The Gilmo Report

September 30, 2012

September 30, 2012

The major market indexes are caught in what is so far nothing more than a short-term correction as both the S&P 500 and NASDAQ Composite Indexes are about 2% off of their recent price peaks. Given the sharp move in the indexes since breaking out from their July range in early August, a correction of 3-5% would not be abnormal. This, of course, implies further downside for the market, and as I discussed in my mid-week report of this past Wednesday any further downside would bring the 50-day moving average into play, currently at 1412.08 on the S&P 500 and 3052 on the NASDAQ Composite, as we can see on its daily chart, below. A push through and below the 50-day line on the NASDAQ would also take it below its 2-week handle, the short consolidation that it formed in the latter half of August. That would be one scenario that in my mind would serve to create some serious fear and set up a shakeout of sorts. The market could also simply remain range-bound here as it does very little in anticipation of the November election. In the meantime, I think investors want to keep a close eye on their stocks, keeping some dry powder handy in the event that a further market pullback creates some buyable pullbacks in leading stocks.





What strikes me as the most constructive area of the market right now given the 2% pullback off the peak is the action in the precious metals, gold and silver. Below I show a weekly chart of the SPDR Gold Trust (GLD) that gives a better picture of what’s going on in the yellow metal without some of the daily volatility and noise that has characterized its action over the past two weeks. Note that despite trying to sell off intra-week the GLD found support each time and has now closed very tightly over the past two weeks. The long lower tails on the weekly ranges also imply supporting action of the lows, and with volume drying up. I believe that another move in the precious metals is brewing. Currently the GLD seems to be engaging in a normal consolidation as it runs into some resistance at two prior peaks in its overall, year-long weekly consolidation. Thus one can buy the GLD right here, using the 20-day moving average, currently at 169.28, or the intra-day low of three days ago at 168.13 as your selling guide. Otherwise one can look for some sort of breakout or pocket pivot from this current 2-plus-week flag to add to, rebuild, or outright initiate a GLD position.




Silver is in a similar position as gold within its longer-term, one-year weekly chart, as we see below in silver’s proxy, the iShares Silver Trust (SLV), below. Like the GLD, the SLV is encountering some resistance at the two prior peaks in its one-year consolidation. As it does so, it is holding up very well with tight weekly closes of its own over the past two weeks. The SLV also found support at its 20-day moving average this past week on the daily chart, which I don’t show here, but you can see the action in the long lower tail on the weekly range for this week on the chart. Thus I tend to look at the 20-day moving average on both the GLD and the SLV as rough guides for support on any pullback. Another constructive development this past week is the movement in the SLV’s 10-week moving average back above the 40-week line, basically a 50-day cross over the 200-day, also known as the proverbial “golden cross.” My view is that barring any deleterious action from here, gold and silver are both poised to move higher over the next few weeks. Of course, my preferred vehicle for any precious metals move is the very volatile 2-times leveraged silver ETF, the AGQ, although the SLV, GLD, and even the 2-times leveraged gold ETF, the DGP, work as well.




One piece of evidence for market bears might, I say might, be the action in big-stock leader Apple (AAPL), shown below on a weekly chart, which has failed at the $700 price level. Jesse Livermore, using his Century-Mark rule in reverse, might have shorted AAPL at 700 if he were alive today, and he would have scored a quick 40 points on the downside, something that would have been very “Livermorian” as he often liked to play for “points.” We all know that leading stocks will often top when all the news is the rosiest, and of course with the new iPhone 5 selling out in rapid fashion the news for AAPL has been as rosy as possible. However, it is not clear that AAPL has topped, as it may simply be pulling back to its 10-week moving average for the first time since breaking out in August. While AAPL’s 10-week moving average is at 653.80, the stock only got as low as 660 during the week, so I could see it pulling back further towards the line before we see whether or not it gets big support or violates the 50-day line. If I owned AAPL I would probably use the 50-day moving average as my maximum downside selling guide, while also being open to an opportunistic “scoop,” buying shares at the 50-day line if the stock finds support there.




At this point in AAPL’s life-span, I don’t see it as being all that necessary as a “market barometer” stock, given that other big-stock NASDAQ names, such as Google (GOOG), have picked up the ball for AAPL as strong-acting big-stock leaders. (AMZN), which has been another big-stock NASDAQ leader in the market’s current rally phase, acted well this week as it found support at its 10-week/50-day moving average, as we see in its weekly chart below. Volume remained about even with last week’s volume, so I don’t necessarily see any big-volume support at the 50-day moving average. But so far the action doesn’t argue for anything more than the fact that the stock may simply move sideways for a period of time as it prepares to eventually move higher. There is nothing conclusively bearish about AMZN’s action, and so far the action appears to be normal for the stock given that it tends to be more of a plodder than a streaking upside leader. Like AAPL, AMZN’s 10-week/50-day moving average should serve as one’s ultimate selling guide for the stock. Both stocks saw strong moves up off the 10-week lines on Thursday, but this did not sustain into Friday and so they are left in pullback mode as they seek to hold above the 10-week lines for now.




As the market pulls back, I simply look for leading stocks that appear to be using the market correction as an excuse to engage in a little constructive consolidation of prior gains as they go about building short bases. LinkedIn (LNKD), which has remained one of my favorite long targets in this market, appears to be moving sideways in coherent fashion as selling volume dries up. So far the stock is trying to build a two-week little flag type of base here as it consolidates the sharp move up off the 10-week/50-day moving average four weeks ago. Also note that it closed up off its intra-week low with volume picking up just a hair. I would interpret this as some mild supporting action, but supporting action nevertheless. In the short-term it seems to be finding a little bit of upside resistance at the 10-day moving average. From here I would look at buying the stock on a constructive pullback closer to the 113 handle breakout in early September or on a pocket pivot move that carries the stock up through the 10-day moving average. For this to occur, then volume would have to exceed 1,854,400 shares, the highest down-volume in the pattern over the prior 10 trading days.




