The Gilmo Report

April 4, 2012

April 4, 2012


As I wrote over the weekend, the tape felt a little heavy last week, and so far this week it has gotten a fair bit heavier with two more distribution days showing up on the NASDAQ Composite Index daily chart, below. Yesterday’s sell-off came on heavier volume and closed mid-range, but with the index trying to move into postiive territory earlier in the day it could be seen as churning and distribution, while today’s gap-down move closed mid-range, but still qualifies as a more significant distribution day. Combine that with last week’s action as I described in my report of this past weekend, and you have a market that is at least in a short-term correction. As it stands now, the NASDAQ is 2% off of its recent peak, and a meaningful short-term correction would be at least 3-5%, in my view, but given that the NASDAQ was able to hold 3050 support today it could try and bounce around these levels before deciding which way to turn next. The market has run up a long way since the lows of late December 2011, so a period of sideways chop could be in store for the market, but for now the distribution we are seeing in the indexes continues to argue for a cautionary approach as I emphasized over the weekend. The bottom line is that it still comes down to watching your stocks and heeding sell points.


mentioned in this report Gilmo Report Stock Chart

#### “NASDAQ Gilmo Report Stock Chart” title=”NASDAQ ” />

Apple (AAPL) illustrates this concept of letting sell signals force you out with its first material breach of the 10-day moving average last week, as we see on the daily chart below. While AAPL closed below the 10-day line last Friday, it never moved or closed below the intra-day low of that day, which was at 597.94. AAPL got close on Monday to breaking that low, but in fact never did and from there was able to rally back above the 10-day moving average. On Monday the stock picked up strong, above-average volume and gapped higher, only to gap back down this morning. But notice that all AAPL did today was pull down to fill yesterday’s upside gap on volume that remained light. AAPL acts powerfully here, despite the shaky action in the market indexes, and as a big-stock leader in this current market environment it could continue higher even as or if the general market goes into more of a correction in the coming days. So while I am neutral on the general market indexes, I believe that some leading stocks could buck any sideways or downside action in the general market. That is why we simply watch our stocks – AAPL never issued a 10-day moving average violation, hence is still not a sell.

Apple (AAPL) Gilmo Report Stock Chart

Like AAPL, another big-stock leader in this market that can only be sold on a 10-day moving average violation as well is (PCLN), shown below on a daily chart. PCLN also lends weight to the argument that sometimes the indexes can be mushy and sloppy as the market starts to act like it wants to go into corrective mode, but a big leading stock can just power higher. PCLN did exactly that yesterday and today with a fine pair of continuation pocket pivots on strong, above-average volume, even as the NASDAQ Composite index churned yesterday and gapped-down today. PCLN, if not AAPL, certainly paints the picture as a perfect illustration and example of what is known as “contrarian strength.” Thus, if one owns PCLN one does not have to be concerned about the general market action if the stock is doing what you see on the chart below. It also illustrates that when a stock is trending this strongly there is no reason to try and anticipate a 10-day moving average violation, just let it happen and then act IF and when it actually does. (PCLN) Gilmo Report Stock Chart

Invensense (INVN) finally closed below its 50-day moving average today, and as I discussed in my report of this past weekend a violation of the 50-day moving average would be a sell signal for the stock. With today’s close below the 50-day line on heavy volume the stock is now on sell watch, but note from the daily chart below that it closed well in the upper part of the daily trading range, even if you consider the gap-down on the open this morning. Volume was also heavy today, implying that some support came into the stock as it lurched up off the lows of the day. Keep in mind that INVN is a recent IPO and hence a more volatile stock. My view here is that any core position taken at lower prices, even at the 50-day moving average bounce of early March off the 15 price level, should be sold if INVN does violate the moving average by moving below 16.07. However, given today’s quasi-supporting action, I would also want to see the stock recover from here and get back above the 50-day line in the next few days if it is to remain viable – “living” under the 50-day moving average would not be what I want to see if I’m going to try and hang with a core position here.

Invensense (INVN) Gilmo Report Stock Chart

Monster Beverage (MNST) also continues to hold up well and remains near all-time highs, despite the market indexes coming off over the past couple of days. MNST made a new all-time high yesterday, and today succumbed just a bit to the general market sell-off by testing its 10-day moving average on lighter volume that was also well below average. Technically, your selling guide for MNST would be the 50-day moving average since it tends to act a little bit sloppily around the 10-day moving average. However, one can observe on the daily chart below that MNST tends to obey its 20-day moving average, not its 10-day, and while it did close below the green 20-day line in mid-February it did not actually violate it and has remained well above the 20-day line since then. If one doesn’t want to sit through a pullback to the 50-day line, I tend to think that the 20-day moving average presents a reasonable selling guide for those who want to keep their trailing stops tight.

