The Gilmo Report

March 23, 2011

March 23, 2011

We saw the market start the week off with a big fat gap-up move on the futures Monday morning thanks to “good news” on Libya and Japan. As Homer Simpson would say while pumping his fist in the air, “Woohoo!” But while the action in the indexes may have looked impressive on Monday morning, the action “under the hood” was less sanguine. This morning, however, the NASDAQ Composite Index, shown below on a daily chart, came down to “fill the gap” from Monday and then turn higher as volume picked up. With the market now five days off the lows of last Wednesday it is in position for a potential follow-through day (FTD), so investors should be cognizant of this. As well, a number of stocks have come down sharply and are likewise in a position to bounce. Today’s action constituted an outside reversal to the upside, which was also seen in the other major market indexes. The reality is that technically we are in what I would call “no-man’s land” where stocks have broken down and are now attempting to bounce as the market remains in an attempted rally with no FTD as yet. Where this leads to is as yet undetermined, and even today’s action picked up very little in the way of stocks moving on high volume to the upside or the downside, adding further reinforcement to this idea of being in “no-man’s land.”

NASDAQ Composite Index Gilmo Report Chart

I would have to say that the “poster child” for the short side over the past two to three weeks has been the perfect head and shoulders short-sale set-up we have seen pan out in F5 Networks (FFIV), one of the former hot cloud-computing leaders that has come unglued in 2011. On Monday FFIV counter-trended the market by breaking through its neckline and then moved lower yesterday as it looked all but lost. Today, however, FFIV was able to muster a bounce back up towards the neckline, but it does give some idea how these short-sale ideas I’ve discussed in recent weeks, such as CRM, VMW, LVS, etc. have come down a fair bit and are indeed entitled to bounce. Whether they have made short-term lows remains to be seen, but one reason that you always want to be taking 10-20% profits in short positions is because you can never tell exactly when a sharp upside bounce will occur, and so you want to be in a position to set up on the short side into a bounce if the market fails to follow through and ends up rolling over again. If we had seen stocks like LULU or CMG, which I discussed in my weekend report as possibly becoming late-stage failed-base set-ups, break down through their 50-day moving averages this week on heavy volume, then it was likely that further market deterioration was in the cards.

F5 Networks (FFIV) Gilmo Report Chart

While we have not seen further market deterioration, then the obvious question is if the market rights itself here and does follow through in the coming days, where does one seek to go long? Today’s action did not feature broad-based strength, but Gilmo Report members may recall however that I pointed out strength in Chinese internets in my report of March 13th where I noted two recent pocket pivot buy points in Baidu, Inc. (BIDU), as I show below in the daily chart. The stock broke out of a short five-week base today on news that it is developing search software for mobile devices. Volume was about twice average, giving the move to all-time highs a clear look and feel of power and strength. I would call the buy point here an even 130, so the stock is of course well within range of the buy point at today’s closing price of 132.58. This, therefore, makes it onto my primary buy watch list as I wait and watch for a possible follow-through day. If you think that BIDU’s breakout is presaging a possible FTD in the general market, then you could always buy some here with the idea that the position would be sold if it can’t hold the breakout level. That is certainly a viable strategy if one is amenable to making a move in anticipation of an FTD.

, Inc. (BIDU) Gilmo Report Chart

Overall, however, I do not see a lot of stocks I am very comfortable designating as “actionable” on the long side, so in general I think that investors should keep their powder dry here. Last week I wrote that I was not all that hot on buying the pocket pivot buy point I noted in Netflix, Inc. (NFLX) as it came up through the 50-day moving average on strong volume, thanks to a buy recommendation and $300 price target from Goldman Sachs. The stock did come back to test its 50-day moving average, as we see on the daily chart below. More buy recommendations this week as well as a certain vociferous financial TV commentator screaming that Verizon Wireless (VZ) or AT&T (T) should buy NFLX before Apple, Inc. (AAPL) does and that NFLX is worth twice what it is selling at currently sent the stock even higher today on above-average volume. I would prefer to see NFLX showing strong action without all the news noise, but for now it continues to work its way up what could be a potential cup formation. As well, about 20% of the stock’s 41 million share float has been sold short by short-sellers, so it still has reasonably high short-interest in this regard. But one could always look at today’s action as a low base breakout with the idea that it should hold the 220 level on any pullback.

