The Gilmo Report

September 12, 2010

September 12, 2010

This weekend I find myself in a position of mostly trying to figure out how to say the same thing in a different way. The market maintains its current uptrend based on the follow-through day (FTD) of September 1st, and leading stocks continue to act well although many are somewhat extended to the upside. So far the market rally hasn’t run into any big speed bumps, but then it hasn’t really been speeding along much as it has inched higher over the past week, moving up into the “no-man’s land” between its 50-day moving average and the higher 200-day moving average. What I do note, however, is that the NASDAQ Composite Index, shown below on a daily chart, has moved up to this declining tops trendline, which, for Technical Analysis 101 purists who do not necessarily subscribe to the FTD concept, is the dividing line between a market in a downtrend vs. a market in an uptrend. If the NASDAQ can break out through this declining tops trend line or downtrend line, to put it more simply, then I might consider this to be constructive. Aside from one sharp increase in volume on Wednesday of this past week, trading has remained lackluster, perhaps due to the shortened holiday week. In any case, sellers still have not come into this market to put an end to this rally attempt, as buyers have remained in control to keep the rally in force for now, as I see it.

NASDAQ Composite Index Gilmo Report Chart

If we draw the same type of Technical Analysis 101 downtrend line on the S&P 500 Index‘s daily chart, below, we note that the index is actually trading above the trendline. While this might be considered constructive if it were occurring on heavy buying volume, the reality is that the S&P 500 Index is wedging, e.g., rallying on successively lighter and lighter volume, which I find a little troublesome. At the very least, it seems to imply that on the S&P 500 Index, at least, a pullback might serve to correct the wedge. The critical factor here will be whether volume picks up sharply on any such pullback as such action could indicate that the market is going to roll over. Such action would be in character with the chop and slop nature of this big sideways consolidation that has been forming since the market topped in early May, so I would advise Gilmo members to stay alert here as we return to allegedly “normalized” volume levels in the middle of September.

S&P 500 Index Gilmo Report Chart

One thing that paints an ominous picture to some is the action of the Semiconductor Index, the well-known “SOX,” which is represented by the daily chart of the Semiconductors Holders Trust ETF (SMH) shown below on a daily chart. What many don’t like here is the fact that the Semis, which normally correlate to the general market in any rally phase, are lagging and diverging to the downside as the rest of the market goes up.

Semiconductors Holders Trust ETF (SMH) Gilmo Report Chart

Meanwhile others can’t decide whether the S&P 500 is forming a “bullish” reverse Head & Shoulders bottom (green dotted line) or a “bearish” Head & Shoulders top (red dotted line), per the weekly chart of the $SPX below (pay no attention to the moving averages – they are set for a daily chart):

S&P 500 Gilmo Report Chart


So many choices, so little time! Given the wedging nature of this rally, I’m not in the mood to be heavily leveraged here, while still reasonably invested in leading stocks, such as (CRM), shown on a daily chart below We cannot predict what the market will do from here, but the evidence, including a very complacent put/call ratio of .58 on Friday’s close, certainly argues that a pullback here is a definite possibility, so start marking up charts of your holdings with hypothetical price/volume movements and asking yourself how you will react to them should they occur. For example, CRM is acting quite normally right now as it remains at and finds support at its 10-day moving average, for now. Now ask yourself what you will do if you own this and it breaks the 10-day moving average on heavy volume. I myself would most likely cut back that part of the position that I added on this recent breakout of seven trading days ago that took the stock up and out of a short little flag formation. Cutting back my position in this manner drops my cost basis down on a LIFO (last-in-first-out) basis, reducing the “top heavy” part of my position. This is how you want to avoid getting into trouble if this market is going to re-engage the “whipsaw” here. (CRM), Gilmo Report Chart

Otherwise, CRM acts fine for now, and there is nothing really to do here except wait for further evidence to present itself. F5 Networks (FFIV), another one of my favorite cloud-computing-related stocks, didn’t too anything too differently from what CRM did as it also pulled down to its 10-day moving average on Friday with volume drying up, as we see in the daily chart below. The stock even closed mid-range, as buyers stepped up and bid the stock back up off the 10-day moving average.

