The Gilmo Report

April 1, 2012

April 1, 2012


The market limped into the end of the quarter with four days in a row where the NASDAQ closed down on increasing volume each day, as the daily chart of the NASDAQ
Composite Index shows, below. On a relative basis, Monday’s gap-up move occurred on much lighter volume than the downside volume that ensued over the remaining four days of the week. As the churning action implies, any further upside moves in the NASDAQ were sold into all week long as quarter-end window-dressing failed to materalize. The situation remains much as I discussed in my mid-week report of this past Wednesday, and I would still be operating with caution here, watching my stocks for sell signals. More leaders have been faltering as of late, and to me the tape has a heavy feel to it, thus I would not be surprised to see the market correct in April given the extent of its rise in the first quarter of 2012, something it is entitled to, given its steep ascent since December.

NASDAQ Gilmo Report Stock Chart

The key point is to watch your stocks and remain alert to potential sell signals, such as might be the case with Apple (AAPL). As I’ve discussed in recent reports, because AAPL has obeyed its 10-day moving average for the past 12 weeks, a violation of the 10-day line is your clear sell signal for the stock. On Friday AAPL finally closed materially below the 10-day line, which it has tested twice before on the way up since its buyable gap-up in mid-January, as we see on the daily chart below. It will be interesting to see if the Rule of Three can be applied here, as a third test of the 10-day line might fool the crowd and fail to act as support for AAPL. A close below Friday’s intra-day low of 597.94 would constitute a violation of the 10-day moving average and hence would be your sell signal for AAPL, and this may have implications for the market.

Apple (AAPL) Gilmo Report Stock Chart

Invensense (INVN) has been one leading stock that has taken some heat over the past week, as we see on its daily chart below. In my mid-week report, I noted that the velocity with which the stock broke down through its 10-day moving average three days ago implied a test of the 50-day moving average. Despite the heavy selling volume on Friday after an analyst’s downgrade, INVN was still able to hold the 50-day moving average after finding above-average volume support on Thursday. A violation of the 50-day moving average would be your final sell signal for the stock if it were to occur. For now INVN is sitting on the fence, so to speak, and the action over the next few days will likely determine its fate. I find the action in INVN to be disappointing, at best, but if it can hold the 50-day line and build a base from here it might survive.

Invensense (INVN) Gilmo Report Stock Chart

LinkedIn (LNKD) is running up into resistance from the far left of its big basing formation as I’ve highlighted on the weekly chart, below. LNKD stalled this week on above-average weekly volume, and may need time to further consolidate this move above the $100 level and towards its “IPO highs” of last year. Again, you want to use the 97.01 intra-day low of LNKD’s gap-up move on March 21st as your selling guide for the stock, with another 2-3% added to account for any “porosity.” The 10-week/50-day moving average is moving up the right side of the pattern but I would not use that as a selling guide, preferring to unload quickly if the stock cannot hold the 97.01 level. So far it continues to act okay, and it is simply a matter of the stock continuing to hold the March 21st buyable gap-up move in order to remain viable. Next month’s Facebook IPO will bring the spotlight back on the social-networking group, and I can see LNKD biding its time until then as it potentially goes sideways here.

LinkedIn (LNKD) Gilmo Report Stock Chart

Zynga (ZNGA) priced its big secondary offering of 43 million shares offered by insiders at $12-a-share on Thursday, and the stock immediately rallied back above its 50-day moving average, corresponding to the blue 10-week moving average on ZNGA’s weekly chart, below. This past week’s action would constitute strong supporting action off the lows of the stock’s current four-week base, and this may be a constructive development that may figure into the ability of the stock to continue building a base here and eventually make an attempt at new highs. Thursday’s action did constitute a pocket pivot buy point coming up through the 10-week/50-day moving average, so the stock is potentially buyable at current levels with the idea that it should hold the 50-day moving average without violating it. Like LNKD, ZNGA may need to engage in further sideways action and base-building as the Facebook IPO looms ahead in May.

Zynga (ZNGA) Gilmo Report Stock Chart

Members should refer to my notes on stocks covered in recent reports that I included in my mid-week report of this past Wednesday. Leaders that continue to hold up should be monitored for potential sell signals, and of course AAPL is one example of a big-stock leader in this market that is on the verge of issuing a 10-day moving average violation sell signal. Sloppy action in another big-stock leader, MasterCard (MA), as shown below on its daily chart, has caused it to fail on its recent pocket pivot and new-high breakout with volume picking up sharply on Friday. This is similar to what SolarWinds (SWI) has done over the past few days, and these types of breakout failures in leading stocks are problematic, in my view, as they become more widespread.

MasterCard (MA) Gilmo Report Stock Chart

One could argue that this market is becoming dominated by complacency, and that the Volatility Index ($VIX), shown on a weekly chart below, is indicative of this as it has moved to its lowest lows since this bull rally began off the market lows of March 2009. The last two times the VIX got down to these levels it preceded both the “Flash Crash” market correction that began in May of 2010 and the very sharp break that we saw in the general market indexes in August of last year. Of course, the VIX can stay down at these levels for a while before it would necessarily correlate to any downside market break, or it could go lower as it did from 2004 to 2008, but I do think this is something for investors to take notice of given the distribution and churning on increasing volume that we’ve seen in the general market indexes this past week.

Volatility Index ($VIX) Gilmo Report Stock Chart

One might argue that the market has had a nice intermediate trending move since the lows of late November, and hence is entitled to at least an intermediate correction. Most professional investors appear to be expecting a correction in the second quarter, and some of the stalling and distribution that we saw this past week looked like profit-taking going into the end of the quarter in anticipation of an April pullback. Some leading stocks have already been in the base-building process, such as Michael Kors (KORS), Tangoe (TNGO), and ZNGA, for example, so it may be that a market correction will allow certain leaders to continue building their bases and then emerge after a correction ends which would be “logical.” Of course, this assumes that we will go into a correction in April and the market does not always have to act in a “logical” manner. Some leaders, such as Biogen-Idec (BIIB) which broke out to all-time highs this week, could just continue going higher no matter what the market does. Thus it all comes back to one simple, guiding principle: Watch your stocks.

For more on the market and stocks, Gilmo members might want to check out my month-end video review posted on at: . Please note that it will take about 25 seconds for the video to load initially before you can view it.

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 BIIB, INVN, LNKD, and TNGO, though positions are subject to change at any time and without notice.

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