The Gilmo Report

December 22, 2020

December 22, 2020 6:54 pm ET

A manic Monday started Christmas week off with Dow futures down around 800 points overnight leading into Monday’s opening bell. As we’ve seen with other gap-down opens over the past couple of weeks, the market simply finished its business early in the day and turned right back around. This resulted in long lower tails for the index price bars yesterday as the daily chart of the NASDAQ Composite Index shows below.

Today saw the NASDAQ spin around on higher volume as it still managed to post an all-time high close in what was mostly a big churning day. Meanwhile the S&P 500 and Dow Indexes were down on lighter volume

 

 

To get a sense of just how bubbly this market is, I note that my current Leaders List has over 160 names on it currently. The reality is that I could have about 20-40 more names on the list. In the past when this list has reached 130 names or more, the market has at least gone into a decent correction.

As it has done with so many indicators like this, however, the market seems to have made it less relevant. Another indicator that might be considered similar as a measure of sheer market ebullience was one that we used to use back when I managed money for Bill O’Neil and ran the Institutional Advisory Group.  That was the percentage of stocks above their 150-day moving average.

A chart like the one below was included in the front section of every set of big maroon O’Neil Database chartbooks that we sold to institutional clients. Our basic rule was that whenever more than 65% of stocks were trading above the 150-day moving averages, it was a strong, cautionary sign. You can see that currently the percentage of stocks on the NASDAQ that are above their 150-day lines is at 71.64%, an extreme as measured over the past ten years.

 

 

Indicators like this are all over the place. Sentiment indicators, overbought indicators, and the like have all been sustaining at extreme levels. In the end, however, all they’ve done is demonstrate what can be achieved when the Fed prints 25% of all dollars ever created in just nine months during the bizarre year of 2020. To quote one of my all-time favorite cartoon characters, Zippy the Pinhead, “Yow!!!” But again, it’s all been about the set-ups you can catch, and trying to stay one step ahead of the FOMO retail crowd.

After getting extended on the upside, precious metals are pulling back. Remember that we do not chase strength in the metals but rather try to remain as opportunistic as possible when it comes to timing long entries in either gold or silver. With that in mind, we can approach the current action in the metals with a clear plan.

The Vaneck Merk Gold Trust (OUNZ) has dropped back below its 50-dma, but that is no surprise given how extended the yellow metal has gotten since bottoming around its 200-dma over three weeks ago. In this position you’re now looking at the confluence of the 10-dma and 20-dema as a potential lower-risk entry spot using the two moving averages as tight selling guides.

 

 

The iShares Silver Trust (SLV) is coming in as it looks set for a test of the 10-day moving average. Once it gets there, assuming it does, then we would look for a possible lower-risk entry at or near the line while using it as a tight selling guide. The 20-dema and 50-dma are not too far below the 10-dma, so there’s always the possibility of a deeper pullback to those levels, so play it as it lies.

 

 

My three favorite silver miners are pulling in as the price of silver pulls in. First Majestic (AG), Coeur Mining (CDE), and Gatos Silver (GATO) are all pulling back after near-term FOMO types of moves. All three can be watched on these pullbacks as we look for potential support at their 10-day moving averages where lower-risk entry possibilities would lie.

 

 

While the action looked dire early Monday morning, most leading stocks just bounced off near-term support. A Reuters report that Apple (AAPL) was potentially on track to produce an electric car, an iCar, if you will, by 2024 helped the stock find support at its 20-dema yesterday for a tight close with Friday’s levels. That pullback served as a reasonable lower-risk entry based on last week’s pocket pivot gap move through the 10-day moving average.

AAPL then launched higher today but stalled near its prior all-time highs of early September. At this point, only constructive pullbacks into the 10-day moving average would offer lower-risk entries from here and can be watched for.

 

 

This set off a FOMO chain-reaction in stocks that might considered as beneficiaries of an AAPL iCar, like Lumentum (LITE), which makes 3-D sensors. I discussed LITE as a buyable gap-up in my video reports last week, before this news, but the stock failed yesterday at the intraday low and shook out at its 20-dema after filling the gap-up rising window.

Yesterday’s sharp shakeout at the 20-dema constitute a moving average undercut & rally (MAU&R) long entry trigger using the line as a selling guide. It then closed above the line and then today blasted higher in FOMO fashion on a big-volume base breakout as it heads for the $100 Century Mark.

It seems a bit odd that LITE would rally so sharply in light of the fact that the alleged production of an iCar isn’t supposed to start until 2024, four years from now, and has not been confirmed by AAPL itself. I’m not sure if this move holds up, but as a technical base breakout it becomes actionable for those who buy stuff like this. My own preference, of course, would have been to buy the MAU&R yesterday at the 20-dema.

