The Gilmo Report

June 12, 2011

June 12, 2011

The market is now working on its steepest slide since the summer correction of summer 2010, and the only thing that stands between the general market and a continuing freefall is the 200-day moving average, as we see on the daily chart of the NASDAQ Composite Index, below. Volume picked up on Friday as a market that was by any measure “oversold” at the time of my mid-week report this past Wednesday became even more “oversold” by the time the closing bell on Friday mercifully ended the carnage, at least for the weekend. The NASDAQ Composite is now down 8.4% off its late April peak, while the S&P 500 is now 7.2% off the peak, exceeding the 8.3% and 7.1% corrections seen in those indexes in mid-March of this year, respectively. At best, the indexes might be able to muster a bounce off their 200-day moving averages, but this is as yet to be determined, as well as the sustainability of any such bounce.

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There is no sane reason to try and play the long side here, and, as my report of this past Wednesday indicated, the only viable postures to take here are either to remain in cash or to play the short side of the market. I might also caution members trying to play the otherwise constructive action in gold and, by association, silver, that these precious metals could become swept away by the sell-off in stocks as many institutional investors could be forced to sell positions in commodities as a result of margin calls or the need to raise more cash and reduce risk. In particular, I did not like the way the iShares Silver Trust (SLV) gapped down Friday on heavier volume as it failed to hold above its 10-day moving average. I’ve been looking for a possible pocket pivot in either the GLD or the SLV as confirmation of the precious metals’ recovery off their recent mid-May lows, but it looks like a test of support is in the cards for silver and gold. I would look for the SLV to test the 200-day moving average at around the 30 price level as the market sell-off potentially drags everything down with it. The problem for me is the strong odor of “forced selling” as everything is getting whacked, and whacked hard, to say the least. And the strong whiff of forced selling is what leads me to think that even if there is a decent bounce off the 200-day moving average in the general market indexes, it may not last very long, so I would steer clear of ANYTHING on the long side for now.

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The SPDR Gold Trust (GLD) looks much more constructive than the SLV given that it is trading above its 50-day moving average and forming a little cup-with-hande type formation on its daily chart, shown below. I would expect that the GLD would at least hold above the pocket pivot buy point of May 20th, at around the 147.50 level. Ultimately, the 50-day moving average at 146.53 is your downside selling guide. Any violation of that line likely means further consolidation. Otherwise, for now I would ONLY enter the GLD or SLV if and ONLY if they flash some sort of pocket pivot or other type of buy signal given their current technical positions and conditions. Of the two, I also consider gold to be the lower-risk situation given that it has held up better, which I might speculate is due to the fact that it did not run up as fast as silver did and that it is far more accepted and recognized as an alternative currency, as “money,” if you will.

SPDR Gold Trust (GLD) Gilmo Report Chart

The key factor here for the precious metals is the action of the dollar, shown below by way of the daily chart of its proxy, the PowerShares US Dollar Index Bullish Fund (UUP), below. As you can see, this past week the dollar successfully tested its early May low and is now bumping up against its 50-day moving average, which I would now consider short-term resistance. Troubles in Europe as well as a slowdown in China have likely led to a short-term “safety trade” into the dollar, and it remains to be seen how long this sustains an upside move in the dollar. In the near-term, the market is not seeing the emergence of a QE3, but over the intermediate- to longer-term I would expect that continued monetization or perhaps the eventual restructuring of the massive global debt juggernaut will have its deleterious effects on the dollar and other fiat currencies. For now the action of the dollar appears to preclude any short-term strength in precious metals as an alternative currency play, but it could set up strong buying opportunities in the metals over the coming days or weeks.

PowerShares US Dollar Index Bullish Fund (UUP) Gilmo Report Chart

The most and only rewarding activity over the past seven trading days has been shorting individual stocks for some quick 3-4 day gains in some cases. On Wednesday I discussed Apple, Inc. (AAPL)
as having flashed a potential late-stage failed-base (LSFB) short-sale signal at around the 340 price level and its 50-day moving average. As we see on the weekly chart of AAPL, below, the stock is testing its 40-week (200-day) moving average at 323.84 for the first time in this run off the March 2009 lows. I don’t count the extreme intra-week low caused by the “Flash Crash” of May 6, 2010 as true price action, so this is in my view the first time AAPL has come to rest right on top of the 40-week line. Looking at AAPL’s 2009-2011 price move within a longer-term context helps understand why the stock could be putting in a significant top here as it has formed three big, long-duration bases on the way up and broken out of the last two. The Rule of Three might tell us that this time could be different.

Apple, Inc. (AAPL) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investors (www.highgrowthstock.com), ©2011 used by permission.

Apple, Inc. (AAPL)’s daily chart, below, provides a little more detail to the current price/volume action in the stock. Note the price reversal on Monday, the same day AAPL announced its iCloud service at its hyped-up Developers Conference, when the initial short-sale signal in the stock occurred. AAPL then traded down to the 330 level where it held short-term support for two days. On Thursday, AAPL announced the design of its wild, new space-age headquarters office campus that Steve Jobs says will be the “best office building in the world” and which I myself have dubbed the “Lord of the Ring” monument. With so much great news and iPads selling like hotcakes, why isn’t AAPL stock taking off, especially when it sells at a “mere” 13 times forward estimates. Something is not quite right here, and I tend to view AAPL’s low P/E as a sign that the market simply does not place a very high value on the future earnings of AAPL, a clear yellow flag, at best. As well, when leading companies start building monuments, investors beware, whether those big monuments come in the form of grand new office buildings like the Pan-Am (now the MetLife building) building in the 60’s, the largest commercial office building in the world at the time, or grand mergers like AOL and Time Warner in the early 2000’s. As well, AAPL’s price/volume action, when placed within the longer-term context of its overall chart pattern since the market lows of March 2009, shows that AAPL could be vulnerable to further downside.

