The Gilmo Report

September 14, 2011

September 14, 2011

I heard somebody use the term “nutzo” to describe the market’s volatile action these days, but as we know this is merely what happens when the market drops into the “chop zone.” Theoretically, the market is in a little uptrend “channel” off the August lows, but how well this “channel” defines a strong uptrend is another issue altogether given the crazy volatility that stocks are contending with. The market found support at the lower end of this “chop channel,” as I will refer to it, on Monday morning, and it has now rallied back up near resistance at around 2600 on the NASDAQ Composite Index daily chart shown below. Volume picked up sharply today on the NASDAQ as it sold off hard into the close, giving back about 1% of its gains seen at the highs of the day when it kissed the 2600 level ever so briefly. For now the index has not stopped me out of inverse index ETF positions, and my tendency is to view this rally as failure-prone. There is very little to absolutely nothing that catches my eye on the long side of this market, and I am looking for short-sale target stocks to rally into resistance in synchrony with the market as it tests the late August high, so it is a matter of waiting in the tall grass to see if any short-sale prey come trotting by.

NASDAQ Gilmo Report Chart

As the dollar now pulls back after gapping and running sharply to the upside last week and into the early part of this week, gold appears to be continuing its stabilizing movements as we see on the daily chart of the SPDR Gold Trust (GLD), below. Despite closing below the 20-day moving average three days ago, the GLD has still not technically violated the 20-day moving average since it has not moved below the intra-day low of three days ago at 175.33. Meanwhile the iShares Silver Trust (SLV), not shown here on a chart, continues to hold above its 50-day moving average. Taken together, the overall action in the precious metals remains as I described it over the weekend. Both silver and gold are simply continuing to move in sideways consolidations, and while they aren’t providing investors with any fireworks just yet, I believe that time is on the side of the precious metals. Either side of the solution to a Greek or any other Euro-default involves fiat money-printing of one form or another, so the long-term forces for higher precious metals prices are still in place. GLD and SLV remain holds for now.

SPDR Gold Trust (GLD) Gilmo Report Chart

As far as short-sale targets go, most of the retailers I’ve discussed such as JWN, LTD, UA, DECK, and TIF, have offered only fleeting breaks to the downside followed by short-squeezing drifts back to the upside, and both DECK and TIF have been stopped out on moves up through resistance over the past two days. Fossil, Inc. (FOSL), one of the biggest retailer leaders in the bull market since September of last year, is holding above its 200-day moving average and finding resistance at around the top of this current three-week range and its 65-day exponential moving average. I see FOSL as the weakest and hence the best retail short-sale target given that it has not been able to show much in the way of upside volume as it bounces up off the 200-day moving average. The stock has held the 200-day moving average on two prior tests, so it may be that any third test of the 200-day line will fool the crowd and break to the downside. That is what I would be looking for here if the market rally fails in the next day or two. For now I would use the 65-day line at 101.78 as an upside stop.

Fossil, Inc. (FOSL) Gilmo Report Chart

OpenTable, Inc. (OPEN), which I discussed over the weekend, is also trying to rally back up into the area of congestion defined by the prior bearish flag formation or “ledge” it formed through most of August and the first week of September, as I’ve highlighted on the daily chart below. This looks very shortable here potentially, using a 5% upside stop, although I would expect the stock to find resistance right here in the 56-58 price area and not move that far up from here. As the market has driven higher over the past three days, OPEN has performed much more weakly on a relative basis. This reverse flag formation/ledge is a downside continuation from the breakdown through the neckline in the prior head and shoulders top formation. OPEN’s downtrend is very well-defined and since moving down off the right shoulder it has roughly tracked the 10-day and 20-day moving average to the downside, so they could also serve as guides for an upside stop since we would expect the stock to move lower from here.

OpenTable, Inc. (OPEN) Gilmo Report Chart

Ancestry.com (ACOM) was a hot “novelty” stock that had a very nice run from September of last year up until it failed at the 55 price level on an attempted breakout from a v-shaped cup formation in late July, as we see on its weekly chart below. ACOM has an interesting business line helping individuals to research their ancestors. I suppose this can be an interesting novelty, unless your ancestors were Hitler and Mussolini. I just have to wonder how interested people are in spending money to find out who they are distantly related to when they are unemployed. Perhaps the stock’s head and shoulders top formation is telling us what we need to know in this regard. ACOM’s initial late-stage failed-base has now morphed into a full-on head and shoulders top as it flirts with the lows of its right shoulder here in the 27-28 price area. There are two ways to play this potentially: short the stock here using the high of today at 30 as a quick stop, or wait for a rally up into the 20-day moving average at around 32 to short into. Either way, this one should be on your short-sale watch list.

