Time to Take Some Profits on Gold

On September 2^nd the price of gold broke above an important trend line. Gold had put in a superb base, lasting nearly 18 months from March 2008. The last seven months of the base featured increasingly tight trading, auguring a powerful break out.

 

And so it has been. The position has been up over 20% at recent intraday highs. And it’s probably not over yet. An 18 month base suggests a measured move is a valid target, and that would take us to about 1300 or so.

Twenty percent is a fine profit for a commodity trade. For those that took our suggestion to go long we believe this is a good time to cash some in. Not all of it, just enough to make the inevitable, likely volatile pullback easier to endure.

Why lock down some profits now when technicals tell us 1300 is a not unreasonable target?

Because the animal spirits are starting to flow. Novice money is being attracted into the trade. The number of advertisements on TV and other media is mounting. And this evening we received an unsolicited e-mail from The Street.com to subscribe to their products that pump gold investments. It was headlined by a smiling Jim Cramer posing with thumb up and this superb analysis in the caption: “Cramer says: ‘The rally in gold is a good thing.” What an oracle.

These are signs that the intelligent investor, who leads the crowd, should accommodate those less knowledgeable who are eager to make a purchase best made months ago.

We don’t know when or even if the price of gold will correct. We do know that it has become unmoored from all reality. Previously it was tethered to the US Dollar index, rising as the dollar fell. But lately even as the dollar has stabilized gold has continued its ascent, accelerating as the dollar moves sideways. This is a sign of an overheated, overcrowded trade. It is as likely to continue in the near term as it is to react to a seemingly innocuous headline as an excuse to embark upon a harsh correction.

Investors make the most money when risk seems at its highest. Paradoxically as prices rise those that are increasingly risk averse become emboldened to commit. The most risk averse tend to invest at what turns out to be the moment of greatest peril. They do so because they perceive that a constantly rising price has removed the risk. These are the people that are beginning to plunge into gold. They are exposing themselves to the likelihood of a harsh lesson.

Dendreon Corp (DNDN) update

We've profiled this wonderful pattern several times, what O'Neil calls a base on top of a base. It is very bullish.

Previously we looked for entry in the earlier double bottom with handle.

Coincidentally the second pattern is also a double bottom with handle. There are 2 concerns we have, though. The first is that there is no accumulation in this latest formation:  not one day of gains on above average volume. The other is that until today the handle wedged upward. You want to see the lows of the handle edge down to shake out weak holders.

With this afternoon's move you're getting that. We'd keep DNDN on the long radar should the market stabilize. This could be an interesting and low risk entry to position yourself for a potential break out.

Trading Recommendations for Tuesday 17 November

On our sister blog we recommended considering smaller capitalization names again given Monday’s renewed strength in that area. Accordingly we profile Buffalo Wild Wings (BWLD) and Coeur d'Alene Mines (CDE).

If you have not previously taken entry in Jos. A. Bank (JOSB), per our profile last week, re do not believe it is too late to look for entry in this stock using O’Neil’s Shake Out Plus 3 method for double bottom bases.

Buffalo Wild Wings (BWLD)

Last week McDonald’s (MCD) powered into new high ground. We were taken aback as restaurants have been among the poorest market performers. But Monday morning’s retail sales report indicates Americans are trickling back into eateries, and BWLD is among the strongest up and coming franchise concepts around.

After running early in the bull market the group has rested and BWLD has formed a seven month cup with handle base. We’re not in love with the handle. Volume has been a bit too noisy and the handle bases sideways instead of lower. But we like how volume dried up the last two weeks before accelerating Monday as price tried to breach the downtrend line formed by the September and October highs.

We’d be buyers on any volume move higher.

Coeur d’Alene Mines (CDE)

Silver made an impressive break out move today indicating it is beginning a second leg higher. CDE rose on volume off its 50 MA and was turned back at a trend line connecting recent highs.

Price originally broke out of a well formed base when silver made its earlier move in September. It broke from a price point just south of $17 and ran nearly 50%.