Apple, Inc. (AAPL) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investors (www.highgrowthstock.com), ©2011 used by permission.

In my June 1st report I discussed the potential for Google, Inc. (GOOG) to “break out” to the downside as it was hovering just below the 530 price level at around the 525 price level. As we can see from the daily chart below, GOOG on Friday did in fact break out to the downside as it breaks down further in this overall head and shoulders type of formation it began forming in October of last year. Interestingly, this H&S type of formation actually forms the right-most portion of what was a failed cup-with-hande
breakout from mid-January. On the daily chart below I outline the left side of the “cup” as well as the “handle” and point out where the actual failed breakout from the cup-with-hande occurred. That failed breakout also forms the peak of the “head” in the H&S, a good example of how topping patterns can form “combos” as they can be made up of several different topping formations morphing together. Like AAPL, it appears that while GOOG is moving ahead on the mobile-device front with the growth of its Android platform, you wouldn’t know it from the chart.

Google, Inc. (GOOG) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investors (www.highgrowthstock.com), ©2011 used by permission.

In my report of this past Wednesday I noted the “Pin-Head & Shoulders” type of formation I was seeing in Under Armour, Inc.’s (UA) daily chart, shown below, and I also pointed out that I would look for some type of rally back up into the 50-day moving average as being a potential opportunity to short the stock. On Thursday UA did exactly that, and by Friday morning the stock was above its 65-day exponential moving average and just below the 50-day line before it turned tail and reversed on above-average volume. To me, UA looks primed to “break out” from here to the downside, and if I wanted to enter the stock on the short side here I would probably do so with the idea of using Friday’s high at 67.07 as my upside stop. This is just slightly above the 65-day e.m.a. which appears to be near-term resistance fo the stock. I would also keep an eye on Lululemon Athletica (LULU), UA’s “cousin,” as LULU gapped up on earnings Friday but found resistance at its 50-day moving average before reversing to close at the lower end of its daily trading range, and a late-stage base breakdown in LULU might coincide with a downside “breakout” in UA.

Under Armour, Inc.'s (UA) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investors (www.highgrowthstock.com), ©2011 used by permission.

I’ve covered a very specific number of short-sale situations in recent reports as the market has begun to wobble at the top, and a number of these have done quite well as the market has broken down sharply over the past seven trading sessions. At this point we are looking at taking some profits in successful short-sale positions while anticipating the potential for a bounce in the general market indexes as they all approach and begin to touch their 200-day moving averages. In my view that is all there is to do right now, as the downside is getting fairly obvious in the short-term. The next bounce in the general market could, however, be where we want to either re-enter or add to short-sale target stocks if they coincide with rallies by each target stock into logical resistance at a prior moving average or congestion area. Below are excerpts and notes from my trading diary regarding other short-sale set-ups I’ve discussed in recent reports:

ARUN – Stock has hit its 200-day moving average (25.58), down about 10% from where we first discussed it as a short-sale target at 28.11 in my report of last weekend, June 5th. Short-sellers in ARUN at that price point could cover here and take profits or look for a further breach of the 200-day moving average depending on your risk preferences.

FNSR – the stock is now at 18.21, down 27% from where I first discussed the stock as a short-sale possibility at 25.08. Earnings come out this Wednesday, so short-sellers in FNSR from the 25 price level could consider taking profits or “letting it ride” going into earnings. This, of course, depends on your risk-tolerance. For my money, I might consider covering at least ½ and letting the rest ride if indeed I were inclined to take the extra risk/reward potential going into earnings. FNSR could gap either way after earnings, and thus risk and reward either way could be large. But with a Relative Strength of 24 and Accumulation/Distribution rating of “E,” FNSR is as “down and dirty” as it gets.

LVS – the stock has now undercut the 39.59 low of May 24th, a little over two weeks ago and is now 9% below its 200-day moving average, where I last discussed the stock as being shortable. For now this appears to be in play still with the possibility of some bounce based on the potential for a) an “undercut & rally” or b) a general market bounce off the 200-day moving average in the major indexes.

SINA – SINA is down seven days in a row, ending the week at its lows at 89.33. This is about 22% from the 115 price level where I considered the stock shortable per my report of June 5th. Profits could certainly be taken here as the stock is sitting right on top of potential base support from a sideways consolidation it formed back from February 15th to March 23rd. It is also about 10% above its 200-day moving average, so a bounce from here first before it hits the 200-day line might occur if the general market also bounces – otherwise I would expect that the 200-day line is where SINA is headed to at some point.

TZOO – stock is hovering in “mid-air” between its 65-day exponential moving average (66.15) and its 200-day simple moving average (46.94). I would look at any rally up into the 66.15 price level as potentially shortable, but the stock could bee-line downward to its 200-day moving average. Given percentage decline from initial short-sale point around 50-day moving average, short-sellers in TZOO could bag a profit here or try and play for further downside by holding for a move down to the 200-day line or adding to a short position on any rally to the 65-day e.m.a. at 66.15.

VMW – the potential late-stage failed-base (LSFB) short-sale set-up in VMW is still in play. The stock is only 5.1% from the 98.55 short point, as I measure it, and so this position is still in play as long as VMW does not move up through the 98.55 price level, which I would use as my guide for an upside stop in any VMW short position.

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.