The Golden Triangle (GLD)

It wasn’t long ago that wherever you turned the talk was of gold, and of how it was going to go on a rampage because of impending inflation. It seemed as if your taxi driver was prepared to buy a break above $1000 and “drop the flag” for a ride to quick gains. Then economic releases shifted the focus to deflation. Suddenly inflation wasn’t going to be a problem and we stopped hearing about gold.

We’re not sure how the deflation/inflation argument is going to resolve itself. The bursting of financial bubbles are generally deflationary events and inflationary policies are required to fight them. Where that leaves us is in uncharted territory.

But when it comes to investing we are never in uncharted territory as we have the charts to guide us. The first thing that impresses us about the price of gold, best represented in the GLD ETF, is that it has held up. Given how out of favor the bullish argument in gold has been we expected to find lower prices but that’s not the case.

Instead what we have, if you connect the February, June and August highs and the April, July and August lows, is a lateral triangle. And we are rapidly approaching the apex of that triangle which means a break out is not far off. Break outs usually occur before the apex is reached.

One thing lateral triangles don’t tell us is which way price is likely to break. It could go either way. But with the US Dollar Index (DXY) constantly trading into significant support the last few months, weakening it with each penetration, a downside break out in the dollar is likely and with it a corresponding upside break out in the price of gold.

Today the price of gold gapped up and is yet again approaching the top of the triangle. A decisive break above the trend line, which on Monday will be about $94.50, would be a buy signal.

Bear a few things in mind if you take this trade. First, you should see the dollar index break to fresh lows as gold moves higher. Anything less is likely to lead to a false break out in the yellow metal.

More important is the political risk. Faced with an enormous deficit the US government could well take a “benign neglect” approach to the dollar, as an eroding dollar would cheapen its outstanding debt and make it that much easier to repay. But China and Japan have been important buyers of US debt and continued erosion in the value of the dollar could be met by strong protests from these key creditors and cause the US Treasury to defend the buck, effectively curtailing a long in gold.

Such are the risks in a political trade. And all the more reason to get in at the right point on a break out. Buying gold when it becomes extended and obvious is likely to have harsh repercussions.

Dendreon Corp (DNDN)

One of the winning themes in the current market uptrend has been small, profitless biotech stocks nearing approval for blockbuster drugs, which in turn has spurred share price appreciation. Human Genome Sciences (HGSI) is probably the most prominent example but there are others and DNDN is among them.

Based on Phase 3 trial data DNDN is all but certain to receive approval for their prostate cancer drug Provenge. The company, which has never turned a profit, now has forward EPS projections of 32c in ’11, $1.19 in ’12 and $2.23 in ’13.

In addition to seeing their share prices appreciate because of anticipated profitability, companies like DNDN are takeover candidates as pharmaceutical companies with skimpy pipelines seek new blockbuster drugs. Indeed HGSI’s latest gallop to the upside is on just such speculation.

Bear in mind that Provenge has not been approved and the drug extends life by only 4 months. It’s not a cure. Healthcare reform could well limit the use of drugs such as this.

But for now the market does not seem too concerned. Price has formed a double bottom base and today has advanced more than $3 off the first low of the pattern. O’Neil refers to this as a “Shakeout Plus 3” and considers it a valid early entry point for a break out from such a pattern.

With price having taking out the $25 level we seek entry at the market with a stop under $24.

Fuqi International (FUQI)

FUQI has been a standout performer during the current rally but last Monday it suffered an ugly gap down, triggered by doubts about the sustainability of the Chinese recovery. If China can’t maintain its economic rebound then a consumer driven stock like FUQI is likely to be a casualty.

But FUQI has shown no further price progress lower. And while there remains an ugly gap in the chart price is trying to penetrate that gap this morning on volume. This would be a logical area for the stock to meet resistance and for a new leg lower to begin, so caution is warranted.

But we have seen a significant recovery in the US market and in many stocks off of last Monday’s gap down. A long in FUQI here (stock is currently trading around $25.70) is a bet that it can bridge its gap and continue its uptrend. We’d recommend a stop under 25.30.

Salesforce.com (CRM)

Last night CRM beat estimates on both the top and bottom lines. The beat wasn't exceptional and forward guidance wasn't raised significantly. But what matters is the market's reaction. Price has gapped off its 10 MA weekly and vaulted on massive volume to fresh 52 week highs.

