The Gilmo Report

March 27, 2011

March 27, 2011

By Wednesday of this week I thought things could get “interesting,” and they did as the market gapped up two days in a row to finish off the week with the NASDAQ Composite Index, shown below on a daily candlestick chart, closing just above its 50-day moving average and logging a follow-through day on Thursday when it was up 1.41% on higher volume compared to Wednesday. Although Dr. K has no involvement with The Gilmo Report, he has been generous enough to allow me to disclose to members that based on his rigorous real-time statistical analysis the threshold percentage move for a follow-through day that we are using is 1.4% on the NASDAQ Composite Index. Like any other follow-through day, however, it does not guarantee the start of a new rally phase, but it does create the proper technical context in which to start looking for reasonable long ideas. A couple of key factors to note in the daily candlestick chart of the NASDAQ Composite Index is that Friday was a “shooting star” formation that comes on the heels of what is essentially a very steep”straight-up-from-the-bottom type of move, hence I would expect the market to pull back here as it either constructively consolidates this sharp upside move off the lows of last week or, conversely, fails and heads lower. Thus, if this is indeed the start of a new rally phase, there is plenty of time to look around and figure out a prudent course of action.

NASDAQ Composite Index Gilmo Report Chart

Despite the fact that the NASDAQ flashed a follow-through day (FTD) on Thursday, the S&P 500 was up only .93%, a fairly tepid move given the alleged strength in the NASDAQ. My view here is that to a fair extent we remain in a type of “no-man’s land” as little in the way of solid leadership is sticking its head up here. In my report of this past Wednesday, I discussed stocks like Baidu, Inc. (BIDU), Netflix, Inc. (NFLX), and Molycorp, Inc. (MCP) as some of the few situations I might be willing to buy, although none of these puts me in the mood to commence with my aggressive trademark style. In many ways, one gets the sense that while the indexes have looked good over the past week-and-a-half, stocks on the other hand look less so. Even the best performing stocks in recent weeks, such as “the Chinese Netflix,” internet TV company Yoku.com (YOKU), shown on a weekly chart, leave a bit to be desired. Besides having no profits to speak of, YOKU has managed to close at the peak of the weekly range for six up weeks in a row. This Is normally very strong technical action, but note also that if this is a double-bottom base formation, there is a flaw in the pattern in that the second low did not undercut the first low, as a proper double-bottom should. One could argue that on a weekly closing basis the stock did undercut the first closing low, however. In any case, YOKU strikes me as a speculative play given its lack of fundamentals, so despite its strength I consider it a “fuzzy” long idea at best.

Yoku.com (YOKU) Gilmo Report Chart

Another stock that has been mostly a speculative play, but which has had a huge price move since initially coming public at $14 a share back in July of last year is Molycorp Inc. (MCP), shown below on a weekly chart. I flagged MCP in my report of this past Wednesday when it flashed a pocket pivot buy point as it was coming up through its 50-day/10-week moving average, and the stock has moved higher from there. MCP is looking to post its first profitable quarter when it announces earnings in late April. The look of these big blue up weeks on heavy volume within this current base is very alluring, to say the least. Notice, however, that the weekly chart reveals very little in the way of tight weekly price closes, and the weekly ranges tend to be somewhat on the wide side. If I had to classify this base formation, I’d say it looks mostly like a very wide-and-loose cup-with-hande. In the most recently reported period, there are 165 funds in the stock vs. 118 in the previous reported period, so it is gaining strong institutional following. On the weekly chart, this is a bona fide base breakout, but keep in mind MCP is volatile and prone to very quick 10% price swings.

Molycorp Inc. (MCP), Gilmo Report Chart

I’ve long been a fan of Fortinet, Inc. (FTNT), maker of the FortiGate product, a unified threat management solution (UTM). UTM is the fastest growing category in network security, and FTNT is the “best in class” player in the field, as members can read in my January 9th report. FTNT has held its ground and its 10-week (50-day) moving average quite well since early January while the market itself has been rolling around in a “sea-sick” range. FTNT has been building this little three-stair stair-step formation which is not an ascending base as it does not have the pullbacks that take the stock back into the prior price range, but instead it quietly moves up a little bit, goes sideways, moves up a little bit, and goes sideways again. This sort of action can throw investors off the track as they get bored with the stock, but often this type of “slow” but constructive and steady action in the face of a weak general market can lead to a sharp upside price move when the weight of the general market comes off, similar to an ascending base. FTNT is one stock to keep on your buy watch list, and even now remains within range of its March 3rd
pocket pivot buy point.

