The Gilmo Report

February 2, 2020

February 1, 2020 7:37 pm ET

More craziness marked the final two trading days of the week, but the essential message remained the same: This market is coming down. The clues were there, most notably in how important groups like the semiconductors and financials started to break down over a week ago.

Nevertheless, extreme intraday volatility made the market a tough nut to crack on Thursday before things finally resolved to the downside on Friday. And the resolution was quite ugly. The group chart of four indexes comprising the NASDAQ Composite, the Dow, the S&P 600 Small-Cap, and the S&P 500 indexes confirms this.

All four indexes sold off sharply on heavy volume, with the Dow and the S&P 600 breaking below their 50-day moving averages while the S&P 500 held support at its own 50-dma. The NASDAQ still has some room to drop toward its 50-dma if it wants to, and this would likely accompany a breach of the 50-dma by the S&P 500.

 

 

If that isn’t a picture of synchronized cliff-diving, nothing is. Overall, these charts represent a train I’m not all that interested in stepping in front of on the long side just yet. We will have to see how this plays out this coming week, and in any case, it has been the short side that has been working better.

But as I pointed out last weekend, we were starting to see more successful set-ups on the short side, so this was another clue that the market could be headed for some trouble.

Chinese markets have been closed all week long for the Lunar New Year and are expected to open again on Sunday afternoon our time here in the Western Hemisphere. While this report will be published well before then, I’m guessing it won’t be a pretty sight based on what the Chinese futures have been telling us.

The iShares China Large-Cap ETF (FXI), which has also been open for business, so to speak, tells the story as well. A big-volume, gap-down break on Monday was followed by a weak-volume rally right up into the 200-dma on Wednesday and it fell back to lower lows by Friday.

 

 

I would not jump to any conclusions that the coronavirus is helping the market correct normally because it needs to, as if it is merely getting something out of its system. The potential for this to blossom into something far more serious is very high, in my view, particularly against a backdrop of a global debt bubble that has been stretched to the analogous thinness of half a micron.

Central banks around the globe, including the Fed, have continued printing money at a furious pace as they have attempted to prop up their financial systems and sovereign economies. This creates a situation where an exogenous event could easily provide the pinprick that pops the bubble. Thus, as the pundits assure investors that the market is simply getting a correction out of its system, its system may be contracting something much more odious.

Danger is high, and there is no reason to start thinking you need to buy everything that is down, because things will likely get worse this week. As I’ve written in the last two reports, I saw no reason whatsoever to start getting heavily involved on the long side of this market. Certainly, as leading stocks come down, this opens the possibility of opportunistic long entries into weakness, but right now there are no solid conclusions to be drawn.

One of the few areas benefiting from the corona-chaos has been precious metals. The iShares Silver Trust (SLV), which I discussed as buyable on the pullback to the 50-dma on Wednesday (as well as in an intraday blog on the same day) launched off its 50-dma on Thursday with a vengeance as volume shot higher as well.

Meanwhile, the SPDR Gold Shares (GLD) was holding the prior move higher on Monday as it pulled into the 10-dma by mid-week. This led to a move to higher highs on Friday on heavy volume. My best assessment is that the corona-chaos will have an impact on the global economy, which may bring the Fed back into action lowering rates sooner than they think, and this will continue to create a positive backdrop for precious metals.

 

 

Meanwhile, Franco-Nevada (FNV), not shown, posted another new high on Friday on heavy volume and remains well-extended and out of buying range. Agnico-Eagle Mines (AEM) is in a better buying position along its 10-dma, but the stock is expected to report earnings next week. I’m tempted to look for some cheap calls ahead of earnings.

 

 

While all that is gold and silver glitters, stocks have gone flat, and the group charts tell a tale of carnage. The big-stock financial names that I follow, below, have all broken lower, with Citigroup (C) and J.P. Morgan (JPM) both offering short-sale entries at their 50-dmas on Thursday.

Goldman Sachs (GS) reversed at its 10-dma on Friday and closed below the 20-dema, which would put it in another short-sale entry position here, using the 20-dema as a covering guide.

 

 

Semiconductors continued to get pummeled on Friday as well. Note that of the six shown in the group chart below, Applied Materials (AMAT), Advanced Micro Devices (AMD), KLA-Tencor (KLAC), Micron Technologies (MU), Qualcomm (QCOM) and Texas Instruments (TXN), several could have been shorted successfully on Thursday or on Friday morning.

AMAT triggered a short at the 50-dma on Friday after running into resistance and reversing at its 10-dma on Thursday. KLAC did the same thing except that it ran into resistance at its 20-dema on Thursday. QCOM rallied back into its 50-dma on Thursday and then broke lower on Friday. AMD turned out to be shortable at its 20-dema on Friday, where it reversed to the downside.

 

 

Maxim Integrated Products (MXIM) was another semiconductor in breach mode after two failed breakouts over the past six trading days. I discussed this as a short on rallies back up into the 10-dma and 20-dema, which is what you saw on Thursday. MXIM then broke below the 20-dema early on Friday and headed right on down to the 50-dma, where it ended the day.

