The Gilmo Report

September 28, 2011

September 28, 2011

Over the weekend I wrote that the market was in a position to stage a short-term bounce or at least shuffle around a bit as it tests the August lows, and the week started off with a nice three-day rally attempt that ended today at the 50-day moving average for the NASDAQ Composite Index, shown below on a daily chart. As the market works its way through the volatile “Chop Zone” it has formed since the August lows, the argument for a bear flag consolidaton of the prior breakdown off the peak in early August remains in force. The week got off to a rousing start with a big move to the upside, and yesterday’s almost ridiculous gap-and-run move right into and above the 50-day moving average reversed and churned, closing below the 50-day moving average on the heaviest volume in the rally over the prior three days. In my view, index maneuvers like you saw yesterday show that institutional selling is at work and will continue to be at work here as the big money distributes stock in anticipation of further lows. That’s how it looks from my vantage point. Whether some form of in-your-face QE gets announced by the Fed and sparks a continued upside drift is always a question, but for now I believe one can remain short the indexes using inverse Index ETFs per my September 17th report of two weekends ago.

NASDAQ Composite Index Gilmo Report Chart

The weak keep getting weaker in this market, rally or not, and former leader Netflix, Inc. (NFLX) is being shown no mercy as sellers have held it flat on its back over the past six days since it streaked lower after breaking out to the downside through the descending neckline of its previous Head & Shoulders top formation. Turn this chart upside-down and hold it up in a mirror and you will see what looks like a very high, tight, six-day flag formation on the daily chart, below. I wrote over the weekend that NFLX is showing little more than a “dead cat splat” since it stopped going down six days ago, and another move to lower lows looks to be in the offing. With the 10-day moving average coming down very quickly to meet up with the stock, I would consider shorting NFLX here with a maximum stop at the 10-day moving average at 137.14. As well, if I’m short a position in the stock from much further above, I would look for the 10-day or the 20-day moving average to provide upside guides for trailing stops in the event that NFLX does bounce, which could always occur if there is chatter about someone buying out NFLX.

Netflix, Inc. (NFLX) Gilmo Report Chart

Frankly, I think if anyone is interested in buying NFLX they should wait a while – the stock will likely get chaper. And the same might be true for some of these Chinese internets like Sina Corp. (SINA), shown below on a daily chart. Over the weekend I told you to watch for a rally up into the top of the gap-down day of what is now five days ago and which also coincides with the area of congestion in the pattern from mid-August that would constitute some overhead resistance. If you were brave enough to get short SINA on the rally right up into 90 resistance, and were not psyched out by the market’s low-volume rally right up into the 50-day moving average on the NASDAQ, then your downside target is initially going to be the 76.48 lows of three days ago when the stock staged an “undercut & rally” around the mid-June low at 82.25. With SINA having already undercut that low, the 76.48 low comes into play, and that is your initial downside profit objective, maintaining your upside stop somewhere around the 90 price level and hopefully at least no more than 3-5% above your initial entry point. At this point this is a simple trade if you are already short – run it to the downside price objective, or run it to the stop, there is nothing else to think.

Sina Corp. (SINA) Gilmo Report Chart

In addition to discussing what to do with a rally in SINA, over the weekend (September 25th report) I also discussed watching for a similar rally in the biggest Chinese internet leader, Baidu, Inc. (BIDU), which we’ve been following as a short-sale target over the past couple of weeks. BIDU rallied with the market right up into its 200-day moving average yesterday, and this was the perfect short-sale lay-up as one could have hit the stock on the short side right at the 200-day moving average, minimizing risk with a very tight stop. Today the stock opened up just slighty with the market opening up right at the bell before rolling over along with the market. While SINA, above, picked up some heavier selling volume, BIDU’s volume was lighter today, but that could easily change tomorrow with sellers reacting to today’s move. BIDU has not yet undercut its mid-June low at 114.14, missing it by 16 cents three days ago as it tested that low before rallying right into the 200-day line. For now that would be my downside price objective if I’m short from around the 200-day moving average, watching to see how it acts if and when it gets there.

