The Gilmo Report

February 26, 2012

February 26, 2012

The markets made another closing high Friday, as we can see in the NASDAQ Composite Index‘s daily candlestick chart, below. The S&P 500 cleared to a new closing high as well, but the day’s action came on overall lighter upside volume. If one wants to be a stickler, one could say the indexes looked “tired” on Friday, and the candlestick chart shows a small gap-up “doji” formation that characterizes Friday’s tight, lackluster action following the slight gap-up in the morning. This gives it the look of a possible “abandoned baby” or “evening star” formation in the works, both of which are obviously bearish formations, but this is all meaningful if you want to focus on the action of the indexes alone. Recall that last weekend I noted that the action ten trading days ago where the index gapped down and held tight to form a doji within a “morning star when the index gapped up the next day, and this had bullish implications as the index moved higher from there. Setting aside all the “cool” and colorful candlestick terminology, we might say Friday’s action was simply churning on light volume. So far the market appears to be consolidating quietly, which it is entitled to do. And while Friday’s action might argue for more consolidation in the coming days, leading stocks continue to shine on a day-to-day basis.

NASDAQ Composite Index Gilmo Report Chart

The big story, in my view, is the movement in commodities like oil and precious metals which have been strong performers lately as one of the areas of the market providing real-time excitement, despite the fact that they are commodities and not stocks. Both silver and gold have been moving together, more or less, since their final lows in late December, and the two metals tend to mimic each other on a day-to-day basis. The major difference between the two is that the SPDR Gold Shares (GLD), shown below on a daily chart, is making a run at a breakout from a double-bottom pattern, while silver is working its way higher after having three big waves of selling in its pattern since the peak last year when it approached $50-an-ounce. This past week’s breakout through the short three-week range it was locked in previously saw the GLD move higher into Thursday and then hold up very well on Friday as it pulled back on light, well below-average volume. GLD appears poised to move higher once it has finished pausing as it consolidates its strong upside move up and off of the 10-day moving average earlier in the week. GLD looks good on a technical basis and remains a hold for now.

SPDR Gold Shares (GLD) Gilmo Report Chart

The iShares Silver Trust (SLV) joined the GLD this week as it is now also above both of its major moving averages, the 50-day and the 200-day. As we see on the daily chart of the SLV, below, it smashed through its 200-day moving average on the upside Thursday with what might be considered another “bottom-fishing” pocket pivot up through the 200-day moving average. The SLV held Thursday’s strong move very well on Friday as volume receded and the white metal held in very tight for the day, closing roughly unchanged. The move above the 200-day moving average is quite buyable, in my view, with the idea that the SLV should hold the 200-day line, more or less, on any pullback. For more on the metals, Gilmo members should tune into Fox Business News Monday morning as I will be on at around 6:45 a.m. Pacific to discuss the precious metals, and perhaps the move in oil, with host Stuart Varney.

iShares Silver Trust (SLV) Gilmo Report Chart

I’ve received some questions regarding the action in LinkedIn (LNKD) and whether the stock is “wedging.” I’m not too concerned about any slight wedging in the daily pattern as the stock digests this move up into resistance at the 95 price level. LNKD is a volatile stock, even squirrely at times, and so I would focus on the action on the weekly chart, which so far looks very strong, but also indicates that LNKD might need to go sideways here for a while. Recall that even the example of (AMZN) in 2003, which showed very strong action as it closed up and at the peak of the weekly range for five weeks in a row as it was coming up the right side of a base back then, followed up that strong action by drifting down for four weeks as the 50-day moving average caught up to the stock. This sort of orderly pullback and consolidation may be what LNKD needs to do here as it tries to set up to clear 95 resistance which it ran into earlier in the week. So far this is doing nothing abnormal, and if a position in LNKD was bought on the basis of the buyable gap-up two weeks ago in the mid-80’s then there isn’t much to do here but sit.

LinkedIn (LNKD) Gilmo Report Chart

Zynga Corp. (ZNGA), another social-networking play and a “cousin” to LNKD which I first discussed in my report of last weekend, continues to build a new base here, as we see on the weekly chart below. Last weekend I talked about the reasonably tight weekly closes in ZNGA’s pattern, despite the wide weekly range last week as a result of the volatility related to its earnings announcement. This week, however, note how the stock has closed exactly even with last week’s close (color coded as a black week), and, equally importantly, the weekly range has tightened up considerably. It is in fact the tightest weekly range in the pattern since the stock came flying out of its IPO base four weeks ago. I’ve read many articles knocking ZNGA’s business, but the price/volume action rules all. Short interest in the stock is also very high, similar to LNKD, as 2.8 days worth of short interest exists in the stock, or about 35.6 million shares, over a third of the float. I’m willing to take a position here with the idea that it should hold the $12.50 price level, this week’s low, as I would expect the pattern to continue to tighten up constructively if in fact it is going to work

Zynga Corp. (ZNGA) Gilmo Report Chart

I wasn’t expecting any surprises when Monster Beverage (MNST) announced earnings Thursday after the close, but the company did surprise analysts by “missing” their earnings bogey, which caused the stock to promptly drop down below 51 in after-hours trading. MNST provides a good example of why it is not always such a good idea to react too quickly in what is, except for the biggest of stocks, a very thin and relatively illiquid after-hours trading session. In MNST’s case, once the company began its earnings conference call the stock was back up to 55 and up from its closing price on Thursday. On Friday, the stock sold off just briefly before turning around and flashing a big pocket pivot buy point on very strong volume as the stock launched to an all-time high closing price. In my view one could add to pre-existing position in MNST here on the basis of Friday’s pocket pivot. I first discussed the stock even before its buyable gap-up move mid-January when it flashed a pocket pivot the day before it gapped up, and it has continued to move higher from there.

