The Gilmo Report

February 7, 2021

February 6, 2021 10:01 pm ET

The major market indexes remain a lovely picture of staying power as the NASDAQ Composite and S&P 500 Indexes pushed right out to all-time highs this week after short-term corrections of 5.41% and 4.56%, respectively. The uptrends remain intact as they begin to widen, taking on the look of megaphone formations, which according to Technical Analysis 101 are bearish.

Somebody forgot to tell the indexes, however, and so far, no tops are evident as the indexes post new highs on lighter volume. While the volatility is widening on the way up, it’s still more a matter of following individual stock set-ups than trying to make macro-calls about the market or broad groups of stocks.

 

 

Some of the individual stock action may seem confounding at times, primarily because many names that were hit hard with big selling volume the prior week simply melted right back to the upside this week. While its cousins, Alcoa (AA) and U.S. Steel (X), do in fact continue to flounder, Freeport-McMoRan (FCX) simply shrugged off last week’s selling heat and has trudged right back to its prior highs on weak volume.

This is very typical Down Big on Volume action (otherwise known as DBOV) followed by the low-volume melt-up where no orthodox buy signals other than simple U&Rs and moving average U&Rs (MAU&Rs) are to be found. Remember that volume is not a factor for U&Rs of any kind. In that sense, they are very simple set-ups.

Thus, one could have come in long FCX on the move above the 20-dema and then use that as a selling guide. It is the type of action that first led me to use the MAU&R as a long entry as it was the only coherent way to make sense of these types of moves. Meanwhile, FCX finally picked up some strong volume on Friday as it approaches the prior highs.

 

 

We see similar action in a stock that looked potentially shortable as I discussed in my last report. That would be big-cloud name Coupa Software (COUP) as it ran into resistance at its 50-dma on Wednesday. The next day, however, volume picked up slightly while remaining light, and the stock pushed above the 50-day line from there.

COUP is now approaching the prior December/January highs as volume remains light. Again, very typical action for individual stocks in this market, and the action tends to correlate across industry groups as the examples of FCX and COUP show.

 

 

The broader question is why we see this type of action, and why it tends to correlate across many different stocks and industry groups. As I wrote in my last report, this is the essential theme in play currently, which is base- and breakout-failures on heavy selling the prior week followed by quick recoveries this week, often on light volume.

The answer may lie in the fact that machines, that is to say algorithmic trading programs, probably account for much of the decision-making. This is what leads to rapid and sharp sell-offs that suddenly stop and turn the other way, often on light volume. There is a distinct absence of steady accumulation or distribution, just wild swings in either direction when they appear least likely.

Sometimes the reflex rallies aren’t as strong, even when you would think there is a good reason for a stronger-volume rally. Wednesday night news came out that Apple (AAPL) was intending to partner with Kia Motors, subsidiary of Hyundai Motors, to build its version of an electric vehicle. This sent the stock further above the 20-dema, but the news couldn’t get investors excited enough to drive it through the 10-dma.

Instead, AAPL stalled at the 10-day line on Friday as volume petered out. Investors do not appear to be convinced that a electric vehicle is going to be a big winner for AAPL, at least not yet. In this position, therefore, one can consider whether this becomes shortable here using the 10-day line as a covering guide, or whether we can wait for a potential reversal back below the 20-dema as a short-sale trigger.

 

 

In my January 24th report I discussed Canoo (GOEV), yet another EV play but one with unique technology that last year gained the attention of Apple (AAPL), which considered buying them.  At that time, the stock was working on a base and had since tried to hold up along its 50-day line. Technically it never violated the line, but one certainly could have played it as a moving average undercut & rally on Wednesday when it regained the 50-day line.

The AAPL news, however, was what got it moving, and created a buyable gap-up move on Thursday with an intraday low of 17.17. However, no follow-through was seen, and GOEV simply slumped back toward the BGU low on Friday as selling volume came in above average. One can watch this as it approaches the 17.17 price level for a lower-risk entry, but the lack of follow-through is not encouraging, to say the least.

Friday evening, Bloomberg reported that AAPL’s talks with Kia Motors have “paused,” so this may likely have some bearing on both AAPL and GOEV come Monday morning. Stay tuned.

 

 

Earnings season continues to produce some big moves in both directions. Notable was the dual breakdown in Qualcomm (QCOM) and Qorvo (QRVO) after they reported earnings Wednesday after the close. While QCOM is dangling well below its 50-day line, QRVO is clinging to the underside of its own 50-day line.

Given the DBOV phenomenon in this market, one could always watch for a move back above the 50-day line as a MAU&R long entry trigger. Otherwise, it may simply be a short right here just below the 50-dma while using it as a covering guide. Play it as it lies.

