The Gilmo Report

January 10, 2021

January 10, 2021 1:16 am ET

A negative jobs number (-140,000) and one Democrat senator balking at the idea of handing out $2,000 checks in a new stimulus bill weren’t able to put a lid on the New Year’s Party of new highs that had been going on leading into Friday. The NASDAQ Composite and the S&P 500 Indexes both finished the week at all-time highs, as the promise of a Blue Wave of massive deficit spending on the horizon keeps a bid under this market.

 

 

Interest rates have been moving higher, which I take to be indicative of reflation. The Ten-Year Treasury Yield is back above 1%, and although this doesn’t look like much on the 10-year chart below, it is, however, a large percentage move off the .398% lows of March. My tendency is to view the rise in rates as a harbinger of higher inflation expectations as a result of a Blue Wave of spending coming down the pike, and Friday’s negative jobs number likely added wind to that sail.

Initially, higher rates support a higher dollar, and this has a decidedly negative effect on precious metals. If we begin to see inflation kick in, then that would serve as a counter-vailing force toward dollar devaluation. We might also consider what higher rates might do to equity money flows at some point, but for now the market trend remains decidedly to the upside.

 

 

The SPDR Gold Shares (GLD) was slammed into its 200-day line on Friday, and any gold ETF taken along the 10-dma would have been expunged at the open. For now, the GLD is holding the 200-dma which, despite the steep drop on Friday, still puts it in a potentially opportunistic entry at the 200-day line while using it as a selling guide.

 

 

The iShares Silver Trust (SLV), which has rallied nicely off its late-November lows as it outperformed gold handily since then, was slammed into its 50-day moving average on Friday. It remains well above the $21 level where it began the current trend off the November lows. As with the GLD and its 200-day line, the SLV is holding support at the 50-day line where it offers a potentially opportunistic entry using the 50-dma as a selling guide.

I’m said many times that the time to buy precious metals is not after a strong trend but in opportunistic fashion when it is coming in. The general rule is that I prefer to buy precious metals when nobody loves them and sell them when everybody does.

 

 

One member asked me recently how I decide whether to use the 10-day simple or 20-day exponential moving averages when determining entry points on pullbacks. From a practical perspective, the reality on the ground, is that I don’t decide, the stock does. I’m just watching the stock as it comes in and trying to decipher where lows might occur using the five-minute 620-chart within the context of where the stock is on the chart.

An example from my trading on Friday is Uber (UBER), which I had discussed in Thursday night’s video report as a stock to watch based on the pocket pivot that day. Lo and behold, the next morning Reuters reports a rumor that Goldman Sachs (GS) is shopping around a 38 million share block of UBER shares to sell. That sends the stock gapping lower at the bell.

As the morning progressed, just as we turned through 8:30 a.m. PST my time, two hours after the open, this is what the daily chart was looking like in real-time. As you can see, the stock is bouncing along both moving averages, but it is, overall, in the zone. At that time, I posted to my live blog what I was seeing in UBER on an intraday basis.

 

 

At the start of the day, however, it was a short up around 54 on the first bounce up into and just above the 6-period and 20-period lines. You can see a lot of long upper tails on the candlesticks. It then rolled over to a low of 53.29 as the fast orange MACD line began to stretch further below the slow blue line.

That was about 1% above the 10-day line at that point, so one could have covered the short and flipped long down there on the MACD stretch, and it would have worked, but only briefly. The ensuing rally failed at the 20-period line and UBER broke to an intraday low of 52.58. That was just below the 10-day line at 52.84 and just above the 20-day line at 52.40.

Now you’re pretty much in last-stand territory, and here comes the 620 on a third wave of intraday selling as the MACD stretches much further than it did on the first low at 53.29. So now you’ve got the 20-dema at 52.40 as a tight selling guide, and boom, off you go.

 

 

As the day progressed, the move off that 8:40 a.m. low at 52.58 ran out of gas just above the 20-period line. Once the MACD crossed to the downside it was over, so I unloaded, and UBER just chopped around for the rest of the day.

