The Gilmo Report

September 29, 2013

September 28, 2013 5:03 pm ET

If you look at the daily chart of the NASDAQ Composite Index, below, you don’t see much of a pullback in the index as it remains within a half of a percent below its September peak. In fact, if the NASDAQ were able to muster a 7 point rally from Friday’s close it would in fact make a higher closing high. And while there has been some churning and stalling in the index over the past week, it simply appears to be digesting the prior move off the 50-day moving average and the late August lows as it forms a rather tight little flag formation over the past seven trading days. The Russell 2000 Small-Cap Index is holding up in a similar tight flag formation, and we would have to surmise that if small-cap stocks are holding up well in this market, things are relatively constructive despite the choppy action over the past week.




Meanwhile, the S&P 500 Index, shown below on a daily chart, is getting dragged down by what seems to be mostly weaker large financials and industrial names as it falls back below its prior cup breakout that occurred on the day that the Fed announced it would be going “taperless” in September. Still, the S&P 500’s pullback has only retraced about 36%, just over one-third, of its own upside move off the late August lows. Thus, when placed within this simple context, the current market pullback doesn’t look like much, particularly when we consider that the S&P 500 is only about 2% off of its September peak. The broader NYSE Composite Index, not shown, looks a little better than the S&P 500. Meanwhile the much narrower Dow Jones Industrials, also not shown, has been dragged below its 50-day moving average by its big financials and industrial components, not to mention a few doggy old-name big techs like CSCO, IBM, and INTC. Meanwhile, most of the relevant leadership in the market remains quite intact.




While the market supposedly grapples with the potential for eventual QE tapering in October and beyond, the message from bonds, as illustrated by the daily chart of the iShares 20+ Year Treasury ETF (TLT), below, seems to be that tapering is not a factor as it makes a higher high.




And the U.S. Dollar, as illustrated by the daily chart of the PowerShares Db US $ Bullish ETF (UUP), below, looks to be confirming this as it makes a lower low.




The outlier here is found in the precious metals, which pulled back sharply following the huge upside move they had after the Fed’s “taperless” announcement two Wednesdays ago and which remain in pullback mode. I would note, however, that the SPDR Gold Shares (GLD) is holding above the lows of that big move eight days ago on the chart and the low of early August. It is still possible that gold, and silver for that matter, are trying to build bottoms after their roughly two-year downtrends. For me, the precious metals are not really anything I want to trade right now given the sloppy movement and the fact that leading stocks make better profit vehicles in the current environment. They are, however, somewhat relevant as clues regarding the potential direction of QE going forward, and while bonds and the dollar are telling us that QE is not a factor, gold and silver are giving what I would consider an uncertain message.




Among the “Four Horsemen” of this market, Facebook (FB) shook off any hints of an exhaustion gap and trucked higher throughout the week, as we see on its daily chart below. The last clear buy point in the stock was seen nine days ago on the chart when the stock bounced off of its 20-day moving average in a clear continuation pocket pivot move. What is amazing is that the stock has moved over 10% higher since then.




LinkedIn (LNKD) is taking the most heat as it has endured several above-average selling days over the past six trading days on the daily chart, below. LNKD gapped down on Friday following some cautionary comments from an analyst and never really mustered up any kind of bounce as it clung to its 20-day exponential moving average (the green moving average on the chart). As I’ve written in recent reports, I still believe that near-term demand for the stock has been absorbed by the company’s recent 5.38 million share secondary offering, and this is keeping a lid on upside for the stock currently. I would not be surprised to see the stock retest its 50-day moving average.




Netflix (NFLX) is trying to recover from Monday’s huge-volume outside reversal day, and the stock has done a reasonable job of drifting back up to its prior closing highs. NFLX closed Friday at 312.40, just a little over a buck away from its all-time closing high of 313.83. Selling volume dried up on Friday as the stock held above its 10-day moving average. While the stock may at least need to do some sideways work here for a bit, I would not become overly concerned with the stock unless it broke down below the $300 level, roughly, where it has found support since its buyable gap-up move of a little less than three weeks ago (see September 11th report).




Like FB, Tesla Motors (TSLA) continues making new highs as it follows through on last week’s flag breakout. To me, the stock looks like a shoo-in to reach the $200 century mark, and I would use any weakness down to the 180 level or better to pick up shares if I’m not already long the stock.




Yelp (YELP) got hit with some heavy selling volume on Monday of this past week, something I noted in my report of this past Wednesday, but the selling has settled down a bit as the stock holds along its 10-day moving average. This would normally bring into play the possibility of a pocket pivot of some sort occurring along the 10-day line, but Monday’s volume spike presents a formidable level of downside volume to overcome. Barring that, I would remain alert to any further pullback that takes the stock down to its 20-day moving average, currently running through about the 64 price level. YELP has had a nice move since we first picked it up on the pocket pivot buy points along the 10-day moving average in late August, so I would not begrudge it a little time and room to consolidate those gains.




