The Gilmo Report

October 23, 2013

October 23, 2013

Over the weekend I discussed the fact that the market indexes, which have been “sticking straight up in the air,” and many leading stocks are extended, some even after odd v-shaped rallies. This includes the market indexes themselves, as we can see on the daily chart of the NASDAQ Composite Index, below. I would even have to say that the action got a little bit “frothy” for a bit. In such a condition, the market is in a position to pull back, and this is what we saw today after some higher-volume churning in the NASDAQ yesterday. Volume was up today on the NASDAQ, making for a distribution day, and I would have to say that given the action in a number of leading stocks, this is not the place to be getting aggressive. At best, the market likely needs to consolidate the sharp move off the earlier October lows, and so one should simply be watching their stocks. Orderly, constructive pullbacks here might present new buying opportunities, but with a day of churning yesterday followed by a distribution day today occurring right after the peak, investors should remain alert here.




One dynamic in this market that appears to be changing somewhat is the status of the “Four Horsemen,” and the action in three of them likely accounted for the NASDAQ’s churning day yesterday. While Facebook (FB) has merely pulled back to the top of its prior v-shaped flag breakout, the other “riders” haven’t fared so well. As we can see in FB’s daily chart, the stock has pulled back into the top of the prior flag range and its 10-day moving average on volume that was decidedly below average today. FB is still holding up and holding near-term support levels for now.




LinkedIn (LNKD) continues to flop around after briefly moving below its 50-day moving average yesterday and then closing below the line today, as we can see on its daily chart, below. LNKD did find some support off the 10-day line as it pulled back sharply following a v-shaped move back up to its highs. Going into earnings in the first week of November, I would not be looking to position trade LNKD, meaning I would not want to take a long position in the stock with the idea of holding into November and playing “earnings roulette.” At the same time, it is not necessarily clear that the stock is short here either. Thus, outside of a short-term or day-trading perspective, I would be leaving the stock alone for now.




Netflix (NFLX) has likely topped based on yesterday’s incredibly ugly reversal which sent the stock down 9.1% to close at 322.52 after opening up at 387.84 and getting as high as 389.16 before rolling over on very heavy volume. This sort of reversal is clearly bearish action, and in my view likely means that NFLX has formed at least an intermediate top. The stock closed today at 330.24, and interestingly enough is still above last week’s v-shaped pocket pivot move of seven days ago on the daily chart, below. The action in NFLX of course begs the question as to whether the stock is now shortable, but I would have to say that NFLX as a short-sale target right here, right now is a bit of a roll of the dice. It’s possible that the stock could continue to bounce from here given that it did find support at the 20-day exponential moving average, the green line on my charts, and the prior pocket pivot of seven days ago. If one were to try and short into such a continued bounce, one might be successful, with the operative word here being “might.” If NFLX has topped for good, I would expect it to develop into a bona fide short-sale set-up at some point, and for now that’s good enough for me.

Anyone who owns the stock on the basis of prior buy points I’ve discussed in my reports over the past couple of months is still up on the stock, and for now one could continue to use a violation of the 50-day moving average as your ultimate selling guide, although my preference would be to sell the stock here and get out of the way of whatever yesterday’s huge-volume, butt-ugly reversal implies for the stock going forward.




Tesla Motors (TSLA) has busted its 50-day moving average for the first time since mid-July, as we can see on its daily chart, below. TSLA’s inability to hold the 10-day and 20-day moving averages on Monday was a negative development for the stock, as I discussed over the weekend. Today’s close below the 50-day moving average sets up the possibility of a 50-day moving average violation and sell signal tomorrow should TSLA move below today’s intra-day low of 160.15.




The health of the so-called “Four Horsemen” may not necessarily be an issue for the market as a whole since it could simply be a matter of rotation as other big stocks step in to assume leadership. Obviously, weak action in LNKD, NFLX, and TSLA is bad news for those stocks, but while the “Four Horsemen” simply makes references to the fact that these four stocks, FB, LNKD, NFLX, and TSLA have been “big-stock” leaders, there is always the potential for this role to shift to other stocks.  For example, other big-stock NASDAQ names like (AMZN), not shown, and Google (GOOG), shown below on a daily chart, have stepped up recently with big buyable gap-up moves last week. AMZN is expected to announce earnings tomorrow after the close which of course brings up the issue as to whether one wishes to play “earnings roulette” with the stock. However, GOOG demonstrates that letting the report come out and reacting to the stock in the event of a buyable gap-up can work well without the risk of earnings roulette.

For those who might ask, what differentiates GOOG’s gap-up of last Friday and NFLX’s failed gap-up yesterday is the fact that GOOG’s occurred with the stock just emerging from a 21-week base while NFLX’s gap occurred after a long price run that took the stock on a more than seven-fold price move from the lows of 2012. NFLX also never established an intra-day low yesterday while GOOG established a 974 low last Friday and then moved tight sideways for two days to give on a chance to buy the stock within 3% of the 974 stop.




