The Gilmo Report

August 7, 2022

August 6, 2022 6:49 pm ET

A whopper of a jobs number on Friday dashed hopes of an imminent Fed pivot as expectations of 250,000 new jobs fell short by more than half. The Bureau Labor Statistics reported 528,000 new non-farm payrolls, sending the futures careening to the downside in pre-open trade. After spinning around for most of the day, the indexes finished mixed as hopes of a Fed pivot remain alive.

Higher-PE names, which had been leading the rally off the lows of a month ago, sent the NASDAQ Composite drifting back to the downside. When viewed from a big-picture vantage point we see a one-month uptrend off the lows within a seven-month downward trend channel off the market peak of late December.

 

 

Making money in that uptrend has been tricky but certainly possible, if one is long or short the right stock at the right time for the right amount of time, as I noted on Wednesday. On the other hand, lean the wrong way at the wrong time and you could suffer the proverbial rap on the noggin.

As the bear market rally has persisted, sentiment has been forced to capitulate and cross over to the bullish side of the boat. The National Association of Active Investment Managers Exposure Survey shows that active managers are now net long 55.28% as their long exposure is now more than twice what it was at the lows two weeks ago.

 

 

Friday’s jobs number sent the 10-Year Treasury Yield (TNX) back above the allegedly critical 2.80% level to end the week at 2.84%. The dollar also rallied to close up for the week, so neither rates nor the dollar appears to be fully buying into the Fed pivot line of thinking. We will see how this plays out during the rest of August.

 

 

Precious metals continue to consolidate recent gains off the lows of two weeks ago. The Sprott Physical Gold Trust (PHYS) pushed through its 50-day line on Thursday in a pocket pivot volume signature but backed down on Friday while the Sprott Physical Silver Trust (PSLV) drifted into its 20-dema where it found support on Friday.

Currently I view the 20-dema as potentially key support in both the PHYS and PSLV. Alternatively, prior undercut & rally lows for the PHYS exist at 13.77 and 13.56, so these can also be watched as key U&R lows for potential support.

 

 

The entire precious metals space strikes me as being in a state of percolation as they attempt to build bottoms. While the action is far from decisive, some of it is constructive, such what we see in Gold Fields (GFI). While the stock has run into resistance at its 50-day moving average and the highs of what is objectively a bear flag at the moment, it did show a voodoo pullback to the 10-dma and 20-dema on Friday.

A pullback early in the day as gold and silver sold down for the day did not keep the stock from closing positive on Friday. With volume drying up sharply, that was a clear test for supply for which the stock passed with flying colors. Earnings are expected on August 25th, so while the action is constructive and actionable, we may not see a decisive resolution until earnings are out unless we see gold and silver streak sharply higher from current levels.

 

 

I also note that my favorite silver miner, First Majestic Silver (AG), is acting better than its gold mining cousin GFI as it has now regained its 50-day moving average. The stock did so on Thursday on a five-day pocket pivot after reporting earnings. Like GFI, it overcame an early deficit on Friday to close positive, which is interesting given that gold and silver were down roughly $17 and 27 cents, respectively.

I would like to see this set up along the 50-day line and tighten up, although a constructive retest of the 10-dma/20-dema confluence could also offer an opportunistic lower-risk entry if it occurs.

 

 

Uranium producer Cameco (CCJ) was buyable Thursday along the 200-day moving average as volume dried up to -41% below average. As noted in my Wednesday report, that was the spot to get long if one was interested in owning the stock. After posting a bottom-fishing buyable gap-up (BFBGU) after earnings last week, CCJ ran up about 10% from the 200-dma before backing down in a natural reaction.

That brought the stock right into the 200-dma on Wednesday and Thursday with volume drying up to voodoo levels. One more test of the 200-dma on Friday led to a sharp move back up to the current price range highs. It is now extended but one can watch for any further pullbacks into the 200-day line as opportunistic long entries from here.

I certainly would not chase it up here since in this environment we want to keep our risk as tight as possible. For that reason, I prefer having the 200-day line nearby as a tight selling guide. Meanwhile, we can watch for the 10-dma and 20-dema to push above the 200-dma whereupon they can serve as support references.

 

 

We also saw constructive action in the industrials metals sling-shot examples I discussed on Wednesday, aluminum producer Alcoa (AA), iron ore producer Cleveland-Cliffs (CLF), and resource producer Teck Resources (TECK). All three had already reported earnings and on Wednesday were flashing little low-volume pullbacks into their 10-day and 20-day moving averages.

