The Gilmo Report

October 5, 2011

October 5, 2011

The NASDAQ Composite Index, shown below on a daily chart, did what I expected it to do, and that was to head for the August lows. On Monday, the index nicely undercut those lows, setting up the obvious “undercut & rally” type of situations as shorts and exhausted sellers coming in on what is seen as a “breach of support” create a floor under the index. and cause it to rally back above the August low. This movement in the indexes also coincided with a number of short-sale target stocks moving down to their downside price targets, and in my weekend report of October 2nd, I discussed the fact that Baidu, Inc. (BIDU) and Sina Corp. (SINA) had already hit their downside price targets last week. In most cases, profits in short positions should have been taken on that basis, but more on that shortly. Right now what we know for sure is that the market is in the second day of a new rally attempt, and the earliest we could hope for a follow-through day would be Friday, when the big monthly jobs numbers comes out. For now, on the short side, it is probably best to lay low and look to short into this rally on the assumption that it may fail. However, if we do get a follow-through on Friday then we will have to let the market rally further if that’s what it wants to do.

NASDAQ Composite Index Gilmo Report Chart

Big NASDAQ leader Apple, Inc. (AAPL), which became shortable on the reverse “Livermore Century Mark” rule when it failed at the $400 price level last week, hit its downside price objective at the 200-day moving average, where profits could have and likely should have been taken on any AAPL short-sale positions as we see in the daily chart below. AAPL’s action is very typical for any late-stage base-failure in its initial stages. Once the breakdown back through the prior new-high breakout occurs, the stock will generally move down very rapidly before bouncing and moving back up to the 50-day moving average, where it may noodle around a bit. Thus while one can test AAPL on the short side as it rallies up into the 50-day line at 384.16, do not expect that you will necessarily see any quick, positive feedback in the form of an immediate reversal and break back to the downside. As the biggest of the big-stock NASDAQ leaders, AAPL’s action from here will likely be a bellwether for the market. It does point out the necessity of establishing downside price targets for short positons and being perfectly willing to cover as the stock(s) approach and/or undercut the target price. Bulls make money, bears make money – pigs get slaughtered. You know the drill.

Apple, Inc. (AAPL) Gilmo Report Chart

Chipotle Mexican Grill (CMG) is a slightly different example of a late-stage base-failure that did not quite make it to the 200-day moving average on the downside, as we see on its daily chart below. In this case it undercut its early-September low and tested a late-August low yesterday, Tuesday, before staging a logical bounce. Notice that these bounces in CMG and AAPL, among many other short-sale target stocks, all coincided with the NASDAQ Index and the general market undercutting its August lows and staging a logical undercut & rally. Thus if you were alert to the market undercutting the lows in synch with short-sale target stocks hitting and/or approaching downside price targets, you had a sense of where to lighten up or cover short positions outright, depending on how aggressive you are approaching the short side of this market. CMG might continue rallying up to the 50-day moving average at 310.71, but it does have some overhead resistance to contend with at around the $300 price level, so it is possible to test this on the short side using a very tight stop of 2-3%, up to the 50-day line.

Chipotle Mexican Grill (CMG) Gilmo Report Chart

Fossil, Inc. (FOSL), which we’ve discussed as being potentially shortable between the 200-day and 50-day moving averages, as we see in its daily chart below, also broke down hard with the market before finding support at its prior mid-August low yesterday. This bounce is, however, coming on light volume that so far is declining on the way up. I would look for FOSL to find resistance somewhere around the 90 price level, which coincides with the series of lows it made around the 200-day moving average during September. This is something to keep an eye on here, as some of our short-sale targets will bounce in weaker fashion than others, which is a clue regarding their potential to weaken again. Notice how we focused on Tiffany & Co. (TIF) and Fossil, Inc. (FOSL) as primary retail short-sale targets given their weak action during the prior market rally up to the 50-day moving average on the NASDAQ. Thus this weak-volume bounce in FOSL may be a clue that it will be a stock to come after on the short side again as this market “undercut & rally” runs its course.

Fossil, Inc. (FOSL) Gilmo Report Chart

Here are my trading diary notes regarding the action of other short-sale target stocks we’ve discussed in recent reports:

BIIB – stock broke down and undercut its early September lows, setting up a bounce. It has now moved back up through its 50-day moving average, so whether one took profits on the undercut of the early September lows or not, this move back above the 50-day line would be a clear stop-out.

BIDU – the initial profit target at 114.14 was hit last Thursday, profits should have been taken and still can be as the stock closed today at 111.17.


SINA – the initial profit target at 76.48 was hit last Thursday, and SINA closed today at 76.57, so you can still take profits if you have not already done so.

TIF – stock hit the 57.21 low of mid-August, which was your price target and profit objective on the stock if you were short, as discussed over the weekend in my October 2nd report. Waiting for it to rally into the 65-66 price level where resistance lies.

RAX – undercut 31.09 low of early August before staging a logical bounce. Watch for rallies into the 35.78 level and the 50-day moving average as potentially shortable, using a 3-5% stop.

TIBX – rallied back above the 50-day moving average, but remains below the 23.94 high of seven days ago which is your stop-out level.

OPEN – stock continues to hold below 10-day moving average on a closing basis, but at this point profits should have been taken on any OPEN short positions. If you think you can play this further on the downside from here continue to use the 10-day line as a trailing upside stop, as it has already hit our downside profit target at around 44-45 last week.

SODA – stock broke down on Monday and has bounced over the past two days right up into the 33-35 price area . Would look to short this on weak rallies up into the 20-day moving average at 37.77. level. Got close to the 27 downside target low from early January of this year, hitting 27.85 on an intra-day basis yesterday, so stock may be in position to rally for a bit here unless the general market gives it up rather quickly here.

ACOM – still looking like it’s ready to test its 20.67 low of nine days ago. Stock is bouncing over the past two days on very weak volume, so look for 26-27 price level to continue to serve as upside resistance on any continued rally from here.

With stocks having come down hard over the past week, a bounce in the market on this recent undercut of the August lows is quite logical. The market could noodle around here for a bit as we move into the Friday jobs number, so I would lay back and see if any short-sale target stocks rally up into optimal short-sale positions. If you find yourself stopped out of a short-sale position, stick to your stops, as trying to anticipate where this rally will end is a fool’s game. If you are still short positions in short-sale target stocks and are a ways from being stopped out, it is always possible to hold onto these with the idea of playing out a potential further down leg in this market. That, however, is also not guaranteed to be a fool-proof approach, so again stick to your stops, and stick to your downside profit targets, taking profits when they are there for the taking. In the meantime, we will probably have a better idea of where this bounce is going by the end of the week, so 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

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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