The Gilmo Report

September 3, 2014

September 3, 2014

The NASDAQ Composite Index continued moving higher on Tuesday after the long Labor Day holiday weekend, posting another new 15-year high before getting whacked on an outside reversal day today, as we can see on the daily chart, below. In general, the indexes are quite extended off of the early August lows, and when they have been in this position previously in the great Market of 2009-Present, a decent pullback has occurred. I consider today’s action as a short-term warning shot across the bow, so to speak, especially given some of the action in leading stocks. As well, IBD laments the lack of progress among stocks having recent breakouts, and I would have to agree with this assessment of the “breakout landscape.”

However, as we’ve known for some time, the only way to gain an edge in this market is to focus on bottom-fishing and roundabout pocket pivots (BFPP’s and RAPP’s) and to sell into sharp moves to the upside following these types of buy signals. This has been my modus operandi since last May of 2013, and so far I cannot argue with the results. Ultimately it’s all about being in the right stocks at the right time, and my own personal experience yesterday illustrated this concept as I had three stocks that were up over 11% on the day, and all three were purchased on the basis of previous BFPP’s or RAPP’s over recent days. Today they all opened higher but reversed course and closed sharply lower off of yesterday’s peaks.




The S&P 500 Index, shown below on a daily chart, reversed off the peak and gave up early gains to close down on the day on roughly even volume. The chart below shows slightly higher volume, while other sources show slightly lower volume. Either way the index reversed off the peak on volume that remains above the average levels of the past month or so, as can be discerned on the chart. While today is all of just one day’s action, we have to consider that within the context of the prior sharp move up off the early August lows, stocks may be in a positon to pull back here, at least short-term. Meanwhile, news out of the Ukraine seems to indicate that Russia is already “seeping” further into the eastern part of that country. NATO’s idea of putting together a rapid strike force to protect Baltic nations also seems to leave Ukraine dangling in front of the salivating Russian bear since this new force does not seem to apply to what is going on in the Ukraine.




Twitter (TWTR) continued past the $50 price level on yesterday before going a little parabolic this morning on a gap-up opening. It then reversed to form an ugly outside reversal, which in my view means it is likely to test the 10-day moving average, as we can see on the daily chart, below. I’m out of this for now, looking for a possible re-entry point near the 10-day line, should that occur. The bottom line is that TWTR is over 10% extended from the pocket pivot of about two weeks ago and as is my well-known method in this market, I take profits into such moves with the idea of buying back cheaper. Furthermore, today’s big-volume outside reversal day isn’t the way I like to see it consolidate the prior gains from the pocket pivot of eight days ago on the chart.




LinkedIn (LNKD) has tried to come up off of its 10-day moving average following the continuation pocket pivot of eight days ago on the daily chart, below, but so far is having trouble making progress. Today it stalled again and closed roughly flat on the day on below-average volume. While one can consider LNKD to be buyable here along the 10-day line on the basis of the prior pocket pivot, there is another side to the stock. I am watching this carefully just in case it breaches the 10-day moving average, at which point I would consider the stock a potential Punchbowl of Death short-sale set-up. Not that it has become one just yet, but it is one scenario for the stock that I maintain awareness of in case the market gets into trouble and I want to flip to the short side.




Tesla Motors (TSLA) powered higher yesterday to a new all-time high, and gapped up again this morning to a peak of exactly 288 before reversing and closing down on the day, as we see on the daily chart, below.  If we figure that TSLA’s base breakout occurred somewhere around the 240 price level. This move to 288 this morning put the stock exactly 20% above that, and in this market that is the type of profit that I will take, end of story.




GW Pharmaceuticals (GWPH) was unable to hold its 50-day moving average yesterday and has now in fact violated the line, as we can see on the daily chart, below. What I don’t like here is the fact that GWPH was unable to generate any kind of upside juice and follow-through after two RAPP’s in August. Thus it should be sold on the break through the 50-day moving average, end of story. My view is that after two nice-looking pocket pivots in the pattern, GWPH should be acting better, and if it isn’t there is no reason to be in it right now.




Taser International (TASR) followed through on the “voodoo” action it exhibited on Friday and which I discussed in my report of this past weekend as it jacked sharply to the upside yesterday and then this morning gapped up and pushed through the 18 price level. It was one of the stocks I owned yesterday that was up more than 11%, but this morning’s added move struck me as a 16.4% gain in just two days that should be sold into, with the idea of buying constructive weakness on a pullback. That kind of move in this market is certainly not one that you want to buy into, and hopefully members were able to get into position close to the 200-day line early on Monday or last week based on my discussions of the stock in my prior two reports. TASR did in fact flash a pocket pivot buy point on Tuesday, but today’s selling was very heavy, as we can see on the daily chart, below. You absolutely do not want to be buying strength in this market, but as TASR settles back a bit it might offer a lower entry point near the 10-day line, currently at 16.02, if it does so on constructive volume.


GR090314-TASR (JD) has pulled back to the top of its recent base, as we see on the daily chart, below. I would have preferred to see the stock hold at the 10-day moving average as an indication of some upside “spunk,” but instead it has dropped to its 20-day moving average, as we see on the daily chart, below. This move, however, has occurred on very low selling volume so the stock could be in a reasonable buy position with the idea that it needs to hold the 20-day line to remain viable from here.