Those were potential long entry spots, and all three stocks have since moved higher. AA is still running into potentially shortable resistance at its 50-day moving average while CLF was able to clear its own 50-day line on Friday. If one was going to get long either of these, however, the time to do it was Thursday morning.

The beast of the bunch is TECK which has posted four pocket pivots over the past eight trading days. It posted the fourth pocket pivot on Friday and may be setting up for a test of the 50-day and 200-day moving averages above.

 

 

Big-stock fertilizers CF Industries (CF), Mosaic (MOS) and Nutrien (NTR) all reported earnings this past week and all three posted strong mid-triple-digit earnings growth on equally strong mid-double-digit sales growth. CF, not shown, let the pack with a 440% earnings increase on a 49% sales pop.

It remains in an extended position but the other two are in potentially actionable positions on their charts but in slightly different ways. Mosaic (MOS) is a simple voodoo type of pullback into the 50-day moving average as volume dried up to -58% below average on Friday.

That puts the stock in a lower-risk long entry position using the 50-day as a selling guide. If it busts the 50-day line, then it would trigger as a short-sale entry at that point using the 50-dma as a covering guide.

 

 

If MOS holds up, then I would look for Nutrien (NTR) to hold here along clear support at its 20-dema, the lowest of four moving averages on the chart below. The stock recovered off the intraday lows nicely on Friday to regain all four moving averages and close just above the highest one, the 50-day line.

Keying on MOS, as well as CF, if they all remain buoyant, I would view NTR as buyable here using the 50-day line as a squeaky, tight selling guide. It might be more reasonable, however, to use the 20-dema as a slightly wider selling guide given that NTR closed nineteen cents above the line, so choose your poison.

 

 

One member sent in a very timely question asking if Celsius Holdings (CELH), a producer of energy drinks, is forming a POD. That would be a Punchbowl of Death, which I discussed at length in the book Short-Selling with the O’Neil Disciples (Wiley, 2015) and in Chapter 6 of Trade Like an O’Neil Disciple (Wiley, 2010). We can see that CELH broke down in November 2021 after a big run-up during the Everything Bubble.

That break took the stock down 64.2% in just twelve weeks. The stock then chopped around along the $40 level and finally posted a macro-U&R through the initial 39.45 low of January 2022. That led to a sharp 13-week run up the right side of a 64% deep cup, or punchbowl, formation that has come to within 46 cents of the prior 110.22 left-side peak of November 8, 2021.

It certainly fits the general description of a punchbowl formation, essentially a very rapid decline followed by an equally rapid decline back to the prior highs. The idea here is that the rise of the right side occurs so fast that it never has time to consolidate, and eventually fails. CELH also was also a hot concept stock centered around its popular energy drink offerings.

 

 

We must remember, however, that labels in and of themselves mean nothing. While a punchbowl formation certainly describes CELH’s action since topping back in November 2021, it is not yet a Punchbowl of Death simply because it has not technically failed.

For that to occur, as I have written in my books, the stock would need to bust the 10-dma and then the 20-dema as it fails in typical, late-stage, base-failure fashion. Remember, a POD is just a corollary to other types of base failure set-ups, which would include short-sale set-ups like the LSFB and the Double-Top.

So, while CELH could be treated as a Double-Top short-sale set-up on the failed approach to the left-side peak at 110.22 this past week using 110.22 as a covering guide, it does not trigger as a POD until it starts wavering at the 10-dma and 20-dema and then eventually busts them both. Of course, that is something to watch for given CELH’s status as a high PE-expansion purveyor of magic water.

 

 

As the member asking the question pointed out, Celsius Holdings (CELH) does bear some resemblance to Ariba (ARBA), a stock I played coming up the right side of a big punchbowl formation during the Summer 2000 bear market rally. ARBA was a double-bottom U&R while CELH was a triple-bottom U&R.

ARBA broke down a lot faster, taking only seven weeks to hit bottom off the left-side peak. It took 14 weeks to get back to the highs which compares closely with the 13 weeks it took CELH to reach its prior November 2021 left-side peak.

 

 

The one-two punch of better-than-expected earnings combined with a new clean energy pork barrel spending bill running through Congress has given solars reasons to keep rallying. The initial news of Senator Joe Manchin conceding his support of the bill is what knocked these names out of their respective slumbers last week, and the good times kept rolling along all this week.

