The Gilmo Report

January 17, 2021

January 16, 2021 8:17 pm ET

The market indexes came off on Friday after new highs were posted across the board during the week. The NASDAQ Composite Index pulled into its 10-day line on lighter volume while the S&P 500 and Dow Indexes posted higher volume distribution days on Friday. For the most part, the indexes remain in week-long consolidations, but the situation with individual stocks is mixed.

 

 

It should be quite obvious by now that the Great QE Macro-Bull Market of 2009-2021 has required many adaptations along the way. The shift toward Ugly Duckling long entries in the OWL style is one of them and includes things like the undercut & rally (U&R) long set-up off the lows of a pattern rather than chasing breakouts through the highs of the pattern. With breakouts becoming less effective, at least as an initial entry trigger, the U&R has given us a potent weapon among several with which to attack this market.

Another more recent adaptation has been that I no longer have separate Long and Short Watch Lists. The way this market works, I have found that by the time something becomes an obvious short, it is often way too late. Because I also observe that some of the sharpest downside breaks in leading stocks occur nearer to the highs than the lows, I now use one list, a Leaders List, which I post on the website and use as a source of both long and short ideas based on the specific set-ups.

Leaders can quickly transpose or morph (two words I have found myself using more and more in recent years) into short-sale set-ups. So, when the market and certain individual socks flip out, I myself often just flip from long to short in the same stocks. That’s how this market rolls, and so one simply rolls with it.

Back when I ghost-wrote How to Make Money Selling Stocks Short (John Wiley & Sons 2004) as a co-author with Bill O’Neil, I used the pamphlet below as the foundation for my original work that was contained in the book. That pamphlet was written by Bill and published in the late 1970’s and focused on the Head & Shoulders set-up as the one-and-only short-sale pattern to look for.

 

 

When I was conducting my research for the new short-selling book, How to Make Money Selling Stocks Short, back in the early 2000’s, I notice that the best moves on the downside often occur right off the peak. In essence, this is what forms the right side of the “head” in a head & shoulders top. That is where I began to notice that the right sides of these H&S heads were in fact later-stage base-failures.

Thus, I discovered the late-stage, failed-base, short-sale set-up, or LSFB, which was included in the 2004 book, How to Make Money Selling Stocks Short. In recent years I’ve added double-top, or DT, types of set-ups to my repertoire of short-sale patterns, which acknowledges the fact that this is a market primarily driven by machines and FOMO retail investors and that in turn creates more contrarian conditions where buying strength and shorting weakness does not work.

Therefore, when the market starts to come off, the first thing I’m looking for are LSFBs and DTs as possible short-sale set-ups. Then of course, we shoot off into areas of opportunistic set-ups, which is what double-tops tend to be. This is certainly not how I used to do things on the short side of the market, but it is now, solely as an adaptation to how this market behaves.

Exhibit Number One among some current examples that illustrate this concept is SolarEdge (SEDG). This one looked potentially buyable on Wednesday as it edged into its 10-day moving average and the top of a prior base. A rally attempt on Thursday reversed to close back below the 10-day line as sellers utilized the move to sell into.

SEDG then triggered as a base-failure short-sale entry on Friday when it busted the 20-dema, effectively transposing in an LSFB in an instant. That breakdown had enough velocity to push the stock below its 50-day moving average, where it closed the week. From here, any rallies back up toward the 20-dema might offer lower-risk short-sale entries, but the time to hit this thing short was on Friday morning as an example of long idea gone bad, or rather short!

 

 

Solars in general had a rough time on Friday after President-elect Biden’s pitch for a $1.9 trillion stimulus bill on national TV the night before. With SEDG failing on a potential LSFB in progress, First Solar (FSLR), which was looking buyable along the 10-day line and just above the $100 Century Mark, also ran into trouble on Friday and broke below its 10-day line and then the $100 Century Mark.

It therefore triggered as a short-sale entry first at the 10-day line and then at the $100 price level before heading lower into the close. It now looks set for a test of the 50-day line, but anyone not already campaigning this short might look for rallies up into the 20-dema as possible short-sale entries from here.

 

 

In my Wednesday report I opened with a discussion of how new censorship policies from Facebook (FB) and Twitter (TWTR) had sent those stocks lower. I’ve even had members email me to tell me that they are leaving TWTR as a result of the new censorship policies, so it’s clear that this likely does not sit well with a significant portion of both social-networkers’ users.

 

 

I noted on Wednesday that so far Snap (SNAP) was acting much better as it broke out after refraining from announcing similar policies. But lo and behold, on Thursday morning, SNAP became the latest social-networking concern to jump on the censorship bandwagon, booting the lame duck President off of its platform.

Surprisingly, as I discussed in Thursday’s video report, the stock rallied at the open. But, considering how this all played out for its social-networking cousins, that worked out as an opportunistic short-sale entry at the open on Thursday which I discussed in detail using the 620-chart in Thursday’s video report.

