The Gilmo Report

September 29, 2010

September 29, 2010

What amazes me about this market is its expanding bullish condition based on evidence coming in from many directions. For example, last night I was scanning through the market on my HighGrowthStock Investor software and I noticed that on Friday the NASDAQ Composite Index (along with the other major market indexes) had what is known as a “Eureka” buy signal where I’ve circled the two green bars on the lower right side of chart below. This is a candlestick chart of the NASDAQ with a number of indicators on it, and notice that all of the indicators along the top are flashing green across the board. The critical component here are these two green bars, which are the second such “Eureka” indicator occurring in this rally off of the late August lows, with the first one occurring on the same day as the follow-through day of September 1st. Notice how other pairs of green bars showed up at the start of prior rally attempts, as I’ve circled in purple on the chart, but so far none of these has had a second such indicator. This current rally, in contrast, is flashing a second such signal, however, and I read this as very bullish action.

NASDAQ Composite Index Gilmo Report Chart

As it looks to me right now, there isn’t much reason to be selling here, and when the market pulls back, the only thing I want to think about is what and how much to buy when presented with such opportunities.

The bottom line is that I’ve been looking for the market to consolidate and pullback here in order to digest its sharp gains off the late August lows, but so far what it looks like the market is doing here is in fact consolidating in ascending fashion as it pulls back and then moves to new highs, and then pulls back again before moving higher again. A clean daily chart of the NASDAQ Composite below illustrates what I’m talking about, and I see this as very strong action in that the market is in reality consolidating prior gains even as it continues to move higher. Over the past two weeks, each time the market has tried to pull back it has seen ready support step in as a solid bid continues to lurk beneath this market. Even as the market looked to be selling off into today’s close, a bid came in to bring the indexes back up to nearly “UNCH’d” on the day. This is impressive action as I see it, regardless of where you think the buying is coming from, particularly when you combine it with expanding bullish action that includes breakouts and pocket pivot buy points showing up in a broadening number of stocks. I get the strong sense here that the market is aching to go higher. Note that today’s intra-day range on the NASDAQ was very tight as volume dried up on the day, which looks to me like additional evidence that the market is setting up to move higher from here.

NASDAQ Composite Gilmo Report Chart

Cloud-computing stocks continue to hold their own, and most recently we saw a pocket pivot buy point in F5 Networks, Inc. (FFIV), as we see in its daily chart, below. FFIV looks a little bit like VMware, Inc., which I do not show here on a chart, as it gently trends higher within this current up-trend channel. Yesterday’s pocket pivot buy point is in play right here with the idea that it should hold the 10-day moving average at around 102.73. On a down market day, FFIV held up in positive territory as it did not see any serious selling following yesterday’s pocket pivot, and I tend to view this as constructive as I look for the stock to attempt to move out of here soon as it follows up on yesterday’s pocket pivot buy point.

F5 Networks, Inc. (FFIV) Gilmo Report Chart

Cloud-computing stocks were very hot coming off of the late August lows, but over the past week or so have taken some time to pull back and consolidate, which they are certainly entitled to. Riverbed Technologies (RVBD), which we first picked up when it flashed pocket pivot buy points as it came up through the 10-day moving average in late August, has been a powerful new-comer to the group. Last week it jerked down to its 20-day moving average (green line) on the daily chart below, which is consistent with its character. RVBD does not tend to hold its 10-day moving average, so we would not use it as a selling guide for our entire position. I would, however, use the 10-day line as my selling guide for any stock purchased up here on this most recent pocket pivot buy point that RVBD flashed yesterday. Because RVBD has not held its 10-day moving average for at least 7 weeks, we are better off using the 20-day or 50-day moving averages as our reference points for support on any pullback.

Riverbed Technologies (RVBD) Gilmo Report Chart (CRM) led the cloud-computing stocks when it shot to new highs in late August and into mid-September, but the stock is taking what I see as a deserved rest here as it pulls down toward its 50-day moving average. Note that CRM does not tend to hold its 10-day moving average, as we see on its daily chart below; hence I don’t get concerned about the stock until it breaks down through its 50-day moving average, looking at a pullback down to the 50-day line for now as a potential buying opportunity. This makes sense as the 108-113 area roughly coincides with the prior breakout from late August as well as the 50-day line, which has been busy catching up to the stock. I’m not averse to using this pullback as an opportunity to pick up CRM shares with the idea that it should not violate its 50-day moving average. (CRM) Gilmo Report Chart

Silver and gold continue higher, with the iShares Silver Trust (SLV) actually outperforming the SPDR Gold Trust (GLD) since late August, and this has been a huge positive for precious metals stocks. Over the weekend I indicated that I was looking for Randgold Resources (GOLD), my favorite gold stock here, to pull back into its 10-day moving average which is exactly what it did yesterday, as we see on its daily chart below. In fact, yesterday’s bounce from a point just under the 10-day moving average constitutes a bullish outside reversal day to the upside as well as a strong pocket pivot buy point off the 10-day line. With GOLD pulling back today on a volume dry-up I think you have your shot at the stock here with the idea that it should hold yesterday’s low just under the 100 price level. The momentum is broadening in the metals space, as we saw in my discussion of Vale S.A. (VALE), not shown, over the weekend, and VALE has moved higher all week long.

