The Gilmo Report

February 19, 2012

February 19, 2012

 

Despite Wednesday’s high-volume reversal off the peak in the NASDAQ Composite Index, no additional selling materialized as the index posted above-average trading volume on Thursday, reversing to the upside and closing at a new 11-year high. It may be that Wednesday’s reversal was inspired somewhat by big-stock marquee-leader Apple, Inc.’s (AAPL) big climax and reversal which might have unnerved investors. Studying a “close-up” daily candlestick chart of the NASDAQ, below, shows that despite the attempt at an “ugly reversal” on Wednesday, the index still hasn’t come close to seriously testing the top of the gap-up move eleven trading days ago, which I’ve highlighted in yellow on the chart. Note also the “morning star” formation that occurs in the midst of the uptrend six days ago. I still would consider a 3-5% correction anywhere in here as normal for the indexes given the extent and duration of the move off the bottom. This may even be necessary for further upside over the next few weeks and months, but so far the indexes aren’t budging. Some leading stocks have taken a little heat recently, but this is what assists in the process of weeding out your weaker holdings and pyramiding into your stronger ones. Bottom line: The market can correct at any time, but just watch your stocks.

NASDAQ Composite Index Gilmo Report Chart

In addition to AAPL’s reversal on Wednesday, the release of the Fed meeting minutes did not indicate any imminent sense of urgency by Fed heads to begin a new, third round of QE known as QE3. That seemed to take the wind out of the market’s sails, but only if one considers that the current rally is due to nothing but the promise of more QE. I would argue that one cannot know the underlying fundamental driver of any rally since the market discounts the future. However, the potential for more QE remains, and I look to the action of the precious metals for a clue in this regard. The weekly chart of the SPDR Gold Trust Shares (GLD), below, which helps to take a lot of the daily “noise” out of the picture, shows that the GLD is doing little more than consolidating normally as it pulls back slightly with volume drying up. Note also the relatively tight weekly closes over the past three weeks as the GLD bides its time, and the SLV, not shown, is doing the same. My view is that the Fed is likely going to keep its QE3 powder dry for now until it is truly needed, and perhaps a situation like a disorderly or even “orderly” Greek default might be the event that triggers the Fed to start opening the QE spigot again. The action in the precious metals mimics this “waiting game,” in my view, and they both remain holds.

SPDR Gold Trust Shares (GLD) Gilmo Report Chart

The debate over whether Apple’s (AAPL) climactic move and reversal on Wednesday is the “final” top for AAPL continues to rage, but I would argue that it is largely irrelevant. In my view, having been long AAPL from the 444 price level (the “Sign of the Gilmo” as I joked with my trader), Wednesday’s action was the type of short-term action that one sells into, particularly since AAPL was up over 20% from its buyable gap-up move back in late January following earnings. Once it broke down through the $500 level it was worth a quick scalp on the short side, and once the stock found the 10-day moving average it bounced hard, which is entirely logical. But it does not mean that AAPL is engaged in a “shakeout” here since I view Wednesday’s action as, at the very least, short-term climactic and indicative of AAPL at least needing to consolidate further before making an attempt at new highs again. Thus, for now, I don’t need to consider AAPL’s action as “The Top” as much as I consider it a top for now, and having sold my position into Wednesday’s move I can afford to sit back and let the stock do whatever it is going to do from here, waiting for the next buy point.

Apple's (AAPL) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com), ©2012 used by permission.

As I discussed on Wednesday, the critical aspect of AAPL’s action on that day from my perspective is whether it is a sign of initial weakness in a big-name leader that will spread to the rest of the market, or, alternatively,

simply a sign that the AAPL “play” is probably one of the most obvious in the market as every analyst on the planet raises their upside price targets for the stock. It reminds me of every leading stock I have ever owned which tends to top when all the analysts raise their price targets following a sharp upside price burst such as we’ve seen in AAPL following the late January gap-up and it just needs a rest. The other aspect of AAPL’s action is that the stock is overowned by institutions who need to deploy into other names and areas of the market, resulting in a rotational move. So if big money is selling AAPL, is that money exiting the market or going into other names? Maybe the answer is found in the daily chart of Intel, Inc. (INTC), below, which flashed two pocket pivot buy points over the past two days as it moved to a 52-week high.

Intel, Inc. (INTC) Gilmo Report Chart

The past couple of days have also seen strong action in two other long-ago former big-stock NASDAQ leaders, Microsoft (MSFT) and Qualcomm (QCOM), both shown below on daily charts. Both stocks have had buyable gap-ups and pocket pivot buy points in their patterns recently.

