The Gilmo Report

February 12, 2020

February 12, 2020 3:33 pm ET

As the market keeps extending its rally, I remain wary of a meaningful pullback, but so far, the market has continued to zombie-walk its way to new highs. The trend is persistent enough to also bring up the possibility of a parabolic sort of resolution, that is a blow-off move higher.

I characterize the current rally as a zombie-walk because of the uneven action on the way. High-volume stalling and churning and high-volume sell-offs may knock the indexes back a step or two, but eventually they emit a derisive grunt and keep marching onward and upward.

We can see the stalling and churning action in the daily chart of the NASDAQ Composite Index, the leading major market index. That action occurred yesterday and last Wednesday but constituted little more than a stumble for the index as it pushed to all-time highs today on lighter volume.

 

 

Precious metals have lost some of their luster, perhaps as a result of the Friday jobs number which has temporarily lowered expectations for a future Fed rate cut. Overall, however, economic data continues to deteriorate, as, for example, year-over-year jobs growth is making its lowest lows since Obama took office and job openings, especially in manufacturing, plunge.

I’ve written before that precious metals generally need some sort of catalyst to further them along. Currently there are no significant catalysts, but that can change quickly. For now, both the iShares Silver Trust (SLV) and the SPDR Gold Shares (GLD) remain in consolidations following their sharp upside moves in the latter part of 2019 into early 2020.

 

 

The SLV has dipped below its 50-dma slightly, but the GLD has pulled into its 20-dema, which can serve as a support reference for both ETFs. Meanwhile, the SLV moves into a position where it would likely set up an undercut & rally situation if the GLD is also able to hold and bounce off its 20-dema.

 

 

I remain longer-term bullish on the metals, and for now am willing to let them base as I retain my core SLV position. As an example of how I handle this, since that core position was purchased on the last big U&R down around 15.50, the 200-dma at 15.68 serves as a longer-term selling guide. Precious metals tend to be volatile, and one must be willing to give them room to swing.

I know this from experience, since I retain a large physical gold position (not in the form of GLD, however) purchased in year 2000 when central banks were throwing gold away under $300 an ounce. I’m not sure if that makes me the Warren Buffet of precious metals, but over time I’ve come to appreciate the utility of buying the metals when they’re weak and sitting tight when they start to shoot higher.

On an individual stock basis, I’m still running across set-ups on both sides of the market, surprisingly enough. Over the weekend we saw Virgin Galactic (SPCE) setting up along the 10-dma, which put it in a buyable position, where it remained Monday morning.

An article from Motley Fool, calling the stock the “Tesla of the space industry,” however got the stock launching higher in a hurry.  By mid-morning, I blogged that the stock was posting a pocket pivot flag breakout, and it continued streaking higher from there. Based on my discussion of the stock in my weekend report as well as last week’s video reports, you’d think Motley Fool had read my report.

As I have discussed, I believe SPCE is a highly compelling thematic play as the only publicly-traded private space company in the market. I had hoped for a more opportunistic entry, perhaps at the 20-dema, but the Motley Fool article got this thing rolling first.

However, I think the stock has likely put in a short-term peak. Thus, I sell into today’s move and look for a pullback to the 10-dma at 19.43 or possibly a deeper pullback to the 20-dema at 18.19 as potentially opportunistic entries from here. If a lot of trapped longs bought the stock today, you could get a flurry of selling that brings it back into a lower-risk entry zone.

 

 

Big-stock alt-currency names like Apple (AAPL) continue to rally, but the stock flipped through its 10-dma on Monday before bouncing off the 20-dema. It then paused at the 10-dma yesterday and moved to a new closing high today on a slight increase in volume.

One could view this as buyable here using the 10-dma as a selling guide. However, the opportunistic entry at the 20-dema Monday or the 10-dma yesterday was much more optimal in my view if one was intent on owning shares of AAPL at this stage of its price run.

 

 

Amazon.com (AMZN) has continued to move higher since its post-earnings buyable gap-up of two Fridays ago, but is stalling slightly here just below the $2200 Century Mark, while Netflix (NFLX) presses higher on light volume. Microsoft (MSFT) finally got hit with some selling yesterday. This is no surprise since the stock has gone nearly parabolic over the past 2-3 weeks.

Meanwhile, Alphabet (GOOG) offered a lower-risk entry at its 10-dma per my discussion over the weekend and has since moved higher. I don’t consider any of these four names to be in lower-risk entry positions. It will take some sort of pullback into their 10-dmas or 20-demas to get me interested in opportunistic style.

 

 

I blogged yesterday that Tesla (TSLA) was tightening up just above its 10-dma as volume was diminishing. However, that did not lead to upside today as the stock came in slightly on a small increase in selling volume. The 10-dma is now rising up to meet with the stock and serves as a selling guide for anyone still in the stock at this point.

