The Gilmo Report

September 12, 2012

September 12, 2012

Thus far this week the market has not been able to get past last week’s highs following Thursday’s big-volume breakout to higher highs in all the big market indexes, as illustrated by the daily chart of the NASDAQ Composite Index, below. After gapping higher this morning on news of a German court going along with the proposed European Central Bank’s “sterilized” bond-buying program, the markets slopped around all day before closing roughly flat, with the NASDAQ leading the way on a 0.32% gain for the day. Volume picked up on the NASDAQ as the index found support off the recent lows around the 3100 price level. While the market can’t seem to muster up much follow-through to last Thursday’s breakout to higher highs, it is still holding up on the pullback, thanks to the action in Apple (AAPL) today, most likely, since most of the big NASDAQ stocks were flat to down on the day. With the Fed policy announcement coming tomorrow, we will finally get to see how much the potentiality of QE3 means to the market, particularly if the Fed does nothing but pay lip service to their willingness to act as needed as they maintain a zero interest-rate policy.

As the market moved closer to the bell and the close of trading, it was starting to look as if the indexes would all reverse into the red as Apple (AAPL) spent the day gyrating into the red itself after its new-product presentation today at 1 p.m. Eastern, three hours before the close. The stock traded back and forth and at times looked as if it might drag the market down with it. But by the close AAPL in fact was able to eke out a pocket pivot buy point as it closed all of three cents above its 10-day moving average on big volume, as we see in its daily chart below. This was all enough to create a legitimate pocket pivot buy point in the stock. One can add to any original position in AAPL bought further below in the pattern, or more aggressive players can take a position right here on the basis of the pocket pivot with the idea that AAPL should, at the very least hold the low of today on any pullback. Although I would have to say that further upside from here without much of a pullback would be preferable to see. With the stock closing just three cents above the 10-day moving average, it is still buyable 1-2% beyond that, in my view, and I would not be surprised to see AAPL gap up tomorrow.

Apple (AAPL) Gilmo Report Stock Chart

The precious metals continue to confirm the idea that QE3, in some form, is on the way, and tomorrow will certainly be the day of reckoning for both gold and silver. While gold is holding tight in a four-day range, silver, as represented by the iShares Silver Trust (SLV), had a little bit of a spin-out today but found support at its 10-day moving average, as we see in its daily chart, below. One might also consider this a supporting type of pocket pivot buy point off the 10-day line, although it would have been preferable to see the SLV close up for the day. Nevertheless, the uptrend for precious metals remains intact, some volatility notwithstanding. Although most of the time I prefer to make the news of the day irrelevant to my trading, tomorrow’s Fed announcement may figure heavily in where the precious metals go from here. If the Fed merely keeps their options open, the metals could sell off or simply track sideways as they continue to hold up on the possibility of QE3 should the Fed leave the door open. At this stage it is just a matter of watching how the metals act on any pullback, and we might consider today’s action in the SLV as an example of such constructive action.

iShares Silver Trust (SLV) Gilmo Report Stock Chart

LinkedIn (LNKD) continues to hold its recent breakout through the 113 peak of the handle in its prior cup-with-handle base, as we see on the daily chart, below. As I discussed over the weekend, the stock is running into some logical overhead above the 120 price level, and so it likely needs to spend a little time here as it tries to build a short flag formation and volume recedes. Meanwhile, the 10-day moving average is coming up from down below and is currently moving through the 113.77 price level, still about 5% below where the stock closed today. I would certainly look to buy shares on any pullback from here towards the 10-day line, otherwise any new buy points in the stock will have to depend on the 10-day line catching up to the stock and providing a legitimate base from which a potential pocket pivot buy point could be launched. For now all we know for sure is that the base-breakout is holding, and so on that basis the stock can be held if one owns it from down below, namely around the 50-day moving average where we were first buying the initial pocket pivots in the stock during the month of August, prior to the September breakout.

LinkedIn (LNKD) Gilmo Report Stock Chart

You could almost see this one coming given all the negativity being spewed about Facebook (FB) and the exuberance of those shorting the stock and looking for much lower prices in this most-hated of formerly most-loved IPOs. Yesterday Facebook CEO Mark Zuckerberg uttered a few words about how mobile advertising could be larger than its existing PC-based advertising, and this sent FB on a big-volume gap to the upside this morning that does qualify as a rare-sighting of the often elusive, infamous “bottom-fishing” pocket pivot buy point. With the stock up nearly 8% today, it’s hard to want to step in here and buy this, but one way to try this out, if one is so inclined, is to use the intra-day low of today at 20.28 as a downside stop, about 3% below where the stock closed today. With so many hating the stock and short FB shares here, I could see the stock rallying up to the 50-day moving average at 23.43, especially if the Fed gives the market a reason to run tomorrow.

