The Gilmo Report

November 13, 2011

November 13, 2011

If you like schizoid markets then this one would qualify as your nutty “dream date” for sure. As volatile as the market seems, however, the daily chart of the NASDAQ Composite Index, below, shows that the whipsaw action that took place throughout much of August and September was actually much worse. The sharp breaks to the downside have only been two-day affairs, which gives the impression of rapid ping-ponging action to and fro. The bottom line is that aside from the nice, clean nine-day uptrend off the early October lows, the market’s action since the August lows has been quite choppy. More recently, the NASDAQ has been in a struggle for the 200-day moving average, and Friday’s action could be viewed somewhat suspiciously as a wedging rally up into the 200-day line after the market successfully tested logical resistance at the top of the prior range on Thursday, as I’ve highlighted on the chart. The better-acting stocks have continued to act okay, although net upside progress is scarce, while there have been some leaders that suffered a bit this week, such as Green Mountain Coffee (GMCR) and Apple, Inc. (AAPL), for example. It’s still more a market of stocks than a stock market, made even more difficult by the wild, daily gaps up and down.

NASDAQ Composite Index Gilmo Report Chart

Gold still remains the one solid play that so far has not been difficult to make sense of as it continues to hold above the 50-day moving average on the daily chart of its proxy, the SPDR Gold Shares (GLD), below. I wrote in my Wednesday report of November 9th that I would look for the 50-day line to serve as near-term support on the GLD, and a low-volume pullback on Thursday resulted in a bounce off the moving average that carried into Friday.

SPDR Gold Shares (GLD) Gilmo Report Chart

The action on a weekly chart of the GLD, below, shows the yellow metal ETF closing near the peak of the weekly range over the past three weeks since we saw the initial pocket pivot buy point as discussed in my October 26th report. Some overhead congestion and potential resistance looms ahead, as I’ve highlighted on the chart, but I would not see this as a reason to unload gold. On the contrary, I am very interested in seeing how it acts as it approaches and tests the highs of August. The critical component here may be determined by which side the volume starts to come in on here, as sellers may already be washed out from the sharp break down towards the 200-day moving average.

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Perhaps a clue is offered in the daily chart of the nearest gold futures contract, below, which shows a pocket pivot buy point coming up through the 10-day moving average.

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Wednesday’s severe, high-volume sell-off got me back to considering the short side of the market again, but I kept it to just four simple targets: AAPL, AMZN, NTES, and SINA. Of the four, only Apple, Inc. (AAPL) provided any real “love” as it busted its 50-day moving average very nicely on Thursday as we see on the daily chart below. On Friday, the stock was unable to move very much at all despite a sharp upside general market rally. A lot of commentary was devoted to AAPL “finding support” at its 100-day moving average, a moving average that I do not use but which I have drawn on the chart below as an aqua-colored moving average, and you can see that AAPL did indeed find support at this mythical line of support. One could argue that the small area of congestion right around the cusp of September and October provides some tiny measure of support along the 380 price level, but I would probably look to short AAPL into any reflex rally that carries above the 390 area and into the 395 price level where the 50-day moving average is currently moving through. If the general market continues to bounce around here, AAPL may go nowhere, but any breakdown in the market indexes could see AAPL head for its 200-day moving average at 262.68.

Apple, Inc. (AAPL) Gilmo Report Chart

There are very few things coming through my screens on the long side these days, and mostly what I find when something positive does come through my screens is something more on the order of a constructive clue. One interesting stock that did pop up on my pocket pivot buy point screens is big NASDAQ internet name Google, Inc. (GOOG), shown below on a daily chart. GOOG gapped up about a month ago when it announced earnings and has since chopped its way higher in somewhat incoherent fashion. But on Friday it flashed a very clear pocket pivot buy point off the 10-day moving aveage on decently above-average trading volume. If you study the chart carefully you will also notice another pocket pivot buy point that occurred on Monday of this past week, literally framing GOOG’s trading week with a pretty pair of pocket pivots (say that 10 times fast!). GOOG’s Android operating system is the main competitor to APPL’s iPad/iPhone hegemony, and with AAPL teetering here GOOG may be showing signs that it is ready to assume AAPL’s role as the smartphone/tablet leader. If we were in a strong, bullishly trending market I would probably be inclined to look at GOOG as a “go to” big stock NASDAQ leader, so I think it bears watching closely.

Google, Inc. (GOOG) Gilmo Report Chart

In my mind GOOG joins Intuitive Surgical, Inc. (ISRG), as another big-stock former leader that is now in a similar newly emerging state of being, at least from a technical standpoint. You may recall that one of the positive aspects I like about ISRG is the fact that it is just emerging from an 18-month base that sets up the possibility of a fresh new upside price move (see October 26th report). As we can see from GOOG’s weekly chart, below, it is also working on what may be the right side of a nearly three-year consolidation that it has formed since it topped out following its big post-IPO run from 2004 to 2007. I made a lot of money in GOOG in 2004-2005 when the stock logged the best upside acceleration in that overall price move extending into the market top of October 2007, and I would certainly be open to any opportunity to do so again if the stock is able to move out of this big consolidation to new all-time highs. For now, the pocket pivots we saw in GOOG this past week are the first clues of just such an attempt. If you think the market is still in a bullish state of being, then certainly these pocket pivots can be bought if one so desires, using the usual downside stops, but at the very least just put GOOG on the watch list along with the other stocks I’ve discussed as long ideas in my November reports.

