The Gilmo Report

July 31, 2011

July 31, 2011

As I wrote in my report of this past Wednesday, navigating this market is next to impossible given its tendency to suddenly flow back on itself like some sort of Escherian mobius curve leading to nowhere. Thus the twists and the turns that predominate at this moment in market time argue for minimal or outright non-involvement. If you choose to get involved, stay alert, or you might get caught in something like we saw in LinkedIn, Inc (LNKD), which acted more like SuckedIn, Inc. on Thursday when it began to stage what looked like a powerful breakout through the 110 peak of the handle in this cup-with-hande formation the stock has been forming for the last couple of weeks (see below chart). LNKD reports earnings late next week, and given that the stock had only formed a one-week handle prior to this week, it is likely that such a breakout attempt was premature. But this type of action is probably not unexpected given the nature of this current market environment, yet it can be frustrating. Note, however, that LNKD held above its 20-day moving average and closed slighly up on Friday, producing no real follow-through selling to Thursday’s bizarre and ugly-looking reversal. Instead it appears that the stock drew some overhead supply that is left over from the stock’s first trading day, and so we will probably have to wait for LNKD to announce earnings before this pattern is able to generate a breakdown or a breakout.

LinkedIn, Inc (LNKD) Gilmo Report Chart

As the faux-brinksmanship of the various parties to the debt ceiling debate makes for great headlines, it simply serves as a decoy away from the broader issues encompassed by the economy and sovereign debt around the globe. Sure, the crowd expects that once the debt ceiling debate is settled we may see a sharp reaction rally, but it is not clear to me just yet whether this would be a rally to buy into as much as it might be a rally to sell into. Objectively, the NASDAQ Composite Index, shown below on a daily chart, found support along its 50-day moving average on Friday with volume picking up, although it was still a distribution day. This also undercut the prior low from about two weeks ago, which sets the market up in a logical positon from which a rally attempt could be made. The charts may be lining up for a bounce as the S&P 500 Index, which I don’t show here, is in a similarly logical position given its own support-action bounce off its own 200-day moving average and mid-range close on Friday. I would not, however, assume anything, as the quality of any bounce or rally on a debt ceiling agreement will be critical in determining the future course of the major market indexes from here. But at the current moment the indexes look to be in a logical position to stage such a reaction rally and this may be supported by the news flow early this coming week.

NASDAQ Composite Index Gilmo Report Chart

Gold and the SPDR Gold Shares ETF (GLD) closed at an all-time high on Friday. Despite the fact that the crowd seems fairly well satisfied that the market will rally like gangbusters and precious metals will lose their lustre once the debt ceiling “crisis” is resolved, the metals hang in there pretty well as I see it. It all boils down to the longer-term scenario for precious metals which is governed by the binary solution of “default or devalue.” The U.S. government is not likely to default on its debt, and of course an increase in the debt ceiling merely continues the Ponzi scheme of eternal borrowing to pay off existing holders of U.S. debt and therefore only serves to highlight the “devalue” side of the equation. While I could see the GLD having a normal pullback of 4-5% that would take it right back to its breakout point at 151.86, it is not clear to me that it would pull back this far once a debt ceiling agreement is reached. I would, however, use any such pullback to buy into the GLD, continuing to use that 151.86 breakout point as my initial selling guide.

SPDR Gold Shares ETF (GLD) Gilmo Report Chart

Chart courtesy of eSignal, Inc. (www.esignal.com), ©2011 used by permission.

Meanwhile the situation with silver, as we see in the daily chart of the iShares Silver Trust ETF (SLV) below, is such that it continues to hold well above its initial buy point at around the 36 price level where it gapped up above its 50-day moving average thirteen trading days ago on a pocket pivot buy point move. The SLV is holding just below its 10-day moving average, but I would not consider this meaningful since it has so far not shown any tendency to hold the 10-day moving average. I might look for the initial level of support on any pullback in the SLV to take it back to the 20-day moving average at around 37.34. The real wild card in the debt ceiling saga is whether an agreement does not cut spending enough to avoid a downgrade in the U.S.’ AAA credit-rating. Bond fund managers and others who are required to sell any debt that falls below a certain credit-quality level are scrambing to change their charters in order to avoid having to engage in the “forced selling” of Treasuries in the event of such a downgrade. As I discussed in my Wednesday report, selling ½ of one’s precious metals holdings was prudent, looking to buy back on a pocket pivot off the 10-day moving average or a pullback down to the 37 price level that could occur on a debt ceiling agreement announcement.

