The Gilmo Report

June 19, 2011

June 19, 2011

My Wednesday report of this past week discussed the potential technical events for a rally attempt by the general market, and the indexes behaved pretty much according to script. The NASDAQ Composite Index undercut its 2603 low as it broke further below the 200-day moving average on Thursday, sparking a logical rally off the lows, as I pointed out in my Wednesday report. The NASDAQ still sits at 2616.48, in a precarious position just below its 200-day moving average at 2640.88 and right above Thursday’s intra-day low at 2599.86. On Thursday the S&P 500 Index followed its script by coming within 18 cents of its 200-day moving average before bottoming and bouncing in perfect synchrony with the NASDAQ’s undercut of the 2603 mid-March low, which I also discussed as a potentiality in my Wednesday report. For now, however, that’s as far as my “crystal ball” goes, and Friday’s action was muddy at best. Heavy quadruple-witching options expiration helped to provide a ready alibi for the extremely heavy volume, but taken on its face, Friday’s action looks pretty ugly. The bottom line, however is that many leading stocks are very much way down off their peaks after some severe breakdowns over the past 13 trading days and so the potential for a bounce continues to grow. But so far the trend is your friend, and the market is still in a sharp downtrend off the peak of late May and the phony follow-through day of May 31st.

NASDAQ Composite Index Gilmo Report Chart

Despite the carnage in stocks, gold continues to hold up and act reasonably well considering that the dollar has been in an uptrend since its early May lows. The dollar is benefitting from the fear trade out of the euro as well as the fact that the Greek situation will likely lead to more euro-printing. In my view, it is not a matter of whether Greece will default, but when. It is a simple math exercise to understand that Greece, saddled with an entitlement-mentality citizenry, will never be able to muster the entrepreneurial/productive work-ethic and mind-set necessary to grow their way out of this self-made mess. Meanwhile gold gains ground as the preferred alternative currency of choice. Objective evidence in support of this argument is the fact that the SPDR Gold Shares ETF (GLD), shown below on a daily chart, has issued two pocket pivot buy points in the past three days, one roughly off support at the 50-day moving average on Wednesday of this past week, as I discussed in my report of that day and the second as the stock came up through its 10-day moving average on Friday. In my opinion, the GLD remains buyable using the 50-day line as your stop.

SPDR Gold Shares ETF (GLD) Gilmo Report Chart

In many ways the NASDAQ Composite Index’s daily chart, shown further above, looks a lot like Apple, Inc.’s (AAPL) daily chart, below. In many ways, however, AAPL is the market, and so its resemblance to the NASDAQ Index is not surprising. AAPL has yet to actually violate its 200-day moving average on a technical basis since it has not undercut the 318.33 low of Thursday which was the first day the stock closed below the 200-day line. A technical violation of any moving average ONLY occurs after the stock moves below the intra-day low of the first day it closes below the moving average. AAPL did, however, attempt to rally above the 200-day moving average on Friday on news that Facebook is producing an iPad app. As Homer Simpson would say, “Woohoo!”, so in my view the news-induced bounce simply provided a short-selling opportunity. By day’s end AAPL reversed and closed at the intra-day lows, just barely avoiding a big-volume outside reversal day. At this point, I see any rally up into the 200-day moving average at 325.90 as potentially shortable, using Friday’s high at 329.25 as a guide for an upside stop.

Apple, Inc.'s (AAPL) Gilmo Report Chart

While I understand it is controversial, my view is that AAPL is likely on the verge of a long-term top and decline, and, as I’ve written before in my reports of June 1st and 5th, Google (GOOG) is also “carving out” what may be confirmation of a long-term top and decline as a former “big stock” leader that institutions have piled into and driven higher over the past 6-7 years. In my view, both AAPL and GOOG are likely at the end of their current “life cycles” as big leading stocks, and the institutions that drove their stock prices higher by steadily accumulating shares over an extended period of time are likely in the process of distributing these shares as the stocks are given less emphasis within their portfolios. As I wrote on June 1st, GOOG was looking like it was ready to “break out” to the downside, which it did last week, and Friday’s big-volume downside streak, as we see in the daily chart below, provided some price/volume momentum to the stock’s continuing decline. GOOG is now 24% below its January price highs, and while rallies and bounces back up into the 50-day moving average are to be expected on the way down, I would not be surprised to see GOOG eventually trading down in the 300’s. If you’re short this, you can sit with it, looking for the 450 area to provide the first logical support area.