That is, of course, unless you are SolarEdge (SEDG), which blasted out of a base last week on the pork barrel spending news but blew up after earnings this week. That was a typical, late-stage, base-failure where the initial break below the 20-dema results in a bounce off deeper support, in this case at the 200-dma.

That led to a shortable reaction rally back up into the 10-day moving average that was shortable on Friday using the 10-dma as a covering guide. That would remain the case for now on any moves back up closer to the 10-day line from here.

 

 

SEDG’s close cousin, Enphase (ENPH), remained unruffled by SEDG’s misfortune and simply plowed to new highs by the end of the week. It closed Friday at 300.91, clearing the $300 Century Mark for the first time ever. That would trigger a long entry based on Jesse Livermore’s Century Mark Rule for the long side, using the $300 level as a tight selling guide.

Meanwhile, the weekly chart illustrates how ENPH was bouncing around in what appeared to be the left shoulders of a big head & shoulders top formation when suddenly earnings triggered a gap-up out of the low-base range and pork barrel spending news sent it streaking to new highs.

This chart has become remarkably interesting at this point because you have the Century Mark long entry on one hand on a breakout occurring after an extended, sharp move from a low-base formation. If the breakout fails, then watch the 282.46 left-side peak (formerly the top of the head in the H&S) as a possible, double-top, short-sale trigger. Two ways play, first long, and if that does not work, then potentially short if the DTSS set-up comes into play.

 

 

Sunrun (RUN) reported earnings Thursday after the bell and despite losing money again the stock continued its upside momentum. Despite the earnings surprise, it remains an infinite-PE stock in the solar space. That was, however, overshadowed by a not-as-bad-as-expected earnings report combined with residual enthusiasm over the current clean-energy pork barrel legislation.

The morning move on Friday took it through the 34.26 and 34.34 double-top highs of April 5th and May 29th, respectively and up to an intraday peak of 35.23. It then floundered about for the rest of the day but closed at 34.32 to trigger a double-top, short-sale entry using the 35.23 left-side peak as a covering guide.

 

 

With RUN’s earnings report on Thursday afternoon, the big-stock solars that I follow are now officially past earnings season. And while most moved higher on Friday in sympathy to RUN, they were already in wildly extended positions, so certainly not buyable. RUN’s close cousin, SunPower (SPWR), made a run for its early-April left-side peak at 25.24 on Friday but fell short to close at 24.08.

It came close enough to short the move, however, if one was using the five-minute 620-chart to time a short entry. I would prefer to see it push past the 25.24 left-side peak and then reverse for a cleaner DTSS set-up, but I suppose I will take what I can get if Friday’s move to a high of 24.64 turns out to be a near-term peak.

 

 

Tesla (TSLA) posted a textbook short-sale entry trigger on Friday as it broke through the 200-day moving average. That was an easy entry where the 200-dma now serves as a covering guide. As well, any further rallies up into the 200-dma could present opportunistic short-sale entries from here, depending on how they play out.

 

 

It is easy to get excited about the move in semiconductors over the past month, but when viewed on weekly charts one gains a better perspective on what these moves really are – reaction rallies off oversold lows. The group chart below of Advanced Micro Devices (AMD), Broadcom (AVGO), Lam Research (LRCX), Microchip Technology (MCHP), Micron Technology (MU), and Nvidia (NVDA) shows a bunch of stocks that have yet to regain their 200-day moving averages.

The moves off the lows look nice, but in the larger scheme of things do not represent what I would call new leadership in a glorious new bull market phase. In fact, MCHP and LRCX may work out as potential short-sale targets along their 40-week moving averages on the weekly charts below.

 

 

If we drill down to the daily chart of Microchip Technology (MCHP), we see that Wednesday’s post-earnings spike through the 200-day line has worked out in the near-term as a short-sale entry trigger along the moving average. There is no guarantee that this will lead to a sharp break back to the prior lows as the stock could also attempt to consolidate somewhere up here and base-build instead.

MCHP has also worked out as a double-top, short-sale set-up after it rallied above the early-June left-side peak at 73.36 and closed just below it on Wednesday. That occurred while the stock was still holding above the 200-day line, and the break back below the line triggered a second short-sale entry.

Further rallies up into the underbelly of the 200-day line could represent potential opportunistic short-sale entries from here. At the same time, we can watch to see whether support along the 10-day moving average holds and the stock goes into a base-building process. This can go either way, in my view, so play it as it lies.