iShares Silver Trust ETF (SLV)  Gilmo Report Chart

The uncertainty inherent in the market does not necessarily squelch any and all long ideas, as recent pocket pivot buy points in Molycorp, Inc. (MCP), shown below on a daily chart, as it came up through its 50-day moving average are still holding. As we see in the chart, MCP is holding well above the 57-59 area where these buy points occurred, and you will note that four of the last seven days have also been up days on pocket pivot volume signatures while the three down days have come up in lighter volume. MCP announces earnings on August 11th, thus the approach of “earnings roulette” comes into play for investors holding onto MCP. MCP is expected to post its first significant profit of 44 cents a share, en route to earning $12-13 per share in 2013. Since I own the stock, as long as it continues to act well and remains about 10% above my entry price, I would be willing to hold a 10-20% position into earnings, knowing that a 10% drop will cost me 1-2% in overall portfolio damage, a 20% drop 2-4%, and so on, but this is all within acceptable risk ranges for me. Investors who aren’t me, however, will have to determine what their own risk tolerance is in this regard and act accordingly. But so far MCP has been counter-trending the sell-off in the general market over the past several days, and this is at the very least quite constructive.

Molycorp, Inc. (MCP) Gilmo Report Chart

Chart courtesy of HGS Investor (www.highgrowthstock.com), ©2011 used by permission.

MCP is one mining stock I’ve liked here, and while it has counter-trended the market’s pullback, my other favored mining stock, First Majestic Silver Corp. (AG) has pulled back with the market and silver over the past few days, as we see in its daily chart, below. Last weekend I wrote that AG looked to be in position to begin forming a handle to this cup-like formation it has formed since pocket pivoting back above the 50-day moving average three and four weeks ago. Mining stocks tend to be volatile rides, and as I’ve pointed out, AG is about as volatile as the AGQ, the 2-times leveraged silver ETF, so the rides are equally wild. In the case of mining stocks, waiting for a constructive pullback is probably your best entry point, and this appears to be no different for AG. I like this pullback down to the green 20-day moving average as the stock has found support right at the line with volume drying up sharply. The stock could pull back a little further to the 21 area, but this would serve as a rough selling guide should the stock fail. My guess is that if you want to buy AG, however, this is the place to do it. Otherwise focus on the GLD and SLV instead.

First Majestic Silver Corp. (AG)  Gilmo Report Chart

Chart courtesy of HGS Investor (www.highgrowthstock.com), ©2011 used by permission.

While there has been a lot of carnage in a number of stocks, from Panera Bread (PNRA) to Illumina (ILMN) to Caterpillar (CAT), what stands out currently is the fact that several “big-stock” NASDAQ leaders are showing reasonably constructive or just outright powerful action in the midst of this pullback. For example, Amazon.com (AMZN), shown below on a daily chart, staged a buyable gap-up move on Wednesday of this past week after announcing earnings, and that gap held up for the rest of the week as the stock traded tight sideways. AMZN is a strange paradox in that it has a putrid four-quarter earnings record with the last two quarters showing negative growth, but continues to show technical strength as big money moves into the stock. The intra-day low of the gap-up day three days ago is 219.62, and I would expect this to hold if AMZN is going higher. I would keep this AMZN idea in your back pocket if we get a rally here that pans out into something more significant. At the very least, this is a low-risk entry point since a violation of the 219.62 intra-day low on the gap-up day would be a quick selling guide.

Amazon.com (AMZN) Gilmo Report Chart

Chart courtesy of HGS Investor (www.highgrowthstock.com), ©2011 used by permission.

Four of the top 10 industry groups right now are retail-oriented, and among these is retail-internet, which includes AMZN. Another group of stocks that I tend to look at as having an internet retail flavor to them are the Leisure-Travel Booking stocks like Priceline.com (PCLN) and Expedia, Inc. (EXPE). EXPE announced strong earnings on Thursday after the close and broke out to new highs on Friday. This led to a sympathy move from PCLN as it flashed a pocket pivot buy point, as we see on its daily chart below. EXPE, which I don’t show here on a chart, is a base breakout with a 31.01 pivot point, and the stock closed at 31.69 on Friday. Keep that in your back pocket as well. PCLN, on the other hand, is flashing this pocket pivot buy point right here, as we see in its daily chart, below, as it gets closer to its own earnings announcement this coming Thursday. Not that I would buy PCLN going into earnings right here, but I think it is another example of these big-stock NASDAQ leaders holding steady during an otherwise volatile month of July.

Priceline.com (PCLN) Gilmo Report Chart

Chart courtesy of HGS Investor (www.highgrowthstock.com), ©2011 used by permission.

