The Gilmo Report

September 8, 2010

September 8, 2010

The NASDAQ Composite Index, shown below on a daily chart, pretty much did what it was entitled to do as it pulled back yesterday to its 50-day moving average on volume that was slightly higher, a possibility I noted in my report of this past weekend. I do not, however, consider yesterday to be a distribution day on the NASDAQ since the increased volume was largely due to wild trading in Oracle Corp. (ORCL) after it hired Hewlett-Packard’s (HPQ) former CEO, Mark Hurd. Overall, the volume was well-contained as the index closed right at the 50-day moving average, more or less, and then today picked up increased trading volume as it pushed up off of the 50-day moving average for a reasonable show of support. So far so good, and it appears that today’s action is setting up a run at and test of resistance at the 200-day moving average, up around 2272 on the NASDAQ. The S&P 500 Index, not shown, would see potential resistance at its 200-day moving average at 1115-1116. So far the indexes are acting constructively, and leading stocks continue to act well.

  Gilmo Report Chart

In many cases we are seeing new highs as these leading stocks, such as my Power Trio of (CRM), Vmware (VMW), and F5 Networks (FFIV), become extended and beyond buyable range as they push away from their 10-day moving averages. In CRM, not shown, I would wait for a pullback to its 10-day moving average at around 114 before trying to add to any position in the stock, and VMW, also not shown and which I discussed in my weekend report of September 5th, would become quite buyable on any pullback down to the 81 price level where its own 10-day moving average is. Likewise for F5 Networks (FFIV), we would prefer to jump on a pullback to the 10-day line at around 90-91, as we see in the daily chart below. There is no guarantee, however, that these stocks won’t go higher first, hence I see no reason to unload shares of any of these stocks at the current time. They continue to act well, and other than using pullbacks to add to positions in these strong leaders, there is no reason to try and get cute at the risk of losing your position. Let the stock push you out first.

F5 Networks (FFIV) Gilmo Report Chart

Over the weekend I went into some detail regarding Acme Packet (APKT) and the ascending base it emerged from last week, as we see on the daily chart below. APKT is also showing “ants,” or those little black triangles that show up on my eSignal charts whenever the stock is up 12 out of 15 days or more. In this case, APKT has been up 12 out of 15 days in a row or more for the past three days. Today’s volume was in fact higher than any down-volume day in the pattern over the prior 10 days, a clear pocket pivot volume signature which is quite constructive but was not in fact a pocket pivot buy point since the stock is well extended from its 10-day moving average, the pink moving average that you see in all of my charts. Someone asked why I use pink for the 10-day line on my charts, and the answer is because I think of the 10-day as a “dainty” moving average since it isn’t hard for a stock to pull down to it or just beneath it given that it is usually the closest to a stock’s current price. Hence, it is pink! In any case, APKT was buyable yesterday as it paused briefly, based on my discussion of the stock in this weekend’s (September 5th) report.

Acme Packet (APKT) Gilmo Report Chart

When I look around at the price moves in leading stocks this week, I can’t help but think that Gilmo members were well-equipped and knew where to go, particularly with a stock like Rovi Corp. (ROVI), in which I was anticipating a pocket pivot buy point over the weekend, as I discussed in that September 5th report. ROVI has been setting up in this base-on-base formation, but the second base might still be just a hair short at only five weeks long. Nevertheless, I consider today’s pocket pivot buy point to be constructive, despite the fact that it ran into some selling as it tried to move to new price highs and stalled to close just about mid-range on the day, but still up on very strong buying volume as we see on the daily chart below. As well, with the short five-week base coming into this week, APKT may need a few more days to set up for a breakout, but in my view the pocket pivot is good enough, with the idea that the stock should hold the 42.40 price level right around the 50-day moving average. This looks fine, barring some kind of failure here that takes the stock below its 50-day moving average on heavy volume.

Rovi Corp. (ROVI) Gilmo Report Chart

In my report of August 8th I discussed both Xilinx, Inc. (XLNX), not shown, and Altera Corp. (ALTR) as hardware plays within the cloud-computing theme given their role in the production of field programmable gate arrays (FPGAs). Both stocks soon broke down, however, and only ALTR has recovered, as we see in the daily chart below. ALTR is in fact the leader in the space and has a first-mover advantage over XLNX, hence it is not surprising to see the market sift it out as ALTR flashed a pocket pivot buy point today by staging a massive-volume outside reversal day to the upside that is buyable, using the 50-day moving average as your guide for a stop. This morning, Intel (INTC) was downgraded, but let’s face it – INTC is a stale old former leader from many moons ago, and so when that downgrade clobbered the chip sector, including stocks like ALTR, it turned out to be a grand buying opportunity, apparently. ALTR has posted two quarters of big sequential earnings growth at 192% and 190% over the past two quarters, respectively. It is a larger-cap, slower-moving stock, but for those who like this sort of thing, it is potentially buyable here.

