The Gilmo Report

May 2, 2012

May 2, 2012


For the most part the market continues grinding its way through this current sideways consolidation as “earnings roulette” season runs its course. So far the S&P 500’s marginal follow-through day of last Wednesday is holding, while the NASDAQ Composite Index, shown below on a daily chart, still hasn’t come through with a follow-through day of its own. Nevertheless, the index is showing constructive action as it pulls back into its 50-day moving average and finds support today with volume above average, despite being below yesterday’s volume levels. The market also showed some spunk by getting hit right at the open on the ADP Employment Change report which came in at 119,000 jobs, well below the 170,000 number that was expected, but rallying well off the lows. With Friday’s jobs number coming up, the ADP has already presaged a possible disappointment, but if the market was able to shrug off today’s bad news, then it is possible that a weak jobs number on Friday will have a muted effect as well. Perhaps the market is banking on the fact that QE3 will show up quickly if the economic numbers don’t measure up, which is more or less what Fed Chief Bernanke intimated last week during his press conference.

NASDAQ Gilmo Report Stock Chart

As the NASDAQ finds support at its 50-day moving average we see that Apple (AAPL) is likewise hovering around its 50-day moving average for the second time. Unlike last week’s test of its 50-day moving average, today’s test came on decidedly less volume, as we see on the daily chart below. To me this has the look of a “Wyckoffian Retest” where the stock pulls back to test the prior low but volume remains light relative to the first low as selling dries up. AAPL teetered at the 50-day line all day long, but held up and closed in the black for the day. I would expect some volume to come in here if we are going to see any credible support for the stock off the 50-day line, but in my view it is 50-dma pullbacks like this where the stock can become buyable. What would be optimal would be to see some sort of pocket pivot buy point off of the 50-day moving average and up through the 10-day line which is running through the 586.52 price point as of today’s close. If this were to occur, volume would need to exceed 38,442,800 shares, which is the highest down-volume in the pattern over the prior ten trading days. For now, AAPL is in the fourth week of a possible second-stage base as we look for support at the 50-day line.

Apple (AAPL) Gilmo Report Stock Chart

Earnings roulette season brings a lot of “smoke and fire” with all the gaps up and down, and while some look very tempting, such as Trip Advisor (TRIP) which gapped up today very sharply, it’s hard to buy the given that the stock gapped up on an earnings announcement that shows 0% earnings growth. Sourcefire (FIRE), on the other hand, which last gapped up in February (see page 9 of my report of February 26th), gapped up again yesterday with another buyable gap-up, but it is too extended as of this writing. Between TRIP and FIRE, however, the best gaps to buy are those occurring in stocks that have the best fundamentals, and FIRE, not shown, came in with a 175% earnings increase. Even better than buying earnings-related gap-ups is buying a pocket pivot breakout in Lululemon Athletica (LULU), shown below on a daily chart, on no earnings news! LULU is an established leader which gapped out of a five-month base in January, as we see on the daily chart below, which one could call its first-stage breakout. Thus this breakout today is potentially buyable as a second-stage breakout with the idea that it should hold the 75 price level.

Lululemon Athletica (LULU) Gilmo Report Stock Chart

Strength in LULU today as well as Francesca’s Holdings (FRAN) so far this week, which I discussed in my weekend report, has been accompanied by strength in other boutique-type retailers such as Michael Kors (KORS), one of the biggest of the IPO leaders in this market rally since early January. KORS has been spending roughly the last eight weeks building its first real base since coming public and then flashing a pocket pivot buy point off of a short IPO flag type of pattern back in January, as we see on the daily chart below. KORS also flashed a pocket pivot buy point yesterday as it came up through its 50-day moving average and up the right side of this current base. The stock is coming straight up off the lows of the base, so a pullback to the 50-day moving average could be possible here. According to reports I’ve seen, KORS will announce earnings sometime after mid-May, supposedly, and the stock is acting constructively as that date approaches. My guess is any breakout from this base will occur on earnings, but it is possible to take a measured position on the basis of yesterday’s pocket pivot which could bear fruit if the stock continues to act constructively.

