The Gilmo Report

October 16, 2013

October 16, 2013

What is basically a last-minute “kick the can down the road” deal in the Senate that will allegedly make it through the House this afternoon as I write helped to stabilize the markets and trigger a big rally today following yesterday’s volume sell-off. Early in the day yesterday the markets were looking forward to an imminent deal coming out of Washington, but when it appeared the situation was deteriorating again the market expressed its disappointment by turning tail to the downside. The question now is, pending the House vote after the close today, does the market rally further on the news or does it become a “sell the news” situation.

My view remains as it was over the weekend, which is to take some profits into the bounce, put some cash in your pocket, and only seek to deploy that cash on opportunistic pullbacks or in buy points in emerging leading stocks. With the NASDAQ moving to a new 13-year high in a wild v-shaped move and many stocks mimicking this v-shaped action, chasing rallies is not advisable. However, focusing on the actionable situations that I see currently and which I discussed in my weekend report, it was possible to make decent progress over the past three days without having to chase rallies. So far, the NASDAQ daily chart, below, looks like a big “shakeout & breakout” move, but I would not be surprised if the index paused here to digest the sharp move off the lows in a type of “sell the news” pullback.




The lagging S&P 500 Index, meanwhile, is lagging a little less as it moves up to its third-highest daily close in its history, as we can see on the daily chart, below. To reiterate, the real question at this juncture is whether a final resolution to the budget and debt-ceiling logjams, even if it is a temporary “kick the can down the road” deal, leads to more sustained upside in the indexes. With the Fed meeting next week, I think any possibility of them announcing a taper is off the table, but the market is still working through “earnings roulette” season. After-hours as I write I’m seeing International Business Machines (IBM) and eBay (EBAY) getting smacked to the downside after announcing earnings this afternoon, so these stocks are certainly not going to benefit from any final budget and debt-ceiling deal tomorrow morning.




Our “Four Horsemen” provide something of a mixed picture currently, as Facebook (FB) remains the lead horse as it moves right back up to its all-time highs. As we can see on the daily chart below, volume was light on this move back up to the highs, and my guess is that the stock remains in something of a range here as we approach its earnings announcement, scheduled for late October.




The horse at the back of the pack remains LinkedIn (LNKD), shown below. Over the weekend I discussed LNKD as a long trade on the reaction rally following the prior undercut of the August 16th low which coincided with the stock filling the gap that occurred on August 2nd. With the stock rallying right up to my upside price objective at the 50-day moving average, this short-term long trade is now complete. We now revert back to looking at the stock as a short-sale target now that it has staged its first rally back up to the 50-day moving average after its base-failure eight days ago on the chart. LNKD streaked higher yesterday on strong volume but today stalled out right at the 50-day line on lighter volume that came in at right about average. The stock could continue a little higher through the 50-day line, before potentially rolling over again, but if I’m going to try and short this here I would use the 50-day line at 240.50 as a hyper-stop, particularly if the market remains in an uptrend. If the general market pulls back here on a “sell the news” type of move, then LNKD might push lower from here.




Netflix (NFLX) announced that it is in talks to have its app placed on the cable set-top boxes of several cable services on Monday, sparking a sharp upside move on very strong volume that was more than twice normal, as we can see on the daily chart below. Monday’s move also qualifies as a pocket pivot, but the one issue here is the fact that it occurred on a v-shaped move. However, NFLX has spent the last two days holding tight sideways as it spends a little time correcting the v-shaped defect. NFLX announces earnings next week, so it’s not clear that one should enter an initial position in the stock here going into earnings.




Tesla Motors (TSLA) gapped up yesterday after a brokerage firm raised their rating on the stock to “outperform” with a $240 price target. As we can see on the daily chart, the gap-up move did not hold, probably because there simply wasn’t much volume on the move. Volume came in at just about average, thus the move was never strong enough to qualify as a buyable gap-up. If anything, it strikes me a little bit as a possible bull trap, and no upside follow-through was seen in the stock today as it drifted lower on light volume, even as the general market was rallying sharply to the upside.




SolarCity (SCTY) was one actionable idea I discussed over the weekend, and it has done very well over the past three days, as we see on its daily chart, below. After last Friday’s buyable gap-up move that was initially buyable at around the 42 price level and which later in the day became a buyable breakout from a double-bottom formation at the 45.60 price level, SCTY paused for two days, testing the top of the double-bottom breakout yesterday, before launching to an all-time high today on very heavy volume. Obviously, the stock is well-extended at this point, but it was quite actionable over the past two days as it pulled back slightly and tested the breakout through the mid-point of the double-bottom formation. As it turned out, SCTY has acted very much like Cree (CREE) did following its gap-up move from the lower reaches of a big, ugly cup base a couple of weeks ago, something I discussed in detail in this past weekend’s October 13th report.




In my weekend report I also discussed last week’s trendline breakout in InfoBlox (BLOX), shown below on a daily chart. Given that the stock had rallied sharply off of its 50-day moving average coming into Monday of this week, we were looking for a pullback in the stock as a buyable move per my discussion over the weekend. BLOX pulled right into the top of Friday’s trendline breakout over the past two days at around the 43 price level as volume also declined, setting up today’s launch to all-time highs. Thus BLOX was quite actionable over the past two days as one of two primary long ideas I discussed in my weekend report of October 13th. I suppose to some extent both SCTY and BLOX provided actionable long situations that could have been handled solely on the basis of their price/volume action while ignoring the noise of the general market as it flapped around in the changing news wind blowing out of Washington – good examples of how one can play the market as a market of stocks rather than a stock market.




