The Gilmo Report

July 13, 2011

July 13, 2011

The QE2 gold rush is on. The pre-release of Fed meeting minutes on Tuesday show that some members still advocate further monetary stimulus. Then Fed Chairman Bernanke came in this morning and made comments alluding to the Fed leaving the door wide open for further easy-money policies, e.g., QE3 in some form or another. This sparked a strong general market rally in the morning that fizzled out into the close. The market started out the week suffering a couple of days of heavy selling, as can be seen on the daily chart of the NASDAQ Composite, below. But as I see it the market was fully entitled to this sell-off, even a slightly scary one on the news of Italian debt fears over the weekend, given its extremely steep rise off the 200-day moving average since mid-June. In this context, the pullback simply needs to be watched to see how well the market holds up here. The trick here is that with many leaders not necessarily trading at or near optimal buy points, what does one buy? In my view that leads us towards any vehicle that will enable us to surf the next QE wave as that develops, while maintaining a certain comfort level in the face of so much global financial uncertainty.

NASDAQ Composite Gilmo Report Chart

In my view, and as my recent comments have reflected, it remained clear that one way or another the politicians will always end up doing the only thing they know how to do, which is continue the whole borrow-and-spend, fiat money-printing operation given that they lack the creative will to do anything else that addresses the problem. The problem of course is simply a global financial system that is awash in debt and fiat currencies. And given that we know QE2 did little to spur real economic growth, QE3 could simply end up being the big bid that stock sellers hit. With this in mind, and as I have been discussing in recent reports, the critical buy point for gold would emerge when the yellow metal stages a bona fide breakout from its recent big, sideways consolidation since hitting an intermediate-term top on May 2nd. Yesterday the SPDR Gold Shares ETF (GLD), cleared the 151.86 peak in the base on huge volume that was 53% above-average, following up on the prior day’s pocket pivot volume signature that was itself 29% above-average. This was an easy buy yesterday on the breakout if you were paying attention, and the GLD is still well within 5% of the 151.86 breakout buy point, as can be seen on the daily chart below. Today’s gap up move stalled just a bit, so a small pullback might be in order.

SPDR Gold Shares ETF (GLD) Gilmo Report Chart

Meanwhile, with gold breaking out, one could easily infer that silver was also likely to move in sympathy with the yellow metal, and in fact the iShares Silver Trust (SLV), shown below on a daily chart, staged what could be interpreted as a pocket pivot buy point at and around the 50-day moving average yesterday. Today the SLV confirmed the pocket pivot by gapping up on huge volume and staging another gap-up type of pocket pivot well up through and beyond the 50-day moving average that closed near the highs; very positive action in my view. There is a good possibility that we may very well be seeing the initial phases of a very playable trend in silver and gold going forward from here as long as these moves over the past two days hold up. Certainly, the breakout level of 151.86 on the GLD and the 50-day moving average on the SLV at 35.16, roughly, would be quick downside stop-out levels on either. The beauty of playing the metals here as QE wave-riders is that with earnings season coming into full swing for stocks, the “earnings roulette” factor creates perhaps some unwanted risk. The worst thing that can happen to any investor is to start building a position in a stock right in the middle of earnings season and have the whole thing derailed on a weak report. The SLV and the GLD don’t have earnings reports, thus are quite immune to such risk. I would have liked to have seen much bigger volume on the SLV, but today’s action is a pocket pivot buy point, so we must take the evidence on its face for now.

iShares Silver Trust (SLV) Gilmo Report Chart

I’m not all that interested in delving into too many long ideas since the market’s action here is somewhat feeble and most leading stocks are nowhere near optimal buy points. A number of the stocks I’ve mentioned in recent reports have been sluggish, at best, such as NTGR, ILMN, RAX, etc. As well, a number of potential pocket pivot moves today fizzled out along with the market, which was somewhat disappointing. For example, take a stock that I tend to like in any continued market rally given its status as newer merchandise, Fusion I/O, Inc. (FIO). This is a 24-day-old IPO that has been building a tight flag here for roughly the past 2½ weeks. The stock looked like it was headed for an interesting pocket pivot move as it began trading up on strong volume earlier this morning, getting above the 10-day moving average and then the 33 price level. Volume was also on track to meet the requirements for a pocket pivot volume signature which it ultimately met. But by the close the price-move component of the pocket pivot was not there as the stock faded back down below the 10-day moving average. Disappointing to say the least.

