The Gilmo Report

September 7, 2011

September 7, 2011

Despite breaking down hard from near-term resistance at the 2600 level on the NASDAQ Composite Index, shown below on a daily chart, the market remains trapped within the “Chop Zone.” Today’s action brought the NASDAQ up into the top of the “falling Window” created by last Friday’s gap-down move, and while it came on volume that was heavier than yesterday it was well below average. So far we are acting quite normally for what could be the start of a corrective phase, with one sharp break off the peak followed by a little over a month of action within the “Chop Zone.” The market came down three days in a row, and by yesterday was in a position to bounce. The bounce also has a logical pretext as the market anticipates President Obama’s “jobs speech” tomorrow. It is not likely that the President will embrace any “job creation” policies that don’t fixate on the idea that government is necessary to create jobs, but sellers stand aside as the hopeful crowd moves into the market, driving the indexes higher. In the meantime, leadership remains scant, if not non-existent in what is mostly an “index rally.” If you are long any inverse ETFs such as the QID or the SQQQ, the 2600 level on the NASDAQ is your upside stop if this index rally continues.

NASDAQ Composite Index Gilmo Report Chart

The pullback in gold and silver that we saw today looks normal as both metals came up to test recent higher highs before pulling back normally. We have to consider what constitutes normal action as gold works off increased CME margin requirements as well as a sharp, prior run-up of 18.7% since breaking out through the 1559 price level. This corresponds to 151.86 on the SPDR Gold Shares (GLD), shown below on a daily chart. We also have to keep in mind that commodities, which include precious metals, tend to be volatile beasts. This is one reason why I believe the CME and other exchanges raising margin requirements as the metals rise in price is in fact constructive over the long run. If any long-term uptrend is defined by the constant movement of stocks or other investment vehicles like commodities from “weak hands” to “strong hands,” then taking out some of the “hot” money that comes in whenever gold or silver start to pitch steeply to the upside is a good thing, as I see it. The GLD tested its high of two weeks ago by launching back above 1900 yesterday and has pulled back to find support at the 20-day moving average, closing well up off the lows of today. A retest of the 1700 low on gold is certainly within the realm of possibilities, but gold looks to be trying to stabilize here for now.

SPDR Gold Shares (GLD) Gilmo Report Chart

Similarly, as gold goes so does silver, and the white metal also has sold off over the past two days along with gold. As I wrote over the weekend, the iShares Silver Trust (SLV), shown below on a daily chart, appears to be working its way up the the right side of this big consolidation it has built since margin requirements for silver that were raised 68% between April and May knocked silver down very hard off of its price peak following its obvious climactic run up to the $50 level. Today’s action took the SLV below its 20-day moving average but selling volume was light and it closed down only 1.27%, or 52 cents on the day. I still consider the 50-day moving average down at 38.31 as ultimate downside support for the SLV, and for now the short-term uptrend off the 50-day extending back to early August remains intact. As gold takes a breather here, the SLV may begin to perk up a bit. Notice how the pattern of selling over the past month or so on each sharp pullback since early August has been accompanied by lighter and lighter selling volume each time. Despite the volatile behavior in the SLV, the overall action remains somewhat constructive. But the SLV has still had to work off the overhead supply on the right side of the pattern.

iShares Silver Trust (SLV) Gilmo Report Chart

All five of the retail stocks, JWN, DECK, TIF, EL, and LTD, that I discussed in my report of last Wednesday came down hard off of their peak price levels of last week. They also all found support at respective logical areas as they sold off on Thursday and Friday of last week before finding near-term support yesterday morning. Tiffany & Co. (TIF), shown below on a daily chart, illustrates this all quite well as it rallied up into logical resistance just below its 50-day moving average and just above its 65-day moving average last week before making a downside run to its 200-day moving average yesterday. As I wrote over the weekend, it was important to be mindful of these potential support areas. With TIF, we can see that the stock undercut the 200-day moving average yesterday before finding support and reversing back to the upside. This is very logical given the state of the general market as you will notice these stocks all more or less mimic the action of the general market indexes. With DECK, LTD, and JWN rallying up into their 50-day lines and TIF and EL rallying into their 65-day exponential moving averages, it is possible to test short positions in these at current price levels using 3-5% stops, maximum. But don’t expect them to work unless the general market rolls over.