Monster Beverage (MNST) Gilmo Report Chart

Apple, Inc. (AAPL) continues to hold up as it refuses to break down below its 10-day moving average. I sold my AAPL position into the huge-volume, quasi-climactic spike last week, and of course watching the stock stubbornly hold its 10-day line gets me to thinking about where and how one would buy AAPL again. Notice the little black triangle, what we affectionately refer to as an “ant,” on the chart the day before the big reversal day. These “ants,” as most of you know, pop up on my charts whenever a stock is up 12 out of 15 days in a row or better – a sign of strength. One way to handle this based on the “ants” in the pattern is to simply buy the stock if it clears to new highs on strong volume, using a violation of the 10-day line at 507.41 as your sellng guide for the stock. While that might seem like a lot of “points” on the downside, it is still less than 4% from last-week’s intra-day high of 526.29. So far AAPL has held the 10-day moving average for ten weeks, thus one can easily use a violation of the 10-day line as a clear selling guide per the Seven-Week Rule.

Apple, Inc. (AAPL) Gilmo Report Chart

Gilmo members should view this report in conjunction with this past week’s Wednesday report, since the two are only two trading days apart, and together they give a broader picture of what I’ve been seeing over the past week. There is a great deal of positive action among many stocks, and the problem seems to be finding which to focus on – at times it is like being a kid in a candy store if one is looking for nothing but buy signals. For example, this past week saw buyable gap-ups in computer software security firm Sourcefire, Inc. (FIRE) as well as cloud-software leader (CRM). Technically, each of these gap-ups is potentially buyable using the intra-day lows of the gap-up days in each case as your selling guide. For FIRE this is 41.15 and for CRM it is 139.75. CRM has some overhead while FIRE looks the “scariest” given how high it is from the top of its prior base. But I would tend to see FIRE as more powerful on that basis, as we see on its daily chart below. Personally, I would prefer to see the stock pull down closer to the 41.15 low, but if it holds tight here it may just as well be a sign of the stock’s upside strength. I know this looks “too high”, even for a buyable gap-up, but that is precisely what makes such moves work as the crowd remains frightened away from the stock.

Sourcefire, Inc. (FIRE) Gilmo Report Chart

There may be a group theme in computer software security brewing here as our old friend, the #1 global leader in unified threat management and a computer/network software security cousin to FIRE, Fortinet, Inc. (FTNT), has also been acting strongly as of late, as we see in its daily chart, below. FTNT gapped up from the lows of a cup-like base in late January and has steadily moved higher along its 10-day moving average over the past month. I’m looking for some sort of pocket pivot buy point here, and today’s volume just missed being a pocket pivot volume signature. However, the stock was able to make a higher high. Of note: FTN has seen mutual fund sponsorship balloon as the number of funds owning the stock has gone from 518 to 583 in the most recently reported period. The bottom line here is that the action in FIRE and FTNT is indicative of group-related strength, which is likely a positive for both stocks.

Fortinet, Inc. (FTNT) Gilmo Report Chart

Some updated notes from my trading diary on stocks discussed in recent reports:

AMZN – still a possible short-sale candidate if the market gets weak, but so far holding just below the 50-day moving average. Consider this a “security blanket” short if you own some stocks and are a bit skittish.

BIIB – has not violated its 50-day moving average yet, but can’t seem to rally up off the 50-day line. Volume picked up on Friday, pushing the stock back to its 50-day moving average after it tried to rally earlier in the day.

CXO – got hit on earnings Thursday but traded back up to the 10-day moving average. Should hold the 105-106 price level on any pullback, which is exactly what it did on Thursday as it did not get any lower than about 108.

CLR – one of the leaders in the oil patch, holding tight at its highs.

Comments regarding other stocks from my Wednesday report still apply if the stock is now shown here. The bottom line is that the best stocks continue to act well, and there is not a lot that is necessarily actionable here as the market essentially tracks sideways over the past few days. If anything, I tend to think that too much thinking here is unwarranted. While the indexes may show some fatigue here, many leading stocks do not, so the bottom line remains the same: Just watch your stocks, and as long as they act well, think less and sit more.

Gil Morales

CEO & Principal, Gil Morales & Company, LLC
Principal and Managing Director, MoKa Investors, LLC
Principal and Managing Director, Virtue of Selfish Investing, LLC

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