In my view, the climactic move last Tuesday was the final move to sell into for now. The only question at this stage is whether the stock holds support or fails at first the 10-dma and then at the 20-dema down at 668.43. If it can, then it’s possible pullbacks to either could offer entries in anticipation of a possible swing-trade back up toward the prior highs.

However, note that this is a swing-trade only, and I do not advise trying to buy this stock now with the idea of holding it from a longer-term move. As Bill O’Neil used to say, the heart is out of the watermelon.

After-hours, TSLA has announced a recall of 15,000 Model X SUVs which is sending the stock down to the 10-dma as I write. This may bring the stock into one of the aforementioned moving averages tomorrow morning, at which point we can see whether there is anything actionable here as a result of the news.

 

 

Facebook (FB) turned out to be shortable at the 20-dema, but unless one was already short coming into Monday morning when the stock was downgraded to sell by a big brokerage firm analyst it was a matter of acting on the breach of the 50-dma.

That, however, would have only been good for a quick scalp as FB turned and rallied today on light volume, but still managed to retake the 50-dma. One could treat this as a moving average undercut & rally (MAU&R) long entry using the 50-dma as a tight selling guide.

That does not preclude the fact that FB might become shortable again on another move up to the 20-dema, or that it might simply reverse back below the 50-dma and morph into a short-sale target again. Play it as it lies.

 

 

With FB breaking down, it could trigger a similar rollover in its smaller cousins. I blogged yesterday that Snap (SNAP) looked like a potential short as it rallied into the 20-dema. Note that this rally came after the stock was hit hard after earnings, and only served to confirm that in this market Down Big on Volume = Buy Signal. Or, as we say acronymically: DBOV=BS!

The stock came down from the 20-dema today as volume continued to recede. I would look to short this on any small rallies from here back up into the 20-dema. Otherwise, a low-volume Wyckoffian type of retest of the 50-dma might also serve as a lower-risk long entry set-up, depending on how this plays out from here.

 

 

Twitter (TWTR) could have been treated as a short on Monday once it breached the 200-dma, but that was only good for a quick scalp on the short side. The stock turned back to the upside today as it shook out through the 200-dma and regained the line on a MAU&R long entry signal.

Volume was strong, so the move looks good. It is therefore actionable as a long entry as close to the 200-dma as possible while using the line as a tight selling guide. As I wrote over the weekend, I liked TWTR as a potential 360-degree play and ironically it worked in both directions. A true 360-degree situation to start the week.

 

 

Semiconductors got a lift today from a UBS analyst who upgraded Micron Technology (MU) and raised his price target to $75 from $47. As I noted over the weekend, one could treat the pullback to the 20-dema in MU as a lower-risk entry with the idea of reversing the position if it breached the line.

The interesting point here is that MU looked like it was going to blow through the 10-dma and 20-dema after reversing and closing in the red yesterday on heavy selling volume. An analyst upgrade changed everything, and the stock turns right around and breaks out to new highs.

However, the breakout this morning didn’t last long, and MU reversed to close where it began the day at the lows of its intraday price range. After-hours as I write, Applied Materials (AMAT) has reported earnings and is up about 1%. Given the extended position of most semiconductors over the past few days, I’d watch for AMAT to lead the rest in one direction or the other tomorrow.

 

 

Rather than chasing strength on an analyst’s upgrade of MU, I decided to look around for semiconductors on my short watch list rallying in sympathy today. Maxim Integrated Products (MXIM) is one of my favorite go-to shorts for such semiconductor sympathy rallies since I consider it more broadly exposed to a slowing economy.

The stock has certainly been shortable on each rally to new highs over the past three weeks, and today’s breakout fell three cents short of at least a new closing high. This could become shortable around the $65 price level tomorrow depending on how AMAT plays out tomorrow, so is one to watch.

 

 

Texas Instruments (TXN) also looks like a possible double-double-top (no that’s not a typo!) as it moves back up to its prior breakout point on weak volume. This type of action is not unusual as stocks in this market will often break hard and then float back to the upside on light volume.

TXN is just following the pattern of other semiconductors and therefore comes into play as a possible short-sale target up here IF we see AMAT lead semiconductors lower tomorrow. Once this is certain, the stock is not in a buyable position, as that occurred down at the 50-dma on Monday when the stock bounced off the line.

 

 

KLA-Tencor (KLAC) also has the same look as TXN and MXIM. You’ll note that most of these semiconductors are not trending animals, but rather erratic and unpredictable beasts as they fly back and forth within their chart patterns. Its wedging rally carried it back above the 50-dma today, but a reversal back through the 50-dma could come into play as a short-sale entry if AMAT leads the semis lower tomorrow.

 

 

Qualcomm (QCOM) is another v-shaped semiconductor rally that is stalling near the prior highs on above-average volume. This goes into the same boat as the other examples I’ve shown here. In each case I will stalk the stocks on my 620-chart charts to see if they are in the mood to roll back to their moving averages.