From there, SNAP reversed and headed right through its 10-dma and 20-dema as its nascent breakout attempt failed. It’s now edging back up into the 20-dema, where one can test a short entry here using the 20-dema as a tight covering guide, or the 10-dma as a wider covering guide.

 

 

Last but not least, Lyft (LYFT) was looking quite chipper on Tuesday morning as it rallied to higher highs on a pocket pivot breakout move. That breakout attempt failed, and LYFT was looking buyable along the 20-dema on Thursday as it tucked into the line on very light volume. In this position, however, it starts to take on a two-sided character.

Friday’s close below the 20-dema initially puts this in a short-sale position as a potential LSFB using the line as a tight covering guide. If LYFT can regain the 20-dema with some authority, then it would trigger a moving average undercut & rally (MAU&R) long entry where one would then use the 20-dema as a selling guide.

 

 

SEDG, FSLR, and LYFT are examples of potential base failures in extended moves off the March lows to watch for in leading stocks if we see any kind of market correction. They also illustrate the concept of looking to failing leaders as your best potential short-sale target if and when the set-ups are right.

As long as we’re on the topic of LYFT, I note that its cousin Uber (UBER), which was last buyable along the 10-dma last week as it attempts to hold a recent base breakout, is also at a similar crossroads. Note how Tuesday’s big-volume breakout went absolutely nowhere, and now the stock is retesting the 10-dma on receding but average volume.

At the very least, UBER illustrates why chasing breakouts isn’t an optimal technique in this market. But if we see it bust the 10-dma and then the 20-dema it could also trigger as a short-sale entry at that point. So, like LYFT, this has two-side, 360-degree characteristics that we should be aware of and ready to act upon if and when the proper real-time technical evidence guides us toward one direction or the other.

 

 

Symbolic of the FOMO froth that can develop very quickly in this market is the recent action of my space-related stocks. With Aerojet Rocketdyne (AJRD) now out of the running now that Lockheed-Martin (LMT) is going to gobble them up, there are really only three prime space plays in my universe, as members who’ve been around for the past several months know.

Those names are Iridium Communications (IRDM), Maxar Technologies (MAXR), and Virgin Galactic (SPCE). On Thursday, a well-known asset management firm announced its intent to create a Space ETF. That sent these three names gapping to the upside, while LMT wasn’t invited to the party, although the ETF currently does not exist and so the only buying was knee-jerk panic-buying, likely from retail investors.

As we know, one should not underestimate the Power of the Froth in this market. Suddenly, everyone decided they were going to front-run any Space ETF and get in before the fact.  Of course, the actual appearance of this ETF is still yet to come. Thus, the question now is whether these big gap-up FOMO froth moves become shortable events in the absence of any actual ETF coming in to buy right at this moment in time.

Thus, I think a 360-degree posture becomes useful here, perhaps with a bit of an opportunistic eye. Buyable gap-up type moves in IRDM, MAXR and SPCE can be played as BGU’s, trying to buy as close to the BGU intraday low as possible.

The only one in such a position is SPCE, which closed Friday at 30.43 and just above Thursday’s BGU low at 30.19. If it busts the 30.19 low, however, and stays there, it could easily trigger as a short-sale entry. This would be the case as well for IRDM and MAXR, although so far both are holding up well.

As we know, SPCE has filed for a roughly 113-million secondary stock offering, and this price jack would seem to me to offer the perfect opportunity to unload the offering. Meanwhile, I note that Jeff Bezos’ Blue Origin announced this past week that it expects to begin taking space tourists up into orbit by early April, offering some competition to SPCE which is still working out the kinks in its spacecraft.

 

 

Industrial metals names remain on hold for now as we await expected earnings from Alcoa (AA) next Wednesday and Freeport McMoRan (FCX) on January 26th.  U.S. Steel (X) is expected to report on January 28th. However, the action on Friday was not constructive in both AA and X, as the group chart below shows.

AA gapped below its 10-dma and closed below the 20-dema on heavy selling volume while X and gapped and closed below its own 10-dma on heavy selling volume. FCX, meanwhile, pulled into its 10-dma on about average volume, but should be watched for a breach of the 10-dma as a possible tactical short-sale trigger given how extended the stock is.

 

 

Note that AA is now starting to play out as a base-failure type of short-sale situation, where Friday’s break below the 20-dema triggers a short-sale entry. At the same time, the prior breakout is now in failure mode. However, it is not clear to me that I would want to be getting aggressive with this in either direction ahead of earnings, although intrepid players might look for a quick scalp from here if they can get it.

 

 

My favored ags and fertz, including Bunge (BG), expected to report on February 12th, Corteva (CTVA), expected to report on February 3rd, Mosaic (MOS), expected to report on February 22nd, and Nutrien (NTR), expected to report on February 18th, remain extended with the exception of BG.

