The Gilmo Report

June 1, 2011

June 1, 2011

The NASDAQ Composite Index came in with a 1.37% gain on Tuesday with volume picking up very sharply, as we see in the daily chart of the index below, but this did not meet the 1.4% requirement that we are currently using to define a follow-through day (FTD). Rounding up for the purpose of spinning a bullish tale is nice, but not something I’m willing to engage in. On the other hand, given the shallow 3-4% correction in the major market indexes, an FTD is not required for a resumption of the uptrend. The validity of such an uptrend resumption would be embedded more in the action of leading stocks, but in any case today’s action squelched all of that. Yesterday’s action struck me as somewhat unusual as well in the way the market suddenly rushed to the upside right at the end of the day after stalling around and drifting downward for most of the day off the intra-day peak following the big upside opening gap-up move. Today’s action confirmed my suspicions as the market blew to the downside on what was still heavy volume, hence was quite negative in my view, and came on the heels of yesterday’s fake-out “follow-through.” Adding to the negative tone is the fact that the NASDAQ Composite streaked below its 50-day moving average with a very long downside.

NASDAQ Composite Index Gilmo Report Chart

Some of you may have caught me on Fox Business News’ Stuart Varney & Company show yesterday morning where I told Stuart that I was NOT enamored with stocks at the moment but that I do favor gold. As you all know, we saw a pocket pivot buy point in the SPDR Gold Trust (GLD), shown below on a daily chart, on Friday, May 20th, which I also informed Stuart of in yesterday’s Fox appearance. Since then gold has moved higher, and today the GLD flashed a pocket pivot volume signature, not a pocket pivot
buy point, as it traded volume that was higher than any down-volume day over the prior ten trading days. With the market selling off right at the start this morning, gold was up over $10-an-ounce throughout the day before succumbing to the pressure of stocks and closing barely up a couple of dollars by the bell. Right now I’m holding my position in DGP on the basis of the May 20th
pocket pivot point, and it will be interesting to see how gold and silver hold up if stocks start to get pummeled. If falling stocks lead to margin calls, then I suppose the GLD becomes as good a “source of funds” as any to meet such calls. Ultimately, however, I believe gold will benefit in the event of a financial crisis, which is what I think we are heading for, one way or another. At this point we are using the 50-day moving average at 144.99 as our selling guide for the GLD.

SPDR Gold Trust (GLD) Gilmo Report Chart

Over the weekend I wrote that I saw very little that was actionable in this market, and this appeared to remain the case even with yesterday’s so-called follow-through. Even if you had thought yesterday was a follow-through day, that is all out the window now as today’s high-volume, but not necessarily higher-volume, reversal negates that FTD in short-order. Further evidence of the carnage today is evident in VMware, Inc.’s (VMW) daily chart, below. VMW announced on Tuesday that they have acquired “social collaboration provider” Socialcast, adding more “heat” to the “hot” social-networking craze, and the stock tried to break out of its cup-with-hande formation this morning in the face of a weak tape. Things were looking pretty good for VMW, despite the market sell-off, until later in the day when huge-volume selling came in and sent the stock reversing back below its 98.55 buy point. One thing to note here is that VMW’s action today may cause the stock to change from a buyable C&H breakout to a shortable late-stage failed-base (LSFB) situation! At this point I am more inclined to view VMW as a possible short here given today’s fresh, new, and very material evidence. If you are bold, short it here, using the 98.55 as a guide for an upside stop!

VMware, Inc.'s (VMW) Gilmo Report Chart

After today’s action, which can only be described as “third-degree ugly,” it’s easy to want to go and short everything. However, if we are to stick to our shorting methodology, we always look to former big bull market leaders as short-sale targets on the premise that the institutions who piled into a leading stock, say like Google, Inc. (GOOG), shown below on a daily chart, driving it higher over a period of months and even years, will at some point be piling out, thus creating the optimal “big leader short.” Right here, right now, I believe GOOG is one such short-sale target, and I have been watching it for some time as it has formed this head and shoulders type of breakdown ever since topping at around the $640 price level. I believe GOOG will go lower from here. I can see shorting the stock here with the idea that it should “break out” to the downside before it ever sees $140, about 3% higher from here. Thus I might use that level as a near-guide for my stop, but I believe the line of least resistance for GOOG over the intermediate-term, if not the short-term, is down, plain and simple.