Meanwhile, take note of the fact that LITE is approaching the $100 Century Mark for the first time ever. This can set up some interesting dynamics on either side of the market, since if it can clear $100 decisively it would trigger as a long entry based on Jesse Livermore’s Century Mark Rule while a failure at $100 could trigger it as a short per Livermore’s Century Mark Rule in Reverse! Play it as it lies.

 

 

The AAPL EV news lit a fire under some areas of the EV-related space, but not all. Chinese EV names, for example, buckled under the prospect of an Apple iCar competitor. Li Auto (LI), Nio (NIO, and Xpeng (XPEV) all closed down for the day, while smart E-scooter maker Niu Technologies (NIU) spun around its 50-dma in a very wide price range without going anywhere.

Because NIU did close a few pennies above its 50-dma, perhaps it can be viewed as being in a long entry position using the line as a selling guide. NIO, on the other hand, which priced a 60-million share secondary offering last week at $39 a share, is holding along its 50-dma, where pullbacks to the line could offer lower-risk entries.

 

 

The prospect of an Apple EV competitor didn’t excite Tesla (TSLA) much either, as it initially sold off today on the news. However, it found support near the 20-dema and the $600 Century Mark, defining these two areas as buyable support for now on any further pullbacks to either.

 

 

The Apple news also sparked a pocket pivot rally through three moving averages in Workhorse (WKHS). One could chase this if they really want to, I suppose, using the 20-dema as your selling guide, but the trick would have been to jump on these earlier this morning as it was just coming up through the 50-dma. Overall, it just strikes me as a FOMO type of chain-reaction move in another EV-related name.

 

 

Lithium names also got a boost from the Apple news. The top name in the group, from my perspective, Livent (LTHM), continued to get further extended on the upside, but it was buyable at the 10-day line yesterday based on Friday’s pocket pivot as I discussed in the weekend report.

LTHM’s Lithium Americas (LAC) and Piedmont Lithium (PLL) both popped today as well with LAC posting a bottom-fishing type of pocket pivots while PLL was a bit too extended from its 10-dma to do the same but still had a strong move today on the Apple news.

Even lowly Chinese lithium name CBAK Energy Technology (CBAT) posted a pocket pivot today. One can certainly try to find lower-risk entries from here on pullbacks in any of these lithium names, but it’s not clear to me how much of this is just a short-term reaction to the Apple news and how much of it is sustainable.

 

 

EV battery/charging names were also winners today, and all four of the names I’ve discussed in recent reports moving higher still so far this week. Ballard Power (BLDP), Blink Charging (BLNK), FuelCell Energy (FCEL) and Plug Power (PLUG) all streaked higher today on the Apple news and are extended in my view.

 

 

As I noted over the weekend, while the recently discovered computer hack of the U.S. government sent cyber-security FOMOing higher last week, Microsoft (MSFT) is in fact that company that is assisting with the security breach. It was buyable yesterday near the 10-dma but is now extended.

 

 

Meanwhile, cyber-security names are flying higher in what looks to me like a pure retail-driven FOMO move. Adding a couple of names to the chart I showed over the weekend, you can see an incredibly broad FOMO run in these names as if cyber-security was suddenly a new concept. CrowdStrike (CRWD), CyberArk Software (CYBR), FireEye (FEYE), Fortinet (FTNT), Mimecast (MIME) and Palo Alto Networks (PANW) are all going near-term parabolic.

The most amusing thing about all this is that FEYE blew apart two weeks ago when it announced that it itself had been hacked on December 9th and now all of a sudden it is considered a must-own stock as a company that will solve the cyber-security issues of the U.S. government. You can’t make this stuff up, but it is clear that when the mutant FOMO virus hits this market it is at least 10,000% more contagious than Covid-19 itself!

 

 

Lockheed Martin (LMT) is buying out one of the few space-related names in the market and also one of this handful of space-plays that I’ve discussed many times in my reports for many moons now, Aerojet Rocketdyne (AJRD). Some pundits say this confirms that space is the place to be, and LMT’s purchase of a company that makes rocket engines gives them additional clout in the space, pardon the pun.

This, of course, makes one consider whether other larger companies in the aerospace/defense industry will start swallowing up smaller companies as the privatized space race continues. This perhaps brings into play something like Maxar (MAXR), which has its own set of unique capabilities when it comes to space travel. While a company like AJRD focuses on the engines, MAXR is more of a space travel infrastructure play, and has been tagged to assist NASA with its next moon mission.

This is one stock to keep an eye on here, assuming one doesn’t already own it down near the 50-dma which was the last spot that I discussed as a lower-risk entry over three weeks ago. Thematically I have liked this stock a great deal, but technically it has proven to be a volatile one.

