The Gilmo Report

April 1, 2020

April 1, 2020 3:25 pm ET

The bear market rally off the lows of nearly two weeks ago ran into some April Fool’s Day selling today. The NASDAQ Composite Index, like the S&P 500 and the Dow, finally peeled away from its 20-dema to the downside as selling volume picked up yesterday. Today a gap-down open carried the index below its 10-dma on lighter volume.

 

 

While the situation is far from crystal clear, it is possible that we’ve seen the indexes put in the top of a potential bear flag. How long that flag lasts is another question, as we could simply keep rolling lower from here and bust right through the prior March lows. There’s always the outside chance that the indexes could find their feet and rally back up closer to their 200-dmas, but right now it appears that this is a low-probability possibility.

News that Russia has stopped buying gold put some pressure on the yellow metal over the past couple of days. The country had been accumulating gold for some time, but now that its gold holdings now constitute 20% of their reserves, they likely became saturated. As other central banks come around to seeing the writing on the wall, we may see other countries pick up the slack.

The news sent the SPDR Gold Shares (GLD) right into the thick of the confluence of its 10-dma, 20-dema, and 50-dma, where it found support at the 10-dma, the lowest of three moving averages. This obviously brings it into a lower-risk entry spot, using the 10-dma as a selling guide.

 

 

The iShares Silver Trust (SLV) has held up perhaps a little better, but it has now pulled into its own 10-dma. This offers a lower-risk entry using the 10-dma as a selling guide for the white metal ETF.

 

 

With the indexes butting into the underbellies of their respective 20-demas for the past week, individual stocks have been living in the chop zone. As I’ve discussed often in the past few reports, this is a trader’s market. My approach is to focus on a handful of names and work ‘em in either direction depending on what the 620-charts are showing me.

Zoom Telecommunications (ZM) is a wonderful trading vehicle as it literally zooms back and forth 10 or more Livermorian points a day. However, it looks like it may have finally topped for good based on the double-top short-sale entry it presented on Monday around the $160 price level.

That reversal showed up quite clearly on the 620-chart and the stock has now come off the highs for three days straight. Today ZM broke below its 10-dma on above-average selling volume, triggering it as a short at the line this morning.

That would have been a secondary short entry, however, since the proper entry was on Monday around $160. Watch for any weak rallies back up into the 10-dma as potential secondary short-sale entries, or a breach of the 20-dema which would trigger a third short-sale entry.

 

 

And, of course, we never, ever chase strength. Sharp moves in one direction or the other are certainly playable, but only by entering in the proper direction at the proper extreme. If one was alert to it, RingCentral (RNG) was buyable along the 50-dma last week, allowing one to participate in Friday’s sharp pocket pivot move back to the prior highs.

On a move like that, given the double-top look of the chart, I’m certainly not going to go long at that point, but will start to stalk the stock for a possible short-sale entry. As always, the five-minute 620-chart is my preferred tool for guiding entries in this regard. And so, we can see that RNG reversed nicely off the $250 price level on Monday before running into the 50-dma yesterday.

Today RNG descended further but found support around the 10-dma/20-dema confluence and closed just below the 50-dma. One could technically treat this as a secondary short-sale entry point using the 50-dma as a covering guide. However, it could retest today’s highs around $220, so one could remain flexible and ready to act on such a move should it occur.

 

 

Citrix Systems (CTXS) has been one of those impossible v-formations, running to new highs early this week on the heels of Friday’s buy recommendation from Goldman Sachs. Notice, however, that once the stock pushes into new-high price ground it reverses. That’s where I stalk it for a short entry, and the stock has responded on the downside, although not excessively so.

One can stalk this on any bounces from today’s close, as I tend to think it will soon test the 10-dma if the general market continues to roll lower. A breach of the 10-dma would trigger this as an initial late-stage, failed-base, short-sale set-up should it occur, so can be watched for.

 

 

I mentioned DocuSign (DOCU) on the Benzinga Pre-Market Prep radio show Monday before the open, and the stock took off from there. It was already buyable along the 50-dma, which also offered a very convenient and tight selling guide. The stock then broke out yesterday.

But I don’t subscribe to buying breakouts as initial entry points in a good market, and in a bear market even less so. Interestingly, if one was watching DOCU’s five-minute 620-chart one would have picked a short-sale entry up around 96 yesterday. The stock then closed at 92.40, just below the 92.55 new-high breakout point.

