The Gilmo Report

May 30, 2011

May 30, 2011

The market has now completed three days of a rally attempt off the intra-day lows of Monday and has managed to rally above the 50-day moving average and into the top of the “falling Window” or gap-down day of last Monday, as I’ve highlighted on the daily chart of the NASDAQ Composite Index, below. While the rally into the top of the “falling Window” might find some logical resistance at the top of the gap it also sets up the potential for the index to stage a follow-through day (FTD) on Tuesday or later this week. Thus the general market situation remains fluid where it could go either way by failing at resistance or confirming its upside potential with an FTD. While Friday’s light volume might cause one to take the move back above the 50-day moving average lightly (no pun intended), keep in mind it occurred on the Friday before a long holiday weekend. For now there is no need to guess or assume what the market is going to do as we can simply sit back and observe what happens in the coming days.

NASDAQ Composite Index Gilmo Report Chart

Last Tuesday we saw a Democrat win an election for what was previously a Republican congressional seat in upstate New York. The candidate, Kathy Hochul, used the “Mediscare” tactic by claiming the Republicans will throw grandma off the cliff by denying her medical care. While this is not true there is no point in discussing the political deceit and deception that characterizes most elections, What I think is significant for investors to take very careful note of, however, is that it does show how voters can be spooked if their entitlement mentality is threatened by the potential for the government to stop giving them theirs, as it were. And this, I believe, is why Congress and the Obama Administration will not be able to solve the looming budget crisis. The can gets kicked down the road until it reaches a point where the markets will decide for them, and the telling clue in this regard is the action of gold, shown below on a daily chart of the SPDR Gold Trust (GLD). After the pocket pivot buy point of two Fridays ago, as I discussed in my report of last weekend, gold has continued to move higher this past week and looks poised to make a run at its old highs. Gold will likely drag silver along with it, but for now I prefer the better technical coherence in the GLD chart as the SLV still remains under its 50-day moving average.

SPDR Gold Trust (GLD) Gilmo Report Chart

Keep an eye on the dollar here as well. If the politicians are, wittingly or unwittingly, ultimately going to leave it up to the markets to settle the debt issue, then the dollar will voice its opinion. The dollar showed how it feels about things as it rolled over this week and fell below its 50-day moving average, as we see in the daily chart of the dollar’s proxy, the PowerShares U.S. Dollar Bullish Fund (UUP), below. Thus with no deliberate solution that involves spending cuts, “default or devalue” is the only other route available, as I see it, and this will mean a run on the dollar combined with higher precious metals prices. The stock market’s recent correction and rally synchronizes quite well with the movement of the dollar throughout May, and we note that last Monday’s action looks like a classic island top/exhaustion gap to the sharp bounce that began in early May. A resumption of the dollar’s downtrend most likely will mean higher nominal precious metals and commodity prices.

PowerShares U.S. Dollar Bullish Fund (UUP) Gilmo Report Chart

The only way to know how stocks, however, will react to a falling dollar is to watch stocks. Overall there isn’t a huge number of names I’m looking to buy into here if the market is able to get its rally mojo back, but I do note that cloud-computing-related names appear to be showing some better relative strength here as they have started to come to life to some extent in recent weeks/days. Citrix Systems, Inc. (CTXS), which I see as a company that enables the efficiencies of “meeting up in the cloud” with their GotoWebinar, GotoMeeting, and GoView.com services, staged a buyable gap-up on earnings back in late April as I discussed in my report of May 1st. Since then the stock has built a fairly tight four-week flag formation from which it broke out on Thursday of this past week in a move that was also a pocket pivot buy point. The stock remains in a buyable position, and I would expect that if this flag
breakout is going to work then the stock should hold the 84 price level at the very least. CTXS turned back into positive earnings growth territory with their most recent earnings report, and that trend is expected to continue going forward.

Citrix Systems, Inc. (CTXS) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com), ©2011 used by permission.

We saw Salesforce.com (CRM) make a run for all-time highs this past week, and its cousin, VMware, Inc. (VMW), shown below on a weekly chart did in fact make its highest weekly close since November 2007, not too long after it came public back in August of 2007 and ran up 160.9% from there. This past week saw the stock move up to the top of its five-week handle to the cup-with-hande formation I’ve outlined on the chart. Right now I would prefer to buy the stock on some sort of pocket pivot buy point within the handle or, barring that, a clean new-high breakout on heavy volume. Volume in VMW as it has risen from the lows of the handle two weeks ago off its 10-week (50-day) moving average has been relatively low. I would not be surprised if VMW pulled back down towards its 10-week moving average again as it corrects this little bit of wedging action over the past two weeks. But a high-volume breakout from here would also be constructive action to buy into, particularly since the top of the breakout provides a ready-reference for a quick stop if the breakout should fail.