While the price of silver based CDE has pulled back constructively to its 50 MA for the first time since the break out. O’Neil teaches that the first touch of this line after a break out in a continuing bull market is most often buyable for further gains.

We’d be buyers here on a breach of the trend line.

Big Cap Suggestions for a Rally That Might Not Be Done Yet (PCLN, BIDU, GG, CRM, BLK, AAPL)

Priceline (PCLN)

This stock bounced off its 50 MA and exploded to 52 week highs last week on earnings. It was buyable on the gap up. If you missed that a excellent entry point in a stock that gaps explosively and is likely to continue will often come on an undercut of a prior low in the pattern. Usually that comes when price dips into the gap. Eager buyers will often provide “gap support.” PCLN is sufficiently strong that it has not yet tested the gap. But it did undercut Wednesday’s low on Friday. The stock climbed nicely from this “failure.” It’s a buy here with a stop under Friday’s low. Should it stop out we’d look at reentry on gap support.

Baidu (BIDU)

BIDU broke down hard on earnings. Usually this kind of high volume break down signals the end of a stock’s run. Shorting the bounce back can be quite profitable. Except BIDU has had two legs up off its bottom, has flirted with new all time highs, refused to sell off, and is basing near new highs. This is a sign of price wanting higher. The stock is offering valid entry on this bounce off the 50 MA. We’d be buyers of a move to new highs, or immediately with a tight stop.

Goldcorp (GG)

This stock has formed an improper base. The mid-point of the W is higher than the left side of the base, invalidating a double bottom pattern. The move off the top of the W went too deep to be considered a 50 MA rebound play. It was V shaped, which usually augurs price failure. But unless gold corrects, and it hasn’t done so materially even when the dollar has bounced, we like entry here not far off minor support around $43.50. We’d have little patience if price does not respect minor support or gold itself sees some profit taking.

Salesforce.com (CRM)

This is a 50 MA rebound play and price moved to new highs on excellent volume on Friday ahead of earnings this coming Tuesday evening, November 17^th. This is a buy as it stands. We would only be willing to hold through earnings should we have a sufficient cushion in the stock. Otherwise our stop would be a move back into the consolidation.

Blackrock (BLK)

This stock is a rather thin trader for a $12B company, but it has a 50 day average of $73MM moving through the stock, which is sufficiently liquid for us. The company will begin to see a sharp acceleration in earnings next quarter and it should last for several quarters, with 51% EPS growth projected for next year. Of course price has nearly trebled off the February bottom so this is well priced in, but the promise of these earnings is driving the trend.

We have here yet another 50 MA rebound play. This one is more risky than the others because of the multiple touches of the line throughout the uptrend without forming a proper base. But we are using tight stops here. Early entry could be taken on a volume break above the trend line formed by trading over the last week. We’d use $230 as our stop.

Apple (AAPL)

This is the first time AAPL has come near its 50 MA since its last base in July. Price pierced the roughly equivalent 10 MA weekly, which is sufficient for us to consider this a 50 MA rebound play.

The volume profile in this stock is just horrid, featuring above average volume on the decline and disinterested volume on the rebound. Often times a pattern like this will reverse hard when retesting the old highs and that could well happen here. But unless the market breaks down we don’t think it will. We have mentioned innumerable times that AAPL is the most liquid leader of the bull market and we expect it to be among the last generals standing.

You can enter here with a tight stop or buy a move to new highs on volume.

Home Inns and Hotels Management ADS (HMIN)

We previously profiled this stock when it set up in a powerful ascending base. It never triggered. Rather it sold off into earnings, ruining the pattern.

But HMIN's decline was quickly arrested, the stock bounced back and then exploded to new highs on earnings earlier this week. The company has now posted two consecutive quarters of triple digit year over year EPS acceleration. At least two more are projected.

This is the first time the stock has bounced off its 50 MA since breaking out of a base in July and we consider this to be a buyable event.

Price has pulled into the gap on today's market weakness but is bouncing back on good volume. We're taking entry just south of $34.50 on this rebound. Our stop will be under $34.

