The Gilmo Report

May 18, 2011

May 18, 2011

The market pulled down and tested logical support at the 50-day moving average on the S&P 500 Index (not shown), and the NASDAQ Composite Index yesterday morning, shown below on a daily chart before embarking on a two-day rally off the lows. The Fed released the minutes of their last meeting today, which spoke in tongues about selling assets like mortgage bonds that the Fed is currently carrying on its balance sheet sooner and faster but raising the target for the federal funds rate later and more slowly. Essentially they articulated the idea that they will juggle all of these activities around for the purpose of achieving something of a “QE soft-landing.” Given the Fed’s historical record of achieving soft-landings of any kind, much less a soft-landing after massive QE stimulus, it did not appear that the market was all that enthusiastic as volume came in much lighter compared to yesterday despite the 1.14% upside move in the NASDAQ. The rally over the past two days, objectively, is quite logical given the position of the major market indexes at their respective 50-day lines over the past two days. As well, all we know for sure is that we are in day two of a rally attempt, and so, as I wrote over the weekend, there is no reason to take a stand as a bull or a bear here, but rather to simply “take a sit,” and see how things develop.

NASDAQ Composite Index Gilmo Report Chart


It may be that the dollar is the thing to watch here as it has consolidated its recent sharp move up off the lows of over two weeks ago and holds its 50-day moving average on a 3-day pullback, as we see on the daily chart of the U.S. Dollar Index below. The market’s pullback off the peak has so far been synchronized with the move in the dollar off its own lows, although the market’s move has not been as steep to the downside as the dollar’s rally has been off the lows just under the 73 price level on the chart below. The Fed today intimated that QE3 is off the table, but that doesn’t mean they don’t have other ways of injecting liquidity into the system hiding up their sleeves. Speculating about what they may or may not or can or cannot do won’t help, but I think the action of the dollar will be the telling influence here. For the most part, the past two days have consisted of mostly reaction rallies and bounces in a lot of leading stocks as well as commodities, as the dollar has taken a breather, and after many of these leaders and commodities have come off sharply from their recent highs. While we haven’t seen a decisive break to the downside in the market, we also haven’t seen a meaningful “all clear” signal show up yet.

U.S. Dollar Index Gilmo Report Chart

Both gold and silver have appeared over the past few days to be plumbing for lows in their chart patterns, and as we see in the daily chart of the SPDR Gold Shares ETF (GLD), below, gold is holding its prior breakout through the $140 price level on the GLD as well as its 50-day moving average. While both gold and silver may be in the lower reaches of their current pullbacks, it is not clear to me at this point that they are on the verge of any kind of significant recovery rallies just yet – downside risk still exists. Silver could drift below the $30 level given its position below its 50-day moving average and above its 200-day moving average, but gold, as we see in the GLD chart, is so far holding its 50-day moving average which it has tended to follow during periods of upside trends in the yellow metal and thus offers a better risk-management proposition as I see it. Thus, if one is going to try and take a stab at the metals here, gold provides a much easier reference point for a downside stop given that it is just above its 50-day moving average. In any case, I tend to think that it will still take some time for both gold and silver to consoidate, heal, and build new consolidations from which they may eventually pierce the “line of least resistance” to the upside again. If one chooses to accumulate gold or silver here, then at the very least they should do so with little expectation of any kind of immediate gratification.

SPDR Gold Shares ETF (GLD) Gilmo Report Chart

Over the weekend in my May 15th report I discussed Las Vegas Sands (LVS) setting up again as a late-stage base-failure (LSFB) short-sale formation. The stock on Monday immediately broke down through its 50-day moving average with volume picking up on the day, as we see on the daily chart below. This breach of the 50-day line also took the stock down through its red 200-day moving average on the chart, and the past two days have seen the stock rally back up into the 200-day line on weak volume. The two-day wedging rally also stalled out today with LVS closing below the mid-point of the daily price range. If you are short from just above the 50-day moving average on Monday, this looks like a good spot to add to any LVS short position, using the 50-day moving average at 42.89 as a nice convenient upside stop for the whole position. LVS is one of the few actionable short-sale ideas I see in the market right now, but so far it is panning out as well as one could expect given the set-up.

