The Gilmo Report

October 16, 2011

October 16, 2011

Despite a rally that has seen the NASDAQ Composite Index bee-line on a run for its 200-day moving average, shown below on a daily chart, the market is still without a clear follow-through day. Some have asked me whether Wednesday’s 1.43% move in the NYSE Composite Index was a follow-through, but I don’t pay attention to the NYSE Composite Index when it comes to follow-throughs as it is historically unreliable. The NASDAQ is the most reliable, and on Wednesday, it, along with all the other major market indexes, couldn’t even muster a 1% upside move on the day to complement the action on the NYSE Composite Index. For now all we can do is let the rally run its course, because even if we did want to go long stocks on the basis of some perceived follow-through on Wednesday, there isn’t anything setting up in a proper base or at a proper buy point. There have been some base breakouts, but in these cases the stock is coming up straight off the bottom, which is a dangerous position from which to buy a stock. I am still inclined, however, despite the sharp rally, to look for a point at which the short side may come back into play. So with the exception of what I’m going to cover in this report, any other short-sale targets we’ve been discussing are off the table unless and until I discuss them again.

NASDAQ Composite Index Gilmo Report Chart

This rally over the past two weeks has that straight-up look similar to the bottom following the summer correction of 2010. Below I show a chart of the NASDAQ Composite Index from that period, and you can see the steep rise off the lows that began with a clear follow-through day on September 1, 2010. As well, on that day we saw a lot of stocks flashing either breakout buy points or pocket pivot buy points, in sharp contrast to what we are seeing today. You would think that with the market up so strongly over these past two weeks, my pocket pivot screens would be bursting with names. But that isn’t the case – it is literally quite dry out there when it comes to stocks showing the types of technical characteristics that give me the conviction to go long these suckers. What this market acts like, at least by my own impression, is a QE-fed rally, where liquidity is being pumped into the market in a continuous stream as it sends the indexes and everything else straight up off the bottom. For me it’s not a question of whether the rally is “real” or not, but whether I can find stocks that can be bought, and the straight answer to that right now is that I cannot.

NASDAQ Composite Index Gilmo Report Chart

As I wrote in my report on Wednesday, October 12th, it may simply be a matter of letting the rally run its course, because the action in a number of stocks is very volatile and somewhat bizarre. Take Apple, Inc. (AAPL), for example, which is, along with (AMZN) the most v-shaped rebound and breakout to new highs you could ever ask for! To me this type of action in a number of these big NASDAQ stocks that at first looked to be breaking down tells me that there is a pool of liquidity out there that needs a fast and furious way to buy into this market, and when it rains it pours into these big stocks. Maybe this gap-up move is the start of another run in AAPL shares, but with earnings coming up on Tuesday after the close, taking a position here is not advisable, especially when you are not seeing any kind of convincing volume on the upside. This was also the case with AMZN today, which made a new all-time high. AAPL continues to play out per Livermore’s “Century Mark” rule on the long side, and with the stock refusing to break the key $400 price level the view here is it remains in a bullish mode going into earnings on Tuesday after the close.

Apple, Inc. (AAPL) Gilmo Report Chart

As the market rallies without showing me a follow-through day or anything in a strong position to buy, I make careful note of which stocks on my short-sale watch list are showing weaker action relative to the upside blitz we are seeing in the major market indexes and the bigger NASDAQ stocks. In my report of this past Wednesday, October 12th, I noted Green Mountain Coffee Roasters’ (GMCR) possible head and shoulders formation on its weekly chart. Below I show a daily chart, and we can see that the stock continues to look like it is forming the right shoulder in this overall pattern. The stock also stalled and closed at the lows of its price range Friday on weak volume in an otherwise strong market day and despite the fact that a lower-tier broker came out with a buy rating and $112 price target for the stock. GMCR continues to find resistance at the 65-day exponential moving average as it did four days ago, and I would continue using this as a guide for an upside stop if one is inclined to take a short position in the stock here, as I am. If the market rally begins to falter, GMCR will likely head for its neckline at around the 77-78 price level. As a weak stock setting up in an H&S formation in a strong market, it moves to the top of my short-sale target list.

Green Mountain Coffee Roasters' (GMCR) Gilmo Report Chart

Fossil, Inc. (FOSL), which we’ve been following for some time as a short-sale target stock, was also relatively weak in a strong up market. As we see in its daily chart, below, the stock has rallied up into its 200-day moving average where it ran out of buying interest today as volume dried up in the extreme, the so-called “Voodoo” day that I often look for at the peak of a rally in a short-sale target stock. FOSL is also working on the right side of a head and shoulders formation, and with earnings coming out on November 8th I would be looking for the stock to roll over in anticipation of a weak earnings report as it did in early August. If the stock strengthens from here then all bets are off on the short side. For now, however, the weak action and light buying interest in the form of a “Voodoo” day volume dry-up on Friday after a nine-day rally looks tantalizing as a potential short-sale right here, using the 65-day exponential moving average at 96.20 as your quick upside stop.

Fossil, Inc. (FOSL) Gilmo Report Chart

Buyout rumors sparked a sharp rally in Sina Corp. (SINA) on Thursday of this past week, as we see on the daily chart below. China’s government also came out with positive comments on the same day regarding SINA’s Weibo platform for social media. The shock and awe move lasted only one day, as on Friday the stock churned about and found resistance at its 50-day moving average on volume that was well below average. Last weekend in my October 7th report I looked at SINA’s weekly chart, and the stock remains in a late-stage failure type of set-up after the climax top that occurred in April of this year way on the left side of the chart. The company comes out with earnings in mid-November, and expectations are for a decline in earnings growth of -53% at 23 cents per share. Outside of the buyout rumors, which were not specific on Thursday, it is not clear to me that the stock has anything going for it to drive a further rally, although this may be dependent on what the general market does from here. But this is in a potentially shortable positon using the high of Friday at 96 as your guide for a quick upside stop.