Baidu, Inc. (BIDU) Gilmo Report Chart


I continue to keep a close eye on Apple, Inc. (AAPL) as I consider it the “key” to this market and whether we will see a new leg down. AAPL is doing something quite similar to what it did in late 2007, after the market had topped in October 2007. AAPL continued higher going into the end of December 2007 when it broke out of a short cup-with-hande type formation and then cleared the 200 “Century Mark” price level and failed, invoking the Livermore Century Mark rule on the short side instead of the long side. In 2011 we see that AAPL, shown below on a daily chart, has continued higher even after the market topped out in late April/early May of this year. With AAPL tottering about the 400 “Century Mark” price level, a failure here could be similar to its failure at the 200 price level in 2007 – it could occur as the general market begins a new leg down as it did in January 2008. Today the general market is in a similar positoin to where it was in December 2007 as it forms a bear flag after a prior break off the peak just as it did back in 2007. AAPL tried to move higher yesterday and today, but without any volume to push it higher, sunk back into the red both days. Coming on the heels of the high-voume gapdown of five days ago, it may spell trouble for this recent breakout.

Apple, Inc. (AAPL) Gilmo Report Chart

Below are daily charts of Apple, Inc. 2007 (AAPL) and the NASDAQ from 2007 going into 2008, roughly lined up with one another, so you can study the synchronous and non-synchronous moves in both during that critical market top.

Apple, Inc. 2007 (AAPL) Gilmo Report Chart


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<p>Some notes from my trading diary regarding other recently discussed short-sale target stocks:</p>
<p>FOSL – stock continues to find resistance at the 65-day exponential moving average which is now about to meet up with the 50-day simple moving average. Still looks potentially shortable at current levels using the declining 50-day moving average as your upside guide for a stop at 101.33.</p>
<p>OPEN – after finding logical support at the 44-45 price area, the stock has rallied right back up into its 10-day moving average. For now use the 10-day moving average as your upside trailng stop if you are still short the stock and did not cover when it hit the profit objective in the 44-45 price area.</p>
<p>RAX – stock tried to rally up into the 50-day moving average yesterday but failed to reach this key moving average line on very light volume. The stock rolled over today on light volume, but it remains potentially shortable on rallies up to the 50-day moving average now, using the 36.62 price level as your guide for a stop. With the 50-day moving average now moving well below the 200-day moving average (see chart from this weekend’s September 25<sup>th</sup> report), at this point, if you are trying to short the stock at current closing levels, you are looking for a breakout to the downside to occur in short order. Keep in mind that the further away from a logical point of resistance you short a stock, the greater your upside risk.</p>
<p>SODA – as with all of the names I discussed in my report of this past weekend, SODA rallied up into logical resistance at the 40 level, the top of last week’s gap-down “falling Window” and the 20-day moving average yesterday, and failed to hold above the 20-day line, closing at 37.27. The stock remains potentially shortable using the 20-day line at 38.86 as an upside guide for a stop. SODA is a squirrely stock and can move 10% in a day, so structure your position size and stops accordingly to allow for this. Note that while we were using the 20-day line as our upside stop from my discussion of the stock in this past weekend’s report, the stock did not close above that line, so whether you are using intra-day or closing prices to trigger stops can make a difference given the squirreliness of the stock.</p>
<p>TIF- stock was not able to hold its rally above the 50-day moving average yeterday, and remains potentially shortable using the 50-day line at 71.22 or yesterday’s high at 73.24 as your guides for stops, depending on your personal risk tolerance and preference.</p>
<p>PCLN – still unable to get back above the 50-day line. Potentially shortable here using the 50-day moving average at 514.17 or the 20-day at 525.20 as potential guide for upside stops.</p>
<p>The key to the market right now is that one should likely already be short stocks or long inverse ETFs like the TZA or the SQQQ from just above the 2600 level on the NASDAQ. I was never stopped out of my inverse ETFs on any of the NASDAQ’s two recent rallies up into the 50-day moving average, and those positions continue to work, but it has required sitting through some volatility and giving the trades some room. Meanwhile, certain short-sale target stocks remain in shortable range, per my comments above, assuming we don’t get some sort of gap-down in the market tomorrow which is quite possible given today’s very weak action. If one is not psychologically ready to play the short side of this market, then cash is king. Stay tuned. <em><br /> </em></p>
<p>Gil Morales</p>
<p><em> CEO & Principal, Gil Morales & Company, LLC</em><br /><em> Principal and Managing Director, MoKa Investors, LLC</em><br /> <em> Principal and Managing Director, Virtue of Selfish Investing, LLC</em></p>
<p>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 a position in SQQQ and TZA, though positions are subject to change at any time and without notice. </p><div class=

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