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Thus we see that money coming out of AAPL seems to be rotating into other big-stock NASDAQ names, which is constructive. What is also constructive for this market is the emergence of the social-networking concept as a compelling new investment theme, and this is confirmed by the action in LinkedIn (LNKD), shown below on a weekly chart. We were on to LNKD right off the lows as it first flashed a pocket pivot coming up through its 50-day moving average at around 73, as I discussed in my January 15th report, but I believe that the stock is just starting its real move here. A move up through the 95 price level would be a breakout from a double-bottom formation, and last week’s buyable gap-up and the action over the past seven weeks as the stock has closed up each week and at or near the peak of the weekly trading range appears to argue for this possibility. Meanwhile, geniuses like hedge fund manager Whitney Tilson, who got his head handed to him trying to short NFLX and LULU all the way up, is going around mouthing off about how he is shorting LNKD. All I can say is that being long LNKD I find great comfort in his participation as a short-seller, particularly given that the stock already has some 8 million shares sold short against a small float of 11 million shares! Thank Mr. Tilson for helping to instigate what I believe will be a short-squeeze of epic proportions if LNKD clears the 95 level on volume.

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LNKD’s action over the past seven weeks as it has closed up each week at or near the peak of the weekly range while coming off the lows of its base reminds me a little bit of Amazon.com (AMZN) in 2003, when I played the stock on a nice move from $25 to $61. The weekly chart of AMZN from 2002-2003 below shows how the stock set up back then. AMZN went up five weeks in a row, closing at the peak each week, and then pulled back right down to its 10-week moving average. I began buying the stock right at the 10-week line on the pullback, and I remember buying it heavily as the trading desk at O’Neil was telling me I was buying it from another internal portfolio manager. After the close, Scott O’Neil, Bill’s son, came into my office looking a bit worn and talking about how he had to sell out his AMZN stock. Ironically, he was the internal PM from whom I was buying AMZN all day long, so the position essentially went from one member of the internal portfolio management team to another. Now that’s teamwork! The next week AMZN launched off the 10-week line and did not look back.

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Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com), ©2012 used by permission.

I should point out that Scott exhibited class as total team player when this happened, never displaying any resentment towards me for taking his position in AMZN at the lows on that pullback. In fact, I believe he took his mistake in stride and turned right around and bought the stock back. But I digress! Getting back to the social-networking theme in this market, let’s look at the action in another social-networking name, Zynga, Inc. (ZNGA), shown below on a weekly chart. Despite all the volatility in the stock this week both before and after it announced earnings, the weekly chart helps to distill out all the noise to reveal that the stock has actually closed reasonably tightly over the past three weeks in a loose-range little flag formation. The past two weeks saw the stock close around mid-range both weeks for some subtle supporting action off the lows with heavy volume coming into the stock. Watch to see how or if the stock retests the 12 price level, as a small pullback after bouncing over the past two days will reveal whether this is a buyable pattern. If one can handle the risk, I would use any small pullback in the stock to enter an initial position, or simply buy it here, using the low of this past week as my stop. In my view, if LNKD continues higher it will pull ZNGA along with it, but to me LNKD is the big-stock leader right now in the social-networking space.

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Rackspace Holdings (RAX), which I briefly mentioned in my February 5th report after it had broken out of a nicely-formed handle within a larger cup-with handle, followed that up on Tuesday of this week after announcing earnings by staging a buyable gap-up, as we see on the daily chart below. The stock has pulled back over the past few days and is testing the intra-day low of the gap-up day of four days ago where I consider it imminently buyable using the 52.77 low plus 2-3% as a downside stop. RAX is a partner with FFIV, which I’ve also liked, but I might be more willing to shift to RAX here as it is acting much more strongly than FFIV, and it has better fundamentals. FFIV posted 17% earnings growth in the most recent quarter while RAX reported earnings growth of 55.6% to 80%, depending on which data source you use. I generally like to see a gap-up move consolidate for a few days, pulling back on lighter volume towards the lows of the gap move, similar to what LNKD did this past week after gapping up last week.

Rackspace Holdings (RAX) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com), ©2012 used by permission.

The other thing that RAX has going for it is the fact that it is breaking out to all-time highs, unlike FFIV which remains well below its 52-week high of 145.76, so RAX has nothing but daylight above it while FFIV may still have some resistance to work through. RAX, which I show below on a weekly chart, has also broken out from a very tight handle within an overall cup-with-handle base formation, which looks very constructive. RAX was also one of the few stocks trading near a 52-week high which had its Relative Strength line move to new highs in December of last year BEFORE the stock broke out in early February. As the daily chart of RAX above reveals, despite moving up over 20% in just three weeks since breaking out, RAX remains in a potentially buyable position based on the buyable gap-up move of last Tuesday, and the action on the weekly chart confirms RAX’s potential as perhaps a stronger cloud-networking leader relative to its partner, FFIV. Both, however, remain viable as leaders in the cloud space.