Trulia (TRLA) is doing the same thing as YELP, more or less, as it consolidates the gains it achieved coming up and off of its 10-day moving average back in early September. The stock is holding right at the peak of its prior base and above the 20-day moving average, which it tested on Monday. Volume is drying up sharply here, and given the position of the stock just above the 20-day line and right on top of its prior base, this looks like the spot to buy shares, with the idea that it will continue to hold the 20-day line and the top of the prior base right along the 46-48 price area.




YY, Inc. (YY) is another stock that had a nice move off of its 10-day moving average in late August and which is now backing-and-filling along the top of its prior base and the 20-day moving average, as we see on its daily chart, below. Volume has dried up sharply as the stock holds the 10-day moving average after successfully testing the 20-day line earlier in the week. I mentioned in my report of this past Wednesday that I thought the stock was buyable along the 20-day line and this turned out to be the case as the stock rallied on Thursday. From here I’m looking for the stock to move to new highs, with the idea that it will continue to hold the 20-day line and the top of the prior base.




Continuing with this idea of opportunistically eyeing purchases of leading stocks on constructive pullbacks, I like the position of Alliance Fiber Optic (AFOP) on this current pullback following last week’s buyable gap-up. AFOP is a micro-cap stock with a market-cap of $387 million, so we can expect it to be somewhat volatile. As small stock, however, it tends to trade reasonably well, but one is better off trying to buy pullbacks instead of plowing into strength in AFOP. With the stock pulling down into its 10-day and 20-day moving averages while volume dries up sharply, this is the spot to step in and buy shares with the idea that the stock will continue to hold the 20-day moving average, currently at 20.49, on any further pullbacks.




We know from my previous reports that AFOP is the #1 stock in the #1 Telecom – Fiber Optic industry group based on its HGS Investor ERG Rating and its O’Neil Composite Rating. Coming in at #2 is Finisar (FNSR), which I would consider something of a strong turnaround situation. FNSR and the other companies in this group are benefitting from the build-out of 4G LTE technology which is lifting demand for single-mode 10G transceivers as more telecom carriers deploy LTE. Mobile technology is expanding rapidly as mobile devices violently disrupt the old desktop PC model of computing and information access, and the products that companies like AFOP and FNSR make literally represent the backbone of mobile technology.

The data shown on the chart below indicates 1,000% earnings growth in the most recent quarter on a big jump in sales growth of 21%. These are HGS Investor numbers, while O’Neil shows 158% earnings growth in the most recent quarter on 21% sales growth. Reuters estimates call for 287.50% earnings growth in the next quarter while First Call indicates 139%. The variances in such numbers are due to the way certain items are included or excluded, but the basic message is that the Telecom Fiber Optic group is ranked #1 for a reason, and that is the rapidly improving technicals of these stocks.  We can see on FNSR’s daily chart, below, that the stock flashed a pocket pivot back in early September, and has since moved tight sideways in a three-weeks-right formation after moving up above the 24 price level. The stock is now backing-and-filling a bit here as it pulls back to the 20-day exponential moving average, where I think shares can be bought. FNSR is a nice complement to AFOP in that it trades close to 2 million shares a day vs. AFOP’s 900,000, so it is more liquid.




InfoBlox (BLOX) held its 20-day moving average after enduring some above-average volume selling earlier in the week, much to its credit, as we can see on the daily chart below. BLOX came through with a very nice continuation pocket pivot off the 20-day line and up through the 10-day line on Friday on very strong volume. This is the second buy point for the stock after the buyable gap-up move of early September, and I consider it very constructive to see some strong volume support finally show up on this recent pullback as Friday’s volume nicely exceeded the above-average selling levels we saw earlier in the week.




Maintaining an opportunistic stance on pullbacks worked well with Celgene (CELG) as the stock rebounded from its pullback to the 20-day moving average and moved higher on Thursday and Friday. This rebound culminated with a breakout to new highs from an eight-week cup-with-handle pattern on heavy volume. If you like to buy breakouts, I suppose you could buy the stock here given that it remains within range of this standard-issue base breakout, but I might say that I would have preferred to buy the pullback on Wednesday or at least Thursday morning!




Biogen Idec (BIIB) rebounded from a sharp pullback on Friday to close back above its 10-day moving average on a pocket pivot buy point, as we can see on its daily chart, below. BIIB also found support at the 20-day moving average on Friday from which it rebounded before issuing the pocket pivot buy point by the close as it regained the 10-day line. Bio-techs in general have been acting strongly, as we’ve seen with a number of other names in the group which ranks #4 currently among all industry groups.




