The Gilmo Report

September 11, 2013

September 11, 2013

With the market now in a “confirmed rally,” the crowd now knows that it is “safe” to buy stocks. In my view, now that the crowd knows this, the market is likely primed for a little pullback and consolidation given that most leading stocks I’ve been discussing over the past week or two are extended to some degree at this point. Today saw the Dow and the S&P 500 move higher while the NASDAQ Composite Index, shown below on a daily chart, did a little backing-and-filling as it tested Monday’s breakout level. Volume was lower, but declining stocks on the NASDAQ did outnumber advancing stocks, 1295 to 1206.




Apple (AAPL) led the NASDAQ to the downside after failing to announce any “killer app” products yesterday when it unveiled its usual mix of product updates, including the new iPhone 5c. Yesterday’s high-volume reversal was not a good thing to see if you happened to be a holder of AAPL shares, and this morning’s massive-volume gap-down and move toward the 200-day moving average, as we can see on the daily chart below, could have been anticipated based on yesterday’s selling and price reversal.




AAPL’s recent rally off of its extreme late-June lows has been a factor in the NASDAQ’s recent outperformance, so with AAPL working in reverse today the S&P 500 was able to take up some of the performance slack. The S&P 500, shown below on a daily chart, was able to extend its recent move above the 50-day moving average, albeit on volume that was lighter than yesterday’s. My stance currently is that with so many leading stocks having had strong moves over the past week or so, when I first began getting bullish on the market again, we could easily see a little bit of sideways consolidation. This is especially in light of the Fed policy announcement looming next Wednesday, Sept. 18th. Thus I see no reason to make any aggressive moves on the long side. With a number of stocks acting well, it is simply a matter of letting things develop and looking for logical pullbacks to areas of support or new buy points in the form of pocket pivots to add to existing positions. Steady as she goes.




Facebook (FB) is following a fairly steady uptrend along its 10-day moving average as it made a new closing high today, exceeding the $45 intra-day high it achieved on its IPO debut day last May of 2012 by 4 cents today. The move came on above-average volume, and so far FB has shown no new buy points since its breakout through the 39.32 August high nearly three weeks ago. It has yet to even touch its 10-day moving average since then, and so has not had any continuation pocket pivots on the way up.




Netflix (NFLX) also continues its uptrend, moving sharply higher yesterday in its biggest point move since its last gap-up move on April 23rd of this year. NFLX surged 6% yesterday before pausing to pull back today. Yesterday’s action just missed being a buyable gap-up since the 40-day average true range as of Monday’s close was 8.25, and the stock opened up 5.96 points coming up from a 291.54 close on Monday to an opening price of 297.50 on Tuesday. If we calculate 0.75 times the 8.25 40-day average true range number, we determined that a buyable gap-up move would have required opening gap of 6.43 points. A 50-cent move in NFLX is a wiggle, so the situation is somewhat unclear. Certainly, one could always test the move as a buyable gap-up, using the 296.81 intra-day low of yesterday’s price range as your stop.




LinkedIn (LNKD) tightened up nicely along its 10-day moving average over the past couple of days with volume drying up, as we see on the daily chart below, and the stock was able to clear to a new all-time high today on a slight pick-up in volume. Volume came in below average, but coming on the heels of last Thursday’s pocket pivot buy point, this is constructive action to see in LNKD.




Tesla Motors (TSLA) got hit with some selling volume on Monday, as we see on its daily chart, below, but was able to hold at the 20-day exponential moving average, the green moving average on the chart. The stock bounced yesterday on below-average volume and today turned downward on a retest of the 20-day line and Monday’s pullback as volume dried up. So far TSLA has been able to hold the top of its ascending base breakout of mid-August at 158.88, and if it is to remain viable I would expect it to continue to hold this level and/or the 20-day moving average on any continued pullback. Otherwise you are looking at the next level of support at the 50-day moving average, currently at 141.36.




Trulia (TRLA) has now moved up to the top of its base where it ran into some stiff selling back in the earlier part of August. Given that the stock has come straight up from the bottom of its base, it is entitled, in my view, to back-and-fill here as it sets up for a run at all-time highs. Today’s move came on strong, above-average volume and took the stock to an all-time closing high. I like the stock on pullbacks into the 46 price level from here.




Splunk (SPLK) has also continued higher as it achieved an all-time high today after moving up sharply from the short three-day flag it formed after last week’s buyable gap-up move, as we see on the daily chart, below. Notice that the stock has been making new highs as volume has declined, which argues for some consolidation here as the stock digests its recent strong gains. I would like to see the stock hold in tightly here along the 60 price level or at least give the 10-day moving average, currently at 55.53, some time to catch up to the stock. For now SPLK is acting well and I don’t see any reason to be selling the stock given that it is in new high price ground with no discernible resistance above.




Yelp (YELP) also continues higher here, as we can see on its daily chart, below, and it also made a new all-time closing high on above-average volume. Since we were on to YELP at the 53-54 price level when it flashed a couple of pocket pivot buy pints along its 10-day moving average over a week ago, I would like to see a pullback down toward the 60 level and the top of its recent and obvious base breakout as a new entry point for the stock. In my view the stock is actually fairly extended from what I considered to be a trendline breakout coming up through the 54-55 level, as I’ve drawn on the chart. To me this is the actual base breakout, and buying on the breakout through the 60 level, while not entirely bad, is still buying a little high as I see it. However, from here, a pullback to the 60 price level would be a spot to pick up shares.




