The Gilmo Report

May 8, 2011

May 8, 2011

This past week was characterized by what I would call “book-end” news-induced gap-up rallies with the first occurring on Monday morning after Sunday’s “Osama bin Killed” news and the second occurring on Friday morning after the jobs number came in well-above expectations. Forget that the government’s jobs numbers don’t square up with the previous day’s ADP report or the big jump in new jobless claims, or that the unemployment rate increased to 9%. What is most notable, at least to me, is the fact that both of these news-induced gap-up moves on Monday and Friday morning were dutifully sold into by smart money. Without jumping to any broader conclusions, it does appear that news-induced gap-ups are being used as a prime opportunity to distribute stock, and it will be interesting to see where this leads us in the coming days. Even on the plain old daily bar chart of the NASDAQ Composite Index, below, it isn’t hard to discern the “shooting star” price bars representing Monday and Friday as they are the ones with the long upper “tails,” indicating that each closed well off the highs and right near the lows. In a nutshell, Monday and Friday were classic examples of “sell the news” action, but so far the NASDAQ has been able to hold the 2800 level. A breach of that, however, may be the harbinger of further lows on what is so far a mild 2% correction.

NASDAQ Composite Index Gilmo Report Chart

I certainly hope that Gilmo members have been paying attention to my commentary on silver as my discussions of a climax top two weekends ago and in my report of two Wednesday’s ago were quite clear and there was plenty of time to react by dumping silver ETFs. Seven weeks of upside price progress were brutally scrubbed away in a mere four days of plummeting prices. Some may point to the CME raising margin requirements for silver four times in one week as the culprit, but the fact is that the climax top sell-signal was there BEFORE the margin requirements were raised. So what did the silver market know, and when did it know it? Sticking to our price/volume selling rules and the climax top signal kept us out of this mess, and so it was never necessary to “interpret” the “impact” of higher CME margin requirements for silver. As we see in the daily chart of the iShares Silver Trust (SLV), below, even the 50-day moving average could not provide any support as the silver ETF gapped down through that line on Thursday before finally slowing down on Friday as it found support within a short area of congestion between May 7th and 21st that I have highlighted on the chart. For now, my advice is to forget about silver as this type of price break off the peak will need some time to heal given the extent of the damage that is quite apparent on the chart.

iShares Silver Trust (SLV) Gilmo Report Chart

Unlike silver which is currently 28% off of its peak of only five days ago, gold, as represented by the daily chart of the SPDR Gold Trust (GLD), below, remains a relatively scant 5% below its own recent price highs. Unlike the SLV, the GLD was able to find support just above its 50-day moving average, gapping up in a weak reaction rally and bounce on Friday. Given that gold did not run up as quickly or in such marked parabolic fashion as silver did, I would expect that its correction would remain relatively mild, and so far it has. Logically, I would look for gold to find support at its recent breakout level which now roughly coincides with where the 50-day moving average is at 141.94 on the chart. The real question is whether the GLD is buyable on such a pullback and whether buying it in fact provides a strong window of opportunity to realize some upside on the trade. Right now that is less than clear, so my tact is to simply let the precious metals “settle out” for a period of time before coming back to them. Overall, over the past 2-3 weeks, silver and gold have been getting a lot of attention and in my view the time to begin looking at the possibility of re-entering precious metals on the long side is when nobody loves them. Stick to our strategy of “Buy it when it’s quiet.”

SPDR Gold Trust (GLD) Gilmo Report Chart

While some can point to higher CME margin requirements as a catalyst for the brutal sell-off in silver and the less brutal sell-off in gold, another major factor that cannot be overlooked is the sharp gap-up and bounce in the U.S. Dollar, as represented by the PowerShares US Dollar Index Bullish Fund (UUP) shown below on a daily chart, over the past couple of days. As I have been writing, both in my report of this past Wednesday and last weekend, the dollar was in a critical position given that it was flirting with some major long-term lows. Thus my fear was that a rally in the dollar might be forthcoming, and this helps to put pressure on precious metals and other commodities as well as stocks. Right now the UUP looks to be headed for the 50-day moving average on the upside, and it would not surprise me to see it get above that moving average line over the next few days or weeks. Meanwhile I note that bonds are holding near their lows, so I can put a dollar rally together with weak relative action in bonds to conclude that the market may be starting to discount the possibility of higher U.S. interest rates which would be bad for bonds but good for the dollar. As well, higher interest rates would likely be a negative for stocks.

PowerShares US Dollar Index Bullish Fund (UUP) Gilmo Report Chart

It is quite interesting to note that one of the strongest “big stock” leaders on the NASDAQ is one that reported negative earnings growth in the most recent quarter. That stock is of course Amazon.com (AMZN), and it has managed to hold relatively tight up against the $200 price level in a bullish little flag or pennant formation here over the past five days with volume drying up, as we see in the daily chart below. I have to admit that I don’t see a lot of stocks that I would consider buying right now, both on the basis of their own price/volume action merits as well as the current general market environment. But given that we are still in a QE2 environment, the potential for the market to suddenly come out of a correction and move back to new highs is still there, and so if I’m looking for a vehicle to ride any potential continued market uptrend it is going to be something exhibiting steadfast strength in the midst of a market pullback. AMZN is doing that right now, but of course if the market continues lower it is likely that AMZN will eventually pull back. Right now I’m watching for a strong move up through the $200 price level which could set in motion the Livermore “Century Mark” rule. Watch for this.