That qualified as a failed breakout attempt, and the stock pulled another failed breakout attempt today, closing at 92.09. This is somewhat fluid in this position, since one could treat this as a short here with the idea that it will not clear the 92.55 breakout point again. Otherwise, one might take a more opportunistic stance here and look to potentially short another breakout attempt, should that occur.

 

 

Slack Technologies (WORK) finally gave up on its own impossible v-formation on Monday by rolling over from a double-top formation after coming within three cents of the $30 price level. That double-top set-up took three days to pan out, but it needed a general market rollover to help it along. Had the market been able to push higher from here, I would not have been surprised to see WORK perhaps break out.

But then, we already know that any set-up will tend to resolve in synchrony with the general market action, so when we can determine that the market is failing, WORK becomes a primary short-sale target. It closed today two cents above the 10-dma as volume dried up, so we can watch for a breach of the line as a secondary short-sale trigger should it occur. Otherwise, if the general market remains weak, I would look to stalk it into any rally up closer to the highs.

 

 

CrowdStrike (CRWD) failed on the lower-risk entry along the 50-dma by, obviously, breaching the line yesterday. Notice how the $60 price level, along the axis-line I discussed in my video reports this week, served as solid resistance for the stock rather than the 50-dma. This is typical, and as I discussed over the weekend, where moving average resistance doesn’t hold then we can then look to price resistance.

After bumping into the $60 level and reversing yesterday, CRWD briefly rallied into the 50-dma early today before reversing to close negative. Rallies back into the 50-dma from here can be treated as lower-risk short-sale entries using the line as a covering guide. Otherwise, a breach of the 10-dma from here triggers a secondary short-sale entry.

 

 

Price resistance is also at play in ZScaler (ZS). Last week it reversed hard off the $66 level and the prior February high in double-top fashion but has since held along the 200-dma. It again tested the highs today but stalled just short of the $65 price level. Thus, we can see that material price resistance exists along the 65-66 price area.

One can approach this in one of two ways. Short it here and use the 65-66 area as a covering guide or take the opportunistic route by waiting for any rally up in that direction as a more optimal short-sale entry using those same highs as your covering guide. Otherwise, one could simply wait for a breach of the 200-dma as a short-sale trigger which I think would have a good chance of occurring on any further general market downside.

 

 

JD.com (JD) is stalling as it bounces along the 50-dma, but more accurately is stalling near mushy price resistance in the 43-44 price area. Today’s attempt at a rally stalled badly as the stock closed in the lower part of its price range on heavy volume.

I think rallies in JD up to the 43-44 price area likely provide optimal short-sale entries, and one can use the 620-chart to watch for intraday signals that could aid a short-sale entry on such a rally. We can also watch for an eventual breach of the 50-dma, if it occurs, as a secondary short-sale trigger using the line as a covering guide.

 

 

Apple (AAPL) regained its 200-dma on Monday morning but reversed yesterday at the 20-dema as selling volume expanded vs. the prior day. For an enterprising short-seller, that would have provided a clear short-sale entry at the 20-dema.

AAPL then gapped below the 200-dma today on light volume. One could watch for any rally back up into the 200-dma from here as a potentially lower-risk short-sale entry.

 

 

Amazon.com (AMZN) triggered as a short-sale entry today at the 50-dma. It initially gapped just below the line, rallied back up into it very briefly, and then rolled over to close just below its 10-dma. While the movement on the chart doesn’t look like much.

The distance between yesterday’s intraday peak and today’s low was about 100 points. So, from here, AMZN would be a short on any rallies back up into the 50-dma while using the line as a covering guide.

 

 

On the AMZN weekly chart we can get a sense of how the stock is starting to play out as a potential late-stage, failed-base (LSFB), short-sale set-up. After a failed breakout back in February, the stock has tried to re-breakout a couple of times but come up well short.

The new-high breakout point on this chart is 2035.80. So, if it is able to regain the 50-dma and rally we would watch for an approach toward 2035.80 as potentially setting up a more opportunistic short-sale entry at the prior breakout point.

 

 

Netflix (NFLX) moved into a double-top short-sale position yesterday and held up there this morning before rolling over to retest its 50-dma. The stock was good for a trade off the 50-dma on Monday, but the rally ran out of gas at the prior February/March highs. In this position, watch for a breach of the 50-dma as a secondary short-sale trigger from here using the line as a covering guide.

