The Gilmo Report

December 11, 2011

December 11, 2011

The last two trading days of the week provided investors with a nicely compacted two-day real-time illustration of just what a whip-saw market is like. News out of Europe provided the drivers for a big slide on Thursday as well as a big upside grinder type of move on Friday that made up most of Thursday’s losses. The buying on Friday lagged the volume of Thursday’s selling, so despite the big percentage moves in the major market indexes there was no follow-through day on Friday. In simple terms, what we see on the NASDAQ Composite Index’s daily chart below is a heavier-volume break to the 50-day moving average followed by a lower-volume bounce off the 50-day line. Is the market setting up for a clean, permanent breakout through the 200-day moving average on the basis of a glorious new round of Euro-QE, backed up by a willing Fed ready to brandish its own cornucopia of QE “tools”? The most recent of which manifested itself as lower rates on dollar swaps for foreign banks, giving rise to the gap-up move of eight trading days ago that took the NASDAQ back above its 50-day moving average. The crowd seems convinced that Euro-QE, and QE in general is here to stay and stocks will simply continue to rally, and this is where I begin to wonder whether the crowd is being set up to be fooled here.

NASDAQ Composite Index's Gilmo Report Chart

My general view is that gold and precious metals provide a clue as to the effects of forthcoming rounds of QE, whether they come from Europe or the Fed. Massive money-printing will, according to simple laws of currency supply and demand, tend to devalue fiat currencies and cause alternative stores of wealth such as gold and silver to rally. With all the talk of Euro-QE and the Fed standing by with a quiver full of QE “tools” at their disposal, gold is still just biding its time, as we see on the daily chart of the SPDR Gold Shares (GLD) shown below. The GLD seems to exemplify some of the uncertainty surrounding the current negotiations among the EMU nations as they haggle over how much money-printing they are williing to conjure up as they seek to add another layer of debt to a system that is already mired in deeply laminated layers of debt. Gold’s pullback to the 50-day moving average on an extreme volume dry-up might be a buying point, but I would prefer to see a pocket pivot type of move off the 50-dma first before adding to my original positons taken on the October 25th pocket pivot buy point.

SPDR Gold Shares (GLD) Gilmo Report Chart

Despite the market’s volatility and the uneven action that dominates most of what we might consider leading stocks, there are some stocks that seem to live in a world of their own. Questcor Pharamaceuticals (QCOR) is one of these stocks as they continue to ride a wave driven by their one-drug product line, Acthar, which is used to treat multiple sclerosis, among 18 other “indications.” The daily chart below, provided by our friends at HighGrowthStock Investor, shows a strong pocket pivot buy point emerging on Friday as the stock came up and off of its 10-day and 20-day moving averages, thanks to a brokerage firm’s buy recommendation on that day. This is coming off of a short, ascending pattern that is only six weeks long, hence it does not meet the strict definition of an “ascending base,” but I would not be concerned with that since it is potentially buyable on the basis of the pocket pivot buy point, using a reasonable stop. QCOR is showing a very sharp three-quarter earnings and sales acceleration with big estimates going forward, so fundamentally it is one of the stronger situations in this market. The stock is potentially buyable with the idea that it should hold the 10-day line at 43.46, less than 5% away from Friday’s close.

Questcor Pharamaceuticals (QCOR) Gilmo Report Chart

While some want to see the market as being black or white, either bull or bear, there are always times when it is more “gray.” This is one of those markets, and the “grayness” is typified by the uneven action of stocks in what becomes more a market of stocks and less a stock market. QCOR provides an example of a fluorishing leader while some of these big-stock NASDAQ names I’ve been tracking as potential short-sale targets continue to flop around. Obviously, if the market continues higher from here I would expect strong names like QCOR to lead the market, but if it rolls over I would certainly look at some of these feeble-acting big former leaders as viable short-sale candidates given their status as big “market stocks” and former leaders that have started to falter somewhat. Apple, Inc. (AAPL) is still flopping around after its “two-down-and-one-up” sell signal eight weeks ago, and note that some sort of resolution is likely coming as we see selling volume and buying volume dry-up over the past five weeks. Keep an eye on this, as a breach of the 10-week/50-day line would be a likely signal to enter a short position on AAPL.

Apple, Inc. (AAPL) Gilmo Report Chart

In my report of this past Wednesday I showed daily charts of my four “big stock” short-sale targets, including AAPL, above. In this report I am looking at weekly charts, as these are often helpful in eliminating a lot of the daily “noise” that emanates from the constant market-moving news coming out of Europe. I don’t necessariy consider that all four of these stocks will provide hugely profitable short-sale opportunities, even if the market does roll over from current levels, but I will continue to monitor patterns that appear to have at least a better than 50% probability of leading to further downside in these stocks. For example, we can ask whether Baidu, Inc. (BIDU) is building a big head and shoulders formation or whether it is going through a correction and base-building process of unknown duration. With trading volume drying up in the stock, we can only watch and see how this stalling around the 10-week/50-day and 40-week/200-day moving averages resolves once we do see some meaningful volume begin to come into the stock. For now, I only note the “rolling top” nature of the pattern as being potentially negative.

