The Gilmo Report

August 10, 2022

August 10, 2022 6:56 pm ET

The market got what it has been angling for since the lows of mid-June – a less-than-expected Consumer Price Index increase in August of 0.3% vs. expectations of 0.5%. Year-over-year inflation remains at 8.5% despite coming in .2% lower than expected and remains 6% above the current Fed Funds Rate, yet the market finds the logic of a Fed pivot compelling, nevertheless. Such is the nature of bear market rallies.

The massive upside futures response after the CPI number was quite a sight to behold and in fact set up some bizarre, instant hit & run short-sale trades right at the open. Witness a stock like extended infinite-PE residential solar name Sunrun (RUN) which gapped up to an opening price of 35.84 and within the first five minutes traded down to a low of 33.87.

It then held along those early lows for the next 25 minutes before turning on a bullish MACD cross and melting back to the upside on very light intraday volume. Eventually volume started to come back as it approached fresh highs and sellers came into the market, and by the close RUN printed 37.03 after all the early and nutty volatility.

 

 

I have considered that a rally as far as the 200-day moving average for the major market indexes is within the realm of possibility, and today’s action helped push things back in that direction. Despite all the index noise, however, the NASDAQ Composite carried only as far as the intraday highs of this past Monday and it still has 5% to cover before reaching the 200-dma.

 

 

Meanwhile, the S&P 500 finished at higher highs as it gets to within 2.8% of its own 200-day line. The Dow has come the closest to the 200-day moving average, closing in to within 1.8% of the line today. The gap-up move looks like it has an exhaustive look to it, and we still have the Producer Price Index tomorrow morning, which will likely give a read on just how sustainable today’s CPI decline is. Don’t unbuckle those seatbelts just yet.

 

 

While the CPI added fuel to the whole Fed Pivot argument, interest rates did not react strongly given that they have already been correcting for the past two months. The 10-Year Treasury Yield (TNX) hit a low of 2.746% early in the day before rallying off the lows and ending the day at 2.786%, down 1.1 basis points.

 

 

Being long anything overnight coming into today’s CPI report was predicated on playing a binary outcome of sorts. A lower-than-expected CPI and you’re looking good, a higher-than-expected CPI and you likely have problems. So, barring any roll of the die, or at least already being long something with some cushion heading into the CPI (like precious metals, for example), it was not advisable to chase extended stocks today.

At the earliest, lower-risk long entries were to be found last week in certain areas of the market. As I noted a week ago, one area that looked to be percolating was the industrial metals space. Three names that I highlighted, Alcoa (AA), Cleveland Cliffs (CLF), and Teck Resources (TECK), have all pushed higher after setting up along their 10-day and 20-day moving averages with volume drying up last week.

 

 

Uranium producer Cameco (CCJ) came in today to test the 20-dema as it pushes above the 200-day moving average and did so successfully as volume dried up to -36.4% below average. Not an extreme dry-up, but certainly the kind of action you want to see on a pullback and test of a moving average after strength earlier in the week.

Today’s pullback offered a reasonable entry on the heels of last week’s voodoo pullback into the 200-day moving average. If this current bear market rally continues, I see no reason why CCJ can’t move higher from here either.

 

 

Precious metals have also continued to rally with gold pushing further above the $1800 level this week. The Sprott Physical Gold Trust (PHYS) and the Sprott Physical Silver Trust (PSLV) have both cleared their 50-day moving averages and are now well-extended from the last lower-risk entry points along their 20-demas last week.

While one could look at these moves above the 50-dma as buyable using the 50-day as a selling guide, I would prefer to sit back and wait for a deeper pullback to the 20-dema if I can get it. Otherwise, the best entries occurred lower in the pattern following the PHYS’ long-term U&R through the March 2021 low at 13.23.

 

 

As gold and silver rally, the miners and related stocks are starting to play catch-up. Gold Fields (GFI) gapped above its 50-day line on Monday but then slid right back into the 10-dma and 20-dema yesterday where it posted a voodoo pullback last Friday. It managed to close back above the 50-day line and then move higher from there today.