At the very least, this could offer a short-scalp in any of them depending on how they play out. But my guess is that AMAT will provide the lead for tomorrow’s dance which could play out on the short or long side. The v-shaped patterns get my short-selling antennae up here since the stocks are generally short-term extended and certainly not in long-entry positions.

 

 

The only semiconductor I was interested in buying per my comments over the weekend was Advanced Micro Devices (AMD). At the time, it was holding along its 10-dma and 20-dema, and briefly tested the two short moving averages on Monday morning before launching higher.

It posted all-time highs yesterday but has been stalling and churning over the past two days. Buying volume declined today as buying interest waned at the highs. Another one to keep an eye on tomorrow, although only as a possible short since it is near-term extended after the nice move off the 10-dma and 20-dema so far this week.

 

 

Overall, I think the semiconductors are an important group to watch as the market rally rages on. If they start to wobble and roll here then that may have implications for the general market. But if they choose to don the froth that is this market, then look out above!

Twilio (TWLO) was playable as a MAU&R at the 200-dma as I discussed over the weekend, and it pushed a little higher on Monday. This morning the stock tested the 20-dema where it offered a lower-risk entry opportunity and then rallied back above its 10-dma.

This remains buyable on constructive pullbacks to the 20-dema. If one were hot to own the stock, then it can be viewed as buyable here using either the 10-dma as an uber-tight selling guide or the 20-dema or the 200-dma as wider selling guides.

 

 

The Trade Desk (TTD) cleared the $300 Century Mark again today after it broke out Tuesday, also clearing the $300 Century Mark for the first time. This puts it back in play as a Livermore Century Mark Rule long entry using the $300 price level as a tight selling guide.

A reversal back through the $300 level, however, could trigger it as a short-sale using the rule in reverse, most likely within the context of a general market pullback.

 

 

Elsewhere in Cloud Land we see Citrix Systems (CTXS) trying to set up again in a typical sling-shot position following a buyable gap-up after earnings that went nowhere. That’s not unusual to see, and the ensuing pullback in this type of set-up can often provide a lower-risk entry based on another type of OWL/Ugly Duckling entry.

In this case, we can see that CTXS has undercut and rallied back above the prior 120.96 low in the pattern. It held support near the 20-dema today as volume remains low. This puts it in a buyable position using the 120.96 prior low as a tight selling guide. That’s the way I like it.

 

 

CrowdStrike (CRWD) was one of the cloud names I featured in my video reports in early January as it was trying to turn up off its lows like many other clouds were at the time. It successfully rallied from there and is now trying to work its way out of a short flag formation.

The stock broke out of this three-week flag yesterday on a pocket pivot move but stalled slightly. It then tested the 10-dma this morning and held, to rebound and close roughly flat for the day. I like this on pullbacks closer to the 10-dma, if you can get ‘em.

 

 

Pinterest (PINS) is getting interesting here as it drifts lower following a seriously failed gap-up move after earnings last Friday. At that time the stock turned into a shortable gap-up as it gapped up to an opening price of 26.99 continued lower, printed an intraday high of 27.15 and then headed straight down and through its 200-dma.

The stock is now drifting down toward the 10-dma and the lows of the gap-up rising window as volume rapidly declines, so is approaching a point where it could fill the gap and hit the 10-dma at the same time. This could present an opportunistic, lower-risk Ugly Duckling type of entry on the gap-fill, so is something to watch for.

 

 

Our old IPO friend Ping Identity Holdings (PING) has done well since I first picked it off as a buyable gap-up after earnings way back in November of last year. It has spent the last four weeks building a base along its 10-dma and 20-dema as volume remains very low.

The company is expected to report earnings on March 4th, so I’m interested in buying shares on small pullbacks closer to the 50-dma. However, right here along the 10-dma/20-dema confluence, the stock can still be bought using the 50-dma as a tight selling guide.

 

 

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.

Given how extended the market is, one must be careful when it comes to new long entries. Keeping risk to a minimum and highly controllable by buying near to support reference points like key moving averages is critical at this juncture of the market. Things have a very frothy feel to them, but that doesn’t mean they can’t go higher.

The trick is in being able to weather any sharp sell-off that could easily occur. Such a sell-off could be a one-off, or the start of something deeper, so controlling risk is my #1 priority at this stage of the rally. If you’ve been long many of the ideas I’ve discussed since the start of the year then you are doing just fine, and at this point it is a matter of letting things ride and knowing where your trailing stops are in the event of a market pullback or correction.

As I wrote over the weekend, this remains mostly a 360-degree market with a lot of volatility. So, the recipe remains the same. Play the set-ups as you see them and let the market push you in the direction that the market wants to, not the direction you want it to. Take it from there.

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 SLV, 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.