The Gilmo Report

August 3, 2022

August 3, 2022 7:42 pm ET

A line-up of Fedheads insisting that they still have some distance to cover before getting interest rates to a place where they can fully slay the inflation dragon did not deter the market from pushing higher today. Some of it may have been helped along by a general sense of relief after China did not shoot down Speaker of the House Nancy Pelosi’s plane as it landed in Taiwan.

Most of it, however, is just a plain old bear market rally, and bear market rallies are often convincing enough to get everyone well lathered up. Recall my example of the Summer of 2000, when after a follow-through day on June 2, 2000, Bill O’Neil called for a major new bull market phase based on the precedent of October 1962. So, you see, even market gurus are not immune to getting lathered up during a bear market rally.

To be fair, however, and as I have also shown in recent reports, it was possible to make some money on the long side of that bear market rally, just as it was during the bear market rally of Spring/Summer 2008. The trick is being in the right stocks at the right time for just the right amount of time. That is a problem more easily solved in hindsight, to be sure, but we certainly have the tools to solve it in real-time while keeping risk to a minimum.

The NASDAQ Composite leads the rally as investors pile back into higher PE stocks on the hopes that the Fed will soon pivot to an easing stance. You know something may be close to running its course when they now have a term for it – the Fed pivot. Investors are playing for a Fed pivot, plain and simple, with the idea that the prior Everything Bubble is now clear to reflate.



With the fed funds rate at 2.5% and inflation at 9.1% as measured today and at 17.3% as measured using the government’s 1980’s methodology (the period to which today’s numbers are compared, although as measured by the 1980’s methodology today’s inflation passed those numbers a long time ago), I am not sure the math adds up. Not that a bear market rally requires it, since they tend to be more of a technical phenomenon than a fundamental one.

Interest rates and the dollar perked up early this morning but both lost momentum as the day wore on. The 10-Year Treasury Yield (TNX) stalled at its 20-dema to close at 2.748% while the dollar’s proxy, the Invesco Dollar Index Bullish (UUP) ETF also stalled along its own 20-dema.



The Sprott Physical Gold Trust (PHYS) and the Sprott Physical Silver Trust (PSLV) are both pulling back slightly after running right into their 50-day moving averages yesterday. Watch the 20-dema on both of these as potential support on a normal consolidating pullback following the sharp moves off the lows of two weeks ago.



Miners and related stocks were mostly just short-sale targets earlier this week as they attempted to rally with the metals. As an example, Gold Fields (GFI) plowed into its 50-day moving average and the highs of a current bear flag on Monday. That played out as an exceptionally clean short-sale entry at both moving average and price resistance as the move in precious metals does not generate much more than ephemeral love for the stocks.



Against all the talk of Fed pivots, earnings season remains a major focus. Fertilizers took center stage on Monday when CF Industries (CF) and Mosaic (MOS) reported earnings after the close that day. Nutrien (NTR) is expected to report earnings today after the bell but so far, I see nothing on the news wires.

CF meanwhile is extended after rallying on earnings, while MOS posted a pocket pivot at its 50-day moving average yesterday after reporting earnings. Today’s pullback toward the 50-dma brings it into buying range of the pocket pivot using the 50-day as a selling guide. If it busts the 50-dma, however, then it would trigger as a short-sale entry at that point.



Solars have held up reasonably well as the spendthrifts who run the country move forward to allocate $369 billion in corporate welfare to the clean energy space. Note that most of these patterns were dead in the water a week or so ago, but once Senator Joe Manchin jumped on board for passage of the bill, they have rallied sharply.

Some of the air was taken out of the tires today as SolarEdge (SED) blew apart after reporting earnings yesterday after the close. It triggered four short-sale entries today, the first at the left-side double-top highs around $340 on the gap-down open, the second at the 314.52 June 6th high. The other two occurred at the 10-day and 20-day moving averages.

This is now a late-stage, failed-base, short-sale set-up in motion, where we now look for shortable resistance to develop along the 20-dema. The 200-day and then the 50-day lines loom just below, so watch for normal LSFB type bounces off those moving averages and back up toward the 10-dma/20-dema and the prior breakout point around $340.



SEDG’s close cousin, Enphase (ENPH) reacted negatively, if only marginally so. Early in the day it broke below the 282.46 left-side peak of the current punchbowl formation but rallied from there to close at 290.25. I would continue to monitor this for any break below the 282.46 left-side peak which then becomes a covering guide.

Otherwise, if you believe in buying breakouts this extended from the last area of price congestion below $220, then you can certainly work it that way using the 282.46 left-side peak as a selling guide If it fails cleanly at the 282.46 price level, then that can also serve as a flip-point back to the short side.



That sent other rallying solars lower, such as First Solar (FSLR) which was in fact shortable along price resistance established over the past three trading days just below and around the $102 level. So far, this cannot be said to be failing outright, as that would require a break below the 10-day line.

The 10-dma is a long ways away from the current price levels. As it approaches price, we will get a better idea of just how buoyant FSLR can remain up here as it attempts to consolidate last week’s gap and run move on positive pork barrel news and earnings.