 

 

UBER’s daily chart ended the day looking not much different from what it looked like at 8:40 a.m. PST. The stock traded 37.88 million shares on the day, so would appear that the 38 million share block that was being shopped around, allegedly, may not have hit the market. I certainly want to see what this is able to do on Monday, especially if this mystery block actually materializes and prices.

 

 

Here’s another one I blogged about early on Friday, a SPAC known as Forum Merger III (FIII) that has merged with a real company, Electric Last Mile Solutions, or the acronym ELMS. Electric Last Mile Solutions can be viewed as a competitor of sorts to Workhorse (WKHS), as they make electric delivery vehicles for that last mile to the consumer.

So, another example for the new Gilmo Game Show, 10-day or 20-day? In this case, there are other considerations. The first is that the stock tends to have wide daily ranges. It is now hanging around its 10-dma, but is that solid support? Well, theoretically, if the stock is going to hold support along the 10-dma and the highs of this short flag-handle, then it should tighten up.

Therefore, I’d look at the Wednesday low as a support reference, in conjunction with the 10-dma. The 20-dema is down near the lows of the flag-handle and the prior low along the 10-day line at 13.17. So, in this case, we’re looking at price support and moving average support, and we likely have to remain flexible in real-time.

FIII, like most SPACs, is a volatile name with two run-ups to around $15 where the second run-up is of greater magnitude than the first because it started from a lower point after a steep sell-off. Ideally, I’d like to be opportunistic here at the 20-dema, but unless the market gives us a good yank to the downside, it may not break down that far.

 

 

While many liken the emergence of SPACs as a sign of imminent speculative doom for the market, we can dispense with the judgement and just think of them as similar to the DotCom stocks with high-minded concepts but no earnings or sales and no idea of how to generate them. Some even compared the SPACs of today to similar vehicles that were sold during the South Sea Bubble of 1720. You can look that one up on your own.

But there have been a number of SPACs that have merged with legitimate, even cutting edge, forward-looking business today, so there is certainly thematic legitimacy. And if you understand what drives this market’s soul, then you can understand how something like QuantumScape (QS), which has no products and certainly no customers, earnings, or sales, can have such an outlandish price move given that a) it has been backed by $500 million of Bill Gates’ money and b) it claims to have “blown past” Tesla (TSLA) when it comes to battery technology.

In a nutshell, the company claimed in a slide-show that its battery “would propel a mass-market EV about 90% further than conventional lithium ion, charge up in a lightning fast 15 minutes, and cost less than vehicles with current batteries.” Now that’s a spicy meatball! That was in September and look at the move it spawned, in both directions.

 

 

Of course, one certainly has to know when to hold ‘em and when to fold ‘em, without a doubt. But those intrepid enough and wise enough in the Ways of the OWL can certainly extract some succulent meat off of this bone. Notice how this one just held the 10-day line all the way up, and when it stopped holding it, that was all she wrote.

This one reminded me of the way some DotComs used to act back in 1999-2000, where they would follow the 10-day line religiously as they streaked to the upside. When it was all over, climactic tops combined with 10-day moving average busts rang the bell. The big alpha/beta combo, as with SPACs today, made these very risky since if you get on board at the wrong station, you could easily get run over.

Let us now, however, view SPACs pejoratively, but rather opportunistically. Many fertile, thematic stocks have started their lives as SPAC mergers, like Virgin Galactic (SPCE), Nikola (NKLA) and DraftKings (DKNG), for example.

This therefore implies neither a bullish or bearish outlook on the stocks, just a willingness to understand the potential of these highly-thematic investment vehicles and interpret the action on the charts accordingly. They can present excellent high-velocity/high time-value vehicles both long and short, as something like QS shows. And that is pretty much my view on SPACs, in a nutshell.

With the Holiday Season now past, we now look forward to visions of sugar plums in what is my favorite season of the year, Earnings Season. This means that in most cases where an earnings report is coming up within the next 1-2 weeks you are either sitting with a position if you show a decent profit or sitting back and waiting for a potential high-velocity/high-time value set-up to emerge.

