The Gilmo Report

March 2, 2011

March 2, 2011

If you believe in the everlasting presence of Quantitative Easing 2 (QE2) then you would have no choice but to buy the (bleeeeep) out of this market, right here, right now. Objectively, the NASDAQ Composite Index has been hit with three big-volume distribution days over the past seven trading days and appears to be staggering a bit here as it again tests the 50-day moving average for the second time since breaking off the peak last week. Today’s volume on the bounce coming up off the 50-day line was lighter than yesterday, which is not indicative of robust buying interest as the market pulls back here. At the very least, I remain cautionary, without having to look at the market as being bullish or bearish at the current juncture. For now, there is a certain equilibrium that comes into play as the NASDAQ retests the 50-day moving average, as we see on its daily chart below, and in what direction that equilibrium begins to tilt will dictate how I will look to play it from here. I tend to think, however, that QE2 or not, the smart money has been selling into this peak, and the topping process actually began in mid- to late-January of this year. It is tricky, however, and so that is why I am neither bullish or bearish here, although I do see some set-ups coming into play on the short side, as I discussed in my report of this past weekend.

NASDAQ Composite Index Gilmo Report Chart

In my February 20th report I noted the “bullish catapult” formation on the Point & Figure chart of the iShares Silver Trust (SLV), and this came on the heels of my February 16th report where I noted that silver looked primed to break out to new highs. My vehicle of choice for the breakout in silver was the ProShares Ultra Silver 2-times leveraged ETF (AGQ), of which I show a daily chart below. You can see that this has been a very nice trade, although with silver one has to expect to sit through a hairy pullback or two on the way up. Silver continues to outperform gold, and is currently getting a lot of attention in the media as the crowd is drawn to the alluring sparkle of the “white metal.” You can now turn on the flat-panel TV and see any number of commentators discussing the metal and its industrial uses, which they will tell you sets it apart from gold. But I also think that silver benefits from its historical use as money, and with investors looking to diversify away from paper currencies, silver becomes the “poor man’s gold.” This trend towards silver as money, its many valuable industrial uses notwithstanding, is what will continue to drive it higher over time. Right now I would be more interested in practicing the maxim of “buy it when it’s quiet,” thus would look for a pullback into the 10-day moving average to add to my AGQ position. For now I maintain my view that silver is headed above $40 an ounce, and unless this recent breakout through the $31.25-an-ounce level on silver itself fails, I believe the trend is intact.

ProShares Ultra Silver 2-times leveraged ETF (AGQ) Gilmo Report Chart

While silver has outperformed gold since October the “yellow metal” is once again exerting itself as it has also broken out to all-time highs, as we can see in gold’s proxy, the SPDR Gold Trust ETF (GLD), shown below on a daily chart. Gold has been consolidating for nearly four months now and this latest move in the GLD came on above-average volume. In my view you can play gold via the GLD or the higher-octane two-times leveraged gold ETF, the PowerShares DB Gold Double Long (DGP). This gives you a little extra juice on the upside if gold gets a nice move going here, which it has tended to do once it emerges from a reasonable consolidation of some length since bottoming and breaking out of a three-year consolidation in late 2002. I think the GLD (or the DGP) can be bought here with the idea that it will hold its recent breakout level in the 138 price area, using that as a downside guide for a stop.

SPDR Gold Trust ETF (GLD) Gilmo Report Chart

Over the weekend I pointed out the ugly-looking reversal in Salesforce.com (CRM) and that this could morph into a late-stage failed-base (LSFB) type of set-up with a further breakdown through the 50-day moving average. As we can see on the daily chart below, CRM busted right through the 50-day line on Monday morning and has drifted lower over the past three days. Note that selling volume is drying up here and it may be that the stock is in a position to rally. On most late-stage failed-base set-ups, the initial breakdown through the top of the base takes the stock down through the 50-day line, at which point you will tend to see these things try to rally up to the 50-day a few times before breaking loose. I would watch to see if and how CRM rallies from here and into the highlighted area that represents what I see as the optimal short-sale target zone. This could take some time to develop, and if one does get the chance to execute a short-sale in the 133-136 price area, between the 65-day exponential moving average (black line) and the 50-day simple moving average (blue line), then the downside objective would be somewhere in the neighborhood of the 200-day moving average currently down around 115-116.