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Screening for long ideas in this market on a practical basis only seems to yield stocks to keep a close eye on, as none of the stocks I’ve discussed on the long side recently have had any significant upside price moves. We saw three pocket pivots in LinkedIn, Inc. (LNKD) going into its earnings report last week, but a secondary stock offering sent the stock lower, while Fusion I/O, Inc. (FIO) also lost its mojo when it similarly announced a $100 million secondary stock offering. LNKD and FIO remain on my watch lists as I believe there could be some upside in the stocks once they complete their secondaries, but for now all they have become are ideas that are still on the drawing board. FIO finally pulled back in what becomes the first week down following a sharp six-week move off the lows of a 59.7% deep cup formation. While FIO did not hold the 35 breakout level this past week, it would probably be very constructive to see the stock go about the business of building a proper handle here. Keep FIO on your watch list as I believe the fundamental story here remains very compelling.

Fusion I/O, Inc. (FIO) Gilmo Report Chart

Among the other stocks I’ve discussed on the long side, those that continue to hold up above key moving averages or breakout points are BIIB, CMG, GOLD, ISRG, MA, NEM, PNRA, QCOR, UA, ULTA, and V. LULU is the only one that has dipped below its 50-day moving average, and it did so on Friday on a pick-up in volume – not the most constructive action you would want to see. I like the positions of ULTA, not shown, and Under Armour, Inc. (UA), shown below on a weekly chart since the stocks have both held their recent breakouts. UA, for example, has pulled back to the 80 price level, roughly, twice over the past two weeks when the market has pulled down, but it has held the breakout and both weeks closed up in the upper part of the trading range, which is the type of action you want to see in a recent breakout as it contends with some sharp downside action in the general market following its new-high breakout. UA is still in a potentially buyable position, and as long as it holds the 80 level it is fine. Whether an imminent launch to the upside is in the cards is another question, so it may simply continue moving sideways here if the general market remains choppy.

Under Armour, Inc. (UA) Gilmo Report Chart

It is often helpful to refer to weekly charts during periods of general market volatility since clues in the behavior of potentially emerging leaders can be discerned that are not as obvious on the daily charts where the action appears choppy. VMware, Inc. (VMW) catches my eye this week with three weeks of very tight closes, as we see on the weekly chart below. Notice that each of these three weeks has a “longish” tail on the weekly price range with the closes just about at the weekly peak in each case. The long lower price tails occur within the context of a general market that has had some sharp downside breaks over the past three weeks, and the closes at the weekly peaks indicate a stock that is doing its best to buck the market volatility. If this base that it is coming up the right side of is a double-bottom, then it is slightly flawed in that the second bottom does not undercut the first bottom. Weekly volume is drying up as the stock goes three-weeks-tight here with closes that are progressively higher, and notice that the 10-week (50-day) moving average has crossed back above the 40-week (200-day) moving average. I don’t see a buy signal here in this pattern just yet, but I would keep VMW on my watch list.

VMware, Inc. (VMW) Gilmo Report Chart

With the general market indexes rallying up to their 200-day moving averages on Thursday and Friday on lighter and declining volume compared to the high-volume sell-off on Wednesday, the market remains in a state of flux. For the most part, the environment leaves us more or less in the position of simply gathering clues at the scene of the crime. I have a laundry list of long ideas on my watch list, and four possible short-sale targets in AAPL, AMZN, NTES, and SINA, as I discussed in my Wednesday report (November 9th), but only AAPL has broken down, and it did so on two up days for the general market. Is AAPL’s action a clue given its status as a market bellwether? Perhaps so, but this point we are left to little more than simply waiting for the line of least resistance to be broken, whether that will be to the upside or the downside. In the meantime we remain in this very choppy range around the 200-day moving averages on the major market indexes with support around the 2600 level on the NASDAQ Composite and around 1220 on the S&P 500. In such an environment the GLD has been the best trending vehicle in my portfolio, and for now that has remained my main focus on the long side. If we awaken one morning to find the European Union dissolving like Alka-Seltzer® in a glass of water, gold may be on the receiving end of the safe haven bid, and if we see the European Union move to liquify, e.g., print Euros as they continue to kick the can down the road, gold may rally as well. And confirmation of gold’s staying power here is embedded in the fact that it has clearly outperformed the market. In the meantime I would look for the GLD to hold any pullback to the 50-day moving average at around 168 as we stay long the yellow metal while waiting for the next playable move in stocks. On Thursday morning of this past week I gave my views on gold during an appearance on Fox Business News. Members can view it at: http://www.virtueofselfishinvesting.com/news/2011/11/fox-business-channel-gold-up-26-percent-in-2011/.

This Wednesday Dr. K and I head to Las Vegas and Bally’s Casino for the Traders Expo where we will be presenting for one hour on Thursday at 1:15 p.m. and then for four hours from 8 a.m. to noon on Friday in an exclusive, hands-on, paid workshop. Friday’s workshop is scheduled during market hours so we can go from theory to practice in real-time during a live market, giving the workshop its “hands-on” component. We hope to see you there. Meanwhile, Dr. K and I have signed the contract for our follow-up book to “Trade Like an O’Neil Disciple,” tentatively titled, “In the Cockpit with the O’Neil Disciples.” The book will be completed by the end of March 2012 and ready for publicatioin sometime in summer of 2012.

Gil Morales

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

At the time of this writing, of the stocks mentioned in this report, Gil Morales, MoKa Investors, LLC, Virtue of Selfish Investing, LLC, and/or Gil Morales & Company, LLC held a position in AGQ, DGP, and GLD, though positions are subject to change at any time and without notice.

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