The Gilmo Report

September 22, 2010

September 22, 2010

Allow me the intransigence of veering from protocol by starting out this report with an administrative note, but both Dr. K and I are very happy to announce that our publisher, John Wiley & Sons has reached agreements to translate and publish our new book, “Trade Like an O’Neil Disciple – How We Made 18,000% in the Stock Market,” in Chinese and Korean-language editions.

The NASDAQ Composite Index’s trajectory since the late summer lows has been quite impressive as it has the look of a nearly vertical launch to the upside on the daily chart, below. Given that angle of trajectory and the magnitude of the move off the lows so far, the market is fully entitled to a pullback and consolidation for a period of a few days or even weeks, in my view. Hence I’m not operating on the assumption that it will pay to be heavily aggressive and on margin here as I might normally be. I prefer to sit back and let things develop after two distribution days in a row off the peak. We would need to see more evidence before calling an end to this current rally phase, but the odds of a period of backing and filling here seem reasonable given that some uncertainty regarding the November elections might cause the market to pause, which ultimately would help to set up further upside if done constructively.

NASDAQ Composite Index' Gilmo Report Chart

Meanwhile the big development this week has been the big move in precious metals and precious metals stocks, with gold just barely missing the $1300-an-ounce level, while silver moves to closing highs not seen since late 1981, as we see on the monthly chart of the nearest silver contract, below. This has the look of a big, somewhat ugly cup-with-hande formation with a very jagged handle. Notice that trading volume has been picking up sharply as silver has come up the right side of this formation. Does it have the potential to play “catch up” with gold given that silver has not surpassed its 1981 high of $46.50 an ounce while gold is long past its own $873 high of January 1982? Perhaps.

silver Gilmo Report Chart

In my view, and as I discussed in my report of last Wednesday, September 15th, investors can take a long-term view of silver here by taking a position in the iShares Silver Trust (SLV) with the idea of using the 10-day moving average at 20.073 as your nearest guide for a stop, given that SLV flashed a pocket pivot buy point yesterday right off the 10-day moving average, as we see on its daily chart, below. Note that we also saw some huge buying in the SLV today as volume shot up 158% above average. So far SLV is following its 10-day moving average as it streaks higher – the question is whether this move starts to go parabolic, or whether the SLV pauses here to digest these recent gains.

iShares Silver Trust (SLV) Gilmo Report Chart

Randgold Resources (GOLD), which I discussed last week in my report of September 15th when it broke out, flashed a pocket pivot buy point yesterday as it bounced up off of its 10-day moving average. GOLD is now above the $100 level for the first time in its trading history, and Livermore’s “Century Mark” rule might apply here, so we might look for the stock to move up sharply through this level, perhaps up to 110.

Randgold Resources (GOLD), Gilmo Report Chart

This past weekend I noted Oracle Corp.’s (ORCL) big gap-up
breakout from a long-term pattern, and so we can see exactly what is going on here in the monthly chart, below. ORCL is in fact the granddaddy of cloud-computing, and provides investors with perhaps a lower-octane, stable, big-cap play in the cloud space, Back in the 1990’s Chairman Larry Ellison came up with the idea of a network-based “appliance” that eliminated the need to store applications and data on a separate “PC.” Back then ORCL teamed up with Sun Microsystems, which it recently acquired, to build the “Network Computer” or “NC” which was designed to run and store its applications and data on a remote network – the first “cloud-computing” device of its kind. Unfortunately, ORCL was ahead of its time since bandwidth was an issue in the 1990’s given the nascent state of the internet and slow 56k connection speeds. Today, however, this is an entirely different story, as we now think of connection speeds in terms of “megs.” Hence, the time may be ripe for Larry Ellison’s original vision to reach full fruition. And with ORCL posting some strong earnings growth over the past two quarters at 30% and 40%, respectively, this breakout from a nearly 11-year cup-with-hande formation looks very interesting to me.

Oracle Corp.'s (ORCL) Gilmo Report Chart

On Oracle Corp.’s (ORCL)’s daily chart, which I discussed in my report of this past weekend, September 19th and which I show below, we can see last Friday’s huge gap-up move on a very strong 40% earnings growth announcement. This is in fact a buyable gap-up move, as Dr. K and I discuss in the book, “Trade Like an O’Neil Disciple,” using the intra-day low of Friday’s gap-up as your guide for a stop. Note that this level coincides with the top of the base on the left side of the chart. If for any reason ORCL pulled back to the 26 level or better, I would consider the stock imminently buyable, but first I would look for it to hold this current gap-up move. Theoretically, given the huge upside volume on Friday, which I see as indicative of heavy institutional buying coming into the stock, the stock should hold the top of the “rising window,” which is also the low of Friday’s intra-day trading range. So far ORCL is holding the gap up very nicely as it forms a tight little four-day flag here. I would not be surprised to see this clear the top of this little flag in short order, perhaps in the next few days or 2-3 weeks as potentially sets up in a three-weeks-tight type of flag.

