The Gilmo Report

June 10, 2012

June 10, 2012


Technically the market remains in a sort of “no-man’s land” as it remains in a correction while mounting what is so far a five-day rally off the lows with the potential for a follow-through day to show up at any time. As the NASDAQ Composite Index daily chart below shows, the index is pushing up towards an area of upside resistance between the highs of two Monday’s ago and the 2900 level. On Thursday it turned tail and reversed on lighter volume as it felt the initial effects of upside resistance. But it was interesting to see the index “melt up” on Friday as it reversed to the upside, despite the fact that the situation in Europe remains unsettled as Eurocrats meet over the weekend to come up with a bailout plan for the latest wobbling sovereign, Spain. This also occurred as bond-rating agency Moody’s is looking to downgrade a squadron of banks as early as this coming week. Meanwhile France’s new leader lowers the retirement age from 62 to 60, proving that nanny-state Eurocrats still don’t get it. Despite the news flow, the market did not blow to pieces this week as many had predicted last weekend after the NASDAQ Composite and S&P 500 Indexes both busted their 200-day moving averages in what was cited as a “technical sell signal.” Of course, this was quite obvious to the crowd, setting up this week’s rally attempt. From a practical standpoint, there is very little in the way of short-sale or long side set-ups to act on.

NASDAQ Gilmo Report Stock Chart

Fed Chief Bernanke also put the kibosh on QE3 during his testimony on Thursday, and this sent gold reeling to the downside as it reversed and filled the huge upside gap move it had two Friday’s ago when the exceptionally weak jobs number gave rise, allegedly, to visions of QE3. Looking at the daily chart of the SPDR Gold Shares (GLD), below, gold remains well above the lows of eight days ago where I initially felt the GLD could be bought. Using the 155 level on the GLD as a trailing stop pushed me out of my gold ETF positions in the short-term, and I am now looking for a more pronounced move up through the 50-day moving average as the next potential buy signal for gold. If one still owns the ETF closer to the 150 level and remains profitable on the position, then I believe it can be held. The caveat is that it may take more time for gold to work off overhead resistance at the 50-day line and the 1640-1660 price level on the yellow metal futures before it can set up again and move higher. Even though QE3 is on the backburner for now, longer-tem I do not see how ECB and the Fed avoid money-printing activities of some sort in order to address continuing and looming sovereign insolvency issues.

SPDR Gold Shares (GLD Gilmo Report Stock Chart

Given the market’s status in “no-man’s land,” I consider that we are in more of a wait-and-see situation right now, although in my report of last Wednesday I indicated that I lean slightly towards the long side here despite the fact that only a small handful of constructive long ideas can be identified. Apple (AAPL) remains the strongest of the big-stock leaders, and has acted constructively over the past couple of weeks as I’ve discussed in recent reports. AAPL’s Relative Strength rating remains very strong at 96, and the stock did in fact managed to close above its 40-week moving average on the weekly chart, below. My view is that if the market does turn and follow through here, all you’ll need to own on the long side will be AAPL. If we consider its breakout in January of this year as a first-stage breakout, then its current nine-week base is a second-stage base, and in my experience stocks tend to have their strongest moves from second-stage bases. This is something to keep in mind here since on its daily chart, not shown, AAPL is just about half a percent below its 50-day moving average, and so is in position to stage a possible pocket pivot buy point if it can come up through the 50-day line on volume that exceeds 18,606,400 shares, the volume level of five days ago and the highest downside volume day in the pattern over the prior 10 days – watch for this.

Apple (AAPL) Gilmo Report Stock Chart

As discussed in my report of this past Wednesday, Israeli tech leader Mellanox Technologies (MLNX) also remains firmly entrenched on my buy watch list as it weathered a bit of market weakness on Thursday and then Friday morning to close up strongly for the week. Friday’s early morning sell-off took the stock down to its 20-day MA, as we see on the daily chart below, but selling interest remained quite light as the stock lifted back up to close at the same levels as Wednesday’s base breakout and pocket pivot buy point. MLNX remains one of my top picks on the long side should the market be able to sustain its current five-day rally off this past Monday’s early morning lows. MLNX trades about 540,000 shares a day on average, so it’s also a bit more volatile as a smaller stock that just barely meets my minimum in this regard. Like AAPL, however, it came out of an approximately six-month-long, first-stage base in January of this year, and this latest high, tight flag formation qualifies as a second-stage base. What impresses me most about MLNX is that even during a reasonably sharp market correction this thinner stock has held up better than even the “thickest” of big-cap leaders. It remains potentially buyable here.

Mellanox Technologies (MLNX) Gilmo Report Stock Chart

Equinix (EQIX) is another cloud-related name that also only recently emerged from a two-year-long base that extended back to January 2010. If we consider the breakout from this base through the 110 price level, roughly, as a first-stage breakout, then this current six-week consolidation would qualify as a second-stage base. EQIX showed some strong, pocket pivot volume support seven days ago on the chart at the end of May, but this was likely due to index rebalancing. Nevertheless, as we can see on the daily chart, the stock has held up very well as it counter-trends the general market over the past three weeks, making higher highs and higher lows as the general market indexes have done the opposite. When the market gets into trouble, stocks like EQIX with a 97 Relative Strength rating, as well as MLNX with its 99 RS rating and AAPL with its 96 RS rating, make it to the top of my buy watch list as stocks that have held up exceptionally well during a general market correction. EQIX is on the verge of a new-high breakout and should be monitored closely for a breakout from what is now a six-week base.

