The Gilmo Report

July 20, 2011

July 20, 2011

Despite the news-oriented volatility, I still find stocks to be a dicey proposition, and holding them as we enter the casino of “earnings season roulette” is not necessarily rewarding. But as I pointed out in my report of July 13, staying with my preferred precious metals plays in GLD and SLV avoids the entire issue. Meanwhile, the NASDAQ Composite Index’s daily chart, below, illustrates the see-saw action in the market as it has tested and undercut its 50-day moving average and then rallied yesterday on news that the U.S. debt ceiling issue was about to be resolved by the “Gang of Six.” I’m not sure whether they are related to the “Chicago Seven,” but an increase in the debt ceiling does not strike me as a resolution to the fundamental problem of over-borrowing and over-spending. Thus it makes a poor excuse for a wild market rally. But it is what it is, and for now the action in stocks remains uneven at best, so I remain in a “Burle Ives Investment Strategy” frame of mind with silver and gold, recalling that old theme song from the original stop-action animation “Rudolph the Red-Nosed Reindeer” of decades ago. Volume was lower all around, so the indexes avoided a distribution day.

NASDAQ Composite Index's Gilmo Report Chart

Silver and gold were on a tear by Monday of this week, bringing on a gallery of oohs and ahhs from the media and other commentators, which is always the case when the precious metals get extended. Thus, they were primed for a pullback, and both the iShares Silver Trust (SLV) and the SPDR Gold Trust (GLD) held above their recent breakout/pocket pivot buy points today. The GLD, not shown, held well above its 151.86 breakout point, as I measure it, while the SLV held its 10-day moving average today on a nice pullback as investors misinterpreted a debt ceiling deal as a reason to sell the metals. Raising the debt ceiling merely means that the ponzi scheme of fiat money-printing can continue, and it is clear that silver and gold remain in their near-term uptrends as a result. Keep in mind that most of the buyable pullbacks in the SLV, in particular, tend to be ugly, scary affairs, but in hindsight appear reasonably well-contained, as we see on the daily chart of the SLV, below. Thus the SLV was fully entitled to yesterday’s sharp pullback given the rapid five-day run-up through the 50-day moving average that began with a pocket pivot
gap-up buy point six days ago, as I discussed in my report of July 13, last Wednesday. It is not clear yet whether the SLV will follow the 10-day moving average or the 20-day moving average as this move is still in the developing stages with the first initial entry point six days ago.

iShares Silver Trust (SLV) Gilmo Report Chart

First Majestic Silver (AG) continues moving up the right side of what is looking like a cup formation, as we see in the daily chart below. AG has a lot of upside thrust as it comes up the right side of the cup here. This is evident in the “ants,” the little triangles that have shown up over the past three days and which indicate that the stock has been up 12 out of 15 days in a row or better. While I think it’s just as simple to play the gold and silver ETFs like DGP and AGQ if one wants the “excitement” of a hot mining stock like AG, I do prefer AG based on its upside thrust here as well as its EPS, RS, and Composite Ratings, which are combined the best among the group. AG also has very strong 43.2% after-tax profit margins in the most recent quarter. AG could break out here without forming a handle given the strong upside momentum and relatively thinness of the stock which trades about $37-38 million in daily dollar volume, but as long as silver and gold remain in an uptrend this is likely your strongest play. Royal Gold (RGLD), another miner I don’t show here, has broken out of a base, but I don’t consider that necessarily a deciding factor here as AG, which exhibits better profitability, could soon follow in its footsteps.

First Majestic Silver (AG) Gilmo Report Chart

LinkedIn, Inc. (LNKD) demonstrates how simple it is to operate mechanically as the stock closed below its 10-day moving average yesterday and then today broke below the intra-day low of yesterday – the technical definition of a 10-day moving average violation. On this basis, one would simply sell the position they took on the pocket pivot buy point of July 8th, as we see on the daily chart of LNKD below. Fusion I/O, Inc. (FIO), not shown, also triggered my hard 29.95 downside stop so that both LNKD and FIO are now stopped out per my discussions regarding both stocks in my previous report of July 17th. Notice how the 10-day moving average, as it trailed upward with the stock following the pocket pivot of July 8th, provided a nice trailing stop-out reference point that kept risk well within reason if you bought the pocket pivot buy signal of nine days ago, as we see on the chart. LNKD and FIO may need to form longer bases, so for now they sit on my watch list as we see whether LNKD builds a handle to this big cup, or FIO continues to form out some other constructive base structure.