El Pollo Loco (LOCO) went “loco” yesterday as it jammed over 10% higher and then threw in another 5% this morning when it gapped up and moved to an intraday high of 37.69, as we can see on the daily chart, below. The gap-up move this morning above the 37 level seemed like a reasonable sell point, at least short-term, as I tweeted earlier today. At the time I had received information that LOCO’s earnings are expected to be announced tomorrow after the close, but another source shows that they are expected to be announced on September 11th. If earnings are in fact coming on September 11th, then a pullback to the 20-day moving average today might offer a second entry point on the basis of yesterday’s pocket pivot, with the idea that it should hold the 20-day line, more or less. We have to remember that some overhead supply is to be expected from the left side of the pattern from late buyers who got sucked into the sharp upside move following the LOCO’s IPO at the end of July.




Interestingly, the oil patch, which looked like it was trying to make a comeback late last week as a number of stocks started to attempt to come up the right sides of their bases, lost traction yesterday as the group slid back to the downside. Illustrating this phenomenon is Diamondback Energy (FANG), which I discussed over the weekend after it flashed an RAPP coming up through the 50-day moving average on Friday. FANG was bitten on Tuesday as it closed below its 50-day moving average. Today it tested the 20-day moving average as selling dissipated and closed back above the 50-day line. One might keep an eye on this pullback since it may be buyable here with the idea that it will continue to hold as volume dries up along the 20-day line I might be tempted to grab some shares, but that will depend heavily on what the general market does from here.

Bonanza Creek Energy (BCEI), not shown, also pulled back yesterday and today, and the stock is still holding above its own 10-day and 50-day moving averages. The 10-day line is currently at 59.31, while the 50-day is at 58.39, so a pullback to the line on a volume dry-up might be something to watch. The operative word here is might because, as I just said in regards to FANG, all of this will depend on the general market.




One thing that struck me as a possible clue regarding the general market, at least as it relates to the leading NASDAQ Composite, was the action of Apple (AAPL), shown below on a daily chart. AAPL had previously pushed above the $100 “century mark” level but today basically collapsed back below the 100 price level on very heavy selling volume. As something of a market barometer, AAPL’s action didn’t strike me as very constructive given the rush of sellers that hit the stock.




There was also something of a late-stage base failure move by (PCLN) today, as the daily chart below shows. PCLN broke out of its latest base on a big-volume move in early August, but today that breakout has failed based on the above-average volume break through the 50-day moving average. I might look at a bounce back up into the 50-day line at 1248.93 as potentially shortable, but this remains to be seen as PCLN might find some support in the area of congestion around the lower half of its prior base. However, like AAPL, it is a big-stock NASDAQ leader that showed some deleterious action today, not to mention the initial starting phase of a possible late-stage failed-base short-sale set-up (LSFB).




Some notes from my trading diary regarding other long ideas I’ve discussed in recent reports:

Arista Networks remains extended from its recent breakout through the 80 price level, closing today at 85.61. I would only consider it buyable on a pullback to the 10-day moving average, currently at 80.32.

Biogen Idec (BIIB) has not been able to move higher following last week’s subtle pocket pivot along its 10-day moving average. The stock is still holding the 10-day line, however, and remains in a buyable position based on the prior pocket pivot in the pattern.

Facebook (FB) closed at a new all-time high yesterday but volume was insufficient for a pocket pivot. Today the stock tried to push further into new-high price ground before reversing and closing lower. So far there are no real bona fide buy points within its current flag formation.

GrubHub (GRUB) hasn’t completed its 10-million-share secondary offering just yet, but the stock did find support at the 38 price level and roughly around the top of its recent base. I still want to see how this absorbs the additional shares once the secondary is priced and the shares are released into the open market.

Keurig Green Mountain (GMCR) is building what is so far a seven-day flag following its buyable gap-up of not quite two weeks ago. As I’ve discussed previously, this may not have much upside thrust from here and it is currently not in what I would consider an optimal buying position.

Netflix (NFLX) tried to make a new high today but reversed from all-time highs to close right at its 10-day moving average. I look at NFLX similar to how I look at LNKD, discussed above. While low-volume pullbacks to the 10-day line might offer buying opportunities, if the stock breaks the 10-day line it may become a POD-type of short-sale set-up. But as with LNKD this is only something to remain alert to “just in case.”

Palo Alto Networks (PANW) has been able to recover to new all-time high price ground after last week’s dip below the 50-day moving average and broke out to a new high yesterday. Today we saw the stock push above the 90 price level before reversing and closing down on the day. Again, PANW is expected to announce earnings next week, so buying into the stock here requires playing “earnings roulette.”

If one has a reasonable profit cushion in a position, one can certainly elect to ride-out any short-term market pullback with the idea of knowing exactly where one’s stops are if the market gets into worse trouble here. My method, however, is to sell into sharp gains when I have them, and dumping stocks that don’t work out, such as GWPH, very quickly if they do not act as I expect. In my view, however, trying to play a longer-term trend in this market is a difficult bill to fill, and my preference is to maintain my established and successful method of buying stocks when they are quiet and setting up properly and then (hopefully) selling into sharp upside moves. That has worked well so far with stocks like TSLA, TASR, TWTR, and LOCO, for example, over the past few days, and I am open to buying anything back if it pulls back in constructive fashion.

The market is starting to show some signs of wobbling underneath the hood, and so it is imperative to keep risk to a minimum by seeking to buy leading stocks into constructive pullbacks. Chasing strength is absolutely not advisable in this environment. Meanwhile, I would also be on the alert for something more material to come out of the Ukraine, and I have to wonder if today’s action was telling us something in this regard. While European markets rallied sharply on news of a cease-fire in the Ukraine, the U.S. markets did not respond in kind. That struck me as something of a divergence. As well, my profit-taking discipline put me back into cash today, and generally when this happens it has worked in my favor. We’ll see if that remains the case yet again. Stay cautious, and remain opportunistic while shunning the greed-fed impulse to chase strength!


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 had no positions, though positions are subject to change at any time and without notice.

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