The Gilmo Report

July 1, 2012

July 1, 2012


The market action on Thursday was at best confusing as the Supreme Court’s out-of-left-field justification for upholding the insurance mandate portion of Obamacare threw stocks for a loop. It was enough to force me to back down from my aggressive long positions in stocks that I had coming into the day before things settled down in the last hour and the market began to find its feet. Given the extent of the selling by mid-day, I even threw out a couple of short positions to get a feel for just how weak the market was, and I soon discovered that it wasn’t all that weak as I immediately covered those test shorts and rebuilt my long positions going into the last half-hour. That is the type of flexibility that I employ as a matter of course, and in environments like this I think that is the only way to gain an edge and maintain it. As well, my gut instinct as discussed in my Wednesday report of June 27th was that this current market “correction” is more likely to resolve itself to the upside, one way or another. And while the Obamacare decision didn’t encourage the market, it may have brought the November election and its potential result more into focus as 49% of Americans do not care much for Obamacare. This in turns leads right into my thesis for a possible market resolution to the upside, namely a Romney Rally. Throw in the Eurocrats’ expressions of a unified willingness to carry on with the credo of “all the fiat money that’s fit to print” on Thursday night and you have a new, “confirmed” uptrend by Friday since the NASDAQ Composite Index extended its uptrend by closing at its higher highs in its rally off the early June lows, as we see in the daily chart below.

NASDAQ Gilmo Report Stock Chart

Thus, whether you call Friday a follow-through day or not, the market is in a de facto resumption of its uptrend. You could almost see it coming, as the late-day turn in the market on Thursday seemed to confirm my thesis that the continuation of Obamacare may simply put voters in the position of having to do what the Supreme Court refused to do as it manufactured a way around having to strike down the first “legislation of the absurd” in U.S. history that we’ve had “to pass so we can find out what’s in it.” Once the market reversed off the lows on Thursday, it was a sign to get aggressively long again, and this paid off on Friday morning. But the real money will be made if this rally can lead to something more meaningful, and a clue in this regard might be the constructive action in big-stock NASDAQ names like Apple (AAPL), (AMZN), Intuitive Surgical (ISRG), and (PCLN) which all flashed pocket pivot buy points on Friday in unison as they all try to come up the right sides of potential new base formations. We can see AAPL’s pocket pivot on a daily chart, something we’ve been looking for in previous reports (seeJune 20th report, for example), since it typifies similar action seen in AMZN, ISRG, and PCLN. Keep in mind that we saw Chipotle Mexican Grill (CMG) also flash a pocket pivot coming up through its 50-day moving average last week and then fail this week in a spectacular downside break, but then it wasn’t a big-stock NASDAQ name, instead being an older retail-restaurants leader.

Apple (AAPL) Gilmo Report Stock Chart

Below we can see the pocket pivot of (AMZN) on Friday on a daily chart. This is probably the most constructive of the bunch given that it is occurring in the handle of a cup-with-handle formation and is the second pocket pivot in the past four trading days. This is potentially buyable here using a 6-7% downside stop. (AMZN) Gilmo Report Stock Chart

Intuitive Surgical (ISRG) is building what looks like a short cup pattern with a handle forming along the 50-day line on the daily chart. On the weekly chart, not shown, no discernible handle exists, so this is likely just part of a continuing base-building process as the stock attempts to come up the right side. If you like ISRG, then it is possible to initiate a smaller starter position here on the basis of this pocket pivot, using a violation of the 50-day line as a stop.

Intuitive Surgical (ISRG) Gilmo Report Stock Chart

With respect to other stocks, despite the fact that there was a broad range of pocket pivots, gaps, and breakouts in stocks like TDG, MGAM, CTXS, SLXP, BUD, as well as homebuilders like LEN, PHM, TOL, and RYL, I am sticking to my original list of core names that were early-movers which continued to act well in the face of the market’s correction. Facebook (FB) remains one of them, as one of the big-stock social-networking names, an area that I believe will figure significantly in any continued market rally phase. In spite of this, I am not getting aggressive on the stock here as it pulls back and forms a handle to its little cup formation, as we see on the daily chart below. The 10-day moving average now acts as near-term resistance for the stock while it seems to find support around the 31 price area. This occurs as it takes some time to clear out recent buyers of FB who were looking for a kind of pop based on the end of the quiet period on Wednesday. I might look to nibble here around the 30-31 area if selling volume remains muted. But once this process of clearing out the “quick-pop” buyers is done, I would look to get aggressive again on a pocket pivot buy point coming up through the 10-day line at some point if the market rally is sustained. And that is what we are waiting for in FB now.