I would not watch to see how well GFI can hold support along what is now the confluence of the 10-day, 20-day, and 50-day moving averages. I would watch for pullbacks into those moving averages as possible lower-risk entries from current extended levels.

 

 

First Majestic Silver (AG), which was also discussed over the weekend, has had quite a run over the past three weeks. Since posting an undercut & rally move along the 6.47 low of July 14th, which I noted in my July 31st report, the stock is up over 35% and pressing higher as it becomes further extended to the upside.

 

 

A thinner silver miner that I think bears watching for a possible lower-risk entry is one I’ve discussed many times before over the past couple of years, MAG Silver (MAG). The company is ramping up operations on its Juanicipio project in Central Mexico and detailed yields of 9,000 grams of silver per ton of ore in a recent presentation which I believe was the cause for the massive two-day move and pocket pivot through the 50-day line over two weeks ago.

This is a junior miner that trades a little over 500,000 shares a day on average, so is not as thick as most of the names in the space that I follow. The company claims that the ramping up of current production is starting to pay off as the company expects strong cash flows going forward.

We will get a view of just how this plays out when the company reports earnings as expected next Monday. Near-term MAG is extended from the last lower-risk entry at the 50-day line last Friday. That and the slightly higher 20-dema would serve as my references for potentially buyable pullbacks from here if we can get them.

 

 

As I noted above, most stocks were well-extended after being in rally mode for several days coming into today’s CPI number. There were some exceptions, such as semiconductors, which have been whacked off their recent double-top highs following news of severe business slowdowns from Nvidia (NVDA) on Monday and Micron Technology (MU) yesterday.

The semiconductors all broke in unison on the NVDA and MU news with mostly big-volume breaks to lower lows, as the group chart of Advanced Micro Devices (AMD), Broadcom (AVGO), Lam Research (LRCX), Microchip Technology (MCHP), Micron Technology (MU), and Nvidia (NVDA) shows below. Note that today’s action features shakeouts at the 10-dma or 20-dema, in most cases.

If one is feeling particularly bullish on the group right here, then treating a shakeout at the 10-dma or 20-dema as a moving average U&R is possible. In each case a move back up through the 10-dma would utilize that moving average as a selling guide, while a move back up through the 20-dema would utilize the 20-day line.

Otherwise, in a situation such as we see in MU, below, the 50-day line could work as moving average resistance. In that case we would want to be on the lookout for that as a possible short-sale entry. With respect to the others, if the shakeouts along the 10-dma or 20-dema fail and break back below those specific moving averages, then short-sale entries could be triggered depending on how the group and the general market play out from here.

 

 

Many of these breaks in semiconductors off the recent highs occurred at or around double-top positions. That’s one reason why so many of these charts look alike. I offer another six names to consider, Analog Devices (ADI), Applied Materials (AMAT), KLA Corp. (KLAC), Marvell Technology Group (MRV), NXP Semiconductors (NXPI), and Texas Instruments (TXN), as examples of the same types of action and set-ups that are so closely correlated among stock in the group.

In each case you’re looking at possible MAU&R long entries if they hold up and potential short-sale entries if they reverse back below their 10-dmas and 20-demas. I tend to think, however, that if one was jonesing to get long any of these, then the pullbacks into the 50-dma in AMAT, MRVL, and NXPI were your best bets using my amazing 20/20 hindsight!

 

 

For those of you who hate having to make choices, then maybe you can just focus on Qualcomm (QCOM). The stock rallied sharply off the June lows before finally clearing the 200-dma en route to what looked like a test of the late-March high at 160.46. It never quite made it before turning tail along the 200-day moving average and triggering short-sale entries at the line three weeks ago.

It has since moved lower, but has now shaken out along the 20-dema for the second time in two weeks. Thus, one could treat this as an MAU&R long entry using the 20-dema as a selling guide. Otherwise, any break below the 20-day could trigger a fresh short-sale entry. If the stock can rally, however, then the next test of potentially shortable resistance would be along the 200-dma.