Amazon.com (AMZN) Gilmo Report Chart

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

Apple, Inc. (AAPL) is an interesting situation in that it represents the biggest of the “big stock” NASDAQ leaders that doesn’t seem to want to go down any more than it seems to want to go up. Thus it could simply continue going sideways given that it trades at 13 times forward estimates and remains the consumer technology “juggernaut” of modern times. Perhaps the next big move in the stock will occur when Steve Jobs announces that AAPL has developed head-up displays that are implantable into human corneas, including an optional 4G connection, thus producing a new product we could call the “eyePad.” Objectively, the stock is in a 12-week base where you can see three “waves” or movements downward with each making a lower low up until three weeks ago when the stock rallied back above the 10-week (50-day) moving average, as we see on the daily chart below. AAPL is now holding tight above the 10-week line with volume drying up. A breakout or pocket pivot buy point might be a signal to buy some AAPL shares, so keep an eye out for that.

Apple, Inc. (AAPL) Gilmo Report Chart

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

Priceline.com (PCLN) has been another “big stock” NASDAQ juggernaut, but it finally took some heat this week as it sold off on heavy volume following its earnings announcement after the close on Thursday. For all we know PCLN may take a break here and let something like AMZN or AAPL pick up the slack IF the general market recovers and pulls out of its current shallow correction. There was nothing wrong with PCLN’s numbers on Thursday, and when we look out two quarters on the data portion of the daily chart below we see that analysts are looking for $7.64 a share in earnings, an all-time quarterly high for PCLN if not an outright impressive number. However, the fact that PCLN sells off on the positive earnings news gives us some idea of how intent money has been in leaving stocks over the past week or so as most leaders have in fact taken some heat. PCLN tends to hold its 50-day moving average, so my best guess is that unless the long-term fundamental picture is changing drastically the stock is likely to find support at the line and perhaps build a new base, something it is entitled to do given its inexorable leadership role throughout the bull market that began off the March 2009 lows, more than two years ago.

Priceline.com (PCLN) Gilmo Report Chart

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

In my report of this past Wednesday I spewed out a list of stocks that looked to be pulling back to a logical support area as represented by their 50-day moving averages and/or a breakout point at the top of an immediately prior base. Most of those stocks did in fact bounce on Thursday and Friday, but the bounces were not all that impressive. For example, “big stock” NASDAQ leader Baidu, Inc. (BIDU) found ready support three days ago at its 50-day line and bounced, as was quite “logical.” The bounce, however, leaves a bit to be desired as it occurred on very light volume and so comes off as little more than a normal reaction rally after a sharp downside break four days ago. If volume picks up and BIDU pushes down through the 50-day line then you would have some problems. On the other hand, a low-volume re-test of the 50-day line would be more constructive and could indicate that BIDU is simply correcting and looking to build a new base. For the most part, the action of stocks that are pulling back to their 50-day moving averages or a prior breakout point is still inconclusive and does not lead me to become necessarily bearish or bullish on these names, such as APKT, FTNT, OVTI, OTEX, etc.

Baidu, Inc. (BIDU) Gilmo Report Chart

I’ll be frank and say that while I’m not enamored with this market on the long side currently, I’m also not ready to dive headlong into the short side. There are some patterns potentially setting up in stocks like F5 Networks, Inc. (FFIV) and Finisar, Inc. (FNSR), which I don’t show here but which could be working on head and shoulders types of formations. Whether these are going to yield immediate downside profits is another question altogether. The only reasonably actionable short-sale idea I have right now is Las Vegas Sands, Inc. (LVS), which was a late-stage failed-base (LSFB) set-up back in early March which then morphed into a pocket pivot buy point set-up in mid-April only to morph back into a late-stage failed-base set-up this past week as it broke down below its 50-day moving average on big volume after announcing earnings post-close on Tuesday. Recall that LVS had a climax top back in November 2010, as we see on the daily chart, and I see this recent breakdown as potentially shortable here using Friday’s high at 444.12 as a guide for an upside stop. Note that the stock found resistance on Friday at its 65-day exponential moving average.

Las Vegas Sands, Inc. (LVS) Gilmo Report Chart

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

For my style, taking advantage of the most optimal windows of opportunity is critical. While it is necessary to remain constantly vigilant as one monitors the current market action and that of leading stocks, as one never knows for sure when the next big opportunity will present itself, I find that most of my money is made within a relatively short window of time. For example, May 2010 was a short month-long period where I scored just about a double on the short side, while the past two months have been another short window of opportunity with silver via the AGQ 2-times leveraged silver ETF where I scored more than a double in a short period of time.

Sure, if I had a crystal ball and could determine exactly when these windows would open up and how many would occur within any given year, I could just trade 2-4 months of the year and take the other 8 months off lolling around on the beach in Bora Bora. But, as Dr. K is fond of saying, “in the stock market the opportunity of a lifetime can occur every two weeks.” Of course, my chosen course is to sit on the beach with a laptop so I can continue monitoring the market at “arm’s length” as the internet provides us with the luxury of being close to the market while being far away from it. In any case, for now I sit in cash, waiting for the next market move. The next strong opportunity won’t take one day to begin and end, or even one week, so this report will be on it when it occurs and there will be plenty of time to get involved. For now that’s all any of us needs to know. Until further notice, the market remains in a correction, so relax and sit back, as the next window of opportunity will open up at its own pace.

On an administrative note, Gilmo members who may have missed my Fox Business News appearance on Stuart Varney & Company on Thursday morning can view it by typing the following URL into their browser: http://video.foxbusiness.com/v/4679290/silver-prices-continue-to-fall.

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 no positions, 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, 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. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.