Facebook (FB) Gilmo Report Stock Chart

Michael Kors (KORS) has flopped out a bit after announcing a 20-million-share secondary offering last Friday after the close, but this is to be expected given the sharp move the stock has had off the lows after announcing earnings in mid-August. At this point it is a matter of waiting to see how the secondary is priced and how the stock reacts when that occurs. Otherwise KORS is backing-and-filling a bit here and could conceivably test the top of the base at around the 50.69 price level, as I’ve drawn it on the daily chart below. So far the stock has held its 20-day moving average, the green line on the chart, and volume today dried up sharply, indicating that sellers were less interested in dumping shares going into the secondary pricing.

Michael Kors (KORS) Gilmo Report Stock Chart

Over the weekend I discussed the buyable gap-up in Ulta Salon Cosmetics & Fragrance (ULTA), shown below on a daily chart, and the stock has continued to drift lower from Friday’s close on below-average volume. The stock closed today at 98.90, less than 0.5% away from the intra-day low of the gap-up day at 99.26. Generally one can allow for 2-3% porosity around the intra-day low of the gap-up day when using it as a selling guide, but as I see it with the stock pulling down like this it sets up a low-risk buying proposition given that your downside stop would be about 2.5% on the downside from today’s close. This would take you down to the 10-day moving average, roughly, which is currently running through the 96.43 price point. One could also employ a time stop here in that the stock should find its feet here very quickly given that it is already three days down from a buyable gap-up day. If the gap-up is truly that strong, some buying interest should show up within the next 2-3 days, in my view.

Ulta Salon Cosmetics & Fragrance (ULTA) Gilmo Report Stock Chart

Regeneron Pharmaceuticals (REGN) was presenting at a bio-tech conference today and it must have been something they said because the stock got knocked back to its prior base-breakout point just above the $140 price level before finding some support and closing off the lows of the day, as we see in the daily chart below. REGN closed just about mid-range, so it is still a down day on heavy volume, but the pullback to the top of the base and the prior breakout point could set up a buying opportunity in the stock. The closer to the 140 level one can buy the stock the better since it would have to hold that level to keep me in the stock, frankly. Remember that it is not uncommon for leading stocks to have at least one pullback to a breakout point. So, despite the heavy-volume selling, it is still just one day’s worth of action and not outside the realm of normal behavior. As long as REGN can hold the 140 level, roughly, then buying any pullback here is feasible given that your stop-out point at 140 is very close by, which helps to minimize downside risk.

Regeneron Pharmaceuticals (REGN) Gilmo Report Stock Chart

Given that tomorrow’s Fed announcement has the potential to surprise, investors will likely have to remain alert. We have already seen some leaders take some hits recently, such as Mellanox Technologies (MLNX) which should have been sold on the basis of its 10-day moving average violation on Monday. Equinix (EQIX), another name that we’ve been following, also broke below its 10-day moving average on Monday after issuing a pocket pivot along its 10-day moving average about three weeks ago (see August 26th report), as we see on its daily chart, below. Back then, I felt that the stock should hold the 185 price level, and it closed today at 186.55 on heavy volume – not exactly the “constructive pullback” you would want to see. If one is still long this I would most certainly use 185 as my stop-out level, but one could also use a violation of the 50-day moving average as a selling guide if one wanted to give the stock a little more room, but either way I would be mindful of risk management here given the weak action over the past two days.

Equinix (EQIX) Gilmo Report Stock Chart

While some may want to try and game tomorrow’s Fed policy announcement, I believe it should be sufficient to simply watch your stocks and act on the basis of whatever selling (or buying, for that matter!) parameters you are using for the individual stocks that you own. Many times the response you might expect given any number of potential announcement scenarios is not the outcome that actually occurs. On the other hand, with the market able to hold up along the 3100 level for the NASDAQ on these pullbacks we’ve seen so far this week, that is a key level for the market to hold. If it ends up getting breached on the downside, then last Thursday’s breakout will have failed. Meanwhile, there is no reason to try and predict what will happen, just wait for events to unfold and act accordingly. 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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