The Gilmo Report

February 5, 2020

February 5, 2020 3:32 pm ET

Had I blogged near the close on Friday that members should scoop up stocks with both hands as the bell approached, I likely would have been written off as a nut job. And as I wrote over the weekend, Friday’s big volume outside reversal on the NASDAQ Composite Index looked like a train I wasn’t willing to stand in front of.

While it would have certainly sounded crazy at the time, buying stocks at the close on Friday would have been the counter-intuitively optimal move going into a weekend where Chinese markets were expected to gap down big when they re-opened on Sunday afternoon our time.

Because once the Chinese Central Bank announced that it would inject a trillion yuan into its markets on Sunday, that was all the U.S. futures needed to begin rallying Sunday night. Another 500-billion-yuan injection kept the party going into Tuesday, where the NASDAQ launched 2.1%. It continued into this morning with a big futures gap-up that ended with the index closing below its opening levels as it churned on slightly higher volume.

 

 

If one was going to make money this week, then one had to be buying stocks on Friday at the close or at least on Monday morning. But that was not such an easy proposition either as the S&P 500 Index stalled and closed in the lower half of its trading range on Monday as volume declined. That didn’t look exceptionally bullish, but ultimately that didn’t figure into what the S&P did the very next day.

 

 

It’s not unusual for the market to “forget” what it did the trading day before, and this is something I’ve observed and discussed many times before. It is often impossible to predict what the market will do on any given day based on what it did the day before. The bottom line is that Friday’s big-volume outside reversal to the downside had “bearish” written all over it.

So, the smart assessment on Friday was to stand aside and stay away from stocks based on the obvious technical action. All too often, however, being right in this market isn’t necessarily about being smarter but more about the willingness to be crazier. And so, the coronavirus crisis is shrugged off and the NASDAQ kicks itself to new highs.

As the market shrugs off the coronavirus, precious metals back off a bit, but the iShares Silver Trust (SLV) is holding support at its 50-dma. This current pullback and retest of a prior low along the 50-dma is of the Wyckoffian variety where volume dries up as the ETF pulls back and approaches the prior low.

This puts the SLV in a lower-risk entry position right here using the 50-dma as a selling guide. In addition, support for the SLV at the 50-dma can also be extrapolated to the GLD, using a breach of the 50-dma by the SLV as a selling guide for both given that the GLD, not shown, is sitting just below its 20-dema but still within a four-week flag formation.

 

 

From a practical standpoint, it is still a very messy market with respect to individual stocks. While they may have had the indexes up big this morning right at the get-go, cloud names came under strong selling pressure. This is fascinating group action since these stocks were strong leaders throughout January once they started up off their lows, something I discussed in late December and early January.

Yesterday a number of these names looked quite strong as can be seen from the two cloud group charts below. In cases where the stock was in a double-top position, as with Appian (APPN), one could have shorted this using the 620-chart this morning. Coupa (COUP) was another short-sale possibility once it breached the 10-dma early this morning after a sharp upside move yesterday. Hubspot (HUBS) was a similar set-up.

 

 

 

Notice also that CrowdStrike (CRWD) posted a double-top reversal off the prior January highs. Volume was light as buyers failed to show any interest in the stock. It closed right at its 10-dma, so that it is either a lower-risk long entry right here using the 10-dma as a tight selling guide or it morphs into a short-sale on a breach of the 10-dma. Play it as it lies.

 

 

Twilio (TWLO), which is also shown in the cloud group chart, above, reported earnings today after the close and as I write is trading just below its 200-dma. This one will be on my action watch list tomorrow as possible shortable gap-down.

If it opens where it is trading right now in the after-hours, then it would offer a convenient short-sale entry using the 200-dma as a tight covering guide. But we don’t know for certain that this is where it will open tomorrow morning, so it will be a matter of checking in on the stock at that time.

The cloud stocks that led the market higher in January are rolling over, and it’s a question of whether this is meaningful for the market. Or will money coming out of these names after running them up sharply for a month rotate into other beaten-down areas of the market.

Today we saw that as money ran out of clouds it simultaneously ran into selected semiconductor names after a strong earnings report from Microchip Technology (MCHP). Note, however, that despite the gap-up move, the stock essentially closed where it opened and in fact offered an opportunistic short-sale entry near the prior January highs before stalling badly.

If it makes another approach toward the prior highs, it may become shortable again. Otherwise, it certainly isn’t buyable in this sharp v-shaped move straight up off the lows of last Friday.

 

 

Other semiconductors posted similar moves. In the group chart below we see similar v-shaped moves back up toward prior highs in Applied Materials (AMAT), Advanced Micro Devices (AMD), KLA-Tencor (KLAC), Maxim Integrated Products (MXIM), Micron Technologies (MU), and Texas Instruments (TXN).

KLAC blew up today after missing earnings yesterday, while both AMD and MU have had weak upside moves here as they stumble back above their 10-dmas. AMAT, MXIM, and TXN posted moves more like MCHP’s.