Stocks expected to report earnings in the next couple of weeks or so include my industrial metals names discussed in recent reports, Alcoa (AA), Freeport McMoRan (FCX), and U.S. Steel (X). All three are also extended from buy points down near their moving averages. If they can hold these gains heading into earnings, it would seem reasonable to hold at least a partial position given the potential profit cushions.

 

 

With precious metals getting hit, the miners were hit as well. Of course, some of these were already quite extended, so the pullbacks just brought them into buyable range. To me, the miners are like the metals – you want to buy ‘em on opportunistic weakness, often the deeper the better. That’s just how they roll, and as someone who has owned and traded these beasts for 21 years, I know as well as anyone.

My group of favored silver miners, First Majestic Silver (AG), Coeur Mining (CDE), Gatos Silver (GATO), and Pan-American Silver (PAAS) all pulled into support at their 10-day or 20-dema lines except for CDE. It failed to hold either moving average and instead pulled off a U&R long entry trigger at the prior 9.37 low when it printed 9.33 and then rallied from there to close at 9.59.

CDE’s U&R would therefore be actionable using the 9.37 low as selling guide, although the best entry point occurred earlier in the day as close to the prior 9.37 low as possible. Meanwhile, GATO, the leader in the group, found support at its 10-dma, while AG and PAAS sunk a little deeper to find support at their 20-demas. All of these can be tested on the long side here at near-term support, which then serves as your selling guide.

 

 

Gold miners, like gold itself, remain laggards relative to their silver cousins. Of the several gold miners that I showed in the mid-week report, Agnico Eagle Mines (AEM), Alamos Gold (AGI), Eldorado Gold (EGO), Barrick Gold (GOLD), Kirkland Lake Gold (KL), and Newmont (NEM), only EGO comes close to being in a potentially opportunistic long entry position.

I also tend to think that given its ability to hold up well near its highs, quite unlike the others among its gold cousins, makes it the stronger candidate.

 

 

Agricultural names I’ve discussed in recent reports don’t report earnings until February. In any case, Bunge (BG), Corteva (CTVA), Mosaic (MOS), and Nutrien (NTR) are all extended and would only be actionable if they can pull back constructively into their 10-day moving averages.

 

 

Caterpillar (CAT) is expected to report on January 20th but remains well extended after shooting higher on Wednesday. The 10-dma serves as your nearest reference for support on pullbacks. Of course, I’d prefer to look for a pullback that might occur after earnings if I could get it.

 

 

With the stuff-stock rally breathing new life into lithium names, the whole group that I follow is well-extended. In general, stuff stocks that I follow are almost all extended, and such is the case with the lithiums. Albemarle (ALB, Lithium Americas (LAC), Livent (LTHM) and Piedmont Lithium (PLL) are trekking higher but at this point only the 10-day lines would serve as reasonable references for buyable pullbacks.

 

 

Solars that I’ve discussed in recent reports are mostly extended. Canadian Solar (CSIQ), DAQO New Energy, Enphase (ENPH), SolarEdge (SEDG), Array Technologies (ARRY), Sunrun (RUN), and SunPower (SPWR) are all well extended from their 10-day moving averages after gapping on Tuesday in the wake of the Blue Wave.

The only one that remains interesting with respect to something that is actionable is First Solar (FSLR), which is flopping all over the place and on either side of the $100 Century Mark. In this case, the Century Mark appears relatively meaningless as a unidirectional point of least resistance as it appears to offer little resistance or support. Jesse Livermore would not be pleased.

FSLR started off the week with a reversal near the $105 level on Monday that led to a gap-down break through the $100 level on Tuesday, courtesy of an analyst’s downgrade. It then gapped back above the 20-dema on Wednesday, courtesy of the Blue Wave, and stalled at the $100 level, but then simply gapped through it and continued higher on Thursday. On Friday, it gapped up and ran right into price resistance near the $110 level as it did in late December and reversed to close at 104.10.

It’s somewhere in no-man’s land at this point, but it appears that rallies toward the $110 level are shortable using the same level as a covering guide. At least that’s my instinct on this one, although we can watch to see whether it can settle in somewhere and tighten up, perhaps along the 10-day line. Stay tuned.