Talecris Biotherapeutics (TLCR)

TLCR is a recent IPO in the biotech space that makes proprietary blood products. This is not a microcap profitless company, but has a market cap of nearly $3B and a liquid share count. It is profitable.

The company released its first earnings report as a public concern last night posting solid EPS and sales increases. Further earnings are expected to continue accelerating for Q4 after allowing for one time charges related to debt refinancing.

The stock has formed a tight initial base after rising 20% from its offering price. Today it is gapping to new highs on the heels of coordinated upgrades by the underwriters.

Price has traded above $23 before pulling back. The resistance point is $22.80. We're taking some shares as price moves back over $22.80 with a stop under $22.

Joseph A. Bank (JOSB)

We hate their commercials. They are ubiquitous and annoying. But they’re effective.

The company is highly promotional. For a long time we couldn’t figure out how they could make money by giving you a suit, a pair of pants and 12 shirts for free if you buy a pair of socks, but we’ve given up wondering. They are tremendously successful.

We know. We’ve spent a lot of time telling you to buy big cap stocks. And this stock has not made a lot of growth screens. But they bumped up EPS by 42% last quarter after beating by 14c. They are projected to increase EPS only 10% this quarter, but analysts routinely underestimate their quarters.

Very quietly the stock gained 65% during one three month period earlier this year. It has now spent 7 weeks consolidating its gains and has formed a double bottom base from which it has just started to rise. This can be a difficult stock to buy or hold using our usual methods. So we’re going to recommend entry here, just above last week’s high, using last week’s low as the stop.

Cerner (CERN)

Here’s a company of unexceptional performance. Earnings decelerated for the fifth quarter in a row at last report. The company missed sales estimates and they were lower for the third quarter in a row and negative year over year.

And yet the stock goes higher. Much higher. Recently it went higher in 12 of 15 days, which O’Neil says qualifies the company as a buy candidate on its next significant pullback. That would be now.

Cerner is the leader in medical software, a mid cap stock in a filed of mostly tiny companies. And it is rising because of President Obama’s stimulus plan that gives inducements to digitize medical records in an effort to reduce costs in the system.

We frankly doubt this company has the wherewithal to deliver on these promises, but that’s besides the point. The market believes and that’s all that counts. Price recently ran over 40% in a month and half and has now pulled back to the 50 MA, from which it began to rise on Monday.

We are not fans of the volume on the pullback, nor of the volume on Monday as it began to rise. We don’t think it matters. With medical stocks leading the 52 week highs lists we consider this a buy here using the 50 MA as your stop.

Southwestern Energy (SWN)

We still like this stock and with the correction over will take a position over last week’s high. Bear in mind price essentially found support at the top of the handle of the base discussed in our last write up and also off the 50 MA, which will serve as our stop.

Green Mountain Coffee Roasters (GMCR)

We have been singularly unsuccessful with this stock ever time we have recommended it. Bill O’Neil taught us that once you identify a big winner, never stop stalking it for ideal entry until it gives you reason to believe its story is at a conclusion.

We don’t believe GMCR’s story is anywhere near an epilogue.

GMCR purchased the Keurig coffee system and transformed the company into a growth vehicle. Perhaps last month’s most sensational takeover story was Peet’s (PEET) acquisition of Diedrich (DDRX), a maker under license of K-Cups, the consumables for the Keurig system. One look at the charts of the these two companies tells you that the Keurig system remains a growth driver and that GMCR should have significant upside yet ahead of it.

Yet the stock has been a hard hold, making sporadic outsized gains followed by torturous periods of trailing the market.

We like GMCR here for a few reasons. First, price is rising on some volume off the 50 MA, often an ideal entry point for an uptrending stock. Price has risen in two of the last five days off the MA on average or above average volume. The rest of the days the stock essentially based on light volume.

More importantly there is an actionable event in front of us. The company is due to report earnings Wednesday after the bell.