Google (GOOG) Gilmo Report Chart

More evidence of fallen “angels” is found in big-stock leader Netflix, Inc. (NFLX), shown below on a daily chart. NFLX’s recent breakout from a sloppy “ladle-with-handle” formation in late May has been short-lived as it ended the week below the 252-253 buy point. NFLX also closed just below its 50-day moving average. Its recent breakout was likely a final squeezing of the shorts, which peaked out at a high 2.2 days in May. NFLX is now showing signs of evolving into a late-stage failed-base (LSFB) formation, and it is possible to short the stock on an aggressive tactical basis based on this breach of the 50-day line should a violation be confirmed with a move lower in coming days, using the high of Thursday at 257.69 as a roughly 5% stop. We know from models of other LSFB set-ups that the first break through the 50-day moving average can lead to a sharp sell-off of 10-20%, and then subsequent rallies back up into the 50-day moving average are what you look to short into. Potentially, if this breakout failure continues to develop, NFLX might break down and undercut the lows of the handle in the 224-225 area before trying to rally back up to the 50-day line. The LSFB may take more time to develop, but a tactical short might be possible in the interim.

Netflix, Inc. (NFLX) Gilmo Report Chart

I discussed Netapp, Inc. (NTAP) in my mid-week report of this past weekend as a combination head & shoulders (H&S) and late-stage failed-base (LSFB), short-sale set-up. The stock has spent the past two days since then trying to rally back up towards its 50-day moving average at around 51.32 before falling back to its intra-day lows by the close. Friday saw volume increase, and it appears that, another blip back up towards the 50-day moving average notwithstanding, NTAP is heading lower and will eventually test the 46 price level, perhaps a little lower as I’ve highlighted n the daily chart below. The other big stock in the data storage group, EMC Corp. (EMC), not shown here on a chart, is also breaking down in earnest and thus confirming the weakness in NTAP. As the weaker of the two, NTAP then becomes my preferred short-sale target. I’ve highlighted what I see as the first potential area of support down around the 46 price level, so a possible undercut & rally could occur if the stock breaks down further from here. For now this remains in play as a short-sale target stock using the 50-day moving average at 51.32 as your upside guide for a stop. If you want to give the stock a little more room on the upside you could also use the 51.85 high of this past Wednesday as an alternative upside stop.

Netapp, Inc. (NTAP) Gilmo Report Chart

Both of my newest retail shorts, Under Armour, Inc. (UA), shown below on a daily chart, and Lululemon Athletica (LULU), not shown, remain “in play” as neither has been able to hold recent rallies back above their respective 50-day moving averages. I continue to view both as potential short-sale targets, and members should refer to my discussion of LULU from this past Wednesday’s report to understand the parameters and rationale of that trade. Meanwhile UA has been trying to rally higher on two buy recommendations and one admonition for LULU to buy the stock by a certain manic financial TV commentator. Despite the recommendations and buyout cajoling, UA was not able to end the week above its 50-day moving average as it closed just below the line on Friday on heavy volume. As I’ve discussed in my reports over the past week or so, UA is a flattish-looking “pin-head & shoulders” type of formation. Unlike Travelzoo (TZOO), which I first mentioned in my report of June 1st as a “PH&S” short-sale set-up, UA has a neckline that goes straight across instead of declining, so it is by definition a less-weak formation. A short here on UA could continue to use the 50-day line or Wednesday’s high at 69.90 as a quick upside stop.

Under Armour, Inc. (UA) Gilmo Report Chart

CF Industries (CF) provides an interesting example of a “Lone Ranger” breakout given that it was acting well on a new-high breakout in late May even as the rest of the big fertilizer stocks like Potash Corp., (POT), Agrium, Inc. (AGU) and Mosaic Company (MOS) have exhibited much weaker behavior. When a single stock among a particular industry group is trying to break out while the other names in the group deteriorate, this is what is known as a classic “Lone Ranger” breakout. Without his trusty sidekick, Tonto, in the form of confirming positive action among other stocks in the group, the breakout has to be seen as suspect. And, in fact, it has confirmed such suspicious behavior by becoming a late-stage failed-base (LSFB) this past week when it broke down through the roughly 145.25 breakout buy point and streaked below its 50-day moving average on heavy volume. While AGU, MOS, and POT all continue to break down, CF is now following them lower and is the only one among them in a reasonably shortable position. I would look for a rally back up into or towards the 50-day moving average at 141.41 as potentially shortable, using the 144.64 intra-day high on Friday as a guide for an upside stop.