Netflix, Inc. (NFLX) Gilmo Report Chart

One stock I have been keeping an eye on for some time is “rare earth metals” miner Molycorp, Inc. (MCP), shown below on a daily chart. Yesterday the company announced that they are seeing “significantly higher” prices for rare earth metals, which sent the stock rocketing 17.7% higher on the day. This also qualified as a pocket pivot buy point as the stock came up through the 50-day moving average on volume that was higher than any down-volume day over the prior ten trading days, the standard “volume signature” required for a pocket pivot buy point. This was a very sharp upside move for the stock as it cleared resistance at around the 50 price level. The stock traded very heavy volume again today but held in relatively tight. This may need to consolidate a few more days if it is to move higher, but as an early mover within its base formation, it also makes it onto my buy watchlist as we wait and see whether the market stages any kind of follow-through in the coming days. Even if one were to buy this right here, then you would certainly want to see the stock hold the 50-day moving average at 48.13 in any case. A pullback from here to the moving average might also provide a decent entry point.

Molycorp, Inc. (MCP) Gilmo Report Chart

If rare earth metals don’t get you hot and bothered, then the recent buying opportunity we saw in precious metals as they pulled back last week on the Japanese earthquake, tsunami, and nuclear disaster (a “triple-header” as we might call it) might. As I wrote last week, silver, as represented by the daily chart of the high-octane two-times leveraged ProShares Ultra Silver ETF (AGQ), below, my preferred vehicle for playing silver currently, tends to find support at its 20-day moving average when moving in a strong uptrend. Therefore, as I indicated, it had to hold that line in order for the uptrend to remain intact. Not only has silver managed to hold its 20-day moving average and keep its uptrend intact, but it also moved to all-time highs today on increasing volume. This has been my most rewarding position, but it is not without its volatile moments, as we saw last week. For now, all systems remain “go” for silver as we still have not seen the final top to this current breakout and rally that began in the latter half of February. Meanwhile gold also made an all-time closing high today as it cleared 1438. I continue to view the GLD and the 2-times leveraged DGP gold ETFs as buyable at current price levels, using the 50-day moving averages as my guide for a downside stop

ProShares Ultra Silver ETF (AGQ) Gilmo Report Chart

Apple, Inc. (AAPL) remains on my short-sale watch list as it builds this formation that is starting to look a little bit like a left shoulder, a head, and perhaps the very beginnings of a right shoulder, but this is still early. We can see on the daily chart below that the stock broke down very sharply through both the 50-day simple and 65-day exponential moving averages last week before attempting what has so far been a very feeble rally back up to the 65-day line. If the market continues to rally, AAPL would likely grind its way up to the 50-day moving average at 346.60, at which point I might seek to short the stock IF and ONLY IF the general market is not able to follow through by that time. This would also create a logical peak for a right shoulder in the pattern. For now, however, this is still “in the works,” and should be monitored on your short-sale watch list.

Apple, Inc. (AAPL) Gilmo Report Chart

For the most part I do not see very much in the way of actionable ideas on the long side, while the short side also makes me cautious given the fact that the market is in a position for a follow-through day (FTD). Not that an FTD would necessarily result in a bold, new bull phase for the market, but with QE2 always presenting a wild card for investors, I would not want to get caught short in such a move. However, the situation remains fluid.

While the cloud-computing short-sale targets like CRM, FFIV, and VMW have broken down nicely and provided opportunities for tactical profits on the short side, other names I’ve discussed like CTXS and WYNN have rallied on lighter volume into their 50-day moving averages, where they should be watched as potential short-sale targets if the market resumes its downside maneuvering in the coming days. In general, however, if you try and short target stocks into rallies, use reasonably tight stops, say 3-5% maximum so as not to get yourself into serious trouble if the market does in fact follow through. Right now, the bottom line is that the market has now moved into a position of being in “no-man’s land,” a place where the market turns a nice shade of gray and one should therefore maintain a lot of dry powder. If we get an FTD, I have my small handful of potential long ideas, as discussed above, but for now it is a matter of waiting and watching to see how the current action pans out, and there may likely be more to say about this once we get to the weekend. Stay tuned, this could get interesting.

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, DGP, and NFLX, 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.