 

 

We can also make a case for Enphase (ENPH) as a Century Mark long entry based on Jesse Livermore’s Century Mark Rule. It cleared the $200 level for the first time on Wednesday as the Blue Wave sent it gapping higher. It tested the $200 level on Friday and did so successfully to close at 207.41, which in my view is a little too extended from the $200 level to be buyable.

However, one could still treat this as a Century Mark long entry using the $200 level, not quite 4% lower, as a selling guide. As always, the flip side of this is that a failure to hold the $200 level could also trigger this as a short-sale if that were to occur.

 

 

VivoPower International (VVPR) can’t put two up days in a row together since coming up off the 20-dema after putting in a nice voodoo day at the line on Monday, just ahead of the Blue Wave. This latest pullback on Friday after showing a strong-volume move to higher highs on Thursday brings the stock back near a buyable level along the 10-day moving average, using the line as a selling guide.

 

 

Among Chinese EV names that I follow, Li Auto (LI) and Xpeng (XPEV) continue to bounce around as they try and work on the right sides of potential new bases. Meanwhile, the de facto leader in the group, Nio (NIO), went right ahead and broke out on Friday on an 11% increase in volume over average.

That didn’t qualify for a buyable gap-up (BGU), much less a sanctioned O’Neil-style breakout, but it did qualify as a pocket pivot breakout, so it is possible to play this as a base breakout, perhaps with the idea of keeping risk tighter by using the intraday low of Friday’s gap-up range at 55.88 as a selling guide.

 

 

Niu Technologies (NIU), no doubt insulted by comments in my Wednesday report, came out and reported a 40.9% increase in Q4 sales of its smart E-Scooters on Thursday morning. That sent the stock gapping up in a move that finished the day with a 47% increase in volume over average, just shy of the required 50% level.

To some extent, that can be viewed as splitting hairs and so NIU could have been treated as a bottom-fishing buyable gap-up on Thursday for those properly schooled in and aware of this type of long set-up. NIU is now back to the highs of a new cup-like base, where we can now look for some consolidation of this two-day move off the lows of the base.

 

 

EV battery/charging names Ballard Power (BLDP), FuelCell Energy (FCEL) and Plug Power (PLUG) have shot higher over the past two days. They were last buyable along their 20-demas on Tuesday, ahead of the Blue Wave on Wednesday. The outlier is Blink Charging (BLNK) which is holding tight along its 10-dma, thus is the only one in a reasonable long entry position at the 10-day line which would also serve as a selling guide.

 

 

Tesla (TSLA) CEO Elon Musk can now add to his many distinctions, including being the first CEO to smoke cannabis live and on camera during a widely aired interview, the fact that he is now the richest person in the world, based on the value of his stock in the company. TSLA zoomed past the $800 Century Mark after clearing $700 last week and is now within spitting distance of $900.

In hindsight, a strategy of simply buying the stock each time it had crossed a Century Mark over the past two months would have been a very rewarding one. While Chinese EV names, along with other U.S. EV names, have been mostly biding their time, the biggest of the big-stock EV leaders sets the pace.

 

 

Micron Technology (MU) became our first Earning Season contestant when it reported earnings Thursday after the close. The company beat estimates by nine cents and beat revenue estimates while raising forward guidance. In response, sixteen analysts came out Friday morning and raised their price targets on the big-stock flash memory chip maker.

This sent MU gapping to new highs, but not for long. Sellers seized upon the euphoria to ring the cash register by unloading into the wave of analyst recommendations and sending MU back the other way. Thus, it played out as a shortable gap-up.

 

 

This was almost easy on the five-minute 620-chart as MU reversed right at the open, forming a red candle with a long upper tail as the MACD crossed to the downside. It was all downhill from there as the stock was unable to decisively clear the 20-period line all the way down. In a case like this, if I get a very good entry right at the open and a decent cushion in short order, I will often ignore the MACD at that point and wait to see if the stock can decisively clear the 20-period line.

This is precisely the type of stuff I look for during Earnings Season, and in the case of MU it worked out well as a shortable gap-up and offered a high-velocity/high time-value move. Given how extended the stock was to begin with, the sell-the-news reversal is not all that surprising. Now we can see whether MU can hold a pullback to the 10-day line on the daily chart, above. If it can, then that might offer a lower-risk long entry, but a breach of the line could trigger it as a later-stage breakout failure short-sale entry.

