The Gilmo Report

May 13, 2012

May 13, 2012


From the looks of the NASDAQ Composite Index daily chart below one could see the market as either stodgily holding support at the 2900 level despite taking two news-related broadsides that looked ready to sink the major market indexes, or as simply building an inverted “bear flag” as the indexes remain locked below the late April lows after under-cutting them earlier in the week. On a positive note, the French and Greek elections at the outset of the week followed by the Thursday after-hours announcement of a $2 billion credit derivatives loss on the books of J.P. Morgan (JPM) both failed to send the market into a downward spiral through near-term support. The market has an unstable feel to it as investors don’t seem entirely sure how to interpret the situation. Is JPM a “one-off” or is it symptomatic of potentially broader, systemic issues in the financial system? While bad news this week failed to kill the market, the market also has not shown much in the way of a revival after twice testing the lows earlier in the week. Friday’s action saw the NASDAQ stall below the 2950 level, but objectively the index is in what one could consider the fourth or at least third day of a rally attempt, making a follow-through day on Monday a clear possibility, oddly enough. The real issue in this regard, however, is that more leading stocks are breaking down rather than setting up in bases, so it is difficult to see where the seeds are being planted for another rally phase in this market.

NASDAQ Gilmo Report Stock Chart

I would expect to see any resurgent rally in the market be led by big leading stocks coming out of second-stage bases, but we can see that the biggest of the big-stock leaders in this market, Apple (AAPL), still lies in violation of its 50-day moving average. In fact, AAPL is starting to “live” under its 50-day moving average as it finds temporary support at the 65-day exponential moving average, the black moving average line on the daily chart, below. We can see that on Thursday buying interest dried up precipitously, and while selling volume on Friday was 42% below average it was still a pick-up from the previous day. In general, as AAPL sits here just under the 50-day line, it appears that both buyers and sellers are hesitant to make any concerted moves, and it remains to be seen to which side this current little sideways movement over the past week ends up resolving itself. I’m still looking for AAPL to at least undercut the 555 low it put in at the end of April just before gapping up on a very false and not-so-buyable gap-up move after announcing blow-out earnings at the end of April. The crowd continues to love AAPL, but I am not so sure that AAPL loves the crowd, and with the stock violating its 50-day moving average, it is a technical sell.

Apple (AAPL) Gilmo Report Stock Chart

While AAPL has its issues, the other big-stock leader in this market that has had a very similar and steep upside ascent since breaking out in January and which has run into problems in April/May is (PCLN). Despite Expedia (EXPE) and recent new-issue Trip Advisor (TRIP) gapping up strongly on earnings, PCLN slumped lower after announcing earnings after Thursday, and in fact has now violated its 50-day moving average after first violating its 10-day moving average in mid-April, similar to AAPL. Unlike AAPL, however, PCLN has undercut its late April low which sets up the possibility of the stock trying to rally from here and form a possible double-bottom base, but the way volume has picked up sharply as the stock has plummeted below the 50-day moving average doesn’t seem to argue for a quick recovery. Technically, PCLN is a sell, and has been a sell since it violated its 10-day moving average back in April. If there is to be another buy signal in PCLN, or AAPL for that matter, then that will depend on how these stocks go about building potential new bases or whether they simply continue to break down further. All I know is that based on the current real-time technical evidence, neither of these stocks is a buy. (PCLN Gilmo Report Stock Chart

Last weekend I discussed some short-sale ideas, including CF Industries (CF), shown below on a daily chart. CF hit my initial downside target on Friday as it gapped down to the 200-day moving average. My own experience with CF was very positive, aside from one little glitch caused by the fact that I will often set an alert at the point where I think a stock will undercut and bounce, in this case the 200-day moving average at 167.42. I set my alert at 167.80, and the stock dropped down to 168.10, just 25 cents below the 168.35 low from early March and 30 cents above my alert, before bouncing higher. This cost me a dollar or two as I covered my position once I noticed that it wasn’t going to trigger my alert, but I’m not going to complain about a quick profit in hand on the short side here. Now I would look for CF to try and bounce up to possible resistance at the lows of its prior base in the 180 price area, where the 50-day line might perhaps meet up with the stock as it continues to roll over. Therefore, 180 up to the 50-day line, currently at 184.50, a 2-3% wide “short-sale zone,” is where I would prefer to come after CF on the short side again, although a weak, low-volume or wedging bounce off the 200-day line could also bring me in earlier, so that is something to watch for.