Apple (AAPL) is also emerging as a big-stock NASDAQ leader with a range breakout on Monday that was also a pocket pivot range breakout, as we can see on the daily chart below. AAPL is expected to announce earnings next Monday after the close, so I do not view the stock as actionable between now and then. It does, however, illustrate how the stock is stepping up to assume at least part of the role of a “big-stock” leader as the “Four Horsemen” come under pressure. I would also say that (PCLN), not shown, has also continued to act well as it consolidates its v-shaped breakout to new highs on Monday.




Some of the v-shaped rallies we’ve seen over the past week have been pulling in sharply so far this week, as the daily charts of YY, Inc. (YY) and Yelp (YELP) illustrate so well. YY broke out to all-time highs last week in a wild v-shaped rally that occurred after a 15% dive two weeks ago on October 8th. This sort of action is very difficult to buy into, and the stock has been hit with some heavy selling volume over the past three days.




Meanwhile, YELP has also reversed over the past three days after breaking out to an all-time high last Friday. Again, that type of v-shaped breakout is hard to buy into, and the action over the past three days proves why. Going into earnings, which are expected to be announced next Tuesday after the close, there is no reason to be doing anything in YELP, and I have previously suggested selling the stock as it has rallied up into the 70 price level and then waiting for earnings to come out before reconsidering the stock. We’ve had a nice gain in the stock since the pocket pivots of late August, and in this market a bird in the hand is most definitely worth two in the bush.




Lightning has now officially struck twice in Cree (CREE), which got plastered again after announcing earnings yesterday after the close. As I wrote over the weekend, I was looking for the stock to possibly gap up on earnings, which would likely set up a buyable gap-up situation, but CREE simply demonstrated why it is often better to wait for a buyable gap-up after earnings rather than trying to play “earnings roulette.”




NXP Semiconductors (NXPI) is scheduled to announce earnings today after the close, and as of the time of this writing no report has been released yet. In any case, today’s action certainly made it evident that nobody wanted to own the stock going into the earnings release, as we can see on the daily chart, below. I’ve discussed some constructive aspects of NXPI’s base in previous reports, but as with most of these situations where the date of the company’s earnings release is coming up, it is best to wait until the report is out and you have a chance to see how the stock reacts.




Santarus (SNTS), which I discussed over the weekend following its bottom-fishing pocket pivot of four days ago on the daily chart, below, has pulled back on very light volume after moving to a higher high on Monday and reversing, and I do consider this to be constructive action. So far the stock is holding above the 50-day moving average as it pulls in over the past three days on very light volume. SNTS isn’t expected to announce earnings until early November, which is rapidly approaching, so I don’t really consider this actionable for anything more than a trade going into earnings two weeks from now. If I saw a low-volume pullback into the 22.95 price level where the 50-day moving average is currently running through, I might take a shot with the idea of trading a possible 10% rally from the 50-day line and exiting before earnings. Of course, that is a short-term trade, which does not suit everyone’s taste.




The Telecom Fiber-optics stocks continue to hang in there well. Both Ciena (CIEN) and Finisar (FNSR) have been favorite stocks of mine lately, and both have recently moved to 52-week highs. CIEN, shown below on a daily chart, moved to a new high yesterday from a v-shaped formation, so today’s pullback on about average volume wasn’t too serious within the context of the pattern. CIEN found support right at its 10-day moving average which might help to “correct” the prior v-shaped rally unless we begin to see some heavier downside volume and a breakdown through the 20-day moving average at around 26.25.




FNSR is the more coherent of the two, pulling back today on average volume after last Friday’s breakout to a 52-week high coming from a nicely formed month-long base formation. FNSR could continue to pull back from here, depending on the state of the general market, but I would expect it to continue holding the prior breakout and the 10-day moving average in the 24.70 to 24.96 price area.




Taser International (TASR) is also pulling back on light volume as it tucks into its 10-day moving average here on the daily chart, shown below. Volume dried up sharply today, which looks constructive within the context of the current flag formation that the stock is trying to form before it announces earnings which are expected on October 30th before the market opens.




Netqin Mobile (NQ) is also pulling back to retrace not quite half of the sharp move it had up from the 50-day moving average, as we can see on the daily chart below. On this pullback I’m looking for support to show up somewhere along the 10-day or 20-day moving averages currently at 22.42 and 22.09, respectively.




The bottom line currently is that while I’m watching some pullbacks in leading stocks with an opportunistic eye, there is almost nothing I consider actionable currently as the market remains in a high-risk position given the sharp v-shaped rally off the lows of early October and some distribution over the past couple of days. Thus I prefer to take 20-30% partial or full profits where I have them in stocks like YELP or SolarCity (SCTY), for example, something I have advocated for some time now, and hang loose as the market consolidates through earnings roulette season. There is no reason to try and force anything, as a little patience can go a long way while we wait for optimal set-ups and new entry points to appear. 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, and TASR, though positions are subject to change at any time and without notice.

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