The Gilmo Report

October 20, 2013

October 18, 2013

With the market streaking to higher highs, the recent budget and debt-ceiling “crisis” turns out to be little more than a massive “shakeout & breakout,” as we can see on the daily chart of the NASDAQ Composite Index, below. Friday’s gap-up on volume that was lighter than the prior day but still above average looks quite frothy, and most leading stocks exhibited similar action. While a pullback could occur at any time, of course, the trend is up, and the chart below needs no annotations. The S&P 500 Index, not shown, joined the new-high party on Thursday by breaking out to a new high, and it too gapped up on Friday as it continues to streak off the lows of early October.




With the U.S. Government showing no inclination to reduce spending and raising the debt-ceiling on an as-needed basis as determined by the President until early next year, the government’s battle cry remains “all the money that’s fit to print!.” Gold, as represented by the SPDR Gold Shares (GLD), shown below on a daily chart, responded on Thursday by gapping up sharply and breaking through its prior declining tops trendline. There are no concrete buy points here for either of the precious metals, but with the continuance of QE and an expanding pile of U.S. debt pretty much baked into the cake, we could see a rally in the metals at some point. For now there are no actionable buy points in the GLD or its white metal cousin, the iShares Silver Trust (SLV), not shown.




Big NASDAQ stocks helped get Friday’s nitro-rally in the NASDAQ going as Google (GOOG) came out with a strong earnings report on Thursday after the close and staged a massive-volume buyable gap-up move, as we see on its daily chart below. The intra-day low on Friday was 974, which would serve as a selling guide for the BGU.


GR102013-GOOG (AMZN), moving in sympathy to GOOG, also staged a buyable gap-up move, as we see on the daily chart below. The intra-day low of Friday’s gap-up move in AMZN was 316.75, and the stock closed at 328.93, which puts it just within a 5% buyable range. The only issue with buying into this move is the fact that AMZN announces earnings next week, so buying the stock here would imply that one must be ready to play “earnings roulette.”




For the most part, the “Four Horsemen” kicked into gear as well, with the lead horse, Facebook (FB), gapping up to all-time highs on a 20% increase in volume. Friday’s gap-up move basically churned around on heavier volume, somewhat reminiscent of the last gap-up move FB had back in the latter part of September, as we can see on its daily chart below. Back then the stock was able to move higher despite stalling into that particular gap, and Friday’s has the look of a “doji” which could morph into a so-called “evening star” top if the stock were to gap down on Monday. FB is expected to announce earnings at the end of October, and Friday’s move was clearly in sympathy to GOOG’s move, but did not result in any further upside in the stock following the gap-up at the opening bell. If you own the stock, I don’t think there is much to be concerned with as the stock remains well above its 10-day moving average.




Interestingly, if we focus on FB’s weekly chart, below, we can see that last week constituted the stock’s first pullback to the 10-week moving average since its buyable gap-up/breakout move in late July. As well, because the stock closed in the upper part of the weekly price range on heavy volume it was also a supporting week. This week’s move created a breakout from a short two-week flat formation, which may be of insufficient duration to call a high, tight flag, but it is a nice bounce off the 10-week line followed by a move to new highs.




LinkedIn (LNKD) was able to clear its 50-day moving average on Friday in a gap-up move that also occurred in sympathy to GOOG’s move, as we can see on the daily chart below. LNKD ran into some resistance at the 50-day line on Thursday, but thanks to GOOG it found the impetus to push it well through the line and back towards its highs. The gap-up move on Friday occurred on a 25% increase in volume, thus was not sufficient for a buyable gap-up move. Nevertheless, LNKD’s ability to regain territory near its old highs is impressive, and it serves to illustrate how a late-stage failed-base short-sale set-up’s first breakdown through the 50-day moving average is generally your only actionable move on the short side with the stock. After that an LSFB situation will rally back up to or above its 50-day moving average several times before breaking down again, thus trying to short the first rally back up into the 50-day line becomes problematic, particularly in a general market that is trending strongly to the upside. As well, while normally we don’t like to see these v-shaped rallies on a breakout should LNKD move to new highs next week, in the current environment it has been true that a number of v-shaped rallies have broken out to new highs, including stocks like Yelp (YELP), Five Below (FIVE), YY, Inc. (YY), Pandora (P), Yandex (YNDX), and Qihoo 360 Technology (QIHU), just to name a few. Thus LNKD could just as easily do the same, in my view.