 

 

Solars have continued to streak higher, even among infinite-PE stocks like Sunrun (RUN) as noted in the outset of this report. One solar name that isn’t showing its face at the party is SolarEdge (SEDG). The stock failed on a breakout attempt two weeks ago and blew up after earnings but has found support along the 50-day and 200-day moving averages.

That is textbook type action for a late-stage, failed-base (LSFB) type of short-sale set-up, with ensuing bounces off the 50-day and 200-day pushing into resistance along the 10-day and 20-day moving averages. Today SEDG rallied into the 10-dma as volume declined in a wedging rally. So it can be watched for a possible short-sale entry along the 10-day line as has been the case twice over the past six trading days.

 

 

SEDG’s close cousin, Enphase (ENPH), acts much better as it takes on a meme-stock quality along with other solars that are streaking higher. It has been a long time since I have discussed and applied Jesse Livermore’s Century Mark Rule for either the long side or the short side, but ENPH finally breaks that streak as it again clears the $300 Century Mark after doing so last Friday.

It initially played out as a Century Mark short-sale entry on Monday when it fell back below the $300 price level, only to trigger a long entry today when it again cleared $300. ENPH closed at 303.22 which means it can be bought using the $300 level as a selling guide.

If it fails again, however, then it would again trigger as a Century Mark short-sale entry. If that occurs, then I would probably want to see it also bust the 10-day moving average to trigger an aggressive short-sale entry at the line. So far, all we know for sure is that ENPH is back above the $300 Century Mark on below-average volume, so isn’t showing a lot of spunk, at least volume-wise.

 

 

In my discussion of Sunrun (RUN) above I focused on the action on the 620-chart, but that’s only half the story. We can see on the daily chart below that the stock in fact triggered a potential double-top, short-sale (DTSS) entry in the first five minutes of the day when it broke below the 34.34 double-top peak from late March and hit an intraday low at 33.87.

While one could have treated that as a DTSS entry trigger one would have been stopped out lickety-split. Context is important here as well since the stock opened at 35.84 before streaking lower within the first five minutes of the day. For my money, the best short entry occurred at the open, but one would have had to be very alert to what was going on with the 620-chart almost instantaneously.

RUN simply turned off those initial lows and streaked back up toward the Monday high at 37.30. That could come into play as a near-term DTSS type of set-up, so can be watched for. It is certainly extended off the lows of the pattern. And if you want to treat this as some sort of cup-base or double-top breakout, you can, but the pattern strikes me as failure-prone given the straight-up-off-the-bottom look.

 

 

SunPower (SPWR) also posted a double-top or cup-base breakout, but the pattern here also strikes me as failure-prone given the huge straight-up-from-the-bottom move off the lows of two weeks ago. The stock closed today at 26.53 as it streaked to higher highs in meme-stock fashion. However, I believe we should remember that all of these solar stock patterns were quite moribund until they were stirred by meaningful meme-like news.

That news was Senator Joe Manchin announcing he would support the new Inflation Reduction Act which includes $369 billion worth of pork for the clean energy industry. So, while one could treat this as a buyable base breakout I would also watch for any break back below the prior-March peak at 25.24 as a DTSS entry trigger if it occurs.

 

 

I suppose we found out who was doing the selling that turned Tesla (TSLA) into a short-sale entry at the 200-day moving average a week ago. It was none other than CEO Elon Musk selling a million shares of stock even as he was publicly talking up the company. That and a big CPI-induced market rally today brought buyers back into the stock as it found support near the 20-dema.

The action here looks a bit indecisive, but I would watch for any weak rallies back up to the 200-day line as possible short-sale entries. TSLA closed today just below the 10-dma so there are no MAU&R set-ups here for the long side, but that can be watched for.

 

 

Ponzi-Stocks were definitely on the move today, and that would include infinite-PE ride-sharing service Uber (UBER). The stock showed exceptional pluck today with a 5.6% rally right into the 200-day line. The stock played out as a short at the 200-dma on Monday and broke nicely from there.

UBER shares closed today one thin dime below the 200-day so the stock is in a potential short-sale entry position using the moving average as a tight covering guide.