Michael Kors (KORS) Gilmo Report Stock Chart

Over the weekend I discussed the gap-downs in Western Digital (WDC), not shown, and Seagate Technology (STX) that we saw last week as a result of WDC’s earnings announcement, which was very strong but apparently not liked by holders of WDC shares. This had a sympathy effect on WDC, but you can see that the pullback was contextual only, as I discussed in my report over the weekend, since STX simply pulled back to the top of its prior base and the 50-day moving average where it found big-volume support, as we see in the daily chart below. STX is also showing “ants,” the little black tick marks that indicate the stock is up 12 out of 15 days in a row or better. Thus STX is acting quite strongly despite its sympathy gap of four trading days ago. STX looks like it needs to rest here, and so at this time there isn’t much to do but wait for the next buy signal in the stock.

Seagate Technology (STX) Gilmo Report Stock Chart

The various areas of the cloud, including network-related stocks, are looking very fertile here, as we see nice basing action or outright strength in stocks like Red Hat (RHT), Citrix Systems (CTXS), Rackspace Holdings (RAX), F5 Networks (FFIV) and SolarWinds (SW). Another one is Equinix (EQIX) an internet network solutions player similar to SWI. While SWI gapped up the other day and remains extended, EQIX, shown below on a daily chart, has drifted back down to the intra-day low of the gap-up day of five trading days ago in relatively orderly fashion. This pullback also came right back on top of the prior base formation, so I see this as a low-risk entry point if one is interested in buying the stock. EQIX broke out of a long two-year base in January as we see down at the bottom left of the chart below, and has now gapped up out of a high, tight flag formation, a second-stage formation. In my view the stock should hold the 160 level from here. One thing you will note is that EQIX is showing negative earnings estimates for next quarter, but in my view the market already knows this – what may be more relevant is the stock’s ability to turn the corner in the coming quarters en route to estimates of $3.68 a share in 2013 and then $7.38 in 2016. At the very least this is in a low-risk spot from which to take the shot.

Equinix (EQIX) Gilmo Report Stock Chart

Splunk (SPLK) is an interesting recent IPO which came public at $17 a share two weeks ago, rocketed up into the mid-30 price area and since then has been forming a relatively tight “IPO flag” formation. I find SPLK’s concept as the “Google for Business” quite compelling, and it, too, ties into the whole cloud/network/machine-data-explosion theme. SPLK is a souped-up search engine of sorts that businesses use to search for and manage their internal data and information. As we see on the daily chart below, the stock has very little trading history, and so there is no 10-day or 50-day moving average of price, or even a moving-average of volume for that matter. However, If you have an upside move from here that came on volume that was heavier than the 931,000 shares of downside volume seen eight days ago it would be buyable, in my view. The company is currently unprofitable, but expects that to ramp up quickly as it faces a massive opportunity going forward. Because of the explosion of data being generated across the cloud, demand for their product is very strong as the company finds itself in something of a “sweet spot.” If you buy into the tight flag, use a reasonable stop, otherwise wait for a pocket pivot or other type of buy point to emerge.

Splunk (SPLK) Gilmo Report Stock Chart

I tend to think that if the market is going higher, and if we are going to see the recent marginal follow-through in the S&P 500 confirmed by the NASDAQ flashing its own follow-through in the coming days, then AAPL is going to come out of this current base it is working on and head higher as well. Perhaps that is all one needs to own, and that might be very possible if AAPL remains a big market big-stock, if that makes any sense. What I am most interested in, however, on a stock-by-stock basis, are those leaders that have built proper second-stage bases, because it is usually from the second stage base that a big, leading stock’s price move tends to pick up the pace to the upside, and it is from second-stage moves that I have historically made most of my money. That is why I like LULU, STX, KORS, EQIX, AAPL, and others that are either breaking out of second-stage bases or which look to be setting up nicely within second-stage bases. Throw in some new merchandise like SPLK, and you may have the makings of another upside leg in this market. Perhaps LinkedIn (LNKD) will produce some sort of buyable gap-up following earnings tomorrow after the close, which is also something I would look to buy since LNKD qualifies as relatively “new merchandise” in this market given that it has yet to break out of its big, fat IPO base, as we see on the weekly chart below.

LinkedIn (LNKD) Gilmo Report Stock Chart

Give me a buyable gap-up in LNKD after tomorrow’s earnings and I am probably in, so that is certainly something for members to be watching for tomorrow. Meanwhile, it is hard to make any kind of short case for this market given the dearth of short-sale set-ups, which in itself is also telling you something about this market. For now, and until further notice, I’m looking for the next leg up in this market, not the next leg down.

Gil Morales

CEO & Principal, Gil Morales & Company, LLC
Principal and Managing Director, MoKa Investors, LLC
Principal and Managing Director, Virtue of Selfish Investing, LLC

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