Las Vegas Sands (LVS) Gilmo Report Chart

Finisar Corp. (FNSR), which I discussed in my weekend report as a head and shoulders short-sale set-up along with LVS’ LSFB short-sale set-up, also gave us some instant gratification by mimicking LVS in that it broke down through its 50-day and 200-day moving averages on the same day as LVS on Monday of this week. FNSR moved further below its 200-day moving average yesterday before staging a very weak-volume rally today as it rallied back up towards its 200-day line and closed at the peak of its trading range. If the stock moves any closer to its 200-day moving average then my tendency is to see this as a spot to add to any short position in FNSR taken at the 50-day moving average on Monday. Notice also that the blue 50-day moving average is just starting to cross below the 200-day moving average, a bearish “black cross.” FNSR announces earnings in the early part of June so short-sellers should keep that in mind as earnings always present a knife that could cut either way, although the stock’s price/volume action doesn’t appear to offer any signs that it expects a strong report.

Finisar Corp. (FNSR) Gilmo Report Chart

With the market in a position to stage a follow-through day as early as Friday, what is there to look at on the long side to be prepared? As always, it is best to look at those stocks holding up well as the market pulls back. Biogen Idec (BIIB) is one of the few stocks holding up near its highs as we see in the daily chart below, and had two buyable gap-up moves, one on April 11th, and then another one on April 21st after announcing earnings. These are massive price moves, and the “buzz” producing such moves has to do with BIIB’s treatments for multiple sclerosis, a potentially huge market for the company. BIIB has had success in trials for BG-12, its newest drug for multiple sclerosis, and already sells a drug for multiple sclerosis known as Tysabri. Some have feared that Tysabri and the new drug may experience some cross-cannibalization, but the market for various treatments and drugs for multiple sclerosis is broad. The way BIIB is holding up so tight here after such a monstrous gap-up on April 21st might be a clue that there is room for multiple MS drugs in the marketplace, and with BIIB potentially having two such drugs this may be a big plus for the company going forward. I would be looking for a pocket pivot move here up through the 10-day moving average on volume that exceeds 2,492,900 shares, which is the volume on May 16th, the highest down-volume in the pattern over the prior 10 trading days.

Biogen Idec (BIIB) Gilmo Report Chart

On April 27th Fortinet, Inc. (FTNT) reported earnings, beating estimates by 3 cents and also announcing a 2-for-1 stock split. Network security remains viable as a growth niche within an otherwise tepid economic environment, judging from the tight technical action that we see on FTNT’s daily chart, below. FTNT’s buyable gap-up on April 27th which sent the stock to all-time highs has actually held quite well considering that the market has pulled down in the meantime as well as the fact that FTNT is a thinner-trading stock, so would be susceptible to some porosity at the intra-day lows of the gap-up day at 44.66. The last two weeks have seen the stock hold very tight sideways along the 10-day moving average so I would keep this on my pocket pivot watch list if it is able to move up through this little price range on volume that exceeds 925,500 shares, the highest down-volume in the pattern over the last 10 trading days. So far, near-term resistance has been seen in the high 47 price area, so a strong pocket pivot type of move up through that price level and the top of this short, tight, sideways price range would be a constructive signal to buy into.