YY, Inc. (YY) is also pulling back towards its original pocket pivot buy point of last Thursday, which I discussed in this past weekend’s report. As we can see on the daily chart, this led to a trendline base breakout on Monday that in turn led to a standard new-high base breakout yesterday. However, that breakout failed today as the stock pulled in on above-average volume. YY is a very volatile stock, and I am more comfortable buying this on a pullback coming down towards the trendline breakout in the 44-45 price region. I’ve discussed many times the advantages of buying stocks on pocket pivots as they are rounding out the lows of new bases vs. the standard technique of buying base breakouts, and this has paid off in a number of stocks I’ve discussed over recent weeks.




Fleetcor Technologies (FLT), shown below on a daily chart, broke out to a new all-time high today but ran into some selling as it stalled on heavy volume. In my view this points out the risk in buying into strength. Buying the stock along the 20-day moving average last Friday was a better spot to come into the stock since that pullback also took FLT right back into its prior flag breakout of two weeks ago. These are the types of pullbacks to watch for in leading stocks.




The mortgage servicing “twins,” Northstar Mortgage Holdings (NSM) and Ocwen Financial (OCN), have continued to move higher, but both are extended as the daily chart of NSM, below, illustrates. NSM ran into some selling on heavy volume today as it reversed and closed in the lower part of its daily trading range. OCN, not shown, pulled back today after making an all-time high yesterday. In general, the action appears normal as leading stocks that, in general, have run up over the past week or so are backing-and-filling as they become extended to the upside. But as with other stocks I’ve discussed over that time period, the entry points occurred far earlier and at lower price points, hence that was the time to be buying – not now when the market is now in an obvious resumption of its uptrend and these stocks are extended.




Exone Company (XONE), not shown, priced its secondary offering at $62 a share, and the stock has since violated its 50-day moving average. Meanwhile, Stratasys (SSYS), shown below on a daily chart, announced a 4-million-share secondary offering yesterday, and the stock held in relatively well as it pulled back slightly on decreased and well below-average volume. In general I am wary of all the 3-D printing stocks right now given that they are relatively “long in the tooth” and have exhibited volatile price action. Thus, as a group, I would rather leave these stocks alone and focus my efforts on stronger-acting names.




Restoration Hardware (RH) illustrates why I do not like to hold stocks into earnings with the idea of playing “earnings roulette.” RH had a nice move to the upside off the 10-day moving average prior to the earnings report, and as I discussed over the weekend, one could take profits or gamble on the earnings announcement. With the stock blowing through the 50-day moving average line on huge selling volume, this is an ugly base-failure that one should steer clear of. If one did hold the stock through earnings, one could have exited right away this morning and gotten out relatively flat if one was buying the stock initially along the 10-day and 50-day moving averages, as I had discussed in previous reports. When a stock gaps down on huge volume, it generally does not pay to sit around and wait to see what happens.




Lumber Liquidators (LL), however, moved the other way today as it made a new all-time high on above-average volume, as we see on the daily chart below. I had suggested buying the stock as it held tight along the 10-day moving average with the idea of seeing the stock stage a Livermore Century Mark move decisively up through the $100 price level. LL is extended now, but developed some strong momentum as it pushed up through the $100 level to close at a healthy 108.80 today.




Bio-techs are still holding up well as Celgene (CELG), not shown, got right back up to its old highs today. Acadia Pharmaceuticals (ACAD) and Gilead Sciences (GILD), both not shown here on charts, also have moved higher over the past three days after exhibiting buy points on Friday. Biogen Idec (BIIB), shown below on a daily chart, is also trying to break out to new highs, and one could consider today’s move a below-average volume breakout from an improper double-bottom. Notice that the second low in the pattern does not undercut the first low, making for a potentially faulty pattern. I also notice that Regeneron Pharmaceuticals (REGN), not shown here on a chart, is in a similar position, so this is something to watch out for. While REGN remains in a short four-day consolidation, I am a little concerned with BIIB’s move given that it is coming out of an improper double-bottom base. This doesn’t mean that one should unload the stock right away, but if it fails to hold today’s breakout level at around 231-232 one might consider selling right away at that point. As an aside, I should note that Questcor Pharmaceuticals (QCOR) was hit today on heavy volume, allegedly on some cautious comments coming out of a couple of bearish sources. While QCOR held its 50-day moving average, I don’t really care much for the action and would prefer to be out of the stock given that it failed to hold its 20-day moving average, something I discussed in my report of this past weekend.




For the most part, everything I like is currently extended beyond recent buy points, and so this puts us in the position of letting things develop and waiting for the next buy points to emerge. These could come in the form of pullbacks to logical areas of support, such as a moving average like the 20-day or 50-day lines, or the top of a prior base-breakout. For now I see nothing that I consider actionable, and this makes sense given that most names are extended.

With the Fed meeting coming up next week, the market might simply spend some time consolidating its recent gains, but investors can simply focus on their stocks. At worst, I would expect leading stocks to pull back normally as they digest recent gains. In some cases, one might consider taking partial profits in names that have run up 15% or more, such as YELP, with the idea of buying back shares on a normal and constructive pullback. In the meantime, exercise some patience, and be prepared to maintain an opportunistic posture.


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 LNKD and SPLK, though positions are subject to change at any time and without notice.


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