SunPower (SPWR) reported earnings yesterday and gapped higher to clear its 200-day moving average. That was an extended pocket pivot at the 200-day line, and a test of the line today succeeded in posting a second pocket pivot. Technically, one could treat pullbacks to the 200-dma as lower risk long entries with the idea of flipping short if it fails at the 200-day line.

Otherwise, I tend to think the solars are being driven by news of a pork barrel rolling their way. Therefore, I am keeping a close eye on the 25.24 left-side peak in the pattern from early April as a possible double-top reference level. After-hours SPWR’s cousin Sunrun (RUN) has reported earnings and is currently up about a buck in after-hours trade. We will see what this sets up in the group tomorrow.



While electric vehicle names have not necessarily seen huge moves in response to the oncoming clean energy pork barrel train, Tesla (TSLA) has been able to push back into and just above its 200-day line. The stock cleared the line on light volume today, so I would watch for any reversal back below the 200-day line as a short-sale entry trigger using the 200-dma as a covering guide.



Things are heating up in the payments space after both Paycom (PAYC) and PayPal (PYPL) reported earnings yesterday after the close. PYPL’s gap-up move this morning played out as a shortable gap-up. It opened at 101.14, quickly posted an intraday high at 101.95 and then headed south from there.

Technically, however, this can still be played as a bottom-fishing buyable gap-up (BFBGU) using today’s 97.27 intraday low as a selling guide. It is important to maintain perspective here and understand that PYPL was trading at 310 a year ago, and so today’s gap-up move is just a blip in the overall pattern and downtrend off the peak of last July.



Paycom’s (PAYC) post-earnings move was not big enough of a gap-up move to garner status as a buyable gap-up. Overall, the move takes the stock back up to the highs of a big sloppy bear flag type of consolidation extending back to late January.

This move also brought PAYC right into and above the 200-day line where it stalled and closed below the line. That brings it into a short-sale entry position using the 200-dma as a covering guide.



The post-earnings rallies in PAYC and PYPL led to sympathy moves in both big-stock payments names MasterCard (MA) and Visa (V). However, only V is in a concrete short-sale entry position after stalling on the approach towards the 200-day line and closing below the 20-dema.

In this case, the 20-dema serves as a covering guide here, but also be alert to any rallies back up toward the 200-day line as more opportunistic short entries depending on how V plays out from here.



A stock I have not discussed for a long time, Uber (UBER), reported yesterday and posted yet another big loss but gapped higher this morning on news that the company became cash flow positive in the second quarter. That was enough to send it flying out of a 12-week bear flag and up towards the 200-day moving average.

I’ve got this on my radar as it approaches the 200-day line as I watch for a possible short entry if the rally continues. From here we are looking at the 200-day line at 33.26 or the 40-week moving average on the weekly chart at 32.37 as references for potential moving average resistance.



Advanced Micro Devices (AMD) reported earnings yesterday after the close and gapped down at the open. It set a low about three hours later at 93.62, a little over 1% above the 10-day moving average and rallied back from there. AMD closed at 98.04 in what looks constructive.

In this position, I would only look to buy it near the 10-dma where it was this morning. At this stage, the 10-day line would serve as near-term support and a selling guide with the prior price highs just below $110 and the 200-day moving average looming above as potential price and moving average resistance.



Microchip Technology (MCHP) also reported yesterday afternoon and gapped higher this morning, although not quite enough to call it a buyable gap-up. Volume was also only 31.1% above average, so not enough for a BGU either, but it did post a very extended pocket pivot at the 200-dma.

The move brought the stock into an interesting position as it approaches the left-side peak at 73.36 and closed today just below at 73.20 but just above the 200-dma. While the stock is certainly too extended to buy here, short-sellers can stalk MCHP for any reversal along the 73.36 left-side peak from early June and the 200-dma as potential short-sale entry triggers.



If the NASDAQ is rocking like it was today, then you can pretty much bet that big-stock NASDAQ names Apple (AAPL), (AMZN), Alphabet (GOOG) and Microsoft (MSFT) are doing their best to contribute with moves of their own. Over the weekend I discussed treating AAPL’s pocket pivot move above the 200-dma as buyable first, with the idea of using the line as a selling guide.

That would have worked as the stock retested the 200-day line yesterday before pushing higher today. I also discussed treating AMZN’s post-earnings gap-up as a buyable gap-up using the intraday low of the gap-up day as a selling guide. The stock has edged higher from there.

Meanwhile, GOOG is pushing toward potential double-top highs at the 120.43 high of July 8th. It is the only one of the four that remains within the confines of a bear flag with the 120.43 high looming as potential resistance or a bear flag breakout point.



Netflix (NFLX) continues to hold its post-earnings bear flag breakout as it tracks tight sideways along the 10-day moving average. Volume declined to -40.8% below average today as the stock held support along the 10-day line, so could be treated as a long entry here using the 10-dma as a selling guide.