Netflix’ (NFLX) pocket pivot from a v-shaped formation on Monday was able to back-and-fill for a couple of days on Tuesday and Wednesday, helping to correct it’s v-shaped move, as I discussed it might in my report of this past Wednesday. While NFLX did not gap up in sympathy to GOOG, it was able to move an entire one percent higher as it made a new all-time high. NFLX also provides us with another example of a stock breaking out to new highs from a supposedly “suspect” v-shaped formation. NFLX is expected to announce earnings on Monday after the close, so we’ll see just how “suspect” this latest breakout to all-time highs is.




Tesla Motors (TSLA) is something of the laggard among the “Four Horsemen,” but to its credit it is only all of 5% down from its all-time high. After Tuesday’s gap-up move, which was something of a mini-bull-trap as I discussed in my report of this past Wednesday, TSLA has drifted in slightly over the past three days as volume dries up, which we can discern on the daily chart below. This looks constructive, and if the stock can hold above its 10-day and 20-day moving average confluence at around 279 and change, it may make another run for its highs before announcing earnings in early November. As an auto-maker, TSLA did not participate in Friday’s “Google fest” that saw a number of internet names go nuts on the upside, but that is not necessarily a bad sign for the stock.



If we examine TSLA’s weekly chart, below, we can see that it has actually held in tight over the past three weeks, forming something of a three-weeks-tight formation as it holds support along the 10-week moving average. During the prior two weeks which are red weeks on the chart, the stock closed mid-range or better on heavy volume, which can be interpreted as supporting action. With earnings expected to be announced after the first week of November, TSLA may be setting up for another earnings-based move.




Finisar (FNSR), one of the fiber-optic stocks I have been discussing in recent reports, finally pushed to a new 52-week high on Friday, up 5.97% on a big 147% increase in volume. I don’t really consider this a base breakout since, as I discussed in my report of this past Wednesday, I considered buyable in the low-24 price area given that it had already broken out on its weekly chart. Thus one could have gained an early entry to Friday’s strong move which I consider to now be slightly extended from the true buy point close to 24. Watch for any pullbacks below or down towards the 25 level as being buyable. Ciena (CIEN), not shown, did not have a big move on Friday but it continues to edge higher along its 10-day moving average, as I discussed in my report of this past Wednesday, and the tight action seems to imply that it will soon move higher as well.




Taser (TASR), which had been moving tight sideways along its 10-day moving average with volume drying up, as my introductory discussion of the stock in this past Wednesday’s report pointed out, launched higher on Thursday with volume picking up, as we can see on its daily chart below. This, however, was too early for a pocket pivot buy point, but in my view it was possible to buy the stock closer to the 10-day moving average on the basis of its very tight price action along that line with volume drying up sharply. TASR is expected to announce earnings at the end of October, and as long as the stock can hold the 10-day line, currently at 15.07, it remains quite viable.




SolarCity (SCTY) continues to streak higher, as we can see on its daily chart below, but in my view one could consider taking at least partial profits as the stock becomes extended going into earnings which are expected to be announced in early November. There’s not much to say here except that it was a great play five days ago after I discussed the big breakout through the 45.60 mid-point peak of the double-bottom base last Friday which also started that day out as a buyable gap-up at around the 42 price level. If you bought anywhere in that range you have at least a 25%-plus gain in the stock in all of 3 days. My guess is that we will see some profit taking going into earnings.

Some ask whether one should use the so-called “eight-week rule” whereby a stock that goes up 20% or more in 2-3 weeks after breaking out must be blindly held for at least eight weeks. I don’t really subscribe to this rule, and you can go check out a chart of Acadia Pharmaceuticals (ACAD), not shown, for a nice illustration of why I don’t. In general it is sufficient to operate on the basis of one’s selling rules alone, and I do not subscribe to any rules that require a sort of “blind” approach. In any case, solar stocks, including names like Sunpower (SPWR), First Solar (FSLR), and Canadian Solar (CSIQ), have continued to act well, and it is interesting to see that the one that looked the ugliest a couple of weeks ago, SCTY, has morphed into the most powerful. SCTY provides ready proof that things can change very quickly in the market, for sure.




In my report of October 6th I discussed the fact that Santarus (SNTS) may be trying to round out the lows of a base after an initial but premature pocket pivot back in late September, as we can see on the daily chart below. That pocket pivot back on September 26th was premature because the stock had not had time to “round out” the lows of its base. At that time it was just starting to recover from the ultimate low of a downtrend that lasted throughout most of August and September. Now the stock is beginning to show “rounding out” action as it first undercut the 21 lows last week and then recovered to post a bottom-fishing pocket pivot on Friday as it moved above the 50-day moving average and the peak of the sideways lower-base range it built from the beginning of September until now. SNTS doesn’t announce earnings until early November, but I think this bottom-fishing pocket pivot is buyable with the idea that the stock should continue to hold the 50-day moving average, currently at 23,14, on any ensuing pullback.