CF Industries (CF) Gilmo Report Stock Chart

Cisco Systems’ (CSCO) earnings announcement Wednesday after the close sparked fears of a tech slowdown, and this weighed heavily on the “Power Trio” of big cloud stocks (CRM), F5 Networks (FFIV) and VMware (VMW), all of which got smacked on Thursday. CRM took the most heat, as we see on its daily chart below, and members may recall that I indicated that the stock looked ready to bust its 50-day moving average given the weakness in its cousins FFIV and VMW which were both already living under their 50-day lines. CRM did not quite get to its 200-day moving average at 129.84 as it undercut the early March low and attempt to bounce back up into the 140 price level, which is where I see near-term resistance for the stock on the upside. CRM is expected to announce earnings this coming Thursday, so if one was nimble enough to hit CRM right on the open on Thursday and is able to build up a profit cushion in the stock as a short-sale going into the earnings announcement, my bet would be that the stock gets hit on earnings. But I would still use the 200-day moving average as a point to take profits for certain if the stock falls to that level before earnings, so don’t get caught sleeping. (CRM) Gilmo Report Stock Chart

F5 Networks (FFIV) held up much better than CRM as well as VMW, not shown, which also got smacked very nicely on Thursday much like CRM. It appears that the CSCO earnings were seen as worse for cloud-related software names and less so for FFIV, which found support at the top of the short sideways consolidation that formed just before the stock gapped up on earnings in mid-April. FFIV is a competitor with CSCO, and for the most part eats CSCO’s lunch within the space in which they compete, so perhaps CSCO’s floundering is seen as a sign of FFIV’s continued dominance. Nevertheless, FFIV is still very much in play and I would use any bump back up towards the 50-day line at 130.35 to short the stock, using that as a guide for my upside stop. FFIV is probably more related to Rackspace Holdings (RAX), which uses FFIV’s application delivery controllers in its “RackConnect” service, and RAX recently gapped-down on huge volume following its earnings announcement this past Monday after the close. If RAX is an FFIV customer, does its slowdown bode poorly for FFIV? The best answer to that question is to simply let price/volume action remain the final arbiter.

F5 Networks (FFIV) Gilmo Report Stock Chart

Below we can see RAX’s daily chart and the huge-volume gap-down that occurred on Tuesday but found some support off the lows as the stock closed near the peak of the daily trading range, excluding the gap-down that took the stock from just above its 50-day moving average to well below that line. I suppose I would love to see RAX rally up into the 50-day simple moving average right around 56 or at least into the 65-day exponential moving average at 55.24. One could color in the area between the 50-day simple and 65-day exponential moving averages to come up with an upside “zone” of resistance, but I note that the stock is quickly running out of gas on its dead-cat bounce attempt over the past three days. Thus there are two ways to approach this, the first being to lay back and hope for the stock to rally up further towards the 55 price level, which would probably be considered “optimal” for selling the stock short. But weak stocks often stay weak, and it is the weakest that you want to go after on the short side, Thus we might consider the intra-day highs of the past few days as near-term resistance, shorting the stock here while using those highs at 53.37 as a guide for an upside stop.


One of the most interesting charts out there is that of Monster Beverage (MNST), which has experienced some wild action over the past couple of weeks and about which I have received a number of questions. Frankly, if I were long MNST on the day that rumors of a buyout by Coca-Cola (KO) surfaced two weeks ago, I would have sold into that crazy move. That move dissipated rather quickly once KO denied the rumor, and thus some overhead supply is created in the pattern as a result of the players who bought into the rumor. Technically, MNST did have a buyable gap-up move as it thrust up and out of the slow, methodical uptrend channel it has been hanging out in since breaking out on a buyable gap-up move back in January, as we see in the daily chart below. Thursday’s earnings-related gap-up closed at the lows of the day, however, and that might be due to overhead sellers who bought on the rumor day and are looking to wipe the egg off of their face by getting out close to even. MNST is still holding the intra-day low of Thursday’s gap-up range, but given the state of the general market I would use a very tight stop here, e.g., the gap-up low of 71.01 plus 2% max on the downside if I wanted to try and hold onto the stock.

Monster Beverage (MNST) Gilmo Report Stock Chart

I have not cared for the long side of this market now for the past week-and-a-half, and the market has not provided any evidence so far to refute my current views. The market remains in a correction, and given the extreme news-orientation in the market is subject to both volatility and screwy action. As well, the question as to whether JPM’s erroneous “hedging” activities in the credit derivatives market represent the proverbial tip of the iceberg in terms of the vulnerability of these “too-big-to-fail” banks remains wide open. But this sort of news could work both ways, as a breakdown in the financial sector that infects the rest of the market could bring the Fed in with QE3, which could result in some index-related fireworks in the form of wide swings in the market. I recall in late 2008, when the market began to bust apart on a severe bear market leg, 400 point moves in the Dow Jones Industrials Index both ways became commonplace, even as the market was blowing apart. That is why, for those of you who wish to venture on the short side of this current market correction, I would remind you of the danger of shorting and the need to remain vigilant. My view is that if you cannot keep a close eye on things then you should not be shorting stocks, since volatility is always an issue when playing the downside. Stocks can drop fast, as we saw CRM display on Thursday, but in bear environments the snap-back rallies can be as severe, and one must be nimble. Therefore, cash is as good a place to be as any for those who don’t have the psychological and intestinal fortitude to short stocks. 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

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. ©2008-2019 Gil Morales & Company, LLC. All rights reserved.