The Gilmo Report

September 4, 2013

September 4, 2013

In the “old days,” the NASDAQ’s 1.01% move today on higher volume would have been sufficient for a follow-through day. But within the context of finding support at the 50-day moving average last week, as we can see on the NASDAQ’s daily chart, below, this might be enough to kick the market back into rally mode. While much is being made of the impending military strike against Syria, the action itself, as well as its outcome, remains a source of uncertainty. But this does not seem to be bothering the market too much. The Senate has allegedly decided that it will work through the weekend to work out an authorization for the use of force, but once that is complete it will have to make it through the House as well, and in my view the whole thing has a reasonable chance of going nowhere. This then leaves the Obama Administration with the option of going ahead with the operation given that the War Powers Act already gives the President all the authorization he needs.

My view is that whatever happens, all the fretting will be for naught, and the whole thing might just turn out be a non-event. Thus I am starting to lean a little bit here to the long side of the market, particularly since we are seeing a lot of leading stocks starting to perk up here, and the appearance of pocket pivots and other buy signals can often be the precursor to a market turn.

 

GR090413-NAZ

 

The “Four Horsemen,” namely Netflix (NFLX), Facebook (FB), Tesla Motors (TSLA), and LinkedIn (LNKD) all gapped up towards new high price ground on Tuesday’s futures-led gap-up opening, but were not able to make much progress beyond that as TSLA reversed to close down slightly, FB churned around and closed mid-range, and NFLX held most of its early gap-up gains without moving higher from there. For the most part, NFLX, TSLA, and FB (which I don’t show here on charts) are holding up around their highs, with NFLX actually pushing to a 52-week high today. LNKD, on the other hand, showed more strength on Tuesday in that it flashed a pocket pivot move to new highs that day, as we can see on its daily chart below.

However, this was short-lived when the company announced after Tuesday’s close a $1 billion secondary offering of Class A common stock, which by my math is somewhere around 4.1 million shares. This sent the stock gapping down after-hours on Tuesday, and after making a feeble attempt at bouncing back early in the day, settled back to close at 238.93. This is about a nickel above its 10-day moving average on above-average volume, as we see on the daily chart below. As I see it, 4.1 million shares is not a huge amount of stock. Once this thing prices, the pullback in LNKD may turn out to be a buying opportunity. Thus I would look to be opportunistic once the secondary is priced.

 

GR090413-LNKD

 

Splunk (SPLK) is continuing to hold its buyable gap-up move of last Friday, but so far doesn’t seem to be able to get much beyond the intra-day highs of that gap day. It is, however, holding up in a tight little flag so far as it closes tight along the 55.22 to 55.33 price area over the past three days. This should be watched for any pullback from here towards the intra-day low of its buyable gap-up day at 52.52, although I would be satisfied to be able to buy shares under 54 if such an opportunity arose.

 

GR090413-SPLK

 

Yelp (YELP) presented at a Citigroup conference this morning at 8:15 a.m. EST, or 5:15 a.m. my time here on the West Coast. It must have been a very positive presentation as the stock launched on a big pocket pivot breakout from its high, tight flag formation. I’ve already discussed YELP in recent reports as moving tightly along its 10-day moving average in what I see as a bona fide high, tight flag formation (see August 28th report). YELP has acted well over the past few days as it continues to hold along its 10-day moving average following last Thursday’s pocket pivot buy point, as we see on the daily chart below. The stock is quite buyable on this high, tight flag pocket pivot breakout, with the idea that it will continue to hold above its 10-day moving average as it has throughout the last two weeks.

 

GR090413-YELP

 

Restoration Hardware (RH) and Lumber Liquidators (LL), which I consider to be “cousin” stocks, more or less, are both continuing to hang tight. RH has flashed a pocket pivot or two as it tries to round out a new base, but so far these have not resulted in any further upside. However, if the general market gets going then RH’s initial constructive action would lead me to expect that it will also move higher in more concerted fashion. Thus I still see it as buyable here as it pulls back along its 10-day and 50-day moving averages. LL found support at its 20-day exponential moving average last week and has now moved back up to the $100 price level and its 10-day moving average. While LL has not been able to clear the $100 “century mark,” invoking Jesse Livermore’s rule for stocks that clear a round century mark price number for the first time, the stock still has a chance at doing so given that its upside potential has had a lid put on it by the general market action. Thus I think the stock is buyable at current levels, using the 20-day moving average as a selling guide.

 

GR090413-RH

 

GR090413-LL

 

Another pair of “cousin stocks” that I have discussed in recent reports is the duo of Ocwen Financial (OCN) and Nationstar Mortgage Holdings (NSM), both shown below on daily charts. I discussed both stocks in my report of this past weekend as being buyable on the basis of their tight pullbacks into logical areas of support as volume dried up. OCN, after failing on a pocket pivot attempt last Monday, found support along its 20-day exponential moving average as volume dried up. Yesterday it was able to come back with a strong pocket pivot breakout from a four-week flag that also qualified as a pocket pivot buy point. OCN stalled a bit yesterday, but that was likely due to the general market’s uneven action as well as some possible investor skepticism based on the fact that it failed on its last attempt at new highs last Monday. NSM also saw volume dry up in the extreme as it tucked in and pulled back to its 10-day moving average last Friday. Today it was able to push to a new all-time high on a pocket pivot breakout. Both stocks look buyable with the idea that they will hold their 10-day moving averages on any pullback from here.

