The Gilmo Report

December 14, 2011

December 14, 2011

You don’t really need a weatherman to tell you which way the wind is blowing, as the song goes, , and with a QE wind failing to blow, the market’s action, which has been a little bit on the “gray” side recently, has certainly made it a bearish shade of gray over the past three days. The NASDAQ Composite Index, shown below on a daily chart, is now decisively below its 50-day moving average as selling volume has picked up sharply. What you have here is a good old-fashioned case of forced selling as the markets re-thought the European announcement on Friday and realized that not much is going on in terms of a real commitment to or mechanism for a bold slug of Euro-QE. And so everything gets hit, from stocks to commodities as institutions rush to increase liquidity by selling off assets. Yesterday’s nasty reversal at the 50-day moving average led to a gap-down open today that carried down to the bottom of the “rising window,” or gap-up day in late November, as I’ve highlighted on the chart. A short-term bounce from here would be logical, but all we know for sure is that heavy selling has sent the index decisively below its 50-day line as a number of leading stocks have been hit hard, certainly enough to know better than to try and get long this market.

NASDAQ Composite Index Gilmo Report Chart


In my report of this past weekend, December 11th, I discussed gold as being something of a “QE clue” given its lack of movement on Friday despite news that the market took as a sign of Euro-QE-in-the-offing, sending stocks vaulting higher. A high-volume gap-down in the SPDR Gold Shares (GLD) that took it below the 50-day moving average confirmed this and also flashed a clear sell signal for the GLD, and SLV by association. By Tuesday the clear violation of the 50-day line was complete. I am out of my gold and silver ETFs at little cost, and it is clear for now that the major uptrend line in gold has been broken, as we can see on the weekly chart of the GLD below. As well, this is the first time the GLD has broken the 200-day moving average (40-week on the chart) since August 2008 when it went into a steep correction that lasted over a year. For now the gold trade is off, end of story. The message of gold, however, may be that the rule of QE is beginning to waver. When gold broke its 200-day moving average in August 2008 it was a precursor to a nasty down leg in stocks that began in September 2008 – food for thought in December 2011!

SPDR Gold Shares (GLD) Gilmo Report Chart

Because I don’t think it’s necessary to have to short everything on the planet when the market has a potentially legitimate downside break, I have kept my list of short-sale targets down to four key stocks, for the most part: Apple, Inc. (AAPL), (AMZN), Baidu, Inc. (BIDU), and (CRM), which I discussed in detail in my report of this past weekend, December 11th. AAPL, shown below on a daily chart, has been on my short-sale watch list ever since it pulled the two-down-one-up sell signal several weeks ago. Today the stock violated its 50-day moving average, as we see on the daily chart below, and broke the 65-day exponential moving average on increasing selling volume. Note how AAPL found a little support today around the little area of congestion I’ve circled on the chart. This violation of the 50-day moving average is potentially shortable using the 50-day line as your guide for an upside stop. Yesterday saw the stock close below the 50-day line, and today’s move below yesterday’s intra-day low was the violation to be shorting AAPL on. Certainly any bounce from here up into the 50-day is potentially shortable as well.

Apple, Inc. (AAPL) Gilmo Report Chart (AMZN) has been on our short-sale watch list based on the same thesis as AAPL since AMZN flashed its own variation of a straight-down-and-straight-up sell signal when it went two-weeks-down-and-two-weeks-up several weeks ago as I’ve indicated on the daily chart below. As I discussed over the weekend, AMZN has formed this very narrow head and shoulders formation and looked primed to break down. Over the past three days the stock has done exactly that, breaking through what I see as the “neckline” in this very short H&S pattern. Today’s action took the stock below the lows of August, setting up a very logical “undercut & rally” type of situation as the stock rallied and closed near the peak of its intra-day range. This rally off the intra-day lows may stop right here, or it may continue higher up towards the neckline at around 184-185. But I would look to try and short this bounce as it moves above the 180 level, keeping the usual 3-5% stop, maximum. The key here is just how much, if any, the general market tries to bounce after filling the late November upside gap, as I indicated on the NASDAQ daily chart shown at the top of this report. (AMZN) Gilmo Report Chart

We looked at Baidu’s (BIDU) weekly chart over the weekend and noted that it is forming this big head and shoulders type of formaton, and so far this week the stock is rolling over in what looks like the right shoulder in this pattern that we’ve been watching develop over the past few weeks and months. Today’s heavy-volume gap-down move took the stock below the lows of late October and late November, as I’ve highlighted on the chart, which could set up a short “undercut & rally” bounce from here, but I would tend to look at any bounce into the 120-125 price zone as being imminently shortable. If in fact this continues to form out as this big head and shoulders formation that I’ve outlined on the daily chart, below, then a test of the neckline, down below the $100 price level, may be in the cards. That is what I would be playing for if I intended to campaign a short position in BIDU as it potentially continues to move lower. A bounce up to the 125 price level from here might be logical as a roughly 50% retracement of the move down off the 135 level that began two weeks ago, so watch closely for this as I would not try and short BIDU right here if I were not already short the stock.

Baidu's (BIDU) Gilmo Report Chart (CRM) is another of these head and shoulder top situations that continues to evolve, and the daily chart below shows the head and the two big right shoulders in the formation. I discussed CRM in my report of this past weekend, using the weekly chart to illustrate the long, rolling H&S formation, so members can refer to that chart to see the rest of the pattern as I only showed the head and the two right shoulders here. CRM looked quite shortable over the weekend as it was stalling around its 50-day moving average, as smart money used the news-related rally to unload stock. The stock was very shortable Monday morning as it gapped down on heavy volume right off the opening, and after today is down three days in a row, so is in a potential position to bounce here. I would, however, look at any bounce above the 110 area up into 115 as very shortable, using the usual 3-5% maximum upside stop. (CRM) Gilmo Report Chart

The market may very well be at the beginning of a potential new leg down in an overall bear phase, and the only thing that I can see saving it from further downside would be an announcement from the Fed that they are initiating a new round of QE in the form of, say, purchases of Mortgage Backed Securities (MBS), or some comprehensive European plan to print Euros which so far hasn’t happened despite an endless stream of positive pronouncements, promises and “agreements.” The weekly chart of the NASDAQ Composite Index, below, does not look so healthy when viewed in this time frame as it appears to be locked in some sort of head and shoulders/lean-to/rollover type of formation of its own. We can also see the wide weekly ranges as volatility has ruled in what has been, from a practical standpoint, little more than a giant “chop zone” since the August lows.

NASDAQ Composite Index Gilmo Report Chart

A little more than half way through the week we can see we are on track to potentially exceed last week’s weekly volume, so if a bounce fails to materialize over the next two days we could be looking at a test of the October lows. Right now that is not necessarily clear, but we do know two things for sure: 1) the market is in a correction, so there is no reason to be long stocks, and 2) short-sale target stocks have become profitable affairs over the past three days as the market has broken down, which for now puts the short side in play as we would seek to short any rallies, either adding to or initiating short-sale positions as I’ve outlined in my discussions of my four short-sale target stocks in this report. 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

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 AAPL, though positions are subject to change at any time and without notice.

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