Last week I suggested taking some profits in Silica Holdings (SLCA) given its roughly 30% move since flashing several pocket pivots along its 50-day and 10-day moving averages in September. SLCA went through some wild intra-day gyrations on Thursday after a broker downgraded the stock, and after swinging around in a five-point (!!!) range throughout the day it finally ended up closing roughly flat on the session. SLCA announces earnings in a couple of weeks, and in my view the stock needs to spend some time moving sideways, thus I would be willing to let it settle down here and perhaps flash a new buy point, probably after it announces earnings.




Cree (CREE) is expected to announce earnings this Tuesday after the close, and so far it has held tight as it builds a boxy-shaped cup-with-handle formation on the weekly chart, shown below. CREE edged up to a new all-time closing weekly high on Friday. So far the stock has been able to hold above its 10-day moving average on the daily chart, not shown, which is constructive going into this week’s earnings announcement. In fact, CREE just missed posting a pocket pivot buy point off the 10-day line on Friday, trading 2,759,700 shares on the day, just below the 2,996,200 of downside volume traded eight days prior to Friday. Since my next report won’t come out until Wednesday, the day after the expected earnings report, I would be watching closely for a possible buyable gap-up move in the event CREE reacts positively to its earnings report, which I think stands a reasonable chance of occurring based on the recent action. Keep an eye on this Tuesday afternoon and Wednesday morning.




The last time I discussed Netqin Mobile (NQ) in my report of October 6th I suggested that it might be buyable along the 20-day moving average as it pulled back down on top of its prior base that it had formed through most of August and early September. Thanks to last week’s market spin-out, NQ dropped below through the 20-day line and ultimately below its 50-day moving average where it closed eight days ago on the daily chart below. There was some supporting action off the lows as the stock did close in the upper half of its price range, and the next day it clambered back above the 50-day moving average on light upside volume.

Watching other stocks rebound strongly as NQ sat on its 50-day moving average, I decided to test my “ugly duckling” theory which basically postulates that when the market is getting hit, and everything looks about as ugly as it can, it will rebound. In hindsight, we can see that this is exactly what happened following last week’s spin-out. In any case, I decided to take a position in NQ at the 50-day line, and sure enough, the stock has moved back up to new highs, breaking out of a jagged two-week flag on heavy volume over the past two days, as we can see on the daily chart below. This looks very strong, and I would be looking to buy the stock on any pullbacks into the 23-24 price area. NQ is expected to announce earnings in the second week of November, so the stock could easily have more upside going into that earnings release.




I’ve been keeping an eye on Lumber Liquidators (LL) which I last discussed in my report of September 29th after the company had been raided by the Immigration and Customs Enforcement and the U.S. Dept. of Fish & Wildlife Service for allegedly illegally importing wood supplies. Back then I discussed letting things settle out in the stock. After the big support we saw off the 50-day line the day of the news, as the daily chart below shows, the stock then retested that low last week as the market sold off hard, and has since recovered to a point back above both its 10-day and 20-day moving averages. The stock is now moving tightly along these moving averages as volume remains below average, and it looks to me like it is setting up to go higher from here. LL is expected to announce earnings on Wednesday before the open, so it is not clear to me whether I would want to buy the stock before earnings. A pocket pivot move on Monday or Tuesday of this coming week could be a precursor to a positive earnings announcement, but if one does choose to play “earnings roulette” with LL, be sure to assess your risk and position size carefully.




With the market sticking straight up in the air there is not a lot that is actionable, although as “earnings roulette” season progresses we have to be on the lookout for buyable gap-ups following positive earnings releases. These could turn out to be prime opportunities if you are alert to them, and I am particularly interested in CREE’s earnings announcement which is expected Tuesday after the close. Other than that, I hope that Gilmo members have been able to capitalize on the outstanding opportunities we had in stocks like FNSR and SCTY this week, among others. When you consider it, if all you owned this week were these two stocks, you did pretty well, without having to worry about buying into v-shaped rallies, although admittedly most of these have worked, surprisingly enough. With the sharp upside move we’ve seen in the market and leading stocks this week, the next pullback may help to produce fresh entry points, so 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 CIEN, FNSR, NQ, SNTS, TASR, and TSLA, though positions are subject to change at any time and without notice.

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