The Gilmo Report

August 8, 2012

August 8, 2012

The market’s three-day rally finally ran into some selling as volume came in above average on the NASDAQ Composite Index, shown below on a daily candlestick chart, although slightly less than yesterday’s volume. This spared the NASDAQ from coming under distribution today, but the index does appear to be stalling somewhat here after a sharp turnaround from a point just above the 50-day moving average, the blue line on the chart. Members might recall that in my report of July 22nd I discussed the fact that peaks in the NASDAQ candlestick chart have been marked by so-called “spinning tops,” and in fact that did turn out to be a short-term peak for the index at that point. Now, through the “magic” of candlestick charting we can see the index forming a “bearish harami” formation where the smaller candle “body” of today lies within yesterday’s candle body. This suggests at least a pause in the trend, and perhaps the next few days will determine whether this latest market move to higher highs since the rally began off the early June lows has any legs. In any case, the market looks primed for a pullback, and this would be consistent with the chop n’ slop environment we have been in all summer. Despite the rally, leadership is relatively scarce and sloppy in its own right, and on this basis I remain skeptical of the rally.

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Apple (AAPL) remains as the last big-stock NASDAQ leader that is still on its feet, as we can see on its daily chart below. AAPL attempted to break out through the 619.87 peak in the handle of its cup-with-handle formation earlier in the week, but buying interest didn’t show up for the breakout party, so the stock has run out of upside steam. However, while nobody appeared willing to buy the breakout, nobody also appeared willing to sell the stock as volume has dried up on both the upside and the downside. Most institutional investors still see “value” in AAPL, and for now holders of AAPL stock don’t seem to be in a hurry to sell the stock for now. However, it is hard to see a big-volume breakout materializing for the stock given the lack of any real catalysts. The potential for a rapidly slowing global economy, as indicated by the earnings reports of McDonald’s (MCD) and Priceline.com (PCLN) over the past 24 hours, to slow down the torrid pace of AAPL’s growth could lead to more selling. Bottom line: Without any volume coming into this breakout attempt, it could fail just as easily as succeed, perhaps even more so. Stay tuned on this one.

Apple (<a href=AAPL) Gilmo Report Stock Chart" title="Apple (AAPL) \" />

Priceline.com (PCLN) was already looking a bit “funky” going into yesterday’ after-hours earnings announcement and the funkiness turned into a bad smell as the stock blew right through its 200-day moving average on the downside. The daily chart below has the look of a meteor blazing its way towards Hades on massive selling volume, and PCLN’s status as a big-stock NASDAQ leader is now recent history. PCLN saw a sharp deceleration in revenues and bookings, as it fell victim to slowing in Europe, an area that had been a hotbed of growth for the company. Like McDonald’s (MCD), which came out with a weak earnings report that showed its own suffering at the hands of a slowing economy (see my appearance on Fox Business News this morning at the following URL: http://video.foxbusiness.com/v/1776843427001/mcdonalds-priceline-and-disney-hit-markets-wednesday/?playlist_id=87247), the fundamental and technical action in these stocks is your prima facie evidence that the global economy is slowing rapidly. Will the Fed come to the rescue?

Priceline.com (<a href=PCLN) Gilmo Report Stock Chart" title="Priceline.com (PCLN) \" />

Obviously, a break in PCLN makes me wish I were short the stock going into earnings, but there are other former big-stock NASDAQ leaders that are moving into potentially shortable positions, such as Intuitive Surgical (ISRG), shown below on a daily chart. ISRG took two days to blow through its 200-day moving average after announcing earnings in mid-July, unlike PCLN which did it all in one meteoric descent today. But since then, ISRG has wedged and nudged its way up into the 200-day moving average on volume that has remained well below average. This is the second visit up to the 200-day line since the breakthrough in mid-July, and it is coming on less volume, so it appears more vulnerable to failure. Notice also that we are coming up into the prior lows of the stock’s cup base, the highlighted area on the chart, and the stock may slide into this short-sale “target zone,” if you will, in the coming days. I view it as potentially shortable here up to the 50-day moving average, about a 4-5% price band from today’s close. The stock could toss its cookies right here, but that is unclear if the general market does not pull back from current levels as well.

Intuitive Surgical (<a href=ISRG) Gilmo Report Stock Chart" title="Intuitive Surgical (ISRG) \" />

With Priceline.com (PCLN) breaking down, this puts obvious pressure on the other names in the group, particularly the weak ones, and one stock I did short into PCLN’s earnings was not PCLN itself, but rather TripAdvisor (TRIP), which I first discussed in my report of August 1st. TRIP had rallied beyond my original stop at around 38, but I felt it was shortable yesterday on the basis of its low-volume churning action, and so if I wanted to try and game PCLN’s earnings, TRIP was a less-aggressive proxy and was also in a reasonable position to sell short. The stock did gap-down with PCLN and was down nearly 10% intra-day so I did not want to be a pig given that the general market remained indecisive on the downside. However, I would be quite interested in re-entering a short position on any rally from here, using today’s intra-day high at 37.69 as a quick stop. TRIP looks like it could continue building some additional right shoulder structure in the pattern, but it appears that the ultimate price direction for TRIP will be to the downside.

TripAdvisor (TRIP) Gilmo Report Stock Chart

Tibco Software (TIBX), another short-sale target in rally mode, as last discussed in my report of one week ago, August 1st, was able to clear its 200-day moving average by about 2% before reversing course today and dropping back into the 200-day line, as we see on the daily chart below. TIBX found resistance at the 29-and-change level, which more or less lines up with the declining tops trend line I’ve drawn on the chart. TIBX saw a slight increase in volume yesterday as it pushed away from the 200-day line on the upside, but there was no follow-through buying in the stock today. And so it did not take much in the way of selling to send it back to the 200-day moving average where it ended the day. A small bounce off the 200-day line from here, on feeble volume, might represent a short-sale opportunity using the 29.23 intra-day high as a guide for an upside stop.

Tibco Software (TIBX) Gilmo Report Stock Chart

In a choppy market environment the action of the better-acting stocks remains choppy as well. And if one chooses to participate on the long side one is often left to the task of trying to make money on a short-term swing trade, as little real accumulation appears to be evident in this market. LinkedIn (LNKD) is somewhat representative of the situation as it tried to break out on Monday following last Friday’s big gap-up after earnings, but even this “shakeout & breakout” type of move failed to produce any further high-volume buying interest as the stock dropped back into its prior consolidation. If one bought the breakout, one is now underwater on the stock, testimony to the idea that buying strength in this current market environment is not likely to be rewarded.

LinkedIn (<a href=LNKD) Gilmo Report Stock Chart" title="LinkedIn (LNKD) \" />

While I remain skeptical of the current “confirmed rally,” the action remains murky as the possibility of the Fed or the ECB stepping in with a formal QE announcement keeps sellers at bay for now. Currently I see no high-probability way of playing further upside in the indexes, while the market’s sharp move off the lows of a week ago remains vulnerable to a pullback. If the market acts as it has all summer and turns back to the downside, some of my short-sale targets have a reasonable chance of getting dragged down with it, so that is actually where I am looking to deploy after a few days of sharp upside that appears to be losing steam. As always, the situation remains fluid, making upside stops an important component in any short-sale campaign one might choose to wage.

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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