The Gilmo Report

July 11, 2012

July 11, 2012


The “Romney Rally” appeared to die on the vine this week when yesterday the major market indexes reversed hard on heavy volume. Today volume receded as the market sold off following the release of the Fed meeting minutes. But despite all the wild index action, all the NASDAQ Composite Index, shown below on a daily chart, did was pull down to the low end of its uptrend channel after moving to the top of the channel exactly one week ago. Over the past two days, one thing that has struck me about this rally attempt since the follow-through day of eight trading days ago has been the contraction in potential leading stocks making it through my screens. This is often the first warning sign that a follow-through might fail as successful follow-throughs will see an increase and expansion in the number of potential leading stocks acting in a constructive manner. The question now is whether this follow-through has failed, or whether the market is simply in a whip-sawing uptrend channel given that the NASDAQ was able to hold the lows of the trend channel and its 50-day moving average today on lower volume. It’s a tough call to make, but the bottom line is always what the stocks are doing, and in most cases leading stocks have gotten smacked around over the past couple of days.

NASDAQ Gilmo Report Stock Chart

Apple (AAPL) held its 10-day moving average and its pocket pivot buy point of eight trading days ago, as we see in the daily chart below.

Apple (AAPL) Gilmo Report Stock Chart

But Intuitive Surgical (ISRG) could not hold its pocket pivot of eight trading days ago and ended up blowing through its 50-day moving average on heavy selling volume, as we see below.

Intuitive Surgical (ISRG) Gilmo Report Stock Chart

LinkedIn (LNKD) violated its 50-day moving average yesterday, as we see on the daily chart, and in my view once a stock shows weak action like this, or like ISRG, above, it is not a situation to remain invested in. For all we know, we are trapped in a mid-summer chop zone that is going to send stocks flopping around all over the place, making it difficult to make any kind of progress on the upside. LNKD comes out with earnings towards the end of the month, and I would steer clear of the stock until then. I do not want to own anything going into earnings if I don’t have some profit cushion in the stock, and in LNKD’s case the 50-day moving average violation seals the deal for me. We can see that one major flaw in the stock’s action is that it tried to push up through the 110 level and there was very little buying interest which showed up at that price level. This of course brings up the question as to whether LNKD is shortable here, and the answer is that a short trade is viable on the basis of the 50-day moving average violation, using the line at 103.11 as an upside stop. The question is whether a whip-saw market will make the short side viable, but this could be worth a try if the market runs into more trouble in coming days.

LinkedIn (LNKD) Gilmo Report Stock Chart

Meanwhile, Facebook (FB) is holding the lows of this little cup-with-handle it continues to work on, as we see on the daily chart below. With the way the NASDAQ held its 50-day moving average with a late-day rally/recovery attempt, I thought it might be worthwhile to nibble on a bit of FB going into the close, since the stock did not see any heavy selling over the past two days. The idea here is that the stock will hold the intra-day lows of today at 30.55, less than 2% from where the stock closed. This would thus provide a quick stop on the downside if the market continues to roll over and drags more leading stocks down with it, including FB. Overall I would say that most stocks got hit with some strong selling volume over the past two days, and if the market is able to bounce off the 50-day line, stocks that saw less selling might have a better chance of rebounding as well. FB also announces earnings towards the latter part of the month, but expectations are low for the stock. So I would not expect any major downside reaction to earnings which have already been ratcheted downward before the stock came public in mid-May.

Facebook (FB) Gilmo Report Stock Chart

I didn’t care much for the volume selling in CoinStar (CSTR), not shown, as well as Mellanox Technologies (MLNX), shown below on a daily chart. Stocks that steadily move up over the course of a couple of weeks only to give up most of those gains in just three days strike me as less-than-desirable, so it is back to the drawing board on both CSTR and MLNX. Both are pulling back to the tops of prior bases, and in MLNX’s case it pulled back below its alleged “buy point” at 67.30. But in reality it has simply pulled into its “breakout zone” as I’ve highlighted on the chart. It may be possible to step in and buy MLNX shares here with the idea that it should hold the 50-day moving average at around 63.08, about 5% lower. MLNX announces earnings next week, so buying into the stock here would mean I would want to see it jack higher over the next four days going into earnings, otherwise one is simply playing “earnings roulette.” With the company’s products gaining broader acceptance, it may be that the company is set for an upside earnings surprise. If one wants to see this pullback in MLNX or the pullback in CSTR as a buying opportunity, it may make sense to take a measured, smaller position rather than trying to be too aggressive.

Mellanox Technologies (MLNX) Gilmo Report Stock Chart

The bottom line is that two days of heavy selling in some leading stocks have made the long side a bit dicey, but it doesn’t necessarily mean that one can make money shorting stocks in what strikes me as a clear whip-saw trend within an upside trend channel, as we saw on the NASDAQ chart at the beginning of this report. Thus I would lean towards keeping my powder dry as we let the market sort things out here in the middle of a hot, dry summer. June follow-throughs tend to fail, so it may be that the market is able to find better traction as we progress into August, a month where I’ve seen many follow-throughs work, usually when most are least expecting one. 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

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