We’re interested in immediate entry in the stock using the 50 MA as our stop. Will we hold through earnings? If the stock moves Tuesday and Wednesday to give us sufficient cushion the answer is “yes.”

Starbucks (SBUX)

We recommended this stock in July after it gapped higher on massive volume off earnings. We were, and remain, not enamored of its declining sales, but the company has closed underperforming stores. Price gained over 20% from our entry point.

The stock has formed what O’Neil calls a Square Box. Last week it dipped under the 50 MA but gapped back above it, breaking out to new 52 week highs on earnings. Price traded in a tight range Monday on sharply reduced volume, a sign gains were being bullishly consolidated prior to another move higher.

We believe this is an ideal entry point for the stock and favor it because it is a large cap, which have been outperformers of late, and is in an area of great interest to investors (coffee).

Intuitive Surgical (ISRG)

ISRG is a pioneer in robotic surgery with their DaVinci system. After suffering last year the company is on the comeback trail with two quarters of positive EPS and sales increases, featuring significant beats in both reports. More importantly these metrics are projected to accelerate in the two quarters ahead, with EPS increases of better than 30% and 100% on tap on sales increases of 27% and 47%. With the company’s recent outperformance investors are likely to bid up shares into these reports.

Technically price is favorably positioned for entry. The stock gapped up on an earnings report in July but has not been an easy hold, trading in choppy fashion after an initial run. But price has pulled back for the first time of late to the 50 MA and has formed a five week flat base. With medical stocks leading the 52 week highs list we’d be buyers of any move to new highs.

Long Options for a Market Follow Through

On our sister blog we’ve laid out our case for further downside in the markets, but there clearly exists the potential for a resumption of the market’s uptrend should the indices post an outsized high volume gain. Good traders need to be prepared with options should the market flout our expectations.

We do not feel the market is sufficiently overbought to recommend swing short positions with the potential for significant gains.

However should the long side prevail a number of stocks have built solid foundations for extended upside.

Dendreon (DNDN) is in a double bottom base with Shake Out Plus Three entry at current price levels. It needs to show at least 5 MM shares of trading for us to consider entry, however, and volume has been conspicuously absent on its recent rise.

Perfect World (PWRD) is also at an inflection point. Price has carved a Cup With Handle base. Friday it rose above the downtrend line connecting the highs of the pattern but as with DNDN volume was lacking. We’d need to see a pace of nearly 2 MM shares to draw our commitment on a strong market day.

Finally Apple (AAPL), which we have often described as the institutional bellwether of the current uptrend, is lifting off its first of the 50 MA since July. We do not care for the volume pattern, with heavy volume on the downside and light volume on the current advance, but AAPL has defied unattractive volume profiles throughout this rally and mounted a most impressive advance.

You will notice a consistent objection we have to all of the patterns above. It is the same objection we expressed in our Market Commentary blog about the general indices. Upside volume is lacking. Unless and until it appears traders with any but the shortest of time horizons belong on the sidelines, waiting for better opportunities.

Margaritaville

We’ve been regularly posting on our Market Commentary blog but have been silent here since last week.

The reason is simple. There’s nothing in the charts that argues for a trade except of the intraday variety and that’s not the purpose of these blogs.

There are a decent number of stocks that are holding up well in their uptrends and could resume higher should the market’s correction be brief. But they are certainly not buy candidates in the current environment. Further downside in the markets would take these stocks lower and possibly ruin their still constructive patterns.

At the same time stocks that have sold off hard could move lower as well but they are certainly not positioned for shorting at this juncture. Nor would we recommend them as longs. Should a market correction be brief and constructive leadership would be more likely to come from stocks that have not suffered such heavy distribution.

The best position for swing and intermediate traders right now is cash. Sooner than later the market will either resume its rally, inviting us to pursue intermediate term longs per our overarching trading strategy, or rally meekly to logical short selling areas. But for now neither scenario is available to us.

Rather than spin our wheels and churn our account we far prefer the opportunity to step back for a time. Welcome to Margaritaville. Just don’t waste away.