Fortinet, Inc. (FTNT) Gilmo Report Chart

iShares Silver Trust (SLV) remains my best-performing position, and in my view, the long-term trend for silver is up. While U.S. government officials like Treasury Secretary Tim Geithner assure us that the U.S. will not allow the dollar to devalue “for export advantage” (notice they don’t’ say “to monetize our debt” which is one reason they might have to), they really don’t have any choice, but not for export reasons. In fact, given the U.S.’ huge morass of debt that it continues to pile up, it really has only two choices: default or devalue. And since the U.S., unlike countries like Greece, Spain, or Portugal, has the luxury of owing debt that is denominated in its own currency, which it can print at will, the most expedient route is dollar devaluation. Charts don’t lie, and a long-term chart of the dollar reveals that this is exactly what is happening, and this week the dollar did in fact move to a lower low. Thus, in my opinion, precious metals and commodities will continue to move higher over the long-term, and that includes silver. As I wrote in my Wednesday report, only a violation of the 20-day moving average will kick me out of my short-term silver position, and even then such a violation probably only means the metal takes some time to consolidate as it did in January and February before breaking out again. Look at charts of any commodity ETF, such as the DBC (CRB Index), JJS (“soft” commodities and a recent pocket pivot), or USO (oil), and the trends are clear.

iShares Silver Trust (SLV) Gilmo Report Chart

With the market jerking up off of its recent lows, we can see in most of our short-sale target stocks that this is also reflected in their patterns. Stocks like Salesforce.com (CRM) show why one should never seek to get “piggy” when engaging the market on the short side as sharp bounces and reaction rallies off of logical support areas are quite typical, as we see in the daily chart of CRM below. CRM found support at its 200-dma, which was in fact our initial downside profit-taking target level as I discussed in my report of March 2nd. CRM has bounced rather sharply over the past three days, and tried to move higher on positive earnings from Oracle Corp. (ORCL) on Friday, but ran into its 65-day exponential moving average. Members know that one of my “tricks” on the short-side is to use the 65-day day e.m.a. as a guide for initiating short positions, and CRM bounced right up into that before turning tail on Friday. Thus one can test a short position in CRM here using the 65-day e.m.a. as an upside guide for a stop. The stock could conceivably continue higher to its 50-day moving average closer to 132, but the 65-day is usually my first point of entry.

Salesforce.com (CRM) Gilmo Report Chart

In my Wednesday report I discussed F5 Networks (FFIV), which had broken down through its neckline in a head & shoulders topping formation, and this past week the stock bounced right back up into the neckline on weak volume and may be ready to head lower. While I do not show a chart of FFIV here (refer to Wednesday’s report for that), I do show VMware, Inc. (VMW), another one of my “cloud” short-sale targets, below on a daily chart. VMW has been surprisingly weak as I expected it to hold its 200-day moving average a little better, but two weeks ago the stock busted the 200-day line, exemplifying some severe weakness, in my view. The general market bounce has also taken VMW on a reaction rally back up to its 200-day moving average, where it becomes potentially shortable using the 200-day line as an upside guide for a stop. You can see from the chart that the stock has had two waves down off the peak, so I would not be surprised to see a third wave to the downside come into play here. Same story goes for FFIV, which has also had two waves down off the peak, so I would expect a third one to show up in that as well. Right now the “clouds” remain primary short targets.

VMware, Inc. (VMW) Gilmo Report Chart

The 65-day exponential moving average also comes into play in another short-sale target stock, Las Vegas Sands (LVS), which I first discussed in my report of March 2nd as resembling the top in Qualcomm (QCOM) back in 2000. LVS has so far played out much like QCOM, including the recent bounce off the 200-day moving average. This bounce and reaction rally, like CRM, also found resistance at its 65-day exponential moving average, which it ran into on Friday after an analyst upgrade calling the stock “undervalued.” Yes, the fundamentals on LVS look good, of course, but we know that when stocks top, the fundamentals generally look good, which is why we always sell on the basis of technicals only. LVS is potentially shortable here using the 65-day e.m.a. as an upside guide for a stop. The stock may continue higher to the 50-day moving average, but for now the 65-day e.m.a. becomes my first point of entry on the short side of LVS.

Las Vegas Sands (LVS) Gilmo Report Chart

At best I view the market environment as somewhat “muddied” and sloppy, as a sharp general market bounce has not resulted in a critical mass of constructive and sound leaders moving to the fore. While this could still take some time to develop, it simply means that as far as the long side of this market goes investors can afford to take their time, catch their breath, and let the market “show them the money” first before making a large commitment. Meanwhile, the recent and sharp bounce off the lows has brought some of our target short-sale stocks right up into logical resistance where they may become profitable shorts again. This, of course, is not guaranteed to work, so keep stops clearly in mind when taking any short positions as the market did have a minor follow-through on Thursday and could potentially build on this as QE2 remains an anomalous force to be reckoned with. Thus I see no reason to play this market heavily, and this is why over the weekend I remain mostly in cash with only a small smattering of long and short positions as I wait to see how things develop.

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, CRM, NFLX, and LVS, 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.