Equinix (EQIX) Gilmo Report Stock Chart

I received several emails on Friday asking whether Monster Beverage (MNST) had posted a continuation pocket pivot buy point on Friday. As we can see on the daily chart below, MNST is slightly extended from the 10-day moving average so that while this qualifies as a pocket pivot volume signature the fact that it is slightly extended from the 10-day line makes it a riskier proposition to buy. Recall that in my report of May 27th I pointed out MNST’s continuation pocket pivot buy point, and so far the stock has held above that buy point which offered a lower-risk buy point given that it came up through the 10-day moving average rather than starting from a point that is slightly extended from the 10-day line as Friday’s pocket pivot move was. The market’s current correction never really got to MNST, although you can see on the daily chart how the stock got a bit more “wobbly” during the market sell-off that began two months ago. If one has an existing position in MNST then I can see adding a little to your position on the basis of this slightly-extended pocket pivot buy point. But as an initial entry one must understand that the stock carries a bit more risk at these levels, although the stock sure looks like it is just champing at the bit to move higher.

Monster Beverage (MNST) Gilmo Report Stock Chart

Using any of my screening systems that use a Relative Strength indicator, such as HGS Investor® or MarketSmith® among systems available to the general public, I can run a screen for all stocks trading with a 95 Relative Strength or higher to come up with a nice list of 60-70 stocks that are going about the business of building what so far look like decent bases. Among these we see stocks like SXC Health Solutions (SXCI), shown below on a weekly chart, which recently merged in an accretive-to-earnings deal with Catalyst Health Solutions (CHSI), not shown, which is forming a similar type of base. I should also note that Cerner (CERN), not shown, is another medical stock forming a decent base currently. But getting back to SXCI I note that the stock did flash a pocket pivot buy point as it moved up through its 10-day moving average four days ago. So I consider it potentially buyable at current levels with the idea that it should not violate the 10-day line from here. Like the other long ideas I’ve discussed in this report, SXCI is also in what could be considered a second-stage base after breaking out of an approximately 11-month consolidation eight weeks ago.

SXC Health Solutions (SXCI) Gilmo Report Stock Chart

If the market is able to muster a follow-through day somewhere along this current rally attempt off of the lows of this past Monday, I know exactly where I want to go, and the small handful of ideas on my buy watch list currently should be sufficient to take initial action on the long side. In fact, based on some of the constructive action in certain stocks that I’ve been discussing in recent reports, I’ve already been nibbling on stocks like AAPL and MLNX at lower prices. Whether any meaningful upside progress can be made from here remains to be seen. Meanwhile, my list of prior short-sale targets isn’t showing me anything set up in an optimal short-sale position as most of these looked extended to the downside and hence in position to rally higher up in their chart patterns. Thus I tend to think that the action in individual stocks currently populating both my buy watch and short-sale target lists, when taken in the aggregate, argues for either some sort of continued market rally, with or without a follow-through day, or the possibility that we have entered a big “chop zone” that will see the market indexes chop sideways for a period of time as it goes nowhere.

With all of the current and potential sloshing of news coming out of Europe, the Middle East, China, and the U.S., the argument for a chop zone seems plausible. On the other hand, maybe by the time the futures open up on Sunday at 6 p.m. Eastern time, well after this report is posted on the internet, Spain and Greece will have fallen off the planet and we will see the market gap-down big. Or perhaps a bailout of Spain will have been agreed to, and the futures might gap up.

Perhaps, as well, the market begins to see a potential inflection point in U.S. economic policy as a result of a new administration coming into office in January 2013 to spark a “Romney Rally” that may not be unlike the “Reagan Rally” that began in April of 1980 following sharp 25.3% and 21.6% corrections in the NASDAQ Composite and S&P 500 Indexes, respectively, as we can see in the daily chart of the S&P 500 Index from 1980, below. That rally began in April of 1980 and was fairly steady off the market lows and carried just past the election before finally starting a correction in December of 1980. Notice also the widening swings in the index as the November election approached and market volatility increased. The potential for a “Romney Rally” is one factor that must be considered, since with all the extremely accommodative monetary policy out there, a shift in governmental economic policy that is viewed as favorable for capital formation and business growth could be the spark that ignites it all into one big bubble rally.


On an intra-day basis, this past Monday the S&P 500 was down about 11% from its April 2nd peak of 1442.38 while the NASDAQ Composite was down about 13% from its 3134.17 peak of March 27th. So if one were to try and make apples to apples comparisons between 1980 and today on the basis of some of the economic and political parallels, we could also look for a steeper correction from here. The point of all this discourse is that in summation, all possibilities remain on the table currently, and there is no reason to lean too far one way or the other, although I tend to think that the short side of this market is probably played out in the short-term. But things could set up in the next week if this rally begins to falter, so short-sale target names I’ve discussed in previous reports during May and June should be monitored for rallies into logical areas of resistance. Otherwise, stocks that are in position to issue potential buy points, or which already have, would be your “go to” names in the event of a market follow-through.

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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