Baidu, Inc. (BIDU) Gilmo Report Chart

I tend to see the action in AAPL and BIDU less conclusive, perhaps, than I currently see the action in (AMZN), shown below on a weekly chart. AMZN’s position is much more compromised as it remains below its 40-week/200-day moving average where it finds resistance that coincides with the lows of a right shoulder within a very compact 10-week head and shoulders type of formation. At the very least it appears that AMZN has a fair bit of upside resistance and overhead supply to contend with from current levels, thus I tend to see it as potentially shortable on any rallies up into or towards the 40-week/200-day moving average, using that as a guide for an upside stop. Meanwhile it is sitting roughly on top of the big double-bottom type of structure that extends from January to April of this year at around the 187 price level. You don’t typically see a big-stock former leader like AMZN form such a short H&S formation. This is usually seen in “hotter,” lesser-capitalization stocks that do not have as wide an institutional following as something like an AMZN. Thus this weak formation, on its face, is notable, and AMZN may simply be building a “reverse flag” or “ledge” as it consolidates its breakdown off the peak in preparation for further downside price movement. (AMZN) Gilmo Report Chart (CRM), like AMZN also appears to be in a more compromised position than AAPL and BIDU as it stalls and churns around its 10-week/50-day moving average, as we see on its weekly chart, below. From a macro-perspective CRM has failed from a breakout attempt back in May of this year, and that breakdown through the 10-week/50-day and 40-week/200-day moving averages formed the right side of the “head” in a pattern that has evolved from a late-stage failed-base situation to a head and shoulders formation. CRM has formed two right shoulders in the pattern and after undercutting the 110 price level three weeks ago the last two weeks have taken the stock up into the 10-week/50-day moving average. This has occurred as CRM has benefitted from positive industry news in the form of three high-profile buyouts of smaller “cloud” software companies: SAP buying SFSF, IBM buying DMAN, and ORCL buying RNOW, but I would ask why one of these companies hasn’t bought CRM. Instead, they buy CRM’s competitors like RNOW. I see stiff resistance for CRM in the 120-130 price zone, and this looks potentially shortable using the 50-day line at 124.38 as your guide for a stop. (CRM) Gilmo Report Chart

Since I started this report with a discussion of a long idea, I’ll sandwich my previous four short-sale discussions between that and another long discussion, this time on a stock I’ve received a number of emails about, Mercadolibre (MELI), shown below on a weekly chart. Of course, everyone sees the obvious cup-with-handle breakout with a 47.9% deep cup and a four-week handle. MELI’s extremely deep cup has also undercut its prior base and penetrated down into the cup-with-handle base it formed between December and June 2010 for your standard “clearing of the decks.” Earnings and sales look decent, and of course you can buy any legitimate breakout you want as long as you have a clear exit point in mind, but this is a very deep cup formatioin here, and in a continued sloppy general market environment it may have trouble working, similar to the way Tibco Software (TIBX), not shown, has had some trouble working after a breakout attempt from a 41.2% deep cup-with-handle. If the general market rallies well from here, however, it could end up working. But be aware of the additional risk this poses and scale your position accordingly if you are long this.

Mercadolibre (MELI) Gilmo Report Chart

Success with any of these short-sale targets as well as any strong long situations like QCOR, for example, is going to depend heavily on the direction of the general market, which could remain in a sloppy and choppy “gray zone” for an indefinite period of time. I see a number of stocks trying to build bases from which they could break out or which are holding recent breakouts (ISRG, CMG, BIIB, PNRA, UA, ULTA) while a number of others remain in weak patterns from which they could break down without any material resolution and conclusions to be drawn (AMZN, CRM, etc.). When you see a strong pocket pivot from an ascending type of formation like we do in QCOR, you have to think that sort of action is quite buyable, but to some extent you don’t have the confidence of the market’s tide behind you. That happens some times. When you see a stock like CRM or AMZN forming what look like extremely weak formations on the brink of further breakdown, you aren’t sure whether you won’t have to deal with mad upside QE news-induced gaps to the upside if you decide to go short such names. While such periods are perhaps times to play light and avoid heavy commitments, they are also times to pay attention, because the next big move in the market will begin to show up in subtle clues in the action of individual stocks, and the final resolution one way or the other will eventually make itself apparent. It just won’t do it when you expect or want it to. Thus the challenge is to keep your eye on the ball very closely while not necessarily swinging, waiting for the next fat pitch. That is where we stand right now, as I see it.

Gil Morales

CEO & Principal, Gil Morales & Company, LLC
Principal and Managing Director, MoKa Investors, LLC
Principal and Managing Director, 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 a position in AGQ and DGP, though positions are subject to change at any time and without notice.

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