The Gilmo Report

January 27, 2021

January 27, 2021 7:35 pm ET

The stuff stock rally has been stuffed, as have the rallies of many other leading names. We were already seeing the initial cautionary signs in the expanding number of base-failure short-sale set-ups showing up in a variety of stocks, including the stuffs, so once again it was simply a matter of following the set-ups. Selling in stuffs and other less stuffy areas of the market took the indexes down nicely today on higher volume.

 

 

As is usually the case in this market, your prior leaders make your best short-sale targets, with some even qualifying as flippers where you might flip a pre-existing long position short. That would describe the action for many leading stocks over the past few days.

The industrial metals were having their issues last week, and that came to full fruition when Freeport-McMoRan (FCX) reported earnings yesterday morning and promptly did what Alcoa (AA) and U.S. Steel (X) had already done, which was to trigger a short-sale entry at its 20-dema. Today all three continued lower in busted patterns, reaction rallies from here notwithstanding.

 

 

Agriculturals that I’ve been following have also gotten stuffed as of late. Last week’s pullbacks to their 20-day lines were simply precursors to break lower this week. Bunge (BG) and Corteva (CTVA) both illustrate this as they found support at their 20-day lines last week and then triggered as shorts on Monday when they breached those same moving averages.

Those were both actionable on that basis Monday and yesterday at the 20-demas. Today BG and CTVA moved lower and tested their 50-day moving averages, with both closing below the 50-day line. These are busted patterns ahead of earnings, with CTVA expected to report next Wednesday on February 3rd and BG on February 12th.

 

 

Fertilizers Mosaic (MOS) and Nutrien (NTR) both triggered as short sales yesterday when they failed at their 10-day moving averages. This led to sharp breaks below their 20-demas this morning. One could view these as short-sale entry triggers here using the 20-dema as a covering guide.

However, I would stay nimble in the event they are able to regain the 20-demas and push toward the 10-day lines as a secondary reference for overhead resistance. MOS is expected to report earnings on February 22nd, and NTR on February 18th.

 

 

Caterpillar (CAT), the mover-of-stuff stock, not shown here on a chart, is expected to report tomorrow after the close.

Lithium names are stuff stocks as well, albeit with an EV spin. The only one holding up here is Piedmont Lithium (PLL) which is now wildly extended as it runs up a more than 64.4% deep punchbowl formation and breaks out to new highs. At this point it is far too extended to buy, but if the market is going into a more significant correction from here, we can watch for a possible Punchbowl of Death (POD) to occur at some point.

The others, Albemarle (ALB), Lithium Americas (LAC), and Livent (LTHM), have broken lower, with ALB and LTHM breaching their 20-demas today. LTHM closed right at its prior 20.18 low of January 12th, so could potentially post a U&R if it can clear it tomorrow. LAC has pulled into its 20-dema, a potential lower-risk entry spot but also an area of support that, if breached, would trigger a short-sale entry at that point.

ALB broke below its 20-dema today and then closed just below the line. Initially, we can view this as a short-sale entry using the 20-dema as a covering guide. Otherwise, if it can quickly retake the 20-dema, it would trigger a moving average undercut & rally (MAU&R) at that point using the line as a selling guide.

Play ‘em all as they lie. One also has the added convenience of knowing that all four aren’t expected to report earnings until mid-February.

 

 

But it wasn’t just stuff stocks that got hit. Cloud names that looked to be setting up over the weekend, DocuSign (DOCU) and Okta (OKTA), as I discussed in my last report, quickly transposed into short-sale set-ups on Monday and Tuesday when they broke below their ten day moving averages. They then moved lower again today before finding support at their 50-day lines. They were joined by others like Coupa (COUP) and Bill.com (BILL).

 

 

And then there was Dynatrace (DT) which had broken out last week on huge volume, allegedly, the rocket fuel necessary for a big, sustained move higher (at last according to the old O’Neil-style vernacular). But again, as is often the case in this market, that big breakout went absolutely nowhere. DT has since failed badly, adding another base-failure short-sale set up to the tally.

 

 

You’re also seeing some breakdowns in the semiconductor space although some of these are just barely starting to drop below their ten day and 20 day lines. The group has been a leader as of late and we’ve seen names like Advanced Micro Devices (AMD), Marvel Technology Group (MRVL), Qualcomm (QCOM), and Qorvo (QRVO) post all-time highs over the past couple of weeks.

While the others are faltering around their 10-day and 20-day lines, AMD became the first to falter after reporting earnings yesterday after the close. As I discussed in yesterday afternoon’s video report, the stock looked shortable near the $100 century mark yesterday in after-hours trade. That worked out well as an after-hours trade, and the stock continued lower today at the open before rallying back up to the 10-dma, 20-dema, and 50-dma where it was again shortable.

MRVL broke below its 10-dma today and is now testing the 20-dema, where a breach of the line would trigger a short-sale entry at that point if it occurred. QRVO slashed all the way down to its 50-dma today but was actually shortable yesterday when it initially breached the 20-dema. Now we’ll see how well it can hold support at the 50-day line.