Altera Corp. (ALTR) Gilmo Report Chart

Last Wednesday, I noted that (PCLN) appeared to be coming out of a high, tight flag formation, and the stock has since moved higher as we see on the daily chart below. Based on Jesse Livermore’s rule about the significance of “Century Marks” in stock prices whereby a stock should move through such a mark, e.g., 100, 200, or as in PCLN’s case 300, with some urgency once it decisively breaks through, PCLN is now doing what it should be doing . I discussed this rule of Livermore’s starting on page 4 of my August 18th report. Last Wednesday’s move looked like that kind of move, although the volume was just below that required for a pocket pivot volume signature. Nevertheless, as I indicated in last Wednesday’s report of September 1st, the stock was buyable as long as one did not freak out about a pullback down to the 303 price level. This, however, did not occur and PCLN today flashed a big pocket pivot volume signature, although it was not a pocket pivot buy point given that the stock was already well extended from its 10-day moving average, something that is currently quite common among the leading stocks. In any case, PCLN is a nice illustration of Livermore’s “Century Mark” rule, and is currently extended, hence not buyable. (PCLN) Gilmo Report Chart

I suppose I could talk about Green Mountain Coffee Roasters (GMCR), not shown, and its breakout move from a cup-with-hande base formation today, but to me that is fairly obvious and well covered in a newspaper like IBD. One cup-with-hande I see setting up nicely, and which is perhaps not so obvious, is Berkshire Hathaway, Inc. (BRKB), shown below on its weekly chart. With the “reflation play” perhaps taking form as the basis for any continued market rally, stocks that own hard assets, like BRKB, can come into favor. BRKB is also posting some decent earnings growth at 63% in the most recent quarter following last quarter’s 21% earnings growth turnaround. As I noted in my report of last Wednesday, September 1st, BRKB flashed pocket pivot buy points on August 27th and September 1st as it began to move up in the handle of this current C&H formation. I don’t show the daily chart here, but note the large upside volume spikes in the overall weekly pattern, which I believe offer strong clues that institutional investors are steadily accumulating the stock. The most recent weekly volume spike, last week, created a standard new-high breakout buy point for the stock; hence on that basis BRKB remains buyable, although it is extended from the two pocket pivot days while it was still in the handle. For more detail on the pocket pivots, see my report of September 1st.

Berkshire Hathaway, Inc. (BRKB) Gilmo Report Chart

You know you are on when the only stocks you talk about as short-selling targets proceed to blow apart, even in the midst of a market follow-through day (FTD) and confirmed rally. Over the weekend, I noted my consideration of MasterCard (MA), not shown, and Visa, Inc. (V), as short-selling targets in the event that the market ran into trouble. Given yesterday’s pullback in the general market, which I tended to view as necessary and justified given the prior sharp, three-day rally, it appears that both MA and V used that action as their cue to blow apart yesterday and today. As I noted over the weekend, V looked to be the weaker of the two, and today it got slaughtered on very heavy volume as it broke down through support. This looks like it wants to go lower, and if by chance you are short it, I would stay short until I saw some sort of convincing move back above the 70 price level.

Visa, Inc. (V) Gilmo Report Chart

I suppose the action in stocks like V and MA prove that this is still a market of stocks rather than a stock market, and playing it this way can yield results, even on the short side. Of course, you have to pick the right stocks if you want to short after a follow-through and into a confirmed market rally. In general, shorting in a confirmed rally is dangerous, and the odds of success are muted thereby. However, it is interesting to note that V and MA were prime short-sale targets yesterday, despite the fact that I am not short either of them.

Bearishness remains rampant, as I noted over the weekend, and most participants don’t want to believe this rally. A lot of the commentary regarding the current poor economic back drop and the “logical” conclusion that the market can’t possibly go higher when everything is so terrible reminds me of May 2003 when many were parroting the line that “economic fundamentals do not justify a bull market.” Of course we know that the market discounts the future, not the present, so current economic fundamentals do not get priority in our market and individual stock analysis. As well, we know where that kind of analysis got you in May 2003. Price/volume action rules all, and for now the upside trend remains our friend. The upcoming November elections could be a turning point as economic participants see potential Republican victories as counter-balancing the Obama Administration and Congress’ anti-business posture, helping to create a more certain environment for business spending and expansion, and this may be what the market is currently discounting. Meanwhile many leading stocks are somewhat extended, so for now we simply think less and sit more, pending further evidence from the market.

Gil Morales

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

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