 

 

Qualcomm (QCOM) is not shown in the group chart above, but it looks exactly the same on its own weekly chart. On the daily chart we see that it, too, played out as a short-sale entry around the 200-day moving average after it reported earnings last week. It has since dropped down to the 20-dema where it is now engaging in a low-volume, wedging rally back up into the 10-day line.

This may put it in a short-sale entry position here along the 10-dma after closing just above the line on Friday. A reversal back below the 10-day would put this into motion using the 10-dma as a covering guide. Meanwhile, there is always the possibility of another move up toward the 200-day line in a continued bear market rally so play it as it lies.

 

 

Analog Devices (ADI), Applied Materials (AMAT), KLA Corp. (KLAC), Marvell Technology Group (MRVL), NXP Semiconductors (NXPI), and Texas Instruments (TXN) in the group chart below further confirm the overall look of most semiconductor charts. In this group chart, however, we can see that ADI and KLAC have pushed past prior left-side double-top highs and their 40-week moving averages.

TXN has pushed past its 40-week moving average as it approaches a 187.58 left-side peak from March 29th. There is no guarantee that any of these will play out at DTSS set-ups since we cannot assume that they will immediately and sharply inflect back to the downside. That is unrealistic, in my view, as these could take some time to set up one way or the other.

 

 

One member asked about ON Semiconductor (ON) as a late-stage, failed-base (LSFB) and double-top set-up. This is one of the more unusual semiconductor charts that I have seen, as the stock has chopped back and forth in a 35% deep pattern that shows no tight action anywhere, as it has been shortable near the highs using basic DTSS technique.

Each break has resulted in an equally sharp rally back to the upside, and now the stock is within 7% of its 52-week high. The pattern has a multitude of prior left-side peaks which could serve as double-top, short-sale entry triggers, but it is certainly not a late-staged failed-base in its current real-time state.

Yes, the base is extremely sloppy, but one cannot simply apply a label such as “double-top” or “LSFB” and derive some predictive value from it. That is the sort of meaningless “analysis” that IBD teaches – label something as this or that and then plunge headlong with your handful of assumptions.

If you take the 68.70 March 29th peak in the middle of the base, if we can call it that, then Friday’s action could be treated as DTSS set-up given the close at 67.53. The 68.70 price level would then serve as a covering guide, but at the same time ON remains above its 10-day line so cannot be labeled an LSFB until and unless it confirms with a break below the 20-dema.

The lesson here is that one should not get caught up in trying to label things since there is little predictive value that can be obtained from such an intellectually sloppy process. Everything exists in real-time at the point of impact, and if we simply stick to what is going on with ON at the point of impact, all we have is a possible, emphasis on possible, DTSS here along the prior March 29th peak at 68.70. Other than that, no guarantees or predictions can be made.

 

 

Payments names Paycom (PAYC) and PayPal (PYPL) both gapped higher after earnings this past week but only PYPL, not shown, has played out as a shortable gap-up and is now out of shorting range. Meanwhile, PAYC has pushed right through its 200-day moving average and the prior February 10th peak at 371.33, hitting an intraday high of 373.73 on Friday before backing down to close at 370.22.

That would put it in a double-top, short-sale entry position using the 371.33 peak as a covering guide. Upside volume has been strong, however, with PAYC also posting a pocket pivot at the 200-day line on Friday, so this is not a cut-and-dried short-sale set-up. I would want to see it confirm relatively quickly by reversing back below the 200-dma with the understanding that it could just consolidate at current levels.

 

 

The group chart of six payments-related names that I follow that include, in addition to PAYC and PYPL, Global Payments (GPN), MasterCard (MA), Block (SQ) (formerly Square) and Visa (V) reveal much of the same type of action that we see in semiconductors. Persistent rallies off the lows of a month ago that mostly in Nowhere Land.

Offhand, GPN looks like it could set up as a short at its 40-week/200-day moving average. MA and V are the twin credit-card giants that have both regained their 40-week/200-day moving averages in what are very choppy and sloppy overall weekly patterns. SQ, meanwhile, is simply trying to break through the layer of dirt covering its grave, not too unlike PYPL.

All of these weekly charts, from the semiconductors to the payments names, exemplify the current state of the market on an individual stock basis. Everything is just coming up off recent lows with extraordinarily little in the way of new, strong, thematic leadership setting up within 10-15% of prior 52-week highs.