QCOM slashed through its 20-dema this morning where it triggered a short-sale entry, although one could have hit it as soon as it gapped below the 10-day line within the context of a market sell-off. It now looks set to test the 50-day line where we’ll see how well it can hold support at the line. QCOM and QRVO are both expected to report earnings next week on Wednesday, February 3rd while MRVL is expected to report on March 4th.

 

 

I’ve discussed many times before in my reports the concept of retail FOMO investors as a serious force in this market. While as individuals they may be small investors with only a few $100 or a couple of $1000 in their accounts, their ability to coalesce in an instant like trillions of atoms coming together to form a meteor in outer space can wield a force that is at times quite startling.

Social media, by virtue of its ability to connect millions of people in an instant, creates a critical mass of buying power that can appear out of nowhere and which has enabled this relatively new phenomenon. I don’t know if it’s occurred in the past, before my time, but I certainly have never seen anything like it. The cherry on top of the magical sundae that is the FOMO market has to be what we’ve seen in GameStop (GME) this week.

You can read all about it in the media so I’m not going to waste any time getting into some detailed analysis of what happened. I’m simply making the point that this is just further confirmation of this concept that I’ve been talking about previously where retail investors wield a force that collectively is extremely influential in this market. Just ask the hedge funds that they’ve driven out of business over the past few days. Things can really get out of hand when a stock has 140% of its float short!

 

 

Yesterday another incarnation of this phenomenon came when Tesla CEO Elon Musk tweeted that he had bought something on Etsy (ETSY) and that he likes the store. This sent ETSY shares jacking above the 230 dollar level in pre-open trade. But the stock flashed a sell signal on the 5 minute 620- chart about 90 minutes before the opening bell. The stock then flopped around from there before breaking hard at the open.

It ended the day at 204.41 and provides a two-sided example of how mindless FOMO can embrace stocks, stop any stocks, in this market at any time given the right impetus, no matter how absurd it might seem. Remember, however, that I don’t use the term FOMO necessarily in a pejorative sense. It can be a good thing as long as you’re on the right side of the FOMO at the right time. May the froth be with you!

 

 

All the FOMO excitement in this market and today’s meaningless Fed policy announcement is a little bit of a distraction from earnings season, but as noted with AMD, above, there is plenty of post-earnings action to keep one busy. As it turned out, this was mostly on the short side as a result of the general market’s red tide today.

We also had Microsoft (MSFT) to mess around with today as it also reported earnings yesterday. The stock rallied yesterday in after-hours trade and got as high as 247.70 before reversing course. It opened this morning at 238 on the nose and then proceeded to trade down to an intraday low of 230.74.

From there it ran back up to the intraday highs, clearing the $140 level before reversing to close near the intraday lows. Overall, mostly a shortable gap-up although the intraday spin-cycle offered a lot of day-tradeable movement.

 

 

After the close today we are being treated to earnings reports from three big-stock NASDAQ names, Apple (AAPL), Facebook (FB) and Tesla (TSLA). As I write this afternoon, FB reported first and is trading roughly flat, as is AAPL. TSLA missed earnings estimates and is trading down to the lower $800 price area.

We can watch all three tomorrow to see what sorts of potential set-ups, long or short, might present themselves either in the pre-open session or once the regular session begins. As was the case today with AMD and MSFT, a nimble approach will be likely be necessary, perhaps with the aid of the five-minute 620-chart for those up to the task.

 

 

Amazon.com (AMZN) and Alphabet (GOOG) are both expected to report earnings on Tuesday, February 2nd after the close. AMZN broke down hard today from a double-top type of position and is now back to its 20-dema. GOOG is starting to give up on last week’s base breakout as it also pulls into its 20-dema on heavy selling volume.

I’m not inclined to do too much with either of these ahead of earnings, but alert short-sellers could have attacked these and other leading names that I’ve discussed so far in this report as patterns starting to go awry.

 

 

Meanwhile Netflix (NFLX) is failing on its previous buyable gap-up (BGU) move from last week after it reported earnings. The stock dropped below the 556.89 low of the BGU day yesterday but was able to close back above it. Today it was a different story.

NFLX skidded right through the 556.89 BGU low early today, triggering a short-sale entry at that point. It then crashed through its 10-dma and 20-dema to trigger another short-sale entry lower in the pattern. The stock is now a late-stage, failed-base (LSFB), short-sale set-up in progress where weak rallies into the moving averages could be utilized as potential short-sale entries from here.

 

 

As commodities, hence stuff, precious metals have come off, but only the iShares Silver Trust (SLV) is holding support along its 50-day moving average. The SPDR Gold Shares (GLD) has dipped back below its own 200-day line. I’ve discussed my view that I tend to favor silver in the event the metals get moving to the upside, but so far, the action has been sluggish, and the potential for assets of all classes, including precious metals, to move lower if we see stocks continue lower remains a risk.

 

 

As the metals come off, so do the miners. In some cases, these have also become actionable as short-sale set-ups as they breach support. On the group chart below, we can see that Coeur Mining (CDE), MAG Silver (MAG) and SSR Mining (SSRM) are all in freefall, and you can pick off the various short-sale entries along the way in each.