CF Industries (CF) Gilmo Report Chart

The big-stock clouds continue to come under pressure as Salesforce.com (CRM), not shown, is on the verge of becoming a late-stage failed-base (LSFB) while VMware, Inc. (VMW) already is, as I’ve discussed in previous reports. Initially we used the 98.55 pivot point breakout level as an upside stop on short positions taken near that level. Now a reasonable trailing stop can be found at the 50-day moving average at 92.48 as VMW has now moved below the 50-day line since the failed breakout of June 1st. Note how VMW broke down through the 50-day line and then on Friday staged a typical “blip” back up to that blue moving average on the daily chart below on light volume. This is where the stock becomes potentially shortable again, using that 50-day line as an upside stop. My first downside objective from here would be the 200-day moving average at 86.27, which might provide some near-term support if the stock heads lower from here. Meanwhile, keep an eye on CRM which closed the week sitting right on top of its 50-day moving average. Any breach of the 50-day line could confirm an LSFB type of set-up in CRM as well.

VMware, Inc. (VMW) Gilmo Report Chart

While they were in uptrends following the September 1, 2010 market follow-through day, I considered CRM, VMW, and F5 Networks (FFIV) to be the “Power Trio” of “big stock” cloud-computing plays. More recently, however, these stocks have become the “Trio of Weaklings.” FFIV made a brief attempt at strength in late May as it flashed a “bottom-fishing” pocket pivot buy point coming up through its 200-day moving average, as we see in its daily chart, below. But that did not hold the 200-day moving average for very long, stopping out any would-be buyers of that more risky pocket pivot move. Over the past two days FFIV has confirmed this weakness by breaking below its 50-day moving average on sharply expanding selling volume. This is looking like another roll-over within a second right shoulder in a large, head and shoulders formation extending back to November 2010. In the daily chart below I show the right side of the formation with the two right shoulders. While the action at the end of May looked like the stock might be headed up the right side of a big “cup” formation, recent action brings the H&S top back into play. I would look to short rallies back up into the 50-day moving average, using that as my guide for an upside stop.

F5 Networks (FFIV) Gilmo Report Chart

In my view what we’ve seen over the past 13 trading days has been nothing less than a bout of “forced selling” as Greece potentially puts pressure on the balance sheets of financial institutions and sovereigns who are long Greek debt. This web of exposure to Greece is broad enough, in my mind, to bring such forced selling into play. Obviously, any default wipes out these “assets” and so the severe selling over the past two weeks is likely the result of a move to shore up balance sheets by raising cash and liquidity in light of a potential Greek meltdown. With Italy on the verge of being downgraded and problems in Spain, Ireland, and Portugal likely to raise their heads again over time as Greece has, more forced selling is likely. Of course, there is no need to predict this; just watch the price/volume action of leading stocks and the general market. Obviously, with the market in a 13-day downtrend, a sharp reflex rally of 2-4 days or more is always a possibility, but so far the market has not been able to muster anything more than one-day wonder rallies on June 2nd, 9th, and 14th, as measured on the NASDAQ Composite Index daily chart shown at the outset of this report.

For short-sellers, this means only taking new short positions in short-sale target stocks providing optimal entry points near potential resistance levels such as key moving averages or areas of overhead supply. Meanwhile, stocks that have come down sharply, such as TZOO or SINA, should be watched as they reach profit-objective price levels. Among names I’ve discussed as short-sale targets recently and which I have not already discussed in this report, below are current notes from my trading diary:

ARUN – has broken below 200-day moving average and is now 7% below that line. Watch for a rally back up into 200-day moving average as a potential add/short area, otherwise the downside price objective is an undercut of the 20-21 lows of the prior base.

FNSR – a big gap-down on earnings after the close on Wednesday has put the stock down well over 30% from where we first discussed it as a short-sale. FNSR is a perfect model of a proper H&S short-sale set-up, so clip that chart and save it for your short-selling model book.

LVS – still in play as it has now fallen 11% below its 200-day moving average. Ultimate resistance on any reflex rally from here would be expected at the 40 price level.

SINA
– Stock is now 30% below its 50-day moving average and closed below its 200-day moving average for the first time on Friday. If the stock is unable to find support around here then we might expect an undercut of the 74.22 price level at the lows of the prior base. A move below the 79.83 level in the next couple of days would confirm the 200-day moving average violation.

TZOO – is 22% below its 50-day moving average but still 17% above its 200-day moving average. Over the past three days TZOO has found resistance at its 10-day moving average, and given the downside acceleration in the stock after it broke down through its 50-day moving average, we might look for the stock to follow the 10-day line down toward the 200-day moving average currently running through the 47.92 price level. If one wants to try and be a “pig” with TZOO on the short side, risk can be minimized by using the 10-day moving average as a very quick upside stop. Otherwise, I would look to short the stock on any rally up into the 65-day exponential moving average at 64.82.

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.