BG is sitting right on its 10-dma as volume declined to about average on Friday. This can be viewed as an add point using the 10-day line as a selling guide for any portion bought up here.

 

 

Caterpillar (CAT) is expected to report on Wednesday, January 20th and remains extended after a huge breakout last week. It found support along the 10-day line on Friday, bringing it into a lower-risk entry position. However, one would want to have some cushion ahead of Wednesday’s report, so for now there is nothing one has to do with the stock until earnings are out.

 

 

Both the SPDR Gold Shares (GLD) and the iShares Silver Trust (SLV) have broken near-term support at their 200-day and 50-day moving averages, respectively. I was half-expecting this to occur based on the visceral feedback I was getting from my own positions, long and short, in the metals and mostly the metals miners. Any and all long entries here are off the table until further notice.

 

 

The weakness in the metals has kept me working the short side of the miners, and we can see from the group chart of First Majestic Silver (AG), Coeur Mining (CDE), Gatos Silver (GATO), and Pan-American Silver (PAAS) that this has mostly been the right side to be on, at least near-term. In the meantime, these pullbacks have yet to find a floor as they trek lower in various states of disrepair.

 

 

Lithium names have continued to act well as a group but watch for logical pullbacks as they become ever more extended. Livent (LVNT) was notable on Friday as it posted a pocket pivot off the 10-dma but is near-term extended. These are all expected to report earnings sometime in February, and for now there isn’t much to do with this group pending any pullbacks to near-term support along their 10-day lines.

 

 

Chinese EV names have quickly lost their spunk. Li Auto (LI) and Xpeng (XPEV) had strong-volume pocket pivot moves off their 50-day moving averages on Tuesday, but these were just pocket pivots to nowhere and strong examples of why it doesn’t pay to chase strength in this market.

Both LI and XPEV have pulled complete about-faces since then and are now retesting their 50-day lines on light volume. If you feel lucky, then these could offer lower-risk entries using the 50-day lines as selling guides for either.

Niu Technologies (NIU) remains extended despite three days of downside while Nio (NIO) broke back below its 10-dma on Friday as volume picked up vs. the prior day. NIO is now also testing the top of its prior base breakout as it approaches the 20-dema. It should be watched for either support near the 20-dema or a breach which could then trigger it as a possible base-failure short-sale entry if it occurred.

 

 

In the EV segment, battery/charging names are finally pulling back after gong parabolic earlier in the week. The only exception has been Blink (BLNK) which remains in a three-week base. It pulled into its 10-day line on Friday as volume dried up, which can be viewed as a lower-risk entry. Be wary of any breaches of the 10-dma as short-sale triggers, however.

Meanwhile, Ballard Power (BLDP), FuelCell Energy (FCEL), and Plug Power (PLUG) are all sliding back to the downside following parabolic moves. FCEL is the only one to reach its 10-dma, which it did on Friday as volume dried up. It is expected to report earnings next Thursday.

If you’re feeling lucky, then you could try and buy this pullback using the 10-day line as a tight selling guide, but you’d be looking for a strong pop ahead of Thursday’s earnings report. Otherwise, this group as a whole looks mostly near-term climactic, however, so expecting another move to new highs on big bounces off the 10-day lines may be asking for too much at this point.

 

 

True to form, EV/Solar hybrid play VivoPower International (VVPR) just can’t seem to put two strong days together. After posting another strong upside day off the 10-day line on Thursday it just slinked back to the line on Friday on lighter volume. A frustrating name to play, frankly, but this pullback to the 10-day line does bring it back into buyable range using the 10-day line as a selling guide.

 

 

Workhorse Group (WKHS) has pulled back after a strong upside run the prior week, but the action so far doesn’t inspire. Volume has been drying up on this current pullback, but it doesn’t seem to keep the stock from sliding lower. It closed just below the 20-dema on Friday as it now looks set to test the 50-dma.

In my view WKHS should be holding up much more tightly after the prior week’s strong upside move. All this pattern does is prove that it doesn’t pay to chase big strength which can often be ephemeral, and we can see that WKHS is in fact acting true to its nature as each move up toward the $30 level over the past five months has simply led to back-sliding reversals.

 

 

Forum Merger III (FIII) still can’t get anything going as it keeps running into resistance at its 10-dma. At the same time, it continues to hold support at the 20-dema, clinging to the line on Friday as it also posted a mini-U&R along the lows of four days ago. My best guess is that this will likely test the late-December low at 12.70, although one could venture a long entry here while using the 20-dema or Friday’s lows as selling guides.