If it busts the 10-day line, then look for a possible aggressive short-sale entry trigger to develop at the line which then becomes a covering guide. If NFLX can move higher from here, however, then the next major level of resistance is at the 248.79 bottom or windowsill of the gap-down window from April when the company last reported earnings.



Qualcomm (QCOM) has bounced off support of its 20-dema after gapping down after earnings last week. The ensuing rally has pushed back up into the 10-day line on light volume. Initially, this is setting up as a short into the rally here using the 10-day line as a covering guide.



NXP Semiconductors (NXPI) has continued to rally after reporting earnings last week and held support at the 10-dma yesterday and today. Note the utter lack of volume all the way up, which illustrates how bear market rallies are more a function of an all-sold-out condition than anything else.

Nevertheless, as the stock rallies, the 200-day moving average and two left-side peaks from late May and early June at 198.28 and 194.71, respectively, might come into play as potentially shortable resistance. Otherwise, I would need to see a break below the 10-day line as an aggressive short-sale entry trigger from here. Just an example of names that I am watching but still just stalking for now.



If you review all the semiconductor names that I have discussed in recent reports, you will see similar persistent rallies that are now arguably extended on the upside. Either these rallies fail, or the stocks will have to consolidate constructively by building bases up at current levels. Another example of the type of action we are seeing the group at large is seen in Lam Research (LRCX).

The stock continues to rally strongly following earnings last week and is now heading for the prior 537.37 high from late May and the 200-day line. Since this is not actionable on the long side given its extended state, then I am simply watching to see if double-top price or 200-day moving average resistance comes into play.

If the stock can hold these gains and consolidate, then I would look for the 10-day and 20-day moving averages to play catch up to the price. At that point I could then figure out whether these are setting up for further upside.

That is why I say there is no rush to chase these things right here, right now – let the set-ups come to you. And if the rallies do not fail immediately and morph back into short-sale set-ups, look for constructive consolidations to form and choose your spots wisely.



Cyber-security names CrowdStrike (CRWD), CyberArk Software (CYBR), Fortinet (FTNT), and Palo Alto Networks (PANW) may be in play tomorrow after FTNT’s earnings report this afternoon after the bell. As I write, the stock is trading down to the low $57 level after closing at 62.88, so is down about 7-8%.

All four of these cyber-security names that I have been following lately were up today and moving to the highs of current price ranges and consolidations. CRWD and PANW ran up into their 200-day lines while FTNT cleared its own 200-dma but is now back below the line in after-hours trade.

Keep all four on your action watch list for tomorrow as I am sure there is going to be some playable pin-action here, one way or the other.



Uranium producer Cameco (CCJ) had a nice buyable gap-up after earnings last week, which was quite playable using the 200-day moving average as a selling guide once it cleared the line. That was good for about another 10% higher and now the move has retraced right back to the 200-day as volume declines to -32.8% below average.

That is not enough for a voodoo style pullback, but the low-volume pullback into the 200-dma offers a lower-risk entry using the line as a selling guide. CCJ also illustrates that some strong post-earnings moves can give it up quickly, so it again becomes a matter of buying the right stock at the right time and holding it the right amount of time.

That can vary considerably between various names, and that is part of what makes such bear market rallies difficult to gauge and play. Of course, that is no reason not to engage in the first place if a proper set-up presents itself. You just have to have a good feel for what the stock is going to give you.



If this bear market rally continues, emphasis on IF, I would expect broader participation from other beaten-down leaders. Industrial metals names might fit that category, and there are some interesting little sling-shot types of set-ups in aluminum producer Alcoa (AA), iron ore producer Cleveland-Cliffs (CLF), and resource producer Teck Resources (TECK) which deals in coal, copper, and zinc.

Before everyone gets too excited, a sling-shot formation is just a simple set-up where you have a decent move to the upside that gets extended and then pulls back as volume dries up sharply. In essence, slight the rubber band of a sling-shot being pulled back.

So here we see AA and CLF pull into their 10-day and 20-day moving averages as volume dries up -33.5% and -46.6% below average for each, respectively. TECK is pulling more into the 10-day line just below the 20-dema on volume that is -28.5% below average.

I am generally willing to test these types of set-ups on the long side but keep them on a short leash from a risk-management perspective. That would be by using the 10-dma and 20-dema as tight selling guides in each case.



From the standpoint of a Fed pivot, it is hard to figure out what the market sees in this regard given the current evidence, so it does not make sense. But then, that is the thing about bear market rallies – they often do not make sense because they do not have to.

Everything gets sold out, both price and duration-wise, and reaction rallies begin to sprout, growing at different rates and to varying heights. While I do not see the current environment as suited to intermediate-term investors, it certainly is tradeable in both directions in the right stock at the right time for the right amount of time.

For now, that is the name of the game as this bear market rally progresses. We may make it as far as the 200-day moving averages in the major market indexes, we may not. This brings us back full circle to that which provides us with our primary clues in this regard, which is the individual stock set-ups themselves, long or short as we let the market push us in the right direction. Play ‘em as they lie.

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.