The Gilmo Report

November 22, 2011

November 11, 2011

The market started out the week with a big gap-down opening on Monday which was no real surprise as the market had already started to roll over last week. As I wrote over the weekend, just because we are in a shortened holiday trading week investors should not assume that things will necessarily conform to “quiet holiday trade.” The NASDAQ Composite Index, shown below on a daily chart, moved decisively below its 50-day moving average with Monday’s gap-down, but with four days down already in the pattern, a logical bounce was a clear possibility. When the market comes down that steeply, the need to sell starts to get pretty obvious by the third or fourth day down. With a short trading week, institutions that need to raise liquidity and engage in forced selling have likely positioned themselves for any news surprises over the long weekend, which will be interrupted by a short trading session on Friday. It is not clear, however, that the market will necessarily “melt up” going into Thursday’s holiday, so again one should not assume anything – simply play according to the technical evidence. For now, 2500 is the “magic number” for the NASDAQ as it holds above that level for two days now. But without a bounce from here a test of the October lows down at 2300 could easily come into play.

NASDAQ Composite Index Gilmo Report Chart

The SPDR Gold Shares (GLD) dropped below its 50-day moving average on Monday with some sharp selling volume, but it found at least temporary support on top of the prior little consolidation area it formed before flashing a pocket pivot buy point back on October 25th. A close below Tuesday’s 162.07 intra-day low on the GLD would be a technical violation of the 50-day moving average, but that did not happen today as the GLD gapped up and tucked up into the underside of its 50-day moving average, as we see on the daily chart below. While one can always back away from the GLD if they are uncomfortable with the action here, a technical violation does not occur until we close below the intra-day low of yesterday down at 162.07. With German leader Merkel saying that the ECB has no “bazooka” with which to respond to the current crisis in that part of the globe, the QE boost for gold is not there in the short-term, as I see it, but we will have to see how this consolidation continues to play out, with the idea that yesterday’s intra-day low must hold.

SPDR Gold Shares (GLD) Gilmo Report Chart

Apple, Inc. (AAPL) tested its 200-day moving average yesterday, and we can see on the daily chart below that AAPL got to a point just above the 200-day line where it held. This puts it in a logical position to bounce, and so it has with a light-volume rally today that strikes me as little more than a logical reaction rally off the red moving average. I see the first line of resistance on any such bounce at around the 380 price level, although any kind of sustained bounce in the general market from here, given the somewhat oversold condition of the indexes after four days of selling off prior to today, could see AAPL rally up to the 50-day moving average at around 395.16. Certainly, I would consider any rally up to that level as being quite shortable, although I tend to think that a 50% upside retracement from the 200-day line up to the 50-day line would end somewhere around the 380 level, maybe a point or two above. Watch for this closely as my view remains that AAPL has made an intermediate- to long-term top based on the “two-down-one-up” sell signal back in late September and early October, as I’ve discussed in detail in prior reports.

Apple, Inc. (AAPL) Gilmo Report Chart (AMZN) continued further below its 200-day moving average on Monday, but note on the daily chart below that a severe four-day price break also creates short-term potential for a bounce as the stock becomes quite oversold. The past two days have seen AMZN try to find support along the 190 price level, coinciding with a confluence of two separate lows, one in the earlier part of August, one in the latter part, as I’ve drawn on the daily chart below. In contrast to AAPL, which saw very weak volume on the bounce off of its 200-day moving average, AMZN is picking up above-average volume as it tries to hold up around the 390 level and the lows of mid-August down closer to 380. Today was not quite an outside reversal to the upside as the stock closed below the peak of yesterday’s intra-day range, but I would watch for a logical rally from here that could carry into last Friday’s intra-day low at 197.11 on the low end or the 200-day moving average at 200.25 on the high end – a “zone of resistance.” Watch for a weak volume rally into this area as a shortable target zone. (AMZN) Gilmo Report Chart (CRM) undercut its prior lows around the 110 area on Monday, setting up the potential for a typical “undercut & rally” type of move. This did occur, but the rally could not sustain itself as volume decline sharply from yesterday and the stock closed back below the confluence of prior lows around the 110 price level, as I’ve drawn on the daily chart below. Ultimate upside resistance lies at the 120 level, which is the bottom of the “falling window” or gap-down day of last Thursday, three trading days ago. I would only see CRM rallying up this far if the general market also is able to muster up some sort of sustainable bounce from here, but a weak bounce could find resistance at yesterday’s high around the 114.43 price level. As I wrote over the weekend, Friday’s massive-volume gap-down move indicates that further downside is in the cards for CRM, so the trick is simply finding a good entry point. It may turn out that 110 turns into resistance, so watch this carefully. In any case, wherever you choose to try and enter a short position, use the levels of resistance that I’ve drawn on the chart as your guides for an upside stop. (CRM) Gilmo Report Chart

Obviously, there is no reason to be long this market, and I certainly have nothing in the way of ideas to offer when it comes to buying stocks. However, we continue to focus on AAPL, AMZN, and CRM as our pool of short-sale targets for now, using weak-volume rallies to put ’em out, as I see it. There is very little else that strikes me as a “high probability” activity, and it will likely not be until this weekend that I have a broader idea of where we can go on the short side. I would love to see a holiday “melt-up” over the next two trading days left in this week as a potential opportunity to hit some stocks on the short side, so stay tuned.

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 and DGP, though positions are subject to change at any time and without notice.

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