Fortinet, Inc. (FTNT) Gilmo Report Chart (AMZN) suffered some bad news over the weekend, and this, combined with a general market pullback over recent days, took the stock back down towards its breakout point in the 190 price area and lower, depending on how you want to mark the breakout point. I tend to look at the trendline breakout at around 186.42 as the ultimate downside “hold” point for the stock on any pullback. AMZN is a recent new-high breakout following its earnings report in late April, and so I view this pullback over the past week as simply a first retest of the breakout point. If the general market is able to find its feet here and turn back to new highs, I would look for (AMZN) to be right there leading the charge. AMZN failed to hold the “Livermore Century Mark” at $200, but of course that is due to the general market action. Notice, however, that AMZN’s bounce over the past two days has occurred on declining volume, so it is possible that another retest of the 190 price level is in the cards. Nevertheless, unless the market breaks down sharply through recent support, AMZN’s downside action here could be little more than a buyable pullback to its original pivot point. (AMZN) Gilmo Report Chart

In my report of April 24th I noted the pocket pivot buy point in Cypress Semiconductor (CY) as it came up through its 50-day moving average on April 21st after announcing earnings, as we see in the daily chart of CY below. CY pulled back two weeks ago and tested its 50-day moving average one time, holding up well and then proceeding to move up from that point. Yesterday the stock made a higher low as the general market made a lower low, showing relative strength, and today the general market bounce helped CY flash a bona fide pocket pivot buy point in what looks like a handle area within a cup-with-hande base. This looks potentially buyable using the 10-day moving average at 21.64 as your downside guide for a near-term stop. One could also give the stock more room and use a lower stop with a standard 7-8% downside stop-loss limit. CY makes TrueTouch® touch-screen technology, and in its most recent earnings report stated that TrueTouch® revenues exceeded expectations as they hit all-time highs. Sponsorship has been increasing strongly in CY over the past two quarters, lending weight to the strong technical action in the stock recently.

Cypress Semiconductor (CY) Gilmo Report Chart

Last but not least among the potential long situations that catch my eye and which MAY become actionable IF we see a follow-through day in the market no sooner than Friday of this week is VMware, Inc. (VMW), which I show below on a weekly chart. VMW did not hold the low of its gap-up day on April 20th, swinging back and forth both above and below the 92 price level that we were using as a downside stop on the buyable gap-up of April 20th. But even though that buyable gap-up is out the window, the stock still merits attention because it does continue to form what so far looks like a decent cup-with-hande formation. VMW also found support at its 10-week (50-day) moving average earlier this week and so far is trading near its highs for the week. The second week in the handle also closed mid-range, so this is so far acting as it should for a cup-with-hande base formation. Currently VMW is only 6% off its recent price highs. And because it appears to be building a constructive base as the market pulls down and bounces around, it merits keeping on your buy watch list as I see it. (CRM), its cousin, reports earnings tomorrow after the close, so watch this one carefully.

VMware, Inc. (VMW) Gilmo Report Chart

LinkedIn’s (LNKD) Initial Public Offering is being priced tonight and will open for trading tomorrow, the first of the explicit social networking companies to come public. Interestingly, LNKD points out a number of negatives in its prospectus, not the least of which is a decline in revenues and increase in costs that the company expects will continue going forward. Nevertheless, after-hours LNKD is being priced at $45 a share, so the demand for this widely-hyped and anticipated IPO is strong. I have previously considered that the social networking “sector,” which will grow as more names like Facebook, Groupon, Twitter, etc. start to come public in the next year or so, will be a hot area for potential new leaders in any bull market phase, whether this year or next year. The only problem with this is that this is an idea that is being touted by many when discussing the LNKD IPO and all the hype surrounding it these days. What is obvious to the crowd is generally not the right course of action. In any case, I would not be interested in buying LNKD shares tomorrow but would advise members to let the stock trade for a few weeks and build some sort of discernible base first. This could be something like Google’s (GOOG) short 3-week flag formation in September of 2004, or it might take longer to build a base, like Crocs, Inc.’s (CROX) 19-week cup-with-hande pattern that it formed after coming public in 2006.

Currently the market situation remains fluid, with potential for a follow-through day to come as early as Friday of this week. The flip-side is that a move back to the downside to lower lows is also a possibility, and so for now we simply let the situation develop, armed with a few ideas on both the long and short side in the event action is warranted. Stay tuned.

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 no positions, though positions are subject to change at any time and without notice.

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