Acadia Pharmaceuticals (ACAD) has moved sharply higher since its pocket pivot buy point of September 5th, which I discussed in my report of September 8th. If we look at a weekly chart of ACAD, below, we might recognize an ascending base formation, but the bottom line is that it was not necessary to know this if one simply bought into the pocket pivot on September 5th. I’ve annotated the weekly chart below in detail to outline the key features of this ascending type of pattern which is characterized by three pullbacks where the second and third pullbacks occur after a marginal move to a higher high that then reverses and drops back into the pattern but remains above the low of the prior pullback. I would consider this a 12-week ascending base, but again, what one wants to label this as is really irrelevant since one could have simply bought into the stock on the basis of the September 5th pocket pivot. In my view, this is a much simpler and more concrete way to operate than trying to slap labels on every base you see or think you see.




Lumber Liquidators (LL) had been quietly hovering at all-time highs following its previous move through the $100 century mark level (see September 4th report) before it got slammed Friday morning after the company confirmed that search warrants were executed at its corporate offices by the Department of Homeland Security’s Immigration and Customs Enforcement and the U.S. Fish and Wildlife Service. Reading over all the news stories on this raid, my conclusion is that this may turn out to be a non-event, although short-sellers have often pointed out issues with their flooring products such as high formaldehyde levels, for example. Now the issue concerns illegal supplies of wood from Siberia, according to news sources. With the stock finding big-volume support off of the 50-day moving average, anyone who bought the stock along the $100 price level is not experiencing any pain, and my view is that as long as the stock can hold above Friday’s intra-day low at 98.50 it is okay. Obviously, you are now dealing with some headline risk in the stock, but it is unclear how bad this really is considering the worst-case scenarios. Ultimately, let the technical action be your guide, but if the whole situation makes you nervous, there is no reason why one can’t simply bag a profit here and let things settle down.




Solar stocks continue to show signs of resurgence, but most of the hot action over the past few days has been in Chinese solars like Trina Solar (TSL), the deceptively named Canadian Solar (CSIQ), and Yingli Green Energy (YGE) based on analyst upgrades looking for a re-acceleration in the Chinese solar market. In the wake of all this, U.S.-based Sunpower (SPWR) continues to edge higher, but other U.S.-based solars are not faring as well.




Canadian Solar (CSIQ) is a Chinese solar manufacturer with another country in its name, but it illustrates the action in the group, at least with respect to the China-based solar companies. I had previously discussed the stock when it was forming a tight little flag back in late July (see July 28th and July 31st reports). But following a breakout to new highs, the stock promptly reversed and broke down sharply, a move that would have forced one out of any position bought on the basis of that flag breakout in early August. Now the stock has turned around and broken out again on heavy volume. This move is coming out of a very deep, v-shaped weekly pattern, so I would not be inclined to buy into it.




First Solar (FSLR), shown below on a daily chart, remains something of a laggard, along with SolarCity (SCTY), not shown. As I pointed out in my report of this past Wednesday, FSLR flashed a deep bottom-fishing pocket pivot off the 200-day line on that day, but this is coming from a very weak position below the 50-day moving average. FSLR tried to rally back above its 50-day line on Thursday and Friday on all the wonderful Chinese solar news, but it stalled out both days on heavy volume. The problem here is that the pattern is very weak, with two major price breaks since the early July highs that constitute two big downside legs. Often stocks like this will have three downside legs in their patterns before finally washing out to the downside and FSLR seems to be in this type of situation. It is possible that FSLR is a short right here, using the 41.92 intra-day high of Friday as a quick hyper-stop on the upside, with the idea that the stock will eventually break to  lower lows and form a final third leg down in the pattern.




News regarding the debt-ceiling as well as speculation over when QE tapering will finally begin has given the market the alibi it needs to consolidate the gains it has made since the late August lows. When the market is finally declared to be in an “uptrend,” then things get a bit obvious, and some of this needs to be worked off, in my view. That is what the market is likely doing now.

Just watch your stocks as many leaders continue to act well. Looking to buy into constructive, low-volume pullbacks in the leaders that started their initial moves in late August or early September is a reasonable strategy. If the market begins to show more exacerbated selling, and leading stocks begin to break down in earnest, then we will have something more concrete to operate on in terms of new market information. For now, however, the pullback strikes me as normal within the context of the prior move, and if the action does make you nervous then throw out a short in something like FSLR and see if it works. Meanwhile, I remain opportunistic here until further notice.


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 AFOP, BLOX, TRLA, TSLA, and YY though positions are subject to change at any time and without notice.


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