Generally, that is what I look for when a new bull market is starting out, as many leaders will still be percolating within constructive bases and within 10-15% of prior 52-week highs. I then prefer to take long positions within the bases using typical OWL set-ups.

There is almost nothing to be found in that category currently so while I acknowledge that one can play oversold rallies in beaten-down leaders, there is no objective evidence for a new bull market when it comes to the action of individual stocks.

 

 

Uber (UBER) has continued to rally following a post-earnings BFBGU move on Tuesday. The stock got some additional impetus from its close cousin Lyft (LYFT) which reported Thursday after the close and shot higher on Friday. UBER is now approaching the 200-day moving average where I might stalk it for a possible short-sale entry near the line.

 

 

Weekly charts of cyber-security names CrowdStrike (CRWD), CyberArk Software (CYBR), Fortinet (FTNT), and Palo Alto Networks (PANW) that I have discussed in recent reports reveal a foursome of big-stocks in the space living below their 40-week/200-day moving averages. FTNT became the first to break down sharply after missing on earnings Wednesday after the close and taking -16.33% on Thursday.

CYBR is next in line and is expected to report earnings Wednesday before the open. PANW is then expected to report August 22nd, and CRWD on August 30th. Of the four, we can see that CRWD is in a potential short-sale entry position just below its 40-week line while PANW has already played out as a shortable reversal at the 40-week line this past week.

 

 

NASDAQ Big-Stocks have been rallying off their lows over the past month as well, but only Apple (AAPL) has been able to regain its 200-day moving average. I wrote last weekend that one could treat the pocket pivot at the 200-dma as a long entry with the idea of flipping short if it reversed back below the line.

So far that has not happened, but we see that Amazon.com (AMZN) is getting close to the underbelly of its own 40-week/200-day line here where it could potentially become shortable as close to the line as possible. Alphabet (GOOG) and Microsoft (MSFT) meanwhile remain at the highs of current bear flags.

While AAPL seems to get the nod when money wants to come rushing back into stocks, note that weekly volume has been lacking, lending some credence to the idea that it is simply an oversold vacuum and melt-up. Meanwhile, AMZN, GOOG, and MSFT do not qualify as bold new market leaders as they languish in the lower regions of their weekly charts.

 

 

Maybe Netflix (NFLX) can give big-stock NASDAQ names some respectability if it can pop off the 10-day line where it has been consolidating in very tight sideways fashion. I noted on Wednesday that it was showing voodoo action along the 10-dma as volume declined to -40.8% below average.

On Friday, volume again dried up, this time to -47.8% below average as it closed 1% above the 10-day line. That keeps it in a voodoo long entry position using the 10-dma as a selling guide. If it busts the 10-day line, then an aggressive short-sale entry trigger at the line could develop at that point.

For now, however, the long side remains in play with the tight voodoo action along the 10-day line. If this works as a long swing-trade, then my initial target would be the 248.79 bottom or windowsill of the gap-down window from mid-April.

 

 

The bear market rally remains in force, despite the market’s second thoughts about a Fed pivot after Friday’s jobs numbers. For all we know the market will decide that the big 528,000 jobs increase is the peak of employment ahead of an oncoming recession, keeping the hope of a Fed pivot alive.

Forget about the fact that the Bureau of Labor Statistics Household Survey since March shows a decline of 168,000 jobs. This compares starkly and bizarrely to the 1.68 million total jobs reported in Establishment Survey since March. The Establishment Survey what is reported by the media as the headline jobs number.

We should not be surprised by the media’s failure to report the full story with both surveys since it does the same thing with inflation. While the media laments the fact that current CPI inflation at 9.1% is a 40-year high, they neglect to report that the comparison is moot since if we used the same methodology to calculate inflation that we did 40 years ago, current CPI is at 17.3%

In the end, all we have to go by are the charts. For now, that remains a mixed bag, but we have seen that most stocks are rallying after earnings now that analysts have lowered expectations enough after seven months of a bear market. This creates the backdrop for not-as-bad-as-expected earnings reports to look favorable and triggers oversold reaction rallies that can gather near-term momentum as shorts are driven to cover.

Expect more of the same as a bear market rally potentially grinds and chops higher. Certainly, I do not see the conditions for a glorious new bull market cycle, but bear market rallies, as I have noted before, can offer their own types of profit opportunities as much on the long side as the short side.

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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