Randgold Resources (GOLD) Gilmo Report Chart

I last discussed hot new Chinese solar IPO JinkoSolar Holding Co. (JKS) in my report of September 12th, and at the time I noted that I was waiting for a new buy point to show up in the stock, which has gone on a tear since breaking out in early July. Today there were a number of pocket pivot buy points showing up in solars like Trina Solar Ltd. (TSL), which also had a new-high breakout buy point today and which I discussed in my report of this past weekend, along with Renesola Ltd. (SOL), and Solarfun Power Holdings (SOLF), which I do not show here. JKS was not to be outdone as it flashed its own pocket pivot buy point today off its 10-day moving average, as we see in its daily chart below. I have to admit I was looking for JKS to pull down and consolidate in some sort of flag formation, but it is simply too strong to want to pull back as it instead sets up here as a pocket pivot making new highs in an ascending formation. This is potentially buyable, and based on the fundamentals I would not consider JKS to be in some nutty, speculative move here as it is still selling at 8 times forward estimates. The fundamentals are in fact the primary driver of this price move, as I see it.

JinkoSolar Holding Co. (JKS) Gilmo Report Chart

The award for the most interesting pocket pivot buy point among the solar stocks today goes to Yingli Green Energy Holding Co. (YGE), shown below on a daily chart. For those of you who have read the book I recently co-authored with Dr. K, “Trade like an O’Neil Disciple: How We Made 18,000% in the Stock Market,” you know that pocket pivots can also sometimes be used for bottom-fishing. In this case, we see that YGE has flashed the rare bottom-fishing 200-day moving average pocket pivot buy point as it rockets up through its 200-day line on very big buying volume. Generally, this sort of pocket pivot occurs after a stock has been coming down and finally begins to round out its bottom in a potential basing formation as YGE has. Remember that these are riskier pocket pivots to buy, but at the very least I think this rare 200-day bottoming pocket pivot by YGE, the laggard in the group, attests to the strength in the group, and I would be very interested in buying JKS and TSL, as I have previously discussed both in this and prior reports on September 12th and 26th.

Yingli Green Energy Holding Co. (YGE) Gilmo Report Chart

You have to pay attention to buyable massive-volume gap-up moves, especially when they take a stock out to 52-week highs. Oracle Corp. (ORCL) blew out to new highs not quite three weeks ago, and is now working on the third week of a potential three-weeks-tight formation (3WT), if you were to look at the stock on a weekly chart. I show it here on a daily chart to illustrate how this 3WT is setting up along the 10-day moving average as it has now caught up to the stock’s price here in the 27 price area. I would watch this for some sort of pocket pivot move off the 10-day line to jump on this one. ORCL is a very liquid, big-cap NASDAQ 100 stock, and being able to quickly jump in on a huge position looking to capitalize on a price move from here is very easy to do. I discussed the thematic case for ORCL in my reports of September 19th and 22nd, and I would not be surprised to see ORCL get into the mid-30’s in any continuing market rally. As the grandfather of cloud-computing stocks, ORCL is certainly in the right place at the right time given its status as a fundamentally strong, highly liquid, big-cap play in this hot space.

Oracle Corp. (ORCL) Gilmo Report Chart

We’ve seen strength in semiconductors positioned in the right places, such as Altera Corp. (ALTR), which I last discussed in my report of this past weekend as a hardware play on cloud-computing and which has recently moved to a 9-year high. Cirrus Logic (CRUS) is another “fabless” semiconductor stock that feeds off of the strength in Apple, Inc. (AAPL), which I do not show here but which has recently moved to all-time price highs. I’ve been waiting to see if CRUS, which supplies chips for AAPL’s various devices, would start to perk up here as it has been bouncing along the lows of a potential cup base. Today I got that “perkiness” when CRUS decided to blast up through its 50-day moving average on huge volume, constituting a buyable pocket pivot up through the 50-day line. This is a bit extended from the 50-day moving average, so I wouldn’t mind seeing a little bit of a pullback towards the 18 price level to pick up some shares if I were interested in owning the stock. In a sense, CRUS is a type of “cloud” stock in that it supplies the chips to AAPL which makes the devices that people do their “cloud” computing on. This is the essence of the “next wave” in computing: the “cloud” and the devices that enable convenient and efficient access to the “cloud.”

Cirrus Logic (CRUS) Gilmo Report Chart

Instead of backing-and-filling in some sort of normal pullback-type of consolidation, I see the general market as engaging in a type of “ascending” consolidation. This implies a certain upside bias to this market as it appears to be “chomping at the bit” to move higher. Leading stocks continue to act well, even those that pull back and go into base-building mode here as the market has become extended off the late August lows. In the meantime, new situations have emerged, and I note a number of breakouts in thinner stocks like Lululemon Athletica (LULU), telecom play Oclaro, Inc. (OCLR) and Finisar Corp. (FNSR), for example, among many others, as evidence of a healthy tone to this current market environment. As of yet, there is no material evidence to call the end of this rally as, quite to the contrary, it appears, amazingly enough, to simply want to move higher here.

Gil Morales

CEO & Principal, Gil Morales & Company, LLC
Principal and Managing Director, MoKa Investors, LLC

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