In this current position, pullbacks to the 20-dema would be my preferred entry opportunities. One such pullback occurred last Friday, and we can observe that this also brought MAXR right back into the top of its prior base. Thus, we can watch for further pullbacks to the 20-dema and the top of the prior base as potential lower-risk entries from here.

 

 

Certainly, a stock like Virgin Galactic (SPCE), which is no doubt the flashiest name in my little space industry group that I cover regularly in my reports, has had its moments. Near-term however, a failed ignition on the first flight from the company’s Spaceport America in New Mexico two Saturdays ago has taken some of the shine out of that flash. That led to a very festive gap-down open two Mondays ago.

A couple of days later, more air was taken out of the stock by the announcement of a 112.89 million share secondary offering. SPCE picked up another upgrade yesterday, this time from Cowen, adjusting its price target from $22 to $30, which kept it buoyant along the 50-dma.

While one could venture a long entry here at the 50-day line which would also serve as a tight selling guide. However, my own preference would be to wait for the secondary to be priced first. At that point we can then see how well it absorbs all this new supply, representing nearly half of all the outstanding stock.

 

 

All of the solar names I’ve discussed in recent reports are quite extended currently, including Canadian Solar (CSIQ), DAQO New Energy (DQ), Enphase (ENPH), SolarEdge (SEDG), Array Technologies (ARRY), First Solar (FSLR), Sunrun (RUN), and SunPower (SPWR). FSLR is perhaps notable as it just barely clears the $100 Century Mark for the first time since 2011, but it’s not clear whether this can be treated as a Century Mark long entry set-up.

The stock was a huge winner back in the 2006-2008 time frame, when it ran from 23.5 up to a peak of 317 in 2008. FSLR then completely blew apart in the latter part of 2011 before reaching an all-time low of 11.43 in mid-2012. The monthly chart below shows the entire lifetime of the stock, and you might notice that it has only recently broken out of a long consolidation extending back to late 2013.

With FSLR clearing the $100 Century Mark today, it triggered a long entry at that point and ended the day up another 5% to close at 105.16. Now all one can do is watch for pullbacks to the $100 level as potentially lower-risk entries while using the $100 price level as a selling guide based on Livermore’s Century Mark Rule.

 

 

Netflix (NFLX) pulled into its 10-day moving average this morning and held support at the line. Volume dried up to -65% below average, making this a voodoo long entry at the 10-dma while using the line as a tight selling guide.

 

 

Some of you might recall my discussions last year about Walt Disney Company (DIS) after they had launched their Disney+ streaming service where I speculated whether it could ever be valued on par with NFLX. None of that ever came to fruition, but perhaps that was just a good idea waiting for the right time.

More recently, we’ve seen a big BGU in DIS shares after it updated guidance on its Disney+ member count. Now, the pundits consider it a potent brand-name competitor to NFLX.  That big gap-up move hasn’t led to any significant upside since then, but the stock has held tight sideways for the past seven trading days since the BGU and finally ran into its 10-dma today.

Volume dried up to -59% below average today, creating a voodoo long entry set-up at the 10-dma while using the line as a tight selling guide. Alternatively, one could use a wider selling guide using the BGU intraday low at 165.33 as a wider selling guide.

 

 

Snap (SNAP) and Twitter (TWTR) remain in uptrends. SNAP today spun below its 10-dma but ended the day right at the line as volume picked up slightly. I would tend to look for a deeper pullback to the 20-dema as a more opportunistic entry if I can get it, however.

Meanwhile, TWTR is holding very tight after posting a buyable gap-up (BGU) in an extended position last week. The intraday low of that BGU price range five days ago on the chart was at 53.64, which keeps TWTR within buying range using the 53.64 low as a tight selling guide.

 

 

In chip land, I like the pullback in Advanced Micro Devices (AMD) as it finds support around its 20-dema with volume declining. Volume was only -26% below average so not a voodoo type of pullback. However, given the contraction in volume this still looks like a reasonable lower-risk entry here along the 20-dema using the line as a tight selling guide.

Marvell Technology Group (MRVL) pulled off a surprising rally off its 50-dma last week and has spent the past two days holding squeaky tight in new-high price ground. If you consider this a breakout buy point, then you could act on it on this basis using the usual textbook risk management, although I consider this to be a suboptimal approach. Speaking for myself, I’d be more inclined to watch for a pullback to the 10-dma at 45.22 as a more opportunistic entry if I can get it.

 

 

Qualcomm (QCOM) and Qorvo (QRV) have been moving in different directions as of late, but QCOM is looking a bit like a Wyckoffian Retest here as it drifts back below its 20-dema. The big-volume gap-down break eight days ago on the chart constituted a high-volume low followed by a rally back up to the 10-dma.