AMAT, MXIM and TXN can therefore be watched for possible double-top type of action around the January highs. Otherwise, as with MCHP, none of these is buyable in their current positions given the v-shaped rallies off their lows.

 

 

Western Digital (WDC) also stumbled back above its 10-dma and 20-dema after rallying off the Friday lows on Monday. It stalled and reversed near the January highs to close right at its 10-dema. A breach of the 10-dma would trigger this as a short-sale.

 

 

Tomorrow morning keep an eye on Qualcomm (QCOM), not shown, which closed at 90.91 and after reporting earnings after-hours is currently trading at 87-88. This could also be actionable as a short right under the 20-dema if it opens here. Play it as it lies.

Overall, today was an odd day with leading groups getting hammered while others rallied. The best trade of the day, at least for me, was Snap (SNAP) which blew up after earnings. The stock gapped down at the open slightly and opened just below the 20-dema where it then proceeded to streak lower to end the day down nearly 15%.

SNAP closed below the 50-dma as sellers hit the stock in one last wave into the close to drive it below the line. I discussed the stock as one to watch in last night’s video report. It turned out to be a wonderful example of how stocks in this market can take the escalator up but the elevator down. A month’s worth of gains gone in a day.

 

 

Money has also run into most big-stock NASDAQ names, with the one exception of Google (GOOG). The biggest story among these big-stock NASDAQ names has been, of course, Tesla (TSLA). The stock may have finally had its climax top after two huge upside days to start off the week that saw the stock clear three, count ‘em three, Century Marks.

Something I noticed over the past day or two was the influx of pundits talking about how investors can play the move in TSLA. One has to wonder where these guys were back when TSLA posted its original bottom-fishing buyable gap-up just below $300 back in October.

The pundits are also gushing over how much money CEO Elon Musk is making with his stock as well as how TSLA is now a real company that will become huge in the coming years. Anecdotally, this sounds like the stuff you often hear about a big-stock winner right around the top within the context of climactic technical action.

The interesting thing to watch for now is whether the massive speculative move in TSLA and the ensuing climax top has implications for what is clearly a frothy market.

 

 

Apple (AAPL), Amazon.com (AMZN) and Microsoft (MSFT) all ran up off their Friday lows in varying types of moves. AAPL pulled a sharp v-shaped move back above its 10-dma and can be watched for any breach of its 10-dma as a short-sale entry. Otherwise it is not in a lower-risk long entry position.

AMZN rallied up to its BGU highs of last Friday and reversed. Keep in mind that the stock is barely 2% above the $2,000 millennial mark, so it’s not like it has huge upside momentum here following a BGU breakout move after earnings last Friday.

A breach of the $2,000 level would trigger it as a short-sale at that point. MSFT, meanwhile, is looking a bit short-term climactic here as it reversed off its highs today on heavy volume. While I would not necessarily try and short this, I do not consider it to be in any kind of buyable position.

Alphabet (GOOG) is trapped between its 10-dma and 20-dema after gapping down on earnings Tuesday morning. So far, it has been shortable on moves up to the 10-dma, and that remains the case for now.

 

 

Facebook (FB) rallied off last Friday’s lows and through its 50-dma yesterday before reversing at the confluence of the 10-dma and 20-dema and closed in the lower part of its daily trading range. That made it a short right at the 10-dma and 20-dema, and I would watch for further rallies into the moving average confluence as potential short-sale entries from here.

 

 

Netflix (NFLX) was one of the few big-stock NASDAQ names in a coherently buyable entry position on Monday as it sat along its 10-dma. It has rallied over the past three days with the market but stalled today at higher highs as volume declined slightly.

This was a 360-degree situation as discussed in my weekend report depending on market context. With the market rallying every day this week, NFLX then became playable as a long at the 10-dma and is now out of buying range.

 

 

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.

I have to tell you all that as I approach 30 years of experience as an investor and trader, in this nutty QE-infused, QE-driven market, all that experience often doesn’t add up to a hill of beans, as Bill O’Neil was fond of saying. Sure, stocks like TSLA can cause one to reminisce about 1999 and the dot-com bubble, but the move in TSLA in 2020 doesn’t compare to the moves in so many stocks in late 1999 into early 2000.

Bottom line – this market is beyond anything I’ve ever seen or experienced. In particular, this would encompass its ability to suddenly turn on a dime and to defy technical action that at one time would be a death-knell but today is just an excuse to flip the other way and run like mad.

As I’ve joked many times before, Down Big on Volume (DBOV) is a buy signal in this market, and over time it has become less of a joke and more of an essential QE-market reality. That said, with stocks mostly in v-shaped rallies off the Friday lows, I don’t see anything on the long side that I need to stick my neck out on right here, right now.

My suspicion is that we are entering a phase where a more significant market correction becomes more likely. Obviously, I’ll let the stocks tell me which way to go, but today I found more actionable set-ups that were attractive on the short side than the long side. If that is meaningful, we will find out soon enough. Stay tuned.

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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