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Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com), ©2012 used by permission.

One thing that investors need to understand about the stock market is that sometimes it is impossible to avoid getting shaken out of a stock if it drops below your stop-out price as one must always adhere to their stops. It happened to me this past week as I was forced out of my position in Spirit Airlines (SAVE) after it “spun-out” following its earnings announcement on Thursday. That’s a huge shakeout as the stock fell back into its base, found support at the 50-day line and then ran back up to its previous position above the 10-day moving average, as we see in its daily chart below. Given that we had started entering the stock on its pocket pivot buy signal at the 50-day moving average, this did not cause much damage at all, but of course it can be frustrating to see a stock you just sold magically lift right back up to where it started the day after dropping 15% intra-day. SAVE closed at a new all-time high on Friday, and on the weekly chart looks very powerful given the amount of supporting volume that came in off the 10-week/50-day moving average. I bet SAVE just turns and goes higher from here, so if one is inclined to buy it back I would keep a tight stop at the 10-day moving average at 19. A great example of how the market can throw you for a loop, particularly in smaller, thinner stocks like SAVE.

Spirit Airlines (SAVE) Gilmo Report Chart

Speaking of getting thrown for a loop, Jazz Pharmaceuticals (JAZZ) had a spin-out of its own on Friday as it suddenly dropped four points to the 45 price level and its 50-day moving average on no discernible news. JAZZ has a history of these spin-outs, the last one occurring on April 27, 2011, when the stock dropped from an opening price of 33.59 to an intra-day low of 23.50 before closing at 32.93 on no news. Perhaps it’s helpful to look at the weekly chart here, and what we see is that despite Friday’s spin-out JAZZ closed up off the lows and roughly mid-range for the week. Biogen Idec (BIIB) also got hit on Friday, along with other bio-techs, and perhaps all of this action was due to Gilead Sciences (GILD) getting destroyed after studies showed one of its drugs didn’t work as well as planned, an event that highlighted the unique risk investors face if they own bio-techs. News related to the non-efficacy of any of their big drug products can send a biotech gapping down in brutal fashion, and this is something investors have to think about whenever they “dabble” in bio-techs! Personally, I don’t care much for JAZZ given this bizarrre action, and with earnings coming up I don’t want to own the stock here.

Jazz Pharmaceuticals (JAZZ) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com), ©2012 used by permission.

I’ve been asked to discuss big fertilizer name CF Industries, Inc. (CF), shown below on a weekly chart, and for now all we can see is a natural pullback after the stock streaked up off the lows of its double-bottom base for seven weeks in a row before finding resistance at its 52-week high. This past week shows volume picking up, but the stock closed in the upper-half of its weekly range which is supporting action. The one potential flaw to consider here is that the big double-bottom base has the second low bottoming out above the first low, and in a proper double-bottom, as you all know, the second low should undercut the first low for a proper shake-out along the lows of the base that make a double-bottom pattern work. However, my view on CF is that as long as it holds the recent breakout through the 176 price level, roughly, it is okay. But for my money, I am focused on newer merchandise in this market, and so while I have played CF successfully on the move up through the 10-week line on a short-term basis, I prefer looking towards, say, social-networking stocks like LNKD to provide the new big-stock leadership in this market.

CF Industries, Inc. (CF) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com), ©2012 used by permission.

Some notes from my trading diary regarding other names discussed in my reports recently:


ALXN – Based on the 20% move since breaking out through the 70 price level eight weeks ago, profits could have been taken as I suggested in my Wednesday report at around the 82 price level. The stock has pulled back to the 80 level and I would wait for a new buy point to show up.

ABMD – like most other bio-techs in the market, ABMD took some heat after GILD blew up on Friday, but the stock is just pulling back to its breakout point at the 21.50 price level, and could be buyable on just such a pullback.

BIIB – also likely took some heat as a result of the GILD news, but the weekly chart doesn’t look so bad for BIIB, so I’m giving this a chance by waiting to see if it violates the 50-day moving average before selling it.

BWLD – in my report of February 8th I pointed out the buyable gap-up move in BWLD, and the stock has not looked back since, moving about 8% higher to a new 52-week high. I don’t own this myself, but I sure hope there is a Gilmo member or two that does!