Now QCOM is pulling in to test that prior low while volume declined to -44% below average. This looks like a textbook Wyckoffian Retest, which one can act on using yesterday’s intraday low at 144.41 as a selling guide. Stay nimble with this, however, as it could also push lower to test the 50-dma if the Wyckoffian Retest fails.

 

 

Nvidia (NVDA), not shown here on a chart, still can’t clear its 50-day line. The chart doesn’t look any different from the one I showed in the weekend report other than the fact that you can add two identical price bars to cover the past two days’ action.  Therefore, NVDA remains in an unresolved position where rallies into the 50-day line can be tested as possible short-sale entries, while a decisive move back up through the line could trigger this as a long.

Over in cloud land, everything I’ve liked recently, and even not so recently, is quite extended. The one exception is JFrog (FROG) which continues to hang along support at the confluence of the 10-dma and 20-dema after posting an undercut & rally (U&R) long entry last week through the prior 97.05 low as I blogged in real-time at the time.

Volume was heavy today as FROG dipped below the two moving averages and then closed above them in a show of supporting action along the intraday lows. This puts FROG in a convenient long entry position using either the 10-dma/20-dema confluence as a tight selling guide and the prior U&R trigger low at 65.07 as a wider selling guide since that prior U&R is still in force.

 

 

While most of the cloud names I have discussed in recent reports were streaking higher, that was not the case with Snowflake (SNOW). The stock found nearly precise support at the 20-dema yesterday for a nice upside trade, but today it reversed off the intraday highs to close in the red and just below the 10-day moving average.

In this position we can still watch for tests of the 20-dema as potential lower-risk entries from here. However, be aware that a break below the 20-dema could also trigger this as a short-sale target at that point, so play it as it lies.

 

 

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Note #1 for newer members: 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 for newer members: 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 special requirements for a U&R other than the price action. It is similar to Wyckoff’s Spring. A MAU&R, or a moving average undercut & rally, is essentially 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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The FOMO (Fear of Missing Out) element in this market is perhaps the strongest I’ve ever seen in any market environment, including that of 1999/2000. Obviously, the influx of trade-from-home retail investors is a big factor in this type of thing, much as it was back in 1999/2000. Some of the youngsters out there like to think that this is all new, and that us old-timers just don’t get it.

Au contraire, we old-timers not only “get it” but we’ve traded this exact type of market before. I remember back in early 2000 Bill O’Neil told me that if I was lucky, I might see another market like that one “in twenty years.” Well, he nailed that one, didn’t he?

Another big enabling factor, in my view, of today’s retail-driven FOMO madness is that larger numbers of small investors are now in the market. In the past, someone with just $1,000 would have a tough time buying a full share of stock. But now that brokers offer fractional shares, one can now buy “$5 worth” of AAPL stock, for example, instead of a full share. This is referred to as share slices, making stocks as easy to buy as buying pizza by the slice.

This effectively turns big-stock leaders priced in the hundreds of dollars per share into penny stocks that can be traded for $5 a slice. Personally, I think this is a brilliant ploy to bring in retail investors who perhaps could not afford to invest otherwise. This is definitely something new in the markets, and I believe it has attracted and generated a particular brand of retail speculative fever.

By enabling so many small retail investors who might have previously been shut out of the market by not even having enough money to buy one share of a big-stock leader, you get this convergence phenomenon where a mass of retail money appears to converge simultaneously and instantaneously on the latest hot goodie, to borrow a favorite phrase of Bill O’Neil’s. It is their buying power en masse that makes them a force to contend with, and when enough of them pile in at the same time it creates an aggregate force that can get things moving higher, and fast.

Back in 1999-2000 everyone was quitting their job to become a day-trader, but it eventually set the stage for a massacre, as will the current speculative retail fever that exists in this market. I’m not knocking it, because it gives us some incredible profit opportunities as long as we maintain perspective and understand that when it ends it will likely end very badly.

However, I will say it again: do not get carried away with your perceived investment prowess. As I like to say, as traders and investors we are just like surfers. We don’t create the wave, we just ride it, and our skill exists in recognizing the wave when it comes, catching the wave, and then getting off before it crashes on the rocky shore.

When you begin to think that it is your brilliance that creates the wave, that is the first step toward your own demise. So, maintain perspective, and, as Bill O’Neil use to say, “Now don’t go off getting full of yourself!”

Merry Christmas and Happy Holidays to all my amazing members – I certainly hope Santa has left you with many presents under your investing tree this year. But if not, then remember that a New Year is about to begin, and fresh starts are often a strong elixir for future success.

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 no positions, though positions are subject to change at any time and without notice.

Gil Morales & Company, LLC (“GMC”), 8033 Sunset Boulevard, Suite 830, Los Angeles, California, 90046. GMC is a Registered Investment Adviser. This information is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to GMC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Gil Morales & Company, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2008-2020 Gil Morales & Company, LLC. All rights reserved.