The Gilmo Report

April 25, 2012

April 25, 2012


The market is stuck in what I like to call an “algo swamp” (areference to trading algorithms pushing things around) as it swings back and forth here along the lows of its pullback off the peak. So far this week has been a week where one good gap seems to have deserved another as a gap-down on Monday morning was answered with a gap-up this morning. Both gaps were news-driven with Monday’s gap-down caused by news coming out of Europe that included the collapse of the Dutch government and the possiblity of France embracing a socialist candidate, while today’s gap-up move was all about Apple (AAPL). The Fed might also have had something to do with today’s gap-up and rally holding all day as Fed Chairman Bernanke continued to indicate that while QE3 is not necessary right now it remaiins on the table should the economy falter. Over the weekend I was looking for further downside based on the weak action along the 50-day moving average, and that certainly was the case on Monday and yesterday. But, the bottom line now for the NASDAQ is that it is in the midst of what is so far a two-day rally attempt off of Monday’s lows. A follow-through day could come as early as Friday


Meanwhile the NYSE-based indexes, such as the S&P 500, shown below on a daily chart, remain in extended rally mode. While the NASDAQ gapped below its prior lows on Tuesday so that its rally attempt is only two days old, so far, the S&P 500, the Dow, and the NYSE Composite Index have all remained above their lows of two weeks ago. This puts the NYSE-based indexes in the midst of an 11-day rally attempt that is still looking for a follow-through day. Is the market getting ready to turn? Without a follow-through all we can say for certain is that the market remains in a correction with the potential for a follow-through given that tomorrow will be the fourth day of the NASDAQ’s rally attempt, and I would expect to see any market follow-through include the NASDAQ index. We might consider that to some extent AAPL is a big driver in this market, and the NASDAQ’s weakness over the last several days has been a function of AAPL selling down to its 50-day moving average. If AAPL stabilizes, then the market likely does as well.

S&P 500 Gilmo Report Stock Chart

The daily chart of Apple (AAPL) below shows the big gap-up move today, but I do not consider this a buyable gap-up given the light volume. AAPL is simply coming straight up off of its 50-day moving average on volume that is lighter than the selling volume seen over the prior three days. Volume came in at 22% above average, so based on the volume levels today’s gap-up was far from buyable. AAPL already issued a sell-signal last week when it violated its 10-day moving average, and I would be looking for the stock to take some time to set up properly before moving higher. For all practical purposes, however, AAPL is holding up at its 10-week/50-day moving average,and this week’s undercut and retest of the 50-day line has so far turned out to be successful. So far AAPL is three weeks down in a base and probably needs more time to build a constructive formation, so I don’t feel as if one has to come in and buy AAPL shares right here. I would be looking for some sort of pocket pivot buy point to show up somewhere along the 10-day or 50-day moving averages, but it’s going to take some time to get those big downside volume bars out of the way for a pocket pivot. Otherwise AAPL would have to trade some big volume to exceed those, and if it wasn’t able to do it on a big earnings gap-up, I don’t consider it likely to do so any time over the next ten trading days.

Apple (AAPL) Gilmo Report Stock Chart

If the market is simply correcting here and setting up for another upleg, I would expect to see some rotation into newer groups, or leading stocks that have been quietly building bases. Oil leader Continental Resources (CLR) checked in with its second pocket pivot move in the last five trading days today as it was able to clear above its 50-day moving average. The first pocket pivot that occurred last week came up off of the 10-day moving average but could not clear the 50-day line where it found resistance. CLR announces earnings next Thursday and these pocket pivots might be presaging a positive earnings announcement. Technology, retail, and medical stocks have been big leaders in the market since the beginning of the year, and some healthy rotation into “stuff” stocks like oils might be in the offing here as we see some constructive action in CLR as well as Pioneer Natural Resources (PXD), not shown, which also flashed a big pocket pivot buy point today as well. Both of these are on my buy watch list given their constructive action as they round out fresh bases.

Continental Resources (CLR) Gilmo Report Stock Chart

I’ve also noticed big fertilizer stock CF industries (CF) tighten up considerably over recent weeks after some shakey action throughout March and early April. While I had previously considered that CF might break down from a possible POD formation, the stock has negated the POD, in my view, by building a tight base here as volume has dried up. Each time the stock has tried to break down through the 50-day moving average over the past two months, selling volume has diminished, which might tell you that all the sellers have finally been wrung out of the stock. Today the stock confirmed that to some extent with a strong pocket pivot buy point and base-breakout, as we see on the daily chart below. Volume came in at 18% above average which is not huge, but the fact that this is a pocket pivot makes the move today potentially buyable with the idea that the stock should try and hold the top of the base at 190. CF announces earnings next Friday, so the technical action might be presaging a positive earnings announcement.

CF industries (CF) Gilmo Report Stock Chart

In recent reports I’ve been discussing hard-drive stocks Western Digital (WDC) and Seagate Technology (STX) (see April 4th and 18th reports), and both stocks have more or less ignored the market’s recent correction. STX, which I don’t show here, executed a “shakeout & breakout” maneuver early last week and broke out through the 28 price level.. Today it closed at 31.02 as it continues to move higher, and WDC, shown below on a daily chart, confirmed the group’s strength today by flashing a pocket pivot buy point that is also a breakout pocket pivot as the stock emerges from this tiny little cup-with-handle base, the bottom of which violated the 50-day moving average and the stock’s previous breakout in late March. Of the two, STX is stronger as it is coming out of a second-stage base while WDC is just starting to push out of a long base that extends all the way back to January 2010. Thus I am not surprised that the stock ran into some resistance on its late March breakout attempt since it is just emerging from this long base. I think, however, that the stock can potentially go a lot higher, along with STX, if the market is able to weather this correction and produce a follow-through day.

Western Digital (WDC) Gilmo Report Stock Chart

I see some evidence for rotation in this market, which is always constructive to see during a market correction. As I’ve said before, and often, the market’s move so far in 2012 makes it deserving of a correction. Leading stocks like AAPL and PCLN have pulled back to their 50-day moving averages for the first time, and may simply be in the process of building second-stage bases. Intuitive Surgical (ISRG) did not hold its recent buyable gap-up but on its weekly chart looks like it could be in the second week of a tight flag type of formation. Meanwhile, some former leaders are taking some heat, such as Under Armour (UA) on a failed breakout and Ulta Salon (UA), which got smacked in brutal fashion yesterday on what appeared to be no particular news. You can see in the daily chart below that, leading up to yesterday’s break, buying volume was fairly light, which might have been one clue that buying interest in the stock was becoming exhausted.

Ulta Salon (UA) Gilmo Report Stock Chart

Stocks that are able to weather this correction well should be your first buy targets, and I prefer those that have already issued pocket pivot buy points or which have broken out of bases and are holding above these breakout points ahead of any possible follow-through day. If we get a follow-through, these would be your “go-to” stocks. Leading stocks which have not acted as well probably need more time to build bases or are cooked for now, like I tend to think something like ULTA is. Meanwhile, as I discussed over the weekend, the short-side of this market is not very well-defined as there exists a dearth of short-sale set-ups, as in not very many. Therefore, as I indicated over the weekend, plenty of dry powder is a good thing to have here as we wait to see where this market goes and, more specifically, where the precise opportunities to catch a good trend might exist. Stay tuned.

Gil Morales

CEO & Principal, Gil Morales & Company, LLC
Principal and Managing Director, MoKa Investors, LLC
Principal and Managing Director, Virtue of Selfish Investing, LLC

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