Google, Inc. (GOOG) Gilmo Report Chart

Finisar Corp. (FNSR) has served as our most current “poster child” example of what we look for in the most optimal of head and shoulder top formations. With its huge-volume gap-down break down the right side of the “head” in the formation, it continues to act quite weakly. Next week the company announces earnings, and this may be what finally sends the stock blowing down into the mid-‘teens as it potentially breaks down through its neckline, which I see as being somewhere around the 16 price level. The stock traded heavier volume today as it rolled over and “broke out” to the downside as it closed just below the 22.33 low of this sideways range it has been in over the past 11 trading days. I would short any kind of bounce in FNSR from here as it looks primed to test the $20 price level, and my best guess is that earnings are not going to save the stock from a grisly demise.

Finisar Corp. (FNSR) Gilmo Report Chart

Las Vegas Sands Corp. (LVS) has served as our “poster child” for a late-stage failed-base short-sale set-up, complete with a climax top on the left side of the base back in October of last year, and it has continued to act weakly despite the fact that it has yet to really break down. Of course, we know that the general market action has a lot to do with this, and if the market begins to weaken considerably here on a potential first major leg to the downside, then I would expect it to take LVS down with it. LVS tried to rally back above its 200-day moving average today, as we see on the daily chart, below, on news that its Macau operations saw a big 43% jump in revenue. That, however, was not enough to keep the stock up as it found resistance at its 50-day moving average before turning tail and closing back below its 200-day moving average. LVS remains in a potentially shortable position here just below the 200-day moving average, and I would use that or the 50-day moving average as my guide for an upside stop, depending on my risk tolerance.

Las Vegas Sands Corp. (LVS) Gilmo Report Chart

For those of you who might want to dial up the “risk/reward” excitement on a short-sale target, perhaps Travelzoo, Inc. (TZOO) fits the bill. It is rare to find what I call a “pin-headed” head & shoulders top formation, but TZOO is exactly that right now. This type of formation usually occurs in a hot stock, and TZOO was pretty hot on the upside as it climaxed not once but twice, once at the peak of its left shoulder and once at the peak of its “pin-head,” which I’ve labeled as “PH” on the daily chart below. TZOO tried to flash a pocket pivot buy point yesterday, but that stalled out, closing in the lower part of the intraday trading range. Today the stock busted down through its 50-day moving average on heavy volume, and given the compact “pin-headedness” of this overall H&S formation, this would be about the right spot for TZOO to break down further. If it isn’t gapping down further tomorrow morning, it may be possible to initiate a short position around the $70 price level using the 50-day moving average at 73.58 as your guide for an upside stop.

Travelzoo, Inc. (TZOO) Gilmo Report Chart

I’ll be quite frank here and say that after yesterday’s phony follow-through day, with the suspicious run-up into the close in the last 20 minutes or so of the trading day, and then today’s decent-volume reversal to the downside that sent the major market averages streaking back down below their 50-day moving averages, I’m leaning towards the possibility of a much deeper correction. Leading stocks have been “sketchy” at best, and this is why over the weekend I felt that there was little that was actionable on the long side, while the short-side was still difficult given the fact that the general market had yet to break down in any meaningful way. The probability of further lows for the general market is rising as I see it currently. I could probably throw up 20 charts and say “short them all,” but in this report I’ve culled them down to those I feel best fit our methodology.

Obviously, if you were going to short everything in the market, you’re simply better off buying an inverse index ETF, such as the SQQQ, which is a reasonable idea here using the 50-day moving average on the NASDAQ Composite Index as a guide for a stop in the SQQQ. The SQQQ is a three-times leveraged short QQQ ETF, and with such ETFs it is best to pick a level on the underlying index, in this case the NASDAQ, against which to set your stop. Thus if I went long the SQQQ here, as an example, you might use the 2794.68 level on upside in the NASDAQ Composite Index as my guide for a stop in the SQQQ. While I have not wanted to necessarily take a stand on the bull or bear side of the market in recent weeks, today’s action makes me lean towards what could become the “right side” here, and that is either in cash or short this market. Stay tuned, as QE remains a force to be reckoned with and can still add to the volatility in this market.

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 DGP, 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.