The Gilmo Report

June 22, 2011

June 22, 2011

The market finally got its bounce to start off the week, but today’s Fed meeting announcement, along with Fed Chairman Ben Bernanke’s press conference exercise inspired a decidedly negative response today. All of the major market indexes, including the NASDAQ Composite shown below on a daily chart, reversed hard during and right after the chairman’s press conference and closed down on the day. The NYSE traded heavier volume, making for a distribution day to kill the rally attempt on the S&P 500 Index, which I don’t show here. Yesterday’s action had the look of a follow-through day if you want to count the first day off the lows, five days ago on the chart, as a rally attempt given that it closed in the upper half of the daily trading range. For my money, it wasn’t, given the dearth of leadership and the fact that most of the recently whacked leaders were simply bouncing off of their 200-day moving averages after some steep declines over the prior two weeks. The rally on the NASDAQ carried right into logical resistance at the mid-April low which had served as potential support at the beginning of June but which now constitutes a logical point of near-term resistance.

NASDAQ Composite Gilmo Report Chart

I wouldn’t touch stocks with a 10-foot pole on the long side in this market environment, but gold has continued to make higher highs since its pocket pivot buy point back on May 20th down at around 147 on the SPDR Gold Shares ETF (GLD), shown below on a daily chart. Gold and silver serve a useful purpose as vehicles with which to ride a counter-trend to a downward-trending dollar, but that wasn’t the case today as the dollar rallied but the yellow metal held up well. I also view gold and silver as reserve currencies that will attract buying as a hedge against a world that is literally awash in fiat currencies, thus there is upside based on that premise. Long-term I think gold and silver go higher, much higher perhaps, and the key right here, right now is whether the market is going to continue experiencing forced selling, which is what I see dominating the market action right now, and whether a continued downside move in stocks will eventually drag down precious metals as well. As Chairman Bernanke admitted today, U.S. financial institutions have significant exposure to European banks who in turn have exposure to bankrupt sovereigns like Greece. This, in my view, brings on forced selling in the markets as institutions move to raise liquidity, and in my view it is not over yet. Beyond Greece there is Spain, Italy, Ireland, and Portugal, and without QE3 coming to the rescue then assets will get sold for the purpose of increasing liquidity among financial and other institutions with stock market assets to sell.

Gold Shares ETF (GLD) Gilmo Report Chart

Looking over my list of short-sale targets I must note that its size has been reduced by the fact that UA and LULU were both able to get above their 50-day moving averages which I was using as a very tight stop on any short positions in those stocks. Hence they are off the table for now, but my biggest of big stock short-sale targets, Apple, Inc. (AAPL) is still very much in play. AAPL came down hard on Monday morning, gapping further below its 200-day moving average on huge volume and then setting up an undercut & rally at the mid-April low, as I’ve indicated on the daily chart below. This undercut & rally created a textbook move back up towards the 200-day line, which is now resistance. AAPL skidded just past its 200-day moving average this morning before turning tail and closing down for the day. The area between the 200-day line and the 330 price level is a zone of upside resistance as I see it, so any rallies up into this area are eminently shortable. This move back up towards the 200-day line provides a secondary short-sale point, using the zone between 326.88 (the 200-day line) and resistance at around 330 as your maximum upside stop.

Apple, Inc. (AAPL) Gilmo Report Chart

Netapp, Inc. (NTAP) also rallied up into an optimal short-sale entry point right at the confluence of its 50-day simple and 65-day exponential moving averages, as we see on the daily chart below. NTAP has benefitted from more “overweight ratings” being placed on the stock by analysts, but these have only served to create a weak rally over the past three days that ended today at the 50-day moving average currently running through the 53.54 price level. NTAP could not get back above the 50-day line and reversed on the day as it simply ran out of gas. I don’t know if there are any analysts left out there to prop the stock up with buy or “overweight” recommendations, but in my view this is very shortable right here using the 50-day as your quick stop on the upside. If the market were able to resume its bounce and stop us out on NTAP at 51.54, then I might look for the next area of resistance to occur up at the 200-day moving average at 52.19. NTAP is a weak stock with a Relative Strength rating of 60, and you can see that there is a fair bit of resistance around the 51-52 level as I’ve highlighted on the chart.

Netapp, Inc. (NTAP) Gilmo Report Chart

In my report of this past weekend, my trading diary notes indicated to look for a rally by Travelzoo, Inc. (TZOO) back up into its 65-day exponential moving average as a spot to re-short the stock or to add to an existing short position in the stock for those of you who have wanted to get piggy on this one. For those of you who did get piggy and perhaps shorted the stock again on the rally to the 65-day exponential line, you played it perfectly today as the stock reversed right off the moving average on very heavy volume, as we see in the daily chart below. In my view, TZOO either rallies back above its 65-day line or it is destined to kiss its 200-day moving average down at 48.48 in the event of more general market weakness, which currently looks like a pretty good possibility given all the selling volume that TZOO ran into today. TZOO is so far one of the best examples of a “pin-head & shoulders” top formation that I’ve seen in a while, and so far it has panned out well since I first discussed it in my report of June 1st as it was hovering around its 50-day moving average up at 70.96. If you added or entered TZOO on the short side here, the 65-day exponential line at 64.22 is your stop.

Travelzoo, Inc. (TZOO) Gilmo Report Chart

Last but not least among my short-sale target stocks that I consider most actionable, which is all I’m discussing in this report today, is Aruba Networks (ARUN), shown below on a daily chart. As I noted in my diary notes over the weekend, a rally by ARUN back up into its 200-day moving average was likely. We can also see from the chart that the rally came up off the neckline in what is so far a head & shoulders topping formation in ARUN. Stocks can often slide past their moving averages as they bounce off of logical support, and ARUN slid about 5% past its 200-day moving average today before reversing and closing near the intra-day lows of the day. ARUN is a little bit of a thinner stock, so its bounces often carry farther than they look like they should, but this one carried right into a small area of congestion that I see as near-term resistance. In my view, ARUN can be shorted here using today’s high at 27.69 as your guide for an upside stop. Remember that ARUN pulled all the way back down into the base structure from which it emerged in late February, so this bounce is not unexpected.

Aruba Networks (ARUN) Gilmo Report Chart

In my view a lot is going to have to happen to turn this market back into a bull trend, and the potential for lower lows is much higher. It may be that some sort of capitulation low will have to be put in before this is all said and done. In addition, the specter of forced selling as financial institutions seek to shore up liquidity as they brace for a systemic shock coming out of the euro-zone and its bankrupt sovereigns. At some point a severe market sell-off may force the Fed to respond with a more discernible QE3 program that goes beyond its current lip service to “continued accommodative policy.” At that point, precious metals may become the vehicle of choice for a QE3-induced rally, but until then the stock market’s trend remains in bear mode.

Gilmo members might want to catch me tomorrow morning on Fox Business News’ Stuart Varney & Company show at around 7:00 a.m. Pacific Time, 10:00 a.m. Eastern time, and 3 p.m. London Time.

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 AAPL, ARUN, DGP and NTAP 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. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.