 

 

There were a number of buyable gap-up moves on Friday after earnings, including names like Activision Blizzard (ATVI), Open Text (OTEX), Pinterest (PINS), and Zendesk (ZEN) shown below. In each case the moves stalled off the intraday highs but each of these can be treated as a buyable gap-up using their respective intraday lows from Friday as selling guides.

These are often tough to buy on the day of the gap-up if the intraday action entails a lot of wild spinning to the upside and downside, and sometimes both, more than once during the day. Once they settle down, however, one can use the BGU intraday low as reference for lower-risk entries if the stock continues to come in toward the BGU low.

 

 

Of course, there is that rare situation where a stock gaps up and just keeps going, as was the case with one of our old cloud favorites, Bill.com (BILL). The company reported a three cent loss on Thursday afternoon, good enough for a massive 32.04% total move on the day in what is best described as a streaker BGU move.

BILL was a rare bird indeed as a BGU because it opened at 153.88 and just shot higher from there so that the 153.88 opening print was also the intraday low. A wild move for a company losing money and for which analysts raised their price targets to anywhere from $150 to $180 as the stock closed the day at 184.69.

The obvious question I suppose is, just how does one figure out whether they’re buying a BGU like BILL or one of the four shown above that churned around all day with little progress beyond the initial gap-up open. The truth is that there is no way to determine this with any certainty. It’s essentially a matter of luck, and that’s what investing is in the first place: working hard to put yourself in a position to get lucky with no guarantee that you will.

 

 

When a stock gaps down hard after earnings there’s also the possibility of playing it as a shortable gap-down (SGU). In the case of an SGU, where we treat it as the inverse of a BGU and use the high of the day, once it is set, as a covering guide. This is usually achieved with the aid of the five-minute 620-chart.

In a case like Unity Software (U), a name I’ve discussed previously in my video reports, you get a gap-down to an opening price of 132 followed by a rally up to 139.78 and the underside of its prior base before the stock reverses and closes 11 points lower and near the intraday lows.

 

 

You can see from the 620-chart of U below that this is still very tricky stuff. Once the stock starts rallying back right after the open you start to wonder whether it will turn into a buyable gap-down, and the situation remains cloudy until mid-day when the 620-chart shows both a bearish MACD and moving average cross. Nice work if you can get it, but still hard work with a lot of intraday uncertainty.

 

 

Snap (SNAP) is a nice example of a buyable gap-down after earnings on Friday. The stock reported Thursday afternoon and gapped down to its 10-dma and the top of its prior base at the open on Friday. It held the line and turned back to the upside on huge volume. Normally, with this kind of huge buying volume I’d say this thing looks primed to go higher, but in this environment that’s never a gimme as stocks can often post big-volume one-day wonder rallies that fizzle out quickly.

If you study SNAP’s 620-chart from Friday on your own, you’ll see that it was absolutely no help at all as the MACD kept crossing to the downside, but the stock just kept on moving higher. We’ll see if SNAP can snap out of this tendency and move higher from here.

 

 

The iShares Silver Trust (SLV) is trying to settle down around its 10-day and 20-day lines after Monday’s short-squeeze that wasn’t. This looks like it can be tested on the long side along the two shorter moving averages, but I would certainly prefer to see a more opportunistic dip into the 50-day line as the lower-risk option if I can get it.

Given how little sense the whole concept of a silver squeeze via the SLV was, I have to wonder whether it was more media hype than anything. Perhaps the media hounds, spurred on by the GME mania, were too easy to jump on the next big squeeze story. While paper silver and mining stocks have come in sharply after Monday’s big gap, physical prices remain near the highs seen in early August.

My survey of bullion retailers on the internet over the weekend shows that prices for one-ounce Silver Eagle coins remain in the $38 and up range. So, while paper silver can be shoved around, the real stuff remains the place to be. In addition, the SLV remains in a nice-looking base with support along the 10-dma and 20-dema, so remains quite viable in my view.

 

 

The action in gold, while less ebullient than silver, is also interesting. While the SPDR Gold Shares (GLD) is floundering in no-man’s land well below any nearby lows, the Sprott Physical Gold Trust (PHYS) is flashing a U&R through two prior lows in its pattern. Sometimes these ETFs can vary, and I will use the action in one particular ETF’s chart as a guide for the entire group of gold ETFs.

In this case, the PHYS dropped to a low of 14.19 on Friday, undercutting the 14.26 low of December 14th and the 14.33 low of January 15th and then rallied to close at 14.37. This puts it in a long entry position using either of those prior lows as selling guides to keep risk tight.

 

 

While any of the better silver miners that I’ve discussed in recent reports will likely rally if the white metal also rallied, I tend to favor First Majestic (AG) right here over the others. It has held up the best since the short-squeeze that wasn’t by virtue of the fact that it’s holding well above its prior base and the 10-day and 20-day lines.

