The Gilmo Report

February 15, 2012

February 15, 2012

Finally, the market pullback that experts have been predicting for the past three weeks materialized today. That exercise has proved its futility as the market always has final say over when and how it will pull back. Today’s action was a somewhat ugly-looking reversal on very heavy volume that gained some momentum as the Fed meeting minutes revealed that the Fed is still debating further QE maneuvers, such as purchases of mortgage-backed securities that many have been predicting. Obviously, with the rally as extended and prolonged as it is, the longer it goes the higher the probability it is near a pullback point. I think today’s reversal marks that point, and while we saw a similar high-volume reversal back in late January that the market just shrugged off, things may not play out the same way this time around. Thus one must watch their stocks for the first clues, and there were a few of these apparent in the action of certain leaders.

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For example, the critical aspect in today’s action as I see it is the way Apple, Inc. (AAPL) reversed off of its price peak today on very heavy volume. I had figured an upside thrust to 540 in any potential climactic move, and 526.29 apparently was close enough. Once the stock reversed on the day with volume on track to be the highest one-day volume in this run since breaking out in the low-400’s, it was a clear sell. I suppose it is debatable whether this is a climax top in AAPL, since it allegedly depends on whether one considers this recent base a first-stage base or not. I frankly don’t think it’s relevant, since the practical reality is that I don’t need to be sure – today’s action was all I needed to see to take profits in the position. The other thing to consider is that AAPL was up about 20% from the initial breakout point at 431.36, and it took AAPL not quite four weeks to get there, so it is a logical place to take profits. Now AAPL has closed below the $500 price level, and I am now using this as an application of Jesse Livermore’s Century Mark Rule in reverse by shorting the stock here under the $500 level using a tight stop at or just above 500. Livermore employed his own rule in reverse himself after being long Anaconda Copper in 1907 and then blowing it out when it failed at the $300 level and going short the stock big time. (see my report of October 17, 2010 in the Past Reports section). We’ll see if this works here and now with AAPL.

Apple, Inc. (AAPL) Gilmo Report Chart

Obviously, the action in AAPL was not something I consider favorable. The issue then becomes whether AAPL tops here for good, and whether this simply leads to rotation into other leaders or whether it has broader implications for the general market. AAPL is the marquee name in this market, so this has to be watched carefully. Most leading stocks acted okay today, and certainly within the parameters of their recent upside moves, so the next few days may be critical in determining whether this correction goes any deeper, but I would not be surprised to see at least a 3-5% correction from these levels. This would be a normal short-term correction. Keep an eye on the precious metals, as only the iShares Silver Trust (SLV) was down today. The daily chart below shows how the SLV, similarly to the GLD, is moving sideways within a short consolidation as it digests the sharp move up off the late December lows. If the market gets into trouble, then we might see the SLV and GLD start to roll over here.

iShares Silver Trust (SLV) Gilmo Report Chart

While AAPL’s chart is pretty ugly, you can’t say that about every leading stock, even a thinner name like Spirit Airlines (SAVE), shown below on a daily chart. SAVE continues to hold well above its recent breakout through the 17-18 price level, and on Monday flashed a pocket pivot buy point. Today it traded above-average volume but did not bust wide open. If the market begins to correct 3-5%, then we might consider that a name like SAVE might continue to hold up very well or might pull back to its breakout point. If you own something like this, you have to take this into consideration.

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It’s most efficient for me to simply run through all the names I’ve discussed in recent reports and transfer some of my notes from my trading diary on the report so you can get an idea of what I’m looking at in these leading stocks. You know where I stand with AAPL, but a number of these stocks continue to act fine, for now.


ALXN – stock ran up over 20% from its breakout point at the $70 price level in seven weeks. Could take profits on this basis.

ABMD – continues to hold well above its 21.50 breakout level of last week. Would expect it to hold this breakout on any pullback. This is a thin name so be careful.

BIIB – still roughly holding its breakout and the top of its prior base, but definitely on the fence for now. A violation of the 50-day moving average would be a good reason to sell this.