CXO – acting fine. Not much to say here other than that a pullback should hold the 105-106 price level, roughly.

CLR – broke out to new highs this week. Nothing much else to say.

FFIV – holding up fine after its buyable gap-up, but I prefer RAX as a cloud-networking play as discussed further above in this report given RAX’s superior earnings growth and acceleration.

ISRG – holding tight here just above the 500 price level. Buyable on the basis of the Livermore Century Mark Rule, using the 500 level as a quick stop for any additional stock bought up at these price levels. Otherwise, ISRG is a big-stock leader in this market among the strong-acting medical-related stocks.

INVN – down this week, and as I have discussed recently this stock needs to build another base after launching some 90% from the original pocket pivot buy point under $11. If you own a position from down there, it is very possible to sit with the stock and let it build a base. So far I see nothing wrong with the stock, as its technical action is so far normal for a small “upside heater” type of stock and the fundamental concept behind the stock as a maker of motion-sensor chips that are rapidly becoming standard on many hand-held devices, gaming sytems, and other growing applications is a strong, compelling investment theme.

LULU – still holding along the 10-day moving average. I would use a clear violation of the 10-day line as a stop here given that LULU has followed the 10-day line for at least seven weeks, invoking the Seven-Week Rule.

MA – well within range of its recent gap-up breakout through the 385 price level as it holds along its 10-day moving average in a three-weeks-tight formation, so it is in a potentially buyable position right here. Also, watch for a move up through the $400 price level which might invoke the Livermore Century Mark Rule.

MNST – stock has violated its 10-day moving average, but this is not critical for the stock since it has not shown a tendency to “obey” the 10-day line. I would use the 50-day moving average at around 50 as a clear downside selling guide, but the recent violation of the 10-day line means that one might consider cutting back any additional stock bought last week on the basis of its pocket pivot buy point off the 10-day moving average.

PCLN – has broken out of its base going into earnings this week.

SWI – holding the 10-day moving average, so watch for a secondary buy point in the form of a possible pocket pivot move off the 10-day line, should that occur.

TIBX – still holding along its 10-day moving average, so watch for a possible pocket pivot off the 10-day line should it occur.

TSCO – the attempted breakout from a short 4WT flag formation hasn’t gone anywhere, but as long as the stock holds the 82 price level it is probably okay.

VPHM – still holding the 10-day moving average, which I am using as my selling guide for the stock.

V – acting well right along with MA. Theoretically, one could still buy the stock here on the basis of the buyable gap-up move of seven trading days ago, using the intra-day low of that gap-up day at 112.05, plus another couple of percent, as a downside stop. If MA continues to move higher, V will also, and vice versa, in my view.

VMW     – moving up the right side of its base. But my favorite cloud play currently is RAX.

Whether the market goes into a short-term correction here is not on my list of worries, as I believe investors should simply focus on the action of their stocks and operate on the basis of buy and sell signals generated in their stock holdings alone. The market can correct at any time, and a 3-5% short-term correction would probably be a healthy thing to see here given that we are already seeing some subtle rotation in the market. But even in such a short-term correction, leading stocks can hold their ground begrudgingly and in many cases simply move higher. So allowing the action of the indexes to scare you out of your good stocks is, for lack of a better word, quite silly. Let the market force you out of your positions by adhering to your stops and trailing stops, as well as using the Seven-Week Rule to determine whether to use the 10-day or 50-day moving averages as your selling guides and as “trailing stops” as the moving averages move up with your stocks. Meanwhile, you can always allay your fears with a “short-sale security blanket” by shorting a weak former leader like, for example, Amazon.com (AMZN), which I discussed in my report of this past Wednesday, but if the market turns and goes higher the short-side will not be the place to make money, so I would only be interested in coming after AMZN in size if the general market goes into a bona fide short-term correction. So far that has not happened and AMZN continues to find support in the 170-180 price area along the lows and near what could be the “neckline” of a big head and shoulders formation, as the weekly chart below shows. So it’s not clear to me that this is going to be a wildly profitable short-sale target just yet. .

Amazon.com (AMZN), Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com), ©2012 used by permission.

Meanwhile, news of a big, fat Greek debt solution might be forthcoming, or not, as early as Monday when the U.S. markets are closed, but in my view this remains a binary situation that I believe the markets have already discounted. We’ll know for sure once the news is out, but for now I am sticking with my best stocks as I let the market tell me which of my holdings is weaker and which are stronger, aiding me in the process of shoveling more funds into my strong holdings and cutting back the so-called weak sisters.

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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