The Gilmo Report

August 15, 2012

August 15, 2012

The market remains in a de facto rally based on its ability to persist in producing higher highs in this choppy rally off the early-June lows that is now in its eleventh week. As I wrote over the weekend, despite some of the funky action “I would not necessarily discount the market’s ability to slowly bring things back into alignment as it continues to move higher.” And to some extent we’ve seen that occur so far this week. In reality, the market has been in a rally phase since the early-June lows, as the daily chart of the NASDAQ Composite Index shows below. And despite temporary bouts of selling the market has come right back up like the proverbial “Weeble” that “wobbles but doesn’t fall down,” for those who remember that distinctive advertising tag line for the infamous “Weebles” toy figures of yore. (But perhaps I date myself, and most of you are asking, “Weebles? What the h*** is he talking about!”) What we’ve seen for the past week or so is a market that is consolidating gains in a manner that is unlike the other peaks that we’ve seen in this summer “bull” market.

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Apple (AAPL) continues to levitate higher on below-average volume, something that seemed likely over the weekend given the stocks excruciatingly tight series of closes over the prior week, as I discussed in my August 12th weekend report. While buying enthusiasm remains below average, there still does not seem to be any AAPL shareholders willing to sell the stock. AAPL did run into a little logical resistance as it approached the prior 644 high yesterday, which I’ve highlighted in yellow on the daily chart below. Even with volume picking up slightly as the stock reversed and closed at the low end of its daily trading range, today saw absolutely nothing in the way of follow-through selling and AAPL closed down 86 whopping cents on the day as it held very tight.

Apple (AAPL) Gilmo Report Stock Chart

AAPL’s ability to head for its old highs is being mimicked by another big-stock NASDAQ name, Amazon.com (AMZN), which broke out of a base at the end of July on huge volume and since then has been moving roughly sideways in a short flag-like formation, as we see in the daily chart below. AMZN is one of the most-hated stocks on the planet as it is perceived by “bears” as being wildly “overvalued.” But so far the market does not agree with this assessment. Selling volume has been drying up in the pattern and AMZN today followed through with a pocket pivot buy point coming up through the 10-day moving average. This is occurring well within range of the stock’s recent breakout through the 230.50 buy point in the prior base. AMZN did briefly dip below that buy point 10 days ago on the chart, but managed to close above that level as selling volume remained below average. It looks to me like today’s pocket pivot buy point is presaging a move above the 240 level as the stock makes a run for its 246.71 all-time price high.

Amazon.com (AMZN) Gilmo Report Stock Chart

Over the weekend I discussed the very tight flag formation in the weekly chart of Lumber Liquidators (LL), and noted that I would like to see a pocket pivot buy point on a move up and out of the flag (see August 12th report). Below we see a daily chart of LL which looked primed to bust out of its flag formation yesterday before it reversed and dropped back into the pattern. Today, however, on the heels of favorable housing news in the NAHB Market Index, LL found its mojo once again and moved to new highs on higher volume than that seen yesterday. Unfortunately, the volume was one day shy of being higher than any down volume in the pattern over the prior 10 trading days, and so a valid pocket pivot buy point was not to be had today. However, the stock still acts well and I would use any pullback into the 44 price level to potentially buy shares.

Lumber Liquidators (LL) Gilmo Report Stock Chart

Moving through a couple of other buy ideas I discussed in my report of this past weekend, we see the daily chart of Regeneron Pharmaceuticals (REGN), below, as the stock continues to move sideways in an attempt to complete the handle in a cup-with-handle formation. On Monday REGN got hit with some selling as news of Roche’s drug for age-related macular degeneration cited the lower cost of the drug as a competitive factor for REGN to overcome with its own macular degeneration drug, Eylea. REGN pulled down to its 20-day moving average, the green line on the chart, and provided an opportunity to pick up some shares on weakness as the stock found support off the 20-day line and has moved higher over the past two days. I would like to see REGN continue to hold the lows of this past Monday as it continues to build a handle, and eventually might look to get more aggressive in the stock on a high-volume breakout through the 140 price level, roughly the peak of the handle.

Regeneron Pharmaceuticals (REGN) Gilmo Report Stock Chart

Over the weekend I thought that LinkedIn (LNKD) might have a shot at testing its recent 113 high after pulling back down near its 50-day moving average, but the stock has pushed below its 50-day moving average, as we see on the daily chart below. Does this mean the stock is “dead?” Well, consider that LNKD tends to act in a “porous” manner around its 50-day moving average, as is evident from the chart, and I would note that the move below the 50-day line has not been accompanied by any increase in volume. LNKD is another stock that is considered to be hideously overvalued by those who are bearish on the stock, and some may now see this current dip below the 50-day moving average as some sort of technical confirmation of that theory. What I am open to, however, is the possibility that this dip below the 50-day line may be potentially buyable if LNKD can hold above today’s 101.50 low, or at least the $100 price level if one wanted to give it some room. In this market, what might look like a shortable breach of the 50-day line might turn out to be a buyable pullback if selling volume does not pick up here and it ends up faking out the bears.