CRM has been posting double digit sales and double and triple digit EPS gains on a year over year basis for at least eight quarters and that is forecasted to continue.

This morning price has taken out the early gap up highs signalling that shares are likely to only go higher during a continued market uptrend. We would recommend entry at the market (where price is currently trading around $53).

Your stop should be the day's low. But given CRM's performance thus far we think this has an excellent chance of resuming a powerful run.

This morning on our sister blog we published the reasons why, surprisingly, you need to begin to reinvest. We recommend reentry in BIDU, AAPL, WMS and STEC. While market leadership has narrowed we are monitoring reentry in other prospects and are considering some new names as well.

Over the weekend we advised caution. Today should find you out of the market in the safety of cash. See our companion site for our take. We'll be posting new trading opportunities, long or short, as they arise.

Updates on Stocks in our Universe

While today's market posture doesn't encourage fresh entries it does require us to manage our longs. Of late we've posted updates on GMCR, NTES and CSTR. Look for them under the Comments section of the original write up.

The Punchbowl is Empty for Those Late to the Party

If we must say so ourselves we’ve hit the ball out of the park in the brief time this blog has been in existence. With few exceptions our picks have been exceptional gainers.

But that doesn’t make us geniuses. What it makes us is pretty good at timing the market and picking stocks well positioned to move aggressively higher with the market when it makes its move. We could make picks using the same criteria when the market has another posture and be spectacularly mediocre or even unsuccessful.

This is why the number of recommendations we have made of late have been few. Of note the only one we made last week, Neutral Tandem (TNDM), was a dismal failure. Let’s take a look at some reasons why.

Most people will immediately turn to the chart and in retrospect point to a number of factors that doomed it. But we’ve seen “faulty” patterns work often enough in the past to dismiss these objections.

Others will point to a management that suddenly has a more cautious outlook. But Apple (AAPL) management is consistently cautious in their guidance and that hasn’t stopped that stock from being one of the largest winners of the past half decade.

We think that TNDM was unsuccessful because it was late to the party. It’s that simple. The market resumed its uptrend in mid July and immediately a number of stocks, including many that we profiled, started to launch higher on volume out of their patterns. Many quickly gained 15, 20, even 40% in the case of STEC. And TNDM? It sat there not doing much.

When the market is moving and a stock isn’t moving with it that makes the stock a laggard. While it could well launch on a big run the odds are lessened. True leaders assert themselves soon after the market turns itself loose.

This is why we are reticent to profile other stocks at the moment. For now your best chances of investing success are to watch those stocks that have made good moves and patiently await an opportunity to climb on board. That seems counterintuitive but historically those stocks that move late tend to be lesser stars and we are after only the true leaders.

We’ll be following all of our stocks and making suggestions for alternative entries in the Comments section underneath each write up.

Some Thoughts on the Impact of Stock Offerings in Your Holdings

This morning GMCR priced a primary offering of 5MM shares at $67.25, a discount of less than 1% from last night's close. Thus far today the stock has only traded higher. That kind of enthusiasm for an offering is exactly what we want to see in one of our positions.

Juxtapose this reception to the horrid reaction to STEC's secondary offering yesterday. (A secondary offering is when locked up shares are sold as opposed to a primary where fresh shares are brought to market. The primary is dilutive. The secondary increases the float but doesn't dilute.) In spite of not brining any new shares to market investors bailed on the stock. Underwriters had to price the offering nearly 8% below the previous closing price. The lack of institutional support for a winning stock is a cautionary sign.

Clearly the market has been disturbed by STEC’s not raising forward estimates and the selling of large shares by insiders. We don’t think STEC’s fundamental outlook has changed and believe the uptrend could well be saved. But we felt compelled to take some profits in the name yesterday.

We are prepared to add back provided we see a convincing turn in the stock. This morning STEC gapped higher with the market but then traded below yesterday’s low. It has found support at the July 16th gap fill. Whether it can mount a convincing turn here or will trade back towards its 50 MA remains to be seen. We’ll be monitoring the action and post further recommendations under our write up of the stock.

We Blew It On Coinstar (CSTR)

CSTR is in flight. We clearly missed at least a terrific trading opportunity. We have posted complete analysis of the quarter and suggestions on how to approach this stock going forward in the "Comments" section underneath our write up of the stock.