In this position I like it as close to the 20-dema as possible which can then serve as a selling guide if it fails. According to my sources, AG is expected to report earnings on February 17th, so keep that in mind.

 

 

Gatos Silver (GATO) is another strong candidate given that if we forget about the manic Monday move on the short-squeeze that wasn’t, the stock is essentially moving very tight sideways in a well-defined five-week base. GATO tends to show support along the 10-dma and 20-dema, so I would view pullbacks closer to the two shorter moving averages as potential lower-risk entries.

 

 

With SNAP making new highs and Twitter (TWTR) set to report this coming Tuesday, Facebook (FB) looks to be in a position where it could resolve in either direction. So far, following the prior week’s sell-off, the stock has rallied back up near its 50-dma where it has not reversed but instead has moved tight sideways as volume declines, essentially forming a bear flag.

Therefore, one should watch to see if FB can clear the 50-day line, at which point it could trigger a long entry using the line as a selling guide. If the 50-day line remains as solid resistance, then it could play out as a short here using the line as a covering guide. Play it as it lies.

 

 

While the Chinese electric-vehicle names that I’ve followed in recent reports continue to base and slump, perhaps in reaction to the AAPL EV news, the best-in-class name, Tesla (TSLA), continues to hold up squeaky tight. The stock has been moving tight sideways, save for one low-volume shakeout the prior week.

On Friday it posted a voodoo day as it closed right at the 10-day moving average with volume drying up to -60% below average. It did churn a bit at the line, however, which makes me think I’d rather sit back and look for a pullback to the 20-dema as the more opportunistic option if I can get it. For now, it appears that TSLA does not fear the possibility of an iCar.

 

 

While Alphabet (GOOG) remains extended from Thursday’s post-earnings buyable gap-up, Amazon.com (AMZN) is attempting to stabilize along its 10-day line and the top of its prior price range extending back to early November. This keeps it in a buyable position using the 10-dma as a selling guide.

The flip side of this is that a breach of the 10-dma and the 20-dema could also trigger this as a possible breakout-failure short-sale situation if it occurs. For now, however, the long side of AMZN remains in play pending further evidence to the contrary, so just play it as it lies.

 

 

Netflix (NFLX) broke out of its confinement between the 10-dma and the 20-dema by posting a five-day pocket pivot at the 10-dma on Thursday. Remember, however, that we want to see a cluster of five-day pocket pivots in lieu of a single ten-day pocket pivot as a sign of constructive price/volume action.

That said, NFLX pulled into its 10-dma on Friday as volume declined. This sets the stock up as a long entry here using the 10-dma as a tight selling guide. However, I would maintain a 360-degree awareness here as this could still change into a short-sale target if it cannot hold support at the 10-dma and 20-dema.

 

 

Semiconductors represent a bifurcated group where some names hold up well and others blow apart, as we saw with QCOM and QRVO. Companies beyond the semiconductor space, such as General Motors (GM), have reported shortages of semiconductors, and this has weighed on certain names within the group.

Marvel Technology Group (MRVL), which is considered a 5G play, triggered as a short on Wednesday as it dipped below its 20-dema, and then Thursday reversed at the line on higher, above average selling volume. It moved lower again on Friday, so can be watched for rallies back up into the 20-dema as potential short-sale entries.

It may also have been moving in sympathy to QCOM and QRVO, but the bottom line for now is that the price/volume action points toward the short side, at least for now, so play it as it lies. MRVL is expected to report earnings on March 3rd.

 

 

The semiconductor shortage has been viewed as a negative for some names in the group, and a positive for others. Applied Materials (AMAT), which makes equipment that makes semiconductors, is one such beneficiary, but it is showing some signs of wobbling up around its recent highs. The company is expected to report on Wednesday after the close, so for now this one is on Earnings Watch.

This may be a key earnings report for the group and will certainly determine how the stock resolves as it attempts to hold support along its 20-dema while reversing around its 10-dma. Stay tuned.

 

 

Micron Technology (MU), which makes your basic memory chips, also continues to flop around as it holds support above its 10-dma and 20-dema. The daily chart reveals something of a fractal head-and-shoulders type of formation after the sharp gap-down break eight days ago on the chart.

I’m watching this closely as it could potentially present a lower-risk entry along the 10-dma/20dema confluence. The flip side is, of course if it breaks below those two moving averages, which would then turn this into a short-sale target entry at that point. A fluid situation, and it may be that AMAT’s earnings report on Wednesday figures into how MU’s pattern resolves.

 

 

Bunge (BG) and Corteva (CTVA) illustrate the highly-correlated price action we see across many stocks and groups. The two look nearly identical as they make V-shaped runs back up to their prior highs. BG in fact broke out of its own big V pattern on Friday on very strong volume. Neither is in a buyable position, however.

