The Gilmo Report

June 29, 2011

June 29, 2011

As I wrote over the weekend, “For now I would tend to see the short side of the market as being potentially played out in the short-term as the break off the peak in the first thirteen days of June turns into a logical ‘chop swamp’ that yields little in the way of progress one way or the other.” And right on cue the market has this week produced a three-day upside move as beaten down stocks jerked off their lows on the wings of a Big Fat Greek Austerity Plan relief rally. So far the NASDAQ Composite Index, shown below on a daily chart, has been able to muster up a textbook three-day rally on light volume as it makes its way towards potential resistance around and between the 2740 level and the 50-day moving average at 2762.The rally, for the most part, has been led by former leading stocks which were beaten silly in the first half of June as they have spent the latter half of June rallying back up into areas of logical resistance. Going into the end of June we have some cross-currents at hand, such as a long three-day Fourth of July weekend, window-dressing at the end of the first half of the year, and the end of QE2. Cross-currents or not, the bottom line is that until we see a follow-through day on what is now a 10-day rally off the lows, then we should remain alert to the possibility of shorting this rally should it fail.

NASDAQ Composite Index Gilmo Report Chart

Inasmuch as Apple (AAPL) is the market, it is not surprising then to see on its daily chart below that it has rallied back up to its 50-day moving average right in synch with the NASDAQ Composite Index. This rally is so far a textbook wedging rally into the 50-day line that was driven by an undercut & rally off the 110 level occurring in tandem with the general market finding support off of its 200-day moving average. I still believe that the greater probability for AAPL is more downside, and that the stock has likely seen its best days, at least for this cycle. In my view this is the spot to short the stock, using the 50-day moving average as your upside guide for a stop. Of course, this will depend on what the general market does. So if AAPL does fail at its 50-day moving average then I would like to see it occur in synchrony with the general market also finding resistance and reversing back to the downside. To some extent we are in “no-man’s land” right here until we see this market rally result in a follow-through day or fail outright. But if short-sale target stocks come into strong, optimal short-sale positions at a major point of resistance, as AAPL has done, then it is possible to test the short side here using quick stops at or just above the 50-day line.

Apple (AAPL) Gilmo Report Chart

Aruba Networks, Inc. (ARUN), shown below on a daily chart, also presents a potential shortable rally within an overal head and shoulders formation. ARUN broke down off the peak of its previous right should back in early June along with the market, but it has also spent the latter half of June rallying back up to its 50-day moving average along with the general market. Today the stock ran into a logical point of resistance as it stalled along its 50-day moving average. Again, we see how short-sale target stocks can be viewed within the context of a general market bounce and rally following a sharp sell-off as the stock’s movements generally mimic those of the market. And this is why we would like to see the general market also peel off and roll over here along with ARUN doing the same. Obviously, if we get a follow-through day, albeit a late one, over the next few days then all bets are off. But as with AAPL, ARUN’s position within its chart provides the most optimal point at which to try shorting the stock as this rally may simply form a second right shoulder if it rolls over from here. The 50-day line, or today’s high at 29.79, becomes your quick upside stop.

Aruba Networks, Inc. (ARUN) Gilmo Report Chart

Netapp, Inc. (NTAP) is a bit different from AAPL and ARUN in that it has not been able to rally along with the market over the past two weeks, and hence is in a much weaker position as it continues to find resistance along the confluence of its 50-day simple and 65-day exponential moving averages, with the 65-day so far serving as the clear line of demarcation for upside resistance. I first discussed NTAP’s head and shoulders formation in my report of June 15th, and the daily chart below shows the head and right shoulder of this PH&S formation. NTAP has come under some high-volume selling within the past week each time it has tried to rally up through the 65-day exponential line, and in my view the stock remains shortable here using the 50-day moving average as an upside guide for a quick stop at the 51.74 price level currently. On the downside NTAP has held the 49 price level several times, but I would consider a clean breach of this level as downside confirmation that would bring the 46 lows into play.