F5 Networks (FFIV), Gilmo Report Chart

VMware, Inc. (VMW) is in a similar position to both of these but has not tested its 10-day moving average yet, but it may not as it closed for a second week tight on the weekly chart, which I don’t show here for VMW. A number of leading stocks held up for a second week tight in their patterns, such as VMW, so for the most part everything has moved to higher highs and held its gains. In all cases where leading stocks are extended, I would first watch to see how well they hold their 10-day moving averages on any pullback.

Outside of the “cloud-computing complex,” leaders like Netflix, Inc. (NFLX), which I show below on a weekly chart, just “keep on truckin’.” NFLX’s action is quite classic as it broke out of a short double-bottom formation five weeks ago, as we see on the chart, and then staged a little two-week pullback to the original breakout point and the top of the double-bottom base as volume dried up. This is textbook pullback action following a new-high base breakout, and right now I might be very interested in NFLX shares on any constructive, well-contained (e.g., low volume) pullback into the 10-day or even the 20-day moving averages which are both running through their respective price points of 136.57 and 132.52. Perhaps the sole caveat here on NFLX becomes noticeable in the weekly chart where we see the late January breakout on big volume that results in a very tight uptrend with narrow weekly price ranges – all very “tight” action. Notice how since running into a less cooperative general market in early May that NFLX’s price action has become a bit more volatile with wider weekly ranges. This sort of stuff can start to look like typical late-stage base behavior where the price/volume action in a potential late-stage base becomes wider and looser as the stock begins to run into distribution. There is no reason to sell the “flicks” now – just be cognizant of this.

Netflix, Inc. (NFLX), Gilmo Report Chart

In my report of this past Wednesday I noted the pocket pivot buy point in Altera Corp. (ALTR) on that day that coincided with a strong outside reversal day to the upside on very heavy volume, normally a bullish type of price/volume signature. ALTR remains the leader in its space as a maker of field programmable gate arrays (FPGAs), otherwise known as chips that can be reprogrammed for different purposes AFTER they are manufactured, something that becomes more relevant in an emerging mobile world of e-tablets, iPads, e-readers and smart phones. ALTR failed on this pocket pivot buy point, however, as soon as it busted the 50-day moving average on heavy volume which caused me to unload my position immediately. ALTR did see heavier volume on Friday, and although it closed down for the day, it actually gapped down on the open and closed higher than it opened that day, resulting in a blue color-coded price bar. This gives some hint of support at the 10-day moving average (pink line) as volume picked up for the day. Analysts are looking for a 237% increase in earnings in the September quarter, which piles up on the prior two quarters’ earnings growth of 194% and 190%, respectively. It may be possible to take another shot here at the 10-day line, using it as your guide for a stop.

Altera Corp. (ALTR) Gilmo Report Chart

If you look over all the international markets, you will notice that India has been pushing for higher highs as it has acted in a much more stable and steady manner than the U.S. markets, for example. A quick look at the Barclays Ipath India ETF (INP), which I don’t show here, will give you an idea of what I’m talking about. As well, despite the economic malaise in developed countries, auto sales world-wide are expected to continue to grow, particularly in countries where car ownership is not the norm as it is in the United States and other developed nations. Tata Motors, Ltd. (TTM), shown below on a daily chart, has been hitting my radar screen as it flashes a couple of pocket pivot type moves here in this little “cup” it has been forming for most of August and into September. Over the past four days, as the stock has moved up into the 22.75 price level, I note that selling volume has been drying up. If the general market were to pull back in here, I could see TTM moving back down to the 21 price level, but if it remains a counter-trending leader, given that it has rallied sharply since early June vs. the general market which has slopped around, mostly, then it may simply hold the 10-day or 20-day moving average as it acts very well up here.