VMware, Inc. (VMW) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com), ©2011 used by permission.

As we’ve learned from other historical examples of head & shoulders formations, not every pattern that starts out looking like an H&S top actually pans out into one. For example, back in July of last year Priceline.com 2010 (PCLN) was beginning to look like a classic head and shoulders breakdown when it suddenly rounded out the lows of what turned out to be a cup formation and then gapped up to new highs later in July 2010. The weekly chart of PCLN from that period is shown below, and we can see how at the time the head and shoulders formation looked like it was setting up in classic fashion. PCLN was also a big leader, and former big leaders of a prior bull move are what we prefer as short-sale targets (see “How to Make Money Selling Stocks Short” by William J. O’Neil and Gil Morales, Wiley & Sons 2004). However, PCLN had no intention of gratifying the short-sellers and it pushed back above its 200-day moving average in late June with a bottom-fishing pocket pivot buy point (see July 14, 2010 report) before eventually launching to all-time highs in July of 2010.

Priceline.com 2010 (PCLN) Gilmo Report Chart

As we know, history does repeat itself, and so we can never become rigid in the face of a new evidence when what starts to look like a classic head and shoulders top does not result in an actual top and downside break, as occurred with PCLN in 2010. Thus F5 Networks (FFIV), which I have discussed as a potential H&S top, must now be viewed differently in light of its bottom-fishing pocket pivot buy point on Friday of this past week as it moved up through its 200-day moving average on volume that is higher than any down-volume day since April 1st of this year. While the stock doesn’t necessarily have to move higher, it may have a shot if it can hold this move above its 200-day moving average at the 111.07 price level. Volume in FFIV has been light since the middle of April and now that some volume has finally come in to help resolve this pattern it could very well begin working its way up the right side of a big cup formation, particularly if the general market can resume its uptrend. This also dovetails with some of the group strength we are seeing in cloud-related names lately.

F5 Networks (FFIV) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com), ©2011 used by permission.

Cypress Semiconductor Corp. (CY) may not be a “rocket stock,” but it is most definitely a “pocket stock” as it has flashed several pocket pivot volume signatures since the latter part of April. As I wrote in my report of April 24th, CY began this move up off the lows of this current cup base with a pocket pivot move that took the stock above its 50-day moving average on April 21st. Nine days later another pocket pivot move occurred as the stock found support at the 50-day moving average, and then another nine days after that CY flashed a pocket pivot buy point as it moved up above its 10-day moving average. On Friday of this past week the stock moved up and out of this ascending trend channel it has been forming since April 21st and has broken out of the top of the channel on volume that would qualify as a pocket pivot volume signature although the price move occurred well extended from the 10-day line so was not an actual pocket pivot buy point. In my view, however, the move was strong enough to be buyable with the idea that it should hold the 10-day line at 22.

Cypress Semiconductor Corp. (CY) Gilmo Report Chart

Chart courtesy of HighGrowthStock Investor (www.highgrowthstock.com), ©2011 used by permission.

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While some names have been resurgent, we have seen leaders like big-cap cloud play Oracle Corp. (ORCL) push back below its 50-day moving average, as we see in its daily chart below…

Oracle Corp. (ORCL) Gilmo Report Chart

…while retail hot-stock Lululemon Athletica (LULU), shown below on a daily chart, finally violated its 50-day moving average for the first time since this latest bull move started on September 1st of last year.

Lululemon Athletica (LULU) Gilmo Report Chart

Over the past couple of weeks I have advocated playing lightly and cautiously as we let things settle out. The market remains in a correction, albeit a very shallow one with the S&P 500 and the NASDAQ Composite indexes only down 2% and 3% from their late April peaks, but as I stated at the outset of this report, it is in a position from which it could stage a follow-through any time this week as long as it holds the lows of this past Wednesday and remains in a rally attempt. Given that this recent shallow correction occurred in synchrony with the dollar finding a bottom and then engaging in a nice reaction rally off of its early May lows, it may be useful to keep an eye on the dollar as it may provide critical clues with respect to where the Fed is headed with the end of QE2 and whether a QE3 of some sort is in the cards. These are challenging times, and individual stocks offer a mixed bag, at best. In light of this, and for additional insights as well as a broader view of individual stocks discussed in The Gilmo Report in May, members should refer to my month-end video review on GoView.com at the following link:

http://goview.com/?id=913599a1-7fe0-4892-a0dc-93de8f3808e

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Also, for those interested, you may catch me on Fox Business News’ Stuart Varney & Company show Tuesday morning May 31 at around 7:20 a.m. Pacific, 10:20 a.m. Eastern. Remember that “hit times” can vary by as much as 15 minutes or more depending on the morning news flow before I am scheduled to go on.

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 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.