First Majestic (AG) is the outlier here as it forms a little double-top type of formation. After-hours I’m seeing it trade up above 14.50 after closing at 13.89, but not news to account for the move. However, if the metals continue lower, then so will the miners, and AG could present a double-top type of short-sale situation to work here tomorrow, especially if it gaps up at the open.

 

 

Even the leader among the silver miners, Gatos Silver (GATO), is splitting wide open as it peels away from the 20-dema on the downside. Watch this as it approaches the 50-day moving average down at 9.83. It could be a harbinger for a low in the group if it can hold support at the 50-day line.

 

 

The rideshare cousins became the sell-off brothers as both Lyft (LYFT) and Uber (UBER) became actionable shorts yesterday on rallies into their 20-demas. Notice that both stocks actually briefly cleared their 20-day lines yesterday and kissed their 10-day lines before plummeting lower. Both then gapped below their 50-day moving averages today in a display of sheer ugliness.

Note that I’ve discussed these stocks as prime examples of what to look for in terms of 360-degree situations. Both of these stocks started out as possible long situations a couple of weeks ago but have since morphed into short-sale set-ups as their breakouts fail. And as the breakouts fail, they trigger short-sale entries as late-stage, failed-based (LSFB), short-sale set-ups.

 

 

If TSLA continues sliding tomorrow, keep an eye on Chinese EV names that we’ve followed as they could start to breach near-term support and trigger short-sale entries. Note that on Monday Li Auto (LI) busted its 50-day line and then ran into resistance at the line again yesterday before heading lower today.

The other three, Niu Technologies (NIU), Nio (NIO), and Xpeng (XPEV), are all testing nearby support at key moving averages where they may trigger shorts tomorrow if they breach the lines. Play them as they lie.

 

 

Battery/charging stocks were all trying to break out yesterday, as the group chart of Ballard Power (BLDP), Blink Charging (BLNK), FuelCell Energy (FCEL) and Plug Power (PLUG) below shows. All four kissed new-high price ground yesterday but reversed course today. These have been extremely frothy names and up here they could start to wobble a bit.

Today we saw BLDP and PLUG drop just below their 10-day lines. If the market continues to come down, then these may work as short-sale entries right under the 10-dmas while using them as selling guides. BLNK launched yesterday after I discussed over the weekend as being in a very nice voodoo long entry position at that time.

Of course, it helps when the President says he plans to convert the entire federal vehicle fleet to EVs. Meanwhile, FCEL remains the only one to hold its breakouts, but can be watched for possible breaks below the 10-day line within the context of a continued general market correction.

 

 

The President’s announcement also fueled rallies in other EV names, like Forum Merger III (FIII). That turned out to be a one-day wonder move as the stock gapped down this morning and right back to where it started. Meanwhile, Canoo (GOEV) didn’t even stir. It then headed below its 50-day line and it, along with FIII are probably best left alone at this point.

 

 

Nikola (NKLA) and Workhorse (WKHS) performed much better, however. I discussed NKLA as a voodoo long entry at the 50-dma where high short-interest could also be a factor in generating a potential upside move from there. That turned out to be the case yesterday, but it was no doubt helped along by the President’s announcement.

WKHS was discussed last week as a buyable set-up along the 50-day moving average, and it took positively to the President’s proposal to shift all federal vehicles to EVs. The question with both NKLA and WKHS at this point is whether these moves create shortable news-rallies that don’t last very long on the upside within the context of any continued market correction.

NKLA is the one with clear potential resistance at the 200-day line, while WKHS is sticking up in the air in new-high price territory. If you do decide to mess with these on the short side and are in fact able to borrow shares, be ready to dance!

 

 

Solar stocks have also started to come under pressure in certain cases. Both Array Technologies (ARRY) and Sunrun (RUN) have busted their 20-day lines where they triggered as short-sale entries yesterday. First Solar (FSLR) spun out today and rallied sharply off its intraday lows before wedging itself firmly between its 10-dma and 20-dema. Watch for a break below the 20-dema as a short-sale trigger within the context of a continued market correction.

SunPower (SPWR) has gone parabolic with wide daily price ranges over the past five days. I’m watching this for a possible short-sale entry along the highs, but this is very tricky to pull off and I would only suggest trying this if you are a) an experienced short-sellers and b) have a strong risk-control tool at hand like the five-minute 620-chart.

 

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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The selling today was broad, no doubt about it. There are some bright spots here and there on the upside, bur as I’ve noted many times before, in this market there is almost always something interesting going on, long or short, regardless of what the major market indexes do.

That said, the set-ups have now pushed me way over to the short side over the past couple days. That’s where the money was to be made today, and it may turn out that this is the start of a deeper correction.

Over the weekend, it looked like a rotation into big-stock NASDAQ might be taking place, but this is now questionable. Tomorrow, we’ll get some solid evidence in this regard once we see how AAPL, FB, and TSLA play out once the market opens up in the morning.

Over a week ago I indicated that as the market continues to march to new highs, members should review their risk-management and selling plans.  Hopefully, that was done, and handling things on a day like today should be a rote affair. Keep it that way. In the meantime, play it as it lies.

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.