Tata Motors, Ltd. (TTM) Gilmo Report Chart

If we switch to the weekly chart of Tata Motors, Ltd. (TTM), below, we can see that the stock has found decent support on pullbacks towards the 21 price level. Three of the past four weeks have seen the stock close very tight around the 22.68-22.75 price points, having closed at 22.68 three and four weeks ago. This past week the stock traded in a very tight range as volume continued to dry up, giving it a little bit of a “short-stroke” look, although I would tend to see this as a tight little flag formation here given that the pattern is now three weeks long. Note that the first down week in the little flag (three weeks ago) closed in the upper part of the weekly price range with volume coming in above-average for that week, which I read as supporting action. My only criticism of the pattern here is that it is slightly wedging up along the lows, e.g., the lows of the weekly price ranges are each slightly higher than the previous one with weekly volume drying up. However, some of this is negated, in my view, by the strong pocket pivot action that shows up on the daily chart, above. I would use the 10-day or 20-day moving averages as my guide for a near stop on any TTM position taken up here, with the idea that if I am stopped out at the 22.25 level, the 21 level could become buyable.

Tata Motors, Ltd. (TTM) Gilmo Report Chart

Looking over the sponsorship data this weekend, I noted with interest that institutional money appears to be moving into the solar group. One stock that has seen a number of institutions move into is this little JinkoSolar Holding Co. (JKS), a recent IPO in the group that has gone on a tear since breaking out of an “improper” double-bottom base in early July. JKS is expected to earn $3.37 a share in 2010, and $3.47 in 2011. These are huge numbers that confirm the stock’s current price action, no doubt. JKS’ initial base was an “improper” double-bottom because the second low in the pattern did not undercut the first as it should in a “proper” base of this type, but all you had to do was pay attention to the pocket pivot buy point on the breakout as a buy signal and forget this idea of “improper” bases. This is what pocket pivots enable you to do – ignore so-called “improper” bases. The stock broke out in early July on a pocket pivot and new high breakout buy point and ran like mad, flashing several pocket pivot buy points along the 10-day moving average as it launched towards the $30 price level. The stock has now violated the 10-day moving average, so I would keep an eye on this to see if it sets up again and perhaps flashes a pocket pivot buy point over the next few days and weeks.

JinkoSolar Holding Co. (JKS) Gilmo Report Chart

I did not buy that initial breakout in JKS back in early July mostly because the stock was trading just over 100,000 shares a day, making it way too thin for me to want to play. However, average daily volume is now up to 411,000 shares, and this stock is “growing up” and maturing fast, so at $24 it becomes more attractive to me. As well, this recent run-up indicates strength and power, and so JKS remains my other top pick in the group along with Trina Solar Ltd. (TSL), which I discussed in my report of August 29th, and TSL held tight this past week after breaking out last week. Another interesting and newer solar play that has held up and trended higher since coming public in early November 2009 is STR Holdings (STRI), which has flashed earnings growth of 214%, 138%, and 200% over the past three quarters, respectively. STRI also flashed a pocket pivot buy point on Friday, which I see as constructive despite the somewhat V-shaped move off the lows of two weeks ago. Seven trading days ago, as we see on the daily chart below, STRI flashed another pocket pivot buy point as it came up off its 10-day moving average. Note all the blue upside volume spikes in this recent base as well. In my view, this looks okay to test out here as a buy, using the 50-day moving average as your guide for a stop.

STR Holdings (STRI) Gilmo Report Chart

Overall, the action in some of these solars is quite interesting, and so among the group I favor TSL, STRI, and JKS, with JKS being a situation to watch carefully here as it potentially consolidates its recent huge price run and perhaps sets up again.