 

 

Tesla (TSLA) seems to be encountering solid resistance at its 20-dema following the rally off the 200-dma that began with a bottom-fishing pocket pivot, as I’ve noted in the last two reports. It closed back below its 10-dma, which could be treated as a short-sale trigger using the 10-dma as a covering guide.

That said, any weak rallies up into the 20-dema can be considered potentially lower-risk short-sale entries from here. I tend to think, as with any of these big-stock NASDAQ names, that a bearish resolution will coincide with the continuation of the current two-day rollover in the general market indexes.

 

 

As I noted over the weekend, when it comes to all these big-stock NASDAQ names, I like to play them all as a short at once by going long the ProShares UltraShort QQQ (SQQQ). I discussed how to approach this in my weekend video report and was able to put that plan into action yesterday when the market reversed off its highs.

Below we see the SQQQ’s five-minute 620-chart from yesterday (Tuesday). There was a very short-lived MACD cross to the upside, which quickly quashed any thoughts of entering a position in the SQQQ at that point. However, as the morning wore on, another MACD cross occurred about an hour later, just before 8:00 a.m. PDT my time.

That signal was successful, and the SQQQ quickly launched higher from there. Two hours later, a bearish MACD cross occurred. But at that point the position is showing a decent profit and the moving averages remained in a bullish configuration with the 6-period line remaining above the 20-period line.

When this occurs, I will stay in my position provided that it is showing a reasonable profit cushion. With the original signal occurring at around 18.30, once the MACD crossed back to the downside it was trading at around 19, so this, combined with a continuation of the bullish moving average configuration, kept me in the position. It then closed near the highs of the day, and I held a core position overnight.

 

 

That turned out to be a smart move as the market gapped down, but notice how the MACD crossed to the downside in pre-open trade. One could have exited around 21 in the pre-open session and look for another long entry signal a little lower if it occurred. Well, it did, right after 8:00 a.m. PDT my time, and that was a very good signal.

Today’s action, while starting out with a gap-down break, saw the indexes rally off their opening lows before reversing back to the downside just after 8:00 a.m. PDT. The rally off the lows set up that bullish MACD cross, and despite a MACD cross to the downside about two hours later, the moving averages remained in a bullish configuration.

So that kept me in the position all day long, and the SQQQ ended the day near the highs. I’m not sure where it goes from here, but I’m looking for more downside in the coming days. I prefer working the SQQQ as a proxy short for a basket of big-stock NASDAQ 100 names, like those discussed above.

As I’ve noted many times before, this strategy can be employed with any of the 3x-leveraged major market index ETFs. This includes ETFs for the S&P 500, the Dow, or the Russell 2000 like the SDOW, SPXU, or TZA. Pick your favorite and have at it!

 

 

For newer members: Please note that when I use the term “20-day moving average,” “20-day line,” or “20-dema” I am referring to the 20-day exponential moving average. I use four primary moving averages on my daily charts: a 10-day simple (the magenta line), 20-day exponential (the green line), 50-day simple (the blue line) and 200-day simple moving average (the red line). On rare occasions, I will also employ a 65-day exponential moving average (thin black line). In all cases I will mostly use the shorthand version of “10-dma,” “50-dma,” etc.

What we know for certain right here, right now, is that the reflex rally off the lows of nearly two weeks ago ran into resistance at the 20-dema in all of the Big-Three major market indexes. This coincides with breakdowns in stocks across the board and provided for opportunistic short-sale entries starting yesterday in both the indexes and individual target stocks.

Where we go from here is of course uncertain, but right now I’m looking for a possible retest of the lows barring a shift in the real-time evidence. But playing this, as I noted over the weekend, requires being on your toes and alert to any opportunistic changes as you seek to bob and wave with the market, so to speak. Otherwise, if you can’t dance like a butterfly and sting like a bee with timely entries long or short, cash remains king.

Gil Morales

CEO and Principal, Gil Morales & Company, LLC
Managing Director and Principal, MoKa Investors, LLC
Managing Director and Principal, Virtue of Selfish Investing, LLC

At the time of this writing, of the stocks mentioned in this report, Gil Morales, MoKa Investors, LLC, Virtue of Selfish Investing, LLC, and/or Gil Morales & Company, LLC held a position in SQQQ, though positions are subject to change at any time and without notice.

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