Fusion I/O, Inc. (FIO).  Gilmo Report Chart

Among the strongest of the new merchandise stocks that I have liked in recent reports, #2 social-networking site LinkedIn Corp. (LNKD), performed in stellar fashion today as it continued to rally higher on another strong pocket pivot volume signature. This is not a pocket pivot buy point since the stock is trading well above its 10-day moving average. But I wouild say that since the stock hasn’t been trading long enough to have a 50-day moving average of volume (what we use to calculate average daily trading volume), the fact that today’s volume met the volume requirements for a pocket pivot while the stock made a move into all-time high closing price ground is quite constructive. Whether this strong technical action will have to deal with the weight of a sloppy general market remains to be seen. But for now we can simply go with last week’s pocket pivot buy point, which I discussed in my report of July 10th, and today’s strong action in the face of a flakey and indecisive general market. Right now the only reference one has for a selling guide on LNKD is the 10-day line at 95.86, so that would be my ultimate downside selling guide for any stock bought as the result of the pocket pivot buy point of last Friday as I discussed in my weekend report.

LinkedIn Corp. (LNKD) Gilmo Report Chart

Sequans Communications (SQNS) had a nice, sharp move up the right side of a very steep and very narrow cup formation; almost a straight-up-and-straight-down type of pattern that presents some difficulties in my interpretation. If this were to develop into a cup-with-hande formation, a narrow one but a C&H nevertheless, I would expect it to show some tight price action with volume drying up. What we have instead, as you can see from the daily chart below, is volume drying up with price action remaining somewhat volatile. If you have this from the pocket pivot buy point of two weeks ago, keep this in mind as the stock could simply head back to the lows and build a double-bottom. A lot of this will depend on what the general market does, and it acts like it is in a big muddy area right here, making owning stocks a potentially choppy proposition.

Sequans Communications (SQNS) Gilmo Report Chart

The window of opportunity in Coffee Holdings, Inc. (JVA) opened wide and since then has slammed shut as far as I’m concerned, and we can now look at JVA as an interesting rocket stock to study. It didn’t quite get high enough to qualify as a “rocket stock” short-sale set-up as Dr. K and I discuss in Chapter 6 our book, “Trade Like an O’Neil Disciple,” but it got close. As I wrote in my report of this past weekend, anyone who had bought the pocket pivot that I mentioned in my report of July 3rd should consider selling into what appeared to be a climactic top by this past weekend, and by Monday was a climactic top in fact! Anyone who tried to be a pig and ignored the obvious evidence of a climax top ended up getting slaughtered, as least figuratively. A great example for study, in my view.

Coffee Holdings, Inc. (JVA) Gilmo Report Chart

I’m going to be frank here, or rather Gil, and put it bluntly: The long side of this market with respect to stocks is murky and fraught with danger. If something is working for you, such as LNKD, then holding a position is fine until your clearly-in-mind stop-loss price is hit. LNKD could always turn out to be one of those stocks that acts well and works its way higher even as the general market goes nowhere. Thus if you act strictly according to a pre-set stop-loss level, such as a violation of the 10-day moving average, you give yourself the chance of being right while limiting your risk to whatever acceptable point you can handle, which is then determined by position size. So figure out what is going to keep you up at night and go from there. Otherwise the only clear trends and buyable vehicles I see are the GLD and the SLV, and their associated leveraged siblings, the DGP and the AGQ. Precious metals have the safety play hedge in them that perhaps stocks don’t, but keep in mind that when the stock market sells off persistently they will come down as well, so stops in the GLD and SLV, with a maximum downside stop to be defined by a violation of the 50-day moving average is the only way to play these while giving yourself a chance at being right and catching a decent trend in the yellow and white metals.

Meanwhile, should the market continue to weaken, the short side could come back into play here, and we will have a better idea of this by the weekend. News regarding the U.S. debt ceiling and other positive developments in the midst of various news “crises,” as well as the crises themselves, could make the market a very choppy affair on both the long and the short side. Hence the clear trend in SLV and GLD, at least for now, remains most attractive.

Gil Morales

CEO & Principal, Gil Morales & Company, LLC

Principal and Managing Director, MoKa Investors, LLC

At the time of this writing, of the stocks mentioned in this report, Gil Morales, MoKa Investors, LLC, and/or Gil Morales & Company, LLC held positions in AGQ,DGP, FIO, GLD, and LNKD, though positions are subject to change at any time and without notice. Gil Morales & Company, LLC (“GMC”), 8033 Sunset Boulevard, Suite 830, Los Angeles, California, 90046. GMC is a Registered Investment Adviser. This information is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to GMC, its members, officers, directors, employees, customers, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Gil Morales & Company, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2011 Gil Morales & Company, LLC. All rights reserved.

Gil Morales & Company, LLC (“GMC”), 8033 Sunset Boulevard, Suite 830, Los Angeles, California, 90046. GMC is a Registered Investment Adviser. This information is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to GMC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Gil Morales & Company, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.