LinkedIn (LNKD) Gilmo Report Stock Chart

Michael Kors Holdings Ltd. (KORS) blew out earnings yesterday morning as it quelled fears of a slowdown in the European side of its business, and the stock staged a buyable gap-up move on massive volume, as we see in the daily chart below. The gap-up move sent the stock past the 50 price level today, right around the left-side peak in the base, where it found some resistance, and closed in the lower part of its daily trading range. Alert members might note that KORS in fact flashed a pocket pivot buy point off the 50-day moving average the day prior to announcing earnings on Tuesday morning. This might have been a clue regarding a strong earnings announcement. But in my view if the stock is in fact going to go higher from here this buyable gap-up should be sufficient to buy into, using the 48.10 low plus 2-3% to allow for some porosity given the overhead supply from the left side of the pattern as your selling guide. The interesting thing about KORS is that this breakout is coming from its one and only first-stage base since coming public last December.

Michael Kors Holdings Ltd. (KORS) Gilmo Report Stock Chart

Over the weekend I discussed covering any short positions in TripAdvisor (TRIP) if it moves below the $34 price level as this would be a logical point for the stock to stage an “undercut & rally” type of maneuver. TRIP did exactly that yesterday and today, and we might note from my annotations on the daily chart of TRIP, below, that the stock has now undercut two prior lows in the pattern. Unless the general market starts to break down, TRIP may likely end up having to build a few more right shoulders in its head and shoulders formation, and I will be monitoring any rallies from here in the event they become shortable. Until then, I’m just watching the stock after making some profits on the short side, and in a market that does not seem willing to give it up on the downside a profit in hand is worth two in the bush, so to speak.

TripAdvisor (TRIP) Gilmo Report Stock Chart

Following up on another short-sale idea from previous reports, I last discussed AutoZone (AZO) in my report of August 5th as being shortable on bounces off the 200-day moving average. AZO had a couple of those between then and now before it finally broke down through the 200-day moving average a week ago. As we can see on the daily chart below, AZO attempted to rally back to the 2900-day line today before being turned back on increased volume. AZO is basically bouncing along its prior lows in the pattern around the 353-354 price area, and if I were still short AZO I would use, at the very least, the 200-day moving average as a trailing upside stop. Otherwise it is still not clear how much downside potential exists on the short side in AZO if the general market continues to rally. But the 200-day line at least provides a reference by which one can keep a short leash on the stock. Intuitive Surgical (ISRG), not shown, was one short-sale idea that was quickly stopped out at the 200-day moving average, and it has managed to move higher, so remember to keep true to your stops as these stocks can sometimes rally further above a key moving average than you think.

AutoZone (AZO) Gilmo Report Stock Chart

After-hours, Cisco Systems (CSCO) is pushing higher after announcing earnings, and this may set a positive tone for tomorrow’s open. I still tend to think that some of the better long ideas can work in a continued market rally, and as we approach the end of August we could see a market headed for new highs, although the path may be choppy along the way. Over the weekend I discussed my views regarding Dow Theory and the idea that underlying bearishness exists in this market because the Dow Jones Transportation Index, shown below on a daily chart, has been lagging the Dow Jones Industrials. However, we might note that today produced a trend line breakout in the Trannies, so perhaps this is the first step in their ultimate realignment and rehabilitation into a more bullish configuration with respect to the Dow itself! As I discussed in my report of this past weekend, I don’t consider the Dow indexes to be as relevant in a world where the industry spectrum is so much broader, particularly in the realm of technology which is misrepresented, as far as I can see, in the Dow by big laggards Microsoft (MSFT) and Intel (INTC).

Dow Jones Transportation Index Gilmo Report Stock Chart

Perhaps some confirmation of a revival in the Trannies is the fact that railroad names Union Pacific (UNP), shown below on a daily chart, and Kansas City Southern (KSU), not shown, both flashed pocket pivot buy points today and yesterday, respectively. UNP and KSU are both 2% and 4%, respectively, down from their 52-week highs, so given that the rails are considered strong economic barometers, their technical action does not seem so out of line as the more general Transportation Index is. Therefore the basis for fearing “economic weakness” is not as valid as some might want to believe based on Dow Theory.

Union Pacific (UNP) Gilmo Report Stock Chart

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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