I also don’t see anything wrong with Splunk (SPLK) as it also pulls back and consolidates the prior sharp move it had five weeks ago after announcing earnings. As we see on SPLK’s weekly chart, below, the stock has pulled back for two weeks and this week picked up some volume as it closed in the upper half of its weekly range, making for some strong supporting action on the weekly chart this past week. On August 31st, after announcing earnings, SPLK staged a buyable gap-up move with an intra-day low of 34.25, and since then it has not really tested that low. As long as this pullback remains above that level I think the stock is okay, and I think that opportunistic buyers could come in and take shares around the 35 level using the 34.25 low of the buyable gap-up day as a quick stop-out point. The other way to approach SPLK is the way I discussed in my report of last weekend, September 23rd, whereby we would wait for a pocket pivot move up through the 10-day moving average, currently at 37.12, on volume that exceeds 1,202,400 shares, the highest down-volume in the pattern over the prior 10 trading days.




Some might ask why I focus on LNKD and SPLK here, and the primary reason is that pretty charts are one thing, but more importantly I look for strong fundamentals and/or a compelling theme combined with evidence of institutional movement into the stock. Both LNKD and SPLK show that, and unlike Z’s action this past week, there has been no evidence of massive selling in either, so the thesis of strong institutional interest remains intact. Another stock that I discussed in my mid-week report of this past Wednesday that I’ve also cited as having strong and increasing institutional interest is Regeneron Pharmaceuticals (REGN), shown below on a weekly chart. As I discussed on Wednesday, the stock became buyable on the pullback right down to its prior base breakout point at the 141.96 level after closing at 142.97 on Wednesday. The stock found strong support from there on above-average volume on Thursday, and we can see that the action on Thursday and Friday show an increase in weekly volume that indicates strong support off the 10-week line. This is very constructive, and one had to be willing to take a shot at the stock on Thursday morning in order to participate in the strong action on Thursday and Friday. Given this strong weekly action, I would look for the stock to hold the 10-day line at 147.10 on any pullback from here.




Last but not least, we address the question, “Is Michael Kors Holdings (KORS) dead?” While I blew out my position on Monday and Tuesday, I should make it clear that this was based on my perception by Tuesday that the 23-million-share secondary offering likely sated institutions’ appetite in the very short-term, and so it is preferable, to me at least, to back off and let the stock settle down before seeking a new re-entry. Remember, playing leading stocks isn’t about the 2-3 point wiggles in between, it’s about getting onboard the stock in a big way just as it begins a major upside price move. While the weekly chart, shown below, shows a down week on massive volume, keep in mind that the volume bulge was the result of the secondary offering, and also note that the stock both held well above the 10-week/50-day moving average and within the boundaries of last week’s weekly price range. Currently the stock is under its 10-day moving average at 53.49, and I would consider a move above the line on volume of 5,513,500 or greater as constructive and buyable for the stock. I would not rely on volume having to exceed Tuesday’s exaggerated volume, using instead the volume level on the day before. In the meantime, the 10-week moving average at 50.49 and the 50-day moving average at 49.03 might provide areas at which opportunistic buyers might look at buying shares on a constructive pullback.




Thus my answer on KORS is that no, it is not dead, but it might need some time to work off the 23 million shares that have absorbed near-term demand for the stock. Whether this happens sooner than later is also not that relevant since a pocket pivot type move above the 10-day line could serve as an add/re-entry point for buyers of the stock just as easily as a constructive pullback to the 10-week or 50-day moving averages would be. In my mind I can construct a scenario where the market continues to come off down to the 50-day moving averages on the NASDAQ    Composite and S&P 500 Indexes, and this coincides with certain leading stocks also pulling back to test their own 10-week/50-day moving averages or even their prior breakout points. We have already seen REGN successfully test its breakout point on Wednesday, leading to a sharp rebound on Thursday and Friday.


Thus, as long as the market remains in a confirmed uptrend, even as a normal short-term correction might take hold, this is the primary thrust of my current strategy and approach to the market as it relates to stocks. With respect to the precious metals, I believe they remain very much in play here given their very tight action on the weekly charts, and investors should keep a close eye out for new buy points developing in the GLD or the SLV over the coming days or weeks.


In my view, pullbacks to logical areas of support in stocks or precious metals ETFs are easy to buy since a pullback to a 50-day moving average, a 20-day moving average, or a prior breakout point gives one a handy stop-out level that is often just 2-3%, sometimes less, below your entry point. Therefore, I think that barring further evidence to the contrary with respect to the general market environment, investors should be bold enough to take some shots if they see a reasonable pullback to such a low-risk buy area occur in a stock they are interest in. This report has focused on my current strategies with respect to handling this very occurrence in my favorite stocks, most of which I have discussed herein.


On the short side, I cannot find any truly decent thematic short-sale targets to go after here, and this makes sense since outside of one- or two-day tactical short-sales, there is no basis for taking an aggressive short-sale posture at this time. After all, the indexes are only 2% down from their recent price peaks, and for all we know this could be little more than a short-term correction of 3-5%. Whether it develops into something far more serious is beyond our current knowledge based on the objective evidence. And so we simply continue to flow with the information available in real-time. 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 positions in AGQ and REGN, though positions are subject to change at any time and without notice.
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