Monster Beverage (MNST) Gilmo Report Stock Chart

LinkedIn (LNKD) is another stock that has not yet triggered a sell signal as it has remained above the 97.01 intra-day low of its buyable gap-up of eleven trading days ago, as we see on its daily chart below. LNKD pulled back down towards that key price level today, but selling volume, while picking up a little bit, was well below average. As I wrote over the weekend, LNKD could move sideways here for a period of time as it potentially works off overhead supply in the 105 price area and bides its time as the upcoming May Facebook IPO approaches. Recall that depending on one’s risk tolerance and preferences one could give LNKD a little bit of leeway to the downside with the idea that it should at least hold the 95 level which had served as resistance prior to the buyable gap-up in the middle of March.

LinkedIn (LNKD) Gilmo Report Stock Chart

While Zynga (ZNGA) has floundered over the past few days as it violates its 50-day moving average today, another “Z stock,” or perhaps more accurately the true “Z stock,” Zillow (Z) acts well following a low-base breakout on Monday. The stock traded above-average volume today as it sold down to the trendline breakout level as I’ve drawn it on the chart below, but closed at the peak of its daily trading range. Z is very thin, trading about 327,000 shares a day on average, but might be one to keep an eye on if it can hold this breakout. Some traders might see this as a breakout through the neckline of a “reverse” head and shoulders, so that may be what attracts traders on this recent move back above the 35 level. Z is an online real estate service connecting home buyers and renters with sellers and landlords. You’ve got a little over 1.5 million shares sold short on Z, which has a float of 5 million, so for those who can play these smaller stocks in a smaller account, this might be something of interest. To me this is a breakout from a sloppy base but one that is probably typical of thin stocks like Z. Just look at the way it traded on the day it came public, zooming to 60 before setting down to just about where it is trading today.

Zillow (Z) Gilmo Report Stock Chart

I received an email today asking about Questcor Pharmaceuticals (QCOR) and whether yesterday’s action constituted a pocket pivot buy point, and the short answer is yes. As we see from the daily chart, the stock poked back up above the $409 price level yesterday on a pocket pivot volume signature, and today tried to sell off but closed at the peak of its daily trading range. Overhead resistance looms in the 42-46 price zone, as I’ve dramatically highlighted and labeled on the chart, and yesterday’s pocket pivot comes off of a slightly v-shaped pattern. As well, there is little strong upside volume in the pattern since the early March lows, so it may be wedging just slightly here. At best I see potential up to the 42 price level, but why be long QCOR when you can be long Biogen-Idec (BIIB), not shown, which acts much better here as it clears out to new highs.

Questcor Pharmaceuticals (QCOR) Gilmo Report Stock Chart

Western Digital (WDC) catches my eye as it pulls back here following a breakout to fresh 52-week highs a little over two weeks ago, as we see on the daily chart below. WDC is a big player in data storage and has some big numbers behind it as it is expected to earn $6.40 a share in 2012, up from $3.27 in 2011. Expectations are for the company to earn $8.57 in 2013. The pullback here is occurring normally as volume recedes sharply and the stock pulls right back on top of the prior five-week base from which it broke out. WDC has several upside gaps in the trend since late November 2011, and huge upside volume accompanies the recent breakout. Unless the general market comes apart here, I would expect WDC’s pullback to hold the 40-41 price area, roughly where the breakout occurred with the 50-day moving average at 39.44 as ultimate support.

Western Digital (WDC) Gilmo Report Stock Chart

It’s not hard to make the argument that the market, at best, may be stuck in neutral for a period of time here, but that should not present a practical problem for investors holding stocks that continue to act well. If the market continues to weaken, then it will be confirmed by seeing leading stocks hit their sell signals, otherwise there is always the off chance that this is a temporary shakeout. Last Wednesday I covered a long laundry list of stocks we’ve discussed in recent reports, and those notes still hold with respect to selling guides for these leading stocks. In the short-term the market may be disappointed with a message of no QE3 for now, but keep in mind that there is still some $12-13 trillion of liquidity sloshing around in the system even if the Fed isn’t going to add to it just yet. That may be enough to keep things afloat and thus keep the market’s correction somewhat contained, albeit in sloppy fashion. Of course, all of this entails trying to predict what the market might do, and the reality is that for now all we need to know and pay attention to is what our stocks are doing. Until further notice, I prefer to leave it at that.

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

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