Any rally back up toward the 20-dema would certainly offer a potentially lower-risk entry on the short side. Also watch for a fresh breach of the 50-dma which would then come into play as a new short-sale trigger at the 50-dma while using it as a tight covering guide.

 

 

Western Digital (WDC) reported earnings Thursday after the close and gapped above its 10-dma at the open Friday. It then reversed, triggering as a short at the 10-dma and then closed below the 20-dema and right at its prior new-high breakout buy point.

This looks like it is likely developing as a late-stage failure type of situation. Any small rallies back up into the 20-dema or even as high as the 10-dma could offer additional short-sale rallies from here. Both MXIM and WDC are names I’ve discussed in recent video reports.

 

 

In most cases, my short-sale targets have already broken down, and success on the short side Friday was mostly a matter of probing into the rallies earlier in the week. However, post-earnings action has created and likely will continue to create possible shortable gap-up (SGU) moves this coming week as earnings season remains hot and heavy.

MXIM and WDC were good examples of SGUs, and so far, Amazon.com (AMZN) is starting to look that way as well. The stock reported earnings on Thursday afternoon and gapped up to an opening print of 2051.47, posted an intraday high of 2055.72 and then broke down to close at 2008.72 and near the intraday lows. It also failed on a breakout attempt.

 

 

The five-minute 620-chart of AMZN reveals that the stock was already wobbling in pre-open trade. A bearish MACD cross occurred about an hour before the opening bell, and once the regular session commenced, AMZN broke down sharply. Once the six-period moving average crossed below the 20-period moving average it crossed back above, and AMZN ended the day near its intraday low.

However, note that most of the downside action occurred within the first 15 minutes of the trading day when AMZN plummeted from the opening levels above 2050 to an intraday low of 2002.27. Technically, one could still treat this as a buyable gap-up using 2002.27 as your selling guide, but if the stock breaks that low it becomes shortable once again. Play it as it lies.

 

 

Alert members might have seen that Apple (AAPL) triggered as a short-sale on Friday when it broke below the prior buyable gap-up intraday low at 321.38 and the 10-dma on Friday. As I wrote on Wednesday, if it breaches 321.38, it morphs into a short at that point, and the ensuing breach of the 10-dma confirmed it.

AAPL ended the day on Friday just below the 20-dema on very heavy selling volume. From here, rallies up into the 20-dema might offer additional short-sale entries, but the most optimal entry occurred early in the day on Friday.

 

 

Alphabet (GOOG) is another big-stock NASDAQ name that came under selling pressure on Friday. It had already gapped down on Monday, and then continued running into resistance at the 10-dma for the rest of the week. It closed Friday just below the 20-dema.

In this position, one could short the stock below the 20-dema and then use that as your covering guide, but the optimal entry occurred on Friday at the 10-dma. Another thing to keep in mind with these big-stock NASDAQ names is that if they all start breaking down en masse, then another way to play them all together on the short side is to simply go long the ProShares UltraPro Short QQQ ETF (SQQQ) on any upside bounces.

 

 

I discussed this approach in my report of January 15th as a way of probing for market inflections to the downside near the highs. We can see from the five-minute 620-chart of the SQQQ below that a perfect inflection and entry was seen early in the day on Friday once the MACD crossed to the upside right at the open.

This was a fortuitous entry and the SQQQ kept climbing for the rest of the day. Note that while the MACD crosses to the downside around 8:00 a.m. PST my time, the six-period moving average never crosses below the 20-period line. This keeps one in the position to capture the full move by the end of the day.

Remember that your objective with this strategy in probing for market inflections using the SQQQ is to catch a strong move. You’re not playing for nickels and dimes, and so persistence is required while using the 620-chart to keep risk to a minimum.

I never like to lose more than a dime when trading the SQQQ using a MACD long entry signal when it fails, with the idea of eventually catching a big move like we saw on Friday. Often, I find that even when the signal fails, I can still make a 5-10 cent profit if I heed my 620-chart. But again, nickel and dime profits are not what we’re looking for – we want the big move, and preferably something that may indicate the start of a deeper market correction.

 

 

In my Thursday video report, I discussed Facebook (FB) as a 360-degree situation after it gapped down following earnings on Wednesday afternoon. On Thursday it gapped down but shook out at the 50-dma, creating a momentary moving-average undercut & rally (MAU&R) long entry at the 50-dma.

But, as I pointed out in my video, I was suspicious of this MAU&R and therefore would watch for any break back below the 50-dma as a short-sale entry trigger. FB opened Friday at 208.43, seventy cents above the 50-dma, and then promptly broke to the downside.

Anyone watching this at the open would have been able to quickly act on the 50-dma breach as a short-sale trigger. FB then continued lower to close at 201.91. A breach of the $200 Century Mark could create a fresh short-sale trigger, but I would also watch for any rallies back up to the 50-dma as more opportunistic entries IF we see the market bounce on Monday.