Ancestry.com (ACOM) Gilmo Report Chart

Another hot “novelty” stock in a nice short-sale set-up is Sodastream International (SODA), which I last discussed in my report of August 21st. SODA, an Israeli maker of home carbonation systems was a hot stock during the first part of summer, but it certainly lost its fizz by August, and I noted the sharp break off the peak that defined the right side of a potential head in a head and shoulders top. Back then I discussed keeping an eye on this one for a rally back to the upside and into resistance in the large congestion area I’ve highlighted on the daily chart, below, which would serve the useful purpose of forming a right shoulder and filling out a bona fide head and shoulders formation. It’s taken not quite a month, but SODA has done this over the past couple of weeks as it has rallied up into the mid-40’s, stalling out just under the 45 price level on about average volume. This is potentially shortable using the 45 intra-day price high of today as your upside stop, with the idea that the stock will eventually test its prior lows under the 35 price level.

Sodastream International (SODA) Gilmo Report Chart

Rackspace Hosting, Inc. (RAX) made its third trip back up to the 200-day moving average today but stalled out on heavier volume, as we see on the daily chart below. The 200-day line has served as resistance for the peaks in three little right “shoulderettes” in what I see as a head and shoulders formation. You can also see that RAX was a late-stage failed-base (LSFB) set-up from a failed double-bottom breakout in early July, and it has morphed into a head and shoulders top formation with the double-bottom base-failure forming a big “dome” type of head in this pattern. Often times what starts out as an LSFB formation will pan out into an H&S since the initial break off the peak can often occur from a failed breakout, as it has in RAX. You can also see this in the charts of SODA and ACOM, above. The bottom line for RAX is that the 38 price level is clear resistance for the stock. So it could potentially be shorted here using that as your stop-out level. Something else to take note of here is that the 50-day moving average is just about to cross below the 200-day moving average, and this often marks a breakdown from a right shoulder.

Rackspace Hosting, Inc. (RAX) Gilmo Report Chart

A couple of weeks ago I discussed Hansens Natural Corp. (HANS), MasterCard (MA), and Apple, Inc. (AAPL) as the only stocks I might even be remotely interested in buying in this market. On balance, these stocks have gone nowhere, but they haven’t broken down either. AAPL, the one I show on a daily chart, below, staged a little “trendline breakout” on increased volume, albeit well below-average. This strikes me as the perfect type of technical move to suck in unwary buyers. If AAPL is going to clear this 390 area and short-term resistance, it is likely going to need to see a lot more buying volume. As I wrote over the weekend, AAPL’s extremely low 12 P/E for a 120% earnings grower in the most recent quarter presents a quandary for me, and I tend to think that any new downside leg in the general market that carries down through the August lows will be led to the downside by something like AAPL, as I discussed in my weekend report, so it bears watching. In the meantime, barring any serious buying volume, I might be willing to bet that AAPL’s intra-day high today at 392.91 is as far as it goes on this most recent bounce off the 50-day moving average.

Apple, Inc. (AAPL) Gilmo Report Chart

In my view the market is simply working its way through the “chop zone” following the steep slide off the peak in early August. How long that continues is unknowable, which is why I prefer to take the position of “hiding in the tall grass” as I stalk the short side and wait for any potential short-sale prey to stumble into view at a potentially optimal short-sale position within their chart patterns. Meanwhile, the rally over the past three days helps to discern which short-sale targets may provide the weakest prey in the form of those stocks exhibiting very little upside “oomph” as they rally into potential resistance on unimpressive volume. In my view, if the short-sale ideas I’ve discussed in this report are going to bear any fruit, it will likely be on a general market rally failure from current levels. Thus this becomes a reasonable spot to engage short positions – that’s how I’m playing it right here, right now. 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, and/or Gil Morales & Company, LLC held positions in AGQ, DGP, FOSL, and OPEN, though positions are subject to change at any time and without notice.

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