Baidu, Inc. (BIDU) is another big-stock NASDAQ leader that recently broke out to all-time highs following its earnings announcement last week. As we see on its daily chart, below, the new-high breakout occurred on a buyable gap-up move, but BIDU has not been able to hold the intra-day low of that gap-up day as it has drifted back down into its base and the 10-day moving average. BIDu was able to find support at the 10-day line, however, and close well up in the upper portion of its daily trading range on Friday. Is this a late-stage base breakout? That is not necessarily clear to me, since the stock did correct about 27% off its 156.04 price peak of late April, undercutting the five-week base formation it formed in late February and early March of this year, helping to “clear the decks.” It has also been able to counter-trend the market, moving higher as the major market indexes slopped and chopped to and fro throughout the month of July. If BIDU is to continue higher, I would expect it to hold the 10-day line and Friday’s intra-day low of 152.34, about 3% below Friday’s closing price of 157.07. If the market is able to sustain a rally and break out to new highs, my guess is that BIDU will be moving right along with it.

Baidu, Inc. (BIDU) Gilmo Report Chart

Chart courtesy of HGS Investor (www.highgrowthstock.com), ©2011 used by permission.

Yet another big-stock NASDAQ leader acting well is Intuitive Surgical, Inc. (ISRG), shown on a weekly chart below. ISRG also staged a buyable gap-up on earnings eight trading days ago, accounting for the big blue upside price bar last week on the weekly chart, but it failed to hold the intra-day low of the gap-up day as it drifted down and tried to fill the gap. ISRG did find support at its 10-day moving average on Friday as it reversed back to the upside on heavy volume, closing right near its peak for the week, as we see on the chart. Like BIDU, I would expect ISRG to hold the 10-day moving average and the intra-day low of Friday’s trading range at 384.74, about 3.9% below Friday’s closing price of 400.55. The one thing ISRG has going for it is the fact that it is emerging from a very large cup-with-hande base formation of over 14 months in duration, extending all the way back to April of 2010. Strength in all these big-stock NASDAQ names seems to be implying that there is liquidity looking for a big, safe place to go, and while a number of names outside of these big-stock NASDAQ leaders get smacked around, these names seem to act as if they are living within the eye of a hurricane as they hold up in here and counter-trend the market in July.

Intuitive Surgical, Inc. (ISRG) Gilmo Report Chart

Chart courtesy of HGS Investor (www.highgrowthstock.com), ©2011 used by permission.

Last but not least, Apple, Inc. (AAPL) has been pulling back with the market over the past three days, but as we can see quite clearly on the daily chart below the stock is merely pulling back to its 10-day moving average as it pulls a whopping 3% off of its peak of four days ago. This comes on the heels of a sharp upside move straight up off the lows at around 310 and up to 404.50. AAPL’s gap-up move on earnings was not buyable given the extended position of the stock, but I would watch for it to form some sort of tight base, perhaps a three-weeks-tight formation or a five-week or long flat base as a secondary continuation pattern. AAPL has that “shakeout and breakout” look as it busted below the 200-day moving average in late June for a big shakeout and then plowed out of its base to all-time highs in mid-June on the breakout. If money needs to come into this market, AAPL will be a name that garners interest from institutional investors. AAPL picked up some volume support on Friday as it closed mid-range on heavy volume right at the 10-day moving average.

Apple, Inc. (AAPL) Gilmo Report Chart

Chart courtesy of HGS Investor (www.highgrowthstock.com), ©2011 used by permission.

In summary, what I’m picking up in this market is a lot of bifurcation where earnings season “roulette” creates a stark contrast between winners and losers. In addition a lot of uneven price action in leading stocks leads me to take note of these big-stock NASDAQ names that dominate their respective spaces and which are acting well as they basically have counter-trended the market in July. Thus I am beginning to smell some sort of liquidity push in the offing, and while Fed heads are loathe to mention the phrase “QE3,” they have still not acted to remove the liquidity that they have injected into the system. Meanwhile, it still appears that Congress is going to continue its path of borrowing-and-spending as they issue more and more debt for the purpose of paying off prior obligations, namely all those Treasury bonds and notes that already exist out there. The paradox of the existing debt ceiling “crisis” is that, despite all the talk, there is no way to reduce spending, much less begin paying down the U.S.’ gargantuan debt, which we must remember also includes some $60 trillion-plus in unfunded obligations on top of the current $14 trillion dollar debt. Hence, devaluation will be the driving force here, and this could result in mutant forms of QE coming into play again, which will drive the biggest and best stocks higher along with commodities and of course, the precious metals.

In the interim, during all this “crisis” excitement, I have seen the precious metals as the safest route to play the “default or devalue” theme, but it is possible that stocks could kick in as well at some point in the coming days or weeks. Meanwhile, there is nothing I see as providing a low-risk play on the short-side, so for now I’m sitting on my hands in that regard as we wait and see how events play out in the next week. In the meantime, I like my small basket of long ideas here that focuses on big-stock NASDAQ names as something to keep in my quiver of ideas just in case.

As an added treat, Gilmo members can view my latest month-end video on GoView.com to review names discussed in the month of July at:

http://goview.com/?id=f15418fb-b73f-4ad2-9cfe-d809e07d2fc

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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, LNKD, and MCP, 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, 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.