Salesforce.com (CRM) Gilmo Report Chart

What gives some weight to the short-sale set-up I see in CRM is the fact that the other “big stock” cloud-computing stocks are also potentially in breakdown mode. These become some of the first stocks on my short-sale watch list IF we get into a deeper correction here, or even a bear market. F5 Networks, Inc. (FFIV) is the weakest-looking of these three stocks as it appears to be forming a head and shoulders type of pattern here, as I noted in my report of this past weekend. The stock has come down over the past three days, and was in fact shortable on Monday morning as was CRM. It is not clear whether FFIV will muster any kind of rally from here, but if it were to move up towards the 120 price area I would consider that an optimal short-sale zone, as I’ve highlighted in the daily chart below. At today’s close the stock is extended to the downside, so I would not be looking to short it here, but would wait for a rally. If one is able to execute a short-sale at or near an optimal price then the downside target would become the 200-day moving average at around 103 to the “neckline” of the H&S formation under 100. A lot of this will depend on the general market, as a breakdown through the 50-day moving average on the NASDAQ could just take all these stocks lower from here.

F5 Networks, Inc. (FFIV)  Gilmo Report Chart

Of the three “big stock” cloud plays VMware, Inc. (VMW) is in the least weak position down here near its 200-day moving average and some support that it derives from a little “congestion” area in November, as I’ve highlighted on the daily chart below. VMW is a potential late-stage failed-base type of set-up, and it could have been shorted on Monday morning as well. From today’s close I would look for the stock to stage some kind of rally up towards the highlighted zone on the chart where I consider the optimal short-sale target area to be. VMW does have some support underneath it in the form of the base and congestion area that it formed from October through November of last year, so I would not expect this to come apart any time soon. A few shakes to the upside are probably necessary to work off some of that “underfoot” support.

VMware, Inc. (VMW) Gilmo Report Chart

Another potential late-stage base-failure (LSFB) might be developing in Las Vegas Sands (LVS), which has been moving sideways, more or less, since staging a climax-top type of move back in early November, as you can see on the daily chart below. LVS has had a long move since this bull market rally began in March of 2009, when LVS reached a panic low of $1.38 a share, believe it or not. LVS’ earnings remain pretty robust, and the company did announce strong 1300% earnings growth on an absolute number of 42 cents a share yesterday, but the stock broke down hard on very heavy volume, as you can see on the chart. Today’s rally was somewhat feeble as volume remain well-below normal. I would however, look at the area between the 50-day simple moving average (blue line) and the 65-day exponential moving average, roughly defined by the 46-47 price zone I’ve highlighted on the chart, as the optimal short-sale target zone. Even with strong earnings growth, price/volume action tells all, and yesterday’s high-volume break in the stock looks negative.

Las Vegas Sands (LVS) Gilmo Report Chart

If I may employ a little historical precedent I would note that LVS’ base here reminds me of the one Qualcomm 2000 (QCOM) formed after it had a climax top in the first week of January 2000. QCOM climaxed and then pulled back to form a base over the next three months before finally breaking down with the general market in late March 2000. We can see this in the historical daily chart from late 1999 and early 2000 below. QCOM had a wild move to the upside in December 1999 that finished off with a gap-up move and upside burst in the first week of January 2000 that signaled the end of the line for QCOM. The stock then spent the next three months building a base from which it tried to break out from in late March 2000, but the breakout failed and QCOM went from a climax top to an LSFB short-sale set-up in short order.

Qualcomm 2000 (QCOM) Gilmo Report Chart

The fact that we see one group of leading stocks, the “big stock” clouds, for example, breaking down in a pack, lends some credence to the idea that the short side of this market MAY be developing here, but that is far from conclusive currently. Thus I would remain even-handed in my assessment of the market and individual stocks. If the market decided to stage a much

more concerted bounce from here, with some volume coming in, I might look at big leaders pulling deep down into prior breakouts such as Netflix, Inc. (NFLX) as something to move into on the long side. NFLX’s current action is actually right in line with its previous character where it tends to have these breakouts and sharp moves to new highs which then fizzle out and send the stock into a protracted pullback and base-building period of several days to several weeks. More recently NFLX blasted out of a base on a huge-volume buyable gap-up only to fade away once again, as we see on the daily chart below. Volume is drying up here as the stock sits right on the 50-day moving average, which presents a low-risk buy spot.

Netflix, Inc. (NFLX) Gilmo Report Chart

For the most part I tend to see the market as being in “no-man’s land” right now as the NASDAQ finds support at its 50-day moving average. Looking for a rally here in the general market indexes might set up shortable rallies in my short list of short-sale candidates, consisting primarily of CRM and FFIV currently. On the other hand, QE2 is still lurking out there, and another unbelievable recovery from this latest bout of selling could be in the cards. At the very least, I see no reason to make any heavy commitments, long or short, until the situation clarifies itself. However, I do like the action in precious metals, and GLD offers a reasonable entry point at current levels. For those of you who may be long silver, either through the SLV or AGQ, based on my discussions of the “white metal” in my February 16th and February 20th reports, the trend appears to be intact. Stay tuned.

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 AGQ and 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. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.