Meanwhile, UBER’s cousin Lyft (LYFT) is having issues after gapping up into a potential double-top zone at the 20.24 May 23rd high and reversing yesterday to trigger a DTSS entry. Despite the big up day in the market, the stock was unable to push decisively higher as it stalled below the 20.24 high.

LYFT closed today at 19.40 but can be watched for any moves back up toward the 20.24 May 23rd high as potential short-sale entries into rallies from here. Also take note of the May 5th high at 22.82 that occurred one day after a big gap-down break after the company report first quarter earnings if the stock can rally past the 20.24 price level.

 

 

Cyber-security names came into focus again this morning when CyberArk Software (CYBR) reported earnings and gapped higher. It initially opened at 147.92, immediately set a low at 147.00 and pushed higher from there. Therefore, it was initially playable as a buyable gap-up (BGU) using the 147 low as a selling guide.

A half-hour later the situation changed as CYBR reversed off the intraday highs at 160.00 and broke back below the 200-day line. Besides triggering a sell signal after posting a bearish MACD cross in the five-minute 620-chart at 155, CYBR then went on to trigger another short-sale entry at the 200-day line before closing at 149.74.

The 200-day line is up at 153.05, so one can watch for any weak rallies back up into the line as possible short-sale entries. The closer to the line one can enter a short position, the better, using the 200-dma as a tight covering guide. Otherwise, if it holds the intraday low at 147.00, it could continue playing out as a BGU on the long side with the idea that it should quickly regain the 200-dma. Play it as it lies.

 

 

Big-stock NASDAQ names Apple (AAPL), Amazon.com (AMZN), Alphabet (GOOG) and Microsoft (MSFT) were all up today, no surprise given the big 2.89% move in the NASDAQ Composite today. While AAPL and MSFT are not in any actionable positions, long or short, I note that AMZN stalled just below its 200-dma and GOOG did so just above the 120.44 left-side peak of July 8th.

AMZN might therefore be viewed as a possible short-sale entry here just below and as close to the 200-day line as possible using the line as a tight covering guide. If GOOG, which closed today at 120.65, reverses back below the 120.44 price level then it would trigger a DTSS entry using the 120.44 price level as your covering guide.

 

 

Over the weekend I discussed Netflix (NFLX) as a voodoo long entry along its 10-day moving average as it tucked into the line with volume drying up to -48% below average. It shot higher on Monday but then came right back in yesterday to test the line again.

Volume declined to -42%, so that created a second-chance voodoo long entry at the 10-day line and NFLX dutifully gapped to higher highs today. It closed today at 244.11 which brings it to within 2% of the 248.79 bottom or windowsill of the gap-down window from mid-April.

That could play out as shortable resistance, so is worth watching as potential price resistance. I wrote over the weekend that if the voodoo long entry works out, the stock could push as high as the 248.79 level. So far, that is how this is playing out as it gave voodoo buyers a second chance at the 10-day line yesterday.

 

 

Does this market have the legs it needs to see the indexes reach their 200-day moving averages. I think tomorrow’s Producer Price Index, expected to come in at 0.3% on the core number, may hold the key. If it comes in lower-than-expected, then it may lend weight to the sustainability of today’s better-than-expected CPI and keep this bear market rally alive. Stay tuned.

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

 

Notes on Terminology

Note #1 – Moving Averages: 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 (black line). In all cases I will mostly use the shorthand version of “10-dma,” “50-dma,” etc.

Note #2 – U&R Set-ups: A U&R, or undercut & rally, is a long entry signal that occurs when a stock undercuts (moves below) a prior meaningful low in its chart pattern and rallies back above that low. The precise entry occurs at the prior low, which then becomes your selling guide. There are no other unique requirements for a U&R other than the price action. It is like Wyckoff’s Spring. A MAU&R, or a moving average undercut & rally, is simply a shakeout at a moving average where your entry point occurs at the moving average as the stock is coming up through the line. This then becomes your selling guide. You can run things tight by using the actual price levels as stops or allow for 1-3% of further downside (otherwise known as downside porosity) before being stopped out.

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