 

 

Other semiconductors I’ve been following in recent reports mostly remain extended. Advanced Micro Devices (AMD), Marvell Technology Group (MRVL), Qualcomm (QCOM) and Qorvo (QRVO) are all extended from their 10-day and 20-day lines and out of buying range. Pullbacks to the moving averages are where you can look for lower-risk entries.

AMD is expected to report on January 26th, while QCOM and QRVO are expected to report on February 3rd. MRVL will bring up the rear with its own earnings report which is expected to be released on March 4th, which essentially makes the issue of earnings roulette non-existent for the stock for now.

 

Lumentum (LITE) continues to move past the $100 Century and is now officially extended. At this point only pullbacks closer to the $100 level would offer potentially lower-risk long entry opportunities. Keep in mind that earnings are expected on February 2nd.

 

 

Ambarella (AMBA) is failing to hold the $100 Century Mark but remains above its recent flag base breakout. They aren’t expected to report earnings until March, so earnings roulette is not a factor here. I would watch this as it comes in as it could either flip back above the $100 level which would trigger a new long entry based on Livermore’s Century Mark Rule or keeping drifting lower to test the 10-day moving average where it could also present a lower-risk long entry point.

 

 

The Blue Wave, in addition to sending many other groups gapping to the upside on Wednesday, also sent the Weed Patch gapping higher. The Biden Administration is considered to be favorable for the group although Trump was never hostile to the idea of legalizing cannabis. Nevertheless, investors have been persuaded to pile into these names, resulting in a number of buyable gap-up type moves in most cannabis-related names.

I consider Canopy Growth (CGC) to be the leader in the group, so I will focus on that one, although one could interpret the charts of several others in the group, like Tilray (TLRY) and Cronos Group (CRON) in the same exact way. The basic idea here is simple. Treat Wednesday’s move as a bottom-fishing buyable gap-up (BFBGU) as a long entry trigger while using the BGU intraday low at 29.35 as a selling guide.

 

 

I used to lead my reports off with the chart of the big-stock NASDAQ names consisting of the S&P Five, namely NFLX, along with Apple (AAPL), Amazon.com (AMZN), Facebook (FB), Alphabet (GOOG) and Microsoft (MSFT). Now I add Netflix (NFLX) to make it an even six, as a representative group of the biggest of the big-stock techs, and show it at the end of my reports as the group lags the other hotter spots in this market.

NFLX is expected to report earnings on January 19th, so while it may be buyable here on the pullback to the 50-dma, there is the issue of earnings roulette to deal with. Thus, if one bought it here one would be looking for a strong move to occur ahead of earnings.

The rest keep chopping around, with sharp sell-offs in AAPL, AMZN, FB, and MSFT on Wednesday simply resulting in immediate price recoveries on Thursday. All four of these names and GOOG are expected to report earnings toward the end of the month, so as far as I’m concerned there is no rush to take a stand in any of these at this point.

 

 

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.
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As we move into Earnings Season, my focus begins to encompass the essential strategy of looking for high-velocity/high time-value price moves that occur after earnings. These can come in a variety of forms, such as buyable gap-ups, shortable gap-ups, buyable gap-downs and shortable gap-downs. And then, of course there are the wild intraday reversals, sometimes in both directions.

Often it is a strong earnings report, even an earnings surprise, that sends a stock gapping higher on what becomes a very playable intermediate trend that extends well beyond what the stock does the day after it report earnings. This is also what makes Earnings Season a time where new situations and new themes may emerge, so I consider it to be a frequently fruitful time of the year, which comes four times a year, every year.

Currently, the Blue Wave is in effect, and the promise of a continuing firehose of fiscal deficit-spending has kept the rally going. So far, the market does not seem to be too concerned with the potential for the Blue Wave to drown out the economy with higher taxes and resurgent regulation, but we need only stick with the set-ups at hand and just let the market tell it story.

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 positions in CDE and FIII, though positions are subject to change at any time and without notice.