LinkedIn, Inc. (LNKD) Gilmo Report Chart

When I was on Canadian financial news channel BNN yesterday I took the negative side of Apple, Inc. (AAPL) going into earnings and to some extent played devil’s advocate in order to give BNN a lively discussion on the stock. Negatives for the stock that I currently see. These are essentially 1) a P/E ratio more in line with a value stock when it is arguably the consumer technology juggernaut of the New Millenium with earnings and sales growth of 122% and 82%, respectively in this most recent quarter and 2) all the good news is in the stock and this is a potential late-stage
breakout that will suck buyers in before chewing them up and spitting them out! Obviously, appearing on financial TV means getting into a little bit of financial “theater,” as it were, since objectively we would have to look at the breakout as being what it is: a proper breakout to new highs. Whether it is late-stage or “straight-up-from-the-bottom,” and hence failure-prone, can only be determined by a failure through the “breakout zone” between 355 and 365, as I’ve highlighted on the daily chart below. But as far as all the great earnings and news regarding AAPL, I am again led to that famous Gordon Gekko line from the first Wall Street movie, “Tell me something I don’t know, pal – it’s my birthday!” In any case, a small 3% move in AAPL following blow-out earnings is something of a disappointment, as I see it, but we will simply have to see how well the stock holds its 360-odd price level breakout as it is somewhat extended from that point currently and hence not buyable even if someone wanted to buy the breakout.

Apple, Inc. (AAPL) Gilmo Report Chart

While AAPL was an initial “earnings roulette” winner, Riverbed Technologies (RVBD) got plastered and sent down 23.55% on a weak earnings announcement. This had a deleterious effect on other cloud networkers like a prior short-sale set-up I’ve been tracking, Aruba Networks, Inc. (ARUN), shown below on a daily chart. As I discussed in my reports of June 22nd and 29th, ARUN has been working on the right side of this head and shoulders structure it’s been forming since the latter part of March. As we see in the daily chart below, ARUN has busted its 200-day moving average on huge volume, and it looks to be headed for its neckline at around the 20 price level. I would prefer to see a bounce back up into the 200-day moving average from here to short into with the idea that the 200-day line will present meaningful upside resistance. After-hours I note that F5 Networks (FFIV), another cloud networker, is getting plastered after a poor earnings report, so it’s not clear whether the group will remain under pressure tomorrow.

Aruba Networks, Inc. (ARUN) Gilmo Report Chart

F5 Networks (FFIV)’s weekly chart, below, also looks like a complex head and shoulders top formation, and notice that the past two rallies up to and above the 40-week (200-day) moving average both occurred on weak volume. The most current rally occurred on a wedging move above the 40-week (200-day) line and volume has picked up this week only three days into the week. As of the time of this writing, FFIV is trading down in the light red highlighted area I’ve drawn on the chart, and I would look at a bounce from here up into the 108.43 area, where the 50-day/10-week moving average is running through currently, as a potential short-sale area.

F5 Networks (FFIV) Gilmo Report Chart

The index charts show that the market is simply chopping around, and when I look “under the hood” and investigate the current environment on a stock-by-stock basis, I mostly see weak patterns in a number of former leaders. Yes, there is the occassional AAPL type move on earnings, such as ISRG, but if we look at some of the names I’ve discussed recently on the long side, from QLIK to IACI to ILMN to NTGR to FTNT, the action in these stocks is pathetic, if not downright ugly in some cases. Hence the market is giving us useful feedback in this regard as successful long plays appear to be the exception here, and of course we were summarily stopped out of LNKD and FIO as evidence of this. While the market does not have to break down from here and could continue on an index rally led by a handful of big leaders like AAPL or just continued sloppy and choppy action, there is also potential for late-stage failures to occur, and the action in certain areas like the cloud networkers is raising a yellow flag, as I see it. Hence we find ourselves with a potentially fruitful “Burl Ives Investment Strategy” as we key on the precious metals, gold and silver. Meanwhile some short-sale set-ups in ARUN and FFIV might be coming into play here, which sets into motion the idea of looking at the market as a market of stocks instead of a stock market, and assessing opportunities, short or long, on a stock-by-stock basis. Finally, I would keep an eye on AAPL here as I suspect that it is in a late-stage
breakout, and the 355-365 must hold as support to prevent this from failing. If AAPL fails, then this could be a sign for the general market, but this is also still developing as the overall market situation remains fluid. Stay tuned.

Finally, some media appearances for the rest of this week. First, Dr. K and I will be appearing on the Pimm Fox show on Bloomberg Radio Thursday, July 21 at 12:15 p.m. Pacific, 3:15 p.m. Eastern. Listen live on the internet here: http://www.bloomberg.com/radio/. Then on Friday, at 1 p.m. Pacific, 4 p.m. Eastern, I will be appearing on Fox Business News discussing the market and my current ideas.

Gil Morales

CEO & Principal, Gil Morales & Company, LLC

Principal and Managing Director, MoKa Investors, LLC

At the time of this writing, of the stocks mentioned in this report, Gil Morales, MoKa Investors, LLC, and/or Gil Morales & Company, LLC held positions in AGQ, DGP, GLD, and SLV, though positions are subject to change at any time and without notice. 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, 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. ©2011 Gil Morales & Company, LLC. All rights reserved.

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. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.