It appears that we are seeing the leaders in the fiber-optic space assert their status as both Ciena (CIEN) and Finisar (FNSR) maintain a certain quiet coherency amidst all the market noise. CIEN, shown below on a daily chart, remains in a buyable position as it holds the short flag breakout of not quite two weeks ago and slowly trends higher along its 10-day moving average. At this point I would consider any constructive pullbacks to the 26 price level or lower as buyable. The 20-day moving average, which has served as support on two prior pullbacks over the past month, should continue to provide a solid line of support for the stock if the stock is to remain viable. So far it simply appears to be quietly setting up to move higher at some point in the near future.




Finisar (FNSR) also continues to move in a relatively tight sideways pattern as it flirts with its 52-week highs. As we can see on the daily chart below, FNSR is holding up at the top of its five-week range, and as it quietly ignores all the wild gyrations of the general market it too appears to be setting up for new 52-week highs in the near future.




On FNSR’s weekly chart, below, we can see the tight closes along the mid-23 price level prior to last week’s supporting action at the 10-week moving average. Last week’s action can also be interpreted as a breakout on the weekly chart, despite the fact that there is no high-volume breakout on the daily chart. Weekly volume was reasonably above-average last week as the stock made its highest weekly close since the week of May 27, 2011. On this basis, the stock is potentially buyable right here, but I would certainly be all over any constructive pullback below the 24 price level down to the 20-day line at 23.46. However, based on the stock’s coherent action, I might expect it to hold the 10-day line at 23.85. In any case, FNSR remains an actionable idea that is still actionable.




I also like the position of NXP Semiconductors (NXPI) here as it consolidates its recent rebound after shaking out below its 50-day moving average. As we can see on the daily chart, the stock has come up in a v-shaped move and then constructively consolidated and corrected that v-shaped move as it pulled back into the 50-day line on light volume today before closing to the upside.




NXPI’s weekly chart, below, shows a constructive six-week base-in-the-making as it moves tight sideways over the past six weeks. NXPI showed decent supporting action of off the 10-week moving average last week after the general market took the stock down from its pocket pivot buy point of nine days ago on the chart (see October 6th report). NXPI is scheduled to announce earnings on October 23rd, so it may not be until then that we see some sort of buyable move in the stock such as a standard base breakout or buyable gap-up. However, it is one to keep an eye on, in my view.




Having played Taser (TASR) way back in the 2003 when it had a big price move during a time of heightened security consciousness following the 9/11 terrorist attacks on the World Trade Center, I have to admit I was skeptical when I first saw it pocket pivot down around the $9 price level about two months ago, and I was skeptical again when I saw the stock gap-up in September 16th in pocket pivot/buyable gap-up maneuver at around the 12.50 price level. TASR was crazy on the upside back in 2003, and I sometimes have a hard time believing Cinderella will strike twice. In any case, those two buy points occurred during a 96% price run from the August pocket pivot to the peak in early October, as we can see on the daily chart, below.

Going into earnings next week, TASR has had a sharp pullback as sellers rushed to take profits last week and the week before, something that is understandable within the context of the prior move. Note, however, that the stock held the “magic” 20-day exponential moving average, the green line on my charts, on the pullback and has continued to hold that green line as it has drifted back above the 10-day moving average over the past week with volume drying up sharply. The stock is now holding tight along the 10-day moving average, and to my eye has the look of a high, tight flag type of thing here. My premise here is that the stock might move higher going into earnings which are scheduled to be announced on October 30th as long as it can hold the 20-day moving average.

By early next week the stock will be in position for a possible pocket pivot, but it could start moving higher before then. TASR’s business is coming on again as it moves forward with what it calls its platform. The new platform is “a secure digital evidence management solution allowing law enforcement agencies to connect all of their digital data, such as video, images, audio, reports, and records, into one integrated system. This along with some new “smart” Taser weapons is driving the “N” for TASR in terms of new products. If it can move back up to the highs within the next couple of weeks, then perhaps we can investigate the idea of holding through earnings.




Given the position of the market and most leading stocks which have formed sharp “V” recoveries with no bona fide, actionable buy points in recent days, I am focusing on the situations that I currently see as buyable. A number of stocks I’ve discussed in recent reports have rebounded with the market, such as Biogen Idec (BIIB), Celgene (CELG), Gilead Sciences (GILD), Regeneron Pharmaceuticals (REGN), Yelp (YELP), YY, Inc. (YY), and others, with some having gone on to new highs, but none of these have issued new buy points outside of the pullbacks to the 50-day moving averages which occurred two Tuesdays ago. Thus I don’t consider them to be in the “actionable” category. In the midst of the market’s correction, the actionable buy points are where I prefer to focus for now as we move into the thick of fall “earnings roulette” season.

In the meantime, I would not be surprised to see the market back-and-fill here a little, but then by focusing on the market not as a stock market but as a market of stocks, one can remain somewhat insulated from the more noisy aspects of this market. 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 positions in BLOX, CIEN, FNSR, LNKD and SCTY, though positions are subject to change at any time and without notice.


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