Market Comment

The Breakout

September 9, 2012

The long run is a misleading guide to current affairs. In the long run we are all dead.”

                –John Maynard Keynes

As if lifted from the pages of a textbook – the textbook – the Nasdaq and S&P 500 averages cleared the top of a five-month, cup-with-handle pattern last Thursday. Nasdaq volume, at 19% above average, is considered strong for an average.


This pattern is one of the most bullish formations a market can show. Nothing is 100% prescient, but the pattern and breakout normally lead to further upward revaluation. When combined with the good tone seen in the speculative growth-stock glamours for some weeks, the picture is bright for the medium-term, short-term pullbacks notwithstanding.

On a short-term basis, the move represented a clearing of the Nasdaq’s two-week range, which served as the “handle” for the larger, five-month pattern.


And this is where things get interesting. Trading activity and volatility should both pick up, now that the summer slowness is behind the market. September is historically the worst month of the year on average. This does not mean shares must correct this month. But at the same time it should come to no one’s surprise if there is a retracement of a portion of the Nasdaq’s 15% move from the June 4 intraday low.

The best three-month stretch of the year has historically been November/December/January.

Among the names, Acadia Healthcare (ACHC) was noted here in last week’s report (“The July 5 high at 19.92 potentially makes for a good add-on entry pivot, or for a fresh-money buy…“) as well as three weeks ago (“potentially buyable above 19, using a wide, 10% stop at about the 17 area.”).

Last Tuesday, the stock vaulted through the top of its cup-with-handle base on volume 140% above average, as shown below. Price is now extended past its pivot at 19.92 and should not be chased.

Earnings growth estimates for the provider of psychiatric services were most recently revised upward for ’12 and ’13, with the latter now at 44%, per most analysts.

Acadia Healthcare (ACHC) Gilmo Report Stock Chart

Alexion Pharmaceuticals (ALXN) was noted here two weeks ago (“A potential entry would be on a takeout of the July 27 high of 109.96, using a 7% stop loss in case proven incorrect.”).

Friday, price broke out of its tight, six-week flat base. Volume was just 15% below average, a disappointment. Seeing as how price closed Friday a fraction above the base top, it is not yet extended, and can be entered here by an aggressive player, using a junior-sized position which can be added to should price continue to move up.

In our opinion, ALXN is the premier biotech stock. Earnings growth estimates were most recently revised upward, to 37%/39% for ’12/’13. Earnings stability, at 22% annualized volatility, is decent for a company growing at this pace. Revenue growth has slightly accelerated over the past three quarters, and is very steady at 44%, 46%, 47%, 48%.

Alexion Pharmaceuticals (ALXN) Gilmo Report Stock Chart

Linkedin (LNKD) was noted here on Aug. 12 (“The Aug. 6 high at 113 could potentially be used as an add-on point for entry or as a fresh-money buy.”) and also a week ago (“The longer LNKD does nothing but go sideways, the better its technical health. If it does so for another four weeks, great. The view here is that LNKD makes a run for the roses before that.”).

Last Wednesday, price cleared the 113 level on volume 94% above normal, then followed that up with a 5% gain the next day on volume 165% above average. This is the exact type of conviction that we want to see as price comes up the right side of a base. For those who missed the opportunity at 113 but would still like to enter, we would wait for a pullback or ledge to form around these levels first.

Linkedin (LNKD) Gilmo Report Stock Chart

Carters (CRI) was noted here July 8 (“…the entry pivot of which would be the July 5 high of 56.01.”). Last Tuesday the stock took out this 56.01 pivot, as it lifted out of a four-month base. Volume was disappointing. In light of the dim volume, a more conservative speculator might wish to pass on entry here, with the idea that price will form a handle or shelf from which to launch a more traditional breakout. An aggressive player could enter here using a junior-sized position and a stop right below the 50-day moving average, about 7% away.

Carters (CRI) Gilmo Report Stock Chart

Ulta Salon Cosmetics & Fragrances (ULTA) was noted here on July 15 (“…[ULTA] builds a three-month pattern with a potential pivot of 98.42, which corresponds to the June 20 high.”). On Friday, price rose 7% on volume 280% above usual daily volume.

The stock could be entered around Friday’s closing level of 101.54, using a stop of 7%. The earnings growth is excellent, and last week’s volume was impressive.

Ulta Salon Cosmetics & Fragrances (ULTA) Gilmo Report Stock Chart

ULTA has shown strong interest from institutions as price firms up on the right side of its base on this weekly chart.


Sourcefire (FIRE) is a network security software developer showing earnings growth estimates of 33%/28% for ’12/’13, according to most analysts. Mutual funds that own the stock show steady growth in the past few quarters.

Technically, price has shown good tone as it moves up the right side of its base, albeit on lukewarm volume. Last Wednesday was an exception when the stock rose 4% on volume 32% above average.

FIRE has the potential to be an explosive stock: It has already proved its mettle by doubling in four months earlier this year. We would therefore be watching closely to see if it forms a handle or ledge from current levels. If so, the 57.98 high of Thursday could be used as a potential cheater entry.

Sourcefire (FIRE) Gilmo Report Stock Chart

Zillow (Z) was mentioned in Aug. 19’s report (“The potential pivot drops from the July 19 high of 44 to a cheater pivot of Aug. 7’s high at 42.60.”). Last week, price took out the 42.60 level on big volume. We are now watching to see if the potential add-on entry above the July 19 high at 44 (discussed in the last report) comes into play.

Zillow (Z) Gilmo Report Stock Chart

In summation, both averages and individual leaders show positive tone. A correction should not come as a surprise due to September’s tendency toward weakness as well as the beefy gain racked up by the Nasdaq since early June. Speculators should at all times know where their defensive stop levels are for each holding. This would make it easier to exit positions with less emotion and stress if general market weakness dictates such.

Kevin Marder

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.