The Gilmo Report

June 13, 2012

June 13, 2012


The chart of the NASDAQ Composite Index below illustrates quite nicely the sideways “chop zone” that the market has been trapped in over the past week. Even what looked like a very positive gap-up opening on Monday morning when a “Spain deal” was announced turned quite sour by the end of the day as the market reversed on heavier volume than the prior day. While this may have looked bad as it was occurring going into Monday’s close, the reality is that while volume did pick up relative to Friday it still remained well below average, hence it was not what one would term a “high-volume reversal” and so lacked any decisiveness. The indecision extended into Tuesday, yesterday, when the market reversed course and closed up strongly on increased volume from the prior day, but still less than the 50-day moving average of daily trading volume. Today volume picked up yet again, but this time to the downside as the market reversed in “distributive” fashion despite volume coming in below average. With peak daily volume for the week on the downside today, one might say that the evidence argues for the market rolling over for a retest of its 200-day moving average. As the situation in Europe has gotten so bad that nobody even thinks about Greece any more, as not only Spain but Italy begin to loom large on the immediate horizon, there is always the potential for the Fed to step in with something. As well, we must keep in the back of our heads the fact that the market is still in the midst of an eight-day rally attempt, and an upside follow-through day is always a possibility.

NASDAQ Gilmo Report Stock Chart

The action of gold might provide a clue as it has been able to rally over the past four days and more or less make up for its big downside break of five trading days ago when Fed Chairman Bernanke didn’t give any indication of a green light for QE3. Volume on the SPDR Gold Shares (GLD), shown below on a daily chart, was well below average as the GLD was able to get back above its 50-day moving average, but I noted that gold futures saw increased volume today on the nearest futures contract. The bottom line is that gold is rallying while stocks are sinking as gold recovers back up to its near-term highs. I would like to see a strong move up through the 1642 high as a short-term trendline breakout and buy signal. For now it would be constructive to see the yellow metal hold the 50-day line here for a few days before trying to move higher, which could seat up the potential for a pocket pivot type of move up off of the 50-day moving average that could also lead to a trendline breakout. While it has been possible to nibble at gold along the lows as I theorized over two weeks ago, gold has yet to start a truly playable and pyramidable (anew word for the dictionary) trend, and that is what I am most interested in playing for when it occurs.

SPDR Gold Shares (GLD Gilmo Report Stock Chart

Apple (AAPL) looked fairly negative on Monday as it appeared to lead the market’s reversal, selling off on heavier volume that also had the look of a “reverse” pocket pivot volume signature, although I don’t necessarily rely on such “reverse” pocket pivot type action as a short-selling tool. I was looking for an upside pocket pivot move going up through the 50-day moving average, which looked to be the case early in the day on Monday, but when the stock failed to hold the 50-day moving average that theory was out the window. The key point here from my perspective is that while AAPL showed better upside volume relative to downside volume since rallying off the 528 low of a couple of weeks ago, as we see on the daily chart below, the stock has been wedging, e.g., rallying on lighter and lighter volume, up to the 50-day moving average. This requires that the wedge be “corrected” by having the stock come down from the 50-day moving average. How far probably depends to a high degree on what the general market is going to do. If we roll over, I think AAPL goes, as the last of the strongest leaders get taken down. Therefore, I can see shorting AAPL here with the idea of using the 50-day moving average at 581.10 as an upside stop. The stock could correct to the 200-day line at 474.91, or just over 26% from its recent 644 high, a correction that would be within the range of normal bear market corrections for leading stocks.

Apple (AAPL) Gilmo Report Stock Chart

With AAPL the strategy here is simple: if the market is going to roll, it will likely take down the remaining leaders that have held up well, such as AAPL. At the very least this could involve a test of the recent 528 low to be followed by a test of the 200-day moving average. In a sense it is something of a concentrated short on the NASDAQ 100 and as far as the short side gets right now that is as far as I go with short ideas. In this environment, if I’m interested in playing the potential for new lows in the market, shorting AAPL is the simplest way to do it, particularly given its position on the chart after failing at the 50-day moving average on a wedging rally attempt. Keep it simple and keep it very liquid.

A handful of stocks are trying to hang in there, and Mellanox Technologies (MLNX), which we’ve been following for the past couple of weeks, actually staged a buyable gap-up on Monday, as we see on the daily chart below. The weight of the market, however, keeps a lid on the stock as it reversed today rather hard on above-average volume after stalling on the buyable gap-up and closing near the intra-day lows that day as well. Obviously, this isn’t ready given the market conditions and lack of a follow-through day in the market, and my inclination today was to take short-term profits and back away.

Mellanox Technologies (MLNX) Gilmo Report Stock Chart

The bottom line is that the market remains in a chop zone here just under resistance at 2882 on the NASDAQ Composite Index where the May 29th and June 11th highs are, and we are at a point where the market rolls over or tries to follow through. Throw in the potential for QE madness and you have an essentially unstable market. The action over the past three days has been tipping back to the short side of the market, but right here, right now, I’m more inclined to play it by shorting AAPL under the 50-day moving average. This would be on the theory that a new leg down in the general market, specifically the NASDAQ Composite Index, will take AAPL with it. I noted today that two of our prior short-sale targets, CF Industries (CF) and (CRM), are both just dipping below their 200-day moving averages, as the daily chart of CF illustrates below. CF traded higher volume today while CRM did not, and CF has had more time to move along its 200-day line and work off and consolidate the prior sharp downside move through the 50-day moving average in early May. Thus CF may be in a “riper” position to short here. It too is liquid, and from here a 3% upside stop gets you out a hair above the 200-day moving average.

CF Industries (CF) Gilmo Report Stock Chart

The situation remains fluid, and I am comfortable leaning towards the short side here, but as I’ve indicated in recent reports, cash is still a viable alternative in this crazy QE and news-driven environment where investors face a more random “fat tail” distribution of probabilities and potential outcomes, and as a matter of fact that is where I sit right now as I wait for a window of opportunity to open up here. I still have my list of long ideas on my rather short Buy Watch List like EQIX, MLNX, WWWW, SXCI, CERN, FB, etc., but I’m not giving them much chance of launching any time soon given the general market action over the last three days which at the very least implies that we are in a “chop zone” as the market figures out where it wants to go next. Right now I lean towards deploying on the short side, and an up opening tomorrow would be something to look for in this regard. 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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