 

 

Tesla (TSLA) is holding Thursday’s gap-up move after earnings. The stock is quite extended, but I suppose if one absolutely had to buy shares up here, then treating Thursday’s action as a buyable gap-up (BGU) is possible. In that case one uses the Thursday low at 618 as your selling guide.

Meanwhile, if one is still long TSLA from down lower where I have discussed numerous long entry set-ups on the way up beginning with last October’s post-earnings buyable gap-up just below $300, then the 10-dma becomes your final selling guide based on the Seven-Week Rule.

 

 

Netflix (NFLX) surprisingly held up well on Friday, holding support again at its 20-dema as volume remained light. Technically, one could initially view this as a lower-risk entry spot using the 20-dema as a tight selling guide. However, in any continued market correction this week I would watch for a breach of the 20-dema as a short-sale entry trigger, so play it as it lies.

 

 

ServiceNow (NOW) posted a buyable gap-up move on Thursday after reporting earnings on Wednesday. This can be treated as a BGU using the 329.65 intraday low of Thursday as a selling guide. NOW ended the day Friday about nine points above that low, so at best is out of BGU buying range.

Alternatively, also keep an eye out for any failures through that low as potential short-sale triggers within the context of a continuing market rally. A lot of cloud-related names remain near the highs of recent rallies, and some of these could offer opportunities for short entries into strength.

 

 

In my Wednesday report I discussed watching Workday (WDAY) for a sympathy move in reaction to NOW’s earnings that day after the close. As I noted, a sympathy move could create an opportunistic short-sale entry. One could have simply waited for the reversal back below the 200-dma on Friday as a short-sale entry.

WDAY ended the day lower, and from here I’d watch for any further rallies into the 200-dma as potential short-sale entries. Cloud names in general remain near their recent highs and may provide a fertile field of short-sale targets in any continued market correction. This will be a primary topic of my weekend video report.

 

 

CrowdStrike (CRWD) is a combination cyber-security and cloud-software name and provides one example of a streaker rally in clouds that began in early January, as I noted might occur in my reports of late December and early January.

CRWD peaked at around $64 the week before, and then on Friday attempted to rally early in the day on a retest of those same highs. This created the double-top type of situation I look for as a possible opportunistic short-sale entry. That worked, and CRWD reversed to close just below its 10-dma.

CRWD played out very nicely on the 620-chart, which you must refer to whenever you are probing a double-top type of set-up on the short side. After Friday’s close, the stock is extended on the downside from the highs, so I’d watch for any reaction bounce back up closer to those highs as a potential short-sale entry from here.

 

 

Both DataDog (DDOG) and DocuSign (DOCU) are cloud names that broke out to new highs this week. I’m only showing the chart of DOCU since both stocks look similar on their recent breakouts. As I noted in my last report, both stocks were buyable on Monday at their lows when DOCU posted a U&R at the 50-dma and DDOG a MAU&R at its 20-dema.

In this market, I look to buy these types of set-ups along the lows. Conversely, I often look at the possibility of shorting ensuing breakouts. (See my discussions of names like NTNX and QCOM as shortable breakouts). While I would not want to chase either DDOG or DOCU on the upside on their current breakouts, I would certainly remain open to treating these as a shortable breakouts within the context of a continuing market correction.

 

 

Coupa Software (COUP) is a recent breakout that rallied about 13% higher before rolling over. On Monday it gapped below its 20-dema, and the ensuing rallies into the 10-dma provided short-sale entry opportunities. On Friday the stock reversed at the 10-dma and closed below the 20-dema, so it is starting to show signs of a possible late-stage, failed-breakout, short-sale set-up.

The breach of the 20-dema is the first sign of such a possibility that would then be confirmed by a break below the 50-dma, signaling a complete breakout failure. In this position, I’m not watching for rallies back up into the 20-dema or even the 10-dma as potential short-sale entries from here.

 

 

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.

My cautionary view as expressed in my Wednesday report turned out to be somewhat prophetic by the end of the week but this is still a difficult market to deal with on an intraday basis. Thursday looked like a death-knell for the market, but it managed to close in positive territory following some wild spinouts during the day.

When the Dow can slide 150 points or more in just a few seconds and then right back the other way just as fast, it does not strike me as the actions of humans clicking mouse-buttons on institutional trading desks. It is, pure and simple, the work of machines. The only way to handle machine-driven spinouts and reversals is to maintain a policy of looking for the most opportunistic, lower-risk entries, long or short.

Chasing strength or weakness can easily cross one up in the short-term or on an intraday basis, so the key to hanging in there is to maintain discipline with respect to your entries. Meanwhile, I still do not consider this a market for big-time position-building on the long side as we may be headed for a correction. This week will be telling in this regard, so fasten your seat belts and get ready for an interesting ride.

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.

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