Oracle Corp.'s (ORCL) Gilmo Report Chart

On a day like today, with the market logging its second distribution day in as many trading days, not much was going on, but Netflix, Inc. (NFLX) went on a nice tear after announcing that it has launched a Canadian streaming movie service for $7.99 a month in Canadian dollars. Hopefully, some members have learned enough about identifying pocket pivots that they picked up yesterday’s pocket pivot move as the stock came up through the 10-day moving average on volume that was higher than any down-volume day in the pattern over the prior ten days, as we see on the daily chart below.. Even though volume was lower today than yesterday, yesterday’s higher volume was up-volume, not down-volume, hence today’s volume did not need to be higher than yesterday’s volume, only higher than any down-volume day over the prior 10 days. Got it? J In this case, the pocket pivot was likely providing a clue about today’s news, and had you bought the stock on the pocket pivot yesterday you would have benefited from today’s price move. NFLX is now well-extended from any logical buy point, since yesterday was the last one off the 10-day moving average, and all we can do is watch and wait for the next buy point to set up.

Netflix, Inc. (NFLX) Gilmo Report Chart

In my weekend report of September 19th, four days ago, I noted that Salesforce.com (CRM) looked primed to put in a pocket pivot buy point as it was resting just along and below its 10-day moving average. On Monday this actually occurred as the stock launched on a sharp volume increase that took it up through its 10-day moving average, as we see on the daily chart below. What I don’t like here is that this pocket pivot on Monday did not follow through with further upside, and instead is drifting down right on top of its 10-day moving average with selling volume picking up today. Perhaps CRM needs some time to base here, and I would not make a big deal out of any breach of the 10-day moving average here given that CRM does not show any tendency to follow and “obey” its 10-day line anyway. However, I would watch the stock closely here to see if it gets any lift off the 10-day moving average at 118.51, 18 cents below where the stock closed today. If not, then the next stop could be the 20-day moving average at 116.61. Usually, when I buy a pocket pivot with the kind of volume thrust CRM had on Monday, I want it to keep going, and if it doesn’t I may often cut the position and let it settle in before revisiting it. For now that is the case for CRM, but any volume move up off the 10-day or 20-day moving averages would immediately bring me back into the stock.

Salesforce.com (CRM) Gilmo Report Chart

VMware, Inc. (VMW), on the other hand, found support today at its 10-day moving average, as we see on the daily chart below. Volume came in nicely as the stock tested the 10-day earlier in the day, picking up sharply from yesterday’s low selling-volume. This is holding reasonably well, and what I would like to see is some sort of pocket pivot move up off the 10-day moving average here to get aggressive in the stock. That doesn’t have to happen, and one of my suspicions here is that the cloud-computing space, at least as it relates to the big leaders which have dominated the action in this area, including my “Power Trio” of CRM, FFIV, and VMW, may be a bit over-played in the short-term and hence some of these stocks might need to rest. This is why I’m perfectly willing to rotate in other directions if I am looking to play anything in a concentrated manner, and there are some other areas that look interesting, such as the precious metals stocks as I discussed above. For now, VMW is still holding up, but I note that CRM and FFIV (not shown), have come off the past two days after making new price highs, so it is not clear whether VMW will buck this trend. For now it is simply a matter of watching and waiting.

VMware, Inc. (VMW) Gilmo Report Chart

Rovi Corp. (ROVI) announced a licensing deal with Apple, Inc. (AAPL) on Monday to provide its web-based guide to content that can be accessed through the various devices that AAPL sells. The deal is not necessarily a big revenue driver for ROVI, but it does open up a third end-market for the company’s services in what are called “over-the-top” service providers. The stock reacted by gapping up hugely and breaking out on Monday to new price highs. I tend to like this breakout given that it occurred after a big shakeout in the stock four days ago as it looked to be breaking support along the lows of this current base from which it broke out of on Monday. Needless to say, with a soft general market, profit-takers have knocked the stock back in a bit, but selling volume declined today, and I might look for the stock to drift down towards the intra-day low of Monday’s gap-up move at around 44.70. I would also like to see volume drying up on any continued downside drift here, and I like the idea of having a ready downside stop at the 44.70 level if I decide to take a position. Monday’s “shakeout and breakout” maneuver likely served to shake out weak hands and bring in stronger hands on the breakout, which could be a positive for the stock as long as it is able to hold the 44.70 price level, in my view.

Rovi Corp. (ROVI) Gilmo Report Chart

 

We have to give the market credit for the sharp move it has been able to muster up off the late-August lows, but the market does still look to be in a position to spend some time consolidating its heady gains over the past three to four weeks. However, until yesterday the market did not seem to be in much of a mood to start pulling back and “digesting” its gains. I would look for the 2300 level on the NASDAQ to serve as near support, and I would watch all the stocks we’ve discussed in the report over the past month as they potentially pull back with the market. Steady players looking for an intermediate move should not feel a need to sell stocks that continue to act well, at least until more conclusive evidence to the contrary presents itself. On the other hand, for investors who might seek to play aggressively, as I do, it may not pay to press things too hard here. Wait for opportunities to set up properly, and exercise patience. Speaking for myself, I’ve had some substantial gains off the late August lows, and so there is no need to be a pig by trying to get aggressive at what could be a low-probability point in the market’s current rally phase as it potentially works off a little steam. Wait for a clear shot, and remember: no hurries, no worries.

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 a position in GOLD, SLV, and VMW, though positions are subject to change at any time and without notice.

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