Netapp, Inc. (NTAP) Gilmo Report Chart

Travelzoo, Inc. (TZOO) has worked well since we first came after it around the 50-day moving average and the 71 price level in early June, and I noted last week that the stock appears to be finding resistance along the 65-day exponential moving average. Right now this looks too weak to get through the 65-day line as it reversed back down through the line today with volume picking up. The only way I can see TZOO getting up to its 50-day moving average at around 69.47 is if the general market itself continues rallying. That could happen, of course, but for now I tend to see this as potentially shortable here along the 65-day line, using it, give or take 3-5%, as your upside guide for a stop. Notice how the red 200-day moving average is catching up to the “neckline” of the “Pin-head & Shoulders” formation, and I would be looking for this level to serve as my short-term downside target right along the neckline and the 200-day moving average, assuming it does not stop out by first rallying and closing above the 65-day exponential moving average, the black moving average on the daily chart below.

Travelzoo, Inc. (TZOO) Gilmo Report Chart

Below are notes from my trading diary regarding other short-sale target names we’ve discussed in June and which are still viable on this current market rally. For the most part, this report includes discussion above on the few short-sale targets that I view as optimal right here, right now. Keep in mind, however, that a follow-through day could put the short side on the back burner in the interim, but for now any general market weakness and subsequent failure on this current rally should be watched for as these stocks rally up into logical resistance. Meanwhile my notes on short-sale targets I consider less-than-optimal right now:

CF – stopped for now at the 50-day moving average, as strength in the group, including POT and MON, is keeping this above the 50-day line for now.

FNSR – this one broke down sharply and met our profit goals from the point where we first came after it around the 24 price level.

GOOG – has rallied up to the 20-day moving average at around the 500 price level. For now would look to the 20-day line to serve as trailing resistance since the stock has followed the 20-day moving average to the downside since we first discussed the stock as a short-sale target at around the 530 price level.

LVS – has rallied back to the 50-day moving average at around the 42 price level, so it becomes potentially shortable here using the 50-day line as your guide for a quick stop.

SINA – has rallied back up into its 65-day exponential moving average at around 102-103 where one could test a short position using the 65-day line as your stop. Otherwise, if the stock continues to rally from here, the 50-day moving average closer to 110 becomes your next potential short-sale point.

VMW – the stock has been unable to hold the 98.55 breakout level of late May from which it failed, thus would continue to use that price level as a stop. While VMW did rally up to the $100 level yesterday, that was less than 2% above the 98.55 price level, so one could use that price level with an additional 2-3% stop. One point here to understand is that VMW is less weak than other short-sale targets, hence less attractive here as a short-sale target since weakness begets weaknes, and I prefer to target the weakest of the bunch when it comes to short-sale target stocks.

Because we haven’t seen a follow-through day I have not been in the mood for the long side of this market, but in my report of this past weekend I did mention Fortinet, Inc. (FTNT), not shown, and Biogen Idec, Inc. (BIIB) as a couple of long ideas that I see mostly as trades unless the market follows through here. I show BIIB below on a daily chart, and we can see that as I discussed over the weekend the attraction here was the fact that BIIB was showing some decent strength as it rallied up through the 100 price level, putting Livermore’s “Century Mark” rule into play. The stock made another high today on above-average volume, and if you are trying to trade this it remains in play depending on whether you wish to play this in anticipation of a possible market follow-through. So far both FTNT and BIIB are working, but it remains to be seen whether these are just short-term trades or whether they have the potential to develop into something more. For now BIIB looks like the stronger of the two, but it is now quite extended from the $100 level and well beyond any optimal buy point.

Biogen Idec, Inc. (BIIB) Gilmo Report Chart

For now, all we know is that the market is in the 10th day of a rally attempt if you count June 16th as the first day of the rally given that the index closed off its intra-day lows and in the upper half of the daily trading range. If not, then it is in the 8th day of a rally attempt, but it’s all just semantics to me. At this point a follow-through day would be just that, a follow-through day, and until I see that occur I’m more inclined to probe on the short side as my short-sale target stocks rally up into logical resistance. Given that we remain in “no-man’s land” with little in the way of conclusive evidence to tell us whether this rally is about to end or follow through to the upside, we can only test positions on the short side, keeping clear stops in mind if the market follows through. Until then, I do not have any clear outcome in mind here, preferring to play it as it unfolds, and to do so in measured fashion.

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 ARUN 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. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.