Facebook (FB) Gilmo Report Stock Chart

As I’ve discussed in previous reports, LinkedIn (LNKD) is the other “big stock” social-networking leader, although it isn’t as big as FB in terms of the number of shares issued or its market cap. As a “go-to” name, it has to be on our buy watch list here as the market potentially starts a new rally phase. LNKD flashed a pocket pivot buy point along its 50-day moving average two Fridays ago, as we see on the daily chart below. So far it has managed to hold the 50-day line very well in the midst of the market’s recent gyrations. LNKD was even able to rally off the lows on Thursday and hold above its 10-day moving average on a closing basis. LNKD is again coming under attack as an “overvalued” stock that will receive its comeuppance when it announces earnings later in July (asmany companies will be doing) and the alleged flaws in its business model are “revealed.” In my view, if the flaws in LNKD’s business are that obvious, then it should be reflected in the price/volume action of the stock, and so far that has been positive in a manner that has been decidedly contrarian to the market’s action. LNKD has moved steadily higher since the early June lows as the market has flopped around. LNKD is potentially buyable here with the idea that it will continue to hold the 50-day line, which should be used as a selling guide.

LinkedIn (LNKD) Gilmo Report Stock Chart

CoinStar (CSTR) held its 10-day moving average quite well on Thursday during the pullback, closing just above mid-range on the day as we see on its daily chart below. It was also one of the market’s strongest-performing leaders on Friday as it pushed to new all-time highs on volume that was 42% above average and which also qualified as a pocket pivot buy point based on the new-high breakout. CSTR’s Relative Strength line is also confirming the new highs in the stock, and along with the pocket pivot volume signature that accompanied Friday’s breakout to all-time closing highs, I believe there is a lot that is lining up favorable for the stock on a technical basis. The fundamental picture is also bright for CSTR, in my view, given the potential for expansion with their kiosk-based direct-to-retail model, which has evolved from DVD-rental service RedBox to the latest incarnation as Rubi, a coffee-vending kiosk selling Seattle’s Best Coffee. The upside exists in the potential announcements of future kiosk-based systems for electronic products (called”Gizmo”), beauty products, recycling old cell phones, consolidating gift-card credits, health risk analysis (called”SoloHealth”) and interactive photo shoots (calledas “Star Studio”), to name a few. The stock is buyable on this breakout using a standard 6-7% downside stop.

CoinStar (CSTR) Gilmo Report Stock Chart

Mellanox Technologies (MLNX) also remains one of my top picks as an early mover, and it picked up an increase in volume on Friday after absorbing a bit of selling off the peak that brought the stock down to its 20-day moving average and the lower end of what I see as a logical “pullback zone” as I’ve highlighted on the daily chart below. Unlike others, I don’t see the 67.30 price level, essentially the peak on the far left side of the base when the stock gapped up in mid-April of this year, as the “buy point.” The true initial buy point occurred along the 60 price level, and this points out the clear advantage that pocket pivots offer over the standard new-high buy point rule, especially in a smaller, volatile stock like MLNX. Thus the true support level for the stock lies somewhere at the lower end of the highlighted area on the chart, and in fact this has proven out in practice as the stock has twice tested this “support zone,” finding support at the 20-day moving average in each case. Frankly, if you are sitting around using 67.30 as your buy point, you are buying in what I might consider an extended position where you will have to deal with some volatility if the stock does not launch higher right off the bat. On the basis of the pocket pivot buy point coming up through the 10-day moving average six days ago on the chart, MLNX is potentially buyable here with the idea that it will continue to hold the 20-day line.

Mellanox Technologies (MLNX) Gilmo Report Stock Chart

While Thursday’s action forced me, as it would anyone, I think, to take some defensive action, flexibility was the key, however, in recognizing the turn off the lows later in the day and seeing that as a signal to come back into full long positions, even if one sold all or part of their positions earlier in the day. Remember, stock markets offer investors one major advantage, and that is liquidity. Unlike real estate, and certainly unlike fine art, stocks can be bought and sold all day long in an instant. When the market is uncertain, use this liquidity to your advantage, and do not be afraid to move with the market’s fluctuations if necessary.

As I wrote a few reports ago, in my trading diary from 1999 there is a very clear entry where I discuss a phone call from Bill O’Neil back when I worked for him where he tells me on October 23, 1999 that “this market is through.” Four days later the market followed through to the upside and began what is hands down the most profitable three months of my entire trading career – a run that enabled me to achieve a return in excess of 1,000% in my own account in 1999. A lot of people thought the market was through mid-day on Thursday, but in one day that situation has reversed, and the liquidity advantage that stocks provide made it a simple matter to load up the cart with leading stocks.

That is exactly what Bill and all of his internal portfolio managers did when the market followed through four days later, operating with a clear mind and a clear market view that was based on the current market evidence. Today in July of 2012, that evidence is clear: The market is in an uptrend, and leading stocks are in position to buy, so we buy. On top of that, I know exactly which stocks I want to own, without trying to “kiss all the babies” that popped up on gap-ups, breakouts, and pocket pivots on Friday. As Jesse Livermore said, one must seek not the bull or bear side of the market, but the right side, and at this precise moment in market time the “right side” is the bull side until further market evidence proves otherwise.

Gil Morales

CEO & Principal, Gil Morales & Company, LLC
Principal and Managing Director, MoKa Investors, LLC
Principal and Managing Director, Virtue of Selfish Investing, LLC

Gil Morales & Company, LLC (“GMC”), 8033 Sunset Boulevard, Suite 830, Los Angeles, California, 90046. GMC is a Registered Investment Adviser. This information is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to GMC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Gil Morales & Company, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.