Sina Corp. (SINA) Gilmo Report Chart

The Chinese internets as a group remain weak, and all remain in the lower parts of their overall chart patterns. The biggest of the Chinese internets, Baidu, Inc. (BIDU), gapped up Friday on Google, Inc.’s (GOOG) strong earnings announcement Thursday after the close. Volume remained weak, however, as the stock moved just past its 50-day moving average and right into the top of the “falling Window” that occurred on the gap-down day in late September. Thus the rally off the lows near the $100 price level has now filled that gap and is in a logical position to find resistance here. While BIDU hasn’t moved to new highs like AAPL and AMZN, its rally over the past nine days has the same extreme “V” shaped look to its chart. BIDU gapped up to 138.52 on the opening bell Friday and moved exactly 1 penny higher before closing at 137.60 for a nice day of churning on the gap. Volume was surprisingly weak since you would expect to see strong buying interest come into the stock to confirm the gap move if you wanted to be bullish on BIDU. It looks potentially shortable here with the idea of using a very tight stop at the 138.53 intra-day high of Friday. Earnings come out on October 27th.

Baidu, Inc. (BIDU) Gilmo Report Chart (PCLN) is also showing a weak rally here as it finds resistance at its 50-day moving average. The daily chart below shows buying volume drying up sharply on this rally, another v-shaped phenomenon similar to other big-stock NASDAQ names. If you want to short PCLN, this is as low-risk of an entry point as you could ask for. From here the next area of upside resistance might be the 520 level. But unless buyers start getting more interested, the stock looks to be running out of gas on this rally. A tight stop on this would be the high of Friday or Wednesday at 503.35 and 503.96, respectively. PCLN announces earnings on November 8th, so it has plenty of time to roll over before then if it wants to. The key, of course, is whether it wants to. While a rally like we’ve seen over the past nine days can frustrate short-sellers, it does provide a silver lining in that you are able to see which stocks on your short-sale target list act the weakest during the rally which helps isolate the stocks and help you narrow down your list. This is essentially what I’m trying to do with the stocks I’ve discussed in this report. (PCLN) Gilmo Report Chart

I’m still following the precious metals, but as I wrote in my report of last weekend, October 7th, neither one of the metals, gold or silver, is showing me anything in their chart patterns that looks anywhere near being a buy point. If we look at a daily chart of gold’s proxy, the SPDR Gold Shares ETF (GLD), shown below, we see a continuation of this wedging rally off the recent lows in the 155 price area. GLD has held above its breakout level at the 151.86 price point from back in July, and while I might expect it to eventually retest the 154.19 low it hit in late September, the longer-term trend in gold remains intact as it may simply be spending time here building a well-deserved consolidation after getting a little bit parabolic in early August. Currently I am neutral on the precious metals, and while I would not go long either one of them here I would also not look to short them. And so we just continue watching and waiting for the next actionable evidence on their charts, perhaps some sort of pocket pivot at some point in the future. In the meantime these have some work to do.

SPDR Gold Shares ETF (GLD) Gilmo Report Chart

If this market is going to eventually morph into a new rally phase, then I’m on the lookout for stocks that have been percolating in positive fashion, similar to what we saw in stocks like CMG, DECK, LULU, and others during last year’s summer correction, prior to market bottom and follow-through of September 1, 2010, as I discussed earlier in this report. Lately, on the daily chart of LinkedIn, Inc. (LNKD), shown below, I’ve noticed some constructive developments as the stock works on this big base it has been forming since breaking down from what was probably an improper cup-with-hande formation in early August. This recent base is showing selling volume dry up sharply along the lows, as we see on the daily chart below. What catches my eye here is the fact that LNKD saw very little selling interest as the market was coming down sharply on heavy sellng volume to test the early August lows. Over the past three days the stock has flashed a couple of pocket pivot type days as it has come up through the 50-day moving average. While LinkedIn, Inc. (LNKD) has a weak RS Rating of 52, keep in mind it has only been 21 weeks since it came public. Earnings come out on November 3rd, and I would keep an eye on the stock going into earnings.

LinkedIn, Inc. (LNKD) Gilmo Report Chart

Low-volume “floater” rallies like we’ve seen over the past nine days are often perplexing as investors can’t make progress testing short positions into the rally and they can’t find anything in an optimal buy position. No worries, we just let the rally do what it’s going to do until the situation evolves or clarifies to the point where our methodology will allow us to go long, or simply come back in on the short side again when the time is right. I’m not interested in “playing light” or “playing cautiously” because of some marginal follow-through in the NYSE Composite Index. I’m interested in finding a nice, wide-open window of opportunity to jump through that is well-suited to my methods and my psychology, such as we saw on the short side in early August and then again in late September, as “playing light” is not worth my time. If the market is so screwy that the best you can do is “be cautious,” then go golfing, go hang out with your kids, go play guitar on the beach, or go play piano all over London, as my good friend and colleague Dr. K did recently. Scroll down and play the video of Dr. K:

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, and/or Gil Morales & Company, LLC held a position in BIDU, FOSL, and GMCR, though positions are subject to change at any time and without notice.

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