CTVA reported earnings on Thursday afternoon and gapped up in response on Friday morning. Interestingly, while BG is not expected to report until this Thursday, the 12th, it acts a little bit better.

 

 

Mosaic (MOS) and Nutrien (NTR) both continue to recover from the prior week’s sharp sell-offs, with NTR leading on the upside as it approaches its prior highs in a typical V-shaped move. MOS meanwhile remains in a more buyable position as it tracks sideways along its 10-dma where it can be viewed as buyable using the 10-day line as a selling guide.

Earnings are rapidly approaching for both stocks, so keep this in mind. NTR is expected to report on February 18th, while MOS is expected to report on the February 22nd.

 

 

Caterpillar (CAT) is maintaining support above the 20-dema following Wednesday’s pocket pivot through the 10-dma and 20-dema. This remains buyable on pullbacks closer to the 20-dema while using the two moving averages as selling guides.

 

 

In general, I find that the electric-vehicle space and its sub-spaces, have lost momentum. Lithium stocks are one example as they are starting to look a bit toppy. Albemarle (ALB) has broken down completely, While Livent (LTHM) is bouncing around along its moving averages in what is so far a basing process at best, a topping process at worst, with no firm resolution just yet.

Lithium Americas (LAC) and Piedmont Lithium (PLL) act relatively better as both now test their 20-day lines. These can initially be viewed as potential lower-risk entries along the 20-dema while using it as a tight selling guide. If the group lethargy persists, however, watch for 20-dema breaks as potential short-sale triggers.

Keep in mind that a break below the 20-dema in PLL would likely confirm it as a potential Punchbowl of Death (POD) top as discussed in recent reports. This in turn may have implications for the other names in the group, so the situation here remains quite fluid.

 

 

I also don’t find inspiration in the charts of my favored battery/charging stocks. Among the four, Ballard Power (BLDP), Blink Charging (BLNK), FuelCell Energy (FCEL) and Plug Power (PLUG), only BLNK has been in the desired lower-risk position along its 20-dema and responding with at least a little upside.

 

 

Chinese EV names also look more toppy than not. Li Auto (LI) and Xpeng (XPEV) are both now living below their 50-day lines while Nio (NIO) flops around its 20-dema. The one perhaps in the most constructive position is the maker of smart E-scooters, not cars, Niu Technologies (NIU) which found support near its 20-dema on Friday.

 

 

I’m sure most of you saw the big-volume pocket pivot in Zoom Telecommunications (ZM) on Friday. The only problem with this is that you have to catch it at the point of impact, that is just as it begins to cross above the 50-day moving average. In this position it is well extended, but there’s always the possibility that a pullback to the 50-day line offers a lower-risk entry from here.

 

 

One might therefore be on the lookout for a similar move by recent hot cloud IPO Snowflake (SNOW) as it also attempts to round out the right side lows of a potential new base. The stock posted a pocket pivot at its 10-dma and 20-dema on Tuesday, ran into what looked like potentially shortable resistance at the 50-dma on Wednesday, but has since held tight in a tiny bull flag as volume dried up to -67.2% below average on Friday.

As other charts begin to look a bit stale in this market, perhaps it will be some of these formerly hot but now cold cloud-related names like SNOW and ZM that will lead a charge off their lows. ZM has already cleared its 50-day line, and it may be worthwhile to look for a potential, similar move in SNOW if the general market rally continues.

 

 

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 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.

____________________________________________________________

 

In general, the market situation with respect to individual stocks remains this scenario where we saw many breakout- and base-failures on heavy selling volume in a broad number of leading names over the prior week as the indexes went into what turned out to be a short-term correction. That led to a turn off the lows and a melt-up back to the highs this week.

I’m looking at a few scenarios here, one of which is a potential deeper market correction as things get stale. The other is the more creative possibility of big turns off the lows in names that have been beaten down for some time. This sort of thing has been a trademark of this market as leading groups take a break, while formerly hot but now busted groups build the lows of new bases and come zooming up the right sides, as we may be seeing in ZM and maybe even SNOW.

The market is always about possibilities, and this is where creativity comes into play. Fortunately, we are well-armed with the more creative and original set-ups that enable us to pick off these types of roundabout moves when stocks may be trying to round out the lows of new bases and start coming up the right side. Right now, if this general market rally is going to persist, this is a theme I’m on the lookout for.

Conversely, if the market loses momentum as it moves to new highs on lighter volume, we might consider short-sale targets among stocks that are currently rallying back up into or just above their 10-dmas and 20-demas and which may reverse back to the downside. The situation is ripe with possibilities, and so we simply remain as open as possible to whatever comes our way in terms of actionable set-ups.

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.