CXO – holding up okay, but could pull back. Should hold the 104.83 level on any pullback, rougly.

CLR – stock was up today and near its price highs on above-average volume. Should hold the 76 level on any pullback.

FFIV – still holding above its 10-day moving average, but ultimately must hold the low of its gap-up four weeks ago at 116.49.

ISRG – needs to hold 474 on any pullback from here. Stock did rally off this short little flag it was in, per my discussion of the stock over the weekend.

INVN – as I’ve been writing over the past couple of reports, stock is way extended and was entitled to pull back and start trying to build a base. Today’s close below the 10-day moving average was not a violation, but a movement below today’s low of 16.70 would be a violation and so would be the least I would need to see to be stopped out of the stock.

JAZZ – ultimately the 50-day moving average would be your downside guide on this one, but I would prefer to see the stock hold the 45 level, more or less. So far holding near its highs.

LNKD – continues to hold above the 82.06 gap-up intra-day low of four days ago, and the stock was up today on above-average volume in a down market. This may need to go sideways for a period of time as long as it holds the 82.06 gap-up low.

LULU – looked like it was going to pocket pivot off the 10-day moving average today but reversed on heavy volume. I would sell this if it violates the 10-day moving average.

MA – should hold the 381-385 level on any pullback from here.

MNST – closed below the 10-day moving average on an increase in volume that was 4% below average. A violation of the 10-day line would be a reason to sell any stock purchased on the basis of the pocket pivot six trading days ago. Otherwise the 50-day moving average at around 99 is your ultimate downside guide for a stop.

PCLN – impressive move higher after I discussed its pocket pivot buy point in my report of this past weekend. The stock has now broken out of its long base going into earnings next week. Ultimately, it should hold the 553 breakout level.

SWI – This should hold the 35 price level on any pullback. It’s a smaller stock so I would not give it too much room on the downside if my entry point was above the 35 price level.

TIBX – still holding above the 10-day moving average as it comes up the right side of a potential base here. The last buy point was coming up off of the 50-day moving average a couple of weeks ago, so a pullback to the 50-day moving average is always a possibility.

TSCO – just barely holding its pocket pivot and flag breakout of seven trading days ago, but so far hasn’t broken down or even moved below the 10-day moving average. Ultimately, I want to see this hold the 82 price level.

VPHM – still holding above the 10-day moving average, which it has followed for a few months now, so any technical violation of the 10-day moving average is a reason to sell the stock.

V – needs to hold above the intra-day low of its buyable gap-up five trading days ago at 112.05.

VMW     – had a pocket pivot three days ago so it must absolutely hold above the 94 price level if one bought on the basis of this pocket pivot buy signal on Monday.

If one is heaviliy invested and feels a bit uncomfortable, there is certainly nothing wrong with taking profits. Pocket pivot buy points often provide excellent re-entry points if stocks sell-off, consolidate, and then resume their upside trends. I have to say that on a gut level the action in AAPL was a negative sign for the market, and it is possible that AAPL had a climax top here. Only the coming days and weeks will confirm that, but I have to admit it came a little sooner than I had expected. Nevertheless, in the context of today’s action, which started out as the ninth straight day up, it is at least short-term climactic. If it turns out to be more than that then it could spell trouble for the market. Meanwhile, if one is taking a slow and steady path in this market, and you have some cushion under your positions, just let the market force you out. On the other hand, if you have some profits and feel you are a bit more exposed than you would like, take ’em! A bird in hand is often worth two in the bush.

And so I will leave you with one short-sale idea, and it is the only big-stock NASDAQ name that remains in a bearish formation: Amazon.com (AMZN), shown below on a daily chart. AMZN formed a compact little head and shoulders formation back between September and November of last year, and it has still been unable to rally back above the lows of this H&S pattern at around the 200-day moving average. Today AMZN closed right at its 50-day moving average on above-average volume, and I would look for the stock to bust the 50-day line if the market corrects further, using the 190 level as my quick stop.

Amazon.com (AMZN) Gilmo Report 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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