The Gilmo Report

July 25, 2012

July 25, 2012

It was exactly one week ago in my July 17th report that I discussed my preference to sell into a market rally at that point as opposed to buying into one. Over the weekend, in my July 22nd report I observed that the evidence appeared to argue for further market downside after last Thursday’s short-term peak. And now by mid-week this week we see the indexes down sharply for the week as the NASDAQ Composite Index approaches its 200-day moving average, as we see in its daily chart, below. I suppose the beauty of Technical Analysis 101 is that we can draw all kinds of interesting trend lines on the charts to “figure out” what’s going on here. One could argue that the market has broken down below its uptrend channel low, while some could draw a trendline (the green one) on the chart to show that the market is following and holding above another rising-lows uptrend line. This all in turn is occurring near the 200-day moving average as the NASDAQ sinks ever closer to the line. Are we at the lows of the market’s choppy range, or in position to break to new lows? Obviously, the next few days will reveal this, but for now I see no reason to be long stocks, having come into the week in cash, as I discussed over the weekend.


In the process of raising cash, over the weekend I discussed unloading Apple (AAPL) shares ahead of the earnings announcement, as well as the fact that I didn’t see the cup-with-handle formation as being quite so sound. I surmised that this might represent a tiny clue that the stock’s reaction to this week’s earnings announcement may not be so positive (July 22nd report), and so it wasn’t. AAPL missed analysts’ earnings estimates by about a dollar and gapped down after-hours Tuesday, opening up in the mid-570 price area today to set up a potential late-stage failed-base type of short-sale set-up. You could almost see this one coming, with everybody pretty much convinced that the AAPL growth story was fully intact and bullet-proof at 11 times forward earnings estimates. It was all in the pattern, perhaps. AAPL appeared to pick up some value buyers as it churned around and closed in the middle of its trading range. But by the end of the day it was just a big gap-down on huge volume as the stock potentially fails from a late-stage base. For now I consider AAPL potentially shortable, using the 50-day line at 580.55 as a quick upside stop. Usually a break like this will move further towards the 200-day moving average, which could coincide with a breach of the 522.18 low of mid-May. For now I certainly would not be interested in buying the stock unless it was able to stage a “shake-out and break-out” by turning back to the upside and clearing the top of the handle in its base.

Apple (<a href=AAPL) Gilmo Report Stock Chart" title="Apple (AAPL) \" />

Questcor Pharmaceuticals (QCOR) was discussed as a short-sale target in my weekend report (July 22nd), and if one did venture to take a measured short position going into earnings yesterday after the close then one was amply rewarded after the stock blew apart yesterday and today. As I discussed over the weekend, QCOR qualifies as a late-stage, failed-base short-sale set-up, and this break of the 200-day line took the stock down far enough to undercut the late April and early May lows at 38 and 37.77. But this break seems severe enough to consider that the stock may head for the actual lows of its prior base in the 32.83 to 34.65 range, more than 10% lower than where it closed today. There is potential for QCOR to rally back up into the 200-day moving average at 40.92, but I would tend to look at that as a shorting opportunity to either initiate a position or add to an existing position. Yesterday I wanted to put out a 10% short position in QCOR before earnings were announced but could not borrow the stock, so I hope Gilmo members were luckier than I in being able to borrow shares.

Questcor Pharmaceuticals (<a href=QCOR) Gilmo Report Stock Chart" title="Questcor Pharmaceuticals (QCOR) \" />

Despite three days of sharp general market weakness, the other short-sale target I discussed over the weekend, Fossil (FOSL), has held relatively flat, as we see on its daily chart, below. FOSL continues to build what is now long enough to consider a bear “pennant” rather than a bear “flag.” Another term I give this is “ledging,” or building a ledge from which the stock later “jumps” to its death, much like Zynga (ZNGA) is doing right now after-hours as I type this report. FOSL doesn’t report earnings until August 7th, which is just under two weeks from today. But it wouldn’t surprise me to see it “jump off” the ledge here and break down before earnings, and I have no problem putting out a short position here with the idea that it should hold below yesterday’s high at 69.16 just to keep it on a tight leash. If the general market continues lower from here, FOSL could get dragged down with it. In the short-term I would look for the stock to at least test the lows of this current downward-trending bear pennant channel that I’ve outlined on the daily chart below, roughly at the 60 price level.

Fossil (<a href=FOSL) Gilmo Report Stock Chart" title="Fossil (FOSL) \" />

Providing proof that former leading stocks can break down before earnings are announced is big-stock NASDAQ online travel agent (PCLN), shown below on a daily chart. PCLN gapped down and through its 50-day moving average today on heavy selling volume after TripAdvisor (TRIP) got clocked on earnings and took the group with it, including Expedia (EXP). Another big leader breaking down this week along with AAPL, after we saw Intuitive Surgical (ISRG) and Chipotle Mexican Grill (CMG) get slammed last week, doesn’t strike me as the makings of a new bull trend in the market any time soon. I’m not sure if I would short PCLN here, although if one were willing to keep a maximum 3-5% stop on the upside one could look for a break to the 200-day moving average that also undercuts the early June low at 603.49. This action in PCLN mostly strikes me as another negative for the market, as well as another reason to remain away from the long side. (<a href=PCLN) Gilmo Report Stock Chart" title=" (PCLN) \" />

If you’re going to make money on the short side in this market, assuming it will move lower from here, then I would guess that all you would need to be is short AAPL looking for a move towards the 522.18 low in the base which coincides with where the 200-day moving average is currently running up towards, if you take another look at the AAPL chart further above. If the stock stops you out at the 50-day moving average, then you are out quickly. But if the trade works, that low is your profit objective. After AAPL, we already know that QCOR worked out this week for those able to borrow the stock, while FOSL remains within a bear pennant. We’ll see how FOSL pans out as its August 7th earnings report date approaches. The beauty of AAPL as a short-sale target as I see it is its huge liquidity and high share price. You can get in very heavy very quickly in AAPL and are able to exit just as quickly, so as a short-sale target this type of liquidity is what I prefer to work with, especially in this crazy market environment, hence this is my preferred short-sale target for now, pending further evidence to the contrary. The market is also in a position to either bounce off the 200-day line or break through it, so ultimate fluidity and liquidity is called for. 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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