Tiffany & Co. (TIF) Gilmo Report Chart

Last Wednesday I discussed shorting the Chinese internets, and that my short-sale target of choice in this case would be (SOHU), shown below on a daily chart. SOHU promptly broke down the next day and busted through its 200-day and 50-day moving averages in ugly fashion as selling volume picked up. Now with the market bouncing over the past two days, we see SOHU mimicking the general market as it too bounces up through its 50-day line and back up to the 200-day moving average. Is it shortable here? I suppose as long as one uses a reasonable stop, then yes, it is potentially shortable here. Again, however, this will depend on the action of the general market, and if the market keeps rallying, SOHU likely will as well. Thus, as we find ourselves firmly entrenched in the “chop zone,” stocks like SOHU and stocks like the retailers discussed above could simply zig-zag about, confounding both longs and shorts. Thus if you are going to test the short side here be prepared to exercise tight stops as the market remains in a very “fuzzy” area here. However, if the general market starts to roll over again, I think SOHU becomes a prime potential short-sale target. (SOHU) Gilmo Report Chart

One point to make here is that with the NASDAQ Composite Index up 3.04% today on volume that was higher than yesterday, you do have follow-through type action, although this is less relevant coming on the heels of the follow-through on August 23rd. Checking in with some of the big-stock leaders like AMZN, PCLN, or Apple, Inc. (AAPL), shown below on a daily chart, I don’t see a lot of constructive tightness in their patterns, but I tend to think AAPL looks to be holding up the best as it works its way through the seventh week of a potential flat base following the breakout through the 355-363 price zone two months ago. Today’s action had the look of an “exhausted gap” with AAPL gapping up and trading (some might say churning) around in a tight range all day on very light volume. This reminds me a bit of the gap-up of seven days ago that also occurred on light volume. Price then failed to the downside as AAPL again tested its 50-day moving average yesterday, breaking down through the 50-day line before bouncing right off the 65-day exponential moving average. It’s hard for me to see AAPL breaking out from this pattern just yet as the weekly ranges are somewhat wider than normal for AAPL. That said, a high-volume burst up through the 390 price level might get me interested.

Apple, Inc. (AAPL) Gilmo Report Chart

In my August 28th report, in addition to AAPL, I discussed the only three stocks I might be interested in buying, MasterCard (MA) and Hansen Natural Corp. (HANS). Since breaking out through the 82 price level, roughly, HANS, which I don’t show on a chart here, has given anyone who bought that breakout a wild ride as it ran up to 90 and then back down to a low of 79 before stabilizing today at 84.07. Meanwhile, MA spent the prior two days sliding back down to its 50-day moving average yesterday and finding some marginal support as volume did pick up but remained well below average. Today, however, MA actually flashed a pocket pivot buy point off the 10-day moving average on volume that was above average as well as higher than any down-volume in the pattern over the prior 10 trading days. If you think this current rally has legs to it, then one could buy this with the idea that it should hold the breakout level at 338, a mere point below its 339.10 close today! If that’s too close, then the 10-day moving average at 327.30 remains a reasonable downside guide for a stop as I would expect this breakout to at least hold that price level.

MasterCard (MA) Gilmo Report Chart

Given that the market is in the “chop zone,” and despite a couple of follow-through days in the mix off the recent lows, I find it difficult to come up with a definitive plan for operating in this market currently. This, however, is not unexpected given the position of the general market indexes within their chart patterns and the uneven action of any potential leadership. Thus it is, at best, possible to test the long or the short side here, or maybe even both, but don’t assume that you will reap any immediate rewards any more than you can assume that you will reap some pain instead. The market may remain in the chop zone as it drifts higher or slops around into tomorrow night’s widely-anticipated speech from the President. How the market will react to the speech is anyone’s guess, thus it may make sense to simply lay low until more definitive action is forthcoming from the market, remaining in cash or trying to stay with any positions you may have, long or short, that are still holding above or below their stop-loss points, as the case may be. For the most part, however, I think the market is acting in a manner that is typical after it has experienced a sharp break off the peak as it did in August. Soon enough, the true trend here will begin to clarify, so we can simply “hang loose” and maintain flexibility as we try to draw a bead on the market’s next big move.

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 positions in AGQ, DGP, EL, and SQQQ, though positions are subject to change at any time and without notice.

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