 

GR090413-OCN

 

GR090413-NSM

 

In my report of this past weekend I noted that Gigamon (GIMO) had found support at its 10-week moving average on the weekly chart (not shown), and so far this week the stock has followed through to the upside by clambering back above its 10-day moving average, as we can see on the daily chart, below. Obviously, there is a little overhead resistance for the stock in this current position, so I would watch to see how the stock acts along the 10-day line. If it can hold up and move tightly along the line this may set up the potential for a pocket pivot buy point if volume can exceed the 228,127 shares it traded on August 27th. This was the highest down-volume in the pattern over the prior 10 trading days.

 

GR090413-GIMO

 

Three-D printing stocks in general remain volatile, but I have to admit that the group, including Three-D Systems (DDD) has held up well during the market’s correction. While DDD, not shown, remains within buying range of its recent base breakout, Stratasys (SSYS), not shown, remains extended from its recent base breakout, and Proto Labs (PRLB), not shown, moved to an all-time high today on slightly above-average volume, Exone Company (XONE) continues to build a base as it holds tightly along its 10-day moving average, as we see on its daily chart, below. With the group still acting well, my view is that XONE may follow suit, and I like the fact that it has tucked down into its 10-day moving average with volume drying up in the extreme. XONE has yet to complete a 2.565 million share secondary offering. I’m a buyer with the idea that the stock will continue to hold the 10-day moving average in anticipation of a “catch up” move to the upside.

 

GR090413-XONE

 

Over the weekend I discussed pocket pivot buy points in both Celgene (CELG) and Gilead Sciences (GILD), both of which have since moved higher. Interestingly, both Regeneron Pharmaceuticals (REGN) and Biogen Idec (BIIB) followed suit yesterday with their own “bottom-fishing” pocket pivots as they both look very similar coming up through their 50-day moving averages. Previously, REGN had been a short-sale target, but as I discussed in last Wednesday’s report of August 28th, REGN was likely to rally back above its 50-day moving average. While I did see this coming, I have to admit that I was surprised to see REGN log a pocket pivot move up through the 50-day moving average, which was buyable yesterday but is extended today, as is BIIB.

 

GR090413-REGN

 

GR090413-BIIB

 

Green Mountain Coffee Roasters (GMCR) has been acting well during the market’s correction as it managed to break out to a new high two weeks ago as the market was in the initial throes of its correction. As we can see on GMCR’s daily chart, below, the stock has pulled back slightly and today flashed a continuation pocket pivot buy point along the 10-day moving average, which is buyable.

 

GR090413-GMCR

 

Trulia (TRLA), which I suggested selling near its highs after its early August buyable gap-up move (see August 4th report) did come in to violate the intra-day low of that buyable gap-up day of August 1st, but since then the stock has managed to build a new base. Today the stock flashed a big pocket pivot buy point coming up through its 10-day and 20-day moving averages, as we see on its daily chart, below. Given the volatility of the stock, I would not be surprised to see it pull back towards the 10-day line. But I would use this as an opportunity to pick up shares on the basis of today’s strong pocket pivot move. TRLA’s “cousin,” Zillow (Z), not shown here on a chart, has also been strong as of late as it has moved to all-time highs. Thus I would think that TRLA might decide to follow suit.

 

GR090413-TRLA

 

Short-sale target SolarCity (SCTY) is now down about 25% from its initial short-sale point along the 50-day moving average, as we can see on its daily chart, below. It is here that I would begin to think about taking profits on the position given the percentage profit achieved so far. The stock is also approaching its little flag formation from early May from which it broke out on very strong upside volume, so this could provide an area of short-term support for a bounce. Meanwhile, First Solar (FSLR), not shown, remains below its 200-day moving average as it made a lower low today, and for now I would use the 200-day line at 37.55 as a trailing stop for any existing short-sale position in FSLR.

 

GR090413-SCTY

 

Cree (CREE), another one of our short-sale target stocks, also looks to me like it could rally from what looks like neckline support to form what would be a logical right shoulder within an overall head & shoulders type of formation, as we see on the daily chart below. While CREE is still a few points above its 200-day moving average, it has found support at its 40-week moving average on the weekly chart, not shown. This is why I think the stock is likely to try and bounce from here, and so I would let such a bounce occur before looking at shorting the stock again.

 

GR090413-CREE

 

With a number of stocks showing strong action over the past couple of days, I’m starting to lean towards the long side here in anticipation of a possible market turn. At least that is what my “sixth sense” is telling me here, although the market does remain, to some extent, highly news-oriented and anything could happen, I suppose. But then anything can happen at any time when it comes to the stock market.

With a number of leading stocks coming back with strong pocket pivot buy points ahead of a bona fide resumption of the uptrend, we are getting some clues that the market wants to turn. Thus I will initially anticipate such a turn by focusing on individual stocks that are showing strength and taking some positions on the basis of constructive individual stock action. I would also point out that with the indexes coming off a maximum of about 4% on the S&P 500 Index and a little over 2% on the NASDAQ, the market does not need a follow-through day to resume its uptrend. In this case, your first and best indicator is the action of leading stocks, and on this basis I think the market may have put in its lows for now. 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 YELP and XONE, though positions are subject to change at any time and without notice.

Editor’s Note: Due to a travel commitment, it is possible that this Sunday’s report may be published an hour later than our traditional 6 p.m. PT deadline. Either way, those members on our notification list will receive an email promptly upon publication. We apologize for any convenience.

 

Gil Morales & Company, LLC (“GMC”), 8033 Sunset Boulevard, Suite 830, Los Angeles, California, 90046. GMC is a Registered Investment Adviser. This information is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to GMC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Gil Morales & Company, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.