In my report of September 1st I noted that a pocket pivot volume signature as AAPL moved up off of its 10-day moving average on that day was a signal to cover any short positions in the stock. As we see on AAPL’s daily chart, below, that pocket pivot move led to a five-day rally that has taken the stock into the mid-260 price area. Volume is drying up as the stock backs up a bit over the past couple of days, and it will be interesting to see if AAPL can muster up some sort of breakout to new highs. If so, this would likely be a very positive development for the general market, so I would monitor AAPL here as it may provide a clue with respect to the sustainability of the current rally phase, even if we do experience a general market pullback here in the next few days.

AAPL Gilmo Report Chart

Acme Packet (APKT) continues to bide its time after breaking out from what I see as an ascending base formation, which I outline here on the daily chart as an ascending price channel. APKT is another cloud-related stock, and while not of the same quality, in my view, as stocks like CRM, VMW, or FFIV, is still acting very powerfully as I have discussed in the past several Gilmo Reports. In my report of this past Wednesday I compared APKT’s ascending formation to that of First Solar (FSLR) in the summer of 2007, and so far APKT is still acting similarly. I would expect that this little pullback will run its course down to the 10-day moving average, at most, and would use any light-volume pullback here as an opportunity to work into a position in the stock. So far selling volume has remain muted, and we must keep in mind that given the sharp price move in the stock over the past 2-3 weeks as it has jumped up off the 30-31 price level, it is entitled to a little backing and filling as it consolidates those gains. As the stock approaches the 10-day moving average, I might watch for some sort of pocket pivot volume signature or outright buy point to show up off the 10-day line.

Acme Packet (APKT) Gilmo Report Chart

Last weekend, in my report of September 5th, I anticipated a pocket pivot type of move off the 10-day moving average in Rovi Corp. (ROVI), and in fact we got exactly this three days ago, as I noted in my follow-up in the September 9th mid-week report of this past week. As we see on ROVI’s daily chart, below, the stock is backing up here after stalling on the pocket pivot move of three days ago. As I pointed out on Wednesday, the stock was in a base at the time that was only five weeks long; hence a breakout here could be premature. Now the stock has taken another week to set up and add to the length of its base, and I would watch for some sort of volume to come in here to push the stock up off its 10-day moving average. Friday’s action looked constructive, although the stock did open up and then close lower than it opened with volume picking up, which seems to argue that the gap-up was sold into. This might be true, but I would also note that the stock held above the intra-day low of Thursday, so there was no hairy reversal going on here, and the action may simply be setting up an impending breakout. I would use the 50-day moving average as a guide for selling the stock here as it does not show a tendency to hold the 10-day moving average – its character is to hold the 50-day.

Rovi Corp. (ROVI) Gilmo Report Chart

While I tend to think that a pullback in the general market is necessary here to correct the wedging action we see in the S&P 500 and, to some extent, the NASDAQ Composite Indexes, which I showed at the outset of this report, it certainly does not have to happen. While leading stocks are extended in many cases and certainly entitled to a pullback here, they don’t have to pull back much, and in my view we could just as easily see some strong upside volume come into the general market indexes over the next few days as we return to “normalized” trading activity. We simply let the evidence present itself in real-time.

On an administrative note, I would like to thank the organizers of the Los Angeles chapter of the American Association of Individual Investors for inviting Dr. K and me to speak at their meeting at the Skirball Center in Los Angeles which was held yesterday, Saturday, September 11th. As well, it was a lot of fun meeting Gilmo members who were in. It was certainly an honor and a privilege to present our current work on Pocket pivot Buy Points to this group, and we are grateful for such an opportunity. On another note, Gilmo members may wish to keep an eye out for my next appearance on Fox Business News’ Market Panel sometime around 11:00 – 11:30 a.m. Pacific Standard Time on Thursday, September 23rd. As I wrote last week, Fox has made me a regular part of their Market Panel rotation, and I look forward to adding a different twist to Fox’s Market Panel as their newest “talking head.”

Gil Morales

CEO & Principal, Gil Morales & Company, LLC
Principal and Managing Director, MoKa Investors, LLC

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