a massive blue upside volume spike.




To some extent SCTY’s buyable gap-up move on Friday reminds me of the move Cree (CREE) had a couple of weeks ago. CREE gapped up on huge volume with a 9.57-point move that day, quite similar to SCTY’s 8.85-point move on Friday, as CREE recovered from the lows of its current pattern. I actually like CREE, but after the buyable gap-up move of nine days ago on the daily chart, below, there have been no new buy points along the way as its earnings announcement, expected on October 22nd, approaches. CREE’s new light bulbs are the subject of a new advertising campaign that I’ve seen recently on television, and this is the first time that they have started advertising their products in such a manner. Despite looking quite extended from the lows of its current base, CREE held the 10-day moving average on Wednesday as the market continued to come off.




Looking at CREE’s weekly chart, below, we can see that it closed near the peak of the weekly range as volume declined, which looks quite constructive. The stock may be setting up to break out on some sort of gap move when it is expected to announce earnings in a little over a week from now. Investors could wait until then before deciding to take a position in the stock, particularly since no bona fide buy points have occurred in the pattern since the gap-up move of nine days ago on the daily chart.




I still believe the Telecom – Fiber Optic area is one to keep an eye on, and so my focus here remains on the best-acting names. Among them, Ciena (CIEN) held along its 10-day moving average on Thursday as volume dried up, as we can see on its daily chart, and the stock did try to move higher intra-day on Friday before closing roughly flat on the day. What I find constructive about CIEN is that it did not break down as much as other leading stocks did during the early part of the week when everything was getting slammed, and on Wednesday managed to hold above its 20-day moving average, as I discussed in my report of that day. Sitting here right on top of its prior short range/flag from which it broke out six days ago on the chart, CIEN is in a buyable position with the idea that it will continue to hold the 20-day line on any further pullbacks.




Finisar (FNSR) also looks very good here on its weekly chart, shown below, as it has closed near the peak of its weekly range for three weeks in a row and found volume support at the 10-week moving average. On the daily chart, which I don’t show here, FNSR actually made a new 52-week high on increased, albeit below-average, volume. I consider the stock buyable right at current levels with the idea that it will, like CIEN, continue to hold its 20-day moving average as it did on Wednesday, the final day of the market’s early week sell-off.




U.S. Silica Holdings (SLCA) If you bought into the initial bottom-fishing pocket pivot of September 6th (see September 8th report) that occurred along the 10-day moving average at around the 24 price level or the subsequent pocket pivots along 10-day moving average that occurred around the 25 price area, you are sitting on more than a 20% profit in the stock. In this market, that has often been a prudent place to take at least partial profits, so clearly one could do that if one is so inclined. On the other hand, the stock is still well above its recent new-high breakout through the 27 price level, as we can see on SLCA’s weekly chart, below.

The stock is about 15% above that breakout point, but we know how most breakouts fare in this market environment. Thus one could take some profits with the idea that SLCA may pull back into this breakout level and offer a re-entry point or even a new entry point if one did not buy into the stock based on the pocket pivots around the 24-25 price area. SLCA hasn’t flinched a bit throughout the market’s recent bout of weakness, having gone up for nine days in a row since the pocket pivot buy point of October 1st (see October 2nd report).




Apple (AAPL) is one stock that remains a topic of interest for most investors, although I have to admit I’m not much interested in it myself. We’ve seen some of the other big-stock NASDAQ names that were, I say were, leading this market such as (AMZN) or (PCLN) (not shown) get hit by the recent market sell-off and then rebound slightly in wedging fashion, but AAPL has more or less tracked tight sideways along its 10-day and 50-day moving averages for the past three weeks, as we can see on the daily chart below. This has taken place after a two-week spin-out that sent the stock down about 12% in five days and then back up towards the $500 price level.

The question that has come up is whether a pocket pivot that might emerge here along the 10-day and/or 50-day moving average would be actionable here, and I would say that is an appropriate question to ask. Overall the stock is trying to round out the lows of a big cup formation extending back to September of last year, over a year ago, as it consolidates its July and August rally off the lows below the $400 price level. Over the past three weeks the stock has closed tightly on a weekly basis as volume has declined, which is also evident on the daily chart below. Based on the overall action, I would say that a pocket pivot would definitely be actionable here, with the idea that the stock would remain above the 50-day moving average, assuming it occurs while the 10-day and 50-day lines are still in confluence.




After the sharp break earlier in the week, most leading stocks have rebounded from logical areas of support. The majority of these rebounds have occurred on declining volume, thus are simply wedging reaction rallies in most cases. There are some exceptions, such as the action seen in BLOX and YY, for example, but for the most part this is what most chart patterns look like currently. Obviously, things got somewhat oversold by Wednesday and therefore quite obvious to the downside, leading to a logical reaction back to the upside fueled by hopes of an impending budget and debt-ceiling agreement from our various governing parties.

Essentially, the rally on Thursday and Friday was discounting such a resolution to the current crisis, such that if none is forthcoming by next week, the market could roll over again. However, I think the proper approach is to just let things develop. There could be no deal, but the market could hold up, or there could be no deal and the market could sell off. If there is a deal, there is also the possibility that the market has already priced it in and there would be a “sell the news” reaction. The fourth permutation is that there is a deal and the market goes nuts to the upside or simply tracks sideways as other considerations come into play, namely the next Fed meeting and “earnings roulette” season. I make no assumptions or predictions about whether any of these outcomes is a certainty, and I don’t believe it is necessary to do so to capitalize on whatever market trend develops from the current chaos.

Based on the severity of the sell-off early this past week, I believe that there is as much reason to be cautious as optimistic. As I wrote in my Wednesday report, a bounce was likely coming, and investors could use that to lighten up on existing positions and have some dry powder on hand as a way to decrease risk given the uncertainty or take advantage of opportunities in existing leaders or rotation into new leadership depending on where the proper set-ups present themselves.

Obviously, in hindsight, one could say that one could have “backed up the truck” and loaded up on a number of leading stocks at their 50-day moving averages on Wednesday, and the resulting bounces would have resulted in some profitable moves. Hindsight is always 20/20, and what you could have done based on what you now know about the past is not a real-time investment strategy. However, for nimble traders buying some of these stocks at the 50-day or 10-week lines was definitely a possibility, and I have to admit that I did that exact thing on Wednesday but only with a view towards making short-term trades and taking profits quickly. Thus I am mostly in cash over the weekend.

At the time of this writing, the latest budget and debt-ceiling deal has been rejected by the White House and Senate Democrats, angering House Republicans. Speaker of the House John Boehner on Saturday said, “There is no deal, no negotiations going on,” confirming that no concrete solution was at hand. Thus we will have to see what emerges by Sunday night and how the market reacts to a continuing budget and debt-ceiling log jam. Watch your stocks and watch the market’s technical action and be ready to move either way as the market reaction unfolds.


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 CIEN, FNSR, and SCTY, though positions are subject to change at any time and without notice.


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