 

 

If QuantumScape (QS) has any chance of a rally, it has finally reached what I might consider the point of no return. The stock is now sitting right on top of the 50-day line as it comes in to test the low of two weeks ago with volume drying up sharply to -47.2% below average. That’s a Wyckoffian Retest on a voodoo pullback, and if you’re adventurous you can test a long entry here while using the 50-dma as a tight selling guide.

 

 

I’m starting to lose interest in EV-maker Fisker (FSR) as it continues to flop around within a one-month low-base price range. Wednesday’s stalling pocket pivot, which I discussed in my report of that day, has done nothing but lead to a lifeless drift back below all the moving averages in the pattern.

Perhaps some sort of catalyst is required to get this moving on the upside, but at this point we’ve seen favorable EV-oriented news with the new Biden spending bill with no effect. Thus, I would not be surprised to see the stock move lower from here, which of course brings to mind thoughts of shorting it while using the 50-day line as a covering guide.

 

 

Advanced Micro Devices (AMD) is a bit of a surprise as a leading semiconductor name that is failing to keep up with the Joneses, so to speak. While other semiconductors remain in uptrends, AMD failed on a recent base breakout attempt on Monday and then triggered a short-sale entry on Wednesday as it broke below the 20-dema on heavy selling.

AMD triggered a second short-sale entry on Friday at the 50-day line as sellers hit the stock again. While all this has made for some very shortable price action, it certainly does not seem to bode well for the company’s upcoming earnings report, expected on January 26th.

 

 

By contrast, Micron Technology (MU) acts much better as a big-stock semiconductor. It remains near its highs following last week’s huge-volume reversal off the peak after the company reported earnings. The question for me is whether that big-volume reversal means anything, as it could be a harbinger of a possible breakdown through the 10-day line.

I can’t say that I’m hot to buy the stock here, as it has had a big run already. If the market starts to wobble, I’d remain alert to MU potentially breaching its 10-day line as a possible short-sale trigger. I may be all wet on this, but the bottom line is that it remains a concrete, objective proposition. If it busts the 10-dma, then I’m on it as a short-sale target, and I needn’t do anything but wait for the objective short-sale trigger to occur in real-time.

 

 

Ambarella (AMBA) was able to launch off its 10-dma, something I was looking for per my discussion in Wednesday’s report, but note the consistent resistance along the near-term highs. Over the past six trading days, the stock has run into higher-volume selling on three days as it rallied up toward the $110 level and reversed. Each time it did this, selling volume was successively higher.

The clear delineators here are the $100 Century Mark and the 10-day line at 101.11. If the selling off the peak in AMBA is significant, then we may want to be extremely alert to breaches of these levels. If this were to occur, then we may very well have another failed-base situation on our hands, and the triggers would occur first at the 10-day line. Play it as it lies.

 

 

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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My overall sense of the market at this stage is that some cracks have begun to show. This is why I’m on the alert for the first short-sale set-ups that will appear IF we see any kind of correction and I would expect that these will mostly be late-stage or later-stage failed-bases and double-tops. There are some stirrings in this regard, as shown in this report, so we know what to watch for going forward.

Meanwhile, the big-stock NASDAQ names that were leading this market higher into year-end 2020 have all rolled over in the New Year even as the general market indexes have continued higher. Whether this is a sign of impending trouble for the market is something that is often best-determined in hindsight, however. As we progress through earnings season, we’ll likely get to see whether there is any proof in this pudding.

 

 

What the crowd seems certain of currently is that a Blue Wave of massive, trillion-dollar deficit spending is going to boost stocks in favored sectors like solar, EV, materials, etc., but many of these names did not seem impressed by Biden’s recent infomercial. He certainly has the well-worn political promise format down where things like if we spend x-hundred billion dollars (that we don’t have, I might add) on this or that new program “18 million jobs will be created.”

This is typical of the promises that politicians make, yet many would argue that they have done little to solve society’s problems while running up $27.7 trillion in debt over the past 50-years. Even Trump could only deliver a mythical “strongest economy ever” by running up regular trillion-dollar deficits so that government spending accounted for about a third of total GDP by the time he was voted out of office.

We still have this dynamic of massive deficit-spending and a rapidly growing national debt against a backdrop of now rising interest rates. This has tainted the dynamics for precious metals, but the institutional realization of continued dollar-debasement over the longer-term has given us one heck of a rally in Bitcoin, where a large supply-demand imbalance has taken hold.

When what the crowd expects doesn’t play out, the only guiding light is found in the action of individual stock charts. What we saw in reaction to Biden’s speech on Thursday was selling in areas that were deemed to be beneficiaries of a new wave of profligate government spending, and this resulted in some perhaps surprising LSFB type reactions.

This adds some interesting spin to this market, and so we are back to our 2020 rallying cry, “Assume nothing!” We’ll see whether some of the more deleterious action that occurred at the end of this past week broadens into something more substantial as we follow the set-ups. 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 MAXR, 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.